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



                     CONGRESSIONAL OVERSIGHT PANEL 

                      DECEMBER OVERSIGHT REPORT *

                               ----------                              
 
                       TAKING STOCK: WHAT HAS THE 
                TROUBLED ASSET RELIEF PROGRAM ACHIEVED? 

                    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                December 9, 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

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        CONGRESSIONAL OVERSIGHT PANEL DECEMBER OVERSIGHT REPORT
















                     CONGRESSIONAL OVERSIGHT PANEL

                      DECEMBER OVERSIGHT REPORT *

                               __________

                       TAKING STOCK: WHAT HAS THE
                TROUBLED ASSET RELIEF PROGRAM ACHIEVED?

                    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                December 9, 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
Glossary of Terms................................................     V
Executive Summary................................................     1
Section One:
    A. Overview..................................................     4
    B. Background on the Origins and Evolution of the TARP.......     5
        1. Chronology of the Financial Crisis....................     5
        2. The Initial Federal Response to the Crisis............     9
    C. The TARP's Evolution......................................    13
        1. Capital Programs and Banking Sector Health............    13
        2. Credit for Consumers and Small Business...............    39
        3. Mortgage Foreclosure Relief...........................    51
        4. Auto Industry Assistance..............................    59
        5. The TARP as a Whole...................................    63
    D. Expert Commentary on the TARP.............................    79
        1. Consistency and Transparency..........................    81
        2. Underlying Issues.....................................    82
        3. Moral Hazard..........................................    84
    E. Accomplishments and Shortcomings: How Well Has the TARP 
      Done in Meeting its Statutory Objectives?..................    85
        1. The TARP's Contribution to Financial Stabilization and 
          Economic Recovery......................................    85
        2. The TARP and the American Taxpayer....................    90
        3. Treasury as TARP Steward and Manager..................    92
    F. Conclusions...............................................    95
Section Two: Additional Views....................................    98
    A. Damon Silvers.............................................    98
    B. Richard Neiman............................................   101
    C. Representative Jeb Hensarling.............................   104
    D. Paul S. Atkins............................................   137
Section Three: Correspondence with Treasury Update...............   139
Section Four: TARP Updates Since Last Report.....................   140
Section Five: Oversight Activities...............................   142
Section Six: About the Congressional Oversight Panel.............   143
Appendices:
    APPENDIX I: UNPAID DIVIDEND PAYMENTS UNDER CPP AS OF OCTOBER 
      31, 2009...................................................   144
    APPENDIX II: LETTER FROM CHAIR ELIZABETH WARREN TO ASSISTANT 
      SECRETARY HERB ALLISON, RE: WRITTEN RESPONSES FOR HEARING 
      RECORD, DATED NOVEMBER 25, 2009............................   146
    APPENDIX III: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY 
      TIMOTHY GEITHNER, RE: STRESS TESTS, DATED NOVEMBER 25, 2009   148
    APPENDIX IV: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY 
      TIMOTHY GEITHNER, RE: CIT GROUP, INC., DATED NOVEMBER 25, 
      2009.......................................................   150
    APPENDIX V: ENDNOTES TO FIGURE 27: FEDERAL GOVERNMENT'S 
      FINANCIAL STABILIZATION PROGRAMS (AS OF NOVEMBER 25, 
      2009)--CURRENT MAXIMUM EXPOSURES...........................   153
                           Glossary of Terms

ABS                                   Asset-backed securities
AIFP                                  Automotive Industry Financing
                                       Program
AIG                                   American International Group, Inc.
AGP                                   Asset Guarantee Program
ASSP                                  Auto Supplier Support Program
CBO                                   Congressional Budget Office
CDS                                   Credit default swap
CIT                                   CIT Group, Inc.
CMBS                                  Commercial mortgage-backed
                                       securities
CPP                                   Capital Purchase Program
CRE                                   Commercial real estate
EESA                                  Emergency Economic Stabilization
                                       Act of 2008
FDIC                                  Federal Deposit Insurance
                                       Corporation
FRBNY                                 Federal Reserve Bank of New York
GSE                                   Government-sponsored enterprise
HAMP                                  Home Affordable Modification
                                       Program
HARP                                  Home Affordable Refinancing
                                       Program
IMF                                   International Monetary Fund
IRR                                   Internal rate of return
LIBOR                                 London Interbank Offered Rate
LTV                                   Loan-to-value ratio
MHA                                   Making Home Affordable
OIS                                   Overnight Indexed Swaps
OMB                                   Office of Management and Budget
PPIP                                  Public-Private Investment Program
SBA                                   Small Business Administration
SEC                                   U.S. Securities and Exchange
                                       Commission
SIGTARP                               Office of the Special Inspector
                                       General for the Troubled Asset
                                       Relief Program
SPA                                   Securities purchase agreement
S-PPIP                                Legacy Securities PPIP
SSFI                                  Systemically Significant Failing
                                       Institution Program
TALF                                  Term Asset-Backed Securities Loan
                                       Facility
TARP                                  Troubled Asset Relief Program
TIP                                   Targeted Investment Program
TLGP                                  Temporary Liquidity Guarantee
                                       Program======================================================================
                       DECEMBER OVERSIGHT REPORT

                                _______
                                

                December 9, 2009.--Ordered to be printed

                                _______
                                

                     EXECUTIVE SUMMARY *

---------------------------------------------------------------------------
    \*\ The Panel adopted this report with a 4-1 vote on December 8, 
2009. Rep. Jeb Hensarling voted against the report. Additional views 
are available in Section Two of this report.
---------------------------------------------------------------------------
    The financial crisis that gripped the United States last 
fall was unprecedented in type and magnitude. It began with an 
asset bubble in housing, expanded into the subprime mortgage 
crisis, escalated into a severe freeze-up of the interbank 
lending market, and culminated in intervention by the United 
States and other industrialized countries to rescue their 
banking systems.
    The centerpiece of the federal government's response to the 
financial crisis was the Emergency Economic Stabilization Act 
of 2008 (EESA), which authorized the Treasury Secretary to 
establish the $700 billion Troubled Asset Relief Program (TARP) 
and created the Congressional Oversight Panel to oversee the 
TARP. Now, at the end of the first full year of TARP's 
existence, the Panel is taking stock of the TARP's progress: 
reviewing what the TARP has accomplished to date, and exploring 
where it has fallen short.
    Although the TARP was a key element of the federal 
government's response to the financial crisis, it was only one 
part of a multi-pronged approach. The FDIC and the Federal 
Reserve undertook major initiatives that are also aimed at 
bolstering financial stability. In addition, Congress enacted a 
fiscal stimulus measure that was larger than the TARP. Foreign 
governments also acted to rescue their banking systems, with 
consequences that echoed through the U.S. system as well.
    Because so many different forces and programs have 
influenced financial markets over the last year, TARP's effects 
are impossible to isolate. Even so, there is broad consensus 
that the TARP was an important part of a broader government 
strategy that stabilized the U.S. financial system by renewing 
the flow of credit and averting a more acute crisis. Although 
the government's response to the crisis was at first haphazard 
and uncertain, it eventually proved decisive enough to stop the 
panic and restore market confidence. Despite significant 
improvement in the financial markets, however, the broader 
economy is only beginning to recover from a deep recession, and 
the TARP's impact on the underlying weaknesses in the financial 
system that led to last fall's crisis is less clear.
    Congress established broad goals for the Emergency Economic 
Stabilization Act. It is apparent that, after 14 months, many 
of the ongoing problems remain in the financial markets and the 
broader economy:
     The availability of credit, the lifeblood of the 
economy, remains low. Banks remain reluctant to lend, and many 
small businesses and consumers are reluctant to borrow. Even as 
new capital and earnings flow into banks, questions remain 
about whether this money is being used to repair damaged 
balance sheets rather than putting the money into lending.
     Bank failures continue at a nearly unprecedented 
rate. There have been 149 bank failures between January 1, 2008 
and November 30, 2009. The FDIC, facing red ink for the first 
time in 17 years, must step in to repay depositors at a growing 
number of failed banks. This problem may worsen, as deep-seated 
problems in the commercial real estate sector are poised to 
inflict further damage on small and mid-sized banks.
     Toxic assets remain on the balance sheets of many 
large banks. Some major financial institutions continue to hold 
the toxic mortgage-related securities that contributed to the 
crisis, waiting for a rebound in asset values that may be years 
away. These banks may be considered ``too big to fail,'' but at 
the same time, they may be too weak to play a meaningful role 
in keeping credit flowing throughout the economy.
     The foreclosure crisis continues to grow. More 
than two million families have lost their homes to foreclosure 
since the start of this crisis, and countless more have lost 
their homes in short-sales or have turned their keys over to 
the lender. Foreclosure starts over the next five years are 
projected to range from 8 to 13 million, but more than a year 
after the TARP was passed, it appears that the TARP's 
foreclosure mitigation programs have not yet achieved the 
scope, scale, and permanence necessary to address the crisis.
     Job losses continue to escalate. The unprecedented 
government actions taken since last September to bolster the 
faltering economy have not been enough to stem the rise of 
unemployment, which in October was at its highest level since 
June 1983.
     Markets remain dependent on government support. 
The market stability that has emerged since last fall's crisis 
has been in part the result of an extraordinary mix of 
government actions, some of which will likely be scaled back 
relatively soon, and few of which are likely to continue 
indefinitely. It is unclear whether the market can yet 
withstand the removal of this support.
     Government intervention signaled an implicit 
government guarantee of major financial institutions, and 
unwinding this guarantee poses a difficult long-term challenge. 
As yet, there is no consensus among experts or policymakers as 
to how to prevent financial institutions from taking risks that 
are so large as to threaten the functioning of the nation's 
economy.
    While the TARP, along with other strong government action, 
can be credited with stopping an economic panic, the program's 
progress toward the other goals set by Congress--goals that are 
necessary for reestablishing stability in the financial system 
and providing the tools for rebuilding the American economy--is 
less clear.
    Since its inception, the TARP has gone through several 
different incarnations. It began as a program designed to 
purchase toxic assets from troubled banks, but it quickly 
morphed into a means of bolstering bank capital levels. It was 
later put to use as a source of funds to restart the 
securitization markets, rescue domestic automakers, and modify 
home mortgages. The evolving nature of the TARP, as well as 
Treasury's failure to articulate clear goals or to provide 
specific measures of success for the program, make it hard to 
reach an overall evaluation. In its report of December 2008, 
the Panel called on Treasury to make both its decision-making 
and its actions more transparent. The Panel renews that call, 
as it has done with every monthly report since then.
    Despite the difficult circumstances under which many 
decisions have been made, those decisions must be clearly 
explained to the American people, and the officials who make 
them must be held accountable for their actions. Transparency 
and accountability may be painful in the short run, but in the 
long run they will help restore market functions and earn the 
confidence of the American people.
                              SECTION ONE


                              A. Overview

    Congress created the Congressional Oversight Panel to 
oversee the Executive Branch's broad authority to use the $700 
billion Troubled Asset Relief Program (TARP). In carrying out 
its responsibilities under the Emergency Economic Stabilization 
Act of 2008 (EESA), the Panel has published 12 monthly reports 
and two special reports on a wide range of the TARP and related 
financial stabilization initiatives.
    This month the Panel assesses what the TARP has 
accomplished and where it has fallen short from various 
perspectives in the 14 months since its inception. The report 
describes the major elements of the TARP--capital assistance 
for financial institutions, small business and consumer lending 
initiatives, mortgage foreclosure programs and assistance to 
two U.S. automakers--and their status, including updates on 
particular issues since the Panel's earlier reports on these 
same subjects. It looks at key economic indicators and their 
behavior over the course of the crisis and what they appear to 
be telling us now. The report also summarizes the views of 
academic and other experts whose analysis the Panel requested, 
as well as the Panel's recent hearing with five prominent 
economists and experts on the subject of financial sector 
crises.
    Congress stated that its purpose in passing EESA was ``to 
immediately provide authority and facilities that the Secretary 
of the Treasury can use to restore liquidity and stability to 
the financial system of the United States.'' After reviewing 
the performance of the disparate initiatives that Treasury has 
carried out under the TARP's authorizing legislation and the 
assessments of outside experts concerning that performance, 
this report concludes with a look at how well the TARP has done 
as measured against the stated objectives of the Act and the 
espoused goals of Treasury leadership across two 
administrations.
    This report includes some discussion of financial stability 
efforts of both the Federal Reserve Board and the Federal 
Deposit Insurance Corporation (FDIC), but only inasmuch as 
those efforts augment or supplement Treasury's actions under 
the TARP. The report does not include any detailed discussion 
of other government responses to the financial crisis, such as 
the Housing and Economic Recovery Act of 2008 and the American 
Recovery and Reinvestment Act of 2009, although the Panel is 
mindful of the difficulties in separating the impact of the 
various government responses on the overall U.S. economy. The 
report also does not attempt to bring to light new information 
about the factors that may have contributed to the decision-
making by government officials at the height of the financial 
crisis, although such accounts by journalists and other 
oversight bodies have informed the Panel's framework for 
assessing the TARP.
    In reviewing the performance of the TARP after a little 
over one year, the Panel has benefitted from similar one-year 
assessments from others. Treasury published a summary of the 
Administration's financial stabilization efforts in September, 
and it expects to release its formal accounting statements for 
the TARP for Federal fiscal year 2009 (running from October 1, 
2008 through September 30, 2009) in mid-December. Treasury 
policy officials have also testified and given public 
presentations in recent months providing their own review of 
the performance of the TARP. Assistant Secretary of the 
Treasury for Financial Stability Secretary Herb Allison 
testified before the Panel on October 22, 2009 and made several 
observations on the TARP and its impact after one year. Other 
oversight groups such as the Government Accountability Office 
have recently looked at the performance of the TARP.
    The TARP is currently scheduled to expire on December 31, 
2009. The Secretary of the Treasury is authorized under EESA to 
extend the program through October 3, 2010, upon notification 
of Congress. The Panel takes no position on the desirability of 
such an extension.

         B. Background on the Origins and Evolution of the TARP


1. Chronology of the Financial Crisis

    The global financial crisis that culminated in intervention 
by the United States and other industrialized countries to 
rescue their banking systems was largely the result of an asset 
bubble in housing, driven in part by the relatively low cost of 
credit. U.S. housing prices reached their high point in mid-
2006. At the market's peak, the average cost of a home was more 
than twice what it had been just six and a half years earlier, 
a remarkable annual growth rate of nearly 12 percent.\1\ 
Housing construction had likewise surged to an unsustainable 
annual rate of 2.15 million new privately owned units, and by 
2006 unsold inventory began to pile up.\2\ Then house prices 
began to ebb. The decline was initially not dramatic--prices 
fell by less than 3 percent over the next 12 months.\3\ But it 
was enough to undermine a key assumption behind the financial 
instruments that provided much of the support for the U.S. 
housing bubble--that housing prices never go down, at least not 
on a sustained nationwide basis.\4\
---------------------------------------------------------------------------
    \1\ See 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_092955.xls) (hereinafter ``S&P/Case-Shiller Home 
Price Indices'') (accessed Dec. 7, 2009) (relating how the index rose 
from 100.59 in January 2000 to 206.15 in May 2006, a rise of 11.99 
percent, on average, per year).
    \2\ See generally United States Census Bureau, New Privately Owned 
Housing Units Started in the United States by Purpose and Design 
(online at www.census.gov/const/www/quarterly_starts_completions.pdf) 
(accessed Dec. 7, 2009).
    \3\ See S&P/Case-Shiller Home Price Indices, supra note 1.
    \4\ See Bank of America, Remarks by Chairman and Chief Executive 
Officer Kenneth D. Lewis at Los Angeles Town Hall: Mending our Mortgage 
Markets (July 9, 2008) (online at newsroom.bankofamerica.com/
index.php?s=63&item=205) (``Before this decade, we had a long history 
of relatively stable appreciation in home values, averaging about 3-4% 
a year for more than a century. But during that time, the conventional 
wisdom built that housing prices never go down, except for brief 
corrections in the march upward'').
---------------------------------------------------------------------------
    The impact of falling home prices was felt early on in the 
subprime mortgage market, where borrowers began defaulting on 
mortgages that proved unaffordable as soon as prices stopped 
climbing. Many of the mortgages that helped fuel the boom had 
been premised on the assumption that borrowers would be able to 
refinance before their mortgages reset to higher, unaffordable 
interest rates. But as soon as home prices stopped rising, it 
became impossible for such borrowers, who had little or no 
equity in their homes, to refinance.\5\ In June 2007 two Bear 
Stearns-sponsored hedge funds that were heavily invested in 
subprime mortgages collapsed; Bear Stearns intervened with a 
private bailout.\6\ But the market was becoming more volatile, 
as credit-rating agencies were issuing more and more downgrades 
of bonds composed of souring subprime mortgages. By the end of 
June, the three biggest rating agencies had downgraded their 
ratings on 2,012 tranches, or slices, of residential mortgage-
backed securities. Just 16 days later, that number had climbed 
to 3,079.\7\ Initially the downgrades were largely confined to 
the bonds' lower-rated tranches.\8\ But investors feared the 
losses would spread,\9\ and they did. Soon even the safest 
pieces of these mortgage-backed bonds, those rated triple-A, 
were being downgraded.\10\
---------------------------------------------------------------------------
    \5\ See, e.g., Kristopher Gerardi, Adam Hale Shapiro, and Paul S. 
Willen, Subprime Outcomes: Risky Mortgages, Homeownership Experiences, 
and Foreclosures, Federal Reserve Bank of Boston, Working Paper No. 07-
15 (May 4, 2008) (online at www.bos.frb.org/economic/wp/wp2007/
wp0715.pdf) (``[H]ouse price depreciation plays an important role in 
generating foreclosures. In fact, we attribute much of the dramatic 
rise in Massachusetts foreclosures during 2006 and 2007 to the decline 
in house prices that began in the summer of 2005'').
    \6\ See Forest Asset Management, Hedge Funds: Don't Bank On It, at 
1-2 (Aug. 2008) (online at forestmgmt.lightport.com/727830.pdf); see 
also The Bear Stearns Companies Inc., Presentation, Merrill Lynch 
Banking & Financial Services Investor Conference, at 3 (Nov. 14, 2007) 
(online at www.bearstearns.com/includes/pdfs/investor_relations/
presentations/merrill_lynch.pdf).
    \7\ Standard & Poor's had 767 downgrades through June 2007 and 
1,346 through July 16, 2007. For Moody's, it was 479 through June and 
933 through July 16. Fitch went from 766 downgrades to 800. See Fitch 
Ratings, U.S. Subprime Rating Surveillance Update, at 23-24 (July 2007) 
(online at www.fitchratings.com/web_content/sectors/subprime/
Subprime_Presentation_07_2007.pdf).
    \8\ Id. at 30.
    \9\ See Markus K. Brunnermeir, Deciphering the 2007-08 Liquidity 
and Credit Crunch, 23 Journal of Economic Perspectives, no. 1, at 82-87 
(Winter 2009) (online at www.princeton.edu/markus/research/papers/
liquidity_credit_crunch.pdf) (describing the ``unnerve[ing]'' effect of 
mortgage-backed securities (MBS) downgrades on the broader ABS market).
    \10\ See Office of the Comptroller of the Currency, Remarks of 
Comptroller John C. Dugan before the Global Association of Risk 
Professionals (Feb. 27, 2008) (online at www.occ.treas.gov/ftp/release/
2008-22a.pdf) (``These better-than-triple A tranches were supposed to 
be the least risky parts of the subprime securities pyramid. Instead 
they have generated the clear majority of reported subprime writedowns 
in capital markets, which in turn have been at the core of several of 
the worst episodes of the market's disruptions: the seizing up of the 
asset-backed commercial paper market because of conduit and SIV 
investments in these instruments; the huge, surprising, and 
concentrated losses in commercial and investment banks that packaged 
and sold subprime ABS CDOs; the large losses in regulated firms that 
thought they had conservatively purchased `safe' securities, including 
regional banks from as far away as Germany; and most recently in the 
news, the large losses projected for monoline insurance companies that 
sold credit protection on these super-senior tranches'').
---------------------------------------------------------------------------
    The first major casualty was Bear Stearns. In addition to 
its exposure to risky mortgages, the 85-year-old investment 
bank had come to rely heavily on short-term loans.\11\ These 
factors made Bear Stearns especially vulnerable to a run, which 
came in March 2008. As the firm lost assets, its ability to 
borrow deteriorated. On March 14, the Federal Reserve agreed to 
lend $29 billion as part of a deal that allowed JPMorgan Chase 
to buy Bear Stearns.\12\ JPMorgan Chase ended up paying 
approximately $10 for each share of Bear Stearns stock, or 
about six percent of its peak share price.\13\ The government's 
rescue of Bear Stearns established a new precedent. Previously, 
the government had allowed faltering investment banks, which 
are not insured by the federal government or regulated like 
commercial banks, to go bankrupt, as Drexel Burnham Lambert did 
in 1990.\14\
---------------------------------------------------------------------------
    \11\ See U.S. Securities and Exchange Commission, Office of 
Inspector General, SEC's Oversight of Bear Stearns and Related 
Entities: The Consolidated Supervised Entity Program, at v (Sept. 25, 
2008) (online at www.sec-oig.gov/Reports/AuditsInspections/2008/446-
b.pdf).
    \12\ Federal Reserve Bank of New York, Summary of Terms and 
Conditions Regarding the JPMorgan Chase Facility (Mar. 24, 2008) 
(online at www.newyorkfed.org/newsevents/news/markets/2008/
rp080324b.html) (hereinafter ``Summary of Terms and Conditions 
Regarding the JPMorgan Chase Facility'').
    \13\ JPMorgan Chase, JPMorgan Chase and Bear Stearns Announce 
Amended Agreement (March 24, 2008) (online at www.jpmorgan.com/cm/
cs?pagename=JPM_redesign/JPM_Content_C/Generic_Detail_Page_Template& 
cid=1159339104093&c=JPM_Content_C); Ciovacco Capital Management, Forget 
the Spin, Bear Stearns Was Given Away To Calm Markets (Mar. 17, 2008) 
(online at ciovaccocapital.com/Article%20January%20Lows.pdf).
    \14\ See Kenneth Ayotte and David A. Skeel, Jr., Bankruptcy or 
Bailouts?, Northwestern University School of Law Research Paper No. 09-
05 (July 23, 2009) (online at papers.ssrn.com/sol3/
papers.cfm?abstract_id=1362639##).
---------------------------------------------------------------------------
    As 2008 wore on, conditions in the financial markets 
continued to deteriorate. U.S. securitization markets, which 
had provided the funding that fueled the housing boom, were 
severely contracting. The number of privately securitized 
mortgages plunged from 1.75 million in 2006 to a mere 27,296 in 
2008.\15\ In the first two quarters of that year, U.S. issuance 
of asset-backed securities, which include car loans, student 
loans, credit card lending, as well as home equity loans, 
averaged about $58 billion, down from an average of $175 
billion per quarter between 2005 and the first half of 
2007.\16\ In addition, the effects of the weak financial sector 
were now being felt in the real economy, where unemployment had 
risen from a low of 4.4 percent in March 2007 to 6.2 percent by 
August 2008.\17\ Foreclosure filings had more than doubled in 
just 16 months, from 147,708 in April 2007 to 303,879 in August 
2008.\18\
---------------------------------------------------------------------------
    \15\ Federal Financial Institutions Examination Council, Home 
Mortgage Disclosure Act National Aggregate Report--Instrument: Loans 
Sold by Tract in 2006, 2008 (online at www.ffiec.gov/hmdaadwebreport/
NatAggWelcome.aspx) (accessed Dec. 4, 2009).
    \16\ Securities Industry and Financial Markets Association, US ABS 
Issuance (online at www.sifma.org/uploadedFiles/Research/Statistics/
SIFMA_USABSIssuance.pdf) (hereinafter ``US ABS Issuance'') (accessed 
Dec. 4, 2009).
    \17\ United States Department of Labor, Bureau of Labor Statistics, 
Labor Force Statistics from the Current Population Survey (online at 
data.bls.gov/PDQ/servlet/
SurveyOutputServlet?data_tool=latest_numbers&series_id=LNS14000000) 
(hereinafter ``Labor Force Statistics'') (accessed Dec. 7, 2009).
    \18\ For April 2007 data see Bloomberg, Mortgage Defaults Rise 62 
Percent, RealtyTrac Reports (May 15, 2007) (online at 
www.bloomberg.com/apps/news?pid=20601087&sid=a8IPzXdjD06o&refer=home) 
(quoting the RealtyTrac press release which is no longer available 
online). For August 2008 data see RealtyTrac, Foreclosure Activity 
Increases 12 Percent in August (Sept. 12, 2008) (online at 
www.realtytrac.com/contentmanagement/
pressrelease.aspx?channelid=9&accnt=0&itemid=5163).
---------------------------------------------------------------------------
    Fear in the financial markets, which had been building, 
evolved into a full-blown panic in September 2008. During a 
remarkable 19-day stretch, the federal government took over the 
two largest players in the mortgage market, allowed a large 
investment bank to go bankrupt, bailed out one of the world's 
largest insurance companies, and steered a major financial 
institution through the largest bank failure in U.S. history. 
Treasury took Fannie Mae and Freddie Mac into conservatorship 
on September 7.\19\ Lehman Brothers failed on September 14.\20\ 
The next day, Bank of America announced it was buying Merrill 
Lynch.\21\ The day after that, the government announced its 
bailout of AIG.\22\ Also on September 16, the assets of a 
money-market mutual fund fell below $1 per share, exposing 
investors to losses, an occurrence known as ``breaking the 
buck'' that had not happened in the industry for 14 years.\23\ 
On September 20, the Federal Reserve announced that it was 
allowing Goldman Sachs and Morgan Stanley, the nation's only 
two remaining large investment banks, to become bank holding 
companies, giving them access to a key source of low-cost 
borrowing from the Federal Reserve.\24\ On September 25, the 
FDIC took Washington Mutual, the nation's largest savings and 
loan, into receivership and sold many of its assets to JPMorgan 
Chase.\25\
---------------------------------------------------------------------------
    \19\ U.S. Department of the Treasury, Statement by Secretary Henry 
M. Paulson, Jr. on Treasury and Federal Housing Finance Agency Action 
to Protect Financial Markets and Taxpayers (Sept. 7, 2008) (online at 
www.ustreas.gov/press releases/hp1129.htm) (hereinafter ``Secretary 
Paulson Statements on Action to Protect Financial Markets and 
Taxpayers'').
    \20\ See United States Securities and Exchange Commission, 
Statement Regarding Recent Market Events and Lehman Brothers (Sept. 14, 
2008) (online at www.sec.gov/news/press/2008/2008-197.htm).
    \21\ See Bank of America, Bank of America Buys Merrill Lynch 
Creating Unique Financial Services Firm (Sept. 15, 2008) (online at 
newsroom.bankofamerica.com/index.php?s=43&item=8255).
    \22\ See Board of Governors of the Federal Reserve System, Press 
Release (Sept. 16, 2008) (online at www.federalreserve.gov/newsevents/
press/other/20080916a.htm) (hereinafter ``September 16 Press 
Release'').
    \23\ See The Reserve, Important Notice Regarding Reserve Primary 
Fund's Net Asset Value (Nov. 26, 2008) (online at www.reservefunds.com/
pdfs/Press Release Prim NAV 2008_FINAL_112608.pdf); Christopher Condon, 
Reserve Primary Money Fund Falls Below $1 a Share, Bloomberg (Sept. 16, 
2008) (online at www.bloomberg.com/apps/
news?pid=20601087&sid=a5O2y1go1GRU).
    \24\ Goldman Sachs' and Morgan Stanley's ability to borrow from the 
Federal Reserve dated back to March 2008, when the Primary Dealer 
Credit Facility was established, but that initiative was meant to be 
temporary. As bank holding companies, Goldman Sachs and Morgan Stanley 
would have permanent access to funding from the Federal Reserve. See 
Board of Governors of the Federal Reserve System, Press Release (Sept. 
21, 2008) (online at www.federalreserve.gov/newsevents/press/bcreg/
20080921a.htm).
    \25\ See Federal Deposit Insurance Corporation, JPMorgan Chase 
Acquires Banking Operations of Washington Mutual (Sept. 25, 2008) 
(online at www.fdic.gov/news/news/press/2008/pr08085.html).
---------------------------------------------------------------------------
    One particularly stark measure of the panic that had seized 
the markets was the spread between the three-month London 
Interbank Offered Rate (LIBOR), which shows quarterly borrowing 
costs for banks, and the Overnight Indexed Swaps (OIS) rate, 
which shows the cost of extremely short-term borrowing. The 
spread between these two rates reflects what the market 
believes to be the risk in lending money to a bank; it is 
therefore understood to be a measure of the banking sector's 
overall health.\26\ Prior to the widespread market fears about 
subprime lending, this spread hovered at or below 10 basis 
points, or 0.1 percent. In late 2007, it rose as high as 105 
basis points, reflecting a significantly heightened perception 
of risk. At the height of the financial crisis on October 10, 
2008, the spread was 364 basis points.\27\ In the fall of 2008, 
many major banks had large amounts of bad loans on their books, 
leading to fears that they were insolvent.\28\ The problem was 
exacerbated by the big banks' heavy use of leverage, their 
opaque balance sheets, and the complex structures of many of 
their holdings.\29\ As a result, lenders did not know whom to 
trust. At the same time, the already impaired securitization 
markets were now on the verge of shutting down. Issuance in the 
United States of asset-backed securities fell from $63 billion 
in the second quarter of 2008 to just $3.5 billion in the 
fourth quarter.\30\
---------------------------------------------------------------------------
    \26\ See Federal Reserve Bank of St. Louis, Economic Synopses: What 
the Libor-OIS Spread Says (Number 24) (May 11, 2009) (online at 
research.stlouisfed.org/publications/es/09/ES0924.pdf).
    \27\ Bloomberg, 3 Mo LIBOR-OIS Spread (online at www.bloomberg.com/
apps/cbuilder?ticker1=.LOIS3%3AIND) (hereinafter ``3 Mo LIBOR-OIS 
Spread'') (accessed Dec. 4, 2009).
    \28\ For a more detailed view of which loans went bad and when, see 
Figure 9 in Section 1.C.1.c.i. See also Congressional Oversight Panel, 
Written Testimony of Center for Economic and Policy Research Co-
Director Dean Baker, Taking Stock: Independent Views on TARP's 
Effectiveness, at 4 (Nov. 19, 2009) (online at cop.senate.gov/
documents/testimony-111909-baker.pdf) (hereinafter ``Baker COP 
Testimony'').
    \29\ See Bank of England, Remarks as Prepared for Delivery by 
Mervyn King, Governor of the Bank of England, to the Worshipful Company 
of International Bankers in London: Finance (Mar. 17, 2009) (online at 
www.bankofengland.co.uk/publications/speeches/2009/speech381.pdf).
    \30\ US ABS Issuance, supra note 16.
---------------------------------------------------------------------------

2. The Initial Federal Response to the Crisis

    The federal government's initial responses to the financial 
crisis were often ad hoc, with decisions made on an emergency 
basis.\31\ On March 13, 2008, during the run on Bear Stearns, 
the Federal Reserve learned that, due to a large and sudden 
deterioration in liquidity, the firm was one day from filing 
for bankruptcy. As Chairman of the Board of Governors of the 
Federal Reserve System Ben S. Bernanke later told Congress, 
there were numerous systemic factors for the Federal Reserve to 
consider as it contemplated a possible bailout, including the 
effects that Bear Stearns' failure would have on the firm's 
counterparties, the effects it would have on confidence in the 
financial markets, and the effects that any resulting 
contraction in available credit would have on the U.S. 
economy.\32\ Within hours, the Federal Reserve decided to 
facilitate Bear Stearns' acquisition by JPMorgan Chase by 
extending a $29 billion loan using its authority under Section 
13(3) of the Federal Reserve Act,\33\ which allows the Federal 
Reserve to lend to ``any individual, partnership, or 
corporation'' under ``unusual and exigent circumstances.'' \34\
---------------------------------------------------------------------------
    \31\ See Steven M. Davidoff and David Zaring, Regulation by Deal: 
The Government's Response to the Financial Crisis, 61 ADMIN. L. REV. 
463, 467 (2009) (available online at papers.ssrn.com/sol3/
papers.cfm?abstract_id=1306342) (characterizing the government's role 
as ``that of an extraordinarily vigorous dealmaker''); Richard A. 
Posner, A Failure of Capitalism: The Crisis of '08 and the Descent Into 
Depression (2009) (excerpted online at www.finreg21.com/lombard-street/
a-failure-capitalism-the-crisis-of-'08-and-the-descent-into-depression) 
(writing that the government responded to the crisis with ``a series of 
improvisations'').
    \32\ Senate Banking Committee, Written Testimony of Ben S. 
Bernanke, chairman, Board of Governors of the Federal Reserve System, 
Turmoil in U.S. Credit Markets: Examining the Recent Actions of Federal 
Financial Regulators, 110th Cong., at 2-3 (Apr. 3, 2008) (online at 
banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore_id=0a0ec016-ad61-4736-b6e3-
7eb61fbc0c69).
    \33\ Summary of Terms and Conditions Regarding the JPMorgan Chase 
Facility, supra note 12.
    \34\ 12 U.S.C. Sec. 343.
---------------------------------------------------------------------------
    In March 2008, at the same time that it was dealing with 
the Bear Stearns collapse, the Federal Reserve also took 
further steps to bolster financial markets and the economy with 
the creation of two special liquidity facilities.\35\ These 
facilities served as backstops in the marketplace by ensuring 
that firms that held less liquid assets had access to the cash 
they needed to fund their day-to-day operations. The 
government's improvisations accelerated at a dizzying rate in 
September 2008, as market forces repeatedly overwhelmed 
whichever step the government had most recently taken. The 
decision by Treasury and the Federal Housing Finance Agency to 
take control of Fannie Mae and Freddie Mac was driven by the 
two firms' thin capitalization, as well as the effects of 
falling home prices, rising delinquency rates, and instability 
in the financial markets.\36\ In addition, the firms' enormous 
sizes--together they held $5.4 trillion in guaranteed 
securities and outstanding debt, on par with the federal 
government's publicly held debt \37\--raised the possibility 
that their failure would have systemic consequences. Then-
Secretary of the Treasury Henry Paulson also cited Fannie Mae's 
and Freddie Mac's ambiguous relationships with the government 
as a motivating factor for the backstops. Investors worldwide 
had purchased Fannie and Freddie debt on the understanding that 
the U.S. government implicitly stood behind it.\38\ Secretary 
Paulson stated that under these circumstances the United States 
was obliged to assist the firms.\39\
---------------------------------------------------------------------------
    \35\ The new facilities were known as the Term Securities Lending 
Facility and the Primary Dealer Credit Facility. One additional Federal 
Reserve special liquidity facility pre-dated the market upheaval around 
the time of Bear Stearns' collapse, though its size was expanded in 
March 2008. The Term Auction Facility, which provided short-term 
liquidity to depository institutions, was created in December 2007.
    \36\ See Secretary Paulson Statements on Action to Protect 
Financial Markets and Taxpayers, supra note 19; see also Federal 
Housing Finance Agency, Statement of FHFA Director James B. Lockhart 
(Sept. 7, 2008) (online at www.ustreas.gov/press/releases/reports/
fhfa_statement_090708hp1128.pdf) (hereinafter ``Statement of FHFA 
Director James B. Lockhart'').
    \37\ Statement of FHFA Director James B. Lockhart, supra note 36.
    \38\ Secretary Paulson Statements on Action to Protect Financial 
Markets and Taxpayers, supra note 19.
    \39\ Secretary Paulson Statements on Action to Protect Financial 
Markets and Taxpayers, supra note 19.
---------------------------------------------------------------------------
    The reasoning behind the decision not to bail out Lehman 
Brothers is less clear. Then-Secretary Paulson insisted that he 
never considered committing taxpayer funds to a Lehman rescue. 
Secretary Paulson cited ``moral hazard,'' the idea that firms 
will take greater risks if they believe the government is 
prepared to bail them out.\40\ Government officials including 
Timothy Geithner, then President of the Federal Reserve Bank of 
New York (FRBNY), Chairman Bernanke, and Secretary Paulson, 
ultimately decided against a rescue.\41\ Treasury maintains 
that it doubted its legal authority to intervene in the 
collapse of Lehman, despite its role in the Bear Stearns 
rescue.\42\
---------------------------------------------------------------------------
    \40\ White House, Press Briefing by Dana Perino and Secretary of 
the Treasury Henry Paulson (Sept. 15, 2008) (online at georgewbush-
whitehouse.archives.gov/news/releases/2008/09/ 20080915-8.html).
    \41\ Carrick Mollenkamp et al., Lehman's Demise Triggered Cash 
Crunch Around Globe, Wall Street Journal (Sept. 29, 2008) (online at 
online.wsj.com/article/SB122266132599384845.html).
    \42\ See House Committee on Oversight and Government Reform, 
Testimony of Secretary Henry M. Paulson, Bank of America and Merrill 
Lynch: How Did a Private Deal Turn Into a Federal Bailout? Part III, 
111th Cong., at 6 (online at oversight.house.gov/
index.php?option=com_content&task=view&id=3690&Itemid=2); see also U.S. 
Department of the Treasury, Letter from Assistant Secretary for 
Legislative Affairs Kevin I. Fromer to Senate Finance Committee staff 
(Mar. 28, 2008) (online at finance.senate.gov/press/Bpress/2008press/
prb040108a.pdf) (describing Treasury's role in the negotiations between 
the Federal Reserve Bank of New York (FRBNY), Bear Stearns, and 
JPMorgan Chase).
---------------------------------------------------------------------------
    Subsequent media accounts present a more complicated 
picture--supporting the view that the key decision-makers hoped 
to send a message to the market by letting Lehman fail.\43\ 
Additionally, Treasury may have been leery of the popular 
reaction to a rescue that likely would have benefitted non-U.S. 
counterparties as much as U.S. interests--a real risk, as 
evidenced by the impact of the AIG rescue later.\44\ In any 
case, it would appear that the reasons Chairman Bernanke cited 
for the bailout of Bear Stearns--the effects of a failure on 
counterparties, the effects on financial markets, and the 
impact on credit availability--also applied in the case of 
Lehman Brothers.\45\
---------------------------------------------------------------------------
    \43\ Simon Johnson and James Kwak, Lehman Brothers and the 
Persistence of Moral Hazard, Washington Post (Sept. 15, 2009) (online 
at www.washingtonpost.com/wp-dyn/content/article/2009/09/15/
AR2009091500943.html).
    \44\ Barclays PLC, a British firm, had been interested in buying 
parts of Lehman's operations prior to Lehman's failure, and eventually 
bought significant parts of the Lehman business as part of the 
bankruptcy. AIG's biggest counterparties included Societe Generale, a 
French firm, and Deutsche Bank, a German firm. See Barclays PLC, Form 
6-K (Sept. 15, 2008) (online at sec.gov/Archives/edgar/data/312069/
000119163808001621/barc200809156k.htm); see also Lehman Brothers, 
Barclays to Acquire Lehman Brothers' Businesses and Assets (Sept. 16, 
2008) (online at www.lehman.com/press/pdf_2008/
0916_barclays_acquisition.pdf); AIG, Counterparty Attachments (Mar. 18, 
2009) (online at www.aig.com/aigweb/internet/en/files/ 
CounterpartyAttachments031809_tcm385-155645.pdf).
    \45\ But see Peter Van Doren, Lehman Brothers and Bear Stearns: 
What's the Difference? (Sept. 25, 2008) (online at www.cato.org/
pub_display.php?pub_id=9665). This article notes that firms in market 
economies go bankrupt all the time, and it explores the issue of 
whether the failure of investment banks such as Lehman Brothers and 
Bear Stearns can lead to contagion to firms that have no direct 
relationship with those bankrupt firms. The article describes without 
endorsing the view that investment banks can pose a contagion threat 
because of their use of over-the-counter financial derivatives. The 
article also briefly discusses the possibility that Bear Stearns played 
a more important role in the derivatives market than Lehman Brothers, 
and therefore posed a greater threat of contagion, as well as the 
possibility that Bear Stearns did not pose a contagion threat and 
therefore should not have been rescued.
---------------------------------------------------------------------------
    If policymakers hoped that Lehman's demise would end the 
cycle of bailouts, their strategy failed. Instead, the efforts 
to save the financial sector became more extensive and more 
frantic in the following days. One of the most urgent problems, 
AIG's illiquidity, suddenly emerged on the radar of top 
policymakers.\46\ With roughly 70 U.S. insurance companies, 
tens of billions of dollars of exposure to counterparties, and 
operations in 130 countries, AIG was another firm that was seen 
as posing a systemic risk.\47\ Within days, the Federal Reserve 
had agreed to lend the massive insurance company up to $85 
billion.\48\ In this atmosphere of panic, Chairman Bernanke and 
Secretary Paulson concluded that their only remaining option 
was to convince Congress to authorize an overwhelming fiscal 
response. This idea--that the government needed to respond to 
the crisis in a more comprehensive way--was the kernel of the 
Troubled Asset Relief Program, or the TARP.
---------------------------------------------------------------------------
    \46\ See U.S. Department of the Treasury, Letter from Assistant 
Secretary Herbert M. Allison, Jr. to Special Inspector General Neil M. 
Barofsky re: SIGTARP Official Draft Report, in Factors Affecting 
Efforts to Limit Payments to AIG Counterparties, at 41-42 (Nov. 16, 
2009) (online at www.sigtarp.gov/reports/audit/2009/
FactorsAffecting_Efforts_to_Limit_Payments_ to_AIG_Counterparties.pdf) 
(``Literally overnight, government officials were faced with a 
difficult choice, and a choice that had to be made immediately: either 
let AIG go bankrupt or provide support'').
    \47\ AIG later revealed that after receiving government assistance, 
it paid more than $90 billion to counterparties, including $12.9 
billion to Goldman Sachs, $11.9 billion to Societe Generale, and $11.8 
billion to Deutsche Bank. American International Group, Counterparty 
Attachments (Mar. 18, 2009) (online at www.aig.com/aigweb/internet/en/
files/CounterpartyAttachments031809_tcm385-155645.pdf); see also Scott 
E. Harrington, The Financial Crisis, Systemic Risk, and the Future of 
Insurance Regulation, Issue Analysis: A Public Policy Paper of the 
National Association of Mutual Insurance Companies, at 9 (Sept. 2009) 
(online at www.namic.org/advocatenews/pdfs/090922_harrington.pdf).
    \48\ See September 16 Press Release, supra note 22.
---------------------------------------------------------------------------
    Even after Secretary Paulson and Chairman Bernanke decided 
that a more systematic response was needed, they continued to 
improvise in response to the rapidly changing landscape. On 
September 19, the day after they held an emergency meeting with 
Congressional leaders,\49\ Treasury announced a temporary 
government guarantee of holdings in money-market funds.\50\ And 
in another effort to restore confidence in money-market funds, 
the Federal Reserve announced the creation of yet another 
special liquidity facility.\51\ Top officials at Treasury and 
the Federal Reserve also worked behind the scenes to encourage 
numerous potential bank mergers, including Citigroup-Goldman 
Sachs, Citigroup-Morgan Stanley, Citigroup-Wachovia, Wachovia-
Goldman Sachs, Wachovia-Morgan Stanley, and JPMorgan Chase-
Morgan Stanley.\52\ In the end, none of those mergers 
happened.\53\ Then on September 21, the Federal Reserve 
announced that Goldman Sachs and Morgan Stanley would be 
allowed to become bank holding companies, which was interpreted 
as a signal that the government would not allow those two firms 
to fail.
---------------------------------------------------------------------------
    \49\ See Speaker of the House of Representatives, Pelosi Comments 
on Bipartisan Congressional Leaders' Meeting with Paulson, Bernanke, 
and Cox (Sept. 18, 2008) (online at speaker.house.gov/newsroom/
pressreleases?id=0825).
    \50\ The guarantee was announced following the news that one money-
market fund, the Reserve Fund, had broken the buck. The Reserve Fund 
held Lehman Brothers debt, which sparked fears in the marketplace 
following Lehman's failure. U.S. Department of the Treasury, Treasury 
Announces Guaranty Program for Money Market Funds (Sept. 19, 2008) 
(online at www.treasury.gov/press/releases/hp1147.htm).
    \51\ This facility was called the Asset-Backed Commercial Paper 
Money Market Mutual Fund Liquidity Facility. See Board of Governors of 
the Federal Reserve System, Press Release (Sept. 19, 2008) (online at 
www.federalreserve.gov/monetarypolicy/20080919a.htm).
    \52\ See Andrew Ross Sorkin, Too Big To Fail (2009).
    \53\ Wachovia was soon bought by Wells Fargo and Morgan Stanley was 
stabilized by a capital infusion from a Japanese bank, Mitsubishi UFJ 
Financial Group.
---------------------------------------------------------------------------
    The decision by Chairman Bernanke and Secretary Paulson on 
September 18 to enlist the help of Congress led to a three-page 
legislative proposal from Treasury on September 20. The plan 
would have given Treasury the authority to spend up to $700 
billion to purchase ``troubled assets,'' namely ``residential 
and commercial mortgage-related assets.'' \54\ Over the next 
two weeks, the administration's proposal was significantly 
modified and expanded, and even defeated once in the House of 
Representatives, prior to being signed into law on October 3, 
2008. The law authorizes the Treasury Secretary to purchase not 
only mortgage-related securities under the TARP, but also ``any 
other financial instrument'' the purchase of which the 
Secretary determines to be ``necessary to promote financial 
market stability.'' \55\
---------------------------------------------------------------------------
    \54\ See U.S. Department of the Treasury, Fact Sheet: Proposed 
Treasury Authority to Purchase Troubled Assets (Sept. 20, 2008) (online 
at www.ustreas.gov/press/releases/hp1150.htm).
    \55\ The same law also establishes the Congressional Oversight 
Panel. Emergency Economic Stabilization Act of 2008 (EESA), Pub. L. No. 
110-343.
---------------------------------------------------------------------------
    What started as a contraction in the U.S. housing sector 
had now spread around the globe, prompting emergency responses 
by numerous countries in September-October 2008.\56\ Shortly 
after the comprehensive fiscal response was adopted in the 
United States, European governments decided to respond in a 
similar fashion. On October 8, British Prime Minister Gordon 
Brown announced a financial stability plan that included 
50 billion ($87.5 billion) in capital injections, 
200 billion ($349.8 billion) in a special liquidity 
program, and 250 billion ($437.2 billion) in 
guarantees to encourage inter-bank lending.\57\ On October 13, 
France announced a plan that included $320 billion ($429.4 
billion) in guarantees and $40 billion ($53.7 billion) in 
capital injections.\58\ On October 16, the Swiss government 
used a capital injection of 6 billion francs ($5.3 billion) to 
take a 9.3 percent stake in UBS.\59\ And on October 17, 
Germany's parliament approved a $480 billion ($645.6 billion) 
bank bailout package.\60\
---------------------------------------------------------------------------
    \56\ Bans or restrictions on short selling were imposed from 
Australia to the Netherlands. Ireland stepped in to guarantee deposits 
at its six largest banks. The Russian government injected many billions 
of dollars into its banking system. Iceland nationalized its three 
largest banks. For a lengthier discussion of the international 
response, see the Panel's April report. Congressional Oversight Panel, 
April Oversight Report: Assessing Treasury's Strategy: Six Months of 
TARP, at 60-70 (Apr. 7, 2009) (online at cop.senate.gov/documents/cop-
040709-report.pdf).
    \57\ See British Prime Minister's Office, 50 Billion 
Banking Package (Oct. 8, 2008) (online at www.number10.gov.uk/
Page17112).
    \58\ Henry Samuel, Banking Bail-out: France Unveils $360bn Package, 
Telegraph (U.K.) (Oct. 13, 2008) (online at www.telegraph.co.uk/
finance/financetopics/financialcrisis/3190311/Banking-bail-out-France-
unveils-360bn-package.html).
    \59\ David Gow, Switzerland Unveils Bank Bail-out Plan, Guardian 
(U.K.) (Oct. 16, 2008) (online at www.guardian.co.uk/business/2008/oct/
16/ubs-creditsuisse).
    \60\ See Simon Morgan, Germany Adopts 480-bln-euro Bank Bail-out, 
Agence France-Presse (Oct. 17, 2008) (online at uk.biz.yahoo.com/
17102008/323/germany-adopts-480-bln-euro-bank-bail.html).
---------------------------------------------------------------------------
    For American families, the financial crisis caused a vast 
destruction of wealth. By September 2008, the bursting of the 
housing bubble sent home prices down by 22 percent from their 
peak in 2006.\61\ When the financial markets reached their low 
point, in the first quarter of 2009, the value of households' 
financial assets had also plummeted by about 20 percent from 
their 2007 peak.\62\ From peak to trough, the net worth of 
households and non-profit organizations fell by $12.7 
trillion.\63\ As a point of comparison, the U.S. gross domestic 
product, which measures the market value of the country's 
annual output of final goods and services in a year, is $14.3 
trillion.\64\
---------------------------------------------------------------------------
    \61\ See S&P/Case-Shiller Home Price Indices, supra note 1.
    \62\ See Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release: Flow of Funds Accounts of the United 
States, Flows and Outstandings Second Quarter 2009, at 104 (Sept. 17, 
2009) (online at www.federalreserve.gov/releases/z1/Current/z1.pdf) 
(hereinafter ``Federal Reserve Statistical Release: Second Quarter 
2009'').
    \63\ Id. at 104.
    \64\ U.S. Department of Commerce, Bureau of Economic Analysis, 
Gross Domestic Product: Third Quarter (Advance Estimate) (Oct. 29, 
2009) (online at www.bea.gov/newsreleases/national/gdp/
gdpnewsrelease.htm).
---------------------------------------------------------------------------

                        C. The TARP's Evolution

    Although Secretary Paulson and Chairman Bernanke initially 
had proposed to use TARP funds to buy troubled assets on the 
books of the largest U.S. financial institutions, they soon 
realized that this was impractical given the need for quick 
action. On October 14, 2008, Secretary Paulson summoned the 
heads of the nine largest U.S. banks to Washington and told 
them that Treasury was making direct capital injections into 
each of their institutions, using a total of $125 billion of 
TARP resources. Over the following weeks and months, under both 
Secretary Paulson and incoming Secretary Geithner, Treasury 
made further capital stock purchases \65\ in another 692 banks 
and used the TARP in conjunction with Federal Reserve support 
to implement the extraordinary rescue of AIG. Treasury also 
used TARP resources to provide assistance to two major U.S. 
automobile companies and to fund a mortgage foreclosure relief 
grant program as part of the new Administration's efforts to 
combat the unprecedented level of mortgage defaults and 
foreclosures in the United States. Finally, the TARP was used 
in conjunction with Treasury and Federal Reserve efforts to try 
to restart small business and consumer lending.
---------------------------------------------------------------------------
    \65\ These capital stock purchases, discussed in this section, were 
made through the TARP's Capital Purchase Program, Targeted Investment 
Program, and Systemically Significant Failing Institution Program.
---------------------------------------------------------------------------

1. Capital Programs and Banking Sector Health

            a. Background
    The largest and most prominent use of TARP funding has been 
the government's efforts to provide capital assistance to U.S. 
banks. The Capital Purchase Program (CPP), which provides 
capital injections into banks, was the first and largest TARP 
program. The Targeted Investment Program (TIP) and the 
Systemically Significant Failing Institution (SSFI) Program 
also provide capital injections, but they are narrower efforts 
aimed at providing exceptional assistance to large institutions 
considered critical to the functioning of the financial system. 
Another exceptional assistance program is the Asset Guarantee 
Program (AGP), under which the government has guaranteed 
approximately $301 billion in Citigroup assets, thereby 
insulating Citigroup from potential capital losses on those 
assets. The Public-Private Investment Program (PPIP) provides 
yet another form of capital assistance by attempting to restart 
the markets for troubled securities that are currently weighing 
down bank balance sheets. By removing these troubled securities 
from bank balance sheets, or guaranteeing assets, the PPIP and 
AGP, respectively, alleviate some of the banks' capital needs. 
Lastly, while the FDIC's Temporary Liquidity Guarantee Program 
(TLGP) does not rely on TARP funds, it is another key part of 
the government's support for the banking system.
            i. Capital Purchase Program \66\
---------------------------------------------------------------------------
    \66\ For more detail on the CPP, see the Panel's February and July 
Reports. Congressional Oversight Panel, February Oversight Report: 
Valuing Treasury's Acquisitions, at 5-11 (Feb. 6, 2009) (online at 
cop.senate.gov/documents/cop-020609-report.pdf) (hereinafter ``February 
Oversight Report''); Congressional Oversight Panel, July Oversight 
Report: TARP Repayments, Including the Repurchase of Stock Warrants, at 
8-17 (July 10, 2009) (online at cop.senate.gov/documents/cop-071009-
report.pdf) (hereinafter ``July Oversight Report'').
---------------------------------------------------------------------------
    Treasury used the CPP to provide capital to banks and other 
financial institutions, usually by purchasing senior preferred 
stock.\67\ Treasury has stated that it only provided CPP funds 
to viable banks.\68\ In order to give taxpayers an opportunity 
to participate in the upside if a bank's stock price rose, 
Treasury also received warrants to purchase common stock. The 
program has gone through several phases; the application period 
for the final phase closed on November 21, 2009.\69\ Financial 
institutions that have already received CPP funds may keep 
their money according to the terms of the program, but Treasury 
will not disburse additional funds.\70\ Over the life of the 
program, the CPP has provided nearly $205 billion in capital to 
692 financial institutions, including more than 300 small and 
community banks.\71\
---------------------------------------------------------------------------
    \67\ Treasury has stated that for every $100 Treasury invested, it 
received preferred stock and warrants worth about $100. However, in its 
February Report, the Panel performed a valuation of Treasury's initial 
investments under the capital programs and found that Treasury received 
stock and warrants worth only approximately $66 for every $100 
invested. February Oversight Report, supra note 66, at 4.
    \68\ U.S. Department of the Treasury, Capital Purchase Programs 
(updated Nov. 3, 2009) (online at www.financialstability.gov/
roadtostability/capitalpurchaseprogram.html) (accessed Dec. 7, 2009). 
However, as discussed in Section (C)(1)(a), infra, there are questions 
as to whether Treasury adhered to this guideline.
    \69\ U.S. Department of the Treasury, Frequently Asked Questions 
regarding the Capital Purchase Program (CPP) for Small Banks (online at 
www.financialstability.gov/docs/CPP/FAQonCPPforsmallbanks.pdf) 
(hereinafter ``FAQs on CPP for Small Banks'') (accessed Dec. 7, 2009).
    \70\ U.S. Department of the Treasury, The Next Phase of Government 
Financial Stabilization and Rehabilitation Policies, at 36 (Sept. 14, 
2009) (online at www.treas.gov/press/releases/docs/
Next%20Phase%20of%20Financial%20Policy,%20Final,%202009-09-14.pdf) 
(hereinafter ``Next Phase of Government Financial Stabilization'').
    \71\ See U.S. Department of the Treasury, Troubled Asset Relief 
Program Transactions Report for Period Ending November 25, 2009 (Nov. 
30, 2009) (online at www.financialstability.gov/docs/transaction-
reports/11-30-09%20Transactions%20Report%20as%20of%2011-25-09.pdf) 
(hereinafter ``November 25 Transactions Report''); U.S. Department of 
the Treasury, Assistant Secretary Allison Written Testimony for 
Congressional Oversight Panel (Oct. 24, 2009) (online at 
www.financialstability.gov/latest/tg_10222009.html). The 20 top 
recipients of capital assistance under the CPP, the TIP, and the SSFI 
Program received 89 percent of the $319.5 billion total of these three 
programs' funds.
---------------------------------------------------------------------------
    Fifty financial institutions have redeemed their preferred 
stock, and 30 of them have also repurchased their warrants.\72\ 
CPP recipients may redeem their preferred stock only after 
receiving approval from the federal banking agency that serves 
as their primary regulator.\73\ The redemption price of the 
preferred stock is set contractually, but Treasury repurchases 
the warrants at fair market value, which is determined through 
a negotiation and appraisal process between Treasury and the 
financial institution.\74\ Treasury has determined that it will 
not hold warrants after a financial institution redeems its 
preferred stock.\75\ If a financial institution does not wish 
to repurchase the warrants or if Treasury and the financial 
institution cannot agree on a price through the appraisal 
process, Treasury will auction them to the public.\76\
---------------------------------------------------------------------------
    \72\ This is as of November 25, 2009. November 25 Transactions 
Report, supra note 71. Treasury has stated that it will not hold the 
warrants after the preferred stock has been redeemed. Three of these 
banks have agreed to allow Treasury to auction their warrants. Of the 
remaining banks, Treasury is either currently negotiating the 
repurchase price or, for those which declined to continue discussions, 
is preparing to auction the warrants. Treasury communications with 
Panel staff (Dec. 4, 2009).
    \73\ For a full discussion of the history and legal aspects of CPP 
repayment, see the Panel's July report. July Oversight Report, supra 
note 66, at 8-20.
    \74\ U.S. Department of the Treasury, Securities Purchase 
Agreement: Standard Terms, at Sec. Sec. 4.4, 4.9(c)(i) (online at 
www.financialstability.gov/docs/CPP/spa.pdf) (accessed Dec. 8, 2009); 
12 U.S.C. 5223(a)(2)(B). For a more complete discussion of this topic, 
please see the Panel's July Oversight Report. See July Oversight 
Report, supra note 66, at 10-17. The process is different for private 
banks. Treasury immediately exercised the warrants of private banks. 
The redemption price of the shares received on exercise was set in the 
contracts. The process is different for private banks. Treasury 
immediately exercised the warrants of private banks. The redemption 
price of the shares received on exercise was set in the contracts.
    \75\ U.S. Department of the Treasury, Treasury Announces Warrant 
Repurchase and Disposition Process for the Capital Purchase Program 
(June 26, 2009) (online at www.financialstability.gov/docs/CPP/Warrant-
Statement.pdf ).
    \76\ Treasury has announced it will auction the warrants of 
JPMorgan Chase, Capital One, and TCF Financial Corporation through a 
modified Dutch auction process. U.S. Department of the Treasury, 
Treasury Announces Intent to Sell Warrant Positions in Public Dutch 
Auction (Nov. 19, 2009) (online at www.financialstability.gov/latest/
tg_11192009b.html). Treasury will allow the banks to bid on their own 
warrants. On December 3, 2009, Treasury held a public auction to sell 
Capital One's warrants. At the auction, the warrants were priced at 
$146.5 million. U.S. Department of the Treasury, Treasury Department 
Announces Pricing of Public Offering of Warrants to Purchase Common 
Stock of Capital One Financial Corporation (Dec. 4, 2009) (online at 
www.financialstability.gov/latest/tg_12042009.html) (hereinafter 
``Capital One Warrant Purchase'').
---------------------------------------------------------------------------
    In the first half of this year, Treasury and the bank 
supervisors engaged in the Supervisory Capital Assessment 
Program (SCAP), comprehensive stress tests of the nation's 
largest banks. According to Treasury, these tests were a 
forward-looking exercise aimed at determining whether these 
institutions had sufficient capital to weather a longer and 
more severe economic downturn.\77\ The results showed that 10 
of the 19 stress-tested institutions required additional 
capital.\78\ The other nine were allowed to redeem their 
preferred stock, subject to the approval of their primary 
federal regulator.\79\ The 10 banks that required additional 
capital had to raise this money in the private markets before 
they could redeem their preferred stock. On June 17, 2009, 10 
of the 19 stress-tested banks repurchased their preferred 
stock.\80\ Together, they repurchased approximately $70 billion 
in preferred stock. Figure 1 shows the total amount of CPP 
funds outstanding by month, with the drop-off in June 2009 
resulting from the wave of stock repurchases. Though 10 of the 
19 stress-tested banks have already repaid their CPP funds, 
three of the four largest banks still hold their TARP funds. 
Measured by assets, these three institutions constitute 
approximately 40 percent of the banking system.\81\ One of 
these three, Bank of America, announced on December 2, 2009 
that it would repay all of its TARP funds after the completion 
of a securities offering.\82\
---------------------------------------------------------------------------
    \77\ For a discussion of the stress tests, see the Panel's June 
report. Congressional Oversight Panel, June Oversight Report: Stress 
Testing and Shoring Up Bank Capital (June 9, 2009) (online at 
cop.senate.gov/documents/cop-060909-report.pdf) (hereinafter ``June 
Oversight Report''). If a stress-tested institution required additional 
capital and could not raise it in the private markets, it could have 
access to additional TARP funds through the Capital Assistance Program 
(CAP). The terms of this program were less favorable to the banks than 
were the terms of the CPP.
    \78\ Federal Reserve Board of Governors, The Supervisory Capital 
Assessment Program: Overview of Results, at 3 (May 7, 2009) (online at 
www.federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf). 
Nine of these 10 have raised the required capital in the private 
markets. To date, GMAC is the only institution that has returned to the 
government for more financial support. Treasury announced that it will 
provide any support to GMAC through the AIFP. U.S. Department of the 
Treasury, Treasury Announcement Regarding the Capital Assistance 
Program (Nov. 9, 2009) (online at www.financialstability.gov/latest/
tg_11092009.html) (hereinafter ``Treasury Announcement Regarding the 
CAP''). Treasury staff has told the Panel that GMAC will receive AIFP 
and not CAP funds because its previous injections had been through the 
AIFP. In addition, Treasury staff stated that the terms of the AIFP are 
substantially similar to the CAP. Treasury communications with Panel 
staff (Nov. 17, 2009).
    \79\ U.S. Department of the Treasury, FAQs on Capital Purchase 
Program Repayment and Capital Assistance Program (online at 
www.financialstability.gov/docs/FAQ_CPP-CAP.pdf) (accessed Dec. 7, 
2009). A stress tested institution seeking to repay was also required 
to ``be able to demonstrate its financial strength by issuing senior 
unsecured debt for a term greater than five years not backed by FDIC 
guarantees, in amounts sufficient to demonstrate a capacity to meet 
funding needs independent of government guarantees.'' U.S. Department 
of the Treasury, FAQs on Capital Purchase Program Repayment and Capital 
Assistance Program (online at www.financialstability.gov/docs/FAQ_CPP-
CAP.pdf) (accessed Dec. 7, 2009).
    \80\ The 10 banks that repaid are JPMorgan Chase, Goldman Sachs, 
Morgan Stanley, U.S. Bancorp, Capital One, American Express, Bank of 
New York, State Street, Northern Trust, and BB&T. November 25 
Transactions Report, supra note 71.
    \81\ See National Information Center, Top 50 BHCs (online at 
www.ffiec.gov/nicpubweb/nicweb/Top50form.aspx) (accessed Dec. 7, 2009); 
Federal Reserve Board of Governors, Assets and Liabilities of 
Commercial Banks in the United States--H.8 (Dec. 4, 2009) (online at 
www.federalreserve.gov/releases/h8/current/default.htm).
    \82\ Bank of America, Bank of America to Repay Entire $45 Billion 
in TARP to U.S. Taxpayers (Dec. 2, 2009) (online at 
newsroom.bankofamerica.com/index.php?s=43&item=8583) (hereinafter 
``Bank of America Repayment'').
---------------------------------------------------------------------------

FIGURE 1: CPP FUNDS OUTSTANDING BY MONTH (AS OF NOVEMBER 30, 2009) \83\

---------------------------------------------------------------------------
    \83\ November 25 Transactions Report, supra note 71. 

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Unlike other lending categories, Treasury only began 
publishing small business lending information as of April 2009. 
U.S. Department of the Treasury, Treasury Department Monthly 
Lending and Intermediation Snapshot Data for April 2009-
September 2009 (Nov. 16, 2009) (online at 
www.financialstability.gov/impact/
monthlyLendingandIntermediationSnapshot.htm) (hereinafter 
``Treasury Department Monthly Lending and Intermediation 
Snapshot Data for April 2009-September 2009'').
            ii. Exceptional Assistance Programs
    Treasury has used additional TARP funds to bolster the 
capital bases of financial institutions that were deemed 
``critical to the functioning of the financial system.'' \84\ 
The three beneficiaries of this assistance have been AIG, Bank 
of America, and Citigroup. Because these institutions are 
deemed to have received ``exceptional assistance,'' they are 
subject to more stringent guidelines on executive compensation 
than other TARP recipients.\85\
---------------------------------------------------------------------------
    \84\ See U.S. Department of the Treasury, Targeted Investment 
Program (online at www.financialstability.gov/roadtostability/
targetedinvestmentprogram.html) (hereinafter ``Targeted Investment 
Program'') (accessed Dec. 7, 2009) (the TIP ``focuses on the complex 
relationships and reliance of institutions within 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, Programs (online at 
www.financialstability.gov/roadtostability/programs.htm) (hereinafter 
``Treasury Programs'') (accessed Dec. 7, 2009) (the SSFI Program ``was 
established to provide stability and prevent disruptions to financial 
markets from the failure of institutions that are critical to the 
functioning of the nation's financial system'').
    \85\ See 31 C.F.R. Sec. Sec. 30.0-30.17; U.S. Department of the 
Treasury, Interim Final Rule on TARP Standards for Compensation and 
Corporate Governance (online at www.treas.gov/press/releases/reports/
ec%20ifr%20fr%20web%206.9.09tg164.pdf) (accessed Dec. 7, 2009).
---------------------------------------------------------------------------
    Systemically Significant Financial Institutions Program. 
The SSFI Program was ``established to provide stability and 
prevent disruptions to financial markets from the failure of 
institutions that are critical to the functioning of the 
nation's financial system.'' \86\ AIG, which has received 
nearly $70 billion in capital under the SSFI Program,\87\ is 
the only recipient of funds under the program. AIG can continue 
to draw on the SSFI Program through April 17, 2014. In exchange 
for each drawdown, Treasury will receive additional preferred 
AIG stock in the amount of the drawdown. The preferred stock 
carries a 10 percent dividend.\88\ Treasury has also received 
warrants to purchase common stock.\89\
---------------------------------------------------------------------------
    \86\ Treasury Programs, supra note 84.
    \87\ The first round came through a purchase of $40 billion in 
preferred stock, on November 25, 2008. The initial purchase was of 
cumulative preferred stock. In April 2009, this was exchanged for $41.6 
billion of non-cumulative preferred shares. This represented no change 
in Treasury's initial investment. See U.S. Department of the Treasury, 
Transactions Report (Oct. 27, 2009) (online at 
www.financialstability.gov/docs/transaction-reports/10-27-
09%20Transactions%20Report%20as%20of%2010-23-09.pdf). The second was 
through the April 17, 2009 creation of an equity capital facility of 
approximately $30 billion. See U.S. Department of the Treasury, 
Transactions Report (Oct. 27, 2009) (online at 
www.financialstability.gov/docs/transaction-reports/10-27-
09%20Transactions%20Report%20as%20of%2010-23-09.pdf).
    \88\ See U.S. Department of the Treasury, Term Sheet Exchange of 
Series D Fixed Rate Cumulative Perpetual Preferred Stock for Series E 
Fixed Rate Non-Cumulative Perpetual Preferred Stock (Mar. 2, 2009) 
(online at www.financialstability.gov/docs/agreements/
030209_AIG_Term_Sheet.pdf).
    \89\ Treasury's funding of AIG is not the only government 
assistance to the insurance giant. AIG has also received $96 billion in 
assistance from the Federal Reserve through a revolving credit facility 
and loans extended to special purpose vehicles to buy AIG assets.
---------------------------------------------------------------------------
    Targeted Investment Program. Like the SSFI Program, the TIP 
was intended to ``stabilize the financial system by making 
investments in institutions that are critical to the 
functioning of the financial system.'' \90\ Just two financial 
institutions have received TIP funds: Bank of America and 
Citigroup. Treasury announced that it was providing a capital 
injection to Citigroup on November 23, 2008, and purchased $20 
billion in preferred Citigroup stock on December 31, 2008. The 
term sheet accompanying the announcement portrays the capital 
injection as a modified version of the CPP.\91\ It was not 
until January 2, 2009 that TIP was given a name and its 
guidelines were announced.\92\ Then on January 16, 2009, 
Treasury bought $20 billion in preferred stock from Bank of 
America.\93\ The assistance provided under this program was in 
addition to the $25 billion that Citigroup had already 
received, and the $15 billion that Bank of America 
(subsequently increased to $25 billion, with the inclusion of 
Merrill Lynch's funds) has already received in CPP funds on 
October 28, 2008.\94\
---------------------------------------------------------------------------
    \90\ Targeted Investment Program, supra note 84.
    \91\ See U.S. Department of the Treasury, Summary of Terms: 
Preferred Securities (Nov. 23, 2008) (online at www.treas.gov/press/
releases/reports/cititermsheet_112308.pdf) (``Redemption: In stock or 
cash, as mutually agreed between UST and Citi. Otherwise, redemption 
terms of CPP preferred terms apply . . . Repurchases: Same terms as 
preferred issued in CPP'').
    \92\ U.S. Department of the Treasury, Treasury Releases Guidelines 
for Targeted Investment Program (Jan. 2, 2009) (online at treasury.gov/
press/releases/hp1338.htm); U.S. Department of the Treasury, Joint 
Statement by Treasury, Federal Reserve and the FDIC on Citigroup (Nov. 
23, 2008) (online at www.treas.gov/press/releases/hp1287.htm). The 
announcement on November 23, 2008 did not specify under which program 
Citigroup's second injection fell. In fact, at that time, the CPP was 
the only named program under the TARP.
    \93\ See November 25 Transactions Report, supra note 71.
    \94\ See November 25 Transactions Report, supra note 71.
---------------------------------------------------------------------------
    Treasury required changes in senior management, and diluted 
the interests of shareholders when the government received a 
79.9 percent equity interest in AIG.\95\ By contrast, despite 
providing Bank of America and Citigroup with exceptional 
assistance, Treasury did not require them to make changes in 
management. Furthermore, it did not dilute shareholder 
interests in Bank of America. Treasury has not explained the 
rationale behind the differences in treatment.
---------------------------------------------------------------------------
    \95\ See U.S. Department of the Treasury, Monthly 105(a) Report 
(Nov. 10, 2009) (online at www.financialstability.gov/docs/
105CongressionalReports/October%20105(a)_11.10.2009.pdf) (``the FRBNY 
received convertible preferred shares representing approximately 79.8% 
of the current voting power of the AIG common shares. These preferred 
shares were deposited in a trust, created by the FRBNY. The U.S. 
Treasury (i.e., the general fund) is the beneficiary of this trust'').
---------------------------------------------------------------------------
    Asset Guarantee Program.\96\ The AGP is an initiative by 
Treasury, along with the FDIC and the Federal Reserve, that 
initially guaranteed approximately $301 billion of Citigroup's 
assets.\97\ After Citigroup received $25 billion in CPP funds 
in late October 2008, its financial status continued to 
deteriorate. On November 23, 2008, Treasury, the FDIC and the 
Federal Reserve agreed to share with Citigroup potential losses 
on a pool of its assets that Citigroup identified as some of 
its riskiest.\98\ Treasury announced the aid in conjunction 
with its announcement of Citigroup's second capital infusion, 
this one under TIP.\99\
---------------------------------------------------------------------------
    \96\ For a full discussion of the AGP, see the Panel's November 
report. Congressional Oversight Panel, November Oversight Report: 
Guarantees and Contingent Payments in TARP and Related Programs, at 13-
27 (Nov. 6, 2009) (online at cop.senate.gov/documents/cop-110609-
report.pdf) (hereinafter ``November Oversight Report'').
    \97\ Treasury had also entered into an agreement with Bank of 
America to provide a similar guarantee, but it was never finalized. For 
a full description of the Citigroup and Bank of America guarantees, see 
the Panel's November report. November Oversight Report, supra note 96, 
at 13-27. From the beginning, Treasury had stated that AGP assistance 
would not be ``widely available.'' U.S. Department of the Treasury, 
Report to Congress Pursuant to Section 102 of the Emergency Economic 
Stabilization Act, at 1 (Dec. 31, 2008) (online at 
www.financialstability.gov/docs/AGP/sec102ReportToCongress.pdf).
    \98\ 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).
    \99\ Overall, Treasury has provided $49 billion in capital 
assistance to Citigroup. Treasury's initial CPP holdings of preferred 
stock were subsequently converted to 7.7 billion shares of common stock 
priced at $3.25 per share, for a total value of $25 billion at the time 
of the conversion. Treasury has also converted the form of its TIP and 
AGP holdings. On July 23, 2009, Treasury, along with both public and 
private Citigroup debt holders, participated in a $58 billion exchange. 
As of November 30, 2009, Treasury's common stock investment in 
Citigroup had a market value of $31.6 billion and represented 34 
percent of the value of Citigroup common stock outstanding.
---------------------------------------------------------------------------
            iii. Public-Private Investment Program \100\
---------------------------------------------------------------------------
    \100\ For a complete discussion of the PPIP, see the Panel's August 
report. Congressional Oversight Panel, August Oversight Report: The 
Continued Risk of Troubled Assets, at 48 (Aug. 11, 2009) (online at 
cop.senate.gov/documents/cop-081109-report.pdf) (hereinafter ``August 
Oversight Report'').
---------------------------------------------------------------------------
    PPIP, which is aimed at removing troubled assets from the 
balance sheets of financial institutions, was announced on 
March 23, 2009.\101\ The program aims to aid the 
recapitalization of financial institutions and ultimately to 
support renewed lending by discovering prices in the illiquid 
market for troubled mortgage-related assets.\102\ It has two 
components: a program to be administered by the FDIC that would 
fund the purchase of troubled whole loans, and a program 
administered by Treasury that funds the purchase of troubled 
securities. The first component has yet to exit its trial 
phase,\103\ although Treasury recently stated that government 
officials are continuing to review applications from firms that 
would share the cost of funding whole-loan purchases.\104\ 
Under the second component, known as the Legacy Securities PPIP 
(S-PPIP), Treasury has agreed to invest up to $30 billion in 
both equity and debt to buy troubled securities.
---------------------------------------------------------------------------
    \101\ The troubled assets, which Treasury refers to as legacy 
securities, include residential and commercial mortgage-backed 
securities issued before 2009. See U.S. Department of the Treasury, 
Legacy Securities Investment Program (Legacy Securities PPIP) 
Additional Frequently Asked Questions, at 13 (July 8, 2009) (online at 
www.treas.gov/press/releases/reports/legacy_securities_faqs.pdf); U.S. 
Department of the Treasury, Treasury Department Releases Details on 
Public Private Partnership Investment Program (Mar. 23, 2009) (online 
at www.ustreas.gov/press/releases/tg65.htm).
    \102\ See U.S. Department of the Treasury, Troubled Assets Relief 
Program Eighth Tranche Report to Congress, at 8-9 (Oct. 7, 2009) 
(online at www.financialstability.gov/docs/
Eighth%20Tranche%20Report_2009%2010%2007.pdf) (hereinafter ``TARP 
Eighth Tranche Report'').
    \103\ The FDIC recently announced a pilot sale of troubled whole 
loans, which it conducted as a test of the program's funding mechanism. 
However, the pilot sale did not accomplish the program's goal of 
removing toxic assets from bank balance sheets because the loans that 
were sold came from a failed bank that the FDIC had already taken into 
receivership. See Federal Deposit Insurance Corp., Legacy Loans 
Program--Winning Bidder Announced in Pilot Sale (Sept. 16, 2009) 
(online at www.fdic.gov/news/news/press/2009/pr09172.html).
    \104\ See TARP Eighth Tranche Report, supra note 102, at 8.
---------------------------------------------------------------------------
    As of November 30, Treasury had invested roughly $23.3 
billion, which is slightly more than two-thirds of the funds 
designated for the program.\105\ Treasury's current $30 billion 
commitment to PPIP is scaled down considerably from its initial 
plan of investing a total of $75-$100 billion in the program's 
two components.\106\ Eight of the nine fund managers closed 
their funds between September 30 and November 30, 2009.\107\ 
According to Treasury, these closed funds were able to begin 
purchasing securities within a few weeks of the closing.\108\
---------------------------------------------------------------------------
    \105\ See U.S. Department of the Treasury, Treasury Department 
Announces Additional Initial Closing of Legacy Securities Public-
Private Investment Fund (Nov. 30, 2009) (online at 
www.financialstability.gov/latest/tg_11302009.html) (hereinafter 
``Treasury Announces Additional Initial Closing of Legacy Securities 
Public-Private Investment Fund'').
    \106\ See 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).
    \107\ Treasury Announces Additional Initial Closing of Legacy 
Securities Public-Private Investment Fund, supra note 105; U.S. 
Department of the Treasury, Treasury Department Announces Additional 
Initial Closing of Legacy Securities Public-Private Investment Fund 
(Nov. 5, 2009) (online at www.financialstability.gov/latest/
tg_11052009.html).
    \108\ Treasury communications with Panel staff (Sept. 29, 2009).
---------------------------------------------------------------------------
            iv. Total Government Funding for Financial Institutions
    Figure 2 shows how the government has used TARP funds in 
conjunction with funding from the Federal Reserve and FDIC to 
develop a package of capital programs. With a combination of 
direct outlays, loans, and guarantees, the government has 
committed $617.8 billion to capital programs, well more than 
the $292.1 billion committed from the TARP. The Federal Reserve 
has committed $315.7 billion through guarantees and loans to 
AIG and Citigroup. In addition, the FDIC has $10 billion of 
exposure through its share of the Citigroup guarantee.\109\
---------------------------------------------------------------------------
    \109\ The Panel has 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.

   FIGURE 2: FEDERAL GOVERNMENT'S CAPITAL PROGRAMS (AS OF NOVEMBER 30,
                                2009)110
                        [In billions of dollars]
------------------------------------------------------------------------
                               Treasury   Federal
           Program              (TARP)    Reserve    FDIC111     Total
------------------------------------------------------------------------
AIG:
    Outlays 112.............      $69.8         $0         $0      $69.8
    Loans...................          0       95.3          0       95.3
    Guarantees..............          0          0          0          0
                             -------------------------------------------
    AIG subtotal............       69.8       95.3          0      165.1
PPIP (Securities):
    Outlays.................         10          0          0         10
    Loans...................         20          0          0         20
    Guarantees..............          0          0          0          0
                             -------------------------------------------
    PPIP (securities)                30          0          0         30
     subtotal...............
PPIP (Loans):
    Outlays.................          0          0          0          0
    Loans...................          0          0          0          0
    Guarantees..............          0          0          0          0
                             -------------------------------------------
    PPIP (loans) subtotal...          0          0          0          0
Bank of America:
    Outlays.................         45          0          0         45
    Loans...................          0          0          0          0
    Guarantees..............  .........  .........  .........          0
                             -------------------------------------------
    Bank of America subtotal         45          0          0         45
Citigroup:
    Outlays.................         45          0          0         45
    Loans...................          0          0          0          0
    Guarantees..............          5      220.4         10      235.4
                             -------------------------------------------
    Citigroup subtotal......         50      220.4         10      280.4
Capital Purchase Program
 (Other than Citigroup, Bank
 of America):
    Outlays.................         97          0          0         97
    Loans...................          0          0          0          0
    Guarantees..............          0          0          0          0
    CPP (other than                  97          0          0         97
     Citigroup, Bank of
     America) subtotal......
                             -------------------------------------------
      Capital Programs Total     $291.8     $315.7        $10   $617.58
------------------------------------------------------------------------
\110\ November 25 Transactions Report, supra note 71. The Panel's
  methodology and source citations for these figures can be found in the
  corresponding endnotes for Figure 27.
\111\ This table does not include the FDIC's Temporary Liquidity
  Guarantee Program.
\112\ The term ``outlays'' is used in this table as well as in Figure 27
  to describe the disbursement of 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. Credit reform accounting is discussed in
  further detail in the Panel's November report. November Oversight
  Report, supra note 96, at 11.

    Return on Investment. It is not yet possible to calculate 
the amount of money that the capital programs as a whole will 
earn or lose, and it will not be for some time. However, 
certain sources of income and losses, such as the internal rate 
of return for banks that have repurchased all of their CPP 
funds, are already apparent. Financial institutions that 
received CPP assistance have bought back approximately $70 
billion in preferred stock. As shown in Figure 29, those funds 
comprise most of the $86.9 billion in cash inflows that the 
TARP has generated through November 30, 2009. This includes 
$10.2 billion in dividends and interest payments. In addition, 
Treasury has collected $3.2 billion in payments for warrant 
repurchases.
    In its July Report, the Panel analyzed the prices at which 
Treasury was allowing the financial institutions to repurchase 
their warrants. The Panel was concerned that Treasury was 
undervaluing the warrants and/or not negotiating strongly 
enough.\113\ After the July Report was released, several banks 
repurchased their warrants for prices very close to the Panel's 
valuation: notably, Goldman Sachs, Morgan Stanley, and American 
Express. Figure 3 shows the Panel's estimates for the values of 
warrants outstanding as of November 30, 2009.
---------------------------------------------------------------------------
    \113\ July Oversight Report, supra note 66, at 8-17. For example, 
Old National Bancorp of Evansville, Indiana, paid $1.2 million for 
warrants that analysts had valued at between $1.5 and $6.9 million.
---------------------------------------------------------------------------
    For banks that have fully repaid their TARP funds, the 
Panel has calculated an internal rate of return (IRR), as shown 
in Figure 4. Because the preferred stock under the CPP paid 
fixed dividends of 5 percent per year, the variation in this 
return comes from the price the bank paid Treasury to 
repurchase its warrants. The taxpayers' return has ranged from 
a low of 5.9 percent for Centerstate Banks of Florida, which 
repurchased its warrants on October 28, 2009, to a high of 29.5 
percent for American Express, which repurchased its warrants on 
July 29, 2009. Recent repurchases appear to trend lower. This 
may be because these are small- and medium-sized banks to which 
Treasury applies a liquidity discount in its valuation, while 
the Panel does not. This results in a lower price to estimate 
ratio for banks whose stock is either thinly traded or not 
traded at all. The overall return is 17.1 percent for the 25 
banks that have repurchased both their preferred stock and 
warrants. Had the warrants all been repaid at the Panel's 
estimated market value, the taxpayers would have received 
approximately $198 million more than the banks paid. It is 
important to note, however, that this return reflects only the 
healthiest banks, which were able to repay their TARP funds 
already. As of November 30, 2009, 642 banks still held their 
CPP funds. It is still unknown when they will repay and how 
much they will pay for their warrants.

                        FIGURE 3: WARRANTS OUTSTANDING VALUATION AS OF NOVEMBER 30, 2009
                                            [In millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                    Low        High       Best
                         Institution                           Investment date    estimate   estimate   estimate
----------------------------------------------------------------------------------------------------------------
Capital Purchase Program (CPP):
    JPMorgan Chase..........................................         10/28/2008     $798.7   $2,035.8   $1,115.7
    Wells Fargo.............................................         10/28/2008      300.9    1,734.9      857.0
    Hartford Financial......................................          6/26/2009      695.3    1,068.2      813.4
    Bank of America.........................................         10/28/2008       86.9    1,135.3      381.2
    PNC.....................................................         12/31/2008       91.4      530.8      249.0
    Capital One \114\.......................................         11/14/2008      179.0      343.7      232.0
    Discover Financial......................................          3/13/2009      149.4      217.0      178.9
    Fifth Third Bancorp.....................................         12/31/2008       57.9      313.7      171.4
    Lincoln National........................................          7/10/2009      130.9      225.0      163.7
    Comerica................................................         11/14/2008       31.5      144.5       93.8
Targeted Investment Program (TIP):
    Bank of America.........................................          1/15/2009      487.4    1,465.2      811.9
    Citigroup...............................................         12/31/2008       13.4      454.5      112.7
Asset Guarantee Program (AGP):
    Citigroup...............................................          1/15/2009        4.8      160.6       40.0
Systemically Significant Failing Institutions (SSFI)
 Program:
    AIG.....................................................         11/25/2008        6.9       72.6       53.5
All Other Banks.............................................  .................      313.1    2,038.4    1,089.3
                                                                                --------------------------------
      Total.................................................  .................   $3,347.5  $11,940.3  $6,363.4
----------------------------------------------------------------------------------------------------------------
\114\ Capital One TARP warrants were sold through a Dutch auction process. The secondary public offering of the
  warrants was auctioned on December 3, 2009 for $146.5 million. Capital One Warrant Purchase, supra note 76.


                                                  FIGURE 4: WARRANT REPURCHASES AS OF NOVEMBER 30, 2009
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                        Price/
                        Institution                           Investment  QEO \115\   Repurchase     Repurchase     Panel valuation    estimate  IRR (%)
                                                                 date                    date          amount         (best est.)        (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Old National Bancorp.......................................     12/12/08        No        5/8/09       $1,200,000         $2,150,000         56      9.3
Iberiabank Corporation.....................................      12/5/08       Yes       5/20/09        1,200,000          2,010,000         60      9.4
FirstMerit Corporation.....................................       1/9/09        No       5/27/09        5,025,000          4,260,000        118     20.3
Sun Bancorp, Inc...........................................       1/9/09        No       5/27/09        2,100,000          5,580,000         38     15.3
Independent Bank Corp......................................       1/9/09        No       5/27/09        2,200,000          3,870,000         57     15.6
Alliance Financial Corporation.............................     12/19/08        No       6/17/09          900,000          1,580,000         57     13.8
First Niagara Financial Group..............................     11/21/08       Yes       6/24/09        2,700,000          3,050,000         89      8.0
SCBT Financial Corporation.................................      1/16/09        No       6/24/09        1,400,000          2,290,000         61     11.7
Berkshire Hills Bancorp, Inc...............................     12/19/08        No       6/24/09        1,040,000          1,620,000         64     11.3
Somerset Hills Bancorp.....................................      1/16/09        No       6/24/09          275,000            580,000         47     16.6
HF Financial Corp..........................................     11/21/08        No       6/30/09          650,000          1,240,000         52     10.1
State Street Corporation...................................     10/28/08       Yes        7/8/09       60,000,000         54,200,000        111      9.9
U.S. Bancorp...............................................     11/14/08        No       7/15/09      139,000,000        135,100,000        103      8.7
Old Line Bancshares, Inc...................................      12/5/08        No       7/15/09          225,000            500,000         45     10.4
The Goldman Sachs Group, Inc...............................     10/28/08        No       7/22/09    1,100,000,000      1,128,400,000         97     22.8
BB&T Corp..................................................     11/14/08        No       7/22/09       67,000,000         68,200,000         98      8.7
American Express Company...................................       1/9/09        No       7/29/09      340,000,000        391,200,000         87     29.5
The Bank of New York Mellon Corp...........................     10/28/08        No        8/5/09      136,000,000        155,700,000         87     12.3
Morgan Stanley.............................................     10/28/08        No       8/12/09      950,000,000      1,039,800,000         91     20.2
Northern Trust Corporation.................................     11/14/08        No       8/26/09       87,000,000         89,800,000         97     14.5
Bancorp Rhode Island, Inc..................................     12/19/08        No       9/30/09        1,400,000          1,400,000        100     12.6
Manhattan Bancorp..........................................      12/5/08        No      10/14/09           63,364            140,000         45      9.8
CVB Financial Corp.........................................      12/5/08       Yes      10/28/09        1,307,000          2,800,000         47      6.4
Centerstate Banks of Florida Inc...........................     11/21/08       Yes      10/28/09          212,000            440,000         48      5.9
Bank of Ozarks.............................................     12/12/08        No      11/24/09        2,650,000          3,500,000         76      9.0
                                                                                                 ------------------------------------
      Total................................................  ...........  .........  ...........   $2,903,547,364     $3,099,410,000         94    17.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
\115\ Some banks engaged in a qualified equity offering, or QEO. A QEO is defined in the Securities Purchase Agreement as a sale before 2010 of shares
  that qualify as tier I capital that raises an amount of cash equal to the value of the preferred shares issued to Treasury. A QEO would therefore
  lessen the value of the warrant.

    The TARP recently incurred its first direct losses. The 
failures of three institutions--CIT Group, and two smaller 
banks--have resulted in a potential loss to taxpayers of up to 
$2.63 billion.\116\ In addition, dozens of TARP recipients have 
missed dividend payments to Treasury. As of October 31, 2009, 
38 banks have missed dividend payments, and six additional 
banks have deferred November dividends.\117\ Banks have a 
variety of reasons for the missed payments. Some have reported 
that they have the funds to pay the dividends, but that safety 
and soundness laws restrict their ability to pay dividends to 
any investor if the bank does not meet certain levels of 
retained or cumulative earnings.\118\ A failure to pay 
dividends, however, can foretell larger problems for a bank. On 
November 5, Pacific Coast National Bancorp was the subject of 
an enforcement order from the Federal Reserve preventing it 
from paying dividends without prior approval from federal 
regulators.\119\ A week later it failed.\120\
---------------------------------------------------------------------------
    \116\ On November 1, 2009, small business lender CIT filed for 
bankruptcy, probably resulting in a complete loss of the $2.3 billion 
in CPP funds that it had received in December 2008. CIT has announced 
that all existing common and preferred shares will be cancelled in the 
bankruptcy. See CIT Group, CIT Board of Directors Approves Proceeding 
with Prepackaged Plan of Reorganization with Overwhelming Support of 
Debtholders (Nov. 1, 2009) (online at phx.corporate-ir.net/
External.File?item=UGFyZW50SUQ9MTkxNjh8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1). 
United Commercial Bank failed on November 7, 2009; it had received 
$298.7 million in CPP funds on November 14, 2008. Finally, on November 
13, 2009, Pacific Coast National Bancorp, which received $4.1 million 
in TARP funds on January 16, 2009, failed.
    \117\ See Appendix I for a list of banks that have missed dividend 
payments.
    \118\ See Christine Mitchell, Regulatory Hurdles Hinder Ability to 
Make TARP Dividend Payments, SNL Financial (Nov. 5, 2009) (online at 
www.snl.com/interactivex/article.aspx?Id=10294060&KPLT=2).
    \119\ See Federal Reserve Bank of San Francisco, Written Agreement 
by and between Pacific Coast National Bancorp, San Clemente, California 
at 2 (Nov. 5, 2009) (online at www.federalreserve.gov/newsevents/press/
enforcement/enf20091110a1.pdf).
    \120\ See Federal Deposit Insurance Corporation, Failed Bank 
Information for Pacific Coast National Bank, San Clemente, CA (Nov. 13, 
2009) (online at www.fdic.gov/bank/individual/failed/
pacificcoastnatl.html).
---------------------------------------------------------------------------
    In addition to costing taxpayers, the recent bank failures 
call into question Treasury's assertion that CPP funds were 
only available to ``healthy'' or ``viable'' banks.\121\ 
Furthermore, The Wall Street Journal recently performed an 
analysis of regulatory enforcement actions against TARP-
recipient banks; such actions are a sign that a bank's health 
is deteriorating. The Journal found that, in addition to the 
three banks that have failed, 24 other TARP-recipient banks 
have received regulatory sanctions in 2009. At least eight 
banks received TARP funds when regulators had already voiced 
concerns about the banks' health.\122\ Citigroup's need for TIP 
funds only five weeks after Treasury provided it with CPP funds 
further calls into question the assertion that CPP funds were 
only available to ``healthy'' banks.\123\
---------------------------------------------------------------------------
    \121\ See SIGTARP, Emergency Capital Injections Provided to Support 
the Viability of Bank of America, Other Major Banks, and the U.S. 
Financial System (Oct. 5, 2009) (online at sigtarp.gov/reports/audit/
2009/Emergency_Capital _Injections _Provided _to_Support _the 
_Viability _of _Bank _of _America . . . _100509.pdf) (determining that 
several of the initial CPP banks were not ``healthy'' at the time the 
investements were made); U.S. Department of the Treasury, Factsheet on 
Capital Purchase Program (Mar. 17, 2009) (online at 
www.financialstability.gov/roadtostability/CPPfactsheet.htm) 
(hereinafter ``Factsheet on CPP'') (``Participation is reserved for 
healthy, viable institutions''). CIT Group is an example of an 
institution of questionable health that received CPP funds. It is a 
leading lender to small businesses, and also has a depository bank. It 
suffered accelerating losses since 2Q 2007, and had difficulty 
accessing credit in short-term debt markets, on which its business 
model was heavily reliant. Treasury approved CIT's application for CPP 
funds because it was the leading source of financing for small 
business, and it deemed it systemically significant--at least in the 
early days of the crisis. It received $2.3 billion of CPP funds in 
December 2008. Immediately following its receipt of TARP money, CIT 
sought to enter the TLGP. CIT's TLGP application with the FDIC was 
pending for several months and was finally rejected in July 2009. Also 
in July, FRBNY completed a stress-test of CIT Group and concluded that 
it would need to raise up to $4 billion of funding. Treasury declined 
to make an additional CPP investment in CIT Group because it did not 
believe that CIT had presented a viable business plan. CIT filed for 
Chapter 11 bankruptcy protection on November 1, 2009. CIT's inability 
to access credit outside of the TLGP calls into question whether other 
CPP institutions would be healthy without the government guarantee 
programs.
    \122\ David Enrich, TARP Can't Save Some Banks, Wall Street Journal 
(Nov. 17, 2009) (online at online.wsj.com/article/SB100014240527487 
04538404574539954068634242.html).
    \123\ See SIGTARP, supra note 121. In addition, Merrill Lynch was 
selected to receive CPP funds in October 2008, after Bank of America 
had agreed to acquire it in order to prevent Merrill's dissolution. See 
November 25 Transactions Report, supra note 71 (``This transaction was 
included in previous Transaction Reports with Merrill Lynch & Co., Inc. 
listed as the qualifying institution and a 10/28/2008 transaction date, 
footnoted to indicate that settlement was deferred pending merger. The 
purchase of Merrill Lynch by Bank of America was completed on 1/1/2009, 
and this transaction under the CPP was funded on 1/9/2009'').
---------------------------------------------------------------------------
            b. Health of Banking Sector
            i. Bank Capital Levels
    Capital levels are one measure of the banking sector's 
health. The stress tests measured the capital levels of the 19 
largest bank holding companies, requiring a capital buffer to 
protect them through a more severe downturn.\124\ Eighteen 
banks either already held capital that the supervisors 
considered adequate, or were subsequently able to raise 
additional capital in the private markets. Tier 1 capital--also 
called core capital--is the highest quality capital that a bank 
can hold.\125\ A bank's tier 1 capital ratio is the ratio of 
its tier 1 capital to its risk-weighted assets.\126\ Figure 5 
shows the stress tested institutions' tier 1 capital levels in 
3Q 2008 and in 3Q 2009. Most of these institutions have higher 
tier 1 capital levels than they did a year ago. A number of 
these have already repaid their CPP funds, making their higher 
capital levels due in part to capital raised in the private 
markets.\127\
---------------------------------------------------------------------------
    \124\ The Federal Reserve developed the metrics for the more 
adverse scenario in February 2009. The most recent figures for those 
three metrics are a 2.8 percent increase in annual GDP as of third 
quarter 2009, a 9.2 annualized unemployment rate as of November 2009, 
and a 8.5 annualized percent decrease in housing prices as of the end 
of September 2009. Compare this to the more adverse scenario for 
calendar year 2009 having GDP falling 3.5 percent, housing falling 22 
percent, and unemployment at 8.9 percent.
    \125\ Tier 1 capital is the sum of the following capital elements: 
(1) common stockholders' equity; (2) perpetual preferred stock; (3) 
senior perpetual preferred stock issued by Treasury under the TARP; (4) 
certain minority interests in other banks; (5) qualifying trust 
preferred securities; and (6) a limited amount of other securities.
    \126\ Calculating risk-weighted assets is a complex process, but 
the concept is as simple as it sounds. Assets are weighted based on 
their level of risk.
    \127\ These higher capital levels are also due in part to earnings, 
some of which are a result of various government guarantee programs and 
low-cost funds available to banks.
---------------------------------------------------------------------------
    Public confidence in the adequacy of bank capital levels 
would be enhanced through consistent financial reporting 
practices. The absence of consistent financial reporting 
practices and agreed upon interpretations of relevant 
accounting rules make it difficult to compare capital levels of 
different financial institutions.\128\
---------------------------------------------------------------------------
    \128\ The Panel discussed this issue in depth in its August Report. 
August Oversight Report, supra note 100.
---------------------------------------------------------------------------

 FIGURE 5: TIER 1 CAPITAL RATIOS OF STRESS-TESTED INSTITUTIONS, THIRD 
                       QUARTER 2008 V. 2009 \129\

---------------------------------------------------------------------------
    \129\ This figure excludes four stress-tested institutions: Goldman 
Sachs, Morgan Stanley, GMAC, and American Express. These institutions 
were excluded because data on their tier 1 capital levels for 3Q 2009 
was not available. This is because they became bank holding companies 
at the end of or after the 3Q 2008. SNL Financial, Bank & Thrift Stress 
Test Tear Sheet (online at www.snl.com/interactivex/
TemplateBrowser.aspx?V =V&Format=XLS&Doc= 
9676136&File=7970111&SaveFileAs= Bank & Thrift Stress Test Tear Sheet) 
(accessed Dec. 7, 2009).


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


            ii. Bank Capital Raising
    Since the inception of the TARP, 211 banks, thrifts, and 
specialty lenders have raised a total of $264.3 billion in 
capital from the private markets.\130\ One hundred and thirty 
of these institutions were TARP recipients. Banks' ability to 
raise capital in the private markets shows that investors are 
regaining confidence in the banking sector. However, investor 
confidence may reflect the assumption of an implicit guarantee 
hanging over the financial system. Investors saw that the 
government stepped in to support institutions such as Bank of 
America without wiping out shareholder stakes. This may signal 
to the markets that shareholders in large institutions are 
protected from total loss of their investment.
---------------------------------------------------------------------------
    \130\ This is through November 30, 2009. See SNL Financial, Capital 
Raises Among Banks and Thrifts (online at www.snl.com/InteractiveX/
doc.aspx?ID=10162420) (accessed Dec. 4, 2009). This includes common 
equity, perpetual preferred stock, and trust preferred stock. These 
three are all elements of tier 1 capital. Of the four largest banks, 
Citigroup is the only one that has not raised capital in the private 
markets. JPMorgan raised $5 billion in June, and Wells Fargo raised $11 
billion in November 2008. SNL Financial. Bank of America raised $13.4 
billion in May 2009, and announced that it will raise additional 
capital before repaying its TARP funds. See Bank of America Repayment, 
supra note 82.
---------------------------------------------------------------------------
            iii. Borrowing by Financial Institutions
    Borrowing by banks is crucial to maintaining sufficient 
liquidity in the financial system. But at the height of the 
financial crisis, bank debt issuance ground nearly to a halt. 
In September 2008, banks issued only $661 million in debt, as 
compared to $109 billion a year before. In October 2008, the 
FDIC announced that it would guarantee bank debt under the 
TLGP, a program designed to promote borrowing by financial 
institutions.\131\ This voluntary FDIC program, which is not a 
part of the TARP, provided a full guarantee to senior unsecured 
debt issued by participating banks.
---------------------------------------------------------------------------
    \131\ The TLGP has two programs: the debt guarantee program, and a 
second program that guarantees deposit accounts above the $250,000 FDIC 
insurance limit. The Panel will only discuss the debt guarantee program 
here. A third government guarantee program, Treasury's Temporary 
Guarantee Program for Money Market Funds, guaranteed money market funds 
and not banks, so the Panel does not include it as a capital assistance 
program. The Panel discusses the TGPMMF, and has a full discussion of 
the TLGP, in its November Report. See November Oversight Report, supra 
note 96.
---------------------------------------------------------------------------
    In the last two months of 2008, participating institutions 
issued $108 billion in senior unsecured debt. At the height of 
the program, 101 institutions had $346 billion in debt 
outstanding.\132\ There is currently $315 billion in debt 
outstanding under the program, covering 88 institutions.\133\ 
Though the program ended on October 31, 2009, borrowing by 
financial institutions has continued. As of November 10, 2009, 
banks that had participated in the TLGP issued a total of $5.5 
billion of non-guaranteed debt.\134\ Banks are continuing to 
issue debt without the support of the FDIC guarantee, though at 
lower amounts than they were issuing under the TLGP.\135\ 
Figure 6 shows debt issued under the TLGP compared to non-TLGP 
senior debt issued by banks prior to and during the term of the 
TLGP. Bank borrowing increased during the first two quarters of 
the TLGP. This could be due to the availability of lower cost 
guaranteed debt,\136\ or could be attributed to restored 
confidence in the financial system.
---------------------------------------------------------------------------
    \132\ 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).
    \133\ See Federal Deposit Insurance Corporation, Monthly Reports on 
Debt Issuance Under the Temporary Liquidity Guarantee Program (Oct. 31, 
2009) (online at www.fdic.gov/regulations /resources/TLGP/
total_issuance10-09.html).
    \134\ Data provided under subscription by SNL Financial.
    \135\ The $5.5 billion issued in November is lower than the $10.23 
billion, a mixture of TLGP and non-TLGP debt, issued in October 2009.
    \136\ As shown in the Panel's November report, banks saved between 
$13.4 and $29 billion in borrowing costs by participating in the TLGP. 
See November Oversight Report, supra note 96, at 69.
---------------------------------------------------------------------------

 FIGURE 6: NON-TLGP SENIOR DEBT SINCE 4Q 2006, AND TLGP DEBT SINCE 4Q 
                               2008 \137\

---------------------------------------------------------------------------
    \137\ SNL Financial, Financial Institutions Offering Activity 
(online at www1.snl.com/interactivex/Template 
Browser.aspx?V=V&Doc=10022881&File= 
8302325&Format=XLS&SaveFileAs=Financial Institutions Offering Activity) 
(accessed Dec. 7, 2009). SNL template modified to provide specific data 
necessary to conduct analysis. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

            iv. Market Perception of Banks' Health
    The price of a credit default swap (CDS) contract on a 
specific bank trading in the market offers an indication of the 
market's view of that bank's health. Credit default swap 
contracts function in a similar manner to insurance 
contracts.\138\ If a bank's bondholders are worried about the 
bank defaulting on its debt, they can buy default protection 
through a credit default swap to hedge their bets. Therefore, 
the less healthy a bank is perceived to be, the more expensive 
a CDS contract against that bank will be. As shown in Figure 7, 
the 5-year CDS spreads for institutions AIG, JPMorgan Chase, 
Wells Fargo, Goldman Sachs, Citigroup, Morgan Stanley, Bank of 
America, Capital One, and American Express skyrocketed in fall 
of 2008 and early 2009.\139\ CDS spreads remained high in early 
2009 because of continued uncertainty in the markets.\140\
---------------------------------------------------------------------------
    \138\ A credit default swap contract has a similar payoff structure 
to a put option.
    \139\ Five-year CDS spread refers to the difference between the 
price of a CDS contract maturing in five years and the price of 
Treasury bonds with a similar maturity.
    \140\ Even with the explicit and implicit guarantees of government 
support, U.S. banks remained exposed to overseas financial 
institutions.
---------------------------------------------------------------------------
    On average, five-year CDS spreads on these institutions 
went up by 636 basis points at the height of the crisis, and 
have now fallen 532 basis points, to 104 basis points above the 
trough. Excluding AIG from the list, on average the five-year 
CDS spreads went up by 410 basis points at the height of the 
crisis, and have now fallen 371 basis points, to 39 basis 
points above the trough.\141\ This decline in CDS spreads shows 
a clear increase in CDS market participants' confidence in 
major bank creditworthiness. It is unclear the extent to which 
this decline in CDS spreads is due to confidence in major 
banks' stand-alone creditworthiness and to what degree this 
decline reflects CDS market confidence in implicit government 
guarantees of large banks. While it is no doubt true that the 
perception of an implicit guarantee has grown in the wake of 
the government response to the crisis, market participants lack 
a clear understanding of the scope of any such guarantee and 
the circumstances under which it would be exercised.
---------------------------------------------------------------------------
    \141\ Data provided under subscription by BLOOMBERG Data Services.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
            c. Macro Indicators of the Health of the Banking Sector
    While it is difficult to isolate the effects of the TARP on 
the banking sector, macroeconomic indicators provide some 
insight into the effectiveness of the program in promoting the 
liquidity and stability of the sector. These gauges--lending 
levels, bank failures, and bank consolidations--are relevant to 
assessing the impact of the TARP. But because of the influence 
of other external factors, they do not imply causation.
            i. Lending by Financial Institutions \143\
---------------------------------------------------------------------------
    \143\ The report discusses small business lending in section C2b 
infra at 57.
---------------------------------------------------------------------------
    Bank lending activities are an indicator of financial 
sector health, though it is important not to oversimplify the 
relationship between the two. Treasury has stated that it 
limited capital injections from the CPP to healthy banks in 
order to ensure that the funds were used for lending, and not 
merely to bolster recipient banks' balance sheets.\144\ Even 
healthy banks, however, have a need to recapitalize after the 
losses of the past year. A bank looking to build its capital 
levels will allocate more funds to capital and less to lending.
---------------------------------------------------------------------------
    \144\ See Factsheet on CPP, supra note 121 (``Participation [in the 
CPP] is reserved for healthy, viable institutions that are recommended 
by their applicable federal banking regulator. Treasury's intent is to 
provide immediate capital to stabilize the financial and banking 
system, and to support the economy. . . . A necessary precursor to 
lending and economic recovery is a stable, healthy financial system. 
Healthy banks, not weak banks, lend to their communities and the CPP is 
a program for healthy banks'').
---------------------------------------------------------------------------
    Figure 8 shows loan originations of the top 20 CPP 
recipients through the life of the TARP. It includes all 
lending: consumer, real estate, and commercial.\145\ The chart 
shows the degree to which lending tightened for the period of 
October 2008 through September 2009. Since the enactment of 
EESA, loan originations by these 20 institutions have decreased 
by 13.7 percent. Total average loan balances decreased by 1 
percent.\146\
---------------------------------------------------------------------------
    \145\ Specifically, it includes first mortgage, home equity lines 
of credit (HELOC), credit card, other consumer, commercial and 
industrial renewal, commercial and industrial new commitments, CRE 
renewal, CRE new commitments, and small business lending.
    \146\ See U.S. Department of the Treasury, Treasury Department 
Monthly Lending and Intermediation Snapshot Data for April 2009-
September 2009 (Nov. 16, 2009) (online at www.financialstability.gov/
docs/surveys/Snapshot_Data_September_2009.xls). Data manipulated in 
order to exclude PNC and Wells Fargo. For further explanation of Panel 
methodology see footnote 147.
---------------------------------------------------------------------------

  FIGURE 8: TOTAL LOAN ORIGINATIONS OF SELECTED CPP RECIPIENTS SINCE 
                        INCEPTION OF EESA \147\

---------------------------------------------------------------------------
    \147\ The Panel uses Treasury's ``Monthly Lending and 
Intermediation Snapshot'' of the top 22 CPP participants to track 
specific categories of lending levels of the financial institutions 
that benefitted the most from government assistance under the TARP. Two 
of these institutions, PNC Financial and Wells Fargo, purchased large 
banks at the end of 2008. PNC Financial purchased National City on 
October 24, 2008 and Wells Fargo completed its merger with Wachovia 
Corporation on January 1, 2009. The assets of National City and 
Wachovia are included as part of PNC and Wells Fargo, respectively, in 
Treasury's January lending report but are not differentiated from the 
existing assets or the acquiring banks. As such, there were dramatic 
increases in the total average loan balances of PNC and Wells Fargo in 
January 2009. For example, PNC's outstanding total average loan balance 
increased from $75.3 billion in December 2008 to $177.7 billion in 
January 2009. The same effect can be seen in Wells Fargo's total 
average loan balance of $407.2 billion in December 2008 which increased 
to $813.8 billion in January 2009. The Panel excludes PNC and Wells 
Fargo in order to have a more consistent basis of comparison across all 
institutions and lending categories.
    Unlike other lending categories, Treasury only began publishing 
small business lending information as of April 2009. U.S. Department of 
the Treasury, Treasury Department Monthly Lending and Intermediation 
Snapshot Data for April 2009-September 2009 (Nov. 16, 2009) (online at 
www.financialstability.gov/impact/
monthlyLendingandIntermediationSnapshot.htm) (hereinafter ``Treasury 
Department Monthly Lending and Intermediation Snapshot Data for April 
2009-September 2009'').


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Banks remain cautious with respect to lending, even as they 
become better capitalized.\148\ In the Federal Reserve's 
October 2009 survey of senior loan officers, 25 percent of 
respondents reported tightening standards for prime residential 
real estate loans in the last three months, while 15 percent 
reported tightening standards for credit card loans in the last 
three months, and 15 percent reported tightening lending to all 
size businesses in the past three months.\149\
---------------------------------------------------------------------------
    \148\ Board of Governors of the Federal Reserve System, October 
2009 Senior Loan Officer Opinion Survey on Bank Lending Practices at 3 
(online at www.federalreserve.gov/boarddocs /snloansurvey/200911/
fullreport.pdf) (hereinafter ``Loan Officer Opinion Survey October 
2009'') (accessed Dec. 7, 2009) (observing that ``domestic banks 
indicated that they continued to tighten standards and terms over the 
past three months on all major types of loans to businesses and 
households'').
    \149\ Loan Officer Opinion Survey October 2009, supra note 148 
(accessed Dec. 7, 2009).
---------------------------------------------------------------------------
Banks continued to tighten lending, but less banks reported 
tightening than in late 2008.\150\ Banks might be holding more 
capital in order to offset potential future losses on loans. 
The increases in delinquencies and charge-offs shown in Figures 
9 and 10 support banks' potential desire to hold cash to offset 
future losses on loans.
---------------------------------------------------------------------------
    \150\ Loan Officer Opinion Survey October 2009, supra note 148, at 
3 (accessed Dec. 7, 2009). In October 2008, 80 percent of banks 
reported tightening of lending to all size businesses, 70 percent 
reported tightening on prime residential real estate lending, and 60 
percent reported tightening lending for credit cards. Board of 
Governors of the Federal Reserve System, October 2008 Senior Loan 
Officer Opinion Survey on Bank Lending Practices (online at 
www.federalreserve.gov/boarddocs/Snloan Survey/200811/fullreport.pdf) 
(accessed Dec. 7, 2009).
---------------------------------------------------------------------------
    While it might be desirable for TARP recipients to increase 
lending to help the economy, banks may be reluctant to lend due 
to legitimate concern about increased default risks.\151\ As 
discussed in Section 1.C.2.b, infra, Small Business Loans, for 
instance, carry added risk in today's economic climate. 
Chairman Bernanke recently noted that difficulties in obtaining 
credit may impede the creation and expansion of small- and 
medium-sized businesses.\152\
---------------------------------------------------------------------------
    \151\ See Board of Governors of the Federal Reserve System, Remarks 
by Chairman Ben S. Bernanke at the Economic Club of New York (Nov. 16, 
2009) (online at www.federalreserve.gov/newsevents /speech/
bernanke20091116a.htm) (hereinafter ``Remarks by Chairman Ben S. 
Bernanke''). Of course it is not clear how to define desired levels of 
lending. Few think that the United States should return to 2007 levels 
of consumer borrowing but there is no broad consensus as to what level 
of lending would support economic expansion at this time.
    \152\ Remarks by Chairman Ben S. Bernanke, supra note 151. see also 
Federal Reserve Board of Governors, Minutes of the Federal Open Market 
Committee (Nov. 3-4, 2009) (online at www.federalreserve.gov/monetary 
policy/fomcminutes20091104.htm) (``Limited credit availability, along 
with weak aggregate demand, was viewed as likely to restrain hiring at 
small businesses, which are normally a source of employment growth in 
recoveries'').
---------------------------------------------------------------------------
    Total delinquencies have risen dramatically since the 
second half of 2007, as shown in Figure 9. While those secured 
by real estate have the highest levels, delinquencies on loans 
to consumers have also risen significantly.

FIGURE 9: TOTAL DELINQUENCIES AT ALL DOMESTIC COMMERCIAL BANKS, BY TYPE 
                                 \153\

---------------------------------------------------------------------------
    \153\ Board of Governors of the Federal Reserve, Charge-off and 
Delinquency Rates--Instrument: Delinquencies/All Banks (online at 
www.federalreserve.gov/datadownload /Choose.aspx?rel=CHGDEL) (accessed 
Dec. 7, 2009).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Bank charge-offs have seen a similar rise in 2008 and 2009. 
In general, a bank charges off a loan when it believes that it 
will not be able to recover payment on it. The actual and 
potential for future losses on existing loans goes some way 
toward explaining why banks, despite recapitalization, are 
reluctant to lend.

 FIGURE 10: NET-CHARGE-OFFS AT ALL DOMESTIC COMMERCIAL BANKS, BY TYPE 
                                 \154\

---------------------------------------------------------------------------
    \154\ Id.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    A number of factors could cause banks to pull back on 
lending. A bank might decide to hold increased capital in the 
wake of the severe impairment of bank funding markets or 
uncertainty regarding future changes in regulatory capital 
standards. Though they are regaining strength, the continued 
impairment of securitization markets reduces funding for bank 
loans. And banks might be concerned about upcoming changes to 
accounting rules that will require banks to move a large volume 
of securitized assets onto their balance sheets.\155\ Some 
commentators have explained that current credit tightening has 
followed historical patterns from recessions, when credit risk 
understandably increases.\156\ There is also considerable 
concern that some of this decrease in credit may arise--as in 
past banking crises--from the increased scrutiny given by bank 
examiners to loans, including credit determinations and 
documentation, and the reaction of bank management to the 
prospect of increased scrutiny.\157\
---------------------------------------------------------------------------
    \155\ Remarks by Chairman Ben S. Bernanke, supra note 151.
    \156\ See Baker COP Testimony, supra note 28, at 4-5 (contending 
that ``[t]here is no reason to believe that the tightening of credit 
during this downturn is any greater than what should be expected given 
the severity of the recession'' and ``to insist that [banks] make loans 
[to small businesses] on which they expect to lose money'' would ``be 
questionable economic policy''). But see Remarks by Chairman Ben S. 
Bernanke, supra note 151 (``Nevertheless, it appears that, since the 
outbreak of the financial crisis, banks have tightened lending 
standards by more than would have been predicted by the decline in 
economic activity alone'').
    \157\ See Congressional Oversight Panel, Testimony of Charles 
Calomiris, Taking Stock: Independent Views on TARP's Effectiveness 
(Nov. 19, 2009) (online at cop.senate.gov/hearings/library/hearing-
111909-economists.cfm).
---------------------------------------------------------------------------
    Banks' willingness to lend is only one factor in the 
lending equation. A decline in lending levels may also reflect 
reduced demand from borrowers rather than tightened conditions 
from creditors. There is considerable evidence that demand for 
credit has fallen over the past year.\158\ As Chairman Bernanke 
has explained:
---------------------------------------------------------------------------
    \158\ Loan Officer Opinion Survey October 2009, supra note 148, at 
3.

          The demand for credit also has fallen significantly: 
        For example, households are spending less than they did 
        last year on big-ticket durable goods typically 
        purchased with credit, and businesses are reducing 
        investment outlays and thus have less need to borrow. 
        Because of weakened balance sheets, fewer potential 
        borrowers are creditworthy, even if they are willing to 
        take on more debt. Also, write-downs of bad debt show 
        up on bank balance sheets as reductions in credit 
        outstanding.\159\
---------------------------------------------------------------------------
    \159\ Remarks by Chairman Ben S. Bernanke, supra note 151.
---------------------------------------------------------------------------
            ii. Bank Failures
    Banks of all sizes were affected by the shock to the 
financial sector. While many of the largest banks received 
unprecedented support, smaller banks have been allowed to fail 
and to be seized by regulators. There were 149 bank failures 
between January 1, 2008 and November 30, 2009; \160\ 124 of 
these failures occurred in 2009, with assets totaling $141.6 
billion.\161\ This is the most bank failures since 1992, when 
181 banks failed. Two of these 124 banks were TARP 
recipients.\162\ Many of these failed banks were small- and 
medium-sized banks with higher proportions of commercial real 
estate loans.\163\ The FDIC's Deposit Insurance Fund is feeling 
the stress of these failures--it now carries a balance of 
negative $8.2 billion.\164\ This is only the second time in the 
FDIC's history that the Fund balance has been below zero.
---------------------------------------------------------------------------
    \160\ Data provided under subscription by SNL Financial.
    \161\ See Federal Deposit Insurance Corporation, Failures and 
Assistance Transactions (online at www2.fdic.gov/hsob/
SelectRpt.asp?EntryTyp=30) (hereinafter ``Failures and Assistance 
Transactions'') (accessed Dec. 7, 2009).
    \162\ CIT Group is not an FDIC insured institution, so it is not 
included on failed bank lists.
    \163\ See Federal Deposit Insurance Corporation, Failed Bank List 
(online at www.fdic.gov/bank/individual/failed/banklist.html) (accessed 
Dec. 7, 2009); see also Office of the Comptroller of the Currency, 
Comptroller Dugan Expresses Concern About Commercial Real Estate 
Concentrations (Jan. 31, 2008) (online at www.occ.gov/ftp/release/2008-
9.htm) (Describing that according to data from the Office of the 
Comptroller of the Currency, between 2002 and 2008, the ratio of 
commercial real estate loans to capital at community banks nearly 
doubled to a record 285 percent. By early 2008, nearly one-third of all 
community banks had commercial real estate concentrations that exceeded 
300 percent of their capital.); Maurice Tamman and David Enrich, Local 
Banks Face Big Losses, Wall Street Journal (May 19, 2009) 
(online.wsj.com/article/SB124269114847832587.html) (analyzing the 
relationship between commercial real estate loans and small/medium-size 
banks, and concluding that many such banks could fail because of their 
commercial real estate loan portfolios). For a more complete discussion 
of this topic, please see the Panel's August Oversight report. See 
August Oversight Report, supra note 100, at 4-5, 12, 18.
    \164\ This negative balance includes a $38.9 billion contingent 
loss reserve that the FDIC has already set aside to cover losses in the 
next year. See Federal Deposit Insurance Corporation, FDIC-Insured 
Institutions Earned $2.8 Billion in the Third Quarter of 2009 (Nov. 24, 
2009) (online at www.fdic.gov/news/news/press/2009/pr09212.html.) As 
the FDIC explains ``[c]ombining the fund balance with this contingent 
loss reserve shows total DIF reserves with a positive balance of $30.7 
billion.'' See id.
---------------------------------------------------------------------------
    There are currently 552 banks on the FDIC's watch 
list.\165\ This implies that while the TARP may have stabilized 
the elements of the banking sector that received TARP funds, 
there are still areas of weakness in the sector stemming from 
the ongoing problems of the general economy. FDIC Chairman 
Sheila Bair has predicted bank failures will peak in 2010 and 
then decline.\166\
---------------------------------------------------------------------------
    \165\ Id.
    \166\ Michael S. Derby, FDIC's Bair: Bank Failures Will Peak In 
2010, Wall Street Journal (Nov. 10, 2009) (online at online.wsj.com/
article/BT-CO-20091110-715147.html).
---------------------------------------------------------------------------
    Figure 11 shows numbers of failed banks, and total assets 
of failed banks since 1970. It shows that, although the number 
of failed banks was significantly higher in the late 1980s than 
it is now, the aggregate assets of failed banks during the 
current crisis far outweigh those from the 1980s. At the high 
point in 1988 and 1989, 763 banks failed, with total assets of 
$309 billion.\167\ Compare this to 149 banks failing in 2008 
and 2009, with total assets of $473 billion.\168\
---------------------------------------------------------------------------
    \167\ This is in 2005 inflation-adjusted numbers. Failures and 
Assistance Transactions, supra note 161 (accessed on Dec. 7, 2009). The 
number of bank failures from 1988 and 1989 includes the casualties of 
the savings and loan crisis. During these years regulatory changes 
forced closures of some institutions.
    \168\ This is in 2005 inflation-adjusted numbers. Bank failures for 
2009 are as of November 30, 2009. Failures and Assistance Transactions, 
supra note 161 (accessed on Dec. 7, 2009). This figure includes the 
failures of Washington Mutual and IndyMac, with assets of $307 billion 
and $32 billion, respectively.
---------------------------------------------------------------------------

 FIGURE 11: BANK FAILURES THROUGH NOVEMBER 30, 2009 (IN 2005 DOLLARS) 
                                 \169\

---------------------------------------------------------------------------
    \169\ Failures and Assistance Transactions, supra note 161. Data 
total assets are adjusted for inflation into 2005 dollars using the GDP 
price deflator. U.S. Department of Commerce: Bureau of Economic 
Analysis, Gross Domestic Product: Implicit Price Deflator (online at 
research.stlouisfed.org/fred2/data/GDPDEF.txt) (accessed Dec. 7, 2009). 
This chart does not include the six banks that failed on December 4, 
2009. One of these, AmTrust Bank, had total assets of approximately 
$12.0 billion. Federal Deposit Insurance Company, Failed Bank List 
(online at www.fdic.gov/bank/individual/failed/banklist.html) (accessed 
Dec. 7, 2009).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

            iii. Bank Consolidation
    While an increasing number of small banks have failed over 
the past year, the largest banks have grown larger. Figure 12 
shows the increasing market share held by the four largest U.S. 
banks in the years 1998 through 2009.

 FIGURE 12: MARKET SHARE OF THE FOUR U.S. BANKS WITH THE MOST DEPOSITS 
                       IN MARKET SINCE 1998 \170\

---------------------------------------------------------------------------
    \170\  SNL Financial, Deposit Market Share, 1998-2009 (online at 
www.snl.com/interactivex/InDeposit MarketshareDetail.aspx?ID=US&Number= 
10&Refreshed=1&Year=2009 &Market=0&Ownership=0) (accessed Dec. 7, 
2009).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Bank consolidation has worrisome implications for moral 
hazard, as long as there continues to be a perception in the 
market of an implicit guarantee. As a small number of banks 
acquire a larger share of the market and competition decreases, 
the systemic risk they pose rises.\171\
---------------------------------------------------------------------------
    \171\ This does not imply that bank consolidation is an intended 
policy, but it can be a side effect of many bank failures. The FDIC is 
under a statutory mandate to achieve the ``least cost resolution'' of a 
failing or failed bank, and in the case of large failed banks such as 
Washington Mutual and Wachovia, the least cost solution requires them 
to be acquired by other large banks. The statute does provide an 
exception from the least cost resolution mandate in situations in which 
its application would cause ``serious adverse effects on economic 
conditions or financial stability'' and an alternative action ``would 
avoid or mitigate such adverse effects.'' 12 U.S.C. Sec.  
1A1823(c)(4)(G)(i).
---------------------------------------------------------------------------
            d. Summary
    As TARP capital assistance efforts wind down, the current 
condition of the banking sector is mixed. Treasury and 
regulators have stated that the stress tests show that large 
banks, most of them current or former TARP recipients, are in 
general adequately capitalized. That assertion is challenged by 
leading economists and experts on financial crises.\172\ Many 
small and medium banks, however, are in a more precarious 
situation.
---------------------------------------------------------------------------
    \172\ See Section D of this report, infra.
---------------------------------------------------------------------------

2. Credit for Consumers and Small Business

    Treasury has emphasized the use of the TARP ``to restore 
the flow of credit to small businesses and consumers.'' \173\ 
It has chosen to allocate TARP funds directly for these 
purposes (i) by launching a program with FRBNY to revive the 
loan securitization market and providing $20 billion as a 
credit backstop as part of that program, and (ii) by committing 
up to $15 billion to purchase directly securitized Small 
Business Administration loans. In addition, Treasury has 
recently announced the broad outlines of a program to provide 
capital assistance to small banks in return for commitments to 
lend to small business.\174\
---------------------------------------------------------------------------
    \173\ U.S. Department of the Treasury, The Financial Stability 
Plan: Deploying our Full Arsenal to Attack the Credit Crisis on All 
Fronts (online at www.financialstability.gov/roadtostability) 
(hereinafter ``Financial Stability Plan'') (accessed Dec. 7, 2009).
    \174\ See White House, President Obama Announces New Efforts to 
Improve Access to Credit for Small Businesses (Oct. 21, 2009) (online 
at www.whitehouse.gov/assets/documents/small_business_final.pdf) 
(hereinafter ``President Obama Announces Small Business Efforts''). The 
nature of the market for consumer and small business loans and the 
impact of the crisis on those markets are discussed in detail in the 
Panel's May 2009 report. See Congressional Oversight Panel, May 
Oversight Report: Reviving Lending to Small Businesses and Families and 
the Impact of TALF (May 7, 2009) (online at cop.senate.gov/documents/
cop-050709-report.pdf) (hereinafter ``May Oversight Report'').
---------------------------------------------------------------------------
            a. Asset Securitization--The Term Asset-Backed Securities 
                    Loan Facility
    Since the mid-1980s, banks have increasingly chosen to 
finance their consumer loans (primarily credit card, student, 
and auto loans) by packaging those loans into securities sold 
to investors through a process called securitization, creating 
an important channel for providing credit.\175\ The financial 
crisis froze the markets for these ``asset-backed securities,'' 
in part in reaction to the general credit crunch and in part in 
reaction to the crisis in the larger markets for securitized 
residential mortgages. Thus, Treasury and the Federal Reserve 
Board saw revival of the securitization market as the way to 
revive credit to consumers and created the Temporary Asset-
Backed Securities Loan Facility (TALF) to produce that 
revival.\176\
---------------------------------------------------------------------------
    \175\ The securitization process is described in the Panel's May 
oversight report. May Oversight Report, supra note 174, at 34-39.
    \176\ According to the Federal Reserve Board and Treasury, ``over 
the past few years around a quarter of all non-mortgage consumer 
credit'' has been financed through securitization. U.S. Department of 
the Treasury, White Paper: Term Asset-Backed Securities Loan Facility 
(Mar. 3, 2009) (online at www.treas.gov/press/releases/reports/
talf_white_paper.pdf) (hereinafter ``TALF White Paper'').
---------------------------------------------------------------------------
    The volume of asset-backed securities representing classes 
of consumer loans before the financial crisis, the drop in that 
volume during the crisis, and its movement upward beginning in 
March 2009 are shown in Figure 13:

 FIGURE 13: MONTHLY TOTAL SBA, STUDENT LOAN, CREDIT CARD, AND AUTO ABS 
                       ISSUANCES, 2006-2009 \177\

---------------------------------------------------------------------------
    \177\ Chart prepared by Panel staff using U.S. monthly ABS 
issuances data provided by Securities Industry and Financial Markets 
Association (SIFMA). As of the date of the report, data on small 
business ABS issuances is unavailable prior to January 2009.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The TALF is a credit facility through which FRBNY 
originally committed up to $200 billion to lend to investors 
for the purchase of securitized credit card, student, and 
automobile loans.\178\ The investors post the assets they 
purchase as collateral (security) for the loans; because the 
loans are made on a ``non-recourse'' basis,\179\ FRBNY cannot 
recover more than the then-value of the assets if the loan is 
not paid. Thus, whatever the amount of the original loan, the 
risk that the loan will not be repaid lays with the government, 
not with the investors. The non-recourse feature creates an 
economic subsidy--measured by the difference between the 
interest rates that would be required by investors to buy 
asset-backed securities with and without non-recourse loans. 
The subsidy is reduced somewhat because FRBNY will only make 
loans for something less than the full value of the asset-
backed securities the loans are used to buy.\180\
---------------------------------------------------------------------------
    \178\ As discussed below, infra pages 54-60, the program also 
included Small Business Administration loans.
    \179\ A non-recourse loan is one in which the lender has no right 
to look to the borrower for repayment, but only to take control of the 
collateral, whatever its actual value.
    \180\ See, e.g., Federal Reserve Bank of New York, Term Asset-
Backed Securities Loan Facility: Terms and Conditions (Apr. 21, 2009) 
(online at www.newyorkfed.org/markets/talf_terms.html). As explained in 
the May report, this reduction is called a ``haircut.'' The haircut 
varies for the asset class against which a loan is made and the 
duration of that loan. For a more complete discussion of this topic, 
please see the Panel's May Oversight Report. See Congressional 
Oversight Panel, May Oversight Report: Reviving Lending to Small 
Businesses and Families and the Impact of TALF, at 42 (May 7, 2009) 
(online at cop.senate.gov/documents/cop-050709-report.pdf).
---------------------------------------------------------------------------
    The choice of non-recourse financing reflects the 
assessment of Treasury and FRBNY that the risk of high levels 
of default had made securitized loans largely unsalable during 
the financial crisis, due to the high interest rates investors 
required to offset what they perceived as increased risk; the 
ultimate result, in the agencies' view, was reduction in the 
availability and an increase in the cost of consumer 
credit.\181\ The TALF subsidy is intended to reduce or 
eliminate that difference in two ways: (i) by creating 
competitive conditions to drive down interest rates for 
securitized products, and (ii) by funding a series of 
financings in which the feared level of defaults do not occur.
---------------------------------------------------------------------------
    \181\ See TALF White Paper, supra note 176.
---------------------------------------------------------------------------
    Treasury's economic commitment to the TALF is a relatively 
minor one in relation to the originally projected size of the 
program, but it has committed $20 billion of TARP funds to bear 
and is at risk for the first $20 billion of losses from TALF 
loans. At present, approximately $62 billion in TALF loans has 
been requested,\182\ making the $20 billion Treasury backstop a 
significant figure; posted collateral would have to decline in 
value by more than 33 percent before the Treasury backstop 
would be exhausted and loan losses would begin to be borne by 
FRBNY.
---------------------------------------------------------------------------
    \182\ This figure includes both CMBS and non-CMBS loans requested 
as of December 3, 2009. Federal Reserve Bank of New York, Term Asset-
Backed Securities Loan Facility: Non-CMBS--Recent Operations (online at 
www.newyorkfed.org/markets/TALF_recent_operations.html) (hereinafter 
``Term Asset-Backed Securities Loan Facility: Non-CMBS--Recent 
Operations'') (accessed Dec. 7, 2009); Federal Reserve Bank of New 
York, Term Asset-Backed Securities Loan Facility: CMBS--Recent 
Operations (online at www.newyorkfed.org/markets/cmbs_operations.html) 
(accessed Dec. 4, 2009).
---------------------------------------------------------------------------

  FIGURE 14: TALF V. NON-TALF ABS ISSUANCE, MARCH 2009-NOVEMBER 2009 
                                 \183\

---------------------------------------------------------------------------
    \183\ Chart prepared by Panel staff using U.S. monthly ABS 
issuances data provided by SIFMA and FRBNY. For FRBNY source data, see 
Federal Reserve Bank of New York, Term Asset-Backed Securities Loan 
Facility: Recent Operations (online at www.newyorkfed.org/markets/
TALF_recent_operations.html) (hereinafter ``TALF Recent Operations'') 
(accessed Dec. 3, 2009). 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Three metrics can help evaluate the results of the TALF.
    1. Changes in Amount of Securitizations. TALF's direct 
contribution to credit for consumers is illustrated by Figure 
14, which shows that since TALF's March 2009 launch, 39 percent 
of the total amount of all credit card, student, and auto loan 
ABS has been funded through the program.\184\ Over this period, 
total ABS origination, excluding commercial mortgage-backed 
securities, increased, ranging from a low of $11.3 billion in 
April 2009 to a high of $24.9 billion in June 2009, and 
averaging approximately $15.4 billion per month. While this 
represents an eightfold increase over the average monthly level 
of such securitizations from September 2008 to February 2009, 
securitization levels have not returned to pre-crisis 
levels.\185\ Figure 13 provides some sense of the historical 
base level against which the contribution of the TALF 
(illustrated in Figure 14) should be compared. A comparison of 
Figures 13 and 14 provides some sense of the historical base 
level against which the contribution of the TALF, for the 
months TALF has been in existence, should be compared. Figure 
15 below outlines the amount of loans for various types of ABS 
that the TALF has financed.
---------------------------------------------------------------------------
    \184\ Compare Federal Reserve Bank of New York, Term Asset-Backed 
Securities Loan Facility: Non-CMBS--Recent Operations (online at 
www.newyorkfed.org/markets/TALF_recent_operations.html) (accessed Dec. 
7, 2009) with US ABS Issuance, supra note 16. The text does not mean 
that 39 percent of every class of loans was the subject of TALF 
financing.
    \185\ Pre-crisis securitization levels may not be an accurate 
measure of healthy securitization practices; a portion of the growth of 
the ABS market was attributable to inflated demand for these products 
during the pre-crisis credit bubble.
---------------------------------------------------------------------------

FIGURE 15: TALF LOAN FACILITIES BY COLLATERAL TYPE, MARCH 2009-NOVEMBER 
                               2009 \186\

---------------------------------------------------------------------------
    \186\ Chart prepared by Panel staff using U.S. monthly non-CMBS ABS 
issuances data provided by FRBNY. See TALF Recent Operations, supra 
note 183. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    It is less clear that the TALF has increased the relative 
volume of non-TALF securitizations. As seen in Figure 16, non-
TALF consumer and small business ABS origination has yet to 
stabilize at 2008 levels. On average, during the first nine 
months of 2009, these types of securitizations were down 23.3 
percent versus 2008. It is difficult to draw firm conclusions 
from these data, because without further data it is extremely 
difficult to separate out the various factors--continuing 
uncertainty about the risks of ABS, insufficient transparency 
in the ABS markets, and a general decline in demand in a severe 
recession--that contribute to ABS levels.

         FIGURE 16: ABS ISSUANCE WITHOUT TALF, 2006-2009 \187\

---------------------------------------------------------------------------
    \187\ Chart prepared by Panel staff using U.S. monthly ABS 
issuances data provided by SIFMA and FRBNY. For FRBNY source data, see 
TALF Recent Operations, supra note 183. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    2. Changes in Interest Rate Spreads. FRBNY and Treasury 
have pointed to the narrowing of interest rate spreads for 
privately-financed securitizations as a metric for judging the 
TALF's success, because the closing of the spread indicates 
that investors are again willing to enter the market based on 
the TALF's pricing bellwether. Figure 17 reflects both the 
widening of credit spreads during the crisis as well as 
tightening of spreads since the establishment of TALF.

FIGURE 17: ABS SPREADS OF SELECTED INDICATORS SINCE DECEMBER 2006 \188\

---------------------------------------------------------------------------
    \188\ Chart prepared by Panel staff using data provided under 
subscription by BLOOMBERG Data Services.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    A comparison of Figure 17 above with Figure 16 on the 
previous page indicates that the narrowing of spreads is to 
some degree reflected in the volume of non-TALF ABS.
    3. Changes in credit availability. The premise of the TALF 
is that increasing the volume of asset securitizations will 
increase the overall level of consumer credit. Figure 18, 
derived from statistics published by the Federal Reserve 
System, provides a general picture of the continuing decline in 
consumer credit. Statistical evidence is hard to evaluate, 
however, because it is impossible to disentangle the 
continuation of the credit crisis from bank deleveraging and 
the reduction of credit demand that reflects underlying 
difficulties in the economy.

     FIGURE 18: PERCENT CHANGE IN CONSUMER CREDIT OUTSTANDING \189\

---------------------------------------------------------------------------
    \189\ Chart prepared by Panel staff using U.S. monthly non-CMBS ABS 
issuances data provided by FRBNY. See TALF Recent Operations, supra 
note 183.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Two additional facts should be noted. First, although the 
TALF was originally to be devoted to consumer and small 
business loans, various ABS categories were added throughout 
the program and, on May 19, 2009, FRBNY announced that the TALF 
could also be used by investors in pools of certain commercial 
mortgages--expanding the program beyond its original purpose. 
To date, $7.5 billion has been borrowed for commercial 
mortgage-backed securities (CMBS) investments.
    Second, the TALF is scheduled to end on March 31, 2010 for 
ABS and legacy CMBS, and on June 30, 2010 for newly issued 
CMBS. Given the small percentage of the $200 billion originally 
allocated for the TALF that has been used thus far, and the 
fact that loan requests have fallen off since their height in 
May ($10.6 billion requested) and June ($11.5 billion), it 
seems unlikely that the full $200 billion will be used. During 
a meeting with Panel staff in October, Treasury staff stated 
that the decline in requests was attributable to the increase 
in the availability of less expensive financing from private 
sources and therefore illustrated TALF's success in its goal of 
re-opening the ABS markets.
            b. Loans to Small Business
    During the financial crisis, small business credit froze 
along with the rest of the lending markets.\190\ On March 17, 
2009, Treasury outlined measures to ``jumpstart credit markets 
for small businesses.'' \191\ Again, those measures were aimed 
at stimulating the market for securitized loans. One measure 
was the inclusion in the TALF of securities backed by the 
government-guaranteed portion of Small Business Administration 
(SBA) 7(a) loans and the non-government-guaranteed first-lien 
mortgage loans affiliated with the SBA's 504 loan program in 
the TALF. The second was the direct purchase of up to $15 
billion in securities backed by SBA loans; both measures were 
directed at the securitized loan market.\192\ (From 2006 
through 2008, between 40 and 45 percent of the SBA guaranteed 
portion of 7(a) loans were sold into the secondary market.) 
\193\
---------------------------------------------------------------------------
    \190\ See May Oversight Report, supra note 174, at 52 (referring to 
the market freezing because of (1) the tightening of the Prime versus 
LIBOR spread, which reduced the attractiveness of investment in 
securitized 7(a) loans (indeed, the return for investors had 
disappeared); (2) the strained capacity of broker-dealers, who were 
unable to sell their current inventory and thereby free up capital to 
buy and pool additional loans; (3) the reduced access to and increased 
cost of credit for broker-dealers, who could not sell off inventory to 
pay off existing loans; and (4) general uncertainty and fear in the 
marketplace).
    \191\ See Financial Stability Plan, supra note 173.
    \192\ Unable to shed the risk from their books, commercial lenders 
significantly curtailed their lending activities.
    \193\ Government Accountability Office, Small Business 
Administration's Implementation of Administrative Provisions in the 
American Recovery and Reinvestment Act of 2009, at 6 (Apr. 16, 2009) 
(online at www.gao.gov/new.items/d09507r.pdf).
---------------------------------------------------------------------------
    The TALF originally attracted no interest from investors in 
securitized 7(a) and 504 loans. The first TALF borrowing for a 
pool of such loans, in the amount of approximately $86 million, 
occurred as part of the May 5 TALF facility. To date, TALF 
loans based on small business ABS originations represent only 
2.98 percent of all non-CMBS TALF transactions.\194\
---------------------------------------------------------------------------
    \194\ Calculation based upon data provided by FRBNY. See Term 
Asset-Backed Securities Loan Facility: Non-CMBS--Recent Operations, 
supra note 182.
---------------------------------------------------------------------------
    Treasury has not yet made any purchases under its direct 
purchase program although it has allocated approximately $3 
billion for the program for 2009.\195\ It hopes to create its 
first actual pooling structure by year-end.\196\ It has noted 
that the lack of an earlier start to the program reflects both 
the typical uncertainties investors in the TALF exhibited,\197\ 
as well as the fact that ``the secondary market [has begun] to 
return to more normal conditions.'' \198\
---------------------------------------------------------------------------
    \195\ Government Accountability Office, Troubled Asset Relief 
Program: One Year Later, Actions are Needed to Address Remaining 
Transparency, and Accountability Challenges, at 80 (Oct. 8, 2009) 
(online at www.gao.gov/new.items/d1016.pdf) (hereinafter ``GAO: TARP 
One Year'').
    \196\ Treasury hired Earnest Partners, an independent investment 
manager with SBA-guaranteed loan experience, to guide its efforts to 
buy securitized SBA loans directly. U.S. Department of the Treasury, 
Financial Agency Agreement for Asset Management Services for SBA 
Related Loans and Securities (Mar. 16, 2009) (online at 
www.financialstability.gov/docs/ContractsAgreements/
TARP%20FAA%20SBA%20Asset%20Manager%20-%20Final%20to%20be%20posted.pdf) 
(updated Nov. 12, 2009); see also SIGTARP, Quarterly Report to 
Congress, at 112 (Apr. 21, 2009) (online at www.sigtarp.gov/reports/
congress/2009/April2009_Quarterly_Report_to_Congress.pdf).
    \197\ See May Oversight Report, supra note 174, at 50.
    \198\ U.S. Department of the Treasury, Unlocking Credit for Small 
Businesses: FAQ on Implementation (Mar. 17, 2009) (online at 
www.financialstability.gov/docs/FAQ-Small-Business.pdf) (hereinafter 
``Unlocking Credit for Small Businesses: FAQ'').
---------------------------------------------------------------------------
    Unlike the TALF, Treasury's program to purchase SBA-
guaranteed securities does not utilize private-sector pricing. 
Rather, Treasury would purchase securities directly from ``pool 
assemblers'' and banks.\199\ Under the program, if Treasury 
engages in direct purchases, it plans either to sell the 
securities to private investors or pursue a buy-and-hold 
strategy, depending on market conditions.\200\ According to 
Treasury's implementation documents, ``Treasury and its 
investment manager will analyze the current and historical 
prices for these securities'' in order to ``identify 
opportunities to purchase the securities at reasonable 
prices.'' \201\ Treasury defines such prices as those that 
fulfill the dual objective of ``[providing] sufficient 
liquidity to encourage banks to increase their small business 
lending and [protecting] taxpayers' interest.'' \202\ To date, 
Treasury has not made any direct purchases under this 
program.\203\
---------------------------------------------------------------------------
    \199\ Pursuant to EESA, Treasury expects to receive warrants from 
the pool assemblers as additional consideration for the purchase of 
7(a) and 504 first-lien securities. The pricing and exact nature of the 
warrants is still under consideration by Treasury. Unlocking Credit for 
Small Businesses: FAQ, supra note 198.
    \200\ Id.
    \201\ Id.
    \202\ Id.
    \203\ According to Treasury's FAQ on Implementation, purchases of 
securities backed by SBA 7(a) loans were to begin by the end of March 
2009, while purchases of securities backed by first-lien 504 loans were 
to begin by May due to ``Treasury's need to conduct a thorough risk 
analysis, given that these securities are not government guaranteed.'' 
Unlocking Credit for Small Businesses: FAQ, supra note 198; see also 
November 25 Transactions Report, supra note 71.
---------------------------------------------------------------------------
    On October 21, 2009, the White House announced a third 
small business lending initiative, part of which uses TARP 
funds. Under this initiative, Treasury will provide lower cost 
capital to community banks \204\ to be used in small business 
lending.\205\ Participating banks must submit small business 
lending plans and will be required to submit quarterly reports 
describing their small business lending activities. If their 
lending plans are accepted, banks will have access to capital 
at a dividend rate of 3 percent, more attractive terms than the 
5 percent rate under the Capital Purchase Program. These small 
banks will be able to receive capital totaling up to 2 percent 
of their risk weighted assets.\206\ For community development 
financial institutions \207\ that can document that 60 percent 
of their small business lending targets low-income communities 
or underserved populations, this dividend rate will be only two 
percent.\208\ As currently conceived,\209\ this capital will be 
available after the bank submits a small business lending plan, 
and may only be used to make qualifying small business 
loans.\210\ Further implementing details for this program have 
not been announced as of the date of this report.
---------------------------------------------------------------------------
    \204\ Community banks are banks with $1 billion or less in assets.
    \205\ Small- and medium-sized banks are seen as effective vehicles 
for supporting small business lending because banks with less than $1 
billion in assets hold greater proportions of small business loans to 
all business loans. See President Obama Announces Small Business 
Efforts, supra note 174.
    \206\ See President Obama Announces Small Business Efforts, supra 
note 174 at 2.
    \207\ Community development financial institutions, which are 
certified by the federal government, provide loans to underserved 
communities.
    \208\ See President Obama Announces Small Business Efforts, supra 
note 174.
    \209\ Id.
    \210\ Id.
---------------------------------------------------------------------------
    This program could be a more direct response to the problem 
of small business lending because over 90 percent of small 
business loans are not securitized.\211\
---------------------------------------------------------------------------
    \211\ For a discussion of the relationship between small business 
lending and the securitization of small business loans, see the Panel's 
May report. See May Oversight Report, supra note 174, at 50-52.
---------------------------------------------------------------------------
            c. Impact of Small Business Program
    There is evidence that a rejuvenated secondary market for 
SBA loans may negate Treasury's need for direct purchases. 
Between May and October, the total volume of loans settled from 
lenders to brokers averaged $345 million, exceeding pre-crisis 
levels.\212\ By comparison, in January total volume was $283.4 
million. But it should be noted that the amount of SBA lending 
is small in relation to the overall number of loans to small 
business.
---------------------------------------------------------------------------
    \212\ Calculation based on data provided by SIFMA.
---------------------------------------------------------------------------

FIGURE 19: SMALL BUSINESS ORIGINATIONS OF SELECTED CPP RECIPIENTS SINCE 
             MARCH 2009 (WITHOUT PNC OR WELLS FARGO) \213\

---------------------------------------------------------------------------
    \213\ Prior to February 2009, information on new bank loan 
originations was sparse, untimely, and incomplete. At Treasury's 
request, the top 22 CPP banks began reporting this data in February 
2009. See U.S. Department of the Treasury, Treasury Releases First 
Monthly Bank Lending Survey (Feb. 17, 2009) (online at 
www.financialstability.gov/latest/tg30.html). However, it was not until 
the April 2009 lending survey that these banks first specified their 
small business lending activities. Compare U.S. Department of the 
Treasury, Treasury Department Monthly Lending and Intermediation 
Snapshot: Summary Analysis for April 2009, at 5 (June 15, 2009) (online 
at www.financialstability.gov/docs/surveys/
SnapshotAnalysisApril2009.pdf) with U.S. Department of the Treasury, 
Treasury Department Monthly Lending and Intermediation Snapshot: 
Summary Analysis for March 2009, at 5 (May 15, 2009) (online at 
www.financialstability.gov/docs/surveys/SnapshotAnalysisMarch2009.pdf). 
See footnote 147 supra for an explanation of the exclusion from Figures 
19 and 20 of lending by Wells Fargo and PNC.
    Other CPP banks did not have the same monthly reporting requirement 
as the top 22 banks, and have not provided any data on their small 
business lending activities. As a whole, the CPP banks were only 
required to track average consumer loans outstanding, average 
commercial loans outstanding, and average total loans outstanding. See 
U.S. Department of the Treasury, About the Capital Purchase Program 
Monthly Lending Report, at 1 (online at www.financialstability.gov/
docs/About%20the%20CPP%20Monthly%20Lending%20Report.pdf) (accessed Dec. 
3, 2009).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

     FIGURE 20: SMALL BUSINESS AVERAGE TOTAL LOANS OF SELECTED CPP 
    RECIPIENTS SINCE MARCH 2009 (WITHOUT PNC AND WELLS FARGO) \214\

---------------------------------------------------------------------------
    \214\ See id.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Small business lending has not returned to its pre-crisis 
levels. And as seen in Figures 19 and 20, direct small business 
lending across the top 22 CPP recipients has fallen or remained 
stagnant since TALF's inception. One explanation for this 
outcome is that the top 22 CPP recipient banks have not resumed 
lending at pre-crisis levels in any loan category, increasing 
further the competition smaller businesses face to obtain a 
part of the shrinking loan pool.\215\ Another explanation is 
that small business loans are currently not as lucrative for 
large banks as other types of lending.\216\ In either case, 
small business loans remain difficult to obtain.\217\ TALF has 
not necessarily succeeded in encouraging a broader expansion of 
consumer and small business credit. In the face of continued 
economic stagnation, such inaction could have drastic 
consequences for banks, businesses, and consumers alike.\218\
---------------------------------------------------------------------------
    \215\ See Treasury Department Monthly Lending and Intermediation 
Snapshot Data for April 2009-September 2009, supra note 147.
    \216\ Baker COP Testimony, supra note 28, at 4.
    \217\  See Baker COP Testimony, supra note 28, at 4; Congressional 
Oversight Panel, Written Testimony of Chief Economist and Co-founder of 
Moody's Economy.com Mark Zandi, Taking Stock: Independent Views on 
TARP's Effectiveness, at 1 (Nov. 19, 2009) (online at cop.senate.gov/
documents/testimony-111909-zandi.pdf) (hereinafter ``Zandi COP 
Testimony'').
    \218\ See Congressional Oversight Panel, Transcript of Hearing, 
Taking Stock: Independent Views on TARP's Effectiveness (Nov. 19, 2009) 
(Testimony of Mark Zandi) (publication forthcoming Jan. 2010) (online 
at cop.senate.gov/hearings/library/hearing-111909-economists.cfm) 
(hereinafter ``COP November Hearing Transcript'').
---------------------------------------------------------------------------

3. Mortgage Foreclosure Relief

            a. Background
    On February 18, 2009, Treasury launched two foreclosure 
mitigation programs under an initiative that became known as 
Making Home Affordable (MHA).\219\ These programs seek to 
refinance or restructure loans made during the housing boom in 
order to prevent foreclosures, which result in homeowners 
losing their homes, lenders incurring significant losses, and a 
wide range of costs imposed on communities.\220\
---------------------------------------------------------------------------
    \219\ Prior foreclosure mitigation initiatives include the private 
sector HOPE NOW Alliance, created in October 2007 and the Hope for 
Homeowners program within the Federal Housing Administration, signed 
into law in July 2008, as part of the Housing and Economic Recovery Act 
of 2008.
    \220\ See U.S. Department of the Treasury, Making Home Affordable 
Summary of Guidelines (Mar. 4, 2009) (online at www.treas.gov/press/
releases/reports/guidelines--summary.pdf) (hereinafter ``Making Home 
Affordable Summary of Guidelines''); see also Congressional Oversight 
Panel, October Oversight Report: An Assessment of Foreclosure 
Mitigation Efforts After Six Months, at 6-7 (Oct. 9, 2009) (online at 
cop.senate.gov/documents/cop-100909-report.pdf) (hereinafter ``October 
Oversight Report'').
---------------------------------------------------------------------------
    One of the MHA initiatives, the Home Affordable Refinancing 
Program (HARP), is designed to assist homeowners in refinancing 
mortgages owned or guaranteed by Fannie Mae or Freddie Mac (the 
government-sponsored enterprises, or GSEs). HARP refinances do 
not subsidize payment reductions or reduce principal; 
consequently, no government or GSE funds are used. The program 
permits borrowers who are current on their mortgages to 
refinance into more stable or affordable loans even if they 
have minimal or no equity in their homes. Borrowers are 
eligible for this program if the amount owed on their mortgage 
is up to 125 percent of the home's current value.\221\ 
Delinquent homeowners and those with non-GSE mortgages are 
ineligible.\222\ To the extent that default losses avoided due 
to HARP refinancings exceed the reduced yield on the refinanced 
mortgages owned by the GSEs, the program will improve the long-
term financial outlook for the GSEs, thereby reducing their 
need for federal government support.
---------------------------------------------------------------------------
    \221\ The decision to accept loans with a loan-to-value ratio of up 
to 125 percent was announced in July 2009, but implementation did not 
begin until September 1 at Fannie Mae and until October 1 at Freddie 
Mac. The minimum loan-to-value ratio for HARP loans is 80 percent.
    \222\ U.S. Department of the Treasury, Making Home Affordable 
Borrower Frequently Asked Questions (July 16, 2009) (online at 
makinghomeaffordable.gov/borrower-faqs.html#a2) (hereinafter ``Making 
Home Affordable Borrower FAQs'').
---------------------------------------------------------------------------
    The other major MHA initiative, the Home Affordable 
Modification Program (HAMP), uses TARP dollars to facilitate 
the modification of delinquent mortgages. All loans under the 
conforming loan limit, which is the amount above which the GSEs 
cannot purchase mortgages, are HAMP-eligible; GSE ownership or 
guarantee is not required. HAMP modifications are available for 
delinquent borrowers.\223\
---------------------------------------------------------------------------
    \223\ Borrowers must be at least 60 days delinquent before they can 
seek a loan modification. See Making Home Affordable Summary of 
Guidelines, supra note 220; see also Making Home Affordable Borrower 
FAQs supra note 222.
---------------------------------------------------------------------------
    HAMP facilitates modifications by making incentive 
payments: to loan servicers, homeowners, and lenders. Unlike 
the capital assistance programs and the assistance to the auto 
industry, HAMP incentive payments are grants, so Treasury will 
not recover any of the funds paid out.\224\ Altogether, 
Treasury has designated $75 billion for HAMP, including $50 
billion in TARP funds.\225\ Using that $50 billion pool of 
funds, which is for modifying loans that are not owned or 
guaranteed by Fannie Mae or Freddie Mac, Treasury has signed 
agreements with 79 servicers (representing over 85 percent of 
all mortgages serviced in the United States under the 
agreements signed so far); under the current contracts, the 
maximum payout of TARP funds from Treasury is $27.4 
billion.\226\
---------------------------------------------------------------------------
    \224\ See 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).
    \225\ The remaining $25 billion, which is being used to perform 
HAMP modifications on loans owned or guaranteed by Fannie Mae and 
Freddie Mac, comes from the Housing and Economic Recovery Act of 2008 
(HERA).
    \226\ See November 25 Transactions Report, supra note 71.
---------------------------------------------------------------------------
    HAMP's goal is to make mortgage payments more affordable 
and thus avert defaults. HAMP does so by requiring 
participating servicers and lenders to offer modifications to 
all eligible borrowers in their portfolios where the net 
present value of the modified loan would exceed the net present 
value of the unmodified loan.\227\ Servicers are expected to 
comply with any private contractual restrictions on loan 
modifications, however.
---------------------------------------------------------------------------
    \227\ The formula that is used to determine eligibility is known as 
a net present value test, or NPV test. See Jordan D. Dorchuck, Net 
Present Value Analysis and Loan Modifications (Sept. 15, 2008) (online 
at www.mortgagebankers.org/files/Conferences/2008/
RegulatoryComplianceConference08/
RC08SEPT24ServicingJordanDorchuck.pdf).
---------------------------------------------------------------------------
    HAMP modifications follow a standard template. The servicer 
or lender is to offer to reduce the monthly mortgage payment to 
31 percent of the borrower's monthly income.\228\ This is done 
by first capitalizing all arrearages, then reducing interest 
rates incrementally to as low as 2 percent, then stretching out 
the loan's term if possible, and then stretching out the loan's 
amortization period (forbearing on principal).\229\
---------------------------------------------------------------------------
    \228\ This ratio, a measure of loan affordability, is known as 
debt-to-income ratio or DTI.
    \229\ U.S. Department of the Treasury, Home Affordable Modification 
Program Guidelines at 6-7 (March 4, 2009) (online at www.treas.gov/
press/releases/reports/modification_program_guidelines.pdf) 
(hereinafter ``HAMP Guidelines'').
---------------------------------------------------------------------------
    HAMP modifications begin with a three-month trial 
modification. If the borrower is current on payments at the end 
of the three-month trial period and has provided full 
supporting documentation, such as proof of income, then the 
modification becomes ``permanent.'' \230\ Permanent 
modifications, however, only have fixed monthly payments for 
five years. After five years, interest rates on the modified 
loans are increased up to a cap.\231\ In addition, Treasury 
contributes cash toward interest-rate reductions, and it also 
provides a variety of incentive payments to the defaulted 
homeowner, servicer, and lender. Treasury does not make any 
incentive payments unless a modification becomes 
permanent.\232\
---------------------------------------------------------------------------
    \230\ Making Home Affordable Summary of Guidelines, supra note 220; 
October Oversight Report, supra note 220.
    \231\ See U.S. Department of the Treasury, Making Home Affordable 
Updated Detailed Program Description, at 4 (Mar. 4, 2009) (online at 
www.treas.gov/press/releases/reports/
housing_fact_sheet.pdf).
    \232\ HAMP Guidelines, supra note 229.
---------------------------------------------------------------------------
    As of October 31, 2009, Treasury has expended $2,307,776 of 
the $50 billion in TARP funding set aside for modification of 
non-GSE loans. Of the money expended, $1,828,000 was used for 
servicer incentives; $82,500 went to servicers as a bonus for 
modifying current loans; $238,500 went to investors as a bonus 
for modifying current loans; and $158,776 was expended for 
investor cost sharing subsidies.\233\ Payments only occur for 
loans that have achieved permanent modification status. In 
total, 10 servicers have received payments under HAMP.\234\
---------------------------------------------------------------------------
    \233\ In response to Panel requests, Treasury provided a broad 
range of data related to the mortgage market. Although not all of the 
data are confidential, portions are. These data are cited in numerous 
places throughout the report, and are hereinafter cited as ``Treasury 
Mortgage Market Data.''
    \234\ Treasury Mortgage Market Data, id.
---------------------------------------------------------------------------
            b. Impact
    The refinancing of loans under HARP began in April 
2009.\235\ According to data from Treasury, 136,271 loans have 
been refinanced under the program as of October 31, 2009.\236\ 
HARP accounted for about 5 percent of the Fannie Mae and 
Freddie Mac loans that were refinanced from April 1-September 
30.\237\ Additional data from Treasury show that 12.5 percent 
of HARP refinancings (17,091 mortgages) have involved mortgages 
where the homeowner has negative equity, but only .2 percent 
(272 mortgages) have been for properties with a loan-to-value 
ratio (LTV) over 105 percent.\238\ These numbers should 
increase, however, as the program's maximum LTV was only 
recently increased from 105 percent to 125 percent. While more 
information is needed to evaluate HARP fully, the data that are 
currently available raise questions about whether the program, 
as currently configured, will have a substantial impact on the 
foreclosure problem.
---------------------------------------------------------------------------
    \235\ See Federal Housing Finance Agency, FHFA Refinance Report 
Shows Refinance Volumes Dropped in September; Mortgage Rates Still 
Higher than the Spring, at 3 (Nov. 2, 2009) (online at www.fhfa.gov/
webfiles/15153/Sept_Refinance_Final_report_and_release_11_2_09.pdf) 
(hereinafter ``FHFA Refinance Report'').
    \236\ Treasury Mortgage Market Data, supra note 233.
    \237\ FHFA Refinance Report, supra note 235.
    \238\ Treasury Mortgage Market Data, supra note 233.
---------------------------------------------------------------------------
    Over the next several years, Treasury aims to modify up to 
three million to four million mortgages under the HAMP 
program.\239\ Yet, projections for foreclosure range from 8.1 
million over the next four years to as high as 13 million over 
the next five-plus years.\240\ Under the HAMP program between 
March 1 and October 31, 2009, 919,965 offers of trial 
modifications were extended to borrowers.\241\ From the offers 
extended, the program commenced 600,739 cumulative trial 
modifications, including restarts on duplicate borrowers. In 
total, the program has started 595,536 trial modifications on 
unique borrowers for the same time period.\242\ Although trial 
modifications started each month held steady or increased from 
February through September, no doubt due to the ramp up of the 
program, trials dropped off sharply in October, dropping from 
155,875 trials started the previous month to 99,183.\243\ It is 
unclear why the number of trials dropped and whether or not 
this trend will continue into the future.
---------------------------------------------------------------------------
    \239\ U.S. Department of the Treasury, Making Home Affordable: 
Updated Detailed Program Description (March 4, 2009) (online at 
www.treas.gov/press/releases/reports/
housing_fact_sheet.pdf).
    \240\ Goldman Sachs Global ECS Research, Home Prices and Credit 
Losses: Projections and Policy Options, at 16 (Jan. 13 2009) (available 
online at garygreene.mediaroom.com/file.php/
216/Global+Paper+No++177.pdf); Rod Dubitsky et al., Foreclosure Update: 
Over 8 Million Foreclosures Expected, Credit Suisse Fixed Income 
Research (Dec. 8, 2008) (online at www.nhc.org/Credit%20Suisse%20
Update%2004%20Dec%2008.doc).
    \241\ U.S. Department of the Treasury, Making Home Affordable 
Program: Servicer Performance Report Through October 2009, at 3 (online 
at www.makinghomeaffordable.gov/docs/
MHA%20Public%20111009%20FINAL.PDF) (hereinafter ``MHA Servicer 
Performance Report Through October 2009'').
    \242\ Treasury Mortgage Market Data, supra note 233.
    \243\ Id.
---------------------------------------------------------------------------
    It is important to note two points regarding the trial 
modifications initiated so far under HAMP. First, many trial 
modifications may fail to convert to permanent modifications. 
At the Panel's October 22 hearing, Assistant Secretary Allison 
stated that Treasury's internal estimate before the program was 
launched was that 50-75 percent of the trial modifications 
would be converted into longer-term modifications.\244\ As of 
October 31, 2009, there were only 10,187 permanent 
modifications, with a conversion rate, or roll rate, of 4.69 
percent for trial modifications commenced at least three months 
ago.\245\ While this does not mean that the other 95.31 percent 
of trial modifications begun three months ago are failures, it 
does mean that the vast majority of trial modifications have 
failed to convert to permanent modifications on the three-month 
timeline originally announced by Treasury.
---------------------------------------------------------------------------
    \244\ See Congressional Oversight Panel, Testimony of Treasury 
Assistant Secretary for Financial Stability Herbert M. Allison, Jr., 
Congressional Oversight Panel Hearing with Assistant Treasury Secretary 
Herbert M. Allison, Jr. (Oct. 22, 2009) (publication forthcoming 
January 2010) (online at cop.senate.gov/hearings/library/hearing-
102209-allison.cfm) (hereinafter ``Allison COP Hearing, Oct. 22'').
    \245\ Treasury Mortgage Market Data, supra note 233.
---------------------------------------------------------------------------
    These rates are not necessarily indicative of future HAMP 
performance, but Treasury has not provided the Panel with 
sufficient information to determine fully why there have been 
so few conversions from trial to permanent modifications. 
Treasury has stated that it will not be able to produce a more 
statistically accurate roll rate until the first quarter of 
next year.\246\
---------------------------------------------------------------------------
    \246\ Allison COP Hearing, Oct. 22, supra note 246.
---------------------------------------------------------------------------
    One factor contributing to the paucity of permanent 
modifications is issues in gathering borrower documentation. 
HAMP trial modifications can be initiated before homeowners 
provide any documentation of their income and assets,\247\ and 
that documentation, which in many cases borrowers did not have 
to show in order to get their original loans, is required to be 
produced before a loan modification can exit the trial period. 
Because of difficulties in compiling documentation, Treasury 
has granted a two-month extension to the trial periods of trial 
modifications commenced before September 1, 2009. The roll rate 
for loans made five months ago is more encouraging at 38.24 
percent,\248\ although the success of the program over the long 
term will certainly require a much higher rate.
---------------------------------------------------------------------------
    \247\ See U.S. Department of the Treasury, Obama Administration 
Kicks Off Mortgage Modification Conversion Drive (Nov. 30, 2009) 
(online at www.ustreas.gov/press/releases/tg421.htm).
    \248\ Treasury Mortgage Market Data, supra note 233.
---------------------------------------------------------------------------
    A second major concern about HAMP is that many homeowners 
who receive permanent modifications may redefault and 
ultimately lose their homes in foreclosure sales.\249\ Data on 
loans modified during the first quarter of 2008, prior to the 
launch of HAMP, show that within one year of modification, 54 
percent of the borrowers were again delinquent by at least 60 
days.\250\ As the Panel noted in its October report, redefault 
rates are lower for modifications that reduce monthly payments, 
with greater percentage decreases in payments resulting in 
lower subsequent redefault rates. Nonetheless, redefault rates, 
even on modifications reducing payments by 20 percent or more, 
were still a very high 34.1 percent.\251\ At the Panel's Oct. 
22 hearing, Assistant Secretary Allison noted that HAMP results 
in material reductions in borrowers' payments.\252\ He later 
noted that Treasury's baseline assumption for redefault rates 
is 40 percent over the next five years.\253\ This assumption is 
not based on the actual characteristics of HAMP modified loans; 
adjusting for the actual characteristics of the loans, the 
predicted redefault rate could be substantially higher.
---------------------------------------------------------------------------
    \249\ See Manuel Adelino, Kristopher Gerardi, & Paul S. Willen, Why 
Don't Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, 
and Securitization, Federal Reserve Bank of Boston Working Paper 09-4 
(July 6, 2009) (online at www.bos.frb.org/economic/ppdp/2009/
ppdp0904.pdf). See also October Oversight Report, supra note 220.
    \250\ These data only cover about two-thirds of the mortgage 
market. See Office of the Comptroller of the Currency and Office of 
Thrift Supervision, OCC and OTS Mortgage Metrics Report, Second Quarter 
2009, at 29 (online at www.occ.treas.gov/ftp/release/2009-118a.pdf) 
(hereinafter ``OCC and OTS Mortgage Metrics Second Quarter 2009'') 
(accessed Dec. 7, 2009).
    \251\ Id.
    \252\ Allison COP Hearing, Oct. 22, supra note 246.
    \253\ See U.S. Department of the Treasury, Questions for the Record 
for U.S. Department of the Treasury Assistant Secretary Herbert M. 
Allison Jr., at 3 (Oct. 22, 2009) (online at cop.senate.gov/documents/
testimony-102209-allison-qfr.pdf) (hereinafter ``Questions for the 
Record for Assistant Secretary Allison'').
---------------------------------------------------------------------------
    HAMP is still too new to have conclusive data regarding 
redefaults. HAMP only began converting trials to permanent 
modifications in July, and 94 percent of the conversions to 
permanent status happened in September and October. This means 
that only 580 permanent modifications have been in place for 
more than two months. For the four months during which 
permanent modifications have been in place, the program has 
already seen eight re-defaults.\254\ The causes of those 
redefaults are not known. If the 40 percent redefault estimate 
offered by Assistant Secretary Allison holds true, 
approximately 4,075 of the current 10,187 permanent 
modifications could be expected to redefault. It should also be 
noted here that although HAMP is structured to protect 
taxpayers against losses in cases where homeowners redefault on 
their modified loans, that protection is limited.\255\ 
Redefaults during the five-year modification period mean that 
taxpayer funds will be paid out for modifications that 
nevertheless end in foreclosure.
---------------------------------------------------------------------------
    \254\ Treasury Mortgage Market Data, supra note 233.
    \255\ See HAMP Guidelines, supra note 229.
---------------------------------------------------------------------------
    The combination of failure to convert trial modifications 
to permanent modifications and redefaults on permanent 
modifications means that HAMP's ultimate impact may be 
significantly less than the number of trial modifications 
initiated. The Panel emphasizes that it is the number of 
foreclosures averted, not the number of trial modifications 
offered or even trial modifications commenced, that is the 
proper metric for evaluating HAMP.
    The Panel has other serious concerns about the impact of 
Treasury's efforts to reduce foreclosures. While many of the 
foreclosures earlier in the financial crisis were the result of 
mortgages resetting to higher rates, an issue that HAMP is 
designed to combat, an increasingly pressing problem involves 
foreclosures caused by unemployment, as the Panel showed in its 
October report.\256\ Since that report was released, the U.S. 
unemployment rate has reached 10 percent for the first time in 
26 years.\257\ By comparison, when the financial markets seized 
up in September 2008, the U.S. unemployment rate was at 6.2 
percent, and when HAMP was announced in February, unemployment 
had risen, but only to 8.1 percent.\258\ Furthermore, between 
September 2008 and November 2009, the more expansive 
unemployment rate, which includes people who are working less 
than they want to and those who have stopped looking for a job, 
rose from 11.2 percent to 17.2 percent.\259\ HAMP was simply 
not designed to address foreclosures caused by unemployment, a 
point that Assistant Secretary Allison acknowledged at the 
Panel's Oct. 22 hearing, when he said that people with 
extremely low incomes will not qualify for the program.\260\ 
Assistant Secretary Allison said that Treasury is actively 
looking at ways to address unemployment-related 
foreclosures.\261\
---------------------------------------------------------------------------
    \256\ See October Oversight Report, supra note 220, at 9-21.
    \257\ Labor Force Statistics, supra note 17.
    \258\ Id.
    \259\ U.S. Department of Labor, Bureau of Labor Statistics, Data 
Retrieval: Labor Force Statistics--Instrument: U-6, seasonally adjusted 
(online at www.bls.gov/webapps/legacy/cpsatab12.htm) (accessed Dec. 7, 
2009).
    \260\ Assistant Secretary Allison did point out that that the 
Administration has taken other steps to address unemployment. In 
addition, as Allison suggested, people who have the prospect of getting 
unemployment insurance payments for at least nine months can count 
those payments as income when applying for a HAMP modification. See 
Congressional Oversight Panel, Testimony of Treasury Assistant 
Secretary for Financial Stability Herbert M. Allison, Jr., 
Congressional Oversight Panel Hearing with Assistant Treasury Secretary 
Herbert M. Allison, Jr. (Oct. 22, 2009) (publication forthcoming Jan. 
2010) (online at cop.senate.gov/hearings/library/
hearing-102209-allison.cfm) (hereinafter ``COP Hearing with Assistant 
Secretary Allison''). See also U.S. Department of the Treasury, 
Supplemental Documentation--Frequently Asked Questions Home Affordable 
Modification Program, at 20 (Nov. 12, 2009) (online at 
www.hmpadmin.com/portal/docs/hamp_servicer/hampfaqs.pdf).
    \261\ See First American CoreLogic, Negative Equity Report as of 
September 30, 2009 (Nov. 24, 2009) (online at www.facorelogic.com/
newsroom/marketstudies/
negative-equity-report.jsp) (subscription required). See also COP 
Hearing with Assistant Secretary Allison, supra note 260, at 54, 55.
---------------------------------------------------------------------------
    Treasury's foreclosure prevention efforts thus far also do 
not counteract the problem of negative equity. As the Panel's 
October report stated, there is a correlation between owing 
more than one's home is worth and defaulting on the mortgage--a 
higher correlation, in fact, than any other factor that has 
been identified, besides the mortgage's affordability.\262\ In 
the third quarter of 2009, 23 percent of U.S. single-family 
homes with mortgages had negative equity, and 11 percent owed 
more than 120 percent of their homes' value, according to 
FirstAmerican CoreLogic, an increase from the previous 
quarter.\263\ Another methodology calculates that nearly 34 
percent of U.S. single-family homes with mortgages have 
negative equity.\264\ This means that somewhere between one in 
four and one in three mortgage holders have no home equity 
cushion in the event of a major change in life circumstances, 
such as a divorce or job relocation.\265\ And while Treasury's 
programs have made mortgages more affordable, they have not 
significantly reduced the amount of negative equity in modified 
and refinanced loans.\266\ Reducing loan principal is the only 
way to eliminate negative equity, so Treasury should consider 
how its existing programs might be adapted in ways that result 
in principal reductions.
---------------------------------------------------------------------------
    \262\ October Oversight Report, supra note 220, at 97.
    \263\ See First American CoreLogic, Negative Equity Report as of 
September 30, 2009 (Nov. 24, 2009) (online at www.facorelogic.com/
newsroom/marketstudies/
negative-equity-report.jsp) (subscription required). See also Ruth 
Simon and James R. Hagerty, One in Four Borrowers Is Underwater, Wall 
Street Journal (Nov. 24, 2009) (online at online.wsj.com/article/
SB125903489722661849.html).
    \264\ Id.
    \265\ Nearly 10.7 million mortgages were in negative equity as of 
September 2009, out of 75.6 million owner-occupied residences. Nearly 
13.0 million mortgages were in or near negative equity. See First 
American CoreLogic, Media Alert: First American CoreLogic Releases Q3 
Negative Equity Data (available with registration online at 
www.facorelogic.com/newsroom/marketstudies/
negative-equity-report.jsp) (accessed Dec. 7, 2009); see also U.S. 
Census Bureau, American Housing Survey--Frequently Asked Questions 
(online at www.census.gov/hhess/www/housing/ahs/ahsfaq.html) (accessed 
Dec. 4, 2009).
    \266\ Treasury Mortgage Market Data, supra note 233.
---------------------------------------------------------------------------
    Perhaps the most important way to evaluate the mortgage 
foreclosure relief efforts under the TARP is in relation to the 
number of foreclosures. Are foreclosures rising or declining? 
Are Treasury's programs making a major dent in the problem? 
There has been a small downturn in the number of new 
foreclosure filings since July, but the data also show that 
foreclosures easily continue to outpace HAMP modifications, as 
Figure 21 shows.

   FIGURE 21: FORECLOSURE STARTS V. TRIAL MODIFICATIONS STARTED \267\

---------------------------------------------------------------------------
    \267\ MHA Servicer Performance Report Through October 2009, supra 
note 241, at 3; HOPE NOW, Latest HOPE NOW Data Shows Workout Solutions 
Outpace Foreclosures More than 3 to 1 (Dec. 2, 2009) (online at 
www.hopenow.com/press--release/files/
October%202009%20Data%20Release.pdf); Workout Plans (Repayment Plans + 
Modifications) and Foreclosure Sales, July 2007-September 2009 (online 
at www.hopenow.com/industry-data/HOPE%20NOW%20National%20
Data%20July07%20to%20Sep09%20v2.pdf) (accessed Dec. 7, 2009).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    In October 2009, there were 222,107 foreclosure starts, 
significantly more than the 99,183 HAMP trial modifications 
initiated in the same month.\268\ In October there were also 
94,450 completed foreclosure sales. To keep pace, 95 percent of 
trial modifications in October would have to convert to 
permanent modifications with no redefaults on the 
modifications.
---------------------------------------------------------------------------
    \268\ Treasury Mortgage Market Data, supra note 233. Mortgage 
Bankers Association, Delinquencies Continue to Climb in Latest MBA 
National Delinquency Survey (Nov. 19, 2009) (online at 
www.mortgagebankers.org/NewsandMedia/PressCenter/71112.htm).
---------------------------------------------------------------------------
    In addition, as Figures 22 and 23 show, both mortgage 
delinquencies and homes in foreclosure are substantially above 
their level in February, when Treasury unveiled its foreclosure 
mitigation plans. According to the Mortgage Bankers 
Association's National Delinquency Survey, 14.41 percent of all 
mortgages are delinquent or currently in foreclosure, an all-
time high in the survey's 37-year history.\269\ Cumulatively, 
since July 2007, there have been more than two million 
foreclosure sales completed, and five and a half million 
foreclosure starts, with prime foreclosures now surpassing 
subprime.\270\ As currently structured, HAMP appears capable of 
preventing only a fraction of foreclosures.
---------------------------------------------------------------------------
    \269\ Mortgage Bankers Association, Delinquencies Continue to Climb 
in Latest MBA National Delinquency Survey (Nov. 19, 2009) (online at 
www.mortgagebankers.org/NewsandMedia/PressCenter/71112.htm).
    \270\ HOPE NOW, Workout Plans (Repayment Plans + Modifications) and 
Foreclosure Sales, July 2007-September 2009 (online at www.hopenow.com/
industrydata/HOPE%20
NOW%20National%20Data%20July07
%20to%20Sep09%20v2.pdf) (accessed Dec. 7, 2009).
---------------------------------------------------------------------------

FIGURE 22: PERCENTAGE OF 1-4 FAMILY MORTGAGES IN 30-90 DAYS DELINQUENT 
                                 \271\

---------------------------------------------------------------------------
    \271\ Mortgage Bankers Association, National Delinquency Survey.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

   FIGURE 23: PERCENTAGE OF 1-4 FAMILY MORTGAGES IN FORECLOSURE \272\

---------------------------------------------------------------------------
    \272\ Mortgage Bankers Association, National Delinquency Survey.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

4. Auto Industry Assistance

            a. Background
    Apart from its efforts to use the TARP to help stabilize 
the financial system, Treasury has deployed more than $80 
billion in TARP funds to assist two U.S. auto manufacturers and 
their finance affiliates. With the onset of the financial 
crisis in the fall of 2008, the challenges facing the auto 
industry--including rising gas prices, tightening credit 
markets, declining consumer confidence, and rising 
unemployment--had become acute. By December, two major domestic 
auto makers--Chrysler and GM--faced a sharp downturn in income 
and a crippling lack of access to credit.\273\
---------------------------------------------------------------------------
    \273\ Robert Nardelli, Written Testimony before the United States 
Senate Committee on Banking, Housing and Urban Affairs Committee, 
Hearing Examining the State of the Domestic Automobile Industry (Dec. 
4, 2008) (online at banking.senate.gov/public/
index.cfm?FuseAction=Files.
View&FileStore_id=c41857b2-7253-4253-95e3-5cfd7ea81393).
---------------------------------------------------------------------------
    On December 19, 2008, Chrysler and GM received bridge loans 
totaling $17.4 billion.\274\ The government funding, which did 
not end with those initial loans, came from a new TARP 
initiative called the Automotive Industry Financing Program 
(AIFP). The terms of the loans required both Chrysler and GM to 
demonstrate their ability to achieve financial viability,\275\ 
and both companies submitted their viability plans on February 
17, 2009.
---------------------------------------------------------------------------
    \274\ See U.S. Department of the Treasury, Loan and Security 
Agreement [GM] (Dec. 31, 2008) (online at www.financialstability.gov/
docs/agreements/GM%20Agreement%20
Dated%2031%20December%202008.pdf); U.S. Department of the Treasury, 
Loan and Security Agreement [Chrysler] (Dec. 31, 2008) (online at 
www.financialstability.gov/docs/agreements
/Chysler_12312008.pdf).
    \275\ See White House, Fact Sheet: Financing Assistance to 
Facilitate the Restructuring of Auto Manufacturers to Attain Financial 
Viability (Dec. 19, 2008) (online at georgewbush-
whitehouse.archives.gov/news/releases/2008/12/20081219-6.html). The 
loans also imposed conditions related to operations, expenditures, and 
reporting.
---------------------------------------------------------------------------
The results of the Obama Administration's review of those 
plans, announced on March 30, were not encouraging with respect 
to either automaker. The Administration concluded that Chrysler 
could not achieve viability as a stand-alone company and that 
it would have to develop a partnership with another automotive 
company or face bankruptcy.\276\ As for GM, the Administration 
concluded that the automaker's financial viability plan relied 
on overly optimistic assumptions about the company and future 
economic developments.\277\
---------------------------------------------------------------------------
    \276\ See U.S. Department of the Treasury, Chrysler February 17 
Plan: Determination of Viability, at 1 (Mar. 30, 2009) (online at 
www.financialstability.gov/docs/AIFP/Chrysler-Viability-
Assessment.pdf).
    \277\ See U.S. Department of the Treasury, GM February 17 Plan: 
Determination of Viability, at 1 (Mar. 30, 2009) (online at 
www.financialstability.gov/docs/AIFP/GM-Viability-Assessment.pdf).
---------------------------------------------------------------------------
    Both companies ultimately entered bankruptcy and, with the 
active involvement of the federal government, underwent radical 
restructurings.\278\ Following those restructurings, American 
taxpayers owned about 10 percent of what is now known as New 
Chrysler and 61 percent of New GM.\279\ The Administration has 
stated that it intends to divest of its equity stakes in these 
companies as soon as practicable, and that it intends to manage 
those stakes in a ``hands-off'' manner.\280\ Nevertheless, the 
federal government has exercised some initial influence over 
the companies' corporate governance by appointing 10 members of 
GM's 13-member board and four members of Chrysler's nine-member 
board.\281\
---------------------------------------------------------------------------
    \278\ For a discussion of the details of the bankruptcy, see the 
Panel's September report. See Congressional Oversight Panel, September 
Oversight Report: The Use of TARP Funds in the Support and 
Reorganization of the Domestic Automotive Industry, at 7-8 (Sept. 9, 
2009) (online at cop.senate.gov/documents/cop-090909-report.pdf) 
(hereinafter ``September Oversight Report'').
    \279\ General Motors, The New General Motors Company Launches Today 
(July 10, 2009) (online at www.sec.gov/Archives/edgar/data/1467858/
000119312509150199/dex991.htm); First Lien Credit Agreement (Chrysler) 
at Sec. 2.17(a) (June 10, 2009) (online at www.financialstability.gov/
docs/AIFP/newChrysler.pdf)
    \280\  Congressional Oversight Panel, Written Testimony of Treasury 
Senior Advisor Ron Bloom, Congressional Oversight Panel Field Hearing 
on the Auto Industry, at 10 (July 27, 2009) (online at cop.senate.gov/
documents/testimony-072709-bloom.pdf).
    \281\ See Chrysler Group LLC, Formation of Chrysler Group LLC Board 
is Completed (July 5, 2009) (online at www.chryslergroupllc.com/en/
news/article/?lid=formation_board&year=2009&month=7); General Motors 
Company, Form 8-K (Aug. 7, 2009) (online at www.sec.gov/Archives/edgar/
data/1467858/000119312509169233/d8k.htm).
---------------------------------------------------------------------------
    Auto lender GMAC has been another large beneficiary of 
AIFP, receiving $12.5 billion from the program between December 
2008 and May 2009.\282\ Last month, Treasury announced that it 
expected to provide additional AIFP funds to GMAC.\283\ The 
firm requested more money because it has been unable to meet 
the capital requirements imposed by the stress tests.\284\ The 
government has not yet formally announced its rationale for 
granting GMAC's request, nor has it finalized the size, form, 
or structure of GMAC's latest round of federal assistance.\285\
---------------------------------------------------------------------------
    \282\ November 25 Transactions Report, supra note 71, at 16 GMAC 
was the former financing arm of pre-bankruptcy GM, but is now an 
independent company.
    \283\ See Treasury Announcement Regarding the CAP, supra note 78.
    \284\ See Treasury Announcement Regarding the CAP, supra note 78.
    \285\ Treasury communications with Panel staff (Nov. 17, 2009). In 
answers to questions posed by members of the Panel, Assistant Secretary 
Herb Allison has suggested that Treasury decided to provide further aid 
to GMAC to ensure that GMAC is adequately capitalized to ``provide a 
reliable source of financing to both auto dealers and customers seeking 
to buy cars'' to help ``stabilize our auto financing market,'' and to 
contribute ``to the overall economic recovery.'' Questions for the 
Record for Assistant Secretary Allison, supra note 253, at 9.
---------------------------------------------------------------------------
    The AIFP includes two additional initiatives. The Auto 
Supplier Support Program (ASSP), under which the government 
agreed to guarantee payment for products shipped by 
participating suppliers, even if the buyers went out of 
business, has committed $1 billion to Chrysler and $2.5 billion 
to GM.\286\ Treasury also lent Chrysler $280 million and GM 
$361 million to backstop their new vehicle warranties. Both 
Chrysler and GM have since repaid those loans.\287\
---------------------------------------------------------------------------
    \286\ See November 25 Transactions Report, supra note 71, at 16.
    \287\ See November 25 Transactions Report, supra note 71, at 16.
---------------------------------------------------------------------------
    Figure 24 shows the current state of TARP funds used to 
support the auto industry. Taking into account repayments and 
de-obligations, United States taxpayers have spent $49.5 
billion of TARP funds in support of GM and New GM, and about 
$12.5 billion of TARP funds in support of Chrysler and New 
Chrysler. Investments in GMAC, assistance to automotive 
suppliers, and other miscellaneous funds account for 
approximately $17 billion of TARP spending, bringing the TARP 
net support for the U.S. domestic automotive industry to 
approximately $79 billion as of November 30, 2009.

              FIGURE 24: TARP FUNDS USED IN SUPPORT OF THE AUTO INDUSTRY (AS OF NOVEMBER 30, 2009)
----------------------------------------------------------------------------------------------------------------
                                                     Cumulative       Total amounts repaid
                                                  obligations \288\     and de-obligated    Amounts invested 289
----------------------------------------------------------------------------------------------------------------
Chrysler......................................       $15,222,130,642  \290\ $2,691,977,062       $12,530,153,580
General Motors................................        49,860,624,198           360,624,198  \291\ 49,500,000,000
GMAC..........................................        12,500,000,000                    --        12,500,000,000
Chrysler Financial 292........................         1,500,000,000         1,500,000,000
Loan for GMAC rights offering 293.............           884,024,131                    --           884,024,131
Auto Supplier Supports........................         3,500,000,000                    --   \294\ 3,500,000,000
                                               -----------------------------------------------------------------
    Total.....................................        83,466,778,971         4,552,601,260       78,914,177,711
----------------------------------------------------------------------------------------------------------------
\288\ This column represents Treasury's total obligation, or maximum exposure, to the automotive industry under
  the AIFP. The figure does not reflect repayments, de-obligations or committed funds that have not been used.
\289\ The Amounts Invested are decreased by commitments that were not funded but includes amounts that are no
  longer owed such as the amounts that were credit bid in the GM bankruptcy. For a more complete discussion, see
  September Oversight Report, supra note 273.
\290\ This figure reflects de-obligations ($2.4 billion) and repayments ($280 million). See November 25
  Transactions Report, supra note 71, at 16.
\291\ This number reflects the $8.8 billion in loans and preferred stock outstanding as well as the original
  loan amounts that are now in the form of equity.
\292\ Chrysler Financial completed its repayment of this obligation on July 14, 2009.
\293\ Represents loans to GM that have been converted to shares of GMAC and are currently not obligations of GM
  or GMAC. The GM loan was terminated.
\294\ This figure does not reflect the amount outstanding under the program, but instead is the total amount
  available under the cap.

            b. Impact
    The government's investments in Chrysler and GM will 
ultimately be judged based on the long-term viability of the 
companies, as well as on the profits or losses the government 
incurs. Some preliminary information is now available on the 
recent performance and future plans of the restructured 
automakers. It is important to note, though, that many factors 
besides the government's investments, most notably the Cash for 
Clunkers program, contributed to the two firms' financial 
results over the last several months.
    On November 16, 2009, GM released preliminary results for 
the third quarter of 2009, providing a first glimpse of the 
company's post-bankruptcy performance.\295\ Indicators were 
mixed. On one hand, GM lost about $1.2 billion in the third 
quarter of 2009, its revenues were down significantly from a 
year earlier, and it continued to be burdened with 
restructuring costs.\296\ On the other hand, the results 
``showed a healthier balance sheet, ample cash, and factory 
production much more in line with consumer demand[.]'' \297\ GM 
has said that it plans to repay $1 billion in federal loans by 
December 2009, and that it hopes to repay an additional $6.7 
billion by June 2010.\298\ Chrysler has not announced its 
third-quarter results.\299\ It recently announced a five-year 
business plan under which it predicts it will break even in 
2010, make money in 2011, and generate enough operating profit 
to pay back its government loans by 2014.\300\
---------------------------------------------------------------------------
    \295\ These preliminary results were not calculated in accordance 
with Generally Accepted Accounting Principles (GAAP). GM voluntarily 
filed the results with the SEC in a Form 8-K, in which the company 
stated that in 2010 it will file financial statements with the SEC that 
comply with GAAP.
    \296\ See General Motors, General Motors Announces the New 
Company's July 10-September 30 Preliminary Managerial Results (Nov. 16, 
2009) (online at media.gm.com/content/media/us/en/news/
news_detail.html/content/Pages/news/us/en/2009/Nov/1116_earnings).
    \297\ Bill Vlasic, G.M. Shows Signs of Recovery Despite New Loss, 
New York Times (Nov. 16, 2009) (online at www.nytimes.com/2009/11/17/
business/
17auto.html?_r=2&hp) (hereinafter ``G.M. Shows Signs of Recovery 
Despite New Loss'').
    \298\ See G.M. Shows Signs of Recovery Despite New Loss, supra note 
296.
    \299\ New Chrysler and New GM are not public companies and are not 
required to file reports with the Securities and Exchange Commission 
(SEC). Nevertheless, Ron Bloom, one of the leaders of Treasury's auto 
team, has stated that both companies agreed to provide public 
``quarterly report card[s].'' See ``Oversight of TARP Assistance to the 
Automobile Industry,'' Transcript of Hearing before the Congressional 
Oversight Panel, at 37-38 (July 27, 2009) (online at cop.senate.gov/
documents/transcript-072709-detroithearing.pdf ) (explaining that the 
companies' reports would not rise to the level of ``fully SEC-style'' 
reports in the ``near future,'' but that the companies would attempt to 
provide SEC-style reporting as soon as practicable and likely even 
before undertaking IPOs). It is not clear whether the auto companies 
have met all of Treasury's expectations with respect to reporting.
    \300\ See Chrysler Group LLC, Our Plan Presentation (Nov. 4, 2009) 
(online at www.chryslergroupllc.com/business/).
---------------------------------------------------------------------------
    The most recent monthly U.S. sales data are more positive 
for GM than for Chrysler. GM's sales of cars and light trucks 
were up by 4.7 percent between October 2008 and October 2009. 
Chrysler's sales in October, on the other hand, were down 30.4 
percent from a year earlier. Industry-wide sales were unchanged 
in October, when compared to sales 12 months prior. Meanwhile, 
the sales data from January to October 2009 are gloomy for both 
companies. GM's sales were down 33.6 percent compared with the 
same 10-month period in 2008. Chrysler's sales dropped 38.9 
percent for the first 10 months of the year. Across the auto 
industry, U.S. sales were down 25.4 percent.\301\
---------------------------------------------------------------------------
    \301\ See Autodata, U.S. Light Vehicle Retail Sales (Oct. 2009) 
(online at www.motorintelligence.com/fileopen.asp?File=SR-Sales-3.xls).
---------------------------------------------------------------------------
    Although it may be too early to render a comprehensive 
verdict on the government's intervention in the auto industry, 
the assistance almost certainly prevented Chrysler and GM from 
failing and liquidating. Both the manufacturing sector and the 
broader economy may have suffered severe harm if the government 
had allowed Chrysler and GM to disintegrate.\302\ On the cost 
side of the ledger, it is unlikely that Treasury will recoup 
the full amount of its investment in Chrysler and GM even if 
the companies remain viable and dramatically increase their 
market capitalization.\303\ In addition, as was discussed in 
the Panel's September report, the government has incurred 
competing responsibilities by taking a significant ownership 
interest in private firms.\304\
---------------------------------------------------------------------------
    \302\ The Government Accountability Office estimates that the 
automotive industry, including automakers, dealerships, and automotive 
parts suppliers, directly employs about 1.7 million people. See 
Government Accountability Office, Troubled Asset Relief Program: 
Continued Stewardship Needed as Treasury Develops Strategies for 
Monitoring and Divesting Financial Interests in Chrysler and GM, GAO-
10-151, at 5 (Nov. 2, 2009) (online at www.gao.gov/new.items/
d10151.pdf) (hereinafter ``GAO: Continued Stewardship Needed''). 
According to Steven Rattner, previously one of the leaders of 
Treasury's auto team, ``the short-term effect of a Chrysler shutdown 
[alone] could [have been] 300,000 more unemployed, similar to what was 
lost across the entire economy in the month of July [2009].'' Steven 
Rattner, The Auto Bailout: How We Did It, CNN.com (Oct. 21, 2009) 
(online at money.cnn.com/2009/10/21/autos/auto_
bailout_rattner.fortune/index.htm?postversion=2009102104).
    \303\ See September Oversight Report, supra note 273, at 55-58; 
GAO: Continued Stewardship Needed, supra note 302, at 25-28.
    \304\ See September Oversight Report, supra note 273, at 79-83.
---------------------------------------------------------------------------

5. The TARP as a Whole

            a. Background
    This report has heretofore analyzed Treasury's actions 
within separate parts of the TARP and drawn conclusions about 
the costs and impacts of those targeted programs, while also 
studying broad macroeconomic indicators that may shed 
additional light on individual programs' successes and 
shortcomings. In this section, the Panel undertakes a similar 
exercise with respect to the TARP as a whole. This section also 
places the TARP within the broader context of the financial 
stabilization efforts of the Federal Reserve and the FDIC by 
looking at how the Panel counts the money that has been flowing 
out of and into TARP and the federal government's other 
financial stabilization programs, and discussing what has 
happened to numerous macroeconomic indices since the TARP's 
enactment in October 2008 and what conclusions we can draw from 
the movements in those economic indicators.
            b. Accounting for the TARP and Other Financial 
                    Stabilization Programs
            i. TARP's Balance Sheet
    Treasury is currently committed or obligated to spend 
$528.9 billion of TARP funds through an array of programs 
described earlier in this report.\305\ Of this total, $401.5 
billion is the net disbursement currently outstanding under the 
$698.7 billion statutory limit for TARP expenditures. That 
leaves $297.2 billion, or 43 percent of the statutory limit, 
available for fulfillment of funding commitments under existing 
programs and, potentially, for funding new programs and 
initiatives.\306\ For each TARP initiative, Figure 25 shows how 
much money Treasury anticipated spending, how much actually has 
been spent to date, how much has been returned, how much is 
currently outstanding, and how much is available for future 
use.
---------------------------------------------------------------------------
    \305\ Treasury is scheduled to release detailed accounting 
statements for TARP in December. For purposes of this report, the Panel 
must rely upon its own analysis of the financial status of the TARP, 
and those of the Government Accountability Office (GAO), the 
Congressional Budget Office (CBO), and the Special Inspector General 
for the Troubled Asset Relief Program (SIGTARP).
    \306\ The calculation that $300.5 billion is available under the 
TARP is based on Treasury's interpretation of EESA. According to 
Treasury, repaid TARP funds go into the U.S. Treasury's General Fund 
for the reduction of the public debt, and those repayments also create 
additional headroom under the $698.7 billion statutory limit for 
Treasury's use under TARP. The Panel takes no position on Treasury's 
interpretation of the law. U.S. Department of the Treasury, Treasury 
Announces $68 Billion in Expected CPP Repayments (June 9, 2009) (online 
at www.treas.gov/press/releases/tg162.htm).

                              FIGURE 25: TARP ACCOUNTING (AS OF NOVEMBER 30, 2009)
                                            [In billions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                                          Net
                 TARP Initiative                    Anticipated   Actual      Total      Net funding    funding
                                                      funding     funding   repayments   outstanding   available
----------------------------------------------------------------------------------------------------------------
Capital Purchase Program (CPP)...................        $218.0    $204.7        $71.0        $133.7  \307\ $13.
                                                                                                               3
Targeted Investment Program (TIP)................          40.0      40.0            0          40.0           0
Systemically Significant Financial Institutions            69.8      69.8            0          69.8           0
 Program (SSFI)..................................
Automobile Industry Financing Program (AIFP).....          77.6      77.6          2.2          75.4           0
Asset Guarantee Program (AGP)....................           5.0       5.0            0           5.0           0
Capital Assistance Program (CAP):
Term Asset-Back Securities Lending Facility                20.0      20.0            0          20.0           0
 (TALF)..........................................
Public-Private Investment Partnership (PPIP).....          30.0      26.7            0          26.7         3.3
Supplier Support Program (SSP)...................     \308\ 3.5       3.5            0           3.5           0
Unlocking SBA Lending............................          15.0         0          N/A             0        15.0
Home Affordable..................................          50.0  \309\ 27            0          27.4        22.7
                                                                       .4
Modification Program (HAMP):
Total Committed..................................         528.9     471.3           --         401.5        54.3
Total Uncommitted................................         169.8       N/A         73.2           N/A  \310\ 243.
                                                                                                               0
                                                  --------------------------------------------------------------
      TOTAL......................................         698.7     474.7         73.2         401.5      297.2
----------------------------------------------------------------------------------------------------------------
\307\ This figure excludes the repayment of $71 billion in CPP funds. These funds are accounted for as
  uncommitted.
\308\ On July 8, 2009, Treasury lowered the total commitment amount for the program from $5 billion to $3.5
  billion, reducing GM's portion from $3.5 billion to $2.5 billion and Chrysler's portion from $1.5 billion to
  $1 billion. See U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period
  Ending October 28, 2009, at 17 (Oct. 30, 2009) (online at financialstability.gov/docs/transaction-reports/10-
  30-09%20Transactions%20Report%20as%20of%2010-28-09.pdf).
\309\ This figure reflects the total of all the caps set on payments to each mortgage servicer. See November 25
  Transactions Report, supra note 71.
\310\ This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($169.8 billion)
  and the repayments ($73.2 billion).

    Based on the amount of money spent to date, the biggest 
part of the TARP consists of the programs that provide capital 
assistance to financial institutions. Five such programs--the 
CPP, the SSFI, the TIP, the PPIP and the AGP--comprise a total 
of 68 percent of the net current investments of TARP funds, as 
Figure 26 shows. By contrast, efforts to help the auto industry 
make up 20 percent of the total; foreclosure prevention efforts 
make up 7 percent; and efforts targeted at small business and 
consumer lending make up just 5 percent of the total money 
outstanding.

         FIGURE 26: NET CURRENT INVESTMENT OF TARP FUNDS \311\

---------------------------------------------------------------------------
    \311\ See November 25 Transactions Report, supra note 71.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

            c. The TARP in the Context of Other Federal Government 
                    Stablilization Efforts
    As was stated above, Treasury's actions under the TARP have 
been part of a larger stabilization effort that has included 
programs run by the Federal Reserve and the FDIC. In fact, 
since the onset of the stabilization effort, both the Federal 
Reserve and the FDIC have been exposed on a nominal basis to 
substantially higher losses than Treasury has under the TARP. 
The nature of the three agencies' exposures, however, has 
differed based on the structure and risk profile of each 
specific agency initiative.
    The Panel has classified the agencies' stabilization 
efforts into three broad categories: outlays, loans, and 
guarantees.\312\ As Figure 27 shows, currently the vast 
majority of Treasury's net current investments of $401.5 
billion is in the form of outlays,\313\ which reflects the fact 
that the majority of TARP initiatives have been structured as 
equity investments or have eventually taken that form. The 
Federal Reserve currently has a maximum possible exposure of 
$1.73 trillion, which includes loans, principally in the form 
of programs to enhance liquidity, as well as substantial 
purchases of GSE mortgage-backed securities and its guarantee 
of certain Citigroup assets,\314\ which exposes the Federal 
Reserve to potential losses of up to $220.4 billion.\315\ The 
FDIC's maximum possible exposure is $666.7 billion, and 93 
percent of that exposure is through the TLGP, with the 
remaining amount representing the FDIC's provision for losses 
under its Deposit Insurance Fund.\316\ Altogether, the current 
estimate of the federal government's maximum possible exposure 
is $3.1 trillion,\317\ including uncommitted TARP funds.\318\ 
However, this would translate into the ultimate ``cost'' of the 
stabilization effort only if: (1) all uncommitted balances are 
fully utilized; (2) assets do not appreciate; (3) all loans 
default and are written off; and (4) all guarantees are 
exercised and subsequently written off. As many of these 
programs are phased out and scaled back, it is clear that, 
while the scale and the attendant risks of the government's 
various initiatives were unprecedented, the direct financial 
cost to the government, measured in terms of losses under the 
programs, will likely be a fraction of the maximum possible 
exposure.
---------------------------------------------------------------------------
    \312\ Outlays represent disbursements made with TARP funds, such as 
to purchase debt or equity securities. A guarantee is a promise to 
stand behind another's obligation to a third party. A guarantee, unlike 
a loan, requires no transfer of funds or assets. Outlays here do not 
technically correspond to outlays as measured in the federal budget.
    \313\ See November 25 Transactions Report, supra note 71.
    \314\ See Figure 27 infra.
    \315\ See Appendix V footnote iv infra.
    \316\ See Figure 27 infra.
    \317\ See Figure 27 infra.
    \318\ The federal government has significantly reduced its economic 
stabilization-related exposure in recent months. Since the Panel 
started tracking maximum possible exposure beginning in its April 2009 
report (reflecting data from March 2009), maximum exposure peaked at 
about $4.5 trillion in May 2009 before gradually declining to its 
current level of about $3 trillion. The decline in exposure over the 
last several months is largely attributable to the scaling back of the 
Federal Reserve's liquidity programs, most notably discount window 
lending and Term Auction Facility, and the retrenchment of certain 
guarantee programs. These figures do not include further recent 
reductions in exposure due to the termination of Treasury's Temporary 
Guarantee Program for Money Market Mutual Funds, which extended from 
September 19, 2008 to September 18, 2009 and reflected a maximum 
potential exposure of about $3.2 trillion in its initial phase, and the 
AGP's never fully consummated guarantee of certain Bank of America 
assets under the Asset Guarantee Program that was terminated in 
September 2009. See November Oversight Report, supra note 96, at 35, 
40-52.

   FIGURE 27--FEDERAL GOVERNMENT'S FINANCIAL STABILIZATION PROGRAMS (AS OF NOVEMBER 25, 2009)--CURRENT MAXIMUM
                                                   EXPOSURES *
                                            [In billions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                     Treasury         Federal
                     Program                          (TARP)          Reserve          FDIC            Total
----------------------------------------------------------------------------------------------------------------
AIG.............................................           $69.8           $94.6              $0          $164.4
    Outlays.....................................          i 69.8               0               0            69.8
    Loans.......................................               0         ii 94.6               0            94.6
    Guarantees..................................               0               0               0               0
Bank of America.................................              45               0               0              45
    Outlays.....................................          iii 45               0               0              45
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
Citigroup.......................................              50           220.4              10           280.4
    Outlays.....................................            v 45               0               0              45
    Loans.......................................               0               0               0               0
    Guarantees iv ..............................               5           220.4              10           235.4
Capital Purchase Program (Other)................              97               0               0              97
    Outlays.....................................           vi 97               0               0              97
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
Capital Assistance Program......................             TBD             TBD             TBD         vii TBD
TALF............................................              20             180               0             200
    Outlays.....................................               0               0               0               0
    Loans.......................................               0          ix 180               0             180
    Guarantees..................................         viii 20               0               0              20
PPIF (Loans) x .................................               0               0               0               0
    Outlays.....................................               0               0               0               0
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
PPIF (Securities)...............................           xi 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         xiii 50
    Outlays.....................................          xii 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.....................................        xiv 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.......................................          xv 3.5               0               0             3.5
    Guarantees..................................               0               0               0               0
Unlocking Credit for Small Businesses...........              15               0               0            15.0
    Outlays.....................................          xvi 15               0               0              15
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
Temporary Liquidity Guarantee Program...........               0               0             609             609
    Outlays.....................................               0               0               0               0
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0        xvii 609             609
Deposit Insurance Fund..........................               0               0            47.7            47.7
    Outlays.....................................               0               0      xviii 47.7            47.7
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
Other Federal Reserve Credit Expansion..........               0         1,237.9               0         1,237.9
    Outlays.....................................               0         1,008.5               0    1,008.5229.4
    Loans.......................................               0       xix 229.4               0               0
    Guarantees..................................               0               0               0               0
Uncommitted TARP Funds..........................             243               0               0              24
    Outlays.....................................             TBA               0               0             TBA
    Loans.......................................             TBA               0               0             TBA
    Guarantees..................................             TBA               0               0             TBA
                                                 ---------------------------------------------------------------
        Total...................................           698.7         1,732.9           666.7    xxii 3,054.7
            Outlays xx .........................             387         1,008.5            47.7         1,443.2
            Loans...............................            43.7             504               0           547.7
            Guarantees xxi .....................            25.0           220.4           619.0           864.4
            Uncommitted TARP Funds..............             243               0               0             243
----------------------------------------------------------------------------------------------------------------
* Associated footnotes are located in Appendix V.

    With respect to the Federal Reserve and FDIC's financial 
stabilization programs, the risk of loss varies significantly 
across the programs listed here, as do the mechanisms for 
protecting taxpayers against such risk. The Federal Reserve's 
liquidity programs have generally included mechanisms designed 
to protect taxpayers against program losses, most notably the 
use of loans with recourse to collateral.\319\ The use of 
recourse loans limits the risk of losses to taxpayers to the 
event of the borrower entering bankruptcy, and losses under the 
Federal Reserve liquidity programs have not materialized. The 
Federal Reserve did take on substantial risk in creating three 
special purpose vehicles to purchase Bear Stearns and AIG 
assets. However, in aggregate, the current principal on the 
loans to these facilities is roughly equal to the market value 
of the purchased real estate assets, which have rebounded from 
previous lows. For the TLGP, the FDIC assesses a premium of up 
to one percent on debt guarantees. While potential exposure 
under the TLGP has been enormous, the premiums collected from 
participants have so far been more than adequate to protect 
against program losses.
---------------------------------------------------------------------------
    \319\ The Federal Reserve's 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'' or excess collateral pledged to support the loan, 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.
---------------------------------------------------------------------------
    Furthermore, the federal government's total stabilization-
related exposure has been significantly reduced in recent 
months. Figure 28 shows the Federal Reserve's and FDIC's 
exposure as it has changed since January 2007. The general 
trend shows the Federal Reserve phasing out its liquidity 
programs and continuing to expand its portfolio of GSE 
mortgage-backed securities through new purchases. Exposure 
attributable to the TLGP and the Federal Reserve's support of 
Bear Stearns and AIG has been more stable in recent months.

FIGURE 28: FEDERAL RESERVE AND FDIC ASSISTANCE SINCE JANUARY 2007 \320\

---------------------------------------------------------------------------
    \320\ Federal Reserve Liquidity Facilities include: Primary credit, 
Secondary credit, Central Bank Liquidity Swaps: Primary dealer and 
other broker-dealer credit, Asset-Backed Commercial Paper Money Market 
Mutual Fund Liquidity Facility, Net portfolio holdings of Commercial 
Paper Funding Facility LLC, Seasonal credit, Term auction credit, Net 
Portfolio Holdings of TALF LLC. Federal Reserve Mortgage Related 
Facilities include: Federal agency debt securities and Mortgage-backed 
securities held by the Federal Reserve. Institution Specific Facilities 
include: Credit extended to American International Group, Inc., and the 
net portfolio holdings of Maiden Lanes I, II, and III. All Federal 
Reserve figures reflect the weekly average outstanding under the 
specific programs during the last week of the specified month. Board of 
Governors of the Federal Reserve System, Factors Affecting Reserve 
Balances (H.4.1) (online at www.federalreserve.gov/datadownload/
Choose.aspx?rel=H41) (accessed Nov. 25, 2009). For related 
presentations of Federal Reserve data, see Board of Governors of the 
Federal Reserve System, Credit and Liquidity Programs and the Balance 
Sheet, at 2 (Nov. 2009) (online at www.federalreserve.gov/
monetarypolicy/files/monthlyclbsreport200911.pdf). The TLGP figure 
reflects the monthly amount of debt outstanding under the program. 
Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance 
Under the Temporary Liquidity Guarantee Program (Dec. 2008-Oct. 2009) 
(online at www.fdic.gov/regulations/resources/TLGP/reports.html).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

            d. TARP Repayments and Income
    As of November 30, 2009, a total of 50 banks have fully 
repaid their preferred stock investments under the Capital 
Purchase Program.\321\ Of these banks, 30 have repurchased 
their CPP warrants as well.\322\ The rate of repayments being 
made by CPP participants has greatly slowed since June 2009, 
when twelve banks paid $68.4 billion to redeem their preferred 
shares. Three institutions, Goldman Sachs, JPMorgan Chase, and 
Morgan Stanley are responsible for over 60 percent of all TARP 
repayments.\323\ As noted in Section 1(C), as of October 30, 
2009, the rate of return on TARP investments in financial 
institutions that have completely exited the program is 17 
percent, including preferred shares, dividends, and warrants.
---------------------------------------------------------------------------
    \321\ See November 25 Transactions Report, supra note 71.
    \322\ See Figure 4 supra. The five privately owned banks that 
repurchased its warrants are omitted from the chart.
    \323\ November 25 Transactions Report, supra note 71.
---------------------------------------------------------------------------
    Figure 29 shows that more than 85 percent of the money that 
has flowed back to the TARP has been repayments under the CPP. 
An additional 15 percent of the money has come from CPP 
dividends and warrant repurchases. The TARP's other sources of 
income so far have been quite small by comparison.

                               FIGURE 29: TARP INCOME (AS OF OCTOBER 31, 2009) 324
                                            [In billions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                         Warrant
              TARP initiative                Repayments     Dividends     Interest     repurchases      Total
----------------------------------------------------------------------------------------------------------------
CPP.......................................           $71          $6.8          $.01          $3.2           $81
TIP.......................................  ............           2.3           N/A             0           2.3
Auto Initiatives..........................           2.2           0.5            .3           N/A           3.0
AGP.......................................  ............            .3  ............  ............            .3
Bank of America Guarantee.................  ............  ............  ............          -0.3  ............
                                           ---------------------------------------------------------------------
      Total...............................          73.2           9.9           .43           3.2         86.9
----------------------------------------------------------------------------------------------------------------
\324\ U.S. Department of the Treasury, Cumulative Dividends Report as of Oct. 31, 2009 (Dec. 1, 2009) (online at
  www.financialstability.gov/docs/dividends-interest-reports/August2009_DividendsInterestReport.pdf); November
  25 Transactions Report, supra note 71.

            e. The TARP's Impact on the Federal Budget and the Deficit
    While most federal expenditures are recorded in the federal 
budget on a cash basis, credit programs are treated 
differently. For credit programs, the discounted present value 
of the cash flows is calculated and only this net gain or loss 
amount is recorded in the budget. The relationship of this net 
gain or loss to the government and the total cash disbursed 
produces a ``subsidy rate.'' EESA requires that TARP 
expenditures be treated as credit programs and therefore a 
subsidy rate is calculated for them and only the net loss or 
gain is recorded in the budget.\325\
---------------------------------------------------------------------------
    \325\ Section 123 of EESA requires that TARP be treated on a credit 
reform basis.
---------------------------------------------------------------------------
    In May 2009, the Administration projected that the TARP 
would disburse $704 billion in federal fiscal year 2009, 
although TARP outlays and its deficit impact were $261 billion, 
implying a weighted average subsidy rate of 37 percent. When 
the Administration closed the books on fiscal year 2009 on 
September 30, the $261 billion outlay figure had fallen to $151 
billion and this was, in effect, TARP's contribution to the 
federal deficit in 2009. According to recent press accounts, 
this net cost figure is likely to decline further to 
approximately $42 billion \326\ and the overall subsidy rate to 
12 percent.\327\ The declining net cost to the federal 
government for the TARP investments and loan guarantees 
undertaken in 2009 largely reflects the fact that Treasury now 
estimates higher returns on its CPP investments due largely to 
lower losses on, and faster repayments of, those investments, 
as well as the increased value of the stock warrants Treasury 
holds.
---------------------------------------------------------------------------
    \326\ The difference between the amount recorded in the 
Administration's end of year budget report ($151 billion) and the final 
amount recorded on the Treasury's books for FY 2009 (now reported at 
$42 billion) is $109 billion; this implies that an adjustment (outlay 
reduction) of approximately that amount in the 2010 federal budget will 
be forthcoming.
    \327\ See Jackie Calmes, U.S. Forecasts Smaller Loss From Bailout 
of Banks, New York Times (Dec. 6, 2009) (online at www.nytimes.com/
2009/12/07/business/07tarp.html). Treasury has confirmed the accuracy 
of this report.
---------------------------------------------------------------------------
    Because TARP outlays reflect the discounted present value 
of TARP cash flows, the resulting net cost that is recorded as 
an outlay in the federal budget provides a good measure of the 
economic cost of the program. Consequently, the sum of the 
final outlay figures for each fiscal year provides a good 
measure of the current projection of the ultimate economic cost 
of the program to the American taxpayer. The published 
estimates in the latest budget documents from the OMB show this 
total cost to be $341 billion for the period 2009 through 2016; 
the latest estimate from the CBO for the period 2009-2013 puts 
the total cost at $241 billion. Hence, notwithstanding 
Treasury's asserted authority to have $698.7 billion in cash 
disbursed at any point in time, the net cost of the TARP 
program will in all likelihood be substantially less than $700 
billion. This reflects both the fact that (1) the economic cost 
or subsidy rate has declined from the initial estimate and (2) 
as seen in Figure 25 above, a large amount of the TARP's 
authorized disbursement level is currently unutilized.
            f. Relevant Macroeconomic Indicators
    The TARP was created during a period of severe global 
financial disruption. In October 2009, the International 
Monetary Fund (IMF) projected worldwide losses of $3.4 trillion 
stemming from the crisis.\328\ By way of comparison, that is 
more money than the entire federal government spent--$3.1 
trillion--in fiscal year 2009.\329\ The IMF estimates that $1.5 
trillion in global bank write-downs have yet to be recognized, 
with most of the losses coming from U.S., UK, and Euro area 
banks.\330\ The expected loss of wealth, though lower than 
earlier estimates, poses a challenge to governments seeking to 
reinvigorate their economies. The United States has sought to 
support its banking sector so that it is able to weather the 
downtown, and many banks have seen increasing success in 
raising capital since the stress test results were released. As 
of November 30, U.S. banks, including both those that did and 
did not receive government assistance, had raised $72.4 billion 
in common equity and $49.7 billion in preferred equity in 
2009.\331\
---------------------------------------------------------------------------
    \328\ International Monetary Fund, Global Financial System Shows 
Signs of Recovery, IMF Says (Sept. 30, 2009) (online at www.imf.org/
external/pubs/ft/survey/so/2009/RES093009A.htm).
    \329\ Office of Management and Budget, Table S-1. Budget Totals 
(online at www.whitehouse.gov/omb/rewrite/budget/fy2009/
summarytables.html) (accessed Dec. 7, 2009).
    \330\ International Monetary Fund, World Economic Outlook October 
2009, at 5 (online at www.imf.org/external/pubs/ft/weo/2009/02/pdf/
text.pdf) (accessed Dec. 7, 2009).
    \331\ SNL Financial, Bank and Thrift Capital Raises (online at 
www.snl.com/InteractiveX/article.aspx?CDID=A-9619028-11615&KPLT=4) 
(accessed Dec. 7, 2009).
---------------------------------------------------------------------------
    While conditions in the banking sector have improved, the 
overall shape of the recovery remains unclear. Economic 
contractions that have their source in a banking crisis tend to 
be prolonged,\332\ and the current experience is no exception. 
There is a risk that a new asset bubble will form, leading to 
another crash.\333\ There are also risks that prices for homes 
and in the commercial real estate sector will fall further, 
which would reduce the value of assets held by banks. The 
economy has begun to expand once again, but unemployment 
remains high, and millions of American households continue to 
live with the prospect of imminent foreclosure and the loss of 
their homes.
---------------------------------------------------------------------------
    \332\ See International Monetary Fund, World Economic Outlook, at 
103-138 (Apr. 2009) (online at www.imf.org/external/pubs/ft/weo/2009/
01/pdf/text.pdf) (finding that recessions that are associated with 
financial crises have historically been longer and deeper, and featured 
weak recoveries).
    \333\ See, e.g., Congressional Oversight Panel, Written Testimony 
of MIT Sloan School of Management Professor Simon Johnson, Taking 
Stock: Independent Views on TARP's Effectiveness (Nov. 19, 2009) 
(online at cop.senate.gov/documents/testimony-111909-johnson.pdf) 
(hereinafter ``Johnson COP Testimony'').
---------------------------------------------------------------------------
            i. Credit Risk
    Credit spreads measure the differences in yields between 
different bonds. At the height of the financial crisis in the 
fall of 2008, spreads between the safest bonds and those that 
carried greater risk skyrocketed, reflecting instability in the 
financial markets, as investors panicked and sought refuge in 
safer investments. Credit spreads have fallen significantly 
since the creation of the TARP. Treasury cites the improvement 
as a sign of TARP's success, noting that the largest declines 
occurred in markets receiving direct government support, such 
as asset-backed securities and debt by government-supported 
enterprises such as Fannie Mae and Freddie Mac.\334\
---------------------------------------------------------------------------
    \334\ Next Phase of Government Financial Stabilization, supra note 
70, at 8.
---------------------------------------------------------------------------
    The closely watched LIBOR-OIS spread provides another 
example of how credit conditions have improved.\335\ This 
spread measures the difference between the London Interbank 
Offered Rate (LIBOR), which shows quarterly borrowing costs for 
banks, and the Overnight Indexed Swaps rate (OIS), which 
measures the cost of extremely short-term borrowing by 
financial institutions. As the spread increases, market 
participants have greater fears about whether counterparties 
will be able to deliver on their obligations. After reaching a 
record high of 364 basis points, or 3.64 percent, in October 
2008, the spread fell to around 100 basis points in early 2009. 
It stood at 13 basis points on Nov. 17, 2009.\336\ The lower 
spread means that the banking sector now has a significantly 
lower cost of short-term capital than it did at the height of 
the crisis.
---------------------------------------------------------------------------
    \335\ Next Phase of Government Financial Stabilization, supra note 
70, at 8.
    \336\ Bloomberg, Fed to Cut Maximum Maturity of Discount Window 
Loans (Nov. 17, 2009) (online at www.bloomberg.com/apps/
news?pid=20601068&sid=akC02cF4YHC4).
---------------------------------------------------------------------------
    The TED spread, which is the difference between LIBOR and 
short-term Treasury bill interest rates, is another indicator 
of perceived credit risk. A high TED spread shows an 
unwillingness by investors to hold securities other than 
Treasury bills. After peaking in late 2008, the TED spread has 
fallen to pre-crisis levels, as Figure 30 illustrates. A report 
by the Government Accountability Office (GAO) found that the 
announcement of the Capital Purchase Program under the TARP had 
a statistically significant effect on the TED spread, although 
the decline was not due solely to the TARP.\337\ The GAO 
analysis supports Treasury's claim that the TARP had a positive 
effect on credit markets.
---------------------------------------------------------------------------
    \337\ GAO: TARP One Year, supra note 195, at 36.
---------------------------------------------------------------------------

   FIGURE 30: TED SPREAD SINCE DECEMBER 1999 (IN BASIS POINTS) \338\

---------------------------------------------------------------------------
    \338\ SNL Financial, Historical Yields--Instruments: 3-month LIBOR, 
3-month Treasury Bills (online at www.snl.com/interactivex/
dividendyields.aspx?
Refreshed=1&YieldViewType=1&Industry=0%2c18%2c3%2c1%2c2%
2c8%2c7%2c22%2c10%2c21%2c5%2c4) (accessed Dec. 7, 2009).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

            ii. Credit to Businesses
    While banks now have a lower short-term cost of capital, 
putting them in a better position to lend, many borrowers have 
yet to see a return to pre-crisis levels of credit 
availability. Commercial paper is a form of debt that companies 
use to meet various short-term financial obligations, such as 
meeting their payrolls. Commercial paper outstanding, a rough 
measure of short-term business debt, is an indicator of the 
availability of credit for businesses. Since January 2007, 
total commercial paper outstanding has decreased by almost 37 
percent, and it has fallen by more than 20 percent since the 
enactment of EESA. The value of commercial paper outstanding 
reached a peak of $2.22 trillion in August 2007, fell to $1.61 
trillion by early October 2008, and fell further to $1.24 
trillion in November 2009, as Figure 31 indicates. Figure 31 
shows that the declines have happened not just in the overall 
market, but also in its various segments. These declines 
reflect not only a contraction of available credit to 
businesses, but also a drop in demand for loans due to poor 
economic conditions.

             FIGURE 31: COMMERCIAL PAPER OUTSTANDING \339\

---------------------------------------------------------------------------
    \339\ Board of Governors of the Federal Reserve System, Commercial 
Paper--Instrument: Commercial Paper, Monthly Outstanding; seasonally 
adjusted (online at www.federalreserve.gov/datadownload/
Choose.aspx?rel=CP) (accessed Dec. 7, 2009).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

            iii. Housing Sector
    The health of the residential real estate market is an 
important economic indicator, both because of the housing 
sector's vast size--U.S. households held real estate worth 
$18.3 trillion in the second quarter of 2009 \340\--and because 
families often have a great deal of their wealth invested in 
their homes. It is important not to overstate the connection 
between the TARP and the state of the U.S. housing market. 
Other government policies aimed at supporting the housing 
sector, including historically low interest rates, the Federal 
Reserve's purchases of mortgage-related securities, the 
enactment of a tax credit for first-time homebuyers, and 
policies enacted at the Federal Housing Administration and at 
Fannie Mae and Freddie Mac, which are currently in government 
conservatorship, have a more direct link to the state of the 
housing market than the TARP does.
---------------------------------------------------------------------------
    \340\ See Board of Governors of the Federal Reserve System, B.100 
Balance Sheet of Households and Nonprofit Organizations (Sept. 17, 
2009) (online at www.federalreserve.gov/releases/z1/Current/z1r-5.pdf).
---------------------------------------------------------------------------
    The financial crisis began in the U.S. housing sector, 
which has seen large nationwide declines in home values. There 
are two major indices of residential housing prices nationwide: 
the Federal Housing Finance Agency House Price Index and the 
S&P/Case-Shiller index. The 2009 data from both indices show 
signs of housing price stabilization, and prices are currently 
near their 2004-2005 levels, as Figure 32 shows. However, 
Treasury recently cautioned that the residential real estate 
market had not reached a firm bottom.\341\
To the extent the peak 2006 values were the result of a bubble, 
a return to those levels is neither desirable nor anticipated. 
However, the drop in housing prices represents a real loss in 
wealth to homeowners and investors.
---------------------------------------------------------------------------
    \341\ Next Phase of Government Financial Stabilization, supra note 
70, at 12.
---------------------------------------------------------------------------

       FiGURE 32: CASE SHILLER AND FHFA HOME PRICE INDEXES \342\

---------------------------------------------------------------------------
    \342\ Standard & Poor's, S&P/Case-Shiller Home Price Indices--
Instrument: Seasonally Adjusted Composite20 Index (online at 
www2.standardandpoors.com/spf/pdf/index
/SA_CSHomePrice _
History_102706.xls) (accessed Dec. 7, 2009); Federal Housing Finance 
Agency, U.S. and Census Division Monthly Purchase Only Index 
(Instrument: USA, Seasonally Adjusted) (online at www.fhfa.gov/
Default.aspx?Page=87) (accessed Dec. 7, 2009). Most recent data 
available for both measures are from September 2009.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The current inventory of unsold homes offers another 
indicator of the housing sector's health. Too large an 
inventory puts downward pressure on prices; a six-month 
inventory is generally considered healthy. Inventories have 
been declining in recent months, as Figure 33 shows, the result 
of declining construction levels and improving sales, although 
inventory remains well above historic norms. At the end of 
October 2009, the inventory of unsold homes stood at 3.57 
million homes, which constitutes a seven-month supply. This was 
the first time in more than two years that the inventory of 
unsold homes fell as low as a seven-month supply.\343\
---------------------------------------------------------------------------
    \343\ National Association of Realtors, Existing-Home Sales Record 
Another Big Gain, Inventories Continue to Shrink (Nov. 23, 2009) 
(online at http://www.realtor.org/press_room/news_
releases/2009 /11/record_big).
---------------------------------------------------------------------------

                   FIGURE 33: HOUSING INVENTORY \344\

---------------------------------------------------------------------------
    \344\ National Association of Realtors, Housing Inventory Data. 
Information provided in response to Panel request. Shaded areas 
represent periods of recession.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Mortgage interest rates are yet another indicator of the 
housing market's current state. Low rates make home purchases 
more affordable, and they allow homeowners to refinance their 
mortgages on favorable terms. Completely apart from the TARP, 
the federal government has undertaken various efforts aimed at 
keeping mortgage rates low. These actions include the Federal 
Reserve's decision to hold large volumes mortgage backed 
securities on its balance sheet and the government's decision 
to serve as a backstop for Fannie Mae and Freddie Mac. As 
Figure 34 shows, rates for 30-year conventional mortgages rose 
somewhat earlier this year, but are currently back to near 
historically low levels.

                    FIGURE 34: MORTGAGE RATES \345\

---------------------------------------------------------------------------
    \345\ Board of Governors of the Federal Reserve System, Selected 
Interest Rates--Instruments: Contract Rate on 30-Year Fixed Rate 
Conventional Home Mortgage, Market Yield on U.S. Treasury Securities at 
10-Year Constant Maturity (online at www.federalreserve.gov/
datadownload/Choose.aspx?rel=H.15) (accessed Dec. 7, 2009). Shaded 
areas represent periods of recession.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Finally, as Figure 35 shows, home sales, of both new and 
existing homes, are beginning to recover, although new home 
sales remain well below historic averages.

              FIGURE 35: NEW AND EXISTING HOME SALES \346\

---------------------------------------------------------------------------
    \346\ National Association of Realtors, New and Existing Home 
Sales. Information provided in response to Panel request. Shaded areas 
represent periods of recession.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    While not directly tied to the TARP and its foreclosure 
mitigation programs, there is a relationship between 
foreclosures and key housing indicators. Foreclosures, 
especially on the scale of the 8 to 13 million projected over 
the next five years, can directly affect home prices and 
inventory. Foreclosures increase inventory by flooding the 
market with bank-owned properties and drive down home prices by 
an average of $7,200 per home.\347\
---------------------------------------------------------------------------
    \347\ Center for Responsible Lending, Soaring Spillover: 
Accelerating Foreclosures to Cost Neighbors $502 Billion in 2009 Alone; 
69.5 Million Homes Lose $7,200 on Average (May 7, 2009) (online at 
www.responsiblelending.org/mortgage-lending
/research-analysis/soaring-spillover-3-09.pdf).
---------------------------------------------------------------------------
            iv. Commercial Real Estate
    The commercial real estate (CRE) sector is also an 
important indicator of economic health. Unfortunately, like the 
residential real estate sector, the CRE sector is faring 
poorly.
    The Federal Reserve estimates that approximately $3.5 
trillion of CRE debt is currently outstanding, and that nearly 
$500 billion of CRE loans will mature during each of the next 
few years.\348\ For various reasons, however, commercial 
property values have declined sharply since 2007 and continue 
to fall.\349\ Meanwhile, banks have become increasingly 
hesitant to extend new CRE credit or refinance existing 
debt,\350\ while another major source of CRE financing--the 
market for commercial mortgage-backed securities--has largely 
shut down since the financial crisis began.\351\ Given these 
trends, as well as high vacancy rates and weak rent growth, 
Deutsche Bank estimates that banks' aggregate losses on recent-
vintage core CRE, construction, and multi-family loans could 
fall within the $200 billion to $300 billion range, with the 
biggest losses involving construction loans.\352\
---------------------------------------------------------------------------
    \348\ See House Oversight and Government Reform, Subcommittee on 
Domestic Policy, Written Testimony of Jon D. Greenlee, Associate 
Director of the Division of Banking Supervision and Regulation for the 
Federal Reserve Board, Residential and Commercial Real Estate (Nov. 2, 
2009) (online at federalreserve.gov/newsevents/testimony/
greenlee20091102a.htm) (hereinafter ``Residential and Commercial Real 
Estate'').
    \349\ See Deutsche Bank, The Future Refinancing Crisis in 
Commercial Real Estate, at 3 (Apr. 23, 2009) (online at cop.senate.gov/
documents/report-042309-parkus.pdf) (``Purely as a result of the 
enormous changes in the available financing terms . . . , we estimate 
that commercial real estate prices have declined 25-30% from their 2007 
peak. On top of this, the impact of the worst economic recession in 
decades on property cash flows will likely push them down [an] 
additional 15-20% . . .'').
    \350\ See Congressional Oversight Panel, Written Testimony of 
Jeffrey DeBoer, Chief Executive Officer of the Real Estate Roundtable, 
Congressional Oversight Panel Field Hearing in New York City on 
Corporate and Commercial Real Estate Lending, at 2 (May 28, 2009) 
(online at cop.senate.gov/documents/testimony-052809-deboer.pdf).
    \351\ See Residential and Commercial Real Estate, supra note 348 
(``The current fundamental weakness in CRE markets is exacerbated by 
the fact that the CMBS market, which previously had financed about 30 
percent of originations and completed construction projects, has 
remained closed since the start of the crisis'').
    \352\ Deutsche Bank, Q4 2009 CRE Outlook: Searching for a Bottom 
(Dec. 1, 2009); see also Goldman Sachs, U.S. Commercial Real Estate 
Take III: Re-constructing Estimates for Losses, Timing, at 11-13 (Sept. 
29, 2009) (hereinafter ``2009 CRE Outlook'') (estimating $287 billion 
in losses from core CRE and construction loans); Congressional 
Oversight Panel, August Oversight Report: The Continued Risk of 
Troubled Assets, at 56 (Aug. 11, 2009) (noting that ``the Panel's model 
of whole loan losses estimates potential core CRE and construction loan 
losses through 2010 of $81.1 billion at 701 banks with assets between 
$600 million and $80 billion'').
---------------------------------------------------------------------------
    As Figure 36 illustrates, smaller banks are 
disproportionately exposed to the CRE threat.

            FIGURE 36: BANK EXPOSURE TO CORE CRE LOANS \353\

---------------------------------------------------------------------------
    \353\ 2009 CRE Outlook, supra note 352. The ``Banks 1-4'' group 
includes banks with total assets between $1.28 trillion and $2.25 
trillion; the ``Banks 5-19'' group includes banks with total assets 
between $130 billion and $890 billion; the ``Banks 20-50'' group 
includes banks with total assets between $25 billion and $130 billion; 
the ``Banks 50-97'' group includes banks with total assets between $10 
billion and $25 billion; and the ``Banks >=98'' group includes banks 
with total assets less than $10 billion. ``Core'' CRE does not include 
construction, multi-family, or farm loans. See June Oversight Report, 
supra note 77.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                    D. Expert Commentary on the TARP

    To date, only a handful of studies have attempted to 
evaluate, in a comprehensive way, the effectiveness of the 
TARP. Thus, in October 2009, the Panel solicited the views of a 
broad range of economists and other academics. A number 
responded to the Panel's solicitations. In addition, on 
November 19, 2009, the Panel held a hearing to solicit expert 
views on the strengths and weaknesses of the TARP. That 
hearing--titled ``Taking Stock: Independent Views on TARP's 
Effectiveness''--featured testimony from a distinguished group 
of economists.\354\
---------------------------------------------------------------------------
    \354\ Testifying before the Panel were Dean Baker, Co-Director of 
the Center for Economic and Policy Research; Charles Calomiris, Henry 
Kaufman Professor of Financial Institutions at the Columbia Business 
School; Simon Johnson, Professor of Global Economics and Management at 
the MIT Sloan School of Management and Senior Fellow at the Peterson 
Institute for International Economics; Alex Pollock, Resident Fellow at 
the American Enterprise Institute; and Mark Zandi, Chief Economist and 
Co-Founder of Moody's Economy.com. Written testimony and a video of the 
hearing are available on the Panel's website (cop.senate.gov). An 
official transcript of the hearing will be available online in January 
2010.
---------------------------------------------------------------------------
    Several themes run throughout this body of commentary. Most 
generally, commentators tend to agree that some sort of 
government intervention was necessary to stabilize the 
financial system, and that the TARP has contributed materially 
to that project, at least in the short term.\355\ As evidence, 
these commentators point primarily to the easing of panic in 
the financial sector, as well as various indicators of 
financial health--such as credit spreads, CDS spreads for 
financial firms, and stock prices of financial firms--which 
have improved demonstrably since the TARP's inception.\356\
---------------------------------------------------------------------------
    \355\ See, e.g., Congressional Oversight Panel, Written Testimony 
of Columbia Business school Henry Kaufman Professor of Financial 
Institutions Charles Calomiris, Taking Stock: Independent Views on 
TARP's Effectiveness, at 4 (Nov. 19, 2009) (online at cop.senate.gov/
documents/testimony-111909-calomiris.pdf) (hereinafter ``Calomiris COP 
Testimony'') (``In my view, there is no question that the recent crisis 
qualified as a state of the world in which government assistance to 
financial institutions was warranted''); Johnson COP Testimony, supra 
note 333, at 1 (``There is no question that passing the TARP was the 
right thing to do''); Zandi COP Testimony, supra note 217, at 1 (``The 
Troubled Asset Relief Program has contributed significantly to 
restoring stability to the financial system. In turn, this financial 
stability has been instrumental to ending the Great Recession''); see 
also COP November Hearing Transcript, supra note 218 (Testimony of 
Simon Johnson) (``[I]f the Congress had not passed TARP, you would have 
had a much bigger disaster, irrespective of how the money had been 
used'').
    These views generally accord with the views of international 
institutions that have reviewed the TARP. See International Monetary 
Fund, World Economic Outlook: Sustaining the Recovery, at 67-71 (Oct. 
2009) (online at imf.org/external/pubs/ft/weo/2009/02/pdf/text.pdf); 
Fabio Panetta et al., An Assessment of Financial Sector Rescue 
Programmes, at 2-3 (July 2009) (online at bis.org/publ/bppdf/
bispap48.pdf).
    \356\ See, e.g., Takeo Hoshi, Letter to Panel Staff, at 1 (Nov. 8, 
2009).
---------------------------------------------------------------------------
    In a different but related vein, Professors Pietro Veronesi 
and Luigi Zingales argue that Treasury's capital injections 
program--likely the most well-known aspect of the TARP--was 
both effective and (relatively) efficient.\357\ In one of the 
few in-depth studies on the topic, Professors Veronesi and 
Zingales examine the combined impact of Treasury's purchase of 
$125 billion in equity in the ten largest banks and the FDIC's 
provision of a three-year guarantee of these banks' new debt 
issuances--i.e., the ``first'' bailout (or the ``Revised 
Paulson Plan''). After factoring in costs to the taxpayers, 
they conclude that this action generated $71 to $89 billion in 
total economic value (accounting for a 30 percent deadweight 
taxation cost).\358\ They further conclude that the Revised 
Paulson Plan was the most cost effective of the three plans 
seriously considered by the Bush Administration.\359\ 
Nevertheless, they argue that an even more cost-effective 
method was never considered: namely, enacting legislation to 
permit failing firms to enter special, pre-packaged 
bankruptcies (i.e., with terms set by the government) wherein 
those firms' long-term debt would be converted into equity and 
current equity holders would be wiped out unless they chose to 
exercise a statutory option to purchase existing long-term debt 
at face value.\360\
---------------------------------------------------------------------------
    \357\ See Pietro Veronesi & Luigi Zingales, Paulson's Gift, NBER 
Working Paper, at 5 (Oct. 2009) (online at faculty.chicagobooth.edu/
brian.barry/igm/P_gift.pdf) (hereinafter ``Paulson's Gift''). For a 
different but related analysis, see Dinara Bayazitova & Anil 
Shivdasani, Assessing TARP (University of North Carolina Kenan-Flagler 
Business School Working Paper) (Aug. 25, 2009) (online at 
papers.ssrn.com/sol3/papers.cfm?abstract_id=1461884).
    \358\ See Paulson's Gift, supra note 357, at 3.
    \359\ See Paulson's Gift, supra note 357, at 32-36.
    \360\ See Paulson's Gift, supra note 357, at 36.
---------------------------------------------------------------------------
    Those who acknowledge that TARP was necessary and 
reasonably effective recognize nevertheless that improvements 
in key financial and economic indicators cannot be attributed 
solely to the TARP. Obviously, it remains difficult to 
disentangle the effects of Treasury's efforts under the TARP 
from the effects of the government's other financial stability 
programs, including programs run by the FDIC and the Federal 
Reserve. It is also difficult to isolate the effects of the 
TARP--both on the financial sector and on the broader economy--
from the effects of increasing public confidence and other 
macroeconomic factors.\361\ In general, however, most 
commentators seem to accept the proposition that the TARP has 
played a substantial role in calming and stabilizing the 
financial system.\362\
---------------------------------------------------------------------------
    \361\ A lack of certainty as to how much credit the TARP deserves 
for stabilizing the financial system constitutes yet another important 
theme in the expert commentary. See, e.g., Baker COP Testimony, supra 
note 28, at 1 (``There are many factors that make it difficult to 
assess the effectiveness of the TARP, [the] most important one being 
the fact that the TARP was carried through in conjunction with rescue 
efforts by the [FDIC] and the Federal Reserve Board''); Roy C. Smith, 
Letter to Panel Staff, at 1 (Oct. 23, 2009).
    \362\ See, e.g., Martin Neil Baily and Douglas J. Elliott, Letter 
to Panel Staff, at 2 (Nov. 9, 2009); William Poole, Letter to Panel 
Staff, at 1 (Oct. 23, 2009).
---------------------------------------------------------------------------
    Commentators also agree, however, that the TARP has 
suffered from serious flaws, both in its design and its 
execution. Though there are as many criticisms of the TARP as 
there are TARP commentators, these complaints fall into three 
main categories. First, some commentators argue that the TARP 
has been implemented in an ad hoc, opaque fashion, and that 
this lack of consistency and transparency has undermined its 
effectiveness. Second, most agree that the TARP has failed to 
address many of the underlying issues plaguing the financial 
sector, including thin bank capitalization, risky bank 
activity, and toxic assets on banks' balance sheets. Third, 
many agree that the TARP has failed to address the so-called 
``too big to fail'' problem and its related moral hazards.

1. Consistency and Transparency

    One of the most common criticisms of the TARP is that it 
has been implemented in an ad hoc fashion that lacks 
consistency and transparency.\363\ Transparency problems 
plagued the program from the beginning according to November 
hearing witness Dean Baker, co-director of the Center of 
Economic and Policy Research. He argues that the TARP was 
articulated to the public largely as a means to restart the 
commercial paper markets, stem foreclosures, rein in executive 
compensation, and stimulate lending to small businesses. 
Unfortunately, in his view, the TARP has failed to achieve or 
even seriously pursue any of these goals.\364\ Thus, Dr. Baker 
argues that public confidence in the TARP and the government's 
other stabilization efforts has been undermined.\365\
---------------------------------------------------------------------------
    \363\ See, e.g., Lawrence White, Letter to Panel Staff, at 1 (Nov. 
20, 2009).
    \364\ See COP November Hearing Transcript, supra note 218.
    \365\ See COP November Hearing Transcript, supra note 218.
---------------------------------------------------------------------------
    A different but related criticism is leveled by November 
hearing witness Charles Calomiris, Henry Kaufman Professor of 
Financial Institutions at Columbia Business School. He 
maintains that Treasury has never clearly and comprehensively 
articulated goals and principles to guide its TARP activities. 
Rather, it has employed ``ad hoc interventions, justified as 
they go along, which are inconsistent with one another and 
follow no clear set of discernible principles.'' \366\ As a 
result, he argues, the implementation of the program has been 
and will continue to be susceptible to ``errors of logic'' and 
behind-the-scenes political dealmaking which tends to benefit 
well-connected but not necessarily deserving entities.\367\ 
November hearing witness Simon Johnson, Professor of Global 
Economics and Management at MIT Sloan School of Management and 
senior fellow at the Peterson Institute for International 
Economics, makes a similar point. He criticizes what he views 
as the TARP's ``prominent place of policy by deal.'' All too 
often, he argues, ``when a major financial institution [ ] got 
into trouble, the Treasury Department and the Federal Reserve 
would engineer a bailout over the weekend and announce that 
everything was fine on Monday.'' \368\
---------------------------------------------------------------------------
    \366\ Calomiris COP Testimony, supra note 355, at 16.
    \367\ Calomiris COP Testimony, supra note 355, at 16-17 (``Because 
assistance programs did not flow from previously articulated guiding 
principles . . ., the rushed debates over TARP and other policies were 
undisciplined and prone to errors of logic (like the use of warrants in 
preferred stock assistance), and political manipulation (like the 
multiple bailouts of GMAC)'').
    \368\ Johnson COP Testimony, supra note 333, at 6. Professor 
Johnson also takes both the Bush and the Obama administrations to task 
for providing aid in ways that are difficult for taxpayers to 
understand. See id. at 7 (``As the crisis deepened and financial 
institutions needed more assistance, the government got more and more 
creative in figuring out ways to provide subsidies that were too 
complex for the general public to understand'').
---------------------------------------------------------------------------
    November hearing witness Alex Pollock, resident fellow at 
the American Enterprise Institute, also takes issue with the 
lack of clarity surrounding the TARP's objectives and 
priorities, and agrees with Professor Calomiris that the 
program's lack of transparency has made it unacceptably 
susceptible to political considerations. In his view, the 
``principal goal [of TARP managers] should be to run the 
program in a businesslike manner to return as much of the 
involuntary investment as possible to its owners, along with a 
reasonable overall profit.'' \369\ He therefore argues that 
``TARP should have full, regular, audited financial statements, 
which depict its financial status and results, exactly as if it 
were a corporation.'' \370\ According to Mr. Pollock, it would 
have been far better for transparency and accountability 
purposes if the TARP had been organized as a separate 
corporation, rather than within an existing agency.\371\
---------------------------------------------------------------------------
    \369\ See Congressional Oversight Panel, Written Testimony of 
American Enterprise Institute Resident Fellow Alex J. Pollock, Taking 
Stock: Independent Views on TARP's Effectiveness, at 3 (Nov. 19, 2009) 
(online at aei.org/docLib/Pollock-Testimony-11192009.pdf) (hereinafter 
``Pollock COP Testimony'').
    \370\ Pollock COP Testimony, supra note 369, at 4.
    \371\ See Pollock COP Testimony, supra note 369, at 3.
---------------------------------------------------------------------------

2. Underlying Issues

    Some experts also argue that the TARP, while achieving a 
measure of short-term stability, has failed to address certain 
underlying issues that may wreak havoc on the financial sector 
and the broader economy in the not-too-distant future.
    For example, the CPP and the stress tests are commonly 
credited with reviving private capital sources for capitalizing 
American banks and making banks better prepared to weather 
future financial shocks--in other words, with ``stabilizing'' 
the financial sector.\372\ At the Panel's November hearing, 
however, it became clear that there is some disagreement as to 
whether even the largest banks are in fact adequately 
capitalized and hence sufficiently stable.\373\ Much of this 
disagreement, it seems, stems from (1) commentators' differing 
economic projections, and (2) the difficulty of evaluating 
precisely banks' capital positions.\374\
---------------------------------------------------------------------------
    \372\ See, e.g., COP November Hearing Transcript, supra note 218 
(Testimony of Mark Zandi) (arguing that banks generally have enough 
capital to weather greater-than-projected losses on their portfolios, 
including the toxic assets they continue to hold).
    \373\ See COP November Hearing Transcript, supra note 218 
(Testimony of Dean Baker), at 1 (``So, I'd be a little less confident 
[that the banks are sufficiently capitalized]. And not to say that 
they're all going to collapse, but I'm less confident about their 
soundness, going forward''); COP November Hearing Transcript, supra 
note 218 (Testimony of Simon Johnson) (``So, yes, we have a thinly 
capitalized banking system, as I said, relative to the--relative to the 
trajectory of the economy. That's the way I would put it--relative to 
what I'd see as the real risk scenario''); see also James K. Galbraith, 
Letter to Panel Staff, at 1 (Nov. 8, 2009) (hereinafter ``Galbraith 
Letter to Panel Staff'') (``The Treasury has not demonstrated that the 
purchase of preferred shares in the banking system helped to restore 
stability. Those purchases were addressed to a question of solvency 
that they could not, given the vast overhang of toxic assets, have 
fully resolved'').
    \374\ For a discussion of the difficulties inherent in evaluating 
banks' capital positions, see August Oversight Report, supra note 100, 
at 18-37, 62.
---------------------------------------------------------------------------
    Toxic assets are a related point of concern. Commentators 
agree that Treasury's PPIP, which was designed to leverage 
private funds to purchase such assets, has not been effective 
at removing these assets from banks' balance sheets.\375\ This 
is a significant issue that the Panel addressed in its August 
report and that poses lingering challenges to economic recovery 
and restoring the banking system to a healthy state.
---------------------------------------------------------------------------
    \375\ See, e.g., Zandi COP Testimony, supra note 217, at 4-5.
---------------------------------------------------------------------------
    In addition, some commentators fear that small- and medium-
sized banks are particularly susceptible to future shocks, 
notwithstanding the fact that many have received TARP aid.\376\ 
These banks tend to be disproportionately exposed to commercial 
real estate loans--loans which are widely expected to suffer 
heavy losses in the coming years.\377\ Indeed, several small- 
and medium-sized banks have already failed as a result of their 
commercial real estate exposure, and many more are expected to 
fail for similar reasons.\378\ Such failures threaten to 
further impede a broad economic recovery.
---------------------------------------------------------------------------
    \376\ See, e.g., COP November Hearing Transcript, supra note 218 
(Testimony of Mark Zandi) (``I think that . . . many smaller bank 
institutions will fail, in large part because of their bad lending--in 
large part related to the bad . . . commercial real estate lending, 
which is still being played out'').
    \377\ See Goldman Sachs, U.S. Commercial Real Estate Take III: Re-
constructing Estimates for Losses, Timing, at 11-13 (Sept. 29, 2009).
    \378\ See, e.g., Office of Inspector General, Federal Deposit 
Insurance Corporation, Material Loss Review of Haven Trust Bank, 
Duluth, Georgia, at 9 (August 2009) (online at www.fdicoig.gov/
reports09/09-017.pdf); see also Office of Inspector General, Federal 
Reserve Board of Governors, Material Loss Review of County Bank 
(September 2009) (online at www.federalreserve.gov/oig/files/
County_Bank_MLR_20090909.pdf).
---------------------------------------------------------------------------
    Commentators have also expressed concerns about whether the 
TARP has stimulated lending to businesses and consumers--a 
central justification for using TARP funds for capital 
infusions. For example, according to Paul Volcker, former 
chairman of the Board of Governors of the Federal Reserve 
System, it remains unclear whether the TARP has had a 
``significant and positive impact'' on the provision of credit 
to businesses and consumers.\379\ Joseph Stiglitz argues that 
``one of the key promised benefits of the TARP--restarting 
lending--has not materialized,'' meaning that the ``hoped for 
benefits for the `real economy' have not materialized.''\380\ 
Indeed, some economists argue that TARP-recipient banks have 
not only withdrawn credit from the marketplace, ``but they are 
doing so at an accelerating rate.''\381\ Some experts point to 
TARP-related causes for these phenomena, including Treasury's 
decision to accept preferred stock rather than common stock or 
other assets in exchange for TARP funds,\382\ Treasury's 
failure to require banks receiving TARP funds to use those 
funds for lending,\383\ and Treasury's failure to direct a 
sufficient amount of TARP funds to those parts of the financial 
sector (e.g., community banks) that are heavily involved in 
lending to small- and mid-sized businesses.\384\ Others 
identify non-TARP-related factors such as decreased demand for 
credit and banks' concerns about potential changes to 
accounting rules.\385\ According to November hearing witness 
Dr. Baker, the current tightening of credit for businesses
---------------------------------------------------------------------------
    \379\ Paul A. Volcker, Letter to Panel Staff, at 1 (Nov. 6, 2009).
    \380\ See Joseph E. Stiglitz, Letter to Panel Staff, at 4 (Nov. 17, 
2009); see also Richard Christopher Whalen, Letter to Panel Staff, at 1 
(Nov. 9, 2009) (arguing that ``there has been little positive impact on 
the real economy as a result of the TARP'').
    \381\ Richard Christopher Whalen, Letter to Panel Staff, at 1 (Nov. 
9, 2009).
    \382\ See Linus Wilson & Yan Wendy Wu, Common (Stock) Sense About 
Risk-Shifting and Bank Bailouts, at 2 (Working Paper) (Nov. 30, 2009) 
(online at papers.ssrn.com/sol3/papers.cfm?
abstract_id=1321666) (arguing that ``[b]uying up common (preferred) 
stock is always the most (least) ex ante- and ex post-efficient type of 
capital infusion, whether or not the bank volunteers for the 
recapitalization'').
    \383\ See Joseph E. Stiglitz, Letter to Panel Staff, at 3 (Nov. 17, 
2009) (``As a major `owner' of the banks, the government could and 
should have used its potential control to increase lending, to reduce 
abusive practices, and to direct lending to those activities most 
likely to energize the economy.'')
    \384\ See Joseph E. Stiglitz, Letter to Panel Staff, at 2 (Nov. 17, 
2009).
    \385\ See infra at page 99.

          [I]s typical of a recession. The complaints from 
        business owners over being denied credit are not 
        qualitatively different than the complaints that were 
        made in [the] 1990-91 recession. Lenders will also 
        tighten credit to business during a downturn simply 
        because otherwise healthy businesses are much risk[ier] 
        prospects during a recession. There is no reason to 
        believe that the tightening of credit during this 
        downturn is any greater than what should be expected 
        given the severity of the recession.\386\
---------------------------------------------------------------------------
    \386\ Baker COP Testimony, supra note 28, at 4-5. Dr. Baker also 
notes that large corporations are having little difficulty issuing 
commercial paper and long-term bonds, and that homebuyers are not 
facing any unusual difficulty in securing loans. See Baker COP 
Testimony, supra note 28, at 4.

    Finally, the government's efforts to address the 
foreclosure crisis have drawn little praise. As discussed 
above, for many reasons those efforts may not help as many 
homeowners as originally projected. Meanwhile, as James 
Galbraith has observed, the ``underlying financial conditions 
of the household sector''--including new home sales, new home 
construction, underwater mortgages and mortgage delinquency 
rates--``remain very grim'' despite Treasury's efforts.\387\ 
Foreclosures have continued at a rate of nearly two million per 
year since the TARP was passed, and various projections show 
that this pace is likely to continue through 2011 at 
least.\388\
---------------------------------------------------------------------------
    \387\ Galbraith Letter to Panel Staff, supra note 373, at 1.
    \388\ See Dean Baker, Letter to Panel Staff, at 2 (Nov. 5, 2009).
---------------------------------------------------------------------------

3. Moral Hazard

    Much has been said about the costs of the TARP. Generally, 
these discussions focus on a relatively narrow question: 
whether taxpayers will be paid back for their TARP 
investments.\389\ No doubt this is an important question. 
According to some commentators, however, these more 
quantifiable costs pale in comparison to the so-called ``moral 
hazard'' costs of the TARP. These commentators reason as 
follows. By enacting the TARP, Congress made a conscious 
decision to intervene in the market. One consequence of this 
decision was to stabilize the financial sector. Another 
consequence, however, was to signal to the market that, going 
forward, the government may step in to provide bailouts to 
certain systemically significant institutions--such as 
financial institutions and auto manufacturers--should they face 
the risk of failure.\390\ As a result, the market has been 
distorted in a way that could, absent responses outside of the 
TARP, plague the financial sector and the broader economy for 
the foreseeable future.\391\
---------------------------------------------------------------------------
    \389\ Few believe that the taxpayers will be paid back in full for 
all of their TARP investments. For example, November hearing witness 
Mark Zandi, chief economist and co-founder of Moody's Economy.com, 
estimates that ``the ultimate cost to taxpayers of TARP is expected to 
be between $100 and $150 billion.'' Under Dr. Zandi's projections,
    [t]he most[] costly aspect of TARP will be the aid to the motor 
vehicle industry, which could total up to nearly $50 billion. AIG will 
cost taxpayers up to $35 billion. Support to the housing market is 
expected to cost as much as $30 billion. The CPP program is ultimately 
expected to cost between $15 and $20 billion, while credit losses on 
the TALF and PPIP programs are expected to reach $10 billion. Some $5 
billion will be lost on the small business lending program.
    Zandi COP Testimony, supra note 217, at 3.
    \390\ See, e.g., James K. Galbraith, Letter to Panel Staff, at 2 
(Nov. 8, 2009) (``Having once intervened decisively, the rules of the 
game are now changed, and participants will expect renewed 
intervention, as necessary, along similar lines'').
    \391\ See, e.g., Calomiris COP Testimony, supra note 355, at 3 
(``If financial institutions know that the government is there to share 
losses, risk-taking becomes a one-sided bet, and so more risk is 
preferred to less. There is substantial evidence from financial 
history--including the behavior of troubled financial institutions 
during the current crisis itself--that this `moral hazard' problem can 
give rise to huge loss-making, high-risk investments that are both 
socially wasteful and an unfair burden on taxpayers''); Johnson COP 
Testimony, supra note 333, at 3 (arguing that the manner in which the 
TARP was implemented ``exacerbated the perception (and the reality) 
that some financial institutions are `Too Big to Fail' ''--thereby 
lowering the borrowing costs for such firms, incentivizing them to act 
in risky ways, and leaving the United States vulnerable to similar 
financial crises in the future); see also Edward Kane, Safety-Net 
Subsidies Keep ``Toxic'' Assets Illiquid, at 2 (March 10, 2009).
---------------------------------------------------------------------------

  E. Accomplishments and Shortcomings: How Well Has the TARP Done in 
                   Meeting its Statutory Objectives?


1. TARP's Contribution to Financial Stabilization and Economic Recovery

    As noted in the overview, the primary objective of the 
Congress in passing EESA was to ``restore liquidity and 
stability to the U.S. financial system.'' \392\ EESA further 
calls for the authority it provides to be used to ``promote 
jobs and economic growth.'' \393\ Similarly, Treasury officials 
stated that in implementing the TARP they were seeking to 
``protect the U.S. economy'' \394\ and ``the taxpayer,'' \395\ 
``prevent systemic risk,'' \396\ and ``stabilize the financial 
system.'' \397\ Treasury also said it would focus on bank 
lending to restore economic growth.\398\
---------------------------------------------------------------------------
    \392\ 12 U.S.C. Sec. 5201; 12 U.S.C. Sec. 5223.
    \393\ 12 U.S.C. Sec. 5201.
    \394\ See U.S. Department of the Treasury, U.S. Government Actions 
to Strengthen Market Stability (Oct. 14, 2008) (online at 
www.treas.gov/press/releases/hp1209.htm) (stating ``Today we are taking 
decisive actions to protect the U.S. economy . . .'').
    \395\ See House Committee on Financial Services, Written Testimony 
by Treasury Secretary Henry M. Paulson Jr., Oversight of Implementation 
of the Emergency Economic Stabilization Act of 2008 and of Government 
Lending and Insurance Facilities; Impact on Economy and Credit 
Availability, 110th Cong., at 30 (Nov. 18. 2008) (online at 
www.financialstability.gov/latest/hp1279.html) (``It is my 
responsibility to use the authorities Congress provided to protect and 
strengthen the financial system, and in so doing, protect the 
taxpayer''); U.S. Department of the Treasury, Interim Assistant 
Secretary for Financial Stability Neel Kashkari Update on the TARP 
Program (Dec. 8, 2008) (online at www.treas.gov/press/releases/
hp1321.htm) (hereinafter ``Assistant Secretary Kashkari Update on 
TARP'') (stating Treasury ``acted with the following critical 
objectives in mind . . . to protect taxpayers'').
    \396\ See U.S. Department of the Treasury, Remarks by Secretary 
Henry M. Paulson, Jr. on Financial Rescue Package and Economic Update 
(Nov. 21, 2008) (online at www.financialstability.gov/latest/
hp1265.html) (hereinafter ``Remarks by Secretary Paulson on Financial 
Rescue Package'') (``I believe we have taken the necessary steps to 
prevent a broad systemic event''); see also Assistant Secretary 
Kashkari Update on TARP, supra note 395.
    \397\ See Remarks by Secretary Paulson on Financial Rescue Package, 
supra note 396 (``We must continue to reinforce the stability of the 
financial system''); Assistant Secretary Kashkari Update on TARP, supra 
note 395.
    \398\ See Assistant Secretary Kashkari Update on TARP, supra note 
395 (``Treasury expects banks to increase their lending as a result of 
[TARP] investments'').
---------------------------------------------------------------------------
    There is little doubt that--as virtually all of the experts 
the Panel consulted agree--the TARP played an important role, 
along with other emergency programs from the Federal Reserve 
and the FDIC, in stabilizing the financial system. Following 
the failure of Lehman Brothers and the government's rescue of 
AIG in September 2008, government officials decided that a 
crisis of such magnitude could not be contained through the use 
of monetary policy alone, and that a fiscal response was 
therefore imperative.\399\ The TARP became the government's 
fiscal response. And the initial TARP programs, which were 
aimed at shoring up the capital base of financial institutions, 
did have a positive impact on market confidence. Shortly after 
the law that established the TARP was enacted, measures of risk 
in the banking sector began to decline. Between October 10, 
2008 and mid-November 2008, interest-rate spreads that reflect 
the willingness of banks to lend to each other fell by more 
than 50 percent. These spreads remained highly volatile in late 
2008, but on balance they have continued to fall, and are 
currently back in the low range where they were prior to the 
financial crisis.\400\
---------------------------------------------------------------------------
    \399\ See James B. Stewart, Eight Days: The Battle to Save the 
American Financial System, New Yorker (Sept. 21, 2009) (available for 
purchase online at www.newyorker.com/reporting/2009/09/21/
090921fa_fact_stewart).
    \400\ 3 Mo LIBOR-OIS Spread, supra note 27; Bloomberg, TED Spread 
(online at www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP%3AIND) 
(accessed Dec. 7, 2009). It should be noted, however, that there is 
still a significant lack of liquidity and wide spreads in some markets 
where the Federal Reserve is the dominant participant.
---------------------------------------------------------------------------
    Treasury believes that the capital provided through the CPP 
has been ``essential in stabilizing the financial system, 
enabling banks to absorb losses from bad assets while 
continuing to lend to consumers and businesses.'' \401\ In his 
testimony to the Panel, Assistant Secretary Allison also 
pointed to capital raising as a sign of stabilization of the 
financial sector: ``banks of all sizes have raised over $80 
billion in common equity and $40 billion in non-guaranteed 
debt.'' \402\ This would appear to reflect renewed confidence 
in the U.S. banking system and its ultimate solvency and 
profitability, although there is the lingering question of the 
degree to which investors now assume that the federal 
government has become the implicit guarantor of the largest 
American banks.
---------------------------------------------------------------------------
    \401\ Congressional Oversight Panel, Written Testimony of Assistant 
Secretary of the Treasury for Financial Stability Herbert M. Allison, 
Jr., Congressional Oversight Panel Hearing with Assistant Treasury 
Secretary Herbert M. Allison, Jr. (Oct. 22, 2009) (online at 
cop.senate.gov/documents/testimony-102209-allison.pdf) (hereinafter 
``Allison COP Testimony'').
    \402\ Allison COP Testimony, supra note 401.
---------------------------------------------------------------------------
    The role of the TARP in preventing an even worse economic 
recession is not as clear. The Federal Reserve relaxed monetary 
policy very rapidly beginning in September 2007 once the 
contraction in the housing sector began. From a macroeconomic 
perspective, the federal government's massive deficit 
spending--only a portion of which is attributable to the TARP--
has undoubtedly played an important role in fostering economic 
recovery as well. Support for the housing sector through the 
Federal Housing Administration, Fannie Mae, and Freddie Mac, as 
well as the Federal Reserve, also constitute an important 
element in stabilizing the economy.
    Except for the smaller institutions participating in its 
small business lending initiative, Treasury's bank 
capitalization efforts are now over. The question going forward 
is whether banks are currently adequately capitalized and will 
begin to expand their lending. This, in turn, is partly a 
function of the condition of bank balance sheets and the 
lingering issue of the toxic assets whose presence was the 
justification for creation of the TARP in the first place.
    The PPIP, Treasury's main TARP initiative for removing 
toxic assets from bank balance sheets, remains difficult to 
assess. This program has only recently become operational. 
Treasury argues that the mere announcement of the program in 
March helped to reassure investors, and as a result, prices 
increased for certain mortgage-related securities.\403\ 
Treasury further argues that because banks are now better 
positioned to raise private capital, even if they still own 
toxic assets, the purchase program is less important today than 
it was when it was announced.\404\ However, the Panel is 
concerned that as long as the value of these securities remains 
unknown to investors, they will continue to weigh down the 
banks and be an impediment to economic recovery.
---------------------------------------------------------------------------
    \403\ Allison COP Testimony, supra note 401, at 3-4.
    \404\ Treasury conversations with Panel staff (Nov. 4, 2009).
---------------------------------------------------------------------------
    The Panel is also concerned about the health of small 
banks, which will be helped less by PPIP as it is currently 
implemented than large banks will, because small banks 
generally hold whole loans rather than securities.\405\ Those 
concerns are heightened by the deteriorating commercial real 
estate market, another area where smaller banks are heavily 
exposed. PPIP's success or failure will rest on whether it 
creates genuine price discovery that would have been absent 
otherwise, and whether it provides a return on the public's 
investment.
---------------------------------------------------------------------------
    \405\ See August Oversight Report, supra note 100, at 4.
---------------------------------------------------------------------------
    As discussed in Part C above, Treasury has recently turned 
the focus of its capital injection programs to small banks and 
the promotion of small business lending. Some of this has 
happened naturally, as larger banks have redeemed their CPP 
preferred, and Treasury reopened CPP for small banks, thereby 
``reduc[ing] the size of the Treasury's investments in the 
banking system . . . shifting the mix of remaining CPP 
investments significantly toward small and community banks.'' 
\406\
---------------------------------------------------------------------------
    \406\ Allison COP Testimony, supra note 401. The CPP expansion for 
small banks opened in May 2009. The deadline for applications was 
November 21, 2009. FAQs on CPP for Small Banks, supra note 69.
---------------------------------------------------------------------------
    However, as noted earlier in the report, there remains 
disagreement on whether banks have adequate capital, 
notwithstanding both the TARP capital they still have on their 
balance sheets and their ability in many cases to acquire new 
capital from private investors. The stress tests have helped to 
bring some clarity here and the disclosure of their results 
appears to have helped restore investors' confidence in those 
large institutions tested. But the high and rising level of 
unemployment continues to raise some concern about the adequacy 
of the stress tests. As we have seen, banks currently enjoy a 
low interest rate, steep yield curve environment, due to the 
actions of the Federal Reserve to increase and maintain 
liquidity in the financial system. Yet there remain questions 
about the quality of certain assets on bank balance sheets, 
particularly those related to residential and commercial real 
estate. Further declines in house prices nationwide, for 
example, could bring on renewed concerns about the quality of 
the assets at major TARP assisted banks and raise concerns 
about the continuing need for the TARP to bolster bank capital 
positions. Likewise, the low interest rate, steep yield curve 
environment is bolstering bank profitability in the short run 
but may not last, bringing renewed concern about capital 
strengthening.
    Treasury has said that it realizes that increasing the 
availability of credit to small businesses poses a complex 
challenge, one that is intertwined with the issues of 
commercial real estate and the economy as a whole. A recent 
survey found that 14 percent of small business owners found it 
more difficult to get loans, compared to three months 
earlier.\407\ Availability of credit was not the only factor 
contributing to this. Although 30 percent of those surveyed 
found that their borrowing was down, much of this could be due 
to a decline in the credit quality of borrowers, caused by the 
recession and declines in real estate values.\408\ A 
significant proportion of small business lending depends on 
real estate as collateral; therefore, a decline in real estate 
values will harm borrowers' ability to get credit.\409\
---------------------------------------------------------------------------
    \407\ National Federation of Independent Business, NFIB Small 
Business Economic Trends, at 2, 12 (Oct. 2009) (online at www.nfib.com/
Portals/0/PDF/sbet/SBET200910.pdf) (hereinafter ``NFIB Small Business 
Economic Trends'').
    \408\ See NFIB Small Business Economic Trends, supra note 407, at 2 
(``In addition, the continued poor earnings and sales performance has 
weakened the credit worthiness of many potential borrowers''). It 
should be noted that only slightly more than 300 small and community 
banks out of roughly 7,400 such institutions have participated in CPP.
    \409\ Treasury conversations with Panel staff (Nov. 4, 2009).
---------------------------------------------------------------------------
    TARP funds have also been used as part of the TALF effort 
to kick-start the markets for various types of securities, 
including those based on auto loans, credit card payments, and 
commercial mortgages, but their impact is difficult to assess. 
Since this program's inception, issuance of the types of 
securities that are eligible for the program has risen 
dramatically, both with and without government backing, but 
these markets have not returned to their pre-crisis levels and 
a number of factors other than TALF may account for much of 
this recovery.
    Continuing problems, and possible upcoming shocks, in the 
commercial real estate market have also contributed to a 
contraction in small business lending.\410\ Smaller banks, 
which provide a larger proportion of small business lending, 
also hold larger proportions of commercial real estate 
loans.\411\ With high levels of commercial real estate assets 
on their balance sheets, they have less capacity to engage in 
new and renewed lending. Treasury plans to use its new small 
business lending program to provide banks that are otherwise 
viable with capital to increase lending to small businesses. 
Assistant Secretary Allison explained that the small business 
lending program can help alleviate small banks' CRE losses: 
``by providing [small banks with] access to additional capital 
we can help them to withstand a deterioration of the value of 
[commercial real estate] assets on their books.'' \412\ 
Treasury believes that the problems in the commercial real-
estate market are material to the economy, but will not be 
overwhelming, and can be absorbed over time through loan 
workouts and the bankruptcy process.\413\ However, as discussed 
in Section 1.5.f.iv, the Federal Reserve estimates that almost 
$500 billion of CRE loans will mature annually for the next 
several years, which could generate sizeable losses for the 
banks exposed to this sector.
---------------------------------------------------------------------------
    \410\ See, e.g., Federal Reserve Bank of Atlanta, Speech by Federal 
Reserve Bank of Atlanta President and Chief Executive Officer Dennis P. 
Lockhart, to the Urban Land Institute Emerging Trends in Real Estate 
Conference (Nov. 10, 2009) (online at www.frbatlanta.org/news/speeches/
lockhart_111009.cfm).
    \411\ See Richard Parkus and Jing An, The Future Refinancing Crisis 
in Commercial Real Estate, Part II: Extensions and Refinements, at 23 
(July 15, 2009) (``[E]xposure [to commercial real estate loans] 
increases markedly for smaller banks. For the four largest banks (on 
the basis of total assets), this exposure is 12.3%, for the 5-30 
largest banks, the exposure is 24.5%, while for the 31-100 largest 
banks, the exposure grows to 38.9%'').
    \412\ Allison COP Testimony, supra note 401, at 57.
    \413\ Treasury conversations with Panel staff (Nov. 4, 2009).
---------------------------------------------------------------------------
    The Congress also made foreclosure mitigation a priority in 
EESA, laying out that the authority under the Act was to be 
used in a manner that ``protects home values'' \414\ and 
``preserves homeownership.'' \415\ Treasury promised to use its 
new authorities to stabilize housing and mortgage finance,\416\ 
avoid preventable foreclosures,\417\ and keep low cost mortgage 
financing available.''\418\ Treasury also promised to 
``increase foreclosure mitigation efforts'' \419\ and ``enforce 
stronger oversight of the mortgage origination process.'' \420\
---------------------------------------------------------------------------
    \414\ 12 U.S.C. Sec. 5201.
    \415\ 12 U.S.C. Sec. 5201.
    \416\ See Remarks by Secretary Paulson on Financial Rescue Package, 
supra note 396 (``market turmoil will not abate until the biggest part 
of the housing correction is behind us'').
    \417\ See Remarks by Secretary Paulson on Financial Rescue Package, 
supra note 396 (stating Treasury ``worked aggressively to avoid 
preventable foreclosures'').
    \418\ See Remarks by Secretary Paulson on Financial Rescue Package, 
supra note 396 (Paulson, ``worked aggressively to . . . keep mortgage 
financing available'').
    \419\ See Remarks by Secretary Paulson on Financial Rescue Package, 
supra note 396. See Assistant Secretary Kashkari Update on TARP, supra 
note 395.
    \420\ See Remarks by Secretary Paulson on Financial Rescue Package, 
supra note 396 (Of course, it is already clear that we must address a 
number of significant issues, such as . . . oversight of mortgage 
origination'').
---------------------------------------------------------------------------
    While more time is needed to evaluate fully Treasury's 
substantial use of TARP funds to address the foreclosure 
crisis, it is not too soon to make some preliminary judgments. 
Treasury met its own goal of beginning 500,000 trial 
modifications by Nov. 1, but the Panel has serious concerns 
about whether the program can keep pace with the evolving 
nature of the foreclosure problem.\421\ Since the publication 
of the Panel's October report, which analyzed Treasury's 
foreclosure prevention efforts, new data has underscored the 
Panel's concern that Treasury's mortgage modification program 
is inadequate to address the foreclosure problem as it has 
evolved over the last 10 months. In October, the Panel warned 
that a growing number of people cannot afford their mortgages 
because they have lost their jobs, and Treasury's existing 
programs are not designed to help them. Since then, the 
unemployment rate has passed 10 percent, a level it last 
reached in 1983. Also in October, the Panel warned that 
Treasury's existing programs do not address the problem of 
homeowners who owe more on their loans than their homes are 
worth, a factor that's correlated with foreclosures. Since 
then, new data from the third quarter of 2009 showed that 23 
percent of mortgage holders have negative equity in their 
homes. Lastly in October, the Panel warned that TARP mortgage 
modifications were not keeping pace with foreclosures. HAMP has 
led to a total of 10,187 permanent modifications as of the end 
of October 2009, a fraction of the 89,810 completed foreclosure 
sales in September alone.
---------------------------------------------------------------------------
    \421\ See Manuel Adelino, Kristopher Gerardi, and Paul S. Willen, 
Why Don't Lenders Renegotiate More Home Mortgages? Redefaults, Self-
Cures, and Securitization, Federal Reserve Bank of Boston Working Paper 
09-4 (version of July 6, 2009) (online at www.bos.frb.org/economic/
ppdp/2009/ppdp0904.htm).
---------------------------------------------------------------------------
    It is too early to evaluate the impact of the TARP 
investments in General Motors and Chrysler. Treasury notes that 
its actions helped the two automakers to move unusually fast 
and efficiently through the bankruptcy process.\422\ In 
addition, TARP assistance to GM and Chrysler likely prevented a 
much sharper downturn in the manufacturing sector and the 
broader economy. However, as the Panel stated in its September 
report, Treasury seems likely to absorb losses on its 
investments in GM and Chrysler. In the long term these 
expenditures should be judged based on the viability of GM and 
Chrysler, as well as their ultimate ability to repay the 
taxpayers.
---------------------------------------------------------------------------
    \422\ See generally Allison COP Testimony, supra note 401, at 5; 
Treasury conversations with Panel staff (Nov. 4, 2009).
---------------------------------------------------------------------------
    One final but very important element of the assessment of 
Treasury implementation of the statutory goals of EESA concerns 
the objectives of protecting the U.S. economy and preventing 
systemic risk over the long term. As stressed by the experts 
whom the Panel consulted, the major problem is that in 
executing the TARP, Treasury may have sown the seeds for a 
future crisis by demonstrating that the government will come to 
the rescue of institutions that engage in excessive risk taking 
and are unprepared to deal with the inevitable collapse. 
Further compounding this problem is the fact that, as a result 
of the actions taken in the course of stemming this economic 
crisis, the banking system has perhaps an increased number of 
``too big to fail'' institutions, and they are even bigger in 
size. This will be an important issue on which policymakers 
will need to focus in the aftermath of the crisis and the 
winding down of the TARP.

2. The TARP and the American Taxpayer

    While emphasizing the goals of restoring liquidity and 
stability to the U.S. financial system, Congress also directed 
that the TARP maximize overall returns and minimize overall 
costs to U.S. taxpayers \423\ and that it ensure the most 
efficient use of taxpayer funds \424\ and minimize the impact 
on the national debt.\425\
---------------------------------------------------------------------------
    \423\ See 12 U.S.C. Sec. 5201; 12 U.S.C. Sec. 5223; 12 U.S.C. 
Sec. 5224.
    \424\ See 12 U.S.C. Sec. 5213.
    \425\ See 12 U.S.C. Sec. 5213. See also 12 U.S.C. 5219 (In 
coordination with ``identify[ing] opportunities for the acquisition of 
classes of troubled assets that will improve the ability of the 
Secretary to improve the loan modification and restructuring process 
and, where permissible, to permit bona fide tenants who are current on 
their rent to remain in their homes under the terms of the lease'').
---------------------------------------------------------------------------
    From the perspective of public investors who stepped up at 
the critical time when private investors had fled, Treasury has 
now gotten back more than one-quarter of the money it spent on 
capital injections,\426\ and has earned an annual rate of 17 
percent on the money invested with those institutions that have 
now repaid the TARP investments. It is too soon to estimate how 
much of the overall TARP investment taxpayers will ultimately 
recover, in part because the banks that have returned the money 
are the same banks that needed it least. We do know that 
initial portions of the $80 billion invested in the auto 
industry are unlikely to be recovered and that no return is 
expected on the $50 billion TARP mortgage foreclosure program 
(HAMP). And the banks that have yet to repay their TARP 
investments are no doubt holding larger amounts of poorer 
quality assets.
---------------------------------------------------------------------------
    \426\ See Allison COP Testimony, supra note 401, at 3.
---------------------------------------------------------------------------
    As was the case with the savings and loan rescue in the 
1980s and 90s, the ultimate impact of TARP transactions on the 
national debt will not be known for many years. That financial 
rescue is now estimated to have cost roughly $150 billion in 
current dollars, which was lower than earlier feared. 
Increasingly successful sales of assets acquired early in that 
episode accounts for a portion of that decline in overall cost 
to the government.\427\
---------------------------------------------------------------------------
    \427\ See Timothy Curry and Lynn Shibut, The Cost of the Savings 
and Loan Crisis: Truth and Consequences, Federal Deposit Insurance 
Corporation Banking Review, at 33 (Dec. 2000) (online at www.fdic.gov/
bank/analytical/banking/2000dec/brv13n2_2.pdf) (``As of December 31, 
1999, the thrift crisis had cost taxpayers approximately $124 billion 
and the thrift industry another $29 billion, for an estimated total 
loss of approximately $153 billion. The losses were higher than those 
predicted in the late 1980s, when the RTC was established, but below 
those forecasted during the early to mid-1990s, at the height of the 
crisis'').
---------------------------------------------------------------------------
    As explained above, the best current estimates of the cost 
to the U.S. taxpayer of the current financial crisis are much 
larger but again perhaps not as large as initially feared. The 
latest estimates from the budget agencies--OMB and CBO--imply 
that the ultimate cost of the TARP would be about $341 billion 
(OMB) and $241 billion (CBO).
    As the Panel pointed out in its February report, however, 
the economic value of the assistance being provided is less 
easily assessed based upon the information Treasury has been 
releasing. The Panel therefore contracted with a securities 
valuation firm and published its findings in its February 
Report. The firm estimated that of the $184 billion in TARP 
funds it analyzed, the securities that Treasury received in 
exchange had a market value of only $122 billion, or 66 
percent, at the time Treasury announced its agreement to buy 
them.\428\ Moreover, the action of injecting public funds into 
the banks that have been assisted may have served to provide 
these institutions with an implicit public guarantee of their 
balance sheets, a guarantee for which no fee was charged.
---------------------------------------------------------------------------
    \428\ See February Oversight Report, supra note 66, at 4, 27.
---------------------------------------------------------------------------
    This in turn relates to the larger question of the degree 
to which Treasury has been forthcoming both in acknowledging 
the economic value of the assistance that it has been providing 
to financial institutions and an explanation for the strategy 
in providing such assistance. As noted in the Zingales and 
Veronesi working paper, banks with the greatest likelihood of 
experiencing a run benefited the most from taxpayer 
assistance.\429\ Simply asserting that all recipient 
institutions were ``healthy'' is not accurate in this 
situation. In this respect, Treasury's initial implementation 
of its authority to purchase bank assets and other financial 
instruments (e.g., preferred stock) lacked critical 
transparency and continues to be a source of confusion in 
understanding the actual condition of the major banks that were 
the subject of the initial use of TARP resources.
---------------------------------------------------------------------------
    \429\ See Paulson's Gift, supra note 357, at 3, 52.
---------------------------------------------------------------------------

3. Treasury as TARP Steward and Manager

    Separate from the issues of how well the American economy 
is performing after 14 months of the TARP's existence and what 
has the TARP done for the American taxpayer, there is also the 
question of how well Treasury, under two administrations, has 
performed in implementing the sweeping authority EESA provided. 
EESA calls for ``public accountability'' in the exercise of the 
authority it provides.\430\ It also requires Treasury to 
``facilitate market transparency'' by making available to the 
public ``a description, amounts, and pricing of assets acquired 
under this Act.'' In its initial implementation of EESA, 
Treasury committed to communicate ``actions in an open and 
transparent manner.'' \431\
---------------------------------------------------------------------------
    \430\ 12 U.S.C. Sec. 5201.
    \431\ See Assistant Secretary Kashkari Update on TARP, supra note 
395 (``It is essential we communicate our actions in an open and 
transparent manner to maintain [taxpayers'] trust'').
---------------------------------------------------------------------------
    There is no question that Treasury had to implement the 
TARP in a crisis atmosphere. Through its website at 
financialstability.gov, the Department has provided voluminous, 
detailed transactions information, which has allowed the public 
to monitor closely the funding provided to individual 
institutions and under what terms, as well as repayments of 
investments, dividends and interest received, and warrants 
repurchased. The regular release of online reports has greatly 
improved the public's access to important information such as 
the cumulative commitments of TARP resources and the accounting 
for all of its funding. Publication of TARP accounting 
statements for federal fiscal year 2009 should provide further, 
highly useful information on how TARP resources have been 
utilized and how Treasury has been managing them. Some critics 
argue, however, that the TARP should meet a higher standard of 
private sector type accounting statements including issuance on 
a quarterly rather than just annual basis.\432\ Additional 
disclosures which the Panel believes would be desirable include 
further information about modifications under HAMP and a more 
complete picture of PPIP investment structures.
---------------------------------------------------------------------------
    \432\ Pollock COP Testimony, supra note 369, at 3.
---------------------------------------------------------------------------
    Further, certain transaction details have not been 
forthcoming, such as the actual number of warrants Treasury 
holds for each financial institution.
    Despite Treasury's disclosures, questions continue to be 
raised as to ``where the money went.'' The identity of the 
recipients of CPP funds is well-known, and has been throughout 
the implementation of the program. A list of recipients and 
whether their CPP funds have been repaid is available on 
Treasury's website,\433\ and SIGTARP's quarterly reports give 
the same information.\434\ The public thus knows who has the 
money; what is somewhat less clear is what the recipients did 
with it. The TARP securities purchase agreements (SPAs) provide 
that the recipients will expand the flow of credit to U.S. 
customers and modify mortgage terms but does not specify how 
those objectives should be met, measured, or reported.\435\
---------------------------------------------------------------------------
    \433\ See November 25 Transactions Report, supra note 71.
    \434\ See Office of the Special Inspector General for the Troubled 
Asset Relief Program, Quarterly Report to Congress (Oct. 21, 2009) 
(online at www.sigtarp.gov/reports/congress/2009/
October2009_Quarterly_Report_to_Congress.pdf).
    \435\ The ``recitals'' to the form of Securities Purchase 
Agreement--Standard Terms used for CPP transactions provide:
    WHEREAS, the Company agrees to expand the flow of credit to U.S. 
consumers and businesses on competitive terms to promote the sustained 
growth and vitality of the U.S. economy;
    WHEREAS, the Company agrees to work diligently, under existing 
programs, to modify the terms of residential mortgages as appropriate 
to strength the health of the U.S. housing market . . .;
    See U.S. Department of the Treasury, Securities Purchse Agreement 
for Public Institutions (online at www.financialstability.gov/docs/CPP/
spa.pdf) (accessed Dec. 7, 2009); U.S. Department of the Treasury, 
Securities Purchase Agreement for Private Institutions (online at 
www.financialstability.gov/docs/CPP/SPA-Private.pdf) (accessed Nov. 30, 
2009). While it seems clear that Treasury intended that CPP recipients 
should be agreeing to increase the flow of credit and the modification 
of mortgages, the language cited above is too vague to be useful and 
not in a place where binding obligations are usually set out in a 
contract. Added to the fact that there are no specific restrictions on 
use of funds or reequirements with respect to the reporting of such 
use, the SPAs seem to be a missed opportunity for monitoring the use of 
taxpayers' funds.
---------------------------------------------------------------------------
    Treasury's standard response with respect to the ``use of 
funds'' issue is to point out that money is fungible and that 
it is not possible to correlate receipt of funds with a 
specific use of those funds.\436\ Nevertheless, as the Panel 
and SIGTARP have noted, Treasury could have conditioned receipt 
of TARP assistance upon requirements to report the usage of 
those funds and the overall lending activities of the 
institutions in question.
---------------------------------------------------------------------------
    \436\ See Office of the Special Inspector General for the Troubled 
Asset Relief Program, SIGTARP Survey Demonstrates that Banks Can 
Provide Meaningful Information on Their Use of TARP Funds, at 38-39 
(July 20, 2009) (online at www.sigtarp.gov/reports/audit/2009/
SIGTARP_Survey_Demonstrates_That--Banks_Can_Provide_Meaningful_ 
%20Information_On_Their_Use_Of_TARP_Funds.pdf). In its first report, in 
December 2008, the Panel noted the need for the companies that received 
TARP funds to explain how they were using those funds. See 
Congressional Oversight Panel, Questions About the $700 Billion 
Emergency Economic Stabilization Funds, at 4 (Dec. 10, 2008) (online at 
cop.senate.gov/reports/library/ report-121008-cop.cfm).
---------------------------------------------------------------------------
    Treasury also states that it does not intend to tell banks 
how to run their businesses.\437\ As discussed in Section B 
above, Treasury does, however, track information on lending 
levels by the 22 largest CPP recipients.\438\ SIGTARP attempted 
to address the ``fungibility of money'' issue by asking CPP 
recipients to identify actions that they would not have been 
able to take without TARP funding. In July 2009, SIGTARP 
published a report whose title speaks for itself: ``SIGTARP 
Survey Demonstrates that Banks Can Provide Meaningful 
Information on Their Use of TARP Funds.'' \439\ SIGTARP sent 
survey letters to more than 360 CPP recipients, and summarized 
their responses. While respondents described the use to which 
they put their CPP funds in general terms, they did not 
quantify the amount of new lending or the incremental 
difference in lending based on use of TARP funds.\440\ The 
Panel notes the limitations inherent in the SIGTARP survey due 
to the survey's reliance on self-reporting, and the lack of 
uniform responses or any requirement of quantification. While 
it is possible to say that 300 banks, more than 80 percent of 
all respondents, reported increased lending by reason of the 
TARP,\441\ it is not possible to use the survey itself as 
authority for anything more meaningful.
---------------------------------------------------------------------------
    \437\ See U.S. Department of the Treasury, Summary Response to 
SIGTARP Recommendations in the April 21, 2009 SIGTARP Report, at 2 
(July 2, 2009) (online at www.financialstability.gov/docs/ dividends-
interest-reports/Final%20Treasury%20Response %20to%20 
SIGTARP%20Recommendations %20%2807022009%29.pdf).
    \438\ In 2008, when Treasury first began issuing its Monthly 
Lending and Intermediation Snapshot, it only followed the twenty 
largest CPP recipients. Treasury subsequently added two institutions to 
the list--American Express and Hartford. See U.S. Department of the 
Treasury, Treasury Department Monthly Lending and Intermediation 
Snapshot, Summary Analysis for October-December 2008 (online at 
www.treas.gov/press/releases/reports/tg30-2-122008.pdf) (accessed Dec. 
4, 2009); see also U.S. Department of the Treasury, Treasury Department 
Monthly Lending and Intermediation Snapshot, Summary Analysis for 
August 2009 (online at www.financialstability.gov/docs/surveys/
Snapshot%20Analysis%20 August%202009%20Data%2010%2014% 2009.pdf) 
(accessed Dec. 4, 2009).
    \439\ Office of the Special Inspector General for the Troubled 
Asset Relief Program, SIGTARP Survey Demonstrates that Banks Can 
Provide Meaningful Information on Their Use of TARP Funds, at 5 (July 
20, 2009) (online at www.sigtarp.gov/reports/audit/ 2009/
SIGTARP_Survey_ 
Demonstrates_That_Banks_Can_Provide_Meaningful_%20Information_ 
On_Their_Use_ Of_TARP_Funds.pdf) (hereinafter ``SIGTARP Survey 
Demonstrates that Banks Can Provide Meaningful Information on Their Use 
of TARP Funds'').
    \440\ CPP recipients' responses to SIGTARP's inquiry included the 
following:
     More than 80 percent of the respondents cited the use of 
funds for lending or the avoidance of reduced lending. Many banks 
reported that lending would have been lower without TARP funds or would 
have come to a standstill.
     More than 40 percent of the respondents reported that they 
used some TARP funds to help maintain the capital cushions and reserves 
required by their banking regulators.
     Nearly a third of the respondents reported that they used 
some TARP funds to invest in agency-mortgage backed securities.
     A smaller number reported using some TARP funds to repay 
outstanding loans.
     Several banks reported using some TARP funds to buy other 
banks.
    \441\ SIGTARP Survey Demonstrates that Banks Can Provide Meaningful 
Information on Their Use of TARP Funds, supra note 439.
---------------------------------------------------------------------------
    The Panel staff also reviewed the SEC filings and other 
public disclosures of a number of banks (this group included 
the 17 of the 19 stress test banks that report to the SEC and 
the 10 largest CPP recipients).\442\ While, as discussed above, 
strictly speaking it is not possible to trace particular uses 
to TARP funds, some institutions have made efforts to show how 
TARP funds affected their operations. For example, Citigroup, 
one of the largest TARP recipients,\443\ established a Special 
TARP Committee, which set up guidelines consistent with the 
objectives and spirit of the program, and internal controls to 
ensure that TARP funds would only be used for lending and 
mortgage activities.\444\ Citigroup also separately publishes 
regular reports summarizing its TARP spending initiatives.\445\ 
Similarly, although Associated Banc-Corp did not segregate TARP 
funds from its regular account, it took measures to ensure that 
the funds are readily identifiable, thereby allowing its 
expenditure to be traced.\446\
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    \442\ The 19 stress test institutions are: JPMorgan Chase & Co., 
Citigroup, Bank of America Corp., Wells Fargo & Co., Goldman Sachs 
Group, Morgan Stanley, MetLife, PNC Financial Services Group, U.S. 
Bancorp, Bank of New York Mellon Corp., SunTrust Banks, Inc., State 
Street Corp., Capital One Financial Corp., BB&T Corp., Regions 
Financial Corp., American Express Co., Fifth Third Bancorp, Keycorp and 
GMAC LLC. The 10 largest CPP recipients are all stress test banks. 
These recipients, in order of CPP funds received, are: Citigroup, 
JPMorgan Chase & Co., Wells Fargo & Co., Bank of America, Goldman Sachs 
Group, Morgan Stanley, Bank of New York Mellon, State Street 
Corporation, U.S. Bancorp, and Capital One Financial.
    \443\ Under CPP, TIP and AGP, Treasury has invested a total of $49 
billion in Citibank as of Nov. 17, 2009. See November 25 Transactions 
Report, supra note 71.
    \444\ U.S. Securities and Exchange Commission, Citigroup's 2008 
Annual Report on Form 10-K (Feb. 27, 2009) (online at www.sec.gov/
Archives/edgar/data/831001
/000119312509041237/d10k.htm); Citigroup, TARP Progress Report Third 
Quarter 2009 (Nov. 12, 2009) (online at www.citigroup.com/citi/
corporategovernance/data
/tarp/tarp_pr_3q09.pdf?ieNocache=105) (hereinafter ``TARP Progress 
Report Third Quarter 2009'').
    \445\ See generally Citigroup, TARP Progress and Updates (online at 
www.citigroup.com/citi/corporategovernance/tarp.htm) (accessed Dec. 4, 
2009). ``As of the end of the third quarter [2009], Citi has authorized 
$53.8 billion in initiatives supported by investments it received under 
the TARP capital programs.'' TARP Progress Report Third Quarter 2009, 
supra note 444.
    \446\ Office of the Special Inspector General for the Troubled 
Asset Relief Program, Associated Banc-Corp: UST Sequence No. 76 (online 
at www.sigtarp.gov/reports/audit/UseOfFunds/
Associated%20Banc-Corp.pdf) (accessed Dec. 7, 2009).
---------------------------------------------------------------------------
    The SEC filings and other public disclosures, like the 
responses to the SIGTARP survey, are mixed both in terms of the 
level of detail provided and the thought that went into 
designing an approach to answering the question ``what did you 
do with the taxpayers' money?'' As Treasury points out, an 
exact correlation between TARP funds received and loans made is 
never going to be feasible, and the use of TARP funds for 
prescribed TARP objectives frees up money received from other 
sources, lobbying, and other activities that the taxpayers may 
find objectionable. Within these constraints, however, banks 
such as Citigroup made meaningful efforts to show their use of 
TARP funds.\447\ Treasury could have asked the SEC to send 
``Dear CFO'' letters to all SEC-reporting TARP recipients, 
asking them to make the same kind of disclosures. It does not 
appear that any such effort was made.
---------------------------------------------------------------------------
    \447\ In order to determine whether a bank had made meaningful 
efforts to show use of its TARP funds, the Panel staff asked the 
following questions: Was data easily found in the bank's filings? Did 
the bank attempt to segregate, identify or otherwise follow the money? 
Did it set up rules or guidelines? Did it specify acceptable and non-
acceptable uses of funds, and by reference to what? How much 
quantification was there and how granular was the data? Does it report 
use of funds on special reports?
---------------------------------------------------------------------------
    The terms of the CPP SPAs include the objective of 
promoting the flow of credit to U.S. borrowers. The SPAs did 
not, however, impose any specific geographic restrictions or 
reporting requirements on use or destination of funds. 
Additionally, as discussed above, tracing particular uses of 
funds to a specific source is difficult. As a result, it is 
difficult to establish, in many cases, whether any TARP funds 
ended up outside the United States. Of course, use of TARP 
funds for U.S. activities arguably frees up other funds that 
those banks can use internationally, and many of the largest 
CPP recipients had extensive international operations. With 
respect to Citigroup and AIG, TARP funds permitted the 
institution to continue functioning and in that respect would 
logically have benefitted non-U.S. customers, creditors and 
counterparties. On the other hand, when non-U.S. countries 
helped their banks with capital infusions and debt guarantees, 
some of those funds will necessarily flow to U.S. 
counterparties.

                             F. Conclusions

    The financial crisis that gripped the United States last 
fall was unprecedented in type and magnitude. There is broad 
consensus that the TARP was an important part of a broader set 
of government actions that stabilized the U.S. financial system 
by renewing the flow of credit and averting a more acute 
crisis. The financial markets data that are chronicled in this 
report make a persuasive case that the government's actions, 
while initially halting, were eventually decisive enough to 
stop the panic and restore confidence among key financial 
institutions and actors. However, the TARP's impact on the 
underlying weaknesses in the financial system that led to last 
fall's crisis is less clear.
    Congress established broad goals for EESA to help address 
the economic collapse that was gripping the nation at the time 
of its enactment. It is apparent that after fourteen months the 
TARP's programs have not been able to solve many of the ongoing 
problems Congress identified. Credit availability, the 
lifeblood of the economy, remains low. In light of the weak 
economy, banks are reluctant to lend, while small businesses 
and consumers are reluctant to borrow. In addition, questions 
remain about the capitalization of many banks, and whether they 
are focusing on repairing their balance sheets at the expense 
of lending. The FDIC, facing red ink for the first time in 17 
years, must step in to repay depositors at a growing number of 
failed banks. This problem may well worsen, as deep-seated 
problems in the commercial real estate sector are poised to 
inflict further damage on small and mid-sized banks. Large 
banks have problems of their own. Some of them, waiting for a 
rebound in asset values that may still be years away, continue 
to hold the toxic mortgage-related securities that contributed 
to the crisis. Consequently, the United States continues to 
face the prospect of banks too big to fail and too weak to play 
their role adequately in keeping credit flowing throughout the 
economy. The foreclosure crisis continues to grow. Furthermore, 
the market stability that has emerged since last fall's crisis 
has been in part the result of an extraordinary mix of 
government actions, some of which will likely be scaled back 
relatively soon, and few of which are likely to continue 
indefinitely. The removal of this support too quickly could 
undermine the economy's nascent stability.
    What Treasury has done with the nearly $700 billion in TARP 
funds has not occurred in a vacuum. Since the TARP was enacted 
in October 2008, the FDIC and the Federal Reserve have 
undertaken additional major initiatives that are aimed at 
bolstering financial stability. The Congress enacted a fiscal 
stimulus measure that is larger than the TARP. The government 
has also taken numerous smaller actions, such as the enactment 
of the Cash for Clunkers program, which boosted auto sales. All 
of these steps are in addition to global market forces that are 
outside the government's control, yet have a major impact on 
the U.S. economy. Still, it is clear that the unprecedented 
government actions taken since last September to bolster the 
faltering economy have not been enough to stem the rise of 
unemployment, which (except for October) is currently at its 
highest level since June 1983.
    While strong government action helped prevent a worse 
crisis, it may have done so at a significant long run cost to 
the performance of our market economy. Implicit government 
guarantees pose the most difficult long-term problem to emerge 
from the crisis. Looking ahead, there is no consensus among 
experts or policymakers as to how to prevent financial 
institutions from taking risks that are so large as to threaten 
the functioning of the nation's economy. Congress is currently 
grappling with this issue as it considers how to respond 
legislatively to the financial crisis. It is clear that a 
failure to address the moral hazard issue will only lead to 
more severe crises in the future.
    Since its inception, the TARP has gone through several 
different incarnations. It began as a program designed to 
purchase toxic assets from troubled banks but quickly morphed 
into a means of bolstering bank capital levels. It was later 
put to use as a source of funds to restart the securitization 
markets, rescue domestic automakers, and modify home mortgages. 
The evolving nature of the TARP, as well as Treasury's relative 
lack of fixed goals and measures of success for the program, 
make it hard to provide an overall evaluation. But the Panel 
remains convinced, as it has been since its inception, that 
Treasury should make both its decision-making and its actions 
more transparent. Despite the difficult circumstances under 
which many decisions have been made, those decisions must be 
explained to the American people, and the officials who make 
them must be held accountable for their actions. Transparency 
and accountability may be painful in the short run, but in the 
long run they will help restore market functions and earn the 
confidence of the American people.
                     SECTION TWO: ADDITIONAL VIEWS


                            A. Damon Silvers

    This separate view does not reflect a disagreement with the 
Panel report in any respect. Rather I wish to say in a somewhat 
briefer and perhaps blunter way what I believe the Panel report 
as a whole says about TARP.
    The Emergency Economic Stabilization Act of 2008 and the 
Troubled Asset Relief Program it created, in my opinion, were 
significant contributors to stabilizing a full blown financial 
panic in October 2008. It is clear to me that for that reason, 
we are better off as a nation for the existence of TARP than if 
we had done nothing. Of course this proposition is very hard to 
prove, but I am convinced it is true. Many people deserve 
credit for doing TARP rather than doing nothing, but three 
people who in particular deserve credit are Federal Reserve 
Chairman Ben Bernanke, Treasury Secretary Timothy Geithner, and 
in particular, former-Treasury Secretary Henry Paulson.
    Further, we are better off that, in implementing TARP, 
then-Secretary Paulson and his colleagues chose to do capital 
infusions in the form of the Capital Purchase Program rather 
than the initial plan of asset purchases. The prospect of asset 
purchases did not calm the markets, the announcement of capital 
infusions did. Furthermore, asset purchases at the richly 
subsidized prices the banks had hoped for would have been 
profoundly unfair to the public. Any other kind of asset 
purchases would certainly have had little impact on the panic 
and could have worsened it.
    The reason, however, for the success of the CPP infusions 
into the nine largest banks was, I believe, not that those 
infusions by themselves made those institutions adequately 
capitalized or resolved the toxic asset problem. It worked 
because it was a credible signal, together with other 
guarantees issued by Treasury and the FDIC, that the United 
States government was guaranteeing the solvency of the large 
banks.
    The question then was, what price the Treasury would ask on 
behalf of the public for guaranteeing the large banks? Our 
February report showed that in purchasing preferred stock from 
the large banks the Treasury accepted significantly less in 
exchange for its investment than private commercial parties 
were demanding at the time.\448\ This mispricing was 
substantially driven by the decision to price the preferred 
stock purchased from the large banks as if each bank was 
equally healthy, a decision later criticized by the Special 
Inspector General for TARP as based on a manifestly false 
premise.\449\
---------------------------------------------------------------------------
    \448\ Congressional Oversight Panel, February Oversight Report: 
Valuing Treasury's Acquisitions (Feb. 6, 2009) (online at 
cop.senate.gov/documents/cop-020609-report.pdf).
    \449\ SIGTARP, Emergency Capital Injections Provided to Support the 
Viability of Bank of America, Other Major Banks, and the U.S. Financial 
System, at 17 (Oct. 5, 2009) (online at sigtarp.gov/reports/audit/2009/
Emergency_Capital_Injections_Provided_To_Support_the_Viability_ 
of_Bank_of_America..._100509.pdf).
---------------------------------------------------------------------------
    This initial mispricing was followed by then-Secretary 
Paulson's decision to rescue first Citigroup and then Bank of 
America from imminent bankruptcy without subjecting their 
shareholders to the same levels of dilution that had been 
forced on AIG. This placed the public in the position of 
rescuing the stockholders of banks. For the previous seventy-
five years, it had been a fundamental premise of bank 
regulation that while a stable system required deposit 
insurance, and we might bail out other short term creditors and 
even bondholders in a crisis, no public purpose was served by 
rescuing stockholders. In fact the moral hazard issues created 
by such a wealth transfer were profoundly dangerous.
    After an initial period of deliberation, the Obama 
Administration settled on an approach of trying to limit 
further capital infusions into the banks while effectively 
pursuing a time-buying strategy. This strategy led to improved 
transparency in some respects, such as the release of the 
stress test results and the recognition that some banks were 
stronger than others, opacity continued in other areas. For 
example, in our August report we found it was not possible to 
determine the value of toxic assets on the books of the large 
banks.\450\ It appeared in general that where transparency led 
to the conclusion that the banks were strong, the approach was 
transparency. Where transparency might have led to a different 
conclusion, opacity continued. This is of course completely 
consistent with a time-buying strategy. The time-buying 
strategy so far has worked in that so far there have been no 
further direct capital infusions into the major banks since 
President Obama took office.
---------------------------------------------------------------------------
    \450\ August Oversight Report, supra note 100.
---------------------------------------------------------------------------
    However, though the consequences of the time-buying 
strategy appear to be that while we have had no further capital 
infusions into the large banks, it is unclear whether the large 
banks are actually healthy. Citigroup, Wells Fargo, and Bank of 
America were not allowed to return their TARP money after the 
stress tests. Those banks constitute approximately 40 percent 
of the nation's bank assets. Recently Bank of America announced 
its intention to return TARP money after completing a public 
offering, though questions have been raised by informed 
commentators like Andrew Ross Sorkin as to whether Bank of 
America is really strong enough to be allowed to return its 
TARP capital, and point to the lack of lending on the part of 
Bank of America.\451\ Meanwhile, small banks that do not 
benefit from either implicit or explicit guarantees are failing 
at an alarming rate.
---------------------------------------------------------------------------
    \451\ Andrew Ross Sorkin, Bailout Refund Is All About Pay, Pay, 
Pay, New York Times (Dec. 7, 2009) (online at www.nytimes.com/ 2009/12/
08/ business/08sorkin.html).
---------------------------------------------------------------------------
    As a result of the continuing underlying weakness in the 
banking system, banks appear reluctant to lend, particularly to 
small- and medium-sized businesses. This dynamic has been cited 
by Federal Reserve Chairman Bernanke as a key contributor to 
the high rate of unemployment.\452\ In a parallel development, 
Treasury's foreclosure relief programs seem to be designed with 
the first principle of avoiding writedowns. This is again 
consistent with a goal of buying time for banks, but not 
consistent with a goal of stabilizing the housing market or 
keeping American families in their homes. These dynamics appear 
to have some resemblance to the forces that led in different 
circumstances to Japan in the 1990s having a decade long 
problem with bank weakness that contributed to prolonged 
economic weakness.
---------------------------------------------------------------------------
    \452\ Ben S. Bernanke, Speech at the Economic Club of New York 
(Nov. 16, 2009) (online at www.federalreserve.gov/ newsevents/ speech/ 
bernanke20091116a.htm).
---------------------------------------------------------------------------
    So the verdict on TARP is that it was a success at 
stabilizing a serious financial crisis but that it has been 
characterized by a willingness to give public money to the 
banks at less than fair terms to the public, and by a refusal 
to resolve fundamental problems with the financial institutions 
it has rescued. These weaknesses in TARP were not necessary. In 
some cases these weaknesses have been addressed over time. 
Where these problems remain, and I believe they remain central 
to the nature of TARP today, they could still be addressed.
                           B. Richard Neiman

    I voted for and support this month's Report and my 
Additional Views are related more to important matters of 
emphasis than to specific conclusions. It is critical to 
remember in our analysis that EESA was enacted and first 
implemented in the depths of a major crisis, and the TARP was 
charged with multiple, complex, and enormous responsibilities.

1. TARP Has Significantly Improved the Stability of the Financial 
        System

    In my opinion the Report could be stronger in giving credit 
to TARP for having achieved the primary statutory objective of 
restoring general financial stability and liquidity in the 
financial system, including the restoration of functioning 
credit markets. There are legitimate debates about specific 
causation (TARP was part of a coordinated set of responses) and 
about particular transactions (methods of rescue or seizure of 
one institution or another). However, in comparison to the 
situation in October 2008, I give Congress, the Administration, 
and TARP a large share of credit for the achievement of the 
primary objective under EESA.
    The Panel has issued a series of reports that have closely 
examined TARP programs and transactions and we have been 
critical of many aspects of implementation, including 
transparency and accountability. Yet, in this year-end review 
we should take a step back and be clear and emphatic that a 
dominant success and objective was in fact achieved.
    In hindsight it is difficult to remember how close the 
system was to imploding and even more difficult to imagine what 
the consequences to the ``real economy'' might have been had 
the global financial system collapsed. It is not possible to 
adequately construct that scenario. But for all the criticism 
Treasury has received for assisting in the rescue of Bear 
Stearns and allowing the failure of Lehman Brothers, I shudder 
to imagine what might have happened if AIG had been allowed to 
fail and been followed quickly by a series of major American 
banks and investment banks during those weeks in early October 
2008. They would not have simply ``failed'' in the traditional 
sense--the entire global financial system would have seized and 
ground to a halt. The specter of the United States government 
not acting in the face of such a crisis would have been 
devastating to the world economy. The impacts on trade, on the 
movement of goods, possibly on hunger and dislocation, and 
certainly on the American people's confidence, can only be 
imagined.
    Therefore I think this is a moment to give some appropriate 
credit to the Congress, the Treasury, and the Federal Reserve 
for acting decisively in the face of a potential disaster and 
to TARP for playing a central role in averting that outcome.

2. Formidable Problems Remain in the General Economy, Particularly With 
        Respect to Mounting Foreclosures

    In restoring liquidity and financial stability to the 
financial system, Treasury was charged with ensuring that TARP 
funds and its authority under EESA ``are used in a manner that 
. . . preserves homeownership and promotes jobs and economic 
growth.'' \453\ These are very serious issues for the Treasury 
and for Congress and the country. In some cases TARP results 
have been better; in other cases worse.
---------------------------------------------------------------------------
    \453\  Sec.  EESA 2.
---------------------------------------------------------------------------
    I do not attribute primary responsibility for solving the 
problems of general economic recovery to TARP programs, but I 
do think that some TARP programs could have done, and still can 
do, much better in promoting those goals.
    On the positive side, the TARP capital support programs, 
including the SCAP, have generally been successful in promoting 
financial condition transparency, bringing private capital 
investment back to the banking sector, and protecting taxpayer 
funds. The disagreement among our expert panel of witnesses 
about the current adequacy of overall banking capital levels 
is, I believe, more related to their differing views of the 
future economy and its impact on bank capital than it is to 
their assessment of TARP's effectiveness.
    As for the asset-related programs, the TALF program has 
performed reasonably well in reviving functioning asset-backed 
securities markets for certain consumer credit asset classes. 
The PPIP program was late in launching but can now be expected 
to play an important role in creating a liquid market for 
troubled assets.
    The auto companies' rescue was generally well executed, 
albeit at a cost, and at this point it has helped to mitigate 
the degree of job dislocation in the general economy.
    On the other hand, as the Report rightly points out in 
detail, TARP has struggled to help homeowners and small 
businesses. HAMP has made only limited progress for nine months 
now, and the residential foreclosure crisis continues to mount. 
Moreover, credit is not sufficiently available for small 
businesses and we are entering a period of severe stress on 
commercial real estate loans. Much more needs to be done.
    Looking ahead, TARP needs to close the book on large 
institution support and focus all of its energies on addressing 
the problems of foreclosures, small business credit, and 
commercial real estate.
    One proposal I have long called for is for Treasury to 
expand its foreclosure prevention program to assist borrowers 
who risk foreclosure due to job loss or other temporary 
hardship. As the recession lingers, prime borrowers with 
mortgages that are otherwise affordable are increasingly 
falling into this category. I therefore have been urging the 
use of TARP funds to support state emergency mortgage 
assistance programs to help borrowers while they get back on 
their feet. Innovative programs at the state level have 
demonstrated that this idea can work.

3. The Risk of Moral Hazard Goes Well Beyond the Implementation of TARP

    Moral hazard, which is discussed in the Report, is a far 
ranging effect that occurs anywhere the government interfaces 
with any of the financial sector (e.g., bank debt support), 
private contracts (e.g., mortgages), and the general industrial 
economy (e.g., auto rescue). TARP's very enactment was a 
massive instance of government intervention; presumably 
Congress reached the conclusion that the risks of not acting 
outweighed the risks of moral hazard that implementing TARP 
required.
    Therefore, while moral hazard is a very real issue I do not 
believe it is appropriate to assign the lion's share of 
responsibility for moral hazard risk to the implementation of 
TARP programs. The statute itself was an emergency act of moral 
hazard-inducing intervention. So it is not surprising to find 
moral hazard associated with TARP--it was there from the 
beginning.
    Extraordinary government efforts necessary to avoid system-
wide financial collapse last fall in some cases made 
institutions bigger and more complex and interconnected. This 
was not a desirable matter of policy but an unfortunate matter 
of exigency. In a crisis, a larger company may be required to 
absorb the business of another large company quickly, 
consolidate management and operations, and provide 
uninterrupted service to customers and business partners.
    The important lesson of moral hazard is that we need to 
address ``too big to fail'' not by criticizing or second 
guessing TARP, but by renewing our efforts to create a systemic 
regulator and resolution authority. This is the greatest 
legislative imperative for financial reform and where our 
energies must be directed.

4. Going Forward--Reform of Financial Institutions Must Be Considered

    These outcomes of the crisis have only heightened the need 
to address systemic risk legislatively and to create an 
authority to unwind such institutions in an orderly fashion in 
event of failure.
    They also highlight the debate about whether large 
financial institutions should be allowed to grow so large and 
complex in the first place. Our national dialogue must include 
the debate over the social responsibility and utility of banks 
subject to the federal safety net, and whether in addition to 
stronger capital requirements we should consider restricting 
the level of risky activities that these institutions are 
permitted to conduct (such as proprietary trading and 
sponsorship of hedge funds). Proposals such as those made by 
former Federal Reserve Chairman Paul Volcker warrant full 
consideration and discussion.

5. Conclusion

    TARP was instrumental in avoiding a global financial 
meltdown--a far worse scenario than we experience today--at a 
much lower cost than was originally expected. Systemic 
stability and functioning credit markets were a necessary pre-
condition to be in a position to tackle the problems relating 
to foreclosures, credit availability, and economic growth. 
Going forward these are the most important issues. TARP funds 
and programs must now focus on them.
                    C. Representative Jeb Hensarling

    Although I commend the Panel and its staff for their 
efforts in producing the December report, I do not concur with 
all of the analysis and conclusions presented and, thus, 
dissent. I would like, however, to thank the Panel for 
incorporating several of the suggestions I offered during the 
drafting process.

                           Executive Summary

    The Panel's December report focuses on whether Treasury has 
properly discharged its Congressional mandate under the 
Emergency Economic Stabilization Act of 2008--the enabling 
statute for the Troubled Asset Relief Program. In my view, it 
is not possible to assess the overall effectiveness of the TARP 
without acknowledging and thoughtfully analyzing the intended 
and unintended consequences of the program and the manner in 
which it was implemented by Treasury. In making these 
determinations I analyzed a series of specifically tailored 
metrics and inquired whether the TARP (i) stabilized the U.S. 
financial system, (ii) promoted lending, (iii) was implemented 
in a manner so as to protect the taxpayers, (iv) enhanced 
systemic, implicit guarantee and moral hazard risks, (v) 
enhanced political risk, (vi) promoted transparency and 
accountability, and (vii) was used for economic stimulus 
instead of financial stability.
    Based upon this analysis I conclude that the TARP is 
failing its mandate and offer the following summary of my 
findings.
     In order to end the abuses of the TARP as 
evidenced by the Chrysler, General Motors (GM) and GMAC 
bailouts, misguided foreclosure mitigation programs and the re-
animation of reckless behavior and moral hazard risks, 
Secretary Geithner should not extend the TARP but permit it to 
end on December 31, 2009.
     As of today, Treasury has approximately $297.2 
billion of TARP authority available to fund existing 
commitments and new programs. As the EESA statute requires, all 
recouped and remaining TARP funds should go back into the 
Treasury general fund for debt reduction. All revenues and 
proceeds from TARP investments that have generated a positive 
return should also go for debt reduction.
     If the Secretary extends the TARP to October 31, 
2010, I fear the Administration will continue to employ 
taxpayer resources as a revolving bailout fund to promote its 
politically favored projects as was clearly evident in the 
Chrysler, GM and GMAC bailouts.
     While the programs offered by Treasury, the 
Federal Reserve and the FDIC may very well have jointly 
assisted with the stabilization of the financial system over 
the past year, it seems quite unlikely that the TARP--
unassisted by the Federal Reserve and the FDIC--would have 
stabilized the U.S. financial system.
     Although some criticize the TARP for its failure 
to jump start new lending activity and for the creation of 
dysfunctional financial institutions (zombie banks), others 
note that lending-for-the-sake-of-lending may sow the seeds of 
the next asset bubble and lead to another round of non-
performing loans and toxic securitized debt instruments. 
Nevertheless, if the TARP is judged on the basis of whether it 
successfully restarted the lending market for large and small 
business credit, it appears that it has again failed to meet 
such expectation.
     It is difficult to conclude that Treasury has 
diligently discharged its taxpayer protection obligation given 
the TARP funds that will most likely be lost with respect to 
AIG, the auto related bailouts and the various foreclosure 
mitigation efforts.
     Instead of lessening systemic risk the TARP has 
exacerbated the ``too big to fail'' problem by making the 
federal government the implicit guarantor of the largest 
American financial institutions as well as an undefined select 
group of business enterprises the failure of which might impede 
the Administration's economic, social and political agenda.
     By evidencing its willingness to rescue businesses 
that engage in excessive risk taking and poor business judgment 
Treasury has created needless implicit guarantee and moral 
hazard risks and laid the foundation for another economic 
crisis. If the Administration provides a safety net from risky 
behavior no one should be surprised if the intended recipients 
accept the offer and engage in such behavior. If the 
participants win their high risk bets they will reap all of the 
benefits but if they lose the taxpayers will bear the burden of 
picking up the pieces. It is possible that the TARP not only 
increased the number of ``too big to fail'' institutions but 
the size of such institutions as well.
     I remain troubled that the implementation of the 
TARP has caused the private sector to incorporate the concept 
of ``political risk'' into its analysis before engaging in any 
direct or indirect transaction with the United States 
government. The realm of political risk is generally reserved 
for business transactions undertaken in developing countries 
and not interactions between private sector participants and 
the United States government. Following the Chrysler and GM 
decisions it is possible that private sector participants may 
begin to view interactions with the United States government 
through the same jaundiced eye they are accustomed to directing 
toward third-world governments.
     Treasury has often been less than forthcoming 
regarding matters of transparency and accountability. Treasury 
should provide detailed financial statements to the taxpayers 
and operate its TARP investments in a businesslike manner.
     The 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, the 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.
     The bankruptcy restructurings of Chrysler and GM 
and the recapitalization of GMAC were financed with TARP 
proceeds. These cases serve as the poster child of why the TARP 
should end on December 31, 2009. The restructurings failed each 
of the standards noted above by exacerbating implicit guarantee 
and moral hazard risks, incorporating a heavy dose of political 
risk into private-public sector interactions, offering little 
in the way of taxpayer protection, transparency and 
accountability, and using funds dedicated to financial 
stability for economic stimulus.
     Much like the auto industry interventions, HAMP 
and the Administration's other foreclosure mitigation efforts 
to date have been a failure. The Administration's opaque 
foreclosure mitigation efforts have assisted only a small 
number of homeowners while drawing billions of involuntary 
taxpayer dollars into a black hole.
     The best foreclosure mitigation program is a job, 
and the best assurance of job security is economic growth and 
the adoption of public policy that encourages and rewards 
capital formation and entrepreneurial success. Without a robust 
macroeconomic recovery the housing market will continue to 
languish and any policy that forestalls such recovery will by 
necessity lead to more foreclosures.

                              A. Overview 

    The Panel's December report focuses on whether Treasury has 
properly discharged its Congressional mandate under the 
Emergency Economic Stabilization Act of 2008 (EESA)--the 
enabling statute for the Troubled Asset Relief Program 
(TARP).\454\ In assessing the overall effectiveness of the TARP 
I will analyze the program against each of the following 
metrics:
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    \454\ The EESA statute requires COP to accomplish the following, 
through regular reports:
     Oversee Treasury's TARP-related actions and use of 
authority;
     Assess the impact to stabilization of financial markets 
and institutions of TARP spending;
     Evaluate the extent to which TARP information released 
adds to transparency; and
     Ensure effective foreclosure mitigation efforts in light 
of minimizing long-term taxpayer costs and maximizing taxpayer 
benefits.
    12 U.S.C. 5223.
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           stabilization of the U.S. financial system;
           increased lending activity;
           taxpayer protection;
           systemic, implicit guarantee and moral 
        hazard risks;
           political risk;
           transparency and accountability; and
           financial stability v. economic stimulus.
    I will also describe what I believe was the primary cause 
of the financial crisis that the TARP was created to remedy. In 
addition I will retrace my analyses of the Chrysler and General 
Motors (GM) restructurings--the TARP's lowest point--and the 
misguided TARP funded foreclosure mitigation efforts.
    Based upon this analysis I conclude that the TARP is 
failing its mandate and recommend that Secretary Geithner not 
extend the TARP but allow the program to terminate on December 
31, 2009.\455\
---------------------------------------------------------------------------
    \455\ See generally, Geithner Expects Bailout Program to End Soon, 
The Associated Press (Dec. 2, 2009) (online at www.nytimes.com/2009/12/
03/business/economy/03derivatives.html) (``Treasury Secretary Timothy 
F. Geithner affirmed Wednesday the administration's intent to end the 
$700 billion financial bailout program soon. Although Mr. Geithner did 
not provide details, he said the government was close to the point at 
which `we can wind down this program' and end it. `Nothing would make 
me happier,' he told the Senate Agriculture Committee''); Jackie 
Calmes, Repaid Bailout Money May Go to Jobless Benefits, New York Times 
(Dec. 3, 2009) (online at www.nytimes.com/2009/12/03/us/politics/
03jobs.html) (``Treasury Secretary Timothy F. Geithner, testifying on 
Wednesday before the Senate Agriculture Committee, warned against 
shuttering the program just yet, given the continued weakness in the 
banking, housing and real estate markets. But Mr. Geithner said much of 
the $700 billion would not be needed, an indication of how far the 
financial industry has improved since Mr. Obama took office and 
prepared to ask for up to $500 billion more. On Wednesday, Bank of 
America announced that it would repay all of its $45 billion in bailout 
money before the end of the year''); Michael Crittendon and Sarah 
Lynch, Geithner Says TARP Is Winding Down, but Date Not Set, Wall 
Street Journal (Dec. 3, 2009) (online at online.wsj.com/article/
SB125976850821372893.html) (``The Obama administration will outline its 
plan to end the government's $700 billion financial rescue program in 
the next few weeks, a top official said, though that doesn't mean it 
will expire as scheduled by year end. `We are close to the point where 
we can wind down this program and stop making new commitments,' 
Treasury Secretary Timothy Geithner told a U.S. Senate panel 
Wednesday'').
---------------------------------------------------------------------------
    Before beginning my analysis of the TARP I thought it would 
be helpful to provide some perspective regarding the magnitude 
of the taxpayer resources that have been dedicated to financial 
stability and economic stimulus over the past year. The Wall 
Street Journal recently reported that Treasury is considering 
the investment of up to an additional $5.6 billion in 
GMAC.\456\ To date Treasury has invested $12.5 billion in GMAC. 
I am not aware of any serious claim that the survival of GMAC 
is necessary for the financial stability of our country. 
Remarkably, the up to $18 billion that ultimately may be 
invested in GMAC represents a small drop in a large bucket 
relative to the trillions of dollars of taxpayer sourced funds 
presently committed to financial stability and economic 
stimulus. By comparison, for fiscal year 2010 the National 
Institutes of Health has requested just over $6 billion for 
cancer research.\457\ Although the Panel is not charged with 
debating the allocation of limited public resources, as 
taxpayers we may nevertheless question if GMAC merits the 
equivalent of three years of taxpayer funded cancer research.
---------------------------------------------------------------------------
    \456\ Dan Fitzpatrick and Damian Paletta, GMAC Asks for Fresh 
Lifeline, Wall Street Journal (Oct. 29, 2009) (online at 
online.wsj.com/article/SB125668489932511683.html?mod=
djemalertNEWS) (``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'').
    \457\ Senate Committee on Appropriations, Subcommittee on Labor, 
Health and Human Services, Education, and Related Agencies, Written 
Testimony of National Cancer Institute Director John E. Niederhuber, 
Budget Request for FY 2010 (May 21, 2009) (online at 
legislative.cancer.gov/files/appropriations-2009-05-21.pdf).
---------------------------------------------------------------------------

               B. Primary Cause of the Financial Crisis 

    Just as a history of bad management decisions did not 
preclude Chrysler and GM from receiving TARP funds, the same is 
true of Fannie Mae and Freddie Mac. It should be noted that 
their financial insolvency materialized after years of 
mismanagement--and after years of enjoying the gold seal of the 
government's implicit guarantee. Fannie and Freddie exploited 
their congressionally granted charters to borrow money at 
discounted rates. They dominated the entire secondary mortgage 
market and wildly inflated their balance sheets. Because market 
participants long understood that this government created 
duopoly was implicitly (and, now, explicitly) backed by the 
federal government, investors and underwriters chose to believe 
that if Fannie or Freddie touched something, it was safe, 
sound, secure, and most importantly ``sanctioned'' by the 
government. The results of those misperceptions have had a 
devastating impact on our entire economy. Given Fannie and 
Freddie's market dominance, it should come as little surprise 
that once they dipped into the subprime and Alt-A markets, 
lenders quickly followed suit. In 1995, HUD authorized Fannie 
and Freddie to purchase subprime securities that included loans 
to low-income borrowers and allowed the government sponsored 
enterprises (GSEs) to receive credit for those loans toward 
their mandatory affordable housing goals. Fannie and Freddie 
readily complied, and as a result, subprime and near-prime 
loans jumped from 9 percent of securitized mortgages in 2001 to 
40 percent in 2006. In 2004 alone, Fannie and Freddie purchased 
$175 billion in subprime mortgage securities, which accounted 
for 44 percent of the market that year. Then, from 2005 through 
2007, the two GSEs purchased approximately $1 trillion in 
subprime and Alt-A loans, and Fannie's acquisitions of 
mortgages with less than 10-percent down payments almost 
tripled. As a result, the market share of conventional 
mortgages dropped from 78.8 percent in 2003 to 50.1 percent by 
2007 with a corresponding increase in subprime and Alt-A loans 
from 10.1 percent to 32.7 percent over the same period. These 
non-traditional loan products, on which Fannie and Freddie so 
heavily gambled as their Congressional supporters encouraged 
them to ``roll the dice a little bit more,'' now constitute 
many of the same non-performing loans which have contributed to 
our current foreclosure troubles.\458\ Private sector lenders 
and securitizers of mortgage backed securities lowered their 
diligence and underwriting standards in order to compete with 
the heavily subsidized duopoly resulting in unprecedented 
levels of mortgage defaults and the near shut-down of our 
credit markets. Without the reckless behavior of Freddie and 
Fannie it seems most unlikely that a financial crisis of the 
magnitude we have experienced over the past year would have 
developed.\459\
---------------------------------------------------------------------------
    \458\ Representative Jeb Hensarling, Additional Views to 
Congressional Oversight Panel, March Oversight Report: Foreclosure 
Crisis: Working Towards a Solution (Mar. 6, 2009) (online at 
cop.senate.gov/documents/cop-030609-report-view-hensarling.pdf).
    \459\ In addition, for well over twenty years, federal policy has 
promoted lending and borrowing to expand home ownership, through 
incentives such as the home mortgage interest tax exclusion, the FHA, 
discretionary HUD spending programs, and the Community Reinvestment Act 
(CRA). CRA is an example of a program with the best of intentions 
having adverse, unintended consequences on exactly the population it 
hopes to serve. It was initially authorized to prevent ``redlining,'' a 
term that refers to the practice of denying loans to neighborhoods 
considered to be higher economic risks, by mandating banks lend to the 
communities where they take deposits. Since its passage into law in 
1977, however, CRA has advanced at least two undesirable outcomes: (1) 
some financial institutions completely avoided doing business in 
neighborhoods and restricted even low-risk forms of credit, and (2) 
many institutions went the other way and relaxed underwriting standards 
to meet CRA guidelines, thus opening the door to the development of 
certain risky products that have contributed to the problem of 
foreclosures. These lax underwriting standards spread to Fannie and 
Freddie and ultimately to the private sector as the role of the GSEs 
morphed from that of a liquidity provider to a promoter of home 
ownership.
---------------------------------------------------------------------------
    GAO noted in a September 2009 report:

          While housing finance may have derived some benefits 
        from the enterprises' activities over the years, GAO, 
        federal regulators, researchers, and others long have 
        argued that the enterprises had financial incentives to 
        engage in risky business practices to strengthen their 
        profitability partly because of the financial benefits 
        derived from the implied federal guarantee on their 
        financial obligations.\460\
---------------------------------------------------------------------------
    \460\ Government Accountability Office, Analysis of Options for 
Revising the Housing Enterprises' Long-term Structures (September 2009) 
(online at www.gao.gov/new.items/d09782.pdf).

    In September 2008, Treasury put Fannie Mae and Freddie Mac 
into conservatorship under the Federal Housing Finance Agency 
(FHFA), effectively making taxpayers liable for their 
portfolios which now total about $5.46 trillion (including 
mortgage-backed securities and other guarantees, as well as 
gross mortgage portfolios).\461\
---------------------------------------------------------------------------
    \461\ Fannie Mae, Monthly Summary (July 2009) (online at 
www.fanniemae.com/ir/pdf/monthly/2009/073109.pdf); Freddie Mac, Monthly 
Volume Summary (July 2009) (online at www.freddiemac.com/investors/
volsum/pdf/0709mvs.pdf).
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                        C. Analysis of the TARP

    In my view, it is not possible to assess the overall 
effectiveness of the TARP without acknowledging and 
thoughtfully analyzing the intended and unintended consequences 
of the program and the manner in which it was implemented by 
Treasury. Any analysis that does not thoroughly consider the 
issues of implicit guarantee, moral hazard, political risk, 
transparency and accountability, and financial stability v. 
economic stimulus is myopic and of limited benefit.

1. Stabilization of U.S. Financial System

    Any role that the TARP may have played over the past year 
in stabilizing the financial system cannot be analyzed to the 
exclusion of the programs adopted by the Federal Reserve and 
the FDIC. Although Treasury's maximum exposure under the TARP 
totals $698.7 billion, the Federal Reserve and the FDIC have 
maximum exposures of $1.732 trillion and $666.7 billion, 
respectively.\462\
---------------------------------------------------------------------------
    \462\ See Figure 27 on pp. 79-80 of the Panel's December Report.
---------------------------------------------------------------------------
    Any such analysis becomes more challenging when you 
consider the broad array of programs adopted by Treasury, the 
Federal Reserve and the FDIC. Treasury--under TARP authority--
rolled out a dizzying group of programs including, among 
others:
           the Capital Purchase Program (CPP--the 
        purchase of preferred stock in approximately 700 
        financial institutions);
           the Targeted Investment Program (TIP--
        exceptional assistance to Citigroup and Bank of 
        America);
           the Systemically Significant Failing 
        Institutions Program (SSFI--exceptional assistance to 
        AIG);
           the Asset Guarantee Program (AGP--the 
        guarantee of certain assets of Citigroup);
           the Public-Private Investment Program 
        (PPIP--purchase of toxic assets from financial 
        institutions);
           the Term-Asset Back Securities Loan Facility 
        Program (TALF--restart the securitization market);
           various small business programs;
           the Making Home Affordable Program (MHA--
        foreclosure mitigation, including the Home Affordable 
        Modification Program (HAMP) and the Home Affordable 
        Refinancing Program (HARP);
           the Automotive Industry Financing Program 
        (AIFP--bailout of Chrysler, GM and GMAC); and
           the Auto Supplier Support Program (bailout 
        of certain auto suppliers).
    The Federal Reserve has extended credit to AIG, advanced 
loans under the TALF program, provided asset guarantees to 
Citigroup and extended over $1 trillion in credit under, among 
others, its Term Auction Facility, discount window program, 
Primary Dealer Credit Facility, commercial paper facility 
programs, and GSE debt securities and mortgage backed 
securities programs. The FDIC introduced the Temporary 
Liquidity Guarantee Program (TLGP-guarantee of debt issued by 
certain financial institutions), structured a PPIP for whole 
loans, guaranteed assets of Citigroup and increased outlays to 
its deposit insurance fund.\463\ The Panel's current and prior 
reports analyze many of these programs in detail.
---------------------------------------------------------------------------
    \463\ See pp. 74-81 of the Panel's December Report.
---------------------------------------------------------------------------
    While the programs offered by Treasury, the Federal Reserve 
and the FDIC may very well have jointly assisted with the 
stabilization of the financial system over the past year, it 
seems quite unlikely that the TARP--unassisted by the Federal 
Reserve and the FDIC--would have stabilized the U.S. financial 
system.\464\
---------------------------------------------------------------------------
    \464\ Because it has served as a barrier to private-sector 
investment and capital formation, TARP has likely done much more to 
impede job creation and organic economic growth than it has done to 
promote them. U.S. unemployment recently surpassed 10 percent for the 
first time in 26 years and the broader definition of unemployment--
including those who are underemployed and have stopped looking for 
work--recently jumped to 17.5 percent. Although the two metrics have 
fallen to 10 percent and 17.2 percent, respectfully, such improvements, 
while encouraging, hardly signal a return to a robust employment 
market.
---------------------------------------------------------------------------
    Interestingly, some who attribute relative success to 
certain aspects of the TARP offer only faint praise. Dr. Dean 
Baker, Co-Director, Center for Economic and Policy Research, 
provided the following testimony to the Panel:

          There are many factors that make it difficult to 
        assess the effectiveness of the TARP, most important 
        one being the fact that the TARP was carried through in 
        conjunction with rescue efforts by the Federal Deposit 
        Insurance Corporation (FDIC) and the Federal Reserve 
        Board. The money made available to the financial system 
        through these alternative mechanisms was considerably 
        larger than the amount made available through the TARP. 
        Furthermore, there is no publicly available information 
        on the terms or the beneficiaries of the loans issued 
        through the Fed's special lending facilities.
          For this reason, there is no easy way to determine 
        the importance of TARP funds in stabilizing the 
        financial system. Clearly, the TARP did play a role in 
        stopping the panic that was driving financial markets 
        last year. Together with the other structures put in 
        place, the TARP did succeed in restoring stability to 
        the financial system.
          However, keeping the financial system operating is a 
        rather low bar. There is little doubt that the Federal 
        Reserve Board, with its virtual unlimited ability to 
        print money, can prevent a financial collapse. The 
        relevant question is whether the TARP, along with the 
        other programs put in place, restored stability in a 
        way that best served the real economy and also can be 
        viewed as fair by the American people. By these 
        criteria, the TARP does not score very well.\465\
---------------------------------------------------------------------------
    \465\ Congressional Oversight Panel, Written Testimony of Center 
for Economic and Policy Research Co-Director Dean Baker, Taking Stock: 
Independent Views on TARP's Effectiveness, at 1 (Nov. 19, 2009) (online 
at cop.senate.gov/documents/testimony 09111909-baker.pdf).

    Roy Smith, Professor of Finance, New York University Stern 
School of Business, states in his written submission to the 
Panel that the role of the TARP was relatively small compared 
to that of the Federal Reserve. In his view, the greatest 
contribution of the program was its announcement, which 
signaled that the government intended to act, while the actual 
accomplishments of the program are ``relatively few and 
unimportant.'' Professor Smith states that Treasury's highest 
priority should be to recover the TARP's investment.\466\
---------------------------------------------------------------------------
    \466\  Roy Smith, Letter to Panel Staff (Oct. 23, 2009).
---------------------------------------------------------------------------
    William Isaac, chairman of the FDIC, 1981-1985, argues in 
his written submission to the Panel that the TARP legislation 
did more harm than good, and that the Federal Reserve, the FDIC 
and the SEC had the tools necessary to alleviate the financial 
crisis without taxpayer outlays. In Chairman Isaac's view, 
Treasury lacked the expertise and personnel to run the capital 
infusion program, and as a result Treasury should have turned 
the program over to the FDIC. Isaac criticizes Treasury for (i) 
forcing banks to participate in the TARP, (ii) publicly 
announcing the stress tests, and (iii) taking the position that 
the TARP is a revolving fund.\467\
---------------------------------------------------------------------------
    \467\ William Isaac, Letter to Panel Staff (Nov. 6, 2009).
---------------------------------------------------------------------------

2. Lending

    Dr. Baker offered the following written testimony to the 
Panel regarding the lending activity of TARP recipients:

          The one sector that clearly is having difficulty 
        securing credit is the small business sector. While 
        this is an impediment to recovery, this sort of credit 
        tightening is typical of a recession. The complaints 
        from business owners over being denied credit are not 
        qualitatively different than the complaints that were 
        made in 1990-91 recession. Lenders will also tighten 
        credit to business during a downturn simply because 
        otherwise healthy businesses are much risk[ier] 
        prospects during a recession. There is no reason to 
        believe that the tightening of credit during this 
        downturn is any greater than what should be expected 
        given the severity of the recession. To press banks to 
        make more loans in this context would be to insist that 
        they make loans on which they expect to lose money. 
        This would be questionable economic policy.\468\
---------------------------------------------------------------------------
    \468\ Congressional Oversight Panel, Written Testimony of Center 
for Economic and Policy Research Co-Director Dean Baker, Taking Stock: 
Independent Views on TARP's Effectiveness, at 4, 5 (Nov. 19, 2009) 
(online at cop.senate.gov/documents/testimony-111909-baker.pdf).

    Although some criticize the TARP for its failure to jump 
start new lending activity and for the creation of 
dysfunctional financial institutions (zombie banks), Dr. Baker 
notes that lending-for-the-sake-of-lending may sow the seeds of 
the next asset bubble and lead to another round of non-
performing loans and toxic securitized debt instruments. 
Nevertheless, if the TARP is judged on the basis of whether it 
successfully restarted the lending market for large and small 
business credit, it appears that it has again failed to meet 
such expectation.

3. Taxpayer Protection

    Roughly $71 billion of TARP funds have been paid back, 
mostly from large financial institutions who received equity 
injections as part of the CPP. In addition, Bank of America 
recently announced that it will repay the full $45 billion with 
interest it has accessed from the TARP. 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 and common share 
purchases in Citigroup, Bank of America and hundreds of 
additional large and small financial institutions and other 
initiatives. The Panel should undertake to analyze these 
programs to determine if the investment of taxpayer funds is 
appropriate, authorized under EESA and adequately protected. 
This undertaking is particularly important with respect to the 
TARP funded foreclosure mitigation programs since EESA requires 
the Panel to ``ensure effective foreclosure mitigation efforts 
in light of minimizing long-term taxpayer costs and maximizing 
taxpayer benefits.'' It is difficult to conclude that Treasury 
has diligently discharged its taxpayer protection obligation 
given the TARP funds that will most likely be lost with respect 
to AIG, the auto related bailouts and the various foreclosure 
mitigation efforts.

4. Systemic, Implicit Guarantee and Moral Hazard Risks

    Instead of reducing systemic risk the TARP has exacerbated 
the ``too big to fail'' problem by making the federal 
government the implicit guarantor of the largest American 
financial institutions as well as an undefined select group of 
business enterprises the failure of which might impede the 
Administration's economic, social and political agenda.\469\ By 
evidencing its willingness to rescue businesses that engage in 
excessive risk taking and poor business judgment Treasury has 
created needless implicit guarantee and moral hazard risks and 
laid the foundation for another economic crisis. If the 
Administration provides a safety net from risky behavior no one 
should be surprised if the intended recipients accept the offer 
and engage in such behavior. If the participants win their high 
risk bets they will reap all of the benefits but if they lose 
the taxpayers will bear the burden of picking up the pieces. It 
is possible that the TARP not only increased the number of 
``too big to fail'' institutions but the size of such 
institutions as well.
---------------------------------------------------------------------------
    \469\ The Financial Times reports that thirty institutions have 
made the latest ``too big to fail list'':
    The list, which is not public, contains many of the multinational 
bank names that would be widely expected: Goldman Sachs, JPMorgan 
Chase, Morgan Stanley, Bank of America Merrill Lynch and Citigroup of 
the US; Royal Bank of Canada; UK groups HSBC, Barclays, Royal Bank of 
Scotland and Standard Chartered; UBS and Credit Suisse of Switzerland; 
France's Societe Generale and BNP Paribas; Santander and BBVA from 
Spain; Japan's Mizuho, Sumitomo Mitsui, Nomura, Mitsubishi UFJ; Italy's 
UniCredit and Banca Intesa; Germany's Deutsche Bank; and Dutch group 
ING.
    The exercise follows the establishment of the FSB in the summer and 
is principally designed to address the issue of systemically important 
cross-border financial institutions through the setting up of 
supervisory colleges. These colleges will comprise regulators from the 
main countries in which a bank or insurer operates and will have the 
job of better coordinating the supervision of cross-border financial 
groups.
    As a spin-off from that process, the groups on the list will also 
be asked to start drawing up so-called living wills--documents 
outlining how each bank could be wound up in the event of a crisis.
    Regulators are keen to see living wills prepared for all 
systemically important financial groups, but the concept has split the 
banking world, with the more complex groups arguing that such documents 
will be almost impossible to draft without knowing the cause of any 
future crisis.
    Patrick Jenkins and Paul J. Davies, Thirty Financial Groups on 
Systemic Risk List, Financial Times (Nov. 30, 2009) (online at 
www.ft.com/cms/s/0/c680e0da-dd4e-11de-ad60-00144feabdc0.html).
    The Wall Street Journal recently reported regarding Treasury's AIG 
exit strategy:
    The bailout of AIG, owned 80% by taxpayers, is one of the most 
controversial of the government's unpopular bailouts. Yet with so much 
taxpayer money at stake, the government is asserting its ownership.
    AIG is the best example of why the government should never get 
itself in the position of even having to make these tradeoffs, said 
Anil Kashyap, an economics professor at the University of Chicago Booth 
School of Business. ``It's why you don't want the government involved 
in the private sector in the first place.''
    Deborah Solomon, AIG's Rescue Bedevils U.S., Wall Street Journal 
(Nov. 23, 2009) (online at online.wsj.com/article/
SB10001424052748703819904574554241356640428.html).
---------------------------------------------------------------------------
    Charles Calomiris, the Henry Kaufman Professor of Financial 
Institutions, Columbia Business School, stated in written 
testimony before the Panel:

          In my judgment, TARP and other interventions were not 
        designed properly, and consequently assistance programs 
        have resulted in less benefit to the economy than they 
        should have (in particular, have resulted in 
        insufficient mitigation of the credit crunch) and they 
        have cost more than they should have (in the form of 
        excessive taxpayer bearing of current losses, and 
        unnecessary moral-hazard incentive costs going 
        forward).

           *         *         *         *         *

          Government loans, guarantees and investments in 
        troubled financial institutions (which even include 
        potential capital infusions into the GSEs), not to 
        mention government purchases of assets (as originally 
        contemplated under the TARP plan, and as executed under 
        the TALF plan) have resulted in huge losses to 
        taxpayers (Fannie and Freddie and FHA subprime lending 
        will account for the lion's share of these losses, as 
        they alone will approach half a trillion dollars) and 
        remaining risks of future loss. They also have changed 
        the risk-taking behavior of financial institutions 
        going forward. If financial institutions know that the 
        government is there to share losses, risk-taking 
        becomes a one-sided bet, and so more risk is preferred 
        to less. There is substantial evidence from financial 
        history--including the behavior of troubled financial 
        institutions during the current crisis itself--that 
        this ``moral-hazard'' problem can give rise to hugely 
        loss-making, high-risk investments that are both 
        socially wasteful and an unfair burden on taxpayers. 
        \470\ (emphasis in original.)
---------------------------------------------------------------------------
    \470\ Congressional Oversight Panel, Written Testimony of Charles 
Calomiris, Henry Kaufman Professor of Financial Institutions, Columbia 
Business School, Taking Stock: Independent Views on TARP's 
Effectiveness, at 1, 3 (Nov. 19, 2009) (online at cop.senate.gov/
documents/testimony-111909-calomiris.pdf).

    In order to avoid the creation of moral hazard risks, 
Professor Calomiris advises that any government sponsored 
---------------------------------------------------------------------------
intervention incorporate the following concepts:

          (1) Assistance should be offered only under rare 
        circumstances. The purpose of assistance is not to 
        prevent the failure of one or a few institutions, per 
        se; assistance is only warranted when asymmetric 
        information about the incidence of losses in the 
        financial system leads to a general breakdown in 
        financial market buying and selling, resulting in a 
        liquidity crisis, which makes it impossible or 
        excessively difficult for otherwise solvent borrowers 
        to roll over their debts, or for banks to prove their 
        solvency to the market in order to access needed 
        capital to shore up their positions.
          (2) The design of assistance is crucial to maximizing 
        its effectiveness and minimizing its social costs; 
        particularly the allocation of the risk of loss between 
        the private sector and the government is crucial to the 
        successful design of assistance. Assistance should be 
        selective, targeted toward institutions worth saving, 
        not basket cases. Government should take a senior 
        position in loss sharing; in discount window lending 
        that is ensured through collateralization of loans; in 
        preferred stock purchases, seniority is ensured through 
        the adequacy of common equity; in other assistance 
        programs, it is achieved through the structure of 
        guarantees (e.g., their out-of-the-moneyness).
          (3) The assistance toolkit must be diverse. The 
        proper structure of assistance depends on the severity 
        of the systemic crisis being addressed; discount window 
        lending may be sufficient for dealing with liquidity 
        crises that are not very severe, bank preferred stock 
        purchases by the government may make sense for more 
        severe shocks, and other mechanisms (organized rescues 
        of failed institutions, or guarantees attached to 
        liabilities or assets) may be the only effective tools 
        to employ when the crisis is even more severe. No 
        matter which of the tools is employed, the other 
        principles (rarity, selectivity, and seniority) can and 
        should be adhered to.'' \471\ (emphasis in original).
---------------------------------------------------------------------------
    \471\ Congressional Oversight Panel, Written Testimony of Charles 
Calomiris, Henry Kaufman Professor of Financial Institutions, Columbia 
Business School, Taking Stock: Independent Views on TARP's 
Effectiveness, at 6, 7 (Nov. 19, 2009) (online at cop.senate.gov/
documents/testimony-111909-calomiris.pdf).

    Dr. Baker submitted the following testimony to the Panel 
---------------------------------------------------------------------------
regarding systemic risk:

          The crisis itself led to further concentration in the 
        financial sector, with the largest banks all having 
        been encouraged to buy up bankrupt competitors. As a 
        result, the largest banks now enjoy fairly explicit 
        ``too big to fail'' protection. There also has been 
        almost nothing done to restrain the speculative 
        practices of the major banks. Goldman Sachs, in 
        particular, stands out by virtue of the fact that it is 
        still acting as an investment bank (arguably, it can 
        better be described as a hedge fund), even though it is 
        now operating under the protective umbrella of the 
        Federal Reserve Board and the FDIC. There does not 
        appear to be any effort to restrain its speculative 
        activity.

    Simon Johnson, the Ronald Kurtz Professor of 
Entrepreneurship, MIT Sloan School of Management, stated in 
written testimony before the Panel:

          If any country pursues (a) unlimited government 
        financial support, while not implementing (b) orderly 
        resolution for troubled large institutions, and 
        refusing to take on (c) serious governance reform, it 
        would be castigated by the United States and come under 
        pressure from the IMF. At the heart of every crisis is 
        a political problem--powerful people, and the firms 
        they control, have gotten out of hand. Unless this is 
        dealt with as part of the stabilization program, all 
        the government has done is provide an unconditional 
        bailout. That may be consistent with a short-term 
        recovery, but it creates major problems for the 
        sustainability of the recovery and for the medium-term. 
        Serious countries do not do this. Seen in this context, 
        TARP has been badly mismanaged.

           *         *         *         *         *

          The implementation of TARP exacerbated the perception 
        (and the reality) that some financial institutions are 
        ``Too Big to Fail.'' This lowers their funding costs, 
        enabling them to borrow more and to take more risk.

           *         *         *         *         *

          The administration as much as said that the major 
        banks will all pass the stress tests, making it appear 
        that the results were foreordained. Essentially, this 
        was used to signal that the government stood behind the 
        19 banks in the stress test and would not allow any of 
        them to fail. Effectively, the government signaled 
        which banks were Too Big To Fail.\472\
---------------------------------------------------------------------------
    \472\ Congressional Oversight Panel, Written Testimony of Professor 
Simon Johnson, Ronald Kurtz Professor of Entrepreneurship, MIT Sloan 
School of Management, Taking Stock: Independent Views on TARP's 
Effectiveness, at 2, 3, 7 (Nov. 19, 2009) (online at cop.senate.gov/
documents/testimony-111909-johnson.pdf).

    Viral Acharya and Matthew Richardson, Professors of 
Finance, New York University Stern School of Business, argue in 
their written submission to the Panel that the CPP did not 
include ``sufficient strings attached,'' and as a result 
created the expectation of ``unconditional government support'' 
in the future. Moving forward, Professors Acharya and 
Richardson highlight the risks of moral hazard, noting ``it is 
not just about fighting the last war, but also about the next 
one.'' \473\
---------------------------------------------------------------------------
    \473\ Viral Acharya and Matthew Richardson, Letter to Panel Staff 
(received Nov. 6, 2009).
---------------------------------------------------------------------------
    Paul Volcker, former Chairman of the Federal Reserve, 1979-
1987, and member of the Economic Recovery Advisory Board, 
states in his written submission to the Panel that Treasury 
``appears to have done a good job in structuring their capital 
investments,'' but questions the extent to which the program is 
currently having a positive impact on the flow of credit. 
Chairman Volcker also notes the problems associated with moral 
hazard, concluding that reform is necessary.\474\
---------------------------------------------------------------------------
    \474\ Paul A. Volcker, Letter to Panel Staff (Nov. 6, 2009).
---------------------------------------------------------------------------
    William Poole, Senior Fellow, the Cato Institute, argues in 
his written submission to the Panel that the core issue in the 
financial system today is the subsidy to large banks created by 
the implicit federal guarantee of bank liability. Citing a 
recent paper by Dean Baker and Travis McArthur, Mr. Poole notes 
that the implicit subsidy may be as large as $34 billion per 
year. In addition to this subsidy, the funding advantage 
enjoyed by large banks permits them to grow larger, increasing 
the risks posed by banks that are too big to fail. Poole also 
notes that efforts to control executive compensation are 
``unwise and will ultimately be ineffective.'' \475\
---------------------------------------------------------------------------
    \475\ William Poole, Letter to Panel Staff (Oct. 23, 2009).
---------------------------------------------------------------------------
    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.'' \476\ I am concerned that the TARP is 
again inflating the problem of moral hazard by providing 
government funded 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.
---------------------------------------------------------------------------
    \476\ SIGTARP, Quarterly Report to Congress, at 4 (Oct. 21, 2009) 
(online at sigtarp.gov/reports/congress/2009/
October2009_Quarterly_Report_to_Congress.pdf).
---------------------------------------------------------------------------
    The SIGTARP report also discussed the cost of the TARP to 
the government's credibility. It claims, ``Unfortunately, 
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.'' \477\ 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 diminished promise that such funds will 
be fully recouped.\478\
---------------------------------------------------------------------------
    \477\ Id.
    \478\  There are three recent examples of the problems that may 
arise with respect to government financed investments in the private 
sector.
    (i) A recent GAO report on the Chrysler and GM bailouts 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.

    Government Accountability Office, Troubled Asset Relief Program: 
Continued Stewardship Needed as Treasury Develops Strategies for 
Monitoring and Divesting Financial Interests in Chrysler and GM (Nov. 
2, 2009) (online at www.gao.gov/new.items/d10151.pdf).
    (ii) Thomas E. Lauria, the Global Practice Head of the Financial 
Restructuring and Insolvency Group at White & Case LLP, represented a 
group of senior secured creditors, including the Perella Weinberg 
Xerion Fund (``Perella Weinberg''), during the Chrysler bankruptcy 
proceedings. On May 3, the New York Times reported:

    In an interview with a Detroit radio host, Frank Beckmann, Mr. 
Lauria said that Perella Weinberg `was directly threatened by the White 
House and in essence compelled to withdraw its opposition to the deal 
under threat that the full force of the White House press corps would 
destroy its reputation if it continued to fight.'
    In a follow-up interview with ABC News's Jake Tapper, he identified 
Mr. [Steven] Rattner, the head of the auto task force, as having told a 
Perella Weinberg official that the White House `would embarrass the 
firm.'

    Michael J. de la Merced, White House Denies Claims of Threat to 
Chrysler Creditor, New York Times (May 3, 2009) (online at 
dealbook.blogs.nytimes.com/2009/05/03white-house-perella-weinberg-deny-
claims-of-threat-to-firm/). See also News/Talk WJR 760 am, Frank Talks 
With Tom Lauria, Who Represents a Group of Lenders That Object to the 
Chrysler Sale (May 1, 2009) (online at www.760wjr.com/
article.asp?id=1301727&spid=6525).
    For a further discussion of the interactions between Mr. Rattner 
and Perella Weinberg see William D. Cohan, The Final Days of Merrill 
Lynch, The Atlantic (Sept. 2009) (online at www.theatlantic.com/doc/
200909/bank-of-america) and Steve Fishman, Exit the Czar, New York 
Magazine (Aug. 2, 2009) (online at nymag.com/news/features/58193/).
    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 regards 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.
    See my dissent from the September report on the auto bailouts. 
Representatives Jeb Hensarling, Additional Views to Congressional 
Oversight Panel, September Oversight Report: The Use of TARP Funds in 
the Support and Reorganization of the Domestic Automotive Industry 
(Sept. 9, 2009) (online at cop.senate.gov/documents/cop-090909-report-
additionalviews.pdf).
    (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.

    Neil King, Jr., Politiciand Butt In at Bailed-Out GM, Wall Street 
Journal (Oct. 29, 2009) (online at online.wsj.com/article/
SB125677552001414699.html#mod=todays--us--page--one).
---------------------------------------------------------------------------
    In my view and as supported by the above cited economists, 
the TARP has created substantial and needless implicit 
guarantee and moral hazard risks. In order to articulate these 
risks I offer the following analysis from the Panel's November 
report on the government sponsored guarantee programs which 
also applies to the broader TARP:

          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 
        [government sponsored guarantee programs] 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.\479\
---------------------------------------------------------------------------
    \479\ Board of Governors of the Federal Reserve System, Speech: 
Federal Reserve Board Governor Daniel K. Tarullo at the Exchequer Club, 
Washington D.C., 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.

5. Political Risk

    In addition to the implicit guarantee and moral hazard 
issues discussed above, I am troubled that the implementation 
of the TARP has caused the private sector to incorporate the 
concept of ``political risk'' into its analysis before engaging 
in any direct or indirect transaction with the United States 
government. While private sector participants are accustomed to 
operating within a complex legal and regulatory environment, 
many are unfamiliar with the emerging trend of public sector 
participants to bend or restructure rules and regulations so as 
to promote their economic, social and political agenda as was 
clearly evident in the Chrysler and GM bankruptcies (described 
in more detail below). The realm of political risk is generally 
reserved for business transactions undertaken in developing 
countries and not interactions between private sector 
participants and the United States government. Following the 
Chrysler and GM decisions it is possible that private sector 
participants may begin to view interactions with the United 
States government through the same jaundiced eye they are 
accustomed to directing toward third-world governments. It's 
disingenuous for the Administration to champion transparency 
and accountability for the private sector but neglect such 
standards when conducting its own affairs. How is it possible 
for directors and managers of private sector enterprises to 
discharge their fiduciary duties and responsibilities when 
policy makers legislate and regulate without respect for 
precedent and without thoughtfully vetting the unintended 
consequences of their actions?

6. Transparency and Accountability

    Although improvements have been made, Treasury has often 
been less than forthcoming regarding matters of transparency 
and accountability. I agree with Alex Pollock, a Resident 
Fellow with the American Enterprise Institute, that Treasury 
should provide detailed financial statements to the taxpayers 
and operate its TARP investments in a businesslike manner. Mr. 
Pollock provided the following testimony to the Panel:

          The principal goal should be to run [TARP] in a 
        businesslike manner to return as much of the 
        involuntary investment as possible to its owners, along 
        with a reasonable overall profit. The predominant 
        discipline should be that of investment management, not 
        politics.

           *         *         *         *         *

          In my view, TARP should have full, regular, audited 
        financial statements, which depict its financial status 
        and results, exactly as if it were a corporation. There 
        should be a balance sheet, with all assets, 
        liabilities, accumulated profits or losses, and 
        contingencies. There should be a profit and loss 
        statement and a statement of cash flows. The expenses 
        should include the interest cost of the Treasury debt 
        required to fund its disbursements, and like every 
        financial operation, TARP management should be 
        estimating probable losses on investments and reserving 
        accordingly.
          Had TARP been organized as a corporation, it would 
        have facilitated this accountability. But even with its 
        status as a ``program'', we should insist on 
        appropriate and regular accounting. Everybody must 
        agree with this basic requirement for financial 
        responsibility.
          Moreover, TARP's financial statements should include 
        line of business reporting. Logical separate profit and 
        loss reporting units would include: the Capital 
        Purchase Program; automotive program; Citigroup; AIG; 
        mortgage modification (of course a total loss from the 
        TARP point of view); and small business and consumer 
        programs.\480\
---------------------------------------------------------------------------
    \480\ Congressional Oversight Panel, Written Testimony of American 
Enterprise Institute resident fellow Alex J. Pollock, Taking Stock: 
Independent Views on TARP's Effectiveness (Nov. 19, 2009) (online at 
aei.org/docLib/Pollock-Testimony -11192009.pdf).
---------------------------------------------------------------------------

7. Financial Stability v. Economic Stimulus

    The 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.'' 
In testimony on the still-nascent TARP, former Treasury 
Secretary Henry Paulson reminded Congress, ``[t]he rescue 
package was not intended to be an economic stimulus or an 
economic recovery package; it was intended to shore up the 
foundation of our economy by stabilizing the financial system. 
. .'' \481\ Regrettably, the 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 the TARP is not being used 
for ``economic stimulus,'' then how else is it possible to 
explain the $81 billion bankruptcy restructuring of Chrysler 
and GM, neither of which qualifies as a ``financial 
institution'' as required under EESA? 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''? No transparent 
end-game is in sight for the TARP's commitment to support 
Chrysler, GM and GMAC.
---------------------------------------------------------------------------
    \481\ U.S. Department of the Treasury, Testimony of Treasury 
Secretary Paulson before the House Financial Services Committee (Nov. 
18, 2008) (online at www.treasury.gov/press/releases/hp1279.htm).
---------------------------------------------------------------------------

                 D. Chrysler and GM Bankruptcies \482\

---------------------------------------------------------------------------
    \482\ In this section I borrow extensively from my dissent to the 
Panel's September report on the auto bailouts. Representative Jeb 
Hensarling, Additional Views to Congressional Oversight Panel, 
September Oversight Report: The Use of TARP Funds in the Support and 
Reorganization of the Domestic Automotive Industry (Sept. 9, 2009) 
(online at cop.senate.gov/documents/cop-090909-report-
additionalviews.pdf).
---------------------------------------------------------------------------
    The bankruptcy restructurings of Chrysler and GM and the 
recapitalization of GMAC were financed with TARP proceeds. 
These cases serve as the poster child of why the TARP should 
end on December 31, 2009. If the TARP is extended to October 
31, 2010, I fear the Administration will continue to employ 
taxpayer resources as a revolving bailout fund to promote its 
economic, social and political agenda as was clearly evident in 
the Chrysler, GM and GMAC bankruptcy restructurings. These 
restructurings failed each of the standards noted above by 
exacerbating implicit guarantee and moral hazard risks, 
incorporating a heavy dose of political risk into private-
public sector interactions, offering little in the way of 
taxpayer protection, transparency and accountability, and using 
funds dedicated to financial stability for economic 
stimulus.\483\
---------------------------------------------------------------------------
    \483\ Edward Niedermeyer, Taking Taxpayers for a Ride, New York 
Times (Nov. 22, 2009) at www.nytimes.com/2009/11/23/opinion/
23niedermayer.html?_r=1&sq=taking taxpayers for a ride niedermeyer 
november22&st=cse&adxnnl=1&scp=1&adxnnlx=1259856084-
RhEqA9+sraJEUegFNAcvew).
---------------------------------------------------------------------------

1. Policy Issues and Fundamental Questions Arising from the Use of TARP 
        Proceeds in the Chrysler and GM Bankruptcies

    Over the past year taxpayers have involuntarily 
``invested'' over $81 billion \484\ in Chrysler, GM, GMAC and 
the other auto programs. According to a recent estimate from 
the CBO, the investment of TARP funds in the auto industry is 
expected to add $40 billion more to the deficit than CBO 
calculated just five months earlier in March 2009.\485\ A 
reasonable interpretation of such an estimate provides that the 
American taxpayers may suffer a loss of over 50 percent of the 
TARP funds invested in Chrysler, GM and the other auto 
programs.\486\
---------------------------------------------------------------------------
    \484\ According to the Panel's December report, $2.2 billion of the 
funds advanced under the Auto Industry Financing Program have been 
repaid. See Figure 25 of this Report, supra.
    \485\ Congressional Budget Office, The Budget and Economic Outlook: 
An Update August 2009, at 55-56 (online at www.cbo.gov/ftpdocs/105xx/
doc10521/08-25-BudgetUpdate.pdf) (accessed Dec. 8, 2009). The report 
provides in part:

    The improvement in market conditions results in a reduction in the 
subsidy rate associated with the Capital Purchase Program (CPP)--a 
major initiative through which the government purchases preferred stock 
and warrants (for the future purchase of common stock) from banks. CBO 
has dropped the projected subsidy for the remaining investments in that 
program from 35 percent in the March baseline to 13 percent. The 
decrease in the estimated CPP subsidy cost also reflects banks' 
repurchase of $70 billion of preferred stock through June. Similarly, 
the estimated subsidy cost for other investments in preferred stock 
(for example, that of American International Group) has also been 
reduced. Partially offsetting those reductions in projected costs is 
the expansion of assistance to the automotive industry; CBO has raised 
its estimate of the costs of that assistance by nearly $40 billion 
relative to the March baseline. (emphasis added).

    In addition, our country faces a staggering deficit of $1.6 
trillion in 2009, and a debt that more-than-triples in ten years.
    \486\ How is it possible that with the economic challenges facing 
our nation the Administration chose to allocate such a significant 
share of the TARP to such questionable investments? How much additional 
funding will be provided by the Administration for Chrysler and GM? 
What is the strategy and timeline for recouping taxpayer dollars? See 
Keith Bradsher, G.M. is Said to Agree to Sell Stakes to China Partner, 
New York Times (Dec. 3, 2009) (online at www.nytimes.com/2009/12/04/
business/global/04gm.html?hp). What are the metrics for determining 
whether or not Chrysler and GM are ``successful,'' and will the 
Administration continue to provide assistance until this is attained?
---------------------------------------------------------------------------
    By making such an unprecedented investment in Chrysler and 
GM \487\ the Administration by definition chose not to assist 
other Americans who are in need. With the economic suffering 
the American taxpayers have endured during the past two years 
one wonders why Chrysler and GM merited such generosity to the 
exclusion of other taxpayers. Why, indeed, did the United 
States government choose to reward two companies that have been 
arguably mismanaged for many years at the expense of other hard 
working taxpayers? More poetically, The New York Times on July 
25 asked: ``Why, after all, should the automakers receive the 
equivalent of a Technicolor dreamcoat, giving them favorite-son 
status, when other industries, like airlines and retailers, 
also have suffered from the national recession?'' More bluntly, 
the September 2009 issue of The Atlantic simply cut to the 
bottom line: ``Essentially, the government was engineering a 
transfer of wealth from TARP bank shareholders to auto workers, 
and pressuring other creditors to go along.'' \488\ The 
Chrysler and GM reorganizations represent a sad day for the 
rule of law, the sanctity of commercial law principles and 
contractual rights, long term economic growth, and the ideal 
that the United States government should not pick winners and 
losers.
---------------------------------------------------------------------------
    \487\ In the bankruptcy proceedings for Chrysler and GM, (i) ``Old 
Chrysler'' sold substantially all of its assets to ``New Chrysler'' and 
(ii) ``Old GM'' sold substantially all of its assets to ``New GM,'' 
each pursuant to Section 363 of the United States Bankruptcy Code. For 
purposes of simplicity, I generally refer to these entities as 
``Chrysler'' or ``GM,'' but occasionally employ other terms as 
appropriate.
    \488\ William D. Cohan, The Final Days of Merrill Lynch, The 
Atlantic (Sept. 2009) (online at www.theatlantic.com/doc/200909/bank-
of-america).
---------------------------------------------------------------------------
    Given the unorthodox reordering of the rights of the 
Chrysler and GM creditors, a fundamental question arises as to 
whether the Administration directed that TARP funds be used to 
advance its economic, social and political objectives rather 
than to stabilize the American economy as required by EESA. It 
has long been my view that the United States government should 
not engage in the business of picking winners and losers and 
certainly should not allocate its limited resources to favor 
one group of taxpayers over another. Following the Chrysler and 
GM bankruptcies one has to question what's next in the 
Administration's playbook--a bailout of the airline industry 
and its unionized workforce? What about Starbucks?

2. Transfer of TARP Proceeds and Retirement Saving of Indiana School 
        Teachers and Police Officers to the UAW and the VEBAs

    On a ``before'' v. ``after'' basis the Chrysler and GM 
bankruptcy cases make little legal or economic sense.\489\ How 
is it possible that the Chrysler and GM VEBAs \490\--unsecured 
creditors--received a greater allocation of proceeds than the 
Chrysler senior secured creditors or the GM bondholders? In 
other words, why did the United States government spend tens of 
billions of dollars of taxpayer money to bailout employees and 
retirees of the UAW to the detriment of other non-UAW employees 
and retirees--such as retired school teachers and police 
officers from the State of Indiana \491\--whose pension funds 
invested in Chrysler and GM indebtedness? \492\
---------------------------------------------------------------------------
    \489\ The Chrysler and GM bankruptcy rearranged the rights of the 
creditors and equity holders as follows: Chrysler. Pursuant to the 
Chrysler bankruptcy, the equity of New Chrysler was allocated as 
follows:

    (i) United States government (9.846 percent initially, but may 
decrease to 8 percent),
    (ii) Canadian government (2.462 percent initially, but may decrease 
to 2 percent),
    (ii) Fiat (20 percent initially, but may increase to 35 percent), 
and
    (iii) UAW (comprising current employee contracts and a VEBA for 
retired employees) (67.692 percent, but may decrease to 55 percent).

    The adjustments noted above permit Fiat to increase its ownership 
interest from 20 percent to 35 percent by achieving specific 
performance goals relating to technology, ecology and distribution 
designed to promote improved fuel efficiency, revenue growth from 
foreign sales and US based production.
    Some, but not all, of the claims of the senior secured creditors 
were of a higher bankruptcy priority than the claims of the UAW/VEBA.
    The Chrysler senior secured creditors received 29 cents on the 
dollar ($2 billion cash for $6.9 billion of indebtedness).
    The UAW/VEBA, an unsecured creditor, received (x) 43 cents on the 
dollar ($4.5 billion note from New Chrysler for $10.5 billion of 
claims) and (y) a 67.692 percent (which may decrease to 55 percent) 
equity ownership interest in New Chrysler.
    GM. Pursuant to the GM bankruptcy, the equity of New GM was 
allocated as follows:

    (i) United States government (60.8 percent),
    (ii) Canadian government (11.7 percent),
    (iii) UAW (comprising current employee contracts and a VEBA for 
retired employees) (17.5 percent), and
    (iv) GM bondholders (10 percent).

    The bankruptcy claims of the UAW/VEBA and the GM bondholders were 
of the same bankruptcy priority.
    The equity interest of the UAW/VEBA and the GM bondholders in New 
GM may increase (with an offsetting reduction in each government's 
equity share) to up to 20 percent and 25 percent, respectively, upon 
the satisfaction of specific conditions. It is important to note, 
however, the warrants received by the UAW/VEBA and the GM bondholders 
are out of the money and it's possible they will not be exercised. As 
such, it seems likely that the UAW/VEBA and the GM bondholders will 
hold 17.5 percent and 10 percent, respectively, of the equity of New 
GM.
    The GM bondholders exchanged $27 billion in unsecured indebtedness 
for a 10 percent (which may increase to 25 percent) common equity 
interest in New GM, while the UAW/VEBA exchanged $20 billion in claims 
for a 17.5 percent (which may increase to 20 percent) common equity 
interest in New GM and $9 billion in preferred stock and notes in New 
GM.
    \490\ The Chrysler and GM VEBAs (voluntary employee benefit 
associations) administer and fund the health and retirement plans of 
Chrysler and GM retirees.
    \491\ The Chrysler senior secured debt and the GM bonds were held 
by pension funds (for the benefit of retirees such as the Indiana 
school teachers and police officers), individuals (including the 
retirees who have contacted my office to ask why they lost their 
savings but UAW employees benefited) as well as different types of 
business entities.
    \492\ If you trace the funds, TARP money was employed by New 
Chrysler and New GM to purchase assets of the old auto makers, yet a 
substantial portion of the equity in the new entities was transferred 
to the VEBAs and, thus, not retained for the benefit of the American 
taxpayers (who funded the TARP) or shared with other creditors of Old 
Chrysler and Old GM. Accordingly, it's hardly a stretch to conclude 
that TARP funds were transferred to the UAW and the VEBAs after being 
funneled through New Chrysler and New GM. In addition, New Chrysler and 
New GM entered into promissory notes and other contractual arrangements 
for the benefit of the VEBAs, but not for the benefit of the other 
creditors of Old Chrysler and Old GM. Why did the United States 
government--the controlling shareholder of New Chrysler and New GM--
direct New Chrysler and New GM to make an exclusive gift of taxpayer 
funds to the VEBAs? Why didn't New Chrysler and New GM transfer more of 
their equity interests to the creditors of Old Chrysler and Old GM? Why 
were Indiana school teachers and police officers and other investors in 
the Chrysler senior secured indebtedness and the GM bonds in effect 
forced by the Administration to transfer a portion of their claims 
against Chrysler and GM, respectively, to the UAW and the VEBAs? That 
is, why did the Administration orchestrate two bankruptcy plans whereby 
one group of employees and retirees was preferred to another?
---------------------------------------------------------------------------
    What message do the Chrysler and GM holdings send to non-
UAW employees whose pension funds invested in Chrysler and GM 
indebtedness--you lose part of your retirement savings because 
your pension fund does not have the special political 
relationships of the UAW? What message do the Chrysler and GM 
bankruptcies send to the financial markets--contractual rights 
of investors may be ignored when dealing with the United States 
government?
    In written testimony submitted to the Panel, Barry E. 
Adler, professor of law and business at New York University, 
noted:

          There are at least two negative consequences from the 
        disregard of creditor rights. First, at the time of the 
        deviation from contractual entitlement, there is an 
        inequitable distribution of assets. Take the Chrysler 
        case itself, where the approved transaction well-
        treated the retirement funds of the UAW. If such 
        treatment deprived the secured creditors of their due, 
        one might well wonder why the UAW funds should be 
        favored over other retirement funds, those that 
        invested in Chrysler secured bonds. Second, and at 
        least as importantly, when the bankruptcy process 
        deprives a creditor of its promised return, the 
        prospect of a debtor's failure looms larger in the eyes 
        of future lenders to future firms. As a result, given 
        the holding in Chrysler, and the essentially identical 
        holding in the General Motors case, discussed next, one 
        might expect future firms to face a higher cost of 
        capital, thus dampening economic development at a time 
        when the country can least well afford impediments to 
        growth.\493\
---------------------------------------------------------------------------
    \493\ Congressional Oversight Panel, Written Testimony of Barry E. 
Adler, Field Hearing on the Auto Industry (July 27, 2009) (online at 
cop.senate.gov/documents/testimony-072709-adler.pdf).

    In an article analyzing the Chrysler and GM bankruptcies, 
Mark J. Roe and David A. Skeel, professors of law at Harvard 
University and the University of Pennsylvania, respectively, 
---------------------------------------------------------------------------
noted:

          Warren Buffett worried in the midst of the 
        reorganization that there would be ``a whole lot of 
        consequences'' if the government's Chrysler plan 
        emerged as planned, which it did. If priorities are 
        tossed aside, as he implied they were, ``that's going 
        to disrupt lending practices in the future.'' ``If we 
        want to encourage lending in this country,'' Buffett 
        added, ``we don't want to say to somebody who lends and 
        gets a secured position that the secured position 
        doesn't mean anything.''\494\
---------------------------------------------------------------------------
    \494\ Mark Roe and David Skeel, Assessing the Chrysler Bankruptcy 
(Aug. 12, 2009) (online atssrn.com/abstract=1426530).

    In an op-ed in The Wall Street Journal, Todd J. Zywicki, 
---------------------------------------------------------------------------
professor of law at George Mason University, noted:

          By stepping over the bright line between the rule of 
        law and the arbitrary behavior of men, President Obama 
        may have created a thousand new failing businesses. 
        That is, businesses that might have received financing 
        before but that now will not, since lenders face the 
        potential of future government confiscation. In other 
        words, Mr. Obama may have helped save the jobs of 
        thousands of union workers whose dues, in part, 
        engineered his election. But what about the untold 
        number of job losses in the future caused by trampling 
        the sanctity of contracts today?\495\
---------------------------------------------------------------------------
    \495\ Todd Zywicki, Chrysler and the Rule of Law, Wall Street 
Journal (May 13, 2009) (online at online.wsj.com/article/
SB124217356836613091.html).

    In the September 2009 issue of The Atlantic, William D. 
---------------------------------------------------------------------------
Cohan notes:

          ``The rules as to how the government will act are not 
        what we learned,'' explained Gary Parr, the deputy 
        chairman of Lazard and one of the leading mergers-and-
        acquisitions advisers to financial institutions. ``In 
        the last 12 months, new precedents have been set 
        weekly. The old rules often don't apply as much 
        anymore.'' He said the recent examples of the 
        government's aggression are ``a really big deal,'' but 
        adds, ``I am not sure it is going to last a long time. 
        I sure hope not. I can't imagine the markets will 
        function properly if you are always wondering if the 
        government is going to step in and change the 
        game.''\496\
---------------------------------------------------------------------------
    \496\ William D. Cohan, The Final Days of Merrill Lynch, The 
Atlantic (Sept. 2009) (online at www.theatlantic.com/doc/200909/bank-
of-america).

    Richard A. Epstein, the James Parker Hall Distinguished 
Service Professor of Law, The University of Chicago, the Peter 
and Kirsten Bedford Senior Fellow, The Hoover Institution, and 
a visiting law professor at New York University Law School, 
offered the following analysis in the May 12, 2009 issue of 
---------------------------------------------------------------------------
Forbes:

          The proposed bankruptcy of the now defunct Chrysler 
        Corp. is the culmination of serious policy missteps by 
        the Bush and Obama administrations. To be sure, the 
        long overdue Chrysler bankruptcy is a welcomed turn of 
        events. But the heavy-handed meddling of the Obama 
        administration that forced secured creditors to the 
        brink is not.
          A sound bankruptcy proceeding should do two things: 
        productively redeploy the assets of the bankrupt firm 
        and correctly prioritize various claims against the 
        bankrupt entity. The Chrysler bankruptcy fails on both 
        counts.

           *         *         *         *         *

          In a just world, that ignominious fate would await 
        the flawed Chrysler reorganization, which violates 
        these well-established norms, given the nonstop 
        political interference of the Obama administration, 
        which put its muscle behind the beleaguered United Auto 
        Workers. Its onerous collective bargaining agreements 
        are off-limits to the reorganization provisions, 
        thereby preserving the current labor rigidities in a 
        down market.
          Equally bad, the established priorities of creditor 
        claims outside bankruptcy have been cast aside in this 
        bankruptcy case as the unsecured claims of the union 
        health pension plan have received a better deal than 
        the secured claims of various bond holders, some of 
        which may represent pension plans of their own.
          President Obama--no bankruptcy lawyer--twisted the 
        arms of the banks that have received TARP money to 
        waive their priority, which is yet another reason why a 
        government ownership position in banks is incompatible 
        with its regulatory role. Yet the president brands the 
        non-TARP lenders that have banded together to fight 
        this bogus reorganization as ``holdouts'' and 
        ``speculators.''
          Both charges are misinformed at best. A holdout 
        situation arises when one party seeks to get a 
        disproportionate return on the sale of an asset for 
        which it has little value in use. Thus the owner of a 
        small plot of land could hold out for a fortune if his 
        land is the last piece needed to assemble a large 
        parcel of land. But the entire structure of bankruptcy 
        eliminates the holdout position of all creditors, 
        secured and unsecured alike, by allowing the court to 
        ``cram'' the reorganization down their throats so long 
        as it preserves the appropriate priorities among 
        creditors and offers the secured creditors a stake in 
        the reorganized business equal to the value of their 
        claims. Ironically, Obama's Orwellian interventions 
        have allowed unsecured union creditors to hold out for 
        more than they are entitled to.
          His charge of ``speculation'' is every bit as 
        fatuous. Speculators (who often perform a useful 
        economic function) buy high-risk assets at low prices 
        in the hope that the market will turn in their favor. 
        By injecting unneeded uncertainty into the picture, 
        Obama has created the need for a secondary market in 
        which nervous secured creditors, facing demotion, sell 
        out to speculators who are better able to handle that 
        newly created sovereign risk. He calls on citizens to 
        buy Chrysler products, but patriotic Americans will 
        choose to go to Ford, whose own self-help efforts have 
        been hurt by the Chrysler and GM bailouts.
          Sadly, long ago Chrysler and GM should have been 
        allowed to bleed to death under ordinary bankruptcy 
        rules, without government subsidy or penalty. 
        Libertarians have often remarked on these twin dangers 
        in isolation. The Chrysler fiasco confirms their deadly 
        synergistic effect.\497\
---------------------------------------------------------------------------
    \497\ Richard Epstein, The Deadly Sins Of The Chrysler Bankruptcy, 
Forbes (May 12, 2009) (online at www.forbes.com/2009/05/11/chrysler-
bankruptcy-mortgage-opinions-columnists-epstein.html).

    In his testimony before the Judiciary Committee of the 
United States House of Representatives, Andrew M. Grossman, 
---------------------------------------------------------------------------
senior legal policy analyst, The Heritage Foundation, stated:

          Also detrimental to General Motors and Chrysler is 
        the difficulty that they will have accessing capital 
        and debt markets. Lenders know how to deal with 
        bankruptcy--it's a well understood risk of doing 
        business. But the tough measures employed by the Obama 
        Administration to cram down debt on behalf of the 
        automakers were unprecedented and will naturally make 
        lenders reluctant to do business with these companies, 
        for fear they could suffer the same fate. Even secured 
        and senior creditors, those who forgo higher interest 
        rates to protect themselves against risks, suffered 
        large, unexpected losses. So nothing that either 
        company can offer, no special status or security 
        measure, can fully assuage lenders' fears that, in an 
        economic downturn, they could be forced to accept far 
        less than the true value of their holdings. At best, if 
        General Motors and Chrysler have access to debt markets 
        at all, they will have to pay dearly for the privilege. 
        At worst, even high rates and tough covenants will not 
        be enough to attract interest.

           *         *         *         *         *

          The Obama Administration's transparent favoritism 
        toward its political supporters in the United Auto 
        Workers Union may lead other unions to demand the same: 
        hefty payouts and ownership stakes in exchange for 
        halfhearted concessions. Lenders know now that the 
        Administration is unable to resist such entreaties. As 
        one hedge fund manager observed, ``The obvious [lesson] 
        is: Don't lend to a company with big legacy 
        liabilities, or demand a much higher rate of interest 
        because you may be leapfrogged in bankruptcy.''
          Perhaps the most affected will be faltering 
        corporations and those undergoing reorganization--that 
        is, the enterprises with the greatest need for capital. 
        Lending money to a nearly insolvent company is risky 
        enough, but that risk is magnified when bankruptcy 
        ceases to recognize priorities or recognize valid 
        liens. With private capital unavailable, larger 
        corporations in dire straits will turn to the 
        government for aid--more bailouts--or collapse due to 
        undercapitalization, at an enormous cost to the 
        economy.

           *         *         *         *         *

          Financial institutions--enterprises that the federal 
        government has already spent billions to strengthen--
        will also be affected. Many hold debt in domestic 
        corporations that could be subject to government 
        rescue, rendering their obligations uncertain. It is 
        that uncertainty which transforms loans into 
        impossible-to-value toxic assets and blows holes in 
        balance sheets across the economy.
          Finally, there are the investors, from pension funds 
        and school endowments to families building nest eggs 
        for their future. General Motors bonds, like the debt 
        of other long-lived corporations, has been long 
        regarded as a refuge from the turmoil of equity 
        markets. The once-safe investment held directly by 
        millions of individuals and indirectly, through funds 
        and pensions, by far more, are now at risk, which will 
        be reflected in those assets' values.\498\
---------------------------------------------------------------------------
    \498\ Andrew M. Grossman, Bailouts, Abusive Bankruptcies, And the 
Rule of Law, Testimony before the Judiciary Committee of the United 
States House of Representatives (May 21, 2009) (online at 
www.heritage.org/Research/Economy/tst052209a.cfm).
---------------------------------------------------------------------------

3. The Use of TARP Funds in the Chrysler and GM Bankruptcies 

    Section 101(a)(1) of the EESA states that:

          The Secretary [of the Treasury] is authorized to . . 
        . purchase, and to make and fund commitments to 
        purchase, troubled assets from any financial 
        institution, on such terms and conditions as are 
        determined by the Secretary, and in accordance with 
        this Act and the policies and procedures development 
        and published by the Secretary. (emphasis added).

    A plain reading of the statute would necessarily preclude 
the employment of TARP funds for the benefit of the auto 
industry because, among other reasons, neither Chrysler nor GM 
qualifies as a ``financial institution.'' If Chrysler and GM 
are somehow deemed to qualify as ``financial institutions,'' 
then what business enterprise will fail to so qualify? If 
Congress had intended for the TARP to cover all business 
enterprises it would not have incorporated such a restrictive 
term as ``financial institution'' into EESA.
    Further, a funding bill specifically aimed at assisting the 
auto industry was not approved by Congress. Nevertheless, the 
Bush Administration extended credit to Chrysler and GM and the 
Obama Administration orchestrated the Chrysler and GM 
bankruptcies which resulted in an investment of over $81 
billion in the auto industry.
    Since the authority for such an investment remains unclear, 
I requested that the Administration provide the Panel with a 
formal written legal opinion justifying: \499\
---------------------------------------------------------------------------
    \499\ In a written response to the Panel the Administration stated:

    The Treasury described the authority to use TARP funds to finance 
the old Chrysler and GM in bankruptcy court filings made on its behalf 
by the Department of Justice, specifically in the Statement of the 
United States of America Upon The Commencement of General Motors 
Corporation's Chapter 11 Case filed June 10, 2009, a copy of which has 
been provided to the Congressional Oversight Panel. In Judge Gerber's 
final sale order in the GM bankruptcy case dated July 5, 2009, also 
provided to the Congressional Oversight Panel, he wrote:

    The U.S. Treasury and Export Development Canada (``EDC''), on 
behalf of the Governments of Canada and Ontario, have extended credit 
to, and acquired a security interest in, the assets of the Debtors as 
set forth in the DIP Facility and as authorized by the interim and 
final orders approving the DIP Facility (Docket Nos. 292 and 2529, 
respectively). Before entering into the DIP Facility and the Loan and 
Security Agreement, dated as of December 31, 2008 (the ``Existing UST 
Loan Agreement''), the Secretary of the Treasury, in consultation with 
the Chairman of the Board of Governors of the Federal Reserve System 
and as communicated to the appropriate committees of Congress, found 
that the extension of credit to the Debtors is ``necessary to promote 
financial market stability,'' and is a valid use of funds pursuant to 
the statutory authority granted to the Secretary of the Treasury under 
the Emergency Economic Stabilization Act of 2008, 12 U.S.C. 
Sec. Sec. 5201 et seq. (``EESA''). The U.S. Treasury's extension of 
credit to, and resulting security interest in, the Debtors, as set 
forth in the DIP Facility and the Existing UST Loan Agreement and as 
authorized in the interim and final orders approving the DIP Facility, 
is a valid use of funds pursuant to EESA.

    The rationale and determination of the ability to use TARP funds 
applies equally to the financing provided to the new Chrysler. There 
was no new financing provided to New GM. Instead, cash flowed from old 
GM to new GM as part of the asset sale, and new GM assumed a portion of 
the loan that Treasury had made to old GM.
    The interests received by other stakeholders of Chrysler and GM 
including the UAW/VEBAs were a result of negotiations between all 
stakeholders as described in detail by myself and Harry Wilson in our 
depositions in the bankruptcy cases, transcripts of which have been 
provided to the Congressional Oversight Panel.

    I find the response unhelpful and ask the Administration to provide 
a formal written legal opinion supporting its position. Since Congress 
specifically rejected the bailout of Chrysler and GM, under what theory 
and precedent did the Executive unilaterally invest $81 billion in 
these non-financial institutions?
---------------------------------------------------------------------------
          (i) the use of TARP funds to support Chrysler and GM 
        prior to their bankruptcies;
          (ii) the use of TARP funds in the Chrysler and GM 
        bankruptcies;
          (iii) the transfer of equity interests in New 
        Chrysler and New GM to the UAW/VEBAs; and
          (iv) the delivery of notes and other credit support 
        by New Chrysler and New GM for the benefit of the UAW/
        VEBAs.\500\
---------------------------------------------------------------------------
    \500\ The promissory notes issued to the UAW/VEBAs are senior to 
the equity issued to the United States government. Since the government 
controlled New Chrysler and New GM at the time the notes were issued, 
it's apparent that the government agreed to subordinate the TARP claims 
held by the American taxpayers to the claims held by the UAW/VEBAs. 
What was the purpose of the subordination except perhaps to prefer the 
claims of a favored class over the claims of the taxpayers who funded 
the TARP?
---------------------------------------------------------------------------
    Such opinions have not been delivered.

4. Analysis of the Chrysler and GM Cases by Bankruptcy Scholars and 
        Pressure on TARP Recipients

    A number of bankruptcy academics at top-tier law schools 
have questioned the holdings in the Chrysler and GM 
bankruptcies. In the Chrysler and GM proceedings, Section 363 
of the United States bankruptcy code was used by the 
Administration to upset well established commercial law 
principles and the contractual expectations of the parties. As 
Professors Adler, Roe and Skeel note, the Chrysler and GM 
bankruptcy courts required each Section 363 bidder to assume 
certain obligations of the UAW/VEBAs as part of its bid. This 
means that potential purchasers could not simply acquire the 
assets free and clear of the liabilities of the seller, but, 
instead, were also required to assume certain of those 
liabilities. This requirement most likely chilled the bidding 
process and precluded the determination of the true fair market 
value of the assets held by Chrysler and GM. By disrupting the 
bidding process it's entirely possible that TARP proceeds were 
misallocated away from the Chrysler senior secured creditors 
and the GM bondholders to the UAW/VEBAs.\501\ Although I do not 
concur that EESA authorized the use of TARP proceeds in the 
Chrysler and GM bailouts, it's nevertheless important to follow 
the TARP funds once they were committed.
---------------------------------------------------------------------------
    \501\ A summary of the analysis of Professors Adler, Roe and Skeel 
as well as a set of examples are included in Appendix A to my 
Dissenting Views to the Panel's September Auto Report. Representative 
Jeb Hensarling, Additional Views to Congressional Oversight Panel, 
September Oversight Report: The Use of TARP Funds in the Support and 
Reorganization of the Domestic Automotive Industry (Sept. 9, 2009) 
(online at cop.senate.gov/documents/cop-090909-report-
additionalviews.pdf).
    The following example illustrates how the Administration used 
Section 363 of the bankruptcy code to achieve its economic, social and 
political objectives at the expense of the American taxpayers and the 
Chrysler senior secured creditors and GM bondholders.

    Assume Oldco (i.e., Old Chrysler or Old GM) has (i) assets with a 
fair market value (FMV) of $70, (ii) secured debt (with liens on $40 
FMV of assets) in an outstanding principal amount of $90 held by 
Creditor 1, and (iii) unsecured debt in an outstanding principal amount 
of $50 held by Creditor 2. Creditor 1 in effect holds two claims, a $40 
secured claim (equal to the FMV of the assets securing Creditor 1's 
claim) and a $50 unsecured claim (which together equal Creditor 1's 
total claim of $90); and Creditor 2 holds a $50 unsecured claim. Any 
distribution on the unsecured claims should be shared 50/50 percent 
(because each creditor holds a $50 unsecured claim) under the ``no 
unfair discrimination'' rule of Chapter 11.
    If, in a Section 363 sale, Newco (i.e., New Chrysler or New GM) 
purchased the Oldco assets (with no assumption of Oldco liabilities) 
for $70 FMV, then the $70 cash proceeds would be distributed as 
follows: Creditor 1 would receive $55 ($40 secured position, plus $15 
unsecured position), and Creditor 2 would receive $15.
    Conversely, if in the Section 363 sale the bankruptcy court 
required Newco to assume Creditor 2's debt of $50, then Newco would 
only pay $20 cash for the Oldco assets ($70 FMV of assets, less $50 
required assumption of Creditor 2's debt). In such event, Creditor 1 
would only receive $20 (representing 100 percent of the cash sales 
proceeds from the Section 363 sale, but leaving a shortfall of $70 
($90, less $20)). Creditor 2 would receive no proceeds from the Section 
363 sale, but would quite possibly receive $50 in the future from Newco 
(the amount of Creditor 2's debt assumed by Newco).
    Thus, without the required assumption of the $50 claim by Newco, 
Creditor 1 (the senior creditor) would receive $55 and Creditor 2 (the 
junior creditor) would receive $15. This result is consistent with 
commercial law principles and the contractual expectations of the 
parties. With the required assumption, however, Creditor 1 would only 
receive $20 and Creditor 2 would receive $50. The required assumption 
results in a shift of $35 from Creditor 1 to Creditor 2, a result that 
is not consistent with commercial law principles, the contractual 
expectations of the parties and the Chapter 11 reorganization rules.
---------------------------------------------------------------------------
    The technical bankruptcy laws issues are exacerbated 
because the winning purchaser in the Chrysler and GM cases--
entities directly or indirectly controlled by the United States 
government--had virtually unlimited resources, which is 
certainly not the case in typical private equity transactions. 
The matter becomes particularly muddled when you consider that 
a majority in interest of the Chrysler senior secured debt was 
held by TARP recipients at a time when there was much talk in 
the press about ``nationalizing'' some or all of these 
institutions. It is not difficult to imagine that these 
recipients felt direct pressure to ``get with the program'' and 
support the Administration's proposal.\502\
---------------------------------------------------------------------------
    \502\ TARP recipients who were also Chrysler senior secured 
creditors included Citigroup, JPMorgan Chase, Morgan Stanley and 
Goldman Sachs.
    Michael J. de la Merced, Dissident Chrysler Group to Disband, New 
York Times (May 8, 2009) (online at dealbook.blogs.nytimes.com/2009/05/
08/oppenheimer-withdraws-from-dissident-chrysler-group/
?scp=1&sq=TARP%20lender%20Chrysler%20pressure&st=cse). The article 
provides:
    ``After a great deal of soul-searching and quite frankly agony, 
Chrysler's non-TARP lenders concluded they just don't have the critical 
mass to withstand the enormous pressure and machinery of the US 
government,'' Thomas E. Lauria, a partner of Mr. Kurtz's and the lead 
lawyer for the group. ``As a result, they have collectively withdrawn 
their participation in the court case.''
    With the group's disbanding, a little over a week since it made 
itself public, a vocal obstacle to Chrysler's reorganization has 
subsided. The committee's membership has shrunken by the day as it 
faced public criticism from President Obama and others. That continued 
withdrawal of firms led Oppenheimer and Stairway to conclude that they 
could not succeed in opposing the Chrysler reorganization plan in 
court, the two firms said in separate statements.
    In its first public statement last week, the ad hoc committee said 
that it consisted of about 20 firms holding $1 billion in secured debt. 
But hours after Mr. Obama criticized the firms as ``speculators,'' the 
group lost its first major member, Perella Weinberg Partners, which 
changed its mind and signed onto the Chrysler plan.

    In the September 2009 issue, The Atlantic reported:

    As the crisis has receded this year, the government has remained 
aggressive, seeking business outcomes it finds desirable with some 
apparent indifference to contractual rights. In Chrysler's bankruptcy 
negotiations in April, for example, Treasury's plan offered the 
automaker's senior-debt holders 29 cents on the dollar. Some debt 
holders, including the hedge fund Xerion Capital Partners, believed 
they were contractually entitled to a much better deal as senior 
creditors holding secured debt. But four TARP banks--JPMorgan Chase, 
Citigroup, Morgan Stanley, and Goldman Sachs--which owned about 70 
percent of the Chrysler senior debt at par (100 cents on the dollar), 
had agreed to the 29-cent deal. By getting these banks and the other 
senior-debt holders to accept the 29-cent deal and give up their rights 
to push for the higher potential payout they were entitled to, the 
government could give Chrysler's workers, whose contracts were general 
unsecured claims--and therefore junior to the banks'--a payout far more 
generous than would otherwise have been possible or likely. 
Essentially, the government was engineering a transfer of wealth from 
TARP bank shareholders to auto workers, and pressuring other creditors 
to go along.
    * * * * *
    A somewhat similar story played out during GM's bankruptcy--the 
government again put together a deal that looked to many like a gift to 
the United Auto Workers at the expense of bondholders, who were pressed 
hard to quickly take a deal that would leave them with 10 percent of 
the equity of the reorganized company (plus some out-of-the-money 
warrants) when they likely would have been able to negotiate for more 
in a less well-orchestrated bankruptcy proceeding.'' (emphasis added.)

    William D. Cohan, The Final Days of Merrill Lynch, The Atlantic 
(Sept. 2009) (online at www.theatlantic.com/doc/200909/bank-of-
america).
    In the Panel's September Report I requested that SIGTARP 
investigate this matter.
---------------------------------------------------------------------------
    Based upon the analysis of Professors Adler, Roe and Skeel, 
the bankruptcy courts should have called a time-out and changed 
the bidding procedure (i.e., no assumption of liabilities 
required), extended the time to submit a bid \503\ and applied 
the protections afforded under the Chapter 11 reorganization 
rules. With those changes the judicial holdings would have most 
likely appeared fair and reasonable and could have served as a 
model for high-pressure bankruptcies that followed. Without 
such changes, however, the process was inherently flawed 
because we will never know if another bidder would have paid 
more for the gross assets (without the assumption of any 
liabilities) of Chrysler or GM.\504\ As intentionally 
structured by the Administration, the bidding procedures 
ultimately adopted for the Section 363 sales necessarily 
precluded the determination of the true fair market value of 
the assets held by Chrysler and GM. Without such determination, 
the appropriateness of the price paid for the assets of Old 
Chrysler and Old GM as well as the appropriateness of the 
distribution made by Old Chrysler and Old GM to the Chrysler 
senior secured creditors and GM bondholders will remain in 
doubt.
---------------------------------------------------------------------------
    \503\ Mr. Richard E. Mourdock, the Indiana State Treasurer, whose 
pension funds invested in Chrysler senior secured indebtedness, 
provided the following testimony to the Panel:

    The principal restriction was imposed by the time requirement that 
mandated the bankruptcy be completed by June 15, 2009. Throughout the 
bankruptcy process, the government maintained if the deal was not 
completed by that date that Fiat would walk away from its ``purchase'' 
of 20% of the Chrysler assets. From the beginning, the June 15 date was 
a myth generated by the federal government. Fiat was being given the 
assets at no cost at a minimum value of $400,000,000. Why would Fiat 
establish or negotiate such a date when they were to receive such a 
bonanza? On the very day that the Chrysler assets were transferred to 
Fiat, the company's chairman stated to the media that the June 15th 
date never originated from them. The artificial date drove the process 
in preventing creditors from having any opportunity to establish true 
values, prepare adequate cases, and therefore failed to protect their 
rights to the fullest provisions of the law. The artificial date also 
forced the courts to act with less than complete information.
    The U.S. [Second Circuit] Court of Appeals in its written opinion 
of August 9, 2009, denied our pensioners standing pursuant to the 
argument that we could not prove, under any other bankruptcy plan, we 
could have received more than the $0.29 we were offered. We believe 
this was an error because the court used a liquidation value for the 
company rather than an `on-going concern' basis. We received written 
notice from the U.S. Bankruptcy Court of New York by certified letter 
of our rights to file a claim on Monday, May 18, 2009, at 10:00 a.m. We 
were advised in the letter that any evidence we wished to submit to 
make a claim against the submitted plan (in part, the $0.29), would 
have to include trade tickets, depositions, affidavits, documents of 
evidence to substantiate claims, and etc. and would have to be filed 
with the bankruptcy court on Tuesday, May 19, 2009, by 4:00 p.m. The 
bankruptcy of Chrysler was frequently referred to as ``the most complex 
bankruptcy in American history,'' and yet we were given thirty hours to 
respond. We feel this was clearly an error in the process that helped 
to reduce the wealth of our beneficiaries.

    Congressional Oversight Panel, Field Hearing on the Auto Industry, 
at 154 (July 27, 2009) (online at cop.senate.gov/documents/transcript-
072709-detroithearing.pdf).
    \504\ It is also important to note that for these purposes it's 
irrelevant if certain Chrysler or GM creditors happened to have 
purchased their securities at a cheap price. The substantive legal 
issue concerns whether their contractual rights were honored. Courts 
should not abrogate well established commercial law principles and 
contractual expectations simply because an investor has earned a 
``reasonable return'' on its investment. That's not the rule of law, 
but the law of political expediency.
---------------------------------------------------------------------------

                E. TARP and Foreclosure Mitigation\505\
---------------------------------------------------------------------------
    \505\ In this section I borrow extensively from my dissent to the 
Panel's October report on foreclosure mitigation. Representative Jeb 
Hensarling, Congressional Oversight Panel, October Oversight Report: An 
Assessment of Foreclosure Mitigation Efforts After Six Months (Oct. 9, 
2009) (online at cop.senate.gov/documents/cop-100909-report-
hensarling.pdf).
---------------------------------------------------------------------------
    Much like the auto industry interventions, HAMP and the 
Administration's other foreclosure mitigation efforts to date 
have been a failure.\506\ The Administration's opaque 
foreclosure mitigation efforts have assisted only a small 
number of homeowners while drawing billions of involuntary 
taxpayer dollars into a black hole.\507\
---------------------------------------------------------------------------
    \506\ Taxpayer protection is a guiding principle of EESA interwoven 
throughout the legislation, including for foreclosure mitigation 
efforts. EESA gives the Panel a clear duty to provide information on 
foreclosure mitigation programs, but with the following caveat. Reports 
must include:

    The effectiveness of foreclosure mitigation efforts and the 
effectiveness of the program from the standpoint of minimizing long-
term costs to the taxpayers and maximizing the benefits for taxpayers.

    12 U.S.C. 5223(b)(1)(A)(iv).
    \507\ Housing GSEs--Government Sponsored Enterprises--Fannie Mae 
and Freddie Mac play key roles in the Administration's new housing 
policies. Funds from the Preferred Share Purchase Agreements, which 
allow the GSEs to draw up to $400 billion from Treasury, are being 
deployed for foreclosure mitigation and refinancing efforts. Since 
Fannie Mae and Freddie Mac are now under the conservatorship of the 
Federal Housing Finance Agency (FHFA), their concerns are now 
officially the taxpayer's concerns--any losses they experience through 
MHA should be a carefully considered part of a cost-benefit analysis.
    Fannie Mae and Freddie Mac should be more forthcoming with respect 
to their foreclosure mitigation efforts and use of taxpayer funds.
---------------------------------------------------------------------------
1. 100 Percent Loss to the Taxpayers from the Administration's 
        Foreclosure Mitigation Efforts
    While the CBO estimates that taxpayers will lose 100 
percent of the $50 billion in TARP funds committed to the 
Administration's foreclosure relief programs, the 
Administration appears inclined to commit additional taxpayer 
funds in hopes of helping distressed homeowners--both deserving 
and undeserving--with a taxpayer subsidized rescue.\508\
---------------------------------------------------------------------------
    \508\ Dealbook, Treasury Pushes Mortgage Firms for Loan relief, New 
York Times (Nov. 30, 2009) (online at dealbook.blogs.nytimes.com/2009/
11/30/treasury-presses-banks-for-mortgage-relief/
?scp=1&sq=Treasury%20Goodman%20November%2030&st=cse):
    The Obama administration said Monday that it would increase the 
pressure on banks to help troubled homeowners permanently lower 
mortgage payments. . .
    * * * * *
    Monday's push was the latest evidence that a $75 billion taxpayer-
financed effort aimed at stemming foreclosures was struggling. Even as 
lenders have accelerated the pace at which they are reducing mortgage 
payments for borrowers, most loans modified remain in a trial stage 
lasting up to five months, and only a fraction have been made 
permanent.
    In its statement on Monday, the Treasury Department said that more 
than 650,000 borrowers have received trial modifications under the 
program, called Making Home Affordable, and that about 375,000 
borrowers were scheduled to convert to permanent modifications by the 
end of the year.
    That would represent a sharp turnaround--last month, an oversight 
panel created by Congress reported that fewer than 2,000 of the 500,000 
loan modifications then in progress had become permanent.
    Jim Kuhnhenn, Strong Banks, Weak Credit: Treasury Rethinks TARP, 
ABC News (Nov. 24, 2009) (online at abcnews.go.com/Business/
wireStory?id=9161503). Determination of costs is especially important 
if, as Treasury Secretary Geithner has stated, TARP is interpreted to 
be a ``revolving facility.'' Given the likelihood that he will extend 
TARP to October 31, 2010, it's possible that a substantial portion of 
the $700 billion TARP facility could be directed to foreclosure 
mitigation efforts.
---------------------------------------------------------------------------
    While there may be some positive signals in our economy, 
recovery remains in a precarious position. The unemployment 
rate hovers around 10 percent and the broader definition of 
unemployment exceeds 17 percent. This is unfortunate because 
the best foreclosure mitigation program is a job, and the best 
assurance of job security is economic growth and the adoption 
of public policy that encourages and rewards capital formation 
and entrepreneurial success. Without a robust macroeconomic 
recovery the housing market will continue to languish and any 
policy that forestalls such recovery will by necessity lead to 
more foreclosures.
    To date, despite the commitment of some $27 billion,\509\ 
only a modest number of underwater homeowners have received a 
permanent modification of their mortgage.\510\ If the 
Administration's goal of subsidizing up to 9 million home 
mortgage refinancings and modifications is met, the cost to the 
taxpayers will possibly exceed the $75 billion already 
allocated to the MHA--Making Home Affordable--program,\511\ and 
it is likely that most (if not all) of it will be not be 
recovered.
---------------------------------------------------------------------------
    \509\ Number as defined by the current ``Total Cap'' for the Home 
Affordable Modification Program, $27,382,460,000. U.S. Department of 
the Treasury, Transactions Report (Nov. 30, 2009) (online at 
www.financialstability.gov/docs/transaction-reports/11-30-
09%20Transactions%20Report%20as%20of%2011-25-09.pdf).
    \510\ See Section One, C.3. of the Panel's December report.
    \511\ The Making Home Affordable program presently consists of the 
HAMP--Home Affordable Modification Program--and the HARP--Home 
Affordable Refinancing Program.
---------------------------------------------------------------------------

2. Mortgage Holders Profit from Private Sector Foreclosure Mitigation 
        Efforts

    Professor Alan M. White, an expert retained by the Panel, 
notes in a paper attached to the Panel's October Report the 
effectiveness of non-subsidized voluntary foreclosure 
mitigation when he states:

          Nevertheless, there is convincing evidence that 
        successful modifications avoided substantial losses, 
        while requiring only very modest curtailment of 
        investor income. In fact, the typical voluntary 
        modification in the 2007-2008 period involved no 
        cancellation of principal debt, or of past-due 
        interest, but instead consisted of combining a 
        capitalization of past-due interest with a temporary 
        (three to five year) reduction in the current interest 
        rate. Foreclosures, on the other hand, are resulting in 
        losses of 50% or more, i.e. upwards of $124,000 on the 
        mean $212,000 mortgage in default.\512\
---------------------------------------------------------------------------
    \512\ Since these numbers apparently include up to $9,000 of 
incentive payments, it appears that the total cost to the taxpayers of 
all interest rate and principal adjustments is approximately $10,000 
per modification, or approximately $2,000 per year ($167 per month) for 
the full five-year HAMP modification period. Perhaps this is correct, 
but I question whether mortgage loans may be successfully modified at 
such a relatively modest cost to the taxpayers under the HAMP. It 
appears that Professor White did not independently calculate these 
amounts, but, instead, generally relied upon estimates provided by 
Treasury. It is unclear what methodology Treasury employed except, 
perhaps, to divided the $50 billion of TARP funds initially allocated 
to HAMP by 2.5 million modifications, or $20,000 per mortgage 
modification. Treasury's approach, although employed by Professor 
White, should be augmented by the application of a more comprehensive 
methodology. See generally Alan M. White, Annex B to Congressional 
Oversight Panel, October Oversight Report: An Assessment of Foreclosure 
Mitigation Efforts After Six Months Potential Costs and Benefits of the 
Home Affordable Modification Program, at 118 (Oct. 9, 2009) (online at 
cop.senate.gov/documents/cop-100909-report.pdf).

    Significantly, he also quantifies the overall benefit of 
---------------------------------------------------------------------------
voluntary foreclosure mitigation to investors by concluding:

          The bottom line to the investor is that any time a 
        homeowner can afford the reduced payment, with a 60% or 
        better chance of succeeding, the investor's net gain 
        from the modification could average $80,000 per loan or 
        more. Two million modifications with a 60% success rate 
        could produce $160 billion in avoided losses, an amount 
        that would go directly to the value of the toxic 
        mortgage-backed securities that have frozen credit 
        markets and destabilized banks.\513\
---------------------------------------------------------------------------
    \513\ If this is indeed the case, then why is it not in the best 
interest of each mortgage holder to modify the mortgage loans in its 
portfolio? Why would a mortgage holder risk breaching its fiduciary 
duties to its investor group by foreclosing on mortgaged property 
instead of restructuring the underlying loans? Why should the taxpayers 
subsidize the restructuring of mortgage loans--whether through the HAMP 
or otherwise--if the mortgage holders may independent of such subsidy, 
realize a net gain of approximately $80,000 per loan by voluntarily 
restructuring their distressed mortgage loans?
    Professor White seems to imply that without taxpayer funded 
subsidies the mortgage servicers would be economically disinclined to 
modify distressed mortgage loans because of unfavorable terms included 
in typical pooling and servicing agreements--the contracts pursuant to 
which servicers discharge their duties to mortgage holders. Professor 
White writes:

    While modification can often result in a better investor return 
than foreclosure, modification requires ``high-touch'' individualized 
account work by servicers for which they are not normally paid under 
existing securitization contracts (pooling and servicing agreements or 
``PSAs''.) Servicer payment levels were established by contracts that 
last the life of the mortgage pools. Servicers of subprime mortgages 
agreed to compensation of 50 basis points, or 0.5% from interest 
payments, plus late fees and other servicing fees collected from 
borrowers, based on conditions that existed prior to the crisis, when 
defaulted mortgages constituted a small percentage of a typical 
portfolio. At present, many subprime and alt-A pools have delinquencies 
and defaults in excess of 50% of the pool. The incentive payments under 
HAMP can be thought of as a way to correct this past contracting 
failure.
    * * * * *
    Because mortgage servicers are essentially contractors working for 
investors who now include the GSE's, the Federal Reserve and the 
Treasury, we can think of the incentive payments under HAMP as extra-
contractual compensation for additional work that was not anticipated 
by the parties to the PSAs at the time of the contract. (emphasis 
added).

    Is the purpose of the HAMP to bail out servicers from their 
``contracting failure'' through the payment of ``extra-contractual 
compensation''? The taxpayers should not be charged with such a 
responsibility and I am disappointed that the Administration and 
Professor White would advocate such an approach.

    Notwithstanding the complexity injected into the 
foreclosure mitigation debate by the Administration, a solution 
appears relatively straightforward. If, as Professor White 
suggests, mortgage holders stand to realize a net gain of 
approximately $80,000 from restructuring each mortgage loan 
instead of foreclosing on the underlying property, the mortgage 
holders themselves should undertake to subsidize the 
``contracting failure'' of their servicers out of such gains. I 
appreciate that mortgage holders may not wish to remit 
additional fees to their servicers, but, between mortgage 
holders and the taxpayers, why should the taxpayers--through 
TARP or otherwise--bear such burden? Taxpayers should not be 
required to subsidize mortgage holders or servicers when 
foreclosure mitigation efforts appear to be in their own 
economic best interests.
    The Administration, by enticing mortgage holders and 
servicers with the $75 billion HAMP and HARP programs (with a 
reasonable expectation that additional funds may be 
forthcoming) has arguably caused them to abandon their market 
oriented response to the atypical rate of mortgage defaults in 
favor of seeking hand-outs from the government.\514\ All of the 
false starts with HAMP and the other government programs may 
have in effect exacerbated the foreclosure mitigation process 
by keeping private sector servicers and mortgage holders on the 
sidelines waiting on a better deal from the government. By 
creating a perceived safety net, the foreclosure mitigation 
efforts advocated by the Administration may encourage 
economically inefficient speculation in the residential real 
estate market with its adverse bubble generating consequences.
---------------------------------------------------------------------------
    \514\ It is difficult to fault mortgage holders and servicers for 
their rational behavior in accepting bailout funds that may enhance the 
overall return to their investors.
---------------------------------------------------------------------------

3. Taxpayer Protection and Shared Appreciation Rights

    It is my understanding that the foreclosure mitigation 
programs announced by Treasury do not provide Treasury or the 
mortgage lenders with the ability to participate in any 
subsequent appreciation in the fair market value of the 
properties that serve as collateral for the modified or 
refinanced mortgage loans. Since one of Treasury's fundamental 
mandates is taxpayer protection, the incorporation of a shared 
appreciation right or equity kicker feature would appear 
appropriate. Homeowners should not receive a windfall at the 
expense of the taxpayers and mortgage lenders who suffered the 
economic loss from restructuring their distressed mortgage 
loans.
    For example, a $100,000, 6 percent home mortgage loan may 
be modified by reducing the principal to $90,000 and the 
interest rate to 5 percent. If the house securing the mortgage 
loan subsequently appreciates by, say, $25,000, the taxpayers 
and the mortgage lender who shared the cost of the mortgage 
modification will not benefit from any such increase in value. 
Such result seems inappropriate and particularly unfair to the 
taxpayers. By modifying the mortgage loan and avoiding 
foreclosure, the taxpayers and the mortgage lender have 
provided a distinct and valuable financial benefit to the 
distressed homeowner that should be recouped to the extent of 
any subsequent appreciation in the value of the house securing 
the modified mortgage. A simple filing in the local real estate 
records should make the shared appreciation feature self-
effectuating upon the sale or exchange of the applicable 
residence. In order to ensure the integrity of the shared 
appreciation right, limitations should apply regarding the 
ability of homeowners to obtain home equity loans except when 
the proceeds of the loans are used to repay the taxpayers for 
the costs incurred with respect to the mortgage modifications.
    In addition, as I noted in my dissent to the Panel's 
October report on foreclosure mitigation,\515\ it would also 
seem productive if modified home mortgage loans were treated as 
recourse loans to the homeowners instead of as in effect non-
recourse loans under the ``anti-deficiency'' laws of many 
jurisdictions.\516\
---------------------------------------------------------------------------
    \515\ Representative Jeb Hensarling, Congressional Oversight Panel, 
October Oversight Report: An Assessment of Foreclosure Mitigation 
Efforts After Six Months, at 158-61 (Oct. 9, 2009) (online at 
cop.senate.gov/documents/cop-100909-report-hensarling.pdf).
    \516\ Edward Pinto, Saving More Homes for the Same Money, Wall 
Street Journal (Dec. 6, 2009) (online at online.wsj.com/article/
SB10001424052748704342404574577853961145272.html).
---------------------------------------------------------------------------

4. Equity and Moral Hazard

    Regardless of whether one believes foreclosure mitigation 
can truly work, taxpayers who are struggling to pay their own 
mortgage should not be forced to bail out their neighbors 
through such an inefficient and transparency-deficient program. 
The Administration appears to prioritize good intentions and 
wishful thinking over taxpayer protection.
    Any foreclosure mitigation effort must appear fair and 
reasonable to the American taxpayers. It is important to 
remember that the number of individuals in mortgage distress 
reaches beyond individuals who have experienced an adverse 
``life event'' or been the victims of fraud. This complicates 
moral hazard issues associated with large-scale modification 
programs. Distinct from a moral hazard question there is an 
inherent question of fairness as those who are not facing 
mortgage trouble are asked to subsidize those who are facing 
trouble.
    In light of current statistics regarding the overall 
foreclosure rate, an essential public policy question that must 
be asked regarding the effectiveness of any taxpayer-subsidized 
foreclosure mitigation program is: ``Is it fair to expect 
approximately 19 out of every 20 people to pay more in taxes to 
help the 20th person maintain their current residence?'' 
Although that question is subject to individual interpretation, 
there is an ever-increasing body of popular sentiment that such 
a trade-off is indeed not fair.\517\
---------------------------------------------------------------------------
    \517\ State anti-deficiency laws also create significant moral 
hazard risks that will be exacerbated if Congress passes a cramdown 
amendment to the bankruptcy code. With these laws in effect, the risk-
reward mix underlying each mortgage and home equity loan will be 
bifurcated with lenders assuming substantially all of the risks 
regarding the underlying value of the mortgaged property and homeowners 
receiving substantially all of the rewards. These laws may have the 
unintended consequence of encouraging homeowners to reject their 
contractual responsibilities and service their mortgage obligations 
only when it's in their economic self-interest. Since option contracts 
are inherently more risky to lenders than traditional mortgage 
contracts, lenders may have little choice but to incorporate such risks 
into the interest rates and fees charged on mortgage loans. The 
Administration should refrain from suggesting that Congress enact 
legislation that encourages individuals and families to invest in the 
housing market for speculative purposes while permitting them to avoid 
their contractual obligations upon the occurrence of adverse market 
conditions.
    It is worth noting that the decision of individuals and families to 
speculate in the housing market, while perhaps unwise, is not entirely 
irrational. While some may contend that the average consumer is too 
unskilled to comprehend seemingly sophisticated financial products, I 
would argue to the contrary. With anti-deficiency, single-action and, 
perhaps, bankruptcy cramdown laws in effect, borrowers will receive the 
bulk of any equity appreciation while lenders will bear substantially 
all of the risk of loss arising from home mortgage loans. Most 
consumers are rational and react favorably to incentives that reward 
particular behavior. Providing economic and legal incentives that 
encourage inappropriate speculation in the housing market is unwise and 
fraught with adverse unintended consequences. That a bankruptcy 
cramdown law could help re-inflate a housing bubble by encouraging 
reckless speculation and cause lenders to raise mortgage interest rates 
and fees justifies its rejection.
---------------------------------------------------------------------------
    Since there is no uniform solution for the problem of 
foreclosures, a sensible approach should encourage multiple 
private sector mitigation programs that do not amplify taxpayer 
risk or require government mandates. Subsidized loan 
refinancing and modification programs may provide relief for a 
select group of homeowners, but they work against the majority 
who shoulder the tax burden and make mortgage payments on time. 
Based upon the analysis of Professor White, little reason 
exists for government sponsored programs since it is in the 
best economic interest of the mortgage holders to restructure 
troubled loans rather than to pursue a foreclosure remedy.

 F. Secretary Geithner Should Not Extend the TARP but Permit it to End 
                          on December 31, 2009

    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 and moral 
hazard risks, Secretary Geithner should not extend the TARP but 
permit it to end on December 31, 2009. As of today, Treasury 
has approximately $297.2 billion of TARP authority available to 
fund existing commitments and new programs.\518\ As the EESA 
statute requires, all recouped and remaining TARP funds should 
go back into the Treasury general fund for debt reduction. All 
revenues and proceeds from TARP investments that have generated 
a positive return should also go to the general fund. Neither 
the letter nor the spirit of the law allow for TARP funds to be 
used as offsets for future spending programs, such as those 
currently being considered by the Administration and Majority 
leadership.
---------------------------------------------------------------------------
    \518\ See Section One, C.5.b.i. of the Panel's December report.
---------------------------------------------------------------------------
    Further, the TARP should be terminated due to:
           the desire of the taxpayers for 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;
           enhanced implicit guarantee and moral hazard 
        risks;
           an increase in the number and size of ``too 
        big to fail'' financial institutions;
           the absence of appropriate standards of 
        transparency and accountability in TARP-related 
        disclosure by Treasury;
           the stigma associated with continued 
        participation in the TARP by the recipients; \519\ and
---------------------------------------------------------------------------
    \519\ Dealbook, Bank of America's TARP Move Helps Shed Stigma, New 
York Times (Dec. 3, 2009) (online at dealbook.blogs.nytimes.com/2009/
12/03/move-to-repay-aid-helps-bank-of-america-shed-stigma/
?scp=2&sq=stigma%20bank%20of%20america&st=cse).
---------------------------------------------------------------------------
           the use of the TARP (i) for economic 
        stimulus instead of EESA mandated financial stability 
        and (ii) to promote the Administration's economic, 
        social and political agenda as evidenced by, 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 CPP 
        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.\520\
---------------------------------------------------------------------------
    \520\ SIGTARP, Quarterly Report to Congress (Oct. 21, 2009) (online 
at sigtarp.gov/reports/congress/2009/
October2009_Quarterly_Report_to_Congress.pdf).
---------------------------------------------------------------------------
     Assuming that most financing for the 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.\521\
---------------------------------------------------------------------------
    \521\ 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 the TARP to reach its $699 billion potential, 
it would mean a $5,000 expenditure for each taxpayer.\522\ The 
TARP represents five percent of 2008 GDP.
---------------------------------------------------------------------------
    \522\ The $5,000 ``cost'' per taxpayer assumes 138.4 million 
taxpayers are covering the full $699 billion.
---------------------------------------------------------------------------
     Other costs identified by SIGTARP include (i) 
higher borrowing costs in the future as a result of increased 
Treasury borrowing levels, (ii) a potential ``crowding out 
effect'' on prospective private sector borrowers, potentially 
driving private sector borrowers out of the market, (iii) moral 
hazard, or unnecessary risk-taking in the private sector due to 
the bailout, and (iv) 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 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 
        for each dollar repaid.
                           D. Paul S. Atkins 

    Although I concur with the report issued by the Panel 
today, some aspects of the report should be elucidated. The 
report is careful to come to no outright conclusion regarding 
the TARP. The program is still in operation and distributing 
money (although at a much diminished rate), and we are still 
much too close to the events of last year to be able to obtain 
good data in order to render a dispassionate analysis.
    The basic question of this month's report is: Has TARP been 
a success? The response must be that we do not know. Not that 
the program, together with larger government programs 
instituted by the Federal Reserve and FDIC that dwarfed TARP in 
terms of taxpayer dollars put at risk, did not show some 
results. Indeed, the Panel report on page 77, points out that 
the federal government had almost $8 trillion of exposure 
through various programs to try to cure the ills of the banking 
and finance industry, including TARP's $700 billion. With the 
injection of all of this money into the system, something had 
to happen. The fact that these programs had some effect does 
not answer the question of whether the resources were used 
wisely.
    More time is needed to judge the short- and long-term 
ramifications of TARP and the other programs. The benefits that 
some ascribe to TARP only manifested themselves long after the 
program was implemented. Looking at the equity markets, the 
banks hit bottom in March 2009, months after the implementation 
of TARP. The credit markets also took a while to recover. Does 
this length of time between the implementation of TARP and the 
manifestation of supposed benefits indicate that exogenous 
factors might have come into play?
    A major cause of the turmoil in the financial markets last 
year was the lack of transparency and the resulting lack of 
confidence that investors had in bank balance sheets. The TARP 
infusions, other than demonstrating that the government was 
willing to put taxpayer money on the line and stood ready to 
bail banks out, did not solve the transparency issue. In fact, 
the issue persists and affects valuation of financial firms. It 
did not help that the government at first claimed that TARP 
money would only be given to ``healthy'' banks. This claim 
proved to be manifestly false as even some of the original 
recipients appear not to have been healthy.
    One cannot view government programs only in the short term; 
one must take into account the longer term. Otherwise, the 
analysis inevitably will be superficial because the full 
ramifications of decisions are given little weight. With TARP, 
dangerous precedents have been made and expectations 
established in the marketplace. These include the unfortunate 
embrace of the principle of ``too big to fail'' and the 
implicit guarantees that go with that doctrine. I am pleased 
that the Panel will consider these issues in next month's 
report.
    Under normal circumstances, TARP would be in the 
liquidating phase because institutions are repaying the money 
they received. Unfortunately, the Treasury seems to be trying 
to maximize its power by improperly considering TARP to be like 
a revolving line of credit, contrary to the intent of Congress 
and section 106(d) of EESA, which states: ``Revenues of, and 
proceeds from the sale of troubled assets purchased under this 
Act, or from the sale, exercise, or surrender of warrants or 
senior debt instruments acquired in section 113 shall be paid 
into the general fund of the Treasury for reduction of the 
public debt.'' Moreover, the program may yet be extended by the 
Treasury Secretary until October 2010, and it may transform 
itself into something entirely different during that time, 
given the nature of the hastily drafted statute that 
established TARP and the extreme flexibility with which the 
Treasury apparently interprets its mandate and powers 
thereunder.
    Already, $80 billion of TARP funds have been used to 
intervene in General Motors, Chrysler, and GMAC, hardly major 
components of the banking and finance system. The Treasury has 
announced that it intends to dump billions more into GMAC, but 
the underlying problems of the automotive industry, including 
excessive labor costs, inflexible work rules, and a poor 
product mix have yet to be addressed. As the financial markets 
have stabilized, a continuation of TARP raises the prospect 
that Treasury will put funds into other companies with only a 
tenuous connection to the financial markets, contrary to 
Congress's intent. Thus, TARP should not be extended. If more 
funds are needed in the future, Treasury should go back to the 
current Congress and make its case.
    During our hearing featuring five economists on November 
19, 2009, I posed a question to Dr. Dean Baker as to whether 
things would look different today in the financial industry if 
TARP had never been established. He responded by saying that 
``I am not convinced that we'd be in a hugely different 
world.'' Presumably, the Treasury and the Federal Reserve would 
have found ways to muddle through, much as they had done during 
and after the collapse of Bear Stearns. Dr. Baker further 
argued that ``the biggest flaw of TARP'' was that ``we rushed 
in with something that wasn't well thought out.'' Indeed, some 
economists argue that the confusing roll out of TARP in 2008 
only made matters worse. Ultimately, however, had there been no 
TARP, we would not be facing all of the unfortunate collateral 
consequences of TARP and a poorly thought-out EESA.
    As we move into 2010, perhaps into the final few months of 
this Panel's existence, we should be insisting that Treasury 
stick to the intent of EESA and to a strict reading of the 
statute. In addition, we should follow the advice of Mr. Alex 
Pollock, who appeared before the Panel on November 19, to 
insist that Treasury run TARP as a business. Transparency, 
audited financial statements, and adherence to Congressional 
intent will foster accountability and taxpayer confidence.
          SECTION THREE: CORRESPONDENCE WITH TREASURY UPDATE 

    On behalf of the panel, Chair Elizabeth Warren sent a 
letter on November 25, 2009,\523\ to Secretary of the Treasury 
Timothy Geithner, to follow up on a letter sent on September 
15, 2009,\524\ and to request that the Secretary provide a 
timely response to the questions contained therein regarding 
inputs, formulae, and other information for the stress tests. 
The Panel has not yet received a response from Secretary 
Geithner.
---------------------------------------------------------------------------
    \523\ See Appendix III of this report, infra. 
    \524\ See Appendix I of the Congressional Oversight Panel's October 
Oversight Report. October Oversight Report, supra note 220, at 207.
---------------------------------------------------------------------------
    On behalf of the panel, Chair Elizabeth Warren sent a 
letter on November 25, 2009,\525\ to Secretary of the Treasury 
Timothy Geithner, to obtain information on Treasury's 
assistance to CIT Group, Inc. (CIT). Specifically, the letter 
inquires about the effects of CIT's recent bankruptcy on the 
taxpayers' investment in the company via the Capital Purchase 
Program (CPP), and whether Treasury expects failures of more 
financial institutions participating in the CPP. The Panel has 
not yet received a response from Secretary Geithner.
---------------------------------------------------------------------------
    \525\ See Appendix IV of this report, infra. 
---------------------------------------------------------------------------
    On behalf of the panel, Chair Elizabeth Warren sent a 
letter on November 25, 2009,\526\ to Assistant Secretary of the 
Treasury for Financial Stability Herbert M. Allison, Jr. The 
letter notes that Assistant Secretary Allison had yet to 
respond to a series of questions for the record following his 
appearance before the Congressional Oversight Panel on October 
22, 2009, despite an initial request to receive a response by 
November 18, 2009. The Panel received a response from Assistant 
Secretary Allison on December 1, 2009.\527\
---------------------------------------------------------------------------
    \526\ See Appendix II of this report, infra. 
    \527\ Questions for the Record for Assistant Secretary Allison, 
supra note 253.
              SECTION FOUR: TARP UPDATES SINCE LAST REPORT


                           A. TARP Repayment

    Since the Panel's prior report, additional banks have 
repaid their TARP investments under CPP. A total of 50 banks 
have repaid in full their preferred stock TARP investments 
provided under the CPP to date. Of these banks, 30 have 
repurchased their warrants as well. Additionally, during the 
month of October, CPP participating banks paid $481.6 million 
in dividends and $125.8 million in interest on Treasury 
investments.
    Bank of America has been given leave by its regulator to 
repay $45 billion in TARP funds. News reports stated that Bank 
of America would sell common equity to raise the funds for the 
repayment. As of December 2, 2009, Bank of America reported 
that it had raised $19.3 billion, and that it would be holding 
a shareholder meeting to approve the issuance of additional 
shares to be sold for this purpose.

                     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 November 16, 2009, includes data through the 
end of September 2009, and shows that CPP recipients had $4.18 
trillion in loans outstanding as of September 2009. This 
represents a one percent decline in loans outstanding between 
the end of August and the end of September.

          C. Term Asset-Backed Securities Loan Facility (TALF)

    At the November 17, 2009 facility, there were $1.4 billion 
in loans requested for legacy CMBS, and $72.2 million for new 
CMBS. By way of comparison, there were $2.1 billion in loans 
for legacy CMBS requested at the October facility, and $1.4 
billion at the September facility. This month was the first 
facility in which there was a request for TALF loans for new 
CMBS.
    At the December 3, 2009 facility, there were $3 billion in 
loans requested to support the issuance of ABS collateralized 
by loans in the credit card, equipment, floorplan, small 
business, servicing advances, and student loan sectors. No 
loans in the auto and premium financing sectors were requested. 
By way of comparison, there were $1.1 billion in loans 
requested at the November 3, 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. Public-Private Investment Funds

    Treasury announced the initial closing of three more of the 
nine funds pre-qualified as Fund Managers as part of the 
Public-Private Investment Program. Treasury expects the final 
fund to close shortly. As of November 30, 2009, Public-Private 
Investment Funds have closed on $5.07 billion of private sector 
equity. This investment has been matched by Treasury for a 
total of $10.13 billion in equity capital. Treasury has also 
provided $10.13 billion of debt capital.

                 E. Capital Assistance Program Closing

    On November 9, 2009, Treasury announced that it would close 
the CAP without making any investments through the program. CAP 
was established to provide additional assistance to 
institutions subject to the stress tests. The only institution 
that was determined to need additional capital was GMAC. 
Treasury has announced that GMAC will receive the needed 
assistance through the Automotive Industry Financing Program 
instead of through CAP.

         F. Auctions to Sell Capital Purchase Program Warrants

    Treasury announced on November 19, 2009, that it would sell 
several warrant positions received under the Capital Purchase 
Program. The sales would take place over the month following 
the announcement and would include Treasury's warrant positions 
in JPMorgan Chase & Co., Capital One Financial Corporation, and 
TCF Financial Corporation. Each of these banks has already 
repurchased Treasury's full preferred stock investment. The 
sales will be conducted through registered public offerings 
using a Dutch auction method. The auction for Capital One began 
on December 1, 2009 and closed on December 3, 2009. This 
auction included 12,657,960 warrants to purchase common stock 
of Capital One and the net proceeds from the sale, which should 
close on or around December 9, are expected to be $146.5 
million.
                   SECTION FIVE: OVERSIGHT ACTIVITIES

    The Congressional Oversight Panel was established as part 
of EESA and formed on November 26, 2008. Since then, the Panel 
has produced twelve 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 November oversight report assessing 
guarantees and contingent payments, the following developments 
pertaining to the Panel's oversight of the Troubled Asset 
Relief Program (TARP) took place:
     The Panel held a hearing in Washington, DC with 
several prominent economists to discuss the effectiveness of 
the TARP. The views of these experts informed this report.

Upcoming Reports and Hearings

    The Panel will release its next oversight report in 
January. The report will assess Treasury's strategy for exiting 
the TARP.
    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 SIX: ABOUT THE CONGRESSIONAL OVERSIGHT PANEL

    In response to the escalating crisis, on October 3, 2008, 
Congress provided Treasury with the authority to spend $700 
billion to stabilize the U.S. economy, preserve home ownership, 
and promote economic growth. Congress created the Office of 
Financial Stability (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, 2009, 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: UNPAID DIVIDEND PAYMENTS UNDER CPP AS OF OCTOBER 31, 2009 


     UNPAID DIVIDEND PAYMENTS UNDER CPP AS OF OCTOBER 31, 2009 \528\
------------------------------------------------------------------------
                                                        Value of unpaid
                     Institution                           dividends
------------------------------------------------------------------------
CIT Group Inc........................................        $29,125,000
Popular, Inc.........................................         11,687,500
First BanCorp........................................          5,000,000
Pacific Capital Bancorp..............................          4,515,850
First Banks, Inc.....................................          4,024,825
Sterling Financial Corporation/Sterling Savings Bank.          3,787,500
UCBH Holdings, Inc...................................          3,734,213
Anchor BanCorp Wisconsin, Inc........................          2,979,167
Midwest Banc Holdings, Inc...........................          2,119,600
Dickinson Financial Corporation II...................          1,989,980
Central Pacific Financial Corp.......................          1,687,500
Seacoast Banking Corporation of Florida/Seacoast               1,250,000
 National Bank.......................................
Blue Valley Ban Corp.................................            543,750
Centrue Financial Corporation........................            408,350
Royal Bancshares of Pennsylvania, Inc................            380,088
One United Bank......................................            301,575
United American Bank.................................            230,490
Pacific City Financial Corporation/Pacific City Bank.            220,725
Commonwealth Business Bank...........................            209,850
The Connecticut Bank and Trust Company...............            178,573
Peninsula Bank Holding Co............................            162,500
Commerce National Bank...............................            150,000
Citizens Bancorp.....................................            141,700
Pacific Coast National Bancorp.......................            112,270
Premier Service Bank.................................            105,972
Idaho Bancorp........................................             94,013
Lone Star Bank.......................................             87,917
Pacific International Bancorp Inc....................             81,250
One Georgia Bank.....................................             80,766
Georgia Primary Bank.................................             70,850
Saigon National Bank.................................             54,378
Patterson Bancshares, Inc............................             50,288
Grand Mountain Bancshares, Inc.......................             35,395
Fresno First Bank....................................             33,357
Citizens Bank & Trust Company........................             32,700
Pacific Commerce Bank................................             31,961
Community Bank of the Bay............................             28,874
Community First Bank.................................             11,199
                                                      ------------------
    Total............................................        $75,739,924
------------------------------------------------------------------------
\528\ U.S. Department of the Treasury, Dividends and Interest Reports,
  May, 2009-October, 2009 (online at www.financialstability.gov/ latest/
  reportsanddocs.html); SIGTARP, Quarterly Report to Congress, at 58
  (Oct. 21, 2009) (online at www.sigtarp.gov/reports/congress/ 2009/
  October2009_Quarterly_Report_to_ Congress.pdf).

APPENDIX II: LETTER FROM CHAIR ELIZABETH WARREN TO ASSISTANT SECRETARY 
HERB ALLISON, RE: WRITTEN RESPONSES FOR HEARING RECORD, DATED NOVEMBER 
                                25, 2009

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

 APPENDIX III: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY 
          GEITHNER, RE: STRESS TESTS, DATED NOVEMBER 25, 2009 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

 APPENDIX IV: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY 
        GEITHNER, RE: CIT GROUP, INC., DATED NOVEMBER 25, 2009 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

   APPENDIX V: ENDNOTES TO FIGURE 27: FEDERAL GOVERNMENT'S FINANCIAL 
   STABILIZATION PROGRAMS (AS OF NOVEMBER 25, 2009)--CURRENT MAXIMUM 
                               EXPOSURES 

    i 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). See U.S. Department of the 
Treasury, Troubled Asset Relief Program Transactions Report for 
Period Ending November 25, 2009, (Nov. 30, 2009) (online at 
www.financialstability.gov/docs/transaction-reports/11-30-
09%20Transactions%20Report%20 as%20of%2011-25-09.pdf).
    ii This number represents the full $60 billion 
that is available to AIG through its revolving credit facility 
with the Federal Reserve ($44.9 billion had been drawn down as 
of November 27, 2009) and the outstanding principal of the 
loans extended to the Maiden Lane II and III SPVs to buy AIG 
assets (as of November 19, 2009, $16 billion and $19 billion 
respectively). Board of Governors of the Federal Reserve 
System, Factors Affecting Reserve Balances of Depository 
Institutions and Condition Statement of Federal Reserve Banks 
(Nov. 27, 2009) (online at www.federalreserve.gov/RELEASES/H41/
20091127/). 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 October 2009, at 17 
(online at www.federalreserve.gov/monetarypolicy/files/
monthlyclbsreport200910.pdf) (accessed Dec. 7, 2009). On 
December 1, 2009, AIG entered into an agreement with FRBNY to 
reduce the debt AIG owes the FRBNY by $25 billion. In exchange, 
FRBNY received preferred equity interests in two AIG 
subsidiaries. This also reduced the debt ceiling on the loan 
facility from $60 billion to $35 billion. This figure does not 
reflect that agreement since the table is intended to represent 
exposure as of November 30, 2009. American International Group, 
AIG Closes Two Transactions That Reduce Debt AIG Owes Federal 
Reserve Bank of New York by $25 billion (Dec. 1, 2009) (online 
at phx.corporate-ir.net/
External.File?item=UGFyZW50SUQ9MjE4ODl8Q2hpbGRJRD0tMXxUeXBlPTM=&
t=1).
    iii U.S. Department of the Treasury, Troubled 
Asset Relief Program Transactions Report for Period Ending 
November 25, 2009, (Nov. 30, 2009) (online at 
www.financialstability.gov/docs/transaction-reports/11-30-
09%20Transactions%20Report%20as%20of%2011-25-09.pdf). 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.
    iv 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) (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).
    v U.S. Department of the Treasury, Transactions 
Report (Oct. 27, 2009) (online at www.financialstability.gov/
docs/transaction-reports/10-927-
09%20Transactions%20Report%20as%20of%2010-23-09.pdf). 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.
    vi 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 $71 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. See U.S. Government Accountability Office, 
Troubled Asset Relief Program June 2009 Status of Efforts to 
Address Transparency and Accountability Issues, at 12 (online 
at www.gao.gov/new.items/d09658.pdf) (accessed Dec. 7, 2009); 
U.S. Department of the Treasury, Troubled Asset Relief Program 
Transactions Report for Period Ending November 25, 2009 (Nov. 
30, 2009) (online at www.financialstability.gov/docs/
transaction-reports/11-30-09%20Transactions%20Report%20 
as%20of%2011-25-09.pdf).
    vii The CAP was officially closed on November 9, 
2009. Of the original 19 SCAP participants, GMAC was the only 
institution that requested additional capital under the CAP. 
U.S. Department of the Treasury, Treasury Announcement 
Regarding the Capital Assistance Program (Nov. 9, 2009) (online 
at www.financialstability.gov/latest/tg_11092009.html). As of 
yet, further details of this transaction, including the amount 
GMAC will receive, have not been released, and the Panel 
continues to reflect the program as dormant.
    viii This figure represents a $20 billion 
allocation to the TALF special purpose vehicle on March 3, 
2009. U.S. Department of the Treasury, Troubled Asset Relief 
Program Transactions Report for Period Ending October 28, 2009 
at 18 (Oct. 30, 2009) (online at financialstability.gov/docs/
transaction-reports/10-30-
09%20Transactions%20Report%20as%20of%2010-28-09.pdf). 
Consistent with the analysis in the Panel's August report, only 
$61.9 billion in TALF loans have been requested as of December 
3, 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 (Aug. 
11, 2009) (online at cop.senate.gov/documents/cop-081109-
report.pdf) (discussing criteria for constituting a ``troubled 
asset'').
    ix 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.
    x The Panel continues to account for this 
program as dormant. It 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); 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.
    xi 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) (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 November 30, 
2009, Treasury reported $17.8 billion in outstanding loans and 
$8.8 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. U.S. Department of 
the Treasury, Troubled Asset Relief Program Transactions Report 
for Period Ending November 25, 2009 (Nov. 30, 2009) (online at 
www.financialstability.gov/docs/transaction-reports/11-30-
09%20Transactions%20Report%20as%20of%2011-25-09.pdf).
    xii 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). 
Of the $50 billion in announced TARP funding for this program, 
$27.4 billion has been allocated as of November 30, 2009. U.S. 
Department of the Treasury, Troubled Asset Relief Program 
Transactions Report for Period November 30, 2009, at 22 (Nov. 
30, 2009) (online at financialstability.gov/docs/transaction-
reports/11-30-09%20Transactions%20Report%20 as%20of%2011-25-
09.pdf).
    xiii Fannie Mae and Freddie Mac, 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).
    xiv U.S. Department of the Treasury, Troubled 
Asset Relief Program Transactions Report for Period Ending 
November 25, 2009 (Nov. 30, 2009) (online at 
www.financialstability.gov/docs/transaction-reports/11-30-
09%20Transactions%20Report%20 as%20of%2011-25-09.pdf). 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 loans (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.
    xv U.S. Department of the Treasury, Troubled 
Asset Relief Program Transactions Report for Period Ending 
November 25, 2009 (November 30, 2009) (online at 
www.financialstability.gov/docs/transaction-reports/11-30-
09%20Transactions%20Report%20 as%20of%2011-25-09.pdf).
    xvi U.S. Department of the Treasury, Fact Sheet: 
Public-Private Investment Program, at 1 (Mar. 23, 2009) (online 
at www.treas.gov/press/releases/reports/ppip_fact_sheet.pdf).
    xvii 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. $315 billion 
of debt subject to the guarantee was outstanding as of October 
31, 2009. This represents approximately 52 percent of the 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 
www.fdic.gov/regulations/resources/TLGP/total_issuance9-
09.html) (updated Nov. 30, 2009). The FDIC has collected $10.4 
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 (Oct. 31, 2009) 
(online at www.fdic.gov/regulations/resources/TLGP/fees.html) 
(updated Nov. 30, 2009).
    xviii 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. For example, 
see 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).
    xix In past reports, the Panel has classified as 
loans the Federal Reserve's purchases of federal agency debt 
securities and mortgage-backed securities issued by GSEs. With 
this report, the Panel adopts a different approach. Instead, 
these purchases will be accounted as outlays made under the 
Federal Reserve's credit expansion effort. Federal Reserve 
Liquidity Facilities classified in this table as loans include: 
Primary credit, Secondary credit, Central bank liquidity swaps, 
Primary dealer and other broker-dealer credit, Asset-Backed 
Commercial Paper Money Market Mutual Fund Liquidity Facility, 
Net portfolio holdings of Commercial Paper Funding Facility 
LLC, Seasonal credit, Term auction credit, Net Portfolio 
Holdings of TALF LLC, and loans outstanding to Bear Stearns 
(Maiden Lane I LLC). While the Federal Reserve does not employ 
the outlays, loans and guarantees classification, its 
accounting clearly separates its mortgage-related purchasing 
programs from its liquidity programs. See Board of Governors of 
the Federal Reserve, Credit and Liquidity Programs and the 
Balance Sheet November 2009, at 2 (online at 
www.federalreserve.gov/monetarypolicy/files/
monthlyclbsreport200911.pdf) (accessed Dec. 7, 2009).
    xx 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.
    xxi 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.
    xxii 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.
