[JPRT, 112th Congress]
[From the U.S. Government Publishing Office]
CONGRESSIONAL OVERSIGHT PANEL
MARCH OVERSIGHT REPORT *
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THE FINAL REPORT OF THE CONGRESSIONAL OVERSIGHT PANEL
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
March 16, 2011.--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 MARCH OVERSIGHT REPORT
CONGRESSIONAL OVERSIGHT PANEL
MARCH OVERSIGHT REPORT *
__________
THE FINAL REPORT OF THE CONGRESSIONAL OVERSIGHT PANEL
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
March 16, 2011.--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
U.S. GOVERNMENT PRINTING OFFICE
64-832 WASHINGTON : 2011
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CONGRESSIONAL OVERSIGHT PANEL
Panel Members
Sen. Ted Kaufman, Chairman
Richard H. Neiman
Damon Silvers
J. Mark McWatters
Kenneth Troske
C O N T E N T S
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Page
Glossary of Terms................................................ vi
Executive Summary................................................ 1
Section One:
I. Introduction.................................................. 5
A. Key Events of the Financial Crisis........................ 6
1. Events Leading up to Enactment of EESA................ 6
2. Initial TARP Investments in the Largest Institutions.. 13
B. Overview of Government Efforts............................ 15
1. Federal Reserve....................................... 15
2. FDIC.................................................. 18
3. Treasury Department................................... 19
4. Coordinated Action.................................... 21
II. Banks........................................................ 25
A. Capital Infusions and Bank Balance Sheets................. 25
1. Summary of COP Reports and Findings................... 25
2. Panel Recommendations and Updates..................... 31
3. Lessons Learned....................................... 46
B. Guarantees and Contingent Payments........................ 48
1. Background............................................ 49
2. Summary of COP Report and Findings.................... 50
3. Panel Recommendations and Updates..................... 50
4. Lessons Learned....................................... 51
C. Global Context and International Effects of the TARP...... 52
1. Background............................................ 52
2. Summary of COP Report and Findings.................... 53
3. Panel Recommendations and Updates..................... 54
4. Lessons Learned....................................... 55
III. Credit Markets: Small Business and Consumer Lending......... 55
A. Background................................................ 55
1. Small Business Lending................................ 55
2. Consumer Lending...................................... 58
3. Government Efforts to Stimulate Small Business and
Consumer Lending....................................... 59
B. Summary of COP Reports and Findings....................... 63
C. Panel Recommendations and Updates......................... 64
1. Current State of Commercial and Industrial Lending.... 64
2. Consideration of Alternatives......................... 65
3. Small Business Lending Fund........................... 66
D. Lessons Learned........................................... 67
IV. Foreclosure Mitigation....................................... 68
A. Background................................................ 68
B. Summary of COP Reports and Findings....................... 72
C. Panel Recommendations and Program Updates................. 75
1. Transparency.......................................... 76
2. Compliance............................................ 78
3. Goals................................................. 78
4. Streamlining.......................................... 79
5. Program Structure..................................... 80
6. Document Irregularities............................... 83
D. Data Updates.............................................. 84
1. Treasury's Foreclosure Mitigation Programs............ 84
2. Housing Market........................................ 88
E. Lessons Learned........................................... 93
V. Automotive Industry Assistance................................ 95
A. Background................................................ 95
1. Initial Treasury Action............................... 96
2. Additional Initiatives and Actions.................... 98
B. Summary of COP Reports and Findings....................... 99
C. Panel Recommendations and Updates......................... 103
1. Transparency.......................................... 103
2. Accountability........................................ 103
3. Improved Balance among Treasury's Roles............... 105
4. Continued Oversight................................... 105
5. Updates............................................... 105
D. Lessons Learned........................................... 106
VI. AIG.......................................................... 107
A. Background................................................ 107
1. Government Assistance................................. 109
B. Summary of COP Report and Findings........................ 114
1. AIG Changed a Fundamental Market Relationship......... 114
2. The Powerful Role of Credit Rating Agencies........... 115
3. The Options Available to the Government............... 115
4. The Government's Authorities in a Financial Crisis.... 116
5. Conflicts............................................. 116
C. Panel Recommendations..................................... 117
1. Government Exit Strategy/Equity Market Risk Mitigation 117
2. Status of COP Recommendations......................... 118
D. Updates................................................... 118
1. Recent Developments................................... 118
2. Outlook............................................... 125
E. Lessons Learned........................................... 129
VII. Administration of the TARP.................................. 130
A. Treasury's Use of Its Contracting Authority............... 130
1. Background............................................ 130
2. Summary of COP Report and Findings.................... 131
3. Panel Recommendations and Updates..................... 133
4. Lessons Learned....................................... 135
B. Executive Compensation Restrictions in the TARP........... 135
1. Background............................................ 135
2. Summary of COP Report and Findings.................... 139
3. Panel Recommendations and Updates..................... 140
4. Lessons Learned....................................... 141
VIII. General TARP Assessment.................................... 141
A. Summary of COP Reports and Findings....................... 142
B. Panel Recommendations..................................... 144
C. Financial Status of the TARP.............................. 145
IX. Conclusions and Lessons Learned.............................. 151
A. ``Too Big to Fail'' and Moral Hazard...................... 153
B. Stigma.................................................... 155
C. Transparency, Data Collection, and Accountability......... 156
D. Other Obstacles Encountered by the TARP................... 158
E. On the Role of Oversight.................................. 160
Annex I: Federal Financial Stability Efforts..................... 162
Annex II: Additional CPP Data.................................... 165
Annex III: Endnotes.............................................. 172
Section Two: Oversight Activities................................ 180
Section Three: About the Congressional Oversight Panel
A. Members................................................... 181
B. Reports................................................... 182
C. Hearings.................................................. 187
D. Staff..................................................... 188
E. Budget.................................................... 188
Appendices:
APPENDIX I: LETTER TO SECRETARY TIMOTHY GEITHNER FROM CHAIRMAN
TED KAUFMAN RE: REDESIGN OF WEBSITE, DATED MARCH 7, 2011....... 190
APPENDIX II: LETTER TO CHAIRMAN TED KAUFMAN FROM ACTING ASSISTANT
SECRETARY TIMOTHY MASSAD RE: REDESIGN OF WEBSITE, DATED MARCH
14, 2011....................................................... 194
Glossary of Terms
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ABS.................................... asset-backed securities
AGP.................................... Asset Guarantee Program
AIA.................................... American International
Assurance Company, Limited
AIFP................................... Automobile Industry Financing
Program
AIG.................................... American International Group
AIGFP.................................. AIG Financial Products
AIGIP/SSFI Program..................... American International Group
Investment Program/
Systemically Significant
Failing Institutions Program
ALICO.................................. American Life Insurance Company
AMLF................................... Asset-Backed Commercial Paper
Money Market Mutual Fund
Liquidity Facility
ARRA................................... American Recovery and
Reinvestment Act
ASSP................................... Auto Supplier Support Program
BHC.................................... bank holding company
C&I loans.............................. commercial and industrial loans
CAP.................................... Capital Assistance Program
CBO.................................... Congressional Budget Office
CDCI................................... Community Development Capital
Initiative
new Chrysler........................... Chrysler Group LLC; Chrysler
post bankruptcy
Chrysler Holding LLC................... Chrysler Holding Limited
Liability Company
CMBS................................... commercial mortgage-backed
securities
CPFF................................... Commercial Paper Funding
Facility
CPP.................................... Capital Purchase Program
CRE.................................... commercial real estate
DGP.................................... Debt Guarantee Program
Dodd-Frank Act......................... Dodd-Frank Wall Street Reform
and Consumer Protection Act of
2010
EESA................................... Emergency Economic
Stabilization Act of 2008
FDIC................................... Federal Deposit Insurance
Corporation
FHA.................................... Federal Housing Administration
FHFA................................... Federal Housing Finance Agency
FOMC................................... Federal Open Market Committee
FRB.................................... Federal Reserve Board
FRBNY.................................. Federal Reserve Bank of New
York
GAO.................................... Government Accountability
Office
GDP.................................... gross domestic product
new GM................................. General Motors Company; GM post
bankruptcy
GM..................................... General Motors Corporation
GMAC................................... General Motors Acceptance
Corporation; now Ally
Financial
GMAC/Ally Financial.................... Ally Financial
GSE.................................... government sponsored enterprise
GSE MBS Purchase Program............... Government Sponsored
Enterprises' Mortgage Backed
Securities Purchase Program
HAMP................................... Home Affordable Modification
Program
IFR-COI................................ Interim Final Rule on TARP
Conflicts of Interest
IFR-Comp............................... Interim Final Rule on TARP
Standards for Compensation and
Corporate Governance
IPO.................................... initial public offering
IRR.................................... internal rate of return
LIBOR.................................. London Interbank Offered Rate
LIBOR-OIS spread....................... measures the difference between
the LIBOR and the OIS
LLC.................................... limited liability company
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Glossary of Terms
------------------------------------------------------------------------
------------------------------------------------------------------------
MBS.................................... Mortgage Backed Securities
Purchase
MMF.................................... Money Market Fund
OIS.................................... Overnight Indexed Swaps rate
OMB.................................... Office of Management and Budget
PDCF................................... Primary Dealer Credit Facility
PPIP................................... Public-Private Investment
Program
RCF.................................... revolving credit facility
RMBS................................... residential mortgage-backed
security
SBA.................................... Small Business Administration
SBA 504................................ a loan program of the Small
Business Administration
SBA 7(a)............................... a loan program of the Small
Business Administration
SBLF................................... Small Business Lending Fund
program
SCAP................................... Supervisory Capital Assessment
Program (the ``stress tests'')
SEC.................................... U.S. Securities and Exchange
Commission
SIGTARP................................ Special Inspector General for
the Troubled Asset Relief
Program
SPA.................................... Securities Purchase Agreement
SPV.................................... special purpose vehicle
SSFI program........................... Systemically Significant
Failing Institutions program
(solely for AIG)
TAF.................................... Term Auction Facility
TAG.................................... Transaction Account Guarantee
TALF................................... Term Asset-Backed Securities
Loan Facility
TALF LLC............................... Term Asset-Backed Securities
Loan Facility Limited
Liability Company
TARP................................... Troubled Asset Relief Program
TGPMMF................................. Temporary Guarantee Program for
Money Market Funds
TIP.................................... Targeted Investment Program
TLGP................................... Temporary Liquidity Guarantee
Program
Trust.................................. AIG Credit Facility Trust
TSLF................................... Term Securities Lending
Facility
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MARCH OVERSIGHT REPORT
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March 16, 2011.--Ordered to be printed
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EXECUTIVE SUMMARY *
On October 3, 2008, in response to rapidly deteriorating
financial market conditions, Congress and the President created
the Troubled Asset Relief Program (TARP) to ``immediately
provide authority and facilities that the Secretary of the
Treasury can use to restore liquidity and stability to the
financial system of the United States.'' The same law also
established the Congressional Oversight Panel and charged it
with providing public accountability for Treasury's use of its
TARP authority. By statute, the Panel terminates six months
after the expiration of TARP authority, which ended on October
3, 2010. Thus, the Panel's work concludes with this report.
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* The Panel adopted this report with a 5-0 vote on March 15, 2011.
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For its final report, the Panel summarizes and updates its
comprehensive body of oversight work. The report describes the
financial crisis and the broad array of federal initiatives
undertaken in response. The Panel also provides a summary of
its key findings and recommendations, along with updates since
the Panel's prior work.
In order to evaluate the TARP's impact, one must first
recall the extreme fear and uncertainty that infected the
financial system in late 2008. The stock market had endured
triple-digit swings. Major financial institutions, including
Bear Stearns, Fannie Mae, Freddie Mac, and Lehman Brothers, had
collapsed, sowing panic throughout the financial markets. The
economy was hemorrhaging jobs, and foreclosures were escalating
with no end in sight. Federal Reserve Chairman Ben Bernanke has
said that the nation was on course for ``a cataclysm that could
have rivaled or surpassed the Great Depression.''
It is now clear that, although America has endured a
wrenching recession, it has not experienced a second Great
Depression. The TARP does not deserve full credit for this
outcome, but it provided critical support to markets at a
moment of profound uncertainty. It achieved this effect in part
by providing capital to banks but, more significantly, by
demonstrating that the United States would take any action
necessary to prevent the collapse of its financial system.
The Cost of the TARP. The Congressional Budget Office (CBO)
today estimates that the TARP will cost taxpayers $25 billion--
an enormous sum, but vastly less than the $356 billion that CBO
initially estimated. Although this much-reduced cost estimate
is encouraging, it does not necessarily validate Treasury's
administration of the TARP. Treasury deserves credit for
lowering costs through its diligent management of TARP assets
and, in particular, its careful restructuring of AIG, Chrysler,
and GM. However, a separate reason for the TARP's falling cost
is that Treasury's foreclosure prevention programs, which could
have cost $50 billion, have largely failed to get off the
ground. Viewed from this perspective, the TARP will cost less
than expected in part because it will accomplish far less than
envisioned for American homeowners. In addition, non-TARP
government programs, including efforts by the FDIC and the
Federal Reserve, have shifted some of the costs of the
financial rescue away from the TARP's balance sheet. Further,
accounting for the TARP from today's vantage point--at a time
when the financial system has made great strides toward
recovery--obscures the risk that existed in the depths of the
financial crisis. At one point, the federal government
guaranteed or insured $4.4 trillion in face value of financial
assets. If the financial system had suffered another shock on
the road to recovery, taxpayers would have faced staggering
losses.
``Too Big to Fail.'' The Panel has always emphasized that
the TARP's cost cannot be measured merely in dollars. Other
costs include its distortion of the financial marketplace
through its implicit guarantee of ``too big to fail'' banks. At
the height of the financial crisis, 18 very large financial
institutions received $208.6 billion in TARP funding almost
overnight, in many cases without having to apply for funding or
to demonstrate an ability to repay taxpayers. In light of these
events, it is not surprising that markets have assumed that
``too big to fail'' banks are safer than their ``small enough
to fail'' counterparts. Credit rating agencies continue to
adjust the credit ratings of very large banks to reflect their
implicit government guarantee. Smaller banks receive no such
adjustment, and as a result, they pay more to borrow relative
to very large banks.
By protecting very large banks from insolvency and
collapse, the TARP also created moral hazard: very large
financial institutions may now rationally decide to take
inflated risks because they expect that, if their gamble fails,
taxpayers will bear the loss. Ironically, these inflated risks
may create even greater systemic risk and increase the
likelihood of future crises and bailouts.
In addition, Treasury's intervention in the automotive
industry, rescuing companies that were not banks and were not
particularly interconnected within the financial system,
extended the ``too big to fail'' guarantee and its associated
moral hazard to non-financial firms. The implication may seem
to be that any company in America can receive a government
backstop, so long as its collapse would cost enough jobs or
deal enough economic damage.
Stigma. As the TARP evolved, Treasury found its options
increasingly constrained by public anger about the program. The
TARP is now widely perceived as having restored stability to
the financial sector by bailing out Wall Street banks and
domestic automotive manufacturers while doing little for the
13.9 million workers who are unemployed, the 2.4 million
homeowners who are at immediate risk of foreclosure, or the
countless families otherwise struggling to make ends meet. As a
result of this perception, the TARP is now burdened by a public
``stigma.''
Because the TARP was designed for an inherently unpopular
purpose--rescuing Wall Street banks from the consequences of
their own actions--stigmatization was likely inevitable.
Treasury's implementation of the program has, however, made
this stigma worse. For example, many senior managers of TARP-
recipient banks maintained their jobs and their high salaries,
and although shareholders suffered dilution of their stock,
they were not wiped out. To the public, this may appear to be
evidence that Wall Street banks and bankers can retain their
profits in boom years but shift their losses to taxpayers
during a bust--an arrangement that undermines the market
discipline necessary to a free economy.
Transparency, Data Collection, and Accountability.
Beginning with its very first report, the Panel has expressed
concerns about the lack of transparency in the TARP. In perhaps
the most profound violation of the principle of transparency,
Treasury decided in the TARP's earliest days to push tens of
billions of dollars out the door to very large financial
institutions without requiring banks to reveal how the money
was used. As a result, the public will never know to what
purpose its money was put.
In some cases, public understanding of the TARP has
suffered not because Treasury refused to reveal useful
information but because relevant data were never collected in
the first place. Without adequate data collection, Treasury has
flown blind; it has lacked the information needed to spot
trends, determine which programs are succeeding and which are
failing, and make necessary changes. A related concern is
Treasury's failure to articulate clear goals for many of its
TARP programs or to update its goals as programs have evolved.
For example, when the President announced the Home Affordable
Modification Program in early 2009, he asserted that it would
prevent three to four million foreclosures. The program now
appears on track to help only 700,000 to 800,000 homeowners,
yet Treasury has never formally announced a new target. Absent
meaningful goals, the public has no meaningful way to hold
Treasury accountable, and Treasury has no clear target to
strive toward in its own deliberations.
On the Role of Oversight. Between the efforts of the
Congressional Oversight Panel, SIGTARP, the GAO, the U.S.
Congress, and many journalists and private citizens, the TARP
has become one of the most thoroughly scrutinized government
programs in U.S. history. Such close scrutiny inevitably begets
criticism, and in the case of the TARP--a program born out of
ugly necessity--the criticism was always likely to be harsh.
After all, in the midst of a crisis, perfect solutions do not
exist; every possible action carries regrettable consequences,
and even the best decisions will be subject to critiques and
second-guessing.
Yet there can be no question that oversight has improved
the TARP and increased taxpayer returns. For example, in July
2009, the Panel reported that Treasury's method for selling
stock options gained through the CPP appeared to be recovering
only 66 percent of the warrants' estimated worth. Due in part
to pressure generated by the Panel's work, Treasury changed its
approach, and subsequent sales recovered 103 cents on the
dollar, contributing to $8.6 billion in returns to taxpayers.
Other substantial improvements in the TARP--such as Treasury's
heightened focus on the threat to HAMP posed by second liens,
the increased transparency of the TARP contracting process, and
the greater disclosure of TARP-related data--are all partly the
result of pressure exerted by the Panel and other oversight
bodies.
Thus, an enduring lesson of the TARP is that extraordinary
government programs can benefit from, and indeed may require,
extraordinary oversight. This lesson remains relevant in the
context of the government's extraordinary actions in the 2008
financial crisis: The public will continue to benefit from
intensive, coordinated efforts by public and private
organizations to oversee Treasury, the FDIC, the Federal
Reserve, and other government actors. Careful, skeptical review
of the government's actions and their consequences--even when
this review is uncomfortable--is an indispensable step toward
preserving the public trust and ensuring the effective use of
taxpayer money.
SECTION ONE
I. Introduction
In response to rapidly deteriorating financial market
conditions, Congress passed and the President signed into law
the Emergency Economic Stabilization Act of 2008 (EESA) on
October 3, 2008, creating the Troubled Asset Relief Program
(TARP). The Act was intended to ``immediately provide authority
and facilities that the Secretary of the Treasury can use to
restore liquidity and stability to the financial system of the
United States'' and ``to ensure that such authority and such
facilities are used in a manner that protects home values,
college funds, retirement accounts, and life savings; preserves
homeownership and promotes jobs and economic growth; maximizes
overall returns to the taxpayers of the United States; and
provides public accountability for the exercise of such
authority.''
In order to provide the intended public accountability,
EESA designated multiple oversight bodies. In particular,
Section 125 established the Congressional Oversight Panel (the
Panel) and charged it with reviewing the current state of the
financial markets and regulatory system. In addition to one
special report on regulatory reform, the Act required monthly
reports, including oversight of ``the use by the Secretary of
authority under this Act, including with respect to the use of
contracting authority and administration of the program; the
impact of purchases made under the Act on the financial markets
and financial institutions; the extent to which the information
made available on transactions under the program has
contributed to market transparency; and the effectiveness of
foreclosure mitigation efforts, and the effectiveness of the
program from the standpoint of minimizing long-term costs to
the taxpayers and maximizing the benefits for taxpayers.'' In
meeting this mandate the Panel has issued 27 monthly oversight
reports, as well as the special report on regulatory reform and
a subsequently required special report on farm credit.
Under EESA, the Panel terminates six months after the
expiration of TARP authority, which ended on October 3, 2010.
Thus, the Panel's work will conclude with this report. For its
final report the Panel summarizes and revisits its
comprehensive body of monthly oversight work. To provide a
context for understanding and evaluating the TARP, the report
first describes the major events of the financial crisis in the
fall of 2008 and the economic conditions prevailing during the
crisis and response, as well as the broad array of federal
initiatives undertaken to promote financial stability and
liquidity as a result of the crisis. For each area in which it
has done oversight work, the Panel then provides a summary of
its key findings and recommendations, along with an update
since the Panel's prior work and the current status of the
Panel's recommendations.
The Panel's body of work reveals a number of clear and
consistent themes. In closing, the report summarizes these key
``lessons learned'' in order to guide policymakers as they
continue to unwind the TARP, but more important, to inform
policymakers should they find it necessary to respond to
financial crises in the future.
A. Key Events of the Financial Crisis
1. Events Leading up to Enactment of EESA \1\
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\1\ For a more expansive listing of the events prior to and during
the financial crisis, see Federal Reserve Bank of St. Louis, The
Financial Crisis: A Timeline of Events and Policy Actions (online at
timeline.stlouisfed.org/) (accessed Mar. 3, 2011).
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The first tremors of the impending financial crisis and the
severe recession that followed were seen in the American
housing market. During the years from 2000 until 2007 home
prices more than doubled and the amount of mortgage debt
outstanding increased nearly 80 percent.\2\ The rapid
appreciation in home prices, which increased every month from
January 2000 to their peak in April 2006, helped fuel housing
speculation and a boom in mortgage refinancing and home equity
loans.\3\
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\2\ The S&P Case/Shiller home price index, a measure of home values
in the United States, reached its peak level of 206.5 in April 2006,
representing a 105 percent increase from January 2000. Standard &
Poor's, S&P/Case-Shiller Home Price Index (Instrument Used: Home Price
Index Levels, Seasonally adjusted, Composite 20-city Index) (online at
www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/
us/?indexId=spusa-cashpidff--p-us----) (accessed Mar. 11, 2011)
(hereinafter ``S&P/Case-Shiller Home Price Index''). An alternative
measure of home prices, the Federal Housing Finance Agency's quarterly
Purchase Only Index increased for 49 consecutive quarters beginning in
the first quarter of 1995 until the second quarter of 2007. Federal
Housing Finance Agency, Purchase Only Indexes: U.S. Summary Through Q4
2010 (Instrument Used: HPI % Change Over Previous Quarter) (online at
www.fhfa.gov/Default.aspx?Page=87) (accessed Mar. 11, 2011).
Total mortgage debt outstanding for one to four family homes
increased from $4.8 trillion at the end of 1999 to $10.4 trillion in
the beginning of 2007. Board of Governors of the Federal Reserve
System, Statistical Supplement to the Federal Reserve Bulletin:
Mortgage Debt Outstanding (Jan. 2004) (online at
www.federalreserve.gov/pubs/supplement/2004/01/table1_54.htm); Board of
Governors of the Federal Reserve System, Mortgage Debt Outstanding
(Dec. 2010) (online at www.federalreserve.gov/econresdata/releases/
mortoutstand/current.htm).
\3\ From 2001 to 2005, Americans extracted an average of $646.3
billion of equity from their homes each year. In the ten years prior,
the average amount of equity extracted per year was $272.0 billion.
Board of Governors of the Federal Reserve System, Sources and Uses of
Equity Extracted from Homes, at 21 (Mar. 2007) (online at
www.econ.jku.at/members/Riese/files/SS08/239315/topic2_wealth_effect/
greenspan_kennedy.pdf).
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The Housing Bubble Bursts
In late 2006, home prices began to decline and
delinquencies on home mortgages, particularly those taken out
by subprime borrowers, began to rise significantly.\4\ Figure 1
illustrates the dramatic increase in subprime mortgage
delinquencies, which reached 13.3 percent by the end of 2006,
and the corresponding beginning of a relative decline in home
values that continues to this day.\5\
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\4\ S&P Case Shiller index reached its peak of 206.5 in April 2006.
Also, delinquencies as a percentage of loans rose from 4.39 percent at
the end of Q2 2006 to 5.12 percent at the end of Q2 2007. Mortgage
Bankers Association, National Delinquency Survey--2010 4th Quarter, at
4 (Feb. 17, 2011) (hereinafter ``National Delinquency Survey--2010 4th
Quarter'').
\5\ Case-Shiller values are indexed to 100 in January 2000. As of
December 2010, national home prices, as measured by the S&P Case-
Shiller Home Price Index, have declined 30.2 percent since January 2007
and declined 9.1 percent since the enactment of EESA in October 2008.
S&P/Case-Shiller Home Price Index, supra note 2. Subprime delinquencies
reached their highest level during the first quarter of 2010 when
delinquencies reached 27.2 percent. National Delinquency Survey--2010
4th Quarter, supra note 4, at 4.
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FIGURE 1: PERCENTAGE OF DELINQUENT HOME LOANS BY TYPE AS COMPARED TO
HOME PRICES \6\
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\6\ National Delinquency Survey--2010 4th Quarter, supra note 4, at
4; S&P/Case-Shiller Home Price Index, supra note 2.
[GRAPHIC] [TIFF OMITTED] T4832A.001
The subprime mortgage crisis grew in 2007, and during the
period from April to the end of August the credit rating
agencies downgraded hundreds of bonds backed by such mortgages.
Later that summer, Bear Stearns closed two mortgage-backed
securities (MBS) focused hedge funds, and two of the largest
subprime mortgage originators and securitizers--New Century
Financial and American Home Mortgage--filed for bankruptcy.\7\
On August 9, 2007, BNP Paribas, the largest bank in France,
suspended redemptions in three investment funds due to their
exposure to the U.S. subprime mortgage market.\8\ These events
contributed to the significant stress in the housing and
mortgage finance market which then began to spread into the
broader financial sector.
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\7\ U.S. Securities and Exchange Commission, American Home Mortgage
Investment Corp. Files for Chapter 11 Bankruptcy (Aug. 6, 2007) (online
at www.sec.gov/Archives/edgar/data/1256536/000091412107001892/
am9746838-99_1.txt); U.S. Securities and Exchange Commission, New
Century Financial Corporation Files for Chapter 11; Announces Agreement
to Sell Servicing Operations (Apr. 2, 2007) (online at www.sec.gov/
Archives/edgar/data/1287286/000129993307002129/exhibit1.htm).
\8\ Viral V. Acharya and Ouarda Merrouche, Precautionary Hoarding
of Liquidity and Inter-Bank Markets: Evidence from the Sub-prime
Crisis, at 2 (July 3, 2009) (online at pages.stern.nyu.edu/ sternfin/
vacharya/public_html/acharya_merrouche.pdf).
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Beginning of the Financial Crisis
The uncertainty and fear that gripped the financial markets
during this period can be seen in critical credit market
indicators such as the closely watched LIBOR-OIS spread. This
spread measures the difference between the London Interbank
Offered Rate (LIBOR), which shows quarterly borrowing costs for
banks, and the Overnight Indexed Swaps rate (OIS), which
measures the cost of extremely short-term borrowing by
financial institutions. An increase in the LIBOR-OIS spread
indicates that market participants have growing fears about
whether major financial institutions will be able to deliver on
their obligations.\9\ Figure 2 illustrates the spikes in the
LIBOR-OIS spread as key events in the ensuing financial crisis
unfolded.
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\9\ Federal Reserve Bank of St. Louis, What the Libor-OIS Spread
Says (2009) (online at research.stlouisfed.org/publications/es/09/
ES0924.pdf).
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FIGURE 2: LIBOR-OIS SPREAD AND SELECTED EVENTS \10\
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\10\ SNL Financial (accessed Mar. 1, 2011).
[GRAPHIC] [TIFF OMITTED] T4832A.002
For the first seven months of 2007, the LIBOR-OIS spread
averaged 8.7 basis points, reflecting relative calm in the
financial markets. Following the announcement by BNP Paribas on
August 9, 2007, however, this measure increased nearly 200
percent, settling at 39.9 basis points.\11\ On the same date,
the rate for overnight commercial paper, a mechanism of short-
term credit for enterprises, increased to levels not seen since
early 2001.\12\ The summer of 2007 ended with the Federal Open
Market Committee (FOMC) of the Federal Reserve System
concluding that financial market conditions had worsened,
credit availability had decreased, and ``downside risks to
growth [had] increased appreciably.'' \13\
---------------------------------------------------------------------------
\11\ SNL Financial (accessed Mar. 1, 2011).
\12\ The interest rate for overnight AA Asset-backed Commercial
Paper increased from 5.39 percent on August 8, 2007 to 5.75 percent on
August 9, 2007. This was the highest level this measure reached since
its January 31, 2001 level of 5.78 percent. The interest rate for
overnight financial AA Financial Commercial Paper increased from 5.31
percent on August 8, 2007 to 5.39 percent on August 9, 2007. This was
the highest level this measure reached since its March 30, 2001 level
of 5.44 percent. Board of Governors of the Federal Reserve System, Data
Download Program: Commercial Paper (Instruments Used: Rates; Overnight
AA Asset-backed Commercial Paper, Overnight AA Financial Commercial
Paper) (online at www.federalreserve.gov/datadownload/
Choose.aspx?rel=CP) (accessed Mar. 1, 2011).
\13\ Board of Governors of the Federal Reserve System, FOMC
Statement (Aug. 17, 2007) (online at www.federalreserve.gov/newsevents/
press/monetary/20070817b.htm).
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Initial Government and Industry Responses
Among the first direct actions taken by governments to stem
the effects of the growing financial crisis was the creation by
the British Government of a liquidity facility to support
Northern Rock, the fifth largest bank in the United
Kingdom.\14\ In the United States, the Board of Governors of
the Federal Reserve System, or Federal Reserve Board (FRB or
Federal Reserve) lowered its target interest rate twice in the
fall of 2007, signaling the Federal Reserve's growing concern
regarding the tightening credit markets and worsening housing
conditions.\15\ On October 10, 2007, the HOPE NOW Alliance--a
private sector initiative promoted by Treasury and the
Department of Housing and Urban Development and aimed at
bringing together mortgage market participants to encourage
counseling and other foreclosure mitigation options--was
announced.\16\ Finally, on October 15, 2007, a consortium of
banks agreed, after discussions facilitated by Treasury, to
create a pooling mechanism to facilitate liquidity in the
asset-backed commercial paper market.\17\ Within a couple of
months, however, the leading banks involved in this effort--
Bank of America, JPMorgan Chase, and Citigroup--announced that
the initiative had collapsed.\18\
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\14\ HM Treasury, Liquidity Support Facility for Northern Rock plc
(Sept. 14, 2007) (online at webarchive.nationalarchives.gov.uk/+/
www.hm-treasury.gov.uk/press_94_07.htm).
\15\ On September 18, 2007, the FOMC reduced its target for the
federal funds rate from 5.25 percent to 4.75 percent. In conjunction
with that decision, the Federal Reserve stated that, ``the tightening
of credit conditions has the potential to intensify the housing
correction and to restrain economic growth more generally. Today's
action is intended to help forestall some of the adverse effects on the
broader economy that might otherwise arise from the disruptions in
financial markets and to promote moderate growth over time.'' Board of
Governors of the Federal Reserve System, FOMC Statement and Board
Approval of Discount Rate Requests of the Federal Reserve Banks of
Boston, New York, Cleveland, St. Louis, Minneapolis, Kansas City, and
San Francisco (Sept. 18, 2007) (online at www.federalreserve.gov/
newsevents/press/monetary/20070918a.htm) (hereinafter ``FOMC Statement
and Board Approval of Discount Rate Requests''). On October 31, 2007,
the FOMC reduced its target for the federal funds rate from 4.75
percent to 4.25 percent. Board of Governors of the Federal Reserve
System, FOMC Statement and Board Approval of Discount Rate Requests of
the Federal Reserve Banks of Boston, New York, Cleveland, St. Louis,
Minneapolis, Kansas City, and San Francisco (Oct. 31, 2007) (online at
www.federalreserve.gov/newsevents/press/monetary/20071031a.htm).
\16\ HOPE NOW Alliance, HOPE NOW Alliance Created to Help
Distressed Homeowners (Oct. 10, 2007) (online at www.fsround.org/
hope_now/pdfs/AllianceRelease.pdf).
\17\ Bank of America Corporation, Global Banks Announce Plans for
Major Liquidity Facility to Bolster Asset-Backed Commercial Paper
Markets (Oct. 15, 2007) (online at mediaroom.bankofamerica.com/
phoenix.zhtml?c=234503&p=irol-newsArticle&ID=1389929&highlight=).
\18\ Bank of America Corporation, Consortium Provides Update on
Master Liquidity Enhancement Conduit (Dec. 21, 2007) (online at
mediaroom.bankofamerica.com/phoenix.zhtml?c=234503&p=irol-
newsArticle&ID=1389982&highlight=).
---------------------------------------------------------------------------
The Financial Crisis Widens
As housing fundamentals continued to weaken and financial
fear spread, some of the nation's largest financial firms began
to teeter on the edge of failure. On January 11, 2008, Bank of
America announced its purchase of a major mortgage originator,
Countrywide Financial.\19\ Then on March 14, the Federal
Reserve intervened to rescue Bear Stearns by helping to arrange
for and assisting with its purchase by JPMorgan.\20\ During
this period the impacts of the crisis in the housing and
financial sectors began to be felt in the broader economy. The
nation's gross domestic product (GDP), a measure of this
country's economic activity, suffered its first quarterly
decline since 2001 in the first quarter of 2008. Following a
slight increase of 0.6 percent in the next quarter, GDP
contracted for four consecutive quarters through June 2009.\21\
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\19\ See Bank of America Corporation, Bank of America Agrees to
Purchase Countrywide Financial Corp. (Jan. 11, 2008) (online at
mediaroom.bankofamerica.com/phoenix.zhtml?c=234503&p=irol-
newsArticle&ID=1389986&highlight=). This purchase followed a $2 billion
investment by Bank of America in Countrywide in return for 16 percent
of the company on August 22, 2007. See Bank of America Corporation,
Bank of America Makes Investment in Countrywide Financial (Aug. 22,
2007) (online at mediaroom.bankofamerica.com/
phoenix.zhtml?c=234503&p=irol-newsArticle&ID=1389904&highlight=).
\20\ For further details on the purchase of Bear Stearns by
JPMorgan, as well as the government assistance provided to facilitate
the agreement, see Section I.B.1, infra.
\21\ The National Bureau of Economic Research, the body responsible
for determining when shifts in the U.S. business cycle occur, stated on
September 20, 2010 that the most recent recession--commonly referred to
as the ``Great Recession''--began in December 2007 and ended in June
2009, a period corresponding to the decline in GDP mentioned here.
National Bureau of Economic Research, US Business Cycle Expansions and
Contractions (online at www.nber.org/cycles/cyclesmain.html) (accessed
Mar. 3, 2011) (hereinafter ``NBER: US Business Cycle''). Bureau of
Economic Analysis, Gross Domestic Product (Instruments used: Current-
dollar and ``real'' GDP, Percent change from preceding period) (online
at www.bea.gov/national/index.htm) (accessed Mar. 3, 2011) (hereinafter
``Gross Domestic Product'').
---------------------------------------------------------------------------
FIGURE 3: GDP SINCE 2006 \22\
---------------------------------------------------------------------------
\22\ Amounts are in constant 2005 dollars. Gross Domestic Product,
supra note 21.
[GRAPHIC] [TIFF OMITTED] T4832A.003
Similarly, unemployment rose sharply in 2008 and early
2009. The unemployment rate rose from a low of 4.6 percent in
January 2007 to 6.2 percent by September 2008 and 10.1 percent
by October 2009. Figure 4 shows not only the rise in the
unemployment rate, but also the concurrent increase in the
median duration of unemployment, and the sharp increase in
underemployment, a measure that includes people who are
unemployed as well as those who are working fewer hours than
they want to work and those who have become discouraged and
stopped looking for a job.
FIGURE 4: UNEMPLOYMENT, UNDEREMPLOYMENT, AND DURATION OF UNEMPLOYMENT
\23\
---------------------------------------------------------------------------
\23\ Bureau of Labor Statistics, Labor Force Statistics from the
Current Population Survey: Unemployment Rate (online at data.bls.gov/
pdq/SurveyOutputServlet?data_tool=latest_numbers&series_id=LNS14000000)
(accessed Mar. 4, 2011) (hereinafter ``BLS: Unemployment Rate'');
Bureau of Labor Statistics, Alternative Measures of Labor
Underutilization (Instrument Used: U-6) (online at www.bls.gov/
news.release/empsit.t15.htm) (accessed Mar. 4, 2011); Federal Reserve
Bank of St. Louis, Median Duration of Unemployment (online at
research.stlouisfed.org/fred2/series/UEMPMED) (accessed Mar. 4, 2011).
[GRAPHIC] [TIFF OMITTED] T4832A.004
Second Half of 2008 Brings Extraordinary Government Intervention
As the effects of the crisis spread to the wider market,
the summer of 2008 brought further concerns about financial
institutions which specialized in mortgage finance. IndyMac
Bank, one of the nation's largest savings and loans and the
second largest mortgage lender in the country, came under
pressure as fear spread about its potential insolvency. Over an
eleven day period, depositors withdrew over $1.3 billion of the
$19 billion it held in deposits and the institution was
subsequently taken over by the Federal Deposit Insurance
Corporation (FDIC).\24\ Also in July 2008, the Federal Reserve
and Treasury took coordinated action to provide increased
credit support to Fannie Mae and Freddie Mac, two critical
players in the secondary mortgage market which had begun
experiencing difficulty in financing their operations.\25\ Then
on July 30, the Housing and Economic Recovery Act of 2008
(HERA) was signed into law. Among its provisions, HERA
reorganized the government sponsored enterprise's (GSE)
regulatory framework, placing them under the supervision of the
newly created Federal Housing Finance Agency (FHFA) and
providing Treasury with the ability to invest taxpayer funds in
Fannie Mae and Freddie Mac.\26\
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\24\ Office of Thrift Supervision, OTS Closes IndyMac Bank and
Transfers Operations to FDIC (July 11, 2008) (online at
www.ots.treas.gov/index.cfm?p=PressReleases&ContentRecord_id=37f10b00-
1e0b-8562-ebdd-d5d38f67934c&ContentType_id=4c12f337-b5b6-4c87-b45c-
838958422bf3&MonthDisplay=7&YearDisplay=2008).
\25\ U.S. Department of the Treasury, Paulson Announces GSE
Initiatives (July 13, 2008) (online at www.treasury.gov/press-center/
press-releases/Pages/hp1079.aspx). Also, the Federal Reserve announced
that it would supplement the Treasury credit line by providing its own
credit line if necessary. Board of Governors of the Federal Reserve
System, Board Grants Federal Reserve Bank of New York the Authority to
Lend to Fannie Mae and Freddie Mac Should Such Lending Prove Necessary
(July 13, 2008) (online at www.federalreserve.gov/newsevents/press/
other/20080713a.htm).
\26\ Housing and Economic Recovery Act of 2008, Pub. L. No. 110-
289, Sec. Sec. 1101, 1117 (2008) (codified at 12 U.S.C. Sec. Sec. 4511,
1716 et seq., 1451 et seq.).
---------------------------------------------------------------------------
In September, the housing bubble, the liquidity crunch, and
the financial crisis culminated in a string of unprecedented
events and government interventions that took place over a 19-
day stretch. During this period, Fannie Mae and Freddie Mac
were placed into conservatorship, Lehman Brothers filed for
bankruptcy, the Federal Reserve initiated an $85 billion
government rescue of American International Group (AIG),
Treasury announced a temporary guarantee of the $3.7 trillion
money market funds (MMFs), and the FDIC steered Washington
Mutual through the largest bank failure in U.S. history.\27\ By
the beginning of October 2008, the value of the stock market
had declined by nearly 20 percent from its level in January of
that year, losing 10 percent in September alone.\28\ Figure 2
illustrates the effect these events had on the credit markets.
The LIBOR-OIS spread reached a record high of 364 basis points,
or 3.64 percentage points, in October 2008.\29\
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\27\ Treasury took Fannie Mae and Freddie Mac into conservatorship
on September 7, 2008. Lehman Brothers failed on September 14. The next
day, Bank of America announced it was buying Merrill Lynch. The day
after that, the government announced its bailout of AIG. Also, on
September 16, the assets of a money-market mutual fund fell below $1
per share, exposing investors to losses, an occurrence known as
``breaking the buck'' that had not happened in the industry for 14
years. On September 20, the Federal Reserve announced that it was
allowing Goldman Sachs and Morgan Stanley, the nation's only two
remaining large investment banks, to become bank holding companies,
giving them access to a key source of low-cost borrowing from the
Federal Reserve. On September 25, the FDIC took Washington Mutual, the
nation's largest savings and loan, into receivership and sold many of
its assets to JPMorgan Chase. Congressional Oversight Panel, December
Oversight Report: Taking Stock: What Has the Troubled Asset Relief
Program Achieved?, at 11 (Dec. 9, 2009) (online at cop.senate.gov/
documents/cop-120909-report.pdf) (hereinafter ``2009 December Oversight
Report''). The size of the money market funds (MMFs) was $3.66 trillion
in June 2009. Institutional Money Market Funds Association, Frequently
Asked Questions (online at www.immfa.org/about/faq/default.asp)
(accessed Mar. 3, 2011) (hereinafter ``IMMFA: Frequently Asked
Questions'').
\28\ The value of the S&P 500 Index is used here as a proxy for the
broader market. SNL Financial (accessed Mar. 3, 2011).
\29\ SNL Financial (accessed Mar. 3, 2011).
---------------------------------------------------------------------------
As a result of these events and the continuing rapid
deterioration in the condition of the credit markets, Chairman
of the Board of Governors of the Federal Reserve System Ben S.
Bernanke and Secretary of the Treasury Henry M. Paulson, Jr.
concluded on September 18th that their only realistic option to
contain the rapidly spreading financial crisis was to convince
Congress to authorize an overwhelming fiscal response by the
federal government. On September 20th, Treasury sent Congress a
three-page legislative proposal giving Treasury the authority
to spend up to $700 billion to purchase ``troubled assets,''
particularly ``residential and commercial mortgage-related
assets.'' \30\
---------------------------------------------------------------------------
\30\ 2009 December Oversight Report, supra note 27, at 16.
---------------------------------------------------------------------------
Over the following two weeks, the proposal was defeated
once in the House of Representatives and subsequently modified
and expanded prior to being signed into law on October 3, 2008.
The law--EESA--authorized the Treasury Secretary to purchase
not only mortgage-related securities under the TARP, but also
``any other financial instrument'' the purchase of which the
Secretary determined to be ``necessary to promote financial
market stability.'' \31\ Although the federal government has
intervened to rescue financial institutions and prevent bank
runs on several previous occasions in U.S. history, the scale
and breadth of the financial rescue authorized in EESA was
unprecedented.\32\
---------------------------------------------------------------------------
\31\ 2009 December Oversight Report, supra note 27, at 16.
\32\ For example, the savings and loan crisis of the late 1980s and
early 1990s was the last significant previous disruption in financial
markets that involved government intervention. At the time, the total
cost of government assistance provided over the course of this crisis
was estimated at $160 billion ($230 billion in 2005 dollars). Federal
Deposit Insurance Corporation, The Cost of the Savings and Loan Crisis:
Truth and Consequences, at 29 (Dec. 2000) (online at www.fdic.gov/bank/
analytical/banking/2000dec/brv13n2_2.pdf). Dollars adjusted for
inflation using the Gross Domestic Product Implicit Price Deflator.
Federal Reserve Bank of St. Louis, Gross Domestic Product: Implicit
Price Deflator (online at research.stlouisfed.org/fred2/data/
GDPDEF.txt) (accessed Mar. 1, 2011).
---------------------------------------------------------------------------
Secretary Paulson and Chairman Bernanke had initially
proposed using TARP funds to buy troubled assets on the books
of the largest U.S. financial institutions; however, they soon
decided that this was impractical given the need for quick
action and the difficulty of structuring an auction process for
purchasing such assets.\33\ On October 14, 2008, Secretary
Paulson met with the heads of the nine largest U.S. banks to
Washington and told them that Treasury would instead make
direct capital injections into each of their institutions.\34\
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\33\ Less than two weeks after EESA was signed into law, Secretary
Paulson announced that Treasury would ``purchase equity stakes in a
wide array of banks and thrifts.'' U.S. Department of the Treasury,
Statement by Secretary Henry M. Paulson, Jr. on Actions to Protect the
U.S. Economy (Oct. 14, 2008) (online at www.treasury.gov/press-center/
press-releases/Pages/hp1205.aspx) (hereinafter ``Statement by Secretary
Paulson on Actions to Protect the U.S. Economy'').
In response to questions posed by this Panel regarding the shift
from asset purchases to injecting capital, Treasury stated: ``Given
such market conditions, Secretary Paulson and Chairman Bernanke
recognized that Treasury needed to use the authority and flexibility
granted under the EESA as aggressively as possible to help stabilize
the financial system. They determined the fastest, most direct way was
to increase capital in the system by buying equity in healthy banks of
all sizes. Illiquid asset purchases, in contrast, require much longer
to execute.'' U.S. Department of the Treasury, Responses to Questions
of the First Report of the Congressional Oversight Panel for Economic
Stabilization, at 56 (Dec. 30, 2008) (online at cop.senate.gov/
documents/cop-010909-report.pdf).
\34\ 2009 December Oversight Report, supra note 27, at 17-18.
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2. Initial TARP Investments in the Largest Institutions
The nine institutions that were the recipients of the
initial round of TARP investments included the four largest
U.S. commercial banks (JPMorgan, Bank of America, Citigroup,
and Wells Fargo), the three largest investment banks (Goldman
Sachs, Morgan Stanley, and Merrill Lynch), and the two largest
custodian banks (State Street and BNY Mellon). At that time,
these banks held $10.3 trillion in assets, representing more
than 75 percent of all the assets in the American banking
system.\35\ On October 28, 2008, Treasury purchased $125
billion of preferred stock in these nine institutions and by
the end of 2008, Treasury had invested approximately $177.6
billion in banks through the Capital Purchase Program
(CPP).\36\
---------------------------------------------------------------------------
\35\ Amount of assets held by each of these institutions was as of
the third quarter 2008. Total amount of assets in the banking system
were accessed through the FDIC's Quarterly Banking profile as of the
third quarter 2008. SNL Financial (accessed Mar. 3, 2011); Federal
Deposit Insurance Corporation, Quarterly Banking Profile: Balance
Sheet--Excel (online at www2.fdic.gov/qbp/timeseries/BalanceSheet.xls)
(accessed Mar. 3, 2011).
\36\ On October 14, 2008, then Secretary Paulson stated that the
nine initial Troubled Asset Relief Program (TARP) recipients ``are
healthy institutions, and they have taken this step for the good of the
U.S. economy. As these healthy institutions increase their capital
base, they will be able to increase their funding to U.S. consumers and
businesses.'' Statement by Secretary Paulson on Actions to Protect the
U.S. Economy, supra note 33; U.S. Department of the Treasury, Troubled
Asset Relief Program Transactions Report for Period Ending March 8,
2011 (Mar. 10, 2011) (online at www.treasury.gov/initiatives/financial-
stability/briefing-room/reports/tarp-transactions/
DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf) (hereinafter
``Treasury Transactions Report'').
---------------------------------------------------------------------------
In addition to the initial capital investments made in the
nation's largest banks, Treasury undertook additional steps to
ensure the stability of Citigroup and Bank of America in
November and December 2008 by purchasing an additional $20
billion of preferred shares from both institutions under the
Targeted Investment Program (TIP), a program that was utilized
only for those two banks.\37\ Furthermore, in November,
Treasury, in conjunction with the Federal Reserve and the FDIC,
put together a hastily crafted $301 billion guarantee of
Citigroup assets.\38\ A similar guarantee of $118 billion of
Bank of America assets was announced as well, although it was
never legally finalized.\39\
---------------------------------------------------------------------------
\37\ U.S. Department of the Treasury, Joint Statement by Treasury,
Federal Reserve and the FDIC on Citigroup (Nov. 23, 2008) (online at
www.treasury.gov/press-center/press-releases/Pages/hp1287.aspx)
(hereinafter ``Statement by Treasury, Federal Reserve and the FDIC on
Citigroup''); Treasury Transactions Report, supra note 36; Board of
Governors of the Federal Reserve System, Regulatory Reform: Citigroup
(online at www.federalreserve.gov/newsevents/reform_citi.htm) (accessed
Mar. 11, 2011); Board of Governors of the Federal Reserve System,
Regulatory Reform: Bank of America (online at www.federalreserve.gov/
newsevents/reform_boa.htm) (accessed Mar. 11, 2011) (hereinafter
``Regulatory Reform: Bank of America'').
\38\ On November 23, 2008, the Treasury, Federal Reserve, and FDIC
announced in a joint statement that they would provide further
assistance to Citigroup in the form of an asset guarantee and an
additional $20 billion preferred investment. The funds were disbursed
to Citigroup on December 31, 2010 under a program first introduced on
that day named the Targeted Investment Program (TIP). Similarly, the
asset guarantee announced in November was not a part of a specific TARP
initiative until the agreement was finalized on January 16, 2010 under
the newly designated Asset Guarantee Program (AGP). Statement by
Treasury, Federal Reserve and the FDIC on Citigroup, supra note 37;
Treasury Transactions Report, supra note 36.
\39\ Regulatory Reform: Bank of America, supra note 37; 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.treasury.gov/initiatives/financial-stability/investment-programs/
agp/Documents/BofA%20-%20Termination%20Agreement%20-%20executed.pdf)
(hereinafter ``BofA Termination Agreement'').
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Also in November, the federal government supplemented the
original $85 billion loan to AIG and initiated a second round
of assistance to AIG in which the TARP purchased $40 billion of
preferred equity and the Federal Reserve provided $44 billion
to create two special purpose vehicles (SPVs) to take ownership
of certain AIG financial assets.\40\ Treasury also made its
first investments in the automotive industry in late 2008 with
loans and preferred stock purchases for General Motors, GMAC,
Chrysler, and Chrysler Financial. By the end of January 2009,
TARP assistance outstanding amounted to $301 billion with over
75 percent having been provided to only a few firms: the
nation's biggest banks, the automotive industry, and AIG.\41\
---------------------------------------------------------------------------
\40\ Two Special Purpose Vehicles (SPVs), Maiden Lane II and Maiden
Lane III, were created on December 12, 2008 as part of the federal
government's restructuring of its original assistance to AIG. These
facilities were funded with loans from the Federal Reserve of $19.5 and
$24.3 billion respectively. Board of Governors of the Federal Reserve
System, Regulatory Reform: American International Group (AIG), Maiden
Lane II and III (online at www.federalreserve.gov/newsevents/
reform_aig.htm) (accessed Mar. 11, 2011) (hereinafter ``Fed Regulatory
Reform: AIG, Maiden Lane II and III''). These TARP funds were later
supplemented with a commitment of an additional $30 billion TARP
commitment to AIG in April 2009. Treasury Transactions Report, supra
note 36, at 21.
\41\ In total, $301 billion was outstanding under the TARP with
$195.3 billion outstanding under the Capital Purchase Program (CPP),
$40 billion outstanding under the TIP, $20.8 billion outstanding under
the automotive portion of the program, $40 billion outstanding to AIG,
and $5 billion in funds committed to the Citigroup asset guarantee. All
but $70.3 billion of the $301 billion outstanding was provided to
thirteen institutions: Citigroup, Bank of America, JPMorgan, Wells
Fargo, Goldman Sachs, Merrill Lynch, Morgan Stanley, Bank of New York,
State Street, General Motors, GMAC, Chrysler, and Chrysler Financial.
U.S. Department of the Treasury, Troubled Asset Relief Program
Transaction Report for Period Ending January 30, 2009 (Feb. 2, 2009)
(online at www.treasury.gov/initiatives/financial-stability/briefing-
room/reports/tarp-transactions/DocumentsTARPTransactions/
transaction_report_02-02-09.pdf) (hereinafter ``Treasury Transactions
Report--January 2009'').
---------------------------------------------------------------------------
It was in this climate that the Panel began its oversight
work. The unprecedented financial crisis and the corresponding
government intervention left many questions. What steps would
be taken to ensure accountability from TARP recipients? How
would Treasury make certain that its actions were transparent
and that the taxpayer be fairly compensated for the risk they
were taking? What steps would Treasury take to stem the tide of
foreclosures that was having a debilitating effect on American
families and neighborhoods? The Panel laid out these central
concerns in its first two reports and, throughout its
existence, has consistently used its oversight authorities to
focus attention on these questions.
B. Overview of Government Efforts
In response to the financial crisis, Congress, the Federal
Reserve, Treasury, and the FDIC worked both independently and
in concert with other agencies to implement a variety of
policies and initiatives aimed at ensuring financial stability.
In addition to the direct expenditures Treasury made through
the TARP, the federal government also engaged in a broad array
of programs directed at stabilizing the economy. Many of these
programs explicitly augmented Treasury's TARP initiatives, like
asset guarantees for Citigroup and Bank of America, or relied
on cooperation, such as the Federal Reserve and Treasury
working in tandem to create programs such as the Term Asset-
Backed Securities Loan Facility (TALF). Other programs, like
the Federal Reserve's extension of credit through its section
13(3) facilities and SPVs or the FDIC's Temporary Liquidity
Guarantee Program (TLGP), stood independent of the TARP and
sought to accomplish different, but related, goals. Given that
all of these programs provided support to the largest banks,
they had an interactive effect and clearly affected the
performance of each separate program. Figure 6 illustrates the
interconnectedness of certain financial stability programs.
1. Federal Reserve
The policy response to the financial crisis ran the gamut
from the use of traditional monetary policy to the creation of
unprecedented credit and liquidity measures. From September
2007 to December 2008, the Federal Reserve steadily lowered the
federal funds rate from 5.25 percent to its December 2008
target of 0 to 0.25 percent.\42\ Furthermore, in August 2007
the Federal Reserve lowered the interest rate it charged banks
for loans through its discount window above the federal funds
target rate to 50 basis points.\43\ It also expanded the list
of securities banks could post to draw down these loans through
the discount window. While the discount window is an important
monetary tool in normal economic conditions, there were two
problems that limited its effectiveness in late 2007: (1) There
was a fear in the market that companies accessing the discount
window would have a stigma attached to them,\44\ and (2) only
banks could access the discount window.
---------------------------------------------------------------------------
\42\ FOMC Statement and Board Approval of Discount Rate Requests,
supra note 15; Board of Governors of the Federal Reserve System, FOMC
Statement and Board Approval of Discount Rate Requests of Federal
Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis,
and San Francisco (Dec. 16, 2008) (online at www.federalreserve.gov/
newsevents/press/monetary/20081216b.htm).
\43\ Its level prior to the reduction was 100 basis points above
the federal funds target rate. Board of Governors of the Federal
Reserve System, Federal Reserve Board Discount Rate Action (Aug. 17,
2007) (online at www.federalreserve.gov/newsevents/press/monetary/
20070817a.htm). The Federal Reserve subsequently lowered this interest
rate to 25 basis points above the federal funds target rate in March
2008. See, e.g., Board of Governors of the Federal Reserve System, FOMC
Statement and Board Approval of Discount Rate Requests of the Federal
Reserve Banks of Boston, New York, and San Francisco (Mar. 18, 2008)
(online at www.federalreserve.gov/newsevents/press/monetary/
20080318a.htm). The discount window ``functions as a safety valve in
relieving pressures in reserve markets; extensions of credit can help
relieve liquidity strains in a depository institution and in the
banking system as a whole. The Window also helps ensure the basic
stability of the payment system more generally by supplying liquidity
during times of systemic stress.'' Board of Governors of the Federal
Reserve System, The Federal Reserve Discount Window (Feb. 19, 2010)
(online at www.frbdiscountwindow.org/
discountwindowbook.cfm?hdrID=14&dtlID=43).
\44\ Chairman Bernanke stated that, ``In August 2007 . . . banks
were reluctant to rely on discount window credit to address their
funding needs. The banks' concern was that their recourse to the
discount window, if it became known, might lead market participants to
infer weakness--the so-called stigma problem.'' Federal Reserve Bank of
New York, Stigma in Financial Markets: Evidence from Liquidity Auctions
and Discount Window Borrowing During the Crisis, at 1 (Jan. 2011)
(online at www.newyorkfed.org/research/staff_reports/sr483.pdf).
---------------------------------------------------------------------------
The Federal Reserve took actions to solve both of these
issues. First, the Term Auction Facility (TAF) was created in
order to allow banks to access funding anonymously through a
bidding process. Second, the Federal Reserve created a number
of new programs under section 13(3) of the Federal Reserve Act
aimed at expanding access to liquidity beyond banks.\45\ These
programs included:
---------------------------------------------------------------------------
\45\ Board of Governors of the Federal Reserve System, Regulatory
Reform: Usage of Federal Reserve Credit and Liquidity Facilities
(online at www.federalreserve.gov/newsevents/reform_transaction.htm)
(accessed Mar. 11, 2011).
---------------------------------------------------------------------------
The Commercial Paper Funding Facility (CPFF)--a
facility for corporations to roll over their maturing
commercial paper debt. At its maximum, nearly $350 billion was
outstanding under the facility.\46\
---------------------------------------------------------------------------
\46\ Board of Governors of the Federal Reserve System, Regulatory
Reform: Commercial Paper Funding Facility (online at
www.federalreserve.gov/newsevents/reform_cpff.htm) (accessed Mar. 11,
2011) (hereinafter ``Fed Regulatory Reform: Commercial Paper Funding
Facility''); Board of Governors of the Federal Reserve System, Loans to
CPFF LLC (Instrument Used: CPFF commercial paper holdings, net) (online
at www.federalreserve.gov/newsevents/files/cpff.xls) (accessed Mar. 11,
2011).
---------------------------------------------------------------------------
Support for Primary Dealers through the Primary
Dealer Credit Facility (PDCF), an overnight loan facility for
Primary Dealers, and the Term Securities Lending Facility
(TSLF), a program that loaned Primary Dealers relatively liquid
securities such as U.S. Treasury bonds in exchange for less
liquid securities such as residential mortgage-backed security
(RMBS).\47\
---------------------------------------------------------------------------
\47\ Primary Dealers are banks and securities firms that serve as
counterparties for FRBNY in the management of its open market
operations. Fed Regulatory Reform: Commercial Paper Funding Facility,
supra note 46; Board of Governors of the Federal Reserve System,
Regulatory Reform: Glossary of Terms (online at www.federalreserve.gov/
newsevents/reform_glossary.htm#primarydealers) (accessed Mar. 11,
2011).
---------------------------------------------------------------------------
Support for the money market mutual funds through
the Asset-Backed Commercial Paper Money Market Mutual Fund
Liquidity Facility (AMLF).\48\ During the crisis, withdrawals
from money market mutual funds caused the funds to sell the
asset-backed commercial paper they held at discounted levels to
meet liquidity needs. Under the AMLF, the Federal Reserve
provided loans to allow eligible institutions to purchase
asset-backed commercial paper, thereby fostering liquidity in
the market.
---------------------------------------------------------------------------
\48\ The Federal Reserve also introduced the Money Market Investor
Funding Facility on October 21, 2008. However, this facility was never
used and closed on October 30, 2009. See Board of Governors of the
Federal Reserve System, Regulatory Reform: Money Market Investor
Funding Facility (online at www.federalreserve.gov/newsevents/
reform_mmiff.htm) (accessed Mar. 11, 2011).
---------------------------------------------------------------------------
Support for the securitization market through the
TALF. Under the TALF, the Federal Reserve provided holders of
eligible asset-backed securities (ABS) with loans, using the
ABS as collateral. The intent of the program was to use TALF
borrowers as conduits for enhanced liquidity by providing loans
to those entities that served as issuers and sponsors of ABS.
At its height, $1.7 trillion was outstanding under the
Federal Reserve's liquidity facilities.\49\
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\49\ To offset some of the impact of the Federal Reserve's
liquidity programs, Treasury announced on September 17, 2008, the
Supplementary Financing Program--a program expected to be temporary in
nature but that would allow Treasury to auction bills to various
financial institutions with relationships with the Federal Reserve. The
program consisted of a series of Treasury bill auctions, separate and
distinct from Treasury's standard borrowing operations. The proceeds
from these auctions were maintained in a Treasury account held at the
Federal Reserve Bank of New York. As a result, funds would flow from a
particular bank's account with the Fed to Treasury's account with the
Fed. The program was created in order to help the Federal Reserve
manage the significant increase in the size of its balance sheet due to
its newly created liquidity programs. U.S. Department of the Treasury,
Treasury Announces Supplementary Financing Program (Sept. 17, 2008)
(online at www.treasury.gov/press-center/press-releases/Pages/
hp1144.aspx); Federal Reserve Bank of Cleveland, The Supplemental
Financing Program (Sept 28, 2009) (online at www.clevelandfed.org/
research/trends/2009/1009/03monpol.cfm).
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As noted earlier, in March 2008, the financial condition of
Bear Stearns, an investment bank with assets of $400 billion,
began to worsen rapidly and the Federal Reserve intervened to
facilitate the purchase of Bear Stearns by JPMorgan Chase.\50\
The Federal Reserve did so by creating a limited liability
company (LLC) named Maiden Lane that acquired a portion of Bear
Stearns' assets.\51\ The Federal Reserve Bank of New York
(FRBNY) extended approximately $30 billion of credit to the
Maiden Lane vehicle to purchase the securities.\52\
---------------------------------------------------------------------------
\50\ Bear Stearns was unable to fulfill its liquidity needs, and in
response, the Federal Reserve authorized a $12.9 billion loan to the
company. Although the loan was repaid in full with interest, continued
pressure on the firm made it clear that without either a large infusion
of capital or a sale, the firm would likely fail. Board of Governors of
the Federal Reserve System, Regulatory Reform: Bear Stearns, JPMorgan
Chase, and Maiden Lane LLC (online at www.federalreserve.gov/
newsevents/reform_bearstearns.htm) (accessed Mar. 11, 2011)
(hereinafter ``Fed Regulatory Reform: Bear Stearns, JPMorgan Chase, and
Maiden Lane LLC'').
\51\ The Maiden Lane facilities were named for the street behind
the FRBNY building in Manhattan, New York. As of March 3, 2011, the net
portfolio holdings of the Maiden Lane vehicles are $26.1 billion while
the amount due to FRBNY, including accrued interest, is $24.7 billion.
Board of Governors of the Federal Reserve System, Factors Affecting
Reserve Balances (H.4.1) (Mar. 3, 2011) (online at
www.federalreserve.gov/releases/h41/20110303/); Fed Regulatory Reform:
Bear Stearns, JPMorgan Chase, and Maiden Lane LLC, supra note 50.
\52\ The Federal Reserve Act of 1913 provides for the central bank
to take broad action in the face of financial or economic crisis.
Section 13, paragraph 3 of the Act states that ``[i]n unusual and
exigent circumstances, the Board of Governors of the Federal Reserve
System'' may lend to any individuals, partnerships or corporations,
given that certain conditions are met. On March 16, 2008, the Federal
Reserve Board announced that it would use its authority under section
13(3) of the Federal Reserve Act to help facilitate the acquisition of
Bear Stearns by JPMorgan Chase. The Federal Reserve provided this
assistance by creating a Limited Liability Company (LLC) named Maiden
Lane that then received a $28.8 billion loan from FRBNY to purchase
troubled assets from Bear Stearns. Subsequently, in September 2008, the
Federal Reserve used its authority under section 13(3) of the Act to
assist AIG. This assistance came in the form of a $85 billion credit
facility for AIG and the creation as well as funding of two more Maiden
Lane SPVs dedicated to purchasing troubled assets from the company.
Federal Reserve Bank of Minneapolis, The History of a Powerful
Paragraph (June 2008) (online at www.minneapolisfed.org/
publications_papers/pub_display.cfm?id=3485); Federal Reserve Bank of
New York, Maiden Lane Transactions: Introduction (online at
www.newyorkfed.org/markets/maidenlane.html) (accessed Mar. 8, 2011).
---------------------------------------------------------------------------
The Federal Reserve also undertook considerable asset
purchases in response to the crisis. Between November 2008 and
March 2010, the Federal Reserve purchased $1.25 trillion of MBS
with government agency guarantees in an attempt to drive down
mortgage rates and by doing so provided additional liquidity to
financial institutions, including TARP participants.\53\ The
Federal Reserve also purchased nearly $175 billion of GSE
debt.\54\ As Figure 5 below illustrates, the purchase of agency
MBS and GSE debt steadily increased as the liquidity facilities
established at the height of the crisis were wound down, thus
signaling a shift from crisis response to economic stimulus.
---------------------------------------------------------------------------
\53\ See Congressional Oversight Panel, September Oversight Report:
Assessing the TARP on the Eve of Its Expiration, at 99-100 (Sept. 16,
2010) (online at cop.senate.gov/documents/cop-091610-report.pdf)
(hereinafter ``2010 September Oversight Report''); Board of Governors
of the Federal Reserve System, Data Download Program (Instrument Used:
Mortgage-Backed Securities Held by the Federal Reserve) (online at
www.federalreserve.gov/datadownload/) (accessed Mar. 3, 2011).
\54\ At its height, on March 31, 2010, the Federal Reserve owned
$169 billion of GSE debt. Board of Governors of the Federal Reserve
System, Data Download Program (Instrument Used: Federal agency debt
securities: week average) (online at www.federalreserve.gov/
datadownload/) (accessed Mar. 3, 2011).
---------------------------------------------------------------------------
FIGURE 5: FEDERAL RESERVE LIQUIDITY FACILITIES AS COMPARED TO ASSET
PURCHASES \55\
---------------------------------------------------------------------------
\55\ Federal Reserve Liquidity Facilities are comprised of Term
auction credit, Secondary credit, Seasonal credit, Term Asset-Backed
Securities Loan Facility, Other credit extensions, Net portfolio
holdings of Commercial Paper Funding Facility LLC, Central bank
liquidity swaps, Primary dealer and other broker-dealer credit, Asset-
Backed Commercial Paper Money Market Mutual Fund Liquidity Facility,
Term facility. The Federal Reserve Mortgage Asset Purchases are
comprised of federal agency debt securities and mortgage-backed
securities held by the Federal Reserve. Board of Governors of the
Federal Reserve System, Data Download Program (online at
www.federalreserve.gov/datadownload/) (accessed Mar. 3, 2011).
[GRAPHIC] [TIFF OMITTED] T4832A.005
2. FDIC
In keeping with its mission to ``maintain stability and
public confidence in the nation's financial system,'' the FDIC
undertook a number of measures in response to the financial
crisis.\56\ The FDIC experienced significant losses to its
Deposit Insurance Fund during the crisis due to the high number
of bank failures. From the third quarter of 2008 through 2010,
318 banks failed in the United States with total assets of
$631.7 billion.\57\ During that same period, the FDIC set aside
provisions for deposit insurance fund losses totaling $185.7
billion.\58\ In addition, the enactment of EESA in October 2008
raised the basic limit on federal deposit insurance coverage
from $100,000 per borrower to $250,000.\59\
---------------------------------------------------------------------------
\56\ Federal Deposit Insurance Corporation, FDIC Mission, Vision,
and Values (online at www.fdic.gov/about/mission/index.html) (accessed
Mar. 3, 2011).
\57\ This figure includes the $307 billion of assets Washington
Mutual held when it was seized by regulators on September 25, 2008. The
institution's banking assets were purchased by JPMorgan Chase the
following day in a deal facilitated by the FDIC. Federal Deposit
Insurance Corporation, Failures and Assistance Transactions (online at
www2.fdic.gov/hsob/SelectRpt.asp?EntryTyp=30) (accessed Mar. 4, 2011);
Federal Deposit Insurance Corporation, JPMorgan Chase Acquires Banking
Operations of Washington Mutual (Sept. 25, 2008) (online at
www.fdic.gov/news/news/press/2008/pr08085.html).
\58\ This figure only reflects information provided through the
third quarter of 2010. Federal Deposit Insurance Corporation, DIF
Income Statement (Instrument Used: Provision for insurance losses, Q3
2008 through Q3 2010) (online at www.fdic.gov/about/strategic/
corporate/index.html) (hereinafter ``FDIC: DIF Income Statement'').
\59\ Federal Deposit Insurance Corporation, Emergency Economic
Stabilization Act of 2008 Temporarily Increases Basic FDIC Insurance
Coverage from $100,000 to $250,000 Per Depositor (Oct. 7, 2008) (online
at www.fdic.gov/news/news/press/2008/pr08093.html).
---------------------------------------------------------------------------
The FDIC created its TLGP less than two weeks after the
enactment of EESA, under the authority of the Federal Deposit
Insurance Act. The TLGP had two parts. First, the Debt
Guarantee Program (DGP) portion of the TLGP guarantees debt
issued by banks. Second, the Transaction Account Guarantee
Program (TAG) guaranteed certain noninterest-bearing
transaction accounts at insured depository institutions.\60\
Though it covered all depository accounts, the TAG program was
intended to benefit business payment processing accounts, such
as payroll accounts. The FDIC currently guarantees
approximately $264.6 billion in outstanding financial
institution obligations, and at its maximum $345.8 billion was
guaranteed under the program.\61\ Through both the TLGP and the
expansion of deposit insurance, the FDIC provided significant
additional support for the banking system at the peak of the
crisis.
---------------------------------------------------------------------------
\60\ Congressional Oversight Panel, November Oversight Report:
Guarantees and Contingent Payments in TARP and Related Programs, at 38
(Nov. 6, 2009) (online at cop.senate.gov/
documents/cop-110609-report.pdf) (hereinafter ``2009 November Oversight
Report'').
\61\ The maximum amount outstanding under this program was in May
2009. The current amount outstanding is as of January 31, 2011. Federal
Deposit Insurance Corporation, Monthly Reports Related to the Temporary
Liquidity Guarantee Program (Instrument Used: Debt Issuance Under
Guarantee Program) (accessed Mar. 3, 2011) (online at www.fdic.gov/
regulations/resources/tlgp/reports.html) (hereinafter ``FDIC: Monthly
Reports Related to the TLGP'').
---------------------------------------------------------------------------
3. Treasury Department
In addition to the TARP, Treasury undertook several other
highly important initiatives in response to the financial
crisis. On September 7, 2008, Treasury announced that it would
purchase government sponsored enterprises' mortgage backed
securities (GSE MBS) in an attempt to promote both market
stability and lower interest rates.\62\ At its maximum,
Treasury owned $220.8 billion in MBS under this program.\63\
Furthermore, on September 29, 2008, Treasury announced a
temporary guarantee for MMFs. While the total size of the money
market at that point in time was $3.7 trillion, no losses were
incurred and the program was closed on September 18, 2009, with
Treasury having earned $1.2 billion in participation fees.\64\
---------------------------------------------------------------------------
\62\ U.S. Department of the Treasury, Fact Sheet: GSE Mortgage
Backed Securities Purchase Program (Sept. 7, 2008) (online at
www.treasury.gov/press-center/press-releases/Documents/
mbs_factsheet_090708.pdf).
\63\ U.S. Department of the Treasury, Agency MBS Purchase Program
(Instrument Used: Trades by Month) (www.treasury.gov/resource-center/
data-chart-center/Documents/Final%20Trades%20by%20month.pdf). As of
February 2011, Treasury has received $84.0 billion in principal
repayments and $16.7 billion in interest payments from the securities
it holds as part of this program. U.S. Department of the Treasury, MBS
Purchase Program Principal and Interest Received (online at
www.treasury.gov/resource-center/data-chart-center/Documents/
February%202011%20MBS%20Principal%20and%20Interest%20Monthly%20Breakout.
pdf) (accessed Mar. 11, 2011).
\64\ The size of the MMFs was $3.66 trillion in June 2009. IMMFA:
Frequently Asked Questions, supra note 27; U.S. Department of the
Treasury, Treasury Announces Expiration of Guarantee Program for Money
Market Funds (Sept. 18, 2009) (online at www.treasury.gov/press-
center/press-releases/Pages/tg293.aspx) (hereinafter ``Treasury's
Guarantee Program for Money Market Funds Expires'').
---------------------------------------------------------------------------
In early September 2008, the FHFA, using authority it had
been provided in law only six weeks earlier, placed the two
large GSEs, Fannie Mae and Freddie Mac, in conservatorship, and
Treasury agreed to provide capital infusions to these mortgage
giants.\65\ At that time, these two GSEs owned or guaranteed
approximately $5.3 trillion in mortgage assets.\66\ The FHFA
placed Fannie Mae and Freddie Mac into conservatorship on
September 7, 2008, in order to preserve each company's assets
and to restore them to sound and solvent condition. Secretary
Paulson announced Treasury's intention to make capital
injections (through the purchase of preferred interests) in the
GSEs in order to preserve their positive net worth.\67\ Due to
these coordinated actions, Treasury had guaranteed the GSE's
debts, and FHFA had all the powers of the management, board,
and shareholders of the enterprises.\68\ In sum, these actions
had the effect of changing the previously implicit government
guarantee of these institutions into an explicit government
guarantee.
---------------------------------------------------------------------------
\65\ Conservatorship is the legal process by which an entity
establishes control and oversight of a company to put it in a sound and
solvent condition. Congressional Budget Office, CBO's Budgetary
Treatment of Fannie Mae and Freddie Mac (Jan. 2010) (online at
www.cbo.gov/ftpdocs/108xx/doc10878/01-13-FannieFreddie.pdf)
(hereinafter ``CBO: Fannie Mae and Freddie Mac'').
\66\ At the end of the third quarter 2008, Fannie Mae's mortgage
credit exposure was $3.1 trillion, and Freddie Mac's exposure was $2.2
trillion. Federal National Mortgage Association, Form 10-Q for the
Quarterly Period Ended September 30, 2008, at 110-111 (Instrument Used:
Mortgage credit book of business) (Nov. 10, 2008) (online at
www.sec.gov/Archives/edgar/data/310522/000095013308003686/
w71392e10vq.htm#131); Federal Home Loan Mortgage Corporation, Form 10-Q
for the Quarterly Period Ended September 30, 2008, at 99 (Instrument
Used: Total mortgage portfolio) (Nov. 14, 2008) (online at www.sec.gov/
Archives/edgar/data/1026214/000102621408000043/f65508e10vq.htm).
\67\ U.S. Department of the Treasury, Fact Sheet: Treasury Senior
Preferred Stock Purchase Agreement (Sept. 7, 2008) (online at
www.treasury.gov/press-center/press-releases/Documents/
pspa_factsheet_090708%20.pdf) (hereinafter ``Treasury Fact Sheet on
Senior Preferred Stock'').
\68\ House Financial Services, Subcommittee on Capital Markets,
Insurance, and Government-Sponsored Enterprises, Written Testimony of
Edward J. DeMarco, acting director, Federal Housing Finance Agency, The
Future of Housing Finance: A Progress Update on the GSEs, at 2 (Sept.
15, 2010) (online at financialservices.house.gov/Media/file/hearings/
111/DeMarco091510.pdf).
---------------------------------------------------------------------------
Initially, Treasury acquired $1 billion in preferred stock
from both Fannie Mae and Freddie Mac. Subsequently both
entities drew upon this assistance by providing preferred stock
with a dividend rate of 10 percent (double the initial dividend
rate for participation in the CPP) in exchange for cash
investments from Treasury. Furthermore, Treasury received
warrants to purchase common stock in the GSEs, representing
79.9 percent of the common ownership when exercised.\69\ The
preliminary ceiling for the amount of preferred stock Treasury
would purchase was $100 billion for each of the GSEs.\70\ In
February 2009, the ceiling for preferred stock purchases was
raised to $200 billion for each GSE, and in December 2009,
Treasury removed the cap on possible purchases entirely.\71\ As
of February 2011, the GSEs had drawn $153.9 billion under the
Treasury preferred facility and paid $20.2 billion in
dividends.\72\ Earlier, in January 2010, the Congressional
Budget Office (CBO) had estimated the total cost to the
government for assistance to Fannie Mae and Freddie Mac to be
$389 billion, a figure which included ``the recognition of
substantial losses on the entire outstanding stock of mortgages
held or guaranteed by Fannie Mae and Freddie Mac'' at the time
the estimate was made in August 2009.\73\
---------------------------------------------------------------------------
\69\ Treasury Fact Sheet on Senior Preferred Stock, supra note 67.
\70\ Treasury Fact Sheet on Senior Preferred Stock, supra note 67.
\71\ U.S. Department of the Treasury, Statement by Secretary Tim
Geithner on Treasury's Commitment to Fannie Mae and Freddie Mac (Feb.
2, 2009) (online at www.treasury.gov/
press-center/press-releases/Pages/tg32.aspx); U.S. Department of the
Treasury, Treasury Issues Update on Status of Support for Housing
Programs (Dec. 24, 2009) (online at www.treasury.gov/press-center/
press-releases/Pages/2009122415345924543.aspx) (hereinafter ``Treasury
Update on Housing Programs'').
\72\ This figure excludes the $2 billion in preferred stock given
to Treasury by the GSEs upon the creation of these facilities. Fannie
Mae had drawn $90.2 billion and Freddie Mac had drawn $63.7 billion
under their respective facilities. Thus far, Fannie Mae has paid $10.2
billion and Freddie Mac has paid $10.0 billion in dividends for their
draws from the preferred facilities. Federal Housing Finance Agency,
Treasury and Federal Reserve Purchase Programs for GSE and Mortgage-
Related Securities, at 2-3 (Feb. 25, 2011) (online at www.fhfa.gov/
webfiles/19854/TreasFED02252011%20pdf%20-%20Adobe%20Acrobat%20Pro.pdf)
(hereinafter ``Treasury & Federal Reserve Purchase Programs for GSE and
Mortgage-Related Securities'').
\73\ CBO: Fannie Mae and Freddie Mac, supra note 65, at 8-9.
---------------------------------------------------------------------------
From a larger perspective, TARP-assisted institutions were
also among the many beneficiaries of the federal government's
rescue of the GSEs themselves. Given the large holdings of GSE
securities at the largest TARP-assisted institutions, the
federal government's rescue of Fannie Mae and Freddie Mac
effectively served to prevent additional major losses at these
institutions. As noted above, one result of the federal
government's intervention to place Fannie Mae and Freddie Mac
in conservatorship in September 2008 was that their MBS and
debt issues now enjoyed the effective guarantee of the federal
government.\74\ 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 effectively provided substantial economic benefit to
the TARP-assisted banks that went well beyond the amounts
reflected in the accounting for the TARP itself.
---------------------------------------------------------------------------
\74\ Absent government intervention, the GSEs would have been
unable to honor their MBS guarantees, and therefore the value of these
MBS securities would have plummeted. Treasury Update on Housing
Programs, supra note 71.
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4. Coordinated Action
As mentioned above, there were a number of initiatives that
called for cooperative action between government actors. Figure
6 below illustrates this interaction. For example, the TALF was
a cooperative program between Treasury and the Federal Reserve
in which the TARP took a first-loss position on any losses
associated with TALF loans, originally up to $20 billion, with
the Federal Reserve responsible for losses above that
level.\75\ Similarly, Citigroup and Bank of America benefitted
from an asset guarantee in which Treasury, the FDIC, and the
Federal Reserve all accepted risk liability for losses above a
certain level.\76\ Additionally, as discussed in Section VI of
this report, AIG was the beneficiary of a coordinated effort
between the TARP and the Federal Reserve, with $182 billion of
funds being committed at the height of assistance.
---------------------------------------------------------------------------
\75\ The TARP is currently only responsible for losses up to $4.3
billion. Treasury Transactions Report--January 2009, supra note 41.
\76\ Although Treasury, the Federal Reserve, and the FDIC
negotiated with Bank of America regarding a Guarantee similar to the
one provided to Citigroup, 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. BofA Termination Agreement, supra note 39, at 1-2.
---------------------------------------------------------------------------
FIGURE 6: GOVERNMENT RESPONSE TO FINANCIAL CRISIS BY ORGANIZATION \77\
[GRAPHIC] [TIFF OMITTED] T4832A.006
---------------------------------------------------------------------------
\77\ This figure does not reflect that Fannie Mae and Freddie Mac
were placed into conservatorship by their regulator, the Federal
Housing Finance Agency, on September 7, 2008. Federal Housing Finance
Agency, Statement of FHFA Director James B. Lockhart (Sept. 7, 2008)
(online at www.fhfa.gov/webfiles/23/FHFAStatement9708final.pdf);
Congressional Research Service, Government Interventions in Response to
Financial Turmoil (Dec. 16, 2010).
Finally, the Federal Reserve, the FDIC, and the Comptroller
of the Currency released the Supervisory Capital Assessment
Program (SCAP), more commonly known as the ``stress tests,'' on
May 7, 2009. This forward-looking analysis was intended to
determine whether or not the nation's 19 largest bank holding
companies (BHCs) could withstand adverse economic
conditions.\78\ Under the SCAP, only one institution, GMAC/Ally
Financial, was found to be in need of additional government-
provided capital, which was provided under the automotive
portion of the TARP. The review, however, did note that roughly
half of the firms needed to take steps, including raising
capital, to be more adequately prepared for possible
losses.\79\
---------------------------------------------------------------------------
\78\ Board of Governors of the Federal Reserve System, Federal
Reserve, OCC, and FDIC Release Results of the Supervisory Capital
Assessment Program (May 7, 2009) (online at www.federalreserve.gov/
newsevents/press/bcreg/20090507a.htm).
\79\ Board of Governors of the Federal Reserve System, Federal
Reserve Board Makes Announcement Regarding the Supervisory Capital
Assessment Program (SCAP) (Nov. 9, 2009) (online at
www.federalreserve.gov/newsevents/press/bcreg/20091109a.htm)
(hereinafter ``Federal Reserve Announcement on the Supervisory Capital
Assessment Program'').
FIGURE 7: TOTAL FEDERAL GOVERNMENT EXPOSURE TO SCAP BANK HOLDING COMPANIES
[Dollars in billions]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TARP i FDIC Federal Reserve
----------------------------------------------------------------------------------------------------------------------------------------------- Total
Liquidity Programs iv Federal
CPP AGP TIP AIFP TLGP Debt AGP iii ----------------------------------------------------------------- Exposure
Issuance ii PDCF CPFF TAF TSLF vi AGP v
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Bank of America..................... $25.0 $5.0 $20.0 -- $68.6 $5.0 $9.3 $14.9 $88.0 $13.1 $87.2 $336.1
Citigroup........................... 25.0 5.0 20.0 -- 66.4 $10.0 21.3 24.9 25.0 34.0 244.5 476.2
JPMorgan Chase...................... 25.0 -- -- -- 40.6 -- vii 3.0 -- 48.0 13.0 ........... 129.6
Wells Fargo......................... 25.0 -- -- -- 9.7 -- -- -- 72.5 -- ........... 107.2
American Express.................... 3.4 -- -- -- 5.9 -- -- 4.5 -- -- ........... 13.8
Bank of New York Mellon............. 3.0 -- -- -- 0.6 -- -- -- -- -- ........... 3.6
BB&T Financial...................... 3.1 -- -- -- -- -- -- -- 8.5 -- ........... 11.6
Capital One Financial............... 3.6 -- -- -- -- -- -- -- -- -- ........... 3.6
Regions Financial................... 3.5 -- -- -- 3.8 -- -- -- 13.0 -- ........... 20.3
KeyCorp............................. 2.5 -- -- -- 1.9 -- -- -- 9.5 -- ........... 13.9
State Street........................ 2.0 -- -- -- 4.1 -- -- 8.5 10.0 -- ........... 24.6
SunTrust............................ 4.9 -- -- -- 3.6 -- -- -- 3.5 -- ........... 11.9
PNC Financial Services.............. 7.6 -- -- -- 3.9 -- -- 0.4 2.0 -- ........... 13.9
Goldman Sachs....................... 10.0 -- -- -- 28.6 -- 16.5 * -- 34.5 ........... 89.6
Morgan Stanley...................... 10.0 -- -- -- 24.5 -- 60.2 4.3 -- 36.0 ........... 135.0
US Bancorp.......................... 6.6 -- -- -- 3.9 -- -- -- -- -- ........... 10.5
Fifth Third Bancorp................. 3.4 -- -- -- -- -- -- 0.3 7.3 -- ........... 11.0
Ally Financial/GMAC................. -- -- -- 17.2 7.4 -- -- 7.9 5.0 -- ........... 37.5
MetLife viii........................ -- -- -- -- 0.4 -- -- 1.6 2.8 -- ........... 4.8
-----------------------------------------------------------------------------------------------------------------------------------------------------------
Total........................... $163.5 $10.0 $40.0 $17.2 $273.8 $15.0 $110.2 $67.4 $295.1 $130.6 $331.7 $1,454.6
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
*Amount less than $50 million.
See endnote references in Annex III: Endnotes
In conjunction with its oversight mandate, the Panel has
done its own accounting of the total resources that the federal
government has devoted to stabilizing the economy through the
programs and initiatives outlined above. A complete accounting
of the government's current maximum exposure from these
financial stability efforts can be found in Annex I.
FIGURE 8: GOVERNMENT EXPOSURE TO FINANCIAL STABILITY EFFORTS \80\
---------------------------------------------------------------------------
\80\ At its peak, the Federal Reserve had purchased $1.1 trillion
of Fannie Mae and Freddie Mac MBS. These MBS are guaranteed by Fannie
Mae and Freddie Mac and those two institutions in turn have been placed
into conservatorship and had the entirety of their debts guaranteed by
Treasury. Hence, while this graph represents the federal government's
financial exposure to the MBS held by the Federal Reserve as part of
the Federal Reserve's balance sheet, there is an open question as to
what agency of the federal government is ultimately bearing the risk
entailed in holding these securities. In a May 2010 Report, as part of
a larger review of the Federal Reserve's actions during the financial
crisis, CBO concluded that ``Direct Purchases of Securities''
(including MBS) of the Federal Reserve that had been made up to that
time did not expose the federal government to any subsidy cost. This
analysis was done on a risk-adjusted basis and implies that there was
no risk of loss to the Federal Reserve from these MBS purchases.
Treasury & Federal Reserve Purchase Programs for GSE and Mortgage-
Related Securities, supra note 72, at 2-3; Congressional Budget Office,
The Budgetary Impact and Subsidy Costs of the Federal Reserve's Actions
During the Financial Crisis (May 2010) (www.cbo.gov/
doc.cfm?index=11524&zzz=40793).
[GRAPHIC] [TIFF OMITTED] T4832A.007
Figure 8 \81\ above shows the actual monthly amounts
outstanding for all three agencies' (TARP, FDIC, and the
Federal Reserve) stabilization efforts since November 2008. At
its height, $2.4 trillion was outstanding under the financial
rescue programs conducted by these agencies. While significant,
TARP funds outstanding never represented more than 19 percent
of the total government stability efforts.
---------------------------------------------------------------------------
\81\ The Federal Reserve total is comprised of the following: Term
auction credit, Secondary credit, Seasonal credit, Term Asset-Backed
Securities Loan Facility, Other credit extensions, Net portfolio
holdings of Commercial Paper Funding Facility LLC, Central bank
liquidity swaps, Primary dealer and other broker-dealer credit, Asset-
Backed Commercial Paper Money Market Mutual Fund Liquidity Facility,
Term facility, federal agency debt securities, mortgage-backed
securities held by the Federal Reserve, Credit extended to American
International Group, Inc., Net portfolio holdings of Maiden Lane II
LLC, Net portfolio holdings of Maiden Lane III LLC, and Preferred
interests in AIA Aurora LLC and ALICO Holdings LLC. Board of Governors
of the Federal Reserve System, Data Download Program: Factors Affecting
Reserve Balances (H.4.1) (Instrument Used: Weekly Average) (Mar. 3,
2011) (online at www.federalreserve.gov/releases/h41/20110203/). The
TARP total uses the amounts outstanding at the end of each month as
reported on Treasury's Monthly 105(a) Reports to Congress. The total
amount committed under the HAMP and the SSFI/AIGIP is used rather than
the outstanding amount in order to reflect more accurately the TARP's
assistance. U.S. Department of the Treasury, Monthly 105(a) Reports to
Congress (Dec. 5, 2008-Feb. 10, 2011) (online at www.treasury.gov/
initiatives/financial-stability/briefing-room/reports/105/Pages/
default.aspx). The FDIC total is comprised of the amounts outstanding
under the Temporary Liquidity Guarantee Program (TLGP), the quarterly
amounts outstanding on the Deposit Insurance Fund's balance sheet for
``liabilities due to resolutions'' and ``contingent liabilities: future
failures,'' and the FDIC's exposure to the Bank of America and
Citigroup asset guarantees. This figure represents the FDIC's actual
balance sheet holdings for ``liabilities due to resolutions'' and
``contingent liabilities: future failures'' in the third and fourth
quarters of 2008; the first, second, third, and fourth quarters of
2009; and the first, second, and third quarters of 2010. FDIC: DIF
Income Statement, supra note 58; FDIC: Monthly Reports Related to the
TLGP, supra note 61.
---------------------------------------------------------------------------
II. Banks
A. Capital Infusions and Bank Balance Sheets
1. Summary of COP Reports and Findings
Since banks are the principal actors in most financial
systems and were at the center of many of Treasury's TARP
interventions, a substantial majority of the Panel's reports
addressed the banking sector in some fashion.\82\ The six
reports discussed in this section (II.A), however,
predominantly addressed issues arising out of one of Treasury's
central strategies for the banking sector during the crisis:
Treasury's (and, as applicable, the Federal Reserve's) focus on
the health of bank balance sheets and Treasury's attempts to
foster bank stability through capital infusions in the form of
equity investments.\83\ The questions that the Panel raised in
its first two reports, including the means for ensuring
accountability and transparency from TARP recipients (such as
the tracking of TARP funds) and the methods for the taxpayer to
be fairly compensated for the risk they were taking, run
solidly through the Panel's reports on banks.
---------------------------------------------------------------------------
\82\ For example, reports on small business lending and
foreclosures and housing have important implications for banks' health
and the stability of the financial system in general.
\83\ In Sections II.B and II.C, infra, this report discusses
additional types of Treasury actions intended to foster bank stability.
---------------------------------------------------------------------------
a. Treasury as Investor and Recovery for the Taxpayer
The Panel's reports on the banking sector have consistently
focused on returns to the taxpayer from Treasury's investments
and the valuation of the assets received by Treasury for the
equity investments it made. Prior to the first CPP repayments,
the Panel addressed the problem of valuation broadly and
published a report assessing Treasury's investment to determine
whether the taxpayers had received a fair deal.\84\ The
February 2009 report provided a financial valuation and legal
analysis of the terms of Treasury's investment in the
participating financial institutions and concluded that,
partially because all investments were made on the same terms,
Treasury paid substantially more for the assets it purchased
under the TARP than their then-current market value.\85\ While
a legal analysis of the program concluded that one-size-fits-
all terms aided speed and participation rates for the
program,\86\ the program design meant that Treasury could not
address differences in credit quality or risk among
institutions, or differences in their need for capital, by
varying the terms of each investment. Insofar as the standard
terms were set for strong institutions, they may have been too
lenient for weaker institutions.\87\ In its April 2009 report,
the Panel continued to emphasize the need for a clear and well-
explained strategy and transparent execution for Treasury's
TARP investments to improve public confidence in the
program,\88\ and broadly discussed valuations for the
distressed assets in the financial sector and their
relationship to government options.\89\
---------------------------------------------------------------------------
\84\ Congressional Oversight Panel, February Oversight Report:
Valuing Treasury's Acquisitions, at 2-11 (Feb. 6, 2009) (online at
cop.senate.gov/documents/cop-020609-report.pdf) (hereinafter ``2009
February Oversight Report'').
\85\ The Duff & Phelps analysis was done for the ten largest TARP
transactions and compared the amount of the government's investment
with the value of the preferred stock and the warrants it received in
return in each transaction. Since these were not publicly traded
securities, the valuation had to make a variety of assumptions and make
comparisons with a specific set of private deals. The study concluded
that every time Treasury spent $100, it took back assets that were
worth, on average, $66. This difference would equal a $78 billion
shortfall for the $254 billion spent on these deals. See Section II.A.2
below for further analysis.
\86\ The legal analysis study, performed by Timothy Massad and
Catherina Celosse, found that the standardized documentation used by
Treasury likely contributed to Treasury's ability to obtain speed of
execution and wide participation, both important program goals. 2009
February Oversight Report, supra note 84, at 40-50. At the time of this
report, Mr. Massad was a corporate lawyer at a New York-based law firm.
He took a leave of absence from the law firm in order to serve as
special advisor to the Panel on a pro bono basis. Ms. Celosse acted as
counsel for the Panel.
\87\ The Panel's ongoing concerns with respect to Treasury's ``one
size fits all'' approach are discussed further in Section II.A.2 below.
\88\ Congressional Oversight Panel, April Oversight Report:
Assessing Treasury's Strategy: Six Months of TARP, at 7 (Apr. 7, 2009)
(online at cop.senate.gov/documents/cop-040709-report.pdf) (hereinafter
``2009 April Oversight Report'').
\89\ Id. at 75-76.
---------------------------------------------------------------------------
---------------------------------------------------------------------------
\90\ 2009 February Oversight Report, supra note 84, at 7. Note that
Merrill Lynch was not included in the Duff & Phelps analysis because it
did not exist as a standalone entity by February 2009.
FIGURE 9: ESTIMATED VALUE AND SUBSIDY RATES OF CERTAIN TARP INVESTMENTS AS OF COP'S FEBRUARY 2009 REPORT 90
----------------------------------------------------------------------------------------------------------------
Total Estimated Value
--------------------------------------
Purchase Program Participant Valuation Face Value Subsidy
Date Value -------------------------
Percent $
----------------------------------------------------------------------------------------------------------------
Capital Purchase Program:
Bank of America Corporation................ 10/14/08 $15.0 $12.5 17% $2.6
Citigroup, Inc............................. 10/14/08 25.0 15.5 38% 9.5
JPMorgan Chase & Co........................ 10/14/08 25.0 20.6 18% 4.4
Morgan Stanley............................. 10/14/08 10.0 5.8 42% 4.2
Goldman Sachs Group........................ 10/14/08 10.0 7.5 25% 2.5
PNC Financial Services..................... 10/24/08 7.6 5.5 27% 2.1
U.S. Bancorp............................... 11/3/08 6.6 6.3 5% 0.3
Wells Fargo & Company...................... 10/14/08 25.0 23.2 7% 1.8
----------------------------------------------------------------
Subtotal................................... ........... 124.2 96.9 22% 27.3
311 Other Transactions......................... ........... 70.0 54.6 22% 15.4
SSFI & TIP:
American International Group, Inc.......... 11/10/08 40.0 14.8 63% 25.2
Citigroup, Inc............................. 11/24/08 20.0 10.0 50% 10.0
----------------------------------------------------------------
Subtotal................................... ........... 60.0 24.8 59% 35.2
----------------------------------------------------------------
Total.................................. ........... $254.2 $176.2 31% $78.0
----------------------------------------------------------------------------------------------------------------
In June 2009, Treasury permitted (with the Federal
Reserve's approval), ten of the nation's largest BHCs--
representing more than one-third of the nation's banking
assets--to repay the financial assistance they received in
October 2008.\91\ The Panel's July 2009 report on TARP
repayments (including the repurchase of stock warrants)
accordingly focused on whether the taxpayer was receiving
maximum benefit from its investment in the TARP.\92\
---------------------------------------------------------------------------
\91\ CPP recipients may only repay their funds if their regulator
determines that the repayment will not jeopardize the entity's capital
position, and thus repayments must be approved.
\92\ Congressional Oversight Panel, July Oversight Report: TARP
Repayments, Including the Repurchase of Stock Warrants, at 3-4 (July
10, 2009) (online at cop.senate.gov/documents/cop-071009-report.pdf)
(hereinafter ``2009 July Oversight Report''). The Panel noted, however,
that its own valuations did not include the liquidity discounts and
other adjustments contemplated by Treasury.
---------------------------------------------------------------------------
As part of its analysis, the Panel determined that because
the warrants that accompanied the CPP funds represented the
only opportunity for the taxpayer to participate directly in
the increase in the share prices of banks made possible by
public money, the price at which the warrants were sold was
critical. As of July 2, 2009, 11 small banks had repurchased
their warrants from Treasury for a total amount that the Panel
estimated to be only 66 percent of its best estimate of their
market value.\93\ However, at the time of this valuation,
Treasury was just beginning its warrant repurchase program, and
the Panel acknowledged that the prices paid might not be
representative of future repurchases. Building on its February
2009 report, the Panel's July 2009 report analyzed the
contractual constraints governing Treasury's TARP investments
in the banks.\94\ As in prior reports, the Panel emphasized
that it was critical that Treasury make the repayment process--
the reason for its decisions, the way it arrived at its
figures, and the exit strategy from or future use of the TARP--
absolutely transparent.
---------------------------------------------------------------------------
\93\ Id. at 7.
\94\ Id. at 23.
---------------------------------------------------------------------------
b. Stability of the Banking System
The health--or possible lack thereof--of a variety of
banks, small and large, lay at the center of the financial
crisis and significantly informed Treasury's approach under the
TARP. Thus, in a number of reports, the Panel focused on
actions Treasury took to assess the health of financial
institutions participating in the TARP, the impact of those
actions on financial stability in general, and whether they
contributed to market transparency. The Panel particularly
focused on these issues in its June 2009 and August 2009
reports on the Federal Reserve's and Treasury's ``stress
tests'' and on the impact of troubled assets on bank balance
sheets, respectively.
As described above in Section I, in the first quarter of
2009 Treasury and the Federal Reserve announced that they would
conduct stress tests of the 19 largest BHCs in the country, the
vast majority of which were TARP recipients and which received
the lion's share of the CPP funds. Upon completion of the
stress tests in May 2009, BHCs found to be in need of an
additional capital buffer were given six months to raise the
necessary capital. Accordingly, the Panel's June 2009 report
examined the first stress tests conducted by banking regulators
on these BHCs.\95\ The report focused on how effectively
Treasury and the Federal Reserve conducted the stress tests,
specifically reviewing the government's economic assumptions,
their methods of calculating bank capitalization, their release
of information to the public, and whether the stress tests
should be repeated in the future.\96\
---------------------------------------------------------------------------
\95\ Congressional Oversight Panel, June Oversight Report: Stress
Testing and Shoring Up Bank Capital, at 3-5 (June 9, 2009) (online at
cop.senate.gov/documents/cop-060909-report.pdf) (hereinafter ``2009
June Oversight Report''). Treasury and the Federal Reserve Board had
announced in early February 2009 that they would conduct comprehensive
and simultaneous reviews of the nation's largest BHCs--those with more
than $100 billion in assets--to determine their ability to remain well
capitalized if the recession were to lead to deeper than expected
losses. The effort, called the Supervisory Capital Assessment Program
(SCAP), has been referred to more informally as the ``stress tests.''
\96\ To help make these assessments of the stress tests and review
the stress test methodology, the Panel engaged two internationally
renowned experts in risk analysis, University of California at Berkeley
Professors Eric Talley and Johan Walden.
---------------------------------------------------------------------------
The Panel asked independent experts to review and evaluate
the stress tests. These experts found the economic modeling
used to conduct them to be generally soundly conceived and
conservative based on the limited information available to
them.\97\ However, the experts cautioned that the stress tests
did not model BHC performance under ``worst case'' scenarios,
and as a result did not project the capital necessary to
prevent banks from being stressed to near the breaking point.
Most important, the expert study stated that the primary issue
with the stress test process was the program's lack of
``transparency to outsiders and replicability of its results.''
\98\ In the report, the Panel concluded that while the stress
tests had a positive short-term effect on the markets, they did
not address the question as to whether the values shown on bank
balance sheets for certain classes of assets were too high; by
restricting themselves to a two-year timeframe, their
conclusions did not take into account the possibility that the
asset values assumed (particularly for so-called troubled
assets), may overvalue bank assets to the extent that those
liabilities result in losses after 2010.\99\ Thus, although the
release of these stress test results had a positive effect on
the market, it was not clear that the banks were fully healthy.
---------------------------------------------------------------------------
\97\ 2009 June Oversight Report, supra note 95, at 50.
\98\ 2009 June Oversight Report, supra note 95, at 43.
\99\ 2009 June Oversight Report, supra note 95, at 50.
---------------------------------------------------------------------------
In its August 2009 report, the Panel revisited bank balance
sheets in analyzing the potential risks troubled assets may
present in the future and assessed Treasury's strategy for
removing these assets from bank balance sheets.\100\ In this
context, the Panel has noted that a continuing uncertainty in
the financial markets was whether the troubled assets that
remain on banks' balance sheets could again become the trigger
for instability.\101\ The Panel found that ten months after the
TARP was signed into law, substantial troubled assets remained
on banks' balance sheets but that it was difficult to assess
the full scope of the problem because of insufficient
disclosure by the banks. In light of this finding, the Panel
analyzed Treasury's program to remove these assets from banks'
balance sheets, which was the Public-Private Investment Program
(PPIP), and concluded that there was much uncertainty as to
whether the PPIP would jump-start the market for troubled
securities.\102\ The Panel concluded that the future
performance of the economy and the performance of the
underlying loans, as well as the method of valuation of the
assets, were critical to the continued operation of the banks.
---------------------------------------------------------------------------
\100\ Congressional Oversight Panel, August Oversight Report: The
Continued Risk of Troubled Assets, at 6 (Aug. 11, 2009) (online at
cop.senate.gov/documents/cop-081109-report.pdf) (hereinafter ``2009
August Oversight Report'').
\101\ Id. at 62.
\102\ For details regarding the Public-Private Investment Program
(PPIP), see U.S. Department of the Treasury, Legacy Securities Public-
Private Investment Program: Program Update--Quarter Ended December 31,
2010, at 3 (Jan. 24, 2011) (online at www.treasury.gov/initiatives/
financial-stability/investment-programs/ppip/s-ppip/Documents/ppip-
%2012-10%20vFinal.pdf) (hereinafter ``Treasury's Legacy Securities
Public-Private Investment Program: Program Update''). The PPIP,
announced on March 23, 2009, was designed to allow banks and other
financial institutions to shore up their capital by removing troubled
assets from their balance sheets by creating public-private investment
funds financed by private investors, whose capital contributions were
to be matched dollar-for-dollar by Treasury using TARP funds. Treasury
initially pledged up to $30 billion for the PPIP, but the fund managers
did not raise sufficient private sector capital for Treasury's
combination of matching funds and debt financing to reach that amount.
Therefore, Treasury's total obligation is limited to $22.4 billion
(which includes $22.1 billion for active public-private investment
funds and $356.3 million disbursed to TCW, which has been repaid). For
an update on the PPIP as of December 31, 2010, see id. at 5.
---------------------------------------------------------------------------
The August 2009 report also addressed differences between
smaller and larger banks, discussed more fully below: in
particular, the Panel was concerned about the impact of
troubled assets on small banks, whose troubled assets are
generally whole loans that could not be sold under the PPIP's
terms.\103\ In addition, the report noted that small banks were
and remain far more exposed to commercial real estate (CRE)
loans and, unlike the larger financial institutions, are not
stress tested by Treasury and the Federal Reserve.
---------------------------------------------------------------------------
\103\ As noted in the discussion of the Panel's small business
lending report, Section III.A.3.d, infra, the PPIP can therefore be
assumed to have had very little effect on small business lending since
it had little effect on the balance sheets of the banks that are
disproportionately engaged in such lending.
---------------------------------------------------------------------------
c. Ongoing Risks for Smaller Banks
One of the recurring themes in the Panel's reports has been
the different effects of Treasury's TARP programs on banks of
different sizes. Smaller and larger banks have different types
of exposures and focus on different assets in the banking
sector. Accordingly, one-size-fits-all programs do not always
have comparable effects on smaller and larger banks.
As an example, smaller banks lend to CRE ventures at much
greater rates than larger banks. Smaller banks are therefore
significantly exposed to one of the sectors in the economy that
has been very hard-hit during and since the crisis. In this
context, the Panel examined the effects of CRE loans on smaller
banks in detail in its February 2010 report. The Panel
expressed concern that a wave of CRE loan losses over the next
four years could jeopardize the stability of many banks,
particularly community banks.\104\ CRE loans made over the last
decade--for retail properties, office space, industrial
facilities, hotels and apartments--totaling $1.4 trillion will
require refinancing in the period 2011 through 2014. The report
noted that nearly half of those CRE loans are ``underwater,''
meaning the borrower owes more on the loan than the underlying
property is worth. While these problems have no single cause,
the loans made at the peak of the real estate market are most
likely to fail.
---------------------------------------------------------------------------
\104\ Congressional Oversight Panel, February Oversight Report:
Commercial Real Estate Losses and the Risk to Financial Stability, at 2
(Feb. 10, 2010) (online at cop.senate.gov/documents/cop-021110-
report.pdf) (hereinafter ``2010 February Oversight Report'').
---------------------------------------------------------------------------
In its evaluation of the effect of CRE exposures, the Panel
stated that ``a significant wave of commercial mortgage
defaults would trigger economic damage that could touch the
lives of nearly every American.'' The failure of commercial
properties creates a downward spiral of economic contraction:
job losses; deteriorating store fronts, office buildings and
apartments; as well as the failure of the banks serving those
communities. Acknowledging that not every bank can or should be
saved, the Panel noted that because community banks play a
critical role in financing the small businesses that could help
the American economy create new jobs, their widespread failure
could disrupt local communities, undermine the economic
recovery, and extend an already painful recession.
In July 2010, continuing its examination of stresses on
smaller banks, and emphasizing problems with one-size-fits-all
programs, the Panel published a comprehensive report on small
banks in the CPP and addressed issues beyond the continued risk
posed by CRE assets. The Panel's main conclusion was that
because of the CPP's ``one-size-fits-all'' repayment terms,
large banks had been much better served by the program than
smaller institutions. In fact, the Panel concluded that small
banks might find it difficult or impossible to exit the
program, particularly if the banking sector remained weak.\105\
As discussed earlier, Treasury provided capital to banks
participating in the CPP under a single set of repayment terms
designed at the outset of the program. Of the 19 American banks
with more than $100 billion in assets, 17 participated in the
CPP, receiving 81 percent of the total CPP funds. Money was
made available to many of these large banks in only a matter of
weeks, in some cases even before the banks applied for the
funds. As of July 2010, 76 percent of these large banks had
already repaid taxpayers, and the healthier banks were
reporting record profits. However, the July 2010 report noted
that by contrast, of the 7,891 banks with assets of less than
$100 billion, only 690 received funds from CPP, and less than
10 percent of those banks had repaid their loans. Those banks
experienced a longer and more stringent evaluation to receive
the funds, and many are still struggling to meet their
obligations to the taxpayer.\106\ The Panel also stated that
the CPP could have the potential to contribute to an already
ongoing trend towards concentration in the financial sector and
analyzed the potential negative consequences of such a
trend.\107\
---------------------------------------------------------------------------
\105\ Congressional Oversight Panel, July Oversight Report: Small
Banks in the Capital Purchase Program, at 3 (July 14, 2010) (online at
cop.senate.gov/documents/cop-071410-report.pdf) (hereinafter ``2010
July Oversight Report'').
\106\ Id. at 3.
\107\ Id. at 56 (``This increase in concentration could potentially
have the ancillary, and likely unpopular, effect of reducing
competition and giving the remaining banks a freer hand in setting
terms for their depositors, possibly resulting in higher fees and more
restrictions on account holders. Individuals and families with smaller
accounts may receive diminished customer service, and smaller
businesses are likely to suffer as well. Moreover, the limited systemic
effect of small banks belies the critical role they can play in local
economies.'').
---------------------------------------------------------------------------
FIGURE 10: CONCENTRATION OF BANK ASSETS, BY SIZE (2007-2010) \108\
[GRAPHIC] [TIFF OMITTED] T4832A.008
---------------------------------------------------------------------------
\108\ Data compiled using the FDIC's Statistics on Depository
Institutions. Four asset categories were created in order to facilitate
a snapshot of the industry at the end of each financial quarter.
Federal Deposit Insurance Corporation, Statistics on Depository
Institutions (Instrument: Total Assets) (online at www3.fdic.gov/sdi/)
(accessed Mar. 3, 2011).
---------------------------------------------------------------------------
In its conclusions, the Panel questioned whether the
participation of small banks in the CPP had advanced Treasury's
broader aims for the program. These CPP-participant small banks
comprised too small a share of the banking sector to be
systemically significant, and therefore their participation was
and remains unlikely to contribute to financial stability. In
addition, the Panel stated that there was very little evidence
to suggest that the CPP led small banks to increase lending,
which was the other initial goal of the program.\109\ According
to the Panel's May 2010 report on small businesses, the
inability of smaller banks to provide credit was also
problematic because between 2008 and 2009 Wall Street banks'
small business loan portfolios fell by 9.0 percent, more than
double the 4.1 percent decline in their entire lending
portfolios.\110\
---------------------------------------------------------------------------
\109\ See Section III for additional discussions on the
consequences of these ongoing problems for small businesses and the
economy.
\110\ Congressional Oversight Panel, May Oversight Report: The
Small Business Credit Crunch and the Impact of the TARP, at 3 (May 13,
2010) (online at cop.senate.gov/documents/cop-051310-report.pdf)
(hereinafter ``2010 May Oversight Report''). In addition, the Panel
noted in its July report that ``neither Treasury nor federal financial
regulators have pushed big banks to deploy their TARP funds in lending
to consumers, small businesses, and smaller banks to `unfreeze' the
financial markets the way they have pushed small banks. This may be in
part because the larger institutions have largely exited, and therefore
are not subject to the public pressure arising from the lingering
credit crunch.'' 2010 July Oversight Report, supra note 105, at 48.
---------------------------------------------------------------------------
2. Panel Recommendations and Updates
Over the course of the last two years, in evaluating
Treasury's capital infusion programs and approaches to bank
balance sheets, the Panel has provided Treasury with a series
of specific recommendations targeted towards particular
programs. These recommendations are detailed below, and as
individual and detailed as they may be, the recommendations
share common themes. The Panel's recommendations have
constantly included calls for greater transparency and
accountability as well as suggested program changes that would
improve the government's financial stabilization effort and
protect the taxpayer's investments in the banking sector.\111\
---------------------------------------------------------------------------
\111\ In connection with its evaluation of Treasury's investments
in banks, the Panel has also expressed continuing concerns with moral
hazard associated with the TARP investments, which are detailed in
Section IX, below.
---------------------------------------------------------------------------
a. Risk Assessments/Stress Tests
Accurately assessing the economic viability of the banks
was critical to instilling public trust in our financial
markets. Accordingly, the Panel recommended several steps that
were geared towards reducing the risk of the banks' returning
to instability and improving market confidence. In both the
June 2009 and August 2009 reports, the Panel advocated that
Treasury and the Federal Reserve repeat the stress tests if the
adverse scenario assumptions (unemployment, GDP, and housing
prices) of the original stress tests had been exceeded.\112\
Specifically, the Panel noted the possibility that the actual
unemployment rate average for 2009 would exceed the one used in
the more adverse scenario.\113\ The Panel also suggested that
stress testing should be a regular feature of the 19 largest
BHCs' examination cycle as long as an appreciable amount of
troubled assets remain on their books, economic conditions do
not substantially improve, or both.\114\ In addition, the Panel
stated that between supervisory stress tests, the 19 stress-
tested BHCs should be required to run internal stress tests,
according to supervisory guidance, and to submit those results
as part of their ongoing supervisory examinations.\115\
Finally, the Panel encouraged regulators to use stress tests on
an ad hoc basis for all banks or BHCs as circumstances,
including the banks' business mix, dictated.\116\
---------------------------------------------------------------------------
\112\ 2009 June Oversight Report, supra note 95, at 48-49; 2009
August Oversight Report, supra note 100, at 61-62.
\113\ The adverse economic assumptions for the unemployment rate
were 8.9 percent for 2009 and 10.3 percent for 2010. The actual
unemployment rates for those years were 9.3 percent for 2009 and 9.6
percent for 2010. 2009 June Oversight Report, supra note 95, at 5, 17;
BLS: Unemployment Rate, supra note 23. After the June 2009 report, the
Panel questioned Secretary Geithner at a hearing and engaged in
correspondence with him regarding the assumptions (including the
unemployment assumptions) and the relative weight of the assumptions
used in the stress tests without, however, receiving substantial
additional clarity. 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 33
(Sept. 10, 2009) (online at cop.senate.gov/documents/transcript-091009-
geithner.pdf); Letter from Elizabeth Warren, chair, Congressional
Oversight Panel to Timothy F. Geithner, secretary, U.S. Department of
the Treasury (Sept. 15, 2009) (online at cop.senate.gov/documents/cop-
100909-report-correspondence.pdf); Letter from Timothy F. Geithner,
secretary, U.S. Department of the Treasury to Elizabeth Warren, chair,
Congressional Oversight Panel (Dec. 10, 2009) (online at
cop.senate.gov/documents/cop-011410-report-correspondence.pdf).
\114\ 2009 June Oversight Report, supra note 95, at 48-49.
\115\ 2009 June Oversight Report, supra note 95, at 48-49.
\116\ 2009 June Oversight Report, supra note 95, at 48-49.
---------------------------------------------------------------------------
Although the stress tests are being repeated,\117\ not all
of the Panel's concerns regarding bank stability have been
assuaged. For instance, neither Treasury nor the banking
regulators have made stress testing a regular part of the bank
examination process yet, although under the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 (Dodd-Frank
Act) the Federal Reserve must conduct and publish a summary of
the results of annual stress tests for systemically important
financial institutions.\118\ Furthermore, Secretary of the
Treasury Timothy F. Geithner has stated that he expects public
disclosure of stress testing will become a regular part of bank
supervision.\119\ The Dodd-Frank Act has also made broader
changes to the regulatory landscape, including requiring that
regulators establish minimum capital leverage levels for the
banks and other relevant financial institutions.\120\
---------------------------------------------------------------------------
\117\ Board of Governors of the Federal Reserve System, Revised
Temporary Addendum to SR Letter 09-4: Dividend Increases and Other
Capital Distributions for the 19 Supervisory Capital Assessment Program
Bank Holding Companies (Nov. 17, 2010) (online at
www.federalreserve.gov/newsevents/press/bcreg/bcreg20101117b1.pdf)
(hereinafter ``Fed Addendum to SR Letter 09-4'').
\118\ 12 U.S.C. Sec. 5365(i). The Federal Reserve has yet to
implement this regulation or to release information on the extent to
which it will disclose the results of the latest round of stress tests
or those tests which will be performed in accordance with the Dodd-
Frank Act Wall Street Reform and Consumer Protection Act of 2010 (Dodd-
Frank Act). The Federal Reserve lists the stress requirements under the
Dodd-Frank Act as initiative that it plans to implement between April
and June of 2011. See Board of Governors of the Federal Reserve System,
Implementing the Dodd-Frank Act: The Federal Reserve Board's Role:
Initiatives Planned: April to June 2011 (online at
www.federalreserve.gov/newsevents/reform_milestones201104.htm)
(accessed Mar. 11, 2011).
\119\ Congressional Oversight Panel, Testimony of Timothy F.
Geithner, secretary, U.S. Department of the Treasury, Transcript: COP
Hearing with Treasury Secretary Timothy Geithner (Dec. 16, 2010)
(publication forthcoming) (online at cop.senate.gov/hearings/library/
hearing-121610-geithner.cfm) (hereinafter ``Geithner Testimony to the
Panel'') (``I am very confident that a regular part of risk management
and supervision in the future for our system will be regular public
disclosure of stress tests by major institutions.'').
\120\ 12 U.S.C. Sec. 5371. The question of the level of capital
leverage requirements remains a much debated issue among policymakers
and academics. At the Panel's March 4, 2011 hearing, there was a
consensus among economists across the political spectrum that the
capital requirements should be more stringent than those required under
Basel III and those that could be required under the Dodd-Frank Act.
However, the economists still disagreed on the exact level that a bank
should hold, with one economist suggesting that it should start at 10
percent and increase towards 20 percent based on the size of the bank
and another economist indicating that a 40 or 50 percent capital
requirement would not be unreasonable. Congressional Oversight Panel,
Testimony of Allan H. Meltzer, Allan H. Meltzer University Professor of
Political Economy, Carnegie Mellon University, COP Hearing on the
TARP's Impact on Financial Stability (Mar. 4, 2011) (publication
forthcoming) (online at cop.senate.gov/hearings/library/hearing-030411-
final.cfm) (``I would raise the requirement to say that for every--that
after a minimum size to protect community banks, you start to phase in
capital requirements which start at 10 percent and increase as the size
of the bank increases so that it's 11, 12, 13, going up toward 20, so
that the largest banks will be paying what they were paying in the
1920's.''); Congressional Oversight Panel, Testimony of Simon Johnson,
Ronald A. Kurtz (1954) Professor of Entrepreneurship, MIT Sloan School
of Management, and senior fellow, Peterson Institute for International
Economics, COP Hearing on the TARP's Impact on Financial Stability
(Mar. 4, 2011) (publication forthcoming) (online at cop.senate.gov/
hearings/library/hearing-030411-final.cfm) (hereinafter ``Simon Johnson
Testimony to the Panel'') (``Gene Fama suggests, and I actually agree
with him, we should be looking at capital requirements closer to 40 or
50 percent. This is--this is just the percent of the assets financed
with equity. . . . '').
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b. Program Changes
For several of its program-centered recommendations, the
Panel focused on stresses particular to smaller banks. In the
August 2009 report, the Panel noted that Treasury must be
prepared to turn its attention to small banks in crafting
solutions to the growing problem of troubled whole loans. As
discussed above, those banks also face special risks with
respect to problems in the CRE loan sector. The Panel believed
that Treasury should implement programs to ensure the viability
of smaller banks. One such example was for Treasury and the
banking regulators to extend the methodology and capital
buffering involved in the stress tests to the nation's smaller
banks on a forward-looking basis.\121\
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\121\ 2009 August Oversight Report, supra note 100, at 62.
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Similarly, in the July 2010 report, the Panel's
recommendations focused on the potentially long timeframe and
the increased uncertainty of CPP investments in smaller
banks.\122\ Banks with more than $100 billion in assets have
returned to profitability while smaller banks, which (among
other things) have more significant CRE exposure, continue to
struggle financially and are now struggling to meet their
obligations to taxpayers.\123\ To deal with CPP investments in
smaller banks, the Panel's July 2010 report recommended that
Treasury articulate and determine options for the illiquid
portions of its portfolio, such as warrants that are too small
to be listed on an exchange, including bundling or pooling
investments if that makes them more attractive to
investors.\124\ The Panel went on to suggest that Treasury both
articulate clear measures for risk-testing its own portfolio
and aggressively exercise its shareholder rights, such as
appointing directors in those banks that have missed the
requisite number of dividends or payments, in order to protect
the taxpayers' investment and maintain market discipline.\125\
In addition, the Panel recommended that for the banks that
Treasury's asset manager believed were in need of additional
capital, Treasury should retain or create a workout team that
will swiftly negotiate a deal.\126\ Treasury has announced that
it has exercised some of its shareholder rights and has
observers attending board meetings at 31 banks; however, if
Treasury has adopted any of these other recommendations, it has
not announced them publicly.\127\
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\122\ During a discussion of Treasury's ability to exit CPP at the
Panel's March 4, 2011 hearing, Acting Assistant Secretary for Financial
Stability Timothy Massad indicated that Treasury was concerned with
small banks and there was still work to be done to help their recovery.
Congressional Oversight Panel, Testimony of Timothy G. Massad, acting
assistant secretary for the Office of Financial Stability, U.S.
Department of the Treasury, Transcript: COP Hearing on the TARP's
Impact on Financial Stability (Mar. 4, 2011) (publication forthcoming)
(online at cop.senate.gov/hearings/library/hearing-030411-final.cfm)
(hereinafter ``Massad Testimony to the Panel'') (``We've made a lot of
progress, but we still have more work to do. And in particular with
respect to our small banks, their path to recovery has been a little
harder. And we need to continue to work with them on that.''). In
discussing stresses on smaller banks in the context of the CPP,
however, the Panel noted that economic stability and a strengthened
banking sector would help alleviate some of the difficulties facing
various TARP recipients and Treasury. For example, if the banking
sector strengthens and becomes a more attractive investment, all banks,
but particularly smaller banks, may have an easier time repaying their
CPP funds. If the economy recovers more generally, then commercial real
estate (CRE) may weigh less on bank balance sheets and smaller banks
may experience healthier balance sheets as a result. Similarly, if
Treasury holds CPP-related warrants in a company, and the common stock
value of that institution is greater than the strike price of its
warrants, those warrants have a greater value since they can be
exercised and immediately reap a profit. The strike price, or the fixed
price that a holder must pay to exercise their option (warrant) to
purchase a company's stock, for the warrants Treasury received as part
of its TARP investment, were established by averaging the common stock
price during the twenty days prior to TARP assistance being provided.
U.S. Department of the Treasury, Warrant Disposition Report, at 3 (June
30, 2010) (online at www.treasury.gov/initiatives/financial-stability/
briefing-room/reports/other/DocumentsOther/ TARP_WRRTDISP_80310.pdf)
(hereinafter ``June 2010 Warrant Disposition Report'').
\123\ 2010 July Oversight Report, supra note 105, at 5, 33. Of the
smaller banks in the CPP, approximately 16 percent have repaid their
CPP funds. Many have no clear path for repaying their CPP investment
and exiting the program in the near future, if at all.
\124\ 2010 July Oversight Report, supra note 105, at 61.
\125\ 2010 July Oversight Report, supra note 105, at 61.
\126\ 2010 July Oversight Report, supra note 105, at 61.
\127\ See Section II.A.2.d for a more detailed description of the
board observers.
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c. Particular Stresses on Smaller Banks
In connection with its concerns about the risks that
distressed CRE loans pose to smaller banks, the Panel has
continued to monitor the sector.\128\ In its most comprehensive
discussion of the problem, the February 2010 report, the Panel
noted that there were no easy solutions to the risks CRE may
pose to the financial system. Although it endorsed no specific
proposals, the Panel identified a number of possible
interventions to contain the problem until the CRE market could
return to health. The Panel indicated that government cannot
and should not keep every bank afloat, but neither should it
turn a blind eye to the dangers of unnecessary bank failures
and their impact on communities.\129\
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\128\ Specifically, the Panel has held three hearings and released
one report specifically dedicated to CRE issues. See 2010 February
Oversight Report, supra note 104; Congressional Oversight Panel, COP
Hearing on Commercial Real Estate's Impact on Bank Stability (Feb. 4,
2011) (online at cop.senate.gov/hearings/library/hearing-020411-
cre.cfm); Congressional Oversight Panel, COP Atlanta Field Hearing on
Commercial Real Estate (Jan. 27, 2010) (online at cop.senate.gov/
hearings/library/hearing-012710-atlanta.cfm); Congressional Oversight
Panel, COP Field Hearing in New York City on Corporate and Commercial
Real Estate Lending (May 28, 2009) (online at cop.senate.gov/hearings/
library/hearing-052809-newyork.cfm).
\129\ 2010 February Oversight Report, supra note 104, at 138.
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Since the release of the February 2010 report, CRE
continues to threaten the economic viability of banks,
particularly smaller banks. There is approximately $3.2
trillion of outstanding debt associated with CRE loans, with a
significant concentration of that debt centered in smaller
banks.\130\ Over the next two years over $1 trillion of that
debt will come to maturity.\131\ In February 2010, the Panel
reported that losses on these loans for commercial banks alone
could total $200 billion to $300 billion for 2011 and
beyond.\132\ However, Chairman Bernanke recently indicated that
many of the worst fears about the CRE market do not seem to be
coming to fruition.\133\ In pursuit of information as to the
degree of risk that the CRE market poses to economic recovery,
the Panel held a hearing on February 4, 2011. The hearing
focused in particular on CRE's impact on bank stability. Though
there were indicators of price stabilization in some key
markets, issues related to commercial real estate continue to
cause problems for the banking sector and are the main reason
for recent bank failures.\134\ Sandra Thompson, director of the
Division of Supervision and Consumer Protection at the FDIC,
indicated that it could take time to sort out the CRE market
through restructuring and for loans that cannot be modified,
``prompt loss recognition and restructuring, painful as it may
be, is needed to lay the foundation for recovery in CRE
market.'' \135\ The Panel stated that until Treasury and the
bank supervisors address forthrightly and transparently the
threats facing the CRE markets--and the potential impact that a
breakdown in those markets could have on local communities,
small businesses, and individuals--the financial crisis will
not end.\136\
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\130\ Congressional Oversight Panel, Written Testimony of Patrick
M. Parkinson, director, Division of Banking Supervision and Regulation,
Board of Governors of the Federal Reserve System, COP Hearing on
Commercial Real Estate's Impact on Bank Stability, at 3-5 (Feb. 4,
2011) (online at cop.senate.gov/documents/testimony-020411-
parkinson.pdf) (hereinafter ``2011 COP Hearing on CRE Impact on Bank
Stability'') (``Notably, CRE concentrations are not a significant issue
at the largest banks. Among banks with total assets of $10 billion or
more, 10 percent had CRE concentrations. In contrast, one-third of all
banks with assets between $1 billion and $10 billion had CRE
concentrations. For banks with less than $1 billion in assets,
approximately 17 percent had CRE concentrations.''). See also
Congressional Oversight Panel, Written Testimony of Matthew Anderson,
managing director, Foresight Analytics, COP Hearing on Commercial Real
Estate's Impact on Bank Stability, at 1, 3 (Feb. 4, 2011) (online at
cop.senate.gov/documents/testimony-020411-anderson.pdf)
(``Approximately two-thirds of CRE debt is held by banks with less than
$100 billion in total assets.'').
\131\ 2011 COP Hearing on CRE Impact on Bank Stability, supra note
130, at 5 (``Approximately one-third of all CRE loans (both bank and
non-bank), totaling more than $1 trillion, are scheduled to mature over
the next two year''). See also Morgan Stanley, CMBS Market Insights CRE
Debt Markets: Challenges and Opportunities, at 1 (Dec. 6, 2010) (online
at cop.senate.gov/documents/testimony-020411-parkus.pdf) (``nearly $1.4
trillion of commercial real estate loans maturing over the next three
years'').
\132\ 2010 February Oversight Report, supra note 104, at 2, 38,
102.
\133\ Senate Committee on Banking, Housing, and Urban Affairs,
Testimony of Ben S. Bernanke, chairman, Board of Governors of the
Federal Reserve System, Transcript: The Semiannual Monetary Policy
Report to the Congress (Mar. 1, 2011) (publication forthcoming) (online
at banking.senate.gov/public/
index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=9ff8158e-fc56-495b-
aa5b-e957b981da96) (``I would say overall that some of the worst fears
about commercial real estate seem not to be coming true, that there is
some stabilization of vacancy rates and prices and so on in this--in
this market. That being said, there's still a lot of, as you say, a lot
of properties that are going to have to be refinanced and probably some
losses the banks are still going to have to take. So it's still
certainly a risk to the financial system, but it does seem to be
looking at least marginally better than we were fearing six months
ago.'').
\134\ Congressional Oversight Panel, Testimony of Patrick M.
Parkinson, director, Division of Banking Supervision and Regulation,
Board of Governors of the Federal Reserve, Transcript: COP Hearing on
Commercial Real Estate's Impact on Bank Stability (Feb. 4, 2011)
(publication forthcoming) (online at cop.senate.gov/hearings/library/
hearing-020411-cre.cfm) (``CRE-related issues also present ongoing
problems for the banking industry, particularly for community and
regional banking organizations. Losses associated with CRE,
particularly residential construction and land development lending,
have been the dominant reason for the high number of bank failures
since the beginning of 2008.'').
\135\ Congressional Oversight Panel, Testimony of Sandra Thompson,
director, Division of Supervision and Consumer Protection, Federal
Deposit Insurance Corporation, Transcript: COP Hearing on Commercial
Real Estate's Impact on Bank Stability (Feb. 4, 2011) (publication
forthcoming) (online at cop.senate.gov/hearings/library/hearing-020411-
cre.cfm) (``Distressed CRE loan exposures take time to work out, and in
some cases require restructuring to establish a more realistic and
sustainable repayment program. Some loans may not be able to be
modified and must be written off. This process of prompt loss
recognition and restructuring, painful as it may be, is needed to lay
the foundation for recovery in CRE market. At the same time, it must be
recognized that many institutions with CRE concentrations have
weathered the financial crisis.'').
\136\ 2010 February Oversight Report, supra note 104, at 139.
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As summarized in the July 2010 report, many smaller banks
face balance sheet pressures in what remains a pervasively
uncertain market. Faced with these pressures, however, smaller
banks do not necessarily have the options for capital-raising
available to larger banks. In particular, smaller banks have
more difficulty accessing capital than larger banks for many
reasons, among them that equity capital markets are more costly
for smaller banks due to fixed costs associated with
transactions; they are often too small to interest private
equity funds; and their traditional investors, who tend to be
locally based, might be unwilling to part with capital during
difficult economic times.\137\
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\137\ 2010 July Oversight Report, supra note 105, at 24-25.
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d. Transparency and Accountability
Transparency is essential because it facilitates
accountability and instills confidence in and increases
credibility of the decisions of Treasury and the Federal
Reserve--all of which are necessary and critical for proper
management of the taxpayers' involvement in the financial
sector rescue. The Panel has emphasized the need for
transparency in the operation and administration of the TARP
since its first report. In that report, the Panel first asked
whether Treasury knew what TARP recipients were doing with the
money they had received from the government.\138\ In the
context of Treasury's bank capital programs, the Panel stressed
the need for transparency in the administration of both the
stress tests and the CPP and has made calls more generally for
release of additional data from recipients of TARP funds.
---------------------------------------------------------------------------
\138\ Congressional Oversight Panel, December Oversight Report:
Questions About the $700 Billion Emergency Economic Stabilization
Funds, at 11-12 (Dec. 10, 2008) (online at frwebgate.access.gpo.gov/
cgi-bin/getdoc.cgi?dbname=110_cong_senate_committee_
prints&docid=f:45840.pdf) (``If the funds committed under TARP have an
intended purpose and are not merely no-strings-attached subsidies to
financial institutions, then it seems essential for Treasury to monitor
whether the funds are used for those intended purposes. Without that
oversight, it is impossible to determine whether taxpayer money is used
in accordance with Treasury's overall economic stabilization strategy.
Treasury cannot simply trust that the financial institutions will act
in the desired ways; it must verify.'').
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Stress Tests. In the June 2009 report, the Panel suggested
that additional information on the results of the stress tests
needed to be in the public domain, including the results under
the ``baseline'' economic scenario, or at least an explanation
if Treasury and the Federal Reserve decided not to release that
data. Furthermore, the Panel advocated for the release of more
extensive data on the stress test results, for instance, more
granular details on estimated losses by sub-categories. The
Panel noted that this additional information would improve the
transparency of the process and increase confidence in the
robustness of the tests.\139\ The Panel also recommended that
Treasury and the Federal Reserve publicly track the status of
its stress tests' macro-economic assumptions, including
unemployment, GDP, and housing price assumptions.\140\
---------------------------------------------------------------------------
\139\ 2009 June Oversight Report, supra note 95, at 49.
\140\ 2009 June Oversight Report, supra note 95, at 48-49.
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Since the June 2009 report, there has not been
significantly more information released regarding the results
of the May 2009 stress tests. In November 2010, the Federal
Reserve announced a second round of stress testing for SCAP
banks.\141\ The Federal Reserve requested that by January 7,
2011 these banks file a comprehensive capital plan detailing
their ability to absorb losses over the next two years and to
comply with new banking industry capital rules.\142\ Although
Secretary Geithner stated that disclosure of stress test
results is an effective supervisory approach,\143\ unlike the
May 2009 stress tests the results of the Federal Reserve's
regulatory review will not be made public.\144\ Similarly, in
August 2009, the Panel suggested that Treasury and relevant
government agencies work together to move financial
institutions toward sufficient disclosure of the terms and
volume of troubled assets on banks' books so that markets can
function more effectively.\145\ To date, this has not occurred.
---------------------------------------------------------------------------
\141\ In November, the Federal Reserve announced that nine of the
ten bank holding companies that needed to raise or improve the quality
of their capital under the stress tests had done so and at the time
they had sufficient capital to meet their capital requirements under
the stress tests. Federal Reserve Announcement on the Supervisory
Capital Assessment Program, supra note 79 (``The Federal Reserve Board
on Monday said that 9 of the 10 Bank Holding Companies (BHCs) that were
determined in the Supervisory Capital Assessment Program (SCAP) earlier
this year to need to raise capital or improve the quality of their
capital to withstand a worse-than-expected economic scenario now have
increased their capital sufficiently to meet or exceed their required
capital buffers. The one exception, GMAC, is expected to meet its
remaining buffer need by accessing the TARP Automotive Industry
Financing Program, and is in discussions with the U.S. Treasury on the
structure of its investment.''); Fed Addendum to SR Letter 09-4, supra
note 117.
\142\ Fed Addendum to SR Letter 09-4, supra note 117.
\143\ Geithner Testimony to the Panel, supra note 119 (stating that
disclosure is a ``remarkably effective approach, because it allowed
these firms to go out and raise a lot of capital much earlier'').
\144\ In addition, under the Dodd-Frank Act, financial institution
regulators will be required to perform stress tests for financial
companies with over $10 billion in assets for which they are the
primary regulator. Those findings will then be reported to the Federal
Reserve. The Dodd-Frank Act will not cover any financial institution
with assets of below $10 billion or which is a state chartered
institution. Under rules to be accepted within 18 months of the
enactment of the Dodd-Frank Act, any financial company with a primary
federal regulator that has over $10 billion in assets must conduct an
annual stress test and report the results to the Federal Reserve. In
addition, BHCs and non-bank financial Companies with assets in excess
of $50 billion must conduct semi-annual stress tests. At systemically
important BHCs and non-bank financial companies, the Federal Reserve
must conduct annual stress tests using at least three scenarios of
increasing adversity. 12 U.S.C. Sec. 5365(i).
\145\ 2009 August Oversight Report, supra note 100, at 61-62.
---------------------------------------------------------------------------
CPP. The Panel has continually advanced recommendations
aimed at fostering transparency in the CPP. In the June 2009
report, the Panel urged Treasury to increase transparency in
the CPP repayment process; including a recommendation that
Treasury disclose information on the criteria for repayment
eligibility, the approval process, and the process for
valuation and repurchase of warrants. The Panel further
suggested that the relationship of the stress test results to
CPP repurchases should be completely transparent.\146\ The
Panel reiterated many of these recommendations in the July 2009
report about warrant dispositions, emphasizing that Treasury
should negotiate the disposition of the warrants in a manner
that is as transparent and fully accountable as possible.\147\
The Panel noted that Treasury and the Federal Reserve must
explain fully and clearly to the public the reasons for
approval for repayment of financial assistance. The Panel also
stated that Treasury must be transparent about the way warrants
are valued, and clearly set forth the exit strategy for, or
future use of, the TARP, including how it proposed to use
repaid TARP funds.\148\ Specifically, the Panel recommended
that Treasury promptly provide written reports to the American
taxpayer analyzing the fair market value determinations for any
warrants either repurchased by a TARP recipient from Treasury
or sold by Treasury through an auction, and that Treasury
disclose the rationale for its choice of an auction or private
sale.\149\ Furthermore, in December 2009, the Panel suggested
that Treasury disclose the precise number of warrants it holds
for each financial institution within CPP.\150\ Similarly, the
Panel made several calls for additional transparency for the
use of TARP funds, and noted in May 2010 that Treasury had
failed to track TARP funds or require certain kinds of
longitudinal lending data from TARP recipients, both of which
hampered the Panel in its efforts to determine the
effectiveness of CPP.\151\
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\146\ 2009 June Oversight Report, supra note 95, at 48-49.
\147\ 2009 July Oversight Report, supra note 92, at 44-45.
\148\ 2009 July Oversight Report, supra note 92, at 44-45; 2009
June Oversight Report, supra note 95, at 49.
\149\ 2009 July Oversight Report, supra note 92, at 44-45.
\150\ 2009 December Oversight Report, supra note 27, at 108.
\151\ 2010 May Oversight Report, supra note 110, at 26.
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Since the Panel made its recommendations for increased
transparency, Treasury and the other banking regulators have
released significantly more information; however, there is
still room for improvement. For instance, even though federal
regulators have established approval processes for CPP
repayments, Treasury has not publicly issued uniform guidelines
or documentation needed for meaningful oversight or to achieve
transparency regarding these repayments. Additionally, while
Treasury has issued some general statements on its overall
repayment policy, it has not provided more detailed, case-by-
case explanations for approval of financial assistance
repayments. Furthermore, even though Treasury described its
approach to CPP warrant dispositions in three Warrant
Disposition Reports, Treasury's negotiations with the banks to
repurchase the warrants are still not transparent.\152\
Treasury never required the tracking of funds and has not
collected the lending data that the Panel thought was essential
for effective oversight.\153\
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\152\ 2010 February Oversight Report, supra note 104, at 149-152;
U.S. Department of the Treasury, Warrant Disposition Report (Jan. 20,
2010) (online at www.treasury.gov/
initiatives/financial-stability/briefing-room/reports/other/
DocumentsOther/TARP%20Warrant%20Disposition%20Report%20v4.pdf); June
2010 Warrant Disposition Report, supra note 122; U.S. Department of the
Treasury, Warrant Disposition Report (Dec. 31, 2010) (online at
www.treasury.gov/initiatives/financial-stability/briefing-room/reports/
other/DocumentsOther/TARP%20Warrant%20
Disposition%20Report%2012.31.2010%20Update.pdf) (hereinafter ``December
2010 Warrant Disposition Report'').
\153\ 2010 May Oversight Report, supra note 110, at 26. When asked
how institutions used the TARP funds they were given, Treasury raised
the difficulty in tracking individual dollars through an institution in
response--in essence, that because money is fungible, it is not useful
to track particular funds. Nevertheless, as the Panel and the Special
Inspector General for the Troubled Asset Relief Program (SIGTARP) have
noted, Treasury could have conditioned receipt of TARP assistance upon
requirements to report the usage of those funds and the overall lending
activities of the institutions in question. See Congressional Oversight
Panel, January Oversight Report: Taking Stock: Accountability for the
Troubled Asset Relief Program, at 3-4 (Jan. 9, 2009) (online at
cop.senate.gov/documents/cop-010909-report.pdf); 2009 December
Oversight Report, supra note 27, at 108-111. See also Congressional
Oversight Panel, January Oversight Report: Exiting TARP and Unwinding
Its Impact on the Financial Markets, at 5 (Jan. 14, 2010) (online at
cop.senate.gov/documents/cop-011410-report.pdf) (hereinafter ``2010
January Oversight Report''); Office of the Special Inspector General
for the Troubled Asset Relief Program, SIGTARP Survey Demonstrates that
Banks Can Provide Meaningful Information on Their Use of TARP Funds
(July 20, 2009) (online at sigtarp.gov/reports/audit/2009/SIGTARP_
Survey_Demonstrates_That_Banks_Can_Provide_Meaningful_%20Information_On_
Their_ Use_Of_TARP_Funds.pdf). Further, banking industry witnesses at
the Panel's Field hearing in Phoenix stated that they would support a
tracking requirement for capital infusion programs. See Congressional
Oversight Panel, Testimony of Candace Wiest, president and chief
executive officer, West Valley National Bank, Transcript: Phoenix Field
Hearing on Small Business Lending (Apr. 27, 2010) (publication
forthcoming) (online at cop.senate.gov/hearings/library/hearing-042710-
phoenix.cfm) (hereinafter ``Wiest Testimony to the Panel'').
---------------------------------------------------------------------------
The Panel's calls for transparency have also focused on
Treasury's activities as a shareholder. In the July 2010
report, the Panel requested that Treasury explain its process
for appointing board members to banks that are in arrears,
including the way in which it will identify board members for
those banks. The Panel added that Treasury should clearly
articulate its restructuring policy and indicate to CPP
participants that it will protect the priority of its
investments.\154\ Since the July 2010 report, Treasury has
publicly released a ``fact sheet'' and ``frequently asked
questions'' regarding the nomination of directors.\155\
Although Treasury has not yet exercised its right to nominate
board members for banks that have missed six dividend or
interest payments, as of February 28, 2011, 31 banks have
agreed to have Treasury observers attend board of directors
meetings.\156\ To date, 32 banks have missed at least six
payments.\157\ To the extent that Treasury has implemented the
Panel's other recommendations, it has not announced these
changes publicly.
---------------------------------------------------------------------------
\154\ 2010 July Oversight Report, supra note 105, at 61.
\155\ In these documents released in August 2010, Treasury
indicated that director nominations would be a two-step process based
on the number of missed dividend or interest payments. After five
missed payments, Treasury may request permission to send qualified
members of its staff to observe board meetings of the institution.
Then, once an institution misses six payments, Treasury will evaluate
whether to nominate up to two board members. Such determinations will
be based on Treasury's evaluation of the condition and health of the
institution as well as the functioning of its board of directors. U.S.
Department of the Treasury, Frequently Asked Questions: Capital
Purchase Program (CPP), Related to Missed Dividend (or Interest)
Payments and Director Nomination (Aug. 2010) (online at
www.treasury.gov/initiatives/financial-stability/investment-programs/
cpp/Documents/CPP%20Directors%20FAQs.pdf); U.S. Department of the
Treasury, Factsheet: Capital Purchase Program, Nomination of Board
Observers & Directors (Aug. 2010) (online at www.treasury.gov/
initiatives/financial-stability/investment-programs/cpp/Documents/
CPP%20 Directors%20-%20Observer%20Fact%20Sheet.pdf). See also U.S.
Government Accountability Office, Report to Congressional Addressees,
Troubled Asset Relief Program: Status of Programs and Implementation of
GAO Recommendations, at 18-19 (Jan. 2011) (GAO-11-74) (online at
www.gao.gov/new.items/d1174.pdf). Treasury has elected two members to
AIG's board of directors under the AIG Investment Program. Id. at 18.
\156\ U.S. Department of the Treasury, Cumulative Dividends,
Interest and Distributions Report as of February 28, 2011 (Mar. 10,
2011) (online at www.treasury.gov/initiatives/
financial-stability/briefing-room/reports/dividends-interest/
DocumentsDividends Interest/
February%202011%20Dividends%20Interest%20Report.pdf) (hereinafter
``Treasury's Dividends & Interest Report'').
\157\ Id. Based on information as of February 28, 2011.
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Data Gathering and Disclosure. In pursuit of greater
accountability, the Panel has called for data gathering to help
review the effectiveness of Treasury's programs. In the July
2010 report, the Panel recommended that Treasury analyze the
characteristics of the smaller banks that took CPP funds and
the data on the smaller banks that have repaid CPP funds in
order to determine commonalities among them. The Panel further
urged Treasury to use those commonalities to create a strategy
for exit, to help anticipate risks in the portfolio, and to
evaluate the effectiveness of capital infusions for stabilizing
smaller banks, given the program design of the CPP.\158\ The
Panel also requested that Treasury review the CPP's impact on
bank consolidations and concentration in the banking sector
generally.\159\ While the Panel acknowledges improvements in
data disclosure, many of the specific recommendations of the
Panel, such as a review of the CPP's impact on bank
consolidation and concentrations, have not been implemented, or
at least not announced publicly.
---------------------------------------------------------------------------
\158\ 2010 July Oversight Report, supra note 105, at 61.
\159\ 2010 July Oversight Report, supra note 105, at 52-57. The
Panel noted that although concerns about bank consolidation may not
have informed the program at the outset, increasing concentration in
the banking sector could have adverse effects on competition and
services offered to customers, and, potentially, on systemic stability.
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e. CPP Profits and Accountability
Accountability and program effectiveness are of particular
import with respect to returns under the CPP. The CPP was the
largest of three capital injection programs under the TARP,
providing 707 banks with capital injections totaling nearly
$205 billion.\160\ The program has to date generated returns
for the government: the current CBO and Office of Management
and Budget (OMB) subsidy costs for CPP are actually savings of
$15 billion and $12 billion, respectively, which represents a
positive rate of return. These returns come from redemptions,
warrant repurchases, and dividend payments. As of March 8,
2011, 145 of the 707 banks that participated in the CPP have
fully redeemed their preferred shares either through capital
repayment or exchanges for investments under other government
programs, including the Community Development Capital
Initiative (CDCI).\161\ Currently, banks can apply to the Small
Business Lending Fund (SBLF) as a means of refinancing their
preferred shares issued through CPP and CDCI.\162\ In addition,
Treasury receives dividend payments on the preferred shares it
holds under the CPP, 5 percent per year for the first five
years and 9 percent per year thereafter.\163\ In total,
Treasury has received approximately $30 billion in net income
from warrant repurchases, dividends, interest payments, profit
from the sale of stock, and other proceeds deriving from TARP
investments, after deducting losses.\164\ As noted above, in
conjunction with its preferred stock investments under the CPP
and the TIP, Treasury generally received warrants to purchase
common equity.\165\ As of July 2009, the Panel reported that
Treasury's method for selling stock options gained through the
CPP appeared to be recovering only 66 percent of the warrants'
estimated worth. Treasury has subsequently changed its approach
and subsequent sales recovered 103 cents on the dollar compared
to the Panel's best estimate. As of March 8, 2011, 51
institutions have repurchased their warrants from Treasury at
an agreed-upon price and Treasury has also sold warrants for 18
other institutions at auction. To date, income from warrant
dispositions totals $8.6 billion. Treasury still holds warrants
in 211 TARP recipients. The Panel's best estimate for the total
value of all outstanding warrants is $2.3 billion as of March
3, 2011.\166\ Figure 38 in the Annex provides further detail on
the income from warrant dispositions for financial institutions
that have fully repaid CPP funds and Figure 39 in the Annex
breaks down the value of Treasury's current holdings of
warrants by financial institution.
---------------------------------------------------------------------------
\160\ Treasury Transactions Report, supra note 36.
\161\ Treasury Transactions Report, supra note 36.
\162\ In a pamphlet designed for community banks, Treasury explains
the eligibility requirements for refinancing outstanding CPP or CDCI
securities through the Small Business Lending Fund (SBLF). U.S.
Department of the Treasury, SBLF: Small Business Lending Fund--Getting
Started Guide For Community Banks, at 4-5 (online at www.treasury.gov/
resource-center/
sb-programs/Documents/SBLF_Getting_Started_Guide_Final.pdf).
\163\ U.S. Department of the Treasury, Capital Purchase Program
(online at www.treasury.gov/initiatives/financial-stability/investment-
programs/cpp/Pages/capitalpurchaseprogram.aspx) (accessed Mar. 11,
2011). For preferred shares issued under the TIP, Treasury received a
dividend of 8 percent per year. U.S. Department of the Treasury,
Targeted Investment Program (online at www.treasury.gov/initiatives/
financial-stability/investment-programs/tip/Pages/
targetedinvestmentprogram.aspx) (accessed Mar. 11, 2011).
\164\ This number is calculated including only the CPP and CDCI.
Treasury's Dividends & Interest Report, supra note 156; Treasury
Transactions Report, supra note 36. Treasury also received an
additional $1.2 billion in participation fees from its Guarantee
Program for MMFs. Treasury's Guarantee Program for Money Market Funds
Expires, supra note 64.
\165\ For its CPP investments in privately held financial
institutions, Treasury also received warrants to purchase additional
shares of preferred stock, which it exercised immediately. Similarly,
Treasury received warrants to purchase additional subordinated debt
that were immediately exercised along with its CPP investments in
subchapter S corporations.
\166\ As discussed in its July 2009 report, the Panel uses a Black-
Scholes model to calculate low, high, and best valuation estimates of
outstanding TARP warrants. For more details on the Panel's warrant
valuation methods and inputs used in the Black-Scholes model, see 2009
July Oversight Report, supra note 92, at 20-28 and Annex A/B.
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That CPP has had an overall rate of return that is positive
is not to say that all CPP investments have been profitable. As
of February 28, 2011, 161 institutions have missed at least one
dividend payment on outstanding preferred stock issued under
the CPP. Among these institutions, 131 are not current on
cumulative dividends, amounting to $187.4 million in missed
payments. Another 30 banks have not paid $11.3 million in non-
cumulative dividends.\167\ Of the $30.9 billion currently
outstanding in CPP funding, Treasury's investments in banks
with non-current dividend and interest payments total $7.3
billion. A majority of the banks that are not current on
dividend payments have under $1 billion in total assets on
their balance sheets.\168\ Under the terms of the 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. Figure 35 in the Annex provides further details on
the distribution and the number of institutions that have
missed dividend payments.
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\167\ In addition, nine CPP participants have missed at least one
interest payment, representing $5.6 million in cumulative unpaid
interest payments. Treasury's total investments in these non-public
institutions represent less than $100 million in CPP funding.
Treasury's Dividends & Interest Report, supra note 156.
\168\ There are also 19 institutions that no longer have
outstanding unpaid dividends, after previously deferring their
quarterly payments. Fourteen banks have failed to make six dividend
payments, eleven banks have missed seven quarterly payments, six banks
have missed eight quarterly payments, and one bank has missed all nine
quarterly payments. These institutions received a total of $1.07
billion in CPP funding. Treasury's Dividends & Interest Report, supra
note 156.
---------------------------------------------------------------------------
Other CPP investments have been losses. As of March 8,
2011, Treasury has realized a total of $2.6 billion in losses
from investments in seven CPP participants.\169\ Figure 37 in
the Annex details settled and unsettled investment losses from
CPP participants that have declared bankruptcy, been placed
into receivership, or renegotiated the terms of their CPP
contracts. As of March 9, 2011, however, the average internal
rate of return (IRR) \170\ for all public financial
institutions that participated in the CPP and TIP and fully
repaid the U.S. government (including preferred shares,
dividends, and warrants) was at 10 percent.
---------------------------------------------------------------------------
\169\ CIT Group Inc. and Pacific Coast National Bancorp both
completed bankruptcy proceedings, and the preferred stock and warrants
issued by the South Financial Group, TIB Financial Corp., the Bank of
Currituck, Treaty Oak Bancorp, and Cadence Financial Corp. were sold to
third-party institutions at a discount. Excluded from Treasury's total
losses are investments in institutions that have pending receivership
or bankruptcy proceedings, as well as an institution that is currently
the target of an acquisition. Treasury Transactions Report, supra note
36, at 14. Settlement of these transactions and proceedings would
increase total losses in the CPP to $2.8 billion.
\170\ The internal rate of return (IRR) is the annualized effective
compounded return rate that can be earned on invested capital.
---------------------------------------------------------------------------
CPP Profits and the Risk of the Investments in 2008. As
described above, the overall rate of return for CPP and TIP is
10 percent,\171\ and Treasury often points to this positive
rate of return.\172\ As Harvard professor and economist Kenneth
Rogoff noted to the Panel in connection with the September 2010
report, however, that should not be the end of the inquiry. In
his words, 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.'' \173\ 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.\174\
---------------------------------------------------------------------------
\171\ That said, however, as the Panel noted in its September
report, many of the banks that have yet to repay may be in weaker
capital positions, and the ultimate overall returns may be less
favorable. 2010 September Oversight Report, supra note 53, at 28
(``[B]anks 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.'').
\172\ 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 www.treasury.gov/press-center/press-releases/Pages/
tg742.aspx) (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.'').
\173\ Kenneth Rogoff, Thomas D. Cabot Professor of Public Policy,
Harvard University, Written Answers to Questions Posed by the
Congressional Oversight Panel (Aug. 2010); 2010 September Oversight
Report, supra note 53, at 123. Professor Joseph E. Stiglitz echoed the
same opinion stating that Treasury should have demanded appropriate
compensation for the risk borne and that a proper evaluation should be
done ex ante and take into account the risks at the time. Congressional
Oversight Panel, Written Testimony of Joseph E. Stiglitz, Nobel
Laureate and University Professor, Columbia Business School, Graduate
School of Arts and Sciences Department of Economics and the School of
International and Public Affairs, COP Hearing on the TARP's Impact on
Financial Stability, at 3 (Mar. 4, 2011) (online at cop.senate.gov/
documents/testimony-030411-stiglitz.pdf) (``The fairness of the terms
is to be judged ex ante, not ex post, taking into account the risks at
the time.'').
\174\ 2010 September Oversight Report, supra note 53, at 93.
---------------------------------------------------------------------------
The Panel first addressed the question of whether, given
the risk involved, Treasury had paid a premium for the assets
purchased under the CPP in February of 2009. At that time,
there had been no CPP repayments: the first repayment took
place in March 2009, and thus the analysis performed was made
without the benefit of knowing the current CPP returns.\175\ As
noted above, while all of the investments under the CPP carry
the same terms,\176\ the first investments in the CPP were made
before Treasury instituted an application process, on the
publicly stated grounds that all recipients were healthy--an
assertion that came into question very rapidly.\177\
---------------------------------------------------------------------------
\175\ The February 2009 report also addressed the Systemically
Significant Failing Institutions (SSFI) program, but this discussion
focuses primarily on the CPP and the TIP.
\176\ As noted above, the Panel addressed the effect this had on
smaller banks in the CPP in July of 2010. See 2010 July Oversight
Report, supra note 105, at 3.
\177\ 2009 February Oversight Report, supra note 84, at 5 (``This
program was intended for healthy banks: those that are sound and not in
need of government subsidization. While a total of 317 financial
institutions have received a total of $194 billion under the CPP as of
January 23, 2009, eight large early investments represent $124 billion,
or 64 percent of the total. The eight were: Bank of America
Corporation, Citigroup, Inc., JPMorgan Chase & Co., Morgan Stanley,
Goldman Sachs Group, Inc., PNC Financial Services Group, U.S. Bancorp,
and Wells Fargo & Company.'').
---------------------------------------------------------------------------
Shortly after the initial CPP investments, it became clear
that the health of some of these initial recipients--
particularly Bank of America and Citigroup--was less certain
when soon after the initial CPP investments, these institutions
received additional infusions through the TIP.\178\ Testifying
in front of the Panel, Assistant Secretary of the Treasury for
Financial Stability Herb Allison stated that, ``I think that
Citi, and a number of other banks, many banks, would have been
on the brink of failure had the system not been underpinned by
actions of the government--including the Federal Reserve and
the U.S. Treasury.'' \179\ Subsequent emails made public in
connection with the Financial Crisis Inquiry Commission's work
made it clear that within weeks after the initial CPP
investments, the regulators in various banking agencies,
including the FDIC and FRBNY, were aware that Citigroup was in
a ``negative and deteriorating'' situation and that its
financial condition was ``marginal.'' \180\ Similarly, in mid-
January 2009, minutes of a board meeting indicate that the FDIC
was significantly concerned about Bank of America's health,
describing that entity's capital situation as ``strained'' and
expressing concern about a systemic event that disclosure of
Bank of America's operating results might cause.\181\
---------------------------------------------------------------------------
\178\ 2009 February Oversight Report, supra note 84, at 5.
\179\ Assistant Secretary Allison added that, ``Citi [ . . . ]
could have difficulty funding themselves at that time. Their debt
spreads had widened considerably, and so, in the opinion of their
management, they were facing a very serious situation.'' Congressional
Oversight Panel, Testimony of Herbert M. Allison, Jr., assistant
secretary for financial stability, U.S. Department of the Treasury,
Transcript: COP Hearing on Assistance Provided to Citigroup Under TARP,
at 27 (Mar. 4, 2010) (online at cop.senate.gov/documents/transcript-
030410-citi.pdf).
\180\ See Email from Christopher J. Spoth to Sheila C. Bair (Nov.
21, 2008) (online at c0181567.cdn1.cloudfiles.rackspacecloud.com/2008-
11-21%20FDIC%20Richardson% 20Email%20re%2011-21-
08%20Citi%20Liquidity%20Call%20Notes.pdf). See also Federal Deposit
Insurance Corporation, Transcript of the Minutes of the Meeting of the
Board of Directors, at 4 (Nov. 23, 2008) (online at
c0181567.cdn1.cloudfiles.rackspacecloud.com/2008-11-
23%20Transcript%20of%20FDIC%20
Board%20of%20Directors%20meeting,%20closed%20session.pdf); Federal
Reserve Bank of New York, Memorandum to Citigroup Board of Directors
(Jan. 14, 2009) (online at c0181567.cdn1.cloudfiles.rackspacecloud.com/
2009-01-14%20FRBNY%20Summary%20 of%20Supervisory%20Activity%20
and%20Findings%20on%20Citi.pdf).
\181\ Federal Deposit Insurance Corporation, Transcript: Board of
Directors Meeting (Jan. 15, 2009) (online at
c0181567.cdn1.cloudfiles.rackspacecloud.com/2009-01-
15%20FDIC%20Board%20Meeting%20Transcript.pdf) (hereinafter ``FDIC
Transcript on Board of Directors Meeting'').
---------------------------------------------------------------------------
Nor was the market unaware of these differences among the
big banks: an examination of the stock prices in the fall of
2008 of these nine banks shows that the market had a fairly
accurate perception of their relative health--or lack thereof.
Figure 11 details the percent change in stock prices of the
nine banks from December 2005. Specifically, in February 2009
the monthly stock prices of Bank of America and Citigroup were
below their December 2005 levels by 91 percent and 97 percent,
respectively. While all of the first nine banks to enter the
CPP clearly saw dipping stock prices, two banks, Citigroup and
Bank of America, consistently tracked the bottom of the group
after December 2008.
FIGURE 11: STOCK PRICE CHANGE OF THE FIRST NINE CPP BANKS (DECEMBER
2005-DECEMBER 2009) (RELATIVE TO DECEMBER 2005 LEVELS)
[GRAPHIC] [TIFF OMITTED] T4832A.009
Accordingly, even assuming that the other large banks that
received the initial CPP infusions were equally healthy, by
virtue of being made on the same one-size-fits-all terms, at a
minimum the Bank of America and Citigroup CPP investments
appear not to have properly priced the risk of investing in
those entities. As the Panel warned in its February 2009
report, when the initial CPP returns were unknown, using a one-
size-fits-all investment policy, rather than using risk-based
pricing more commonly used in market transactions, meant that
Treasury made its investments at a substantial premium to the
market value of the assets purchased under the CPP.\182\ As the
Panel stated:
---------------------------------------------------------------------------
\182\ 2009 February Oversight Report, supra note 84, at 2.
Treasury's emphasis on uniformity, marketability, and
use of call options in structuring TARP investments
helped produce a situation in which Treasury paid
substantially more for its TARP investments than their
then-current market value. The decision to model the
far riskier investments under the TIP . . . closely on
the CPP transactions also effectively guaranteed that a
substantial subsidy would exist for these riskier
institutions. Because Treasury decided to make all
healthy bank purchases on precisely the same terms,
stronger institutions received a smaller subsidy, while
weaker institutions received more substantial
subsidies.\183\
---------------------------------------------------------------------------
\183\ 2009 February Oversight Report, supra note 84, at 8.
Professors Luigi Zingales and Pietro Veronesi came to a similar
conclusion in their evaluation of the redistributive effects of
Treasury's initial investments into the first and largest
banks.\184\ Examining the TARP interventions on an ex-ante
basis, they found that the initial CPP terms provided these
banks' shareholders with a subsidy--or, as the authors put it,
a gift--which they estimated to be between $21 and $44 billion.
According to this study, the subsidy to the banks' bondholders
was even larger: $121 billion.\185\ The general effect of the
intervention on enterprise value also differed: stronger
institutions received lower and sometimes negative increases in
enterprise value from the announcement of the TARP
interventions, while weaker institutions received more.\186\
---------------------------------------------------------------------------
\184\ Luigi Zingales, Robert C. McCormack Professor of
Entrepreneurship and Finance and the David G. Booth Faculty Fellow,
Booth School of Business, University of Chicago. Pietro Veronesi, Roman
Family Professor of Finance, Booth School of Business, University of
Chicago.
\185\ Zingales and Veronesi note, however, that if the goal of the
plan was to get full participation and avoid signaling effects, more
stringent terms might have interfered. Pietro Veronesi and Luigi
Zingales, Paulson's Gift, Journal of Financial Economics, Vol. 97, No.
3, at 364 (Sept. 2010) (hereinafter ``Zingales & Veronesi: Paulson's
Gift''). At the time of the initial CPP infusion, Wells Fargo had
already reached an agreement to purchase Wachovia. The Panel's reports
have therefore consistently referred to the first nine banks:
Professors Zingales and Veronesi refer in their paper both to the first
nine and the first ten banks.
\186\ Id. at 364.
---------------------------------------------------------------------------
The subsequent positive returns on investment in the larger
CPP banks--including Citigroup and Bank of America--should not
obscure this point. Had Treasury more accurately priced the
risk--and calibrated it to each investment, as a private
investor would have done \187\--Treasury's upside returns would
have been greater. In illustrating this principle, Professors
Zingales and Veronesi compared Treasury's returns using the
terms of the CPP as implemented to Warren Buffet's investment
in Goldman at around the same time. Professors Zingales and
Veronesi concluded that if Treasury had demanded Mr. Buffet's
terms, Treasury would in most cases have captured significant
gains.\188\ Thus, if this analysis is correct, and although Mr.
Buffet remains currently invested in Goldman and his ultimate
returns are unknown, it is likely that Mr. Buffet will realize
more on his investment in Goldman than Treasury realized for
its similar TARP investment in that institution.\189\
---------------------------------------------------------------------------
\187\ In the February report, the Panel noted that it appeared that
private investors who made investments at around the same time received
better terms and thus better valuations than Treasury. Two of the
private transactions compared received assets worth more than their
investment, and one received assets worth less than the investment, but
still of greater worth than Treasury's assets (these ranged from
securities worth $123 on a $100 investment to $91 on a $100 investment,
as compared to Treasury's average $66 on a $100 investment). 2009
February Oversight Report, supra note 84, at 4, 8.
\188\ Zingales & Veronesi: Paulson's Gift, supra note 185, at 364.
\189\ These analyses are ex-ante, and not ex-post, and it is
important to note that--to the best of the Panel's knowledge--there is
no current academic effort to value the private investments under
discussion in this section. Further, since the private investments are
ongoing, it is impossible to determine what their ultimate value will
be, and an unforeseen shock to Goldman could impair Mr. Buffet's
returns in the future.
---------------------------------------------------------------------------
Treasury was not, of course, acting as a normal private
investor. Secretary Geithner recently stated that, ``you can't
say because we priced our investments below the cost of credit
that was available in the market in a time of a financial panic
that we underpriced those investments. That would not be a fair
way to evaluate it or a sensible way to run a financial
emergency.'' \190\ In the early days of the CPP, Treasury said
that its primary goal for the program was to stabilize the
financial system.\191\ Thus, Treasury was acting as a
government body with the goal not only of returns to taxpayers,
but also of market stability. In an atmosphere of profound
uncertainty as to the health of banks in general, the
regulators questioned whether the market was fully prepared for
the details of what the regulators knew to be true--that not
all of the largest banks were alike and healthy, and that some
were indeed very fragile.\192\ Accordingly, the fact that
Treasury's returns likely differ from those of a private
investor is not, and should not, be the end of the inquiry or
dispositive of future policy responses to a crisis.
Nonetheless, Professor Rogoff's cautions--with which Secretary
Geithner has said he agrees \193\--are not satisfied by
observations that Treasury has since made money without
recognizing that Treasury did not necessarily price the risk of
its investments in all of the CPP recipients.
---------------------------------------------------------------------------
\190\ Geithner Testimony to the Panel, supra note 119.
\191\ U.S. Department of the Treasury, Interim Assistant Secretary
for Financial Stability Neel Kashkari Remarks on Financial Markets and
TARP Update (Dec. 5, 2008) (online at www.treasury.gov/press-center/
press-releases/Pages/hp1314.aspx).
\192\ For example, in FDIC board minutes from the time, the FDIC
board acknowledged that while the market was sensitive to Bank of
America's losses and liabilities from Countrywide and Merrill Lynch,
the extent of the losses to which it was exposed would still be a
surprise. See, e.g., FDIC Transcript on Board of Directors Meeting,
supra note 181, at 22-23 (``DIRECTOR REICH: Yes, I think there's been
the perception that B of A has been sort of--well, certainly their
acquisitions of Countrywide and Merrill Lynch has given them greater
exposure to losses, but there nevertheless has been the perception that
they are among the strongest of institutions, and I think this is going
to be a surprise to the market. . . . DIRECTOR DUGAN: . . . . My only
comment would be, it would be a lot more surprise if it came out with a
loss in November [unclear]....I mean, I think it will be a very big
surprise, indeed, the size of the loss. That's exactly the shock that I
think we're all fearful of and will generate the systemic risk that can
have such harmful effects and the idea is that this will counteract
that perception as much as possible.''); Id. at 5 (``MR. NEWBURY: The
market reaction to Bank of America Corporation's operating results may
have systemic consequences given the size of the institution and the
volume of counterparty transactions involved.''). See also Email from
Jennifer Burns, Federal Reserve Bank of Richmond, to Richard Cox, FDIC,
and Morgan Morris, Office of the Comptroller of the Currency,
discussing Bank of America (online at
c0181567.cdn1.cloudfiles.rackspacecloud.com /2009-01-
11%20FDIC%20Cox%20Email%20to%20Corston,%20Hoyer%20-
%20FW%20Funding%20Vulnerabilities%20Memo.pdf).
\193\ In testimony before the Panel, Secretary Geithner stated that
Professor Rogoff's approach was fundamentally right. Geithner Testimony
to the Panel, supra note 119 (stating that ``what [Professor Rogoff]
says is fundamentally right. You have to measure, as any investor would
do, you have to measure return against risk.'').
---------------------------------------------------------------------------
3. Lessons Learned
As noted above, between February 2009 and July 2010, the
Panel examined questions about the policy, strategy, and
execution of the TARP's approach to bank assistance, how
Treasury and the Federal Reserve allowed banks to repay TARP
assistance, the financial stability of banks in the context of
troubled assets and CRE losses, and small banks' ability to
exit Treasury's CPP. From the Panel's recommendations common
themes emerged: transparency and accountability, forward-
looking risk assessment, and the fact that one size does not
necessarily fit all banks. These themes are discussed below.
a. Transparency and Accountability
In the reports on banking, the Panel has been consistent in
its call for greater transparency. Fuller disclosure to the
public instills confidence that the steps that Treasury has
implemented to buttress the financial system are being executed
in a prudent and fair manner. Accountability and transparency
go hand in hand: there can be no accountability without
transparency in decision-making. The taxpayers are only able to
assess Treasury's choices meaningfully if they get a complete
picture of how those choices were made and why Treasury deemed
those to be the most appropriate to recover the public's
investment, stabilize financial markets, and maximize return.
Such disclosure would prevent the appearance of ad hoc
decision-making and give Treasury an opportunity to take credit
for any positive outcomes. The Panel recognizes that
occasionally there are statutory and supervisory reasons to
limit transparency about certain data; however, except in those
limited circumstances, Treasury should always err on the side
of greater disclosure.
In some cases, and as mentioned above, this lack of
transparency has made Treasury the target of criticism that it
could have avoided had it been more open. Some economists
believe that the TARP was the most visible of the government's
actions in addressing the financial crisis, and that being the
public face of the intervention has contributed to its negative
reputation \194\--a difficulty that additional transparency
might have alleviated. The Panel has pointed out on numerous
occasions that a major source of the TARP's unpopularity was
insufficient transparency and inadequate communication. For
instance, in the implementation of the CPP, Treasury initially
indicated it was only infusing money into healthy banks. Later,
when it became apparent that some participating banks were on
the brink of failure, this not only tainted all participating
banks (including healthy banks), but also diminished Treasury's
credibility with the public.\195\ Furthermore, with regard to
TARP repayments by financial institutions small and large,
Treasury has only issued some general statements on its overall
repayment policy, instead of more detailed, case-by-case
explanations for its approval of these repayments. Given the
vast amounts of money involved, the public has a right to
expect transparency and to hold Treasury accountable for its
decisions. In addition, the lack of transparency may have
contributed to the general misperceptions that exist about the
TARP. Despite, for example, Treasury's recovery of much of the
money taxpayers initially invested, there is the lingering
belief that the TARP was an extremely costly program.\196\ The
transparency and accountability of Treasury's various choices
in the TARP may thus have significant implications not only for
the policies chosen during this crisis, but also for
policymakers facing difficult questions in the future.
---------------------------------------------------------------------------
\194\ 2010 September Oversight Report, supra note 53, at 95-96.
\195\ 2010 September Oversight Report, supra note 53, at 107.
\196\ The Pew Research Center, Few Aware of TARP Repayment,
Inflation Rate: Public Knows Basic Facts About Politics, Economics but
Struggle with Specifics, at 1-2 (Nov. 18, 2010) (online at people-
press.org/reports/pdf/677.pdf) (``But the public continues to struggle
with questions about the bank bailout program known as the TARP: Just
16 percent say, correctly, that more than half of loans made to banks
under the TARP have been paid back; an identical percentage says that
none has been paid back.'').
---------------------------------------------------------------------------
b. Forward-Looking Risk Assessment
Stress testing of banks was designed to assess whether
banks on a forward-looking basis could withstand a variety of
worst-case scenarios of economic events and still continue to
be financially viable. Banking regulators have used these tests
to require capital buffers to be built in advance of any
problem, based on projections about the economy and its impact
on banks' operating results. While it would be unwise to think
that stress testing could diagnose all of potential weaknesses
of the banking system, it does determine the extent of problems
in the market that are reasonably foreseeable.\197\ For
example, although it is not known to what degree the current
stress tests will take into account the effect on bank balance
sheets of mortgage documentation irregularities, the Panel has
urged the regulators to do so.
---------------------------------------------------------------------------
\197\ 2009 June Oversight Report, supra note 95, at 3-5.
---------------------------------------------------------------------------
c. One Size Does Not Necessarily Fit All
Treasury provided capital to banks participating in the CPP
under a single set of repayment terms designed at the outset of
the program. However, the result has been that large banks have
been much better served by the program than smaller banks. For
the stress-tested banks, the CPP proved to be a short-term
investment. They entered early, and most have exited early--
beneficiaries of capital market confidence resulting, in part,
from their ``too big to fail'' status. For smaller banks, by
contrast, the CPP is a long-term investment, subject to market
uncertainty, stigma, and pressure. Additionally, the purchase
agreements between Treasury and the banks did not address
differences in credit quality among various capital-infusion
recipients through variations in contractual terms governing
the investments. Nor did the purchase agreements impose
specific requirements on a particular recipient that might have
helped insure stability and soundness.
The CPP had a different impact on large and small banks in
part because these banks vary in a number of fundamental ways.
Small banks are often privately held or thinly traded and have
limited access to capital markets.\198\ Also, small banks are
disproportionately exposed to CRE, where there remains
substantial uncertainty about future performance. In addition,
and finally, as small banks do not benefit from any ``too big
to fail'' guarantee, their regulators have been quite willing
to close them down. Therefore, designing a standardized program
may be the quicker answer, but speed may not address
differences among participants in a program.
---------------------------------------------------------------------------
\198\ 2010 July Oversight Report, supra note 105, at 3.
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B. Guarantees and Contingent Payments
Capital infusions were not the only tool that Treasury
employed under the TARP to stabilize the banking sector. In
fact, during the financial crisis of late 2008 and early 2009,
the federal government dramatically expanded its role as a
guarantor.\199\ All told, the federal government's guarantees
have exceeded the total value of the TARP, making guarantees
the single largest element of the government's response to the
financial crisis.
---------------------------------------------------------------------------
\199\ Created by the FDIC less than two weeks after the enactment
of EESA, the TLGP was intended to promote liquidity in the interbank
lending market and confidence in financial institutions. The U.S.
government also developed two other initiatives with guarantee-like
aspects. First, through the TALF, FRBNY served as a quasi-guarantor of
the newly issued ABS by permitting participating ABS owners to default
on their TALF loans without further recourse from the lender (the
government). Second, the PPIP provides a quasi-guarantee to the markets
by demonstrating the U.S. government's willingness to subsidize private
investments and implement measures to encourage market liquidity.
---------------------------------------------------------------------------
1. Background
As noted above, CPP infusions were not enough for some
institutions. In a matter of weeks, two of the first nine
institutions to receive CPP funds--Citigroup and Bank of
America--needed additional support.\200\ Citigroup faced
widening credit default swap spreads and losses due to write-
downs on leveraged finance investments and securities,
particularly in residential real estate. Citigroup's stock
price, which had been volatile, fell below $4 per share on
November 21, 2008, from a high of over $14 per share just three
weeks earlier. This constituted a loss of more than two-thirds
of Citigroup's market capitalization during those three
weeks.\201\ Citigroup ultimately incurred a loss of $8.29
billion for the fourth quarter of 2008.\202\ For its part, Bank
of America incurred its first quarterly loss in more than 17
years in the fourth quarter of 2008. These losses were largely
due to escalating credit costs (including additions to
reserves), and significant write-downs and trading losses in
the capital markets businesses.\203\ In addition, the market
feared Bank of America's liability from its purchases of
Merrill Lynch and Countrywide.\204\
---------------------------------------------------------------------------
\200\ 2009 November Oversight Report, supra note 60, at 13-14.
\201\ 2009 November Oversight Report, supra note 60, at 43-44.
\202\ 2009 November Oversight Report, supra note 60, at 43.
\203\ 2009 November Oversight Report, supra note 60, at 43.
\204\ See Section II.A.1.a, supra. As noted above, in FDIC board
minutes from the time, the FDIC board acknowledged that the market was
sensitive to Bank of America's losses and liabilities from Countrywide
and Merrill Lynch, although the extent of the losses to which it was
exposed would still be a surprise. See, e.g., FDIC Transcript on Board
of Directors Meeting, supra note 181, at 22-23.
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Treasury, the Federal Reserve, and the FDIC stated that
providing additional assistance to both institutions was
necessary not only to keep them afloat, but also ``to
strengthen the financial system and protect U.S. taxpayers and
the U.S. economy.'' Noting that at the end of 2008 no one knew
what might happen to the economy next, Treasury stated that a
driving force behind the decision to provide additional
assistance was a fear that either institution's failure would
cause the same deep, systemic damage as had Lehman Brothers'
collapse.\205\
---------------------------------------------------------------------------
\205\ 2009 November Oversight Report, supra note 60, at 45.
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Part of the government's additional assistance to Citigroup
and Bank of America was provided through the Asset Guarantee
Program (AGP), which Treasury created pursuant to Section 102
of EESA to guarantee certain distressed or illiquid assets that
were held by systemically significant financial
institutions.\206\ In Treasury's view, asset guarantees would
``calm market fears about really large losses,'' thereby
encouraging investors to keep funds in Citigroup and Bank of
America.\207\ Citigroup's guarantee under the AGP ended in
December 2009, following the partial repayment of its TARP
assistance.
---------------------------------------------------------------------------
\206\ 2009 November Oversight Report, supra note 60, at 14, 40.
Section 102 of EESA required the Secretary of the Treasury, if he
created the TARP, also to ``establish a program to guarantee troubled
assets originated or issued prior to March 14, 2008, including
mortgage-backed securities.''
\207\ 2009 November Oversight Report, supra note 60, at 24-25, 46.
As discussed above, while a provisional term sheet was drafted
reflecting the outlines of Bank of America's asset guarantee agreement
(which was intended to resemble the Citigroup guarantee), the parties
never agreed upon a finalized term sheet.
---------------------------------------------------------------------------
In addition to the AGP, on September 19, 2008, two weeks
before EESA was signed into law, Treasury announced the
Temporary Guarantee Program for Money Market Funds (TGPMMF),
which was designed to alleviate investors' concerns that MMFs
would drop below a $1.00 net asset value, an occurrence known
as ``breaking the buck.'' \208\ At the program's height, it
guaranteed $3.2174 trillion in MMFs.\209\ The TGPMMF ended in
September 2009. Similarly, the FDIC's DGP, part of the TLGP,
discussed in greater detail in Section I, placed the FDIC's
guarantee behind the debt that banks issued in order to raise
funds that they could use to lend to customers. The DGP closed
to new issuances of debt on October 31, 2009. The FDIC will
continue to guarantee debt issued prior to that date until the
earlier of its maturity or June 30, 2012.
---------------------------------------------------------------------------
\208\ 2009 November Oversight Report, supra note 60, at 54.
\209\ 2009 November Oversight Report, supra note 60, at 6.
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2. Summary of COP Report and Findings
The Panel's November 2009 oversight report found that the
income of several government-backed guarantee programs would
likely exceed their direct expenditures, and that guarantees
had played a major role in calming financial markets. These
same programs, however, exposed American taxpayers to trillions
of dollars in guarantees and created significant moral hazard
that distorted the marketplace. Despite the guarantees'
significant impact, the contingent nature of guarantees,
coupled with the limited transparency with which the guarantee
programs were implemented, obscured the total amount of money
that was being placed at risk. Some financial stabilization
initiatives outside of the TARP, such as the FDIC's DGP and
Treasury's TGPMMF, carried greater potential for exposure of
taxpayer funds than the TARP itself.
3. Panel Recommendations and Updates
The extraordinary scale of these guarantees, the
significant risk to taxpayers, and the corresponding moral
hazard led the Panel to conclude that these programs should be
subject to extraordinary transparency. The Panel strongly urged
Treasury to provide regular, detailed disclosures about the
status of the assets backing up the Citigroup AGP guarantee,
the largest single guarantee offered. The Panel called upon
Treasury to disclose greater detail about the rationale behind
guarantee programs, the alternatives that might have been
available and why they were not chosen, and whether these
programs had achieved their objectives, including an analysis
of why Citigroup and Bank of America were selected for the AGP
and not others. The Panel also asked Treasury to provide a
legal justification for its use of the Exchange Stabilization
Fund to create the TGPMMF and to provide reports of the total
number of MMFs participating in the program (or the total
dollar value guaranteed), for each month that the program was
in existence.
To date, Treasury has not disclosed any of the information
the Panel requested concerning the various guarantee programs
it launched during the financial crisis, although a SIGTARP
audit recently disclosed information germane to the Panel's
requests.\210\ As noted above, the temporary guarantee program
for MMFs terminated in September 2009 and the Citigroup AGP
terminated in December 2009.
---------------------------------------------------------------------------
\210\ A recent SIGTARP audit provides some key disclosures relating
to the AGP and the government's decision to provide additional
assistance to Citigroup. Not only does this audit detail Citigroup's
initial proposal for additional government assistance, but it also
discusses several alternatives that were floated besides guarantees to
address the lack of market confidence in Citigroup. These included the
possibility of creating a conservatorship for Citigroup or creating a
SPV or public-private investment fund to purchase troubled assets from
Citigroup with government funds. Office of the Special Inspector
General for the Troubled Asset Relief Program, Extraordinary Financial
Assistance Provided to Citigroup, Inc., at 17-21 (Jan. 13, 2011)
(online at www.sigtarp.gov/reports/audit/2011/
Extraordinary%20Financial%20Assistance%20Provided
%20to%20Citigroup,%20Inc.pdf).
---------------------------------------------------------------------------
4. Lessons Learned
As the Panel pointed out in its November 2009 oversight
report, it is impossible to attribute specific results to a
particular initiative given that so many stabilization
initiatives have been in use. The guarantees provided by
Treasury, the Federal Reserve, and the FDIC helped restore
confidence in financial institutions, and did so without
significant expenditure, initially at least, of taxpayer money.
Moreover, as the market has stabilized and the scope of the
programs has decreased, the likelihood diminishes that any such
expenditure will be necessary. Additionally, the U.S.
government--and thus the taxpayers--have benefited financially
from the fees charged for guarantees.
This apparently positive outcome, however, was achieved at
the price of a significant amount of risk. A significant
element of moral hazard was injected into the financial system
at that time and a very large amount of money was at risk. At
its high point, the federal government guaranteed or insured
$4.4 trillion in face value of financial assets under the three
major guarantee programs.\211\ In addition, while circumstances
may have led the government into ad-hoc reactions to the
financial crisis, rather than permitting it to develop clear
and transparent principles, the result is that government
intervention has caused confusion and muddled
expectations.\212\
---------------------------------------------------------------------------
\211\ This figure includes the entirety of the governments exposure
to the Citigroup and Bank of America guarantees, $259 billion and $97
billion respectively, as well as the maximum amount outstanding under
the TLGP ($346 billion in May 2009), and the size of the money market
fund at the time Treasury enacted its guarantee ($3.7 trillion).
Federal Deposit Insurance Corporation, Monthly Reports on the Temporary
Liquidity Guarantee Program (Instrument Used: Debt Issuance under
Guarantee Program, Debt Outstanding) (May 31, 2009) (online at
www.fdic.gov/regulations/resources/tlgp/total_issuance5-09.html). For
details regarding the loss exposure for Treasury, the FDIC, and the
Federal Reserve to Citigroup and Bank of America guarantees, see U.S.
Department of the Treasury, Master Agreement Among Citigroup Inc.,
Certain Affiliates of Citigroup Inc. Identified Herein, Department of
the Treasury, Federal Deposit Insurance Corporation and Federal Reserve
Bank of New York, at 6-8, 13 (Jan. 15, 2009) (online at
www.treasury.gov/initiatives/financial-stability/investment-programs/
agp/Documents/Citigroup_01152009.pdf); Federal Deposit Insurance
Corporation, Summary of Terms (Jan. 15, 2009) (online at www.fdic.gov/
news/news/press/2009/pr09004a.pdf). IMMFA: Frequently Asked Questions,
supra note 27.
\212\ 2009 November Oversight Report, supra note 60, at 85.
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C. Global Context and International Effects of the TARP
Many of the banks at the center of the TARP interventions
had substantial global operations. Similarly, the U.S. banking
sector contains multiple financial institutions headquartered
elsewhere, but active in the U.S. economy. The crisis showed
that these sorts of cross-border links within the financial
system could magnify rather than reduce risks. In order to
examine the effects of these links on financial stability, the
Panel's August 2010 report addressed the international effects
of the TARP.
1. Background
In an earlier era, a mortgage crisis that started in a few
regions in the United States might have ended there as well.
But by 2008, the global financial system had become deeply
internationalized and interconnected. Mortgages signed in
Florida, California, and Arizona were securitized, repackaged,
and sold to banks and other investors in Europe, Asia, and
around the world. At the same time, other countries experienced
their own housing booms fueled by new financial products.
The conventional wisdom in the years immediately before the
crisis held that banks that operated across global markets were
more stable, given their ability to rely on a collection of
geographically dispersed businesses. The conventional wisdom,
however, was proved wrong. Using short-term liabilities
(funding from the overnight and other short-term markets, often
dollar-denominated) to purchase long-term assets such as RMBS,
many firms simply recreated the classic problem faced by
commercial banks prior to the securitization of mortgages,
creating a mismatch in the length of liabilities and assets.
When subprime borrowers began to default on their mortgages,
banks around the world discovered that their balance sheets
held the same deteriorating investments. The danger was
amplified by the high leverage created by layers of financial
products based on the same underlying assets. When short-term
lenders began to question the ability of banks to repay their
obligations, markets froze, and the international financial
system verged on chaos.\213\ The result was a truly global
financial crisis, and the interconnections within the global
financial marketplace and the significant cross-border
operations of major U.S. and foreign-based firms widened the
fallout of the crisis, requiring a multi-pronged response by a
host of national regulators and central banks.\214\
---------------------------------------------------------------------------
\213\ Congressional Oversight Panel, August Oversight Report: The
Global Context and International Effects of the TARP, at 3-4 (Aug. 12,
2010) (online at cop.senate.gov/documents/cop-081210-report.pdf)
(hereinafter ``2010 August Oversight Report'').
\214\ Id. at 29.
---------------------------------------------------------------------------
For the most part, governments across the globe responded
to the crisis on an ad hoc basis as it unfolded. What this
meant was that most of the responses were tailored to address
immediate problems and they tended to target specific
institutions or specific markets, rather than the entire
financial system. Home country regulators generally took
responsibility for banks headquartered in their jurisdictions,
and the evidence suggests that assistance was doled out less to
stabilize the international financial landscape than to respond
to potential fallout across a particular domestic market.\215\
There was, however, substantial cross-border coordination
between financial authorities and central banks of foreign
governments to establish TARP-like programs.\216\ For example,
in response to market disruptions, the Federal Reserve and
other central banks established reciprocal currency
arrangements, or swap lines, starting in late 2007.\217\ The
Federal Reserve's swap line programs enhanced the ability of
foreign central banks to provide U.S. dollar funding to
financial institutions in their jurisdictions at a time when
interbank lending was effectively frozen. Most countries
ultimately intervened in similar ways and used the same basic
set of policy tools: capital injections to financial
institutions, guarantees of debt or troubled assets, asset
purchases, and expanded deposit insurance.\218\
---------------------------------------------------------------------------
\215\ Id. at 35.
\216\ Id. at 3-4. Treasury also stated that it coordinated
extensively with its foreign counterparts throughout the financial
crisis. Id. at 96.
\217\ A swap line functions as follows: as the borrowing central
bank draws down on its swap line, it sells a specified quantity of its
currency to the lending central bank in exchange for the lending
central bank's currency at the prevailing market exchange rate. The two
central banks simultaneously enter into an agreement that obligates the
borrowing central bank to buy back its currency at a future date at the
same exchange rate that prevailed at the time of the initial draw, plus
interest. The borrowing central bank then lends the dollars at variable
or fixed rates to entities in its country. Id. at 107-108. The majority
of the swap line programs established by the Federal Reserve terminated
on February 1, 2010, but in response to the European sovereign debt
crisis, the Federal Reserve reestablished its swap line facilities by
entering into agreements with the European Central Bank and other major
central banks (the Bank of England, the Swiss National Bank, the Bank
of Canada, and the Bank of Japan) in May 2010 in order to counteract a
shortage of dollar liquidity. These swaps were authorized through
January 2011. In addition, on December 21, 2010, the Federal Reserve
Board authorized an extension through August 1, 2011, of its temporary
U.S. dollar liquidity swap arrangements with the Bank of Canada, the
Bank of England, the European Central Bank, the Bank of Japan, and the
Swiss National Bank. See Board of Governors of the Federal Reserve
System, Credit and Liquidity Programs and the Balance Sheet, at 8-9
(Feb. 2011) (online at www.federalreserve.gov/monetarypolicy/files/
monthlyclbsreport201102.pdf).
\218\ 2010 August Oversight Report, supra note 213, at 117.
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2. Summary of COP Report and Findings
The Panel's August 2010 oversight report examined the TARP
in an international context, describing how the financial
crisis that began in 2007 exposed the interconnectedness of the
global financial system. By 2008, the global financial system
had become deeply internationalized and interconnected.
Although the crisis began with subprime mortgage defaults in
the United States, its damage spread rapidly overseas and it
quickly evolved into a global financial crisis. Faced with the
possible collapse of their most important financial
institutions, many national governments intervened. While the
United States attempted to stabilize the system by flooding
money into as many banks as possible--including those that had
significant overseas operations--most other nations targeted
their efforts more narrowly toward institutions that in many
cases had no major U.S. operations. While it was difficult to
assess the precise international impact of the TARP or other
U.S. rescue programs because Treasury gathered very little data
on how TARP funds flowed overseas, it appeared likely that
America's financial rescue had a much greater impact
internationally than other nations' programs had on the United
States.\219\
---------------------------------------------------------------------------
\219\ 2010 August Oversight Report, supra note 213, at 3-5.
---------------------------------------------------------------------------
3. Panel Recommendations and Updates
Improved Data Collection and Reporting. In its August 2010
Oversight Report, the Panel called upon Treasury to collect and
report more data about how the TARP and other rescue funds
flowed internationally, to document the impact that the U.S.
rescue had overseas, to create and maintain a database of this
information, to urge foreign regulators to collect and report
similar data, and to make international regulatory bodies and
their interactions with U.S. regulators open and transparent.
The Panel also urged U.S. regulators to make clear to
policymakers the impact that such international regulatory
bodies have on the U.S. banking industry and broader economy.
It does not appear that Treasury has acted upon this
recommendation.
``War gaming'' Exercises. The Panel also recommended that
the international community gather information about the
international financial system, identify vulnerabilities, and
plan for emergency responses to a wide range of potential
future crises. The Panel called upon U.S. regulators to
encourage regular crisis planning and financial ``war gaming.''
Though no regulatory body has yet reported results from
financial ``war gaming,'' a broad array of international
standard-setting bodies, including the Basel Committee on
Banking Supervision and national authorities, under the
coordination of the Financial Stability Board, are in the midst
of quantifying and finalizing key elements of regulatory
reform. The Financial Stability Board, which includes the G20
(a group of 20 nations consisting of both industrialized and
emerging economies), will assess financial system
vulnerabilities, promote coordination and information exchange
among authorities, advise and monitor best practices to meet
regulatory standards, set guidelines for and support the
establishment of supervisory colleges, and support cross-border
crisis management and contingency planning. At the Seoul Summit
in November 2010, the G20 leaders endorsed the Financial
Stability Board policy framework, including its work processes
and timelines, for reducing the moral hazard of systemically
important financial institutions.\220\ Regulators are also
working with international bodies to coordinate responses in
the event of a large cross-border bank failure.\221\ U.S.
regulators do not have the authority to resolve foreign parents
of U.S. subsidiary firms that fail in the United States and
only have authority over the U.S. parent companies and U.S.
subsidiaries of U.S. entities,\222\ making international
cooperation helpful for the successful resolution of large,
transnational banks.
---------------------------------------------------------------------------
\220\ See Sullivan & Cromwell LLP, Basel III and FSB Proposals
(Nov. 15, 2010) (www.sullcrom.com/files/Publication/27b4dd5f-05fd-4f6b-
b49e-21caae447eee/Presentation/PublicationAttachment/6cdbbb2e-1103-
4c89-b0d5-23f7341d2b4c/SC_Publication_Basel_III_and_FSB_Proposals.pdf).
\221\ Federal Deposit Insurance Corporation, Statement of John
Corston, Acting Deputy Director, Complex Financial Institution Branch,
Division of Supervision and Consumer Protection, Federal Deposit
Insurance Corporation on Systemically Important Institutions and the
Issue of ``Too Big to Fail'' (Sept. 1, 2010) (online at www.fdic.gov/
news/news/speeches/archives/2010/spsep0110.html).
\222\ See Simon Johnson Testimony to the Panel, supra note 120. See
also Jeffrey N. Gordon, The Dangers of Dodd-Frank (Oct. 15, 2010)
(online at www.law.com/jsp/nylj/PubArticleNY.jsp?id=1202473381266).
---------------------------------------------------------------------------
4. Lessons Learned
As the Panel highlighted in its August 2010 oversight
report, the international response to the crisis that started
in 2007 developed on an ad hoc, informal, jurisdiction-by-
jurisdiction basis. Despite the limitations of international
coordination, macro-economic responses taken by central banks,
which had broader discretion to design liquidity facilities,
were the most coordinated.\223\ Governments ultimately made
their decisions, however, based on an evaluation of what was
best for their own banking sector and their domestic economy:
consideration of the specific impact of their actions on the
financial institutions, banking sector, or economies of other
jurisdictions was not a high priority. This was due to both the
rapid and brutal pace of the crisis as well as the absence of
effective cross-border crisis response structures. Ultimately,
this meant that the assistance that was provided to specific
troubled institutions depended very much on where they were
headquartered.\224\
---------------------------------------------------------------------------
\223\ 2010 August Oversight Report, supra note 213, at 116-117.
\224\ 2010 August Oversight Report, supra note 213, at 116.
---------------------------------------------------------------------------
Although these ad hoc actions ultimately restored a measure
of stability to the international system, there is no doubt
that international cooperation could be improved. The
internationalization of the financial system has, in short,
outpaced the ability of national regulators to respond to
global crises.\225\
---------------------------------------------------------------------------
\225\ 2010 August Oversight Report, supra note 213, at 117.
---------------------------------------------------------------------------
III. Credit Markets: Small Business and Consumer Lending
As noted above, the majority of the Panel's reports have
addressed topics relevant to the banking sector. Bank health
and credit markets are opposite sides of the same coin, because
a healthy bank with a solid balance sheet is in a better
position to respond to demand for credit. Accordingly, this
section discusses the impact of the financial crisis and
subsequently the TARP on credit markets.
A. Background
1. Small Business Lending
Credit is critical to the ability of all businesses to
purchase new equipment or new properties, expand their
workforce, and fund their day-to-day operations. If credit is
unavailable, businesses may be unable to meet current business
demands or to take advantage of opportunities for growth.\226\
In contrast to large corporations, small businesses are
generally less able to access the capital markets directly and
thus are more vulnerable to a credit crunch. The result of
reduced access to credit can be that too few small businesses
start and too many stall--a combination that can hinder
economic growth and prolong an economic downturn.\227\
---------------------------------------------------------------------------
\226\ 2010 May Oversight Report, supra note 110, at 3;
Congressional Oversight Panel, Written Testimony of Paul Smiley,
president, Sonoran Technology and Professional Services, Phoenix Field
Hearing on Small Business Lending, at 2 (Apr. 27, 2010) (online at
cop.senate.gov/documents/testimony-042710-smiley.pdf).
\227\ Congressional Oversight Panel, May Oversight Report: Reviving
Lending to Small Businesses and Families and the Impact of the TALF, at
12 (May 7, 2009) (online at cop.senate.gov/documents/cop-050709-
report.pdf) (hereinafter ``2009 May Oversight Report'').
---------------------------------------------------------------------------
During the financial crisis, bank lending to individuals
and businesses decreased across the board due to market
uncertainty and continued credit quality deterioration.\228\ As
Figure 12 shows, the amount of loans and leases outstanding at
commercial banks dropped to $6.5 trillion in the spring of 2010
from its level of $7.3 trillion outstanding in October
2008.\229\ As loans and leases outstanding have declined, the
amount of cash assets held as a portion of total loans and
leases has increased. Following the government's initial $125
billion investment in the first nine TARP participants in
October 2008, the cash to loans ratio more than doubled, from 7
percent to its December 2010 level of 16 percent.\230\ While an
increased cash to loan ratio is not necessarily a negative
sign, as it conveys a desire to ensure adequate cash reserves,
the continued decrease in loans outstanding shows that there
continues to be a decrease in the amount of credit in the
market.
---------------------------------------------------------------------------
\228\ Board of Governors of the Federal Reserve System, U.S. Credit
Cycles: Past and Present, at 4 (online at www.treasury.gov/initiatives/
financial-stability/results/cpp/cpp-report/Documents/
Fed%20US%20Credit%20Cycles%20072409.pdf) (accessed Mar. 11, 2011) (``.
. . credit growth typically declines prior to and during economic
downturns'').
\229\ The National Bureau of Economic Research, the body
responsible for determining when shifts in the business cycle occur,
stated that the most recent recession began in December 2007 and ended
in June 2009. NBER: US Business Cycle, supra note 21. The sharp jump in
loans and leases to $7.0 trillion in the spring of 2010 is
predominantly due to the implementation of FAS 166/167, which required
institutions to bring all loans held in variable interest entities onto
their balance sheets. Since then, outstanding loans and leases have
steadily decreased.
\230\ It is difficult to isolate new lending due to reporting
standards of banks. As part of the TARP, banks that received assistance
were required to report on their lending. Treasury used those data to
publish a survey of the top 22 CPP recipients. However, Treasury did
not require TARP recipients that repaid their funds to continue
reporting, thereby leaving a deficiency of data on new lending by the
nation's largest banks. Treasury continued publishing the Capital
Purchase Program Monthly Lending Report, which measures only three
metrics of the 26 measured by the survey of the top 22 CPP recipients.
2010 May Oversight Report, supra note 110, at 28.
---------------------------------------------------------------------------
FIGURE 12: LENDING AND CASH ASSETS AT COMMERCIAL BANKS \231\
[GRAPHIC] [TIFF OMITTED] T4832A.010
---------------------------------------------------------------------------
\231\ The considerable increase in loans and leases outstanding in
this graphic in early 2010 is due to the adoption of the Financial
Accounting Standards Board's Financial Accounting Statements No. 166
and No. 167 as of the week ending March 31, 2010. These rules changed
the accounting standards for financial assets and led to domestically
chartered commercial banks consolidating approximately $377.8 billion
in assets and liabilities on their balance sheets at the end of the
first quarter 2010. Financial Accounting Standards Board, FASB Issues
Statements 166 and 167 Pertaining to Securitizations and Special
Purpose Entities (June 16, 2009) (online at www.fasb.org/cs/
ContentServer?c=FASBContent_C&pagename=FASB/FASBContent_C/
NewsPage&cid=1176156240834); Board of Governors of the Federal Reserve
System, Assets and Liabilities of Commercial Banks in the United
States--Notes on the Data (Apr. 9, 2010) (online at
www.federalreserve.gov/releases/h8/h8notes.htm#notes_20100409);
Treasury Transactions Report, supra note 36.
---------------------------------------------------------------------------
While it is difficult to gather data specifically about
small business credit or to generalize across small business
market participants, credit began to tighten for small
businesses in early 2008 and worsened over the course of
2009.\232\ For loans to small businesses, in the first quarter
of 2008, 51.8 percent of the Federal Reserve's Survey of Senior
Loan Officers respondents reported that they had tightened
credit standards. By the fourth quarter of that year, that
percentage had risen to 69.2 percent. Credit remained tight
during the first part of 2009: in the first quarter, 42.3
percent of the Survey of Senior Loan Officers respondents
reported that they had tightened credit standards. The numbers
of Senior Loan Officers reporting tightening credit eventually
leveled off, reflecting the fact that most banks had already
tightened their lending standards.\233\ Unable to find credit,
many small businesses shut their doors, and some of the
survivors are still struggling to find adequate financing.\234\
At an acute phase of the crisis, the Panel found compelling
reports of slowed lending at its April 2009 field hearing in
Milwaukee, Wisconsin. On the one hand, small business owners
discussed their lack of access to credit at that hearing.
Anecdotally, small business owners who testified suggested that
their banks, which had received TARP injections, had been
unable to fulfill their credit needs, which ranged from
additional loans to restructuring or even sustaining existing
lines of credit. On the other hand, the community bankers who
testified at the field hearing highlighted their efforts to
extend credit to their small business customers. Two witnesses
representing community banks emphasized that they were
continuing to lend throughout the crisis, while acknowledging
that they had no choice but to pursue new opportunities
cautiously.\235\
---------------------------------------------------------------------------
\232\ A source of information on trends is the Federal Reserve's
Senior Loan Officer Opinion Survey on Bank Lending Practices, which is
based on quarterly data reported by the Survey of Senior Loan Officers
respondents and addresses changes in the supply of and demand for loans
to businesses and households. See Board of Governors of the Federal
Reserve System, January 2011 Senior Loan Officer Opinion Survey on Bank
Lending Practices, at 7 (Jan. 31, 2011) (online at
www.federalreserve.gov/boarddocs/snloansurvey/201102/fullreport.pdf)
(hereinafter ``January 2011 Senior Loan Officer Survey'').
\233\ 2010 May Oversight Report, supra note 110, at 17.
\234\ 2010 May Oversight Report, supra note 110, at 3.
\235\ 2009 May Oversight Report, supra note 227, at 13-14;
Congressional Oversight Panel, Hearing on the Credit Crisis and Small
Business Lending (Apr. 29, 2009) (online at cop.senate.gov/hearings/
library/hearing-042909-milwaukee.cfm) (full audio recording).
---------------------------------------------------------------------------
During the crisis, many larger banks pulled back from the
small lending market.\236\ Some borrowers looked to community
banks to pick up the slack, but smaller banks remained strained
by both their exposure to CRE, which continued to pose a risk
to the economic viability of banks, and other liabilities.\237\
In addition, many of the government programs aimed at banks
were arguably designed more to provide relief for the kinds of
assets held by larger banks, and have had little effect on the
smaller banks now bearing a greater share of small business
lending. Even now, with a cautious recovery under way in many
sectors, standards for small business lending have remained
tight, easing only very slightly by the fourth quarter of
2010.\238\
---------------------------------------------------------------------------
\236\ 2010 May Oversight Report, supra note 110, at 62-63.
\237\ The withdrawal of consumer and small business loans because
of a disproportionate exposure to commercial real estate capital
creates a ``negative feedback loop'' that suppresses economic recovery.
See Section II.
\238\ 2009 May Oversight Report, supra note 227, at 4, 12-13.
According to the Federal Reserve Board's January 2011 Senior Loan
Officer Opinion Survey on Bank Lending Practices, a small fraction of
banks reported they were continuing to ease standards for commercial
and industrial (C&I) loans over the fourth quarter of 2010 to large and
medium-size firms, but few reported changing standards on such loans to
small businesses. January 2011 Senior Loan Officer Survey, supra note
232, at 4, 13. While the respondents reported a moderate increase in
demand for C&I loans, there was little if any change in demand for
other types of loans. Reports of strengthened demand for C&I loans were
more widespread than in the previous survey. Approximately 5 percent of
banks reported increased demand from small businesses. Id.
---------------------------------------------------------------------------
2. Consumer Lending
Leading into the financial crisis, families were deep in
debt, including mortgages, auto loans, credit cards and student
loans. Families were left with little savings, while declines
in the value of housing and in the stock market further shrunk
household net worth. As wages stagnated and unemployment rose,
the ability of households to manage ever-larger debt loads
became increasingly difficult.
During late 2008 and into 2009, consumer credit indicators
showed the tightening of the credit markets and the effect on
household borrowing. This reduction in credit availability can
be seen through rising interest rates and higher lending
standards, as well as through reductions in the rate and
overall volume of lending. In the fourth quarter of 2008,
consumer spending on goods and services fell 4.3 percent--a
decline responsible for nearly half of the reported 6.2 percent
annualized contraction in GDP. This was the largest spending
decrease in 29 years.\239\ At the same time, the recession
impacted demand for borrowing, as households paid down debts
built up during the boom years, which contributed to the
economic contraction. Overall, the trend across the sector was
one of debt reduction, credit limit decreases, rising
delinquencies, and tightening lending standards.\240\ The
aggregate decline in consumer lending was likely due to a
combination of deleveraging by households and reduced access to
credit.
---------------------------------------------------------------------------
\239\ 2009 May Oversight Report, supra note 227, at 19-20.
\240\ 2009 May Oversight Report, supra note 227, at 25-30.
---------------------------------------------------------------------------
3. Government Efforts to Stimulate Small Business and Consumer Lending
Since the onset of the financial crisis, the federal
government has instituted a series of programs designed to
support lending and liquidity in the consumer and small
business credit markets. Since the TARP's inception, Treasury
has announced almost $60 billion in funding for TARP programs
for small business-related initiatives, but it has reduced that
commitment to approximately $5.2 billion over the past
year.\241\ The government initiatives predominantly included
additional support for Small Business Administration (SBA)
programs, capital infusions for smaller banks, and various
efforts to stimulate secondary markets for bank assets in hopes
of easing the stresses on bank balance sheets and freeing banks
to make more loans.
---------------------------------------------------------------------------
\241\ In April 2010, Treasury reduced its planned investment
commitments for the Consumer and Business Lending Initiative from $60
billion to $52 billion. The $52 billion of the Consumer and Business
Lending Initiative was comprised of $20 billion for the TALF, $30
billion reserved for the SBLF (separate from the TARP through
legislation), not more than $1 billion for the CDCI Program, and not
more than $1 billion for the SBA 7(a) Securities Purchase Program. U.S.
Department of the Treasury, Troubled Asset Relief Program Monthly
105(a) Report--March 2010, at 7 (Apr. 12, 2010) (online at
www.treasury.gov/initiatives/financial-stability/briefing-room/reports/
105/Documents105/March%202010%20105(a)%20monthly%20report_final.pdf).
Before and after passage of the Dodd-Frank Act, Treasury announced
changes in the planned commitments under the TARP, including changes to
its small business-related initiatives. Treasury reserved $5.48 billion
for the Consumer and Business Lending Initiative in July 2010, of which
(i) $4.3 billion was allocated to TALF, (ii) $337 million was disbursed
from the $400 million allocated for SBA 7(a) securities purchases, and
(iii) $570 million was disbursed from the $780 million allocated for
the CDCI. See U.S. Department of the Treasury, Troubled Asset Relief
Program Monthly 105(a) Report--July 2010, at 4-6 (Aug. 10, 2010)
(online at www.treasury.gov/initiatives/financial-stability/briefing-
room/reports/105/Documents105/July%202010%20105(a)%20Report_Final.pdf).
As of the expiration of Treasury's authority to make new financial
commitments under the TARP on October 3, 2010, its Consumer and
Business Lending Initiative commitment stood at approximately $5.2
billion. See U.S. Department of the Treasury, Troubled Asset Relief
Program Monthly 105(a) Report--December 2010, at 3 (Jan. 10, 2011)
(online at www.treasury.gov/initiatives/financial-stability/briefing-
room/reports/105/Documents105/December105(a)%20report_FINAL_v4.pdf)
(hereinafter ``TARP Monthly 105(a) Report--December 2010'').
---------------------------------------------------------------------------
a. SBA Programs
In stable credit markets, the government's effort to
facilitate small business lending relies chiefly on programs
run by the SBA. The SBA acts as direct lender or, more often,
guarantor in the small business lending sector. Guarantees,
which comprise the bulk of the SBA's outstanding loan
portfolio, derive from the agency's 7(a) and 504 loan programs
and its Small Business Investment Company Program. Under its
7(a) program, the SBA is authorized to guarantee loans for
working capital. Under its 504 program, the SBA is authorized
to guarantee loans for the development of small assets such as
land, buildings, and equipment that will benefit local
communities. Direct loans originate from the SBA's microloan
and disaster loan programs. While SBA programs have helped
promote lending to small businesses, SBA-guaranteed loans
constitute only a small percentage of total small business
lending.\242\
---------------------------------------------------------------------------
\242\ 2010 May Oversight Report, supra note 110, at 42.
---------------------------------------------------------------------------
During the financial crisis, however, SBA lending declined
considerably, even though those loans can be a fallback for
business owners who fail to obtain conventional loans. The
tightening of credit in the SBA lending markets mirrored the
tightening of credit in conventional markets for small business
loans, with loan volume decreasing over the course of 2008. In
the fall of 2008, the secondary market for SBA 7(a) loans froze
altogether. Unable to shed the associated risk from their books
and free up capital to make new loans through securitization,
commercial lenders significantly curtailed both their SBA
lending and other lending activities. The decline in SBA
lending became even more pronounced in the early months of 2009
while commercial lending remained very constricted, thus
leading to few sources of credit for small businesses.\243\
---------------------------------------------------------------------------
\243\ 2009 May Oversight Report, supra note 227, at 14, 30-42.
---------------------------------------------------------------------------
In an effort to increase SBA lending, the American Recovery
and Reinvestment Act (ARRA) included a provision that reduced
the risk to private lenders by temporarily increasing the
government guarantee on loans issued through the SBA's 7(a)
loan program to as much as 90 percent.\244\ The SBA began
implementing the increased guarantee program in March
2009.\245\
---------------------------------------------------------------------------
\244\ 2010 May Oversight Report, supra note 110, at 45.
\245\ Moreover, ARRA temporarily eliminated up-front fees that the
SBA charges on 7(a) loans that increase the cost of credit for small
businesses, and temporarily eliminated certain processing fees
typically charged on 504 loans. ARRA also included a Business
Stabilization Program that allowed the SBA to guarantee fully loans to
``viable'' small businesses experiencing short-term financial
difficulty (up to $35,000).
Pursuant to H.R. 5297, the Small Business Jobs Act of 2010, the SBA
loan guarantee enhancement provisions relating to guarantees and fees
were extended through December 31, 2010.
---------------------------------------------------------------------------
b. Capital Infusions
i. CDCI
On October 21, 2009, the White House announced a small
business lending initiative under the TARP, the CDCI, to invest
lower cost capital in community development financial
institutions (CDFIs). As of the CDCI's close in September 2010,
Treasury had provided to 84 community development financial
institutions approximately $570.1 million (approximately $363.3
million of this amount was a result of exchanges from CPP by 28
institutions) of the $780.2 million it originally allocated for
this program.\246\ Treasury did not require community
development financial institutions to use the capital to
increase small business lending as a condition of participating
in CDCI.
---------------------------------------------------------------------------
\246\ U.S. Department of the Treasury, Troubled Asset Relief
Program: Two Year Retrospective, at 33 (Oct. 5, 2010) (online at
www.treasury.gov/initiatives/financial-stability/briefing-room/reports/
agency_reports/Documents/
TARP%20Two%20Year%20Retrospective_10%2005%2010_
transmittal%20letter.pdf) (hereinafter ``TARP: Two Year
Retrospective'').
---------------------------------------------------------------------------
ii. SBLF
On September 27, 2010, President Barack Obama signed the
Small Business Jobs and Credit Act of 2010 into law.\247\ This
legislation created the SBLF, which was created outside the
TARP and aims to stimulate small business lending by providing
capital to participating community banks at interest rates
keyed to small business lending levels.\248\ The capital is in
the form of a preferred stock investment with a variable
dividend rate: it starts at 5 percent and can be reduced to as
low as 1 percent or increased to as high as 7 percent,
depending on small business lending levels. As small business
lending increases, a bank will receive a reduced dividend rate
on the funds borrowed. If small business lending fails to
increase, the bank will pay increased dividend rates on the
funds borrowed. After four and a half years, the dividend rate
will increase to 9 percent regardless of the change in small
business lending levels. The SBLF will be open to banks that
received funds from the TARP's CPP as well as those that did
not. The legislation limits participation in the SBLF to banks
with under $10 billion in assets, and it prohibits
participation by institutions on the FDIC's Problem Bank List
and by TARP recipients that have missed more than one dividend
payment.\249\ Generally speaking, the SBLF will provide capital
on terms that are more favorable than the CPP offered.
---------------------------------------------------------------------------
\247\ Small Business Jobs and Credit Act of 2010, Pub. L. No. 111-
240 (2010).
\248\ For further discussion concerning the SBLF, see Section III,
infra. On December 20, 2010, Treasury issued guidance under which CDCI
recipients can refinance into the SBLF. Banks that participate in the
SBLF will not be able to continue to participate in the CDCI, must be
in compliance with all the terms, conditions, and covenants of the CDCI
in order to refinance, and must be current in their dividend payments
owed to Treasury under the CDCI. U.S. Department of the Treasury,
Resource Center--Small Business Lending Fund (Dec. 20, 2010) (online at
www.treasury.gov/resource-center/sb-programs/Pages/Small-Business-
Lending-Fund.aspx) (hereinafter ``Treasury Resource Center--SBLF'').
\249\ H.R. 5297 Sec. 4103(d)(4), 111th Cong. (2010); H.R. 5297
Sec. 4103(d)(7)(B), 111th Cong. (2010). Banks may be put on the Problem
Bank List for a number of reasons, including failure to achieve certain
capital ratios, the issuance of cease and desist orders, and other
regulatory actions.
---------------------------------------------------------------------------
c. Supporting Secondary Markets
Starting in November 2008, Treasury and the FRB emphasized
revival of the securitization markets, not simply basic bank
lending, to restore the flow of credit to small businesses and
families. The government developed numerous initiatives for
supporting secondary lending markets. Secondary markets allow
depository institutions either to sell or securitize loans,
converting potentially illiquid assets into cash and shifting
assets off their balance sheets. From the outset, however, this
approach raised a variety of issues, including whether the
program would meaningfully affect access to credit for small
businesses because only a small fraction of small business
loans are securitized, limiting the effectiveness of secondary
market-driven programs for small business loans.\250\
---------------------------------------------------------------------------
\250\ Generally, only SBA-guaranteed loans are securitized, and
they constitute only a small fraction of small business lending. 2010
May Oversight Report, supra note 110, at 42; 2009 May Oversight Report,
supra note 227, at 50-58.
---------------------------------------------------------------------------
i. TALF
Driven by the ABS market freeze in the fall of 2008, the
Federal Reserve and Treasury announced the creation of the TALF
in late November 2008. The TALF was designed to promote renewed
issuance of consumer and business ABS at more normal interest
rate spreads. As demonstrated in Figure 13 below, the majority
of TALF ABS issuances were consumer lending-related, but only a
small percentage of transactions occurred in the small business
sector. When the TALF program was closed on June 30, 2010,
there were $43 billion in loans outstanding. Accordingly, on
July 20, 2010, 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.\251\
---------------------------------------------------------------------------
\251\ 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); Board of Governors of
the Federal Reserve System, Press Release (July 20, 2010) (online at
www.federalreserve.gov/newsevents/press/monetary/20100720a.htm).
---------------------------------------------------------------------------
FIGURE 13: TALF ABS ISSUANCES BY SECTOR \252\
---------------------------------------------------------------------------
\252\ The TALF provided investors with non-recourse loans secured
by certain types of ABS, including credit card receivables, auto loans,
equipment loans, student loans, floor plan loans, insurance-premium
finance loans, loans guaranteed by the SBA, residential mortgage
servicing advances, and commercial mortgage-backed securities (CMBS).
The chart reflects all TALF ABS issuances, but does not reflect CMBS
issuances.
[GRAPHIC] [TIFF OMITTED] T4832A.011
ii. SBA 7(a) and 504 Securities Purchase Programs
In addition to the TALF, Treasury created a program to make
direct purchases of securities backed by the government-
guaranteed portion of SBA 7(a) loans and the non-government-
guaranteed first lien mortgage loans affiliated with the SBA's
504 loan program in hopes of unlocking the small business loan
market. Treasury announced its SBA 7(a) initiative in March
2009 to help restart small business credit markets and provide
an additional source of liquidity designed to foster new
lending. Despite stating that 7(a) and 504 purchases would
begin by May 2009, Treasury did not implement the program until
March 19, 2010.\253\ Treasury initially allocated $15 billion
in TARP funds for the purchases, but this was revised to just
$1 billion, and was again reduced to $400 million.\254\ As of
the program's close in September 2010, Treasury had made 31
purchases of SBA 7(a) securities totaling about $357
million.\255\ Treasury never purchased any 504 securities
through this initiative.
---------------------------------------------------------------------------
\253\ 2010 May Oversight Report, supra note 110, at 41.
\254\ 2010 September Oversight Report, supra note 53, at 53-54.
\255\ TARP: Two Year Retrospective, supra note 246, at 43.
Securities purchased by Treasury comprised approximately 700 loans
ranging across approximately 17 industries including retail, food
services, manufacturing, scientific and technical services, health
care, and educational services. The program supported loans from 39 of
the 50 states.
---------------------------------------------------------------------------
d. Other Government Programs
Some programs, like the PPIP, discussed above in Section
II.A.1.b, were initially expected to help stimulate small
business and consumer lending but ultimately did not. The PPIP
was designed to allow banks and other financial institutions to
shore up their capital by removing troubled assets from their
balance sheets. Since the PPIP did not ultimately purchase the
whole loans that many smaller banks hold on their books, it had
little effect on the banks responsible for a disproportionate
amount of small business lending. Many state and local entities
also have programs to support small business lending within
their geographic boundaries. These programs generally mirror,
on a smaller scale, tools employed by SBA, including both
direct lending and loan guarantees.\256\
---------------------------------------------------------------------------
\256\ 2010 May Oversight Report, supra note 110, at 46-47, Annex
II.
---------------------------------------------------------------------------
B. Summary of COP Reports and Findings
In May 2009, the Panel addressed small business lending and
evaluated the impact of FRBNY's and Treasury's TALF. The report
examined the design of the TALF, which was intended to restart
securitization markets, and questioned whether any
securitization program could help meet the credit needs of
small businesses. The report also examined other sources of
small business credit, including credit cards and informal
credit sources, such as angel investors, family, and friends.
The report noted Treasury's assertion that restoring access to
credit has multiplier effects throughout the economy and
examined the difficulties that small businesses were having in
obtaining credit of any kind.
The Panel's examination of small business credit at the
beginning of 2009 showed credit terms tightening and loan
volume dropping, based on the limited data available. Small
businesses found themselves in a contradictory position: they
needed credit to operate, but the drop in demand for their
products or services as a result of the country's economic
difficulties likely made lenders unwilling to give them that
credit except on terms that small businesses could not accept.
While noting that the TALF, if successful, could improve access
to lending for families and small businesses, the Panel found
that there was reason for caution in predicting the ultimate
impact of the TALF, though the program could succeed in
improving investor demand for ABS.
In May 2010, the Panel re-examined the contraction in small
business lending and noted that although Treasury had launched
several programs aimed, in whole or in part, at improving small
business credit availability, it was not clear that they had
had any significant impact on small business lending, which
remained severely constricted. Numerous factors--bank strength
or weakness, number of creditworthy borrowers, soft demand for
goods and services, and deleveraging, among other things--can
all cause low lending levels, and the relative importance of
these factors in the overall mix can shift over time. As demand
and supply shift and interact, low lending levels can be
difficult to analyze.\257\ For example, at the Panel's April
2010 field hearing in Phoenix, Arizona, Candace Wiest,
President and CEO of the West Valley National Bank, noted that
``we want to loan'' \258\ but ``it is difficult to find anyone
who has not been impacted [by the recession] and remains
creditworthy.'' \259\ FDIC San Francisco Regional Director Stan
Ivie noted, however, that ``many banks have financial
difficulties right now with their credit quality and they need
to reserve their capital for losses and future losses which
results in less capital and liquidity to lend . . . to
borrowers.'' \260\ In focusing on measures to increase the
supply of small business loans, the Panel's report noted that
Treasury's actions may ultimately be ineffective if the demand
for small business loans fails to keep pace. While government
intervention in the form of capital infusions, for example,
might foster additional lending if the recipient institutions
are facing depleted capital, a bank might not necessarily use
an unrestricted capital infusion to increase leverage if low
lending volume is in fact the result of constrictions in
demand.
---------------------------------------------------------------------------
\257\ 2010 May Oversight Report, supra note 110, at 47-57.
\258\ Wiest Testimony to the Panel, supra note 153.
\259\ Congressional Oversight Panel, Written Testimony of Candace
Wiest, president and chief executive officer, West Valley National
Bank, Phoenix Field Hearing on Small Business Lending, at 61-62 (Apr.
27, 2010) (online at cop.senate.gov/documents/transcript-042710-
phoenix.pdf).
\260\ Congressional Oversight Panel, Testimony of Stan Ivie, San
Francisco regional director, Federal Deposit Insurance Corporation,
Transcript: Phoenix Field Hearing on Small Business Lending (Apr. 27,
2010) (online at cop.senate.gov/documents/transcript-042710-
phoenix.pdf).
---------------------------------------------------------------------------
The Panel also evaluated the proposed SBLF,\261\ which the
Administration sent to Congress shortly before publication of
the Panel's May report. The Panel found that even if enacted by
Congress the prospects of the SBLF in its draft form were far
from certain. Not only would the program require legislative
approval (and even if Congress had acted immediately, the
program would not be fully operational for some time), but the
Panel also noted the possibility that banks could shun the
program for fear of being stigmatized by its association with
the TARP, or avoid taking on SBLF liabilities in such troubled
economic times.
---------------------------------------------------------------------------
\261\ On May 7, 2010, the Administration provided Congress with
revised proposed legislation for the SBLF program, and the discussion
of the SBLF in the Panel's May 2010 oversight report was based upon
that proposal. This revised proposed legislation modified the
Administration's original proposal in some respects, and is different
from the version that ultimately was passed by both houses of Congress
and signed into law by President Obama in September 2010. For further
discussion of the final SBLF legislation, see Section III.A.3.b.ii,
supra.
---------------------------------------------------------------------------
C. Panel Recommendations and Updates
1. Current State of Commercial and Industrial Lending
After declining or stagnating consistently through 2008 and
2009, commercial and industrial (C&I) lending at domestic
commercial banks began to increase slightly towards the end of
2010.\262\ As of February 23, 2011, there were approximately
$620 billion in outstanding C&I loans at large banks, while
small banks had $374 billion in outstanding C&I loans.\263\
Figure 14 below illustrates the level of outstanding C&I loans
from 2000 to 2011.
---------------------------------------------------------------------------
\262\ Board of Governors of the Federal Reserve System, Monetary
Policy Report to Congress, at 12 (Mar. 1, 2011) (online at
www.federalreserve.gov/monetarypolicy/files/
20110301_mprfullreport.pdf).
\263\ Board of Governors of the Federal Reserve System, H.8 Assets
and Liabilities of Commercial Banks in the United States: Data Download
Program (Instruments: Large Domestically Chartered Banks, Small
Domestically Chartered Banks; Frequency: Weekly; Seasonally-Adjusted)
(online at www.federalreserve.gov/datadownload/Choose.aspx?rel=H.8)
(accessed Mar. 10, 2011) (hereinafter ``Federal Reserve H.8''). Large
banks are defined as the top 25 domestically chartered commercial
banks. As of December 2009, these banks had more than $65 billion in
total assets. Board of Governors of the Federal Reserve System, Assets
and Liabilities of Commercial Banks in the United States--H.8: About
the Release (Apr. 9, 2010) (online at www.federalreserve.gov/releases/
h8/about.htm) (hereinafter ``Federal Reserve H.8: About the Release'').
---------------------------------------------------------------------------
FIGURE 14: COMMERCIAL AND INDUSTRIAL LOANS OUTSTANDING AT DOMESTIC
COMMERCIAL BANKS (2000-2011) \264\
---------------------------------------------------------------------------
\264\ Federal Reserve H.8, supra note 263. Large banks are defined
as the top 25 domestically chartered commercial banks. As of December
2009, these banks had more than $65 billion in total assets. Federal
Reserve H.8: About the Release, supra note 263.
[GRAPHIC] [TIFF OMITTED] T4832A.012
Despite the slight increase in loans, data from the January
2011 Senior Loan Officer Opinion Survey offered mixed responses
from banks regarding the state of C&I lending over the fourth
quarter in 2010. More large banks were reporting easing
standards for both large/middle-market and small firms, while
responses from small banks show that loan standards remained
largely unchanged for all firms. Respondents cited increased
competition from other banks and nonbank lenders, as well as
``a more favorable or less uncertain'' economic horizon, as
reasons for easing lending standards. With regard to loan
demand, the net percentage of large banks reporting stronger
demand for C&I loans from large/middle-market firms was 53
percent. However, a lesser percentage indicated stronger demand
from small firms. Small banks, on the other hand, reported
weaker overall demand for C&I loans.\265\
---------------------------------------------------------------------------
\265\ The Senior Loan Officer Opinion Survey on Bank Lending
Practices reviews changes in lending terms and standards, as well as
demand for loans to businesses and households at approximately 60
domestic banks and 22 U.S. branches and agencies of foreign banks. The
survey defines large and middle-market firms as firms with more than
$50 million in annual sales. Also, large banks are defined as banks
with at least $20 billion in total assets as of October 31, 2010.
January 2011 Senior Loan Officer Survey, supra note 232, at 3-5. For
measures of C&I loan standards and demand, see id. at 12-13, 24.
---------------------------------------------------------------------------
2. Consideration of Alternatives
In its May 2009 Oversight Report, the Panel recommended
that if Treasury's efforts to revive securitization failed to
expand small business access to credit, then the administration
should consider: (1) reviving SBA direct loans without going
through bank intermediaries; and/or (2) devoting more funds
directly to business lending rather than securitization, given
that secondary markets may have limited impact on the financing
of small and medium-sized firms.\266\ Treasury's new programs,
the CDCI and the SBLF, however, while not dependent on the SBA
or securitization, still focused on bank intermediaries and
capital infusions. The Panel also recommended that Treasury and
relevant federal regulators establish a rigorous data
collection system or survey that examines small business
finance that would include demand- and supply-side data along
with data from banks of different sizes (both TARP recipients
and non-TARP recipients). The Panel also recommended that
Treasury require reporting obligations as part of any future
capital infusion program, some of which were addressed through
the SBLF.
---------------------------------------------------------------------------
\266\ 2009 May Oversight Report, supra note 227, at 58.
---------------------------------------------------------------------------
3. Small Business Lending Fund
In its May 2010 report, the Panel evaluated a proposed
draft of the SBLF and made multiple recommendations about
aspects of the program, many of which appear to have informed
the final legislation. The Panel recommended that Treasury
consider mandating minimum standards for underwriting SBLF
loans in order to ensure that the incentives embedded in any
program do not spur imprudent lending; and evaluate whether the
SBLF could be implemented quickly enough to make any difference
at all in small business lending. The SBLF as enacted,\267\
several months after the Panel's May 2010 report, contains some
key provisions relating to several of the Panel's
recommendations. It mandates minimum standards for underwriting
SBLF loans to ensure that the incentives embedded in any
program do not spur imprudent lending.\268\ The SBLF as enacted
also improved tracking and reporting over the draft reviewed by
the Panel. It requires the Secretary of the Treasury to report
to the appropriate congressional committees on key SBLF
metrics, including the duty to provide a written report
detailing how SBLF participants have used the funds they
received within seven days after the end of each calendar
quarter in which transactions are made under the SBLF.\269\
Similarly, as part of their application form, prospective SBLF
participants must submit a ``small business lending plan'' of
approximately two pages to their primary federal regulator and
to their state regulator, if applicable.\270\
---------------------------------------------------------------------------
\267\ See the Small Business Jobs and Credit Act of 2010, Pub. L.
No. 111-240 (2010). President Obama signed the law on September 27,
2010. Although the SBLF evolved from a 2009 administration proposal to
use $30 billion in TARP funds to spur small business lending, the
latest incarnation of the SBLF is separate from the TARP.
\268\ H.R. 5297 Sec. 4103(d)(10), 111th Cong. (2010).
\269\ H.R. 5297 Sec. 4103(3), 111th Cong. (2010).
\270\ The ``small business lending plan'' must detail how the
institution would use the SBLF funds to increase small business lending
in their community, their expected increase in small business lending
after receipt of SBLF funds, and proposed outreach efforts to inform
community members about how to apply for small business loans. Treasury
Resource Center--SBLF, supra note 248.
---------------------------------------------------------------------------
The terms for the SBLF have been made available, and the
application deadline is March 31, 2011. As of March 8, 2011,
Treasury had received 336 applications.\271\
---------------------------------------------------------------------------
\271\ Data provided by Treasury (Mar. 9, 2011).
---------------------------------------------------------------------------
D. Lessons Learned
Several important lessons can be identified through the
Panel's examinations of Treasury's efforts to support small
business and consumer lending.
First, FRB and Treasury's emphasis on the securitization
markets as an avenue to restore small business and consumer
credit and creation of the TALF to regenerate investor interest
in those markets illustrate the complexities and difficulties
of making predominant use of any single approach to reviving
credit for small businesses and families.\272\ While the
revival of the securitization markets, which are an important
part of the nation's financial sector, can be a part of any
effective strategy for restarting the credit markets, this
cannot be the primary means to stimulate credit for small
business lending because of the relatively small number of
small business loans that are securitized. Therefore, it is
also critical to consider bank lending without regard to
securitization. Ultimately, keeping the credit markets open in
a fair--and economically healthy--manner to small businesses
requires a mix of policies that reflect the realities that
borrowers face.\273\
---------------------------------------------------------------------------
\272\ 2009 May Oversight Report, supra note 227, at 62-63.
\273\ 2009 May Oversight Report, supra note 227, at 62-63.
---------------------------------------------------------------------------
Second, while it is easier and arguably more efficient for
Treasury and other government actors to use regulated entities
like banks as conduits to small businesses since small
businesses are so heterogeneous, this does not come without
cost. Not only are the intermediary's incentives and challenges
not identical to the government's in this approach, but also
the form of the government's involvement depends entirely upon
the assets the intermediary holds. For example, the government
can use an intermediary to help provide guarantees and
secondary market support only if that intermediary holds assets
that can be securitized or guaranteed.\274\
---------------------------------------------------------------------------
\274\ 2010 May Oversight Report, supra note 110, at 81-82.
---------------------------------------------------------------------------
Third, when adopting any particular small business and
consumer lending program, the government should consider
whether approaches that are less dependent on healthy bank
balance sheets (i.e., state-level consortia and programs in
which banks take first losses and first profits with a public
backstop), might more likely effectuate Treasury's stated
objectives.\275\
---------------------------------------------------------------------------
\275\ 2010 May Oversight Report, supra note 110, at 82-83.
---------------------------------------------------------------------------
Finally, the lack of aggregated, timely, and consistent
data collection regarding small business lending undermines the
development of sound policy and fails to reflect the importance
of small business to the economy. One problem in trying to
analyze small business lending, or in identifying and designing
programs for spurring small business lending, arises from the
heterogeneity of small businesses (which makes it difficult to
determine what, precisely, constitutes a small business).
``Small business'' has been variously defined by Congress and
several agencies, including the SBA, the Federal Reserve, and
others.\276\ The myriad definitions not only complicate any
discussion of small business but also make it difficult to
compare data and results across studies and surveys in a field
in which, as an added complication, data are notoriously hard
to obtain. The wide variety among small businesses also makes
it difficult to collect data, target individual trends, and
effectively stimulate small business lending. Furthermore, in
the absence of a rigorous data collection system or survey that
examines small business finance and includes timely and
consistent data, the federal government's efforts to develop
sound policies to address small business lending will remain
significantly hampered.
---------------------------------------------------------------------------
\276\ These definitions depend on sector, assets, number of
employees, and revenue. 2010 May Oversight Report, supra note 110, at
8-9.
---------------------------------------------------------------------------
IV. Foreclosure Mitigation
Given the importance of foreclosure mitigation to families
and communities and the impact of foreclosures on bank balance
sheets and financial stability, the Panel has devoted more
attention to this topic than any other single area under the
TARP. The Panel issued its first foreclosure mitigation report
in March 2009, coinciding with the announcement of Treasury's
Making Home Affordable initiative, and released three update
reports, approximately every six months after the initial
program announcement and report. The Panel produced a fifth
foreclosure mitigation report in November 2010, focusing
specifically on the foreclosure irregularities that had come to
light. The body of foreclosure mitigation work was shaped by
information obtained at field hearings held in Clark County,
Nevada, Prince George's County, Maryland, and Philadelphia, as
well as a hearing in Washington, DC.
A. Background
As the housing boom peaked and began its long downward
slide in 2006, millions of families began entering foreclosure,
with serious implications for the housing markets and broader
financial stability. Policymakers appeared to take for granted
that the housing market would not require government
intervention. Theoretically, loan modifications should be in
the self-interest of lenders, since they are typically less
costly than foreclosure, and should therefore need no
inducement. But lenders did not engage in the anticipated
number of modifications due to a number of factors that the
Panel has examined in its reports. In particular, incentives
built into the mortgage servicing system often make foreclosure
more attractive than modification.\277\
---------------------------------------------------------------------------
\277\ The Panel has looked at the disincentives for servicers to
employ HAMP modifications in several reports. See, e.g., Congressional
Oversight Panel, April Oversight Report: Evaluating Progress on TARP
Foreclosure Mitigation Programs, at 70-76 (Apr. 14, 2010) (online at
cop.senate.gov/documents/cop-041410-report.pdf) (hereinafter ``2010
April Oversight Report''). Some of the more notable of these include:
misalignment of servicer and investor interests, including lack of
servicer funds at risk and servicing fees that are not tied to
investment performance; impediments to loan modification in pooling and
servicing agreements that, even if they can be overcome, create
additional cost and complication for servicers; lack of investor
supervision of servicers to encourage financially beneficial
modifications; and the possible negative assessment of modifications by
credit rating agencies.
---------------------------------------------------------------------------
As millions of borrowers continued moving into foreclosure,
the federal government made several attempts to address the
foreclosure problem, generally with minimal impact. In the wake
of the financial crisis of late 2008, and incorporating lessons
from these unsuccessful foreclosure mitigation efforts,
Treasury developed the Home Affordable Modification Program
(HAMP) to fulfill the foreclosure prevention mandate in TARP's
authorizing legislation, EESA.\278\ At the time, policymakers
were concerned about both the social and economic effects of
mass foreclosures and the systemic risk to the banking system
caused by non-performing mortgages.
---------------------------------------------------------------------------
\278\ See Emergency Economic Stabilization Act of 2008 (EESA), Pub.
L. No. 110-343, at Sec. 109 (2008) (online at thomas.loc.gov/cgi-bin/
query/z?c110:H.R.1424.enr:).
---------------------------------------------------------------------------
Prior to the introduction of HAMP in March 2009, there were
several federal foreclosure mitigation initiatives, but they
met with little success. One of the earliest of these
initiatives was endorsement of the HOPE NOW Alliance, a
voluntary coalition of mortgage companies and industry
organizations designed to centralize and coordinate private
foreclosure mitigation efforts. Although both Treasury and the
Department of Housing and Urban Development were consulted and
strongly promoted the effort, the federal government is not an
official sponsor.\279\ HOPE NOW reports that it has modified
over 3 million loans to date,\280\ but little information is
available about the monthly savings those modifications provide
to homeowners.
---------------------------------------------------------------------------
\279\ See U.S. Department of the Treasury, Statement by Secretary
Henry M. Paulson, Jr. on Announcement of New Private Sector Alliance--
HOPE NOW (Oct. 10, 2007) (online at www.treasury.gov/press-center/
press- releases/Pages/hp599.aspx).
\280\ HOPE NOW Alliance, HOPE NOW: Mortgage Servicers Completed
1.76 million Loan Modifications for Homeowners in 2010 (Feb. 2, 2011)
(online at www.hopenow.com/press_release/files/
HN%202010%20Full%20Data_FINAL.pdf).
---------------------------------------------------------------------------
The outcome of several federal programs influenced the
design of HAMP. The first official federal government
foreclosure mitigation program was FHA Secure, announced in
August 2007, which refinanced adjustable-rate mortgages into
fixed-rate mortgages insured by the Federal Housing
Administration (FHA). FHA Secure ended in late 2008. Although
the program refinanced nearly half a million loans, only about
4,000 of these were delinquent at the time of refinancing. The
Panel has previously attributed FHA Secure's failure to its
restrictive borrower criteria.\281\
---------------------------------------------------------------------------
\281\ Congressional Oversight Panel, March Oversight Report:
Foreclosure Crisis: Working Toward a Solution, at 35 (Mar. 6, 2009)
(online at cop.senate.gov/documents/cop-030609-report.pdf) (hereinafter
``2009 March Oversight Report'').
---------------------------------------------------------------------------
HOPE for Homeowners was established by Congress in July
2008 to permit the FHA to insure refinanced distressed
mortgages. HOPE for Homeowners was initially expected to help
400,000 homeowners, but it managed to refinance only a handful
of loans. This was likely due to the program's poor initial
design, lack of flexibility, and its reliance on voluntary
principal write-downs, which lenders were very reluctant to
make, a pattern also seen in HAMP.\282\
---------------------------------------------------------------------------
\282\ See id. at 36.
---------------------------------------------------------------------------
Also in July 2008, the FDIC took over IndyMac, one of the
nation's largest subprime lenders. Soon afterward, the FDIC
announced a loan modification program to assist the 65,000
delinquent borrowers with loans in IndyMac's non-securitized
portfolio. The FDIC instituted a number of similar efforts for
loans owned by other, smaller failed banks, which have been
moderately successful in mitigating foreclosures at those
particular lenders.\283\
---------------------------------------------------------------------------
\283\ For more discussion of the FDIC's IndyMac program, see
Congressional Oversight Panel, December Oversight Report: A Review of
Treasury's Foreclosure Prevention Programs, at 92 (Dec. 14, 2010)
(online at cop.senate.gov/documents/cop-121410-report.pdf) (hereinafter
``2010 December Oversight Report'').
---------------------------------------------------------------------------
Figure 15 below shows a timeline of foreclosure mitigation
efforts and the number of new foreclosure actions each month
from January 2007 to the present. It is important to note that
although foreclosure actions have declined in recent months,
this likely is due to voluntary foreclosure suspensions put in
place in the fall of 2010 in response to the documentation
irregularities situation. At that time many of the government
initiatives were still relatively new and would not reasonably
be expected to cause a significant decline in the foreclosure
rate.\284\
---------------------------------------------------------------------------
\284\ For statistics on how many borrowers Treasury's programs have
helped to date, see Figure 19 and footnote 336.
[GRAPHIC] [TIFF OMITTED] T4832A.013
B. Summary of COP Reports and Findings
The Panel's first report on foreclosures was published in
March 2009, roughly concurrent with the announcement of
HAMP.\286\ The report, Foreclosure Crisis: Working Toward a
Solution, described major impediments to mortgage
modifications, including the presence of second liens and
incentive problems for mortgage servicers caused by the
securitization process. The report called for the collection
and public dissemination of more nationwide mortgage
performance data. And it established eight questions on which
to evaluate a foreclosure mitigation program:\287\
---------------------------------------------------------------------------
\286\ HAMP is designed to provide a path to modifying mortgages and
provides subsidies to lenders, servicers, and homeowners to encourage
such modifications. Once approved for assistance through HAMP, a
borrower must successfully complete a trial period, typically three
months, during which the borrower makes payments on the modified
mortgage. A borrower who remains current through the trial period
becomes eligible for a permanent modification, under which the terms of
the trial modification remain in effect for a period of five years.
After the five-year term is up, the interest rate on the loan can
increase by a maximum of 1 percent per year until it reaches the
prevailing Freddie Mac average interest rate at the time the HAMP
modification was made.
\287\ These criteria were considerably influenced by the testimony
of foreclosure prevention experts and borrowers facing foreclosure in
the Panel's field hearings on foreclosures in Clark County, Nevada, and
Prince George's County, Maryland. See Congressional Oversight Panel,
COP Field Hearing: Clark County, NV: Ground Zero of the Housing and
Financial Crisis (Dec. 16, 2008) (online at cop.senate.gov/hearings/
library/hearing-121608-firsthearing.cfm); Congressional Oversight
Panel, Coping with the Foreclosure Crisis: State and Local Efforts to
Combat Foreclosures in Prince George's County, MD (Feb. 27, 2009)
(online at cop.senate.gov/hearings/library/hearing-022709-housing.cfm).
---------------------------------------------------------------------------
Will the plan result in modifications that create
affordable monthly payments?
Does the plan deal with negative equity?
Does the plan address junior mortgages?
Does the plan overcome obstacles in existing
pooling and servicing agreements that may prevent
modifications?
Does the plan counteract mortgage servicer
incentives not to engage in modifications?
Does the plan provide adequate outreach to
homeowners?
Can the plan be scaled up quickly to deal with
millions of mortgages?
And finally, will the plan have widespread
participation by lenders and servicers?
The report did not specifically evaluate the
administration's initial foreclosure-prevention plan, since
Treasury announced it shortly before the Panel's report went to
press, and it had not yet become operational.
The Panel's October 2009 report, An Assessment of
Foreclosure Mitigation Efforts After Six Months, provided a
preliminary evaluation of HAMP, which at the time was still in
its early stages. The report expressed concern that HAMP was
not designed to deal with the evolving nature of the
foreclosure crisis; in particular, the report raised questions
about the ability of HAMP to prevent foreclosures caused by
unemployment or negative equity. The report questioned whether
HAMP would be able to attain the scale necessary to deal with
the millions of foreclosures that were expected. Finally, the
report questioned whether or not HAMP would merely forestall
foreclosure for many homeowners, since only a small percentage
of HAMP trial modifications had converted into five-year, so-
called permanent modifications, and also because even those
that became permanent modifications carried the risk that the
homeowner would redefault.
The Panel again assessed HAMP in April 2010. The report
applauded Treasury for beginning to address the problems that
the Panel highlighted during the previous year and in
particular for taking steps to address the ways in which
unemployment, second liens, and negative equity may lead to
foreclosure. Foreclosures continued at a rapid pace, however,
and the report found that Treasury's response continued to lag
well behind the pace of the crisis. The April 2010 report
highlighted in particular the role of unemployment as a driver
of delinquencies and foreclosures. However, the program as
structured at that time did not meet the needs of the
unemployed. First, many unemployed individuals were unable to
qualify for HAMP because they could not pass the net present
value test for program admittance. Second, borrowers who have
lost their jobs and have no income are rarely able to pay their
mortgages for long, even if they receive favorable concessions
from their lender; therefore, a program premised on moderate,
long term payment relief did not provide the deep, short term
relief necessary to keep unemployed borrowers temporarily
without income in their homes. Finally, the unemployed are also
often forced to move to take advantage of better job
opportunities. This can undermine many loan modifications
designed to prevent foreclosure, since these modifications are
generally based on an assumption that the borrower will stay in
place for several years. The Panel stated the best foreclosure
mitigation initiative would be a sound economy with low
unemployment.\288\
---------------------------------------------------------------------------
\288\ See 2010 April Oversight Report, supra note 277, at 18-20,
134-139.
---------------------------------------------------------------------------
The Panel articulated three major concerns with HAMP in the
April 2010 report: (1) its failure to deal with the foreclosure
crisis in a timely way; (2) the unsustainable nature of many
HAMP modifications, given the large debt burdens and negative
equity that many participating homeowners continued to carry;
and (3) the need for greater accountability in HAMP,
particularly with regard to the activities of participating
servicers.
Following the release of the Panel's April 2010 report,
Treasury implemented certain previously announced changes to
HAMP, but the Panel remained concerned that the choices made by
Treasury in terms of program structure, transparency, and data
collection did not leave borrowers well served. In a December
2010 report, the Panel estimated that HAMP would prevent only
700,000 to 800,000 foreclosures if it continues on its current
trajectory--far fewer than the three to four million
foreclosures that Treasury initially aimed to prevent, and
vastly fewer than the eight to 13 million foreclosures expected
by 2012. The Panel attributed many of the problems plaguing
HAMP to the program's design, including its failure to address
adequately the incentive structures for loan servicers and the
obstacles to modifications created by second liens. Because
Treasury's authority to restructure HAMP ended on October 3,
2010, the Panel noted that HAMP's prospects were unlikely to
improve substantially in the future.
In the December 2010 report, the Panel again raised
concerns that Treasury refused to specify meaningful goals by
which to measure HAMP's progress. The program's sole initial
goal--to prevent 3 to 4 million foreclosures--had been
repeatedly redefined and watered down.\289\ When the stated
objectives of a program are limited or not meaningful, the
scope of oversight and analysis is narrowed. However, as of the
publication of this report, with fewer than 1.5 million total
trial modifications started and only about 540,000 permanent
modifications in place, it is clear that Treasury is going to
fall well short of its initial goal, no matter how that goal is
defined.\290\
---------------------------------------------------------------------------
\289\ See 2010 December Oversight Report, supra note 283, at 42-48.
For an example of Treasury's articulation of HAMP goals and
expectations in the early months of the program, see Congressional
Oversight Panel, Transcript: Hearing with Herbert M. Allison, Jr.,
Assistant Secretary of the Treasury for Financial Stability, at 30-33
(Oct. 22, 2009) (online at cop.senate. gov/
documents/transcript-102209-allison.pdf).
\290\ U.S. Department of the Treasury, Making Home Affordable
Program: Servicer Performance Through January 2011, at 2 (Jan. 31,
2011) (online at www.treasury.gov/initiatives/financial
-stability/results/MHA-Reports/Documents/Jan_2011_MHA_Report_FINAL.PDF)
(hereinafter ``MHA Program: Servicer Performance January 2011'').
---------------------------------------------------------------------------
The Panel further noted in December 2010 that the problem
of evaluating HAMP was exacerbated by Treasury's failure to
collect and analyze data that would explain its shortcomings.
Absent a dramatic and unexpected increase in HAMP enrollment,
it appears that many billions of dollars set aside for
foreclosure mitigation will be left unused. Yet Treasury
continues to state that $30 billion in TARP funding will be
expended under HAMP. Because Treasury's authority to
restructure HAMP ended, the Panel noted in December 2010 that
it was too late for Treasury to revamp its foreclosure
prevention strategy, but that meaningful steps could be taken
to wring every possible benefit from the program.
The Panel also focused on possible conflicts of interest
and their impact on servicer compliance in the December 2010
report. Treasury has essentially outsourced the responsibility
for overseeing servicers to Fannie Mae and Freddie Mac, but
both companies have critical business relationships with the
very same servicers, calling into question their willingness to
conduct stringent oversight. Freddie Mac in particular has
hesitated to enforce some of its contractual rights related to
the foreclosure process, arguing that doing so ``may negatively
impact our relationships with these seller/servicers, some of
which are among our largest sources of mortgage loans.'' \291\
---------------------------------------------------------------------------
\291\ 2010 December Oversight Report, supra note 283, at 5.
---------------------------------------------------------------------------
A complex group of issues that came to light in the summer
and fall of 2010 related to documentation ``irregularities'' in
recent foreclosure actions added further to the factors
impeding HAMP success and recovery of the housing market. These
widely reported problems include improper mass ``robo-signing''
of mortgage documents by servicers, lost promissory notes and
other documents that call into question the proper legal
ownership of mortgage loans, and related securitization issues.
The Panel's November 2010 report examined these issues and
considered their implications for HAMP, the housing market, and
the stability of the economy and the banking system. As of the
date of publication, a group comprised of Treasury, bank
regulators, and attorneys general of all 50 states and the
District of Columbia are engaged in negotiations over
resolution of the documentation irregularity situation with a
group representing servicers and lenders.
Although the ultimate implications of these irregularities
remain unclear, it is possible that the irregularities may
conceal deeper problems in the mortgage market that could
potentially threaten financial stability and undermine
foreclosure prevention efforts.\292\
---------------------------------------------------------------------------
\292\ Congressional Oversight Panel, November Oversight Report:
Examining the Consequences of Mortgage Irregularities for Financial
Stability and Foreclosure Mitigation, at 83 (Nov. 16, 2010) (online at
cop.senate.gov/documents/cop-111610-report.pdf) (hereinafter ``2010
November Oversight Report'').
---------------------------------------------------------------------------
The Panel observed that in the coming years, in the best-
case scenario, mortgage documentation irregularities may prove
to be relatively rare paperwork errors that can be easily
corrected, and have little impact on the housing and financial
markets. However, the Panel also found that if future
revelations show that documentation problems are pervasive,
investors and others will have reason to doubt the legal
ownership of pooled mortgages, which could have severe
consequences. In this scenario, borrowers may be unable to
determine whether they are sending their monthly payments to
the right people. Judges may block any effort to foreclose,
even in cases where borrowers have failed to make regular
payments. Multiple banks may attempt to foreclose on the same
property. Borrowers who suffered foreclosure may seek to regain
title to their homes and force any new owners to move out.
Would-be buyers and sellers could find themselves in limbo,
uncertain about whether they can safely buy or sell a
home.\293\
---------------------------------------------------------------------------
\293\ Id. at 84.
---------------------------------------------------------------------------
Should foreclosure irregularities cause such wide-scale
disruptions in the housing market, financial institutions may
suffer significant harm, and the stability of the financial
system may be at risk. For example, if a bank were to discover
that, due to shoddily executed paperwork, it still owns many
defaulted mortgages that it thought it sold off years ago, it
could face substantial unexpected losses. This could disrupt
foreclosure prevention efforts such as HAMP. This situation has
the potential to reduce public trust substantially in the
entire real estate industry, especially in the legitimacy of
important legal documents and the good faith of other market
participants, particularly if foreclosure irregularities prove
to be very common or to involve deliberate fraud.\294\
---------------------------------------------------------------------------
\294\ Id. at 84.
---------------------------------------------------------------------------
C. Panel Recommendations and Program Updates
After examining various issues related to the foreclosure
crisis and Treasury's response throughout the last two years,
the Panel provided a series of specific recommendations
designed to improve the modification process, the structure of
Treasury's foreclosure programs, their transparency, and their
accountability.\295\ Treasury's response to these
recommendations has been mixed. Treasury followed some
suggestions, ignored some, and partially or unsuccessfully
followed others. Overall, Treasury's response thus far has been
disappointing.
---------------------------------------------------------------------------
\295\ SIGTARP released a report in January 2011 that echoed many of
the Panel's recommendations for HAMP, particularly in the fields of
transparency, servicer accountability, and goals. See Office of the
Special Inspector General for the Troubled Asset Relief Program,
Quarterly Report to Congress, at 10-13 (Jan. 26, 2011) (online at
www.sigtarp.gov/reports/congress/2011/
January2011_Quarterly_Report_to_Congress.pdf).
---------------------------------------------------------------------------
1. Transparency
In order to provide a source of comprehensive information
about loan performance and foreclosure mitigation initiatives,
the Panel concluded in its March 2009 report that Congress
should create a national mortgage loan performance reporting
requirement applicable to banking institutions and other
mortgage servicers. In subsequent reports, the Panel repeatedly
recommended that Treasury collect more loan-level data on
borrowers facing foreclosure.\296\ In particular, the Panel
stated that Treasury does not collect sufficient information to
determine why loans are moving to foreclosure rather than
workouts, nor does it monitor closely enough any loan
modifications performed outside of HAMP.\297\ Since the Panel
published those recommendations, federal banking regulators
have not implemented a national mortgage loan performance
reporting requirement. After being surveyed by the Panel, the
OCC and OTS did create a quarterly report that contains a
limited amount of aggregate information about mortgage
performance across the country, but this information falls far
short of the loan-level data that is needed.
---------------------------------------------------------------------------
\296\ Treasury officials have predicted that upcoming ``dramatic''
changes in the servicing industry will lead to a comprehensive database
of mortgages in foreclosure, but have provided no indication of when
these changes will occur, or whether Treasury will take any specific
actions on this front. Congressional Oversight Panel, Transcript: COP
Hearing on TARP's Impact on Financial Stability (Mar. 4, 2011)
(publication forthcoming) (online at cop.senate.gov/hearings/ library/
hearing-030411-final.cfm) (hereinafter ``COP Transcript: Hearing on
TARP's Impact on Financial Stability'').
\297\ 2010 December Oversight Report, supra note 283, at 107.
---------------------------------------------------------------------------
In April 2010, the Panel recommended that Treasury commit
to providing regular and publicly available data reports on all
HAMP modifications through the end of their five-year
modification period. In addition, the Panel called on Treasury
to release more data collected by its program administrator,
Fannie Mae, and its compliance agent, Freddie Mac, so that
Congress, the TARP oversight bodies, and the public can better
evaluate the effectiveness of HAMP.\298\ In late January 2011,
Treasury for the first time released loan-level data on HAMP
participants, fulfilling the Panel's recommendation. This
information provides a great deal of raw data that could reveal
insights that could then be used to improve HAMP. The data
include information on the gross income of applicants, the loan
balances of HAMP participants after they receive permanent
modifications, the credit scores of HAMP participants, and the
race and ethnicity of HAMP participants, as well as other
information. However, the timing of the data release provides
limited time for oversight bodies or academics to draw any
conclusions from the data before HAMP expires at the end of
2012.
---------------------------------------------------------------------------
\298\ 2010 April Oversight Report, supra note 277, at 88.
---------------------------------------------------------------------------
The Panel expressed concern about the impact of redefaults
of HAMP permanent modifications on the program's ultimate
success, and the related need for the collection of better data
specifically on redefaults. At the Panel's October 2010
hearing, Guy Cecala, publisher of Inside Mortgage Finance,
emphasized the danger that redefaults pose to the housing
market as a whole. ``Even a re-default rate at the lower end of
estimates would put more than 600,000 additional distressed
properties into the housing market at time when it is
struggling to unload an already high inventory,'' Cecala
stated.\299\ In order to understand which HAMP participants are
most at risk of redefault and thereby improve the program's
success rate, the Panel believes that Treasury should focus its
data analysis on identifying borrower characteristics that
positively correlate to a higher risk of redefault. To maximize
the effectiveness of their data collection efforts, Treasury's
metrics should be comprehensive, and the results should be
disaggregated by lenders and servicers and made publicly
available.\300\ Treasury has begun to release a limited amount
of aggregate data on HAMP redefaults, but despite the Panel's
urging, it has not made public any analysis that identifies
borrower characteristics that positively correlate to a higher
risk of redefault. Nor has Treasury made public data on
redefaults that is disaggregated by servicer, or that shows
redefault rates for more than 12 months after the permanent
modification begins. Such information is crucial for evaluating
the extent to which redefaults are undermining HAMP's
performance.
---------------------------------------------------------------------------
\299\ Congressional Oversight Panel, Written Testimony of Guy
Cecala, chief executive officer and publisher, Inside Mortgage Finance
Publications, Inc., COP Hearing on TARP Foreclosure Mitigation Programs
(Oct. 27, 2010) (online at cop.senate.gov/documents/testimony-102710-
cecala.pdf).
\300\ Congressional Oversight Panel, October Oversight Report: An
Assessment of Foreclosure Mitigation Efforts After Six Months, at 112
(Oct. 9, 2009) (online at cop.senate.gov/documents/cop-100909-
report.pdf) (hereinafter ``2009 October Oversight Report''); 2010 April
Oversight Report, supra note 277, at 90.
---------------------------------------------------------------------------
The Panel made a number of specific recommendations related
to publicly available information. In October 2009, the Panel
called on Treasury to provide borrowers and housing counselors
with access to its net present value model.\301\ Contrary to
the Panel's recommendations, Treasury has never made the net
present value model fully or even substantially public.
Treasury has provided borrowers and housing counselors with
greater access to its net present value model, but the model
remains less than fully transparent.
---------------------------------------------------------------------------
\301\ 2009 October Oversight Report, supra note 300, at 47. HAMP
relies on a net present value calculation performed by the loan
servicer to determine whether or not a modification is warranted. This
consists of a comparison of the net present value of an unmodified
delinquent loan to the net present value of a modification of that same
delinquent loan. If the net present value of the modified loan is
greater than the net present value of the unmodified loan, then a
modification is value maximizing for the investors in the loan. The
Panel's October 2009 report examined Treasury's model and models used
by similar programs. Id. at 45-47, 83, 106, 113-116, 129-131.
---------------------------------------------------------------------------
In December 2010, the Panel urged Treasury to determine
which sorts of modifications have proven to be most successful
in practice. Treasury could then encourage servicers to make
more of these types of modifications and fewer of the types of
modifications that tend to end in redefault.\302\ Treasury has
thus far shown no indication that it has studied or understands
which types of loan modifications tend to be most effective and
sustainable. Without this knowledge, it is impossible for
Treasury to press servicers to favor more effective types of
modifications over others.
---------------------------------------------------------------------------
\302\ 2010 December Oversight Report, supra note 283, at 109-110.
---------------------------------------------------------------------------
The Panel also called on Treasury to provide detailed
public information related to its selection and use of Fannie
Mae as a financial agent and HAMP administrator and Freddie Mac
as compliance agent.\303\ Treasury has not provided this
information. In January 2010, the Panel recommended that
Treasury release a legal opinion on its HAMP authority.\304\
Although Treasury did provide a legal opinion on its HAMP
authority to the Panel and allowed the Panel to quote from the
document, it objected to the Panel making the entire document
public.
---------------------------------------------------------------------------
\303\ 2010 April Oversight Report, supra note 277, at 78.
\304\ 2010 January Oversight Report, supra note 153, at 12.
---------------------------------------------------------------------------
2. Compliance
Treasury has struggled to ensure that HAMP servicers comply
with the program's rules. In describing the ineffectiveness of
the current system, which provides few real ``sticks'' to
punish noncompliance, Professor Katherine Porter, University of
Iowa College of Law, testified before the Panel that,
``servicers . . . have gorged themselves at a buffet of
carrots, and they're still not doing what we want them to do.''
\305\ In October 2009, the Panel stressed that Treasury needed
an appropriate monitoring mechanism to ensure that servicers
were accurately reporting the reasons for denial or
cancellation and that those who did not received meaningful
sanctions for noncompliance.\306\ The Panel stated that these
sanctions should include the use of Treasury's authority to
withhold or claw back incentive payments.\307\ Following the
Panel's recommendations, Treasury has not permanently withheld
or clawed back any incentive payments as a result of
noncompliance.
---------------------------------------------------------------------------
\305\ Congressional Oversight Panel, Testimony of Katherine Porter,
professor of law, University of Iowa College of Law, Transcript: COP
Hearing on TARP Foreclosure Mitigation Programs (Oct. 27, 2010)
(publication forthcoming) (online at cop.senate.gov/hearings/library/
hearing-102710-foreclosure.cfm).
\306\ 2009 October Oversight Report, supra note 300, at 9, 96.
\307\ 2010 December Oversight Report, supra note 283, at 109.
---------------------------------------------------------------------------
In addition to meaningful monetary penalties for
noncompliance, the Panel stated that foreclosures should be
stayed until an independent analysis of the application or
trial could be performed, with the servicer paying the cost of
the evaluation.\308\ The Panel also stressed that information
on eligibility and denials should be clearly and promptly
communicated to borrowers, and that denial information should
be reported to the public. The Panel reiterated these
recommendations in April 2010 and again in December 2010,
stressing that denials should be subject to a meaningful,
independent appeals process managed by either the Office of
Homeowner Advocate or an ombudsman. While Treasury made
progress in ensuring that HAMP applicants receive clear and
prompt notice on why they are being denied a modification, it
has not stayed any foreclosures until an independent analysis
of the application has been performed. Furthermore, Treasury
has not implemented the Panel's recommendation that HAMP denial
be made subject to a meaningful, independent appeals process.
And while Treasury collects data on why modifications are being
denied or cancelled, it still lacks a monitoring mechanism to
ensure that those reasons are being reported accurately, and
that servicers that make inaccurate reports face meaningful
sanctions.
---------------------------------------------------------------------------
\308\ 2010 April Oversight Report, supra note 277, at 53.
---------------------------------------------------------------------------
3. Goals
The Panel repeatedly requested that Treasury announce
firmer goals for HAMP. Specifically, the Panel recommended that
Treasury produce a clear metric of how many foreclosures it
expects HAMP to prevent, since foreclosures prevented is the
only real measure of the program's success.\309\ To date,
Treasury has not released any goals or estimates for how many
foreclosures will be ultimately prevented by HAMP since its
original goal of 3 to 4 million.\310\ Although Treasury has
made some additional data on the program available to the
public, and also asserts that HAMP has yielded indirect
benefits by establishing industry-wide standards for mortgage
modifications,\311\ the lack of clearly articulated goals still
hampers evaluation of the program.
---------------------------------------------------------------------------
\309\ 2010 December Oversight Report, supra note 283, at 106.
\310\ 2010 December Oversight Report, supra note 283, at 106. See
also Congressional Oversight Panel, Testimony of Timothy F. Geithner,
secretary, U.S. Department of the Treasury, Transcript: COP Hearing
with Treasury Secretary Timothy Geithner, at 55 (June 22, 2010) (online
at cop.senate.gov/documents/transcript-062210-geithner.pdf) (``Well,
again, what HAMP does and what HAMP is designed to do--it was not
designed to prevent all foreclosures. It could not be designed to do
that. . . . What HAMP is designed to try to do is to make sure that a
set of people facing the risk of foreclosure have the chance of being
able to afford the challenges of staying in their home.'').
\311\ Congressional Oversight Panel, Written Testimony of Timothy
G. Massad, acting assistant secretary for the Office of Financial
Stability, U.S. Department of the Treasury, COP Hearing on the TARP's
Impact on Financial Stability, at 8 (Mar. 4, 2011) (online at
cop.senate.gov/documents/testimony-030411-massad.pdf) (hereinafter
``COP Hearing on the TARP's Impact on Financial Stability'')
(``Moreover, many more homeowners have been helped indirectly as a
result of the standards that HAMP has catalyzed across mortgage
modifications industry-wide.''). The Panel has encouraged Treasury to
collect and release information on non-HAMP proprietary loan
modifications. Treasury has stated that it has suggested to several
servicers that they submit such information, but it has made no
commitments to the Panel. COP Transcript: Hearing on TARP's Impact on
Financial Stability, supra note 296.
---------------------------------------------------------------------------
In addition, the Panel recommended that Treasury be clearer
about exactly how much TARP money it intends to spend on
HAMP.\312\ Treasury has not provided a realistic estimate of
how much it expects to spend. Treasury continues to insist that
it will use the entire $30 billion allocated to HAMP, a highly
unlikely outcome considering the program's meager performance
to date and the looming expiration of HAMP in December 2012,
after which no new trial modifications can begin.\313\ More
realistically, CBO estimated that Treasury will spend a total
of $12 billion among Treasury's three foreclosure-prevention
programs--HAMP, the Hardest Hit Fund, and the FHA Short
Refinance Program. The Panel further estimated that as little
as $4 billion may be spent on HAMP.
---------------------------------------------------------------------------
\312\ 2010 April Oversight Report, supra note 277, at 5.
\313\ As of February 25, 2011 Treasury has expended $1.038 billion
under HAMP.
---------------------------------------------------------------------------
4. Streamlining
The Panel repeatedly urged Treasury to improve and
streamline communications with borrowers, and to make it easier
for them to apply for HAMP assistance. For instance, the Panel
recommended that Treasury establish an ombudsman and dedicated
case staff to help borrowers cut through red tape and resolve
servicer problems.\314\ Treasury did not implement this
recommendation. The Panel also requested that Treasury
standardize the paperwork that HAMP applicants must submit in
order to document their income.\315\ The shift in June 2010 to
requiring that servicers verify borrower income upfront for all
trial modifications was an important step in this direction,
but it would not be accurate to call the current system
``standardized.''
---------------------------------------------------------------------------
\314\ 2009 October Oversight Report, supra note 300, at 112.
\315\ 2009 October Oversight Report, supra note 300, at 111.
---------------------------------------------------------------------------
The Panel focused on the slow rollout of the HAMP borrower
web portal, which allows borrowers to apply for modifications
and to track their application status online. The Panel
repeatedly encouraged Treasury to get the portal operational,
ensure that it is user-friendly, and press servicers to use it
as the primary point of entry for applications.\316\ The Panel
also called on Treasury to enforce borrower outreach and
communication standards and timelines.\317\ Although the
servicer portion of the HOPE LoanPort web portal finally rolled
out in November 2010, a development the Panel applauded, the
``borrower portal'' portion, which would allow borrowers to
interact directly with the LoanPort system by uploading
documents and information without working through housing
counselors, has not been implemented due to cost reasons. The
Panel sees this as a significant problem.
---------------------------------------------------------------------------
\316\ The web portal, officially the HOPE LoanPort, is operated by
the HOPE Alliance, a consortium of private lenders and other mortgage
industry firms. 2009 October Oversight Report, supra note 300, at 111;
2010 April Oversight Report, supra note 277, at 96; 2010 December
Oversight Report, supra note 283, at 78, 198.
\317\ 2010 April Oversight Report, supra note 277, at 96.
---------------------------------------------------------------------------
Overall, Treasury made some progress in making the program
more accessible and understandable to borrowers, improving
communications with HAMP participants, and streamlining the
HAMP process. For example, Treasury instituted a campaign of
televised public service announcements. Treasury implemented
firmer timelines and standards for the servicers, although as
discussed above, servicer compliance remains a major challenge.
But there are several indications that Treasury has more work
to do in this area: the low number of new trial modifications
in recent months; the long average time that it takes for a
trial modification to convert into a permanent modification;
the still considerable, though much reduced number of trial
modifications that remain in the conversion pipeline for many
months; and anecdotal evidence that many borrowers remain
confused and frustrated.
5. Program Structure
Since the inception of HAMP, the Panel made numerous
recommendations regarding the structure of the program, in
order to address problems that became apparent during the
program's implementation. Although Treasury made some modest
progress in increasing participation and reducing the redefault
rate, it adopted relatively few of the Panel's recommendations
thus far.
The Panel repeatedly called on Treasury to modify the
program to address three areas of major concern: second lien
mortgages, unemployed borrowers, and borrowers with negative
equity. In response to criticisms by the Panel and other
observers, Treasury developed several new HAMP-related programs
intended to deal with these issues directly, which the Panel
applauded. Unfortunately, as of the publication of this report,
these efforts have not demonstrated a track record of success.
The Panel addressed the problems caused by second-lien
mortgages in each of its reports on HAMP. The Panel encouraged
Treasury to investigate and find a solution to the obstacles
that second liens often present to first-lien mortgage
modifications.\318\ The Panel recommended that Treasury explore
the implications of adding borrower-specific junior lien
information directly into HAMP's net present value model, which
is a key tool that servicers use to determine whether
applicants are eligible for the program. The Panel also
recommended that Treasury consider the effect these additional
debts have on the number of borrowers served by HAMP and the
impact they have on the sustainability of HAMP
modifications.\319\
---------------------------------------------------------------------------
\318\ 2009 March Oversight Report, supra note 281, at 38-39. See
also 2010 April Oversight Report, supra note 277, at 16, 126; 2010
December Oversight Report, supra note 283, at 109.
\319\ 2010 April Oversight Report, supra note 277, at 16; 2010
December Oversight Report, supra note 283, at 109.
---------------------------------------------------------------------------
On April 28, 2009, Treasury announced the Second Lien
Modification Program to address the problem of second liens.
The program went into effect on August 14, 2009. Borrowers are
eligible after their corresponding first liens have been
modified under HAMP. Although servicer participation is
voluntary, once they sign a participation agreement, servicers
must modify or extinguish the second liens of all eligible
borrowers. Servicers, borrowers, and second-lien investors all
receive incentive payments for their participation. Although
the second lien modification program is a welcome development,
the program has so far seen relatively little use.
The Panel repeatedly urged Treasury to find a way to
provide assistance to unemployed borrowers, and Treasury
attempted to do so by instituting several new programs. The
Panel commends Treasury for creating the Home Affordable
Unemployment Program. This program, announced on March 26,
2010, and effective July 1, 2010, assists unemployed homeowners
by granting temporary forbearance of a portion of their monthly
mortgage payments. During the forbearance period, which lasts a
minimum of three months, unless the homeowner finds a job,
payments fall to no more than 31 percent of the borrower's
gross monthly income, including unemployment benefits. Once
borrowers are in the program, the forbearance ends when they
find work.
Another Treasury program designed in part to deal with the
problem of unemployed homeowners is the Hardest Hit Fund. This
program, announced on February 19, 2010, provides TARP money to
state-run foreclosure mitigation programs in specific states
hit hardest by home value decreases and unemployment. Eighteen
states and the District of Columbia are eligible for funding.
Before receiving the funds, eligible states must submit and
receive approval for their plans to use the money. Many of the
proposed Hardest Hit Fund programs aim to help low- to
moderate-income families. Some states, such as Arizona,
developed programs intended to help any struggling homeowner
with a demonstrated hardship who meets certain qualifications.
To date, Treasury allocated $7.6 billion to the states in four
rounds of funding. All states receiving these funds are using
at least a portion of the money to aid unemployed homeowners.
The Panel also suggested that Pennsylvania's successful
Homeowners' Emergency Mortgage Assistance Program, which
provides short-term loans to unemployed homeowners, could serve
as a model for a nationwide program.\320\ Although it is not
part of HAMP, Congress authorized and the Department of Housing
and Urban Development is implementing the Emergency Homeowners'
Loan Program, which will assist unemployed borrowers. Despite
these new programs, however, unemployed borrowers continue to
account for many foreclosures.\321\
---------------------------------------------------------------------------
\320\ 2009 October Oversight Report, supra note 300, at 89-90; 2010
April Oversight Report, supra note 277, at 20.
\321\ In September 2009, the Panel visited Philadelphia's Mortgage
Foreclosure Diversion Pilot Program, a court sponsored mediation
program for borrowers in foreclosure created by Judge Annette Rizzo of
the Philadelphia Court of Common Pleas. This program, instituted in
April 2008, requires ``conciliation conferences'' in all foreclosure
cases involving residential properties with up to four units that were
used as the owner's primary residence, based on the idea that bringing
borrowers into the same room with lenders' representatives will foster
a compromise that is in both parties' best interests. The program was
also discussed in the Panel's September Field Hearing. See
Congressional Oversight Panel, Written Testimony of Judge Annette M.
Rizzo, Court of Common Pleas, First Judicial District, Philadelphia
County, Philadelphia Mortgage Foreclosure Diversion Program,
Philadelphia Field Hearing on Mortgage Foreclosures (Sept. 24, 2009)
(online at cop.senate.gov/documents/testimony-092409-rizzo.pdf);
Congressional Oversight Panel, Testimony of Judge Annette M. Rizzo,
Court of Common Pleas, First Judicial District, Philadelphia County,
Philadelphia Mortgage Foreclosure Diversion Program, Transcript:
Philadelphia Field Hearing on Mortgage Foreclosures, at 46-47, 103-105
(Sep. 24, 2009) (online at cop.senate.gov/documents/transcript-092409-
philadelphia.pdf).
---------------------------------------------------------------------------
Negative equity constituted another longstanding area of
concern for the Panel, since there is a correlation between
negative equity, or owing more on your mortgage than your home
is worth, and delinquency.\322\ In December 2009, the Panel
encouraged Treasury to consider incentivizing servicers to use
principal reduction to deal with these ``underwater''
borrowers.\323\ Since then, Treasury has attempted to deal with
negative equity in several ways.
---------------------------------------------------------------------------
\322\ See First American CoreLogic, Underwater Mortgages On the
Rise According to First American CoreLogic Q4 2009 Negative Equity Data
(Feb. 23, 2010) (online at www.corelogic.com/uploadedFiles/Pages/
About_Us/ResearchTrends/Q4_2009_Negative_Equity_FINAL.pdf).
\323\ 2010 December Oversight Report, supra note 283, at 67.
---------------------------------------------------------------------------
Treasury created the HAMP Principal Reduction Alternative,
which attempts to incentivize servicers to write down
underwater loans voluntarily. The program was announced on June
3, 2010, and went into effect on October 1, 2010. The Principal
Reduction Alternative operates much like HAMP, except that
instead of postponing payments on a portion of the mortgage,
the program forgives that portion altogether. Servicers are
required to consider loans that are HAMP-eligible and have
loan-to-value ratios greater than 115 percent. This evaluation
involves comparing the amount of money that a modification
involving principal reduction would generate to the amount
generated by a modification that does not involve principal
reduction. The final decision on whether to grant a principal
reduction is ultimately up to the servicer. Participating
investors receive standard incentive payments as well as a
percentage of each dollar forgiven.
The Principal Reduction Alternative also includes an equity
sharing option, in which the investor may be able to share the
benefits of a subsequent appreciation in the home's value.
Based on this option, the Panel suggested that Treasury monitor
the Principal Reduction Alternative to determine whether equity
sharing increased program participation. If so, the Panel
suggested that Treasury should consider authorizing equity
sharing arrangements in other programs.\324\ Although the
Principal Reduction Alternative program allows equity sharing,
it is not required, and it is unclear at this time if this
feature will be extensively used or will significantly boost
overall program performance. Treasury has not implemented any
additional equity sharing arrangements. Although the Principal
Reduction Alternative is a welcome additional tool to prevent
foreclosures, it does not yet have a demonstrated track record
of success, and Treasury has not made much data available on
its performance.
---------------------------------------------------------------------------
\324\ 2010 December Oversight Report, supra note 283, at 109.
---------------------------------------------------------------------------
Treasury's Home Affordable Foreclosure Alternative and the
FHA Short Refinance Program are also intended to address
problems caused by negative equity. The Home Affordable
Foreclosure Alternative program, announced on November 30,
2009, but not effective until April 5, 2010, seeks to encourage
the use of short sales and deeds-in-lieu of foreclosure for
HAMP-eligible borrowers who are underwater and unable to
qualify for modifications. Servicers agree to forfeit the
ability to seek a deficiency judgment in exchange for allowing
borrowers to make short sales or issue a deed-in-lieu.
Essentially, a servicer agrees to accept the property itself in
satisfaction of a borrower's mortgage obligation. All parties
receive TARP financial incentives.
The FHA Short Refinance Program, which was announced on
March 26, 2010 and went into effect on September 7, 2010,
offers a similar option. This TARP-funded program allows for
the refinancing of non-FHA-insured underwater mortgages into
positive equity, FHA-insured mortgages. Program participation
is voluntary for servicers on a case-by-case basis. As with the
Principal Reduction Alternative, both the Home Affordable
Foreclosure Alternative program and the FHA Short Refinance
program are relatively new and have not been used extensively
so far.
The Panel also recommended that Treasury consider allowing
borrowers whose monthly mortgage payments are currently less
than 31 percent of their monthly incomes to enter HAMP, thereby
capturing additional at-risk borrowers, especially those who
owe large amounts in overdue payments.\325\ In the Panel's
October 2010 hearing on foreclosures, Faith Schwartz, senior
adviser for the HOPE NOW Alliance, testified that HAMP's 31
percent minimum eligibility standard was considered
``aggressive'' when HAMP was first rolled out, but that even
this level of mortgage payment to income is too high for many
homeowners who wind up in foreclosure.\326\ Treasury has not
taken action on this suggestion.
---------------------------------------------------------------------------
\325\ 2009 October Oversight Report, supra note 300, at 112.
\326\ Congressional Oversight Panel, Written Testimony of Faith
Schwartz, senior advisor, HOPE NOW Alliance, COP Hearing on TARP
Foreclosure Mitigation Programs, at 7 (Oct. 27, 2010) (online at
cop.senate.gov/documents/testimony-102710-schwartz.pdf).
---------------------------------------------------------------------------
6. Document Irregularities
The Panel's November 2010 report on foreclosure
irregularities included several recommendations for Treasury.
Treasury stated at the Panel's October 2010 hearing that based
on the information it had at the time, foreclosure
irregularities posed no systemic threat to the financial
system. The Panel challenged this view and asked Treasury to
explain why it saw no danger. The Panel also encouraged
Treasury to monitor closely the impact of foreclosure
irregularities and publicly report its findings. Further, the
Panel's November 2010 report stated that Treasury should
develop contingency plans to prepare for the potential worst-
case scenario.\327\ Treasury indicated that as of the
publication of this report, it has not found evidence of a
systemic threat. However, the 11 member federal agency working
group, of which Treasury is a member, continues to investigate.
Rather than conducting an independent monitoring effort,
Treasury has chosen to monitor the situation through its
participation with the interagency working group and updates
from various regulators. Finally, Treasury has not yet prepared
any contingency plans for a worst case scenario, but is
awaiting the findings of the interagency investigations to
decide what action, if any, it should take.\328\
---------------------------------------------------------------------------
\327\ 2010 November Oversight Report, supra note 292, at 6, 83-84;
Congressional Oversight Panel, COP Hearing on TARP Foreclosure
Mitigation Programs (Oct. 27, 2010) (online at cop.senate.gov/hearings/
library/hearing-102710-foreclosure.cfm).
\328\ Information provided by Treasury (Mar. 9, 2011).
---------------------------------------------------------------------------
So far, the most comprehensive federal response to the
Panel's concerns came from the OCC, which, along with other
federal banking regulators, conducted examinations of
foreclosure processing at the 14 largest federal regulated
servicers during the fourth quarter of 2010. These examinations
found ``critical deficiencies and shortcomings in foreclosure
governance process, foreclosure document preparation process,
and oversight and monitoring of third party law firms and
vendors'' that ``have resulted in violations of state and local
foreclosure laws, regulations, or rules that have had an
adverse effect on the functioning of the mortgage markets and
the U.S. economy as a whole.'' The examinations also found
``[a] small number of foreclosure sales'' that ``should not
have proceeded'' for various reasons, but also that ``servicers
maintained documentation of ownership and had a perfected
interest in the mortgage to support their legal standing to
foreclose.'' \329\
---------------------------------------------------------------------------
\329\ Senate Committee on Banking, Housing, and Urban Affairs,
Written Testimony of John Walsh, acting comptroller of the currency,
Office of the Comptroller of the Currency, Oversight of Dodd-Frank
Implementation: A Progress Report by the Regulators at the Half-Year
Mark, at 13-15 (Feb. 17, 2011) (online at banking.senate.gov/public/
index.cfm? FuseAction=Files. View&FileStore_id=99d7b6a8-d834-46e6-a088-
f463fb740cf0).
---------------------------------------------------------------------------
D. Data Updates
1. Treasury's Foreclosure Mitigation Programs
Treasury announced its broad foreclosure mitigation
initiative, headlined by HAMP, more than two years ago. Since
that time, what results has the effort produced? HAMP began in
2009 with a major push to get at-risk homeowners into trial
modifications. As early enrollees either converted into
permanent modifications or dropped out of the program, the
number of new trial modifications began to fall. As a result,
the pipeline of new trial modifications has slowed considerably
since 2009. Unless this trend reverses, which appears unlikely,
the program will fall far short of Treasury's initial goal of 3
million to 4 million foreclosures prevented. Figure 16 shows
the number of trial modifications started each month since the
program's inception.
FIGURE 16: NUMBER OF NEW TRIAL MODIFICATIONS SINCE HAMP'S INCEPTION BY
MONTH \330\
---------------------------------------------------------------------------
\330\ Trial modifications are categorized by the month in which
homeowners made their first reduced trial payment. Data provided by
Treasury (Feb. 28, 2011).
[GRAPHIC] [TIFF OMITTED] T4832A.014
According to Treasury, most of the decline in new trial
modifications has been due to Treasury's decision, instituted
in June 2010, to require that servicers verify upfront the
income of HAMP applicants. Prior to June 2010, homeowners were
able to qualify for trial modifications by verbally providing
their incomes to servicers over the phone. As the Panel
observed in the December 2010 report, however, this change
cannot completely explain the decrease, since the number of new
trial modifications began dropping off long before the upfront
verified documentation standard was implemented. The Panel also
considered the possibility that HAMP has already reached the
majority of eligible borrowers who can be helped.\331\ In the
early months of the program, there was a large pool of
borrowers awaiting help. Once many of these homeowners entered
HAMP or other programs, there were simply fewer potential
applicants who met HAMP criteria.\332\
---------------------------------------------------------------------------
\331\ 2010 December Oversight Report, supra note 283, at 20.
\332\ Office of the Comptroller of the Currency and Office of
Thrift Supervision, Mortgage Metrics Report, Second Quarter 2010, at 22
(Sept. 2010) (online at www.ots.treas.gov/_files/490019.pdf). See also
Fitch Ratings, U.S. RMBS: Still Under a Shadow, at 5 (Nov. 1, 2010)
(noting that ``the number of remaining borrowers eligible for a loan
modification appears to be declining, as new loan modification activity
has declined from its peak in 2009'').
---------------------------------------------------------------------------
While new trials are an important metric for determining
the maximum number of borrowers the program may be able to
assist, a trial modification that fails to convert to a
permanent modification can hardly be called a success. The
pipeline of new permanent modifications expanded in late 2009
and early 2010 as Treasury made a major push to convert trial
modifications into permanent ones. Between January and June
2010, Treasury recorded an average of about 55,000 new
permanent modifications each month. But since then, the numbers
have fallen, as Figure 17 shows, to an average of around 30,000
new permanent modifications per month.
FIGURE 17: NUMBER OF NEW PERMANENT MODIFICATIONS SINCE HAMP'S INCEPTION
BY MONTH \333\
---------------------------------------------------------------------------
\333\ From May 2009 to September 2009, new permanent modifications
totaled 4,742. Monthly new permanent modifications are derived from
``All Permanent Modifications Started'' levels from October 2009 to
January 2011, which are recorded in the Making Home Affordable
Program's monthly Servicer Performance Reports. For these monthly
reports, see U.S. Department of the Treasury, Program Results, Making
Home Affordable Reports (online at www.treasury.gov/initiatives/
financial-stability/results/MHA-Reports/Pages/default.aspx) (accessed
Mar. 3, 2011) (hereinafter ``MHA: Program Results'').
[GRAPHIC] [TIFF OMITTED] T4832A.015
The number of permanent modifications is not a complete
indicator of program success either, since HAMP participants
who redefault after conversion to permanent modifications not
only face foreclosure once again, but also represent an
unsuccessful expenditure of taxpayer dollars. The Panel in its
December 2010 report expressed concern about HAMP redefaults,
since they have the potential to undermine the program's
success. As Figure 18 illustrates, the gap between the number
of redefaults and the new monthly permanent modifications
narrowed in recent months.
FIGURE 18: MONTHLY HAMP PERMANENT MODIFICATIONS AND REDEFAULTS \334\
---------------------------------------------------------------------------
\334\ ``Monthly Active Permanent Modifications'' and ``Monthly
Permanent Modification Redefaults'' are derived from cumulative
``Active Permanent Modifications'' and ``Permanent Modifications
Canceled'' (excluding loans paid off) from February 2010 to January
2011, as recorded in the Making Home Affordable Program's monthly
Servicer Performance Reports. For these monthly reports, see MHA:
Program Results, supra note 333.
[GRAPHIC] [TIFF OMITTED] T4832A.016
As noted earlier, Treasury set a goal in March 2009 of
assisting 3-4 million homeowners avoid foreclosure through
HAMP, although Treasury's definition of ``assist'' has been
somewhat unclear. Figure 19 shows the number of households
currently being assisted by HAMP, as measured by active trial
and permanent modifications, along with the number of
households currently being assisted by the other TARP
foreclosure prevention programs. It is important to note that
some HAMP trial modifications will not convert to permanent
modifications and some permanent modifications will end in
redefaults; therefore, not all of these households will avoid
foreclosures.
FIGURE 19: NUMBER OF HOUSEHOLDS CURRENTLY BEING ASSISTED BY TARP
FORECLOSURE PREVENTION PROGRAMS 335
------------------------------------------------------------------------
Households Receiving
Program Assistance
------------------------------------------------------------------------
HAMP \336\................................ 684,753
FHA Short Refinance Program \337\......... 64
Hardest Hit Fund \338\.................... 757
-----------------------------
Total................................. 685,574
------------------------------------------------------------------------
\335\ In light of the number of households assisted to date by
Treasury's foreclosure prevention programs, some members of Congress
have introduced legislation proposing the repeal of various TARP
foreclosure prevention programs. See H.R. 430, The HAMP Repeal and
Deficit Reduction Act of 2011, 112th Cong. (online at www.gpo.gov/
fdsys/pkg/BILLS-112hr430ih/pdf/BILLS-112hr430ih.pdf) (accessed March
11, 2011); H.R. 839, The HAMP Termination Act of 2011, 112th Cong.
(online at www.gpo.gov/fdsys/pkg/BILLS-108hr839ih/pdf/BILLS-
108hr839ih.pdf) (accessed March 11, 2011).
Treasury has stated that it is ``very concerned'' about HAMP repeal
legislation, and believes that if the program was terminated, ``many,
many Americans who otherwise could be helped into an affordable
mortgage will not have that opportunity to do so.'' Massad Testimony
to the Panel, supra note 122.
The Panel has taken no position on this issue.
\336\ This figure is the sum of 539,493 active permanent modifications
and 145,260 active trial modifications. Both numbers are as of Jan.
31, 2011. MHA Program: Servicer Performance January 2011, supra note
290, at 2. Treasury also reports that 21,043 households have received
assistance through HAMP's Principal Reduction Alternative, HAMP's
Unemployment Program, HAMP's Second Lien Program, the Home Affordable
Foreclosure Alternatives Program, and the Home Price Decline
Protection Program. It is likely, however, that at least some of these
households are among those in active HAMP trial and permanent
modifications, and that some of the households are not currently
receiving assistance. Treasury data provided to the Panel (Feb. 28,
2011).
\337\ Data provided by Treasury (Mar. 10, 2011).
\338\ The Hardest Hit Fund data show the number of applications approved
through December 31, 2010. The data is sourced from seven of the 19
states participating in the program. Treasury data provided to the
Panel (Feb. 28, 2011).
To achieve these results, Treasury has spent $1.2 billion
out of the $45.6 billion in TARP funds allocated for
foreclosure mitigation programs, or 2.6 percent of the funds
available.\339\ Spending on these programs will continue until
2018, but given the current pace of outlays, Treasury seems
unlikely to spend anywhere near $45.6 billion.\340\ CBO
estimates that Treasury will ultimately spend only about $12
billion on these programs.\341\ Figure 20 shows Treasury's
expenditures to date for its TARP foreclosure mitigation
programs.
---------------------------------------------------------------------------
\339\ Treasury estimates that over time each HAMP permanent
modification will cost the federal government $20,000. Massad Testimony
to the Panel, supra note 122.
\340\ Although HAMP expires on December 31, 2012, and new trial
modifications after that date are prohibited, existing trial
modifications can continue to convert. Considering the five-year term
of HAMP assistance, the program should continue to expend funds into
2018.
\341\ Congressional Budget Office, Report on the Troubled Asset
Relief Program--November 2010, at 4 (Nov. 29, 2010) (online at
www.cbo.gov/ftpdocs/119xx/doc11980/11-29-TARP.pdf) (``CBO Report on
TARP--November 2010'').
FIGURE 20: EXPENDITURES FOR TARP FORECLOSURE MITIGATION PROGRAMS 342
------------------------------------------------------------------------
Program Expenditures
------------------------------------------------------------------------
HAMP...................................... $1.0 billion
FHA Short Refinance Program............... 53.9 million
Hardest Hit Fund.......................... 125.1 million
-----------------------------
Total................................. $1.2 billion
------------------------------------------------------------------------
\342\ The HAMP expenditures are as of February 25, 2011, while the
expenditures for the other two programs are as of February 28, 2011.
Treasury data provided to the Panel (Feb. 28, 2011).
2. Housing Market
Treasury introduced the foreclosure mitigation programs in
an effort to prevent foreclosures and stabilize the housing
markets. Yet, foreclosures have remained at very high levels
over the last two years. In December 2010, there were 232,000
foreclosure starts, while there were 56,000 foreclosure sales.
This compares to 282,000 foreclosure starts and 51,000
foreclosure sales in March 2009, when HAMP was introduced.
(Foreclosure sales dipped in late 2010 as a result of a number
of large mortgage servicers suspending foreclosures in order to
review their internal foreclosure procedures, but these numbers
will likely increase in the coming months as these servicers
resume their foreclosures.) Figure 21 shows foreclosure starts
and completions by month since March 2009. The 685,574
households currently receiving TARP housing assistance--shown
in Figure 19--represent roughly the same number of households
that move into foreclosure proceedings every three months,
based on the current rate.
FIGURE 21: FORECLOSURE STARTS AND COMPLETIONS \343\
---------------------------------------------------------------------------
\343\ HOPE NOW Alliance, Appendix--Mortgage Loss Mitigation
Statistics: Industry Extrapolations (Quarterly from Q1-2007 to Q1-
2009), at 4 (online at www.hopenow.com/industry-data/
HOPE%20NOW%20National%20Data%20July07%20to%20April09.pdf) (accessed
Mar. 11, 2011); HOPE NOW Alliance, 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 Mar. 11, 2011); HOPE NOW Alliance, Industry Extrapolations
and Metrics (May 2010), at 8 (June 28, 2010) (online at
www.hopenow.com/industry-data/HOPE%20NOW%20Data%20Report%20(May)%2006-
21-2010.pdf); HOPE NOW Alliance, Industry Extrapolations and Metrics
(September 2010), at 8 (Oct. 31, 2010) (online at hopenow.com/industry-
data/HOPE%20NOW%20Data%20Report%20(September)%2010-31-2010%20v2.pdf);
HOPE NOW Alliance, Industry Extrapolations and Metrics (December 2010),
at 8 (Feb. 2, 2011) (online at www.hopenow.com/industry-data/
HOPE%20NOW%20Data%20Report%20(December)%2002-01-2011%20v2.pdf).
[GRAPHIC] [TIFF OMITTED] T4832A.017
As foreclosure starts and completions have remained at a
persistently high level, home prices have continued to fall.
The S&P/Case Shiller index, which measures residential real
estate prices nationwide, began declining in 2007, and the
index's fall continued through the financial crisis of 2008 and
beyond. After stabilizing in early 2010, home prices continued
their decline in the second half of last year. Since the TARP
was enacted in October 2008, nationwide home prices have
declined by 9.1 percent. Since their peak in February 2007,
nationwide home prices have fallen by 30.2 percent.\344\ Figure
22 shows that this decline in home prices has happened
simultaneous with the rise in foreclosures.\345\
---------------------------------------------------------------------------
\344\ S&P/Case Shiller Index data, which runs through December
2010, accessed through Bloomberg Financial Data Service (accessed Mar.
4, 2011).
\345\ At the Panel's March 4, 2011, hearing, Assistant Secretary
Massad noted that foreclosures put downward pressure on the prices of
neighboring homes. ``A foreclosure for any family that goes through it
is obviously a terrible economic loss,'' he stated. ``It's also a great
social and--or great psychological and emotional loss. It's a loss to
the community. The community suffers from it because neighboring house
prices fall. Particularly where you have a vacant home that can then be
subject to vandalism. . . . So you know this situation is a drag on our
economy as a whole.'' Massad Testimony to the Panel, supra note 122.
Patrick Lawler, the FHFA's chief economist, made a related point,
noting that foreclosures can result in additional losses for government
sponsored enterprises Fannie Mae and Freddie Mac. Speaking about HAMP
and other foreclosure-prevention programs, he stated: ``These programs
have benefited the enterprises by mitigating risks and reducing both
direct losses on loans where foreclosure is avoided and indirect losses
on properties where housing markets are stabilized, which reduces
defaults on other loans.'' Congressional Oversight Panel, Testimony of
Patrick Lawler, chief economist and head of the Office of Policy
Analysis and Research, Federal Housing Finance Agency, Transcript: COP
Hearing on the TARP's Impact on Financial Stability (Mar. 4, 2011)
(publication forthcoming) (online at cop.senate.gov/hearings/library/
hearing-030411-final.cfm).
---------------------------------------------------------------------------
FIGURE 22: FORECLOSURE ACTIONS AND HOME PRICES \346\
---------------------------------------------------------------------------
\346\ The metric ``foreclosure actions,'' as used by RealtyTrac,
encompasses default notices, scheduled auctions and bank repossessions.
RealtyTrac: Foreclosures in February, supra note 285. S&P/Case Shiller
Index data accessed through Bloomberg Financial Data Service (accessed
Mar. 4, 2011).
[GRAPHIC] [TIFF OMITTED] T4832A.018
Putting additional pressure on housing prices is a glut of
unsold homes. According to one estimate, there are currently
more than six million unsold housing units in the United
States, as compared to a pre-crisis level of 3.8 million.\347\
Figure 23 shows the overhang of housing inventory in the
market. The chart distinguishes between visible inventory and
pending inventory, which is a measure of potential additions to
the sales inventory from homes that are in the foreclosure
process or have mortgages that are seriously delinquent. There
are currently 16 months of visible housing supply, as compared
to an average of 7.3 months of visible inventory in 2006.\348\
---------------------------------------------------------------------------
\347\ Data provided by CoreLogic (Feb.16, 2011).
\348\ Even though the pending nationwide inventory increased only
from 3.4 million in January 2006 to 3.9 million in November 2010, the
rate at which the inventory was clearing slowed down, which explains
why the rate at which the pending inventory is expected to clear has
more than doubled during the same nearly five-year period. Data
provided by CoreLogic (Feb. 15, 2011).
---------------------------------------------------------------------------
FIGURE 23: VISIBLE AND PENDING HOUSING INVENTORY \349\
---------------------------------------------------------------------------
\349\ Data provided by CoreLogic (Feb.16, 2011).
[GRAPHIC] [TIFF OMITTED] T4832A.019
Because borrowers entering foreclosure have been delinquent
on their mortgage payments for several months, delinquencies
are an indicator of likely future trends in foreclosures.
HAMP's declining trial modification production is therefore
troubling in relation to the current high level of
delinquencies. While mortgage delinquencies have declined over
the past three quarters, they remain near historically high
levels. At the end of 2010, loans that were 30, 60, or 90 or
more days delinquent represented approximately 8.2 percent of
all outstanding loans--down from 10.1 percent during the first
quarter of 2010, which was the peak during the current crisis,
but still above 7.8 percent rate in the fourth quarter of 2008.
Mortgages in the foreclosure inventory, meaning those currently
in the foreclosure process, represent 4.6 percent of
outstanding loans--which equals the highest level since 2006
and is well above the 3.3 percent rate in the fourth quarter of
2008. The delinquency rate remains 18 percent above its level
at the time the TARP was enacted, and the foreclosure inventory
rate is 56 percent above its level from that period.\350\
Figure 24 shows delinquency and foreclosure inventory rates
since before the foreclosure crisis began.
---------------------------------------------------------------------------
\350\ National Delinquency Survey--2010 4th Quarter, supra note 4.
---------------------------------------------------------------------------
FIGURE 24: DELINQUENCY AND FORECLOSURE INVENTORY RATES \351\
---------------------------------------------------------------------------
\351\ National Delinquency Survey--2010 4th Quarter, supra note 4.
[GRAPHIC] [TIFF OMITTED] T4832A.020
Unemployment rates remain problematic as well, given the
link between joblessness and mortgage delinquency. Figure 25
shows that the nationwide delinquency rate and the U.S.
unemployment rate have followed similar trends since early
2006.
FIGURE 25: UNEMPLOYMENT AND DELINQUENCY RATES \352\
---------------------------------------------------------------------------
\352\ Data accessed through Bloomberg Financial Data Service
(accessed Mar. 4, 2011).
[GRAPHIC] [TIFF OMITTED] T4832A.021
Negative equity, a situation in which homeowners owe more
than their homes are worth, is another factor that may
contribute to foreclosures. Figure 26 shows that the percentage
of homeowners who are underwater has risen by more than 10
percentage points since the second quarter of 2008.
FIGURE 26: PERCENTAGE OF HOMEOWNERS WHO ARE UNDERWATER \353\
---------------------------------------------------------------------------
\353\ Data provided by Zillow.com (Feb. 18, 2011).
[GRAPHIC] [TIFF OMITTED] T4832A.022
While we cannot know what the state of the housing market
would be in the absence of HAMP, we do know that despite the
implementation of HAMP and other foreclosure mitigation
efforts, foreclosures remain high, and the housing market shows
continuing signs of stress.
E. Lessons Learned
The first step in crafting a successful mortgage
modification program is to have an accurate empirical picture
of the mortgage market. As the Panel has noted with other TARP
programs, insufficient data collection undermines the
development of good policies. The lack of comprehensive,
reliable data also makes it difficult for policymakers to
identify successful loan modifications or make apples-to-apples
comparisons among programs. This information is crucial for
understanding the changing nature of the mortgage market and
crafting informed, targeted policy responses.
It is important to ensure that modified mortgages be
affordable to borrowers. Because the HAMP requirement that
homeowners spend 31 percent of their monthly income on their
first-lien mortgage payments does not take into account local
conditions, overdue payments, second liens, and other borrower
debt, the Panel has questions about the sustainability of many
HAMP modifications. Future mortgage modification programs
should consider the best way to measure overall affordability.
The problems that Treasury has encountered with HAMP
underscore the importance of a timely, decisive response to any
future foreclosure crisis. When HAMP was introduced in early
2009, the foreclosure crisis was already well under way, and
HAMP was not well designed to address the coming waves of
foreclosures, which were increasingly driven by unemployment
and negative equity. Over the next two years, Treasury provided
increasingly generous incentives to participating borrowers,
lenders, and servicers, which gave them reason to hold out for
a better offer. While the constant flux of new programs, new
standards, and new requirements reflected Treasury's efforts to
respond to recommendations made by oversight bodies, the
shifting ground also led to confusion among servicers and
borrowers. Any future foreclosure mitigation programs should be
forward-looking and attempt to address new and emerging
problems before they reach crisis proportions.
Future policymakers should be mindful that the incentives
of mortgage servicers are different from those of the
government, and design any foreclosure mitigation program with
that reality in mind. Borrower eligibility must depend on
criteria set forth in the foreclosure mitigation program,
rather than on the willingness of servicers or lenders to
participate. If incentive payments are used to drive servicer
participation, those payments must be sufficient to offset the
financial incentives for servicers to push for foreclosure.
Modification programs should also include an appropriate
monitoring mechanism to ensure that servicers are accurately
reporting the reasons for denials and cancellations, and there
should be meaningful sanctions for noncompliance.
The need for better communication with homeowners is
another important lesson to be drawn from HAMP. Because
servicers generally first contact borrowers in a debt-
collection role, any future foreclosure mitigation program that
relies on servicers would benefit from a government-run
outreach campaign designed to inform borrowers of their options
for preventing foreclosure. A uniform and streamlined
modification process would allow housing counselors to be more
effective and allow borrowers and servicers to navigate the
system more easily. Foreclosure mitigation efforts that rely on
servicers should also make increasing servicer capacity an
early priority.
It is also important that policymakers focus on ensuring
good outcomes for homeowners, rather than becoming bogged down
in process-related concerns. HAMP has a dizzying number of
rules. In its oversight of Fannie Mae, HAMP's administrator,
and Freddie Mac, HAMP's compliance agent, Treasury has seemed
to focus more on ensuring that its rules are followed than on
addressing the individual concerns of the people that the
program is supposed to help.
Finally, the current crisis shows how closely foreclosure
prevention is intertwined with efforts to ensure bank solvency.
Delinquent mortgages continue to weigh on the U.S. banking
system, and government efforts to remedy either the debt facing
homeowners or the weakness of the banking system can have
significant effects on the other problem. Principal write-downs
on a large scale, for example, would help homeowners but hurt
the banks. Over the last two years, Treasury has designed
housing programs that aim to avoid fully facing this trade-off,
by providing assistance to homeowners without restructuring
bank balance sheets.\354\ The limitations of that approach are
apparent in the problems that Treasury has encountered.
---------------------------------------------------------------------------
\354\ See, e.g., Congressional Oversight Panel, Written Testimony
of Timothy F. Geithner, secretary, U.S. Department of the Treasury, COP
Hearing with Treasury Secretary Timothy Geithner, at 6 (Apr. 21, 2009)
(online at cop.senate.gov/documents/testimony-042109-geithner.pdf)
(``Falling home prices are a major financial challenge for many
families. At the same time, financial losses related to the housing
sector adjustment continue to be a significant headwind for banks and
other financial institutions. Foreclosures are particularly problematic
because they not only impose significant financial and emotional
burdens on families, they are also costly for communities and banks.
For all these reasons, addressing the housing crisis and reducing
foreclosures is an important objective.'').
---------------------------------------------------------------------------
V. Automotive Industry Assistance
A. Background
The automotive industry has traditionally accounted for a
significant portion of U.S. domestic output and employment. As
recently as 2004, the industry produced nearly 4 percent of
U.S. GDP.\355\
---------------------------------------------------------------------------
\355\ Bureau of Economic Analysis, National Income and Product
Accounts Table: Table 1.5.5--Gross Domestic Product, Expanded Detail
(online at www.bea.gov/national/nipaweb/TableView.asp?
SelectedTable=35&ViewSeries=NO&Java= no&Request3Place=N
&3Place=N&FromView=YES&Freq= Year&FirstYear=1990&LastYear=2008&3Place=
N&Update=Update&JavaBox=no) (accessed Mar. 11, 2011).
---------------------------------------------------------------------------
Even prior to the financial crisis, the industry had begun
to experience severe strain. Foreign competitors were steadily
increasing market share at the expense of domestic
manufacturers. Legacy costs and poor strategic decisions added
to the problems of General Motors Corporation (GM) and
Chrysler. Between 2000 and 2008, employment in the industry
fell by roughly 34 percent, from a high of 1,254,900 in
February 2001 to 822,900 in October 2008.\356\
---------------------------------------------------------------------------
\356\ Bureau of Labor Statistics, Automotive Industry: Employment,
Earnings, and Hours (online at data.bls.gov/pdq/
SurveyOutputServlet?series_id=CEU3133600101&data_tool=XGtable)
(accessed Mar. 11, 2011).
---------------------------------------------------------------------------
In the fall of 2008, a combination of rising gasoline
prices, tightening credit markets, eroding consumer confidence,
high unemployment, and a decline in consumer discretionary
spending led to a significant downturn in automobile sales in
the United States and abroad. U.S. automobile sales fell to a
26-year low.\357\ By early December 2008, GM and Chrysler were
struggling to secure the credit they needed to conduct their
day-to-day operations.
---------------------------------------------------------------------------
\357\ IHS Global Insights, U.S. Executive Summary (Aug. 2009).
---------------------------------------------------------------------------
Additionally, the freeze in credit markets in late 2008
resulted in lenders experiencing increased difficulty in
raising capital to finance auto loans. At that time, GMAC/Ally
Financial had already suffered third quarter losses and was
facing even greater fourth quarter losses, due largely to their
hemorrhaging residential mortgage unit, ResCap. The contraction
of the credit markets and the shaky financial condition of the
companies had an especially severe impact on their automotive
lending businesses. Since substantially all wholesale purchases
by automobile dealers and about three quarters of retail
consumer purchases are financed with borrowed funds,\358\ GM
and Chrysler faced additional losses in sales due to potential
customers' inability to find credit.
---------------------------------------------------------------------------
\358\ Senate Committee on Banking, Housing, and Urban Affairs,
Written Testimony of Ron Bloom, senior advisor, U.S. Department of the
Treasury, The State of the Domestic Automobile Industry: Impact of
Federal Assistance (June 10, 2009) (online at banking.senate.gov/
public/index.cfm?FuseAction =Files.View&FileStore_id=40341601-355c-
4e6f-b67f-b9707ac88e32). As of December 2009, 26 percent of all retail
automobile purchases were cash transactions. This figure has been
relatively constant over the past five years, fluctuating between 22
and 32 percent. Data provided to the Panel by J.D. Power and
Associates.
---------------------------------------------------------------------------
The CEOs of Chrysler and GM appeared before Congress in
December of 2008 to plead for government assistance to keep
them from going under.\359\ The House of Representatives
responded on December 10 by passing legislation that would have
provided a total of $14 billion in loans to Chrysler and GM,
but the bill was blocked in the Senate on December 11.\360\ The
Bush administration then reversed its previous stance that had
precluded TARP funding for the auto industry, and on December
19 announced that Chrysler and GM would both be provided TARP
assistance. This was justified in part on the basis that
allowing them to fail would result in a more than 1 percent
reduction in real GDP growth and about 1.1 million workers
losing their jobs.\361\
---------------------------------------------------------------------------
\359\ The President and Chief Executive Officer of Ford Motor
Company also testified at this hearing. Senate Committee on Banking,
Housing, and Urban Affairs, Written Testimony of Richard Nardelli,
chairman and chief executive officer, Chrysler LLC, State of the
Domestic Automobile Industry: Part II (Dec. 4, 2008) (online at
banking.senate.gov/public/index.cfm
?FuseAction=Files.View&FileStore_id=c41857b2-7253-4253-95e3-
5cfd7ea81393).
\360\ The money would have been re-allocated from a pre-existing
Department of Energy program for advanced vehicle technology. H.R.
7321, Auto Industry Financing and Restructuring Act, 110th Cong.
(2008). The Senate failed to invoke cloture on the proposed legislation
by a vote of 52 to 35. U.S. Senate, Roll Call Vote on the Motion to
Invoke Cloture on the Motion to Proceed to Consider H.R. 7005 (Dec. 11,
2008) (online at www.senate.gov/legislative/LIS/roll_call_lists/
roll_call_vote_cfm.cfm ?congress=110&session=2&vote=00215) (52 yeas, 35
nays).
\361\ The George W. Bush 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) (hereinafter ``White House Fact Sheet: Assistance to
Auto Manufacturers'').
---------------------------------------------------------------------------
Meanwhile, on November 20, 2008, GMAC/Ally Financial
requested the approval of FRB to become a BHC, contingent on
the conversion of GMAC Bank to a commercial bank.\362\ Becoming
a BHC would make GMAC/Ally Financial eligible for access to
both the FDIC's TLGP and the TARP's CPP. GMAC/Ally Financial's
management also maintained that conversion to a BHC addressed a
weakness in the company's business model by providing it with
access to deposits for liquidity. FRB expedited GMAC/Ally
Financial's BHC application, citing ``emergency conditions,''
although the 4-1 split in the vote of FRB was unusual for these
kinds of actions.\363\
---------------------------------------------------------------------------
\362\ GMAC, LLC, GMAC Files Application With Federal Reserve to
Become Bank Holding Company (Nov. 20, 2008) (online at
media.gmacfs.com/index.php?s=43&item=288).
\363\ Board of Governors of the Federal Reserve System, Order
Approving Formation of Bank Holding Companies and Notice to Engage in
Certain Nonbanking Activities, at 2, 15 (Dec. 24, 2008) (online at
www.federalreserve.gov/newsevents/press/orders/orders20081224a1.pdf).
---------------------------------------------------------------------------
1. Initial Treasury Action
The Automobile Industry Financing Program (AIFP) was
announced on December 19, 2008. Its first acts were to provide
Chrysler and GM with bridge loans of $4 billion and $13.4
billion, respectively, under separate loan and security
agreements. Treasury, asserting that GM and Chrysler could not
survive without access to GMAC/Ally Financial's and Chrysler
Financial's financial underpinning, further provided GMAC/Ally
Financial with $5 billion in emergency funding under the AIFP
on December 29, 2008. Another $887 million lent to GM was used
to buy GMAC/Ally Financial shares in a $2 billion equity rights
offering to current shareholders. Additionally, Chrysler
Financial was provided with a $1.5 billion loan on January 16,
2009.
A key component of the receipt of this federal aid required
each company to demonstrate that the assistance would allow it
to achieve ``financial viability.'' \364\ Both companies were
required to submit viability plans incorporating ``meaningful
concessions from all involved in the automotive industry.''
\365\ These plans were submitted to the Obama administration in
February 2009, and on February 15, 2009, President Obama
announced the creation of the interagency Presidential Task
Force on the Auto Industry, to assume responsibility for
reviewing the Chrysler and GM viability plans. In addition, the
President named two advisors, Ron Bloom and Steven Rattner, to
lead the Treasury auto team in reviewing the viability plans
and negotiating the terms of any further assistance.\366\
---------------------------------------------------------------------------
\364\ ``Financial viability'' was defined as ``positive net value,
taking into account all current and future costs, and [the ability to]
fully repay the government loan.'' White House Fact Sheet: Assistance
to Auto Manufacturers, supra note 361.
\365\ The George W. Bush White House Office of the Press Secretary,
President Bush Discusses Administration's Plan to Assist Automakers
(Dec. 19, 2008) (online at georgewbush-whitehouse.archives.gov/news/
releases/2008/12/20081219.html).
\366\ The missions and personnel of the Presidential Task Force on
the Auto Industry and Treasury auto team--a joint Treasury-National
Economic Council team that staffs the Task Force--overlap considerably;
therefore, these entities are often cited interchangeably.
---------------------------------------------------------------------------
The results of the auto team's review were announced by
President Obama on March 30, 2009. The team found GM's plan
``not viable as it is currently structured'' due largely to
overly optimistic assumptions about prospects for the
macroeconomy and GM's ability to generate sales. GM was
provided 60 days of working capital in order to submit a
substantially more aggressive plan.\367\ The team found that
Chrysler had an even poorer outlook than GM and concluded that
Chrysler was not viable outside of a partnership with another
automotive company. Chrysler was offered working capital for 30
more days in order to seek an agreement with Fiat.\368\
---------------------------------------------------------------------------
\367\ U.S. Department of the Treasury, GM February 17 Plan:
Viability Determination (Mar. 30, 2009) (online at www.whitehouse.gov/
assets/documents/GM_Viability_Assessment.pdf).
\368\ The White House, Obama Administration New Path to Viability
for GM & Chrysler (Mar. 30, 2009) (online at www.whitehouse.gov/assets/
documents/Fact_Sheet_GM_Chrysler_FIN.pdf).
---------------------------------------------------------------------------
Unable to reach agreement in 30 days, Chrysler filed for
bankruptcy on April 30. Forty-two days later, the sale of the
majority of its assets to a newly formed entity, Chrysler Group
LLC (new Chrysler), closed. Treasury provided a total of $8.5
billion in working capital and exit financing to support
Chrysler through the bankruptcy and restructuring process.\369\
---------------------------------------------------------------------------
\369\ Treasury Transactions Report, supra note 36, at 18.
---------------------------------------------------------------------------
GM followed Chrysler into bankruptcy on June 1, 2009. On
July 5, 2009, the sale of the ``good'' assets of GM to the new
government-owned General Motors Company (new GM) closed.
Treasury provided $30.1 billion of financing to facilitate an
expedited Chapter 11 proceeding and restructuring.\370\
---------------------------------------------------------------------------
\370\ The White House, Remarks by the President on General Motors
Restructuring (June 1, 2009) (online at www.whitehouse.gov/
the_press_office/Remarks-by-the-President-on-General-Motors-
Restructuring/); Treasury Transactions Report, supra note 36, at 18.
---------------------------------------------------------------------------
GMAC/Ally Financial, in the interim, one of the 19 large
entities subject to stress tests, had failed the stress test
and was unable to raise capital in the private markets.
Accordingly, Treasury extended a further $7.5 billion in TARP
financing in May of 2009, and another $3.8 billion in December
2009.
Meanwhile, in July 2009, Chrysler Financial repaid its $1.5
billion loan in full with all interest and an additional $15
million note. GMAC/Ally Financial had taken over its floor plan
business in May 2009. The remaining platform of Chrysler
Financial was owned by Chrysler Holding LLC, which was in turn
owned by Cerberus Management. Through Treasury's investment in
Chrysler Holding LLC, Treasury remained entitled to proceeds
Chrysler Holding LLC received from Chrysler Financial: the
greater of either $1.375 billion, or 40 percent of the equity
value of Chrysler Financial.\371\
---------------------------------------------------------------------------
\371\ For more discussion of how Treasury potentially left money on
the table in the Chrysler Financial deal, see Congressional Oversight
Panel, January Oversight Report: An Update on TARP Support for the
Domestic Automotive Industry, at 15-16 (Jan. 13, 2011) (online at
cop.senate.gov/documents/cop-011311-report.pdf) (hereinafter ``2011
January Oversight Report'').
---------------------------------------------------------------------------
2. Additional Initiatives and Actions
In addition to the assistance provided to the automotive
industry described above, several other initiatives were
undertaken to support the industry, both within and outside of
the TARP.
On March 19, 2009, Treasury announced the Auto Supplier
Support Program (ASSP), a TARP initiative. At the time it was
announced, Treasury stated that up to $5 billion in financing
would be available to auto suppliers, to be funded through
participating automotive companies. Under this program, auto
suppliers could obtain government-backed protection on
receivables to provide a safety net for those who may not
receive payment for their shipments. Auto suppliers were also
able to sell their receivables into the program at a discount
to provide immediate liquidity for suppliers in need of cash to
continue operations. This facility was reduced to $3.5 billion,
and ultimately only $413 million was used.\372\ On the same
day, as part of ARRA, the Obama administration announced a
grant of up to $2 billion for competitively awarded cost-shared
agreements for manufacturing of advanced batteries and related
drive components, plus another $400 million for transportation
electrification demonstration and deployment projects.\373\
---------------------------------------------------------------------------
\372\ Treasury Transactions Report, supra note 36.
\373\ U.S. Department of Energy, President Obama Announces $2.4
Billion for Electric Vehicles (Mar. 19, 2009) (online at
apps1.eere.energy.gov/news/daily.cfm/hp_news_id=159).
---------------------------------------------------------------------------
To help spur automotive sales, Congress created the Car
Allowance Rebate System (nicknamed ``cash for clunkers'') to be
administered through the Department of Transportation. The
program, announced on July 27, 2009, offered rebates for new
car buyers who were trading in older cars for newer, more
efficient models. The program attracted interest and resulted
in a brief surge in sales in the summer of 2009, with federal
disbursements of $2.9 billion.
The Energy Independence and Security Act of 2007
established a $25 billion loan program to encourage the
development of advanced technology vehicles--primarily those
that meet certain energy efficiency criteria--and associated
components in the United States. The program, administered by
the Department of Energy, had completed a little over $2
billion in loans as of the end of 2010. Before declaring
bankruptcy, GM applied for a loan under this program and was
rejected. The new GM later resubmitted the old GM's
applications but ultimately withdrew these, saying it had
enough liquidity of its own to modernize its facilities and
build fuel-efficient vehicles.\374\ Chrysler is still awaiting
a determination on its application for a total of $3 billion in
loans to be disbursed over three years.
---------------------------------------------------------------------------
\374\ General Motors Company, GM Withdraws Federal Loan Application
(Jan. 27, 2011) (online at www.gm.com/news-article.jsp?id=/content/
Pages/news/us/en/2011/Jan/0127_federal_loan.html).
---------------------------------------------------------------------------
B. Summary of COP Reports and Findings
In September 2009, the Panel issued its first report on the
use of TARP funds in supporting the domestic automotive
industry.\375\ In that report, the Panel examined several key
considerations relating to the commitment of $85 billion in
TARP funds, including: Treasury's justification for extending
TARP funds to the automotive sector, how exactly this money had
been used, and whether Treasury had properly and publicly
articulated its objectives and taken action in furtherance of
those objectives. The report also examined Treasury's role in
the bankruptcy of Chrysler Holding LLC (Chrysler) and (GM, how
Treasury planned to protect taxpayers' interests while the
government controlled these companies, and how Treasury
intended to maximize taxpayers' returns when the government
divested itself of ownership.
---------------------------------------------------------------------------
\375\ Congressional Oversight Panel, September Oversight Report:
The Use of TARP Funds in the Support and Reorganization of the Domestic
Automotive Industry (Sept. 9, 2009) (online at cop.senate.gov/
documents/cop-090909-report.pdf).
---------------------------------------------------------------------------
The Panel compared Treasury's dealings with the automotive
companies with its dealings with banks under the CPP and
similar programs, and found that Treasury's financial
assistance to the automotive industry differed significantly
from its assistance to the banking industry. In particular,
assistance provided to the banks carried less stringent
conditions, and money was made readily available without a
review of business plans and without any demands that
shareholders forfeit their stake in the company, or that top
management lose their jobs. By contrast, the Panel found that
Treasury was a tough negotiator as it invested taxpayer funds
in the automotive industry, requiring the companies to file for
bankruptcy, wiping out their old shareholders, cutting their
labor costs, reducing their debt obligations and replacing some
top management. While this stance may have provided better
protection for Treasury's investment, the Panel noted that it
may have raised other issues related to the government's role
as shareholder in private companies. The report recommended
that Treasury consider placing the government's shares in a
trust that could be managed in a more hands-off manner,
effectively removing the concern that direct management by
Treasury itself could have undesirable consequences.
The Panel also examined the bankruptcy processes each of
the companies underwent and concluded, with the assistance of
outside bankruptcy experts, that the government's intervention
in the bankruptcies raised questions about the long-term
effects of such intervention on credit markets, but that it was
too early to determine what those effects might be. Although
the Panel also discussed the legal justification for using the
TARP to support the automotive industry, the Panel took no
position on whether this use was authorized by EESA.
At the time of the Panel's 2009 report, the prospects for a
return of the $85 billion invested in the automotive industry
were not favorable. Projected losses on TARP investments in the
auto industry at that time varied from Treasury's estimate that
approximately $23 billion of the initial loans made would be
subject to ``much lower recoveries'' to an estimate of $40
billion in losses from CBO.\376\ Although Treasury at times
stated its definition of success was whether taxpayers saw a
return of their money, at other times it defined success in
terms of preserving jobs or preventing the disorganized
bankruptcy of systemically significant institutions that could
potentially destabilize all or a sector of the fragile economy.
Treasury's inability to articulate a clear objective, the Panel
noted, made it difficult to determine whether the program had
been a success even by Treasury's own standards.
---------------------------------------------------------------------------
\376\ Id. at 5.
---------------------------------------------------------------------------
In March 2010, the Panel examined Treasury's use of TARP
funds to rescue GMAC/Ally Financial.\377\ Although the Panel
took no position on whether Treasury should have rescued GMAC/
Ally Financial, it found that Treasury missed opportunities to
increase accountability and better protect taxpayers' money.
Treasury did not, for example, condition access to TARP money
on the same kinds of sweeping changes that it required from GM
and Chrysler: it did not wipe out GMAC/Ally Financial's equity
holders; it did not require GMAC/Ally Financial to create a
viable plan for returning to profitability; nor did it require
a detailed, public explanation of how the company would use
taxpayer funds to increase consumer lending. Treasury's
explanations for the need to rescue GMAC/Ally Financial were
also at times inconsistent, casting the decision sometimes as a
part of the wider automotive industry rescue and at other times
as a part of the stress tests, and therefore a part of the
effort to backstop the nation's financial sector. If the rescue
of GMAC/Ally Financial was necessitated by its inclusion in the
stress tests, it was not clear why Treasury turned to the AIFP,
a program intended to support the automotive sector, for
financing instead of using the Capital Assistance Program
(CAP), which was devised specifically to provide additional
capital to those BHCs that did not pass the stress tests.
---------------------------------------------------------------------------
\377\ Congressional Oversight Panel, March Oversight Report: The
Unique Treatment of GMAC Under the TARP (Mar. 11, 2010) (online at
cop.senate.gov/documents/cop-031110-report.pdf) (hereinafter ``2010
March Oversight Report'').
---------------------------------------------------------------------------
Whatever the reason for rescuing GMAC/Ally Financial, the
report questioned Treasury's assertion that bankruptcy was not
a viable option in 2008.\378\ The report concluded that, in
connection with the Chrysler and GM bankruptcies, Treasury
might have been able to orchestrate a strategic bankruptcy for
GMAC/Ally Financial.\379\ This bankruptcy could have preserved
GMAC/Ally Financial's automotive lending functions while
winding down its other, less significant operations, dealing
with the ongoing liabilities of the mortgage lending
operations, and putting the company on more sound economic
footing. The Panel also expressed concern that Treasury had not
given due consideration to the possibility of merging GMAC/Ally
Financial back into GM, a step which would have restored GM's
financing operations to the model generally shared by other
automotive manufacturers, thus strengthening GM and eliminating
other money-losing operations.\380\ The Panel expressed no
doubt that Treasury's actions to preserve GMAC/Ally Financial
played a major role in supporting the domestic automotive
industry.\381\ These same actions, however, reinforced GMAC/
Ally Financial's dominance in automotive floor plan financing,
perhaps obstructing the growth of a more competitive lending
market. The report also examined the great public expense
incurred by this rescue, noting that the federal government had
spent $17.2 billion to bail out GMAC/Ally Financial and now
owned 56.3 percent of the company. At the time, OMB estimated
that $6.3 billion or more may never be repaid.
---------------------------------------------------------------------------
\378\ Ron Bloom, senior advisor to the Secretary of the Treasury,
testified that the administration considered bankruptcy in April and
May 2009. He did not state whether bankruptcy was considered before
Treasury made the December 2008 investment. Congressional Oversight
Panel, Testimony of Ron Bloom, senior advisor, U.S. Department of the
Treasury, Transcript: COP Hearing on GMAC Financial Services, at 23-24
(Feb. 25, 2010) (online at cop.senate.gov/documents/transcript-022510-
gmac.pdf).
\379\ 2010 March Oversight Report, supra note 377, at 5.
\380\ 2010 March Oversight Report, supra note 377, at 5.
\381\ 2010 March Oversight Report, supra note 377, at 5.
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The Panel also noted that Treasury's avowed hands-off
approach to managing its sizeable stake in the company could
have unintended consequences, such as creating a power vacuum
that would allow smaller shareholders a disproportionate
influence.\382\ Because both GM and GMAC/Ally Financial were at
the time majority-owned by Treasury and subject to its hands-
off policy, the potential for a governance vacuum was
amplified. This meant that the parties who wished to operate
GMAC/Ally Financial in GM's interests had the potential to
become proportionately more powerful, inasmuch as GM has
extraordinary commercial influence over GMAC/Ally Financial,
and there may not have been countervailing pressure from
involved shareholders. The report repeated the suggestion made
in the September 2009 report that Treasury consider placing the
government's shares in a trust to help alleviate this concern.
The Panel concluded, however, that although the rescue of GMAC/
Ally Financial appeared to be one of the more baffling
decisions made under the TARP, since the company itself posed
no systemic risk, when viewed as a piece of either the
automotive industry or the group of banks involved in the
stress tests, Treasury's objectives become clearer.\383\
---------------------------------------------------------------------------
\382\ 2010 March Oversight Report, supra note 377, at 121.
\383\ 2010 March Oversight Report, supra note 377, at 122.
---------------------------------------------------------------------------
In its oversight report for January 2011, the Panel
revisited Treasury's support of the domestic automotive
industry as Treasury began the process of unwinding its stakes
in GM, Chrysler, and GMAC/Ally Financial.\384\ Of those
companies, GM is furthest along in the process of repaying
taxpayers. It conducted an initial public offering (IPO) on
November 18, 2010, and Treasury used the occasion to sell a
portion of its GM holdings for $13.5 billion. This sale
represents a major recovery of taxpayer funds, but it is
important to note that Treasury received a price of $33.00 per
share--well below the $44.59 needed to be on track to recover
fully taxpayers' money. Pricing the GM IPO below the break-even
price likely had the effect of greatly reducing the likelihood
that taxpayers will be fully repaid, as full repayment will not
be possible unless the government is able to sell its remaining
shares at a far higher price. However, it is impossible to know
if a longer-term investment horizon by the government (via an
IPO at a later date) would have allowed Treasury to sell its
shares at a more favorable price, closer to its breakeven cost
basis. The Panel recognized that delaying the IPO would have
exposed Treasury to the risk that the price that buyers were
willing to pay for GM stock would fall. Moreover, such a delay
would have run contrary to the government's stated objective of
disposing of its shares ``as soon as practicable.'' \385\
---------------------------------------------------------------------------
\384\ 2011 January Oversight Report, supra note 371, at 15-16.
\385\ 2011 January Oversight Report, supra note 371, at 47.
---------------------------------------------------------------------------
The report also discussed the status of Treasury's
investments in Chrysler, Chrysler Financial, and GMAC/Ally
Financial. The report noted that Treasury will likely require
an IPO to redeem its investment in Chrysler. The need for an
IPO presents a challenge since Treasury does not have a
controlling stake in Chrysler and, even if it did, it is
unlikely given Treasury's hands-off management approach that it
would use this leverage. Meanwhile, it appears that GMAC/Ally
Financial is moving closer to an IPO and Treasury has had
significant leverage over the IPO's timing due to its preferred
stock holdings. Regrettably, however, Treasury has been
inconsistent in acknowledging this leverage. Treasury's
reluctance to recognize its own influence may represent an
effort to claim a coherent hands-off shareholder approach,
despite the unique circumstances that apply to GMAC/Ally
Financial.\386\ Finally, another source of concern explored in
this report was Treasury's unwinding of its position in
Chrysler Financial, in which taxpayer returns appear to have
been sacrificed in favor of an accelerated exit, further
compounded by apparently incomplete due diligence. Although
Treasury's hands-off approach may have reassured market
participants about the limited scope of government
intervention, it may also have forced Treasury to leave
unexplored options that would have benefited the public.
---------------------------------------------------------------------------
\386\ 2011 January Oversight Report, supra note 371, at 5.
---------------------------------------------------------------------------
While the Panel had previously questioned the government's
perception of its policy choices during various stages of the
crisis, there is little doubt that in the absence of massive
government assistance, GM, Chrysler, and GMAC/Ally Financial
faced the prospect of bankruptcies and potential liquidation,
given the apparent dearth of available financing from the
private sector.\387\ The Panel noted that in the context of a
fragile economy and the financial crisis (which severely
restricted both corporate and consumer credit), the failure of
these companies could have had significant near-term
consequences in terms of job losses and the performance of the
broader U.S. economy. Further, although the assets of GM and
Chrysler (plants and equipment, employees, brand recognition)
would have had value to other firms over the longer term, it
was in the context of these adverse near-term consequences that
both the Bush and Obama administrations provided assistance to
the auto sector. As in its September 2009 report, the Panel
took no position on the decision to support the auto industry.
Despite the recent GM IPO and improving financials at the other
companies, the Panel noted that there is still a long road
ahead, particularly for GMAC/Ally Financial and Chrysler,
before the final outcome of these programs can be determined.
---------------------------------------------------------------------------
\387\ 2011 January Oversight Report, supra note 371, at 115.
---------------------------------------------------------------------------
C. Panel Recommendations and Updates
The Panel's recommendations in its three reports on the
automotive industry and GMAC/Ally Financial focused on four key
areas in need of improvement:
Transparency on the part of Treasury and
the companies' management;
Accountability;
Improved balance among Treasury's roles as
shareholder in private enterprise and government
policymaker; and
Continuing oversight to ensure that the
American people are not again called upon to rescue the
automotive industry.
To date, only a handful of recommendations made by the Panel
have been implemented and even those have been implemented only
partially.
1. Transparency
The Panel consistently requested that Treasury and the
automotive companies provide detailed information about
Treasury's investments and the companies' management and
strategic planning but has received only a partial response to
these requests. In September 2009, the Panel recommended that
Treasury ensure that the automotive companies' bylaws and
policies provide for full disclosure of all dealings with
significant shareholders, including the government, and that
the two new companies, when filing their planned periodic
reports with the U.S. Securities and Exchange Commission (SEC),
ensure that these reports conform to the standards of
disclosure required for SEC reporting companies. While GM and
GMAC/Ally Financial have released such reports, Chrysler has
reported only its consolidated financial statement and notes.
In March 2010 and again in January 2011, the Panel also
recommended that the administration enhance disclosure in the
budget and financial statement for the TARP by reporting on the
valuation assumptions for the individual companies. The Panel's
recommendations in March 2010 focused on the specific lack of
transparency with regard to the government's investment in
GMAC/Ally Financial, encouraging Treasury to go to greater
lengths to explain its approach to the treatment of legacy
shareholders. Treasury has provided no such additional
explanation. Finally, the Panel requested that Treasury provide
a legal opinion justifying the use of TARP funds for the
automotive industry rescue. In response, Treasury directed the
Panel to certain materials associated with the automotive
companies' bankruptcies. These materials did not provide a
sufficiently robust analysis of Treasury's legal justification
and so constitute, at most, only a partial response to the
Panel's recommendation.
2. Accountability
In each of its three reports on the industry, the Panel
called for Treasury to articulate clear goals and benchmarks by
which progress could be measured. Treasury, however, has never
articulated a clear set of goals for these programs. Instead,
it has articulated a number of goals at different times, many
of which may ultimately be conflicting. For example, at a Panel
hearing in June 2009, then-Panel Chair Elizabeth Warren asked
Assistant Secretary Allison, ``Can you explain in some general
strokes, the strategic thinking on the part of your team in
terms of what we are trying to accomplish with the auto
industry?'' \388\ Assistant Secretary Allison responded:
---------------------------------------------------------------------------
\388\ Congressional Oversight Panel, Testimony of Herbert M.
Allison, Jr., assistant secretary for financial stability, U.S.
Department of the Treasury, Transcript: COP Hearing with Assistant
Treasury Secretary Herb Allison, at 23 (June 24, 2009) (online at
cop.senate.gov/documents/
transcript-062409-allison.pdf).
What we're trying to do is to allow the automobile
industry and encourage the automobile industry to
restructure so that it is again a highly-competitive
sector of our economy and can grow and create more jobs
over time and that's the reason why the
Administration--actually, they were asked to take part
in this. That's the reason why they've decided it was
necessary to do so. The outlook here is very important
to the whole economy and I think that's been the
underlying reason why the Administration has acted in
the way it has.\389\
---------------------------------------------------------------------------
\389\ Id. at 24.
In a later hearing on the automotive industry, senior Treasury
advisor Ron Bloom defined success as primarily a question of
return on investment: ``the greater percentage of the money
that we invested that we get back, the greater success.'' \390\
These differing and potentially conflicting goals make it
difficult to determine whether the TARP's interventions in the
auto industry should be judged to be successful. Instead, the
articulation of multiple goals, without specification of their
priority, allows Treasury to claim success if the program
achieves any one of these goals.
---------------------------------------------------------------------------
\390\ Congressional Oversight Panel, Testimony of Ron Bloom, senior
advisor, U.S. Department of the Treasury, Transcript: COP Field Hearing
on the Auto Industry, at 38 (July 27, 2009) (online at cop.senate.gov/
documents/transcript-072709-detroithearing.pdf).
---------------------------------------------------------------------------
The Panel also called on Treasury to provide a detailed
plan for exiting its position in each company. In particular,
in its March 2010 report, the Panel urged Treasury to require
greater accountability on the part of GMAC/Ally Financial by
insisting that the company produce a viable business plan
showing a path toward profitability. Given that a GMAC/Ally
Financial IPO, which is likely to occur later this year, would
provide an opportunity for Treasury to sell its GMAC/Ally
Financial holdings, Treasury should clearly outline its
proposed strategy for divesting itself of some or all of its
position as the IPO approaches. There remain, in addition,
certain obstacles that Treasury must overcome before it can
successfully and fully exit its position in all of these
companies and, as discussed in the Panel's January 2011 report,
Treasury has yet to articulate a clear plan for addressing
these challenges. The Panel also recommended that Treasury
require that any entity receiving TARP funds be subject to more
stringent criteria and due diligence to establish that it would
become a profitable concern, and that any such entity be
subject to use of funds disclosure requirements. Specifically,
the Panel suggested that Treasury take these steps
retroactively with regard to its investment in GMAC/Ally
Financial. Treasury has never acted to implement this
recommendation.
3. Improved Balance among Treasury's Roles
While Treasury has insisted that it adheres to a hands-off
policy in managing its TARP investments to assuage concerns
about government intervention in private enterprise, the Panel
warned against an unduly rigid policy that could jeopardize
both taxpayers' investment and the longer-term goals of the
TARP. In September 2009, the Panel recommended that Treasury
provide more detail about its corporate governance policies,
including how the government would deal with conflicts of
interest between its role as an equity holder or creditor and
as regulator. The Panel also suggested that Treasury establish
policies prohibiting Treasury employees from accepting
employment with the automotive companies for a period of at
least one year following termination of their employment with
Treasury. The Panel is not aware that Treasury has acted on any
of these recommendations. The Panel also recommended that
Treasury consider placing its holdings in a trust that could be
managed by an independent trustee whose actions would not raise
the same concerns that similar actions by Treasury might raise.
There has not been any indication that Treasury seriously
considered creating such a trust. In March 2010, the Panel
recommended that Treasury consider affirmatively promoting a
merger between GM and GMAC, a step that Treasury may have been
unwilling to consider in light of its hands-off management
policy. There has been no indication that Treasury has altered
its stance on this issue.
While the Panel recommended in each of its reports that
Treasury unwind its positions in the companies quickly, the
Panel also cautioned against an exit that would be unduly
detrimental to the value of the taxpayers' investment. Based on
the steps it has taken thus far to sell portions of its
holdings, it appears that Treasury has been mindful of this
concern but, because of its avowed ``hands-off'' stance, may
not have fully considered all options that would provide the
best return.
4. Continued Oversight
In its last report on the industry in January 2011, the
Panel recommended, in order to prevent the need for a future
government rescue, that Congress commission independent
researchers to periodically assess the long-term fallout from
the collapse of the auto industry and the subsequent government
intervention, including the risk to taxpayers stemming from
future disruptions to the auto market from economic, credit
market or other potential threats.
5. Updates
Since the Panel's most recent report on the industry in
January 2011, Treasury announced on March 1, 2011, that it was
planning a public offering of its trust preferred securities
holdings in GMAC/Ally Financial.\391\ The offering is not to
include any of Treasury's $5.9 billion of mandatory convertible
preferred stock in Ally nor does it include any of Treasury's
current holdings of 74 percent of the shares of Ally's common
stock. On March 2, 2011, Treasury announced the pricing of the
offering, stating that the securities would be offered at par,
for a total of $2.7 billion.\392\ This offering closed on March
7, 2011.
---------------------------------------------------------------------------
\391\ U.S. Department of the Treasury, Treasury Announces Public
Offering of Ally Financial, Inc., TruPS (Mar. 1, 2011) (online at
www.treasury.gov/press-center/press-releases/Pages/tg1081.aspx).
\392\ U.S. Department of the Treasury, Treasury Announces Pricing
of $2.7 billion of Ally TruPS (Mar. 2, 2011) (online at
www.treasury.gov/press-center/press-releases/Pages/tg1086.aspx).
---------------------------------------------------------------------------
Also on March 1, 2011, GM released its annual report,
showing the company made meaningful gains in 2010, posting a
profit of $4.7 billion for the year.\393\
---------------------------------------------------------------------------
\393\ General Motors Company, Form 10-K for the Fiscal Year Ended
December 31, 2010, at 142 (Mar. 1, 2011) (online at www.sec.gov/
Archives/edgar/data/1467858/000119312511051462/d10k.htm).
---------------------------------------------------------------------------
D. Lessons Learned
It is clear that GM and Chrysler were in dire straits in
late 2008. Although it is difficult to say whether government
intervention was the best option, the TARP funds the companies
received provided them with at least some short-term stability.
Whether the programs aimed at helping the automotive industry
can be called ``successful'' will be difficult to determine
since Treasury has never clearly stated its goals in assisting
the companies. To the extent that success is defined as a
return of taxpayer money, it remains somewhat unlikely that all
TARP funds invested will be returned. Although the outlook is
currently much better than it was when the Panel released its
first report on the industry in late 2009, certain factors,
including the loss locked in by the GM IPO price, must be
overcome before taxpayers see a complete return of the money
invested.
Even if TARP funds are fully repaid, the government's
intervention in this industry may have lasting effects. In an
effort to reduce the impact of its intervention in private
industry, Treasury has consistently stated that it is acting as
a ``reluctant shareholder'' and has committed to maintaining a
hands-off approach to management of the companies. This
position, however, may have served principally to highlight the
difficult role Treasury occupied as shareholder, creditor, and
regulator of the companies. Furthermore, Treasury's
unwillingness to influence management even in its role as a
large shareholder may ultimately have put the government's
investment at greater risk than was necessary. Finally, it is
too soon to say what the TARP's ultimate impact on the
automotive industry, and these companies in particular, will
be. The domestic automotive industry was trending downward
before the financial crisis hit and it is unclear whether the
TARP will ultimately reverse that trend in the long term.
Even if these companies were to become extremely successful
in the coming years, paying back the funds invested by Treasury
and creating jobs and revenue for the American people, there
may be lingering and potentially harmful effects from the
programs. The Panel has frequently cited the potential moral
hazard if large companies, and the markets in which they
operate, believe that they will be rescued by the government if
they falter. Although the TARP seemed originally to target only
those companies whose financial operations made them a
potential risk to systemic stability, the use of the TARP to
support the automotive industry suggests that a company may be
considered ``systemically significant'' merely because it
employs a certain number of workers. Whether and to what extent
these issues become manifest can only be determined as future
events unfold.
VI. AIG
The magnitude of AIG's operations and the company's far-
flung linkages across the global financial system led to
multiple rounds of exceptional assistance from the government.
Only Fannie Mae and Freddie Mac, institutions in government
conservatorship, received more assistance during this
period.\394\ Accordingly, AIG's unique position in the
financial system and the significant investment of taxpayer
dollars required to avert the company's collapse warranted
particular scrutiny from the Panel relative to other recipients
of TARP assistance. In addition to the Panel's June 2010
report, which focused solely on AIG, the Panel also held a
hearing to explore the rescue of AIG, its impact on the
markets, and the outlook for the government's significant
investment in the company.\395\
---------------------------------------------------------------------------
\394\ Unlike AIG, Fannie Mae and Freddie Mac were not TARP
participants. See Section II.B for further discussion of the combined
federal efforts.
\395\ See Congressional Oversight Panel, June Oversight Report: The
AIG Rescue, Its Impact on Markets, and the Government's Exit Strategy
(June 10, 2010) (online at cop.senate.gov/documents/cop-061010-
report.pdf) (hereinafter ``2010 June Oversight Report''); Congressional
Oversight Panel, Transcript: COP Hearing on TARP and Other Assistance
to AIG (May 26, 2010) (online at cop.senate.gov/documents/transcript-
052610-aig.pdf).
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A. Background
At its peak, AIG was one of the largest and most successful
companies in the world. With over $1 trillion in assets and a
AAA credit rating, AIG generated over $100 billion in annual
revenues, serving 76 million customers in more than 130
countries. However, the scale of and linkages across AIG's
operations posed unique managerial and regulatory challenges.
Accordingly, a poor risk management structure, combined with a
lack of regulatory oversight, led AIG to accumulate staggering
amounts of risk, especially in its Financial Products
subsidiary, AIG Financial Products (AIGFP).\396\ Among its
other operations, AIGFP sold credit default swaps to investors,
instruments that would pay off if certain financial securities,
particularly those made up of subprime mortgages, defaulted. As
long as the mortgage market remained sound and AIG's credit
rating remained stellar, these instruments did not threaten the
company's financial stability.
---------------------------------------------------------------------------
\396\ AIG's product and regional diversity was predicated on
maintaining an exceptional credit rating, which helped bolster its
insurance operations and allowed the company to use its low cost of
funds as leverage to boost non-insurance business lines, including
aircraft leasing and consumer finance. AIG's longtime AAA credit rating
also increased its attractiveness as a counterparty in the capital
markets, helping the company further expand its product base in the
United States and around the world. The product and geographic breadth
of AIG's operations, however, were not matched by a coherent regulatory
structure to oversee its business. The Office of Thrift Supervision
(OTS), a federal agency that regulates the U.S. thrift industry, was
specifically charged with overseeing the parent and it failed to do so.
Whether the OTS or a more coherent regulatory framework could have
prevented the build-up in risks that the company's own management team
failed to recognize or understand is unlikely, but this does not
obscure the point that AIG's holding company regulator had the power
and the duty to spot and require the company to curtail its risk. 2010
June Oversight Report, supra note 395, at 21-24.
---------------------------------------------------------------------------
The financial crisis, however, fundamentally changed this
equation. As subprime mortgages began to default, the complex
securities based on those loans threatened to topple both AIG
and other long-established institutions. During the summer of
2008, AIG faced increasing demands from its credit default swap
customers for cash security--known as collateral calls--
totaling tens of billions of dollars. These costs put AIG's
credit rating under pressure, which in turn led to even greater
collateral calls, creating even greater pressure on AIG's
credit.
The trigger and primary cause of AIG's collapse came from
inside AIGFP. This business unit was responsible for unrealized
valuation losses and collateral calls that ultimately engulfed
AIG. While the risk overhang in this business would have likely
been sufficient to bring down the firm on its own, AIG's
securities lending operations,\397\ which involved securities
pooled from AIG's domestic life insurance subsidiaries,
contributed to a ``double death spiral.'' \398\ The problems in
AIGFP exacerbated the problems in securities lending, and vice
versa, as collateral demands from both sets of counterparties
quickly imperiled the company's liquidity position as it
struggled to meet its cash demands. Meanwhile, the company's
insurance operations were incapable of generating the requisite
cash either through normal operations or asset sales to fund
the parent company. The threats within both of these businesses
emanated from outsized exposure to the deteriorating mortgage
markets, owing to grossly inadequate valuation and risk
controls, including insufficient capital buffers as losses and
collateral calls mounted.
---------------------------------------------------------------------------
\397\ Securities lending normally provides a low-risk mechanism for
insurance companies and other long-term investors in the financial
markets to earn modest sums of money on assets that would otherwise be
sitting idle. However, rather than investing the cash collateral from
borrowers in low-risk short-term securities in order to generate a
modest yield, AIG invested in more speculative securities tied to the
RMBS market. Consequently, these investments posed a duration mismatch
(securities lending counterparties could demand a return of their
collateral with very little notice) that was exacerbated by valuation
losses and illiquidity in the mortgage markets that impaired AIG's
ability to return cash to its securities lending counterparties. 2010
June Oversight Report, supra note 395, at 7, 271-272.
\398\ Assessment of Marshall Huebner of Davis Polk & Wardwell (a
law firm that represented FRBNY). FRBNY and Treasury briefing with the
Panel and Panel staff (Apr. 12, 2010).
---------------------------------------------------------------------------
By early September 2008 AIG had reached a crisis
point.\399\ AIG sought more capital in a desperate attempt to
avoid bankruptcy. When the company could not arrange its own
funding, then-FRBNY President Timothy Geithner told AIG that
the government would attempt to orchestrate a privately funded
solution in coordination with JPMorgan Chase and Goldman Sachs.
However, this approach failed to materialize, forcing the
government's hand.
---------------------------------------------------------------------------
\399\ These problems did not arrive out of the blue in mid-
September. AIGFP had recognized $11.1 billion in unrealized losses on
CDS contracts as early as the fourth quarter of 2007. This was followed
by an effort to raise capital on May 21, 2008, and an announcement on
June 15, 2008 that CEO Martin Sullivan was being replaced. A further
$13.5 billion in unrealized losses on RMBS and other structured
securities investments was recognized in late June, and on July 29, the
new CEO, Robert Willumstad, spoke with then-FRBNY President Timothy
Geithner about the possibility of getting access to the Federal
Reserve's discount window, an idea which was dismissed by Mr. Geithner
on the premise that this would only induce further panic among AIG's
creditors. Various efforts to raise capital in other ways ensued. In
late August, AIG contracted with JPMorgan Chase to help develop
alternatives as the market and the company's condition worsened
rapidly. A detailed timeline of the events leading up to the collapse
of AIG is available in Annex II of COP's June 2010 AIG report. 2010
June Oversight Report, supra note 395, at 58, 238-250.
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1. Government Assistance
In the wake of the collapse of Lehman Brothers, FRBNY
abandoned its effort at a private solution, announcing an $85.0
billion taxpayer-backed Revolving Credit Facility (RCF) for AIG
on September 16, 2008.\400\ These funds would later be
supplemented by $49.1 billion from Treasury under the TARP, as
well as additional funds from FRBNY, aggregating to total
assistance of $133.3 billion. At the height of the government
support, AIG and its affiliates received $89.5 billion in loans
from the Federal Reserve, $49.1 billion from Treasury, and
$43.8 billion from the Federal Reserve to capitalize two SPVs
for AIG asset purchases (i.e., Maiden Lane II and III),
totaling $182.4 billion.\401\ As discussed below, FRBNY
underwrote the initial two rounds of government assistance
(September and November 2008) before Treasury provided TARP
funds for subsequent efforts by the government (November 2008
and April 2009).
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\400\ Revolving Credit Facility (RCF) is a credit facility that
allows the company to draw and repay loans to meet its funding
requirements. As a part of a broader restructuring of the Government's
assistance to AIG, on November 10, 2008, the RCF ceiling was lowered to
$60.0 billion and the TARP made its initial investment of $40.0 billion
in preferred stock. Fed Regulatory Reform: AIG, Maiden Lane II and III,
supra note 40.
\401\ The announced assistance to AIG exceeded the cost of the EU's
sovereign bailouts of Greece (=110 billion) and Ireland (=85 billion).
International Monetary Fund, Europe and IMF Agree =110 Billion
Financing Plan With Greece (May 2, 2010) (online at www.imf.org/
external/pubs/ft/survey/so/2010/car050210a.htm); International Monetary
Fund, IMF Reaches Staff-level Agreement with Ireland on =22.5 Billion
Extended Fund Facility Arrangement (Nov. 28, 2010) (online at
www.imf.org/external/np/sec/pr/2010/pr10462.htm). See also 2010 August
Oversight Report, supra note 213.
---------------------------------------------------------------------------
The rescue of AIG was initially led by FRBNY, acting on
behalf of FRB and in close consultation with Treasury. While
FRB had no role in supervising or regulating AIG and was also
not lending to the company, it was the only governmental entity
at the time with the legal authority to provide liquidity to
the financial system in emergency and exigent
circumstances.\402\ Treasury had little if any authority to
provide funds to AIG at the time given that EESA was not
enacted until October 3, 2008.\403\ Similarly, other AIG
regulatory bodies, such as state insurance regulators and the
OTS, possessed oversight authority but lacked any legal
authority to step in and provide funds to the parent
company.\404\
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\402\ The Federal Reserve's ability to act was dependent upon the
Board's authorization to invoke Section 13(3) of the Federal Reserve
Act, which was provided on September 16, 2008. For further discussion
of the legal options available to AIG in September 2008, see 2010 June
Oversight Report, supra note 395, at 79-83.
\403\ At the time FRBNY provided AIG with the $85 billion RCF,
Treasury only provided a very short statement, with then-Secretary
Paulson noting that ``[t]hese are challenging times for our financial
markets. We are working closely with the Federal Reserve, the SEC and
other regulators to enhance the stability and orderliness of our
financial markets and minimize the disruption to our economy. I support
the steps taken by the Federal Reserve tonight to assist AIG in
continuing to meet its obligations, mitigate broader disruptions and at
the same time protect the taxpayers.'' U.S. Department of the Treasury,
Statement by Secretary Henry M. Paulson, Jr., on Federal Reserve
Actions Surrounding AIG (Sept. 16, 2008) (online at www.treasury.gov/
press-center/press-releases/Pages/hp1143.aspx). In a subsequent letter
to Timothy F. Geithner, then-president and CEO of FRBNY, Secretary
Paulson stressed that ``the situation at AIG presented a substantial
and systemic threat'' to our financial markets, and that the
government's decision to assist AIG ``was necessary to prevent the
substantial disruption to financial markets and the economy that could
well have occurred from a disorderly wind-down of AIG.'' Letter from
Henry M. Paulson, Jr., secretary, U.S. Department of the Treasury, to
Timothy F. Geithner, president and chief executive officer, Federal
Reserve Bank of New York (Oct. 8, 2008) (online at
www.federalreserve.gov/monetarypolicy/files/letter_aig.pdf).
\404\ It is similarly worth noting that OTS, although it was AIG's
primary regulatory, approached AIG from a bottom-up perspective,
focused primarily on ensuring that no harm would be done to AIG's
relatively small thrift institution, as opposed to taking a top-down
approach that reviewed the overall safety and soundness of the holding
company. Given that AIG's thrift represented well under 1 percent of
the holding company's assets, this approach seems misguided at best and
raises questions about whether this is the most effective way to
regulate complex companies and monitor their systemic risks. 2010 June
Oversight Report, supra note 395, at 23.
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Through internal discussions and a dialogue with AIG and
its state insurance regulators, FRB and FRBNY, with input from
Treasury, ultimately chose to provide AIG with assistance after
identifying the systemic risks associated with the company and
contemplating the consequences of an AIG bankruptcy or partial
rescue.\405\ FRB determined that, in the then-existing
environment, ``a disorderly failure of AIG could add to already
significant levels of financial market fragility and lead to
substantially higher borrowing costs, reduced household wealth,
and materially weaker economic performance.'' \406\
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\405\ FRBNY and Treasury briefing with Panel and Panel staff (Apr.
12, 2010).
\406\ Board of Governors of the Federal Reserve System, Press
Release (Sept. 16, 2008) (online at www.federalreserve.gov/newsevents/
press/other/20080916a.htm) (hereinafter ``Fed Press Release on AIG
Assistance'').
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Secretary Geithner has stated that ``[t]he decision to
rescue AIG was exceptionally difficult and enormously
consequential.'' \407\ Chairman Bernanke noted that the Federal
Reserve's decision-making was driven by the ``prevailing market
conditions and the size and composition of AIG's obligations,''
\408\ as well as ``AIG's central role in a number of markets
other firms use to manage risks, and the size and composition
of AIG's balance sheet.'' \409\ The Federal Reserve's actions,
with the support of Treasury, were also informed by its
judgment that an AIG collapse would have been much more severe
than that of Lehman Brothers because of its global operations,
substantial and varied retail and institutional customer base,
and the various types of financial services it provided.\410\
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\407\ House Committee on Oversight and Government Reform, Written
Testimony of Timothy F. Geithner, secretary, U.S. Department of the
Treasury, The Federal Bailout of AIG, at 3 (Jan. 27, 2010) (online at
oversight.house.gov/images/stories/Hearings/Committee_on_Oversight/
TESTIMONY-Geithner.pdf) (hereinafter ``Geithner Written Testimony
before House Committee on Oversight'').
\408\ Senate Committee on Banking, Housing, and Urban Affairs,
Written Testimony of Ben S. Bernanke, chairman, Board of Governors of
the Federal Reserve System, Turmoil in U.S. Credit Markets: Recent
Actions Regarding Government Sponsored Entities, Investment Banks and
Other Financial Institutions, at 2 (Sept. 23, 2008) (online at
banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore_id=bbba8289-b8fa-46a2-a542-
b65065b623a1).
\409\ Ben S. Bernanke, chairman, Board of Governors of the Federal
Reserve System, Remarks at the National Association for Business
Economics, 50th Annual Meeting, Washington, DC, Current Economic and
Financial Conditions (Oct. 7, 2008) (online at www.federalreserve.gov/
newsevents/speech/bernanke20081007a.htm).
\410\ Ben S. Bernanke, chairman, Board of Governors of the Federal
Reserve System, Speech at the Morehouse College, Atlanta, GA, Four
Questions About the Financial Crisis (Apr. 14, 2009) (online at
www.federalreserve.gov/newsevents/speech/bernanke20090414a.htm).
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a. Initial Government Assistance (Non-TARP Initiatives)
As noted, on September 16, 2008, the FRB, with the full
support of Treasury, announced that, using its authority under
Section 13(3) of the Federal Reserve Act,\411\ it had
authorized FRBNY to establish an $85.0 billion RCF for
AIG.\412\ This facility would be secured by AIG's assets and
``assist AIG in meeting its obligations as they come due and
facilitate a process under which AIG will sell certain of its
businesses in an orderly manner, with the least possible
disruption to the overall economy.'' \413\ In exchange for the
provision of the credit facility by the federal government, AIG
provided Treasury with preferred shares and warrants that, if
exercised, would give the government a 79.9 percent ownership
stake in AIG.\414\
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\411\ The Federal Reserve Act, enacted December 23, 1919, created
the Federal Reserve System. Section 13(3) of the Act gives the Board of
Governors of the Federal Reserve the power to authorize any regional
Federal Reserve bank to provide funding in unusual or exigent
circumstances, provided that evidence is obtained that a participant is
unable to secure adequate credit accommodations from other banking
institutions. Board of Governors of the Federal Reserve System, Federal
Reserve Act: Section 13. Powers of Federal Reserve Banks (online at
www.federalreserve.gov/aboutthefed/section13.htm (accessed Mar. 11,
2011).
\412\ Fed Press Release on AIG Assistance, supra note 406. See also
Henry M. Paulson, Jr., On the Brink (2010).
\413\ Board of Governors of the Federal Reserve System, Report
Pursuant to Section 129 of the Emergency Economic Stabilization Act of
2008: Securities Borrowing Facility for American International Group,
at 2 (Oct. 14, 2008) (online at www.federalreserve.gov/monetarypolicy/
files/129aigsecborrowfacility.pdf) (hereinafter ``Fed Report Pursuant
to Section 129 of the EESA'').
\414\ Id. at 2.
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By September 30, 2008, just 14 days after FRB approved the
$85.0 billion RCF, AIG had already drawn down approximately
$61.3 billion of that money.\415\ It became apparent that the
facility would be inadequate to meet all of AIG's
obligations.\416\ FRB and FRBNY worried about further ratings
downgrades, which would--among other adverse effects--trigger
more collateral calls on AIGFP.
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\415\ AIG used these funds for the following: $35.3 billion to
cover loans to AIGFP for collateral postings, Guaranteed Investment
Agreements, and other maturities; $13.3 billion in capital
contributions for insurance subsidiaries; $3.1 billion to repay
securities lending obligations; $2.7 billion for AIG funding commercial
paper maturities; $1.5 billion for intercompany loan repayment; $1.0
billion each in contributions for AIG Consumer Finance Group's
subsidiaries and debt repayments; and $2.7 billion in additional
borrowing. Including paid in kind interest and fees on the amount
borrowed, AIG's total balance outstanding on the facility was $62.96
billion at the end of September 2008. American International Group,
Inc., Form 10-Q for the Quarterly Period Ended September 30, 2008, at
52 (Nov. 10, 2008) (online at www.sec.gov/Archives/edgar/data/5272/
000095012308014821/y72212e10vq.htm).
\416\ Fed Report Pursuant to Section 129 of the EESA, supra note
413, at 2.
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On October 6, 2008, FRB approved an additional Securities
Borrowing Facility to allow FRBNY to lend up to $37.8 billion
to AIG.\417\ The lending would occur on an overnight basis,
with FRBNY borrowing investment-grade fixed income securities
from AIG's life insurance subsidiaries in return for cash
collateral.\418\ The facility allowed AIG to replenish
liquidity to its securities lending program--by extending its
then-outstanding lending obligations where those obligations
were not rolled over or replaced by transactions with other
private market participants--while giving FRBNY possession and
control of the securities.
---------------------------------------------------------------------------
\417\ Fed Report Pursuant to Section 129 of the EESA, supra note
413, at 2. The Federal Reserve Board publicly announced the Securities
Borrowing Facility on October 8, 2008, the day that FRBNY established
it. See Board of Governors of the Federal Reserve System, Press Release
(Oct. 8, 2008) (online at www.federalreserve.gov/newsevents/press/
other/20081008a.htm).
\418\ These securities were previously lent by AIG's insurance
subsidiaries to third parties. The maximum amount of credit that FRBNY
could extend at any one time was $37.8 billion. The Board made this
authorization under Section 13(3) of the Federal Reserve Act. Fed
Regulatory Reform: AIG, Maiden Lane II and III, supra note 40.
---------------------------------------------------------------------------
b. Additional Government Assistance (Treasury Action)
As discussed above, Treasury's participation in the initial
rescue of AIG was limited to an advisory role. It is clear,
however, that all actions taken by FRBNY were in close
consultation with Treasury. After passage of EESA in October
2008, Treasury took on a greater role in the AIG rescue as the
government expanded and restructured its aid to the company.
Additional assistance was necessitated by an ongoing decline in
asset values and AIG's mounting debt burden, both of which
raised concern with credit rating agencies.
The credit rating agencies advised AIG that the company's
upcoming November 10 report of third quarter earnings results--
which would reveal a loss of $24.5 billion \419\--would likely
trigger a ratings downgrade in the absence of a ``parallel
announcement of solutions to its liquidity problems.'' \420\
AIG was having difficulty selling assets to pay down debt from
the RCF and meet anticipated liquidity needs, particularly in
light of continuing collateral calls under its credit default
swap contracts.\421\ Consequently, in the days leading up to
AIG's earnings announcement, the Federal Reserve and Treasury
hurried to put together additional financial assistance from
the federal government that would address AIG's growing debt
burden.
---------------------------------------------------------------------------
\419\ Of which $19 billion was due to the securities lending
program and AIGFP's CDS exposure. Board of Governors of the Federal
Reserve System, Report Pursuant to Section 129 of the Emergency
Economic Stabilization Act of 2008: Restructuring of the Government's
Financial Support to the American International Group, Inc. on November
10, 2008, at 4 (Nov. 10, 2008) (online at federalreserve.gov/
monetarypolicy/files/129aigrestructure.pdf).
\420\ House Committee on Oversight and Government Reform, Written
Testimony of Thomas C. Baxter, executive vice president and general
counsel, Federal Reserve Bank of New York, The Federal Bailout of AIG,
at 8-9 (Jan. 27, 2010) (online at oversight.house.gov/images/stories/
Hearings/pdfs/20100127baxter.pdf); FRBNY and Treasury briefing with
Panel and Panel staff (Apr. 12, 2010).
\421\ Congressional Oversight Panel, Joint Written Testimony of
Thomas C. Baxter, Jr., general counsel and executive vice president of
the legal group, and Sarah Dahlgren, executive vice president of
special investments management and AIG monitoring, Federal Reserve Bank
of New York, COP Hearing on TARP and Other Assistance to AIG, at 9 (May
26, 2010) (online at cop.senate.gov/documents/testimony-052610-
baxter.pdf).
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This resulted in the November 10, 2008 announcement by
FRBNY and Treasury of a comprehensive multi-pronged plan to
address AIG's liquidity issues, create a ``more durable capital
structure,'' and provide AIG with more time and increased
flexibility to sell assets and repay the government.\422\
Significantly, Treasury's TARP equity facilities allowed AIG to
access capital without drawing on credit lines, avoiding an
increase in the company's outstanding debt (and thus further
pressure on its credit ratings).\423\ As Secretary Geithner
later stated, ``[a]voiding any downgrade of AIG's credit rating
was absolutely essential to sustaining the firm's viability and
protecting the taxpayers' investment.'' \424\
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\422\ Board of Governors of the Federal Reserve System, Federal
Reserve Board and Treasury Department Announce Restructuring of
Financial Support to AIG (Nov. 10, 2008) (online at
www.federalreserve.gov/newsevents/press/other/20081110a.htm).
\423\ FRBNY and Treasury briefing with Panel and Panel staff (Apr.
12, 2010).
\424\ Geithner Written Testimony before House Committee on
Oversight, supra note 407, at 8.
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As part of the announcement, Treasury said it planned to
use $40 billion of TARP money to purchase newly issued AIG
perpetual preferred shares and warrants to purchase AIG common
stock;\425\ this initiative was known as the Systemically
Significant Failing Institutions program (SSFI), and AIG was
its only beneficiary. At the same time, FRBNY reduced AIG's
line of credit under the RCF to $60 billion from $85 billion.
FRBNY also announced that it was restructuring the facility by
extending the loan from two to five years and lowering the
interest rate and fees charged.\426\
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\425\ The perpetual preferred shares were also known as the Series
D Preferred Stock Purchase Agreement. American International Group,
Inc., U.S. Treasury, Federal Reserve and AIG Establish Comprehensive
Solution for AIG, at 1 (Nov. 10, 2008) (online at media.corporate-
ir.net/media_files/irol/76/76115/reports/Restructuring10Nov08LTR.PDF)
(hereinafter ``U.S. Treasury & Federal Reserve Craft Solution for
AIG'').
\426\ See Fed Regulatory Reform: AIG, Maiden Lane II and III, supra
note 40.
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Also on that day, Treasury and FRB announced a major
initiative to increase and restructure federal assistance to
AIG; FRBNY would be authorized to create two SPVs--Maiden Lane
II and Maiden Lane III--to purchase troubled assets from AIG
and its subsidiaries. Maiden Lane II was designed to address
AIG's liquidity problems by purchasing RMBS assets from its
securities lending collateral portfolio.\427\ Maiden Lane III
was authorized to provide up to $30.0 billion ($24.3 billion
from FRBNY and $5.0 billion from AIG) to purchase the
collateralized debt obligations (held by the firm's
counterparties) underlying AIG's credit swap contracts.\428\
---------------------------------------------------------------------------
\427\ Initially $22.5 billion was authorized, of which $19.5
billion was lent in order to purchase $39.3 billion (at par value) of
RMBS at the then-current market price of $20.8 billion. See 2010 June
Oversight Report, supra note 395, at 87-88; Board of Governors of the
Federal Reserve System, Monthly Report on Credit and Liquidity Programs
and the Balance Sheet, at 22 (Jan. 2011) (online at
www.federalreserve.gov/monetarypolicy/files/
monthlyclbsreport201101.pdf) (hereinafter ``Fed Monthly Report on
Credit, Liquidity Programs, and Balance Sheet'').
\428\ See 2010 June Oversight Report, supra note 395, at 91; Fed
Monthly Report on Credit, Liquidity Programs, and Balance Sheet, supra
note 427, at 23.
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Although Maiden Lane II, Maiden Lane III, and Treasury's
initial TARP capital infusion helped relieve AIG's financial
pressures, asset valuations continued to decline, and AIG's
losses increased through the end of 2008.\429\ These losses
raised the prospect of another round of rating agency
downgrades and collateral calls that would require further cash
postings from AIG. In response, the Federal Reserve and
Treasury announced on March 2, 2009, that they would again
restructure their existing aid to AIG and provide additional
assistance in order to stabilize AIG and protect financial
markets and the existing investment.\430\
---------------------------------------------------------------------------
\429\ The company reported a net loss of $61.7 billion for the
fourth quarter of 2008 on March 2, 2009, capping off a year in which
AIG incurred approximately $99 billion in total net losses. 2010 June
Oversight Report, supra note 395, at 94.
\430\ See U.S. Department of the Treasury, U.S. Treasury and
Federal Reserve Board Announce Participation in AIG Restructuring Plan
(Mar. 2, 2009) (online at www.treasury.gov/press-center/press-releases/
Pages/tg44.aspx). See also House Committee on Financial Services,
Written Testimony of William C. Dudley, president and chief executive
officer, Federal Reserve Bank of New York, Oversight of the Federal
Government's Intervention at American International Group, at 5 (Mar.
24, 2009) (online at www.house.gov/apps/list/hearing/financialsvcs_dem/
hr03240923.shtml).
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Under the March 2009 restructuring, Treasury substantially
increased its involvement in AIG, with the goal of reducing
AIG's leverage, or debt load.\431\ Treasury announced a new
five-year standby $29.8 billion TARP preferred stock facility,
which would allow AIG to make draw-downs as needed.\432\
Treasury also exchanged its November 2008 cumulative preferred
stock interest for noncumulative preferred stock, which more
closely resembles common stock and is, therefore, viewed more
favorably as a source of funding by the credit rating
agencies.\433\
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\431\ FRBNY also took several actions at this time with respect to
the terms and structure of the RCF. First, it announced the creation of
SPVs for American International Assurance Company, Limited (AIA) and
American Life Insurance Company (ALICO), two of AIG's foreign insurance
company subsidiaries, through which AIG would contribute the equity of
AIA and ALICO in exchange for preferred and common interests in the
SPVs. FRBNY received preferred interests of $16 billion in the AIA SPV
and $9 billion in the ALICO SPV. AIG would then transfer the preferred
interests in the SPVs to FRBNY in exchange for a $25 billion reduction
in the outstanding balance of the RCF, to $35 billion. 2010 June
Oversight Report, supra note 395, at 95, 97.
\432\ The total amount of credit made available under the second
TARP intervention was $30.0 billion, which included $165 million
dedicated for retention bonuses of AIGFP employees. See 2010 June
Oversight Report, supra note 395, at 95; Treasury Transactions Report,
supra note 36.
\433\ Non-cumulative preferred stock is more like common stock
largely because its dividends are non-cumulative, which means missed
dividend payments do not accumulate for later payment. At the time, the
$1.6 billion in dividends AIG did not pay were capitalized and added as
an obligation to be repaid prior to the company redeeming the newly
issued Series E preferred stock. U.S. Treasury & Federal Reserve Craft
Solution for AIG, supra note 425, at 1; Treasury Transactions Report,
supra note 36.
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These March 2009 announcements represented the final round
of government support prior to the publication of the Panel's
June 2010 report on AIG.
B. Summary of COP Report and Findings \434\
---------------------------------------------------------------------------
\434\ For a more complete discussion of the Panel's findings, see
Section K and the conclusions of the Panel's June 2010 oversight
report. 2010 June Oversight Report, supra note 395, at 230-235.
---------------------------------------------------------------------------
1. AIG Changed a Fundamental Market Relationship
By providing a complete bailout that called for no shared
sacrifice among AIG and its creditors, FRBNY and Treasury
fundamentally changed the rules of America's financial
marketplace.
U.S. policy has long drawn a distinction between two
different types of investments. The first type is ``safe''
products, such as checking accounts, which are highly regulated
and are intended to be accessible and relatively risk free to
even unsophisticated investors. Banks that offer checking
accounts must accept a substantial degree of regulatory
scrutiny, offer standardized features, and pay for FDIC
insurance on their deposits. In return, the bank and its
customers benefit from an explicit government guarantee: within
certain limitations, no checking account in the United States
will be allowed to lose even a penny of value.
By contrast, ``risky'' products, which are more loosely
regulated, are aimed at more sophisticated players. These
products often offer much higher profit margins for banks and
much higher potential returns to investors, but they have never
benefited from any government guarantee.
Before the AIG bailout, the derivatives market appeared to
fall cleanly in the second category. Yet by bailing out AIG and
its counterparties, the federal government signaled that the
entire derivatives market--which had been explicitly and
completely deregulated by Congress through the Commodities
Futures Modernization Act \435\--would now benefit from the
same government safety net provided to fully regulated
financial products. In essence, the government distorted the
marketplace by transforming highly risky derivative bets into
fully guaranteed transactions, with the American taxpayer
standing as guarantor.
---------------------------------------------------------------------------
\435\ The Commodities Futures Modernization Act was passed by
Congress and signed into law by President Bill Clinton in December
2000. For a further discussion of AIG's regulatory scheme, see 2010
June Oversight Report, supra note 395, at 19-24.
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The Panel believes that the moral hazard problem unleashed
by making whole AIG's counterparties in unregulated,
unguaranteed transactions undermined the credibility of
specific efforts at addressing the financial crisis that
followed, including the entirety of the TARP, as well as
America's system of financial regulation.
2. The Powerful Role of Credit Rating Agencies
Considerations about credit rating agencies were central to
FRBNY's, and later Treasury's, decision to assist AIG, and
shaped many of the decisions that had to be made during the
course of the rescue.\436\ Indeed, it is no exaggeration to say
that concerns about rating downgrades drove government policy
in regard to AIG.
---------------------------------------------------------------------------
\436\ See 2010 June Oversight Report, supra note 395, at 52-53,
150, and 230-231.
---------------------------------------------------------------------------
As the market's most widely followed judges of financial
soundness, credit rating agencies wield immense power, whether
they consciously use it or not. In this case, government
decision makers felt compelled to follow a particular course of
action out of a fear of what credit rating agencies might do if
they acted otherwise. The fact that this small group of private
firms was able to command such deference from the federal
government raises questions about their role within the
marketplace and how effectively and accountably they have
wielded their power.\437\
---------------------------------------------------------------------------
\437\ Credit rating agencies are private companies subject to the
appropriate registration and approval of the SEC as nationally
recognized statistical rating organizations (NRSROs). A complete list
of NRSROs--including Moody's Investor Services, Standard & Poor's
Ratings Services, and Fitch--can be found on the SEC's website. See
U.S. Securities and Exchange Commission, Commission Orders Granting
NRSRO Registration (online at www.sec.gov/divisions/marketreg/
ratingagency.htm#nrsroorders) (accessed March 4, 2011).
---------------------------------------------------------------------------
3. The Options Available to the Government \438\
---------------------------------------------------------------------------
\438\ For a more complete discussion of the Panel's findings, see
Section F.1.b of the Panel's June 2010 oversight report. 2010 June
Oversight Report, supra note 395, at 139-164.
---------------------------------------------------------------------------
FRBNY and Treasury justify AIG's extraordinary bailout by
saying that they faced a ``binary choice'' between allowing AIG
to fail, which would have resulted in chaos, or rescuing the
entire institution, including all of its business
partners.\439\ The Panel was skeptical of this reasoning. The
evidence suggested that government had more than two options at
its disposal, and that some of the alternatives would not have
involved payment in full of the counterparties and other AIG
creditors.
---------------------------------------------------------------------------
\439\ According to Thomas Baxter Jr., FRBNY's general counsel, the
government officials faced ``a binary choice to either let AIG file for
bankruptcy or to provide it with liquidity.'' 2010 June Oversight
Report, supra note 395, at 69.
---------------------------------------------------------------------------
In interviews and meetings with participants on all sides
in these events, the Panel identified a key decision point: the
period between Sunday afternoon, September 14, 2008, and
Tuesday morning, September 16, 2008. This was the period during
which FRBNY sought to encourage a private effort to lend
sufficient funds to AIG to address its liquidity crisis, while
at the same time trying to determine what the consequences
would be of the bankruptcy of AIG's holding company.
The Panel is concerned that the government put the effort
to organize a private AIG rescue in the hands of only two
banks--banks with severe conflicts of interest given that they
would have been among the largest beneficiaries of a taxpayer
bailout.\440\ By failing to bring in other players, the
government neglected to use all of its negotiating leverage.
There is no doubt that a private rescue would have been
difficult, perhaps impossible, to arrange, but the Panel
concluded that if the effort had succeeded, the impact on
market confidence would have been extraordinary, particularly
for a solution that avoided putting taxpayer dollars at risk.
---------------------------------------------------------------------------
\440\ 2010 June Oversight Report, supra note 395, at 74-75.
---------------------------------------------------------------------------
Further, even after the Federal Reserve and Treasury had
decided that a public rescue was the only choice, they still
could have pursued options other than paying every creditor and
every counterparty at 100 cents on the dollar. Arrangements in
which different creditors accept varying degrees of loss are
common in bankruptcy proceedings or other negotiations when a
distressed company is involved, and in this case the government
failed to use its significant negotiating leverage to extract
such compromises. As Martin Bienenstock of Dewey & LeBoeuf
testified to the Panel, ``FRBNY was saving AIG with taxpayer
funds due to the losses sustained by the business divisions
transacting business with these creditor groups, and a
fundamental principle of workouts is shared sacrifice,
especially when creditors are being made better off than they
would be if AIG were left to file bankruptcy.'' As such, ``it
was very plausible to have obtained material creditor discounts
from some creditor groups as part of that process without
undermining its overarching goal of preventing systemic
impairment of the financial system and without compromising the
Federal Reserve Board's principles.'' \441\
---------------------------------------------------------------------------
\441\ See Congressional Oversight Panel, Written Testimony of
Martin J. Bienenstock, partner and chair of business solutions and
government department, Dewey & LeBoeuf, COP Hearing on TARP and Other
Assistance to AIG, at 1, 3 (May 26, 2010) (online at cop.senate.gov/
documents/testimony-052610-bienenstock.pdf).
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Ultimately, it is impossible to stand in the shoes of those
who had to make decisions during those hours, to weigh the
risks of accelerated systemic collapse against the profound
need for AIG and its counterparties to share in the costs and
the risks of that rescue, and to weigh those considerations not
today in an atmosphere of relative calm, but in the middle of
the night in the midst of a financial collapse. All the Panel
can do is observe the costs to the public's confidence in our
public institutions from the failure to require that AIG's
counterparties in the financial sector share the burden of the
AIG rescue.
4. The Government's Authorities in a Financial Crisis
The Federal Reserve and Treasury have explained the
haphazard nature of the AIG rescue by noting that they lacked
specific tools to handle the collapse of such a complex,
multisector, multinational financial corporation.\442\ To some
extent this argument is a red herring: the relevant authorities
should have monitored AIG more closely, discovered its
vulnerability earlier, and sought any needed new authorities
from Congress in advance of the crisis. Even after AIG began to
unravel, the Federal Reserve and Treasury could have used their
existing authority more aggressively.
---------------------------------------------------------------------------
\442\ See Section B.2 of the Panel's June 2010 oversight report for
an overview of the company's operations and regulatory framework. See
2010 June Oversight Report, supra note 395, at 19-24.
---------------------------------------------------------------------------
5. Conflicts
The AIG rescue illustrated the tangled nature of
relationships on Wall Street. People from the same small group
of law firms, investment banks, and regulators appear in the
AIG saga (and many other aspects of the financial crisis) in
many roles, and sometimes representing different and
conflicting interests.\443\ The lawyers who represented banks
trying to put together a rescue package for AIG became the
lawyers to FRBNY, shifting sides in a matter of minutes. Those
same banks appear first as advisors, then potential rescuers,
then as counterparties to several different kinds of agreements
with AIG, and thereby as the direct and indirect beneficiaries
of the government rescue. Many of the regulators and government
officials (in both administrations) are former employees of the
entities they oversee or that benefited from the rescue.
---------------------------------------------------------------------------
\443\ See 2010 June Oversight Report, supra note 395, at 72-76.
---------------------------------------------------------------------------
The government justified its decision to draw from a
limited pool of lawyers and advisors by citing the need for
expertise from Wall Street insiders familiar with AIG. Even so,
the government entities should have recognized that at a time
when the American taxpayer was being asked to bear
extraordinary burdens, they had a special responsibility to
ensure that their actions did not undermine public trust by
failing to address all potential conflicts and the appearance
of conflicts that could arise. The need to address conflicts
and the appearance of conflicts by government actors,
counterparties, lawyers, and all other agents involved in this
drama was wrongly treated largely as a detail that could be
subjugated to the primary goal of keeping the financial system
up and running.
Even setting aside concerns about actual or apparent
conflicts of interest, the limited pool of people involved in
AIG's rescue raises a broader concern. Everyone involved in
AIG's rescue had the mindset of either a banker or a banking
regulator. The discussions did not include other voices that
might have brought different ideas and a broader view of the
national interest. It is unsurprising, then, that the American
public remains convinced that the rescue was designed by Wall
Street to help fellow Wall Streeters, with less emphasis given
to protecting the public trust.
The Panel recognized that government officials were
confronting an immediate crisis and had to act in haste. Yet it
is at moments of crisis that the government has its most acute
obligation to protect the public interest by avoiding even the
appearance of impropriety. As Mr. Baxter of FRBNY told the
Panel, ``[i]f we should go through this again, we [would] need
to be more mindful of how our actions can be perceived. The
lesson learned for me personally here is that we need to be
mindful of that and perhaps change our behavior as a result of
the perception, not the actuality.'' \444\
---------------------------------------------------------------------------
\444\ Congressional Oversight Panel, Testimony of Thomas C. Baxter,
Jr., general counsel and executive vice president of the legal group,
Federal Reserve Bank of New York, COP Hearing on TARP and Other
Assistance to AIG, at 102 (May 26, 2010) (online at cop.senate.gov/
documents/transcript-052610-aig.pdf).
---------------------------------------------------------------------------
C. Panel Recommendations
1. Government Exit Strategy/Equity Market Risk Mitigation
In its June 2010 report, the Panel recommended that
Treasury should explore options aimed at accelerated sales of
smaller portions of its stake in AIG sooner rather than later,
to help mitigate longer term equity market risks, and transfer
some of the risk from the taxpayer to the public markets.\445\
While the Panel recognized the danger in a prolonged investment
strategy, political expediency should not trump the opportunity
for taxpayers to realize as much value as possible from their
investment. Thus, the Panel cautioned against a rapid exit in
the absence of clearly defined parameters for achieving the
maximum risk-adjusted return to the taxpayer. Nonetheless,
given the significant equity market and company execution risks
involved in a long-term, back-end-loaded exit strategy, the
Panel noted that the government's exposure to AIG should be
minimized (and shifted to private shareholders) where possible
via accelerated sales of a small minority of the government's
holdings, provided this could be done with limited harm to the
share price. In this sense, the interests of AIG's government
and private shareholders would be aligned, as the taxpayer
would be best served by enhancing value before a broader exit
strategy via the public markets could be executed.
---------------------------------------------------------------------------
\445\ 2010 June Oversight Report, supra note 395, at 202.
---------------------------------------------------------------------------
2. Status of COP Recommendations
The Panel's recommendation that Treasury should explore
options aimed at reducing its equity market exposure to AIG
remains something of a work in progress.\446\ In September
2010, AIG and Treasury reached an agreement to restructure
AIG's obligations under the TARP, in which Treasury exchanged
its preferred stock for 1.1 billion shares of AIG common stock
on January 14, 2011 (discussed in more detail below). While
AIG's improving outlook facilitated this announcement, these
actions have not mitigated long-term equity market risk from
Treasury's holdings. Although this recapitalization temporarily
increases Treasury's equity market exposure to AIG (given the
conversion of its preferred equity stake to common equity), the
transaction does provide a path for the government to pursue
share sales in the public markets that would reduce its
exposure, potentially as soon as the second quarter of 2011.
The assumption of FRBNY's preferred interest in AIG SPVs serves
to increase Treasury's overall exposure to AIG, but via a
mechanism that fully collateralizes this exposure, without
assuming additional equity market risks.
---------------------------------------------------------------------------
\446\ 2010 June Oversight Report, supra note 395, at 170.
---------------------------------------------------------------------------
D. Updates
1. Recent Developments
On September 30, 2010, AIG, Treasury, FRBNY, and the AIG
Credit Facility Trust (Trust) announced their intent to enter
into a series of transactions that would ultimately allow the
government to exit AIG.\447\ The timing and substance of this
announcement clarifying the government's exit strategy was
generally consistent with the expectations outlined in the
Panel's June report.\448\ The aggregate effect of this
agreement, which was subsequently executed, was to repay all
outstanding obligations to FRBNY, consolidate AIG's government
ownership with Treasury, and provide the government with a
pathway to monetize its holdings. The integrated steps involved
in the execution of AIG's recapitalization plan on January 14,
2011--the most significant being the repayment of FRBNY in full
and Treasury exchanging its preferred equity interests for
common stock--are outlined below.\449\
---------------------------------------------------------------------------
\447\ American International Group, Inc., AIG Announces Plan To
Repay U.S. Government (Sept. 30, 2010) (online at www.aigcorporate.com/
newsroom/2010_September/AIGAnnouncesPlantoRepay30Sept2010.pdf). This
agreement was supplemented by a master transaction agreement on
December 8, 2010. American International Group, Inc., AIG Files Master
Agreement on Recapitalization Plan (Dec. 8, 2010) (online at
ir.aigcorporate.com/External.File?t =2&item=g7rqBLVLuv81UAmrh20Mp
3rr7lYtG5aXEd/NUIhOaDRM1TgAKUfc NQqWGNGO+veYq18TQTV4xM1BjE/CQAuJPw==).
While largely similar to the recapitalization plan released on
September 30, it contains two new pieces of material information.
First, the terms of Treasury's role as a selling shareholder have been
somewhat clarified. Treasury has the right to participate in any
registered stock offering and can demand twice in a year that AIG
effect a registered market offering of shares after the earlier of
August 15, 2011 or AIG's completion of a primary equity offering.
Treasury can also dictate the terms and frequency of any sales of new
AIG shares until the government's ownership falls to under 33 percent.
Finally, the agreement provides additional clarity on future AIG
capital raises. AIG may raise up to $3 billion of common equity by
August 15, 2011 (and can raise an additional $4 billion with Treasury's
consent, for a total of $7 billion in additional equity).
\448\ 2010 June Oversight Report, supra note 395, at 222.
\449\ American International Group, Inc., AIG Executes Plan to
Repay U.S. Government (Jan. 14, 2011) (online at ir.aigcorporate.com/
External.File? t=2&item=g7rqBLVLuv81UAmrh20Mp
31WhknkljlRVwaPlA8x40UnwpUYeTWq NeJMSo+ju5ThNwA5rr5tEDobelzmAXWiow==);
U.S. Department of the Treasury, Treasury Announces Completion of the
American International Group Recapitalization Transaction (Jan. 14,
2011) (online at www.treasury.gov/press-center/press-releases/Pages/
tg1024.aspx); Federal Reserve Board of New York, New York Fed Ends AIG
Assistance with Full Repayment (Jan. 14, 2011) (online at
www.newyorkfed.org/newsevents/news/aboutthefed/2011/oa110114.html).
---------------------------------------------------------------------------
Repayment and Termination of the FRBNY Credit
Facility: FRBNY, which has repayment priority over Treasury,
received approximately $21 billion in cash to redeem its
outstanding balance and accrued interest and fees. AIG used
funds from asset sales--the IPO of American International
Assurance Company (AIA) and sale of American Life Insurance
Company (ALICO)--to facilitate the repayment of amounts owed
under the FRBNY Credit Facility.\450\
---------------------------------------------------------------------------
\450\ As described in a regulatory filing AIG made with the SEC on
January 14, 2011: ``[a]t the Closing, AIG repaid FRBNY approximately
$21 billion in cash, representing complete repayment of all amounts
owing under the Credit Agreement (as amended, the ``FRBNY Credit
Facility''), dated as of September 22, 2008, and the FRBNY Credit
Facility was terminated. The funds for the repayment came from the net
cash proceeds from AIG's sale of 67 percent of the ordinary shares of
AIA Group Limited (``AIA'') in its initial public offering and from
AIG's sale of American Life Insurance Company (``ALICO''). These funds
were loaned to AIG, in the form of secured limited recourse debt (the
``SPV Intercompany Loans''), from the SPVs that hold the proceeds of
the AIA IPO and the ALICO sale. The SPV Intercompany Loans are secured
by pledges by AIG and certain of its subsidiaries of, among other
collateral, certain of their equity interests in Nan Shan Life
Insurance Company, Ltd. (``Nan Shan''), AIG Star Life Insurance Co.
Ltd. (``AIG Star''), AIG Edison Life Insurance Company (``AIG Edison'')
and International Lease Finance Corporation (collectively with Nan
Shan, AIG Star and AIG Edison, the ``Designated Entities''), as well as
the remaining AIA ordinary shares held by the AIA SPV and certain of
the MetLife, Inc. securities received from the sale of ALICO held by
the ALICO SPV. The proceeds from any sale or disposition of the equity
of such Designated Entities and such other assets will be used to repay
the SPV Intercompany Loans and the recourse on the SPV Intercompany
Loans is generally limited to foreclosing on the pledged collateral,
except to the extent of the fair market value of equity interests of
the Designated Entities that cannot be pledged because of regulatory or
tax considerations.'' American International Group, Inc., Form 8-K for
the Period Ended January 14, 2011 (Jan. 14, 2011) (online at
www.sec.gov/Archives/edgar/data/5272/000095012311003061/y88987e8vk.htm)
(hereinafter ``AIG: Form 8-K Period Ended January 14, 2011'').
---------------------------------------------------------------------------
Repurchase and Exchange of SPV Preferred
Interests: AIG drew down an additional $20.3 billion in TARP
funds (Series F) towards the repurchase of SPV interests from
FRBNY. In consideration for this new funding, AIG transferred
$20.3 billion of FRBNY's former SPV Preferred interests to
Treasury.\451\
---------------------------------------------------------------------------
\451\ As outlined in a company filing on January 14, 2011: ``[a]t
the Closing, AIG drew down approximately $20 billion (the ``Series F
Closing Drawdown Amount'') under the Treasury Department's commitment
(the ``Treasury Department Commitment'') pursuant to the Securities
Purchase Agreement, dated as of April 17, 2009 (the ``Series F SPA''),
between AIG and the Treasury Department relating to AIG's Series F
Fixed Rate Non-Cumulative Perpetual Preferred Stock, par value $5.00
per share (the ``Series F Preferred Stock''). The Series F Closing
Drawdown Amount was the full amount remaining under the Treasury
Department Commitment, less $2 billion that AIG designated to be
available after the Closing for general corporate purposes under a
commitment relating to AIG's Series G Cumulative Mandatory Convertible
Preferred Stock, par value $5.00 per share (the ``Series G Preferred
Stock''), described below (the ``Series G Drawdown Right''). The right
of AIG to draw on the Treasury Department Commitment (other than the
Series G Drawdown Right) was terminated.
AIG applied certain proceeds from asset sales to retire a portion
of FRBNY's preferred interests in the ALICO SPV and used the Series F
Closing Drawdown Amount to repurchase the remainder of FRBNY's
preferred interests in the ALICO SPV and all of FRBNY's preferred
interests in the AIA SPV (``SPV Preferred Interests''). AIG transferred
the SPV Preferred Interests to the Treasury Department as part of the
consideration for the exchange of the Series F Preferred Stock,
described below.
Under the Master Transaction Agreement, the Treasury Department, so
long as it holds SPV Preferred Interests, will have the right, subject
to existing contractual restrictions, to require AIG to dispose of the
remaining AIA ordinary shares held by the AIA SPV and certain of the
MetLife, Inc. securities received from the sale of ALICO held by the
ALICO SPV. The consent of the Treasury Department, so long as it holds
SPV Preferred Interests, will also be required for AIG to take
specified significant actions with respect to the Designated Entities,
including initial public offerings, sales, significant acquisitions or
dispositions and incurrence of significant levels of indebtedness. If
any SPV Preferred Interests are outstanding on May 1, 2013, the
Treasury Department will have the right to compel the sale of all or a
portion of one or more of the Designated Entities on terms that it will
determine.
As a result of these transactions, the SPV Preferred Interests will
no longer be considered permanent equity on AIG's balance sheet, and
will be classified as redeemable noncontrolling interests in partially
owned consolidated subsidiaries.'' AIG: Form 8-K Period Ended January
14, 2011, supra note 450.
---------------------------------------------------------------------------
Exchange of AIG Preferred for Common Stock: In
the aggregate, Treasury converted $47.5 billion in TARP
preferred stock at $45 per share for an equivalent amount of
equity (representing approximately 1.1 billion shares).\452\
Additionally, the Trust's Series C preferred shares were
converted into approximately 563 million shares of AIG common
equity. These conversions resulted in Treasury holding a 92.1
percent equity stake in AIG.
---------------------------------------------------------------------------
\452\ This figure includes $40.0 billion of Series E preferred
stock converted to equity and $7.5 billion of Series F preferred stock
converted to equity. Treasury Transactions Report, supra note 36.
As outlined in a company filing on January 14, 2011: ``[a]t the
Closing, AIG and the Treasury Department amended and restated the
Series F SPA to provide for the issuance of 20,000 shares of Series G
Preferred Stock by AIG to the Treasury Department. The Series G
Preferred Stock initially has a liquidation preference of zero, which
will increase by the amount of any funds drawn down by AIG under the
Series G Drawdown Right from the Closing until March 31, 2012 (or the
earlier termination of the Series G Drawdown Right).
At the Closing (i) the shares of AIG's Series C Perpetual,
Convertible, Participating Preferred Stock, par value $5.00 per share
(the ``Series C Preferred Stock''), held by the Trust were exchanged
for 562,868,096 shares of AIG common stock, par value $2.50 per share
(``AIG Common Stock''), which were subsequently transferred by the
Trust to the Treasury Department; (ii) the shares of AIG's Series E
Fixed Rate Non-Cumulative Perpetual Preferred Stock, par value $5.00
per share (the ``Series E Preferred Stock''), held by the Treasury
Department were exchanged for 924,546,133 shares of AIG Common Stock;
and (iii) the shares of the Series F Preferred Stock held by the
Treasury Department were exchanged for (a) the SPV Preferred Interests,
(b) 20,000 shares of the Series G Preferred Stock, and (c) 167,623,733
shares of AIG Common Stock. As a result of the Recapitalization, the
Treasury Department holds 1,655,037,962 shares of newly issued AIG
Common Stock, representing ownership of approximately 92 percent of the
outstanding AIG Common Stock, and 20,000 shares of Series G Preferred
Stock. After this share exchange and distribution were completed, the
Trust terminated pursuant to the terms and conditions of the Trust
Agreement.
The issuance of AIG Common Stock in connection with the exchange
for the Series C Preferred Stock, the Series E Preferred Stock and the
Series F Preferred Stock will significantly affect the determination of
net income attributable to common shareholders and the weighted average
shares outstanding, both of which are used to compute earnings per
share.'' AIG: Form 8-K Period Ended January 14, 2011, supra note 450.
---------------------------------------------------------------------------
Warrants to Purchase Common Stock: AIG
distributed 10-year warrants on 75 million shares of AIG common
stock with an exercise price of $45.00 per share to the
existing public shareholders. These warrants, aimed at
softening the significant dilution from the government's common
share conversion, were not provided to Treasury or other
government shareholders.\453\
---------------------------------------------------------------------------
\453\ As described in a company filing on January 14, 2011: ``[a]s
part of the Recapitalization, on January 19, 2011, AIG will distribute
to the holders of record of AIG Common Stock on January 13, 2010, by
means of a dividend, 10-year warrants to purchase a total of up to 75
million shares of AIG Common Stock at an exercise price of $45.00 per
share. None of the Trust, the Treasury Department or the FRBNY will
receive these warrants. For more information on these warrants, see
AIG's Current Reports on Form 8-K dated January 7, 2011 and January 12,
2011.'' AIG: Form 8-K Period Ended January 14, 2011, supra note 450.
---------------------------------------------------------------------------
Figure 27 below provides a timeline of recent AIG-related
announcements following the publication of our June 2010
report.
[GRAPHIC] [TIFF OMITTED] T4832A.023
The composition of the government's assistance to AIG has
evolved from debt to equity as the company's financial
condition has changed. Initially, the Federal Reserve was the
only government entity to provide assistance to AIG, which was
limited to large lines of credit. Following the enactment of
EESA, Treasury authorized $70 billion of preferred equity
facilities for AIG. Since TARP assistance was in the form of
preferred equity, it did not count against the company's
outstanding debt, thereby providing a more attractive form of
capital which helped improve AIG's leverage, or risk levels, in
the eyes of the rating agencies. Currently, the only debt
instruments outstanding as part of the government rescue of AIG
are the loans to the Maiden Lane II and Maiden Lane III SPVs,
which are not AIG liabilities. At present, Treasury holds
exclusively common or preferred equity interests in AIG.
FIGURE 28: GOVERNMENT ASSISTANCE TO AIG OUTSTANDING
[Dollars in millions]
----------------------------------------------------------------------------------------------------------------
November 5, June 24, 2010 March 8, 2011
2008 \454\ \455\
----------------------------------------------------------------------------------------------------------------
FRBNY
Revolving Credit Facility \456\................................. $80,257 $25,756 $0
Maiden Lane II \457\............................................ N/A 14,668 12,832
Maiden Lane III \458\........................................... N/A 16,290 13,008
Preferred interest in AIA Aurora LLC............................ N/A 16,453 0
Preferred interest in ALICO SPV................................. N/A 9,255 0
Total FRBNY................................................. 80,257 82,422 25,840
TARP
Series E Non-Cumulative Preferred Stock (converted to common N/A 40,000 40,000
equity) \459\..................................................
Series F Non-Cumulative Preferred Stock \460\................... N/A \461\ 7,543 \462\ 18,763
Total TARP.................................................. N/A 47,543 58,763
-----------------------------------------------
Total Assistance................................................ $80,257 $129,965 $84,609
----------------------------------------------------------------------------------------------------------------
\454\ See Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.4.1: Factors
Affecting Reserve Balances (June 24, 2010) (online at www.federalreserve.gov/releases/h41/20100624/)
(hereinafter ``June 2010 Fed Statistical Release H.4.1'').
\455\ Treasury Transactions Report, supra note 36.
\456\ Board of Governors of the Federal Reserve System, Data Download Program (Instrument Used: Factors
Affecting Reserve Balances, Credit extended to American International Group, Inc., Net: week average) (online
at www.federalreserve.gov/datadownload/).
\457\ Outstanding principal amount of loan extended by FRBNY (including accrued and payable interest to FRBNY).
Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.4.1: Factors Affecting
Reserve Balances (June 24, 2010 and Mar. 10, 2011) (online at www.federalreserve.gov/releases/h41/). On March
11, 2011, FRBNY announced that AIG had formally offered to purchase the assets in Maiden Lane II. There was no
further news regarding the offer at the time this report was published. See Federal Reserve Bank of New York,
Statement Related to Offer by AIG to Purchase Maiden Lane II LLC (Mar. 11, 2011) (online at www.newyorkfed.org/
newsevents/news/markets/2011/an110311.html).
\458\ Outstanding principal amount of loan extended by FRBNY (including accrued and payable interest to FRBNY).
June 2010 Fed Statistical Release H.4.1, supra note 454; Board of Governors of the Federal Reserve System,
Federal Reserve Statistical Release H.4.1: Factors Affecting Reserve Balances (Mar. 10, 2011) (online at
www.federalreserve.gov/releases/h41/20110310/) (hereinafter ``March 2011 Fed Statistical Release H.4.1'').
\459\ The initial direct TARP assistance was the $40 billion purchase of Series D (cumulative) preferred stock.
AIG missed $1.6 billion of dividend payments on this investment. Consequently, when the Series D preferred
stock was converted to Series E non-cumulative preferred stock in April 2009, the missed dividends were
capitalized as part of the newly issued Series E preferred shares. Prior to the conversion to equity, the
Series E shares could not be redeemed by AIG until the $1.6 billion in capitalized dividends were repaid.
Following the conversion of the preferred interests to equity, however, the claims to the capitalized interest
were also exchanged, thereby eliminating the potential for a payment from the missed dividends. Treasury
Transactions Report, supra note 36.
\460\ The funds available under the Series F stock facility were reduced by $165 million in March 2009 in order
to pay retention bonuses to AIGFP employees, thus leaving $29.8 billion available. Immediately following the
recapitalization, the components of the $29.8 billion of TARP Series F preferred stock were: the newly created
$2.0 billion of Series G preferred credit facility (available but currently undrawn by AIG to date), a $16.9
billion investment in AIA preferred units, a $3.8 billion investment in ALICO junior preferred units, and the
$7.5 billion from the Series F preferred stock facility that were subsequently converted into 167,623,733
common equity shares. As of March 8, 2011, $9.1 billion of Treasury's holdings in the AIA and ALICO SPVs had
been redeemed. Treasury Transactions Report, supra note 36.
\461\ American International Group, Inc., Form 10-Q for the Quarterly Period Ended June 30, 2010, at 107 (Aug.
6, 2010) (online at www.sec.gov/Archives/edgar/data/5272/000104746910007097/a2199624z10-q.htm).
\462\ This figure is comprised of the $7.5 billion in Series F preferred stock that was converted to common
stock and the $11.2 billion invested in the AIA SPV holdings. This figure does not reflect the $2.0 billion
Series G preferred stock credit facility, which is available to AIG, but has yet to be drawn. Treasury
Transactions Report, supra note 36.
As summarized above, with the execution of AIG's
recapitalization plan, FRBNY retired its claims on the company,
centralizing the remaining government holdings in AIG with
Treasury in the form of AIG common stock and preferred
interests in certain AIG assets through SPVs. While Treasury
increased its assistance to AIG, the incremental commitment to
each SPV is fully secured, putting the government ahead of
other creditors in the (unlikely) event of a default on these
obligations. More broadly, a key hurdle to the ultimate
government exit has been removed as a result of the conversion
of its claims to more liquid, but higher risk common stock,
paving the way for an eventual exit via share sales in the
public equity market. The government's exit is expected to
parallel the emergence of AIG as a standalone A-rated credit,
no longer reliant on government support to sustain its credit
rating at a level sufficient for independent access to private
capital market funding.
Treasury now owns 1.655 billion shares of AIG's common
stock, representing 92 percent of the company's outstanding
shares.\463\
---------------------------------------------------------------------------
\463\ The total number of shares owned is comprised of 924,546,133
shares exchanged from the Series E preferred stock and the associated
unpaid dividends, 167,623,733 shares of common stock exchanged from the
Series F preferred stock, and 562,868,096 common shares that are
connected to FRBNY's original assistance. Although the common shares
derived from the FRBNY credit facility are not directly connected to
the TARP assistance, they are included here as part of the total
Treasury holdings in AIG. In total, Treasury holds 1,655,037,962 shares
of AIG common stock. Treasury Transactions Report, supra note 36.
FIGURE 29: OWNERSHIP PROFILE OF AMERICAN INTERNATIONAL GROUP \464\
------------------------------------------------------------------------
Outstanding
Shares of AIG Percentage of
Common Stock (in Outstanding
millions) Shares (Percent)
------------------------------------------------------------------------
Series C Preferred Stock.......... 562.9 31.3
Series E Preferred Stock.......... 924.5 51.4
Series F Preferred Stock.......... 167.6 9.3
Subtotal...................... 1,655.0 92.0
Non-Government AIG Common Stock 143.3 8.0
Holders \465\....................
-------------------------------------
Total......................... 1,798.4 100.0
------------------------------------------------------------------------
\464\ Figures affected by rounding. Treasury Transactions Report, supra
note 36; U.S. Department of the Treasury, AIG Recapitalization:
Summary of Terms September 30, 2010, at 2 (Sept. 30, 2010) (online at
www.treasury.gov/initiatives/financial-stability/investment-programs/
AIG/Documents/Recapitalization.Summary.Terms.Executed.pdf)
(hereinafter ``AIG Recapitalization Summary''); Treasury conversations
with Panel staff (Mar. 7, 2011).
\465\ This figure assumes that 2,854,069 additional shares will be
converted and held by non-Treasury participants stemming from a
conversion of equity units to common shares. American International
Group, Inc., Financial Supplement: Fourth Quarter 2010, at 15 (Feb.
25, 2011) (online at www.aigcorporate.com/investors/2011_February/
Financial_Supplement_4Q10_ Revised_2-24-11.pdf) (hereinafter ``AIG
Financial Supplement: 4Q 2010''); AIG Recapitalization Summary, supra
note 464, at 2.
In addition to this equity--valued at $61.9 billion based
on the stock's current price of $37.39--Treasury has also
invested approximately $11.2 billion in AIG-related preferred
interests.\466\ While the price of AIG common equity shares has
fluctuated significantly since the recapitalization plan was
announced on September 30, 2010, taxpayers are poised to
recognize a gain on the government's assistance to AIG at
current market prices.\467\ The total value of Treasury's
equity and preferred interests in AIG is currently $73.2
billion.\468\ This equates to a $14.3 billion net gain based on
Treasury's $58.8 billion cost-basis, or the amount of TARP
funds spent to secure the government's current outstanding
common and preferred equity interests. Of note, the Series C
shares--representing a current market value of $21.0 billion--
were obtained at no cost to the taxpayer (or Treasury), and
reflect consideration provided by AIG for FRBNY's initial
lending facility in September 2008. Thus, based on current
valuations, this stake, which is now held for the benefit of
Treasury, is offsetting a current loss on the direct TARP
assistance provided by Treasury. The break-even threshold for
the value of the government's stake, including the common stock
derived from the Series C shares, is approximately $28.73 per
share, which means that should the share price drop below this
level, representing a 23 percent decline versus its current
share price, Treasury's holdings in AIG would imply a net loss
to the government.\469\
---------------------------------------------------------------------------
\466\ Treasury's investment in the AIA SPV is $11.2 billion,
although the current value of this holding is $11.3 billion due to the
payment of accrued interest. As outlined in Section IV.D.1, AIG opted
to exercise its right to classify $2.0 billion of funds into the newly
created Series G preferred stock. This facility is not accounted for
here because although the funds are available to AIG, the company has
not drawn on the facility to date. On March 8, 2011, Treasury announced
that its interests in the ALICO SPV, which were $3.4 billion following
the recapitalization, had been fully redeemed by AIG. Treasury
Transactions Report, supra note 36; U.S. Department of the Treasury,
Treasury: With $6.9 Billion Repayment Today from AIG, 70 Percent of
TARP Disbursements Now Recovered (Mar. 8, 2011) (online at
www.treasury.gov/press-center/press-releases/Pages/tg1096.aspx)
(hereinafter ``Treasury: $6.9 Billion Repayment from AIG'').
\467\ Between September 30, 2010 and January 19, 2011, AIG shares
traded within a dividend-adjusted range of $34.22 and $51.25. Bloomberg
Data Service (Mar. 8, 2011); AIG: Form 8-K Period Ended January 14,
2011, supra note 450.
\468\ Based on a March 4, 2011 closing stock price of $37.39 per
share. Bloomberg Data Service (Mar. 8, 2011). This includes the current
market price of the common equity as well as the value of Treasury's
holdings in the AIA SPV. Treasury's investment in the AIA SPV is $11.2
billion; this figure references the current value of $11.3 billion,
which includes accrued interest. Bloomberg Data Service (Mar. 8, 2011);
Treasury Transactions Report, supra note 36; Treasury: $6.9 Billion
Repayment from AIG, supra note 466.
\469\ The breakeven price assumes the following cost basis for the
1,655,037,962 common shares Treasury holds: $40.0 billion investment in
Series E preferred shares and $7.5 billion in Series F preferred stock
draws. Treasury Transactions Report, supra note 36.
FIGURE 30: VALUATION OF TREASURY'S COMMON STOCK HOLDINGS IN AIG 470
[In billions]
----------------------------------------------------------------------------------------------------------------
Total Treasury
TARP Series C Position (TARP +
Series C)
----------------------------------------------------------------------------------------------------------------
Funds Provided......................................... $47.5 N/A $47.5
Common Equity:
No. of Shares...................................... 1.1 0.6 1.7
Implied Value...................................... $40.8 $21.0 $61.9
Implied Net Gain on Common Stock....................... $(6.7) $21.0 $14.3
----------------------------------------------------------------------------------------------------------------
470 This figure reflects Treasury's common stock position only, and does not account for Treasury's other
holdings in AIG: $11.2 billion interest in the AIA SPV, the $2 billion Series G preferred stock credit
facility (available but undrawn). Similarly, it does not account for the $9.1 billion in repayments Treasury
has received on its preferred holdings. Bloomberg Data Service (Mar. 9, 2011). Based on a March 4, 2011
closing stock price of $37.39 per share. Treasury Transactions Report, supra note 36.
2. Outlook
a. Key Swing Factor: AIG's Execution of Strategy
Based on a share price of $37.39, the equity market
currently values AIG at $67.2 billion.\471\ While down
considerably from the firm's peak split-adjusted share price of
$1,456, the stock is trading significantly above the lows
witnessed in late 2008 and early 2009, and has gained 52
percent in value since the beginning of 2010.\472\ Not
surprisingly, this rebound has coincided with increased
optimism concerning the potential for the government to recoup
a significant portion of its investment. (The recent spike and
subsequent decline in AIG shares corresponded with the
September 30, 2010 recapitalization announcement and January
19, 2011 issuance of 10-year warrants to non-government
shareholders. Market analysts estimated that these warrants
equated to a value of approximately $8-10/share.) \473\
---------------------------------------------------------------------------
\471\ AIG's market capitalization is based on a March 4, 2011
closing price of $37.39 and a total of 1,798,357,785 common shares
outstanding. Bloomberg Data Service (Mar. 9, 2011); This figure assumes
that 2,854,069 additional shares will be converted and held by non-
Treasury participants stemming from a conversion of equity units to
common shares. AIG Financial Supplement: 4Q 2010, supra note 465, at
15.
\472\ This calculation uses dividend-adjusted stock prices for AIG
on January 5, 2010 and March 4, 2011. Bloomberg Data Service (Mar. 9,
2011).
\473\ Analysis of Bloomberg adjusted vs. unadjusted share price
data. Bloomberg Data Service (Mar. 9, 2011). See also Andrew Kligerman,
UBS Investment Research, American International Group: Staying Neutral,
but with Short-term Buy (Oct. 18, 2010).
---------------------------------------------------------------------------
In this context, both AIG and Treasury continue to express
varying degrees of optimism on repayment prospects. AIG expects
to repay fully its obligations to the government, while
Treasury is increasingly confident on the outlook for a return
of the taxpayer's investment. Secretary Geithner noted in a
December 2010 appearance before the Panel that AIG's
recapitalization plan ``will accelerate the government's exit
on terms that are likely to lead to an overall profit on the
government's support for AIG, including the value of Treasury's
interests in AIG held outside of the TARP.'' \474\ Acting
Assistant Secretary of the Treasury for the Office of Financial
Stability Timothy Massad noted in a March 2011 appearance
before the Panel that the government is ``potentially in
position to recover every dollar we invested.'' \475\
---------------------------------------------------------------------------
\474\ Geithner Testimony to the Panel, supra note 119.
\475\ COP Hearing on the TARP's Impact on Financial Stability,
supra note 311, at 7.
---------------------------------------------------------------------------
The outlook for the taxpayer is dependent on the successful
execution of AIG's strategy, which will inform the public
market's assessment of AIG's valuation over the next 12-18
months. This relationship was evidenced by the recent
announcement by AIG of a $4.1 billion charge to cover increased
loss reserves in its insurance operations.\476\ This charge
could have weakened the company's capital position. In
response, Treasury agreed to waive the right to $2.0 billion or
proceeds from the sale of Star Life and Edison Life insurance
subsidiaries for use in AIG's reserve strengthening, thereby
delaying the payment of proceeds from asset sales Treasury was
entitled to as collateral for its SPV Preferred Interests.\477\
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\476\ AIG ``announced today that, following completion of its
annual comprehensive loss reserve review, it expects to record a $4.1
billion charge, net of $446 million in discount and loss sensitive
business premium adjustments, for the fourth quarter of 2010 to
strengthen loss reserves in its Chartis property and casualty insurance
subsidiaries.'' American International Group, Inc., AIG Expects to
Record $4.1 Billion Net Charge in Fourth Quarter 2010 to Strengthen
Loss Reserves Associated with Long-Tail Lines in P&C Business (Feb. 9,
2011) (online at ir.aigcorporate.com/External.File?t=2&item=
g7rqBLVLuv81UAmrh 20Mpz0DS1SXuRN3Wmk CRzUb5ppzF78O70yv CeQf98uqlxnez
2NAoHFPnDPDhNydgIxz0w==). The actual charge reported on February 24,
2011 was $4.2 billion. American International Group, AIG Reports Fourth
Quarter Net Income of $11.2 billion (Feb. 24, 2011) (online at
www.aigcorporate.com/investors/2011_February/4Q2010PR02242010LTR.pdf).
\477\ Treasury's investment in the AIA SPV is $11.2 billion;
however, its current holdings in this SPV are $11.3 billion due to the
payment of accrued interest. American International Group, Inc., Form
8-K for the Period Ended February 8, 2011 (Feb. 9, 2011) (online at
www.sec.gov/Archives/edgar/data/5272/000095012311010653/
y89586e8vk.htm); Treasury Transactions Report, supra note 36.
---------------------------------------------------------------------------
This allowed AIG to stabilize its capital ratios in a cost-
effective manner (e.g., without relying on market funding).
Importantly, this agreement does not represent a direct loss to
Treasury. The only ``concession'' by the government was the
nominal forfeiture of interest income that it would have
otherwise earned on the sale proceeds. However, this is more
than offset by the 5 percent dividend on the government's
preferred interest in the SPVs. Further, since Treasury's
preferred equity investment is over-collateralized (the value
of Treasury's claims on AIG's assets is in excess to the value
of the funds provided by Treasury), the government remains
well-positioned to be paid in full as AIG transfers payments
received from subsequent asset sales to Treasury. In fact, this
process continues, with the recent sale of AIG equity in
MetLife conducted ahead of schedule, netting Treasury $6.9
billion in proceeds, reducing the outstanding amount of
Treasury's preferred interests in AIG assets to $11.2 billion
from $20.3 billion immediately following the
recapitalization.\478\
---------------------------------------------------------------------------
\478\ Treasury Transactions Report, supra note 36; Treasury: $6.9
Billion Repayment from AIG, supra note 466.
---------------------------------------------------------------------------
Thus, AIG's financial health remains dependent on the
government, the company's dominant shareholder, while the
outlook for the government's investment is to a large degree
dependent on AIG's successful execution of its business
strategy. AIG is seeking to balance asset sales and risk
reduction with a credible and focused ongoing business
strategy. This strategy has been some time in the making, as
difficult market conditions and management turnover may have
frustrated earlier efforts at charting a course for repaying
the taxpayer prior to CEO Robert Benmosche's arrival at the
firm in August of 2009.\479\ Thus, a greatly improved market
backdrop and a longer-term investment mentality on the part of
AIG's principal shareholder have facilitated a strategy aimed
at repaying the government and cultivating a sustainable
independent business strategy.
---------------------------------------------------------------------------
\479\ In the wake of the government's rescue in the fall of 2008,
the math simply did not provide a way forward for the company (and, as
became evident in subsequent months, for the government). Market
conditions and the terms of the government's rescue provided little
hope of a full recovery, beyond seeking to mitigate the magnitude of
expected losses on the government's assistance and to reduce the
systemic risk posed by the company. Potential buyers in the insurance
sector suffered through significant valuation declines, dampening their
appetite for acquisitions of AIG's most marketable assets. Cash
purchases were problematic during this period, owing to the dearth of
available funding, even to highly rated borrowers. In this environment,
core operating fundamentals of key insurance businesses suffered amidst
the deteriorating market, further clouding the mergers and acquisitions
outlook.
---------------------------------------------------------------------------
Specifically, in addition to asset sales, the firm is
focused on strengthening its global property and casualty
franchise and its domestic life insurance and retirement
services operations, while continuing to reduce the firm's
legacy exposure within AIGFP. After the company's restructuring
and asset sales are complete, the vast majority of AIG's
businesses will be housed within its global property and
casualty and commercial insurance operation, which has been
rebranded as Chartis, and its domestic life insurance and
retirement services segment, rebranded as SunAmerica.\480\
---------------------------------------------------------------------------
\480\ These businesses include General Insurance (Chartis),
Domestic Life Insurance & Retirement Services, and Foreign Life
Insurance & Retirement Services.
Additionally, the company must continue to make progress on
streamlining its operations and untangling the cross-linkages
throughout its vast operations. In turn, greater transparency into
individual business lines will help facilitate more beneficial terms
from the capital markets for financing core operations as well as
advancing the prospects for the sale of non-core businesses at more
attractive valuations.
---------------------------------------------------------------------------
b. Exit Strategy and Timing
The government is unlikely to wait for the successful
execution of this strategy. According to press reports,
Treasury intends to commence the sale of an initial stake in
AIG via a secondary share offering after AIG's 1Q 2011 earnings
are released in May 2011.\481\ Media reports indicate the
government could sell up to $20 billion worth of stock,
representing approximately one-third of the government's
holdings in AIG. The balance of the government's stake in AIG
would then likely be sold through additional secondary
offerings, automated sales through a prearranged written
trading plan, or some combination of both.\482\
---------------------------------------------------------------------------
\481\ See, e.g., Serena Ng, AIG to Start Marketing ``Re-IPO'' in
May, Wall Street Journal (Feb. 25, 2011) (online at online.wsj.com/
article/SB1000142405274870415 0604576166360234955504.html) (by
subscription only).
\482\ Treasury employed both methods to dispose of its Citigroup
holdings--large secondary offerings were supplemented by smaller and
more frequent automated sales of stock in the marketplace.
---------------------------------------------------------------------------
The government's disposition of its shares in Citigroup is
likely to be the model for AIG.\483\ However, the AIG
disposition may prove more difficult for Treasury to execute,
given the value of AIG's publicly traded float of $5.4 billion
and a government equity stake that currently amounts to
approximately $61.9 billion.\484\ Institutional investor
ownership in AIG is relatively limited, whereas Citigroup
enjoyed broad institutional ownership prior to the government's
share sales.\485\ Thus, absent a capital raise by AIG to repay
Treasury directly, a protracted wind-down of Treasury's stake
seems inevitable.
---------------------------------------------------------------------------
\483\ The differences between the AIG rescue and the government's
investment in Citigroup and the subsequent exit strategy is discussed
in Section F.8 of the Panel's June 2010 oversight report. See 2010 June
Oversight Report, supra note 395, at 181. 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. As of February
8, 2011, Treasury had sold the entirety of its Citigroup common shares
and warrants for $31.91 billion in gross proceeds. The Panel's January
2010 oversight report contains a discussion of the government's since-
executed Citigroup exit strategy, including the monetization of the
preferred shares under the CPP. See 2010 January Oversight Report,
supra note 153, at 34-64.
\484\ The value of AIG's public float is based on the closing price
of the common shares on March 4, 2011 of $37.39 and 143,319,823 shares
held by non-government investors. This assumes 2,854,069 shares will be
converted from equity units to common shares. AIG Financial Supplement:
4Q 2010, supra note 465, at 15; AIG Recapitalization Summary, supra
note 464, at 2.
\485\ Few actively managed investment funds own sizable long
positions in AIG shares. The top five shareholders, outside of the U.S.
government are: Fairholme Capital Management, which owns approximately
2.5 percent of AIG shares; Starr International, Hank Greenberg's
company, which owns 0.8 percent; two index funds, Vanguard Group Inc.
and State Street Corp., which own 0.7 percent in the aggregate; and
Blackrock Institutional Trust, which owns 0.2 percent. These five
shareholders account for over half the 8 percent of AIG's shares not
owned by the U.S. government. Fairholme Capital Management, LLC,
Schedule 13D Statement of Acquisition of Beneficial Ownership by
Individuals (Jan. 14, 2011) (online at www.sec.gov/Archives/edgar/data/
5272/000091957411000237/d1164162_13d-a.htm); American International
Group, Inc., Form 4 Statement of Changes in Beneficial Ownership of
Securities (Jan. 20, 2011) (online at www.sec.gov/Archives/edgar/data/
5272/000114036111003441/xslF345X03/doc1.xml); Vanguard Group Inc., Form
13F for Quarterly Period Ending December 31, 2010 (Dec. 31, 2010)
(online at www.sec.gov/Archives/edgar/data/102909/000093247111000241/
dec2010vgi13f1.txt); State Street Corp., Form 13F for Quarterly Period
Ending December 31, 2010 (Dec. 31, 2010) (online at www.sec.gov/
Archives/edgar/data/93751/000119312511032288/d13fhr.txt); Blackrock
Institutional Trust, Form 13F for Quarterly Period Ending December 31,
2010 (Dec. 31, 2010) (online at www.sec.gov/Archives/edgar/data/913414/
000108636411004275/blkinsttrustco.txt); Data accessed through Bloomberg
Data Service.
---------------------------------------------------------------------------
In a briefing for TARP oversight bodies, Jim Millstein,
Treasury's chief restructuring officer, noted that the
government's exit from AIG could take anywhere from six months
to two years, following the execution of the recapitalization
plan.\486\ In any case, as the Panel has noted previously in
the case of other asset dispositions, Treasury is likely to do
what it can to accelerate the timetable for its exit. While six
months may be overly aggressive, a two-year time horizon is
probably overly cautious, assuming a normalized market
backdrop. For his part, Mr. Benmosche believes the government
may not fully exit AIG until mid-year 2012.\487\
---------------------------------------------------------------------------
\486\ Oversight briefing on AIG recapitalization (Oct. 6, 2010).
\487\ See Andrew Frye and Hugh Son, AIG Repays Fed, Swaps Treasury
Investment for Common as U.S. Unwinds Stake, Bloomberg News (Jan. 14,
2011) (online at www.bloomberg.com/news/2011-01-14/aig-repays-fed-
swaps-treasury-investment-for-common-stock.html) (``Treasury may need
18 months to divest its stake, Benmosche told CNBC today.'').
---------------------------------------------------------------------------
This exit timeline, of course, involves substantial equity
market risk and will rely heavily on AIG building a sustainable
franchise value over the medium term in order to support the
placement of a significant supply of additional shares (at
relatively attractive valuations) on the market. As noted,
based on the stock's current valuation, taxpayers would see a
positive return on their investment in AIG. However, near-term
paper gains do not always equate to longer-term realized gains.
Accordingly, the long-term horizon for a full government exit,
with attendant equity market and company operating risks, still
presents potential downside risks to the taxpayer.
E. Lessons Learned
The Panel noted that the government has no well-defined
legal process to wind down a company like AIG in the same way
that it winds down banks through the FDIC resolution process or
nonfinancial companies through bankruptcy. As a result, the
Federal Reserve and Treasury had to repurpose powers that were
originally intended for other circumstances, leading to a
bailout that was improvised, imperfect, and in many ways deeply
unfair.
While issues surrounding AIG's failure provide an
exhaustive list of lessons for regulators, Congress and the
financial industry (``too-big-to-fail,'' moral hazard, systemic
risk oversight, over-the-counter transparency/centralized
clearing, risk management, etc.), the government's (both
Treasury and FRBNY) management of its AIG engagement offers a
host of specific lessons. These include:
Transparency: Decisions made by government
officials behind closed doors that put taxpayer dollars at risk
must be subject to elevated transparency to assure fair dealing
on behalf of the taxpayer. FRBNY's failure to be more sensitive
with respect to potential conflicts of interest and the way in
which the public and members of Congress would view its actions
has colored all the dealings between the government and AIG in
the eyes of the public.\488\
---------------------------------------------------------------------------
\488\ 2010 June Oversight Report, supra note 395, at 105.
---------------------------------------------------------------------------
Reluctant Shareholder versus Maximizing Taxpayer
Value: As the Panel has previously noted, particularly in
conjunction with accelerated exits of the government's other
assets (e.g., GM and Chrysler Financial), Treasury should be
careful not to sacrifice its mandate to maximize the value of
its investment in favor of an expedited exit strategy
consistent with its ``reluctant shareholder'' philosophy. AIG
represents a notable example of Treasury successfully taking a
longer-term view on its investment horizon to provide the
greatest opportunity to realize a meaningful return.
Moral Hazard: Given the absence of a resolution
authority to assist with a controlled liquidation of the firm,
AIG's vast interconnectedness across the financial landscape
served as a mechanism to broaden the risk of moral hazard to
the firm's creditors and counterparties. The absence of shared
sacrifice by private parties undermined the government's
ability to respond to the financial crisis, while also seeding
longer-term risks for the effective functioning of the
financial markets.
VII. Administration of the TARP
A. Treasury's Use of Its Contracting Authority
1. Background
The TARP was an unprecedented intervention into the markets
and as a result, Treasury did not always have the in-house
capabilities needed to implement the programs it wished to
establish. To meet these needs, Treasury employed outside
contractors and agents.
Treasury is authorized by EESA and pre-existing law to
employ private parties to provide goods and services using two
separate mechanisms. First, the Secretary may enter into
contracts, which are used to acquire goods and services from
the market. This process is governed by the Federal Acquisition
Regulation, and though EESA authorizes the Secretary to waive
specific provisions of the regulation if needed, Treasury has
not done so.\489\ Second, the Secretary may designate
``financial institutions'' as financial agents to perform ``all
such reasonable duties related to this Act . . . as may be
required.'' \490\ Financial agents ``serve as an extension of
Treasury to act on behalf of the Government.'' \491\
Historically, financial agents could be employed to perform
only ``inherently governmental'' functions, although it may be
the case that EESA eliminated this limitation. Treasury is not
bound by the Federal Acquisition Regulation when it hires a
financial agent. As a result, there are essentially no
restrictions on the process Treasury may use for selecting
financial agents. Once selected, however, a financial agent
must abide by the principles of agency law.\492\
---------------------------------------------------------------------------
\489\ Congressional Oversight Panel, October Oversight Report:
Examining Treasury's Use of Financial Crisis Contracting Authority, at
10 (Oct. 14, 2010) (online at cop.senate.gov/documents/cop-101410-
report.pdf) (hereinafter ``2010 October Oversight Report'').
\490\ 12 U.S.C. Sec. 5211(c)(3). For a definition of ``financial
institutions,'' see 2010 October Oversight Report, supra note 489, at
39 n.143.
\491\ Congressional Oversight Panel, Joint Written Testimony of
Gary Grippo, deputy assistant secretary for fiscal operations and
policy, and Ronald W. Backes, director of procurement services, U.S.
Department of the Treasury, COP Hearing on Treasury's Use of Private
Contractors, at 2-3 (Sept. 22, 2010) (online at cop.senate.gov/
documents/testimony-092210-treasury.pdf). For a discussion comparing
contracting to financial agency agreements, see 2010 October Oversight
Report, supra note 489, at 42.
\492\ 2010 October Oversight Report, supra note 489, at 11.
---------------------------------------------------------------------------
a. Treasury Action
At the time of the Panel's October 2010 report, Examining
Treasury's Use of Financial Crisis Contracting Authority,
Treasury had awarded 81 TARP-related procurement contracts and
15 financial agency agreements. Under these arrangements, there
were a total of 98 subcontracts, 40 from procurement contracts
and 58 from financial agency agreements.\493\
---------------------------------------------------------------------------
\493\ 2010 October Oversight Report, supra note 489, at 24.
---------------------------------------------------------------------------
The obligated value of these contracts and agreements was
$436.7 million, with $109.3 million attributable to procurement
contracts and $327.4 million attributable to financial agency
agreements. The expended value under these contracts and
agreements totaled $363.0 million, with procurement contracts
accounting for $87.0 million and financial agency agreements
accounting for the remaining $276.0 million.\494\
---------------------------------------------------------------------------
\494\ 2010 October Oversight Report, supra note 489, at 24-25.
---------------------------------------------------------------------------
In terms of obligated value, Fannie Mae was the largest
financial agent, with $126.7 million, while
PricewaterhouseCoopers LLP was the largest contractor, with
$25.8 million. Seven categories of work were performed under
the TARP procurement contracts, the largest of which was legal
advisory. Legal advisory work accounted for 35 contracts as
well as for the largest obligated and potential contract values
of $55.6 million and $203.4 million, respectively.\495\
---------------------------------------------------------------------------
\495\ 2010 October Oversight Report, supra note 489, at 25, 31.
---------------------------------------------------------------------------
In addition, to govern potential conflicts of interest
arising from these contracts and agreements, Treasury issued an
Interim Final Rule on TARP Conflicts of Interest (IFR-COI) on
January 21, 2009. The rule establishes two separate schemes to
govern two different types of conflicts: organizational
conflicts of interest,\496\ and personal conflicts of
interest.\497\ The IFR-COI also regulates many traditional
ethical issues, such as acceptance of gifts and other sorts of
``bribes'' during the contract solicitation process and the
handling of nonpublic information.\498\
---------------------------------------------------------------------------
\496\ The IFR defines an organizational conflict of interest as ``a
situation in which the retained entity has an interest or relationship
that could cause a reasonable person with knowledge of the relevant
facts to question the retained entity's objectivity or judgment to
perform under the arrangement, or its ability to represent the
Treasury.'' 31 CFR Sec. 31.201. Organizational conflicts of interest
are prohibited unless they are disclosed to Treasury and either
mitigated under a Treasury-approved plan or waived by Treasury.
\497\ The rule defines a personal conflict of interest as a
``personal, business, or financial interest of an individual, his or
her spouse, minor child, or other family member with whom the
individual has a close personal relationship, that could adversely
affect the individual's ability to perform under the arrangement, his
or her objectivity or judgment in such performance, or his or her
ability to represent the interests of the Treasury.'' 31 CFR
Sec. 31.201. A retained entity must ensure that ``all management
officials'' working on the contract or agreement not have personal
conflicts of interest unless the conflict has been either neutralized
by mitigation measures or waived by Treasury. 2010 October Oversight
Report, supra note 489, at 13-14, 62-63.
\498\ 2010 October Oversight Report, supra note 489, at 15.
---------------------------------------------------------------------------
2. Summary of COP Report and Findings
The Panel's October 2010 report, Examining Treasury's Use
of Financial Crisis Contracting Authority, applauded Treasury's
significant efforts to ensure that it used contractors and
agents appropriately, noting that in testimony to the Panel,
some outside experts had praised Treasury for going above and
beyond the usual standards for government contracting.\499\
However, the report cautioned that there still remained
important areas of concern.\500\
---------------------------------------------------------------------------
\499\ Congressional Oversight Panel, Testimony of Steven Schooner,
professor of law and co-director of the government procurement law
program, The George Washington University School of Law, Transcript:
COP Hearing on Treasury's Use of Private Contractors (Sept. 22, 2010)
(publication forthcoming) (online at cop.senate.gov/hearings/library/
hearing-092210-contracting.cfm); 2010 October Oversight Report, supra
note 489, at 5.
\500\ 2010 October Oversight Report, supra note 489, at 5.
---------------------------------------------------------------------------
For example, the Panel was concerned that while Treasury
had disclosed some information, such as the texts of the
contracts and agreements, the date each contract was awarded,
and the value of the arrangements, material information still
had not been released. Specifically, the report noted that
Treasury does not release task orders to the public, despite
the fact that for many arrangements critical specifics
typically appear in task orders, rather than in the contracts
themselves. Similarly, Treasury does not publicly disclose
detailed information with respect to the names and duties of
subcontractors, nor does it publish the subcontracts
themselves. In addition, Treasury publishes almost no
information on the performance of contractors and financial
agents during the life of the arrangement.\501\
---------------------------------------------------------------------------
\501\ 2010 October Oversight Report, supra note 489, at 55-59.
---------------------------------------------------------------------------
The report expressed further concern with regard to
Treasury's post-award management of its contracts and
agreements. The Panel acknowledged that the procedures for
post-award management of contracts followed well-established
government contracting norms. By contrast, however, the Panel
observed that the procedures for financial agent management had
failed to detect at least one serious failing by an agent.\502\
---------------------------------------------------------------------------
\502\ 2010 October Oversight Report, supra note 489, at 47, 49.
---------------------------------------------------------------------------
More troublingly, the report noted that although Treasury's
consent was required before any contractor or financial agent
could engage a subcontractor, Treasury had limited oversight
ability after the subcontract was awarded and instead relied
upon the prime contractor or the financial agent to ensure
their subcontractors' compliance. As a result, Treasury lacked
critical basic information about subcontractors, such as the
text of the subcontracts themselves and the dates on which they
were awarded. Furthermore, the Panel found that Treasury would
have difficulty both ensuring they received the best value from
subcontractors and detecting violations of contract terms not
related to work product, such as whether or not a subcontractor
has maintained the confidentiality of information or that there
are no conflicts of interest.\503\
---------------------------------------------------------------------------
\503\ 2010 October Oversight Report, supra note 489, at 49-50.
---------------------------------------------------------------------------
The Panel was also concerned about the scope of Treasury's
conflict of interest rules. Though the IFR-COI took a robust
approach to organizational conflicts of interest, personal
conflicts of interest, and the traditional ethical issues, the
Panel noted that the regulations did not address all situations
in which conflicts of interest could arise. In particular, the
report noted with concern the potential that a conflict of
interest could develop in the following situations:
Treasury treats a retained entity differently in
Treasury's exercise of its public responsibilities;
A retained entity carries out its assignments in
a manner that serves its interest and not the public interest;
A retained entity carries out its assignments in
a manner that serves the interest of the entity's other
clients;
A retained entity uses information it obtains
from its work for the TARP in a manner that benefits itself or
its other clients.\504\
---------------------------------------------------------------------------
\504\ For further discussion of these potential conflicts of
interest, see 2010 October Oversight Report, supra note 489, at 63-70.
---------------------------------------------------------------------------
The Panel was especially concerned with the potential
conflicts of interest arising from Treasury's financial agency
agreements with Fannie Mae and Freddie Mac to administer and to
enforce compliance with HAMP, respectively. The report noted
that because the majority of modifications involved mortgages
that the GSEs held or guaranteed, the GSEs were in the position
of both overseeing the program and using it to modify mortgages
at the same time.\505\ In addition, Freddie Mac had indicated
that it may not attempt to enforce its contractual rights
against servicers who violated their contracts by using ``robo-
signers'' because doing so would jeopardize their relationships
with these servicers. The Panel noted that if Freddie Mac was
hesitant to jeopardize their relationships with servicers to
enforce its rights in its own book of business, it was
reasonable to worry that it may be similarly unwilling to risk
these relationships on Treasury's behalf by aggressively
overseeing HAMP servicers.\506\ It is worth noting that the
GSEs and Treasury took a number of measures to mitigate these
conflicts, such as establishing a fiduciary relationship,
placing a firewall around material non-public information, and
creating separate entities in the GSEs to handle all HAMP
work.\507\ Despite these efforts, the Panel remained deeply
concerned about the significant potential conflicts of interest
that spring from using Fannie Mae and Freddie Mac as financial
agents.\508\
---------------------------------------------------------------------------
\505\ 2010 October Oversight Report, supra note 489, at 82-86.
\506\ 2010 December Oversight Report, supra note 283, at 82.
\507\ For a more complete discussion of the mitigating factors, see
2010 October Oversight Report, supra note 489, at 82-86.
\508\ 2010 October Oversight Report, supra note 489, at 82-86.
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3. Panel Recommendations and Updates
The Panel recommended that Treasury publish more
information, including its rationale in selecting contractors
and agents, contract and agreement task orders, the results of
monitoring efforts, and descriptions of its plans to hold
contractors and agents accountable. The Panel further
recommended that Treasury require all contractors to disclose
the names and duties of all subcontractors, the values of the
subcontracts, and the subcontracts themselves. The Panel
released some of this information, such as the names of all
subcontractors and the values of the subcontracts, in the
October report. Finally, the Panel recommended that Treasury
adopt a final rule on conflicts of interest, disclose ongoing
conflicts-of-interest findings and compliance costs, and
consider alternatives that would make it less reliant on the
retained entities for factual information, such as conducting
intensive spot checks on individual entities.
Since the Panel made these recommendations, Treasury has
begun on-site reviews of financial agents' conflict-of-interest
regimes, making it less reliant on self-reporting by retained
entities. To date, Treasury has done one such review and plans
to complete three to five more in 2011. The examinations focus
on agents' conflict-of-interest controls, such as their
policies and procedures, the information firewalls around
confidential information, and the non-disclosure agreements. In
addition, Treasury has been working to finalize the IFR-COI,
including doing a high-level review of a possible final rule,
though there is no timeline for publishing the final rule.\509\
Outside of these two areas, Treasury has not acted on the
Panel's other recommendations.
---------------------------------------------------------------------------
\509\ Treasury conversations with Panel staff (Feb. 24, 2011).
---------------------------------------------------------------------------
Since it last provided data to the Panel for its October
report, Treasury has awarded 13 more contracts worth $1.8
million in obligated value and $265,637 in expended value.
Eight of these contracts have been to Management Concepts for
administrative support. The other five contracts are with the
Association of Government Accountants, Reed Elselvier, Inc.,
Addx Corporation, MITRE Corporation, and the Hispanic
Association of Colleges & Universities.\510\
---------------------------------------------------------------------------
\510\ Data provided by Treasury (Mar. 1, 2011). Data on procurement
contracts is current through January 31, 2011.
---------------------------------------------------------------------------
Treasury has also awarded two additional financial agency
agreements to Greenhill & Co., LLC and Perella Weinberg
Partners & Co. on November 18, 2010 and January 18, 2011,
respectively. The agreements were for structuring and
disposition services and have a combined obligated value of
$13,050,000 and expended value of $1,400,000.\511\ In addition,
two agreements, with Morgan Stanley and with KBW Asset
Management, have been successfully completed.\512\
---------------------------------------------------------------------------
\511\ Data provided by Treasury (Mar. 1, 2011). Data on financial
agency agreements is current through January 31, 2011.
\512\ Treasury conversations with Panel staff (Feb. 17, 2011).
---------------------------------------------------------------------------
In total, Treasury has now awarded 94 TARP-related
procurement contracts and 17 financial agency agreements.\513\
The total obligated value of these arrangements, including both
new arrangements and new expenses under existing arrangements,
is $697.5 million, with procurement contracts accounting for
$134.2 million and financial agency agreements accounting for
the remaining $563.3 million. The total expended value of these
arrangements is $454.5 million, with $96.7 million attributable
to procurement contracts and $357.8 million attributable to
financial agency agreements.\514\
---------------------------------------------------------------------------
\513\ Base contracts, novations, modifications, and task orders all
count as a single contract. However, task orders under Treasury
contracts for Phacil Inc. and the MITRE Corporation were counted as
separate contracts. There were two novations, a contract with the law
firm Thacher Proffitt & Wood was novated to a contract with
Sonnenschein Nath & Rosenthal LLP, and a contract with McKee Nelson LLP
was novated to Bingham McCutchen LLP. For the purposes of this
analysis, the novations count as a single contract. The total number of
procurement contracts includes eight contracts, which were awarded by
other branches within the Procurement Services Division pursuant to a
common Treasury service level and subject to a reimbursable agreement
with the Office of Financial Stability, or were awarded by other
agencies on behalf of the Office of Financial Stability and not
administered by the Procurement Services Division.
\514\ Data provided by Treasury (Mar. 1, 2011). The majority of the
total growth in both obligated value and expended value is due to
increases in the financial agency agreements with Fannie Mae and
Freddie Mac. The obligated and expended values of the agreements with
the GSEs have grown by $192.7 million and $61.5 million, respectively,
since the Panel's October report. Data provided by Treasury (Mar. 1,
2011).
---------------------------------------------------------------------------
In addition, since the Panel's October report, Treasury's
conflict-of-interest monitoring regime has been changed.
Previously, the Office of Financial Stability-Compliance was
primarily responsible for such monitoring. Since October, the
Contract and Agreement Review Board and the contracting officer
technical representatives have also been tasked with reviewing
conflict-of-interest issues.
Finally, Treasury is in the process of consolidating
Procurement Services with the corresponding body in the
Internal Revenue Service (IRS). All Procurement Services
employees are scheduled to become employees of the IRS on March
13, 2011. Procurement Services employees working in the Office
of Financial Stability are scheduled to move physically to the
IRS facility on Oxon Hill on June 30, 2011. As a result of this
consolidation, Procurement Services is in the process of
reviewing their policies and procedures and will update them as
needed once this review is completed.\515\
---------------------------------------------------------------------------
\515\ Treasury conversations with Panel staff (Feb. 17, 2011).
---------------------------------------------------------------------------
4. Lessons Learned
In general, Treasury has taken significant steps to ensure
that it has used private contractors appropriately, and indeed
some experts have praised Treasury for going above and beyond
the usual standards for government contracting. This praise
must be viewed in context, however. The government contracting
process is notoriously nontransparent, and although Treasury
appears to have performed well on a comparative basis,
significant improvements can still be made.
In particular, the Panel noted the need for increased
transparency. For example, contractors may hire subcontractors,
and those subcontracts are not disclosed to the public.
Important aspects of a contractor's work may be buried in work
orders that are never published in any form. As work moves
farther and farther from Treasury's direct control, it becomes
less and less transparent and thus impedes accountability.
B. Executive Compensation Restrictions in the TARP
1. Background
a. Overview
Since well before the financial crisis, executive
compensation has been a contentious issue. From the early 1950s
through the mid-1970s, executive pay remained at a fairly
steady level in terms of real dollars. From the 1980s onward,
however, executive compensation has generally increased, often
swiftly. For instance, during the 1970s, the average pay for a
CEO was approximately 30 times the average annual pay of a
production worker. Just before the economic crisis in 2007, the
average compensation for a CEO was approximately $21 million,
nearly 300 times that of a production worker.\516\
---------------------------------------------------------------------------
\516\ Congressional Oversight Panel, February Oversight Report:
Executive Compensation Restrictions in the Troubled Asset Relief
Program, at 10 (Feb. 10, 2011) (online at cop.senate.gov/documents/cop-
021011-report.pdf) (hereinafter ``2011 February Oversight Report'').
---------------------------------------------------------------------------
Though a good deal of research has been done on why
executive pay has risen over the past three decades, there is
still no real consensus. Executive mobility, managerial
bargaining power, executive control over boards of directors,
the low values assigned to stock options along with the
perception that stock options are a low-cost method to pay
employees, the effects of the bull market and government
regulation, and deregulation have all been cited as
contributing to this phenomenon. Commentators across the
spectrum do agree that changing the structure of pay to include
stock-based compensation during a thriving stock market
contributed to the increase in compensation.\517\
---------------------------------------------------------------------------
\517\ Id. at 13.
---------------------------------------------------------------------------
Since the onset of the financial crisis, much attention has
focused on how executive compensation practices contributed to
corporate risk-taking. Some have argued that compensation
packages created incentives for executives to focus on short-
term results, even at the cost of taking excessively large
risks of later catastrophe. Many commentators have a particular
interest in the effect of mismatches between executive
compensation and the time horizon for assessments of risk.\518\
Chairman Bernanke stated that compensation practices ``led to
misaligned incentives and excessive risk taking, contributing
to bank losses and financial instability.'' \519\ On the other
hand, this link between compensation and risk taking has been
contested by some scholars who note that the value of
executives' stock holdings fell precipitously during the
crisis. Given this potential for loss, they argue, there is no
reason compensation structures would lead to excessive risk
taking. Some commentators note, however, that stock options in
particular do not necessarily create an exposure to losses for
executives symmetric with that of ordinary shareholders.\520\
As one of these commentators puts it, ``stock options--where
executives only participate in the gains, but not the losses--
and even more so, analogous bonus schemes prevalent in
financial markets, provide strong incentives for excessive risk
taking.'' \521\ Although there is no academic consensus on the
relationship between compensation practices and risk, or
whether compensation practices contributed to the financial
crisis,\522\ Treasury's view is that compensation practices did
in fact contribute to the crisis. Secretary Geithner has stated
that executive compensation played a ``material role'' in
causing the crisis because it encouraged excessive risk
taking.\523\
---------------------------------------------------------------------------
\518\ Id. at 17-18. The Panel discussed the role of misaligned
incentives on risk-taking in its Special Report on Regulatory Reform.
The Panel noted ``the unnecessary risk that many compensation schemes
introduce into the financial sector,'' and stated that ``[a]ltering the
incentives that encourage this risk . . . will help mitigate systemic
risk in future crises. . . . Executive pay should . . . incentivize
financial executives to prioritize long-term objectives, and to avoid
both undertaking excessive, unnecessary risk and socializing losses
with the help of the federal taxpayer.'' Congressional Oversight Panel,
Special Report on Regulatory Reform: Modernizing the American Financial
Regulatory System: Recommendations for Improving Oversight, Protecting
Consumers, and Ensuring Stability, at 37-40 (Jan. 29, 2009) (online at
cop.senate.gov/documents/cop-012909-report-regulatoryreform.pdf)
(hereinafter ``COP: Special Report on Regulatory Reform'').
\519\ Board of Governors of the Federal Reserve System, Press
Release (Oct. 22, 2009) (online at www.federalreserve.gov/newsevents/
press/bcreg/20091022a.htm).
\520\ 2011 February Oversight Report, supra note 516, at 17-18.
\521\ Joseph E. Stiglitz, The Financial Crisis of 2007/2008 and its
Macroeconomic Consequences, at 1 (online at unpan1.un.org/intradoc/
groups/public/documents/apcity/unpan033508.pdf) (accessed Feb. 8,
2011). See also Financial Crisis Inquiry Commission, Final Report of
the National Commission on the Causes of the Financial and Economic
Crisis in the United States, at 63 (Jan. 2011) (online at www.gpo.gov/
fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf) (``Stock options had potentially
unlimited upside, while the downside was simply to receive nothing if
the stock didn't rise to the predetermined price. The same applied to
plans that tied pay to return on equity: they meant that executives
could win more than they could lose. These pay structures had the
unintended consequence of creating incentives to increase both risk and
leverage, which could lead to larger jumps in a company's stock
price.'').
\522\ 2011 February Oversight Report, supra note 516, at 17-18.
\523\ Geithner Testimony to the Panel, supra note 119.
---------------------------------------------------------------------------
In addition, commentators have also examined how the
government's implicit ``too big to fail'' guarantee may further
distort executive compensation practices. As a result of
providing a ``too-big-to-fail'' backstop, the government may
have eliminated certain disincentives for pay arrangements that
encourage excessive risk taking. Too-big-to-fail status permits
shareholders and executives to accept substantial amounts of
risk, since they can reap the benefits but will not suffer the
consequences if the gambles are unsuccessful.\524\
---------------------------------------------------------------------------
\524\ 2011 February Oversight Report, supra note 516, at 19-20, 89-
91.
---------------------------------------------------------------------------
b. Treasury's Legal Framework
Congress entered the executive compensation debate with the
passage of EESA. After a series of revelations about bonuses at
several major TARP recipients, ARRA subsequently amended EESA
(EESA as amended) and put additional restrictions on pay
practices at TARP recipients. These included, among others, a
prohibition on golden parachutes, the requirement that TARP
recipients establish compensation committees composed entirely
of independent directors, the adoption of ``clawback''
provisions, and annual ``say on pay'' votes, and a requirement
that bonuses not exceed one-third of total compensation.\525\
EESA as amended required the Secretary of the Treasury to issue
implementing regulations, which resulted in the Interim Final
Rule on TARP Standards for Compensation and Corporate
Governance (IFR-Comp) in June 2009. For all TARP recipients,
the IFR-Comp includes a number of specific limitations, such as
prohibiting paying tax gross-ups to the top 25 most highly
compensated employees, and then requiring them annually to
certify their compliance with the IFR-Comp. Treasury's Office
of Internal Review monitors these certifications for
completeness. Some of the smaller TARP institutions have failed
to meet their reporting deadlines or to provide complete
information. The Office of Internal Review works with these
recipients to ensure that these reports are eventually filed
and that all information is accurate.\526\
---------------------------------------------------------------------------
\525\ 2011 February Oversight Report, supra note 516, at 23.
\526\ 2011 February Oversight Report, supra note 516, at 26.
---------------------------------------------------------------------------
In addition to the provisions applicable to all TARP
recipients, the IFR-Comp created the Office of the Special
Master and placed seven exceptional assistance recipients under
its jurisdiction. These exceptional assistance recipients were
AIG, Bank of America, Citigroup, Chrysler, Chrysler Financial,
General Motors, and GMAC/Ally Financial. The Special Master
determined the compensation packages for the 25 most highly
paid employees at these companies and the structure of
compensation for the 26th-100th most highly compensated
employees.\527\
---------------------------------------------------------------------------
\527\ 2011 February Oversight Report, supra note 516, at 22.
---------------------------------------------------------------------------
c. Special Master's Determinations
To date, the Special Master has released compensation
determinations for 2009 and 2010, as well as a number of
supplemental determinations.
In general, the Special Master awarded compensation to
executives in the form of cash, stock salary, and incentive
payments, and generally targeted total compensation amounts at
the 50th percentile of compensation for comparable employees at
comparable companies. Cash compensation was typically limited
to $500,000. The amount of stock salary was not restricted but
it was not immediately redeemable. Incentive payments were also
not immediately redeemable. In addition, the Special Master
limited incentive payments to no more than one-third of total
compensation and required that they be paid only if specific
observable performance metrics were met. All other types of
compensation, such as severance plans or perquisites, were
limited to a maximum of $25,000.\528\
---------------------------------------------------------------------------
\528\ 2011 February Oversight Report, supra note 516, at 34.
---------------------------------------------------------------------------
In making these determinations, the Special Master is
required by the IFR-Comp to use six guiding principles: (1)
minimize excessive risk; (2) maximize the capacity to repay
TARP obligations; (3) appropriately allocate compensation
between types of compensation; (4) use performance-based
compensation; (5) award pay that is consistent with
compensation for similar employees at similar entities; and (6)
base compensation on an employee's contributions. The IFR-Comp
also created a ``safe harbor'' for employees who will receive
less than $500,000 in annual compensation. Institutions are not
required to obtain approval of compensation structures from the
Special Master for employees who fall within this safe
harbor.\529\
---------------------------------------------------------------------------
\529\ 2011 February Oversight Report, supra note 516, at 28.
---------------------------------------------------------------------------
For a detailed description of the specific determinations
made for each of the seven exceptional assistance recipients,
see the Panel's February 2011 report.\530\
---------------------------------------------------------------------------
\530\ 2011 February Oversight Report, supra note 516, at 36-48.
---------------------------------------------------------------------------
In addition to approving specified compensation payments
and structures, the Special Master is authorized to interpret
and issue non-binding advisory opinions on Section 111 of EESA
as amended and the IFR-Comp. Furthermore, the IFR-Comp
authorized the Special Master to review compensation paid by
each TARP recipient from the day it first received TARP funding
to February 17, 2009, the date of ARRA's passage, to determine
whether such payments were contrary to the public interest. If
any payments met this standard, the Special Master was required
to seek to negotiate with the offending company for
reimbursement.\531\ The Special Master found that TARP
recipients had paid $1.7 billion in ``disfavored'' compensation
that was ``inappropriate,'' \532\ but not contrary to the
public interest.\533\
---------------------------------------------------------------------------
\531\ 2011 February Oversight Report, supra note 516, at 36-48.
\532\ Congressional Oversight Panel, Testimony of Kenneth R.
Feinberg, former special master for TARP executive compensation,
Transcript: COP Hearing on the TARP and Executive Compensation
Restrictions (Oct. 21, 2010) (publication forthcoming) (online at
cop.senate.gov/hearings/library/hearing-102110-compensation.cfm).
\533\ 2011 February Oversight Report, supra note 516, at 6.
---------------------------------------------------------------------------
d. Non-TARP Initiatives
Although Treasury has not regulated executive compensation
outside of the TARP, a number of other agencies have begun
developing guidance on executive compensation. For example, on
June 21, 2010, the Office of the Comptroller of the Currency,
the Federal Reserve, the FDIC, and the Office of Thrift
Supervision adopted final guidance that establishes three core
principles for executive compensation designed to maintain the
safety and soundness of banking organizations. In addition, the
FDIC is developing enhanced examination procedures to use in
evaluating incentive compensation at institutions under its
supervision. Furthermore, the SEC recently adopted regulations
that require shareholder approval of executive compensation and
``golden parachute'' compensation arrangements, and is in the
process of formulating regulations that require institutional
investment managers to disclose how they vote on these
compensation arrangements.\534\
---------------------------------------------------------------------------
\534\ 2011 February Oversight Report, supra note 516, at 31.
---------------------------------------------------------------------------
Moreover, Congress took further action on executive
compensation. Signed into law on July 21, 2010, the Dodd-Frank
Act includes several provisions that will govern executive
compensation at financial institutions in the future. For
example, it includes provisions that permit clawbacks in
certain situations, require increased disclosures, and impose
more stringent requirements with respect to independent
compensation committees.\535\
---------------------------------------------------------------------------
\535\ 2011 February Oversight Report, supra note 516, at 29.
---------------------------------------------------------------------------
2. Summary of COP Report and Findings
The Panel first considered executive compensation in its
January 2009 report when it noted that executive pay should
``incentivize financial executives to prioritize long-term
objectives, and to avoid both undertaking excessive,
unnecessary risk and socializing losses with the help of the
federal taxpayer.'' \536\ The Panel again examined compensation
practices in March 2010, when it stated that the levels of
compensation set for GMAC/Ally Financial's CEO ``raise
significant questions, which the Panel will continue to
study.'' \537\ In its June 2010 report, the Panel reiterated
its concern that compensation levels ``raise significant
unanswered questions.'' \538\ In addition, on October 21, 2010,
the Panel held a hearing on executive compensation, which
included testimony from former Special Master for TARP
Executive Compensation Kenneth Feinberg, among others.\539\
---------------------------------------------------------------------------
\536\ COP: Special Report on Regulatory Reform, supra note 518, at
38.
\537\ 2010 March Oversight Report, supra note 377, at 57 (``These
[significant questions] include whether particular levels of
compensation are either necessary or appropriate, the nature of the
incentives the compensation creates, and the manner in which Treasury
is exercising its authority under the EESA compensation restrictions as
amended by the American Recovery and Reinvestment Act of 2009
(ARRA).'').
\538\ 2010 June Oversight Report, supra note 395, at 229.
\539\ Other witnesses at the Panel's hearing included Kevin Murphy,
Kenneth L. Trefftzs Chair in Finance and professor of corporate
finance, University of Southern California Marshall School of Business;
Fred Tung, Howard Zhang Faculty Research Scholar and professor of law,
Boston University School of Law; Rose Marie Orens, senior partner,
Compensation Advisory Partners LLC; and Ted White, strategic advisor,
Knight Vinke Asset Management. Congressional Oversight Panel, COP
Hearing on the TARP and Executive Compensation Restrictions (Oct. 21,
2010) (online at cop.senate.gov/hearings/library/hearing-102110-
compensation.cfm).
---------------------------------------------------------------------------
The Panel's primary study of executive compensation,
though, was in its February 2011 report, Executive Compensation
Restrictions in the Troubled Asset Relief Program, which
primarily examined the Office of Internal Review and the Office
of the Special Master. The report expressed concern that the
Office of Internal Review had not released a single document to
the public, despite having far-reaching jurisdiction to monitor
compliance with executive compensation restrictions at all TARP
recipients. In addition, the Panel was troubled that the Office
did not review compliance with all relevant compensation
restrictions.\540\
---------------------------------------------------------------------------
\540\ 2011 February Oversight Report, supra note 516, at 5.
---------------------------------------------------------------------------
With regard to the Special Master, the Panel praised the
changes the Special Master had made to compensation practices
at the seven exceptional assistance companies. In particular,
the Panel noted that in 2009 the Special Master reduced total
direct compensation by 55 percent overall and had altered the
form of compensation executives received. Nevertheless, the
Panel concluded that the Special Master's impact was likely to
be limited, noting rebounding pay on Wall Street, including at
some of the institutions that had previously been under the
Special Master's jurisdiction. However, the report acknowledged
that it is difficult to develop a precise assessment of the
Special Master's impact because there are so many different
factors that contribute to setting executive pay.\541\
---------------------------------------------------------------------------
\541\ 2011 February Oversight Report, supra note 516, at 79.
---------------------------------------------------------------------------
The Panel also expressed concern with the Special Master's
level of transparency. The report described the Special
Master's process for making determinations as a ``black box''
that was not capable of replication by any interested outsider.
In particular, the report noted that the Special Master had not
explained how he resolved conflicts between the six principles
of the public interest standard, how he crafted the general
rules he used, and how he applied these rules to specific
circumstances. This lack of transparency, the Panel stated,
helped prevent the Special Master's work from becoming a model
for compensation in the future.\542\
---------------------------------------------------------------------------
\542\ 2011 February Oversight Report, supra note 516, at 6.
---------------------------------------------------------------------------
The Panel was also troubled by the general uniformity of
the Special Master's determinations. The report questioned
whether one size truly fits all and, for example, whether the
same redemption schedule for salary stock should apply to both
employees of an automotive company and employees of a large
bank.\543\
---------------------------------------------------------------------------
\543\ 2011 February Oversight Report, supra note 516, at 59 & n.
241.
---------------------------------------------------------------------------
A separate concern in the February 2011 report was the
Special Master's aforementioned ``Look Back Review'' of
payments to executives at TARP recipients prior to February 17,
2009. Because the Special Master concluded that payments
totaling $1.7 billion were ``inappropriate'' but not ``contrary
to the public interest,'' he did not attempt to claw back the
payments. The Panel found the Special Master's conclusion
troublesome for several reasons: it may have appeared to the
public to be excessively legalistic, it may have represented an
end-run around Congress' determination that the Special Master
should make every effort to claw back wrongful payments, and it
may have given the impression that the government condoned
inappropriate compensation to executives whose actions
contributed to the financial crisis.\544\
---------------------------------------------------------------------------
\544\ 2011 February Oversight Report, supra note 516, at 6.
---------------------------------------------------------------------------
3. Panel Recommendations and Updates
In its February 2011 report, the Panel recommended that
both the Office of Internal Review and the Office of the
Special Master provide more information to the public. In
particular, the report called for the Office of the Special
Master to publish the specific rationales that led to
individual determinations. In addition, the report suggested
publishing executive turnover data, the companies' compensation
proposals, and specific information on the performance goals
set for incentive compensation. For the Office of Internal
Review, the Panel recommended that it issue a report on
compensation at non-exceptional assistance companies and also
publish information on its monitoring activities. The Office of
Internal Review was also called upon to expand its monitoring
activities to encompass all of the compensation restrictions
set by EESA as amended, the IFR-Comp, and the Special Master.
Finally, the Panel recommended that Treasury release a guide
outlining best practices for executive compensation.\545\
---------------------------------------------------------------------------
\545\ 2011 February Oversight Report, supra note 516, at 81.
---------------------------------------------------------------------------
Since the Panel's February 2011 report, several companies
have released their 2010 compensation data, which showed that
executive compensation increased.\546\ In total, the New York
State Comptroller calculated that overall compensation
increased by 6 percent in 2010. The structure of this
compensation has changed, however. Base salaries and deferred
compensation increased while cash bonuses declined by 8
percent.\547\ Also, in a step away from the structures
established by the Special Master, Citigroup stated that ``it
does not intend to award salary stock in 2011 or future years,
as it is no longer a TARP company.'' \548\
---------------------------------------------------------------------------
\546\ For example, J.P. Morgan CEO James Dimon received a 22
percent increase in restricted stock payout. J.P. Morgan Chase & Co.,
Form 4: Statement of Change in Beneficial Ownership (Feb. 17, 2011)
(online at sec.gov/Archives/edgar/data/19617/000122520811006335/
xslF345X03/doc4.xml).
\547\ Office of the New York State Comptroller Thomas P. DiNapoli,
DiNapoli: Wall Street Bonuses Declined in 2010 (Feb. 23, 2011) (online
at www.osc.state.ny.us/press/releases/feb11/022311a.htm). Though
applauding the changes to compensation that have occurred to date, a
Moody's report expressed pessimism that such changes would last. See
Moody's Investor Service, Bank Compensation Reform: Short-Term
Improvements, Long-Term Questions (Mar. 9, 2011).
\548\ Citigroup, Inc., Schedule 14(a), at 56 (Feb. 28, 2011)
(online at sec.gov/Archives/edgar/data/831001/000119312511050132/
dpre14a.htm).
---------------------------------------------------------------------------
In addition, on March 2, 2011, the SEC proposed a new rule
requiring certain financial institutions to disclose the
structure of their incentive compensation and prohibiting pay
arrangements that encourage excessive risk-taking. The rule is
now open for public comment and therefore may change before
becoming final.\549\
---------------------------------------------------------------------------
\549\ U.S. Securities and Exchange Commission, SEC Proposes Rules
on Disclosure of Incentive-Based Compensation Arrangements at Financial
Institutions (Mar. 2, 2011) (online at www.sec.gov/news/press/2011/
2011-57.htm).
---------------------------------------------------------------------------
4. Lessons Learned
The Panel's recommendations from its February 2011 report
focused on a common theme: transparency. In the more than two
years since EESA was passed, exceptional assistance
institutions have altered their cash compensation and their
compensation structures. The Office of the Special Master has
been at the center of these two reforms. But despite these
achievements, the public knows very little about how the
government has implemented the compensation rules or about the
impact of these measures. The Office of Internal Review has not
published a single document to the public and aspects of the
Special Master's work are ``black boxes.''
This lack of transparency limits the impact of the
executive compensation restrictions. It makes it very
difficult, if not impossible, for any board of directors,
shareholder, or government agency to use the Special Master's
public determination letters as the basis for mimicking those
decisions. So long as compensation experts on Wall Street and
elsewhere lack the information needed to use the Special
Master's deliberations as a model, what seemed an opportunity
for sweeping reform will be destined to leave a far more modest
legacy.
VIII. General TARP Assessment
The preceding sections have provided an issue-specific look
at the various pieces of the TARP. But this program, an
unprecedented $700 billion response to a panic in the financial
markets, is more than just the sum of its parts. In four of its
previous reports, the Panel evaluated the TARP as a whole. This
section includes a review of the findings in those reports, as
well as an update on the current status of the TARP.
A. Summary of COP Reports and Findings
The Panel's April 2009 report, Assessing Treasury's
Strategy: Six Months of TARP, provided a framework for
evaluating the TARP's success.\550\ The report gave an overview
of past banking crises in the United States and in other
countries, as well as the responses of other countries to the
current crisis. It concluded that each successful resolution of
a financial crisis involved: (1) swift action to ensure the
integrity of bank accounting; (2) a willingness to take
aggressive action to address failing institutions; (3) a
willingness to hold management accountable either by firing
them or, where appropriate, prosecuting them; and (4)
transparency in the reporting of the use of public sector
funds. The report also stated that if a future course change
proved necessary, Treasury might consider liquidation or
conservatorship of distressed banks as an alternative to
subsidizing them through the TARP.\551\
---------------------------------------------------------------------------
\550\ 2009 April Oversight Report, supra note 88.
\551\ The Panel also explored these questions in an associated
hearing. See generally Congressional Oversight Panel, Transcript:
Learning from the Past: Lessons from the Banking Crises of the 20th
Century (Mar. 19, 2009) (online at cop.senate.gov/documents/transcript-
031909-bankingcrises.pdf).
---------------------------------------------------------------------------
The Panel's December 2009 report, Taking Stock: What Has
the Troubled Asset Relief Program Achieved?, evaluated the TARP
a little more than one year after its enactment. The report
noted that the TARP should be judged as part of a larger series
of extraordinary actions taken by the federal government to
stem the panic in the financial markets in the fall of 2008,
and stated that there is a consensus that these programs
stabilized the U.S. financial system by renewing the flow of
credit and averting a more acute crisis. The report also found,
though, that credit availability remained low, questions
remained about the capitalization of many banks, the
foreclosure crisis continued to grow, CRE remained a looming
problem, and the government's actions resulted in implicit
guarantees of financial institutions, which posed the most
difficult long-term problem to emerge from the crisis. As
Columbia University economist Charles Calomiris stated in
testimony before the Panel, ``If financial institutions know
that the government is there to share losses, risk-taking
becomes a one-sided bet, and so more risk is preferred to
less.'' \552\
---------------------------------------------------------------------------
\552\ Congressional Oversight Panel, Written Testimony Charles
Calomiris, Henry Kaufman Professor of Financial Institutions, Columbia
Business School, Taking Stock: Independent Views on TARP's
Effectiveness, at 4 (Nov. 19, 2009) (online at cop.senate.gov/
documents/testimony-111909-calomiris.pdf).
---------------------------------------------------------------------------
In its January 2010 report, Exiting TARP and Unwinding Its
Impact on the Financial Markets, the Panel focused on
Treasury's strategy for exiting the TARP.\553\ The report was
released following Secretary Geithner's December 9, 2009,
exercise of his authority to extend the TARP until October 3,
2010.\554\ Secretary Geithner had recently explained this
decision in testimony before the Panel, stating: ``We need to
continue to find ways to help mitigate foreclosures for
responsible homeowners and to get credit to small business. We
also must maintain the capacity to address potential threats to
our financial system, which could undermine the recovery we
have seen to date.'' \555\ The Panel noted that while
Treasury's formal cutoff from further TARP commitments was
October 3, 2010, its final exit from the TARP and divestiture
of all TARP-related holdings, potentially worth billions of
dollars, would be an ongoing process that would extend well
into the future.\556\ Treasury's exit strategy sought to
balance an emphasis on maintaining the stability of the
financial system, preserving the stability of individual
financial institutions, and maximizing the return on the
taxpayers' investment. The Panel concluded that Treasury's
three goals were potentially conflicting and sufficiently broad
to justify any strategy. The report also focused on the
continuing market effects created by the TARP, specifically the
implicit guarantee that has created the perception that certain
institutions will be protected by the government. The Panel
noted two means of counteracting the effects of implicit
guarantees: regulation of implicitly guaranteed institutions
and the creation of a financial system in which those
institutions could be liquidated or reorganized to allow for
failure.
---------------------------------------------------------------------------
\553\ 2010 January Oversight Report, supra note 153.
\554\ TARP funds had to be legally obligated to a program by
October 3, 2010, but they could continue to be disbursed after that
date.
\555\ Congressional Oversight Panel, Written Testimony of Timothy
F. Geithner, secretary, U.S. Department of the Treasury, COP Hearing
with Treasury Secretary Timothy Geithner (Dec. 10, 2009) (online at
cop.senate.gov/documents/testimony-121009-geithner.pdf).
\556\ EESA provided the Treasury Secretary with the authority to
``hold the assets to maturity or for resale for and until such time as
the Secretary determines that the market is optimal for selling such
assets, in order to maximize the value for taxpayers'' and ``sell such
assets at a price that the Secretary determines, based on available
financial analysis, will maximize return on investment for the Federal
Government.'' 12 U.S.C. Sec. 5223(a)(2).
---------------------------------------------------------------------------
The Panel's September 2010 report, Assessing the TARP on
the Eve of Its Expiration, provided a summation of Treasury's
use of TARP funds and how its TARP programs have performed. The
Panel noted that while Secretary Geithner's extension of the
TARP in December 2009 was meant to allow for continued use of
TARP funds and preserve Treasury's authority to intervene
swiftly should financial markets exhibit signs of another
meltdown, Treasury provided no further funding to address the
areas it highlighted at the time the extension occurred. Thus,
the report noted, the extension of the TARP functioned as a
means to extend the government's implicit guarantee of the
financial system. The report also noted that over time a public
stigma has attached to the TARP, which is seen as a bailout of
Wall Street banks and domestic auto manufacturers that had
little impact on the unemployed and homeowners at risk of
foreclosure. Alan Blinder, a Princeton economist, told the
Panel 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.'' \557\ The Panel's report noted that
Treasury did little to remove this stigma, as it struggled with
transparency and communications and failed to collect key data
that would have allowed for greater understanding of the use
and impact of TARP funds. The Panel consulted with outside
economic experts who, while disagreeing on various points,
generally agreed that the TARP was necessary to stabilize the
financial system, but that it created significant moral hazard.
The report noted that any evaluation of the TARP ultimately
must take into account the goals stated in EESA: protecting
home values, college funds, retirement accounts, and life
savings; preserving homeownership and promoting jobs and
economic growth; and maximizing overall returns to U.S.
taxpayers.\558\
---------------------------------------------------------------------------
\557\ Alan Blinder, Written Answers to Questions Posed by the
Congressional Oversight Panel (Aug. 2010). See 2010 September Oversight
Report, supra note 53, at 96, 112-114.
\558\ 2010 September Oversight Report, supra note 53, at 106.
---------------------------------------------------------------------------
B. Panel Recommendations
In its reports evaluating the TARP as a whole, several of
the Panel's recommendations have focused on transparency.
Specifically, the Panel has encouraged Treasury to provide more
detailed, useful information in its TARP accounting statements,
in order to show how it has managed TARP resources. The Panel
has encouraged Treasury to produce quarterly TARP financial
statements with an improved Management's Discussion and
Analysis section. The Panel also recommended that Treasury
disclose to the public more information about its plans for
disposing of TARP assets. And in January 2010 the Panel urged
Treasury to require any future TARP recipients to be more
transparent about their use of taxpayer funds.\559\
---------------------------------------------------------------------------
\559\ 2010 January Oversight Report, supra note 153.
---------------------------------------------------------------------------
Treasury has made some progress in this area, but the Panel
believes that Treasury can and should be more transparent.
Treasury has produced annual financial statements and a TARP
Two Year Retrospective that more clearly articulated the
metrics by which Treasury was evaluating the TARP's
effectiveness;\560\ these have been useful for oversight of the
program. Treasury now provides daily updates on its financial
positions and releases some of its data in a spreadsheet
format, making it more easily analyzed and evaluated.\561\
Treasury released a semi-annual TARP financial statement in
early 2010 and has been providing more frequent accounting for
the status of TARP resources, but it has not adopted the
Panel's recommendation of producing quarterly financial
reports. Treasury did not take meaningful steps to require more
transparency by new TARP recipients.
---------------------------------------------------------------------------
\560\ TARP: Two Year Retrospective, supra note 246.
\561\ For instance as of December 7, 2009, Treasury began releasing
the Transaction reports in excel format. See, e.g., U.S. Department of
the Treasury, Troubled Asset Relief Program Transactions Report for the
Period Ending December 3, 2009 (Dec. 7, 2009) (online at
www.treasury.gov/initiatives/financial-stability/briefing-room/reports/
tarp-transactions/Pages/default.aspx?page=8).
---------------------------------------------------------------------------
In light of the government's dual roles as investor in and
overseer of the financial industry, the Panel recommended that
Treasury consider holding its TARP assets in a trust that is
insulated from political pressure and government interference,
as long as care is taken to ensure that the trust assets are
managed in the best interests of taxpayers. Treasury has
maintained that the drawbacks of such a trust outweigh the
benefits. One drawback that Treasury has cited is that the
trust structure would make it difficult to balance Treasury's
goal of maximizing the benefit to taxpayers with the goal of
maintaining financial stability.\562\
---------------------------------------------------------------------------
\562\ 2010 January Oversight Report, supra note 153, at 32, 142.
---------------------------------------------------------------------------
Finally, the Panel, both in its January 2009 Special Report
on Regulatory Reform and in subsequent reports, recommended
that Treasury take steps to resolve the problem of an implicit
government guarantee of too-big-to-fail financial
institutions.\563\ The Dodd-Frank Act takes a variety of
approaches to address this problem. The law empowers the FDIC
to resolve financial institutions whose failure poses a risk to
the nation's financial stability. The law also requires
systemically significant institutions with more than $50
billion in assets to submit so-called ``living wills,'' or
plans for their resolution in times of severe financial
distress. And the law creates a Financial Stability Oversight
Council charged with identifying and responding to systemic
risks in the U.S. economy. In recent months, federal regulatory
agencies have begun the process of implementing these
provisions. Nonetheless, the implicit guarantee of the TARP is
proving difficult to unwind.\564\
---------------------------------------------------------------------------
\563\ COP: Special Report on Regulatory Reform, supra note 518, at
76 (``We should all know by now that whenever government subsidizes
risk, either by immunizing parties from the consequences of their
behavior or allowing them to shift risk to others at no cost, we
produce a clear moral hazard that furthers risky behavior, usually with
disastrous consequences.''); 2010 January Oversight Report, supra note
153, at 142 (``There are multiple options available and there is broad
agreement that a new approach to systemic risk regulation is necessary
so that businesses are not insulated from the effects of their own bad
decisions.''). See also Congressional Oversight Panel, Written
Testimony of Sarah Bloom Raskin, commissioner, Maryland Office of
Financial Regulation, Modernizing America's Financial Regulatory
Structure, at 6 (Jan. 14, 2009) (online at cop.senate.gov/documents/
testimony-011409-raskin.pdf) (``While this crisis has demanded a
dramatic response from the federal government, the short-term result of
many of these programs, including the TARP, has been to create even
larger and more complex institutions and greater systemic risk. These
responses have created extreme disparity in the treatment of financial
institutions, with the government protecting those deemed to be too big
or too complex to fail at the expense of smaller institutions, and
perhaps of the diversity of our financial system.'').
\564\ 2010 September Oversight Report, supra note 53, at 11-12. The
four economists who testified at the Panel's March 4th hearing--Prof.
Joseph E. Stiglitz, Prof. Simon Johnson, Prof. Allan H. Meltzer, and
Prof. Luigi Zingales--were all skeptical as to whether the Dodd-Frank
Act will prove effective in limiting the too-big-to-fail guarantee that
TARP has served to strengthen. See generally Congressional Oversight
Panel, COP Hearing on Assessing the TARP (Mar. 4, 2011) (online at
cop.senate.gov/hearings/library/hearing-030411-cre.cfm).
---------------------------------------------------------------------------
C. Financial Status of the TARP
EESA authorized the expenditure of up to $700 billion under
the TARP, and by the end of 2008 Treasury had used roughly $250
billion of that sum, mostly in assistance to banks. In February
2009, the Obama administration proposed a budget that raised
the possibility that as much as $750 billion more would be
needed.\565\ Those additional funds were never requested. As
2009 continued, it became clear that unless Treasury expanded
TARP programs or introduced new ones, it would not spend the
entire $700 billion that Congress had authorized in October
2008. The stress tests, which raised the possibility of
substantial additional TARP funds going to the banking sector,
ultimately resulted in a TARP expenditure of only $3.8
billion.\566\ Treasury initially announced that it would spend
$100 billion in TARP funds on the PPIP, but later lowered the
program's ceiling to $22.4 billion. Likewise, the ceiling for
TARP spending on the TALF was dropped from $55 billion to $4.3
billion.\567\ On the eve of the TARP's potential expiration in
December 2009, nearly $300 billion of the original $700 billion
in TARP funds was still available. Then on December 9, 2009,
Secretary Geithner exercised his statutory authority to extend
the TARP for roughly nine more months. Secretary Geithner
explained at the time that barring an immediate and substantial
threat to the economy stemming from financial instability,
Treasury would limit new TARP commitments to mitigating home
foreclosures, providing capital to small and community banks,
along with other efforts aimed at facilitating small business
lending, and potentially increasing Treasury's commitment to
the TALF.\568\ In the end Treasury did not allocate any
additional TARP funds beyond those it had allocated in December
2009. In the summer of 2010, Congress reduced the TARP's
ceiling--or the amount that Treasury could spend before
accounting for repayments--to $475 billion. Treasury's spending
authority under the TARP expired on October 3, 2010.
---------------------------------------------------------------------------
\565\ Office of Management and Budget, A New Era of Responsibility:
Renewing America's Promise, at 37 (Feb. 26, 2009) (online at
www.whitehouse.gov/sites/default/files/omb/assets/fy2010_new_era/
A_New_Era_of_Responsibility2.pdf) (``Although the Administration is not
requesting additional funds from the Congress at this point and
although it is not yet possible to provide a precise estimate of how
much additional Federal action may be involved should the
Administration need to request such funds, the President's Budget
nonetheless includes a $250 billion contingent reserve for further
efforts to stabilize the financial system. . . . The $250 billion
reserve would support $750 billion in asset purchases.'').
\566\ See the discussion of GMAC's participation in the SCAP in
Section V.A.1, supra.
\567\ 2009 May Oversight Report, supra note 227, at 72-73; 2011
February Oversight Report, supra note 516, at 107.
\568\ U.S. Department of the Treasury, Treasury Department Releases
Text of Letter from Secretary Geithner to Hill Leadership on
Administration's Exit Strategy for TARP (Dec. 9, 2009) (online at
www.treasury.gov/press-center/press-releases/Pages/tg433.aspx).
---------------------------------------------------------------------------
Over the life of the TARP, final loss estimates have
sharply decreased. In March 2009, CBO estimated that the TARP
would end up costing $356 billion. By January 2011, that latest
loss estimate for the TARP is $25 billion, while OMB's latest
estimate is $48 billion.\569\ OMB's cost estimates reflect the
Administration's policy on HAMP and other programs, have
similarly declined sharply since 2009. Figure 31 illustrates
three trends: the total TARP funds outstanding, which rose over
the early months of the program before falling in 2010; CBO's
loss estimates, which rose sharply in early 2009 before
declining; and OMB's loss estimates, which also rose
precipitously before falling off.
---------------------------------------------------------------------------
\569\ The main reason for the difference between CBO's estimate and
the Administration's estimate is that CBO projects a total of $12
billion in expenditures on HAMP, the Hardest Hit Fund, and the FHA
Short Refinance Program, while the Administration projects $45.6
billion in spending on those programs. The Panel believes that CBO's
assumption is more realistic. CBO Report on TARP--November 2010, supra
note 341, at 5; Office of Management and Budget, FY 2012 Budget,
Economic and Budget Analyses, at 47 (Feb. 14, 2011) (online at
www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/
econ_analyses.pdf).
---------------------------------------------------------------------------
FIGURE 31: TARP FUNDS OUTSTANDING VS. CBO AND OMB SUBSIDY COST
ESTIMATES \570\
---------------------------------------------------------------------------
\570\ For current and past CBO cost estimates of TARP, see
Congressional Budget Office, Report on the Troubled Asset Relief
Program, at 2 (Jan. 16, 2009) (online at cbo.gov/ftpdocs/99xx/doc9961/
01-16-TARP.pdf); Congressional Budget Office, Report on the Troubled
Asset Relief Program, at 7 (June 2009) (online at www.cbo.gov/ftpdocs/
100xx/doc10056/06-29-TARP.pdf); Douglas Elmendorf, Troubled Asset
Relief Program, Congressional Budget Office Director's Blog (Apr. 17,
2009) (online at cboblog.cbo.gov/?p=231); Congressional Budget Office,
Report on the Troubled Asset Relief Program, at 2 (June 2009) (online
at www.cbo.gov/ftpdocs/100xx/doc10056/06-29-TARP.pdf); Congressional
Budget Office, The Budget and Economic Outlook: An Update, at 18 (Aug.
2009) (online at www.cbo.gov/ftpdocs/105xx/doc10521/08-25-
BudgetUpdate.pdf); Congressional Budget Office, The Budget and Economic
Outlook: Fiscal Years 2010 to 2020, at 104 (Jan. 2010) (online at
www.cbo.gov/ftpdocs/108xx/doc10871/01-26-Outlook.pdf); Congressional
Budget Office, Report on the Troubled Asset Relief Program, at 3 (Mar.
2010) (online at cbo.gov/ftpdocs/112xx/doc11227/03-17-TARP.pdf);
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); Congressional Budget Office, Report on the
Troubled Asset Relief Program, at 5 (Nov. 2010) (online at cbo.gov/
ftpdocs/119xx/doc11980/11-29-TARP.pdf); Congressional Budget Office,
The Budget and Economic Outlook: Fiscal Years 2011 to 2021, at 67 (Jan.
2011) (online at cbo.gov/ftpdocs/120xx/doc12039/01-
26_FY2011Outlook.pdf).
For current and past OMB cost estimates of TARP, see Office of
Management and Budget, OMB Report Under the Emergency Economic
Stabilization Act, Section 202, at 4 (Dec. 5, 2008) (online at
www.whitehouse.gov/sites/default/files/omb/assets/omb/legislative/
eesa_120508.pdf); Office of Management and Budget, Analytical
Perspectives: Budget of the U.S. Government--Fiscal Year 2010, at 66
(Feb. 26, 2009) (online at www.gpoaccess.gov/usbudget/fy10/pdf/
spec.pdf); Office of Management and Budget, Analytical Perspectives:
Budget of the U.S. Government--Fiscal Year 2011, at 40 (Feb. 1, 2010)
(online at www.gpoaccess.gov/usbudget/fy11/pdf/spec.pdf); Office of
Management and Budget, OMB Report Under the Emergency Economic
Stabilization Act, Section 202, at 3 (Oct. 15, 2010) (online at
www.whitehouse.gov/sites/default/files/
OMB212Sharp_omb_eop_gov_20101015_175127.pdf); Office of Management and
Budget, Analytical Perspectives: Budget of the U.S. Government--Fiscal
Year 2012, at 45 (Feb. 14, 2011) (online at www.gpoaccess.gov/usbudget/
fy12/pdf/BUDGET-2012-PER.pdf).
[GRAPHIC] [TIFF OMITTED] T4832A.024
Figure 32 shows the current status of the government's
investments for the 13 programs that have used TARP funds. This
table only shows the status of principal invested by Treasury.
Any dividends, interest payments, and other proceeds that may
allow Treasury to earn a return on its TARP investments are
accounted for separately in Figure 33.
The first five programs listed in Figure 32--CPP, TIP, AGP,
AIGIP, and CDCI--collectively represent the TARP's direct
assistance to financial institutions. Out of $320 billion
provided to these firms, about $92.3 billion remains
outstanding, including $30.9 billion in the CPP and $60.9
billion to AIG. The Panel believes that the eventual losses in
the CPP are likely to be relatively small. Consequently, most
of Treasury's exposure to losses on its investments in
financial institutions involves AIG. The outcome of the AIG
investment will depend on the price that Treasury can
eventually obtain for its common stock, including its Series C
shares, which were not actually received as part of any TARP
initiative.\571\
---------------------------------------------------------------------------
\571\ The Series C shares--discussed in Section VI.F.1, supra--were
provided by AIG to the U.S. Treasury in consideration for FRBNY's $85
billion lending facility. This happened in September 2008, prior to the
TARP investments in AIG.
---------------------------------------------------------------------------
The next two programs listed in the table--AIFP and ASSP--
represent the TARP's assistance to automotive companies.\572\
About 60 percent of the $81.3 billion that Treasury provided to
automotive companies remains outstanding, including large
investments in GM, Chrysler, and GMAC/Ally Financial. There is
still uncertainty about the outcome of each of those
investments. The next three TARP programs listed in the table--
TALF, PPIP, and the SBA 7(a) Securities Purchase Program--
represent targeted efforts to revive lending. Though very
little of this money has been repaid, the Panel expects losses
on these programs to be minimal.
---------------------------------------------------------------------------
\572\ This category includes assistance to GMAC/Ally Financial,
which Treasury chose to fund as part of AIFP due to the companies'
interconnectedness to the future viability of the automotive
manufacturers.
---------------------------------------------------------------------------
Finally, the last three programs listed in the table--HAMP,
HHF, and the FHA Short Refinance Program--represent the TARP's
foreclosure-prevention efforts. By design, all three of these
programs will result in net losses to the TARP, since the funds
are being used to provide financial incentives to prevent
foreclosures, and are not meant to be repaid. So the size of
the eventual losses will be negatively correlated with the
success of the programs. In other words, the more foreclosures
that the program prevents, the greater the losses to the TARP.
The Panel expects the eventual losses to be far smaller than
the $45.6 billion allocated for the programs, because usage of
the programs to date is far below initial projections.
Overall, Treasury has spent $419.9 billion of the $475
billion that it is currently authorized to spend. Of the total
amount spent, $255.9 billion has been repaid. Roughly $6
billion in losses have been recorded. For particular TARP
programs, those losses on principal may be partially or fully
offset by dividends, interest payments, and other proceeds
collected by Treasury. Since the TARP expired in October 2010,
Treasury has no longer been able to make new funding
commitments, but it can continue to provide funding for TARP
programs for which it has existing contracts and previous legal
commitments. As Figure 32 shows, $55.1 billion in TARP funding
is still available to Treasury, reserved mostly for the three
TARP foreclosure-prevention programs.
FIGURE 32: TARP ACCOUNTING (AS OF MARCH 10, 2011)
[Dollars in billions] ix
----------------------------------------------------------------------------------------------------------------
Total
Maximum Actual Repayments/ Total Funding Funding
Program Amount Funding Reduced Losses Currently Available xi
Allotted x Exposure Outstanding
----------------------------------------------------------------------------------------------------------------
Capital Purchase Program (CPP)... $204.9 $204.9 xii $(171.5 xiii $(2.6) $30.8 $0
)
Targeted Invest-ment Program 40.0 40.0 (40.0) 0 0 0
(TIP)...........................
Asset Guarantee Program (AGP).... 5.0 xiv 5.0 xv (5.0) 0 0 0
AIG Investment Program (AIGIP)... xvi 70.0 70.0 xvii (9.1) 0 60.9 0
Community Development Capital 0.6 xviii 0.6 0 0 0.6 0
Initiative (CDCI)...............
Auto Industry Financing Program 81.3 81.3 xix (29.0) xx (3.4) 48.9 0
(AIFP)..........................
Auto Supplier Support Program 0.4 0.4 (0.4) 0 0 0
(ASSP) xxi......................
Term Asset-Backed Securities Loan xxii 4.3 xxiii 0.1 0 0 0.1 4.2
Facility (TALF).................
Public-Private Investment Program 22.4 xxv 15.9 xxvi (0.7) 0 15.2 6.5
(PPIP) xxiv.....................
SBA 7(a) Securities Purchase 0.4 xxvii 0.4 xxviii 0 0 0.4 0
Program.........................
Home Affordable Modification 29.9 xxix 1.0 0 0 1.0 28.9
Program (HAMP)..................
Hardest Hit Fund (HHF)........... xxx 7.6 xxxi 0.1 0 0 0.1 7.5
FHA Short Refinance Program...... 8.1 xxxii 0.1 0 0 0.1 8.1
------------------------------------------------------------------------------
Total........................ $475.0 $419.9 $(255.8) $(6.0) $158.1 $55.1
----------------------------------------------------------------------------------------------------------------
See endnote references in Annex III: Endnotes
A quantitative assessment of the TARP must also include any
profit earned or loss incurred on actual fund outlays. The
terms of TARP transactions created the possibility for Treasury
to profit from its investments after repayment, but Treasury
has also suffered losses related to both investments that are
unrecoverable and those never intended for repayment.
Most of the TARP programs hold at least the potential for
the taxpayers to make a profit. So far, those programs have
earned a profit, net of losses, of $30.3 billion.\573\ The
losses to date include $2.6 billion from CPP investments and
$3.4 billion from the AIFP. The CPP losses relate to the
bankruptcies of CIT Group and Pacific Coast National Bank and
the sales of the preferred stock (and any related warrants) of
South Financial Group, TIB Financial Corporation, the Bank of
Currituck, Treaty Oak Bancorp, and Cadence Financial
Corporation. The AIFP losses were derived from a $1.9 billion
settlement payment for Treasury's $3.5 billion loan to Chrysler
Holding \574\ and the net loss from the $1.9 billion debtor-in-
possession loan provided to Old Chrysler.\575\ Figure 33 shows
the profits and losses for each TARP program. It is important
to note that this table represents a snapshot in time, and
shows only recorded profits and losses; the TARP's net profit
or loss changes with the finalization of each transaction.
Additional profits and losses are inevitable. As noted earlier,
CBO currently estimates a final net loss of $25 billion,
although this represents a discounted present value estimate
rather than a simple accounting summation of net profits and
losses as discussed here.\576\
---------------------------------------------------------------------------
\573\ These figures do not include the amount currently outstanding
of $157.9 billion. Treasury Transactions Report, supra note 36.
\574\ 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. See 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.treasury.gov/press-center/press-
releases/Pages/tg700.aspx); Treasury Transactions Report, supra note
36.
\575\ Following the bankruptcy proceedings for Old Chrysler, which
extinguished the $1.9 billion debtor-in-possession loan provided to Old
Chrysler, Treasury retained the right to recover the proceeds from the
liquidation of specified collateral. Although Treasury does not expect
a significant recovery from the liquidation proceeds, Treasury is not
yet reporting this loan as a loss in the TARP Transactions Report. As
of March 8, 2011, Treasury had collected $48.1 million in proceeds from
the sale of collateral. Treasury included these proceeds as part of the
funds repaid under the AIFP. U.S. Department of the Treasury, Troubled
Assets Relief Program Monthly 105(a) Report--September 2010 (Oct. 12,
2010) (online at www.treasury.gov/initiatives/financial-stability/
briefing-room/reports/105/Documents105/
September%20105(a)%20report_FINAL.pdf); Treasury conversations with
Panel staff (Aug. 19, 2010 and Nov. 29, 2010); Treasury Transactions
Report, supra note 36.
\576\ CBO Report on TARP--November 2010, supra note 341, at 5.
FIGURE 33: TARP PROFIT AND LOSS
[Dollars in millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Warrant
Dividends xxxiv Interest xxxv Disposition Other Losses xxxvii
TARP Initiative xxxiii (as of 2/28/ (as of 2/28/ Proceeds xxxvi Proceeds (as (as of 3/8/ Total
2011) 2011) (as of 3/8/ of 2/28/2011) 2011)
2011)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total.................................................. $16,482 $1,256 $8,681 $10,014 ($6,018) $30,415
CPP.................................................... 10,570 68 7,069 xxxviii 6,852 (2,578) 21,981
TIP.................................................... 3,004 - 1,446 - - 4,450
AIGIP.................................................. - - - xxxix 18 - 18
AIFP................................................... 2,461 1,061 xl 99 xli 43 xlii (3,440) 224
ASSP................................................... - 15 - xliii 101 - 116
AGP.................................................... 443 - 67 xliv 2,246 - 2,756
PPIP................................................... - 107 - xlv 477 - 583
SBA 7(a)............................................... - 5 - xlvi 0 - 5
Bank of America Guarantee.............................. - - - xlvii 276 - 276
CDCI................................................... 3 2 - - - 5
--------------------------------------------------------------------------------------------------------------------------------------------------------
See endnote references in Annex III: Endnotes
Beyond the basic profit and loss calculation, an additional
determination of the profitability of investments is the
investment's return. As mentioned above, some TARP programs
were not designed to create a return, and thus it would not
make sense to calculate one for those expenditures. But for the
other TARP programs, the return offers one way to assess their
effectiveness. The Panel has consistently employed the IRR as a
measure of profitability, as it incorporates cash outflows and
inflows while taking into consideration the time value of
money. Treasury, in contrast, has utilized several measures to
assess the government's return on particular TARP programs as
well as the TARP as a whole.\577\
---------------------------------------------------------------------------
\577\ One criticism of the IRR approach is that it assumes
reinvestment of the earnings and repaid principal at the same rate as
that calculated for the overall IRR for the program. See e.g., John S.
Walker, Henry F. Check, and Karen L. Randall, Does the Internal Rate of
Return Calculation Require a Reinvestment Rate Assumption?--There Is
Still No Consensus (online at www.abe.sju.edu/check.pdf) (accessed Mar.
11, 2011). In the case of Treasury, the more appropriate assumption may
be that Treasury's return covers only its cost of issuing new debt for
the comparable period.
---------------------------------------------------------------------------
For the warrants associated with the CPP investment,
Treasury utilizes a non-annualized absolute return, which is
calculated simply as money in divided by money out, without any
consideration for the timing of cash flows.\578\ The Panel's
calculation includes a consideration for the time value of
money. Further, Treasury includes only CPP and TIP investments
that have been fully repaid, and excludes investments lost due
to bankruptcy or partial repayment. The Panel, however,
includes all CPP and TIP investments that have been repaid or
in which Treasury has concluded it will take a loss, ensuring
that the total return is not inflated by exclusion of known
losses. As of December 31, 2010, Treasury measured the return
on CPP investments fully repaid to be 9.8 percent, including
both dividends and warrants.\579\ The Panel, by comparison,
calculates a return of 8.4 percent on CPP investments as of
January 3, 2011.\580\
---------------------------------------------------------------------------
\578\ Treasury notes that this method was chosen because at the
time they first issued a CPP return, most of the investments and
disposed warrants had only been held for a year or less, which would
have inflated an annualized return. They have continued with this
calculation for consistency. Treasury conversations with Panel staff
(Mar. 7, 2011).
\579\ December 2010 Warrant Disposition Report, supra note 152, at
1.
\580\ The 8.4 percent return calculated by the Panel also includes
the additional warrants received from Treasury's investment in Bank of
America through the TIP. The Panel calculates a return of 10.0 percent
on CPP investments as of March 9, 2011.
---------------------------------------------------------------------------
Neither Treasury nor the Panel have calculated an overall
rate of return for TARP as a whole, given the disparate nature
of the separate programs involved--including housing programs
for which no return was expected--and the fact that most have
not been completely closed out. The only other TARP program for
which Treasury calculates a rate of return is the PPIP, for
which Treasury calculates a return on equity alone, excluding
the debt portion.\581\ While calculating a return on equity is
standard industry practice in the private sector, for the
purpose of a return on taxpayer dollars, this practice does not
reflect the government's true financial exposure. While
Treasury makes clear that its PPIP return is for equity only,
and is useful for private investors in the program, the total
return on debt and equity would be lower than the return on
equity alone. Based on its method of calculating a return for
PPIP, Treasury currently shows a return of 27.0 percent.\582\
When calculated as a blended return on both equity and debt,
the total return is only 9.7 percent.\583\
---------------------------------------------------------------------------
\581\ According to Treasury, their rationale for using a return on
only equity is because under the terms of the PPIP agreement, only the
equity financing was truly at risk. Treasury conversations with Panel
staff (Feb. 11, 2011). Also, the debt portion of the PPIP investment
carries a financing rate of LIBOR plus 1 percent. U.S. Department of
the Treasury, Letter of Intent, at Exhibit A (July 8, 2009) (online at
www.treasury.gov/initiatives/financial-stability/investment-programs/
ppip/s-ppip/Documents/S-PPIP_LOI_Term-Sheets.pdf).
\582\ Treasury's Legacy Securities Public-Private Investment
Program: Program Update, supra note 102, at 8.
\583\ Ben Protess, Bad Asset Purchase Program Turning a Profit, The
New York Times Dealbook Blog (Jan. 24, 2011) (online at
dealbook.nytimes.com/2011/01/24/toxic-asset-purchase-program-turning-a-
profit/).
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IX. Conclusions and Lessons Learned
In order to evaluate the TARP's impact, one must first
recall the extreme fear and uncertainty that infected the
financial system in late 2008. The stock market had endured
triple-digit swings. Major financial institutions, including
Bear Stearns, Fannie Mae, Freddie Mac, and Lehman Brothers, had
collapsed, sowing panic throughout the financial markets. The
economy was hemorrhaging jobs, and foreclosures were escalating
with no end in sight. Chairman Bernanke, looking back on the
events of late 2008, has said that the nation was on course for
``a cataclysm that could have rivaled or surpassed the Great
Depression.''
It is now clear that, although America has endured a
wrenching recession, it has not experienced a second Great
Depression. America's financial system has survived. Its
economy is recovering.
The TARP does not deserve full credit for preventing a
depression; indeed, the TARP in isolation may have been
insufficient to make much of a difference to the broader
economy. But the TARP provided critical support at a moment of
profound uncertainty. At the peak of the 2008 financial crisis,
when the markets questioned the stability of virtually every
bank in the country, the TARP restored a measure of calm and
stability. It achieved this effect in part by providing capital
to banks but, more significantly, by demonstrating that the
United States would take any action necessary to prevent the
collapse of its financial system. Through a combined display of
political resolve and financial force, the TARP quelled the
immediate panic and helped to avert an even more severe crisis.
At the time that Congress established the TARP in October
2008, CBO declined to provide a cost estimate, saying that the
program's extremely broad and vague mandates rendered its final
cost unknowable. One number, however, caught the public
imagination: $700 billion, the total amount of money that
Treasury requested and Congress authorized to bail out the
financial system. As the New York Times reported following
Treasury's initial TARP proposal, ``A $700 billion expenditure
on distressed mortgage-related assets would roughly be what the
country has spent so far in direct costs on the Iraq war and
more than the Pentagon's total yearly budget appropriation.
Divided across the population, it would amount to more than
$2,000 for every man, woman and child in the United States.''
It is important to note, however, that even at the time the
TARP was created, CBO considered it unlikely that the program
would cost taxpayers $700 billion, as Treasury always stood to
recover at least some portion of its investments. Nonetheless,
$700 billion was the most precise figure available to the
public as the TARP was enacted, and it remains the figure
indelibly associated with the program.
Several months after the TARP's creation, in April 2009,
CBO finally had enough information to estimate what the TARP
would ultimately cost taxpayers: $356 billion, or roughly half
of the oft-cited $700 billion figure. Since then, CBO's
estimates have grown progressively less grim as the economy has
recovered and TARP investments have been repaid. CBO today
estimates that the TARP will cost $25 billion--an enormous sum,
but vastly less than anyone expected in the dark days of late
2008 and early 2009.
Although CBO's falling cost estimates are in many ways
encouraging, they do not necessarily validate Treasury's
administration of the TARP. To be sure, Treasury deserves
credit for lowering costs to taxpayers through its diligent
management of TARP assets and, in particular, its careful
restructuring of AIG, Chrysler, and GM. However, a separate
reason for the TARP's falling costs is that Treasury's
foreclosure prevention programs, which could have cost $50
billion, have largely failed to get off the ground. Viewed from
this perspective, the TARP will cost less than expected in part
because it will accomplish far less than envisioned for
American homeowners. Another reason for the TARP's falling
costs is that non-TARP government programs, such as the FDIC's
efforts to allow banks to borrow at below-market rates and the
Federal Reserve's efforts to support the RMBS market, have
shifted some of the costs of the financial rescue off of the
TARP's balance sheet and onto the balance sheets of other
programs that are subject to significantly less oversight.
Still another reason that costs have fallen is that the value
of the government's stock holdings in the financial sector have
sharply rebounded--a rebound that has, unfortunately, not been
accompanied by increased lending to consumers and small
businesses, nor by increased hiring in the broader economy,
both of which were among the TARP's explicit goals.
Further, the Panel has always emphasized that the TARP's
cost cannot be measured merely in dollars. The TARP's implicit
guarantee of ``too big to fail'' financial firms has entrenched
moral hazard in the financial system, and the TARP's
unpopularity in the public eye has created a lingering stigma
that may hinder future rescue efforts. Further, accounting for
the TARP from today's vantage point--at a time when the
financial system has made great strides toward recovery--
obscures the risk that existed in the depths of the financial
crisis. At one point, the federal government guaranteed or
insured $4.4 trillion in face value of financial assets. If the
financial system had suffered another shock on the road to
recovery, taxpayers would have faced staggering losses.
Finally, the TARP's incomplete transparency creates a real
cost as well: an enduring public suspicion that taxpayers'
money was not managed as effectively and accountably as
possible.
A. ``Too Big to Fail'' and Moral Hazard
The TARP did not create the idea of ``too big to fail.''
Commentators had suggested for years that the U.S. government
would intervene to prevent the collapse of any sufficiently
large and interconnected financial institution. The government
had even demonstrated a willingness in the past--for example,
in the 1998 Federal Reserve-supervised bailout of Long Term
Capital Management, a hedge fund whose failure the government
believed would threaten financial stability--to play at least a
limited role in preventing a panic. It is possible that these
relatively small-scale interventions created a market
expectation that the government would intervene in a more
sweeping manner in the event of a crisis.
Yet although the notion of ``too big to fail'' had existed
for years, the TARP and other extraordinary government
interventions in 2008 transformed it into stark reality. At the
height of the financial crisis, 18 very large financial
institutions received $208.6 billion in TARP funding almost
overnight, in many cases without having to apply for funding or
to demonstrate any ability to repay taxpayers. Three
particularly weak and systemically significant firms--
Citigroup, Bank of America, and AIG--received even greater
amounts of assistance under improvised programs that were not
available to smaller, less significant institutions. The AIG
rescue was particularly extraordinary in that it appears to
have extended the ``too big to fail'' guarantee beyond AIG
itself and into the broader derivatives market in which the
company was entrenched. In essence, by bailing out AIG and its
counterparties, the government transformed highly risky
derivative bets into fully guaranteed transactions, with the
American taxpayer standing as guarantor.
The parameters of ``too big to fail'' gained greater
clarity in early 2009, when Treasury and the Federal Reserve
announced that the nation's 19 largest banks would undergo
stress tests and that, if any of these banks were found to be
potentially insolvent, it would receive further TARP capital as
needed. In essence, the federal government announced that
taxpayers would bear any burden and pay any price to prevent
the collapse of any very large or very interconnected U.S.
bank. Indeed, it was this implicit guarantee, more than any
explicit government action, that played the greatest role in
calming markets and halting the financial panic.
Even as Treasury took drastic steps to rescue a handful of
very large banks, smaller banks continued to collapse across
the country. A total of 334 small and medium-sized banks have
failed since the TARP's creation. Partly due to Treasury's
decision to rescue very large banks while allowing smaller
banks to collapse, America's largest banks today manage an even
greater fraction of the nation's wealth than before the crisis.
Banks that were ``too big to fail'' in 2008 are even bigger
today.
In light of these events, it is not surprising that markets
have incorporated the notion that ``too big to fail'' banks are
safer than their ``small enough to fail'' counterparts. Credit
rating agencies continue to adjust the credit ratings of very
large banks to reflect their implicit government guarantee.
Smaller banks receive no such adjustment, and as a result, they
face higher costs of funds relative to very large banks.
By protecting very large banks from insolvency and
collapse, the TARP also created classic moral hazard: that is,
very large financial institutions may now rationally decide to
take inflated risks because they expect that, if their gamble
fails, taxpayers will bear the loss. Ironically, these inflated
risks may create even greater systemic risk and increase the
likelihood of future crises and bailouts. It is difficult to
determine the degree to which moral hazard continues to infect
the financial system. Treasury believes that the recent Dodd-
Frank Act reined in the problem by establishing a plausible
resolution authority for very large banks, but that authority
has yet to be tested.
It is important to note that much of the moral hazard
created by the TARP was inherent in any large-scale government
intervention in the financial sector. That is, once Congress
and the administration decided to rescue too-big-to-fail firms
from the natural consequences of their own errors, a hefty dose
of moral hazard was guaranteed. Yet Treasury likely exacerbated
moral hazard in late 2008 and early 2009 by choosing not to
impose tough consequences on TARP-recipient banks. For example,
if banks had been forced as a condition of TARP assistance to
use TARP funds to increase lending, fire their top management,
or endure other severe penalties, they would be less willing to
repeat the experience, reducing moral hazard.
Treasury's interventions in the automotive industry, in
particular, raise moral hazard concerns. In some ways, Treasury
actually mitigated moral hazard through its very strict
approach to these companies: it forced GM and Chrysler to enter
bankruptcy, a step not required of other major TARP-recipient
institutions. However, the mere fact that Treasury intervened
in the automotive industry, rescuing companies that were not
banks and were not particularly interconnected within the
financial system, extended the ``too big to fail'' guarantee
and its associated moral hazard to non-financial firms. The
implication may seem to be that any company in America can
receive a government backstop, so long as its collapse would
cost enough jobs or deal enough economic damage.
B. Stigma
As the TARP evolved, Treasury found its policy choices
increasingly constrained by public anger about the program. The
TARP is now widely perceived as having restored stability to
the financial sector by bailing out Wall Street banks and
domestic automotive manufacturers while doing little for the
13.9 million workers who are unemployed, the 2.4 million
homeowners who are at immediate risk of foreclosure, or the
countless families 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.''
Because the TARP was designed for an inherently unpopular
purpose--rescuing Wall Street banks from the consequences of
their own actions--stigmatization was likely inevitable.
Treasury's implementation of the program has, however, made
this stigma worse. For example, Treasury initially insisted
that only healthy banks would be eligible for capital infusions
under the CPP. When it later became clear that some TARP-
recipient banks were in fact on the brink of failure, all
participating banks, even those in comparatively strong
condition, became tainted in the public eye. Further, many
senior managers of TARP-recipient institutions maintained their
jobs and their substantial salaries, and although shareholders
often suffered meaningful dilution, they were not wiped out. To
the public, this may appear to be evidence that Wall Street
banks and bankers can retain their profits in boom years and
shift their losses to taxpayers during a bust--an arrangement
that is anathema to market discipline in a free economy.
Another factor contributing to stigmatization was the
haphazard, constantly shifting, and in some ways misleading
manner in which the TARP was sold to the public. Treasury
initially proposed the TARP in a three-page bill that would
have provided the Secretary of the Treasury with nearly
unlimited, unilateral authority to buy troubled mortgage-backed
assets off of bank balance sheets, absent any oversight or
review. Although the legislation authorizing the TARP later
grew in length and complexity (and added several layers of
oversight, including the Panel), Treasury continued to assert
that the TARP would function mainly by purchasing troubled
assets. Mere days after the legislation authorizing the program
was signed into law, however, Treasury changed course and
decided to implement the TARP mainly as a bank capitalization
program. The shift may have been made for sound policy reasons,
but it helped to create a public distrust of the TARP: a sense
that the government was treating honest and forthright
communication to the public as secondary to Wall Street's
needs. Further, the program's architects in many ways oversold
its potential. Congress authorized the TARP to be used in a
manner that ``protects home values, college funds, retirement
accounts, and life savings'' and ``preserves homeownership and
promotes jobs and economic growth.'' Notwithstanding these
stated goals, the TARP was always intended by Congress and
Treasury primarily to recapitalize banks. By citing the other
goals as part of the rationale for the TARP, Congress and the
administration may have laid the groundwork for some of the
public disillusionment and anger that followed.
Yet another source of stigma is that the TARP and other
government rescue efforts were generally coordinated by the
very regulators, bankers, and public officials who failed to
anticipate or prevent the crisis, and that the boundaries
between public and private actors were not always clear. To
give a concrete example, in the rescue of AIG, people from the
same small group of law firms, investment banks, and regulators
appeared in many roles, sometimes representing conflicting
interests. More broadly, the individuals who orchestrated the
TARP and other rescue efforts almost all had the perspectives
of either a banker or a banking regulator. This problem may be
insurmountable--after all, who other than financial experts
would coordinate a financial rescue? Nonetheless, the fact that
the same people who contributed to the crisis were charged with
ending it contributed to a perception that the government was
quietly helping banking insiders at the expense of
accountability and transparency.
Whatever the reasons for the TARP's stigmatization, the
program eventually became so detested that some smaller banks
refused to participate in the CPP, while the legislation
proposing the SBLF, a TARP-like bank capitalization program,
attempted to escape the program's unpopularity by providing
explicit assurances that the fund was not affiliated with the
TARP.
Stigma is difficult to quantify, but opinion polling is
suggestive. A Bloomberg poll conducted in October 2010 found
that 60 percent of respondents believe that most of the TARP
funds provided to the banks would be lost; only 33 percent
believed that most of the funds would be recovered. This
overwhelming public belief stands at odds with projections
released by the administration and CBO, which indicate that
these programs may in fact turn a profit. In other words, the
public's broad fury about the TARP may leave many Americans
ready to believe only the worst about the program--a sentiment
that creates real obstacles to any future government effort to
intervene in a financial crisis.
C. Transparency, Data Collection, and Accountability
Transparency. Beginning with its very first report, the
Panel has repeatedly expressed concerns about the lack of
transparency in the TARP. In too many cases, especially in late
2008 and early 2009, Treasury either declined to release
information that it possessed about the program or declined to
require TARP-recipient institutions to reveal information about
their use of taxpayer funds. In perhaps the most profound
violation of the principle of transparency, Treasury decided in
the TARP's earliest days to push tens of billions of dollars
out the door to very large financial institutions without
requiring banks to use the funds in any particular way or even
reveal how the money was used. As a result, the public will
never know to what purpose its money was put. Other
transparency problems include Treasury's refusal to explain how
it valued the stock warrants it received in exchange for its
TARP investments and the joint failure of Treasury and the
Federal Reserve to disclose enough details of the 2009 stress
tests to permit the results to be duplicated or challenged by
outside parties.
To Treasury's credit, its transparency and disclosure
practices have improved over the lifetime of the TARP. For
example, Treasury has recently begun to release loan-level
information on its foreclosure mitigation programs--a far
greater level of detail than was available in the program's
early days. Further, Treasury has made an admirable commitment
to posting TARP contracts online, and it has even disclosed the
identity of TARP subcontractors--an unusual degree of
transparency within the government contracting arena.
Data Collection and Analysis. In some cases, public
understanding of the TARP has suffered not because Treasury
refused to reveal useful data but because these data were never
collected in the first place. For example, despite repeated
urgings from the Panel, Treasury still does not collect
sufficient information about why loans are moving to
foreclosure, nor does it monitor closely enough any loan
modifications performed outside of HAMP. Additionally, Treasury
stopped collecting lending data from CPP-recipient banks after
larger banks repaid TARP funds, rendering it difficult for
observers to measure that program's continuing impact.
Without adequate data collection, Treasury has flown blind;
it has lacked the information needed to spot trends, determine
which programs are succeeding and which programs are failing,
and make changes necessary for better implementation. The
collection and analysis of data were especially important
because so many of the TARP's programs were unprecedented,
creating the possibility that data could reveal surprising and
unexpected results. For example, Treasury took for granted that
recapitalizing banks through the CPP would spur lending, yet
when the Panel analyzed bank-level lending data, it was unable
to find any correlation between the receipt of CPP funds and
new lending. Similarly, it may seem intuitively obvious that
homeowners who are burdened by significant car loan and credit
card payments would be more likely to default on their
mortgages than similar homeowners unburdened by such payments--
yet surprisingly, HAMP data revealed that this was not the
case. To the extent that comprehensive, usable data were not
collected for all TARP programs, or to the extent that data
were collected but not analyzed or released for public review,
other surprising and important correlations were likely never
uncovered.
Goals and Accountability. A related concern is Treasury's
failure to articulate clear, meaningful goals for many of its
TARP programs or to update its goals as programs have evolved.
For example, when the President announced HAMP in early 2009,
he asserted that the program would prevent three to four
million foreclosures. The program has fallen far short of that
goal and now appears on track to help only 700,000 to 800,000
homeowners--yet Treasury has never formally announced a new
target for the program.
Even in cases in which Treasury's decisions have been
clearly disclosed, the justifications have often remained
obscure. For example, Treasury has often stated numerous goals
for a single TARP program, such as to maintain systemic
stability, to protect the stability of a particular
institution, and to ensure the best possible return on taxpayer
money. These goals have, unfortunately, frequently come into
conflict, and Treasury has never adequately explained how it
balanced conflicting obligations or prioritized conflicting
aims. Because virtually any course of action could be justified
as meeting one or another of Treasury's goals, the public has
had no meaningful way to hold Treasury accountable--and
Treasury has had no clear target to strive toward in its own
internal deliberations.
D. Other Obstacles Encountered by the TARP
In addition to the broad problems laid out above, Treasury
has encountered other recurring difficulties in its
administration of the TARP.
Treasury often found greater success in TARP
programs that had only a few participants than in programs that
required coordinating hundreds or thousands of participants. In
the case of the CPP, Treasury achieved the vast majority of the
program's effect by quickly pumping tens of billions of dollars
into a handful of very large banks. Treasury needed a much
longer timeframe to recapitalize hundreds of local and regional
banks, and Treasury's investments in these banks were simply
too small and too late to have a meaningful effect on financial
stability. Along similar lines, the TARP program that directly
reached the most participants--HAMP--was also one of the least
effective, in part because Treasury found the task of
coordinating hundreds of banks and loan servicers and millions
of homeowners to be nearly overwhelming.
Although Treasury found it easier and often more effective
to stabilize the financial system by supporting ``too big to
fail'' institutions rather than smaller banks or individual
homeowners, it is critically important that the government
consider the effects of its actions on the overall financial
system. Rescuing large banks may have averted the immediate
crisis, but it also provided these banks a competitive
advantage, exacerbating concentration and potentially
destabilizing the financial system. Further, the fact that
large banks received such quick and dramatic support even as
foreclosures continued unabated has contributed to the TARP's
stigmatization, which has undermined the program's
effectiveness.
Treasury often encountered difficulty in
attracting active, widespread participation in voluntary
programs. The TARP's most effective programs were those in
which participants had little choice but to follow Treasury's
guidance. In particular, the investments that most dramatically
stabilized the financial system were the CPP's investments in
very large banks (which, at the peak of the financial crisis,
received intense political and market pressure to participate
in the TARP) and AIG, GM, and Chrysler (which would have
suffered catastrophic, uncontrolled bankruptcies had they
refused government support). In cases in which Treasury relied
on voluntary participation, as in the involvement of small
banks in the CPP or of investors and loan servicers in HAMP,
many would-be participants refused to join, and Treasury found
that it had little leverage to enforce program terms on the
participants that did enroll. These problems persisted even
though the terms of HAMP and the CPP were quite generous.
Of course, mandatory programs present their own problems,
including the specter of unrestrained government intervention
into private institutions. The fact that voluntary TARP
programs worked relatively poorly does not necessarily mean
that future programs should be made mandatory; rather, it means
that future administrations should carefully weigh the trade-
offs of a program that relies purely on voluntary
participation.
Treasury often found that hastily designed
programs could backfire. For example, in the foreclosure arena,
Treasury found that HAMP's initial design attracted only
limited interest from loan servicers, prompting it to launch
half a dozen increasingly generous foreclosure-related efforts
in 2009 and early 2010. Unfortunately, the pattern of providing
ever more generous incentives may have backfired, as lenders
and servicers may have opted to delay modifications in hopes of
eventually receiving a better deal. In addition, loan servicers
expressed confusion about the constant flux of new programs,
new standards, and new requirements that made implementation
more complex. A similar problem arose in the CPP, in which
Treasury and Congress imposed additional restrictions on CPP-
recipient banks--particularly as related to executive
compensation--long after those banks had accepted taxpayer
money. Once financial institutions recognized that their CPP
participation entailed a risk of being forced to accept
additional, unilaterally imposed restrictions at a later date,
they became less willing to participate in future TARP
programs.
In a crisis, government agencies may feel forced to launch
a response--any response--as quickly as possible with the
expectation that, if their first effort should fail, they can
always revise and improve the program later. The experience of
the TARP, however, suggests that poorly designed first efforts
may create enduring problems. Government actors should weigh
this risk carefully when choosing whether to launch an
immediate, haphazard response or to take more time to design an
effective program.
Treasury's programs often focused on addressing
the immediate crisis, potentially giving short shrift to
longer-term risks. For example, the Panel highlighted potential
threats to the financial system in its oversight reports on the
CRE market and on the potential hazards posed by mortgage
irregularities. Treasury had not established specific programs
to deal with these potential systemic threats, and its existing
programs in some cases relied upon these threats not
materializing (for example, HAMP's contracts with loan
servicers take for granted that those servicers have a legal
right to conduct loan modifications, notwithstanding widespread
concern about mortgage documentation irregularities).
It is understandable that, while dealing with threats that
could impair the financial system tomorrow, Treasury may pay
less attention to threats that could damage the system months
or years in the future. Even so, failure to pay attention to
threats at their earliest stages could allow risks to magnify
and may force more costly interventions down the road.
E. On the Role of Oversight
In establishing the TARP, Congress assigned oversight roles
to no fewer than three government bodies: the Congressional
Oversight Panel, the Special Inspector General for TARP
(SIGTARP), and the Government Accountability Office (GAO).
Although this document is the Panel's final report, SIGTARP and
GAO will continue to monitor the TARP and issue public reports
on their findings, and further oversight work will be performed
by committees of the U.S. House of Representatives and the U.S.
Senate. Academics, journalists, and watchdog groups also have
played and will continue to play an important role in
evaluating the TARP.
Because so many organizations have examined Treasury's
efforts, the TARP has become one of the most thoroughly
scrutinized government programs in U.S. history. Such close
scrutiny inevitably begets criticism, and in the case of the
TARP--a program born out of ugly necessity--the criticism was
always likely to be harsh. After all, in the midst of a crisis,
perfect solutions do not exist; every possible action carries
regrettable consequences, and even the best possible decisions
will be subject to critiques and second-guessing. For these
reasons the TARP was likely doomed to be unpopular, and because
close scrutiny from oversight bodies drew attention to the
program's faults--both the faults resulting from Treasury's
decisions and the faults beyond anyone's control--the oversight
process itself may have magnified the TARP's unpopularity.
This fact creates an unfortunate tension. In a democracy in
which a government's legitimacy depends upon public approval
for its actions, political logic may argue for conducting only
loose oversight of unpopular programs in hopes of shielding
such programs from public criticism. It is to the credit of
Congress, Treasury, and the administration that the TARP has
not been hidden: that despite the much-discussed gaps in the
program's transparency, it has been thoroughly and
systematically scrutinized and debated. There can be no
question that this oversight has improved the TARP and
increased taxpayer returns. For example, in July 2009, the
Panel reported that Treasury's method for selling stock options
gained through the CPP appeared to be recovering only 66
percent of the warrants' estimated worth. Due in part to
pressure generated by the Panel's work, Treasury changed its
approach, and subsequent sales recovered 103 cents on the
dollar, contributing to $8.6 billion in returns to taxpayers.
Other substantial improvements in the TARP--such as Treasury's
heightened focus on the threat to HAMP posed by second liens
and its greater disclosure of TARP-related data--are all partly
the result of pressure exerted by the Panel and other oversight
bodies.
Thus, an enduring lesson of the TARP is that extraordinary
government programs can benefit from, and indeed may require,
extraordinary oversight. This lesson remains relevant in the
context of the government's extraordinary actions in the 2008
financial crisis: the public will continue to benefit from
intensive, coordinated efforts by public and private
organizations to oversee Treasury, the FDIC, the Federal
Reserve, and other government actors. Careful, skeptical review
of the government's actions and their consequences--even when
this review is uncomfortable--is an indispensable step toward
preserving the public trust and ensuring the effective use of
taxpayer money.
ANNEX I: FEDERAL FINANCIAL STABILITY EFFORTS
Beginning in its April 2009 report, the Panel broadly
classified the resources that the federal government has
devoted to stabilizing the economy in the aftermath of the
financial crisis through myriad programs and initiatives such
as outlays, loans, or guarantees. The Panel calculates the
total current value of these Treasury, FDIC, and Federal
Reserve resources to be approximately $1.9 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. The $1.9 trillion total current value does not
include Treasury's exposure to Fannie Mae and Freddie Mac,
which the Panel consistently has treated as a separate issue.
It also excludes efforts by the Federal Reserve that are
primarily monetary policy initiatives, rather than financial
stability efforts. These efforts are discussed separately
below.
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 2009 report, the FDIC assesses a premium of up to 100
basis points, or 1 percentage point, on TLGP debt
guarantees.\584\ In contrast, the Federal Reserve's liquidity
programs, classified here as loans under ``Other Federal
Reserve Credit Expansion,'' 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.
---------------------------------------------------------------------------
\584\ 2009 November Oversight Report, supra note 60, at 36.
FIGURE 34: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORTS (AS OF MARCH 8, 2011)
[Dollars in billions]
----------------------------------------------------------------------------------------------------------------
Treasury Federal
Program (TARP) Reserve FDIC Total
----------------------------------------------------------------------------------------------------------------
Total........................................... $213.2 $1,156.9 558.3 1,928.3
Outlays xlviii.............................. 186.4 1,092.2 64.1 1,342.7
Loans xlix.................................. 22.4 64.7 0 87.1
Guarantees l................................ 4.3 0 494.2 498.5
AIG li.......................................... 60.0 24.8 0 85.7
Outlays..................................... lii 60.9 liii 0 0 60.9
Loans....................................... 0 liv 24.8 0 24.8
Guarantees.................................. 0 0 0 0
Citigroup....................................... 0 0 0 0
Outlays..................................... lv 0 0 0 0
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Bank of America................................. 0 0 0 0
Outlays..................................... lvi 0 0 0 0
Loans........................................... 0 0 0 0
Guarantees...................................... 0 0 0 0
Capital Purchase Program (Other)................ 30.8 0 0 30.8
Outlays..................................... lvii 30.8 0 0 30.8
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Capital Assistance Program...................... N/A 0 0 lviii N/A
TALF............................................ 4.3 15.9 0 20.2
Outlays..................................... 0 0 0 0
Loans....................................... 0 lx 15.9 0 15.9
Guarantees.................................. lix 4.3 0 0 4.3
PPIP (Loans) lxi................................ 0 0 0 0
Outlays..................................... 0 0 0 0
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
PPIP (Securities)............................... lxii 21.7 0 0 21.7
Outlays..................................... 7.4 0 0 7.4
Loans....................................... 14.3 0 0 14.3
Guarantees.................................. 0 0 0 0
Making Home Affordable Program/Foreclosure 45.6 0 0 0
Mitigation.....................................
Outlays..................................... lxiii 45.6 0 0 45.6
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Automotive Industry Financing Program........... lxiv 48.9 0 0 48.9
Outlays..................................... 40.8 0 0 40.8
Loans....................................... 8.1 0 0 8.1
Guarantees.................................. 0 0 0 0
Automotive Supplier Support Program............. 0 0 0 0
Outlays..................................... 0 0 0 0
Loans....................................... lxv 0 0 0 0
Guarantees.................................. 0 0 0 0
SBA 7(a) Securities Purchase.................... lxvi 0.37 0 0 0.37
Outlays..................................... 0.37 0 0 0.37
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Community Development Capital Initiative........ lxvii 0.57 0 0 0.57
Outlays..................................... 0 0 0 0
Loans....................................... 0.57 0 0 0.57
Guarantees.................................. 0 0 0 0
Temporary Liquidity Guarantee Program........... 0 0 494.2 494.2
Outlays..................................... 0 0 0 0
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 lxviii 494.2 494.2
Deposit Insurance Fund.......................... 0 0 64.1 64.1
Outlays..................................... 0 0 lxix 64.1 64.1
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Other Federal Reserve Credit Expansion.......... 0 1,116.2 0 1,116.2
Outlays..................................... 0 lxx 1,092.2 0 1,092.2
Loans....................................... 0 lxxi 24.0 0 24.0
Guarantees.................................. 0 0 0 0
----------------------------------------------------------------------------------------------------------------
See endnote references in Annex III: Endnotes
Treasury's Exposure to Fannie Mae and Freddie Mac
In July 2008, the Federal Reserve and Treasury began to
provide increased credit support to Fannie Mae and Freddie Mac.
On September 7, 2008, the FHFA, using authority it had been
provided through the Housing and Economic Recovery Act of 2008,
placed Fannie Mae and Freddie Mac in conservatorship, thereby
explicitly guaranteeing the $5.2 trillion in debt and MBS
guaranteed by the GSEs in 2008.\585\ As part of this action,
Treasury initiated agreements to recapitalize the GSEs, and
additionally established two programs to aid them: the
Government Sponsored Enterprises' Mortgage Backed Securities
Purchase Program (GSE MBS Purchase Program) and the GSE Credit
Facility.
---------------------------------------------------------------------------
\585\ Fannie Mae had $3.0 trillion of guaranteed debt on its books
in 2008, and had $3.1 trillion in 2010. Freddie Mac had $2.2 trillion
of MBS on its books in 2008 and had $2.2 trillion in 2010. Federal
National Mortgage Association, Form 10-K for the Fiscal Year Ended
December 31, 2010, at 74 (Feb. 24, 2011) (online at www.sec.gov/
Archives/edgar/data/310522/ 000095012311017972/w81665e10vk.htm);
Federal Home Loan Mortgage Corporation, Form 10-K for the Fiscal Year
Ended December 31, 2010, at 81 (Feb. 24, 2011) (online at www.sec.gov/
Archives/edgar/data/1026214/000102621411000005/f71542e10vk.htm).
---------------------------------------------------------------------------
Under the GSE MBS Purchase Program, Treasury purchased
approximately $225 billion in GSE MBS by the time its authority
expired.\586\ As of February 2011, there was approximately
$136.3 billion in MBS still outstanding under this
program.\587\ No loans were needed or issued under the GSE
Credit Facility.
---------------------------------------------------------------------------
\586\ U.S. Department of the Treasury, FY2011 Budget in Brief, at
138 (Feb. 2010) (online at www.treasury.gov/about/budget-performance/
budget-in-brief/Documents/FY%202011%20BIB%20(2).pdf).
\587\ U.S. Department of the Treasury, MBS Purchase Program:
Portfolio by Month (online at www.treasury.gov/resource-center/data-
chart-center/Pages/mbs-purchase-program.aspx) (accessed Mar. 11, 2011).
Treasury has received $80.7 billion in principal repayments and $16.2
billion in interest payments from these securities. See U.S. Department
of the Treasury, MBS Purchase Program Principal and Interest Received
(online at www.treasury.gov/resource-center/data-chart-center/Pages/
mbs-purchase-program.aspx) (accessed Mar. 11, 2011).
---------------------------------------------------------------------------
On May 6, 2009, Treasury doubled its recapitalization
(stock purchase) commitment to each enterprise. In December
2009, Treasury announced amendments to the Senior Preferred
stock purchase agreements that removed any limits on such stock
purchases of each GSE through the end of 2012. As of the end of
fiscal year 2010, Treasury held $52.6 billion in preferred
stock, a number that was predicted to fall to $47.5 billion in
fiscal year 2011.\588\
---------------------------------------------------------------------------
\588\ U.S. Department of the Treasury, Housing Government Sponsored
Enterprise Programs: Program Summary by Budget Activity (Feb. 14, 2011)
(online at www.treasury.gov/about/budget-performance/budget-in-brief/
Documents/FY2012_GSE_508.pdf).
---------------------------------------------------------------------------
Other Federal Reserve Actions
On November 3, 2010, the FOMC announced that it had
directed FRBNY to begin purchasing $600 billion in longer-term
Treasury securities. In addition, FRBNY will reinvest $250
billion to $300 billion in principal payments from agency debt
and agency MBS in Treasury securities.\589\ The additional
purchases and reinvestments will be conducted through the end
of the second quarter of 2011, meaning the pace of purchases
will be approximately $110 billion per month. In order to
facilitate these purchases, FRBNY will temporarily lift its
System Open Market Account per-issue limit, which prohibits the
Federal Reserve's holdings of an individual security from
surpassing 35 percent of the outstanding amount.\590\ As of
March 9, 2011, the Federal Reserve held $1.27 trillion in
Treasury securities.\591\
---------------------------------------------------------------------------
\589\ On August 10, 2010, the Federal Reserve began reinvesting
principal payments on agency debt and agency MBS holdings in longer-
term Treasury securities in order to keep the amount of their
securities holdings in their System Open Market Account portfolio at
their then-current level. Board of Governors of the Federal Reserve
System, FOMC Statement (Aug. 10, 2010) (online at
www.federalreserve.gov/newsevents/press/monetary/20100810a.htm).
\590\ Federal Reserve Bank of New York, FAQs: Purchases of Longer-
term Treasury Securities (Nov. 3, 2010) (online at www.newyorkfed.org/
markets/lttreas_faq.html).
\591\ March 2011 Fed Statistical Release H.4.1, supra note 458.
ANNEX II: ADDITIONAL CPP DATA
The CPP is discussed at length in Section II.A above. This
annex provides additional data about the current state of the
CPP. Figure 35 shows the number of CPP recipients that have
missed dividend payments to Treasury by bank size, type of
dividend owed, and number of payments missed.
FIGURE 35: CPP MISSED DIVIDEND PAYMENTS (AS OF FEBRUARY 28, 2011) \592\
------------------------------------------------------------------------
Number of Missed Payments 1 2 3 4 5 6 7 8 9 Total
------------------------------------------------------------------------
Cumulative Dividends:
Number of Banks, by asset 26 18 26 20 17 13 8 3 0 131
size.......................
Under $1B............... 16 11 19 17 13 8 5 1 0 90
$1B-$10B................ 9 7 6 3 4 5 3 2 0 39
Over $10B................... 1 0 1 0 0 0 0 0 0 2
Non-Cumulative Dividends:
Number of Banks, by asset 3 5 2 6 6 1 3 3 1 30
size.......................
Under $1B............... 2 5 2 6 5 1 3 3 1 28
$1B-$10B.................... 1 0 0 0 1 0 0 0 0 2
Over $10B................... 0 0 0 0 0 0 0 0 0 0
-------------------------------------------
Total Banks Missing .. .. .. .. .. .. .. .. .. 161
Payments...............
-------------------------------------------
Total Missed Payments... .. .. .. .. .. .. .. .. .. 596
------------------------------------------------------------------------
\592\ Additionally, two banks in the CDCI program have missed one
payment and one has missed two payments, as of February 28, 2011. All
three banks have less than $1 billion in assets. Treasury's Dividends
& Interest Report, supra note 156. Data on total bank assets compiled
using SNL Financial data service (accessed Mar. 11, 2011).
Figure 36 identifies CPP recipients to whose board meetings
Treasury currently sends an observer, as a result of multiple
missed dividend payments.
FIGURE 36: INSTITUTIONS WHERE TREASURY OBSERVERS NOW ATTEND BOARD MEETINGS \593\
----------------------------------------------------------------------------------------------------------------
Non-Current
Institution CPP Investment Dividends/ No. of Missed
Amount Interest Payments
----------------------------------------------------------------------------------------------------------------
Anchor BanCorp Wisconsin, Inc............................. $110,000,000 $11,229,167 8
Blue Valley Ban Corp...................................... 21,750,000 2,175,000 8
Cascade Financial Corporation............................. 38,970,000 2,922,750 6
Central Pacific Financial Corp.\594\...................... 135,000,000 N/A 0
Centrue Financial Corporation............................. 32,668,000 2,858,450 7
Citizens Bancorp.......................................... 10,400,000 991,900 7
Citizens Commerce Bancshares, Inc......................... 6,300,000 515,025 6
Dickinson Financial Corporation II........................ 146,053,000 13,929,860 7
FC Holdings, Inc.......................................... 21,042,000 1,720,170 6
First BanCorp (PR) \595\.................................. 400,000,000 12,077,176 3
First Banks, Inc.......................................... 295,400,000 28,173,775 7
Grand Mountain Bancshares, Inc............................ 3,076,000 286,885 7
Heritage Commerce Corp.................................... 40,000,000 3,000,000 6
Idaho Bancorp............................................. 6,900,000 658,088 7
Integra Bank Corporation.................................. 83,586,000 6,268,950 6
Northern States Financial Corporation..................... 17,211,000 1,290,825 6
Pacific Capital Bancorp \596\............................. 180,634,000 0 0
Pacific City Financial Corporation........................ 16,200,000 1,545,075 7
Pathway Bancorp........................................... 3,727,000 304,635 6
Premierwest Bancorp....................................... 41,400,000 3,105,000 6
Ridgestone Financial Services, Inc........................ 10,900,000 891,075 6
Rogers Bancshares, Inc.................................... 25,000,000 2,043,750 6
Royal Bancshares of Pennsylvania, Inc..................... 30,407,000 2,660,613 7
Seacoast Banking Corporation of Florida................... 50,000,000 5,000,000 8
Syringa Bancorp........................................... 8,000,000 654,000 6
Georgia Primary Bank...................................... 4,500,000 438,725 7
Lone Star Bank............................................ 3,072,000 339,107 8
One Georgia Bank.......................................... 5,500,000 530,391 7
OneUnited Bank............................................ 12,063,000 1,206,300 8
Premier Service Bank...................................... 4,000,000 378,472 7
United American Bank...................................... 8,700,000 941,715 8
-----------------------------------------------------
Total................................................. $1,772,459,000 $108,136,877 194
----------------------------------------------------------------------------------------------------------------
\593\ Treasury's Dividends & Interest Report, supra note 156.
\594\ On February 18, 2011, Treasury completed the exchange of its $135,000,000 of Preferred Stock (including
accrued and unpaid dividends thereon) in Central Pacific Financial Corp. for 5,620,117 shares of common stock,
pursuant to an exchange agreement dated February 17, 2011. Treasury's Dividends & Interest Report, supra note
156.
\595\ On July 20, 2010, Treasury completed the exchange of its $400,000,000 of Preferred Stock in First BanCorp
for $424,174,000 of Mandatorily Convertible Preferred Stock (MCP), which is equivalent to the initial
investment amount of $400,000,000, plus $24,174,000 of capitalized previously accrued and unpaid dividends.
Subject to the fulfillment by First BanCorp of certain conditions, including those related to its capital
plan, the MCP may be converted to common stock. Since that point, two additional dividend payments have been
missed. Treasury's Dividends & Interest Report, supra note 156.
\596\ On August 31, 2010, following the completion of the conditions related to Pacific Capital Bancorp's
capital plan, Treasury exchanged its $180,634,000 of Preferred Stock in Pacific Capital for $195,045,000 of
Mandatorily Convertible Preferred Stock, which is equivalent to the initial investment amount of $180,634,000,
plus $14,411,000 of capitalized previously accrued and unpaid dividends. On September 27, 2010, following the
completion of the conversion conditions set forth in the Certificate of Designations for the MCP, all of
Treasury's MCP was converted into 360,833,250 shares of common stock of Pacific Capital. No dividends have
been missed since this point. Treasury's Dividends & Interest Report, supra note 156.
Figure 37 details the losses to Treasury to date, both
settled and unsettled, from the CPP.
FIGURE 37: CPP SETTLED AND UNSETTLED LOSSES \597\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Investment Warrant Possible Losses/
Institution Investment Disposition Disposition Dividends Reduced Action
Amount Amount Amount & Interest Exposure
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cadence Financial Corporation*.............. $44,000,000 $38,000,000 ........... $2,970,000 $(6,000,000) 3/4/2011: Treasury completed
the sale of the preferred
stock and warrants issued by
Cadence Financial to Community
Bancorp LLC for $38 million
plus accrued and unpaid
dividends.
CIT Group Inc.*............................. 2,330,000,000 ............ ........... 43,687,500 (2,330,000,000) 12/10/2009: Bankruptcy
reorganization plan for CIT
Group Inc. became effective.
CPP preferred shares and
warrants were extinguished and
replaced with contingent value
rights. On Feb. 8, 2010, the
contingent value rights
expired without value.
Midwest Banc Holdings, Inc.................. 89,388,000 ............ ........... 824,289 (89,388,000) 5/14/2010: Midwest Banc
Holdings, Inc. subsidiary,
Midwest Bank and Trust, Co.,
placed into receivership.
Midwest Banc Holdings is
currently in bankruptcy
proceedings.
Pacific Coast National Bancorp *............ 4,120,000 ............ ........... 18,088 (4,120,000) 2/11/2010: Pacific Coast
National Bancorp dismissed its
bankruptcy proceedings without
recovery to creditors or
investors. Investments,
including Treasury's CPP
investments, were
extinguished.
Pierce County Bancorp....................... 6,800,000 ............ ........... 207,948 (6,800,000) 11/5/2010: Pierce County
Bancorp subsidiary, Pierce
Commercial Bank, placed into
receivership.
Sonoma Valley Bancorp....................... 8,653,000 ............ ........... 347,164 (8,653,000) 8/20/2010: Sonoma Valley
Bancorp subsidiary, Sonoma
Valley Bank, placed into
receivership.
South Financial Group *..................... 347,000,000 130,179,219 $400,000 16,386,111 (216,820,781) 9/30/2010: Preferred stock and
warrants sold to Toronto-
Dominion Bank.
The Bank of Currituck *..................... 4,021,000 1,742,850 ........... 169,834 (2,278,150) 12/3/2010: The Bank of
Currituck completed its
repurchase of all preferred
stock (including preferred
stock received upon exercise
of warrants) issued to
Treasury.
TIB Financial Corp.*........................ 37,000,000 12,119,637 40,000 1,284,722 (24,880,363) 9/30/2010: Preferred stock and
warrants sold to North
American Financial Holdings.
Tifton Banking Company...................... 3,800,000 ............ ........... 223,208 (3,800,000) 11/12/2010: Tifton Banking
Company placed into
receivership.
Treaty Oak Bancorp *........................ 3,268,000 500,000 ........... 192,415 (2,768,000) 1/26/2011: Treaty Oak
shareholders approve Carlile
Bankshares' purchase plan.
UCBH Holdings, Inc.......................... 298,737,000 ............ ........... 7,509,920 (298,737,000) 11/6/2009: United Commercial
Bank, a wholly owned
subsidiary of UCBH Holdings,
Inc., was placed into
receivership. UCBH Holdings is
currently in bankruptcy
proceedings.
---------------------------------------------------------------------------
Total................................... $3,176,787,000 $182,541,706 440,000 73,821,199 $(2,994,245,294) ...............................
--------------------------------------------------------------------------------------------------------------------------------------------------------
\597\ Treasury Transactions Report, supra note 36, at 14. The asterisk (``*'') denotes recognized losses on Treasury's Transactions Report.
FIGURE 38: WARRANT REPURCHASES/AUCTIONS FOR FINANCIAL INSTITUTIONS THAT HAVE FULLY REPAID CPP FUNDS (AS OF MARCH 9, 2011)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Panel's Best
Warrant Warrant Valuation Price/
Institution Investment Repurchase Repurchase/ Sale Estimate at Estimate IRR
Date Date Amount Disposition Ratio (Percent)
Date
--------------------------------------------------------------------------------------------------------------------------------------------------------
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
CIT Group Inc.................................................... 12/31/2008 ........... ................ 562,541 ......... (97.2)
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 \598\............................................ \599\ 10/28/ 3/3/2010 1,566,210,714 1,006,416,684 1.533 6.5
2008 \600\ 1/9/
2009 \601\ 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 9/1/2010 400,000 468,164 0.854 5.9
Columbia Banking System, Inc..................................... 11/21/2008 9/1/2010 3,301,647 3,291,329 1.003 7.3
Hartford Financial Services Group, Inc........................... 6/26/2009 9/21/2010 713,687,430 472,221,996 1.511 30.3
Lincoln National Corporation..................................... 7/10/2009 9/16/2010 216,620,887 181,431,183 1.194 27.1
Fulton Financial Corporation..................................... 12/23/2008 9/8/2010 10,800,000 15,616,013 0.692 6.7
The Bancorp, Inc./The Bancorp Bank............................... 12/12/2008 9/8/2010 4,753,985 9,947,683 0.478 12.8
South Financial Group, Inc./Carolina First Bank.................. 12/5/2008 9/30/2010 400,000 1,164,486 0.343 (34.2)
TIB Financial Corp/TIB Bank...................................... 12/5/2008 9/30/2010 40,000 235,757 0.170 (38.0)
Central Jersey Bancorp........................................... 12/23/2008 12/1/2010 319,659 1,554,457 0.206 6.3
Huntington Bancshares............................................ 11/14/2008 1/19/2011 49,100,000 45,180,929 1.087 6.4
First PacTrust Bancorp, Inc...................................... 11/21/2008 1/5/2011 1,033,227 1,750,518 0.590 7.3
East West Bancorp................................................ 12/5/2008 1/26/2011 14,500,000 32,726,663 0.443 7.0
Susquehanna Bancshares, Inc...................................... 12/12/2008 1/19/2011 5,269,179 14,708,811 0.358 6.2
Citigroup \602\.................................................. \603\ 10/25/ 1/25/2011 245,008,277 136,161,499 1.799 13.4
2008 \604\ 12/
31/2008
Boston Private Financial Holdings, Inc........................... 11/21/2008 2/1/2011 6,352,500 10,150,607 0.626 7.4
Sandy Spring Bancorp, Inc........................................ 12/5/2008 2/23/2011 4,450,000 4,452,306 0.999 7.3
Wintrust Financial Corporation................................... 12/19/2008 2/8/2011 25,694,061 30,185,219 0.860 9.6
Washington Banking Company....................................... 1/16/2009 3/2/2011 1,625,000 3,792,179 0.429 7.8
Cadence Financial Corporation.................................... 1/9/2009 3/4/2011 ................ 881,230 ......... (2.2)
First Horizon National Corporation............................... 11/14/2008 3/9/2011 79,700,000 43,387,200 1.837 8.9
1st Source Corporation........................................... 1/13/2009 3/9/2011 3,750,000 4,494,175 0.834 6.5
--------------------------------------------------------------------------------------
Total........................................................ .............. ........... $8,585,404,069 $8,329,269,048 1.031 10.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
\598\ Calculation of the IRR for Bank of America does not include fees received by Treasury as part of an agreement to terminate that bank's
participation under the AGP. TARP Monthly 105(a) Report--December 2010, supra note 241, at A-3.
\599\ Investment date for Bank of America in the CPP.
\600\ Investment date for Merrill Lynch in the CPP.
\601\ Investment date for Bank of America in the TIP.
\602\ Calculations for the IRR of Citigroup do not include dividends or warrant proceeds earned from the Asset Guarantee Program (AGP). This IRR also
does not incorporate proceeds received from Treasury's sale of Citigroup's trust preferred securities, given as a premium for Treasury's guarantee
under the AGP. It is important to note that subject to the AGP termination agreement with Citigroup, Treasury could receive $800 million in trust
preferred securities held by the FDIC upon the company's exit from the FDIC's TLGP. As of March 11, 2011, the company and its subsidiaries had $58.2
billion in long-term debt outstanding, which is guaranteed under the TLGP. Treasury Transactions Report, supra note 36, at 20. Data on Citigroup debt
guaranteed by the TLGP accessed through SNL Financial(Mar. 11, 2011).
\603\ Investment date for Citigroup in the CPP.
\604\ Investment date for Citigroup in the TIP.
Figure 39 shows the Panel's estimates of the value of
Treasury's current holdings of warrants in CPP recipients as
well as in AIG.
FIGURE 39: VALUATION OF CURRENT HOLDINGS OF WARRANTS (AS OF MARCH 3,
2011)
------------------------------------------------------------------------
Warrant Valuation (millions of
dollars)
Financial Institutions with --------------------------------------
Warrants Outstanding Low High Best
Estimate Estimate Estimate
------------------------------------------------------------------------
SunTrust Banks, Inc.............. $44.75 $305.37 $128.99
Regions Financial Corporation.... 13.62 203.30 111.40
Fifth Third Bancorp.............. 134.47 427.64 189.77
KeyCorp.......................... 34.51 179.69 87.17
AIG.............................. 247.75 1,708.06 787.49
All Other Banks.................. 554.97 1,371.69 964.56
--------------------------------------
Total........................ $1,030.07 $4,195.74 $2,269.38
------------------------------------------------------------------------
ANNEX III: ENDNOTES
i U.S. Department of the Treasury, Troubled Asset Relief
Program Transactions Report for Period Ending March 8, 2011 (Mar. 10,
2011) (online at www.treasury.gov/initiatives/financial-stability/
briefing-room/reports/tarp-transactions/DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
ii Figures represent TLGP debt outstanding at the end of
the month for which the amount of debt outstanding reached its peak.
BB&T Financial, Capital One Financial, and Fifth Third Bancorp did not
issue debt guaranteed under the TLGP. Data provided by FDIC staff (Feb.
25, 2011).
iii For further discussion on the FDIC's loss exposure
to Bank of America and Citigroup under the AGP, see Section II.B.1.
iv Figures represent the outstanding loan amount at the
end of the month for which the amount loaned to each company reached
its peak, and include loans to companies that were acquired by a SCAP
bank. Data provided by Federal Reserve staff (Mar. 4, 2011). For more
information on the credit and liquidity programs, see Board of
Governors of the Federal Reserve System, Regulatory Reform--Usage of
Federal Reserve Credit and Liquidity Facilities (online at
www.federalreserve.gov/newsevents/reform_transaction.htm) (accessed
Mar. 14, 2011).
Does not include the Asset-Backed Commercial Paper Money Market
Mutual Fund Liquidity Facility (AMLF). Under the AMLF, the Federal
Reserve provided loans to banks, which served as conduits to purchase
asset-backed commercial paper from money market mutual funds. At its
height, the facility had $146 billion in outstanding loans to
participating banks. Although the data released by the Federal Reserve
in December 2010 indicate that some of the SCAP banks acted as sponsors
for money market mutual funds, it is difficult to determine the extent
to which these banks were the ultimate beneficiaries of this facility.
As a result, loans extended under the AMLF are not included in this
table.
v For discussion on the Federal Reserve's loss exposure
to Bank of America and Citigroup under the AGP, see Section II.B.1.
vi Under the TSLF, the Federal Reserve loaned Treasury
securities in exchange for eligible collateral rather than extending
credit. Figures represent the par value of Treasury securities loaned
to participating institutions. See Board of Governors of the Federal
Reserve System, Regulatory Reform--Term Securities Lending Facility
(TSLF) and TSLF Options Program (TOP) (online at
www.federalreserve.gov/newsevents/reform_tslf.htm) (accessed Mar. 11,
2011).
vii JPMorgan Chase did not have any outstanding loans
from the Primary Dealer Credit Facility at month end. However, the
company's maximum amount drawn from the facility was $3 billion in
September 2008. Data provided by Federal Reserve staff (Mar. 4, 2011).
viii MetLife was not a TARP recipient.
ix Figures affected by rounding. Unless otherwise noted,
data in this table are from the following sources: U.S. Department of
the Treasury, Troubled Asset Relief Program Transactions Report for
Period Ending March 8, 2011 (Mar. 10, 2011) (online at
www.treasury.gov/initiatives/financial-stability/briefing-room/reports/
tarp-transactions/DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf); U.S. Department of
the Treasury, Daily TARP Update (Mar. 10, 2011) (online at
www.treasury.gov/initiatives/financial-stability/briefing-room/reports/
tarp-daily-summary-report/TARP%20Cash%20Summary/
Daily%20TARP%20Update%20-%2003.10.2011.pdf).
x Unless otherwise noted, figures reference the adjusted
TARP commitments following the enactment of the Dodd-Frank Act. The
automotive sector programs (AIFP and ASSP) as well as the housing
programs (HAMP, HHF, FHA Short Refi) have been broken out in the above
table in order to provide more detail. U.S. Department of the Treasury,
Troubled Assets Relief Program (TARP) Monthly 105(a) Report--July 2010,
at 5 (July 2010) (online at www.treasury.gov/initiatives/financial-
stability/briefing-room/reports/105/Documents105/
July%202010%20105(a)%20Report_Final.pdf).
xi Treasury will not make additional purchases pursuant
to the expiration of its purchasing authority under EESA. Any funds
still accounted for as available were committed to programs prior to
the expiration of Treasury's purchasing authority. U.S. Department of
the Treasury, Troubled Asset Relief Program: Two-Year Retrospective, at
43 (Oct. 2010) (online at www.treasury.gov/initiatives/financial-
stability/briefing-room/reports/agency_reports/Documents/
TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
xii The total CPP repayment figure includes the
principal repayment from the sale of Citigroup common stock as well as
amounts repaid by institutions that exchanged their CPP investments for
investments under the CDCI. See U.S. Department of the Treasury,
Troubled Asset Relief Program Transactions Report for Period Ending
March 8, 2011, at 2, 7, 13-15 (Mar. 10, 2011) (online at
www.treasury.gov/initiatives/financial-stability/briefing-room/reports/
tarp-transactions/DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf); U.S. Department of
the Treasury, Troubled Asset Relief Program: Two-Year Retrospective, at
25 (Oct. 2010) (online at www.treasury.gov/press-center/news/Documents/
TARP%20Two%
20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf); U.S.
Department of the Treasury, Treasury Commences Plan to Sell Citigroup
Common Stock (Apr. 26, 2010) (online at www.treasury.gov/press-center/
press-releases/Pages/tg660.aspx).
xiii In the TARP Transactions Report, Treasury has
classified the entirety of investments it made in two institutions, CIT
Group ($2.3 billion) and Pacific Coast National Bancorp ($4.1 million),
as losses. In addition, Treasury sold its preferred ownership
interests, along with warrants, in South Financial Group, Inc., TIB
Financial Corp., the Bank of Currituck, Treaty Oak Bancorp, and Cadence
Financial Corp. to non-TARP participating institutions. These shares
were sold at prices below the value of the initial CPP investment, and
represent losses of $252.7 million. Therefore, Treasury's net current
CPP investment is $30.8 billion due to the $2.6 billion in losses thus
far. See U.S. Department of the Treasury, Troubled Asset Relief Program
Transactions Report for the Period Ending March 8, 2011, at 1-14 (Mar.
10, 2011) (online at www.treasury.gov/initiatives/financial-stability/
briefing-room/reports/tarp-transactions/DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
xiv The $5.0 billion AGP guarantee for Citigroup was
unused since Treasury was not required to make any guarantee payments
during the life of the program. U.S. Department of the Treasury,
Troubled Asset Relief Program: Two-Year Retrospective, at 31 (Oct.
2010) (online at www.treasury.gov/initiatives/financial-stability/
briefing-room/reports/agency_reports/Documents/
TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
xv Although this $5.0 billion is no longer exposed as
part of the AGP, 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 32. See U.S. Department of the Treasury,
Troubled Asset Relief Program Transactions Report for the Period Ending
March 8, 2011, at 20 (Mar. 10, 2011) (online at www.treasury.gov/
initiatives/financial-stability/briefing-room/reports/tarp-
transactions/DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
xvi AIG completely utilized the $40 billion that was
made available on November 25, 2008, in exchange for the company's
preferred stock. U.S. Department of the Treasury, Troubled Asset Relief
Program Transactions Report for the Period Ending March 8, 2011 (Mar.
10, 2011) (online at www.treasury.gov/initiatives/financial-stability/
briefing-room/reports/tarp-transactions/DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf). It has also drawn
down the entirety of the $30 billion made available on April 17, 2009.
Of this $30 billion investment, $165 million was a reduction of
available funds used for retention payments and the remainder was
exchanged or used in the execution of AIG's recapitalization plan. In
total $29.8 billion was drawn by AIG. The $7.5 billion that was
outstanding under the facility at the time AIG executed its
recapitalization plan was converted to 167.6 million shares of AIG
common stock. Upon the closing of the recapitalization plan, $16.9
billion of the funds drawn-down by AIG from the Series F TARP
investment was exchanged for a corresponding liquidation preference of
preferred stock in the AIA Aurora LLC, $3.4 billion was exchanged for
junior preferred stock interest in the ALICO Holdings LLC, and $2
billion was designated as Series G preferred stock, which provides AIG
with an equity capital facility they can draw on for general corporate
purposes. This figure does not include $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. Id. at 21. For a full discussion of AIG's
recapitalization plan, see American International Group, Inc., Form 8-K
for the Period Ending January 14, 2011 (Jan. 14, 2011) (online at
www.sec.gov/Archives/edgar/data/5272/000095012311003061/
y88987e8vk.htm).
xvii As of March 8, 2011, Treasury received $9.1 billion
in proceeds from its preferred interests in AIG-related SPVs. The funds
used by AIG to redeem these preferred shares came from AIG asset sales.
On February 14, 2011, AIG paid Treasury $2.2 billion using funds from
the sale of AIG Star Life Insurance Co., Ltd. and AIG Edison Life
Insurance Company. On March 8, 2011, Treasury received a further $6.9
billion pursuant to AIG's sales of the MetLife equity units it acquired
when it sold its subsidiary, ALICO, to MetLife. This fully closes
Treasury's stake in the ALICO SPV. Treasury's remaining investment is
comprised of $11.2 billion in AIA Preferred Units, 92 percent of AIG's
common stock, and $2.0 billion preferred stock credit facility for
AIG's benefit (available but undrawn). AIG is also still required to
pay the remaining $110 million it owes stemming from the $165 million
reduction to the Series F TARP investment. These funds were used to pay
AIGFP retention bonuses and, as of March 8, 2011, $55 million had been
repaid. American International Group, Inc., Form 8-K for the Period
Ending February 8, 2011 (Feb. 9, 2011) (online at www.sec.gov/Archives/
edgar/data/5272/000095012311010653/y89586e8vk.htm); U.S. Department of
the Treasury, Treasury: With $6.9 Billion Repayment Today from AIG, 70
Percent of TARP Disbursements Now Recovered (Mar. 8, 2011) (online at
www.treasury.gov/press-center/press-releases/Pages/tg1096.aspx); U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions
Report for the Period Ending March 8, 2011 (Mar. 10, 2011) (online at
www.treasury.gov/initiatives/financial-stability/briefing-room/reports/
tarp-transactions/DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf); Treasury
conversations with Panel staff (Mar. 11, 2011).
xviii Treasury closed the program on September 30, 2010,
after investing $570 million in 84 community development financial
institutions. Including additional investments, $464 million of the
CDCI program funds were provided to banks that previously received
assistance under the TARP's Capital Purchase Program. U.S. Department
of the Treasury, Treasury Announces Special Financial Stabilization
Initiative Investments of $570 Million in 84 Community Development
Financial Institutions in Underserved Areas (Sept. 30, 2010) (online at
www.treasury.gov/press-center/press-releases/Pages/tg885.aspx); U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions
Report for the Period Ending March 8, 2011, at 18-19 (Mar. 10, 2011)
(online at www.treasury.gov/initiatives/financial-stability/briefing-
room/reports/tarp-transactions/DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
xix This figure includes $2,540,000,000 of repayment
Treasury received from the sale of GMAC\Ally Financial's TruPs. U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions
Report for the Period Ending March 8, 2011, at 18-19 (Mar. 10, 2011)
(online at www.treasury.gov/initiatives/financial-stability/briefing-
room/reports/tarp-transactions/DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
xx 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. See 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.treasury.gov/press-center/
press-releases/Pages/tg700.aspx); U.S. Department of the Treasury,
Troubled Asset Relief Program Transactions Report for the Period Ending
March 8, 2011, at 18-19 (Mar. 10, 2011) (online at www.treasury.gov/
initiatives/financial-stability/briefing-room/reports/tarp-
transactions/DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
Also, following the bankruptcy proceedings for Old Chrysler, which
extinguished the $1.9 billion DIP loan provided to Old Chrysler,
Treasury retained the right to recover the proceeds from the
liquidation of specified collateral. Although Treasury does not expect
a significant recovery from the liquidation proceeds, Treasury is not
yet reporting this loan as a loss in the TARP Transactions Report. To
date, Treasury has collected $48.1 million in proceeds from the sale of
collateral. Treasury includes these proceeds as part of the $26.4
billion repaid under the AIFP. U.S. Department of the Treasury,
Troubled Assets Relief Program Monthly 105(a) Report--September 2010
(Oct. 12, 2010) (online at www.treasury.gov/initiatives/financial-
stability/briefing-room/reports/105/Documents105/
September%20105(a)%20report_FINAL.pdf); Treasury conversations with
Panel staff (Aug. 19, 2010 and Nov. 29, 2010); U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Report for the
Period Ending March 8, 2011, at 18 (Mar. 10, 2011) (online at
www.treasury.gov/initiatives/financial-stability/briefing-room/reports/
tarp-transactions/DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
xxi On April 5, 2010, Treasury terminated its commitment
to lend to the GM special purpose vehicle (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 March 8, 2011, at 19 (Mar. 10, 2011)
(online at www.treasury.gov/initiatives/financial-stability/briefing-
room/reports/tarp-transactions/DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
xxii For the TALF, $1 of TARP funds was committed for
every $10 of funds obligated by the Federal Reserve. The program was
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 was incrementally funded. When the program closed in June 2010, a
total of $43 billion in loans was outstanding under the TALF, and the
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 from the TARP 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).
xxiii As of March 9, 2011, Treasury had provided $107
million to TALF LLC. This total is net of accrued interest payable to
Treasury. Board of Governors of the Federal Reserve System, Factors
Affecting Reserve Balances (H.4.1) (Mar. 10, 2010) (online at
www.federalreserve.gov/releases/h41/20110310/).
xxiv As of December 31, 2010, the total value of
securities held by the PPIP fund managers was $21.5 billion. Non-agency
residential mortgage-backed securities represented 81 percent of the
total; commercial mortgage-backed securities represented the balance.
U.S. Department of the Treasury, Legacy Securities Public-Private
Investment Program, Program Update--Quarter Ended December 31, 2010, at
5 (Jan. 24, 2011) (online at www.treasury.gov/initiatives/financial-
stability/investment-programs/ppip/s-ppip/Documents/ppip-12-
10vFinal.pdf).
xxv This number is calculated as the sum of the
disbursed equity and disbursed debt on the Daily Tarp Update. U.S.
Department of the Treasury, Daily TARP Update (Mar. 10, 2011) (online
at www.treasury.gov/initiatives/financial-stability/briefing-room/
reports/tarp-daily-summary-report/TARP%20Cash%20Summary/
Daily%20TARP%20Update%20-%2003.10.2011.pdf).
xxvi As of March 2, 2011, Treasury has received $713
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 March 8, 2011, at 24 (Mar. 10, 2011)
(online at www.treasury.gov/initiatives/financial-stability/briefing-
room/reports/tarp-transactions/DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
xxvii As of March 2, 2011, Treasury's purchases under
the SBA 7(a) Securities Purchase Program totaled $368.1 million. U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions
Report for the Period Ending March 8, 2011, at 23 (Mar. 10, 2011)
(online at www.treasury.gov/initiatives/financial-stability/briefing-
room/reports/tarp-transactions/DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
xxviii Treasury has received to date $12.2 million in
principal repayments through this program. U.S. Department of the
Treasury, Cumulative Dividends, Interest, and Distributions Report as
of February 28, 2011 (Mar. 10, 2011) (online at www.treasury.gov/
initiatives/financial-stability/briefing-room/reports/dividends-
interest/DocumentsDividendsInterest/
February%202011%20Dividends%20Interest%20Report.pdf).
xxix As of March 10, 2011, $1.04 billion was disbursed
under this program. U.S. Department of the Treasury, Daily TARP Update
(Mar. 10, 2011) (online at www.treasury.gov/initiatives/financial-
stability/briefing-room/reports/tarp-daily-summary-report/
TARP%20Cash%20Summary/Daily%20TARP%20Update%20-%2003.10.2011.pdf).
xxx On June 23, 2010, $1.5 billion was allocated to
mortgage assistance through the Hardest Hit Fund (HHF). Another $600
million was approved on August 3, 2010. U.S. Department of the
Treasury, Obama Administration Approves State Plans for $600 Million of
`Hardest Hit Fund' Foreclosure Prevention Assistance (Aug. 4, 2010)
(online at www.treasury.gov/press-center/press-releases/Pages/
tg813.aspx). As part of its revisions to TARP allocations upon
enactment of the Dodd-Frank Act, Treasury allocated an additional $2
billion in TARP funds to mortgage assistance for unemployed borrowers
through the HHF. 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.treasury.gov/press-center/press-releases/Pages/
tg1042.aspx). In October 2010, another $3.5 billion was allocated among
the 18 states and the District of Columbia currently participating in
HHF. The amount each state received during this round of funding is
proportional to its population. U.S. Department of the Treasury,
Troubled Asset Relief Program: Two Year Retrospective, at 72 (Oct.
2010) (online at www.treasury.gov/press-center/news/Documents/
TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
xxxi As of February 28, 2011, $125.1 million has been
disbursed to fourteen states and the District of Columbia: Alabama
($8.0 million), Arizona ($6.3 million), California ($17.5 million),
Florida ($10.5 million), Georgia ($8.5 million), Kentucky ($4.0
million), Michigan ($7.7 million), Nevada ($2.6 million), North
Carolina ($15.0 million), Ohio ($11.6 million), Oregon ($15.5 million),
Rhode Island ($3.0 million), South Carolina ($7.5 million), Tennessee
($6.3 million), and the District of Columbia ($1.1 million). Data
provided by Treasury (Feb. 28, 2011).
xxxii This figure represents the amount Treasury
disbursed to fund the advance purchase account of the Letter of Credit
issued under the FHA Short Refinance Program. The $53.8 million in the
FHA Short Refinance Program is broken down as follows: $50 million for
a deposit into an advance purchase account as collateral to the initial
$50 million Letter of Credit, $2.9 million for the closing and funding
of the Letter of Credit, $115,000 in trustee fees, $175,000 in claims
processor fees, $11,500 for a letter of credit fee, and $663,472 for an
unused commitment fee for the Letter of Credit. Data provided by
Treasury (Feb. 28, 2011).
xxxiii HAMP is not listed in this table because HAMP is
a 100 percent subsidy program, and no profit is expected.
xxxiv U.S. Department of the Treasury, Cumulative
Dividends, Interest and Distributions Report as of February 28, 2011
(Mar. 10, 2011) (online at www.treasury.gov/initiatives/financial-
stability/briefing-room/reports/dividends-interest/
DocumentsDividendsInterest/
February%202011%20Dividends%20Interest%20Report.pdf).
xxxv U.S. Department of the Treasury, Cumulative
Dividends, Interest and Distributions Report as of February 28, 2011
(Mar. 10, 2011) (online at www.treasury.gov/initiatives/financial-
stability/briefing-room/reports/dividends-interest/
DocumentsDividendsInterest/
February%202011%20Dividends%20Interest%20Report.pdf).
xxxvi U.S. Department of the Treasury, Troubled Asset
Relief Program Transactions Report for the Period Ending March 8, 2011
(Mar. 10, 2011) (online at www.treasury.gov/initiatives/financial-
stability/briefing-room/reports/tarp-transactions/
DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
xxxvii In the TARP 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.
Treasury has also sold its preferred ownership interests and warrants
from South Financial Group, Inc., TIB Financial Corp the Bank of
Currituck, Treaty Oak Bancorp, and Cadence Financial Corp. This
represents a $252.7 million loss on its CPP investments in these five
banks. See Figure 37, CPP Settled and Unsettled Losses, for details on
other banks likely to result in losses. U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Report for the
Period Ending March 8, 2011 (Mar. 10, 2011) (online at
www.treasury.gov/initiatives/financial-stability/briefing-room/reports/
tarp-transactions/DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
xxxviii This figure represents net proceeds to Treasury
from the sale of Citigroup common stock to date. 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. Treasury
completed the sale of its Citigroup common shares on December 6, 2010.
The gross proceeds of the common stock sale were $31.85 billion and the
amount repaid under CPP was $25 billion. The difference between these
two numbers represents the $6.85 billion in net profit Treasury has
received from the sale of Citigroup common stock. U.S. Department of
the Treasury, Troubled Asset Relief Program Transactions Report for the
Period Ending March 8, 2011, at 15 (Mar. 10, 2011) (online at
www.treasury.gov/initiatives/financial-stability/briefing-room/reports/
tarp-transactions/DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
xxxix On March 8, 2011, Treasury received full payment
for its share of the ALICO Junior Preferred Interests, which resulted
in an associated payment of $18.5 million of accrued preferred returns
since the recapitalization date (Jan. 14, 2011) on this segment of the
AIG investment. This payment reflects a profit on a particular portion
of Treasury's remaining investment, and does not account for the
remaining ownership positions in the company or related SPVs.
xl This represents the cash received for the warrants
related to the GMAC/Ally sale of trust preferred securities that closed
on March 7, 2011. U.S. Department of the Treasury, Troubled Asset
Relief Program Transactions Report for the Period Ending March 8, 2011,
at 19 (Mar. 10, 2011) (online at www.treasury.gov/initiatives/
financial-stability/briefing-room/reports/tarp-transactions/
DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
xli This represents a distribution fee of $28.2 million
received in connection with the sale of GMAC/Ally trust preferred
securities, as well as the additional note of $15.0 million received
upon repayment of the Chrysler Financial investment. U.S. Department of
the Treasury, Troubled Asset Relief Program Transactions Report for the
Period Ending March 8, 2011, at 19 (Mar. 10, 2011) (online at
www.treasury.gov/initiatives/financial-stability/briefing-room/reports/
tarp-transactions/DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
xlii Losses on the AIFP do not include projected losses
on the GM stock sale as reported on the Daily TARP Update. U.S.
Department of the Treasury, Daily TARP Update (Mar. 10, 2011) (online
at www.treasury.gov/initiatives/financial-stability/briefing-room/
reports/tarp-daily-summary-report/TARP%20Cash%20Summary/
Daily%20TARP%20Update%20-%2003.10.2011.pdf). See endnote xx above for
further details on the AIFP losses.
xliii This represents the total proceeds from additional
notes connected with Treasury's investments in GM Supplier Receivables
LLC and Chrysler Receivables SPV LLC. U.S. Department of the Treasury,
Troubled Asset Relief Program Transactions Report for the Period Ending
March 8, 2011, at 19 (Mar. 10, 2011) (online at www.treasury.gov/
initiatives/financial-stability/briefing-room/reports/tarp-
transactions/DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
xliv 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 in December 2009, Treasury cancelled $1.8 billion of the
trust preferred securities, leaving Treasury with $2.23 billion in
Citigroup trust preferred securities. On September 30, 2010, Treasury
sold these securities for $2.25 billion in total proceeds. At the end
of Citigroup's participation in the FDIC's Temporary Liquidity
Guarantee Program (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 March 8, 2011, at 20 (Mar. 10, 2011) (online at
www.treasury.gov/initiatives/financial-stability/briefing-room/reports/
tarp-transactions/DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.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.treasury.gov/
initiatives/financial-stability/investment-programs/agp/Documents/
Citi%20AGP%20Termination%20Agreement%20-
%20Fully%20Executed%20Version.pdf); U.S. Department of the Treasury,
Treasury Announces Further Sales of Citigroup Securities and Cumulative
Return to Taxpayers of $41.6 Billion (Sept. 30, 2010) (online at
www.treasury.gov/press-center/press-releases/Pages/tg887.aspx); Federal
Deposit Insurance Corporation, 2009 Annual Report, at 87 (June 30,
2010) (online at www.fdic.gov/about/strategic/report/2009annualreport/
AR09final.pdf).
xlv As of January 31, 2011, Treasury has earned $456.1
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. See U.S. Department of the
Treasury, Cumulative Dividends, Interest and Distributions Report as of
February 28, 2011, at 14 (Mar. 10, 2010) (online at www.treasury.gov/
initiatives/financial-stability/briefing-room/reports/dividends-
interest/DocumentsDividendsInterest/
February%202011%20Dividends%20Interest%20Report.pdf); U.S. Department
of the Treasury, Troubled Asset Relief Program Transactions Report for
the Period Ending March 8, 2011, at 24 (Mar. 10, 2011) (online at
www.treasury.gov/initiatives/financial-stability/briefing-room/reports/
tarp-transactions/DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
xlvi Treasury has received approximately $183,555 in
proceeds from senior indebtedness instruments associated with its
investments in SBA 7(a) securities. U.S. Department of the Treasury,
Troubled Asset Relief Program Transactions Report for the Period Ending
March 8, 2011 (Mar. 10, 2011) (online at www.treasury.gov/initiatives/
financial-stability/briefing-room/reports/tarp-transactions/
DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
xlvii 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.treasury.gov/initiatives/financial-stability/investment-programs/
agp/Documents/BofA%20-%20Termination%20Agreement%20-%20executed.pdf).
xlviii 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 investments 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.
xlix Figures affected by rounding. All figures are as of
March 8, 2010 unless otherwise noted.
l Although many of the guarantees may never be exercised
or will be exercised only partially, the guarantee figures included
here represent the federal government's greatest possible financial
exposure.
li See U.S. Department of the Treasury, Treasury Update
on AIG Investment Valuation (Nov. 1, 2010) (online at www.treasury.gov/
press-center/press-releases/Pages/pr_11012010.aspx). AIG values exclude
accrued dividends on preferred interests in the AIA and ALICO SPVs and
accrued interest payable to FRBNY on the Maiden Lane LLCs.
lii This number is comprised of the investments under
the AIGIP/SSFI Program. U.S. Department of the Treasury, Troubled Asset
Relief Program Transactions Report for the Period Ending March 8, 2011,
at 21 (Mar. 10, 2011) (online at www.treasury.gov/initiatives/
financial-stability/briefing-room/reports/tarp-transactions/
DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
liii 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 SPVs, AIA
Aurora LLC and ALICO Holdings LLC. These SPVs were established to hold
the common stock of two AIG subsidiaries: AIA and ALICO. This interest
was exchanged as part of the AIG recapitalization plan and is now
consolidated under the Treasury holdings. Board of Governors of the
Federal Reserve System, Federal Reserve System Monthly Report on Credit
and Liquidity Programs and the Balance Sheet, at 18 (Dec. 2010) (online
at www.federalreserve.gov/monetarypolicy/files/
monthlyclbsreport201012.pdf).
Upon the completion of AIG's recapitalization plan, FRBNY no longer
held an interest in the AIA and ALICO SPVs. The remaining holdings in
these vehicles were consolidated under Treasury. After the March 2,
2011 sale of these MetLife equity units, Treasury, through the TARP,
currently holds $11.3 billion in liquidation preference of preferred
stock in the AIA Aurora LLC and no longer holds an interest in the
ALICO SPV. U.S. Department of the Treasury, Troubled Asset Relief
Program Transactions Report for the Period Ending March 8, 2011, at 21
(Mar. 10, 2011) (online at www.treasury.gov/initiatives/financial-
stability/briefing-room/reports/tarp-transactions/
DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
liv This number represents the outstanding principal of
the loans extended to the Maiden Lane II and III SPVs to buy AIG assets
(as of March 10, 2011, $12.4 billion for each of the SPVs). Federal
Reserve Bank of New York, Factors Affecting Reserve Balances (H.4.1)
(Mar. 10, 2011) (online at www.federalreserve.gov/releases/h41/
20110310/); Board of Governors of the Federal Reserve System, Federal
Reserve System Monthly Report on Credit and Liquidity Programs and the
Balance Sheet (Nov. 2010) (online at www.federalreserve.gov/
monetarypolicy/files/monthlyclbsreport201011.pdf). 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 taxpayer's
exposure to losses over time. Board of Governors of the Federal Reserve
System, Federal Reserve System Monthly Report on Credit and Liquidity
Programs and the Balance Sheet, at 15 (Nov. 2010) (online at
www.federalreserve.gov/monetarypolicy/files/
monthlyclbsreport201011.pdf).
On March 11, 2011, FRBNY announced that AIG had formally offered to
purchase the assets in Maiden Lane II. There was no further news
regarding the offer at the time this report was published. Federal
Reserve Bank of New York, Statement Related to Offer by AIG to Purchase
Maiden Lane II LLC (Mar. 11, 2011) (online at www.newyorkfed.org/
newsevents/news/markets/2011/an110311.html).
lv The final sale of Treasury's Citigroup common stock
resulted in full repayment of Treasury's investment of $25 billion. See
endnote xxxviii, supra, for further details of the sales of Citigroup
common stock. U.S. Department of the Treasury, Troubled Asset Relief
Program Transactions Report for the Period Ending March 8, 2011, at 1,
13 (Mar. 10, 2011) (online at www.treasury.gov/initiatives/financial-
stability/briefing-room/reports/tarp-transactions/
DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
lvi Bank of America repaid the $45 billion in assistance
it had received through TARP programs on December 9, 2009. U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions
Report for the Period Ending March 8, 2011, at 1 (Mar. 10, 2011)
(online at www.treasury.gov/initiatives/financial-stability/briefing-
room/reports/tarp-transactions/DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
lvii U.S. Department of the Treasury, Troubled Asset
Relief Program Transactions Report for the Period Ending March 8, 2011,
at 13 (Mar. 10, 2011) (online at www.treasury.gov/initiatives/
financial-stability/briefing-room/reports/tarp-transactions/
DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
lviii On November 9, 2009, Treasury announced the
closing of the CAP and that only one institution, GMAC/Ally Financial,
was in need of further capital from Treasury. GMAC/Ally Financial,
however, received further funding through the AIFP. Therefore, the
Panel considers the CAP unused. U.S. Department of the Treasury,
Treasury Announcement Regarding the Capital Assistance Program (Nov. 9,
2009) (online at www.treasury.gov/press-center/press-releases/Pages/
tg359.aspx).
lix This figure represents the $4.3 billion adjusted
allocation to the TALF SPV. However, as of March 3, 2011, TALF LLC had
drawn only $107 million of the available $4.3 billion. Board of
Governors of the Federal Reserve System, Factors Affecting Reserve
Balances (H.4.1) (Mar. 10, 2011) (online at www.federalreserve.gov/
releases/h41/20110310/); U.S. Department of the Treasury, Troubled
Asset Relief Program Transactions Report for the Period Ending March 8,
2011, at 22 (Mar. 10, 2011) (online at www.treasury.gov/initiatives/
financial-stability/briefing-room/reports/tarp-transactions/
DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
lx 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, at 4 (Feb. 10, 2009) (online at
banking.senate.gov/public/_files/GeithnerFINALfinancial
stabilityfactsheet2.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 only $43 billion
in TALF loans remained outstanding when the program closed, Treasury is
currently responsible for reimbursing the Federal Reserve Board only up
to $4.3 billion in losses from these loans. Thus, since the outstanding
TALF Federal Reserve loans currently total $20.2 billion, the Federal
Reserve's maximum potential exposure under the TALF is $15.9 billion.
See Board of Governors of the Federal Reserve System, Federal Reserve
Announces Agreement with Treasury Regarding 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); Board of Governors of the Federal
Reserve System, Factors Affecting Reserve Balances (H.4.1) (Instrument
Used: Term Asset-Backed Securities Loan Facility, Wednesday Level)
(Mar. 3, 2011) (online at www.federalreserve.gov/releases/h41/20110303/
).
lxi No TARP resources were expended under the PPIP
Legacy Loans Program, a TARP program that was announced in March 2009
but never launched.
lxii These numbers are a staff calculation, subtracting
the amount repaid from the funds obligated to find the maximum current
commitment. U.S. Department of the Treasury, Daily TARP Update (Mar.
10, 2011) (online at www.treasury.gov/initiatives/financial-stability/
briefing-room/reports/tarp-daily-summary-report/TARP%20Cash%20Summary/
Daily%20TARP%20Update%20-%2003.10.2011.pdf). On January 24, 2010,
Treasury released its fifth quarterly report on PPIP. The report
indicates that as of December 31, 2010, all eight investment funds had
realized an internal rate of return (on equity) since inception (net of
any management fees or expenses owed to Treasury) of at least 27
percent. The highest performing fund, thus far, is AG GECC PPIF Master
Fund, L.P., which has a net internal rate of return (on equity) of 59.7
percent. These figures do not include the taxpayer's additional
exposure under PPIP for credit extended to these investment funds. As
noted in Section VIII.C of this report, when calculated as a (blended)
return on both equity and debt, the total return is only 9.7 percent.
U.S. Department of the Treasury, Legacy Securities Public-Private
Investment Program, at 8 (Jan. 24, 2010) (online at www.treasury.gov/
initiatives/financial-stability/investment-programs/ppip/s-ppip/
Documents/ppip-12-10 vFinal.pdf).
lxiii The total amount of TARP funds committed to HAMP
is $29.9 billion. U.S. Department of the Treasury, Troubled Assets
Relief Program Monthly 105(a) Report--November 2010, at 4 (Dec. 10,
2010) (online at www.treasury.gov/initiatives/financial-stability/
briefing-room/reports/105/Documents105/
December105(a)%20report_FINAL_v4.pdf). However, as of March 4, 2011,
only $1.04 billion in non-GSE payments have been disbursed under HAMP.
U.S. Department of the Treasury, Daily TARP Update (Mar. 10, 2011)
(online at www.treasury.gov/initiatives/financial-stability/briefing-
room/reports/tarp-daily-summary-report/TARP%20Cash%20Summary/
Daily%20TARP%20Update%20-%2003.10.2011.pdf).
lxiv A substantial portion of the total $81.3 billion in
debt instruments 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). $48.8 billion represents
Treasury's current obligation under the AIFP after accounting for
repayments, an additional note payment, and losses. U.S. Department of
the Treasury, Troubled Asset Relief Program Transactions Report for the
Period Ending March 8, 2011, at 18 (Mar. 10, 2011) (online at
www.treasury.gov/initiatives/financial-stability /briefing-room/
reports/tarp-transactions/DocumentsTARPTransactions/3-10-11%20
Transactions%20Report%20as%20of%203-8-11.pdf).
lxxv At its maximum, $400 million was outstanding under
the ASSP. These funds were fully repaid and Treasury earned $101
million in proceeds from additional notes associated with the program.
U.S. Department of the Treasury, Troubled Asset Relief Program
Transactions Report for the Period Ending March 8, 2011 (Mar. 10, 2011)
(online at www.treasury.gov/initiatives/financial-stability/briefing-
room/reports/tarp-transactions/DocumentsTARPTransactions/3-10-
11%20Transactions%20Report%20as%20of%203-8-11.pdf).
lxvi U.S. Department of the Treasury, Daily TARP Update
(Mar. 10, 2011) (online at www.treasury.gov/initiatives/financial-
stability/briefing-room/reports/tarp-daily-summary-report/
TARP%20Cash%20Summary/Daily%20TARP%20Update%20-%2003.10.2011.pdf).
lxvii U.S. Department of the Treasury, Troubled Asset
Relief Program Transactions Report for the Period Ending March 8, 2011,
at 17 (Mar. 10, 2011) (online at www.treasury.gov/initiatives/
financial-stability/briefing-room/reports/tarp-transactions/
DocumentsTARPTransactions/3-10-11%20Transactions%20
Report%20as%20of%203-8-11.pdf).
lxviii 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. $264.6 billion of debt subject to the
guarantee is currently outstanding, which represents approximately 53.5
percent of the current cap. Federal Deposit Insurance Corporation,
Monthly Reports Related to the Temporary Liquidity Guarantee Program:
Debt Issuance Under Guarantee Program (Feb. 23, 2011) (online at
www.fdic.gov/regulations/resources/TLGP/total_issuance01-11.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 Temporary Liquidity Guarantee
Debt Program (Feb. 23, 2011) (online at www.fdic.gov/regulations/
resources/TLGP/fees.html).
lxix This figure represents the amount of funds on the
FDIC's balance sheet at the end of the third quarter of 2010 dedicated
to the resolution of bank failures. These metrics are ``liabilities due
to resolutions'' as well as ``contingent liabilities: future
failures.'' As of Q3 2010, $42.8 billion was earmarked as ``liabilities
due to resolutions'' and $21.3 billion was marked as ``contingent
liabilities: future failures.'' Federal Deposit Insurance Corporation,
Chief Financial Officer's (CFO) Report to the Board (Instrument Used:
DIF Balance Sheet, Third Quarter 2010) (online at www.fdic.gov/about/
strategic/corporate/cfo_report_3rdqtr_10/balance.html) (accessed Mar.
11, 2011).
lxx Outlays are comprised of the Federal Reserve
Mortgage Related Facilities. On November 25, 2008, the Federal Reserve
announced that it would purchase $100 billion of debt and $500 billion
of MBS guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Federal
Housing Finance Agency, Mortgage Market Note 10-1 (Jan. 20, 2010)
(online at www.fhfa.gov/webfiles/15362/MMNote_10-1_revision_of_MMN_09-
1A_01192010.pdf). In March 2009, these amounts were increased to $1.25
trillion of MBS guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae,
and $200 billion of agency debt securities from Fannie Mae, Freddie
Mac, and the Federal Home Loan Banks. The intended purchase amount for
agency debt securities was subsequently decreased to $175 billion.
Board of Governors of the Federal Reserve System, Federal Reserve
System Monthly Report on Credit and Liquidity Programs and the Balance
Sheet, at 5 (Dec. 2010) (online at federalreserve.gov/monetarypolicy/
files/monthlyclbsreport201012.pdf). As of March 2, 2011, the Federal
Reserve held $949 billion of agency MBS and $143 billion of agency
debt. Board of Governors of the Federal Reserve System, Factors
Affecting Reserve Balances (H.4.1) (Mar. 10, 2011) (online at
www.federalreserve.gov/releases/h41/20110310/).
lxxi Federal Reserve Liquidity Facilities classified in
this table as loans include primary credit, secondary credit, central
bank liquidity swaps, loans outstanding to Commercial Paper Funding
Facility LLC, seasonal credit, term auction credit, and loans
outstanding to Bear Stearns (Maiden Lane LLC). Board of Governors of
the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1)
(Mar. 10, 2011) (online at www.federalreserve.gov/releases/h41/
20110310/) (accessed Mar. 4, 2011). For further information, see the
data that the Federal Reserve recently disclosed on these programs
pursuant to its obligations under the Dodd-Frank Act. Board of
Governors of the Federal Reserve System, Credit and Liquidity Programs
and the Balance Sheet: Overview (May 11, 2010) (online at
www.federalreserve.gov/monetarypolicy/bst.htm); Board of Governors of
the Federal Reserve System, Credit and Liquidity Programs and the
Balance Sheet: Reports and Disclosures (Aug. 24, 2010) (online at
www.federalreserve.gov/monetarypolicy/bst_reports.htm); Board of
Governors of the Federal Reserve System, Usage of Federal Reserve
Credit and Liquidity Facilities (Dec. 3, 2010) (online at
www.federalreserve.gov/newsevents/reform_transaction.htm).
SECTION TWO: OVERSIGHT ACTIVITIES
Recent Hearings
The Panel held its final hearing on March 4, 2011 in
Washington, DC. The top official in Treasury's Office of
Financial Stability answered questions about the overall
effectiveness of the TARP in meeting its statutory goals and
also provided insight into the future strategy for the TARP as
it continues to wind down in the coming years. Officials from
the FDIC, the FHFA, and the Federal Reserve offered testimony
about their respective agencies' credit, liquidity, and housing
initiatives that worked in concert with the TARP in the
government's broader efforts to stabilize the financial system.
Finally, four academic economists each offered their overall
assessment of the effectiveness of the TARP and the
government's other financial stability efforts.
Correspondence With Treasury
The Panel's Chairman, Senator Ted Kaufman, sent a letter to
the Secretary of the Treasury, Timothy F. Geithner, on March 7,
2011.\605\ The letter raised concerns about transparency with
respect to Treasury's recent redesign of its Office of
Financial Stability website.
---------------------------------------------------------------------------
\605\ See Appendix I of this report, infra.
---------------------------------------------------------------------------
In response to this letter, Timothy Massad, the Acting
Assistant Secretary for Financial Stability, sent a letter to
Senator Kaufman on March 14, 2011.\606\ The letter outlined the
steps Treasury has taken to address the issues raised by the
Panel and promised future steps to ensure TARP transparency via
Treasury's website.
---------------------------------------------------------------------------
\606\ See Appendix II of this report, infra.
SECTION THREE: 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 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 was 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 was
charged with overseeing Treasury's actions, assessing the
impact of spending to stabilize the economy, evaluating market
transparency, ensuring effective foreclosure mitigation
efforts, and guaranteeing that Treasury acted 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.
A. Members
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, William B. Sturgill
Professor of Economics at the University of Kentucky, to fill
the vacancy created by the resignation of Paul Atkins on May
21, 2010. Effective September 17, 2010, Elizabeth Warren
resigned from the Panel, and on September 30, 2010, Senate
Majority Leader Harry Reid announced the appointment of Senator
Ted Kaufman to fill the vacant seat. On October 4, 2010, the
Panel elected Senator Kaufman as its chair.
B. Reports
12/10/2008 Questions About the $700 Billion Emergency Economic
Stabilization Funds
This report offered an initial impression of Treasury's use
of authority under EESA. In order to set the agenda for the
Panel's future work, the Panel posed ten primary questions
regarding Treasury's goals and methods for the TARP. Among
these questions: What is the scope of Treasury's authority?
What is Treasury's strategy and is it working to stabilize
markets and help reduce foreclosures? What have financial
institutions done with taxpayers' money? Is the public
receiving a fair deal?
1/9/2009 Accountability for the Troubled Asset Relief Program
The report documented the efforts to get answers to the
questions posed in the Panel's first report. It detailed both
the answers received from Treasury and the many questions that
remained unaddressed or unanswered. It specifically highlighted
four key areas of concern: The rising tide of foreclosures,
insufficient bank accountability, poor transparency in the use
of TARP funds, and a lack of clarity in Treasury's overall
strategy.
1/29/2009 Special Report on Regulatory Reform
Fulfilling a mandate from Congress, this special report
discussed how shortcomings in the financial regulatory regime
contributed to the financial crisis by failing to effectively
manage risk, require transparency, and ensure fair dealings.
The report identified eight specific areas most urgently in
need of reform and three key areas of risk management,
concluding that financial regulation requires good risk
management, transparency, and fairness.
2/6/2009 February Oversight Report: Valuing Treasury's
Acquisitions
This report presented the results of a detailed, technical
analysis of the value of Treasury's largest transactions under
the TARP in an effort to determine whether taxpayers were
receiving fair value. The Panel determined that, in the ten
largest transactions made with TARP funds, for every $100 spent
by Treasury, it received assets worth, on average, only $66.
This disparity translated into a $78 billion shortfall for the
first $254 billion in TARP funds spent.
3/6/2009 Foreclosure Crisis: Working Toward a Solution
The Panel examined the causes of the foreclosure crisis and
developed a checklist providing a roadmap for foreclosure
mitigation program success. Among the questions on the Panel's
checklist: Will the plan result in modifications that create
affordable monthly payments? Does the plan deal with negative
equity? Does the plan address junior mortgages? Will the plan
have widespread participation by lenders and servicers?
4/7/2009 Assessing Treasury's Strategy: Six Months of TARP
In this report, the Panel looked back on the first six
months of Treasury's TARP efforts and offered a comparative
analysis of previous efforts to combat banking crises in the
past. The Panel found that the successful resolution of past
financial crises involved four critical elements: Transparency
of bank accounting, particularly with respect to the value of
bank assets; assertiveness, including taking early aggressive
action to improve salvageable banks and shut down insolvent
institutions; accountability, including willingness to replace
failed management; and clarity in the government response.
5/7/2009 Reviving Lending to Small Businesses and Families and
the Impact of the TALF
This report surveyed the state of lending for small
businesses and families and examined the TALF. The report
raised concerns about whether TALF was well-designed to help
market participants meet the credit needs of households and
small businesses. It also raised serious doubts about whether
the program would have a significant impact on access to
credit.
6/9/2009 Stress Testing and Shoring Up Bank Capital
The Panel examined how effectively Treasury and the Federal
Reserve conducted stress tests of America's 19 largest banks.
The Panel found that, on the whole, the stress tests were based
on a solidly designed working model, but that serious concerns
remained, including the possibility that economic conditions
could deteriorate beyond the worst-case scenario considered in
the tests. The Panel recommended that, if the economy continued
to worsen, stress testing should be repeated.
7/10/2009 TARP Repayments, Including the Repurchase of Stock
Warrants
The July report examined the repayment of TARP funds and
the repurchase of stock warrants. At that time, 11 banks had
repurchased their warrants from Treasury. The Panel's analysis
indicated that the taxpayers had received only 66 percent of
the Panel's best estimate of the value of the warrants. In
order to ensure that taxpayers received the maximum values as
banks exited the TARP, the Panel urged Treasury to make its
process, reasoning, methodology, and exit strategy absolutely
transparent.
7/21/2009 Special Report on Farm Loan Restructuring
This special report fulfilled a mandate under the Helping
Families Save Their Homes Act of 2009 to issue a report that
``analyzes the state of the commercial farm credit markets and
the use of loan restructuring as an alternative to foreclosure
by recipients of financial assistance under the Troubled Asset
Relief Program (TARP).''
8/11/2009 The Continued Risk of Troubled Assets
The August report found that substantial troubled assets
backed by residential mortgages remained on banks' balance
sheets and presented a potentially serious obstacle to economic
stability. The risk to the health of small and mid-sized banks
was especially high. The Panel recommended that Treasury and
the bank supervisors carefully monitor the condition of the
troubled assets held by financial institutions and that
Treasury should move forward with one or more initiatives aimed
at removing troubled whole loans from bank balance sheets.
9/9/2009 The Use of TARP Funds in Support and Reorganization
of the Domestic Automotive Industry
In this report, the Panel examined the use of TARP funds to
assist the domestic automotive industry. The Panel recommended
that Treasury provide a legal analysis justifying the use of
TARP funds in the domestic automotive industry. The Panel
further recommended that, in order to limit the impact of
conflicts of interest and to facilitate an effective exit
strategy from ownership, Treasury should consider placing its
Chrysler and GM shares in an independent trust.
10/9/2009 An Assessment of Foreclosure Mitigation Efforts
After Six Months
The Panel's October report examined Treasury's efforts to
prevent home foreclosures. The Panel expressed concern about
the limited scope and scale of the Making Home Affordable
program and questioned whether Treasury's strategy would lead
to permanent mortgage modifications for many homeowners.
11/6/2009 Guarantees and Contingent Payments in TARP and
Related Programs
The November oversight report found that the income of
several government-backed guarantee programs will likely exceed
their direct expenditures, and that guarantees played a major
role in calming financial markets. At their height, these same
programs, however, exposed American taxpayers to trillions of
dollars in guarantees and created significant moral hazard that
can distort the marketplace.
12/9/2009 Taking Stock: What Has the Troubled Asset Relief
Program Achieved?
The Panel's December oversight report concluded that the
TARP was an important part of a broader government strategy
that stabilized the U.S. financial system. It was apparent
after 14 months that significant underlying weaknesses
remained, including a foreclosure crisis that showed no signs
of abating and record unemployment, as well as market
distortions caused by moral hazard.
1/14/2010 Exiting TARP and Unwinding Its Impact on the
Financial Markets
Even after Treasury's authority to make new TARP
commitments expires in October 2010, taxpayers will hold a
diverse collection of assets worth many billions of dollars.
The Panel's January oversight report expressed concern that the
stated principles guiding Treasury's divestment strategy may
frequently conflict and are broad enough to justify a wide
range of actions. Furthermore, any effective exit strategy must
help to unwind the implicit guarantee created by the TARP.
2/11/2010 Commercial Real Estate Losses and the Risk to
Financial Stability
The Panel expressed concern that, over the next several
years, a wave of CRE loan failures could jeopardize the
stability of many banks, particularly community banks. Because
community banks play a critical role in financing the small
businesses that help the American economy create new jobs,
their widespread failure could disrupt local communities,
threaten America's weakened financial system, and extend an
already painful recession.
3/11/2010 The Unique Treatment of GMAC Under the TARP
The Panel examined the ways the TARP was used to support
GMAC with funds from the Auto Industry Financing Program. The
Panel found the government's early decisions to rescue GMAC
resulted in missed opportunities to increase accountability and
to better protect taxpayers' money.
4/14/2010 Evaluating Progress on TARP Foreclosure Mitigation
Programs
The Panel applauded recent changes to the mortgage
modification program, but found that Treasury's response lagged
behind the pace of the crisis, Treasury's programs would not
reach the overwhelming majority of homeowners in trouble, and
even families who navigate all the way through these programs
will have a precarious hold on their homes.
5/13/2010 The Small Business Credit Crunch and the Impact of
the TARP
The May report found little evidence that the TARP had
successfully spurred small business lending, and it raised
questions about whether the program helped to restore stability
to the smaller banks that provide substantial amounts of small
business credit. The Panel also evaluated the proposed SBL) and
found that, even if approved by Congress, its prospects were
far from certain. The program might not be fully operational
for some time, may not be embraced by banks, and may not
address the root causes of the small business credit crunch.
6/10/2010 The AIG Rescue, Its Impact on Markets, and the
Government's Exit Strategy
This report found that the Federal Reserve and Treasury
failed to exhaust all other options before undertaking their
unprecedented, taxpayer-backed rescue of American International
Group (AIG) and its creditors. This rescue resulted in
extraordinary risk to taxpayers and a fundamental redefinition
of the relationship between the government and the country's
most sophisticated financial institutions.
7/14/2010 Small Banks in the Capital Purchase Program
The July report found that the CPP's ``one-size-fits-all''
design served Wall Street banks much better than smaller banks.
Moving forward, small banks may find it difficult to repay
their TARP funds because the capital they need is difficult to
obtain. If so, they are at risk of being unable to raise enough
money to exit the program, even as many continue to struggle to
pay their TARP dividends. If this leads smaller banks to
consolidate or collapse, one lasting effect of the TARP could
be an even more concentrated banking sector.
8/12/2010 The Global Context and International Effects of the
TARP
This report found that America targeted its bailouts very
differently than other nations. While most nations targeted
their funds to save individual banks, America simply flooded
the markets with money to stabilize the system. As a result, it
appeared that America's bailouts had much greater impact
internationally than other nations' bailouts had on America.
Additionally, the crisis revealed the need for an international
plan to handle the collapse of major, globally significant
financial institutions. The Panel recommended that U.S.
regulators encourage regular crisis planning and ``war gaming''
for the international financial system.
9/16/2010 Assessing the TARP on the Eve of Its Expiration
The September report found that, although the TARP quelled
the financial panic in the fall of 2008, it was less successful
in fulfilling its broader statutory goals. After the TARP's
extension, Treasury's policy choices were increasingly
constrained by public anger about the TARP. The Panel concluded
that this stigma proved an obstacle to future financial
stability efforts. In addition, in preparing the report, the
Panel consulted a variety of prominent economists, who cited
significant concerns about moral hazard.
10/14/2010 Examining Treasury's Use of Financial Crisis
Contracting Authority
This report found that Treasury's extensive use of private
contractors in TARP programs created significant concerns about
transparency and potential conflicts of interest. Private
businesses performed many of the TARP's most critical
functions, operating under 91 different contracts worth up to
$434 million. They may have had conflicts of interest, were not
directly responsible to the public, and were not subject to the
same disclosure requirements as government actors. Although
Treasury took significant steps to ensure the appropriate use
of private contractors, the Panel recommended further
improvements.
11/16/2010 Examining the Consequences of Mortgage
Irregularities for Financial Stability and Foreclosure
Mitigation
The November report reviewed allegations that companies
servicing $6.4 trillion in American mortgages may in some cases
have bypassed legally required steps to foreclose on a home.
The implications of these irregularities were unclear, but the
Panel expressed concerns about the possibility that ``robo-
signing'' may have concealed deeper problems in the mortgage
market that potentially threatened financial stability and put
foreclosure prevention efforts at risk.
12/14/2010 A Review of Treasury's Foreclosure Prevention
Programs
This report found that Treasury's main foreclosure
mitigation effort, HAMP, would not make a significant dent in
the foreclosure crisis. The Panel estimated that, if current
trends held, HAMP would prevent only 700,000 foreclosures--far
fewer than the three to four million foreclosures that Treasury
initially aimed to stop. While Treasury intended to devote $30
billion to the program, it appeared that only $4 billion would
be spent. Since the TARP had already expired, it was too late
for Treasury to revamp its foreclosure prevention strategy, but
Treasury could still have taken steps to wring every possible
benefit from its programs.
1/13/2011 An Update on TARP Support for the Domestic
Automotive Industry
The January report found that, although it remained too
early to tell whether Treasury's intervention in the U.S.
automotive industry would prove successful, the government's
ambitious actions appeared to be on a promising course. Even
so, the companies that received automotive bailout funds
continued to face uncertain futures, taxpayers remained at
financial risk, concerns remained about the transparency and
accountability of Treasury's efforts, and moral hazard lingered
as a long-run threat to the automotive industry and the broader
economy.
2/10/2011 Executive Compensation Restrictions in the Troubled
Asset Relief Program
This report examined Treasury's efforts to implement
restrictions on executive pay at TARP-recipient institutions
and, in particular, examined the work of the Special Master for
Executive Compensation. The Panel found that, amidst intense
media scrutiny and in a time of deep public anger, the Special
Master achieved significant changes at the institutions under
his review. Overall compensation at the companies under the
Special Master's jurisdiction fell by an average of 55 percent,
and cash salaries were generally limited to $500,000.
Unfortunately, the Special Master fell short in his far broader
goal of permanently changing Wall Street's pay practices.
3/16/2011 The Final Report of the Congressional Oversight
Panel
For its final report the Panel summarized and revisited its
comprehensive body of monthly oversight work. To provide a
context for understanding and evaluating the TARP, the report
described the major events of the financial crisis in the fall
of 2008 and the economic conditions prevailing during the
crisis and response, as well as the broad array of federal
initiatives undertaken to promote financial stability and
liquidity as a result of the crisis. For each area in which it
has done oversight work, the Panel provided a summary of its
key findings and recommendations, along with an update since
the Panel's prior work and the current status of the Panel's
recommendations. The report concluded with a summation of the
key lessons learned in order to guide policymakers should they
find it necessary to respond to financial crises in the future.
C. Hearings
------------------------------------------------------------------------
Date Hearing
------------------------------------------------------------------------
12/16/2008 Clark County, NV: Ground Zero of
the Housing and Financial Crises
1/14/2009 Modernizing America's Financial
Regulatory Structure
2/27/2009 COP Field Hearing: Coping with the
Foreclosure Crisis: State and
Local Efforts to Combat
Foreclosures in Prince George's
County, Maryland
3/19/2009 Learning from the Past: Lessons
from the Banking Crises of the
20th Century
4/21/2009 COP Hearing with Treasury
Secretary Timothy F. Geithner
5/28/2009 COP Field Hearing in New York
City: The Impact of Economic
Recovery Efforts on Corporate and
Commercial Real Estate Lending
6/24/2009 COP Hearing with Herb Allison,
Assistant Secretary of the
Treasury for Financial Stability
7/7/2009 COP Field Hearing in Greeley, CO
on Farm Credit
7/27/2009 Oversight of TARP Assistance to
the Automobile Industry
9/10/2009 COP Hearing with Treasury
Secretary Timothy F. Geithner
9/24/2009 COP Field Hearing in Philadelphia:
Foreclosure Mitigation Under the
Troubled Asset Relief Program
10/22/2009 COP Hearing with Herbert M.
Allison, Jr., Assistant Secretary
of the Treasury Secretary for
Financial Stability
11/19/2009 Taking Stock: Independent Views on
TARP's Effectiveness
12/10/2009 COP Hearing with Treasury
Secretary Timothy Geithner
1/27/2010 COP Field Hearing in Atlanta on
Commercial Real Estate
2/25/2010 GMAC Financial Services and the
Troubled Asset Relief Program
3/4/2010 Citigroup and the Troubled Asset
Relief Program
4/27/2010 COP Field Hearing in Phoenix on
Small Business Lending
5/26/2010 TARP and Other Government
Assistance for AIG
6/22/2010 COP Hearing with Treasury
Secretary Timothy Geithner
9/22/2010 Treasury's Use of Contracting
Authority Under the TARP
10/21/2010 COP Hearing on the TARP and
Executive Compensation
Restrictions
10/27/2010 COP Hearing on TARP Foreclosure
Mitigation Programs
12/16/2010 COP Hearing with Treasury
Secretary Timothy Geithner
2/4/2011 COP Hearing on Commercial Real
Estate
3/4/2011 COP Hearing on the TARP's Impact
on Financial Stability
------------------------------------------------------------------------
D. Staff
Naomi Baum, Executive Director
Tewana Wilkerson, Deputy Executive
Director
Elizabeth MacDonald, General
Counsel
Alan Rhinesmith, Senior Policy Advisor
Steve Kroll, Deputy Executive Director/General Counselics Counsel
Patrick McGreevy, Professional Staff Membera Battista, Counsel/Senior
Eamonn Moran, Counsel Financial Analyst
Michael Negron, Counsel Adam Berkland, Staff Assistant/
Marcus Newman, Financial Analyst Dir. of Correspondence
Jamie Ostrow, Counsel Isaac Boltansky, Research Analyst
Joe Otchin, Legislative Fellow Katherine Brandon, Press Assistant
Patrick Pangan, Research Assistant Elizabeth Brennan, Financial
Matt Perault, Counsel Analyst
Brian Phillips, Research Analyst and Dir. of Correspondenceer/Research
Patrick Pinschmidt, Financial Markets Policy Advisor
Caroline Read, Press Assistant Ellen Campbell, Research Analyst
Thomas Seay, Communications Director Joe Cwiklinski, Policy Advisor
William Shen, Policy Advisor Beth Davidson, Investigative
Ryan Spear, Legislative Fellow Counsel
Marianne Spraggins, Senior Counsel Elizabeth Davis, Chief Clerk
Jonathan Vogan, Fellow Neal Desai, Counsel
Kevin Wack, Policy Analyst/Senior Editorn Evans, Chief Clerk
Graham Ward, Financial Analyst Dan Geldon, Counsel
Caleb Weaver, Senior Advisor Marc Geller, Professional Staff
Member
Shanan Guinn, Communications
Director
Sara Hanks, General Counsel
Aslynn Hogue, Counsel
Charles Honig, Senior Counsel
Peter Jackson, Communications
Director
Thaya Knight, Investigative
Counsel
Fanni Koszeg, Counsel
DETAILEES
Jayne Copley
Jean Paffenback
Pamela Williams
INTERNS
Benjamin Levine Michael Abelson
Eric Levine Daniel Arking
Dan O'Brien Eric Baum
Jared Policicchio Shirley Dai
Joshua Ruby Anthony DeLuise, Jr.
Matthew Schoenfeld Paul Dumaine
Elyse Schneiderman Cory Ellenson
Steven Syverud George Everly III
Thomas Smith Michael Gallagher
Nick Smyth Reid Johnson
Don Snyder Sean Kelly
Benjamin Steiner Arthur Kimball-Stanley
Alexa Strear Heather Klein
Wei Xiang Paul Laliberte-Tipple
E. Budget
Section 125(g)(2) of EESA required that Panel expenses be
paid equally from the contingent fund of the Senate and an
``applicable'' fund of the House of Representatives. Such
expenses were then to be reimbursed to the House and Senate by
the Treasury Department from funds made available to the
Secretary of the Treasury pursuant to the Act. Congressional
leadership designated the Senate as the ``administrating
entity'' for the Panel. All contracts entered into by the Panel
received written approval from the Senate Committee on Rules
and Administration and adhered to all Senate policies and
procedures.
Projected Total Panel Expenses through April 3, 2011
Compensation and Benefits............................... $8,738,630
Office Space Rental..................................... 619,000
Office Equipment and Expenses........................... 358,904
Printing Costs for Hearings and Reports................. 768,851
Hearings and Travel..................................... 199,037
--------------------------------------------------------
____________________________________________________
Total............................................... $10,684,422
APPENDIX I: LETTER TO SECRETARY TIMOTHY GEITHNER FROM CHAIRMAN TED
KAUFMAN RE: REDESIGN OF WEBSITE, DATED MARCH 7, 2011
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APPENDIX II: LETTER TO CHAIRMAN TED KAUFMAN FROM ACTING ASSISTANT
SECRETARY TIMOTHY MASSAD RE: REDESIGN OF WEBSITE, DATED MARCH 14, 2011
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