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department
treasury

the
of the

office of financial
stability

t roubled
a sset
r elief
p rogram

agency
financial
report
fiscal year

2010

AbbreviAtions And Acronyms
ABS

Asset-backed Securities

LTV

Loan-to-value Ratio

AGP

Asset Guarantee Program

MBS

Mortgage-backed Security

AIFP

Automotive Industry Financing Program

MHA

Making Home Affordable Program

AIG

American International Group, Inc.

NPV

Net Present Value

BofA

Bank of America Corporation

OFS

Office of Financial Stability

CBLI

Consumer and Business Lending Initiative

OMB

Office of Management and Budget

CBO

Congressional Budget Office

PPIF

Public-Private Investment Fund

CDFI

Community Development Financial
Institution

PPIP

Public-Private Investment Program

PRA

Principal Reduction Alternative

QFI

Qualifying Financial Institution

RMBS

Residential Mortgage-backed Securities

SIGTARP

Special Inspector General for the Troubled
Asset Relief Program

CMBS

Commercial Mortgage-backed Securities

Commercial Paper

COP

Congressional Oversight Panel

CPP

Capital Purchase Program

CDCI

Community Development Capital Initiative

SPV

Special Purpose Vehicle

EESA

Emergency Economic Stabilization Act of
2008

TALF

Term Asset-Backed Securities Loan Facility

TARP

Troubled Asset Relief Program

TIP

Targeted Investment Program

FCRA

Federal Credit Reform Act of 1990

FHA

Federal Housing Administration

FRBNY

Federal Reserve Bank of New York

GAO

Government Accountability Office

GSE

Government-sponsored enterprise

HAFA

Home Affordable Foreclosure Alternatives

HHF

Hardest Hit Fund

HAMP

Home Affordable Modification Program

HPDP

Home Price Decline Protection

IPO

Initial Public Offering

LIBOR

London Interbank Offered Rate

TABLE OF CONTENTS
iii

Executive Summary

Part 1: Management’s Discussion and Analysis
Background, Mission and Organizational Structure

Overview of TARP for Fiscal Year 2010

Key Trends/Factors Affecting TARP Future Activities and Ultimate Cost

Systems, Controls, and Legal Compliance

Limitations of the Financial Statements

Operational Goals

Operational Goal One: Ensure the Overall Stability and Liquidity of the Financial System

Capital Purchase Program (CPP)

Community Development Capital Initiative (CDCI)

Targeted Investment Program (TIP)

AIG Investment Program (AIG)

Asset Guarantee Program (AGP)

Automotive Industry Financing Program (AIFP)

Consumer and Business Lending Initiative (CBLI)

Term Asset-Backed Securities Loan Facility (TALF)

Public-Private Investment Program (PPIP)

Small Business and Community Lending Initiatives (SBA Initiative)

Operational Goal Two: Prevent Avoidable Foreclosures and Preserve Homeownership

Operational Goal Three: Protect Taxpayers’ Interests

Operational Goal Four: Promote Transparency

Part 2: Financial Section
Message from the Chief Financial Officer (CFO)

Government Accountability Office Auditor’s Report

Appendix I: Management’s Report on Internal Control over Financial Reporting

Appendix II: OFS Response to Auditor’s Report

Financial Statements

Notes to the Financial Statements

Required Supplementary Information

Appendices
A Oversight Entities
B TARP Glossary

table of contents

98
101

table of contents

Message from the Assistant Secretary

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table of contents

agency financial report | fiscal year 2010

I am pleased to present the Office of Financial Stability’s (OFS) Agency Financial Report for FY
2010. This report describes our financial results for the Troubled Asset Relief Program (TARP)
during the second year of the OFS. The report contains the financial statements for TARP and the
Government Accountability Office’s audit opinion on those financial statements, a separate opinion
on OFS’ internal controls over financial reporting, and results of tests of OFS’ 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 to implement TARP.
The OFS carries out the mission and objectives of the TARP: ensuring the overall stability and
liquidity of the financial system; preventing avoidable foreclosures and helping preserve homeowner
ship; protecting taxpayers’ interests; and promoting transparency.
On October 3, 2010, the second anniversary of the enactment of TARP, the authority to make new purchase commitments expired.
This date is also an appropriate time to reflect on what the program has accomplished.
The TARP was, and is, an enormous commitment of taxpayer money. And it has been unpopular for good reason—no one likes
using tax dollars to rescue financial institutions. However, by objective standards, TARP worked. It helped stop the widespread
financial panic we faced in the fall of 2008 and helped prevent what could have been a devastating collapse of our financial system.
Moreover, it did so at a cost that is far less than what most people expected at the time the law was passed.
Of course, TARP was not the answer to all of America’s challenges, and we have many still ahead. The U.S. economy is healing but
at a slower pace than we need. Millions of Americans are still out of work and at risk of losing their homes. We still have much work
to do to repair the damage from this crisis.
Our results to date reflect the following:
•

•

Treasury-OFS will use up to $475 billion of the original $700 billion authorized. A total of $388 billion has been disbursed from
inception through September 30, 2010.
Treasury-OFS has already recovered a total of about $204 billion of those funds. This includes approximately three-fourths of
the $245 billion investment in banking institutions. In addition, we have received about $28 billion from TARP recipients
from inception through September 30, 2010, including interest, dividends and repurchase of warrants.
The lifetime cost of TARP will not be known for some time and will depend on many factors, including how financial
markets and the economy perform in the future. But assuming the recently announced AIG restructuring plan is implemented
as announced, and subject to the assumptions discussed herein as to the valuation of the AIG investment in light of the
restructuring, the cost of TARP would be around $50 billion. These costs are expected to come primarily from losses related
to TARP investments in auto companies and the initiatives to help responsible homeowners avoid foreclosure. Please see the
detailed information in this report on these estimates and the methodology used to make them.

message from the assistant secretary

iii

message from the assistant secretary

MESSAGE FROM THE ASSISTANT SECRETARY

message from the assistant secretary

the department of the treasury | office of financial stability

Going forward, our focus is to manage the investments prudently while working to recover as much of the taxpayers’ funds as possible.
We will also continue our efforts to help distressed homeowners. And we will take these steps while maintaining comprehensive
accountability and transparency standards.
The financial data included in this report are reliable and complete. For the second consecutive year, the OFS has earned “clean”
opinions on its financial statements and its internal control over financial reporting from the Government Accountability Office.

Sincerely,

Acting Assistant Secretary
Office of Financial Stability

message from the assistant secretary

agency financial report | fiscal year 2010

executive summary

EXECUTIVE SUMMARY
Treasury-OFS is pleased to present the Fiscal Year 2010 Agency Financial Report (AFR) for the Troubled Asset Relief Program
(TARP), established by the Department of the Treasury pursuant to the Emergency Economic Stabilization Act of 2008 (EESA).
There have been a number of important milestones for TARP in recent months. First, the President signed the Dodd-Frank Wall
Street Reform and Consumer Protection Act (Dodd-Frank Act) on July 21, 2010, which limited TARP cumulative purchase author
ity to $475 billion. Second, October 3, 2010 marked the second anniversary of the passage of EESA and the end of the authority to
make new financial commitments. Therefore, it is an appropriate time to reflect on what TARP has accomplished.
TARP, in conjunction with other federal government actions, helped to unfreeze the markets for credit and capital, bringing down
the cost of borrowing for businesses, individuals, and state and local governments, restoring confidence in the financial system and
restarting economic growth. TARP did so faster, and at a much lower cost, than many anticipated.
•

•

At the peak of the financial crisis, many banks were not making new loans to businesses, or even to one another. Many
businesses could not get financing in capital markets. Numerous municipalities and state governments could not issue bonds
at reasonable rates. The securitization markets — which provide financing for credit cards, student loans, auto loans and other
consumer financing — had basically stopped functioning. The economy was contracting at an accelerating rate, with millions
of Americans losing their jobs.
By the middle of 2009, assisted by the combined impact of the federal government’s financial programs, borrowing rates had
fallen sharply for businesses, individuals, and state and local governments. More companies could fund themselves in private
markets by issuing equity and long-term debt. Housing prices began to stabilize. The value of the savings of American workers
had begun to recover. Economic growth turned from negative to positive.

EESA provided the Secretary of the Treasury with the authority to purchase or guarantee $700 billion but it has been clear for some
time that TARP will cost taxpayers substantially less than $700 billion. In December 2009, the Secretary of the Treasury announced
that no more than $550 billion of the authority would be used. In July 2010, the Dodd-Frank Act reduced the cumulative authority
to $475 billion, in line with expected investment amounts. Finally, many of the investments under the program, particularly those
aimed at stabilizing banks, have thus far delivered positive returns for taxpayers.
As a result of improved market conditions, lower utilization of the program, and careful stewardship, the estimated cost of TARP
over its lifetime continues to decline. In the August 2009 Midsession Review of the President’s 2010 Budget, the lifetime cost of
TARP, based on budget scoring conventions, was projected to be $341 billion (assuming the full $700 billion of TARP authority was
utilized). By the February 2011 President’s Budget, the lifetime cost of TARP had decreased to $117 billion (assuming $546 billion of
the $700 billion TARP authority was utilized).
Our most recent analysis of the potential lifetime cost of TARP suggests that if the proposed restructuring of AIG is completed as
announced, the lifetime cost of TARP could be less than $50 billion. Under the proposed restructuring of AIG, Treasury-OFS would
receive 1.1 billion shares of AIG common stock in exchange for its TARP investment. While this cost is based on the October 1,
2010 market price, it should be noted that the proceeds that would actually be received by Treasury-OFS from the future sale of such

executive summary

the department of the treasury | office of financial stability

stock would be based on the market price at the time of sale, which may differ materially from the October 1, 2010 market price.
Of course, the final lifetime cost of TARP will depend on how financial conditions evolve in the future, including the price of AIG
shares, and other common stock held by TARP.
The estimated lifetime cost of TARP reflects several factors, including the cost of the initiatives to help responsible homeowners
avoid foreclosure, for which $45.1 billion is budgeted which has not yet been spent. All funds disbursed for housing programs result in
a cost because these funds will not be returned. It also reflects losses on investments in the auto companies and AIG. These losses are
largely offset in part by gains on TARP investments in banks and gains in other programs.
Because the restructuring has not occurred and its completion is subject to contingencies, the value of the AIG investment in the
fiscal year 2010 financial statements does not reflect any potential from the restructuring. The effects of the proposed restructuring of
AIG on the lifetime cost of TARP are presented in more detail later in Management’s Discussion and Analysis.
Note that the lifetime cost of TARP, based on budget scoring conventions, differs from the cost included in the Treasury-OFS finan
cial statements. Estimates of lifetime costs assume that all planned expenditures are made. By contrast, the TARP financial statement
costs are based on transactions through September 30, 2010.
The reported cost of TARP activities from inception, October 3, 2008, through September 30, 2010 based on the Treasury-OFS
financial statements was $18.5 billion. Unlike the federal budget cost estimate, this reflects only transactions through September 30,
2010. Thus, it does not include the committed but undisbursed funds for housing programs as well as other programs all of which
are included in the expected lifetime cost for budget purposes. The $18.5 billion cost consists of $23.1 billion of reported TARP net
income in the Treasury-OFS financial statements for fiscal year 2010 and the $41.6 billion of reported TARP net cost for the period
ended September 30, 2009. The change since last year is primarily due to the early repayment of TARP investments by the larger
banks and an improvement in the financial markets and the economy.
Since its inception, TARP has disbursed $387.7 billion in direct loans and equity investments, collected $204.1 billion in repay
ments, and reported $16.7 billion in dividends, interest and fees, and $10.9 billion in net proceeds from the sale and repurchase of
assets in excess of cost. As of September 30, 2010, TARP had $179.2 billion in gross outstanding direct loans and equity investments,
which are valued at $142.4 billion. In addition, from inception through September 30, 2010, TARP incurred costs related to Treasury
Housing programs of $0.8 billion and administrative costs of $0.5 billion.
The cost estimates for budget and financial statement purposes are only estimates. They are based on current market prices where
available. Because market prices change, such estimates will change. The ultimate cost of the outstanding TARP investments
is therefore subject to significant uncertainty and will depend on, among other things, how the economy, financial markets and
particular companies perform.
Treasury-OFS is moving quickly to recover the federal government’s investments and to withdraw from the financial system.
Treasury-OFS 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.
•

•

Treasury-OFS continues to carefully manage the TARP assets and has recovered more than 75 percent of the TARP funds
provided to banks, principally through the Capital Purchase Program (CPP), and expects these capital support programs for
banks to provide an overall positive return for taxpayers.
Treasury-OFS is beginning to recover investments in the auto industry. GM has repaid the assistance it received that remained
outstanding as a loan and has recently agreed to repurchase the preferred stock issued to Treasury. The ultimate loss estimate on
investments in Chrysler and Ally Financial, Inc. (formerly GMAC) is expected to be less than last year as well due to financial
improvements in both firms.

executive summary

agency financial report | fiscal year 2010

•

Treasury-OFS also expanded the Treasury Housing Programs under TARP. Treasury-OFS launched the Housing Finance Agency
(HFA) Innovation Fund for the Hardest Hit Housing Markets (HFA Hardest Hit Fund, or HHF) to help state housing finance
agencies provide additional relief to homeowners in the states hit hardest by unemployment and house price declines. In addition,
Treasury-OFS and the Department of Housing and Urban Development (HUD) enhanced the FHA-Refinance program to enable
homeowners whose mortgages exceed the value of their homes to refinance into more affordable mortgages if their lenders agree to
reduce the unpaid principal balance by at least 10 percent.
•

Final authority to make commitments within the reduced TARP authorization expired on October 3, 2010. Servicers that
participate in the Making Home Affordable Program (MHA) can continue to make mortgage modifications through the end
of calendar year 2012. The HFA Hardest Hit Fund permits participating state housing agencies to provide support through
their programs until as late as calendar year 2017, depending on available funding. The FHA-Refinance program is designed to
enable homeowners to refinance their mortgage loans and reduce their overall mortgage debt through the end of calendar year
2012.

Treasury-OFS continues to provide detailed information about TARP to insure transparency. Treasury-OFS published a Two-Year
Retrospective Report on the Troubled Asset Relief Program on October 5, 2010. This report includes information on TARP
programs and the effects of TARP and other federal government actions to address the financial crisis. Readers are invited to refer to
this document at www.financialstability.gov/docs/TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf

executive summary

vii

executive summary

The restructuring plan announced by AIG, assuming it is completed as announced, will accelerate the timeline for repaying
the federal government and put taxpayers in a considerably stronger position to recoup the Treasury-OFS investment in the
company. As noted earlier, the AIG restructuring is not yet completed and its closing is subject to contingencies.

executive summary

the department of the treasury | office of financial stability

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viii

executive summary

part 1:

management’s
discussion
and analysis

agency financial report | fiscal year 2010

In order to appreciate the effects of TARP and the concentrated
efforts of the Administration to combat the financial crisis, it is
useful to examine the origin and causes of the crisis.
In September 2008, the nation was in the midst of one of the
worst financial crises in our history. The financial institutions
and markets that Americans rely upon to protect their savings,
help finance their children’s education, and help pay their bills,
and that businesses rely upon to make payroll, build inventories,
fund new investments, and create new jobs, were threatened
unlike at any time since the Great Depression. Across the
country, people were rapidly losing confidence in our financial
system and in the federal government’s ability to safeguard their
economic future.
The causes of the crisis will be studied for years, and this report
is not meant to provide a comprehensive analysis of why the
crisis occurred. But some reasons are clear. Over the two decades
preceding the crisis, the financial system had grown rapidly in
an environment of economic growth and stability. Risks grew
in the system without adequate transparency. Lax regulations
and loopholes in supervision let firms become highly leveraged
and take on too much risk. Ample credit around the world
fueled an unsustainable housing boom in the first half of the
last decade. When the housing market inevitably turned down,
starting in 2006, the pace of mortgage defaults accelerated at an
unprecedented rate. By mid2007, rising mortgage defaults were
undermining the performance of many investments held by
major financial institutions.

tions, and the capacity of the federal government to contain the
damage, were vanishing.
Our system of regulation and supervision had failed to con
strain the excessive use of leverage and the level of risk in
the financial system, and the United States entered this crisis
without adequate tools to manage it. The Executive Branch did
not have existing options for managing failures of systemically
important non-bank financial institutions.
The Treasury Department, the Federal Reserve, the FDIC, and
other federal government bodies undertook an array of emer
gency actions to prevent a collapse and the dangers posed to
consumers, businesses, and the broader economy. However, the
severe conditions our nation faced required additional resources
and authorities. Therefore, the Bush Administration proposed
EESA in late September, and with the support of Democrats and
Republicans in Congress, it was enacted into law on October 3,
2008.

The crisis began in the summer of 2007 and gradually increased
in intensity and momentum over the course of the follow
ing year. A series of major financial institutions, including
Countrywide Financial, Bear Stearns, and IndyMac, failed;
and Fannie Mae and Freddie Mac, the largest purchasers and
guarantors of home loans in the mortgage market, came under
severe stress.

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 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. Section 102 of EESA also
provides authority for a guarantee program for troubled assets.
Section 109 of EESA provides authority to maximize assistance
for homeowners. The enactment of the Dodd-Frank Act in July
2010 subsequently reduced total TARP purchase authority from
$700 billion to a cumulative $475 billion.

By September 2008, for the first time in 80 years, the U.S. finan
cial system was at risk of collapse. A growing sense of panic was
producing the classic signs of a generalized run on the banks.
Peoples’ trust and confidence in the stability of major institu

Final purchase authority to make new commitments under
TARP expired on October 3, 2010. This means no new com
mitments to invest funds can be made. There is, however, still
significant work to be done to implement commitments made

management’s discussion and analysis
management’s discussion and analysis

part 1: management s discussion and analysis

BACKGROUND, MISSION AND
ORGANIzATION STRUCTURE

part 1: management s discussion and analysis

the department of the treasury | office of financial stability

by prior to the October 3 deadline but not yet fully funded. For
those assets already purchased, Treasury-OFS will continue to
wind down TARP and manage the remaining TARP investments
in order to recover as much of taxpayers’ funds as possible.
Treasury-OFS is headed by the Assistant Secretary for Financial
Stability, appointed by the President with the advice and consent
of the Senate. Reporting to the Assistant Secretary for Financial
Stability are six major organizations: the Chief Investment
Officer, the Chief Financial Officer, the Chief of Operations,
the Chief of Homeownership Preservation, the Chief Reporting
Officer, and the Chief of 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.
The Treasury-OFS organization chart is shown below:
Assistant Secretary
for
Financial Stability

Chief
Investment
Officer

Chief
Financial
Officer

Chief of
Operations

Chief Counsel

Chief of
Chief of OFS
Home
Internal
Ownership
Review
Preservation

Chief
Reporting
Officer

The Office of the Chief Investment Officer (CIO) is responsible
for program development and the execution and management of
all investments made by either purchasing or insuring “troubled
assets” pursuant to EESA, other than TARP housing programs.
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, program and internal metrics analytics,
modeling cash flows, and internal controls.
The Office of the Chief of Homeownership Preservation is
responsible for identifying opportunities to help homeowners
and overseeing homeownership programs while also protecting
taxpayers.

The Office of the Chief of Operations is responsible for develop
ing the operating infrastructure and managing internal operations in Treasury-OFS.
The Office of the Chief Reporting Officer is responsible for
coordinating Treasury-OFS’ work with the external oversight
entities including the Government Accountability Office
(GAO), the Special Inspector General for TARP, the Financial
Stability Oversight Board and the Congressional Oversight
Panel. The Office also prepares periodic reports to the Congress
as required by EESA.
The Office of Internal Review (OIR) is responsible for iden
tifying the most significant risks that the TARP faces, both
internally and externally. In addition, OIR is responsible for
validating internal controls are present and functioning cor
rectly and for monitoring TARP recipient and external entity
compliance with various statutory and regulatory requirements.
The Office of the Chief Counsel reports functionally to the
Office of General Counsel at the Department of the Treasury
and provides legal advice to the Assistant Secretary. The Office
is involved in the structuring of OFS programs and activities
to ensure compliance with EESA and with other laws and
regulations.
Treasury-OFS is not envisioned as a permanent organization, so
to the maximum extent possible when economically efficient
and appropriate, Treasury-OFS utilizes private sector expertise
in support of the execution of TARP programs. Fannie Mae
and Freddie Mac accounted for over sixty percent of the fiscal
year 2010 non-personnel services costs ($149 million of $247
million) to assist in the administration and compliance over
sight, respectively, of the Making Home Affordable Program.
Additionally, asset managers were hired to serve as financial
agents in assisting with 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 sup
port, facilities, legal advisory, financial advisory, and information
technology.

management’s discussion and analysis

agency financial report | fiscal year 2010

Brief Statement of ofS Strategic
and o perational g oalS

institutions. If these institutions were unable to raise adequate
private funds to meet the SCAP requirements, Treasury-OFS
stood ready to provide additional capital.

The purpose of EESA is to provide the Secretary of the Treasury
with the authorities and facilities necessary to restore liquidity
and stability to 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 funds, retirement
accounts, and life savings; preserves homeownership; promotes
jobs and economic growth; maximizes overall returns to taxpay
ers; and provides public accountability. EESA also provided
specific authority to take certain actions to prevent avoidable
foreclosures.

In addition, Treasury-OFS provided direct aid to certain
financial industry participants through the Targeted Investment
Program (TIP), the Asset Guarantee Program (AGP), and the
AIG Investment Program. These programs were designed to
mitigate the potential risks to the system as a whole from the
difficulties facing these firms.

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 capi
tal 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

management’s discussion and analysis
management’s discussion and analysis

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 economic growth and employ
ment. Treasury-OFS’ actions helped GM and Chrysler under
take 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-OFS implemented the
Consumer and Business Lending Initiative (CBLI) to enhance
liquidity and restore the flow of credit to consumers and small
businesses. Treasury-OFS developed programs to revitalize
asset-backed securities markets critical to restoring the flow of
credit to consumers and small businesses. CBLI is composed of
the Term Asset-Backed Securities Loan Facility, the SBA 7a
Securities Purchase Program and the Community Development
Capital Initiative.
Details on all of these efforts, including program-specific
results, can be found later in this Management’s Discussion and
Analysis under Operational Goals.

part 1: management s discussion and analysis

OVERVIEW OF TARP FOR FISCAL YEAR 2010

part 1: management s discussion and analysis

the department of the treasury | office of financial stability

2. Prevent Avoidable Foreclosures and
Preserve Homeownership
To prevent avoidable foreclosures and preserve home ownership,
Treasury-OFS launched the Making Home Affordable Program
(MHA), which includes the Home Affordable Modification
Program (HAMP). Under this program, Treasury-OFS pays the
cost of modifications of loans not held by government-sponsored
enterprises (GSEs) while the GSEs pay the cost of modifica
tions of loans held by the GSEs. After 18 months, more than
1.3 million homeowners participating in HAMP have entered
into trial modifications that reduced their mortgage payments to
more affordable levels. This includes 619,000 homeowners with
non-GSE loans. Nearly 500,000 homeowners participating in the
HAMP Program have had their mortgage terms modified perma
nently, with over 220,000 of these participants in non-GSE-loans
that would be funded by Treasury-OFS. HAMP participants (both
GSE and non-GSE loans) collectively have experienced a 36 per
cent median reduction in their mortgage payments—more than
$500 per month—amounting to a total, program-wide anticipated
savings for homeowners of more than $3.2 billion. MHA has also
spurred the mortgage industry to adopt similar programs that have
helped millions more at no cost to the taxpayer.
In addition, Treasury-OFS launched the Housing Finance
Agency (HFA) Innovation Fund for the Hardest Hit Housing
Markets (HFA Hardest Hit Fund, or HHF) to help state housing
finance agencies provide additional relief to homeowners in the
states hit hardest by unemployment and house price declines,
and Treasury-OFS and the Department of Housing and Urban
Development (HUD) enhanced the FHA-Refinance Program
in creating the FHA Short Refinance option to enable more
homeowners whose mortgages exceed the value of their homes
to refinance into more affordable mortgages if their lenders agree
to reduce principal by at least 10 percent.
MHA operations and program detail can be found later in this
Management Discussion and Analysis under Operational Goals.

3. Protect Taxpayer Interests
Federal 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 stan

dards, limit executive pay, and provide additional reporting on
lending activity. In addition, Treasury-OFS 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 con
nection with most investments, Treasury-OFS also received
warrants for additional securities in the institutions. Under the
broad programs described above, 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.
Finally, Treasury-OFS seeks to achieve the goal of protecting the
taxpayer through the effective management and disposition of
all TARP investments, as detailed under Operational Goals.

4. Promote Transparency
EESA requires transparency and accountability. Specifically,
EESA requires Treasury-OFS to provide Congress with a variety
of reports. These include a monthly report to Congress on
TARP activity and transaction reports posted within two days
detailing every TARP transaction. In carrying out its opera
tions, 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.
EESA also provided for extensive oversight of the TARP,
including by the Congressional Oversight Panel, the Special
Inspector General for the TARP, the Financial Stability
Oversight Board (FSOB), 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 can be found in this
Management’s Discussion and Analysis under Operational
Goals.

management’s discussion and analysis

agency financial report | fiscal year 2010

•

EESA provided authority for the TARP to purchase or guaran
tee up to $700 billion in troubled assets.1 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. EESA spending authority
would terminate December 30, 2009, unless extended upon sub
mission of a written certification to Congress by the Secretary of
the Treasury, pursuant to Section 120(b) of EESA.

•

In December 2009, the Secretary of the Treasury certified the
extension of TARP authority until October 3, 2010. The
Secretary identified two principal objectives for the extension of
TARP — to preserve capacity to respond to unforeseen threats
to financial stability and to address continuing challenges in the
areas of home foreclosures and credit for small business lending
and consumers. He also indicated that Treasury-OFS did not
expect to use more than $550 billion of the approximately $700
billion authorized by Congress.
The Dodd-Frank Wall Street Reform and Consumer Protection
Act2 (the Dodd-Frank Act) amended EESA, as follows:
•

•

Total purchase and guarantee authority under TARP was
capped at a cumulative $475 billion;
The amount of TARP investments that have been repaid
could not be used to increase spending; and
Obligations could not be incurred for programs or initia
tives that were not initiated prior to June 25, 2010.

Treasury-OFS reduced the TARP program allocations to con
form to these limitations. As of September 30, 2010, Treasury
OFS had cumulative purchases and guarantees (as defined in the
Dodd-Frank Act) amounting to $474.8 billion.
Based on operations for the year ended September 30, 2010,
Treasury-OFS reports the following key results:

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.

Pub. L. 111-203.

management’s discussion and analysis
management’s discussion and analysis

•

In fiscal year 2010, Treasury-OFS disbursed $23.4 billion
in TARP funds to make loans and equity investments, and
reported net income from operations of $23.1 billion.
During fiscal year 2010, Treasury-OFS received $131.3
billion of repayments on certain investments and loans
and $8.2 billion in net proceeds from the sale/repurchase
of assets in excess of cost.
As of September 30, 2010, Treasury-OFS reported $145.5
billion for the value of loans, equity investments, and the
asset guarantee program.

net i ncome of tarp operationS
(fiScal Year 2010 and fiScal Year
2009)
Treasury-OFS’ fiscal year 2010 net income from operations of
$23.1 billion includes the estimated net cost related to loans,
equity investments, and the asset guarantee program. For the
fiscal year ended September 30, 2010, Treasury-OFS reported
net subsidy income for five programs – the Targeted Investment
Program, the Asset Guarantee Program, PPIP, the AIG
Investment Program and the Automotive Industry Financing
Program (AIFP). These programs collectively reported net
subsidy income of $28.4 billion. Also, for the fiscal year ended
September 30, 2010, Treasury-OFS experienced net subsidy
cost for two programs – CPP and the Consumer and Business
Lending Initiative had reported net subsidy cost of $4.2 billion.
Fiscal year 2010 expenses for the Treasury Housing Programs
under TARP of $825 million and administrative expenses of
$296 million bring the total reported fiscal year net income from
operations to $23.1 billion, as shown in Table 1. For the period
ending September 30, 2009, the net cost of operations was
$41.6 billion as shown in Table 1. These net income and net
cost amounts reported in the financial statements reflect only
transactions through September 30, 2010 and September 30,
2009, respectively and therefore are different than lifetime cost
estimates made for budgetary purposes. See the discussion in the
Executive Summary.

part 1: management s discussion and analysis

fiScal Year 2010 financial
SummarY

part 1: management s discussion and analysis

the department of the treasury | office of financial stability

Table 1: Net Income (Cost) of TARP Operations
Dollars in millions

TARP Program

For the
Year Ended
September
30, 2010

For the
Period Ended
September
30, 2009

Capital Purchase Program

$ ( 3,861) $

15,033

Table 2: TARP Summary1
From TARP Inception through September 30, 2010
Dollars in billions
Purchase
Price or
Guaran- Total
tee
DisAmounts bursed

From TARP’s
Inception
through
September
30, 2010

11,172

Capital Purchase Program3

Targeted Investment Program

1,879

1,927

3,806

Targeted Investment
Program

Asset Guarantee Program

1,505

2,201

3,706

Asset Guarantee Program

Consumer and Business Lending
Initiative

(306)

Public Private Investment Program

704

American International Group
Investment Program
Automotive Industry Financing Program
Total Net Subsidy Income (Cost)

339

33
704

7,668

(30,427)

(22,759)

16,614

(30,477)

(13,863)

(41,404) $

(17,201)

$ 24,203

Additional TARP (Costs)

(825)

(2)

$(827)

Administrative Costs

(296)

(167)

(463)

Total Net (Cost of) Income from
TARP Operations

$ 23,082

(41,573) $ (18,491)

Over time the cost of the TARP programs will change. As
described later in this MD&A, and in the Treasury-OFS audited
financial statements, these estimates are based in part on
currently projected economic factors. These economic factors will
likely change, either increasing or decreasing the lifetime cost of
the TARP.

tarp p rogram SummarY
Table 2 provides a financial summary for TARP programs since
TARP inception on October 3, 2008, through September
30, 2010. For each program, the table gives the face value of
the amount obligated for each program, the amount actually
disbursed, repayments to Treasury-OFS from program partici
pants, net outstanding balance as of September 30, 2010, and
cash inflows on the investments for each program in the form
of dividends, interest or other fees. As of fiscal year end 2010,
$230 million of the $475 billion in purchase and guarantee
authority remained unused. 3
3

Received
Out
from
standing Invest2
Balance ments

$ 204.9 $ 204.9 $ 152.54 $ 49.8 $

19.8

40.0

0.0

4.2

5.0

0.0

0.7

69.8

47.6

0.0

47.6

0.0

Consumer and Business
Lending Initiative

5.3

0.94

---

0.9

---

Public Private Investment
Program

22.4

14.1

0.4

13.7

0.2

Automotive Industry
Financing Program

81.8

79.7

11.2

67.2

2.9

45.6

0.5

N/A

American International
Group Investment Program5

Treasury Housing Programs
Under TARP
Totals

Treasury Housing Programs under TARP
Program

Investment
Repayments

$ 474.8 $ 387.7 $ 204.1 $ 179.2 $

N/A
27.8

1/ This table shows the TARP activity for the period from inception through
September 30, 2010, on a cash basis. Received from investments includes
dividends and interest income reported in the Statement of Net Cost, and
Proceeds from sale and repurchases of assets in excess of costs.
2/ Total disbursements less repayments do not equal the outstanding balance.
Other transactions affecting the outstanding balance include Treasury housing
program funding of $0.5 billion as repayments are not required (or expected).
Also, the outstanding balance is affected by certain non-cash items including
capitalized interest of $0.3 billion, write-offs totaling $3.9 billion and losses on
two preferred stock transactions of $0.2 billion.
3/ Treasury-OFS received $16.1 billion in proceeds from sales of Citigroup common
stock, of which $13.1 billion is included at cost in investment repayments,
and $3.0 billion of net proceeds in excess of cost is included in Received from
Investments.
4/ Includes Community Development Capital Initiative exchange from CPP of $363
million.
5/ The disbursed amount is lower than purchase price because of the $29.8 billion
facility available to AIG. During the periods ended September 30, 2010 and
September 30, 2009, AIG drew $4.3 billion and $3.2 billion respectively from the
facility, leaving an undrawn amount of $22.3 under this facility.

Most of the TARP funds have been used to make investments
in preferred stock or make loans. Treasury-OFS has gener
ally received dividends 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 two-year period ended September
30, 2010, Treasury-OFS received a total of $16.7 billion in
dividends, interest and fees. Table 3 shows the breakdown of
receipts for the period ended September 30, 2010 and 2009 for
all TARP programs combined as well as totals for the period
from inception through September 30, 2010.

Treasury-OFS tracks costs in accordance with Federal budget procedures.
First, Treasury-OFS enters into legally binding “obligations” to invest or
spend the funds for TARP programs. Then, funds are disbursed over time
pursuant to the obligations. In any given case, it is possible that amount
obligated will not be disbursed.

management’s discussion and analysis

agency financial report | fiscal year 2010

Dividends, Interest, Fees and Warrants
Repurchases

For the
For the
Period
Year Ended Ended
September September
30, 2010
30, 2009

Dividends and Fees

5.9

9.6

From
TARP’s
Inception
through
September
30, 2010

15.5

Interest

1.0

0.2

1.2

Sales/Repurchases of Warrants and Warrant
Preferred Stock and Additional Notes

5.2

2.9

8.1

Proceeds from Sales of Citigroup Common
Stock in Excess of Cost

3.0

0.0

3.0

Subtotal

15.1

12.7

$ 122.0

70.7

$ 192.7

2.1

11.4

represents fair value. The total difference of $36.8 billion (2010)
and $53.1 billion (2009) 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 Note 6 in the financial statements for further
discussion)4. The chart does not give effect to the proposed
restructuring of AIG. The AIG restructuring plan is still subject
to a number of conditions and much work remains to be done to
close the transactions.
Table 4: Summary of TARP Direct Loans and Equity Investments
(Dollars in billions)

27.8

Investment/Loan Repayments

Sales/Repurchases/Repayments
on preferred stock
Loan Principal Repaid

Program

9.3

Subtotal

$ 131.3

72.8

$ 204.1

GRAND TOTAL

$ 146.4

85.5

$ 231.9

Capital Purchase
Program

Outstanding
Balance as
of September
30, 2010 1

Targeted Investment
Program

1/ This table shows TARP activity on a cash basis.

49.8

Estimated
Value of
Investment as
of September
30, 2010

48.2

Outstanding
Balance as
of September
30, 2009 1

133.9

Estimated
Value of
Investment as
of September
30, 2009

141.7

---

40.0

40.3

AIG Investment Program

47.6

26.1

43.2

13.2

Automotive Industry
Financing Program

67.2

52.7

73.8

42.3

0.9

1.0

0.1

0.4

Consumer Business
Lending Initiative (TALF
only 2009)

Treasury-OFS also receives warrants in connection with most of
its investments, which provides an opportunity for taxpayers to
realize an upside on investments. Since the program’s inception,
Treasury-OFS has received $8.0 billion in gross proceeds from
the disposition of warrants consisting of (i) $3.1 billion from
issuer repurchases at agreed upon values and (ii) $4.9 billion from
auctions. TARP’s Warrant Disposition Report is posted on the
OFS website at the following link: www.financialstability.gov/latest/
reportsanddocs.html

Public-Private
Investment Program

Total

13.7

179.2

14.4

142.4

291.0

237.9

1/ Before subsidy cost allowance.
2/ Does not give effect to proposed restructuring. See discussion concerning “The
AIG Restructuring Plan and Taxpayer Exit” later in this Management’s Discussion
and Analysis.

SummarY of tarp direct l oanS
and e quitY i nveStmentS
Table 4 provides information on the estimated values of the
TARP direct loan and equity investments by program, as of the
end of fiscal year 2010 and the end of fiscal year 2009. (Treasury
Housing Programs under TARP are excluded from the chart
because no repayments are required). The Outstanding Balance
column represents the amounts disbursed by Treasury-OFS
relating to the loans and equity investments that were outstand
ing as of September 30, 2010 and 2009. The Estimated Value
of the 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

management’s discussion and analysis

part 1: management s discussion and analysis

Table 3: TARP Receipts and Repayments
on Investments/Loans 1
(Dollars in billions)

The subsidy cost in Table 1 and on the Statement of Net Cost, is
composed of (1) the change in the subsidy cost allowance, net of write
offs, (2) net intragovernmental interest cost, (3) certain inflows from
the direct loans and equity investments (e.g., dividends, interest, net
proceeds from sales and repurchases of assets in excess of cost, and other
realized fees), and (4) the change in the estimated discounted net cash
flows related to the asset guarantee program.

part 1: management s discussion and analysis

the department of the treasury | office of financial stability

Table 5 below shows the estimated net asset value for the top
ten CPP investments held as of September 30, 2010.
Table 5: Top Ten CPP Investments
Dollars in billions

Institution

Citigroup (Common Shares)

Estimated Net Asset
Value (excluding
warrants) as of
September 30, 2010

Outstanding
Investment 1

11.90

14.31

SunTrust

4.85

4.84

Regions

3.50

3.49

Fifth Third

3.41

3.34

Keycorp

2.50

Marshall & Ilsley

1.72

1.47

Zions

1.40

1.22

Huntington

1.40

1.39

Synovus

0.97

0.79

Popular

Total

0.94

32.59

0.79

34.14

1/ Outstanding investment for Citigroup common equals the remaining number
of common shares multiplied by the per share cost basis of $3.25.
.

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 condi
tions, and the business prospects of specific institutions. The
estimates are sensitive to slight changes in model assumptions,
such as 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 and fewer defaults, TARP’s ultimate cost of
these investments may be lower than estimated. Wherever
possible, Treasury-OFS uses market prices of tradable securities
to estimate the fair 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, Treasury-OFS
uses internal market-based models to estimate the market value
of these investments. All cash flows are adjusted for market risk.
Further details on asset valuation can be found in Note 6 of the
Financial Statements.

compariSon of e Stimated lifetime
tarp coStS o ver time
Market conditions and the performance of specific financial
institutions will be critical determinants of the TARP’s lifetime
cost. The changes in the Treasury-OFS estimates since TARP’s
inception through September 30, 2010 provide a good illustra
tion of this impact. In the Fiscal Year 2011 President’s Budget,
Treasury-OFS projected the cost for TARP to be $117 billion
(assuming $546 billion utilized), down substantially from the
previous estimate of $341 billion (based on the entire $700
billion utilized) reflected in the Midsession Review in August
2009, which is reflective of the improved economy and financial
markets. An August 2010 report of the Congressional Budget
Office estimated the total cost of TARP as $66 billion.5
Table 6 provides information on how Treasury-OFS’ estimated
lifetime cost of TARP has changed over time. This table
assumes that all expected investments (e.g. AIG, PPIP) and disbursements for Treasury housing programs under TARP are com
pleted, and adheres to government budgeting guidance. This
table will not tie to the financial statements since it includes
investments and other disbursements expected to be made in
the future. Table 6 is consistent with the estimated lifetime cost
disclosures on the TARP web site at www.financialstability.gov.
The cost amounts in Table 6 are based on assumptions regarding
future events, which are inherently uncertain.

The Budget and Economic Outlook: An Update. August 2010. Available
at www.cbo.gov/ftpdocs/117xx/doc11705/08-18-Update.pdf.

management’s discussion and analysis �

agency financial report | fiscal year 2010
part 1: management s discussion and analysis

Table 6: Estimated TARP Lifetime Costs (Income)1
Dollars in billions

Program

Capital Purchase Program

Estimated
Lifetime
Cost on
March 31,
2010

Targeted Investment
Program

( 9.8)

Estimated
Lifetime Cost
on May 31,
2010

( 9.4)

Estimated
Lifetime
Cost on
September
30, 2010

( 3.8)

(11.2)

Pro-forma
Lifetime Cost
Assuming AIG
Restructuring
and October
1, 2010
Market Price

(11.2)

( 3.8)

Asset Guarantee
Program2

( 3.1)

( 3.0)

( 3.7)

AIG Investment Program

45.2

44.9

36.9

5.13

Auto Industry Financing
Program4

24.6

26.9

14.7

Consumer and Business
Lending Initiative

3.0

( 0.4)

( 0.1)

Public Private Investment
Program
Subtotal
Treasury Housing
Programs under TARP

Total

0.5

( 0.7)

56.6

55.7

32.1

0.3

105.4

45.6

48.8

101.3

$77.7

45.6

45.9

1/ Estimated program costs (+) or savings (in parentheses) over the life of the
program, including interest on re-estimates and excluding administrative costs.
2/ Prior to the termination of the guarantee agreement, Treasury guaranteed up to
$5 billion of potential losses on a $301 billion portfolio of loans.
3/ The pro-forma lifetime cost for the AIG Investment Program assumes that: (i) the
outstanding preferred stock investment is exchanged for 1.1 billion shares of AIG
common stock and valued at the market price of $38.86 at October 1, 2010, and (ii)
the undrawn commitment is disbursed and is valued consistent with Treasury-OFS
methodology for valuing its non-traded securities. Under this methodology,
Treasury-OFS estimates that it will not incur any loss on the additional
disbursements because the aggregate value of the assets underlying the preferred
interests in the Special Purpose Vehicles that Treasury-OFS will receive for the
disbursements exceeds the liquidation preference of the preferred interests. The
restructuring is subject to contingencies and has not been completed. In addition,
market prices will change which will result in changes to the cost estimate over
time. The pro-forma lifetime cost does not include any recovery from the shares
of AIG common stock to be received by Treasury from the AIG Credit Facility Trust
that are in addition to Treasury-OFS shares. See “The AIG Restructuring Plan and
Taxpayer Exit” discussion later in this Management’s Discussion and Analysis.
4/ GM has filed a registration statement for an initial public offering (IPO). If the
IPO is completed, Treasury-OFS will use the market price for GM common stock
to value its investment in the future. Because there is no market price today,
Treasury-OFS cannot value its investment in this manner and instead uses its
methodology for non-traded securities. The actual price that would be obtained
from the IPO is uncertain and will vary, perhaps significantly, from the September
30, 2010 valuation. However, if Treasury-OFS were to value its investment at the
IPO range of $26 to $29 per share announced by GM in the preliminary prospectus
dated November 3, 2010, Treasury-OFS’ estimated cost for the AIFP would
increase by $3 billion to $6 billion. Although not given effect in this column either,
GM has also agreed, subject to the closing of the IPO, to repurchase $2.1 billion of
preferred shares issued to Treasury-OFS at 102 percent of par value.
.

management’s discussion and analysis

part 1: management s discussion and analysis

the department of the treasury | office of financial stability

KEY TRENDS/FACTORS AFFECTING TARP FUTURE
ACTIVITIES AND ULTIMATE COST
This section provides additional TARP analytic information
and enhanced sensitivity analysis focusing on the remaining
TARP dollars/continued taxpayer exposure and what is likely
to affect the expected future return. Five TARP programs, the
Capital Purchase Program, the AIG Investment Program, the
Automotive Industry Financing Program, the Public-Private
Investment Program and the Treasury Housing Programs under
TARP, have $10 billion or more still committed. The recoveries
or costs from CPP, AIG, AIFP, and PPIP and the expenditures
for Treasury Housing programs going forward will most significantly affect the lifetime cost of the TARP.

cpp and Banking i nduStrY
i nformation
As of September 30, 2010, Treasury-OFS had CPP invest
ments with an outstanding balance of $49.8 billion. Of these
investments $11.9 billion is the Treasury-OFS investment in
Citigroup common stock, $26.5 billion is in financial institu
tions with assets greater than $10 billion (25 institutions), and
$11.4 billion is in financial institutions with assets less than $10
billion (565 institutions). As of September 30, 2010, 5 CPP
recipients had failed: 4 were banks and one was CIT Group, a
non-bank financial institution with a bank subsidiary. As noted
earlier in this report, the largest institutions in the CPP have
repaid their investments to Treasury-OFS.
Treasury-OFS’ actual recoveries on the outstanding CPP
investments will depend on a number of factors, including the
asset quality, capital position, reserve ratios and capital positions
of financial institutions participating in CPP as well as whether
these institutions have a business focus in areas hit hard by the
housing downturn or difficulties in commercial real estate. It
is also anticipated that a certain number of these institutions
will elect to convert their CPP investments into investments
made by the Small Business Lending Fund which was created by
Congress pursuant to the Small Business Jobs and Credit Act of
2010 (Public Law 111-240).

Throughout the life of the program, 118 CPP recipients have
not declared and paid one or more dividends to Treasury-OFS.
Of these recipients, six have missed six payments, which gives
Treasury-OFS the right to place members on the institutions’
boards of directors.

auto i nduStrY i nformation
As of September 30, 2010, Treasury-OFS held $67.2 billion in
AIFP investments, with an estimated value of $52.7 billion.
Over the past several months, conditions in the U.S. automo
tive industry have improved as has Treasury-OFS’ estimate of
the recovery on the AIFP investment.
The competitiveness of U.S. manufacturers, both domestically
and internationally will affect the value of Treasury-OFS’
investment. In addition, the macroeconomic conditions
(unemployment, Gross Domestic Product (GDP) growth, etc.)
will affect the overall trends in auto sales and thus Treasury
OFS’ recoveries.
Treasury-OFS has recovered all amounts invested under the
Auto Supplier Support Program (ASSP) and the Auto Warranty
Commitment Program (AWCP). With the emergence of
General Motors Company and Chrysler Group LLC from
bankruptcy proceedings and with the threat of liquidation greatly
reduced, credit market access for suppliers improved. The ASSP
closed in April 2010 after full repayment of all loans, which had
totaled $413 million, plus interest. The AWCP was terminated
in 2009, and the $640 million advanced under the program was
assumed and/or repaid in the bankruptcy sale transactions by
General Motors Company and Chrysler Group LLC.
The outlook for the domestic auto industry has improved and
the estimated value of Treasury-OFS’ investments has increased.
The cost of AIFP from inception through September 30, 2010
was $13.9 billion, as compared to the cost through September
30, 2009 of $30.5 billion.
General Motors Company repaid $7 billion to Treasury-OFS,
and is currently preparing for an initial public offering in which

management’s discussion and analysis

agency financial report | fiscal year 2010

Likewise, after taking one-time charges last year associated with
its restructuring, Chrysler posted two consecutive quarters of
operating profit. With respect to Old Chrysler, Treasury-OFS
was repaid $1.9 billion, which was more than Treasury-OFS
had previously estimated to recover and under the terms of the
settlement agreement, the $1.6 billion remaining face value was
written off.
Each of Ally (formerly GMAC) Financial’s four operating busi
nesses has reported a profit so far this year.

aig i nveStment p rogram
As of September 30, 2010, Treasury-OFS held $47.6 billion in the
AIG Investment Program, with an estimated value of $26.1 billion.
On September 30, 2010 AIG announced that it had entered
into an agreement-in-principle which, if completed as
announced, will accelerate the timeline for AIG’s repayment of
the federal government and put taxpayers in a stronger position
to recoup most of the Treasury-OFS investment in the company.
In addition, under the restructuring, up to all of the remaining
$22.3 billion available under the AIG capital facility would be
drawn from Treasury-OFS.
The basic terms of the restructuring plan are to: (i) sell sufficient
assets to pay off AIG’s obligations to the FRBNY, (ii) streamline
AIG’s business portfolio, and (iii) recapitalize AIG’s balance
sheet to support investment grade status without the need for
ongoing federal government support. See the discussion under
Operational Goal One, Subgoal 1B.

p uBlic -p rivate i nveStment
p rogram
Thus far, each of the eight PPIFs has generated positive invest
ment returns for Treasury. Because the PPIFs are still in the early
stages of their investment life cycles, it would be premature
to draw any meaningful long-term conclusions regarding the
performance of individual PPIFs or the program in general.
However, Treasury-OFS has been encouraged by the perfor
mance of the PPIP fund managers to date with net internal rates
of return on equity since inception ranging from 19 percent to
52 percent as of September 30, 2010. The PPIFs have generated
cumulative gross unrealized equity gains in excess of funded
capital contributions of more than $1.5 billion as of September
30, 2010 to all investors (Treasury-OFS and private investors).
In addition to its equity investment, Treasury-OFS has made
loans in the PPIFs equal to the total equity invested by Treasury
OFS and private investors which earns interest at a rate of 1
Month LIBOR plus 1 percent (approximately 1.26 percent as of
September 30, 2010). As of September 30, 2010, the PPIFs also
have made approximately $228 million of interest and dividend
payments and distributions to Treasury.
The PPIFs are still in their first year of investing and are
expected to continue deploying and reinvesting their capital in
eligible assets through 2012.

SenSitivitY a nalYSiS
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 the Treasury-OFS estimates. In the analysis
reported here, Treasury-OFS focuses on the largest components
of the TARP6, the assets held under the Capital Purchase
Program (CPP), the Automotive Industry Financing Program
(AIFP), and the Public Private Investment Program (PPIP).
For CPP the most important inputs to the valuation are the
market prices of publicly-traded preferred stock used to calibrate
6

management’s discussion and analysis
management’s discussion and analysis

See further discussion of AIG under Part II, Subgoal 1B.

part 1: management s discussion and analysis

Treasury-OFS may elect to sell shares. GM has also agreed,
subject to the closing of the initial public offering, to repurchase
$2.1 billion of preferred stock issued to Treasury-OFS. In the
first six months of 2010, General Motors Company reported two
consecutive quarters of positive operating profit and net income
– its first quarterly profits since 2007.

CPP - Citigroup

% change from current

0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20

Figure B:
Price Chart of
Citigroup
Common Stock

Increase 10%

10
n

ay
M

b
10
ar
1
0

Market Value

n
Ja

p
Se

0.00

0.10

Decrease 10%

6.00
5.00
4.00
3.00

14.31

48.23

15.74
10.0%

51.11
5.97%

12.88
(10.0)%

10
g

Se
p
1

0
l1
Ju

0
1
ay

Increase 10%

Ju
n
1

0
r1

ar
1

b
1
Fe

n
Ja

9
0

Avg. Monthly Closing Price

Decrease 10%

31.06
(8.4)%

De
c
0

0
Se
p

4.3%

N/A
N/A

35.57

No
v

N/A

33.92

Effect of 10%
Decrease

0.00

Effect of 10%
Increase

% change from current
Combined

1.00

September
30, 2010
Reported
Value for
CPP

% change from current

Figure A:
Price Chart of
Benchmark
Preferred
Stock

2.00

Table 7: Impact on CPP Valuation
(Dollars in Billions)

CPP - No Citigroup

To put this sensitivity analysis in perspective it is useful to
consider the range over which actual securities have moved
over the past year. Figure A shows the monthly average price of
the benchmark preferred as a percentage of par (the CPP – no
Citigroup value as of September 30, 2010, represents approxi
mately 88 percent of par, excluding the warrants held by Treasury
OFS). The dashed lines indicate the upper and lower bound price
used for the sensitivity analysis. Similarly, Figure B shows the
monthly average closing price of the Citigroup common stock
(closing price on September 30, 2010, was $3.91) with the dashed
lines representing the prices used in the sensitivity analysis. Figure
B shows that the securities have been trading within the range
used in the analysis as well as outside of this range. This helps to
illustrate the uncertainty around the cost estimates.

the model derived pricing of the preferred stock held in the
TARP and the current market price of the Citigroup common
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. This calibration
influences the asset-to-liability ratio of the banks and conse
quently the default and prepayment estimates predicted by the
model7. The current market price of the Citigroup common
stock is used to value the Citigroup shares held in CPP and
consequently impacts the cost of the program. As a sensitivity
analysis, Treasury-OFS increased and decreased the value of
the benchmark preferred stock in the CPP by 10 percent. As
an additional sensitivity analysis, Treasury-OFS increased and
decreased the value of the Citigroup September 30, 2010 closing
price 10 percent. Table 7 shows the impact on the value of
Treasury-OFS’ outstanding investment under CPP as a result of
a 10 percent increase and a 10 percent decrease in the value of
the calibration securities, the 10 percent increase and decrease
in the Citigroup stock price as well as the combined impact of
both increases and decreases. The combined analysis shows the
impact on the estimated value of Treasury-OFS’ CPP invest
ment with a combined increase or decrease of the benchmark
preferred stock as well as the Citigroup common stock.

$ Price

part 1: management s discussion and analysis

the department of the treasury | office of financial stability

43.94
(8.89)%

See discussion of valuation methodology in Note 6 of the Financial
Statements.

Similar to the CPP, the most important inputs to the valuation
of Treasury-OFS’ outstanding investments under the AIFP are
the market prices of certain traded defaulted bonds of the Old
GM and the change in the estimated value of Ally Financial
(formerly GMAC) common stock, which is driven by certain
pricing metrics of comparable public financial institutions.
The bonds of Old GM are used to estimate the value of GM
common stock held by Treasury-OFS because the bondholders

management’s discussion and analysis

agency financial report | fiscal year 2010

Table 8: Impact on AIFP Valuation
(Dollars in Billions)
September
30, 2010
Reported
Value for
AIFP

Effect of 10%
Increase

Effect of 10%
Decrease

Impact of Old GM Bond Price
Change on AIFP

52.71

% change from current

Table 9: Impact on PPIP Valuation
(Dollars in Billions)

55.29

N/A

Impact of Ally (Formerly GMAC)
Price Change on AIFP

52.71

% change from current

comes, based on the characteristics of the loans underlying the
securities and their behavior under simulated macro economic
variables, such as unemployment, mortgage interest rates,
short-term rates and home price appreciation. The cash flows
are then applied to the waterfall established for the funds to
estimate the cash flows to Treasury-OFS. The aggregate of these
cash flows (each scenario is equally weighted) is discounted to
estimate the value of the program. Table 9 shows the change
in the value of the Treasury-OFS outstanding PPIP investment
using the scenario which produces the minimum amount of cash
flows to Treasury-OFS and the maximum amount of cash flows
to Treasury-OFS.

50.13

4.9%
$

(4.9)%

54.00

N/A

September 30,
2010 Reported
Value for PPIP

Dollars
% change from current

14.40
N/A

Maximum
Cash Flows

14.79
2.7%

Minimum Cash
Flows

13.90
(3.5)%

51.42

2.4%

(2.4)%

Figure C shows the daily prices of the Old GM Bonds for the
previous year. The dashed lines represent the high and low
price used in the sensitivity analysis.
40.00
35.00
$ Price as a Percent of Par

Figure C:
Daily Price of
Old GM Bonds

30.00
25.00
20.00
15.00
10.00
5.00

Increase 10%

10
p
Se

10
g

0
Ap
r1

10
b

ar
1

10
n

Median Bond Price

09
v

c
De

t0
Oc

Se
p
0

0.00

Decrease 10%

To estimate the value of Treasury-OFS outstanding investments
under the PPIP, Treasury-OFS first estimates the cash flows
of the portfolio held by the various funds. Treasury-OFS uses
a stochastic process to generate 300 potential cash flow out
8

On November 3, 2010, GM issued a preliminary prospectus for an initial public
offering of stock with an estimated price range between $26 and $29 per share.
Due to the uncertainty as to the market price that would results from the initial
public offering, the potential effect on the value of Treasury-OFS’ investment in
GM is unknown and could be significantly different from the September 30, 2010
financial statement valuation.

management’s discussion and analysis

part 1: management s discussion and analysis

are entitled to receive GM stock and warrants upon liquida
tion of Old GM. Table 8 shows the change in estimated value
of Treasury-OFS outstanding AIFP investments based on a 10
percent increase and 10 percent decrease in the trading price of
the Old GM bonds and separately a 10 percent increase and 10
percent decrease in the estimated value of the Ally Financial
(formerly GMAC) common stock price. Figure C shows that
the securities have been trading within the range used in the
analysis as well as outside of this range, illustrating the uncer
tainty around the cost estimates8.

part 1: management s discussion and analysis

the department of the treasury | office of financial stability

SYSTEMS, CONTROLS, AND LEGAL COMPLIANCE
MAnAgEMEnT ASSurAncE STATEMEnT

The Office of Financial Stability’s (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. 3512(c), (d). 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, we considered the results of
extensive documentation, assessment and testing of controls across OFS, as well as the results of independent audits. We
conducted our reviews of internal controls in accordance with FMFIA and OMB Circular A-123.
As a result of our reviews, management concludes that the management control objectives described below, taken as a
whole, were achieved as of September 30, 2010. Specifically, this assurance is provided relative to Sections 2 (internal
controls) and 4 (systems controls) of FMFIA. OFS further assures that the financial management systems relied upon by
OFS are in substantial compliance with the requirements imposed by the Federal Financial Management Improvement
Act (FFMIA).
OFS’ internal controls are designed to meet the management objectives established by Treasury and listed below:
a.

Programs achieve their intended results;

Resources are used consistent with the overall mission;

Program and resources are free from waste, fraud, and mismanagement;

Laws and regulations are followed;

Controls are sufficient to minimize any improper or erroneous payments;

Performance information is reliable;

Systems security is in substantial compliance with all relevant requirements;

Continuity of operations planning in critical areas is sufficient to reduce risk to reasonable levels; and

Financial management systems are in compliance with federal financial systems standards, i.e., FMFIA Section
4/FFMIA.

In addition, 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, OFS provides unqualified assurance that internal control over financial reporting is appropri
ately designed and operating effectively as of September 30, 2010, with no related material weaknesses noted.

Timothy G. Massad
Acting Assistant Secretary for Financial Stability

management’s discussion and analysis

agency financial report | fiscal year 2010

communicating control objectives across the organization and
its third party service providers.

Effective internal controls in safeguarding taxpayer dollars
while providing financial stability through the Troubled Asset
Relief Program (TARP) remains a top priority of Treasury-OFS
management. During fiscal year 2010, Treasury-OFS made
significant progress in effectively deploying new TARP programs
and maturing its internal control environment.

Treasury-OFS’ Internal Control Program Office (ICPO) operates under the direction of the CFO and is guided by the SAT.
ICPO monitors the implementation of the internal control
framework and is responsible for assessing the achievement of
management control objectives. ICPO monitors Treasury-OFS
activities to promote the achievement of management control
objectives by:

•

Treasury-OFS continued to define and deploy new
programs as the focus of TARP activities migrated from
stabilizing the financial markets to assisting the taxpayer
through the Treasury Housing Programs Under TARP. For
the Housing Programs Under TARP and other new TARP
programs, Treasury-OFS maintained its focus on establish
ing an initial operating capability for operational processes
and implementing effective internal controls.
Business processes supporting existing programs, including
internal control activities, matured through well-defined
roles and responsibilities and policies and procedures.
Treasury-OFS performed monitoring activities that demon
strated that control procedures were performed consistently
and as designed.
Treasury-OFS made significant progress in addressing areas
for improvement in the internal control environment
identified through Treasury-OFS’ self assessment processes
(e.g., OMB A-123 internal controls over financial report
ing assessment, annual assurance statement process) and
through work performed by the oversight bodies (e.g.,
GAO, SIGTARP, and COP). This remains a top priority
for Treasury-OFS senior management.
Treasury-OFS made investments in information technol
ogy (IT) in fiscal year 2010 to drive efficiencies through
automation of the operational and accounting environment
and to reduce the overall cost of maintaining TARP.

Treasury-OFS is committed to maintaining an effective Internal
Control Program and has a Senior Assessment Team (SAT) to
guide the office’s efforts to meet the statutory and regulatory re
quirements 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 program
and support areas. Furthermore, Treasury-OFS has an internal
control framework in place that is based on the principles of
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The SAT leverages this framework in

management’s discussion and analysis
management’s discussion and analysis

•

Integrating management controls into Treasury-OFS
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;

•

Periodic testing of key controls; and,

•

Monitoring feedback from third party oversight bodies.

In addition, the internal control environment supporting TARP
undergoes continuous improvement to remain effective and is
subject to significant third party oversight by the Government
Accountability Office (GAO), the Special Inspector General
for the Troubled Asset Relief Program (SIGTARP), and the
Congressional Oversight Panel (COP).
The Assistant Secretary for Financial Stability reports 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. This assurance statement covers Treasury-OFS
compliance with the Federal Managers’ Financial Integrity Act
(FMFIA), the Federal Financial Management Improvement
Act (FFMIA), the Government Performance and Results
Act (GPRA), and Office of Management and Budget (OMB)
Circular A-123, Management’s Responsibility for Internal
Control. 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

part 1: management s discussion and analysis

i nternal control p rogram

part 1: management s discussion and analysis

the department of the treasury | office of financial stability

Treasury-OFS internal control objectives and disclose any noted
internal control weaknesses.

Treasury-OFS will continue to monitor this issue closely
through resolution.

i nformation technologY S YStemS

a reaS

For fiscal year 2010, Treasury-OFS developed the Core
Investment Transaction Flow (CITF), TARP’s system of record
and accounting translation engine. CITF automated important
operational and financial activities, a major improvement from
last year’s largely manual financial reporting process.

Over the next year, Treasury-OFS management will focus on
maturing its internal control environment in several key areas
as follows:

Other IT systems are supported by financial agents who provide
services to the Department of the 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 Treasury at least annually.

•

In addition, Treasury-OFS utilizes financial systems maintained
by Treasury Departmental Offices and different Treasury
bureaus. These systems are in compliance with federal financial
systems standards and undergo regular independent audits

compliance with the i mproper
paYmentS i nformation act (ipia)
The elimination of improper payments is a major focus of
Treasury-OFS senior management. Managers are held account
able 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 2010 IPIA review per
Treasury-wide guidance and did not assess any programs or
activities as susceptible to significant erroneous payments.

•

for i mprovement

As operational and accounting processes evolve over time,
there is a continued need for Treasury-OFS to develop
and update policies and procedures and internal control
documentation to detail the controls in place to mitigate
the risks identified.
Treasury-OFS relies on financial agents to provide many of
the business processes and controls supporting its programs.
The Housing programs, in particular, have grown in
number, scale and complexity over the last year. Treasury
OFS continues to assess the adequacy of internal controls
provided by third parties as they develop their program
capabilities. However, Treasury-OFS will need to heighten
its oversight practices to monitor controls as these programs
grow and mature. For example, Treasury-OFS will work to
provide clarity on certain Home Affordable Modification
Program (HAMP) policy guidelines, enhance monitoring
controls over Housing program financial agents, and assess
the adequacy of staffing and systems at financial agents.
Over the past year, Treasury-OFS developed information
technology capabilities to increase efficiency and automate
some of Treasury-OFS’ manual processes. Treasury-OFS
IT management will continue to mature the information
technology control environment in areas such as privileged
access and monitoring procedures where operating effec
tiveness issues were identified.

However, management did identify a small number of HAMP
investor cost share payments the amounts of which were
incorrect due to unclear guidelines related to escrow payments
and data integrity issues from servicers related to determina
tions of homeowner income. While the overall impact of these
improper payments was immaterial to the financial statements,
Treasury-OFS management is in the process of implementing
corrective actions at the servicer-level to remedy this issue.

management’s discussion and analysis

agency financial report | fiscal year 2010
part 1: management s discussion and analysis

LIMITATIONS OF THE FINANCIAL STATEMENTS

The principal financial statements have been prepared to
report the financial position and results of operations of the
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 Generally Accepted
Accounting Principles (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.
The statements should be read with the realization that they are
for a component of the U.S. Government, a sovereign entity.

management’s discussion and analysis
management’s discussion and analysis

part 1: management s discussion and analysis

the department of the treasury | office of financial stability

OPERATIONAL GOALS

operational goal o ne: enSure
the o verall StaBilitY and
liquiditY of the financial S YStem
Subgoal 1a:
Make capital available to viable
institutions.
Through the Capital Purchase Program, Treasury-OFS provided
capital infusions directly to banks and thrifts deemed viable by
their regulators.

In the period following announcement of the Capital Purchase
Program, Treasury-OFS provided $205 billion in capital to 707
institutions in 48 states, including more than 450 small and
community banks and 22 certified community development
financial institutions (CDFIs) (see Table 10 below). The largest
investment was $25 billion and the smallest was $301,000. The
final investment under the CPP was made in December 2009.
Table 10
CPP Initial Investment Profile
(Dollars in billions)

Asset Range

CPP Participants

Investment

Number

Amount

Percent

Capital Purchase Program

<$1billion

473

66.9%

3.8

$1 billion - $10 billion

177

25.0%

10.0

4.9%

1. Program and goals

>$10 billion

8.1%

191.1

93.3%

Treasury-OFS launched the Capital Purchase Program (CPP),
the largest and most significant program under EESA, on
October 14, 2008. At the close of the program, Treasury-OFS
had invested approximately $205 billion under the Capital
Purchase Program.

Total

707

100%

204.9

100%

The Capital Purchase Program was designed to bolster the capital
position of viable institutions of all sizes 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 and continue to provide
other services to consumers and businesses, even while absorbing
write-downs and charge-offs on loans that were not performing.
Of the originally planned $250 billion in total possible commit
ments to CPP, 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 and loan associations, bank holding companies and sav
ings and loan holding companies. QFIs interested in participat
ing 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.

1.8%

Treasury-OFS received preferred stock or debt securities in ex
change for these investments. There is no fixed date on which
the financial institutions must redeem the preferred stock—or
repay Treasury-OFS. This is necessary for the investment
to qualify as “Tier 1” capital under regulatory requirements.
However, there are incentives for the financial institutions to
repay. Institutions may repay Treasury-OFS after consultation
with the appropriate federal regulator. To date, Treasury-OFS
has received approximately $153 billion in CPP repayments.
Most financial institutions participating in the Capital Purchase
Program pay Treasury-OFS a dividend rate of five percent per
year, which will increase to nine percent a year after the first
five years. In the case of Subchapter S-corporations, Treasury
OFS acquires subordinated debentures. The subordinated
debenture interest rate is 7.7 percent per year for the first five
years and 13.8 percent thereafter; however, the total amount
of S-corporation dividends payable per year is less than $40
million. To date, Treasury-OFS has received approximately
$10 billion in CPP dividends and interest and $3 billion in net
proceeds received from the sale of Citigroup common stock in
excess of cost.
Treasury-OFS also received warrants to purchase common shares
or other securities from the financial institutions at the time of

management’s discussion and analysis

agency financial report | fiscal year 2010

a. Small institutions
Smaller financial institutions make up the vast majority of
participants in the CPP. Of the 707 applications approved and
funded by Treasury-OFS through the Capital Purchase Program
by the time it closed on December 31, 2009, 473 or 67 percent
were institutions with less than $1 billion in assets.
In May 2009, after many larger institutions started raising
capital from the private debt and equity markets, Treasury-OFS
re-opened the CPP application window for institutions with less
than $500 million in assets. This initiative gave smaller institu
tions, which did not have the same access to the capital markets
as larger institutions, an opportunity to receive additional CPP
investments, and Treasury-OFS increased the amount of capital
available to smaller institutions under the program. Originally,
institutions were eligible for a CPP capital investment that
represented up to three percent of risk-weighted assets. Upon
re-opening the CPP for smaller institutions, Treasury-OFS raised
the amount of funds available to five percent of risk-weighted
assets, and did not require additional warrants for the incremen
tal investment.

b. TARP CPP investments were structured as
non-voting preferred stock, which provided
crucial capital support without creating
government control
In 2008 Treasury-OFS decided that the most effective way to try
to stabilize the nation’s financial system was to provide capital
to QFIs. The majority of TARP investments were made in the
form of non-voting preferred stock. In order to achieve the
objective of providing capital support, and meet bank regulatory
requirements for Tier 1 capital, TARP could not require that
a CPP participant repay Treasury-OFS at a fixed date, as one
would with a loan.
Preferred stock generally is nonvoting (except in limited
circumstances), while common stock has full voting rights.
Therefore, most TARP investments are nonvoting. The
preferred stock does not entitle Treasury-OFS to board seats or
board observers, except in the event dividends are not paid for

management’s discussion and analysis
management’s discussion and analysis

six quarters, in which case Treasury-OFS has the right to elect
two directors to the board.

2. Status as of September 2010

a. Repayments – getting TARP funds back
CPP participants may repay Treasury-OFS under the condi
tions established in the purchase agreements as amended by
the American Recovery and Reinvestment Act (ARRA).
Treasury-OFS also has the right to sell the securities. However,
Treasury-OFS does not have the right to require repayment.
The repayment price is equal to what Treasury-OFS paid for the
shares, plus any unpaid dividends or interest.
As of September 30, 2010, Treasury-OFS has received over $152
billion in CPP repayments. Of that amount, approximately
$13.1 billion (excluding net proceeds from sale of common
stock in excess of cost – see below) is from the sales of Citigroup
common stock through September 30, 2010.

b. Returns for taxpayers
1) Dividend and interest payments
As is typical for a preferred stock investment, financial institu
tions must decide whether to pay the dividends; they can elect
instead to conserve their capital. In some instances, Treasury
OFS received “cumulative” dividends. That is, if the dividends
are not paid in any quarter, they are added to the liquidation
preference, thus increasing the claim of the holder of the
preferred. In other cases, the dividends were “noncumulative”.
If a financial institution fails to pay dividends for six quarterly
periods, Treasury-OFS has the right to appoint two directors to
the bank’s board.
From inception through September 30, 2010, total dividends and
interest received from Capital Purchase Program investments is
approximately $10 billion. In addition, the sales of Citigroup
common stock through September 30, 2010 have generated $3
billion of gains (amounts in excess of the recovered principal
amount of the Citigroup investment referred to above).

2) Overall returns
The CPP is expected to generate a positive return to taxpayers,
as are the other bank support programs (Targeted Investment
Program and Asset Guarantee Program) taken as a whole. The
ultimate return will depend on several factors, including market
conditions and performance of individual companies.

part 1: management s discussion and analysis

the CPP investment. The purpose of the additional securities is
to provide opportunities for taxpayers to reap additional returns
on their investments as CPP participants recover. To date,
Treasury-OFS has received more than $8 billion in proceeds
from the sale/repurchase of CPP and TIP warrants.

part 1: management s discussion and analysis

the department of the treasury | office of financial stability

citigroup
Under the CPP, Treasury-OFS purchased $25 billion in pre
ferred stock from Citigroup in October 2008. This preferred
stock had a dividend rate of 5 percent per annum. Under the
TIP, Treasury-OFS purchased $20 billion in additional preferred
stock from Citigroup in December 2008. That preferred stock
had a dividend rate of 8 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
exchanged all of its preferred stock in Citigroup for a combina
tion of common stock and trust preferred securities.

citigroup common Stock Disposition
•

•

Pursuant to the June 2009 Exchange Agreement between
Treasury-OFS and Citigroup, which was part of a series of
exchange offers conducted by Citigroup to strengthen its
capital base, Treasury-OFS exchanged the $25 billion in
preferred stock it received in connection with Citigroup’s
participation in the Capital Purchase Program for ap
proximately 7.7 billion shares of common stock at a price of
$3.25 per share.
During fiscal year 2010, Treasury-OFS entered into three
pre-arranged written trading plans with Morgan Stanley &
Co. Incorporated as its sales agent: in April, June, and July.
Under the agreement, the agent was provided discretionary
authority to sell shares of Citigroup common stock held by
Treasury-OFS under certain parameters.
As of September 30, 2010, Treasury-OFS had sold approxi
mately 4.0 billion shares of Citigroup common stock for total
gross proceeds of $16.1 billion, resulting in $3.0 billion in net
proceeds from the sale of common stock in excess of cost.

cPP Quarterly report
An interagency group consisting of representatives from
Treasury, the Federal Reserve Board, and other Federal banking agencies conducts periodic analysis of the effect of TARP
programs on banking organizations and their activities, and pub
lishes the results in reports available at www.FinancialStability.
gov/impact/CPPreport.html.

Annual use of capital Survey
Treasury-OFS has also conducted an annual Use of Capital
Survey to obtain insight into the lending, financial intermedia
tion, and capital building activities of all recipients of govern

ment investment through CPP funds. Collection of the Use of
Capital survey data began during March 2010. Data and survey
results are available at www.FinancialStability.gov/useofcapital.
The overwhelming majority of respondents (85 percent)
indicated that after the receipt of CPP capital their institutions
increased lending or reduced lending less than otherwise would
have occurred. About half of the respondents (53 percent)
indicated that their institutions increased reserves for non
performing assets after the receipt of CPP capital. Nearly half of
the respondents (46 percent) noted that their institutions held
the CPP capital as a non-leveraged increase to total capital.

Community Development Capital
Initiative
Communities underserved by traditional banks and financial
services providers have found it more difficult to obtain credit in
the current economic environment. Community Development
Financial Institutions (CDFIs) exist to provide financing to
these communities. CDFIs offer a wide range of traditional and
innovative financial products and services designed to help their
customers access the financial system, build wealth and improve
their lives and the communities in which they live. In particular,
CDFIs focus on providing financial services to low- and moder
ate- income, minority, and other underserved communities.

1. Program and goals
Most CDFIs have been adversely affected by the financial crisis.
Treasury-OFS launched the Community Development Capital
Initiative to help viable certified CDFIs and the communities
they serve cope with effects of the financial crisis.
Under this program, CDFI banks and thrifts received invest
ments of capital with an initial dividend or interest rate of
2 percent, compared to the 5 percent rate offered under the
Capital Purchase Program. CDFI banks and thrifts applied to
receive capital up to 5 percent of risk-weighted assets. To en
courage repayment while recognizing the unique circumstances
facing CDFIs, the dividend rate will increase to 9 percent after
eight years, compared to five years under CPP.
CDFI credit unions could also apply to receive secondary capital
investments at rates equivalent to those offered to CDFI banks
and thrifts and with similar terms. These institutions could
apply for up to 3.5 percent of total assets, which is an amount
approximately equivalent to the 5 percent of risk-weighted
assets available to banks and thrifts.

management’s discussion and analysis

agency financial report | fiscal year 2010

of eight percent, which was higher than the CPP rate, and
also imposed greater reporting requirements and more onerous
terms 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.

2. Status as of September 2010

Treasury-OFS completed funding under this program in
September 2010. The total investment amount for the CDCI
program under TARP is $570 million for 84 institutions. Of
this amount, $363.3 million from 28 banks was exchanged
from investments under the Capital Purchase Program into the
CDCI.

In December 2009, both participating institutions repaid
their TIP investments in full, with dividends. Total dividends
received from Targeted Investment Program investments were
about $3 billion during the life of the program. Treasury-OFS
also received warrants from each bank which provide the
taxpayer with additional gain on the investments. Treasury
OFS sold the BofA warrants and continues to hold Citigroup
warrants. TIP is closed and will result in a positive return for
taxpayers

Subgoal 1b:
Provide targeted assistance as needed.
Through the Targeted Investment Program, Asset Guarantee
Program, AIG Investment Program, and the Automotive
Industry Financing Program, Treasury-OFS provided direct aid
to certain institutions in order to mitigate the potential risks
to the financial system and the economy as a whole from the
difficulties facing these firms.

Targeted Investment Program
Treasury-OFS established the Targeted Investment Program
(TIP) in December 2008. The program gave Treasury-OFS the
necessary flexibility to provide additional or new funding to
financial institutions that were critical to the functioning of
the financial system. The TIP was considered “exceptional as
sistance” for purposes of executive compensation requirements.

1. Program and goals
Through the Targeted Investment Program, 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 situ
ated financial institutions, impair broader financial markets,
and undermine the overall economy. Treasury-OFS invested
$20 billion in each of Bank of America and Citigroup under
the Targeted Investment Program, which investments were
in addition to those that the banks received under the CPP.
Like the CPP, Treasury-OFS invested in preferred stock, and
received warrants to purchase common stock in the institutions.
However, the TIP investments provided for annual dividends

management’s discussion and analysis
management’s discussion and analysis

American International Group, Inc.
(AIG) Investment Program
In September of 2008, panic in the financial system was deep
and widespread as previously discussed. Amidst these events,
on Friday, September 12, American International Group
(AIG) officials informed the Federal Reserve and Treasury that
the company was facing potentially fatal liquidity problems.
Although it was neither AIG’s regulator nor supervisor, the
Federal Reserve Bank of New York (FRBNY) immediately
brought together a team of people from the Federal Reserve,
the New York State Insurance Department, and other experts
to consider how to respond to AIG’s problems. The Federal
Reserve Act authorizes the Federal Reserve to provide liquidity
to the financial system in times of severe stress, and it acted to
fulfill that responsibility.
At the time, AIG was the largest provider of conventional
insurance in the world, with approximately 75 million individual and corporate customers in over 130 countries. AIG’s
assets exceeded $1 trillion. It was significantly larger than
Lehman Brothers. It insured 180,000 businesses and other
entities employing over 100 million people in the U.S. It was a
large issuer of commercial paper and the second largest holder of
U.S. municipal bonds. AIG’s parent holding company engaged
in financial activities that were well beyond the business of life
insurance and property and casualty insurance. Its financial
products unit was a significant participant in some of the

part 1: management s discussion and analysis

Treasury-OFS established a process for reviewing CDCI applica
tions that relied on the appropriate federal regulators. For this
program, viability was determined by the CDFI’s federal regula
tor on a pro-forma basis. In addition, CDFIs that participated in
CPP and were in good standing could exchange securities issued
under CPP for securities under this program.

part 1: management s discussion and analysis

the department of the treasury | office of financial stability

newest, riskiest, and most complex transactions of the financial
system.

•

In the chaotic environment of September 2008, the Federal
Reserve and Treasury concluded that AIG’s failure could be
catastrophic. Among other things, if AIG had failed, the crisis
would have almost certainly spread to the entire insurance
industry, and its failure would have directly affected the savings
of millions of Americans. Therefore, the federal government
took action to protect the financial system.
AIG needed a durable restructuring of both its balance sheet
and its business operations. Falling asset prices generated
substantial losses on the company’s balance sheet. They also
increased the payments to counterparties that AIG was required
to make under the terms of credit protection contracts it had
sold. AIG’s insurance subsidiaries experienced significant cash
outflows related to a securities lending program, as the value of
residential mortgage-backed securities that they had purchased
and loaned against cash collateral continued to fall.
The federal government faced escalating and unprecedented
challenges on many different fronts of the financial crisis during
September, October, and November 2008. During that time,
the Federal Reserve and Treasury-OFS took a series of steps to
prevent AIG’s disorderly failure and mitigate systemic risks.

•

1. Program and goals
The initial assistance to AIG was provided by the FRBNY
before the passage of EESA and the creation of TARP. The
FRBNY provided loans to AIG under the section 13(3) author
ity of the Federal Reserve Act to lend on a secured basis under
“unusual and exigent” circumstances to companies that are not
depository institutions:
•

In September 2008, the FRBNY provided an $85 billion
credit facility to AIG, and received preferred shares which
currently have approximately 79.8 percent of the voting
rights of AIG’s common stock (known as Series C). The
FRBNY created the AIG Credit Facility Trust (the Trust)
to hold the shares for the benefit of the U.S. Treasury but
the Department of the Treasury does not control the Trust
and cannot direct its trustees.

After TARP was enacted, the Treasury-OFS and the Federal
Reserve continued to work together to address the challenges
posed by AIG:

•

In November 2008, the Federal Reserve and Treasury-OFS
jointly announced a package of actions designed to address
the continuing vulnerabilities in AIG’s balance sheet that
threatened its viability and its credit ratings. Treasury-OFS
invested $40 billion in senior preferred stock of AIG under
the authority granted by EESA (the preferred stock was
subsequently exchanged in April 2009, for face value plus
accrued dividends, into $41.6 billion of a different series of
preferred stock), and it also received warrants to purchase
common shares in the firm. The funds were used immediately to reduce the loans provided by the FRBNY. As
part of the restructuring, the FRBNY also agreed to lend up
to $22.5 billion to a newly created entity, Maiden Lane II
LLC, to fund the purchase of residential mortgage-backed
securities from the securities lending portfolio of several
of AIG’s regulated U.S. insurance subsidiaries, and up to
$30 billion to a second newly created entity, Maiden Lane
III LLC, to fund the purchase of multi-sector collateralized debt obligations from certain counterparties of AIG
Financial Products Corp (AIGFP).
In April 2009, Treasury-OFS created an equity capital
facility, under which AIG may draw up to $29.8 billion
as needed in exchange for issuing additional shares of
preferred stock to Treasury-OFS. As of September 30,
2010, AIG has drawn $7.5 billion from the facility and the
remainder is expected to be used in connection with the
restructuring plan discussed below.
In December 2009, the Federal Reserve received preferred
equity interests in two special purpose vehicles (SPVs)
formed to hold the outstanding stock of AIG’s largest
foreign insurance subsidiaries, American International
Assurance Company (AIA) and American Life Insurance
Company (ALICO), in exchange for a $25 billion reduc
tion in the balance outstanding and maximum credit
available under AIG’s revolving credit facility with the
FRBNY. The transactions positioned AIA and ALICO for
initial public offerings or sale.

2. The AIg restructuring Plan and Taxpayer Exit
On September 30, 2010, AIG announced that it had entered
into an agreement-in-principle with the U.S. Department of
the Treasury, the FRBNY, and the Trust. The restructuring plan,
if completed as announced, will accelerate the timeline for the
federal government’s recovery of its investment in AIG and will
put Treasury-OFS in a considerably stronger position to recoup
Treasury-OFS’ investment in the company. Giving effect to

management’s discussion and analysis

agency financial report | fiscal year 2010

a. Repaying and terminating the FRBNY Credit
Facility with AIG
As of September 30, 2010, AIG owed the FRBNY approximate
ly $21 billion in senior secured debt under the FRBNY credit
facility. Under the plan, AIG will repay this entire amount and
terminate the FRBNY senior secured credit facility. Funding
for this is expected to come primarily from the proceeds of the
initial public offering of the company’s Asian life insurance
business (AIA) and the pending sale of its foreign life insurance
company (ALICO) to MetLife. As of November 5, 2010, AIG
completed an IPO of AIA selling approximately 67 percent for
total proceeds of $20.5 billion and closed the sale of ALICO
for total proceeds of $16.2 billion, approximately $7.2 billion of
which is cash.

b. Facilitating the orderly exit of the U.S.
Government’s interests in two special purpose
vehicles (SPVs) that hold AIA and ALICO
As of September 30, 2010, the FRBNY holds preferred interests
in two AIG-related SPVs totaling approximately $26 billion.
Under the plan, AIG will draw up to all of the remaining
$22.3 billion of TARP funds available to it (under the Series F
preferred stock facility provided in April 2009) and Treasury
OFS will receive an equal amount of the FRBNY’s preferred
interests in the SPVs. Over time, AIG is expected to repay the
FRBNY and Treasury-OFS for these preferred interests through
proceeds from the sales of AIG Star Life Insurance and AIG

management’s discussion and analysis
management’s discussion and analysis

Edison Life Insurance, the monetization of the remaining equity
stake in AIA, the sale of MetLife equity securities that AIG will
own after the close of the ALICO sale, and the monetization
of certain other designated assets. The aggregate value of the
assets underlying the preferred interests in the SPVs exceeds the
liquidation preference of the preferred interests. As a result, the
net cost associated with the $22.3 billion of draws is assumed to
be zero if the restructuring plan is completed as announced. See
also footnote 3 to Table 6 in Part I.

c. Retiring AIG’s remaining TARP support
To date, Treasury-OFS has invested approximately $47.5
billion of TARP funds in AIG. Under the plan, Treasury-OFS
is expected to receive approximately 1.1 billion shares of AIG
common stock in exchange for its existing TARP investments
in AIG. The Department of the Treasury is also expected to
receive an additional 563 million shares of common stock from
the exchange of the Series C preferred shares held by the Trust
on behalf of the United States taxpayers. After the exchange
is completed, it is expected that Treasury-OFS’ shares will be
sold into the public markets over time. The lifetime cost of the
TARP investment in AIG after giving effect to the restructur
ing (as shown in Table 6) does not include any recovery from
the sale of the shares of AIG common stock to be received by
Treasury from the Trust that are in addition to Treasury-OFS’
shares.
The plan is still subject to a number of contingencies, and
much work remains to be done to close the transactions.
Nevertheless, the plan reflects the substantial progress that AIG
and the federal government have made in restructuring the
company and reducing the systemic risk that it once posed. The
plan also represents a significant step towards ending the federal
government’s role in providing assistance to the company.
Over the past two years, AIG has recruited a new CEO, a
new Chief Risk Officer, a new General Counsel, a new Chief
Administrative Officer, and an almost entirely new Board of
Directors. All of these executives and directors are committed
to the objective of executing the restructuring plan and paying
back taxpayers as promptly as practicable. In addition, the
profitability of the AIG’s core business – its insurance subsidiar
ies – has been steadily improving, as has the market’s perception
of the value of these subsidiaries. The improvement in the
value of these businesses and their ultimate sale are central to
the AIG restructuring plan.

part 1: management s discussion and analysis

the proposed restructuring, the lifetime cost of Treasury-OFS’
investment in AIG would be $5 billion. This lifetime cost
reflects the effects of restructuring when valued at October 1,
2010 including principally the following: (i) the outstanding
preferred stock investment is exchanged for common stock
and valued at the market price of $38.86 at October 1, 2010,
and (ii) the undrawn commitment of $22.3 billion is disbursed
and is valued consistent with Treasury-OFS’ methodology for
valuing its non-traded securities. Under this methodology,
Treasury-OFS estimates that it will not incur any loss on the
additional disbursements because the aggregate value of the
assets supporting the preferred interests in the Special Purpose
Vehicles that Treasury-OFS will receive for the disbursements
exceeds the liquidation preference of the preferred interests.
The common stock price will vary over time, and the price real
ized by Treasury-OFS in disposing of common shares will likely
not be the same as this price, which would result in changes,
possibly material, to this lifetime cost.

part 1: management s discussion and analysis

the department of the treasury | office of financial stability

Upon completion of the restructuring plan, AIG is expected to
be a simplified life, property and casualty insurer with solidly
capitalized insurance subsidiaries, adequate liquidity, and a
stable balance sheet.

Asset Guarantee Program
1. Program and goals
Under the Asset Guarantee Program (AGP), Treasury-OFS
acted to support the value of certain assets held by qualifying
financial institutions, by agreeing to absorb a portion of the
losses on those assets. The program was conducted jointly by
Treasury, the Federal Reserve and the FDIC. Like the Targeted
Investment Program, it was designed for financial institutions
whose failure could harm the financial system and reduce the
potential for “spillover” to the broader financial system and
economy.

a. Bank of America
In January 2009, Treasury-OFS, the Federal Reserve and the
FDIC agreed in principle to share potential losses on a $118
billion pool of financial instruments owned by Bank of America,
consisting of securities backed by residential and commercial
real estate loans and corporate debt and derivative transactions
that reference such securities, loans and associated hedges. If
the arrangement had been finalized, Treasury-OFS and the
FDIC would have received preferred stock and warrants as a
premium for the guarantee. The announcement of the trans
action (and the Citigroup transaction discussed below) was
widely welcomed by the markets and contributed immediately
to helping restore investor confidence in the financial institu
tion and the banking system generally. In May 2009, before
the transaction was finalized, Bank of America announced
its intention to terminate negotiations with respect to the
loss-sharing arrangement and in September 2009, the federal
government and Bank of America entered into a termination
agreement. Bank of America agreed to pay a termination fee of
$425 million to the federal government parties, $276 million of
which went to Treasury-OFS. The fee compensated the federal
government for the value that Bank of America had received
from the announcement of the federal government’s willingness
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 reference to the fees that would have been payable had the
guarantee been finalized. No claims for loss payments were

made to the federal government, nor was any TARP or other
funds spent. Thus, the fee was a net gain for taxpayers.

b. Citigroup
In January 2009, Treasury, the Federal Reserve and the FDIC
similarly agreed to share potential losses on a $301 billion pool
of Citigroup’s covered assets. The arrangement was finalized
and, as a premium for the guarantee, Treasury-OFS and the
FDIC received $7.0 billion of preferred stock, with terms that
were similar to those in the TIP investment and more onerous
than in the CPP, including a dividend rate of eight percent.
Treasury-OFS also received warrants to purchase 66.5 million
shares of common stock. Although the guarantee was originally
designed to be in place for five to ten years, Citigroup requested
that it be terminated in December 2009 in conjunction with
Citigroup’s repayment of the $20 billion TIP investment. This
was because Citigroup‘s financial condition had improved and
the bank raised over $20 billion of private capital. The banking
regulators approved this request.
In connection with the termination, Treasury-OFS and the
FDIC kept most of the premium paid. That is, these parties
retained a total of $5.3 billion of the $7.0 billion of preferred
stock (which had since been converted to trust preferred securi
ties). Of this amount, Treasury-OFS retained $2.23 billion, and
the FDIC and Treasury-OFS agreed that, subject to certain con
ditions, the FDIC would transfer to Treasury-OFS $800 million
of their Citigroup trust preferred stock holding plus dividends
thereon contingent on Citigroup repaying its previously-issued
FDIC debt under the FDIC’s Temporary Liquidity Guarantee
Program which expires on December 31, 2012.
For the period that the Citigroup asset guarantee was outstand
ing prior to termination in December 2009, Citigroup made no
claims for loss payments to the federal government, and conse
quently Treasury-OFS made no guarantee payments of TARP
funds to Citigroup. Thus, all payments received to date, and the
income received from the sale of the securities described above,
will constitute a net gain for the taxpayer. The cumulative
total dividends received through September 30, 2010 from the
securities totaled approximately $440 million. On September
30, 2010, Treasury-OFS agreed to sell the trust preferred securi
ties for approximately $2.25 billion and on October 5, 2010,
the transaction was consummated. Treasury-OFS still holds its
Citigroup warrants which should provide an additional return
for taxpayers.

management’s discussion and analysis

agency financial report | fiscal year 2010

The Asset Guarantee Program is now closed. No Treasury-OFS
payments were made. The fee from Bank of America, and
securities and dividends received from Citigroup, represents a
positive return for taxpayers.

Automotive Industry Financing
Program
The Automotive Industry Financing Program (AIFP) was begun
in December 2008 to prevent a significant disruption of the U.S.
automotive industry, because the potential for such a disruption
posed a systemic risk to financial market stability and would
have had a negative effect on the economy.
Recognizing both GM and Chrysler were on the verge of
disorderly liquidations, Treasury-OFS extended temporary loans
to GM and Chrysler in December 2008. After the Obama
Administration took office, it agreed to provide additional
investments conditioned on each company and its stakeholders
participating in a fundamental restructuring. Sacrifices were
made by unions, dealers, creditors and other stakeholders,
and the restructurings were achieved through bankruptcy
court proceedings in record time. As a result, General Motors
Company and Chrysler Group LLC are more competitive and
viable companies, supporting American jobs and the economy.
Operating results have improved, the industry has added jobs,
and the TARP investments have begun to be repaid.

1. Programs and goals

a. Automotive companies
Short-term funding was initially provided to General Motors
(GM) and Chrysler on the condition that they develop plans
to achieve long-term viability. In the spring and summer of
2009, GM and Chrysler developed satisfactory viability plans
and successfully conducted sales of their assets to new entities in
bankruptcy proceedings. Chrysler completed its sale process in
42 days and GM in 40 days. Treasury-OFS provided additional
assistance during these periods.
In total, Treasury-OFS has provided approximately $80 billion
in loans and equity investments to GM, GMAC (now known as
Ally Financial), Chrysler, and Chrysler Financial. The terms of
Treasury’s assistance impose a number of restrictions including
rigorous executive compensation standards, limits on luxury
expenditures, and other corporate governance requirements.

management’s discussion and analysis
management’s discussion and analysis

While some have questioned why TARP was used to sup
port the automotive industry, both the Bush and Obama
Administrations determined that Treasury’s investments in the
auto companies were consistent with the purpose and specific
requirements of EESA. Among other things, 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, employ
ment and the economy as a whole.

b. Supplier and warranty support programs
In the related Auto Supplier Support Program (ASSP),
Treasury-OFS provided loans to ensure that auto suppliers
receive compensation for their services and products, regard
less of the condition of the auto companies that purchase
their products. In the Auto Warranty Commitment Program
(AWCP), Treasury-OFS provided loans to protect warranties
on new vehicles purchased from GM and Chrysler during their
restructuring periods.
In early 2009, auto suppliers faced the risk of uncontrolled
liquidations across the sector. Fifty-four (54) supplier-related
bankruptcies occurred in 2009 as the industry went through a
painful restructuring. Today, in part due to the support provided
by Automotive Supplier Support Program (ASSP), the auto
supply base appears to have stabilized. Suppliers are now break
ing even at a lower level of North American production.

2. general Motors
Treasury-OFS provided $50 billion under TARP to General
Motors. This began in December 2008, with a $13.4 billion
loan to General Motors Corporation (GM or Old GM) to fund
working capital. Under the loan agreement, GM was required
to submit a viable restructuring plan. The first plan GM
submitted failed to establish a credible path to viability, and
the deadline was extended to June 2009 for GM to develop an
amended plan. Treasury-OFS loaned an additional $6 billion to
fund GM during this period.
To achieve an orderly restructuring, GM filed for bankruptcy
on June 1, 2009. Treasury-OFS provided $30.1 billion under a
debtor-in-possession financing agreement to assist GM during
the restructuring. A newly formed entity, General Motors
Company purchased most of the assets of Old GM under a sale

part 1: management s discussion and analysis

2. Status as of September 2010

part 1: management s discussion and analysis

the department of the treasury | office of financial stability

pursuant to Section 363 of the bankruptcy code (363 Sale).
When the sale to General Motors Company was completed
on July 10, Treasury-OFS converted most of its loans to 60.8
percent of the common equity in the General Motors Company
and $2.1 billion in preferred stock. At that time, Treasury-OFS
held $6.7 billion in outstanding loans.
Approximately $986 million remained with Old GM (now
known as Motors Liquidation Company) for wind-down costs
associated with its liquidation.

a. Repayments
General Motors Company repaid the $6.7 billion loan in full
on April 21, 2010. (The rest of the investment is equity which
Treasury-OFS expects to sell as described below.)

Ownership structure
General Motors Company currently has the following ownership:
Treasury-OFS (60.8 percent), GM Voluntary Employee Benefit
Association (VEBA) (17.5 percent), the Canadian Government
(11.7 percent), and Old GM’s unsecured bondholders (10 per
cent). As part of the restructuring, GM issued warrants to acquire
additional shares of common stock to VEBA and Old GM (for
distribution to the creditors of Old GM following confirmation of
a plan of liquidation by the bankruptcy court).

b. General Motors Company initial public
offering
Treasury-OFS’ most likely exit strategy for the AIFP equity invest
ments is a gradual sale beginning with an initial public offering of
General Motors Company. In June 2010, Treasury-OFS provided
guidance on its role in the exploration of an IPO by General
Motors Company. Consistent with this guidance:
•

•

The timing of the offering is being determined by General
Motors Company and the IPO process is being managed by
General Motors Company. Treasury-OFS will determine
whether to sell shares and the price at which it will sell shares.
The selection of the lead underwriters was made by General
Motors Company, subject to Treasury-OFS’ agreement that
the selection was reasonable. Treasury-OFS will determine
the fees to be paid to the underwriters.

In August 2010, General Motors Company filed a registration
statement on Form S-1 with the U.S. Securities and Exchange
Commission (SEC) for a proposed IPO consisting of com
mon stock to be sold by certain of its stockholders, including

Treasury, and the issuance by the company of its Series B
mandatory convertible junior preferred stock. GM has filed a
registration statement for an initial public offering (IPO). If
the IPO is completed, Treasury-OFS will use the market price
for GM common stock to value its investment in the future.
Because there is no market price today, Treasury-OFS cannot
value its investment in this manner and instead uses its meth
odology for non-traded securities. The actual price that would
be obtained from the IPO is uncertain and will vary, perhaps
significantly, from the September 30, 2010 valuation. However,
if Treasury-OFS were to value its investment at the IPO range
of $26 to $29 per share announced by GM in the preliminary
prospectus dated November 3, 2010, Treasury-OFS’ estimated
cost for the AIFP would increase by $3 billion to $6 billion. GM
has also agreed, subject to the closing of the IPO, to repurchase
$2.1 billion of preferred shares issued to Treasury-OFS at 102
percent of par value.

3. chrysler
Treasury-OFS has provided a total commitment of approxi
mately $14 billion to Chrysler and Chrysler Financial of which
more than $12 billion has been utilized. In January 2009,
Treasury-OFS loaned $4 billion to Chrysler Holding (the parent
of Chrysler Financial and Old Chrysler). Under the loan agree
ment, Chrysler was required to implement a viable restructuring
plan. In March 2009, the Administration determined that
the business plan submitted by Chrysler failed to demonstrate
viability and concluded that Chrysler was not viable as a stand
alone company.
The Administration subsequently laid out a framework for
Chrysler to achieve viability by partnering with the interna
tional car company Fiat. As part of the planned restructuring,
in April 2009, Chrysler filed for bankruptcy protection. In May
2009, Treasury-OFS provided $1.9 billion to Chrysler (Old
Chrysler) under a debtor-in-possession financing agreement for
assistance during its bankruptcy proceeding.

a. Chrysler Group LLC
In June 2009, a newly formed entity, Chrysler Group LLC,
purchased most of the assets of Old Chrysler under a 363
(bankruptcy) Sale. Treasury-OFS provided a $6.6 billion loan
commitment to Chrysler Group LLC (as of September 30,
2010, and 2009, $2.1 billion remained undrawn), and received
a 9.9 percent equity ownership in Chrysler Group LLC. Fiat
transferred valuable technology to Chrysler and, after extensive

management’s discussion and analysis

agency financial report | fiscal year 2010

As of September 30, 2010, Treasury-OFS’ investments in
Chrysler Group LLC consist of 9.9 percent of common equity
and a $7.1 billion loan (including $2.1 billion of undrawn com
mitments and $500 million assumed from Chrysler Holding).
Chrysler Group LLC currently has the following ownership:
Chrysler Voluntary Employee Benefit Association (VEBA)
(67.7 percent), Fiat (20 percent), Treasury-OFS (9.9 percent),
and the Government of Canada (2.5 percent).

b. Old Chrysler
In April 2010, the bankruptcy court approved Old Chrysler’s
Plan of Liquidation. As a result, the $1.9 billion debtor-in-pos
session loan provided to Old Chrysler in May 2009 was extin
guished and the assets remaining with Old Chrysler, including
collateral security attached to the loan, were transferred to a
liquidation trust. Treasury-OFS retained the right to recover
the proceeds from the liquidation of the specified collateral,
but does not expect a significant recovery from the liquidation
proceeds.

c. Settlement with Chrysler Holding
The original $4 billion loan made to Chrysler Holding in
January 2009 went into default when Old Chrysler filed for
bankruptcy. In July 2009, $500 million of that loan was
assumed by Chrysler Group LLC. As a result of a settlement
agreement in May 2010, Treasury-OFS accepted a settlement
payment of $1.9 billion as satisfaction in full of the remaining
debt obligations ($3.5 billion) associated with the original loan.
The final repayment, while less than face value, was more than
Treasury-OFS had previously estimated to recover following
the bankruptcy and greater than an independent valuation
provided by Keefe, Bruyette and Woods, Treasury’s adviser for
the transaction.

d. Chrysler Financial
In January 2009, Treasury-OFS announced that it would lend
up to $1.5 billion to a special purpose vehicle (SPV) created by
Chrysler Financial to enable the company to finance the pur
chase of Chrysler vehicles by consumers. In July 2009, Chrysler
Financial fully repaid the loan, including the additional notes
that were issued to satisfy the EESA warrant requirement,
together with interest.

management’s discussion and analysis
management’s discussion and analysis

4. Ally Financial (formerly gMAc)
Through September 30, 2010, Treasury-OFS had invested
approximately $17 billion in Ally Financial. This began with
an investment of $5 billion in December 2008. Treasury-OFS
also lent $884 million of TARP funds to GM (one of GMAC’s
owners) for the purchase of additional ownership interests
in a rights offering by GMAC. In May 2009, federal bank
ing regulators required GMAC to raise additional capital by
November 2009 in connection with the SCAP/stress test.
Treasury-OFS exercised its option to exchange the loan with
GM for 35.4 percent of common membership interests in
GMAC. Treasury-OFS also purchased $7.5 billion of convert
ible preferred shares from GMAC in May 2009, which enabled
GMAC to partially meet the SCAP requirements. Additional
Treasury-OFS investments in GMAC were contemplated to
enable GMAC to satisfy the SCAP requirements. These were
completed in December 2009, when Treasury-OFS invested an
additional $3.8 billion in GMAC, increasing the percentage of
ownership. As of September 30, 2010, Treasury’s investment
in Ally Financial consists of 56.3 percent of the common stock,
$11.4 billion of mandatorily convertible preferred securities
(which may be converted into common stock at a later date)
and $2.7 billion of trust preferred securities. If the mandatorily
convertible preferred securities were converted, Treasury-OFS
ownership would increase to 80.48 percent

5. Status as of September 2010

a. Outlook on automotive industry following
restructurings and repayments
As the outlook for the domestic auto industry has improved and
the estimated value of Treasury’s investments has increased, the
projected cost to taxpayers of AIFP has decreased. The cost of
AIFP from inception through September 30, 2010 was $13.9
billion, as compared to the cost through September 30, 2009 of
$30.5 billion.

Subgoal 1c:
Increase liquidity and volume in
securitization markets.
The Community Development Capital Initiative, the Term
Asset-Backed Securities Loan Facility, the SBA 7a Securities
Purchase Program and the Public-Private Investment Program
were developed by Treasury-OFS to help restore the flow of
credit to consumers and small businesses.

part 1: management s discussion and analysis

consultation with the Administration, committed to building
new fuel efficient cars and engines in U.S. factories.

Community Development Capital Initiative
CDCI contributed to this subgoal, but is discussed in detail
above following the Capital Purchase Program because of the
link between the two programs.

Figure D:
Total Consumer
and TALF ABS
Issuance from
June 2008
through
March 2010
(Dollars in
billions)

25
20
Dollars in billions

Consumer and Business Lending
Initiative

18.5 18.2

TALF Issuance

15
10

8.3 2.9

5
0

Term Asset-Backed Securities Loan
Facility

1. Program and goals

a. Program design
Pursuant to its Federal Reserve Act Section 13(3) authority, the
Federal Reserve Bank of New York (FRBNY) agreed to extend
up to $200 billion in non-recourse loans to borrowers to enable
the purchase of newly issued asset-backed securities (including
newly issued CMBS and legacy CMBS) AAA-rated securities
including those backed by consumer loans, student loans, small
business loans, and commercial real estate loans. In return, the
borrowers pledged the eligible collateral with a risk premium
(“haircut”) as security for the loans. Should a borrower default
upon its TALF loan or voluntarily surrender the collateral,
the collateral would be seized and sold to TALF LLC, a special
purpose vehicle created by FRBNY to purchase and hold seized
or surrendered collateral. Through September 30, 2010, TALF
LLC has not purchased any collateral from the FRBNY.
Treasury-OFS’ role in TALF is to provide credit protection
for the program through the purchase of subordinated debt in
TALF LLC. The funds would be used to purchase the underly
ing collateral associated with the FRBNY TALF loans in the

16.8

12.6

13.6

8.2 8.1

3.6

9.1

0.4 0.5

1.3 1.6

2.0

6.6

5.8

5.2
1.9

The Term Asset-Backed Securities Loan Facility (TALF) is a
key part of the Financial Stability Plan and the major initiative
under the TARP’s Consumer and Business Lending Initiative
(CBLI). TALF is a joint Federal Reserve-Treasury-OFS program
that was designed to restart the asset-backed securitization
markets that had ground to a virtual standstill during the early
months of this financial crisis. The ABS markets historically
have helped to fund a substantial share of credit to consumers
and businesses. The effects of this issuance standstill were
many: limited availability of credit to households and businesses
of all sizes, an unprecedented widening of interest rate spreads,
sharply contracting liquidity in the capital markets and a
potential to further weaken U.S. economic activity.

16.5

NonTALF Issuance

4.4 4.3
1.2

2.0

6.0
6.6

1.5
4.2
3.8 7.4
7.2
4.1

3.9

0.1

0.5

20
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ar
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Ap 09
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M 009
ay
2
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0
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ar
20
10

part 1: management s discussion and analysis

the department of the treasury | office of financial stability

Source: FRBNY TALF Subscription Report

event the borrower surrendered the collateral or defaulted upon
its loan. Treasury-OFS originally committed to purchase $20
billion in subordinated debt from TALF LLC, or 10 percent
of the maximum amount of loans that could be issued. This
commitment was later reduced to $4.3 billion after the program
closed to new lending in June 2010 with $43 billion in loans
outstanding, so that the commitment remained at 10 percent of
the outstanding loans.
Although TALF was designed to provide up to $200 billion
in loans secured by eligible collateral, the positive effects of
TALF on liquidity and interest rate spreads resulting from the
announcement of TALF made utilization of the full amount
unnecessary. As TALF positively impacted the market for
asset-backed securities, investors became able to access cheaper
funds in the restarted capital markets. The program was at
first extended past the original termination date of December
2009 to March 2010, for non-mortgage-backed ABS and legacy
CMBS collateral, and to June 2010, for newly issued CMBS
collateral. Given the improvements in the markets, at the
time of the closing of the program in June 2010, the FRBNY
had disbursed approximately $70 billion in loans under TALF.
Of that amount, $29.7 billion (or 47 percent) in TALF loans
remained outstanding as of September 30, 2010.

b. Protection of taxpayer interests
TALF was designed to provide borrowers with term loans of up
to five years against highly rated securities, which are forfeited
in the event a loan is not repaid. TALF employs a number of
other safeguards to protect taxpayers’ interests including the
following:
•

TALF borrowers bear the first loss risk in all securities
pledged as collateral for TALF loans due to the substantial
haircuts (set by reference to borrower’s equity in the securi
ties) required of those borrowers. Haircuts ranged from 5

management’s discussion and analysis

agency financial report | fiscal year 2010

•

Eligible securities must have received two AAA ratings
from a major rating agency, and have never been rated
below AAA or placed on watch for downgrade by a major
rating agency.
Protection is provided by the risk premium included in the
TALF loan rates. The interest rate spread provides accumu
lated excess interest in TALF LLC as a first loss position.
The available excess spread to fund forfeited loans is $501
million as of September 30, 2010.
Each ABS issuer must engage an external auditor to offer
an opinion that supports management’s assertion that the
ABS is TALF eligible. Further protection is provided by
FRBNY and their collateral monitors responsible for assess
ing the risk associated with ABS and CMBS collateral and
performing due diligence.

In November 2009, TALF funds also facilitated the first issuance
of commercial mortgage-backed securities since June 2008. This
helped re-open the market for such securities. Following that
transaction, there have been additional commercial mortgagebacked transactions funded without assistance from TALF.
Treasury-OFS loaned TALF LLC $100 million of the original
$20 billion committed. The maturity date on the Treasury
OFS loan to the TALF LLC is March 2019. The loans made
by TALF mature at the latest by March 2015. To date, the
TALF program has experienced no losses and all outstanding
TALF loans are well collateralized. Treasury-OFS and FRBNY
continue to see it as highly likely that the accumulated excess
interest spread will cover any loan losses that may occur
without recourse to the dedicated TARP funds. Therefore,
Treasury-OFS does not expect any cost to the taxpayers from
this program.

2. Status as of September 2010

Public-Private Investment Program

TALF helped encourage lending to consumers and businesses
while operating under a conservative structure that protects
taxpayer interests. The facility has ceased making new loans
as noted above. By improving credit market functioning and
adding liquidity to the system, TALF has provided critical sup
port to the financial system. This has allowed lenders to meet
the credit needs of consumers and small businesses, and has
strengthened the overall economy.

The Legacy Securities Public Private Investment Program
(PPIP) was designed to purchase troubled legacy securities (i.e.,
non-agency residential mortgage-backed securities (“RMBS”)
and commercial mortgage-backed securities (“CMBS”)) that
were central to the problems facing the U.S. financial system,
and thereby help ensure that credit is available to households
and businesses and ultimately drive the U.S. toward economic
recovery.

Specifically, TALF helped increase credit availability and
liquidity in the securitization markets and reduced interest rate
spreads. Secondary spreads narrowed significantly across all eli
gible asset classes by 60 percent or more. For instance, spreads
on AAA-rated auto receivables fell sharply from a peak of 600
basis points in the fourth quarter of 2008 to 27 basis points
over their benchmarks on September 30, 2010. Spreads in the
secondary market for CMBS have declined from 1500 basis
points over its benchmark to 210 basis points as of September
30, 2010.
Moreover, the improvements in the secondary credit market
contributed to the re-start of the new-issue market. According
to the Federal Reserve Bank of New York, issuance of non
mortgage asset-backed securities jumped to $35 billion in the
first three months of TALF lending in 2009, after having slowed
to less than $1 billion per month in late 2008.

management’s discussion and analysis
management’s discussion and analysis

part 1: management s discussion and analysis

percent to 20 percent based on asset quality thereby further
limiting risk.

part 1: management s discussion and analysis

the department of the treasury | office of financial stability

1. Program goals and Design

a. The Goal: Unlock credit markets for legacy
securities to allow financial institutions to
repair their balance sheets and extend new
credit
During the crisis, many financial institutions and investors were
under extreme pressure to reduce indebtedness. This de-lever
aging process pushed down the market prices for many financial
assets, including troubled legacy RMBS and CMBS, below their
fundamental value. Institutions and investors were trapped
with hard-to-value assets, marked at distressed prices on their
balance sheets, which constrained liquidity and the availability
of credit in these markets.
The purpose of PPIP was to draw new private capital into the
market for legacy RMBS and CMBS by providing financing
on attractive terms as well as a matching equity investment
made by Treasury-OFS. By providing this financing, PPIP was
designed to help restart the market for these securities, thereby
helping financial institutions begin to remove these assets from
their balance sheets and allowing for a general increase in credit
availability to consumers and small businesses.
The key objectives of the Public Private Investment Program
include:
•

•

Support market functioning by acting as a catalyst to bring
private capital back to the market for legacy RMBS and
CMBS;
Facilitate price discovery in the markets for mortgage
backed securities, thereby reducing the uncertainty
regarding the value of such securities among the banks and
other financial institutions holding them and enabling
these financial institutions to sell such assets and raise new
private capital;
Restore confidence in and create an environment condu
cive to new issuance of new credit; and
Protect taxpayer interests and generate returns through
long-term investments in eligible assets by following
predominantly a buy and hold strategy.

b. Program Design
Following the completion of obtaining commitments from
private investors, Treasury-OFS has committed approximately

$22 billion of equity and debt financing to eight Public Private
Investment Funds (PPIFs). Treasury-OFS matches equity
dollar-for-dollar and will loan up to the amount of equity raised
by the PPIFs. These funds were established by private sector
fund managers for the purpose of purchasing eligible RMBS and
CMBS from eligible financial institutions under EESA. This
represented a reduction from Treasury’s initial allocation of
$30 billion (for nine PPIFs) in potential capital commitments,
because there was less aggregate demand from private sector
investors due to improved market conditions for legacy nonagency RMBS and CMBS.
The equity capital raised from private investors by the PPIP
fund managers has been matched by Treasury. Treasury-OFS has
also provided debt financing up to 100 percent of the total eq
uity committed to each PPIF. PPIFs have the ability to invest in
eligible assets over a three-year investment period. They then
have up to five additional years, which may be extended for up
to two more years, to manage these investments and return the
proceeds to Treasury-OFS and the other PPIF investors. PPIP
fund managers retain control of asset selection, purchasing,
trading, and disposition of investments.
The profits generated by a PPIF, net of expenses, will be
distributed to the investors, including Treasury, in proportion
to their equity capital investments. Treasury-OFS also receives
warrants from the PPIFs, which gives Treasury-OFS the right
to receive a percentage of the profits that would otherwise be
distributed to the private partners that are in excess of their
contributed capital. The program structure allows for risk to be
spread between the private investors and Treasury, and provides
taxpayers with the opportunity for positive returns.
The following fund managers currently participate in PPIP:
•

AllianceBernstein, LP and its sub-advisors Greenfield
Partners, LLC and Rialto Capital Management, LLC;

•

Angelo, Gordon & Co., L.P. and GE Capital Real Estate;

•

BlackRock, Inc.;

•

Invesco Ltd.;

•

Marathon Asset Management, L.P.;

•

Oaktree Capital Management, L.P.;

•

RLJ Western Asset Management, LP.; and

management’s discussion and analysis

agency financial report | fiscal year 2010

Wellington Management Company, LLP

In addition, PPIP fund managers have established meaningful
partnership roles for small, minority-, and women-owned busi
nesses. These roles include, among others, asset management,
capital raising, broker-dealer, investment sourcing, research,
advisory, cash management and fund administration services.
Collectively, PPIP fund managers have established relationships
with ten leading small-, minority-, and women-owned firms,
located in five different states.

2. Status as of September 2010

a. PPIF status
Through September 30, 2010, the PPIFs have completed fund
ing commitments from private investors for approximately $7.4
billion of private sector equity capital, which was matched 100
percent by Treasury, representing $14.7 billion of total equity
capital. Treasury-OFS also committed to provide $14.7 billion
of direct loans, representing $29.4 billion of total purchasing
power to the program. As of September 30, 2010, PPIFs have
drawn-down approximately $18.6 billion of total capital (63
percent of total purchasing power)9, which has been invested in
eligible assets and cash equivalents pending investment. After
the announcement of the program contributed to improved
market conditions, Treasury-OFS reduced its maximum commit
ment from $30 billion to $22.4 billion which allowed Treasury
OFS to accomplish certain of its objectives with a reduced
amount of taxpayer funds.

b. Support market functioning
The announcement and subsequent implementation of PPIP
were considered keys to reducing the illiquidity discount embed
ded in these legacy securities and the uncertainty associated
with their value, which created an environment conducive for
financial institutions to begin trading and selling their holdings
of such assets. According to the National Information Center,
the non-agency RMBS and CMBS holdings of the top 50 bank
holding companies holdings were $237 billion as of June 30,
2010, approximately $47 billion or 17 percent lower than levels
from a year earlier. PPIP played a role in helping restart the
market for such securities, thereby allowing banks and other
financial institutions to begin reducing their holdings in such
assets at more normalized prices.
9

c. Facilitate price discovery
Since the announcement of PPIP in March 2009, prices for
representative legacy securities have increased by as much as 75
percent for RMBS and CMBS.

d. Extending New Credit
Since the announcement of the program in March 2009,
approximately ten new CMBS and RMBS transactions have
been brought to market, collectively representing approximately
$5 billion in new issuance to date. Although smaller than the
annual issuance prior to the financial crisis, these transactions,
particularly in CMBS, represent meaningful steps toward new
credit formation in the marketplace.

Small Business and Community
Lending Initiatives - SBA 7a Securities
Purchase Program
Small businesses have played an important role in generating
new jobs and growth in our economy. The Small Business
Administration’s (SBA) 7(a) Loan Guarantee Program assists
start-up and existing small businesses that face difficulty in obtaining loans through traditional lending channels. SBA 7(a)
loans help finance a wide variety of business needs, including
working capital, machinery, equipment, furniture and fixtures.

1. Program and goals
To ensure that credit flows to entrepreneurs and small business
owners, Treasury-OFS developed the SBA 7(a) Securities
Purchase Program to purchase SBA guaranteed securities from
pool assemblers. By purchasing in the open market, Treasury
OFS injected liquidity - providing cash to pool assemblers
- enabling those entities to purchase additional loans from loan
originators. In this manner, Treasury-OFS acted as a patient
provider of incremental liquidity to foster a fluid secondary
market, which in turn benefits small business lending.
Since the launch of the program Treasury-OFS has conducted
transactions with two pool assemblers. An external asset
manager purchases the SBA 7(a) securities on behalf of
Treasury-OFS directly from those pool assemblers (sellers) in
the open market. Treasury-OFS utilized independent valuation
service providers to gain additional market insight in order to
make informed purchases.

Includes $13.8 billion of Treasury-OFS loans and equity, net of $336
million of amounts returned from a wound-down PPIF.

management’s discussion and analysis
management’s discussion and analysis

part 1: management s discussion and analysis

•

2. Status as of September 2010
Securities purchased by Treasury-OFS comprised about 700
loans ranging across approximately 17 diverse industries includ
ing: retail, food services, manufacturing, scientific and technical
services, health care and educational services. The program
has supported loans from 39 of the 50 states in the country,
indicating a broad geographic impact. As of September 30,
2010, Treasury-OFS has conducted 31 transactions totaling
approximately $357 million. All securities were purchased at a
premium.

Indicators of Impact for Subgoal 1c:
During the financial crisis, interbank lending froze. The LIBOR
(spreads of the term London interbank offered rate) from mid
2007 to mid-2008 widened from a range of 100 basis points to
200 basis points for a specific three-month LIBOR spread rate.
In the fall of 2008, the LIBOR spread rose to a peak of nearly
360 basis points.

LIBOR OIS
Spread

400
350
300
Basis Points

part 1: management s discussion and analysis

the department of the treasury | office of financial stability

1 Month
3 Month

250
200
150

operational goal two: p revent
avoidaBle forecloSureS and
p reServe homeownerShip
Through the Treasury Housing Programs Under TARP,
Treasury-OFS created a mortgage modification program that
provides incentives to mortgage servicers, investors, and
homeowners to work together to reduce eligible homeowners’
monthly payments to affordable levels based on the
homeowner’s current income.

Housing Programs

Making Home Affordable
In January 2009, the nation’s housing market had been in broad
decline for 18 months. EESA authorities enabled Treasury-OFS
to develop a voluntary program that would support servicers’
efforts to modify mortgages, consistent with the protection
of taxpayers. While the serious effects of the recession and
financial crisis on the housing market and foreclosures persist,
this Administration has taken aggressive action on many fronts,
including under TARP, and has made considerable progress in
helping to stabilize the housing market
•

100
50
0

Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10
Source: Bloomberg

TARP actions stimulated confidence in the financial system,
and combined with the expansion of lending facilities by the
Federal Reserve, helped to lower the LIBOR spread rate to 100
basis points by January 2009. TARP is commonly credited with
helping tighten spreads because the Federal Reserve’s actions
alone (before TARP) were not sufficient to ease the credit crisis.
The ability of financial institutions to address their losses and
balance sheet capitalization, both through the TARP, provided
elements for a rebound in bank valuations and a further nar
rowing in the LIBOR spread rate to the under 40 basis point
pre-crisis level.

Treasury-OFS launched the Making Home Affordable
(MHA) program, which includes the Home Affordable
Modification Program (HAMP), under TARP. Under
this program, Treasury-OFS pays the cost of modifications
of loans not held by government-sponsored enterprises
(GSEs) while the GSEs pay the cost of modifications
of loans held by GSEs. HAMP has helped hundreds of
thousands of responsible homeowners reduce their mort
gage payments by an average of $500 per month and avoid
foreclosure. MHA has also spurred the mortgage industry
to adopt similar programs that have helped millions more
at no cost to the taxpayer

As the housing crisis has evolved, Treasury-OFS has responded
to the unemployment and negative equity problems by adjusting
HAMP and instituting additional programs. For example:
•

Treasury-OFS launched the Housing Finance Agency
(HFA) Hardest Hit Fund to help state housing finance
agencies provide additional relief to homeowners in the
states hit hardest by unemployment and house price
declines.

management’s discussion and analysis

agency financial report | fiscal year 2010

Treasury-OFS and the Department of Housing and Urban
Development (HUD) enhanced the FHA- Refinance
program to enable more homeowners whose mortgages
exceed the value of their homes to refinance into more
affordable mortgages.

To protect taxpayers, MHA housing initiatives have pay-for
success incentives: funds are spent only when transactions are
completed and thereafter only as long as those contracts remain
in place. Therefore, funds will be disbursed over many years.
The total cost of the housing programs cannot exceed—and
may be less than—$46 billion, which is the amount committed
to that purpose. Making Home Affordable is a collection of
multiple initiatives. The individual programs and their purposes
are detailed below.

Making Home Affordable Program
(MHA)
Home Affordable Modification Program (HAMP)
The Home Affordable Modification Program (HAMP) is the
largest program within MHA and includes several additional
components to complement first lien modifications. HAMP
provides eligible homeowners the opportunity to reduce their
monthly first lien mortgage payments to 31 percent of their
gross (pre-tax) income.
To qualify for HAMP, a borrower must:
•

Own a one- to four-unit home that is a primary residence;

•

Have received a mortgage on or before January 1, 2009;

•

Have a mortgage payment (including principal, interest,
taxes, insurance, and homeowners association dues) that is
more than 31 percent of the homeowner’s gross monthly
income; and
Owe not more than $729,750 on a first mortgage for a one–
unit property (there are higher limits for two– to four– unit
properties).

To create an affordable payment, a participating servicer applies
a series of modification steps in the following order: rate reduc
tion to as low as two percent; term extension up to 40 years;
and principal deferral (or forgiveness, at the servicer’s option).
The modified interest rate is fixed for a minimum of five years.
Beginning in year six, the rate may increase no more than one
percentage point per year until it reaches the Freddie Mac

management’s discussion and analysis
management’s discussion and analysis

Primary Mortgage Market Survey rate (essentially the market
interest rate) at the time the permanent modification agreement
was prepared.
Before a mortgage is permanently modified, the homeowner
must make the new, reduced monthly mortgage payment on
time and in full during a trial period of three or four months.
Homeowners who make payments on permanently modified
loans on time accrue an incentive of $1,000 per year for five
years to reduce the amount of principal they owe up to $5,000

Home Price Decline Protection Program (HPDP)
The HPDP provides, an additional component of HAMP,
incentives to investors to partially offset losses from home price
declines.

Principal Reduction Alternative (PRA)
Under the Principal Reduction Alternative (PRA), an ad
ditional component of HAMP, servicers are required to evaluate
the benefit of principal reduction and are encouraged to offer
principal reduction whenever the NPV result of a HAMP
modification using PRA is greater than the NPV result without
considering principal reduction. Incentives are paid based on
the dollar value of the principal reduced.

The Unemployment Program (UP)
The Unemployment Program (UP), an additional component
of HAMP, requires participating servicers to grant qualified
unemployed borrowers a forbearance period during which their
mortgage payments are temporarily reduced for a minimum of
three months, and up to six months for some borrowers, while
they look for new jobs. If a homeowner does not find a job
before the temporary assistance period is over or finds a job
with a reduced income, the homeowner will be evaluated for a
permanent HAMP modification or may be eligible for certain
alternatives to the modification program under MHA. No
incentives are paid by Treasury-OFS.

Home Affordable Foreclosure Alternatives (HAFA)
Program
Under the Home Affordable Foreclosure Alternatives (HAFA)
Program, an additional component of HAMP, Treasury-OFS
provides incentives for short sales and deeds-in-lieu of foreclo
sure for circumstances in which borrowers are unable or unwill
ing to complete the HAMP modification process. Borrowers are
eligible for relocation assistance of $3,000 and servicers receive

part 1: management s discussion and analysis

•

part 1: management s discussion and analysis

the department of the treasury | office of financial stability

a $1,500 incentive for completing a short sale or deed-in-lieu
of foreclosure. In addition, investors are paid up to $2,000 for
allowing short sale proceeds to be distributed to subordinate lien
holders.

FHA-HAMP Program
The FHA-HAMP Program, an additional component of MHA,
provides the same incentives as HAMP for Federal Housing
administration (FHA) guaranteed loans.

Second Lien Modification Program (2MP)
Under the Second Lien Modification Program (2MP), an ad
ditional component of MHA, Treasury-OFS provides incentives
for second-lien holders to modify or extinguish a second-lien
mortgage when a modification has been initiated on the first
lien mortgage for the same property under HAMP. Under 2MP,
when a borrower’s first lien is modified under HAMP and the
servicer of the second lien is a 2MP participant, that servicer
must offer to modify the borrower’s second lien according to a
defined protocol, which provides for a lump sum payment from
Treasury-OFS in exchange for full extinguishment of the second
lien, or a reduced lump sum payment from Treasury-OFS in
exchange for a partial extinguishment and modification of the
borrower’s remaining second lien.

Treasury/FHA Second Lien Program (2LP)
The Treasury/FHA Second Lien Program (2LP), an additional
component of MHA, provides for incentives to servicers for
extinguishment of second liens for borrowers who refinance
their first lien mortgages under the FHA-Refinance Program.

Rural Development (RD) HAMP Program
The RD-HAMP Program provides incentives for modified
United States Department of Agriculture (USDA) guaranteed
mortgages.
The PRA, RD-HAMP, and 2LP programs were announced late
in the fiscal year and no activity has occurred in these programs.

Housing Finance Agency Innovation
Fund for the Hardest Hit Housing
Markets (HFA Hardest Hit Fund, or HHF)
In February 2010, the Obama Administration announced the
Housing Finance Agency Innovation Fund for the Hardest Hit
Housing Markets (HFA Hardest Hit Fund, or HHF), allowing

state housing finance agencies (HFAs) in the nation’s Hardest
Hit housing markets and high unemployment to design innova
tive, locally targeted foreclosure prevention programs. States in
cluded those which have had average home price declines greater
than 20 percent since the housing market downturn, accounting
for the majority of “underwater” mortgages in the country or have
concentrated areas of economic distress due to unemployment or
had an unemployment rate at or above the national average for
the past year.
A total of $7.6 billion is being made available to 18 states
and the District of Columbia. These states include Alabama,
Arizona, California, Florida, Georgia, Illinois, Indiana,
Kentucky, Michigan, Mississippi, Nevada, New Jersey, North
Carolina, Ohio, Oregon, Rhode Island, South Carolina, and
Tennessee. As of September 30, 2010, $56.1 million has been
disbursed to states participating in HHF – largely for administra
tive and startup expenses.
To receive funding, programs must satisfy the requirements
for funding under EESA. These requirements include that
the recipient of funds must be an eligible financial institution
and that the funds must be used to pay for programs designed
to prevent avoidable foreclosures and other permitted uses
under EESA. HFAs designed the state programs, tailoring the
housing assistance to their local needs. Further information on
the funded programs is available at www.FinancialStability.gov/
roadtostability/hardesthitfund.html.

Support for the FHA Refinance
Program
In March 2010, the Administration announced enhancements
to an existing FHA program that will permit lenders to provide
additional refinancing options to homeowners who owe more
than their homes are worth because of large declines in home
prices in their local markets. This program, known as the FHA
Short Refinance program, will provide more opportunities for
qualifying mortgage loans to be restructured and refinanced into
FHA-insured loans.
Among other requirements:
•

•

The homeowner must be current on the existing first lien
mortgage;
The homeowner must occupy the home as a primary
residence and have a qualifying credit score;

management’s discussion and analysis

agency financial report | fiscal year 2010

•

The mortgage investor must reduce the amount owed on
the original loan by at least ten percent;
The new FHA loan must have a balance less than the
current value of the home; and
Total mortgage debt for the borrower after the refinancing,
including both the first lien mortgage and any other junior
liens, cannot be greater than 115 percent of the current
value of the home – giving homeowners a path to regain
equity in their homes and an affordable monthly payment

TARP funds will be made available up to approximately $8
billion in the aggregate to provide additional coverage to lend
ers for a share of potential losses on these loans and to provide
incentives to support the write-downs of second liens and
encourage participation by servicers.

HAMP results
The incentives offered under HAMP are helping American
homeowners and assisting in stabilizing the housing market. The
HAMP Program is designed to help make housing affordable to
American homeowners who are strained by the double impact
of high mortgage payments and a significantly reduced home
value. The program has reached out to these borrowers and
provided an industry-leading solution for servicers to negotiate
lower mortgage payments with qualifying homeowners which al
lows those homeowners to make continued mortgage payments
through a trial program and remain in their homes.
Through September 30, 2010, 144 active servicers have signed
up for MHA. Between loans covered by these servicers and
loans owned or guaranteed by the GSEs, more than 85 percent
of first-lien residential mortgage loans in the country are
now held by servicers participating in the program. Through
September 30, 2010, Treasury-OFS has made commitments to
fund up to $29.9 billion in HAMP payments.
After 18 months, more than 1.3 million homeowners participat
ing in HAMP have entered into trial modifications that reduced
their mortgage payments to more affordable levels. This
includes 619,000 homeowners with non-GSE loans. Nearly
500,000 homeowners participating in the HAMP have had
their mortgage terms modified permanently, with over 220,000
of those participants in non-GSE loans that would be funded by
Treasury-OFS

management’s discussion and analysis
management’s discussion and analysis

Housing Scorecard
On June 21, 2010, the U.S. Department of Housing and Urban
Development (HUD) and the Treasury-OFS introduced a
Monthly Housing Scorecard on the nation’s housing market.
Each month the scorecard presents key housing market indica
tors and highlights the impact of the Administration’s housing
recovery efforts, including assistance to homeowners through
the Federal Housing Administration (FHA) and the Home
Affordable Modification Program. The Housing Scorecard is
available at www.hud.gov/scorecard.

operational goal three: p rotect
taxpaYerS ’ i ntereStS
Treasury-OFS manages TARP investments to minimize costs to
taxpayers and receives income on its holdings of preferred equity
and other TARP investments in the form of interest, dividends
and fees. Treasury-OFS also takes steps to ensure that TARP
recipients comply with any TARP-related statutory or contrac
tual obligations such as executive compensation requirements
and restrictions on dividend payments.
Consistent with the statutory requirements, Treasury-OFS’ four
overarching portfolio management guiding principles are as
follows:
•

•

Protect taxpayer investments and maximize overall invest
ment 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
Dispose of investments as soon as practicable, in a timely
and orderly manner that minimizes financial market and
economic impact.

Treasury-OFS’ asset management approach is designed to imple
ment 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,

part 1: management s discussion and analysis

•

part 1: management s discussion and analysis

the department of the treasury | office of financial stability

Treasury-OFS seeks to bolster market confidence to increase pri
vate 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 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 Treasury-OFS and therefore regula
tory 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 exper
tise. In addition, information about Treasury-OFS’ 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.
Treasury-OFS tracks the fair value of the assets in the TARP
portfolio. The value of publicly traded common stock can be
measured by market quotations. Most of Treasury-OFS’ invest
ments, however, consist of securities and instruments for which
no market value exists. Such securities include preferred stocks,
warrants, loans, and other debt securities, as well as common
stock of private companies. As a result, Treasury-OFS has de
veloped 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.

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.
In conducting the portfolio management activities, Treasury-OFS
employs a mix of dedicated professionals and external asset manag
ers. These external asset managers provide market specific informa
tion such as market prices and valuations as well as detailed credit
analysis using public information on a periodic basis.

Risk Assessment
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 condi
tion 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, Treasury-OFS’ 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 as
set managers engage in heightened monitoring and due diligence
that reflects the severity and timing of the challenges.
Although Treasury-OFS relies on the recommendations of
federal banking regulators in connection with reviewing and ap
proving 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 federal
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

management’s discussion and analysis

agency financial report | fiscal year 2010

Exchanges and restructurings
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:
•

•

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 federal
government,
Guidance of the institution’s primary federal supervisor, and
Consistent pricing with comparable marketplace
transactions.

compliance
Treasury-OFS also takes steps to ensure that TARP recipients
comply with their TARP-related statutory and contractual
obligations. Statutory obligations include executive compensa
tion 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 federal government. Recipients of exceptional assistance
must comply with additional restrictions on executive compen
sation, 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.
All servicers voluntarily participating in MHA have con
tractually agreed to follow the MHA program guidelines,
which require the servicer to offer a MHA modification to

management’s discussion and analysis
management’s discussion and analysis

all eligible borrowers and to have systems that can process all
MHA-eligible loans. Servicers are subject to periodic, on-site
compliance reviews performed by Treasury-OFS’s compliance
agent, Making Home Affordable-Compliance (MHA-C), a
separate, independent division of Freddie Mac, to ensure that
servicers satisfy their obligations under MHA requirements
in order to provide a well-controlled program that assists as
many deserving homeowners as possible to retain their homes
while taking reasonable steps to prevent fraud, waste and abuse.
Treasury-OFS works closely with MHA-C to design and refine
the compliance program and conducts quality assessments of the
activities performed by MHA-C.

Warrant Sales results
Treasury-OFS adheres to a consistent process for evaluating bids
from institutions to repurchase their warrants. Upon receiving
a bid for a warrant repurchase, Treasury-OFS utilizes (i) market
quotes, (ii) independent, third party valuations, and (iii)
model valuations to assess the bid. Treasury-OFS began selling
warrants back to banks that had repaid the TARP investment in
May 2009.
For the 50 fully repaid CPP investments representing $131.8
billion in capital, Treasury-OFS has received a return of 4.2
percent from dividends and an added 4.4 percent return from
the sale of the warrants for a total return of 8.6 percent. For the
$20 billion TIP investment in Bank of America Corporation,
Treasury-OFS received a return of 7.2 percent from dividends
and an added 6.3 percent return from the sale of the warrants for
a total return of 13.5 percent. These returns are not predictive
of the eventual returns on the entire CPP and TIP portfolios.
On August 4, 2010, Treasury-OFS released the second Warrant
Disposition Report. Through September 30, 2010, Treasury
OFS has received over $8 billion in warrant repurchases by
and sales to 64 institutions. For the full report, please visit
www.FinancialStability.gov/docs/TARP_WRRTDISP_80310.pdf

operational goal four : p romote
tranSparencY
Treasury-OFS is committed to transparency and accountability
in all of its programs and policies, including all programs
established under EESA. To protect taxpayers and ensure that
every dollar is directed toward promoting financial stability,

part 1: management s discussion and analysis

and other 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. TreasuryOFS does not seek to influence the management of TARP
recipients for non-financial purposes.

part 1: management s discussion and analysis

the department of the treasury | office of financial stability

Treasury-OFS established comprehensive accountability and
transparency measures.

A. comprehensive Measures
Treasury-OFS publishes hundreds of reports other information
about TARP so that the public knows how the money was
spent, who received it and on what terms. This includes all
contracts governing any investment or expenditure of TARP
funds, and more than 275 reports over two years. All of these
reports and information are posted on the Treasury-OFS
website, www.FinancialStability.gov, including:
•

•

Lists of all the institutions participating in TARP programs,
and all of the investments Treasury-OFS has made;
All investment contracts defining the terms of those invest
ments within five to ten business days of a transaction’s
closing;
All contracts with Treasury-OFS service providers involved
with TARP programs;
A report of each transaction within two business days of
completing the transaction;
Monthly reports of dividend and interest received, which
allow the American people to see and evaluate the invest
ment income they are receiving from these investments;
Monthly reports to Congress, which present updates on
Treasury-OFS investments and programs in a clear, concise
manner, and answer basic questions that many Americans
have, such as how TARP funds are invested;
Monthly reports detailing the progress of modifications
under the Making Home Affordable program;
All program guidelines, within two business days of any
program launch; and
A monthly lending survey, and an annual use of capital
survey, which contains detailed information on the lending
and other activities of banks that have received TARP
funds to help the public understand what banks are doing
with their TARP funds.

Treasury-OFS has worked to maximize the transparency of the
housing program to borrowers and ensure that servicers are held
accountable. Every borrower is entitled to a clear explana-

tion if he or she is determined to be ineligible for a HAMP
modification. Treasury-OFS has established denial codes that
require servicers to report the reason for modification denials
in writing to Treasury-OFS. Servicers are required to use those
denial codes as a uniform basis for sending letters to borrowers
who are evaluated for HAMP but denied a modification. In
those letters, borrowers will be provided with a phone number
to contact their servicers as well as the phone number of the
HOPE hotline, which has counselors who are trained to work
with borrowers to help them understand reasons they may have
been denied modifications and explain other modification or
foreclosure prevention options that may be available to them.
Treasury-OFS increased transparency and public access to the
Net Present Value (NPV) model – a key component of the
eligibility test for HAMP – in releasing the NPV white paper,
which explains the methodology used in the NPV model. To
ensure accuracy and reliability, Freddie Mac, Treasury-OFS’s
compliance agent, conducts periodic audits of servicers’ imple
mentation of the model and requires servicers to use models
which meet Treasury-OFS’s NPV specifications or to revert
back to Treasury-OFS’ NPV application. As required by the
Dodd-Frank Act, Treasury-OFS is preparing to establish a web
portal that borrowers can access to run a NPV analysis on their
own mortgages, and that borrowers who are turned down for a
HAMP modification can use.

B. Audited Financial Statements
Treasury-OFS prepares separate financial statements for TARP
on an annual basis. This is the second audited Treasury-OFS
Agency Financial Report, presented for the fiscal year ended
September 30, 2010 and for the period ended September 30,
2009. The initial AFR for the period ended September 30,
2009 was released in December 2009. Both reports are avail
able at www.FinancialStability.gov.
In its first year of operations, TARP’s financial statements
received an unqualified (“clean”) audit opinion from its audi
tors, the Government Accountability Office, and a separate
“clean” report on internal control over financial reporting found
no material weaknesses -- unprecedented achievements for a
start-up operation with an extraordinary emergency mission.
As a result of these efforts, Treasury-OFS received a Certificate
of Excellence in Accountability Reporting (CEAR) from the
Association of Government Accountants.

management’s discussion and analysis

agency financial report | fiscal year 2010
part 1: management s discussion and analysis

c. TArP retrospective report
In October 2010, Treasury-OFS published the TARP Two
Year Retrospective. This report includes information on
TARP programs and the effects of TARP and other federal
government actions to address the financial crisis. Readers are
invited to refer to this document at www.FinancialStability.gov/
docs/TARP%20Two%20Year%20Retrospective_10%2005%20
10_transmittal%20letter.pdf.

D. Oversight by Four Separate Agencies
Congress also established four avenues of oversight for TARP:
•

•

The Financial Stability Oversight Board, established by
EESA §104;
Specific responsibilities for the Government Accountability
Office as set out in EESA §116;
The Special Inspector General for TARP, established by
EESA §121; and
The Congressional Oversight Panel, established by EESA
§125.

Treasury-OFS has productive working relationships with all of
these bodies, and cooperates with each oversight agency’s effort
to produce periodic audits and reports that focus on the many
aspects of TARP. Individually and collectively, the oversight
bodies’ audits and reports have made and continue to make
important contributions to the development, strengthening, and
transparency of TARP programs.

E. congressional Hearings and Testimony
Treasury-OFS officials have testified in numerous Congressional
hearings since TARP was created. Copies of the written
testimony are prepared for those hearings and are available at
www.FinancialStability.gov/latest/pressreleases.html.

management’s discussion and analysis
management’s discussion and analysis

part 1: management s discussion and analysis

the department of the treasury | office of financial stability

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management’s discussion and analysis

part 2:

financial
section

MESSAGE FROM THE CHIEF FINANCIAL OFFICER
I am pleased to provide the Office of Financial Stability’s (OFS) Agency Financial Report for fiscal year 2010. This report provides
readers information on financial results relating to the Troubled Asset Relief Program (TARP) as required by the Emergency
Economic Stabilization Act (EESA) and other laws.
For fiscal year 2010, the Government Accountability Office (GAO) provided Treasury-OFS unqualified audit opinions on the
fair presentation of our financial statements and the effectiveness of our internal control over financial reporting. The auditors
determined that we had no material weaknesses and concluded that Treasury-OFS successfully addressed one of the significant
deficiencies identified in the prior year’s audit relating to internal control over financial reporting. However, GAO continued to
report a significant deficiency in internal control over our accounting and financial reporting processes.

part 2: financial section

As a second year organization executing large and complicated programs, we are extremely proud of these audit results. I would like
to acknowledge senior management’s commitment to good governance as well as the discipline, transparency, and care exhibited by
Treasury-OFS employees in the creation and execution of our organization’s policies and procedures.
For fiscal year 2010, net income from operations was $23.1 billion resulting in a cumulative net cost of operations of $18.5 billion
since inception. The reduction in cost is primarily due to the early repurchase of TARP investments by the larger banks and an
improvement in the financial markets and the economy.
During the past year, Treasury-OFS focused on further strengthening its rigorous internal control processes around obligations,
transaction processing, disbursement, collections, and financial reporting. While our processes continue to mature, the audit opinions
evidence successes surrounding internal controls over financial reporting implementation across the organization. In fiscal year 2010,
Treasury-OFS developed a subsidiary ledger for tracking TARP equity investments and loans and the supporting accounting data. This
new ledger will provide automated controls over reporting financial information with appropriate separation of duties. In addition, we
implemented credit model enhancements to reduce the possibility of human error in loading assumption data.
On October 3, 2010, authority to make new commitments to purchase troubled assets expired under the EESA. While new
obligations are prohibited, funding under our existing commitments for housing and other programs will continue to be disbursed
and many assets in our investment program are currently outstanding. As a result, the organization will primarily focus on managing
current investment assets and implementing the housing programs.
I feel fortunate to have had the chance to play a role in the continuing tradition of sound fiscal stewardship at Treasury-OFS. This
organization recognizes the importance of a proper control environment and will continue to uphold the highest standards of
integrity as we carry out our fiduciary responsibilities to the American public. Moving forward, we will continue to strengthen our
financial management capacity. In particular, we will continue to enhance our procedures, documentation, and controls over systems
in order to protect taxpayer interests and ensure transparency in our activities.

message from the chief financial officer (cfo)

agency financial report | fiscal year 2010

GOVERNMENT ACCOUNTABILITY OFFICE
AUDITOR’S REPORT

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

To the Acting Assistant Secretary for Financial Stability
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 fiscal years 2010 and 2009,3 we found

part 2: financial section

• 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, 2010; and
• no reportable noncompliance in fiscal year 2010 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

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.

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

Fiscal year 2009 for TARP covers the period October 3, 2008 (date of the Office of Financial
Stability’s inception) through September 30, 2009.

Page 7

Auditor’s report

GAO11179 OFS’s Fiscal Years 2010 and 2009 Financial Statements

the department of the treasury | office of financial stability

taken under TARP.4 This report responds to both of these requirements. We
have issued numerous other reports on TARP in connection with this 60
day reporting responsibility which can be found on GAO’s Web site at
http://www.gao.gov.

part 2: financial section

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, 2010, and 2009, and its net cost, changes in net position,
and budgetary resources for fiscal years 2010 and 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 guarantee
program is based on estimates using economic and financial credit subsidy
models. The estimates use entityspecific 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 guarantee
program, OFS management considered and selected assumptions and data
that it believed provided a reasonable basis for the estimated subsidy
allowance and related subsidy income/costs reported in the financial
statements;5 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

4
Section 116 of EESA, 12 U.S.C. § 5226, requires the 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.
5
The subsidy income/cost is composed of (1) the change in the subsidy cost allowance, net
of writeoffs; (2) net intragovernmental interest cost; (3) certain inflows from the direct
loans and equity investments (e.g., dividends, interest, net proceeds from sales and
repurchases of assets in excess of cost, and other realized fees), and (4) the change in the
estimated discounted net cash flows related to the asset guarantee program.

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GAO11179 OFS’s Fiscal Years 2010 and 2009 Financial Statements

Auditor’s report

agency financial report | fiscal year 2010

part 2: financial section

program experience upon which to base the estimates. In addition, there
are significant uncertainties related to the potential effect of proposed
transactions, such as the restructuring of American International Group,
Inc., on the amounts that OFS will realize from its investments. As such,
there will be differences between the net estimated values of the direct
loans, equity investments, and asset guarantee program as of September 30,
2010, and 2009, that totaled $145.5 billion and $239.7 billion respectively,
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 OFS
continues to acquire assets under obligations that existed as of October 3,
2010, and incur related subsidy costs as well as incur costs under other
TARP initiatives relating to Treasury Housing Programs under TARP.6
As discussed in note 1 to the financial statements, while OFS’s financial
statements for TARP 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, 2010, 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
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). On December, 9, 2009, the Secretary provided the written certification to
extend EESA to October 3, 2010. However, the DoddFrank Wall Street Reform and
Consumer Protection Act, Pub. L. No. 111203, 124 Stat. 1376 (July 21, 2010), (1) reduced
Treasury’s authority to purchase or insure troubled assets to a maximum of $475 billion and
(2) prohibited Treasury, under EESA, from incurring any obligations for a program or
initiative unless the program or initiative had already been initiated prior to June 25, 2010.

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the department of the treasury | office of financial stability

established under 31 U.S.C. § 3512 (c), (d), commonly known as the
Federal Managers’ Financial Integrity Act (FMFIA).
During fiscal year 2010, OFS addressed one significant deficiency and made
progress in addressing the other significant deficiency that we reported for

part 2: financial section

fiscal year 2009.7 Specifically, OFS sufficiently addressed the issues that
resulted in a significant deficiency in fiscal year 2009 regarding OFS’s
verification procedures over the data used for asset valuations such that we
no longer consider this to be a significant deficiency as of September 30,
2010. In addition, OFS addressed many of the issues related to the other
significant deficiency we reported for fiscal year 2009 concerning its
accounting and financial reporting processes. However, the remaining
control issues along with other control deficiencies in this area that we
identified in fiscal year 2010 collectively represent a continuing significant
deficiency in OFS’s internal control over its accounting and financial
reporting processes. Specifically, we found the following:
• While improvements were noted in OFS’s review and approval process
for preparing its financial statements, notes, and MD&A for TARP from
what we had found for fiscal year 2009, we continued to identify
incorrect amounts and inconsistent disclosures in OFS’s draft financial
statements, notes, and MD&A that were significant, but not material,
and that were not detected by OFS.
• For fiscal year 2009, we reported that OFS had not finalized its
procedures related to its process for accounting for certain program
transactions, preparing its September 30, 2009, financial statements, and
its oversight and monitoring of financialrelated services provided to
OFS by asset managers and certain financial agents. During fiscal year
2010, we found that most of these procedures were finalized. However,
we identified instances where OFS’s procedures were not always
followed or effectively implemented.
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 controls 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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GAO11179 OFS’s Fiscal Years 2010 and 2009 Financial Statements

Auditor’s report

agency financial report | fiscal year 2010

• OFS’s documentation was incomplete for certain areas of its asset
valuation process. Specifically, some valuation methodology changes
and the basis for certain assumptions derived from informed opinion
that were used in valuing TARP’s assets were not included in its written
documentation.8 After we notified OFS that the documentation was
incomplete, it was able to provide adequate additional information
about its asset valuation process.

part 2: financial section

• OFS did not have adequate procedures to determine whether the tool
and related guidance it used properly calculated valuations for certain
TARP assets with projected future disbursements.9 OFS’s use of the tool
and related guidance resulted in errors in the valuation of such assets.
OFS had other controls over TARP transactions and activities that reduced
the risk of misstatements resulting from these deficiencies. For significant
errors and issues that were identified, OFS revised the financial statements,
notes, and MD&A, as appropriate. 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. Misstatements
may occur in other financial information reported by OFS and not be
prevented or detected because of this significant deficiency.
We reported on the two significant deficiencies identified last year and
provided OFS recommendations to address these and other less significant
issues.10 The significant deficiency identified for fiscal year 2010, although
not considered to be a material weakness, is important enough to merit
management’s attention. We will be reporting additional details concerning
this significant deficiency separately to OFS management, along with some
recommendations for corrective actions. During our fiscal year 2010 audit,

8
Informed opinion refers to the judgment of agency staff or others who make subsidy
estimates based on their programmatic knowledge, experience, or both. Informed opinion is
considered an acceptable approach under Federal Accounting Standards Advisory Board
Technical Release 6 when adequate historical data does not exist.
9
The tool and related guidance used by OFS in its TARP asset valuation process is provided
to federal agencies for performing valuations under the Federal Credit Reform Act of 1990.
10
GAO, Management Report: Improvements Are Needed in Internal Control Over
Financial Reporting for the Troubled Asset Relief Program, GAO10743R (Washington,
D.C.: June 30, 2010).

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GAO11179 OFS’s Fiscal Years 2010 and 2009 Financial Statements

the department of the treasury | office of financial stability

part 2: financial section

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. We will follow up in our fiscal
year 2011 audit on OFS’s progress in implementing our recommendations.

Compliance with Laws
and Regulations

Our tests of OFS’s compliance with selected provisions of laws and
regulations for fiscal year 2010 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. A136, 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. OFS management evaluated the
effectiveness of OFS’s internal control over financial reporting as of
September 30, 2010, 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

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GAO11179 OFS’s Fiscal Years 2010 and 2009 Financial Statements

Auditor’s report

agency financial report | fiscal year 2010

management maintained, in all material respects, effective internal control
over financial reporting as of September 30, 2010. 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.
In order to fulfill these responsibilities, we

part 2: financial section

• examined, on a test basis, evidence supporting the amounts and
disclosures in the financial statements;
• 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; the Federal
Credit Reform Act of 1990; the DoddFrank Wall Street Reform and
Consumer Protection Act; and the Purpose Statute; and
• performed such other procedures as we considered necessary in the
circumstances.

the department of the treasury | office of financial stability

part 2: financial section

An entity’s internal control over financial reporting is a process effected 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
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. Our
internal control testing was for the purpose of expressing an opinion on the
effectiveness of internal control over financial reporting and may not be
sufficient for other purposes. Consequently, our audit may not identify all
deficiencies in internal control over financial reporting that are less severe
than a material weakness. 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 fiscal year 2010. 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 Acting Assistant Secretary,
Office of Financial Stability, stated OFS concurred with the significant
deficiency in its internal control over financial reporting that GAO

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GAO11179 OFS’s Fiscal Years 2010 and 2009 Financial Statements

Auditor’s report

agency financial report | fiscal year 2010

identified. He also stated that OFS is committed to correcting the
deficiency. The complete text of OFS’s comments is reprinted in appendix
II.

part 2: financial section

Gary T. Engel
Director
Financial Management and Assurance
November 5, 2010

Page 15

GAO11179 OFS’s Fiscal Years 2010 and 2009 Financial Statements

the department of the treasury | office of financial stability

a ppendix i

part 2: financial section

Management’s Report on Internal Control over
Financial Reporting

54 �

agency financial report | fiscal year 2010

a ppendix ii

OFS Response to Auditor’s Report

part 2: financial section

the department of the treasury | office of financial stability

FINANCIAL STATEMENTS

part 2: financial section

The Office of Financial Stability (OFS) prepares financial statements for the Troubled Asset Relief Program (TARP) as a critical
aspect of ensuring the accountability and stewardship for the public resources entrusted to it and as required by Section 116 of the
Emergency Economic Stabilization Act of 2008 (EESA). Preparation of these statements is also an important part of the OFS’s
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 (OMB).
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.
The statements presented are for the year ended September 30, 2010 and for the period from October 3, 2008 (the inception of OFS)
through September 30, 2009.
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

agency financial report | fiscal year 2010

Office of Financial Stability (Troubled Asset Relief Program)

BALANCE SHEET
As of September 30, 2010 and 2009

Dollars in Millions

2010

2009

ASSETS
Intragovernmental Assets:
Fund Balance with Treasury (Note 4)
Asset Guarantee Program (Note 6)
Total Intragovernmental Assets
Accounts Receivable
Troubled Asset Relief Program:
Direct Loans and Equity Investments, Net (Note 6)
Asset Guarantee Program (Note 6)
Total Assets

98,664
815
99,479

97,733
97,733

142,452
2,240
244,175

237,892
1,765
337,390

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 Treasury Housing Programs under TARP (Note 5)
Total Liabilities

5
140,404
25,112
165,521
134
283
165,938

Commitments and Contingencies (Note 7)

5
143,335
109,748
253,088
73
1
253,162
-

NET POSITION
Unexpended Appropriations
Cumulative Results of Operations
Total Net Position
Total Liabilities and Net Position

79,783

84,229

$
$

(1,546)
78,237
244,175

$
$

(1)
84,228
337,390

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

part 2: financial section

LIABILITIES

the department of the treasury | office of financial stability

Office of Financial Stability (Troubled Asset Relief Program) �

STATEMENT OF NET COST �
For the Year Ended September 30, 2010
And the Period Ended September 30, 2009
2010

Dollars in Millions

Gross Cost:
Subsidy Cost (Income) (Note 6)
Direct Loan and Equity Investment Programs (Including $8,013 in 2010 and $2,916
in 2009 of Net Proceeds from Sales and Repurchases of Assets in Excess of Cost)
Asset Guarantee Program
Total Program Subsidy Cost (Income)

part 2: financial section

Interest Expense on Borrowings from the Bureau of the Public Debt (Note 9)
Treasury Housing Programs Under TARP (Note 5)
Administrative Cost
Total Gross Cost (Income)
Less Earned Revenue:
Dividend and Interest Income - Programs (Note 6)
Interest Income on Financing Account (Note 9)
Subsidy Allowance Amortization (Note 9)
Net Earned Revenue
Total Net Cost of (Income from) Operations

(22,698)

2009

(2,201)

(24,203)

41,404

5,913

6,436

825

296

(17,169)

167

48,009

(7,242)

(9,503)

(1,173)

(3,649)

2,502

$
$

43,605

(1,505)

(5,913)
(23,082)

6,716

$
$

(6,436)
41,573

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

financial statements

agency financial report | fiscal year 2010

Office of Financial Stability (Troubled Asset Relief Program)

STATEMENT OF CHANGES IN NET POSITION
For the Year Ended September 30, 2010
And the Period Ended September 30, 2009
2010

Dollars in Millions

2009
Cumulative
Results of
Operations

Unexpended
Appropriations

Beginning Balances

84,229

(1)

(4,446)

(34,224)
(24,627)

Net (Cost of) Income from Operations
Net Change
Ending Balances

23,082

(4,446)
79,783

(1,545)
(1,546)

5,151

9,597

(9,597)
-

238,268

154,039

(154,039)
84,229

(112,467)
41,572

84,229
84,229

(41,573)
(1)
(1)

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

part 2: financial section

Budgetary Financing Sources
Appropriations Received
Appropriations Used
Other Financing Sources
Total Financing Sources

Cumulative
Results of
Operations

Unexpended
Appropriations

the department of the treasury | office of financial stability

Office of Financial Stability (Troubled Asset Relief Program)

STATEMENT OF BUDGETARY RESOURCES
For the Year Ended September 30, 2010
And the Period Ended September 30, 2009
2010
Budgetary
Accounts

Dollars in Millions

part 2: financial section

BUDGETARY RESOURCES
Unobligated Balances Brought Forward
Recoveries of Prior Year Unpaid Obligations
Budget Authority:
Appropriations
Borrowing Authority
Spending Authority from Offsetting Collections
Earned: Collected
Change in Unfilled Orders Without Advance
Total Budget Authority
Permanently Not Available
TOTAL BUDGETARY RESOURCES (Note 10)
STATUS OF BUDGETARY RESOURCES
Obligations Incurred - Direct
Unobligated Balance:
Apportioned and Available
Not Available
TOTAL STATUS OF BUDGETARY RESOURCES
CHANGE IN OBLIGATED BALANCES
Obligated Balance Brought Forward:
Unpaid Obligations
Uncollected Customer Payments from Federal Sources
Obligated Balance, Net, Brought Forward

8,945
39,364

Nonbudgetary
Financing
Accounts

69,440

238,268
-

309,971

156,112

(107,976)
160,774

238,268
238,268

243,072
28,927
581,970

34,480
34,480

(120,841)
461,129

23,405

150,226

210,112

452,184

142
10,933
34,480

7,692
2,856
160,774

28,156
238,268

7,009
1,936
461,129

79,202

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

NET OUTLAYS
Gross Outlays
Offsetting Collections
Distributed Offsetting Receipts
NET OUTLAYS

Budgetary
Accounts

5,151
-

Obligations Incurred
Gross Outlays
Recoveries of Prior Year Unpaid Obligations
Change in Uncollected Customer Payments from Federal Sources

Obligated Balance, Net, End of Period

28,156
1,173

2009
Nonbudgetary
Financing
Accounts

56,151
56,151

(5,111)
268,750

(28,927)
50,275

23,405

150,226

210,112

452,184

(9,255)
(1,173)
-

(148,146)
(39,364)
5,111

(153,961)
-

(372,982)
-

69,128
-

41,918
(23,816)

56,151
-

69,128

9,255
-

(118,860)
(109,605)

(28,927)

79,202
(28,927)

18,102

56,151

148,146

153,961
-

372,982

(243,072)
129,910

(156,112)
$

(7,966)

(2,720)
151,241

50,275

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

financial statements

agency financial report | fiscal year 2010

NOTES TO THE FINANCIAL STATEMENTS
note 1. r eporting 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.

Under the provisions of the EESA, the OFS implemented the TARP which resulted in the development of the following programs:
the Capital Purchase Program (CPP); American International Group, Inc. Investment Program (AIG, formerly known as the
Systemically Significant Failing Institutions Program); the Targeted Investment Program (TIP); the Automotive Industry Financing
Program (AIFP); the Consumer and Business Lending Initiative (CBLI); the Public-Private Investment Program (PPIP); and the
Asset Guarantee Program (AGP); (see Note 6 for details regarding all of these programs); as well as the Treasury Housing Programs
Under the TARP (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 program 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 are not included in the Federal budget, and
therefore, do not meet the conclusive criteria in SFFAC No. 2. As such, the OFS determined that none of these entities 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.

notes to the financial statements

part 2: financial section

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 mortgage-backed securities. Section 115 of the EESA limited the authority of the
Secretary to purchase troubled assets up to $700.0 billion outstanding at any one time, calculated at the aggregate purchase prices of
all troubled assets held. Amendments to Section 115 of EESA during the period ended September 30, 2009 reduced that authority
by $1.3 billion, from $700 billion to $698.7 billion. Section 120 of the EESA established that the authorities under Sections 101(a),
excluding Section 101(a)(3) and Section 102 of the EESA would terminate December 31, 2009 unless extended upon submission
of a written certification to Congress by the Secretary of the Treasury. On December 9, 2009, the Secretary extended the program
authorities through October 3, 2010. In July, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act amended
Section 115 of EESA, limiting the TARP’s authority to a total of $475 billion cumulative obligations (i.e. purchases and guarantees)
and prohibiting any new obligations for programs or initiatives that had not been publically announced prior to June 25, 2010. There
was $474.77 billion of obligations outstanding against the Section 115 authority as of September 30, 2010 and $381.3 billion of
obligations outstanding as of September 30, 2009.

the department of the treasury | office of financial stability

In addition, the OFS has made loans and investments in certain Special Purpose Vehicles10 (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 about whether the SPV should be classified as a federal entity. The OFS has concluded that none of the SPVs
meet the conclusive or indicative 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 loans and 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 Note 6, see Automotive Industry Financing Program, Term Asset-Backed Loan Facility and the
Public-Private Investment Program.

part 2: financial section

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 annual Performance and
Accountability Report.

10 The OFS invested in SPVs under the Consumer and Business Lending Initiative, the Automotive Industry Financing Program and the Public-Private
Investment Program.

notes to the financial statements

agency financial report | fiscal year 2010

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 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.
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 in July, 2009. 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.

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, as amended (SFFAS No. 2), 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 for financial reporting. The OFS applies the provisions of the SFFAS No. 2 when accounting and reporting for direct
loans, equity investments, asset guarantee program and the Federal Housing Administration (FHA)-Refinance Program. Direct loans
and equity investments disbursed and outstanding are recognized as assets at the net present value of their estimated future cash
flows. Outstanding asset guarantees are recognized as liabilities or assets at the net present value of their estimated future cash flows.
Liabilities under the FHA-Refinance Program are recognized at the net present value of their estimated future cash flows when the
guaranteed loans are disbursed. For direct loans and equity investments, 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.
The OFS recognizes dividend income associated with equity investments when declared by the entity in which the OFS has invested
and when received in relation to any repurchases, exchanges and restructurings. The OFS recognizes interest income when earned
on performing loans. The OFS reflects changes, referred to as reestimates, in the value of direct loans, equity investments, and
asset guarantee program 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 providing direct
loans and equity investments made and the asset guarantee program. The OFS accounts for the warrants and warrant preferred stock

notes to the financial statements

part 2: financial section

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 estimated net present value of its direct loans, equity investments and asset
guarantee program for budgetary purposes. Similarly, market risk is considered in the valuations for financial reporting purposes (see
Note 6 for further discussion).

the department of the treasury | office of financial stability

received under Section 113 of EESA as fees under SFFAS No. 2, and, as such, the value of the warrants, warrant preferred stock and
additional notes, when the assets are sold, 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 that include
estimates are TARP Direct Loans and Equity Investments, Net and the Asset Guarantee Program on the Balance Sheet, and related
subsidy cost on the Statement of Net Cost (see Note 6).

part 2: financial section

The most significant differences between actual results and estimates may occur in the valuation of direct loans, equity investments,
and the asset guarantee program. The forecasted future cash flows used to determine these amounts as of fiscal year end 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, and prepayment rates. Forecasts of future financial results have inherent
uncertainty and the OFS’s TARP Direct Loans and Equity Investments, Net and Asset Guarantee Program line items as of fiscal
year end 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 of factors affecting estimates can be found in the Management
Discussion and Analysis section of the Agency Financial Report.

Credit Reform Accounting
The FCRA provides for the use of program, financing, and general fund receipt accounts to separately account for activity related to
direct loans and loan 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.
As discussed previously, the OFS accounts for the cost of direct loans, equity investments, the asset guarantee program and the FHA
Refinance Program in accordance with Section 123(a) of the EESA and the FCRA for budgetary accounting and SFFAS No. 2 for
financial reporting.
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, asset guarantee program and the FHA-Refinance Program 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 guarantee program11. Cash flows include disbursements, repayments,
repurchases, fees, recoveries, interest, dividends, proceeds from the sale of stock and warrants, borrowings from Treasury, 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: (1) Borrowing for program
funds under Section 118 that constitute appropriations when obligated or 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).

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

notes to the financial statements

agency financial report | fiscal year 2010

The OFS uses general fund receipt accounts to record the receipt of amounts paid from the financing accounts when there is a
negative subsidy or negative modification (a reduction in subsidy cost due to changes in program policy or terms that change
estimated future cash flows) 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.
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 guarantee
program. 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

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 Treasury Housing Programs Under TARP. The direct loan and equity
investment balances have been determined in accordance with the provisions of SFFAS No. 2 (see Note 6). Writeoffs of gross direct
loan and equity investment balances (presented in Note 6 table) are recorded when a legal event, such as a bankruptcy with no
further chance of recovery, or extinguishment of a debt instrument by agreement, occurs. Under SFFAS 2, writeoffs do not affect
the Statement of Net Cost because the written-off asset is fully reserved. Therefore, the write-off removes the asset balance and the
associated subsidy allowance.

Asset guarantee Program
The Asset Guarantee Program line item on the Balance Sheet as of September 30, 2009 represents the asset value resulting from the
net present value of the estimated cash inflows that were in excess of the estimated future claim payments. During fiscal year 2010,
the OFS and the Federal Deposit Insurance Corporation (FDIC) entered into a termination agreement with the program’s remaining
participant, Citigroup. As a result, the Asset Guarantee Program line item (non-intragovernmental asset) represents the net present
value of the estimated cash inflows from Citigroup trust preferred securities that OFS held after the guarantee was terminated. The
intragovernmental Asset Guarantee Program line item is the estimated value of certain Citigroup trust preferred securities currently
held by the FDIC. Under the termination agreement, the FDIC has agreed to transfer to the OFS these securities less any losses on
FDIC’s guarantee of Citigroup debt. See Note 6.

general Property and Equipment
Equipment with a cost of $50,000 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 meeting the capitalization criteria is expensed

notes to the financial statements

part 2: financial section

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.

the department of the treasury | office of financial stability

when purchased. Software developed for internal use is capitalized and amortized over the estimated useful life of the software if the
cost per project is greater than $250,000. However, OFS may expense such software if management concludes that total period costs
would not be materially distorted and the cost of capitalization is not economically prudent. Based upon these criteria, the OFS
reports no capitalized property, equipment or software on its Balance Sheet as of September 30, 2010 and 2009.

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 for equity investments, direct loans, and
asset guarantee program funded by borrowings from the BPD as of the end of the fiscal year. Additionally, OFS borrows from the BPD
for payment of intragovernmental interest and payment of negative subsidy cost to the general fund, as necessary. See Note 8.

part 2: financial section

Due to the general Fund
Due to the General Fund represents the amount of accrued downward reestimates and, for fiscal year 2010, one downward
modification not yet funded, related to direct loans, equity investments and asset guarantee programs as of September 30, 2010 and
2009. See Notes 3 and 6.

Liabilities for the Treasury Housing Programs under TArP
There are three initiatives in the Treasury Housing Programs: the Making Home Affordable Program, the Housing Finance Agency
Hardest Hit Fund and the Federal Housing Administration Refinance Program (see Note 5). The OFS has determined that credit
reform accounting is not applicable to the Treasury Housing Programs Under TARP except the FHA-Refinance Program, since
there are no incoming cash flows to be valued. Therefore, liabilities for the Making Home Affordable Program and Housing
Finance Agency Hardest Hit Fund for payments to servicers and investors, including principal balance reduction payments for the
accounts of borrowers are accounted for in accordance with SFFAS No. 5, Accounting for Liabilities of the Federal Government. A
liability is recognized for any unpaid amounts due as of the reporting date. The liability estimate is based on information about loan
modifications reported by participating servicers for the Making Home Affordable Program and participating states for the Housing
Finance Agency Hardest Hit Fund.

unexpended Appropriations
Unexpended Appropriations represents the OFS undelivered orders and unobligated balances in budgetary appropriated funds as of
September 30, 2010 and 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 not funded by appropriations or some other source, such as borrowing authority, from inception
through fiscal year end. For fiscal year 2010, there were $1.5 billion of unfunded upward reestimates that increased subsidy cost. The
appropriations for this increase in cost will be received next fiscal year. Until then, the cost is recorded as negative Cumulative
Results of Operations. The Other Financing Sources line in the Statement of Changes in Net Position for each year consists
primarily of transfers due to the Treasury General Fund relating to downward reestimates. Each program’s reestimates, upward and
downward, are recorded separately, not netted together.

notes to the financial statements

agency financial report | fiscal year 2010

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 occupational 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.

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 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.

related Parties
The nature of related parties and descriptions of related party transactions are discussed within Notes 1 and 6.

notes to the financial statements

part 2: financial section

Employee Pension Benefits

the department of the treasury | office of financial stability

note 3. d ue

to the

general fund

As of September 30, 2010, the OFS accrued $25.1 billion of downward reestimates and one downward modification payable to the
General Fund (See Note 6). Due to the General Fund is a Non-Entity liability on the Balance Sheet. At September 30, 2009, Due to
the General Fund payable was $109.7 billion for downward reestimates.

note 4. fund BalanceS

with

treaSurY

Fund Balances with Treasury, by fund type and status, are presented in the following table as of September 30, 2010 and 2009:

part 2: financial section

(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

2010

2009

45,438
34,766
18,460
98,664

7,834
13,790
77,040
98,664

45,650
38,658
13,425
97,733

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

Included in the OFS Financing Funds balance are premium collections of $265.2 million during fiscal year 2010 and $174.8 million
for the period ended September 30, 2009 related to the AGP that are required by the EESA Section 102(d) to be maintained in the
Troubled Asset Insurance Financing Fund (see Note 6).

notes to the financial statements

agency financial report | fiscal year 2010

note 5. the treaSurY houSing p rogramS under tarp
Fiscal year 2010 has seen an expansion of programs designed to provide stability for both the housing market and homeowners.
These programs assist homeowners who are experiencing financial hardships to remain in their homes while they get back on their
feet or relocate to a more sustainable living situation. These programs fall into three initiatives:
1) Making Home Affordable Program (MHA);
2) Housing Finance Agency (HFA) Hardest Hit Fund; and
3) Federal Housing Administration (FHA)-Refinance Program.
Under MHA, the initial programs rolled out in the period ended September 30, 2009 were the Home Affordable Modification
Program (HAMP) including the Home Price Decline Protection Program (HPDP).

Fiscal year 2010 has also seen the introduction of additional programs under MHA. These programs include the FHA-HAMP which
provides the same incentives as HAMP for Federal Housing Administration (FHA) guaranteed loans. The 2MP provides additional
incentives to servicers to extinguish second liens on first lien loans modified under HAMP. The FHA 2LP provides for incentives
to servicers for extinguishment of second liens for borrowers who refinance their FHA-insured first lien mortgages under the FHA
Refinance Program. The RD-HAMP Program provides HAMP incentives for USDA guaranteed mortgages.
All MHA disbursements 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. Servicers have until December 31, 2012 to
enter into mortgage modifications with borrowers.
Included in administrative costs are fees paid to Fannie Mae and Freddie Mac. 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.
The Housing Finance Agency (HFA) Hardest Hit Fund was implemented in 2010 and provides targeted aid to families in the states
hit hardest by the housing market downturn and unemployment. States that meet the criteria for this program consist of Alabama,
Arizona, California, Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, Mississippi, Nevada, New Jersey, North Carolina, Ohio,
Oregon, Rhode Island, South Carolina, Tennessee, and Washington D.C. Approved states develop and roll out their own programs
with timing and types of programs offered targeted to address the specific needs and economic conditions of their state. States have
until December 31, 2017 to enter into agreements with borrowers.

notes to the financial statements

part 2: financial section

MHA includes HAMP, FHA-HAMP, Second Lien Program (2MP), Treasury/FHA Second Lien Program (FHA 2LP)
(extinguishment of 2nd lien portion of the program), and Rural Development (RD-HAMP). The HAMP includes first lien
modifications, the HPDP, the Principal Reduction Alternative Waterfall Program (PRA), the Unemployment Program (UP), and
the Home Affordable Foreclosure Alternatives Program (HAFA). The HAMP first lien modification program provides for one
time, monthly and annual incentives to servicers, borrowers, and investors who participate in the program whereby the investor
and OFS share the costs of modifying qualified first liens. The HPDP provides incentives to investors to partially offset losses from
home price declines. In fiscal year 2010, additional programs have been introduced under HAMP to complement the first lien
modification program and HPDP. The Principal Reduction Alternative Waterfall Program (PRA) offers mortgage relief to eligible
homeowners whose homes are worth significantly less than the remaining amounts outstanding under their first-lien mortgage. The
Unemployment Program (UP) offers assistance to unemployed homeowners through temporary forbearance of a portion of their
mortgage payments. The UP will not have a financial impact on the OFS because no incentives are paid by OFS. Finally, the Home
Affordable Foreclosure Alternatives Program (HAFA) is designed to assist eligible borrowers unable to retain their homes through a
HAMP modification by simplifying and streamlining the short sale and deed in lieu of foreclosure processes and providing incentives
to borrowers, servicers and investors to pursue short sales and deeds in lieu.

the department of the treasury | office of financial stability

The FHA-Refinance Program is a joint initiative with the Department of Housing and Urban Development (HUD) which is
intended to encourage refinancing of existing underwater (i.e. the borrower owes more than the home is worth) mortgage loans not
currently insured by FHA into FHA-insured mortgages. HUD will pay a portion of the amount refinanced to the investor and OFS
will pay incentives to encourage the extinguishment of second liens associated with the refinanced mortgages. OFS established a
Letter of Credit to fund the OFS portion of any claims associated with the FHA-insured mortgages. Homeowners can refinance into
FHA-guaranteed mortgages through December 31, 2012 and OFS will honor its share of claims against the Letter of Credit through
2020. As of September 30, 2010, no loans had been refinanced under this program as the joint initiative was entered into late in the
fiscal year. However, in fiscal year 2010, OFS paid $3 million to establish the Letter of Credit.
The table below recaps payments and accruals as of September 30, 2010 and September 30, 2009. As noted above, the UP is
structured so that there is no financial impact on the OFS. Although in operation on September 30, 2010 the PRA, FHA-HAMP,
2LP and RD-HAMP had not been in operation for a period long enough to have fiscal year 2010 financial activity.
TREASURY HOUSING PROGRAMS UNDER TARP
(Dollars in
Billions)
Commitments

(Dollars in Thousands)
Payments

part 2: financial section

9/30/2010
MHA

HAMP (1st Lien)
HPDP
PRA1
UP2
HAFA3
FHA HAMP
2MP
2LP1
RD-HAMP1
HFA Hardest Hit Fund
FHA-Refinance
TOTALS

9/30/2010

29.9
7.6
8.1
45.6

473,592
8,755
N/A
1,627
11
56,120
3,015
543,120

(Dollars in Thousands)
Accruals

9/30/2009

946
N/A
946

9/30/2010

175,415
107,914
N/A
N/A
24
5
283,358

9/30/2009

1,361
N/A
1,361

No FY2010 activity with financial impact.
2
No financial impact.
3
HAFA payments are made in the month earned and not accrued.
1

For fiscal year 2010, cost for Treasury Housing Programs Under TARP totaled $825 million; for the period ending September 30,
2009, cost totaled $2 million.

notes to the financial statements

agency financial report | fiscal year 2010

note 6. trouBled a SSet r elief p rogram direct l oanS
i nveStmentS, net and a SSet guarantee p rogram

and

e quitY

Direct Loan, Equity Investments and Asset guarantee Program
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 made direct loans, equity investments and entered into asset guarantees. The table below recaps OFS
programs by title and type:
Program Type

Capital Purchase Program
American International Group, Inc. Investment Program
Targeted Investment Program
Automotive Industry Financing Program
Consumer and Business Lending Initiative:
• Term Asset-Backed Securities Loan Facility
• SBA 7(a) Security Purchase Program
• Community Development Capital Initiative
Public-Private Investment Program
Asset Guarantee Program

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

The OFS applies the provisions of SFFAS No. 2 to account for direct loans, equity investments and the asset guarantee program. 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 by the market
to compensate for variability around the expected losses reflected in the cash flows (the “unexpected loss”).
The adjustment for market risk requires the OFS to determine the return that would be required by market participants to enter into
similar transactions or to purchase the assets held by OFS. Accordingly, the measurement of the assets attempts to represent the proceeds
expected to be received if the assets were sold to a market participant. The methodology employed for determining market risk for equity
investments generally involves a calibration to market prices of similar securities that results in measuring equity investments at fair value.
The adjustment for market risk for loans is intended to capture the risk of unexpected losses, but 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. The OFS uses market observable inputs,
when available, in developing cash flows and incorporating the adjustment required for market risk. For purposes of this disclosure, the OFS
has classified the various investments as follows, based on the observability of inputs that are significant to the measurement of the asset:
Quoted prices for Identical Assets: The measurement of assets in this classification is based on direct market quotes for the specific
asset, e.g. quoted prices of common stock.
Significant Observable Inputs: The measurement of assets in this classification is primarily derived from market observable data, other
than a direct market quote, for the asset. This data could be market quotes for similar assets for the same entity.
Significant Unobservable Inputs: The measurement of assets in this classification is primarily derived from inputs which generally
represent management’s best estimate of how a market participant would assess the risk inherent in the asset. These unobserv
able inputs are used because there is little to no direct market activity.

notes to the financial statements

part 2: financial section

Program

the department of the treasury | office of financial stability

The table below displays the assets held by the observability of inputs significant to the measurement of each value:
(Dollars in Millions)

Program

Capital Purchase Program
American International Group Investment Program1
Targeted Investment Program
Automotive Industry Financing Program
Consumer and Business Lending Initiative, which includes TALF, SBA 7(a) securities
and CDCI
Public-Private Investment Program
Asset Guarantee Program
Total TARP Program

As of September 30, 2010
Quoted Prices
for Identical
Assets

14,899
2,240
17,139

Significant
Observable
Inputs

(Dollars in Millions)

part 2: financial section

Program

815
815

Significant
Unobservable
Inputs

33,334
26,138
1
52,709
966
14,405
127,553

Total

48,233
26,138
1
52,709

966
14,405
3,055
$ 145,507

As of September 30, 2009
Quoted Prices
for Identical
Assets

Significant
Observable
Inputs

Significant
Unobservable
Inputs

Total

37,231
-

40,341
-

104,440
13,152
42,284
444
1,765

$ 141,671
13,152
40,341
42,284
444
1,765

Total TARP Program

37,231

40,341

162,085

$ 239,657

1 Does not give effect to the proposed restructuring as discussed under American International Group, Inc. Investment Program in this note.

The following provides a description of the methodology used to develop the cash flows and incorporate the market risk into the
measurement of the OFS assets.

Financial Institution Equity Investments12
The estimated values of preferred equity investments are the net present values of the expected dividend payments and repurchases.
The model assumes that the key decisions affecting whether or not institutions pay their preferred dividends are made by each
institution based on the strength of their balance sheet. The model assumes a probabilistic evolution of each institution’s asset-to
liability ratio (the asset-to-liability ratio is based on the estimated fair value of the institution’s assets against its liabilities). 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 institution’s asset-to-liability
ratio.
In the model, when equity decreases, i.e. the asset-to-liability 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 1990-2009. At the other end of the spectrum, institutions call their preferred shares when the present
value of expected future dividends exceeds the call price; this occurs when equity is high and interest rates are low. Inputs to the
model include institution specific accounting data obtained from regulatory filings, an institution’s stock price volatility, historical
12 This consists of equity investments made under CPP, CDCI, and TIP.

notes to the financial statements

agency financial report | fiscal year 2010

bank failure information, as well as market prices of comparable securities trading in the market. The market risk adjustment is
obtained through a calibration process to the market value of certain trading securities of financial institutions within the TARP
programs. The 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 quoted market price.

AIG Investment
The method used to measure AIG preferred shares is broadly analogous to the approach used to measure financial institution
preferred shares. However, greater uncertainty exists for the valuation of preferred shares for AIG. First, the size of OFS’s 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, OFS based the
AIG valuation on the observed market values of publicly traded junior subordinated debt, adjusted for OFS’s position in the capital
structure. Further, based on certain publicly available third party sources, assumptions about payouts in different outcomes and the
probability of some outcomes were made. Finally, an external asset manager provided estimated fair value amounts, premised on
public information, which also assisted OFS in its measurement. These different factors were all used in determining the best estimate
for the AIG assets. The adjustment for market risk is incorporated in the data points the OFS uses to determine the measurement for
AIG as all points rely on market data.

As of September 30, 2009, the value of the asset guarantee program reflected the net present value of estimated default-claim
payments by the OFS, net of income from recoveries on defaults, fees (including equity received), or other income. Default-claim
payments were 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. During fiscal year 2010, an
agreement was entered into to terminate the guarantee of OFS to pay for any defaults. After the termination, the OFS still held
some of the trust preferred securities (initially received as the guarantee fee) issued by Citigroup and the potential to receive $800
million (liquidation preference) of additional Citigroup trust preferred securities from the FDIC, see further discussion below under
the heading of Asset Guarantee Program. As such, as of September 30, 2010, the value of the instruments within the AGP is the
value of the trust preferred securities held and the estimated cash flows associated with the contingent right to receive additional trust
preferred securities. On September 30, 2010, the OFS entered into an agreement to sell13 the trust preferred securities held within
AGP, and the value of the trust preferred securities is approximately the sales price and the contingent right is valued in a similar
manner as the financial institutions preferred equity investments noted above.

Investments in Special Purpose Vehicles
The OFS has made certain investments in financial instruments issued by special purpose vehicles (SPVs). Generally, the OFS
estimates the cash flows of the SPV and then applies those cash flows to the waterfall governing the priority of payments out of the
SPV.
For the loan associated with the Term Asset-Backed Securities Loan Facility (TALF), the OFS model derives the cash flows to the
SPV, and ultimately the OFS, by simulating 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 OFS funding. Simulation outcomes consisting of a range of loss scenarios are probability-weighted to generate
the expected net present value of future cash flows.

13 See further discussion of sale under Asset Guarantee Program below.

notes to the financial statements

part 2: financial section

Asset Guarantee Program

the department of the treasury | office of financial stability

For the PPIP investments and loans made in the Public Private Investment Funds (PPIF), the OFS model derives cash flows to the SPV
by simulating the performance of the collateral supporting the residential mortgage-backed securities (RMBS) and commercial mortgage
backed securities (CMBS) held by the PPIF (i.e. performance of the residential and commercial mortgages). The simulated cash flows
are then run through the waterfall of the RMBS/CMBS to determine the cash flows to the SPV. Once determined, the cash flows are run
through the waterfall of the PPIF to determine the expected cash flows to the OFS through both the equity investments and loans. Inputs
used to simulate the cash flows are unemployment forecast, home price appreciation/depreciation forecast, the current term structure of
interest rates, historical pool performance as well as estimates of the net income and value of commercial real estate supporting the CMBS.

SBA 7(a) Securities
The valuation of SBA 7(a) securities is based on the discounted estimated cash-flows of the securities.

Auto Industry Financing Program (AIFP) Investments and Loans

part 2: financial section

The valuation of equity investments was performed in a manner that is broadly analogous to the methodology used for financial
institution equity investments, with reliance on publicly traded securities to benchmark the assumptions of the valuation exercise.
AIFP loans with potential value are valued using rating agency default probabilities.
As part of the General Motors (GM) bankruptcy proceedings, 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. OFS used this implied equity value to account for its common
stock ownership in New GM. The adjustment for market risk is incorporated in the data points the OFS uses to determine the
measurement for GM as all points rely on market data.
For GMAC, Inc (GMAC – currently known as Ally Financial) trust preferred equity instruments, OFS estimates the value based
on comparable publicly traded securities adjusted for factors specific to GMAC, such as credit rating. For investments in GMAC’s
common equity and mandatorily convertible preferred stock, which is valued on an “if-converted” basis, the OFS uses certain
valuation multiples such as price-to-earnings and price-to-tangible book value to estimate the value of the shares. The multiples are
based on those of comparable publicly-traded entities. The adjustment for market risk is incorporated in the data points the OFS uses
to determine the measurement for GMAC as all points rely on market data.
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 an 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. The models also incorporate an adjustment for market risk to reflect the additional return on capital that would be
required by a market participant.

Subsidy Cost
The recorded subsidy cost of a direct loan, equity investment or asset guarantee is based on the estimated future cash flows calculated
as discussed above. The OFS actions, as well as changes in legislation, that change these estimated future cash flows change subsidy
costs and are recorded as modifications. 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 2010, modifications occurred within the
Capital Purchase Program, the Asset Guarantee Program and the Automotive Industry Financing Program. During the period ended
September 30, 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

notes to the financial statements

agency financial report | fiscal year 2010

related to each program and related modifications below. Total net modification cost for the year ended September 30, 2010 was
$47.9 million. For the period ended September 30, 2009, net modification costs were $412.1 million.
The following table recaps gross loan or equity investment, subsidy allowance, and net loan or equity investment by TARP program.
Detailed tables providing the net composition, subsidy cost, modifications and reestimates, along with a reconciliation of subsidy cost
allowances as of and for the year ended September 30, 2010 and the period ended September 30, 2009, are provided at the end of this
Note for Direct Loans and Equity Investments, detailed by program, and for the Asset Guarantee Program separately.
Descriptions and chronology of significant events by program are after the summary table.
(Dollars in Millions)

Program

Gross Direct
Loan or Equity
Investment

49,779
47,543
67,238
908
13,729
179,197

(Dollars in Millions)

Program

Capital Purchase Program
American International Group Investment Program1
Targeted Investment Program
Automotive Industry Financing Program
Consumer and Business Lending Initiative, which includes TALF
Public-Private Investment Program
Total TARP Program

Subsidy
Allowance

Net Direct Loan or
Equity Investment

(1,546)
(21,405)
1
(14,529)
58
676

(36,745)

48,233
26,138
1
52,709
966
14,405
142,452

As of September 30, 2009
Gross Direct
Loan or Equity
Investment

133,901
43,206
40,000
73,762
100
290,969

Subsidy
Allowance

7,770

Net Direct Loan or
Equity Investment

(30,054)
341
(31,478)
344
$

(53,077)

141,671
13,152
40,341
42,284
444
237,892

1/ Does not give effect to the proposed restructuring as discussed under American International Group, Inc. Investment Program in this note.

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 purchased 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 had received the proceeds of one or more Qualified Equity Offerings (QEO)14 which results in aggregate gross proceeds to the QFI
of not less than 25.0% of the issue price of the senior preferred stock. QFIs that are Sub-chapter S corporations issued subordinated

14 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

part 2: financial section

Capital Purchase Program
American International Group Investment Program1
Targeted Investment Program
Automotive Industry Financing Program
Consumer and Business Lending Initiative,
which includes TALF, SBA 7(a) securities and CDCI
Public-Private Investment Program
Total TARP Program

As of September 30, 2010

the department of the treasury | office of financial stability

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.

part 2: financial section

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 for the period ended September 30,
2009 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 exercise price equal to 15.0% of the total senior
preferred stock investment. The exercise price per share used to determine the number of shares of common stock subject to the warrant
was calculated based on the average closing prices of the common stock on the 20 trading days ending on the last day prior to the
date the QFI’s application was preliminarily approved for participation in the program. The warrants include customary anti-dilution
provisions. Prior to December 31, 2009, in the event a public QFI completed 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 was
reduced by 50.0%. As of September 30, 2009, 19 QFIs had reduced shares pursuant to the provision. As of December 31, 2009, a total
of 38 QFIs reduced the number of shares available under the warrants as a result of this provision. The warrants have a 10 year term.
Subsequent to December 31, 2009, the OFS may exercise any warrants held in whole or in part at any time.
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 preference 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 financial institutions considered Community Development Financial Institutions
(CDFIs). A total of 35 and 20 institutions considered CDFIs were in the CPP portfolio as of September 30, 2010, and 2009, respectively.
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.
The following table provides key data points related to the CPP. In addition, 106 and 38 QFIs have not declared and paid one or
more dividends to the OFS under CPP as of September 30, 2010 and September 30, 2009, respectively:
CPP INvESTMENT
Fiscal Year
2010

(Dollars in Billions)

Number of Institutions Participating
Outstanding Beginning Balance, Investment in CPP Institutions
Purchase Price, Current Year Investments
Repayments and Sales of Investments
Write-offs and Losses
Transfers to CDCI
Outstanding Ending Balance, Investment in CPP Institutions
Interest and Dividends Collections
Net Proceeds from Sales and Repurchases of Assets in Excess of Cost

707
133.9
0.3

Period Ended
September 30, 2009

685
0.0
204.6

(81.4)
(2.6)
(0.4)
49.8

(70.7)
133.9

$
$

3.1
6.7

$
$

6.8
2.9

notes to the financial statements

agency financial report | fiscal year 2010

The task of managing the investments in CPP banks may require that the OFS enter into certain agreements to exchange and/or
convert existing investments in order to achieve the best possible return for taxpayers. In the period ended September 30, 2009, the
OFS entered into an exchange agreement with Citigroup under which the OFS exchanged $25.0 billion, at $3.25 per share, of its
investment in senior preferred stock for 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 $1.8 billion for the period ended September
30, 2009. In April 2010, the OFS began a process of selling the Citigroup common stock. As of September 30, 2010, the OFS had sold
approximately 4.0 billion shares for total proceeds of $16.1 billion resulting in proceeds from sales in excess of cost of $3.0 billion. As of
September 30, 2010, the OFS continues to hold approximately 3.7 billion shares of Citigroup common stock with an estimated fair value
of $14.3 billion, based on the September 30, 2010 closing price of $3.91 per share. Included in shares held as of September 30, 2010, is
approximately 77.2 million shares which were sold prior to or on September 30, 2010, but did not settle until October 2010. Proceeds
from these sales were $302.7 million resulting in proceeds from sales in excess of cost of $51.9 million.

During fiscal year 2010, certain financial institutions participating in CPP which are in good standing became eligible to exchange
their OFS-held stock investments to preferred stock under the Community Development Capital Initiative (CDCI) of the Consumer
and Business Lending Initiative Program (CBLI). The exchange of stock is treated as a repayment of CPP investments from the
participating financial institution and a distribution for the CDCI. See further discussion of the CBLI and CDCI below. This was not
considered in the formulation estimate for the CPP program. As a result, OFS recorded a modification cost savings of $31.9 million in
the CPP program for this option during fiscal year 2010.

Failed institutions
In November 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. In fiscal year 2010, as a result of the
bankruptcy proceedings, the OFS wrote off the $2.3 billion investment in CIT Group and will not recover any amounts associated
with it. In addition, during fiscal year 2010, four other financial institutions within the CPP portfolio either filed for bankruptcy
or were closed by their regulators. The OFS had invested approximately $396.3 million into these institutions. The OFS does not
anticipate recovery on these investments and therefore the value of these shares are reflected at zero as of September 30, 2010. The
ultimate amount received, if any, from the investments in institutions that filed for bankruptcy and institutions closed by regulators
will depend primarily on the outcome of the bankruptcy proceedings and of the receivership.

American International group, Inc. Investment Program (AIg)
The OFS provided 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. The OFS also received a warrant for the purchase of approximately 53.8 million
shares (adjusted to 2.7 million shares after a 20:1 reverse stock split) of AIG common stock. 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

notes to the financial statements

part 2: financial section

In addition to the above transaction, the OFS has entered into other transactions with various financial institutions including,
exchanging existing preferred shares for a like amount of non tax-deductible Trust Preferred Securities, shares of mandatorily
convertible preferred securities and selling preferred shares to acquiring financial institutions. Generally the transactions are entered
into with financial institutions in poor financial condition with a high likelihood of failure. As such, in accordance with SFFAS
No. 2, these transactions are considered workouts and not modifications. The changes in cost associated with these transactions are
captured in the year-end reestimates.

the department of the treasury | office of financial stability

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 being
recorded. The OFS requested and received an appropriation for this additional cost in the period ended September 30, 2009.

part 2: financial section

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 related to the capital facility consists of Series F non
cumulative perpetual preferred stock with no initial liquidation preference, and a warrant for the purchase of 3,000 shares (adjusted
to 150 shares after a 20:1 reverse stock split of AIG common stock). This liquidation preference 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 preference. For the fiscal year ended September 30, 2010 and the period ended September 30, 2009, $4.3 billion and $3.2
billion, respectively, has been funded by the OFS to AIG under this additional capital facility. Consistent with SFFAS No.2, the
unused portion of the AIG capital facility is not recognized as an asset as of September 30, 2010 and 2009.
According to the terms of the preferred stock, if AIG misses four 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. The ability to appoint such directors
shall remain in place until dividends payable on all outstanding shares of the Series E Preferred Stock have been declared and paid in
full for four consecutive quarterly dividend periods, subject to revesting for each and every subsequent missed dividend payment. On
April 1, 2010, the OFS appointed two directors to the Company’s board as a result of non-payments of dividends. The additional two
directors increased the total number of AIG directors to twelve.
On September 30, 2010, the Treasury, Federal Reserve Bank of New York and AIG announced plans for a restructuring of the Federal
Government’s investments in AIG. The restructuring plan provides for, among other items, the conversion of currently outstanding
Series E & F preferred stock to 1.092 billion shares of AIG common stock. Under the plan, the current undrawn portion of Series
F will be available to AIG for the repayment of certain amounts owed to the Federal Reserve Bank of New York and for general
corporate liquidity. The plan is still subject to a number of conditions which must be met in order to close. OFS management
believes that the implementation of this plan would not result in additional losses on the AIG investment. See additional discussion
regarding the proposed restructuring plan within the Management’s Discussion and Analysis section of the Agency Financial Report.

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 considered institutions as candidates for the TIP on a case-by
case basis, based on a number of factors including 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.
In the period ended September 30, 2009, the OFS invested $20.0 billion in each of Bank of America and Citigroup under TIP.
Under each agreement, the OFS purchased $20.0 billion of perpetual preferred stock with an annual cumulative dividend rate of 8%
and received a warrant for the purchase of common stock. In December 2009, Bank of America and Citigroup repaid the amounts
invested by OFS along with dividends through the date of repayment. The amounts remaining within the TIP subsidy cost allowance
represent the estimated value of the Citigroup warrant still held by the program.
During fiscal year 2010, the OFS received $1.1 billion in dividends under the TIP and proceeds of $1.2 billion from the auction of the
Bank of America warrants. In the period ended September 30, 2009, the OFS received $1.9 billion in dividends under this program.

notes to the financial statements

agency financial report | fiscal year 2010

Automotive Industry Financing Program
The Automotive Industry Financing Program (AIFP) was designed to prevent a significant disruption of the American automotive
industry, which could have had a negative effect on the economy of the United States.

general Motors (gM)

OFS has not yet determined whether to sell any of its shares of General Motors Company common stock in connection with the
company’s proposed initial public offering. Due to the uncertainty as to the market price that would result from the initial public
offering, the potential effect on the value of OFS’s investment in General Motors Company is unknown and could be significantly
different from the September 30, 2010 financial statement value.

gMAc LLc rights Offering
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
(now known as Ally Financial, Inc.) 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 loan 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 at the time, in GMAC in full
satisfaction of the loan. In addition, during the period ended September 30, 2009, the 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 for the period ended September 30, 2009. As of
September 30, 2010 the OFS continues to hold the GMAC shares obtained in this transaction (see further discussion of OFS’s
GMAC holdings under GMAC, Inc. in this note.).

chrysler Holding LLc (chrysler)
In the period ended September 30, 2009, the OFS invested approximately $5.9 billion in Chrysler. Specifically, $4.0 billion was
for general and working capital purposes (General Purpose Loan) and $1.9 billion was for DIP financing while Chrysler was in
bankruptcy (DIP Loan). 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 the general purpose loan was assumed by the New Chrysler (see discussion
under Chrysler Exit for discussion of note terms). In fiscal year 2010, the OFS received approximately $1.9 billion and subsequently

notes to the financial statements

part 2: financial section

In the period ended September 30, 2009, the OFS provided $49.5 billion to GM through various loan agreements including the
initial loan for general and working capital purposes and the final loan for debtor in possession (DIP) financing while GM was
in bankruptcy. The OFS assigned its rights in these loans (with the exception of $986.0 million which remained in GM for wind
down purposes and $7.1 billion that would be assumed) and previously received common stock warrants to a newly created entity
(General Motors Company). General Motors Company used the assigned loans and warrants to credit bid for substantially all of the
assets of GM in a sale pursuant to Section 363 of the Bankruptcy Code. Upon closing of the Section 363 sale, the credit bid loans
and warrants were extinguished and the OFS received $2.1 billion in 9.0% cumulative perpetual preferred stock and 60.8% of the
common equity interest in General Motors Company. In addition, General Motors Company 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 assets received by
the OFS as a result of the assignment and Section 363 sale are considered recoveries of the original loans for subsidy cost estimation
purposes. Recovery of the $986.0 million remaining in GM is subject to the final outcome of the bankruptcy proceedings. During
fiscal year 2010, the OFS had received the remaining $6.7 billion as full repayment of the DIP loan assumed. In addition as of
September 30, 2010 the OFS had received $188.8 million in dividends and $343.1 million in interest on General Motors Company
preferred stock and the loan prior to repayment, respectively. The OFS received $34.1 million in dividends on the preferred stock and
no interest on the loan during the period ended September 30, 2009. On October 27, 2010, the OFS signed a Letter Agreement with
GM agreeing to sell the preferred stock to GM. GM will repurchase the preferred stock for 102% of the liquidation amount.

the department of the treasury | office of financial stability

wrote-off the remaining $1.6 billon of the General Purpose Loan. Recovery of the DIP Loan is subject to the bankruptcy process
associated with the Chrysler assets remaining after the sale to New Chrysler. During fiscal year 2010 the OFS received $40.2 million
in recoveries on the DIP loan. OFS did not receive any interest on these loans during the fiscal year 2010. During the period ended
September 30, 2009, the OFS had received $52.1 million in interest payments from these loans.

chrysler Exit
In May 2009, the OFS committed to make a loan to New CarCo Acquisition LLC (Chrysler Group LLC), the company that
purchased certain 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 a commitment to fund up to $6.6 billion of new funding and $500.0 million of assumed debt15
from the OFS January 2, 2009 General Purpose Loan with Chrysler, described above. 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.

part 2: financial section

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 generally16 3 Month Eurodollar plus 5.0% margin. Tranche B is due and payable on December 10, 2011, provided that the Chrysler
Group 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 from 5.0% to 6.5%.
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 C is 3 Month Eurodollar plus 7.91% margin. On June 10, 2016, the Tranche C loan is due to 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 was payable in-kind through December 2009 and added to the principal balance of
the respective Tranche. Subsequently, interest is paid quarterly beginning on March 31, 2010. In addition, additional in-kind interest
is being accrued 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 notes17 with
principal balances of $288.0 million and $100.0 million18. As of September 30, 2009, the OFS had funded approximately $4.6
billion under this facility, which was outstanding as of September 30, 2010 and 2009. During fiscal year 2010, the OFS received
$381.8 million in interest payments. No interest was due for payment in the period ended September 30, 2009. For the year ended
September 30, 2010, the OFS has recognized $344.4 million of in-kind interest that has been capitalized. No in-kind interest was
recognized in the period ended September 30, 2009.

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. On July 14, 2009, the loan and additional note of
$15.0 million were paid in full. In addition, during the period ended September 30, 2009, the OFS received $7.4 million in interest
payments while this loan was outstanding.

15 The assumed debt contains the same terms as the Tranche C loan with respect to mandatory prepayment, interest and maturity.
16 For both Tranche B and C, an Alternative Base Rate (defined in agreement) is available at the option of the OFS in certain situations defined in the
agreement.
17 The additional notes bear the same interest rate and maturity as the Tranche C loan.
18 Interest begins to accrue on this note after certain events, defined in the credit agreement, have taken place.

notes to the financial statements

agency financial report | fiscal year 2010

Auto Supplier Support Program
In April 2009, under the Auto Supplier Support Program, OFS committed $5.0 billion in financing for the Auto Supplier 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 agreements. Under the program, suppliers were
able to sell their receivable to a SPV, created by the respective automaker, at a discount. The OFS provided approximately $413.1
million of funding to this program during the period ended September 30, 2009. The bankruptcy of Chrysler and GM did not impact
this program, as both companies were allowed to continue paying suppliers while in bankruptcy. The OFS received $5.9 million in
interest during the period ended September 30, 2009. The $413.1 million was repaid in fiscal year 2010 along with approximately
$9.0 million in interest and $101.1 million in fees and other income.

Auto Warranty Program

gMAc Inc. (gMAc-currently known as Ally Financial)
In December 2008, the OFS purchased preferred membership interests for $5.0 billion that 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. During the period ended September 30, 2009, the OFS received $265.2 million in dividends associated with these
preferred and warrant preferred shares. On December 30, 2009, this preferred stock (including the warrant preferred shares) was
exchanged for 105.0 million shares of GMAC’s Series F-2 Fixed Rate Cumulative Mandatorily Convertible Preferred Stock (Series
F-2) shares (described below). This exchange was not considered in the original subsidy estimate for GMAC; therefore OFS recorded
a modification cost of $1.5 billion in fiscal year 2010.
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. In the period ended September 30, 2009, OFS invested $7.5 billion (150.0 million shares) 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 preference 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. In addition, the OFS received warrants
to purchase an additional 7.5 million shares of Mandatorily Convertible Preferred Stock, which were exercised upon closing of the
transaction. In December 2009, 97.5 million shares (which include the warrant preferred shares) were exchanged for GMAC’s Series F-2
shares (discussed below) and the remaining 60 million were converted to 259,200 shares of GMAC common stock.
In addition to the exchanges and conversions discussed above, on December 30, 2009, the OFS entered into the following transactions
with GMAC to assist it in complying with the requirements of the Federal Reserve Board’s Supervisory Capital Assessment Program:
1. Purchased $2.54 billion (2.54 million shares with a face value of $1,000) of 8.0% Trust Preferred Securities and received
a warrant for an additional $127 million of the Trust Preferred Securities, which was immediately exercised. GMAC

notes to the financial statements

part 2: financial section

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 purchased from Chrysler and GM during the period in which Chrysler and
GM were restructuring. In the period ended September 30, 2009, the OFS received all principal amounts due on the Auto Warranty
Program loans 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 during the period ended September 30, 2009. No interest was received in connection with the
GM repayment. The GM additional note was assigned to the General Motors Company as part of the bankruptcy proceedings and
extinguished as part of the credit bid for the assets of old GM. In fiscal year 2010, the Chrysler additional note was written off with
the remaining portion of the Chrysler General Purpose Loan.

the department of the treasury | office of financial stability

issued $2.747 billion of subordinate debentures to a trust, established by GMAC, which in turn issued the trust preferred
securities. The trust preferred securities pay cumulative cash distributions of 8%. GMAC may defer payments on the
debentures (and the trust may defer distributions on the trust preferred securities) for a period of up to 20 consecutive
quarters, but such distributions will continue to accrue through any such deferral period. GMAC has not elected to defer
payments. The Trust Preferred Securities have no stated maturity date, but must be redeemed upon the redemption or
maturity of the debentures (February 15, 2040).

part 2: financial section

2. Purchased $1.25 billion (25 million shares) of GMAC’s Series F-2, $50 liquidation preference per share. The Series F-2
is convertible into GMAC common stock at the option of GMAC subject to the approval of the Federal Reserve and
consent by the OFS or pursuant to an order by the Federal Reserve compelling such conversion. The Series F-2 is also
convertible at the option of the OFS upon certain specified corporate events. Absent an optional conversion, the Series
F-2 will automatically convert to common stock after 7 years from the issuance date. The initial conversion rate is .00432
and is subject to a “reset” such that the conversion price will be adjusted in 2011, if beneficial to OFS, based on the
market price of private capital transactions occurring in 2010 and certain anti-dilution provisions. The Series F-2 have
a stated dividend rate of 9%, payable when and if declared by the board of directors. The Series F-2 may be redeemed by
GMAC, subject to certain limitations and restrictions. The OFS also received a warrant to purchase $62.5 million (1.25
million shares) of additional Series F-2, which was immediately exercised.
As a result, after the December 30, 2009 transaction, the OFS had the following investments in GMAC as of September 30, 2010:
Number of
Shares

8% Trust Preferred Securities
Purchased
Received from warrant exercise
Total Trust Preferred Securities
Series F-2 Mandatorily Convertible Securities
Purchased /exchanged for
Received from warrant exercise
Total Series F-210
Common Stock11

2,540,000
127,000
2,667,000
227,500,000
1,250,000
228,750,000

Investment amount / % ownership
(dollars in millions)

$
$
$
$

450,121

2,540
127
2,667
11,375
63
11,438
56.3%

In fiscal year 2010, the OFS received $1.2 billion in dividends from GMAC. In the period ended September 30, 2009, the OFS
received $430.6 million in dividends from GMAC.

consumer and Business Lending Initiative (cBLI)
The Consumer and Business Lending Initiative is intended to help unlock the flow of credit to consumers and small businesses. Three
programs were established to help accomplish this. The Term Asset-Backed Securities Loan Facility was created to help jump start
the market for securitized consumer and small business loans. The SBA 7(a) Securities Purchase Program was created to provide
additional liquidity to the SBA 7(a) market so that banks are able to make more small business loans. The Community Development
Capital Initiative was created to provide additional low cost capital to small banks to encourage more lending to small businesses.
Each program is discussed in more detail below.

19 These shares are convertible into 988,200 shares of GMAC common stock, which if combined with common stock currently held by OFS would represent
approximately 80.5% ownership of GMAC.
20 Includes shares received upon conversion of GMAC Rights Loan discussed above.

notes to the financial statements

agency financial report | fiscal year 2010

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.
Under the TALF, the Federal Reserve Bank of New York (FRBNY), as implementer of the TALF program, originated loans on a non
recourse basis to purchasers of certain AAA rated ABS secured by consumer and commercial loans and commercial mortgage backed
securities. Generally ABS issued after January 1, 2009 are eligible collateral under the TALF program. In addition, SBA securities
issued after January 1, 2008 and CMBS issued prior to January 2009 and originally AAA rated 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 the 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 fixed or variable interest. The program ceased issuing new loans on June 30, 2010. As of September 30, 2010,
approximately $29.7 billion of loans due to the FRBNY remained outstanding.

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
During the period ended September 30, 2009, 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 for the period ended September 30, 2009, increasing the original cost estimate by $8.0 million.
The TALF, LLC is owned, controlled and consolidated 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.
As of September 30, 2010 and 2009, no TALF loans were in default and consequently no collateral was purchased by the TALF, LLC.

SBA 7(a) Security Purchase Program
In March 2010, the OFS began the purchase of securities backed by Small Business Administration 7(a) loans (7(a) Securities) as
part of the Unlocking Credit for Small Business Initiative. Under this program OFS purchases 7(a) Securities collateralized with 7(a)

notes to the financial statements

part 2: financial section

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 originally committed to invest up to $20.0 billion in non-recourse
subordinated notes issued by the TALF, LLC. On July 19, 2010, the OFS’s commitment was reduced to $4.3 billion. The subordinated
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 the TALF, LLC (collateral defaults, reaches final maturity or is sold), the cash balance will be
disbursed according to the following payment priority:

the department of the treasury | office of financial stability

loans (these loans are guaranteed by the full faith and credit of the United States Government) packaged on or after July 1, 2008.
Generally, the OFS entered into a trade to purchase 7(a) Securities with actual settlement and delivery to occur one to three months
in the future. As of September 30, 2010, OFS has entered into trades to purchase $356.3 million (excluding purchased accrued
interest) of these securities. Of this amount, $240.7 million has settled with the remaining trades to be settled by December 30, 2010.
During fiscal year 2010, the OFS received $3.5 million in interest and principal payments on these securities.

community Development capital Initiative
In February 2010, the OFS announced the Community Development Capital Initiative (CDCI) to invest lower cost capital in
Community Development Financial Institutions (CDFIs). Under the terms of the program, the OFS purchases senior preferred stock
(or subordinated debt) from eligible CDFI financial institutions. The senior preferred stock has an initial dividend rate of 2 percent.
CDFIs may apply to receive capital up to 5 percent of risk-weighted assets. To encourage repayment while recognizing the unique
circumstances facing CDFIs, the dividend rate will increase to 9 percent after eight years.

part 2: financial section

For CDFI credit unions, the OFS purchased subordinated debt at rates equivalent to those offered to CDFI financial institutions and
with similar terms. These institutions may apply for up to 3.5 percent of total assets - an amount approximately equivalent to the 5
percent of risk-weighted assets available to banks and thrifts.
CDFIs participating in the CPP, subject to certain criteria, were eligible to exchange, through September 30, 2010, their current CPP
preferred shares (subordinated debt) for CDCI preferred shares (subordinated debt). These exchanges were treated as a disbursement
from CDCI and a repayment to CPP.
As of September 30, 2010, the OFS has invested $570.1 million ($363.3 million was a result of exchanges from CPP) in 84
institutions under the CDCI.

Public-Private Investment Program
The PPIP is part of the OFS’s efforts to help restart the market and provide liquidity for legacy assets. Under this program, the OFS
made equity investment in and loans to investment vehicles (referred to as Public Private Investment Funds or “PPIFs”) established
by private investment managers. The equity investment was used to match private capital and equaled approximately 50.0% of the
total equity invested. The loan is, at the option of the investment manager, equal to 50.0% or 100.0% of the total equity (including
private equity). As of September 30, 2010, all PPIFs have elected to receive loans up to 100% of total equity. The loans bear interest
at 1 Month LIBOR, plus 1.0%, which accrues monthly and is payable on the tenth business day of the month following the accrual
period. The maturity date of the loan is the earlier of 10 years or the termination of the PPIF. The loan can be prepaid, subject to
compliance with the priority of payments discussed below, without penalty. The PPIF will terminate in 8 years from the commence
ment of the fund. The governing documents of the funds allow for 2 one year extensions, subject to approval of the OFS. The loan
agreements also require purchased security cash flows from securities received by the PPIFs to be distributed in accordance with a
priority of payments schedule (waterfall) designed to help ensure secured parties are paid before equity holders. Specifically, security
cash flows collected are disbursed as follows (steps 7 through 10 are at the discretion of the PPIF),
1. To pay administrative expenses, excluding certain tax expenses of the Partnership;
2. To pay interest or margin due on permitted interest rate hedges;
3. To pay current period interest due to the Lender21;
4. To pay amounts due to an interest reserve account if the total deposit in the interest reserve account is less than the
required interest reserve account;
5. To pay principal on the Loan required when the minimum Asset Coverage Ratio Test is not satisfied as of the prior month
end;
21 The Lender is OFS

notes to the financial statements

agency financial report | fiscal year 2010

6. To pay other amounts due on permitted interest rate hedges not paid in accordance with step 2. above;
7. For investment in Temporary Investments, prepayments of the Loan and/or investment in eligible Assets during the
investment period, which is three years from the Initial Closing Date (the “Investment Period”);
8. For distribution to partners after step 1 through 7 not to exceed the lesser of: (a) cumulative consolidated net interest
income for the preceding twelve months or (b) 8% on the funded capital commitments, so long as no event of default is
then continuing and the appropriate Asset Coverage Ratio Requirement is satisfied;
9. To pay the Loan not to exceed the lesser of (a) prepayment on the Loan as scheduled or (b) an amount which reduces
the Loan to zero, provided that dollar for dollar credit is given for any optional prepayments of the Loan made during the
related collection period on any date prior to the applicable determination date; and
10. Remaining amounts to be used or distributed in accordance with the limited partnership agreement after repayment of
the Loan.
The loan is subject to certain affirmative and negative covenants as well as a financial covenant, the Asset Coverage Test. The Asset
Coverage Test generally requires that the Asset Coverage Ratio be equal to or greater than 150%. The Asset Coverage Ratio is a
percentage obtained by dividing total assets of the PPIF by the principal amount of the loan and accrued and unpaid interest on the
loan. Failure to comply with the test could require accelerated repayment of loan principal (see step 7 above) and prohibit the PPIF
from borrowing additional funds under the loan agreement.

The PPIFs pay a management fee to the fund manager from the OFS’s share of investment proceeds. During the Investment Period,
the management fee is equal to 0.20% per annum of the OFS’s capital commitment as of the last day of the applicable quarter.
Thereafter, the management fee will be equal to 0.20% per annum of the lesser of (a) the OFS’s capital commitment as of the last day
of the applicable quarter and (b) the OFS Interest Value as of the last day of the quarter.
The PPIFs are allowed to purchase commercial mortgage-backed securities (CMBS) and non-agency residential mortgage-backed
securities (RMBS) 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 (eligible assets) and not other securities. The PPIFs may invest in the aforementioned securities for a
period of 3 years using proceeds from capital contribution, loans and amounts generated by previously purchased investments (subject
to the requirements of the waterfall). 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.
As of September 30, 2010 the total market value of the eligible assets held by all PPIFs was approximately $19.3 billion. The
approximate split between RMBS and CMBS was 82% RMBS and 18% CMBS.
On January 4, 2010, the OFS entered into a Winding-up and Liquidation Agreement with one of the PPIFs. Prior to the signing of
the agreement, the OFS had invested $356.3 million ($156.3 million equity investment and $200.0 million loan) in the fund. Upon
final liquidation, the OFS received $377.4 million representing return of the original investment, interest on the loan and return on
the equity investment and warrant.
As of September 30, 2010, the OFS had signed definitive limited partnership and loan agreements with eight investment managers,
committing to disburse up to $22.1 billion. During fiscal year 2010, OFS disbursed $4.9 billion as equity investment and $9.2 billion
as loans to PPIFs. As of September 30, 2009, no investment managers had made any investments under PPIP and the OFS had not
disbursed any funds. During fiscal year 2010, the OFS received (excluding amounts repaid in liquidation discussed above) $56.0

notes to the financial statements

part 2: financial section

As a condition of its investment, the OFS also received a warrant from the PPIFs entitling the OFS to 2.5% of investment proceeds
(excluding those from temporary investments) otherwise allocable to the non-OFS partners. The warrant payment will be distributed
by the PPIF to the OFS following the return of 100% of the non-OFS partner’s capital contributions to the PPIF.

the department of the treasury | office of financial stability

million in interest on loans and $151.8 million (net of management fees of $7.2 million) of income on the equity investments. In
addition, the OFS received $72.0 million in loan principal repayments.

Asset guarantee Program
The Asset Guarantee Program (AGP) provided guarantees for assets held by systemically significant financial institutions that faced
a risk of losing market confidence due in large part to a portfolio of distressed or illiquid assets. The AGP was applied with extreme
discretion in order to improve market confidence in the systemically significant institution and in financial markets broadly.

part 2: financial section

Section 102 of the EESA required the Secretary to establish 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.
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 (FDIC), and the Federal Reserve Bank of
New York (FRBNY) (collectively the USG Parties) 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
remained on Citigroup’s balance sheet. The OFS’s guarantee was limited to $5.0 billion.
As a premium for the guarantee, Citigroup issued $7.0 billion of cumulative perpetual preferred stock (subsequently converted to
Trust Preferred Securities with similar terms) with an 8.0% stated dividend rate and a warrant for the purchase of common stock;
$4.0 billion and the warrant were issued to the OFS, and $3.0 billion was issued to the FDIC. The OFS received $265.2 million and
$174.8 million during the periods ending September 30, 2010 and September 30, 2009, respectively, in dividends on the preferred
stock received as compensation for this arrangement. These dividends have been deposited into the TAIFF. The OFS had also
invested in Citigroup through CPP and the TIP.
As of September 30, 2009, the net present value of the estimated cash inflows from the preferred stock and warrant received by the
OFS from Citigroup as a premium was greater than the estimated net present value of future claims payments, resulting in an asset of
$1.765 billion, after reestimates.
In December 2009, the USG Parties and Citigroup agreed to terminate the guarantee agreement. Under the terms of the termination
agreement the OFS cancelled $1.8 billion of the preferred stock previously issued to OFS. In addition, the FDIC agreed to transfer to
the OFS $800 million of their trust preferred stock holding plus dividends thereon contingent on Citigroup repaying its previously
issued FDIC guaranteed debt. The contingent receipt of additional preferred shares from the FDIC is included in the subsidy
calculation for AGP, based on the expected value. Termination of the agreement was not considered in the formulation estimates of
the guarantee and therefore the termination resulted in a negative modification cost (reduction of cost) of $1.4 billion recorded in
fiscal year 2010. On September 29, 2010, the OFS exchanged its existing Trust Preferred Securities for securities containing market
terms to facilitate a sale. On September 30, 2010, the OFS agreed to sell its Trust Preferred Securities it holds for $2.246 billion. The
Trust Preferred Securities are valued at approximately the sales price in the financial statements. The sale settled on October 5, 2010.
In January 2009, 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

notes to the financial statements

agency financial report | fiscal year 2010

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. 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 the OFS pursuant to the settlement is reflected in the OFS Statement of Net Cost as a reduction of the AGP
subsidy cost in the period ended September 30, 2009.

Subsidy reestimates

The OFS assessed using security specific data available as of September 30, 2010 and, in its determination, there were no significant changes to
the portfolio characteristics or performance of the PPIP and TALF programs that would require a revision to the reestimates for fiscal year 2010.
For the period ending September 30, 2009, 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 required a revision to the reestimates.
Net downward reestimates for the year ended September 30, 2010 and the period ended September 30, 2009 totaled $30.3 billion
and $109.7 billion, respectively. Descriptions of the reestimates, by OFS Program, are as follows:

cPP
The net upward reestimate for the CPP of $3.9 billion for the year ended September 30, 2010 is the net result of a decrease in the
price of Citigroup common stock that was partially offset by an increase in the estimated value of the other investments within the
CPP, due to improved market conditions during the period.
The $70.7 billion in repurchases during the period ended September 30, 2009 accounted for $9.7 billion of the $72.4 billion
in downward reestimates in the CPP for the period. Projected repurchases of $30.0 billion for fiscal year 2010 accounted for
approximately $5.4 billion, with the $57.3 billion balance in downward reestimates in the CPP for the period ended September 30,
2009 primarily due to improved market conditions from when the original estimate was made in December 2008.

AIg
The $12.0 billion in downward reestimates for the AIG Investment Program for the year ended September 30, 2010 are due to an
increase in the estimated value of AIG assets and subordinated debt and improvements in market conditions over the period.
The $1.1 billion in downward reestimates for the AIG Investment Program in the period ended September 30, 2009 was primarily
due to improvements in market conditions from when the equities were purchased resulting in a reduction in the projected costs of
the programs.

notes to the financial statements

part 2: financial section

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 information about the portfolio, 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, 2010 and 2009. Market
and security specific data publicly available as of September 30, 2010, was used for the CPP, AGP, TIP, AIG, CDCI, AIFP and SBA
programs in the reestimate calculations for fiscal year 2010. Security specific data through June 30, 2010, with market prices through
September 30, 2010, was used for the PPIP and TALF programs in the reestimate calculations for fiscal year 2010. Market and
security specific data publicly available as of September 30, 2009, was used for the CPP, AGP, TIP and AIFP direct loans and data
through August 31, 2009, was used for the equity portion of AIFP, AIG and TALF programs in the reestimate calculations for the
period ending September 30, 2009.

the department of the treasury | office of financial stability

TIP
The $1.9 billion in net downward reestimates in the TIP in fiscal year 2010 included $2.2 billion in downward reestimates due to the
repurchase of the program’s investments by the two institutions participating in the program. That downward reestimate amount was
partially offset by a $0.3 billion upward reestimate from a slight reduction in the estimated value of outstanding warrants.
The $21.5 billion in downward reestimates in the TIP in the period ended September 30, 2009 was primarily due to improved market
conditions from when the original estimates were made in December 2008 and January 2009. Approximately $2.3 billion was due to
a $20.0 billion repurchase forecast for fiscal year 2010.

AIFP

part 2: financial section

The $19.3 billion in downward reestimates for the AIFP direct loan and equity investments for the year ended September 30, 2010
was due to $1.8 billion in payments exceeding projections, a reduction in estimated defaults due to improvements in the domestic
automotive industry, and an increase in the bond prices and valuations used to estimate the cost of the remaining AIFP investments.
The approximately $10.6 billion in downward reestimates for the direct loans-AIFP in the period ended September 30, 2009 was
primarily the result of the post bankruptcy improved financial position of one of the major companies participating in the program.
The $2.7 billion in downward reestimates for the AIFP equity programs in the period ended September 30, 2009 were primarily due
to improvements in market conditions from when the equities were purchased resulting in a reduction in the projected costs of the
programs.

cBLI
The TALF and SBA programs within the CBLI had a total upward reestimate of less than $0.1 billion for the year ended September
30, 2010. The TALF program had a $23 million upward reestimate mostly due to a projected reduction in the size of the portfolio
and higher than projected repayments. The SBA program had an upward reestimate of less than $1 million due to an increase in
projected interest rates and a reduction in market risks. The CDCI program had $7.3 million in upward reestimates for the period.
The $0.2 billion in downward reestimates for the TALF in the period ended September 30, 2009 was due to projected improved
performance of the securities within the program versus the original estimate.

PPIP
The $1.0 billion in downward reestimates for the PPIP debt and equity programs for the year ended September 30, 2010 was the net
of a $1.2 billion upward reestimate in the PPIP debt program and $2.2 billion in downward reestimates for the PPIP equity programs
mostly due to the use of actual portfolio data for reestimates rather than the proxy data used in developing the baseline estimates and
changes in market risks.

AgP
The AGP had a net $0.1 billion downward reestimate for the year ended September 30, 2010. The reestimate amounts exclude an
estimated cost savings of $1.4 billion that resulted from the cancellation of the $5.0 billion guarantee because this transaction was
reflected in the subsidy modifications during fiscal year 2010.
The $1.2 billion in downward reestimates for the AGP in the period ended September 30, 2009 was 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 the OFS from Citigroup as a premium being greater than the estimated value of future claim payments associated with
the $5.0 billion asset guarantee.

notes to the financial statements

agency financial report | fiscal year 2010

Summary Tables
The following detailed tables provide the net composition, subsidy cost, modifications and reestimates, a reconciliation of subsidy
cost allowance and budget subsidy rates and subsidy by component for each TARP direct loan, equity investment or asset guarantee
program for the year ended September 30, 2010 and the period ended September 30, 2009:
TROUBLED ASSET RELIEF PROGRAM LOANS AND EqUITY INVESTMENTS
(Dollars in Millions)
TOTAL
As of September 30, 2010
Direct Loans and Equity Investment Programs:
Direct Loans and Equity Investments Outstanding, Gross
$ 179,197
Subsidy Cost Allowance
(36,745)
Direct Loans and Equity Investments Outstanding, Net
$ 142,452

CPP

AIG

$ 49,779
(1,546)
$ 48,233

$ 47,543
(21,405)
$ 26,138

New Loans or Investments Disbursed

$ 23,373

277

Obligations for Loans and Investments not yet Disbursed

$ 36,947

$ 53,077
7,533
6,977

AIFP

$ 67,238
(14,529)
$ 52,709

1
1

4,338

$ 22,292

(7,770)
(16)
3,131

$ 30,054
4,293
-

(341)
1,143

$ 31,478
2,644
2,475

8,013

6,676

1,237

(4,690)
(3,934)

(2,018)
(2,334)

(981)
-

(161)
-

(1,309)
(1,600)

(20)
-

(201)
-

66,976
(30,231)
$ 36,745

(2,331)
3,877
1,546

33,366
(11,961)
$ 21,405

1,878
(1,879)
(1)

33,787
(19,258)
$ 14,529

(89)
31
(58)

365
(1,041)
$ (676)

6,067
1,466
(30,231)

16
(32)
3,877

4,293
(11,961)

(1,879)

1,146
1,498
(19,258)

275
31

337
(1,041)

$ (22,698)

3,861

(7,668)

(1,879)

$ (16,614)

306

(704)

Net Interest Expense on Borrowings from BPD
and Financing Account Balance
Writeoffs
Balance, End of Period, Before Reestimates
Subsidy Reestimates
Balance, End of Period
Reconciliation of Subsidy Cost:
Subsidy Cost for Disbursements
Subsidy Cost for Modifications
Subsidy Reestimates

Total Direct Loan and Equity Investment Programs
Subsidy Cost (Income)

CBLI

PPIP

908
58
966

$ 13,729
676
$ 14,405

3,790

811

$ 14,157

2,066

$ 4,339

$ 8,250

TROUBLED ASSET RELIEF PROGRAM LOANS, EqUITY INVESTMENTS AND ASSET GUARANTEE PROGRAM BUDGET SUBSIDY RATES:
(Dollars in Millions)
AGP
CPP
AIG
TIP
AIFP
Budget Subsidy Rates, Excluding Modifications and Reestimates (see Note below):
As of September 30, 2010
Interest Differential
-25.62%
37.70%
Defaults
16.36%
13.78%
Fees and Other Collections
-3.00%
-0.38%
Other
18.03%
-20.85%
Total Budget Subsidy Rate (See Note below)
N/A
5.77%
N/A
N/A
30.25%
Subsidy Cost by Component:
Interest Differential
Defaults
Fees and Other Collections
Other
Total Subsidy Cost, Excluding Modifications and Reestimates

N/A

(71)
45
(8)
50
16

1,415
2,907
(29)
4,293

N/A

1,429
522
(15)
(790)
1,146

(344)
275
-

337
228

CBLI

PPIP

30.39%
3.93%
0.00%
-0.41%
33.91%

11.72%
0.00%
-0.41%
-10.34%
0.97%

246
32
(3)
275

1,880
(55)
(1,488)
$
337

“Note: The rates reflected in the table above are FY 2010 budget execution rates by program. The subsidy rates disclosed pertain only to the current year’s cohorts. These
rates cannot be applied to the direct loans disbursed during the current reporting year to yield the subsidy expense. The subsidy cost (income) for new loans reported in
the current year could result from disbursements of loans from both current year cohorts and prior year cohorts. The subsidy cost (income) reported in the current year
also includes modifications and re-estimates.Therefore, the Total Subsidy Cost Excluding Modifications and Reestimates will not equal the New Loans or Investments
Disbursed multiplied by the Budget Subsidy Rate.

notes to the financial statements

part 2: financial section

Reconciliation of Subsidy Cost Allowance:
Balance, Beginning of Period
Subsidy Cost for Disbursements and Modifications
Interest and Dividend Revenue
Net Proceeds from Sales and Repurchases of Assets
in Excess of Cost

TIP

part 2: financial section

the department of the treasury | office of financial stability

TROUBLED ASSET RELIEF PROGRAM LOANS AND EqUITY INVESTMENTS
(Dollars in Millions)
TOTAL
As of September 30, 2009
Direct Loans and Equity Investment Programs:
Direct Loans and Equity Investments Outstanding, Gross
$ 290,969
Subsidy Cost Allowance
(53,077)
Direct Loans and Equity Investments Outstanding, Net
$ 237,892

CPP

AIG

TIP

AIFP

$ 133,901
7,770
$ 141,671

$ 43,206
(30,054)
$ 13,152

$ 40,000
341
$ 40,341

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

New Loans or Investments Disbursed

$ 363,826

$ 204,618

$ 43,206

$ 40,000

Obligations for Loans and Investments not yet Disbursed

$ 51,681

$ 26,629

57,386
6,790

Reconciliation of Subsidy Cost Allowance:
Balance, Beginning of Period
Subsidy Cost for Disbursements and Modifications
Interest and Dividend Collections
Net Proceeds from Sales and Repurchases of Assets
in Excess of Cost
Net Interest Income (Expense) on Borrowings from BPD
and Financing Account Balance
Balance, End of Period, Before Reestimates
Subsidy Reestimates
Balance, End of Period

152,179
9,329

31,552
-

CBLI

PPIP

100
344
444

$ 75,902

100

5,152

$ 19,900

19,540
1,862

43,797
677

(96)
-

2,916

2,901

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

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

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

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

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

(5)
(101)
(243)
(344)

Reconciliation of Subsidy Cost:
Subsidy Cost (Income) for Disbursements
Subsidy Cost (Income) for Modifications
Subsidy Reestimates

$ 151,767
412
(108,574)

$ 55,520
1,866
(72,419)

$ 31,425
127
(1,125)

$ 19,540
(21,467)

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

(104)
8
(243)

Total Direct Loan and Equity Investment Programs
Subsidy Cost (Income)

$ 43,605

$ (15,033)

$ 30,427

$ 30,477

(339)

(1,927)

TROUBLED ASSET RELIEF PROGRAM LOANS, EqUITY INVESTMENTS AND ASSET GUARANTEE PROGRAM BUDGET SUBSIDY RATES:
(Dollars in Millions)
AGP
CPP
AIG
TIP
AIFP
Budget Subsidy Rates, Excluding Modifications and Reestimates (see Note below):
As of September 30, 2009
Interest Differential
0.00%
5.97%
Defaults
43.62%
25.60%
Fees and Other Collections
-53.23%
0.00%
Other
-5.37%
-4.58%
Total Budget Subsidy Rate (See Note below)
-14.98%
26.99%
Subsidy Cost (Income) by Component:
Interest Differential
Defaults
Fees and Other Collections
Other
Total Subsidy Cost (Income), Excluding Modifications
and Reestimates

-45.52%
123.56%
0.00%
4.74%
82.78%

$ 12,279
52,655
(9,414)

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

$ $55,520

$ $31,425

9.31%
48.38%
0.00%
-8.84%
48.85%

(17,280)
46,906
1,799

3,724
19,352
(3,536)

$ 19,540

6.97%
54.21%
0.00%
-3.13%
58.05%

CBLI

5.87%
0.00%
0.00%
-110.10%
-104.23%

5,446
42,384
(2,444)

6
(110)

$ 45,386

(104)

PPIP

N/A

Note: 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 cost
(income) for the program. Therefore, the Total Subsidy Cost (Income) Excluding Modifications and Reestimates will not equal the New Loans or Investments Disbursed
multiplied by the Budget Subsidy Rate.

notes to the financial statements

agency financial report | fiscal year 2010

TROUBLED ASSET RELIEF PROGRAM ASSET GUARANTEE PROGRAM
(Dollars in Millions)
As of September 30,
2010
Asset Guarantees Outstanding:
Outstanding Principal Amount of Guaranteed Loans, Face Value
Amount of Outstanding Principal Guaranteed

Asset Guarantee Program:
Intragovernmental Portion (See Note)
Portion held by OFS, net
Total Asset Guarantee Program

815
2,240
3,055

Reconciliation of Subsidy Cost (Income)
Subsidy Income for Disbursements
Subsidy Income for Modifications
Subsidy Reestimates
Cancellation Fees Collected
Total Asset Guarantee Program Subsidy Income

(1,765)
(1,418)
265
(50)
(2,968)
(87)
$ (3,055)

(1,418)
(87)
(1,505)

301,000
5,000

1,765
1,765

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

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

Note: The net present value of the future cash flows for the Asset Guarantee Program consists of (i) $800 million of Citigroup trust preferred securities, plus dividends thereon,
that the FDIC agreed to transfer to OFS contingent on Citigroup repaying previously issued FDIC guaranteed debt and (ii) additional Citigroup trust preferred securities valued
at $2,240, for a total of $3,055.

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 the Chief Counsel,
the ultimate resolution of these legal actions and claims will not have a material effect on the OFS financial statements. 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 relating to the TARP’s Direct Loan and Equity Investments and Asset Guarantee Program.

note 8. p rincipal paYaBle

to the

Bureau of

the

p uBlic deBt (Bpd)

Equity investments, direct loans, and the asset guarantee program 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 in advance of receiving the expected cash flows that cause the negative subsidy or downward
reestimate. 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.

notes to the financial statements

part 2: financial section

Reconciliation of Asset Guarantee Program
Balance, Beginning of Period
Subsidy Income for Disbursements and Modifications
Dividend Revenue
Net Interest Income on Borrowings from BPD and Financing Account Balance
Balance, End of Period, Before Reestimates
Subsidy Reestimates
Balance, End of Period

2009

the department of the treasury | office of financial stability

Debt transactions for the year ended September 30, 2010 and the period ended September 30, 2009 were as follows:
(Dollars in Millions)

2010

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

143,335
49,025
(51,956)
140,404

2009

215,593
(72,258)
143,335

Borrowings from the BPD by the TARP program, outstanding as of September 30, 2010 and 2009, were as follows:

part 2: financial section

(Dollars in Millions)

2010

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

49,503
23,061
710
45,706
1,073
17,918
2,433
140,404

2009

77,232
12,531
20,460
32,134
204
774
143,335

Borrowings are payable to the BPD as collections are available. As of September 30, 2010, borrowings carried terms ranging from 5
to 31 years. Interest rates on borrowings ranged from 2.2% to 4.7%. At September 30, 2009, borrowing terms ranged from 2 to 30
years, and interest rates were from 1.0% to 4.5%.

note 9. Statement

net coSt

The Statement of Net Cost (SNC) presents the net cost of operations for the OFS under the Department of the Treasury’s 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 for fiscal year 2010 includes $5.9 billion of intragovernmental costs relating to interest expense on borrowings from
the BPD and $1.2 billion in intragovernmental revenues relating to interest income on financing account balances. The SNC for the
period ended September 30, 2009 included $6.4 billion of cost and $3.6 billion of revenues for intragovernmental borrowings and
interest income.
Subsidy allowance amortization on the SNC is the difference between interest income on financing fund account balances, dividends
and interest income on direct loans, equity investments, and the asset guarantee program from TARP participants, and interest
expense on borrowings from the BPD. Credit reform accounting requires that only subsidy cost, not the net of other costs (interest
expense and dividend and interest income), be reflected in the SNC. The subsidy allowance account is used to present the loan or
equity investment at the estimated net present value of future cash flows.

notes to the financial statements

agency financial report | fiscal year 2010

note 10. Statement

BudgetarY r eSourceS

The Statement of Budgetary Resources (SBR) presents information about total budgetary resources available to the OFS and the
status of those resources. For the year ended September 30, 2010, the OFS’s total resources in budgetary accounts were $34.5 billion
and resources in non-budgetary financing accounts, including borrowing authority and spending authority from collections of
loan principal, liquidation of equity investments, interest and fees, were $160.8 billion. For the period ended September 30, 2009,
budgetary resources totaled $238.3 billion and resources in non-budgetary financing accounts totaled $461.1 billion.

Permanent Indefinite Appropriations
The OFS receives permanent indefinite appropriations annually, if necessary, to fund increases in the projected subsidy costs of direct
loans, equity investment and asset guarantee programs as determined by the reestimation process required by the FCRA.
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.

The OFS is authorized to borrow from the BPD when funds needed to disburse direct loans and equity investments, and to enter
into asset guarantee arrangements, exceed subsidy costs and collections in the non-budgetary financing accounts. For the year ended
September 30, 2010, the OFS had borrowing authority of $69.4 billion. Of this total, $10.2 billion was available as of September 30,
2010. For the period ended September 30, 2009, the OFS had borrowing authority of $310.0 billion, and of that, $45.8 billion was
available.
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 direct loan, equity investment and asset guarantee program financing accounts. These receipts are
not available for any other use per credit reform accounting guidance.

Apportionment categories of Obligations Incurred: Direct versus 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 intragovernmental reimbursable agreements).

undelivered Orders
Undelivered orders as of September 30, 2010 were $68.7 billion in budgetary accounts, and $41.9 billion in non-budgetary financing
accounts. At September 30, 2009, undelivered orders were $56.1 billion in budgetary accounts, and $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 and entities are required to explain material differences between amounts reported in the Statement of Budgetary
Resources and the actual amounts reported in the Budget of the U. S. Government (the President’s Budget).

notes to the financial statements

part 2: financial section

Borrowing Authority

the department of the treasury | office of financial stability

The President’s Budget for 2012, with the “Actual” column completed for fiscal year 2010, has not yet been published as of the date
of these financial statements. The Budget is currently expected to be published and delivered to Congress in early February 2011. The
Budget will be available from the Government Printing Office.
The 2011 Budget of the U. S. Government, with the “Actual” column completed for for the period ended September 30, 2009, was
published in February 2010 and reconciled to the SBR. The only differences between the two documents were due to rounding.

note 11. r econciliation of oBligationS i ncurred to net coSt of
(i ncome from) operationS

part 2: financial section

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 (Income from) Operations for the Year Ended September 30, 2010 and
the Period Ended September 30, 2009 is as follows:

Dollars in Millions

2010

Resources Used to Finance Activities:
Budgetary Resources Obligated
Obligations Incurred
Spending Authority from Offsetting Collections and Recoveries
Offsetting Receipts
Net obligations
Other Resources
Total Resources Used to Finance Activities

(191,538)
(118,860)
(136,767)
1

40,139

Components of Net Cost of (Income from) Operations that Will Not Require or Generate Resources in the
Current Period:
Accrued Downward Reestimate and Modification of Subsidy Cost, Net of Unfunded Upward Reestimates
Other
Total Components of Net Cost of (Income from) Operations that Will Not Require or Generate Resources
in the Current Period
Net Cost of (Income from) Operations

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

(136,766)

Resources Used to Finance Items Not Part of Net Cost (Income from) Operations:
Net Obligations in Direct Loan, Equity Investment and Asset Guarantee Financing Funds
Increase in Resources Obligated for Goods, Services and Benefits Ordered but not yet Provided
Resources that Fund Prior Period Expenses and Downward Reestimates
Total Resources Used to Finance Items Not Part of Net Cost of (Income from) Operations
Total Resources Used to Finance the Net Cost of (Income from) Operations

173,631

2009

(180,185)
(56,073)
-

(12,639)
109,747
137, 247
481

(236,258)
151,319

(23,563)
-

(109,748)
2

(23,563)
(23,082)

(109,746)
41,573

notes to the financial statements

REQUIRED SUPPLEMENTARY INFORMATION �
OFFICE OF FINANCIAL STABILITY (TROUBLED ASSET RELIEF PROGRAM) COMBINED STATEMENT OF BUDGETARY RESOURCES �
FOR THE YEAR ENDED SEPTEMBER 30, 2010
(UNAUDITED)

Dollars in Millions

BUDGETARY RESOURCES
Unobligated Balances Brought Forward
Recoveries of Prior Year Unpaid Obligations

STATUS OF BUDGETARY RESOURCES
Obligations Incurred - Direct
Unobligated Balance:
Apportioned and Available
Not Available
TOTAL STATUS OF BUDGETARY RESOURCES
CHANGE IN OBLIGATED BALANCES
Obligated Balance Brought Forward:
Unpaid Obligations
Uncollected Customer Payments from Federal
Sources
Obligated Balance, Net, Brought Forward

NET OUTLAYS
Gross Outlays
Offsetting Collections
Distributed Offsetting Receipts
NET OUTLAYS

8,945
39,364

28,126
1,118

8,945
39,364

30
55

5,151
-

69,440

4,745
-

69,440

406
-

34,480
34,480

156,112
(5,111)
268,750
(107,976)
$ 160,774

33,989
33,989

156,112
(5,111)
268,750
(107,976)
$ 160,774

491
491

23,405

150,226

23,040

150,226

365

142
10,933
34,480

7,692
2,856
160,774

101
10,848
33,989

7,692
2,856
160,774

41
85
491

56,151

79,202

55,992

79,202

159

Obligations Incurred
Gross Outlays
Recoveries of Prior Year Unpaid Obligations
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

28,156
1,173

TARP Administrative
Nonbudgetary
Budgetary
Financing
Accounts
Accounts

56,151

(28,927)
50,275

55,992

(28,927)
50,275

159

23,405
(9,255)
(1,173)

150,226
(148,146)
(39,364)

23,040
(9,016)
(1,118)

150,226
(148,146)
(39,364)

365
(239)
(55)

5,111

69,128

41,918

68,898

41,918

230

69,128

9,255
(118,860)
$ (109,605)

(23,816)
18,102

148,146
(156,112)
$
(7,966)

68,898

9,016
(118,860)
$ (109,844)

(23,816)
18,102

148,146
(156,112)
$
(7,966)

230

239
239

part 2: financial section

Budget Authority:
Appropriations
Borrowing Authority
Spending Authority from Offsetting Collections
Earned: Collected
Change in Unfilled Orders Without Advance
Total Budget Authority
Permanently Not Available
TOTAL BUDGETARY RESOURCES (Note 10)

2010
TARP Programs
Nonbudgetary
Budgetary
Financing
Accounts
Accounts

Combined
Nonbudgetary
Budgetary
Financing
Accounts
Accounts

REQUIRED SUPPLEMENTARY INFORMATION
OFFICE OF FINANCIAL STABILITY (TROUBLED ASSET RELIEF PROGRAM)
COMBINED STATEMENT OF BUDGETARY RESOURCES
FOR THE PERIOD ENDED SEPTEMBER 30, 2009
(UNAUDITED)
2009
Combined
Budgetary
Accounts

Dollars in Millions

part 2: financial section

BUDGETARY RESOURCES
Unobligated Balances Brought Forward
Recoveries of Prior Year Unpaid Obligations
Budget Authority:
Appropriations
Borrowing Authority
Spending Authority from Offsetting Collections
Earned: Collected
Change in Unfilled Orders Without
Advance
Total Budget Authority
Permanently Not Available
TOTAL BUDGETARY RESOURCES (Note 10)
STATUS OF BUDGETARY RESOURCES
Obligations Incurred - Direct
Unobligated Balance:
Apportioned and Available
Not Available
TOTAL STATUS OF BUDGETARY RESOURCES
CHANGE IN OBLIGATED BALANCES
Obligated Balance Brought Forward:
Unpaid Obligations
Uncollected Customer Payments from Federal
Sources
Obligated Balance, Net, Brought Forward

Budgetary
Accounts

TARP Administrative Fund

Nonbudgetary
Financing
Accounts

Budgetary
Accounts

Nonbudgetary
Financing
Accounts

238,268
-

309,971

237,989
-

309,971

279
-

243,072

28,927
581,970
$

(120,841)
461,129

237,989
237,989

28,927
581,970

238,268
238,268

(120,841)
461,129

279
279

210,112

452,184

209,863

452,184

249

28,156
238,268

7,009
1,936
461,129

28,126
237,989

7,009
1,936
461,129

30
279

TARP Programs

Nonbudgetary
Financing
Accounts

210,112

452,184

209,863

452,184

(153,961)
-

(372,982)
-

(153,871)
-

(372,982)
-

249
(90)
-

(28,927)

56,151

79,202

55,992

79,202

159

(28,927)

56,151

153,961

(28,927)

50,275

55,992

372,982

153,871

50,275

159

372,982

NET OUTLAYS

Gross Outlays
Offsetting Collections
Distributed Offsetting Receipts
NET OUTLAYS

(2,720)
151,241

(243,072)
$

129,910

(2,720)
151,151

(243,072)
$

129,910

appendices

the department of the treasury | office of financial stability

appendix a:
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 Government Accountability Office, the Office of 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 o verSight Board
The Oversight Board was established by section 104 of EESA to help oversee TARP and other emergency authorities and facili
ties granted to the Secretary of the Treasury under 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-OFS 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.
The Oversight Board also monitors Treasury’s responses to the recommendations made by SIGTARP and the GAO. Throughout
fiscal year 2010, 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 commu
nication 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.

appendices

Based on this dialogue and analysis, the Oversight Board issues a Quarterly Report for each three-month period that describes its
activities for that quarter, its assessment of the effects of TARP programs on financial stability and housing markets in the quarter,
and developments in TARP programs and administration during the quarter. 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.

appendix a: oversight entities

agency financial report | fiscal year 2010

government accountaBilitY
office (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 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.” Section 116(b)(1) provides for
the Comptroller General to conduct an annual audit of TARP
financial statements in accordance with generally accepted
auditing standards.
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 com
mittees of Congress that no action is necessary or appropriate.
In addition, under Section 236 of the Legislative Reorganization
Act of 1970, Treasury-OFS 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 10 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 se
nior Treasury-OFS staff. In addition, Treasury-OFS apprises the
GAO of key developments in current and proposed programs
and policies under EESA.

appendix a: oversight entities

Section 121 of EESA created the SIGTARP. The objectives of
SIGTARP are to investigate and prevent fraud, waste and abuse
in TARP programs, while promoting transparency in TARP
programs.
SIGTARP must report to Congress each quarter certain
information about TARP regarding the preceding quarter. As
of September 30, 2010, SIGTARP has issued seven quarterly
reports. 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,
2010, SIGTARP had published 11 audit reports and is currently
conducting ten audits that are at various stages.
Treasury-OFS has worked closely with SIGTARP and maintains
open lines of communications with audit staff and investigations
of TARP programs. Treasury-OFS staff also regularly provides
updates to SIGTARP about program design and implementa
tion. Treasury-OFS has benefited from SIGTARP’s involvement
in the development of TARP programs and policies as Treasury
OFS pursues our common goal of carrying out the objectives of
EESA, which are to promote financial stability and protect the
interests of the taxpayers.
As of September 30, 2010, SIGTARP has issued 64 recom
mendations in its reports. General topics addressed by
SIGTARP’s recommendations include establishing goals,
metrics, costs and expected participation for the TARP housing
programs; documenting communications with TARP recipients
concerning the warrant repurchase process; and conducting
independent testing of TARP recipients’ compliance with
TARP contractual requirements. Treasury-OFS has carefully
considered SIGTARP’s recommendations in prior reports, and
has submitted responses describing the actions Treasury-OFS has
taken or will take to address them. Treasury-OFS’ policies and
programs currently address many of the issues SIGTARP raised
in its recommendations. Treasury has implemented or is in the
process of implementing 53 of the 64 SIGTARP recommenda
tions and has declined to implement nine of the recommenda
tions. Additionally, SIGTARP has concurred with Treasury’s
assessment that two of SIGTARP’s 64 recommendations are no
longer applicable due to subsequent events

appendices

Between December 2008 and September 2010, the GAO issued
74 recommendations in its 20 published reports. The topics
addressed by GAO’s recommendations are (1) transparency,
reporting, and accountability; (2) management infrastructure;
and (3) communication. In response to the recommendations,
the Treasury-OFS has developed remediation plans and regularly
communicates the status of its remediation efforts to the GAO
and will continue to do so in fiscal year 2011. Treasury-OFS has
fully or partially implemented 72 of the recommendations and
the remaining recommendations have been deemed closed by
the GAO and/or Treasury-OFS has taken no action

the office of the Special
i nSpector general for tarp
(Sigtarp)

the department of the treasury | office of financial stability

congreSSional o verSight panel
(cop)

with COP on a regular basis, offering briefings on the topic of
their current focus, as well as any new initiatives or changes in
Treasury-OFS programs.

The COP consists of five panel members appointed as fol
lows: one member appointed by the Speaker of the House of
Representatives; one member appointed by the minority leader
of the House of Representatives; one member appointed by the
majority leader of the Senate; one member appointed by the
minority leader of the Senate; and one member appointed by
the Speaker of the House of Representatives and the major
ity leader of the Senate, after consultation with the minority
leader of the Senate and the minority leader of the House of
Representatives. In October 2010, Senator Ted Kaufman of
Delaware was appointed to replace Elizabeth Warren on the
panel. He was elected by his fellow members to serve as the
Chair of this panel. The COP also employs a professional staff,
numbering 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 analyses in
support of their work.

The COP holds semi-regular hearings on Capitol Hill, often
timed to coincide with its work on a particular report. Treasury
OFS makes its senior staff available to appear before the COP as
witnesses; the Secretary of the Treasury appears before the COP
on a quarterly basis, and the Assistant Secretary for Financial
Stability is made available as requested for other hearings.
Other Treasury-OFS officials have also appeared before the COP
as requested.

appendices

The 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. Unlike the other oversight
bodies, EESA mandated that COP’s work would end six months
after the expiration of the TARP spending authority which
means that it will cease to exist on April 3, 2011.
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-OFS 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, in some
instances, presents recommendations. Many of its recommen
dations have focused on issues of transparency and what COP
views as the need to be clearer on goals and metrics so that
taxpayers can better understand whether their monies are being
effectively utilized.
The COP staff uses public information to develop the outlines
of their reports, then follows up with requests of information,
documents, and data from Treasury-OFS. Treasury-OFS engages

100

appendix a: oversight entities

agency financial report | fiscal year 2010

appendix b:
tArP glossAry
Asset-Backed Security (ABS): A financial instrument repre

senting an interest in a pool of other assets, typically consumer
loans. Most ABS are backed by credit card receivables, auto
loans, student loans, or other loan and lease obligations.
Asset guarantee Program (AgP): A TARP program under

which Treasury, together with the Federal Reserve and the
FDIC, agreed to share losses on certain pools of assets held by
systemically significant financial institutions that faced a high
risk of losing market confidence due in large part to a portfolio
of distressed or illiquid assets.
Automotive Industry Financing Program (AIFP): A TARP

program under which Treasury-OFS provided loans or equity
investments in order to avoid a disorderly bankruptcy of one or
more auto companies that would have posed a systemic risk to
the country’s financial system.
capital Purchase Program (cPP): A TARP program pursuant

to which Treasury-OFS invested in preferred equity securities
and other securities issued by financial institutions.
commercial Mortgage-Backed Securities (cMBS): A finan

cial instrument representing an interest in a commercial real
estate mortgage or a group of commercial real estate mortgages.
commercial Paper (cP): An unsecured debt instrument with a

short maturity period, 270 days or less, typically issued by large
financial institutions or other large commercial firms.
community Development capital Initiative (cDcI): A

TARP program that provides low-cost capital to CDFIs to
encourage lending to small businesses and help facilitate the
flow of credit to individuals in underserved communities.

provide financing to consumers and businesses and otherwise
support small banks.
Emergency Economic Stabilization Act (EESA): The law

that created the Troubled Asset Relief Program (TARP).
government-Sponsored Enterprises (gSEs): Private

corporations created by the U.S. Government. Fannie Mae
and Freddie Mac are GSEs.
Home Affordable Modification Program (HAMP): A TARP

program Treasury-OFS established to help responsible but
struggling homeowners reduce their mortgage payments to
affordable levels and avoid foreclosure.
Legacy Securities: CMBS and non-agency RMBS issued prior to

2009 that were originally rated AAA or an equivalent rating
by two or more NRSROs without ratings enhancement and
that are secured directly by actual mortgage loans, leases or
other assets and not other securities.
Making Home Affordable (MHA): A comprehensive plan to

stabilize the U.S. housing market and help responsible, but
struggling, homeowners reduce their monthly mortgage payments to more affordable levels and avoid foreclosure. HAMP
is part of MHA.
Mortgage-Backed Securities (MBS): A type of ABS represent

ing an interest in a pool of similar mortgages bundled together
by a financial institution.
nationally recognized Statistical rating Organization
(nrSrO): A credit rating agency which issues credit ratings

that the U.S. Securities and Exchange Commission permits
other financial firms to use for certain regulatory purposes.

community Development Financial Institution (cDFI):

consumer and Business Lending Initiative (cBLI): A series

of programs created under TARP which included the TALF,
the CDCI, and the SBA 7(a) Securities Purchase Program.
These were designed to jump start the credit markets that

appendix b: tarp glossary

non-Agency residential Mortgage-Backed Securities:

RMBS that are not guaranteed or issued by Freddie Mac,
Fannie Mae, any other GSE, Ginnie Mae, or a U.S. federal
government agency.
Preferred Stock: Equity ownership that usually pays a fixed

dividend and gives the holder a claim on corporate earnings
superior to common stock owners. Preferred stock also has
priority in the distribution of assets in the case of liquidation of
a bankrupt company.

101

appendices

A financial institution that focuses on providing financial
services to low- and moderate- income, minority and other
underserved communities, and is certified by the CDFI Fund,
an office within Treasury-OFS that promotes economic
revitalization and community development.

the department of the treasury | office of financial stability

Public-Private Investment Fund (PPIF): An investment

fund established to purchase Legacy Securities from financial
institutions under PPIP.
Public-Private Investment Program (PPIP): A TARP program

designed to improve the health of financial institutions
holding real estate-related assets. The program is designed to
increase the flow of credit throughout the economy by partner
ing with private investors to purchase Legacy Securities from
financial institutions.
Qualifying Financial Institution (QFI): Private and public

U.S.-controlled banks, savings associations, bank holding
companies, certain savings and loan holding companies, and
mutual organizations.
residential Mortgage-Backed Securities (rMBS): A

financial instrument representing an interest in a group of
residential real estate mortgages.
SBA: U.S. Small Business Administration.
SBA 7(a) Securities Purchase Program: A TARP program

under which Treasury-OFS purchases securities backed by the
guaranteed portions of the SBA 7(a) loans.
Servicer: An administrative party that collects payments and gener

ates reports regarding mortgage payments.
Targeted Investment Program (TIP): A TARP program that

was created to stabilize the financial system by making invest
ments in institutions that are critical to the functioning of the
financial system.
Term Asset-Backed Securities Loan Facility (TALF): A

and liabilities that includes primarily common equity (includ
ing retained earnings), limited types and amounts of preferred
equity, certain minority interests, and limited types and
amounts of trust preferred securities, but excludes goodwill,
certain other intangibles and certain other assets. It is used by
banking regulators as a measure of a bank’s ability to sustain
future losses and still meet depositor’s demands.
Tier 1 common (also known as Tangible common Equity
or TcE): A measure of a bank’s assets and liabilities calculated

by removing all non-common elements from Tier 1 Capital,
e.g., preferred equity, minority interests, and trust preferred
securities. It can be thought of as the amount that would be
left over if the bank were dissolved and all creditors and higher
levels of stock, such as preferred stock, were paid off. Tier 1
Common is the highest “quality” of capital in the sense of
providing a buffer against loss by claimants on the bank. Tier
1 Common is used in calculating the Tier 1 Common Ratio
which determines the percentage of a bank’s total assets that
is categorized as Tier 1 Common. Generally, the higher the
percentage, the better capitalized the bank. Preferred stock is
an example of capital that is counted in Tier 1 Capital, but not
in Tier 1 Common.
Troubled Asset relief Program (TArP): The Troubled Asset

Relief Program, which was established under EESA to stabilize
the financial system and prevent a systemic collapse.
Trust Preferred Security: A security that has both equity and

debt characteristics, created by establishing a trust and issuing
debt to it. A company may create a trust preferred security to
realize tax benefits, since the trust is tax deductible.
Warrant: A financial instrument that represents the right, but not

the obligation, to purchase a certain number of shares of com
mon stock of a company at a fixed price.

appendices

program under which the Federal Reserve Bank of New York
makes term non-recourse loans to buyers of AAA-rated Asset
Backed Securities in order to stimulate consumer and business
lending by the issuers of those securities. Treasury-OFS used
TARP funds to provide credit support for the TALF as part of
its Consumer and Business Lending Initiative.

Tier 1 capital or “core capital”: A measure of a bank’s assets

102

appendix b: tarp glossary

office of finAnciAl stAbility
Websites:
www.FinancialStability.gov
www.MAKINGHOMEAFFORDABLE.gov
Documents Referenced in the AFR:
Two-Year Retrospective:

http://www.financialstability.gov/docs/TARP%20Two%20Year%20Retrospective_10%20
05%2010_transmittal%20letter.pdf
Housing Scorecard:

www.hud.gov/scorecard
Warrant Disposition Report:

www.financialstability.gov/latest/reportsanddocs.html
U. S. Budget and Economic Outlook:

www.cbo.gov/ftpdocs/117xx/doc11705/08-18-Update.pdf
Housing Finance Agency Hardest Hit Fund:

www.financialstability.gov/roadtostability/hardesthitfund.html
Congressional Hearings and Testimony:

Full text of Agency Financial Report : Fiscal Year 2010

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