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


 
                     CONGRESSIONAL OVERSIGHT PANEL 

                       JANUARY OVERSIGHT REPORT * 

                               ----------                              

     EXITING TARP AND UNWINDING ITS IMPACT ON THE FINANCIAL MARKETS

                 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                January 13, 2010.--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 JANUARY OVERSIGHT REPORT




















                     CONGRESSIONAL OVERSIGHT PANEL

                       JANUARY OVERSIGHT REPORT *

                               __________

     EXITING TARP AND UNWINDING ITS IMPACT ON THE FINANCIAL MARKETS

                 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                January 13, 2010.--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
                             Panel Members
                        Elizabeth Warren, Chair
                             Paul S. Atkins
                           Richard H. Neiman
                             Damon Silvers
                           J. Mark McWatters
                            C O N T E N T S

                              ----------                              
                                                                   Page
Executive Summary................................................     1
Section One: January Report......................................     3
    A. Overview..................................................     3
    B. The Various Stages of ``Exit'' from the TARP..............     4
        1. Secretary's Authority and Obligations.................     4
        2. Other Oversight and Management Entities...............     7
        3. Effect on Other Related Programs......................     8
        4. EESA Requirements Relating to Use of TARP Profits, or 
          Approach to TARP Losses................................     9
        5. Continuing Market Effects of the TARP: The Implicit 
          Guarantee..............................................    10
        6. Certain Tax Issues Affecting TARP Exit................    12
    C. Historical Precedents: the RFC and the RTC................    16
        1. The RFC...............................................    17
        2. The RTC...............................................    19
        3. Lessons from the RFC and the RTC......................    20
    D. Disposal of the Assets....................................    21
        1. Introduction..........................................    21
        2. Treasury's TARP Exit Strategy.........................    22
        3. Accounting for the TARP...............................    26
        4. CPP Preferred and Warrants............................    27
        5. Citigroup.............................................    38
        6. AIG...................................................    51
        7. Chrysler and GM.......................................    68
        8. GMAC..................................................    81
        9. PPIP..................................................    84
        10. TALF.................................................    86
        11. Small Business Programs..............................    88
    E. Unwinding TARP Expenditure Programs.......................    91
        1. HAMP..................................................    92
        2. Future Considerations.................................    95
    F. What Remains and What Additional Assets Might Be Acquired?    96
    G: Unwinding Implicit Guarantees in a Post-TARP World........    98
        1. Regulatory Options....................................    98
        2. Liquidation and Reorganization........................   105
        3. International Aspects of Reform.......................   109
        4. Proposed Legislation..................................   110
    H. Conclusions and Recommendations...........................   116
Section Two: Additional Views....................................   119
    A. Damon Silvers.............................................   119
    B. J. Mark McWatters and Paul S. Atkins......................   121
Section Three: Correspondence with Treasury Update...............   133
Section Four: TARP Updates Since Last Report.....................   134
Section Five: Oversight Activities...............................   153
Section Six: About the Congressional Oversight Panel.............   154
Appendices:
    APPENDIX I: LETTER FROM SECRETARY TIMOTHY GEITHNER TO CHAIR 
      ELIZABETH WARREN, RE: STRESS TESTS, DATED DECEMBER 10, 2009   155
    APPENDIX II: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY 
      TIMOTHY GEITHNER, RE: EXECUTIVE COMPENSATION, DATED 
      DECEMBER 24, 2009..........................................   160
    APPENDIX III: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY 
      TIMOTHY GEITHNER, RE: CIT GROUP ASSISTANCE, DATED JANUARY 
      11, 2010...................................................   167
======================================================================

                        JANUARY OVERSIGHT REPORT

                                _______
                                

                January 13, 2010.--Ordered to be printed

                                _______
                                

                          EXECUTIVE SUMMARY *

---------------------------------------------------------------------------
    * The Panel adopted this report with a 5-0 vote on January 13, 
2010.
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    In its December oversight report, the Panel reviewed the 
successes and failures of the Troubled Asset Relief Program in 
2008 and 2009. This month, the Panel focuses on the road ahead 
as Treasury closes the TARP. Now that Treasury has acquired 
hundreds of billions of dollars in assets, how does it plan to 
unwind its stake in the financial markets? How will Treasury 
balance its desire to sell these assets quickly with its goals 
of promoting financial stability and strengthening the return 
to taxpayers? What steps will Treasury take to unwind the 
implicit guarantee that the federal government will always 
stand behind too big to fail banks? In short, what is 
Treasury's exit strategy?
    Ending the TARP will involve several stages of exit. The 
first milestone will be on October 3, 2010, when Treasury's 
authority to make new commitments to purchase assets, commit 
funds, and establish guarantees using TARP funds will expire. 
The end of this authority will not, however, constitute the end 
of the TARP; Treasury will be authorized to continue making 
purchases using funds that were committed in advance of the 
October 3, 2010 deadline. Finally, after Treasury completes all 
of its TARP purchases, it will hold a massive pool of financial 
assets likely worth hundreds of billions of dollars, and the 
process of unwinding some of these holdings may continue for a 
number of years.
    As of December 31, 2009, Treasury's largest TARP-related 
assets include $58 billion in preferred securities issued by 
banks, $25 billion in Citigroup common stock, $46.9 billion in 
AIG preferred stock, and $61 billion in shares and debt of GM 
and Chrysler. Treasury also holds significant assets under the 
Public-Private Investment Program, the Term Asset-Backed Loan 
Facility, and the Capital Purchase Program, and it has 
announced plans to purchase further assets under new programs 
such as the small business initiative.
    The Emergency Economic Stabilization Act authorized 
Treasury to hold its TARP assets until maturity or to sell them 
earlier. Treasury has articulated three principles that guide 
its determination of when to sell assets: maintaining the 
stability of the financial system, preserving the stability of 
individual financial institutions, and maximizing the return on 
the taxpayers' investment.
    These principles may sometimes be at odds with one another. 
For example, the most profitable moment to sell a TARP asset 
may not be the moment that best promotes systemic stability or 
the moment that best serves a particular institution. 
Furthermore, Treasury is only one department of a much larger 
federal government, and the broader government may have 
additional goals for the TARP, such as preserving jobs or 
satisfying a political constituency.
    The Panel is also concerned that, although Treasury has 
been consistent in articulating its principles, the principles 
as announced are so broad that they provide Treasury with a 
means of justifying almost any decision. This means that there 
is effectively no metric to determine whether Treasury's 
actions met its stated goals. Because any approach may 
alternatively be justified as maximizing profit, or maintaining 
the stability of significant institutions, or promoting 
systemic stability, almost any decision can be defended. 
Measuring Treasury's success against these metrics is 
problematic.
    As Treasury enters the next stage of its administration of 
the TARP, it must learn from the mistakes it has made in the 
past--in particular, its failure to follow the money used to 
bail out large financial institutions. Because Treasury never 
required the institutions that received the first infusions of 
TARP funding to account for their use of these funds, taxpayers 
have not had a clear understanding of how their money has been 
used. As Treasury embarks on new programs, it must require that 
future recipients provide much greater disclosure of their use 
of TARP dollars.
    Finally, and perhaps most significantly, the TARP has 
raised the long-term challenge of how best to eliminate 
implicit guarantees. Belief remains widespread in the 
marketplace that, if the economy once again approaches the 
brink of collapse, the federal government will inevitably rush 
in to rescue financial institutions deemed too big to fail. 
This belief distorts prices, giving large financial 
institutions an advantage in raising capital that mid-sized and 
smaller banks--those not too big to fail--do not enjoy. These 
implicit guarantees also encourage major financial institutions 
to take unreasonable risks out of the belief that, no matter 
what happens, taxpayers will not allow their failure. So long 
as markets continue to believe that an implicit guarantee 
exists, moral hazard will continue to distort prices and 
endanger the nation's economy, even after the last TARP program 
has been closed and the last TARP dollar has been repaid.
                      SECTION ONE: JANUARY REPORT


                              A. Overview

    On December 9, 2009, Treasury Secretary Timothy Geithner 
announced that the Troubled Asset Relief Program (TARP) would 
be extended until October 3, 2010.\1\ Although it may take 
years to unwind some of the assets acquired under the TARP, 
once the program expires, no new commitments may be made with 
respect to TARP funds and the end of the TARP will have begun.
---------------------------------------------------------------------------
    \1\ U.S. Department of the Treasury, Treasury Department Releases 
Text of Letter from Secretary Geithner to Hill Leadership on 
Administration's Exit Strategy for TARP (Dec. 9, 2009) (online at 
www.treasury.gov/press/releases/tg433.htm).
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    In its December report, the Congressional Oversight Panel 
looked at the entire program in order to assess what the TARP 
has accomplished and where it has fallen short from various 
perspectives in the 14 months since its inception. This month 
the Panel looks at what the TARP will leave behind when it 
ultimately is wound down.
    The TARP will leave behind a dual legacy: hard assets and 
an even harder problem. As a result of expenditures under the 
TARP, Treasury is now managing assets that rival in size a 
substantial sovereign wealth fund. Treasury's Office of 
Financial Stability (OFS) is managing a diverse portfolio of 
assets, worth approximately $258.1 billion at December 31, 
2009, which it eventually must divest. Divesting these assets 
will call for a balance between maximizing the return to 
taxpayers, maintaining financial stability, and continuing to 
pursue other stated objectives of the TARP. There are, of 
course, also unavoidable political considerations that will 
affect these decisions, and that political context in the 
current environment can shift quickly and unpredictably.
    Devising an exit strategy from the market impact of the 
TARP and related programs is even more difficult than deciding 
how and when to dispose of the assets. The Panel has several 
times noted the moral hazard that the financial rescue created: 
the market distortion arising from the belief among market 
participants and the managers of financial institutions that 
the government will guarantee the obligations and preserve the 
shareholders of large financial institutions.\2\ Government 
intervention has created implicit guarantees of some undefined 
portion of the financial system, and any effective exit 
strategy from the TARP and related programs must address how to 
unwind or withdraw that implicit guarantee.
---------------------------------------------------------------------------
    \2\ See Congressional Oversight Panel, November Oversight Report: 
Guarantees and Contingent Payments in TARP and Related Programs (Nov. 
6, 2009) (online at cop.senate.gov/documents/cop-110609-report.pdf) 
(hereinafter ``COP November Oversight Report'').
---------------------------------------------------------------------------
    The primary focus of this report is to follow the money: To 
summarize the assets and obligations that Treasury holds or 
owes as a result of its expenditure of TARP funds, to explore 
how Treasury plans to divest itself of those assets or 
obligations and get the taxpayers' money back, and also to 
examine how the recipients intend to make sure taxpayers are 
made whole. This implicates several elements of the Panel's 
mandate, particularly the use of the Secretary's authority 
under the TARP, the effectiveness of the TARP in minimizing 
costs and maximizing benefits to taxpayers, and contributions 
to transparency.\3\
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    \3\ 12 U.S.C. Sec. 5233(b).
---------------------------------------------------------------------------
    As examined in more detail below, Treasury has described to 
the Panel an exit strategy based on Treasury's view of sound 
asset management practices and Treasury's understanding of the 
statutory obligations imposed by the Emergency Economic 
Stabilization Act of 2008 (EESA), the law that led to the 
TARP's establishment. In this Report, the Panel discusses a 
number of questions that arise from this approach. The Panel 
notes that the publication of audited TARP financial statements 
has improved the transparency of the program and provided some 
insight with respect to the value of Treasury's holdings.
    This report also considers issues that arise with respect 
to further expenditures that may be made before the TARP 
expires; in particular under Treasury's small business 
initiatives and the continuing support provided to GMAC.
    As for the broader and still evolving issue--the unwinding 
of the implicit guarantees created by the financial rescue--the 
Panel reviews the current state of the debate and identifies 
the issues that must be addressed before it can be said that 
the TARP has been truly unwound.

            B. The Various Stages of ``Exit'' from the TARP


1. Secretary's Authority and Obligations

    The end of the TARP will involve several stages of 
``exit'': (1) The end of the Secretary's authority to purchase 
assets or commit funds, and to establish guarantees for 
troubled assets, on October 3, 2010; (2) the expenditure of all 
funds committed for the purpose of purchasing or supporting 
``troubled assets,'' as defined by EESA,\4\ and (3) the 
eventual disposition of all assets held by Treasury that were 
purchased through the TARP.
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    \4\ ``Troubled assets'' as defined by EESA includes both assets 
associated with mortgage-based securities and ``any other financial 
instrument that the Secretary, after consultation with the Chairman of 
the Board of Governors of the Federal Reserve System, determines the 
purchase of which is necessary to promote financial stability[.]'' 12 
U.S.C. Sec. 5202(9). Under this definition, valuable assets from 
healthy institutions may nonetheless be defined as ``troubled assets'' 
under the statute if their purchase is deemed to promote stability.
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    The first and most talked-about stage will come on October 
3, 2010, when the Secretary's authority to purchase troubled 
assets, or to commit funds for the purpose of purchasing 
troubled assets, will end.\5\ Originally, this authority was to 
end on December 31, 2009.\6\ The statute was written to permit 
the Secretary of the Treasury to extend the program, however, 
until October 3, 2010, provided he submitted to Congress ``a 
written certification . . . includ[ing] a justification of why 
the extension is necessary to assist American families and 
stabilize financial markets, as well as the expected cost to 
the taxpayers for such an extension.'' \7\  On December 9, 
2009, the Secretary sent such a certification to Speaker of the 
House Nancy Pelosi and Senate Majority Leader Harry Reid, 
stating his intention to exercise his authority to extend the 
TARP until October 2010.\8\ According to this certification, 
Treasury will spend the remaining months of the TARP 
``terminating and winding down many of the government programs 
put in place last fall [2008].'' \9\ New commitments in 2010 
will be limited to the following three areas:
---------------------------------------------------------------------------
    \5\ See 12 U.S.C. Sec. 5230.
    \6\ 12 U.S.C. Sec. 5230(a).
    \7\ 12 U.S.C. Sec. 5230(b).
    \8\ U.S. Department of the Treasury, Letter from Secretary Geithner 
to Speaker Pelosi (Dec. 9, 2009) (online at www.financialstability.gov/
docs/press/Pelosi%20Letter.pdf); U.S. Department of the Treasury, 
Letter from Secretary Geithner to Senator Reid (Dec. 9, 2009) (online 
at www.financialstability.gov/docs/press/Reid%20Letter.pdf).
    \9\ Id.
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           Mitigating foreclosures for homeowners;
           Providing capital to small and community 
        banks, and other efforts to facilitate small business 
        lending; and
           Potentially increasing Treasury's commitment 
        to the Term Asset-Backed Securities Loan Facility 
        (TALF), a program administered by the Federal Reserve 
        Bank of New York (FRBNY) and aimed at unlocking the 
        credit markets via loans for the purchase of certain 
        types of asset-backed and commercial mortgage-backed 
        securities.\10\
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    \10\ Id.
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    The certification notes that ``[b]eyond these limited new 
commitments, we will not use remaining EESA funds unless 
necessary to respond to an immediate and substantial threat to 
the economy stemming from financial instability.'' \11\
---------------------------------------------------------------------------
    \11\ Id.
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    The end of the authority to purchase assets or commit funds 
for their purchase will not, however, constitute a true 
``exit'' from the TARP. The statute permits Treasury to commit 
funds until October 3, 2010, but spend them after that 
date.\12\ Therefore, there may be funds that have been 
committed but that, as of October 4, 2010, have not yet been 
actually spent. It is too soon to know how many such unfunded 
commitments may exist by October 3. The current state of the 
various programs under the TARP, and the amounts that could yet 
be expended, are discussed in Sections D and E.
---------------------------------------------------------------------------
    \12\ Under 12 U.S.C. Sec. 5216(e), the Secretary may continue to 
hold assets purchased under TARP, and may purchase or fund purchases of 
assets after the October 3, 2010 expiration date if the commitment to 
make such purchase was made by October 3, 2010.
---------------------------------------------------------------------------
    Even after the Secretary's authority to purchase assets has 
expired and all commitments have been funded, Treasury will 
still likely hold billions of dollars worth of assets purchased 
through the program. Treasury will have to provide for the 
management and prudent sale of these assets, which may continue 
over a number of years. Various sections of EESA contemplate 
such ongoing management and describe the structures that will 
remain in place to oversee and guide this process.
    Section 5223 of EESA contains direct guidance to Treasury 
with respect to its obligations in holding and selling assets. 
According to this section, the Secretary shall: ``hold the 
assets to maturity or for resale for and until such time as the 
Secretary determines that the market is optimal for selling 
such assets, in order to maximize the value for taxpayers'' and 
``sell such assets at a price that the Secretary determines, 
based on available financial analysis, will maximize return on 
investment for the Federal Government.'' \13\
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    \13\ 12 U.S.C. Sec. 5223(a)(2).
---------------------------------------------------------------------------
    Section 5216 of EESA provides specific details regarding 
Treasury's authority. This section provides that the Secretary 
``may, at any time, exercise any rights received in connection 
with troubled assets purchased under this chapter'' and that 
the Secretary has the authority to ``manage troubled assets 
purchased under this chapter, including revenues and portfolio 
risks therefrom.'' \14\ As to the sale of troubled assets, this 
section grants the Secretary the ability to ``at any time, upon 
terms and conditions and at a price determined by the 
Secretary, sell, or enter into securities loans, repurchase 
transactions, or other financial transactions in regard to, any 
troubled asset purchased under this chapter.'' \15\ The 
proceeds from such sales as well as revenues from troubled 
assets are to be paid into ``the general fund of the Treasury 
for reduction of the public debt.'' \16\
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    \14\ 12 U.S.C. Sec. 5216(a), (b).
    \15\ 12 U.S.C. Sec. 5216(c).
    \16\ 12 U.S.C. Sec. 5216(d). Treasury apparently concedes that EESA 
bars the Secretary from taking amounts Treasury receives when stock and 
warrants are redeemed and spending those amounts again, rather than 
using them to reduce the public debt (allowing section 106(d) of EESA 
to operate). However, it argues that section 118 of EESA also permits 
the Secretary to issue new government securities to raise new funds 
``[f]or the purposes of the authorities granted in [EESA],'' including 
use to restore the TARP fund to full strength (roughly, the amount by 
which the statutory funding ceiling exceeds outstanding purchases and 
commitments). See, e.g., Congressional Oversight Panel, Questions for 
the Record for U.S. Department of the Treasury Secretary Timothy 
Geithner, at 13 (Sept. 23, 2009) (online at cop.senate.gov/documents/
testimony-091009-geithner-qfr.pdf). The Panel takes no position on the 
validity of this position.
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    While it is clear that EESA contemplates some form of 
ongoing management of TARP assets, the scope of that authority 
is less clear. For example, section 5216 permits the Secretary 
to ``exercise any rights received in connection with'' TARP 
assets, and section 106(b) authorizes the Secretary ``to manage 
troubled assets purchased under this Act, including revenues 
and portfolio risks therefrom.'' Clearly, if the Secretary 
purchased convertible preferred stock before the expiration of 
the TARP, that stock could be converted, according to its 
terms, into common equity after the TARP sunset date. The right 
to convert the stock was received in the transaction by which 
Treasury acquired the asset.
    That leaves the question of whether Treasury could exchange 
a TARP asset for anything but cash after the sunset date. 
Suppose that Treasury sought to exchange non-convertible 
preferred stock after the sunset date for common stock in the 
same institution. Such a transaction might be characterized as 
an exercise of a right ``received in connection with'' the 
original asset, but it could perhaps more appropriately be 
characterized as a means of purchasing new common equity using 
the preferred stock, depending on the facts of the situation.
    The statute provides no guidance as to whether the 
Secretary's authority to ``manage'' an asset includes using the 
stock to obtain a different class of stock, or whether such an 
exchange is permitted if it can be shown to ``reduce portfolio 
risk.'' Whether an exchange, for example, of preferred for 
common stock, can be shown to ``reduce portfolio risk'' depends 
on the facts of particular situations. Treasury has stated 
that, while it is unwilling to speculate on such hypothetical 
situations, its position is that if the February 2009 Citigroup 
exchange offer, in which preferred stock was exchanged for 
common stock in an effort to bolster the company's regulatory 
capital, had occurred after the sunset date, Treasury would 
nonetheless have the authority to engage in such a transaction 
as part of its authority to manage TARP assets.\17\
---------------------------------------------------------------------------
    \17\ Treasury conversations with Panel staff (Nov. 20, 2009).
---------------------------------------------------------------------------
    Another issue involves the conditions under which the 
Secretary may sell TARP assets. The Secretary has a statutory 
obligation to hold TARP assets until the Secretary determines 
the market for the sale of such assets is ``optimal.'' This may 
prove to be a difficult standard to apply. Without the benefit 
of hindsight, determining when a market is ``optimal'' for a 
particular sale is extraordinarily difficult. As discussed in 
greater detail below, Treasury reads this provision to require 
sales to forward the broad policy views required and implied by 
EESA. ``Optimal'' timing might therefore not be the most 
profitable, but timing that best forwards Treasury's goals. As 
also discussed in Section D.2 below, such an understanding of 
``optimal timing'' creates certain difficulties with regard to 
oversight.

2. Other Oversight and Management Entities

    The same section of EESA that provides the Secretary with 
the authority to create the TARP also provides for the creation 
of the Office of Financial Stability (OFS) to implement 
programs created under the TARP.\18\ The section of EESA that 
provides a sunset date for the authority granted the Secretary, 
however, explicitly excludes OFS from the sunset.\19\ No other 
section in EESA provides an alternative sunset date for OFS. 
This office will remain the primary office for the 
administration, management, and disposition of TARP assets.
---------------------------------------------------------------------------
    \18\ 12 U.S.C. Sec. 5211(a)(3)(A).
    \19\ 12 U.S.C. Sec. 5230(a).
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    In addition, the Financial Stability Oversight Board 
(FSOB), created by EESA,\20\ will remain in existence until 15 
days after the later of either the date the last troubled asset 
purchased has been sold, or the last insurance contract entered 
into under the section to guarantee troubled assets has 
expired.\21\ Because the statute provides explicitly for the 
FSOB to continue until Treasury has fully exited from all TARP-
related transactions, this board is clearly intended to provide 
guidance not only for the implementation of the TARP, but for 
the ongoing management and sale of TARP assets. EESA requires 
the Secretary to make monthly reports to the FSOB regarding the 
current status of TARP programs and expenditures; this 
obligation continues until the date of the FSOB's termination.
---------------------------------------------------------------------------
    \20\ The FSOB's members are the Secretary of the Treasury, the 
Chairman of the Board of Governors of the Federal Reserve System, the 
Director of the Federal Housing Finance Agency, the Chairman of the 
Securities Exchange Commission, and the Secretary of Housing and Urban 
Development. 12 U.S.C. Sec. 5214(b). Its duties include reviewing 
``policies implemented by the Secretary and [the OFS] . . . including 
the appointment of financial agents, the designation of asset classes 
to be purchased, and plans for the structure of vehicles used to 
purchase troubled assets.'' 12 U.S.C. Sec. 5214(a).
    \21\ 12 U.S.C. Sec. 5214(h). For a detailed analysis of the 
programs created under Sec. 5212, please see the Congressional 
Oversight Panel's November report. COP November Oversight Report, supra 
note 2.
---------------------------------------------------------------------------
    The three main oversight bodies for the TARP--the Special 
Inspector General for the Troubled Asset Relief Program 
(SIGTARP), the Government Accountability Office (GAO), and the 
Panel--also have duties that extend beyond the October 3, 2010, 
sunset date. SIGTARP's oversight obligations expire on the same 
date as the FSOB terminates.\22\ GAO's obligations expire on 
the later of the date the last TARP asset is sold, or the last 
insurance contract ends.\23\ The Panel's obligations expire on 
April 3, 2011.\24\
---------------------------------------------------------------------------
    \22\ 12 U.S.C. Sec. 5231(h).
    \23\ 12 U.S.C. Sec. 5226(e).
    \24\ 12 U.S.C. Sec. 5233(f).
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3. Effect on Other Related Programs

    Treasury's exit from the TARP will have little to no effect 
on several programs that use TARP funds,\25\ or on other 
related programs that are also aimed at stabilizing the 
country's economy.
---------------------------------------------------------------------------
    \25\ One of the stated purposes of the EESA is to preserve 
homeownership, and section 109 of EESA directs the Secretary of the 
Treasury ``[t]o the extent that [he] acquires mortgages, mortgage 
backed securities, and other assets secured by residential real 
estate'' to ``implement a plan that seeks to maximize assistance for 
homeowners and use the authority of the Secretary to encourage the 
servicers of the underlying mortgages, considering net present value to 
the taxpayer, to take advantage of the HOPE for Homeowners Program . . 
. or other available programs to minimize foreclosures. In addition, 
the Secretary may use loan guarantees and credit enhancements to 
facilitate loan modifications to prevent avoidable foreclosures.'' 12 
U.S.C. Sec. Sec. 5201(2)(B), 5219(a).
---------------------------------------------------------------------------
    The Home Affordable Modification Program (HAMP), which aims 
to assist homeowners seeking to avoid foreclosure, will be 
largely unaffected by the end of the TARP. Treasury initially 
committed up to $50 billion in TARP funds to this program, and 
as of the release of this report, there has been no 
announcement that any additional funds have been committed. But 
more funds may be committed in the future. In Secretary 
Geithner's recent letter extending the TARP, he cited 
foreclosure mitigation as one of the areas where additional 
TARP commitments may be made in 2010. Furthermore, the $50 
billion in TARP funds already committed to HAMP may be paid out 
even after the expiration of the TARP. Because these funds are 
used to reduce homeowners' mortgage payments, there are no 
assets for Treasury to manage; therefore, no exit strategy is 
necessary.\26\
---------------------------------------------------------------------------
    \26\ The Panel requested from Treasury a legal opinion on its HAMP 
authority. See, e.g., Congressional Oversight Panel, COP Hearing with 
Treasury Secretary Timothy Geithner (Dec. 10, 2009).
---------------------------------------------------------------------------
    Two other programs that use TARP funds, the TALF and the 
Public-Private Investment Program (PPIP), will also be 
unaffected because the TARP funds that they use have already 
been committed. To the extent that the TALF and the PPIP are 
used to purchase assets, the assets are held and managed by 
private entities under the terms of the programs. Therefore, 
although OFS will have continuing oversight responsibility for 
these programs and the private entities that manage them, 
Treasury will not itself have responsibility for directly 
selling any assets purchased through these programs. 
Furthermore, both programs have their own fixed termination 
dates. Loans made under the TALF must not have a term limit 
beyond seven years and, currently, no loans may be made past 
June 30, 2010.\27\ The investment funds established under the 
PPIP have a ten-year termination date.
---------------------------------------------------------------------------
    \27\ Federal Reserve Bank of New York, Term Asset-Backed Securities 
Loan Facility: Terms and Conditions (Nov. 13, 2009) (online at 
www.newyorkfed.org/markets/talf_terms.html) (hereinafter ``TALF Terms 
and Conditions'').
---------------------------------------------------------------------------
    A small business initiative that was announced by the White 
House in October 2009 has yet to take form.\28\ But to the 
extent that it includes any outright expenditures, there will 
similarly be no requirement for an exit strategy for assets. 
This does not mitigate the need for rigorous oversight of any 
such programs.\29\
---------------------------------------------------------------------------
    \28\ White House, Weekly Address: President Obama Says Small 
Business Must be at the Forefront of the Recovery (Oct. 24, 2009) 
(online at www.whitehouse.gov/the-press-office/weekly-
address-president-obama-says-small-business-must-be-forefront-
recovery).
    \29\ See Section E, infra.
---------------------------------------------------------------------------
    Several related programs run by the Federal Deposit 
Insurance Corporation (FDIC) and the Federal Reserve will 
likewise be unaffected by the TARP's end. An FDIC program under 
which bank accounts are guaranteed up to $250,000, up from the 
earlier level of $100,000, is unrelated to the TARP and will 
remain in place until December 31, 2013. Similarly, certain 
financing that the Federal Reserve has made available in 
response to the financial crisis is unrelated to the TARP and 
will be unaffected by the TARP's termination.

4. EESA Requirements Relating to Use of TARP Profits, or Approach to 
        TARP Losses

    Most of the programs established in the TARP's early days 
carry the potential of a return on Treasury's investments, 
which gives rise to the question of what is the best use of any 
profits from the TARP. While EESA provides that all profits are 
to be used to pay down the national debt,\30\ there is an 
ongoing debate about what to do with TARP funds going forward. 
Should the TARP instead realize a net loss, EESA provides that 
``the President shall submit a legislative proposal that 
recoups from the financial industry an amount equal to the 
shortfall in order to ensure that the Troubled Asset Relief 
Program does not add to the deficit or national debt.'' \31\
---------------------------------------------------------------------------
    \30\ 12 U.S.C. Sec. 5216(d).
    \31\ 12 U.S.C. Sec. 5239.
---------------------------------------------------------------------------
    The fact that the TARP morphed from the asset purchase 
program contemplated by the legislation to a capital infusion 
program complicated the issue somewhat, and later TARP programs 
such as HAMP, which are not intended to produce any return at 
all, complicated it further. It currently appears that, 
although some capital-injection programs will show a profit, 
the TARP as a whole will result in a loss.\32\ Even if the 
capital-injection programs show a profit, these profits will 
have to be large enough to also make up for outlays under 
programs such as HAMP, which are structured without any 
contemplation of a return of capital or interest. It is thus 
possible that legislation may result in financial institutions 
being charged for losses made on investments in two automobile 
companies and on foreclosure mitigation efforts. On the other 
hand, it may be argued that many of the financial institutions 
that received TARP funds would not have survived absent such 
capital injections, or, even if they themselves were not short 
of capital, would have been vulnerable had other giants in the 
industry fallen, and therefore asking for these institutions to 
contribute to an overall TARP shortfall is appropriate. 
Ultimately, EESA specifies that the determination of whether 
the program has made a loss is to be made after October 3, 
2013,\33\ and it may take several years for the results of some 
of the investments made under the TARP to be clear, although 
the TARP financial statements do calculate likely profit or 
loss for all TARP investments in fiscal year 2009.\34\
---------------------------------------------------------------------------
    \32\ Congressional Oversight Panel, Written Testimony of Treasury 
Secretary Timothy F. Geithner (Dec. 10, 2009) (online at 
cop.senate.gov/documents/testimony-121009-geithner.pdf) (hereinafter 
``Sec. Geithner Written Testimony''); U.S. Department of the Treasury, 
Agency Financial Statement 2009, at 3 (Sept. 30, 2009) (online at 
www.treas.gov/press/releases/OSF%20AFR%2009.pdf) (hereinafter ``Agency 
Financial Statement 2009'').
    \33\ See 12 U.S.C. Sec. 5239.
    \34\ An amendment to a bill that passed the House on December 10, 
2009 (see Section G.1, infra) permits the FDIC to make an assessment 
for the Systemic Dissolution Fund used to repay any shortfalls in the 
Troubled Asset Relief Program to ensure that such shortfalls do not add 
to the deficit or national debt. Rep. Gary Peters, Amendment to the 
Wall Street Reform and Consumer Protection Act of 2009, Congressional 
Record, H14748-14750 (Dec. 11, 2009) (online at 
frwebgate.access.gpo.gov/cgi-bin/
getpage.cgi?dbname=2009_record&page=H14745&position=all). One potential 
issue with this approach is that institutions that repaid their TARP 
funds in full would be required to make up the shortfall for those 
banks that were unable to do so. During a meeting with Panel staff on 
December 16, 2009, OFS Chief Counsel Timothy Massad said that OFS was 
aware of this issue but that it was too early to consider any concrete 
plans for such recoupment.
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5. Continuing Market Effects of the TARP: The Implicit Guarantee

    Even after the TARP has ended, it is likely that the effect 
of the TARP and related programs on the market will continue 
for some time. The decisions to rescue certain financial 
institutions have created an implicit government guarantee, the 
limits of which are unknown and the reasons for which are not 
fully articulated.\35\ This guarantee goes beyond the so-called 
too big to fail problem: it is not clear how far the guarantee 
extends into the smaller banks, and even some of the banks 
subjected to the ``stress tests''--which some commentators have 
viewed as the too big to fail list \36\--seem to pose no real 
threat to the financial system.\37\
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    \35\ The ramifications of this may be visible in certain comments 
by rating agencies with regard to Citigroup. See Section D.5(b), infra.
    \36\ Thomas F. Cooley, The Need for Failure, Forbes.com (May 27, 
2009) (online at www.forbes.com/ 2009/05/26/fdic-treasury-banks-too-
big-to-fail-opinions-columnists-sheila-bair.html).
    \37\ Metlife, which operates in a confined segment of the financial 
services industry, was also one of the nineteen entities selected for 
the stress tests. Federal Reserve Board of Governors, The Supervisory 
Capital Assessment Program: Overview of Results, at 30 (May 7, 2009) 
(online at www.federalreserve.gov/newsevents/press/bcreg/
bcreg20090507a1.pdf).
---------------------------------------------------------------------------
    Implicit guarantees affect the market's view of these 
institutions, and a perception that an institution will be 
protected by the government may in fact result in the 
government's continued protection. Those institutions may 
factor the implicit guarantee into their calculation of 
downside risk, assuming the government will backstop any failed 
investments while they preserve any upside. Such risk 
calculations will have a ripple effect across the market as the 
investment portfolios of the guaranteed institutions' risk 
profiles shift. For example, the government guarantees that 
were provided to money market funds at the height of the 
financial crisis have now officially lapsed, but at least one 
commentator has noted that the implicit guarantees may linger, 
and may be influencing both the funds' investment decisions and 
their cost of capital.\38\ As discussed in the Panel's November 
report, capital tends to be cheaper for institutions that have 
strong guarantees, such as a guarantee backed by the U.S. 
government.\39\ This has the dual effect of decreasing the cost 
of capital for the guaranteed institution and placing that 
institution at a competitive advantage over institutions 
without such a guarantee. These guarantees have lowered the 
cost of capital for many institutions.\40\ Investors make 
similar calculations, taking on more risk when they are 
protected from the consequences of their decisions.\41\ If 
there is no new crisis and bailout, the market-distorting 
effect of the TARP and related programs may dissipate as 
institutions and investors come to believe that the government 
will not step in to save failing institutions, or at least have 
no government bailout in their recent memories. The effect in 
the period immediately following the TARP's dissolution, 
however, must be taken into account when analyzing market 
behavior, especially with regard to risk calculations.
---------------------------------------------------------------------------
    \38\ Daisy Maxey, Money Funds Again Take On Risk, Wall Street 
Journal (Nov. 16, 2009) (online at online.wsj.com/article/
SB10001424052748703811604574534011795078126.html).
    \39\ COP November Oversight Report, supra note 2, at 37.
    \40\ COP November Oversight Report, supra note 2, at 37 (``The 
research firm SNL Financial (SNL) . . . found that the DGP saved 
issuers 39 percent in interest costs'').
    \41\ Moral hazard arises when the government agrees to guarantee 
the assets and obligations of private parties and protect them from 
loss. The insured party might take greater risk, especially when the 
protected party is not required to purchase the protection. 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.
    For an in depth discussion of moral hazard in the context of TARP 
programs, see the Panel's November report. COP November Oversight 
Report, supra note 2, at 70-72.
---------------------------------------------------------------------------
    The implicit guarantee that has now been created will not 
end with the end of the TARP. The markets will assume that the 
government will intervene with a new TARP in the event of 
another crisis, unless the government credibly establishes that 
this will not happen. One of the first orders of business for 
the government as part of the unwinding of the TARP must be to 
clarify or rein in the implicit guarantee and the distortion it 
has on the markets.\42\
---------------------------------------------------------------------------
    \42\ This process may have already begun with the failure of CIT in 
July 2009. Although the company received $2 billion in CPP funds, the 
federal government did not provide additional funding when it became 
clear that the company would not survive despite the capital injection. 
CIT Group, Inc., CIT Announces That Discussions with Government 
Agencies Have Ceased (July 15, 2009) (online at www.businesswire.com/
portal/site/cit/
?ndmViewId=news_view&newsId=20090715006374&newsLang=en). CIT's 
prepackaged bankruptcy plan was confirmed by a court in December. CIT 
Group, Inc., CIT Prepackaged Plan of Reorganization Confirmed by Court 
(Dec. 8, 2009).
---------------------------------------------------------------------------
    The term too big to fail has come to be used as shorthand 
for the implicit guarantee and to describe institutions that 
the government dare not let fail, because such failure would 
threaten to spread to the larger economy.\43\ Such risk might 
be posed by reason of size or by the impact a company's failure 
would have on the financial system. Size alone does not 
determine this status, although the size of some institutions 
means that their collapse in markets that have not properly 
addressed the risk could have a significant impact on the 
economy. Financial institutions can also threaten the financial 
system by reason of their concentration of derivative risk or 
by the fact that they provide essential services, disruption of 
which could result in significant dislocations in the financial 
system. The securities processing services, custody, and cash 
management and treasury functions of some institutions are 
depended upon by so many large entities that their loss could 
cause significant problems in the global financial system. Risk 
is multi-faceted, and because risk derives from the very 
different functions and activities of the various financial 
institutions, it will be very difficult to find a one-size-
fits-all definition of too big to fail.
---------------------------------------------------------------------------
    \43\ In this context, it is worth noting that ``risk'' is not the 
only multi-faceted concept. The too big to fail shorthand implies that 
there is only one kind of failure: where the dissolution of the 
relevant entity could create enormous labor or market disruptions. This 
arguably presents the choice facing Treasury and the U.S. government as 
always between chaos or moral hazard: to use concrete examples, that 
the only choices were either to let an entity--for example, Lehman 
Bros.--collapse into chaos, and bring other entities with it, or to 
provide the entity--for example, AIG--with bail-outs, distorting the 
markets. Under other circumstances, however, these extreme poles might 
not have formed the models for government intervention. Put another 
way, that these were the choices Treasury made in 2008-2009 does not 
mean that they were the only choices available to it. This report, 
however, deals with the problem of exit, and therefore does not address 
alternative actions that Treasury, the Bush or Obama Administrations, 
or Congress could have taken in the crisis. The TARP program may not 
have been the only means of responding to the crisis, but in discussing 
exit from the TARP program, this report can only assess exit from the 
choices that were actually made.
---------------------------------------------------------------------------
    In Section G of this report, the Panel reviews some of the 
options that are currently being proposed to address the risks 
posed by too big to fail institutions. The Panel takes no view 
on those options, but notes that it is essential that the 
unwinding of the TARP includes steps to address the moral 
hazard and market distortion that the TARP and related programs 
created.

6. Certain Tax Issues Affecting TARP Exit

    TARP exit strategy and the operation of the CPP are 
affected by a series of Treasury Department decisions that 
limit the applicability of the Internal Revenue Code (Code) 
rules limiting the use of a corporation's net operating losses 
(NOLs).\44\ NOLs can reduce the future income and hence the tax 
liability of a financial institution, or of any other 
corporation.\45\ Equally important, a bank holding company's 
tier 1 regulatory capital will ordinarily include a portion of 
its NOLs.\46\ Any cap on an institution's available NOLs could 
be expected to have a negative effect on the institution's 
value and regulatory capital position. If the institution has a 
large number of NOLs, the effect is likely to be substantial.
---------------------------------------------------------------------------
    \44\ An NOL, conceptually, is the excess of a corporation's 
deductions over its taxable income. Section 382 also applies to what 
are called ``built-in losses'' (in simplest terms, the amount by which 
the value of an asset is less than its cost), and its companion section 
383 applies in a similar way to the carryforward of unused tax credits. 
NOLs, built-in losses, and tax credits together form a corporation's 
``deferred tax assets,'' whose value is greater than the value of the 
corporation's NOLs alone. Although not technically correct, the term 
``NOL'' is used here for ease of presentation to refer to all three tax 
attributes.
    \45\ A corporation is generally permitted to carry forward NOLs for 
20 years, to offset its future income.
    \46\ 12 CFR Sec. 225 at appendix A.II.A.1. To summarize the rule, 
NOLs may constitute up to 10 percent of tier 1 capital, to the extent 
that the institution ``is expected to realize [a tax deduction by their 
use] within one year . . . based on its projections of future taxable 
income for that year . . . .'' 12 CFR Sec. 225 at appendix 
A.II.B.4.a.i.
---------------------------------------------------------------------------
    The NOL limitation rules, contained in section 382 of the 
Code, limit the annual availability of a corporation's NOLs 
after a ``change in control'' of that corporation to a small 
percentage of the otherwise usable amount.\47\ The corporation 
does not have to be sold to trigger the limitation; a change in 
control occurs if the percentage of the corporation's stock 
owned by any of its ``five percent shareholders'' increases by 
more than 50 percent over a three-year period, whether by the 
corporation's sale or otherwise. A ``five percent shareholder'' 
is any shareholder that owns five percent or more of the stock 
of the corporation. The stock owned by all shareholders who are 
not five percent shareholders is treated as being owned by one 
or more groups which may be treated as five percent 
shareholders, referred to as the ``public groups.''
---------------------------------------------------------------------------
    \47\ 26 U.S.C. Sec. 382. The limitation may be severe. If a change 
in control occurs, the amount of income that the ``post-change'' 
corporation can offset by ``pre-change'' losses is capped at a small 
percentage of the corporation's value, which is roughly equal to its 
market capitalization. This percentage, called ``the long-term tax-
exempt rate'' and set monthly by the IRS, is currently at 4.14 percent. 
Thus, at present, a corporation whose market capitalization was $1 
billion could use the NOLs generated before its change in control only 
to the extent of $41.4 million of taxable income each year.
---------------------------------------------------------------------------
    The Internal Revenue Service (IRS) issued several notices 
(the EESA Notices) containing guidance about the application of 
section 382 to institutions engaged in transactions with the 
Treasury Department under EESA. The Notices extended to 
transactions under any of the TARP programs. The first three 
EESA Notices, issued in October 2008, January 2009, and April 
2009, allowed Treasury to take, and the institutions to redeem 
eventually, stock and warrants without causing a change in 
ownership under section 382.\48\ Any other result would have 
increased substantially the uncertainty created by TARP and the 
potential cost of participation in its programs. The tax and 
regulatory capital costs of participation by financial 
institutions might well have greatly limited TARP's 
effectiveness. All of the EESA Notices to date have been issued 
under both the Secretary's authority to issue income tax 
regulations and to issue ``such regulations and other guidance 
as may be necessary or appropriate to define terms or carry out 
the authorities or purposes of [EESA].'' \49\
---------------------------------------------------------------------------
    \48\ IRS Notice 2008-100 (Oct. 15, 2008) (online at www.irs.gov/
irb/2008-44_IRB/ar13.html); IRS Notice 2009-14 (Jan. 31, 2009) (online 
at www.irs.gov/pub/irs-drop/n-09-14.pdf); IRS Notice 2009-38 (April 13, 
2009) (online at www.irs.gov/irb/2009-18_IRB/ar09.html). Each of the 
Notices was described as ``amplifying'' and was designated as 
``superseding'' the immediately prior Notice. The first Notice applied 
only to preferred shares and warrants issued under the CPP. The second 
expanded the treatment to include the TIP, SSFI, and the AIFP. It also 
added a provision excepting from section 382 Treasury's ownership of 
stock ``other than preferred stock.'' The April Notice extended the 
guidance to the CAP and AGP, and in anticipation of Treasury's exchange 
of preferred stock for common stock of Citigroup, exempted Treasury's 
receipt of that stock from section 382, even though such stock was not 
received directly under the TARP program. The Revenue Service had 
previously issued similar guidance for two pre-EESA transactions that 
were part of the financial stability effort.
    \49\ 12 U.S.C. Sec. 5211(c)(5). In addition to the Secretary's 
overall authority to issue income tax regulations, section 382(m) 
specifically authorizes the Secretary to issue ``such regulations as 
may be necessary or appropriate to carry out the purposes of this 
section.'' 26 U.S.C. Sec. 382(m).
---------------------------------------------------------------------------
    In addition, the IRS issued a Notice at the end of 
September 2008, prior to the enactment of EESA, stating that 
important elements of section 382 would not apply to a change 
in ownership of a bank.\50\ Any bank was allowed to rely on the 
Notice, but it was identified as having been issued to 
facilitate the acquisition of Wachovia by Wells Fargo and at 
least one other bank acquisition.\51\ That Notice was rescinded 
by Congress, however, as part of the economic stimulus 
legislation, for any ownership change after January 16, 
2009.\52\ The effective date excluded transactions under 
contracts entered into on or before January 16, so that the 
Notice did apply to lift the section 382 limitations for the 
acquisition of Wachovia. The accompanying Conference Committee 
Report mentioned without comment the EESA Notices that existed 
at the time of the report.\53\
---------------------------------------------------------------------------
    \50\ IRS Notice 2008-83 (Sept. 30, 2008) (online at www.irs.gov/
irb/2008-42_IRB/ar08.html). The items involved were ``any deduction . . 
. for losses on loans or bad debts (including any deduction for a 
reasonable addition to a reserve for bad debts).''
    \51\ See Crowell & Moring, Tax Notice Drives Wachovia Takeover 
Turmoil (Oct. 6, 2008) (online at www.crowell.com/NewsEvents/
Newsletter.aspx?id=1032); Baker Hostetler, IRS Net Operating Loss 
Guidance to Banks (Oct. 9, 2009) (online at www.bakerlaw.com/irs-net-
operating-loss-
guidance-to-banks-10-9-2008/); Press Release, Grassley Seeks Inspector 
General Review of Treasury Bank Merger Move (Nov. 14, 2008) (online at 
finance.senate.gov/press/Gpress/2008/prg111408c.pdf) (``The Notice, 
issued just days before Congress voted on the Emergency Economic 
Stabilization Act of 2008, appears to have had the effect of benefiting 
Wachovia Corporation executives and Wells Fargo . . . Treasury's 
issuance of the Notice apparently enabled Wells Fargo to take over 
Wachovia despite a pending bid from Citibank. Without the issuance of 
the Notice, Wells Fargo would have only been able to shelter a limited 
amount of income. Under the Notice, however, Wells Fargo could 
reportedly shelter up to $74 billion in profits''). See also Sen. 
Charles E. Schumer, Schumer Seeks Answers from IRS, Treasury on Tax 
Code Change That Subsidizes Bank Acquisitions (Oct. 30, 2008) (online 
at schumer.senate.gov/new_website/record.cfm?id=304737) (``Wells Fargo 
. . . stands to save $19.4 billion as a result of the tax change, PNC 
Financial is estimated to save more than $5.1 billion in its takeover 
of Cleveland-based National City'').
    \52\ Congress found that:
    (1) The delegation of authority to the Secretary of the Treasury 
under section 382(m) of the Internal Revenue Code of 1986 does not 
authorize the Secretary to provide exemptions or special rules that are 
restricted to particular industries or classes of taxpayers.
    (2) Internal Revenue Service Notice 2008-83 is inconsistent with 
the congressional intent in enacting such section 382(m).
    (3) The legal authority to prescribe Internal Revenue Service 
Notice 2008-83 is doubtful.
    American Recovery and Reinvestment Act (ARRA), Pub. L. No. 111-5, 
at Sec. 1261 (2009).
    \53\ Conference Report to Accompany H.R. 1, at 555-560, 111th Cong. 
(2009) (H.R. Rept. 111-16) (online at legislative.nasa.gov/
ConferenceReport%20111-16.pdf).
---------------------------------------------------------------------------
    The fourth EESA Notice was issued in December 2009.\54\ The 
December Notice expands the prior guidance by stating that a 
sale by the Treasury Department of stock it had received under 
any of the EESA programs to a ``public group,'' that is, to a 
group of less than five percent shareholders, would not trigger 
an ownership change. The December Notice applies to all 
Treasury shareholdings. Its most immediate application and 
likely most significant application, however, is to the planned 
sale of the shares of Citigroup that Treasury holds.\55\
---------------------------------------------------------------------------
    \54\ IRS Notice 2010-2 (Dec. 11, 2009) (online at www.irs.gov/pub/
irs-drop/n-10-02.pdf).
    \55\ This section does not discuss the possible impact of the 
December Notice on future sales of stock held by Treasury under the 
Automotive Industry Financing Program, SSFI, or any common stock 
acquired by Treasury pursuant to its CPP warrants. However, as noted in 
the text, the December notice is likely to have its greatest 
significance as applied to Citigroup because any triggering of section 
382 will likely reduce a financial institution's tier 1 capital. in the 
value of Citigroup's NOLs and in the amount of its tier 1 capital.
---------------------------------------------------------------------------
    The application of the section 382 limitations to Citigroup 
would have been harsh.\56\
---------------------------------------------------------------------------
    \56\ Citigroup recognized the risk of the application of section 
382. In early June 2009, as part of its Exchange Offer with Treasury, 
and as described in its 2009 Third Quarter 10-Q, its Board had adopted 
a ``tax benefits preservation plan . . . to minimize the likelihood of 
an ownership change [under section 382] and thus protect Citigroup's 
ability to utilize certain of its deferred tax assets, such as net 
operating loss and tax credit carry forwards, to offset future 
income.'' However, the 10-Q continued: ``[d]espite adoption of the 
[p]lan, future stock issuance our transactions in our stock that may 
not be in our control, including sales by the USG, may . . . limit the 
Company's ability to utilize its deferred tax asset and reduce its 
[tangible common equity] and stockholders equity.'' Citigroup, 
Quarterly Report for the Third Quarter of 2009 (10-Q), at 11 (online at 
www.citibank.com/citi/fin/data/q0903c.pdf?ieNocache=106) (hereinafter 
``Citigroup Third Quarter 10-Q'').
---------------------------------------------------------------------------
    Citigroup reported deferred tax assets (DTA) of $38 billion 
as of September 30, 2009, and stated that it would require 
``approximately $85 billion of taxable income during the 
respective carry-forward periods to fully realize its U.S. 
federal, state and local DTA.'' \57\ Given Citigroup's current 
market capitalization of $80.02 billion, it could use its NOLs 
only to offset $3.31 billion in taxable income annually, under 
the section 382 limitation.\58\
---------------------------------------------------------------------------
    \57\ It is not possible, or very difficult, to discern from public 
information how much taxable income Citigroup would need in order to 
use its DTAs if it were subject to section 382 limitations. Use of DTAs 
is not one to one against taxable income.
    \58\ $3.23 billion is Citigroup's market capitalization multiplied 
by the long-term tax exempt rate. See supra note 47.
---------------------------------------------------------------------------
    Of course, any application of the limitation would have 
also reduced Citigroup's capital. Citigroup reported that as of 
September 30, 2009 ``[a]pproximately $13 billion of [its] net 
deferred tax asset is included in Tier 1 and Tier 1 Common 
regulatory capital.'' \59\ Citigroup reported that its tier 1 
common and tier 1 regulatory capital were approximately $90 
billion, and $126 billion respectively. It is difficult to 
calculate the capital reduction that imposition of the 382 
limitations would cause, but the reduction would likely be a 
significant percentage of the $13 billion, and Citigroup would 
have been required to raise capital from other sources to 
restore its capital position.\60\ Under the worst set of 
circumstances, such a reduction in tier 1 capital might have 
left Citigroup undercapitalized and postponed its eligibility 
for exit from the TARP altogether.
---------------------------------------------------------------------------
    \59\ Citigroup Third Quarter 10-Q, supra note 56, at 11.
    \60\ Without an ability to know the amount of the $13 billion 
figure made up of federal NOLs, a precise calculation is impossible.
---------------------------------------------------------------------------
    By eliminating the section 382 limitations, the Treasury 
Department avoided either reducing the value of its shares (and 
the capital held by Citigroup) or being forced to sell its 
shares serially over a period of years, in amounts small enough 
not to increase the holdings of Citigroup's public stockholders 
by more than five percent.
    Nonetheless, the December Notice has attracted criticism as 
an additional subsidy to Citigroup and a loss to the 
taxpayers.\61\ Section 382 is a highly reticulated statute, and 
this departure from its operation, under the authority both of 
the Code and EESA, has raised concerns.\62\
---------------------------------------------------------------------------
    \61\ House Committee on Oversight and Government Reform, 
Subcommittee on Domestic Policy, Opening Statement of Committee 
Chairman Dennis Kucinich, The U.S. Government as Dominant Shareholder: 
How Should Taxpayers' Ownership Rights be Exercised? (Part II), at 3 
(Dec. 17, 2009) (online at oversight.house.gov/images/stories/
121709_111th_DP_Opening_Statement_Chairman_Kucinich_121709.pdf); Sen. 
Charles Grassley, Grassley Urges Fair Tax Treatment for Small 
Businesses Compared to Large Banks (Dec. 23, 2009) (online at 
grassley.senate.gov/news/Article.cfm?customel_ dataPageID_1502=24632). 
Senator Jim Bunning has introduced a bill to rescind 2010-2, and to 
require Treasury to receive congressional authorization for any future 
regulations under section 382 that provide an ``exemption or special 
rule . . . which is restricted to dispositions of instruments acquired 
by the Secretary.'' S. 2916, 111th Cong. (Dec. 18, 2009).
    \62\ Binyamin Appelbaum, U.S. gave up billions in tax money in deal 
for Citigroup's bailout repayment, Washington Post (Dec. 16, 2009) 
(online at www.washingtonpost.com/wp-dyn/content/article/2009/12/15/
AR2009121504534.html) (quoting Robert Willens, a tax accounting expert, 
that ``I've been doing taxes for almost 40 years, and I've never seen 
anything like this, where the IRS and Treasury acted unilaterally on so 
many fronts'').
---------------------------------------------------------------------------
    Congress' rescission of the September 2008 Notice directed 
at the Wells Fargo-Wachovia transaction is inconclusive.\63\ 
The legislation indicated a congressional belief that section 
382 was not intended to apply differently to ``particular 
industries.'' \64\ However, the Notice was arguably directed at 
private transactions and was announced before the enactment of 
EESA.\65\ In addition, by the time Congress acted to reverse 
that Notice, the CPP, TIP, and SSFI were in operation, and the 
significance of the EESA Notices was apparent. The first two 
EESA Notices are cited in the ARRA Conference Committee Report 
without comment, positive or negative, and Congress has taken 
no action, either in ARRA or thereafter to rescind the EESA 
Notices.
---------------------------------------------------------------------------
    \63\ IRS Notice 2008-83 (Sept. 30, 2008) (online at www.irs.gov/
irb/2008-42_IRB/ar08.html).
    \64\ See ARRA, supra note 52.
    \65\ Although EESA was close to enactment at the end of September, 
the consensus was that the TARP would be used to purchase ``troubled 
assets'' from financial institutions. Congressional Oversight Panel, 
August Oversight Report: The Continued Risk of Troubled Assets (Aug. 
11, 2009) (online at cop.senate.gov/documents/cop-081109-report.pdf) 
(hereinafter ``COP August Oversight Report'').
---------------------------------------------------------------------------
    Given the previous guidance, it is difficult to understand 
why Treasury waited until December 2009 to extend the earlier 
guidance to a sale of its shares to the public.\66\ Treasury 
staff has indicated that, before the decision was made to sell 
the shares to the public, it was possible that Citigroup would 
repurchase the shares itself, making the December Notice 
unnecessary; the Notice would, however, have been necessary in 
any event with respect to the other institutions in which 
Treasury continues to hold a common stock interest.\67\ It is 
also possible that Treasury did not want to run a risk of 
attracting a negative congressional reaction such as that which 
led to the reversal of Notice 2008-83.
---------------------------------------------------------------------------
    \66\ Some tax experts believe that the conclusion was implicit in 
the prior assurance that section 382 could not apply to any repurchase 
of CPP shares from Treasury. Amy Elliot, Criticism of Notice Allowing 
Citigroup to Keep NOLs is Unfounded, Official Says, Tax Analysts (Dec. 
17, 2009) (``Most thought that `even if it wasn't a redemption that 
shouldn't matter,''' said Todd B. Reinstein, a partner with Pepper 
Hamilton LLP. ``If it was a sale to a public group it should be the 
same treatment. This just . . . confirms that'').
    \67\ Treasury conversations with Panel staff (Jan. 7, 2009).
---------------------------------------------------------------------------
    Treasury has pointed out to staff of the Panel that the 
December Notice balances the policies of section 382 and EESA 
by limiting the EESA relief to sales to the public and not to 
any freestanding five percent shareholders. This avoids the 
primary thrust of section 382 by not creating any single 
shareholder or shareholders with more than five percent of 
Citigroup stock through its sale. The limitation is 
significant, but its relevance in this case depends to some 
degree on the relationship between the timing of the Notice and 
Treasury's decision to sell its Citigroup shares to the public.
    Assistant Secretary of the Treasury for Financial Stability 
Herb Allison's initial response to the criticism of the 
December Notice, in a letter to The Washington Post, emphasized 
that Treasury could not avoid taxes because it did not pay 
taxes.\68\ The response sidesteps the fact that section 382 
applies to Citigroup, not Treasury, and that the operation of 
the statute is not limited to sales of a company. A second 
argument, that Citigroup should not ``be treated differently 
simply because the government intervened'' comes closer to the 
core of the matter. The December Notice eliminated what could 
have been a major obstacle to the severance of Treasury's 
ownership of Citigroup common stock. Without the Notice, 
Treasury could still have eliminated the costs of the section 
382 limitations for Citigroup by selling its shares into the 
market over a number of years, causing no revenue loss. 
Calculations of the extent to which taxpayers benefited or not 
from the lifting of the section 382 limitation are extremely 
difficult in any event, because they depend on assumptions 
about Citigroup's income in future years if use of its NOLs had 
been limited, and the value to the taxpayers of realizing an 
immediate gain from the sale of the Citigroup shares.
---------------------------------------------------------------------------
    \68\ Assistant Secretary Herbert Allison, Letter to the Editor, 
U.S. Isn't Evading Taxes on Citigroup, Washington Post (Dec. 22, 2009) 
(online at www.washingtonpost.com/wp-dyn/content/article/2009/12/22/
AR2009122200040.html).
---------------------------------------------------------------------------
    Finally, the EESA Notices, however sound in themselves, 
illustrate again the inherent conflict implicit in Treasury's 
administration of the TARP. In this case the conflict is a 
three-way one, pitting Treasury's responsibilities as TARP 
administrator, regulator, and tax administrator against one 
another. Perhaps the most troublesome aspect of the debate over 
the December Notice is posed by this conflict, in the 
perception that income tax flexibility is especially, and 
quickly, available for large financial institutions at a time 
of general economic difficulty.

             C. Historical Precedents: the RFC and the RTC

    The TARP is not the first U.S. government program to 
involve large-scale U.S. government acquisition of private 
assets.\69\ The Reconstruction Finance Corporation (RFC) and 
the Resolution Trust Corporation (RTC) provide prior models for 
the investment of public funds in struggling or insolvent 
private entities and the ensuing public sector management and 
disposition of the acquired assets. The RFC was established in 
1932 and ultimately unwound in 1957,\70\ while the RTC was 
established in 1989 and ultimately terminated in 1995.\71\
---------------------------------------------------------------------------
    \69\ See generally Congressional Oversight Panel, April Oversight 
Report: Assessing Treasury's Strategy: Six Months of TARP, at 35-50 
(Apr. 7, 2009) (online at cop.senate.gov/documents/cop-040709-
report.pdf) (hereinafter ``COP April Oversight Report'').
    \70\ Congress terminated the lending power of the RFC in 1953, and 
its remaining duties were transferred to other agencies in 1957. See 
The National Archives, Records of the Reconstruction Finance 
Corporation, at 234.1 (online at www.archives.gov/research/guide-fed-
records/groups/234.html) (accessed Jan. 13, 2010) (hereinafter 
``Records of the RFC'').
    \71\ See Timothy Curry and Lynn Shibut, The Cost of the Savings and 
Loan Crisis: Truth and Consequences, FDIC Banking Review, at 28 (Dec. 
2000) (online at www.fdic.gov/bank/analytical/banking/2000dec/
brv13n2_2.pdf) (hereinafter ``The Cost of the Savings and Loan Crisis: 
Truth and Consequences'').
---------------------------------------------------------------------------

1. The RFC

    President Herbert Hoover established the RFC in response to 
the credit freeze of the Great Depression.\72\ The RFC provided 
liquidity to struggling institutions through investments in 
preferred stock and debt securities.\73\ Initially, the RFC 
provided liquidity for healthier institutions but was prevented 
from offering long-term capital to weaker institutions by 
restrictions such as high interest rates, collateral 
requirements, and short-term lending requirements.\74\ The 
Emergency Banking Act of 1933, however, gave the RFC the 
ability to offer investment capital, while looser collateral 
requirements expanded the RFC's lending capacity.\75\ 
Ultimately, under President Franklin Roosevelt, successive 
expansions of authority helped the RFC evolve from its initial 
role as a short-term lender into an agency that provided 
federal support for the credit markets and became a major part 
of the New Deal program.\76\
---------------------------------------------------------------------------
    \72\ James S. Olson, Saving Capitalism: The Reconstruction Finance 
Corporation and the New Deal, 1933-1940, at 14-15 (1988) (hereinafter 
``Olson'').
    \73\ See Olson, supra note 72. The funds were provided to banks, 
railroads, financial institutions, commercial enterprises, industrial 
banks, farm collectives and a variety of other entities, as well as to 
other agencies. See id. at 43-44. See generally Records of the RFC, 
supra note 70.
    \74\ See Jesse Jones, 50 Billion Dollars: My Thirteen Years with 
the RFC (1932-1945), at 19, 520 (1951) (hereinafter ``Jones''); see 
also Olson, supra note 72, at 69.
    \75\ See Olson, supra note 72, at 69.
    \76\ See Olson, supra note 72, at 83, 88; see also Jones, supra 
note 74. In addition to financial sector entities, the many recipients 
of RFC loans included department stores, fabric and paper mills, and 
small business owners as well as banks and railroads. See id. at 184-
85, 188, 190. Jack Dempsey also received a loan, which he used to 
refurbish a restaurant. See id. at 190.
---------------------------------------------------------------------------
    The RFC investments in bank and industry capital took place 
in the shadow of the Emergency Banking Act and President 
Franklin Roosevelt's nation-wide bank holiday. After the 
holiday, only those banks that were liquid enough to do 
business were permitted to reopen. Banks with insufficient 
assets to return to depositors and creditors were reorganized 
with RFC assistance or liquidated.\77\ The key steps the RFC 
followed in resolving failing banks have been cited as a model 
method for dealing with bank failures: (1) Write down a bank's 
bad assets to realistic economic values; (2) evaluate bank 
management and make any needed and appropriate changes; (3) 
inject equity in the form of preferred stock but only after the 
write-downs; and (4) receive the dividends and eventually 
recover the par value of the stock as the bank returns to 
profitability and full private ownership.\78\
---------------------------------------------------------------------------
    \77\ See Jones, supra note 74.
    \78\ Federal Reserve Bank of Kansas City, Speech by President 
Thomas Hoenig: Too Big Has Failed, at 7 (Mar. 6, 2009) (online at 
www.kc.frb.org/speechbio/hoenigPDF/Omaha.03.06.09.pdf).
---------------------------------------------------------------------------
    The RFC's involvement with the entities to which it 
provided funds was neither hands-off nor consistently 
interventionist. Although the RFC was the largest investor in 
the country, its head, Jesse Jones, expressed a preference for 
leaving competent executives in charge of their institutions, 
and preferred to offer advice and capital without trying to 
control or manage the institutions.\79\ He stated generally 
that where he felt a bank was well run, the RFC would not 
become involved with management.\80\ This general philosophical 
approach, however, did not prevent Jones from intervening where 
he thought it necessary and suggesting management and board 
changes for RFC debtors.\81\ In some cases, the RFC loan was 
contingent upon the relevant entity accepting new management 
chosen by the RFC.\82\ Jones also certified the appropriateness 
of the salaries received by executives at corporations 
accepting RFC loans and instituted a declining scale of salary 
reductions, under which cuts could exceed 50 percent.\83\ On 
the other hand, Jones did not use the RFC to make economic and 
industrial policy decisions.\84\ Jones stated that he resisted 
what he considered the New Dealers' plans to use the RFC funds 
as a ``grab bag'' \85\ and instead ran the RFC according to 
business principles, using what he considered ``proper 
accounting methods'' to manage the RFC's investments.\86\ In 
his memoirs, Jones stated that everyone assumed that the RFC 
was to provide the emergency relief necessary for weathering 
the crisis. When private enterprise was in a position to 
invest, he expected the RFC to cease operations.\87\ By the end 
of 1935, the RFC had loaned or invested $10.6 billion ($167.38 
billion in 2009 dollars) \88\ in various businesses and 
government agencies, often (although not always) without 
interfering in the operations of the debtors.\89\ Most of the 
RFC's investments in banks were ultimately recovered in full, 
and the RFC also received dividends from those investments, 
although its investments in railroads were less lucrative.\90\
---------------------------------------------------------------------------
    \79\ See Jones, supra note 74, at 125-127.
    \80\ See Jones, supra note 74, at 125-127.
    \81\ See Charles Calomiris and Joseph Mason, How to Restructure 
Failed Banking Systems: Lessons from the U.S. in the 1930s and Japan in 
the 1990s, National Bureau of Economic Research, at 20-24 (Apr. 2003) 
(online at papers.nber.org/papers/w9624.pdf?new_window=1).
    \82\ The most famous instances of t his kind of RFC control were 
Continental Illinois Bank and Trust Company and the Union Trust Company 
of Cleveland. See Olson, supra note 72, at 125; Joseph R. Mason, 
Reconstruction Finance Corporation Assistance to Financial 
Intermediaries and Commercial & Industrial Enterprise in the U.S., 
1932-1937, at 20-21 (Jan. 17, 2000).
    \83\ See Olson, supra note 72, at 125-126.
    \84\ See Olson, supra note 74, at 127.
    \85\ See Jones, supra note 74, at 290.
    \86\ Congressional Oversight Panel, Written Testimony of Alex 
Pollock Taking Stock: Independent Views on TARP's Effectiveness, at 3 
(Nov. 19, 2009)(online at cop.senate.gov/documents/testimony-111909-
pollock.pdf) (hereinafter ``Pollock COP Testimony''). From its 
formation in 1932 onwards, the RFC and its subsidiaries prepared 
monthly financial statements setting forth cumulative assets, 
liabilities, and shareholder capital. Where applicable, these 
``Statement[s] of Condition'' also listed the cumulative loan positions 
with recipient firms, including data such as authorized loan amount, 
proceeds disbursed/not disbursed, and repayments. These loan statements 
included detailed footnotes. See generally Reconstruction Finance 
Corporation, Statement of Condition (Dec. 31, 1934). In time, the RFC 
also added a ``Statement of Income and Expense,'' that more explicitly 
detailed income, expenses, and profits (losses). See Reconstruction 
Finance Corporation, Statement of Condition (Dec. 31, 1937). By the 
1930s, most publicly traded corporations produced some financial 
information for their investors. Principally, this meant two documents: 
the balance sheet and the income statement. The balance sheet was 
broadly divided into two section: ``assets'' and ``liabilities'' (or 
``liabilities and capital''). Income statements varied more widely, but 
almost always had a description of revenues and expenses, and some 
statement of profit and loss. See generally Mortimer Battey Daniels, 
Corporation Financial Statements, at 5-7 (first edition 1934, reprinted 
1980). Thus, the RFC financial statements mirrored those of its non-
government peers.
    The financial statements prepared by OFS with rsepect to the TARP 
program, and the accompanying MD&A, provide extensive discussion of the 
results of all the TARP programs. The notes to the statements are not 
easily accessible for a lay leader, but the MD&A is easier to read and 
includes a short executive summary. Overall, Agency Financial Report 
seems broadly consistent with the RFC precedent. Agency Financial 
Statement 2009, supra note 32; see Section D.3, infra.
    \87\ See Jones, supra note 74, at 191. The RFC also declined to 
provide loans to industries that had access to private capital. See id.
    \88\ A consumer price index inflation calculator is available via 
the Bureau of Labor Statistics (online at data.bls.gov/cgi-bin/
cpicalc.pl).
    \89\ See Jones, supra note 74, at 127.
    \90\ See Pollock COP Testimony, supra note 86, at 2-3.
---------------------------------------------------------------------------

2. The RTC

    The RTC was established as part of the effort to address 
the savings and loan crisis of the 1980s.\91\  Scholars have 
cited volatile interest rates, state and federal deregulation, 
market shifts and adverse economic conditions as factors 
contributing to the crisis.\92\ By the end of 1986, 441 thrifts 
representing $113 billion were insolvent, and 533 thrifts 
representing $453 billion held severely impaired assets.\93\ 
Together, those insolvent and struggling thrifts held nearly 50 
percent of the assets in the industry.\94\
---------------------------------------------------------------------------
    \91\ See Lee Davison, Politics and Policy: The Creation of the 
Resolution Trust Corporation, FDIC Banking Review, at 17-18 (July 2005) 
(online at www.fdic.gov/bank/analytical/banking/2005jul/article2.pdf) 
(hereinafter ``Politics and Policy: The Creation of the Resolution 
Trust Corporation'').
    \92\ See The Cost of the Savings and Loan Crisis: Truth and 
Consequences, supra note 71, at 27 (describing the factors contributing 
to the crisis and citing sources).
    \93\ See id.
    \94\ See id.
---------------------------------------------------------------------------
    In response to the crisis, the Financial Institutions 
Reform, Recovery and Enforcement Act of 1989 (FIRREA) created 
the RTC as a limited-term entity. (Although originally intended 
to operate for five years, it was extended twice, ultimately 
until 1995.) \95\ It acted as conservator or receiver of 
eligible insolvent institutions, and was responsible for 
carrying assets of the insolvent institutions until it could 
sell them.\96\ Its funding derived in part from the Resolution 
Funding Corporation, which was partially supported by the 
Federal Home Loan Banks and the Treasury and issued long-term 
bonds to the public.\97\ Among other methods, the RTC created 
joint ventures with private parties to help dispose of thrift 
assets. The private sector partner purchased, managed and sold 
the assets, and shared returns with the RTC.\98\ The RTC 
created 72 such joint ventures between 1992 and 1995, which 
collectively held assets with a book value of $21.4 
billion.\99\
---------------------------------------------------------------------------
    \95\ See Politics and Policy: The Creation of the Resolution Trust 
Corporation, supra note 91, at 19; see also The Cost of the Savings and 
Loan Crisis: Truth and Consequences, supra note 71, at 28.
    \96\ See The Cost of the Savings and Loan Crisis: Truth and 
Consequences, supra note 71, at 28-30.
    \97\ See id.
    \98\ Federal Deposit Insurance Corporation, Managing the Crisis: 
The FDIC and RTC Experience, Chronological Overview: Chapter 15 (Jan. 
5, 2005) (online at www.fdic.gov/bank/historical/managing/Chron/1992/
index.html) (hereinafter ``Managing the Crisis: The FDIC and RTC 
Experience'').
    \99\ See Ralph F. MacDonald III, Mark V. Minton, Sarah H. Eberhard, 
Brett P. Barragate, Glenn S. Arden, James C. Olson, Valerie Pearsall 
Roberts, FDIC Delays the PPIP Legacy Loan Program to Focus on Public-
Private Programs to Sell Assets from Failed Bank, Jones Day (June 2009) 
(online at www.jonesday.com/pubs/pubs_detail.aspx?pubID=S6324).
---------------------------------------------------------------------------
    By the end of its existence, the RTC had disposed of more 
than $450 billion in assets, representing nearly 98 percent of 
the assets that were its responsibility, and resolved 747 
failed thrifts.\100\ Although the RTC ultimately realized 
losses from its investments, the losses were lower than the 
estimates made during the early- and mid-1990s, and the cost of 
intervention declined every year after 1991.\101\ The savings 
resulted in part from the RTC's decision to follow conservative 
accounting principles and its efforts to avoid overvaluing the 
assets it had acquired.\102\ In addition, the RTC benefited 
from the economic recovery of the 1990s, which lessened the 
rate of thrift failures and increased the prices that the RTC 
could get for its thrift asset holdings.\103\
---------------------------------------------------------------------------
    \100\ See Managing the Crisis: The FDIC and RTC Experience, supra 
note 98; see also Lee Davison, The Resolution Trust Corporation and 
Congress, 1989-1993, FDIC Banking Review, at 38 (Sept. 2006) (online at 
www.fdic.gov/bank/analytical/banking/2006sep/article2/article2.pdf).
    \101\ See The Cost of the Savings and Loan Crisis: Truth and 
Consequences, supra note 71, at 33.
    \102\ See id.
    \103\ Early estimates of the losses were lower, in part because the 
forecasts had not predicted the full extent of the crisis. See id.
---------------------------------------------------------------------------

3. Lessons from the RFC and the RTC

    The RFC and the RTC were both established during 
extraordinary circumstances.\104\ For the RFC, the market 
collapse of the Great Depression and the needs of the New Deal 
programs ultimately vested the agency with a role as an all-
things lender and fixer. The RTC, by contrast, had a more 
limited brief: to organize and dispose of the mess left by the 
savings and loan crisis. TARP funds are not directly available 
for the wide variety of possible recipients that received RFC 
funds,\105\ and in that sense the TARP is more targeted. Unlike 
the RTC, however, Treasury under the TARP has intervened in 
multiple types of market failures, and has not restricted its 
actions to just one sector.
---------------------------------------------------------------------------
    \104\ For additional discussion of the RFC and the RTC, see COP 
April Oversight Report, supra note 69, at 35-41, 44-50.
    \105\ See Jones, supra note 74, at 190.
---------------------------------------------------------------------------
    In addition, Treasury is not predominantly acting to 
liquidate the entities that are part of the TARP, as did the 
RTC. Accordingly, it is difficult to draw too many parallels 
between Treasury's management of the TARP and either the RFC or 
the RTC. At a more abstract level, the crises to which the RTC 
and the RFC responded involved the sequential failure of 
multiple regulated entities over several years prior to 
government intervention.\106\ By contrast, the TARP developed 
in response to rapidly-unfolding market events for which, in 
some cases, there was no obvious precedent. That said, however, 
in each situation--sale and management of assets for the RTC, 
unwinding of investments for the RFC--the U.S. government found 
itself in the position of a money-manager and/or conservator of 
private sector assets, from which they ultimately divested, 
over time, with attention to available returns and protection 
of government funds. When the RFC and the RTC had completed 
their tasks, they were dissolved.
---------------------------------------------------------------------------
    \106\ See COP April Oversight Report, supra note 69, at 35-41, 44-
50.
---------------------------------------------------------------------------
    Treasury has informed the Panel that it interprets its 
obligations in a way that, while not precisely analogous to the 
RFC and RTC precedents, appears to rest on similar principles. 
Like its predecessors, Treasury has stated that it intends to 
act as a reluctant shareholder and to exit while maximizing 
returns and preserving stability.\107\ Treasury has stated that 
it does not intend to interfere with day-to-day business 
decisions, relying instead on the management of the covered 
entities, although Treasury has initiated board and management 
changes in some situations (for example, with General Motors), 
much as the RFC did in some situations.\108\ Similarly, 
Treasury is experimenting with public-private partnerships to 
manage and dispose of its assets.
---------------------------------------------------------------------------
    \107\ See Section D.2, infra (discussing the ``three pillars'').
    \108\ See Congressional Oversight Panel, September Oversight 
Report: The Use of TARP Funds in the Support and Reorganization of the 
Domestic Automotive Industry, at 20 (Sept. 9, 2009) (online at 
cop.senate.gov/documents/cop-090909-report.pdf) (hereinafter ``COP 
September Oversight Report'').
---------------------------------------------------------------------------

                       D. Disposal of the Assets


1. Introduction

    Treasury currently holds assets and obligations as part of 
a number of different programs created under the TARP. These 
programs differ in scope, size, and state of maturity. The 
largest and most prominent use of TARP funding has been 
Treasury's injections of capital into financial institutions. 
There are three different capital injection programs under the 
TARP. The Capital Purchase Program (CPP) is the largest; under 
the CPP, 707 banks received capital injections totaling nearly 
$205 billion. The Targeted Investment Program (TIP) and 
American International Group, Inc. Investment Program (AIGIP), 
formerly known as the Systemically Significant Failing 
Institutions Program (SSFI),\109\ are narrower efforts aimed at 
large institutions that Treasury and the bank regulators 
considered critical to the functioning of the financial 
system.\110\ The only institutions that received TIP funds were 
Citigroup and Bank of America, each of which received $20 
billion. AIG, which has received approximately $45.3 billion 
through AIGIP/SSFI to date, is that program's only beneficiary. 
Treasury has also provided capital assistance to banks outside 
the capital injection programs. Through the Asset Guarantee 
Program (AGP), Treasury, the FDIC, and the Federal Reserve 
guaranteed approximately $250.4 billion \111\ in Citigroup 
assets until the termination of this program on December 23, 
2009. Three other programs--TALF, PPIP and the small business 
initiative--account for a further $65 billion of TARP funds.
---------------------------------------------------------------------------
    \109\ Treasury, without public announcement, recently changed the 
name of the TARP's SSFI Program to the more positive sounding American 
International Group, Inc. Investment Program. The Panel was made aware 
of this change only after reviewing OFS' recently issued TARP financial 
statements for fiscal year 2009.
    \110\ See 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) (hereinafter 
``Joint Statement on Citigroup'') (stating that the decision to provide 
Citigroup with TIP assistance was based on the government's commitment 
``to supporting financial market stability, which is a prerequisite to 
restoring vigorous economic growth''); U.S. Department of the Treasury, 
Treasury, Federal Reserve and the FDIC Provide Assistance to Bank of 
America (Jan. 16, 2009) (online at www.treas.gov/press/releases/
hp1356.htm) (stating that the objective of TIP is to ``foster financial 
market stability and thereby to strengthen the economy and protect 
American jobs, savings, and retirement security.''); U.S. Department of 
the Treasury, Treasury to Invest in AIG Restructuring Under the 
Emergency Economic Stabilization Act (Nov. 10, 2008) (online at 
www.treas.gov/press/releases/hp1261.htm) (hereinafter ``Treasury to 
Invest in AIG Restructuring Under EESA'') (highlighting that AIG is a 
``systemically important company''); Board of Governors of the Federal 
Reserve System, Federal Reserve Board, with Full Support of the 
Treasury Department, Authorizes the Federal Reserve Bank of New York to 
Lend up to $85 billion to the American International Group (AIG) (Sept. 
16, 2008) (online at www.federalreserve.gov/newsevents/press/other/
20080916a.htm) (hereinafter ``Federal Reserve Board authorizes lending 
to AIG'') (noting that the Federal Reserve Board ``determined that, in 
current circumstances, a disorderly failure of AIG could add to already 
significant levels of financial market fragility and lead to 
substantially higher borrowing costs, reduced household wealth, and 
materially weaker economic performance'').
    \111\ The $250.4 billion of Citigroup's assets reflected the value 
of the ring-fenced pool as of September 30, 2009. Citigroup Third 
Quarter 10-Q, supra note 56, at 35.
---------------------------------------------------------------------------

           FIGURE 1: NET INVESTMENT AMOUNT IN TARP BY MONTH 


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

2. Treasury's TARP Exit Strategy

    Treasury must balance several potentially conflicting 
interests in managing its exit from the TARP. Because of the 
policy concerns related to the TARP and, more broadly, the 
requirements of EESA, Treasury has taken the position that it 
is not able to act simply as a prudent money-manager, seeking 
only an exit strategy that provides the best return on its 
investment.
    The policy goals of EESA are laid out in several sections 
of the statute. The overarching purpose of EESA is 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.'' \112\ 
While the Secretary ``may, at any time, exercise any rights 
received in connection with troubled assets purchased under'' 
EESA,\113\ he must also specifically consider, among other 
concerns:
---------------------------------------------------------------------------
    \112\ 12 U.S.C. Sec. 5201(1).
    \113\ 12 U.S.C. Sec. 5216(a).
---------------------------------------------------------------------------
           Protecting the interests of taxpayers by 
        maximizing overall returns and minimizing the impact on 
        the national debt;
           Providing stability and preventing 
        disruption to financial markets in order to limit the 
        impact on the economy and protect American jobs, 
        savings, and retirement security;
           The need to help families keep their homes 
        and to stabilize communities;
           In determining whether to engage in a direct 
        purchase from an individual financial institution, the 
        long-term viability of the financial institution in 
        determining whether the purchase represents the most 
        efficient use of funds[.] \114\
---------------------------------------------------------------------------
    \114\ 12 U.S.C. Sec. 5213(1)-(4).
---------------------------------------------------------------------------
    Furthermore, the Secretary is to use his authority under 
EESA ``in a manner that will minimize any potential long-term 
negative impact on the taxpayer, taking into account the direct 
outlays, potential long-term returns on assets purchased, and 
the overall economic benefits of the program, including 
economic benefits due to improvements in economic activity and 
the availability of credit, the impact on the savings and 
pensions of individuals, and reductions in losses to the 
Federal Government.'' \115\ In carrying out this authority, the 
Secretary is to ``hold the assets to maturity or for resale for 
and until such time as the Secretary determines that the market 
is optimal for selling such assets, in order to maximize the 
value for taxpayers'' and ``sell such assets at a price that 
the Secretary determines, based on available financial 
analysis, will maximize return on investment for the Federal 
Government.'' \116\
---------------------------------------------------------------------------
    \115\ 12 U.S.C. Sec. 5223(a)(1).
    \116\ 12 U.S.C. Sec. 5223(a)(2).
---------------------------------------------------------------------------
    Treasury has interpreted its various obligations to require 
a management and exit strategy that rests on three pillars:
           Maintaining systemic stability;
           Preserving the stability of individual 
        institutions; and
           Maximizing return on investment.\117\
---------------------------------------------------------------------------
    \117\ Treasury conversations with Panel staff (Dec. 3, 2009).
---------------------------------------------------------------------------
    Treasury officials have consistently stated that Treasury 
believes ``the U.S. government is a shareholder reluctantly and 
out of necessity'' and that Treasury ``intend[s] to dispose of 
[its] interests as soon as practicable, with the dual goals of 
achieving financial stability and protecting the interests of 
the taxpayers.'' \118\ This view, Treasury has stated, is 
consistent with EESA in that EESA does not specifically 
contemplate Treasury's taking positions in private companies or 
managing the day-to-day operations of these companies.\119\ 
Treasury has also noted that the American system is premised on 
privately-owned industry and that it is therefore contrary to 
Treasury's nature as a government entity to hold shares in 
these companies. In an earlier meeting with Panel staff, a 
Treasury official noted that Treasury made its investments 
because it needed to stabilize the country's financial system, 
not because it needed a way to make money.\120\ For that 
reason, he stated, exit from any TARP position must be done in 
a way that promotes stability and the policy goals of EESA, 
even if that means that Treasury must hold securities longer 
than it would otherwise wish.
---------------------------------------------------------------------------
    \118\ House Oversight and Government Reform Committee, Subcommittee 
on Domestic Policy, Written Testimony of Assistant Secretary of the 
Treasury Herbert Allison, Jr., The Government As Dominant Shareholder: 
How Should the Taxpayers' Ownership Rights Be Exercised?, 111th Cong. 
(Dec. 17, 2009) (online at oversight.house.gov/images/stories/Allison_
Testimony_for_Dec-17-09_FINAL_2.pdf) (hereinafter ``Allison Testimony 
before House Oversight and Government Reform Committee''). As part of 
his testimony, Secretary Allison also discussed the major principles 
guiding Treasury's role as a shareholder with regard to corporate 
governance issues. These principles were: (1) as a reluctant 
shareholder, Treasury intends to exit its positions as soon as 
practicable; (2) Treasury does not intend to be involved in the day-to-
day management of any company; (3) Treasury reserves the right to set 
conditions on the receipt of public funds to ensure that ``assistance 
is deployed in a manner that promotes economic growth and financial 
stability and protects taxpayer value''; and (4) Treasury will exercise 
its rights as a shareholder in a commercial manner, voting only on core 
shareholder matters.
    \119\ Treasury conversations with Panel staff (Jan. 8, 2010).
    \120\ Treasury conversations with Panel staff (Dec. 3, 2009).
---------------------------------------------------------------------------
    Treasury's multi-faceted approach to managing and winding 
down this program raises issues regarding an assessment of 
Treasury's performance with respect to its exit. If Treasury's 
only obligation were to maximize profit, the public would be 
able to compare Treasury's yield with yields on other similar 
investments and reach a conclusion as to whether Treasury had 
fulfilled its mandate.\121\ Because Treasury identified a 
number of mandates to fulfill, any action that fails to fulfill 
one may be attributed to a step toward fulfilling another. 
Furthermore, two of the three pillars do not lend themselves to 
quantitative measures of performance.
---------------------------------------------------------------------------
    \121\ The comparison would be an imperfect one because no two 
investments are identical.
---------------------------------------------------------------------------
    Because of the various policy concerns at issue and the 
three-pillar approach to TARP strategy laid out above, Treasury 
reads its obligation to sell at a time that is ``optimal'' to 
encompass not only a determination that such a sale will 
directly maximize the benefit to taxpayers by fetching the 
highest price, but also a determination that the sale will at 
least not undermine systemic stability.\122\ While the section 
of the statute in which this language resides states that the 
sale must be at the time determined to be ``optimal . . . to 
maximize the value for taxpayers,'' this section also applies 
directly to an earlier subpart that directs the Secretary to 
use his authority under EESA to minimize long-term negative 
impact on taxpayers, taking into account ``the direct outlays, 
potential long-term returns on assets purchase, and the overall 
economic benefits of the program, including economic benefits 
due to the improvements in economic activity and the 
availability of credit, the impact on the savings and pensions 
of individuals, and reduction in losses to the Federal 
Government.'' \123\
---------------------------------------------------------------------------
    \122\ Treasury conversations with Panel staff (Dec. 3, 2009).
    \123\ 12 U.S.C. Sec. 5223(a)(1).
---------------------------------------------------------------------------
    While this position may be the best way to meet the various 
policy goals outlined above, it may prevent Treasury from 
taking advantage of a true buy-and-hold strategy that would 
allow greater profits from companies on a strong upward trend 
over a years-long period. Such a strategy would, however, 
conflict with Treasury's position as a ``reluctant 
shareholder'' because it would require Treasury to hold shares 
for a long period of time.
    These policy considerations raise an additional question: 
to what extent will Treasury's actions, whatever they may be, 
affect the markets? Not only is there the potential for 
Treasury's actions to have such an effect simply because 
Treasury's presence in the market is unlike that of a private 
firm, but the potential also exists for purposeful impact on 
the markets. This potential might conflict with Treasury's 
stated goal of minimizing government intervention in the 
markets and may raise objections from market participants who 
might claim that Treasury was deliberately disrupting the 
market. Treasury's statements to date have not explained how it 
will address this conundrum.
    Although Treasury's exit strategy from the TARP has not 
always been transparent to the American public, Treasury has 
now clearly articulated the principles upon which it is 
operating with respect to exit strategy, however obscure the 
eventual application of those principles may be.\124\ The Panel 
does not take a view either with respect to Treasury's 
``reluctant shareholder'' approach or with respect to the 
strategy that Treasury is following, but it acknowledges that 
the approach has been enunciated with the objective of 
articulating a policy. In meetings and calls with the managers 
of the various asset classes at Treasury, those managers were 
consistent in their articulation of the exit strategy and the 
principles driving it.\125\
---------------------------------------------------------------------------
    \124\ Allison Testimony before House Oversight and Government 
Reform Committee, supra note 118; Treasury conversations with Panel 
staff (Dec. 3, 2009); see Congressional Oversight Panel, January 
Oversight Report: Accountability for the Troubled Asset Relief Program, 
at 4 (Jan. 9, 2009) (online at cop.senate.gov/documents/cop-010909-
report.pdf).
    \125\ In the course of drafting this report, Panel staff conducted 
extensive discussions with the managers of the various asset classes at 
Treasury. See, e.g., Treasury conversations with Panel staff (Dec. 15, 
2009, Dec. 16, 2009, and Jan. 5, 2010) (discussing Citigroup and AIG).
---------------------------------------------------------------------------
    By comparison, in a previous Report the Panel suggested 
that Treasury consider dealing with the shareholder duties that 
have emerged from its investments in troubled companies by 
placing those investments in a privately managed trust,\126\ 
thereby segregating these functions from the other oversight 
and intervention obligations occasioned by the TARP.
---------------------------------------------------------------------------
    \126\ See COP September Oversight Report, supra note 108, at 5.
---------------------------------------------------------------------------
    The principal benefit of such a trust would be that the 
assets could be managed for the sole benefit of the U.S. 
Treasury, and would be insulated from undue political 
influence.\127\ While the creation of such a trust is 
authorized by the statute,\128\ and has been considered by 
Treasury, Treasury has explained that the drawbacks of using a 
trust are currently outweighed by the benefits.\129\ The belief 
is that if a trust were created, it would be difficult to 
determine which assets should be placed in the trust, and it 
would be difficult to carry out Treasury's policy goals--which 
include promoting market stability in addition to maximizing 
the benefit to taxpayers.\130\ Treasury has also indicated that 
statutory requirements may prevent the implementation of a 
trust managed by an independent trustee, because of EESA's 
requirements for the Secretary to maintain supervision over 
investments held by vehicles established by Treasury. Treasury 
has not ruled out the use of such a trust when only a small 
pool of assets remain.\131\
---------------------------------------------------------------------------
    \127\ Treasury statements make it clear that Treasury sees a clear 
distinction between ``managing assets'' (which Treasury sees as the 
government's role) and ``managing companies'' (which Treasury does not 
see as its role). Allison Testimony before House Oversight and 
Government Reform Committee, supra note 118, at 5-6. While Treasury is 
clearly able to manage assets outside a trust, Treasury's direct 
involvement in, for example, deciding when to sell Citigroup shares, 
has the potential to send unintended signals to the markets, which 
signals would be tempered if a trustee were making the decisions. 
Additionally, while Treasury intends to vote its shares only on 
``core'' shareholder matters, there are non-core matters that may be 
presented to shareholders where a failure to vote could lead to a 
governance vacuum and where a trustee could prove useful.
    \128\ 12 U.S.C. Sec. 5219(c).
    \129\ Treasury conversation with Panel staff (Dec. 15, 2009). 
Trusts are also as prone as any group of people to suffer from 
disagreements among members or other internal politics.
    \130\ Treasury conversation with Panel staff (Dec. 15, 2009).
    \131\ Treasury conversation with Panel staff (Dec. 15, 2009).
---------------------------------------------------------------------------
    The Panel is concerned that, although Treasury has been 
consistent in its description of its goals, the articulated 
principles are so broad that they provide Treasury with an easy 
means of justifying almost any decision--effectively giving no 
metric to determine whether Treasury's actions met its stated 
goals. Because either holding or selling, or a third approach, 
may alternatively be justified as maximizing profit, or 
maintaining the stability of significant institutions, or 
promoting systemic stability, almost any decision can be 
demonstrated to be forwarding one of these three principles.

3. Accounting for the TARP

    EESA requires an annual financial statement prepared in 
accordance with generally accepted accounting principles and 
audited in accordance with generally accepted auditing 
standards.\132\ On December 10, 2009, Treasury issued financial 
statements for the TARP for the federal fiscal year ending 
September 30, 2009.\133\ The statements disclose that 
Treasury's final estimate for the cost of the transactions 
undertaken in fiscal year 2009 is $41.6 billion, approximately 
$110 billion lower than earlier estimated. This sizeable 
``downward reestimate'' reflects improved equity prices and 
lower projected loss rates on the investments made in 2009, as 
well as faster repayment of some of those investments than was 
initially anticipated. Similarly, over the full multi-year 
course of the TARP's operations, the expected cost of the 
program is now estimated at $141 billion, roughly $200 billion 
lower than was initially forecast.\134\ Of this estimated $141 
billion in losses, Treasury has acknowledged that roughly $60 
billion is attributable solely to the TARP investments in AIG 
and the auto companies.\135\
---------------------------------------------------------------------------
    \132\ 12 U.S.C. Sec. 5226(b)(1).
    \133\ See Government Accountability Office, Office of Financial 
Stability (Troubled Asset Relief Program) Fiscal Year 2009 Financial 
Statements (Dec. 2009) (online at www.gao.gov/new.items/d10301.pdf) 
(hereinafter ``OFS FY09 Financial Statements'').
    \134\ The TARP Financial Statements were released on December 10, 
2009. The Department of the Treasury issued a press release which 
stated, ``[a]s additional funds are disbursed, particularly for the 
housing initiative, the total cost of TARP is likely to rise, although 
it is anticipated to be at least $200 billion less than the $341 
billion estimate in the August 2009 Mid-Session Review.'' See U.S. 
Department of the Treasury, New Report Shows Higher Returns, Lower 
Spending Under TARP Than Previously Projected (Dec. 10, 2009) (online 
at ustreas.gov/press/releases/tg438.htm).
    \135\ See House Oversight and Government Reform Committee, 
Subcommittee on Domestic Policy, Transcript Testimony of Assistant 
Secretary of the Treasury for Financial Stability Herbert Allison, Jr., 
The Government As Dominant Shareholder: How Should the Taxpayers' 
Ownership Rights Be Exercised?, 111th Cong., (Dec. 17, 2009) (online at 
oversight.house.gov/
index.php?option=com_content&task=view&id=4722&Itemid=31) (hereinafter 
``Allison Testimony Transcript'').
---------------------------------------------------------------------------
    The TARP financial statements were prepared in accordance 
with generally accepted accounting principles. EESA further 
requires that the budgetary cost of the TARP be calculated 
under the rules of the Federal Credit Reform Act. This ``credit 
reform'' treatment means that TARP transactions are discounted 
to reflect the time value of money and the market risk of those 
investments.\136\ As a result, the accounting and budget 
information that Treasury publishes for the TARP are a good 
measure of the economic value of the resources expended. The 
GAO audited the financial statements and stated that the Office 
of Financial Stability had maintained effective financial 
controls in all material respects.\137\
---------------------------------------------------------------------------
    \136\ See 12 U.S.C. Sec. 5232 (requiring that TARP transactions be 
measured for budget presentation purposes under credit reform 
procedures, but modified to reflect the market risk of those 
transactions).
    \137\ See OFS FY09 Financial Statements, supra note 133, at 1-2. 
GAO did note two internal control deficiencies in the OFS financial 
systems which OFS agreed to rectify.
---------------------------------------------------------------------------
    The next financial report on the TARP will be released by 
Treasury in early February 2010, at the time the President's 
2011 Budget is transmitted to the Congress. While normal 
practice has been not to provide a further update of a 
particular federal program's financial information until the 
time of the Midsession Review of the budget on July 15th, 
Treasury has indicated that it expects to release interim 
financial reports on TARP transactions sometime between 
February and July 2010. The financial statements and 
accompanying ``management's discussion and analysis'' (MD&A) 
provide discussion of the results of all the TARP 
programs.\138\ The notes to the statements are not easily 
accessible for a lay reader, but the MD&A is easier to read and 
includes a short executive summary.
---------------------------------------------------------------------------
    \138\ Panel staff compared the financial statements and MD&As with 
those of financial institutions, and also considered the MD&A in the 
light of the many pronouncements on MD&A disclosure by the Securities 
and Exchange Commission (SEC). The MD&A discusses each of the programs 
under the TARP, addressing the purpose and impact of each program, the 
way in which assets were acquired, their current value, and the 
principles informing Treasury's management of the assets. The most 
significant criticisms that could be made of the MD&A are that: (a) a 
more thorough explanation of the accounting principles used would be 
helpful, as the notes to the financial statements, while thorough, are 
not written with the lay reader in mind; (b) more ``forward-looking 
information'' and a more expansive discussion of ``trends and 
uncertainties'' would be helpful; and (c) the graphic design and layout 
is distracting and inconsistent and could have benefitted from some 
reader-friendly, ``plain English'' editing. The second and third points 
are mitigated to some extent by the Executive Summary, which not all 
financial institutions provide, although the SEC encourages it. 
Commentators had urged that Treasury produce such disclosure. See 
Pollock COP Testimony, supra note 86, at 6.
---------------------------------------------------------------------------

4. CPP Preferred and Warrants

            a. Acquisition of Assets and Current Value
    Under the CPP, Treasury provided capital to financial 
institutions by purchasing senior preferred stock (CPP 
Preferred) or subordinated debentures. The purchases were made 
pursuant to a ``Securities Purchase Agreement'' (SPA), which 
has standard terms for most banks.\139\ In addition, Treasury 
received warrants in order to give taxpayers ``an opportunity 
to participate in the equity appreciation of the institution.'' 
\140\ The CPP Preferred, which has no maturity date, pays 
quarterly dividends at a rate of five percent per year for the 
first five years, and nine percent thereafter.\141\ The issuing 
financial institution may redeem the CPP Preferred at any time, 
subject to the requirement that regulators must approve the 
repayment.\142\ The warrants, which have a 10-year life, may be 
exercised at any time.\143\ The exercise price of the warrants 
for public financial institutions is based upon the 20-day 
average stock price of the underlying common shares.\144\ For 
non-public financial institutions, the exercise price is $0.01 
per share.\145\
---------------------------------------------------------------------------
    \139\ The terms of SPAs vary somewhat by institution type--public, 
private, S-corporation, mutual holding company or mutual bank--but are 
substantially similar. See Congressional Oversight Panel, July 
Oversight Report: TARP Repayments, Including the Repurchase of Stock 
Warrants, at 7 (July 10, 2009) (online at cop.senate.gov/documents/
cop_071009_report.pdf) (hereinafter ``COP July Oversight Report'').
    \140\ See U.S. Department of the Treasury, Factsheet on Capital 
Purchase Program (updated Mar. 17, 2009) (online at 
www.financialstability.gov/roadtostability/CPPfactsheet.htm) 
(hereinafter ``CPP Factsheet''); see also COP July Oversight Report, 
supra note 139, at 6 (``[W]arrants may be traded on public or private 
markets, and they can be highly valued by investors who believe the 
share price of the issuing company is likely to rise above the strike 
price'').
    \141\ Dividends are cumulative for bank holding companies and their 
subsidiaries, and non-cumulative for banks. See COP July Oversight 
Report, supra note 139, at 8.
    \142\ See id., at 10-11.
    \143\ Id., at 8.
    \144\ The warrant exercise price is calculated taking the average 
of the closing prices for the 20 trading days up to and including the 
day prior to the date on which the TARP Investment Committee recommends 
that the Assistant Secretary for Financial Stability approve the 
investment. See U.S. Department of the Treasury, FAQs on Capital 
Purchase Program Repayment and Capital Assistance Program, at 2 (May 
2009) (online at www.financialstability.gov/docs/FAQ_CPP-CAP.pdf). In 
addition, the number of warrants issued is equal to 15 percent (5 
percent for a private financial institution) of the face value of the 
preferred investment divided by the exercise price. See U.S. Department 
of the Treasury, Term Sheet for CPP Preferred (online at 
www.financialstability.gov/docs/CPP/termsheet.pdf) (hereinafter ``Term 
Sheet for CPP Preferred'').
    \145\ U.S. Department of the Treasury, TARP Capital Purchase 
Program (Non-Public QFIs, excluding S Corps and Mutual Organizations) 
(online at www.financialstability.gov/docs/CPP/Term%20Sheet%20-
%20Private%20C%20Corporations.pdf).
---------------------------------------------------------------------------
    CPP funding ended on December 29, 2009.\146\ The program 
provided approximately $205 billion in capital to 707 financial 
institutions.\147\ CPP funding for qualifying financial 
institutions was based upon the size of the institution.\148\ 
Of the 19 stress-tested financial institutions, 17 institutions 
received $164 billion through CPP funding.\149\ As noted above, 
the issuing financial institution may redeem the CPP Preferred 
at any time, subject to the requirement that regulators must 
approve the repayment.\150\ The redemption price of the CPP 
Preferred is set by the SPA, which provides that the shares are 
to be redeemed at the principal amount of the debt.\151\ 
Subject to compliance with applicable securities laws, Treasury 
also has the ability to ``sell, assign, or otherwise dispose 
of'' the CPP Preferred it holds.\152\ This means that the CPP 
Preferred could in theory be sold in private transactions to 
interested investors, or they could be offered to the public in 
a resale registered with the SEC.\153\ The CPP-recipient 
institutions that report to the SEC are required, under the 
terms of the SPAs, to file a shelf registration statement, 
which would permit sales to the public.\154\ Treasury is not 
limited to public sales, however, and could make sales in 
private transactions exempt from or not subject to SEC 
registration.
---------------------------------------------------------------------------
    \146\ Treasury conversations with Panel staff (Jan. 8, 2010). The 
application process ended on November 21, 2009. See U.S. Department of 
the Treasury, FAQ on Capital Purchase Program Deadline (online at 
www.financialstability.gov/docs/
FAQ%20on%20Capital%20Purchase%20Program%20Deadline.pdf).
    \147\ Treasury conversations with Panel staff (Jan. 8, 2010). See 
also U.S. Department of Treasury, Troubled Asset Relief Report, Monthly 
105(a) Report--December 2009, at 10 (Jan. 11, 2010) (online at 
financialstability.gov/docs/105CongressionalReports/
December%20105(a)_final_1-11-10.pdf) (hereinafter ``Monthly 105(a) 
Report'').
    \148\ As stated in the term sheets for both public and private 
institutions, ``[e]ach [qualifying financial institution] may issue an 
amount of Senior Preferred equal to not less than 1% of its risk-
weighted assets and not more than the lesser of (i) $25 billion and 
(ii) 3% of its risk weighted assets.'' See Term Sheet for CPP 
Preferred, supra note 144, at 1. Risk weighted assets are the total 
assets of a financial institution, weighted for credit risk. See U.S. 
Department of the Treasury, Decoder (online at 
www.financialstability.gov/roadtostability/decoder.htm) (hereinafter 
``Treasury Decoder'').
    \149\ MetLife, Inc. did not receive CPP funding. In addition, GMAC 
received $13.4 billion under the Automotive Industry Financing Program. 
See Section D.8, infra.
    \150\ See COP July Oversight Report, supra note 139, at 10-11.
    \151\ See COP July Oversight Report, supra note 139, at 10-11.
    \152\ See U.S. Department of the Treasury, Securities Purchase 
Agreement: Standard Terms, at Sec. 4.4 (online at 
www.financialstability.gov/docs/CPP/spa.pdf) (accessed Jan. 4, 2010).
    \153\ The CPP financial institutions that report to the SEC are 
required, under the terms of the SPA, to file a shelf registration 
statement, which would permit sales to the public. See SPA 
Sec. 4.5(a)(i). In addition, Treasury could make sales in private 
transactions exempt from or not subject to SEC registration.
    \154\ See SPA, supra note 153, at 4.5(a)(ii). A shelf registration 
statement allows the financial institution to offer and sell its 
securities for a period of up to two years. With the registration ``on 
the shelf,'' the financial institution, by simply updating regularly 
filed annual and quarterly reports to the SEC can sell its shares in 
the market as conditions become favorable with a minimum of 
administrative preparation and expense.
---------------------------------------------------------------------------
    After redemption of its CPP Preferred, a financial 
institution may also repurchase its warrants,\155\ the warrants 
are ``detachable'' from the CPP Preferred,\156\ which means 
that they can trade separately. Treasury is required to 
purchase the warrants at ``fair market value.'' \157\ The fair 
market value is determined using a negotiation and appraisal 
process between Treasury and the financial institution.\158\ If 
a financial institution does not wish to repurchase its 
warrants,\159\ or the parties cannot agree on a fair price and 
neither party wishes to invoke the appraisal procedure, 
Treasury will, as a matter of policy, auction the warrants to 
the public.\160\ Treasury staff has stated that it is 
Treasury's policy to dispose of the warrants as soon as 
practicable.\161\ Therefore, a financial institution may 
repurchase its warrants as soon as it redeems its preferred 
shares.\162\ To date, of the 58 \163\ financial institutions 
that have redeemed fully their CPP Preferred, 31 \164\ 
financial institutions have also repurchased their warrants 
\165\ and Treasury has received approximately $2.9 billion from 
warrant redemptions.\166\ In addition, as discussed in Section 
D.4.b below, Treasury has received approximately $1.1 billion 
in gross proceeds from third-party auction sales. The following 
table shows the valuation of Treasury's current holdings of CPP 
Preferred, common shares, and warrants as of December 31, 2009. 
In addition, the table shows the fair value (Net Asset Value) 
of Treasury's CPP Preferred and common share holdings.
---------------------------------------------------------------------------
    \155\ OFS Chief Counsel Timothy Massad confirmed in a meeting with 
Panel staff on December 15, 2009 that if Treasury sold its CPP 
Preferred to third party, a financial institution would be allowed to 
repurchase its warrants once the sale is completed. Treasury 
conversations with Panel staff (Dec. 15, 2009). See also COP July 
Oversight Report, supra note 139, at 8-17 (discussing the history and 
legal aspects of repayment of CPP Preferred and warrants
    \156\ See SPA, supra note 153, at Sec. 1.2.
    \157\ See SPA, supra note 153, at Sec. 4.9(a).
    \158\ The repurchase process for a financial institution is a 
multi-step procedure starting with the institution's proposal to 
Treasury of its determination of the fair market value of the warrants. 
Treasury has a choice of whether to accept this proposed fair value. If 
Treasury and the financial institution are unable to agree on the fair 
value determination, either party may invoke the appraisal procedure. 
In the appraisal procedure process, both Treasury and the financial 
institution select independent appraisers. If the appraisers fail to 
agree, a third appraiser is hired, and subject to certain limitations, 
a composite valuation of the three appraisals is used to establish fair 
market value. This composite valuation is determined to be the fair 
market value and is binding on both Treasury and the financial 
institution. If the appraisal procedure is not invoked, and neither 
party can agree on the fair market value determination, Treasury then 
sells the warrants through the auction process. See Robert A. Jarrow, 
TARP Warrants Valuation Methods (Sept. 22, 2009) (online at 
www.financialstability.gov/Jarrow%20TARP%20 
Warrants%20Valuation%20Method.pdf) (hereinafter ``TARP Warrants 
Valuation Methods'').
    In addition, the process is different for private banks. Warrants 
of private financial institutions are immediately exercisable. See COP 
July Oversight Report, supra note 139, at 11.
    \159\ After the CPP preferred is redeemed, the financial 
institution has 15 days to decide whether it wishes to repurchase its 
warrants. See U.S. Department of the Treasury, Treasury Announces 
Warrant Repurchase and Disposition Process for the Capital Purchase 
Program (June 26, 2009) (online at www.financialstability.gov/latest/
tg_06262009.html).
    \160\ In November 2009, Treasury announced that it intended to 
conduct auctions to sell its warrant positions in JPMorgan Chase, 
Capital One Financial Corporation, and TCF Financial Corporation. The 
issuers were allowed to bid in these auctions. See U.S. Department of 
the Treasury, Treasury Announces Intent To Sell Warrant Positions in 
Public Dutch Auctions (Nov. 19, 2009) (online at www.ustreas.gov/press/
releases/tg415.htm) (hereinafter ``Treasury Announces Intent To Sell 
Warrant Positions in Public Dutch Auctions'').
    \161\ See COP July Oversight Report, supra note 139.
    \162\ See id.
    \163\ Treasury conversations with Panel staff (Jan. 8, 2010). See 
also Monthly 105(a) Report, supra note 147, at 11.
    \164\ Treasury conversations with Panel staff (Jan. 8, 2010).
    \165\ In its July Report, the Panel analyzed the prices at which 
Treasury was allowing the financial institutions to repurchase the 
warrants. The Panel was concerned that Treasury was undervaluing the 
warrants and/or not negotiating strongly enough. See COP July Oversight 
Report, supra note 139, at 8-17. 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. Also after the release of the July Report, Treasury retained 
an expert to perform an independent review of its valuation 
methodology. He found that it was ``consistent with industry best 
practice and the highest academic standards.'' See TARP Warrants 
Valuation Methods, supra note 158.
    \166\ See U.S. Department of the Treasury, Troubled Asset Relief 
Program Transactions Report for Period Ending December 30, 2009 (Jan. 
4, 2010) (online at www.financialstability.gov/docs/transaction-
reports/1-4-10%20Transactions%20Report%20as%20of%2012-30-09.pdf) 
(hereinafter ``TARP Transactions Report for Period Ending December 30, 
2009'').

 FIGURE 2: VALUATION OF CURRENT HOLDINGS OF CPP PREFERRED SHARES, COMMON SHARES, AND WARRANTS AS OF DECEMBER 31,
                                                      2009
----------------------------------------------------------------------------------------------------------------
                                  Preferred Shares  (billions of     Warrant Valuation  (millions of dollars)
                                             dollars)            -----------------------------------------------
                                 --------------------------------
                                                     Net Asset
                                     Principal    Value as of 9/   Low Estimate    High Estimate   Best Estimate
                                      Amount       30/2009 \167\
----------------------------------------------------------------------------------------------------------------
Stress-Tested Financial
 Institutions with CPP Preferred
 and/or Warrants Outstanding:
    Wells Fargo & Company.......           $0.00           $0.00         $313.02       $1,727.96         $829.57
    Bank of America Corporation             0.00            0.00          561.18        2,581.16        1,036.20
     \168\......................
    Citigroup, Inc. (Common                25.00           25.46            9.51          891.04          204.32
     Shares) \169\..............
    The PNC Financial Services              7.58            7.17           82.81          500.60          231.03
     Group Inc..................
    SunTrust Bank, Inc..........            4.85            4.14            5.67          252.90           98.15
    Regions Financial                       3.50            3.01            3.61          155.48           65.41
     Corporation................
    Fifth Third Bancorp.........            3.41            3.05           63.74          317.82          161.23
    KeyCorp.....................            2.50            1.94            5.59          108.70           49.48
    GMAC, LLC...................     \170\ 14.11      \171\ 7.17           \170\           \170\           \170\
Failed Banks Enrolled in CPP:
    Pacific Coast National                  0.00            0.00       \172\ N/A             N/A             N/A
     Bancorp....................
    UCBH Holdings, Inc.\173\....            0.30            0.02            0.00            0.07            0.01
    CIT Group...................            2.33            0.00            0.00            3.19            2.84
All Other Banks.................           33.53     \174\ 28.91        2,314.46        5,998.02        3,654.25
                                 -------------------------------------------------------------------------------
    Total.......................          $97.11          $80.87       $3,359.59      $12,536.94      $6,332.49
----------------------------------------------------------------------------------------------------------------
\167\ Except for Citigroup, Net Asset Value for December 31, 2009 is not available. Net Asset Value is the per
  share value on September 30, 2009 as disclosed in the TARP Financial Audit Report. See OFS FY09 Financial
  Statements, supra note 133, at 36. Except for Citigroup, Inc., Net Asset Value is calculated by dividing the
  total value of all securities in the financial institution's portfolio, less any liabilities by the number of
  shares outstanding. See note 174, infra. The Net Asset Value of Citigroup was calculated using the common
  stock closing price of $3.31 on December 31, 2009 multiplied by Treasury's common ownership of 7.7 billion
  shares. On September 30, 2009, Citigroup's closing price was $4.84 per share.
\168\ Warrant Valuation includes warrants outstanding from TIP investment (valuation of $459.1, $1,405.9, and
  $666.5 for Low, High, and Best Estimates, respectively).
\169\ Warrant Valuation includes warrants outstanding from TIP (valuation of $6.4, $371.3, and $118.1 for Low,
  High and Best Estimates, respectively) and AGP investments (valuation of $2.3, $132.0, and $42.4 for Low,
  High, and Best Estimates, respectively).
\170\ On December 30, 2009, Treasury provided an additional commitment to GMAC of approximately $3.8 billion.
  The $3.8 billion of new capital was provided in the form of $2.54 billion of Trust Preferred Securities
  (TruPs), which are senior to all other capital securities of GMAC, and $1.25 billion of Mandatory Convertible
  Preferred Stock (MCP). In addition, Treasury received warrants, which were exercised, to purchase an
  additional $127 million of TruPs and $63 million of MCP. U.S. Department of the Treasury, Treasury Announces
  Restructuring of Commitment to GMAC (Dec. 30, 2009) (online at ustreas.gov/press/releases/tg501.htm)
  (hereinafter ``Treasury Announces Restructuring of Commitment To GMAC''). See also Section D.8, infra.
\171\ The Net Asset Valuation of GMAC was based $12.5 billion of preferred stock held by GMAC prior to the
  additional financing. Net Asset Value on December 31, 2009 is not available.
\172\ Pacific Coast National Bancorp, 2008 Annual Report, Form 10-K, Part II, Item 5 (online at www.sec.gov/
  Archives/edgar/data/1302502/000092708909000143/p-10k123108.htm). There are no warrants currently outstanding
  for Pacific Coast National Bancorp. At the date of initial TARP CPP investment, Pacific Coast National issued
  a warrant to Treasury to purchase 206.00206 shares of its Fixed Rate Cumulative Perpetual Preferred Stock,
  Series B, which Treasury immediately exercised in a cashless transaction, per the Company's 2009 10-K. The
  valuation of Pacific Coast National's preferred shares at September 30, 2009 was approximately $154,000.
\173\ Agency Financial Statement 2009, supra note 32, at 34-35. The Net Asset Value of UCBH Holdings, Inc.
  includes warrants.
\174\ Treasury conversations with Panel staff (Jan. 5, 2010). The Net Asset Value of ``All Other Banks'' was
  provided by OFS as an aggregate value. This is due to the inherent constraints of the model created and used
  by OFS in its valuation of CPP preferred stock and warrants, as discussed with the OFS modeling team on
  December 22, 2009. In this regard, generating a net asset value for Treasury's investment in a specific
  financial institution requires each institution to be separately modeled. The man-hours and model run-time
  required prevent each financial institution from being modeled separately. As such, OFS has valued the stress-
  tested financial institutions and those receiving the largest CPP investment and has provided an aggregate net
  asset value for Treasury's holdings in the remaining financial institutions.

    Of the 19 stress-tested financial institutions, there are 
currently six that have not repaid their TARP funding.\175\ One 
of the six is GMAC, which is discussed later in Section D.8.
---------------------------------------------------------------------------
    \175\ MetLife, Inc. did not receive any funding. See Congressional 
Oversight Panel, June Oversight Report: Stress Testing and Shoring Up 
Bank Capital, at 15 (June 9, 2009) (online at cop.senate.gov/documents/
cop-060909-report.pdf) (hereinafter ``COP June Oversight Report''). As 
of December 31, 2009, the following stress tested banks have not repaid 
their TARP funding: PNC Financial Services Group, SunTrust Banks, Inc., 
Regions Financial Corp., Fifth Third Bancorp, Keycorp, and GMAC LLC. 
See TARP Transactions Report for Period Ending December 30, 2009, supra 
note 166.
---------------------------------------------------------------------------
            b. Disposal of CPP Assets and Recovery of TARP Funds
    In September 2009, Treasury issued a report that discussed 
the next phase of its financial and rehabilitation efforts--
what it describes as ``moving from rescue of our financial 
system to a period of stabilization, rehabilitation and 
rebuilding.'' \176\ The report stated that the ``next phase 
will focus on winding down those programs that were once 
necessary to prevent systemic failure.'' \177\
---------------------------------------------------------------------------
    \176\ See U.S. Department of the Treasury, The Next Phase of 
Government Financial Stabilization and Rehabilitation Policies, at 1 
(Sept. 14, 2009) (online at www.treas.gov/press/releases/docs/
Next%20Phase%20of%20Financial%20Policy,%20Final,%202009-09-14.pdf) 
(hereinafter ``Treasury Status Report on Financial Stabilization'').
    \177\ See Treasury Status Report on Financial Stabilization, supra 
note 176, at 1.
---------------------------------------------------------------------------
    The report stated that Treasury anticipated financial 
institutions would repay another $50 billion in CPP Preferred 
over the next 12 to 18 months.\178\ To date, Treasury has 
received approximately $122 billion from CPP recipients through 
principal repayments of preferred stock repurchases, an amount 
in excess of the September projection.\179\ The report does not 
discuss the timing of repayment of the remaining balance of 
approximately $58 billion,\180\ which largely comprises 
investments in approximately 600 smaller financial 
institutions. In this regard, Treasury has stated that it is 
looking at ``lots of possibilities,'' including market sales, 
but it is ``nowhere near'' a decision process.\181\ These 
smaller financial institutions have not publicly disclosed 
their intended exit strategy for CPP repayment. Non-disclosure 
by these financial institutions may be due to the fact that the 
banking regulators have not specifically disclosed their 
criteria for allowing a financial institution to redeem its CPP 
Preferred and the fact that some of these institutions may be 
unable to redeem due to high loan losses and ``vulnerable 
capital ratios.'' \182\
---------------------------------------------------------------------------
    \178\ See Treasury Status Report on Financial Stabilization, supra 
note 176, at 3.
    \179\ The $50 billion of projected repayments was based upon total 
repayments of approximately $70 billion received by September 30, 2009. 
See Treasury Status Report on Financial Stabilization, supra note 176, 
at 3. In addition, Treasury estimated that total bank repayments 
``could reach up to $175 billion by the end of 2010.'' See Treasury 
Announces Intent To Sell Warrant Positions in Public Dutch Auctions, 
supra note 160.
    \180\ The remaining balance owed is based upon the cash outlay of 
$205 billion less cash repayments of $122 billion less $25 billion of 
Citigroup's common shares.
    \181\ Treasury conversations with Panel staff (Dec. 15, 2009).
    \182\ Some financial institutions may continue to need the CPP 
funding due to ``staggering loan losses and vulnerable capital 
levels.'' See Kevin Dobbs, For Some Regional Banks, TARP remains 
necessary (Jan 5, 2010) (online at snl.com/InteractiveX/article.aspx? 
Id=10545545&KPLT=4).
---------------------------------------------------------------------------
    Although Treasury has the ability to sell its CPP Preferred 
to third parties either in a private or public offering, it 
currently has no plans to use third-party sales.\183\ Treasury 
stated in the TARP Financial Statements that although ``it has 
not exercised these rights, it may do so in the future.'' \184\ 
Treasury's preference, however, as it stated in the TARP 
Financial Statements and in meetings with Panel staff, is to 
hold the preferred stock with the objective of receiving 
redemption in full from the CPP participant, as opposed to 
selling to third parties at a likely discount.\185\ Similarly, 
in the event of a severe downturn in the market, Treasury 
indicated that it would not immediately sell its CPP 
investments. Treasury stated that it would need to evaluate its 
investment objectives (i.e., minimization of costs, 
maximization of returns to the taxpayers, and preservation of 
market stability), before it would sell those investments. In 
this regard, as stated in the TARP Financial Statements, 
``Treasury-OFS must also consider the limited ability to sell 
an investment to a third party due to the absence of a trading 
market or lack of investor demand, and the possibility of 
achieving potentially higher returns through a later 
disposition.'' \186\ Accordingly, Treasury has not decided at 
what point the option of selling to third parties might be used 
for any of the investments it currently holds, but has stated 
that this remains a possible mode of exit to be considered in 
the future.\187\
---------------------------------------------------------------------------
    \183\ Treasury conversations with Panel staff (Dec. 3, 2009).
    \184\ Treasury conversations with Panel staff (Dec. 3, 2009); 
Treasury conversations with Panel staff (Dec. 15, 2009); See also OFS 
FY09 Financial Statements, supra note 133, at 73.
    \185\ Treasury conversations with Panel staff (Dec. 15, 2009).
    \186\ See OFS FY09 Financial Statements, supra note 133, at 68-69.
    In connection with warrant sales, the Panel stated in its July 
report that ``Treasury would be more likely to maximize taxpayer 
returns if it sold the warrants through auctions,'' since the process 
is straightforward. See COP July Oversight Report, supra note 139.
    \187\ Treasury conversations with Panel staff (Dec. 3, 2009); 
Treasury conversations with Panel staff (Dec. 15, 2009). However, the 
Panel recommended in its June report that ``[t]he CPP repayment process 
should be more transparent.'' See COP June Oversight Report, supra note 
175.
---------------------------------------------------------------------------
    With respect to a CPP recipient's warrants, to date it has 
been Treasury's policy to conduct third party sales by 
auction.\188\ As a result, Treasury has somewhat less leeway 
with respect to the disposal of warrants than it does with 
respect to the CPP Preferred. Upon redemption of its CPP 
Preferred, a financial institution has 15 days to elect whether 
it will repurchase its warrants. If it does not, Treasury will 
sell the warrants through auction sales.\189\ In December 2009, 
Treasury conducted auctions to sell its warrant positions in 
JPMorgan Chase, Capital One, and TCF Financial Corporation, and 
received approximately $1.1 billion in gross proceeds.\190\ 
Treasury informed Panel staff that the next auction sale will 
not take place before February 2010.\191\
---------------------------------------------------------------------------
    \188\ In November 2009, Treasury announced that it would conduct 
auctions for warrant positions it holds in financial institutions that 
have repaid CPP investments and do not reach agreement with Treasury on 
the warrant price. The auctions are done through a modified Dutch 
auction methodology that establishes a market price by allowing 
investors to submit bids at specified increments above a minimum price 
specified for each auction. See, Treasury Announces Intent To Sell 
Warrant Positions in Public Dutch Auctions, supra note 160.
    \189\ Treasury conversations with Panel staff (Dec. 3, 2009).
    \190\ Gross proceeds received for JPMorgan Chase, Capital One, and 
TCF Financial Corporation were approximately $950 million, $148 
million, and $9 million, respectively. See TARP Transactions Report for 
Period Ending December 30, 2009, supra note 166.
    \191\ Treasury conversations with Panel staff (Dec. 3, 2009).
---------------------------------------------------------------------------
    As of December 31, 2009, 60 financial institutions, 
including three that have declared bankruptcy, had outstanding 
dividend payments to Treasury of approximately $140 
million.\192\ TARP-recipient financial institutions pay two 
different kinds of dividends--cumulative dividends, which are 
paid by bank holding companies and their subsidiaries, and non-
cumulative dividends, which are paid by banks--with different 
consequences for the funds' potential recovery. When CPP 
Preferred are redeemed, if cumulative dividends remain unpaid, 
Treasury will be paid any accrued and unpaid dividends. 
However, non-cumulative dividends do not have to be paid, 
unless such dividends have been accrued.\193\
---------------------------------------------------------------------------
    \192\ See SIGTARP, Quarterly Report to Congress, at 58 (Oct. 21, 
2009) (online at www.sigtarp.gov/reports/congress/2009/
October2009_Quarterly_Report_to_Congress.pdf) (hereinafter ``SIGTARP 
October Report''). When institutions were given TARP assistance, there 
was no time to perform any due diligence in view of the immediacy of 
the situation. However, TARP was supposedly given to healthy banks but 
in many instances this was not the case. For example, Citigroup needed 
further assistance from the TARP. In addition there are further 
difficulties in valuing an institution once the government provides 
external support, since values tend to be inflated. See discussion 
below regarding the difficulties of valuation once there is government 
support. See also David Enrich, TARP Can't Save Some Banks, Wall Street 
Journal (Nov. 17, 2009) (online at online.wsj.com/article/
SB10001424052748704538404574539954068634242.html).
    \193\ At December 31, 2009, non-cumulated dividends totaled 
approximately $2.4 million. Information provided by Treasury on January 
4, 2010.
---------------------------------------------------------------------------
    Of the $140 million in unpaid dividends, approximately $66 
million represented unpaid cumulative dividends from the three 
failed financial institutions.\194\ CIT filed for bankruptcy on 
November 1, 2009,\195\ while UCBH Holdings, Inc. (UCBH) and 
Pacific Coast National Bancorp (Pacific Coast) filed for 
bankruptcy on November 24, 2009, and December 17, 2009, 
respectively.\196\ Beyond dividend payments, the amount that 
can be recovered from these three failed institutions, if any, 
will depend on the outcome of the bankruptcy proceedings.\197\ 
As shown in Figure 2, on September 30, 2009, Treasury's 
investment in CIT was valued at zero,\198\ and the aggregate 
value of Treasury's investments in UCBH and Pacific Coast 
totaled approximately $22.5 million.\199\
---------------------------------------------------------------------------
    \194\ Information provided by Treasury on January 4, 2010. On 
December 31,2009, CIT, UCBH Holdings, and Pacific Coast National 
Bancorp owed $58.3 million, $7.5 million, and $168,000 in dividends, 
respectively.
    \195\ See OFS FY09 Financial Statements, supra note 133, at 125.
    \196\ Treasury conversation with Panel staff (Jan. 7, 2010).
    \197\ See OFS FY09 Financial Statements, supra note 133.
    \198\ See OFS FY09 Financial Statements, supra note 133, at 36. See 
also Figure 2.
    \199\ The CPP investment in UCBH was valued at $22.5 million which 
include the warrants; the CPP Investment in Pacific Coast was valued at 
$154,000. See OFS FY09 Financial Statements, supra note 133, at 125. 
See also Figure 2.
---------------------------------------------------------------------------
    In certain circumstances, TARP recipients may seek approval 
from Treasury for exchange offers, recapitalizations, or other 
restructuring actions to improve their financial 
condition.\200\ Treasury evaluates each such proposal on a 
case-by-case basis, and before it grants approval of such 
transactions, it takes into account the following principles: 
\201\
---------------------------------------------------------------------------
    \200\ See OFS FY09 Financial Statements, supra note 133, at 70.
    \201\ See OFS FY09 Financial Statements, supra note 133, at 70-71.
---------------------------------------------------------------------------
           Pro forma capital position of the 
        institution;
           Pro forma position of Treasury investment in 
        the capital structure;
           Overall economic impact of the transaction 
        to the government;
           Guidance of the institution's primary 
        regulator; and
           Consistent pricing with comparable 
        marketplace transactions.
    During 2009, two exchange transactions were completed. In 
August, Popular, Inc. completed an exchange of $935 million of 
preferred stock held by Treasury for an identical amount of 
newly issued trust preferred securities.\202\ Similarly, on 
December 11, 2009, Superior Bancorp completed an exchange of 
$69 million of preferred stock held by Treasury for an 
identical amount of newly issued trust preferred 
securities.\203\ Two exchange offers are currently pending with 
Independent Bank Corp \204\ and Midwest Banc Holdings.\205\ 
Treasury has stated that exchange transactions will be approved 
only on a case-by-case basis once all the relevant information 
is evaluated.\206\
---------------------------------------------------------------------------
    \202\ Banco Popular paid Treasury a $13 million exchange fee. See 
SIGTARP October Report, supra note 192, at 61. See also, Popular, Inc., 
Form 10-Q for the quarter ended September 30, 2009, at 60 (online at 
www.sec.gov/Archives/edgar/data/763901/000095012309060126/
g20716e10vq.htm#107) (accessed Jan. 12, 2010).
    \203\ On December 14, 2009, Superior Bancorp filed with the SEC a 
Form 8-K which announced the completion of the exchange transaction 
with Treasury (online at www.sec.gov/Archives/edgar/data/1065298/
000114420409064449/v168906_ex99.htm).
    \204\ On November 25, 2009, Independent Bank Corp. filed a 
preliminary proxy statement asking its shareholders to vote on a 
potential exchange of the bank's common stock for preferred stock held 
by Treasury. See Independent Bank Corp., Preliminary Proxy Statement 
filed by Independent Bank Corp on November 25, 2009 (Nov. 25, 2009) 
(online at www.sec.gov/Archives/edgar/data/39311/000092604409000561/
ibc-prer14a_093009.htm).
    \205\ On December 3, 2009, Midwest Banc Holdings announced that it 
is in discussions with Treasury regarding an exchange transaction 
(online at www.sec.gov/Archives/edgar/data/1051379/000091384909000815/
ex99-1.htm). Since this announcement, Midwest has entered into a 
written agreement with the Federal Reserve Bank of Chicago and the 
Illinois Department of Financial and Professional Regulation, Division 
of Banking (online at www.sec.gov/Archives/edgar/data/1051379/
000095012309073372/c55234e8vk.htm).
    \206\ Treasury conversations with Panel staff (Dec. 15, 2009).
---------------------------------------------------------------------------
    Panel staff asked Treasury whether it has considered 
divestment alternatives such as a bundled sale of CPP Preferred 
issued by various banks. Treasury indicated that it would 
consider all types of divestment alternatives, especially in 
regard to the relatively small CPP investments in a large 
number of smaller institutions, as the program winds down. At 
present, however, the focus is on an institution-by-institution 
approach.
            c. Analysis of Intended Exit Strategy
    As noted above, CPP recipients may redeem their CPP 
Preferred only after receiving approval from their primary 
banking regulators.\207\ The banking regulators have not 
specifically disclosed their criteria for allowing a financial 
institution to redeem its CPP Preferred,\208\ a lack of clarity 
that has led to frustration at some banks.\209\ Until the 
banking regulators are more transparent about their redemption 
policies, the Panel cannot assess the propriety of Treasury's 
investment strategy, which is to hold onto the stock with the 
goal of eventually receiving redemption in full from the CPP 
recipient, rather than selling to another investor at a likely 
discount.
---------------------------------------------------------------------------
    \207\ If Treasury sells its investment in CPP Preferred to a third 
party, approval by a financial institution's primary regulator is not 
required. Treasury conversations with Panel staff (Dec. 15, 2009).
    \208\ As the Panel indicated in its August report, the banking 
regulators ``see the stress test and the repayment of assistance as 
working together to protect the bank's balance sheet;'' however 
``supervisory flexibility underlies the stress test's assumptions.'' 
See COP August Oversight Report, supra note 65, at 42.
    \209\ Bank of America, Citigroup, and SunTrust have all expressed 
their frustrations with the lack of clarity about the criteria for TARP 
repayment. In November, Bank of America announced that it was ready and 
willing to repay TARP but was ``waiting for the government to establish 
the appropriate time.'' See BofA, Feds at odds over when TARP gets 
repaid, Charlotte Observer (Nov. 24, 2009) (online at 
www.charlotteobserver.com/597/story/1072637.html). Similarly, Citigroup 
announced it was ready to repay its TARP funding, but said its 
regulators were undecided over the amount of capital it should raise. 
SunTrust's Chairman and CEO views ``the rules for repaying TARP 
assistance as ever-changing.'' See J. Scott Trubey, SunTrust CEO wants 
to repay TARP, Atlanta Business Chronicle (Sept. 15, 2009) (online at 
atlanta.bizjournals.com/
atlanta/stories/2009/09/14/daily34.html); Samil Surendran, Citi's plan 
to exit TARP hits roadblock (Dec. 9, 2009) (online at www.snl.com/
InteractiveX/article.aspx?ID=10454610&BeginDate=12/09/2009&KPLT=2); 
David Enrich, Banks, U.S. Spar Over TARP Repayments, Wall Street 
Journal (Dec. 7, 2009) (online at online.wsj.com/article/
SB10001424052748704825504574582311943469506.html).
---------------------------------------------------------------------------
    In addition, at the Panel's December hearing Secretary 
Geithner could not definitively answer the Panel's questions in 
regard to the banking regulators' criteria for redemption. He 
stated that a financial institution would not be allowed to 
make repayments if it would ``leave the system or these 
financial institutions with inadequate capital.'' \210\ He 
further stated that a financial institution would be required 
to ``raise capital from the markets'' so that it ``can repay 
the taxpayer with interest.'' \211\ Secretary Geithner did not, 
however, provide a definitive answer about whether a financial 
institution would be required to raise the full amount of its 
TARP debt.\212\ Although it is the banking regulators' 
responsibility to disclose their criteria for allowing 
repayments, Treasury also should be able to articulate this 
policy in view of the broader economic issues it raises. This 
lack of clarity breeds uncertainty and instability in the 
financial markets and provides a disservice to taxpayers as 
well as investors.
---------------------------------------------------------------------------
    \210\ See Congressional Oversight Panel, Transcript of Hearing with 
Treasury Secretary Timothy Geithner (Dec. 10, 2009) (publication 
forthcoming) (online at http://cop.senate.gov/hearings/library/hearing-
121009-geithner.cfm) (hereinafter ``Dec. 10 Hearing Transcript'').
    \211\ See Dec. 10 Hearing Transcript, supra note 210.
    \212\ See Dec. 10 Hearing Transcript, supra note 210.
---------------------------------------------------------------------------
    To prevent a truly healthy bank from repaying its TARP 
funding is a disservice to that bank's investors as well as 
taxpayers.\213\ It is, moreover, inconsistent with Treasury's 
``systemic stability'' principle. Repayment is, or should be, a 
signal of health to the markets, and delaying repayment risks 
withholding valuable information from the markets. Permitting 
premature repayment for whatever reason, however, including 
escape from executive compensation limitations,\214\ serves no 
public purpose if the institution in question cannot survive on 
its own. Financial institutions in 2010 will be faced with a 
substantial amount of debt that will be maturing over the next 
few years.\215\ This fact could lead to the government having 
to decide whether to provide additional assistance if a 
repaying institution is not truly healthy. The Panel is 
concerned about reports of dissent among the banking 
supervisors and tensions between Treasury and the supervisors, 
and the extent to which institutions might be permitted to exit 
the TARP when not financially stable.\216\ The underlying issue 
here relates to the bank regulators' position that their 
assessment of a bank's condition should remain confidential in 
order to maximize their effectiveness in promoting bank safety 
and soundness. This traditional position of the regulators 
conflicts with the need for Treasury as investor in particular 
banks to know as much as possible about the financial condition 
of those banks. In these circumstances, the regulators' 
traditional lack of transparency may do a disservice to the 
taxpayers, investors, and to the marketplace in financial 
institutions' securities.
---------------------------------------------------------------------------
    \213\ Some commentators have pointed out that the replacement of 
CPP Preferred with common stock, which is generally more expensive, 
places an additional burden on the ability of a TARP recipient to earn 
its way back to profitability. See, e.g., James Kwak, Why Did Bank of 
America Pay Back the Money? (Dec. 4, 2009) (online at 
baselinescenario.com/2009/12/04/why-did-bank-of-america-pay-back-the-
money/).
    \214\ For example, the financial press has indicated that 
Citigroup's and Bank of America's exit from TARP was due to the release 
of executive compensation restrictions, especially in view of Bank of 
America's CEO search. See, e.g., Bradley Keoun, Citigroup Said to Near 
Accord on TARP Repayment, US Stake Sale, Business Week (Dec. 13, 2009) 
(online at businessweek.com/bwdaily/dnflash/content/dec2009/
db20091213_027634.htm); David Mildenberg, Bank of America TARP Payment 
May Aid Shares, Search, Bloomberg (Dec. 3, 2009) (online at 
bloomberg.com/apps/news?pid=20601087&sid=a8MHKJc4D3bc).
    \215\ Banks will have trillions of dollars of debt maturing over 
the next few years, potentially forcing them to refinance their debt at 
substantially higher rates. Data provided under subscription by 
BLOOMBERG Data Services (Instrument: Map Debt, filtered for average 
maturity date under 5 years). See also Carrick Mollenkamp and Serena 
Ng, Banks Scramble as Debt Comes Due, Wall Street Journal (Nov. 25, 
2009) (online at online.wsj.com/article/
SB10001424052748703819904574554223793153390.html); Federal Deposit 
Insurance Corporation, FDIC Board Approves 2010 Operating Budget (Dec. 
15, 2009) (online at www.fdic.gov/news/news/press/2009/pr09228.html) 
(FDIC Chairman Sheila Bair explained that a 55 percent increase in the 
FDIC operating budget ``will ensure that we are prepared to handle an 
even-larger number of bank failures next year, if that becomes 
necessary, and to provide regulatory oversight for an even-larger 
number of troubled institutions'').
    \216\ See, e.g., David Enrich and Damian Paletta, Discord Behind 
TARP Exits, Wall Street Journal (Dec. 18, 2009) (``Bank regulators at 
the Federal Reserve and Federal Deposit Insurance Corp. . . . have 
disagreed with other government officials about banks' plans to repay 
government funds, and have privately complained that Treasury officials 
pushed them to allow banks to quickly leave TARP, according to people 
familiar with the matter'').
---------------------------------------------------------------------------
    There exists a range of views on how transparent Treasury 
should be as it seeks to divest from its stakes in financial 
institutions. Vincent Reinhart, a fellow at the American 
Enterprise Institute and a former official at the Federal 
Reserve, states that ``[b]y and large, government officials are 
big fans of constructive ambiguity.'' \217\ While it may be 
beneficial for the government to retain flexibility in certain 
situations, others disagree about the merits of a policy of 
constructive ambiguity. For example, James B. Thomson, vice 
president of the Office of Policy Analysis at the Federal 
Reserve Bank of Cleveland, has argued that a ``policy of 
supervisory transparency is superior to constructive 
ambiguity.'' \218\ This debate illustrates the inherent 
challenges and obstacles associated with the government's 
involvement in the private sector. In this regard, the 
government acknowledges that it does not function like an 
ordinary investor; however, its investments are purely 
taxpayer-funded. This means that the government has a 
heightened responsibility to the taxpayers whose money is being 
spent, and an even greater responsibility to be transparent and 
forthcoming about all aspects of its reasoning and decision-
making.
---------------------------------------------------------------------------
    \217\ See Mark DeCambre, No Pity for Citi, New York Post (Sept. 4, 
2009) (online at www.nypost.com/p/news/business/
no_pity_for_Citi_F7vQTwjTr4ogsVyyEQ4K6N). Henry Kissinger first 
employed this term in the context of diplomatic negotiations, and it 
has been used in economic policy to refer to a ``policy of using 
ambiguous statements to signal intent while retaining policy 
flexibility.'' See, e.g., Marvin Goodfriend and Jeffrey M. Lacker, 
Limited Commitment and Central Bank Lending, Economic Quarterly Federal 
Reserve Bank of Richmond, at 19-21 (Fall 1999) (hereinafter ``Limited 
Commitment and Central Bank'') (discussing the benefits and weaknesses 
of a policy of constructive ambiguity with regard to central bank 
lending).
    \218\ James B. Thompson, On Systemically Important Financial 
Institutions and Progressive Systemic Mitigation, Federal Reserve Bank 
of Cleveland, at 9 (2009) (online at clevelandfed.org/research/
policydis/pdp27.pdf); see also Limited Commitment and Central Bank, 
supra note 217, at 19-21 (``Constructive ambiguity in the absence of an 
ability to precommit may actually increase the drift toward 
expansion''); see also International Monetary Fund, Global Economic 
Prospects and Principles for Policy Exit, at 7 (2009) (``Basic 
principles and plans for the exit and beyond should be established 
early and communicated clearly and consistently by policymakers to the 
public''). Similarly, two officials from the Federal Reserve Bank of 
Boston refer to ``less than constructive ambiguity.'' Jane Sneddon 
Little and Giovanni P. Olivei, Why the Interest in Reform?, Rethinking 
the International Monetary System, Proceedings from the Federal Reserve 
Bank of Boston Conference Series, at 81 (1999) (online at 
www.bos.frb.org/economic/conf/conf43/41p.pdf). In addition, Reinhart 
has expressed doubts about the benefits of constructive ambiguity, 
stating that ``[n]ow is the time to articulate an exit strategy.'' 
Craig Torres and Scott Lanman, Bernanke May Explain Fed Exit Strategy 
in Testimony Next Week, Bloomberg (July 13, 2009) (online at 
www.bloomberg.com/apps/news?pid=20601087&sid=aNU.UkT9EB68).
---------------------------------------------------------------------------
    In its July report, the Panel examined the repurchase of 
stock warrants. At that time, 11 public financial institutions 
had repurchased their warrants from Treasury. The Panel's 
analysis of the numbers indicated that taxpayers had received 
only 66 percent of the Panel's best estimate of the value of 
the warrants.\219\ As the Panel stated then, ``[T]reasury 
should promptly provide written reports to the American 
taxpayers analyzing in sufficient detail the fair market value 
determinations for any warrants either repurchased by a TARP 
recipient from Treasury or sold by Treasury through an auction, 
and it should disclose the rationale for its choice of an 
auction or private sale.'' \220\ In order to ensure that 
taxpayers receive the maximum value as financial institutions 
exit the TARP, the Panel urged Treasury to make its process, 
reasoning, methodology, and exit strategy absolutely 
transparent.\221\
---------------------------------------------------------------------------
    \219\ See COP July Oversight Report, supra note 139, at 27.
    \220\ See COP July Oversight Report, supra note 139, at 44-45.
    \221\ The Panel's July report stated ``. . . it is critical that 
Treasury make the process--the reason for its decisions, the way it 
arrives at its figures, and the exit strategy from our future use of 
the TARP--absolutely transparent. If it fails to do so, the credibility 
of the decisions it makes and its stewardship of the TARP will be in 
jeopardy.'' COP July Oversight Report, supra note 139, at 4. Similarly, 
the Panel's November report echoed the same concerns regarding 
transparency by stating, ``. . . in light of these guarantees' 
extraordinary scale and their risk to taxpayers, the Panel believes 
that these programs should be subject to extraordinary transparency. 
The Panel urges Treasury to disclose greater detail about the rationale 
behind guarantee programs, the alternatives that may have been 
available and why they were not chosen, and whether these programs have 
achieved their objectives.'' See COP November Oversight Report, supra 
note 2, at 4. Lastly, Panel Chair Elizabeth Warren stated in her 
September testimony that ``[i]n order to ensure that taxpayers would 
receive the maximum value as banks exited TARP, the Panel urged 
Treasury to make its process, reasoning, methodology, and exit strategy 
absolutely transparent.'' See Senate Committee on Banking, Housing and 
Urban Affairs, Testimony of Elizabeth Warren, Emergency Economic 
Stabilization Act: One Year Later, 111th Cong., at 3 (Sept. 24, 2009) 
(online at cop.senate.gov/documents/testimony-092409-warren.pdf).
---------------------------------------------------------------------------
    Although there has not been the robust disclosure called 
for by the Panel, the return to taxpayers has increased since 
the July report was published. Subsequent to the publication of 
the July report, an additional 25 financial institutions have 
repurchased their warrants or sold warrants in auction sales, 
generating total aggregate proceeds to Treasury of $4.0 
billion, which represented more than 92 percent of the Panel's 
best estimate of their values.\222\ With specific regard to 
large TARP recipients, in December 2009, Treasury conducted 
auctions to sell its warrant positions in JPMorgan Chase, 
Capital One, and TCF Financial Corporation, and received 
approximately $1.1 billion in gross proceeds.\223\ Treasury 
stated that the auction sales were ``a robust alternative to 
negotiations'' since it received market price for the 
warrants.\224\ The Panel's analysis of the numbers indicated 
that the taxpayer received approximately 89 percent of the 
Panel's best estimate of the value of the warrants.\225\
---------------------------------------------------------------------------
    \222\ See TARP Transactions Report for Period Ending December 30, 
2009, supra note 166.
    \223\ Gross proceeds received for JPMorgan Chase, Capital One, and 
TCF Financial Corporation were approximately $950 million, $147 
million, and $9 million, respectively. See TARP Transactions Report for 
Period Ending December 30, 2009, supra note 166.
    \224\ Treasury conversations with Panel staff (Dec. 15, 2009).
    \225\ The valuation was derived by dividing total net proceeds 
received ($1.1 billion) by total aggregate value of Panel's best 
estimate ($1.3 billion). For the individual auction sales of JPMorgan 
Chase, Capital One, and TCF Financial Corporation, the taxpayers 
received 94 percent, 64 percent, and 81 percent, respectively, of the 
Panel's best estimate of the value of the warrants.
---------------------------------------------------------------------------
    As noted above, as the CPP program winds down, Treasury has 
indicated to Panel staff that it would consider all types of 
divestment alternatives, especially in regard to relatively 
small CPP investments in a large number of smaller 
institutions. At present, however, the focus is on an 
institution-by-institution approach.
    One form of exit from the TARP that has not drawn much 
attention from commentators involves those TARP-recipient 
financial institutions that fail, an event that can be expected 
to wipe out the taxpayers' investment. Ironically, when no 
further government intervention occurs, this kind of early and 
involuntary exit from TARP may have the effect of reducing 
moral hazard and restoring market discipline.

5. Citigroup

            a. Acquisition of Assets and Current Value
    Between October 2008 and January 2009, Treasury invested a 
total of $50 billion in Citigroup through three separate 
programs: the CPP, the TIP, and the AGP.\226\ After Citigroup's 
repayment of trust preferred securities in December, Treasury 
currently holds 7.7 billion shares of Citigroup's common stock, 
worth $25.49 billion on December 31, 2009. Treasury is 
Citigroup's largest shareholder, with 27.04 percent of 
Citigroup's equity.
---------------------------------------------------------------------------
    \226\ The Panel notes that Treasury's Transaction Reports state 
that the total TARP assistance to Citigroup is $49 billion, based on 
the $25 billion CPP investment, $20 billion TIP investment, and 
Treasury's receipt of $4.03 billion in preferred stock under the AGP. 
While the total amount Treasury has invested under the AGP is $4.03 
billion, Treasury's actual maximum loss position under the AGP was $5 
billion, which is the number used by the Panel since that represents 
Treasury's actual exposure. For further information on the AGP 
accounting, see Figure 22, infra. The AGP agreement was structured so 
that losses on assets in the pool will be shared among Citigroup, 
Treasury, the FDIC and the Federal Reserve. As of September 30, 2009, 
the total asset pool was approximately $250.4 billion. U.S. Securities 
and Exchange Commission, Quarterly Report Pursuant to Section 13 or 
15(d) of the Securities Exchange Act of 1934 for Citigroup Inc., at 33-
34 (Nov. 6, 2009) (online at www.sec.gov/Archives/edgar/data/831001/
000104746909009754/a2195256z10-q.htm). Citigroup would absorb up to 
$39.5 billion of initial losses arising from the covered pool (losses 
of $8.1 billion had been recorded at September 30, 2009), and would 
then absorb 10 percent of any losses in excess of that amount. Id. The 
federal government would absorb the remainder, with Treasury absorbing 
the first $5 billion in federal liability, the FDIC absorbing the 
second $10 billion, and the Federal Reserve covering any further 
federal liability by way of a non-recourse loan to Citigroup. Id. The 
guarantee was structured to run for up to 10 years for residential 
assets and five years for non-residential assets. Id.
---------------------------------------------------------------------------
    The first Citigroup investment was made through the CPP. On 
October 28, 2008, Treasury used the program to inject $25 
billion into Citigroup. Treasury received $25 billion face 
value of CPP Preferred and warrants to purchase 210,084,034 
shares at a strike price of $17.85. The second TARP investment 
in Citigroup was made through the TIP. Although Citigroup's TIP 
capital infusion was announced on November 23, 2008 and 
finalized on December 31, 2008, the guidelines for the TIP were 
not announced until January 2, 2009.\227\ Under the TIP, 
Treasury purchased $20 billion in preferred stock from 
Citigroup.\228\ This preferred stock paid dividends of 8 
percent. Treasury also took warrants to accompany the preferred 
stock. There are no standard terms for the TIP; terms and 
conditions were determined on a case-by-case basis.\229\ Any 
institutions participating in the TIP were required to comply 
with strict executive compensation standards.
---------------------------------------------------------------------------
    \227\ See U.S. Department of the Treasury, Treasury Releases 
Guidelines for Targeted Investment Program (Jan. 2, 2009) (online at 
treasury.gov/press/releases/hp1338.htm) (hereinafter ``Treasury 
Releases Guidelines for Targeted Investment Program''); Joint Statement 
on Citigroup, supra note 110.
    \228\ TARP Transactions Report for Period Ending December 30, 2009, 
supra note 166; Citigroup, Citi Issuance of $20 Billion Perpetual 
Preferred Stock and Warrants to U.S. Treasury As Part of TARP Program 
(Dec. 31, 2008) (online at www.citigroup.com/citi/fin/data/
fs081231a.pdf).
    \229\ Treasury Releases Guidelines for Targeted Investment Program, 
supra note 227.
---------------------------------------------------------------------------
    Under the AGP, Treasury, the FDIC, and the Federal Reserve 
guaranteed, until the program was ended, approximately $250.4 
billion of Citigroup's assets.\230\ The guarantee, originally 
for $301 billion, followed a continuing deterioration of 
Citigroup's financial status after it received CPP funds. As 
consideration for the guarantee, Citigroup issued Treasury with 
$4.034 billion face value of preferred stock (the AGP 
Preferred) \231\ and warrants to purchase 66,531,728 shares of 
common stock at a strike price of $10.61.\232\
---------------------------------------------------------------------------
    \230\ According to Citigroup's SEC filing for the third quarter of 
2009, the total asset pool had declined by approximately $50 billion on 
a GAAP basis to approximately $250.4 billion as of September 30, 2009. 
See Citigroup Third Quarter 10-Q, supra note 56, at 33. COP November 
Oversight Report, supra note 2 (describing the Citigroup and Bank of 
America guarantees). 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).
    \231\ The FDIC was issued $3.025 billion in preferred stock. 
Treasury and the FDIC's holding were exchanged for separate trust 
preferred securities with a coupon of 8 percent in the subsequent 
exchange offer.
    \232\ The AGP Preferred have a perpetual life and pay dividends at 
8 percent per annum. They can be redeemed in stock or cash, as mutually 
agreed between Treasury and Citigroup, otherwise the redemption terms 
of CPP preferred terms apply. Citigroup is not permitted to pay common 
stock dividends, in excess of $0.01 per share per quarter, for a period 
of three years without Treasury consent. With respect to repurchase 
rights, the same terms apply as for the CPP Preferred, meaning they 
could be sold in private transactions to interested investors, or that 
they could be offered to the public in a resale registered with the 
SEC. Master Agreement Among Citigroup Inc., Certain Affiliates of 
Citigroup Inc. Identified Herein, Department of the Treasury, Federal 
Deposit Insurance Corporation and Federal Reserve Bank of New York 
(Jan. 15, 2009) (online at www.financialstability.gov/docs/AGP/
Citigroup_01152009.pdf).
---------------------------------------------------------------------------
    On July 30, 2009, Treasury and Citigroup agreed to exchange 
Treasury's $25 billion in CPP Preferred for 7.7 billion shares 
of common stock priced at $3.25 per share. The two parties also 
agreed to exchange Treasury's $20 billion in TIP holdings and 
$4 billion of preferred stock acquired under the AGP into trust 
preferred securities.\233\ These exchanges took place as part 
of a larger $58 billion exchange offer with public and private 
holders of Citigroup's debt in which Citigroup bolstered its 
common tangible equity and thus its reserves. The company 
received shareholder approval for the exchange on September 3, 
2009.\234\
---------------------------------------------------------------------------
    \233\ The trust preferred securities are senior in right of 
repayment to preferred stock. They pay dividends at 8 percent per 
annum, and are paid on a quarterly basis. The term is for 30 years. 
Treasury may, subject to applicable securities laws, transfer, sell, 
assign, or otherwise dispose of its trust preferred shares provided 
that it consults with Citigroup for the first three years to see if 
such action is feasible. Upon regulatory approval, Citigroup has the 
right to redeem such shares, either at its discretion or upon the 
occurrence of specified events, but cannot redeem less than all of the 
outstanding securities unless all accumulated and unpaid dividends have 
been paid. In certain circumstances, these securities carry limited 
voting rights. These securities are also ranked equally, meaning 
payment thereon shall be made pro rata with the common securities, 
except in the case of default. Exchange Agreement dated June 9, 2009 
between Citigroup Inc. and United States Department of the Treasury, at 
Schedule A (June 9, 2009) (online at www.financialstability.gov/docs/
agreements/08282009/Citigroup%20Exchange%20Agreement.pdf).
    \234\ Citigroup, Citi Announces Shareholder Approval of Increase in 
Authorized Common Shares, Paving Way to Complete Share Exchange (Sept. 
3, 2009) (online at www.citibank.com/citi/press/2009/090903a.htm).
---------------------------------------------------------------------------
    On December 14, 2009, Citigroup, Treasury, and the 
regulators announced an agreement regarding Citigroup's plan to 
repay part of its outstanding TARP assistance.\235\ Pursuant to 
the agreement, Citigroup would repay Treasury the $20 billion 
it held in trust preferred securities and terminate its loss-
sharing agreement under the AGP, meaning that the government 
would no longer be liable for any losses arising from the 
covered asset pool.\236\ To fund this repayment, Citigroup 
successfully completed a securities offering of $21.08 billion 
of equity securities, comprising $17 billion of common stock 
(with an additional over-allotment option of 184.9 million 
shares exercised on December 23, 2009) \237\ and $3.5 billion 
of tangible equity units.\238\ On December 23, 2009, Citigroup 
completed its TARP repayment and terminated its loss-sharing 
agreement after Treasury permitted it to cancel $1.8 billion of 
the $7 billion in AGP Preferred that Citigroup had issued to 
Treasury and the FDIC as consideration.\239\ Following 
Citigroup's repayment of the $20 billion of trust preferred 
securities and the termination of the loss-sharing agreement, 
Citigroup is no longer deemed a beneficiary of ``exceptional 
financial assistance'' under the TARP (even though some AGP 
Preferred is still outstanding), meaning that it will no longer 
be subject to the jurisdiction of Special Master for 
Compensation Kenneth Feinberg.\240\
---------------------------------------------------------------------------
    \235\ Treasury conversations with Panel staff (Dec. 15, 2009); see 
also Citigroup, Repaying TARP and Other Capital Actions (Dec. 14, 2009) 
(online at www.sec.gov/Archives/edgar/data/831001/000095012309070371/
x80976bfwp.htm) (hereinafter ``Repaying TARP and Other Capital 
Actions''); U.S. Department of the Treasury, Treasury Statement 
Regarding Citigroup's Intention to Repay Taxpayers (Dec. 14, 2009) 
(online at www.financialstability.gov/latest/pr_12142009.html) 
(hereinafter ``Treasury Statement Regarding Citigroup's Intention to 
Repay Taxpayers''). As part of the agreement, Citigroup also decided to 
issue $1.7 billion of common stock equivalents to its employees in 
January 2010 as a substitution for the cash they would have otherwise 
received. Subject to shareholder approval at the company's annual 
meeting on April 1, 2010, the common stock equivalents will be replaced 
by common stock.
    \236\ Citigroup has used the proceeds from its offerings to repay 
Treasury's TIP investments (the preferred securities exchanged for 
trust preferred securities in July 2009). Trust preferred securities 
possess characteristics of both equity and debt issues. These 
securities are generally long-term, allow early redemption by the 
issuer, make periodic fixed or variable interest payments, and mature 
at face value. When issued by a bank holding company such as Citigroup, 
trust preferred securities are treated as capital rather than as debt 
for regulatory purposes.
    \237\ An over-allotment option is granting the underwriter in a 
public offering with the option, for a period of anywhere from 15 to 45 
days after the offering date, to purchase additional securities from 
the issuer (usually up to 15 percent of the shares being sold) at the 
initial price to the public, in order to cover over-subscriptions for 
the securities.
    \238\ Repaying TARP and Other Capital Actions, supra note 235; 
Citigroup, Forms 424(b) (Dec. 16, 2009) (online at www.sec.gov/
Archives/edgar/data/831001/000095012309071618/y80953b2e424b2.htm and 
www.sec.gov/Archives/edgar/data/831001/000095012309071909/
y81064e424b2.htm) (SEC filings detailing the issuances of securities by 
Citigroup in connection with the TARP repayment); Treasury 
conversations with Panel staff (Dec. 15, 2009).
    \239\ Treasury conversations with Panel staff (Dec. 15, 2009); 
Treasury conversations with Panel staff (Jan. 7, 2010); Allison 
Testimony before House Oversight and Government Reform Committee, supra 
note 118, at 11; Citigroup, Citi Completes $20 Billion TARP Repayment, 
Terminates Loss-Sharing Agreement (Dec. 23, 2009) (online at 
www.citigroup.com/citi/press/2009/091223b.htm). In discussions with 
Panel staff, Treasury staff indicated that the $5.259 billion in trust 
preferred securities that will be retained reflects a $1.8 billion 
reduction since the loss-sharing agreement was terminated after one 
year. Treasury will incur the $1.8 billion haircut initially, but will 
receive up to $800 million of the Citigroup trust preferred securities 
currently held by the FDIC, provided that Citigroup repays its 
outstanding debt issued under the FDIC's Temporary Liquidity Guarantee 
Program (TLGP).
    \240\ Treasury conversations with Panel staff (Dec. 15, 2009); 
Treasury conversations with Panel staff (Jan. 7, 2010). Although 
Citigroup is no longer considered a participant in the CPP due to the 
exchange of CPP preferred securities for common stock, Treasury has 
specifically stated that Citigroup will remain subject to EESA's 
general corporate governance standards and executive compensation 
restrictions, as amended by the American Recovery and Reinvestment Act 
of 2009. This is because Treasury, when agreeing to the exchange, did 
not want to surrender the leverage and taxpayer protections that these 
restrictions afford. In addition, Citigroup has agreed to abide by Mr. 
Feinberg's 2009 executive compensation determinations for its 100 most 
highly compensated employees.

FIGURE 3: INCOME FROM CITIGROUP TARP INVESTMENTS AS OF NOVEMBER 30, 2009
                                  \241\
------------------------------------------------------------------------
                    Program                          Dividends Earned
------------------------------------------------------------------------
CPP............................................          $932,291,666.67
AGP............................................           255,486,666.66
TIP............................................         1,333,333,333.33
                                                ------------------------
    Total......................................       $2,521,111,666.66
------------------------------------------------------------------------
\241\ U.S. Department of the Treasury, Cumulative Dividends Report as of
  November 30, 2009 (Dec. 18, 2009) (online at
  www.financialstability.gov/docs/dividends-interest-reports/
  November%202009%20Dividends%20and%20Interest%20Report.pdf)
  (hereinafter ``Cumulative Dividends Report as of November 30, 2009'').

    The following table shows Treasury's holdings in Citigroup 
as of December 31, 2009:

                                            FIGURE 4: TREASURY HOLDINGS IN CITIGROUP AS OF DECEMBER 31, 2009
                                                                  [Dollars in millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     Estimated Valuation as of 12/31/09
                                                                                                        Revenues  --------------------------------------
                  Asset                               Number                   Acquisition Cost        Generated       Low          High         Best
                                                                                                                     Estimate     Estimate     Estimate
--------------------------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock (CPP)....................  0...........................  $25,000....................         $932  ...........  ...........          N/A
Preferred Stock (TIP)....................  0...........................  $20,000....................          933  ...........  ...........          N/A
Preferred Stock (AGP)....................  0...........................  $5,000 \242\...............          175  ...........  ...........          N/A
Common Stock (CPP).......................  7,692,307,692...............  $25,000....................            0  ...........  ...........      $25,462
Trust Preferred..........................  Received in exchange for AGP  $2,234.....................    \243\ 737  ...........  ...........        1,871
                                            Preferred.
Warrants (CPP, TIP, AGP).................  210,084,024 shares at $17.85  (Received as part of CPP     ...........          $10         $891          204
                                            (CPP).                        Preferred, TIP.
                                           188,501,414 at $10.61 (TIP).  Preferred and AGP).........
                                           66,531,728 at $10.61 (AGP)..  ...........................  ...........  ...........  ...........  ...........  Total..................................  ............................  ...........................  ...........  ...........  ...........     $27,537
--------------------------------------------------------------------------------------------------------------------------------------------------------
\242\ Treasury's potential maximum loss position under the AGP was $5 billion; Treasury received $4,034 billion in preferred stock under the AGP.
\243\ Of the total Trust Preferred revenues generated, $636 million relates to dividends received from TIP Trust Preferred securities.

            b. Disposal of Assets and Recovery of Expended Amounts
    As shown in Figure 4 above, Treasury owns trust preferred 
securities, common stock, and warrants for common stock in 
Citigroup. The taxpayers' money can be recovered from the trust 
preferred securities so long as Citigroup generates profits 
sufficient to make dividend payments on them and eventually 
redeem them. Alternatively, the trust preferred securities 
could be sold into the markets. Recovery of the taxpayers' 
investment in the common stock and warrants depends on the 
performance of the common stock, which in turn depends on 
Citigroup's actual performance and the market's perception of 
its likely performance in the future. Treasury may sell its 
common stock holdings publicly or privately. Since Citigroup 
has repaid its trust preferred securities, it may also 
repurchase its warrants issued under the TIP.\244\ The 
repurchase must happen at ``fair market value.'' \245\ As 
discussed above, fair market value would be determined using a 
negotiation and appraisal process between Treasury and 
Citigroup. If Citigroup chooses not to repurchase its warrants, 
or if an agreement cannot be reached on a fair price and 
neither party wishes to invoke the appraisal procedure, 
Treasury will auction the warrants to the public. Unlike other 
auctions that have occurred relatively shortly after the TARP 
recipient has repaid its TARP funds, Treasury has indicated 
that, if Citigroup's warrants were to be auctioned to the 
public, the auction would not take place in the near 
future.\246\ This is due to an agreement by Treasury to refrain 
from selling its common stock holdings until March 16, 2010, as 
well as the size of those holdings.\247\
---------------------------------------------------------------------------
    \244\ See Securities Purchase Agreement dated December 31, 2008 
between Citigroup Inc., as Issuer and United States Department of the 
Treasury, at 4.9(a).
    \245\ Id.
    \246\ Treasury conversations with Panel staff (Jan. 7, 2010).
    \247\ Treasury conversations with Panel staff (Jan. 7, 2010).
---------------------------------------------------------------------------

     FIGURE 5: VALUE OF CITIGROUP'S STOCK SINCE OCTOBER 2008 \248\

---------------------------------------------------------------------------
    \248\ SNL Financial, Citigroup Inc. Historical Stock Price (online 
at www.snl.com/InteractiveX/
historyCP.aspx?ID=4041896&Tabular=True&GraphType=3&Frequency= 
0&TimePeriod2=9&BeginDate=1%2F13%2F2009&EndDate= 
1%2F13%2F2010&ctl00%24ctl11%24IndexPreference= 
default&ComparisonIndex2=25&ComparisonYield2=- 
1&CustomIndex=0&ComparisonTicker2=&Action=Apply). 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Figure 5 above reflects the decline of and volatility in 
Citigroup's stock price since October 3, 2008, the date that 
President Bush signed EESA into law. Throughout most of the 
period it has received TARP assistance, Citigroup's stock price 
has been trading at approximately $4 per share, and it 
plummeted to around $1 per share in March 2009. Government 
intervention in the private sector has significantly influenced 
both Citigroup's credit ratings and stock price.\249\
---------------------------------------------------------------------------
    \249\ For further discussion on how government intervention impacts 
credit ratings and equity pricing, see Section B.5, infra.
---------------------------------------------------------------------------
The Panel notes that the government assistance has boosted 
Citigroup's credit ratings,\250\ and that although it is dif- 
ficult to analyze Citigroup's stock price, that price has been 
significantly affected by the extraordinary government 
intervention.
---------------------------------------------------------------------------
    \250\ Credit ratings tend to be higher than they would otherwise 
be, since government support provides the public and stockholders an 
added degree of confidence in the company's health. For example, in its 
July 31, 2009 report, Standard & Poor's gave Citigroup a credit rating 
of ``A'' but noted ``the potential for additional extraordinary 
government support, if necessary,'' and further stated that Citigroup's 
rating ``reflects a four-notch uplift from our assessment of 
Citigroup's stand-alone credit profile'' (emphasis added). See also 
Fitch Ratings, Citigroup Inc. (Nov. 2, 2009) (hereinafter ``Fitch 
Ratings for Citigroup''); Moody's Investors Service, Global Credit 
Research, Issuer Comment: Citigroup: Earnings Commentary--Third Quarter 
2009 (Oct. 16, 2009) (hereinafter ``Moody's Earnings Commentary for 
Citigroup'').
---------------------------------------------------------------------------
    Pro-rating the original $25 billion ``acquisition cost'' of 
Citigroup shares under the CPP against the number of shares 
received in the exchange (ignoring shares already sold and 
warrants), Citigroup shares need to be worth approximately 
$3.25 for Treasury to ``break even.'' In Citigroup's December 
offering, Treasury agreed initially to sell up to $5 billion of 
its shares in a concurrent secondary offering, while announcing 
plans to sell the remainder of its shares over the next six to 
twelve months.\251\ Although Citigroup managed to raise over 
$21 billion in the capital markets on December 16, 2009 (the 
largest equity offering in the U.S. equity markets), it priced 
the new shares at $3.15 each, below Treasury's break-even 
price.\252\ Rather than incur a $770 million loss, Treasury 
decided not to participate in the secondary offering and 
postponed plans to start divesting its common shares.\253\ 
Treasury has now agreed not to sell its common stock until 
after March 16, 2010 and plans to sell the remainder of its 
holdings over the next 12 months.\254\ Until it does so, 
Treasury will remain the major shareholder.\255\ Because 
Treasury's sales of its holdings in Citigroup common stock 
would constitute a change in ownership, that sale would not be 
feasible without the recent IRS guidance that allows Treasury 
to conduct the sales and Citigroup to maintain its deferred tax 
assets, discussed above in Section B.6.\256\
---------------------------------------------------------------------------
    \251\ Treasury Statement Regarding Citigroup's Intention to Repay 
Taxpayers, supra note 235.
    \252\ As noted above, Citigroup's offering was the largest offering 
in American history. Even before its offering occurred, Citigroup faced 
a number of factors that impacted its market pricing. These included 
its size, its occurrence at year-end with resulting time constraints, 
its timing after several similar types of transactions, including the 
Bank of America and Wells Fargo offerings to facilitate their TARP 
repayments (and the limited demand for financial stocks as a result), 
and eagerness on the part of Citigroup's management to repay the TARP 
funds to get out from under the government's thumb. See Kevin Dobbs, 
Conditions improving, but Citi still faces confidence crisis, SNL 
Financial (Jan. 7, 2010) (hereinafter ``Conditions improving, but Citi 
still faces confidence crisis'') (suggesting that Citigroup's pricing 
of the deal at 20 percent below its announced target was due in part to 
``poor timing'').
    \253\ This decision underscores Treasury's commitment to 
``protect[ing] the taxpayers' investment.'' Allison Testimony before 
House Oversight and Government Reform Committee, supra note 118.
    \254\ Allison Testimony before House Oversight and Government 
Reform Committee, supra note 118. As part of Treasury's agreement to 
delay selling its common stock holdings for 90 days, Citigroup agreed 
to compensate Treasury for all of the costs associated with its future 
common stock sales, including commissions.
    \255\ While Treasury remains the major shareholder, Treasury does 
not have any Citigroup board seats. The Shareholders Agreement between 
Treasury and Citigroup stipulates that Treasury will exercise its right 
to vote only on particular matters (e.g., the election or removal of 
directors, major corporate transactions including mergers, dissolution, 
amendments to charter or bylaws). On other issues, Treasury ``will vote 
its shares in the same proportion'' as all other company shares are 
voted. Allison Testimony before House Oversight and Government Reform 
Committee, supra note 118.
    \256\ For further discussion on the recent IRS guidance and its tax 
impact, see discussion in Section B.6.
---------------------------------------------------------------------------
    On December 31, 2009, Citigroup's stock price was $3.31 a 
share, meaning that the value of Treasury's remaining holdings 
in Citigroup common stock was $25.49 billion, and the value of 
the warrants held, by the Panel's best estimate, was $204.32 
million. By that measure, Citigroup stock would need to be 
worth approximately $3.25 a share for the TARP investment in 
common stock to be repaid. The warrants derive from three 
separate investments in Citigroup, and in each case were part 
of a package of securities issued to Treasury, so it is 
difficult to attribute an ``acquisition cost'' to specific 
components such as the warrants.\257\ As part of the 
consideration for Treasury's TARP investment, the warrants are 
supposed to permit the taxpayers to benefit from the ``upside'' 
deriving from the government's intervention.\258\
---------------------------------------------------------------------------
    \257\ Citigroup financial statements distinguish between preferred 
and warrants. However, when the initial investments were made there 
were part of a package of securities.
    \258\ As the Panel noted in its February Oversight Report, ``[t]he 
warrants allowed the Treasury to buy common stock of each institution 
for an additional amount--called the ``exercise price''--that was 
calculated so that Treasury benefit [sic] if the value of the common 
stock increased.'' Congressional Oversight Panel, February Oversight 
Report: Valuing Treasury's Acquisitions, at 5 (Feb. 6, 2009) (online at 
cop.senate.gov/documents/cop-020609-report.pdf).
---------------------------------------------------------------------------
    In conversations with Panel staff, Treasury indicated that 
it has spent much time thinking about how to make an orderly 
exit from Citigroup, and emphasized that there are many 
different possibilities for how to sequence the sales of its 
common stock holdings.\259\ According to Assistant Secretary 
Allison, Treasury concluded that ``by gradually selling the 
shares, [it] will be in a better position to achieve the best 
possible prices for the American public.'' \260\
---------------------------------------------------------------------------
    \259\ Treasury conversations with Panel staff (Dec. 3, 2009).
    \260\ Allison Testimony Transcript, supra note 135.
---------------------------------------------------------------------------
    With respect to Citigroup's plans and strategies for future 
profitability, in the first quarter of 2009, Citigroup 
reorganized itself into Citicorp and Citi Holdings, the former 
consisting of operations considered central to the bank's 
future, including worldwide retail banking, investment banking, 
and transaction services for institutional clients, and the 
latter holding the assets and business units that Citigroup 
does not regard as its core business, such as asset management 
and consumer lending, and which it will presumably sell 
off.\261\ Citigroup has already made some material asset sales, 
including brokerage and asset management business units, as set 
out in Figure 6 below. Due in part to the current difficulties 
in obtaining what it considers to be reasonable prices, some of 
these sales have been made at low prices.\262\ It remains 
unclear whether Citigroup's primary impetus for these sales was 
to strengthen its capital base and reduce risk by concentrating 
on core business areas and simplifying the institution, or to 
reduce government involvement with its business. As a result of 
these changes, as well as reductions in headcount and expenses 
since the beginning of 2008, Citigroup stated it has raised 
``considerable capital'' and has built ``considerable 
liquidity.'' \263\
---------------------------------------------------------------------------
    \261\ Citigroup conversations with Panel staff (Dec. 4, 2009); see 
Bank of America--Merrill Lynch Financial Services Conference, 
Presentation by Citigroup Vice Chairman Ned Kelly, at 1 (Nov. 11, 2009) 
(online at www.citigroup.com/citi/fin/data/p091111a.pdf?ieNocache=311) 
(hereinafter ``Citigroup Ned Kelly Presentation''); Citi Statement to 
the Congressional Oversight Panel on Asset Sales and Business 
Divestitures (Dec. 22, 2009) (hereinafter ``Citi Statement on Asset 
Sales and Business Divestitures'').
    \262\ See Figure 6 and related footnotes identifying the amounts 
Citigroup has realized on its asset sales as compared to Citigroup's 
prior valuations of those assets.
    \263\ Citigroup conversations with Panel staff (Dec. 4, 2009).

                  FIGURE 6: CITIGROUP ASSET SALES \264\
------------------------------------------------------------------------
           Asset Sold                Date of Sale       Amount Realized
------------------------------------------------------------------------
German Retail Banking Operation.   12/5/2008........  $6.6 billion \265\
Citigroup Global Services          12/31/2008.......  $512 million \266\
 Limited.
Citigroup Technology Services     1/20/2009.........  $127 million \267\
 Ltd.
Smith Barney....................   6/1/2009.........  $2.75 billion
                                                       \268\
Three North American Partner      8/31/2009.........  Undisclosed \269\
 Credit Card Portfolios.
Nikko Cordial Securities Inc....  10/1/2009.........  $8.7 billion \270\
Nikko Citi Trust and Banking      10/1/2009.........  $212 million \271\
 Corporation.
Nikko Asset Management..........   10/1/2009........  $844 million \272\
Portugal Credit Cards Business..  11/30/2009........  Undisclosed \273\
Norwegian Consumer Finance         12/15/2009.......  Undisclosed \274\
 Business.
Phibro LLC......................  12/31/2009........  $250 million
                                                       \275\
Diners Club North America \276\.  12/31/2009........  Undisclosed \277\
Primerica, Inc..................  Not closed          TBD \278\
                                   (announced 11/5/
                                   2009).
------------------------------------------------------------------------
\264\ Citigroup had divested $281 billion in ``non-core businesses and
  assets'' from its Citi Holdings subsidiary at the end of Q3 2009.
  Citigroup, Repaying TARP and Other Capital Actions, at 13 (Dec. 14,
  2009) (online at www.citibank.com/citi/fin/data/p091214a.pdf).
  Citigroup divested a further $25 billion in assets during Q4 2009. Id.
  This table only includes publicly disclosed transactions; other non-
  public transactions have taken place which, although not reflected in
  this table, are reflected in the $306 billion total. Citi Statement on
  Asset Sales and Business Divestitures, supra note 261.
\265\ Citigroup, Citi Successfully Completes Sale of German Retail
  Banking Operation to Credit Mutuel-CIC (Dec. 5, 2008) (online at
  www.citi.com/citi/press/2008/081205a.htm). Citigroup previously valued
  the assets at $15.6 billion, meaning that the sale took place at
  almost a 50 percent discount. See id.
\266\ Citigroup, Citi Completes Sale of Citigroup Global Services
  Limited (Dec. 31, 2008) (online at www.citi.com/citi/press/2008/
  081231a.htm).
\267\ Citigroup, Form 10-Q for the Quarterly Period Ending March 31,
  2009, at 10 (Mar. 31, 2009) (online at www.citigroup.com/citi/fin/data/
  q0901c.pdf?ieNocache=664); Citigroup, Citi Completes Sale of Citigroup
  Technology Services Ltd. (India) (Jan. 20, 2009) (online at
  www.citi.com/citi/press/2009/090120e.htm).
\268\ Citigroup sold 100 percent of its Smith Barney, Quilter and
  Australia private client networks in exchange for a 49 percent stake
  in a joint venture with Morgan Stanley and an upfront cash payment of
  $2.75 billion. Citigroup, Form 10-Q for the Quarterly Period Ending
  June 30, 2009, at 14 (June 30, 2009) (online at www.citi.com/citi/fin/
  data/q0902c.pdf?ieNocache=410). CEO Vikram Pandit has publicly
  indicated that Citigroup will eventually sell its stake in the joint
  venture. Matthias Rieker, Citi Plans to Shed Stake in Smith Barney,
  Wall Street Journal (Sept. 17, 2009) (online at online.wsj.com/article/
  SB125312761700516895.html).
\269\ Citigroup, Citi Holdings Update: Citi Sells Three Credit Card
  Portfolios (Aug. 31, 2009) (online at www.citi.com/citi/press/2009/
  090831d.htm). Although Citigroup has not disclosed the terms of the
  sale, it previously valued the assets it sold at $1.3 billion. Id.
\270\ Citigroup, Form 10-Q for the Quarterly Period Ending September 30,
  2009, at 99 (Sept. 30, 2009) (online at www.citigroup.com/citi/fin/
  data/q0903c.pdf?ieNocache=909). Citigroup previously valued these
  assets at $23.6 billion. Id. at 11. Contemporaneous press reports
  indicate that robust bidding among major Japanese financial
  institutions took place for the right to acquire Nikko Cordial. Alison
  Tudor, Citi's Nikko Sale Ignites Japanese Bid War, Wall Street Journal
  (Apr. 2, 2009) (online at online.wsj.com/article/
  SB123863295192980917.html).
\271\ Citigroup, Citi Successfully Completes Sale of NikkoCiti Trust and
  Banking Corporation to Nomura Trust and Banking (Oct. 1, 2009) (online
  at www.citi.com/citi/press/2009/091001b.htm).
\272\ Citigroup, Citi Successfully Completes Sale of Nikko Asset
  Management to Sumitomo Trust (Oct. 1, 2009) (online at www.citi.com/
  citi/press/2009/091001a.htm).
\273\ Citigroup, Citi to Sell Portugal Credit Cards Business to Barclays
  Bank PLC (Sept. 29, 2009) (online at www.citi.com/citi/press/2009/
  090929b.htm). Although Citigroup has not disclosed the terms of the
  sale, it previously valued the assets at =644 million, about $938
  million. See id.
\274\ Citigroup, Citi to Sell Norwegian Consumer Finance Business to
  Gjensidige Bank ASA (Oct. 8, 2009) (online at www.citi.com/citi/press/
  2009/091008a.htm). Although Citigroup has not disclosed the terms of
  the sale, it previously valued the assets it sold at $470 million. Id.\275\ Citigroup announced that it would sell Phibro LLC for a purchase
  price equal to the net asset value of the business. Citigroup, Citi to
  Sell Phibro, LLC (Oct. 9, 2009) (online at www.citi.com/citi/press/
  2009/091009a.htm). Occidental announced that it anticipated the net
  asset value of Phibro would be about $250 million when the deal
  closed. Occidental Petroleum, Occidental Petroleum Announces
  Acquisition of Phibro (Oct. 9, 2009) (online at newsroom.oxy.com/
  portal/site/oxy/
  ?ndmViewId=news_view&newsId=20091026006112&newsLang=en). Citing
  government pressure to sell the energy-trading business, news reports
  characterized the sale price as ``bargain-basement.'' David Enrich,
  Ben Casselman and Deborah Solomon, How Occidental Scored Citi Unit
  Cheaply, Wall Street Journal (Oct. 12, 2009) (online at online.wsj.com/
  article/SB125509326073375979.html).
\276\ Citigroup, Citi Sells Diners Club North America Business (Nov. 24,
  2009) (online at www.citibank.com/citi/press/2009/091124a.htm)
  (hereinafter ``Citi Sells Diners Club North America Business'').
\277\ Citi Sells Diners Club North America Business, supra note 276.
  Although Citigroup has not disclosed the terms of the sale, it
  previously valued the assets involved at $1 billion.
\278\ Primerica, Inc. has filed the paperwork to conduct an initial
  public offering, with proceeds going to Citigroup, as part of a
  reorganization and eventual divestiture by Citigroup. U.S. Securities
  and Exchange Commission, Form S-1 Registration Statement: Primerica,
  Inc., at 1, 6-7, 39 (Nov. 5, 2009) (online at www.sec.gov/Archives/
  edgar/data/1475922/000119312509225601/ds1.htm). Citigroup attempted to
  sell Primerica to another financial institution or other investor but
  could not find a buyer. David Enrich, An IPO of Primerica Will End a
  Citi Era, Wall Street Journal (Nov. 6, 2009) (online at online.wsj.com/
  article/SB125746499148732279.html). The IPO has not yet taken place;
  Primerica held $12.1 billion in assets as of June 30, 2009. U.S.
  Securities and Exchange Commission, Form S-1 Registration Statement:
  Primerica, Inc., at 11 (Nov. 5, 2009) (online at www.sec.gov/Archives/
  edgar/data/1475922/000119312509225601/ds1.htm).

            c. Analysis of Intended Exit Strategy
    Given the recent announcement by Citigroup concerning its 
TARP repayment, the Panel notes that Treasury is left with 7.7 
billion common shares, which it is free to sell at any time 
after the 90-day lockup period which expires on March 16, 2010, 
and $2.23 billion of trust preferred securities issued 
originally under the AGP.\279\ Given the regulators' decision 
to allow Citigroup to repay, there are only a few remaining 
prospective issues with respect to Treasury's exit strategy. 
This discussion focuses on those remaining challenges.
---------------------------------------------------------------------------
    \279\ For further discussion of the AGP termination and the related 
effect on the government's holding of trust preferred securities, see 
supra note 239.
---------------------------------------------------------------------------
    In making the decision to sell the 7.7 billion common 
shares that it holds in Citigroup, Treasury will need to 
balance the desire to exit ``as soon as practicable'' \280\ 
with the need to maximize the return (or minimize the loss) to 
the American taxpayers and maintain institutional and systemic 
stability, as identified by EESA.\281\ There are strong 
arguments from a pure investment perspective for Treasury to 
hold its investments as long as possible, with the expectation 
that equity values will increase and taxpayers will see a 
greater return. The Panel notes that Treasury opted recently to 
postpone divesting its common shares in order to avoid 
incurring a $770 million loss. Instead, as discussed above, 
Treasury anticipates disposing of its remaining common stock 
holdings during the next 12 months. At the current market 
price, Treasury's common shares are worth about $27.6 
billion.\282\ Because the common shares were converted from $25 
billion of preferred shares, that is a gain of more than $2 
billion, or 10.4 percent, on paper. Even if Treasury sells now 
at a profit, there remains the possibility that it could be 
second-guessed if the shares were to increase in value at a 
later date. In conversations with Panel staff, however, 
Treasury staff emphasized that Treasury is a ``reluctant 
shareholder'' and that the TARP was not designed primarily to 
make money.\283\ Treasury is not trying to pick trading spots, 
meaning that its actions are not driven purely by a desire to 
maximize shareholder value.\284\ Due to its desire to preserve 
the stability of individual institutions, however, Treasury is 
unlikely to sell its stakes all at once since that would likely 
depress the share price. As of December 9, 2009, Citigroup's 
trading volume was averaging 471 million shares per day, or 
about 6 percent of Treasury's holdings. The challenge, 
therefore, is to dispose of its stakes in an orderly but 
deliberate fashion. Treasury's interests in preserving 
institutional stability are also illustrated by its agreement 
to a 90-day lockup period. There has been some speculation that 
Treasury only agreed to this after Citigroup notified Treasury 
of its challenges in attracting investors, some of whom 
indicated they would only buy shares if Treasury agreed to such 
a restriction.\285\ The Panel notes that Treasury previously 
had the capacity to sell its Citigroup common shares at its 
discretion. By agreeing to the 90-day lockup period, Treasury 
may have limited for a time its ability to sell when 
circumstances might be more favorable. On balance, Treasury's 
actions suggest the tensions and competing interests that exist 
in its three-pillared management strategy. While it is 
difficult to determine which if any pillar has been the primary 
driving force behind Treasury's decision-making with respect to 
the disposition of its Citigroup common stock holdings, 
Treasury's strategy of intending to balance taxpayer return, 
institutional stability and systemic stability, tips in favor 
of institutional and systemic stability, which are now very 
much the same.
---------------------------------------------------------------------------
    \280\ Allison Testimony before House Oversight and Government 
Reform Committee, supra note 118, at 5.
    \281\ See 12 U.S.C. Sec. 5213.
    \282\ This figure reflects Citigroup stock's closing price as of 
Friday, January 8, 2010.
    \283\ Treasury conversations with Panel staff (Dec. 15, 2009); 
Allison Testimony before House Oversight and Government Reform 
Committee, supra note 118, at 5 (stating that ``the U.S. government is 
a shareholder reluctantly and out of necessity. We intend to dispose of 
our interests as soon as practicable, with the dual goals of achieving 
financial stability and protecting the interests of the taxpayers'').
    \284\ Treasury conversations with Panel staff (Dec. 15, 2009).
    \285\ David Enrich, Treasury Halts Plan to Sell Off Citi Stock, 
Wall Street Journal (Dec. 18, 2009) (online at online.wsj.com/article/
SB126100573858094185.html).
---------------------------------------------------------------------------
    Since 2008, Citigroup has made some tangible progress in 
setting forth a new strategic direction and working towards 
stability and profitability. Chief Executive Officer Vikram 
Pandit's strategy is to dismantle the company's financial 
supermarket structure, reduce assets, and focus on the 
company's core business operations contained in Citicorp 
(wholesale banking for large corporate clients and retail 
banking for consumers).\286\ In recent months, Citigroup has 
changed its senior management team, appointing a new chief risk 
officer and making changes in finance, treasury, and consumer 
and corporate banking. Citigroup recently named its fifth chief 
financial officer in five years. These actions were, in large 
part, a reaction to Citigroup's continued poor asset quality 
performance. While credit rating agencies such as Moody's 
Investors Service note that Citigroup's current management is 
making progress in improving its risk management system, 
Moody's concludes that ``these changes will take time to 
achieve and the complexity of the effort is enormous.'' \287\ 
It is still too early to tell whether the new management slate 
has the commercial and retail banking experience necessary. In 
addition, four new independent directors with substantial 
banking experience commenced service in 2009. The ultimate 
success of Citigroup's strategy, however, is contingent upon 
how soon the economy recovers. Given that Citigroup still 
remains a large, complex company with 200 million customer 
accounts and operations in over 100 countries, there remains 
the potential for a return to profitability once economic 
recovery sets in. Thanks in large part to the U.S. government's 
substantial assistance, Citigroup's financial position has 
strengthened considerably, and the company has nearly doubled 
its cash holdings to $244.2 billion over the past year.
---------------------------------------------------------------------------
    \286\ Citigroup, Citi to Reorganize into Two Operating Units to 
Maximize Value of Core Franchise (Jan. 16, 2009) (online at 
www.citibank.com/citi/press/2009/090116b.htm) (quoting Mr. Pandit as 
saying that ``[g]iven the economic and market environment, we have 
decided to accelerate the implementation of our strategy to focus on 
our core businesses''); Bank of America--Merrill Lynch Financial 
Services Conference, Presentation by Citigroup Vice Chairman Ned Kelly, 
at 1 (Nov. 11, 2009) (online at www.citigroup.com/citi/fin/data/
p091111a.pdf). Citi Statement on Asset Sales and Business Divestitures, 
supra note 261.
    \287\ Moody's Investors Service, Global Credit Research, Credit 
Opinion: Citigroup Inc. (Oct. 1, 2009).
---------------------------------------------------------------------------
    Citigroup's record has been mixed, however, with regard to 
its reorganization and Mr. Pandit's strategy of ``reducing 
assets while optimizing value and mitigating risk.'' \288\ 
Citigroup has made some progress in reducing noncore operations 
with the completion of a joint venture between its Smith Barney 
unit and Morgan Stanley's wealth management group, as well as 
with sale of Nikko Cordial Securities and Nikko Asset 
Management. By December 2009, Citigroup had conducted asset 
sales, business divestitures, and natural portfolio run-off, 
reducing Citi Holdings' assets by $281 billion since the first 
quarter of 2008. Citigroup expects an additional $25 billion 
reduction in assets resulting from the Nikko divestitures.\289\ 
On the other hand, Citigroup's December 2009 fire sale of 
Phibro, its commodity-trading arm and one of its few 
consistently profitable business units, for only $250 million 
demonstrates the obstacles Citigroup continues to face with 
maximizing value in a difficult economic climate, and 
emphasizes the need for restrictions on the sale of good 
assets.\290\ Much work remains until noncore assets are reduced 
substantially, including the disposition of large noncore 
businesses with substantial consumer credit exposure.\291\ 
Therefore, Citigroup's intended further downsizing of Citi 
Holdings will likely take place over several years.
---------------------------------------------------------------------------
    \288\ Citigroup Ned Kelly Presentation, supra note 261.
    \289\ Citi Statement on Asset Sales and Business Divestitures, 
supra note 261.
    \290\ This illustration further underscores the influence of the 
U.S. government on TARP-recipient institutions, as Citigroup had 
intended to maintain its core profitable businesses while offloading 
its ``legacy'' businesses.
    \291\ Such major noncore businesses include the CitiFinancial 
consumer loan business, the retail partner credit card business, and 
Primerica Financial Services.
---------------------------------------------------------------------------
    In addition, some analysts have suggested that a 
significant downside of Citigroup's new strategy is that the 
institution's operations have become less transparent. As 
compared to JPMorgan, Wells Fargo, and Bank of America--
institutions that are growing and becoming more complex--these 
analysts argue that Citigroup does a poorer job of explaining 
its strengths and weaknesses.\292\ In their view, Citigroup 
needs to substantially improve disclosure in its securities and 
banking business as well as more country-specific information 
relating to its international consumer banking operations.\293\ 
While some of this lack of transparency may be due in part to 
the complexity of Citigroup's organization as compared to other 
financial institutions, the Panel notes that the lack of 
transparency makes it very difficult to evaluate Citigroup's 
progress and efforts to regain profitability.
---------------------------------------------------------------------------
    \292\ Conditions improving, but Citi still faces confidence crisis, 
supra note 252 (stating that ``vagueness tends to raise concerns about 
weakness,'' in large part due to its recent financial troubles) (based 
on SNL interviews with Jeff Harte, Sandler O'Neill & Partners analyst, 
Jeff Saut, chief investment strategist at Raymond James & Associates, 
and Christopher Whalen, a managing director at Institutional Risk 
Analytics); see also Peter Eavis, Bright Lights, Transparent Citi, Wall 
Street Journal (Dec. 18, 2009) (online at online.wsj.com/article/
SB20001424052748703323704574602310167166196.html?) (``For instance, 
Citicorp says its Asian consumer operations have $92 billion of assets, 
but doesn't disclose specifically where they are, let alone the types 
of loans that exist in each country. Oddly, Citi has given a country 
breakdown for the problematic businesses bunched under Citi Holdings, 
but not for Citicorp'').
    \293\ Conditions improving, but Citi still faces confidence crisis, 
supra note 252.
---------------------------------------------------------------------------
    While the regulators have permitted Citigroup to repay, the 
critical question is whether Citigroup can become a viable and 
profitable financial institution again.\294\ After two 
consecutive quarterly profits, Citigroup incurred a loss of 
$3.2 billion in the third quarter of 2009, as consumer loan 
losses exceeded trading profits from its bond and currency 
businesses.\295\ Citigroup's credit card and mortgage units 
contributed to approximately $9.4 billion in consumer losses 
for the third quarter alone. Analysts anticipate that Citigroup 
will post a loss of 32 cents per share for the fourth quarter 
of 2009, marking its ``eighth quarterly loss, on a per-share 
basis, in the past nine reporting periods.'' \296\
---------------------------------------------------------------------------
    \294\ See discussion of the additional financial burden assumed by 
banks repaying CPP Preferred at Note 213, infra. See also Figure 7, 
infra, for a representation of changes in Citigroup's capital 
structure.
    \295\ Furthermore, unlike JPMorgan Chase or Goldman Sachs, 
Citigroup's operations have not yet generated enough profits to cover 
potentially substantial write-downs in the future. In the third quarter 
of 2009, its core business units did not show an increase in revenue.
    \296\ Conditions improving, but Citi still faces confidence crisis, 
supra note 252. While analysts expect Citi to incur a fourth quarter 
loss, this is due in large part to one-time accounting changes that 
Citi needed to take as part of its recent TARP repayment.
---------------------------------------------------------------------------

 FIGURE 7: CITIGROUP'S CAPITAL RATIOS SINCE THE FIRST QUARTER OF 2008 
                                 \297\

---------------------------------------------------------------------------
    \297\ The Tier 1 ``Well Capitalized'' Capital ratio and Tier 1 
``Well Capitalized'' Common ratio of 6 percent and 4 percent, 
respectively, are based on the Supervisory Capital Assessment Program's 
desired ratio of capitalization for bank holding companies to ensure a 
sufficient capital buffer against future economic challenges. See Board 
of Governors of the Federal Reserve System, Joint Statement by 
Secretary of the Treasury Timothy F. Geithner, Chairman of the Board of 
Governors of the Federal Reserve System Ben S. Bernanke, Chairman of 
the Federal Deposit Insurance Corporation Sheila Bair, and Comptroller 
of the Currency John C. Dugan regarding The Treasury Capital Assistance 
Program and the Supervisory Capital Assessment Program (May 6, 2009) 
(online at www.federalreserve.gov/newsevents/press/bcreg/
20090506a.htm). The Tier 1 Capital includes core capital. Tier 1 Common 
Capital includes Tier 1 Capital less non-common elements (i.e., 
qualifying perpetual preferred stock, qualifying noncontrolling 
interests in subsidiaries, and qualifying mandatorily redeemable 
securities of subsidiary trusts). For the purposes of the SCAP, both 
ratios are stated as a percentage of risk-weighted assets. As losses 
hit common equity first and dividend payment schedules are not fixed, 
the Tier 1 Common capital ratio drills deeper into the capital 
structure by showing the institution's permanent loss absorption 
capacity. According to Citigroup's press release on December 23, 2009, 
if the TARP repayment had been in effect at the end of Q3 2009, the 
Tier 1 Capital ratio would have been 11.0 percent and the Tier 1 Common 
Capital ratio would have been 9.0 percent. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    While Citigroup's stock has climbed back from a low of 
$1.02 per share in March 2009 to its current price of 
$3.59,\298\ it remains unclear whether it can regain its 
footing and reemerge as a profitable institution going forward. 
Citigroup's market capitalization is currently less than Bank 
of America, JPMorgan Chase, and Wells Fargo, all institutions 
that have repaid their TARP assistance in full. Another 
lingering concern is whether Citigroup will be able to 
refinance its obligations coming due in the next few years. 
Citigroup has approximately $30 billion of debt coming due in 
2010, plus $39.5 billion in 2011 and $59.3 billion in 
2012.\299\
---------------------------------------------------------------------------
    \298\ This figure reflects Citigroup stock's closing price as of 
Friday, January 8, 2010.
    \299\ Citigroup, 2008 Annual Report on Form 10-K, at 170 (online at 
www.citigroup.com/citi/fin/data/k08c.pdf?ieNocache=265) (hereinafter 
``Citigroup 2008 Annual Report on Form 10-K'') (detailing aggregate 
annual maturities of long-term debt obligations (based on final 
maturity dates)).
---------------------------------------------------------------------------
If Citigroup is unable to refinance at affordable rates or has 
insuffi- cient cash to cover its maturing obligations, it may 
be forced to face much higher borrowing costs, possibly 
resulting in renewed liquidity problems.
    In addition, Citigroup's exit from the TARP does not come 
without cost. As a result of its TARP repayments and accounting 
charges taken on the value of the repaid trust preferred 
securities and the termination of the AGP loss-sharing 
agreement, Citigroup will incur a $10.1 billion pre-tax loss 
for the fourth quarter of 2009.\300\ The recent stock offering 
also caused substantial dilution for existing Citigroup shares, 
including Treasury's holdings. While Citigroup has written down 
billions of dollars' worth of mortgages on its books, there are 
looming problems in its huge credit card and mortgage 
portfolios.\301\ Citigroup raised interest rates on some credit 
card holders to 29.99 percent in October 2009. Analysts at 
Fitch Ratings predict that Citigroup will continue to need 
substantial loan loss reserves and that its operations will 
remain weak into 2010, but that write-downs on capital market 
exposures are expected to be much lower due to the large amount 
of write-downs already incurred,\302\ while Standard & Poor's 
predicts that Citigroup ``will likely face a tough credit cycle 
over the next two years.'' \303\
---------------------------------------------------------------------------
    \300\ Repaying TARP and Other Capital Actions, supra note 235.
    \301\ Standard & Poor's has characterized Citigroup's credit cards 
and residential mortgages as ``[c]hief among its most problematic 
exposures.'' Standard & Poor's, Global Credit Portal, Citigroup Inc. 
(July 31, 2009) (hereinafter ``S&P Citigroup'').
    \302\ Fitch Ratings for Citigroup, supra note 250; Moody's Earnings 
Commentary for Citigroup, supra note 250 (expecting that loan loss 
provisions will rise over the next few quarters, ``increasing the 
probability that Citigroup will report quarterly losses'').
    \303\ S&P Citigroup, supra note 301.
---------------------------------------------------------------------------
    Citigroup has been the recipient of substantial government 
assistance on at least three occasions over the past 80 
years.\304\ If Citigroup were to run into trouble again, 
perhaps because of some market disruption, recent history 
suggests that the government would not let it fail. The 
American people and Congress are forced to place an enormous 
amount of faith and trust in Treasury and the regulators' 
decision to allow Citigroup to repay its TARP assistance in the 
hope that it will not return for further rescue in the future. 
During his recent testimony before the Panel, Secretary 
Geithner expressed great confidence in the strength of the 
regulators' decisions concerning repayment, and noted that the 
regulators would not allow or support premature repayment by a 
weak institution.\305\ In addition, Secretary Geithner, on a 
separate occasion, responded to concerns that the regulators 
are allowing the large financial institutions to exit from the 
TARP too quickly, calling the TARP repayments ``good news for 
everyone.'' \306\ While such statements and assurances are 
encouraging, the capital markets do not seem so convinced.\307\ 
The repeated failure of Citigroup underscores the gravity and 
seriousness of these repayment decisions and raises critical 
questions about the redesign of the institution so that it is 
less likely to become a systemic risk in the future.
---------------------------------------------------------------------------
    \304\ Prior to the TARP bailout, the U.S. government rescued 
Citigroup on at least two other occasions. As part of its response to 
the Great Depression, the federal government instituted several 
policies aimed at preventing the financial sector from failing. Because 
of these policies, Citibank's predecessor, National Bank, was able to 
weather the storm while thousands of smaller banks failed. The risky 
activities of National Bank that contributed to the crash prompted 
Congress to pass the Glass-Steagall Act, which required the separation 
of commercial banking activities from those of investment banks. 
Citibank, operating as Citicorp, was again bailed out in the 1980s 
following the LDC (less-developed-country) debt crisis, in which 
several Latin American countries were unable to meet interest payments 
on massive debts to large American banks due to rising LIBOR rates 
(which were used to price credits to LDCs). In response to the crisis, 
U.S. banking officials waived several capital and accounting standards, 
such as the requirement that banks set aside reserves to cover 
restructurings of loans. Without such regulatory forbearance, it is 
possible that Citicorp would have been deemed insolvent, thereby 
causing a widespread panic. See Robert A. Eisenbeis and Paul M. 
Horvitz, The Role of Forbearance and Its Costs in Handling Troubled and 
Failed Depository Institutions, Reforming Financial Institutions in the 
United States, at 68 (George G. Kaufman ed., 1993) (``Had these 
institutions been required to mark their sometimes substantial holdings 
of underwater debt to market or to increase loan-loss reserves to 
levels close to the expected losses on this debt (as measured by 
secondary market prices), then institutions such as Manufacturers 
Hanover, Bank of America, and perhaps Citicorp would have been 
insolvent''). By the 1990s, Citicorp had not fully recovered and so was 
again helped by a cash infusion from Saudi Prince Walid bin Talal. The 
federal government simultaneously aided in this rescue by cutting 
interest rates so that large banks could borrow money at low rates from 
the Federal Reserve, while lending at higher rates to their customers.
    \305\ Agency Financial Statement 2009, supra note 32 (noting that 
Treasury and the regulators ``would not support'' allowing institutions 
to repay their TARP assistance due to the institution's desire to 
increase executive compensation).
    \306\ MarketWatch.com, Geithner Dismisses Worry Over Bank TARP 
Repayments, MarketWatch (Dec. 15, 2009) (online at www.marketwatch.com/
story/story/print?guid=3941CA39-8EB4-408C-B147-1BBEE978EB14).
    \307\ As discussed above, Citigroup priced its offering designed to 
facilitate its TARP repayment at $3.15 per share on December 16, 2009, 
reflecting a 20 percent discount from the intended target.
---------------------------------------------------------------------------

6. AIG

            a. Acquisition of Assets and Current Value
    Along with Citigroup and Bank of America, AIG is one of the 
largest recipients of TARP assistance, and has received even 
more assistance from the Federal Reserve. Through a series of 
coordinated efforts, Treasury and the Federal Reserve have 
committed over $182.3 billion to AIG since September 2008.\308\ 
Treasury's share of this commitment is $69.8 billion, which it 
holds under the AIGIP/SSFI in the form of preferred shares 
(AIGIP/SSFI Preferred). As of December 31, 2009, $46.9 billion 
in principal amount of the AIGIP/SSFI Preferred was 
outstanding. Like the TIP, the AIGIP/SSFI 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'' and carries 
strict executive compensation guidelines.\309\ AIG is the only 
institution to be provided assistance under this initiative.
---------------------------------------------------------------------------
    \308\ According to Treasury, each decision to provide assistance 
was driven by the recognition that AIG faced increasing pressure on its 
liquidity following a downgrade in its credit ratings in May and 
September 2008 and the real risk of further downgrades unless 
extraordinary steps were taken. Treasury conversations with Panel staff 
(Dec. 3, 2009). While AIG tried to raise additional capital in the 
private market in early September 2008, its attempt was unsuccessful. 
AIG, in an unusual set of terms, agreed to post collateral upon 
downgrades in its credit ratings, and also allowed counterparties to 
assert claims. The company's destabilization can be attributed, in 
large part, to these terms.
    \309\ U.S. Department of the Treasury, Road to Stability: Programs 
(online at www.financialstability.gov/roadtostability/programs.htm) 
(accessed Jan. 13, 2010). The Panel notes, however, that Special Master 
Feinberg has exempted certain AIG executives from his default $500,000 
cash salary cap after at least five employees reportedly threatened to 
resign because of the compensation limits. See Steve Eder and Paritosh 
Bensal, AIG executive resigns over pay limits, Reuters (Dec. 30, 2009) 
(online at www.reuters.com/article/idUSTRE5BT45E20091231).
---------------------------------------------------------------------------
    The government's assistance to AIG began on September 16, 
2008--one day after the collapse of Lehman Brothers. FRBNY, 
pursuant to the authorization of the Federal Reserve and with 
the support of Treasury,\310\ provided AIG with an $85 billion 
revolving credit facility.\311\ In exchange for the facility 
and $0.5 million,\312\ AIG agreed to establish a trust for the 
sole benefit of the United States Treasury, providing the 
United States Treasury with a 77.9 percent voting interest in 
AIG, held in trust (the Trust Shares).\313\ While Treasury has 
a limited consultative role to the FRBNY in its administration 
of the Trust,\314\ the Trust Shares are not technically TARP 
assets.
---------------------------------------------------------------------------
    \310\ The Board of Governors of the Federal Reserve System 
authorized FRBNY to lend under section 13(3) of the Federal Reserve 
Act, which authorizes the Federal Reserve Board to make secured loans 
to individuals, partnerships, or corporations in ``unusual and exigent 
circumstances'' and when the borrower is ``unable to secure adequate 
credit accommodations from other banking institutions.'' This authority 
was designed to allow the Federal Reserve to respond to emergency 
circumstances. It was amended in 1991 to allow the Federal Reserve to 
lend directly to securities firms during financial crises.
    \311\ Federal Reserve Board authorizes lending to AIG, supra note 
110; Board of Governors of the Federal Reserve System and U.S. 
Department of the Treasury, U.S. Treasury and Federal Reserve Board 
Announce Participation in AIG Restructuring Plan (Mar. 2, 2009) (online 
at www.federalreserve.gov/newsevents/press/other/20090302a.htm) 
(hereinafter ``AIG Restructuring Plan Announcement''). The facility was 
subsequently revised:
     In November 2008, the initial $85 billion to be made 
available was reduced to $60 billion. Additionally, the facility's 
initial term of 24 months was extended to five years. These and other 
changes in terms were prompted by the fact that credit rating agencies 
were prepared to further downgrade the company's credit ratings based 
upon their conclusion that the FRBNY revolving credit facility, in the 
form of debt, made the company overleveraged.
     In March 2009 the Federal Reserve made several changes to 
the facility. The facility was reduced from $60 billion to no less than 
$25 billion, in exchange for FRBNY taking preferred interests in two 
special purpose vehicles created to hold all of the outstanding common 
stock of American Life Insurance Company (ALICO) and American 
International Assurance Company Ltd. (AIA), two life insurance holding 
company subsidiaries of AIG. While AIG will retain control of ALICO and 
AIA, FRBNY has certain governance rights in order to protect its 
interests. The Federal Reserve also authorized FRBNY to make new loans, 
up to an aggregate amount of approximately $8.5 billion, to special 
purpose vehicles (SPVs) created by these life insurance subsidiaries, 
which would repay the loans from cash flows from designated blocks of 
existing life insurance policies. The proceeds of these new FRBNY loans 
would be used to pay down an equivalent amount of outstanding debt 
under the facility. On December 1, 2009, AIG announced that it 
consummated these two debt-for-equity transactions by selling preferred 
equity stakes in these two subsidiaries to FRBNY, thereby reducing 
AIG's debt to FRBNY to $17 billion, excluding interest and fees. AIG's 
recent decision to have a public stock offering for AIA on the Hong 
Kong stock exchange (which might raise as much as $20 billion) is 
designed to help AIG repay its government assistance.
    \312\ As a discount, the initial commitment fee AIG paid for the 
Revolving Credit Facility was reduced by $0.5 million and will not be 
repaid. Initially, AIG drew down $28 billion on this facility on 
September 17, 2008.
    \313\ Federal Reserve Board authorizes lending to AIG, supra note 
110.
    The Credit Facility Trust Agreement provides that the trust is for 
the sole benefit of the United States Treasury, meaning that any 
property distributable to the United States Treasury as a beneficiary 
must be paid to the Treasury for deposit into the U.S. Treasury General 
Fund as miscellaneous receipts. See AIG Credit Facility Trust 
Agreement, at Sec. 1.01 (Jan. 16, 2009) (online at www.newyorkfed.org/
newsevents/news/markets/2009/AIGCFTAgreement.pdf) (hereinafter ``AIG 
Credit Facility Trust Agreement'').
    The interest is in the form of preferred stock, convertible into 
AIG's common stock. The AIG Credit Facility Trust Agreement was not 
executed until January 16, 2009. On March 4, 2009, AIG, as required by 
the Trust Agreement governing the Revolving Credit Facility, AIG agreed 
to issue shares of convertible preferred stock an approximately 77.9 
percent equity interest in AIG to an independent trust for the sole 
benefit of the United States Treasury. The conversion formula 
stipulates that the trust will receive 79.9 percent of AIG's common 
stock, less the percentage of common stock that may be acquired by or 
for the benefit of the United States Treasury as a result of warrants 
or other convertible preferred stock held by Treasury. Treasury 
received a warrant to purchase a number of shares equal to two percent 
of AIG's common stock in connection with its November 2008 preferred 
stock purchase, and an additional warrant to purchase AIG common stock 
in connection with its April 2009 preferred stock purchase. Subsequent 
to the initial agreement, a reverse stock split of AIG's common stock 
increased the government's equity interest to 79.8 percent.
    \314\ Under section 1.02 of the Credit Facility Trust Agreement, 
FRBNY has to consult with the Treasury Department in appointing the 
trustees. FRBNY also has to consult with the Treasury with respect to 
filling any trustee vacancies. Trustees can be removed for engaging in 
criminal conduct or if it has been reasonably determined by FRBNY, in 
consultation with Treasury, that a trustee has ``demonstrated 
untrustworthiness or to be derelict in the performance of his or her 
duties.'' AIG Credit Facility Trust Agreement, supra note 313.
---------------------------------------------------------------------------
    On November 25, 2008, Treasury provided AIG with a $40 
billion capital infusion under the AIGIP/SSFI.\315\ Treasury 
received $40 billion face value of preferred shares and a 
warrant to purchase approximately two percent of the shares of 
AIG's common stock.\316\ AIG used these funds to pay down $40 
billion of the amounts under the Revolving Credit Facility that 
FRBNY had provided in September, $72 billion of which was the 
maximum that had been drawn down at that point, but the 
cumulative outstanding balance was $69.25 billion on the 
particular days preceding the AIGIP/SSFI infusion.\317\
---------------------------------------------------------------------------
    \315\ Treasury to Invest in AIG Restructuring Under EESA, supra 
note 110; U.S. Department of the Treasury, TARP AIG SSFI Investment 
Term Sheet (online at www.treas.gov/press/
releases/reports/111008aigtermsheet.pdf) (hereinafter ``AIG SSFI 
Investment Term Sheet'').
    \316\ AIG SSFI Investment Term Sheet, supra note 315. See Note 314 
for further discussion of the conversion calculation.
    \317\ At the same time, the Federal Reserve created two separate 
lending facilities for AIG assets. In addition to authorizing FRBNY to 
restructure the terms of its revolving credit facility to AIG, the 
Federal Reserve authorized FRBNY to create, and lend up to $22.5 
billion to, an SPV called Maiden Lane II LLC, designed to purchase 
residential mortgage-backed securities from AIG life insurance 
companies. AIG will absorb the first $1 billion of losses due to its 
acquisition of a subordinated $1 billion interest in the facility. On 
December 12, 2008, FRBNY extended a $19.5 billion loan to Maiden Lane 
II LLC. The Federal Reserve further authorized FRBNY to create and lend 
up to $30 billion to another SPV called Maiden Lane III LLC designed to 
purchase collateralized debt obligations (CDOs) from AIG's 
counterparties. In two separate disbursements in November and December 
2008, FRBNY funded Maiden Lane III LLC with a $24.3 billion senior loan 
and AIG agreed to absorb the first $5 billion of losses after providing 
a $5 billion equity investment. AIG's counterparties, in exchange for 
agreeing to terminate their credit default swap (CDS) contracts, were 
allowed to retain the $35 billion in collateral previously posted by 
AIG. TARP funds were not directly used in either the Maiden Lane II or 
III transactions.
---------------------------------------------------------------------------
    During March and April 2009, Treasury and the Federal 
Reserve provided additional assistance and further restructured 
the terms of their existing assistance.\318\ On April 17, 2009, 
Treasury provided AIG with a commitment to invest an additional 
$29.8 billion on certain terms and conditions. This facility, 
to be used on a standby basis, allows AIG to issue to Treasury 
up to $29.8 billion in AIGIP/SSFI Preferred over five years to 
meet its liquidity and capital needs as they arise. Treasury 
will receive AIGIP/SSFI Preferred in the amount of each 
drawdown. In connection with providing AIG this additional 
commitment, Treasury received a warrant to purchase up to 3,000 
shares of AIG common stock.\319\ As of December 31, 2009, $5.3 
billion had been drawn down under this facility. AIG can 
continue to draw on the AIGIP/SSFI investments through April 
17, 2014, provided it remains in compliance with certain 
conditions.
---------------------------------------------------------------------------
    \318\ See Note 311, for further discussion of some of the key 
components of the March restructuring.
    \319\ U.S. Department of the Treasury, U.S. Treasury and Federal 
Reserve Board Announce Participation in AIG Restructuring Plan (Mar. 2, 
2009) (online at www.treas.gov/press/releases/tg44.htm) (hereinafter 
``Participation in AIG Restructuring Plan Announcement'').
---------------------------------------------------------------------------

       FIGURE 8: TREASURY'S PREFERRED STOCK HOLDINGS IN AIG \320\

---------------------------------------------------------------------------
    \320\ The value of Treasury's preferred stock holdings in AIG does 
not include the additional obligations of $1.6 billion in cumulative 
unpaid dividends outstanding at the time of exchange from cumulative 
preferred to non-cumulative preferred shares (April 17, 2009) and $165 
million commitment fee to be paid in three equal installments over the 
five-year life of the commitment facility. See TARP Transactions Report 
for Period Ending December 30, 2009, supra note 166. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    On April 17, 2009, the $40 billion face amount of AIGIP/
SSFI Preferred that Treasury received in its November 2008 
AIGIP/SSFI investment was exchanged for $41.6 billion \321\ of 
noncumulative preferred shares, allowing AIG to reduce its 
leverage and dividend requirements.\322\
---------------------------------------------------------------------------
    \321\ The $1.6 billion difference reflects a compounding of 
accumulated but unpaid dividends owed by AIG to Treasury on the 
cumulative preferred stock.
    \322\ Participation in AIG Restructuring Plan Announcement, supra 
note 319.
---------------------------------------------------------------------------
    The following tables show Treasury's and the Federal 
Reserve's holdings in AIG as of December 31, 2009.

                             FIGURE 9: DEPARTMENT OF TREASURY HOLDINGS IN AIG AS OF DECEMBER 31, 2009 [Dollars in millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Revenues
                   Assets                        Principal  Amount             Acquisition  Cost           Generated     Estimated Value  as of 12/31/09
--------------------------------------------------------------------------------------------------------------------------------------------------------
AIGIP/SSFI Non-Cumulative Preferred........  \323\ $46,900,000,000      $45,300                             \324\ $0                      \325\ $13,200


Warrants....................................           \326\ 53,798,766         Received as part of     N/A              Low         High         Best
                                                                                 initial AIGIP/SSFI                    $44.9     $1,052.8      $556.4
                                                                                        investments\323\ The $1.6 billion difference between the principal amount and acquisition cost reflects a compounding of accumulated but unpaid dividends owed by
  AIG to Treasury.
\324\ According to Treasury, there have been no revenues generated from its AIGIP/SSFI investments in AIG because AIG has not declared or paid any
  dividends since the inception of Treasury's preferred equity investments.
\325\ This figure reflects Treasury's estimated value of its AIGIP/SSFI investments in AIG as of September 30, 2009. Agency Financial Statement 2009,
  supra note 32, at 17.
\326\ AIG's stock split 20 to 1 in April 2009. The U.S. Government will get 1/20th share of AIG common stock every warrant exercised, so the government
  will get 2,690,088.3 shares of common stock if all warrants are exercised.


    FIGURE 10: U.S. TREASURY HOLDINGS IN AIG AS OF DECEMBER 31, 2009
                          [Dollars in millions]
------------------------------------------------------------------------
                                                  Estimated Value  as of
               Asset                   Number            9/30/09
------------------------------------------------------------------------
Preferred Securities Convertible        100,000           \327\ $23,500
 into Common, held by Trust.......
------------------------------------------------------------------------
\327\ According to Treasury, ``[t]he value recorded is based on the
  market value of the trust's AIG holdings at September 30, 2009; as the
  underlying AIG common stock is actively traded on the New York Stock
  Exchange, this represents the best independent valuation available for
  the government's beneficial interest.'' U.S. Department of the
  Treasury, 2009 Agency Financial Report--Department of Treasury, at
  182, 194-95 (online at www.treas.gov/offices/management/dcfo/
  accountability-reports/2009-afr.shtml). Treasury will re-value the
  trust each year until the trust is liquidated.


   FIGURE 11: FEDERAL RESERVE HOLDINGS IN AIG AS OF DECEMBER 31, 2009
                          [Dollars in millions]
------------------------------------------------------------------------
                                     Amount of
               Asset                 assistance    Outstanding Balance
                                     authorized
------------------------------------------------------------------------
Revolving Credit Facility.........  \328\ $35,0            \329\ $22,000
                                             00
Maiden Lane II....................  \330\ 22,50             \331\ 15,700
                                              0
Maiden Lane III...................  \332\ 30,00             \333\ 18,200
                                              0
                                   -------------------------------------
    Total.........................       87,500                  55,900
------------------------------------------------------------------------
\328\ The facility was initially $85 billion but was reduced to $60
  billion in November 2008, and further reduced to $35 billion in
  December 2009.
\329\ This amount includes outstanding principal and capitalized
  interest, net of unamortized deferred commitment fees and allowance
  for loan restructuring.
\330\ While FRBNY was authorized to provide a loan to Maiden Lane II up
  to $22.5 billion, it lent only $19.5 billion of this amount.
\331\ As of December 31, 2009, the outstanding principal amount was
  $15.739 billion, and the accrued interest payable to FRBNY was $265
  million. The net portfolio holdings of Maiden Lane II as of December
  31, 2009, as defined by FRBNY, were $15.697 billion.
\332\ While FRBNY was authorized to provide a loan to Maiden Lane III up
  to $30 billion, it lent only $24.3 billion of this amount.
\333\ As of December 31, 2009, the outstanding principal amount was
  $18.159 billion, and the accrued interest payable to FRBNY was $340
  million. The net portfolio holdings of Maiden Lane III as of December
  31, 2009, as defined by FRBNY, were $22.660 billion.

            b. Disposal of Assets and Recovery of Expended Amounts
    The Administration and Treasury in particular have 
articulated the view that public ownership of financial 
institutions is not a policy objective.\334\ While public 
ownership has been the outcome of the federal government's 
intervention in AIG, the primary objective of Treasury and the 
Federal Reserve with respect to AIG is to stabilize the company 
enough to replace federal government assistance with private 
sector resources in order to create a ``more focused, 
restructured, and viable economic entity as rapidly as 
possible.'' \335\
---------------------------------------------------------------------------
    \334\ Agency Financial Statement 2009, supra note 32; Allison 
Testimony before House Oversight and Government Reform Committee, supra 
note 118, at 5. The Administration has also articulated a set of four 
guidelines that will govern its approach to managing ownership 
interests in financial and automotive companies. These include a desire 
not ``to own equity stakes in companies any longer than necessary,'' 
and the objective ``to dispose of its ownership interests as soon as 
practicable.'' White House, Fact Sheet: Obama Administration Auto 
Restructuring Initiative General Motors Restructuring (June 30, 2009) 
(online at financialstability.gov/latest/05312009_gm-factsheet.html) 
(listing the guidelines governing the government's ownership interests 
in financial institutions and automotive companies).
    \335\ AIG Restructuring Plan Announcement, supra note 311.
---------------------------------------------------------------------------
    Treasury's approach to its AIG investment now seems to have 
shifted from balancing its three pillars of asset management to 
a strategy based largely on preventing the detrimental effect 
on market confidence that would result if Treasury were to not 
deliver on its promise to provide financial assistance, as well 
as preserving the value of its investment.\336\ The public 
purpose in keeping the AIG parent company solvent, therefore, 
is based on the government's initial decision to not let AIG 
fail in September 2008, and if the U.S. government were to act 
otherwise, it would jeopardize not only its financial 
credibility, but also the value of its sizeable 
investment.\337\
---------------------------------------------------------------------------
    \336\ Treasury conversations with Panel staff (Dec. 15, 2009).
    \337\ Treasury conversations with Panel staff (Dec. 15, 2009).
---------------------------------------------------------------------------
    Earlier government pronouncements with respect to 
divestment included maximizing value as an objective. In 2008, 
Treasury and the Federal Reserve noted that the federal 
government ``intends to exit its support of AIG over time in a 
disciplined manner consistent with maximizing the value of its 
investments and promoting financial stability.'' \338\ At the 
beginning of 2009, the focus appeared to shift somewhat with 
the change in the overall market situation, toward a faster 
exit to the extent possible without destabilization. Earlier 
this year, Secretary Geithner stated that the U.S. government 
``will continue our aggressive efforts to resolve the future 
status of AIG in a manner that will reduce the systemic risks 
to our financial system while minimizing the loss to taxpayers. 
And we will explore any and all responsible ways to accelerate 
this wind down process.'' \339\ Moreover, when asked whether he 
would like to see AIG ``prosper, make a lot of money again and 
be successful'' in a recent Meet the Press interview, Secretary 
Geithner commented that he would like to see AIG ``bring down 
the risk that brought that company to the edge of collapse and 
to restructure its business so the taxpayer can get out.'' 
\340\ Treasury's focus is clearly on medium-term exit rather 
than long-term investment, although AIG is not expected to 
fully repay the government's assistance for several years.\341\
---------------------------------------------------------------------------
    \338\ Board of Governors of the Federal Reserve System, Federal 
Reserve Board and Treasury Department Announce Restructuring of 
Financial Support to AIG (Nov. 10, 2008) (online at 
www.federalreserve.gov/newsevents/press/other/20081110a.htm); Treasury 
conversations with Panel staff (Dec. 3, 2009).
    \339\ U.S. Department of the Treasury, Letter from Secretary 
Geithner on AIG to House Speaker Nancy Pelosi (Mar. 17, 2009) (online 
at www.treas.gov/press/releases/tg61.htm).
    \340\ Interview with Treasury Secretary Timothy F. Geithner, Meet 
the Press with David Gregory, NBC (Nov. 1, 2009) (online at 
www.msnbc.msn.com/id/33562673/ns/meet_the_press/).
    \341\ Treasury conversations with Panel staff (Dec. 16, 2009); 
Treasury conversations with Panel staff (Dec. 3. 2009).
---------------------------------------------------------------------------
    Similar to the CPP Preferred, the AIGIP/SSFI Preferred 
shares have no mandatory redemption date, and can be disposed 
of, at least in theory, to third parties.\342\ FRBNY's 
Revolving Credit Facility is available until September 16, 
2013. The government agencies are not, however, intending to 
remain involved in AIG through that date.
---------------------------------------------------------------------------
    \342\ See Securities Purchase Agreement dated as of April 17, 2009 
between American International Group, Inc. and United States Department 
of the Treasury, at Sec. 4.9 (online at www.financialstability.gov/
docs/agreements/Series.F.Securities.Purchase.Agreement.pdf).
---------------------------------------------------------------------------
    While Treasury's objective is to make an orderly exit ``as 
soon as practicable,'' Treasury understands that the 
government's exit from AIG is constrained by the same factors 
that prompted the government to provide AIG with assistance in 
late 2008--the threat of continued downgrades in the company's 
credit ratings and the loss in market confidence that would 
cause. Credit rating agencies such as Moody's have indicated 
that AIG's current credit ratings are maintained only because 
of the extraordinary government assistance,\343\ making the 
government extra cautious about any premature exit that might 
trigger a ratings downgrade and thereby destabilize AIG and the 
financial system. In Treasury's view, therefore, the key to 
allowing the government to exit in an orderly fashion is to do 
so in a manner that allows AIG to maintain its credit ratings 
on a stand-alone basis and to remain well-capitalized without 
government assistance.\344\ Given the extraordinary government 
assistance provided to AIG, such an exit will take time to 
effectuate, but Treasury believes that it is the optimal way to 
protect the value of its investments and to avoid causing a 
loss in market confidence, as discussed above.\345\
---------------------------------------------------------------------------
    \343\ Treasury conversations with Panel staff (Dec. 16, 2009); 
Treasury conversations with Panel staff (Dec. 3, 2009); see Moody's 
Investors Service, Issuer Comment: Moody's sees AIG holding its ground 
through 3Q09 (Nov. 9, 2009) (hereinafter ``Moody's sees AIG holding its 
ground through 3Q09''); Moody's Investors Service, Issuer Comment: AIG 
shows signs of stabilization but risks remain, says GAO (Sept. 28, 
2009) (hereinafter ``AIG shows signs of stabilization but risks 
remain'').
    \344\ Treasury conversations with Panel staff (Dec. 3, 2009).
    \345\ Treasury conversations with Panel staff (Dec. 16, 2009).
---------------------------------------------------------------------------
    Treasury's AIGIP/SSFI investments are junior to the FRBNY's 
revolving credit facility, which is collateralized by all the 
assets of AIG and of its principal non-regulated subsidiaries. 
This means that AIG's repayment of Treasury's AIGIP/SSFI equity 
investments can only occur after it has completely repaid the 
Revolving Credit Facility.
    The Federal Reserve expects that the Revolving Credit 
Facility will be repaid from the proceeds of the sale of 
certain of AIG's assets and businesses, including the future 
initial public offerings of its two insurance company 
subsidiaries, the American International Assurance Company Ltd. 
(AIA) and the American Life Insurance Company (ALICO),\346\ the 
timing of which is contingent upon market conditions.\347\ As 
discussed above, the ceiling on this facility has been reduced 
gradually as a result of several restructurings since September 
2008, as well as certain asset sales that have already 
occurred, and currently stands at $35 billion, of which $22 
billion, including principal and interest, but net of any fees, 
is outstanding.\348\
---------------------------------------------------------------------------
    \346\ With respect to the Maiden Lane facilities, FRBNY anticipates 
that its loans to Maiden Lane II LLC and Maiden Lane III LLC, both of 
which have six-year terms but may be extended at the Federal Reserve's 
discretion, will be repaid with the proceeds from the interest and 
principal payments or proceeds from the liquidation of the assets held 
by the facilities. Letter from Scott G. Alvarez, general counsel, Board 
of Governors of the Federal Reserve System, and Thomas C. Baxter, Jr., 
general counsel, Federal Reserve Bank of New York, to Neil Barofsky, 
special inspector general, Troubled Asset Relief Program (Nov. 15, 
2009). FRBNY has retained BlackRock Financial Management Inc. to manage 
the Maiden Lane II and III asset portfolios, with the objective of 
maximizing long-term cash flows to pay the loans (including principal, 
interest, and contingent interest), while ``refraining from investment 
actions that would disturb general financial market conditions.'' 
Federal Reserve Bank of New York, Maiden Lane II Transactions (online 
at www.newyorkfed.org/markets/maidenlane2.html); Federal Reserve Bank 
of New York, Maiden Lane III Transactions (online at 
www.newyorkfed.org/markets/maidenlane3.html). The Federal Reserve has 
indicated that it plans to hold the Maiden Lane assets until they 
mature or increase enough in value so as to allow the Federal Reserve 
to maximize its recovery through asset sales. AIG Restructuring Plan 
Announcement, supra note 311. While these steps will take time, FRBNY 
expects that the proceeds from the asset sales ``should enable AIG to 
repay the New York Fed in full.'' House Committee on Financial 
Services, Testimony of William C. Dudley, president and chief executive 
officer of the Federal Reserve Bank of New York, Oversight of the 
Federal Government's Intervention at American International Group, 
111th Cong., at 2 (Mar. 24, 2009) (hereinafter ``Dudley Testimony 
before House Financial Services Committee''); Senate Committee on 
Banking, Housing, and Urban Affairs, Testimony of Donald L. Kohn, vice 
chairman, Board of Governors of the Federal Reserve System, American 
International Group: Examining what went wrong, government 
intervention, and implications for future regulation, 111th Cong., at 
10 (Mar. 5, 2009) (online at banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore_id=aa8bcdf2-f42b-4a60-b6f6-
cdb045ce8141) (stating that the investment manager for FRBNY projects 
that the Maiden Lane II and Maiden Lane III loans ``will be repaid over 
time with no loss to the taxpayer,'' even under highly stressed 
scenarios).
    \347\ Federal Reserve Board authorizes lending to AIG, supra note 
110.
    \348\ For further discussion of the terms and current status of the 
revolving credit facility, see footnote 311.
---------------------------------------------------------------------------
    Once AIG repays the Revolving Credit Facility in full and 
thereby reduces its leverage, Treasury expects that AIG will be 
able to access the capital markets on its own and consider 
different capital market strategies to begin repaying its 
obligations to Treasury.\349\ As Assistant Secretary Allison 
stated, ``[u]pon the repayment in full of its debt to the 
FRBNY, AIG will then focus on building value in its remaining 
insurance businesses, Chartis, Domestic Life and Retirement 
Services and American General and Valic, as well as ILFC, its 
aircraft leasing business, and American General, its consumer 
finance business.'' \350\ Treasury has indicated, however, that 
among the strategies AIG may pursue to facilitate the repayment 
of the AIGIP/SSFI Preferred is a recapitalization pursuant to 
which all or a portion of them would be converted into common 
stock.\351\ Such a recapitalization would boost AIG's capital 
ratios, further buttressing its ability to maintain an 
investment grade rating on a stand-alone basis and facilitating 
Treasury's exit from its investment by permitting it to sell 
common stock on the New York Stock Exchange as market 
conditions permit.\352\
---------------------------------------------------------------------------
    \349\ Treasury conversations with Panel staff (Dec. 16, 2009); 
Treasury conversations with Panel staff (Dec. 3, 2009). For further 
discussion on Treasury's recently published financial statements which 
shows Treasury's view as to the expected loss amount from TARP AIGIP 
investments in AIG, see Section D.6, infra.
    \350\ Allison Testimony before House Oversight and Government 
Reform Committee, supra note 118, at 11.
    \351\ Treasury conversations with Panel staff (Dec. 16, 2009).
    \352\ Treasury conversations with Panel staff (Dec. 16, 2009); see 
also Allison Testimony before House Oversight and Government Reform 
Committee, supra note 118, at 11 (stating that ``AIG and Treasury are 
in active, ongoing discussions with regard to strategies to allow 
Treasury to monetize its investment in AIG, once the FRBNY has been 
paid in full'').
---------------------------------------------------------------------------
    The stabilization of AIG ``so that it no longer poses a 
disruptive threat'' \353\ to the financial system and the 
economy will inevitably be a multi-year process.\354\ This is 
especially the case given the current market conditions and 
continued economic uncertainty. As Ben S. Bernanke, chairman of 
the Board of Governors of the Federal Reserve System, 
testified, ``[h]aving lent money to avert the risk of a global 
financial meltdown, we found ourselves in the uncomfortable 
situation of overseeing both the preservation of its value and 
its dismantling, a role quite different from our usual 
activities.'' \355\ Chairman Bernanke further stated that 
``[u]sing our rights as a creditor, we have worked with AIG's 
new management team to begin the difficult process of winding 
down [AIG Financial Products] and to oversee the company's 
restructuring and divestiture strategy.'' \356\
---------------------------------------------------------------------------
    \353\ Dudley Testimony before House Financial Services Committee, 
supra note 346.
    \354\ Treasury conversations with Panel staff (Dec. 3, 2009). Then-
CEO Edward Liddy testified in May that he expects AIG to take three to 
five years to complete its restructuring and repay Treasury and the 
Federal Reserve. House Committee on Oversight and Government Reform, 
Testimony of Edward Liddy, chief executive officer of AIG, AIG: Where 
is the Taxpayer Money Going?, 111th Cong. (May 13, 2009) (online at 
oversight.house.gov/images/stories/documents/20090512165421.pdf).
    \355\ House Committee on Financial Services, Testimony of Ben S. 
Bernanke, chairman of the Board of Governors of the Federal Reserve 
System, Oversight of the Federal Government's Intervention at American 
International Group, 111th Cong., at 4 (Mar. 24, 2009).
    \356\ Id.
---------------------------------------------------------------------------
    For its part, AIG has offered some insight into how it 
expects to become profitable enough so that it can repay its 
government assistance. Since September 2008, the company has 
been focused on executing an asset disposition plan, preserving 
and enhancing the value of key business operations, and placing 
the company on a path toward future profitability.\357\ AIG 
Chief Executive Officer Robert Benmosche states that his 
immediate concerns are to restore stability and profitability 
to the company.\358\ At a town hall-style meeting for company 
employees held in August 2009, Mr. Benmosche stated that the 
company plans to rebuild businesses and will not be pressured 
by the federal government into selling assets at ``unfavorable 
prices.'' \359\ AIG owes ``the U.S. government a lot of money 
and we are not going to be able to pay it back just by our 
profits,'' he said, and, AIG ``will sell some of the company 
off but only at the right time at the right price.'' \360\ With 
respect to the winding down of AIG Financial Products (AIGFP), 
the business unit whose derivative trades in part brought AIG 
to the brink of collapse, Mr. Benmosche has emphasized 
maximizing asset values rather than selling the assets with 
speed.\361\ Furthermore, Mr. Benmosche has postponed planned 
sales of an investment-advisory unit and AIG's two Japanese 
life insurance companies, in order to build value in those 
assets. While the restructuring is still taking place, Mr. 
Benmosche's recent statements suggest that AIG is moving away 
from the path set by former Chief Executive Officer Edward 
Liddy, who planned to sell off units last year before they lost 
value, but then delayed those plans as deteriorating economic 
conditions interfered with the company's ability to engage in 
such sales. In AIG's view, the company has stabilized 
significantly from where it was a year ago, and even six months 
ago.\362\ AIG management also believes that the current amount 
of U.S. government assistance is ``sufficient for the 
restructuring process.'' \363\
---------------------------------------------------------------------------
    \357\ AIG conversations with Panel staff (Dec. 11, 2009). See also 
American International Group, AIG Reports Third Quarter 2009 Results 
(Nov. 6, 2009) (online at www.aigcorporate.com/investors/2009_November/
AIG%203Q09%20Press%20Release.pdf) (hereinafter ``AIG Reports Third 
Quarter 2009 Results'') (highlighting the progress AIG has made in its 
restructuring efforts). AIG's restructuring plan has four key goals:
    (1) Creation of strong, more independent insurance businesses 
worthy of investor confidence to stabilize and protect the value of 
AIG's important franchise businesses.
    (2) Divestment of assets and implementation of restructuring 
program to enable repayment of loans made by the U.S. government.
    (3) Comprehensive review of AIG's cost structure to significantly 
reduce operating costs.
    (4) Wind-down of AIG's exposure to certain financial products and 
derivatives trading activities to reduce excessive risk.
    American International Group, Inc., The Restructuring Plan (online 
at www.aigcorporate.com/restructuring/index.html) (accessed Jan. 13, 
2010).
    \358\ Hugh Son and Boris Cerni, Benmosche Says He'll Rebuild Units 
to Repay U.S., Bloomberg (Aug. 20, 2009) (online at www.bloomberg.com/
apps/news?pid=20601087&sid=aMclXyXbD2HA).
    \359\ Id.
    \360\ Id.
    \361\ Id.; AIG conversations with Panel staff (Dec. 11, 2009).
    \362\ AIG conversations with Panel staff (Dec. 11, 2009).
    \363\ AIG conversations with Panel staff (Dec. 11, 2009).
---------------------------------------------------------------------------
    The Trust Shares will be disposed of separately. They are 
held in a trust for the benefit of the United States Treasury, 
overseen by three independent trustees.\364\ Pursuant to the 
terms of the Credit Facility Trust Agreement, the trustees are 
responsible for managing the equity stake in matters such as 
voting and for establishing a plan to dispose of the shares 
over time, but must refrain from interfering in the day-to-day 
management of the company.\365\ The Credit Facility Trust 
Agreement provides that the trustees must act ``in or not 
opposed to the best interests of Treasury.'' \366\ The Credit 
Facility Trust Agreement further stipulates that the trustees 
cannot be Treasury or FRBNY employees.
---------------------------------------------------------------------------
    \364\ The three independent trustees are Jill M. Considine, former 
chairman of the Depository Trust & Clearing Corporation; Chester B. 
Feldberg, former chairman of Barclays Americas; and Douglas L. Foshee, 
president and chief executive officer of El Paso Corporation. The 
Treasury Department has no control over the trust and cannot direct the 
trustees.
    \365\ AIG Credit Facility Trust Agreement, supra note 313.
    \366\ AIG Credit Facility Trust Agreement, supra note 313. Note 
that the trust is for the benefit of the United States Treasury, not 
the United States Department of the Treasury. The AIG Credit Facility 
Trust Agreement uses both terms without explaining the distinction, 
leaving some question as to whether the Treasury Department is the 
trust's beneficiary. As noted above, the Agreement stipulates that 
``any property distributable to Treasury as beneficiary hereunder shall 
be paid to Treasury for deposit into the General Fund as miscellaneous 
receipts.'' Id. at Sec. 1.01.
---------------------------------------------------------------------------
    The articulated justification for establishing a trust was 
to avoid conflicts of interest. The Credit Facility Trust 
Agreement provides, ``to avoid any possible conflict with its 
supervisory and monetary policy functions, FRBNY does not 
intend to exercise any discretion or control over the voting 
and consent rights associated with the Trust Stock.'' \367\ In 
exercising their discretion under the Credit Facility Trust 
Agreement, the trustees are advised, however, that FRBNY 
believes that AIG ``being managed in a manner that will not 
disrupt financial market conditions, [is] consistent with 
maximizing the value of the Trust Stock.'' \368\ Any proceeds 
from the ultimate sale of the Trust Shares will go directly to 
the U.S. Treasury.
---------------------------------------------------------------------------
    \367\ AIG Credit Facility Trust Agreement, supra note 313; Dudley 
Testimony before House Financial Services Committee, supra note 346 
(stating that ``[i]n light of the inherent conflicts that would arise 
from either the U.S. government or the Federal Reserve exerting 
ownership control over the world's largest insurer, the Federal 
Reserve, with the support of the Treasury Department, directed in the 
loan agreement that an approximately 79.9 percent equity interest in 
AIG be issued to an independent trust established for the sole benefit 
of the United States Treasury'').
    \368\ AIG Credit Facility Trust Agreement, supra note 313, at 2.0.
---------------------------------------------------------------------------
    While a trust structure does provide some important 
benefits and value, the Panel notes that there have been 
various criticisms raised about the AIG trust structure. As the 
Panel noted in its September Oversight Report, Professor J.W. 
Verret articulated three criticisms of the AIG trust structure 
in his May 2009 testimony before the House Oversight and 
Government Reform Committee.\369\ First, he discussed how the 
AIG trustees are required to ``manage the trust in the best 
interests of Treasury, rather than the U.S. taxpayers 
specifically.'' \370\ Second, he believes that the trust should 
require the trustees to act to maximize the value for the trust 
beneficiaries.\371\ Third, Professor Verret raised concerns 
that the Trust Agreement might allow trustees to benefit 
personally from investment opportunities that belong to 
AIG.\372\ Some members of Congress have also raised concerns 
about the AIG trust structure. Representatives Darrell Issa (R-
CA) and Spencer Bachus (R-AL) have sent letters to Treasury and 
SIGTARP calling for an audit of the AIG trust and setting out 
criticisms of the trust structure, including the ``lack of 
standard fiduciary duties,'' the Trust's ``broad 
indemnification of the actions of the trustees,'' and lack of 
accountability on the part of the trustees.\373\ Congressman 
Gerry Connolly (D-VA) has expressed some concern that the AIG 
trustees are not independent enough from the Federal Reserve, 
and do not have enough power relative to the Federal Reserve in 
exercising their duties.\374\ Furthermore, Congressman Edolphus 
Towns (D-NY), chairman of the House Committee on Oversight and 
Government Reform, and Congressman John Tierney (D-MA), have 
both expressed concerns about the actual level of power the 
trustees have over AIG decisions, the degree of transparency 
and accountability their decisions have, and the overall lack 
of clarity as to what role they play.\375\
---------------------------------------------------------------------------
    \369\ House Oversight and Government Reform Committee, Testimony of 
Professor J.W. Verret, Panel II: AIG: Where is the Taxpayer's Money 
Going? (May 13, 2009) (online at
oversight.house.gov/images/stories/documents/20090512175538.pdf) 
(hereinafter ``Verret Testimony before House Oversight and Government 
Reform Committee''). Professor Verret is an assistant professor of law 
at George Mason University, and a senior scholar with the Mercatus 
Center. He has also served as a consultant for SIGTARP and the GAO on a 
corporate governance audit for TARP-recipient institutions.
    \370\ Id.
    \371\ Id.
    \372\ Id.
    \373\ Letter from Representatives Spencer Bachus and Darrell Issa 
to Neil Barofsky (Aug. 31, 2009); see also Letter from Representatives 
Spencer Bachus and Darrell Issa to Secretary Timothy F. Geithner (Aug. 
31, 2009).
    \374\ See House Committee on Oversight and Government Reform, 
Transcript Statement of Representative Connolly, AIG: Where is the 
Taxpayer Money Going?, 111th Cong. (May 13, 2009) (questioning the 
distinction between the role of the trustees and ``those members of the 
Federal Reserve who sit in on'' every board and committee meeting).
    \375\ See House Committee on Oversight and Government Reform, 
Transcript Statement of Chairman Towns, AIG: Where is the Taxpayer 
Money Going?, 111th Cong. (May 13, 2009) (stating ``I'm just thinking 
that if you are trustees of a company that has set a record in losses, 
it seems to me you should have something to say--should put something 
somewhere. I mean, if not, you should feel extremely guilty'' and also 
commenting that ``it's not clear to me and other members here exactly 
what you do in terms of your role that you're playing in this''); House 
Committee on Oversight and Government Reform, Transcript Statement of 
Representative Tierney, AIG: Where is the Taxpayer Money Going?, 111th 
Cong. (May 13, 2009).
---------------------------------------------------------------------------
    For its part, the GAO has noted that any trust raises some 
important efficiency and management concerns since the 
structure takes control of the investment out of the 
government's hands substantially and requires the trustees to 
``develop their own mechanisms to monitor the investments and 
analyze the data needed to assess the financial condition of 
the institutions or companies and decide when to divest.'' 
\376\
---------------------------------------------------------------------------
    \376\ U.S. Government Accountability Office, Troubled Asset Relief 
Program: Status of Government Assistance Provided to AIG, GAO-09-975, 
at 18 (September 2009) (online at www.gao.gov/new.items/d09975.pdf) 
(hereinafter ``GAO Report on AIG'').
---------------------------------------------------------------------------
    Additionally, tensions have arisen between AIG, trustees, 
and other government regulators, despite the existence of a 
trust.\377\ Recent press reports indicating that one of the AIG 
trustees was contemplating whether to resign suggest the 
potential conflicts between trustees and other government 
regulators (e.g., the special master for compensation) that can 
arise even when a trust structure is used.
---------------------------------------------------------------------------
    \377\ In recent weeks, AIG has seen the departures of some of its 
senior management, including its vice chairman for legal, human 
resources, corporate affairs, and corporate communications, and its 
chief compliance and regulatory officer. These employees resigned due 
to the reduction in base salary that was mandated by Special Master for 
Compensation Kenneth Feinberg.
---------------------------------------------------------------------------
            c. Analysis of Intended Exit Strategy
    Earlier this year, no real exit strategy was apparent with 
respect to AIG. At the Panel's hearing on April 21, 2009, 
Secretary Geithner was unable to explain clearly the 
Administration's exit strategy.\378\ Secretary Geithner could 
only point to the fact that the federal government ``came into 
this financial crisis without a legal framework that allowed it 
to intervene and manage more effectively the risk posed by 
institutions like AIG . . . We still do not have that authority 
today.''
---------------------------------------------------------------------------
    \378\ Congressional Oversight Panel, Testimony of Treasury 
Secretary Timothy F. Geithner (Apr. 21, 2009) (online at 
cop.senate.gov/documents/transcript-042109-geithner.pdf) (in response 
to question from Rep. Hensarling).
---------------------------------------------------------------------------
    While the legal framework necessary for proper resolution 
of a large failing financial institution still does not exist, 
improvements in market conditions have allowed Treasury to 
better articulate an exit strategy for AIG. Treasury's intent 
to balance taxpayer return, institutional stability and 
systemic stability, however, tips in favor of institutional and 
systemic stability, which at present are very much the same 
thing. Treasury believes that AIG still represents a 
significant systemic weakness and would be given non-investment 
credit ratings by the rating agencies without government 
support, and any exit strategy is constrained by that 
fact.\379\ Additionally, changing circumstances mean that 
Treasury's exit strategy has to be adjusted on a continuous 
basis. While the initial plan by the Federal Reserve and 
Treasury was to sell off certain divisions of AIG quickly, 
Treasury and the Federal Reserve indicated in their March 
announcement that deteriorating economic conditions (and the 
difficulty of obtaining reasonable prices) had interfered with 
that objective. Their goal became reducing the size of AIG by 
disposing of assets once the market improves.\380\ AIG has had 
mixed success in some of its restructuring plans, such as 
separating and strengthening core insurance businesses, 
divesting assets, reducing operating expenses, and winding down 
its exposure to certain financial products and derivatives 
trading activities in order to reduce risk. Given the 
complexity and extensiveness of AIG's restructuring, however, 
this is a process that will take several years.\381\ Even some 
critics of the AIG bailout recognize that the U.S. government 
cannot end its assistance to AIG anytime soon because of the 
size of its assistance as well as continued economic 
uncertainty.\382\
---------------------------------------------------------------------------
    \379\ Treasury conversations with Panel staff (Dec. 1, 2009).
    \380\ AIG Restructuring Plan Announcement, supra note 311; 
Participation in AIG Restructuring Plan Announcement, supra note 319.
    \381\ See AIG Reports Third Quarter 2009 Results, supra note 357 
(noting that AIG's wind-down has slowed as the company expects to 
accomplish its restructuring plan ``over a longer time frame than 
originally contemplated''); Treasury conversations with Panel staff 
(Dec. 3, 2009); Treasury conversations with Panel staff (Dec. 16, 
2009).
    \382\ Professor Charles Calomiris, Henry Kaufman Professor of 
Financial Institutions at Columbia Business School, made the following 
statement with respect to AIG on an NPR radio broadcast in March 2009: 
``I've made most of my career talking about the dangers of rewarding 
failure in financial institutions. So it's especially ironic that I'm 
here on your program telling people that right now, that isn't the 
right answer. Yes, it doesn't feel very good, it creates bad 
incentives, too. . . . But right now, we have to also deal with what 
the cards that were dealt. And the cards that we're dealt is a 
financial system, the brain center of the economy, that's desperately 
in need of propping up. And if we don't prop it up, we're the ones who 
are going to not get credit. We're the ones who are going to suffer the 
consequences of a very depressed economy for a very long time. We're 
the ones who are going to lose our jobs, our homes and our retirement 
savings.'' Interview with Charles Calomiris, Talk of the Nation, NPR 
radio broadcast (Mar. 17, 2009) (online at www.npr.org/templates/
transcript/transcript.php?storyId=102006900).
---------------------------------------------------------------------------
    With respect to timing, as with most TARP-related 
investments, the U.S. government has stated that it would like 
AIG to repay its federal assistance ``as soon as practicable'' 
(and AIG has also indicated a desire to do so as soon as 
possible),\383\ but it seems likely that a complete disposition 
of Treasury's holdings in AIG will occur over several years, 
especially in light of the size of its stake as well as its 
objective to achieve ``full repayment'' of the government 
assistance that AIG has received.\384\ The Panel notes that the 
AIG intervention is somewhat unique in that it involves both 
Treasury and FRBNY, meaning that the actions of both Treasury 
and FRBNY have an impact on what the U.S. government holds and 
what steps might be taken in the future.
---------------------------------------------------------------------------
    \383\ AIG conversations with Panel staff (Dec. 11, 2009).
    \384\ Dudley Testimony before House Financial Services Committee, 
supra note 346, at 2. However, even Treasury believes that achieving 
this goal is doubtful, as its recently published financial statements 
show Treasury's estimate of the expected loss from TARP AIGIP 
investments in AIG. See Section D.6, infra.
---------------------------------------------------------------------------
    A ``buy-and-hold'' strategy, which appears to be the 
objective of Treasury and the Federal Reserve, has several 
advantages. First, a satisfactory return on collateralized debt 
obligations (CDOs) and residential mortgage-backed securities 
(RMBS) purchased by Maiden Lane II LLC and Maiden Lane III LLC 
will likely take time, given the current difficulties in 
obtaining reasonable prices for these types of assets.\385\ 
Second, a long-term approach may increase AIG's ability to 
repay its obligations to the federal government as economic 
conditions continue to improve. ``The slower approach to 
restructuring could help AIG to generate more favorable values 
from its business portfolio than would be the case under rushed 
asset sales,'' Moody's Investors Service has noted.\386\ Third, 
Mr. Benmosche has cautioned that corporate earnings will likely 
remain subject to ``continued volatility'' as the company 
continues its restructuring process. In early March 2009, AIG 
announced a loss of $61.7 billion for the fourth quarter of 
2008, the largest quarterly corporate loss in U.S. history. AIG 
only recently posted a second consecutive quarterly profit. 
Since AIG continues to rely heavily on the federal government 
for liquidity and capital, it is still too early to know 
whether this recent trend in earnings will continue.
---------------------------------------------------------------------------
    \385\ The Federal Reserve Bank of New York stated that this equity 
interest ``has the potential to provide a substantial financial return 
to the American people should the $85 billion loan, as anticipated, 
provide AIG with the intended breathing room to execute a value-
maximizing strategic plan.'' Federal Reserve Bank of New York, 
Statement by the Federal Reserve Bank of New York Regarding AIG 
Transaction (Sept. 29, 2008) (online at www.newyorkfed.org/newsevents/
news/markets/2008/an080929.html).
    \386\ Moody's sees AIG holding its ground through 3Q09, supra note 
343.
---------------------------------------------------------------------------
    While Treasury might consider selling now and realizing a 
loss or pursuing an orderly liquidation of AIG's businesses 
outside the bankruptcy process, Treasury indicated that such 
options do not seem feasible or practical given the company's 
substantial connections to various parts of the insurance and 
financial products sectors.\387\ First, the value of the 
taxpayers' investment in AIG would be jeopardized substantially 
in a liquidation, since Treasury would receive little or no 
value on its preferred securities holdings; moreover, market 
confidence could be shaken by any such action by Treasury.\388\ 
Second, Treasury discussed how it reached a mutual agreement 
with the Federal Reserve to assist AIG under a unique set of 
circumstances, largely due to the systemic risk concerns 
created by the company's substantial size and exposure to 
various sectors of the financial markets, including insurance 
and credit default swaps (CDS) and derivatives.\389\ In 
conversations with Panel staff, Treasury staff emphasized that 
its exit from AIG is constrained by the impact of credit rating 
agency downgrades, which would trigger the posting of 
additional collateral.\390\
---------------------------------------------------------------------------
    \387\ Treasury conversations with Panel staff (Dec. 16, 2009).
    \388\ Id.
    \389\ Id.; Treasury conversations with Panel staff (Dec. 3, 2009).
    \390\ AIG entered into credit-default swaps with counterparties who 
were authorized to require AIGFP to post collateral upon the occurrence 
of certain events relating to the underlying CDOs, including declines 
in market value as well as credit rating downgrades. Treasury 
conversations with Panel staff (Dec. 3, 2009). A significant portion of 
AIGFP's Guaranteed Investment Agreements (GIAs), structured financing 
arrangements and financial derivative transactions included provisions 
that required AIGFP, ``upon a downgrade of AIG's long-term debt 
ratings, to post collateral or, with the consent of the counterparties, 
assign or repay its positions or arrange a substitute guarantee of its 
obligations by an obligor with higher debt ratings.'' American 
International Group, 2008 Annual Report, Form 10-K, Item 7 (online at 
www.aigcorporate.com/
investors/annualreports_proxy.html). In addition, certain downgrades of 
AIG's long-term senior debt ratings (resulting from various default 
events, including bankruptcy due to dissolution, insolvency, 
appointment of a conservator, etc.) would permit either AIG or the 
counterparties to elect early termination of contracts. See 1992 ISDA 
section 5. (Treasury confirmed that AIG had contracts with this type of 
wording.)
---------------------------------------------------------------------------
    While most of the initial focus in the AIG intervention was 
on the AIGFP transactions, Treasury points out that the 
intervention was also driven by the positions of AIG's 
insurance companies.\391\ Four major subsidiaries are 
consolidated with AIG. While each is functionally regulated by 
the states where it is licensed, and each state imposes its own 
capital requirements, Treasury noted that the subsidiaries' 
viability and performance are subject to the capacity to 
maintain investment-grade credit. To some, the notion that 
several insurance players could cause the system to be 
destabilized substantially seems unlikely, given that insurance 
underwriters and agencies have gotten into trouble many times 
before, and no major crisis has resulted. Panel staff pressed 
this issue with Treasury, and Treasury's response underscores 
how the entirety of its exit strategy with respect to AIG is 
based on the reaction of the credit rating agencies.\392\ In 
Treasury's view, if the government does anything to cause a 
substantial credit downgrade for the AIG parent, it would 
result in an unraveling of the business of its subsidiaries. 
AIG has made efforts to sell two of its insurance subsidiaries 
(American International Assurance Company Ltd. (AIA), and 
American Life Insurance Company (ALICO)) in order to create 
some independence from the parent and AIGFP.\393\ The credit 
rating agencies have indicated that if AIG were to sell off the 
remaining two insurance subsidiaries, such actions would 
substantially affect AIG's ongoing business and thereby trigger 
further downgrades,\394\ unless the proceeds of the sales would 
be sufficient to pay off all of the company's debt, which is 
not likely.\395\ While a downgrade of a parent does not 
necessarily result in the downgrade of a well-capitalized 
subsidiary, A.M. Best, a leading credit rating agency for the 
insurance industry, indicated to Treasury that if the parent is 
no longer rated investment grade, it would be very difficult to 
maintain an investment grade rating on a subsidiary.\396\ While 
policyholders would likely be protected in the event of a 
downgrade, Treasury noted that, given that there are 130 
million AIG life insurance policyholders, there would be 
significant interruption in the flow of insurance claim 
payments as a result of any such downgrade, at least for some 
time.\397\ This would result in a ``loss of confidence among 
policyholders,'' and a possible run in the insurance industry, 
similar to a bank run.\398\
---------------------------------------------------------------------------
    \391\ Treasury conversations with Panel staff (Dec. 16, 2009); 
Treasury conversations with Panel staff (Dec. 3, 2009).
    \392\ Treasury conversations with Panel staff (Jan. 5, 2010).
    \393\ Treasury conversations with Panel staff (Jan. 5, 2010). As 
discussed in Note 312, AIG recently decided to have a public stock 
offering for AIA on the Hong Kong stock exchange (which might raise as 
much as $20 billion).
    \394\ According to Treasury, such downgrades would also trigger the 
remaining AIGFP debt, resulting in the need to post more collateral as 
counterparties would terminate the Guaranteed Investment Agreements 
(GIAs), structured financing arrangements and financial derivative 
transactions.
    \395\ Treasury conversations with Panel staff (Jan. 5, 2010).
    \396\ Treasury conversations with Panel staff (Jan. 5, 2010).
    \397\ Treasury conversations with Panel staff (Dec. 3, 2009).
    \398\ Agency Financial Statement 2009, supra note 32.
---------------------------------------------------------------------------
    Furthermore, AIG remains exposed to financial products, 
including over $1 trillion notional value of credit-default 
swaps and other derivatives, according to Treasury.\399\ As a 
result of this exposure, any credit rating downgrade would, in 
Treasury's view, cause serious destabilization and volatility 
in those markets, as counterparties liquidated their contracts 
and asserted their claims.\400\ Additionally, Treasury noted 
that such circumstances could result in real discontinuity in 
pricing, and not just among the counterparties.\401\ The Panel 
notes, however, that many of these contracts are partially 
canceling, so AIG's net notional exposure is much smaller than 
the notional value articulated by Treasury. According to the 
Depository Trust & Clearing Corporation, AIG's CDS gross 
notional outstanding and net notional outstanding were $82.4 
billion and $7.4 billion, respectively, as of December 31, 
2009.\402\ The gross notional outstanding represents the 
aggregate dollar value exposure on all CDS contracts. The net 
notional outstanding, however, represents the maximum funds 
that would be transferred on outstanding credit default swaps 
from net sellers to net buyers were a credit event to occur on 
December 31, 2009.
---------------------------------------------------------------------------
    \399\ Treasury conversations with Panel staff (Dec. 3, 2009); 
Treasury conversations with Panel staff (Dec. 16, 2009).
    \400\ Treasury conversations with Panel staff (Dec. 3, 2009).
    \401\ Treasury conversations with Panel staff (Dec. 3, 2009).
    \402\ See The Depository Trust & Clearing Corporation, Trade 
Information Warehouse Credit Derivatives Data Report, Table 6: Top 1000 
Reference Entities (Gross and Net Notional) for the Week ending: 2010-
01-01 (www.dtcc.com/products/derivserv/
data_table_i.php?id=table6_current) (accessed Jan. 6, 2010). AIG's CDS 
notional outstanding figures include the CDS gross and net notional 
outstanding for American General Finance Corp. and International Lease 
Finance Corp., both of whom are subsidiaries of AIG Capital Corp., a 
subsidiary of AIG. The CDS securities for American General Finance 
Corp. and International Lease Finance Corp. trade under their own 
unique CDS tickers but are underneath the corporate AIG, Inc. umbrella 
and, therefore, represent CDS exposure for AIG, Inc. The CDS gross 
notional outstanding and net notional outstanding for these two 
subsidiaries comprise $38.3 billion and $3.5 billion of the total gross 
and net notional outstanding for AIG, Inc.
---------------------------------------------------------------------------
    In some ways, it is difficult to assess the progress that 
AIG itself is making towards restructuring because recent 
changes in senior management have altered the company's 
direction. The Economist has characterized AIG's strategy as 
``oscillat[ing] between retrenchment and rebirth, depending on 
who is in charge on any given day.'' \403\ Based upon the 
available information, however, it seems that AIG's revised 
restructuring strategy, as articulated by Mr. Benmosche, has 
resulted in some progress in the company's path toward 
stabilizing and repaying at least part of its government 
assistance. In his recent testimony before the Panel, Secretary 
Geithner discussed how the company's new board and management 
are ``working very hard and effectively'' at strengthening 
AIG's core insurance business while reducing the AIGFP 
portfolio.\404\
---------------------------------------------------------------------------
    \403\ The Living Dead, The Economist (Nov. 5, 2009) (online at 
www.economist.com/opinion/displaystory.cfm?story_id=14803171) (arguing 
that AIG is the ``biggest financial zombie of all'').
    \404\ Agency Financial Statement 2009, supra note 32.

                                                    FIGURE 12: NET INCOME/(LOSS) ATTRIBUTABLE TO AIG
                                                                  [Dollars in millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Q1 2008      Q2 2008      Q3 2008      Q4 2008      Q1 2009      Q2 2009      Q3 2009
--------------------------------------------------------------------------------------------------------------------------------------------------------
Net Income/(Loss)............................................     $(7,805)     $(5,357)    $(24,468)    $(61,659)     $(4,353)       $1,822         $455
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As noted above and shown in Figure 12, AIG has now posted 
two consecutive quarterly profits. These earnings results 
prompted Moody's to maintain its credit ratings on AIG in early 
November 2009 after concluding that the company should be able 
to repay its Federal Reserve loans and ``much or all'' of 
Treasury's TARP investments if financial markets continue to 
stabilize.\405\ In discussing the profits, AIG management 
highlights the company's retention of existing customers as 
well as its ability to attract new customers.\406\ Through 
October 31, 2009, AIG had entered into agreements to sell or 
complete the sale of operations and assets that are expected to 
generate roughly $5.6 billion in proceeds that will, upon 
closing, be used to repay outstanding borrowings and reduce the 
amount of the FRBNY revolving credit facility.\407\ There are 
also some indications that AIG has garnered success in selling 
fixed annuities to bank customers and that more insurance 
customers are keeping their policies with AIG, both of which 
might provide some positive news for the company's future. On 
the other hand, the Panel cannot determine if this is due to 
good business practices, or simply a result of government 
involvement. This uncertainty emphasizes once again the 
difficulty the U.S. government faces in backing out of this 
involvement.
---------------------------------------------------------------------------
    \405\ See Moody's sees AIG holding its ground through 3Q09, supra 
note 343.
    \406\ AIG conversations with Panel staff (Dec. 11, 2009).
    \407\ AIG Reports Third Quarter 2009 Results, supra note 357; 
American International Group, SEC Form 10-Q, Third Quarter 2009 (online 
at www.aigcorporate.com/investors/2009_November/
2517447_17501T04_CNB.pdf) (hereinafter ``AIG SEC Form 10-Q'').
---------------------------------------------------------------------------
    The Panel notes, however, that it is still too early to 
reach conclusions about the effectiveness of AIG's 
restructuring, and that the company continues to face steep 
obstacles in its restructuring efforts and path toward 
profitability. AIG's restructuring plan still relies heavily on 
government assistance, and it will take more than two 
profitable earnings quarters for the company to stabilize and 
be able to repay the entirety of its government support. As the 
GAO noted recently, ``[t]he sustainability of any positive 
trends of AIG's operations and repayment efforts is not yet 
clear. The government's ability to recoup the federal 
assistance money depends on the ``long-term health of AIG, its 
sales of certain businesses, and the maturation or sales of 
assets in the Maiden Lanes, among other factors.'' \408\ In a 
recent interview, Mr. Benmosche stated that the company remains 
too large and unwieldy. ``I feel strongly that AIG is too big 
today--it is extremely complex to manage and we need to make 
sure it's more transparent, that it's smaller, and that we can 
make it on our own,'' he said.\409\ As noted above, AIG has 
made some preliminary progress with respect to its commitment 
to split off two sizeable foreign life insurance units, which 
it said previously would be broken off before the end of 2009. 
AIG's assets, many of which are derivative contracts tied to 
mortgage debt, could again lose value, or the company could be 
forced to take losses as it sells them off. Another issue of 
some concern is AIG's ability to refinance debt obligations as 
they come due in coming years. The AIG parent company and two 
of its business units face significant maturities in the near 
term,\410\ and whether AIG has the capacity to refinance these 
debt obligations remains to be seen. As it writes down the 
value of sold-off assets, AIG's ability to achieve a long run 
of profitable quarters will be impacted. For example, as a 
result of its recently completed debt-for-equity swap involving 
its two life insurance subsidiaries with FRBNY, AIG will take a 
$5.7 billion restructuring charge in the fourth quarter of 
2009, which will likely offset any profits AIG has made in this 
same period. It is also unclear at this time whether and to 
what extent AIG will be able to access the capital markets, a 
necessary step before it can repay its AIGIP/SSFI assistance, 
and whether AIG will be able to maintain its single ``A'' 
credit rating or face further downgrades. In addition, much of 
the recent improvement in AIG's financial condition can be 
reasonably attributed to the substantial Treasury and Federal 
Reserve assistance that AIG has received since late 2008.\411\
---------------------------------------------------------------------------
    \408\ GAO Report on AIG, supra note 376, at 51.
    \409\ Serena Ng, AIG Chief: Key Staff Suffer Financially, Wall 
Street Journal (Dec. 15, 2009) (online at online.wsj.com/article/
SB10001424052748703954904574596501071391332.html).
    \410\ American International Group, 2008 Annual Report, Form 10-K, 
at 274-75 (online at phx.corporate-ir.net/External.File?item= 
UGFyZW50SUQ9Mjg0NHxDaGlsZElEPS0xfFR5cGU9Mw==&t=1) (detailing aggregate 
annual maturities of long-term debt obligations (based on final 
maturity dates); AIG conversations with Panel staff (Dec. 16, 2009).
    \411\ See Moody's sees AIG holding its ground through 3Q09, supra 
note 343; AIG shows signs of stabilization but risks remain, supra note 
343 (noting that the U.S. government has continued to serve as AIG's 
primary liquidity and capital source and that the ``restructuring plan 
still relies heavily on government support.'' In addition, Moody's 
Investors Service emphasizes that its current ratings on AIG ``reflect 
[its] understanding that the government is committed to working with 
the firm to maintain its ability to meet obligations as they come due 
throughout the restructuring process''); see also GAO Report on AIG, 
supra note 376, at 43-51.
---------------------------------------------------------------------------
    The most troublesome part of AIG remains AIGFP.\412\ As of 
September 30, 2009, the notional amount of the AIGFP 
derivatives portfolio had been reduced by 28 percent from 
December 2008, with a 13 percent reduction in the third quarter 
of 2009 alone, but Maiden Lane III had not eliminated AIGFP's 
exposure to credit default swaps.\413\ In discussions with 
Panel staff, Treasury expressed confidence that the entire 
AIGFP will be unwound by the end of 2010.\414\ However, a 
recent AIG filing with the SEC suggests that it remains unclear 
whether AIG will need to post additional collateral if credit 
markets experience continued deterioration and, hence, whether 
it will be exposed to further losses as well as risks for a 
much longer period of time.\415\ Given the continued economic 
uncertainty, AIGFP is unable to predict accurately when it will 
be able to retire its credit default swap portfolio in full.
---------------------------------------------------------------------------
    \412\ The Panel notes that SIGTARP issued a recent audit discussing 
the government's intervention in AIG and the controversy over AIG 
counterparty payments and why they were paid at par value. See SIGTARP, 
Audit: Factors Affecting Efforts to Limit Payments to AIG 
Counterparties, at 25 (Nov. 17, 2009) (online at www.sigtarp.gov/
reports/audit/2009/
Factors_Affecting_Efforts_to_Limit_Payments_to_AIG_Counterparties.pdf).
    \413\ See AIG Reports Third Quarter 2009 Results, supra note 357; 
see also AIG SEC Form 10-Q, supra note 407.
    \414\ Treasury conversations with Panel staff (Dec. 16, 2009); 
Allison Testimony before House Oversight and Government Reform 
Committee, supra note 118, at 11.
    \415\ See AIG SEC Form 10-Q, supra note 407.
---------------------------------------------------------------------------
    The Panel notes the steps the government has taken to 
address AIG's systemic risk concerns and prevent it from facing 
imminent collapse again, including a significant amount of 
information sharing between Treasury and FRBNY personnel with 
respect to the monitoring of AIG's restructuring process.\416\ 
These steps by themselves do not mean, however, that the 
government's exit will come quickly or that the decision to 
intervene in AIG will prove to be a profitable one. As 
discussed above, there are significant obstacles to the 
company's restructuring process, and Treasury's most recent 
estimates are that some significant portion of those funds will 
never be recovered.\417\ Treasury appears not, however, to have 
been seeking to maximize profits in this intervention.\418\
---------------------------------------------------------------------------
    \416\ Treasury conversations with Panel staff (Dec. 16, 2009).
    \417\ In its recently issued TARP financial statements for the year 
ended September 30, 2009, Treasury noted that the prospect for full 
repayment from the AIGP is doubtful. Unlike its banking investments, 
for which it expects to make money, Treasury does not have the same 
level of confidence with respect to its efforts to stabilize AIG. As of 
September 30, 2009, Treasury reports that AIGIP will result in a net 
cost to the taxpayers of $30.427 billion. As Secretary Geithner stated 
in his recent testimony before the Panel, ``[t]here is a significant 
likelihood we will not be repaid from our investments in AIG.'' COP 
December Geithner Hearing Transcript, supra note 210. Assistant 
Secretary Allison confirmed the likelihood of losses on AIG, ``[b]ased 
on current valuations,'' in his recent testimony before the House 
Oversight and Government Reform Committee. Allison Testimony 
Transcript, supra note 135.
    \418\ Treasury conversations with Panel staff (Dec. 16, 2009).
---------------------------------------------------------------------------
    Treasury and the Federal Reserve have taken extraordinary 
steps to keep AIG from facing bankruptcy. As discussed above, 
the government's exit strategy has to be adjusted on a 
continuous basis due to changing circumstances, meaning that 
AIG's restructuring is an iterative process. While neither AIG 
management nor Treasury believes that additional assistance is 
necessary at this time, Treasury and FRBNY continue to monitor 
the company's restructuring process and financial condition 
closely.\419\ Treasury remains cognizant of the fact, however, 
that it will be difficult for the company ``to prosper under 
[the U.S. government's] majority ownership,'' and Treasury 
expressed the view that the U.S. government would rather make 
an orderly exit out of AIG ``than [make] a lot of money on 
it.'' \420\
---------------------------------------------------------------------------
    \419\ Treasury conversations with Panel staff (Dec. 16, 2009); AIG 
conversations with Panel staff (Dec. 11, 2009); Allison Testimony 
Transcript, supra note 135 (noting that Treasury ``believe[s] that the 
investments [it] made should be adequate'').
    \420\ Treasury conversations with Panel staff (Dec. 16, 2009); see 
also Allison Testimony Transcript, supra note 135 (noting that ``[t]he 
TARP investments were not made to make money but to help avert a 
collapse of our financial system'').
---------------------------------------------------------------------------

7. Chrysler and GM

            a. Acquisition of Assets and Current Value
    The government's holdings in Chrysler and General Motors 
(GM) derive from a sequence of events that started in late 
2008, described more fully in the Panel's September 
report.\421\ Facing a crippling lack of access to the credit 
markets due to the global financial crisis, Chrysler and GM 
appealed to Congress for assistance. The government eventually 
provided assistance under a new TARP initiative, the Automobile 
Industry Financing Program (AIFP). Chrysler and GM received 
bridge loans of $4 billion and $19.4 billion,\422\ 
respectively.\423\
---------------------------------------------------------------------------
    \421\ See COP September Oversight Report supra note 108, at 7-23.
    \422\ Treasury invested an initial amount of $13.4 billion in 
December 2008, and had loaned an additional $6 billion to GM by June 
2009. See Agency Financial Statement 2009, supra note 32, at 34.
    \423\ For the terms of the loans, see generally U.S. Department of 
the Treasury, Loan and Security Agreement [GM] (Dec. 31, 2008) (online 
at www.financialstability.gov/docs/agreements/
GM%20Agreement%20Dated%2031%20December%202008.pdf) (hereinafter ``Loan 
and Security Agreement [GM]''); U.S. Department of the Treasury, Loan 
and Security Agreement [Chrysler] (Dec. 31, 2008) (online at 
www.financialstability.gov/docs/agreements/Chysler_12312008.pdf) 
(hereinafter ``Loan and Security Agreement [Chrysler]'').
---------------------------------------------------------------------------
    The loans were extended to Chrysler and GM under terms and 
conditions specified in separate loan and security agreements. 
Under the initial agreements, the Bush Administration required 
each company to demonstrate its ability to achieve ``financial 
viability,'' which was defined as ``positive net value, taking 
into account all current and future costs,'' and the ability to 
``fully repay the government loan.'' \424\ In February 2009, 
both companies submitted plans for achieving financial 
viability, which were reviewed by officials in the 
Administration.
---------------------------------------------------------------------------
    \424\ 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 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.\425\ The Administration concluded that GM's 
financial viability plan relied on overly optimistic 
assumptions about the company and future economic 
developments.\426\
---------------------------------------------------------------------------
    \425\ 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).
    \426\ 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).
---------------------------------------------------------------------------
    Ultimately, both companies entered bankruptcy and, with 
debtor-in-possession financing provided by the federal 
government,\427\ underwent significant restructuring. In the GM 
bankruptcy, some of the debt owed to the U.S. government was 
converted into equity. All told, U.S. taxpayers expended $49.9 
billion of TARP funds in conjunction with GM's bankruptcy and 
the subsequent creation of what is called New GM.\428\ The 
Chrysler transactions expended $12.8 billion of TARP funding. 
Today, the U.S. government owns:
---------------------------------------------------------------------------
    \427\ Treasury provided a total of $8.5 billion in working capital 
and exit financing to facilitate Chrysler's Chapter 11 restructuring. 
U.S. Department of the Treasury, AIFP Outlays for COP (Aug. 18, 2009). 
It provided a total of approximately $30.1 billion of financing to 
support GM's Chapter 11 restructuring. See also Allison Testimony 
before House Oversight and Government Reform Committee, supra note 118, 
at 4.
    \428\ COP September Oversight Report, supra note 108, at 54.
---------------------------------------------------------------------------
           10 percent of the common equity of Chrysler;
           $7.1 billion in debt securities of Chrysler; 
        \429\
---------------------------------------------------------------------------
    \429\ The $7.1 billion debt security consists of a $6.6 billion new 
commitment and $0.5 billion in assumed debt. As of December 31, 2009, 
Chrysler has drawn approximately $4.6 billion. See Agency Financial 
Statement 2009, supra note 32, at 35.
---------------------------------------------------------------------------
           60.8 percent of the common equity of GM;
           $5.7 billion in debt securities of GM; \430\ 
        and
---------------------------------------------------------------------------
    \430\ As of December 31, 2009, the outstanding principal balance is 
$5.7 billion. See Agency Financial Statement 2009, supra note 32, at 
34; see also U.S. Department of the Treasury, Treasury Receives First 
Quarterly Repayment from General Motors (Dec. 18, 2009) (online at 
treasury.gov/press/releases/tg456.htm) (hereinafter ``Treasury Receives 
First Quarterly Repayment from GM'').
---------------------------------------------------------------------------
           $2.1 billion in GM preferred stock, paying a 
        dividend of nine percent.\431\
---------------------------------------------------------------------------
    \431\ Agency Financial Statement 2009, supra note 32, at 34-35; see 
also Allison Testimony before House Oversight and Government Reform 
Committee, supra note 118, at 5.
---------------------------------------------------------------------------
    The following table shows the government's current holdings 
and the amounts expended to acquire those holdings:

                             FIGURE 13: GOVERNMENT HOLDINGS IN CHRYSLER AND GM \432\
----------------------------------------------------------------------------------------------------------------
                                           Number/Principal                               Aggregate Value  as of
                Asset                        Amount \433\           Acquisition Cost             9/30/09
----------------------------------------------------------------------------------------------------------------
Chrysler:
    Common Stock (Class A)...........             \434\ 96,461  .......................  .......................
    Floating Rate Notes..............     \435\ $7,142,000,000  .......................  .......................
        Total........................  .......................    \436\ $12,810,284,222  .......................
----------------------------------------------------------------------------------------------------------------
GM:
    Preferred Stock..................    \434\ \437\ 3,898,305  .......................  .......................
    Common Stock.....................  \434\ \438\ 304,131,356  .......................  .......................
    Floating Rate Notes..............           $5,711,864,407  .......................  .......................
        Total........................  .......................    \439\ $49,860,624,198  .......................
            Total for All Assets.....  .......................  .......................    \440\ 42,300,000,000
----------------------------------------------------------------------------------------------------------------
\432\ In December 2009, SIGTARP released a report on the use of TARP funds for GM, Chrysler, GMAC, Chrysler
  Financial Services, the Hartford Financial Services Group and Lincoln National Corporation. According to the
  report, GM used the $49.5 billion it received to pay operating costs, aid in the wind-down of old GM, settle
  derivative positions, fund foreign subsidiaries, and provide a loan to GM Canada. By November 18, 2009,
  Chrysler had used $10.5 billion of the total $12.5 billion in Treasury funds, primarily for operating costs.
  See SIGTARP, Additional Insight on Use of Troubled Asset Relief Program Funds, at 5-6 (Dec. 10, 2009) (online
  at www.sigtarp.gov/reports/audit/2009/Additional_Insight_on_Use_of_Troubled_Asset_Relief_Program_Funds.pdf).
  In addition, also in December 2009, the OFS released the Agency Financial Report for the year ending September
  30, 2009. The report discusses the automotive industry financing program and associated programs, as well as
  the valuation methodology that OFS uses to account for the investments. See Agency Financial Statement 2009,
  supra note 32, at 33-36 and 53.
\433\ This table only lists the government's holdings in Chrysler Group LLC and General Motors Holdings LLC, the
  ``new'' car companies as detailed in the Panel's September report. See COP September Oversight Report, supra
  note 108, at 60-63. The government also holds claims in Chrysler Holding LLC and Motors Liquidation Company,
  the ``old'' car companies, which are currently in the process of being liquidated in bankruptcy. See TARP
  Transactions Report for Period Ending December 30, 2009, supra note 166. These claims will be administered by
  the bankruptcy court and it is unlikely that the government will be repaid. See COP September Oversight
  Report, supra note 108.
\434\ Treasury conversations with Panel Staff (Dec. 3, 2009). This number represents numbers of shares of stock,
  rather than dollar values.
\435\ The $7.1 billion amount consists of a $6.6 billion new commitment and $0.5 billion in assumed debt. As of
  December 31, 2009, Chrysler has drawn approximately $4.6 billion. See Agency Financial Statement 2009, supra
  note 32, at 35.
\436\ This figure represents the total amount of funds provided to Chrysler through the AIFP. It does not
  reflect the $280 million repayment made by Chrysler on July 10, 2009 or the $2.4 billion in Treasury
  commitments to Chrysler that were unused and de-obligated. See COP September Oversight Report, supra note 108,
  at 60.
\437\ Treasury conversations with Panel Staff (Dec. 3, 2009). This number represents numbers of shares of stock,
  rather than dollar values.
\438\ Treasury conversations with Panel Staff (Dec. 3, 2009).
\439\ This figure represents the total amount of funds provided to General Motors through the AIFP. It does not
  reflect the $361 million repayment made by GM on July 10, 2009, or the $1 billion repayment made in December
  2009. See COP September Oversight Report, supra note 108, at 62-63; see also Treasury Receives First Quarterly
  Repayment from GM, supra note 430.
\440\ Agency Financial Statement 2009, supra note 32, at 17.

    Treasury's holdings in the automotive companies cannot be 
ascribed a definitive value. As an initial matter, following 
bankruptcy proceedings, the ``good'' assets in GM and Chrysler 
are now held by private companies, sometimes referred to as New 
GM and New Chrysler, and there is at present no market for 
either the common or the preferred shares. Accordingly, there 
is no trading data on which to base a valuation. The companies 
are reorganizing their varying properties--intellectual, 
physical, and human capital--increasing the uncertainty of 
valuation. Further, in addition to the difficulty in valuing 
the shares of private companies (much less those in such flux 
as GM and Chrysler), valuation incorporates many assumptions, 
such as market risk and projected cash flows. Experts will use 
different methodologies and professional judgment to formulate 
these assumptions and, thus, their results may vary. The TARP 
financial statements reflect expected losses of $30.4 billion 
from GM and Chrysler as of September 30, 2009.\441\ Office of 
Management and Budget (OMB) and Congressional Budget Office 
(CBO) valuations of the taxpayer subsidy rate in automotive 
industry have produced varying results.\442\ Nevertheless, both 
OMB's and CBO's subsidy estimates imply there is a high 
likelihood the initial TARP financing to GM and Chrysler will 
not be repaid.\443\
---------------------------------------------------------------------------
    \441\ See Agency Financial Statement 2009, supra note 32, at 18.
    \442\ The OMB calculated separate subsidy rates for TARP investment 
debt and equity transactions at 49 percent and 65 percent, 
respectively, while the CBO estimated an aggregate credit subsidy rate 
for all TARP automotive industry support programs of 73 percent. See 
COP September Oversight Report, supra note 108, at 55-56. See generally 
Office of Management and Budget, The President's Budget for Fiscal Year 
2010, at 983 (May 2009) (online at www.whitehouse.gov/omb/budget/
fy2010/assets/tre.pdf); 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).
    \443\ See COP September Oversight Report, supra note 108, at 55-56.
---------------------------------------------------------------------------
            b. Disposal of Assets and Recovery of Expended Amounts
    As discussed above, it is unlikely that the taxpayers will 
recover the whole of their TARP expenditure in the automobile 
companies.\444\ The money that can be recovered will come in 
two forms. First, both companies are indebted to the 
government. They must make enough money to pay principal and 
interest on that debt. Second, the government owns equity in 
both companies. Treasury must sell that equity in order to 
realize the taxpayers' investment. Repaying the debt merely 
depends on the company staying solvent long enough to make 
payments. Getting a return on equity investment depends on the 
company actually doing well enough for its stock price to 
increase: that is more directly linked to good corporate 
strategies. The companies' strategies are, therefore, discussed 
below in the context of the equity investment.
---------------------------------------------------------------------------
    \444\ Further, in recent testimony, Assistant Secretary for 
Financial Stability Herbert Allison stated that the losses from the 
disbursements to AIG and the auto companies were likely to be $60 
billion. See Allison Testimony Transcript, supra note 135.
---------------------------------------------------------------------------
            i. Debt
    The complex events leading to Treasury's loans to GM and 
Chrysler have resulted in a variety of debts outstanding, with 
different borrowers, terms, and maturity periods.\445\ The 
initial loan and securities agreements between Treasury and Old 
GM and Treasury and Old Chrysler have substantially similar 
terms.\446\ Each agreement stipulates that the respective 
company may obtain financing from time to time, on an as-needed 
basis, and sets forth a process for each company to request 
such funding. For both Old Chrysler and Old GM, Treasury loans 
made under the applicable agreements accrue interest at the 
London Interbank Offered Rate (LIBOR) plus 3 percent,\447\ 
subject to increase upon nonpayment or default to the ordinary 
interest rate plus another 5 percent.\448\ These loans are 
secured by a lien on and security interest in all the 
respective company's assets, including, for example, cash and 
cash equivalents, intellectual property rights and its 
corresponding royalties, and all other tangible and intangible 
property.\449\ Subsequent credit agreements between Treasury 
and GM and Treasury and Chrysler provide for an interest rate 
that resets each quarter to the greater of three-month LIBOR or 
the floor (2 percent), plus a percentage that differs depending 
on the company and, in Chrysler's case, the tranche involved. 
The interest rates may be determined by reference to a variety 
of interest rate markers and provide for an increased rate in 
the event of default.\450\
---------------------------------------------------------------------------
    \445\ See generally U.S. Department of the Treasury, Auto Industry 
Financing Program (online at www.financialstability.gov/
roadtostability/autoprogram.html) (updated Jan. 7, 2010).
    \446\ See generally Loan and Security Agreement [Chrysler], supra 
note 423.
    \447\ U.S. Department of the Treasury, Warrant Agreement Between 
General Motors Corporation and the U.S. Department of the Treasury, 
Appendix A, at 1-5 (Dec. 2008) (online at www.financialstability.gov/
docs/ContractsAgreements/GMagreement.pdf) (hereinafter ``Warrant 
Agreement Between GM and Treasury''); Loan and Security Agreement 
[Chrysler], supra note 423, at Appendix A. By way of comparison, in 
October 2008, the Prime Rate (the rate at which banks make short term-
loans to businesses) was 4.56 percent, while the one-month LIBOR was 
2.58 percent at the end of October 2008, and had been 3.24 percent a 
week earlier. See Board of Governors of the Federal Reserve System, 
Bank Prime Loan (Frequency: Monthly) (online at www.federalreserve.gov/
Releases/H15/data/Monthly/H15_PRIME_NA.txt) (accessed Jan. 4, 2010); 
Market Data Center, Money Rates, Wall Street Journal (Oct. 31, 2008) 
(online at
online.wsj.com/mdc/public/page/2_3020-moneyrate-
20081031.html?mod=mdc_pastcalendar). It is difficult, however, to 
evaluate the rates given to the automobile companies against other 
loans given the extraordinary nature of the circumstances and the 
credit crunch.
    \448\ Warrant Agreement Between GM and Treasury, supra note 447, at 
17; Loan and Security Agreement [Chrysler], supra note 423, at 17.
    \449\ Warrant Agreement Between GM and Treasury, supra note 447, at 
29-30; Loan and Security Agreement [Chrysler], supra note 423, at 29-
30.
    \450\ Specifically, the interest rate may switch from the three-
month Eurodollar Rate to the Alternate Base Rate (the higher of the 
Prime Rate announced by JPMorgan Chase Bank or the federal funds rate 
plus 50 basis points). In an event of default, the interest rate for 
both companies resets to the then-applicable interest rate plus 2 
percent. See U.S. Department of the Treasury, Second Amended and 
Restated Secured Credit Agreement among General Motors Co., the 
Guarantors, and the United States Department of the Treasury, at 
section 2 (Aug. 12, 2009) (online at www.financialstability.gov/docs/
AIFP/Binder1%20Second%20AR%20Credit
%20Agreement%20and%201-4%20Amendments%2011-23-09.pdf) (hereinafter 
``Second Amended and Restated Credit Agreement''); First Lien Credit 
Agreement among New Carco Acquisition LLC and the Lenders Party Thereto 
Dated as of June 10, 2009, at section 2 (online at 
www.financialstability.gov/docs/AIFP/
4.%20Newco%20Credit%20Agreement.PDF). See also COP September Oversight 
Report, supra note 108, at 66.
---------------------------------------------------------------------------
    Absent an event of default, GM's loans mature on July 10, 
2015.\451\ The credit agreement between Treasury and GM 
provides for quarterly mandatory prepayments of $1 billion from 
existing escrow amounts in addition to the obligation for such 
funds to be applied to repay the loan by June 30, 2010, unless 
extended. Absent an event of default, a portion of Chrysler's 
loans mature in December 2011, with the balance becoming due in 
June 2017.\452\ However, in the event of default, any loans to 
either GM or Chrysler would become immediately due and 
payable.\453\ Treasury may transfer any or all of its rights 
under the debt instruments at any time. Chrysler and GM, 
however, may only transfer their rights and obligations with 
the prior written consent of Treasury.\454\
---------------------------------------------------------------------------
    \451\ See Second Amended and Restated Credit Agreement, supra note 
450, at section 2. The original loans to Old GM mature on December 30, 
2011. See Warrant Agreement Between GM and Treasury, supra note 447, at 
1.
    \452\ See Allison Testimony before House Oversight and Government 
Reform Committee, supra note 118, at 12.
    \453\ See Warrant Agreement Between GM and Treasury, supra note 
447, at 2.
    \454\ See Warrant Agreement Between GM and Treasury, supra note 
447, at 66; Loan and Security Agreement [Chrysler], supra note 423.
---------------------------------------------------------------------------
    In testimony before the Panel in July, Senior Advisor to 
the Secretary of the Treasury Ron Bloom, now also senior 
counselor on manufacturing policy,\455\ expressed reservations 
about the likelihood of taxpayers recouping the entirety of 
their investment in Chrysler and GM: ``[U]nder certain 
assumptions, GM may be able to pay off a high percentage of the 
total funds advanced by the taxpayers. Less optimistic, and in 
Treasury's view more likely, scenarios involve a reasonable 
probability of repayment of substantially all of the government 
funding for new GM and new Chrysler, and much lower recoveries 
for the initial loans.'' \456\ As of the end of 2009, Treasury 
has stated that it does not believe that there has been any 
material change to this assumption.
---------------------------------------------------------------------------
    \455\ White House, President Obama Names Ron Bloom Senior Counselor 
for Manufacturing Policy (Sept. 7, 2009) (online at www.whitehouse.gov/
the_press_office/President-Obama-Names-Ron-Bloom-Senior-Counselor-for-
Manufacturing-Policy/).
    \456\ Congressional Oversight Panel, Transcript Testimony of Ron 
Bloom, Senior Advisor to the Secretary of the Treasury and Senior 
Counselor on Manufacturing Policy, Field Hearing: Oversight of TARP 
Assistance to the Automobile Industry, 111th Cong. (July 27, 2009) 
(online at cop.senate.gov/documents/transcript-072709-
detroithearing.pdf ) (hereinafter ``Ron Bloom Transcript Testimony'').
---------------------------------------------------------------------------
    For its part, Chrysler has expressed confidence that it 
will ``make good on the public's investment as the economy 
begins to recover and financing becomes available to dealers 
and consumers.'' As Jan Bertsch, a senior vice president of 
Chrysler, explained in her testimony at the Panel's July 
hearing: ``Our debt to the U.S. Treasury is due in several 
different tranches. One would be in 2011, again in 2016, and 
2017. Our goal would definitely be, if possible, to pay that 
back early. Part of the reason is the interest cost to the 
company is not immaterial, and so based on the interest rates 
that we are paying, I think that it would be one of our 
definite goals to pay that back early. But we see no issue in 
paying it back on time, certainly.'' \457\
---------------------------------------------------------------------------
    \457\ Congressional Oversight Panel, Transcript Testimony of Jan 
Bertsch, Chrysler Senior Vice President and Treasurer, Field Hearing: 
Oversight of TARP Assistance to the Automobile Industry, 111th Cong., 
at 82 (July 27, 2009).
---------------------------------------------------------------------------
    On December 1, 2009, GM replaced then-CEO Fritz Henderson 
with Edward Whitacre,\458\ who has since said that GM is 
considering repaying the (now) $5.7 billion it owes the 
government under the secured notes through a lump-sum 
payment,\459\ and has stated that GM will repay by June 
2010.\460\ It should be noted, however, that GM is not yet 
making any profits, and the payment will come from an escrow 
account established as part of the bankruptcy 
reorganization,\461\ so that GM could not, strictly speaking, 
be said to be earning money to pay the taxpayer.\462\
---------------------------------------------------------------------------
    \458\ See General Motors, Statement Attributed to Chairman Ed 
Whitacre (Dec. 1, 2009) (online at media.gm.com/content/media/us/en/
news/news_detail.brand_gm.html/content/Pages/news/us/en/2009/Dec/
1201_GM_Fritz).
    \459\ See General Motors, GM CEO and Chairman Ed Whitacre: GM 
Leaders Expected to Show Quick Results (Dec. 9, 2009) (online at 
media.gm.com/content/media/us/en/news/news_detail.brand_gm.html/
content/Pages/news/us/en/2009/Dec/1209_webchat). GM has since repaid $1 
billion of the sums outstanding. See Treasury Receives First Quarterly 
Repayment from GM, supra note 430.
    \460\ See General Motors, Statement Attributed to Chairman and 
Chief Executive Officer Ed Whitacre (Dec. 18, 2009) (online at 
media.gm.com/content/media/us/en/news/news_detail.brand_gm.html/
content/Pages/news/us/en/2009/Dec/1218_repayment).
    \461\ Proceeds in the amount of $16.4 billion from the $30.1 
billion debtor-in-possession facility were deposited in escrow and will 
be distributed to GM at its request if the following conditions are 
met: (1) the representations and warranties GM made in the loan 
documents are true and correct in all material respects on the date of 
the request; (2) GM is not in default on the date of the request taking 
into consideration the amount of the withdrawal request; and (3) the 
United States Department of the Treasury (UST), in its sole discretion, 
approves the amount and intended use of the requested disbursement. 
U.S. Securities and Exchange Commission, General Motors Co. Form 8-K 
(Sept. 2, 2009) (online at www.sec.gov/Archives/edgar/data/1467858/
000119312509220534/0001193125-09-220534-index.htm) (hereinafter 
``General Motors Co. Form 8-K'').
    \462\ General Motors Co. Form 8-K, supra note 461; Allison 
Testimony before House Oversight and Government Reform Committee, supra 
note 118, at 12. In December, 2009, GM made the first of its quarterly 
payments to Treasury. See Treasury Receives First Quarterly Repayment 
from GM, supra note 430.
---------------------------------------------------------------------------
            ii. Equity
    The Treasury auto team expects that both companies will 
eventually access the equity capital markets through IPOs,\463\ 
and as a result, successful IPOs will form the basis for the 
recovery of the taxpayers' money. This strategy hinges directly 
on the ability of the two companies to restructure and become 
profitable. At the moment, in a still-constrained credit 
market, and with the two companies facing pressure to rebuild 
themselves and under the perceived threat of political 
interference,\464\ it is unclear whether either company in its 
current form could access the banks or the capital markets in 
the amounts and on the terms that they would require. Since the 
public offering of these companies is the primary method for 
recovery of taxpayers' money, delays in or hindrances to 
accessing the capital markets will prolong Treasury's 
involvement as a shareholder, leading to greater uncertainty, 
both for the companies and for Treasury.
---------------------------------------------------------------------------
    \463\ See COP September Oversight Report, supra note 108, at 68-70. 
Chrysler and GM will require initial public offerings in order to 
become publicly-traded and access the capital markets. As part of the 
bankruptcy proceeding, both Chrysler and GM sold the majority of their 
assets to private companies. These companies are not public: they are 
neither SEC-registrants nor traded on any exchange.
    \464\ See COP September Oversight Report, supra note 108, at 68-69. 
Pursuant to its operating agreement, GM will attempt to make a 
reasonable best efforts IPO by July 10, 2010. See Allison Testimony 
before House Oversight and Government Reform Committee, supra note 118, 
at 12.
---------------------------------------------------------------------------
    Following the completion of a successful IPO, the Treasury 
auto team has made clear that it intends to dispose of 
Treasury's ownership stakes in Chrysler and GM ``as soon as is 
practicable.'' At least with respect to GM, where Treasury 
holds 60.8 percent of the company, Treasury does not expect to 
sell its entire stake in the IPO.\465\ The Stockholders 
Agreement calls for Treasury to use reasonable best efforts to 
effect an IPO by July 10, 2010.\466\ In its Shareholder's 
Agreement, Chrysler has agreed to file a shelf registration 
statement with the SEC either six months after an IPO or on 
January 1, 2013, whichever is earlier.\467\
---------------------------------------------------------------------------
    \465\ See Allison Testimony before House Oversight and Government 
Reform Committee, supra note 118, at 12.
    \466\ Stockholders Agreement by and among General Motors Company, 
United States Department of the Treasury, 7176384 Canada Inc., and UAW 
Retiree Medical Benefits Trust, at 8 (July 10, 2009) (online at 
www.sec.gov/Archives/edgar/data/1467858/000119312509150199/dex101.htm) 
(hereinafter ``GM Stockholders Agreement''); see also Agency Financial 
Statement 2009, supra note 32, at 44.
    \467\ Under the terms of the Chrysler Shareholders Agreement, 
Treasury can require Chrysler to file a registration statement under 
the Securities Act of 1933 (a ``demand registration''); in the case of 
an IPO, such demand notice can only be delivered by either (a) one or 
more holders holding 10 percent or more of the equity securities, or 
(b) both Treasury and Canada. Shareholders Agreement Among Fiat Newco, 
United States Department of the Treasury, UAW Retiree Medical Benefits 
Trust, Canada Development Investment Corporation, and the Other Members 
Party Hereto, at section 3.2(a)(i) (filed May 12, 2009) In Re Chrysler 
LLC, S.D.N.Y. (No. 09 B 50002 (AJG)) (online at 
www.chryslerrestructuring.com/). Treasury cannot seek more than one 
demand registration in any 12-month period, and cannot request more 
than five. Id., at section 3.2(a)(ii).
---------------------------------------------------------------------------
    The Treasury auto team has not ruled out other ways of 
exiting ownership of these companies and returning them to 
private hands, but options such as selling Treasury's stake to 
private equity investors seem unlikely at present.\468\ 
Treasury's stake in Chrysler is small enough that Treasury 
believes that it could exit ownership of Chrysler promptly upon 
Chrysler's filing of a shelf registration statement. As noted 
above, Treasury's stake in GM is sufficiently large that it 
would be extremely difficult for Treasury either to find a 
buyer or buyers, and it is not clear whether significant sales 
would have a destabilizing effect on GM or on the markets. 
Treasury has stated, however, that when it is able to sell, it 
should do so in a transparent and open manner so as to avoid 
additional destabilization.\469\
---------------------------------------------------------------------------
    \468\ At a July 29, 2009 briefing with Panel staff, Treasury and 
Task Force staff indicated that, at least at that point, no private 
equity investor has come along with demonstrated interest in investing 
in these companies, and as of the end of 2009, this remains unchanged. 
Treasury conversations with Panel staff (Dec. 22, 2009). See generally 
Section D.7(c), infra.
    There are also several pre-IPO contractual limitations on the 
public sale of Treasury's ownership stakes in GM that are set out in 
the Stockholders Agreement. See GM Stockholders Agreement, supra note 
466, at 8-9.
    \469\ Treasury conversations with Panel staff (Dec. 22, 2009).
---------------------------------------------------------------------------
    In making the decision--or decisions--to sell the equity 
stakes that it holds in the automotive companies, Treasury will 
have to balance the desire to exit as soon as practicable, as 
articulated by the President and the head of the Treasury auto 
team,\470\ with the need to maximize the return or minimize the 
loss to taxpayers, as dictated by EESA.\471\ Maximizing returns 
may, however, argue for holding the investments for longer than 
Treasury would otherwise prefer, bringing these two goals into 
conflict. It is not easy to time the markets, and Treasury 
cannot force Chrysler's board, at least, to engage in an IPO. 
Until the companies go public through the IPO process, 
Treasury's primary and perhaps only option is to sell its stake 
privately, which, as discussed above, remains an unlikely 
event, although of the two, it would be more likely that 
Treasury could sell the Chrysler stake privately. Once the 
companies become public companies subject to SEC reporting 
requirements, Treasury's options would be somewhat broader. 
Subject to certain conditions, Treasury could sell large stakes 
in SEC-registered secondary offerings.\472\ Treasury could also 
sell smaller amounts of shares into the public markets.\473\
---------------------------------------------------------------------------
    \470\ See White House, Remarks by the President on General Motors 
Restructuring (June 1, 2009) (online at www.whitehouse.gov/
the_press_office/Remarks-by-the-President-on-General-Motors-
Restructuring/) (hereinafter ``Remarks by the President on GM'') (``In 
short, our goal is to get GM back on its feet, take a hands-off 
approach, and get out quickly.''); see also COP September Oversight 
Report, supra note 108, at 69.
    \471\ See 12 U.S.C. Sec. 5213.
    \472\ See Allison Testimony before House Oversight and Government 
Reform Committee, supra note 118, supplemented by Treasury 
conversations with Panel staff (Dec. 22, 2009).
    \473\ Shareholders that are ``affiliates'' of a company (in 
general, those with a significant stake in the voting equity of the 
company, or the right to a board seat) may sell their shares in the 
public markets without registration of the transaction with the SEC. 
SEC rules impose volume, timing, and other restrictions on such sales. 
17 CFR Sec. 230.144 (2009). Any such sales by the government are likely 
to have a significant impact on the securities market, which may 
suspect a signal to the market with respect to the specific companies, 
the auto industries, or the economy in general. For this reason (and 
the general difficulty in timing the market discussed above), holding 
these equity stakes in a trust, discussed in more detail below, might 
help to manage the taxpayers' stake more efficiently and maximize 
returns.
---------------------------------------------------------------------------
    Until it exits ownership of Chrysler and GM, Treasury will 
continue to be a substantial shareholder of these companies; 
however, Treasury does not intend to take the activist role 
commonly associated with large private shareholders.\474\ Mr. 
Bloom, who was appointed to lead the Treasury auto team, has 
stated that President Obama gave the Task Force two directives 
regarding its approach to the automotive restructurings. First, 
the Task Force was to avoid intervening in the day-to-day 
corporate management of GM and Chrysler, and instead act as ``a 
potential investor of taxpayer resources'' with the goal of 
promoting profitable companies that contribute to economic 
growth without taxpayer support.\475\ Second, the Task Force 
was to ``behave in a commercial manner.'' \476\ The Panel noted 
the tension between these dual roles in its September oversight 
report. President Obama has stated that each company's board of 
directors and management team are responsible for achieving 
financial and operational restructuring as well as cultural 
changes at GM and Chrysler.\477\
---------------------------------------------------------------------------
    \474\ See Allison Testimony before House Oversight and Government 
Reform Committee, supra note 118, at 5.
    \475\ See Congressional Oversight Panel, Written Testimony of Ron 
Bloom, Senior Advisor to the Secretary of the Treasury and Senior 
Counselor on Manufacturing Policy, Field Hearing: Oversight of TARP 
Assistance to the Automobile Industry, 111th Cong. (July 27, 2009) 
(online at cop.senate.gov/documents/testimony-072709-bloom.pdf) 
(hereinafter ``Ron Bloom Written Testimony'').
    \476\ See Senate Committee on Banking, Housing, and Urban Affairs, 
Testimony of Senior Advisor at the U.S. Department of the Treasury Ron 
Bloom, The State of the Domestic Automobile Industry: Impact of Federal 
Assistance, 111th Cong. (June 10, 2009) (online at
banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore_id=40341601-355c-4e6f-b67f-
b9707ac88e32).
    \477\ See Remarks by the President on GM, supra note 470; see also 
Ron Bloom Written Testimony, supra note 472.
---------------------------------------------------------------------------
    Testifying before the Panel, Mr. Bloom reiterated that 
while the government has a partial ownership stake in these 
companies, the Task Force should manage its stake in a ``hands 
off'' manner, voting only on core governance issues such as the 
selection of directors and other major corporate actions.\478\ 
Characterizing the Administration as a ``reluctant 
shareholder'' in GM and Chrysler, Mr. Bloom also testified that 
Treasury would work with a ``firm conviction to manage that 
investment commercially'' and dispose of equity stakes ``as 
soon as practicable.'' \479\ Further, the GM Shareholders' 
Agreement provides that after GM's IPO, Treasury will only vote 
on certain matters, including elections to the board, certain 
major transactions, such as merger or dissolution, and matters 
in which Treasury must vote its shares in order for the 
shareholders to take action. In the latter case, Treasury will 
vote its shares in the same proportion (for, against, or 
abstain) as the other shares are voted.\480\
---------------------------------------------------------------------------
    \478\ See Ron Bloom Written Testimony, supra note 472; see also COP 
September Oversight Report, supra note 108, at 82-83.
    \479\ Ron Bloom Written Testimony, supra note 472. See also Allison 
Testimony before House Oversight and Government Reform Committee, supra 
note 118, at 5.
    \480\ See Allison Testimony before House Oversight and Government 
Reform Committee, supra note 118, at 6.
---------------------------------------------------------------------------
    While the Administration's stated purpose is not to involve 
the federal government in daily business decisions, Treasury 
cannot entirely abrogate its responsibilities as a shareholder. 
Even if Treasury restricts its participation to ``core 
governance,'' it must reasonably and responsibly establish its 
interpretation of ``core governance.'' As an example, given the 
ongoing and sweeping changes at both companies, a management 
succession plan--which SEC staff has recently described as one 
of a board's key functions--is critical.\481\ If Treasury has 
not clearly established a policy for its involvement in 
management succession plans, it should do so promptly.
---------------------------------------------------------------------------
    \481\ See Division of Corporation Finance, Securities and Exchange 
Commission, Shareholder Proposals, Staff Legal Bulletin No. 14E (CF) 
(Oct. 27, 2009) (online at www.sec.gov/interps/legal/cfslb14e.htm).
---------------------------------------------------------------------------
    Treasury has been directed and intends to make minimal 
interventions in management, as well as shareholder decisions. 
Overall, Treasury has expressed a firm commitment to its 
limited role. In conversations with Panel staff, the Treasury 
auto team indicated that they would, at most, share their 
opinions about strategy with the management of the auto 
companies. The management of the auto companies, however, is 
entirely responsible for setting strategy, and may ignore 
Treasury's opinions as they please. A ``hands off'' approach, 
however, may not provide the influence necessary to achieve the 
cultural changes most likely to lead to sustained viability for 
Chrysler and GM. If the government maintains the role of a 
disinterested shareholder, it may be difficult to protect 
taxpayer interests in these companies. On the other hand, it 
may be similarly detrimental to taxpayer interests if Treasury 
is an involved shareholder, as in this role Treasury arguably 
suffers from inherent conflicts of interest, politics, lack of 
knowledge, and lack of competence.
    Treasury's position is that the government, as shareholder, 
distorts the market in such a way that the auto companies--and 
accordingly the taxpayers--will ultimately reap greater benefit 
from a passive government shareholder. Where a typical 
shareholder can be assumed to seek profit maximization, 
Treasury is concerned that any shareholder activism on its part 
will be perceived through a political rather than commercial 
lens. Treasury believes this would harm the market as a whole 
in addition to harming the auto companies. Under this model, 
private shareholders, faced with a large shareholder that acts 
with multiple, possibly political motivations, would be more 
reluctant to invest in the company, delaying Treasury's exit 
and the return of the company to private hands, and overall 
reducing the value of Treasury's investment.\482\ It is 
difficult to determine which of these approaches would cause 
more or less harm to the markets in general or to the auto 
companies in particular. It is also possible that the passive 
approach promotes market stability in general at the expense of 
the taxpayers' specific investment in the auto companies.
---------------------------------------------------------------------------
    \482\ See Allison Testimony before House Oversight and Government 
Reform Committee, supra note 118; Treasury conversations with Panel 
staff (Dec. 22, 2009). On the other hand, although Treasury is 
concerned that its involvement may depress stock price, absent 
Treasury's and the U.S. Government's intervention, the liquidated 
companies' stock would have no value at all.
---------------------------------------------------------------------------
    To mitigate the potential conflicts of interest inherent in 
government ownership of Chrysler and GM shares, the Panel 
recommended in September that Treasury consider placing its 
Chrysler and GM shares in an independent trust that would be 
insulated from political pressure and government 
interference.\483\ At a hearing on October 22, 2009, however, 
Assistant Secretary Allison questioned whether an independent 
trust would be an efficient use of taxpayer funds given the 
requisite ``administrative infrastructure'' that would be 
involved.\484\ Treasury also has expressed concern that a trust 
might be inconsistent with its supervisory obligations under 
EESA. In February 2009, however, Secretary Geithner discussed 
the possibility of putting assets from the TARP, as then-
constituted in the Capital Assistance Program, in a Financial 
Stability Trust.\485\ The Capital Assistance Program ultimately 
closed without making any investments, and therefore no assets 
were ever placed in the Financial Stability Trust.\486\
---------------------------------------------------------------------------
    \483\ See COP September Oversight Report, supra note 108, at 114. 
In addition, Senator Warner and Senator Corker have proposed the TARP 
Recipient Ownership Trust Act of 2009, which would move any government 
private company shareholding over 20 percent into a trust with 
instructions to liquidate the stakes by the end of 2011. See Sen. Bob 
Corker, Corker, Warner Introduce TARP Recipient Ownership Trust Act of 
2009 (June 17, 2009) (online at
corker.senate.gov/public/
index.cfm?FuseAction=NewsRoom.NewsReleases&ContentRecord_id= efcc93cf-
0189-87f7-0c26-fb49c985a43f).
    \484\ See Congressional Oversight Panel, Transcript Testimony of 
Treasury Assistant Secretary for Financial Stability Herbert M. 
Allison, Jr., COP Hearing with Assistant Treasury Secretary Herbert M. 
Allison, Jr., at 63 (Oct. 22, 2009).
    \485\ U.S. Department of the Treasury, Secretary Geithner 
Introduces Financial Stability Plan (Feb. 10, 2009) (www.treas.gov/
press/releases/tg18.htm) (hereinafter ``Secretary Geithner Introduces 
Financial Stability Plan'').
    \486\ 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'').
---------------------------------------------------------------------------
    As part of its efforts to increase profitability, on 
November 4, 2009, Chrysler unveiled its five-year business 
plan.\487\ Under this plan, the current Chairman of the Board, 
Robert Kidder, states that Chrysler's top priority will be to 
create a compelling brand and product offering. In addition, 
Chrysler will leverage its alliance with Italian automaker 
Fiat, manage its supply chain to match customer demand and 
production, strengthen its dealer network, cut fixed costs, 
develop its new MOPAR brand, build a strong team and high 
performance culture, and adopt a financial plan that aims to 
recapitalize the company. In conversations with Panel staff, 
Chrysler maintained that it is happy with its progress in 
merging with Fiat, and believes that it is creating a more 
efficient company. Its product mix will include more fuel-
efficient cars, and it believes it is making progress in 
reducing the time-to-market for newer products. Chrysler is 
also sensitive to the need to act quickly, and believes that it 
has brought greater focus to its product offerings.\488\
---------------------------------------------------------------------------
    \487\ See generally Chrysler Group, Our Plan Presentation (Nov. 4, 
2009) (online at www.chryslergroupllc.com/business/?redir=cllc).
    \488\ Chrysler conversations with Panel staff (Dec. 16, 2009).
---------------------------------------------------------------------------
    GM also issued a five-year plan,\489\ which includes 
consolidating facilities, streamlining brands and dealer 
networks, creating ``fewer, better'' vehicles, developing 
technologies to increase fuel efficiency, hybrids, advanced 
propulsion, and addressing unprofitable foreign operations. On 
November 16, 2009, GM stated that its focus is currently on 
``top line performance'' and gaining market share by offering 
``performance and value'' to customers.\490\ In subsequent 
conversations with Panel staff, GM stated that it believes that 
it has made good progress on initiatives designed to increase 
its competitiveness, including: building plants that can switch 
between products; developing a more versatile product mix, with 
more small cars; building its four core brands and attempting 
to divest other brands; and creating strategic alliances in 
overseas markets. GM believes that the restructured business 
will be simpler and much easier to manage as a result.\491\
---------------------------------------------------------------------------
    \489\ See generally General Motors Corporation, 2009-2014 
Restructuring Plan (Feb. 17, 2009) (online at 
www.financialstability.gov/docs/AIFP/GMRestructuringPlan.pdf).
    \490\ General Motors Corporation, 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).
    \491\ GM conversations with Panel staff (Dec. 15, 2009).
---------------------------------------------------------------------------
    Treasury has stated that the new companies are, in capital 
structure alone, fundamentally quite different from their prior 
incarnations. In addition to manufacturing changes and product 
shifts, the restructured companies lack the debt that dogged 
old Chrysler and old GM. They have lower overhead and a lower 
break-even point. They compete in a smaller market and have 
simplified obligations to fewer debt and equity holders. 
Treasury believes that these differences significantly 
distinguish the current auto companies from their predecessors, 
and will help them to become profitable.\492\
---------------------------------------------------------------------------
    \492\ Allison Testimony before House Oversight and Government 
Reform Committee, supra note 118, at 5; Treasury conversations with 
Panel staff (Dec. 22, 2009).
---------------------------------------------------------------------------
            c. Analysis of Intended Exit Strategy
    The crisis that beset Chrysler and GM was a long time 
coming, even if its severity was unprecedented. As President 
Obama observed in his speech on the GM bankruptcy, the crisis 
resulted from a long series of poor business decisions, large 
legacy costs, and failure to address a changing market.\493\ It 
is to be hoped that the near-liquidation of these companies 
will impress upon their respective managements and employees 
the need to be more responsive to changes in markets, commodity 
prices, and consumer preferences. Both Chrysler and GM were 
resting upon a very long period of market dominance, and failed 
to respond promptly when it was revealed that their influence 
had waned and their competitors were more nimble and modern, 
both culturally and technologically. High labor costs--from 
wages, benefits, and rigid work rules--further hampered GM's 
and Chrysler's competitiveness.\494\ Compounding the 
difficulty, the auto industry overall suffers from a long time-
to-market, relatively high fixed and variable costs, and 
substantial infrastructure needs, which make it difficult for 
even a flexible and adaptive company to move quickly. Reports 
that GM is restructuring its bureaucracy are encouraging,\495\ 
although substantial additional changes will be needed for both 
companies to again become profitable and permit Treasury to 
divest its holdings.
---------------------------------------------------------------------------
    \493\ See Remarks by the President on GM, supra note 470; see also 
COP September Oversight Report, supra note 108, at 107-110.
    \494\ House Select Committee on Global Warming, Testimony of 
Professor Peter Morici, The Energy Independence Implications of the 
Auto Bailout Proposal, 110th Cong., at 2 (Dec. 9, 2008) (online at 
www.globalwarming.house.gov/tools/3q08materials/files/0068.pdf).
    \495\ Treasury conversations with Panel staff (Dec. 22, 2009).
---------------------------------------------------------------------------
    As discussed above, Treasury owns equity in and holds debt 
of both Chrysler and GM. While repayments on the debt and 
successful IPOs are both dependent on revitalized companies, 
Treasury will likely hold the equity stakes for longer than the 
debt will remain outstanding. The equity stakes, accordingly, 
are of greater concern in a discussion of exit. Further, it is 
Treasury's GM holding that poses the most difficulty: 
Treasury's stake in Chrysler is small enough that Treasury 
could sell it shortly after a Chrysler IPO or to a third-party 
buyer.\496\ The size of the GM holding therefore creates unique 
circumstances: In the absence of buyers for a block sale or 
sales, in all probability, Treasury will sell its stake into 
the public market, and it probably cannot sell its entire stake 
simultaneously. Although it continues to evaluate the best 
methods for divesting its holdings in the GM equity, Treasury 
currently takes the position that transparency--in the form of 
successive registered follow-on offerings--will best serve the 
markets and the taxpayers' investment in the auto 
companies.\497\ If, by contrast, Treasury were to sell its 
stake at less predictable or less transparent intervals, 
Treasury believes that potential investors might be concerned 
about unpredictable pressure on the stock price from Treasury's 
sales. Any such sales, however, must follow the IPO, and likely 
will be subject to a lock-up as well. Treasury therefore 
probably cannot sell even the larger part, much less all, of 
its equity stake until years in the future.
---------------------------------------------------------------------------
    \496\ Allison Testimony before House Oversight and Government 
Reform Committee, supra note 118.
    \497\ Allison Testimony before House Oversight and Government 
Reform Committee, supra note 118; Treasury conversations with Panel 
staff (Dec. 22, 2009).
---------------------------------------------------------------------------
    It is unusual for any company to have a majority 
shareholder as passive as Treasury intends to be. This stance, 
especially with respect to Treasury's GM holding, may result in 
no other entity's being able to play the traditional majority 
shareholder role, and create a governance vacuum. This concern 
will intensify as the auto companies return to being publicly 
traded companies. The Panel's September report suggested that 
Treasury consider holding its auto company shares in a trust, 
to which Treasury has responded with a variety of concerns, 
from administrative costs to statutory obligations. In addition 
to these concerns, establishing a trust to hold the shares 
might: slow Treasury's exit; prolong its involvement in the 
market; and make future interventions more palatable, any or 
all of which could set an inappropriate precedent. However, 
particularly with respect to the GM stake, it may be some time 
before Treasury is able to divest itself of its holdings. GM 
will therefore have a deliberately disinterested and passive 
majority shareholder for the foreseeable future, which may 
hamper its ability to again become viable and may affect the 
value that the capital markets place on it. This being the 
case, the Panel believes that Treasury should continue to 
contemplate whether it should place the automobile company 
shares, particularly the GM shares, in a trust. In an earlier 
incarnation of the TARP, Treasury had contemplated creating a 
trust for its financial sector investments.\498\ Treasury 
should revisit the discussions surrounding the Financial 
Stability Trust to help determine whether any of the 
considerations in operation at that time might now be 
applicable to the automobile company shares. If Treasury is of 
the opinion that a trust is unnecessary at present, it should 
reconsider this position at the time an IPO is being 
planned.\499\
---------------------------------------------------------------------------
    \498\ Secretary Geithner Introduces Financial Stability Plan, supra 
note 485.
    \499\ Other unconventional measures that Treasury might consider 
would include replacing its common stock with a class of limited 
shares, and, drawing from private equity traditions, breaking its 
holding into six or more blocks and having private managers manage 
those holdings, actively exercising the governance rights that 
accompany the shares.
---------------------------------------------------------------------------
    The uncertainty surrounding the long-term prospects for 
these investments, of course, raises additional issues. 
Investments without clear time frames for exit--if any--pose 
particularly difficult questions about Treasury's involvement 
in a commercial enterprise. Even if Treasury believes that the 
taxpayers' best interest is served by its ``hands-off'' 
approach, it must nonetheless perform rigorous diligence of its 
ongoing investment in search of good divestment windows. If, 
instead, Treasury later determines that it should take a more 
interventionist role, it must still find the appropriate 
balance between serving the taxpayers' need and the significant 
problems posed by involving Treasury in management. In any 
case, however, Treasury should not exit either company without 
establishing that it has a reasonable plan for long-term 
viability. The alternative, as discussed below, would be to 
reinstitute the full-scale liquidation avoided through 
commitment of TARP funds.
    The Panel is hopeful that both Chrysler and GM will return 
to profitability in short order, making Treasury's continued 
involvement unnecessary. The Panel also appreciates the auto 
task force's difficulty in balancing its role as a shareholder 
with its obligations to the taxpayers and its decided 
reluctance to become actively involved in management. That 
said, while there are many ways in which Treasury differs from 
a shareholder in the ordinary course, one in particular is 
relevant to our discussion: what Treasury should do if and when 
it determines that it has made a ``bad investment.'' A typical 
shareholder may decide that he or she no longer wishes to hold 
a given investment, and may sell, generally without much effect 
on the market. If, however, the automotive companies prove 
unlikely to become profitable again, even if far in the future, 
Treasury cannot simply sell and write off its investment. And 
if Treasury sees no possibility of a sale, then in the best 
interests of the taxpayers, Treasury may need to contemplate 
its only remaining means of exit--an orderly wind-down of the 
relevant company. Not only can this never be a casual decision, 
but it must also involve deep and careful consideration of the 
effect on all parties concerned--taxpayers, investors, 
suppliers, car owners, and industrial workers, among others.
    The consequences of liquidating one or both of these 
companies, even if far into the future and in an orderly 
fashion, would likely still be significant for the 
economy.\500\ The Panel is hopeful that the global financial 
crisis that precipitated the TARP will not be repeated, and 
that if it is, the industries that require rescue will be more 
robust. If there is a similar crisis, or if after some period 
of time, one or both of GM and Chrysler appear unlikely to ever 
become profitable again, Treasury will face a difficult choice. 
Treasury should have procedures for the continuing evaluation 
of its investment in the automotive industry. This report 
discusses these procedures in the context of divestment 
windows. These procedures should be formulated with an 
awareness that Treasury may need to consider exit even though 
the subject company or companies cannot continue without 
Treasury's support. The Panel hopes that no such action will 
ever be necessary, but believes that in order for Treasury to 
have a comprehensive understanding of its role as an investor, 
it must internally take note of this possibility. That said, 
publication of precise metrics or timelines may be inadvisable, 
both because they could limit Treasury's discretion and could 
negatively affect the companies. Treasury, at present, takes 
the view that the auto companies will not be ripe for long-term 
evaluation until after any IPO. While it is reasonable to look 
to the IPOs as a more concrete point at which to assess the 
auto companies, it is also appropriate for Treasury to 
consider, if not plan for, the longer term.\501\
---------------------------------------------------------------------------
    \500\ See COP September Oversight Report, supra note 108, at 7-23.
    \501\ The Panel understands that Treasury intends to begin a formal 
evaluation of its investment in the automobile companies shortly.
---------------------------------------------------------------------------

8. GMAC

    Since the results of the stress tests were announced in 
early May,\502\ nine of the 10 bank holding companies that were 
identified as needing to raise additional capital have met or 
exceeded their capital raising requirements without government 
assistance.\503\ GMAC, which was unable to raise sufficient 
outside capital to meet the capital buffer established by the 
stress tests, originally set at $11.5 billion, is the only 
participant to seek additional TARP funds from Treasury.\504\
---------------------------------------------------------------------------
    \502\ Treasury Announces Restructuring of Commitment To GMAC, supra 
note 170; COP June Oversight Report, supra note 175, at 41.
    \503\ Agency Financial Statement 2009, supra note 32, at 25.
    \504\ Prior to the December 2009 capital injection, Treasury owned 
$13.1 billion in preferred shares in GMAC, and 35 percent of GMAC's 
common equity. Of this $13.1 billion, $5.25 billion was acquired in 
December 2008 when Treasury purchased $5 billion in preferred equity 
and received warrants for an additional $250 million in preferred 
equity. Treasury then acquired an additional $7.875 billion in May 2009 
when it purchased $7.5 billion of convertible preferred shares and 
received warrants for an additional $375 million. Also, on May 29, 
2009, Treasury exercised its option to exchange a $884 million loan for 
the ownership interest that GM had purchased, amounting to about 35 
percent of the common membership interests in GMAC. OFS FY09 Financial 
Statements, supra note 133, at 62, 74.
---------------------------------------------------------------------------
    At the conclusion of the stress tests in May 2009,\505\ 
Treasury made a ``down payment'' of $7.5 billion but 
acknowledged that GMAC would need additional capital 
support.\506\ On December 30, 2009, Treasury provided GMAC with 
$3.8 billion in new capital.\507\ This amount was $1.8 billion 
less than the remaining $5.6 billion shortfall on the capital 
buffer calculated in May by the Federal Reserve under the 
stress tests.\508\ According to Treasury, the reduced size of 
the capital injection was due to ``less disruption'' than 
anticipated in the GM and Chrysler restructurings.\509\ The 
Panel is not aware of the stress tests being recalculated for 
any other bank that participated in them, although it must be 
noted that GMAC is the only participant that failed to meet the 
stress tests' November 2009 deadline for raising additional 
capital.
---------------------------------------------------------------------------
    \505\ At the conclusion of the stress tests in May, the Federal 
Reserve announced that GMAC required an additional $11.5 billion in 
capital, $9.1 billion of which had to be in the form of fresh capital 
(as opposed to conversions). Treasury conversations with Panel staff 
(Jan. 8, 2010); Treasury Announces Restructuring of Commitment To GMAC, 
supra note 170.
    \506\ Of this $7.5 billion, $3.5 billion was used to add to GMAC's 
required capital buffer, and $4 billion was used to support new 
financing for Chrysler dealers and customers. Treasury conversations 
with Panel staff (Jan. 8, 2010). The term sheet for this investment 
stated that Treasury would invest ``up to $5.6 billion'' at a later 
date.
    Treasury stated that it decided to ``stage'' its investments 
because it believed that the GM and Chrysler bankruptcy proceedings 
might be less disruptive, and faster, than anticipated and because it 
wanted to give a new GMAC management team the opportunity to develop 
its own strategy for raising capital. Treasury conversations with Panel 
staff (Jan. 8, 2010). Less disruptive bankruptcy proceedings would have 
the effect of lowering GMAC's capital needs because the value of the GM 
and Chrysler automobiles financed by GMAC and forming a large part of 
its collateral, would be higher with GM and Chrysler standing behind 
their warranties. Id.; see also Treasury Announces Restructuring of 
Commitment To GMAC, supra note 170; OFS FY09 Financial Statements, 
supra note 133, at 62 (``GMAC is in discussions with the Treasury-OFS 
regarding additional financing to complete GMAC's post-SCAP capital 
needs up to the amount of $5.6 billion, as previously discussed in 
May'').
    \507\ Treasury Announces Restructuring of Commitment To GMAC, supra 
note 170. The transaction closed and was funded on December 30, 2009. 
Treasury conversations with Panel staff (Jan. 6, 2010). Treasury stated 
that it timed the transaction to close in fiscal year 2009 in order to 
``clean up'' GMAC's balance sheet. Treasury conversations with Panel 
staff (Jan. 8, 2010).
    \508\ Treasury Announces Restructuring of Commitment To GMAC, supra 
note 170; Treasury Announcement Regarding the CAP, supra note 486 
(``[GMAC's] capital need is expected to be lower than anticipated at 
the time the SCAP results were announced''); U.S. Department of the 
Treasury, Questions for the Record for U.S. Department of the Treasury 
Assistant Secretary Herbert M. Allison Jr., at 9 (Oct. 22, 2009) 
(online at cop.senate.gov/documents/testimony-102209-allison-qfr.pdf) 
(hereinafter ``Questions for the Record for Secretary Allison''); OFS 
FY09 Financial Statements, supra note 133, at 62 (``GMAC is in 
discussions with the Treasury-OFS regarding additional financing to 
complete GMAC's post-SCAP capital needs up to the amount of $5.6 
billion, as previously discussed in May''). A Wall Street Journal story 
in late October stated that the capital injection would be between $2.8 
billion and $5.6 billion. Dan Fitzpatrick and Damian Paletta, GMAC Asks 
for Fresh Lifeline, Wall Street Journal (Oct. 19, 2009) (online at
online.wsj.com/article/SB125668489932511683.html?mod=djemalertNEWS).
    \509\ Treasury Announces Restructuring of Commitment To GMAC, supra 
note 170.
---------------------------------------------------------------------------
    The additional funds were provided in the form of $2.54 
billion in Trust Preferred Securities (TruPs) and $1.25 billion 
in Mandatory Convertible Preferred Stock (MCP).\510\ Treasury 
also received warrants to purchase $127 million of TruPs and 
$63 million of MCP, which it exercised upon closing.\511\ At 
the same time, Treasury converted $5.25 billion of its 
preferred securities to MCPs (which have a more advantageous 
conversion rate) and converted $3 billion of its MCPs to common 
stock, increasing its ownership stake from 35 percent to 56 
percent.\512\ Treasury also took the opportunity to recut the 
terms of some of its existing securities, including the 
conversion terms. With its enlarged ownership stake, Treasury 
has the right to appoint four directors to GMAC's board of 
directors.\513\ In total, Treasury now holds $2.67 billion in 
TruPs and $11.4 billion in MCPs.
---------------------------------------------------------------------------
    \510\ Treasury Announces Restructuring of Commitment To GMAC, supra 
note 170.
    \511\ Treasury Announces Restructuring of Commitment To GMAC, supra 
note 170.
    \512\ Treasury Announces Restructuring of Commitment To GMAC, supra 
note 170.
    \513\ Treasury Announces Restructuring of Commitment To GMAC, supra 
note 170. The increase in ownership stake from 35 percent to 56 percent 
gave Treasury the right to appoint two additional directors.
---------------------------------------------------------------------------
    The additional capital was provided under the AIFP, rather 
than under the Capital Assistance Program (CAP), which was 
established to provide capital to financial institutions in 
connection with the stress tests.\514\ Treasury stated that it 
used the AIFP because its previous capital injections had been 
through the AIFP and because of the relationship between GMAC 
and the automotive industry.\515\ The terms of the securities 
issued under the AIFP are also more advantageous to Treasury.
---------------------------------------------------------------------------
    \514\ Id.; see also Congressional Oversight Panel, December 
Oversight Report: Taking Stock: What Has the Troubled Asset Relief 
Program Achieved?, at 20 (Dec. 9, 2009) (online at cop.senate.gov/
documents/cop-120909-report.pdf) (hereinafter ``COP December Oversight 
Report''). Although Treasury provided the funds through the AIFP, it 
stated that it was ``acting on its previously announced commitment to 
provide capital to GMAC as identified in May as a result of the 
Supervisory Capital Assessment Program (SCAP).'' Treasury Announces 
Restructuring of Commitment To GMAC, supra note 170.
    \515\ Treasury conversations with Panel staff (Jan. 8, 2010).
---------------------------------------------------------------------------
    GMAC intends to seek financing in the credit markets during 
2010, and if it is able to access the equity markets, then 
Treasury will be able to start unwinding its position. 
Treasury's large MCP position makes it likely that it will 
convert the MCPs and sell common stock in the market after an 
eventual IPO, although a private sale cannot be ruled out.\516\ 
In either case, Treasury's goal is to ``dispose of the 
government's interests as soon as practicable consistent with 
EESA goals.'' \517\ Treasury intends to sell its interests in a 
timely and orderly manner that ``minimizes financial market and 
economic impact,'' under what it determines to be appropriate 
market conditions.\518\
---------------------------------------------------------------------------
    \516\ Agency Financial Statement 2009, supra note 32, at 102; 
Treasury conversations with Panel staff (Jan. 8, 2010).
    \517\ Agency Financial Statement 2009, supra note 32, at 44.
    \518\ Agency Financial Statement 2009, supra note 32, at 40.
---------------------------------------------------------------------------
    In answers to questions posed by members of the Panel, 
Assistant Secretary Allison suggested that Treasury's 
assistance to GMAC has provided a ``reliable source of 
financing to both auto dealers and customers seeking to buy 
cars,'' helped ``stabilize our auto financing market,'' and 
contributed ``to the overall economic recovery.'' \519\ GMAC is 
a source of retail and wholesale financing for both GM and 
Chrysler.\520\ Treasury has stated that if it refused to 
support GMAC after providing assistance to GM and Chrysler, it 
would undermine its own investments in the automotive 
companies. Treasury has also stated that denying support to 
GMAC in December 2009 would have placed Treasury's previous 
investments at risk, and that refusing assistance after 
promising it in May would have had a detrimental effect on 
market confidence.\521\
---------------------------------------------------------------------------
    \519\ Questions for the Record for Secretary Allison, supra note 
508, at 9; see also COP December Oversight Report, supra note 514, at 
71.
    \520\ Treasury conversations with Panel staff (Jan. 8, 2010).
    \521\ Treasury conversations with Panel staff (Jan. 8, 2010).
---------------------------------------------------------------------------
    In spite of Assistant Secretary Allison's general 
statements about the reasons for providing additional support 
to GMAC, Treasury has not yet articulated a specific and 
convincing reason to support the company. Treasury's most 
recent announcement of assistance states only that its 
``actions fulfill Treasury's commitments made in May to GMAC in 
a manner which protects taxpayers to the greatest extent 
possible.'' \522\ It has never stated that a GMAC failure would 
result in substantial negative consequences for the national 
economy. If Treasury has made such a determination, then it 
should say so publicly. It does not appear that the support has 
been made on the merits of the investment, particularly given 
GMAC's recent statements that it anticipates reporting fourth 
quarter 2009 losses of approximately $5 billion.\523\ Treasury 
has not indicated whether it will be open to providing 
additional financing to GMAC in the future.
---------------------------------------------------------------------------
    \522\ Treasury Announces Restructuring of Commitment To GMAC, supra 
note 170.
    \523\ GMAC Financial Services, 2009 Fourth Quarter Strategic 
Actions (Jan. 5, 2009) (online at phx.corporate-ir.net/
External.File?item= 
UGFyZW50SUQ9MjY1MzIxN3xDaGlsZElEPTM2MzQ5M3xUeXBlPTI=&t=1); Samuel 
Spies, GMAC Expects to Report Q4 Loss of about $5B, SNL Financial (Jan. 
5, 2010).
---------------------------------------------------------------------------
    Moreover, GMAC has received different treatment from all 
other financial institutions that were subject to the stress 
tests. Unlike other institutions, it was subjected to 
additional stress tests after the initial stress test results 
were released in May, and unlike other institutions, its 
capital buffer requirements were revised in light of this 
second round of tests. GMAC was the only institution that was 
allowed to benefit from post-May improvements in its financial 
position and in related sectors of the economy. In the face of 
criticism about the merits of saving GMAC, Treasury owes the 
public a more detailed and convincing explanation not only of 
its rationale for providing substantial assistance to GMAC, but 
also of its rationale for treating GMAC differently than other 
stress-tested institutions.

9. PPIP

    Treasury has committed up to $30 billion to be invested in 
the Public-Private Investment Program (PPIP), a TARP initiative 
pairing Treasury with private investors to purchase mortgage-
backed securities as a means of jump-starting that market back 
into active trading. Treasury announced the PPIP on March 23, 
2009, as part of its efforts to repair balance sheets distorted 
by toxic assets and increase credit availability in the 
financial system.\524\ Although the PPIP, when announced, 
included both a legacy loans program and a legacy securities 
program, the legacy loan program has been postponed for the 
present.\525\ Because the loan program has not been 
implemented, this report will address only the securities 
program.
---------------------------------------------------------------------------
    \524\ 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).
    \525\ ``Legacy securities'' are defined as ``Troubled real estate-
related securities (residential mortgage-backed securities or 
commercial mortgage-backed securities), and other asset-backed 
securities lingering on institutions' balance sheets because their 
value could not be determined.'' Treasury Decoder, supra note 148.
---------------------------------------------------------------------------
    The PPIP was designed to draw private capital into the 
legacy securities market by creating public-private investment 
funds financed by private investors, whose capital 
contributions are matched dollar-for-dollar by Treasury using 
TARP funds. The funds may also obtain debt financing from 
Treasury equal to the full value of the fund's capital 
investments.\526\ The funds, called PPIFs, are managed by fund 
managers who have been selected by Treasury through an 
application process. According to Treasury, those who were 
ultimately selected were chosen based on a combination of the 
following criteria:
---------------------------------------------------------------------------
    \526\ This financing may include TALF financing, as described in 
Section D.10, infra.
---------------------------------------------------------------------------
          1. Demonstrated capacity to raise a minimum amount of 
        private sector capital;
          2. Demonstrated experience investing in targeted 
        asset classes, including through performance track 
        records;
          3. A minimum amount (market value) of the targeted 
        asset classes currently under management;
          4. Demonstrated operational capacity to manage the 
        investments in a manner consistent with Treasury's 
        stated investment objectives while also protecting 
        taxpayers; and
          5. Headquartered in the United States (although the 
        ultimate parent company need not be headquartered in 
        the United States).\527\
---------------------------------------------------------------------------
    \527\ U.S. Department of the Treasury, Guidelines for the Legacy 
Securities Public-Private Investment Program (accessed Jan. 6, 2010) 
(online at www.financialstability.gov/docs/ProgramGuidelinesS-
PPIP.pdf).
---------------------------------------------------------------------------
    Treasury ultimately selected nine funds, all of which have 
succeeded in raising the private capital necessary to qualify 
as fund managers under the program.\528\ As of December 31, 
2009, Treasury has committed approximately $30 billion in eight 
funds.\529\ Of the $30 billion invested under PPIP, $19.9 
billion was committed as senior debt and $9.9 billion as 
equity.\530\ Treasury received notes in exchange for its loans, 
with the ``same duration as the underlying fund.'' \531\
---------------------------------------------------------------------------
    \528\ One fund was recently frozen under the Key Man provision of 
the partnership agreement creating the fund due to the departure of the 
person named in that provision from the fund.
    \529\ TARP Transactions Report for Period Ending December 30, 2009, 
supra note 166, at 19.
    \530\ These amounts represent Treasury's total commitment and not 
the actual amount disbursed. Id.
    \531\ See U.S. Department of the Treasury, Public-Private 
Investment Program: $500 Billion to $1 Trillion Plan to Purchase Legacy 
Assets (online at www.treas.gov/press/releases/reports/ppip--
whitepaper--032309.pdf) (accessed Jan. 12, 2010). This expiration term 
will apply unless the note is accelerated in the event of default or 
the fund is dissolved earlier. See, e.g., U.S. Department of the 
Treasury, Loan Agreement (online at www.financialstability.gov/docs/
Loan%20Agreement%20(redacted)%20-%20AB.PDF) (accessed Jan. 12, 2010).
---------------------------------------------------------------------------
    The PPIFs are structured as limited partnerships, with the 
Fund Manager serving as General Partner and Treasury, along 
with the other private investors, serving as Limited Partners. 
Under the terms of the partnership agreements, the General 
Partners have broad authority for the ``management, operation 
and policy of the Partnership,'' which is ``vested exclusively 
in the General Partner.'' \532\ Concerns have been expressed 
over Treasury's apparent lack of control over the funds and the 
funds' lack of transparency regarding their trading 
activities.\533\ Although the agreements require the General 
Partners to obtain Treasury approval for certain actions, these 
actions are limited and generally involve the PPIFs venturing 
beyond the prescribed terms of the program by, for example, 
purchasing assets other than those designated as ``eligible 
assets'' under the terms of the program. Obviously, as partner 
in the funds, Treasury has the right and ability to counsel the 
General Partners regarding investment strategy, but there is no 
provision in the agreements to provide Treasury with the 
ability to manage the assets directly or to dictate the General 
Partners' management of the assets. Treasury has yet to 
implement any measures to address these concerns.
---------------------------------------------------------------------------
    \532\ Amended and Restated Limited Partnership Agreement for 
AllianceBernstein Legacy Securities Master Fund, L.P., at 25 (online at 
www.financialstability.gov/docs/AB%20Complete%20LPA%20(redacted).pdf). 
The partnership agreements for the remaining PPIFs contain identical 
language.
    \533\ See COP August Oversight Report, supra note 65; SIGTARP, 
Quarterly Report to Congress, at 171 (July 21, 2009) (online at 
www.sigtarp.gov/reports/congress/2009/
July2009_Quarterly_Report_to_Congress.pdf) (expressing concern over the 
lack of transparency in the PPIFs' trading activities and holdings and 
requesting that Treasury take measures to address these concerns).
---------------------------------------------------------------------------
    Under the agreements, each fund is able to conduct business 
in the legacy securities markets until the eighth anniversary 
of its inception, subject to a two-year extension with 
Treasury's consent, unless the fund is terminated earlier by 
the General Partner.\534\ Thus, the funds will be terminated 
and dissolved no later than 2020.\535\ After outstanding debt 
is repaid, any remaining funds will be divided equally between 
Treasury (on account of its equity investment) and the private 
investor.
---------------------------------------------------------------------------
    \534\ U.S. Department of the Treasury, Public-Private Investment 
Program (online at www.financialstability.gov/roadtostability/
publicprivatefund.html) (accessed Dec. 31, 2009) (providing redacted 
versions of every executed partnership agreement between Treasury and 
the private investor in establishing PPIFs).
    \535\ Before Treasury and the private investor are paid on behalf 
of their capital investments, the PPIF must first repay loans plus 
principle, if any, under TALF. As previously discussed in this Section 
and Section D.9 supra, Treasury may also receive a portion of this debt 
repayment as a result of its financing of TALF's SPV.
---------------------------------------------------------------------------
    As of the date of this report, neither Treasury nor the 
funds have disclosed the nature of the PPIFs' investments.
    While Treasury will have no direct role in selling the 
assets held by the PPIFs, and therefore will not need as 
detailed an exit strategy as other programs will require, OFS 
will continue to have a responsibility to monitor the Fund 
Managers and the funds' investments.

10. TALF

    Another small TARP program, the Term Asset-Backed 
Securities Loan Facility (TALF), will require very little 
action to facilitate a complete exit. FRBNY created the TALF in 
response to ``near-complete halt'' of the asset-backed 
securities (ABS) market in October 2008.\536\ Under the TALF, 
FRBNY provides non-recourse, three- to five-year loans to 
eligible borrowers who pledge qualifying ABS or commercial 
mortgage-backed securities.\537\ FRBNY receives monthly 
interest payments on these loans.\538\ As of December 31, 2009, 
TALF loan requests totaled approximately $61 billion.\539\ 
Unless FRBNY grants an extension,\540\ the TALF will no longer 
make new loans after March 31, 2010 for loans collateralized by 
ABS, and after June 30, 2010 for loans collateralized by 
commercial mortgage-backed securities.\541\
---------------------------------------------------------------------------
    \536\ See Federal Reserve Bank of New York, Term Asset-Backed 
Securities Loan Facility: Frequently Asked Questions (online at 
www.newyorkfed.org/markets/talf_faq.html) (hereinafter ``TALF 
Frequently Asked Questions'') (accessed Jan. 12, 2010) (``The asset-
backed securities (ABS) market has been under strain for some months. 
This strain accelerated in the third quarter of 2008 and the market 
came to a near-complete halt in October'').
    \537\ In addition to other criteria, an ``eligible borrower'' must 
be a ``U.S. company,'' as defined by FRBNY. See generally TALF Terms 
and Conditions, supra note 27. ``Eligible collateral'' includes ABS 
that have a long-term AAA credit rating and are backed by one or more 
of the following classes of securities: auto loans, student loans, 
credit card loans, equipment loans, floorplan loans, insurance premium 
finance loans, small business loans fully guaranteed as to principal 
and interest by the U.S. Small Business Association, receivables 
related to residential mortgage servicing advances (servicing advance 
receivables), or commercial mortgage loans. See generally id.
    \538\ See generally TALF Terms and Conditions, supra note 27.
    \539\ Federal Reserve Bank of New York, Term Asset-Backed 
Securities Loan Facility: CMBS (online at www.newyorkfed.org/markets/
CMBS_recent_operations.html) (accessed Jan. 12, 2010) (hereinafter 
``FRBNY CMBS Recent Operations''); Federal Reserve Bank of New York, 
Term Asset-Backed Securities Loan Facility: non-CMBS (online at 
www.newyorkfed.org/markets/talf_operations.html) (accessed Jan. 12, 
2010) (hereinafter ``FRBNY non-CMBS Recent Operations'').
    \540\ TALF has already been granted one extension, which authorized 
this program to continue beyond December 31, 2009, the original 
termination date. Board of Governors of the Federal Reserve System, 
Federal Reserve and Treasury Department Announce Extension to Term 
Asset-Backed Securities Loan Facility (TALF) (Aug. 17, 2009) (online at 
www.federalreserve.gov/newsevents/press/monetary/20090817a.htm).
    \541\ TALF Terms and Conditions, supra note 27.
---------------------------------------------------------------------------
    Treasury has currently committed up to $20 billion in TARP 
funds under the TALF.\542\ This amount is incrementally funded 
and, as of September 30, 2009, Treasury has only disbursed $100 
million under the program.\543\ In exchange for any amount 
disbursed, Treasury will receive a promissory note bearing 
interest at LIBOR plus 3 percent.\544\ Pursuant to an agreement 
to subordinate its debt, Treasury's loan will be repaid only 
after FRBNY's loans, if any, are paid in full with 
interest.\545\ This program is administered by FRBNY, and 
Treasury has limited discretion regarding its management.
---------------------------------------------------------------------------
    \542\ TARP Transactions Report for Period Ending December 30, 2009, 
supra note 166.
    \543\ Agency Financial Statement 2009, supra note 32.
    \544\ U.S. Department of the Treasury, Credit Agreement among TALF 
LLC as Borrower, FEDERAL RESERVE BANK OF NEW YORK, as Controlling 
Party, FEDERAL RESERVE BANK OF NEW YORK, as the Senior Lender and 
UNITED STATES DEPARTMENT OF THE TREASURY, as the Subordinated Lender at 
12 (Mar. 3, 2009) (online at www.financialstability.gov/docs/SPV-
Credit-Agt.pdf) (hereinafter ``TALF Credit Agreement'').
    \545\ TALF Credit Agreement, supra note 544. FRBNY's loans, if any, 
are secured by a first priority lien on all assets of the SPV. See U.S. 
Department of the Treasury, Security and Intercreditor Agreement among 
TALF LLC, as borrower, FEDERAL RESERVE BANK OF NEW YORK, as Senior 
Lender, UNITED STATES DEPARTMENT OF THE TREASURY, as Subordinated 
Lender, FEDERAL RESERVE BANK OF NEW YORK, as Controlling Party, and THE 
BANK OF NEW YORK MELLON, as Collateral Agent (Mar. 3, 2009) (online at 
www.financialstability.gov/docs/SPV-Sec-Agt.pdf).
---------------------------------------------------------------------------
    Because a TALF loan is non-recourse,\546\ if the borrower 
defaults, FRBNY cannot take action against the borrower. 
Instead, FRBNY takes ownership of the collateral. In turn, 
FRBNY sells the collateral to TALF, LLC,\547\ a special purpose 
vehicle (SPV) formed to facilitate this program. The SPV 
purchases the recovered collateral from FRBNY at a price equal 
to the defaulted TALF loan amount, plus accrued unpaid interest 
and fees.\548\ As of December 31, 2009, no TALF loans have 
defaulted, and the SPV contains only $100 million of Treasury's 
seed funding.\549\
---------------------------------------------------------------------------
    \546\ ``The TALF loan is non-recourse except for breaches of 
representations, warranties, and covenants, as further specified in the 
MLSA.'' TALF Frequently Asked Questions, supra note 536.
    \547\ TARP Transactions Report for Period Ending December 30, 2009, 
supra note 166.
    \548\ TALF Terms and Conditions, supra note 27.
    \549\ Agency Financial Statement 2009, supra note 32, at 53.
---------------------------------------------------------------------------
    Treasury's $20 billion commitment to the TALF is to provide 
the initial funding of this SPV.\550\ To the extent the SPV 
purchases assets exceeding $20 billion, FRBNY will loan the SPV 
the additional funding. As mentioned above, FRBNY's loan to the 
SPV, if any, will be senior to Treasury's loan. To the extent 
there are any assets remaining in the SPV after both FRBNY and 
Treasury have been repaid, those assets will be shared equally 
between FRBNY and Treasury.\551\
---------------------------------------------------------------------------
    \550\ TALF Terms and Conditions, supra note 27.
    \551\ Board of Governors of the Federal Reserve System, Term Asset-
Backed Securities Loan Facility (TALF) Terms and Conditions (online at 
www.federalreserve.gov/newsevents/press/
monetary/monetary20081125a1.pdf) (hereinafter ``TALF Terms and 
Conditions'').
---------------------------------------------------------------------------
    Loans extended by Treasury and FRBNY to the SPV are due on 
the 10th anniversary of the credit agreement, subject to 
extension by FRBNY upon receipt of Treasury's consent.\552\ 
Treasury has informed Panel staff that if an ABS sold to the 
SPV is underwater, the SPV will hold the asset until it 
appreciates in value before disposing of it, thereby increasing 
the likelihood of Treasury being repaid in full and with 
interest.\553\ While potentially maximizing taxpayer returns, 
this exit strategy may also have the effect of prolonging the 
winding down process and therefore Treasury's involvement in 
the market. Moreover, it will be the SPV created by FRBNY that 
will manage any assets it holds.\554\ Consequently, within the 
10-year period after the execution of the credit agreement, 
Treasury has little to no control over when its loan will be 
repaid.
---------------------------------------------------------------------------
    \552\ Assuming the agreement closed in 2009, FRBNY and Treasury 
loans would become due in 2019. The credit agreement is considered 
``closed'' upon the satisfaction or waiver of certain preconditions 
stipulated therein. TALF Credit Agreement, supra note 544.
    \553\ Treasury conversations with Panel staff (June 24, 2009).
    \554\ Assuming the agreement closed in 2009, FRBNY and Treasury 
loans would become due in 2019. The credit agreement is considered 
``closed'' upon the satisfaction or waiver of certain preconditions 
stipulated therein. TALF Credit Agreement, supra note 544.
---------------------------------------------------------------------------

11. Small Business Programs

            a. Programs
    Treasury has yet to acquire any assets under its small 
business initiatives, but it has committed $15 billion in TARP 
funds out of the $35 billion it has allocated toward supporting 
small businesses so far, to potentially do so.\555\ Treasury's 
small business initiatives are three-pronged: $20 billion 
pledged as credit protection under the TALF, $15 billion 
directed to the purchase of Small Business Administration 
(SBA)-guaranteed securities, and a still-evolving initiative to 
provide capital assistance to small banks in return for 
commitments to lend to small businesses.\556\ As relates to the 
first two initiatives, Treasury may directly acquire assets 
should it elect to purchase SBA-guaranteed securities, but it 
will not receive assets from its TALF credit protection 
pledge.\557\ It is still unclear what assets, if any, Treasury 
may receive from its latest initiative.
---------------------------------------------------------------------------
    \555\ U.S. Department of the Treasury, Fact Sheet: Unlocking Credit 
for Small Businesses (Oct. 19, 2009) (online at 
www.financialstability.gov/roadtostability/unlockingCredit 
forSmallBusinesses.html) (hereinafter ``Small Business Fact Sheet'').
    \556\ Small Business Fact Sheet, supra note 555. Cf. U.S. 
Department of the Treasury, Consumer & Business Lending Initiative 
(July 17, 2009) (online at www.financialstability.gov/roadtostability/
lendinginitiative.html) (hereinafter ``Consumer & Business Lending 
Initiative''); 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 New 
Small Business Efforts'').
    \557\ Small Business Fact Sheet, supra note 555; see TALF Terms and 
Conditions, supra note 551 (accessed Jan. 12, 2010).
---------------------------------------------------------------------------
    Under the TALF, as noted above, Treasury provides up to $20 
billion of TARP funds as a credit backstop against first losses 
on FRBNY's overall $200 billion program commitment.\558\ At 
present, approximately $62 billion in TALF loans have been 
requested.\559\ For Treasury's backstop to be fully depleted, 
and for FRBNY to incur any loan losses subsequently, posted 
collateral would need to decline in value by more than one-
third.
---------------------------------------------------------------------------
    \558\ Consumer & Business Lending Initiative, supra note 556.
    \559\ This figure includes both CMBS and non-CMBS loans requested 
as of December 3, 2009. See FRBNY CMBS Recent Operations, supra note 
539; FRBNY non-CMBS Recent Operations, supra note 539.
---------------------------------------------------------------------------
    Another of Treasury's small business initiatives calls for 
the purchase of up to $15 billion in securities backed by SBA 
loans: the government-guaranteed portion of SBA 7(a) loans and 
the non-government-guaranteed first-lien mortgage loans 
affiliated with the SBA's 504 loan program.\560\ Although an 
active secondary market traditionally allowed commercial 
lenders to sell the government-guaranteed portion of their 7(a) 
loans, providing lenders with new capital and allowing them to 
offer additional loans, beginning last fall, the secondary 
market for SBA-guaranteed securities froze.\561\ Unable to shed 
the risk from their books, commercial lenders significantly 
curtailed their lending activities.\562\ Treasury enacted this 
initiative in March 2009 to ``jumpstart credit markets for 
small businesses.'' \563\
---------------------------------------------------------------------------
    \560\ Small Business Fact Sheet, supra note 555. Under its 7(a) 
Loan Program, the Small Business Administration (SBA) guarantees a 
portion of qualified loans made and administered by commercial lenders. 
The SBA does not make 7(a) loans, nor fully guarantee them--the lender 
and SBA share the risk that a borrower will not fully repay the loan. 
U.S. Small Business Administration, SBA Programs Office (online at 
www.sba.gov/financialassistance/borrowers/
guaranteed/7alp/index.html) (accessed Nov. 24, 2009).
    \561\ From 2006 through 2008, between 40 and 45 percent of the SBA 
guaranteed portion of 7(a) loans were sold into the secondary market. 
See 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); Congressional Oversight Panel, May 
Oversight Report: Reviving Lending to Small Businesses and Families and 
the Impact of the TALF, at 52 (May 7, 2009) (online at cop.senate.gov/
documents/cop-050709-report.pdf) (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).
    \562\ Small Business Fact Sheet, supra note 555.
    \563\ Small Business Fact Sheet, supra note 555.
---------------------------------------------------------------------------
    Under the initiative, Treasury hired Earnest Partners, an 
independent investment manager with SBA-guaranteed loan 
experience, to guide its efforts to buy the securities.\564\ 
Unlike the TALF, Treasury's program to purchase SBA-guaranteed 
securities does not utilize private-sector pricing. Rather, 
Treasury may purchase securities directly from ``pool 
assemblers'' and banks.\565\ 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.'' \566\ 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.'' \567\
---------------------------------------------------------------------------
    \564\ 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%20 be%20posted.pdf) (updated Nov. 12, 2009); See SIGTARP, 
Quarterly Report to Congress, at 112 (Apr. 21, 2009) (online at 
www.sigtarp.gov/reports/congress/2009/
April2009_Quarterly_Report_to_Congress.pdf).
    \565\ 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. 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 on Implementation'').
    \566\ Id.
    \567\ Id.
---------------------------------------------------------------------------
    Treasury has $3 billion apportioned for its direct purchase 
program, and despite stating 7(a) and 504 purchases would begin 
by May 2009, Treasury has not yet made any purchases under the 
program.\568\ A rejuvenated secondary market for SBA loans, as 
Treasury previously noted, has tempered the need for an earlier 
start to the program.\569\ If Treasury does engage in direct 
purchases, it plans to either sell the securities to private 
investors or pursue a buy-and-hold strategy, depending on 
market conditions.\570\
---------------------------------------------------------------------------
    \568\ 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); Unlocking Credit for Small 
Businesses: FAQ on Implementation, supra note 565.
    \569\ Between May and October, the total volume of loans settled 
from lenders to broker averaged $344 million, exceeding pre-crisis 
levels. By comparison, in January total volume was $85.9 million. U.S. 
Department of the Treasury, SBA Host Small Business Financing Forum 
(Nov. 18, 2009) (online at www.financialstability.gov/latest/tg--
11182009.html) (hereinafter ``SBA Host Small Business Financing 
Forum''). See also Unlocking Credit for Small Businesses: FAQ on 
Implementation, supra note 565.
    \570\ SBA Host Small Business Financing Forum, supra note 569.
---------------------------------------------------------------------------
    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 low-cost 
capital to community banks to be used in small business 
lending.\571\ 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 CPP. These small banks will be able to 
receive capital totaling up to 2 percent of their risk weighted 
assets.\572\ For community development financial institutions 
that can document that 60 percent of their small business 
lending targets low income communities or underserved 
populations,\573\ this dividend rate will be only two percent. 
As currently conceived,\574\ 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.\575\ 
Further implementing details for this program have not been 
announced as of the release of this report.
---------------------------------------------------------------------------
    \571\ 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 New Small Business 
Efforts, supra note 556.
    \572\ See id.
    \573\ Community development financial institutions, which are 
certified by the federal government, provide loans to underserved 
communities.
    \574\ See President Obama Announces New Small Business Efforts, 
supra note 556.
    \575\ See id.
---------------------------------------------------------------------------
            b. Future Considerations
    Small businesses continue to experience an inability to 
access credit.\576\ Treasury has indicated that measures to 
``get credit to small businesses'' will be a key driver in 
Treasury's economic recovery strategy.\577\ At the Panel's 
December hearing, Secretary Geithner stated that new TARP 
investments would be limited to ``housing, small business, and 
securitization markets that facilitate consumer and small 
business loans.'' \578\ In the process of doing so, the 
Secretary noted, Treasury is ``reserving funds for additional 
efforts to facilitate small business lending.'' \579\
---------------------------------------------------------------------------
    \576\ See U.S. Department of the Treasury, Report to the President 
Small Business Financing Forum (Dec. 3, 2009 (online at 
www.financialstability.gov/docs/Small%20Business% 
20Financing%20Forum%20Report%20FINAL.PDF) (hereinafter ``Report to the 
President Small Business Financing Forum'').
    \577\ Agency Financial Statement 2009, supra note 32.
    \578\ Id.
    \579\ Id.
---------------------------------------------------------------------------
    Treasury, in coordination with the SBA, held a Small 
Business Financing Forum on November 18, 2009, convening 
``entrepreneurs, small business owners, lenders, policymakers 
and regulators to assess additional ways to spur small business 
growth.'' \580\ Secretary Geithner delivered a summary of 
participant views and recommendations to President Obama on 
December 3, 2009.
---------------------------------------------------------------------------
    \580\ See Report to the President Small Business Financing Forum, 
supra note 576.
---------------------------------------------------------------------------
    As of the date of this report, it is still unclear which 
proposals, if any, the Administration is considering, and 
Treasury has not allocated additional TARP funds to support new 
small business initiatives beyond those discussed above.\581\ 
It is possible, however, that small business initiatives will 
result in Treasury's acquisition of additional assets. As 
Secretary Geithner noted at the Panel's December hearing, small 
banks have been reluctant to participate in Treasury's recent 
low-cost-capital initiative for fear of being stigmatized or 
having operating conditions attached.\582\ Because community 
bank lending is tied to small business growth, which often 
feeds job creation, Treasury's success in tailoring its small 
business programs to facilitate such lending will be essential 
to the success of Treasury's adapted TARP strategy.
---------------------------------------------------------------------------
    \581\ Senator Mark Warner has also offered a proposal calling for 
the reallocation of up to $40 billion in unused TARP funds to create a 
small business loan fund. Participating regional and community banks 
would be required to contribute up to $10 billion and assume first-
dollar losses on the loans. On October 21, 2009, Senator Warner sent 
President Obama a letter signed by 32 Senate colleagues seeking 
Administration backing for the proposal. Letter from Senator Mark R. 
Warner to President Barack Obama (Oct. 21, 2009).
    \582\ See Agency Financial Statement 2009, supra note 32.
---------------------------------------------------------------------------
    Moving forward, as other TARP programs wind down, Treasury 
should be transparent about its eventual exit plans for 
programs that are not yet under way.

                 E. Unwinding TARP Expenditure Programs

    Some of Treasury's TARP initiatives will neither generate 
fees, nor acquire assets with the potential to increase in 
value. These initiatives constitute non-recoverable 
expenditures from the TARP, whereby Treasury can only realize 
monetary losses on these programs. To date, this exposure 
relates solely to Treasury's mortgage foreclosure mitigation 
efforts, including disbursements or potential disbursements, 
made under Treasury's HAMP initiative and its subprograms, but 
may also apply to the small business initiatives discussed 
above.\583\ HAMP is the largest of the Making Home Affordable 
programs and presents the most exposure for monetary losses. As 
Secretary Geithner noted of HAMP at the Panel's December 10, 
2009 hearing, ``expenditures through [HAMP] were never intended 
to generate revenue.'' \584\ Rather, HAMP ``was created to help 
mitigate foreclosure for responsible but at-risk homeowners.'' 
\585\
---------------------------------------------------------------------------
    \583\ In keeping with the scope of this report, this section 
examines only Treasury's monetary exposure related to its mortgage 
foreclosure mitigation programs. For an in-depth assessment of 
Treasury's mortgage foreclosure mitigation efforts, see the Panel's 
October 2009 report. See 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.pdf) (hereinafter ``COP October Oversight Report''); see also 
COP December Oversight Report, supra note 514.
    \584\ Agency Financial Statement 2009, supra note 32.
    \585\ Id.; OFS FY09 Financial Statements, supra note 133, at 3. 
(``In particular, the $50 billion Home Affordable Modification Program 
or `HAMP,' is not designed to recoup money spent on loan modifications 
to keep people in their homes.'')
---------------------------------------------------------------------------

1. HAMP

    Under HAMP, Treasury allocated up to $50 billion from the 
TARP to modify private-label mortgages. To prevent 
foreclosures, Treasury shares the cost of reducing monthly 
payments on certain delinquent loans and provides targeted 
incentives to borrowers, investors, and servicers that 
participate in the program.\586\ Treasury currently estimates 
it will spend $48.756 billion for private-label loans under 
HAMP. Of the initial $50 billion allocation, $1.244 billion 
will never be obligated due to the fact that TARP authority was 
reduced by this amount under the Helping Families Save their 
Home Act. Treasury has currently obligated $35.5 billion of the 
amount, reflecting Treasury's legal commitments to 102 
servicers as of December 31, 2009.\587\ Due to HAMP's payment 
structure, including delayed payments and a long disbursement 
cycle, only a fraction of TARP funds have been paid out to 
date.\588\
---------------------------------------------------------------------------
    \586\ 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) 
(hereinafter ``MHA Program Description'').
    \587\ TARP Transactions Report for Period Ending December 30, 2009, 
supra note 166.
    \588\ OFS FY09 Financial Statements, supra note 133. (Treasury's FY 
2009 net cost of operations of $41.6 billion includes the estimated net 
cost related to loans, equity investments, and asset guarantees. Due to 
its program structure, the $50 billion HAMP has delayed payments as 
well as a long disbursement cycle so the FY 2009 amounts include only 
$2 million in cost.)
---------------------------------------------------------------------------
    HAMP provides lenders/investors with cost-share payments 
for up to five years for half the cost of reducing a borrower's 
payment from 38 percent to 31 percent of the borrower's gross 
monthly income.\589\ Investors must pay for reducing the 
borrower's payment down to the 38 percent threshold before they 
are able to benefit from the cost-share incentive.\590\
---------------------------------------------------------------------------
    \589\ MHA Program Description, supra note 586.
    \590\ MHA Program Description, supra note 586.
---------------------------------------------------------------------------
    HAMP also provides targeted incentive payments for first- 
and second-lien mortgage modifications. On first-lien 
mortgages, targeted incentives include an up-front payment of 
$1,000 to the servicer for each successful modification 
following the completion of the borrower's trial period, and 
``pay for success'' fees of up to $1,000 annually for three 
years if the borrower remains current.\591\ Additional one-time 
incentives include $500 to servicers and $1,500 to investors if 
loans are successfully modified for distressed borrowers who 
are current but are in danger of imminent default.\592\ 
Homeowners also earn up to $1,000 towards principal balance 
reduction annually for five years contingent on their remaining 
current with payments.\593\ Treasury estimates that up to 50 
percent of at-risk mortgages have second liens.\594\ In order 
to address second lien debts, such as home equity lines of 
credit or second mortgages, HAMP encourages servicers to 
contact second lien holders and negotiate the extinguishment of 
the second lien.\595\ Servicers are eligible to receive 
payments of $500 per second lien modification, as well as 
success payments of $250 per year for three years, provided the 
modified first loan remains current.\596\ Borrowers also 
receive success payments for participating of $250 per year for 
up to five years that are used to pay down the principal on the 
first lien.\597\
---------------------------------------------------------------------------
    \591\ MHA Program Description, supra note 586.
    \592\ Imminent default determinations are made by servicers based 
on the borrower's financial condition in light of hardship as well as 
the condition of and circumstances affecting the property securing the 
mortgage. U.S. Department of the Treasury, Supplemental Documentation--
Frequently Asked Questions Home Affordable Modification Program (Nov. 
12, 2009) (online at www.hmpadmin.com/portal/docs/hamp_servicer/
hampfaqs.pdf) (hereinafter ``Supplemental Documentation for HAMP'').
    \593\ MHA Program Description, supra note 586.
    \594\ U.S. Department of the Treasury, Making Home Affordable: 
Program Update (Apr. 28, 2009) (online at www.financialstability.gov/
docs/042809SecondLienFactSheet.pdf) (hereinafter ``Making Home 
Affordable: Program Update'').
    \595\ Id.
    \596\ Id.
    \597\ Id.
---------------------------------------------------------------------------
    Treasury utilizes mortgage servicers to carry out the 
process of modifying mortgages. In exchange for agreeing to 
follow Treasury's standardized guidelines and process, 
participating servicers are eligible for the various program 
incentive payments. Under the Servicer Participation 
Agreements, Treasury has authorized each participating servicer 
to modify mortgages through December 31, 2012. Because 
mortgages will continue to be modified past the October 2010 
expiration of TARP, it is important to consider how various 
aspects of the program will function.
    HAMP modifications begin with a three-month trial 
modification period for eligible borrowers, although the 
maximum trial period was recently extended to allow borrowers 
additional time to provide necessary documentation. After three 
months of successful payments at the modified rate and 
provision of full supporting documentation, the modification 
becomes permanent. December 31, 2012 will be the last date upon 
which servicers can commence a new trial modification. Under 
current program guidelines, the last date for a possible 
conversion to permanent status is May 1, 2013.
    Presuming a HAMP modification remains current, incentive 
payments will extend into the future for five years after the 
trial modification converts to permanent status, long past the 
scheduled expiration of the TARP. Based on the final date for a 
modification to become permanent, servicer incentive payments 
could continue until May 1, 2016, and borrower incentive 
payments could continue until May 1, 2018. Following the 
expiration of TARP and following the expiration of servicers' 
authority to continue making new modifications, scheduled 
payments will continue to be made by Fannie Mae, Treasury's 
financial agent, as they are currently. HAMP payments are made 
to servicers monthly via wire transfer in a consolidated 
manner.\598\ Payments are remitted to servicers either for 
themselves or on behalf of borrowers and investors.\599\ 
Servicers apply payments made to borrowers directly to reducing 
the principal of the borrower's mortgage.\600\ Cost-share 
payments to investors/security holders accrue monthly as of the 
completed modification, not from the start of the trial period. 
Servicers are responsible for delivering these payments to the 
appropriate investors/security holders.\601\
---------------------------------------------------------------------------
    \598\ Monthly incentive payments are distributed on a consolidated 
basis, rather than by individual loan. Supplemental Documentation for 
HAMP, supra note 592, at 25.
    \599\ Fannie Mae provides loan-level accounting for the incentives. 
Id.
    \600\ Making Home Affordable: Program Update, supra note 594.
    \601\ Treasury is not providing guidance on how those funds are to 
be passed through to security holders of securitization trusts.
---------------------------------------------------------------------------
    Treasury anticipates that HAMP expenses will increase 
significantly over time, ``as more modifications of mortgage 
payments are finalized between mortgage servicers and 
borrowers, resulting in increased incentive payments.'' \602\ 
As more money flows, the need for strong oversight becomes even 
more important. Freddie Mac serves as Treasury's compliance 
agent and monitors servicer payments to ensure the proper 
remittance of funds to investors/security holders and the 
proper application of funds to borrowers' accounts.\603\ 
Freddie Mac will continue in this role after the expiration of 
the TARP.
---------------------------------------------------------------------------
    \602\ See Agency Financial Statement 2009, supra note 32 (``We need 
to continue to find ways to help mitigate foreclosures for responsible 
homeowners . . .'').
    \603\ Supplemental Documentation for HAMP, supra note 592, at 25.
---------------------------------------------------------------------------
    Payments under HAMP are contingent on borrowers remaining 
in ``good standing.'' A borrower loses good standing when an 
amount equal to three full monthly payments is due and unpaid 
on the last day of the third month in which payments were due. 
If this occurs, good standing cannot be restored, and the 
borrower permanently loses eligibility to receive further 
incentives and reimbursements under HAMP. A borrower who fails 
a HAMP modification is not eligible for another HAMP offer, 
even if the borrower fully cures the delinquency. However, the 
servicer is obligated to work with the borrower to attempt to 
cure their delinquency. If a cure cannot be reached, the 
servicer must consider the borrower for ``any other home 
retention loss mitigation options that may be available.'' If 
those options are unsuccessful, a short sale or deed-in-lieu 
must be considered.\604\ Notwithstanding any future changes 
Treasury may make to the program, provisions addressing 
troubled modifications and redefaults will not change following 
the expiration of the TARP or the cessation of additional 
modifications.
---------------------------------------------------------------------------
    \604\ Supplemental Documentation for HAMP, supra note 592, at 25.
---------------------------------------------------------------------------
    The October 2010 expiration of TARP will have one notable 
effect on the foreclosure mitigation programs by freezing the 
maximum number of modifications, even though the program will 
continue to operate. The funds available to pay servicer, 
borrower, and investor payments are capped based upon each 
servicer's Servicer Participation Agreement.\605\ Treasury 
established the amount in each servicer's initial program 
participation cap by ``estimating the number of HAMP 
modifications expected to be performed by each servicer during 
the term of the HAMP.'' \606\ Once a servicer's cap is reached, 
a servicer cannot ``enter into any agreements with borrowers 
intended to result in new loan modifications, and no payments 
will be made with respect to any new loan modifications.'' 
\607\ Treasury, at its sole discretion, can adjust a servicer's 
cap based on an updated estimate of the number of HAMP 
modifications the servicer is expected to perform.\608\ For 
example, the total initial allocation to servicers was $23.6 
billion, but the various allocations have been increased by a 
total of $11.9 billion to the current cap of $35.5 billion. 
However, Treasury will only commit funds to servicers until 
TARP's October 2010 expiration.\609\ This means that after 
October 3, 2010, the maximum amount each servicer is authorized 
to modify under HAMP will be locked into place, and Treasury 
can no longer increase a servicer's cap, only decrease it, 
through the end of the program.
---------------------------------------------------------------------------
    \605\ U.S. Department of the Treasury, Supplemental Directive 09-01 
Introduction of the Home Affordable Modification Program, at 23 (online 
at www.hmpadmin.com/portal/docs/hamp_servicer/sd0901.pdf) (hereinafter 
``Supplemental Directive for HAMP'').
    \606\ Id.
    \607\ Id.
    \608\ Id.
    \609\ U.S. Department of the Treasury, Making Home Affordable 
Borrower Frequently Asked Questions, at 11 (July 16, 2009) (online at 
www.financialstability.gov/docs/borrower_qa.pdf).
---------------------------------------------------------------------------

2. Future Considerations

    Moving forward, Treasury has stated that its focus will 
remain on foreclosure mitigation as a key part of its new TARP 
commitment strategy.\610\ The prospect of future initiatives 
raises important questions about future expenditures, 
timetables, management, supervision and enforcement, in 
addition to Treasury's relationship to servicers and borrowers 
going forward. At this time, Treasury has not announced any 
changes to the foreclosure mitigation programs on these points. 
Further, as noted in the Panel's October 2009 report, the 
foreclosure problem is far from abating, and with rising 
unemployment, widespread deep negative equity, and recasts on 
payment-option adjustable rate mortgages and interest-only 
mortgages increasing in volume, there is no immediate sign of a 
resolution to the foreclosure crisis in sight.\611\ While 
Treasury has structured the Servicer Participation Agreements 
to allow servicers to modify mortgages through 2012, it is 
unclear that Treasury would have the authority to introduce any 
new foreclosure initiatives or make changes to existing 
programs past the October 2010 expiration of the TARP. 
Therefore, should Treasury intend to make changes to address 
these matters, the changes would need to be implemented 
relatively soon.
---------------------------------------------------------------------------
    \610\ See Agency Financial Statement 2009, supra note 32; Sec. 
Geithner Written Testimony, supra note 32, at 5 (``Second, we must 
fulfill EESA's mandate to preserve home ownership, stimulate liquidity 
for small businesses, and promote jobs and economic growth. To do so, 
we will limit new commitments in 2010 to three areas. We will continue 
to mitigate foreclosure for responsible American homeowners as we take 
the steps necessary to stabilize our housing market'').
    \611\ See COP October Oversight Report, supra note 583.
---------------------------------------------------------------------------
    Treasury identified its key challenges related to HAMP 
going forward as three-fold: To reach more eligible borrowers, 
to help borrowers convert more modifications from trial to 
permanent, and to increase transparency to assure the public 
that the program is helping homeowners as intended.\612\ Of 
these objectives, borrower conversions is the ``central 
focus.'' \613\ HAMP was not designed to address foreclosures 
caused by unemployment, which now appears to be a central cause 
of nonpayment. Testifying before the House Financial Services 
Committee in December, Assistant Secretary Allison stated:
---------------------------------------------------------------------------
    \612\ House Financial Services Committee, Written Testimony of 
Assistant Secretary Herbert Allison, The Private Sector and Government 
Response to the Mortgage Foreclosure Crisis 111th Cong. (Dec. 8, 2009) 
(online at www.house.gov/apps/list/hearing/financialsvcs_dem/
herb_allison.pdf).
    \613\ Id.

        While our key focus is on helping as many borrowers as 
        quickly as possible under the current program, Treasury 
        recognizes that unemployment presents unique challenges 
        and is still actively reviewing various ideas and 
        suggestions in order to improve implementation and 
        effectiveness of the program in this area.\614\
---------------------------------------------------------------------------
    \614\ Id.

    Finally, as Treasury winds down the foreclosure mitigation 
programs under the TARP, it must be cognizant of the 
intersection of these programs with other non-TARP programs and 
initiatives, which may also be unwound or changed. For example, 
the Federal Reserve's monetary policy has produced low interest 
rates, which have stimulated greater demand for mortgage 
financed home purchases by lowering the cost of capital, and 
federal government support for the GSEs and the private label 
mortgage backed securities market has also contributed to 
liquidity and thus lowered the costs of mortgage capital. This 
level of support cannot continue indefinitely, however, and as 
long as foreclosures and real estate owned inventory flood the 
housing market and contribute to an oversupply of housing stock 
for sale, there will be strong downward pressure on home 
prices.

     F. What Remains and What Additional Assets Might Be Acquired?

    Set forth above in Sections D and E is a summary of the 
TARP initiatives that are open and closed to new expenditures. 
As of December 30, 2009, $65.5 billion of TARP funds have been 
committed and not used and $336.2 billion of TARP funds remains 
uncommitted.\615\ On December 10, 2009, Secretary Geithner 
announced that Treasury will continue to wind down programs put 
in place to address the crisis. During the fourth quarter of 
2009, the CPP ended. New TARP commitments in 2010 will be in 
three areas:
---------------------------------------------------------------------------
    \615\ See Figure 22.
---------------------------------------------------------------------------
           Continuing foreclosure mitigation; \616\
---------------------------------------------------------------------------
    \616\ For further discussion, see Section E, infra.
---------------------------------------------------------------------------
           Providing capital to small and community 
        banks and reserve funds to facilitate small business 
        lending; \617\ and
---------------------------------------------------------------------------
    \617\ For further discussion, see Section D.11, infra.
---------------------------------------------------------------------------
           Increasing commitment to the TALF.\618\
---------------------------------------------------------------------------
    \618\ For further discussion, see Section D.10, infra.
---------------------------------------------------------------------------
    In addition, if passed, the following proposed legislation 
includes several provisions that would impact the TARP.
    H.R. 4173, the Wall Street Reform and Consumer Protection 
Act of 2009, passed the House of Representatives on December 
11, 2009 by a vote of 223 to 202.\619\ The bill includes a 
series of measures that would comprehensively reform the U.S. 
financial regulatory structure. In addition, the bill includes 
the following TARP provisions:
---------------------------------------------------------------------------
    \619\ Wall Street Reform and Consumer Protection Act of 2009, H.R. 
4173, 111th Cong. (2009).
---------------------------------------------------------------------------
           The bill would reduce the maximum allowable 
        amount outstanding under TARP by $20.8 billion and use 
        the money to offset the excess costs of the bill.\620\
---------------------------------------------------------------------------
    \620\ Congressional Budget Office, Cost Estimate of H.R. 4173, Wall 
Street Reform and Consumer Protection Act of 2009 (Dec. 9, 2009) 
(online at www.cbo.gov/ftpdocs/108xx/doc10844/hr4173asreported.pdf).
---------------------------------------------------------------------------
           An amendment offered by Rep. Barney Frank 
        (D-MA), adopted by a vote of 240 to 182, would 
        authorize Treasury to transfer $3 billion in funds 
        available under EESA to the Department of Housing and 
        Urban Development (HUD) to provide emergency low-
        interest loans to unemployed homeowners in need of 
        assistance in making mortgage payments and $1 billion 
        to HUD's Neighborhood Stabilization Program to assist 
        states and local governments with the redevelopment of 
        abandoned and foreclosed homes.\621\
---------------------------------------------------------------------------
    \621\ Representative Barney Frank, Wall Street Reform and Consumer 
Protection Act of 2009, Congressional Record Vol. 155, No. 186: p. 
H14663-14664 (Dec. 10, 2009) (online at frwebgate.access.gpo.gov/cgi-
bin/getpage.cgi?position=all&page=H14663&dbname=2009_record).
---------------------------------------------------------------------------
           Section 134 of EESA states that should TARP 
        realize a net loss, ``the President shall submit a 
        legislative proposal that recoups from the financial 
        industry an amount equal to the shortfall in order to 
        ensure that the Troubled Asset Relief Program does not 
        add to the deficit or national debt.'' An amendment 
        offered by Rep. Gary Peters (D-MI), adopted by a vote 
        of 225-198, would authorize the FDIC to make 
        assessments on large financial institutions to 
        compensate for any such TARP shortfall.\622\
---------------------------------------------------------------------------
    \622\ Rep. Gary Peters, Amendment to the Wall Street Reform and 
Consumer Protection Act of 2009, Congressional Record, H14748-14750 
(Dec. 11, 2009) (online at www.congress.gov/cgi-lis/query/D?r111:1:./
temp/r111kAWb3J::).

The Senate Committee on Banking, Housing & Urban Affairs 
expects to mark up its version of this bill at the end of 
January 2010.
    H.R. 2847, Jobs for Main Street Act of 2010, passed the 
House of Representatives on December 16, 2009, by a vote of 217 
to 212.\623\ The bill, which originated as the FY 2010 
Commerce-Justice-Science appropriations bill, authorizes $154 
billion for job creation and the extension of unemployment 
benefits. The bill would reduce the maximum amount outstanding 
under the TARP by $150 billion and redirect $75 billion to 
create new jobs through infrastructure projects ($48.3 billion) 
and prevent layoffs of state and local employees ($26.7 
billion).\624\ The remaining $79 billion in spending, not 
funded through the TARP, would pay for the extension of 
unemployment benefits and health insurance aid for the jobless, 
measures that were included in the $787 billion economic 
stimulus package (Pub. L. 111-5) earlier this year. The Senate 
is expected to act on this bill in January 2010.\625\
---------------------------------------------------------------------------
    \623\ Jobs for Main Street Act, H.R. 2847, 111th Cong. (2009).
    \624\ In its March 2009 baseline projection, the Congressional 
Budget Office (CBO) estimated that Treasury would use all of the 
spending authority available under the TARP. That baseline was adopted 
as the Congress' budget resolution baseline for scorekeeping purposes 
and is used by CBO for estimating the budgetary impact of legislation 
until the Congress adopts a new baseline for scorekeeping purposes. 
Using the March baseline's estimated average subsidy of 50 percent for 
the use of uncommitted TARP authority, the bill's proposed reduction in 
authority of $150 billion would result in outlay savings of $75 billion 
which would be redirected toward job creation initiatives.
    \625\ Geof Koss, House-Passed Jobs Measure Will Wait, CQ Weekly 
(Dec. 28, 2009).
---------------------------------------------------------------------------

         G. Unwinding Implicit Guarantees in a Post-TARP World

    There are two kinds of tools available to counteract the 
effects of implicit guarantees.\626\ One is to regulate the 
institutions that are the beneficiaries of such risks in order 
to minimize the impact of the guarantees. The second is to 
create a credible system in which such institutions could be 
liquidated or otherwise reorganized so that failure is a real 
possibility.\627\ The options may work alone or in concert. In 
the following section, this report lays out several options 
that have been discussed by various commentators, and describes 
legislative proposals by Congress and the current 
Administration. The Panel does not take a position as to 
whether any of these options are advisable; the sole purpose in 
describing the options available is to provide a brief survey 
of current thought on this issue.
---------------------------------------------------------------------------
    \626\ It is important to note that implicit guarantees from 
government subsidization or sponsorship exist in numerous markets. For 
example, before the mortgage crisis, Government Sponsored Enterprises 
(GSEs) such as Fannie Mae were thought to be shielded from aggregate 
credit risks by implicit government backing, allowing them to take on 
debt at rates below those paid by private institutions. See Karsten 
Jeske & Dirk Kreuger, Housing and the Macroeconomy: The Role of 
Implicit Guarantees for Government-Sponsored Enterprises, Federal 
Reserve Bank of Atlanta Working Paper 2005-15 (Aug. 2005) (online at 
papers.ssrn.com/sol3/
papers.cfm?abstract_id=811004). Some economists have argued that such 
implicit guarantees contributed to the mortgage crisis. See Vernon L. 
Smith, The Clinton Housing Bubble, Wall Street Journal (Dec. 18, 2007) 
(online at online.wsj.com/article/SB119794091743935595.html). This 
report, however, addresses the effects of TARP and its aftermath and so 
is limited in scope to the concerns created by the implicit guarantee 
to large financial institutions.
    \627\ The Panel made a number of recommendations on this topic in 
its special report on regulatory reform. Congressional Oversight Panel, 
Modernizing the American Financial Regulatory System: Recommendations 
for Improving Oversight, Protecting Consumers, and Ensuring Stability 
(Jan. 29, 2009) (online at cop.senate.gov/reports/library/report-
012909-cop.cfm).
---------------------------------------------------------------------------

1. Regulatory Options

    The regulatory options most often discussed at present 
include the following broad categories:
            a. Limitations on Size
    One school of thought holds that size alone is a threat to 
the system.\628\ The proponents of this theory point out that 
just four of the 8,100 or so U.S. banks control nearly 40 
percent of the deposits in the U.S. banking system,\629\ that 
as of September 30, 2009, the four largest banks held 37.9 
percent of all domestic assets,\630\ and that a collapse of any 
one of them could bring down the banking system, if not large 
portions of the economy.\631\ While JPMorgan Chase CEO Jamie 
Dimon argues that a regulatory system could be created to deal 
with the failure of very large banks, as the FDIC deals with 
failed commercial banks,\632\ the ``just too big'' school 
points out that the FDIC system is predicated on the existence 
of bigger banks that can take over the assets of failed 
commercial banks, and that no entity exists that can take over 
a failed very large bank, except the U.S. government.\633\ 
Among the proponents of this argument is former Federal Reserve 
Chairman Alan Greenspan, who maintains that the solution to the 
too big to fail problem will require ``radical things,'' such 
as the forced break-up of very large banks, just as Standard 
Oil was broken up in 1911.\634\ Without such action, Mr. 
Greenspan believes the implicit subsidy provided to very large 
firms will result in ``a moribund group of obsolescent 
institutions, which will be a big drain on the savings of this 
society.'' \635\ David Moss, the John G. McLean Professor of 
Business Administration at Harvard Business School, suggests an 
alternative solution to the too big to fail problem in which 
federal officials identify financial institutions whose failure 
would pose a systemic threat to the broader financial system 
and submit such institutions to increased oversight and 
mandatory federal insurance.\636\
---------------------------------------------------------------------------
    \628\ This seems to be the belief in Europe. Several large, 
struggling financial institutions have instead been forced to sell off 
business units, leaving the parent companies smaller but, ostensibly, 
stronger. Most notably, Royal Bank of Scotland PLC in the UK, ABN Amro 
in the Netherlands, and Dexia SA in Belgium have all recently announced 
planned sell-offs. See The Royal Bank of Scotland, RBS Announces 
Successful Sale of RBS Asset Management Fund Management Assets (Jan. 8, 
2010) (online at www.rbs.com/media/news/press-releases/2010-press-
releases/2010-01-08-asset-finance-sale.ashx) (quoting the RBS Group's 
CFO, Bruce Van Suan as saying ``This transaction represents another 
step in our plan to restructure RBS around its core customer 
franchises''); Ministry of Finance of the Netherlands, Government 
Clears the Way for Integration of ABN Amro and Fortis Bank Netherlands 
(Nov. 19, 2009) (online at www.minfin.nl/english/News/Newsreleases/
2009/11/Government_clears_the_way_for_integration_of_ABN_ 
AMRO_and_Fortis_Bank_Nederland) (citing letter from Dutch Minister of 
Finance to the Dutch Lower House of Parliament stating that ``the 
hiving off of business units is necessary''); Dexia, Societe General 
and Dexia Complete the Credit du Nord Transaction (Dec. 11, 2009) 
(online at www.dexia.com/docs/2009/2009_news/
20091210_credit_nord_UK.pdf) (noting that Dexia's divestiture of its 20 
percent stake in Credit du Nord is part of the Dexia Group's 
restructuring plan).
    \629\ These banks are Citigroup, Bank of America, Wells Fargo, and 
JPMorgan.
    \630\ Specifically, four banks accounted for 37.9 percent of the 
assets of all insured U.S.-chartered commercial banks with assets of at 
least $300 million. See Board of Governors of the Federal Reserve 
System, Large Commercial Banks (online at www.federalreserve.gov/
releases/lbr).
    \631\ See, e.g., Joint Economic Committee, Written Testimony of 
Joseph Stiglitz, Professor, Columbia University, Too Big to Fail or Too 
Big to Save? Examining the Systemic Threats of Large Financial 
Institutions, 111th Cong., at 2-3 (Apr. 21, 2009) (online at 
jec.senate.gov/index.cfm?FuseAction=Files.View&FileStore`id=6b50b609-
89fa-4ddf-a799-2963b31d6f86).
    \632\ Jamie Dimon, No More Too Big To Fail', Washington Post (Nov. 
13, 2009) (online at www.washingtonpost.com/wp-dyn/content/article/
2009/11/12/AR2009111209924.html).
    \633\ See, e.g., Joint Economic Committee, Written Testimony of 
Thomas M. Hoenig, President, Federal Reserve Bank of Kansas City, Too 
Big to Fail or Too Big to Save? Examining the Systemic Threats of Large 
Financial Institutions, 111th Cong., at 23-24 (Apr. 21, 2009) (online 
at jec.senate.gov/
index.cfm?FuseAction=Files.View&FileStore_id_5335d2cb-895a-4075-8db8-
a8b71e27f933).
    \634\ Alan Greenspan, C. Peter McColough Series on International 
Economics: The Global Financial Crisis: Causes and Consequences, 
Council on Foreign Relations (Oct. 15, 2009) (online at www.cfr.org/
publication/20417/
c_peter_mccolough_series_on_international_economics.html) (hereinafter 
``Greenspan on the Causes of the Crisis'').
    \635\ Id.
    \636\ David Moss, An Ounce of Prevention: The Power of Public Risk 
Management in Stabilizing the Financial System, Harvard Business School 
Working Paper No. 09-087 (Rev. Jan. 27, 2009) (online at www.hbs.edu/
research/pdf/09-087.pdf) (hereinafter ``David Moss An Ounce of 
Prevention'').
---------------------------------------------------------------------------
    Others have suggested imposing limitations that prohibit 
banks getting to a specified size. For example, Simon Johnson, 
Professor of Global Economics and Management at the MIT Sloan 
School of Management, has suggested that capping assets under 
management at a single financial institution at $100 billion 
may permit such institutions to pass easily through the 
bankruptcy system, obviating the need for bailouts.\637\
---------------------------------------------------------------------------
    \637\ House Financial Services Committee, Written Testimony of 
Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship, MIT's 
Sloan School of Management, Systemic Risk: Are Some Institutions too 
Big to Fail, and if so, What Should We Do About It?, 111th Cong. (July 
21, 2009) (online at www.house.gov/apps/list/hearing/financialsvcs_dem/
simon_johnson.pdf) (hereinafter ``Johnson Testimony on Systemic 
Risk'').
---------------------------------------------------------------------------
    Those in favor of retaining very large banks say there is a 
need within the global economy for large banks capable of 
lending billions of dollars at a time. Gerald Corrigan, a 
managing director of Goldman Sachs & Co., has remarked that it 
is the size of large financial institutions ``that allows 
[them] to meet the financing needs of large corporations--to 
say nothing of the financing needs of sovereign governments.'' 
\638\ And while one commentator has noted that ``[t]he 
presumption . . . that big meant diversified and sophisticated 
and, therefore, less risky . . . proved false,'' nonetheless, 
``the size of many of our financial institutions, despite its 
role in bringing on the crisis, has also greatly benefited the 
U.S. economy'' by ``enabl[ing] our big financial firms to 
compete against others in Europe and Asia'' and that ``[s]hould 
we fragment and constrain the system and cap the size of banks, 
it would undoubtedly limit the competitive level of service, 
breadth of products, and speed of execution,'' leading clients 
to ``turn to foreign banks that don't face the same 
restrictions.'' \639\
---------------------------------------------------------------------------
    \638\ E. Gerald Corrigan, Containing Too Big to Fail, Remarks at 
The Charles F. Dolan Lecture Series, Fairfield University (Nov. 10, 
2009) (online at www.fairfield.edu/documents/academic/
dsb_corrigan_remarks_09.pdf).
    \639\ Mortimer Zuckerman, Finding the Right Fix for ``Too Big to 
Fail,'' Wall Street Journal (Nov. 25, 2009) (online at online.wsj.com/
article/SB10001424052748704888404574550570805868530.html).
---------------------------------------------------------------------------
    Martin Baily and Robert Litan of the Brookings Institution 
have made the same argument, testifying before a Senate 
committee that ``[w]e need very large financial institutions 
given the scale of the global capital markets, and, of 
necessity, some of these may be `too big to fail' because of 
systemic risks. For U.S. institutions to operate in global 
capital markets, they will need to be large.'' \640\ Messrs. 
Baily and Litan further argued that punishing banks for 
becoming ``too'' successful will also have a negative impact on 
the willingness of financial institutions to compete with each 
other.\641\
---------------------------------------------------------------------------
    \640\ Senate Committee on Banking, Housing and Urban Affairs, 
Testimony of Martin Neil Baily and Robert E. Litan, Regulating and 
Resolving Institutions Considered ``Too Big to Fail,'' 111th Cong. (May 
6, 2009) (online at banking.senate.gov/public/index.cfm?FuseAction=
Hearings.Hearing&Hearing_ID=7d66a948-69e4-407e-a895-04cec6a4f541) 
(hereinafter ``Bailey and Litan Testimony'').
    \641\ Bailey and Litan Testimony, supra note 640.
---------------------------------------------------------------------------
    Opponents of the view that the global market demands very 
large banks state that the need for a loan of $8 billion can be 
met by eight smaller banks each lending $1 billion. They 
further argue that these banks would compete against each other 
to provide the best loan terms, improving market efficiency 
over the current scenario in which a handful of banks provide 
all of the capital.\642\ Such an arrangement would also spread 
out the risk so that the majority of large transactions would 
not rest on a small number of very large banks.\643\ One 
commentator has argued that large corporations do not typically 
use one megabank to complete a significant transaction, but 
that up to 11 such large banks may be necessary.\644\ To the 
extent that a company operates in multiple countries, this 
commentator argues, the company is likely to select the best 
bank for its needs in each country or region, rather than 
relying on one-stop-shopping for its banking, countering the 
argument that multinational companies need multinational 
banks.\645\
---------------------------------------------------------------------------
    \642\ Cf. Johnson Testimony on Systemic Risk, supra note 637 (Dr. 
Johnson argues that ``breaking up our largest banks would likely 
increase (rather than reduce) the availability of low-cost financial 
intermediation services''). Ilan Moscovitz and Morgan Housel, It's Time 
to End ``Too Big To Fail,'' The Motley Fool (Nov. 13, 2009) (online at 
www.fool.com/investing/general/2009/11/13/its-time-to-end-too-big-to-
fail.aspx) (hereinafter ``It's Time to End `Too Big To Fail' '').
    \643\ It's Time to End ``Too Big To Fail'', supra note 642.
    \644\ James Kwak, Who Needs Big Banks, The Baseline Scenario (Oct. 
12, 2009) (online at baselinescenario.com/2009/10/12/who-needs-big-
banks/) (hereinafter ``Who Needs Big Banks'').
    \645\ Id.
---------------------------------------------------------------------------
            b. Limitations on Activities
    Some commentators have advocated for the reinstatement of 
the provisions of the Glass-Steagall Act, repealed in 1999, 
which precluded banks from acting as both investment banks and 
depository institutions. Notably, in May 2009, Congressman 
Maurice Hinchey (D-NY), with the support of fellow House 
members John Tierney (D-MA), Jay Inslee (D-WA), John Conyers 
(D-MI), and Peter DeFazio (D-OR), proposed an amendment that 
would reinstate those provisions. In announcing the amendment, 
Representative Hinchey stated that the repeal had created banks 
that provided ``one stop shopping'' with the result that 
``these banks were empowered to make large bets with 
depositors' money and money they didn't really have. When many 
of those bets, particularly in the housing sector, didn't pan 
out, the whole deck of cards came crumbling down and U.S. 
taxpayers had to come to the rescue.'' \646\ Senators John 
McCain (R-AZ) and Maria Cantwell (D-WA) have recently 
introduced a bill in the Senate to prohibit certain 
affiliations between commercial and investment banks.\647\
---------------------------------------------------------------------------
    \646\ Office of Representative Maurice Hinchey, Hinchey to 
Introduce Amendment to Reinstate Glass-Steagall Act to Break Up 
MegaBanks that Caused Financial Crisis (Dec. 7, 2009) (online at 
www.house.gov/apps/list/press/ny22_hinchey/morenews/
120709glassstegallamendment.html).
    \647\ Banking Integrity Act of 2009, S. 2886, 111th Cong. (2009).
---------------------------------------------------------------------------
    Paul Volcker, the former chairman of the Federal Reserve 
and current chairman of the President's Economic Recovery 
Advisory Board, has also recommended reinstating a barrier 
between commercial and investment banks that, while not a full 
return to Glass-Steagall as it previously existed, would be 
functionally similar to the barrier that existed under certain 
repealed sections of that act. Mr. Volcker has proposed 
breaking up the largest banks into investment houses and 
commercial banks, with government assistance available only to 
the commercial banks.\648\ The commercial banks would take 
deposits, make loans, and trade securities for their customers, 
but not for themselves. These banks would be eligible for 
government assistance if they were to falter. The investment 
banks, on the other hand, would be free to engage in riskier 
behavior because they would be buying and selling their own 
securities, but they would not be rescued if they were poised 
to fail. According to Mr. Volcker, regulation is insufficient 
without separating commercial banks from investment banks. 
``The [commercial] banks,'' he has stated, ``are there to serve 
the public, and that is what they should concentrate on. These 
other activities create conflicts of interest. They create 
risks, and if you try to control the risks with supervision, 
that just creates friction and difficulties.'' \649\
---------------------------------------------------------------------------
    \648\ Charlie Rose, Paul Volcker: The Lion Lets Loose, BusinessWeek 
(Dec. 30, 2009) (online at www.businessweek.com/magazine/content/10_02/
b4162011026995.htm) (interview of Mr. Volcker in which Mr. Volcker 
explained his vision of the type of reform needed); see also Louis 
Uchitelle, Volcker Fails to Sell a Bank Strategy, New York Times (Oct. 
21, 2009) (online at www.nytimes.com/2009/10/21/business/
21volcker.html?_r=1) (hereinafter ``Volcker Fails to Sell a Bank 
Strategy'') (quoting statements by Mr. Volcker on the same subject).
    \649\ This position is not far from the ``break-up-the-banks'' 
position advocated by Alan Greenspan. Greenspan, however, seems opposed 
to reinstating Glass-Steagall at this juncture. Volcker Fails to Sell a 
Bank Strategy, supra note 648. While similar in their desire to divide 
up the banks, the rationale behind the two positions is not fully 
aligned. The Greenspan position holds that the size of the banks 
themselves creates the risk, while Volcker's position holds that it is 
the inherent conflict within the banks that causes commercial banks to 
engage in risky behavior befitting investment banks. Other commentators 
suggest simply spinning off the banks' proprietary trading activities. 
See Roger Ehrenberg, Rethinking the Wall Street Business Model (Part 1) 
(Nov. 21, 2009) (online at www.informationarbitrage.com/2009/11/
rethinking-the-wall-street-business-model.html).
---------------------------------------------------------------------------
    In response to these arguments, some commentators have 
stated that the repealed portions of Glass-Steagall have had 
little impact on the way traditional banks conduct their 
business, and that reinstating these portions would have 
implications in the international sphere while doing nothing to 
prevent another crisis.\650\ These commentators note that 
commercial banks have suffered because of their investment 
decisions with respect to mortgages, and other types of 
traditional lending--activities permitted under Glass-Steagall. 
The repeal of portions of Glass-Steagall permitted banks to 
engage in underwriting and dealing in securities, but these 
commentators note, those activities have not caused banks to 
fail. Instead, they argue, it was overinvestment in mortgage 
backed securities that led to the crisis, a phenomenon that 
would not have been prevented by Glass-Steagall.\651\ Former 
chairman of the law firm Sullivan & Cromwell H. Rodgin Cohen 
recently stated, ``If you look at what happened, with or 
without Glass-Steagall, it would have made no difference.'' 
\652\ Mr. Cohen and others point out that both Bear Stearns and 
Lehman brothers were pure investment banks, and so would not 
have been affected by the Glass-Steagall prohibition on joint 
investment-commercial banks.\653\ Opponents of the Act's 
revival also argue that the Act was in place during the savings 
and loan crisis of the 1980s, yet did not prevent that 
crisis.\654\ Furthermore, according to economist Mark Zandi, 
reinstating those portions of Glass-Steagall and ``breaking up 
the banking system's mammoth institutions would be too 
wrenching and would put U.S. institutions at a distinct 
competitive disadvantage vis-a-vis their large global 
competitors'' who do not have such restrictions.\655\
---------------------------------------------------------------------------
    \650\ See, e.g., Peter Wallison, Did the ``Repeal'' of Glass-
Steagall Have Any Role in the Financial Crisis? Not Guilty. Not Even 
Close, Networks Financial Institute (Nov. 2009) (online at
papers.ssrn.com/sol3/papers.cfm?abstract_id=1507803) (hereinafter 
``Wallison Paper on Glass-Steagall''); Robert Pozen, Stop Pining for 
Glass-Steagall, Forbes.com (Oct. 5, 2009) (online at www.forbes.com/
forbes/2009/1005/opinions-glass-steagall-on-my-mind.html).
    \651\ See, e.g., Wallison Paper on Glass-Steagall, supra note 650.
    \652\ Alison Vekshin & James Sterngold, Reviving Glass-Steagall 
Means ``War'' on Wall Street, BusinessWeek (Dec. 27, 2009) (online at 
www.businessweek.com/investor/content/dec2009/pi20091228_523550.htm) 
(hereinafter `` `War' on Wall Street'').
    \653\ ``War'' on Wall Street, supra note 652.
    \654\ Would Reinstatement of Glass-Steagall Improve Banking?, 
American Banking News (Jan. 4, 2010) (online at 
www.americanbankingnews.com/2010/01/04/would-reinstatement-of-glass-
steagall-improve-banking/).
    \655\ House Financial Services Committee, Written Testimony of Mark 
Zandi, chief economist and co-founder of Moody's Economy.com, Systemic 
Risk: Are Some Institutions too Big to Fail, and if so, What Should We 
Do About It?, 111th Cong. (July 21, 2009) (online at www.house.gov/
apps/list/hearing/financialsvcs_dem/zandi.pdf).
---------------------------------------------------------------------------
            c. Increased Regulatory Oversight
    Another school of thought holds that large institutions 
that pose a systemic risk will and must exist, and that the 
best solution is to increase regulation of these institutions 
proportionately to the risk that they pose.\656\ Certain 
legislative proposals put forward in the House and Senate, and 
by the current Administration, hew closely to this line. Under 
key provisions of these proposals, systemic risk would be 
managed through either new or newly empowered government 
entities and increased supervision and regulation of financial 
institutions.\657\ These proposals are discussed in detail in 
Section G.4 below.
---------------------------------------------------------------------------
    \656\ See, e.g., Paul Krugman, Too Big to Fail FAIL, The New York 
Times (June 18, 2009) (online at krugman.blogs.nytimes.com/2009/06/18/
too-big-to-fail-fail) (noting that systemic risk is not a new concept 
and was a concern at least as of the Latin debt crisis in 1982. The 
solution, he states, is to ``[r]egulate and supervise, then rescue if 
necessary; there's no way to make this [financial system] automatic'').
    \657\ U.S. Department of the Treasury, Financial Regulatory Reform: 
A New Foundation, at 10-19 (June 17, 2009) (online at 
www.financialstability.gov/docs/regs/FinalReport_web.pdf).
---------------------------------------------------------------------------
    Some have argued that increased regulation would only 
exacerbate the current problem of implicit guarantees by 
highlighting the firms that require additional oversight, thus 
marking them as too big to fail. Kevin Hassett of the American 
Enterprise Institute has remarked that ``[o]nce there is a 
public list of firms that are too big to fail, they will have 
an enormous competitive advantage . . . [s]ince government is 
backstopping them, they will be able to borrow at lower 
interest rates[.]'' \658\ SEC Commissioner Elisse Walter has 
similarly testified that under proposed legislation creating a 
council to monitor financial risk, ``a real risk remains that 
market participants will favor large interconnected firms, 
particularly those identified as systemically important, over 
smaller firms of equivalent creditworthiness, because of the 
belief that the government will step in and support such an 
institution, its bondholders, or counterparties in times of 
crisis.'' \659\ Others have observed that if interconnectedness 
results in systemic risk that must be regulated, there is no 
reason to stop at financial institutions; any large, 
interconnected business must be similarly regulated--or there 
is no need for such regulation because interconnectedness is 
not inherently risky.\660\ There is the additional difficulty 
of identifying potentially risky behavior in time to avert a 
financial crisis. In light of the failure of many to predict 
the current crisis, the question arises of what level of 
competence is required for an economist to predict accurately 
which institutions will pose a threat to our financial 
system.\661\
---------------------------------------------------------------------------
    \658\ Kevin Hassett, Obama's Too-Big-to-Fail Plan Is Too Dumb to 
Pass, American Enterprise Institute for Public Policy Research (Sept. 
28, 2009) (online at www.aei.org/article/101075).
    \659\ House Committee on Agriculture, Written Testimony of 
Securities and Exchange Commissioner Elisse Walter, Review of Financial 
Stability Improvement Act, 111th Cong. (Nov. 17, 2009) (online at 
agriculture.house.gov/testimony/111/h111709/Walter.pdf).
    \660\ See Hal Scott, Do We Really Need a Systemic Regulator?, Wall 
Street Journal (Dec. 10, 2009) (online at online.wsj.com/article/
SB10001424052748704342404574577870952276300.html).
    \661\ One method of valuing risk that has been proposed in the past 
is to track the spread between the yield on a Treasury bond and on an 
institution's own subordinated debt with a similar maturity date. The 
rationale is that the spread should reflect the increased yield to 
balance the increased risk presented by the institution. This notion 
has been challenged, however, by data analysis that shows a lack of 
correlation between risk and yield spreads. C.N.V. Krishnan et al., 
Monitoring and Controlling Bank Risk: Does Risky Debt Help?, The 
Journal of Finance (Feb. 2005); Diana Hancock and Myron L. Kwast, Using 
Subordinated Debt to Monitor Bank Holding Companies: Is It Feasible?, 
The Federal Reserve Board of Governors (Apr. 27, 2001) (online at 
www.federalreserve.gov/Pubs/FEDS/2001/200122/200122pap.pdf).
---------------------------------------------------------------------------
            d. Charging Too Big To Fail Institutions Insurance Fees or 
                    Taxes
    Banks that are considered too big to fail receive the 
benefit of an implicit taxpayer subsidy, since their cost of 
funding does not adequately reflect the potential costs of 
their rescue. Some of the reform proposals suggest that 
institutions that are found to pose systemic risks be assessed 
financial contributions for the risk they pose, either before 
or after any failure occurs. A proposal introduced by House 
Financial Services Committee Chairman Barney Frank would create 
an insurance fund within the FDIC similar to that available to 
insure bank deposits to be used to ``extend credit to or 
guarantee obligations of solvent insured depository 
institutions or other solvent companies that are predominantly 
engaged in activities that are financial in nature, if 
necessary to prevent financial instability during times of 
severe economic distress[.]'' \662\ This insurance would be 
funded by assessments on ``large financial companies'' under 
terms in the Administration's proposed regulatory reform 
legislation that would enable the FDIC to impose ``risk-based 
assessments on bank holding companies based on their total 
liabilities.'' \663\
---------------------------------------------------------------------------
    \662\ Financial Stability Improvement Act of 2009, H.R. 3996, 
Sec. 1109(a) (2009).
    \663\ Resolution Authority for Large, Interconnected Financial 
Companies Act of 2009, 1209(o)(1) (2009). The House bill actually 
states that the assessments are to be made under 1609(o) of the 
Administration's proposal. No such section of that proposal exists 
while 1209(o) appears to include the provision to which the House bill 
intended to refer.
---------------------------------------------------------------------------
    At least one commentator has noted a flaw in this proposal. 
According to economist Dean Baker, because the fee is to be 
assessed only after a bank faces failure, either the necessary 
funds are unlikely to be available, or other banks are unlikely 
to be willing to make such payments.\664\ Whether the former or 
the latter scenario applies, he writes, depends on whether the 
failing bank has gotten into trouble by doing what everyone 
else was doing--in which case all the other banks would be in 
just as much trouble and unable to pay--or it was doing some 
unusual, risky thing--in which case all the other banks would 
be unwilling to underwrite the failing bank's imprudence. David 
Moss of the Harvard Business School has proposed, among other 
options, a system of federal capital insurance under which 
systemically significant institutions would be publicly 
identified and then required to pay into a federal insurance 
fund on a regular basis.\665\ Premiums, as for any insurance 
plan, would be keyed to the level of risk the insured posed, 
and payments on claims would be limited to a pre-set 
amount.\666\ Mr. Moss also believes that in the event of a 
failure, the federal government should not bail out or prop up 
the failing company, but should take the company over and 
restructure, sell, or liquidate it.\667\ Such measures, he 
believes, would result in a system where no institution is too 
big to fail.
---------------------------------------------------------------------------
    \664\ Dean Baker, Breaking Up the Banks is Hard to Do, The Guardian 
(Nov. 2, 2009) (online at www.guardian.co.uk/commentisfree/cifamerica/
2009/nov/02/banking-regulation-us-congress/print).
    \665\ David Moss An Ounce of Prevention, supra note 636.
    \666\ David Moss An Ounce of Prevention, supra note 636.
    \667\ David Moss An Ounce of Prevention, supra note 636.
---------------------------------------------------------------------------
    Another option may be a so-called Tobin tax, named after 
the late economist James Tobin, which would impose a tax on 
cross-currency financial transactions. While a Tobin tax has 
been most often proposed as a means of funding projects for the 
public good, today's proponents envisage it as an emergency 
fund to be used to support a faltering financial system. The 
most prominent proponent of the tax has been British Prime 
Minister Gordon Brown, who reportedly raised the issue of 
creating such a tax during the November 2009 meeting of the 
finance ministers of the G-20.\668\ Secretary Geithner 
reportedly rejected the idea during the same meeting.\669\ 
Opponents of the tax argue that the presence of such an 
emergency fund may perpetuate moral hazard as institutions 
begin to rely on the presence of the fund to backstop major 
losses.\670\
---------------------------------------------------------------------------
    \668\ Gordon Brown's Global Tax Trap, Wall Street Journal (Nov. 13, 
2009) (online at
online.wsj.com/article/
SB10001424052748704576204574531211500981726.html#printMode) 
(hereinafter ``Gordon Brown's Global Tax Trap'').
    \669\ Gordon Brown's Global Tax Trap, supra note 668.
    \670\ Gordon Brown's Global Tax Trap, supra note 668.
---------------------------------------------------------------------------
            e. Other Regulatory Options
    Messrs. Baily and Litan, whose views on the need for large 
banks are discussed above, argue that while the government 
should not break up large banks, it should take steps to ensure 
that any large-scale growth is ``organic,'' based on the banks' 
own success, and not the result of a merger. To this end, they 
argue, the government should review proposed mergers to prevent 
those that would create an institution that might pose a 
systemic risk.\671\
---------------------------------------------------------------------------
    \671\ Bailey and Litan Testimony, supra note 640.
---------------------------------------------------------------------------

2. Liquidation and Reorganization

    The impact of implicit guarantees can also be substantially 
reduced if there are credible ways to liquidate or reorganize 
failing businesses. In effect, if there are ways to permit such 
businesses to fail, then they are no longer too big to fail. 
Several options are under discussion.
            a. ``Living Wills''
    There are many advocates of ``living wills,'' contingency 
plans creating a systematic regime under which an institution 
that posed a systemic risk would be wound down, which also 
entails the institution reorganizing itself so that the plan 
can be effected in a crisis.\672\ Advocates argue that the 
existence of such plans would avoid the shockwaves that the 
disorderly collapse of Lehman Brothers caused and AIG 
threatened, but it is possible that the very act of creating 
such plans might bring unexpected risks to the attention of 
management in time for them to be addressed.\673\ Living wills 
could be used in conjunction with several of the other 
regulatory approaches being considered.
---------------------------------------------------------------------------
    \672\ Among the proponents for such contingency plans are members 
of the House and Senate and the President, who have included variations 
on this idea in their financial reform bills. See Section G.4, infra.
    \673\ One related proposal would have banks issue contingent 
convertible bonds, long-term debt that would be convertible to equity 
upon a triggering event, providing the bank with access to capital. A 
``living will'' would be required in the event the new equity was 
insufficient to meet the bank's needs. See, e.g., the description in 
Section G.4(c) below of the bill that has been proposed in the Senate, 
which incorporates this proposal.
---------------------------------------------------------------------------
    However, even commentators generally in favor of this 
concept note that living wills are an incomplete tool without 
ensuring separation among an institution's component parts. 
This separation can take place along activity lines, where 
systemically critical functions must have ring-fencing capable 
of protecting them during the unwinding pursuant to the living 
will.\674\ The international complexities of large, 
interconnected firms also may require that ring-fencing or 
other separation by national operating units accompany living 
wills.\675\ The absence of ring-fencing controls, along either 
functional or national lines, means that an institution might 
collapse more tidily but not necessarily that the government 
will permit it to do so; until the government does, the moral 
hazard remains.\676\
---------------------------------------------------------------------------
    \674\ Senate Committee on Banking, Housing, and Urban Affairs, 
Written Testimony of Vincent Reinhart, Resident Scholar, American 
Enterprise Institute, Establishing a Framework for Systemic Risk 
Regulation, 111th Cong., at 9-10 (July 23, 2009) (online at 
banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore_id=c00a4670-8edd-4a6e-947f-
09afb555fa4d).
    \675\ David G. Mayes, Banking Crisis Resolution Policy--Different 
Country Experiences, Norges Bank Staff Memo, at 58-61 (2009) (online at 
www.norges-bank.no/upload/77285/staff_memo_09_10.pdf).
    \676\ See, e.g., Death Warmed Up, The Economist (Oct. 1, 2009) 
(online at www.economist.com/businessfinance/
displaystory.cfm?story_id=14558456).
---------------------------------------------------------------------------
            b. Resolution Authority
    The problem with very large institutions, according to 
some, is not that they are too big to fail, but that the proper 
structures do not exist to enable their orderly failure.\677\ 
The Administration has also proposed legislation granting the 
government resolution authority for systemically significant 
institutions that fall outside of the FDIC's existing 
resolution regime for commercial banks. Under the proposed 
legislation, resolution authority would be available to the 
Secretary of the Treasury upon determination, with positive 
recommendations from the Federal Reserve and the appropriate 
federal regulators, and in consultation with the President, 
that ``the financial institution in question is in danger of 
becoming insolvent . . . its insolvency would have serious 
adverse effects on economic conditions or financial stability 
in the United States; and . . . taking emergency action . . . 
would avoid or mitigate these adverse effects.'' \678\ A 
similar proposal has been drafted by the House.
---------------------------------------------------------------------------
    \677\ According to Professor Charles Calomiris of the Columbia 
Business School, bankruptcy law as it currently exists does not 
contemplate allowing ``large, complex financial institutions to enter 
bankruptcy, or receivership in the case of banks, because there is no 
orderly means for transferring control of assets and operations, 
including the completion of complex transactions with many 
counterparties perhaps in scores of countries via thousands of 
affiliates.'' Charles Calomiris, In the World of Banks, Bigger Can be 
Better, Wall Street Journal (Oct. 19, 2009) (online at online.wsj.com/
article/SB10001424052748704500604574483222678425130.html). The 
solution, Mr. Calomiris believes, lies in constructing a system that 
would enable such a bankruptcy. As discussed below, various legislative 
proposals include provisions to address just this concern.
    \678\ U.S. Department of the Treasury, Treasury Proposes 
Legislation for Resolution Authority (Mar. 25, 2009) (online at 
www.financialstability.gov/latest/tg70.html).
---------------------------------------------------------------------------
    In the Senate, Senators Bob Corker (R-TN) and Mark Warner 
(D-VA) have introduced legislation that would vest resolution 
authority in the FDIC. This authority would extend only to 
depository institutions and their holding companies, 
affiliates, and subsidiaries and would be available only when 
the FDIC determined that a receivership was preferable to a 
resolution under Chapter 11 bankruptcy.\679\ Other Republican 
lawmakers, rejecting the view that the federal government 
should determine which institutions should receive government 
intervention in the event of failure, have instead proposed 
improving the bankruptcy system to enable it to process huge, 
complex bankruptcies such as AIG's might have been.\680\ A bill 
proposed in the House would amend the current bankruptcy code 
to enable the orderly liquidation or reorganization of non-bank 
financial institutions as a means of forestalling the need for 
future bail-outs.\681\ These bills are discussed in greater 
detail below.
---------------------------------------------------------------------------
    \679\ Resolution Reform Act of 2009, S. 1540, 111th Congress 
(2009).
    \680\ The current bankruptcy system has been criticized as being 
ill-equipped to handle a bankruptcy such as AIG's. Professor Stephen 
Lubben of Seton Hall Law School, for example, has noted that the 2005 
expansion of sections of the Bankruptcy Code that provide a ``safe 
harbor'' for the type of swap agreements at issue in AIG's decline have 
exacerbated this problem. Stephen Lubben, Repeal the Safe Harbors, 
Seton Hall Public Law Research Paper No. 1497040(Nov. 1, 2009). One of 
the key functions of bankruptcy law is to freeze the debtor estate, 
prohibiting any payments out of the debtor's assets, until the entire 
estate and all claims on it have been sorted out and preferences 
established. The safe harbor provisions exempt certain types of 
agreements from this freeze and permit payment. Because the swap 
agreements fit into the safe harbor provision, AIG's trouble triggered 
what Professor Lubben describes as a ``run'' on the institution as CDS 
counterparties insisted on payment. Professor Lubben has therefore 
called for a repeal of the safe harbor provision as a way to prevent a 
future situation like AIG's. In contrast, Professor Edward R. Morrison 
of Columbia Law School has argued that the Bankruptcy Code is 
inadequate to protect the economy from failing systemically significant 
institutions, and a systemic risk regulator with the power to monitor 
and rescue institutions should be created. Edward R. Morrison, Is the 
Bankruptcy Code an Adequate Mechanism for Resolving the Distress of 
Systemically Important Institutions?, Temple Law Review (forthcoming) 
(available online at papers.ssrn.com/sol3/
papers.cfm?abstract_id=1529802).
    \681\ Consumer Protection and Regulatory Enhancement Act, H.R. 
3310, 111th Congress (2009).
---------------------------------------------------------------------------
            c. Chapter 11
    Some commentators have argued that Chapter 11 bankruptcy 
principles should play a role in the extension of taxpayer 
money to ``bail out'' private businesses. Of these 
commentators, some propose the increased use of prepackaged 
bankruptcy filings (commonly referred to as ``pre-packs'') 
before the government provides assistance,\682\ some favor 
ordinary bankruptcy filings in which the debtor's operations 
come under court supervision and shareholders are wiped 
out,\683\ and others propose implementing Chapter 11-like 
measures without the business actually filing a petition with 
the bankruptcy court.\684\ Any of these measures may help to 
unwind implicit government guarantees by holding businesses and 
investors accountable for their actions.
---------------------------------------------------------------------------
    \682\ See, e.g., Edward I. Altman and Thomas Philippon, Where 
Should the Bailout Stop?, in Restoring Financial Stability, at 355-61 
(Viral V. Acharya and Matthew Richardson, eds., 2009).
    \683\ See, e.g., Jennifer Chamberlain, The Big Three: Bailout or 
Bankruptcy?, Illinois Business Law Journal (Mar. 7, 2009) (online at 
www.law.uiuc.edu/bljournal/post/2009/03/07/The-Big-Three-Bailout-or-
Bankruptcy.aspx); Paul Ingrassia, The Case for Chapter 11, Portfolio 
(Nov. 9, 2008) (online at www.portfolio.com/news-markets/national-news/
portfolio/2008/11/09/Can-
Bankruptcy-Save-US-Carmakers/).
    \684\ See, e.g., Global Economic Symposium, The Global Polity: The 
Future of Global Financial Governance, at 4 (Sept. 2009) (online at 
www.global-economic-symposium.org/ges-2008-09/ges-2009/downloads/
session-handouts/the-global-polity/the-future-of-global-financial-
governance
_2009).
---------------------------------------------------------------------------
    In a Chapter 11 reorganization, a troubled company 
restructures its business to emerge as viable and 
profitable.\685\ To this end, under certain circumstances the 
business may wipe out existing shareholder classes, renegotiate 
the terms or balances on its debt, exchange preexisting debt 
for equity in the new business, replace management, and undo 
fraudulent transfers or preferences.\686\ Often those who 
provide financing to the debtor are given liens at a higher 
priority than existing creditors and shareholders.\687\
---------------------------------------------------------------------------
    \685\ See generally COP September Oversight Report, supra note 108, 
at 40 (providing an in depth discussion of business restructuring under 
bankruptcy law).
    \686\ A ``fraudulent transfer'' is a transfer for less-than-
reasonably equivalent value made while insolvent. A ``preference'' is 
an unusual payment to one creditor that prevents other creditors from 
receiving a pro rata share of the assets. Professor Randy Picker, 
Bailouts and Phantom Bankruptcies, The University of Chicago Law School 
Faculty Blog (Sept. 23, 2008) (online at uchicagolaw.typepad.com/
faculty/2008/09/bailouts-and-ph.html) (hereinafter ``Bailouts and 
Phantom Bankruptcies'').
    Under these avoiding powers, creditors may be able to force 
outgoing executives to repay their bonuses, thereby returning capital 
to the business. See Jesse Fried, Uncle Sam Should Claw Back Wall 
Street Bonuses, Harvard Law School Forum on Corporate Governance and 
Financial Regulation (Oct. 4, 2008) (online at blogs.law.harvard.edu/
corpgov/2008/10/04/uncle-sam-should-claw-back-wall-street-bonuses) 
(hereinafter ``Uncle Sam Should Claw Back Wall Street Bonuses'').
    \687\ See COP September Oversight Report supra note 108, at 40-48 
(discussing priority of claims and general principles of bankruptcy 
law).
---------------------------------------------------------------------------
    Congress amended the Bankruptcy Code in 2005 to exempt a 
broad range of financial assets from bankruptcy rules.\688\ 
Swaps, repurchase agreements, securities contracts, and other 
financial products were exempted from the automatic stay that 
normally prevents creditors from seizing a debtor's assets 
after the filing of a bankruptcy petition. Companies holding 
substantial financial assets may therefore find bankruptcy a 
less attractive way to resolve financial distress, since 
creditors could continue to collect on some contracts. Critics 
of the exemptions have argued that they hinder the bankruptcy 
system's ability to distribute property in an orderly and 
equitable manner.\689\ Under the current rules, some creditors 
may collect on their debts while others are stayed. This 
creates an incentive for parties seeking to bypass the 
bankruptcy process to structure contracts as swaps, securities 
contracts, or other exempt categories of assets.
---------------------------------------------------------------------------
    \688\ See 11 U.S.C. Sec. Sec. 555-56, 559-61.
    \689\ See, e.g., House Judiciary Committee, Subcommittee on 
Commercial and Administrative Law, Written Testimony of Professor Jay 
Lawrence Westbrook, Exemption of Financial Assets from Bankruptcy 
(Sept. 26, 2008) (online at www.judiciary.house.gov/hearings/pdf/
Westbrook080926.pdf).
---------------------------------------------------------------------------
    If Congress required a bankruptcy filing as a prerequisite 
to receiving assistance, the petition could be a regular 
bankruptcy or a pre-pack. Pre-packs are Chapter 11 bankruptcies 
where the plans of reorganization are prepared in advance of 
filing petitions with the bankruptcy court. Pre-packs are 
formulated after negotiations and with the cooperation of 
creditors and other invested parties. Most of the legal issues 
litigated in the bankruptcy process are resolved as part of 
this out-of-court negotiation. This reduces the time and cost 
spent in the actual bankruptcy process. The sooner the 
restructuring under Chapter 11 is completed, the sooner the 
company can return focus to its core operations.\690\
---------------------------------------------------------------------------
    \690\ Some of these pre-pack reorganizations are extremely large, 
but can nevertheless be accomplished in less than two months. See COP 
September Oversight Report, supra note 108, at 40 (discussing pre-packs 
under Chapter 11).
---------------------------------------------------------------------------
    Commentators who propose pre-packs as a solution to 
reorganize large businesses hope to take advantage of the 
debtor's rights under Chapter 11 at this reduced cost to the 
business. They propose that the government should make the 
extension of ``bailout'' funds contingent upon the distressed 
business filing a pre-pack with the bankruptcy court.\691\ In 
doing so, shareholders could be wiped out, creditors could take 
a haircut, misappropriated funds could be returned to the 
business, and incompetent management could be replaced. These 
repercussions would add to a business's incentive to steer 
itself away from the brink of disaster, and would incentivize 
commercial creditors to pressure businesses to take fewer 
risks. The same incentives could be created by mandating a 
regular bankruptcy filing, and there is disagreement regarding 
the cost savings associated with pre-packs.\692\ In either 
case, it could be argued that the bankruptcy requirement may 
counterbalance any market distortion that arises from implicit 
guarantees, while allowing the government to intervene to save 
systemically important institutions. Other commentators argue 
the same result is possible without actually utilizing the 
bankruptcy court.\693\ Instead of filing a pre-pack, the 
government could make any taxpayer bailout contingent upon 
successful out-of-court negotiations between the distressed 
business and the invested parties. Thus, if the business wants 
public funding, it must wipe out its shareholders, get its 
creditors to agree to take a haircut, and replace its 
management. This would have the same effect as filing a pre-
pack--i.e., holding managers and investors accountable for 
their actions and incentivizing prudent decision making. 
Moreover, this approach would also serve to wind down the 
government's implicit guarantee.
---------------------------------------------------------------------------
    \691\ Jim Kuhnhenn, Bailout With a Price: Chapter 11 Bankruptcy, 
Associated Press (Nov. 20, 2008) (online at seattletimes.nwsource.com/
html/businesstechnology/2008412177_apmeltdownbankruptcy.html).
    \692\ Pre-packs may prove infeasible in the case of systemic 
failures, in which case regular filings may be the only form of 
bankruptcy relief available to debtors.
    \693\ See, e.g., Bailouts and Phantom Bankruptcies, supra note 108; 
Uncle Sam Should Claw Back Wall Street Bonuses, supra note 686; Robert 
Reich, The Real Difference Between Bankruptcy and Bailout, Robert 
Reich's Blog (Nov. 11, 2008) (online at robertreich.blogspot.com/2008/
11/real-difference-between-bankruptcy-and.html).
---------------------------------------------------------------------------

3. International Aspects of Reform

    Federal Reserve Board Governor Daniel Tarullo recently 
remarked on the need for a resolution plan to contemplate the 
specific issues confronting a failing international 
institution. ``Some of those [insolvency] regimes may be 
substantively inconsistent with one another, or may not account 
for the special characteristics of a large international 
firm,'' he noted.\694\ He further remarked that ``an effective 
international regime would . . . likely require agreement on 
how to share the losses and possible special assistance 
associated with a global firm's insolvencies.'' Such 
``satisfyingly clean and comprehensive solutions to the 
international difficulties occasioned by such insolvency,'' he 
believes, however, ``are not within sight.'' Professor Simon 
Johnson of the MIT Sloan School of Management has expressed 
similar concerns. Writing about last summer's G-8 summit, he 
noted the lack of progress on ``any kind of international 
agreement that would be the essential complement to a national 
legal authority (for example, in the United States or Europe), 
by providing a framework for `resolving' the failure of a major 
financial institution with cross-border assets and 
liabilities[.]'' \695\ The tension between the need for such an 
international regulatory scheme and the difficulty of creating 
one, even just for the European markets, was outlined by the 
deputy director of the Monetary and Capital Markets Department 
of the International Monetary Fund, Jan Brockmeijer, in his 
remarks at a conference in Belgium this summer: ``on the one 
hand, cross-border integration of European financial markets is 
desirable,'' he stated. ``But . . . at the same time, financial 
supervision remains fundamentally a national responsibility.'' 
\696\
---------------------------------------------------------------------------
    \694\ Federal Reserve Board of Governors, Speech by Daniel Tarullo, 
Supervising and Resolving Large Financial Institutions (Nov. 10, 2009) 
(online at www.federalreserve.gov/newsevents/speech/
tarullo20091110a.htm).
    \695\ Simon Johnson, What the G-8 Won't Achieve, The New York Times 
(July 9, 2009) (online at economix.blogs.nytimes.com/2009/07/09/what-
the-g-8-wont-achieve/).
    \696\ Jan Brockmeijer, Lessons of the Crisis for EU Financial 
Supervisory Policy, Remarks at the IMF-Bruegel-National Bank of Belgium 
Conference After the Storm: The Future Face of Europe's Financial 
System (Mar. 24, 2009) (online at www.imf.org/external/np/seminars/eng/
2009/eurfin/pdf/brockm.pdf).
---------------------------------------------------------------------------
    The Basel Committee's more modest approach suggests ring-
fencing during periods of considerable financial distress. Such 
an approach would enable host countries to shore up 
institutions operating within their domestic borders. To do so, 
changes to existing laws would need to allow for this 
particular framework to complement domestic regulatory aims. 
The approach would protect the pertinent functions of the 
failing institution, but not the institution itself. As a 
result, such efforts would limit financial contagion and lessen 
the likelihood of moral hazard.\697\
---------------------------------------------------------------------------
    \697\ Basel Committee on Banking Supervision, Report and 
Recommendations of the Cross-border Bank Resolution Group (Sept. 2009) 
(online at www.bis.org/publ/bcbs162.pdf) (hereinafter ``Basel Committee 
Report'').
---------------------------------------------------------------------------

4. Proposed Legislation

    Legislative proposals from the Administration and both 
houses of Congress have drawn from many of the proposals 
discussed above.
            a. Administration's Proposal
    Under a legislative proposal put forward by the current 
Administration, new government entities would provide 
``robust'' supervision of the financial services sector. The 
proposed government entities include a Financial Services 
Oversight Council, a Consumer Financial Protection Agency, and 
a National Bank Supervisor. The Council would ``identify 
emerging risks'' and ``advise the Federal Reserve on the 
identification of firms whose failure could pose a threat to 
financial stability due to their combination of size, leverage, 
and interconnectedness.'' \698\ The Consumer Financial 
Protection Agency would ``protect consumers of credit, savings, 
payment, and other consumer financial products and services, 
and to regulate providers of such products and services,'' in 
part to minimize aggregation of risk.\699\ The National Bank 
Supervisor would ``conduct prudential supervision and 
regulation of all federally chartered depository institutions, 
and all federal branches and agencies of foreign banks.'' \700\ 
The proposal also includes the creation of various offices 
within Treasury to improve oversight of systemically 
significant institutions.
---------------------------------------------------------------------------
    \698\ U.S. Department of the Treasury, Financial Regulatory Reform: 
A New Foundation, Summary of Recommendations (online at 
www.financialstability.gov/docs/regs/FinalReport_web.pdf) (accessed 
Jan. 13, 2010).
    \699\ Id.
    \700\ Id.
---------------------------------------------------------------------------
    The Administration's proposal also contemplates increased 
oversight of institutions that may pose a systemic risk, dubbed 
``Tier 1 financial holding companies,'' and a greater concern 
for how individual firms may impact the overall economy. Tier 1 
FHCs would be subject to stricter and more conservative 
regulations regarding capital levels and liquidity 
requirements,\701\ and might be subject to standards and 
guidelines for executive compensation that aim to align 
employees' interests with those of long-term shareholders and 
prevent incentives for excessive risk-taking. These firms would 
also be regulated with a macroeconomic view, taking into 
consideration the effects that actions by the company might 
impose on the wider economy. Finally, a Tier 1 FHC would be 
required to implement a plan for an orderly winding down if the 
firm were to face insolvency.
---------------------------------------------------------------------------
    \701\ Contingent capital bonds (commonly referred to as ``CoCo 
bonds'' or ``CoCos'') would be one method a Tier 1 FHC could use to 
meet these more stringent requirements. CoCo bonds refer to debt that 
may be converted to common equity when the issuer is under distress. 
This conversion occurs automatically upon triggering one or more 
contingencies (e.g., Tier 1 capital level falls below specific 
threshold, market price contingency, etc.). As a result, the issuer is 
instantly given a capital boost and is saved from having to raise fresh 
capital at high interest rates.
---------------------------------------------------------------------------
            b. House Legislation
    The Wall Street Reform and Consumer Protection Act passed 
the House of Representatives on December 11, 2009, by a vote of 
223-202.\702\ The bill, which was introduced on December 2 by 
Financial Services Committee Chairman Barney Frank (D-MA), 
incorporates provisions from nine separate bills reported by 
the Financial Services, Energy and Commerce, and Agriculture 
committees. The bill, H.R. 4173, would create an inter-agency 
oversight council charged with identifying large, complex 
financial companies that pose a systemic risk to financial 
stability and economic growth. These firms would be subject to 
heightened oversight, prudential regulation, and reporting and 
disclosure requirements. The bill would also establish an 
orderly process for resolving large, failing financial firms 
whose problems could not be addressed by a stricter regulatory 
regime or the bankruptcy process.
---------------------------------------------------------------------------
    \702\ CQ House Actions Reports, No. 111-22 (Dec. 7, 2009) 
(describing the bill); CQ House Actions Reports, No. 111-20 (Dec. 14, 
2009) (describing the vote).
---------------------------------------------------------------------------
    H.R. 4173 would establish a council of federal regulators, 
the Financial Services Oversight Council (``the Council''), to 
monitor the financial system and regulate any financial company 
whose material financial distress could pose a threat to 
financial stability or whose scope, size, scale, concentration, 
interconnectedness, or mix of activities could pose a threat to 
economic stability.\703\ After consultation with a financial 
company's regulator and upon a majority vote of the Council 
members, the Council would be empowered to place stricter 
regulatory standards on such company. This designation would 
subject a company that was not already subject to the Bank 
Holding Company Act of 1956 (Pub. L. 84-511), to certain 
provisions of the Act, which the Federal Reserve is responsible 
for enforcing, as if the company were a financial holding 
company. The Federal Reserve, as agent for the Council and in 
coordination with appropriate supervisors, would be responsible 
for implementing and enforcing heightened prudential standards. 
The heightened standards imposed by the Federal Reserve would 
have to include:
---------------------------------------------------------------------------
    \703\ Voting members of the council would include the secretary of 
the Treasury; the chair of the Federal Reserve; Comptroller of the 
Currency; chair of the Securities and Exchange Commission; chair of the 
Commodity Futures Trading Commission; director of the Federal Housing 
Financing Agency; chair of the National Credit Union Administration; 
and an appointed state insurance commission and state-banking 
supervisor would serve on the council for up to two years in a non-
voting capacity.
---------------------------------------------------------------------------
           Risk-based and size-based capital 
        requirements;\704\
---------------------------------------------------------------------------
    \704\ When calculating new capital requirements, the Federal 
Reserve would have to take into account the company's off-balance sheet 
exposure, including financial derivatives obligations. Companies 
subject to stricter prudential standards would be limited to a debt-to-
equity ratio of 15 to 1.
---------------------------------------------------------------------------
           Leverage limits;
           Liquidity requirements;
           Concentration requirements;
           Prompt corrective action requirements;
           Resolution plan requirements; and
           Risk management requirements.
    In addition to restrictions stipulated by the bill, the 
Federal Reserve, as agent for the Council, also would have 
authority to prohibit a firm from engaging in any credit 
transaction or disbursal of capital it deemed a detriment to 
financial stability. Senior management of undercapitalized 
institutions would be subject to dismissal, and the Federal 
Reserve could require the submission of quarterly stress tests 
from troubled companies. All financial companies subject to 
stricter regulatory standards would be required to submit to 
the Federal Reserve and FDIC plans for an orderly and rapid 
dissolution in the event of a severe financial crisis.
    If, after the company were subjected to stricter regulatory 
standards, it continued to pose a grave threat to financial 
stability of the economy, the Council could take several 
additional steps to limit the danger posed by the company. The 
Council could modify the existing prudential standards, impose 
conditions on certain activities, limit mergers and 
acquisitions, and restrict the company's ability to offer 
certain financial products. As a last resort, the Council, with 
concurrence by the Secretary of the Treasury or the President, 
could require a company to sell, divest, or otherwise transfer 
business units, branches, assets, or off-balance sheet items to 
unaffiliated companies.
    H.R. 4173 would also grant to the FDIC the authority to 
dissolve systemically important financial firms that are in 
default or in danger of default. The new mechanism would 
empower the FDIC--separate and apart from its authority to 
liquidate banks--to take over and either wind down or act as a 
receiver for large, complex financial institutions that are in 
default or in danger of default, and whose failure would 
threaten the financial system. The FDIC would have the 
authority to make loans to a failing firm, guarantee the 
obligations of a failing firm to its creditors, acquire common 
or preferred shares in a failing firm, take a security interest 
in the assets of a failing firm, and sell assets that the FDIC 
has acquired from a failing firm. This authority, as it relates 
to an individual firm, would be temporary and would last until 
the firm was placed in receivership and liquidated. The 
dissolution process would not affect financial institution 
liquidation processes already in place, such as federal deposit 
insurance, Securities Investor Protection Corporation (SIPC) 
protection, and state insurance insolvency regimes.
    The FDIC would also have the authority to liquidate the 
company's assets and organize a bridge financial company, or 
merge the financial institution with another company, or 
transfer its assets and any liabilities. A maximum of $200 
billion would be available to the FDIC to dissolve failing 
firms; $150 billion would come from a Systemic Dissolution Fund 
that would be pre-funded by assessments on financial companies 
with more than $50 billion in assets and by hedge funds with 
more than $10 billion in assets. Assessments would be risk-
based, so that more complex institutions engaged in riskier 
activities would pay more. The remaining $50 billion could come 
from the Treasury's general fund, as borrowing that would be 
paid back through industry assessments, and would be available 
only upon approval from Congress.
    The FDIC's resolution authority could only be employed to 
ensure broader financial stability and not solely to preserve a 
particular failing institution. Shareholders in a failing 
institution would not recoup any losses from the fund. The FDIC 
would also be required to remove management responsible for the 
company's failure. Companies placed into receivership by the 
FDIC would be subject to the executive compensation limits 
included in EESA (Pub. L. 110-343).
    Under the House bill, the FDIC's appointment as receiver of 
a financial institution would terminate at the end of one year, 
with the ability to extend the appointment for two one-year 
periods. The FDIC's general receivership authority would sunset 
on December 31, 2013, unless Congress approved a joint 
resolution extending the authority.
    In addition, the bill would also create a Consumer 
Financial Protection Agency to oversee institutions providing 
financial services and products to consumers, provide the 
Securities and Exchange Commission (SEC) with expanded powers 
including the ability to regulate the over-the-counter 
derivatives market, require hedge funds and other private pools 
of capital to register with the SEC, and introduce new 
regulations for credit rating agencies.
    Republicans in the House unanimously opposed H.R. 4173. In 
the area of resolution authority, some Republican members 
criticized the systemic risk-related supervisory powers that 
the bill granted to the Board of Governors of the Federal 
Reserve, a criticism that was shared by some House Democrats. 
The Federal Reserve's recent regulatory record and failure to 
anticipate the bursting of the housing bubble give critics 
little faith that the Federal Reserve will be an effective 
agent for identifying and regulating systemic risk.\705\ The 
Federal Reserve's mission, in their view, should be modified to 
focus solely on monetary policy. In addition, some Republicans 
argue, although the bill is allegedly designed to end the too 
big to fail phenomenon, it in fact gives the federal government 
unlimited authority to prop up ailing financial institutions 
through the new powers granted to the FDIC and the Council. And 
although the identity of those firms deemed to pose a systemic 
risk is supposed to remain confidential, SEC disclosures and 
changes in the identified firms' behaviors or strategies could 
make it relatively easy for market watchers to discern which 
firms are listed, according to the bill's critics. Such a 
designation would foster favoritism and reduce competition in 
the marketplace, providing an advantage to the firms with the 
special designation. Finally, critics assert that by funding 
the Systemic Dissolution Fund through assessments on all 
financial companies with over $10 billion in assets, the bill 
would penalize stable, profitable firms by making them pay for 
the resolution of failed firms.\706\
---------------------------------------------------------------------------
    \705\ House Republican Conference, Democrat Systemic Risk 
Legislation--Permanent Bailout Mania for the Politically Significant 
(Nov. 16, 2009) (online at www.gop.gov/policy-news/09/11/16/democrat-
systemic-risk-legislation) (hereinafter ``House Republican Conference 
on Systemic Risk'').
    \706\ The Republican Cloakroom, Republican Leader John Boehner, 
Statement of Republican Policy, H.R. 4173, Wall Street Reform and 
Consumer Protection Act (Dec. 9, 2009) (online at http://
repcloakroom.house.gov/news/DocumentSingle.aspx?DocumentID=159983).
---------------------------------------------------------------------------
    The favored alternative of House Republicans is H.R. 3310, 
a bill sponsored by the ranking member of the House Financial 
Services Committee, Representative Spencer Bachus. The 
Republican-sponsored Consumer Protection and Financial 
Regulatory Enhancement Act would create a Market Stability and 
Capital Adequacy Board, chaired by the Secretary of the 
Treasury, to examine interactions of various areas of the 
financial system, and to issue recommendations to policymakers 
and regulators to stem potential systemic risk. This bill would 
also provide the FDIC with enhanced resolution authority for 
large banks and create a new chapter of the Bankruptcy Code for 
failing non-financial institutions.\707\ This new chapter would 
facilitate coordination between regulators and the courts to 
ensure technical and specialized expertise is applied when 
dealing with complex institutions. Bankruptcy judges under this 
proposal would also have the power to stay claims by creditors 
and counterparties to prevent runs on troubled institutions.
---------------------------------------------------------------------------
    \707\ Protection and Regulatory Enhancement Act, H.R. 3310, 111th 
Cong., 1st session (2009).
---------------------------------------------------------------------------
            c. Senate Bill
    On November 10, 2009, Senate Banking Committee Chairman 
Christopher Dodd (D-CT) unveiled a discussion draft for 
comprehensive financial regulatory reform.\708\ Unlike the 
House Financial Services Committee, which passed the components 
of the regulatory reform bill in piecemeal fashion, Senator 
Dodd intends to report one bill out of committee. Senator 
Dodd's discussion draft proposes even more sweeping changes to 
the current financial regulatory framework than the bill that 
passed the House. For example, it would consolidate all federal 
banking regulation in one agency, the newly created Financial 
Institutions Regulatory Administration (FIRA).
---------------------------------------------------------------------------
    \708\ Discussion Draft (online at banking.senate.gov/public/_files/
AYO09D44_xml.pdf).
---------------------------------------------------------------------------
    In order to address systemic risk, the discussion draft 
would enact regulatory measures similar to those in the House 
bill, but it would employ a much different institutional 
structure. Rather than an inter-agency council of regulators, 
Senator Dodd's proposal would create an independent Agency for 
Financial Stability (AFS) responsible for identifying, 
monitoring, and addressing systemic risks posed by large, 
complex companies as well as products and activities that can 
spread risk throughout the financial system. The agency would 
be governed by a board of nine members and led by an 
independent chairman, appointed by the President and confirmed 
by the Senate.\709\ The agency would collect and analyze data 
on emerging risks to the financial system and would be 
empowered to set strict prudential standards for firms 
identified as systemically important. Enhanced resolution 
authority would be vested in the FDIC for companies that 
continued to pose a systemic risk.
---------------------------------------------------------------------------
    \709\ The board would include the secretary of the Treasury; chair 
of the Federal Reserve; the chair of the Financial Institutions 
Regulatory Administration; head of the Consumer Financial Protection 
Agency; chair of the Securities and Exchange Commission; chair of the 
Federal Deposit Insurance Corporation; chair of the Commodity Futures 
Trading Commission; and independent members, including the chair, 
appointed by the President and confirmed by the Senate.
---------------------------------------------------------------------------
    Under Senator Dodd's proposal, the Agency for Financial 
Stability would be empowered to regulate certain financial 
companies, upon a determination by the Agency that the material 
financial distress or failure of such a firm would pose a 
threat to financial stability and economic growth. The agency 
would establish prudential standards and reporting and 
disclosure requirements on a graduated scale based on the size 
and complexity of each firm. The prudential standards would 
include risk-based capital requirements, leverage limits, 
liquidity requirements, concentration limits, and prompt 
corrective action requirements. In addition, the companies 
would be required to establish a Board-level risk committee 
responsible for the oversight of the enterprise-wide risk 
management practices of the company. The companies would also 
be required to issue a minimum amount of contingent capital, 
long-term hybrid debt convertible to equity if a company fails 
to meet prudential standards or its conversion is deemed 
necessary by the AFS to preserve financial stability.
    Each specified financial company would be required to 
develop a plan for the rapid and orderly dissolution of the 
company in the event of material financial distress or failure. 
The company would report periodically to the AFS, FIRA, and 
FDIC on the resolution plan, as well as the nature and extent 
of the company's credit exposure and indebtedness to other 
financial companies. Upon review of the resolution plan and 
credit exposure reports, FIRA and FDIC could jointly determine 
that a resolution plan is not credible and require the company 
to resubmit a revised plan. If the company failed to provide a 
satisfactory plan within a specified timeframe, FIRA and FDIC 
could impose more stringent prudential requirements and 
restrict certain growth, activities, and operations. In 
consultation with AFS, the company could also be required to 
sell certain assets and business operations.
    Bank holding companies with total assets of over $10 
billion would automatically be subject to heightened prudential 
standards and reporting and disclosure requirements without the 
need for an AFS evaluation of their systemic significance. The 
stringency of the heightened standards, which would include 
risk-based capital, leverage, and liquidity requirements, would 
increase on a graduated scale based on the size of the company. 
The bank holding companies would be required to establish a 
risk committee to oversee all risk-management practices.
    The Dodd proposal gives FIRA, with FDIC serving as 
receiver, the authority to break up firms posing a systemic 
risk on a case-by-case basis. Following consultation with AFS 
and FIRA, FDIC would have a range of options at its disposal 
for resolving the institution, including making loans, 
purchasing debt obligations, purchasing or guaranteeing assets, 
purchasing an equity stake, taking a lien on any or all assets, 
or liquidating the company by selling or transferring all of 
its assets, liabilities, obligations, equity interests, or 
securities.
    Senator Dodd's proposal stipulates that any exercise of the 
enhanced resolution authority must be for the purpose of 
financial stability and not for the purpose of rescuing or 
preserving a particular company. Shareholders in the company 
would not be eligible to recoup their investment until all 
other claims are fully paid. The FDIC would be required to 
ensure that the management responsible for the failed condition 
of the company be removed. If proceeds from the sale of the 
company or its assets were insufficient to cover the costs of 
the resolution, the difference would be recouped from 
assessments on financial companies with assets of over $10 
billion.
    Shortly after Senator Dodd released his discussion draft, 
Senator Richard Shelby, the ranking member of the Senate 
Banking Committee, announced his opposition to the bill and his 
intention to draft his own alternative bill, in particular 
because of his opposition to the creation of a Consumer 
Financial Protection Agency and his view that the legislation 
would institutionalize permanent bailout authority for the 
government.\710\ Senator Dodd has agreed to work with Senator 
Shelby and other Republicans on the Banking Committee in order 
to arrive at a bipartisan bill. The two sides are currently 
negotiating.
---------------------------------------------------------------------------
    \710\ Senate Committee on Banking, Housing, and Urban Affairs, 
Opening Statement of Senator Richard Shelby, Mark Up: Restoring 
American Financial Security Act, 111th Cong. (Nov. 19, 2009) (online at 
shelby.senate.gov/public/index.cfm?FuseAction=PressRoom.Speeches&
ContentRecord_id=0da23880-802a-23ad-45c9-
2c06baab4f5f&Region_id=&Issue_id=&County_id=).
---------------------------------------------------------------------------

                   H. Conclusions and Recommendations

    Treasury holds, on behalf of the American taxpayer, a 
diverse collection of assets that it must dispose of with all 
deliberate speed, transparency, and good stewardship. In 
general Treasury has made progress toward meeting these 
requirements, but it could improve certain aspects of its 
performance.

Strengthen Transparency and Accountability

    In its past oversight reports, the Panel has repeatedly 
urged Treasury to disclose greater detail about the goals, 
metrics, and future plans for the programs that it has launched 
and operated under the TARP. This same exceptional degree of 
transparency will remain critical as Treasury exits the TARP.
    In particular, Treasury should disclose to the public more 
information about its plan for disposing of its assets. There 
are some details that Treasury either cannot disclose (because 
of the need to comply with securities laws, for example, or the 
need to work with banking regulators using confidential 
information) or should not disclose (because of the need to 
time the market for asset sales). Treasury should, however, be 
transparent with respect to the constraints under which it 
operates (for example, any limits to Treasury's authority on 
how and when to sell assets) and how it will balance its 
sometimes conflicting obligations to maintain systemic 
stability, preserve the stability of individual institutions, 
and maximize taxpayers' return on investment. Treasury should 
also disclose the metrics that it is using to determine timing 
and manner of sales, and Treasury should publicly explain its 
objectives so the American people can measure its success.\711\ 
Though it is the banking regulators' responsibility to disclose 
their criteria for allowing repayments, Treasury also should be 
able to articulate this policy in view of the broader economic 
issues it raises. This lack of clarity breeds uncertainty and 
instability in the financial markets and provides a disservice 
to taxpayers as well as investors.
---------------------------------------------------------------------------
    \711\ See also COP September Oversight Report, supra note 108, at 
112.
---------------------------------------------------------------------------
    Treasury should be particularly transparent with respect to 
any plans to acquire additional assets or obligations under the 
TARP, whether as a result of the TARP programs under which 
money remains to be expended, or as a result of arrangements 
with other governmental entities. If, for example, Treasury 
were to acquire any of the assets that the Federal Reserve has 
acquired as a result of its market interventions, those 
arrangements, and Treasury's plans for disposition of those 
assets, should be subject to the same transparency 
considerations discussed above.
    Reprising a theme of the Panel's September report, Treasury 
should also be more transparent with respect to corporate 
governance issues, including management succession issues, and 
provide greater detail about the circumstances in which 
Treasury will be involved in business decisions with respect to 
its investee companies.\712\ Greater clarity will help to 
reassure both taxpayers and market participants about the scope 
of Treasury's role as a major investor in the private sector.
---------------------------------------------------------------------------
    \712\ See COP September Oversight Report, supra note 108, at 102.
---------------------------------------------------------------------------
    Because of the unprecedented nature of the TARP and the 
many challenges involved in executing the sale of such an 
enormous pool of assets, transparency is crucial to Treasury's 
credibility and to the functioning of the markets in which 
Treasury is now a key participant.

Demand Greater Transparency from TARP Participants

    The need for greater transparency in TARP programs is not 
limited to Treasury. Many TARP-recipient financial institutions 
have provided very limited disclosures about their use of TARP 
funds, denying taxpayers the opportunity to account precisely 
for their tax dollars.
    Any future recipient of TARP funds, including banks 
participating in the small business initiative, must be 
obligated to give a complete accounting of what they did with 
the money and how those actions served the objectives of the 
TARP.

Improve Operations to Protect Taxpayers

    Exiting the TARP will be a lengthy and demanding process, 
and a successful exit will require that Treasury have expertise 
in complex markets and instruments. Treasury should take steps 
to ensure that it will continue to be staffed, through final 
exit from the TARP, with qualified and expert personnel. 
Treasury should also give due consideration to each stage of 
its exit strategy, including how it will handle the period in 
the future when only a few recipients are left in the system.
    Treasury should also be frank in addressing the potential 
for conflicts of interest in light of the government's dual 
role as investor and overseer of the financial industry. To 
limit any conflicts of interest and facilitate an effective 
exit strategy, Treasury should continue to consider holding its 
TARP assets in a trust that would be insulated from political 
pressure and government interference, especially as 
circumstances change. Any such trust, however, should address 
the concerns discussed above, which have been raised by 
Professor Verret and others, so that the trust assets are 
managed in the best interests of taxpayers.
    Treasury should provide quarterly TARP financial 
statements, and consider improving the readability of its 
Management's Discussion and Analysis.

Take Steps to Resolve Implicit Guarantees

    Perhaps the largest problem that Treasury faces is one that 
Treasury cannot solve alone: the continued existence of a broad 
implicit guarantee that hangs over the markets. There are 
multiple options available and there is broad agreement that a 
new approach to systemic risk regulation is necessary so that 
businesses are not insulated from the effects of their own bad 
decisions.
    In the aftermath of the government's extraordinary economic 
stabilization efforts, markets may believe that too big to fail 
financial institutions operate under an implicit guarantee: 
that the American taxpayer would bear any price, and absorb any 
loss, to avert a financial meltdown. To the degree that lenders 
and borrowers believe that such an implicit guarantee remains 
in effect, moral hazard will continue to distort the market in 
the future, even after TARP programs wind down. As Treasury 
contemplates an exit strategy for the TARP and similar 
financial stability efforts, addressing the implicit guarantee 
of government support is critical.
                     SECTION TWO: ADDITIONAL VIEWS


                            A. Damon Silvers

    The Panel's January Report is an extraordinarily detailed 
survey of many issues associated with the windup of the 
programs created under the Emergency Economic Stabilization Act 
of 2008. Because of the breadth of the Report, I think it is 
important to express in one place clearly what I see as the 
problem with the direction the TARP has taken in recent weeks.
    In the course of several weeks in December 2009, the Board 
of Governors of the Federal Reserve announced it was allowing 
three of the nation's largest banks to return their TARP 
monies--allowing Bank of America and Wells Fargo to escape 
TARP's limitations on executive pay, and allowing Citigroup to 
escape the extraordinary limits on executive pay associated 
with institutions receiving extraordinary aid, even though 
Citigroup continued to be the beneficiary of tens of billions 
of TARP funds in the form of common stock. Citigroup is now the 
only company in which the TARP holds common stock that is not 
subject to the rulings of the Special Master on Executive Pay.
    But despite the intense interest that the executives of 
Citigroup, Bank of America and Wells Fargo appeared to have in 
the executive pay issue, that issue is a secondary one in 
relation to the repayment decision. The real issues are about 
systemic stability and moral hazard.
    In relation to systemic stability the question is--are 
these banks really sound after repayment? Given their enormous 
size, if they are not sound after repayment allowing them to 
repay would be a profoundly irresponsible act, making another 
systemic financial crisis far more likely. Then there is the 
question of these large banks' ability to withstand future 
economic and financial turmoil. It would not be good for the 
country if it turned out that these repayment transactions were 
high stakes bets on continued economic and financial stability.
    It is very important that the public and Congress 
understand that the Congressional Oversight Panel has no 
ability to answer this critical question because (1) we have 
never received, despite repeated requests, the algorithms at 
the heart of the stress tests (see our earlier hearings and our 
correspondence with Secretary Geithner); (2) we were unable to 
determine the extent of or the value of the toxic assets that 
continue to be held by the major banks (see our August 2009 
report) and (3) because the bank regulators have never 
disclosed the criteria for allowing repayment.
    Following the stress tests, each of these three banks began 
to press to be allowed to repay their TARP funds. Because we do 
not know what the criteria were for being allowed to repay, it 
is impossible to know when they met them. But it is puzzling to 
note that in the case of Wells Fargo and Bank of America, the 
result of bank regulators allowing repayment transactions not 
entirely funded by new equity was to reduce those banks' Pro 
forma Tier 1 capital ratios, a basic measure of bank capital 
strength, to below the level that it had been at these banks at 
the end of the second quarter of 2009, when the Treasury 
steadfastly refused to permit them to repay TARP funds. One 
explanation for the regulator opposing transactions that 
weakened Tier I capital is that the regulators were exclusively 
focused on measures of common equity capital strength. But an 
approach focused on common stock is odd in the context of the 
fact that all of TARP's efforts to strengthen bank capital have 
involved preferred stock infusions.
    Then there is Citigroup. While our conversations with 
Treasury and others on this matter are ongoing, we have yet to 
receive a satisfactory explanation for how it is possible that 
Citigroup, which had a Tier 1 capital ratio of 11.92 percent at 
the end of 2008, and was generally understood to be the walking 
dead, is now healthy enough to be let out of TARP with a Pro 
forma Tier 1 capital ratio post-repayment of 11.0 percent. 
Citigroup gets more puzzling in light of several other facts: 
Citigroup posted net losses available to common shareholders in 
the first and third quarters of 2009, and most analysts believe 
it will lose money in the fourth quarter; its equity offering 
ran into trouble; its stock price post-repayment is just over 
$3 per share; and its total preferred and common equity market 
capitalization is the same as it was at the beginning of 2009. 
Of course, by converting the majority of its TARP preferred to 
common, then selling common to replace preferred at the close 
to option value price of $3.25, Citigroup has been able to 
raise its common equity ratios significantly. But does trading 
government preferred stock for government common stock 
transform a sick bank into a healthy bank?
    As to moral hazard, repayment converts what had been a 
time-buying strategy into a fait accompli. We now know for 
certain that, barring another systemic crisis requiring 
revisiting these issues, the public has definitely rescued the 
shareholders, bondholders and executives of these large banks 
from the consequences of their actions. What is far less clear 
is whether as a result we have strong, stable banks able to 
play their proper role as provider of credit to the real 
economy.

Note on Recusal

    In July, 2009, I recused myself from participation in any 
Panel discussions about and votes on matters pertaining to 
General Motors, Chrysler or their financial affiliates, 
including but not limited to GMAC. I did not vote on or 
participate in discussions related to the Panel's September 
Report, The Use of TARP Funds in Support and Reorganization of 
the Domestic Automotive Industry. My vote in favor of this 
Report and the Panel's December Report, entitled Taking Stock: 
What Has the Troubled Asset Relief Program Achieved? should not 
be taken as an expression of opinion on sections of the report 
dealing with General Motors, Chrysler, or their financial 
affiliates. Lastly, my votes in favor of this report and the 
December Report were addressed only to those portions of the 
reports that did not relate to General Motors, Chrysler, or 
their financial affiliates.

                B. J. Mark McWatters and Paul S. Atkins 

    We concur with the issuance of the January report and offer 
additional observations below. We thank the Panel for 
incorporating suggestions offered during the drafting process.

1. Executive Summary 

    We offer the following summary of our analysis:
           Treasury should request that each TARP 
        recipient submit a formal exit strategy and update such 
        strategy each calendar quarter. Treasury should also 
        provide the Panel with its written assessment of the 
        exit strategies and updates submitted by the TARP 
        recipients.
           In order to expedite the swift metamorphosis 
        of many TARP recipients from insolvent to investment 
        grade, the institutions were arguably subsidized 
        through government-sponsored purchases of mortgage-
        backed securities and by the all but unlimited 
        investment of (and commitment to invest) public funds 
        in Fannie Mae, Freddie Mac and AIG. One may argue that 
        the government has created without meaningful public 
        debate or analysis a series of ``bad banks'' within the 
        Federal Reserve, Treasury, Fannie Mae, Freddie Mac, and 
        AIG to accomplish what TARP alone failed to achieve. 
        These ``bad banks'' or, perhaps, ``debt consolidation 
        entities'' operate by actually and virtually removing 
        toxic assets from the books of TARP recipients and 
        other holders and issuers. The Federal Reserve and 
        Treasury have actually removed up to $1 trillion of 
        troubled assets from the books of TARP recipients and 
        other holders and issuers through outright purchases. 
        The Federal Reserve and Treasury have also virtually 
        removed additional troubled assets from the books of 
        TARP recipients and other holders and issuers by 
        propping up the market values of such assets and 
        maintaining historically low mortgage rates.
           A question arises as to whether the 
        termination of the AIG credit default swaps (CDSs) at 
        par--that is, without any discount or haircut--
        constituted an inappropriate subsidy of the AIG 
        counterparties--which included TARP recipients Goldman 
        Sachs, Merrill Lynch and Bank of America--and 
        necessitated the investment of additional TARP funds in 
        AIG. Although then-FRBNY President Geithner denies that 
        the payments by the Federal Reserve Bank of New York 
        (FRBNY) constituted a ``backdoor bailout'' of the AIG 
        counterparties, without any other explanation it is 
        difficult to conclude that the FRBNY insisted that AIG 
        terminate the CDSs other than as a mechanism to provide 
        a direct--yet not particularly transparent--government-
        sponsored subsidy to the AIG counterparties. Without a 
        better explanation of a straightforward business 
        purpose for these transactions, the taxpayers may be 
        best served by having Treasury seek recission from the 
        AIG counterparties, reversing cancellation of the CDS 
        contracts and requiring the counterparties to purchase 
        the underlying collateralized debt obligations (CDOs) 
        at their $62.1 billion par value.
           Since Treasury is charged with protecting 
        the interests of the taxpayers who funded the Home 
        Affordable Modification Program (HAMP) and the other 
        TARP programs, we recommend that Treasury's foreclosure 
        mitigation efforts be structured so as to incorporate 
        an effective exit strategy by allowing Treasury to 
        participate in any subsequent appreciation in the home 
        equity of any mortgagor whose loan is modified under 
        HAMP or any other taxpayer subsidized program.

2. Required Submission of Proposed Exit Strategies by TARP Recipients 

    One job of effective oversight is to assess the exit 
strategies proposed by TARP recipients and Treasury. In 
discharging this responsibility the Panel undertook in the 
January report to analyze (i) how each major TARP recipient 
plans to repay its TARP funds, (ii) how Treasury expects to 
recoup the TARP funds advanced to each major TARP recipient, 
and (iii) each of these strategies for transparency, 
effectiveness and taxpayer protection. The January report 
serves as an intermediate step in an ongoing process, the 
ultimate effectiveness of which will depend upon the 
transparency and accountability of the disclosure provided by 
the TARP recipients and Treasury. The Panel cannot claim unique 
expertise regarding the wide array of financial institutions 
and non-financial institutions, such as Chrysler and General 
Motors, which have accepted TARP funds and, as such, must rely 
to a significant extent upon good faith submissions by TARP 
recipients and Treasury.
    In our view, Treasury should request that each TARP 
recipient submit a formal exit strategy and update such 
strategy each calendar quarter. Treasury should also provide 
the Panel with its written assessment of the exit strategies 
and updates submitted by the TARP recipients. Because Treasury 
has stated that it has a ``reluctant shareholder'' investment 
strategy, the Panel and its staff, together with outside 
experts and advisors, should commit periodically to offer 
updated assessments of the proposed exit strategies for major 
TARP recipients as an addendum to the Panel's monthly reports. 
In our view, Treasury should exit each TARP investment as soon 
as possible,\713\ and apply all proceeds received with respect 
to each TARP investment permanently to repay the national 
debt.\714\
---------------------------------------------------------------------------
    \713\ It does not appear, however, that Treasury in fact is 
operating as a reluctant shareholder in all instances. The investment 
of yet another $3.8 billion in GMAC--an apparently non-systemically 
significant financial institution--indicates a contrary strategy. 
Treasury's exit strategy with respect to GMAC remains a mystery. In 
addition, although the Panel in reports predating our membership on the 
Panel, has encouraged Treasury to hold its TARP investments in a series 
of trusts, as the January report acknowledges, such a structure is 
problematic and we cannot recommend it.
    \714\ Treasury has interpreted TARP as a ``revolving facility'' 
pursuant to which payments received under the program may be recycled 
and remitted to other TARP recipients. We disagree with this analysis 
and contend that all such payments should be applied permanently to 
repay the national debt.
---------------------------------------------------------------------------

3. The Repayment of TARP Funds 

    It is encouraging that several of the most significant 
recipients of TARP funds have been permitted by their 
regulators \715\ to repay their TARP advances.\716\ It is more 
satisfying that many of these recipients have funded their 
redemptions by successfully accessing the private capital 
markets. We remain optimistic that many--if not most--of these 
former TARP recipients will not return to business-as-usual, 
but will endeavor to operate with best practices in corporate 
governance and risk management guidelines and policies.
---------------------------------------------------------------------------
    \715\ We assume the applicable regulators have analyzed the many 
challenges facing financial institutions, including, without 
limitation, (i) rising credit card, consumer and home equity loan 
defaults, (ii) rising commercial real estate and private equity/
leveraged buyout loan defaults, (iii) the loss of traditional profits 
centers due to recent regulatory changes, and (iv) the fall in loan 
demand from borrowers. See Loan-Rate Differences are Challenges for 
Banks, Wall Street Journal (Jan. 4, 2010) (online at online.wsj.com/
article/SB10001424052748704162104574630570328742070.html).
    \716\ Recipients of TARP funds appear eager to exit the program 
most likely because of the executive compensation restrictions as well 
as the general stigma associated with participation in the program and 
the risk that Congress and Treasury will mandate the application of 
additional adverse laws and regulations to such recipients.
---------------------------------------------------------------------------
    As the December Report discussed, TARP is only a small part 
of the total activity of the federal government to intervene in 
the financial markets in 2008, including larger government 
programs instituted by the Federal Reserve and the FDIC. TARP 
amounted to approximately 10 percent of the total exposure of 
the taxpayer. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Thus, we are troubled that some may view TARP as 
monochromatic whereby any institution that receives regulatory 
approval to redeem its TARP advances must necessarily be 
financially stable. This may not be the case. It is possible 
that but for the other programs and intervening events, many 
TARP recipients would not have been financially strong enough 
to receive regulatory clearance to exit TARP.
    Financial institutions (and the automobile companies) have 
received many direct and indirect financial and regulatory 
subsidies, including:
         The support of TARP recipients by the Federal 
        Reserve and Treasury with non-TARP sourced funds; and
         The settlement of AIG credit default swap 
        obligations with certain TARP recipients at par value 
        (i.e., without any discount).
    It is possible that these subsidies contributed to the 
alleged transformation of a group of essentially insolvent 
banks in 2008 into non-TARP dependent financial institutions by 
the end of 2009. These subsidies were delivered at significant 
cost, and the taxpayers--not the TARP recipients--will most 
likely ultimately bear those costs.\717\
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    \717\ It is also likely that a series of unintended consequences--
such as the establishment of the United States government as the 
implicit/explicit guarantor of certain ``too big to fail'' 
institutions--will gain sounder footing from these investments. We do 
not support the recently announced proposal to levy a special tax, fee 
or assessment against financial institutions. Such a levy could impede 
lending in an already tight credit market.
---------------------------------------------------------------------------
    We have heard much lately about the success of TARP and how 
the Capital Purchase Program--the original bailout program for 
approximately 700 financial institutions--may actually yield an 
overall net profit. This assessment appears premature and 
inappropriate. The final operating results of TARP should not 
be tallied without including the costs of the other subsidies 
afforded TARP recipients by the Federal Reserve, Treasury, 
Fannie Mae, Freddie Mac, and AIG (channeling Federal Reserve 
money).
            a. Support by the Federal Reserve and Treasury of TARP 
                    Recipients
    Fannie Mae and Freddie Mac together own or guarantee 
approximately $5.5 trillion of the $11.8 trillion in U.S. 
residential mortgage debt and financed as much as 75 percent of 
new U.S. mortgages during 2009.\718\ On December 24, 2009, 
Treasury announced that it would provide an unlimited amount of 
additional assistance to the two government-sponsored 
enterprises (GSEs) as required over the next three years.\719\ 
Treasury apparently took this action out of concern that the 
$400 billion of support that it previously committed to the 
GSEs could prove insufficient. Additional assistance by 
Treasury will also allow the GSEs to honor their mortgaged-
backed securities (MBS) guarantee obligations and to absorb 
further losses from the modification or write down of 
distressed mortgage loans.\720\ Treasury also revised upwards 
to $900 billion the cap \721\ on the retained mortgage 
portfolio of each of the GSEs which means the GSEs will not be 
forced to sell MBS into a distressed market just as the Federal 
Reserve is preparing to end its program to purchase up to $1.25 
trillion of MBS.\722\ The increased commitment and revised cap 
enhance the likelihood that the GSEs will undertake to make 
``large-scale'' purchases of distressed MBS for which they 
provided a guarantee.\723\ Presumably, the GSEs may make such 
purchases from TARP recipients and other holders and issuers, 
and it will be interesting to note how the GSEs elect to employ 
the proceeds of this unlimited facility.
---------------------------------------------------------------------------
    \718\ Dawn Kopecki, Mortgage Anxieties Mean Limbo for Fannie and 
Freddie (Update 2), Bloomberg (Dec. 28, 2009) (online at 
www.bloomberg.com/apps/news?pid=newsarchive&sid=aLEn75100iNg#).
    \719\ U.S. Department of the Treasury, Treasury Issues Update on 
Status of Support for Housing Programs (Dec. 24, 2009) (online at 
www.treasury.gov/press/releases/2009122415345924543.htm).
    \720\ Nick Timiraos, Questions Surround Fannie, Freddie, Wall 
Street Journal (Dec. 30, 2009) (online at online.wsj.com/article/
SB20001424052748704234304574626630520798314.html#mod= 
todays_us_money_and_investing).
    \721\ The revised number should not be viewed as a ``cap'' since 
Treasury may again elect to increase the amount of retained MBS.
    \722\ Nick Timiraos, Questions Surround Fannie, Freddie, Wall 
Street Journal (Dec. 30, 2009) (online at online.wsj.com/article/ 
SB20001424052748 704234304574626630520798314.
html#mod=todays_us_money_and_investing).
    ``The relaxed portfolio limits calmed investor worries that Fannie 
and Freddie would be forced to sell some of their mortgage holdings 
just as the Federal Reserve was preparing to wind down its purchases of 
mortgage-backed securities next spring. The Federal Reserve's 
commitment to buy up to $1.25 trillion has helped to keep mortgage 
rates near record lows; without that support some economists have said 
that could rise to 6% by the end of 2010.
    Others said the new flexibility means that Fannie and Freddie could 
replace the Federal Reserve as a big buyer of mortgage-backed 
securities, especially if weak demand for mortgage-backed securities 
from private investors drives rates higher.''
    \723\ Jody Chenn, Fannie Changes Clear Way for `Large-Scale' 
Buyouts (Update 1), Bloomberg (Dec. 28, 2009) (online at 
www.bloomberg.com/apps/news?pid=newsarchive&sid=aA7QrMCZHhRs#).
---------------------------------------------------------------------------
    As reflected on its November 25, 2009 balance sheet, the 
Federal Reserve System holds $155 billion face-value federal 
agency debt securities representing the direct obligations of 
Fannie Mae, Freddie Mac and the Federal Home Loan Banks, and 
$852 billion of face-value MBS representing securities 
guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Since 
November 26, 2008, the Federal Reserve has increased its 
holdings of federal agency debt securities by $143 billion, and 
the $852 billion of MBS is entirely new since that date.\724\ 
In addition, Treasury anticipates that as of December 31, 2009, 
it will have purchased $220 billion of GSE-guaranteed MBS under 
the Housing and Economic Recovery Act of 2008 (HERA).\725\
---------------------------------------------------------------------------
    \724\ Board of Governors of the Federal Reserve System, Federal 
Reserve System Monthly Report on Credit and Liquidity Programs and 
Balance Sheet (Dec. 2009) (online at federalreserve.gov/monetarypolicy/
files/monthlyclbsreport200912.pdf).
    \725\ U.S. Department of the Treasury, Treasury Issues Update on 
Status of Support for Housing Programs (Dec. 24, 2009) (online at 
www.treasury.gov/press/releases/2009122415345924543.htm).
---------------------------------------------------------------------------
    It does not seem unreasonable to conclude that the actions 
of Treasury and the Federal Reserve in support of the MBS 
market and the GSEs also offered material assistance to many 
TARP recipients and expedited the exit of some recipients from 
the TARP.\726\ By directly and indirectly (through the GSEs) 
funding the acquisition of MBS \727\ from TARP recipients and 
other holders and issuers, Treasury and the Federal Reserve 
added liquidity to an all but frozen MBS market and no doubt 
enhanced the trading value of such securities. It is difficult 
to imagine that the Federal Reserve's public commitment to 
purchase up to $1.25 trillion of MBS did not materially move 
the market and permit holders of MBS--including TARP 
recipients--to liquidate their investments at more favorable 
pricing. Even if the Federal Reserve ends its program to 
purchase MBS within the next few months \728\ the GSEs could 
potentially pick up the slack by funding the acquisition of MBS 
through Treasury's recently announced expansion of its 
commitment to the GSEs. Further, by funding Fannie Mae's and 
Freddie Mac's performance of their MBS guarantee obligations, 
Treasury has directly supported the MBS market and, as such, 
quite likely improved the net worth of many TARP recipients. 
Similarly, by purchasing MBS and GSE-issued mortgage bonds, the 
Federal Reserve has kept mortgage rates near historic 
lows,\729\ thereby facilitating mortgage loan originations and 
refinancings and lessening the default rate on existing 
adjustable rate mortgage loans--all of which have benefited 
many TARP recipients.
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    \726\ This is not to say that the overarching purposes and 
mechanics of the Treasury and Federal Reserve programs are necessarily 
transparent. A number of questions--without limitation--are presented.
     What is the authority for Treasury's unlimited assistance 
to the GSEs?
     Will the GSEs continue to use funds contributed by 
Treasury to guarantee the MBS purchased by the Federal Reserve?
     If so, are the taxpayers--through Treasury's recently 
announced unlimited capital commitment to the GSEs--in effect bailing 
out the Federal Reserve for its efforts to create a liquid one-buyer 
market for MBS?
     Is one of the principal purposes of these circular 
purchases, capital infusions and guarantee payments simply to remove 
MBS from the books of TARP recipients (the original purpose of TARP) 
and other holders and issuers at favorable prices to the sellers?
     Is the Federal Reserve in effect bailing out TARP 
recipients and other holders and issuers of MBS?
     If so, will this action also placate foreign sovereigns 
and other holders and issuers that acquired GSE guaranteed MBS with the 
understanding that it was full faith and credit paper of the United 
States government?
     Have the purchases of MBS by the Federal Reserve coupled 
with the unlimited assistance from Treasury converted the implicit 
guarantee into an explicit guarantee of the GSEs by the United States 
government?
     If so, under what authority was such action taken?
     Has the Federal Reserve or Treasury purchased any MBS from 
any TARP recipient or other holder or issuer for consideration in 
excess of the then existing market value?
     If so, under what authority was such action taken?
    \727\ To the extent Treasury or the Federal Reserve purchased MBS 
from TARP recipients for consideration in excess of market value, it is 
possible that some or all of the spread should be classified as a 
subsidy--without an offsetting additional reimbursement obligation--for 
the benefit of the selling TARP recipients. We question whether many 
TARP recipients would have sold a material portion of their MBS 
portfolios for less than the original purchase price paid for the 
securities due to the adverse effect the recognition of any resulting 
losses would have had on their required capital ratios. In addition, 
these transactions would have provided lower ``marks'' for valuation 
purposes, which could have had significant adverse balance sheet and 
income statement effects under FAS 157. Thus, the revision of the mark-
to-market accounting rules noted below in the text may have also 
encouraged TARP holders to defer any sales of MBS for consideration 
less than their original purchase price. In addition to the cash 
infusion generated from the sale of illiquid MBS at favorable prices, 
the selling TARP recipients may have been able to book trading profits 
from the MBS dispositions and it is possible that some TARP recipients 
generated material trading gains by purchasing distressed MBS at well 
below par and selling the securities to Treasury or the Federal Reserve 
at or near par. These transactions would have bolstered the recipient's 
capital and expedited its exit from TARP.
    The quantification of any such subsidy is not free from doubt since 
each MBS purchased by Treasury or the Federal Reserve apparently 
carried a GSE guarantee and presumably would have been paid pursuant to 
the terms of the guarantee contract assuming the guarantor remained 
solvent. Nevertheless, GSE guaranteed MBS presumably may trade below 
par if the guarantee obligation has not been triggered (or has only 
been partially triggered) and the disposition of any such MBS by a TARP 
recipient for consideration in excess of its prevailing market price 
may in certain instances be viewed as a subsidy to the selling 
recipient. The recognition of significant subsidies would have improved 
the financial position and operating results of TARP recipients and 
assisted their exit from the program. The cost of providing such 
subsidies to the TARP recipients will be borne by the taxpayers and not 
the recipients.
    \728\ Fed may re-enter MBS market later in 2010--Market News, 
Reuters (Jan. 5, 2010) (online at www.reuters.com/article/
idUSN0530695520100105?type=marketsNews):
    ``The Federal Reserve is discussing re-entering the mortgage-backed 
securities market later this year if its buying power is needed to hold 
down interest rates, Market News said on Tuesday in a story citing Fed 
officials.
    The $5 trillion agency mortgage-backed securities market may weaken 
when last year's biggest buyer, the Federal Reserve, ends its $1.25 
trillion agency MBS purchasing program at the end of the first quarter 
of 2010.''
    See also, Fed Minutes Show Division on Emergency Steps, New York 
Times (Jan. 6, 2010) (online at www.nytimes.com/2010/01/07/business/
07fed.html?hp); see also, Fed Plan to Stop Buying Mortgages Feeds 
Recovery Worries, Wall Street Journal (Jan. 8, 2010) (online at 
online.wsj.com/article/SB126291088200220743.html).
    \729\ Although the purchases have reduced the cost of capital of 
the GSEs and lowered mortgage rates, some analysts fear that the 
withdrawal of Federal Reserve support for the GSEs will lead to an 
``asset collapse'' while others note that such concerns are 
``overblown.'' See Mortgage Anxieties Mean Limbo for Fannie and Freddie 
(Update 2), Bloomberg (Dec. 28, 2009) (online at www.bloomberg.com/
apps/news?pid=newsarchive&sid=aLEn75100iNg#); see also, Mortgage Bond 
Rally May End, Rates Rise as Fed Stops Purchases, Bloomberg (Dec. 31, 
2009) (online at www.bloomberg.com/apps/
news?pid=20601087&sid=aukqYVzx6x3w&pos=4).
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    In order to expedite the swift metamorphosis of many TARP 
recipients from insolvent to investment grade, the institutions 
were arguably subsidized through government-sponsored purchases 
of MBS and by the all but unlimited investment of (and 
commitment to invest) public funds in Fannie Mae, Freddie Mac 
and AIG. One may argue that the government has created without 
meaningful public debate or analysis a series of ``bad banks'' 
within the Federal Reserve, Treasury, Fannie Mae, Freddie Mac 
and AIG \730\ to accomplish what TARP alone failed to achieve. 
These ``bad banks'' or, perhaps, ``debt consolidation 
entities'' operate by actually and virtually removing toxic 
assets from the books of TARP recipients and other holders and 
issuers. The Federal Reserve and Treasury have actually removed 
up to $1 trillion of troubled assets from the books of TARP 
recipients and other holders and issuers through outright 
purchases.\731\ The Federal Reserve and Treasury have also 
virtually removed additional troubled assets from the books of 
TARP recipients and other holders and issuers by propping up 
the market values of such assets and maintaining historically 
low mortgage rates.
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    \730\ It is our understanding that many of the distressed assets of 
AIG are housed in a group of special purpose vehicles with the common 
name ``Maiden Lane LLC.''
    \731\ Treasury anticipates that it will have purchased 
approximately $220 billion face value of mortgage-backed securities 
guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae by December 31, 
2009, and the Federal Reserve's November 25, 2009 balance sheet 
discloses the purchase of $852 billion face value of mortgage-backed 
securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. See 
U.S. Department of the Treasury, Treasury Issues Update on Status of 
Support for Housing Programs (Dec. 24, 2009) (online at 
www.treasury.gov/press/releases/2009122415345924543.htm; see also, 
Board of Governors of the Federal Reserve System, Federal Reserve 
System Monthly Report on Credit and Liquidity Programs and Balance 
Sheet (Dec. 2009) (online at www.federalreserve.gov/monetarypolicy/
files/monthlyclbsreport200912.pdf).
---------------------------------------------------------------------------
    Although Treasury and the Federal Reserve have arguably 
bolstered the net worth of many TARP recipients by purchasing 
MBS and investing in the two GSEs, much of the risk associated 
with Treasury's and the Federal Reserve's investments will fall 
to the taxpayers even though substantial benefits may inure to 
many TARP recipients. Such actions by Treasury and the Federal 
Reserve have all but enshrined the ``implicit guarantee'' of 
the United States government with respect to institutions that 
are deemed ``too big or too interconnected to fail'' and may 
have intentionally or inadvertently subsidized the early exit 
from TARP of many recipients at an increasing cost of the 
taxpayers.
            b. AIG and Credit Default Swap Payments
    On November 17, 2009, the Special Inspector General for 
TARP (SIGTARP) issued a report addressing the termination of 
certain AIG CDSs at par (SIGTARP Report).\732\ In order to 
close out the AIG CDSs the FRBNY remitted $27.1 billion to the 
AIG counterparties (CPs) in return for $62.1 billion of face 
value CDOs held by the CPs.\733\ The CPs were also permitted to 
retain $35 billion of cash collateral previously pledged by AIG 
pursuant to the CDSs. The CPs--which included TARP recipients 
Goldman Sachs, Merrill Lynch and Bank of America--were paid the 
full face value of their respective CDOs and the FRBNY failed 
in its efforts to receive a discount in payment from any 
CP.\734\
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    \732\ Office of the Special Inspector General for the Troubled 
Asset Relief Program, Factors Affecting Efforts To Limit Payments to 
AIG Counterparties (Nov. 17, 2009) (online at www.sigtarp.gov/reports/
audit/2009/Factors_Affecting_Efforts_to_
Limit_Payments_to_AIG_Counterparties.pdf).
    \733\ Each AIG CDS was structured with the applicable CP based upon 
a unique set of facts. The noted description is, by necessity, 
simplified.
    \734\ The aggregate face amount of the underlying CDOs equaled 
$62.1 billion and the CPs received $27.1 billion from the FRBNY and 
were permitted to retain $35 billion of cash collateral previously 
pledged under the CDS contracts. Id.
---------------------------------------------------------------------------
    A question arises as to whether the termination of the CDSs 
at par--that is, without any discount or haircut--constituted 
an inappropriate subsidy of the CPs and necessitated the 
investment of additional TARP funds in AIG. According to the 
SIGTARP Report, the CPs refused to accept a discounted payment 
and terminate the CDSs for less than par because (i) the 
collateral previously posted under the CDS contracts ($35 
billion) plus the then fair market value of the CDOs ($27.1 
billion) equaled the full face value of the CDOs ($62.1 
billion), (ii) the United States government had clearly 
signaled that it would not permit AIG to fail and, therefore, 
the CDSs would be honored in full, (iii) certain CPs had hedged 
against a default by AIG under the CDSs, and (iv) the CPs were 
entitled to par value payments pursuant to the CDS 
contracts.\735\ Although the FRBNY apparently asked the CPs to 
accept a discounted payment for the settlement of the CDSs, 
their efforts ultimately proved unsuccessful.
---------------------------------------------------------------------------
    \735\ Office of the Special Inspector General for the Troubled 
Asset Relief Program, Factors Affecting Efforts to Limit Payments to 
AIG Counterparties, at 15 (Nov. 17, 2009) (online at www.sigtarp.gov/
reports/audit/2009/Factors_Affecting_Efforts_to_Limit_
Payments_to_AIG_Counterparties.pdf).
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    These justifications proffered by the CPs, and accepted by 
the FRBNY, are not compelling. If the CPs believed that the 
United States government would not permit AIG to fail, then why 
did the FRBNY insist on terminating the CDSs? If the CPs were 
confident that AIG--or the FRBNY in its absence--would continue 
to post collateral if the fair market value of the CDOs 
declined or that the CDOs could be sold for their then market 
value if AIG collapsed, then why not let the CPs assume that 
risk? If the CPs believed that their third-party hedges against 
an AIG default would be honored in full, then (again) why not 
let the CPs assume that risk? Although the SIGTARP Report notes 
that then-FRBNY President Geithner denies that the payments by 
the FRBNY constituted a ``backdoor bailout'' of the CPs,\736\ 
without any other explanation, it is difficult to conclude that 
the FRBNY insisted that AIG terminate the CDSs other than as a 
mechanism to provide a direct--yet not particularly 
transparent--government-sponsored subsidy to the CPs.\737\
---------------------------------------------------------------------------
    \736\ Office of the Special Inspector General for the Troubled 
Asset Relief Program, Factors Affecting Efforts to Limit Payments to 
AIG Counterparties, at 30 (Nov. 17, 2009) (online at www.sigtarp.gov/
reports/audit/2009/Factors_Affecting_Efforts_to_Limit_Payments_to_
AIG_Counterparties.pdf).
    \737\ Is it likely that the market value of the referenced CDOs 
would have dropped from $27.1 billion to zero and necessitated that AIG 
post additional collateral of $27.1 billion? By terminating the CDS 
contracts at par, the FRBNY effectively assumed that the market value 
of the CDOs would drop to zero within the very near term.
---------------------------------------------------------------------------
    Even if the FRBNY did not intend for the termination of the 
CDSs to serve as a government-sponsored subsidy of the CPs, why 
did the FRBNY fail to negotiate material discounts with each 
CP? Although the CPs may have believed that (i) the United 
States government would not let AIG fail, (ii) AIG--or the 
FRBNY--would continue to post collateral under the CDS 
contracts or that the CDOs could be sold for their then market 
value if AIG collapsed, and (iii) their third-party hedges 
would be honored in full, such assumptions were by no means 
free from doubt. All doubt was resolved, however, in favor of 
the CPs upon their receipt of cash payments from the FRBNY for 
the full par value of the CDOs. It seems that the negation of 
these risks should have merited the termination of the CDS 
contracts at a material discount to par value.
    In addition, other justifications exist for discounting the 
payments remitted by the FRBNY to the CPs. Prior to the 
termination of the CDSs, the CPs held cash collateral of $35 
billion. Yet, after the termination of the CDSs, the CPs held 
actual cash in the same amount. The transformation of cash 
collateral into actual cash must have been of some benefit to 
the CPs.\738\ Further, prior to the termination of the CDSs, 
the CPs held CDOs with a (falling) market value of $27.1 
billion, but after the termination of the CDSs, the CPs held 
actual cash in the same amount.\739\ In effect, the FRBNY 
permitted--if not directly encouraged--the CPs to convert 
illiquid cash collateral and illiquid CDOs into $62.1 billion 
of actual cash. Trading cash collateral and CDOs with a 
problematic market value for cash during a worldwide liquidity 
crunch must have been of substantial benefit to the CPs. Why 
was the FRBNY unable to terminate the CDSs at a material 
discount to par value? Why did the FRBNY not insist on these 
discounts? Again, the inescapable conclusion, without other 
facts, seems to be that this was a direct government-sponsored 
subsidy to the CPs.
---------------------------------------------------------------------------
    \738\ This assumes that posted collateral under these transactions 
was encumbered by contractual and legal restrictions.
    \739\ At the time the FRBNY financed the termination of the AIG 
CDSs, the CDO market was illiquid--if not frozen--and it is doubtful 
that lenders would have accepted CDOs as collateral without the 
imposition of substantial discounts to their then significantly 
depressed market values.
---------------------------------------------------------------------------
    It is unlikely that the FRBNY (or the United States 
government) has a basis to seek to unwind the termination of 
the CDSs or compel the CPs to promptly remit a suitable 
discount to the FRBNY. It appears that the CPs--including 
several TARP recipients--received another taxpayer subsidy for 
which they hold no reimbursement obligation. Without this 
substantial subsidy, it is possible that at least some of the 
CPs would not have been permitted by their regulators to exit 
the TARP program on an expedited basis. We recommend that the 
Panel investigate this matter in its upcoming report on AIG. 
Without a better explanation of a straightforward business 
purpose for these transactions, the taxpayers nevertheless may 
be best served by having Treasury seek recission from the CPs, 
reversing cancellation of the CDS contracts and requiring the 
CPs to purchase the underlying CDOs at their $62.1 billion par 
value.
4. Exit Strategy from HAMP and Other Foreclosure Mitigation Programs
    The TARP-funded HAMP program carries a 100 percent subsidy 
rate according to the General Accounting Office.\740\ This 
means that the United States government will recover none of 
the $50 billion of taxpayer sourced TARP funds invested in the 
HAMP foreclosure mitigation program.\741\ The projected 
shortfall will become more burdensome to the taxpayers as 
Treasury contemplates expanding HAMP or introducing additional 
programs targeted at modifying or refinancing distressed home 
mortgage loans. Since Treasury is charged with protecting the 
interests of the taxpayers who funded HAMP and the other TARP 
programs, we recommend that Treasury's foreclosure mitigation 
efforts be structured so as to incorporate an effective exit 
strategy by allowing Treasury to participate in any subsequent 
appreciation in the home equity of any mortgagor whose loan is 
modified under HAMP or any other taxpayer subsidized 
program.\742\ In order to encourage the participation of 
mortgage lenders in Treasury's foreclosure mitigation efforts, 
such lenders should also be granted the right--subordinate to 
the right granted Treasury--to participate in any subsequent 
equity appreciation. The incorporation of an equity 
participation right may be achieved by the filing of a one-page 
document in the local real estate property records when the 
applicable home mortgage loan is modified. The mechanics of 
such a feature may be illustrated by the following example of a 
typical home mortgage loan modification.
---------------------------------------------------------------------------
    \740\ Government Accountability Office, Financial Audit: Office of 
Financial Stability (Troubled Asset Relief Program) Fiscal Year 2009 
Financial Statements (Dec. 2009) (online at www.gao.gov/new.items/
d10301.pdf).
    \741\ 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).
    \742\ Congressional Oversight Panel, Taking Stock: What Has the 
Troubled Asset Relief Program Achieved?, Additional views of former 
panelist Congressman Jeb Hensarling (Dec. 9, 2009) (online at 
cop.senate.gov/documents/cop-120909-report-hensarling.pdf).

          Assume a homeowner borrows $200,000 and purchases a 
        residence in the same amount.\743\ The home 
        subsequently declines in value to $175,000 and the 
        homeowner and the mortgage lender agree to restructure 
        the loan under a TARP-sponsored foreclosure mitigation 
        program pursuant to which the outstanding principal 
        balance of the loan is reduced to $175,000 and Treasury 
        advances $10,000 in support of the restructure. 
        Immediately after the modification the mortgage lender 
        has suffered a $25,000 \744\ economic loss and Treasury 
        has advanced $10,000 of TARP funds. If the homeowner 
        subsequently sells the residence for $225,000, the 
        $50,000 of realized equity proceeds \745\ will be 
        allocated in accordance with the following waterfall--
        the first $10,000 \746\ is remitted to reimburse 
        Treasury for the TARP funds advanced under the 
        foreclosure mitigation program; the next $25,000 \747\ 
        is remitted to the mortgage lender to cover its $25,000 
        economic loss; and the balance of $15,000 is paid to 
        the homeowner.
---------------------------------------------------------------------------
    \743\ These facts illustrate the zero ($0.00) down-payment 
financings that were more common a few years ago.
    \744\ The $25,000 loss equals the $200,000 principal balance of the 
original loan, less the $175,000 principal balance of the modified 
loan. The example does not consider the consequences of modifying the 
interest rate on the loan.
    \745\ The $50,000 of realized equity proceeds equals the $225,000 
sales price of the residence, less the $175,000 outstanding balance of 
the modified loan. The example makes certain simplifying assumptions 
such as the absence of transaction and closing fees and expenses.
    \746\ In order to more appropriately protect the taxpayers, the 
$10,000 advanced under the TARP sponsored foreclosure mitigation 
program should accrue interest at an objective and transparent rate of 
interest. For example, if the 30-year fixed rate of interest on 
mortgage loans equals five-percent when the mortgage loan is modified, 
the $10,000 advance should accrue interest at such a rate and Treasury 
should be reimbursed the aggregate accrued amount upon realization of 
the equity proceeds. If at such time $2,500 of interest has accrued, 
Treasury should be reimbursed $12,500 ($10,000 originally advanced, 
plus $2,500 of accrued interest) instead of only the $10,000 of TARP 
proceeds originally advanced.
    \747\ The mortgage lender may also argue that its $25,000 loss 
should accrue interest in the same manner as provided Treasury. In such 
event, the mortgage lender would be entitled to recover $25,000, plus 
accrued interest upon the realization of sufficient equity proceeds.

    Prior to the repayment of all funds advanced by Treasury 
and the economic loss suffered by the mortgage lender the 
homeowner should not be permitted to borrow against any 
appreciation in the net equity value of the mortgaged property 
unless the proceeds are applied in accordance with the 
waterfall noted above. That is, instead of selling the 
residence for $225,000 as assumed in the foregoing example, the 
homeowner should be permitted to borrow against any net equity 
in the residence, provided $10,000 is remitted to Treasury and 
$25,000 is paid to the mortgage holder prior to the homeowner 
retaining any such proceeds.\748\ Such flexibility allows the 
homeowner to cash out the interests of Treasury and the 
mortgage lender without selling the residence securing the 
mortgage loan. The modified loan documents should also permit 
the homeowner to repay Treasury and the mortgage lender from 
other sources such as personal savings or the disposition of 
other assets.\749\
---------------------------------------------------------------------------
    \748\ Prudent underwriting standards should apply to all such home 
equity loans.
    \749\ Treasury may wish to structure its foreclosure mitigation 
efforts so as to encourage the early repayment of TARP funds by 
homeowners. Treasury, for example, could agree to a ten-percent 
discount or waive the accrual of interest on the TARP funds advanced if 
a homeowner repays such funds in full within three years following the 
restructuring. Any such incentives should appear reasonable to the 
taxpayers and should not negate the intent of the equity participation 
right. Mortgage lenders may also agree to similar incentives.
---------------------------------------------------------------------------
    We also recommend that to the extent permitted by 
applicable law, Treasury should structure all mortgage loan 
modifications and refinancings under HAMP and any other 
foreclosure mitigation programs as recourse obligations to the 
homeowners. If the loans are structured as non-recourse 
obligations, under state law or otherwise, the homeowners may 
have a diminished incentive to repay Treasury the funds 
advanced under TARP.\750\
---------------------------------------------------------------------------
    \750\ Roger Lowenstein, Walk Away From Your Home, New York Times 
(Jan. 7, 2009) (online at www.nytimes.com/2010/01/10/magazine/10FOB-
wwln-t.html?hp). The article implies that a recourse structure is of 
little benefit if the homeowner is otherwise judgment proof.
---------------------------------------------------------------------------
    In our view, the incorporation of these specifically 
targeted modifications into each TARP funded foreclosure 
mitigation program will enhance the possibility that Treasury 
will exit the programs at a reduced cost to the taxpayers.

5. Implicit Guarantees

    The January report analyzes the difficulties that may arise 
when the United States government directly or indirectly 
undertakes to prevent certain systemically significant 
institutions from failing. Although the government does not 
generally guarantee the assets and obligations of private 
entities, its actions and policies may nevertheless send a 
clear message to the market that some institutions are simply 
too big, or too interconnected, to fail. Once the government 
adopts such a policy it is difficult to know how and where to 
draw the line. With little public debate, automobile 
manufacturers were recently transformed into financial 
institutions so they could be bailed out with TARP funds and an 
array of arguably non-systemically significant institutions--
such as GMAC \751\--received many billions of dollars of 
taxpayer funded subsidies. In its haste to restructure favored 
institutions, the government may assume the role of king 
maker--as was surely the case in the Chrysler and GM 
bankruptcies--and dictate a reorganization structure that 
arguably contravenes years of well-established commercial and 
corporate law precedent. The unintended consequences of these 
actions linger in the financial markets and legal community 
long after the offending transactions have closed and 
adversely--yet subtly--affect subsequent transactions that 
carry any inherent risk of future governmental intervention. 
The uninitiated may question why two seemingly identical 
business transactions merit disparate risk-adjusted rates of 
return or why some transactions appear over-collateralized or 
inexplicably complicated. The costs of mitigating political 
risk in private sector business transactions are seldom 
quantified or even discussed outside the cadre of 
businesspersons and their advisors who structure, negotiate and 
close such transactions, yet such costs certainly exist and 
must be satisfied.
---------------------------------------------------------------------------
    \751\ Although Treasury indicates that GMAC was (again) saved so as 
to support its auto financing business, it also appears that 
substantial GMAC losses stem from speculation in the MBS market. It is 
unclear why GMAC--a putative auto finance company--chose to speculate 
in the MBS market. We recommend that the Panel investigate GMAC and the 
inherent ongoing subsidies that its taxpayer-supported operations 
afford to Chrysler and GM in contrast to their competitors.
---------------------------------------------------------------------------
    The resolution of the fundamental public policy issues 
arising from implicit guarantee and political risk should 
remain with Congress.
           SECTION THREE: CORRESPONDENCE WITH TREASURY UPDATE

    Secretary of the Treasury, Timothy Geithner, sent a letter 
to Chair Elizabeth Warren on December 10, 2009 \752\ in 
response to a series of questions presented by the Panel 
regarding the Supervisory Capital Assessment Program (the 
``stress tests'').
---------------------------------------------------------------------------
    \752\ See Appendix I of this report, infra.
---------------------------------------------------------------------------
    On behalf of the Panel, Chair Elizabeth Warren sent a 
letter on December 24, 2009 \753\ to Secretary of the Treasury, 
Timothy Geithner, requesting information with respect to the 
Emergency Economic Stabilization Act of 2008 provisions 
governing executive compensation at TARP-recipient financial 
institutions and regarding the authority of the Special Master 
for TARP Executive Compensation. The Panel requested a written 
response from Treasury by January 13, 2010. The Panel has not 
yet received a response from Secretary Geithner.
---------------------------------------------------------------------------
    \753\ See Appendix II of this report, infra.
---------------------------------------------------------------------------
    On behalf of the Panel, Chair Elizabeth Warren sent a 
letter on January 11, 2010 \754\ to Secretary of the Treasury 
Timothy Geithner, to follow-up on a letter sent on November 25, 
2009,\755\ requesting information with respect to Treasury's 
assistance to CIT Group, Inc. As of the publication of this 
report, the Panel has not received a response from Secretary 
Geithner.
---------------------------------------------------------------------------
    \754\ See Appendix III of this report,  infra.
    \755\ See Appendix IV of the Panel's December oversight report. 
Congressional Oversight Panel, December Oversight Report: Taking Stock: 
What Has the Troubled Asset Relief Program Achieved? (Dec. 9, 2009) 
(online at cop.senate.gov/documents/cop-120909-report.pdf).
              SECTION FOUR: TARP UPDATES SINCE LAST REPORT


           A. Restructuring of Treasury's Investment in GMAC

    Treasury injected an additional $3.8 billion of capital 
into GMAC on December 30, 2009. The $3.8 billion is divided 
into a $2.54 billion purchase of Trust Preferred Securities 
(TruPs), $127 million in warrants to purchase TruPs exercised 
on December 30, a $1.25 billion purchase of Mandatory 
Convertible Preferred Stock (MCP), and $63 million in warrants 
to purchase MCP exercised on December 30.
    In addition, Treasury converted $3 billion of the $7.5 
billion in MCP it purchased in May 2009 into common equity; 
Treasury now owns 56 percent of GMAC's common stock, up from 35 
percent prior to this transaction. As a result, Treasury will 
appoint four members of GMAC's board of directors, up from two 
before the restructuring. The restructuring also converted 
Treasury's preferred stock and warrants, from a $5 billion 
purchase in December 2008, into MCP. Treasury exercised 
warrants it held following both transactions prior to the 
conversions, totaling $375 million and $250 million, 
respectively.
    Treasury made the additional purchases and restructured the 
investment in order to help GMAC satisfy its additional capital 
requirements under the Supervisory Capital Assistance Program 
(SCAP) following the May 2009 stress tests. Treasury's 
additional commitment came in under the $5.6 billion Treasury 
previously estimated GMAC would require under SCAP.
    For a more complete discussion of the restructuring of 
Treasury's GMAC investment, please see Section D.8 of this 
report.

                     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 December 14, 2009, includes data through the 
end of October 2009. Treasury reported that the overall 
outstanding loan balance at the top CPP recipients declined by 
one percent between the end of September 2009 and the end of 
October 2009.

                           C. TARP Repayments

    Since the Panel's most recent oversight report, additional 
banks have repaid their TARP investments under CPP. A total of 
58 banks have repaid their preferred stock TARP investments 
provided under the CPP to date. Treasury has also liquidated 
the warrants it holds in 40 of these 58 banks.
    Most notably, Bank of America and Wells Fargo & Company 
both repaid their full $25 billion CPP investments. In 
addition, both Bank of America and Citigroup repaid all $20 
billion Treasury invested in both institutions through the TIP. 
Finally, General Motors repaid the first $1 billion of a $6.7-
billion debt obligation to Treasury remaining after GM's 
bankruptcy proceedings. Similar quarterly payments will 
continue until the debt is repaid.
    During November 2009, Treasury received $1.87 billion in 
dividends and $13.5 million in interest from its investments.

                 D. Asset Guarantee Program Termination

    On December 23, 2009, Treasury, the Federal Reserve, the 
Federal Deposit Insurance Corporation, and Citigroup terminated 
a loss-sharing agreement on $301 billion of ring-fenced 
Citigroup assets reached under Treasury's Asset Guarantee 
Program (AGP) in January 2009 and expected to run for 10 years. 
As a result of the early termination, Treasury cancelled $1.8 
billion in Trust Preferred Securities, leaving Treasury with a 
little over $2.2 billion in Trust Preferred Securities and a 
warrant for 66 million shares of Citigroup common stock in 
exchange for the guarantee. This transaction was the only one 
ever consummated under the AGP, and Treasury is terminating the 
program.

                  E. Public-Private Investment Program

    On December 18, 2009, the last of the nine pre-qualified 
PPIP fund managers, Oaktree Capital Management, L.P., closed a 
PPIF transaction. As a result, Treasury has made available to 
fund managers its full complement of $30 billion financing, 
representing $10 billion in equity capital and $20 billion in 
secured debt financing.
    As of December 22, 2009, Treasury reported that PPIP 
transactions totaling $24 billion in purchasing power had 
closed, representing $6 billion in private equity capital, $6 
billion in Treasury equity capital, and $12 billion in secured 
debt financing.
    On January 4, 2010, Treasury entered into a wind-up and 
liquidation agreement with TCW Asset Management, one of the 
nine pre-qualified PPIP fund managers. The agreement will 
unwind a Treasury investment of $356.3 million, with a portion 
of the losses backstopped by TCW.

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

    At the December 14, 2009 facility, investors requested $1.3 
billion in loans for legacy CMBS. Investors did not request any 
loans for new CMBS. By way of comparison, investors requested 
$1.4 billion in loans for legacy CMBS at the November facility 
and $2.1 billion at the October facility. Investors requested 
$72.2 million in loans for new CMBS at the November facility, 
the only loans requested for new CMBS during TALF's operation.
    At the January 7, 2010 facility, investors requested $1.1 
billion in loans to support issuance of ABS collateralized by 
loans in the credit card, floorplan, and small business 
sectors. No loans were requested in the auto, equipment, 
premium financing, servicing advances, and student loan 
sectors. By way of comparison, at the December 3, 2009 
facility, investors requested $3 billion in loans 
collateralized by the issuance of ABS in the credit card, 
equipment, floorplan, small business, servicing advances, and 
student loan sectors; investors did not request any loans in 
the auto or premium financing sectors.

                          G. Warrant Auctions

    Treasury previously announced that it would sell its 
warrant positions in JPMorgan Chase & Co. and TCF Financial 
Corporation through a modified Dutch auction process. The 
auction of JPMorgan Chase warrants closed on December 10, 2009, 
with proceeds to Treasury of $950.3 million. The auction of TCF 
Financial warrants closed on December 15, 2009, with proceeds 
to Treasury of $9.6 million.

                               H. Metrics

    Each month, the Panel's report highlights a number of 
metrics that the Panel and others, including Treasury, the 
Government Accountability Office (GAO), Special Inspector 
General for the Troubled Asset Relief Program (SIGTARP), and 
the Financial Stability Oversight Board, consider useful in 
assessing the effectiveness of the Administration's efforts to 
restore financial stability and accomplish the goals of EESA. 
This section discusses changes that have occurred in several 
indicators since the release of the Panel's December report.
     Interest Rate Spreads. Interest rate spreads have 
continued to tighten since the Panel's December report, showing 
further signs of financial stability. Interest rates on 
overnight commercial paper have returned to near pre-crisis 
levels. The interest rate spread for AA asset-backed commercial 
paper, which is considered mid-investment grade, has decreased 
by nearly 8 percent since the Panel's December report and is at 
its lowest level since July 2007. Interest rate spreads on 
overnight A2/P2 commercial paper, considered to be lower 
quality, have decreased over 95 percent since the enactment of 
EESA.

                                        FIGURE 14: INTEREST RATE SPREADS
----------------------------------------------------------------------------------------------------------------
                                                                                          Percent Change  Since
                             Indicator                                Current Spread     Last Report  (as of 11/
                                                                     (as of 12/31/09)            30/09)
----------------------------------------------------------------------------------------------------------------
3 month LIBOR-OIS spread \756\....................................                0.09                     -33
1 month LIBOR-OIS spread \757\....................................                0.10                     -16
TED spread \758\ (in basis points)................................               19                         -5
Conventional mortgage rate spread \759\...........................                1.29                     -12.8
Corporate AAA bond spread \760\...................................                1.56                     -11.9
Corporate BAA bond spread \761\...................................                2.66                      -9.5
Overnight AA asset-backed commercial paper interest rate spread                   0.17                      -7.6
 \762\............................................................
Overnight A2/P2 nonfinancial commercial paper interest rate spread                0.13                      52.3 
 \763\............................................................
----------------------------------------------------------------------------------------------------------------
\756\ 3 Mo LIBOR-OIS Spread, Bloomberg (online at www.bloomberg.com/apps/quote?ticker=.LOIS3:IND) (accessed Jan.
  4, 2010) (hereinafter ``3 Mo LIBOR-OIS Spread'').
\757\ 1 Mo LIBOR-OIS Spread, Bloomberg (online at www.bloomberg.com/apps/quote?ticker=.LOIS1:IND) (accessed Jan.
  4, 2010).
\758\ TED Spread, SNL Financial.
\759\ Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected
  Interest Rates: Historical Data (Instrument: Conventional Mortgages, Frequency: Weekly) (online at
  www.federalreserve.gov/releases/h15/data/Weekly_Thursday_/H15_MORTG_NA.txt) (accessed Jan. 4, 2010); Board of
  Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates:
  Historical Data (Instrument: U.S. Government Securities/Treasury Constant Maturities/Nominal 10-Year,
  Frequency: Weekly) (online at www.federalreserve.gov/releases/h15/data/Weekly_Friday_H15_TCMNOM_Y10.txt)
  (hereinafter ``Federal Reserve Statistical Release H.15'') (accessed Jan. 4, 2010).
\760\ Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected
  Interest Rates: Historical Data (Instrument: Corporate Bonds/Moody's Seasoned AAA, Frequency: Weekly) (online
  at www.federalreserve.gov/releases/h15/data/Weekly_Friday_H15_AAA_NA.txt) (accessed Jan. 4, 2010); Federal
  Reserve Statistical Release H.15, supra note 759 (accessed Jan. 4, 2010).
\761\ Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected
  Interest Rates: Historical Data (Instrument: Corporate Bonds/Moody's Seasoned BAA, Frequency: Weekly) (online
  at www.federalreserve.gov/releases/h15/data/Weekly_Friday_/H15_BAA_NA.txt) (accessed Jan. 4, 2010); Federal
  Reserve Statistical Release H.15, supra note 759 (accessed Jan. 4, 2010).
\762\ Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper
  Rates and Outstandings: Data Download Program (Instrument: AA Asset-Backed Discount Rate, Frequency: Daily)
  (online at www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (hereinafter ``Federal Reserve Statistical
  Release on Commercial Paper'') (accessed Jan. 4, 2010); Board of Governors of the Federal Reserve System,
  Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data Download Program
  (Instrument: AA Nonfinancial Discount Rate, Frequency: Daily) (online at www.federalreserve.gov/DataDownload/
  Choose.aspx?rel=CP) (accessed Jan. 4, 2010). In order to provide a more complete comparison, this metric
  utilizes a five-day average of the interest rate spread for the last five days of the month.
\763\ Federal Reserve Statistical Release on Commercial Paper, supra note 762. In order to provide a more
  complete comparison, this metric utilizes a five-day average of the interest rate spread for the last five
  days of the month.

       LIBOR-OIS Spread. The LIBOR-OIS spread provides 
another example of how credit conditions have improved. This 
spread measures the difference between 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. 
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.\764\
---------------------------------------------------------------------------
    \764\ Federal Reserve Bank of St. Louis, What the Libor-OIS Spread 
Says (May 11, 2009) (online at research.stlouisfed.org/publications/es/
09/ES0924.pdf).
---------------------------------------------------------------------------

    FIGURE 15: 3 MONTH LIBOR-OIS SPREAD (AS OF DECEMBER 2009) \765\

---------------------------------------------------------------------------
    \765\ See 3 Mo LIBOR-OIS Spread, supra note 756. 

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
       TED Spread. The TED spread, which is the 
difference between LIBOR and short-term Treasury bill interest 
rates, is another indicator of perceived credit risk. After 
peaking in late 2008, the TED spread has fallen to pre-crisis 
levels, as Figure 16 illustrates. The TED spread has continued 
to tighten since the Panel's December report, declining 5 
percent since November 30, 2009.\766\
---------------------------------------------------------------------------
    \766\ SNL Financial, Historical Dividend Yield Values, 3 Month 
Libor (online at www1.snl.com/InteractiveX/history.aspx? 
RateList=1&Tabular=True&GraphType= 2&Frequency=0&TimePeriod2= 
11&BeginDate=12%2F29%2F06&EndDate =11%2F4%2F2009&SelectedYield2 
=YID%3A63&ctl00%24ctl09%24IndexPreference= default&ComparisonIndex2 
=0&ComparisonYield2=1&CustomIndex= 0&ComparisonTicker2=&Action=Apply) 
(accessed Nov. 5, 2009) (hereinafter ``Historical Dividend Yield 
Values, 3 Month Libor''); SNL Financial, Historical Dividend Yield 
Values, 3 Month Treasury Bill (online at www1.snl.com/InteractiveX/
history.aspx?RateList 
=1&Tabular=True&GraphType=2&Frequency=0&TimePeriod2= 
11&BeginDate=12%2F29%2F06&EndDate =11%2F4%2F2009&Selected Yield2 
=YID%3A63&ctl00%24ctl09%24IndexPreference=default&ComparisonIndex2 
=0&ComparisonYield2=1&CustomIndex=0&ComparisonTicker2=&Action=Apply) 
(accessed Nov. 5, 2009).
---------------------------------------------------------------------------

           FIGURE 16: TED SPREAD SINCE OCTOBER 3, 2008 \767\

---------------------------------------------------------------------------
    \767\ Historical Dividend Yield Values, 3 Month Libor, supra note 
766; Historical Dividend Yield Values, 3 Month Libor, supra note 766. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

       Commercial Paper Outstanding. Commercial paper 
outstanding, a rough measure of short-term business debt, is an 
indicator of the availability of credit for enterprises. The 
amount of commercial paper outstanding has decreased across the 
three categories the Panel measures since the December 2009 
report. Financial commercial paper outstanding has decreased by 
over 9 percent since the Panel's last report while nonfinancial 
commercial paper outstanding fell by over 13.5 percent.\768\ 
Commercial paper outstanding has continued to decrease since 
the enactment of EESA. Asset-backed commercial paper 
outstanding has declined nearly 32 percent and nonfinancial 
commercial paper outstanding has decreased by over 49 percent 
since October 2008.\769\
---------------------------------------------------------------------------
    \768\ Federal Reserve Statistical Release on Commercial Paper, 
supra note 762.
    \769\ Federal Reserve Statistical Release on Commercial Paper, 
supra note 762.

                                     FIGURE 17: COMMERCIAL PAPER OUTSTANDING
----------------------------------------------------------------------------------------------------------------
                                                                     Current Level  (as
                                                                        of 12/31/09)      Percent Change  Since
                             Indicator                                  (billions of     Last Report  (11/25/09)
                                                                          dollars)
----------------------------------------------------------------------------------------------------------------
Asset-backed commercial paper outstanding (seasonally adjusted)                  $485.8                    -2.35
 \770\.............................................................
Financial commercial paper outstanding (seasonally adjusted) \771\.               578                      -9.13
Nonfinancial commercial paper outstanding (seasonally adjusted)                   103.1                  -13.57
 \772\.............................................................
----------------------------------------------------------------------------------------------------------------
\770\ Federal Reserve Statistical Release on Commercial Paper, supra note 762.
\771\ Federal Reserve Statistical Release on Commercial Paper, supra note 762.
\772\ Federal Reserve Statistical Release on Commercial Paper, supra note 762.

       Lending by the Largest TARP-recipient Banks. 
Treasury's Monthly Lending and Intermediation Snapshot tracks 
loan originations and average loan balances for the 22 largest 
recipients of CPP funds across a variety of categories, ranging 
from mortgage loans to commercial real estate to credit card 
lines. The data below exclude lending by two large CPP-
recipient banks, PNC Bank and Wells Fargo, because significant 
acquisitions by those banks since October 2008 make comparisons 
difficult.\773\
---------------------------------------------------------------------------
    \773\ 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.
---------------------------------------------------------------------------
In October, these 20 institutions originated over $187 billion 
in loans, a decrease of nearly one percent compared to 
September 2009.\774\
---------------------------------------------------------------------------
    \774\ U.S. Department of the Treasury, Treasury Department Monthly 
Lending and Intermediation Snapshot: Summary Analysis for October 2009 
(Jan. 4, 2010) (online at www.financialstability.gov/docs/surveys/
Snapshot_Data_October_2009.xls) (hereinafter ``Treasury Snapshot for 
October'').

           FIGURE 18: LENDING BY THE LARGEST TARP-RECIPIENT BANKS (WITHOUT PNC AND WELLS FARGO) \775\
----------------------------------------------------------------------------------------------------------------
                                                        Most Recent Data
                                                         (October 2009)     Percent Change      Percent Change
                      Indicator                           (millions of     Since  September     Since  October
                                                            dollars)             2009                2008
----------------------------------------------------------------------------------------------------------------
Total loan originations..............................           $187,033               -0.67               -14.3
Total mortgage originations..........................             54,645                0.84                23.4
Small business originations..........................              5,394                8              \776\ 5.6
Mortgage refinancing.................................             30,427               -0.15                62.1
HELOC originations (new lines & line increases)......              2,226               -1.98               -53.2
C&I renewal of existing accounts.....................             47,677              -12.6                -17
C&I new commitments..................................             41,824               19.7                -29.1
    Total average loan balances......................         $3,398,679               -0.89                -0.7 
----------------------------------------------------------------------------------------------------------------
\775\ Treasury Snapshot for October, supra note 774.
\776\ Treasury only began reporting data regarding small business originations in its April Lending Survey. U.S.
  Department of the Treasury, Treasury Department Monthly Lending and Intermediation Snapshot (hereinafter
  ``Treasury Snapshot for April'').

     Housing Indicators. Foreclosure filings decreased 
by over seven percent from October to November, and are nearly 
10 percent above the level of October 2008. Housing prices, as 
illustrated by both the S&P/Case-Shiller Composite 20 Index and 
the FHFA House Price Index, increased slightly in October.

                                          FIGURE 19: HOUSING INDICATORS
----------------------------------------------------------------------------------------------------------------
                                                                            Percent Change
                                                          Most Recent          From Data        Percent  Change
                      Indicator                          Monthly Data      Available at Time    Since  October
                                                                            of Last Report           2008
----------------------------------------------------------------------------------------------------------------
Monthly foreclosure filings \777\...................          306,627                  -7.7                 9.7
Housing prices--S&P/Case-Shiller Composite 20 Index               145.4                 0.37               -7.3
 \778\..............................................
FHFA Housing Price Index \779\......................              199.41                0.64               -1.91 
----------------------------------------------------------------------------------------------------------------
\777\ RealtyTrac, Foreclosure Activity Press Releases (online at www.realtytrac.com//ContentManagement/
  PressRelease.aspx) (accessed Jan. 4, 2010) (hereinafter ``RealtyTrac Foreclosure Activity Data''). The most
  recent data available is for October 2009.
\778\ Standard & Poor's, S&P/Case-Shiller Home Price Indices (Instrument: Seasonally Adjusted Composite 20
  Index) (online at www.standardandpoors.com/prot/servlet/BlobServer?blobheadername3=MDT-
  Type&blobcol=urldata&blobtable=MungoBlobs&
  blobheadervalue2=inline%3B+filename%3DSA_CSHomePrice_History_122925.xls&blobheadername2=Content-Disposition
  &blobheadervalue1=application%2Fexcel&blobkey=id&blobheadername1=content-
  type&blobwhere=1243629218624&blobheadervalue3=UTF-8) (hereinafter ``S&P/Case-Shiller Home Price Indices'')
  (accessed Jan. 4, 2010). The most recent data available is for October 2009.
\779\ Federal Housing Finance Agency, U.S. and Census Division Monthly Purchase Only Index (Instrument: USA,
  Seasonally Adjusted) (online at www.fhfa.gov/webfiles/15321/MonthlyIndex_Jan1991_to_Latest.xls) (accessed Jan.
  4, 2010). The most recent data available is for October 2009.

FIGURE 20: FORECLOSURE FILINGS AS COMPARED TO THE CASE-SHILLER 20 CITY 
              HOME PRICE INDEX (AS OF OCTOBER 2009) \780\

---------------------------------------------------------------------------
    \780\ RealtyTrac Foreclosure Activity Data, supra note 777; S&P/
Case-Shiller Home Price Indices, supra note 778. The most recent data 
available is for October 2009. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

     Commercial Real Estate. The commercial real estate 
market has continued to deteriorate since the Panel's last 
report. New CRE lending by the top 22 CPP recipients has 
decreased by over 71 percent since the enactment of EESA. 
Respondents to Treasury's survey of the top 22 CPP participants 
reported that demand for C&I and CRE loans was still below 
normal levels due to the lack of new construction.\781\ A 
recent Goldman Sachs report notes that rent growth in this 
market declined at an annualized rate of 8.7 percent in the 
second quarter and estimates that there will be a total of $287 
billion in aggregated losses.
---------------------------------------------------------------------------
    \781\ Treasury Snapshot for April, supra note 776. The Goldman 
Sachs Group, Inc., US Commercial Real Estate Take III: Reconstructing 
Estimates for Losses, Timing (Sept. 29, 2009).

     FIGURE 21: COMMERCIAL REAL ESTATE LENDING BY TOP 22 CPP RECIPIENTS (WITHOUT PNC AND WELLS FARGO) \782\
----------------------------------------------------------------------------------------------------------------
                                       Current Level  as of 12/                            Percent Change Since
              Indicator                  31/09)  (millions of     Percent Change Since    EESA  Signed into Law
                                               dollars)              September 2009             (10/3/08)
----------------------------------------------------------------------------------------------------------------
CRE New Commitments..................                   $2,977                    -4.07                   -71.7
CRE Renewal of Existing Accounts.....                    9,194                   -11.9                      2.2
CRE Average Total Loan Balance.......                  370,569                    -1.16                    -1.14 
----------------------------------------------------------------------------------------------------------------
\782\ Treasury Snapshot for October, supra note 735.

                          I. Financial Update 

    Each month, the Panel summarizes the resources that the 
federal government has committed to economic stabilization. The 
following financial update provides: (1) An updated accounting 
of the TARP, including a tally of dividend income, repayments 
and warrant dispositions that the program has received as of 
November 30, 2009; and (2) an updated accounting of the full 
federal resource commitment as of December 30, 2009.

1. TARP

            a. Costs: Expenditures and Commitments 
    Treasury has committed or is currently committed to spend 
$532.6 billion of TARP funds through an array of programs used 
to purchase preferred shares in financial institutions, offer 
loans to small businesses and automotive companies, and 
leverage Federal Reserve loans for facilities designed to 
restart secondary securitization markets.\783\ Of this total, 
$297 billion is currently outstanding under the $698.7 billion 
limit for TARP expenditures set by EESA, leaving $403.3 billion 
available for fulfillment of anticipated funding levels of 
existing programs and for funding new programs and initiatives. 
The $297 billion includes purchases of preferred and common 
shares, warrants and/or debt obligations under the CPP, AIGIP/
SSFI Program, PPIP, and AIFP; and a $20 billion loan to TALF 
LLC, the special purpose vehicle (SPV) used to guarantee 
Federal Reserve TALF loans.\784\ Additionally, Treasury has 
allocated $35.5 billion to the Home Affordable Modification 
Program, out of a projected total program level of $50 billion.
---------------------------------------------------------------------------
    \783\ EESA, as amended by the Helping Families Save Their Homes Act 
of 2009, limits Treasury to $698.7 billion in purchasing authority 
outstanding at any one time as calculated by the sum of the purchase 
prices of all troubled assets held by Treasury. Pub. L. No. 110-343, 
115(a)-(b); Helping Families Save Their Homes Act of 2009, Pub. L. No. 
111-22, 402(f) (reducing by $1.26 billion the authority for the TARP 
originally set under EESA at $700 billion). For further discussion of 
pending legislation that may affect the total amount of TARP funds 
available, see Section F, infra.
    \784\ TARP Transactions Report for Period Ending December 30, 2009, 
supra note 166.
---------------------------------------------------------------------------
            b. Income: Dividends, Interest Payments, and CPP Repayments 

    As of December 30, 2009, a total of 58 institutions have 
completely repurchased their CPP preferred shares. Of these 
institutions, 37 have repurchased their warrants for common 
shares that Treasury received in conjunction with its preferred 
stock investments; Treasury sold the warrants for common shares 
for three other institutions at auction.\785\ Treasury received 
$50.9 million in repayments from 13 CPP participants during 
December.\786\ The vast majority of this total was repaid by 
two institutions--Bank of America and Wells Fargo--that each 
repaid $25 billion received as part of the CPP.\787\ 
Furthermore, Treasury closed its Targeted Investment Program 
(TIP) after Citigroup and Bank of America's program repayments 
of $20 billion each ended any of TIP's outstanding obligations. 
In addition, Treasury receives dividend payments on the 
preferred shares that it holds, usually five percent per annum 
for the first five years and nine percent per annum 
thereafter.\788\ In total, Treasury has received approximately 
$186.5 billion in income from repayments, warrant repurchases, 
dividends, and interest payments deriving from TARP 
investments,\789\ and another $1.2 billion in participation 
fees from its Guarantee Program for Money Market Funds.\790\
---------------------------------------------------------------------------
    \785\ TARP Transactions Report for Period Ending December 30, 2009, 
supra note 166.
    \786\ TARP Transactions Report for Period Ending December 30, 2009, 
supra note 166.
    \787\ TARP Transactions Report for Period Ending December 30, 2009, 
supra note 166.
    \788\ See, e.g., U.S. Department of the Treasury, Securities 
Purchase Agreement: Standard Terms (online at 
www.financialstability.gov/docs/CPP/spa.pdf) (accessed Jan. 4, 2010).
    \789\ See Cumulative Dividends Report as of November 30, 2009, 
supra note 241; TARP Transactions Report for Period Ending December 30, 
2009, supra note 166.
    \790\ U.S. Department of the Treasury, Treasury Announces 
Expiration of Guarantee Program for Money Market Funds (Sept. 18, 2009) 
(online at www.treasury.gov/press/releases/tg293.htm).
---------------------------------------------------------------------------
            c. TARP Accounting 

                           FIGURE 22: TARP ACCOUNTING (AS OF DECEMBER 30, 2009) \791\
                                              [Dollars in billions]
----------------------------------------------------------------------------------------------------------------
                                 Anticipated                        Total           Funding          Funding
       TARP Initiative             Funding     Actual Funding     Repayments      Outstanding       Available
----------------------------------------------------------------------------------------------------------------
Capital Purchase Program               $218.0          $204.9           $121.9            $83              $13.1
 (CPP) \792\.................
Targeted Investment Program              40.0            40.0             40                0                0
 (TIP) \793\.................
AIG Investment Program                   69.8      \794\ 46.9              0               46.9             22.9
 (AIGIP)/Systemically
 Significant Failing
 Institutions Program (SSFI).
Automobile Industry Financing            81.3            81.3              3.2             78.1              0
 Program (AIFP) \795\........
Asset Guarantee Program (AGP)             5.0             5.0        \797\ 5.0              0                0
 \796\.......................
Capital Assistance Program     ..............  ..............  ...............  ...............  ...............
 (CAP) \798\.................
Term Asset-Backed Securities             20.0            20.0              0               20.0              0
 Lending Facility (TALF).....
Public-Private Investment                30.0            30.0              0               30.0              0
 Partnership (PPIP)..........
Supplier Support Program            \799\ 3.5             3.5              0                3.5              0
 (SSP).......................
Unlocking SBA Lending........            15.0               0            N/A                0               15.0
Home Affordable Modification             50.0      \800\ 35.5              0               35.5             14.5
 Program (HAMP)..............
Total Committed..............           532.6           467.1             --              297               65.5
Total Uncommitted............           166.1             N/A            170.1            N/A        \801\ 336.2
    Total....................          $698.7          $467.1           $170.1           $297       \802\ $401.7
----------------------------------------------------------------------------------------------------------------
\791\ TARP Transactions Report for Period Ending December 30, 2009, supra note 166.
\792\ As of December 30, 2009, the CPP was closed. This figure reflects funds that were committed but unused.
  This information was provided by Treasury in response to Panel inquiry.
\793\ Both Bank of America and Citigroup repaid the $20 billion in assistance each institution received under
  the TIP on December 9 and December 23, 2009, respectively. Therefore the Panel accounts for these funds as
  repaid and as uncommitted. U.S. Department of the Treasury, Treasury Receives $45 Billion in Repayments from
  Wells Fargo and Citigroup (Dec. 22, 2009) (online at www.treas.gov/press/releases/20091229716198713.htm)
  (hereinafter ``Treasury Receives $45 Billion from Wells Fargo and Citigroup'').
\794\ In information provided by Treasury in response to a Panel request, AIG has completely utilized the $40
  billion made available on November 25, 2008 and drawn-down $5.3 billion of the $29.8 billion made available on
  April 17, 2009. This figure also reflects $1.6 billion in compounding of accumulated but unpaid dividends owed
  by AIG to Treasury due to the restructuring of Treasury's investment from cumulative preferred shares to non-
  cumulative shares. TARP Transactions Report for Period Ending December 30, 2009, supra note 166.
\795\ Treasury indicated that it would most likely not provide additional assistance to companies through the
  AIFP. Government Accountability Office, Auto Industry: Continued Stewardship Needed as Treasury Develops
  Strategies for Monitoring and Divesting Financial Interests in Chrysler and GM, at 28 (Nov. 2009) (GAO-10-151)
  (online at www.gao.gov/new.items/d10151.pdf) (``Although the immediate crisis of helping Chrysler and GM
  maintain solvency has passed for now and Treasury has no plans for further financial assistance to the
  companies, the significant sums of taxpayer dollars that are invested in these companies warrant continued
  oversight''). However, on January 5, 2010, Treasury announced a restructuring of its investment in GMAC, which
  resulted in $3.8 billion in additional funds being provided to the company through the AIFP.
\796\ Treasury, the Federal Reserve, and the Federal Deposit Insurance Company terminated the asset guarantee
  with Citigroup on December 23, 2009. The agreement was terminated with no losses to Treasury's $5 billion
  second-loss portion of the guarantee. Citigroup did not repay any funds directly, but instead terminated
  Treasury's outstanding exposure on its $5 billion second-loss position. As a result, the $5 billion is now
  accounted for as available. Treasury Receives $45 Billion from Wells Fargo and Citigroup, supra note 793.
\797\ Although this $5 billion is no longer exposed as part of the AGP and is accounted for as available,
  Treasury did not receive a repayment in the same sense as with other investments. See infra notes 806-807.
  Treasury did receive other income as consideration for the guarantee, which is not a repayment and is
  accounted for in Figure 25. See id.
\798\ On November 9, 2009, Treasury announced the closing of this program and that only one institution, GMAC,
  was in need of further capital from Treasury. Treasury Announcement Regarding the CAP, supra note 486.
\799\ On July 8, 2009, Treasury lowered the total commitment amount for the program from $5 billion to $3.5
  billion. This action reduced GM's portion from $3.5 billion to $2.5 billion and Chrysler's portion from $1.5
  billion to $1 billion. TARP Transactions Report for Period Ending December 30, 2009, supra note 166.
\800\ This figure reflects the total of all the caps set on payments to each mortgage servicer and not the
  disbursed amount of funds for successful modifications. TARP Transactions Report for Period Ending December
  30, 2009, supra note 166.
\801\ This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($166.1 billion)
  and the repayments ($170.1 billion).
\802\ This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($166.1 billion)
  and the difference between the total anticipated funding and the net current investment ($297 billion).


                                                          FIGURE 23: TARP REPAYMENTS AND INCOME
                                                                  [Dollars in billions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                              Warrant
                                                        Repayments  (as  Dividends \803\  Interest \804\    Repurchases   Other Proceeds
                    TARP Initiative                      of  12/30/09)    (as of  11/30/   (as of  11/30/ (as of  12/30/   (as of  12/30/      Total
                                                                               09)              09)             09)             09)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total.................................................           $165.1           $11.7            $0.36           $4.03               -         $183.7
CPP...................................................            121.9             8               0.02            4.03               -          134
TIP...................................................             40               2.7              N/A            0                  -           42.7
AIFP..................................................              3.2             0.75            0.33          N/A                  -            4.3
ASSP..................................................            N/A             N/A               0.01          N/A                  -            0.01
AGP...................................................        \805\ 0               0.26             N/A            0        \806\ $2.23            2.5
Bank of America Guarantee.............................              -               -                  -            -         \807\ 0.28             .28 
--------------------------------------------------------------------------------------------------------------------------------------------------------
\803\ See Cumulative Dividends Report as of November 30, 2009, supra note 241.
\804\ See Cumulative Dividends Report as of November 30, 2009, supra note 241.
\805\ Although Treasury, the Federal Reserve, the FDIC, and Citigroup have terminated the AGP, and although Treasury's $5 billion second-loss position
  no longer counts against the $698.7 TARP ceiling, Treasury did not receive any repayment income. See infra notes 806-807. Treasury did receive other
  income as consideration for the guarantee, which is not a repayment and is accounted for in Figure 25. See id.
\806\ As a fee for taking a second-loss position up to $5 billion on a $301 billion pool of ring-fenced Citigroup assets as part of the AGP, Treasury
  received $4.03 billion in Citigroup preferred stock and warrants; Treasury exchanged these preferred stocks and warrants for trust preferred
  securities in June 2009. Following the early termination of the guarantee, Treasury cancelled $1.8 billion of the trust preferred securities, leaving
  Treasury with a $2.23 billion investment in Citigroup trust preferred securities in exchange for the guarantee. U.S. Department of the Treasury,
  Troubled Asset Relief Program Transactions Report for Period Ending December 30, 2009 (Jan. 4, 2010) (online at www.financialstability.gov/docs/
  transaction-reports/1-4-10%20Transactions%20Report%20as%20of%2012-30-09.pdf).
\807\ Although Treasury, the Federal Reserve, and the FDIC negotiated with Bank of America regarding a similar guarantee, the parties never reached an
  agreement. In September 2009, Bank of America agreed to pay each of the prospective guarantors a fee as though the guarantee had been in place during
  the negotiations. This agreement resulted in payments of $276 million to Treasury, $57 million to the Federal Reserve, and $92 million to the FDIC.
  U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Bank of America
  Corporation, Termination Agreement, at 1-2 (Sept. 21, 2009) (online at www.financialstability.gov/docs/AGP/BofA%20-%20Termination%20Agreement%20-
  %20executed.pdf).

Rate of Return

    As of December 30, 2009, the average internal rate of 
return for all financial institutions that participated in the 
CPP and fully repaid the U.S. government (including preferred 
shares, dividends, and warrants) is 14.4 percent.\808\ The 
internal rate of return is the annualized effective compounded 
return rate that can be earned on invested capital.
---------------------------------------------------------------------------
    \808\ Participating privately-held qualified financial institutions 
provided Treasury with warrants to purchase additional preferred stock, 
which Treasury exercised immediately. TARP Transactions Report for 
Period Ending December 30, 2009, supra note 166. The corresponding 
figure does not reflect the repayment of private institutions' 
preferred stock. The internal rate of return for repayments by these 
institutions is 16.7 percent.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

2. Other Financial Stability Efforts

Federal Reserve, FDIC, and Other Programs

    In addition to the direct expenditures Treasury has 
undertaken through TARP, the federal government has engaged in 
a much broader program directed at stabilizing the U.S. 
financial system. Many of these initiatives explicitly augment 
funds allocated by Treasury under specific TARP initiatives, 
such as FDIC and Federal Reserve asset guarantees for 
Citigroup, or operate in tandem with Treasury programs, such as 
the interaction between PPIP and TALF. Other programs, like the 
Federal Reserve's extension of credit through its section 13(3) 
facilities and SPVs and the FDIC's Temporary Liquidity 
Guarantee Program, operate independently of TARP.
    Figure 25 below reflects the changing mix of Federal 
Reserve investments. As the liquidity facilities established to 
face the crisis have been wound down, the Federal Reserve has 
expanded its facilities for purchasing mortgage related 
securities. The Federal Reserve has announced that it intends 
to purchase $175 billion of federal agency debt securities and 
$1.25 trillion of agency mortgage-backed-securities.\809\ As of 
January 7, 2010, $160 billion of federal agency (government-
sponsored enterprise) debt securities and $909 billion of 
agency mortgage-backed-securities have been purchased. The 
Federal Reserve has announced that these purchases will be 
completed by April 2010.\810\
---------------------------------------------------------------------------
    \809\ Board of Governors of the Federal Reserve System, Minutes of 
the Federal Open Market Committee, at 10 (Dec. 15-16, 2009) (online at 
www.federalreserve.gov/newsevents/press/
monetary/fomcminutes20091216.pdf) (hereinafter ``Minutes of the Federal 
Open Market Committee'').
    \810\ RealtyTrac Foreclosure Activity Data supra note 809, at 10 
(``In order to promote a smooth transition in markets, the Committee is 
gradually slowing the pace of these purchases, and it anticipates that 
these transactions will be executed by the end of the first quarter of 
2010''); Board of Governors of the Federal Reserve System, Factors 
Affecting Reserve Balances (Jan. 7, 2010) (online at 
www.federalreserve.gov/Releases/H41/Current/).
---------------------------------------------------------------------------

 FIGURE 25: FEDERAL RESERVE AND FDIC FINANCIAL STABILITY EFFORTS \811\

---------------------------------------------------------------------------
    \811\ 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 Jan. 4, 2010). 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-Nov. 2009) (online at 
www.fdic.gov/regulations/resources/TLGP/reports.html). 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


---------------------------------------------------------------------------
3. Total Financial Stability Resources (as of November 30, 2009)

    Beginning in its April report, the Panel broadly classified 
the resources that the federal government has devoted to 
stabilizing the economy through myriad new programs and 
initiatives as outlays, loans, or guarantees. Although the 
Panel calculates the total value of these resources at over $3 
trillion, this would translate into the ultimate ``cost'' of 
the stabilization effort only if: (1) assets do not appreciate; 
(2) no dividends are received, no warrants are exercised, and 
no TARP funds are repaid; (3) all loans default and are written 
off; and (4) all guarantees are exercised and subsequently 
written off.
    With respect to the FDIC and Federal Reserve programs, the 
risk of loss varies significantly across the programs 
considered here, as do the mechanisms providing protection for 
the taxpayer against such risk. As discussed in the Panel's 
November report, the FDIC assesses a premium of up to 100 basis 
points on TLGP debt guarantees.\812\ In contrast, the Federal 
Reserve's liquidity pro- grams are generally available only to 
borrowers with good credit, and the loans are over-
collateralized and with recourse to other assets of the 
borrower. If the assets securing a Federal Reserve loan realize 
a decline in value greater than the ``haircut,'' the Federal 
Reserve is able to demand more collateral from the borrower. 
Similarly, should a borrower default on a recourse loan, the 
Federal Reserve can turn to the borrower's other assets to make 
the Federal Reserve whole. In this way, the risk to the 
taxpayer on recourse loans only materializes if the borrower 
enters bankruptcy. The only loans currently ``underwater''--
where the outstanding principal amount exceeds the current 
market value of the collateral--are two of the three non-
recourse loans to the Maiden Lane SPVs (used to purchase Bear 
Stearns and AIG assets).
---------------------------------------------------------------------------
    \812\ COP November Oversight Report, supra note 2, at 36.

               FIGURE 26: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF NOVEMBER 30, 2009)
                                              [Dollars in billions]
----------------------------------------------------------------------------------------------------------------
                                                     Treasury         Federal
                     Program                          (TARP)          Reserve          FDIC            Total
----------------------------------------------------------------------------------------------------------------
Total...........................................          $698.7        $1,509.9          $678.4          $2,887
    Outlaysi....................................           299.8         1,069.5            69.4         1,438.7
    Loans.......................................            42.7           440.4               0           483.1
    Guaranteesii................................              20               0             609             629
    Uncommitted TARP Funds......................           336.2               0               0           336.2
AIG.............................................            69.8            68.7               0           138.5
    Outlays.....................................         iii6938               0               0            69.8
    Loans.......................................               0          iv68.7               0            68.7
    Guarantees..................................               0               0               0               0
Bank of America.................................               0               0               0               0
    Outlays.....................................              v0               0               0               0
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
Citigroup.......................................              25               0               0              25
    Outlays.....................................            vi25               0               0              25
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
Capital Purchase Program (Other)................            71.1               0               0            71.1
    Outlays.....................................         vii71.1               0               0            71.1
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
Capital Assistance Program......................             N/A               0               0         viiiN/A
TALF............................................              20             180               0             200
    Outlays.....................................               0               0               0               0
    Loans.......................................               0            x180               0             180
    Guarantees..................................            ix20               0               0              20
PPIP (Loans)xi..................................               0               0               0               0
    Outlays.....................................               0               0               0               0
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
PPIP (Securities)...............................           xii30               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           xiv50
    Outlays.....................................          xiii50               0               0              50
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
Automotive Industry Financing Program...........          xv78.2               0               0            75.4
    Outlays.....................................              59               0               0            75.4
    Loans.......................................            19.2               0               0            19.2
    Guarantees..................................               0               0               0               0
Auto Supplier Support Program...................             3.5               0               0             3.5
    Outlays.....................................               0               0               0               0
    Loans.......................................          xvi3.5               0               0             3.5
    Guarantees..................................               0               0               0               0
Unlocking SBA Lending...........................          xvii15               0               0              15
    Outlays.....................................              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        xviii609             609
Deposit Insurance Fund..........................               0               0            69.4            69.4
    Outlays.....................................               0               0         xix69.4            69.4
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
Other Federal Reserve Credit Expansion..........               0         1,261.2               0         1,261.2
    Outlays.....................................               0       xx1,069.5               0         1,069.5
    Loans.......................................               0        xxi191.7               0           191.7
    Guarantees..................................               0               0               0               0
Uncommitted TARP Funds..........................           336.2               0               0           336.2
----------------------------------------------------------------------------------------------------------------
iThe 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 used here represent investment and asset 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.
iiAlthough 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.
iiiThis number includes investments under the AIGIP/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). As of January 5, 2010, AIG had utilized $45.3 billion of
  the available $69.8 billion under the AIGIP/SSFI. This information was provided by Treasury in response to a
  Panel inquiry.
ivThis number represents the full $35 billion that is available to AIG through its revolving credit facility
  with the Federal Reserve ($22.2 billion had been drawn down as of December 31, 2009) and the outstanding
  principal of the loans extended to the Maiden Lane II and III SPVs to buy AIG assets (as of December 31, 2009,
  $15.7 billion and $18 billion, respectively). Income from the purchased assets is used to pay down the loans
  to the SPVs, reducing the taxpayers' exposure to losses over time. Board of Governors of the Federal Reserve
  System, Federal Reserve System Monthly Report on Credit and Liquidity Programs and the Balance Sheet, at 17
  (Oct. 2009) (online at www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200910.pdf). 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. 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=UGFyZW50SUQ9MjE40D18Q2hpbGRJRD0tMXxUeXB1PTM=&t=1).
vBank of America repaid the $45 billion in assistance it had received through TARP programs on December 9, 2009.
  U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending December
  30, 2009 (Jan. 4, 2010) (online at www.financialstability.gov/docs/transaction-reports/1-4-
  10%20Transactions%20Report%20as%20of%2012-30-09.pdf) (hereinafter ``TARP Transactions Report'').
viAs of December 30, 2009, the U.S. Treasury held $25 billion of Citigroup common stock. See TARP Transactions
  Report, supra note v.
viiThis figure represents the $218 billion Treasury has anticipated spending under the CPP, minus the $25
  billion investment in Citigroup ($25 billion) identified above, and the $121.9 billion in repayments that are
  reflected as available TARP funds. This figure does not account for future repayments of CPP investments, nor
  does it account for dividend payments from CPP investments.
viiiOn November 9, 2009, Treasury announced the closing of the CAP and that only one institution, GMAC, was in
  need of further capital from Treasury. GMAC, however received further funding through the AIFP, therefore the
  Panel considers CAP unused and closed. 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).
ixThis figure represents a $20 billion allocation to the TALF SPV on March 3, 2009. See TARP Transactions
  Report, supra note vi. As of January 7, 2010, investors had requested a total of $64.3 billion in TALF loans
  ($9.2 billion in CMBS and $55 billion in non-CMBS). Federal Reserve Bank of New York, Term Asset-Backed
  Securities Loan Facility: CMBS (accessed Jan. 7, 2009) (online at www.newyorkfed.org/markets/
  CMBS_recent_operations.html); Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility:
  non-CMBS (accessed Jan. 7, 2009) (online at www.newyorkfed.org/markets/talf_operations.html).
xThis 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.
xiIt is unlikely that resources will be expended under the PPIP Legacy Loans Program in its original design as a
  joint Treasury-FDIC program to purchase troubled assets from solvent banks. See also Federal Deposit Insurance
  Corporation, FDIC Statement on the Status of the Legacy Loans Program (June 3, 2009) (online at www.fdic.gov/
  news/news/press/2009/pr09084.html) and Federal Deposit Insurance Corporation, Legacy Loans Program--Test of
  Funding Mechanism (July 31, 2009) (online at www.fidc.gov/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.
xiiU.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 December 30, 2009, Treasury reported $19.9 billion in outstanding loans and $9.9 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. TARP
  Transactions Report, supra note v.
xiiiU.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, $35.5 billion has been allocated
  as of December 30, 2009. See TARP Transactions Report, supra note v.
xivFannie Mae and Freddie Mac, government-sponsored entities (GSEs) that were placed in conservatorship of the
  Federal Housing Finance Housing Agency on September 7, 2009, will also contribute up to $25 billion to the
  Making Home Affordable Program, of which the HAMP is a key component. U.S. Department of the Treasury, Making
  Home Affordable: Updated Detailed Program Description (Mar. 4, 2009) (online at www.treas.gov/press/releases/
  reports/housing_fact_sheet.pdf).
xvSee TARP Transactions Report, supra note v. A substantial portion of the total $81 billion in loans extended
  under the AIFP have since been converted to common equity and preferred shares in restructured companies.
  $19.2 billion has been retained as first lien debt (with $6.7 billion committed to GM, $12.5 billion to
  Chrysler). This figure ($78.2 billion) represents Treasury's current obligation under the AIFP after
  repayments.
xviSee TARP Transactions Report, supra note v.
xviiU.S. Department of Treasury, Fact Sheet: Unlocking Credit for Small Businesses (Oct. 19, 2009) (online at
  www.financialstability.gov/roadtostability/unlockingCreditforSmallBusinesses.html) (``Jumpstart Credit Markets
  For Small Businesses By Purchasing Up to $15 Billion in Securities'').
xviiiThis 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 institutes participating. $313
  billion of debt subject to the guarantee has been issued to date, which represents about 51 percent of the
  current cap, Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary
  Liquidity Guarantee Program: Debt Issuance Under Guarantee Program (Nov. 30, 2009) (online at www.fdic.gov/
  regulations/resources/TLGP/total_issuance11-09.html) (updated Jan. 4, 2010). The FDIC has collected $10.3
  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 (Nov. 30, 2009) (online at www.fdic.gov/regulations/resources/TLGP/fees.html) (updated Jan. 4, 2010).
xixThis 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, second and third 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); Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF
  Income Statement (Third Quarter 2009) (online at www.fdic.gov/about/strategic/corporate/cfo_report_3rdqtr_09/
  income.html). This figure includes the FDIC's estimates of its future losses under loss-sharing agreements
  that it has entered into with banks acquiring assets of insolvent banks during these four quarters. Under a
  loss-sharing agreement, as a condition of an acquiring bank's agreement to purchase the assets of an insolvent
  bank, the FDIC typically agrees to cover 80 percent of an acquiring bank's future losses on an initial portion
  of these assets and 95 percent of losses of another portion of assets. See, for example Federal Deposit
  Insurance Corporation, Purchase and Purchase and Assumption Agreement Among FDIC, Receiver of Guaranty Bank,
  Austin, Texas FDIC and Compass Bank at 65-66 (Aug. 21, 2009) (online at www.fdic.gov/bank/individual/failed/
  guaranty-tx_p_and_a_w_addendum.pdf). In information provided to Panel staff, the FDIC disclosed that there
  were approximately $132 billion in assets covered under loss-sharing agreements as of December 18, 2009.
  Furthermore, the FDIC estimates the total cost of a payout under these agreements to be $59.3 billion. Since
  there is a published loss estimate for these agreements, the Panel continues to reflect them as outlays rather
  than as guarantees.
xxOutlays are comprised of the Federal Reserve Mortgage Related Facilities. The Federal Reserve balance sheet
  accounts for these facilities under Federal agency debt securities and mortgage-backed securities held by the
  Federal Reserve. 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 Jan. 4, 2010). Although 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).
xxiFederal 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). 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 Jan. 4, 2010);
  see id.

                   SECTION FIVE: OVERSIGHT ACTIVITIES

    The Congressional Oversight Panel was established as part 
of the Emergency Economic Stabilization Act (EESA) and formed 
on November 26, 2008. Since then, the Panel has produced 
thirteen 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 December oversight report, which 
assessed the performance of the Troubled Asset Relief Program 
(TARP) since its inception, the following developments 
pertaining to the Panel's oversight of the TARP took place:
     The Panel held a hearing in Washington, DC with 
Secretary of the Treasury Timothy Geithner on December 10, his 
third appearance before the Panel. Secretary Geithner answered 
questions relating to the Panel's December oversight report, 
discussed the TARP exit strategy, and provided an overview of 
how the TARP would be used as it is extended into 2010. 
Secretary Geithner has agreed to testify before the Panel once 
per quarter.

Upcoming Reports and Hearings

    The Panel will release its next oversight report in 
February. The report will address the TARP's role in mitigating 
continued concerns about the commercial real estate market.
    The Panel is planning a field hearing in Atlanta on January 
27, 2010. The hearing will discuss the implications of the 
troubled commercial real estate market on sustained financial 
stability.
          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 the 
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. Effective December 9, 2009, Congressman 
Jeb Hensarling resigned from the Panel and House Minority 
Leader John Boehner announced the appointment of J. Mark 
McWatters to fill the vacant seat.
 APPENDIX I: LETTER FROM SECRETARY TIMOTHY GEITHNER TO CHAIR ELIZABETH 
           WARREN, RE: STRESS TESTS, DATED DECEMBER 10, 2009

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 APPENDIX II: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY 
     GEITHNER, RE: EXECUTIVE COMPENSATION, DATED DECEMBER 24, 2009


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 APPENDIX III: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY 
       GEITHNER, RE: CIT GROUP ASSISTANCE, DATED JANUARY 11, 2010

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