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United States Government Accountability Office

GAO

Report to Congressional Committees

December 2008

TROUBLED ASSET
RELIEF PROGRAM
Additional Actions
Needed to Better
Ensure Integrity,
Accountability, and
Transparency

GAO-09-161

December 2008

TROUBLED ASSET RELIEF PROGRAM
Accountability Integrity Reliability

Highlights

Additional Actions Needed to Better Ensure Integrity,
Accountability, and Transparency

Highlights of GAO-09-161, a report to
congressional committees

Why GAO Did This Study

What GAO Found

On October 3, 2008, the Emergency
Economic Stabilization Act was
signed into law. The act established
the Office of Financial Stability
(OFS) within the Department of the
Treasury (Treasury) and authorized
the Troubled Asset Relief Program
(TARP). Every 60 days, the U.S.
Comptroller General is required to
report on a variety of areas
associated with oversight of TARP.
This report reviews (1) the activities
that have been undertaken through
TARP as of November 25, 2008; (2)
the structure of OFS, its use of
contractors, and its system of
internal controls; and (3) preliminary
indicators of TARP’s performance.
GAO reviewed documents related to
TARP, including contracts,
agreements, guidance, and rules.
GAO also met with OFS, contractors,
federal agencies, and officials from
some participating institutions. GAO
plans to continue to monitor these
and other issues including future and
ongoing capital purchases, other
transactions undertaken as part of
TARP (e.g., capital purchases in
Citigroup and American
International Group), and the status
of other aspects of TARP.

Treasury has taken a number of steps to stabilize U.S. financial markets and
the banking system, including injecting billions of dollars in financial
institutions. Through the capital purchase program (CPP)—a preferred stock
and warrant purchase program—Treasury provided more than $150 billion in
capital to 52 institutions as of November 25, 2008. GAO recognizes that TARP
has existed for less than 60 days and that a new program of such magnitude
faces many challenges, especially in this current uncertain economic climate.
However, Treasury has yet to address a number of critical issues, including
determining how it will ensure that CPP is achieving its intended goals and
monitoring compliance with limitations on executive compensation and
dividend payments. Moreover, further actions are needed to formalize
transition planning efforts and establish an effective management structure
and an essential system of internal control. To help ensure the program’s
integrity, accountability, and transparency, GAO recommends that Treasury
•

•
•

•

What GAO Recommends

•

Treasury generally agreed with
GAO’s recommendations, but had a
different perspective on the need to
monitor how participating
institutions are spending CPP
funds. GAO believes that
monitoring aggregate information
across the participants would help
ensure an appropriate level of
transparency and accountability.

•

To view the full product, including the scope
and methodology, click on GAO-09-161.
For more information, contact Thomas
McCool (202)512-2642.

•

•
•

work with the bank regulators to establish a systematic means of
determining and reporting in a timely manner whether financial
institutions’ activities are generally consistent with the purposes of
CPP and help ensure an appropriate level of accountability and
transparency;
develop a means to ensure that institutions participating in CPP
comply with key program requirements (e.g., executive compensation,
dividend payments, and the repurchase of stock);
formalize the existing communication strategy to ensure that external
stakeholders, including Congress, are informed about the program’s
current strategy and activities and understand the rationale for
changes in this strategy to avoid information gaps and surprises;
facilitate a smooth transition to the new administration by building on
and formalizing ongoing activities, including ensuring that key OFS
leadership positions are filled during and after the transition;
expedite OFS’s hiring efforts to ensure that Treasury has the
personnel needed to carry out and oversee TARP;
ensure that sufficient personnel are assigned and properly trained to
oversee the performance of all contractors, especially for Contracts
priced on a time and materials basis, and move toward fixed-price
arrangements whenever possible;
continue to develop a comprehensive system of internal control over
TARP, including policies, procedures, and guidance that are robust
enough to protect taxpayers interests and ensure that the program
objectives are being met;
issue final regulations on conflicts of interest quickly and review and
renegotiate mitigation plans to enhance specificity and compliance;
and
institute a system to effectively manage and monitor the mitigation of
conflicts of interest.
United States Government Accountability Office

Highlights of GAO-09-161 (continued)

It is too soon to determine whether the program is having the intended effect on credit and financial markets.
Moreover, given that U.S. regulators as well as foreign governments are continuing to take a variety of actions
aimed at stabilizing markets and the economy, separately evaluating the impact of Treasury’s efforts under TARP
will be difficult. Nevertheless, GAO has identified a number of preliminary indicators that when viewed
collectively should signal whether TARP as well as other related programs may be functioning as intended.
Among these preliminary indicators are trends in interest rate spreads, mortgage rates, mortgage originations, and
foreclosures.
Treasury has operated on parallel tracks in implementing the act. The following timeline highlights key actions
associated with program implementation to date.
Timeline of Key Treasury Activities (Program Activities, Selection of Financial Agents and Contractors, and Organizational Activities), as of
November 25, 2008
10/14: Treasury announces that it will purchase up to $250 billion in financial
firms’ preferred stock under TARP via the Capital Purchase Program (CPP)
Nine major financial institutions agree to participate in CPP.
Treasury issued executive compensation guidelines on Tuesday, October 14, for three
TARP areas: CPP, Troubled Asset Auction Program, and Systemically Significant Failing
Institutions (SSFI).

Program
activities

11/10: Treasury
announces that it will
purchase $40 billion in
senior preferred stock
from the American
International Group
(AIG) under SSFI.

11/14: Deadline for
financial institutions
to apply for
participation in CPP.

October

11/25: Treasury purchases
$40 billion in senior preferred
shares from AIG under the
SSFI program.

November

10/20: Treasury, the Federal Reserve, the Office of the Comptroller of
the Currency, the Office of Thrift Supervision, and the Federal Deposit
Insurance Corporation issue application guidelines and other documents
for all banks wishing to participate in CPP.

11/17: Treasury
announces
purchases of
almost $33.6 billion
in senior preferred
shares from 21
financial institutions
under CPP.

10/31: Treasury issues form
documents for publicly traded
financial institutions applying
for CPP participation.

10/28: Treasury disburses capital injections to 8 of the 9 banks slated to
participate in the first round of the CPP, resulting in the purchase of $115
billion in senior preferred shares of 8 national financial institutions.

11/21: Treasury
purchases about $2.9
billion in senior
preferred shares from
23 financial institutions
under CPP.

10/13: Treasury announces it will contract with EnnisKnupp &
Associates to provide investment consultant services on TARP.
10/6: Treasury solicits financial institutions
interested in providing custodial and asset
management services for TARP.

Selection of
financial agents
and contractors

October

10/8: Responses due from financial
institutions interested in providing
custodial and asset management
services for TARP.

10/3: Congress passes P.L. 110-343, the
Emergency Economic Stabilization Act
(the act), which authorized TARP.

Organizational
activities
10/6: Treasury Secretary appoints
Interim Assistant Secretary of the
Treasury for Financial Stability to
oversee the Office of Financial
Stability (OFS).

10/21: Treasury announces it will contract for
accounting and internal controls support services
from PricewaterhouseCoopers and Ernst and
Young under the Federal Supply Schedule.

11/7: Treasury announces solicitation for financial agents
to provide Equity, Debt, Warrants Asset Management
Services to implement CPP.

November

10/16: Treasury announces
10/29: Treasury contracts with Hughes
award of contract to Simpson, Hubbard & Reed, LLP, and Squire Sanders
Thacher & Bartlett to provide
& Dempsey, LLP to provide legal advice on
legal advice on the
implementation of CPP.
implementation of the act.
10/14: Treasury announces Bank of New York Mellon selected
as financial agent to provide custodian services for TARP.

10/13: Treasury identifies indivduals to
fill chief positions within the OFS on an
interim basis.

October

10/7: First meeting of the
Financial Stability Oversight
Board, established under
the act.

11/12: Secretary Paulson provides update on priorities for
spending remaining TARP funds, including plans to provide
support for securitizing credit outside of the banking system.

November

10/22: Treasury Department announces appointment
of Interim Chief Investment Officer for TARP.

Source: GAO.

United States Government Accountability Office

Contents

Letter

1
Scope and Methodology
Results in Brief
Background
Treasury Has Moved Quickly to Establish CPP, but Plans for Other
Approaches for Strengthening Financial Markets Are Ongoing
Efforts to Establish the Office of Financial Stability Are Ongoing
Measuring the Impact of TARP on Credit Markets and the
Economy Will Be Challenging
Conclusions
Recommendations for Executive Action
Agency Comments and Our Analysis

3
6
11
15
31
46
57
59
60

Appendix I

Comments from the Department of the Treasury

64

Appendix II

GAO Contacts and Staff Acknowledgments

66

Tables
Table 1: Amount of Capital Investment and Characteristics of the
Qualified Financial Institutions Participating in the Capital
Purchase Program, as of November 25, 2008
Table 2: Financial Agency Agreement and Contracts Awarded, as of
November 25, 2008
Table 3: GAO’s Standards for Internal Control in the Federal
Government

18
36
44

Figures
Figure 1: Process for Accepting and Approving CPP Applications,
as of November 21, 2008
Figure 2: Organization of the Office of Financial Stability, as of
November 21, 2008
Figure 3: Three-Month LIBOR and 3-Month Treasury Bill Yield
Figure 4: Yields on Corporate Bonds (Aaa and Baa) Relative to
10-year Treasury
Figure 5: Mortgage Rates (30-Year Fixed Rate, Conforming) and
Treasury Yields

Page i

24
33
50
52
53

GAO-09-161 Troubled Asset Relief Program

Figure 6: Mortgage Originations
Figure 7: Percentage of Loans in Foreclosure

54
55

Abbreviations
ABS
AIG
CBO
CBOE
CDFI
CFO
COO
COSO
CPP
FAR
FDIC
FHA
FHFA
GSA
HUD
IMF
LIBOR
MBS
OCC
OFS
OTS
QFI
SAS
SEC
SSFI
TALF
TARP

asset-backed security
American International Group
Congressional Budget Office
Chicago Board of Options Exchange
Community Development Financial Institutions Fund
chief financial officer
chief operating officer
Committee of Sponsoring Organizations of the
Treadway Commission
Capital Purchase Program
Federal Acquisition Regulation
Federal Deposit Insurance Corporation
Federal Housing Administration
Federal Housing Finance Agency
General Services Administration
Department of Housing and Urban Development
International Monetary Fund
London Interbank Offered Rate
mortgage-backed security
Office of the Comptroller of Currency
Office of Financial Stability
Office of Thrift Supervision
qualified financial institution
Statement of Accounting Standards
Securities and Exchange Commission
Systemically Significant Failing Institution
Term Asset-backed Securities Loan Facility
Troubled Asset Relief Program

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GAO-09-161 Troubled Asset Relief Program

United States Government Accountability Office
Washington, DC 20548

December 2, 2008
Congressional Committees:
The current financial crisis has threatened the stability of the U.S. banking
system and the solvency of numerous financial institutions at home and
abroad. On October 3, 2008, Congress passed and the President signed the
Emergency Economic Stabilization Act of 2008 (the act), which
established the Office of Financial Stability (OFS) within the Department
of the Treasury (Treasury) and authorized the Troubled Asset Relief
Program (TARP). Among other things, the act provides Treasury with
broad, flexible authorities to buy up to $700 billion in “troubled assets” and
allows Treasury to purchase and insure mortgages and securities based on
mortgages and, in consultation with the Chairman of the Board of
Governors of the Federal Reserve System (Federal Reserve), purchase any
other financial instrument (e.g., equities) deemed necessary to stabilize
financial markets.1
Before the bill was passed, TARP’s primary focus was expected to be the
purchase of mortgage-backed securities (MBS) and whole loans. Within 2
weeks of enactment, however, following similar action by several foreign
governments and central banks, Treasury announced that it would make
$250 billion of the $700 billion available to U.S. financial institutions
through purchases of preferred stock. The Federal Reserve and the
Federal Deposit Insurance Corporation (FDIC) also announced concurrent
coordinated actions that were intended to increase confidence in the U.S.
financial system. FDIC announced that it would temporarily guarantee
certain senior debt of all FDIC-insured institutions and certain holding
companies, as well as deposits in noninterest bearing deposit transaction

1

Pub. L. No. 110-343, sec. 3(9)(Oct. 3, 2008). The act requires that the appropriate
committees of Congress be notified in writing that the Secretary of the Treasury, after
consultation with the Federal Reserve Chairman, has determined that purchase of other
financial instruments is necessary to promote financial market stability.

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GAO-09-161 Troubled Asset Relief Program

accounts at insured depository institutions.2 The Federal Reserve
announced the details of its Commercial Paper Funding Facility program,
which provides a broad backstop to the commercial paper market by
funding purchases of 3-month commercial paper from high-quality
issuers.3 The Federal Reserve and FDIC, among others, have also
announced a variety of other initiatives aimed at addressing the current
crisis, including the Federal Reserve’s creation of a funding facility to
support a private-sector initiative designed to provide liquidity to U.S.
money market investors and the temporary increase in FDIC deposit
insurance coverage.4
The act requires the U.S. Comptroller General to report at least every 60
days, as appropriate, on findings resulting from oversight of TARP’s
performance in meeting the purposes of the act; the financial condition
and internal controls of TARP, its representatives, and agents; the
characteristics of both asset purchases and the disposition of assets
acquired, including any related commitments that are entered into; TARP’s
efficiency in using the funds appropriated for the program’s operation;
TARP’s compliance with applicable laws and regulations; and TARP’s

2

The FDIC established the two guarantee programs after a determination of systemic risk
by the Secretary of the Treasury. FDIC may bypass the least cost method of resolving
banks in extraordinary circumstances if the least cost method would have “serious adverse
effects on economic conditions and financial stability” and if bypassing the least cost
method would “avoid or mitigate such adverse effects.” The systemic risk exception
requires the approval of the FDIC Board of Directors, the Federal Reserve Board and the
Secretary of the Treasury in consultation with the President. 12 U.S.C. §1823(c)(4)(G).
FDIC believes that the guarantee programs promote financial stability by preserving
confidence in the banking system and encourage liquidity in order to ease lending to
creditworthy businesses and consumers. GAO is required to review the systemic risk
determination and report to Congress on (1) the basis for the determination; (2) the
purpose for the action; and (3) the likely effect of the determination and the action on the
incentives and conduct of insured depository institutions and uninsured depositors. GAO’s
work on this mandate is ongoing.

3

Commercial paper is an unsecured, short-term debt instrument issued by a corporation,
typically for the financing of accounts receivable, inventories, and meeting short-term
liabilities. Maturities on commercial paper rarely range any longer than 270 days.

4

The Federal Reserve Bank of New York will provide senior secured funding to a series of
special purpose vehicles to facilitate an industry-supported private sector initiative to
finance the purchase of eligible assets from eligible investors. Eligible assets are to include
U.S. dollar-denominated certificates of deposit, bank notes, and commercial paper issued
by highly rated financial institutions and having remaining maturities of 90 days or less.
Eligible investors include U.S. money market mutual funds and over time may include
other U.S. money market investors. Congress has also temporarily increased FDIC deposit
insurance from $100,000 to $250,000 per depositor through December 31, 2009.

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GAO-09-161 Troubled Asset Relief Program

efforts to prevent, identify, and minimize conflicts of interest of those
involved in its operations. In response to this mandate, this report
addresses (1) the nature and purpose of activities that have been initiated
under TARP as of November 25, 2008; (2) the structure of OFS, its use of
contractors, and its system of internal controls; and (3) preliminary
indicators of TARP performance.

Scope and
Methodology

To determine the nature and purpose of TARP activities since the passage
of the act on October 3, 2008, through November 25, 2008, we reviewed
documents from OFS that described the amounts, types, and terms of
Treasury’s purchases of preferred stocks and equity warrants under the
Capital Purchase Program (CPP).5 We reviewed documentation and
interviewed officials from OFS and the four primary banking regulators
that are responsible for reviewing CPP applications—FDIC, Federal
Reserve, Office of the Comptroller of Currency (OCC), and Office of Thrift
Supervision (OTS)—on the process for selecting financial institutions to
participate in CPP. We compared the evaluation criteria used by each of
the regulators to determine that they were consistent with the criteria
approved by Treasury and reviewed additional guidelines provided by the
banking regulators to their regional offices. For the first eight institutions
that received CPP funds, we reviewed the individual case memorandums
documenting Treasury’s decision to invest in these institutions.6 We are in
the process of reviewing the regulators’ and Treasury’s guidance. To
understand the requirements of CPP, we reviewed the standard
agreements signed by the participating institutions and interviewed senior
officials from OFS and the banking regulators. In addition, we reviewed
documentation from and interviewed senior officials at the eight
participating institutions on how their participation in the program would
affect their operations, including how they planned to use the capital
injection and whether they intended to report separately on their activities
associated with capital investments. Specifically, the institutions included
in this review are the Bank of America Corp.; Bank of New York Mellon
Corp.; Citigroup, Inc.; Goldman Sachs Group, Inc.; JPMorgan Chase & Co.;
Morgan Stanley; State Street Corp.; and Wells Fargo & Co. We also met
with OFS and regulatory officials to discuss their plans for ensuring

5

An equity warrant is an option to buy the common stock of the debt issuer at a
predetermined price on or before a specified expiration date.
6

Treasury has announced a $10 billion capital purchase for Merrill Lynch & Co., pending
completion of its merger with Bank of America.

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GAO-09-161 Troubled Asset Relief Program

compliance with the requirements of the agreements between Treasury
and participants, including those limiting executive compensation and
restricting CPP participants from increasing dividend payments or
repurchasing common stock. We also reviewed Treasury’s interim final
rule and notices implementing the act’s executive compensation rules. To
determine the status of OFS’s progress in establishing a program to insure
troubled assets—a program that Treasury chose to implement through
OFS in conjunction with TARP—we reviewed OFS’s request for public
comments on potential program design and the comments Treasury
received, and met with OFS officials. For other approaches that Treasury
was considering and had not fully implemented, we met with officials from
OFS and reviewed public statements by Treasury officials to determine the
status of their efforts to address TARP requirements.
To determine how Treasury had structured OFS, we reviewed a draft
organizational chart and other planning documents to understand the
number and types of positions OFS was planning to fill. We also met with
Treasury and OFS officials regularly to discuss their approach to staffing
the office in the near and long terms. We also discussed with them
Treasury’s plan for the transition to the next administration. As part of our
responsibility for monitoring internal controls for TARP and its agents and
representatives, we began regular meetings with OFS officials to learn
what the office was doing to develop such controls for the office’s
operations and for programs such as CPP. We also reviewed information
provided by PricewaterhouseCoopers, the firm that Treasury retained to
help develop a system of internal control, and met with
PricewaterhouseCoopers officials to learn about the approach they are
taking. We also met with Ernst & Young officials who are helping OFS
develop accounting procedures for TARP. Because CPP is the first TARP
program to disburse funds, we reviewed documentation provided by OFS
and PricewaterhouseCoopers that described the controls established for
the initial disbursements and steps taken to implement these controls. We
also met with officials from the Bank of New York Mellon to discuss the
system of internal control for functions related to services the bank plans
to provide for TARP, as well as to review the bank’s internal audit process
and recent reports. Our review included a report by the Bank of New York
Mellon’s external auditor on the internal controls over the Bank of New

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GAO-09-161 Troubled Asset Relief Program

York Mellon’s trust and custodial services and selected internal audit
reports on key functions that will support TARP services.7
To assess Treasury’s approaches to acquiring services in support of TARP,
we reviewed the financial agency agreement Treasury entered into and the
contracts that Treasury awarded between October 3, 2008, and November
25, 2008.8 We also reviewed Treasury’s procurement strategy, solicitations,
and other agency documents related to those agreements and contracts, as
well as the statutes, regulations, and guidance governing the award of
financial agency agreements and contracts. As part of this review, we
examined documentation outlining the steps Treasury had taken to
promote the use of small business concerns—including those owned and
controlled by women, minorities, veterans, and socially and economically
disadvantaged individuals—in carrying out TARP, such as Treasury
guidance on small business participation in procurements under the act.
We reviewed the proposals submitted by the firms that signed the financial
agency agreement or were awarded contracts in order to identify the
approaches those firms proposed for using small businesses. In addition,
we examined documentation outlining actual and potential conflicts of
interest identified by the financial agents and contractors, as well as their
proposed plans for mitigation of those conflicts. We also reviewed
Treasury’s interim guidelines for conflicts of interest related to the
authorities granted under the act and the statutes and regulations related
to organizational and personal conflicts of interest, postemployment
restrictions, and standards of ethical conduct.
Finally, to identify a preliminary set of indicators on the state of credit and
financial markets that might be suggestive of the performance and
effectiveness of TARP, we consulted Treasury officials and other experts
and analyzed available data sources and the academic literature. We
selected a set of preliminary indicators that offered perspectives on
different facets of credit and financial markets, including perceptions of

7

“Reports on the Processing of Transactions by Service Organizations” (Statement of
Auditing Standards [SAS 70]) provides guidance on the factors an independent auditor
should consider when auditing the financial statements of an entity that uses a service
organization to process certain transactions.

8

A financial agency agreement is the document that establishes and governs the
relationship between Treasury and its financial agent. A financial agent is a financial
institution that has authority to hold deposits of public money and perform related
services. See 31 U.S.C. pt. 202. A financial agent has a principal-agent relationship with
Treasury and owes a fiduciary duty of loyalty and fair dealing to the United States.

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risk, cost of credit, and flows of credit to businesses and consumers.9 We
assessed the reliability of the preliminary indicators presented and found
that despite certain limitations and the fact that others could interpret
these indicators differently, they were sufficiently reliable for our
purposes. The data used to construct the indicators in this report came
largely from the Federal Reserve. As these data are widely used, including
by GAO and the Federal Reserve, and are considered to be a reliable and
often definitive source for banking sector data, we conducted only a
limited review of the data but ensured that the trends we found were
consistent with other research. We also relied on data from the Chicago
Board Options Exchange (CBOE), Inside Mortgage Finance, and Global
Insight. We have relied on CBOE and Global Insight data for past reports,
and we determined that considered together, these auxiliary data were
sufficiently reliable for the purpose of presenting and analyzing trends in
financial markets.
We conducted this performance audit in October 2008 and November 2008
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.

Results in Brief

As of November 25, 2008, Treasury’s focus in implementing TARP has
been on investing directly in regulated financial institutions through CPP,
which is intended to provide financial institutions with additional capital
through purchases of senior preferred stock. Treasury stated that it chose
to implement CPP because it concluded that the worsening conditions in
the financial market required a more immediate response than would have
been possible through the purchase of mortgage-related assets. This shift
in the direction of the program heightened the need for Treasury to
proactively provide sufficient information to external stakeholders about
not only the change in strategy but also the rationale for the new focus. As
of November 25, 2008, Treasury had allocated $250 billion to CPP and
purchased $115 billion in senior preferred shares of 8 national financial

9

No indicator on its own provides a definitive perspective on the state of markets;
collectively, the indicators should provide a broad sense of stability and liquidity in the
financial system and could be suggestive of the program’s impact. However, it is difficult to
draw conclusions about actual causality.

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GAO-09-161 Troubled Asset Relief Program

institutions and almost $36.5 billion in senior preferred shares of 44
financial institutions.10 Treasury has stated that by building capital, CPP
should help increase the flow of financing to U.S. businesses and
consumers and support the U.S. economy. Treasury also has indicated that
it intends to use CPP to encourage financial institutions to work to modify
the terms of existing residential mortgages. Treasury has not yet
determined if it will impose reporting requirements on the participating
financial institutions. Such requirements would enable Treasury to
monitor, to some extent, how the infusions were being used. Treasury and
the banking regulators have taken important steps to ensure consistency
in evaluating applications, but the extent to which regulators have
provided guidance to their staff concerning denials of applications has
varied. Institutions participating in CPP must comply with certain
requirements regarding executive compensation—for example certain
senior executives must repay any incentive or bonus compensation that
was based on materially inaccurate financial statements. Treasury has not
yet determined how it will monitor compliance with this or other
requirements such as limitations on dividend payments and stock
repurchases. It is also unclear what other approaches Treasury will pursue
to meet the purposes of the act, including insuring mortgage-related
assets. Treasury recently stated that it intends to purchase mortgagerelated assets only on a targeted basis. In addition, Treasury has taken
initial steps to gather comments on ways of using its authority to insure
troubled assets and is exploring approaches to supporting loan
modification efforts. Without a strong oversight and monitoring function,
Treasury’s ability to help ensure an appropriate level of accountability and
transparency will be limited. Moreover, a strengthened communication
strategy could help avoid information gaps as market conditions and
TARP continue to evolve.
Treasury quickly established an overall organizational structure for OFS,
filled key leadership roles, and contracted for support services. Currently,
it is working to hire the full complement (perhaps as many as 200 full-timeequivalent positions) of staff, and OFS officials said that about 48
employees were assigned to TARP as of November 21, 2008, including
those from other Treasury offices, federal agencies, and organizations who
were providing assistance on a temporary basis and 5 permanent hires.
Identifying and hiring the numbers and types of staff needed to
successfully operate TARP will be challenging because of the evolving

10

One additional purchase of $10 billion is pending until a merger is complete.

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GAO-09-161 Troubled Asset Relief Program

nature of the program and the transition to a new administration. While
Treasury has filled key positions on an interim basis, these same issues
may limit its ability to ensure that key leadership positions at OFS remain
filled both during and after the transition, potentially creating uncertainty
about the direction of the program and impeding efforts to effectively
implement TARP. In addition to using permanent staff, OFS plans to rely
on contractors and financial agents in several key areas. Treasury used
expedited solicitation procedures and structured the agreements to allow
for flexibility in procuring the required services. For the most part, the
contracts awarded as of November 25, 2008, are priced on a time-andmaterials basis, which provides for payments to the contractors based on a
set labor rate for hours billed plus the cost of any materials. This type of
pricing arrangement requires enhanced oversight. Treasury has also taken
steps to help promote the use of small businesses in carrying out TARP
and issued interim guidelines to address potential and actual conflicts of
interest. As required by Treasury, the financial agent and contractors
selected have identified a variety of potential and actual conflicts of
interest and proposed a variety of solutions to mitigate identified conflicts.
However, the agent and contractors have provided few written details on
how they intend to implement mitigation plans or communicate related
issues to OFS, and OFS has not yet developed a process for monitoring
conflicts of interest. Recognizing the importance of internal controls,
Treasury awarded one of the first contracts to PricewaterhouseCoopers to
assist OFS in developing and implementing a comprehensive system of
internal controls over TARP activities, including a risk-assessment
framework. However, the rapid pace of implementation and evolving
nature of the program have hampered efforts to put a comprehensive
system of internal control in place. Instead OFS has focused on specific
transaction controls as programs such as CPP are implemented. While
OFS and PricewaterhouseCoopers are working to implement a
comprehensive system of internal control, until such a system is fully
developed and implemented, there is heightened risk that the interests of
the government and taxpayers may not be adequately protected and that
the program objectives may not be achieved in an efficient and effective
manner.
It is too soon to determine whether the program is having the intended effect
on credit and other markets. While TARP’s CPP could improve confidence in
participating financial institutions and may have beneficial effects on credit
markets, attributing any such improvement solely to TARP is problematic
because of the range of actions that have been and are being taken to address
the current crisis. These include coordinated efforts by the global community
and U.S. regulators—namely, FDIC, the Federal Reserve, and the Federal

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Housing Finance Agency (FHFA)—as well as actions by financial institutions
to mitigate foreclosures. We have identified a set of preliminary indicators
that we will monitor for indications of improvements in credit and financial
markets, such as the narrowing of various interest rate spreads that signal
perceptions about the level of risk associated with lending among banks, in
corporate debt markets, and throughout the general economy and reductions
in the cost of credit for banks, businesses, and consumers. Over time,
additional effects might be apparent in credit flows that capture key
developments in mortgage markets and the level of defaults and foreclosures.
While these indicators may be suggestive of TARP’s ongoing impact, which
we will be monitoring, no single indicator or set of indicators will provide a
definitive determination of the program’s impact. Moreover, we plan to report
on additional indicators as more data become available and as economic and
credit conditions evolve.
We recognize that less than 60 days has passed since the program was
created and the inherent difficulty of setting up any new program,
especially during turbulent economic conditions. However, we have
identified a number of areas that warrant Treasury’s ongoing attention.
Therefore, we are recommending that Treasury take a number of actions
aimed at improving the integrity, accountability, and transparency of
TARP. Specifically, Treasury should
•

work with the bank regulators to establish a systematic means of
determining and reporting in a timely manner whether financial
institutions’ activities are generally consistent with the purposes of
CPP;

•

develop a means to ensure that institutions participating in CPP
comply with key requirements of their agreements with Treasury,
including those covering limitations on executive compensation,
dividend payments, and the repurchase of stock;

•

formalize the existing communication strategy to ensure that external
stakeholders, including Congress and the public, are informed about
the program’s current strategy and activities as well as the rationale for
changes in this strategy to avoid information gaps and surprises;

•

develop a definitive transition plan by building on and formalizing
ongoing activities to facilitate a smooth transition to the new
administration, including ensuring that key OFS leadership positions
are filled during and after the transition to the new administration;

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•

continue OFS hiring efforts in an expeditious manner to ensure that
Treasury has the personnel needed to carry out and oversee TARP;

•

ensure that sufficient numbers of personnel are assigned and
appropriately trained to oversee the performance of all contractors,
especially those performing under contracts priced on a time and
materials basis, and move toward greater reliance on fixed-price
arrangements whenever possible as program requirements are better
defined over time;

•

continue to develop a comprehensive system of internal controls over
TARP including policies, procedures, and guidance for program
activities that are robust enough to ensure that government’s and
taxpayers’ interests are protected and that the program objectives and
requirements are being met;

•

issue final regulations on conflicts of interest concerning its
contractors and financial agents as expeditiously as possible and
review and renegotiate mitigation plans as necessary to enhance
specificity and compliance with the new regulations once they are
issued; and

•

institute a system to effectively manage and monitor the mitigation of
conflicts of interest.

We provided a draft of this report to Treasury for review and comment. We
also provided excerpts of the draft report to the Federal Reserve, FDIC,
OCC and OTS for review and comment. In written comments, Treasury
generally agreed with the report and eight of the nine recommendations
(see app. I). Treasury had a different perspective on what should be done
to evaluate how institutions were using funds received under CPP, opting
for development of general metrics for evaluating the overall success of
CPP rather than working with bank regulators to establish a systematic
means for determining whether financial institutions’ uses of CPP funds
were consistent with the purposes of the program, as we recommended. In
technical comments, the Federal Reserve also expressed concern about
whether Treasury needed to monitor individual institutions’ use of CPP
funds. As discussed in the draft, we agree that it will be important to
develop a range of metrics to evaluate the overall success of CPP and we
welcome continued discussions with Treasury and the bank regulators on
general metrics to achieve this purpose. However, given the magnitude of
funds provided to this program, these types of metrics alone will not
provide the necessary transparency and accountability needed to ensure

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that participating institutions are using the funds in a manner that is
consistent with the purposes of the act. As stated in the report, Treasury
should build on the existing oversight mechanisms of the banking
regulators to minimize any additional regulatory burden and develop a
means of reviewing and reporting on planned and actual actions taken by
participating financial institutions resulting from the additional funding
received through CPP. Obtaining such information could help Treasury
better monitor participating institutions’ activities and provide an
appropriate level of accountability and transparency. Moreover, such
information aggregated across the participants would also provide an
alternative basis to assess the effect of TARP in restoring liquidity and
stability to the financial system. Treasury, the Federal Reserve, FDIC,
OCC, and OTS also provided technical comments that we incorporated in
the report, as appropriate.

Background

The dramatic correction in the U.S. housing market precipitated a decline
in the price of financial assets that were associated with housing, in
particular mortgage assets based on subprime loans that lost value as the
housing boom ended and the market underwent a dramatic correction.
Some institutions found themselves so exposed that they were threatened
with failure—and some failed—because they were unable to raise the
necessary capital as the value of their portfolios declined. Other
institutions, ranging from government-sponsored enterprises such as
Fannie Mae and Freddie Mac to Wall Street firms, were left holding “toxic”
mortgages that became increasingly difficult to value, were illiquid, and
potentially had little worth. Moreover, investors not only stopped buying
securities backed by mortgages but also became reluctant to buy
securities backed by many types of assets. Because of uncertainty about
the financial condition and solvency of financial entities, the prices banks
charged each other for funds rose dramatically, and interbank lending
effectively came to a halt. The resulting credit crunch made the financing
on which businesses and individuals depend increasingly difficult to
obtain as cash-strapped banks held onto their assets. By late summer of
2008, the potential ramifications of the financial crisis ranged from the
continued failure of financial institutions to increased losses of individual
savings and corporate investments and further tightening of credit that
would exacerbate the emerging global economic slowdown that was
beginning to take shape.
In September 2008, the Secretary of the Treasury announced that he was
working with the chairmen of the Federal Reserve and the Securities and
Exchange Commission (SEC) and congressional leaders to develop a

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comprehensive approach to the crisis facing financial institutions and
markets. Until that time, the administration had responded to the ongoing
problems in the financial sector on a case-by-case basis, facilitating
JPMorgan Chase’s purchase of Bear Stearns, addressing problems at
Fannie Mae and Freddie Mac, working with market participants to prepare
for the failure of Lehman Brothers, and lending to American International
Group (AIG) to allow it to sell some of its assets in an orderly manner.
Although Treasury had begun to take a number of broader steps, including
establishing a temporary guarantee program for money market funds in
the United States, it decided that additional and comprehensive action was
needed to address the root cause of the financial system’s stresses. On
September 20, 2008, Treasury proposed draft legislation to allow it to
purchase up to $700 billion in troubled mortgage-related assets. Although
the legislation was initially rejected by the House of Representatives on
September 29, the Senate passed an expanded version of the legislation on
October 1, and on October 3, the act was passed by the House of
Representatives and signed into law by the President.
The act, as it relates to TARP, provides Treasury with the authority to
purchase and insure certain types of troubled assets for the purposes of
providing stability to and preventing disruptions in the economy and financial
system and protecting taxpayers. The purposes of the act are to immediately
provide authority and facilities that Treasury can use to restore liquidity and
stability to the U.S. financial system and to ensure that these activities are
consistent with protecting home values, college funds, retirement accounts,
and life savings; preserving homeownership and promoting jobs and
economic growth; maximizing overall returns to U.S. taxpayers; and providing
public accountability for the exercise of authority under the act.
In exercising its authorities, the act further states that Treasury must
consider a variety of additional factors, including the following:
•

minimizing the impact on the national debt;

•

providing stability for and preventing disruption to financial markets;

•

considering the long-term viability of financial institution in
determining whether a direct purchase represents the most efficient
use of funds under the act;

•

ensuring that all financial institutions are eligible to participate in the
program, regardless of size, geographic location, form of organization,
or amount of assets eligible for purchase under the act;

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•

providing financial assistance to financial institutions—including those
serving low- and moderate-income populations and other underserved
communities, and that have assets of less than $1 billion; that were
well or adequately capitalized as of June 30, 2008; and that as a result
of the devaluation of the preferred government-sponsored enterprises,
will see their stock drop one or more capital levels—in a manner
sufficient to restore the financial institutions to at least an adequately
capitalized level;

•

ensuring stability for U.S. public instrumentalities, such as counties
and cities, that may have suffered significant increased costs or losses
in the current market turmoil;

•

considering the retirement security of Americans by purchasing
troubled assets held by or on behalf of an eligible retirement plan;11 and

•

considering the utility of purchasing other real estate owned and
instruments backed by mortgages on multifamily properties.

The act also requires several new and existing entities, in addition to the
U.S. Comptroller General, to oversee the activities of OFS and TARP. For
example, the legislation created the Financial Stability Oversight Board,
which includes the Chairman of the Federal Reserve; the Secretary of the
Treasury; the Director of FHFA; the Chairman of SEC, and the Secretary
of Housing and Urban Development (HUD).12 Moreover, it created a

11

As described in clause (iii), (iv), (v), or (vi) of section 402(c)(8)(B) of the Internal
Revenue Code of 1986 (IRC), except that such authority shall not extend to any
compensation arrangements subject to section 409A of the IRC.

12

The Chairman of the Federal Reserve was selected as the Chairman of the Oversight
Board.

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Special Inspector General for the program as well as a Congressional
Oversight Panel.13
Treasury and federal and state regulators all play a role in regulating and
monitoring the financial system. Historically, Treasury’s mission has been
to act as steward of U.S. economic and financial systems and to participate
in and influence the global economy. As such, Treasury is responsible for a
wide range of activities, helping to frame economic and financial policies
and encourage sustainable economic growth. Among its many activities is
working to predict and prevent economic and financial crises, positioning
Treasury to take a leading role in addressing underlying issues such as
those currently facing the U.S. financial system. The key federal banking
regulators include the following:
•

Federal Reserve, which is responsible for (among other things)
conducting the nation’s monetary policy by influencing the monetary
and credit conditions in the economy in pursuit of maximum
employment, stable prices, and moderate long-term interest rates;
supervising and regulating bank holding companies and banks that are
members of the Federal Reserve System; and maintaining the stability
of the financial system and containing systemic risk that may arise in
financial markets;

•

FDIC, an independent agency created to help maintain stability and
public confidence in the nation’s financial system by insuring deposits,
examining and supervising state-chartered banks that are not members
of the Federal Reserve System, and managing receiverships;

•

OCC, which charters and supervises national banks; and

•

OTS, which supervises savings associations (thrifts) and savings
association holding companies.

13

The Congressional Oversight Panel consists of five members, with the Speaker of the
House, the House Republican Leader, the Senate Majority Leader, and the Senate
Republican Leader each selecting one member. The fifth member is a joint selection by the
Speaker of the House and the Senate Majority Leader. Its members are Richard H. Neiman,
Superintendent of Banks in New York (appointed by the Speaker of the House);
Representative Jeb Hensarling (appointed by the House Republican Leader); Elizabeth
Warren, Harvard Law School (appointed by the Senate Majority Leader); Senator Judd
Gregg (appointed by the Senate Republican Leader); and Damon Silvers, of the AFL-CIO
Associate General Counsel, (jointly appointed by the Speaker of the House and the Senate
Majority Leader). Others with oversight responsibilities include the Congressional Budget
Office and the Office of Management and Budget.

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As discussed in the next section of this report, these bank regulators have
a role in reviewing the applications of financial institutions applying for
CPP.

Treasury Has Moved
Quickly to Establish
CPP, but Plans for
Other Approaches for
Strengthening
Financial Markets Are
Ongoing

Treasury’s focus on implementing TARP thus far has been on directly
investing in regulated financial institutions through CPP, with federal
banking regulators playing a role in evaluating potential participants.
Treasury had purchased more than $150 billion in senior preferred shares
of 52 financial institutions as of November 25, 2008. Treasury has stated
that it intends to use CPP to encourage U.S. financial institutions to
increase the flow of financing to U.S. businesses and consumers and to
support the U.S. economy. Treasury has also indicated that it intends to
use CPP to encourage financial institutions to work to modify the terms of
existing residential mortgages. OFS has not yet determined if it will
impose reporting requirements on the participating financial institutions
that could enable OFS to monitor, to some extent, how the financial
institutions are using capital infusions. Institutions participating in CPP
have agreed to comply with certain requirements, such as limitations on
executive compensation, dividend payments, and repurchases of stock.
However, Treasury has not yet determined how it will ensure compliance
with these requirements. The extent to which Treasury will pursue other
approaches to strengthening financial markets, including insuring troubled
assets, to meet the purposes of the act also remains uncertain. But without
effective oversight, Treasury cannot ensure that those receiving funds are
complying with CPP requirements.

Treasury’s Focus Has
Shifted Away from the
Purchase of Mortgagerelated Assets

The act authorized the Secretary of the Treasury to purchase mortgages
and MBS, and, in consultation with the Chairman of the Federal Reserve,
to purchase other financial instruments if such purchases were deemed
necessary to promote financial market stability. On October 13, 2008,
consistent with conditions prescribed by the act, Treasury notified
Congress that Treasury officials had determined that it would be necessary
under TARP to purchase preferred stocks and warrants issued by certain
financial institutions.14 On October 14, Treasury announced that it would
make direct capital investments in financial institutions in exchange for

14

See Section 3(9)(B) of the act. Treasury transmitted its determination to the appropriate
committees of Congress on October 13, 2008.

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preferred stocks and warrants through CPP.15 Treasury stated that
strengthening capital via investments under this program was the swiftest
mechanism to stabilize the financial markets, encourage interbank
lending, and increase confidence in lenders and investors. Further, at the
time Treasury stated that it planned to continue developing a program to
purchase mortgages and MBS and would seek public comments on
structuring a program to insure these assets. On November 12, Treasury
announced that it would move away from purchasing mortgages and MBS
as originally planned because it believed that such purchases were not the
best use of TARP funds, although targeted purchases of such assets were
still under consideration. Instead, Treasury planned to focus on extending
capital investments to nonbank financial institutions and providing federal
financing to investors of highly rated asset-backed securities (ABS) to
lower the cost of and increase the availability of credit for consumers. The
ABS market provides liquidity to financial institutions that provide small
business loans and consumer lending such as auto loans, student loans,
and credit cards. In addition, Treasury stated that it would develop
strategies to stabilize the real estate market by encouraging loan
modifications. While Treasury has used a variety of mechanisms to make
sure the program is transparent, the shift in the direction of the program to
CPP highlighted the need for Treasury to more actively provide sufficient
information to external stakeholders (e.g., Congress and the public) about
changes in its planned strategy and activities as well as the rationale for
any shift to avoid future information gaps and surprises.

Treasury Has Invested
More than $150 Billion in
52 Financial Institutions

Treasury had made more than $150 billion in capital investments in 52
financial institutions as of November 25, 2008. On October 14, 2008, in
conjunction with similar actions by foreign governments and coordinated
actions by the Federal Reserve and FDIC, Treasury announced that it
planned to use $250 billion to purchase senior preferred shares in a broad
array of qualifying financial institutions.16 Treasury approved $125 billion
in capital purchases for nine of the largest public financial institutions
considered by the federal banking regulators and Treasury to be

15

Generally, financial institutions include qualifying U.S.-controlled banks, savings
associations, and certain bank and savings and loan holding companies.

16

The act authorized Treasury to draw up to $250 billion for immediate use and provided for
an additional $100 billion if the President certifies that the additional funds are needed. A
written certification that the additional $100 billion was necessary has been submitted. A
final $350 billion is available under the act but is subject to congressional review.

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systemically significant to the operation of the financial system. Together,
these institutions hold about 55 percent of U.S. banking assets. These nine
institutions provide a variety of services, including retail and wholesale
banking, investment banking, and custodial/processing services.
According to Treasury officials, the nine financial institutions agreed to
participate in part to signal the importance of the program to the stability
of the financial system. On October 28, 2008, Treasury settled the capital
purchase transactions with eight of these institutions for a total of $115
billion.17 According to Treasury, the remaining $10 billion will be settled
when the merger of Bank of America Corporation and Merrill Lynch & Co.,
Inc. is complete, sometime before January 31, 2009. Table 1 provides
information about the first eight institutions selected for capital
investment as well as other investments.18

17

In its October 2008 Monthly Treasury Statement of Receipts and Outlays of the United
States Government, Treasury reported the $115 billion it paid for the senior preferred
shares as cash outlays. The Congressional Budget Office (CBO), in its Monthly Budget
Review dated November 7, 2008, reported that, in its view, these stock purchases “should
not be recorded on a cash basis but on a net present value basis, accounting for market
risk, as specified in the Emergency Economic Stabilization Act.” CBO’s preliminary
estimate for the present value cost of the stock purchases is $17 billion as compared to the
$115 billion cash basis amount reported by Treasury. This cost reflects the estimated net
amount of payments made and received by Treasury under the agreements, discounted for
market risk and for interest in future years. The treatment of these stock purchases is being
reviewed as part of our ongoing work.
18
As required under the act, Treasury publicly disclosed a description of the assets
purchased, and the amounts and pricing of those assets for the capital purchases within 2
business days of completion. See section 114(a) of the act.

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Table 1: Amount of Capital Investment and Characteristics of the Qualified Financial Institutions Participating in the Capital
Purchase Program, as of November 25, 2008
Total company assets as of
September 2008 (in millions)
$1,831,000

3,000

268,000

25,000 a

2,050,000

10,000

1,082,000b

25,000

2,251,000

10,000

987,000c

2,000

286,000

25,000

1,371,000d

$115,000

$10,126,000

$17

$651

16

670

299

13,044

1,576

79,244

3,500

174,777

9

404

200

11,795

3,134

137

152

6,410

214

8,328

2,250

65,153

3,500

Bank of America Corp.
(Charlotte, N.C.)
Bank of New York Mellon Corp.
(New York City, N.Y.)
Citigroup, Inc.
(New York City, N.Y.)
Goldman Sachs Group, Inc.
(New York City, N.Y.)
JPMorgan Chase & Co.
(New York City, N.Y.)
Morgan Stanley
(New York City, N.Y.)
State Street Corp.
(Boston, Mass.)
Wells Fargo & Co.
(San Francisco, Calif.)
Subtotal

Capital purchased by Treasury
(in millions)
$15,000

Name of qualified financial institution
(Location of qualified financial institution)
Purchases on October 28, 2008

144,292

Purchases on November 14, 2008
Bank of Commerce Holdings
(Redding, Calif.)
1st FS Corporation
(Hendersonville, N.C.)
UCBH Holdings, Inc.
(San Francisco, Calif.)
Northern Trust Corporation
(Chicago, Ill.)
SunTrust Banks, Inc.
(Atlanta, Ga.)
Broadway Financial Corporation
(Los Angeles, Calif.)
Washington Federal Inc.
(Seattle, Wash.)
BB&T Corp.
(Winston-Salem, N.C.)
Provident Bancshares Corp.
(Baltimore, Md.)
Umpqua Holdings Corp.
(Portland, Ore.)
Comerica Inc.
(Dallas, Tex.)
Regions Financial Corp.
(Birmingham, Ala.)

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Capital purchased by Treasury
(in millions)

Total company assets as of
September 2008 (in millions)

3,555

154,803

867

32,804

1,398

54,661

2,500

101,290

300

14,288

1,400

53,974

1.715

63,501

6,599

247,055

361

16,511

33,562

1,235,464

52

2,258

525

22,487

124

4,650

154

7,022

39

1,552

28

1,235

400

16,331

77

3,105

42

1,967

11

634

184

9,008

19

846

40

Name of qualified financial institution
(Location of qualified financial institution)
Capital One Financial Corporation
(McLean, Va,)
First Horizon National Corporation
(Memphis, Tenn.)
Huntington Bancshares
(Columbus, Ohio)
KeyCorp
(Cleveland, Ohio)
Valley National Bancorp
(Wayne, N.J.)
Zions Bancorporation
(Salt Lake City, Utah)
Marshall & Ilsley Corporation
(Milwaukee, Wisc.)
U.S. Bancorp
(Minneapolis, Minn.)
TCF Financial Corporation
(Wayzata, Minn.)
Subtotal

1,512

Purchases on November 21, 2008
Ameris Bancorp
(Moultrie, Ga.)
Associated Banc-Corp
(Green Bay, Wisc.)
Banner Corporation/Banner Bank
(Walla Walla, Wash)
Boston Private Financial
(Boston, Mass.)
Cascade Financial Corporation
(Everett, Wash.)
Centerstate Banks Of Florida Inc.
(Davenport, Fla.)
City National Corporation
(Beverly Hills, Calif.)
Columbia Banking System, Inc.
(Tacoma, Wash.)
First Community Bancshares Inc.
(Bluefield, Va.)
First Community Corporation
(Lexington, S.C.)
First Niagra Financial Group
(Rockport, N.Y.)
First Pactrust Bancorp, Inc.
(Chula Vista, Calif.)
Heritage Commerce Corp
(San Jose, Calif.)

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Capital purchased by Treasury
(in millions)

Total company assets as of
September 2008 (in millions)

24

905

25

1,128

67

2,598

181

7,689

35

1,596

23

964

105

4,075

215

9,086

400

17,516

140

5,229

$2,910

$123,393

$151,472

Name of qualified financial institution
(Location of qualified financial institution)
Heritage Financial Corporation
(Olympia, Wash.)
Hf Financial Corp.
(Sioux Falls, S. Dak.)
Nara Bancorp, Inc.
(Los Angeles, Calf.)
Pacific Capital Bancorp
(Santa Barbara, Calif.)
Porter Bancorp Inc
(Louisville, Ky.)
Severn Bancorp, Inc.
(Annalopis, Md.)
Taylor Capital Group
(Rosemont, Ill.)
Trustmark Corporation
(Jackson, Miss.)
Webster Financial Corporation
(Waterbury, Conn.)
Western Alliance Bancorporation
(Las Vegas, Nev.)
Subtotal

$11,484,857

Grand Total
Sources: Treasury and SEC (Form 10-Q).

Note: Table does not include the $10 billion purchase of Merrill Lynch & Co. preferred stock because
the settlement of this purchase is pending completion of its merger with Bank of America.
a

On November 23, 2008, Treasury announced that it was purchasing an additional $20 billion in
preferred shares from Citigroup, Inc. TARP funds were used, but this additional purchase was not
part of CPP.
b

Data as of August 29, 2008.

c

Data as of August 31, 2008.

d

Based on estimated 12-31-08 Pro Forma financial statements to reflect the purchase of Wachovia
Corporation.

Treasury made the remaining $125 billion available for additional qualified
financial institutions. The period for public financial institutions to apply
for the capital purchase ended on November 14, 2008. As shown in table 1,
Treasury purchased almost $33.6 billion of senior preferred stock in 21
financial institutions on November 14, 2008 and an additional $2.9 billion
in 23 financial institutions on November 21, 2008. The institutions varied in
size, and purchases ranged from $9 million to $6.6 billion per institution.
According to Treasury, it intends to make final eligibility and purchase
decisions for qualifying financial institutions by the end of 2008.

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Terms of the Capital
Purchase Program
Agreements

Under CPP, a qualified financial institution can receive a minimum
investment of 1 percent of its risk-weighted assets, up to the lesser of $25
billion or 3 percent of those risk-weighted assets.19 In exchange for the
investment, Treasury receives shares of senior preferred stock that will
pay dividends at a rate of 5 percent annually for the first 5 years and 9
percent annually thereafter. Such shares are nonvoting, except with
respect to protecting investors’ rights. The financial institutions can
redeem their shares at their face value after 3 years. At any time before
that time, however, the shares can be redeemed if the financial institution
has received a minimum amount from “qualified equity offerings” of any
Tier 1 perpetual preferred or common stock.20 Treasury may also transfer
the senior preferred shares to a third party at any time.
Treasury will also receive warrants to purchase a number of shares of
common stock with a total market value equal to 15 percent of the senior
preferred investment for publicly traded securities and 5 percent for
privately held securities. The exercise price on the warrants will generally
be based on the market price of the participating institution’s common
stock at the date of the Treasury’s acceptance of the financial institution’s
application to participate in CPP. The exercise price is reduced by 15
percent of the original exercise price on each 6-month anniversary of the
issue date of the warrants if certain shareholder approvals are not
obtained, subject to a maximum reduction of 45 percent of the original
exercise price.21 In addition, the number of shares of common stock
underlying the warrant held by Treasury are reduced by half if the
qualified financial institution completes one or more “qualified equity
offerings” and receives proceeds equal to the amount of the preferred

19

Risk-weighted assets are the total of all assets held by the bank that are weighted for
credit risk according to a formula established in regulation by the Federal Reserve.
20

Tier 1 capital is the core measure of a bank’s financial strength from a regulator’s point of
view. It consists of the types of capital considered the most reliable and liquid, primarily
common stock and preferred stock. A “qualified offering” is the sale and issuance of Tier 1
qualifying perpetual preferred stock, common stock, or a combination of such stock for
cash. Senior preferred may only be redeemed prior to 3 years from the date of investment if
the proceeds of “qualified enquity offerings” result in aggregate gross proceeds to the
financial institution of not less than 25 percent of the issue price of the senior preferred.
Banks are required to hold 8 percent capital for regulatory purposes and historically, on
average hold closer to 10 percent. Therefore, in terms of total capital, Treasury’s capital
infusions could equal about one-quarter to one-third of an institution’s capital.

21

The issue date is the date that Treasury made the capital purchase of preferred stocks and
warrants. In the case of the initial eight financial institutions that have reached settlement,
this date is October 28, 2008.

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shares prior to December 31, 2009. Bank officials we spoke with said that
the option to reduce the number of shares underlying the warrants
provided a powerful incentive to replace public capital with private capital
before this date.
The standardized terms require that dividends on the senior preferred
stock be payable quarterly in arrears. According to a Treasury official, the
first dividend payments will be due in December 2008 for some financial
institutions, with the dividend accrual period beginning on October 28,
2008. These institutions are expected to pay a rate of 5 percent of the
capital investment per annum. As custodian, the Bank of New York Mellon
will receive the dividends and wire the proceeds to the general fund of
Treasury.22
Treasury also plans to make capital investments in privately held financial
institutions and on November 17, 2008, issued new program terms for
investing in these institutions. The deadline for privately held institutions
to submit applications is December 8, 2008. Treasury is also developing
program terms for S Corporations and mutual organizations (mutuals) but
OFS officials noted that there were a number of challenges associated
with structuring terms for these types of organizations. 23 As of November
21, 2008, no final decisions had been made about the timing of any such
program.

Treasury Is Relying on
Recommendations from
the Bank Regulators to
Select Qualified Financial
Institutions for CPP

Treasury officials stated that they were relying extensively on the primary
federal banking regulators in determining which institutions would be
allowed to participate in CPP. Because the program is intended to provide
capital to those institutions that can demonstrate their overall financial
strength and long-term viability, OFS is relying on the banking regulators’
examinations and experience with these institutions when it makes a final
determination regarding their financial condition. The final decision

22
Bank of New York Mellon is also a participant in CPP. We plan to review how OFS
intends to mitigate and manage the conflict between Bank of New York Mellon’s role as
custodian and its participation in the program.
23

An S Corporation is a corporation that makes a valid election to be taxed under
Subchapter S of Chapter 1 of the Internal Revenue Code and thus does not pay any income
taxes. Instead, the corporation’s income or losses are divided among and passed through to
its shareholders. A mutual organization is a company that is owned by its customers rather
than by a separate group of stockholders. Many thrifts and insurance companies (for
example, Metropolitan and Prudential) are mutual companies.

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GAO-09-161 Troubled Asset Relief Program

regarding the selection of institutions to participate in CPP is made by
OFS. Qualified financial institutions seeking capital to participate in the
program were to send their applications directly to their primary federal
banking regulators.24
Treasury, in consultation with the banking regulators, has developed a
standardized process for evaluating the financial strength and viability of
applicants. Specifically, financial institutions are encouraged to consult
with their primary regulators for help about deciding whether to apply.
For those institutions that decide to apply, the federal banking regulators
evaluate applications based on certain factors, such as examination
ratings, selected performance ratios. Federal banking regulators may also
consider information on the intended deployment of capital injections,
although guidance on this possibility varied across regulators. Institutions
with the highest examination ratings are to receive presumptive approval
from the banking regulators, and the regulators’ recommendations are to
be forwarded to OFS’s Investment Committee for its advice and
recommendation.25 Institutions with lower examination ratings or other
considerations require further review and are to be referred to the CPP
Council, which is made up of representatives from the four federal
banking regulators, with Treasury officials as observers. Regulators and
the CPP Council may consider other factors, such as the existence of a
signed merger agreement involving the institution, confirmed private
equity investment in the institution, and other factors that may offset the
effect of lower examination ratings. Finally, those institutions with the
lowest examination ratings are to receive a presumptive denial
recommendation from the banking regulators. In these instances, the
primary bank regulators may have further discussions with the applicants
and encourage the institution to withdraw its application. The banking
regulator or the CPP Council is to forward approval recommendations to
OFS’s Investment Committee, which further reviews the applications and
may request additional analysis or information from the regulators or the
CPP Council. Figure 1 provides an overview of the process for assessing
and approving applications for capital purchases.

24

The primary federal regulator is generally the regulator overseeing the lead bank of the
institution. Where the institution is a bank holding company, the primary federal regulator
also consults with the Federal Reserve.

25

The committee membership includes the OFS’s Chief Investment Officer (committee
chair) and the assistant secretaries for Financial Markets, Economic Policy, Financial
Institutions, and Financial Stability at Treasury.

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GAO-09-161 Troubled Asset Relief Program

Figure 1: Process for Accepting and Approving CPP Applications, as of November 21, 2008
Intake

Evaluation
B

Presumptive approval recommendation

Application
reviewed
and decision
deral Re
Fe
g memo sent
y
Federal
Reserve
OCC
FDIC
OTS

C
Final
decision made

ato
ul

Application
submitted
to one of
the PFRs

rs

Prim
ar

A

Final decisions

Qualified
Financial
Institution
(QFI)

Presumptive
denial
recommendation

Recommendation

Assistant
Investment
Secretary
Committee
for Financial
(Treasury Recommendation Stability,
officials)
Treasury
APPROVE / DENY

Capital Purchase
Program Council

Stages where followup and/or reconsideration are possible. QFIs may contact regulators informally to inquire
about their chances of getting recommended for approval. Treasury may encourage QFIs to withdrawal applications before they are denied.
CPP Council is made up of representatives from the primary federal regulators (PFRs), with Treasury officials as observers

Sources: GAO analysis; Treasury; Art Explosion (images).

Once its review is complete, the Investment Committee is to make
recommendations to the Assistant Secretary for Financial Stability for
final approval. According to OFS officials, denied applicants will not be
publicly announced, and as of November 21, 2008, the primary regulators
also told us that they had not recommended denial for any financial
institutions. However, regulatory officials stated that institutions could
withdraw their applications at any point in the process if it was unlikely
that their applications would be approved. And according to bank
regulators, some institutions have withdrawn their applications. The
extent to which regulators provided additional internal guidance on
processing applications that might not be approved varied. For example,
three bank regulators provided additional written guidance to staff on how
to handle applications that were not likely to be recommended for
approval, while one bank regulator did not provide any additional
guidance. We are also examining the reasonableness of steps taken to
ensure that CPP and regulators’ procedures are being consistently
followed and will report our results in subsequent reports.

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GAO-09-161 Troubled Asset Relief Program

OFS and the Regulators
Have Not Decided How to
Monitor Banks’ Use of CPP
Funds or How to Ensure
Compliance with Purchase
Agreements

It is unclear how OFS and the regulators will monitor participating
institutions’ use of the capital investments. The standard agreement
between Treasury and the participating institutions includes a number of
provisions, some in the “recitals” section at the beginning of the agreement
and others that are detailed in the body of the agreement. The recitals
refer to the participating institutions’ future actions in general terms—for
example, that “the Company agrees to expand the flow of credit to U.S.
consumers and businesses on competitive terms” and “agrees to work
diligently, under existing programs, to modify the terms of residential
mortgages.” Treasury and the regulators have publicly stated that they
expect these institutions to use the funds in a manner consistent with the
goals of the program, which include both the expansion of the flow of
credit and the modification of the terms of residential mortgages. But it is
unclear how OFS and the banking regulators will monitor how
participating institutions are using the capital investments and whether
these goals are being met. The standard agreement between Treasury and
the participating institutions does not require that these institutions track
or report how they plan to use, or do use, their capital investments.
We spoke with representatives of the eight large institutions that initially
received funds under CPP, and they told us that their institutions intended
to use the funds in a manner consistent with the goals of CPP. Generally,
the institutions stated that CPP capital would not be viewed any
differently from their other capital—that is, the additional capital would be
used to strengthen their capital bases, make business investments and
acquisitions, and lend to individuals and businesses. With the exception of
two institutions, institution officials noted that money is fungible and that
they did not intend to track or report CPP capital separately. We will
continue to monitor the activities of these institutions as well as the plans
of others in future reports as well as any oversight provided by Treasury
and its agents or the regulators. The banking regulators indicated that they
had not yet developed any additional supervisory steps, such as requiring
more frequent provision of certain call report data for participating
institutions, to monitor participating institutions’ activities.26 For example,
it is unclear whether Treasury plans to leverage bank regulators, which in
the case of the largest institutions have bank examiners on site, to conduct
any oversight or monitoring related to CPP requirements. However, unless
Treasury does additional monitoring and regular reporting, Treasury’s

26

A call report is a bank/thrift regulatory quarterly report that allows a regulator to monitor
institution’s financial condition.

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GAO-09-161 Troubled Asset Relief Program

ability to help ensure an appropriate level of accountability and
transparency will be limited.
In addition to the general recitals, the standard terms of the securities
purchase agreements include specific requirements. Participating
institutions’ dividend payments are restricted for as long as Treasury’s
senior preferred shares are outstanding, and the institutions cannot
redeem these senior preferred shares for 3 years except with proceeds
from new capital obtained from the market. Treasury is in the early stages
of determining how it plans to monitor compliance with these
requirements. The agreements require that the financial institutions’
benefit plans comply with the requirements for executive compensation
contained in the act and guidance issued by Treasury before the date of
Treasury’s purchase of the preferred shares. On October 20, 2008,
Treasury published in the Federal Register an interim final rule to provide
guidance on the executive compensation provisions in the act applicable
to participants in CPP. The interim final rule outlines four executive
compensation requirements that apply to senior executive officers of
institutions while Treasury holds equity or debt in the institution. Senior
executive officers are generally the chief executive officer, the chief
financial officer, and the three most highly compensated officers. A
participating financial institution must meet the following requirements:
•

The institution’s compensation committee must (1) review the senior
executive officers’ incentive and bonus compensation arrangements
within 90 days of the CPP purchase to ensure the arrangements do not
encourage unnecessary or excessive risk taking, (2) the compensation
committee must meet at least annually with senior risk officers to
review the relationship between the institutions’ risk-management
policies and the senior executive officer incentive arrangements, and
(3) certify that it has completed the reviews.

•

Payments of bonus or incentive compensation that are made based on
materially inaccurate earnings must be refunded to the institution by
the senior executive officers.

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GAO-09-161 Troubled Asset Relief Program

•

No golden parachute payments will be made.27

•

The institution must agree not to deduct for tax purposes executive
compensation in excess of $500,000 per executive.

Treasury officials said that they intended to develop a plan to ensure that
participating institutions adhere to these requirements, including having
Treasury’s equity asset managers (yet to be selected) monitor financial
institutions’ compliance with certain requirements such as executive
compensation and dividend restrictions. As discussed later in this report,
internal controls are a major part of efficiently and effectively managing a
program, and developing a process for monitoring participating financial
institutions will be critical to identifying and addressing any potential
problems in these institutions’ compliance with program requirements.
Treasury officials noted that once they have examined all public
comments, they might add clauses or other components to the executive
compensation rules to strengthen oversight of the executive compensation
requirements. But at this point, the officials have not determined how
Treasury will monitor executive compensation compliance. Bank
regulators varied in their views about their oversight responsibilities
related to compliance with executive compensation requirements and
other required terms of CPP. For example, one regulator noted that it
would rely on the institution’s board of directors to assess compliance,
and another regulator stated that it was Treasury’s responsibility to
provide such oversight. Without a consistent process for monitoring
participating institutions, Treasury’s ability to identify and address any
potential problems in these institutions’ compliance with program
requirements will be limited.

The Extent to Which
Treasury Will Pursue Other
Programs under TARP
Remains Uncertain

The TARP legislation provides Treasury with broad authorities to establish
programs that can purchase or insure “troubled assets.” As previously
mentioned, these assets can include mortgage-related assets and other
financial instruments that Treasury, after consultation with the Federal
Reserve, determines to be necessary to promote financial stability.
Treasury has established a Systemically Significant Failing Institutions

27

A golden parachute is defined as any payment in the nature of compensation to a senior
executive officer made on account of involuntary termination or in connection with any
bankruptcy filing, receivership, or insolvency of the institution to the extent that the
present value of the payment equals or exceeds three times the executive’s average annual
compensation over the preceding 5 years.

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GAO-09-161 Troubled Asset Relief Program

(SSFI) program under TARP. According to Treasury, unlike CPP, which is
broad-based, a financial institution’s participation in SSFI will be
considered on a case-by-case basis. Moreover, there is no deadline for
participation in this program. For example, on November 10, 2008,
Treasury announced that it would purchase $40 billion in senior preferred
stock from AIG as part of a comprehensive plan to restructure federal
assistance to this company, which Treasury views as systemically
significant.28 These funds were disbursed on November 25, 2008.
Treasury has also taken other targeted action. On November 23, Treasury
announced that it would invest an additional $20 billion in Citigroup from
TARP in exchange for preferred stock, with an 8 percent dividend to
Treasury. Citigroup is to comply with enhanced executive compensation
restrictions and implement FDIC’s mortgage modification program.
Treasury and FDIC will provide protection against unusually large losses
on a pool of loans and securities on the books of Citigroup. The Federal
Reserve will backstop residual risk in the asset pool through a
nonrecourse loan.
We plan to continue to monitor activities associated with both of these
transactions in future reports.

Treasury Decided Not to
Pursue Further Development of
the Mortgage-related Assets
Purchase Programs

On November 12, 2008, Treasury announced that it had examined the
benefits of purchasing troubled mortgage-related assets, including
mortgage-backed securities and whole loans, and concluded that this
approach would not be the best use of TARP funds at this time. Prior to
this announcement, despite the creation of CPP, purchases of these assets
were considered a key part of Treasury’s planned strategy for stabilizing
financial markets. Treasury had worked with the financial agent it had
selected to provide custodian services to TARP (Bank of New York
Mellon), bank regulators, and others to develop mechanisms for
identifying and pricing mortgage-backed securities and whole loans. In
addition, OFS started to identify asset managers to oversee acquired
mortgage-backed securities and whole loans, but given that it would not
be purchasing these mortgage-related assets, OFS officials said that it
would not be seeking the services of these asset managers at this time.

28

The restructuring plan also includes actions by the Federal Reserve aimed at
restructuring the terms of its previous agreement.

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GAO-09-161 Troubled Asset Relief Program

Treasury Has Taken
Preliminary Steps to Establish
a Program to Insure Troubled
Assets

Under the act, Treasury is required to establish a program that insures
troubled assets and protects investors from losses.29 On October 16, 2008,
Treasury published in the Federal Register a request for public comment
to identify potential approaches to structuring such an insurance
program.30 In the notice, Treasury solicited comments on how to structure
the program, identify institutions and assets for inclusion, and calculate
premiums. In addition, Treasury requested comments on the types of
events that should lead to an insurance payout and on approaches to
setting a value for the payout. When the comment period closed, on
October 28, Treasury had received 66 comment letters from, among
others, holding companies and financial services firms, consulting firms,
and trade industry groups on how to structure the program. Treasury, as
of November 21, 2008, had made no final decision regarding the design of
the program. The comments suggested a range of program options.
Recommendations focused on insuring asset-backed securities, in
particular securities backed by consumer loans; providing insurance for
guarantors’ losses on their portfolios; and insuring loans to small
businesses to facilitate lending. Many comments targeted securitized
assets, and some comments indicated that the program should encompass
a variety of assets and not just those related to mortgages.

Treasury Is Examining
Strategies to Mitigate Mortgage
Foreclosures

Having decided against large purchases of troubled mortgage assets under
TARP, Treasury stated that the agency was considering other ways to meet
Congress’ expectation that Treasury would work with lenders “to achieve
aggressive loan modification standards” to mitigate foreclosures. As of
November 25, 2008, it had not yet announced any specific programs. OFS
has established and hired a chief for the Office of the Chief of
Homeownership Preservation within OFS. The Director of Treasury’s
Community Development Financial Institutions Fund (CDFI) is serving as
the interim chief for homeownership until a permanent chief is hired.
According to OFS officials, the effort to staff this office with housing
policy, community development, and economic research experts is
ongoing. As of November 21, 2008, seven positions had been filled with
federal government detailees, according to the Chief, and the recruitment
and hiring process had begun for permanent positions. OFS has stated that
it is working with other federal agencies, including FDIC, HUD, and FHFA,

29

The act specifies that the program would insure only troubled assets originated or issued
prior to March 14, 2008.

30

73 Fed. Reg. 61452 (Oct. 16, 2008), Department of the Treasury: Development of a
Guarantee Program for Troubled Assets (Notice and Request for Comments).

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GAO-09-161 Troubled Asset Relief Program

to explore alternatives to help homeowners under TARP. As OFS reviews
foreclosure mitigation program options, it is considering a number of
factors, including the cost of the program, the extent to which the program
minimizes the recidivism of borrowers helped out of default, and the
number of homeowners the program has helped or is projected to help
remain in their homes, according to a senior official. A senior OFS official
stated that the agency had considered loan modification strategies such as
the program FDIC developed to convert nonperforming mortgages owned
or serviced by IndyMac Federal Bank into affordable loans. Possible loan
modification measures under such programs include interest rate
reductions, extended loan terms, and deferred principal.
Other similar programs under review, according to OFS, include strategies
to guarantee loan modifications by private lenders. The HOPE for
Homeowners program at the Federal Housing Administration (FHA) is one
such program.31 According to FHA, lenders benefit by turning failing
mortgages into performing loans. Other loan modification programs
include those announced by FHFA in partnership with Treasury, such as a
streamlined loan modification program for at-risk borrowers, to prevent
foreclosures and mitigate losses. According to an OFS official, OFS is also
considering what policy actions might be taken under CPP to encourage
participating institutions to modify mortgages that are at risk of or in
default. Although OFS has stated that it is contemplating these and other
foreclosure mitigation strategies, including strategies that involve TARP
funds and strategies that do not involve TARP funds, it has not announced
a specific program structure.

Treasury’s Strategy Continues
to Evolve and Will Focus More
on Consumer Credit

In addition to CPP, the insurance program, and potential foreclosure
mitigation programs, Treasury is considering additional strategies under
TARP. According to the Treasury Secretary, the agency is evaluating a
program to leverage TARP funds with matching capital from private
investors. This type of program could address the needs of nonbank
financial institutions that are not eligible to participate in CPP. However,
OFS acknowledged that many nonbank credit providers were not directly
regulated, possibly making taxpayer protection, a key goal of the act, more
difficult to achieve. OFS is also considering strategies to increase the

31
Under the new FHA program, lenders can have loans in their portfolios refinanced into
FHA-insured 40-year loans with fixed interest rates. The new insured mortgages cannot
exceed 96.5 percent of the current appraised value of the homes, a provision that could
require lenders to write down the existing mortgage amounts. Borrowers must also share a
portion of the equity resulting from the new mortgage and the value of future appreciation.

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GAO-09-161 Troubled Asset Relief Program

availability of consumer financing by improving the liquidity of the assetbacked securitization market. According to Treasury, a freezing of credit
in this market has limited financing options for consumers for car loans,
student loans, and credit card borrowing. According to the Secretary,
Treasury has been looking for strategies to use its authority and funds
under TARP to encourage private investors to purchase highly rated ABS
to expand the flow of consumer credit. Treasury and the Federal Reserve
Bank of New York announced on November 25, 2008, the creation of the
Term Asset-Backed Securities Loan Facility (TALF), under which the
Federal Reserve Bank of New York will lend up to $200 billion to holders
of newly issued ABS for a term of at least 1-year. This credit facility is
intended to create consumer credit by providing liquidity to ABS holders
to issue new consumer credit-driven bonds. Using the funds available
under TARP, Treasury will provide $20 billion in credit protection to the
Federal Reserve for loans. This credit facility may expand to include other
asset classes, such as commercial and certain residential mortgage-backed
assets.

Efforts to Establish
the Office of Financial
Stability Are Ongoing

Treasury has taken a number of major steps to set up OFS, including (1)
establishing an organizational structure and filling key leadership
positions and a number of staff positions within that structure, (2)
selecting contractors and a financial agent to support TARP activities, and
(3) beginning to develop an overall system of internal control for the
program. However, OFS faces a number of challenges in completing its
organizational activities. First, hiring the number and type of staff needed
to successfully operate TARP, as well as ensuring that key leadership
positions remain filled, will be challenging due to the rapid evolution of
program activities and the fact that the office will soon be transitioning to
a new administration. Further, Treasury has used contractors and a
financial agent to play key roles in supporting the program, and it is taking
initial steps to address conflicts of interest posed by their roles. But
Treasury is still developing an oversight process for conflicts of interest
involving its contractors and financial agents. These and other gaps in
internal controls have resulted from the need to begin program activities
before policies and procedures have been fully developed and
implemented. While OFS recognizes the need to quickly develop and
implement a comprehensive system of internal control for all TARP
activities, these efforts have also been challenged by recent changes in the
strategic direction of the program and uncertainties about further changes
that may result once the new administration is in place. Successfully
meeting all of these challenges is key to ensuring the efficient and effective
operation of TARP now and in the future.

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GAO-09-161 Troubled Asset Relief Program

An Organizational
Structure Has Been
Established for OFS

On October 6, 2008, in order to implement TARP and address growing
concerns about the stability of the financial markets and the functioning of
credit markets, Treasury established OFS and appointed an Interim
Assistant Secretary of Financial Stability as its head. OFS is organized
within Treasury’s Office of Domestic Finance and reports to the Under
Secretary for Domestic Finance. Soon after establishing OFS, Treasury
created several functional areas within the office and hired interim chiefs
to manage each of the major OFS functions (fig. 2). According to OFS’s
current organizational outline, these interim chiefs and their major areas
of responsibility are as follows:
•

Chief Investment Officer is responsible for administering TARP
programs, such as CPP, and approving and managing all TARP
investments.

•

Chief Risk Officer is responsible for identifying and assessing risks
that TARP faces and for tracking and reporting measurements of those
risks.

•

Chief Financial Officer (CFO) is responsible for the budget, financial
statement reporting, accounting, and internal controls.

•

Chief Compliance Officer is responsible for ensuring program
compliance with laws and regulations, including the executive
compensation and conflicts of interest requirements under TARP.

•

Chief of Homeownership Preservation is responsible for overseeing
efforts to reduce foreclosures and identify opportunities to help
homeowners keep and protect their homes while also protecting
taxpayers.

In addition, OFS has a Chief Operating Officer (COO), who is responsible
for helping to develop the infrastructure to support TARP, coordinating
communications among the various units, and working with Treasury’s
administrative resources unit to ensure efficient and effective TARP
operations. In addition, the COO is responsible for working with the CFO

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GAO-09-161 Troubled Asset Relief Program

to manage the TARP budget.32 The OFS organizational structure also
includes a Chief Counsel who is responsible for providing legal and policy
advice to OFS on implementing TARP and complying with the provisions
of the act, and a Senior Advisor, who provides direct support to the
Assistant Secretary for Financial Stability in overseeing the
implementation of TARP.
Figure 2: Organization of the Office of Financial Stability, as of November 21, 2008

Senior Advisor

Assistant Secretary for Financial Stability

Chief Counsel

Executive Assistant
Chief Operating Officer

Executive Secretariat

Chief
Risk Officer

Chief
Investment Officer

Chief
Financial Officer

Chief
Compliance Officer

Chief
Homeownership

Source: Treasury.

Note: The Chief Counsel reports directly to Treasury’s Office of General Counsel.

32

In our prior work, we have reported that top leadership must set the direction, pace, and
tone for agencies undergoing significant transformation and that the appointment of a chief
operating officer is among the key practices available to help elevate attention on
management issues and transformational change. See GAO, Results-Oriented Cultures:
Implementation Steps to Assist Mergers and Organizational Transformations,
GAO-03-669 (Washington, D.C.: July 2, 2003).

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GAO-09-161 Troubled Asset Relief Program

Treasury recognized that it needed to move quickly to fill the interim chief
positions, for several reasons. First, the escalating financial crisis called
for TARP to become operational as soon as Congress passed legislation to
establish the program. Second, even before OFS was established, Treasury
had contemplated engaging in various strategies to address the credit
crisis and conducting a large number of financial transactions. Third,
Treasury anticipated that a variety of factors could affect the timing,
nature, and extent of the activities that OFS would administer. According
to Treasury, its short-term strategy for staffing high-level OFS positions
was to identify government employees inside Treasury and other federal
agencies with the necessary skills and knowledge who could fill leadership
positions on a temporary basis and establish a structure for administering
the program going forward. The five interim chiefs have come from across
government and beyond, including from OCC, the Federal Reserve, CDFI,
the Export-Import Bank, and the International Monetary Fund (IMF), an
international organization whose mission is to foster global monetary
cooperation and secure financial stability. According to Treasury officials,
the overall structure of OFS will remain appropriate for continuing to
administer TARP regardless of the program’s overall strategic direction.

Effective Implementation
of OFS’s Organizational
Structure Depends on
Timely Hiring and WellCoordinated Transition
Planning Efforts

Treasury is in the process of recruiting and hiring well-qualified career
staff who will be able to stay on in their positions on a long-term basis.
OFS officials said that it had about 48 employees assigned to TARP as of
November 21, 2008, including those from other Treasury offices, federal
agencies, and organizations, who are providing assistance on a temporary
basis. OFS’s interim chiefs have each developed a needs assessment for
their areas and have submitted these assessments to the COO, who is
working with Treasury’s human resources department to meet those
needs. The chiefs identified about 130 positions, although OFS officials
have said that the office may require more (up to 200 full time equivalent
employees) or less staff depending on the type and complexity of the
various activities that OFS initiates under TARP and that hiring could be
adjusted accordingly. Treasury is making efforts to meet the current
estimate of needed staff by the end of December and is prioritizing its
hiring process by filling senior career positions first. Consistent with the
need to fill a large number of positions, Treasury officials said that they
were reviewing a number of résumés from within and outside of the
federal government to staff the organization as quickly as possible. As of
November 21, 2008, Treasury had filled five permanent positions.
OFS is also taking steps to help ensure that the key positions remain filled
during and after the transition to the new administration. While Treasury

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GAO-09-161 Troubled Asset Relief Program

officials said that some interim chiefs might be asked to stay to serve
under the new administration, at present it is unclear how many of them
ultimately will continue in their existing roles or for how long.
Consequently, the interim chiefs have been tasked with developing a
description of their current roles and responsibilities and helping identify
their potential replacements. While Treasury expects that there will be
many qualified candidates interested in chief officer positions, uncertainty
over leadership and the strategic direction of the program may inhibit
some of OFS’s efforts to fill these key positions. OFS officials said that
they planned to meet frequently with the incoming administration’s
transition team and that they planned to hire senior career staff who could
effectively manage TARP activities during and after the transition. Filling
needed positions will be a key step in the successful transition of the
program to the new administration, and we plan to continue to monitor
these activities as the transition to the new administration continues.

Contractors and Financial
Agents Will Provide Key
Services for TARP

Treasury has used a financial agency agreement and a variety of contracts
to acquire a range of services in support of TARP. To promote a timely and
flexible approach to implementing the program, Treasury used expedited
procedures to enter into the agreement and award the contracts and
structured these arrangements to allow for flexibility in ordering the
services required. Treasury has also taken steps to help promote the
inclusion of small businesses in carrying out TARP.

Contracts and Other
Agreements Entered into by
Treasury Provide for a Range
of Services to Support TARP

Treasury has used two approaches to acquire the necessary services to
support TARP. First, Treasury exercised its authority under the act to
retain financial agents to provide services on its behalf. Treasury said that
it would use financial agents when the required services involved
managing public assets. Second, Treasury has entered into a variety of
contracts and blanket purchase agreements under the Federal Acquisition
Regulation (FAR) for legal, investment consulting, accounting, and other
services that are generally available in the commercial sector. While the
financial agency agreement and certain contracts were awarded primarily
to assist with the purchase of troubled assets, Treasury officials explained
that they were redirecting requirements within the scope of the contracts
to support TARP’s shift to CPP and made similar modifications to the
financial agency agreement.
Between October 3 and November 25, 2008, Treasury entered into one
financial agent agreement and seven contractual arrangements in support
of TARP, the details of which are summarized in table 2. In addition, we

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GAO-09-161 Troubled Asset Relief Program

have preliminary information on three other contracts ranging from about
$8,500 to $2.2 million for a budget model, legal services, and leased office
space. We are continuing to review all contracts and agreements, including
these three additional contracts.
Table 2: Financial Agency Agreement and Contracts Awarded, as of November 25, 2008
Purpose

Date signed

Agreement
structure

Pricing
structure

To be
calculated
based on
percentage of
value of
assets
managed

Financial
agency
agreement

Percentage of Open competition:
value of
Submissions
assets
received: 70
managed
Submissions meeting
qualifications: 10

$5,000$500,000

Indefinite
delivery/
indefinite
quantity
contract

Value

Competition

Financial Agency Agreement
Bank of New
York Mellon

To provide custodian
and cash management
services

10/14/2008

Responses considered: 3

Contracts
Simpson,
Thacher &
Bartlett, LLP

To serve as a legal
adviser for
implementing the
Emergency Economic
Stabilization Act

10/10/2008

Time and
materials or
firm-fixed
price task
orders

Other than full and open
based on unusual and
compelling urgency
exception.
Offerors solicited: 6
Offers received: 2

EnnisKnupp &
Associates, Inc.

To support
development and
maintenance of
investment policies
and guidelines and
assist with the
oversight of asset
managers

10/11/2008

$25,000 $2,500,000

Indefinite
delivery/
indefinite
quantity
contract

Firm-fixed
price task
orders

Other than full and open
based on unusual and
compelling urgency
exception.
Offerors solicited: 6
Offers received: 3
Request for quotes from 6
firms on the General
Services Administration’s
(GSA) Federal Supply
Schedules (the Schedule)

Pricewaterhouse To help establish
internal controls
Coopers, LLP

10/16/2008

Total amount
of services
ordered to
date:
$191,469

Blanket
purchase
agreement

Time and
materials or
firm-fixed
price task
orders

Ernst & Young,
LLP

To provide general
accounting support
and expert accounting
advice

10/18/2008

Total amount
of services
ordered to
date:
$492,007

Blanket
purchase
agreement

Time and&
materials or
firm-fixed
price task
orders

Request for quotes from 7
firms on the GSA
Schedule

To provide legal
services in connection
with the capital
purchase program

10/29/2008

Total amount
of services
ordered to
date:
$1,411,300

Blanket
purchase
agreement

Time and
materials or
firm-fixed
price task
orders

Request for quotes from 5
firms on the GSA
Schedule

Quotes received: 6

Hughes
Hubbard &
Reed, LLP

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Quotes received: 6

Quotes received: 4

GAO-09-161 Troubled Asset Relief Program

Purpose
Squire Sanders
& Dempsey,
LLP

Lindholm &
Associates

Date signed

To provide legal
services in connection
with the capital
purchase program

10/29/2008

To provide Human
Resources Support

10/31/2008

Value
Total amount
of services
ordered to
date:
$1,380,000

Agreement
structure

Pricing
structure

Blanket
purchase
agreement

Time &
materials or
firm-fixed
price task
orders

Request for quotes from 5
firms on the GSA
Schedule

Time and
materials task
orders

Quotes sought and
received from 3 small
businesses

Order under
$174,720 for
base period of the GSA
Schedule
6 months.
Total value of
base period
plus all
options is
$710,528.

Competition

Quotes received: 4

Source: GAO analysis of Treasury documents.

Treasury Used Expedited
Procedures to Award the
Agreement and Contracts

Treasury used a variety of methods to expedite the process for entering
into its agreement and awarding contracts for TARP. For the financial
agency agreement, Treasury posted notices on its Web site on October 6
seeking proposals to provide asset management and custodian services.
Proposals were due by October 8. Although Treasury had not selected
asset managers as of November 21, it moved quickly to complete the
custodian agreement. Treasury said that of the 70 custodian proposals it
received, 10 met minimum eligibility requirements, and 3 institutions were
invited to submit formal proposals and make face-to-face presentations.
Treasury evaluated the three proposals and on October 14, 2008, selected
Bank of New York Mellon to be the custodian for the asset purchase
program for a term of 3 years. The parties later amended the agreement to
provide for services under CPP.
Treasury also used other than full and open competition to expedite the
award of two contracts for services. To obtain legal services and the
expertise of an investment consultant firm, Treasury used existing
statutory authority as the basis to award contracts using other than full
and open competition procedures. The specific exception Treasury used
under this authority was unusual and compelling urgency.33 Using market
research that it had conducted, Treasury invited several firms to submit

33

The Competition in Contracting Act authorizes agencies to limit competition when an
unusual and compelling urgency precludes the use of full and open competition and
delaying the contract would result in serious financial or other harm to the government. 41
U.S.C. § 253(c)

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GAO-09-161 Troubled Asset Relief Program

proposals on an expedited basis. Treasury received two proposals for legal
services and three for investment services and was able to make awards in
accordance with its announced criteria. Treasury also made five awards
under schedules maintained by the General Services Administration
(GSA). In all cases, Treasury solicited and awarded the contracts within a
matter of days.

Contracts Have Been
Structured to Accommodate
Treasury’s Need for Flexibility

Treasury used contract structures and pricing arrangements designed to
allow for flexibility in ordering the services required. Specifically, Treasury
established blanket purchase agreements with several firms based on
contracts previously awarded to those firms by the GSA. These blanket
purchase agreements contain the basic terms and conditions governing the
types of services the firms will provide to Treasury in support of TARP. As
specific needs arise, the blanket purchase agreements allow Treasury to
issue task orders to the firms describing the specific services required,
establishing time frames, and setting pricing arrangements. Treasury
established two 3-year agreements; other agreements were established for
periods ranging from 6 to 24 months. In other instances, Treasury awarded
new indefinite delivery/indefinite quantity contracts that, like the blanket
purchase agreements, contain all necessary contract terms and conditions.
As specific needs arise, Treasury issues a task order under the indefinite
delivery/indefinite quantity contract. These contracts were established for
1 year or less. In general, the task orders under these contracts were
awarded for periods of performance ranging from 2 weeks to 6 months.
For the most part, the contracts and task orders awarded as of November
25, 2008, including the blanket purchase agreements, are priced on a time
and materials basis. This pricing mechanism provides for payments to the
contractors based on set labor rates and the number of hours worked, plus
the cost of any materials. Our prior work on such contracts recognized
both the inherent flexibility of such arrangements and the highlighted need
for close government supervision to ensure that costs are contained.
Specifically, time and materials contracts are considered high risk for the
government because they provide no positive incentive to the contractor
for cost control or labor efficiency. Thus, the onus is on the government to
monitor contractors to ensure that they are performing the work
efficiently and controlling costs.34

34

GAO, Defense Contracting: Improved Insight and Controls Needed over DOD’s Timeand-Materials Contracts, GAO-07-273 (Washington, D.C.: Sept. 17, 2007).

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A Treasury procurement official stated that time and materials pricing for
its task orders had been necessary because of the uncertain nature of the
work that would be required. As TARP requirements become more
established, Treasury may award future task orders using fixed-price
arrangements. Furthermore, the official outlined several steps his office
was taking to ensure appropriate management and oversight of the time
and materials contracts awarded as of November 25, 2008, including
assigning additional oversight personnel to TARP procurements, ensuring
that training requirements were met, and providing specific training on the
tracking of billable costs. However, Treasury has not yet established a
specific timetable for completing these steps.

Treasury Has Taken Some
Steps to Promote the Use of
Small Businesses in TARP
Activities

In a memo issued through its Web site, Treasury provided guidelines to
small businesses for pursuing procurement opportunities. Treasury noted
that while there were no requirements under its financial agent authority
to set aside work for various designations of small businesses—including
small business concerns owned and controlled by women, minorities,
veterans, and socially and economically disadvantaged individuals—use of
these groups was an evaluation factor during the selection process.
Treasury further noted that any small businesses that did not meet the
minimum requirements for award of the financial agency agreement could
participate as subcontractors.
For services obtained through procurement contracts, Treasury
considered offerors’ efforts to promote small business participation as
part of its selection criteria. Specifically, for three of the contractual
agreements it has awarded, Treasury evaluated the proposals received
based in part on the offerors’ approach to ensuring that small businesses
had opportunities to participate. One of the contracted firms is a small
business, while other awardees offered the following approaches to using
small businesses:
•

One vendor has teamed with a minority small business firm as a
subcontractor.

•

Another vendor plans to utilize two subcontractors: one woman-owned
small business and one other small business. However, Treasury noted
that the subcontractors’ combined participation would amount to less
than 1 percent of the contract’s total value.

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GAO-09-161 Troubled Asset Relief Program

•

One other company stated that it intends to use a minority- and
woman-owned small business enterprise as a subcontractor.

Three contract proposals did not contain a plan for utilizing small
businesses.

Treasury Has Taken Initial
Steps to Address Conflicts
of Interest but Specific
Policies and Procedures
Have Yet to Be Established

Treasury’s reliance on private sector resources to assist with
implementing TARP has underscored the importance of addressing
conflicts of interest issues. Treasury has taken some steps to address
actual and potential conflicts of interest involving its financial agent and
contractors, such as issuing interim guidelines and requiring that all those
responding to solicitations provide a plan to mitigate any actual or
potential conflicts of interest they or their proposed subcontractors may
have. The financial agent and contractors that Treasury selected identified
a variety of potential or actual conflicts of interest and proposed a variety
of solutions to mitigate these conflicts. We plan to monitor closely the
implementation of these mitigation plans.

Treasury Has Issued Interim
Guidelines and Plans to Issue
Regulations on Conflicts of
Interest

On October 6, 2008, Treasury issued interim conflict of interest guidelines.
The guidelines identify conflict of interest issues for contractors to
consider when submitting their proposals to assist with the act’s
implementation. Treasury’s interim guidelines
•

contemplate that Treasury could obtain nondisclosure and conflict of
interest agreements before supplying an offeror with a solicitation;

•

encourage contractors to disclose all actual or potential conflicts of
interest and develop mitigation plans;

•

note that Treasury’s solicitations could include evaluation factors and
criteria to assess contractors’ conflict of interest mitigation plans;

•

restate Treasury’s statutory authority and duty to oversee, evaluate,
waive, negotiate, and mitigate conflicts of interest related to its
contracts; and

•

provide that a mitigation plan submitted in a proposal will become a
binding contractual obligation.

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The guidelines will remain in effect until Treasury issues the regulations
that are currently being drafted.
Employees of Treasury’s contractors and financial agents are not subject
to the conflict of interest laws and regulations that govern the conduct of
government employees. In prior work on defense contracting, GAO
recommended that the Department of Defense contractually require its
contractors to impose conflict of interest restrictions similar to those for
federal employees on employees who were providing advice or assistance
in mission-critical or in certain contracting matters.35
Treasury officials said that the agency intended to use existing statutory
and regulatory postemployment restrictions to guide the actions of
Treasury employees who might leave the agency. In addition, because
these rules do not apply to employees of Treasury’s contractors,
Treasury’s contracts awarded under TARP provide some postemployment
limitations for contractors and their employees. For example, one
solicitation for legal services prohibits attorneys assigned to work on the
contract from representing other parties on issues related to the services
performed both during the term of the contract and for 6 months
thereafter.

Contractors and Agents Have
Identified Potential and Actual
Conflicts of Interest

For each solicitation, Treasury required respondents to identify any actual
or potential conflicts of interest that they would encounter in providing
the services described and to explain how they would avoid, mitigate, or
neutralize any conflicts concerning the company, its corporate parents,
subsidiaries, affiliates, and proposed subcontractors. Among other
situations, Treasury identified areas of possible conflict for respondents to
consider, including personal, business, or financial interests related to the
requested services and participation in TARP. In their responses to
Treasury’s requirements, six of the eight service providers selected as of
November 25, 2008, identified potential or actual sources of conflict.
According to our review, the identified conflicts generally involve
organizational conflicts of interest, though some also involve personal
conflicts of interest:

35

GAO, Defense Contracting: Additional Personal Conflicts of Interest Safeguards Needed
for Certain DOD Contractor Employees, GAO-08-169 (Washington, D.C.: Mar. 7, 2008).

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GAO-09-161 Troubled Asset Relief Program

•

•

One contractor indicated that a potential conflict of interest would
arise if it received information proprietary to multiple clients with
competing investment interests.

•

Contractors and Agents Have
Proposed Plans to Mitigate
Conflicts of Interest but Have
Provided Few Details on
Implementing Them

Five contractors indicated that they either already had clients or could
have clients who were receiving TARP assistance.

One company identified conflicts regarding troubled assets owned
either directly by the company or by clients that were eligible for
assistance under TARP.

The financial agent and contractors have proposed various approaches to
mitigating any actual or potential conflicts of interest. Awardees indicated
that they would use their codes of conduct, company policies and
procedures, senior executive meetings, confidentiality agreements,
specialized information security methods, and open communication with
Treasury to mitigate conflicts of interest. For example, two contractors
indicated that their companies would create a secure information
environment, provide training to relevant employees, and monitor their
compliance with requirements. Another contractor said that it would
execute nondisclosure agreements, develop a mitigation plan, provide
oversight and training, and conduct regular monitoring of compliance for
any conflicts of interest involving its personnel. One company proposed
using a third-party agent to facilitate the sale of its troubled assets and an
independent accounting firm to oversee the transfer of those assets.
The submitted plans provided few details, however, on how the companies
would notify and communicate with Treasury if conflicts were identified
during the course of performance:36
•

Two firms’ plans indicated that they would either maintain an “open
dialog” or would “work in good faith” with Treasury should conflicts of
interest emerge.

•

Two other plans did not describe how the firms would address
conflicts of interest or how they would notify Treasury.

36

A recent FAR amendment, effective December 12, 2008, will require contractors to
disclose promptly credible evidence of fraud and conflicts of interest to the appropriate
inspector general and contracting officer. 73 Fed. Reg. 67064 (Nov. 12 2008) (to be codified
at 41 C.F.R. §52-203-13(b)(3)).

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By comparison, one plan indicated that the company would provide
information on conflicts of interest to Treasury in its weekly reports and
offer recommendations for addressing each issue.
Treasury relies on its financial agents and contractors to disclose conflicts
of interest. Treasury officials stated that while under current procedures,
they might not know if an agent or contractor did not disclose a conflict,
they believed that the consequences for nondisclosure were sufficiently
severe to deter such behavior. Finally, Treasury has noted in its
solicitations that it intends to oversee and enforce compliance with
conflict of interest mitigation plans. For example, Treasury noted in one of
its solicitations for legal services that it would incorporate the offeror’s
final negotiated conflict of interest mitigation plan into the contract and
then oversee and enforce the contractor’s compliance with the plan. At the
time we conducted our work, however, Treasury was still in the process of
developing an oversight mechanism for enforcing financial agents’ and
contractors’ mitigation plans.

OFS’s Internal Control
Structure Is Evolving As
Program Activities Are
Implemented

A key challenge facing OFS is the need to develop a comprehensive system of
internal controls at the same time that it must react quickly to financial
market events. Effective internal control is a major part of managing any
organization to achieve desired outcomes and manage risk. As shown in table
3, GAO’s Standards for Internal Control include five key elements.37 Internal
controls include the program’s policies, procedures, and guidance that help
management ensure effective and efficient use of resources; compliance with
laws and regulations; prevention and detection of fraud, waste, and abuse;
and the reliability of financial reporting. OFS has hired
PricewaterhouseCoopers to assist in the design and implementation of a
system of internal control for TARP.38 Because of the rapid evolution of
TARP, controls are being developed as various aspects of the program
become operational. For example, once CPP became active, OFS and
PricewaterhouseCoopers focused on developing and implementing internal

37

GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1
(Washington, D.C.: November 1999).

38

According to PricewaterhouseCoopers, it plans to use the Committee of Sponsoring
Organizations of the Treadway Commission’s (COSO)–Enterprise Risk Management–
Integrated Framework as the basis for providing assistance in developing the internal
control model. COSO is a voluntary private sector organization whose purpose is to help
businesses and other entities assess and enhance their internal control systems. This
framework is consistent with GAO’s Standards for Internal Control.

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controls related to the capital purchase transactions and documenting the
control activities as they occurred. However, many key controls remain to be
developed. Specific examples, which we noted earlier, are that OFS has not
yet developed sufficient policies and processes for overseeing its contractors
or overseeing whether participating institutions are adhering to the executive
compensation requirements under CPP.
Table 3: GAO’s Standards for Internal Control in the Federal Government
(1) Control environment—creating a culture of accountability by establishing a positive
and supportive attitude toward improvement and the achievement of established
program outcomes.
(2) Risk assessment—performing comprehensive reviews and analyses of program
operations to determine if risks exist and the nature and extent of risks have been
identified.
(3) Control activities—taking actions to address identified risk areas and help ensure that
management’s decisions and plans are carried out and program objectives met.
(4) Information and communication—using and sharing relevant, reliable, and timely
financial and nonfinancial information in managing programs.
(5) Monitoring—tracking improvement initiatives over time and identifying additional
actions needed to further improve program efficiency and effectiveness.
Source: GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1
(Washington, D.C.: November 1999).

Going forward, it will be essential that OFS continue developing a
comprehensive internal control structure that addresses all five standards.
•

A strong control environment will depend on OFS’s management’s
ability to set and maintain an environment based on integrity and core
values and on the competence of staff hired to manage and perform
program operations. As noted earlier, OFS has taken the first steps by
developing an organizational structure that defines lines of authority
and has begun to hire permanent staff, but OFS may need to adjust
these initial steps as the focus of TARP evolves.

•

A risk assessment for TARP will include consideration of all significant
interactions between OFS and other parties, including banks receiving
funds under CPP and the custodian for TARP activities, as well as internal
factors that increase risk. This assessment is important, but again OFS will
be challenged as the strategies developed to achieve TARP’s objectives
continue to evolve, a fact that could also affect the risks facing the
program. Because TARP is a new and unique program dealing with
unusual circumstances, the program will likely be faced with unique and
complex risks.

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GAO-09-161 Troubled Asset Relief Program

•

Control activities for TARP will consist of the policies, procedures,
and guidance that enforce management’s directives and achieve
effective internal control over specific program activities. Examples of
such policies and procedures particularly relevant to TARP are (1)
proper execution and accurate and timely recording of transactions
and events, (2) controls to ensure compliance with program
requirements, (3) establishment and review of performance measures
and indicators, and (4) management reviews of performance and
agency achievements. As noted earlier, the development of policies and
procedures is occurring concurrently with program execution, thereby
increasing the risk that the programs will not be implemented as
intended or that transactions will not be processed properly. Further,
documented policies, procedures and guidance will be critical tools for
OFS staff, many of whom have yet to be hired and were not involved in
the initial transactions.

•

Information and communication will be important to OFS managers
in helping them achieve their responsibilities and goals within an
effective internal control structure. Communication is particularly
important because of the dynamic environment in which OFS is
currently operating. OFS has begun to address external communication
issues by posting information on Treasury’s Web site as it becomes
available, holding press conferences, speaking at industry events, and
testifying at congressional hearings.

•

Monitoring activities include the systemic process of reviewing the
effectiveness of the operation of the internal control system. These
activities are conducted by management, oversight boards and entities,
and internal and external auditors. Monitoring enables stakeholders to
determine whether the internal control system continues to operate
effectively over time. It also improves the organization’s overall
effectiveness and efficiency by providing timely evidence of changes
that have occurred, or might need to occur, in the way the internal
control system addresses evolving or changing risks.

A robust system of internal control specifically designed to deal with the
unique and complex aspects of TARP will be key to helping OFS
management achieve the desired results from TARP. While OFS plans to
implement such a system, there is heightened risk that without it the
interests of the government and taxpayers may not be adequately
protected and that the programs’ objectives may not be achieved in an
efficient and effective manner. Our ongoing monitoring efforts will
continue to focus on the steps OFS is taking to develop and implement an
effective internal control structure.

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GAO-09-161 Troubled Asset Relief Program

Measuring the Impact
of TARP on Credit
Markets and the
Economy Will Be
Challenging

TARP’s activities could improve market confidence in banks that choose
to participate and have beneficial effects on credit markets, but several
factors will complicate efforts to measure any impact. If TARP is having its
intended effect, a number of developments might be observed in credit
and other markets over time, such as reduced risk spreads, declining
borrowing costs, and increased lending. However, several factors will
make isolating and measuring the impact of TARP challenging, including
simultaneous changes in economic conditions, changes in monetary and
fiscal policy, and other programs introduced by the Treasury, the Federal
Reserve, FDIC, and FHFA to support banks, credit markets, and other
struggling institutions. As a result, any improvement in capital markets
cannot be attributed solely to TARP nor will a slow recovery necessarily
reflect its failure because of the effects of market forces and economic
conditions outside of the control of TARP. Nevertheless, we have
preliminarily identified some indicators that may be suggestive of TARP’s
impact over time. These indicators include measures of the perception of
risk in interbank lending, consumer lending, corporate debt markets, and
the overall economy. We have also identified a number of other indicators
that we are also monitoring and may include in future reports.

TARP Could Have a
Number of Effects on
Credit Markets and the
Economy, but Several
Factors Complicate
Measuring the Impact

TARP activities as of November 25, 2008—specifically CPP—could
improve market confidence in participating banks by improving their
balance sheet, cash flow, and capital positions; reducing their perceived
risk; and allowing them to borrow and raise capital at more favorable
rates. To the extent that confidence in participating banks improves, the
banks should be able to increase lending at lower rates and pass on some
of their lower funding costs to their own customers. Moreover, the capital
infusions could also increase the confidence of participating banks so that
the banks increase business, interbank, and consumer lending rather than
hoarding the capital or using it to purchase low-risk assets. However,
some tension exists between the goals of improving banks’ capital position
and promoting lending—that is, the more capital banks use for lending, the
less their overall capital position will improve.
If TARP does have its intended impact, a number of these effects should
appear in credit and other markets over time. Since the first eight banks
received capital injections on October 28, 2008, it may well be too early to
expect noticeable changes. However, if confidence in banks improves, the
perceived risk of lending to banks should decline, and this development
would be observed in declining risk premiums (the difference between
risky and risk-free interest rates, such as rates on U.S. Treasury securities)
for interbank lending and bank debt. With an improved capital position

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and lower funding costs, over time banks should be able to increase
lending and pass some of their lower borrowing costs on to their
customers. Further, improved market conditions may permit some
borrowers to avoid foreclosures by enhancing the capacity and willingness
of banks to refinance certain loans or modify others.39 Potentially, this
development would lower risk premiums for and raise volumes of
consumer and business lending. Because bank financing and capital
markets are close substitutes for large businesses, declines in borrowing
costs from banks could also reduce borrowing costs in capital markets.40
Over the long term, improvements in credit markets should have effects on
real economic activity as lower borrowing costs boost demand for goods
and services. Asset prices, such as stock prices, and risk premiums,
although imperfect, are also important leading indicators of real economic
activity.41
Changes in credit market conditions may not provide conclusive evidence
of TARP’s effectiveness, however, as other important policies and
interventions can influence these markets. A number of government
agencies, including FHFA, FDIC, Treasury (through approaches other than
TARP), and the Federal Reserve have worked in a collaborative manner to
attempt to restore financial stability. For example, FDIC announced that it
would temporarily guarantee the senior debt of all FDIC-insured
institutions and their holding companies. This guarantee may affect the
interest rates on bank-issued debt and improve confidence in banks. In
addition to lowering the federal funds rate and providing liquidity facilities
for a range of assets and institutions, the Federal Reserve has begun
intervening in the market for commercial paper, a move that is also
intended to reduce the cost of borrowing in those markets. Moreover, as
of November 21, the Federal Reserve had almost $900 billion in loans
outstanding to financial institutions. FHFA placed Fannie Mae and Freddie
Mac in conservatorship in response to their deteriorating financial
condition.

39

In an interagency statement, Treasury, FDIC, and the Federal Reserve encouraged banks
and their regulators to work collectively to meet the needs of creditworthy borrowers and
work with existing borrowers to avoid preventable foreclosures.
40

Capital markets are a larger source of business borrowing than banks, but consumers and
small businesses do not generally have access to capital markets.
41
Real economic activity generally refers to measures of national income and the
production of goods and services, such as gross domestic product and industrial
production.

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In addition, Treasury announced that, under authority provided by the
Housing and Economic Recovery Act of 2008, it planned to purchase
mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac
on the open market. As of September 30, 2008, Treasury reported that it
had purchased about $3.3 billion in Fannie and Freddie MBS and intended
to purchase additional securities.42 Moreover, on November 25, 2008, the
Federal Reserve announced that it was initiating a program to purchase up
to $500 billion in mortgage-backed securities guaranteed by Fannie Mae,
Freddie Mac, and Ginnie Mae and up to $100 billion in direct obligations of
Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. According
to the Federal Reserve, the action was intended to support housing
markets and foster improved conditions in financial markets more
generally. Because banks hold a significant amount of securities
guaranteed by these institutions, which are central to liquid secondary
mortgage markets, these actions may also affect investor and bank
confidence and interest rates. Moreover, FHFA, in partnership with
Treasury, has implemented a supplemental loan modification program for
at-risk borrowers to prevent foreclosures and mitigate losses.
General market forces will also complicate a determination of TARP’s
effectiveness. For example:
•

Recent and expected declines in general economic activity are likely to
reduce lending and heighten perceived credit risk despite a host of U.S.
government interventions.

•

Further declines in housing prices are possible as values fall to levels
consistent with incomes and rents in local areas, possibly leading to
additional foreclosures, asset write-downs, and an increase in the
perceived risk of banks and other financial institutions with exposure
to mortgage assets.43

•

In the face of increased risk, banks may not raise interest rates much
(if at all) but instead ration credit so that only borrowers with pristine

42

Treasury agreed to commit only up to $100 billion per government-sponsored enterprise
to cover the enterprises’ negative net worth.
43
Some changes in financial markets could occur because market participants may alter
their behavior based on the announcement of a program in anticipation that specific action
will be taken. In other words, if market participants believe risk will decline in the future,
they will charge less for that risk in the present, assuming that the announcement is
credible and the program is viewed as effective.

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credit receive loans. Furthermore, changes in both the supply of and
demand for credit can influence interest rates, and interest rates
charged by banks may also reflect the customers they choose rather
than the cost of bank credit for all borrowers.
Finally, any changes attributed to TARP may well be changes that (1)
would have occurred anyway, (2) are enhanced or counteracted by other
market fundamentals, or (3) can be attributed to other policy
interventions, such as the actions of FDIC, the Federal Reserve, or other
financial regulators. For these and other reasons, we will not know what
would have happened in the absence of TARP. As a result, determining the
effect of TARP as it is being implemented will be a challenge.

Changes in Select
Indicators over Time May
Provide Insights about
CPP’s Impact

We considered a number of indicators that, although imperfect, may be
suggestive of TARP’s impact on credit and other markets. Currently, we
have identified a number of preliminary indicators that are likely to
capture interbank, mortgage, and nonbank lending activity as well as
financial market risk perceptions and variables that are predictive of
future real economic activity. At the very least, improvements in these
measures would indicate improving conditions in credit markets. Further,
given that CPP’s goal is to improve the capital position of banks and
promote lending, going forward we expect to monitor indicators that can
provide some insight into the potential effects of the plan on capital ratios,
the structure of liabilities, and net changes in lending at participating
institutions. We continue to consider a variety of additional indicators, and
as more data become available and as economic and credit conditions
evolve, we plan to include them in future reports.

Treasury-London Interbank
Offered Rate (LIBOR) Spread
(TED Spread)

The TED Spread is the difference between an average of interest rates offered
in the London interbank market for 3-month, dollar-denominated loans
(known as LIBOR) and the interest rate on U.S Treasury bills with the same
maturity. It is considered a key indicator of credit risk that gauges the
willingness of banks to lend to other banks. Increases in the TED spread
imply a bigger aversion to risk. That is, investors have a preference for safe
investments (e.g., Treasuries) and charge a higher premium for loans to other
institutions to compensate for greater perceived default risk. Figure 3 shows
both the historical TED spread as well as an inset that focuses on the TED
spread since 2006. The figure shows that the weekly TED spread increased to
roughly 2 percentage points (or 200 basis points) in early December 2007 and

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peaked at over 400 basis points for the week including October 17, 2008. 44
Between the announcement of the creation of CPP the week of October 14
and the week before Treasury disbursed capital injections to the eight banks
initially participating in CPP (week of October 20), the spread declined 146
basis points. Decreases in the TED spread could reflect the fact that banks
are more willing to lend to lend to other banks on terms that reflect greater
confidence in the banking system (i.e., without demanding a large interest
rate premium). From the date of the initial capital injections on October 28 to
November 14, the TED spread declined by about 60 basis points. The LIBOR
itself has declined, but so has the Treasury yield. However, during the week
ending November 21, 2008, the LIBOR rate and the TED spread began to rise.
Figure 3: Three-Month LIBOR and 3-Month Treasury Bill Yield, as of November 21, 2008
Interest rates
20

TED spread

5
4
3

15

2
1

LIBOR
10

0
2006

2007

2008

5
3-month
Treasury

0
1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Year
LIBOR
3-month Treasury
TED spread
Source: Global Insight and Federal Reserve Bank of St. Louis.

Note: Rates and yields are weekly percentages. Area between LIBOR and Treasury yield is the TED
spread.

44
A basis point is a common measure used in quoting yield on bills, notes, and bonds and
represents 1/100 of a percent of yield. It should be noted that while the spread is large, the
actual LIBOR rate is lower than the average rate for 2005 through mid-2007.

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Corporate Spreads

The economywide risk premium is measured in a number of ways, most
commonly as the difference (spread) between Moody’s Investors Service
(Moody’s) Baa bond rate and Moody’s Aaa rate or between these rates and
the relevant government bond yield.45 These spreads represent a premium
lenders demand for taking on risk—that is, when spreads are high, market
participants perceive more risk, warranting a higher rate of return. When
credit market conditions improve, some narrowing of these spreads would
be expected.46 Moody’s describes Aaa bonds as “of the highest quality, with
minimal credit risk” and Baa bonds as “subject to moderate credit risk”
that “may possess certain speculative characteristics.” As shown in figure
4, the various interest rate spreads show a common pattern—an increase
in negative perceptions about risk, resulting in increasing spreads as seen
over the past year (as shown in the inset) and at various points in the past
25 years, including the mid-1980s and early 2000s. Declines in these
spreads would be indicative of improving credit conditions, but because
these spreads may have been too narrow during the period leading up to
the credit market turmoil (risk was underpriced), it is not clear how much
these premiums should decline. Treasury has noted that although
interbank lending rates have improved, U.S. companies continue to
experience difficulties in issuing long-term debt at attractive rates. As of
November 21, 2008, both corporate spreads were higher than they were
the week prior to the initial capital injections.

45
Moody’s Investors Service performs financial research and analysis on commercial and
government entities. It also ranks the creditworthiness of borrowers using a standardized
ratings scale. These spreads can also reflect a liquidity and/or prepayment premium.
Moreover, some economic research also suggests that such interest rate spreads have
predictive power for the real economy, although the inferences to be drawn vary across
time and instruments and may send false signals.
46

Moreover, economic research also suggests that such interest rate spreads have
predictive power for several real economy variables, such as industrial production, durable
orders, the unemployment rate, personal income, capacity utilization, and consumption.

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Figure 4: Yields on Corporate Bonds (Aaa and Baa) Relative to 10-year Treasury
Interest rates

18
Aaa-Treasury spread

6
5
4
3
2
1
0

16
14
12

2006

2007

2008

Baa-Treasury spread

6
5
4
3
2
1
0
2006

2007

2008

10
8
6
4
2
0
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Year

Moody’s Baa
Moody’s Aaa
10-year Treasury
Aaa/Baa-Treasury spread
Source: Federal Reserve Bank of St. Louis.

Note: Rates and yields are weekly percentages. The average for the week of November 21, 2008, is
a midweek estimate.

Mortgage Rates

The credit turmoil has raised concern about consumers’ abilities to obtain
funds, including mortgages, at rates consistent with economic
fundamentals and individual risk characteristics. One of TARP’s explicit
goals is to enhance liquidity and promote lending to consumers, but high
spreads between mortgage rates and Treasury yields indicate relatively
high risk and low liquidity. Therefore, to the extent that credit and
economic conditions improve, these spreads would narrow. Figure 5
shows that the weekly spread between conforming mortgage rates and
Treasuries has widened significantly since 2004.47 As shown in the inset to
the figure, from October 2007 through October 2008, there was some

47
Conforming mortgages are mortgage loans that can be purchased by Fannie Mae and
Freddie Mac.

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GAO-09-161 Troubled Asset Relief Program

improvement in this measure since peaking in early September 2008,
however, the spread increased for the week ending November 21.
Figure 5: Mortgage Rates (30-Year Fixed Rate, Conforming) and Treasury Yields, as of November 20, 2008
Interest rates
8
7
6
5
4
3.0
2.5
2.0
1.5
1.0
0.5
0

3
2
1

Mortgage-Treasury spread

2007

2008

0
2004

2005

2006

2007

2008

Year
30-year fixed rate mortgage
10-yearTreasury
Mortgage-Treasury spread
Source: Federal Reserve Bank of St. Louis.

Note: Rates and yields are weekly percentages.

Mortgage Originations

Like other bank interest rates, mortgage rates may reflect the customers
banks choose to lend to rather than the cost of credit for all potential
customers. As such, the volume of new mortgage lending may also
indicate the availability of credit, changes in credit risk, or demand for
credit. As shown in figure 6, quarterly mortgage originations in the United
States have fallen by over 50 percent since 2005.48 While increases in
mortgage interest rates have remained moderate, mortgage lending has
decreased. To the extent that credit and economic conditions improve
over time and interest rates remain stable, we would expect mortgage

48

This dropoff is consistent with the change in household mortgage debt as measured by
the Federal Reserve’s flow of funds data.

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GAO-09-161 Troubled Asset Relief Program

originations to stop declining and eventually rise, although it is not clear
that this measure would or should return to the level seen in the period
leading up to the credit market turmoil.
Figure 6: Mortgage Originations, as of September 2008
Dollars in billions
1,000

800

600

400

200

0
Q1
2004

Q2

Q3

Q4

Q1

Q2

Q3

Q4

2005

Q1

Q2

Q3

2006

Q4

Q1
2007

Q2

Q3

Q4

Q1

Q2

Q3

2008

Source: Inside Mortgage Finance estimates.

Note: Estimates of originations are based on information from FHA, VA, mortgage-backed securities
and lenders and include refinances.

Mortgage Foreclosures and
Defaults

Going forward, we also plan to report on trends in foreclosures and
delinquencies. Treasury officials have urged banks to work to modify and
restructure loans whenever reasonable to avoid preventable foreclosures.49
Moreover, if CPP is effective, banks may be more able to refinance
mortgage loans for creditworthy borrowers to keep monthly payments
affordable. While it is too early to expect material changes in foreclosures
and the most recent data preclude an assessment of trends since
September 30, figure 7 establishes the historical context for continued
monitoring. As the figure shows, the percentage of total loans foreclosures

49

FDIC, Treasury, and the Federal Reserve have stated that lenders and servicers should (1)
determine whether a loan modification would enhance the net present value of the loan
before proceeding to foreclosure and (2) ensure that loans currently in foreclosure have
been subject to such analysis.

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has reached 2.75—a level unseen in recent history. As noted earlier,
outside of TARP a variety of parties are taking a number of actions to
address the rising foreclosure rate.
Figure 7: Percentage of Loans in Foreclosure, as of June 30, 2008
Q2 2005 – Q2 2008

Percentage

Percentage

3.00

3.00

2.75

2.75

2.50

2.50

2.25

2.25

2.00

2.00

1.75

1.75

1.50

1.50

1.25

1.25

1.00

1.00

0.75

0.75

0.50

0.50

0.25

0.25

0

0

19

79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
(Q 08
2)

First quarter 1979 – second quarter (Q2) 2008

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2005
2006
2007
2008

Source: GAO analysis of Global Insight data.

Other Financial and Credit
Market Indicators May Be
Useful as TARP Evolves

In addition to the preliminary indicators previously identified, we are
evaluating the potential usefulness of a number of other indicators. This
list is not definitive or exhaustive, and we expect to add new indicators
and modify or drop others as we engage with Treasury, Federal Reserve,
and other informed market participants. Moreover, some measures
included may become more appropriate indicators as time progresses.
•

Prime lending rate (Federal Reserve). The prime lending rate is an
interest rate banks charge to their most creditworthy customers and
usually moves with the target Fed funds rate—an overnight interbank
lending rate. Many variable rate consumer loans such as credit cards
are linked to the prime rate. Like mortgage rates, the prime lending rate
does not necessarily indicate the cost of credit to all potential
borrowers.

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GAO-09-161 Troubled Asset Relief Program

•

Survey of lending standards (Federal Reserve). This survey asks
senior loan officers at U.S. banks whether lending standards have
tightened or eased. The most recent survey suggests a tightening in
credit standards for approving applications for commercial and
industrial loans. It also shows increased spreads of loan rates over
banks’ cost of funds, especially for riskier loans, in part because of the
uncertain economic outlook, reduced tolerance for risk, and liquidity
issues.

•

Commercial paper interest rates (Federal Reserve). Interest rates on
financial and nonfinancial commercial paper should be indicative of
liquidity and perceptions of risk in short-term debt markets. The spread
between financial commercial paper and nonfinancial commercial
paper indicates the cost of raising capital for financial institutions
relative to their nonfinancial counterparts.

•

Changes in assets held by commercial banks (Call Report Data).
Banks provide quarterly call report information to their regulators,
including information on loan assets, among other things. This
information could provide information about the quality and flow of
credit.

•

Changes in household and business debt (Federal Reserve). These are
indicators of the quantity and flow of credit.

•

Stock prices (Lexis Nexis Historical Quotes). Stock prices represent
an important component of the cost of capital for publicly traded
companies and impact the ability to secure loans. Stabilization of stock
prices for banks participating in CPP and the financial sector in general
would indicate a rebuilding of investor confidence and improve the
ability of these companies to raise capital on the public market. Stock
prices are also a leading indicator of real economic activity.

•

House prices (S&P/Case-Shiller, Office of Federal Housing Enterprise
Oversight). By increasing liquidity, rebuilding confidence, and lowering
borrowing costs, CPP may lead to improvements in both housing prices
and foreclosure rates.50 The stabilization of housing markets is

50

While dominant causal effect may run from housing prices to foreclosures, foreclosures
can also affect prices. To the extent that at-risk borrowers are able to refinance or
restructure mortgages, prices may stabilize. Similarly, price stabilization can reduce
foreclosure rates. However, independent of foreclosures, housing prices may simply be
returning to their fundamental values after a long period of overvaluation.

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important to the valuation of MBS and other financial instruments
central to current market conditions.
•

Conclusions

VIX (Chicago Board Options Exchange). The VIX is a measure of
expected stock market volatility over the next 30 days, calculated as an
index of the prices of options on the Standard & Poor’s 500 Index. It is
an indicator of uncertainty about the future price of stocks and general
uncertainty about the economy.

TARP is a new program that involves taking a number of steps to help
revive the U.S. and global economies as they struggle through the current
economic crisis. Given changing market conditions and the need to
coordinate efforts both domestically and globally, Treasury must continue
to strengthen its communication with external stakeholders, including
Congress and the public, to ensure that members and the public
understand Treasury’s rationale for shifts in OFS’s strategic direction.
Because TARP is relatively new, and because the crisis makes immediate
action imperative, Treasury is operating on a number of fronts
concurrently. It is setting up programs and establishing oversight policies
and procedures at the same time. As a result, we are seeing some lag in
administrative efforts—for example, in internal controls—as the programs
proceed. Treasury and the banking regulators have publicly stated that
they expect participating institutions to use CPP funds in a manner
consistent with the goals of the program by working to expand the flow of
credit to promote sustained economic growth and modifying the terms of
residential mortgages to strengthen the housing market. But Treasury has
not yet set up policies and procedures to help ensure that CPP funds are
being used as intended. Similarly, institutions participating in CPP are
subject to specific restrictions on dividend payments or repurchasing
shares as long as Treasury has preferred shares outstanding. But Treasury
also has no policies and procedures in place for ensuring that the
institutions are complying with these requirements or that they are using
the capital investments in a manner that helps meet the purposes of the
act. Although Treasury has hired a third party to help establish a system of
internal controls, until control are in place to ensure that specific program
requirements are met, Treasury cannot effectively hold participating
institutions accountable for how they use the capital injections or provide
strong oversight of compliance with the requirements under the act.
Further, while Treasury has made progress in setting up OFS, it faces a
number of ongoing challenges that must be addressed. First, timely
completion of hiring efforts to bring OFS up to its full complement of

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GAO-09-161 Troubled Asset Relief Program

staff, as well as effective succession planning for likely changes in key
OFS leadership positions, is critical to ensuring the integrity of TARP
both during and after the transition to the new administration. Second,
Treasury has not yet finalized necessary oversight procedures for its
growing number of contractors and financial agents, even though the
use of time and materials contracts requires enhanced oversight of
contractor performance. Third, while the financial agent and contractor
arrangements will enhance Treasury’s capabilities to administer TARP,
the substantial reliance on the private sector raises issues related to the
potential for conflicts of interest. Lacking a comprehensive and
complete system to monitor conflicts of interest, Treasury runs the risk
that it may not be able to ensure that conflicts are fully identified and
appropriately addressed. This area is just one of several in which
internal controls have yet to be established for TARP activities. While
OFS is in the process of developing a comprehensive system of internal
control, there is heightened risk that the interests of the government
and taxpayers may not be adequately protected and that OFS may not
achieve its mission in an effective and efficient manner.
Finally, evaluating the impact of Treasury’s efforts under TARP, which are
intended to improve conditions in credit and other markets, will be
challenging for a number of reasons. As we have noted, little time has
passed since the initial infusion of capital into the institutions, and a
variety of other programs and efforts directed at bolstering the economy
and helping homeowners are still being considered. Further, in addition to
TARP, U.S. regulators as well as foreign governments continue to take a
variety of actions, including many coordinated efforts, aimed at stabilizing
markets and the economy. Moreover, a number of other interventions and
market forces themselves will affect future developments and make it
difficult to isolate the effects of any program or action, not just TARP. To
facilitate our assessment of TARP’s activities going forward, we have
identified a number of preliminary indicators that, when viewed
collectively, should signal whether TARP as well as other programs are
functioning as intended. Among these preliminary indicators are interest
rate spreads, mortgage rates, and mortgage originations. We also have
identified other indicators that may prove useful as TARP evolves.
Together, these indicators should provide additional information to
policymakers and others on the overall stability of our financial markets.

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GAO-09-161 Troubled Asset Relief Program

Recommendations for
Executive Action

We recognize that less than 60 days has passed since the program was
created and the inherent difficulty of setting up any new program,
especially during turbulent economic conditions. However, we have
identified a number of areas that warrant Treasury’s ongoing attention.
Therefore, we are recommending that Treasury take a number of actions
aimed at improving the integrity, accountability, and transparency of
TARP. Specifically, Treasury should
•

work with the bank regulators to establish a systematic means of
monitoring and reporting on whether financial institutions’ activities
are consistent with the purposes of CPP and help ensure an
appropriate level of accountability and transparency;

•

develop a means to ensure that institutions participating in CPP
comply with key requirements of program agreements, including those
covering limitations on executive compensation, dividend payments,
and the repurchase of stock;

•

formalize the existing communication strategy to ensure that external
stakeholders, including Congress and the public, are informed about
the program’s current strategy and activities as well as the rationale for
changes in this strategy to avoid information gaps and shocks;

•

develop a definitive transition plan by building on and formalizing
ongoing activities to facilitate a smooth transition to the new
administration, including ensuring that key OFS leadership positions
are filled during and after the transition to the new administration;

•

continue OFS hiring efforts in an expeditious manner to ensure that
Treasury has the personnel needed to carry out and oversee TARP;

•

ensure that sufficient personnel are assigned and appropriately trained
to oversee the performance of all contractors, especially those
performing under contracts priced on a time and materials basis, and
move toward greater reliance on fixed-price arrangements, whenever
possible, as program requirements are better defined over time;

•

continue to develop a comprehensive system of internal control over
TARP, including policies, procedures, and guidance for program
activities that are robust enough to ensure that program’s objectives
and requirements are being met;

•

issue final regulations on conflicts of interest involving Treasury’s
agents, contractors, and their employees and related entities as

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GAO-09-161 Troubled Asset Relief Program

expeditiously as possible, and review and renegotiate mitigation plans,
as necessary, to enhance specificity and compliance with the new
regulations once they are issued; and
•

Agency Comments
and Our Analysis

institute a system to effectively manage and monitor the mitigation of
conflicts of interest going forward.

We provided a draft of this report to the Department of the Treasury for
review and comment. We also provided segments of the draft report to the
Federal Reserve, FDIC, OCC and OTS for review and comment. In written
comments, Treasury generally agreed with the report and eight of the nine
recommendations (see app. I). Treasury stated that it had taken
aggressive measures to stabilize credit markets, such as investing over
$150 billion in financial institutions through CPP. Treasury also said that it
had made significant progress in building an infrastructure to carry out its
ongoing responsibilities to develop other programs, measure risk, monitor
compliance, and ensure robust internal financial controls and that our
report’s recommendations would be helpful in implementing the work that
remained to be done in these areas. Treasury stated that it had made
significant efforts to ensure transparency and good communication with
external stakeholders but acknowledged that more could and would be
done in these areas. Treasury agreed that it needed to develop procedures
to determine whether financial institutions were complying with the
requirements explicitly imposed on them in the CPP agreements and
under the statute but had a different perspective from our
recommendation on what should be done to evaluate how institutions
were using funds received under CPP. Treasury said that it would
welcome further discussion on general metrics for evaluating the overall
success of CPP in addressing the purposes of the act. In technical
comments, the Federal Reserve also expressed concern about whether
Treasury needed to monitor individual institutions’ use of CPP funds,
because data from any single institution would not indicate that the
program’s goals had been achieved. Instead, achievement of the goals
would be reflected in the level of functioning of the financial marketplace
as a whole.
As discussed in the draft, we agree that it will be important to develop a
range of metrics to evaluate the overall success of CPP, and we welcome
continued discussions with Treasury and the regulators on general metrics
to achieve this purpose. However, given the magnitude of funds provided
to this program, these types of metrics alone will not provide the

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necessary transparency and accountability needed to ensure that
participating institutions are using the funds in a manner that is consistent
with the purposes of the act. As stated in the report, Treasury should build
on the existing oversight mechanisms of the banking regulators to
minimize any additional regulatory burden and develop a means for
reviewing and reporting on planned and actual actions taken by
participating financial institutions that result from the additional funding
received through CPP. Obtaining such information could help Treasury
better monitor participating institutions’ activities and provide an
appropriate level of accountability and transparency. Moreover, the
information could also feed into an overall assessment of the effect of
TARP in restoring liquidity and stability to the financial system. Treasury,
the Federal Reserve, FDIC, OCC, and OTS also provided technical
comments that we incorporated in the report, as appropriate.

We are sending copies of this report to other interested congressional
committees and members, Treasury, the federal banking regulators, and
others. The report also is available at no charge on the GAO Web site at
http://www.gao.gov.
If you or your staff have any questions about this report, please contact
Richard J. Hillman at (202) 512-8678 or hillmanr@gao.gov, Thomas J.
McCool at (202) 512-2642 or mccoolt@gao.gov, or Orice M. Williams at
(202) 512-8678 or williamso@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. GAO staff who made major contributions to this report are
listed in appendix II.

Gene L. Dodaro
Acting Comptroller General
of the United States

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List of Congressional Addresses
The Honorable Robert C. Byrd
Chairman
The Honorable Thad Cochran
Ranking Member
Committee on Appropriations
United States Senate
The Honorable Christopher J. Dodd
Chairman
The Honorable Richard C. Shelby
Ranking Member
Committee on Banking, Housing, and Urban Affairs
United States Senate
The Honorable Kent Conrad
Chairman
The Honorable Judd Gregg
Ranking Member
Committee on the Budget
United States Senate
The Honorable Max Baucus
Chairman
The Honorable Charles E. Grassley
Ranking Member
Committee on Finance
United States Senate
The Honorable David R. Obey
Chairman
The Honorable Jerry Lewis
Ranking Member
Committee on Appropriations
House of Representatives
The Honorable John M. Spratt, Jr.
Chairman
The Honorable Paul Ryan
Ranking Member
Committee on the Budget
House of Representatives

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The Honorable Barney Frank
Chairman
The Honorable Spencer Bachus
Ranking Member
Committee on Financial Services
House of Representatives
The Honorable Charles B. Rangel
Chairman
The Honorable Jim McCrery
Ranking Member
Committee on Ways and Means
House of Representatives

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Appendix I: Comments from the Department
of the Treasury

Appendix I: Comments from the Department
of the Treasury

Page 64

GAO-09-161 Troubled Asset Relief Program

Appendix I: Comments from the Department
of the Treasury

Page 65

GAO-09-161 Troubled Asset Relief Program

Appendix II: GAO Contacts and Staff
Acknowledgments

Appendix II: GAO Contacts and Staff
Acknowledgments
GAO Contacts

Richard J. Hillman, (202) 512-8678
Thomas J. McCool, (202) 512-2642
Orice M. Williams, (202) 512-8678

Staff
Acknowledgments

(250429)

In addition to the contacts named above, Linda Calbom, Mathew Scire,
and William Woods (Lead Directors); Daniel Garcia-Diaz, Lawrence Evans,
Jr., Kay Kuhlman, Harry Medina, and Carol Dawn Petersen (Lead Assistant
Directors); and Allison Abrams, Marianne Anderson, Sonya Bensen,
Patrick Breiding, Steven Brown, Angela Burriesci, Mason Calhoun,
Timothy Carr, Tara Carter, Emily Chalmers, Rachel DeMarcus, Heather
Digna, Lynda Downing, Matt Drerup, Abe Dymond, Katherine Eikel, Nancy
Eibeck, Gary Engel, Paul Foderaro, Jeanette Franzel, Leon Gill, Daniel
Gordon, Michael Hoffman, Joe Hunter, Ron Ito, Elizabeth Jimenez, John A.
Krump, James Lager, Robert Lunsford, Stephanie May, Kimberly McGatlin,
Jay R. McTigue, Marc Molino, Susan Offutt, Jose Oyola, Kenneth Patton,
Jasminee Persaud, Susan Poling, Anthony Pordes, Barbara Roesmann,
Susan Sawtelle, Jeremy Sebest, John Treanor, Karen Tremba, Katherine
Trimble, Julie Trinder,and James Vitarello made contributions to this
report.

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