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U n i t e d S t a t e s D e p a r t m e n t o f t h e T r e a su r y

O f f i c e o f f i n a n c i a l s ta b i l i t y

Agency Financial Report
FI S CAL
YEAR

2009

Troubled Asset Relief Program
Office of Financial Stability
for the year ended September 30, 2009

U n i t e d S t a t e s D e p a r t m e n t o f t h e T r e a su r y

O f f i c e o f f i n a n c i a l s ta b i l i t y

Agency Financial Report
FI S CAL
YEAR

2009

Troubled Asset Relief Program
Office of Financial Stability
for the year ended September 30, 2009

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OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

Message from the Assistant Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
Part I: Management’s Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Table of Contents

Table of Contents
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Section One: Background and Creation of the Troubled Asset Relief Program (TARP) . . . . . . . . . . . . . 6
Mission and Organizational Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Section Two: Overview and Analysis of the TARP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
TARP in Context: A Critical Pillar of a Coordinated Government Response . . . . . . . . . . . . . . . . . . . . . . . . . . 9
OFS Strategic Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
TARP Timeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
FY 2009 Financial Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
The Impact of TARP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
External Assessments of TARP Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Section Three: Ensuring Stability and Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Capital Purchase Program (CPP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Capital Assistance Program (CAP) and the Supervisory Capital Assessment Program (SCAP) . . . . . . . . . . . . . . . 25
Targeted Investment Program (TIP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Asset Guarantee Program (AGP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Consumer and Business Lending Initiative (CBLI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Public-Private Investment Program (PPIP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
AIG Investment Program (AIG) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Auto Industry Financing Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Section Four: Preventing Foreclosures and Preserving Homeownership . . . . . . . . . . . . . . . . . . . 37
Section Five: Protecting Taxpayer Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section Six: Promoting Transparency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Section Seven: Financial Accounting Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Section Eight: TARP Valuation Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Incorporating Market Risk in Valuation Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Sensitivity Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Section Nine: Systems, Controls, and Legal Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Management Assurance Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Internal Control Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Improper Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Section Ten: Other Management Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Table of Contents

iii

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

Section Eleven: Limitations of the Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Part II: Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Message from the Chief Financial Officer (CFO) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Government Accountability Office (GAO)’s Report on FY 2009 Financial Statements . . . . . . . . . . . . . . . . . . . . 71
Assistant Secretary’s Response to GAO Report on FY 2009 Financial Statements . . . . . . . . . . . . . . . . . . . . . 79
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Notes to the Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

Table of Contents

I am pleased to provide the Office of Financial Stability’s Agency Financial Report for fiscal
year 2009. This report describes the activities and financial results for the Troubled Asset
Relief Program (TARP) since its inception in October, 2008. The report includes the
financial statements for the TARP and the Government Accountability Office’s audit opinion
on the financial statements, a separate audit opinion on OFS’s internal controls over
financial reporting, and results of tests of OFS’s compliance with selected laws and
regulations.
The Emergency Economic Stabilization Act of 2008 (EESA) established the Office of
Financial Stability (Treasury-OFS) within the Office of Domestic Finance of the Treasury
Department to implement the TARP. The OFS carries out the mission and objectives of the EESA: ensuring the overall
stability and liquidity of the financial system; preventing avoidable foreclosures and helping preserve homeownership;
protecting taxpayer interests, and promoting transparency.
Treasury-OFS has made substantial progress toward meeting these objectives and goals by using TARP funds to help
rebuild confidence in U.S. financial institutions. For the period ended September 30, 2009, Treasury-OFS reports the
following key results:

message from Assistant secretary of financial stability

Message from the Assistant Secretary
for Financial Stability

• Treasury-OFS disbursed $364 billion of the authorized $700 billion, most of it in the form of investments and $73
billion of those TARP funds have already been repaid.

• As shown in greater detail in this report, Treasury-OFS reports an estimated net cost of $41.6 billion for the TARP
disbursements made during the fiscal year.

• The ultimate cost of TARP will not be known for some time. The combination of lower spending and higher expected
returns has already significantly lowered the estimated cost from our earlier estimates. However, as additional funds are
distributed, particularly for the housing initiative, the total cost is likely to rise.
Treasury-OFS also improved its operational efficiency by adopting a number of the recommendations made by our oversight bodies. We have benefited from their involvement in the development of TARP programs and policies as we pursue
our common goal of carrying out the objectives of EESA.
The financial and performance data included in this report are reliable and complete. The Government Accountability
Office rendered an unqualified (“clean”) audit opinion on the OFS financial statements. The OFS has chosen to produce
an alternative to the consolidated Performance and Accountability Report, the attached Agency Financial Report. The OFS
will include its FY 2009 Annual Performance Report with its Congressional Budget Justification and will post it on the
OFS website (www.financialstability.gov) in February.

Sincerely,

Herbert M. Allison Jr.
Assistant Secretary
Office of Financial Stability
message from Assistant secretary of financial stability

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OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

Part 1
Management’s Discussion & Analysis

For more information, see:
FinancialStability.gov
MakingHomeAffordable.gov

This report provides a summary of the activities of the
Troubled Asset Relief Program (TARP), which was
established under the Emergency Economic Stabilization
Act (EESA) last year. The purpose of TARP was to
restore the liquidity and stability of the financial system.
While we will never know for certain what would have
happened without TARP, there is broad agreement today
that because of TARP and other governmental actions,
the United States averted a potentially catastrophic
failure of the financial system.

Four TARP programs reported net income in FY 2009:
the Capital Purchase Program, the Targeted Investment
Program, the Asset Guarantee Program, and the
Consumer and Business Lending Initiative. This net
income was offset by reported net cost of the investments in AIG and the automotive companies, bringing
the net cost for these programs during FY 2009 to
approximately $41.4 billion.

As further disbursements are made in FY 2010 and
later, the costs of the TARP program are likely to
This report also provides an update on the costs of TARP.
rise. In particular, the $50 billion Home Affordable
While EESA provided the Secretary of the Treasury with
Modification Program or “HAMP,” is not designed
the authority to purchase or guarantee $700 billion
to recoup money spent on loan modifications to keep
to meet the objectives of the Act, it is clear today that
people in their homes. In addition, the Treasury-OFS’
TARP will not cost taxpayers $700 billion. First, the
assistance to AIG includes an equity facility on which
Treasury’s Office of Financial Stability (Treasury-OFS) is
$27 billion remained undrawn at fiscal year end, and
unlikely to disburse the full $700 billion. In addition,
$30 billion of investments and loans under the Public
many of the investments under the program, particularly
Private Partnership Program will largely be recorded
those aimed at stabilizing banks, are expected to deliver
beginning in FY 2010.
returns for taxpayers. This combination of lower spending and higher expected returns is expected to lower the The ultimate return on the outstanding TARP investprojected costs of TARP from the $341 billion estimate
ments will depend on how the economy and financial
in the President’s Mid-session Budget in August 2009.
markets evolve. The general improvement in economic
During the period ended September 30, 2009, the
Treasury-OFS disbursed $364 billion of the authorized
$700 billion, most of it in the form of investments,
and $73 billion of those TARP funds have already been
repaid as of such date. In addition, for the period ended
September 30, 2009, the investments generated $12.7
billion in cash received through interest, dividends, and
the proceeds from the sale of warrants. For those TARP
disbursements in FY 2009, the Treasury-OFS reported
net cost of operations of approximately $41.6 billion
including administrative expenses. The reported net cost
of operations includes the estimated net cost related
to loans, equity investments, and asset guarantees. As
additional funds are distributed, particularly for the
housing initiative, the total cost is likely to rise, although
anticipated to remain substantially below the $341 billion estimate in the August 2009 Midsession estimate.

Part 1 • Management’s Discussion and Analysis

Executive Summary

and financial environment, early repayments of TARP
funds and refinements to the valuation models have
significantly lowered expected costs for the program
funds disbursed in FY 2009 by $110 billion below
the estimates made when the programs were initiated.
About $10 billion of that decline in costs stems from
early repayments of TARP funds.
These estimates will change. The design and the precise
amounts of additional investments for small banks and
to facilitate small business lending have not yet been
determined. In addition, the ultimate return on TARP
investments is subject to significant uncertainty as
market conditions evolve.
While this report provides updated information on
TARP’s costs, the initiative should be evaluated primarily based on its impact on stabilizing the financial
system. These investments were not made to make

Executive Summary

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

money but to help prevent a collapse of our financial
system and lay the foundation for economic recovery.
Today, the financial system and the economy are
showing signs of stability. The cost of borrowing has
declined to pre-crisis levels for many businesses, states
and local governments, the government sponsored
enterprises (GSEs), and the banks. Housing markets
have shown signs of stabilization, and home prices have
ticked up in recent months, after three straight years of
declines. The economy grew in the third quarter, and
most private economists predict it will grow for the
remainder of this year and next.

To administer the programs under TARP, the Secretary
of the Treasury has established Treasury-OFS, which
is designed to be temporary in nature, but also highly
skilled and well equipped to handle the complexity of
TARP initiatives. At the same time, Treasury-OFS’ process is designed to be highly transparent. Congress and
taxpayers are kept informed of TARP’s actions, results,
investments and costs through frequent and timely public reports, daily communication with oversight bodies,
public responses to oversight reports, and direct outreach
to taxpayers through its websites: FinancialStability.
gov and MakingHomeAffordable.gov.

That improvement in the economic and financial
outlook since the spring reflects a broad and aggressive
policy response that included the financial stability
policies implemented under TARP, efforts to bolster
confidence in the housing and mortgage markets under
the Housing and Economic Reform Act (HERA),
other financial stability policies implemented by the
Federal Deposit Insurance Corporation and the Board
of Governors of the Federal Reserve System (Federal
Reserve), accommodative monetary policy, and the
Obama Administration’s fiscal stimulus package
implemented under the American Recovery and
Reinvestment Act of 2009.

Because of the magnitude and importance of these
programs, Congress established a strong oversight
structure to ensure accountability. The Government
Accountability Office (GAO), the Special Inspector
General for TARP (SIGTARP), the Congressional
Oversight Panel (COP) and the Financial Stability
Oversight Board (FINSOB) engage in frequent reviews
of TARP activities and have contributed to making the
programs stronger and more effective.

While TARP was necessary, it has put the federal
government in the unwelcome position of owning
sizeable stakes in private sector companies. Given that
unusual position as a reluctant shareholder, TreasuryOFS has established a core set of principles to guide its
actions. First and foremost, Treasury-OFS is seeking to
protect taxpayers by minimizing the long-term consequences of the current economic and financial crisis
with as little direct cost to the taxpayer as possible. As
economic and market conditions improve, TreasuryOFS aims to dispose of its investments as quickly as
practicable, in a timely and orderly manner consistent
with the duty to promote financial stability and protect
taxpayers’ interests.

Executive Summary

Despite TARP’s positive record to date, and the
improving financial and economic outlook, significant
challenges remain for the financial sector and our
economy. While the economy is growing again, jobs
are still being lost and the unemployment situation
continues to worsen. The pace of bank failures,
which tends to lag economic cycles, remains elevated.
Foreclosure rates also remain very high, and bank
lending has contracted, with credit standards tight.
Commercial real estate losses weigh heavily on many
banks, especially on smaller banks, impairing their
ability to extend new loans. Small businesses have
been particularly affected because they rely heavily
on bank lending and do not have the ability to raise
capital through the securities markets.
While a number of TARP initiatives, particularly
those for large institutions, have begun to wind down,
Treasury-OFS continues to focus on stabilizing the

Part 1 • Management’s Discussion and Analysis

housing markets as well as improving access to credit for
small businesses. Treasury-OFS is also mindful of the
fact that risks remain, and history suggests that exiting
too soon from policies designed to contain a financial
crisis can significantly prolong an economic downturn.
It is within this larger context that the Secretary of the
Treasury will evaluate and decide whether to extend
TARP authority past December 31, 2009.

Executive Summary

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

Section One:
Background and Creation of TARP
Stresses in U.S. financial markets began to emerge
in 2007 as the performance of subprime mortgages
deteriorated significantly, and losses on related securities began to climb. With the extent and distribution
of losses quite uncertain, concerns surfaced about the
financial condition of banks and other financial institutions. Pressures in short-term funding markets escalated and some off-balance sheet funding vehicles were
not able to renew their asset-backed commercial paper,
raising concerns about the ability of sponsoring banks
to meet funding needs. As a consequence, short-term
credit markets came under considerable pressure and
risk spreads in interbank funding markets and in some
segments of the commercial paper (CP) market rose
sharply. Announcements of large asset write-downs and
weak financial reports for many large financial institutions in late 2007 raised additional concerns about the
resilience and capital adequacy of financial counterparties and the likelihood of further large losses.
Continuing declines in mortgage loan performance,
market valuations of mortgage-related assets, and the
credit ratings of even so-called “super-senior” tranches
of structured finance securitizations heightened the
pressure on financial institutions with significant
known exposures in these areas. Market participants
became increasingly cautious and, in some cases,
unwilling to extend funding to the most-affected
institutions, as in the case of Bear Stearns. In March
2008, the Federal Reserve, with the full support of
the Treasury, facilitated a merger of Bear Stearns with
JPMorgan Chase to prevent a disorderly collapse of
the firm and potentially severe spillover effects in the
financial markets. The condition of financial guarantors weakened, calling into question the value of the
insurance they had written, leading to declines in the
value of products insured by these entities. In March
2008, the Federal Reserve introduced two new liquidity facilities (the Primary Dealer Credit Facility and the

Term Securities Lending Facility), which increased the
liquidity available to primary dealers.
Pressures in financial markets initially appeared to ease
somewhat as a consequence of these actions. However,
housing conditions and the broader economy continued to deteriorate, and financial institutions came
under renewed stress in the summer of 2008. Capital
market dislocations and volatility combined with losses
and expectations of further losses on mortgage-related
assets resulted in the debt spreads of Fannie Mae and
Freddie Mac widening and these two companies becoming unable to raise new capital or long-term debt.
In September, the Federal Housing Finance Agency
(FHFA) placed these firms into conservatorship while
obtaining backup capital and funding support from
Treasury under authority granted in July 2008 by the
Housing and Economic Recovery Act of 2008.
In mid-September, a series of events caused the crisis
to escalate. Lehman Brothers came under heightened
funding pressures, and on September 15, 2008, the
parent company filed for bankruptcy protection.
American International Group, Inc. (AIG), a global
insurance company, experienced severe liquidity pressures, necessitating assistance from the Federal Reserve,
with the concurrence of Treasury, on September 16,
2008, to prevent the potential for severe systemic
consequences from a disorderly failure of the firm.
In the wake of the bankruptcy of Lehman Brothers
and the near failure of AIG, spreads on interbank
borrowing jumped to a record high as banks sought
to safeguard their own liquidity and interbank lending volumes contracted sharply. Losses on Lehman
Brothers commercial paper caused a money market
mutual fund to experience Net Asset Valuations of
less than $1 per share (i.e., “breaking the buck”) and
investors accelerated withdrawals from prime money
market funds, forcing sales of their CP holdings. Total
CP outstanding fell sharply, leaving many financial and
nonfinancial businesses with sharply reduced access

Section 1: Background and Creation of Tarp

The loss of confidence in financial institutions also
contributed to the failure of Washington Mutual, the
largest U.S. thrift institution in September 2008. The
FDIC sold the banking operations of the institution to
JPMorgan Chase. Wachovia Corporation subsequently
came under intense funding pressures, and ultimately
was acquired by Wells Fargo & Co. Moreover, as the
financial crisis intensified in the U.S. and abroad, risks
to the stability of the international financial system
increased. To help ease liquidity pressures, the Federal
Reserve in coordination with other central banks
around the globe provided dollar liquidity to banking
institutions through reciprocal currency (or swap)
lines.
Accompanying the pressures in interbank and
other funding markets, and in light of the weakening
economy, banks continued to tighten their credit terms
and standards on loans to their customers. The tighter
terms and standards reduced credit availability, leaving
its imprint on economic activity. In the corporate bond
market, borrowing costs increased dramatically and
the spread of corporate yields to comparable maturity
Treasury yields rose, reflecting financial market stresses
and a weakening economic outlook. Broad stock price
indexes fell sharply, nearly 15 percent in early October
2008, leaving them down about 40 percent since the
beginning of 2008.
This accumulation and confluence of events placed severe financial stresses on financial markets and institutions, and strong pressures on institutions to deleverage

and restrain lending. Because of the dependence of our
economy on the flow of credit, serious strains on credit
providers can impose disproportionately large costs on
the broader economy. Responding to these severe conditions, the Treasury, Federal Reserve, Federal Housing
Finance Agency (FHFA), Federal Deposit Insurance
Corporation (FDIC), and other U.S. government
bodies undertook an array of unprecedented actions in
accordance with their respective authorities. However,
additional resources and authorities were needed to
help address the significant problems in the financial
markets and the dangers posed by such problems to
consumers, businesses, and the broader economy. To
provide additional resources and authorities, Congress
passed the Emergency Economic Stabilization Act of
2008 (EESA)1 which was signed into law by President
George W. Bush on October 3, 2008. The purposes
of EESA were to provide authority and facilities that
the Secretary of the Treasury could use to restore
liquidity and stability to the financial system of the
United States, and to ensure that such authority and
facilities were used in a manner that protected home
values, college funds, retirement accounts, and life
savings; preserved home ownership; promoted jobs
and economic growth; maximized overall returns to
the taxpayers of the United States; and provided public
accountability for the exercise of such authority.

Part 1 • Management’s Discussion and Analysis

to needed short-term funds. Many such institutions
tapped existing back-up lines of credit at banks, adding
to the pressure on liquidity funding needs of those
banks. To support the functioning of money market
mutual funds, on September 19, 2008, the Treasury
initiated an insurance program for existing balances at
money market mutual funds. In addition, the Federal
Reserve established the Asset-Backed Commercial
Paper Money Market Mutual Fund Liquidity Facility
(AMLF) to provide liquidity to money market mutual
funds that were holding asset-backed commercial
paper.

Mission and Organizational
Structure
The EESA established the Office of Financial Stability
(OFS) within the Office of Domestic Finance of the
Treasury Department to implement the TARP. The
mission of Treasury-OFS is to carry out the authorities
given to the Secretary of the Treasury to implement
the Troubled Asset Relief Program (TARP). Section
101 of EESA authorized the Secretary of the Treasury
to establish the TARP to “purchase, and to make and
1

The Emergency Economic Stabilization Act of 2008 (EESA),
Pub. L. No. 110-343, 122 Stat.3765 (2008), codified at 12
U.S.C. §§ 5201 et seq.

Section 1: Background and Creation of Tarp

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

fund commitments to purchase, troubled assets from
any financial institution, on terms and conditions as
are determined by the Secretary”. EESA defines the
terms “troubled assets” and “financial institution” and

provides other requirements that must be met for any
such purchase. The statute also provides authority for a
guarantee program for troubled assets.

EESA Section 101: Definitions

Troubled Assets are defined by EESA as residential or
commercial mortgages and any securities, obligations or other instruments that are based on or
related to such mortgages, that in each case was
originated or issued on or before March 14, 2008,
the purchase of which the Secretary of the Treasury
determines promotes financial market stability; and
any other financial instrument that the Secretary of
the Treasury, after consultation with the Chairman
of the Board of Governors of the Federal Reserve
System, determines the purchase of which is necessary to promote financial market stability, but only
upon transmittal of such determination, in writing,
to the appropriate committees of Congress.

Financial Institutions are defined by EESA as any
institution, including, but not limited to, any bank,
savings association, credit union, security broker
or dealer, or insurance company, established and
regulated under the laws of the United States or any
State, territory, or possession of the United States,
the District of Columbia, Commonwealth of Puerto
Rico, Commonwealth of Northern Mariana Islands,
Guam, American Samoa, or the United States
Virgin Islands, and having significant operations in
the United States, but excluding any central bank
of, or institution owned by, a foreign government.

Treasury-OFS is headed by an Assistant Secretary of the
Treasury, appointed by the President with the advice
and consent of the Senate. Reporting to the Assistant
Secretary for Financial Stability are seven major
divisions: the Offices of the Chief Investment Officer,
the Chief Financial Officer, the Chief for Investment
Operations/Technology, the Chief Homeownership

Preservation Officer, the Chief Administrative Officer,
the Chief Reporting Officer, and the Chief for OFS
Internal Review. A Chief Counsel’s Office reports to
the Assistant Secretary and to the Office of the General
Counsel in the Department of Treasury.
Treasury-OFS organization chart is shown below:

Assistant Secretary
for
Financial Stability

Chief
Investment
Officer

Chief
Financial
Officer

Chief
Investment
Operations/Technology

Additional information regarding the operations of
these divisions and other aspects of Treasury-OFS’

Chief
Homeownership
Preservation Officer

Financial Agents (OFA)

Chief Counsel

Chief
Administrative
Officer

Chief
Reporting
Officer

Chief
OFS Internal
Review

operations can be found in Section Ten [Other
Management Information] of this report.

Section 1: Background and Creation of Tarp

This section provides a broad overview of the TARP. It
begins by placing the program in context, explaining
why it was a necessary ingredient of a coordinated government response to contain and resolve the financial
crisis. This is followed by a discussion of Treasury-OFS’
strategic goals, and how particular programs and activities were developed to meet each of these goals. Next,
this section presents the TARP financial summary for
the period ended September 30, 2009. Finally, this
section concludes with a discussion of the aggregate
impact of TARP and other government financial
policies on financial markets and institutions. These are
the metrics by which we evaluate success or failure of
government support policies.

TARP in Context:
A Critical Pillar of
a Coordinated
Government Response
This crisis really began in August 2007. The Federal
Reserve, and to a lesser extent the FDIC, led the policy
response during the first year of the crisis. Before
September 2008, the Federal Reserve was providing
sorely-needed liquidity to many financial institutions,
which allowed them to meet near-term obligations.
The FDIC was insuring deposits, which helped quell
traditional bank runs, and it was resolving troubled
depository institutions, such as IndyMac.
But when stress in the system dramatically intensified
in the wake of the Lehman Brothers failure, investors
began to question whether the financial system was
solvent and confidence collapsed. A different sort of
policy response was needed.
The Federal Reserve does not have the authority to
directly inject capital into banks and other financial

institutions to address potential capital shortfalls.
Although it has expanded the scope of eligible borrowers and collateral over the past few years, the Federal
Reserve’s liquidity provision is confined to secured
lending against good collateral. This is a powerful, but
limited tool. The large amount of troubled assets held
by financial institutions heightened the markets’ fears.
The FDIC has a broader toolset in some respects—
including the ability to inject capital or to purchase or
guarantee liabilities—but only for depository institutions. This too proved a stabilizing factor. But in the
fall of last year the crisis spread well beyond traditional
banks, and threatened to exceed the limitations of the
FDIC’s capacity to effectively respond. Investors feared
that U.S. financial institutions needed, in the aggregate, hundreds of billions of dollars to offset potential
credit losses.

Part 1 • Management’s Discussion and Analysis

Section Two:
Overview and Analysis of the Troubled Asset Relief Program

In this context the passage of EESA was essential. It
gave the Secretary of the Treasury temporary authority
to purchase and guarantee assets in a wide range of
financial institutions and markets. As explained below,
that step, combined with the actions of other government agencies and the Federal Reserve, helped prevent
the potential collapse of the U.S. financial system. To
date, the cost has been considerably less than what was
originally projected. Today, EESA programs continue
to stabilize and rehabilitate still fragile markets and
institutions, while repayments of the government’s
investments over the past year have already begun.

OFS Strategic Goals
The purpose of EESA is to provide the Secretary of the
Treasury with the authorities and facilities necessary
to stabilize the U.S. financial system. In addition, the
Secretary is directed to ensure that such authorities are
used in a manner that protects home values, college

Section 2: Overview and analysis of the Troubled Asset Relief Program

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

funds, retirement accounts, and life savings; preserves
homeownership; promotes jobs and economic growth;
maximizes overall returns to taxpayers; and provides
public accountability. EESA also provided specific
authority to take certain actions to prevent avoidable
foreclosures.
In light of this statutory direction, Treasury-OFS
established the following as its operational goals:
1. Ensure the overall stability and liquidity of the
financial system.
a. Make capital available to viable institutions.
b. Provide targeted assistance as needed.
c. Increase liquidity and volume in securitization
markets.
2. Prevent avoidable foreclosures and help preserve
homeownership.
3. Protect taxpayer interests.
4. Promote transparency.
1. Ensure the Overall Stability and Liquidity of the
Financial System
To ensure the overall stability and liquidity of the
financial system, Treasury-OFS developed several
programs under the TARP that were broadly available
to financial institutions. Under the Capital Purchase
Program (CPP), Treasury-OFS provided capital
infusions directly to banks and insurance companies
deemed viable by their regulators but in need of a
stronger asset base to weather the crisis. The Capital
Assistance Program (CAP) was developed to supplement the Supervisory Capital Assessment Program
(SCAP), or “stress test” of the largest U.S. financial
institutions. If these institutions were unable to raise
adequate private funds to meet the SCAP requirements, Treasury-OFS stood ready to provide additional
capital.
In addition, Treasury-OFS provided direct aid to
certain financial industry participants through the
Targeted Investment Program (TIP) and the Asset
Guarantee Program (AGP), as well as the program

originally known as the Systemically Significant Failing
Institutions (SSFI) program. These programs were designed to mitigate the potential risks to the system as a
whole from the difficulties facing these firms. (Because
SSFI was used only for investments in American
International Group, Inc. (AIG), such investments are
now referred to as the AIG Investment Program.)
Similarly, the Automotive Industry Financing
Program (AIFP) provided funding for General Motors
Corporation (GM) and Chrysler LLC (Chrysler), as
well as their financing affiliates in order to prevent a
significant disruption of the automotive industry that
would have posed a systemic risk to financial markets
and negatively affected the real economy. TreasuryOFS’ actions helped GM and Chrysler undertake
massive and orderly restructurings through the bankruptcy courts that have resulted in leaner and stronger
companies.
The Public-Private Investment Program (PPIP) was
established to facilitate price discovery and liquidity
in the markets for troubled real estate-related assets
as well as the removal of such assets from the balance
sheets of financial institutions. In addition to these
initiatives, Treasury implemented the Consumer and
Business Lending Initiative (CBLI) to enhance liquidity and restore the flow of credit to consumers and
small businesses. The primary program through which
the CBLI operated in 2009 was the Term Asset-Backed
Securities Loan Facility (TALF). Through this combination of tools, the TARP helped strengthen a broad
set of financial institutions and markets.
Details on all of these efforts, including
program-specific results, can be found in Section
Three [Ensuring Stability and Liquidity].
2. Prevent Avoidable Foreclosures and Preserve
Homeownership
To prevent avoidable foreclosures and preserve homeownership, Treasury used authority granted under
EESA to establish the Home Affordable Modification
Program (HAMP) in February 2009. Other government policies have helped keep home mortgage rates

Section 2: Overview and analysis of the Troubled Asset Relief Program

3. Protect Taxpayer Interests
Government financial programs, including TARP,
helped prevent the U.S. financial system from collapse,
which could have resulted in a much more severe contraction in employment and production. The manner
in which TARP was implemented is also designed to
protect taxpayers and to compensate them for risk. For
example, in exchange for capital injections, recipients
of TARP funds have to adhere to corporate governance
standards, limit executive pay, and provide additional
reporting on lending activity. In addition, TreasuryOFS generally received preferred equity, which provides dividends. The dividend rates increase over time
to encourage repayment.
Further, EESA stipulated that the taxpayer benefit as
the institutions which received TARP funds recovered.
In connection with most investments, Treasury-OFS
also receives warrants for additional securities in the institutions. Under the broad programs described above,
the Treasury-OFS has priority over existing shareholders of TARP recipients for which TARP holds equity
investments. This gives taxpayers the ability to share in
the potential upside along with existing shareholders.

4. Promote Transparency
EESA requires transparency and accountability.
Specifically, EESA requires Treasury to provide
Congress with a variety of reports. These include
a monthly report to Congress on TARP activity, a
“tranche” report each time Treasury reaches a $50
billion spending threshold, and transaction reports
posted within two days detailing every TARP transaction. In carrying out its operations, Treasury-OFS has
sought to not only meet the statutory requirements
but also to be creative and flexible with respect to
additional transparency initiatives. Treasury-OFS
proactively provides to the public monthly Dividends
and Interest Reports reflecting dividends and interest
paid to Treasury-OFS from TARP investments, loans,
and asset guarantees, as well as monthly reports
detailing the lending activity of participants in the
Capital Purchase Program. All of these reports are
publicly available on FinancialStability.gov.

Part 1 • Management’s Discussion and Analysis

at historic lows and allowed millions of Americans
to refinance and stay in their homes. But because of
falling housing prices, many responsible homeowners
are unable to refinance. Meanwhile, job losses and
reductions in working hours and benefits are making
it harder for these Americans to pay their mortgages.
HAMP provides incentives to mortgage servicers,
investors, and homeowners to work together to reduce
an eligible homeowner’s monthly payments to levels
that are affordable in light of the homeowner’s current
income. HAMP operations and program detail are
provided in Section Four [Preventing Foreclosures and
Preserving Homeownership].

EESA also provided for extensive oversight of the
TARP, including by the Congressional Oversight
Panel, the Special Inspector General for the TARP,
and the Government Accountability Office. In addition, Treasury-OFS officials frequently testify before
Congress on the progress of TARP programs, and
Treasury-OFS staff provide briefings to Congressional
staff on programmatic developments.
Further details on these efforts are provided in Section
Six [Promoting Transparency].

Finally, the Treasury-OFS seeks to achieve the goal of
protecting the taxpayer through the effective management and disposition of all TARP investments, as
detailed in Section Five [Protecting Taxpayer Interests].

Section 2: Overview and analysis of the Troubled Asset Relief Program

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

TARP Timeline
The following timeline illustrates major events in the implementation of the TARP.

TARP

Oct. 14, 2008
Treasury announces the Capital Purchase Program
(CPP) and intention to purchase up to $250 billion in
preferred stock from ﬁnancial institutions

Timeline

Nov. 23, 2008
Treasury
announces the
Targeted Invest ment Program
(TIP) and Asset
Guarantee Pro gram (AGP)

Nov. 10, 2008
Treasury an nounces that it
will purchase $40
billion in senior
preferred stock
from AIG

Feb. 4, 2009
Treasury issues
new guidelines
on executive
compensa tion for ﬁrms
participating in
TARP

Feb. 10, 2009
Treasury
announces
the Financial
Stability Plan

Mar. 23, 2009
Treasury and the
Federal Reserve
announce the PublicPrivate Investment
Program (PPIP)

Oct. 8, 2009
Treasury announces
a milestone of more
than 500,000 trial
loan modiﬁcations
in progress under
the Making Home
Aﬀordable Program

Oct. 3, 2008 Congress
passes EESA, which
authorizes TARP

Nov. 25, 2008
Treasury
announces it
will allocate
$20 billion to
back the Term
Asset-backed
Securities Loan
Facility (TALF)

Feb. 17, 2009
Treasury releases
its ﬁrst Monthly
Lending and
Intermediation
Snapshot

May 15, 2009
Treasury receives $2.8
billion in dividend
payments from TARP
investments, the largest
amount of dividends
received in one day

Oct. 21, 2009
President Obama
announces new
initiatives to
make it easier for
community banks
to lend to small
businesses

Dec. 19, 2008
Treasury announces
the Automotive
Industry Financing
Program (AIFP)
and its plan for
stabilizing the na tion’s automotive
industry

Feb. 18, 2009
Treasury announces the
Homeowner Aﬀord ability and Stability
Plan, which includes the
Home Aﬀordable
Modiﬁcation Program

June 1, 2009
Treasury releases its
ﬁrst CPP Monthly
Lending Report

Oct. 22, 2009
Special Master for
TARP Executive
Compensation
issues ﬁrst rulings

Oct. 14, 2008
Treasury announces executive com pensation rules under TARP

Jan. 27, 2009
Treasury
announces new
stepped up
rules to limit the
interests of lobby ists and special
interests in the
EESA process

Jan. 16, 2009
Treasury
announces
additional
executive
compensation
rules under
TARP

Feb. 25, 2009
Treasury
announces
the Capital
Assistance
Program

Mar. 3, 2009
Treasury and the
Federal Reserve
launch TALF

June 17, 2009
Ten of the largest banks
repaid their CPP invest ments for over $68
billion in repayments to
Treasury

Nov. 9, 2009
Treasury announces
closure of Capital
Assistance Program
with no invest ments having been
made

Sep. 30, 2009
Treasury announces
initial closings of
Legacy Securities
PPIP funds

Nov. 19, 2009
Treasury announces
its intention to
dispose of sev eral warrant positions
received in consider ation for investments
made under the CPP

Section 2: Overview and analysis of the Troubled Asset Relief Program

The EESA provided authority for the TARP to purchase
or guarantee up to $700 billion in troubled assets. 2
Treasury-OFS used this authority to help strengthen
the U.S. financial system, restore health and liquidity
to credit markets to facilitate borrowing by consumers
and businesses, and prevent avoidable foreclosures in the
housing market. While the TARP should be evaluated
primarily based on its impact on stabilizing the financial
system, a critical factor in the analysis is cost. While
EESA provided $700 billion in authority, the TARP has
not cost taxpayers $700 billion. Treasury-OFS used the
authority to make investments to stabilize the financial
system and expects that much of the funding will be
repaid. While some of the TARP investments may result
in a cost, others are estimated to produce net income.
Treasury-OFS tracks costs in accordance with Federal
budget procedure. First, amounts are allocated or
budgeted to certain programs or needs within the
TARP. Allocations may change over time as needs are
reevaluated. Second, Treasury-OFS enters into legally
binding “obligations” to invest or spend the funds.
Third, funds are disbursed over time pursuant to the
obligations. In any given case, it is possible that the full
amount allocated will not be obligated, and that the
full amount obligated will not be disbursed.
Based on operations for the period ended September 30,
2009, Treasury-OFS reports the following key results:
• Treasury-OFS entered into obligations with a face
value of $454 billion in TARP authority during
the fiscal year.
• In fiscal year 2009, Treasury-OFS disbursed $364
billion in TARP funds to make loans and equity
investments, and reported net cost of operations of
$41.6 billion.
• During fiscal year 2009, Treasury-OFS received
$72.8 billion of repayments on certain investments
and loans made early in FY 2009.
2

The Helping Families Save Their Homes Act of 2009, Pub. L.
No. 111-22, Div. A, amended the act and reduced the maximum
allowable amount of outstanding troubled assets under the act by
almost $1.3 billion, from $700 billion to $698.7 billion.

• At September 30, 2009, Treasury-OFS reported
$240 billion for the value of loans, equity investments, and asset guarantees.
Treasury-OFS’ FY 2009 net cost of operations of
$41.6 billion includes the total estimated net cost
related to loans, equity investments and asset guarantees. The total ultimate cost of the TARP is expected to
be higher because additional investments and disbursements have been made or will be made after FY 2009.
Due to its program structure, the $50 billion HAMP
has delayed payments as well as a long disbursement
cycle so the FY 2009 amounts include only $2 million
in cost. In addition, AIG has drawn an additional
$2.1 billion on its $29.8 billion equity capital facility
since September 30, 2009, and may draw down the
additional funds available to it,which may result in
additional cost. Including these costs as well as the
Public-Private Investment Program and other costs is
likely to significantly increase the estimated lifetime net
cost for TARP. For programs where funds have been
obligated but not yet disbursed, the future outlays in
some cases are dependent on program subscription or
other uncertain factors. In addition, new commitments
may be made under TARP prior to EESA’s expiration.
As described further throughout this report, the valuation of the TARP investments will naturally change
based on many factors.

Part 1 • Management’s Discussion and Analysis

FY 2009 Financial Summary
for TARP

As of September 30, 2009, Treasury-OFS currently
projects that four programs will produce a net return
to taxpayers. The Capital Purchase Program, the
Targeted Investment Program, the Asset Guarantee
Program, and the Consumer and Business Lending
Initiative had reported net income of $19.5 billion.
Also, as of September 30, 2009, Treasury-OFS reports
that two programs—the AIG Investment Program and
the Automotive Industry Financing Program—will
have net costs to taxpayers of $60.9 billion. Taking
into consideration the gains, the total net cost for
TARP to taxpayers, based on disbursements made as
of September 30, 2009, is reported to be $41.4 billion.
Accrued expenses for the HAMP as of September 30,
2009, of $2 million and administrative expenses for
the year of $167 million bring the total estimated net
costs to $41.6 billion, as shown in Table 1.

Section 2: Overview and analysis of the Troubled Asset Relief Program

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

change, either increasing or decreasing the ultimate cost
of the TARP. HAMP expenses will increase significantly
over time, as more modifications of mortgage payments
are finalized between mortgage servicers and borrowers,
resulting in increased incentive payments. These payments are described in Section Four.

table 1: net income (c0st) of tarp operations
for the period ended september 30, 2009
($ in Millions)
Programs with Estimated Subsidy Income
Capital Purchase Program
Targeted Investment Program
Asset Guarantee Program
Consumer and Business Lending Initiative
Net Income (Cost) from Programs Above

15,033
1,927
2,201
339
19,500

Programs with Estimated Subsidy (Cost)
American International Group, Inc.
Investments
Automotive Industry Financing Program
Net (Cost) of Two Programs Above

(30,427)
(30,477)
(60,904)

Total Net Subsidy Income (Cost)

(41,404)

Additional TARP (Costs)
Home Affordable Modification Program
Administrative Costs
Total Net (Costs) of TARP Operations

(2)
(167)
(41,573)

Over time the ultimate cost of the TARP programs
may change. As described later in this MD&A, and in
Treasury-OFS audited financial statements, these estimates are based in part on currently projected economic
factors. Forecasts for these economic factors will likely

Table 2 provides a financial summary for TARP
programs in FY 2009. For each program, the table
gives the face value of the amount obligated by each
program, the amount actually disbursed during the
fiscal year, repayments to Treasury-OFS during the
period from program participants, net outstanding
balance (the amount on the original investment that is
due to be repaid to Treasury) on September 30, 2009,
and cash inflows on the investments for each program
in the form of dividends, interest or other fees. As of
fiscal year end 2009, approximately $317 billion of
the $700 billion in purchase and guarantee authority
remained available, taking into account $72.8 billion
in repayments. However, this does not include the
full planned amounts for the HAMP, Public Private
Investment Program (PPIP), Consumer and Business
Lending Initiative, and other programs.

Table 2: TARP Summary 1
As of September 30, 2009
($ in Billions)
Purchase Price or
Guarantee Amounts

Total $
Disbursed

Cash
Outstanding Received from
Balance
Investments

Investment
Repayments

Capital Purchase Program

204.6

70.7

133.9

9.7

Targeted Investment Program

40.0

0.0

40.0

1.9

Asset Guarantee Program

5.0

0.0

0.5

American International Group Investment2

69.8

43.2

0.0

43.2

0.0

Term Asset-Backed Securities Loan Facility

20.0

0.1

0.0

0.1

0.0

Public Private Investment Program3

6.7

0.0

Automotive Industry Financing Program

81.1

75.9

2.1

73.8

0.7

Home Affordable Modification Program4

27.1

0.0

Totals

454.3

363.8

291.0

12.7

NA
$

72.8

1/ This table shows the TARP activity for the period ended September 30, 2009, on a cash basis. Cash received from investments includes dividends and interest
income reported in the Statement of Net Cost and proceeds from repurchases of warrants and warrant preferred stock.
2/ The disbursed amount is lower than purchase price because of the $29.8 billion facility available to AIG of which only $3.2 billion was drawn at September
30, 2009. AIG drew an additional $2.1 billion from the facility on November 13, 2009.
3/ Reflects the face value of obligations as of September 30, 2009. As of that date, no fund managers had made any investments and Treasury-OFS expects to
provide a total of $30 billion in funding to the nine fund managers selected for PPIP.
4/ Reflects legal commitments to servicers as of September 30, 2009. Treasury-OFS has allocated $50 billion in total for the program. Payments are made to
servicers once temporary modifications are made permanent.

Section 2: Overview and analysis of the Troubled Asset Relief Program

(Treasury-OFS receives warrants for preferred stock in
the case of most private institutions, which are exercised immediately. The receipts from warrants include
receipts from the repayment of such preferred shares,
or “warrant preferred stock”.)
Table 3: TARP FY 2009 Receipts and
Repayments on Investments/Loans 1
For the period ended September 30, 2009
($ in billions)
Dividends, Interest, Fees and Warrants Repurchases

Interest

Treasury-OFS also receives warrants in connection
with most of its investments, which provides an opportunity for taxpayers to realize an upside on investments. Treasury-OFS has begun to dispose of some of
its warrants as institutions repay their preferred share
investments. For the period ended September 30,
2009, twenty-four institutions have already repurchased
their warrants which generated $2.9 billion in receipts.
Table 4 provides information on the institutions that
have fully repurchased the CPP preferred shares and
repurchased warrants as well as those that have fully
repurchased their preferred shares but not their warrants.

Dividends and Fees

9.6

0.2

Repurchases of Warrants and Warrant Preferred Stock

2.9

Additional Notes

0.0

Subtotal

12.7

Repurchases/Repayments on preferred stock

70.7

Loan Principal Repaid

2.1

Subtotal

72.8

Grand Total

Part 1 • Management’s Discussion and Analysis

Most of the TARP funds have been used to make investments in preferred stock or make loans. TreasuryOFS has generally received dividend on the preferred
stock and interest payments on the loans from the
institutions participating in TARP programs. These
payments are a return on Treasury’s TARP investments. For the period ended September 30, 2009,
Treasury-OFS received a total of $9.8 billion in
dividends, interest and fees. Table 3 shows the breakdown of receipts for the period ended September 30,
2009 for all TARP programs combined.

85.5

Investment/Loan Repayments

1/ This table shows the TARP activity for the period ended September 30,
2009, on a cash basis. The table includes receipts and repayments that
do not result in revenue in the Statement of Net Cost.

Section 2: Overview and analysis of the Troubled Asset Relief Program

O F F I C E O F F I N A N C I A L S TA B I L I T Y • Ag ency F inancial R e p ort • F iscal Y ear 2 0 0 9

Table 4: Repurchases of Preferred Shares
($ in millions)
Proceeds from
Total
Preferred Shares
Dividends
Institution
Redeemed
Received
Institutions with fully repurchased preferred shares and repurchased warrants or warrant preferred stock

Proceeds
from Warrants
Repurchased

Alliance Financial Corporation
American Express Company
Bancorp Rhode Island, Inc.
Bank of New York Mellon
BB&T Corp.
Berkshire Hills Bancorp, Inc.

$
$
$
$
$
$

26.9
3,388.9
30.0
3,000.0
3,133.6
40.0

$
$
$
$
$
$

0.5
74.4
0.9
95.4
92.7
0.9

$
$
$
$
$
$

0.9
340.0
1.4
136.0
67.0
1.0

Centra Financial Holdings, Inc.
First Manitowoc Bancorp, Inc.
First Niagara Financial Group
First ULB Corp.
FirstMerit Corporation
Goldman Sachs Group, Inc.
HF Financial Corp.
IberiaBank Corporation
Independent Bank Corp.
Morgan Stanley
Northern Trust Corporation
Old Line Bancshares, Inc.
Old National Bancorp
SCBT Financial Corporation
Somerset Hills Bancorp
State Street Corporation
Sun Bancorp, Inc.
U.S. Bancorp
Subtotal

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

15.0
12.0
184.0
4.9
125.0
10,000.0
25.0
90.0
78.2
10,000.0
1,576.0
7.0
100.0
64.8
7.4
2,000.0
89.3
6,599.0
40,597.0

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

0.2
0.2
4.8
0.1
1.8
318.1
0.7
1.5
1.1
318.1
46.6
0.2
1.5
1.1
0.1
63.6
1.1
195.2
1,220.7

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

0.8
0.6
2.7
0.2
5.0
1,100.0
0.7
1.2
2.2
950.0
87.0
0.2
1.2
1.4
0.3
60.0
2.1
139.0
2,900.9

28.0
3,555.2
27.9
130.0
100.0
41.5
25,000.0
1.7
25.0
120.0
125.2
361.2
75.0
200.0
75.0
29,865.6

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

0.5
105.2
1.2
4.7
3.3
1.3
795.1
0.1
0.3
1.8
2.5
7.9
1.2
5.4
2.9
933.4

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—

12.5
200.0
41.9
254.4
70,717.0

$
$
$
$
$

1.6
11.2
2.2
15.0
2,169.1

$
$
$
$
$

—
—
—
—
2,900.9

Institutions with fully repurchased preferred shares but warrants are outstanding

Bank of Marin Bancorp
Capital One Financial Corp
Centerstate Banks of Florida Inc.
CVB Financial Corp.
F.N.B. Corporation
First Community Bancshares Inc.
JPMorgan Chase & Co.
Manhattan Bancorp
Shore Bancshares, Inc.
Signature Bank
Sterling Bancshares, Inc.
TCF Financial Corporation
Texas Capital Bancshares, Inc.
Washington Federal S and L Association
Wesbanco, Inc.
Subtotal

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

Institutions making partial repurchases of preferred shares and outstanding warrants

State Bankshares, Inc.
Valley National Bancorp
Westamerica Bancorporation
Subtotal
Total

$
$
$
$
$

Section 2: Overview and analysis of the Troubled Asset Relief Program

In Table 5 below, the Outstanding Balance column represents the amounts paid by Treasury-OFS to acquire the
loans and equity investments that were outstanding as
of fiscal year end. The Estimated Value of Investment column represents the present value of net cash inflows that
Treasury-OFS estimates it will receive from the loans and
equity investments. For equity securities, this amount
represents fair value. The total difference of $53.1 billion
between the two columns is considered the “subsidy cost
allowance” under the Federal Credit Reform Act methods Treasury-OFS follows for budget and accounting
purposes (see Section Seven for further discussion).3

Table 5: Summary of TARP Investments
($ in billions)

Outstanding
Balance 1

Estimated
Value of
Investment
9/30/09

Capital Purchase Program

$ 133.9

$ 141.7

Targeted Investment Program

$ 40.0

$ 40.3

AIG Investment Program

$ 43.2

$ 13.2

Automotive Industry Financing Program

$ 73.8

$ 42.3

$ 0.1

$ 0.4

$ 291.0

$ 237.9

Program

Term Asset-Backed Securities Loan
Facility
Total
1/ Before subsidy cost allowance

Table 6 below shows the estimated net asset value for
the top ten CPP investments held as of September
30, 2009. The estimates shown below include only
estimates of the value of the preferred stock for each
institution. Treasury-OFS also holds warrants for each
institution and those warrants have additional value.
As Treasury-OFS will still need to negotiate a sale
price for the warrants, the estimated warrant value of
each institution cannot be disclosed without harming
Treasury-OFS’ ability to secure the best return for taxpayers. Through an exchange process, Treasury-OFS
received common shares at $3.25 per share for the
originally issued preferred shares in Citigroup which
had an initial investment of $25 billion. The holdings
of Citigroup common shares had a market value of
$37.23 billion ($4.84 per share) as of September 30,
2009.

Part 1 • Management’s Discussion and Analysis

The ultimate cost of the TARP will not be known for
some time. The financial performance of the programs
will depend on many factors such as future economic
and financial conditions, and the business prospects of
specific institutions. Table 5 provides information on
the estimated values of the TARP investments by program, as of the end of FY 2009. (HAMP is excluded
from the chart because no repayments are required).
The estimates in Table 5 are based on assumptions
regarding future events, which are inherently uncertain. The estimates are sensitive to a number of factors,
including changes in general economic conditions,
specific stock price volatility of the entities in which
Treasury-OFS has an equity interest, estimates of
expected defaults, and prepayments. If Treasury-OFS
experiences higher than currently projected early
repayments, TARP’s ultimate cost will decline further.
Sections Seven and Eight of this report describe the
methods used to determine the estimates.

To reconcile the subsidy cost allowance to the total subsidy cost
amount of $41.4 billion shown in Table 1 and on the Statement
of Net Cost, the $53.1 billion is adjusted by intragovernmental
interest cost, the net present value of the Asset Guarantee
Program, and certain inflows from the loans and equity investments (e.g., dividends, interest, proceeds from repurchase of
warrants by financial institutions, and other realized fees).

Section 2: Overview and analysis of the Troubled Asset Relief Program

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

Table 6: Top Ten CPP Investments
($ in billions)

Institution

Estimated Net Asset
Value (excluding
Original
warrants)1
Investment
as of 9/30/09

Citigroup (Common Shares)

$ 25.00

$ 37.23

Bank of America

$ 25.00

$ 22.45

Wells Fargo

$ 25.00

$ 23.47

PNC Financial

$ 7.58

$ 7.17

SunTrust Bank

$ 4.85

$ 4.14

Regions Bank

$ 3.50

$ 3.01

Fifth Third Bancorp

$ 3.41

$ 3.05

Hartford Financial

$ 3.40

$ 3.11

Keycorp

$ 2.50

$ 1.94

CIT Group

$ 2.33

$ 0

$ 102.57

$ 105.57

Total

1/ Does not reflect the impact of management’s expectation of an additional
$30 billion in early repayments.

Market conditions and the performance of specific
financial institutions will be critical determinants of
the TARP’s final cost. The changes in Treasury-OFS
estimates during the period ended September 30, 2009,
provide a good illustration of this impact. The estimated
net cost of programs implemented to date declined by
approximately $110 billion as compared to the estimates
made while the programs were being initiated in the
heart of the financial market crisis last winter in large
part due to market stabilization seen to date and actual
and forecast repayments occurring at a faster rate than
originally anticipated. In the CPP program for example,
when the cost of the program was first estimated by the
Congressional Budget Office and Treasury-OFS last
winter, the expectation was that the program would
lose about 18-22 percent.4 In large part because of the
improved market conditions, Treasury-OFS estimated a
net income of about $15.0 billion for the period ended
September 30, 2009. Based on the repayments to date
and current market conditions, the major bank stabilization programs, including the CPP and the TIP, are

currently estimated to provide a net financial return to
the taxpayer. The outstanding $174 billion in CPP and
TIP balances are estimated to be worth approximately
$182 billion. However, the outlook for repayments from
the auto industry investments and the AIG Investment
Program is less positive. Treasury-OFS estimates the
$117 billion originally invested in these programs is
currently valued at approximately $56 billion. These
programs may result in a net financial loss to taxpayers.
Table 7 provides information as to how the estimated
cost of the TARP has changed during the period ended
September 30, 2009. The positive amounts reflect an estimated income whereas negative amounts reflect a cost
or expense. For example, the $204.6 billion invested in
the CPP program was originally expected to cost about
$57 billion (in net present value cost). For the period
ended September 30, 2009, Treasury-OFS reported net
income of about $15 billion for CPP. This amount represents primarily the combination of actual dividends,
interest and realized fees, and the excess of estimated fair
value as of September 30, 2009, of the CPP investments
over original cost. Additional explanatory material on
how these estimates were developed can be found in
Sections Seven [Financial Accounting Policy] and Eight
[TARP Valuation Methodology].
Table 7: Estimated Change in NET cost for the
TARP Programs
($ in billions)
Original
Estimate1

Current
Estimate

Capital Purchase Program

- 57.4

+ 15.0

+ 72.4

Targeted Investment Program

- 19.6

+ 1.9

+ 21.5

Asset Guarantee Program

+ 1.0

+ 2.2

+ 1.2

AIG Investment Program

- 31.5

- 30.4

+ 1.1

Automotive Industry Financing
Program

- 43.7

- 30.4

+ 13.3

Term Asset-Backed Securities
Loan Facility

+ 0.1

+ 0.3

+ 0.2

- 151.1

- 41.4

+ 109.7

- 27.1

0.0

- 178.2

- 68.5

+ 109.7

Subtotal
Home Affordable Modification
Program
Total

“The Troubled Asset Relief Program: Report on Transactions
Through December 31, 2008.” Congressional Budget Office.
January 2009.

Net
Change

1/ Original estimates completed on or near the initiation of each program
and adjusted for modifications. Amounts shown in both original and
current estimates are based on total program disbursements through FY
2009.

Section 2: Overview and analysis of the Troubled Asset Relief Program

Confidence in the stability of our financial markets and
institutions has improved dramatically. Interbank lending rates, which reflect stress in the banking system,
have returned to levels associated with more stable
times. For example, the spread of one-month Libor to
the overnight index swap fell from a peak of about 340
basis points5 last fall to roughly 10 basis points at the
end of October 2009, as shown in Figure 1. Creditdefault swap spreads for financial institutions, which
measure investor confidence in their health, have also
fallen significantly. A measure of credit-default swaps
for the largest U.S. banks reached 450 basis points last
fall, as shown in Figure 2, and is just over 100 basis
points today. The TARP was a necessary step, but not
the only step, to achieving this recovery.

5 A basis point is one hundredth of a percentage point or 0.01
percent so 100 basis points equals 1 percent. Basis points are
often used to measure small changes in interest rates or yields on
financial instruments.

400

Lehman

FSP

Basis Points

350
300
250
200
150
100
50
0

2006

2007
1-Month

2008

2009

3-Month

Source: Bloomberg
Figure 2. Credit Default Spreads for Financial Institutions
(basis points)

Basis Points

Measuring the impact of the TARP in isolation is challenging. The health of the overall system and its impact
on the U.S. economy are the most important metrics
by which Treasury-OFS can measure the effectiveness
of these policies. However, the cost of the financial
system collapse that was likely averted by TARP and
the other government actions taken in the fall of 2008
and since then will never be known. Moreover, it is
difficult to measure separately the impact of TARP as
it was part of a coordinated government response to
restore confidence in our financial system. A few TARP
programs were uniquely targeted to specific markets
and institutions. In those instances, Treasury-OFS can
measure performance more directly.

Figure 1. Libor-OIS Spread (basis points)

500
450
400
350
300
250
200
150
100
50
0

Lehman

2006

2007

2008

Part 1 • Management’s Discussion and Analysis

The Impact of TARP

FSP

2009

Source: Bloomberg
Notes: Includes Bank of America, Citigroup, Goldman Sachs, JPMorgan,
Morgan Stanley, and Wells Fargo.

At the same time, borrowing costs have declined for
many businesses, homeowners, and municipalities.
Investment-grade corporate bond rates have fallen by
over 70 percent since last fall, and high-yield bond rates
have fallen by more than half. Fears of default on these
bonds have receded, providing further relief on prices.
The CDX investment-grade index (see Figure 3), an aggregate measure of credit-default swaps for highly-rated
companies, has fallen about 35 percent from its October
2008 peak. Further, conventional 30-year mortgage rates
(see Figure 4) remain under five percent at historic lows.
AAA municipal bond rates are three percent, down from
five percent last fall.

Section 2: Overview and analysis of the Troubled Asset Relief Program

Figure 5. Corporate Bond Issuance (US$ billions)

$160

Dollars (in billions)

$200

500
Basis Points

600

400
300
200
100
0

2006

2007
AA 5-Year

2008

$120
$80
$40
$0

2009

BBB 5-Year

2008
Government Guaranteed

2009
Not Guaranteed

Source: Bloomberg

Source: JPMorgan

Figure 4. Conventional 30-Year Mortgage Rate (percent)

Figure 6. Net Common Issuance by U.S. Banks (US$ billions)

14
13
12
11
10
9
8
7
6
5
4

$60
Dollars (in billions)

Basis Points

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

Figure 3. Corporate Bond Spreads (basis points)

$50
$40
$30
$20
$10
$0
-$10

1985–1997

1998–2009

Source: Federal Reserve

As borrowing costs have come down, businesses have
raised about $900 billion in investment-grade debt and
over $100 billion in high-yield debt this year. While
much of the new issuance early this year was supported
by the federal government, private investors have
funded most new corporate debt in recent months. In
particular, banks have raised substantial capital from
private sources following the release of the results from
the federal government “stress test” of major U.S.
financial institutions. Since the results were released,
banks have raised $80 billion in new common equity
and over $40 billion in debt that is not guaranteed by
the federal government.

-$20

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: SNL Financial
Notes: Excludes equity generated through asset sales and preferred
conversions. Negative figures represent net repurchases of equity.

Securitization markets that provide important channels
of credit for consumers and small businesses have also
improved, in large part because of programs launched
under the TARP. Announcements about TALF helped
narrow spreads in these markets even before the
program began operating. This trend has continued,
with spreads on TALF-eligible asset-backed securities
(ABS) back to pre-crisis levels today, and spreads on
non-TALF-eligible ABS more than 90 percent off their
peaks from last fall. Issuance of ABS backed by consumer and business loans has averaged $14 billion per
month since the government launched TALF in March
2009, compared to about $1.6 billion per month in
the six months prior to the program’s launch. Issuance

Section 2: Overview and analysis of the Troubled Asset Relief Program

Figure 7. Spreads Between TALF-Eligible ABS and Treasury
Securities (basis points)
800

Lehman

FSP

Basis Points

700
600
500
400
300
200
100
0

2006

2007

2008

AAA 2-Yr/Auto ABS

2009

AAA 2-Yr/Credit Card ABS

Source: JPMorgan

Figure 8. Issuance of ABS Backed by Consumer and Small
Business Loans (US$, billions)

$20
$15

Average Post-TALF
(Mar. 2009 - Oct. 2009)

$10
$5

2007

2008

TALF-Eligible ABS

OCT

SEP

AUG

JUL

JUN

MAY

APR

MAR

FEB

JAN

DEC

NOV

OCT

SEP

AUG

JUL

JUN

Average Pre-TALF
(Sep. 2008 - Feb. 2009)
AUG

Dollars (in billions)

$25

2009

Standard ABS

Source: Federal Reserve

Legacy security prices have improved significantly this
year. This is due in part to general market improvement and in part to announcements for the Securities
PPIP. Most of the Public-Private Investment Funds
(PPIFs) have now been formed and are starting to
purchase legacy assets from banks. The PPIFs should
continue to contribute to price improvements in these
markets.

Stock markets have recovered substantial ground since
March, following 18 months of steep declines. The
S&P 500 has risen over 60 percent over the past six
months, and share prices for financial companies in the
S&P 500 have doubled. At the same time, volatility in
stock markets is trending lower and approaching historical norms. The implied volatility of the S&P 500,
as measured by the Chicago Board Options Exchange’s
Market Volatility (VIX), has fallen by over 70 percent
since its peak in October 2008 and is roughly at its
average since 1990. These improvements reflect broadbased confidence not only in the financial system, but
also the prospects for economic recovery.
Indeed, the American economy is growing again. It
expanded at an annual rate of 2.8 percent in the third
quarter of 2009, snapping four consecutive quarters
of negative growth. And private economists generally
expect moderate growth over the next year.

Part 1 • Management’s Discussion and Analysis

not supported by the federal government program
accounted for about 40 percent of all such issuance in
October 2009. However, the overall size of securitization markets remains small, relative to pre-crisis levels.

Meanwhile, housing markets are showing some signs of
stabilizing and household wealth is recovering, which
should stimulate consumer spending—vital to American
economic growth. Thanks in part to federal government
financial policies, mortgage rates remain near historic
lows. Home prices have ticked up over the past six
months, after showing consistent declines since 2006.
For example, the seasonally adjusted S&P/Case-Shiller
U.S. National Home Price Index rose by 1.8 percent
and 1.9 percent in the second and third quarters,
respectively. Since March, sales of existing single-family
homes have increased by 20 percent and over 2.7
million mortgages have been refinanced. Since TreasuryOFS announced its Making Home Affordable program,
over 650,000 trial modifications under HAMP have
been initiated, with roughly a few hundred completing
the trial period by September 30, 2009. Household net
worth increased by $2 trillion in the second quarter, the
first increase since the third quarter of 2007.
However, the financial and economic recovery faces
significant headwinds. Although the unemployment
rate fell in November, it remains high at 10 percent.
This places enormous pressure on homeowners and
American families. Indeed, delinquencies of subprime

Section 2: Overview and analysis of the Troubled Asset Relief Program

Bank lending also continues to contract, as shown in
Figure 10. In the third quarter, commercial and industrial
(C&I) loans outstanding contracted at an annual rate
of 27 percent, and commercial real estate (CRE) loans
outstanding at 8 percent. Small businesses rely on banks
for 90 percent of their financing. Unlike large corporations, few can substitute credit from securities issuances.
The contraction in bank lending reflects a combination
of weak demand for credit and tightening standards
at the banks. The former is a function of the recession
preceded by a period of over expansion. The latter is
in part a function of the fact that many banks face
continued losses on outstanding exposures, in particular
in commercial real estate. FDIC-insured commercial
banks reported that net charge-offs—that is, losses
that have occurred—increased to 2.9 percent as a share
of loans and leases in the third quarter, up from 0.6
percent before the recession. And delinquencies of commercial real estate loans were nine percent in the third
quarter and increasing.

Figure 10. Bank Loans, C&I and CRE (percent change, end of period)

Percent

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

residential mortgages reached over 26 percent and conforming mortgages nearly seven percent in the third
quarter. And although RealtyTrac’s October report
shows a third straight month of decreasing foreclosure
activity, foreclosures are still up nearly 19 percent since
October 2008. Moreover, according to First American
CoreLogic, roughly one in four homeowners owed
more on their mortgages than the properties were
worth in the third quarter of 2009.

20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%

2004

2005

2006
C&I

2007

2008

2009

CRE

Source: Federal Reserve

Bank failures and the number of problem banks
continue to increase. There have been over 120 bank
failures through November 20, 2009, compared with
41 over the decade that preceded the current recession.
And the number of banks that the FDIC classifies
as “problem institutions” has reached 552 this year,
compared with 76 in 2007 and 252 in 2008.
Banks’ willingness to lend also has a significant impact
on consumer spending and, consequently, economic
growth. Macroeconomic Advisors, a consulting firm,
found that a 10-point increase in bank’s willingness to
make consumer installment loans yields a 0.3 percentage point increase in personal consumption expenditures. 6 Figure 11 illustrates this relationship between
bank lending attitudes and consumer spending.

Figure 9. Mortgage Delinquencies (percent)

24%

20%

16%

12%

Subprime

1998–2003
Subprime

Source: Mortgage Bankers Association

2004–2009

Conforming

28%

Conforming

6 Macroeconomic Advisers, “Banks’ Willingness to Lend and PCE
Growth,” Oct. 8, 2008.

Section 2: Overview and analysis of the Troubled Asset Relief Program

Real Personal
Consumption
Expenditures (left)

80
60

Percent

-2

-20

Banks’ Willingness
To Make Consumer
Installment Loans
(right)

-4
-6

-40
-60

-8
1966

Percent yr/yr

8
6

-80
1971

1976

1981

1986

1991

1996

2001

2006

Source: Federal Reserve, BEA

In this context, some federal government financial
support is still necessary. In particular, the TARP can
help stimulate credit for small businesses and assist
responsible homeowners in avoiding foreclosures.
As discussed in more detail below, Treasury-OFS is
redirecting the TARP to meet these needs. TreasuryOFS recently launched initiatives to provide capital
to small and community banks, which are important
sources of credit for small businesses. Treasury-OFS is
also working with the Small Business Administration,
Congress, and the small business community to design
other programs that will use TARP funds to get credit
flowing again to these important engines of economic
growth.

External Assessments
of TARP Performance
The United States Government Accountability Office
(GAO) is one of four oversight bodies explicitly designated by Congress to provide oversight of the TARP.
GAO’s October 2009 anniversary report on the TARP
provides a comprehensive and independent assessment of various aspects of the TARP.7 The GAO also
acknowledges that isolating and estimating the effect of
TARP programs is challenging and that improvements
in credit markets cannot be attibuted solely to TARP
programs. The indicators that the GAO has monitored
over the past year suggest that there have been broad
improvements in credit markets since the announcement of CPP, the first TARP program. The GAO
notes, specifically, that:

Part 1 • Management’s Discussion and Analysis

Figure 11. Banks’ Willingness to Lend and Personal Consumption
Expenditures (percent)

• The cost of credit and perceptions of risk declined
significantly in interbank, corporate debt, and
mortgage markets;
• The decline in perceptions of risk (as measured by
premiums over Treasury securities) in the interbank market could be attributed in part to several
federal programs aimed at stabilizing markets that
were announced on October 14, 2008, including
CPP; and
• The institutions that received CPP funds in the
first quarter of 2009 saw more improvement in
their capital positions than banks outside the
program.
Additional information on the assessments and activities of the TARP oversight entities can be found in
Section Nine [Systems, Controls, Legal Compliance
and Oversight].

Troubled Asset Relief Program: One Year Later, Actions Are
Needed to Address Remaining Transparency and Accountability
Challenges. Government Accountability Office. GAO-10-16.
October 8, 2009.

Section 2: Overview and analysis of the Troubled Asset Relief Program

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

Section Three:
Ensuring Stability and Liquidity
This section provides a description of each of the
programs established under the TARP to ensure stability
and liquidity, including results for each program to date.

Capital Purchase Program
EESA was originally proposed as a means to buy
mortgage loans, mortgage-backed securities and certain
other assets from banks. However, the authorities
granted under EESA were broadened in the legislative
process to cover any financial instrument whose purchase the Secretary of the Treasury, after consultation
with the Chairman of the Federal Reserve, determines
necessary to promote financial market stability. Shortly
following passage of EESA, it became clear to the
leaders of many G-7 nations that rapid action was
needed to provide capital to the financial system as a
whole. Lending even between banks had practically
stopped, credit markets had shut down, and many
financial institutions were facing severe stress. There
was not sufficient time to implement a program to buy
mortgage related assets, which posed difficulties related
to valuing such assets and getting the holders of such
assets to sell them at current prices. In this context,
immediate capital injections into financial institutions
were a necessary step to avert a potential collapse of the
system.
Given the high level of uncertainty in financial markets
and the economy, even strong financial institutions
began to hoard capital. Based on various market
indicators, it became clear that financial institutions
needed additional capital to sustain a normal flow of
credit to businesses and consumers during the financial
turmoil and economic downturn. As a result, TreasuryOFS launched the Capital Purchase Program (CPP),
its largest and most significant program under EESA,
on October 14, 2008. Treasury-OFS initially committed over a third of the total TARP funding, $250

billion, to the CPP, which it lowered to $218 billion in
March 2009.
The CPP was designed to bolster the capital position
of viable institutions and, in doing so, to build confidence in these institutions and the financial system as
a whole. With the additional capital, CPP participants
were better equipped to undertake new lending, even
while absorbing write downs and charge-offs on loans
that were not performing.
Of the $250 billion commitment, Treasury-OFS
invested $125 billion in eight of the country’s largest
financial institutions. The remaining $125 billion
was made available to qualifying financial institutions (QFIs) of all sizes and types across the country,
including banks, savings associations, bank holding
companies and savings and loan holding companies.
QFIs interested in participating in the program had to
submit an application to their primary federal banking regulator. The minimum subscription amount
available to a participating institution was one percent
of risk-weighted assets. The maximum subscription
amount was the lesser of $25 billion or three percent of
risk-weighted assets.
Over the weeks and months that followed the announcement of the CPP, Treasury-OFS provided
capital to 685 institutions in 48 states, including
more than 300 small and community banks, helping
to enable them to absorb losses from bad assets while
continuing to lend to consumers and businesses. The
largest investment was $25 billion while the smallest
was $301,000. To encourage continued participation by small and community banks, the application
window for CPP was reopened on May 13, 2009, for
banks with less than $500 million in assets, with an
application deadline of November 21, 2009.
Most banks participating in the CPP are to pay
Treasury-OFS a dividend rate of five percent per year,

Section 3: Ensuring Stability and Liquidity

One measure of the CPP’s performance is the effect on
lending by CPP participants. Lending typically falls
during a recession, and the current cycle is no exception. The Federal Reserve Board’s recent article U.S.
Credit Cycles: Past and Present examines how credit volumes have evolved in the current economic downturn
relative to previous business cycle downturns using
the Federal Reserve’s Flow of Funds data.8 Significant
among the Federal Reserve’s findings is that despite
many unprecedented aspects of the current financial
and economic turbulence, movements in credit volumes in the current recession are similar to historical
patterns. In terms of looking more specifically at CPP
bank lending, each month Treasury-OFS asks CPP
participants to provide information about their lending
activity. As illustrated by Treasury-OFS’ Lending and
Intermediation Survey, the 22 largest CPP participants
have been able to sustain their lending activities during
this crisis, despite the significant headwinds posed by
the recession, including increased bankruptcies, higher
unemployment and falling home prices. Details on the
Bank Lending Surveys can be found at http://www.
financialstability.gov/impact/surveys.htm.

The article “U.S. Credit Cycles: Past and Present” can be found
at the following link: http://www.financialstability.gov/docs/
CPP/Report/Fed%20US%20Credit%20Cycles%20072409.
pdf.

Capital Assistance Program
and the Supervisory Capital
Assessment Program
In early 2009, the Federal banking agencies conducted
a one-time, forward-looking assessment or “stress
test”—known as the Supervisory Capital Assessment
Program (SCAP)—on the nineteen largest U.S. bank
holding companies (BHCs). The stress test assessed
whether these BHCs had the capital to continue
lending and absorb all potential losses resulting from
a more severe decline in economic conditions than
projected by economic forecasters. After completion of
the SCAP, the banking agencies concluded that ten of
these BHCs needed to raise a total of an additional $75
billion in capital to establish a buffer for more adverse
conditions. The remaining nine BHCs were found to
have sufficient capital to weather more adverse market
conditions.

Part 1 • Management’s Discussion and Analysis

increasing to nine percent a year after the first five
years. In the case of S-corporations, Treasury-OFS
acquires subordinated debentures. Treasury-OFS has
received $6.8 billion in CPP dividend and interest
payments for the period ended September 30, 2009.
As of September 30, 2009, 38 institutions had not
paid full dividends or interest payments. Under the
CPP, Treasury-OFS has a right to elect two directors to
the board of directors of an institution that misses six
or more dividend payments.

In conjunction with this forward-looking test,
Treasury-OFS announced that it would provide capital
through the Capital Assistance Program (CAP) to
banks that needed additional capital but were unable
to raise it through private sources. The capital provided by the CAP would take the form of convertible
preferred stock. This program was made available to
all QFIs, not solely to those banks that underwent the
SCAP.
The design of the tests and their results were made
public, a highly unusual step that was taken because
of the unprecedented need to reduce uncertainty and
restore confidence. By identifying and quantifying
potential capital shortfalls and requiring that additional
capital be raised to eliminate any deficiencies, the
SCAP ensured that these financial institutions would
have sufficient capital to sustain their role as intermediaries and continue to provide loans to creditworthy
borrowers even if economic conditions suffered a severe
and extended deterioration.
Of the ten bank holding companies that were identified as needing to raise more capital, nine have met or

Section 3: Ensuring Stability and Liquidity

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

exceeded the capital raising requirements through private efforts. In the aggregate, these firms have increased
requisite capital by over $77 billion since the results of
the SCAP were announced. Treasury-OFS may provide
additional capital to GMAC under the Auto Industry
Financing Program to assist its fundraising efforts to
meet the requirements of the SCAP.

Eligibility to participate in the TIP was determined on
a case-by-case basis, depending on a number of factors.
Treasury-OSF considered, among other things:

Since the stress test results were released in early May,
banks of all sizes have raised over $80 billion in common equity and $40 billion in debt that is not guaranteed by the government. Importantly, that capital raising has enabled more than 40 banks to repay the TARP
investments made by Treasury-OFS. Treasury-OFS
has received over $70 billion in principal repayments,
and $9.7 billion in dividends, interest, warrants and
fees from CPP participants. In addition, Treasury-OFS
estimates that another $70 billion in repayments from
all TARP investments will occur over the next 12 to 18
months. Another measure of the effectiveness of SCAP
and the CPP, as well as other government efforts, is
that Treasury-OFS did not receive any applications for
CAP which terminated on November 9, 2009.

• The number and size of financial institutions that
are perceived or known by investors or counterparties as similarly situated to the failing institution,
or that would otherwise be likely to experience
indirect contagion effects from the failure of the
institution;

Targeted Investment Program
Treasury-OFS established the Targeted Investment
Program (TIP) under the TARP in December 2008.
The TIP gave the Treasury-OFS the necessary flexibility to provide additional or new funding to financial
institutions that were critical to the functioning of the
financial system. Through TIP, Treasury-OFS sought to
prevent a loss of confidence in critical financial institutions, which could result in significant financial market
disruptions, threaten the financial strength of similarly
situated financial institutions, impair broader financial
markets, and undermine the overall economy.

• The extent to which the failure of an institution
could threaten the viability of its creditors and
counterparties because of their direct exposures to
the institution;

• Whether the institution is sufficiently important
to the nation’s financial and economic system that
a disorderly failure would, with a high probability,
cause major disruptions to credit markets or payments and settlement systems, seriously destabilize
key asset prices, or significantly increase uncertainty or loss of confidence, thereby materially
weakening overall economic performance; and
• The extent and probability of the institution’s
ability to access alternative sources of capital and
liquidity, whether from the private sector or other
sources of government funds.
Treasury-OFS invested $20 billion in each of Bank
of America (BofA) and Citigroup under the TIP.
These investments provide for annual dividends of
eight percent. These investments also impose greater
reporting requirements and harsher restrictions on
the companies than under the CPP terms, including
restricting dividends to $0.01 per share per quarter,
restrictions on executive compensation, restrictions on
corporate expenses, and other measures. Assistance under the TIP is also considered “exceptional assistance”,
which means that the recipient is also subject to greater
restrictions under the executive compensation rules.

Section 3: Ensuring Stability and Liquidity

Since September 2008, the Federal Reserve and
Treasury-OFS have taken a series of actions related to
AIG in order to prevent AIG’s disorderly failure and
mitigate systemic risks. These actions addressed the
liquidity and capital needs of AIG, helping to stabilize

the company. Treasury-OFS provided this assistance
by purchasing preferred shares in AIG and also received
warrants to purchase common shares in the institution.
The assistance provided to AIG was deemed “exceptional
assistance” which means that the recipient is subject to
greater restrictions under the rules relating to executive
compensation. Further details on the AIG Investment
Program can be found in the AIG box.

AIG
In September 2008, prior to the passage of EESA, AIG faced severe liquidity pressures and potential insolvency. These pressures
grew acute the day after the bankruptcy filing of Lehman Brothers, as financial and credit markets ceased to function. Treasury
and Federal Reserve officials feared that a disorderly failure of the company at that time posed a systemic risk to the financial
system and the U.S. economy. The company had global operations and was a significant participant in many financial markets.
Through its subsidiaries, the company provided insurance protection to more than 100,000 entities, including small businesses,
municipalities, 401(k) plans, and Fortune 500 companies who together employ over 100 million Americans. The company
was also a significant counterparty to a number of major financial institutions. These commitments were reflected in tens of
thousands of contracts that touched millions of Americans and businesses.

Part 1 • Management’s Discussion and Analysis

American International group,
Inc. (AIG) Investment Program

The complexity of these insurance contracts and the exposure of the financial system and economy to their default required
government intervention. The Federal Reserve provided an $85 billion credit facility in the form of secured loans to AIG on
September 16, 2008, to contain the financial panic at least cost to the American taxpayer. At the time, the government was
constrained by the tools at its disposal. The Federal Reserve was not in a position to selectively impose haircuts on AIG
counterparties, or to know the long-term costs of its liquidity provision. Time was of the essence and the Federal Reserve faced a
binary choice: allow AIG to default on tens of thousands of contracts, further eroding confidence in U.S. financial institutions and
perpetuating market freezes, or provide secured credit to allow AIG to meet its near-term contractual obligations with millions of
insurance holders. The Federal Reserve chose the latter option, and, along with Treasury, has managed its investment in AIG to
facilitate an orderly restructuring of the company and to maximize repayments to taxpayers.
In November 2008, this assistance was restructured so that the company had more equity and less debt. Treasury-OFS purchased
$40 billion in cumulative preferred stock from AIG under the TARP, the proceeds of which were used to repay the Federal Reserve
loan in part. In April 2009, Treasury-OFS exchanged the $40 billion in cumulative preferred stock for $41.6 billion in non-cumulative preferred stock and created an equity capital facility, under which AIG may draw up to $29.8 billion as needed in exchange
for issuing additional preferred stock to Treasury-OFS. As of September 30, 2009, AIG had drawn approximately $3.2 billion
from the facility. The preferred stock pays a noncumulative dividend, if declared, of ten percent per annum. The Federal Reserve
Bank of New York (FRBNY) has also provided additional assistance to AIG by funding special purpose entities which purchased
certain derivative contracts from AIG. In connection with its assistance to AIG, the FRBNY received convertible preferred stock
representing approximately 79.8 percent of the fully diluted voting power of the AIG common stock.
The preferred stock was deposited in a trust, which exists for the benefit of the U.S. taxpayers. The FRBNY has appointed three
independent trustees who have the power to vote the stock and dispose of the stock with prior approval of FRBNY and after
consultation with Treasury. The trust agreement provides that the trustees cannot be employees of Treasury or the FRBNY. The
Department of the Treasury does not control the trust and cannot direct the trustees. Treasury-OFS, through its TARP investment,
owns other preferred stock that is not held in the trust and does not have voting rights except in certain limited circumstances.

Section 3: Ensuring Stability and Liquidity

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

Asset Guarantee Program
Pursuant to Section 102 of EESA, Treasury-OFS
established the Asset Guarantee Program (AGP) with
the same objective as the TIP of preserving financial
market stability. The AGP, like the TIP, is a targeted
program aimed at maintaining the stability of systemically important financial institutions and, thereby,
reducing the potential for problems at such an institution to “spillover” to the broader financial system and
economy. More specifically, the AGP may be used
to provide protection against the risk of significant
loss in a pool of assets held by a systemically significant financial institution that faces a risk of losing
market confidence due in large part to its holdings
of distressed or illiquid assets. By helping limit the
institution’s exposure to losses on illiquid or distressed
assets, the AGP can help the institution maintain the
confidence of its depositors and other funding sources
and continue to meet the credit needs of households
and businesses.
The AGP has been applied with extreme discretion
and Treasury-OFS does not anticipate wider use of
this program. To date, Treasury-OFS has used this
program to assist Citigroup and began negotiations
with Bank of America (BofA) under the AGP which
BofA subsequently terminated. Further details on this
assistance can be found in the BofA and Citigroup
separate presentations.

Bank of America
Under the CPP, in October 2008, Treasury-OFS agreed
to purchase $15 billion of preferred stock from Bank of
America and $10 billion from Merrill Lynch. When Bank
of America completed its acquisition of Merrill Lynch at
the end of 2008, Treasury-OFS held a total of $25 billion of
preferred stock in Bank of America. This preferred stock has
a dividend rate of five percent per annum for the first five
years and increases to nine percent thereafter. Under the
TIP, Treasury-OFS purchased an additional $20 billion in preferred stock from Bank of America in January 2009, which
pays a dividend of eight percent per annum. Treasury-OFS
also received warrants in both transactions.
In January 2009, Treasury-OFS, the Federal Reserve and
the FDIC entered into a term sheet for a potential loss
sharing arrangement under the AGP on a $118 billion pool
of financial instruments owned by Bank of America. In May
2009, Bank of America announced its intention to terminate
negotiations with respect to the loss-sharing arrangement
and in September 2009, Treasury, the Federal Reserve,
the FDIC and Bank of America entered into a termination
agreement pursuant to which (i) the parties terminated
the related term sheet and (ii) Bank of America agreed to
pay a termination fee of $425 million to the government
parties, with $276 million going to Treasury-OFS. The fee
compensated the government parties for the value that
Bank of America had received from the announcement of
the negotiations with government parties to guarantee and
share losses on the pool of assets from and after the date
of the term sheet. The termination fee was determined
by taking the fee that would have been payable had the
guarantee been finalized.

Section 3: Ensuring Stability and Liquidity

Under the CPP, Treasury-OFS purchased $25 billion in preferred stock from Citigroup in October 2008. This preferred
stock had a dividend rate of five percent per annum. Under
the TIP, Treasury-OFS purchased $20 billion in additional
preferred stock from Citigroup, Inc. in December 2008. That
preferred stock had a dividend rate of eight percent per
annum. Treasury-OFS also received warrants in both
transactions. As part of an exchange offer designed to
strengthen Citigroup’s capital, Treasury-OFS recently
exchanged all of its preferred stock in Citigroup for a combination of common stock and trust preferred securities.
In January 2009, Treasury-OFS and Citigroup entered into
an agreement for Citigroup’s participation in the AGP.
Treasury-OFS guaranteed up to $5 billion of potential losses
incurred on a $301 billion pool of loans, mortgage-backed
securities, and other financial assets held by Citigroup. The
Federal Reserve and the FDIC are also parties to this arrangement. Treasury-OFS will not become obligated to pay
on its guarantee unless and until Citigroup has absorbed
$39.5 billion of losses on the covered pool. Treasury-OFS
would then cover 90 percent of all losses on the covered
pool, up to a maximum of $5 billion. In consideration
for the guarantee, Treasury-OFS received $4.03 billion
in preferred stock that pays an annual dividend of eight
percent. Treasury-OFS also received a warrant to purchase
approximately 66 million shares of common stock at a strike
price of $10.61 per share.
As part of the exchange offer noted above, Treasury-OFS
exchanged preferred stock received under the AGP for
an equivalent amount of trust preferred securities paying
interest at the same rate.

Consumer and Business
Lending Initiative
Treasury-OFS designed two initiatives to restore
consumer and business lending in the period ended
September 30, 2009, the Term Asset-Backed Securities
Loan Facility (TALF) and the Unlocking Credit for
Small Business Initiative. Both programs are discussed
in more detail below.

1. Term Asset-Backed Securities
Loan Facility
The asset-backed securities (ABS) and commercial
mortgage-backed securities (CMBS) markets over time
have funded a substantial share of credit to consumers,
businesses and real estate owners. In the third quarter
of 2008, the ABS market and CMBS markets came
to nearly a complete halt. Interest rate spreads on the
most highly-rated AAA tranches of ABS and CMBS
rose to levels outside their historical range, in certain
cases well over 7 to 15 times their average, respectively.
CMBS had accounted for almost half of all new commercial mortgage originations in 2007. The disruption
of these markets contributed to the lack of credit to
households and businesses of all sizes, impacting U.S.
economic activity.

Part 1 • Management’s Discussion and Analysis

Citigroup

In November 2008, the Federal Reserve and Treasury
announced the creation of the Term Asset-Backed
Securities Loan Facility (TALF) and launched TALF
under the Financial Stability Plan on February 10,
2009. The TALF’s objective was to stimulate investor
demand for certain types of eligible ABS, specifically those backed by loans to consumers and small
businesses, and ultimately, bring down the cost and
increase the availability of new credit to consumers
and businesses. Under the TALF, the Federal Reserve
extends up to $200 billion in three- and five-year
non-recourse loans to investors that agree to purchase
eligible consumer or small business ABS. Treasury-OFS
provides up to $20 billion of TARP monies in credit
protection to the Federal Reserve for losses arising
under TALF loans.

Section 3: Ensuring Stability and Liquidity

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

The TALF was initially designed for newly or recently
originated AAA-rated ABS backed by student loans,
auto loans, credit card loans, and loans guaranteed
by the SBA. On March 19, 2009, Treasury-OFS and
the Federal Reserve announced that the TALF would
be expanded to include newly or recently issued
AAA-rated Asset Backed Securities (ABS) backed by
four additional types of consumer and business loans
—mortgage servicing advances, loans or leases relating
to business equipment, leases of vehicle fleets, and
floor plan loans. These new categories of collateral were
eligible for inclusion in the April 2009 TALF subscription and funding process.
The Treasury-OFS and the Federal Reserve structured
the TALF to minimize credit risk to the U.S. government to the greatest extent possible, consistent with
achieving the program’s purpose of encouraging lending to consumers and businesses. Investors take risk by
providing some of the capital to purchase the securities. The amount of private capital is measured in the
form of haircuts, which represents the investor’s equity
contribution. For example, if a borrower purchases an
ABS for $100 and that ABS has an assigned haircut of
15 percent, the borrower must put $15 at risk and can
receive only $85 in financing. The haircut level varies
across asset class and maturity to take into account
any differences in risk. Finally, the borrower must also
make monthly or quarterly interest payments to the
federal government. The cost of the loan is 100 basis
points over a fixed or floating rate benchmark, such as
the London Interbank Offered Rate (“LIBOR”).
The Federal Reserve had originally authorized using the
TALF to make loans through December 31, 2009. To
promote the flow of credit to businesses and households and to facilitate the financing of commercial
properties, the Federal Reserve announced on August
17, 2009 that the TALF will continue to make loans
against newly issued ABS and previously issued CMBS
through March 31, 2010. In addition, TALF will make
loans against newly issued CMBS through June 30,
2010. The inclusion of CMBS as eligible collateral
helps prevent defaults on economically viable commer-

cial properties, increases the capacity of current holders
of maturing mortgages to make additional loans, and
facilitates the sale of distressed properties.

TALF Results
TALF’s impact on the securitization markets can be
measured by a number of indicators, including ABS
issuance—both TALF and non-TALF eligible, the
percentage decline in ABS and SMBS spreads from
the height of the financial crisis, and the number and
composition of investors in the securitization market.
ABS Issuance: The market for new issuance of ABS
had shut down at the end of 2008 and remained
effectively closed until TALF became operational.
Since March 2009, offerings in the ABS markets have
gradually increased with nearly $86 billion of new ABS
issuance through October 2009. Of that amount, $49
billion of securities were purchased with TALF loans.
These securities supported over 3.6 million consumer
and small business loans and leases, and over 132
million active credit card accounts. TALF has also
provided loans to purchase about $4.1 billion of legacy
CMBS securities (issued before January 1, 2009).
This re-starting of the securitization market translates
into increased consumer and small business lending
and, in some cases, lower loan rates for consumers. In
addition, investors are gaining confidence in the market’s ability to function without federal government
support. In March 2009, approximately 60 percent of
new ABS issuance was purchased with the support of
the TALF. By September 2009, that was down to 40
percent. The following chart (Figure 12) shows total
consumer ABS issuance and the portion backed by
TALF.

Section 3: Ensuring Stability and Liquidity

TALF Loans to Date: As of September 30, 2009, no
securities used as collateral for TALF loans had been
surrendered to the Federal Reserve. In addition, as of
September 30, 2009, 13.6 percent of the total amount
of TALF loans, or $6.3 billion, had been repaid. Given
that the term of the TALF loans is three to five years,
this reflects the increasing health of the securitization
markets.
Secondary market spreads: Since the peak of the
credit crisis, spreads for the asset classes eligible for
the program have decreased by 60 percent or more.
Spreads on credit card and auto loans have fallen from
a peak of 600 basis points to less than 100 basis points
over their benchmarks, the same levels that existed before Lehman Brothers’ bankruptcy filing in September
2008. Spreads in the secondary market for CMBS have
come in from 1500 basis points over its benchmark to
300 basis points today. Prior to the beginning of the
crisis in August 2007, highly rated CMBS were priced
on average approximately 100 basis points over its
benchmark.
Borrower Composition: At the peak of the credit
crisis, there was little confidence among institutional
investors in the capital markets. Investors effectively
were standing on the sidelines. Since the implementation of TALF, there has been renewed confidence in the
market. A range of institutional investors have become
active participants, including hedge funds, asset
managers, pension funds, and insurance companies.
With an increase in investor participation and thus
investor demand, required returns have fallen more
than half, in some cases, suggesting a return of risk
premiums to more “normalized” levels. Cash participation, specifically for TALF-eligible prime auto and
equipment transactions, has also increased, suggesting investors’ decreasing reliance on TALF support.
Further, some transactions for specific asset classes with
shorter durations are being successfully completed

2. Unlocking Credit for Small
Businesses Program
To help restore the confidence needed for financial
institutions to increase lending to small businesses,
Treasury announced a program to unlock credit for
small businesses on March 16, 2009. Under the program, Treasury announced that it would make up to $15
billion in TARP funds available to purchase securities
backed by the Small Business Administration (SBA)guaranteed portions of loans made under the SBA’s 7(a)
loan program. The SBA’s 7(a) program is the SBA’s most
basic and widely used loan program.

Part 1 • Management’s Discussion and Analysis

without TALF financing, suggesting investor confidence in shorter-duration transactions.

Figure 12. Total Consumer ABS Issuance through September

Since Treasury’s announcement of this program, the
credit markets for small businesses have improved somewhat. The secondary market for guaranteed SBA loans,
for example, had essentially ceased working last fall and
had only $86 million in January re-sales. That market
improved notably this spring in the wake of Treasury’s
announcement, with $399 million settled from lenders
to broker-dealers in September 2009. As a result of this
improvement, as well as reluctance on the part of market
participants to accept TARP funds, Treasury-OFS found
that demand for its proposed program declined. As
of September 30, 2009, no funds had been disbursed
under the program, although it remains available.

Section 3: Ensuring Stability and Liquidity

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

Public-Private Investment
Program
Treasury, in conjunction with the Federal Reserve and
the FDIC, announced the Public-Private Investment
Program (PPIP) on March 23, 2009, as a part of
the Financial Stability Plan. The PPIP is designed
to improve the condition of financial institutions by
facilitating the removal of legacy assets from their balance sheets. Legacy assets include both real estate loans
held on banks’ balance sheets (legacy loans) as well as
securities backed by residential and commercial real
estate loans (legacy securities).
The PPIP should help restart the market and provide
liquidity for legacy assets, enabling financial institutions to make new loans available to households and
businesses. Legacy assets became a stumbling block
to the normal functioning of credit markets with the
bursting of the housing bubble. With the housing
market in decline, financial institutions and investors
suffered significant losses on these legacy assets. These
losses drove financial institutions to conserve capital,
reduce leverage and minimize exposure to riskier
investments. Many institutions did so by selling assets,
triggering a wide-scale deleveraging in these markets.
As the supply of assets being sold increased, prices
declined and many traditional investors exited these
markets, causing further declines in the demand and
the liquidity for these assets. This lack of liquidity
created significant uncertainty regarding the value
of these legacy assets, which in turn raised questions
about the balance sheets of these financial institutions,
compromising their ability to raise capital and continue lending.
The PPIP helps addresses this valuation concern.
Through PPIP, Treasury-OFS partners with experienced
investment managers and private sector investors
to purchase legacy assets. Rather than resolving the
uncertainty by having the government set the price for
these assets, the private sector investors compete with
one another to establish the price of the legacy assets
purchased under the PPIP. By drawing new private

sector capital into the market for legacy assets and
facilitating price discovery, the PPIP should increase
the liquidity for these legacy assets.
Treasury-OFS initially announced that it would
provide up to $100 billion for the PPIP. Because of
improvements in the market, this amount was reduced
to $30 billion. Under the PPIP, Treasury-OFS provides
equity and debt financing to newly-formed publicprivate investment funds (PPIFs) established by private
fund managers with private investors for the purpose of
purchasing legacy securities. These securities are commercial mortgage-backed securities and non-agency
residential mortgage-backed securities. To qualify for
purchase by a Legacy Securities PPIP (S-PPIP), these
securities must have been issued prior to 2009 and
have originally been rated AAA—or an equivalent
rating by two or more nationally recognized statistical
rating organizations – without ratings enhancement
and must be secured directly by the actual mortgage
loans, leases, or other assets.
The S-PPIP allows the Treasury-OFS to partner with
private investors in a way that increases the flow of
private capital into these markets while maintaining
equity “upside” for the taxpayers. Under the principal
terms of the S-PPIP, Treasury-OFS partners with
pre-qualified fund managers that raise a minimum
amount of capital from private sources. Each manager
forms a Public Private Investment Fund or PPIF.
Treasury-OFS invests equity capital from the TARP in
each PPIF on a dollar-for-dollar basis, matching the
funds raised by these managers. In addition, TreasuryOFS also provides debt financing up to 100 percent
of the PPIF’s total equity capital, subject to certain
restrictions on leverage, withdrawal rights, disposition
priorities and other customary financing protections.
Treasury-OFS not only participates pro rata in any
profits or losses of the PPIF but also receives additional
potential equity upside in the form of warrants, as
required by EESA. Each fund manager will seek to
generate attractive returns for the PPIF through a
predominately long-term buy and hold strategy.

Section 3: Ensuring Stability and Liquidity

PPIP Results
Although purchases of assets under the program are
just beginning, the announcement of the program itself helped reassure investors. Since the announcement,
prices for non-agency mortgage-backed securities
have gone up substantially in price. Prime fixed-rate
securities issued in 2006 that traded as low as $60 in
March have increased in value by over 40 percent as
markets have become more liquid. That improvement
in financial market conditions has created the positive
backdrop that caused Treasury-OFS to proceed with
the program at a scale smaller than initially envisioned.

Automotive Industry
Financing Program
The Treasury-OFS established the Automotive Industry
Financing Program (AIFP) on December 19, 2008, to
help prevent a significant disruption to the American
automotive industry, which would have posed a systemic
risk to financial market stability and had a negative
effect on the economy. Treasury-OFS announced a
plan to make emergency loans available from the TARP
under the AIFP to General Motors Corporation (GM)
and Chrysler LLC (Chrysler) to provide a path for these
companies to go through orderly restructurings and
achieve viability.
Treasury-OFS’ investments in the auto companies were
determined to be consistent with both the purpose
and specific requirements of EESA. Treasury-OFS
determined that the auto companies were and are
interrelated with entities extending credit to consumers
and dealers because of their financing subsidiaries and
other operations, and that a disruption in the industry
or an uncontrolled liquidation would have had serious
effects on financial market stability, employment and
the economy as a whole. In addition, Congress provided
the Secretary of the Treasury broad authority by defining
“financial institutions” in EESA flexibly so as not to be
limited to banks, savings institutions, insurance companies and similar entities. The auto companies qualified
as “financial institutions” under EESA as they met the
basic requirements of the definition. In each case, they
were organized under Delaware law, had significant U.S.
operations, were subject to extensive federal and state
regulation, and were not a central bank or institution
owned by a foreign government.

Part 1 • Management’s Discussion and Analysis

On July 8, 2009, following a comprehensive twomonth application, evaluation and selection process,
Treasury-OFS pre-qualified nine fund managers to
participate in the S-PPIP based, in part, on a demonstrated ability to invest in legacy assets and to raise
private capital for such investments. On September
30, 2009, two PPIFs signed limited partnership
agreements and loan agreements with Treasury-OFS,
resulting in a $6.7 billion commitment for TreasuryOFS. As of September 30, 2009, these two PPIFs had
approximately $1.13 billion in private sector capital
commitments, which were matched 100 percent by
Treasury-OFS, representing total equity capital commitments of $2.26 billion. Treasury-OFS is providing
debt financing up to 100 percent of the total capital
commitments of each PPIF, representing in the aggregate approximately $4.52 billion of total equity and
debt capital commitments. As of November 30, 2009,
eight PPIFs have signed agreements with TreasuryOFS. Following signature of these agreements, each
fund manager has up to six months to raise additional
private capital to receive the full allocation of the
$3.3 billion in matching equity and debt capital from
Treasury-OFS. Assuming that each of the nine fund
managers raises enough private capital to receive the
full allocation from Treasury-OFS, the total purchasing
power of the PPIFs will be $40 billion, including $10
billion in private capital and the $30 billion TreasuryOFS commitment. As of September 30, 2009, no fund
managers had made any investments and TreasuryOFS had not disbursed any funds.

Treasury-OFS initially provided loans of $13.4 billion
to GM and $4 billion to Chrysler under the AIFP to
give the companies time to negotiate with creditors
and other stakeholders in order to prevent disorderly bankruptcies. Under the terms of the loans, each
company was required to prepare a restructuring plan
that included specific actions aimed at assuring: (i) the
repayment of the loan extended by TARP; (ii) the ability

Section 3: Ensuring Stability and Liquidity

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

of the company to comply with applicable federal fuel
efficiency and emissions requirements and commence
the domestic manufacturing of advanced technology
vehicles in accordance with federal law; (iii) achievement
of a positive net present value; (iv) rationalization of
costs, capitalization, and capacity with respect to the
manufacturing workforce, suppliers and dealerships of
the company; and (v) a product mix and cost structure
that is competitive in the U.S. marketplace.
To oversee the federal financial assistance—including
evaluating the restructuring plans—and to make decisions about future assistance to the automakers, the loan
agreements provided for a presidential designee. Under
the terms of the loan agreements, because no presidential designee has been appointed to date, the Secretary
of the Treasury makes decisions on all matters involving
financial assistance to the automakers, with input from
the National Economic Council.
To date, Treasury-OFS has provided approximately $76
billion in loans and equity investments to GM, Chrysler,
and their respective financing entities. Further details on
these loans and the valuation of these investments can be
found in Section Eight [Valuation Methodology].

General Motors
On December 31, 2008, Treasury-OFS agreed to make
loans of $13.4 billion to General Motors Corporation to
fund working capital. Under the loan agreement, GM was
required to implement a viable restructuring plan by March
30, 2009. The Administration determined that the first
plan GM submitted failed to establish a credible path to
viability, and the deadline was extended to June 1, 2009.
Treasury-OFS loaned an additional $6 billion to fund GM
during this period. To achieve an orderly restructuring, GM
filed bankruptcy proceedings on June 1, 2009. TreasuryOFS provided $30.1 billion under a debtor-in-possession
financing agreement to assist GM through the restructuring
period. The new entity, General Motors Company (New GM)
purchased most of Old GM’s assets and began operating on
July 10, 2009.
Treasury-OFS converted most of its loans to the Old GM to
$2.1 billion of preferred stock and a 60.8 percent share of
the common equity in the New GM and a $7.1 billion debt
security note. $380 million of Treasury-OFS’ debt in the
new GM was immediately repaid with the termination of
the Auto Warranty Program, leaving $6.7 billion of loans
outstanding as of September 30, 2009. The New GM
currently has the following ownership: Treasury-OFS (60.8
percent), GM Voluntary Employee Benefit Association (17.5
percent), the Canadian Government (11.7 percent), and Old
GM’s unsecured bondholders (10 percent).
Figure 13. New GM Ownership
10%
Old GM’s Unsecured
Bondholders
12%
Canadian
Government
17%
GM Voluntary
Employee
Benefit
Association

Section 3: Ensuring Stability and Liquidity

61%
U.S. Government

On January 2, 2009, Treasury-OFS loaned $4 billion to
Chrysler. On March 30, 2009, the Administration determined
that the business plan submitted by Chrysler failed to demonstrate viability and announced that in order for Chrysler
to receive additional taxpayer funds, it needed to find a
partner with whom it could establish a successful alliance.
Chrysler made the determination that forming an alliance
with Fiat was the best course of action for its stakeholders.
Treasury-OFS continued to support Chrysler as it formed an
alliance with Fiat. In connection with Chrysler’s bankruptcy
proceedings filed on April 30, 2009, Treasury-OFS provided
an additional $1.9 billion under a debtor-in-possession
financing agreement to assist Chrysler in an orderly restructuring. On June 10, 2009, substantially all of Chrysler’s
assets were sold to the newly formed entity, Chrysler Group
LLC (New Chrysler). Treasury-OFS committed to loan $6.6
billion to New Chrysler in working capital funding, and as of
September 30, 2009, New Chrysler has drawn $4.6 billion
of this amount.
As of September 30, 2009, Treasury-OFS had a $7.1 billion
debt security from New Chrysler and held 9.9 percent of
the equity in New Chrysler. The original loans to Chrysler
remain outstanding, but have been reduced by $500 million
of debt that was assumed by New Chrysler. Current equity
ownership in New Chrysler is as follows: the Chrysler
Voluntary Employee Benefit Association (67.7 percent),
Fiat (20 percent), Treasury-OFS (9.9 percent) and the
Government of Canada (2.5 percent).
Figure 14. New Chrysler Ownership
10%
U.S. Government

20%
Fiat
2%
Canadian
Government

68%
The Chrysler
Voluntary
Employee Benefit
Association

In addition to the AIFP funds committed to the two
auto manufacturers, Treasury-OFS determined that

TARP assistance was also needed for the financing
companies affiliated with these manufacturers. The
vast majority of automobile purchases in the U.S. are
financed, including an estimated 80 to 90 percent
of consumer purchases and substantially all dealer
inventory purchases. Without the TARP’s assistance,
it is unlikely that the tightened credit markets would
have been able to provide the critical financing needed
for consumers to purchase autos. A description of the
assistance provided to GMAC and Chrysler Financial
is provided below.

GMAC
GMAC is an important source of auto-related credit for
consumers and dealers and, through a subsidiary, is the
country’s fifth largest mortgage servicer. It is also one of
the largest U.S. bank holding companies. On December
29, 2008, Treasury-OFS purchased $5 billion in preferred
equity from GMAC, and received an additional $250 million
in preferred equity through warrants that Treasury-OFS
exercised at closing. At the same time, Treasury-OFS also
agreed to lend up to $1 billion of TARP funds to GM (one of
GMAC’s owners), to enable GM to participate in GMAC’s
rights offering. GM drew $884 million under that commitment on January 16, 2009.

Part 1 • Management’s Discussion and Analysis

Chrysler

In May 2009, banking regulators required GMAC to raise
additional capital by November 2009 in connection with
the SCAP or stress test. On May 21, 2009, Treasury-OFS
purchased $7.5 billion more of convertible preferred shares
from GMAC and received warrants that Treasury-OFS
exercised at closing for an additional $375 million in
convertible preferred shares. GMAC is in discussions with
the Treasury-OFS regarding additional financing to complete
GMAC’s post-SCAP capital needs up to the amount of $5.6
billion, as previously discussed in May.
On May 29, 2009, Treasury-OFS exercised its option to exchange the $884 million loan for the ownership interest that
GM had purchased, amounting to about 35 percent of the
common membership interests in GMAC. As of September
30, 2009, Treasury-OFS owns $13.1 billion in preferred shares
in GMAC, through purchases and the exercise of warrants, in
addition to 35 percent of the common equity in GMAC.

Section 3: Ensuring Stability and Liquidity

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

Chrysler Financial
On January 16, 2009, Treasury-OFS announced that it
would lend up to $1.5 billion to a special purpose vehicle
created by Chrysler Financial to enable Chrysler Financial
to finance the purchase of Chrysler vehicles by consumers.
To satisfy the EESA warrant requirement, the Chrysler
Financial special purpose vehicle issued additional notes
entitling Treasury-OFS to an amount equal to five percent of
the maximum loan amount. Twenty percent of those notes
vested upon the closing of the transaction, and additional
notes were to vest on each anniversary of the transaction
closing date. The loan was fully drawn by April 9, 2009.
On July 14, 2009, Chrysler Financial fully repaid the loan,
including the vested additional notes and interest.

Auto Supplier Support Program
Because of the credit crisis and the rapid decline in
auto sales, many of the nation’s auto parts suppliers
were struggling to access credit and faced uncertainty
about the prospects for their businesses. Suppliers that
ship parts to auto companies generally receive payment
approximately 45-60 days after shipment. In a normal
credit environment, suppliers can either sell or borrow
against those commitments, or receivables, in the interim period to pay their workers and fund their ongoing
operations. However, due to the uncertainty about the
ability of the auto companies to honor their obligations, banks were unwilling to extend credit against
these receivables. On March 19, 2009, Treasury-OFS
announced the Auto Supplier Support Program (ASSP)
to help address this problem by providing up to $5
billion to domestic auto manufacturers to purchase
supplier receivables. With the emergence of New GM
and New Chrysler from bankruptcy proceedings and
with the threat of liquidation greatly reduced, credit
market access for suppliers has improved. As of July
1, 2009, the base commitment under the ASSP was
decreased to $3.5 billion. As of September 30, 2009,
Treasury-OFS has funded $413 million under the
ASSP. The loans used to finance the program must be
repaid within a year, unless extended. Treasury-OFS

expects these loans to be fully repaid by or before April
2010. The companies may still draw on the loans but
they are not expected to.

Auto Warranty Program
On March 30, 2009, Treasury-OFS announced an
Auto Warranty Program designed to give consumers
considering new car purchases from domestic manufacturers the confidence that warranties on those cars
would be honored regardless of the outcome of the
restructuring process. As of July 10, 2009, the program
was terminated after New GM and New Chrysler
completed the purchase of substantially all of the assets
of GM and Chrysler from their respective bankruptcies. The $640 million advanced to GM and Chrysler
under the program has been repaid to Treasury-OFS;
Chrysler repaid the full amount with interest while
GM repaid only principal.

Section 3: Ensuring Stability and Liquidity

To mitigate foreclosures and help ensure homeownership preservation, Treasury announced a comprehensive $75 billion program, the Home Affordable
Modification Program (HAMP), in February 2009.
Treasury-OFS will provide up to $50 billion in funding through the TARP, while Fannie Mae and Freddie
Mac agreed to provide up to $25 billion of additional
funding. HAMP focuses on creating sustainably
affordable mortgage payments for responsible home
owners who are making a good faith effort to make
their mortgage payments, while mitigating the spillover
effects of preventable foreclosures on neighborhoods,
communities, the financial system and the economy.
HAMP is built around three core concepts. First, the
program focuses on affordability. Every modification
under the program must lower the borrower’s monthly
mortgage payment to no more than 31 percent of the
borrower’s monthly gross income, the “target monthly
mortgage payment ratio”. Second, the HAMP’s
pay-for-success structure aligns the interests of servicers, investors and borrowers in ways that encourage
loan modifications that will be both affordable for
borrowers over the long term and cost-effective for
investors and taxpayers. Third, the HAMP establishes
detailed guidelines for the industry to use in making
loan modifications with the goal of encouraging the
mortgage industry to adopt a sustainably affordable
standard, both within and outside of the HAMP.
HAMP operates through the combined efforts of the
Treasury Department, Fannie Mae, Freddie Mac,
mortgage loan servicers, investors and borrowers to
help qualifying homeowners who commit to making
modified monthly mortgage payments to stay in their
homes. In addition, the federal bank, thrift, and credit
union regulatory agencies have encouraged all federally
regulated financial institutions that service or hold
residential mortgage loans to participate in the HAMP.

The following highlights some of the key terms and
conditions of HAMP:
• Eligible Homeowners: The modification plan
was designed to be inclusive, with a loan limit of
$729,750 for single-unit properties, and higher
limits for multi-unit properties. Over 97 percent
of the mortgages in the country have a principal
balance within these limits.
• Servicers’ Obligation to Extend Modification
Offer: Servicers participating in HAMP are
required to apply a standardized net present
value (NPV) test to each loan that is at risk of
foreclosure—defined as either at risk of imminent
default or in default. The NPV test compares the
net present value of cash flows from the mortgage
if modified under HAMP and the net present
value of the cash flows from the mortgage without
modification. If the NPV test is positive—
meaning that the net present value of expected
cash flows is greater if modified under the HAMP
than if the loan is not modified—the servicer must
extend an offer to modify the loan in accordance
with HAMP guidelines, absent fraud or a contractual prohibition limiting modification of the
mortgage.

Part 1 • Management’s Discussion and Analysis

Section Four:
Preventing Foreclosures and Preserving Homeownership

• Reductions in Monthly Payments: Servicers are
required to follow the waterfall outlined in the
program contracts in reducing the borrower’s
monthly payment to no more than 31 percent of
their monthly gross income. The interest rate floor
under HAMP is 2 percent. Further flexibility is
provided if reducing the loan rate to 2 percent, by
itself, does not achieve the 31 percent threshold.
In that case, the servicers can extend the term of
the loan, up to 480 months, in order to achieve
the 31 percent payment threshold. The HAMP
also provides the servicer the option to reduce

Section 4: Preventing Foreclosures and Preserving Homeownership

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

principal on a stand-alone basis to help reduce the
borrower’s monthly payment.
The HAMP includes a standardized set of procedures
that servicers must follow in modifying eligible loans
under the program and in estimating the expected
cash flows of modified mortgages. The borrower must
remain current on their modified mortgage payments
for at least 90 days in order for a HAMP loan modification to become permanent.
To increase participation in HAMP and encourage
borrowers to remain current on loan modifications
under the program, Treasury-OFS provides targeted
incentives to borrowers, investors, and servicers that
participate in the program. These incentives include
an up-front payment of $1,000 to the servicer for each
successful modification after completion of the trial
period, and “pay for success” fees of up to $1,000 per
year for three years, provided the borrower remains
current. Additional one-time incentives of $500 to the
servicers and $1,500 to the investors are paid if loans
are modified for borrowers who are current but are in
danger of imminent default are successfully modified.
Homeowners will also earn up to $1,000 towards principal balance reduction each year for five years if they
remain current and pay on time. Investors are entitled
to payment reduction cost-share compensation for up
to five years for half the cost of reducing the borrower’s
payment from a 38 percent to 31 percent threshold,
provided the borrower remains current. Investors must
pay for reducing the borrower’s payment down to the
38 percent threshold before they are able to benefit
from the cost-share incentive. This requires investors
to take the first loss for unaffordable and unsustainable
loans that were extended to borrowers.

HAMP Results
The incentives offered under HAMP have had a
substantial impact in helping American homeowners
and stabilizing the housing market, as detailed below:
• As of October 31, 2009, 71 servicers have signed
up for the HAMP. Between loans covered by
these servicers and loans owned or guaranteed by
the GSEs, approximately 85 percent of first-lien
residential mortgage loans in the country are now
covered by the program. As of September 30,
2009, Treasury-OFS has made commitments to
fund up to $27.1 billion in HAMP payments.
• As of October 31, 2009, these participating
servicers have extended offers on over 919,665
trial modifications.
• Over 650,994 trial modifications are already
underway, as of October 31, 2009.
HAMP Snapshot through October 2009
Number of Trial Modifications Started1

650,994

Number of Trial Period Plan Offers Extended
to Borrowers2

919,665

Number of Requests for Financial Information Sent
to Borrowers2

2,776,740

1/ Active trial and permanent modifications as of October 31; based on
numbers reported by servicers to the HAMP system of record.
2/ Source: Survey data provided by servicers, through October 29.

Section 4: Preventing Foreclosures and Preserving Homeownership

The government’s response to the financial crisis
including the actions taken under TARP, were necessary to avoid an even greater deterioration or collapse
of the U.S. and global financial systems , which would
have resulted in a far worse recession or even depression. TARP provided a form of taxpayer protection by
helping to achieve that basic objective. Treasury-OFS is
committed to ensuring that taxpayers are also protected with respect to how the TARP is implemented.
The taxpayers clearly assumed downside risk in the
TARP purchases and guarantees of troubled assets,
thus Treasury-OFS also seeks to protect the taxpayer
through the effective management and disposition of
all TARP investments. EESA also stipulated that the
taxpayer benefit from any potential upside on any
assistance transaction by requiring that Treasury receive
warrants in most investments. This section addresses
portfolio management topics such as:
1. Portfolio Overview
2. Guiding Principles

4. Loans: Treasury-OFS has made loans to GM,
Chrysler, and the special purpose vehicles under
TALF, AIFP, ASSP, and WCP, as well as signed
definitive loan agreements for the Public Private
Investment Funds (PPIFs); and
5. Fund investments: Treasury-OFS has signed
limited partnership agreements to make equity
investments in the PPIFs.

Guiding Principles

3. Portfolio Management Approach

Pursuant to Section 2 of EESA, Treasury-OFS has
made investments and entered into guarantee agreements to “restore liquidity and stability to the financial
system of the United States” in a manner which “maximizes overall returns to the taxpayers of the United
States”. Consistent with the statutory requirements,
Treasury-OFS’ four overarching portfolio management
guiding principles are as follows:

4. Exchange Offers and Restructurings
5. Treasury-OFS’s Actions as a Shareholder
6. Compliance
7. Program Specific Considerations.

Portfolio Overview
Treasury-OFS’s investments include:
1. Preferred stock: a majority of the TARP investments are in nonvoting perpetual preferred stock;
2. Common stock: currently, Treasury-OFS holds
common stock in GM, GMAC, Chrysler and
Citigroup;

3. Warrants and senior debt instruments: in connection with its investments in publicly traded
companies, Treasury-OFS has received, pursuant
to Section 113 of EESA, warrants to purchase
common stock at market price as of the time
of the investment. In the case of investments
in privately held companies, Treasury-OFS has
received warrants to purchase preferred stock at
a nominal price, which it exercised at closing, or
debt instruments issued by the TARP recipient;

Part 1 • Management’s Discussion and Analysis

Section Five:
Protecting Taxpayer Interests

• Protect taxpayer investments and maximize overall
investment returns within competing constraints,
• Promote stability for and prevent disruption of
financial markets and the economy,
• Bolster market confidence to increase private
capital investment, and

Section 5: Protecting Taxpayer Interests

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

• Dispose of investments as soon as practicable, in a
timely and orderly manner that minimizes financial market and economic impact.
Treasury-OFS’s asset management approach is designed
to implement the guiding principles. Treasury-OFS
protects taxpayer investments and promotes stability
through evaluating systemic and individual risk from
standardized reporting and proactive monitoring and
ensuring adherence to EESA and compliance with
contractual agreements. By avoiding involvement
in day to day company management decisions and
exercising its rights as a common shareholder only on
core governance issues, Treasury-OFS seeks to bolster
market confidence to increase private capital investment.
Treasury-OFS also adheres to certain principles in connection with restructurings or exchange offers involving
TARP recipients, including minimizing taxpayer loss,
enhancing and preserving institutional viability, treating like investments across programs consistently, and
minimizing negative governmental impact. Such efforts
help to prevent disruption of financial markets and the
economy.
Treasury-OFS seeks to exit investments as soon as
practicable to remove Treasury-OFS as a shareholder,
eliminate or reduce Treasury-OFS downside tail risk
exposure, return TARP funds to reduce the federal debt,
and encourage private capital formation to replace federal government investment. The desire to achieve such
objectives must be balanced against a variety of other
objectives, including avoiding further financial market
and/or economic disruption, and the potentially negative impact to the issuer’s health and/or capital raising
plans from Treasury-OFS’ disposition. Treasury-OFS
must also consider the limited ability to sell an investment to a third party due to the absence of a trading
market or lack of investor demand, and the possibility
of achieving potentially higher returns through a later
disposition. An issuer typically needs the approval of
its primary federal regulator in order to repay TreasuryOFS and therefore regulatory approvals also affect how
quickly an institution can repay.

Because of the size of certain positions as well as the
overall portfolio, successful disposition will take time,
as well as expertise. In addition, information about
Treasury-OFS’s intentions with respect to its investments could be material information and premature
release of such information could adversely affect
the ability of Treasury-OFS to achieve its objectives.
Therefore, Treasury-OFS will make public announcements of its disposition plans when it is appropriate to
do so in light of these objectives and constraints.

Portfolio management
approach
In managing the TARP investments, Treasury-OFS
takes a disciplined portfolio approach with a review
down to the individual investment level. Treasury-OFS
aims to monitor risk and performance at both the overall portfolio level and the individual investment level.
Given the unique nature and the size of the portfolio,
risk and performance are linked to the overall financial
system and the economy. Therefore, Treasury-OFS
conducts sensitivity analyses to contextualize the results.
Such analyses by their very nature are based upon
significant assumptions.
In conducting the portfolio management activities,
Treasury-OFS employs a mix of dedicated professionals and external asset managers. These external asset
managers provide market specific information such as
market prices and valuations as well as detailed credit
analysis using public information on a periodic basis.
A portfolio management leadership team oversees the
work of asset management employees organized on
a program basis, under which investment and asset
managers may follow individual investments.
Treasury-OFS tracks the fair market value of the assets
in the TARP portfolio on a regular basis. The value of
publicly traded common stock can be measured by
market quotations. Most of Treasury-OFS’ investments,
however, consist of securities and instruments for which
no market exists. Such securities include preferred

Section 5: Protecting Taxpayer Interests

security holders to improve the financial condition of
the company, including through recapitalizations or
other restructurings. These actions are similar to those
taken by large private investors in dealing with troubled
investments. Treasury-OFS does not seek to influence
the management of TARP recipients for non-financial
purposes.

EXCHANGE OFFERS and
reconstructurings

Risk Assessment

TARP recipients may also seek Treasury-OFS’ approval
for exchange offers, recapitalizations or other restructuring actions to improve their financial condition.
Treasury-OFS evaluates each such proposal based on its
unique facts and circumstances, and takes into account
the following principles in all cases:

Treasury-OFS has developed procedures to identify and
mitigate investment risk. These procedures are designed
to identify TARP recipients that are in a significantly
challenged financial condition to ensure heightened
monitoring and additional diligence and to determine
appropriate responses by Treasury-OFS to preserve
the taxpayers’ investment and minimize loss as well as
to maintain financial stability. Specifically, TreasuryOFS’ external asset managers review publicly available
information to identify recipients for which pre-tax,
pre-provision earnings and capital may be insufficient
to offset future losses and maintain required capital.
For certain institutions, Treasury-OFS and its external
asset managers engage in heightened monitoring and
due diligence that reflects the severity and timing of the
challenges.

• Pro forma capital position of the institution,
• Pro forma position of Treasury-OFS investment in
the capital structure,
• Overall economic impact of the transaction to the
government,
• Guidance of the institution’s primary federal
supervisor, and
• Consistent pricing with comparable marketplace
transactions.

Although Treasury-OFS relies on the recommendations of federal banking regulators in connection with
reviewing and approving applications for assistance,
Treasury-OFS does not have access to non-public
information collected by federal banking regulators
on the financial condition of TARP recipients. To the
contrary, there is a separation between the responsibilities of Treasury-OFS as an investor and the duties of
the government as regulator.
The data gathered through this process is used by
Treasury-OFS in consultation with its external managers and legal advisors to determine a proper course of
action. This may include making recommendations to
management or working with management and other

Part 1 • Management’s Discussion and Analysis

stocks, warrants, loans and other debt securities, as well
as common stock of private companies. As a result,
Treasury-OFS has developed internal, market-based
valuation models in consultation with Treasury-OFS’
external asset managers and in compliance with EESA.
For purposes of its financial statements, Treasury-OFS
calculates valuations in accordance with the Federal
Credit Reform Act of 1990, as well as OMB guidelines.
The methodology is discussed further in Section Eight
[Valuation Methodology].

TREASURY-OFs’ ACTIONS as a
SHAREHOLDER
Treasury-OFS’ role as a shareholder is to manage
the government’s investment and not to manage the
related company. Most of Treasury-OFS’ equity investments have been in the form of preferred stock. As is
typical for a preferred stock investor, Treasury-OFS
does not have voting rights except on certain limited
issues such as amendments to the charter and certain
transactions that could adversely affect Treasury-OFS’
rights as an investor. In the event preferred dividends
are unpaid for six quarters (or four quarters in the

Section 5: Protecting Taxpayer Interests

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

case of AIG preferred stock), Treasury-OFS has the
right to elect two directors to the board. Treasury-OFS
holds common shares in GM, GMAC, Chrysler and
Citigroup. In addition, the taxpayers are the beneficiaries of a trust that exercises 80 percent of the voting
rights of the outstanding AIG common stock. This
trust is controlled by three independent trustees who
exercise voting rights on behalf of the taxpayers and do
not report to Treasury-OFS.
Treasury-OFS has established the following four principles to guide its actions as a common shareholder:
• Reluctant shareholder: The government is a reluctant owner as a consequence of the financial crisis
and the current recession. Treasury-OFS intends
to dispose of its investments as soon as practicable
and in conformity with the aforementioned
portfolio management principles;
• Treasury-OFS will not interfere in the day-to-day
management decisions of a company in which it
is an investor. Such interference might actually
reduce the value of those investments, impede
the companies’ successful transition to the private
sector, expose taxpayers to third party lawsuits,
and frustrate the federal government’s broader
economic policy goals;
• Strong board of directors: Establishing an effective
board of directors that selects management with a
sound, long-term vision should restore a company to
profitability and end the need for government support expeditiously. In cases where Treasury-OFS has
the ability to establish strong upfront conditions at
the time of investment, these may include changes to
the existing board of directors and management; and
• Limited voting rights: The government intends to
exercise its voting rights as a common shareholder
only with respect to core shareholder matters such
as board membership; amendments to corporate
charters or bylaws; mergers, liquidations, substantial
asset sales; and significant common stock issuances.

Compliance
Treasury-OFS also takes steps to ensure that TARP
recipients comply with their TARP-related statutory and
contractual obligations. Statutory obligations include
executive compensation restrictions. Contractual
obligations vary by investment type. For most of
Treasury-OFS’ preferred stock investments, TARP
recipients must comply with restrictions on payment
of dividends and on repurchases of junior securities, so
that funds are not distributed to junior security holders
prior to repayment of the government. Recipients of
exceptional assistance must comply with additional
restrictions on executive compensation, lobbying,
corporate expenses and internal controls and must
provide quarterly compliance reports. For AIFP loans,
additional restrictions and enhanced reporting requirements are imposed, which is typical with debt investments compared to equity investments. Such enhanced
reporting requirements include bi-weekly status reports
(rolling 13-week cash forecast), monthly liquidity
analysis reports, and monthly budget reports covering
the current fiscal year.

PROGRAM SPECIFIC
considerations
The following briefly describes key contractual terms
and other characteristics of each program that affect how Treasury-OFS will recover the TARP funds
invested in each institution.

Capital Purchase Program (CPP)
The majority of Treasury-OFS’ investments under
TARP were made under the CPP program. TreasuryOFS received preferred stock and warrants in return
for the capital it provided each institution. The
preferred stock is redeemable at the option of the issuer
at any time, subject to the approval of the primary
federal bank regulator. This means that the primary
federal bank regulator, such as the Federal Reserve
Bank or the FDIC, must determine that the issuer has

Section 5: Protecting Taxpayer Interests

Treasury-OFS also has the right to sell the preferred
stock to a third party. Treasury-OFS also has registration rights, which are rights to require the issuer to
assist Treasury-OFS in making a public sale of the
securities which can facilitate transfer. Although
Treasury-OFS has not exercised these rights, it may
do so in the future. In the case of Citigroup, TreasuryOFS exchanged the CPP preferred shares for common
stock of Citigroup. Because the common stock is not
redeemable and because there is a large trading market
for Citigroup common stock, one potential manner in
which Treasury-OFS may exit this investment would
be by selling the stock in the market.
Much of Treasury-OFS’ warrant portfolio pertains to
CPP investments. Pursuant to the requirements of EESA,
Treasury receives warrants from TARP recipients in order
to give the taxpayers an opportunity to participate in any
increase in shareholder value that follows the investment. In the case of a CPP investment in a company
that is publicly traded, Treasury-OFS receives warrants to
acquire common stock with a price equal to 15 percent
of the senior preferred investment. The exercise price
on the warrants is the market price of the participating
institution’s common stock at the time of preliminary
approval calculated on a 20-trading day trailing aver-

age. In the case of an investment in a privately-held
company, Treasury-OFS receives warrants to purchase,
at a nominal cost, additional preferred stock equivalent
to five percent of the senior preferred investment.
Treasury-OFS exercises the latter kind of warrants at
closing of the senior preferred investment.

CPP Sale of Warrants
Issuers have a contractual right to repurchase the
warrants upon redemption of the preferred stock issued
to Treasury-OFS. In the event they do not repurchase,
Treasury-OFS will sell the warrants to third parties.
If an issuer wishes to repurchase its warrants, the issuer
and Treasury-OFS must agree on a price. The contract
provides for an independent appraisal procedure that
can be invoked by either party to determine this price.
Treasury-OFS has established a methodology for valuing
warrants for purposes of this process that it uses for all
banks, regardless of the size of the bank or the warrant
position. Treasury-OFS’ determination of the value of
any warrant is based on three categories of input: market
prices, financial modeling, and outside consultants.
Further details on this valuation approach are provided
in Section Eight. If the bank and Treasury-OFS do not
agree on price and the appraisal procedure is invoked
by either party, then each party selects an independent
appraiser. These independent appraisers will conduct
their own valuations and attempt to agree upon the fair
market value. If they agree on a price, that price becomes
the basis for repurchase of the warrants by the bank. If
these appraisers fail to agree, a third appraiser is hired,
and subject to some limitations, a composite valuation
of the three appraisals is used to establish the sale price.

Part 1 • Management’s Discussion and Analysis

sufficient capital to repay Treasury-OFS. If permitted
to repay Treasury-OFS, the issuer must repay the full
amount of the investment plus any accrued dividends.
As of September 30, 2009, 42 issuers have repaid a
total of $70.7 billion of CPP investments. TreasuryOFS did not require issuers to repay the preferred
stock by a particular date, because the preferred stock
would not have met the requirements for Tier 1 capital
had such a fixed date been imposed. However, there
are incentives for issuers to repay. First, issuers are
subject to restrictions on executive compensation for as
long as the preferred stock is outstanding. In addition,
they are restricted in their ability to pay dividends to
common stockholders and to make other distributions
and repurchases. In addition, the dividend rate on
the preferred stock increases from five percent to nine
percent after five years.

Even if agreement is not reached within the aforementioned timeframe, an institution that has redeemed
its preferred stock can always bid to repurchase its
warrants at any time and Treasury-OFS can choose
whether to accept a bid. Similarly, Treasury-OFS
retains the right to sell the warrants to a third party at
a mutually agreed price. If following repayment of the
preferred stock, an institution notifies Treasury-OFS
that it does not intend to repurchase its warrants, or

Section 5: Protecting Taxpayer Interests

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

if an agreement is not reached, Treasury-OFS intends
to dispose of the warrants through public auctions.
Treasury-OFS has announced that the first such
auctions would take place in early December. These
auctions are conducted as modified “Dutch” auctions
which are registered under the Securities Act of 1933.
Only one issuer’s warrants will be auctioned in each
auction. In this format, qualified bidders may submit
one or more independent bids at different pricequantity combinations and the warrants will be sold at
a uniform price that clears the market.

in June 2017. Chrysler has recently announced that it
plans to repay the loan fully prior to maturity.

Targeted Investment Program
(TIP)

Contractual agreements govern disposition options
and timetables, and participants in AIFP are subject to
enhanced reporting requirements relative other TARP
recipients (discussed under “Compliance”). TreasuryOFS will periodically evaluate both public and private
options to exit the equity investments under the AIFP.
For GM the most likely exit strategy is a gradual selloff of shares following a public offering. Pursuant to
its operating agreement, General Motors will attempt
a reasonable best efforts initial public offering by July
10, 2010. This date marks the one-year anniversary of
the automaker’s exit from bankruptcy. For Chrysler
and GMAC, the exit strategy may involve either a
private sale or a gradual sell-off of shares following
a public offering. In each case, Treasury-OFS’ goal
is to dispose of the government’s interests as soon as
practicable consistent with EESA goals. As described
below, Treasury will sell down, and ultimately sell off
completely its interests in a timely and orderly manner
that minimizes financial market and economic impact.
At the same time, Treasury cannot control market
conditions and have an obligation to protect taxpayer
investments and maximize overall investment returns
within competing constraints.

Treasury-OFS invested $20.0 billion in each of
Citigroup and Bank of America under TIP and
acquired preferred stock. In the case of Citigroup,
Treasury-OFS exchanged the preferred stock for
trust preferred securities, which are senior in right of
repayment to preferred stock but otherwise have many
similar terms. Both the Citigroup trust preferred
securities and the Bank of America preferred stock pay
dividends at eight percent per year. Treasury-OFS also
received warrants in connection with both investments.
The disposition considerations are similar to those
for CPP, including the fact that the issuers need the
approval of the primary banking regulators to repay the
trust preferred securities and preferred stock.

Automotive Industry
Investments (AIFP/ASSP)
Treasury-OFS’ auto industry investments consist of
equity investments, largely in the form of common
stock, as well as loans. The loans must be repaid by
certain dates. The GM loan was recently amended to
require quarterly mandatory prepayments of $1 billion
from existing escrow amounts in addition to the obligation for such funds to be applied to repay the loan
by June 30, 2010, unless extended. In addition, the
loan matures in July 2015. A portion of the Chrysler
loan also matures in December 2011 and the balance

In the case of the equity investments, Treasury-OFS
holds primarily common stock in GM, Chrysler,
and GMAC. Because the companies are not publicly
traded at this time, there is no market for the common
stock. Treasury-OFS also holds preferred stock in GM
and GMAC. Of the $13.1 billion in preferred shares
in GMAC held by Treasury-OFS, $7.875 billion is
convertible at the option of GMAC subject to certain
conditions.

Treasury-OFS has reduced the Automotive Supplier
Support Program (ASSP) aggregate commitment
from $5.0 billion to $3.5 billion. Treasury-OFS’
current funding equates to $0.4 billion, with GM and
Chrysler accounting for $0.3 billion and $0.1 billion,
respectively. Treasury-OFS does not anticipate in-

Section 5: Protecting Taxpayer Interests

American International Group
(AIG)

30, 2009, no payment had been made to Citigroup
related to the covered asset pool. The preferred stock
can be redeemed or sold in the same manner as CPP
and TIP preferred stocks. Treasury-OFS also received
warrants in connection with this investment.
Treasury-OFS has a cross functional team of staff overseeing and monitoring the covered asset pool under the
Citigroup AGP. Given the nature of the transaction, the
Treasury-OFS, FRBNY and FDIC work collaboratively
on overseeing the Citigroup AGP. Additionally, U.S.
Federal Parties have engaged outside independent service
providers to perform various business, compliances/
audit activities with respect to the covered asset pool.

Treasury-OFS holds preferred stock in AIG. As with
the CPP preferred, there is no mandatory repayment
date. AIG has replaced most of its board of directors,
as well as its chief executive officer since September
2008, and is presently engaged in a variety of restructuring initiatives, including the divestment of assets
to enable repayment of loans made by the FRBNY, as
well as Treasury-OFS’ investment and the wind-down
of exposure to certain financial product and derivative
trading activities to reduce excessive risk taking.

Term Asset Backed Loan Facility
(TALF)
Although Treasury-OFS has committed to provide up
to $20 billion in credit protection to the TALF special
purpose vehicle, Treasury-OFS has only funded $0.1
billion as of September 30, 2009. Additional funding will be required only if borrowers default on their
non-recourse loans and surrender the collateral for such
loans, which consists of asset-backed securities to the
FRBNY, which made the loans. In that event, TreasuryOFS’ funds are used to reimburse the Federal Reserve
Bank, and the asset-backed securities would then be sold
to repay Treasury-OFS.

Asset Guarantee Program (AGP)
This program, which currently includes only
Citigroup, differs from other TARP financial institution support programs in that Treasury-OFS does not
invest TARP funds in the institution directly. Rather,
TARP funds are reserved to cover a portion of the possible losses in the selected assets. In conjunction with
the transaction, Treasury-OFS received $4.0 billion
of preferred stock with identical terms as Citigroup’s
agreement under TIP. This investment is managed and
monitored in conjunction with TIP. As of September

Public-Private Investment
Program (PPIP)

Part 1 • Management’s Discussion and Analysis

creased participation prior to the program’s April 2010
expiration.

Treasury-OFS’ investments in Public-Private
Investment Funds (PPIFs) are subject to different
disposition considerations given the nature of the
investments. Treasury-OFS provides funds which are
used by the PPIF managers, together with private
capital, to purchase asset-backed securities. These
asset-backed securities then yield principal, interest
and dividend payments to the PPIFs which are used to
repay Treasury-OFS for its loans, and provide distributions to Treasury-OFS and the private investors for
their equity investments.
Treasury-OFS’ management of these investments is
therefore focused on ensuring that the asset managers
comply with the requirements of the program, including the detailed compliance rules that govern matters
such as conflicts of interest. Fund managers are required to disclose to and seek the approval of TreasuryOFS with respect to certain fundamental corporate
policies that could impact the PPIFs. In addition,
there are restrictions on dealings with affiliates and
other interested parties, which will help ensure that the
PPIFs only enter into arm’s-length transactions.

Section 5: Protecting Taxpayer Interests

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

Section Six:
Promoting Transparency
Treasury-OFS is committed to providing full disclosure
regarding the TARP. This includes information on how
the money has been spent, who has received it, and the
results of those investments. Providing such information promotes transparency and insures accountability.
In order to meet these objectives, Treasury-OFS
operates under a core set of principles. First, TreasuryOFS will provide detailed information on its programs
on a timely basis, including information on specific
institutions. Second, Treasury-OFS will provide that
information in accessible and usable formats. Finally,
Treasury-OFS will focus on answering the questions
that are most important to the public, the Congress or
the oversight bodies.

1. Providing detailed and timely
information
Treasury-OFS publishes a variety of reports that
provide information about TARP programs and transactions, and Treasury-OFS activities. For the period
ended September 30 2009, Treasury-OFS published
the following reports and information, which are available publicly at www.financialstability.gov:
• 86 transaction reports, in accordance with section 114 of EESA, which include details on every
investment in every institution under every program,
including dates and amounts invested, as well as payments received with respect to TARP investments,
• 10 Section 105(a) monthly congressional reports
which provide qualitative program updates and
detailed financial information on all programs,
• 7 Tranche Reports in accordance with Section
105(b) of EESA, which outline the details of the
transactions related to each $50 billion increment
of TARP investments,
• 3 Dividend and interest reports,
• 2 Making Home Affordable program reports,

Section 6: Promoting Transparency

• 7 Monthly Lending and Intermediation Snapshot
reports and 7 CPP Monthly Lending Reports, and
• 2 Section 104(g) Financial Stability Oversight
Board quarterly reports to the Congress.
All program descriptions, including term sheets and
forms of contracts, are also posted. Treasury-OFS has
used standard forms of contracts and thus within a
program there is little variation among the contracts
for all institutions. Treasury-OFS has also posted
investment contracts on Treasury-OFS website within
two business days of each transaction’s closing.
The monthly report to Congress, also known as the
Section 105(a) report, provides one of the most useful
ways to track the activities of TARP. It contains easyto-read charts showing how much money has been
spent and where the money is going by program. It
also contains charts on how much money has been repaid or returned to Treasury-OFS, descriptions of each
TARP program as well as highlights of new developments. For those who want more detail, the transaction
reports give details on each investment.

2. Making information usable
and accessible
A key element in Treasury-OFS’ public outreach effort
is providing user-friendly resources online. Earlier this
year, Treasury-OFS launched a new website—www.
FinancialStability.gov—that provides a wealth of
information about the TARP. FinancialStability.gov
provides all of the TARP reports, lists the institutions
participating in the Treasury-OFS’ programs, and makes
available detailed contracts defining those investments.
As of today, Treasury-OFS has posted nearly 700
investment contracts, in addition to terms and program
guidelines for all programs under EESA.

3. Answering the right
questions
In being transparent with information, Treasury-OFS
has designed reports not only to be detailed and timely,
but also to answer the questions that observers most
frequently ask. For example, Treasury-OFS is often
asked about what banks are doing with their TARP
funds. So, in January 2009, Treasury-OFS launched
an important initiative to help the public easily assess
the lending and intermediation activities of the largest
CPP participants and more limited information for
smaller CPP participants. Treasury-OFS now publishes
monthly and quarterly lending surveys that contain
information on the lending and other activities of over
670 institutions that have received TARP funds.

Performance Metrics for FY 2010
Treasury-OFS has developed performance measures
related to each of its strategic goals for FY 2010.
• Additional performance measures will evaluate the
change in the capital ratios and lending of CPP
participants by comparing them to a control set of
banks with similar characteristics.
• Treasury-OFS will continue to evaluate performance of the SCAP bank holding companies
(BHCs). Performance measures will include changes
in capital ratios and lending of the SCAP BHCs
versus control banks with similar characteristics.
• Treasury-OFS will continue to track various performance measures for the TALF. These measures
will include the TALF-eligible ABS issuance,
spreads in the secondary markets of RMBS, and
CMBS securities, as well as the spread between
secondary ABS and benchmarks.

• Performance measures of the number of HAMP
modifications (trial and permanent) entered into,
the redefault rate, and the change in average borrower payments will be tracked.
• Several specific measures will address taxpayer
protection. First, Treasury-OFS will seek to have a
clean audit opinion on its financial statements. In
addition, the financial return for each program will
be evaluated against its benchmark (subsidy rate).
Finally, Treasury-OFS will report performance data
on how oversight issues are addressed and resolved.
• Several indicators will measure performance on promoting transparency. First, Treasury-OFS will track
on-time reporting performance. Second, TreasuryOFS will measure the degree of user satisfaction
with the TARP’s website, www.financialstability.
gov, to determine areas for improvement. Finally, a
request response index will be created to provide the
public with a clear measure of timely performance.

Part 1 • Management’s Discussion and Analysis

Treasury-OFS also launched the website www.
MakingHomeAffordable.gov to provide specific information to homeowners on the Making Home Affordable
Program and efforts to mitigate the fore-closure crisis.
In addition, Treasury-OFS has launched an initiative to
ensure that its website meets the needs of all its users to
provide easily accessible data and information.

HAMP Reporting
Treasury-OFS is improving performance and enhancing
transparency on the HAMP.
1. Servicer-specific results are now reported on a
monthly basis. These reports provide a transparent and
public accounting of individual servicer performance by
detailing the number of trial modification offers extended.
2. Treasury-OFS is establishing specific operational
metrics. These metrics wil measure the performance
of each servicer, such as average borrower wait time in
response to inquiries, and the response time for completed
applications; and servicer performance will be included in
our monthly public report.
3. Treasury-OFS directed that Freddie Mac review
declined modifications. In its role as compliance agent,
Freddie Mac has developed a “second look” process by auditing samples of HAMP modification applications that have
been declined. This will minimize the likelihood that borrower
applications are overlooked or that applicants are inadvertently or incorrectly denied a modification. In addition, the
“second look” program is examining servicer non-performing
loan (NPL) portfolios to identify eligible borrowers that should
have been solicited for a modification, but were not.

Section 6: Promoting Transparency

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

Section Seven:
Financial Accounting Policy
Under TARP, Treasury-OFS has made equity investments, loans and asset guarantees in a range of financial institutions. In exchange for these investments,
loans, and asset guarantees, Treasury-OFS, on behalf
of the taxpayer, has received financial instruments—
equity, debt and warrants—from these companies. In
this report, Treasury-OFS is presenting a transparent
accounting of the current estimated cost of TARP,
which reflects estimates of the value of those investments, loans and asset guarantees. Treasury-OFS has
developed and presented the estimates in a way that is
consistent with the statutory reporting requirements.
The statutory reporting requirements for TARP in
this area are in some respects unique. Under EESA,
Treasury-OFS is required to determine the budgetary
cost of TARP under the general framework of credit
reform. Treasury-OFS has determined it was appropriate to also use the credit reform framework for
financial reporting purposes. EESA also requires that
the budgetary cost of TARP programs be determined
using a methodology that incorporates market risk.
This requirement means that TARP equity investments
similar to those that are publicly traded are valued in a
way that is analogous to the “fair value” standard that
private sector firms are required to use.
This section explains the applicable reporting requirements, discusses how Treasury-OFS has met
the requirements, and describes how this reporting
methodology relates to commercial reporting concepts.

Applicable Budget and
Accounting Standards
The Emergency Economic Stabilization Act of 2008
(EESA) requires that the cost of troubled assets
purchased or guaranteed be determined for budgetary accounting purposes in accordance with the

Section 7: Financial Accounting Policy

Federal Credit Reform Act of 1990 (FCRA). EESA
also requires that the cost calculations be adjusted for
market risk.
FCRA established a methodology for budgeting for
loans or loan guarantees issued by the federal government. Under the FCRA, the budgets for loans and loan
guarantee programs reflect the expected cost of these financial arrangements, rather than just the cash flows as
is typically the case for federal budgeting. For example,
when a federal agency enters into a loan guarantee,
no actual cash outflow from the government typically
occurs, however, the cash outflows and the expected
cost over the life of the guarantee may be substantial.
In contrast, when a federal agency provides a loan,
there is a substantial cash outflow at loan origination,
but the ultimate cost of that loan to the government
will depend on future repayments.
Rather than using a cash basis for credit programs,
which can be misleading, the FCRA calls for agencies
to record the “subsidy” cost of a loan or loan guarantee at the time of the disbursement of the loan. The
subsidy cost is the net present value of all cash flows associated with the credit transaction, usually calculated
by discounting all payments back to the current period
at the appropriate Treasury rate. Subsidy estimates
reflect both the terms of the underlying instrument
and the likelihood of repayment. For example, if a
loan carries a rate below the comparable Treasury rate,
that loan will generate a subsidy cost even if the loan
is expected to be fully repaid. The subsidy calculation
also reflects the risk that the borrower may not repay
the entire amount of the loan. The potential for less
than full repayment is reflected in the expected cash
flows, which should reflect historical defaults on
similar instruments, and assumptions about possible
future economic performance.

EESA mandated that the FCRA be used to determine
the cost of all TARP investments for budgetary purposes, although the FCRA as originally designed did
not cover equity investments. Treasury-OFS concluded
that it was appropriate to apply FCRA to its preferred
stock purchases since preferred stock has a dividend
rate and regularly scheduled dividend payments,
similar to debt instruments.
The Federal Accounting Standards Advisory Board
(FASAB) has promulgated extensive accounting
guidance that establish Federal accounting practices
for loans and guarantees are consistent with the FCRA
method of budgeting for credit programs. TARP
investments in direct loans, such as those to the auto
industry, and asset guarantees are covered by existing
accounting standards. Specifically Statement of Federal
Financial Accounting Standards 2, Accounting for
Direct Loans and Loan Guarantees (SFFAS 2) provides
relevant accounting guidance for direct loans and loan
guarantees issued by federal entities and closely parallels the FCRA provisions. Federal entities must record
loans disbursed as an asset, valued at the net present
value of expected future cash inflows. The difference
between the amount disbursed and the net present
value of expected cash inflows for loans is recorded as
a subsidy cost at the time of the loan disbursement.
Federal entities must book outstanding guarantees as
an asset or a liability, valued at the net present value of
the expected future cash flows, with the corresponding
amount reflected in subsidy cost. Estimates of future
cash flows are revised on an annual basis with changes
reflected as an increase or decrease in the subsidy allowance and reflected in the Statement of Net Costs.
FASAB standards do not cover equity investments by
federal entities in private enterprises as the Federal
government generally does not make these types of
investments. Consistent with the accounting policy
for equity investments made by Treasury in private

entities, Treasury-OFS accounts for its equity investments at fair value, defined as the estimated amount
of proceeds Treasury-OFS would receive if the
equity investments were sold to a market participant.
Treasury-OFS uses the present value accounting
concepts embedded in SFFAS No. 2 to derive fair
value measurements. Treasury-OFS concluded that
the equity investments were similar to direct loans in
that there is a stated interest rate and a redemption
feature which, if elected, requires repayment of the
amount invested. Furthermore, the EESA requirement
to consider market risk provides a basis to arrive at a
fair value measurement. Therefore, Treasury-OFS uses
SFFAS No. 2 for reporting and disclosure requirements
of it equity investments. Treasury-OFS accounts for the
warrants received under Section 113 of EESA as fees
under SFFAS No. 2, as such the value of the warrants
is a reduction of the subsidy allowance.

Part 1 • Management’s Discussion and Analysis

The original subsidy cost estimate made at the time the
transaction occurs is updated each year to reflect the
actual cash flows that occurred as well as any changes
in the expected future repayments from the borrower.

Market Risk
EESA departed from the FCRA by requiring that an
adjustment for market risk be made to the interest rate
used to discount future expected cash flows rather than
using the interest rate on comparable maturity Treasury
debt as the FCRA requires. This distinction values the
TARP equity investments as closely as possible to how
they would be priced in private markets. The incorporation of market risk is a departure from the standard
FCRA methodology and is an important factor in the
valuations included in Treasury-OFS financial statements. The loan and asset guarantee models include
an adjustment for market risk which is intended
to capture the risk of unexpected losses, but is not
intended to represent fair value.
TARP holds a variety of investments. The Citigroup
common stock is a standard financial instrument
that trades in public markets and has a market price
that can be directly observed. Certain other TARP
investments are closely related to tradable securities.
Wherever possible Treasury-OFS has sought to use
market prices of traded equity securities in estimating
the fair value of TARP equity investments.

Section 7: Financial Accounting Policy

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

Most TARP equity investments do not have direct analogs in private markets so Treasury-OFS uses internal
market-based models to estimate the fair value of these
investments. These models have been benchmarked
to actual securities with observable market prices to
try and ensure, to the maximum extent possible, that
the model’s results actually reflect how the private
markets are pricing risk. As described in Section Eight
[Valuation], the valuation of Treasury-OFS’ equity
investments comes as close as possible to how private
financial markets would price those instruments.

Comparison to Commercial
Reporting Concepts
While commercial reporting standards vary, fair value
is the most common valuation approach for reporting relatively liquid equity investments like preferred
stock. For Treasury-OFS, adjusting our estimates to
reflect market risk ensures that the asset values reflect
a reasonable assessment of fair value, which can be
readily compared and evaluated based on commercial
investment information.

Section 7: Financial Accounting Policy

This section describes the methodologies used to estimate the value of the diverse set of TARP investments
made under EESA. Wherever possible, Treasury-OFS
has sought to use market prices of tradable securities
to make direct estimates of the market value of TARP
investments. Use of market prices was possible for
TARP investments that are standard financial instruments that trade in public markets or are closely related
to tradable securities. For those TARP investments that
do not have direct analogs in private markets, TreasuryOFS uses internal market-based models to estimate the
market value of these investments as detailed below.

Incorporating “Market Risk” in
Valuation Models
Risk can be taken into account in a number of ways
when estimating the value of an asset. EESA requires
that the budgetary cost and risk of troubled assets
acquired under TARP be estimated in accordance with
the Federal Credit Reform Act of 1990 (FCRA) and
using a market adjusted discount rate. Where possible,
market prices are used to benchmark the values of
TARP investments.
The standard methodology under FCRA is to estimate
asset values as the net present value of expected cash
flows, using Treasury rates for discounting. In that
approach, risk is reflected in the expected cash flows.
For example, default risk on a loan would be reflected
in the fact that the expected cash flows are less than the
contractual obligations.
EESA also requires for budgetary purposes that the
FCRA methodology be modified to include an adjustment for market risk. Specifically, EESA requires that
instead of discounting future expected cash flows at the
interest rate on comparable maturity Treasury debt, an
additional adjustment for market risk must be made.

For financial reporting purposes, the market risk is
incorporated in the future expected cash flows.
In effect, the requirement to adjust the standard FCRA
methodology to reflect “market risk” means that for the
purposes of budget and accounting, TARP equity investments are valued as closely as possible to how they
would be priced in private markets. This requirement is
relatively easy to implement for TARP investments that
are closely related to securities with observable market
prices. However, where empirical models are needed to
estimate the value of non-standard TARP investments
those models must be benchmarked to ensure, to the
extent possible, that their results reflect the way public
markets price risk. This benchmarking is an important
part of valuation methodology.

Part 1 • Management’s Discussion and Analysis

Section Eight:
TARP Valuation Methodology

The adjustment for “market risk” can be reflected in
either expected cash flows or the discount rate used
to calculate net present values. Regardless of where
the adjustment is made, it should not have a material impact on the results as long as those models are
benchmarked to suitable measures of market risk in an
appropriate manner.

CPP Investments
Under the CPP as detailed in Section Three [Ensuring
Stability], Treasury-OFS has provided capital to 685
qualified financial institutions and received preferred
stock and warrants in return. To estimate the value of
these investments, Treasury-OFS has built two separate
statistical models: one to value the preferred stock
and one to value the warrants. Both valuation models
use standard methods employed in academe and the
financial sector. An important aspect of these models is
the treatment of the implicit options embedded in the
assets; i.e., the financial institution’s decision to repurchase the asset and Treasury-OFS’ decision to exercise
the warrants. These models make use of a variety of information, including historical and current information

Section 8: TARP Valuation Methodology

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

on the institution’s balance sheets, the term-structure of
interest rates, and equity prices and dividends.
The estimated values of CPP preferred equity investments are the net present values of the expected dividend payments and repurchases. The model is used to
estimate the likely distribution of dividend payments
over time. Estimates of the ultimate cost of TARP will
decline further if early repayments are higher than
those currently built into the models. It is assumed
that the key decisions that affect whether or not banks
pay their preferred dividends are made by each bank
based on the strength of their balance sheet. The model
assumes a probabilistic evolution of each bank’s asset
to liability ratio. Each institution’s assets are subject
to uncertain returns and institutions are assumed to
manage their asset to liability ratio in such a way that
it reverts over time to a target level. Historical volatility is used to scale the likely evolution of each banks’
assets-to-liabilities ratio.
In the model, when equity decreases, i.e. the asset-toliability ratio falls; institutions are increasingly likely
to default, either because they enter bankruptcy or are
closed by regulators. The probability of default is estimated based on the performance of a large sample of
US banks over the period 1990-2008. At the other end
of the spectrum, institutions call their preferred shares
when the present value of expected future dividends
exceeds the call price; which occurs when equity is high
and interest rates are low.
The warrants for the purchase of common stock are
priced using an option-pricing model augmented for
the fact that exercising warrants infuses cash into an
institution and also dilutes current stockholders. The
model assumes optimal warrant exercise by TreasuryOFS; that is, the warrants are exercised if the expected
present value of income from future optimal warrant
exercise is less than the current in-the-money value.
The key input to the model—the future volatility
of bank stock prices—is derived from the model for
preferred stock.

Section 8: TARP Valuation Methodology

The basic preferred equity model is benchmarked to
the market pricing of risk. The model was used to estimate the value of preferred equity instruments issued
by 18 of the CPP banks that trade actively in public
markets. These particular instruments were chosen
because they share important characteristics with the
CPP instruments. In particular, these traded instruments have very long maturities and are callable. The
stochastic assumptions that drive the evolution of bank
balance sheets in the model were then adjusted so the
model’s valuation of this portfolio of tradable securities
matched the observed market prices.
The only other adjustment to the model relates to
the banks’ repurchases of preferred securities from
Treasury-OFS. Treasury-OFS management, based on
public statements by individual banks, believes that a
significant volume of CPP and TIP preferred shares is
likely to be repaid earlier than the model predicts. To
reflect this judgment, the model is adjusted to generate
approximately $70 billion in CPP and TIP repurchases
over the next twelve to eighteen months. 9
Treasury-OFS exchanged the CPP preferred shares
purchased from Citigroup for common stock. The
exchange rate was $3.25 per share resulting in TreasuryOFS obtaining approximately 7.7 billion shares. The
value of these shares is the amount of shares held times
its market price.

TIP
Treasury-OFS provided funds to both Citigroup
and Bank of America under the Targeted Investment
Program through the purchase of additional preferred
shares. These investments are valued in the same
manner that Treasury-OFS uses to value CPP invest-

Without this adjustment the CPP preferred equity model
predicts roughly $20 billion in repurchases over the next year.
The valuation model is altered both by directly imposing the
repurchases of those institutions that have stated plans to
repurchase soon, and by adding a small additional benefit for
any institution that repays its TARP funds and exits the CPP.
This adjustment increases rates slightly to be consistent with a
reasonable forecast of future repurchases.

AIG Investment Program
The method used to value AIG preferred shares is
broadly analogous to the approach used to value CPP
investments. However, greater uncertainty exists for
the valuation of preferred shares for AIG. First, the size
of Treasury-OFS’ holding of preferred shares relative to AIG’s total balance sheet makes the valuation
extremely sensitive to assumptions about the recovery
ratio for preferred shares should AIG enter default.
Second, no comparable traded preferred shares exist.
Therefore, Treasury-OFS based the AIG valuation on
the observed market values of publicly traded assets on
either side of the liquidation preference of the preferred
stock; common stock (paid after preferred stock),
and the most junior subordinated debt (paid before
preferred stock). Further, based on certain publicly
available third party sources, assumptions about payouts in different outcomes and the probability of some
outcomes were made. Finally, external asset managers
provided estimated fair value amounts, premised on
public information, which also assisted Treasury-OFS
in its valuation. These different factors were all used in
determining the best estimate of the fair value of AIG
assets. The AIG Investment Program also includes an
equity capital facility that can be drawn upon at the
discretion of AIG.

AIFP
The valuation of equity-type investments was performed in a manner that is broadly analogous to
the methodology used for CPP investments, with
reliance on publicly traded securities to benchmark
the assumptions of the valuation exercise. Debt with
potential value is valued using rating agency default
probabilities.
As part of the General Motors (GM) bankruptcy proceedings, Treasury-OFS received a 60.8 percent stake
in the common equity of General Motors Company
(New GM). Because the unsecured bond holders in
General Motors Corporation (Old GM) received 10

percent of the common equity ownership and warrants
in New GM, the expected recovery rate implied by the
current trading prices of the Old GM bonds provides
the implied value of the New GM equity. TreasuryOFS used this implied equity value to account for its
equity stake in New GM.
For the GMAC equity instruments, Treasury-OFS
used the model to estimate the value of GMAC subordinated debt that trades actively in public markets.
The stochastic assumptions that drive the evolution
of the institution’s balance sheet in the model were
then adjusted so the model’s valuation of this security
matched the observed market price.
Treasury-OFS values direct loans using an analytical model that estimates the net present value of the
expected principal, interest, and other scheduled
payments taking into account potential defaults. In
the event of a financial institution’s default, these
models include estimates of recoveries, incorporating
the effects of any collateral provided by the contract.
The probability of default and losses given default are
estimated by using historical data when available, or
publicly available proxy data, including credit rating
agencies historical performance data.

Part 1 • Management’s Discussion and Analysis

ments in large institutions. As noted above, the model
assumes $70 billion in CPP and TIP repurchases.

Treasury-OFS also benchmarks the valuation of OFS’
holdings of auto securities against the assumptions
about the dynamics of future revenues and costs
provided by an inter-agency working group dealing
with the automotive industry.

TALF
Under the TALF program, Treasury-OFS will provide
funding of up to $20 billion as necessary for the
purchase of TALF collateral through a direct loan to
a Special Purpose Vehicle (SPV). The SPV collects
monthly interest spreads on all outstanding TALF
loans, as well as any income or sale proceeds from
purchased collateral. When the program is wound
down, Treasury-OFS will be repaid principal and interest on the loan if funds are available, and will collect
90 percent of any proceeds remaining in the SPV. The
value of Treasury-OFS’ loan to the TALF SPV is the

Section 8: TARP Valuation Methodology

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

estimated net present value of the expected principal,
interest, and additional proceeds.
To derive the cash flows to the SPV, and ultimately,
Treasury-OFS, the model simulates the performance
of underlying collateral. Loss probabilities on the
underlying collateral are calculated based on analysis of
historical loan loss and charge off experience by credit
sector and subsector. Historical mean loss rates and
volatilities are significantly stressed to reflect recent
and projected performance. Simulated losses are run
through cash flow models to project impairment to
the TALF eligible securities. Impaired securities are
projected to be purchased by the SPV, requiring additional Treasury-OFS funding. Simulation outcomes
consisting of a range of loss scenarios are probabilityweighted to generate the expected net present value of
future cash flows.

AGP
Under the AGP, Treasury-OFS received preferred
shares and warrants in exchange for providing a
guarantee on a pool of Citigroup’s assets. The value of
the AGP preferred shares and warrants is determined
in exactly the same manner that Treasury-OFS uses to
value CPP investments in large institutions. The cost
that Treasury-OFS expects to incur is based on projected losses on the asset pool under a weighted average
of different possible loss scenarios.
The value of the AGP is the discounted expected cash
inflows from the preferred shares and warrants less the
expected costs of the TARP expenditures to make good
on the asset pool guarantees and adjusted for market risk.

Sensitivity Analysis
The ultimate value of TARP investments will only be
known in time. Realized values will vary from current estimates in part because economic and financial
conditions will change. Many TARP investments do
not have readily observable values and their values can
only be estimated by Treasury-OFS.
Sensitivity analysis is one way to get some feel for the
degree of uncertainty around Treasury-OFS estimates.

Section 8: TARP Valuation Methodology

In the analysis reported here, Treasury-OFS focuses on
the largest components of the TARP, the assets held
under the Capital Purchase Program (CPP), as well as
preferred stock investments made under the Targeted
Investment Program (TIP). Second, Treasury-OFS
focuses on two of the most important inputs to the
valuation: i) whether and when the banks repay the
preferred stock, and ii) whether there are changes in
the market price of publicly-traded preferred stock
used as a benchmark for valuing the preferred stock
held in the TARP.
Prepayments: The CPP preferred stock carries a 5
percent dividend, which increases to 9 percent after
5 years. Banks able to repay would be likely to do so
at the 5-year point. However, some banks have repaid
early. Over $70 billion of the $204 billion of preferred
stock has already been repaid. The model forecasts additional repayments over the next 18 months of $19.5
billion. Treasury-OFS increased that forecast by $50
billion for CPP and TIP combined to reflect additional
anticipated repayments over the next 12 months. As a
sensitivity analysis, Treasury-OFS computed the CPP
and TIP values without the additional $50 billion
of anticipated repayments. The result is shown in
Scenario 1 of Table 8.
Benchmark Preferred Stock: The valuation procedure
entails observing the market price of publicly-traded
preferred stock and calibrating the model (in particular
the risk premium) to match those prices. The calibrated model is then used to price the non-publicly traded
preferred stock held by the TARP. The benchmark
preferred stock consists of a portfolio of claims issued
by some of the same institutions with TARP preferred
stock. It is generally the larger institutions that have
issued preferred stock. The TARP preferred stock for
smaller institutions may not be exactly comparable,
but the bulk of TARP investments, as measured on a
dollar basis, are in large institutions.
The preferred stock calibration procedure imposes a
strict discipline on the model. If one parameter in the
model is changed, calibration to the market benchmark
will induce an offsetting change in other parameters,

To put this sensitivity analysis in perspective it is useful
to consider the range over which actual preferred shares
have moved in this crisis. Figure 15 shows the prices of
callable preferred shares of those CPP banks that have
such instruments outstanding. Since their troughs in
early March, these shares have recovered substantially.
Currently the basket of callable preferred shares for
CPP banks is trading at about 76 percent of their call
prices which leaves opportunity for further improvement. Of course just last March these instruments
were trading for less than half their current value.
This considerable volatility, along with the sensitivity
analysis presented here, gives a good sense of the degree
of unavoidable uncertainty around the estimates of the
valuation of TARP investments presented here.
Figure 15. Prices of Callable Preferred Shares Issues by CPP
Banks, (Percent of Call Price)
110%

CPP Launched

100%
90%
Percent

Valuation (8/30)
FSP

80%
70%
60%

TABLE 8: Market Value Sensitivity
(Dollars in Billions)
Current
Market
Value1

Scenario
1

Scenario
2

Scenario
3

Additional
Repayments2

No
Additional
Repayments

10%
Financial
Stock
Price
Increase

10%
Financial
Stock
Price
Decrease

133.0

127.7

141.8

123.7

% change
from current

N/A

-4.03%

6.58%

-7.01%

TIP

38.6

36.3

39.8

37.4

% change
from current

N/A

-5.96%

3.05%

-2.98%

Program

CPP

Total
% change
from current

171.6

164.0

181.5

161.1

N/A

-4.46%

5.78%

-6.10%

Part 1 • Management’s Discussion and Analysis

with the result that the final valuation is not altered
much. Changes in the price of the benchmark, however, have the potential to significantly alter the valuations. As a sensitivity analysis, Treasury-OFS increases
and decreases the value of the benchmark preferred
stock in the CPP and TIP by 10 percent. The result is
shown in Scenarios 2 and 3 of the following table.

1/ The difference between the values contained in this table and the financial
statements is that the financial statement values include the warrants.
2/ Assumes $70 billion in repayments over the next 12 to 18 months.

Other Sources of Sensitivity
Wherever possible Treasury-OFS has used direct
market proxies to estimate the value of TARP investments. The volatility of the market prices of the related
securities is an important indicator of the uncertainty
of our estimates of what the returns on TARP investments ultimately will be. For example, the price of
Citigroup common shares has fluctuated in a range
from $2.6 to $5.2 per share just since the SCAP results
were announced in early May.

50%
40%
30%

2007
CPP Repaid

2008

2009

CPP Still Outstanding

Note: Weighted averages of prices of callable preferred shares issued by
three CPP banks that have already repaid their TARP capital injections and
14 CPP banks that have not. Prices are expressed as a percent of the call
price. Source Bloomberg.

Section 8: TARP Valuation Methodology

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

Section Nine:
Systems, Controls, and Legal Compliance
Management Assurance Statement
The Treasury Office of Financial Stability’s (Treasury-OFS) management is responsible for establishing and
maintaining effective internal control and financial management systems that meet the objectives of the Federal
Managers’ Financial Integrity Act (FMFIA), 31 U.S.C. Section 3512(c), (d). Treasury-OFS has evaluated its
management controls, internal controls over financial reporting, and compliance with the federal financial
systems standards. As part of the evaluation process, Treasury-OFS considered the results of extensive documentation, assessment and testing of controls across Treasury-OFS, as well as the results of independent audits.
Treasury-OFS conducted its reviews of internal controls in accordance with the FMFIA and the Office of
Management and Budget (OMB’s) Circular A-123, Management’s Responsibility for Internal Control.
As a result of its reviews, Treasury-OFS management concludes that the management control objectives described below, taken as a whole, were achieved as of September 30, 2009. Specifically, this assurance is provided
relative to Sections 2 (internal controls) and 4 (systems controls) of FMFIA. Treasury-OFS further assures that
the financial management systems relied upon by Treasury-OFS are in substantial compliance with the requirements imposed by the Federal Financial Management Improvement Act (FFMIA). Treasury-OFS does not rely
on any financial systems beyond those maintained by the Department of the Treasury and Fannie Mae.
Treasury-OFS’ internal controls are designed to meet the management objectives established by Treasury and
listed below:
a. Programs achieve their intended results effectively and efficiently;
b. Resources are used consistent with the overall mission;
c. Programs and resources are free from waste, fraud, and mismanagement;
d. Laws and regulations are followed;
e. Controls are sufficient to minimize any improper or erroneous payments;
f. Performance information is reliable;
g. Systems security is in substantial compliance with all relevant requirements;
h. Continuity of operations planning in critical areas is sufficient to reduce risk to reasonable levels; and
i. Financial management systems are in compliance with federal financial systems standards, i.e., FMFIA
Section 4/FFMIA.
In addition, Treasury-OFS management conducted its assessment of the effectiveness of internal control
over financial reporting, which includes safeguarding of assets and compliance with applicable laws and
regulations, in accordance with OMB Circular A-123, Management’s Responsibility for Internal Control,
Appendix A, Internal Control over Financial Reporting. Based on the results of this evaluation, TreasuryOFS provides unqualified assurance that internal control over financial reporting is appropriately designed
and operating effectively as of September 30, 2009, with no related material weaknesses noted.
Sincerely,
Herbert M. Allison, Jr.
Assistant Secretary for Financial Stability

Section 9: systems, controls, and legal compliance

The Emergency Economic Stabilization Act (EESA)
established the Office of Financial Stability (TreasuryOFS) on October 3, 2008. Shortly thereafter, TreasuryOFS funded $115 billion to eight financial institutions
as part of the Capital Purchase Program. From the
inception of that initial program to the current day, the
importance of effective internal controls in safeguarding the use of taxpayer dollars to provide financial
stability through the Troubled Asset Relief Program
(TARP) has remained a top priority of Treasury-OFS
management.
Whether deploying operational processes to support
new TARP programs or implementing complex budget
and financial reporting processes to support its first
year of operations, Treasury-OFS endeavors to establish
an effective initial operating capability for internal controls that are first and foremost effective at mitigating
risk. Then, Treasury-OFS enhances the initial operating capability to a sustainable level that is effective and
efficient, and designed to meet the long-term needs of
its programs.
Treasury-OFS is committed to implementing an
effective internal control program and has established
a Senior Assessment Team (SAT) to guide the office’s
efforts to meet the statutory and regulatory requirements surrounding a sound system of internal control.
The SAT is chaired by the Deputy Chief Financial
Officer (DCFO) and includes representatives from
all Treasury-OFS functional areas. Further, TreasuryOFS has defined an Internal Control Framework
that is based on the principles of The Committee
of Sponsoring Organizations of the Treadway
Commission (COSO). The SAT leverages this framework in communicating control objectives across the
organization and its third party service providers.
Treasury-OFS established an Internal Control Program
Office (ICPO) under the Office of the Chief Financial
Officer that is guided by the SAT and focuses on
managing the office’s internal control efforts. The
ICPO monitors the implementation of the Internal

Control Framework and ensures the achievement of
management control objectives. The ICPO monitors
Treasury-OFS activities to ensure management control
objectives are achieved by:
• Integrating management controls into TreasuryOFS business processes through:
Developing internal control documentation,
Reviewing internal control responsibilities with
process owners before major program execution
events, and,
Real-time monitoring of key control effectiveness
during and after significant program execution
events;
• Conducting “lessons learned” sessions to identify
and remediate areas requiring improvement;

Part 1 • Management’s Discussion and Analysis

Internal Control Program

• Periodic testing of key controls; and,
• Monitoring feedback from third party oversight
bodies.
In addition, the internal control environment supporting TARP programs and Treasury-OFS activities
undergoes continuous improvement to remain effective
and is subject to significant third party oversight by
the Government Accountability Office (GAO) and the
Special Inspector General for the Troubled Asset Relief
Program (SIGTARP).
The Assistant Secretary for Financial Stability must
report annually to the Under Secretary for Domestic
Finance on the adequacy of the various internal
controls throughout the Office of Financial Stability,
to include financial management systems compliance.
The Assurance Statement is required by the Federal
Managers’ Financial Integrity Act (FMFIA). In order to
support the Assistant Secretary’s letter of assurance, the
respective Treasury-OFS divisions prepare individual
statements of assurance. These individual statements of
assurance provide evidence supporting the achievement
of Treasury-OFS-wide internal control objectives and
disclose any noted weaknesses.

Information Technology Systems

Section 9: systems, controls, and legal compliance

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

For fiscal year 2009, Treasury-OFS did not directly
support any Information Technology (IT) systems.
Significant IT systems used by TARP are supported by
various Departmental Offices or bureaus that are part
of Treasury.
Other IT systems are supported by Financial Agents
which provide services to the U.S. Treasury. The
Financial Agency Agreements maintained by the
Treasury Office of the Fiscal Assistant Secretary in
support of Treasury-OFS require the Financial Agents
to design and implement suitably robust IT security
plans and internal control programs, to be reviewed
and approved by the Treasury at least annually.

Compliance with the Improper Payments
Information Act (IPIA)
The elimination of improper payments is a major focus
of Treasury-OFS executive management. Managers
are held accountable for developing and strengthening
financial management controls to detect and prevent
improper payments, and thereby better safeguard
taxpayer dollars.
Treasury-OFS carried out its fiscal year 2009 IPIA
assessment per Treasury-wide guidance and did not
identify any programs or activities susceptible to
significant erroneous payments. Treasury-OFS did not
identify any payments to incorrect payees or ineligible
recipients. Management will continue to monitor
disbursements and re-assess IPIA compliance as new
programs are initiated.

Areas for Improvement
Over the next year, OFS management is focused on
enhancing the maturity of its internal control environment in several key areas as follows:
• Because of limited staffing and competing priorities among the various compliance activities and
TARP programs, independent monitoring of
contract requirements for TARP programs has
been constrained. Treasury-OFS has been challenged to develop sufficient resources to respond
to the number of requirements imposed by TARP

programs, the large number of participants in
those programs, and recommendations by the
oversight entities. Management is building the personnel resources to aggressively address a number
of compliance priorities, including for example,
monitoring Treasury-OFS’ contract compliance
status of CPP recipients’ compliance.
• The system of record used to manage the Home
Affordable Modification Program (HAMP)
requires increased functionality to meet the control
requirements of the program. Weaknesses in these
systems are currently mitigated by our detective internal controls. However, management recognizes
that these system shortfalls must be addressed in
the near term, as the volume and complexity of
these system functions increase.
• EESA required the preparation of stand-alone
financial statements that would be audited by the
GAO. As a new entity, neither Treasury-OFS nor
our GAO auditors have previously been through
the statement preparation and auditing process for
this complicated entity. An additional complication resulted from EESA and OMB’s interpretation of the statute to require the application of
complex accounting required by the Federal Credit
Reform Act of 1990 to all of Treasury-OFS acquisitions (i.e. equities, loans and asset guarantees).
Given these facts, Treasury-OFS faced a number
of challenges, including a shortage of experienced
credit reform staff and evolving and untested
financial reporting processes and controls. Given
the pace and evolution of the TARP programs
throughout the year and subsequent impact on
the accounting and financial reporting areas,
certain accounting practices continued to evolve
throughout the period ended September 30, 2009.
In an effort to keep pace with these changes,
management continues to focus its attention on
the development of robust processes that meet
business needs and internal control requirements.
In developing its accounting processes and controls, management has sought to balance effective

Section 9: systems, controls, and legal compliance

As noted in Section Seven, EESA mandated that the
FCRA be used to determine the cost of all TARP
investments for budgetary purposes. The FCRA calls
for agencies to record the “subsidy” cost of an investment at the time of the disbursement, which requires
the use of detailed models following the methodology
described in Section Eight. Due to a compressed
timeframe, management was not able to execute
the planned controls around manual data inputs in
the credit subsidy models in such a manner so as to
prevent non-material errors from occurring in the
final re-estimate production process. Significant errors
identified were corrected and amounts were properly
reflected in the financial statements. In year one, our
internal controls over data inputs were intended to
provide full coverage of the models, but of necessity
our resources focused more on the high risk programs
and items. In fiscal year 2010, we will focus more
attention on improving internal control effectiveness
in mitigating the risk of errors in data inputs for all
models.

Oversight Entities
Per the EESA requirements, Treasury-OFS has four
oversight entities with specific responsibilities with
regard to TARP, which are the Financial Stability
Oversight Board, the GAO, the Special Inspector
General for TARP, and the Congressional Oversight
Panel. A summary of the responsibilities and activities
of each of these entities is provided below.

Financial Stability Oversight Board
The Oversight Board was established by section 104
of the EESA to help oversee the Troubled Asset Relief
Program and other emergency authorities and facilities granted to the Secretary of the Treasury under
the EESA. The Oversight Board is composed of the
Secretary of the Treasury, the Chairman of the Board of

Governors of the Federal Reserve System, the Director
of the Federal Housing Finance Agency, the Chairman
of the Securities and Exchange Commission, and the
Secretary of the Department of Housing and Urban
Development. Through Oversight Board meetings
and consultations between the staffs of the agencies
represented by each Member of the Oversight Board,
the Oversight Board reviews and monitors the development and ongoing implementation of the policies and
programs under TARP to restore liquidity and stability
to the U.S. financial system. The Oversight Board
meets each month, and receives presentations and
briefings from Treasury officials and, where appropriate, other government officials, including officials from
the other agencies represented on the Oversight Board,
concerning the implementation and the effects of the
programs established under TARP.

Part 1 • Management’s Discussion and Analysis

risk mitigation, flexibility to respond to new
programs, and efficiency through shared resources.
Accordingly, the maturation and formalization of
financial capabilities and controls will continue
into fiscal 2010.

The Oversight Board also monitors Treasury’s responses
to the recommendations made by SIGTARP and the
GAO. Throughout FY 2009, the Oversight Board
received updates on Treasury’s progress in addressing the issues raised by these oversight bodies with
respect to transparency, the establishment of internal
controls, compliance and risk monitoring, staffing and
Treasury’s communication strategy. In addition, staff
of the Oversight Board and of the agencies represented
by each Member of the Oversight Board continued to
have regular discussions with representatives from the
SIGTARP and GAO to discuss recent and upcoming activities of the oversight bodies. These efforts
continued to help facilitate coordinated oversight and
minimize the potential for duplication.
The Oversight Board issues a Quarterly Report for
each three-month period. Copies of approved minutes
of the Oversight Board’s meetings and the Quarterly
Reports are made available on the internet at: http://
www.financialstability.gov/about/oversight.html.

GAO
Section 116(a)(3) of EESA stipulates that “the
Comptroller General [who heads the GAO] shall
submit reports of findings … regularly and no less

Section 9: systems, controls, and legal compliance

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

frequently than once every 60 days, to the appropriate
committees of Congress.” “The Comptroller may also
submit special reports … as warranted by the findings
of its oversight activities.”
Treasury-OFS has a statutory obligation under
Section 116(b)(3) of EESA to take corrective actions
in response to audit deficiencies identified by the
Comptroller General or other auditor engaged by
the TARP or certify to the appropriate committees
of Congress that no action is necessary or appropriate. In addition, under Section 236 of the Legislative
Reorganization Act of 1970, Treasury is required to
respond in writing to Congress within 60 days of the
issuance date of a GAO report.
Currently, the GAO is engaged in eight audits related to
TARP. Treasury-OFS responds to information requests
from the GAO by providing responsive documents
and other information and facilitating comprehensive
briefings on TARP programs with senior Treasury staff.
In addition, Treasury-OFS apprises the GAO of key
developments in current and proposed programs and
policies under EESA.
To date, the GAO has issued 41 recommendations
in its reports issued in December 2008 and January,
March, June, July, October, and November 2009.
The recommendations have focused on the following
themes: (1) transparency, reporting, and accountability; (2) management infrastructure; and (3)
communication. In response to the recommendations,
Treasury-OFS has developed remediation plans and
actively communicates the status of its remediation
efforts to the GAO and will continue to do so in FY
2010. Treasury-OFS has fully or partially implemented
32 of the recommendations and has responded or is in
the process of responding to six recommendations; the
remaining recommendations have been deemed closed
by the GAO and/or Treasury-OFS has taken no action.
Treasury-OFS’ actions in response to GAO recommendations include:

• Treasury-OFS delivered draft internal controls
policies and procedures to GAO on June 30, 2009.
Many of the final policies and procedures covering a majority of OFS were delivered to GAO on
September 30, 2009. The bulk of the remainder
of Treasury-OFS policies and procedures will be
delivered by December 31, 2009.
• Treasury-OFS has completed draft risk assessments
of TALF, CPP, HAMP, contracting and human
resources. Plans have been developed for high risk
areas.
• Treasury-OFS continues to expeditiously hire
personnel to carry out and oversee HAMP as well
as finalizing a comprehensive system of HAMP
internal controls.
Additional detail regarding Treasury-OFS’ progress on the GAO’s recommendations can be
found at http://www.financialstability.gov/docs/
SummaryResponseGAO10-8-2009.pdf.

SIGTARP
The SIGTARP was created by section 121 of EESA.
The objectives of SIGTARP are to investigate and prevent fraud, waste and abuse in TARP programs, while
trying to promote transparency in TARP programs.
SIGTARP must report to Congress each quarter
certain information about TARP over the preceding
quarter. As of September 30, 2009, SIGTARP has
issued three quarterly reports in February 2009, April
2009 and July 2009. SIGTARP also has a duty under
EESA to conduct audits and investigations of the purchase, management, and sale of assets under any TARP
program, and with certain limitations, any other action
under EESA. As of September 30, 2009, SIGTARP
has completed four audits and is currently conducting
eleven audits that are at various stages.
Treasury-OFS has worked closely with SIGTARP
and maintains regular lines of communications with
the personnel conducting audits and investigations of
TARP programs. Treasury-OFS staff also regularly provides updates to SIGTARP about program design and
implementation issues. Treasury-OFS has benefited

Section 9: systems, controls, and legal compliance

As of September 30, 2009, SIGTARP has issued 41
individual recommendations in their reports. General
topics covered by SIGTARP’s recommendations
include reporting on use of TARP funds, valuation of
the TARP portfolio, and potential fraud vulnerabilities
associated with PPIP, TALF and HAMP. Treasury-OFS
has given careful consideration to the recommendations in SIGTARP’s prior reports, and has submitted
responses detailing what actions that Treasury-OFS has
taken or will take to address SIGTARP’s recommendations. Treasury-OFS’ policies and programs currently
address many of the issues raised by SIGTARP in their
recommendations, and in other cases Treasury-OFS
took specific action to implement SIGTARP’s recommendations. Treasury-OFS also has or will execute
alternative approaches that we believe address some of
the issues raised by SIGTARP in their recommenda-

tions. SIGTARP has closed 29 of its recommendations
based on Treasury-OFS’ response to the SIGTARP
recommendations.

Congressional Oversight Panel
The Congressional Oversight Panel (COP’s) mandate includes assessing the impact of Treasury-OFS’
spending to stabilize the economy, evaluating market
transparency, ensuring effective foreclosure mitigation
efforts, and guaranteeing that Treasury-OFS’ actions
are in the best interest of the American people.
The COP consists of five panel members appointed
as follows: 1 member appointed by the Speaker of the
House of Representatives; 1 member appointed by the
minority leader of the House of Representatives; 1 member appointed by the majority leader of the Senate, 1
member appointed by the minority leader of the Senate,
and 1 member appointed by the Speaker of the House
of Representatives and the majority leader of the Senate,
after consultation with the minority leader of the Senate
and the minority leader of the House of Representatives.
The COP also employs a professional staff, numbering

Section 9: systems, controls, and legal compliance

Part 1 • Management’s Discussion and Analysis

from their involvement in the development of TARP
programs and policies as we pursue our common goal
of carrying out the objectives of EESA, which are to
promote financial stability and protect the interests of
the taxpayers.

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

approximately 27, who are responsible for carrying out
the day-to-day work of the Panel. The COP also reaches
out to experts, primarily academics, to conduct analysis
in support of their work.

before the COP on a quarterly basis, and Assistant
Secretary for Financial Stability Herb Allison is made
available as requested for other hearings. Other Treasury
officials have also appeared before the COP as requested.

EESA requires the COP to produce a report every 30
days examining Treasury’s efforts and the impact on the
economy of those efforts. The statute grants the COP
the authority to hold hearings, review official data, and
write reports on actions taken by Treasury and financial
institutions and their effect on the economy. Generally,
the COP focuses on one program or topic each month
and produces a report that describes the program,
assesses its design and implementation and presents
recommendations. Many of their recommendations
have focused on issues of transparency and what they
see as the need to operate the programs in a way that
the public can understand exactly how their taxpayer
dollars are being used.

To date, the COP has issued the following reports:

The COP staff work in a fairly independent fashion,
using publically available documents and information to develop the outlines of their reports. They
also request information, documents, and data from
Treasury-OFS. Treasury-OFS regularly briefs COP staff
on the topic of their current focus, as well as any new
initiatives or changes in Treasury-OFS programs.
The COP also convenes regular hearings on Capitol
Hill, usually timed to coincide with the issuance of their
reports. Treasury makes its senior staff available to appear
before the COP as witnesses; the Secretary appears

• Questions About the $700 Billion Emergency
Economic Stabilization Funds
• Accountability for the Troubled Asset Relief Program
• Special Report on Regulatory Reform
• February Oversight Report: Valuing Treasury’s
Acquisitions
• Foreclosure Crisis: Working Toward a Solution
• Assessing Treasury’s Strategy: Six Months of TARP
• Stress Testing and Shoring Up Bank Capital
• Lending to Small Businesses and Families and the
Impact of the TALF
• TARP Repayments, Including the Repurchase of
Stock Warrants
• Special Report on Farm Loan Restructuring
• The Continued Risk of Troubled Assets
• The Use of TARP Funds in Support and
Reorganization of the Domestic Automotive Industry
• An Assessment of Foreclosure Mitigation Efforts
After Six Months
• Guarantees and Contingent Payments in TARP
and Related Programs

Section 9: systems, controls, and legal compliance

Over the past year, Treasury-OFS has grown into an
organization of 198 full-time employees (101 career
civil servants, 85 term appointments, and 12 detailees)
who support the TARP. These employees include 18
employees who report through the Department of the
Treasury’s Office of General Counsel and approximately 40 others outside of Treasury-OFS who continue
to provide support to the office on an as-needed basis.
Treasury-OFS continues to use direct-hire and other
appointments to expedite hiring of highly-qualified
candidates, which has enabled Treasury-OFS to reduce
the number of temporary and contract staff and
strengthen the continuity and institutional knowledge of the workforce. The FY 2009 Administrative
budget obligations totaled $248 million split between
salaries and benefits of approximately $14 million and
non-personnel services, generally contracts, of approximately $234 million.
As noted in Section One, Treasury-OFS is made up of
seven divisions.
The Chief Investment Office (CIO) is responsible for
program development and the execution and management of all investments made pursuant to EESA.
Investments can be made by either purchasing or insuring “troubled assets” (as defined in EESA). The CIO
relies on contracted asset managers and a custodian to
assist in the management of acquired or insured assets.
The CIO also manages a contract with an investment
advisor who provides guidance on the selection of asset
managers.
The Office of the Chief Financial Officer (CFO) has
lead responsibility within Treasury-OFS for budget formulation and execution, cash management, accounting, financial systems, financial reporting, and internal
controls. In each of these areas the CFO works closely
with the appropriate offices within main Treasury.
The CFO manages Treasury-OFS budget, cash flow

requirements and accounting support activities for
all of Treasury-OFS concentrating on accounting and
reporting activities required by the Federal Credit
Reform Act to include modeling of cash flow and all
required re-estimates. The Office serves as liaison with
Government Accountability Office (GAO) staff for
financial statement reporting and internal controls.
For the FY 2009 reporting cycle, the OCFO led the
implementation of the OMB Circular A-123 internal
controls requirements for Treasury-OFS.
The Office of the Chief of Homeownership
Preservation is responsible for identifying opportunities
to help homeowners while also protecting taxpayers.
The key policy goals of the Office are to reduce the
number of principal residences lost to foreclosure and
to stabilize the value of homeownership in surrounding
communities through polices which impact homeowners, home mortgage loans, lenders, servicers and their
communities. The priorities of the Office are to: implement the Administration’s loss mitigation program;
develop and implement a robust outreach program
targeted to at-risk homeowners; outline and implement strategies to regularly update the Administration,
Congress, the public, and other key stakeholders, on
results; and monitor, analyze and report on the results
of the loan modification program.

Part 1 • Management’s Discussion and Analysis

Section Ten:
Other Management Information

The Office of the Chief Administrative Officer
(OCAO) is responsible for developing an office
infrastructure and managing internal operations
in Treasury-OFS. The OCAO works to integrate
Treasury-OFS investments, program, compliance, risk,
finance, and legal functions and facilitates communication across the organization. The OCAO supports the
execution of TARP programs and the management of
Treasury-OFS employees and contractual resources.
The OCAO works with the Assistant Secretary for
Financial Stability to set and execute goals and objectives. The OCAO works with each Treasury-OFS

Section 10: other management information

OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

organizational entity to effectively manage the budget,
facilities, information technology (IT), acquisition
management oversight, document flows, physical
security and privacy, and workforce planning.
The Office of the Chief Counsel provides legal advice
to the Assistant Secretary. The Chief Counsel reports
to the Assistant General Counsel (Banking and
Finance) in Treasury’s Legal Division. The Office of
the Chief Counsel is responsible for the legal affairs of
Treasury-OFS. The Office is involved in the structuring of Treasury-OFS programs and activities to ensure
compliance with EESA and with other laws and regulations and to insure the programs and activities are well
designed from a legal point of view. The Office assists
in responding to FOIA requests, the inquiries of oversight bodies such as the GAO and the Congressional
Oversight Panel (COP) and any litigation concerning
EESA or Treasury-OFS activities. The Office also
works on a variety of other legal matters pertaining to
Treasury-OFS operations.
The Office of Reporting is responsible for coordinating Treasury-OFS’ work with the external oversight
entities including the GAO, Special Inspector General
for TARP, Financial Stability Oversight Board and
the Congressional Oversight Panel. The Office also
prepares periodic reports to the Congress under EESA.
The Office of Internal Review (OIR) was recently
established within Treasury-OFS to ensure that proper
management controls are developed, in place, and
operating as intended. Management controls include
organization, policies, and procedures, all of which
are designed to help program and financial managers

achieve results and safeguard the integrity of their
programs. The OIR also works with the other program
offices to identify the most significant risks that the
TARP faces including operational risk, credit risk,
market risk, and reputational risk. The office assesses
those risks (either quantitatively or qualitatively) and
works to ensure that the assessments are integrated
into the decision making processes of each business
line of the TARP and that risks are managed in a
consistent fashion across business lines. The OIR scope
of responsibilities also covers the compliance oversight
area including developing and implementing, in conjunction with the relevant program offices, processes
and procedures to provide for overall program compliance with EESA. These include the HAMP program
requirements, executive compensation, statutory
reporting, and conflict of interest requirements.
Treasury-OFS is not envisioned as a permanent
organization, so to the maximum extent possible and
appropriate, Treasury-OFS utilizes private sector expertise in support of the execution of TARP programs.
Fannie Mae and Freddie Mac accounted for almost
thirty percent of the non-personnel services to assist in
the administration and compliance, respectively, of the
Home Affordable Modification Program. Additionally,
asset managers were hired to serve as financial agents in
managing the portfolio of assets associated with several
TARP programs. The balance of the non-personnel
private sector firms were engaged to assist with the
significant volume of work associated with the TARP
in the areas of accounting and internal controls, administrative support, facilities, legal advisory, financial
advisory, and information technology.

Section 10: other management information

The principal financial statements have been prepared
to report the financial position and results of operations of Treasury-OFS’ Troubled Asset Relief Program,
consistent with the requirements of 31 U.S.C.
3515(b). While the statements have been prepared
from the books and records of the Office of Financial
Stability and the Department of the Treasury in
accordance with section 116 of EESA and GAAP for
Federal entities and the formats prescribed by OMB,
the statements are in addition to the financial reports
used to monitor and control budgetary resources which
are prepared from the same books and records.

Part 1 • Management’s Discussion and Analysis

Section Eleven:
Limitations of the Financial Statements

The statements should be read with the realization that
they are for a component of the U.S. Government, a
sovereign entity.

Section 11: limitations of the financial statements

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OFFICE OF FINANCIAL S TABILITY • Ag e n c y F i n a n c i a l R e p o rt • F i s c a l Y e a r 2 0 0 9

Part 2
Agency Financial Statements

I am very pleased to submit the Office of Financial Stability’s (OFS) Annual Financial Report for FY 2009. This
report provides our stakeholders with meaningful financial results and program performance as required by the
Emergency Economic Stabilization Act (EESA) and the Reports Consolidation Act. The unqualified audit opinion
provided by our auditor, the Government Accountability Office (GAO), on these financial statements represents
an extraordinary achievement by OFS and Treasury staff. The support of our contractors, staff at the Office of
Management and Budget and the GAO audit team was invaluable to this success. I am exceptionally proud and
appreciative of the effort and commitment made by everyone involved.
Under the EESA authority as described throughout this report, the government made unprecedented investments
in private entities through the Troubled Asset Relief Program (TARP). The unique features of the EESA programs,
as well as the statutory requirement that the budgetary cost of the programs be determined under the standards of
the Federal Credit Reform Act (FCRA), adjusted for market risk, meant that the OFS had to navigate unchartered
ground in Federal budget and accounting concepts. For these and related reasons, creating the accounting and
reporting infrastructure and internal control environment to support the development of the first year financial
statements for the TARP, was an extraordinary challenge.

Part 2 • agency Financial Statements

Message from the Chief Financial Officer

As a start up organization with an unprecedented emergency mission to stabilize the nation’s financial system, the
OFS moved swiftly to develop and implement eight new programs. The face value of the amounts obligated for
these programs in FY 2009 totaled $454 billion, nearly as much as the entire combined FY 2008 Federal nondefense discretionary outlays. OFS’s budget, accounting, and financial reporting policies and operations had to
be designed and executed simultaneously with the establishment of the new programs. OFS was able to leverage
a number of Treasury’s existing financial management systems and resources, but also had to develop procedures,
reports, models, and methodologies from scratch.
All of the TARP initiatives except for the housing program are loans, guarantees or investments and are accounted
for using FCRA methods of net present value for budgeting and financial reporting. Cost models (or “subsidy”
models as they are called under FCRA) had to be developed for all of the programs and unique transactions.
Never before has a Federal entity created as many subsidy cost models in such a short period made even more difficult by the vastness and complexity of TARP’s programs. While we and GAO identified some non-material errors
and opportunities for improvements in the models and processes, overall the results were outstanding, given the
magnitude of the effort required this year. Because the credit and investment programs constitute the vast majority
of OFS’s financial activity, continuing to build a very strong internal control process and high quality, state of the
art subsidy cost models is a top priority for us.
A consistent focus on internal control was a mainstay of the OFS’s efforts. From the first transactions in October,
2008, 23 days after passage of EESA, OFS instituted comprehensive controls around the highest risk elements
of the transaction lifecycle – for example the disbursement and receipt of funds and receipt of appropriate consideration such as preferred shares and warrants associated with a transaction. OFS aggressively used prototyping
to establish an effective process design, cross-functional meetings to ensure cohesion across areas, and real time
control monitoring of all transactions to improve accuracy in execution. We focused on core controls such as appropriate levels of authorization and reconciliation of critical transaction information. Over the course of the year,
we were able to maturate much of our internal control capacity from heavily monitored, individual transactions, to

message from the chief financial officer

O F F I C E O F F I N A N C I A L S TA B I L I T Y • Ag ency F inancial r e p o rt • F iscal Y ea r 2 0 0 9

documented, repeated processes with embedded control monitoring, automated control evidence collection, and
ongoing control testing.
Finally, OFS implemented the internal control requirements for financial reporting under Appendix A of OMB
Circular A-123. OFS staff within the Office of the Chief Financial Officer worked closely with the program and
other support offices to develop a comprehensive sub-certification and review process supporting management’s
interim and final assurance statements.
Looking ahead, we plan to continue improving our financial management capacity, including strengthening our
financial reporting processes, developing additional or enhancing existing documentation supporting our policies,
and formalizing our financial data management approach. We will be actively addressing GAO’s audit findings
and look forward to building on our successes this year to resolve the outstanding issues identified in this audit.
Successfully preparing the first year financial statements for the programs developed under the EESA required
extraordinary dedication and commitment. It has been a privilege to lead this effort and I want to extend my
thanks to the many people who contributed to making this endeavor successful.
Thank you for your interest in our FY 2009 Annual Financial Report.

Jennifer E. Main
Chief Financial Officer

message from the chief financial officer

United States Government Accountability Office
Washington, D.C. 20548

To the Assistant Secretary for Financial Stability

Adeo
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Part 2 • agency Financial Statements

Government Accountability Office (GAO)’s Report
on FY 2009 Financial Statements

In accordance with the Emergency Economic Stabilization Act of 2008
(EESA),1 we are required to audit the financial statements of the Troubled
Asset Relief Program (TARP), which is implemented by the Office of
Financial Stability (OFS).2 In our audit of OFS’s financial statements for
TARP for the period from October 3, 2008, (date of OFS’s inception)
through September 30, 2009, we found
• the financial statements are presented fairly, in all material respects, in
conformity with U.S. generally accepted accounting principles;
• although internal controls could be improved, OFS maintained, in all
material respects, effective internal control over financial reporting as
of September 30, 2009; and
• no reportable noncompliance in the period ended September 30, 2009,
with provisions of laws and regulations we tested.
The following sections discuss in more detail (1) these conclusions; (2) our
conclusion on Management’s Discussion and Analysis (MD&A) and other
required supplementary and other accompanying information; (3) our audit
objectives, scope, and methodology; and (4) OFS’s comments on a draft of
this report. In addition to our responsibility to audit OFS’s annual financial
statements for TARP, we also are required under EESA to report at least
every 60 days on the findings resulting from our oversight of the actions
taken under TARP.3 This report responds to both of these requirements. We

1
Section 116(b) of EESA, 12 U.S.C. § 5226(b), requires that the Department of the Treasury
(Treasury) annually prepare and submit to Congress and the public audited fiscal year
financial statements for TARP that are prepared in accordance with generally accepted
accounting principles. Section 116(b) further requires that GAO audit TARP’s financial
statements annually in accordance with generally accepted auditing standards.
2

Section 101 of EESA, 12 U.S.C. § 5211, established OFS within Treasury to implement TARP.

Section 116 of EESA, 12 U.S.C. § 5226, 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 act’s purposes; the financial condition and internal controls of
TARP, its representatives, and agents; the characteristics of asset purchases and the
disposition of acquired assets, including any related commitments entered into; TARP’s
efficiency in using the funds appropriated for its operations; its compliance with applicable
laws and regulations; and its efforts to prevent, identify, and minimize conflicts of interest
among those involved in its operations.

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O F F I C E O F F I N A N C I A L S TA B I L I T Y • Ag ency F inancial r e p o rt • F iscal Y ea r 2 0 0 9

have issued numerous other reports on TARP in connection with this 60day reporting responsibility which can be found on GAO’s Web site at
http://www.gao.gov.

Opinion on Financial
Statements

OFS’s financial statements for TARP, including the accompanying notes,
present fairly, in all material respects, in conformity with U.S. generally
accepted accounting principles, OFS’s assets, liabilities, and net position as
of September 30, 2009, and its net cost, changes in net position, and
budgetary resources for the period from October 3, 2008, (date of OFS’s
inception) through September 30, 2009.
As discussed in notes 2 and 6 to OFS’s financial statements for TARP, the
valuation of TARP direct loans, equity investments, and asset guarantees is
based on estimates using economic and financial credit subsidy models.
The estimates use entity-specific as well as relevant market data as the
basis for assumptions about future performance, and incorporate an
adjustment for market risk to reflect the variability around any unexpected
losses. In valuing the direct loans, equity investments, and asset
guarantees, OFS management considered and selected assumptions and
data that it believed provided a reasonable basis for the estimated subsidy
allowance and related subsidy costs reported in the financial statements.4
However, there are a large number of factors that affect these assumptions
and estimates, which are inherently subject to substantial uncertainty
arising from the likelihood of future changes in general economic,
regulatory, and market conditions. The estimates have an added
uncertainty resulting from the unique nature of transactions associated
with the multiple initiatives undertaken for TARP and the lack of historical
program experience upon which to base the estimates. As such, there will
be differences between the net estimated values of the direct loans, equity
investments, and asset guarantees as of September 30, 2009, that totaled
$239.7 billion, and the amounts that OFS will ultimately realize from these
assets, and such differences may be material. These differences will also
affect the ultimate cost of TARP. Further, the ultimate cost will change as
4

The subsidy allowance represents the difference between the amounts paid by OFS to
acquire the direct loans and equity investments and the reported value of such assets. The
subsidy cost is composed of (1) the subsidy cost allowance, (2) net intragovernmental
interest cost, (3) certain inflows from the direct loans and equity investments (e.g.,
dividends, interest, proceeds from repurchase of warrants by financial institutions, and
other realized fees), and (4) the estimated discounted net cash flows related to the Asset
Guarantee Program.

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GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Part 2 • agency Financial Statements

OFS continues to purchase troubled assets and incur related subsidy costs
as well as incur costs under other TARP initiatives.5 OFS’s authority to
purchase or insure additional troubled assets expires on December 31,
2009, but may be extended by the Secretary of the Treasury to up to
October 3, 2010.6
As discussed in note 1 to the financial statements, while OFS’s financial
statements reflect activity of OFS in implementing TARP, including
providing resources to various entities to help stabilize the financial
markets, the statements do not include the assets, liabilities, or results of
operations of commercial entities in which OFS has a significant equity
interest. According to OFS officials, OFS’s investments were not made to
engage in the business activities of the respective entities and OFS has
determined that none of these entities meet the criteria for a federal entity.

Opinion on Internal
Control

Although certain internal controls could be improved, OFS maintained, in
all material respects, effective internal control over financial reporting as
of September 30, 2009, that provided reasonable assurance that
misstatements, losses, or noncompliance material in relation to the
financial statements would be prevented or detected and corrected on a
timely basis. Our opinion on internal control is based on criteria
established under 31 U.S.C. § 3512(c), (d), commonly known as the Federal
Managers’ Financial Integrity Act (FMFIA).

Under EESA, as amended, OFS is authorized to purchase or insure up to almost $700
billion in troubled assets.

6
Section 120 of EESA, 12 U.S.C. § 5230, established that the authorities under Sections
101(a), excluding Section 101(a)(3), and Section 102, shall terminate on December 31, 2009.
Section 120 of EESA further established that the Secretary of the Treasury, upon submission
of a written certification to Congress, may extend the authority provided under these
sections of EESA to expire no later than 2 years from the date of the enactment of EESA
(Oct. 3, 2008).

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O F F I C E O F F I N A N C I A L S TA B I L I T Y • Ag ency F inancial r e p o rt • F iscal Y ea r 2 0 0 9

We identified two significant deficiencies7 in OFS’s internal control over
financial reporting, which although not material weaknesses, are important
enough to merit management’s attention. These deficiencies, described in
more detail later in this report, concern OFS’s (1) accounting and financial
reporting processes, and (2) verification procedures for data used for asset
valuations.
We will be reporting additional details concerning these significant
deficiencies separately to OFS management, along with recommendations
for corrective actions. We also identified other deficiencies in OFS’s system
of internal control that we consider not to be material weaknesses or
significant deficiencies. We have communicated these matters to
management and, where appropriate, will report on them separately.

Significant Deficiencies

Since its creation on October 3, 2008, OFS has made significant progress in
building a financial reporting structure, including developing an internal
control system over TARP activities and transactions and addressing key
accounting and financial reporting issues necessary to enable it to prepare
financial statements, and receive an audit opinion on those statements, for
the period ended September 30, 2009. However, OFS’s financial reporting
structure continued to evolve throughout the year as new TARP programs
were implemented, which posed a challenge to OFS’s ability to establish a
comprehensive system of internal control while simultaneously reacting to
market events and implementing TARP initiatives. This challenge
contributed to the following two significant deficiencies in OFS’s internal
control that we identified.

Accounting and Financial
Reporting Processes

While OFS had developed and implemented controls over TARP
transactions and activities, we identified several control deficiencies that
collectively represented a significant deficiency in OFS’s internal control

7
A significant deficiency is a deficiency, or a combination of deficiencies, in internal control
that is less severe than a material weakness, yet important enough to merit attention by
those charged with governance. A material weakness is a deficiency, or a combination of
deficiencies, in internal control such that there is a reasonable possibility that a material
misstatement of the entity’s financial statements will not be prevented, or detected and
corrected on a timely basis. A deficiency in internal control exists when the design or
operation of a control does not allow management or employees, in the normal course of
performing their assigned functions, to prevent or detect and correct misstatements on a
timely basis.

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GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Verification Procedures for
Data Input for Asset
Valuations

Part 2 • agency Financial Statements

over its accounting and financial reporting processes. Specifically, OFS did
not effectively implement its review and approval process for preparing its
financial statements and related disclosures for TARP. We identified
incorrect amounts and inaccurate, inconsistent, and incomplete
disclosures in OFS’s draft financial statements, footnotes, and MD&A for
TARP that were significant, but not material, and that were not detected by
OFS. OFS revised the financial statements, footnotes, and MD&A to
address the issues that we identified. In addition, OFS had not finalized its
procedures related to its processes for accounting for certain program
transactions, preparing its September 30, 2009, financial statements, and its
oversight and monitoring of financial-related services provided to OFS by
asset managers and certain financial agents. Further, OFS did not have
proper segregation of duties over a significant accounting database it uses
in valuing its assets in that the same individual was responsible for
performing both the data entry and the reconciliation of the data output.
However, OFS had other controls over TARP transactions and activities
that reduced the risk of misstatements resulting from these deficiencies.
Properly designed and implemented controls over the accounting and
financial reporting processes are key to providing reasonable assurance
regarding the reliability of the balances and disclosures reported in the
financial statements and related notes in conformity with generally
accepted accounting principles.

OFS did not effectively implement its verification procedures for certain
assumptions and related data that were input into the economic and
financial credit subsidy models used for the valuation of TARP direct loans,
equity investments, and asset guarantees. Specifically, we identified data
input errors to the estimation models, such as incorrect dividend rates and
maturity dates, that were not detected by OFS’s verification procedures.
Significant errors that we identified were corrected and amounts were
properly reflected in the September 30, 2009, financial statements. OFS did
perform procedures to assess the reasonableness of the model outputs,
including comparison of the asset valuations calculated by the model with
independently performed valuations. We believe that these procedures
reduced the risk of misstatements resulting from the data input errors.
Nonetheless, we believe the ineffective implementation of data input
verification procedures represents a significant deficiency in OFS’s internal
control warranting management’s attention. Effective verification of data
inputs used in the subsidy models is key to providing reasonable assurance
that the asset valuations and related subsidy cost are reliably reported in
the financial statements.

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Compliance with Laws
and Regulations

Our tests of OFS’s compliance with selected provisions of laws and
regulations for the period ended September 30, 2009, disclosed no
instances of noncompliance that would be reportable under U.S. generally
accepted government auditing standards. The objective of our audit was
not to provide an opinion on overall compliance with laws and regulations.
Accordingly, we do not express such an opinion.

Consistency of Other
Information

OFS’s MD&A, other required supplementary information, and other
accompanying information contain a wide range of information, some of
which is not directly related to the financial statements. We did not audit
and we do not express an opinion on this information. However, we
compared this information for consistency with the financial statements
and discussed the methods of measurement and presentation with OFS
officials. On the basis of this limited work, we found no material
inconsistencies with the financial statements, U.S. generally accepted
accounting principles, or the form and content guidance in Office of
Management and Budget Circular No. A-136, Financial Reporting
Requirements.

Objectives, Scope, and
Methodology

OFS management is responsible for (1) preparing the financial statements
in conformity with U.S. generally accepted accounting principles; (2)
establishing and maintaining effective internal control over financial
reporting, and evaluating its effectiveness; and (3) complying with
applicable laws and regulations. Management evaluated the effectiveness
of OFS’s internal control over financial reporting as of September 30, 2009,
based on the criteria established under FMFIA. OFS management’s
assertion based on its evaluation is included in appendix I.
We are responsible for planning and performing the audit to obtain
reasonable assurance and provide our opinion about whether (1) OFS’s
financial statements are presented fairly, in all material respects, in
conformity with U.S. generally accepted accounting principles; and (2) OFS
management maintained, in all material respects, effective internal control
over financial reporting as of September 30, 2009. We are also responsible
for (1) testing compliance with selected provisions of laws and regulations
that have a direct and material effect on the financial statements, and (2)
performing limited procedures with respect to certain other information
accompanying the financial statements.

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• examined, on a test basis, evidence supporting the amounts and
disclosures in the financial statements;

Part 2 • agency Financial Statements

In order to fulfill these responsibilities, we

• assessed the accounting principles used and significant estimates made
by management;
• evaluated the overall presentation of the financial statements;
• obtained an understanding of the entity and its operations, including its
internal control over financial reporting;
• considered OFS’s process for evaluating and reporting on internal
control over financial reporting that OFS is required to perform by
FMFIA and Section 116(c) of EESA;
• assessed the risk that a material misstatement exists in the financial
statements and the risk that a material weakness exists in internal
control over financial reporting;
• evaluated the design and operating effectiveness of internal control over
financial reporting based on the assessed risk;
• tested relevant internal control over financial reporting;
• tested compliance with selected provisions of the following laws and
regulations: EESA, as amended; the Antideficiency Act, as amended; the
Federal Credit Reform Act of 1990; and the Purpose Statute; and
• performed such other procedures as we considered necessary in the
circumstances.
An entity’s internal control over financial reporting is a process affected by
those charged with governance, management, and other personnel, the
objectives of which are to provide reasonable assurance that (1)
transactions are properly recorded, processed, and summarized to permit
the preparation of financial statements in conformity with U.S. generally
accepted accounting principles, and assets are safeguarded against loss
from unauthorized acquisition, use, or disposition; and (2) transactions are
executed in accordance with the laws governing the use of budget

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authority and other laws and regulations that could have a direct and
material effect on the financial statements.
We did not evaluate all internal controls relevant to operating objectives as
broadly established under FMFIA, such as those controls relevant to
preparing statistical reports and ensuring efficient operations. We limited
our internal control testing to testing controls over financial reporting.
Because of inherent limitations, internal control may not prevent or detect
and correct misstatements due to error or fraud, losses, or noncompliance.
We also caution that projecting any evaluation of effectiveness to future
periods is subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
We did not test compliance with all laws and regulations applicable to OFS.
We limited our tests of compliance to selected provisions of laws and
regulations that have a direct and material effect on the financial
statements for the period ended September 30, 2009. We caution that
noncompliance may occur and not be detected by these tests and that such
testing may not be sufficient for other purposes.
We performed our audit in accordance with U.S. generally accepted
government auditing standards. We believe our audit provides a reasonable
basis for our opinions and other conclusions.

Agency Comments

In commenting on a draft of this report, the Assistant Secretary, Office of
Financial Stability, stated OFS concurred with the two significant
deficiencies in its internal control over financial reporting that GAO
identified. He also stated that OFS is committed to correcting the
deficiencies. The complete text of OFS’s comments is reprinted in
appendix II.

Gary T. Engel
Director
Financial Management and Assurance
December 4, 2009

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Appendix I

Management’s Report on Internal Control over
Financial Reporting

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Part 2 • agency Financial Statements

Assistant Secretary’s Response to GAO Report
on FY 2009 Financial Statements

GAO-10-301 OFS Fiscal Year 2009 Financial Statement

assistant secretary’s response to GAO Report on FY 2009 financial statements

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Appendix II

Comments from the Office of Financial
Stability

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GAO-10-301 OFS Fiscal Year 2009 Financial Statement

assistant secretary’s response to GAO Report on FY 2009 financial statements

The OFS prepares financial statements for the Troubled Asset Relief Program as a critical aspect of ensuring the
accountability and stewardship for the public resources entrusted to it and as required by Section 116 of EESA.
Preparation of these statements is also an important part of the OFS’ financial management goal of providing accurate and reliable information that may be used to assess performance and allocate resources. The OFS management is responsible for the accuracy and propriety of the information contained in the financial statements and
the quality of internal controls. The statements are, in addition to other financial reports, used to monitor and
control budgetary resources. The OFS prepares these financial statements from its books and records in conformity with the accounting principles generally accepted in the United States for federal entities and the formats
prescribed by the Office of Management and Budget.
While these financial statements reflect activity of the OFS in executing its programs, including providing resources
to various entities to help stabilize the financial markets, they do not include, as more fully discussed in Note 1, the
assets, liabilities, or results of operations of commercial entities in which the OFS has a significant equity interest. In
addition, comparative information is not available because OFS began operations on October 3, 2008.

Part 2 • agency Financial Statements

Financial Statements

The Balance Sheet summarizes the OFS assets, liabilities and net position as of the reporting date.
Intragovernmental assets and liabilities resulting from transactions between federal agencies are presented separately from assets and liabilities from transactions with the public.
The Statement of Net Cost shows the net cost of operations for the reporting period.
The Statement of Changes in Net Position presents the OFS ending net position by two components Cumulative Results of Operations and Unexpended Appropriations. It summarizes the change in net position.
The ending balances of both components of net position are also reported on the Balance Sheet.
The Statement of Budgetary Resources provides information about funding and availability of budgetary resources and the status of those resources at the end of the reporting period.

Financial statements

O F F I C E O F F I N A N C I A L S TA B I L I T Y • Ag ency F inancial r e p o rt • F iscal Y ea r 2 0 0 9

Office of Financial Stability (Troubled Asset Relief Program)
BALANCE SHEET
As of September 30, 2009

Dollars in Millions

ASSETS
Intragovernmental Assets:
Fund Balance with Treasury (Note 4)
Troubled Asset Relief Program:
Direct Loans and Equity Investments, Net (Note 6)
Asset Guarantee Program (Note 6)
Total Assets
LIABILITIES
Intragovernmental Liabilities:
Accounts Payable and Other Liabilities
Principal Payable to the Bureau of the Public Debt (Note 8)
Due to the General Fund (Note 3)
Total Intragovernmental Liabilities
Accounts Payable and Other Liabilities
Liability for Home Affordable Modification Program (Note 5)
Total Liabilities

97,733

237,892
1,765
337,390

5
143,335
109,748
253,088

73
1
253,162

Commitments and Contingencies (Note 7)
NET POSITION
Unexpended Appropriations
Cumulative Results of Operations
Total Net Position

84,229
(1)
84,228

Total Liabilities and Net Position

337,390

The accompanying notes are an integral part of these financial statements.

Financial statements

Dollars in Millions

Gross Cost:
Subsidy Cost (Note 6)
Direct Loan and Equity Investments Program
Asset Guarantee Program
Total Program Subsidy Costs
Interest Expense on Borrowings from the Bureau of the Public Debt (Note 8)
Home Affordable Modification Program (Note 5)
Administrative Cost
Total Gross Cost
Less Earned Revenue:
Dividend and Interest Income - Programs (Note 6)
Interest Income on Fianancing Account
Subsidy Allowance Amortized (Note 9)
Net Earned Revenue
Total Net Cost of Operations

43,605
(2,201)
41,404
6,436
2
167
48,009

(9,503)
(3,649)
6,716
(6,436)

Part 2 • agency Financial Statements

Office of Financial Stability (Troubled Asset Relief Program)
STATEMENT OF NET COST
For the Period Ended September 30, 2009

41,573

The accompanying notes are an integral part of these financial statements.

Financial statements

O F F I C E O F F I N A N C I A L S TA B I L I T Y • Ag ency F inancial r e p o rt • F iscal Y ea r 2 0 0 9

Office of Financial Stability (Troubled Asset Relief Program)
STATEMENT OF CHANGES IN NET POSITION
For the Period Ended September 30, 2009

Dollars in Millions

Beginning Balances, at Inception

Budgetary Financing Sources
Appropriations Received
Appropriations Used
Other Financing Sources
Total Financing Sources
Net Cost of Operations
Ending Balances

The accompanying notes are an integral part of these financial statements

Financial statements

Cumulative
Results of
Operations

Unexpended
Approprations

—

238,268
(154,039)
—
84,229
$

—
154,039
(112,467)
41,572

—
84,229

(41,573)
(1)

Dollars in Millions

BUDGETARY RESOURCES
Unobligated Balances Brought Forward, Inception

Nonbudgetary
Financing
Accounts

Budgetary
Accounts

Budget Authority:
Appropriations
Borrowing Authority
Spending Authority from Offsetting Collections
Earned: Collected
Change in Unfilled Orders Without Advance
Total Budget Authority

—

238,268
—
—
—
238,268

243,072
28,927
581,970

—

Permanently Not Available

—
309,971

Part 2 • agency Financial Statements

Office of Financial Stability (Troubled Asset Relief Program)
STATEMENT OF BUDGETARY RESOURCES
For the Period Ended September 30, 2009

(120,841)

TOTAL BUDGETARY RESOURCES (Note 10)

238,268

461,129

STATUS OF BUDGETARY RESOURCES
Obligations Incurred:
Direct

210,112

452,184

Unobligated Balance:
Apportioned and Available
Not Available
TOTAL STATUS OF BUDGETARY RESOURCES

28,156
—

7,009
1,936

238,268

461,129

—

CHANGE IN OBLIGATED BALANCES
Obligated Balance Brought Forward, Inception
Obligations Incurred
Gross Outlays
Change in Uncollected Customer Payments from Federal Sources
Obligated Balance, Net, End of Period:
Unpaid Obligations
Uncollected Customer Payments from Federal Sources
Obligated Balance, Net, End of Period
NET OUTLAYS
Gross Outlays
Offsetting Collections
Distributed Offsetting Receipts
NET OUTLAYS

210,112
(153,961)
—

452,184
(372,982)
(28,927)

56,151
—
56,151

79,202
(28,927)
50,275

153,961
—
(2,720)
151,241

372,982
(243,072)
—
129,910

The accompanying notes are an integral part of these financial statements

Financial statements

O F F I C E O F F I N A N C I A L S TA B I L I T Y • Ag ency F inancial r e p o rt • F iscal Y ea r 2 0 0 9

Notes to the Financial Statements
Note 1. Reporting Entity
The Troubled Asset Relief Program (TARP) was authorized by the Emergency Economic Stabilization Act of 2008
(EESA or “The Act”). The Act gave the Secretary of the Treasury (the Secretary) broad and flexible authority to
establish the TARP to purchase and insure mortgages and other troubled assets, which permits the Secretary to
inject capital into banks and other commercial companies by taking equity positions in those entities, if needed, to
stabilize the financial markets.
The EESA established certain criteria under which the TARP would operate, including provisions that impact
the budgeting, accounting, and reporting of troubled assets acquired under the Act. Section 101(a) of the EESA
provided the authority for the Secretary to purchase troubled assets, and Section 101(a)(3) of the EESA established
the Office of Financial Stability (OFS) to implement the TARP. Section 102 of the EESA required the Secretary to
establish a program to guarantee troubled assets originated or issued prior to March 14, 2008, including mortgagebacked securities. Section 115 of the EESA limits the authority of the Secretary to purchase troubled assets up to
$700 billion1 outstanding at any one time, calculated at the aggregate purchase prices of all troubled assets held.
There was approximately $381.3 billion outstanding against the Section 115 authority as of September 30, 2009.
Section 120 of the EESA established that the authorities under Sections 101(a), excluding Section 101(a)(3) and
Section 102 of the EESA, shall terminate on December 31, 2009. Section 120 of the EESA further established that
the Secretary, upon submission of a written certification to Congress, may extend the authority provided under the
Act to expire no later than 2 years from the date of the enactment of the Act (October 3, 2008).
Under the provisions of the EESA, the OFS implemented the TARP which resulted in the development of the following programs: the Capital Purchase Program; the Targeted Investment Program; the Asset Guarantee Program;
the Consumer and Business Lending Initiative; the Public-Private Investment Program; the American International
Group, Inc. Investment Program (formerly known as the Systemically Significant Failing Institutions Program);
and the Automotive Industry Financing Program (see Note 6); as well as the Home Affordable Modification
Program (see Note 5).
While these financial statements reflect the activity of the OFS in executing its programs, including providing
resources to various entities to help stabilize the financial markets, they do not include the assets, liabilities,
or results of operations of commercial entities in which the OFS has a significant equity interest. Through the
purchase of troubled assets, the OFS has entered into several different types of direct loan, equity investment, and
asset guarantee arrangements with private entities. These direct loans, equity investments, and asset guarantees were
made with the intent of helping to stabilize the financial markets and mitigating, as best as possible, any adverse
impact on the economy. These direct loans, equity investments, and asset guarantees were not made to engage
in the business activities of the respective private entities. Based on this intent, the OFS has concluded that such
direct loans, equity investments, and asset guarantees are considered “bail outs”, under the provisions of paragraph
50 of Statement of Federal Financial Accounting Concepts (SFFAC) No. 2, Entity and Display. In addition, these
entities do not meet the conclusive criteria in SFFAC No. 2. As such, OFS determined that none of these entities

The Helping Families Save Their Homes Act of 2009 (PubL. No. 111-22, Div. A, 123 Stat., 1632 (2009) amended the act to reduce the
maximum allowable amount of outstanding troubled assets under the act by almost $1.3 billion, from $700 billion to $698.7 billion. As
required under Section 102 of EESA, the $381.3 billion does not include a subtraction from the outstanding guarantee amount to reflect
the balance in the Troubled Assets Insurance Financing Fund.

Notes to the financial statements

In addition, the OFS has made investments in certain Special Purpose Vehicles2 (SPV). SFFAC No. 2, paragraphs
43 and 44, reference indicative criteria such as ownership and control over an SPV to carry out government powers
and missions, as criteria in the determination of consolidation. The OFS has concluded that the lack of control over
the SPVs is the primary basis for determining that none of the SPVs meet the criteria to be classified as a federal
entity. As a result, the assets, liabilities and results of operations of the SPVs are not included in these OFS financial
statements. The OFS has recorded the investments in private entities and investments in SPVs in accordance with
Credit Reform Accounting, as discussed below. Additional disclosures regarding these SPV investments are included
in these Notes.

Part 2 • agency Financial Statements

meet the criteria to be classified as a federal entity. Consequently, their assets, liabilities, and results of operations
are not consolidated in these OFS financial statements.

The EESA established the OFS within the Office of Domestic Finance of the Department of the Treasury
(Treasury). The OFS prepares stand-alone financial statements to satisfy EESA’s requirement for the TARP to
prepare annual financial statements. Additionally, as an office of the Treasury, its financial statements are consolidated into Treasury’s department-wide financial statements and Agency Financial Report.

Note 2. Summary of Significant Accounting Policies
Basis of Accounting and Presentation
The accompanying financial statements include the operations of the OFS and have been prepared from the
accounting records of the OFS in conformity with accounting principles generally accepted in the United States
for federal entities (Federal GAAP), and the Office of Management and Budget (OMB) Circular A-136, Financial
Reporting Requirements, as amended. Federal GAAP includes the standards issued by the Federal Accounting
Standards Advisory Board (FASAB). The FASAB is recognized by the American Institute of Certified Public
Accountants (AICPA) as the official accounting standards-setting body for the U.S. Government. As such, the
FASAB is responsible for establishing Federal GAAP for Federal reporting entities.
In July 2009, the FASAB issued the Statement of Federal Financial Accounting Standards (SFFAS) No. 34, The
Hierarchy of Generally Accepted Accounting Principles, Including the Application of Standards Issued by the Financial
Accounting Standards Board. SFFAS No. 34 identifies the sources of accounting principles and the framework for
selecting the principles used in the preparation of general purpose financial reports of federal reporting entities
that are presented in conformity with Federal GAAP.
In addition to the above, Section 123(a) of the EESA requires that the budgetary cost of purchases of troubled
assets and guarantees of troubled assets, and any cash flows associated with authorized activities, be determined in
accordance with the Federal Credit Reform Act of 1990 (FCRA). Section 123(b) (1) of the EESA requires that the
budgetary costs of troubled assets and guarantees of troubled assets be calculated by adjusting the discount rate for
market risks. As a result of this requirement, the OFS considered market risk in its calculation and determination of

The OFS has invested in SPV’s under the Consumer and Business Lending Initiative and the Automotive Industry Financing Program.

Notes to the financial statements

O F F I C E O F F I N A N C I A L S TA B I L I T Y • Ag ency F inancial r e p o rt • F iscal Y ea r 2 0 0 9

the estimated net present value of its direct loans, asset guarantees, and equity investments for budgetary purposes.
Similarly, market risk is considered in valuations for financial reporting purposes (see Note 6 for further discussion).
Consistent with the accounting policy for equity investments made by Treasury in private entities, the OFS accounts for its equity investments at fair value, defined as the estimated amount of proceeds the OFS would receive
if the equity investments were sold to a market participant. The OFS uses the present value accounting concepts
embedded in SFFAS No. 2, Accounting for Direct Loans and Loan Guarantees, to derive fair value measurements.
The OFS concluded that the equity investments were similar to direct loans in that there is a stated rate and a
redemption feature which, if elected, requires repayment of the amount invested. Furthermore, consideration of
market risk provides a basis to arrive at a fair value measurement. Therefore, the OFS uses SFFAS No. 2 (as more
fully discussed below) for reporting and disclosure requirements of its equity investments.
Federal loans and loan guarantees are governed by FCRA for budgetary accounting and the associated FASAB
accounting standard SFFAS No. 2, as amended for financial reporting. The OFS applies the provisions of the SFFAS
No. 2, as amended, when accounting for direct loans, equity investments, and asset guarantees. Direct loans and
equity investments disbursed and outstanding are recognized as assets at the net present value of their estimated
future cash flows and outstanding asset guarantees are recognized as liabilities or assets at the net present value of
their estimated future cash flows. The subsidy allowance account represents the difference between the face value
of the outstanding direct loan and equity investment balance and the net present value of the expected future cash
flows, and is reported as an adjustment to the face value of the direct loan or equity investment. Consequently, direct
loans, asset guarantees, and equity investments, including investments in preferred and common stock and warrants
of public companies, are accounted for and reported by the OFS using credit reform accounting in accordance with
SFFAS No. 2, as amended.
The OFS recognizes dividend revenue associated with equity investments when declared by the entity in which OFS
has invested and when received in relation to any repurchases and restructuring. The OFS reflects changes in the value
of direct loans, equity investments, and asset guarantees in the subsidy cost on the Statement of Net Cost annually.
The OFS has received common stock warrants, additional preferred stock (referred to as warrant preferred stock) or
additional notes, as additional consideration for direct loans and equity investments made and asset guarantees entered
into. The OFS accounts for the warrants and warrant preferred stock received under Section 113 of EESA as fees
under SFFAS No. 2, and, as such, the value of the warrants and warrant preferred stock is a reduction of the subsidy
allowance.

Use of Estimates
The OFS has made certain estimates and assumptions relating to the reporting of assets, liabilities, revenues, and
cost to prepare these financial statements. Actual results could significantly differ from these estimates. Major
financial statement line items subject to estimates include Troubled Asset Relief Program Direct Loans and Equity
Investments, Net, Asset Guarantee Program, and related subsidy cost (see Note 6).
The most significant differences between actual results and estimates may occur in the valuation of direct loans,
equity investments, and asset guarantees. The forecasted future cash flows used to determine these amounts as of
September 30, 2009, are sensitive to slight changes in model assumptions, such as general economic conditions,
specific stock price volatility of the entities which the OFS has an equity interest, estimates of expected default,

Notes to the financial statements

Credit Reform for Accounting
The FCRA provided for the use of program, financing, and general fund receipt accounts to separately account
for activity related to loans and guarantees. These accounts are classified as either budgetary or non-budgetary
in the Statement of Budgetary Resources. The budgetary accounts include the program and general fund receipt
accounts, and the non-budgetary accounts consist of the credit reform financing accounts.

Part 2 • agency Financial Statements

and prepayment rates. Forecasts of future financial results have inherent uncertainty and the OFS’s Troubled
Asset Relief Program Direct Loans and Equity Investments, Net, and Asset Guarantee Program line items as of
September 30, 2009, are reflective of relatively illiquid, troubled assets whose values are particularly sensitive to
future economic conditions and other assumptions. Additional discussion related to sensitivity analysis can be
found in the Management Discussion and Analysis section of the Agency Financial Report.

As discussed previously, the OFS accounts for the cost of purchases of troubled assets and guarantees of troubled
assets, and any cash flows associated with authorized activities, including direct loans, in accordance with Section
123(a) of the EESA and the FCRA for budgetary accounting and SFFAS No. 2 for financial reporting, except for
the Home Affordable Modification Program (HAMP) (see Note 5).
The authoritative guidance for financial reporting is primarily contained in the SFFAS No. 2, as amended by the
SFFAS No. 18, Amendments to Accounting Standards for Direct Loans and Loan Guarantees, and the SFFAS No.
19, Technical Amendments to Accounting Standards for Direct Loans and Loan Guarantees.
In accordance with SFFAS No. 2, the OFS maintains program accounts which receive appropriations and obligate
funds to cover the subsidy cost of direct loans, equity investments and asset guarantees, and disburses the subsidy
cost to the OFS financing accounts. The financing accounts are non-budgetary accounts that are used to record
all of the cash flows resulting from the OFS direct loans, equity investments and asset guarantees.3 Cash flows
include disbursements, repayments, repurchases, fees, recoveries, borrowings from the Treasury, interest, negative
subsidy and the subsidy cost received from the program accounts.
The financing arrangements specifically for the TARP activities are provided for in the EESA as follows:
orrowing for program funds under Section 118 that constitute appropriations when obligated or
(1) b
spent, which are reported as “appropriations” in these financial statements;

(2) borrowing by financing accounts for non-subsidy cost under the FCRA and Section 123; and

(3) the Troubled Assets Insurance Financing Fund (TAIFF) under section 102(d).
The OFS has general fund receipt accounts which are used to record the receipt of amounts paid from the financing accounts when there is a negative subsidy or negative modification from the original estimate or a downward
reestimate. Amounts in the general fund receipt accounts are available for appropriations only in the sense that
all general fund receipts are available for appropriations. Any assets in these accounts are non-entity assets and
are offset by intragovernmental liabilities. At the end of the fiscal year, the fund balance transferred to the U.S.
Treasury through the general fund receipt account is no longer included in the OFS’s fund balance reporting.

For the Asset Guarantee Program, OFS has established the Troubled Assets Insurance Financing Fund, as required by Section 102(d) of
the EESA which is the financing account under FCRA for the Asset Guarantee Program.

Notes to the financial statements

O F F I C E O F F I N A N C I A L S TA B I L I T Y • Ag ency F inancial r e p o rt • F iscal Y ea r 2 0 0 9

The SFFAS No. 2 requires that the actual and expected costs of federal credit programs be fully recognized in
financial reporting. The OFS calculated and recorded an initial estimate of the future performance of direct loans,
equity investments, and asset guarantees. The data used for these estimates were reestimated at the fiscal year-end
to reflect adjustments for market risk, asset performance, and other key variables and economic factors. The
reestimate data was then used to estimate and report the “Subsidy Cost” in the Statement of Net Cost. A detailed
discussion of the OFS subsidy calculation and reestimate assumptions, process and results is provided in Note 6.

Fund Balance with Treasury
The Fund Balance with Treasury includes general, financing and other funds available to pay current liabilities
and finance authorized purchases. Cash receipts and disbursements are processed by the Treasury, and the OFS’s
records are reconciled with those of the Treasury on a regular basis.
Available unobligated balances represent amounts that are apportioned for obligation in the current fiscal year.
Unavailable unobligated balances represent unanticipated collections in excess of the amounts apportioned which
are unavailable. Obligated balances not yet disbursed include undelivered orders and unpaid expended authority.

Troubled Asset Relief Program Direct Loans and Equity
Investments, Net
Troubled Asset Relief Program Direct Loans and Equity Investments, Net represents the estimated net outstanding amount of the OFS direct loans and equity investments, exclusive of the HAMP. The direct loan and equity
investment balances have been determined in accordance with the provisions of SFFAS No. 2 (see Note 6).

Asset Guarantee Program
The Asset Guarantee Program represents the asset resulting from the net present value of the estimated cash
inflows that are in excess of the estimated future claim payments (see Note 6).

Liabilities for Home Affordable Modification Program
Liabilities for Home Affordable Modification Program (HAMP) represent the liability for payments to servicers and
investors, and principal balance reduction payments for the account of borrowers under the HAMP are accounted
for in accordance with SFFAS No. 5, Accounting for Liabilities of the Federal Government. Under SFFAS No. 5, a
liability is recognized for any unpaid amounts due as of the reporting date. This liability includes amounts due from
the OFS to pay for benefits and services provided under the terms of the HAMP as of the OFS’s reporting date
regardless of whether such payments have been reported to the OFS. The liability estimate is calculated based on
information reported by participating servicers.
The OFS has determined that credit reform accounting, is not applicable to HAMP since there are no incoming cash
flows to be valued.

General Property and Equipment
Equipment with a cost of $50 thousand or more per unit and a useful life of two years or more is capitalized at
full cost and depreciated using the straight-line method over the equipment’s useful life. Other equipment not

Notes to the financial statements

Accounts Payable and Other Liabilities
Accounts Payable and Other Liabilities are amounts due to intragovernmental or public entities that will generally
be liquidated during the next operating cycle (within one year from the balance sheet date).

Principal Payable to the Bureau of the Public Debt
Principal Payable to the Bureau of the Public Debt (BPD) represents the net amount due to the BPD for equity
investments, direct loans, and asset guarantees funded by borrowings from the BPD as of September 30, 2009
(see Note 8).

Part 2 • agency Financial Statements

meeting the capitalization criteria is expensed when purchased. Under this policy, the OFS had no capitalized
general property and equipment at September 30, 2009.

Due to the General Fund
Due to the General Fund represents the amount of downward reestimates as of September 30, 2009, related to
direct loans, equity investments, and asset guarantees as of September 30, 2009 (see Notes 3 and 6).

Unexpended Appropriations
Unexpended Appropriations represents the OFS undelivered orders and unobligated balances as of
September 30, 2009.

Cumulative Results of Operations
Cumulative Results of Operations, presented on the Balance Sheet and on the Statement of Changes in Net
Position, represents the net results of the OFS operations since inception, through September 30, 2009. The
Other Financing Sources in the Statement of Changes in Net Position consist primarily of transfers due to the
Treasury General Fund as of September 30, 2009, relating to the downward reestimates.

Leave
A liability for OFS employees’ annual leave is accrued as it is earned and reduced as leave is taken. Each year
the balance of accrued annual leave is adjusted to reflect current pay rates as well as forfeited “use or lose” leave.
Amounts are unfunded to the extent current or prior year appropriations are not available to fund annual leave
earned but not taken. Sick leave and other types of non-vested leave are expensed as taken.

Employee Health and Life Insurance and Workers’
Compensation Benefits
The OFS employees may choose to participate in the contributory Federal Employees Health Benefit and the
Federal Employees Group Life Insurance Programs. The OFS matches a portion of the employee contributions to
each program. Matching contributions are recognized as current operating expenses.
The Federal Employees’ Compensation Act (FECA) provides income and medical cost protection to covered
Federal civilian employees injured on the job, and employees who have incurred a work-related injury or occupa-

Notes to the financial statements

O F F I C E O F F I N A N C I A L S TA B I L I T Y • Ag ency F inancial r e p o rt • F iscal Y ea r 2 0 0 9

tional disease. Future workers’ compensation estimates are generated from an application of actuarial procedures
developed to estimate the liability for FECA benefits. The actuarial liability estimates for FECA benefits include
the expected liability for death, disability, medical, and miscellaneous costs for approved compensation cases.

Employee Pension Benefits
The OFS employees participate in either the Civil Service Retirement System (CSRS) or the Federal Employees’
Retirement System (FERS) and Social Security. These systems provide benefits upon retirement and in the event
of death, disability or other termination of employment and may also provide pre-retirement benefits. They
may also include benefits to survivors and their dependents, and may contain early retirement or other special
features. The OFS contributions to both retirement plans and Social Security, as well as imputed costs for pension
and other retirement benefit costs administered by the Office of Personnel Management, are recognized on the
Statement of Net Cost as Administrative Costs. Federal employee benefits also include the Thrift Savings Plan
(TSP). For FERS employees, a TSP account is automatically established and the OFS matches employee contributions to the plan, subject to limitations. The matching contributions are also recognized as Administrative
Costs on the Statement of Net Cost.

note 3. Non-Entity Liabilities
The OFS had approximately $109.7 billion in downward reestimates related to its Troubled Asset Relief Program
Direct Loans and Equity Investments, Net and Asset Guarantee Program which is a non-entity liability payable
due to the Treasury General Fund as of September 30, 2009 (see Note 6).

note 4. Fund Balances with Treasury
As of September 30, 2009, Fund Balances with Treasury, by fund type and status, consisted of the following:
(dollars in Millions)

Fund Balances:
General Funds
Program Funds
Financing Funds
Total Fund Balances
Status of Fund Balances:
Unobligated Balances
Available
Unavailable
Obligated Balances Not Yet Disbursed
Total Status of Fund Balances

Notes to the financial statements

45,650
38,658
13,425

97,733

35,165
1,936
60,632
97,733

note 5. The Home Affordable Modification Program
The Home Affordable Modification Program (HAMP) is designed to assist eligible homeowners who are experiencing financial hardships to remain in their homes by providing reductions in their monthly mortgage payments
for up to five years. The HAMP provides for one-time, monthly, and annual incentives to servicers, borrowers,
and investors who participate in the program. On an ongoing basis, beyond such incentives, the OFS shares
equally in the cost of the reductions with the mortgage investors. Lastly, investors are paid a Home Price Decline
Protection payment to partially offset losses from home price declines.

Part 2 • agency Financial Statements

Included in the OFS Financing Funds is the premium collections of approximately $174.8 million related to the
Asset Guarantee Program (AGP) that are required by the EESA Section 102(d) to be maintained in the TAIFF (see
Note 6).

For the HAMP, Fannie Mae provides direct programmatic support as a third party agent on behalf of the OFS,
Freddie Mac provides compliance oversight as a third party agent on behalf of the OFS, and the servicers work
directly with the borrowers to modify and service the borrowers’ loans.
As of September 30, 2009, the OFS had entered into agreements with 63 servicers to provide up to approximately
$27.1 billion in payments and incentives to borrowers, servicers and investors. As of September 30, 2009, this
$27.1 billion was included in Obligations Incurred in the Statement of Budgetary Resources. All HAMP payments are made to servicers either for themselves or for the benefit of borrowers and investors. Furthermore, all
payments are contingent on borrowers remaining current on their mortgage payments. As of September 30, 2009,
approximately $946.5 thousand in incentive payments had been paid to three servicers in incentive payments for
743 borrowers who had completed official loan modifications.
Servicers have until December 31, 2012, to enter into mortgage modifications with borrowers.
As of September 30, 2009, the OFS had accrued approximately $1.4 million of first lien incentive for modifications under the HAMP program.

note 6. Troubled Asset Relief Program direct Loans and equity
investments, net and asset Guarantee Program
The OFS applies the provisions of SFFAS No. 2 to account for direct loans, equity investments and asset guarantees. This standard requires measurement of the asset or liability at the net present value of the estimated future
cash flows. The cash-flow estimates for each transaction reflect the actual structure of the instruments. For each
of these instruments, analytical cash flow models generate estimated cash flows to and from the OFS over the
estimated term of the instrument. Further, each cash-flow model reflects the specific terms and conditions of the
program, technical assumptions regarding the underlying assets, risk of default or other losses, and other factors
as appropriate. The models also incorporate an adjustment for market risk to reflect the additional return required

Notes to the financial statements

O F F I C E O F F I N A N C I A L S TA B I L I T Y • Ag ency F inancial r e p o rt • F iscal Y ea r 2 0 0 9

by the market to compensate for variability around the expected losses reflected in the cash flows (the “unexpected
loss”). The basic methods for each of these models are outlined below.

Direct Loans
The estimated future cash flows for direct loans are derived using analytical models that estimate the cash flows to
and from the OFS over the life of the loan. These cash flows include the scheduled principal, interest, and other
payments to the OFS, including estimated proceeds from equity interest obtained or additional notes. These
models also include estimates of default and recoveries, incorporating the value of any collateral provided by the
contract. The probability and timing of default and losses relating to a default are estimated by using applicable
historical data when available, or publicly available proxy data, including credit rating agency historical performance data.
In the case of the Term Asset-backed Securities Loan Facility (TALF), the OFS uses an analytical model to project
cash flows to and from the OFS based on the estimated loan collateral performance, the estimated mix of collateral funded through the TALF and the terms of the contracts.
The models include an adjustment for market risk which is intended to capture the risk of unexpected losses, but
are not intended to represent fair value, i.e. the proceeds that would be expected to be received if the loans were
sold to a market participant.

Equity Investments
Preferred stock cash flows are projected using an analytical model developed to incorporate the risk of losses
associated with adverse events, such as failure of the institution or increases in market interest rates. The model
estimates how cash flows vary depending on: 1) current interest rates, which may affect the decision whether to
repay the preferred stock; and 2) the strength of a financial institution’s assets. Inputs to the model include institution specific accounting data obtained from regulatory filings, an institution’s stock price volatility, historical bank
failure information, as well as market prices of comparable securities trading in the market. OFS estimates the
values and projects the cash flows of warrants using an option-pricing approach based on the current stock price
and its volatility. Investments in common stock which are exchange traded are valued at the market price. The
result of using market prices, either quoted prices for the identical asset or quoted prices for comparable assets, is
that the equity investments are recorded at estimated fair value.

Asset Guarantees
The value of the asset guarantee reflects the net present value of estimated default-claim payments by the OFS, net
of income from recoveries on defaults, fees, or other income. Guarantee fees to date have been paid in the form
of preferred stock, subsequently converted to trust preferred stock, and a warrant to purchase common stock of
the financial institution, whose value is modeled using the same methodology for other equity purchase programs,
discussed above. Default-claim payments are based on estimated losses on the guaranteed assets. Key inputs into
these estimates are forecasted gross domestic product, unemployment rates and home price depreciation, in a base
scenario and a stress scenario.

Notes to the financial statements

The recorded subsidy cost of a direct loan, equity investment or asset guarantee is based on a set of estimated
future cash flows. OFS actions that change these estimated future cash flows change subsidy costs and are recorded as a modification. The cost of a modification is recognized as a modification expense, included in subsidy
cost, when the direct loan, equity investment, or asset guarantee is modified. During fiscal year 2009, modifications occurred within the Capital Purchase Program, Consumer and Business Lending Initiative, the American
International Group, Inc. Investment Program, and the Automotive Industry Financing Program. See detailed
discussion related to each program and related modifications below. Total net modification costs for the period
ended September 30, 2009, approximated $412.1 million.

Equity Investments, Direct Loan and Asset Guarantee Programs

Part 2 • agency Financial Statements

Subsidy Cost

The OFS administers a number of programs designed to help stabilize the financial system and restore the flow
of credit to consumers and businesses. The OFS has purchased direct loans and made equity investments and
entered into asset guarantees. The table below is a list and type of the OFS programs:
Program

Program Type

Capital Purchase Program
Targeted Investment Program
Asset Guarantee Program
Consumer and Business Lending Initiative
Public-Private Investment Program
American International Group, Inc. Investment Program (*)
Automotive Industry Financing Program

Equity Investment/Subordinated Debentures
Equity Investment
Guarantee
Direct Loan
Equity Investment and Direct Loan
Equity Investment
Equity Investment and Direct Loan

(*) Formerly known as the Systemically Significant Failing Institutions Program

A description of each of these programs is provided below, and certain financial data by program is provided in
the table at the end of this footnote.

Capital Purchase Program
In October 2008, the OFS began implementation of the TARP with the Capital Purchase Program (CPP), designed to help stabilize the financial system by assisting in building the capital base of certain viable U.S. financial
institutions to increase the capacity of those institutions to lend to businesses and consumers and support the
economy. Under this program, the OFS purchases senior perpetual preferred stock from qualifying U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies (Qualified Financial
Institution or QFI). The senior preferred stock has a stated dividend rate of 5.0% through year five, increasing
to 9.0% in subsequent years. The dividends are cumulative for bank holding companies and subsidiaries of bank
holding companies and non-cumulative for others and payable when and if declared by the institution’s board of
directors. Under the original terms of the senior preferred stock the QFI may not redeem the shares within the
first three years of the date of the investment, unless it has received the proceeds of one or more Qualified Equity
Offerings (QEO)4 which results in aggregate gross proceeds to the QFI of not less than 25.0% of the issue price
4

A Qualified Equity Offering is defined as the sale by the QFI after the date of the senior preferred stock investment of Tier 1 perpetual
preferred stock or common stock for cash.

Notes to the financial statements

O F F I C E O F F I N A N C I A L S TA B I L I T Y • Ag ency F inancial r e p o rt • F iscal Y ea r 2 0 0 9

of the senior preferred stock. QFIs that are Sub-chapter S corporations issued subordinated debentures in order
to maintain compliance with the Internal Revenue Code. The maturity of the subordinated debentures is 30 years
and interest rates are 7.7% for the first 5 years and 13.8% for the remaining years.
In February 2009 and May 2009, the United States Congress passed the American Recovery and Reinvestment
Act of 2009 and the Helping Families Save Their Homes Act of 2009, respectively. These acts contained amendments to the EESA (EESA Amendments) which require the Secretary to allow QFIs to repay at any time, subject
to regulatory approval, regardless of whether the 25.0% or greater QEO was accomplished. The ability of a QFI
to repay the OFS investment prior to year 3 or a 25.0% QEO was not considered in the original subsidy cost
estimate. Therefore, a modification cost of $77.7 million was recorded as a result of these amendments.
In addition to the senior preferred stock, the OFS received warrants, as required by section 113(d) of EESA, from
public QFIs to purchase a number of shares of common stock. The warrants have an aggregate market price equal
to 15.0% of the total senior preferred stock investment. The exercise price and market value used to determine the
number of shares of common stock subject to the warrant was calculated based on the average of closing prices of the
common stock on the 20 trading days ending on the last day prior to the date the QFIs application was preliminarily
approved for participation in the program. The warrants include customary anti-dilution provisions. In the event
that a public QFI completes, prior to December 31, 2009, one or more QEOs with aggregate gross proceeds of not
less than 100.0% (100.0% QEO) of the senior perpetual preferred stock investment, the number of shares subject to
the warrants will be reduced by 50.0%. As of September 30, 2009, 19 QFIs reduced the number of shares available
under the warrants as a result of this provision. The warrants have a 10 year term. The OFS may exercise one half of
the warrants prior to the earlier of a 100.0% QEO, or December 31, 2009. Subsequent to December 31, 2009, OFS
may exercise any warrants held in whole or in part. The OFS considers the impact of potential future QEOs in the
valuation process.
The OFS received warrants from non-public QFIs for the purchase of additional senior preferred stock (or
subordinated debentures if appropriate) with a stated dividend rate of 9.0% (13.8% interest rate for subordinate
debentures) and a liquidation value equal to 5.0% of the total senior preferred stock (additional subordinate
debenture) investment. These warrants were immediately exercised and resulted in the OFS holding additional senior preferred stock (subordinated debentures) (collectively referred to as “warrant preferred stock”) of non-public
QFIs. The OFS did not receive warrants from banks considered Community Development Financial Institutions
(CDFIs). As of September 30, 2009, the OFS has invested in 20 institutions considered CDFIs.
The EESA Amendments previously discussed also allow the Secretary to liquidate warrants associated with repurchased senior preferred stock at the market price. In addition, a QFI, upon the repurchase of its senior preferred
stock, also has the contractual right to repurchase the common stock warrants at the market price.
In June 2009, the OFS entered into an exchange agreement with Citigroup. Under the terms of the agreement
the OFS exchanged $25.0 billion of its investment in senior preferred stock for a new series (Series M) of mandatorily convertible preferred stock. The initial conversion price was $3.25 per share. In July 2009, the OFS received
the Series M shares, which were subsequently converted in September 2009 to approximately 7.7 billion common
shares of Citigroup. This exchange transaction was not considered in the original subsidy cost estimate for CPP.
As a result, the OFS recorded a modification cost of approximately $1.8 billion for the fiscal year ended 2009.
The OFS also has investments in Citigroup through the TIP and AGP.

Notes to the financial statements

On November 1, 2009, a CPP participant, CIT Group, filed for Chapter 11 Bankruptcy. The OFS had invested
$2.3 billion in senior preferred stock of CIT Group and received a warrant for the purchase of common stock.
The OFS does not expect a significant recovery of its preferred stock investment. As such, this investment has
been reduced to zero in these financial statements. The ultimate amount received, if any, from this investment
will depend on the outcome of the bankruptcy proceedings.

Part 2 • agency Financial Statements

During the period ended September 30, 2009, OFS invested approximately $204.6 billion in 685 institutions, including small, community, regional, and national banks, as well as CDFIs, in 48 states, the District of Columbia,
and Puerto Rico. Approximately $70.7 billion of the OFS investments have been repurchased or redeemed
bringing the total gross investment balance as of September 30, 2009, to approximately $133.9 billion. In addition, during the period ended September 30, 2009, the OFS received under CPP approximately $6.8 billion in
dividends on senior preferred and warrant preferred stock and approximately $2.9 billion in proceeds from the
repurchase of warrants and warrant preferred stock. 38 QFIs have not declared and paid one or more dividends to
OFS under CPP as of September 30, 2009.

On November 6, 2009, a subsidiary of UCBH Holdings, Inc. (a CPP participant), United Commercial Bank,
was closed by its regulators. The OFS had invested approximately $298.7 million in senior preferred stock and
received a warrant for the purchase of common shares. The value of these shares, including the warrant, reflected
in these financial statements is approximately $22.5 million as of September 30, 2009. The ultimate amount
received, if any, from this investment will depend on the outcome of the receivership.
On November 13, 2009, a subsidiary of Pacific Coast National Bancorp. (a CPP participant), Pacific Coast
National Bank, was closed by its regulators. The OFS had invested approximately $4.1 million in senior preferred
stock and received warrant preferred stock in the amount of $206 thousand. The value of the shares, including the warrant preferred stock, reflected in these financial statements is approximately $154 thousand as of
September 30, 2009. The ultimate amount received, if any, from this investment will depend on the outcome of
the receivership.
Further details on the outstanding senior preferred share investments and subordinated debentures under CPP
and the net investment amount including estimated cash flows associated with the sale or exercise of the warrants,
as of September 30, 2009, are presented in the table at the end of this section.

Targeted Investment Program
The Targeted Investment Program (TIP) was designed to prevent a loss of confidence in financial institutions that
could result in significant market disruptions, threatening the financial strength of similarly situated financial
institutions, impairing broader financial markets, and undermining the overall economy. The OFS considers institutions as candidates for the TIP on a case-by-case basis, based on a number of factors described in the program
guidelines. These factors include the threats posed by destabilization of the institution, the risks caused by a loss
of confidence in the institution, and the institution’s importance to the nation’s economy.
The OFS completed the first transaction under the TIP in December 2008, when it invested $20.0 billion in
Citigroup cumulative perpetual preferred stock and received a warrant for the purchase of Citigroup common
stock. Under the agreement with Citigroup, the OFS receives an 8.0% annual dividend, payable quarterly, if and
when declared by Citigroups’ Board of Directors. As part of this agreement, Citigroup must implement rigorous
compensation standards and other restrictions on corporate expenditures. In June 2009, the OFS and Citigroup

Notes to the financial statements

O F F I C E O F F I N A N C I A L S TA B I L I T Y • Ag ency F inancial r e p o rt • F iscal Y ea r 2 0 0 9

agreed to an exchange of the cumulative perpetual preferred stock issued under the TIP for a new series of trust
preferred securities. Citigroup issued subordinated debentures to a trust established by Citigroup, and the trust
issued trust preferred securities to the OFS. Interest and principal payments on the subordinated debentures are
passed-through to the trust preferred security holders. The trust preferred securities pay a quarterly distribution
at an annual rate of 8.0% to OFS. The subordinated debentures contain an interest deferral provision allowing
Citigroup to defer payment of interest for up to 5 years. The OFS will not receive distributions from the trust
preferred securities during a deferral period. Deferred interest is required to be paid upon termination of the
deferral period. As of September 30, 2009, Citigroup has not exercised its option to defer interest payments. The
subordinated debentures mature in 2039. As a result, the trust is scheduled to pay out the proceeds to the holders
of the trust preferred securities. In addition, the subordinated debentures can be prepaid by Citigroup at any time
prior to maturity, subject to consultation with the Federal Reserve, as long as the U.S. Government holds the
trust preferred securities. The terms of the new securities are substantially the same as the preferred stock originally received by the OFS and therefore the exchange transaction did not result in a modification. The OFS also
has investments in Citigroup through the CPP and the AGP.
In January 2009, OFS completed its second transaction under the TIP, investing $20.0 billion in Bank of
America. Under the agreement with Bank of America, the OFS purchased $20.0 billion of cumulative perpetual
preferred stock and received a warrant for the purchase of Bank of America common stock. The preferred stock
purchased from Bank of America contains a stated annual dividend rate of 8.0%, payable quarterly, if declared.
Bank of America’s agreement under the TIP stipulated that the institution must implement rigorous executive
compensation standards and other restrictions on corporate expenditures. The OFS also has investments in Bank
of America through the CPP.
During the period ended September 30, 2009, OFS received approximately $1.9 billion in dividends under the
TIP. See the table presented at the end of this section for further details.

Asset Guarantee Program
The Asset Guarantee Program (AGP) provides guarantees for assets held by systemically significant financial institutions that face a risk of losing market confidence due in large part to a portfolio of distressed or illiquid assets.
The AGP is applied with extreme discretion in order to improve market confidence in the systemically significant
institution and in financial markets broadly.
Section 102 of the EESA established the AGP to guarantee troubled assets originated or issued prior to March
14, 2008, including mortgage-backed securities, and established the Troubled Assets Insurance Financing Fund
(TAIFF). In accordance with Section 102(c) and (d) of the EESA, premiums from financial institutions, are
collected and all fees are recorded by the OFS in the TAIFF. In addition, Section 102(c)(3) of the EESA requires
that the original premiums assessed are “set” at a minimum level necessary to create reserves sufficient to meet
anticipated claims. In the event there are insufficient funds within the TAIFF for the payment of claims, amounts
are borrowed from the Treasury until sufficient funds are received into the TAIFF. In the event that the estimate
of claims exceeds the estimated future cash inflows, an upward reestimate would be recorded and amounts would
be transferred to the TAIFF as a subsidy expense.
The OFS completed its first transaction under the AGP in January 2009, when it finalized the terms of a guarantee agreement with Citigroup. Under the agreement, the OFS, the Federal Deposit Insurance Corporation

Notes to the financial statements

As a premium for the guarantee, Citigroup issued $7.0 billion of cumulative perpetual preferred stock with an
8.0 % stated dividend rate and a warrant for the purchase of common stock; approximately $4.0 billion and the
warrant were issued to the OFS, and approximately $3.0 billion was issued to the FDIC. As part of the agreement, Citigroup submitted an executive compensation plan to the OFS and the FDIC for approval and must
comply with certain common stock dividend restrictions. The OFS has received approximately $174.8 million
in dividends on the preferred stock received as compensation for this arrangement. These dividends have been
deposited into the TAIFF. The preferred stock originally issued to the OFS and the FDIC were exchanged for the
trust preferred securities discussed above under the TIP. The OFS has also invested in Citigroup through the CPP
and the TIP.

Part 2 • agency Financial Statements

(FDIC), and the Federal Reserve Bank of New York (FRBNY) provided protection against the possibility of large
losses on an asset pool of approximately $301.0 billion of loans and securities backed by residential and commercial real estate and other such assets, which remain on Citigroup’s balance sheet. The following loss-sharing
terms apply to the transaction: Citigroup absorbs the first $39.5 billion in losses, and losses over the $39.5 billion
are shared by the U. S. government (90.0 %) and Citigroup (10.0 %) (the “second loss”). For the second loss,
the OFS absorbs up to $5.0 billion, then the FDIC absorbs up to $10.0 billion, and lastly the FRBNY funds any
U.S. government losses above the OFS and the FDIC commitments through a non-recourse loan. The guarantee
is in place for ten years for residential assets and five years for non-residential assets.

The net present value of the estimated cash inflows from the preferred stock and warrant received by the OFS
from Citigroup as a premium is greater than the estimated net present value of future claim payments, resulting
in an asset of approximately $1.8 billion, after reestimates, as of September 30, 2009.
In January 2009, the OFS, FDIC, FRBNY (together the USG Parties) and Bank of America signed a Summary
of Terms (Term Sheet) pursuant to which the USG Parties agreed to guarantee or lend against a pool of up to
$118.0 billion of financial instruments consisting of securities backed by residential and commercial real estate
loans and corporate debt and related derivatives. In May 2009, prior to completing definitive documentation,
Bank of America notified the USG Parties of its desire to terminate negotiations with respect to the guarantee
contemplated in the Term Sheet. All parties agreed that Bank of America received value for entering into the
Term Sheet with the USG Parties and that the USG Parties should be compensated for out-of-pocket expenses
and a fee equal to the amount Bank of America would have paid for the guarantee from the date of the signing
of the Term Sheet through the termination date. Under the terms of the settlement, the U.S. Treasury received
$276.0 million for its role in the guarantee agreement through the OFS, the FRBNY received $57.0 million, and
the FDIC received $92.0 million. All the OFS funds received for the settlement were deposited in the TAIFF and
subsequently paid to the Treasury General Fund. The $276 million received by OFS pursuant to the settlement is
reflected in the OFS Statement of Net Cost as a reduction of the AGP subsidy cost.

Consumer and Business Lending Initiative (CBLI)
Term Asset-Backed Securities Loan Facility
The Term Asset-Backed Securities Loan Facility (TALF) was created by the Federal Reserve Board (FRB) to
provide low cost funding to investors in certain classes of Asset Backed Securities (ABS). The OFS agreed to
participate in the program by providing liquidity and credit protection to the FRB.

Notes to the financial statements

O F F I C E O F F I N A N C I A L S TA B I L I T Y • Ag ency F inancial r e p o rt • F iscal Y ea r 2 0 0 9

Under the TALF, the FRBNY, as implementer of the TALF program, originated loans on a non-recourse basis to
holders of certain AAA rated ABS secured by recently originated consumer and commercial loans and commercial
mortgage backed securities (New Issue CMBS). In addition to securities secured by recently originated loans,
CMBS issued prior to January 2009 and originally AAA rated (Legacy CMBS) are eligible collateral. TALF loans
have a term of 3 or 5 years and are secured solely by eligible collateral. Haircuts (a percentage reduction used for
collateral valuation) are determined based on the riskiness of each type of eligible collateral and the maturity of the
eligible collateral pledged to the FRBNY. The “haircuts” provide additional protection to OFS by exposing the
TALF borrowers to some risk of loss. Interest rates charged on the TALF loans depend on the weighted average
maturity of the pledged collateral, the collateral type and whether the collateral pays a fixed or variable coupon
As part of the program, the FRBNY has entered into a put agreement with the TALF, LLC, a special purpose
vehicle created by the FRBNY. In the event of a TALF borrower default, the FRBNY will seize the collateral and
sell it to the TALF, LLC under this agreement. The TALF, LLC receives a monthly fee equal to the difference
between the TALF loan rate and the FRBNY’s fee (spread) as compensation for entering into the put agreement.
The accumulation of this fee will be used to fund purchases. In the event there are insufficient funds to purchase
the collateral, the OFS has committed to invest up to $20.0 billion in non-recourse subordinate notes issued
by TALF, LLC. The subordinate notes bear interest at 1 Month LIBOR plus 3.0% and mature 10 years from
the closing date, subject to extension. The OFS disbursed $100.0 million upon creation of the TALF, LLC and
the remainder can be drawn to purchase collateral in the event the spread is not sufficient to cover purchases.
Any amounts needed in excess of the OFS commitment and the fee would be provided through a loan from the
FRBNY. Upon wind-down of TALF, LLC (collateral defaults, reaches final maturity or is sold), the cash balance
will be disbursed according to the following payment priority:
1. FRBNY principal balance
2. OFS principal balance
3. FRBNY interest
4. OFS interest
5. Remaining cash balance – 90.0% to the OFS, 10.0% to the FRBNY
Subsequent to the initial cost estimates prepared for the TALF, certain changes were made to the terms of the
program, including increasing the term to 5 years and the addition of different types of acceptable collateral.
These program changes resulted in a modification, increasing the original cost estimate by $8.0 million.
The TALF, LLC is owned and controlled by the FRBNY. The credit agreement between the OFS and the TALF,
LLC provides the OFS with certain rights consistent with a creditor but would not constitute control. As such
TALF, LLC is not a federal entity and the assets, liabilities, revenue and cost of TALF, LLC are not included in the
OFS financial statements. The discussion below provides information on 1) the amount of TALF loans issued by
the FRBNY, by collateral class, and 2) the assets, liabilities, income and expense of the TALF, LLC.
The FRBNY has originated $50.9 billion in TALF loans5, of which about $42.7 billion is outstanding as of September 30, 2009. The average “haircut” was approximately 9.92% of the originated balance. As of September 30,
2009, all of the TALF loans performed as agreed. The table below shows the outstanding balance of the FRBNY
TALF loans as of September 30, 2009, by collateral type:
5

100

These represent loans originated by the FRBNY and not the OFS. The intention of this disclosure is to show the activity in the program
and the types of collateral that could eventually be purchased by the TALF, LLC with funding provided by the OFS.

Notes to the financial statements

Auto
Credit Cards
Equipment
Floor Plan
Premium Finance
Servicing Advances
Small Business
Student Loan
New Issue CMBS
Legacy CMBS
Total

Loan Amount
(Dollars in Billions)

$
$
$
$
$
$
$
$
$
$
$

7.43
21.61
0.89
1.01
0.99
0.58
0.46
5.63
0.0
4.13
42.73

% of Total

17.3 %
50.6 %
2.1 %
2.4 %
2.3 %
1.4 %
1.1 %
13.1 %
0.0 %
9.7 %
100.0 %

Part 2 • agency Financial Statements

Collateral Type

As of September 30, 2009, the TALF, LLC has assets of approximately $198.9 million consisting primarily of
investments in U.S. Treasury and Agency securities6. Total liabilities of the TALF, LLC are $101.8 million consisting of the OFS subordinated note plus accrued interest. During the period ended September 30, 2009, the TALF,
LLC collected $99.1 million in fees and investment income and incurred $2.3 million in expenses, $1.8 million
of which is accrued interest on the OFS subordinated note. As of September 30, 2009, there were no TALF borrower defaults and consequently no purchases of collateral by the TALF, LLC.

American International Group, Inc. Investment Program (AIG)
The OFS provides assistance to certain systemically significant financial institutions on a case by case basis in
order to provide stability to institutions that are critical to a functioning financial system and are at substantial
risk of failure as well as to prevent broader disruption to financial markets.
In November 2008, the OFS invested $40.0 billion in AIG’s cumulative Series D perpetual cumulative preferred
stock with a dividend rate of 10.0% compounded quarterly. On April 17, 2009, AIG and the OFS restructured
their November 2008 agreement. Under the restructuring, the OFS exchanged $40.0 billion of cumulative Series
D preferred stock for $41.6 billion of non-cumulative 10.0% Series E preferred stock. The amount of Series E
preferred stock is equal to the original $40.0 billion, plus approximately $733.0 million in undeclared dividends
as of the February 1, 2009, scheduled quarterly dividend payment date, $15.0 million in dividends compounded
on the undeclared dividends, and an additional $855.0 million in dividends from February 1, 2009, but not paid
as of April 17, 2009. AIG’s restructured agreement kept the quarterly dividend payment dates of May 1,
August 1, November 1, and February 1, as established by the original November 2008 agreement. The original
subsidy cost estimate did not consider this restructuring which resulted in a modification cost of $127.2 million.
In addition to the exchange, the OFS agreed to make available an additional $29.8 billion capital facility to allow
AIG to draw additional funds if needed to assist in AIG’s restructuring. The OFS investment consists of Series
F non-cumulative perpetual preferred stock with an initial liquidation amount of $0.0. This liquidation amount
increases with any draw down by AIG on the facility. The dividend rate applicable to these shares is 10.0% and is
payable quarterly, if declared, on the outstanding liquidation amount. As of September 30, 2009, approximately

Agency securities refer to securities issued by either Ginnie Mae, Fannie Mae, Freddie Mac, or the Federal Home Loan Banks.

Notes to the financial statements

101

O F F I C E O F F I N A N C I A L S TA B I L I T Y • Ag ency F inancial r e p o rt • F iscal Y ea r 2 0 0 9

$3.2 billion has been funded by the OFS to AIG under this additional capital facility. Consistent with SSFAS
No. 2, the unused portion of the AIG capital facility is not recognized as an asset as of September 30, 2009.
As of September 30, 2009, AIG has not made any dividend payments on any of the perpetual preferred stock.
Subsequently, AIG failed to make a dividend payment on November 2, 2009. Per the terms of the preferred
stock, if AIG misses 4 dividend payments, the OFS may appoint to the AIG board of directors, the greater of two
members or 20.0% of the total number of directors of the Company.

Automotive Industry Financing Program
The objective of the Automotive Industry Financing Program (AIFP) was to help prevent a significant disruption
of the American automotive industry, which could have a negative effect on the economy of the United States.
The discussion below details the various investments and loans made by the OFS in the automotive industry,
generally provided in chronological order.
The table below illustrates amounts originally disbursed and collected under AIFP. These amounts are shown
before conversions, exchanges, or valuation. For a detailed discussion on the current status of the loans see the
narrative below the table.

(Dollars in Millions)

GM General Purpose Loan including Working Capital Advances
GMAC LLC Rights Offering
Chrysler Holding LLC General Purpose
Chrysler Financial
Auto Supplier Support Program
Auto Warranty Program
Chrysler Debtor-In-Possession
Chrysler Exit
GM Debtor-In-Possession
GMAC Preferred stock
GMAC Mandatorily Convertible Preferred Stock
Total

Amounts
Disbursed as of
September
30, 2009

19,400
884
4,000
1,500
413
640
1,888
4,577
30,100
5,000
7,500
75,902

Collection
of Interest,
Dividends, and
Additional Notes

134
9
53
22
6
4
—
—
34
265
165
692

Principal
Repayments

—
—
—
1,500
—
640
—
—
—
—
—
2,140

Amount Outstanding
before Conversions,
Exchanges, and
Valuation

19,400
884
4,000
—
413
—
1,888
4,577
30,100
5,000
7,500
73,762

General Motors (GM or old GM) General Purpose Loan including Working Capital
Advances
The OFS provided GM with a total of $13.4 billion in a three-year direct loan bearing interest at 3 Month
LIBOR (subject to a 2.0% floor), plus 3.0% and secured by various types of collateral. $4.0 billion of this loan
was funded in December 2008, an additional $5.4 billion in January, 2009, and an additional $4.0 billion in
February 2009. In April 2009, the OFS and GM amended this loan agreement to increase the maximum loan
amount from $13.4 billion to $15.4 billion, and on May 20, 2009 to increase the maximum loan amount from
$15.4 billion to $19.4 billion (these amendments are referred to as the Working Capital Advances) to provide
GM with adequate working capital to assist in the restructuring effort. The additional amounts were funded upon
amendment, bringing the total funded under this loan to $19.4 billion. The agreement required GM to develop
and implement a restructuring plan to achieve long-term financial viability and required compliance with certain
enhanced executive compensation and expense control requirements.

102

Notes to the financial statements

GMAC LLC Rights Offering

Part 2 • agency Financial Statements

Furthermore, the OFS received warrants for shares of GM common stock and an additional senior unsecured
note in the principal amount of $748.6 million. The purpose of this loan was to enhance the ability of GM and
its subsidiaries to pursue timely and aggressive production of energy-efficient advanced technology vehicles;
preserve and promote the jobs of American workers employed directly by GM and its subsidiaries; safeguard
the ability of GM and its subsidiaries to provide retirement and health care benefits for retirees and their dependents; and stimulate manufacturing and sales of automobiles produced by GM. On June 1, 2009, GM filed for
Chapter 11 bankruptcy. All rights under this loan were transferred to a newly created entity (GM NewCo) and
subsequently extinguished in connection with a successful credit bid for the assets of old GM. In addition, the
OFS received $134.4 million in interest while the loan was outstanding. See further discussion below under GM
Debtor-In-Possession.

In December 2008, the OFS agreed, in principal, to lend up to $1.0 billion to GM for participation in a rights
offering by GMAC in support of GMAC’s reorganization as a bank holding company. The loan was secured by
the GMAC common interest acquired in the rights offering. The loan agreement specified that at any time, at
the option of the lender (OFS), the unpaid principal and accrued interest was exchangeable for the membership
interest purchased, by GM, during the rights offering. The note was funded for $884.0 million. In May 2009,
the OFS exercised its exchange option under the loan and received 190,921 membership interests, representing
approximately 35.36% of the voting interest, in GMAC in full satisfaction of the loan. In addition, OFS received
$9.1 million in interest while the loan was outstanding. The conversion to GMAC shares was not considered in
the original subsidy cost. As a result, a modification was recorded reducing the estimated subsidy cost by approximately $1.6 billion.

Chrysler Holding LLC General Purpose
The OFS provided a three-year, $4.0 billion loan to Chrysler in January 2009, bearing interest at 3 Month
LIBOR (subject to a 2.0% floor) plus 3.0%. The loan was secured by various collateral including parts inventory,
real estate, and certain equity interests held by Chrysler. This agreement required Chrysler to submit a restructuring plan to achieve long-term viability and required compliance with certain enhanced executive compensation
and expense-control requirements. Furthermore, the OFS received a senior unsecured note from Chrysler in the
principal amount of approximately $266.8 million, containing the same terms as the General Purpose loan. The
purpose of this loan was to: enhance the ability of Chrysler and its subsidiaries to pursue timely and aggressive
production of energy-efficient advanced technology vehicles; preserve and promote the jobs of American workers
employed directly by Chrysler and its subsidiaries; safeguard the ability of Chrysler and its subsidiaries to provide
retirement and health care benefits for retirees and their dependents; and stimulate manufacturing and sales of
automobiles produced by Chrysler.
On April 30, 2009, Chrysler filed for Chapter 11 bankruptcy. Upon entering bankruptcy, a portion of Chrysler
was sold to a newly created entity (New Chrysler). Under the terms of the bankruptcy agreement, $500.0 million
of this loan was assumed by New Chrysler (see discussion under Chrysler Exit for discussion of note terms).
The balance remains outstanding and is in default. Any recovery of the remainder of this loan will depend on:
(a) Chrysler Holding’s obligation to pay the greater of $1.375 billion or 40.0% of the equity value of Chrysler
Financial to OFS should Chrysler Holding receive certain distributions from Chrysler Financial and, (b) proceeds
received from the sale of assets remaining in the bankrupt company. In addition, OFS received $52.1 million in
interest payments on this note.

Notes to the financial statements

103

O F F I C E O F F I N A N C I A L S TA B I L I T Y • Ag ency F inancial r e p o rt • F iscal Y ea r 2 0 0 9

Chrysler Financial
In January, 2009, the OFS loaned $1.5 billion to Chrysler LB Receivables Trust (Chrysler Trust), a special
purpose entity created by Chrysler Financial, to finance the extension of new consumer auto loans. The five-year
loan bore interest at 1 Month LIBOR plus 1.0% for the first year, 1.5% for the remaining term and was secured
by a senior secured interest in a pool of newly originated consumer automotive loans, and Chrysler served as a
guarantor for certain covenants of Chrysler Financial. Under the agreement, Chrysler Financial was required to
comply with the executive compensation and corporate governance requirements of Section 111(b) of the EESA,
as well as enhanced restrictions on executive compensation including the need to reduce by 40.0% its bonus pool
for Senior Executive Officers and Senior Employees. In lieu of warrants, the OFS received additional notes in an
amount equal to 5.0% of the maximum loan amount. The additional notes would vest 20.0% on the closing date
and 20.0% on each anniversary of the closing date and had other terms similar to the loan. The purpose of this
loan was to assist Chrysler Financial in providing retail financing to purchasers of automobiles, light duty trucks
and recreational vehicles; to stimulate manufacturing and sales of automobiles produced by Chrysler’s affiliates;
preserve and promote the jobs of American workers employed directly by Chrysler’s affiliates and in related industries; and safeguard the ability of Chrysler to provide retirement and health care benefits for their retirees and
their dependents. On July 14, 2009, the loan and additional note of $15.0 million were paid in full. In addition,
the OFS received $7.4 million in interest payments while this loan was outstanding.

Auto Supplier Support Program
In April 2009, the OFS committed $5.0 billion in financing for the Auto Supplier Support Program, as follows:
$3.5 billion for GM suppliers and $1.5 billion for Chrysler suppliers. These commitments were subsequently
reduced to $2.5 billion for GM suppliers and $1.0 billion for Chrysler suppliers per the loan agreement. Under
the program, suppliers are able to sell their receivable to a SPV, created by the respective automaker, at a discount.
The purchases of the receivables are funded by equity investments made by the automaker, cash payments made
by the automaker on previously purchased receivables or from draws on the OFS funding commitment. The
duration of the program is 12 months, extendable at the option of the OFS. Interest is charged on advances
under the facility at a rate of 3 Month LIBOR (subject to a 2.0% floor) plus 3.5%. In addition, the OFS received
a contingent payment note comprised of an exit fee equal to 4.0% of the adjusted commitment amount and
50.0% of the residual equity in the SPV after the program’s end date. This program provides suppliers with access
to government backed protection ensuring that money owed to them for the products they ship will be paid
regardless of what happens to the recipient car company. This provided suppliers with needed funding to operate their businesses and help unlock credit more broadly in the supplier industry. Purchases of receivables and
collection of amounts due from GM and Chrysler is performed by a third party service provider. Suppliers must
maintain qualifying commercial terms with the automakers to participate in the program. The OFS has provided
approximately $413.1 million of funding to this program. The bankruptcy of Chrysler and GM did not impact
this program, as both companies were allowed to continue paying suppliers while in bankruptcy. As of September
30, 2009, the OFS had received $5.9 million in interest under the Auto Supplier Support Program.

Auto Warranty Program
In April 2009 and May 2009, the OFS loaned approximately $280.0 million to Chrysler and $360.6 million
to GM, respectively, to capitalize SPVs created by Chrysler and GM to finance participation in the Warranty
Commitment Program (warranty program). The OFS also received additional notes as consideration for its loans in
an amount equal to 6.67% of the funded amounts. The warranty program covered all warranties on new vehicles

104

Notes to the financial statements

Part 2 • agency Financial Statements

purchased from Chrysler and GM during the period in which Chrysler and GM were restructuring. The program
was run by a third party program administrator with the backing of financial resources allocated by the OFS,
Chrysler and GM. Chrysler and GM contributed 15.0% of the projected cost for warranty service on each covered
vehicle, with the OFS providing additional funds to cover 110.0% of the projected cost. The SPVs holding the
funds operated separately from Chrysler and GM and would transfer the necessary funds to a third-party to handle
all warranty claims even if Chrysler and GM entered into bankruptcy or went out of business. Both Chrysler and
GM have completed the Section 3637 sales in June 2009 and July 2009, respectively. Upon completion of the
sale, the OFS received principal amounts due from both GM and Chrysler and terminated the warranty program.
Interest in the amount of $3.1 million was received by the OFS from Chrysler. No interest was received in connection with the GM repayment. The GM additional note was assigned to the New GM as part of the bankruptcy
proceedings and extinguished as part of the credit bid for the assets of old GM. The Chrysler additional note is still
outstanding.

Chrysler Debtor-In-Possession
In May 2009, the OFS and the Canadian government jointly agreed to make a loan in the total amount of
$4.1 billion ($3.0 billion by the OFS and $1.1 billion by Canada) to Chrysler LLC in its capacity as debtor-inpossession (DIP) in its bankruptcy case. In May 2009, the OFS increased its loan commitment in the DIP credit
agreement to $3.8 billion, and the Canadian government increased its commitment to $1.2 billion, bringing the
maximum loan amount to $5.0 billion. The loan interest rate was the 3 Month Eurodollar rate plus 3.0%. The
stated maturity was September 2009, with earlier maturity depending on the bankruptcy proceedings. Of the
$3.8 billion committed by the OFS, approximately $1.9 billion was funded during the bankruptcy. This DIP
loan provided the necessary liquidity to sustain Chrysler during the bankruptcy period. Upon the Section 363
sale of the Chrysler assets, the funding commitment was reduced to amounts previously drawn. As such, no
additional amounts were drawn from this facility. Recovery of the DIP loan is subject to the bankruptcy process
associated with the Chrysler assets remaining after the sale to New Chrysler.

Chrysler Exit
In May 2009, the OFS committed to make a loan to New CarCo Acquisition LLC (New Chrysler or Chrysler
Group LLC), the company that purchased the assets of Chrysler. The final terms of the credit agreement resulted
in a loan to New Chrysler for approximately $7.1 billion. This amount consists of $6.6 billion of new funding
and $500.0 million of assumed debt8 from the OFS January 2, 2009 credit agreement with Chrysler Holding
LLC. The loan was secured by a first priority lien on the assets of Chrysler Group LLC. Funding of the loan
was available in two installments or tranches (B and C), each with varying availability and terms. The following
describes the terms of Tranches B and C.
The maximum funding under Tranche B was $2.0 billion and was funded on the closing date of the agreement.
Interest on Tranche B is 3 Month Eurodollar plus 5.0% margin (in certain situations, defined in the agreement,
a rate other than the 3 Month Eurodollar rate will be applied. This rate, referred to as the Alternative Base Rate,
will be the greater of the Prime Rate, the Federal Funds Effective rate plus 0.5% or the 3 Month Eurodollar rate
plus 1.0%. If this Alternative Base Rate is applied, the margin will be 4.0% versus the 5.0% if the 3 Month
Eurodollar Rate is used). Tranche B is due and payable on December 10, 2011, provided that the Chrysler Group
7
8

Section 363 refers to Section 363 of the Federal Bankruptcy Code, which allows companies in bankruptcy to sell assets in reorganization.
The assumed debt contains the same terms as the Tranche C loan with respect to mandatory prepayment, interest and maturity.

Notes to the financial statements

105

O F F I C E O F F I N A N C I A L S TA B I L I T Y • Ag ency F inancial r e p o rt • F iscal Y ea r 2 0 0 9

LLC may elect to extend the maturity of up to $400.0 million of Tranche B to the Tranche C maturity date. If so
elected, the applicable margin will increase to 6.5% for Eurodollar and 5.5% for ABR loans, respectively.
The maximum funding under Tranche C is approximately $4.64 billion, of which approximately $2.58 billion
was funded on the closing date. Interest on Tranche B is 3 Month Eurodollar plus 7.91% margin (in certain
situations, defined in the agreement, a rate other than the 3 Month Eurodollar rate will be applied. This rate,
referred to as the Alternative Base Rate, will be the greater of the Prime Rate, the Federal Funds Effective rate
plus 0.5% or the 3 Month Eurodollar rate plus 1.0%. If this Alternative Base Rate is applied, the margin will be
6.91% versus the 7.91% if the 3 Month Eurodollar Rate is used). On June 10, 2016, the Tranche C loan shall be
prepaid to the extent the funded amount is greater than 50.0% of the closing date commitment amount, taking
into consideration amounts previously prepaid as a voluntary prepayment. The remaining balance of the Tranche
C loan is due and payable on June 10, 2017.
Interest on both the Tranche B and Tranche C will be payable in-kind through December 2009 and will be
added to the principal balance of the respective Tranche. In addition, additional in-kind interest will accrue in
the amount of $17.0 million per quarter. Such amount will be added to the Tranche C loan balance subject to
interest at the appropriate rate.
The OFS also obtained other consideration, including a 9.85% equity interest in Chrysler Group LLC and
additional notes9 with principal balances of $288.0 million and $100.0 million10. As of September 30, 2009, the
OFS has funded approximately $4.6 billion under this facility.

GM Debtor-In-Possession
On June 1, 2009, GM filed for Chapter 11 bankruptcy. As part of the filing the OFS and the Canadian government agreed to lend up to $33.3 billion under the terms of the DIP credit agreement; the OFS’s commitment
amount was $30.1 billion. The OFS funded the $30.1 billion of which approximately $986.0 million remains
outstanding as of September 30, 2009. In July 2009, the DIP credit agreement was amended to reflect the fact
that the amounts there under (other than approximately $986.0million that remained with GM for wind-down
in bankruptcy and $7.1 billion that was assumed by GM NewCo) were extinguished in connection with a successful credit bid for the assets of old GM.
The OFS has assigned its rights in this loan as well as the General Purpose and Working Capital loans and previously received common stock warrants to a newly created entity (GM NewCo or General Motors Company). The
purpose of this GM NewCo was to obtain sufficient assets of GM out of bankruptcy to satisfy the original loans
disbursed to GM and discussed above, which it accomplished through a successful credit bid for the assets in a
sale pursuant to Section 363 of the Bankruptcy Code. Upon closing of the Section 363 sale, the General Motors
Company has assumed $7.1 billion of the DIP loan, simultaneously paying $0.4 billion (return of warranty program funds), resulting in a balance of $6.7 billion. The loan has a term of 6 years and bears interest at 3 Month
Eurodollar (subject to a 2.0% floor) plus 5.0% and has a first lien security interest in the assets of General Motors
Company. The OFS also received $2.1 billion in 9.0% cumulative perpetual preferred stock and 60.8% of the
common equity interest in General Motors Company. The assets received by the OFS as a result of the assign-

9 The additional notes bear the same interest rate and maturity as the Tranche C loan.
10 Interest begins to accrue on this note after certain events, defined in the credit agreement, have taken place.

106

Notes to the financial statements

GMAC Preferred Stock
In December 2008, the OFS purchased preferred membership interests for $5.0 billion which were converted to
senior preferred stock with an 8.0% annual distribution right (dividends) from GMAC. Under the agreement,
GMAC issued warrants to the OFS to purchase, for a nominal price, additional preferred equity in an amount equal
to 5.0% of the preferred equity purchased. These warrants were exercised at closing of the investment transaction.
The additional preferred stock provided for a 9.0% annual distribution right. The purpose of this investment was to
enable GMAC to restore liquidity to its finance businesses and restore stability to the domestic automobile industry
in the United States. As of September 30, 2009, the OFS has received $265.2 million in dividends associated with
these preferred and warrant preferred stock.

Part 2 • agency Financial Statements

ment and Section 363 sale are considered recoveries of the original loans for subsidy cost estimation purposes.
As of September 30, 2009, the OFS had received $34.1 million in dividends on GM preferred stock.

GMAC Mandatorily Convertible Preferred Stock
In May 2009, the OFS published a non-binding term sheet to invest $13.1 billion to support GMAC, subject to
definitive documentation and GMAC’s capital needs. The OFS has invested $7.5 billion (of the $13.1 billion) in
9.0% Mandatorily Convertible Preferred Stock in GMAC to support its ability to originate new loans to Chrysler
dealers and consumers, and help address GMAC’s capital needs. The preferred stock have a liquidation amount of
$50 per share and are convertible in whole or in part, at any time, at the option of GMAC, subject to the approval of the Federal Reserve. Furthermore, GMAC shall not convert any of the stock to the extent such conversion
would result in the OFS owning in excess of 49% of GMAC’s common equity except (1) with the prior written
consent of the OFS, (2) pursuant to GMAC’s Capital Plan, or (3) pursuant to an order of the Federal Reserve
compelling such a conversion. The determination of the percentage of common equity owned by the OFS would
take into account the common stock currently owned by the OFS as a result of the conversion of the GMAC
Rights Offering, previously discussed. Absent a previous conversion, the preferred stock will automatically
convert after 7 years. The conversion rate is 0.00432 units of common stock per unit of convertible preferred
stock. The remaining $5.6 billion (per the non-binding term sheet) is subject to the FRB’s review of GMAC’s
capital plan assessment of whether additional capital is needed. As of September 30, 2009, the remaining $5.6
billion has not been funded. The OFS had received approximately $165.4 million in dividends associated with
these preferred and warrant preferred stock.

Public-Private Investment PROGRAM
The Public-Private Investment Program (PPIP) is part of the OFS’s efforts to help restart the market and provide
liquidity for legacy assets. Under this program, the OFS will make equity and debt investments in investment
vehicles (referred to as Public Private Investment Funds or “PPIFs”) established by private investment managers.
The equity investment will be used to match private capital and will equal not more than 50.0% of the total equity invested. The debt investment will be, at the option of the investment manager, equal to 50.0% or 100.0%
of the total equity (including private equity). The PPIFs are only allowed to purchase commercial mortgagebacked securities and non-agency residential mortgage-backed securities issued prior to January 1, 2009 that were
originally rated AAA or an equivalent rating by two or more nationally recognized statistical rating organizations
without external credit enhancement and that are secured directly by the actual mortgage loans, leases or other
assets and not other securities. The PPIFs are also permitted to invest in certain temporary securities, including
bank deposits, U.S. Treasury securities, and certain money market mutual funds. At least 90 percent of the assets
underlying any eligible asset must be situated in the United States. On September 30, 2009, the OFS signed

Notes to the financial statements

107

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108

definitive limited partnership and loan agreements with two investment managers, committing to potentially
disburse up to $6.7 billion. As of September 30, 2009, no private fund managers had made any investments and
the OFS had not disbursed any funds.

Subsidy Reestimates
The purpose of reestimates is to update original program subsidy cost estimates to reflect actual cash flow experience as well as changes in forecasts of future cash flows. Forecasts of future cash flows are updated based on
actual program performance to date, additional publicly available relevant historical market data on securities
performance, revised expectations for future economic conditions, and enhancements to cash flow projection
methods. Financial statement reestimates for all programs were performed using actual financial transaction data
through September 30, 2009. In accordance with credit reform guidance and to ensure the timely completion of
the credit reform reestimate process, market and security specific data publicly available as of September 30, 2009,
was used for the CPP, AGP, TIP and direct loan AIFP and data through August 31, 2009 was used for the equity
portion of AIFP, AIG and TALF in the reestimate calculations. The OFS assessed the key inputs of the reestimates
using data publically available as of September 30, 2009, and in its determination, there were no significant
changes to the key inputs for the three programs for which August 31, 2009, data was used that would require a
revision to the reestimates.
Downward Reestimates for the fiscal year ended September 30, 2009, are as follows:
Downward Reestimate Amounts
(Dollars in Millions)
Program

Subsidy

Interest

Total

AGP

$ (1,097)

$ (77)

$ (1,174)

Direct Loan
AIFP
CBLI/TALF
Subtotal Direct

$ (9,039)
(222)
$ (9,261)

$ (1,571)
(21)
$ (1,592)

$ (10,610)
(243)
$ (10,853)

Equity Investment
CPP
TIP
AIG
AIFP
Subtotal Equity
Total

$ (68,558)
(20,366)
(845)
(2,331)
$ (92,100)
$ (102,458)

$ (3,861)
(1,101)
(280)
(379)
$ (5,621)
$ (7,290)

$ (72,419)
(21,467)
(1,125)
(2,710)
$ (97,721)
$ (109,748)

Notes to the financial statements

The approximately $1.2 billion in downward reestimates for the AGP is primarily due to improvements in market
conditions from when the guarantee was committed in January 2009. The improved market conditions resulted
in an increase in the projected AGP asset due to the net present value of the estimated cash inflows from the preferred stock and warrants received by OFS from Citigroup as a premium being greater than the estimated value of
future claim payments associated with the $5.0 billion asset guarantee.
The approximately $10.6 billion in downward reestimates for the direct loans-AIFP is primarily the result of the
post bankruptcy improved financial position of one of the major companies participating in the program. The
$0.2 billion in downward reestimates for the TALF is entirely due to projected improved performance of the
securities within the program versus the original estimate.

Part 2 • agency Financial Statements

Descriptions of the reestimates, by OFS Program, are as follows:

The $70.7 billion in repurchases during fiscal year 2009 accounts for $9.7 billion of the $72.4 billion in
downward reestimates in the CPP. Projected repurchases of $30.0 billion in the next 12 months accounts for
approximately $5.4 billion, with the $57.3 billion balance in downward reestimates in the CPP primarily due to
improved market conditions from when the original estimate was made in December 2008.
The $21.5 billion in downward reestimates in the TIP is mostly due to improved market conditions from when
the original estimates were made in December 2008 and January 2009. Approximately $2.3 billion is due to a
$20.0 billion repurchase forecast within 12 months following September 30, 2009.
The $1.1 billion in downward reestimates for the AIG Investment Program and $2.7 billion in downward
reestimates for the AIFP equity programs are primarily due to improvements in market conditions from when the
equities were purchased resulting in a reduction in the projected costs of the programs.
Key financial data for the Troubled Asset Relief Program Loans and Equity Investments and Asset Guarantee
Program are included in the following two tables:

1. irect Loans and Equity Investments Outstanding, Gross, represent amounts paid by OFS to acquire
D
the loans and equity investments. Repurchases, redemptions, and repayments have been deducted
from these balances.
2. et Direct Loans and Equity Investments represent the present value of net cash flows that OFS
N
estimates it will receive from the loans and equity investments. For equity securities, this amount
represents fair value.
3. ubsidy Expense by component, subsidy cost allowance and a reconciliation of the subsidy cost
S
allowance illustrate the relationship between subsidy cost and asset value.
4. econciliation of subsidy cost by program, is also incorporated in the tables.
R

Notes to the financial statements

109

O F F I C E O F F I N A N C I A L S TA B I L I T Y • Ag ency F inancial r e p o rt • F iscal Y ea r 2 0 0 9

office of financial stability (Troubled Asset Relief Program)
NOTES TO THE FINANCIAL STATEMENTS
For the Period Ended September 30, 2009
(Dollars in Millions)

TOTAL

CPP

AIG

TIP

AIFP

CBLI

Note 6: Troubled Asset Relief Program Loans and Equity Investments
Direct Loans And Equity Investment Programs:
Direct Loans and Equity Investments Outstanding, Gross
Subsidy Cost Allowance
Net Direct Loans and Equity Investments
New Loans or Investments Disbursed
Obligations for Loans and Investments not yet Disbursed

290,969
(53,077)
237,892

133,901
7,770
141,671

$
$

363,826
51,681

$
$

204,618
—

Budget Subsidy Rate, excluding modifications
and reestimates: (see Note 1 below)
Interest Differential
Defaults
Other
Total Budget Subsidy Rate
Subsidy Cost by Component:
Interest Differential
Defaults
Other
Total Subsidy Cost, Excluding Modifications and Reestimates
Reconciliation of Subsidy Cost Allowance:
Balance, inception
Subsidy cost for disbursements
Subsidy cost for modifications
Interest and Dividend Collections
Warrants and additional notes
Net Interest (to) from Treasury on borrowings and Financing
Account Balance
Balance, End of period, before reestimates
Subsidy Reestimates
Balance, End of period
Reestimates
Interest on Reestimate
Subsidy
Total Reestimates - (Decrease) in Subsidy Cost
Reconciliation of Subsidy Costs:
Subsidy cost for disbursements
Subsidy cost for modifications
Subsidy Reestimates
Total Direct Loan and Equity Investment Programs
Subsidy Costs

$ 40,000
341
$ 40,341

$ 73,762
(31,478)
$ 42,284

43,206
(30,054)
13,152

$
$

43,206
26,629

$ 40,000
$
—

$ 75,902
$ 5,152

$
100
$ 19,900

-45.52%
123.56%
4.74%
82.78%

9.31%
48.38%
-8.84%
48.85%

6.97%
54.21%
-3.13%
58.05%

5.87%
0.00%
-110.10%
-104.23%

5.97%
25.60%
-4.58%
26.99%
$

$
$

4,175
161,297
(13,705)
151,767

—
151,767
412
9,329
2,916

(2,773)
161,651
(108,574)
$
53,077
$

$
$

(7,213)
(101,361)
$ (108,574)

151,767
412
(108,574)

43,605

12,279
52,655
(9,414)
55,520

—
55,520
1,866
6,790
2,901

(2,428)
64,649
(72,419)
(7,770)

$
$

(17,280)
46,906
1,799
31,425

3,724
19,352
(3,536)
$ 19,540

5,446
42,384
(2,444)
$ 45,386

—
31,425
127
—
—

(373)
31,179
(1,125)
30,054

(276)
$ 21,126
(21,467)
$
(341)

309
$ 44,798
(13,320)
$ 31,478

(280)
(845)
(1,125)

$ (1,101)
(20,366)
$ (21,467)

$ (1,950)
(11,370)
$ (13,320)

—
19,540
—
1,862
—

—
45,386
(1,589)
677
15

$
$

100
344
444

6
—
(110)
(104)
—
(104)
8
—
—
(5)
(101)
(243)
(344)

(3,861)
(68,558)
(72,419)

55,520
1,866
(72,419)

31,425
127
(1,125)

$ 19,540
$
—
(21,467)

$ 45,386
(1,589)
(13,320)

(104)
8
(243)

(15,033)

30,427

$ (1,927)

$ 30,477

(339)

(21)
(222)
(243)

Note 1: The rates reflected in the “Budget Subsidy Rate” table above are weighted rates for the program. To compensate for the weighting of the various risk category subsidy rates,
the “by component” dollar amounts reflected were computed as a ratio of the component rate to the total weighted subsidy rate multiplied by the subsidy expense for the program.
Therefore, the Total Subsidy Cost excluding modifications and reestimates will not equal the New Loans or Investments Disbursed multiplied by the Budget Subsidy Rate.

110

Notes to the financial statements

(in Millions)

AGP
Asset Guarantee Program

Asset Guarantees Outstanding:
Oustanding Principal Amount of Guaranteed Assets, Face Value
Amount of Outstanding Principal Guaranteed
Asset for Asset Guarantee Program

$
$
$

Budget Subsidy Rate, excluding modifications and reestimates:
Defaults
Fees and Other Collections
Other
Total Budget Subsidy Rate
Subsidy Cost by Component:
Defaults
Fees and Other Collections
Other
Total Subsidy Cost, Excluding Modifications and Reestimates
Reconciliation of Asset Guarantee Program:
Balance, Inception
Subsidy cost
Dividend Collections on Preferred Stock
Net Interest from Treasury on Borrowings and Financing Account Balance
Balance, End of Period, Before Reestimate
Subsidy Reestimate
Balance, End of Period
Reestimates:
Interest on Reestimate
Subsidy
Total Reestimates - (Decrease) in Subsidy Cost
Reconciliation of Subsidy Costs:
Subsidy cost
Subsidy reestimate
Cancellation fees collected
Total Asset Guarantee Program Subsidy Cost

301,000
5,000
1,765

Part 2 • agency Financial Statements

Office of Financial Stability (Troubled asset relief program)
NOTES TO THE FINANCIAL STATEMENTS
For the Period Ended September 30, 2009

43.62%
-53.23%
-5.37%
-14.98%

$
$

$
$
$

2,181
(2,662)
(270)
(751)

—
(751)
175
(15)
(591)
(1,174)
(1,765)

(77)
(1,097)
(1,174)
(751)
(1,174)
(276)
(2,201)

Notes to the financial statements

111

O F F I C E O F F I N A N C I A L S TA B I L I T Y • Ag ency F inancial r e p o rt • F iscal Y ea r 2 0 0 9

note 7. Commitments and Contingencies
The OFS is party to various legal actions and claims brought by or against it. In the opinion of management and
General Counsel, the ultimate resolution of these legal actions and claims will not have a material effect on the
OFS financial statements as of September 30, 2009. The OFS has not incurred any loss contingencies that would
be considered probable or reasonably possible for these cases. Refer to Note 6 for additional commitments.

note 8. Principal Payable to the bureau of the Public Debt
Equity investments, direct loans, and asset guarantees accounted for under credit reform accounting are funded
by subsidy appropriations and borrowings from the BPD. The OFS also borrows funds to pay the Treasury
General Fund for negative subsidy costs and downward reestimates. The OFS makes periodic principal repayments to the BPD based on the analysis of its cash balances and future disbursement needs. All debt is intragovernmental and covered by budgetary resources. See additional details on borrowing authority in Note 10,
Statement of Budgetary Resources.
Debt transactions for the period ending September 30, 2009, are:
(Dollars in Millions)

Beginning Balance, Principal Payable to the BPD
New Borrowings
Repayments
Ending Balance, Principal Payable to the BPD

—
215,593
(72,258)

143,335

Borrowings from the BPD by TARP Program that are outstanding as of September 30, 2009, are as follows:
(Dollars in Millions)

Capital Purchase Program
American International Group, Inc. Investment Program
Targeted Investment Program
Automotive Industry Financing Program
Consumer & Business Lending Initiative
Asset Guarantee Program
Total Borrowings Outstanding

77,232
12,531
20,460
32,134
204
774

143,335

Borrowings are payable to the BPD as collections are available and carry terms ranging from 2 to 30 years.
Interest rates on borrowings range from 1.0% to 4.5%. Interest expense for the period ended September 30,
2009, was $6.4 billion.

112

Notes to the financial statements

The Statement of Net Cost (SNC) presents the net cost of operations for the OFS for the Department of the
Treasury strategic goal of ensuring that U.S. and World economies perform at full economic potential. The OFS
has determined that all initiatives and programs under the TARP fall within this strategic goal.
The OFS SNC reports the accumulated full cost of the TARP’s output, including both direct and indirect costs
of the program services and output identifiable to TARP, in accordance with SFFAS No. 4, Managerial Cost
Accounting Concepts and Standards.
The OFS SNC includes approximately $6.4 billion of intragovernmental costs relating to interest expense on borrowings from the BPD and approximately $3.6 billion in intragovernmental revenues relating to interest income
on financing account balances for the period ended September 30, 2009.

Part 2 • agency Financial Statements

note 9. Statement of Net Cost

Subsidy Allowance Amortized on the SNC is the difference between interest income on financing fund account
balances, dividends and interest income on direct loans, equity investments, and asset guarantees from TARP
participants, and interest expense on borrowings from the BPD. Credit reform accounting requires all costs on
the SNC for programs to be reflected only in the subsidy cost. The subsidy allowance account is used to present
the loan or equity investment at the estimated net present value of future cash flows.

note 10. Statement of Budgetary Resources
The Statement of Budgetary Resources (SBR) presents information about total budgetary resources available to
the OFS and the status of those resources for the period ended September 30, 2009. The OFS’s total budgetary
resources were approximately $238.3 billion for the period ended September 30, 2009. Additionally, nonbudgetary resources including borrowing authority and spending authority from collections of loan principal,
liquidation of equity investments, interest and fees in financing funds were approximately $461.1 billion for the
period ended September 30, 2009.

Permanent Indefinite Appropriations
The OFS receives permanent indefinite appropriations annually to fund increases in the projected subsidy costs
of loans and the OFS investment programs as determined by the reestimation process required by the FCRA. The
initial funding as a result of the reestimation process will occur in 2010.
Additionally, Section 118 of the EESA states that the Secretary may issue public debt securities and use the
resulting funds to carry out the Act and that any such funds expended or obligated by the Secretary for actions
authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the
time of such expenditure or obligation.

Notes to the financial statements

113

O F F I C E O F F I N A N C I A L S TA B I L I T Y • Ag ency F inancial r e p o rt • F iscal Y ea r 2 0 0 9

114

Borrowing Authority
The OFS is authorized to borrow from the BPD when funds needed to disburse direct loans and investments, and
to enter into asset guarantee arrangements exceed subsidy costs and collections in the non-budgetary financing
accounts. As of September 30, 2009, the OFS had available approximately $45.8 billion of borrowing authority.
The OFS uses dividends and interest received as well as principal repayments on direct loans and liquidation of
equity investments to repay debt in the non-budgetary loan and investment financing accounts. These receipts are
not available for any other use per credit reform accounting guidance.

Apportionment Categories of Obligations Incurred:
Direct vs. Reimbursable Obligations
All of the OFS apportionments are Direct and are Category B. Category B apportionments typically distribute
budgetary resources on a basis other than calendar quarters, such as by activities, projects, objects or a combination of these categories. The OFS obligations incurred are direct obligations (obligations not financed from
reimbursements).

Undelivered Orders
Undelivered orders as of September 30, 2009, were approximately $56.1 billion in budgetary accounts, and approximately $79.2 billion in non-budgetary financing accounts.

Explanation of Differences Between the Statement of Budgetary
Resources and the Budget of the United States Government
Federal agencies are required to explain material differences between amounts reported in the SBR and the actual
amounts reported in the Budget of the U.S. Government (President’s Budget). However, the President’s Budget,
which will include the FY 2009 actual amounts for OFS, has not yet been published. The President’s Budget is
expected to be published in February 2010 and will be made available from the U.S. Government Printing Office.
Since the financial statements are published before the President’s Budget, a reconciliation is to be performed
between the prior year’s SBR and the actual amounts for that year published in the prior year’s President’s Budget.
Any significant differences identified from this reconciliation are to be explained in the federal agency’s notes to its
financial statements. Given that FY 2009 is the OFS’s first year of operations, no prior year data was available to
perform a comparison.

Notes to the financial statements

The OFS presents the SNC using the accrual basis of accounting. This differs from the obligation-based measurement of total resources supplied, both budgetary and from other sources, on the SBR. The reconciliation
of obligations incurred to net cost of operations shown below categorizes the differences between the two, and
illustrates that the OFS maintains reconcilable consistency between the two types of reporting.
The Reconciliation of Obligations Incurred to Net Cost of Operations for the period ended September 30, 2009
is as follows:
(Dollars in Millions)

Resources Used to Finance Activities:
Obligations Incurred
Spending Authority from Offsetting Collections
Offsetting Receipts
Total Resources Used to Finance Activities

Part 2 • agency Financial Statements

note 11. Reconciliation of Obligations Incurred to Net Cost
of Operations

662,296
(271,999)
(2,720)
387,577

Resources Used to Finance Items Not Part of Net Cost:
Net Obligations in Loan and Investment Financing Funds
Increase in Resources Obligated for Items Ordered but not yet Provided
Total Resources Used to Finance Items Not Part of Net Cost
Resources Used to Finance Net Cost

(180,185)
(56,073)
(236,258)
151,319

Components of Net Cost That Will Not Require or Generate Resources in the Current Period:
Downward Reestimate of Subsidy Cost
Other
Total Components of Net Cost Not Requiring or Generating Resources in the Current Period
Net Cost of Operations

(109,748)
2
(109,746)
41,573

Notes to the financial statements

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O F F I C E O F F I N A N C I A L S TA B I L I T Y • Ag ency F inancial r e p o rt • F iscal Y ea r 2 0 0 9

Required Supplementary Information
Office of Financial Stability (Troubled Asset Relief Program)
COMBINED STATEMENT OF BUDGETARY RESOURCES
For the Period Ended September 30, 2009

Combined
Budgetary
Accounts

(Dollars in Millions)

TARP Programs

Nonbudgetary
Financing
Accounts

Budgetary
Accounts

TARP Administrative Fund

Nonbudgetary
Financing
Accounts

Budgetary
Accounts

Nonbudgetary
Financing
Accounts

BUDGETARY RESOURCES
Unobligated Balances Brought Forward,
Inception

—

Budget Authority:
Appropriations

238,268

—

237,989

—

279

—

309,971

—

309,971

—

Borrowing Authority

243,072

—

243,072

—

—
—

Spending Authority from Offsetting
Collections
Earned: Collected
Change in Unfilled Orders Without
Advance

—

Permanently Not Available
TOTAL BUDGETARY RESOURCES

28,927

—

28,927

—

238,268

Total Budget Authority

581,970

237,989

581,970

279

—
$

238,268

(120,841)
$

—

461,129

237,989

210,112

452,184

28,156
—

(120,841)
$

—

461,129

279

—

209,863

452,184

249

—

7,009

28,126

7,009

—

1,936

—

1,936

—

STATUS OF BUDGETARY RESOURCES
Obligations Incurred:
Direct
Unobligated Balance:
Apportioned and Available
Not Available
TOTAL STATUS OF BUDGETARY
RESOURCES

238,268

—

461,129

—

237,989

—

461,129

—

279

—

CHANGE IN OBLIGATED BALANCES
Obligated Balance Brought Forward, Inception

Obligations Incurred

210,112

452,184

209,863

452,184

249

—

Gross Outlays

(153,961)

(372,982)

(153,871)

(372,982)

(90)

—

(28,927)

—

(28,927)

—

56,151

79,202

55,992

79,202

159

—

Change in Uncollected Customer Payments
from Federal Sources
Obligated Balance, Net, End of Period:
Unpaid Obligations
Uncollected Customer Payments from
Federal Sources
Obligated Balance, Net, End of Period

—

(28,927)

56,151

153,961

—

(28,927)

50,275

55,992

372,982

153,871

—

50,275

372,982

—

159

—

NET OUTLAYS
Gross Outlays
Offsetting Collections

—

NET OUTLAYS

116

—

(243,072)

—

(2,720)

Distributed Offsetting Receipts

(243,072)
—

(2,720)

—

151,241

Notes to the financial statements

129,910

151,151

129,910

—
—
$

—

Part 2 • agency Financial Statements

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Full text of Agency Financial Report : Fiscal Year 2009

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