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



 
                     CONGRESSIONAL OVERSIGHT PANEL
                      SEPTEMBER OVERSIGHT REPORT *

                               ----------                              

            ASSESSING THE TARP ON THE EVE OF ITS EXPIRATION

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13


               September 16, 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 SEPTEMBER OVERSIGHT REPORT

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                     CONGRESSIONAL OVERSIGHT PANEL

                      SEPTEMBER OVERSIGHT REPORT *

                               __________

            ASSESSING THE TARP ON THE EVE OF ITS EXPIRATION

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13


               September 16, 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
                             Panel Members
                        Elizabeth Warren, Chair
                             Paul S. Atkins
                           Richard H. Neiman
                             Damon Silvers
                           J. Mark McWatters


                                CONTENTS


                               __________
                                                                   Page
Executive Summary................................................     1
Section One:
    A. Introduction..............................................     4
    B. Summary of the TARP in 2010...............................     5
        1. Updates to the Panel's Oversight of the TARP in 2010..     5
        2. Status of TARP Authorities in Light of Secretary's 
          December Extension Through October 3, 2010, and Changes 
          Made in the Dodd-Frank Legislation.....................    14
    C. TARP's Financial Results..................................    16
        1. Capital Programs and Banking Sector Health............    22
        2. AIG Investment Program (Formerly the Systemically 
          Significant Failing Institutions Program)..............    24
        3. Automotive Industry Financing Program.................    27
        4. Mortgage Foreclosure Relief Programs..................    30
    D. How Has Treasury Used Its Extended TARP Authority?........    31
        1. Foreclosure Mitigation................................    32
        2. Small Business Lending and Small Banks................    44
        3. Support for Securitization Markets Through the TALF...    47
        4. Summary of Treasury's Use of TARP Authority Since 
          December 2009..........................................    49
    E. How Is the American Economy Performing in the Wake of the 
      TARP, Particularly Those Sectors--Financial Markets, 
      Housing, Autos--That Have Been the Specific Target of TARP 
      Assistance?................................................    50
        1. Indicators of the TARP's Impact.......................    50
        2. The TARP's Effect on the Financial System.............    76
        3. Costs of the TARP: Moral Hazard and Stigma............    78
        4. Other Potential Near and Long-Term Costs of the TARP..    83
    F. Conclusion................................................    87
Annex I: Automotive Industry Financing Program Funds Committed...    91
Annex II: Views of Academic Experts
    A. Alan Blinder, Gordon S. Rentschler Memorial Professor of 
      Economics and Public Affairs at Princeton University.......    93
    B. Simon Johnson, Ronald A. Kurtz (1954) Professor of 
      Entrepreneurship at MIT Sloan School of Management.........    95
    C. Anil Kashyap, Edward Eagle Brown Professor of Economics 
      and Finance and Richard N. Rosett Faculty Fellow at the 
      University of Chicago Booth School of Business.............   101
    D. Kenneth Rogoff, Thomas D. Cabot Professor of Public Policy 
      and Professor of Economics at Harvard University...........   103
Section Two: Additional Views....................................   106
    A. J. Mark McWatters and Professor Kenneth R. Troske.........   106
Section Three: TARP Updates Since Last Report....................   111
Section Four: Oversight Activities...............................   124
Section Five: About the Congressional Oversight Panel............   125
======================================================================




                       SEPTEMBER OVERSIGHT REPORT

                                _______
                                

               September 16, 2010.--Ordered to be printed

                                _______
                                

                          EXECUTIVE SUMMARY *

      
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    * The Panel adopted this report with a 4-0 vote on September 15, 
2010.
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    In December 2009, in anticipation of the scheduled 
expiration of Treasury's authority under the Troubled Asset 
Relief Program (TARP) on December 31, 2009, the Panel issued a 
report that attempted to gauge the program's overall 
effectiveness. ``There is broad consensus that the TARP was an 
important part of a broader government strategy that stabilized 
the U.S. financial system by renewing the flow of credit and 
averting a more acute crisis,'' the Panel wrote. ``Although the 
government's response to the crisis was at first haphazard and 
uncertain, it eventually proved decisive enough to stop the 
panic and restore market confidence. Despite significant 
improvement in the financial markets, however, the broader 
economy is only beginning to recover from a deep recession, and 
the TARP's impact on the underlying weaknesses in the financial 
system that led to last fall's crisis is less clear.''
    The TARP did not, however, expire on its original schedule. 
Shortly after the release of the Panel's report, the Secretary 
of the Treasury exercised his legal authority to extend the 
program until October 3, 2010--the latest date authorized by 
statute. This month, in anticipation of this final expiration 
of the program's most significant authorities, the Panel is 
revisiting and expanding upon its earlier findings about the 
program's effectiveness. The Panel will continue to explore 
these broad issues, as well as to evaluate specific TARP 
programs, in further monthly reports until its statutory 
authority expires on April 3, 2011.
    When the Secretary extended the TARP, he stated that use of 
TARP funds in the extension period would be limited to three 
areas: providing mortgage foreclosure relief, extending capital 
to small and community banks, and increasing support for the 
securitization market through the TALF. He also noted that by 
extending the TARP, Treasury was preserving its authority to 
intervene swiftly in the event that the financial markets 
showed signs of another meltdown. This second justification 
ultimately played a much more important role during the 
extension period, as Treasury did not add any new funding to 
any programs intended to address foreclosures, small bank 
capitalization, or the securitization market. Treasury 
therefore used the TARP's extension more to extend the 
government's implicit guarantee of the financial system than to 
address the specific economic problems that the Secretary 
cited.
    Over the last 10 months, Treasury's policy choices have 
been increasingly constrained by public anger about the TARP. 
The program is now widely perceived as bailing out Wall Street 
banks and domestic auto manufacturers while doing little for 
the 14.9 million workers who are unemployed, the 11 million 
homeowners who are underwater on their mortgages, or the 
countless other families struggling to make ends meet. Treasury 
acknowledges that, as a result of this perception, the TARP and 
its programs are now burdened by a public ``stigma.''
    Some of this stigma has arisen due to valid concerns with 
Treasury's implementation of TARP programs and with its 
transparency and communications. For example, Treasury 
initially insisted that only healthy banks would be eligible 
for capital infusions under the Capital Purchase Program (CPP). 
When it became clear that some of these banks were in fact on 
the brink of failure, all participating banks--even those in 
comparatively strong condition--became tainted in the public 
eye. Stigma may also have arisen due to deep public frustration 
that, whatever the TARP's successes, it has not rescued many 
Americans from suffering enormous economic pain. Treasury 
claims that the pain would have been far worse if the TARP had 
never existed, but this hypothetical scenario is difficult to 
evaluate--in part due to regrettable omissions in data 
collection on Treasury's part. For example, since the Panel's 
second report in January of 2009, it has called for Treasury to 
make banks accountable for their use of the funds they 
received. It has also urged Treasury to be transparent with the 
public, in particular with respect to the health of the banks 
receiving the funds. The lack of these data makes it more 
difficult to measure the TARP's success and thus contributes to 
the TARP's stigmatization.
    The program is today so widely unpopular that Treasury has 
expressed concern that banks avoided participating in the CPP 
due to stigma, and the legislation proposing the Small Business 
Lending Fund, a program outside the TARP, specifically provided 
an assurance that it was not a TARP program. Popular anger 
remains high about taxpayer support of America's largest banks, 
and that anger has only intensified in light of the continuing 
economic turmoil. The TARP's unpopularity may mean that, unless 
the program's effectiveness can be convincingly demonstrated, 
the government will not authorize similar policy responses in 
the future. Thus, the greatest consequence of the TARP may be 
that the government has lost some of its ability to respond to 
financial crises.
    In order to gain a full perspective on the TARP, the Panel 
consulted with several outside experts: Professors Alan 
Blinder, Simon Johnson, Anil Kashyap, and Kenneth Rogoff. While 
differing on numerous points, these economists generally agreed 
that the TARP was both necessary to stabilize the financial 
system and that it had been mismanaged and could pose 
significant costs far into the future. The early change in TARP 
strategy from asset purchases to capital injections, followed 
by the rollout of numerous seemingly unconnected programs, 
combined with largely ineffective communication of the 
reasoning behind these actions, spread confusion in the public 
and undermined trust in the TARP. Further, the experts 
consulted by the Panel unanimously felt that the program 
created significant moral hazard. After all, the government had 
alternatives for the form of its intervention. As an 
alternative to subsidizing large, distressed banks, it had the 
option of putting them into liquidation or receivership, 
removing failed managers, and wiping out existing shareholders. 
The fact that the government chose not to impose such stringent 
costs upon TARP recipients meant that the program's moral 
hazard costs were much greater than necessary.
    Ultimately, any evaluation of the TARP must be guided by 
the program's stated goals. Congress authorized Treasury to use 
the TARP in a manner that ``protects home values, college 
funds, retirement accounts, and life savings; preserves 
homeownership and promotes jobs and economic growth; [and] 
maximizes overall returns to the taxpayers of the United 
States.'' But economic weaknesses persist. Since the TARP was 
authorized in October 2008, 7.1 million homeowners have 
received foreclosure notices. Since their pre-crisis peaks, 
home values have dropped 28 percent, and stock indices--which 
indicate the health of many Americans' most significant 
investments for college and retirement--have fallen 30 percent. 
In short, although the TARP provided critical government 
support to the financial system when the financial system was 
in a severe crisis, its effectiveness at pursuing its broader 
statutory goals has been far more limited.


                              SECTION ONE:


                            A. Introduction

    Next month marks the two-year anniversary of the inception 
of the Troubled Asset Relief Program (TARP).\1\ It also 
coincides with the termination of Treasury's capacity to 
authorize new expenditures under the TARP. This milestone 
provides an opportunity to evaluate the program's performance 
from a variety of perspectives.
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    \1\ The Troubled Asset Relief Program (TARP) was authorized and 
funded in the Emergency Economic Stabilization Act of 2008 (Pub. L. 
110-343) enacted October 3, 2008. See 12 U.S.C. Sec. 5201.
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    The TARP was enacted at the height of the severe financial 
collapse that shook the world in the latter half of 2008. 
Although initially conceived as a government initiative to 
rescue financial institutions by purchasing their worst assets, 
the Treasury Department quickly shifted the program's focus to 
providing hundreds of billions of dollars of capital support 
for hundreds of banks. Over the initial months the program 
evolved to rescue a major insurance company and two domestic 
automobile manufacturers. Additional efforts were undertaken to 
support the restart of the securitization markets, to bolster 
small business lending, and to address the mortgage foreclosure 
crisis.
    In December 2009, Treasury Secretary Timothy Geithner sent 
a letter to congressional leaders exercising his authority to 
extend the TARP through October 3, 2010. In his letter, the 
Secretary made renewed commitments to use TARP resources to 
address remaining critical issues in the Administration's 
efforts to promote financial recovery. Except in an emergency, 
the Secretary's letter promised to focus new commitments of 
TARP resources in three areas: (1) mortgage foreclosure relief; 
(2) small business lending, including by providing capital to 
small and community banks; and (3) increasing support for 
securitization markets through the Term Asset-Backed Securities 
Loan Facility (TALF).
    At the time of its initial enactment, the TARP was limited 
to making no more than $700 billion in financial commitments at 
any time.\2\ The Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act), enacted in July 2010, reduced 
the ceiling on TARP expenditures from $698.7 billion to $475 
billion, and prohibited the Treasury Department from 
establishing any new programs under EESA. Hence, Treasury has 
only a limited amount of time remaining--until October 3, 
2010--to undertake any further TARP spending, and its remaining 
funding has been sharply reduced.
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    \2\ Congress reduced the $700 billion ceiling, originally specified 
in EESA, by $1.3 billion to $698.7 billion in the Helping Families Save 
Their Homes Act of 2009, enacted on May 20, 2009. See Helping Families 
Save Their Homes Act of 2009, Pub. L. 111-22, 202(b) (May 22, 2009) 
(online at frwebgate.access.gpo.gov/cgi-bin/
getdoc.cgi?dbname=111_cong_public_laws&;docid=f: publ022.111.pdf) 
(hereinafter ``Helping Families Save Their Homes Act of 2009'').
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    As with prior reports, this report can provide only an 
interim evaluation of the TARP. The effects of the TARP will be 
debated and analyzed for years to come. The impact of the 
financial crisis that shook the world beginning in 2007 
continues to be felt, and much of the economic and financial 
data necessary to reach more definitive conclusions about the 
effectiveness of the TARP are not yet available.
    This month's report first provides an update to the topics 
encompassed by the Panel's reports since December 2009, the 
last time that the Panel broadly evaluated the TARP. It then 
describes current estimates on the subsidy cost--likely losses 
or gains--of the various programs that Treasury established 
under the TARP. The report then describes the actions taken 
since Treasury extended its authority, in December 2009, and 
concludes with an evaluation of the TARP in the context of the 
health of the U.S. economy, aided by the views of several 
prominent economists. This report builds on all of the Panel's 
previous work, but in particular, it is intended as a follow-up 
to the Panel's April 2009 and December 2009 reports, which also 
provided evaluations of the TARP as a whole.

                     B. Summary of the TARP in 2010


1. Updates to the Panel's Oversight of the TARP in 2010

    To assess the overall effect of the TARP, it is necessary 
to consider the performance of the programs that underlie it. 
This section provides updates on the major TARP investments 
either since the Panel's December report or the most recent 
report on each topic, focusing on actions by the 
Administration, Congress, or Treasury.\3\
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    \3\ With the release of this report, the Panel has published 22 
monthly reports and two supplementary reports since December 2008. To 
view these reports, see cop.senate.gov/reports/. See Section C for a 
description of the projected costs of the TARP, and Sections D and E 
for a fuller analysis of the TARP's effect.
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    The Panel concluded in its December 2009 report, when TARP 
had been in existence for slightly more than a year, that the 
``TARP was an important part of a broader set of government 
actions that stabilized the U.S. financial system by renewing 
the flow of credit and averting a more acute crisis'' but that 
``the TARP's impact on the underlying weaknesses in the 
financial system that led to [the] crisis is less clear.'' Nine 
months later, few comprehensive empirical studies on the 
government's concerted response to the crisis have been 
published that would supplement that finding.\4\ Research 
attempting to isolate only the TARP's impact is even more 
sparse. The obstacles to analysis are many: not only is the 
program still in process, but numerous financial rescue 
programs were also implemented by different agencies, including 
Treasury, the FDIC, and the Federal Reserve. These programs 
interact with each other by design, and it is therefore 
difficult to isolate the TARP's effect. Second, ``markets were 
dynamically reacting and adjusting'' to rapid changes in 
financial conditions around the time of the government's 
interventions, which makes it almost impossible to sort out 
causal effects and difficult to develop a compelling 
hypothetical alternative scenario against which to test 
theories.\5\ Such research requires large amounts of data, 
particularly firm-level data, some of which is not publicly 
available and much of which was not required to be kept or 
collected by Treasury.\6\ This task is further complicated by a 
lack of similar prior crises to use in comparisons. Finally, 
such an analysis would need to look at both institutions that 
received TARP assistance and those that did not.
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    \4\ Although some government agencies have released commentary 
assessing TARP's impact, including Treasury and the Federal Reserve, 
these lack either empirical evidence or peer-review or both, thereby 
limiting some of their analytic value. See Alan Blinder and Mark Zandi, 
How the Great Recession Was Brought to an End (July 27, 2010) (online 
at www.economy.com/mark-zandi/documents/End-of-Great-Recession.pdf) 
(hereinafter ``How the Great Recession Was Brought to an End''); John 
B. Taylor, An Exit Rule for Monetary Policy (Feb. 10, 2010) (online at 
www.stanford.edu/johntayl/House%20FSC%20Feb%2010%202010.pdf) 
(hereinafter ``An Exit Rule for Monetary Policy'').
    \5\ An Exit Rule for Monetary Policy, supra note 4, at 2.
    \6\ The Panel has been consistent in its calls for additional data 
collection and disclosure. See Congressional Oversight Panel, January 
Oversight Report: Accountability for the Troubled Asset Relief Program, 
at 10 (Jan. 9, 2009) (online at cop.senate.gov/documents/cop-010909-
report.pdf) (``Treasury should monitor lending at the individual TARP 
recipient level''); Congressional Oversight Panel, March Oversight 
Report: Foreclosure Crisis: Working Toward a Solution, at 15, 26, 48 
(Mar. 6, 2009) (online at cop.senate.gov/documents/cop-030609-
report.pdf) (hereinafter ``March 2009 Oversight Report'') (recommending 
that Congress ``create a national mortgage loan performance reporting 
requirement,'' and that federal banking and housing regulators make 
these data publicly available); Congressional Oversight Panel, May 
Oversight Report: Reviving Lending to Small Businesses and Families and 
the Impact of the TALF, at 56 (May 7, 2009) (online at cop.senate.gov/
documents/cop-050709-report.pdf) (hereinafter ``May 2009 Oversight 
Report'') (``Treasury, the Federal Reserve Board, the SBA, or some 
other agency must strive to compile comprehensive, timely information 
on small business lending across the country.''); Congressional 
Oversight Panel, August Oversight Report: The Continued Risk of 
Troubled Assets, at 50 (Aug. 11, 2009) (online at cop.senate.gov/
documents/cop-081109-report.pdf) (hereinafter ``August 2009 Oversight 
Report'') (``Treasury and relevant government agencies should work 
together to move financial institutions toward sufficient disclosure of 
the terms and volume of troubled assets on banks' books.''); 
Congressional Oversight Panel, September Oversight Report: The Use of 
TARP Funds in Support and Reorganization of the Domestic Automotive 
Industry, at 92 (Sept. 9, 2009) (online at cop.senate.gov/documents/
cop-090909-report.pdf) (hereinafter ``September 2009 Oversight 
Report'') (``New Chrysler and New GM should provide the taxpayer 
investors with a set of metrics by which the companies' success can be 
measured.''); Congressional Oversight Panel, October Oversight Report: 
An Assessment of Foreclosure Mitigation Efforts After Six Months, at 
93, 111, 112 (Oct. 9, 2009) (online at cop.senate.gov/documents/cop-
100909-report.pdf) (hereinafter ``October 2009 Oversight Report'') 
(recommending Treasury: (1) release redefault assumptions to the 
public, (2) collect data on a broader universe of borrowers facing 
foreclosure, beyond those eligible for HAMP, and (3) apply appropriate 
sanctions so that all participants follow program guidelines); 
Congressional Oversight Panel, November Oversight Report: Guarantees 
and Contingent Payments in TARP and Related Programs, at 4 (Nov. 6, 
2009) (online at cop.senate.gov/documents/cop-110609-report.pdf) 
(hereinafter ``November 2009 Oversight Report'') (recommending Treasury 
provide regular detailed disclosures relating to Citigroup's asset 
guarantee, and disclose a cost-benefit analysis of all options 
considered before implementing the asset guarantee protection); 
Congressional Oversight Panel, December Oversight Report: Taking Stock: 
What Has the Troubled Asset Relief Program Achieved, at 108-111 (Dec. 
9, 2009) (online at cop.senate.gov/documents/cop-120909-report.pdf) 
(hereinafter ``December 2009 Oversight Report''); Congressional 
Oversight Panel, January Oversight Report: Exiting TARP and Unwinding 
its Impact on the Financial Markets, at 141 (Jan. 13, 2010) (online at 
cop.senate.gov/documents/cop-011410-report.pdf) (hereinafter ``January 
2010 Oversight Report'') (``Any future recipient of TARP funds . . . 
must be obligated to give a complete accounting of what they did with 
the money . . .''); Congressional Oversight Panel, March Oversight 
Report: The Unique Treatment of GMAC under the TARP, at 121 (Mar. 10, 
2010) (online at cop.senate.gov/documents/cop-031110-report.pdf) 
(hereinafter ``March 2010 Oversight Report'') (``Treasury should 
periodically disclose its estimate of the overall subsidy or loss 
rate'' for each company in the AIFP.); Congressional Oversight Panel, 
April Oversight Report: Evaluating Progress of TARP Foreclosure 
Mitigation Programs, at 91, 96, 94 (Apr. 14, 2010) (online at 
cop.senate.gov/documents/cop-041410-report.pdf) (hereinafter ``April 
2010 Oversight Report'') (recommending Treasury release: (1) more 
specific loan-level data, (2) greater information on compliance results 
and sanctions, (3) regular publicly available data on the performance 
of all HAMP permanent modifications through 2017); Congressional 
Oversight Panel, May Oversight Report: The Small Business Credit Crunch 
and the Impact of the TARP, at 83 (May 13, 2010) (online at 
cop.senate.gov/documents/cop-051310-report.pdf) (hereinafter ``May 2010 
Oversight Report'') (recommending Treasury ``establish a rigorous data 
collection system or survey that examines small business finance in the 
aftermath of the credit crunch and going forward.''); Congressional 
Oversight Panel, August Oversight Report: The Global Context and 
International Effects of the TARP, at 4 (Aug. 12, 2010) (online at 
cop.senate.gov/documents/cop-081210-report.pdf) (hereinafter ``August 
2010 Oversight Report'') (``the Panel strongly urges Treasury to start 
now to report more data about how TARP and other rescue funds flowed 
internationally . . .'').
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    Two studies that review the performance of the government's 
concerted rescue efforts, including the TARP, conclude that the 
government's intervention had a dramatic impact in preventing a 
much more severe economic downturn and promoting economic 
recovery. Economists Alan Blinder and Mark Zandi find that the 
``TARP has been a substantial success, helping to restore 
stability to the financial system and to end the freefall in 
housing and auto markets.'' \7\ Similarly, the International 
Monetary Fund (IMF) in its Financial Sector Assessment Program 
for the United States finds that ``[a]n aggressive policy 
response helped avert the collapse of the U.S. financial 
system'' and that ``[t]he TARP played a critical role in this 
success.'' \8\
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    \7\ How the Great Recession Was Brought to an End, supra note 4, at 
2. The Blinder and Zandi paper is interesting because it looks also at 
the relative impact of the financial rescue efforts, of which the TARP 
was a major component, and compares them to the separate economic 
stimulus measure enacted by Congress in the American Recovery and 
Reinvestment Act (ARRA). Blinder and Zandi estimate that without the 
financial rescue programs, but assuming enactment of ARRA, the American 
economy would not have come out of the recession and begun growing 
again until about July 2010, whereas if only the financial rescue 
measures had been taken without the stimulus measure, the economy would 
have begun its recovery in late 2009. Id. at 7. Some market 
commentators have criticized this study for its failure to incorporate 
the ``financial system'' into its models in a rigorous fashion. 
Treasury conversations with Panel staff (Aug.13, 2010).
    \8\ International Monetary Fund, United States: Publication of 
Financial Sector Assessment Program Documentation--Financial System 
Stability Assessment, at 12 (July 2010) (online at www.imf.org/
external/pubs/ft/scr/2010/cr10247.pdf).
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    Other studies by economist John Taylor draw a different 
conclusion, assessing the government's response during three 
periods: ``pre-panic, panic, and post panic, where the period 
of the panic is from September to November 2008.'' One study 
finds that the government's ``unpredictable and confusing'' 
intervention before the panic failed to stem, and even 
contributed to, the financial crisis.\9\ During the panic, 
Taylor argues, Treasury's clarification that the TARP would be 
used to make capital injections, rather than purchase troubled 
assets, was chiefly responsible for halting the market 
panic.\10\ After the panic, another Taylor study contends, at 
least one part of the government's rescue, the Federal 
Reserve's extraordinary measures, have had very little effect. 
The study concludes that ``whether one believes that these 
programs worked or not, there are reasons to believe that their 
consequences going forward are negative.'' \11\
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    \9\ An Exit Rule for Monetary Policy, supra note 4, at 3, 6. See 
also John B. Taylor, The Financial Crisis and the Policy Responses: An 
Empirical Analysis of What Went Wrong, at 18 (Nov. 2008) (online at 
www.stanford.edu/johntayl/FCPR.pdf) (hereinafter ``The Financial 
Crisis and the Policy Responses''). (``In this paper I have provided 
empirical evidence that government actions and interventions . . . 
prolonged, and worsened the financial crisis . . . . They prolonged it 
by misdiagnosing the problems in the bank credit markets and thereby 
responding inappropriately by focusing on liquidity rather than risk. 
They made it worse by providing support for certain financial 
institutions and their creditors but not others in an ad hoc way 
without a clear and understandable framework.'').
    \10\ See The Financial Crisis and the Policy Responses, supra note 
9, at 16; An Exit Rule for Monetary Policy, supra note 4, at 3 (``This 
clarification was a major reason for the halt in the panic in my 
view.'').
    \11\ See An Exit Rule for Monetary Policy, supra note 4, at 3. For 
a list of the extraordinary Federal Reserve measures discussed in this 
paper, see id. at 7.
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    The overall recovery of the U.S. economy, as marked by 
economic expansion, began in the third quarter of 2009, but the 
recovery, thus far, has been slow and certain economic sectors, 
particularly housing, continue to struggle, while others, such 
as the automobile industry, appear just to be beginning to 
return to pre-2008 levels.\12\ The Panel continues to focus on 
the TARP's role not only in the broad recovery of the 
macroeconomy, but also in restoring the health of the sectors 
that have been the subject of special efforts of the TARP and 
related federal programs. While the TARP was effective in 
initially calming the market panic and provided critical 
liquidity to the financial system, it has not so far succeeded 
in facilitating credit access to small businesses or mitigating 
the tide of foreclosures.\13\
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    \12\ The National Bureau of Economic Research, which is widely 
viewed as the organization that determines when economic recessions 
begin and end in the United States, has yet to say when the recession 
that began in the fourth quarter of 2008 came to an end (or if it has 
indeed done so yet). See Section E.1, infra, for a discussion of 
current economic conditions.
    \13\ See Sections D and E.2, infra.
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            a. Financial Institutions
            i. Treasury's Exit Strategy and the Implicit Guarantee
    The Panel's January 2010 report examined Treasury's exit 
strategy from the TARP and detailed the dual legacy that the 
program will likely leave behind after its formal expiration: 
Treasury's holding billions of dollars worth of private-company 
securities,\14\ and an implicit government guarantee that 
certain private financial institutions are too systemically 
important to be allowed to fail. Congress attempted to address 
the problem of ``too big to fail'' in the recently enacted 
Dodd-Frank Act. The Act takes a variety of approaches in its 
attempt to address ``too big to fail.'' It empowers the Federal 
Deposit Insurance Corporation (FDIC) to resolve financial 
companies whose failure poses a systemic risk to the nation's 
financial stability.\15\ The Act provides that systemic 
considerations will be evaluated jointly by the FDIC, the 
Federal Reserve Board, and the Treasury Secretary (in 
consultation with the President).\16\ The legislation further 
requires systemic institutions with more than $50 billion in 
assets to submit a plan for their ``orderly resolution'' in the 
event of severe financial distress, commonly referred to as a 
``living will.'' \17\ The FDIC is in the process of 
implementing its new resolution and supervisory authorities. 
Additionally, the legislation creates a Financial Stability 
Oversight Council charged with identifying and responding to 
systemic risks in the U.S. economy.\18\ The Council will 
identify nonbank financial companies to be supervised by the 
Federal Reserve and offer recommendations concerning prudential 
standards for institutions supervised by the Federal Reserve, 
including rules for risk-based capital, leverage, liquidity, 
contingent capital, resolution plans, credit exposure reports, 
concentration limits, short-term debt limits, enhanced public 
disclosures, and overall risk management.\19\ Despite 
substantial government activity in this area, however, the 
implicit guarantee of the TARP is proving difficult to 
unwind.\20\
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    \14\ The report discussed the process of managing assets purchased 
under the TARP, or arranging their sale to investors, noting that it 
may extend over a number of years. The Panel also addressed the various 
theories on how to eliminate the implicit guarantee for institutions 
deemed ``too big to fail'' and described how moral hazard can distort 
market prices and endanger the long-term health of the nation's 
economy. See January 2010 Oversight Report, supra note 6. In the 
Panel's June hearing, Secretary Geithner elaborated on Treasury's 
investment management strategy, stating that moving forward Treasury 
will ``dispose of investments as soon as practicable . . . encourage 
private capital formation to replace government investments . . . not 
intervene in the day-to-day management of private companies in which we 
have invested, and, as we implement this strategy, we will seek out the 
best advice available.'' Congressional Oversight Panel, Written 
Testimony of Timothy F. Geithner, secretary, U.S. Department of the 
Treasury, COP Hearing with Treasury Secretary Timothy Geithner, at 5 
(June 22, 2010) (online at cop.senate.gov/documents/testimony-062210-
geithner.pdf).
    \15\ The FDIC's new resolution authority includes both Bank Holding 
Companies (BHCs) and nonbank financial companies such as securities 
broker-dealers and hedge funds. To resolve registered broker-dealers, 
the FDIC will coordinate its efforts with the Securities Investor 
Protection Corporation (SIPC). Where an insurance company is concerned, 
the company will be resolved by the state regulator under state law. 
The FDIC would step in to complete the resolution if the state 
regulator had not taken action within 60 days. See Dodd-Frank Wall 
Street Reform and Consumer Protection Act, Pub. L. No. 111-203 (2010) 
(hereinafter ``Dodd-Frank Wall Street Reform and Consumer Protection 
Act''). Some commentators have raised concerns that final decisions and 
duties are left to the same federal and state banking and other 
regulatory agencies that failed to detect or prevent the last financial 
crisis. See Cato Institute, Dodd's Do-Nothing Financial `Reform' (May 
21, 2010) (online at www.cato.org/pub_display.php?pub_id=11832) 
(hereinafter ``Dodd's Do-Nothing Financial `Reform' '').
    \16\ Two exceptions apply. If the failing financial company is a 
broker-dealer or its largest subsidiary is a broker-dealer, the 
Securities and Exchange Commission (SEC), rather than the FDIC, would 
help make the systemic determination. If the company is an insurance 
company or its largest subsidiary is an insurance company, the Director 
of the new Federal Insurance Office would help make the systemic 
determination, instead of the FDIC. See Dodd-Frank Wall Street Reform 
and Consumer Protection Act, supra note 15.
    \17\ Some market participants question the validity of ``living 
wills,'' suggesting that the plans would not be updated frequently 
enough to keep pace with the ever-shifting portfolios of large complex 
financial institutions. Market participants' conversations with Panel 
staff (July 30, 2010). Others explain that because many of these firms 
are interconnected in nontransparent ways, government agencies' 
resolution authority could not overcome the ``enormous operational 
challenges in unreasonably short periods of time.'' John F. Bovenzi, 
Another View: Why Banks Need Living Wills, New York Times DealBook Blog 
(July 8, 2010) (online at dealbook.blogs.nytimes.com/2010/07/08/
another-view-why-banks-need-living-wills/).
    \18\ The Council is made up of 10 voting members and 5 nonvoting 
members. Voting members are: the Secretary of the Treasury (also 
Council Chair), the Chairman of the Board of Governors of the Federal 
Reserve, the Comptroller of the Currency, Chairperson of the FDIC, 
Chairman of the National Credit Union Administration, Director of the 
Consumer Financial Protection Bureau, Chairman of the SEC, Chairperson 
of the Commodity Futures Trading Commission, the Director of the 
Federal Housing Finance Agency, and an independent insurance expert. 
Nonvoting members are the Director of the Office of Financial Research, 
the Director of the Federal Insurance Office, a State insurance 
commissioner, a State banking supervisor, and a State securities 
commissioner. Dodd-Frank Wall Street Reform and Consumer Protection 
Act, supra note 15, Sec. 18.
    \19\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
supra note 15. Some commentators argue that by allowing the Financial 
Stability Oversight Council to designate firms as systemically risky, 
these firms receive an unfair marketplace advantage and an implicit 
governmental stamp of approval, allowing them to obtain lower costs of 
funds. See, e.g., Dodd's Do-Nothing Financial `Reform', supra note 15.
    \20\ For a discussion of various effects of the implicit guarantee, 
such as a ratings increase associated with ``too big to fail,'' see 
Sections E.2, E.3.b, and F.1, infra.
---------------------------------------------------------------------------
            ii. AIG
    In its June report, the Panel examined Treasury's role in 
the taxpayer-backed rescue of American International Group 
(AIG) and its creditors, stating that the Federal Reserve and 
Treasury failed to exhaust all other options before committing 
$85 billion in taxpayer funds. Total government assistance to 
AIG, much of it from the Federal Reserve Bank of New York 
(FRBNY), ultimately reached $182 billion.\21\
---------------------------------------------------------------------------
    \21\ The Panel also stated that the government failed to address 
perceived conflicts of interest. By not exercising the government's 
negotiating leverage to protect taxpayers or to maintain market 
discipline, AIG's rescue created an implicit guarantee of an 
institution that was ``too big to fail.'' This resulted in risk to 
taxpayers and distortion of the marketplace by transforming highly 
risky derivative bets into fully-guaranteed payment obligations. See 
Congressional Oversight Panel, June Oversight Report: The AIG Rescue, 
Its Impact on Markets, and the Government's Exit Strategy, at 15 (June 
10, 2010) (online at cop.senate.gov/documents/cop-061010-report.pdf) 
(hereinafter ``June 2010 Oversight Report'').
---------------------------------------------------------------------------
    AIG intends to repay the government predominantly through 
asset sales. At present, however, and as described further in 
Section C.2, AIG's ability to repay FRBNY and Treasury remains 
unclear.\22\
---------------------------------------------------------------------------
    \22\ As of July 2010, CBO, OMB, and Treasury are projecting losses 
in the amount of $36 billion, $50 billion, and $45 billion, 
respectively, from the assistance provided to AIG; however, the 
estimated losses have steadily decreased since the initial phases of 
the AIG rescue. See Sections C and C.2 for an assessment of the costs 
of TARP assistance to AIG.
---------------------------------------------------------------------------
            iii. Small Banks
    The Panel's July 2010 report noted that the 690 small and 
medium-sized banks that participated in the Capital Purchase 
Program (CPP) are likely to remain in the program for an 
extended period, and that some may experience difficulty 
exiting.\23\ Since the Panel's report, Treasury released the 
results of its 2009 ``use of capital'' survey for banks that 
participated in the CPP. According to the survey, 85 percent of 
respondents stated that they used their CPP capital to either 
increase lending or decrease it less than they would have 
otherwise, although the degree to which lending levels 
``improved'' are not specified. Nearly half of the respondents 
also stated that they used their capital to increase loan-loss 
reserves or as a non-leveraged increase to total capital.\24\ 
Treasury did not monitor lending at the individual TARP 
recipient level, however, nor require CPP recipients to report 
on their use of funds,\25\ so these results can not be 
independently verified.
---------------------------------------------------------------------------
    \23\ Further, the report noted the disparity between these smaller 
institutions and the 17 large banks that participated in the CPP. 
Smaller banks operate without a ``too big to fail'' guarantee, limiting 
their flexibility relative to their larger competitors. Smaller banks 
are also disproportionately exposed to commercial real estate, where 
future losses are likely, and are often privately held or thinly 
traded, limiting their access to funding from the capital markets. 
Given the current distressed nature of the small bank sector, it is 
likely many of these smaller institutions will remain in the CPP for an 
extended period, while smaller banks that cannot generate sufficient 
earnings or raise capital to repay may become trapped, with no way 
either to escape the CPP or to pay their required dividends, forcing 
some otherwise well-run institutions to default on their obligations, 
consolidate, or collapse completely. The Panel also found that CPP 
institutions, despite being deemed ``healthy'' by their respective 
primary regulator, appeared to be no healthier than other small banks. 
In addition, the Panel found little evidence that the CPP helped 
improve credit access for small businesses or strengthened the small 
bank sector in general. See Congressional Oversight Panel, July 
Oversight Report: Small Banks in the Capital Purchase Program (July 14, 
2010) (online at cop.senate.gov/documents/cop-071410-report.pdf) 
(hereinafter ``July 2010 Oversight Report'').
    \24\ U.S. Department of the Treasury, Annual Use of Capital Survey, 
2009--Capital Purchase Program, at 2 (July 13, 2010) (online at 
www.financialstability.gov/useofcapital/Annual 
%20Use%20of%20Capital%20Survey%20Results,%202009%20-
%20Capital%20Purchase%20Program.pdf).
    \25\ Treasury did require the top 22 CPP recipient banks to submit 
lending data and released monthly summaries to the public. When banks 
repaid their CPP funds, however, Treasury did not require them to 
continue to submit lending data. Consequently, Treasury ceased 
publishing this report, as aggregate month to month changes no longer 
allowed for meaningful comparisons. The most recent report, issued on 
January 15, 2010, includes data through the end of November 2009, 
although Treasury continues to publish the individual bank submissions 
and compile that data into an abridged ``snapshot.'' See U.S. 
Department of the Treasury, Monthly Lending and Intermediation Snapshot 
(updated Aug. 16, 2010) (online at www.financialstability.gov/impact/
monthlyLendingandIntermediationSnapshot.htm).
---------------------------------------------------------------------------
    In July 2010, Treasury began allowing Community Development 
Financial Institutions (CDFIs) to exchange their CPP 
investments for equivalent securities under Treasury's 
Community Development Capital Initiative (CDCI); currently, 11 
CDFIs have exchanged $110 million.\26\ These transactions lower 
the dividend rate these institutions pay from 5 percent to 2 
percent, and lengthens the period before they are required to 
pay a 9 percent dividend rate from five years to eight 
years.\27\
---------------------------------------------------------------------------
    \26\ U.S. Department of the Treasury, Troubled Asset Relief Program 
Transactions Report for the Period Ending September 1, 2010 (Sept. 3, 
2010) (online at www.financialstability.gov/docs/transaction-reports/9-
3-10%20Transactions%20Report%20as%20of%209-1-10.pdf) (hereinafter 
``Sept. 3 TARP Transactions Report'').
    \27\ Treasury made an additional investment of $10.2 million in one 
institution at the time of the exchange. U.S. Department of the 
Treasury, Troubled Assets Relief Program Monthly 105(a) Report--July 
2010 (Aug. 10, 2010) (online at www.financialstability.gov/docs/
105CongressionalReports/July%202010%20105(a)%20Report_Final.pdf) 
(hereinafter ``TARP Monthly 105(a) Report--July 2010'').
---------------------------------------------------------------------------
            b. Small Business Lending
    In its May 2010 report, the Panel examined the contraction 
in small business lending and noted that Treasury has launched 
several programs aimed, in whole or in part, to improve small 
business credit availability, but that these programs have not 
had a noticeable effect.\28\ In focusing on measures to 
increase the supply of small business loans, the Panel's report 
noted, Treasury's actions may ultimately be ineffective if the 
demand for small business loans fails to keep pace.\29\ The 
Panel also evaluated the proposed Small Business Lending Fund 
(SBLF), which the Administration sent to Congress shortly 
before publication of the report. On June 17, 2010 the House of 
Representatives passed a different version of the SBLF for 
banks with less than $10 billion in assets.\30\ The Senate's 
version of this legislation is pending as of September 14, 
2010.
---------------------------------------------------------------------------
    \28\ See May 2010 Oversight Report, supra note 6. The Panel's 
February 2010 report also raised concerns that a wave of commercial 
real estate loan losses over the next four years could jeopardize the 
stability of many banks, particularly smaller community banks, and 
trigger severe economic damage. The Panel noted that smaller banks, 
despite being disproportionately exposed to commercial real estate 
loans compared to their larger counterparts, did not undergo the same 
stress tests to assess institutional soundness as the 19 large bank 
holding companies. Because small banks play a critical role in 
financing small businesses the widespread failure of a number of small 
banks could disrupt local communities and undermine the economic 
recovery. The Panel highlighted the need for Treasury and bank 
supervisors to address quickly and transparently the threats facing the 
commercial real estate markets. See Congressional Oversight Panel, 
February Oversight Report: Commercial Real Estate Losses and the Risk 
to Financial Stability (Feb. 10, 2010) (online at cop.senate.gov/
documents/cop-021110-report.pdf) (hereinafter ``February 2010 Oversight 
Report''). While capital is returning to commercial real estate in 
liquid sectors like real estate investment trusts (REITs) and 
commercial mortgage-backed securities (CMBS), and Moody's Commercial 
Property Price Index indicates recovery in commercial real estate asset 
price levels, these indicators may be misleading due to the current 
lack of liquidity in commercial real estate markets. Transaction volume 
fell nearly 90 percent from 2007 to 2009, and vacancy rates in the 
first quarter of 2010 were almost 20 percent nationally. See PIMCO, 
U.S. Commercial Real Estate Project, at 2-4, 9 (June 2010) (online at 
www.pimco.com/Documents/PIMCO_Commercial_%20 Real_Estate% 
20June2010_US.pdf). The largest commercial real estate loan losses are 
projected for 2011 and beyond, and losses at banks alone could range as 
high as $200 billion-$300 billion. See PIMCO, U.S. Commercial Real 
Estate Project, at 9 (June 2010) (online at www.pimco.com/Documents/
PIMCO_Commercial_%20Real_Estate%20 June2010_US.pdf). Representative 
Walt Minnick (D-Idaho), is proposing a temporary credit-guarantee 
program within Treasury for new loans under $10 million that finance 
commercial properties. The program would be overseen by a new board 
housed at Treasury made up of the Treasury Secretary, other federal 
regulators, and industry experts, who would set criteria for loans 
receiving the federal backing. Treasury would collect fees from banks 
in exchange for issuing the guarantees. See Commercial Real Estate 
Stabilization Act of 2010, H.R. 5816, 111th Congress.
    \29\ In the second quarter of 2010, respondents to the Federal 
Reserve Board's Survey of Senior Loan Officers were more likely to 
report weaker demand for small business loans than to report increased 
demand. See Board of Governors of the Federal Reserve System, July 2010 
Senior Loan Officer Opinion Survey on Bank Lending Practices (Aug. 16, 
2010) (online at www.federalreserve.gov/boarddocs/snloansurvey/201008/
fullreport.pdf) (hereinafter ``July 2010 Senior Loan Officer Opinion 
Survey''); May 2010 Oversight Report, supra note 6, at 74.
    \30\ After two years, the dividend or interest rate for 
participating institutions under the program varies from as low as 1 
percent to 7 percent depending on the institution's lending levels. CPP 
participants that have missed more than one dividend payment may not 
refinance their CPP investments to the terms of the SBLF. See Small 
Business Jobs Act of 2010, H.R. 5297, 111th Congress.
---------------------------------------------------------------------------
    Since the publication of the May 2010 report, Treasury also 
revised its commitment to purchase SBA-guaranteed secondary 
market securities. After initially committing $15 billion to 
the program, Treasury's recently revised commitment 
significantly lowers its potential investment to $400 
million.\31\
---------------------------------------------------------------------------
    \31\ See Section D, infra; U.S. Department of the Treasury, 
Troubled Assets Relief Program Monthly 105(a) Report--June 2010 (July 
12, 2010) (online at www.financialstability.gov/docs/
105CongressionalReports/June%202010%20105(a)%20Report_Final.pdf) 
(hereinafter ``TARP Monthly 105(a) Report--June 2010'').
---------------------------------------------------------------------------
            c. Auto Industry
    The Panel's March 2010 report examined GMAC's unique 
treatment under the TARP and concluded that Treasury's early 
decisions in its rescue of GMAC resulted in missed 
opportunities to increase accountability and better protect 
taxpayers.\32\ On May 10, 2010, GMAC changed its name to Ally 
Financial Inc.\33\ and on May 26, 2010, Treasury appointed the 
first of two board members to Ally's board of directors.\34\
---------------------------------------------------------------------------
    \32\ See March 2010 Oversight Report, supra note 6. Treasury 
initially provided GMAC with $5 billion in emergency funding in 
December 2008. GMAC, which participated in the Federal Revere Board's 
stress tests, was the only stress-tested institution that could not 
raise sufficient capital to meet its requirement and received 
additional government capital. As of June 30, 2010, Treasury's 
investment in GMAC totaled $17.2 billion--56.3 percent of Ally's 
(formerly GMAC's) common stock, $2.5 billion of trust-preferred 
securities, and $11.4 billion in mandatorily convertible preferred 
shares. Office of the Special Inspector General for the Troubled Asset 
Relief Program, Quarterly Report to Congress, at 116 (Apr. 20, 2010) 
(online at www.sigtarp.gov/reports/congress/2010/
April2010_Quarterly_Report_to_Congress.pdf).
    \33\ GMAC, Inc., Form 8-K for the Period Ended May 3, 2010 (May 3, 
2010) (online at www.sec.gov/Archives/edgar/data/40729/
000114420410025354/v183596_8-k.htm).
    \34\ U.S. Department of the Treasury, Treasury Names Appointee to 
Ally Board of Directors (May 26, 2010) (online at 
financialstability.gov/latest/pr_05262010.html).
---------------------------------------------------------------------------
    General Motors Co. proposed to acquire AmeriCredit Corp., a 
subprime auto-finance company, to give GM greater opportunity 
to make vehicle loans and leases.\35\
---------------------------------------------------------------------------
    \35\ See Section C.3.a, infra. Both GM and Chrysler have steadily 
improved since emerging from bankruptcy. After reporting a net loss of 
$3.8 billion dollars for the six months after it emerged from 
bankruptcy, GM has reported profits of $865 million and $1.3 billion 
for the first two quarters of 2010, respectively. General Motors Co., 
Form 10-K for the Fiscal Year Ended December 31, 2009, at 122 (Apr. 7, 
2010) (online at www.sec.gov/Archives/edgar/data/1467858/
000119312510078119/d10k.htm); General Motors Co., Form 10-Q for the 
Quarterly Period Ended March 31, 2010 (May 17, 2010) (online at 
www.sec.gov/Archives/edgar/data/1467858/000119312510121463/d10q.htm); 
General Motors Co., Form 10-Q for the Quarterly Period Ended June 30, 
2010 (Aug. 16, 2010) (online at www.sec.gov/Archives/edgar/data/
1467858/000119312510189968/d10q.htm). Chrysler reported operating 
losses of $628 million in the quarter after it emerged from bankruptcy. 
In the three quarters since then, Chrysler had operating losses of $267 
million, followed by operating profits of $143 million and $183 
million. Chrysler Group, LLC, Chrysler Group LLC Reports Audited 
Financial Results for the Period from June 10, 2009 to December 31, 
2009 (Apr. 21, 2010) (online at www.chryslergroupllc.com/news/archive/
2010/04/21/2009q4_year_end_press_release); Chrysler Group, LLC, 
Chrysler Group LLC Reports Financial Results for the Period Ended March 
31, 2010 (Apr. 21, 2010) (online at www.chryslergroupllc.com/news/
archive/2010/04/21/2010_q1_press_release); Chrysler Group, LLC, 
Chrysler Group LLC Reports Financial Results for the Period Ended June 
30, 2010 (Aug. 9, 2010) (online at www.chryslergroupllc.com/news/
archive/2010/08/09/q2_press_release_financial_statement_08092010) 
(hereinafter ``Chrysler 2Q10 Financial Results''). GM and Chrysler have 
lost considerable market share since 2000, although GM still holds the 
largest share of the total U.S. market. GM's market share decreased 0.9 
percent from 19.5 percent in August 2009 to August 2010. Chrysler holds 
the lowest share of the top five, but its piece of the market has 
increased from 7.4 percent to 10 percent year-over-year since August 
2009. Standard & Poor's, August U.S. Sales Down Slightly from July, 
Down Sharply from August 2009; SAAR in Line with our Expectations for 
2010 (Sept. 2, 2010) (online at www.standardandpoors.com/products-
services/articles/en/us/?assetID=1245220642688).
---------------------------------------------------------------------------
    On August 18, 2010, GM filed a Form S-1 with the Securities 
and Exchange Commission (SEC) for a proposed initial public 
offering. Treasury has agreed to be named as a selling 
shareholder of common stock in GM's registration statement. 
Treasury will retain the right, at all times, to decide whether 
and at what level to participate in the offering. Treasury owns 
60.8 percent of the common stock of GM as well as $2.1 billion 
of Series A preferred stock. The proposed initial public 
offering will not include Treasury's Series A preferred 
stock.\36\
---------------------------------------------------------------------------
    \36\ See U.S. Department of the Treasury, Treasury Department 
Agrees to Be Named as a Selling Shareholder in General Motors' 
Registration Statement for Its Initial Public Offering (Aug. 18, 2010) 
(online at www.financialstability.gov/latest/pr_08182010.html).
---------------------------------------------------------------------------
            d. Foreclosure Relief
    In assessing Treasury's continued foreclosure mitigation 
efforts, the Panel's April 2010 report acknowledged several 
positive developments, but it concluded that the size and scope 
of the crisis continued to outpace Treasury's efforts, the 
permanence of keeping families in their homes under these 
programs was doubtful, and that Treasury's goals remained 
opaque.\37\
---------------------------------------------------------------------------
    \37\ Positive steps included: requiring loan servicers to give an 
explanation to homeowners being declined for a loan modification, 
launching a push to convert temporary modifications into long-term, 
five-year modifications (which Treasury refers to as permanent 
modifications), and taking steps to help unemployed and ``underwater'' 
borrowers regain equity through principal write-downs. The report 
noted, however, that despite Treasury's efforts, foreclosures were 
continuing at a rapid pace, imposing costs directly on borrowers and 
lenders, and indirectly on neighboring homeowners, cities and towns, 
and the broader economy. After evaluating Treasury's foreclosure 
programs, the Panel raised specific concerns about the timeliness of 
Treasury's response to the foreclosure crisis, the sustainability of 
its mortgage modifications, and the accountability of Treasury's 
foreclosure programs. See April 2010 Oversight Report, supra note 6.
---------------------------------------------------------------------------
    Treasury has made progress on two initiatives that were 
announced, but not implemented, prior to the publication of the 
Panel's April 2010 report--the Hardest Hit Fund, which provides 
TARP money to particular states, and a joint program with the 
Federal Housing Administration (FHA) that uses TARP funds to 
support refinanced mortgages with reduced principals.\38\ On 
June 23, as part of the Hardest Hit Fund, Treasury approved 
state proposals in Arizona, California, Florida, Michigan, and 
Nevada to use $1.5 billion of TARP funds to provide foreclosure 
relief to struggling homeowners. On August 3, 2010, Treasury 
approved Hardest Hit Fund proposals from North Carolina, Ohio, 
Oregon, Rhode Island, and South Carolina for $600 million in 
foreclosure prevention funding.\39\ The Treasury/FHA Refinance 
Program has yet to launch, but Treasury has been developing its 
mechanics and preparing for its roll-out.\40\
---------------------------------------------------------------------------
    \38\ The Treasury/FHA refinance program is distinct from other 
refinancing programs run by the Federal Housing Administration. See 
Section D, infra, for further discussion of the current state of 
Treasury's foreclosure programs.
    \39\ U.S. Department of the Treasury, Making Home Affordable: 
Hardest Hit Fund (Aug. 19, 2010) (online at www.financialstability.gov/
roadtostability/hardesthitfund.html) (hereinafter ``Making Home 
Affordable: Hardest Hit Fund'').
    \40\ Treasury conversations with Panel staff (July 28, 2010).
---------------------------------------------------------------------------
    To comply with provisions in the Dodd-Frank Act, Treasury 
reduced its TARP commitment for foreclosure mitigation programs 
to $46 billion, a reduction of $3 billion.\41\
---------------------------------------------------------------------------
    \41\ See TARP Monthly 105(a) Report--July 2010, supra note 27.
---------------------------------------------------------------------------
            e. Other TARP Program Updates
    Over the last two years, Treasury has created a wide range 
of programs under the TARP to help stabilize the financial 
system. Since the Panel's December report, Treasury has closed 
some of these programs, including the Capital Purchase Program 
and the Targeted Investment Program (TIP), and will no longer 
make additional commitments under them. According to Treasury, 
these programs met their goals of stabilizing both the 
financial system and the participating institutions.\42\ As 
noted in the Panel's July report, however, some CPP participant 
banks, particularly some of the smaller ones, continue to 
experience capital pressures and may have difficulty repaying 
Treasury's investment.\43\
---------------------------------------------------------------------------
    \42\ See U.S. Government Accountability Office, Continued Attention 
Needed to Ensure the Transparency and Accountability of Ongoing 
Programs, at 6 (July 21, 2010) (GAO-10-933T) (online at www.gao.gov/
new.items/d10933t.pdf) (hereinafter ``GAO Testimony: Transparency and 
Accountability of Ongoing Programs'').
    \43\ For a discussion of the largest, ``too-big-to-fail'' banks, 
see Section E.1, infra. For smaller institutions, the CPP may not have 
provided long-term stability, and banks that are unable to repay the 
investment and struggle to pay the increased dividend rate after five 
years have no clear options for repayment, making Treasury's timeline 
for the investment uncertain.
---------------------------------------------------------------------------
    The Public-Private Investment Program (PPIP), which 
provided funding for the purchase of troubled assets, and the 
Term Asset-Backed Securities Loan Facility, which provided 
support to securitization markets, are also now closed to new 
commitments. Treasury states that it and FRBNY closed these 
programs because of notable improvement in the securitization 
markets and the stabilization of asset prices for certain 
legacy securities.\44\ Commentators agree, however, that the 
PPIP has not been effective at removing legacy assets from 
banks' balance sheets on a significant scale.\45\ While some 
commentators argue that the TALF did revitalize the 
securitization markets overall, others note that some asset 
classes, such as commercial mortgage-backed securities (CMBS), 
remain weak, and their securitizations markets remain 
fragile.\46\
---------------------------------------------------------------------------
    \44\ See GAO Testimony: Transparency and Accountability of Ongoing 
Programs, supra note 42, at 16. See also Section D.3, infra.
    \45\ See December 2009 Oversight Report, supra note 6. Professor 
Simon Johnson, in responses to questions asked by the Panel, also noted 
that PPIP did not raise bid prices high enough to induce banks to sell 
their assets. Written Responses to Panel Questions by Simon Johnson 
(Sept. 2010).
    \46\ See U.S. Government Accountability Office, Troubled Asset 
Relief Program: Treasury Needs to Strengthen its Decision-Making 
Process on the Term Asset-Backed Securities Loan Facility, at 36-37 
(Feb. 2010) (GAO-10-25) (online at www.gao.gov/new.items/d1025.pdf).
---------------------------------------------------------------------------

2. Status of TARP Authorities in Light of Secretary's December 
        Extension Through October 3, 2010, and Changes Made in the 
        Dodd-Frank Legislation

    On December 9, 2009, Secretary Geithner notified Congress 
of his intention to extend the TARP to October 3, 2010 pursuant 
to Section 120(b) of the Emergency Economic Stabilization Act 
(EESA).\47\ The TARP had been originally scheduled to expire on 
December 31, 2009, but the law provided for the possibility of 
such an extension. In his written certification to Congress, 
the Secretary justified the extension as necessary to maintain 
Treasury's ``capacity to respond if financial conditions worsen 
and threaten our economy.'' \48\ The Secretary further noted 
Treasury would limit new TARP commitments in 2010 to three 
areas: (1) mortgage foreclosure mitigation; (2) providing 
capital to small and community banks ``to facilitate small 
business lending''; and (3) increasing Treasury's commitment to 
the TALF.
---------------------------------------------------------------------------
    \47\ Consumer Product Safety Improvement Act of 2008, Pub. L. No. 
110-314 (2008).
    \48\ See 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.financialstability.gov/latest/pr_12092009.html) (hereinafter 
``Letter from Secretary Geithner to Hill Leadership'').
---------------------------------------------------------------------------
    While the Secretary promised to limit new TARP commitments 
in 2010 to these areas, nothing in the statute at the time 
prevented him from doing more than that. By extending the TARP, 
the Secretary maintained his ability to use the full extent of 
the program's authority until its expiration on October 3, 
2010. That authority changed, however, following the enactment 
of the Dodd-Frank Act on July 21, 2010.\49\ The law included an 
amendment, inserted during the bill's conference proceedings, 
limiting the scope and nature of the TARP for the remainder of 
the program's duration. Specifically, the legislation lowered 
the TARP's spending authority from $700 billion to $475 billion 
and prohibited the Secretary from using TARP funds ``to incur 
any obligation for a program or initiative that was not 
initiated prior to June 25, 2010.'' \50\
---------------------------------------------------------------------------
    \49\ Section 1302 of the Dodd-Frank Act, entitled ``Amendment to 
Reduce TARP Authorization'' was inserted during the legislation's 
conference proceedings on June 29, 2010. According to the Congressional 
Budget Office, the amendment reduces the deficit by $11 billion in 2010 
and by $3.2 billion over ten years. See Dodd-Frank Wall Street Reform 
and Consumer Protection Act, supra note 15.
    \50\ The Dodd-Frank Act also strikes in Section 115(a)(3) of EESA 
the clause ``outstanding at any one time'' which pertains to the 
Treasury Secretary's ability to reuse TARP funds. In place of the 
clause, the Dodd-Frank Act adds the following: ``For purposes of this 
subsection, the amount of authority considered to be exercised by the 
Secretary shall not be reduced by--(A) any amounts received by the 
Secretary before, on, or after the date of enactment of the Pay It Back 
Act from repayment of the principal of financial assistance by an 
entity that has received financial assistance under the TARP or any 
other program enacted by the Secretary under the authorities granted to 
the Secretary under this Act; (B) any amounts committed for any 
guarantees pursuant to the TARP that became or become uncommitted; or 
(C) any losses realized by the Secretary.'' See Dodd-Frank Wall Street 
Reform and Consumer Protection Act, supra note 15.
---------------------------------------------------------------------------
    The Dodd-Frank Act's downward revision of Treasury's 
spending authority has forced Treasury to reassess its plans 
for allocating TARP funds. Prior to the law's enactment, the 
Panel estimated that Treasury had made a total of $535.5 
billion in commitments under the TARP--$60.5 billion above the 
new $475 billion cap.\51\ To meet the new cap, Treasury reduced 
the level of its commitments in several programs.\52\ Treasury 
has reduced the amount of credit protection it provides the 
Term Asset-Backed Securities Loan Facility by $15.7 billion, 
from $20 billion to $4.3 billion. Treasury also reduced its 
TARP commitment for the Public Private Investment Program 
(PPIP) by $8 billion, from $30.4 billion to $22.4 billion, and 
its commitment to the Auto Supplier Support Program (ASSP) by 
$3.1 billion, from $3.5 billion to $400 million. Finally, 
Treasury reduced its commitment to foreclosure mitigation 
programs by $3.2 billion, from $48.8 billion to $45.6 billion. 
The revised total of $45.6 billion is comprised of $11 billion 
for the Treasury/FHA refinance program, $4.1 billion for the 
Hardest Hit Fund and $30.5 billion for the Home Affordable 
Modification Program (HAMP).
---------------------------------------------------------------------------
    \51\ August 2010 Oversight Report, supra note 6, at 142.
    \52\ The Small Business Lending Fund (SBLF), a proposed $30 billion 
lending program, was earlier eliminated as a commitment under the TARP. 
Instead, the Administration had asked Congress to pursue the matter as 
a separate legislative initiative. TARP Monthly 105(a) Report--July 
2010, supra note 27.
---------------------------------------------------------------------------
    While the Dodd-Frank Act prohibits Treasury from creating 
any new programs under the TARP not initiated before June 25, 
2010, it does not affect the TARP's forthcoming expiration as 
defined in EESA. EESA, which was signed into law on October 3, 
2008, is clear that the Secretary cannot extend his authority 
under the TARP beyond October 3, 2010. Section 120(b) of EESA 
reads: ``The Secretary, upon certification to Congress, may 
extend the authority under this Act to expire not later than 2 
years from the date of enactment of this Act.'' \53\ The phrase 
``the authority under this Act'' would seem to capture all 
authority provided under EESA; however, the statute allows for 
one exception. Section 106(e) of EESA stipulates: ``The 
authority of the Secretary to hold any troubled assets 
purchased under this Act before the termination date in Section 
120, or to purchase or fund the purchase of a troubled asset 
under a commitment entered into before the termination in 
Section 120, is not subject to the provisions of Section 120.'' 
\54\
---------------------------------------------------------------------------
    \53\ Consumer Product Safety Improvement Act of 2008, Pub. L. No. 
110-314 (2008).
    \54\ Consumer Product Safety Improvement Act of 2008, Pub. L. No. 
110-314 (2008).
---------------------------------------------------------------------------
    Section 106(e) provides Treasury with two specific 
authorities. First, it allows Treasury to hold its investments 
made through the TARP after October 3, 2010. Second, it allows 
Treasury to continue to use the TARP to fund TARP commitments, 
provided Treasury had made those commitments prior to October 
3. Treasury has committed TARP funding to a variety of programs 
that it has not yet fully funded to their allocated 
amounts.\55\ Many of these programs will continue to receive 
TARP funding well beyond October 3, 2010. HAMP represents the 
largest commitment of TARP dollars yet to be expended.\56\ 
Treasury considers its HAMP contracts to be ``financial 
instruments'' or ``commitments to purchase troubled assets'' 
and, therefore, captured under Section 106(e). According to 
Treasury, the modification payments ``made to servicers are the 
purchase prices for the financial instruments'' or troubled 
assets.\57\ As a result, Treasury plans to continue to fund 
HAMP and make modification payments to mortgage servicers in 
the years ahead.
---------------------------------------------------------------------------
    \55\ PPIP, SBA 7(a) Securities Purchase, HAMP, Hardest Hit Fund, 
FHA Refinance, and the Community Development Capital Initiative, and 
the AIG Investment Program. U.S. Department of the Treasury, Troubled 
Assets Relief Program Monthly 105(a) Report--August 2010 (Sept. 10, 
2010) (online at www.financialstability.gov/docs/
105CongressionalReports/
August%202010%20105(a)%20Report_final_9%2010%2010.pdf) (hereinafter 
``TARP Monthly 105(a) Report--August 2010'').
    \56\ The Panel's April report on foreclosure mitigation discussed 
Treasury's view of the legality of HAMP in the context of its general 
authority under EESA. April 2010 Oversight Report, supra note 6, at 
152.
    \57\ Letter from George Madison, general counsel, U.S. Department 
of the Treasury, to Paul Atkins, member, Congressional Oversight Panel 
(Jan. 12, 2010) (citing 12 U.S.C. Sec. 5202(9)).
---------------------------------------------------------------------------
    Treasury has noted to the Panel that it will lose some of 
its flexibility to alter operational aspects of HAMP after 
October 3. First, it will not be able to enlist new servicers 
to HAMP.\58\ Treasury has explained to the Panel that in its 
view the authority under Section 106(e) ``to purchase or fund 
the purchase of a troubled asset under a commitment entered 
into before the termination'' of TARP requires Treasury to have 
entered into a HAMP contract with a mortgage servicer on or 
prior to October 3, 2010. Treasury has also explained to the 
Panel that it will lose its ability to use committed dollars 
under HAMP if a servicer were to drop from the program after 
TARP's expiration. To provide it with more flexibility and 
maximize HAMP committed dollars, Treasury has informed the 
Panel that it is exploring changes to the way in which purchase 
prices are calculated for HAMP contracts.
---------------------------------------------------------------------------
    \58\ Treasury conversations with Panel staff (Aug. 26 and Sept. 10, 
2010).
---------------------------------------------------------------------------
    Currently, the purchase price in a HAMP contract is a set 
dollar amount. Under Treasury's proposed plan, purchase prices 
will instead be based on a formula. This change will enable 
Treasury to preserve HAMP funding after TARP's expiration date. 
According to Treasury, under the new arrangement, if a servicer 
were to discontinue participation in HAMP, the funds that had 
been committed to that servicer would not lapse, or become 
unavailable for further use, but instead would be spread among 
the remaining servicers. The change would be made by issuance 
of a supplemental directive. The Panel expects to explore these 
issues further in future oversight of foreclosure mitigation.

                      C. TARP's Financial Results

    In addition to the goals of restoring liquidity and 
stability to the U.S. financial system, EESA directs Treasury 
to maximize overall returns and minimize overall costs to U.S. 
taxpayers \59\ and to consider the impact on the national 
debt.\60\ Section 202 of EESA requires the Office of Management 
and Budget (OMB) to submit semiannual reports estimating the 
cost of the TARP's transactions.\61\ Within 45 days of each 
report, the Congressional Budget Office (CBO) is required to 
submit an assessment of OMB's analysis, including a discussion 
of the TARP's impact on the federal budget deficit and debt. To 
value the TARP investments, the budget agencies use procedures 
similar to those specified in the Federal Credit Reform Act of 
1990 \62\ but adjust for market risk as directed by EESA.\63\ 
Under that methodology, the agencies calculate the subsidy cost 
of the TARP as the difference between Treasury's investments 
and the estimated net present value of the transactions. The 
total estimated cost of the TARP is a combination of realized 
and prospective costs.
---------------------------------------------------------------------------
    \59\ See 12 U.S.C. Sec. 5201; 12 U.S.C. Sec. 5223.
    \60\ See 12 U.S.C. Sec. 5213.
    \61\ See 12 U.S.C. Sec. 5252.
    \62\ See 2 U.S.C. Sec. 661 et seq.
    \63\ See 12 U.S.C. Sec. 5232.
---------------------------------------------------------------------------
    The most recent OMB and CBO projections of the total cost 
of the TARP constitute significant reductions from earlier 
estimates,\64\ although taxpayers could still lose significant 
portions of their investments in several programs. In the FY 
2011 Budget, OMB projected the TARP's total impact on the 
budget deficit to be $116.8 billion.\65\ In May, Treasury 
released a revised estimate that lowered the projected deficit 
impact to $105.4 billion.\66\ CBO estimated in March that the 
total cost of the TARP's transactions would be $109 
billion.\67\ That estimate was adjusted to $66 billion in 
August.\68\ CBO attributes the majority of the difference 
between its March estimate and OMB's FY 2011 Budget estimate to 
four factors: (1) differing assumptions of homeowner 
participation in HAMP; \69\ (2) differing assessments of the 
cost of assistance to AIG; \70\ (3) differing estimates of the 
subsidy cost attributed to future commitments to new programs; 
\71\ and (4) valuation disparity due to the dates the estimates 
were performed.\72\
---------------------------------------------------------------------------
    \64\ In June 2009, CBO estimated that the TARP would cost a total 
of $159 billion. Congressional Budget Office, The Troubled Asset Relief 
Program: Reports on Transactions Through June 17, 2009 (June 2009) 
(online at cbo.gov/ftpdocs/100xx/doc10056/MainText.4.1.shtml). In 
August 2009, as part of FY 2010 Mid-Session Review, OMB estimated that 
the TARP would cost a total of $341 billion. Office of Management and 
Budget, Mid-Session Review, Budget of the U.S. Government--Fiscal Year 
2010 (Aug. 25, 2009) (online at www.gpoaccess.gov/usbudget/fy10/pdf/
10msr.pdf).
    \65\ OMB projected the total subsidy cost of TARP to be $126.7 
billion, reflecting the estimated lifetime TARP obligations and costs 
through 2020. OMB adjusted the estimate to $116.8 billion by including 
downward interest on re-estimates of $9.9 billion. Office of Management 
and Budget, Budget of the U.S. Government--Fiscal Year 2011, Analytical 
Perspectives, at 40 (Feb. 1, 2010) (online at www.whitehouse.gov/omb/
budget/fy2011/assets/econ_analyses.pdf) (estimate based on valuations 
through November 30, 2009).
    \66\ U.S. Department of the Treasury, Summary Tables of Troubled 
Asset Relief Program (TARP) Investments as of March 31, 2010, at 1 (May 
21, 2010) (online at www.financialstability.gov/docs/
TARP%20Cost%20Estimates%20-%20March%2031%202010.pdf) (hereinafter 
``Treasury Summary Tables of TARP Investments'') (estimate based on 
valuations through March 31, 2010).
    \67\ Congressional Budget Office, Report on the Troubled Asset 
Relief Program--March 2010, at 1 (Mar. 2010) (online at www.cbo.gov/
ftpdocs/112xx/doc11227/03-17-TARP.pdf) (hereinafter ``CBO Report on the 
TARP--March 2010'').
    \68\ Congressional Budget Office, Budget and Economic Outlook: An 
Update (Aug. 2010) (online at cbo.gov/ftpdocs/117xx/doc11705/08-18-
Update.pdf) (hereinafter ``CBO Budget and Economic Outlook''); Douglas 
Elmendorf, CBO's Latest Projections for the TARP, Congressional Budget 
Office Director's Blog (Aug. 20, 2010) (online at cboblog.cbo.gov/
?p=1322) (hereinafter ``CBO's Latest Projections for the TARP''). The 
CBO Director's Blog cites three factors for the reduction: further 
repurchases of preferred stock and sales of warrants from banks, a 
lower estimated cost for assistance to the automobile industry, and the 
elimination (due to the passage of time and provisions of the Dodd-
Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203) of 
the opportunity to create new programs. CBO plans to publish a full 
update on the TARP sometime this fall.
    \69\ In the FY 2011 Budget, OMB estimated that $48.8 billion would 
be disbursed under HAMP; CBO estimated that only $22 billion would be 
spent. According to CBO, ``[t]he difference between those two estimates 
stems primarily from disparate outlooks on the number of eligible 
households and the participation rate among those households.'' CBO 
Report on the TARP--March 2010, supra note 67, at 6.
    \70\ OMB's estimated subsidy cost of assistance to AIG was $49.9 
billion versus $36 billion for CBO. The difference reflects differing 
assumptions used to value the subsidy provided to the company and the 
cash flows involved in those transactions. CBO Report on the TARP--
March 2010, supra note 67, at 7.
    \71\ OMB projected that the TARP would disburse another $40 billion 
at a subsidy cost of $3 billion; CBO included a similar $45 billion 
placeholder with an estimated subsidy of $23 billion. CBO Report on the 
TARP--March 2010, supra note 67, at 7. The subsequent enactment of the 
Dodd-Frank Act on July 21, 2010, ensured that the Secretary of the 
Treasury would be prohibited from using TARP funds ``to incur any 
obligation for a program or initiative that was not initiated prior to 
June 25, 2010.'' See Dodd-Frank Wall Street Reform and Consumer 
Protection Act, supra note 15.
    \72\ Treasury Summary Tables of TARP Investments, supra note 66, at 
1.
---------------------------------------------------------------------------
    The latest OMB and CBO estimates were released prior to 
enactment of the Dodd-Frank Act, and Treasury has since revised 
its planned investments as a result of the new $475 billion cap 
on TARP expenditures imposed by the bill.\73\ A substantial 
portion ($163.2 billion) of the $223.7 billion in reductions 
required under the Dodd-Frank Act was achieved by forfeiting 
previously uncommitted funds.\74\ As discussed above in Section 
B.2, Treasury offset the remaining $60.5 billion with 
reductions to the $535.5 billion committed as of June 30, 
2010.\75\ In prior reports, the Panel has classified TARP 
expenditures into four different categories: (1) capital 
programs and banking sector health; (2) credit for consumers 
and small businesses; (3) mortgage foreclosure relief; and (4) 
auto industry assistance.\76\ Figure 1 shows the changes in 
funding commitments enacted as result of the passage of the 
Dodd-Frank Act and the projected final cost of each TARP 
subprogram according to estimates from CBO, OMB, and Treasury. 
These assessments of cost are a way for the government to 
project the ultimate losses or gains on its TARP investments 
for budgeting purposes, but there are ways in which their value 
may be limited. On the one hand, they may not completely 
capture the many variables that could still impair taxpayer 
repayment. For instance, the fact that approximately one-
seventh, or 15 percent, of CPP recipients have already missed a 
dividend payment, and fewer than 10 percent of CPP-recipient 
banks have repaid taxpayers, suggests full repayment of CPP 
funds is not assured (see Figure 37).\77\ Likewise, continued 
economic weakness could inhibit consumer demand for 
automobiles, impairing Treasury's ability to recoup its 
investments in GM, Chrysler, and Ally Financial. Therefore, the 
projected final costs in Figure 1 should not be taken to 
indicate maximum possible losses, as repayment is dependent 
upon a number of factors that may not have been incorporated in 
the models used by the three entities. In addition to the 
possibility that these measures may not capture all the 
variables that affect the likelihood that Treasury will be 
repaid, however, these assessments have an additional 
limitation. Although EESA, as described above, directs Treasury 
to take into account the taxpayers' overall returns, the pure 
return on investment from the TARP is not the only way to 
evaluate the effectiveness of the program. As discussed further 
in Section E.2 of this report, using returns as the only or 
primary measure of success may not adequately capture the 
possible consequences to which the taxpayers might have been 
subject through TARP.
---------------------------------------------------------------------------
    \73\ TARP Monthly 105(a) Report--July 2010, supra note 27, at 4-5.
    \74\ The ceiling prior to passage of the Dodd-Frank Act was $698.7 
billion. The original ceiling of $700 billion was reduced $1.2 billion 
with the passage of the Helping Families Save Their Homes Act in 2009. 
See Helping Families Save Their Homes Act of 2009, supra note 2, 
Sec. 40.
    \75\ TARP Monthly 105(a) Report--June 2010, supra note 31, at 5-6.
    \76\ See December 2009 Oversight Report, supra note 6, at 17-74.
    \77\ For a full discussion of outstanding CPP funds, particularly 
those invested in institutions with less than $500 million in assets, 
see July 2010 Oversight Report, supra note 23.

                                               FIGURE 1: TARP EXPENDITURES AND PROJECTED GAINS AND LOSSES
                                                                  [Dollars in billions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                            Funding Allocated                                  Projected Final Cost
                                                 -------------------------------------------------------------------------------------------------------
                                                                                                    CBO                       OMB              Treasury
                                                                                        ----------------------------------------------------------------
                                                                                                      August 2010    FY 2011      FY 2011
                  TARP Programs                    As of June   Dodd-Frank     As of      March 2010   Budget and    Budget,      Budget,        TARP
                                                   30, 2010 i  Act Changes   August 31,  TARP Report    Economic     Deficit      Subsidy      Summary
                                                                    ii        2010 iii   (as of 2/17/ Outlook (as   Impact (as  Cost (as of  Tables  (as
                                                                                            10) iv    of 8/20/10)   of 11/30/    11/30/09)    of  3/31/
                                                                                                           v          09) vi        vii        10) viii
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                       Capital Programs and Banking Sector Health
--------------------------------------------------------------------------------------------------------------------------------------------------------
CPP.............................................        204.9            0        204.9        (2.0)           NA        (3.7)          1.4        (9.8)
TIP.............................................         40.0            0         40.0        (3.0)           NA        (4.1)        (3.7)        (3.8)
AIGIP...........................................         69.8            0         69.8         36.0           NA         48.1         49.9         45.2
PPIP............................................         30.4        (8.0)         22.4          1.0           NA          0.3          0.3          0.5
AGP.............................................          5.0            0          5.0        (3.0)           NA        (3.0)        (3.0)        (3.1)
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Subtotal....................................        350.1        (8.0)        342.1         29.0           NA         37.6         44.9         29.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                        Credit for Consumers and Small Businesses
--------------------------------------------------------------------------------------------------------------------------------------------------------
TALF............................................         20.0       (15.7)          4.3          1.0           NA        (0.5)        (0.5)           NA
SBLF ix.........................................         30.0       (30.0)            0           NA           NA           NA           NA           NA
Unlocking SBA Lendingx..........................          1.0        (0.6)          0.4           NA           NA           NA           NA           NA
CDCI xi.........................................      xii 0.8            0          0.8          0.2           NA           NA           NA           NA
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Subtotal....................................         51.8       (46.3)          5.5          1.2           NA        (0.5)        (0.5)     xiii 3.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               Mortgage Foreclosure Relief
--------------------------------------------------------------------------------------------------------------------------------------------------------
HAMP............................................     xiv 46.7       (16.1)         30.5         22.0           NA         48.8         48.8         48.8
HHFxv...........................................          2.1          2.0          4.1           NA           NA           NA           NA           NA
FHA Refinance Programxvi........................           NA         11.0           11           NA           NA           NA           NA           NA
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Subtotal....................................         48.8        (3.1)         45.6         22.0           NA         48.8         48.8         48.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                Auto Industry Assistance
--------------------------------------------------------------------------------------------------------------------------------------------------------
AIFPxvii........................................         81.3            0         81.3         34.0           NA         28.2         30.8         24.6
ASSPxviii.......................................          3.5        (3.1)          0.4           NA           NA           NA           NA           NA
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Subtotal....................................         84.8        (3.1)         81.8         34.0           NA         28.2         30.8         24.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
Estimates for Uncommitted Funds.................           NA           NA           NA           23            0          2.7          2.7           NA
Total Committed.................................        535.5       (60.5)          475
Total Uncommitted...............................        163.2      (163.2)            0                        Total Projected Cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Statutory Spending Limit........................    xix 698.7      (223.7)          475        109.2       ixx 66        116.8        126.7       105.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
i U.S. Department of the Treasury, Troubled Asset Relief Report, Monthly 105(a) Report--June 2010 (July 12, 2010) (online at www.financialstability.gov/
  docs/105CongressionalReports/June%202010%20105(a)%20Report_Final.pdf).
ii U.S. Department of the Treasury, Troubled Asset Relief Report, Monthly 105(a) Report--July 2010 (Aug. 10, 2010) (online at www.financialstability.gov/
  docs/105CongressionalReports/July%202010%20105(a)%20Report_Final.pdf); Treasury conversations with Panel staff (July 21, 2010) (HAMP de-obligations).
iii U.S. Department of the Treasury, Troubled Asset Relief Report, Monthly 105(a) Report--August 2010 (Sept. 10, 2010) (online at
  www.financialstability.gov/docs/105CongressionalReports/August%202010%20105(a)%20Report_final_9%2010%2010.pdf).
iv Congressional Budget Office, Report on the Troubled Asset Relief Program (Mar. 2010) (online at www.cbo.gov/ftpdocs/112xx/doc11227/03-17-TARP.pdf).
v Congressional Budget Office, Budget and Economic Outlook: An Update (Aug. 2010) (online at cbo.gov/ftpdocs/117xx/doc11705/08-18-Update.pdf).
vi Office of Management and Budget, Budget of the U.S. Government--Fiscal Year 2011 (Feb. 1, 2010) (online at www.whitehouse.gov/omb/budget/fy2011/
  assets/econ_analyses.pdf). The FY 2011 Budget total deficit impact includes downward interest on re-estimates of $9.9 billion.
vii Office of Management and Budget, Analytical Perspectives: Budget of the U.S. Government--Fiscal Year 2011 (Feb. 1, 2010) (online at
  www.whitehouse.gov/sites/default/files/omb/budget/fy2011/assets/econ_analyses.pdf).
viii U.S. Department of the Treasury, Summary Tables of Troubled Asset Relief Program (TARP) Investments as of March 31, 2010 (May 21, 2010) (online at
  www.financialstability.gov/docs/TARP%20Cost%20Estimates%20-%20March%2031%202010.pdf).
ix Prior to passage of the Dodd-Frank Act, Treasury kept a $30 billion placeholder for the SBLF, but the program was never initiated under the TARP.
  CBO, OMB, and Treasury did not assign a subsidy rate or estimated cost to the SBLF.
x CBO, OMB, and Treasury have not assigned a subsidy rate or estimated cost to the program to purchase securities backed by loans from SBA's 7(a)
  Program.
xi OMB and Treasury have not assigned a subsidy rate or estimated cost to the CDCI.
xii In response to a Panel request, Treasury stated that it projects the CDCI program to utilize $780 million.
xiii Treasury assigned one subsidy rate and estimated cost to all programs falling under the Consumer and Business Lending Initiative, which includes
  the four subprograms listed here under ``Credit for Consumers and Small Businesses.''
xiv The original funding amount allotted for HAMP was $50 billion. In May 2009, the $1.2 billion reduction in TARP due to the passage of the Helping
  Families Save Their Homes Act of 2009, Pub. L. No. 111-22 Sec.  402(f) (2009) was officially allocated to HAMP.
xv CBO, OMB, and Treasury have not assigned a subsidy rate or estimated cost to the HHF.
xvi CBO, OMB, and Treasury have not assigned a subsidy rate or estimated cost to the FHA Refinance Program.
xvii In total, $81.3 billion was initially invested in the AIFP: $50.7 billion to GM; $16.3 billion to GMAC; $12.8 billion to Chrysler; and $1.5 billion
  to Chrysler FinCo. See U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September 8, 2010, at
  18-19 (Sept.10, 2010) (online at www.financialstability.gov/docs/transaction-reports/9-10-10%20Transactions%20Report%20as%20of%209-8-10.pdf). CBO,
  OMB, and Treasury have not assigned individual subsidy rates to each individual company receiving TARP funds under the AIFP.
xviii CBO, OMB, and Treasury have not assigned an individual subsidy rate or estimated cost to the ASSP. For budget projection purposes, the program is
  considered part of the AIFP.
xix The ceiling prior to passage of the Dodd-Frank Act was $698.7 billion. The original ceiling of $700 billion was reduced by $1.3 billion with the
  passage of the Helping Families Save Their Homes Act of 2009, Pub. L. No. 111-22 Sec.  402(f) (2009).
xx Douglas Elmendorf, CBO's Latest Projections for the TARP, Congressional Budget Office Director's Blog (Aug. 20, 2010) (online at cboblog.cbo.gov/
  ?p=1322) (``In the baseline budget projections that CBO released yesterday, the lifetime cost of the program has been reduced to $66 billion. Three
  factors account for the reduction: further repurchases of preferred stock and sales of warrants from banks, a lower estimated cost for assistance to
  the automobile industry, and the elimination (due to the passage of time and provisions of the Dodd-Frank Wall Street Reform and Consumer Protection
  Act, P.L. 111-203) of the opportunity to create new programs.'').

    The TARP's current balance sheet shows that Treasury has 
disbursed $394.6 billion under the $475 billion ceiling and 
$204.1 billion in TARP funds have been repaid. There have also 
been $3.9 billion in losses, leaving $184.8 billion in TARP 
funds currently outstanding.\78\ The majority of the funds 
currently outstanding are concentrated in four programs: (1) 
CPP ($55.1 billion); (2) PPIP ($12.7 billion); (3) AIGIP ($49.1 
billion); and (4) AIFP ($67.1 billion). As shown above in 
Figure 1, CPP is expected to be a net gain for Treasury, and 
PPIP is expected to lose no more than $500 million. Conversely, 
while less than $5 billion has been disbursed on housing 
programs, Treasury could disburse as much as $45.6 billion in 
funds that are not intended to be recovered by the federal 
government in HAMP, the Hardest Hit Fund, and the FHA Refinance 
Program.\79\ Therefore, the bulk of Treasury's likely net costs 
are expected to come from three sources: (1) losses on 
investments in AIG; (2) losses on investments in Chrysler, GM, 
and Ally Financial; and (3) expenditures on foreclosure relief. 
The discussion below provides more detail on the current 
estimates of gain or loss on outstanding TARP funds.
---------------------------------------------------------------------------
    \78\ See Sept. 3 TARP Transactions Report, supra note 26.
    \79\ Treasury could have chosen to include equity sharing 
provisions in the TARP foreclosure relief programs. Equity sharing is a 
financing method by which a nonresident investor provides capital and 
receives a portion of any equity in the home. Had Treasury chosen to 
include equity sharing, the subsidy rate for the foreclosure relief 
programs would likely have been less than 100 percent. The Department 
of Housing and Urban Development's (HUD) HOPE for Homeowners program, 
12 U.S.C. Sec. 1715z-23, included equity sharing provisions but 
suffered from a very low participation rate. For a discussion of HOPE 
for Homeowners, see October 2009 Oversight Report, supra note 6, at 79-
82.
---------------------------------------------------------------------------

1. Capital Programs and Banking Sector Health 

    As of September 1, 2010, 614 banks still held their CPP 
funds, with a total of $55.1 billion outstanding. As a result, 
it is not yet possible to calculate precisely the amount of 
money that the CPP will earn or lose, although any losses can 
be capped at $57.4 billion.\80\ The direct financial cost to 
the federal government, however, will probably be a fraction of 
that exposure, and the program may even produce a net gain.
---------------------------------------------------------------------------
    \80\ Treasury closed the CPP on December 29, 2009, having disbursed 
$204.9 billion to 707 financial institutions. As of September 1, 2010, 
a total of 91 institutions had completely repurchased their CPP 
preferred shares and nine had made partial repayments. In total, CPP 
banks have repurchased $147.5 billion in preferred stock and $55.1 
billion remains outstanding. Losses can be capped by adding the total 
amount outstanding ($55.1 billion) to the amount allocated to CIT Group 
($2.3 billion), which declared bankruptcy, and Pacific National Bancorp 
($4.1 million), which was taken into receivership by the FDIC. Three 
additional CPP-recipient banks are likely to result in losses: UCBH 
Holdings received $299 million and is currently in bankruptcy 
proceedings; Midwest Banc Holdings, Inc. and Sonoma Valley Bancorp, 
which received $89.4 million and $8.7 million, respectively, are in 
receivership.
---------------------------------------------------------------------------
    For CPP investments in financial institutions that have 
been fully repaid, including warrants repurchased or sold, the 
overall annual rate of return currently stands at 9.9 
percent.\81\ It is important to note, however, that this rate 
of return reflects returns from CPP banks that have been able 
to repay their TARP funds to date or have been able to pay 
their dividends. As noted above, one in seven banks in the CPP 
has missed a dividend payment, and the prospects for full 
recovery remain uncertain. As the Panel discussed in its July 
report, banks that have strong capital positions face pressure 
to exit the program as quickly as possible.\82\ By contrast, 
banks that have not repaid their TARP funds may be under or 
could come under greater stress. Some banks that remain in the 
CPP may find it difficult or impossible to raise the capital 
necessary to meet their obligations to the taxpayers, and 
Treasury's rate of return may therefore decline over the life 
of the program. Taking into account both losses and gains, 
CBO's most recent published estimate is that the government 
will ultimately earn a net $2 billion from the CPP.\83\ 
Treasury expects a gain of $9.8 billion.\84\
---------------------------------------------------------------------------
    \81\ The calculation of the overall annual rate of return is based 
on Treasury's most recent transactions report. See Sept. 3 TARP 
Transactions Report, supra note 26; data provided by Bloomberg, and the 
Panel's own methodology for valuing warrants; Congressional Oversight 
Panel, July Oversight Report: TARP Repayments, Including the Repurchase 
of TARP Warrants, at 46-53 (July 10, 2009) (online at cop.senate.gov/
documents/cop-071009-report.pdf).
    \82\ See July 2010 Oversight Report, supra note 23, at 30.
    \83\ See CBO Report on the TARP--March 2010, supra note 67.
    \84\ Treasury Summary Tables of TARP Investments, supra note 66.
---------------------------------------------------------------------------
    TARP funds also remain outstanding under the PPIP and the 
TALF. In order to remove troubled assets from bank balance 
sheets, Treasury initially allocated $30 billion to the PPIP. 
Following the enactment of the Dodd-Frank Act, Treasury reduced 
the amount committed to the PPIP by nearly $8 billion to a 
ceiling of $22.4 billion in TARP funds. Treasury's current 
exposure consists of $7.4 billion of equity capital and $14.7 
billion of debt capital.\85\ In the FY 2011 budget, Treasury 
placed the cost of the PPIP at $300 million based on a 1 
percent subsidy rate. In March 2010, Treasury and OMB released 
a revised cost estimate based on a 2 percent subsidy, placing 
the cost of the PPIP at less than $500 million in TARP funds 
over the life of the program.\86\ On June 30, 2010, Treasury 
reported that the rate of return among the eight investment 
funds ranged from 9 to 26 percent since each fund made its 
initial capital draw.\87\ Performance among the investment 
funds over the life of the program will be largely dependent on 
market conditions. Because the PPIP investment funds are in the 
early stages of their three-year investment periods, it is not 
possible to assess the long-term performance of the program 
based on current rates of return.
---------------------------------------------------------------------------
    \85\ TARP Monthly 105(a) Report--July 2010, supra note 27, at 6.
    \86\ Treasury Summary Tables of TARP Investments, supra note 66, at 
1.
    \87\ These returns were calculated based on monthly performance 
reports submitted by PPIF managers and include a deduction for 
management fees and expenses attributable to Treasury. U.S. Department 
of the Treasury, Legacy Securities Public-Private Investment Program, 
at 7 (July 19, 2010) (online at www.financialstability.gov/docs/
111.pdf).
---------------------------------------------------------------------------
    Treasury committed up to $20 billion in TARP funds to 
restart securitization markets through a loan to TALF LLC, a 
special purpose vehicle created by the Federal Reserve Bank of 
New York (FRBNY). On July 19, 2010, Treasury amended its credit 
agreement with FRBNY and TALF LLC to reduce the maximum loan 
amount to $4.3 billion.\88\ Although the TALF has closed, 
meaning that the program will not fund the creation of any new 
securities, Treasury will continue to provide credit protection 
to FRBNY until the full $4.3 billion commitment has been funded 
or the loan commitment term expires.\89\ The latest CBO report 
estimated the subsidy rate for Treasury protection for the TALF 
to be 6 percent, resulting in a $1 billion loss in TARP funds 
over the life of the program.\90\
---------------------------------------------------------------------------
    \88\ TARP Monthly 105(a) Report--July 2010, supra note 27, at 5.
    \89\ Federal Reserve Bank of New York, Term Asset-Backed Securities 
Loan Facility: Terms and Conditions (July 21, 2010) (online at 
www.newyorkfed.org/markets/talf_terms.html) (hereinafter ``TALF Terms 
and Conditions''). See Section D.3, infra, for further discussion of 
TALF.
    \90\ CBO Report on the TARP--March 2010, supra note 67.
---------------------------------------------------------------------------

2. AIG Investment Program (Formerly the Systemically Significant 
        Failing Institutions Program) 

    Most observers expect that the AIG Investment Program will 
generate significant losses to U.S. taxpayers.\91\ The latest 
estimates by CBO, OMB, and Treasury project losses in the 
amount of $36 billion,\92\ $50 billion,\93\ and $45 
billion,\94\ respectively, although the estimated losses have 
steadily decreased since the inception of the credit facility. 
Whether Treasury will be able to exit its investments in AIG 
without substantial losses turns on AIG's ability to produce 
strong operating results and demonstrate that it is capable of 
functioning as a standalone investment-grade company without 
government support. While Treasury and AIG officials have 
expressed confidence that AIG is making great strides towards 
achieving such financial independence,\95\ AIG still relies 
largely on government funding for capital and liquidity, 
although there are recent indications that AIG is planning to 
issue bonds.\96\ Treasury's ability to recoup its investment 
depends on the value of AIG's common stock at the time Treasury 
sells its interests.\97\ Therefore, the value of Treasury's 
substantial investment in AIG and the size of any gain or loss 
are dependent on many external variables, and the protracted 
investment in AIG continues to create significant risks to 
taxpayers.
---------------------------------------------------------------------------
    \91\ The panel has written extensively on the government investment 
in AIG and its prospects. See June 2010 Oversight Report, supra note 
21.
    \92\ CBO Report on the TARP--March 2010, supra note 67, at 3.
    \93\ Office of Management and Budget, The President's Budget for 
Fiscal Year 2011, Analytical Perspectives, Economic and Budget 
Analyses, at 40 (Feb. 1, 2010) (online at www.whitehouse.gov/sites/
default/files/omb/budget/fy2011/assets/econ_analyses.pdf) (hereinafter 
``The President's Budget for Fiscal Year 2011'').
    \94\ Treasury Summary Tables of TARP Investments, supra note 66, at 
2.
    \95\ See Congressional Oversight Panel, Written Testimony of Robert 
Benmosche, president and chief executive officer, American 
International Group, Inc., COP Hearing on TARP and Other Assistance to 
AIG, at 8 (May 26, 2010) (online at cop.senate.gov/documents/testimony-
052610-benmosche.pdf) (e.g. ``AIG is now on a clear path to repaying 
taxpayers. In recent months, we have become less reliant on government 
aid and have been able to tap instead the capital markets. We are 
working hard to complete the sales of AIA and ALICO by the end of the 
year, to increase profits at our remaining businesses and to improve 
operating returns. Then we can begin to examine the alternatives we 
have to address the Treasury's TARP investment and equity holdings.''). 
The current status of the AIA and ALICO sales are discussed in footnote 
108, infra. See also Congressional Oversight Panel, Testimony of Jim 
Millstein, chief restructuring officer, U.S. Department of the 
Treasury, Transcript: COP Hearing on TARP and Other Assistance to AIG 
(May 26, 2010) (publication forthcoming) (online at cop.senate.gov/
hearings/library/hearing-052610-aig.cfm) (hereinafter ``Jim Millstein 
AIG Testimony'' (stating that Mr. Benmosche is an ``experienced 
insurance executive . . . h[e] is confiden[t] that he can get Chartis 
and SunAmerica Financial to an $8 billion dollar net after tax 
earnings. If he can do that, we're going to be paid in full'').
    \96\ American International Group, Inc., Form 10-Q for the 
Quarterly Period Ended June 30, 2010, at 12 (Aug. 6, 2010) (online at 
www.sec.gov/Archives/edgar/data/5272/000104746910007097/a2199624z10-
q.htm) (hereinafter ``AIG Form 10-Q for the Second Quarter 2010''). AIG 
amended its existing SEC registration on August 9, 2010 to permit the 
sale of debt instruments. American International Group, Inc., Form S-3 
(Aug. 9, 2010) (online at services.corporate-ir.net/SEC.Enhanced/
SecCapsule.aspx?c=76115&fid=7076507). The AIG aircraft leasing 
subsidiary ILFC was recently able to raise approximately $4 billion in 
the capital markets, which AIG has used to reduce the balance on the 
FRBNY revolving credit facility. American International Group, Inc., 
AIG Reduces Principal Balance on Federal Reserve Bank of New York 
Revolving Credit Facility by Nearly $4 Billion (Aug. 23, 2010) (online 
at ir.aigcorporate.com/External.File?t=2&item=g7rqBLVLuv81UAmrh20Mp2D/
jbuMQX0JWf4oGazjlIxeJq2b5l2D3jdQlccQVaAZCaOmzP8Hukewe3TB4pawgQ==) 
(hereinafter ``AIG Press Release'').
    \97\ See Jim Millstein AIG Testimony, supra note 95 (``Whether 
Treasury ultimately recovers all of its investment or makes a profit, 
will in large part depend on the company's operating performance and 
market multiples for insurance companies at the time the government 
sells its interest'').
---------------------------------------------------------------------------
    Treasury has invested approximately $47.5 billion in TARP 
funds in AIG. This investment is comprised of non-cumulative 
preferred stock in the amount of $40 billion and an equity 
capital facility under which AIG has drawn down $7.5 
billion.\98\ Including the $1.6 billion in unpaid dividends, 
AIG's outstanding TARP assistance equals $49.1 billion.\99\ In 
addition, AIG must repay $79.1 billion in outstanding debt to 
FRBNY.\100\ Figure 2 shows a breakdown of AIG's outstanding 
obligations to the government.
---------------------------------------------------------------------------
    \98\ U.S. Department of the Treasury, Troubled Asset Relief Program 
Transactions Report for the Period Ending September 9, 2010, at 21 
(Sept. 13, 2010) (online at www.financialstability.gov/ docs/
transaction-reports/9-13-10%20Transactions%20Report%20as%20of%209-9-
10.pdf) (hereinafter ``Treasury Transactions Report''); TARP Monthly 
105(a) Report--August 2010, supra note 55. See also June 2010 Oversight 
Report, supra note 21, at 15. Under the equity capital facility, AIG 
may draw up to $29.8 billion.
    \99\ Because AIG failed to pay dividends on AIG Series E Preferred 
Stock (par value $5.00 per share) and AIG Series F Preferred Stock for 
four quarters, on April 1, 2010 Treasury exercised its right to appoint 
two directors to the Board of Directors of AIG. American International 
Group, Inc., Form 10-Q for the Quarterly Period Ended March 31, 2010, 
at 73 (May 7, 2010) (online at www.sec.gov/Archives/edgar/data/5272/
000104746910004918/a2198531z10-q.htm).
    \100\ Board of Governors of the Federal Reserve System, Factors 
Affecting Reserve Balances (H.4.1) (Aug. 12, 2010) (online at 
www.federalreserve.gov/releases/h41/Current/) (hereinafter ``Factors 
Affecting Reserve Balances (H.4.1)''). See also June 2010 Oversight 
Report, supra note 21, at 15.

      FIGURE 2: GOVERNMENT ASSISTANCE TO AIG AS OF SEPTEMBER 1, 2010
                          [Dollars in millions]
------------------------------------------------------------------------
                                                           Assistance
                                                             Amount
                                    Amount  Allocated   Outstanding  as
                                                          of 9/1/2010
------------------------------------------------------------------------
                               FRBNY \101\
------------------------------------------------------------------------
Revolving Credit Facility \102\...            $30,000            $20,057
Maiden Lane II: Outstanding                    22,500             13,873
 principal amount of loan from
 FRBNY............................
Accrued interest payable to FRBNY.                 --                387
Maiden Lane III: Outstanding                   30,000             15,107
 principal amount of loan from
 FRBNY............................
Accrued interest payable to FRBNY.                 --                477
Preferred interest in AIA Aurora               16,000             16,469
 LLC..............................
Accrued dividends on preferred                     --                111
 interests in AIA Aurora LLC......
Preferred interest in ALICO SPV...              9,000              9,264
Accrued dividends on preferred                     --                 62
 interests in ALICO Holdings LLC
 \103\............................
                                   -------------------------------------
    Total FRBNY ..................           107,500              75,807
------------------------------------------------------------------------
                                  TARP
------------------------------------------------------------------------
Series E Non-cumulative Preferred              40,000             40,000
 stock............................
Unpaid dividends on Series D                       --              1,605
 Preferred stock \104\............
Series F Non-cumulative Preferred              29,835              7,544
 stock \105\......................
                                   -------------------------------------
    Total TARP ...................            69,835              49,149
------------------------------------------------------------------------
                           Total FRBNY + TARP
------------------------------------------------------------------------
Net borrowings....................            181,035            122,314
Accrued interest payable and                       --              2,642
 unpaid dividends.................
                                   -------------------------------------
    Total Balance Outstanding on            $177,335           $127,598
     All Government Investments ..
------------------------------------------------------------------------
\101\ Id.
\102\ Id. See also AIG Press Release, supra note 96.
\103\ Factors Affecting Reserve Balances (H.4.1), supra note 100
  (``Dividends accrue as a percentage of FRBNY's preferred interests in
  AIA Aurora LLC and ALICO Holdings LLC. On a quarterly basis, the
  accrued dividends are capitalized and added to FRBNY's preferred
  interests in AIA Aurora LLC and ALICO Holdings LLC.''). FRBNY also
  reports the Net Portfolio Holdings for Maiden Lane II and III (ML II
  and ML III, respectively). These figures represent fair market value
  estimates of the assets of the two Maiden Lane SPVs. The current Net
  Portfolio Holdings values are $15,967 for ML II and $23,324 for ML III
  (in millions of dollars). These can theoretically be compared to
  FRBNY's investments and accrued interest to determine an approximate
  paper gain or loss. For ML II and ML III, this would represent gains
  of $2,094 and $8,217, respectively.
\104\ U.S. Department of the Treasury, Troubled Asset Relief Program
  Transactions Report for the Period Ending August 20, 2010, at 21 (Aug.
  20, 2010) (online at www.financialstability.gov/docs/transaction-
  reports/8-24-10%20Transactions%20Report%20as%20of%208-20-10.pdf).
\105\ AIG Form 10-Q for the Second Quarter 2010, supra note 96, at 107.

    The timing of Treasury's exit is complicated by the fact 
that AIG is not permitted to repay Treasury until it has fully 
repaid FRBNY. Treasury, the Federal Reserve, and AIG have 
stated that they are confident that AIG will fully repay FRBNY 
in the near future without jeopardizing its financial 
viability.\106\ In addition, over recent months Treasury and 
AIG have stated that they are increasingly optimistic that AIG 
will fully repay Treasury; however, neither AIG nor Treasury 
has provided a timeline or articulated a firm exit 
strategy.\107\ Furthermore, AIG must overcome several barriers 
before it can repay its FRBNY debt, let alone its Treasury 
debt. Notably, problems have arisen in the planned sales of 
certain subsidiaries.\108\ In addition, at this time AIG cannot 
afford to divert the cash it is generating through its 
insurance operations towards repaying FRBNY because it is still 
quite weak financially.\109\ Both the timing of the 
government's exit from its involvement with AIG, and the 
ultimate return on its investment, are difficult to predict 
with confidence.
---------------------------------------------------------------------------
    \106\ Board of Governors of the Federal Reserve System, Federal 
Reserve System Monthly Report on Credit and Liquidity Programs and the 
Balance Sheet, at 27 (July 2010) (online at www.federalreserve.gov/
monetarypolicy/files/monthlyclbsreport201007.pdf) (``[T]he Federal 
Reserve anticipates that the loans provided by the Federal Reserve 
under the Revolving Credit Facility, including interest and commitment 
fees under the modified terms of the facility, will be fully repaid and 
the face value of the preferred interests in the AIA and ALICO SPVs, 
plus accrued dividends, will be received. Accordingly, the Federal 
Reserve anticipates that the facility will not result in any net loss 
to the Federal Reserve or taxpayers.''); Congressional Oversight Panel, 
Testimony of Robert Benmosche, president and chief executive officer, 
American International Group, Inc., Transcript: COP Hearing on TARP and 
Other Assistance to AIG (May 26, 2010) (publication forthcoming) 
(online at cop.senate.gov/hearings/libraryhearing-052610-
aig.cfm) (``I believe that we will pay back all that we owe the U.S. 
Government. And I believe at the end of the day, the U.S. Government 
will make an appropriate profit.''); Jim Millstein AIG Testimony, supra 
note 95 (``[T]he New York Fed, which has about $83 billion dollars 
outstanding today, is very likely to be paid in full.''). See also June 
2010 Oversight Report, supra note 21, at 196.
    \107\ See June 2010 Oversight Report, supra note 21, at 196-197, 
200.
    \108\ AIG's primary strategy for repaying FRBNY debt has faltered 
in recent months. AIG had planned to repay FRBNY with the proceeds from 
the sale of its Asian insurance subsidiaries, AIA and ALICO. On June 2, 
2010, the AIA sale to Prudential for $35.5 billion was cancelled due to 
disagreements over the sale price. AIG is now contemplating an 
alternative strategy to sell AIA through an IPO on the Hong Kong Stock 
Exchange. On March 8, 2010, AIG agreed to sell ALICO to MetLife for 
$15.5 billion, but the sale has not yet closed. AIG's ability to repay 
FRBNY in the near future is uncertain as it does not appear that AIG 
has a viable alternative to repaying FRBNY other than through an IPO or 
sale of AIA and ALICO. Other assets AIG has slated for sale will not 
generate sufficient proceeds to repay FRBNY. See American International 
Group, Inc., AIG to Sell ALICO to MetLife for Approximately $15.5 
Billion (Mar. 8, 2010) (online at phx.corporate-ir.net/
External.File?item= UGFyZW50SUQ9MzU0MTl8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1).
    Despite the challenges outlined above, AIG has made measured 
progress in the disposition of certain assets. On August 11, 2010, AIG 
announced the sale of 80 percent of its ownership stake in American 
General Finance Inc. to Fortress Investment Group LLC. American 
International Group, Fortress Funds to Purchase American General 
Finance (Aug. 11, 2010) (online at www.aigcorporate.com/newsroom/
index.html).
    \109\ See generally, AIG Form 10-Q for the Second Quarter 2010, 
supra note 96, at 12. AIG had a net loss of $2.7 billion in the second 
quarter of 2010, which the company attributed to restructuring-related 
charges.
---------------------------------------------------------------------------

3. Automotive Industry Financing Program \110\

    There are currently $67.1 billion in TARP funds outstanding 
under the Automotive Industry Financing Program (AIFP).\111\ 
The passage of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act ensures that there will be no further 
commitments or expenditures under the AIFP, and the $67.1 
billion currently outstanding under the program is the maximum 
amount that will be at risk going forward.\112\
---------------------------------------------------------------------------
    \110\ See Annex I, infra. 
    \111\ Treasury Transactions Report, supra note 98, at 18.
    \112\ TARP Monthly 105(a) Report--July 2010, supra note 27, at 4.
---------------------------------------------------------------------------
    CBO, OMB, and Treasury are projecting losses in the amount 
of $34 billion,\113\ $28.2 billion,\114\ and $24.6 
billion,\115\ respectively, from the assistance provided under 
the AIFP, although the estimated losses have steadily decreased 
since the early stages of government assistance. Whether 
Treasury will incur losses from its investment in the AIFP 
depends on the ability of GM and Chrysler to achieve strong 
operating results and establish themselves as competitive auto 
manufacturers, and the ability of GMAC, now Ally Financial, to 
rebuild itself as a healthy standalone company.
---------------------------------------------------------------------------
    \113\ CBO Report on the TARP--March 2010, supra note 67, at 3.
    \114\ The President's Budget for Fiscal Year 2011, supra note 93, 
at 40. The subsidy cost represents the lifetime net present value cost 
of TARP obligations from the date TARP obligations originate. CBO, OMB, 
and Treasury do not disaggregate subsidy estimates by each institution 
(GM, Chrysler, and GMAC), and instead use overall subsidy rates for 
AIFP recipients. The OMB estimate ($28.2 billion) includes an interest 
adjustment on its previously published estimate; without this 
adjustment, the OMB estimate is $30.8 billion.
    \115\ Treasury Summary Tables of TARP Investments, supra note 66, 
at 2.
---------------------------------------------------------------------------
            a. General Motors 
    Treasury initially invested a total of $49.9 billion in GM. 
Approximately $30.1 billion was provided in the form of debtor-
in-possession (DIP) financing to support GM's Chapter 11 
restructuring.\116\ Through bankruptcy, the initial investment 
was converted to $2.1 billion in preferred stock, 60.8 percent 
in common equity, and $6.7 billion in debt.\117\ Proceeds in 
the amount of $16.4 billion from the DIP facility were 
deposited in escrow to be distributed to GM at its request, 
subject to certain conditions.\118\ In April 2010, GM repaid 
its outstanding $6.7 billion debt to Treasury using the funds 
in the escrow account. Despite this debt repayment, Treasury 
maintains a significant equity stake in the company.\119\
---------------------------------------------------------------------------
    \116\ TARP Monthly 105(a) Report--July 2010, supra note 27, at 
Appendix 1--Page 8.
    \117\ This figure does not include $361 million in loans repaid by 
GM immediately following its emergence from bankruptcy on July 10, 
2009. Treasury Transactions Report, supra note 98, at 18.
    \118\ GM was required to meet the following conditions in order to 
access the funds in the escrow account: ``(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.'' General Motors Co., Form 
8-K for the Period Ended September 2, 2009 (Nov. 2, 2009) (online at 
www.sec.gov/Archives/edgar/data/1467858/000119312509220534/d8k.htm).
    \119\ GM repaid $1 billion on December 18, 2009, $35 million on 
January 21, 2010, $1 billion on March 31, 2010, and the remaining $4.7 
billion on April 20, 2010, for a total of $6.7 billion. With Treasury's 
permission, GM made each payment using the funds in the escrow account. 
U.S. Department of the Treasury, Troubled Assets Relief Program (TARP): 
Monthly 105(a) Report_April 2010, at 11 (May 10, 2010) (online at 
www.financialstability.gov/docs/105CongressionalReports/
April%202010%20105(a)%20report_final.pdf).
---------------------------------------------------------------------------
    On July 22, 2010, GM announced its acquisition of 
AmeriCredit, an auto finance company specializing in non-prime 
lending, for $3.5 billion.\120\ GM has had limited access to 
non-prime car buyers because Ally Financial (formerly GMAC), 
GM's long-time financing partner, had withdrawn from the 
subprime lending market as a result of the financial 
crisis.\121\ GM has stated that it is expecting the AmeriCredit 
acquisition to allow it to offer more financing options and to 
increase sales in the non-prime market.\122\ In August, GM 
announced that it recorded its second straight quarter of 
profitability, earning $1.3 billion in the second quarter of 
2010.\123\
---------------------------------------------------------------------------
    \120\ General Motors Co., GM to Acquire AmeriCredit (July 22, 2010) 
(online at media.gm.com/content/media/us/en/news/
news_detail.brand_gm.html/content/Pages/news/us/en/2010/July/
0722_americredit) (hereinafter ``GM to Acquire AmeriCredit'').
    \121\ GMAC LLC, Form 10-K for Fiscal Year Ended December 31, 2008, 
at 28 (Feb. 27, 2009) (online at www.sec.gov/Archives/edgar/data/40729/
000119312509039567/d10k.htm). See also March 2010 Oversight Report, 
supra note 6, at 72. In the second quarter of 2010, only 13 percent of 
Ally's loans were non-prime. Ally Financial, Inc., 2Q10 Earnings 
Review, at 6 (Aug. 3, 2010) (online at phx.corporate-ir.net/
External.File?item
=UGFyZW50SUQ9MzI0MjM1M3xDaGlsZElEPTM5MTY3NXxUeXBlPTI=&t=1) (hereinafter 
``GMAC 2Q10 Earnings Review'').
    \122\ GM to Acquire AmeriCredit, supra note 120.
    \123\ GM reported net profits in the second quarter of 2010 of $1.3 
billion on revenues of $33.2 billion. In the first quarter of 2010, GM 
reported net profits of $865 million on revenues of $31.5 billion. 
General Motors Co., Press Release: GM Announces 2010 Second Quarter 
Results (Aug. 12, 2010) (online at phx.corporate-ir.net/
External.File?item
=UGFyZW50SUQ9NTc2NDV8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1).
---------------------------------------------------------------------------
    On August 18, 2010, GM filed a form S-1 registration 
statement with the Securities and Exchange Commission which 
announced the planned sale of common shares to the public.\124\ 
Treasury has been named as a selling shareholder in this IPO, 
although the complete details of the sale, including the 
portion of Treasury's stake to be sold, have not yet been 
disclosed. Assuming Treasury does not dispose of all its shares 
in an IPO, it will then need to sell its shares in the open 
market to recoup its investment in GM. As a major shareholder 
of GM stock, Treasury will need to dispose of its shares over a 
protracted period to avoid a trading imbalance due to 
significant selling volume. Such an extended exit strategy 
leaves Treasury vulnerable to several risks in recouping its 
investment, including market fluctuations and the performance 
of GM's stock price. Meanwhile, General Motors also announced 
in August that Edward E. Whitacre would step down as CEO on 
September 1, 2010, and as chairman of the board by the end of 
the year.\125\ He was replaced by Daniel F. Akerson, a GM 
director and a managing director of the Carlyle Group, a 
private equity firm.\126\ Mr. Akerson was appointed to GM's 
board by the Obama Administration in July 2009. He is GM's 
fourth CEO in less than two years.
---------------------------------------------------------------------------
    \124\ General Motors Co., Form S-1 (Aug. 18, 2010) (online at 
www.sec.gov/Archives/edgar/data/1467858/000119312510192195/ds1.htm).
    \125\ General Motors Co., Press Release: GM Announces CEO 
Succession Process (Aug. 12, 2010) (online at media.gm.com/content/
media/us/en/news/news_detail.globalnews.html/content/Pages/news/global/
en/2010/0812_transition).
    \126\ Id. 
---------------------------------------------------------------------------
            b. Chrysler 
    As of August 2010, Treasury has incurred a total of $1.6 
billion in losses from its $12.5 billion investment in 
Chrysler. In April 2010, Treasury extinguished a $1.9 billion 
DIP loan and transferred the remaining assets of Old Chrysler 
to a liquidation account.\127\ Although Treasury has the right 
to recover the proceeds from the sale of certain assets in the 
liquidation account, Treasury stated that it did ``not expect a 
significant recovery from the liquidation proceeds.'' \128\ As 
of August 18, 2010, Treasury had recovered $31 million from the 
sale of collateral associated with this loan.\129\ In addition 
to the $1.9 billion loss from the DIP loan, on May 14, 2010 
Treasury accepted a payment of $1.9 billion from CGI Holding 
(formerly Chrysler Holding LLC) to settle and terminate one of 
Chrysler's AIFP loans totaling $3.5 billion. Treasury stated 
that it accepted the repayment, which represents a loss of $1.6 
billion to taxpayers, because $1.9 billion was ``significantly 
more than Treasury had previously estimated to recover'' on the 
loan.\130\ Treasury currently holds $7.1 billion in debt and 
9.9 percent equity ownership in New Chrysler.
---------------------------------------------------------------------------
    \127\ Following the bankruptcy proceedings for Old Chrysler, the 
$1.9 billion DIP loan was deducted from Treasury's AIFP investment 
amount. It is accounted for here as a loss until the point in time when 
all assets sales are completed. TARP Monthly 105(a) Report--August 
2010, supra note 55; Treasury conversations with Panel staff (Aug. 19, 
2010).
    \128\ U.S. Department of the Treasury, Troubled Assets Relief 
Program (TARP): Monthly 105(a) Report--May 2010, at 13 (June 10, 2010) 
(online at www.financialstability.gov/docs/105CongressionalReports/
May%202010%20105(a)%20Report_final.pdf) (hereinafter ``TARP Monthly 
105(a) Report_May 2010'').
    \129\ Treasury Transactions Report, supra note 98, at 18.
    \130\ TARP Monthly 105(a) Report--May 2010, supra note 128, at 3, 
13.
---------------------------------------------------------------------------
    On August 9, 2010, Chrysler Group LLC reported its 
financial results for the second quarter 2010. The company 
reported an operating profit of $183 million and reaffirmed its 
2010 guidance that it will not lose money in the fiscal year 
and is likely to revise these estimates upward.\131\ Chrysler 
also announced a target of $40 billion to $45 billion in net 
revenues during 2010.
---------------------------------------------------------------------------
    \131\ Chrysler 2Q10 Financial Results, supra note 35.
---------------------------------------------------------------------------
            c. Ally Financial (Formerly GMAC) \132\
---------------------------------------------------------------------------
    \132\ GMAC Financial formally changed its name on May 10, 2010 to 
Ally Financial Inc. Ally Financial, Inc., Ally Financial Statement on 
New Corporate Brand (May 10, 2010) (online at media.ally.com/
index.php?s=43&item=401).
---------------------------------------------------------------------------
    Treasury's investment in Ally Financial (Ally) includes 
56.3 percent of Ally's common stock, $2.5 billion in trust-
preferred securities, and $11.4 billion in mandatorily 
convertible preferred (MCP) shares.\133\ As a result of 
Treasury's increase in equity ownership from 35 percent to 56.3 
percent in December 2009, Treasury has the right to appoint 
four out of the nine directors to Ally's Board of Directors. As 
of August 2010, Treasury had only appointed one director.\134\
---------------------------------------------------------------------------
    \133\ TARP Monthly 105(a) Report--August 2010, supra note 55, at 
Appendix I--page 12.
    \134\ TARP Monthly 105(a) Report--May 2010, supra note 128, at 
Appendix I--page 13. On May 26, 2010, Treasury announced the 
appointment of Marjorie Magner to the Ally Financial Inc. Board of 
Directors.
---------------------------------------------------------------------------
    In the Panel's March 2010 report on GMAC, the Panel noted 
that Ally's relationship with GM remains critical to Ally's 
success. The report suggested that consideration be given to 
merging Ally back into GM.\135\ However, as mentioned above, GM 
recently acquired AmeriCredit, another provider of automobile 
financing. Ally CEO Michael Carpenter told investors that 
AmeriCredit's role would be largely confined to subprime 
financing and leasing, while Ally would remain the preferred 
vendor of floorplan financing for GM dealers.\136\ Although 
AmeriCredit is small compared to Ally, the purchase raised 
questions from some industry analysts regarding the future of 
GM's relationship with Ally.\137\
---------------------------------------------------------------------------
    \135\ March 2010 Oversight Report, supra note 6, at 121.
    \136\ See Ally Financial, Q2 2010 Ally Financial Inc. Earnings 
Conference Call Webcast (Aug. 3, 2010) (online at 
web.servicebureau.net/conf/meta?i=1113186441&c=2343&m=was&u
=/w_ccbn.xsl&date_ticker=**GMAC) (hereinafter ``Ally Financial Earnings 
Conference Call Webcast''); Ally Financial, Inc., Transcript of Ally 
Financial Inc.'s Q2 2010 Earnings Call, at 4 (Aug. 3, 2010) (online at 
ofchq.snl.com/Cache/753E92A12B9915308.pdf) (hereinafter ``Transcript of 
Ally Financial Earnings Call''). Ally increased its penetration of GM 
and Chrysler wholesale financing from 42 percent in the first half of 
2009 to 84 percent in the first half of 2010.
    \137\ See the Panel's March Report for a detailed discussion of the 
relationship between Ally and GM, and the potential consequences for 
Ally arising from GM's acquisition of a financing company. March 2010 
Oversight Report, supra note 6, at 108-109. See also David Mildenberg, 
Ally ``Loves'' GM Deal That Values Firm at $30 Billion, Bloomberg 
Businessweek (Aug. 3, 2010) (online at www.businessweek.com/news/2010-
08-03/ally-loves-gm-deal-that-values-firm
-at-30-billion.html) (``The one question Ally cannot answer right now 
is, `Why does it make sense for GM to continue doing business with them 
now that they have created a new captive lender?' [managing director of 
Institutional Risk Analytics Chris] Whalen said in a telephone 
interview. `I want to hear about how they're going to fill out the rest 
of the business model.' '').
---------------------------------------------------------------------------
    In its second quarter 2010 earnings review, Ally reported a 
quarterly profit of $565 million, compared with a loss in the 
same quarter of last year of $3.9 billion.\138\ Despite these 
positive results, Ally's greatest liability remains its 
mortgage businesses, which it has been attempting to downsize. 
In April, Ally's troubled real estate finance subsidiary, 
Residential Capital (ResCap), agreed to sell European mortgage 
assets and businesses to affiliates of hedge fund and private 
equity firm Fortress Investment Group. After adjusting for the 
pending sale of the European assets, ResCap still has a balance 
sheet of $17.7 billion, including $4.7 billion in what it calls 
``value sensitive exposures.'' \139\ Ally has stated that it is 
considering a number of strategic alternatives with respect to 
ResCap, including one or more sales, spin-offs, or other 
potential transactions.\140\
---------------------------------------------------------------------------
    \138\ GMAC 2Q10 Earnings Review, supra note 121.
    \139\ See Ally Financial Earnings Conference Call Webcast, supra 
note 136; Transcript of Ally Financial Earnings Call, supra note 136, 
at 4.
    \140\ Ally Financial, Inc., Form 10-Q for the Quarterly Period 
Ended June 30, 2010, at 10 (Aug. 6, 2010) (online at www.sec.gov/
Archives/edgar/data/40729/000119312510181437/d10q.htm).
---------------------------------------------------------------------------

4. Mortgage Foreclosure Relief Programs

    Unlike programs assisting financial institutions and the 
auto industry, Treasury's mortgage modification efforts were 
not designed to recover losses through repayment to the federal 
government. The programs are intended to offset systemic and 
societal harm through a reduced foreclosure rate. As part of 
the 2011 federal budget, OMB projected the total cost of 
Treasury's foreclosure mitigation programs at $48.8 
billion.\141\ Treasury currently estimates that its foreclosure 
mitigation programs will total $45.6 billion. The revised 
program total is comprised of $11 billion for the FHA, $4.1 
billion for the Hardest Hit Fund, and $30.5 billion for the 
remaining programs under HAMP.\142\
---------------------------------------------------------------------------
    \141\ The President's Budget for Fiscal Year 2011, supra note 93, 
at 40.
    \142\ TARP Monthly 105(a) Report--July 2010, supra note 27, at 6.
---------------------------------------------------------------------------
    Under the current program guidelines for HAMP, servicers 
will continue to offer modifications through December 31, 2012, 
and conversions to permanent status through May 1, 2013. The 
program offers cost-sharing for the reduced payments, as well 
as incentive payments for servicers, lenders, and borrowers. 
These payments occur in installments for a period of up to five 
years. Because the program is in its first year of a multi-year 
program, and due to the staggered payments, only a fraction of 
the funds committed have been paid out to date. Of the $30.5 
billion currently committed to HAMP, approximately $395 million 
has been disbursed.\143\
---------------------------------------------------------------------------
    \143\ Data provided by Treasury to Panel staff (Sept. 14, 2010).
---------------------------------------------------------------------------
    The latest CBO report from March 2010 offers its projection 
for spending under Treasury's mortgage foreclosure mitigation 
program. Since, as noted above, the program was not designed to 
recover amounts spent, this number represents the amount that 
will be ``lost'' under the program. CBO estimates that Treasury 
will disburse $1.5 billion for the Hardest Hit Fund and $20 
billion to servicers for permanent loan modifications.\144\ CBO 
attributed the $27.3 billion difference between its estimate 
and OMB's estimate to differing assumptions of homeowner 
eligibility and participation in HAMP and the subsidy cost of 
future commitments to new programs.\145\ On August 19, 2010, 
CBO noted that disbursements under HAMP were slower than 
expected, although it did not change its estimate that the 
total cost of the program would be approximately $22 
billion.\146\ Barring a dramatic increase in homeowners 
admitted to the program and the rate converting to permanent 
modifications, it is unlikely that Treasury will have a high 
enough participation rate to expend all of the funds currently 
committed to HAMP.\147\
---------------------------------------------------------------------------
    \144\ Although Treasury uses the term ``permanent modification,'' 
after five years the interest rate and payments on the modified loan 
can rise. Therefore, the modification is not truly ``permanent.'' 
However, for clarity and consistency with Treasury's terms, this report 
uses the term ``permanent modification.''
    \145\ CBO Report on the TARP--March 2010, supra note 67, at 6.
    \146\ CBO Budget and Economic Outlook, supra note 68, at 70.
    \147\ For further discussion of the status of HAMP and Treasury's 
other foreclosure mitigation programs, see Section D.1, infra.
---------------------------------------------------------------------------

         D. How Has Treasury Used Its Extended TARP Authority?

    In the December 2009 letter to Congressional leadership in 
which Secretary Geithner extended the TARP, he set out three 
discrete areas to which Treasury would limit new TARP funding 
commitments, ``unless necessary to respond to an immediate and 
substantial threat to the economy stemming from financial 
instability.'' \148\ The letter stated:
---------------------------------------------------------------------------
    \148\ Letter from Secretary Geithner to Hill Leadership, supra note 
48.
---------------------------------------------------------------------------
     ``We will continue to mitigate foreclosure for 
responsible American homeowners as we take the steps necessary 
to stabilize our housing market.''
     ``We recently launched initiatives to provide 
capital to small and community banks, which are important 
sources of credit for small businesses. We are also reserving 
funds for additional efforts to facilitate small business 
lending.''
     ``Finally, we may increase our commitment to the 
Term Asset-Backed Securities Loan Facility (TALF), which is 
improving securitization markets that facilitate consumer and 
small business loans, as well as commercial mortgage loans. We 
expect that increasing our commitment to TALF would not result 
in additional cost to taxpayers.'' \149\
---------------------------------------------------------------------------
    \149\ Letter from Secretary Geithner to Hill Leadership, supra note 
48.
---------------------------------------------------------------------------
    Treasury did not promise that it would commit additional 
funds for foreclosure mitigation, small business lending, and 
the TALF, but rather preserved its discretion to do so. 
Treasury's focus on those three areas, however, did come in 
response to its assessment of particular weaknesses in the 
financial system. Secretary Geithner's letter noted, for 
example, that ``[t]oo many American families, homeowners, and 
small businesses still face severe financial pressure.'' It 
also stated that ``foreclosures are increasing'' and that 
``many small businesses face very difficult credit 
conditions.'' The Secretary also noted that extending the TARP 
will ``enable us to continue to implement programs that address 
housing markets and the needs of small businesses.'' \150\
---------------------------------------------------------------------------
    \150\ Letter from Secretary Geithner to Hill Leadership, supra note 
48 (``Too many American families, homeowners, and small businesses 
still face severe financial pressure. Although the economy is 
recovering, foreclosures are increasing, and unemployment is 
unacceptably high. Businesses are still cautious in the face of 
uncertainty about the strength of the recovery, and many small 
businesses face very difficult credit conditions. Although bank lending 
standards are starting to ease, many categories of bank lending 
continue to contract. This contraction has hit small businesses very 
hard because they rely heavily on such lending, and do not have the 
ability to substitute credit from securities issuance. Commercial real 
estate losses also weigh heavily on many small banks, impairing their 
ability to extend new loans.'').
---------------------------------------------------------------------------
    The discussion below focuses on the actions that Treasury 
has taken in each of the three areas Secretary Geithner cited 
when he notified Congress of his decision to extend the TARP.

1. Foreclosure Mitigation

    Prior to the TARP's extension, Treasury had established and 
begun operating its signature foreclosure mitigation program, 
HAMP. HAMP is part of a broader umbrella of Administration 
housing programs known as Making Home Affordable (MHA), which 
was announced in February 2009, and aims to stabilize the 
housing market and help homeowners avoid foreclosure.\151\ HAMP 
provides a combination of incentives and cost-sharing to 
mortgage servicers, investors, and borrowers in order to 
encourage loan modifications that reduce homeowners' monthly 
mortgage payments to 31 percent of their monthly income.\152\ 
Borrowers may enter temporary modifications, and after three 
months of payments, they become eligible for conversion into 
permanent modifications. The program is mandatory for servicers 
of loans owned or guaranteed by Fannie Mae and Freddie Mac, and 
voluntary for servicers of other loans.\153\
---------------------------------------------------------------------------
    \151\ The other major component of MHA is the Home Affordable 
Refinancing Program (HARP), which allows homeowners with loans owned or 
guaranteed by Fannie Mae or Freddie Mac the opportunity to refinance 
into a more sustainable mortgage. HARP does not use any TARP funds.
    \152\ For a more detailed discussion of HAMP and MHA, see the 
Panel's October 2009 and April 2010 reports. October 2009 Oversight 
Report, supra note 6; April 2010 Oversight Report, supra note 6.
    \153\ In 2009, Treasury also established subprograms of HAMP to 
deal with second liens that might otherwise prevent the successful HAMP 
modification of a mortgage, to encourage short sales (home sales for 
less than the amount owed by the homeowner) or deeds-in-lieu of 
foreclosure (agreements by defaulted homeowners to vacate their homes, 
often in exchange for some cash from the lender) in situations where 
they are only feasible alternatives to foreclosure, and to provide 
additional incentives for mortgage investors to modify loans in regions 
where home prices have experienced a steep decline. U.S. Department of 
the Treasury, Supplemental Directive 09-05 Revised: Update to the 
Second Lien Modification Program (2MP) (Mar. 26, 2010) (online at 
www.hmpadmin.com/portal/docs/second_lien/sd0905r.pdf); U.S. Department 
of the Treasury, Supplemental Directive 09-09 Revised: Home Affordable 
Foreclosure Alternatives--Short Sale and Deed-in-Lieu of Foreclosure 
Update (Mar. 26, 2010) (online at www.hmpadmin.com
/portal/docs/hafa/sd0909r.pdf); U.S. Department of the Treasury, 
Supplemental Directive 09-04: Home Affordable Modification Program--
Home Price Decline Protection Incentives (July 31, 2009) (online at 
www.financialstability.gov/docs/press/SupplementalDirective7-31-
09.pdf).
---------------------------------------------------------------------------
    When the Administration announced HAMP, it designated $50 
billion in TARP funds for the program.\154\ By December 2009, 
when Treasury extended the TARP until October 3, 2010, a total 
of $27.4 billion of that $50 billion had been committed; in 
other words, $27.4 billion represented the maximum amount that 
Treasury would have to pay under agreements it had signed with 
servicers.\155\
---------------------------------------------------------------------------
    \154\ U.S. Department of the Treasury, Section 105(a) Troubled 
Assets Relief Program Report to Congress for the Period February 1, 
2009 to February 28, 2009, at 1 (Mar. 6, 2009) (online at 
financialstability.gov/docs/105CongressionalReports/
105aReport_03062009.pdf).
    \155\ U.S. Department of the Treasury, Troubled Asset Relief 
Program Transactions Report for the Period Ending December 3, 2009, at 
20-23 (Dec. 7, 2009) (online at financialstability.gov/docs/
transaction-reports/12-7-09 Transactions Report as of 12-3-09.pdf). 
Servicers under HAMP are responsible for passing along the government's 
contributions to homeowners and investors.
---------------------------------------------------------------------------
    Since the extension of the TARP on December 9, 2009, 
Treasury has made a number of changes with regard to MHA. 
First, it established the Hardest Hit Fund, which provides TARP 
assistance to certain states that have suffered from the 
economic and housing downturn, and has since committed $4.1 
billion to the Fund. Second, it established a program with the 
Federal Housing Administration (FHA) to allow certain 
homeowners who owe more on their mortgages than their homes are 
worth to refinance into FHA loans with lower principals, and 
has since committed up to $11 billion to the program. Third, it 
entered into new contracts with loan servicers to modify 
primary mortgages and second liens as part of HAMP. Treasury 
states that none of these new programs and new contracts would 
have been authorized absent the extension of the TARP.\156\ 
Treasury also made various changes to the structure of HAMP, 
such as increasing certain incentive payments, providing 
temporary assistance to unemployed homeowners, and adding an 
option for servicers to write down mortgage principal. These 
changes may have been allowable, according to Treasury, even if 
the TARP had not been extended.\157\
---------------------------------------------------------------------------
    \156\ Treasury conversations with Panel staff (Aug. 26, 2010).
    \157\ Treasury conversations with Panel staff (Aug. 26, 2010).
---------------------------------------------------------------------------
    Since the extension of the TARP, Treasury has not allocated 
any additional money to foreclosure mitigation beyond the 
initial $50 billion. In fact, as part of its actions to adjust 
its programs under the new $475 billion cap imposed by the 
Dodd-Frank Act, the allocation was reduced to $45.6 billion, 
and the allocations for the Hardest Hit Fund and the FHA 
program were carved out of that total. Figure 3 shows how that 
money was allocated at the time Treasury extended the TARP, and 
how it is split today.

       FIGURE 3: TREASURY'S TARP ALLOCATIONS FOR HOUSING PROGRAMS
                          [Dollars in billions]
------------------------------------------------------------------------
                                               Prior          Current
                 Program                    Allocation      Allocation
------------------------------------------------------------------------
HAMP....................................             $50           $30.5
Hardest Hit Fund........................  ..............             4.1
Treasury/FHA refinance program..........  ..............            11.0
                                         -------------------------------
    Total...............................             $50           $45.6
------------------------------------------------------------------------

    This section summarizes the actions Treasury has taken 
since the TARP's extension with regard to foreclosure 
mitigation. In the coming months, the Panel plans to engage in 
further oversight of Treasury's foreclosure mitigation 
efforts.\158\
---------------------------------------------------------------------------
    \158\ See March 2009 Oversight Report, supra note 6; October 2009 
Oversight Report, supra note 6; April 2010 Oversight Report, supra note 
6.
---------------------------------------------------------------------------
            a. Hardest Hit Fund
    The Hardest Hit Fund was established in February 2010.\159\ 
In three separate rounds of funding, Treasury has committed 
$4.1 billion in TARP funds to 18 states and the District of 
Columbia for a variety of foreclosure mitigation and other 
housing assistance programs.\160\ Eligibility criteria have 
differed for each of the three rounds of funding. The first 
round, $1.5 billion, was committed to five states--Arizona, 
California, Florida, Michigan, and Nevada--which had 
experienced home price declines of at least 20 percent from 
their peaks. Treasury has since approved all five states' plans 
for their use of the money.\161\ These plans call primarily for 
some combination of the following types of initiatives: 
reducing mortgage principal to assist homeowners who owe more 
than their homes are worth; assisting unemployed and under-
employed homeowners with their mortgage payments; assisting 
homeowners who have fallen behind on their mortgage payments; 
facilitating short sales and deeds-in-lieu of foreclosure; and 
encouraging the removal of second liens as an obstacle to 
mortgage modifications.\162\
---------------------------------------------------------------------------
    \159\ The White House, President Obama Announces Help for Hardest 
Hit Housing Markets (Feb. 19, 2010) (online at www.whitehouse.gov/the-
press-office/president-obama-announces-help-hardest-hit-housing-
markets).
    \160\ U.S. Department of the Treasury, Obama Administration 
Approves States' Plans for Use of $1.5 Billion in `Hardest Hit Fund' 
Foreclosure-Prevention Funding (June 23, 2010) (online at 
financialstability.gov/latest/pr_06232010.html) (hereinafter ``Obama 
Administration Approves States' Plans for Use of $1.5 Billion in 
`Hardest Hit Fund' Foreclosure-Prevention Funding''); U.S. Department 
of the Treasury, Obama Administration Approves State Plans for $600 
Million of `Hardest Hit Fund' Foreclosure Prevention Assistance (Aug. 
3, 2010) (online at financialstability.gov/latest/pr_08042010.html) 
(hereinafter ``Administration Approves State Plans for Hardest Hit 
Fund''); U.S. Department of the Treasury, Obama Administration 
Announces Additional Support for Targeted Foreclosure-Prevention 
Programs to Help Homeowners Struggling with Unemployment (Aug. 11, 
2010) (online at financialstability.gov/latest/pr_08112010.html) 
(hereinafter ``Administration Announces Additional Support for Targeted 
Foreclosure-Prevention'').
    \161\ Details of the Arizona, California, Florida, Michigan, and 
Nevada plans are available online. See Making Home Affordable: Hardest 
Hit Fund, supra note 39.
    \162\ U.S. Department of the Treasury, Troubled Asset Relief 
Program (TARP) Monthly 105(a) Report_July 2010, at Appendix I--page 20 
(Aug. 10, 2010) (online at www.financialstability.gov/docs/
105CongressionalReports/July%202010%20105%28a%29%20Report_Final.pdf) 
(hereinafter ``TARP Monthly 105(a) Report_July 2010'').
---------------------------------------------------------------------------
    The second round of funding, $600 million, was split 
between North Carolina, Ohio, Oregon, Rhode Island, and South 
Carolina. These five states qualified for funding based on a 
formula that excluded the first-round recipients and measured 
the percentage of the state population that lived in counties 
with an unemployment rate over 12 percent in 2009. Treasury has 
approved the second-round recipients' plans for their use of 
the money. Like the first-round plans, these plans contain a 
mix of foreclosure mitigation initiatives, including efforts to 
assist unemployed homeowners, to encourage short sales and 
deeds-in-lieu of foreclosure in certain situations, and to 
reduce mortgage principal for some homeowners.\163\ Figure 4 
provides additional detail on the plans of the 10 states 
approved by Treasury. Altogether, the 10 states are expected to 
assist an estimated 127,420 borrowers. Some of the states note 
in their plans that they only expect to help a small fraction 
of the borrowers who are expected to face foreclosure in the 
coming years.\164\
---------------------------------------------------------------------------
    \163\ Details of the North Carolina, Ohio, Oregon, Rhode Island, 
and South Carolina plans are available online. See Making Home 
Affordable: Hardest Hit Fund, supra note 39.
    \164\ Data provided in North Carolina's proposal indicates that the 
state expects to help 7,190 homeowners over a period of three years, 
preventing just over 5 percent of the 135,544 foreclosures expected in 
the state over the same time period. See North Carolina Housing Finance 
Agency, Hardest Hit Fund Proposal, at 3-4 (July 23, 2010) (online at 
www.financialstability.gov/roadtostability/NC.PDF). Ohio's proposal 
notes that with available funding the state would be able to provide 
assistance for just 5 to 7 percent of the potentially eligible 
households in the state. See Ohio Housing Finance Agency, Ohio Hardest-
Hit Fund: Final Submission to the U.S. Department of the Treasury, at 
12 (July 23, 2010) (online at www.financialstability.gov/
roadtostability/OH.PDF). Arizona is most direct in making this point, 
stating that ``[g]iven the number of households significantly 
underwater with their mortgages and an unemployment rate hovering at 10 
percent, $125.1 million is not nearly enough money to stabilize the 
Arizona housing market. At best, these funds will assist just over 
4,000 households or over 11,000 individuals to remain in their homes. 
To put this in perspective, in March 2010, 5,556 homes were foreclosed 
on in the Phoenix area alone. Arizona is expecting as many as 50,000 
foreclosures in 2010.'' Arizona Foreclosure Prevention Funding 
Corporation, Proposal for Use of HFA Hardest-Hit Fund, at 4 (July 23, 
2010) (online at www.financialstability.gov/roadtostability/AZ.pdf).

                           FIGURE 4: STATE-BY-STATE SUMMARY OF HARDEST HIT FUND PLANS
----------------------------------------------------------------------------------------------------------------
                                                                Estimated
                                                                Number of                            Dollars per
                State                     Allocation\165\       Borrowers           Types of           Borrower
                                                                  to be         Assistance\166\         to be
                                                                 Assisted                              Assisted
----------------------------------------------------------------------------------------------------------------
Arizona.............................  $125.1 million.........        4,348  MD, 2L, UE.............      $28,772
California..........................  $699.6 million.........  \167\ 38,23  UE, AR, PR, SD.........       18,295
                                                                         9
Florida.............................  $418.0 million.........  \168\ 10,00  UE, PR, 2L.............       41,800
                                                                         0
Michigan............................  $154.5 million.........       17,224  UE, AR, PR.............        8,970
Nevada..............................  $102.8 million.........        7,313  PR, 2L, SS, FC.........       14,057
North Carolina......................  $159.0 million.........        7,190  UE, 2L, MD.............       21,114
Ohio................................  $172.0 million.........       18,502  AR, UE, MD, SD.........        9,296
Oregon..............................  $88.0 million..........        7,400  MA, UE, AR, SD, FC.....       11,892
Rhode Island........................  $43.0 million..........        5,000  MA, UE, SD, FC.........        8,600
South Carolina......................  $138.0 million.........       12,204  UE, AR, MA, 2L, SD.....       11,308
                                     ---------------------------------------------------------------------------
    Total...........................  $2.1 billion...........      127,420  .......................  \169\ $16,4
                                                                                                              81
----------------------------------------------------------------------------------------------------------------
\165\ These figures do not include third-round allocations to most of the same states, since the states have not
  yet submitted their plans for spending their third-round allocations.
\166\ AR = program to assist homeowners with arrearages; FC = foreclosure counseling; MA = assistance aimed at
  encouraging successful modifications in other programs; MD = modification program; PR = principal reduction
  program; SD = short sale/deed-in-lieu program; SS = short sale program; UE = program for unemployed,
  underemployed homeowners; 2L = second lien program. These are broad categorizations of the programs, and in
  some cases there is overlap between them. For example, modification programs may include a principal-reduction
  element.
\167\ California estimates that 7,854 of these borrowers will participate in two or more of its programs.
\168\ Florida estimates that 7,500-12,500 borrowers will be assisted. The Panel's estimate of 10,000 is based on
  the average of Florida's high-end and low-end estimates.
\169\ This figure is a weighted average, calculated by dividing the 10 states' allocation of $2.1 billion by the
  total estimated number of borrowers assisted, 127,420.

    The Hardest Hit Fund's third round of funding, $2 billion, 
was announced on August 11, 2010. States qualified if their 
unemployment rate during the previous 12 months exceeded the 
national average. Unlike in the second round, states that had 
previously been approved for funding were eligible. All of the 
earlier recipients qualified again, except for Arizona, along 
with eight other states and the District of Columbia.\170\ 
Treasury's rules for how states spend the third-round funds are 
more restrictive than they were in the two previous rounds; 
recipient states are required to use the money to establish a 
bridge loan program for unemployed or underemployed homeowners 
that will cover a portion of their mortgages while they look 
for work. Seventeen states and the District of Columbia 
submitted their term sheets and plans for this round of funding 
by the September 1, 2010 deadline. These plans are currently 
under review.\171\
---------------------------------------------------------------------------
    \170\ Administration Announces Additional Support for Targeted 
Foreclosure-Prevention, supra note 160.
    \171\ U.S. Department of the Treasury, Housing Finance Agency 
Innovation Fund for the Hardest Hit Housing Markets: Guidelines for HFA 
Proposal Submission for Unemployment Programs, at 1-2, 5 (Aug. 2010) 
(online at www.financialstability.gov/docs/
HHF%20Unemployment%20Program%20Guidelines.pdf). Treasury conversations 
with Panel staff (Sept. 10, 2010).
---------------------------------------------------------------------------
    Figure 5 shows the total state-by-state funding from all 
three rounds of Hardest Hit Fund allocations. The top two 
recipients are California, which will receive 29 percent of the 
funds, and Florida, which will receive 16 percent.

           FIGURE 5: TOTAL HARDEST HIT FUND ALLOCATIONS \172\
------------------------------------------------------------------------
                     State                           Total Allocation
------------------------------------------------------------------------
Alabama........................................              $60,672,471
Arizona........................................              125,100,000
California.....................................            1,175,857,070
District of Columbia...........................                7,726,678
Georgia........................................              126,650,987
Florida........................................              656,864,755
Illinois.......................................              166,352,726
Indiana........................................               82,762,859
Kentucky.......................................               55,588,050
Michigan.......................................              282,961,559
Mississippi....................................               38,036,950
Nevada.........................................              136,856,581
New Jersey.....................................              112,200,638
North Carolina.................................              279,874,221
Ohio...........................................              320,728,864
Oregon.........................................              137,294,215
Rhode Island...................................               56,570,770
South Carolina.................................              196,772,347
Tennessee......................................               81,128,260
                                                ------------------------
    Total......................................           $4,100,000,000
------------------------------------------------------------------------
\172\ Obama Administration Approves States' Plans for Use of $1.5
  Billion in `Hardest Hit Fund' Foreclosure-Prevention Funding, supra
  note 160; Administration Approves State Plans for Hardest Hit Fund,
  supra note 160; Administration Announces Additional Support for
  Targeted Foreclosure-Prevention, supra note 160.

    Treasury is encouraging, but not requiring, states that 
participate in the Hardest Hit Fund to leverage their TARP 
funds with matching contributions from affected financial 
institutions.\173\ For example, Arizona, which is using the 
federal dollars to fund a principal reduction program, has 
stated that it expects the lender or servicer of loans to match 
the principal reduction provided by TARP funds on a dollar-for-
dollar basis.\174\ In cases where states obtain a dollar-for-
dollar match for TARP funds, the payments by the states are in 
effect grants, so there is no possibility that the funds will 
be repaid to the state.\175\ If the state is unable to obtain a 
dollar-for-dollar match, though, their payments must be 
structured as forgivable loans, according to Treasury.\176\ 
Forgivable loans are loans that do not require repayment as 
long as certain conditions are met. (Treasury has not made 
public any information about the criteria that must be met in 
order to qualify for loan forgiveness.) If the states receive 
funds from repaid loans, they may recycle those dollars to 
provide assistance to additional homeowners. This is true until 
December 31, 2017, at which point the participating states must 
return any remaining program funds to Treasury.\177\
---------------------------------------------------------------------------
    \173\ Treasury conversations with Panel staff (Sept. 2, 2010).
    \174\ U.S. Department of the Treasury, Commitment to Purchase 
Financial Instrument and HFA Participation Agreement Between Treasury 
and the Arizona Department of Housing, at 33 (June 23, 2010) (online at 
www.financialstability.gov/docs/Redacted Arizona HPA.pdf) (hereinafter 
``Agreement Between Treasury and the Arizona Department of Housing'').
    \175\ Treasury conversations with Panel staff (Sept. 2, 2010).
    \176\ Treasury conversations with Panel staff (Sept. 2, 2010).
    \177\ See, e.g., Agreement Between Treasury and the Arizona 
Department of Housing, supra note 174, at 22. Other Hardest Hit Fund 
contracts between Treasury and state housing finance agencies are 
available online as well. See U.S. Department of the Treasury, OFS 
Contracts List (online at www.financialstability.gov/impact/
contracts_list.htm) (accessed Aug. 30, 2010).
---------------------------------------------------------------------------
    As of September 10, 2010, Treasury had paid out a total of 
$41.9 million from the Hardest Hit Fund to Arizona, California, 
Florida, Nevada, and Michigan, or about 3 percent of the funds 
those states are scheduled to receive in first-round payments. 
No other states have received funding to date.\178\ Once the 
recipient states begin spending TARP funds, Treasury, through 
an agent, Bank of New York Mellon, plans to collect program 
data from the states on a quarterly basis.\179\ No such data 
have been collected yet. On July 20, 2010, Treasury awarded 
four blanket purchase agreements that will cover HHF compliance 
activities and monitoring.\180\ At Treasury's request, 
participating states are in the process of building their own 
compliance programs.\181\
---------------------------------------------------------------------------
    \178\ Treasury conversations with Panel staff (Sept. 10, 2010).
    \179\ Treasury conversations with Panel staff (Aug. 18, 2010). 
Treasury is collecting various data on borrowers who participate in the 
Hardest Hit Fund programs, including income, geographic breakdown, 
delinquency status, reason for hardship, and loan-to-value ratio. 
Treasury is also collecting data on each state initiative, including 
the number of applicants approved and denied, characteristics of the 
loans before and after assistance, median length of time from initial 
request to assistance granted, and homeownership retention after six 
and 12 months.
    \180\ Among the issues that will be monitored are the internal 
controls of the state housing finance agencies (HFAs) that receive the 
funds, the HFAs' processes for dealing with money and expenses, and 
their monitoring of any third parties that are part of the programs. 
Treasury conversations with Panel staff (Sept. 10, 2010).
    \181\ Treasury conversations with Panel staff (Sept. 10, 2010).
---------------------------------------------------------------------------
            b. Treasury/FHA Refinance Program
    Treasury announced its joint mortgage refinance program 
with FHA in March 2010. The program will use up to $11 billion 
in TARP funds to allow borrowers who are current on their 
mortgage payments and owe more than their homes are worth to 
refinance, following a principal write-down, into mortgages 
insured by FHA.\182\ The idea is that by shifting most of the 
mortgage investor's risk of loss to a government program that 
is designed to handle such losses, the program will encourage 
investors to write down principal on certain loans whose value 
exceeds that of the property. For a homeowner to qualify, the 
first-lien mortgage holder must write down at least 10 percent 
of the loan's principal. The loan-to-value ratio (the ratio 
between the outstanding value of the first-lien mortgage and 
the current value of the property) can be no higher than 97.75 
percent after the refinancing. In addition, the combined loan-
to-value ratio on the refinanced mortgage (the ratio between 
the outstanding value of all mortgages and the current value of 
the property) can be no greater than 115 percent.\183\ As with 
other FHA-insured loans, the mortgage holder will have the 
benefit of insurance on up to 97.75 percent of the property's 
value. Participation in the program is voluntary for lenders 
and servicers, and they can decide whether to participate on a 
loan-by-loan basis.
---------------------------------------------------------------------------
    \182\ TARP Monthly 105(a) Report--July 2010, supra note 162, at 6. 
Loans that have been modified under HAMP and other loan-modification 
programs may be eligible for this program. See U.S. Department of 
Housing and Urban Development, FHA Refinance of Borrowers in Negative 
Equity Positions, Mortgagee Letter 2010-23, at 3 (Aug. 6, 2010) (online 
at www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/10-
23ml.pdf) (hereinafter ``FHA Refinance of Borrowers in Negative Equity 
Positions'').
    \183\ FHA Refinance of Borrowers in Negative Equity Positions, 
supra note 182, at 2.
---------------------------------------------------------------------------
    The $11 billion TARP contribution to this program includes 
approximately $3 billion to be used toward incentive payments 
to re-subordinate and to pay for the write-down and 
extinguishment of second liens, which often serve as a barrier 
to the modification or refinancing of first liens. In order to 
overcome that impediment, Treasury will have to persuade 
servicers of second liens to sign participation agreements 
under which they agree to write down loans in exchange for 
incentive payments from Treasury. After Treasury issues formal 
guidance through a Supplemental Directive in mid September, 
servicers will be able to sign up for the program.\184\
---------------------------------------------------------------------------
    \184\ Treasury conversations with Panel staff (Sept. 10, 2010).
---------------------------------------------------------------------------
    Both in the joint program with Treasury and outside of it, 
FHA charges lenders a fee in exchange for a government 
guarantee in the event of a default. Under the joint Treasury/
FHA program, in an acknowledgement that the risk of loss is 
higher than it normally is for FHA, Treasury is agreeing to use 
up to $8 billion in TARP funds to share losses with FHA. In the 
event of default under the program, Treasury will be in a 
first-loss position, and it expects to be responsible for 
losses equal to around 12.75 percent of the property's value, 
meaning that FHA will be responsible for the remaining losses, 
up to, but not exceeding, a total of 97.75 percent.\185\ For 
example, if a lender lost $50,000 on a mortgage on a $200,000 
property, Treasury would be responsible for the first $25,500 
in losses, and FHA would cover the remaining $24,500. To be 
eligible for the program, refinanced loans must close by 
December 31, 2012.\186\ Treasury's participation in the loss-
sharing will continue until August 2020, at which point FHA 
will be responsible for any additional losses.\187\
---------------------------------------------------------------------------
    \185\ Treasury conversations with Panel staff (July 28, 2010).
    \186\ FHA Refinance of Borrowers in Negative Equity Positions, 
supra note 182, at 1.
    \187\ Treasury conversations with Panel staff (July 28, 2010).
---------------------------------------------------------------------------
    Treasury launched this program on September 7, 2010, 
although there are a number of other steps to be taken before 
the program is fully implemented, including the procurement of 
claims processing and financial administration contractors. The 
second lien portion of the program is scheduled to be effective 
on September 30, 2010. As a brand new program, there are no 
performance data to evaluate at this point.\188\ A recent 
analysis by the U.S. Department of Housing and Urban 
Development (HUD) anticipates that the program will have 1 
million participants. The study also found that this program 
would result in $23.5 billion in net benefits to society, $20.4 
billion of which would take the form of benefits to owners of 
first and second liens. According to HUD estimates, each 
refinancing under the program would cost Treasury an average of 
$4,083, which would mean that Treasury would end up losing 
about $4 billion of the $8 billion in TARP funds it is setting 
aside for loss-sharing.\189\
---------------------------------------------------------------------------
    \188\ Treasury conversations with Panel staff (Sept. 10, 2010).
    \189\ U.S. Department of Housing and Urban Development, Economic 
Impact Analysis of the FHA Refinance Program for Borrowers in Negative 
Equity Positions (July 16, 2010) (online at www.hud.gov/offices/adm/
hudclips/ia/ia-refinancenegativeequity.pdf). The $23.5 billion is a net 
figure that includes the $4 billion estimated cost to Treasury.
---------------------------------------------------------------------------
    In its April 2010 report, the Panel questioned whether this 
program would be able to make significant headway against the 
problem of ``underwater'' borrowers, who owe more than their 
homes are worth.\190\ The Panel has the same concerns today. 
Although the program shifts most of a loan's risk from the 
lender to the government, it is unclear whether this will be 
sufficient incentive to persuade a large number of lenders to 
participate, in light of the significant principal write-downs 
participating lenders must offer to borrowers.\191\ And if 
lenders do participate on a widespread basis, this raises 
another concern: that private lenders are shifting the risk of 
loss on their worst loans to the government. Such cherry-
picking, if it materializes, would increase the federal 
government's sizable exposure to the struggling U.S. housing 
market.
---------------------------------------------------------------------------
    \190\ April 2010 Oversight Report, supra note 6, at 21-22.
    \191\ Amherst Securities Group LP explores this question in an 
August 10, 2010 research report. The report concludes that loans in 
private-label servicing and loans guaranteed by Fannie Mae and Freddie 
Mac are unlikely to take advantage of the program, and notes that loans 
already guaranteed by the FHA are ineligible. Amherst states that it 
expects the program to be used primarily by banks holding loans on 
their balance sheet and special servicers that are working out loans. 
Amherst Securities Group LP, Amherst Mortgage Insight: HAMP: A Progress 
Report, at 6-7 (Aug. 10, 2010).
---------------------------------------------------------------------------
    The Panel is also concerned about the precedent set by a 
government program that pays holders of second liens while 
asking first-lien holders to take a loss. As long as the 
homeowner is underwater, the second lien only has value 
inasmuch as it can prevent the first lien from being modified 
or refinanced. Making payments to the second-lien holders under 
these circumstances overturns the fundamental notion that 
second liens are subordinate to first liens, and thereby 
introduces a moral hazard, providing an incentive for lenders 
to take imprudent risks on second liens in the future. On the 
other hand, if there is good reason to believe that the 
property's value will recover such that the homeowner regains 
equity, then the second lien does have value.
    Finally, the Panel is concerned that in many instances, the 
financial institutions that own second liens also service first 
liens on the same homes, which presents a conflict of interest 
and gives the second-lien holder the ability to allocate losses 
to the first-lien holder.\192\ The nation's four largest 
commercial banks--Bank of America, Citigroup, JPMorgan Chase, 
and Wells Fargo--hold 43 percent of second liens.\193\ Those 
same four banks are also the four largest servicers of 
residential mortgages.\194\ Unlike second liens, first liens 
are usually securitized, and are more broadly distributed among 
investors. It is possible that this program may benefit the 
large banks that hold second liens at the expense of first lien 
investors.
---------------------------------------------------------------------------
    \192\ See id. at 6-7 (``One issue with the FHA short refi program 
is that it leaves room for the 2nd lien investor to game the 1st lien 
investor. The 1st mortgage need not be for 97.75%; it can be for less 
and there is no minimum. The servicer that owns the 2nd lien could 
choose to allocate the entire subordinate lien to the 2nd, give the 
borrower a small 1st mortgage, and leave the entire 2nd mortgage intact 
and in a much stronger position. Can't 1st lien investors sue if 
servicers act in obvious self interest? No--as per Supplemental 
Directive 10-05, released on June 3, 2010, the FHA short refi program 
is now under HAMP, and servicers are protected by the servicer safe 
harbor.'').
    \193\ Amherst Securities Group LP data provided to Panel staff 
(Sept. 2, 2010). The distribution of second liens in discussed further 
in Section E.1.d.
    \194\ In the first quarter of 2010, the top mortgage servicers were 
Bank of America (19.9 percent market share); Wells Fargo (16.9 percent 
market share); Chase (12.6 percent market share); and Citi (6.3 percent 
market share). Inside Mortgage Finance, Top Mortgage Servicers in 2010 
(June 30, 2010).
---------------------------------------------------------------------------
            c. HAMP
    HAMP remains the cornerstone of Treasury's foreclosure 
mitigation efforts. Since the TARP's extension in December 
2009, Treasury has introduced various changes to the program. 
These changes, which are discussed in greater detail in the 
Panel's April 2010 report, include a principal-reduction option 
for servicers, higher incentive payments in some instances, and 
the addition of temporary assistance for unemployed 
homeowners.\195\
---------------------------------------------------------------------------
    \195\ April 2010 Oversight Report, supra note 6, at 18-20, 22-27.
---------------------------------------------------------------------------
    The portion of the program that provides temporary 
assistance for unemployed homeowners became effective on August 
1, 2010.\196\ Treasury states that it has not developed metrics 
that would inform a judgment on this program's effectiveness. 
Treasury expects the principal-reduction option to be effective 
by October 3, 2010.\197\
---------------------------------------------------------------------------
    \196\ Congressional Oversight Panel, Questions for the Record from 
the Hearing on June 22, 2010 for the Honorable Timothy F. Geithner, 
Secretary of the Treasury, at 2 (online at cop.senate.gov/documents/
testimony-062210-geithner-qfr.pdf).
    \197\ A few servicers began offering the principal-reduction 
alternative in HAMP prior to the program's official launch; they will 
be eligible for retroactive incentive payments. Treasury conversations 
with Panel staff (Aug. 26, 2010 and Sept. 10, 2010).
---------------------------------------------------------------------------
    In February 2009, Treasury stated that HAMP would help 
three to four million homeowners stay in their homes.\198\ More 
recently, Treasury has stated that this goal refers to the 
number of trial modifications offered to borrowers,\199\ rather 
than permanent modifications, or even trial modifications 
entered. During Secretary Geithner's June 22, 2010 testimony 
before the Panel, he described Treasury's goals for HAMP as 
limited. He acknowledged that HAMP is ``subject to so much 
criticism from people who had hoped that the program would be 
designed to keep a much larger fraction of Americans in their 
homes.'' He added: ``Our program was designed . . . to make 
sure for those Americans--and there are many--who have a 
realistic prospect . . . of staying in their home, who can 
afford to stay in their home in that context, have the option 
and the chance to do that.'' \200\
---------------------------------------------------------------------------
    \198\ U.S. Department of the Treasury, Homeowner Affordability and 
Stability Plan Executive Summary (Feb. 18, 2009) (online at 
www.financialstability.gov/latest/tg33.html).
    \199\ U.S. Department of the Treasury, Making Home Affordable 
Program: Servicer Performance Report Through May 2010, at 7 (June 21, 
2010) (online at financialstability.gov/docs/May MHA Public 062110.pdf) 
(``In 2009, Treasury set a goal of offering help to 3-4 million 
borrowers through the end of 2012, as measured by trial plan offers 
extended to borrowers.'').
    \200\ Congressional Oversight Panel, Testimony of Timothy F. 
Geithner, secretary, U.S. Department of the Treasury, Transcript: COP 
Hearing with Treasury Secretary Timothy Geithner (June 22, 2010) 
(publication forthcoming) (online at cop.senate.gov/hearings/library/
hearing-062210-geithner.cfm) (hereinafter ``Transcript: COP Hearing 
with Secretary Geithner'').
---------------------------------------------------------------------------
    The Panel believes that the most important measure of 
HAMP's effectiveness is the number of sustainable permanent 
modifications, and that HAMP should also be evaluated in the 
context of the number of American families that are losing 
their homes in foreclosures.
    Between September 2009, when the first homeowners received 
permanent HAMP modifications, and July 2010, 434,716 homeowners 
had entered permanent modifications under the program. Of 
those, 12,912 homeowners, or about 3 percent, had either re-
defaulted on their mortgages or left the program for another 
reason. Subtracting out the homeowners who had left the 
program, 421,804 homeowners were in permanent modifications at 
the end of July 2010.\201\ During the same 11-month period, 
there were around 1 million foreclosure sales nationwide.\202\ 
Figure 6 shows the trend in the permanent modifications added 
each month against the backdrop of monthly foreclosure sales.
---------------------------------------------------------------------------
    \201\ Treasury data provided to the Panel (Aug. 23, 2010).
    \202\ HOPE NOW, Appendix--Mortgage Loss Mitigation Statistics: 
Industry Extrapolations (Monthly for Dec. 2008 to Nov. 2009), at 2 
(online at www.hopenow.com/industry-data/
HOPE%20NOW%20National%20Data%20July07%20to%20Nov09%20v2%20(2).pdf) 
(accessed Sept. 14, 2010); HOPE NOW, Appendix--Mortgage Loss Mitigation 
Statistics: Industry Extrapolations (Monthly for Dec. 2009 to Jan. 
2010), at 8 (online at www.hopenow.com/industry-data/
HOPE%20NOW%20Data%20Report%20(May)%2006-21-2010.pdf) (accessed Sept. 
14, 2010); HOPE NOW, Appendix--Mortgage Loss Mitigation Statistics: 
Industry Extrapolations (Monthly for Feb. 2010 to July 2010), at 8 
(online at www.hopenow.com/industry-data/
HOPE%20NOW%20Data%20Report%20(July)%2009-01-2010.pdf) (hereinafter 
``HOPE NOW Statistics (Dec. 2008 to July 2010)'') (accessed Sept. 14, 
2010).
---------------------------------------------------------------------------

 FIGURE 6: FORECLOSURE SALES AND NET NEW HAMP PERMANENT MODIFICATIONS 
                                \203\   

---------------------------------------------------------------------------
    \203\ The net number of permanent modifications by month is 
calculated by subtracting the number of permanent modifications that 
fail each month from the number of new permanent modifications started 
each month. Treasury data provided to the Panel (Aug. 23, 2010). 
Foreclosure sales is a conservative measure of the foreclosure problem. 
HOPE NOW also tracks foreclosure starts, which totaled 2.3 million 
between September 2009 and July 2010. HOPE NOW Statistics (Dec. 2008 to 
July 2010), supra note 202, at 2, 8. RealtyTrac tracks all foreclosure 
actions, which totaled 3.6 million during the same period. RealtyTrac, 
Press Releases (online at www.realtytrac.com/content/press-releases) 
(accessed Sept. 14, 2010).
[GRAPHIC] [TIFF OMITTED] T8023A.001

    The pace of new permanent modifications is also being 
outstripped each month by the number of failed trial 
modifications. Between June 2009 and July 2010, a total of 
616,839 trial modifications have failed.\204\ Figure 7 shows 
the number of trial modifications that failed each month in 
comparison to new permanent modifications added and foreclosure 
sales each month.
---------------------------------------------------------------------------
    \204\ U.S. Department of the Treasury, Making Home Affordable 
Program Servicer Performance Report Through July 2010, at 2 (Aug. 20, 
2010) (online at financialstability.gov/docs/JulyMHAPublic2010.pdf). 
See Figure 8, infra, for the reasons that servicers have given for why 
trial modifications have failed.
---------------------------------------------------------------------------

      FIGURE 7: FAILED TRIAL MODIFICATIONS OUTPACE NEW PERMANENT 
                          MODIFICATIONS \205\

      
---------------------------------------------------------------------------
    \205\ Treasury data provided to the Panel (Aug. 23, 2010); HOPE NOW 
Statistics (Dec. 2008 to July 2010), supra note 202, at 8. 
[GRAPHIC] [TIFF OMITTED] T8023A.002

    HAMP also requires that borrowers be provided with a reason 
when their modifications fail to convert from trial to 
permanent status. Figure 8 shows the breakdown of reasons that 
servicers have provided, which Treasury refers to as ``denial 
codes.''

 FIGURE 8: TOTAL NUMBER OF MODIFICATIONS FAILING TO CONVERT FROM TRIAL 
                   TO PERMANENT, BY DENIAL CODE \206\

      
---------------------------------------------------------------------------
    \206\ Denial codes classified as ``Other Reasons'' are: bankruptcy 
court declined modification; previous HAMP modification; investor 
guarantor not participating; default not imminent; loan paid off or 
reinstated; and other ineligible property, such as a property larger 
than four units. Treasury data provided to Panel (Aug. 23, 2010). 
[GRAPHIC] [TIFF OMITTED] T8023A.003

    Unfortunately, despite Treasury's efforts to collect 
meaningful data in this area, there remain important questions 
about why such a large number of trial modifications have 
failed to convert to permanent modifications. As Figure 8 
shows, the most common reason given is ``Request Incomplete,'' 
which means that the servicer reported that it did not have all 
of the paperwork necessary to approve the modification. This 
could be for one of two reasons, though: either because the 
homeowner failed to provide the necessary documentation, or 
because the servicer lost it. Homeowners applying to the 
program have consistently told stories of servicers losing 
their documentation.\207\ In addition, the fourth most common 
denial code is ``Missing,'' which means that the servicer did 
not provide a denial code. The data in Figure 8 do shed some 
light on the causes of failed trial modifications, though. For 
example, the data show that 21 percent of the trial 
modifications that failed did so because borrowers defaulted on 
their modified mortgages. The data also indicate that 
Treasury's initial decision to allow servicers to enroll 
homeowners into trial modifications without written 
documentation has contributed to the failure rate--several of 
the most frequently used denial codes involve violations of 
basic HAMP eligibility requirements.\208\
---------------------------------------------------------------------------
    \207\ See, e.g., National Community Reinvestment Coalition, HAMP 
Mortgage Modification Survey 2010 at 11 (online at www.ncrc.org/images/
stories/mediaCenter_reports/hamp_report_2010.pdf) (stating that 70.6 
percent of 160 respondents in a survey of HAMP applicants reported 
being asked to re-submit documents). See also Office of the Special 
Inspector General for the Troubled Asset Relief Program, Factors 
Affecting Implementation of the Home Affordable Modification Program 
(Mar. 25, 2010) (online at www.sigtarp.gov/ reports/audit/2010/Factors_ 
Affecting_Implementation_ of_the_Home_Affordable_ 
Modification_Program.pdf) (finding that changing documentation 
requirements, repeated changes and clarifications in net present value 
models, a lack of clear guidance from Treasury, and servicer capacity 
and training issues all posed challenges to the implementation of 
HAMP).
    \208\ For example, borrowers with debt-to-income ratios below 31 
percent are not eligible for HAMP, properties must be owner-occupied to 
be eligible, and mortgages that exceed $729,750 are ineligible. U.S. 
Department of the Treasury, Borrower Frequently Asked Questions (June 
8, 2010) (online at makinghomeaffordable.gov/borrower-faqs.html). 
Treasury now requires servicers to collect written documentation prior 
to enrollment in a trial modification.
---------------------------------------------------------------------------

2. Small Business Lending and Small Banks

    Treasury has announced or implemented three TARP-related 
programs with the stated goal of supporting the small business 
lending market: the SBA 7(a) Securities Purchase Program, the 
Small Business Lending Fund, and the Community Development 
Capital Initiative.\209\ Although all of the programs were 
announced, in some fashion, before the December 9, 2009 
extension of the TARP, none were launched prior to that 
date.\210\ On February 3, 2010, the Administration outlined its 
intent to create the SBLF outside of the TARP.\211\
---------------------------------------------------------------------------
    \209\ See the Panel's May 2010 report for a discussion of the small 
business credit crunch. The report explores the extent to which the 
credit crunch is the result of a lack of demand for small business 
loans, or the result of a lack of supply of such loans as a result of 
bank instability. It concludes that both factors have contributed to 
the problem. May 2010 Oversight Report, supra note 6.
    \210\ The 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 Announces New Efforts to Improve Access to 
Credit for Small Businesses''). See also The White House, Remarks by 
the President on Small Business Initiatives (Oct. 21, 2009) (online at 
www.whitehouse.gov/the-press-office/remarks-president-small-business-
initiatives-landover-md).
    \211\ The White House, President Obama Outlines New Small Business 
Lending Fund (Feb. 2, 2009) (online at www.whitehouse.gov/the-press-
office/president-obama-outlines-new-small-business-lending-fund) 
(hereinafter ``President Outlines New Small Business Lending Fund'').
---------------------------------------------------------------------------
    Treasury's Unlocking Credit for Small Businesses initiative 
involves the purchase of securities backed by Small Business 
Administration (SBA) loans.\212\ Treasury's goal with these 
purchases was to provide liquidity to the SBA securitization 
market.\213\ When the program was announced on March 16, 
2009,\214\ Treasury allocated $15 billion in TARP funds for the 
purchases. Since then, the program's scale has sharply 
decreased. In April 2010, Treasury revised its planned 
investment down to just $1 billion.\215\ Then, as part of its 
implementation of the Dodd-Frank Act, the amount allocated for 
purchases was again reduced to $400 million.\216\
---------------------------------------------------------------------------
    \212\ The initiative also included, among other things, increased 
guarantees for SBA loans, and removing certain fees on SBA loans. These 
programs were not, however, funded with TARP money. See U.S. Department 
of the Treasury, Fact Sheet: Unlocking Credit for Small Businesses 
(Apr. 26, 2010) (online at www.financialstability.gov/roadtostability/
unlockingCreditforSmallBusinesses.html) (hereinafter ``Fact Sheet: 
Unlocking Credit for Small Businesses'').
    \213\ Traditionally, SBA lending has been supported by an active 
secondary market, as community banks and other lenders sell the 
government-guaranteed portion of their loans, providing them with new 
capital to make additional loans. But in the fall of 2008, this 
secondary market--which has historically supported over 40 percent of 
SBA's 7(a) lending program--froze up. As a result, both lenders, 
including community banks and credit unions, and the ``pool 
assemblers'' that securitize their loans were left with government-
guaranteed SBA loans and securities on their books. This prevented them 
from making or buying new loans. See May 2009 Oversight Report, supra 
note 6, at 50-53. See also May 2010 Oversight Report, supra note 6, at 
33-34.
    \214\ The White House, President Obama and Secretary Geithner 
Announce Plans to Unlock Credit for Small Businesses (Mar. 16, 2009) 
(online at www.sba.gov/idc/groups/public/documents/sba_homepage/
white_house_factsheet_031609.pdf).
    \215\ U.S. Department of the Treasury, Troubled Assets Relief 
Program (TARP) Monthly 105(a) Report--March 2010, at 7 fn 6 (Apr. 12, 
2010) (online at www.financialstability.gov/docs/
105CongressionalReports/
March%202010%20105%28a%29%20monthly%20report_final.pdf).
    \216\ TARP Monthly 105(a) Report--July 2010, supra note 162, at 6.
---------------------------------------------------------------------------
    Treasury did not make its first purchases under the program 
until March 2010, one year after the program was announced. The 
same month, the government's involvement in the SBA 7(a) loan 
market through the Term Asset-Backed Securities Lending 
Facility (TALF) ended.\217\ Treasury indicated that it decided 
to begin to make purchases, and thus support the SBA market, in 
March 2010 in response to the expiration of the TALF and other 
factors Treasury believed would negatively impact the SBA-
backed lending market.\218\ (Treasury states that it could not 
have made any purchases under the program in 2010 if the TARP 
had not been extended, since as of December 2009 it had not yet 
committed funds to the program.) \219\ As of August 17, 2010, a 
total of $261.7 million had been spent under this program,\220\ 
an amount equal to about 3 percent of the volume of SBA loans 
approved in the same period, and even a far smaller percentage 
of the overall small-business lending market.\221\ Figure 9 
shows the volume of securities Treasury has purchased by month.
---------------------------------------------------------------------------
    \217\ U.S. Department of the Treasury, Unlocking Credit for Small 
Businesses Fact Sheet (Mar. 2, 2009) (online at 
www.financialstability.gov/latest/tg58.html) (hereinafter ``Unlocking 
Credit for Small Businesses Fact Sheet''). For a full discussion of the 
SBA loan securities purchase program, see May 2010 Oversight Report, 
supra note 6, at 40-42.
    \218\ In particular, Treasury cited uncertainty at the time about 
whether or not the expanded guarantees and reduced fees on SBA-backed 
loans provided by the American Recovery and Reinvestment Act of 2009 
would be extended. These incentives were viewed as providing support 
for the market, and their expiration could be expected to curtail SBA 
lending significantly. See May 2010 Oversight Report, supra note 6, at 
41.
    \219\ Treasury conversations with Panel staff (Aug. 26, 2010).
    \220\ U.S. Department of the Treasury, Troubled Asset Relief 
Program Transactions Report for the Period Ending August 31, 2010, at 
40 (Aug. 31, 2010) (online at www.financialstability.gov/docs/
transaction-reports/8-31-10%20Transactions%20Report%20as%20of%208-27-
10.pdf) (hereinafter ``Treasury Transactions Report'').
    \221\ In fiscal year 2009, the SBA approved a total of $15.2 
billion in loans across all of its loan programs, or roughly $7.6 
billion over six months--the same amount of time in which Treasury 
spent $253.2 million on its SBA Securities Purchase Program. This 
equates to approximately 3.3 percent of SBA lending over the same 
period. U.S. Small Business Administration, Table 2--Gross Approval 
Amount by Program (online at www.sba.gov/idc/groups/public/documents/
sba_homepage/serv_bud_lperf_grossapproval.pdf) (accessed Sept. 7, 
2010). The Government Accountability Office has calculated that, in 
recent years, only about four percent of the total value of outstanding 
small business loans is guaranteed through the 7(a) program. See U.S. 
Government Accountability Office, Small Business Administration: 
Additional Measures Needed to Assess 7(a) Loan Program's Performance, 
at 7 (July 2007) (GAO-07-769) (online at www.gao.gov/new.items/
d07769.pdf). Treasury purchases of SBA loans therefore account for only 
approximately 0.13 percent of all small business lending.
---------------------------------------------------------------------------

 FIGURE 9: MONTHLY VOLUME OF SBA SECURITIES PURCHASES (AS OF SEPTEMBER 
                             1, 2010) \222\

      
---------------------------------------------------------------------------
    \222\ Treasury Transactions Report, supra note 220, at 40. 
    [GRAPHIC] [TIFF OMITTED] T8023A.004
    
    The second program, which was supposed to provide capital 
to banks in order to increase lending to small businesses, was 
first announced on October 21, 2009.\223\ In its original form, 
the program would have used TARP funds to provide capital to 
small and community banks in such a way that provided them an 
incentive to increase their lending.\224\ But following the 
TARP's extension, and after hearing from bankers who did not 
want to participate in the program as long as it was a part of 
the TARP, due to the stigma associated with the TARP,\225\ the 
Administration decided to seek congressional authorization to 
establish the program outside the TARP. The Administration 
would create a separate $30 billion program now known as the 
Small Business Lending Fund.\226\ This proposal passed the 
House of Representatives on June 17, 2010, as part of the Small 
Business Jobs and Credit Act of 2010. The Senate is scheduled 
to vote on this bill during the week of this report's 
publication.
---------------------------------------------------------------------------
    \223\ President Announces New Efforts to Improve Access to Credit 
for Small Businesses, supra note 210.
    \224\ The proposal has gone through a number of iterations since it 
was initially announced. See the Panel's May 2010 and July 2010 reports 
for more thorough discussions. See May 2010 Oversight Report, supra 
note 6; July 2010 Oversight Report, supra note 23, at 42 fn 152.
    \225\ See Congressional Oversight Panel, Testimony of Timothy F. 
Geithner, secretary, U.S. Department of the Treasury, Transcript: COP 
Hearing with Treasury Secretary Timothy Geithner, at 41 (Dec. 10, 2009) 
(online at cop.senate.gov/documents/transcript-121009-geithner.pdf) 
(hereinafter ``Transcript: COP Hearing with Secretary Geithner'') 
(``So, if we're going to be effective in dealing with this, we have to 
find some way to mitigate both the stigma of coming and the fear of 
changes in the future rules of the game that are going to apply to 
them. It is something we cannot do on our own. It's going to require 
some help from Congress, to help deal with those basic concerns.'').
    \226\ President Outlines New Small Business Lending Fund, supra 
note 211.
---------------------------------------------------------------------------
    Finally, on February 3, 2010, Treasury announced the 
Community Development Capital Initiative. This program was 
initially conceived in 2009 as part of the Administration's 
aforementioned small business lending proposals.\227\ The CDCI 
provides low-cost capital to Community Development Financial 
Institutions (CDFIs), which lend to small businesses in 
underserved communities. Under the program, CDCIs pay a 2 
percent dividend rate on the capital they receive. This means 
that participating CDFIs receive funding on more favorable 
terms than do CPP-recipient banks, which pay a 5 percent 
dividend rate.\228\
---------------------------------------------------------------------------
    \227\ President Announces New Efforts to Improve Access to Credit 
for Small Businesses, supra note 210.
    \228\ U.S. Department of the Treasury, Obama Administration 
Announces Enhancements For TARP Initiative For Community Development 
Financial Institutions (Feb. 3, 2010) (online at 
www.financialstability.gov/latest/pr_02032010.html).
---------------------------------------------------------------------------
    Treasury initially allocated $1 billion in TARP funds to 
the CDCI. That allocation has since been decreased to $780 
million.\229\ This program made its first investments on July 
30, 2010. As of September 1, 2010, 11 CDFIs have received a 
total of $143.2 million under the program.\230\ Treasury states 
that if the TARP had not been extended, it could not have 
established the CDCI.\231\
---------------------------------------------------------------------------
    \229\ TARP Monthly 105(a) Report--July 2010, supra note 162, at 6. 
Banks and credit unions that are CDFIs hold a total of about $35.3 
billion in assets, so this program would provide capital equal to about 
2 percent of their total assets. CDFIs hold 1.9 percent of all assets 
held by credit unions, and 0.14 percent of assets held by banks. For a 
list of CDFI-certified institutions, see Community Development 
Financial Initiative Fund, Certified Community Development Financial 
Institutions--By Organization Type (online at www.cdfifund.gov/docs/
certification/cdfi/CDFIList-ByType-7-31-10.pdf) (accessed Sept. 14, 
2010). Data on bank holding company, commercial bank, and savings 
institution assets compiled using the Federal Deposit Insurance 
Corporation Institution Directory (online at www2.fdic.gov/idasp/
main.asp) and Statistics on Depository Institutions (www2.fdic.gov/sdi/
). For data on credit union assets, see National Credit Union 
Administration, Call Report Data Facts/Summary (June 2010) (online at 
www.ncua.gov/DataServices/FOIA/2010/June/June10PACAFacts.xlsx). For 
total assets of individual credit unions, see National Credit Union 
Administration, Credit Union Online (online at cuonline.ncua.gov/
CreditUnionOnline/CU/FindCreditUnions.aspx) (accessed Sept. 14, 2010).
    \230\ Sept. 3 TARP Transactions Report, supra note 26.
    \231\ Treasury conversations with Panel staff (Aug. 26, 2010).
---------------------------------------------------------------------------

3. Support for Securitization Markets Through the TALF

    The final area where Secretary Geithner reserved the 
authority to use his extended TARP authority was in supporting 
securitization markets through the TALF. The Federal Reserve 
Bank of New York (FRBNY) created the TALF in November 2008 in 
response to frozen securitization markets.\232\ Its goal was to 
encourage the issuance of various classes of asset-backed 
securities (ABS), including auto loans, credit card loans, and 
student loans, and commercial mortgage-backed securities 
(CMBS).\233\ Borrowers applied for a TALF loan, which was 
usually issued at below market rates.\234\ In return for the 
loan, the borrower posted collateral in the form of an ABS or a 
CMBS, paid an administrative fee, and took a ``haircut,'' 
meaning that its posted collateral had a market value greater 
than the loan the borrower was receiving.\235\
---------------------------------------------------------------------------
    \232\ The securitization market has accounted for approximately $2 
trillion in loans to consumers, students, and businesses over the past 
decade. Securitization of assets involves diversifying risk by pooling 
assets and then issuing new securities backed by those assets and their 
cash flows. Investors purchase the securities and acquire the rights to 
the associated cash flows as well as the risk of default. Financial 
institutions acquire the proceeds from the sale, transfer ownership of 
the assets to investors, and simultaneously free up capital for further 
lending. As long as there are originators and investors in the market, 
securitization results in increased lending capacity. When buyers 
abandon the market, however, originators cannot move securitized assets 
off their books and their lending capacities can become constrained. 
See generally Brian P. Sack, executive vice president, Federal Reserve 
Bank of New York, Remarks at the New York Association for Business, 
Reflections on the TALF and the Federal Reserve's Role as Liquidity 
Provider (June 9, 2010) (online at www.newyorkfed.org/newsevents/
speeches/2010/sac100609.html) (hereinafter ``Brian Sack Remarks at the 
New York Association for Business'').
    \233\ U.S. Department of the Treasury, TALF Frequently Asked 
Questions, at 1 (Mar. 2009) (online at www.federalreserve.gov/
newsevents/press/monetary/monetary20090303a2.pdf) (hereinafter ``TALF 
Frequently Asked Questions''). To be eligible under the TALF, ABS had 
to be newly issued AAA-rated securities. In addition to auto loans, 
credit card loans, and private and government-guaranteed student loans, 
loans guaranteed by the Small Business Administration were also 
eligible. Board of Governors of the Federal Reserve System, Press 
Release (Nov. 25, 2008) (online at www.federalreserve.gov/newsevents/
press/monetary/20081125a.htm). FRBNY expanded TALF to include newly 
issued CMBS in June 2009 and legacy (i.e., previously issued) CMBS in 
July 2009. Office of the Special Inspector General for the Troubled 
Asset Relief Program, Quarterly Report to Congress, at 91 (July 21, 
2010) (online at www.sigtarp.gov/reports/congress/2010/
July2010_Quarterly_Report_to_Congress.pdf) (hereinafter ``SIGTARP 
Quarterly Report to Congress--July 2010'').
    \234\ TALF Frequently Asked Questions, supra note 233, at 6; 
SIGTARP Quarterly Report to Congress--July 2010, supra note 233, at 94.
    \235\ TALF loans have durations of either three or five years and 
are non-recourse. Federal Reserve Bank of New York, 2009 Annual Report, 
at 35-36 (June 2010) (online at www.newyorkfed.org/aboutthefed/annual/
annual09/annual.pdf) (hereinafter ``FRBNY 2009 Annual Report'').
---------------------------------------------------------------------------
    As part of the program, FRBNY created a special purpose 
vehicle, TALF LLC, to buy from FRBNY collateral seized in the 
event that a TALF loan was not repaid. In exchange for a fee, 
TALF LLC agreed to buy the seized collateral for a price equal 
to the outstanding amount of the TALF loan plus any unpaid 
interest payments.\236\ Treasury initially agreed to loan TALF 
LLC up to $20 billion in TARP funds, although this amount was 
later reduced to $4.3 billion.\237\ FRBNY has also committed to 
loaning up to $180 billion to TALF LLC, but Treasury was in a 
position to absorb the first losses.\238\
---------------------------------------------------------------------------
    \236\ FRBNY 2009 Annual Report, supra note 235, at 36. Another way 
of phrasing this is to say that in the event of a loss, TALF LLC agreed 
to buy the collateral in satisfaction of the put contract even if its 
value was much less than the TALF loan outstanding. Consequentially, 
TALF LLC rather than FRBNY absorbs losses resulting from the TALF 
loans. Cf. Brian Sack Remarks at the New York Association for Business, 
supra note 232.
    \237\ SIGTARP Quarterly Report to Congress--July 2010, supra note 
233, at 95; TALF Terms and Conditions, supra note 89. Under the 
original financing agreement, Treasury's $20 billion loan would have 
had to have been exhausted before FRBNY disbursed its loan to TALF LLC. 
Brian Sack Remarks at the New York Association for Business, supra note 
232.
    \238\ FRBNY retained control of TALF LLC and would be the first to 
receive funds resulting from the eventual sale of the collateral that 
TALF LLC had previously purchased. FRBNY 2009 Annual Report, supra note 
235, at 36-37.
---------------------------------------------------------------------------
    The TALF closed on June 30, 2010.\239\ As securitization 
markets improved in 2009 and early 2010, borrowers were able to 
borrow from third parties at rates lower than they were from 
the TALF. Consequently, the TALF became less appealing relative 
to other sources of borrowing.\240\ Figure 10 shows how use of 
the TALF by market participants generally declined over the 
life of the program.
---------------------------------------------------------------------------
    \239\ TALF Terms and Conditions, supra note 89. The TALF held its 
final subscription on June 18, 2010. SIGTARP Quarterly Report to 
Congress--July 2010, supra note 233, at 41.
    \240\ Brian Sack Remarks at the New York Association for Business, 
supra note 232.
---------------------------------------------------------------------------

    FIGURE 10: MONTHLY ISSUANCE OF TALF LOANS COLLATERALIZED BY ABS 
                              SECURITIES 

[GRAPHIC] [TIFF OMITTED] T8023A.005

    As of September 10, 2010, no collateral had yet been seized 
or purchased by TALF LLC.\241\ Still, it is very early to judge 
the performance of TALF loans, given their three- to five-year 
duration.\242\
---------------------------------------------------------------------------
    \241\ Treasury conversations with Panel staff (Sept. 10, 2010).
    \242\ Although it has not yet purchased any loans, TALF LLC has 
cost $1 million in administrative fees from its creation through June 
30, 2010. Of Treasury's $100 million initial loan to TALF LLC, $15.8 
million was allocated to cover administrative expenses. SIGTARP 
Quarterly Report to Congress_July 2010,supra note 233, at 95-96.
---------------------------------------------------------------------------
    Over the life of the program, $71 billion in TALF loans 
were settled, about 35 percent of the $200 billion initially 
set aside under the facility. ABS TALF loans totaled $59 
billion, and CMBS loans totaled $12 billion. From January 2010 
through June 2010, $9.45 billion in TALF loans were issued; ABS 
TALF loans totaled $6.14 billion, and CMBS loans totaled $3.32 
billion.\243\ Overall, while the TALF was in existence, it made 
up about 25 percent of the ABS market, and about 71 percent of 
the CMBS market, reflecting that market's considerable slowdown 
during the financial crisis.\244\
---------------------------------------------------------------------------
    \243\ Federal Reserve Bank of New York, Term Asset-Backed 
Securities Loan Facility: non-CMBS (online at www.newyorkfed.org/
markets/talf_operations.html) (hereinafter ``Term Asset-Backed 
Securities Loan Facility: non-CMBS'') (accessed Sept. 14, 2010); 
Federal Reserve Bank of New York, Term Asset-Backed Securities Loan 
Facility: non-CMBS (online at www.newyorkfed.org/markets/
TALF_recent_operations.html) (accessed Sept. 14, 2010); Federal Reserve 
Bank of New York, Term Asset-Backed Securities Loan Facility: CMBS 
(online at www.newyorkfed.org/markets/ cmbs_operations.html) (accessed 
Sept. 14, 2010); Federal Reserve Bank of New York, Term Asset-Backed 
Securities Loan Facility: CMBS (online at www.newyorkfed.org/markets/ 
CMBS_recent_operations.html) (hereinafter ``Term Asset-Backed 
Securities Loan Facility: CMBS'') (accessed Sept. 14, 2010). 
Altogether, approximately $70 billion of TALF loans were issued but, 
because some loans were being repaid at the same time that others were 
being issued, there was never more than about $50 billion of TALF loans 
outstanding. Brian Sack Remarks at the New York Association for 
Business, supra note 232.
    \244\ Term Asset-Backed Securities Loan Facility: CMBS, supra note 
243; Securities Industry and Financial Markets Association, SIFMA 
Research and Statistics--US ABS Issuance (online at www.sifma.org/
uploadedFiles/Research/ Statistics/SIFMA_USABSIssuance.xls) (accessed 
Sept. 14, 2010); CRE Finance Council, Compendium of Statistics (Sept. 
3, 2010) (online at www.crefc.org/uploadedFiles/ CMSA_Site_Home/
Industry_Resources/Research/ Industry_Statistics/CMSA_Compendium.pdf) 
(hereinafter ``CRE Finance Council Compendium of Statistics'').
---------------------------------------------------------------------------
    In December 2009, when Treasury extended the TARP, it 
believed that demand under the TALF for CMBS might increase in 
2010, which might require a greater commitment of TARP funds to 
the program. Instead, all new issuances of CMBS after March 
2010 happened outside of the TALF.\245\ As a result, despite 
Secretary Geithner's statement in December 2009 that Treasury 
might use its extended TARP authority to increase its support 
for the TALF, it did not.\246\
---------------------------------------------------------------------------
    \245\ Term Asset-Backed Securities Loan Facility: CMBS,supra note 
243; CRE Finance Council Compendium of Statistics, supra note 244; 
Treasury conversations with Panel staff (Aug. 26, 2010).
    \246\ When the TALF was closed on June 30, 2010, there were $43 
billion in loans outstanding. Accordingly, on July 21, 2010, the 
Treasury reduced the credit protection provided for the TALF from $20 
billion to $4.3 billion, constituting 10 percent of the total 
outstanding TALF loans. TALF Terms and Conditions, supra note 89.
---------------------------------------------------------------------------

4. Summary of Treasury's Use of TARP Authority Since December 2009

    Since December 2009, Treasury has used its extended TARP 
authority in an extremely limited way. In testimony before the 
Panel on June 22, 2010, more than three months before the 
program's expiration, Secretary Geithner spoke about Treasury's 
reluctance to use its extended authority. ``This hearing should 
be a eulogy for TARP,'' he said. ``As I said many times, we are 
working very hard to put this program to rest, put it out of 
its misery. It is not going to solve all the problems facing 
the country. It was not designed to. We are not going to use it 
that way. We use it very carefully, but it has done the 
essential thing it was designed to do and therefore our 
expectation is it will be allowed to expire . . . .'' \247\
---------------------------------------------------------------------------
    \247\ Transcript: COP Hearing with Secretary Geithner, supra note 
200.
---------------------------------------------------------------------------
    Overall, as of December 2009, Treasury had committed a 
total of $474.7 billion in TARP funds; that number tracks 
almost exactly with a $475 billion cap on TARP expenditures 
imposed in July 2010 by the Dodd-Frank Act.\248\ Thus, although 
there were new TARP programs established in 2010 that cost up 
to $15.9 billion, Treasury funded those programs by 
reallocating TARP dollars that had already been allocated for 
specific uses, not by dipping into unallocated TARP funds.
---------------------------------------------------------------------------
    \248\ See December 2009 Oversight Report,supra note 6, at 75-76 
(showing that Treasury had committed $474.7 billion in TARP funds as of 
November 30, 2009); Dodd-Frank Wall Street Reform and Consumer 
Protection Act, supra note 15, 130 (stating that the amount available 
under TARP is reduced to $475 billion).
---------------------------------------------------------------------------
    With respect to the TALF, Treasury did not use its extended 
TARP authority, and its commitment to the program never came 
close to the $20 billion in credit protection it originally 
pledged. With respect to small business lending, not only did 
Treasury abandon its plans to use the TARP for its proposed 
Small Business Lending Fund, Treasury also never approached 
expending the amount of its initial commitment of $15 billion 
in the Unlocking SBA Lending program.\249\ To date, Treasury 
has only expended a total of $261.7 million under the program 
and has reduced its commitment from $15 billion to $400 
million.\250\ Treasury did establish the CDCI, but that program 
can only spend up to $780 million.
---------------------------------------------------------------------------
    \249\ When Treasury first announced the Unlocking SBA Lending 
program in March 2009, it planned to purchase $15 billion in 7(a) 
securities to ``jumpstart credit markets for small businesses.'' 
Unlocking Credit for Small Businesses Fact Sheet, supra note 217. 
Treasury made its first purchases of these securities on March 19, 2010 
(one year later) and at the time reaffirmed its intent to use the full 
$15 billion. Treasury Transactions Report, supra note 220, at 40; Fact 
Sheet: Unlocking Credit for Small Businesses, supra note 212.
    \250\ Treasury Transactions Report, supra note 220, at 40. As 
described in greater detail in Section D.3, TALF is broadly credited 
with jump-starting the securitization markets again. TALF expired as 
expected and additional support might not have been necessary.
---------------------------------------------------------------------------
    Treasury's most significant use of its extended TARP 
authority involved foreclosures. But even in this area, 
Treasury used its authority in a narrow way. Both new TARP 
foreclosure mitigation programs were carved out of funding that 
was initially reserved for HAMP. Moreover, it is not clear how 
much of the $15.1 billion that Treasury has committed to the 
three new programs will actually be spent. As of September 10, 
2010, Treasury had spent just $41.9 million on these programs, 
or well under 1 percent of the total amount committed to 
them.\251\ The amount of money that is eventually spent will 
depend largely on how many people and financial institutions 
participate in the programs.
---------------------------------------------------------------------------
    \251\ Treasury data provided to Panel staff (Aug. 18, 2010).
---------------------------------------------------------------------------

  E. How Is the American Economy Performing in the Wake of the TARP, 
  Particularly Those Sectors--Financial Markets, Housing, Autos--That 
           Have Been the Specific Target of TARP Assistance?


1. Indicators of the TARP's Impact

    Assessing the TARP in the context of both the broad U.S. 
economy and specific economic sectors is a difficult but 
important task.\252\ The purposes of the law that established 
the TARP include ensuring that the law's authorities are used 
in a matter that ``promotes jobs and economic growth,'' 
``preserves homeownership,'' and ``protects home values, 
college funds, retirement accounts, and life savings. . . .'' 
\253\ Thus, while its primary goal was financial stability, the 
TARP was also intended to have a positive effect on the economy 
more generally. The passage of the American Recovery and 
Reinvestment Act of 2009 (ARRA) and the actions of the Federal 
Reserve at the time of the financial crisis were also designed 
to spur economic recovery.\254\
---------------------------------------------------------------------------
    \252\ The GAO noted the difficulty of measuring TARP's impact on 
the economy while identifying key metrics that may be suggestive of 
TARP's economic impact in a previous report that stated, ``TARP's 
activities could improve market confidence in banks that choose to 
participate and have beneficial effects on credit markets, but several 
factors will complicate efforts to measure any impact. If TARP is 
having its intended effect, a number of developments might be observed 
in credit and other markets over time, such as reduced risk spreads, 
declining borrowing costs, and increased lending. However, several 
factors will make isolating and measuring the impact of TARP 
challenging, including simultaneous changes in economic conditions, 
changes in monetary and fiscal policy, and other programs introduced by 
the Treasury, the Federal Reserve, FDIC, and FHFA to support banks, 
credit markets, and other struggling institutions. As a result, any 
improvement in capital markets cannot be attributed solely to TARP nor 
will a slow recovery necessarily reflect its failure because of the 
effects of market forces and economic conditions outside of the control 
of TARP. Nevertheless, we have preliminarily identified some indicators 
that may be suggestive of TARP's impact over time. These indicators 
include measures of the perception of risk in interbank lending, 
consumer lending, corporate debt markets, and the overall economy. We 
have also identified a number of other indicators that we are also 
monitoring and may include in future reports.'' U.S. Government 
Accountability Office, Troubled Asset Relief Program: Additional 
Actions Needed to Better Integrity, Accountability, and Transparency, 
at 46 (Dec. 2008) (GAO-09-161) (online at www.gao.gov/new.items/
d09161.pdf).
    \253\ 12 U.S.C. Sec. 5201.
    \254\ Recovery.gov, About: The Recovery Act (online at 
www.recovery.gov/About/Pages/The_Act.aspx) (accessed Sept. 14, 2010); 
Board of Governors of the Federal Reserve System, Monetary Policy 
Report to the Congress, at 2 (Feb. 24, 2009) (online at 
www.federalreserve.gov/monetarypolicy/files/
20090224_mprfullreport.pdf).
---------------------------------------------------------------------------
    It is impossible to attribute changes in the economic 
climate solely to the TARP without data that isolate the TARP's 
effect. Changes in key economic and industry-specific metrics 
over time show only potential correlation, not causation. 
Further, any present assessment is necessarily limited to 
currently available data, and more time and analysis will be 
necessary before more definitive determinations of the TARP's 
effect can be made. It has, however, been two years since the 
acute crisis, and an assessment of the broader economy is 
therefore a useful standpoint from which to review the TARP. 
Analysis of these metrics provides insight into economic 
conditions at the height of the financial crisis and since the 
implementation of the TARP.
            a. Macroeconomic Indicators
    Real GDP is the total value of goods and services produced 
within the United States and is considered to be a 
comprehensive measure of the performance of the U.S. 
economy.\255\
---------------------------------------------------------------------------
    \255\ Bureau of Economic Analysis, Concepts and Methods of the U.S. 
National Income and Product Accounts, at 2-13 (Oct. 2009) (online at 
www.bea.gov/national/pdf/NIPAhandbookch1-4.pdf) (accessed Sept. 14, 
2010).
---------------------------------------------------------------------------
    As shown in Figure 11 below, real GDP increased steadily 
from 1991 to 2007, remained flat year-over-year from 2007 to 
2008, and decreased in 2009.\256\ Personal consumption 
expenditures drove year-over-year increases in GDP from 2000 to 
2007. During the height of the economic crisis in 2008 and 
2009, however, decreasing gross private domestic investments 
(specifically, lower fixed investment and private inventories), 
resulted in a reduction in real GDP.\257\ This trend has 
reversed in recent quarters, as increases in gross private 
domestic investments have driven the three percent increase in 
real GDP from the second quarter of 2009 to the second quarter 
of 2010.\258\
---------------------------------------------------------------------------
    \256\ Bureau of Economic Analysis, Table 1.1.6.: Real Gross 
Domestic Product, Chained Dollars (online at www.bea.gov/national/
nipaweb/TableView.asp? 
SelectedTable=6&Freq=Qtr&FirstYear=2008&LastYear=2010) (hereinafter 
``Bureau of Economic Analysis, Table 1.1.6.'') (accessed Sept. 8, 
2010). Until the year-over-year decrease from 2007 to 2008, nominal GDP 
had not decreased on an annual basis since 1949. Bureau of Economic 
Analysis, Table 1.1.5.: Gross Domestic Product (online at www.bea.gov/
national/nipaweb/TableView.asp?SelectedTable=5&Freq=Qtr&FirstYear= 
2008&LastYear=2010) (accessed Aug. 18, 2010).
    \257\ ``Personal consumption expenditures'' include the purchases 
of services and both durable and nondurable goods. ``Gross private 
domestic investment'' includes nonresidential structures and equipment 
and software, residential investment, and changes in private 
inventories. Bureau of Economic Analysis, Table 1.1.2.: Contributions 
to Percent Change in Real Gross Domestic Product (online at 
www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=2& 
FirstYear=2009&Last Year=2010& Freq=Qtr) (accessed Aug. 18, 2010); 
Bureau of Economic Analysis, Table 1.1.1.: Percent Change From 
Preceding Period in Real Gross Domestic Product (online at www.bea.gov/ 
national/ nipaweb/ TableView.asp?SelectedTable=1 &ViewSeries=NO 
&Java=no &Request3Place=N &3Place=N &FromView=YES &Freq=Qtr &FirstYear= 
2010&LastYear= 2010&3Place= N&Update=Update &JavaBox=no) (hereinafter 
``Bureau of Economic Analysis, Table 1.1.1.'') (accessed Aug. 18, 
2010).
    \258\ Bureau of Economic Analysis, Table 1.1.2.: Contributions to 
Percent Change in Real Gross Domestic Product (online at www.bea.gov/
national/nipaweb/TableView.asp? SelectedTable=2&ViewSeries=NO&Java= 
no&Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear= 
2008&LastYear=2010&3Place=N&Update=Update&JavaBox=no) (accessed Sept. 
7, 2010); Bureau of Economic Analysis, Table 1.1.6.: Real Gross 
Domestic Product, Chained Dollars (online at www.bea.gov/national/
nipaweb/TableView.asp?SelectedTable6&ViewSeries=NO&Java 
=no&Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear= 
2000&LastYear=2010&3Place=N&Update= Update&JavaBox=no) (accessed Sept. 
7, 2010).
---------------------------------------------------------------------------

                       FIGURE 11: REAL GDP \259\

      
---------------------------------------------------------------------------
    \259\ Bureau of Economic Analysis, Table 1.1.6., supra note 256. 
    [GRAPHIC] [TIFF OMITTED] T8023A.006
    
    The rate of real GDP growth quarter-over-quarter peaked at 
five percent in the fourth quarter of 2009 and has decreased 
during 2010. Real GDP increased at rates of 3.7 and 1.6 percent 
in the first and second quarters of 2010, respectively.\260\ 
These growth rates were also impacted by the 2010 U.S. Census. 
The Economics and Statistics Administration within the U.S. 
Department of Commerce estimated that the spending associated 
with the 2010 Census would peak in the second quarter of 2010 
and could boost annualized nominal and real GDP growth by 0.1 
percentage point in the first quarter of 2010 and 0.2 
percentage point in the second quarter of 2010.\261\ As the 
boost from the Census is a one-time occurrence, continuing 
increases in private investment and personal consumption 
expenditures as well as in exports will be needed to sustain 
the resumption of growth that has occurred in the U.S. economy 
over the past year.
---------------------------------------------------------------------------
    \260\ Bureau of Economic Analysis, Table 1.1.1., supra note 257.
    \261\ Economics and Statistics Administration, U.S. Department of 
Commerce, The Impact of the 2010 Census Operations on Jobs and Economic 
Growth, at 8 (online at www.esa.doc.gov/02182010.pdf).
---------------------------------------------------------------------------
    The unemployment rate has reached levels not seen since the 
recession of the early 1980s. As seen in Figure 12 below, the 
unemployment rate has increased since 2007 to a height of 10 
percent in the fourth quarter of 2009 and is currently 9.5 
percent. The combined rate of unemployment plus underemployment 
has exhibited a similar trend, jumping from 8.8 percent at the 
end of 2007 to the July 2010 rate of 16.5 percent, implying an 
increasing number of part-time workers who could be working 
full-time.\262\ It is important to note that the rate of 
unemployment plus underemployment does not include people who 
have stopped actively looking for work altogether. The median 
duration of unemployment has increased from six weeks in early 
2000 to the current median duration of 20 weeks, the highest 
level since tracking began on this data, and much of that 
increase occurred during 2009.\263\
---------------------------------------------------------------------------
    \262\ A person is classified as unemployed if he/she does not have 
a job, has actively looked for work in the prior four weeks, and is 
currently available for work. People are considered employed if they 
did any work for pay or profit during the employment survey week. 
Bureau of Labor Statistics, How the Government Measures Unemployment 
(online at www.bls.gov/cps/cps_htgm.htm#unemployed) (accessed Aug. 19, 
2010). Underemployment includes part-time workers and is defined based 
on two types: time-related underemployment and inadequate employment 
situations. Time-related underemployed individuals are those who are 
both willing and available to work additional hours and have worked 
fewer hours than a threshold of ``sufficient'' hours (with the number 
of hours deemed ``sufficient'' set by public policy). The other type of 
underemployment involves individuals in inadequate employment 
situations, meaning they were willing to change their current 
employment situation and wanted to do so due to inadequate use of their 
skill set, inadequate income, or excessive work hours. International 
Labour Organization, Underemployment: Current Guidelines (online at 
www.ilo.org/global/What_we_do/Statistics/topics/Underemployment/
guidelines/lang_Ken/index.htm) (accessed Aug. 19, 2010).
    \263\ Bureau of Labor Statistics, Databases, Tables & Calculators 
by Subject: (online at data.bls.gov/PDQ/servlet/SurveyOutputServlet) 
(accessed Sept. 7, 2010).
---------------------------------------------------------------------------

   FIGURE 12: UNEMPLOYMENT, UNDEREMPLOYMENT, AND MEDIAN DURATION OF 
              UNEMPLOYMENT (JANUARY 2000-JULY 2010) \264\

      
---------------------------------------------------------------------------
    \264\ While the Bureau of Labor Statistics (BLS) does not have a 
distinct metric for ``underemployment,'' the U-6 category of Table A-15 
``Alternative Measures of Labor Underutilization'' is used here as a 
proxy. BLS defines this measure as: ``Total unemployed, plus all 
persons marginally attached to the labor force, plus total employed 
part time for economic reasons, as a percent of the civilian labor 
force plus all persons marginally attached to the labor force.'' United 
States Department of Labor, International Comparisons of Annual Labor 
Force Statistics (online at www.bls.gov/webapps/legacy/cpsatab15.htm) 
(accessed Sept. 13, 2010). 
[GRAPHIC] [TIFF OMITTED] T8023A.007

            b. Housing Real Estate Sector Performance Metrics
    The Case-Shiller composite index (Case-Shiller) and Federal 
Housing Finance Agency's House Price Index (HPI) are important 
measures of home price trends.

 FIGURE 13: CASE-SHILLER NATIONAL INDEX AND FHFA HPI (JANUARY 2000-MAY 
                              2010) \265\

      
---------------------------------------------------------------------------
    \265\ Federal Housing Finance Agency, Purchase Only Indexes: U.S. 
and Census Division (Seasonally Adjusted and Unadjusted): January 1991-
Latest Month (online at www.fhfa.gov/Default.aspx?Page=87) (accessed 
Aug. 30, 2010); Standard & Poor's, S&P/Case-Shiller Home Price Indices: 
U.S. National Values (online at www.standardandpoors.com/ indices/sp-
case-shiller-home-price-indices/en/us/ ?indexId=spusa-cashpidff_p_us_) 
(accessed Aug. 30, 2010). Case-Shiller was normalized at 100 in January 
2000, as the U.S. Census count of single-family housing units for metro 
areas in 2000 was used as a base for weights and aggregate values. This 
creates the initial gap at the January 2000 starting point for the two 
indexes in the figure. 
[GRAPHIC] [TIFF OMITTED] T8023A.008

    As shown in Figure 13 above, Case-Shiller displayed a 
sharper increase and subsequent drop in housing prices compared 
to that seen in the HPI. Case-Shiller increased 105 percent 
from January 2000 to April 2006, then fell 32 percent to its 
trough of May 2009. HPI increased 63 percent from January 2000 
to April 2007 and then fell only 14 percent to February 2010. 
HPI includes only conventional mortgages, and thus excludes the 
subprime and other problem loans that ignited the housing 
crisis, and it therefore did not show the same degree of 
appreciation and depreciation seen in Case-Shiller. Case-
Shiller also appears to have picked up on the bursting of the 
bubble more quickly.\266\
---------------------------------------------------------------------------
    \266\ Several additional differences exist between Case-Shiller and 
HPI. Both utilize repeat sales of homes (both exclude first time sales, 
therefore first-time constructions/new homes are excluded), but HPI 
includes refinancing valuations. HPI includes only conforming, 
conventional mortgages (FRE/FNMA), while Case-Shiller includes all 
mortgages (including foreclosures). Case-Shiller uses arithmetic 
weighting, so it is similar to an average price, and thus, higher 
valued homes have greater influence on the average. HPI uses geometric 
weighting, so it is more similar to a median price. Case-Shiller 
excludes 13 states, whereas the national HPI includes all states.
---------------------------------------------------------------------------

       FIGURE 14: EXISTING-HOME SALES (JAN. 2000-JULY 2010) \267\

      
---------------------------------------------------------------------------
    \267\ Existing-home sales are completed transactions that include 
single-family, townhomes, condominiums, and co-ops. Data obtained from 
National Assocation of Realtors.
[GRAPHIC] [TIFF OMITTED] T8023A.009

    As noted in Figure 14 above, existing-home sales declined 
37 percent from September 2005 to November 2008, spiked 
significantly during 2009, and dropped to their lowest point in 
more than a decade in July 2010. The tax credits for first-time 
home buyers and repeat home buyers, beginning in January 2009 
and November 2009, respectively, correlate with sales spikes 
seen during those periods. As both tax credits were 
extinguished on April 30, 2010, existing-home sales have 
dropped to 3.8 million, the lowest level since the total 
existing-home sales series launched in 1999. Lower sales have 
increased the glut of housing inventory. As of July 2010, the 
total housing inventory represents a 12.5 month supply at the 
current sales pace, an increase from the 8.9 month supply as of 
June 2010.\268\
---------------------------------------------------------------------------
    \268\ National Association of Realtors, July Existing-Home Sales 
Fall as Expected but Prices Rise (Aug. 24, 2010) (online at 
www.realtor.org/pres_room/news_releases/2010/08ehs_fall).
---------------------------------------------------------------------------
    Housing sales are sensitive to interest rates, as borrowing 
costs directly impact the cost of home ownership. Generally, 
lower long-term interest rates generate higher value in house 
prices, and lower mortgage rates encourage more home purchases 
and refinancings. Long-term interest rates, specifically 30- 
and 10-year Treasury yields, increased significantly from the 
late 1970s to early 1980s and have gradually decreased since 
then. Similarly, fixed-rate, 30-year conventional mortgage 
rates peaked at 18.45 percent in October 1981 and have 
subsequently trended downward, with rates at an all-time low of 
4.43 percent as of August 2010.\269\
---------------------------------------------------------------------------
    \269\   Board of Governors of the Federal Reserve Ssytem, Data 
Download Program: Selected Interest Rates (H.15) (online at 
www.federalreserve.gov/datadownload/) (hereinafter "Federal Reserve 
Selected Interest Rates (H.15)'') (accessed Sept. 8, 2010).
---------------------------------------------------------------------------

        FIGURE 15: FORECLOSURE COMPLETIONS (2007-Q2 2010) \270\

      
---------------------------------------------------------------------------
    \270\ HOPE NOW, Mortgage Loss and Mitigation Statistics, Industry 
Extrapolations (Quarterly from Q1-2007 to Q1-2009) (online at 
www.hopenow.com/industry-data/
HOPE%20NOW%20National%20Data%20July07%20to%20April09.dpf) (hereinafter 
``HOPE NOW Statistics (July 2007 to Apr. 2009)'') (accessed Sept. 14, 
2010); HOPE NOW Statistics (Dec. 2008 to July 2010), supra note 202. 
[GRAPHIC] [TIFF OMITTED] T8023A.010

    Monthly foreclosure completions have increased from 
approximately 111,000 in the first quarter of 2007 to 
approximately 287,000 in the second quarter of 2010. 
Foreclosure completions in the second quarter of 2010 decreased 
by only 1,000 following four quarters of increasing 
foreclosures.\271\
---------------------------------------------------------------------------
    \271\ HOPE NOW Statistics (July 2007 to Apr. 2009), supra note 270; 
HOPE NOW Statistics (Dec. 2008 to July 2010), supra note 202.
---------------------------------------------------------------------------

 FIGURE 16: DELINQUENCY RATES FOR SINGLE FAMILY RESIDENTIAL MORTGAGES 
                    (2000-SECOND QUARTER 2010) \272\

      
---------------------------------------------------------------------------
    \272\ Delinquency rate is seasonally-adjusted and includes the 
total number of loans that are 30, 60, and 90 days past due. It does 
not include loans that are in foreclosure. Bloomberg Data Service 
(accessed Aug. 26, 2010). 
[GRAPHIC] [TIFF OMITTED] T8023A.011


    As seen in Figure 16, despite three million foreclosures 
since the first quarter of 2007,\273\ single family real estate 
delinquencies have continued to increase. Housing prices will 
continue to be influenced by the supply of homes on the market, 
which in turn is a function of the overall foreclosure and 
default rates.
---------------------------------------------------------------------------
    \273\ HOPE NOW Statistics (July 2007 to Apr. 2009), supra note 270; 
HOPE NOW Statistics (Dec. 2008 to July 2010), supra note 202.
---------------------------------------------------------------------------
    In its February 2010 report, the Panel highlighted the 
struggling commercial real estate (CRE) market, which has 
continued to experience decreased demand. Between 2010 and 
2014, approximately $1.4 trillion in CRE loans will reach 
maturity. Losses on these loans for commercial banks alone 
could total $200 billion to $300 billion for 2011 and 
beyond.\274\
---------------------------------------------------------------------------
    \274\ February 2010 Oversight Report, supra note 28, at 2, 38, 102.
---------------------------------------------------------------------------
    As illustrated by Figure 17, the burden of these losses 
will fall disproportionately on small and mid-size banks that 
do almost half of the nation's small business lending.\275\ In 
recent months, however, small banks have been attempting to 
remove CRE loans from their balance sheet. For example, in the 
second quarter of 2010 alone, small banks cut their outstanding 
balance of construction and land loans, one type of CRE loan, 
by 10 percent.\276\
---------------------------------------------------------------------------
    \275\ February 2010 Oversight Report, supra note 28, at 42.
    \276\ Foresight Analytics data provided to Panel staff (Aug. 24, 
2010).
---------------------------------------------------------------------------

  FIGURE 17: COMMERCIAL REAL ESTATE EXPOSURE AS A PERCENTAGE OF TOTAL 
                        RISK-BASED CAPITAL \277\

      
---------------------------------------------------------------------------
    \277\ Data from Foresight Analytics, LLC. This data does not 
include owner-occupied properties. 
[GRAPHIC] [TIFF OMITTED] T8023A.012

    Since the Panel's February report, the amount of 
outstanding CRE loans at commercial banks has decreased 
slightly. Their holdings decreased by $26 billion, or 2 percent 
in the fourth quarter of 2009,\278\ and by $19 billion, or 1.3 
percent, in the first quarter of 2010, due in part to 
repayments and write-offs from foreclosures.\279\ Commercial 
banks' total holdings, however, still remain at almost $1.5 
trillion.\280\
---------------------------------------------------------------------------
    \278\ Mortgage Bankers Association, Commercial Real Estate/
Multifamily Finance Quarterly Data Book: Q4 2009, at 51 (Mar. 2010) 
(online at www.mbaa.org/files/Research/DataBooks/
4Q09QuarterlyDataBook.pdf).
    \279\ Mortgage Bankers Association, Commercial Real Estate/
Multifamily Finance Quarterly Data Book: Q1 2010, at 48 (May 2010) 
(online at www.mbaa.org/files/Research/DataBooks/
1Q10QuarterlyDataBook.pdf) (hereinafter ``CRE/Multifamily Finance 
Quarterly Data Book: Q1 2010'').
    \280\ Id. at 48.
---------------------------------------------------------------------------
    The number of distressed CRE properties has continued to 
grow.\281\ The total value of troubled properties has increased 
to $154 billion, and another $32 billion worth of CRE has been 
repossessed by the lender through foreclosure.\282\
---------------------------------------------------------------------------
    \281\ Distressed properties are those that are either troubled or 
REO. For definitions of these terms, see footnote 283, infra.
    \282\ Real Capital Analytics, Fresh Evidence of Lenders Moving to 
Resolve Trouble (July 29, 2010) (hereinafter ``Fresh Evidence of 
Lenders Moving to Resolve Trouble'').
---------------------------------------------------------------------------

           FIGURE 18: TOTAL OUTSTANDING DISTRESSED CRE \283\

      
---------------------------------------------------------------------------
    \283\ Data from Real Capital Analytics. Troubled properties are 
those where there is a default, bankruptcy, or foreclosure pending, or 
some kind of lender forbearance or other restructuring. REO stands for 
Real Estate Owned properties. REO properties are those that have been 
repossessed by the lender via foreclosure. Restructured properties are 
those where ownership or debt terms have changed but no long term 
solution to the cause of distress has been reached. Resolved properties 
are those that have moved out of distress. Real Capital Analytics, 
Troubled Assets Radar: Methodology, at 1 (Apr. 5, 2010) (online at 
www.rcanalytics.com/troubled-assets-methodology.pdf).
[GRAPHIC] [TIFF OMITTED] T8023A.013

    Recently, however, the rate at which properties are 
becoming distressed has slowed. In June 2010, only $6.3 billion 
worth of CRE fell into distress, the smallest one-month 
increase since October 2008. In the first half of 2010, an 
additional $56.8 billion of CRE loans became distressed, down 
24 percent from the same period last year. At the same time, 
the rate and total value of restructurings and resolutions of 
CRE loans has increased. In the first half of 2010, $15.2 
billion worth of CRE loans were restructured, up 205 percent 
from the same period last year. The $14 billion of CRE loans 
resolved in the first half of 2010 is 272 percent higher than 
the same period last year.\284\
---------------------------------------------------------------------------
    \284\ Fresh Evidence of Lenders Moving to Resolve Trouble, supra 
note 282.
---------------------------------------------------------------------------
    Returns on CRE properties have recently begun to 
rebound.\285\ Vacancy rates remain high, however, meaning that 
many properties continue to produce no revenue and have little 
value even if foreclosed.\286\ Although the rate of properties 
becoming distressed has slowed, a glut of such properties 
remains in the market.
---------------------------------------------------------------------------
    \285\ CRE Finance Council Compendium of Statistics, supra note 244, 
at 25.
    \286\ PIMCO, PIMCO U.S. Commercial Real Estate Project (July 2010) 
(online at www.pimco.com/Pages/
USCommercialRealEstateProjectJune2010.aspx); CRE/Multifamily Finance 
Quarterly Data Book: Q1 2010, supra note 279, at 27; CRE Finance 
Council Compendium of Statistics, supra note 244, at 24.
---------------------------------------------------------------------------
            c. Financial Sector Performance Metrics
    The crisis that peaked in the fall of 2008 was centered in 
the financial sector. Numerous metrics, including credit 
spreads, loan delinquency rates, measures of financial market 
activity, and bank failures, shed light on the sector's health.
    Credit spreads, which measure the differences in bond 
yields, serve as a good proxy for market perceptions of risk. 
The LIBOR-OIS spread provides insight into market participants' 
confidence in their counterparties' abilities to repay their 
obligations; as the spread increases, market participants are 
more concerned about potential default risk.\287\ Former 
Federal Reserve Chairman Alan Greenspan has noted, for example, 
that the LIBOR-OIS spread served as a ``barometer of fears of 
bank insolvency.'' \288\ The TED spread, the difference between 
LIBOR and short-term Treasury bill interest rates, is another 
indicator of perceived credit risk, with a higher spread 
indicating that market participants are unwilling to hold 
investments other than safe Treasury bills. LIBOR is an average 
of interbank borrowing rates at large banks, and its movement 
was closely correlated to the disbursement of TARP funds to the 
largest U.S. banks in October 2008.\289\
---------------------------------------------------------------------------
    \287\ The LIBOR-OIS spread shows the difference between the London 
Interbank Offering Rate (LIBOR), which is the rate at which banks are 
willing to lend to one another for a specified loan term, and the 
Overnight Indexed Swaps rate (OIS), which is the rate on a derivative 
contract on the overnight rate, measuring the cost of extremely short-
term borrowing by financial institutions. 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).
    \288\ Id.
    \289\ LIBOR is calculated from the interbank borrowing rates of 16 
contributor panel banks, with the top four and bottom four of the rates 
discarded. The middle eight rates are then used to calculate an 
average, which becomes the day's LIBOR rate. The contributor panel 
banks are selected by the Foreign Exchange and Money Markets committee 
on the basis of scale of activity in the London market and perceived 
expertise in the currency concerned. British Bankers' Association, 
Understanding BBA LIBOR: a briefing by the British Bankers' 
Association, at 1 (May 27, 2010) (online at www.bbalibor.com/news-
releases/understanding-bba-libor) (accessed Sept. 14, 2010); British 
Bankers' Association, BBA LIBOR Panels (June 10, 2010) (online at 
www.bbalibor.com/news-releases/bba-libor-panels1).
---------------------------------------------------------------------------

               FIGURE 19: 3-MONTH LIBOR-OIS SPREAD \290\

      
---------------------------------------------------------------------------
    \290\ Bloomberg Financial. 
    [GRAPHIC] [TIFF OMITTED] T8023A.014
    
 FIGURE 20: TED SPREAD BETWEEN 3-MONTH LIBOR AND 3-MONTH TREASURY BILL 
                              YIELDS \291\

      
---------------------------------------------------------------------------
    \291\ Bloomberg Financial.
    [GRAPHIC] [TIFF OMITTED] T8023A.015
    
    Both spreads declined significantly from October 2008 to 
early 2009 and have generally leveled off and returned to rates 
maintained throughout the first half of the decade. The 
leveling trends imply increased confidence in the credit risk 
of counterparties that is correlated with, but not necessarily 
a consequence of, the government's assistance.\292\ The slight 
uptick seen in both the 3-Month LIBOR-OIS and TED spreads in 
2010 mirrors the market uncertainty regarding the European 
financial crisis.
---------------------------------------------------------------------------
    \292\ The Federal Reserve introduced the Term Auction Facility 
(TAF) as a means for banks to borrow from the Federal Reserve without 
using the discount window, with the specific purpose of providing 
liquidity directly to financial institutions to improve money market 
functioning and drive down the spread on term lending relative to 
overnight loans. Various studies have been performed to determine TAF's 
effect on credit spreads, with differing outcomes. In their analysis of 
the Federal Reserve's policy responses to the jump in interest rate 
spreads, John Taylor and John Williams found that increased 
counterparty risk contributed to the increase in interest rate spreads 
but that the government's policy responses, specifically the TAF, did 
not have a significant impact on spread reduction. Taylor and Williams 
used a no-arbitrage model of the term structure of interest rates, 
building in expectations of future short-term rates and risk factors 
drawn from derivative securities markets before and after the financial 
crisis, to test the hypothesis that the spread should be related to 
expectations of future overnight rates and to counterparty risk with no 
impact from liquidity demands. Their results showed this hypothesis to 
be true, although it also highlighted the need for formal treatment of 
liquidity effects in future research, and has implications on future 
policy decisions in times of widening interest rate spreads. See John 
B. Taylor and John C. Williams, A Black Swan in the Money Market, 
American Economic Journal: Macroeconomics, Vol. 1, No. 1 (Jan. 2009) 
(hereinafter ``A Black Swan in the Money Market''). On the other hand, 
Jens Christensen, Jose Lopez, and Glenn Rudebusch used a six-factor 
arbitrage free model of U.S. Treasury yields, financial corporate bond 
yields, and term interbank rates to assess the effect of central bank 
liquidity facilities on LIBOR. Their model allowed them to account for 
fluctuations in the term structure of credit and liquidity risk. They 
found that the TAF and other liquidity facilities did impact interbank 
lending rates and that, through their testing of a counterfactual 
scenario with no central bank liquidity facilities, without the 
liquidity facilities, the three-month LIBOR rate (and thus, credit 
spreads) would have been higher. See Jens Christensen, Jose Lopez, and 
Glenn Rudebusch, Do Central Bank Liquidity Facilities Affect Interbank 
Lending Rates?, Federal Reserve Bank of San Francisco Working Paper, 
No. 2009-13 (June 2009) (online at www.frbsf.org/publications/
economics/papers/2009/wp09-13bk.pdf). Other academic researchers have 
also looked into the effect of TAF on LIBOR using similar methods to 
Taylor-Williams with slight variations and have also found that TAF had 
a significant impact. See James McAndrews, Asani Sarkar, and Zhenyu 
Wang, The Effect of the Term Auction Facility on the London Inter-bank 
Offered Rate, Federal Reserve Bank of New York Staff Report, No. 335 
(July 2008) (online at www.newyorkfed.org/research/staff._reports/
sr335.pdf).
---------------------------------------------------------------------------
    Delinquency rates are currently at a ten-year high across 
all loan types. For loans secured by real estate, both single-
family residential and commercial, delinquency rates have 
increased the most dramatically since 2006, despite three 
million foreclosures since 2007.\293\ While commercial real 
estate loan delinquencies have leveled off a bit in recent 
quarters, those for single-family real estate loans continue 
trending upward. Conversely, delinquency rates on consumer\294\ 
and credit card loans have decreased 0.67 and 1.74 percentage 
points, respectively, from the second quarter of 2009 to the 
second quarter of 2010.
---------------------------------------------------------------------------
    \293\ HOPE NOW Statistics (July 2007 to Apr. 2009), supra note 270; 
HOPE NOW Statistics (Dec. 2008 to July 2010), supra note 202.
    \294\ Consumer loans includes most short- and intermediate-term 
loans extended to individuals, excluding loans secured by real estate. 
Loans for automobiles, mobile homes, education, boats, trailers, and 
vacations are included in this category, although for the purposes of 
Figure 21, the Federal Reserve's category of ``other consumer loans'' 
is excluded. Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release: G19 Consumer Credit (Aug. 6, 2010) (online 
at www.federalreserve.gov/releases/g19/Current/) (accessed Sept. 2, 
2010).
---------------------------------------------------------------------------

FIGURE 21: DELINQUENCY RATES BY LOAN TYPE (2000-SECOND QUARTER OF 2010) 
                                 \295\

      
---------------------------------------------------------------------------
    \295\ For the purposes of this graph and related text, delinquent 
loans and leases are those past due 30 days or more and still accruing 
interest as well as those in nonaccrual status. Board of Governors of 
the Federal Reserve System, Data Download Program: Delinquency Rates/
All Banks (online at www.federalreserve.gov/datadownload/
Choose.aspx?rel=CHGDEL) (accessed Aug. 20, 2010). 
[GRAPHIC] [TIFF OMITTED] T8023A.016

    These data suggest that loans secured by real estate 
continue to comprise the bulk of problem loans at financial 
institutions. The overall increase in delinquency rates 
highlights the continuing strain that financial institutions 
face through losses and write-offs on their loan 
portfolios.\296\ As noted in the Panel's August 2009 report, 
valuing the exact amount of troubled assets remaining is very 
difficult due to the lack of an agreed-upon definition of 
``troubled asset,'' the need to rely upon future projections of 
losses, and the fact that it is difficult to assemble the 
information required for valuation from publicly-available 
data. The inability to value these troubled assets, in turn, 
makes it difficult to assess fully the health of the financial 
sector.\297\
---------------------------------------------------------------------------
    \296\ According to the most recent senior loan officer survey 
conducted by Federal Reserve, a fraction of respondents from large 
banks noted their lending standards and terms have eased on prime 
residential mortgage loans and consumer loans (other than credit card). 
As standards ease and credit becomes more available, changes in 
delinquency rates will continue to be an important metric. July 2010 
Senior Loan Officer Opinion Survey, supra note 29, at 3-4.
    \297\ August 2009 Oversight Report, supra note 6.
---------------------------------------------------------------------------
    Mortgage-backed securities have been the source of 
significant losses to financial institutions. As shown in 
Figure 22, non-agency mortgage-backed securities, meaning those 
not secured by one of the government sponsored enterprises 
(GSEs), reached a height of $2.4 trillion outstanding in 2007, 
and then fell 36 percent to $1.5 trillion outstanding in 2010. 
This reflects both lower demand, as the appetite for these 
securities has fallen dramatically, and lower supply, as fewer 
non-agency loans are being underwritten and securitized. Figure 
22 also suggests that the volume of troubled real-estate assets 
held by financial institutions has correspondingly decreased.

   FIGURE 22: MORTGAGE-BACKED SECURITIES OUTSTANDING, BY SECTOR \298\

      
---------------------------------------------------------------------------
    \298\ JPMorgan, MBS Strategy. 
    [GRAPHIC] [TIFF OMITTED] T8023A.017
    
    Total underwritings per month, as shown in Figure 23 below, 
reflect both the debt and equity raised by corporations in the 
public markets. While extremely volatile, underwritings have 
generally been on an upward swing since 2008. Notably, initial 
public offerings have increased from a low of 11 deals in 2008 
to 26 in 2009, which suggests an increasing appetite for risk 
in the public markets. The successful completion of these deals 
represents increased demand in public markets for new issues of 
debt and equity, thereby reflecting a more efficient allocation 
of funds from investor to borrower in the capital markets.

    FIGURE 23: TOTAL UNDERWRITINGS PER MONTH (DEBT AND EQUITY) \299\

      
---------------------------------------------------------------------------
    \299\ Securities Industry and Financial Markets Association, U.S. 
Key Stats (Instrument: U.S. Corporate Issuance, ``Total 
Underwritings'') (online at www.sifma.org/uploadedFiles/Research/
Statistics/SIFMA_USKeyStats.xls) (accessed Sept. 14, 2010). Monthly 
data prior to January 2009 was provided by SIFMA staff in response to 
Panel request. 
[GRAPHIC] [TIFF OMITTED] T8023A.018

    Total loans at commercial banks increased from $3.5 
trillion in January 2000 to a height of $7.3 trillion in 
October 2008, an increase of 111 percent. While outstanding 
loans decreased during the financial crisis, they jumped to 
nearly $7.0 billion in March, and the current trend suggests 
that they have begun to level off. Real estate loans drove the 
sharp increase in total loans from 2000 to 2008, although they 
have decreased slightly in recent years. Consumer loans also 
increased to a lesser magnitude and, despite a slight dip in 
late 2009, have grown to their highest level of the decade. 
Commercial and industrial (C&I) loans dropped by 25 percent 
since 2006 and have since not returned to earlier levels. As 
the data include both new and previously issued loans, they do 
not provide much detail to improve our understanding of bank 
lending activity.

 FIGURE 24: TOTAL COMMERCIAL BANK LOANS, BY TYPE, SEASONALLY ADJUSTED 
                                 \300\

      
---------------------------------------------------------------------------
    \300\ Board of Governors of the Federal Reserve System, Data 
Download Program: H.8 Assets and Liabilities of Commercial Banks in the 
United States: All Commercial Banks, SA (online at 
www.federalreserve.gov/datadownload/Choose.aspx?rel=H.8) (accessed Aug. 
30, 2010). 
[GRAPHIC] [TIFF OMITTED] T8023A.019

    Since 2007, bank failures have increased dramatically after 
almost two decades at very low failure rates. It is helpful to 
view annual bank failures as a percentage of total banks in 
order to understand the relative impact of the failures on the 
financial sector. As noted in Figure 25 below, bank failures as 
a percentage of total banks have not reached the levels seen in 
the early 1990s, but they have dramatically increased from the 
16-year span prior to 2009, when there were a negligible number 
of failures. The number of failures from January-July 2010 has 
nearly reached the level for all of 2009.\301\
---------------------------------------------------------------------------
    \301\ July 2010 Oversight Report, supra note 23, at 91-93.
---------------------------------------------------------------------------

   FIGURE 25: BANK FAILURES AS A PERCENTAGE OF TOTAL BANKS AND BANK 
               FAILURES BY TOTAL ASSETS (1990-2010) \302\

      
---------------------------------------------------------------------------
    \302\ The 2010 year-to-date percentage of bank failures includes 
failures through July. The total number of FDIC-insured institutions as 
of March 31, 2010 is 7,932 commercial banks and savings institutions. 
As of August 20, 2010, there have been 118 failed institutions. Federal 
Deposit Insurance Corporation, Failures and Assistance Transactions 
(online at www2.fdic.gov/hsob/SelectRpt.asp?EntryTyp=30) (accessed Aug. 
25, 2010). Asset totals adjusted for deflation into 2005 dollars using 
the GDP implicit price deflator. The quarterly values were averaged 
into a yearly value. U.S. Department of Commerce, Bureau of Economic 
Analysis, Gross Domestic Product: Implicit Price Deflator (online at 
research.stlouisfed.org/fred2/data/GDPDEF.txt) (accessed Sept. 14, 
2010). 
[GRAPHIC] [TIFF OMITTED] T8023A.020

    As noted in Figure 25 above, in recent years, the number of 
failed banks has increased, while the total assets of failed 
banks have decreased. The disparity between the number of and 
total assets of failed banks in 2008 is driven primarily by the 
failure of Washington Mutual Bank, which held $307 billion in 
assets. The composition of failing institutions in 2009 and 
2010, however, is small and medium-sized banks; while they are 
failing in high numbers, their aggregate total assets are 
relatively modest. In fact, although the number of failed banks 
in 2010 as of August 20, 2010, is 84 percent of that in all of 
2009, the total assets of failed banks as of the same date are 
only 48 percent of the total assets of failed banks in 2009. 
This suggests that the average size of failed banks has 
decreased.
    As was discussed in the Panel's July 2010 report, these 
small and medium-sized banks have greater exposures to 
commercial real estate loans, especially those of lower credit 
quality, due to larger banks' ability to often provide better 
loan terms and attract borrowers with greater credit quality. 
In an economic cycle in which retail businesses face slumping 
sales and construction projects are put on hold, smaller 
institutions have suffered from higher commercial real estate 
delinquencies.
            d. ``Too-Big-To-Fail'' Banks 
    Upon enactment of EESA in October 2008, Treasury used the 
TARP to make capital injections of $115 billion in the eight 
largest banks in the country. An important aspect of assessing 
the impact of the TARP is to analyze the financial condition of 
those same institutions today, almost two years later. In 
addition to reviewing financial data, the Panel has also 
solicited the views of several research analysts who follow 
large capital banks.
    In May 2009, the Federal Reserve published the results of a 
one-time analysis of the balance sheets of the 19 largest U.S. 
financial institutions, including all of the initial eight TARP 
recipients, which it undertook in the preceding weeks in an 
exercise called the Supervisory Capital Assessment Program, or 
``stress tests.'' This exercise assessed banks' strength in the 
face of certain adverse economic scenarios. Under the more 
adverse scenario, the results suggested that the stress-tested 
banks would lose nearly $600 billion during 2009 and 2010.\303\
---------------------------------------------------------------------------
    \303\ Board of Governors of the Federal Reserve System, The 
Supervisory Capital Assessment Program: Overview of Results, at 3 (May 
7, 2009) (online at www.federalreserve.gov/newsevents/press/bcreg/
bcreg20090507a1.pdf).
---------------------------------------------------------------------------
    As Figure 26 below shows, while losses by the stress-tested 
banks were considerable during the height of the crisis, their 
net income has since improved significantly. From the first 
quarter of 2009 to the second quarter of 2010, the 18 stress-
tested banks that received TARP funds have earned $77.3 
billion.\304\ Since the end of 2008, the stress-tested banks 
have dramatically outperformed all other commercial banks. 
During the fourth quarter of 2008, the stress-tested firms had 
total net income of $10 billion, as did the balance of all non-
stress tested banks. By comparison, during the second quarter 
of 2010, the stress-tested firms earned $17 billion in net 
income while all other banks earned only $3 billion.
---------------------------------------------------------------------------
    \304\ This figure excludes MetLife, which was part of the SCAP but 
did not receive TARP funds, and includes GMAC, which received TARP 
funds under the AIFP. The other 17 stress-tested banks received funds 
through the CPP and, in two cases, the TIP.
---------------------------------------------------------------------------
    The government took a number of steps to assure market 
participants that the stress-tested institutions would be 
secure. Beyond the TARP investments in 18 of the 19 stress-
tested banks, the Capital Assistance Program (CAP) was created 
as a mechanism to provide additional assistance to the stress-
tested institutions. While the CAP was never used and no funds 
were disbursed, the stress tests signaled an implicit 
government guarantee of these institutions.
    This market perception is evidenced by the long-term credit 
ratings of the stress-tested banks, which experienced an 
average downgrade of only two notches from the beginning of 
2007 to the second quarter of 2010. More specifically, Standard 
& Poor's, in a report issued in May 2010, outlined the ratings 
impact of government support on four of the largest stress-
tested institutions. The report stated that the credit ratings 
of Bank of America, Citigroup, and Morgan Stanley were three 
notches higher than they would have been without government 
support and Goldman Sachs was two notches higher. These four 
institutions, the report noted, were the only ones that S&P 
believes ``have the potential for government support above and 
beyond system-wide programs.'' \305\
---------------------------------------------------------------------------
    \305\ Standard & Poor's, Evaluating The Impact of Far-Reaching U.S. 
Financial Regulatory Reform Legislation on U.S. Bank Ratings (May 25, 
2010); Panel staff conversation with S&P staff on September 15, 2010.

                FIGURE 26: STANDARD & POOR'S LONG-TERM CREDIT RATING OF STRESS-TESTED BANKS \306\
----------------------------------------------------------------------------------------------------------------
                                                Q1 2007                  Q3 2008                 Q2 2010
----------------------------------------------------------------------------------------------------------------
American Express Company..............  A+                       A                        BBB+
American International Group, Inc.....  AA                       A-                       A-
Bank of America Corporation...........  AA                       A+                       A
Bank of New York Mellon Corporation...  A+                       AA-                      AA-
BB&T Corporation......................  A+                       A+                       A
Capital One Financial Corporation.....  BBB+                     BBB+                     BBB
Citigroup Inc.........................  AA                       A                        A
GMAC/Ally.............................  BB+                      B-                       B
Goldman Sachs Group, Inc..............  AA-                      AA-                      A
JPMorgan Chase & Co...................  AA-                      A+                       A+
KeyCorp...............................  A-                       A-                       BBB+
MetLife, Inc..........................  A                        A                        A-
Morgan Stanley........................  A+                       A                        A
PNC Financial Services Group, Inc.....  A                        A+                       A
Regions Financial Corporation.........  A                        A                        BBB-
State Street Corporation..............  AA-                      AA-                      A+
SunTrust Banks, Inc...................  A+                       A+                       BBB
U.S. Bancorp..........................  AA                       AA                       A+
Wells Fargo & Company.................  AA+                      AA                       AA-
----------------------------------------------------------------------------------------------------------------
\306\ The Standard & Poor's rating system is composed of the following hierarchy of grades:
  ``AAA'',``AA'',``A'', ``BBB'', ``BB'', ``B'', ``CCC'', ``CC'', ``C'', ``D.'' Furthermore, the system utilizes
  plus (+) and minus (-) signs to reflect relative strength within each category. Standard & Poor's, Credit
  Ratings Definitions & FAQs (online at www.standardandpoors.com/ratings/definitions-and-faqs/en/us) (accessed
  Sept. 14, 2010). SNL Financial. Standard & Poor's long-term issuer credit rating for the company. S&P Ratings
  Copyright 2006, Standard & Poor's, a division of The McGraw-Hill Companies, Inc.

    FIGURE 27: NET INCOME OF STRESS-TESTED BANKS AS COMPARED TO ALL 
                         COMMERCIAL BANKS \307\

      
---------------------------------------------------------------------------
    \307\ SNL Financial. Stress-tested banks exclude MetLife, which was 
part of the SCAP, but did not receive TARP funds. 
[GRAPHIC] [TIFF OMITTED] T8023A.021

    Furthermore, the investment analysts whom the Panel 
consulted emphasized the historically high level of capital 
reserves being maintained by the largest institutions.\308\ 
Tier 1 capital ratios, which are calculated by dividing core 
capital by risk-adjusted assets, are a measure of banks' 
strength.\309\ As illustrated in Figure 27 above, the average 
Tier 1 capital ratio of the 18 stress-tested banks that took 
TARP funds has increased dramatically. Since the third quarter 
of 2008, the average Tier 1 capital ratio of these companies 
has increased from 8.6 percent to 12 percent during the second 
quarter of 2010.\310\
---------------------------------------------------------------------------
    \308\ As of Q2 2010, reserves as a percentage of loans in the U.S. 
banking industry are at their second highest level (3.4 percent) since 
this data was first measured in 1948. Barclays Capital, FDIC Banking 
Industry Charts: 1934-1H10 (Sept. 9, 2010).
    \309\ Core capital is a regulatory measure of a bank's health that 
is primarily comprised of the company's common stock and disclosed 
reserves. The value of risk-adjusted assets is derived from assigning a 
percentage risk value to an asset in order to better assess an 
institution's actual risk profile.
    \310\ SNL Financial.
---------------------------------------------------------------------------
    Another measure of the increasing capital is loan loss 
reserves.\311\ Since the first quarter of 2007, the average 
loan loss reserve ratio for the stress-tested banks has 
increased from 1.08 percent to 3.19 percent.
---------------------------------------------------------------------------
    \311\ SNL Financial. This indicator is defined as: Total Loan Loss 
and Allocated Transfer Risk Reserves/Total Loans & Leases (Net of 
Unearned Income & Gross of Reserves).
---------------------------------------------------------------------------

    FIGURE 28: TIER 1 CAPITAL RATIO OF THE STRESS-TESTED BANKS \312\

      
---------------------------------------------------------------------------
    \312\ SNL Financial. This ratio is defined as: Core capital/risk-
adjusted assets (tier 1 ratio). 
[GRAPHIC] [TIFF OMITTED] T8023A.022


    For the same 18 banks, the net interest margin, an 
indicator of a bank's operating performance, has also increased 
since the height of the crisis, though it remains below its 
levels from 2000-2005.\313\ The investment analysts whom the 
Panel consulted noted that the current low interest rate 
environment has placed pressure on bank spreads--the difference 
between the rate at which the institution borrows and the rate 
at which it then lends--and has effectively squeezed the firms' 
profits. As shown in Figure 28 below, the measure has increased 
11 percent since its trough in the second quarter of 2009.
---------------------------------------------------------------------------
    \313\ SNL Financial. Net interest margin is defined as a bank's net 
interest income as a percentage of its average earning assets.
---------------------------------------------------------------------------

      FIGURE 29: NET INTEREST MARGIN OF STRESS-TESTED BANKS \314\

      
---------------------------------------------------------------------------
    \314\ SNL Financial. This metric is defined as: Net interest income 
(fully taxable equivalent, if available) as a percentage of average 
earning assets. (Annualized). 
[GRAPHIC] [TIFF OMITTED] T8023A.023


    Not all indicators of the strength of the nation's largest 
banks are positive. The nation's largest banks have 32 percent 
of their loan books exposed to the residential real estate 
market.\315\ Uncertainty in the real estate market remains a 
serious concern for these banks. Figure 30 below shows the 
dollar value of the unpaid balances of residential loans in 
bankruptcy proceedings at the stress-tested banks at the end of 
each quarter as compared to the charge-offs. While the amount 
of unpaid principal balance on homes in foreclosure has 
recently leveled off at $70 billion, the amount of charge-offs 
taken by the large banks on residential mortgages in the second 
quarter of 2010 decreased by 17 percent from the first quarter 
of 2010. As Figure 30 highlights, however, nearly $97 billion 
in residential loans are at least 90 days past due as of the 
second quarter of 2010.
---------------------------------------------------------------------------
    \315\ Jason Goldberg, Asset Quality Update, Barclays Capital (Aug. 
26, 2010).
---------------------------------------------------------------------------

     FIGURE 30: TOTAL UNPAID PRINCIPAL OF 1-4 FAMILY MORTGAGES IN 
FORECLOSURE PROCEEDINGS AT STRESS TEST BANKS COMPARED TO CHARGE-OFFS ON 
                       1-4 FAMILY MORTGAGES \316\

      
---------------------------------------------------------------------------
    \316\ SNL Financial. The unpaid principal figure is comprised of 
total unpaid principal balance of loans secured by 1-4 family 
residential properties (in domestic offices) for which formal 
foreclosure proceedings to seize the real estate collateral have 
started and are ongoing as of quarter-end, regardless of the date the 
foreclosure procedure was initiated. (Call Report Line Item:RCONF577/
RCONF577). The charge-off figure is comprised of the revolving and 
permanent loans secured by real estate as evidenced by mortgages (FHA, 
FmHA, VA, or conventional) or other liens secured by 1-4 family 
residential property charged off, for domestic offices only. It 
includes liens on: nonfarm property containing 1-4 dwelling units or 
more than 4 dwelling units if each is separated from other units by 
dividing walls that extend from ground to roof, mobile homes where: (a) 
state laws define the purchase or holding of a mobile home as the 
purchase of real property and where (b) the loan to purchase the mobile 
home is secured by that mobile home as evidenced by a mortgage or other 
instrument on real property, individual condominium dwelling units and 
loans secured by an interest in individual cooperative housing units, 
even if in a building with 5 or more dwelling units, vacant lots in 
established single-family residential sections or areas set aside 
primarily for 1-4 family homes, housekeeping dwellings with commercial 
units combined where use is primarily residential and where only 1-4 
family dwelling units are involved charged off. 
[GRAPHIC] [TIFF OMITTED] T8023A.024

 FIGURE 31: TOTAL REAL ESTATE LOANS 90+ DAYS PAST DUE AT STRESS-TESTED 
                              BANKS \317\

      
---------------------------------------------------------------------------
    \317\ SNL Financial.
    [GRAPHIC] [TIFF OMITTED] T8023A.025
    
    Furthermore, second liens remain a concern and are a 
particularly acute problem at the nation's largest banks. As 
Figure 32 shows, 42 percent of second liens are held by the 
nation's four largest banks: Bank of America, Wells Fargo, 
JPMorgan Chase, and Citigroup.\318\ There is still a 
significant amount of risk associated with these potentially 
under collateralized home equity loans.
---------------------------------------------------------------------------
    \318\ Second lien mortgages are carried as loans held for 
investment. This means that the carrying value of these loans consist 
of the outstanding principal balance net of unearned fees and 
unamortized deferred fees. These loans are not accounted for under 
mark-to-market accounting. Furthermore, while the four largest banks 
(Bank of America, JPMorgan Chase, Citigroup, Wells Fargo) hold 42 
percent of second liens, these loans represent a small proportion of 
the residential loans these banks hold on their loan books. As of the 
second quarter 2010, the average percentage of second liens that 
comprise the 1-4 family servicing book of these banks was 7.5 percent. 
Amherst Securities; Board of Governors of the Federal Reserve System, 
Flow of Funds Accounts of the United States (June 10, 2010) (online at 
www.federalreserve.gov/releases/z1/current/z1.pdf) (hereinafter ``Flow 
of Funds Accounts of the United States'').
---------------------------------------------------------------------------

  FIGURE 32: TOTAL SECOND LIENS BY HOLDER (BILLIONS OF DOLLARS) \319\

      
---------------------------------------------------------------------------
    \319\ Flow of Funds Accounts of the United States, supra note 318. 
The ``Top 4 Commercial Banks'' bucket is comprised of Bank of America, 
Wells Fargo, JPMorgan Chase, and Citigroup. 
[GRAPHIC] [TIFF OMITTED] T8023A.026

    Whether the largest recipients of TARP assistance are 
indeed sound depends in substantial measure on their future 
earnings prospects. The overall outlook remains uncertain as 
large firms attempt to navigate an unfavorable economic 
environment. In June and July, trading volume and activity were 
low, and economic data continued to decline.
    Looking forward, one analyst consulted by the Panel 
observed that significant growth in revenue will be difficult 
due to changes in the regulatory environment, declines in 
medium- and long-term interest rates, and weakening capital 
markets. Another analyst saw volatility in earnings prospects 
as loan balances and loan loss provisions decline.\320\ In the 
view of these analysts, and as illustrated in Figure 33 below, 
the large banks are still profitable, but profits are not at 
the levels they once were. There are, however, opportunities 
for large banks to grow outside the United States. These 
analysts believe that large U.S. banks that are well-positioned 
in emerging Asia and Europe will be able to realize high-
single-digit to low-double-digit growth through international 
capital markets, whereas traditional banks can expect to see 
low single digit growth at best.\321\
---------------------------------------------------------------------------
    \320\ Information provided in industry analyst conversations with 
Panel staff between August 26 and August 30, 2010.
    \321\ Information provided in industry analyst conversations with 
Panel staff between August 26 and August 30, 2010.
---------------------------------------------------------------------------
    While there is widespread agreement among analysts that 
recent regulatory changes and ongoing market weaknesses will 
adversely affect certain segments of the stress-tested 
institutions' profitability, analyst consensus estimates 
illustrate a belief that the health of these firms will 
continue to improve in the coming years. Estimates of earnings 
per share (EPS), GAAP net income, and returns on equity/assets 
from Wall Street research firms show a dramatic increase in 
these measures from 2009 to 2012.\322\
---------------------------------------------------------------------------
    \322\ Figure 33 reflects composites of investment analysts' 
estimates for specific company metrics. Each data point is comprised of 
between seven and nineteen analyst estimates, thereby providing a wider 
array of thoughts and opinions rather than relying on only one analyst.
---------------------------------------------------------------------------

  FIGURE 33: EARNINGS PER SHARE AND NET INCOME OF STRESS-TESTED BANKS 
                            2009-2012 \323\

      
---------------------------------------------------------------------------
    \323\ Bloomberg. The 2009 figures were the actual amounts 
(reflected by ``A'' following the year) and the 2010-2012 figures are 
composite estimates (reflected by ``E'' following the year). This 
analysis excludes GMAC (Ally Financial) which is a private company and, 
as such, analysts do not publish earnings estimates. 
[GRAPHIC] [TIFF OMITTED] T8023A.027

    The Panel's assessment of the current condition and future 
prospects of the large banks that were the initial 
beneficiaries of TARP assistance must ultimately be qualified 
by the many lingering questions concerning the accuracy and 
completeness of the financial data upon which we and analysts 
must rely. The TARP has never fully addressed the issue of 
valuation of troubled loans remaining on the balance sheets of 
these institutions. Many of the assets of these large banks 
continue to be recorded at values that are not necessarily 
consistent across banks, due to differences in mark-to-model 
valuations, or are not open to public verification, due to the 
limitations of data contained in public financial disclosure 
documents.\324\ Consequently, the Panel is unable to say 
whether the American taxpayer can rest assured that over the 
long term these institutions have been fully restored to a 
financially sound condition in the aftermath of their TARP 
capital injections and repayment.
---------------------------------------------------------------------------
    \324\ See August 2009 Oversight Report, supra note 6, at 27 (``the 
usefulness of public financial records is limited, though, by a lack of 
uniformity in reporting and formatting and a lack of granularity.'').
---------------------------------------------------------------------------
            e. Automotive Sector Performance Metrics 
    Though the financial and housing sectors faced the most 
obvious challenges posed by the financial crisis, the U.S. 
automotive industry faced a similar credit crunch and loss of 
sales. Treasury viewed a major disruption to the automotive 
industry as a systemic risk to financial market stability and 
as liable to have a negative impact on the economy.\325\ As 
such, Treasury established the AIFP to provide relief to 
Chrysler, General Motors, Chrysler Financial, and GMAC.\326\
---------------------------------------------------------------------------
    \325\ September 2009 Oversight Report, supra note 6, at 8.
    \326\ U.S. Department of the Treasury, Automotive Industry 
Financing Program (Aug. 26, 2010) (online at 
www.financialstability.gov/roadtostability/autoprogram.html).
---------------------------------------------------------------------------
    Since the AIFP was implemented, the automotive industry has 
begun to recover. Following a steep decline at the end of 2008, 
both global sales and industrial production of automobiles have 
rebounded and stabilized. Total automotive and parts 
manufacturing employment has stopped declining.

 FIGURE 34: U.S. AUTO AND LIGHT TRUCK ASSEMBLIES (MILLIONS) AND MOTOR 
             VEHICLE AND PARTS EMPLOYMENT (THOUSANDS) \327\

      
---------------------------------------------------------------------------
    \327\ Board of Governors of the Federal Reserve System, Data 
Download: G.17 Industrial Production and Capacity Utilization, Motor 
Vehicle Assembles (online at www.federalreserve.gov/datadownload/
Choose.aspx?rel=G.17) (accessed Sept. 14, 2010); Bureau of Labor 
Statistics, Current Employment Statistics Databases: Employment, Hours, 
and Earnings-National: All Employees: Durable Goods: Motor Vehicles and 
Parts (online at www.bls.gov/ces/data.htm) (accessed Sept. 14, 2010). 
[GRAPHIC] [TIFF OMITTED] T8023A.028

    It is important to note, however, that the automotive 
sector has also benefited from many other factors besides the 
government's investments, most notably, the Cash for Clunkers 
program and the bankruptcies of GM and Chrysler.\328\
---------------------------------------------------------------------------
    \328\ Bankruptcy is considered a benefit because it allows a 
company to discharge its unsecured debt and deal with certain pension 
obligations. For a more complete timeline of AIFP assistance, as well 
as the GM and Chrysler bankruptcies, see September 2009 Oversight 
Report, supra note 6. The Cash for Clunkers program was signed into law 
on June 24, 2009 and began on July 27, 2009. National Highway Traffic 
Safety Administration, Transportation Secretary Ray LaHood Kicks-Off 
CARS Program, Encourages Consumers to Buy More Fuel Efficient Cars and 
Trucks (July 27, 2009) (online at www.cars.gov/files/official-
information/July27PR.pdf).
---------------------------------------------------------------------------

2. The TARP's Effect on the Financial System 

    As described in section E.1, supra, there are metrics that 
can provide a certain assessment of various sectors of the 
economy before and after the implementation of the TARP. While 
these yield useful information, some of the challenges for 
oversight and evaluation lie in teasing out the results that 
can be directly attributed to the implementation of a single 
program from other factors, and comparing what actually 
occurred with what might have occurred under a counterfactual 
scenario. In addressing these questions, the Panel consulted 
with Professors Alan Blinder, Simon Johnson, Anil Kashyap, and 
Kenneth Rogoff to elicit their views on the TARP, particularly 
in the context of the Panel's current evaluation. The Panel 
asked these economists to provide broad guidance on, among 
other things: the effectiveness of the TARP (as they believed 
``effectiveness'' should be measured), particularly in 
comparison to other government programs during the crisis; 
alternatives to the TARP and ways in which the TARP could have 
been better implemented or designed; negative effects from the 
TARP; and implications of the TARP for the future. While 
differing on numerous points, the economists generally agreed 
that the TARP was both necessary to stabilize the financial 
system and that its implementation had been flawed in some 
significant ways and could pose significant costs far into the 
future.
            a. Isolating the TARP 
    A predicate to determining the effectiveness of the TARP is 
isolating the effects of the TARP alone from other influences 
on the economy. The economists differed on whether the effect 
of the TARP could ever be isolated. Both Professors Kashyap and 
Rogoff stated that they did not believe that it is possible to 
determine the effectiveness of the TARP, by itself, on the 
health of the entire U.S. economy.\329\ Professor Kashyap noted 
that ``figuring out the contribution of TARP in isolation is 
not really possible'' because ``TARP by itself would not have 
been sufficient [to] stave off a disaster[.]'' \330\ Professors 
Blinder and Johnson, however, expressed a belief that it is 
possible to isolate at least certain effects of the TARP. 
Professor Blinder suggested that the fact that risk spreads 
rose sharply before the TARP was enacted and fell sharply 
afterward is ``highly suggestive that the TARP spread a 
security blanket across the financial markets.'' \331\ 
Professor Johnson suggested that the TARP be viewed in light of 
three main goals for a government facing a major financial 
crisis: (1) stabilizing the banking system; (2) preventing the 
overall level of spending from collapsing; and (3) laying the 
groundwork for a sustainable recovery.\332\
---------------------------------------------------------------------------
    \329\ Anil Kashyap, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010); Kenneth Rogoff, Written 
Answers to Questions Posed by the Congressional Oversight Panel (Aug. 
2010).
    \330\ Anil Kashyap, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010).
    \331\ Alan Blinder, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010).
    \332\ Simon Johnson, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010).
---------------------------------------------------------------------------
    To the extent that Treasury itself has articulated a metric 
by which to measure TARP's success, that metric has generally 
been the response to the question: will the taxpayers get their 
money back.\333\ While it is true that EESA mandates that any 
program undertaken by Treasury under the Act ``maximize[ ] 
overall returns to the taxpayers of the United States'' \334\ 
repayment does not provide a complete picture of either the 
success of TARP or its cost. Professor Rogoff has noted that a 
proper cost benefit analysis ``needs to price the risk the 
taxpayer took on during financial crisis. Ex post accounting 
(how much did the government actually earn or lose after the 
fact) can yield an extremely misguided measure of the true cost 
of the bailout, especially as a guide to future policy 
responses.'' \335\ Therefore the simple question of whether the 
program ends with a negative or positive balance does not 
provide a complete answer to whether the program was necessary, 
or properly designed and implemented.
---------------------------------------------------------------------------
    \333\ In an opinion piece for The New York Times titled ``Welcome 
to the Recovery,'' Secretary Geithner wrote that ``[t]he government's 
investment in banks has already earned more than $20 billion in profits 
for taxpayers, and the TARP program will be out of business earlier 
than expected--and costing nearly a quarter of a trillion dollars less 
than projected last year.'' Timothy F. Geithner, Welcome to the 
Recovery, New York Times (Aug. 2, 2010) (online at www.nytimes.com/
2010/08/03/opinion/03geithner.html?--r=2&dbk). See also U.S. Department 
of the Treasury, Treasury Department Announces TARP Milestone: 
Repayments to Taxpayers Surpass TARP Funds Outstanding (June 11, 2010) 
(online at financialstability.gov/latest/pr--06112010.html) (quoting 
Assistant Secretary Herbert Allison as saying that ``TARP repayments 
have continued to exceed expectations, substantially reducing the 
projected cost of this program to taxpayers. . . . This milestone is 
further evidence that TARP is achieving its intended objectives: 
stabilizing our financial system and laying the groundwork for economic 
recovery.'').
    \334\ 12 U.S.C. Sec. 5201(2)(C).
    \335\ Kenneth Rogoff, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010).
---------------------------------------------------------------------------
            b. Necessity for and Effectiveness of the TARP 
    Despite the difficulty some of them found in ascribing 
particular effects to the TARP, the Panel's experts were 
consistent in their view that even if mismanaged in many ways, 
TARP was the right thing to do. Professor Kashyap noted that 
the Federal Reserve did not have enough options to handle the 
crisis without the tools provided by the TARP, while Professor 
Johnson similarly stated that the TARP was the right thing to 
do. Professor Blinder observed that ``laissez faire would have 
been catastrophic,'' \336\ while Professor Rogoff stated that 
the bailout policy must be given credit for averting the second 
great depression that might otherwise have occurred.\337\ While 
expressing some concerns, Professor Kashyap said, considering 
all of the policies aimed at preventing a complete collapse of 
the financial system, ``the package worked.'' \338\ Professor 
Blinder has said that ``regarding stabilizing institutions like 
AIG, one has to count TARP as a huge success.'' \339\
---------------------------------------------------------------------------
    \336\ Alan Blinder, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010).
    \337\ Kenneth Rogoff, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010).
    \338\ Anil Kashyap, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010).
    \339\ Alan Blinder, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010).
---------------------------------------------------------------------------
    The TARP was enacted amidst enormous market turmoil. After 
Lehman Brothers' failure, major Wall Street players Goldman 
Sachs and Morgan Stanley saw their stock prices fall 30 percent 
and nearly 42 percent, respectively, in the week following the 
announcement. In the week immediately following the passage of 
TARP, the S&P500 index fell by more than 18 percent. The TED 
Spread spiked 177 points, rising from about 136 points on 
September 12, 2008, to 313 points by September 18, 2008.
    The rapid collapse or disappearance of Lehman Brothers, 
AIG, Merrill Lynch, Fannie Mae and Freddie Mac over a period of 
days fed an environment where both firms and investors lost 
confidence in the solvency of financial institutions broadly. 
There was clearly a significant threat of a freeze in global 
credit markets, with banks refusing to lend to each other or 
demanding high premiums, as measured by the rising TED spreads.
    Following the initial CPP investments and the implicit 
government guarantee associated with those investments, 
interbank credit markets became more liquid and markets began 
to differentiate more clearly among stronger and weaker 
institutions. Citigroup and Bank of America received additional 
assistance through the TIP, and Citigroup also received a 
government guarantee through participation in the AGP.
    Ultimately, TARP's provision of government liquidity and 
implicit guarantees, together with actions by the Federal 
Reserve and the other bank regulators both stopped the broader 
market panic in early October 2008, and kept almost all of the 
nation's major financial institutions as of the date of the 
passage of the EESA from bankruptcy. The only major post-EESA 
financial bankruptcy was that of the CIT Group.\340\ In 
February 2009, Treasury unveiled the Administration's financial 
stability plan, which included plans to perform an assessment 
or ``stress test'' of the nation's largest financial 
institutions with an underlying promise to provide adequate 
capital to ensure that none of the tested banks would 
fail.\341\ By summer 2009, there was a consensus that the acute 
financial crisis had passed. Economic recovery, however, 
including financial sector recovery, is far from complete, and 
many Americans are still struggling as they face long term 
unemployment, mortgage foreclosures, and other fall-out from 
the late 2008 crash.\342\
---------------------------------------------------------------------------
    \340\ CIT announced that it would file a pre-packaged bankruptcy 
plan on November 1, 2009. CIT Group, CIT Board of Directors Approves 
Proceeding with Prepackaged Plan of Reorganization with Overwhelming 
Support of Debtholders (Nov. 1, 2009) (online at cit.com/media-room/
press-releases/corporate-news/index.htm).
    \341\ Congressional Oversight Panel, June Oversight Report: Stress-
Testing and Shoring Up Bank Capital (June 9, 2009) (online at 
cop.senate.gov/documents/cop-060909-report.pdf).
    \342\ See, e.g., Board of Governors of the Federal Reserve System, 
Summary of Commentary on Current Economic Conditions By Federal Reserve 
District, at 4 (Aug. 2009) (online at www.federalreserve.gov/FOMC/
Beigebook/2009/20090909/fullreport20090909.pdf) (noting that all 
districts reported ``that economic activity continued to stabilize in 
July and August'').
---------------------------------------------------------------------------

3. Costs of the TARP: Moral Hazard and Stigma

    Even while saying that TARP ``worked'', the economists that 
the Panel consulted did not state that all exercises of the 
TARP were positive. The unquantifiable and immeasurable effects 
are not a one-way ratchet in favor government intervention. The 
TARP distorted the market at the same time as it stabilized it, 
and many of the costs of this distortion will likely occur in 
the future. Although it is difficult to determine what the 
long-term consequences of the TARP will be, it is clear that 
the TARP has introduced some effects that might have been 
averted had the TARP either not been created or been 
implemented differently. Many of these effects will not be 
quantifiable until many years down the road.
            a. Poor Implementation and Stigma
    Some of the decisions Treasury made in designing and 
implementing the TARP have increased the stigma that currently 
dogs the program. Professor Johnson and Professor Kashyap both 
said that the October 2008 change in TARP strategy from asset 
purchases to capital injections, followed by the 2009 rollout 
of numerous seemingly unconnected programs, combined with 
largely ineffective communication of the reasoning behind these 
actions, spread confusion in the public and undermined trust in 
the TARP.\343\ Professor Kashyap described the difficulties 
with Treasury's reversal of direction from its original 
September 2008 plan to purchase troubled assets to, one month 
later, capital injections, and argued that ``buying toxic 
assets never made sense and the fact that the government could 
not explain how this was going to help with the crisis was a 
tell-tale sign that this idea was flawed.'' \344\ While 
Professor Blinder argued that Treasury could have proceeded 
with its original plan of purchasing troubled assets from the 
banks rather than, or in addition to, providing those banks 
with capital infusions,\345\ he also said that Treasury made 
numerous tactical errors in implementing the TARP. These 
include ``forcing capital on banks that did not want it,'' 
giving terms to TARP recipients that were too generous, and not 
requiring that recipient institutions forgo paying dividends 
but increase lending as a quid pro quo for receiving government 
assistance. Additionally, Professor Johnson has expressed 
significant concern with the inequity of various TARP actions, 
suggesting that some actions were motivated by favoritism 
towards politically connected groups,\346\ and that the program 
has rewarded failure, and provided a certain amount of 
artificial support to the financial system. Concerns such as 
these may have stoked hostility towards the program. Even 
though Main Street generally benefits from a well-functioning 
financial system, the hostility towards the program is 
potentially exacerbated by the TARP's comparatively languid 
approach to addressing issues that have a greater direct effect 
on Main Street, such as small business lending and 
foreclosures.
---------------------------------------------------------------------------
    \343\ Anil Kashyap, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010); Simon Johnson, Written 
Answers to Questions Posed by the Congressional Oversight Panel (Aug. 
2010).
    \344\ Anil Kashyap, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010).
    \345\ Alan Blinder, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010). See also August 2009 
Oversight Report, supra note 6, at 9 (discussing differences between 
capital infusions and purchases of troubled assets).
    \346\ Simon Johnson, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010).
---------------------------------------------------------------------------
    The TARP's image has been further damaged by its 
prominence. The TARP was only the most visible portion of a 
number of government policy responses to the financial crisis, 
most notably the far larger Federal Reserve liquidity 
operations and guarantees. As Professor Rogoff observed, 
``[t]hese subsidies, however, were less transparent, and of 
course TARP funds covered some of the ugliest and most painful 
parts of the bailout, including, for example, AIG.'' \347\ 
Considering the myriad sources of resentment towards the TARP 
and the intensity of the stigma that has developed, it is not 
surprising that many observers believe as Professor Blinder 
does, that ``in the near term, the extreme unpopularity of TARP 
will make it hard to do anything even remotely like it again, 
should the need arise.'' \348\ Some of these effects are 
already apparent. Treasury hoped, for example, that the CPP 
would attract 2,000 to 3,000 participant banks: the result was 
a comparatively disappointing 707, and some of the unpopularity 
of the program has been attributed to the stigma that became 
attached to the TARP.\349\ Similarly, the pending SBLF 
legislation was deliberately created outside of the TARP 
because the stigma associated with the TARP led Treasury to be 
concerned that participation in another TARP program would be 
too low.\350\ Professor Johnson stated that one result is that 
the current recovery strategy has produced a stalemate between 
the Administration's reluctance to dictate terms to the banks 
(out of a concern that such an approach will be viewed as an 
attempt at nationalization) and ``bailout fatigue,'' among the 
public and Congress, which ``has made it impossible for the 
administration to propose a solution that is too generous to 
banks, or that requires new money from Congress.'' \351\
---------------------------------------------------------------------------
    \347\ Kenneth Rogoff, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010).
    \348\ Alan Blinder, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010).
    \349\ Financial Crisis Inquiry Commission, Testimony of Henry M. 
Paulson, Jr., former secretary, U.S. Department of the Treasury, The 
Shadow Banking System, at 70 (Mar. 6, 2010) (online at www.fcic.gov/
hearings/pdfs/2010-0506-Transcript.pdf) (Then-Secretary Paulson 
testifying that the CPP was designed to have ``two or three thousand 
banks'' hold the CPP for ``three to five years''); Transcript: COP 
Hearing with Secretary Geithner, supra note 225, at 40; May 2010 
Oversight Report, supra note 6, at 68-72; House Financial Services, 
Subcommittee on Financial Institutions and Consumer Credit, Written 
Testimony of David N. Miller, acting chief investment officer, Office 
of Financial Stability, U.S. Department of the Treasury, The Condition 
of Financial Institutions: Examining the Failure and Seizure of an 
American Bank, at 1 (Jan. 21, 2010) (online at www.house.gov/apps/list/
hearing/financialsvcs_dem/miller_house_testimony_final_1-21-
10_5pm.pdf).
    \350\ Transcript: COP Hearing with Secretary Geithner, supra note 
200, at 84.
    \351\ Simon Johnson, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010).
---------------------------------------------------------------------------
            b. Moral Hazard
    Commentators on the TARP, including the Panel's experts, 
are almost universally concerned with the costs of the 
interventions, particularly the moral hazard it created in the 
financial system. After all, the government had alternatives 
for the form of its intervention. For example, as an 
alternative to subsidizing large, distressed banks, it had the 
option of putting them into liquidation or receivership, 
removing failed managers, and wiping out existing 
shareholders.\352\ Such a strategy has been used successfully 
in past banking crises, as noted by Professor Johnson, such as 
the South Korean crisis of 1997, or in the U.S. Savings and 
Loan Crisis of the early 1990s. The failure to follow this more 
aggressive course was criticized by Professor Johnson, who 
argued that unlimited government support must be accompanied by 
orderly resolution for troubled large institutions and rigorous 
governance reform to ensure that short-term stability does not 
come at the cost of sustainable recovery.\353\ Professor 
Blinder also argued that tougher conditions on banks receiving 
assistance, such as lending targets or banning dividends would 
have made TARP more effective and given it more political 
legitimacy.\354\ Professor Rogoff noted that the TARP 
nationalized the liabilities of the banks while protecting 
equity holders and even junior bond holders.\355\ Similarly, 
the structure of the AIG rescue--in which counterparties 
received full payment while taxpayers continue to face a 
significant loss--has shaken public confidence and created a 
substantial moral hazard.\356\
---------------------------------------------------------------------------
    \352\ Congressional Oversight Panel, April Oversight Report: 
Assessing Treasury's Strategy: Six Months of TARP, at 78-79 (Apr. 7, 
2009) (online at cop.senate.gov/documents/cop-040709-report.pdf) 
(hereinafter ``April 2009 Oversight Report'').
    \353\ Simon Johnson, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010).
    \354\ Alan Blinder, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010).
    \355\ Kenneth Rogoff, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010).
    \356\ June 2010 Oversight Report, supra note 21, at 10.
---------------------------------------------------------------------------
    One of the most significant arenas in which commentators, 
including the Panel's experts, debate moral hazard is in the 
discussion of those entities that are ``too big to fail'' and 
the effect of such entities on the financial system generally. 
Those banks considered to be ``too big to fail'' enjoy an 
implicit guarantee backed by the U.S. government, giving them 
an advantage in attracting business and financing, and 
potentially making them even larger and more interconnected 
than ever.\357\ In his written testimony before the House 
Financial Services Subcommittee on Oversight and 
Investigations, Thomas Hoenig, the president and chief 
executive officer of the Federal Reserve Bank of Kansas City, 
recently warned of just this effect. ``Because the market 
perceived the largest banks as being too big to fail,'' he 
noted, ``they have had the advantage of running their business 
with a much greater level of leverage and a consistently lower 
cost of capital and debt.'' He also described the challenges 
small banks will face going forward, including higher 
regulatory compliance costs, as well as higher costs of capital 
and of deposits, as long as some banks are perceived to be too 
big to fail.\358\ Professor Rogoff echoed this in noting to the 
Panel that the smaller banks, which are not considered to be 
``too big to fail,'' and those which followed more conservative 
lending policies, are now at a huge disadvantage in raising 
funding compared to their more risk-tolerant but larger 
competitors.\359\ The TARP has therefore created a ``perverse 
incentive'' for large banks to disregard risk, since when it 
comes to their all-important cost of capital, the markets will 
no longer penalize them for recklessness or shortsightedness in 
lending, nor will they reward responsibility or prudence. 
Professor Johnson made a similar observation, stating that 
FDIC-type liquidation procedures were applied to small and 
medium banks, but not to large banks, sending confusing 
messages, while providing those large banks with an incentive 
to take excessive risk.\360\ Additionally, the 2009 bank stress 
tests have been interpreted by multiple economists the Panel 
has spoken with as reinforcing the implicit guarantees of 
``too-big-to-fail'' banks.\361\ Even the structure of the CPP 
reinforced this disparity, as noted by Professor Kashyap when 
he criticized Treasury's willingness to inject capital into 
banks without first gaining a clear idea of their 
solvency.\362\ This trend is reflected in the data presented in 
section E.1, supra, which shows that the largest 19 banks 
appear to be on a swifter path toward recovery than their 
competitors. The economists contacted by the Panel generally 
agree, however, that some of the moral hazard costs of the TARP 
were largely unavoidable.
---------------------------------------------------------------------------
    \357\ See Figure 26, supra.
    \358\ House Financial Services, Subcommittee on Oversight and 
Investigations, Written Testimony of Thomas M. Hoenig, president and 
chief executive officer, Federal Reserve Bank of Kansas City, Too Big 
Has Failed: Learning from Midwest Banks and Credit Unions, at 4 (Aug. 
23, 2010) (online at www.kansascityfed.org/speechbio/hoenigpdf/hearing-
testimony-8-23-10.pdf).
    \359\ Kenneth Rogoff, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010).
    \360\ Simon Johnson, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010).
    \361\ Simon Johnson, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010); Anil Kashyap, Written 
Answers to Questions Posed by the Congressional Oversight Panel (Aug. 
2010).
    \362\ Anil Kashyap, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010).
---------------------------------------------------------------------------
    Professors Blinder and Kashyap have suggested that the 
solution may lie in stronger ``resolution authority,'' whereby 
the government could close down systemically significant, 
insolvent financial institutions in an orderly manner that 
minimizes impacts on markets or the financial system, instead 
of bailing them out.\363\ The degree to which any resolution 
authority reduces perverse incentives and thus moral hazard 
will depend on how seriously market participants take the 
threat that the authority will be used, and insolvent ``too-
big-to-fail'' banks will be liquidated. Since the TARP has set 
a precedent for bailouts, and was justified using arguments 
that would likely apply in future crises, Professor Blinder has 
noted that resolution authority will likely have to be used in 
a prominent example before it is taken seriously enough for 
bankers and investors to change their behavior.\364\ Professor 
Kashyap and others have suggested that absent such credible 
resolution authority, the TARP's legacy may actually be to make 
similar financial crises more likely in the future.\365\
---------------------------------------------------------------------------
    \363\ Alan Blinder, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010); Anil Kashyap, Written 
Answers to Questions Posed by the Congressional Oversight Panel (Aug. 
2010).
    \364\ Alan Blinder, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010).
    \365\ Anil Kashyap, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010).
---------------------------------------------------------------------------
    Some additional costs lie in distorted pricing: the 
government paid more than par value for some of its rescue 
efforts,\366\ and as Professor Blinder noted, the government 
gave the banks better terms than Warren Buffett did. As 
discussed above, Professor Rogoff finds that the cost of the 
bailout has been improperly analyzed.\367\ He holds that a 
``proper cost-benefit analysis needs to price the risk the 
taxpayer took on during financial crisis.'' In his view, if 
there had been a major geo-political crisis while the banking 
system was fragile and underpinned by the government, the cost 
to the taxpayer of the various implicit and explicit guarantees 
could have been enormous.
---------------------------------------------------------------------------
    \366\ Congressional Oversight Panel, February Oversight Report: 
Valuing Treasury's Acquisitions, at 4 (Feb. 6, 2009) (online at 
cop.senate.gov/documents/cop-020609-report.pdf).
    \367\ Kenneth Rogoff, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010).
---------------------------------------------------------------------------

        4. Other Potential Near and Long-Term Costs of the TARP

    Beyond the costs described above, however, are several that 
remain unknown and may ultimately prove unknowable. While it 
will never be possible to say definitively what would have 
happened absent the TARP, and it is too soon to say what the 
TARP's long-term ramifications will be, it may be possible to 
highlight a few potential effects, although even such an 
endeavor is largely speculative. Moreover, there have not been 
thus far comprehensive, statistical analyses of the impact of 
the TARP on the U.S. economy or on how, if at all, the TARP 
contributed to ending the financial crisis.\368\
---------------------------------------------------------------------------
    \368\ John Taylor and John Williams' January 2009 paper, for 
example, examining the Federal Reserve's Term Auction Facility (TAF) 
illustrates the kind of analysis needed to assess the government's 
response to the crisis. A Black Swan in the Money Market, supra note 
292. This article, however, examines only one small program and is now 
more than a year and a half old. If more researchers elected to perform 
such detailed analysis of the TARP, it would become much easier to 
evaluate the efficacy of the program.
---------------------------------------------------------------------------
    While there has been no active TARP program dedicated to 
the purchase of troubled assets,\369\ a major initiative of the 
Federal Reserve appears to have facilitated the reduction in 
mortgage assets held by large TARP-assisted institutions. 
During the period December 2008 through March 2010, the Federal 
Reserve purchased over $1.2 trillion face value of mortgage-
backed securities (MBS) \370\ guaranteed by Fannie Mae, Freddie 
Mac (the government sponsored enterprises, or GSEs), and Ginnie 
Mae, and purchased nearly $175 billion face value of federal 
agency debt securities.\371\ While the Federal Reserve used 
investment managers to obtain the best possible competitive 
bids on the specified amounts of mortgage-backed securities 
they were offering to buy, there can be no doubt that this 
massive intervention in the marketplace served to drive up 
prices and reduce yields on MBS--indeed that was their 
deliberate intention. Consequently, at least for the period 
during which the Federal Reserve was active in the MBS market, 
all holders of MBS--including TARP-assisted banks--received 
higher prices for these securities than would otherwise have 
been the case.
---------------------------------------------------------------------------
    \369\ When it was announced, the PPIP was slated to include a sub-
program dedicated to just such purchases. This program was, however, 
deferred indefinitely on June 3, 2009. 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).
    \370\ Federal Reserve Bank of New York, FAQs: MBS Purchase Program 
(online at www.ny.frb.org/markets/mbs_FAQ.HTML) (accessed Sept. 14, 
2010).
    \371\ Federal Reserve Bank of New York, FAQs: Purchasing Direct 
Obligations of Housing-Related GSEs (online at www.newyorkfed.org/
markets/gses_faq.html) (accessed Sept. 14, 2010). See also Federal 
Reserve Bank of New York, Permanent Open Market Operations: Historical 
Search (online at www.newyorkfed.org/markets/pomo/display/
index.cfm?fuseaction=showSearchForm).
---------------------------------------------------------------------------
    TARP-assisted institutions were also among the many 
beneficiaries of the federal government's rescue of the GSEs 
themselves. Given the large holding of GSE securities at the 
largest TARP-assisted institutions, the federal government's 
rescue of Fannie Mae and Freddie Mac effectively served to 
prevent major losses at these institutions. As a result of the 
federal government's intervention to place Fannie Mae and 
Freddie Mac in conservatorship in September 2008, their 
mortgage-backed securities and debt issues now enjoy the 
effective guarantee of the federal government.\372\
---------------------------------------------------------------------------
    \372\ Under the conservatorship, Treasury makes equity purchases in 
the GSEs as needed to prevent them from becoming insolvent. On December 
24, 2009, Treasury announced that it would allow the cap on the line of 
credit that had previously been established to support the GSEs, to 
``increase as necessary to accommodate any cumulative reduction in net 
worth over the next three years.'' Absent that support, the GSEs would 
have been unable to honor their MBS guarantees and therefore the value 
of these MBS securities would have plummeted. U.S. Department of the 
Treasury, Treasury Issues Update on Status of Support for Housing 
Programs (Dec. 24, 2009) (online at www.financialstability.gov/latest/
pr_1052010b.html) (hereinafter ``Treasury HERA Update'').
    The Congressional Budget Office has estimated that as of August 
2009, using the same kind of methodology that Congress required to be 
used to measure the cost of the TARP, the value of the federal 
government support for the GSEs stood at $389 billion. Unlike CBO, the 
Office of Management and Budget does not reflect the cost of the 
federal rescue of the GSEs on a fair value of the subsidy basis. 
Instead, it uses only traditional cash outlays to reflect budget costs. 
On that basis, the latest OMB estimate shows case disbursements of $188 
billion for Treasury support of the GSEs, although OMB also projects 
offsetting recoveries and dividend payments totaling $94 billion 
through 2010.
---------------------------------------------------------------------------
    By first making explicit the federal support for these GSE 
securities and subsequently buying up to $1.25 trillion of the 
same securities, Treasury and the Federal Reserve have 
effectively provided substantial economic benefit to the TARP-
assisted banks that goes well beyond the amounts reflected in 
the accounting for the TARP itself. They may also, in a sense, 
have partially implemented the original TARP plan, i.e., the 
purchase of illiquid assets at government-supported prices, 
relieving the selling entities of the burden of either carrying 
the assets on their books, or selling them at deep discounts.
    It is also impossible to determine the opportunity cost of 
using several hundred billion dollars for the TARP instead of 
using that money for some other purpose, or of never borrowing 
the money in the first place. Ultimately, the decision to 
implement the TARP was a decision in favor of short-term 
stability over the potential long-term harm of market 
distortions and other unknown effects. Moreover, there are many 
harms that the TARP was not able to address. Unemployment 
remains high, and job growth is sluggish. The housing sector 
remains weak. Small business lending is still slow, despite the 
large sums that have been invested in the banking sector. As 
discussed in the Panel's May 2010 report, most financial 
institutions saw their small business loan portfolios fall 
substantially between 2008 and 2009.\373\ Nor is lending 
generally strong. The latest Senior Loan Officer Loan Survey by 
the Federal Reserve Board of Governors reports no noticeable 
increase in lending over the last quarter, which may be due 
either to a lack of demand for such loans, or a lack of the 
banks' willingness or ability to lend.\374\ It is not clear 
that the largest financial institutions or the way they 
interact with the global economy have changed enough--or at 
all--in a way that would forestall another crisis. Nor have 
these banks or the government addressed how to value the 
illiquid assets, nicknamed early in the crisis ``troubled 
assets,'' whose weight on bank balance sheets was a primary 
concern when EESA was first enacted.\375\ While the acute 
crisis that wracked the financial sector in late 2008 appears 
to have passed, the economy continues to struggle.
---------------------------------------------------------------------------
    \373\ May 2010 Oversight Report, supra note 6, at 3.
    \374\ July 2010 Senior Loan Officer Opinion Survey, supra note 29. 
See also May 2010 Oversight Report, supra note 6, at 47-58.
    \375\ For additional analysis of these assets and the difficulties 
in valuing them, see the Panel's April 2009 report. April 2009 
Oversight Report, supra note 352.
---------------------------------------------------------------------------
    Other TARP-related programs pose similar challenges. For 
example, it is difficult to determine what the full impact 
would have been had GM, GMAC, and Chrysler been permitted to 
fail without any government support. Although these companies 
declared bankruptcy, the process through which they passed was 
far from the bankruptcy they likely would have faced without 
the government and the government's contribution to ease the 
process. The U.S. Treasury has committed $85 billion in 
assistance to the automotive industry through two TARP 
initiatives. The primary program, the Automotive Industry 
Financing Program (AIFP) provided $81.3 billion in assistance 
to GM, Chrysler, GMAC, and Chrysler Financial Company ($49.9, 
$12.8, $17.2, and $1.5 billion in assistance 
respectively).\376\ The second program, the Automotive Supplier 
Support Program (ASSP), provided up to $3.5 billion to two 
special purpose vehicles created to help support the automotive 
suppliers.\377\ The likelihood that these companies would have 
otherwise been able to secure such large sums in private 
financing in the middle of a global credit crisis appears 
unlikely. It is more likely that the companies would have 
proceeded to liquidation bankruptcies, a far more disruptive 
option than the pre-pack bankruptcy re-organizations through 
which the companies actually proceeded.
---------------------------------------------------------------------------
    \376\ U.S. Department of the Treasury, Troubled Asset Relief 
Program Transactions Report for the Period Ending August 12, 2010 (Aug. 
17, 2010) (online at www.financialstability.gov/docs/transaction-
reports/8-17-10%20Transactions% 20Report%20as%20of%208-13-10.pdf).
    \377\ This program was originally allocated $5 billion in 
assistance with $3.5 billion being directed to the GM Supplier 
Receivables LLC and $1.5 billion directed to the Chrysler Receivables 
LLC. On July 8, 2009, the aggregate amount available was reduced to 
$3.5 ($2.5 billion for GM Supplier Receivables LLC and $1 billion for 
Chrysler Receivables LLC). Id.
---------------------------------------------------------------------------
    GM and Chrysler, as of the end of 2007, employed almost 
325,000 people combined.\378\ The majority of the companies' 
manufacturing operations are in Michigan, a state that suffers 
the second-highest unemployment rate in the country.\379\ At 
the time that the Bush Administration announced its plan to 
assist the automotive industry, it estimated that 1.1 million 
jobs would have been lost absent the government's support.\380\ 
It is not enough to say simply that a certain number of jobs 
may have been lost; these jobs would have been tightly 
concentrated in a region that was already struggling when the 
crisis began.\381\ It is impossible to determine what ripple 
effects might have occurred. Local businesses may have lost 
large numbers of customers as unemployed workers pulled back on 
spending. The housing market may have suffered as borrowers 
defaulted on mortgages, pushing down the value of homes 
throughout the region. Beyond the effect on the upper Midwest, 
the complete failure of GM and Chrysler would likely have had 
wide-ranging effects on parts suppliers, dealerships, and other 
related businesses. According to a recent report by the Special 
Inspector General for TARP, Chrysler closed 789 dealerships by 
June 2009 and GM has plans to close 1,454 by October 2010.\382\ 
While it is impossible to determine exactly how our current 
economy may have been different had the government failed to 
support GM, Chrysler, or GMAC, there are certain harmful 
outcomes that have not occurred.\383\
---------------------------------------------------------------------------
    \378\ General Motors Corp., Form 10-Q for the Quarterly Period 
Ended June 30, 2008, at 92 (July 31, 2008) (online at sec.gov/Archives/
edgar/data/40730/000095013708010396/k34157e10vq.htm). At the end of 
2007, Fortune magazine listed Chrysler as the fourth largest private 
company in the U.S. with $49 billion in annual revenue and 72,000 
employees. Fortune, The 35 Largest U.S. Private Companies (online at 
money.cnn.com/galleries/2008/fortune/0805/gallery.private_ 
companies.fortune/4.html) (accessed Aug. 3, 2010).
    \379\ General Motors Co., U.S. Facilities List (online at 
www.gmdynamic.com/company/gmability/environment/plants/facility_db/
facilities/list) (accessed Sept. 14, 2010). At the Panel's Detroit 
field hearing held on July 27, 2009, Representative Carolyn C. 
Kilpatrick (D-MI) noted: ``Here in Michigan, we are the epicenter of 
the manufacturing that is kind of eroding itself in America.'' 
Congressional Oversight Panel, Testimony of Rep. Carolyn C. Kilpatrick, 
COP Field Hearing on the Auto Industry, at 7 (July 27, 2009) (online at 
cop.senate.gov/documents/transcript-072709-detroithearing.pdf). Bureau 
of Labor Statistics, Unemployment Rates for States Monthly Rankings, 
Seasonally Adjusted July 2010 (online at www.bls.gov/web/laus/
laumstrk.htm) (accessed Sept. 10, 2010). See also Howard Wial, How a 
Metro Nation Would Feel the Loss of the Detroit Three Automakers, 
Brookings Institution Metropolitan Policy Program Paper (Dec. 12, 2008) 
(online at www.brookings.edu//media/Files/rc/papers/2008/
1212_automakers_wial/automakers_wial.pdf) (showing the concentration of 
automotive-related jobs in the Great Lakes region).
    \380\ White House Office of the Press Secretary, 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).
    \381\ President Obama noted the wide-ranging effect of the 
automotive industry's struggles during remarks in early 2009, while 
also highlighting the historic rise in unemployment in the Midwest. The 
White House, Remarks by the President on the American Automotive 
Industry (Mar. 30, 2009) (online at www.whitehouse.gov/
the_press_office/Remarks-by-the-President-on-the-American-Automotive-
Industry-3/30/09/).
    \382\ Office of the Special Inspector General for the Troubled 
Asset Relief Program, Factors Affecting the Decisions of General Motors 
and Chrysler to Reduce Their Dealership Networks, at 2 (July 19, 2010) 
(online at www.sigtarp.gov/reports/audit/2010/Factors%20 
Affecting%20the%20Decisions%20of%20General%20Motors%20and%20Chrysler%20t
o %20Reduce%20Their%20Dealership%20Networks%207_19_2010.pdf).
    \383\ For a thorough analysis of the government support of the 
automotive industry and its effects, see the Panel's September 2009 
report. September 2009 Oversight Report, supra note 6.
---------------------------------------------------------------------------
    Of course, the government's support for these companies 
raises similar issues to those raised by the TARP as a whole. 
Has the government's intervention skewed the market, permitting 
faltering companies to limp along instead of clearing the way 
for more robust enterprises? Are companies' incentives 
different now that there is precedent for the government 
stepping in to rescue large corporations and, even if they 
ended up in bankruptcy, streamlining some of the processes? 
Will these companies ultimately recover, or have the negative 
outcomes simply been deferred? Did the government signal to the 
markets that in addition to banks, certain industrial companies 
are too big to fail as well?\384\ Moreover, the assistance to 
the automotive sector raises certain questions unique to those 
programs. The government's approach to this industry differed 
from its approach to assisting the financial sector. While the 
capital injections provided to financial institutions were 
offered largely without restrictions attached, the financing to 
the automotive industry was conditioned on the companies' 
provision of certain information to the government, and the 
government has had, overall, a greater role in the rebuilding 
of these companies. These differences have raised questions 
about whether the government inappropriately blurred the line 
between its role as a policy-maker and its role as an 
investor.\385\
---------------------------------------------------------------------------
    \384\ The Panel's September 2009 report also discussed the ongoing 
debate about whether the bankruptcy proceedings properly followed the 
U.S. Bankruptcy Code, or whether certain rules were bent to accommodate 
the swift implementation of a very particular bankruptcy plan for each 
company, imperiling the fair adjudication of these and future 
bankruptcies, especially those in which the government has a hand. 
September 2009 Oversight Report, supra note 6.
    \385\ See September 2009 Oversight Report, supra note 6, at 40-53.
---------------------------------------------------------------------------
    The economists consulted by the Panel were looking at TARP 
as a whole, and not merely TARP since its extension. But in 
light of their observations, the specific question of what 
effect extending the TARP from December 31, 2009 to October 3, 
2010 has had may be easier to evaluate if only because, as 
discussed above, so little was actually done with that 
extension. In his letter to Congressional leadership, while 
stating that the administration's policies were working, 
Secretary Geithner also listed the significant challenges 
facing the economy. As he stated, his decision to extend TARP 
authority was, among other things, ``necessary to assist 
American families and stabilize financial markets because it 
will, among other things, enable us to continue to implement 
programs that address housing markets and the needs of small 
businesses. . . .'' He listed the challenges facing the economy 
as problems of unemployment, increasing foreclosures, 
contraction in bank lending leading to lack of access to credit 
for small businesses that had little access to alternate 
sources of credit, commercial real estate losses weighing upon 
bank balance sheets, and uncertainty about future economic 
conditions.\386\ And as noted above in Section E.1, the 
problems that Treasury identified as requiring further 
assistance were three significant areas--unemployment, 
foreclosures, and struggling small businesses--that continue to 
struggle.
---------------------------------------------------------------------------
    \386\ Letter from Secretary Geithner to Hill Leadership, supra note 
48.
---------------------------------------------------------------------------
    Despite Treasury's stated justification for extending the 
TARP--i.e., a need to improve the unemployment and foreclosure 
rates, and provide better support for small businesses, as 
discussed in Section D, supra--Treasury did not use the 
extension to add funding beyond the amounts already allocated. 
To the extent that Treasury has articulated goals for the 
mortgage foreclosure programs, these goals have not been 
met;\387\ small business lending assistance is being addressed 
outside the TARP; and the TALF expired according to its terms. 
Nor has there been the kind of marked improvement in any of 
these sectors that might obviate attempts to ameliorate their 
condition.
---------------------------------------------------------------------------
    \387\ See the Panel's April 2010 report for a full discussion of 
the disconnect between Treasury's stated goals for the programs and 
data documenting actual results. April 2010 Oversight Report, supra 
note 6, at 62-65.
---------------------------------------------------------------------------
    In his letter, however, Secretary Geithner also cited the 
possibility of ``near-term shocks to [the financial system] 
that could undermine the economic recovery we have seen to 
date.'' \388\ As Secretary Geithner stated, the TARP's 
extension provided Treasury with the capacity in responding to 
any ``near-term shocks'' to the economy. While describing the 
degree of stability that had returned to the markets by the 
fall of 2009, Secretary Geithner noted that there was still 
uncertainty regarding its permanence, and further stated that 
many of the programs created during the crisis were shortly to 
end. Secretary Geithner therefore emphasized the value of 
maintaining the capacity to intervene if financial markets 
staggered again. Such a backstop to the economy may, of course, 
have simply extended the sense that Treasury was providing an 
implicit guarantee to the financial sector, with its attendant 
moral hazard and other negative effects. But in Treasury's 
view, maintaining the ability to intervene would bolster 
confidence, with positive effects on financial stability, and 
thus, despite relative inaction in particular programs during 
2010, Treasury believed the extension was important for market 
stability.
---------------------------------------------------------------------------
    \388\ Letter from Secretary Geithner to Hill Leadership, supra note 
48.
---------------------------------------------------------------------------

                             F. Conclusion

    In December 2009, as the first full year of the TARP's 
existence drew to a close, the Panel issued a report that 
attempted to gauge the program's overall effectiveness as of 
that date. The Panel wrote:

          There is broad consensus that the TARP was an 
        important part of a broader government strategy that 
        stabilized the U.S. financial system by renewing the 
        flow of credit and averting a more acute crisis. 
        Although the government's response to the crisis was at 
        first haphazard and uncertain, it eventually proved 
        decisive enough to stop the panic and restore market 
        confidence. Despite significant improvement in the 
        financial markets, however, the broader economy is only 
        beginning to recover from a deep recession, and the 
        TARP's impact on the underlying weaknesses in the 
        financial system that led to last fall's crisis is less 
        clear.\389\
---------------------------------------------------------------------------
    \389\ December 2009 Oversight Report, supra note 6, at 4.

Events since last December have largely underscored the Panel's 
analysis, yet the last 10 months have also provided new data 
and allowed time for new analysis. The Panel can now expand 
upon its earlier conclusions. These inquiries are critical to 
evaluating the TARP, not only in order to gain perspective on 
the events of the last two years but also to provide guidance 
to policymakers in the future.
    Any evaluation must recognize its own limitations. This 
report is necessarily an interim evaluation, because the 
effects of the TARP and of the financial crisis are still 
unfolding. Experts and observers can use theoretical models and 
data available to provide estimates and expectations, but a 
complete perspective comes only with time and significant, 
objective data, neither of which is fully available at this 
date. Further, the specific effect of the TARP will always be 
difficult to isolate. The TARP was but one of an unprecedented 
number of government responses, which included significant 
liquidity programs by the Federal Reserve, increased deposit 
insurance by the FDIC, and the government absorption of Fannie 
Mae and Freddie Mac.
    Both now and in the future, however, any evaluation must 
begin with an understanding of what the TARP was intended to 
do. Congress authorized Treasury to use the TARP in a manner 
that ``protects home values, college funds, retirement 
accounts, and life savings; preserves homeownership and 
promotes jobs and economic growth; [and] maximizes overall 
returns to the taxpayers of the United States.'' \390\ But 
weaknesses persist. Since EESA was signed into law in October 
2008, home values nationwide have fallen. More than seven 
million homeowners have received foreclosure notices. Many 
Americans' most significant investments for college and 
retirement have yet to recover their value. At the peak of the 
crisis, in its most significant acts and consistent with its 
mandate in EESA, the TARP provided critical support at a time 
in which confidence in the financial system was in freefall. 
The acute crisis was quelled. But as the Panel has discussed in 
the past, and as the continued economic weakness shows, the 
TARP's effectiveness at pursuing its broader statutory goals 
was far more limited.
---------------------------------------------------------------------------
    \390\ 12 U.S.C. Sec. 5201(2).
---------------------------------------------------------------------------

1. The TARP's Extension Served Primarily To Extend the Implicit 
        Guarantee of the Financial System

    When Secretary Geithner exercised his statutory authority 
to extend the TARP until October 3, 2010, he laid out three 
areas for new commitments of TARP resources: (1) mortgage 
foreclosure relief; (2) providing capital to small and 
community banks; and (3) increasing support for securitization 
markets through TALF. Despite this stated justification, and 
despite the creation of additional programs--albeit using 
existing funds--designed to address the foreclosure crisis, 
Treasury did not add any new funding to programs intended to 
address these economic problems during the period of the 
extension.
    The extension did, however, serve another purpose, which 
Secretary Geithner referred to as the capacity to respond to an 
immediate and substantial threat to the economy.\391\ In 
Treasury's view, the extension provided Treasury with the 
continued authority to intervene swiftly if another 
systemically significant financial institution approached 
collapse or if the financial markets showed signs of another 
meltdown. Citing continued market instability and the need to 
preserve confidence, Treasury also extended its authority to 
preserve its ability to deal with a new crisis.\392\ Treasury 
therefore used the TARP's extension more to extend the 
government's implicit guarantee of the financial system than to 
address the specific economic problems that the Secretary cited 
as justification for the extension.
---------------------------------------------------------------------------
    \391\ Letter from Secretary Geithner to Hill Leadership, supra note 
48.
    \392\ Letter from Secretary Geithner to Hill Leadership, supra note 
48.
---------------------------------------------------------------------------

2. TARP ``Stigma'' Has Grown and May Prove an Obstacle to Future 
        Stability Efforts

    The TARP has inspired many varied and evolving responses 
among the markets and the public. At the time of the initial 
Capital Purchase Plan investments in the large banks, market 
participants reacted with relief. The LIBOR-OIS and TED spreads 
fell dramatically shortly after those investments.
    But the reaction of the general public has been far more 
skeptical. Now the TARP is widely perceived as bailing out Wall 
Street banks and domestic auto manufacturers while doing little 
for the millions of Americans who are unemployed, underwater on 
their mortgages, or otherwise struggling to make ends meet. 
Treasury acknowledges that, as a result of this perception, the 
TARP and its programs are now burdened by a public ``stigma.''
    Some of this stigma has arisen due to valid concerns with 
Treasury's implementation of TARP programs and with its 
transparency and communications. For example, Treasury 
initially insisted that only healthy banks would be eligible 
for capital infusions under the CPP. When it became clear that 
some of these banks were in fact on the brink of failure, all 
participating banks--even those in comparatively strong 
condition--became tainted in the public eye. Treasury's initial 
statements about the health of the financial system diminished 
its credibility later in the crisis and have contributed to the 
fragility of the financial system. Questions regarding the 
health of financial institutions linger, even two years after 
the initial crisis.
    Stigma may also arise due to deep public frustration that, 
whatever the TARP's successes, it has not rescued many 
Americans from suffering enormous economic pain. Treasury 
claims that the pain would have been far worse if the TARP had 
never existed, but this hypothetical scenario is difficult to 
evaluate--in part due to regrettable omissions in data 
collection on Treasury's part. For example, since the Panel's 
second report in January of 2009, it has called for Treasury to 
make banks accountable for their use of the funds they 
received. It has also urged Treasury to be transparent with the 
public, in particular with respect to the health of the banks 
receiving the funds. The lack of this data makes it more 
difficult to measure the TARP's success and thus contributes to 
the TARP's stigmatization.
    Another factor contributing to the TARP's stigma is that 
the program created significant moral hazard. The TARP's terms 
were, by comparison to prior government interventions such as 
through the RTC and the RFC, quite generous; financial 
institutions were able to receive TARP funds with relatively 
few costs to their management, shareholders, or creditors. In 
light of this experience, financial institutions may rationally 
decide to take inflated risks in the future out of a conviction 
that, if their gamble fails, taxpayers will bear the price. To 
the extent that this implicit guarantee continues to distort 
markets, it is a real and ongoing cost of the TARP.
    It is possible that rigorous economic evaluations of the 
TARP, based on new data and the additional perspective that 
comes with time, will reverse or soften the stigma currently 
associated with the program. It is equally possible, however, 
that future studies will instead support and elaborate upon the 
negative assessments of the program. Whatever the result, 
policy-makers can only benefit from detailed data-based 
analysis.
    The TARP program is today so widely unpopular that Treasury 
has expressed concern that banks avoided participating in the 
CPP program due to stigma, and the legislation proposing the 
Small Business Lending Fund, a program outside the TARP, 
specifically provided an assurance that it was not a TARP 
program. Popular anger against taxpayer dollars going to the 
largest banks, especially when the economy continues to 
struggle, remains high. The program's unpopularity may mean 
that unless it can be convincingly demonstrated that the TARP 
was effective, the government will not authorize similar policy 
responses in the future. Thus, the greatest consequence of the 
TARP may be that the government has lost some of its ability to 
respond to financial crises in the future.

                                             ANNEX I: AUTOMOTIVE INDUSTRY FINANCING PROGRAM FUNDS COMMITTED
                                                                [Dollars in millions] xxi
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Exchange/
                                 Original        Original       Exchange/   Restructure      Exchange/         Amount                         Amount
  Original Investment Date(s)   Investment   Investment Type   Restructure   Investment     Restructure        Repaid         Losses      Outstanding as
                                  Amount                         Date(s)       Amount     Investment Type                                    of 9/8/10
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     General Motors
--------------------------------------------------------------------------------------------------------------------------------------------------------
12/29/08-6/3/09                    $50,745  Debt obligation     5/29/2009         $884   Exchange for                                            xxii $0
                                             with additional                              equity interest
                                             note.                                        in GMAC.
                                                                7/10/2009       $7,072   Debt obligation..  xxiii ($7,07                              --
                                                                                                                      2)
                                                                7/10/2009       $2,100   Preferred stock..                                        $2,100
                                                                7/10/2009         $986   Debt left at Old                                           $986
                                                                                          GM.
                                                                7/10/2009        60.8%   Common stock.....                                         60.8%
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Chrysler
--------------------------------------------------------------------------------------------------------------------------------------------------------
1/2/09                              $4,000  Debt obligation     6/10/2009   xxiv $3,500  Debt obligation    xxv ($1,900)   xxvi ($1,600)              $0
                                             with additional                              with additional
                                             note.                                        note.
5/1/09                              $1,888                       5/1/2009       $1,888   Debt obligation     xxvii ($31)                          $1,858
                                                                                          with additional
                                                                                          note.
5/27/09                               $280                      4/29/2009         $280   Debt obligation          ($280)                              $0
                                                                                          with additional
                                                                                          note.
4/29/09                             $6,642                      6/10/2009   xxviii $7,1  Debt obligation                                          $7,142
                                                                                    42    with additional
                                                                                          note.
                                                                6/10/2009         9.9%   Common equity....
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        GMAC/Ally
--------------------------------------------------------------------------------------------------------------------------------------------------------
12/29/08                            $5,000  Preferred stock    12/30/2009   xxix $5,250  Convertible                                              $5,250
                                             with exercised                               Preferred stock.
                                             warrants.
5/21/09.......................      $7,500  Convertible        12/30/2009   xxx $4,875   Convertible                                              $4,875
                                             Preferred stock                     56.3%    Preferred stock.                                    xxxi 56.3%
                                             with exercised                              Common equity....
                                             warrants.
12/30/09                            $2,540  Trust Preferred            --           --   --...............                                        $2,540
                                             securities with
                                             exercised
                                             warrants.
12/30/09......................      $1,250  Convertible                --           --   --...............                                        $1,250
                                             Preferred stock
                                             with exercised
                                             warrants.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Chrysler Financial Co.
--------------------------------------------------------------------------------------------------------------------------------------------------------
1/16/09                             $1,500  Debt obligation            --           --   --...............        $1,500                             $0
                                             with additional
                                             note.
--------------------------------------------------------------------------------------------------------------------------------------------------------
xxi For a more complete tracking of the development of the TARP's investment in the automotive industry, please see U.S. Department of the Treasury,
  Troubled Asset Relief Program Transactions Report for the Period Ending September 8, 2010, at 18-19 (Sept. 10, 2010) (online at
  www.financialstability.gov/docs/transaction-reports/9-10-10%20Transactions%20Report%20as%20of%209-8-10.pdf).
xxii For a more complete tracking of the development of the TARP's investment in the automotive industry, please see U.S. Department of the Treasury,
  Troubled Asset Relief Program Transactions Report for the Period Ending September 8, 2010, at 18-19 (Sept. 10, 2010) (online at
  www.financialstability.gov/docs/transaction-reports/9-10-10%20Transactions%20Report%20as%20of%209-8-10.pdf).
xxiii These repayments were made in installments from July 10, 2009 to April 20, 2010. U.S. Department of the Treasury, Troubled Asset Relief Program
  Transactions Report for the Period Ending September 8, 2010, at 18-19 (Sept. 10, 2010) (online at www.financialstability.gov/docs/transaction-reports/
  9-10-10%20Transactions%20Report%20as%20of%209-8-10.pdf).
xxiv On June 10, 2009, $500 million of debt was transferred to New Chrysler. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions
  Report for the Period Ending September 8, 2010, at 18-19 (Sept. 10, 2010) (online at www.financialstability.gov/docs/transaction-reports-9-10-
  10%20Transactions%20Report%20as%20of%209-8-10.pdf).
xxv Pursuant to a termination agreement dated May 14, 2010, Treasury agreed to accept a settlement payment of $1.9 billion as satisfaction in full of
  the $3.5 billion loan (including additional notes and accrued and unpaid interest) of Chrysler Holding, and upon receipt of such payment to terminate
  all such obligations. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September 8, 2010, at
  18-19 (Sept. 10, 2010) (online at www.financialstability.gov/docs/transaction-reports/9-10-10%20Transactions%20Report%20as%20of%209-8-10.pdf).
xxvi Pursuant to a termination agreement dated May 14, 2010, Treasury agreed to accept a settlement payment of $1.9 billion as satisfaction in full of
  the $3.5 billion loan (including additional notes and accrued and unpaid interest) of Chrysler Holding, and upon receipt of such payment to terminate
  all such obligations. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September 8, 2010, at
  18-19 (Sept. 10, 2010) (online at www.financialstability.gov/docs/transaction-reports/9-10-10%20Transactions%20Report%20as%20of%209-8-10.pdf).
xxvii As part of the Chrysler bankruptcy proceedings, all assets of Old Chrysler were transferred to a liquidation trust. Treasury retained the right to
  recover the proceeds from the liquidation from time to time of the specified collateral security attached to such loan. As of September 8, $31 million
  in funds have been recovered from the sale of these assets. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the
  Period Ending September 8, 2010, at 18-19 (Sept. 10, 2010) (online at www.financialstability.gov/docs/transaction-reports/9-10-
  10%20Transactions%20Report%20as%20of%209-8-10.pdf).
xxviii This $500 million increase in the amount of principal outstanding is due to New Chrysler's assumption of $500 million in loans originally given
  to Chrysler Holding. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September 8, 2010, at 18-
  19 (Sept. 10, 2010) (online at www.financialstability.gov/docs/transaction-reports/9-10-10%20Transactions%20Report%20as%20of%209-8-10.pdf).
xxix This figure reflects the exercised warrants associated with the restructuring of Treasury's investment in GMAC. U.S. Department of the Treasury,
  Troubled Asset Relief Program Transactions Report for the Period Ending September 8, 2010, at 18-19 (Sept. 10, 2010) (online at
  www.financialstability.gov/docs/transaction-reports/9-10-10%20Transactions%20Report%20as%20of%209-8-10.pdf).
xxx This figure reflects the exercised warrants associated with the restructuring of Treasury's investment in GMAC. U.S. Department of the Treasury,
  Troubled Asset Relief Program Transactions Report for the Period Ending September 8, 2010, at 18-19 (Sept. 10, 2010) (online at
  www.financialstability.gov/docs/transaction-reports/9-10-10%20Transactions%20Report%20as%20of%209-8-10.pdf).
xxxi Prior to December 30, 2009, Treasury owned 35.4 percent of GMAC common equity as part of its exchange of an $884 million loan to Old GM. Following
  the conversion of $3 billion of convertible preferred stock for common equity on December 30, 2009, Treasury owned 56.3 percent of GMAC's common
  equity. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September 8, 2010, at 18-19 (Sept.
  10, 2010) (online at www.financialstability.gov/docs/transaction-reports/9-10-10%20Transactions%20Report%20as%20of%209-8-10.pdf).

                  ANNEX II: VIEWS OF ACADEMIC EXPERTS


 A. Alan Blinder, Gordon S. Rentschler Memorial Professor of Economics 
               and Public Affairs at Princeton University


1. How would you measure the effectiveness of the TARP? What are the 
        appropriate measures to assess its effectiveness?

    TARP is, of course, one of several measures taken to end 
the financial panic. Viewed as a whole, they clearly worked 
well; but it's hard to parse TARP's specific contribution. That 
said, risk spreads rose sharply before TARP passed and then 
fell sharply when it did, which is highly suggestive that TARP 
spread a security blanket across the financial markets. Those 
falling risk spreads--and, of course, the rising bank capital--
may be the best metrics for appraising TARP's effectiveness. 
Both make TARP look good.
    That said, the part of TARP that was supposed to buy toxic 
assets never really happened to any great extent; and the part 
that was designed to stem the wave of foreclosures was not very 
effective (and, I would say, rather half-hearted).
    Finally, the wisdom of the GM bailout will probably be 
debated forever. (But it appears to have worked well.)

2. Please use these or other measures to evaluate the relative 
        effectiveness of (1) TARP's efforts to stabilize financial 
        institutions, such as AIG and the large stress-tested banks; 
        (2) TARP's efforts to restore confidence to broad financial 
        markets by restarting the securitization markets and buying 
        troubled assets; and (3) TARP's efforts to address the 
        foreclosure crisis. What programs or initiatives were the most 
        effective and successful parts of the TARP? What programs or 
        initiatives were TARP's biggest failures?

    I have answered this in part already. Regarding stabilizing 
institutions like AIG, one has to count TARP as a huge success. 
It and other initiatives (like SCAP) successfully threw the 
above-mentioned security blanket around every large entity. 
This is not something you'd want to do under normal 
circumstances, but was appropriate at the time. And the net 
cost to the taxpayers for this part of the program will, in the 
end, be very small. In that sense, TARP looks like a bargain.
    As to restarting securitizations, I don't think TARP was 
close to enough--or, as noted, even tried hard. The Fed's MBS 
purchase program did much more. (Outside of Fannie/Freddie 
mortgages, securitization has not snapped back much.)

3. Were there alternative uses of the TARP funds or specific changes in 
        actual TARP programs that might have been superior either in 
        terms of protecting the government's interest as an investor or 
        in terms of addressing the economic and financial crisis, or 
        both? If so, what would they have been and why do you believe 
        those uses might have been superior to some of the programs 
        Treasury designed?

    I was in the small minority who thought TARP should have 
been used to buy toxic assets, though not all $700 billion of 
it. I still think that. While I understand the arguments for 
recapitalizing banks, I wish it had been done ``in addition 
to'' buying toxic assets, not ``instead of.'' I never believed 
the argument that was made at the time that each $1 of bank 
capital would (via normal leverage) lead to $10 in lending.
    Regarding the CPP, I thought then and think now that the 
Paulson Treasury made a number of terrible tactical decisions, 
such as: forcing capital on banks that didn't want it; giving 
better terms than Warren Buffett got from Goldman; not 
insisting on quid pro quos such as not paying dividends and 
increasing lending. Where public support is offered and taken, 
there should be public-purpose strings attached. (That is one 
reason why I was against forcing capital on unwilling banks.)
    To repeat, I also think it was a shame that more was not 
done to mitigate foreclosures.

4. Could TARP have been implemented in a way that would have reduced 
        its negative impact, particularly with regard to institutions 
        that are now ``too big to fail''? Or are these negative effects 
        intrinsic to any financial rescue program?

    To start, banning dividends and insisting on a lending quid 
pro quo in the CPP would have made it more effective and given 
it greater political legitimacy.
    But I interpret the question as asking mainly about moral 
hazard costs. I don't think they were avoidable under the 
extreme circumstances of the fall of 2008; laissez faire would 
have been catastrophic, as Lehman illustrated. But the fact 
that the government stepped in to save SIFIs in 2008 certainly 
feeds the presumption that it will do so again, if necessary. 
That's the moral hazard cost, but I think it was unavoidable. 
It remains to be seen how effective the resolution procedures 
in Dodd-Frank will be in dispelling the belief in TBTF.

5. How significant was TARP relative to the efforts of the Federal 
        Reserve and the Treasury Department that did not rely on EESA? 
        Was TARP necessary or were the pre-EESA powers of the Federal 
        Reserve, the Treasury Department and the bank regulators 
        adequate for managing the crisis?

    As I said at the outset, this parsing is difficult. One 
example: TARP allowed the Treasury to step into the Fed's shoes 
and take over some of its risk exposures. I think that was very 
appropriate, but it's another ``interaction term'' that makes 
it hard to answer the question. Another example: The monies 
left in TARP were instrumental in the success of the SCAP. One 
thing that made the whole stress-test exercise highly credible 
was the government's pledge to provide any capital (in return 
for partial ownership) whose need was identified by the SCAP 
but which the banks could not raise on their own. Without EESA, 
neither of these things (and others) would have been possible.

6. What is likely to be the legacy of the TARP in terms of the ability 
        of government officials and policymakers to respond to 
        financial crises in the future?

    I find this hard to answer. In the near term, the extreme 
unpopularity of TARP will make it hard to do anything remotely 
like it again, should the need arise. However, if what happened 
in 2008-09 was really a ``100-year-flood,'' it will be a long 
time (though probably not 100 years!) before we need anything 
like TARP again.
    Also, as noted above, the moral hazard/bailout precedent 
has been set, and it will not go away easily. The Dodd-Frank 
cure will have to be tried (successfully) before it is 
believed.

B. Simon Johnson, Ronald A. Kurtz (1954) Professor of Entrepreneurship 
                   at MIT Sloan School of Management


1. How would you measure the effectiveness of the TARP? What are the 
        appropriate measures to assess its effectiveness?

    In the immediate policy response to any major financial 
crisis--involving a generalized loss of confidence in major 
lending institutions--there are three main goals:
          a. To stabilize the core banking system,
          b. To prevent the overall level of spending from 
        collapsing,
          c. To lay the groundwork for a sustainable recovery.
    International Monetary Fund programs are routinely designed 
with these criteria in mind and are evaluated (internally and 
externally) on the basis of: the depth of the recession and 
speed of the recovery, relative to the initial shock; the side-
effects of the macroeconomic policy response, including 
inflation; and whether the underlying problems that created the 
vulnerability to panic are addressed over a 12-24 month 
horizon.
    This same analytical framework can be applied to the United 
States since the inception of the Troubled Asset Relief Program 
(TARP). While there were unique features to the U.S. experience 
(as is the case in all countries), the broad pattern of 
financial and economic collapse, followed by a struggle to 
recover, is quite familiar.

2. Please use these or other measures to evaluate the relative 
        effectiveness of (1) TARP's efforts to stabilize financial 
        institutions, such as AIG and the large stress-tested banks; 
        (2) TARP's efforts to restore confidence to broad financial 
        markets by restarting the securitization markets and buying 
        troubled assets; and (3) TARP's efforts to address the 
        foreclosure crisis. What programs or initiatives were the most 
        effective and successful parts of the TARP? What programs or 
        initiatives were TARP's biggest failures?

    The overall U.S. policy response did well in terms of 
preventing spending from collapsing. Monetary policy responded 
quickly and appropriately. After some initial and unfortunate 
hesitation on the fiscal front, the stimulus of early 2009 
helped to keep domestic spending relatively buoyant, despite 
the contraction in credit and large increase in unemployment. 
This was in the face of a massive global financial shock--
arguably the largest the world has ever seen--and the 
consequences, in terms of persistently high unemployment, 
remain severe. But it could have been much worse.
    In terms of more detailed approaches within the TARP 
framework, these can be divided into three phases.
    Phase I. In September 2008, Henry Paulson asked for $700 
billion to buy toxic assets from banks, as well as 
unconditional authority and freedom from judicial review. Many 
economists and commentators suspected that the purpose was to 
overpay for those assets and thereby take the problem off the 
banks' hands--indeed, that is the only way that buying toxic 
assets would have helped anything. Perhaps because there was no 
way to make such a blatant subsidy politically acceptable, that 
plan was shelved.
    After the ``Paulson Plan'' was passed on October 3, 2008, 
it was quickly overtaken by events. First the UK announced a 
bank recapitalization program; then, on October 13, it was 
joined by every major European country, most of which also 
announced loan guarantees for their banks. On October 14, the 
U.S. followed suit with a bank recapitalization program, 
unlimited deposit insurance (for non-interest-bearing 
accounts), and guarantees of new senior debt. Only then was 
enough financial force applied for the crisis in the credit 
markets to begin to ease, with LIBOR finally falling and 
Treasury yields rising, although they remained a long way from 
historical levels.
    The money used to recapitalize (buy shares in) banks was 
provided on terms that were excessively favorable to the banks. 
For example, Warren Buffett put new capital into Goldman Sachs 
just weeks before the Treasury Department invested in nine 
major banks. Buffett got a higher interest rate on his 
investment and a much better deal on his options to buy Goldman 
shares in the future.
    Phase II. As the crisis deepened and financial institutions 
needed more assistance, the government got more and more 
creative in figuring out ways to provide subsidies that were 
too complex for the general public to understand. The first AIG 
bailout, which was on relatively good terms for the taxpayer, 
was renegotiated to make it even more friendly to AIG. The 
second Citigroup and Bank of America bailouts included complex 
asset guarantees that essentially provided nontransparent 
insurance to those banks at well below-market rates. The third 
Citigroup bailout, in late February 2009, converted preferred 
stock to common stock at a conversion price that was 
significantly higher than the market price--a subsidy that 
probably even most Wall Street Journal readers would miss on 
first reading. And the convertible preferred shares provided 
under the new Financial Stability Plan gave the conversion 
option to the bank in question, not the government--basically 
giving the bank a valuable option for free.
    Note that this strategy is not internally illogical: if you 
believe that asset prices will recover by themselves (or by 
providing sufficient liquidity), then it makes sense to 
continue propping up weak banks with injections of capital. 
However, our main concern is that it underestimates the 
magnitude of the problem and could lead to years of partial 
measures, none of which creates a healthy banking system.
    Phase III. The main components of the Obama 
administration's bank rescue plan included:
     Stress tests, conducted by regulators, to 
determine whether major banks could withstand a severe 
recession, followed by recapitalization (if necessary) in the 
form of convertible preferred shares \393\
---------------------------------------------------------------------------
    \393\ James Kwak, No, Wait! You Got It Backwards! (Feb. 26, 2009) 
(online at baselinescenario.com/2009/02/26/convertible-preferred-stock-
capital-assistance-program).
---------------------------------------------------------------------------
     The Public-Private Investment Program (PPIP) to 
stimulate purchases of toxic assets, thereby removing them from 
bank balance sheets
    The administration as much as said that the major banks 
will all pass the stress tests, making it appear that the 
results were foreordained. Essentially, this was used to signal 
that the government stood behind the 19 banks in the stress 
test and would not allow any of them to fail. Effectively, the 
government signaled which banks were Too Big To Fail.
    The PPIP did not meet its stated objective of starting a 
market for toxic assets (both whole loans and mortgage-backed 
securities) and thereby moving them off of bank balance sheets. 
In essence, the PPIP attempted to achieve this goal by 
subsidizing private sector buyers (via non-recourse loans or 
loan guarantees) to increase their bid prices for toxic assets. 
Besides the subsidy from the public to the private sector that 
this involves, the plan as outlined did not raise buyers' bid 
prices high enough to induce banks to sell their assets. From 
the banks' perspective, selling assets at prices below their 
current book values would force them to take write-downs, 
hurting profitability and reducing their capital cushion.
    As long as the government's strategy is to prevent banks 
from failing at all costs, banks have an incentive to sit the 
PPIP or similar program out (or even participate as buyers) and 
wait for a more generous plan. Again, the key question is how 
the loss currently built into banks' toxic assets will be 
distributed between bank shareholders, bank creditors, and 
taxpayers. By leaving banks in their current form and relying 
on market-type incentives to encourage them to clean themselves 
up, the administration gave the banks an effective veto over 
financial sector policy.
    Ultimately, the stalemate in the financial sector is the 
product of political constraints. On the one hand, the 
administration has consistently foresworn dictating a solution 
to the financial sector, either out of deep-rooted antipathy to 
nationalization, or out of fear of being accused of 
nationalization. On the other hand, bailout fatigue among the 
public and in Congress, aggravated by the clumsy handling of 
the AIG bonus scandal,\394\ has made it impossible for the 
administration to propose a solution that is too generous to 
banks, or that requires new money from Congress.
---------------------------------------------------------------------------
    \394\ James Kwak, The Tipping Point? (Mar. 18, 2009) (online at 
baselinescenario.com/2009/03/18/the-tipping-point).
---------------------------------------------------------------------------

3. Were there alternative uses of the TARP funds or specific changes in 
        actual TARP programs that might have been superior either in 
        terms of protecting the government's interest as an investor or 
        in terms of addressing the economic and financial crisis, or 
        both? If so, what would they have been and why do you believe 
        those uses might have been superior to some of the programs 
        Treasury designed?

    Best practice, vis-a-vis saving the banking system in the 
face of a generalized panic, involves three closely connected 
pieces:
    a. Preventing banks from collapsing in an uncontrolled 
manner. This often involves at least temporary blanket 
guarantees for bank liabilities, backed by credible fiscal 
resources. The government's balance sheet stands behind the 
financial system. In the canonical emerging market crises of 
the 1990s--Korea, Indonesia, and Thailand--where the panic was 
centered on the private sector and its financing arrangements, 
this commitment of government resources was necessary (but not 
sufficient) to stop the panic and begin a recovery.
    b. Taking over and implementing orderly resolution for 
banks that are insolvent. In major system crises, this 
typically involves government interventions that include 
revoking banking licenses, firing top management, bringing in 
new teams to handle orderly unwinding, and--importantly--
downsizing banks and other failing corporate entities that have 
become too big to manage. In Korea after the 1997 crisis, 
nearly half of the top 30 pre-crisis chaebol were broken up 
through various versions of an insolvency process (including 
Daewoo, one of the biggest groups). In Indonesia during the 
same time frame, leading banks were stripped from the 
industrial groups that owned them and substantially 
restructured. In Thailand, not only were more than 50 secondary 
banks (``Finance Houses'') closed, but around \1/3\ of the 
leading banks were also put through a tough clean-up and 
downsizing process managed by the government.
    c. Addressing immediately underlying weaknesses in 
corporate governance that created potential vulnerability to 
crisis. In Korea, the central issue was the governance of 
nonfinancial chaebol and their relationship to the state-owned 
banks; in Indonesia, it was the functioning of family-owned 
groups, which owned banks directly; and in Thailand it was the 
close connections between firms, banks, and politicians. Of the 
three, Korea made the most progress and was rewarded with the 
fastest economic recovery.
    If any country pursued (a) unlimited government financial 
support, while not implementing (b) orderly resolution for 
troubled large institutions, and refusing to take on (c) 
serious governance reform, it would be castigated by the United 
States and come under pressure from the IMF. At the heart of 
every crisis is a political problem--powerful people, and the 
firms they control, have gotten out of hand. Unless this is 
dealt with as part of the stabilization program, all the 
government has done is provide an unconditional bailout. That 
may be consistent with a short-term recovery, but it creates 
major problems for the sustainability of the recovery and for 
the medium-term. Serious countries do not do this.
    Seen in this context, TARP has been badly mismanaged. In 
its initial implementation, the signals were mixed--
particularly as the Bush administration sought to provide 
support to essentially insolvent banks without taking them 
over. Standard FDIC-type procedures, which are best practice 
internationally, were applied to small- and medium-sized banks, 
but studiously avoided for large banks. As a result, there was 
a great deal of confusion in financial markets about what 
exactly was the Bush/Paulson policy that lay behind various ad 
hoc deals.
    The Obama administration, after some initial hesitation, 
used ``stress tests'' to signal unconditional support for the 
largest financial institutions. By determining officially that 
these firms did not lack capital--on a forward looking basis--
the administration effectively communicated that it was 
pursuing a strategy of ``regulatory forbearance'' (much as the 
U.S. did after the Latin American debt crisis of 1982). The 
existence of TARP, in that context, made the approach 
credible--but the availability of unconditional loans from the 
Federal Reserve remains the bedrock of the strategy.
    The downside scenario in the stress tests was overly 
optimistic relative to standard practice and reasonable 
expectations, with regard to credit losses in real estate 
(residential and commercial), credit cards, auto loans, and in 
terms of the assumed time path for unemployment. As a result, 
our largest banks remain undercapitalized, given the likely 
trajectory of the U.S. and global economy. This is a serious 
impediment to a sustained rebound in the real economy--already 
reflected in continued tight credit for small- and medium-sized 
business.
    Even more problematic is the underlying incentive to take 
excessive risk in the financial sector. With downside limited 
by government guarantees of various kinds, a senior financial 
stability official at the Bank of England (Andrew Haldane) 
bluntly characterizes our repeated boom-bailout-bust cycle as a 
``doom loop.'' \395\
---------------------------------------------------------------------------
    \395\ Piergiorgio Alessandri and Andrew G. Haldane, Banking on the 
State (Nov. 2009) (online at www.bankofengland.co.uk/publications/
speeches/2009/speech409.pdf).
---------------------------------------------------------------------------
    Exacerbating this issue, TARP funds supported not only 
troubled banks, but also the executives who ran those 
institutions into the ground. The banking system had to be 
saved, but specific banks could have wound down and leading 
bankers could and should have lost their jobs. Keeping these 
people and their management systems in place could be serious 
trouble for the future.
    The implementation of TARP exacerbated the perception (and 
the reality) that some financial institutions are ``Too Big to 
Fail.'' This lowers their funding costs, enabling them to 
borrow more and to take more risk--leading presumably to future 
crises.

4. Could TARP have been implemented in a way that would have reduced 
        its negative impact, particularly with regard to institutions 
        that are now ``too big to fail''? Or are these negative effects 
        intrinsic to any financial rescue program?

    TARP allowed the U.S. Treasury to make it clear that some 
individuals are ``Too Connected to Fail''. Financial executives 
with strong connections to the current and previous leadership 
of the New York Fed (e.g., through network connections of 
various kinds) have great power and enormous political access 
in this situation. Such issues are a concern in any financial 
rescue package but were definitely allowed to get out of hand 
in 2008-09 in the United States.

5. How significant was TARP relative to the efforts of the Federal 
        Reserve and the Treasury Department that did not rely on EESA? 
        Was TARP necessary or were the pre-EESA powers of the Federal 
        Reserve, the Treasury Department and the bank regulators 
        adequate for managing the crisis?

    There is no question that passing the TARP was the right 
thing to do. In some countries, the government has the 
authority to provide fiscal resources directly to the banking 
system on a huge scale, but in the United States this requires 
congressional approval. In other countries, foreign loans can 
be used to bridge any shortfall in domestic financing for the 
banking system, but the U.S. is too large to ever contemplate 
borrowing from the IMF or anyone else.

6. What is likely to be the legacy of the TARP in terms of the ability 
        of government officials and policymakers to respond to 
        financial crises in the future?

    The U.S. recovery strategy hinges on continued low interest 
rates (and a continuation of quantitative easing). This creates 
risks of a new global asset bubble, funded in dollars and 
driven by exuberance about prospects in emerging markets. The 
Fed has already signaled clearly that it will not raise 
interest rates for a long while and big banks are increasingly 
building their capacity to take risks in emerging markets.
    Unless bank regulators limit the direct and indirect risk 
exposure of U.S. financial institutions to this new supposedly 
low risk ``carry trade'' (from U.S. dollar funding to emerging 
market exposure, in dollars or local currency), we face the 
very real prospect of another, even larger crisis. There is no 
sign yet that regulators understand or are even willing to talk 
about this issue.
    The power of the financial sector goes far beyond a single 
set of people, a single administration, or a single political 
party. It is based not on a few personal connections, but on an 
ideology according to which the interests of Big Finance and 
the interests of the American people are naturally aligned--an 
ideology that assumes the private sector is always best, simply 
because it is the private sector, and hence the government 
should never tell the private sector what to do, but should 
only ask nicely, and provide handouts to keep the private 
(financial) sector alive. This is a recipe for financial and 
fiscal disaster.
    To those who live outside the Treasury-Wall Street 
corridor, this ideology is increasingly not only at odds with 
reality, but actually dangerous to the U.S. economy.

C. Anil Kashyap, Edward Eagle Brown Professor of Economics and Finance 
and Richard N. Rosett Faculty Fellow at the University of Chicago Booth 
                           School of Business


1. How would you measure the effectiveness of the TARP? What are the 
        appropriate measures to assess its effectiveness?

    TARP was part of a set of measures designed to head off a 
complete collapse of the financial system. So the package 
should be judged by whether it achieved that goal. The package 
worked. But figuring out the contribution of TARP, in isolation 
is not really possible. The problem is that TARP by itself 
would not have been sufficient to stave off a disaster; for 
instance, if the Federal Reserve had been unwilling to act, 
there still would have been many problems.
    Because of restrictions that the Federal Reserve faced on 
its options, TARP was an integral piece of the rescue efforts. 
Without TARP, it would have been illegal to take some of the 
steps that were needed. So TARP was a necessary part of the 
solution but was not sufficient to guarantee success.

2. Please use these or other measures to evaluate the relative 
        effectiveness of (1) TARP's efforts to stabilize financial 
        institutions, such as AIG and the large stress-tested banks; 
        (2) TARP's efforts to restore confidence to broad financial 
        markets by restarting the securitization markets and buying 
        troubled assets; and (3) TARP's efforts to address the 
        foreclosure crisis. What programs or initiatives were the most 
        effective and successful parts of the TARP? What programs or 
        initiatives were TARP's biggest failures?

    The biggest failure associated with TARP was the confusion 
over its purpose and the misleading way in which Treasury 
Secretary Paulson marketed it. The claim that it would be used 
for toxic asset purchases followed by the reversal of direction 
so that it was in fact used for capital injections left the 
public totally confused about TARP's mission. Buying toxic 
assets never made sense and the fact that the government could 
not explain how this was going to help with the crisis was a 
tell-tale sign that this idea was flawed. Banks were 
undercapitalized and badly needed more equity, so using TARP to 
boost equity was appropriate. But, the confusion over the 
government's intent led to the narrative that TARP was a total 
bailout for the banks.
    It was unfortunate that the first capital injections were 
done without any clear assessments of bank solvency. It is an 
open question whether Citigroup was insolvent when it was given 
its first injection, yet it got the funding on the same terms 
as institutions that were clearly in much, much better shape. 
The equality of the terms on which capital was handed out later 
meant that the government was hesitant to impose many 
restrictions on the stronger institutions that took the money. 
The subsequent lack of restrictions on dividends and 
compensation for some of the TARP banks further fueled public 
outrage.
    The public's frustration has led to a general rise in 
populist political rhetoric and has polluted the policy 
discussion in many other areas. Perhaps the clearest example, 
though, is the way that the debate over resolution reform 
played out. Instead of having an intelligent debate about the 
technical issues associated with winding down a large, 
internationally active financial institution, the discussion 
morphed into blame shifting about the crisis. Consequently 
there are important short-comings in the rules for failing 
these large institutions.
    I think TARP had little effect on the foreclosure crisis. 
Indeed, I would say none of the federal programs have made much 
of a difference regarding foreclosures.
    The turning point in the crisis was the announcement of the 
stress test results. We are still not certain why they were so 
successful in boosting confidence. My conjecture is that 
financial market participants concluded that they showed that 
nationalization of some of the large banks was no longer going 
to be necessary. Instead the tests were construed to show that 
the government had the resources to prop weak institutions up, 
even if private financing were not forthcoming. TARP provided 
the financial resources that made this promise credible. So, I 
think the possibility of using TARP to provide additional 
backstop equity was its most important contribution. 
Fortunately, private sector funding for recapitalization proved 
possible so we never had to use the money this way.

3. Were there alternative uses of the TARP funds or specific changes in 
        actual TARP programs that might have been superior either in 
        terms of protecting the government's interest as an investor or 
        in terms of addressing the economic and financial crisis, or 
        both? If so, what would they have been and why do you believe 
        those uses might have been superior to some of the programs 
        Treasury designed?

    All the attention and effort that went into trying to 
design asset purchase programs was a waste of time; these 
programs have been a side show and yet they absorbed a lot of 
attention. This was predictable in real time (lots of people 
pointed out why they were not critical). But in fact most of 
the money spent on equity assistance, except perhaps for 
Citigroup, has worked out well. So, the actions were largely 
successful, even if the perceptions were not as positive.

4. Could TARP have been implemented in a way that would have reduced 
        its negative impact, particularly with regard to institutions 
        that are now ``too big to fail''? Or are these negative effects 
        intrinsic to any financial rescue program?

    The best way to have dealt with too big to fail would have 
been to come up with a better resolution regime. Dodd-Frank 
still falls short in this dimension. So, a threat to close down 
a large internationally active bank is not very credible. 
Without a better resolution regime, too big to fail will 
persist.

5. How significant was TARP relative to the efforts of the Federal 
        Reserve and the Treasury Department that did not rely on EESA? 
        Was TARP necessary or were the pre-EESA powers of the Federal 
        Reserve, the Treasury Department and the bank regulators 
        adequate for managing the crisis?

    Neither the Fed nor the Treasury could have done what was 
needed in the fall of 2008 without TARP. TARP was necessary.

6. What is likely to be the legacy of the TARP in terms of the ability 
        of government officials and policymakers to respond to 
        financial crises in the future?

    The legacy of TARP cannot be judged without knowing how 
Dodd-Frank will be implemented. If, as I fear, systemic 
regulation remains weak and resolution options are poor, then 
the odds of a crisis that requires bailouts reoccurring will be 
high. In this case, the memory of the early, unconditional TARP 
assistance will linger.
    If Dodd-Frank proves more effective, or if it is amended to 
plug its holes, then TARP will not have much of a legacy.

   D. Kenneth Rogoff, Thomas D. Cabot Professor of Public Policy and 
              Professor of Economics at Harvard University

    It is impossible to assess TARP outside a broader 
evaluation of the government's generalized response to the 
financial crisis, including explicit and implicit loan 
guarantees to banks, as well as massive and diverse policy 
interventions by the Federal Reserve. In many ways, TARP was 
simply the most transparent and straightforward component of 
the financial bailout. The value of the loan guarantees and 
Federal Reserve support was likely much larger in the sense 
that taxpayers stood to lose hundreds of billions if not 
trillions of dollars in the event of a deepening of the 
financial crisis, a real risk even with government bailouts. 
Yet, despite effectively nationalizing the liabilities of the 
major financial institutions, the government did not wipe out 
the equity holders or even the junior bondholders in most 
cases. A proper cost-benefit analysis thus needs to price the 
risk the taxpayer took on during the financial crisis. Ex post 
accounting (how much did the government actually earn or lose 
after the fact) can yield an extremely misguided measure of the 
true cost of the bailout, especially as a guide to future 
policy responses. For example, had a major geopolitical crisis 
broken out while the banking system remained so fragile, the 
government guarantees might well have been called in on a large 
scale.
    Stepping back from technical issues surrounding measuring 
how the bailout was conducted, a broader question is whether 
``it worked.'' Would Americans have been worse off if TARP had 
never happened, if the government had waited to reconstitute 
financial institutions only after accelerated bankruptcies, if 
more efforts had been made to write down mortgages? There are 
no simple answers to these questions. One imagines that 
economic historians will debate the efficacy of the various 
bailout policies for decades to come. Most economists believe 
that there was a palpable risk of a second great depression, 
had the government not acted forcefully to stave off panic and 
stabilize the financial system. It is very difficult to 
disentangle the effects on short-term confidence of the various 
policies.
    Given all the huge efforts of the government, including 
TARP, it is sobering to note that in the aftermath of the 
crisis, the U.S. economy has by and large been driving down the 
tracks of previous deep postwar financial crises. If one uses 
the benchmarks for housing prices, equity prices, unemployment, 
government debt, and length of recession given in Reinhart and 
Rogoff (2009),\396\ the United States has so far been 
performing remarkably typically. Unfortunately, recessions 
marked by deep financial crises are generally followed by slow 
protracted recoveries in which unemployment remains elevated 
for many years, and housing prices remain depressed even 
longer. The continuing slow recovery in the United States is 
the norm.
---------------------------------------------------------------------------
    \396\ Carmen M. Reinhart and Kenneth S. Rogoff, This Time Is 
Different: Eight Centuries of Financial Folly (Oct. 2009).
---------------------------------------------------------------------------
    One difference between the United States' recent financial 
crisis and many other deep financial crises is that the 
government retained its borrowing capacity even at the peak of 
the crisis. This allowed the Treasury to cushion the economy 
against the crisis in the short run, but by avoiding a rash of 
bankruptcies, the response also failed to deflate the excess 
leverage from the system. The excess leverage, particularly in 
the consumer sector, implies a long period of low consumption 
as consumers attempt to repair their balance sheets, especially 
in light of the lower value of their houses. Those firms and 
individuals that do want to borrow face much tighter credit 
conditions, with the exception of very large firms with access 
to capital markets. Thus, the U.S. faces a heightened risk of a 
Japan-type scenario with a prolonged period of sub-par growth. 
The principle of TARP, of course, was to facilitate price 
discovery and adjustment, but in practice that seems to have 
been a very secondary consideration.
    There are many further issues that one could take up. For 
example, the bailout with its huge generosity to the large 
``too big to fail'' financial institutions has greatly 
exacerbated moral hazard problems. The Dodd-Frank financial 
regulation bill goes some ways to mitigating the problem, as 
does the recent Basel accord, but it is not at all clear that 
these go far enough. Obviously, the ``too big to fail'' policy 
has put small banks at a huge disadvantage in raising funding, 
even banks that followed conservative policies in the run up to 
the crisis.
    In sum, TARP was the most visible of a multipronged 
approach to subsidizing the financial sector to avoid a 
meltdown, but it was by no means the only one, with Federal 
Reserve policy and loan guarantees constituting arguably far 
larger and more important subsidies, especially if one uses as 
a benchmark underlying risk-adjusted interest rates. These 
subsidies, however, were less transparent, and of course TARP 
funds covered some of the ugliest and most painful parts of the 
bailout, including, for example, AIG. Overall, the government's 
bailout policy has to be given credit for averting the second 
great depression that might have happened in its absence. It 
has not, however, succeeded so far in giving a measurably 
better trajectory for the economy than has been typical after 
other postwar deep financial crises.
                     SECTION TWO: ADDITIONAL VIEWS


         A.  J. Mark McWatters and Professor Kenneth R. Troske

    We concur with the issuance of the September report and 
offer the additional observations below. We appreciate the 
efforts the Panel and staff made incorporating our suggestions 
offered during the drafting of the report.
    In these Additional Views we make the following five 
points:
     Repayment by TARP recipients of advances received 
under the program is a misleading measure of the effectiveness 
of the TARP and therefore should not serve as the standard by 
which the TARP is judged.
     The unlimited bailout of Fannie Mae and Freddie 
Mac by Treasury and the purchase of $1.25 trillion of GSE-
guaranteed MBS in the secondary market by the Federal Reserve 
benefitted TARP recipients and other financial institutions.
     According to the Congressional Budget Office, the 
bailout of Fannie Mae and Freddie Mac is projected to cost more 
than five times the projected cost of the TARP, including the 
Capital Purchase Program employed by Treasury to bail out over 
700 financial institutions. TARP recipients and other holders 
of GSE-guaranteed MBS who benefitted from the bailout of the 
two GSEs are not required, however, to share any of the costs 
incurred in the bailout.
     The bailout of Fannie Mae and Freddie Mac 
permitted TARP recipients to monetize their GSE-guaranteed MBS 
at prices above what they would have received without the GSE 
guarantee and use the proceeds to repay their obligations 
outstanding under the TARP, thereby arguably shifting a greater 
portion of the cost of the TARP from the TARP recipients 
themselves to the taxpayers. Costs such as this should be 
included when evaluating the TARP.
     The TARP created significant moral hazard risks 
and all but enshrined the concept that some financial 
institutions and other business enterprises are too big or too 
interconnected to fail.

1. Treasury Advocates an Inappropriate Metric for Assessing TARP

    As is indicated in the report, among the general public the 
TARP remains one of the most vilified programs enacted by the 
federal government, viewed largely as an effort by former Wall 
Street executives to bail out current Wall Street executives at 
the expense of American taxpayers, with no measurable benefits 
accruing to the taxpayers.\397\ In contrast, both current and 
former Treasury officials state over and over that the TARP was 
a success because it helped avoid a much more severe financial 
crisis that would have caused taxpayers to suffer even greater 
harm. In our view, Treasury is struggling to convince the 
American public of the TARP's success by advocating the 
acceptance of a metric--whether or not the TARP money has been 
repaid--that is simply not a credible measure of success. 
Professor Kenneth Rogoff addressed this issue in his written 
submission to the Panel where he states:
---------------------------------------------------------------------------
    \397\ In our view, the TARP--acting as the financial equivalent of 
a hospital ER--was helpful in returning financial stability to the 
markets during the last quarter of 2008 when properly considered along 
with the substantial and aggressive interventions of the Federal 
Reserve, Treasury, and the FDIC as well as the actions of the markets 
themselves. We nevertheless wonder if the Federal Reserve, Treasury, 
and the FDIC could not have effectively assisted the markets in 
achieving financial stability without additional governmental 
intervention. The TARP, however, has failed as a broader public policy 
initiative by: (1) permitting Treasury (and not the markets) to pick 
winners and losers (that is, which companies are bailed out and on what 
terms); (2) injecting substantial moral hazard risk into the markets; 
and (3) all but enshrining the doctrine that some financial 
institutions and other business enterprises are simply too big or too 
interconnected to fail.

          A proper cost benefit analysis thus needs to price 
        the risk the taxpayer took on during the financial 
        crisis. Ex post accounting (how much did the government 
        actually earn or lose after the fact) can yield an 
        extremely misguided measure of the true cost of the 
        bailout, especially as a guide to future policy 
        responses.\398\
---------------------------------------------------------------------------
    \398\ Kenneth Rogoff, Written Answers to Questions Posed by the 
Congressional Oversight Panel (Aug. 2010). In contrast to a simple 
``TARP has been repaid'' standard, OMB and CBO measure the cost of TARP 
(as required by Section 123 of EESA) using discounted present value of 
the cash flows involved (``credit reform'' methodology) where the 
discounted rate is explicitly adjusted ``for market risk.''
---------------------------------------------------------------------------

2. The Bailout of the GSEs and Its Consequences to TARP Recipients

    One of the important ways this metric can be misleading is 
if other government programs that are not part of the TARP 
either directly or indirectly enhanced TARP recipients' ability 
to repay the government. One program that has potentially 
played a key role, but has received relatively less attention, 
is Treasury's bailout of Fannie Mae and Freddie Mac.\399\ Had 
Fannie Mae and Freddie Mac been allowed to fail, TARP 
recipients and other financial institutions holding MBS 
guaranteed by the two GSEs most likely would have had little 
choice but to retain some of the MBS on their books. The 
eventual write-down in the value of these securities quite 
possibly would have resulted in many of these institutions 
suffering significant financial losses.\400\ This in turn would 
have impaired their ability to pay back their TARP funding and 
may have required them to obtain additional advances from the 
TARP. As it was, Treasury stepped in and provided unlimited 
support for all outstanding MBS guaranteed by Fannie Mae and 
Freddie Mac.
---------------------------------------------------------------------------
    \399\ See Treasury HERA Update, supra note 372.
    \400\ Even if holders of the GSE-guaranteed MBS were able to avoid 
the recognition of their built-in losses under the revised mark-to-
market accounting rules, the holders would have been required to 
recognize such losses upon the disposition of the securities.
---------------------------------------------------------------------------
    In addition, the Federal Reserve has recently purchased 
$1.25 trillion of GSE-guaranteed MBS in the secondary market 
from TARP recipients, other financial institutions and other 
investors and issuers.\401\ Although the Federal Reserve 
purchased the MBS at fair market value at the time of the 
transaction, it is significant to note that the pricing 
reflected the value of the guarantee provided by Treasury 
through its unlimited bailout of Fannie Mae and Freddie 
Mac.\402\ By returning the GSE-guaranteed MBS to Fannie Mae and 
Freddie Mac, or by selling them to the Federal Reserve or 
third-party investors, TARP recipient holders of the MBS were 
able to remove the securities from their balance sheets at 
prices above what they would have received without the GSE-
guarantee and use the sales proceeds to ``pay back'' their 
outstanding obligations under the TARP.\403\ The bailout of the 
two GSEs by Treasury thus had the potential to shift losses 
suffered under the TARP to losses suffered by another Treasury 
program that has not been subject to the same oversight or 
public scrutiny.\404\ As this example illustrates, any 
evaluation of the success of the TARP has to take into account 
the interaction among all government programs designed to prop 
up the financial system and how costs may have been shifted 
among these programs.
---------------------------------------------------------------------------
    \401\ Board of Governors of the Federal Reserve System, Federal 
Reserve System Monthly Report on Credit and Liquidity Programs and the 
Balance Sheet, at 1 (Aug. 2010) (online at www.federalreserve.gov/
monetarypolicy/files/monthlyclbsreport201008.pdf).
    \402\ Without viable GSE guarantees, the MBS most likely would have 
traded at fair market value prices of well below par (due to the 
impairment of the underlying mortgage collateral securing the MBS), but 
with viable GSE guarantees, the MBS most likely would have traded at or 
near par. For example, if Fannie Mae and Freddie Mac were insolvent, a 
$100 face value GSE-guaranteed MBS might have traded for $40, but if 
Fannie Mae and Freddie Mac were solvent and hence able to perform in 
full under their guarantees, the same MBS might have traded at or near 
par, that is, $100. By bailing out Fannie Mae and Freddie Mac, Treasury 
in effect transferred $60 from the taxpayers to the holders of the GSE-
guaranteed MBS. In addition, if TARP recipients and other financial 
institution sellers had previously written down their MBS, a sale to 
the Federal Reserve or another investor at or near par might have 
permitted the institutions to book an accounting gain.
    \403\ Some of the funds employed to bail out the two GSEs most 
likely followed a round-trip from Treasury to Fannie Mae/Freddie Mac to 
TARP recipient sellers of GSE-guaranteed MBS and back to Treasury as 
the repayment of TARP advances. Since money is fungible, it is possible 
that the proceeds received from the sale of GSE-guaranteed MBS freed up 
other funds--including proceeds received from the sale of equity and 
debt securities--that were actually used to repay amounts outstanding 
under the TARP.
    \404\ The bailout of Fannie Mae and Freddie Mac by Treasury 
arguably permitted TARP recipients to extinguish part of their 
outstanding TARP obligations with the proceeds received from the 
disposition of their GSE-guaranteed MBS at prices subsidized by the 
bailout of the two GSEs. Without the bailout, TARP recipients quite 
possibly would have been stuck with their illiquid, severely depressed 
GSE-guaranteed MBS as well as with a greater portion of their 
outstanding TARP obligations.
---------------------------------------------------------------------------

3. Analysis of CBO Subsidy Cost of the TARP and Bailout of the GSEs

    The Congressional Budget Office (CBO) estimates that 
Treasury's bailout of Fannie Mae and Freddie Mac will cost the 
taxpayers approximately $291 billion through fiscal year 2009 
and $389 billion through fiscal year 2019.\405\ If only 25 
percent \406\ of the CBO cost of the bailouts ultimately inures 
to the benefit of TARP recipients and other financial 
institutions, Treasury will have provided a subsidy to these 
institutions of approximately $100 billion.\407\ This non-TARP 
government sponsored support--unlike obligations incurred under 
the TARP itself \408\--remains cost-free to the recipients. 
That is, holders of GSE-guaranteed MBS are not required to 
share any of the cost incurred by the taxpayers arising from 
Treasury's bailout of Fannie Mae and Freddie Mac.\409\
---------------------------------------------------------------------------
    \405\ Congressional Budget Office, Budgetary Treatment of Fannie 
Mae and Freddie Mac, at 8 (Jan. 2010) (online at www.cbo.gov/ftpdocs/
108xx/doc10878/01-13-FannieFreddie.pdf).
    \406\ Since the CBO estimates that the bailout of Fannie Mae and 
Freddie Mac will cost the taxpayers approximately $400 billion, 
Treasury should disclose the amount of the subsidy cost that will inure 
to the benefit of TARP recipients and other financial institutions.
    \407\ $389 billion CBO subsidy cost estimate for the bailout of 
Fannie Mae and Freddie Mac multiplied by 25 percent, equals $97.25 
billion.
    \408\ Participants in the Capital Purchase Program (the financial 
institution bailout program included in the TARP) are required to repay 
all funds advanced thereunder, together with interest or dividends (as 
applicable) thereon, and to grant Treasury warrants to purchase equity 
interests in the recipients.
    \409\ Presumably, Treasury could have underwritten, for example, 
only 50 percent of the unfunded guarantee obligations of Fannie Mae and 
Freddie Mac and required the holders of the GSE-guaranteed MBS to 
absorb the remaining loss.
---------------------------------------------------------------------------
    The cost to the taxpayers of the bailout of the two GSEs is 
all the more remarkable when compared to the most recent CBO 
cost estimate for the entire TARP program of ``only'' $66 
billion.\410\ The CBO also estimates that the financial 
institution bailout component of TARP--the Capital Purchase 
Program (CPP)--will return a profit of approximately $2 
billion.\411\ While TARP has been vigorously debated throughout 
the country over the past two years and has served as a 
lightning rod for those who question government-sanctioned 
bailout programs, it is indeed ironic that the relatively 
obscure bailout of Fannie Mae and Freddie Mac is projected to 
carry a cost to the taxpayers of more than five times the 
projected cost of the much maligned TARP.\412\ It is also 
ironic that the original plan proposed by Secretary Paulson 
under the TARP to purchase distressed GSE-guaranteed MBS and 
other ``toxic assets'' was at least partially implemented 
outside of the TARP by the Federal Reserve through its 
quantitative easing program and by Treasury through its 
unlimited bailout of Fannie Mae and Freddie Mac, both at no 
cost to TARP recipients and other holders of GSE-guaranteed MBS 
but at significant long-term expense to the taxpayers.
---------------------------------------------------------------------------
    \410\ CBO Report on the TARP--March 2010, supra note 67, at 3 
(noting a subsidy cost for the TARP of $109 billion as of March 2010). 
See also CBO's Latest Projections for the TARP, supra note 68 (noting a 
subsidy cost for the TARP of $66 billion as of August 20, 2010).
    \411\ See CBO Report on the TARP--March 2010, supra note 67, at 3. 
See also CBO Budget and Economic Outlook, supra note 68, at 70.
    \412\ $389 billion CBO projected subsidy cost for the bailout of 
Fannie Mae and Freddie Mac through 2019, divided by $66 billion CBO 
projected subsidy cost for the TARP, equals 5.89.
---------------------------------------------------------------------------

4. Moral Hazard and Too-Big-To-Fail Risks Enhanced by the TARP

    Other potential costs of the TARP that we feel deserve more 
attention are the future costs resulting from the use of TARP 
funds to bail out systemically important financial and other 
firms. By targeting much of the TARP funding towards large 
firms such as Citigroup, Bank of America, A.I.G., Chrysler, GM, 
and Ally Financial (formerly GMAC),\413\ which solidified the 
market's belief in an implicit guarantee from the government 
for these firms, the TARP has exacerbated the ``too big to 
fail'' phenomenon.\414\ This in turn provides these large firms 
with a substantial cost advantage over their smaller, less 
systemically important competitors, which will lead to a more 
concentrated financial sector and higher prices paid by 
customers of banks and other financial companies. In addition, 
creating larger, more systemically important financial firms 
increases the likelihood of future financial crises because 
these firms have an incentive to invest in riskier projects as 
a result of the guarantee provided by the government. The 
additional costs borne by consumers in the form of higher 
prices for financial services and the additional costs that 
result from additional financial crises need to be included in 
any accounting of the costs of the TARP.
---------------------------------------------------------------------------
    \413\ It is worth noting that while markets seemed to recognize the 
existence of the ``too big to fail'' guarantee for large financial 
firms, by using the TARP to bail out Chrysler and GM, Treasury appears 
to have extended Too-Big-To-Fail to large non-financial firms.
    \414\ The Additional Views issued by J. Mark McWatters and former 
Panel member Paul S. Atkins with respect to the Panel's January 2010 
report on ``Exiting TARP and Unwinding Its Impact on the Financial 
Markets'' describes some of the challenges presented by the TARP:

      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--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 business persons and their advisors 
      who structure, negotiate and close such transactions, yet 
      such costs certainly exist and must be satisfied.
---------------------------------------------------------------------------
    Congressional Oversight Panel, Additional Views of J. Mark 
McWatters and Paul S. Atkins--January Oversight Report: Exiting TARP 
and Unwinding Its Impact on the Financial Markets at 157-158 (Jan. 14, 
2010) (online at cop.senate.gov/documents/cop-011410-report-
atkinsmcwatters.pdf).
             SECTION THREE: TARP UPDATES SINCE LAST REPORT


                          A. 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 
July 31, 2010; and (2) an updated accounting of the full 
federal resource commitment as of September 1, 2010.

1. The TARP

            a. Program Updates \415\
---------------------------------------------------------------------------
    \415\ Sept. 3 TARP Transactions Report, supra note 26.
---------------------------------------------------------------------------
    Since the enactment of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act, Treasury's commitments for TARP 
programs totaled $475 billion.\416\ Of this amount, $394.8 
billion had been spent under the $475 billion ceiling and 
$204.1 billion in TARP funds have been repaid. There have also 
been $5.8 billion in losses, leaving $185 billion in TARP funds 
currently outstanding.
---------------------------------------------------------------------------
    \416\ The original $700 billion TARP ceiling was reduced by $1.3 
billion as part of the Helping Families Save Their Homes Act of 2009. 
The authorized total commitment level was later reduced to $475 billion 
as part of the Frank-Dodd Financial Reform Bill that was signed into 
law on July 21, 2010. 12 U.S.C. Sec. 5225(a)-(b); Helping Families Save 
Their Homes Act of 2009, supra note 2, Sec. 40 (reducing by $1.26 
billion the authority for the TARP originally set under EESA at $700 
billion). On June 30, 2010, the House-Senate Conference Committee 
agreed to reduce the amount authorized under the TARP from $700 billion 
to $475 billion as part of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act. See Dodd-Frank Wall Street Reform and Consumer 
Protection Act, supra note 15, Sec. 335. On July 21, 2010, President 
Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection 
Act into law. The White House, Remarks by the President at Signing of 
Dodd-Frank Wall Street Reform and Consumer Protection Act (July 21, 
2010) (online at www.whitehouse.gov/the-press-office/remarks-president-
signing-dodd-frank-wall-street-reform-and-consumer-protection-act).
---------------------------------------------------------------------------
    During the month of August, Citizens & Northern Corporation 
and Columbia Banking System, Inc. fully repaid their CPP 
investments. Treasury received $26.4 million and $76.9 million, 
respectively, in repayments from these two institutions. To 
date, a total of 91 institutions have redeemed their CPP 
preferred shares.
    Among those institutions that have repaid CPP funds, nine 
banks exchanged their CPP investments for an equivalent 
investment amount under the Community Development Capital 
Initiative (CDCI) in August. After qualifying banks complete 
the exchange, Treasury records its CPP investment in these 
banks as repaid. Since the first exchanges took place in July, 
11 banks have exchanged $110.2 million in CPP investments. Of 
the $780 million Treasury committed to spend under the CDCI 
program, $143.2 million has been invested, which includes 
additional investments in University Financial Corp, Inc. 
($10.2 million) and Southern Bancorp, Inc. ($22.8 million).
            b. Income: Dividends, Interest, Repayments, and Warrant 
                    Sales
    As of September 1, 2010, 41 institutions 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 13 other institutions at 
auction. On September 1, 2010, Citizens & Northern Corporation 
and Columbia Banking System, Inc. repurchased their warrants 
for $400,000 and $3.3 million, respectively.
    On September 7, 2010, Treasury announced its plans to sell 
its warrants for The Hartford Financial Services Group, Inc. 
and Lincoln National Corporation through public auctions. 
Details regarding the pricing of the warrants and dates of the 
offering have yet to be announced. Deutsche Bank Securities 
Inc. will act as the auction agent and sole bookrunning manager 
for both warrant auctions.\417\
---------------------------------------------------------------------------
    \417\ U.S. Department of the Treasury, Treasury Announces Intent To 
Sell Warrant Positions In Public Dutch Auctions (Sept. 7, 2010) (online 
at financialstability.gov/latest/pr_09072010.html).
---------------------------------------------------------------------------
    Treasury also 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.\418\ In 
total, Treasury has received approximately $23 billion in net 
income from warrant repurchases, dividends, interest payments 
and other considerations deriving from TARP investments.\419\ 
For further information on TARP profit and loss, see Figure 35.
---------------------------------------------------------------------------
    \418\ U.S. Department of the Treasury, Securities Purchase 
Agreement for Public Institutions (online at 
www.financialstability.gov/docs/CPP/spa.pdf) (accessed Sept. 14, 2010).
    \419\ U.S. Department of the Treasury, Cumulative Dividends and 
Interest Report as of July 31, 2010 (Aug. 17, 2010) (online at 
www.financialstability.gov/docs/dividends-interest-reports/
July%202010%20Dividends%20and%20Interest%20Report.pdf) (hereinafter 
``Cumulative Dividends and Interest Report''); Sept. 3 TARP 
Transactions Report, supra note 26. Treasury also received an 
additional $1.2 billion in participation fees from its Guarantee 
Program for Money Market Funds. U.S. Department of the Treasury, 
Treasury Announces Expiration of Guarantee Program for Money Market 
Funds (Sept. 18, 2009) (online at www.ustreas.gov/press/releases/
tg293.htm).
---------------------------------------------------------------------------
            c. TARP Accounting

                                                  FIGURE 35: TARP ACCOUNTING (AS OF SEPTEMBER 1, 2010)
                                                               [Dollars in billions] xxxii
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                         Current
                                                         maximum       Actual    Total  repayments/                      Funding  Currently    Funding
                       Program                            amount      Funding     reduced  Exposure     Total  Losses        Outstanding      Available
                                                        available
--------------------------------------------------------------------------------------------------------------------------------------------------------
Capital Purchase Program (CPP).......................       $204.9       $204.9      xxiii ($147.5)        xxxiv ($2.3)               $55.1           $0
Targeted Investment Program (TIP)....................         40.0         40.0              (40.0)                   0                   0            0
Asset Guarantee Program (AGP)........................          5.0          5.0          xxxv (5.0)                   0                   0            0
AIG Investment Program (AIGIP).......................         69.8   xxxvi 49.1                   0                   0                49.1         20.7
Auto Industry Financing Program (AIFP)...............         81.3         81.3              (10.8)        xxxvii (3.5)        xxxviii 67.1            0
Auto Supplier Support Program (ASSP) xxxix...........          0.4          0.4               (0.4)                   0                   0            0
Term Asset-Backed Securities Loan Facility (TALF)....       xl 4.3      xli 0.1                   0                   0                 0.1          4.2
Public-Private Investment Program (PPIP) xlii........         22.4   xliii 13.1          xliv (0.4)                   0                12.7          9.3
SBA 7(a) Securities Purchase.........................          0.4     xlv 0.29                   0                   0                0.29         0.11
Home Affordable Modification Program (HAMP)..........         30.5          0.4                   0                   0                 0.4         30.1
Hardest Hit Fund (HHF)...............................     xlvi 4.1   xlvii 0.04                   0                   0                0.04         4.06
FHA Refinance Program................................         11.0            0                   0                   0                   0           11
Community Development Capital Initiative (CDCI)......   xlviii 0.8         0.14                   0                   0                0.14         0.66
    Total............................................         $475       394.77             (204.1)               (5.8)              184.97       80.13
--------------------------------------------------------------------------------------------------------------------------------------------------------
xxxii Figures affected by rounding. Unless otherwise noted, data in this table are from the following source: U.S. Department of the Treasury, Troubled
  Asset Relief Program Transactions Report for the Period Ending September 1, 2010 (Sept. 3, 2010) (online at financialstability.gov/docs/transaction-
  reports/9-3-10%20Transactions%20Report%20as%20of%209-1-10.pdf).
xxxiii Total amount repaid under CPP includes $8.5 billion Treasury received as part of its sales of Citigroup common stock. As of September 1, 2010,
  Treasury has sold 2.6 billion Citigroup common shares for $10.5 billion in gross proceeds. In June 2009, Treasury exchanged $25 billion in Citigroup
  preferred stock for 7.7 billion shares of the company's common stock at $3.25 per share. Therefore, Treasury received $2 billion in net proceeds from
  the sale of Citigroup common stock. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September
  1, 2010 (Sept. 3, 2010) (online at financialstability.gov/docs/transaction-reports/9-3-10%20Transactions%20Report%20as%20of%209-1-10.pdf). Total CPP
  repayments also include amounts repaid by institutions that exchanged their CPP investments for investments under the CDCI. For more details on the
  companies who are now participating in the CDCI, see footnote 229, supra.
xxxiv On the Transactions Report, Treasury has classified the investments it made in two institutions, CIT Group ($2.3 billion) and Pacific Coast
  National Bancorp ($4.1 million), as losses. Therefore, Treasury's net current CPP investment is $55.1 billion due to the $2.3 billion in losses thus
  far. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September 1, 2010 (Sept. 3, 2010)
  (online at financialstability.gov/docs/transaction-reports/9-3-10%20Transactions%20Report%20as%20of%209-1-10.pdf).
xxxv 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. Treasury did receive other income as consideration for the guarantee, which is not a repayment and is accounted
  for in Figure 36.
xxxvi AIG has completely utilized the $40 billion made available on November 25, 2008. It has also drawn down $7.5 billion of the $29.8 billion made
  available on April 17, 2009. This figure also reflects $1.6 billion in 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. American International Group, Inc., Form 10-K for
  the Fiscal Year Ended December 31, 2009, at 45 (Feb. 26, 2010) (online at www.sec.gov/Archives/edgar/data/5272/000104746910001465/a2196553z10-k.htm);
  U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending July 30, 2010, at 20 (Aug. 3, 2010) (online at
  www.financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as%20of%207-30-10.pdf).
xxxvii On May 14, 2010, Treasury accepted a $1.9 billion settlement payment for its $3.5 billion loan to Chrysler Holding. The payment represented a
  $1.6 billion loss from the termination of the debt obligation. U.S. Department of the Treasury, Chrysler Financial Parent Company Repays $1.9 Billion
  in Settlement of Original Chrysler Loan (May 17, 2010) (online at www.financialstability.gov/latest/pr-05172010c.html). Also, following the bankruptcy
  proceedings for Old Chrysler, which extinguished the $1.9 billion debtor-in-possession (DIP) loan, Treasury retained the right to recover the proceeds
  from the liquidation of specified collateral. To date, Treasury has collected $30.5 million in proceeds from the sale of collateral, although it
  ultimately does not expect a significant recovery from the liquidation proceeds. Treasury includes these proceeds as part of the $10.8 billion repaid
  under the AIFP. U.S. Department of the Treasury, Troubled Assets Relief Program Monthly 105(a) Report--August 2010 (Sept. 10, 2010) (online at
  financialstability.gov/docs/105CongressionalReports/August%202010%20105(a)%20Report-final-9%2010%2010.pdf); Treasury conversations with Panel staff
  (Aug. 19, 2010).
xxxviii The $1.9 billion Chrysler debtor-in-possession loan, which was extinguished April 30, 2010, was deducted from Treasury's AIFP investment amount;
  however, it is not regarded as a loss since there is an opportunity for Treasury to recover a portion of the loan from the sale of collateral. See
  Endnote xxxvii supra, for details on losses from Treasury's investment in Chrysler.
xxxix On April 5, 2010, Treasury terminated its commitment to lend to the GM SPV under the ASSP. On April 7, 2010, it terminated its commitment to lend
  to the Chrysler SPV. In total, Treasury received $413 million in repayments from loans provided by this program ($290 million from the GM SPV and $123
  million from the Chrysler SPV). Further, Treasury received $101 million in proceeds from additional notes associated with this program. U.S.
  Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September 1, 2010 (Sept. 3, 2010) (online at
  financialstability.gov/docs/transaction-reports/9-3-10%20Transactions%20Report%20as%20of%209-1-10.pdf).
xl For the TALF program, one dollar of TARP funds was committed for every $10 of funds obligated by the Federal Reserve. The program was originally
  intended to be a $200 billion initiative, and the TARP was responsible for the first $20 billion in loan-losses, if any were incurred. The loan is
  incrementally funded. As of September 1, a total of $43 billion in loans was outstanding under the TALF program, and TARP's commitments constituted
  $4.3 billion. The Federal Reserve Board of Governors agreed that it was appropriate for Treasury to reduce TALF credit protection to $4.3 billion.
  Board of Governors of the Federal Reserve System, Federal Reserve Announces Agreement with the Treasury Department Regarding a Reduction of Credit
  Protection Provided for the Term Asset-Backed Securities Loan Facility (TALF) (July 20, 2010) (online at www.federalreserve.gov/newsevents/press/
  monetary/20100720a.htm).
xli As of September 1, Treasury provided $105 million to TALF LLC. This total includes accrued payable interest. Federal Reserve Bank of New York,
  Factors Affecting Reserve Balances (H.4.1) (Sept. 2, 2010) (online at www.federalreserve.gov/releases/h41/20100902/).
xlii On July 19, 2010, Treasury released its third quarterly report on the Legacy Securities Public-Private Investment Partnership (PPIP). As of June
  30, 2010, the total value of assets held by the PPIP managers was $16 billion. Non-agency Residential Mortgage-Backed Securities represented 85
  percent of the total, CMBS represented the balance. U.S. Department of the Treasury, Legacy Securities Public-Private Investment Program, Program
  Update--Quarter Ended June 30, 2010 (July 19, 2010) (online at www.financialstability.gov/docs/111.pdf).
xliii U.S. Department of the Treasury, Troubled Assets Relief Program Monthly 105(a) Report--July 2010, at 6 (Aug. 10, 2010) (online at
  www.financialstability.gov/docs/105CongressionalReports/July%202010%20105(a)%20Report--Final.pdf).
xliv As of September 1, 2010, Treasury has received $368 million in capital repayments from two PPIP fund managers. U.S. Department of the Treasury,
  Troubled Asset Relief Program Transactions Report for the Period Ending September 1, 2010 (Sept. 3, 2010) (online at financialstability.gov/docs/
  transaction-reports/9-3-10%20Transactions%20Report%20as%20of%209-1-10.pdf).
xlv In July, Treasury made $48 million in additional purchases under the SBA 7(a) Securities Purchase Program. As of September 1, 2010, Treasury's
  purchases totaled $261.7 million. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September
  1, 2010 (Sept. 3, 2010) (online at financialstability.gov/docs/transaction-reports/9-3-10%20Transactions%20Report%20as%20of%209-1-10.pdf).
xlvi As part of the Dodd-Frank Act, an additional $2 billion in TARP funds was committed to mortgage assistance for unemployed borrowers through the
  Hardest Hit Fund. U.S. Department of the Treasury, Obama Administration Announces Additional Support for Targeted Foreclosure-Prevention Programs to
  Help Homeowners Struggling with Unemployment (Aug. 11, 2010) (online at www.ustreas.gov/press/releases/tg823.htm).
xlvii This figure represents the total amount paid to date to state Housing Finance Agencies (HFAs). The Panel previously reported the actual funding
  amount for the Hardest Hit Fund as the total amount approved by the Administration. As of September 10, 2010, four state HFAs have drawn out funds
  from their total investment amount. Data provided by Treasury (Sept. 10, 2010).
xlviii During the month of August, nine institutions exchanged their CPP investments for an equivalent investment amount under the CDCI. On August 6,
  2010, Treasury made an additional $22.8 million investment in Southern Bancorp, Inc. as part of the institution's exchange. As of September 1, 2010,
  Treasury's total current investment under the CDCI is $143.2 million. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions
  Report for Period Ending September 1, 2010 (Sept. 3, 2010) (online at financialstability.gov/docs/transaction-reports/9-3-
  10%20Transactions%20Report%20as%20of%209-1-10.pdf).


                                         FIGURE 36: TARP PROFIT AND LOSS
                                              [Dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                                                Warrant
                                                              Disposition     Other
                                Dividendsx xlix   Interest l    Proceeds     Proceeds    Losses lii
        TARP Initiative          (as of  7/31/    (as of  7/   li (as of    (as of  7/  (as of  9/1/    Total
                                     2010)         31/2010)    9/1/2010)     31/2010)      2010)

----------------------------------------------------------------------------------------------------------------
Total.........................        $15,906           $893       $7,217       $4,739     ($5,792)      $22,963
CPP...........................          9,431             39        5,946   liii 2,026      (2,334)       15,108
TIP...........................          3,004             --        1,256           --  ...........        4,260
AIFP..........................      liv 3,060            802           15           --      (3,458)          419
ASSP..........................             --             15           --       lv 101  ...........          116
AGP...........................            411             --            0    lvi 2,234  ...........        2,645
PPIP..........................             --             38           --     lvii 102  ...........          139
Bank of America Guarantee.....             --             --           --    lviii 276  ...........         276
----------------------------------------------------------------------------------------------------------------
xlix U.S. Department of the Treasury, Cumulative Dividends, Interest and Distributions Report as of July 31,
  2010 (Aug. 17, 2010) (online at www.financialstability.gov/docs/dividends-interest-reports/
  July%202010%20Dividends%20and%20Interest%20Report.pdf).
l U.S. Department of the Treasury, Cumulative Dividends, Interest and Distributions Report as of July 31, 2010
  (Aug. 17, 2010) (online at www.financialstability.gov/docs/dividends-interest-reports/
  July%202010%20Dividends%20and%20Interest%20Report.pdf).
li U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending
  September 1, 2010 (Sept. 3, 2010) (online at financialstability.gov/docs/transaction-reports/9-3-
  10%20Transactions%20Report%20as%20of%209-1-10.pdf).
lii On the Transactions Report, Treasury classified the investments it made in two institutions, CIT Group ($2.3
  billion) and Pacific Coast National Bancorp ($4.1 million), as losses. Two TARP recipients, UCBH Holdings,
  Inc. ($298.7 million) and a banking subsidiary of Midwest Banc Holdings, Inc. ($89.4 million), are currently
  in bankruptcy proceedings. Finally, Sonoma Valley Bancorp, which received $8.7 million in CPP funding, was
  placed into receivership on August 20, 2010. U.S. Department of the Treasury, Troubled Asset Relief Program
  Transactions Report for the Period Ending September 1, 2010 (Sept. 3, 2010) (online at financialstability.gov/
  docs/transaction-reports/9-3-10%20Transactions%20Report%20as%20of%209-1-10.pdf); Federal Deposit Insurance
  Corporation, Westamerica Bank, San Rafael, California, Assumes All of the Deposits of Sonoma Valley Bank,
  Sonoma, California (Aug. 20, 2010) (online at www.fdic.gov/news/news/press/2010/pr10196.html).
liii This figure represents net proceeds to Treasury from the sale of Citigroup common stock to date. The net
  proceeds account for Treasury's exchange in June 2009 of $25 billion in Citigroup preferred shares for 7.7
  billion shares of the company's common stock at $3.25 per share. On May 26, 2010, Treasury completed the sale
  of 1.5 billion shares of Citigroup common stock at an average weighted price of $4.12 per share. On June 30,
  2010, Treasury announced the sale of approximately 1.1 billion of additional shares of Citigroup stock at an
  average weighted price of $3.90 per share. Treasury opened a third selling period on July 23, 2010, with plans
  to sell another 1.5 billion shares by September 30, 2010. As of September 1, 2010, Treasury has received $10.5
  billion in gross proceeds from these sales. U.S. Department of the Treasury, Troubled Asset Relief Program
  Transactions Report for the Period Ending September 1, 2010 (Sept. 3, 2010) (online at financialstability.gov/
  docs/transaction-reports/9-3-10%20Transactions%20Report%20as%20of%209-1-10.pdf).
liv This figure includes $815 million in dividends from GMAC preferred stock, trust preferred securities, and
  mandatory convertible preferred shares. The dividend total also includes a $748.6 million senior unsecured
  note from Treasury's investment in General Motors. Data provided by Treasury.
lv This represents the total proceeds from additional notes. U.S. Department of the Treasury, Troubled Asset
  Relief Program Transactions Report for the Period Ending September 1, 2010 (Sept. 3, 2010) (online at
  financialstability.gov/docs/transaction-reports/9-3-10%20Transactions%20Report%20as%20of%209-1-10.pdf).
lvi As a fee for taking a second-loss position of 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 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 $2.2 billion investment in Citigroup trust preferred securities. At the end of Citigroup's
  participation in the FDIC's TLGP, the FDIC may transfer $800 million of $3.02 billion in Citigroup Trust
  Preferred Securities it received in consideration for its role in the AGP to Treasury. U.S. Department of the
  Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September 1, 2010, at 20
  (Sept. 3, 2010) (online at financialstability.gov/docs/transaction-reports/9-3-
  10%20Transactions%20Report%20as%20of%209-1-10.pdf); U.S. Department of the Treasury, Board of Governors of the
  Federal Reserve System, Federal Deposit Insurance Corporation, and Citigroup Inc., Termination Agreement, at 1
  (Dec. 23, 2009) (online at www.financialstability.gov/docs/Citi%20AGP%20Termination%20Agreement%20-
  %20Fully%20Executed%20Version.pdf); Federal Deposit Insurance Corporation, 2009 Annual Report, at 87 (June 30,
  2010) (online at www.fdic.gov/about/strategic/report/2009annualreport/AR09final.pdf).
lvii As of July 31, 2010, Treasury has earned $80.9 million in membership interest distributions from the PPIP.
  Additionally, Treasury has earned $20.6 million in total proceeds following the termination of the TCW fund.
  U.S. Department of the Treasury, Cumulative Dividends, Interest and Distributions Report as of July 31, 2010
  (Aug. 17, 2010) (online at financialstability.gov/docs/dividends-interest-reports/
  July%202010%20Dividends%20and%20Interest%20Report.pdf); U.S. Department of the Treasury, Troubled Asset Relief
  Program Transactions Report for the Period Ending September 1, 2010 (Sept. 3, 2010) (online at
  financialstability.gov/docs/transaction-reports/9-3-10%20Transactions%20Report%20as%20of%209-1-10.pdf).
lviii 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 period.
  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).

            d. CPP Unpaid Dividend and Interest Payments \420\
---------------------------------------------------------------------------
    \420\ Cumulative Dividends and Interest Report, supra note 419.
---------------------------------------------------------------------------
    As of July 31, 2010, 97 institutions have missed at least 
one dividend payment on preferred stock issued under CPP.\421\ 
Among these institutions, 72 are not current on cumulative 
dividends, which amount to $137.1 million in missed payments, 
while another 25 banks have not paid $6.3 million in non-
cumulative dividends. Of the $55.1 billion currently 
outstanding in CPP funding, Treasury's investments in banks 
with non-current dividend payments total $3.6 billion. A 
majority of the banks that remain delinquent on dividend 
payments have under $1 billion in total assets on their balance 
sheets.
---------------------------------------------------------------------------
    \421\ Does not include banks with missed dividend payments that 
have either repaid all delinquent dividends, exited TARP, gone into 
receivership, or filed for bankruptcy.
---------------------------------------------------------------------------
    To date, there are 15 institutions that previously deferred 
dividend payments, but have repaid all delinquent dividends. 
One bank, thus far, has failed to make six dividend payments. 
Under the terms of CPP, after a bank fails to pay dividends for 
six periods, Treasury has the right to elect two individuals to 
the company's board of directors.\422\ Figure 37 below details 
the number of institutions that have missed dividend payments.
---------------------------------------------------------------------------
    \422\ U.S. Department of the Treasury, Frequently Asked Questions 
Capital Purchase Program (CPP): Related to Missed Dividend (or 
Interest) Payments and Director Nomination (online at 
www.financialstability.gov/docs/CPP/CPP%20Directors%20FAQs.pdf) 
(accessed Sept. 14, 2010).
---------------------------------------------------------------------------
    In addition, 6 CPP participants have missed at least one 
interest payment, totaling $2.4 million in non-current interest 
payments. Treasury's investments in these institutions 
represent less than $1 billion in CPP funding.

                       FIGURE 37: CPP MISSED DIVIDEND PAYMENTS (AS OF JULY 31, 2010) \423\
----------------------------------------------------------------------------------------------------------------
                Number of Missed Payments                    1       2       3       4       5       6     Total
----------------------------------------------------------------------------------------------------------------
Cumulative Dividends
Number of Banks, by asset size..........................      20      18      16      14       4       0      72
    Under $1B...........................................      15      12       9       7       1       0      44
    $1B-$10B............................................       5       4       7       6       3       0      25
    Over $10B...........................................       0       2       0       1       0       0       3
Non-Cumulative Dividends
Number of Banks, by asset size..........................       6       5       4       5       4       1      25
    Under $1B...........................................       5       4       4       5       4       1      18
    $1B-$10B............................................       1       1       0       0       0       0       1
    Over $10B...........................................       0       0       0       0       0       0       0
----------------------------------------------------------------------------------------------------------------
\423\ Cumulative Dividends and Interest Report, supra note 419. Data on total bank assets compiled using SNL
  Financial data service (accessed Sept. 8, 2010).

            e. Rate of Return
    As of September 2, 2010, the average internal rate of 
return for all public financial institutions that participated 
in the CPP and fully repaid the U.S. government (including 
preferred shares, dividends, and warrants) was 9.9 percent. The 
internal rate of return is the annualized effective compounded 
return rate that can be earned on invested capital.
    Since the Panel's last report, Citizens & Northern 
Corporation and Columbia Banking System repurchased their 
warrants for common shares for $400,000 and $3.3 million, 
respectively. These represent 85- and 50-percent, respectively, 
of the Panel's best valuation estimate at the disposition date. 
To date, Treasury has received $7.2 billion in proceeds from 
CPP and TIP warrant dispositions.
            f. Warrant Disposition

              FIGURE 38: WARRANT REPURCHASES/AUCTIONS FOR FINANCIAL INSTITUTIONS WHO HAVE FULLY REPAID CPP FUNDS (AS OF SEPTEMBER 2, 2010)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                    Panel's Best
                                                                                     Warrant         Warrant          Valuation       Price/      IRR
                         Institution                             Investment Date    Repurchase     Repurchase/       Estimate at     Estimate  (Percent)
                                                                                       Date        Sale Amount    Disposition Date    Ratio
--------------------------------------------------------------------------------------------------------------------------------------------------------
Old National Bancorp.........................................          12/12/2008     5/8/2009        $1,200,000        $2,150,000      0.558        9.3
Iberiabank Corporation.......................................           12/5/2008    5/20/2009         1,200,000         2,010,000      0.597        9.4
Firstmerit Corporation.......................................            1/9/2009    5/27/2009         5,025,000         4,260,000      1.180       20.3
Sun Bancorp, Inc.............................................            1/9/2009    5/27/2009         2,100,000         5,580,000      0.376       15.3
Independent Bank Corp........................................            1/9/2009    5/27/2009         2,200,000         3,870,000      0.568       15.6
Alliance Financial Corporation...............................          12/19/2008    6/17/2009           900,000         1,580,000      0.570       13.8
First Niagara Financial Group................................          11/21/2008    6/24/2009         2,700,000         3,050,000      0.885        8.0
Berkshire Hills Bancorp, Inc.................................          12/19/2008    6/24/2009         1,040,000         1,620,000      0.642       11.3
Somerset Hills Bancorp.......................................           1/16/2009    6/24/2009           275,000           580,000      0.474       16.6
SCBT Financial Corporation...................................           1/16/2009    6/24/2009         1,400,000         2,290,000      0.611       11.7
HF Financial Corp............................................          11/21/2008    6/30/2009           650,000         1,240,000      0.524       10.1
State Street.................................................          10/28/2008     7/8/2009        60,000,000        54,200,000      1.107        9.9
U.S. Bancorp.................................................          11/14/2008    7/15/2009       139,000,000       135,100,000      1.029        8.7
The Goldman Sachs Group, Inc.................................          10/28/2008    7/22/2009     1,100,000,000     1,128,400,000      0.975       22.8
BB&T Corp....................................................          11/14/2008    7/22/2009        67,010,402        68,200,000      0.983        8.7
American Express Company.....................................            1/9/2009    7/29/2009       340,000,000       391,200,000      0.869       29.5
Bank of New York Mellon Corp.................................          10/28/2008     8/5/2009       136,000,000       155,700,000      0.873       12.3
Morgan Stanley...............................................          10/28/2008    8/12/2009       950,000,000     1,039,800,000      0.914       20.2
Northern Trust Corporation...................................          11/14/2008    8/26/2009        87,000,000        89,800,000      0.969       14.5
Old Line Bancshares Inc......................................           12/5/2008     9/2/2009           225,000           500,000      0.450       10.4
Bancorp Rhode Island, Inc....................................          12/19/2008    9/30/2009         1,400,000         1,400,000      1.000       12.6
Centerstate Banks of Florida Inc.............................          11/21/2008   10/28/2009           212,000           220,000      0.964        5.9
Manhattan Bancorp............................................           12/5/2008   10/14/2009            63,364           140,000      0.453        9.8
CVB Financial Corp...........................................           12/5/2008   10/28/2009         1,307,000         3,522,198      0.371        6.4
Bank of the Ozarks...........................................          12/12/2008   11/24/2009         2,650,000         3,500,000      0.757        9.0
Capital One Financial........................................          11/14/2008    12/3/2009       148,731,030       232,000,000      0.641       12.0
JPMorgan Chase & Co..........................................          10/28/2008   12/10/2009       950,318,243     1,006,587,697      0.944       10.9
TCF Financial Corp...........................................           1/16/2009   12/16/2009         9,599,964        11,825,830      0.812       11.0
LSB Corporation..............................................          12/12/2008   12/16/2009           560,000           535,202      1.046        9.0
Wainwright Bank & Trust Company..............................          12/19/2008   12/16/2009           568,700         1,071,494      0.531        7.8
Wesbanco Bank, Inc...........................................           12/5/2008   12/23/2009           950,000         2,387,617      0.398        6.7
Union First Market Bankshares Corporation (Union Bankshares            12/19/2008   12/23/2009           450,000         1,130,418      0.398        5.8
 Corporation)................................................
Trustmark Corporation........................................          11/21/2008   12/30/2009        10,000,000        11,573,699      0.864        9.4
Flushing Financial Corporation...............................          12/19/2008   12/30/2009           900,000         2,861,919      0.314        6.5
OceanFirst Financial Corporation.............................           1/16/2009     2/3/2010           430,797           279,359      1.542        6.2
Monarch Financial Holdings, Inc..............................          12/19/2008    2/10/2010           260,000           623,434      0.417        6.7
Bank of America..............................................    \424\ 10/28/2008     3/3/2010     1,566,210,714     1,006,416,684      1.533        6.5
                                                                   \425\ 1/9/2009
                                                                  \426\ 1/14/2009
Washington Federal Inc./Washington Federal Savings & Loan              11/14/2008     3/9/2010        15,623,222        10,166,404      1.537       18.6
 Association.................................................
Signature Bank...............................................          12/12/2008    3/10/2010        11,320,751        11,458,577      0.988       32.4
Texas Capital Bancshares, Inc................................           1/16/2009    3/11/2010         6,709,061         8,316,604      0.807       30.1
Umpqua Holdings Corp.........................................          11/14/2008    3/31/2010         4,500,000         5,162,400      0.872        6.6
City National Corporation....................................          11/21/2008     4/7/2010        18,500,000        24,376,448      0.759        8.5
First Litchfield Financial Corporation.......................          12/12/2008     4/7/2010         1,488,046         1,863,158      0.799       15.9
PNC Financial Services Group Inc.............................          12/31/2008    4/29/2010       324,195,686       346,800,388      0.935        8.7
Comerica Inc.................................................          11/14/2008     5/4/2010       183,673,472       276,426,071      0.664       10.8
Valley National Bancorp......................................          11/14/2008    5/18/2010         5,571,592         5,955,884      0.935        8.3
Wells Fargo Bank.............................................          10/28/2008    5/20/2010       849,014,998     1,064,247,725      0.798        7.8
First Financial Bancorp......................................          12/23/2008     6/2/2010         3,116,284         3,051,431      1.021        8.2
Sterling Bancshares, Inc./ Sterling Bank.....................          12/12/2008     6/9/2010         3,007,891         5,287,665      0.569       10.8
SVB Financial Group..........................................          12/12/2008    6/16/2010         6,820,000         7,884,633      0.865        7.7
Discover Financial Services..................................           3/13/2009     7/7/2010       172,000,000       166,182,652      1.035       17.1
Bar Harbor Bancshares........................................           1/16/2009    7/28/2010           250,000           518,511      0.482        6.2
Citizens & Northern Corporation..............................           1/16/2009     8/4/2010           400,000           468,164      0.854        5.9
Columbia Banking System, Inc.................................          11/21/2008    8/11/2010         3,301,647         6,582,658      0.502        7.3
                                                              ------------------------------------------------------------------------------------------
    Total....................................................  ..................  ...........    $7,202,029,864    $7,314,904,102      0.985       9.9
--------------------------------------------------------------------------------------------------------------------------------------------------------
\424\ Investment date for Bank of America in CPP.
\425\ Investment date for Merrill Lynch in CPP.
\426\ Investment date for Bank of America in TIP.


FIGURE 39: VALUATION OF CURRENT HOLDINGS OF WARRANTS (AS OF SEPTEMBER 1,
                                  2010)
                          [Dollars in millions]
------------------------------------------------------------------------
                                             Warrant Valuation
      Stress Test Financial       --------------------------------------
   Institutions with  Warrants         Low          High         Best
           Outstanding               Estimate     Estimate     Estimate
------------------------------------------------------------------------
Citigroup, Inc...................       $13.20    $1,076.60      $125.49
SunTrust Banks, Inc..............         9.79       320.18       123.84
Regions Financial Corporation....         7.85       203.49        79.27
Fifth Third Bancorp..............        71.42       357.19       173.27
Hartford Financial Services             347.70       702.95       472.22
 Group, Inc......................
KeyCorp..........................        17.29       165.54        72.07
AIG..............................       196.52      1687.29       772.09
All Other Banks..................       607.55     1,694.33     1,108.93
                                  --------------------------------------
    Total........................    $1,271.31    $6,207.56    $2,927.19
------------------------------------------------------------------------

2. Federal Financial Stability Efforts

            a. Federal Reserve and FDIC Programs
    In addition to the direct expenditures Treasury has 
undertaken through the 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 the TARP.
            b. Total Financial Stability Resources
    Beginning in its April 2009 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. With the 
reductions in funding for certain TARP programs, the Panel 
calculates the total value of these resources to be over $2.6 
trillion. However, 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.\427\ In contrast, the Federal 
Reserve's liquidity programs are generally available only to 
borrowers with good credit, and the loans are over-
collateralized and with recourse to other assets of the 
borrower. If the assets securing a Federal Reserve loan realize 
a decline in value greater than the ``haircut,'' the Federal 
Reserve is able to demand more collateral from the borrower. 
Similarly, should a borrower default on a recourse loan, the 
Federal Reserve can turn to the borrower's other assets to make 
the Federal Reserve whole. In this way, the risk to the 
taxpayer on recourse loans only materializes if the borrower 
enters bankruptcy.
---------------------------------------------------------------------------
    \427\ November 2009 Oversight Report, supra note 6, at 13-27.

             FIGURE 40: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF SEPTEMBER 1, 2010) lix
                                              [Dollars in billions]
----------------------------------------------------------------------------------------------------------------
                                                     Treasury         Federal
                     Program                          (TARP)          Reserve          FDIC            Total
----------------------------------------------------------------------------------------------------------------
Total...........................................            $475        $1,445.4          $697.9        $2,618.3
    Outlays lx..................................           231.2         1,285.4           188.4           1,705
    Loans.......................................            24.2             160               0           184.2
    Guarantees lxi..............................             4.3               0           509.5           513.8
    Repaid and Unavailable TARP Funds...........           215.3               0               0           215.3
AIG lxii........................................            69.8            84.7               0           154.5
    Outlays.....................................      lxiii 69.8       lxiv 25.7               0            95.5
    Loans.......................................               0          lxv 59               0              59
    Guarantees..................................               0               0               0               0
Citigroup.......................................            16.5               0               0            16.5
    Outlays.....................................       lxvi 16.5               0               0            16.5
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
Capital Purchase Program (Other)................            32.4               0               0            32.4
    Outlays.....................................      lxvii 32.4               0               0            32.4
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
Capital Assistance Program......................             N/A               0               0      lxviii N/A
TALF............................................             4.3            38.7               0              43
    Outlays.....................................               0               0               0               0
    Loans.......................................               0        lxx 38.7               0            38.7
    Guarantees..................................        lxix 4.3               0               0             4.3
PPIP (Loans) lxxi...............................               0               0               0               0
    Outlays.....................................               0               0               0               0
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
PPIP (Securities)...............................      lxxii 22.4               0               0            22.4
    Outlays.....................................             7.5               0               0             7.5
    Loans.......................................            14.9               0               0            14.9
    Guarantees..................................               0               0               0               0
Making Home Affordable Program/Foreclosure                  45.6               0               0            45.6
 Mitigation.....................................
    Outlays.....................................     lxxiii 45.6               0               0            45.6
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
Automotive Industry Financing Program...........      lxxiv 67.1               0               0            67.1
    Outlays.....................................            59.0               0               0            59.0
    Loans.......................................             8.1               0               0             8.1
    Guarantees..................................               0               0               0               0
Auto Supplier Support Program...................             0.4               0               0             0.4
    Outlays.....................................               0               0               0               0
    Loans.......................................        lxxv 0.4               0               0             0.4
    Guarantees..................................               0               0               0               0
SBA 7(a) Securities Purchase....................       lxxvi 0.4               0               0             0.4
    Outlays.....................................             0.4               0               0             0.4
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
Community Development Capital Initiative........     lxxvii 0.78               0               0            0.78
    Outlays.....................................               0               0               0               0
    Loans.......................................            0.78               0               0            0.78
    Guarantees..................................               0               0               0               0
Temporary Liquidity Guarantee Program...........               0               0           509.5           509.5
    Outlays.....................................               0               0               0               0
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0   lxxviii 509.5           509.5
Deposit Insurance Fund..........................               0               0           188.4           188.4
    Outlays.....................................               0               0     lxxix 188.4           188.4
    Loans.......................................               0               0               0               0
    Guarantees..................................               0               0               0               0
Other Federal Reserve Credit Expansion..........               0           1,322               0           1,322
    Outlays.....................................               0    lxxx 1,259.7               0         1,259.7
    Loans.......................................               0      lxxxi 62.3               0            62.3
    Guarantees..................................               0               0               0               0
Repaid and Unavailable TARP Funds...............    lxxxii 215.3               0               0           215.3
----------------------------------------------------------------------------------------------------------------
lix All data in this figure is as of September 1, 2010, except for information regarding the FDIC's Temporary
  Liquidity Guarantee Program (TLGP). That data is as of July 31, 2010.
lx The term ``outlays'' is used here to describe the use of Treasury funds under the TARP, which are broadly
  classifiable as purchases of debt or equity securities (e.g., debentures, preferred stock, exercised warrants,
  etc.). These values were calculated using (1) Treasury's actual reported expenditures, and (2) Treasury's
  anticipated funding levels as estimated by a variety of sources, including Treasury statements 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--
  as well as 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.
lxi Although 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.
lxii AIG received an $85 billion credit facility from the Federal Reserve Bank of New York (FRBNY) (reduced to
  $60 billion in November 2008, to $35 billion in December 2009, and then to $34 billion in May 2010). A
  Treasury trust received Series C preferred convertible stock in exchange for the facility and $0.5 million.
  The Series C shares amount to 79.9 percent ownership of common stock, minus the percentage common shares
  acquired through warrants. In November 2008, Treasury received a warrant to purchase shares amounting to 2
  percent ownership of AIG common stock in connection with its Series D stock purchase (exchanged for Series E
  noncumulative preferred shares on 4/17/2009). Treasury also received a warrant to purchase 3,000 Series F
  common shares in May 2009. Warrants for Series D and Series F shares represent 2 percent equity ownership, and
  would convert Series C shares into 77.9 percent of common stock. However, in May 2009, AIG carried out a 20:1
  reverse stock split, which allows warrants held by Treasury to become convertible into 0.1 percent common
  equity. Therefore, the total benefit to the Treasury would be a 79.8 percent voting majority in AIG in
  connection with its ownership of Series C convertible shares. U.S. Government Accountability Office, Troubled
  Asset Relief Program: Status of Government Assistance Provided to AIG (Sept. 2009) (GAO-09-975) (online at
  www.gao.gov/new.items/d09975.pdf). Additional information was also provided by Treasury in response to Panel
  inquiry.
lxiii This number includes investments under the AIGIP/SSFI Program: a $40 billion investment made on November
  25, 2008, and a $30 billion investment made on April 17, 2009 (less a reduction of $165 million representing
  bonuses paid to AIG Financial Products employees). As of August 31, 2010, AIG had utilized $47.5 billion of
  the available $69.8 billion under the AIGIP/SSFI. U.S. Department of the Treasury, Troubled Assets Relief
  Program Monthly 105(a) Report--August 2010 (Sept. 10, 2010) (online at www.financialstability.gov/docs/
  105CongressionalReports/August%202010%20105(a)%20Report_final_9%2010%2010.pdf).
lxiv As part of the restructuring of the U.S. government's investment in AIG announced on March 2, 2009, the
  amount available to AIG through the Revolving Credit Facility was reduced by $25 billion in exchange for
  preferred equity interests in two special purpose vehicles, AIA Aurora LLC and ALICO Holdings LLC. These SPVs
  were established to hold the common stock of two AIG subsidiaries: American International Assurance Company
  Ltd. (AIA) and American Life Insurance Company (ALICO). As of September 1, 2010, the book value of the Federal
  Reserve Bank of New York's holdings in AIA Aurora LLC and ALICO Holdings LLC was $16.5 billion and $9.3
  billion in preferred equity, respectively. Hence, the book value of these securities is $25.7 billion, which
  is reflected in the corresponding table. Federal Reserve Bank of New York, Factors Affecting Reserve Balances
  (H.4.1) (Sept. 1, 2010) (online at www.federalreserve.gov/releases/h41/).
lxv This number represents the full $30.0 billion that is available to AIG through its Revolving Credit Facility
  (RCF) with the FRBNY ($20.1 billion had been drawn down as of September 1, 2010) and the outstanding principal
  of the loans extended to the Maiden Lane II and III SPVs to buy AIG assets (as of September 1, 2010, $13.9
  billion and $15.1 billion, respectively). The maximum amount available through the RCF decreased from $34
  billion over the past two months, as a result of the sale of two AIG subsidiaries, as well as the company's
  sale of CME Group, Inc. common stock. The reduced ceiling also reflects a $3.95 billion repayment to the RCF
  from proceeds earned from a debt offering by the International Lease Finance Corporation (ILFC), an AIG
  subsidiary.
The amounts outstanding under the Maiden Lane II and III facilities do not reflect the accrued interest payable
  to FRBNY. Income from the purchased assets is used to pay down the loans to the SPVs, reducing the taxpayers'
  exposure to losses over time. Federal Reserve Bank of New York, Factors Affecting Reserve Balances (H.4.1)
  (Sept. 2, 2010) (online at www.federalreserve.gov/releases/h41/); Board of Governors of the Federal Reserve
  System, Federal Reserve System Monthly Report on Credit and Liquidity Programs and the Balance Sheet, at 15
  (July 2010) (online at www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport201007.pdf); Board of
  Governors of the Federal Reserve System, Federal Reserve System Monthly Report on Credit and Liquidity
  Programs and the Balance Sheet, at 16 (Aug. 2010) (online at www.federalreserve.gov/monetarypolicy/files/
  monthlyclbsreport201008.pdf); American International Group, Inc., Press Release: AIG Reduces Principal Balance
  on Federal Reserve Bank of New York Revolving Credit Facility by Nearly $4 Billion (Aug. 23, 2010) (online at
  ir.aigcorporate.com/External.File?t=2&item= g7rqBLVLuv81UAmrh20Mp2D/
  jbuMQX0JWf4oGazjlIxeJq2b5l2D3jdQlccQVaAZCaOmzP8 Hukewe3TB4pawgQ==).
lxvi This figure represents Treasury's $25 billion investment in Citigroup, minus $8.5 billion applied as a
  repayment for CPP funding. The amount repaid comes from the $10.5 billion in gross proceeds Treasury received
  from the sale of 2.6 billion Citigroup common shares. Treasury is currently in the process of selling another
  1.5 billion shares of Citigroup common equity. The selling period is expected to end on September 30, 2010.
  See Endnote lii, supra (discussing the details of the sales of Citigroup common stock to date). U.S.
  Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September
  1, 2010 (Sept. 3, 2010) (online at financialstability.gov/docs/transaction-reports/9-3-
  10%20Transactions%20Report%20as%20of%209-1-10.pdf).
lxvii This figure represents the $204.9 billion Treasury disbursed under the CPP, minus the $25 billion
  investment in Citigroup identified above, $147.5 billion in repayments that are in ``repaid and unavailable''
  TARP funds, and losses under the program. This figure does not account for future repayments of CPP
  investments and dividend payments from CPP investments. U.S. Department of the Treasury, Troubled Asset Relief
  Program Transactions Report for the Period Ending September 1, 2010 (Sept. 3, 2010) (online at
  financialstability.gov/docs/transaction-reports/9-3-10%20Transactions%20Report%20as%20of%209-1-10.pdf).
lxviii On 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).
lxix This figure represents the $4.3 billion adjusted allocation to the TALF SPV. However, as of July 28, 2010,
  TALF LLC had drawn only $105 million of the available $4.3 billion. Board of Governors of the Federal Reserve
  System, Factors Affecting Reserve Balances (H.4.1) (Sept. 2, 2010) (online at www.federalreserve.gov/releases/
  h41/); U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period
  Ending September 1, 2010 (Sept. 3, 2010) (online at financialstability.gov/docs/transaction-reports/9-3-
  10%20Transactions%20Report%20as%20of%209-1-10.pdf). On June 30, 2010, the Federal Reserve ceased issuing loans
  collateralized by newly issued CMBS. As of this date, investors had requested a total of $73.3 billion in TALF
  loans ($13.2 billion in CMBS and $60.1 billion in non-CMBS) and $71 billion in TALF loans had been settled
  ($12 billion in CMBS and $59 billion in non-CMBS). Earlier, it ended its issues of loans collateralized by
  other TALF-eligible newly issued and legacy ABS on March 31, 2010. Federal Reserve Bank of New York, Term
  Asset-Backed Securities Loan Facility: Terms and Conditions (online at www.newyorkfed.org/markets/
  talf_terms.html) (accessed Aug. 10, 2010); Term Asset-Backed Securities Loan Facility: CMBS (online at
  www.newyorkfed.org/markets/cmbs_operations.html) (accessed Aug. 10, 2010); Federal Reserve Bank of New York,
  Term Asset-Backed Securities Loan Facility: non-CMBS (online at www.newyorkfed.org/markets/
  talf_operations.html) (accessed Aug. 10, 2010).
lxx This number is derived from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the value
  of Federal Reserve loans under the TALF. U.S. Department of the Treasury, Fact Sheet: Financial Stability Plan
  (Feb. 10, 2009) (online at www.financialstability.gov/docs/fact-sheet.pdf) (describing the initial $20 billion
  Treasury contribution tied to $200 billion in Federal Reserve loans and announcing potential expansion to a
  $100 billion Treasury contribution tied to $1 trillion in Federal Reserve loans). Since there was only $43
  billion in TALF loans outstanding when the program closed, Treasury is currently responsible for reimbursing
  the Federal Reserve Board up to $4.3 billion in losses from these loans. Thus, the Federal Reserve's maximum
  potential exposure under the TALF is $38.7 billion.
lxxi It 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); Federal Deposit Insurance Corporation, Legacy Loans Program--
  Test of Funding Mechanism (July 31, 2009) (online at www.fdic.gov/news/news/press/2009/pr09131.html). The
  sales described in these statements do not involve any Treasury participation, and FDIC activity is accounted
  for here as a component of the FDIC's Deposit Insurance Fund outlays.
lxxii This figure represents Treasury's final adjusted investment amount in PPIP. As of September 1, 2010,
  Treasury reported commitments of $14.9 billion in loans and $7.5 billion in membership interest associated
  with PPIP. On January 4, 2010, Treasury and one of the nine fund managers, TCW Senior Management Securities
  Fund, L.P. (TCW), entered into a ``Winding-Up and Liquidation Agreement.'' Treasury's final investment amount
  in TCW totaled $356 million. Following the liquidation of the fund, Treasury's initial $3.33 billion
  obligation to TCW was reallocated among the eight remaining funds on March 22, 2010. U.S. Department of the
  Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September 1, 2010 (Sept. 3,
  2010) (online at financialstability.gov/docs/transaction-reports/9-3-10%20Transactions%20Report%20as%20of%209-
  1-10.pdf).
lxxiii Of the $30.5 billion in TARP funding for HAMP, $28.8 billion has been allocated as of September 1, 2010.
  However, as of September 14, 2010, only $395.4 million in non-GSE payments has been disbursed under HAMP. U.S.
  Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September
  1, 2010 (Sept. 3, 2010) (online at financialstability.gov/docs/transaction-reports/9-3-
  10%20Transactions%20Report%20as%20of%209-1-10.pdf). Disbursement information provided by Treasury staff in
  response to a Panel inquiry.
lxxiv A substantial portion of the total $81.3 billion in loans extended under the AIFP has since been converted
  to common equity and preferred shares in restructured companies. $8.1 billion has been retained as first lien
  debt (with $1 billion committed to old GM and $7.1 billion to Chrysler). This figure ($67.1 billion)
  represents Treasury's current obligation under the AIFP after repayments and losses. U.S. Department of the
  Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September 1, 2010 (Sept. 3,
  2010) (online at financialstability.gov/docs/transaction-reports/9-3-10%20Transactions%20Report%20as%20of%209-
  1-10.pdf).
lxxv This figure represents Treasury's total adjusted investment amount in the ASSP. U.S. Department of the
  Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September 1, 2010 (Sept. 3,
  2010) (online at financialstability.gov/docs/transaction-reports/9-3-10%20Transactions%20Report%20as%20of%209-
  1-10.pdf).
lxxvi U.S. Department of the Treasury, Troubled Assets Relief Program (TARP) Monthly 105(a) Report--August 2010
  (Sept. 10, 2010) (online at www.financialstability.gov/docs/105CongressionalReports/
  August%202010%20105(a)%20Report_final_9%2010%2010.pdf).
lxxvii U.S. Department of the Treasury, Troubled Assets Relief Program (TARP) Monthly 105(a) Report--August 2010
  (Sept. 10, 2010) (online at www.financialstability.gov/docs/105CongressionalReports/
  August%202010%20105(a)%20Report_final_9%2010%2010.pdf).
lxxviii This figure represents the current maximum aggregate debt guarantees that could be made under the
  program, which is a function of the number and size of individual financial institutions participating. $292.6
  billion of debt subject to the guarantee is currently outstanding, which represents approximately 57.4 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 (July 31, 2010) (online at
  www.fdic.gov/regulations/resources/TLGP/total_issuance07-10.html). The FDIC has collected $10.4 billion in
  fees and surcharges from this program since its inception in the fourth quarter of 2008. Federal Deposit
  Insurance Corporation, Monthly Reports Related to the Temporary Liquidity Guarantee Program: Fees Under TLGP
  Debt Program (July 2010) (online at www.fdic.gov/regulations/resources/tlgp/fees.html).
lxxix This figure represents the FDIC's provision for losses to its deposit insurance fund attributable to bank
  failures in the third and fourth quarters of 2008, the first, second, third, and fourth quarters of 2009, and
  the first quarter of 2010. 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); Federal Deposit Insurance Corporation, Chief Financial Officer's
  (CFO) Report to the Board: DIF Income Statement (Fourth Quarter 2009) (online at www.fdic.gov/about/strategic/
  corporate/cfo_report_4thqtr_09/income.html); Federal Deposit Insurance Corporation, Chief Financial Officer's
  (CFO) Report to the Board: DIF Income Statement (First Quarter 2010) (online at www.fdic.gov/about/strategic/
  corporate/cfo_report_1stqtr_10/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 seven 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, e.g., Federal Deposit Insurance Corporation, Purchase and Assumption Agreement--Whole Bank, All Deposits--
  Among FDIC, Receiver of Guaranty Bank, Austin, Texas, Federal Deposit Insurance Corporation 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.
lxxx Outlays 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)
  (Sept. 2, 2010) (online at www.federalreserve.gov/releases/h41/) (accessed Sept. 8, 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, at 2 (Nov. 2009) (online at
  www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200911.pdf).
On September 7, 2008, Treasury announced the GSE Mortgage Backed Securities Purchase Program (Treasury MBS
  Purchase Program). The Housing and Economic Recovery Act of 2008 provided Treasury with the authority to
  purchase Government Sponsored Enterprise (GSE) MBS. Under this program, Treasury purchased approximately
  $214.4 billion in GSE MBS before the program ended on December 31, 2009. As of August 2010, there was $164.1
  billion still outstanding under this program. U.S. Department of the Treasury, MBS Purchase Program: Portfolio
  by Month (online at www.financialstability.gov/docs/August%202010%20Portfolio%20by%20month.pdf) (accessed
  Sept. 8, 2010). Treasury has received $56.6 billion in principal repayments and $13.2 billion in interest
  payments from these securities. U.S. Department of the Treasury, MBS Purchase Program Principal and Interest
  Received (online at www.financialstability.gov/docs/
  August%202010%20MBS%20Principal%20and%20Interest%20Monthly%20Breakout.pdf) (accessed Sept. 8, 2010).
lxxxi Federal Reserve Liquidity Facilities classified in this table as loans include primary credit, secondary
  credit, central bank liquidity swaps, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity
  Facility, loans outstanding to Commercial Paper Funding Facility LLC, seasonal credit, term auction credit,
  the Term Asset-Backed Securities Loan Facility, and loans outstanding to Bear Stearns (Maiden Lane LLC). Board
  of Governors of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1) (Sept. 2, 2010) (online
  at www.federalreserve.gov/releases/h41/).
lxxxii Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, TARP resources cannot be
  allocated to programs that were not established prior to June 25, 2010. Also, any TARP funds that have been
  repaid may not be used to fund additional TARP commitments. Dodd-Frank Wall Street Reform and Consumer
  Protection Act, Pub. L. No. 111-203, at Sec.  1302 (2010).

                   SECTION FOUR: OVERSIGHT ACTIVITIES

    The Congressional Oversight Panel was established as part 
of the Emergency Economic Stabilization Act (EESA) and formed 
on November 26, 2008. Since then, the Panel has produced 22 
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.

Upcoming Reports and Hearings

    The Panel will release its next oversight report in October 
on TARP contracting.
    The Panel is planning a hearing in Washington on September 
22, 2010, to discuss the topic of the October report. The Panel 
intends to hear testimony from Treasury officials as well as 
TARP contractors and other financial agents.
         SECTION FIVE: ABOUT THE CONGRESSIONAL OVERSIGHT PANEL

    In response to the escalating financial 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 TARP. 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. Senate Minority Leader Mitch 
McConnell appointed Kenneth Troske, Sturgill Professor of 
Economics at the University of Kentucky, to fill the vacancy 
created by the resignation of Paul Atkins on May 21, 2010.
