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TABLE OF CONTENTS

ii

TABLE OF CONTENTS

MESSAGE FROM THE ASSISTANT SECRETARY FOR FINANCIAL STABILITY ................................. v

EXECUTIVE SUMMARY........................................................................................................................................ vii

Part 1: Management’s Discussion and Analysis

Background, Mission, and OFS Organization Structure ........................................................................... 3

Overview of TARP for Fiscal Year 2011 ......................................................................................................... 5

Key Trends/Factors Affecting TARP Future Activities and Ultimate Cost ..................................... 13

Systems, Controls, and Legal Compliance.................................................................................................... 19
Limitations of the Financial Statements ....................................................................................................... 22
Operational Goals .................................................................................................................................................. 23
Operational Goal One: Ensure the Overall Stability and Liquidity of the Financial System .. 23
Capital Purchase Program(CPP) .............................................................................................................. 23
Targeted Investment Program(TIP) ...................................................................................................... 24
Asset Guarantee Program(AGP) .............................................................................................................. 25
Community Development Capital Initiative (CDCI) ........................................................................ 25
Public-Private Investment Program (PPIP) ........................................................................................ 25
Term Asset-Backed Securities Loan Facility(TALF)........................................................................ 26
Small Business Administration 7(a) Securities Purchase Program(SBA) .............................. 27
Automotive Industry Financing Program(AIFP) .............................................................................. 27
American Internationl Group, Inc. (AIG) Investment Program .................................................. 30

Operational Goal Two: Prevent Avoidable Foreclosures and Preserve Homeownership...... 32

Operational Goal Three: Protect Taxpayers’ Interests .......................................................................... 35

Operational Goal Four: Promote Transparency....................................................................................... 37

Part 2: Financial Section

MESSAGE FROM THE CHIEF FINANCIAL OFFICER (CF0) .................................................................... 41

GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT...................................................... 42

Appendix I: Management’s Report on Internal Control Over Financial Reporting ............ 49
Appendix II: OFS Response to Auditor’s Report ............................................................................... 50

FINANCIAL STATEMENTS ................................................................................................................................. 52
NOTES TO THE FINANCIAL STATEMENTS ................................................................................................. 57

Part 3: Appendices

APPENDIX A: TARP GLOSSARY ........................................................................................................................ 94
APPENDIX B: ABBREVIATIONS and ACRONYMS ..................................................................................... 96

WEBSITES................................................................................................................................ ......... Inside Back Cover
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TABLE OF CONTENTS

iv

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

MESSAGE FROM THE ASSISTANT SECRETARY FOR FINANCIAL
STABILITY
November 10, 2011
I am pleased to present the Office of Financial Stability’s (OFS) Agency
Financial Report for fiscal year 2011. This report describes our
financial and performance results for the third year of the Troubled
Asset Relief Program (TARP). The report contains the financial
statements for TARP and the Government Accountability Office (GAO)
audit opinion on those financial statements, a separate opinion on
OFS’ internal controls over financial reporting, and results of GAO’s
tests of OFS’ compliance with selected laws and regulations.
The Emergency Economic Stabilization Act of 2008 (EESA) established
the Office of Financial Stability (OFS) within the Office of Domestic
Finance of the Department of the Treasury to implement TARP. OFS
carries out the objectives of the TARP: ensuring the overall stability
and liquidity of the financial system; preventing avoidable foreclosures
and helping preserve homeownership.
The TARP was a significant commitment of taxpayer money and Americans did not like the fact that
public funds had to be committed for this purpose. However, by any reasonable objective standard,
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.
Several important achievements from inception through TARP’s third year:
•
•

•
•

•

OFS has collected over three-fourths of the total funds disbursed, through repayments, sales,
dividends, interest, and other income of $316 billion, contrasted with the $413 billion
disbursed.
OFS’ banking investments have resulted in a positive return for taxpayers, while also
helping to keep institutions better capitalized to ensure the overall stability of our financial
system. OFS has already collected a total of $258 billion through repayments, dividends,
interest and other income relative to $245 billion invested in banking institutions.
OFS commenced its exit from General Motors Company through a highly successful Initial
Public Offering (IPO) for General Motors and exited its investment in Chrysler Group, as
Chrysler Group was able to repay its loans six years before the 2017 scheduled maturity.
OFS, working with other federal government entities, closed a major restructuring plan for
American International Group, Inc. (AIG), marking a significant milestone in the company’s
turnaround and putting Treasury OFS in a better position to recover its investment in the
company.
While the housing market remains fragile, OFS initiatives to assist struggling homeowners
have helped hundreds of thousands of families keep their homes and set new standard
practices for mortgage service providers that have indirectly helped millions more.

MESSAGE FROM THE ASSISTANT SECRETARY

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THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

OFS’ authority to make new commitments expired on October 3, 2010. Going forward, our focus is to
manage the remaining 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 financial and performance accountability and
transparency standards.
The financial and performance data included in this report are reliable and complete. For the third
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,

Timothy G. Massad
Assistant Secretary
Office of Financial Stability

vi

MESSAGE FROM THE ASSISTANT SECRETARY

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

EXECUTIVE SUMMARY
Treasury’s Office of Financial Stability (OFS)
presents to the reader the Fiscal Year 2011 Agency
Financial Report for the Troubled Asset Relief
Program (TARP), established by the Department of
the Treasury pursuant to the Emergency Economic
Stabilization Act of 2008 (EESA). Three years
after the establishment of the TARP, substantial
progress continues to be made in stabilizing the
financial system and OFS is unwinding the
extraordinary assistance that was provided during
the crisis.
Three years ago, the U.S. financial system was at
risk of collapse and many major financial
institutions were at risk of failure. Markets had
ceased to function. Without immediate and forceful
government action, our country faced the
possibility of a second Great Depression, which
would have had profound consequences for all
Americans.
In this environment of fear and panic, TARP was
created as a central part of a series of emergency
measures. The goal of TARP, along with other
federal government actions, was to stop the panic
and restore stability to the U.S. financial system.
TARP’s initiatives were done faster, and at a much
lower cost, than many anticipated.
As of October 3, 2010, OFS’ authority to make new
commitments under TARP expired. 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.
During fiscal year 2011, OFS focused principally on
(i) exiting remaining investments in a timely and
orderly manner consistent with the duty to
promote financial stability and protect taxpayers’
interests that maximizes the return for taxpayers,
and (ii) continuing to help homeowners avoid
preventable foreclosures.
In fiscal year 2011, OFS’ progress included the
following:
•

The series of programs that OFS launched
to help stabilize the nation’s banking
institutions are now producing a profit to
taxpayers. A total of $245 billion was

EXECUTIVE SUMMARY

invested in banking institutions pursuant
to several TARP initiatives. Since its
inception and through September 30, 2011,
OFS has collected approximately $258
billion through repayments, sales,
dividends, interest, and other income -approximately $13 billion more than
disbursements -- under these initiatives
including collections for the Asset
Guarantee Program for which nothing was
disbursed by OFS.
•

OFS reduced its stake in General Motors
Company by 50 percent through General
Motors’ highly successful Initial Public
Offering with OFS receiving $13.5 billion
from the sale of a portion of its General
Motors common stock holdings. OFS has
exited its investment in Chrysler Group, as
Chrysler Group repaid its loans six years
earlier than the loan’s maturity date. To
date, OFS has collected more than $40
billion (including repayments, sales,
dividends, interest and other income) of
the $80 billion invested in companies
related to the auto industry.

•

OFS, working with other federal entities,
closed a major restructuring plan for
American International Group, Inc. (AIG),
marking a significant milestone in the
company’s turnaround and putting OFS in
a better position to recover its investment
in AIG. In May 2011, Treasury completed
the sale of 200 million shares (132.0
million shares were OFS’ shares) of AIG
common stock, reducing Treasury's
percentage ownership of AIG’s outstanding
shares from approximately 92 percent to
77 percent; and leaving OFS owning 960
million shares or approximately 50.8
percent of AIG’s common stock equity on a
fully diluted basis.

As a result of improved financial conditions of
TARP participants, earlier than expected asset
repayments, lower utilization of the program and
careful stewardship, the estimated cost of TARP is
significantly below original projections. 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

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THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

TARP authority was utilized). In the 2011
President’s Budget (released in February 2010),
the lifetime cost of TARP had decreased to $116.8
billion (assuming $546 billion of the $700 billion
TARP authority was utilized). In the 2012
President’s Budget (released in February 2011),
the lifetime cost of TARP had decreased to $48.5
billion (assuming $474.8 billion of the TARP
authority was utilized). The most recent estimates
as of September 30, 2011, reflect a lifetime cost
included in the budget of $70.2 billion, based on
utilizing $470 billion of the TARP authority. 1
The estimated lifetime cost of TARP reflects
several factors, including the cost of the initiatives
to help homeowners stay in their homes, for which
$45.6 billion has been committed, of which $2.4
billion has been disbursed. OFS’ housing program
disbursements were never intended to be recovered
and OFS does not expect them to result in any
repayments. The estimated lifetime cost also
reflects costs related to investments in the auto
companies and AIG. These costs fluctuate in large
part due to market prices of common stock, and
declines in market prices largely account for the
increase in the estimated lifetime cost of TARP
from the estimates in the 2012 President’s Budget.
These costs are offset in part by income on TARP
investments in banks and other programs. Note
that the lifetime cost of TARP, based on budget
scoring conventions, differs from the cost included
in the OFS financial 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, 2011.
The reported cost of TARP activities from
inception, on October 3, 2008, through September
30, 2011, based on the OFS financial statements,
was $28.0 billion. Unlike the federal budget cost
estimate, this reflects only transactions through
September 30, 2011. 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 $28.0 billion cost consists of
$9.5 billion of reported TARP net cost in the OFS
financial statements for fiscal year 2011; $23.1
billion of reported TARP net income for fiscal year

2010 and the $41.6 billion of reported TARP net
cost for the period from inception through
September 30, 2009. The change of $9.5 billion
since fiscal year 2010 is primarily due to declines
in the value of OFS’s investments in GM, Ally
Financial, and AIG, and continued funding of the
Treasury Housing Programs Under TARP.
Since its inception, TARP has disbursed $413.4
billion in direct loans, equity investments and for
the Treasury Housing Programs Under TARP,
collected $276.9 billion from repayments and sales,
and reported $20.4 billion in dividends, interest
and fees, $9.1 billion in warrant sales, and $9.7
billion in net proceeds from the sale and
repurchase of assets in excess of costs. As of
September 30, 2011, TARP had $122.4 billion in
gross outstanding direct loans and equity
investments, which are valued at $80.1 billion. In
addition, from inception through September 30,
2011, TARP incurred costs related to Treasury
housing programs of $2.8 billion and
administrative costs of $0.8 billion.
OFS continues to provide detailed information
about TARP to ensure the highest level of
transparency. OFS published a Two-Year
Retrospective Report on the Troubled Asset Relief
Program on October 5, 2010, and a corresponding
Three-Year Anniversary Report on October 3, 2011.
These reports include detailed information on
TARP as well as the federal government’s
additional emergency measures to address the
2008 financial crisis. OFS also publishes a
monthly report on the program, a monthly report
on its housing initiatives and a variety of other
reports. Please refer to these documents at:
http://www.treasury.gov/initiatives/financialstability/briefingroom/reports/agency_reports/Pages/default.aspx.

The Dodd-Frank Wall Street Reform and Consumer
Protection Act (P.L. 111-203) amended EESA Section
115 authority to cap total purchase and guarantee
authority at a cumulative $475 billion.
1

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EXECUTIVE SUMMARY

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

Part 1: Management’s Discussion and Analysis

MANAGEMENT‘S DISCUSSION AND ANALYSIS

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AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

MANAGEMENT‘S DISCUSSION AND ANALYSIS

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AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

MANAGEMENT’S DISCUSSION AND ANALYSIS
Background, Mission, and OFS Organization Structure
In order to appreciate the effects of the 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
investment, 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 mid 2007, rising
mortgage defaults were undermining the
performance of many investments held by major
financial institutions.
The crisis began in the summer of 2007 and
gradually increased in intensity and momentum
over the course of the following year. A series of
major financial institutions, including
Countrywide Financial, Bear Stearns, and
IndyMac, were purchased under duress or failed;

MANAGEMENT‘S DISCUSSION AND ANALYSIS

and Fannie Mae and Freddie Mac, the largest
purchasers and guarantors of home loans in the
mortgage market, came under severe stress.
By September 2008, for the first time in 80
years, the U.S. financial system was at risk of
collapse. Using authority granted in July 2008,
the Federal Housing Finance Agency placed
Fannie Mae and Freddie Mac into
conservatorship on September 7, 2008. A
growing sense of panic was producing the classic
signs of a generalized run on the banks. People’s
trust and confidence in the stability of major
institutions, and the capacity of the federal
government to contain the damage, were
vanishing.
The U.S. system of regulation and supervision
had failed to constrain 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 Department of the Treasury, the Federal
Reserve Board, the Federal Deposit Insurance
Corporation (FDIC), and other federal
government bodies undertook an array of
emergency 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 the Emergency
Economic Stabilization Act (EESA) to create the
TARP in late September, and with the support of
Democrats and Republicans in Congress, it was
enacted into law on October 3, 2008.
EESA established the Office of Financial
Stability (OFS) within the Office of Domestic
Finance of the Department of the Treasury
(Treasury) to implement the TARP. The mission
of OFS is to carry out the authorities given to

3

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

the Secretary of the Treasury to implement the
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 Wall Street
Reform and Consumer Protection Act (the DoddFrank Act) in July 2010 reduced total TARP
purchase authority from $700 billion to a
cumulative $475 billion.

The OFS organization chart
follows:

Final purchase authority to make new
commitments under TARP expired on October 3,
2010. This means no new commitments can be
made. There is, however, still significant work
to be done to implement commitments made
prior to the October 3 deadline but not yet fully
funded. For those assets already purchased,
OFS will continue to wind down TARP and
manage the remaining TARP investments in
order to recover as much of taxpayers’ funds as
possible.

The Office of the Chief Financial Officer (CFO)
has lead responsibility within OFS for budget
formulation and execution, cash management,
accounting, financial systems, financial
reporting, program and internal metrics
analytics, modeling cash flows, and internal
controls.

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
of OFS Internal Review and the Chief Reporting
Officer. A Chief Counsel’s Office reports to the
Assistant Secretary and to the Office of the
General Counsel in the Department of Treasury.

Assistant Secretary for Financial Stability

Chief
Investment
Officer

Chief Financial
Officer

Chief of
Operations

Chief of Home
Ownership
Preservation

Chief
Counsel

Chief of OFS
Internal Review

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 of Operations is
responsible for developing the operating
infrastructure and managing internal operations
in OFS.
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 Internal Review (OIR) is
responsible for identifying the most significant
risks that the TARP faces, both internally and
externally. In addition, OIR is responsible for
verifying that internal controls are present and
functioning correctly and for monitoring TARP
recipient and external entity compliance with
various statutory and regulatory requirements.
The Office of the Chief Reporting Officer is
responsible for periodic reports to the Congress
as required by EESA.

4

MANAGEMENT‘S DISCUSSION AND ANALYSIS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

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.
The Office of the Chief Counsel is also
responsible for coordinating OFS’ work with the
external oversight entities including the
Government Accountability Office (GAO), the
Special Inspector General for TARP (SIGTARP),
the Financial Stability Oversight Board and the
Congressional Oversight Panel (COP) through
the end of its existence on April 3, 2011.
OFS is not envisioned as a permanent
organization, so to the maximum extent possible

when economically efficient and appropriate,
OFS utilizes private sector expertise in support
of the execution of TARP programs. Fannie Mae
and Freddie Mac accounted for more than half of
the fiscal year 2011 administrative cost ($173
million of $315 million) to assist in the
administration and compliance oversight,
respectively, of the Making Home Affordable
Program. Additionally, asset managers were
hired to serve as financial agents in assisting
with managing the assets associated with
several TARP programs. Private sector firms
were also engaged to assist with the significant
volume of work associated with the TARP in the
areas of custodial services, accounting and
internal controls, modeling, administrative
support, facilities, legal advisory, financial
advisory, and information technology.

Overview of TARP for Fiscal Year 2011
OFS Operational Goals
EESA provided the Secretary of the Treasury
with the authorities and facilities to help restore
liquidity and stability to the U.S. financial
system. EESA also provided specific authority
to take certain actions to prevent avoidable
foreclosures.
In light of this statutory direction, OFS
established the following operational goals for
the TARP and developed a number of programs
to help stabilize the U.S. financial system and
the housing market:
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.
Details on programs developed in support of
these Operational Goals can be found later in

this Management’s Discussion and Analysis
under Operational Goals.

Fiscal Year 2011 Financial Summary and
Cumulative Net Income
EESA provided authority for the TARP to
purchase or guarantee up to $700 billion in
troubled assets. 2 EESA spending authority
would have terminated December 30, 2009;
however, as authorized under Section 120(b) of
EESA, the Secretary of the Treasury certified
the extension of TARP authority until October 3,
2010, with the submission of a written
certification to Congress.
The Dodd-Frank Act 3 amended EESA by
capping total purchase and guarantee authority
at a cumulative $475 billion and limiting any
new obligations only to programs or initiatives
that were initiated prior to June 25, 2010. OFS
reduced the TARP program allocations to
conform to these limitations.
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.

2

3

MANAGEMENT‘S DISCUSSION AND ANALYSIS

Pub. L. 111-203.

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THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

Based on operations for the year ended
September 30, 2011, OFS reports the following
key results:
•

Since its inception, TARP has disbursed
$413.4 billion in direct loans, equity
investments and for the Treasury
Housing Programs Under TARP.

•

In fiscal year 2011, OFS disbursed $23.8
billion for loans and equity investments
as well as $1.9 billion in payments for
Treasury Housing Programs Under
TARP, and reported net cost of
operations of $9.5 billion.

•

During fiscal year 2011, OFS received
$72.8 billion from repayments of loans
and repurchases and sales of
investments.

•

As of September 30, 2011, OFS reported
$80.8 billion for the value of loans,
equity investments, and the asset
guarantee program.

Results of TARP Operations (Fiscal Year
2011 and Fiscal Year 2010)
OFS’ fiscal year 2011 net cost of operations of
$9.5 billion includes the reported net cost related
to loans, equity investments, and other credit

programs. For the fiscal year ended September
30, 2011, OFS reported net subsidy income for
five programs – the Capital Purchase Program
(CPP), the Targeted Investment Program (TIP),
the Community Development Capital Initiative
(CDCI), the Term Asset-Backed Securities Loan
Facility (TALF), and the Public-Private
Investment Program (PPIP). These programs
collectively reported net subsidy income of $4.1
billion. Also, for the fiscal year ended
September 30, 2011, OFS experienced net
subsidy cost for four programs – the Asset
Guarantee Program (AGP), the American
International Group, Inc. Investment Program,
the Automotive Industry Financing Program
(AIFP), and the Federal Housing Agency
Refinance Program totaling $11.3 billion. Fiscal
year 2011 expenses for the Treasury Housing
Programs Under TARP of $1.9 billion and
administrative expenses of $0.3 billion bring the
total reported fiscal year net cost of operations to
$9.5 billion, as shown in Table 1. For the fiscal
year ended September 30, 2010, the net income
from operations was $23.1 billion as reflected in
Table 1. These net income and net cost amounts
reported in the financial statements reflect only
transactions through September 30, 2011 and
September 30, 2010, respectively, and therefore
are different than lifetime cost estimates made
for budgetary purposes.

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

TARP Program
Bank Support Programs
Capital Purchase Program
Targeted Investment Program
Asset Guarantee Program
Community Development Capital Initiative3
Credit Market Programs
Public-Private Investment Program
Term Asset-Backed Securities Loan Facility3
SBA 7(a) Securities Purchase Program3
Other Programs
Automotive Industry Financing Program

6

For the Year
Ended
September 30,
2011

For the Year
Ended
September 30,
2010

From TARP’s
Inception
through
September 30,
20112

$ 1.8
0.2
--0.1

$ ( 3.9)
1.9
1.5
(0.3)

$ 13.0
4.0
3.7
( 0.2)

1.8
0.1

0.7
---

2.5
0.4

---

---

---

(9.7)

16.6

(23.6)

MANAGEMENT‘S DISCUSSION AND ANALYSIS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

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

TARP Program
American International Group Investment
Program
FHA-Refinance Program
Total Net Subsidy Income (Cost)
Additional TARP (Costs)
Treasury Housing Programs Under TARP
(excluding FHA-Refinance Program)

For the Year
Ended
September 30,
2011
(1.6)

For the Year
Ended
September 30,
2010
7.7

From TARP’s
Inception
through
September 30,
20112
(24.3)

--(7.3)

N/A
24.2

--(24.5)

(1.9)

(0.8)

(2.7)

(0.3)
$ (9.5)

(0.3)
$ 23.1

(0.8)
$ (28.0)

Administrative Costs
Total Net Income (Cost) of TARP Operations

Information presented in Table 1 is presented in billions of dollars to ensure consistency with other tables in
this Management’s Discussion and Analysis; similar information is presented in the financial statements in
millions of dollars.
2 The Inception through September 30, 2011 column includes dollar amounts related to the $41.6 billion net cost
of operations for the period from inception
through September 30, 2009.
3 The Term Asset-Backed Securities Loan Facility, the Community Development Capital Initiative, and the SBA
7(a) Securities Purchase Program are reported for financial statement purposes under the Consumer and
Business Lending Initiative.
1

Over time the cost of the TARP programs will
change. As described later in the MD&A, and in
the 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 Program Summary
Table 2 provides a financial summary for TARP
programs since TARP inception on October 3,
2008, through September 30, 2011. For each
program, the table provides utilized TARP
authority (which includes purchases made, legal
commitments to make future purchases, and
offsets for guarantees made), the amount
actually disbursed, repayments to OFS from
program participants or from sales of the
investments, write-offs and losses, net
outstanding balance as of September 30, 2011,
and cash inflows on the investments in the form
of dividends, interest or other fees. As of fiscal
year end 2011, $57 billion of the $470 billion in
purchase and guarantee authority remained
unused. 4
4

OFS tracks costs in accordance with Federal budget
procedures. First, 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 the full amount obligated will not be
disbursed.

MANAGEMENT‘S DISCUSSION AND ANALYSIS

7

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

Table 2: TARP Summary1
From TARP Inception through September 30, 2011
(Dollars in billions)
Purchase
Price or
Guarantee
Amounts
Bank Support Programs
Capital Purchase
Program4

Total $
Disbursed

$ 204.9

Targeted Investment
Program

Investment
Repayments

$

204.9

$

Write-offs
and Losses2

(185.0)5

$

(2.6)

Received
from
Investments

Outstanding
Balance3

$

17.3

$

25.7

40.0

40.0

(40.0)

-

-

4.4

Asset Guarantee Program

5.0

-

-

-

-

3.0

Community Development
Capital Initiative6

0.6

0.6

-

-

0.6

-

21.9

17.6

(1.7)

-

15.9

0.7

4.3

0.1

-

-

0.1

-

0.3

0.3

(0.2)

-

0.1

-

79.7

79.7

(35.0)

(7.4)

37.3

5.0

67.8

67.8

(15.0)

(1.9)

51.1

0.4

424.5

411.0

(276.9)

(11.9)

122.4

39.2

45.67

2.4

N/A

N/A

N/A

N/A

Credit Market Programs
Public Private Investment
Program
Term Asset-Backed
Securities Loan Facility6
SBA 7(a) Securities
Purchase Program6
Other Programs
Automotive Industry
Financing Program
American International
Group Investment
Program
Sub-total for Investment
Programs
Treasury Housing
Programs Under TARP
Total for TARP Program
1

$

470.1

$

413.4

$

(276.9)

$

(11.9)

$

122.4

$

39.2

This table shows the TARP activity for the period from inception through September 30, 2011, 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 Losses represent proceeds less than cost on sales of assets which are reflected in the financial statements within “net
proceeds from sales and repurchases of assets in excess of (less than) cost”.
3 Total disbursements less repayments, writeoffs and losses do not equal the total outstanding balance primarily because the
disbursements for the Treasury Housing Programs Under TARP generally do not require (and OFS does not expect)
repayments, and because of certain capitalized income relating to the AIG Investment Program.
4 OFS received $31.9 billion in proceeds from sales of Citigroup common stock, of which $25 billion is included at cost in
investment repayments, and $6.9 billion of net proceeds in excess of cost is included in Received from Investments.
5 Includes $2.2 billion of SBLF refinancing outside of TARP and CDCI exchanges from CPP of $363 million.
6 The Term Asset-Backed Securities Loan Facility, the Community Development Capital Initiative, and the SBA 7(a)
Securities Purchase Program are reported for financial statement purposes under the Consumer and Business Lending
Initiative.
7 Individual obligation amounts are $29.9 billion for the Making Home Affordable Program, $7.6 billion for the Hardest Hit
Fund, and $8.1 billion committed for the FHA-Refinance Program.

8

MANAGEMENT‘S DISCUSSION AND ANALYSIS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

Most of the TARP funds have been used to make
investments in preferred stock or to make loans.
OFS has generally received dividends on the
preferred stock and interest payments on the
loans from the institutions participating in
TARP programs. These payments represent a
return on OFS’ TARP investments. From

inception through September 30, 2011, OFS
received a total of $20.4 billion in dividends,
interest and fees. Table 3 shows the breakdown
of receipts for the periods ended September 30,
2011 and 2010 for all TARP programs combined
as well as totals for the period from inception
through September 30, 2011.

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

Dividends, Interest, Fees and
Warrant Repurchases
Dividends and Fees
Interest
Sales/Repurchases of Warrants and
Warrant Preferred Stock and
Additional Notes

For the Year
Ended September
30, 2011

For the Year
Ended September
30, 2010

From TARP’s
inception through
September 30,
20112

$ 2.8
0.9

$ 5.9
1.0

$ 18.3
2.1

1.5

5.2

9.6

3.9
2.3
11.4

3.0
--15.1

6.9
2.3
39.2

66.5
6.3
72.8
$ 84.2

122.0
9.3
131.3
$ 146.4

259.2
17.7
276.9
$ 316.1

Proceeds from Sales of Citigroup
Common Stock in Excess of Cost
Other Proceeds in Excess of Cost
Subtotal

Investment/Loan Repayments
Sales/Repurchases/Repayments on
Investments3
Loan Principal Repaid
Subtotal
GRAND TOTAL

This table shows TARP activity on a cash basis.
total reported for the Inception through September 30, 2011 column includes the $85.5 billion in receipts
and repayments related to the period from inception through September 30, 2009.
3 Includes $2.2 billion of SBLF refinancing outside of TARP and CDCI exchanges from CPP of $363 million.
1

2 The

OFS also received 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,
OFS has received $9.1 billion in gross proceeds
from the disposition of warrants associated with
93 CPP investments and both TIP investments,
consisting of (i) $3.7 billion from issuer

MANAGEMENT‘S DISCUSSION AND ANALYSIS

repurchases at agreed upon values and (ii) $5.4
billion from auctions. TARP’s Warrant
Disposition Report is posted on the OFS website
at the following link:
http://www.financialstability.gov/latest/reportsa
nddocs.html.

9

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

Summary of TARP Direct Loans and Equity Investments
Table 4 provides information on the estimated
values of the TARP direct loan and equity
investments by program, as of the end of fiscal
years 2011 and 2010. (Treasury Housing
Programs Under TARP are excluded from the
chart because no repayments are required). The
Outstanding Balance column represents the
amounts disbursed by OFS relating to the loans
and equity investments that were outstanding
as of September 30, 2011 and 2010. The

Estimated Value of the Investment column
represents the present value of net cash inflows
that OFS estimates it will receive from the loans
and equity investments. For equity securities,
this amount represents fair value. The total
difference of $42.3 billion (2011) and $36.8
billion (2010) between the two columns is
considered the “subsidy cost allowance” under
the Federal Credit Reform Act methods OFS
follows for budget and accounting purposes
(see Note 6 in the financial statements for
further discussion). 5

Table 4: Summary of TARP Direct Loans and Equity Investments
(Dollars in billions)
Estimated
Value of
Outstanding Investment
Balance as of as of
September
September
Program
30, 2011 1
30, 2011
Bank Support Programs
Capital Purchase Program
Community Development Capital
Initiative2
Credit Market Programs
Public-Private Investment
Program
Term Asset-Backed Securities
Loan Facility2

SBA 7(a) Securities Purchase
Program2
Other Programs
Automotive Industry Financing
Program
American International Group
Investment Program
Total
1 Before

Outstanding
Balance as
of
September
30, 2010 1

Estimated
Value of
Investment
as of September
30, 2010

$ 17.3

$ 12.4

$ 49.8

$ 48.2

0.6

0.4

0.6

0.4

15.9

18.4

13.7

14.4

0.1

0.6

0.1

0.4

0.1

0.1

0.2

0.2

37.3

17.8

67.2

52.7

51.1

30.4

47.6

26.1

$ 122.4

$ 80.1

$ 179.2

$ 142.4

subsidy cost allowance.
2 The Term Asset-Backed Securities Loan Facility, the Community Development Capital Initiative, and the SBA
7(a) Securities Purchase Program are reported for financial statement purposes under the Consumer and
Business Lending Initiative.

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 and FHA-Refinance Program.

5

10

MANAGEMENT‘S DISCUSSION AND ANALYSIS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

The ultimate cost of the TARP will not be known
for some time. The financial performance of the
programs will depend on many factors such as
future economic and financial conditions, and
the business prospects of specific institutions.
The cost estimates are sensitive to slight
changes in model assumptions, such as general
economic conditions, specific stock price
volatility of the entities in which OFS has an
equity interest, estimates of expected defaults,
and prepayments. If OFS receives repayments
faster than expected and incurs lower than
expected defaults, TARP’s ultimate cost on these
investments may be lower than estimated.
Wherever possible, 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 trade in
public markets or are closely related to tradable
securities. For those TARP investments that do
not have direct analogs in private markets, 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.

MANAGEMENT‘S DISCUSSION AND ANALYSIS

Comparison of Estimated Lifetime TARP
Costs Over Time
Market conditions and the performance of
specific financial institutions will be critical
determinants of the TARP’s lifetime cost. The
changes in the OFS estimates since TARP’s
inception through September 30, 2011, provide a
good illustration of this impact. Table 5 provides
information on how OFS’ estimated lifetime cost
of TARP has changed over time. These costs
fluctuate in large part due to changes in the
market prices of common stock for AIG and GM
and the estimated value of the Ally stock. This
table assumes that all expected investments (e.g.
PPIP) and disbursements for Treasury Housing
Programs Under TARP are completed, and
adhere 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 5 is consistent with the estimated
lifetime cost disclosures on the TARP web site
at: www.financialstability.gov. The cost
amounts in Table 5 are based on assumptions
regarding future events, which are inherently
uncertain.

11

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

Table 5: Estimated Lifetime TARP Costs (Income)1
(Dollars in billions)

Program
Bank Support Programs
Capital Purchase Program
Targeted Investment Program
Asset Guarantee Program2
Community Development
Capital Initiative3
Credit Market Programs
Public Private Investment
Program
Term Asset-Backed Securities
Loan Facility3
SBA 7(a) Securities Purchase
Program3
Other Consumer Business
Lending Initiative
Other Programs
Automotive Industry Financing
Program
American International Group
Investment Program
Subtotal
Treasury Housing Programs
Under TARP4
Total

Estimated
Lifetime Cost
(Income) on
March 31, 2010

Estimated
Lifetime Cost
(Income) on
September
30, 2010

Estimated
Lifetime Cost
(Income) on
March 31,
2011

Estimated
Lifetime Cost
(Income) on
September 30,
2011

$ ( 9.8)
( 3.8)
( 3.1)
0.4

$ (11.2)
( 3.8)
( 3.7)
0.3

$ (13.6)
( 4.0)
( 3.8)
0.2

$ (13.0)
( 4.0)
( 3.7)
0.2

0.5

( 0.7)

0.4

( 2.4)

( 0.4)

( 0.4)

( 0.3)

( 0.4)

0.0

0.0

0.0

( 0.0)

3.0

N/A

N/A

N/A

24.6

14.7

13.9

23.6

45.2

36.9

10.9

24.3

56.6
48.8

32.1
45.6

3.7
45.6

24.5
45.6

$ 105.4

$ 77.7

$ 49.3

$ 70.2

Estimated program costs (+) or savings (in parentheses) over the life of the program, including interest on reestimates 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 Term Asset-Backed Securities Loan Facility, the Community Development Capital Initiative and the SBA
7(a) Securities Purchase Program are reported for financial statement purposes under the Consumer and
Business Lending Initiative.
4 For fiscal year 2011, includes FHA-Refinance Program which is accounted for under credit reform.
1

12

MANAGEMENT‘S DISCUSSION AND ANALYSIS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

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. Four
TARP programs --CPP, PPIP, AIFP, and the
AIG Investment Program -- have $10 billion or
more still outstanding and remain at risk of
taxpayer loss. In addition, Treasury’s Housing
Programs Under TARP have about $43 billion
committed but not yet disbursed. Going
forward, the recoveries or costs from CPP, PPIP,
AIFP, and AIG Investment Program and the
expenditures for Treasury Housing Programs
Under TARP will most significantly affect the
lifetime cost of the TARP.

CPP and Banking Industry Information
OFS had CPP investments remaining in 401
financial institutions with a gross outstanding
balance of $17.3 billion as of September 30,
2011. As noted earlier in this report, the largest
financial institutions in the CPP have repaid
their investments to OFS.
Table 6 below shows the outstanding investment
face amount for the 10 largest remaining CPP
investments held as of September 30, 2011.
Table 6: 10 Largest Remaining CPP
Investments
(Dollars in billions)
Outstanding
Institution
Investment
Regions Financial Corporation
$ 3.500
Zions Bancorporation
1.400
Synovus Financial Corp.
0.968
Popular, Inc.
0.935
First Bancorp.
0.424
M&T Bank Corporation
0.382
Sterling Financial Corporation
0.303
Citizens Republic Bancorp, Inc.
0.300
First Banks, Inc.
0.295
New York Private Bank &
Trust Corporation
0.267
Total
$ 8.774

MANAGEMENT‘S DISCUSSION AND ANALYSIS

OFS’ actual recoveries on the outstanding CPP
investments will depend on a number of factors,
including the asset quality, loss reserve ratios
and capital positions of financial institutions
participating in CPP.
Throughout the life of the program, 181 CPP
recipients have not declared and paid one or
more dividends to OFS. Of these recipients, 74
have missed at least six payments, which gives
OFS the right to place members on the
institutions’ boards of directors. During fiscal
year 2011, OFS exercised its rights to elect 10
members in total to boards of directors for 6 CPP
institutions. Board members elected by OFS
cannot be government employees and all have
the same fiduciary duties and obligations to the
shareholders of the financial institutions as any
other board members. Additional information
on the appointment of directors to CPP
institutions is available at:
http://www.treasury.gov/initiatives/financialstability/programs/investment-programs.
Since the initiation of the CPP, 13 institutions in
which OFS had invested $2.9 billion have
entered bankruptcy or been placed in
receivership by their regulators. This includes
eight CPP recipients ($190.3 million in funding)
during fiscal year 2011; and five CPP recipients
($2.7 billion in funding) during fiscal year 2010.
During fiscal year 2010 OFS wrote-off $2.3
billion relating to CIT Group and another small
institution, and made no CPP investment writeoffs in fiscal year 2011. As OFS does not
anticipate any recovery from the other 11
investments outstanding relating to institutions
that entered bankruptcy or receivership, the
value of these investments is reflected at zero as
of September 30, 2011.

Public-Private Investment Program
As of September 30, 2011, OFS had gross
outstanding equity investments in and loans to
Public Private Investment Funds (PPIFs)
amounting to $5.5 billion and $10.4 billion,
respectively, for a total of $15.9 billion. In

13

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

addition, as of September 30, 2011, OFS had
legal commitments to disburse up to $4.3 billion
in additional funds to the PPIFs. The estimated
value of OFS’s investments and loans in the
PPIFs as of September 30, 2011, was
approximately $18.4 billion. PPIFs have the
ability to invest in eligible assets over a threeyear 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 profits to OFS and
the other PPIF investors. In addition, OFS also
received warrants from the PPIFs, which gives
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 PPIFs are now more
than halfway through their three-year
investment periods, which end in the fourth
quarter of fiscal year 2012.

Automotive Industry Financing Program
As of September 30, 2011, OFS held $37.3 billion
in AIFP investments, with an estimated value of
$17.8 billion. As of September 30, 2011, OFS
has received more than $40 billion from
repayments, sales, dividends, interest, and other
income. The competitiveness of U.S.
manufacturers, both domestically and
internationally will affect the value of OFS’
investment. In addition, the macroeconomic
conditions (unemployment, Gross Domestic
Product growth, etc.) will affect the overall
trends in auto sales and thus OFS’ recoveries.
The outlook for the American auto industry has
improved significantly, thanks in part to the
emergency assistance provided by the federal
government. Detroit’s Big Three have all
reported profits and gains in market share for
the first time since 1995.
General Motors Company (New GM), reported
second quarter net income of $2.5 billion, its
sixth consecutive profitable quarter. Since
emerging from bankruptcy, the company has
added shifts at six of its plants to address
growing demand. New Chrysler has also
significantly rebounded after its bankruptcy
filing. The company has lowered its structural
costs, become more efficient, adopted new

14

technologies, rejuvenated its product line, and
rebuilt its brand value.

AIG Investment Program
Following the government’s emergency
assistance to AIG, the company is now
experiencing a turnaround. AIG has completed a
successful restructuring, stabilized its
operations, and as a result, OFS is in a
considerably stronger position to exit OFS’
investment in AIG than was thought possible
during the height of the 2008 financial crisis.
As of September 30, 2011, OFS held $51.1 billion
in the AIG Investment Program, with an
estimated value of $30.4 billion. As of
September 30, 2011, OFS had received $15.4
billion from repayments and sales, dividends
and other income. OFS’ investment in AIG was
originally made in the form of preferred stock,
all of which was converted to common stock or
preferred interests in AIG Special Purpose
Vehicles in the restructuring that took place in
January 2011.

Treasury Housing Programs Under TARP
OFS has committed $45.6 billion to fund
Treasury Housing Programs Under TARP.
From inception through September 30, 2011,
$2.4 billion has been disbursed under these
programs. Based only on the permanent
modifications in place as of September 30, 2011,
OFS estimates that $7.6 billion in incentive fees
will ultimately be disbursed in association with
all Making Home Affordable (MHA)
modifications made as of September 30, 2011, if
all active modifications were to remain current
and receive incentives for 5 years. The program
is continuing to enter into new modifications.
Separately, $7.6 billion has been allocated for
the Hardest Hit Fund and $8.1 billion for the
FHA Refinance Program.

Sensitivity Analysis
The ultimate value of TARP investments will
only be known in time. Realized values will vary
from current estimates in part because economic
and financial conditions will change. Many
TARP investments do not have readily

MANAGEMENT‘S DISCUSSION AND ANALYSIS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

observable values and their values can only be
estimated by OFS.
Sensitivity analysis is one way to get some feel
for the degree of uncertainty around the OFS
estimates. In the analysis reported here, OFS
focuses on the largest components of the TARP,
the assets held under CPP, PPIP, AIFP and the
AIG Investment Program.

CPP Analysis
For CPP, the most important inputs to the
valuation are the market prices of publiclytraded preferred stock used to calibrate the
model-derived pricing of the preferred stock held
in the TARP. 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
Table 7: Impact on CPP Valuation
(Dollars in Billions)

CPP
% change from current

consists of a portfolio of claims issued by some of
the same institutions with TARP preferred stock
investments. 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 the larger institutions. This
calibration influences the asset-to-liability ratio
of the banks and consequently the default and
prepayment estimates predicted by the model. 6
As a sensitivity analysis, OFS increased and
decreased the value of the benchmark preferred
stock in the CPP by 10 percent. Table 7 shows
the impact on the value of OFS’ outstanding
investment in CPP as a result of a 10 percent
increase and a 10 percent decrease in the value
of the calibration securities.

September 30, 2011
Reported Value for
CPP
$12.44
N/A

Effect of 10%
Increase
$12.99
4.4%

Effect of 10%
Decrease
$11.19
(10.1)%

6

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

MANAGEMENT‘S DISCUSSION AND ANALYSIS

15

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

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 value as of September 30, 2011,
represents approximately 74.6 percent of par,
excluding the warrants held by OFS). The
dashed lines indicate the upper and lower bound
price used for the sensitivity analysis.

Price as a Percent of Par

Figure A: Price Chart of Benchmark
Preferred Stock
100%
80%
60%
40%
20%
0%

Market Value

Increase 10%

PPIP Analysis
To estimate the value of OFS’ outstanding
investments under the PPIP, OFS first
estimates the cash flows of the portfolio held by
the various funds. OFS uses a stochastic process
to generate 300 potential cash flow outcomes,
based on the characteristics of the loans
underlying the securities and their behavior
under simulated macro economic variables, such
as unemployment, mortgage interest rates,

Table 8: Impact on PPIP Valuation
(Dollars in Billions)

PPIP
% change from current

16

Decrease 10%

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 OFS. The aggregate of these cash flows
(each scenario is equally weighted) is discounted
to estimate the value of the program. Table 8
shows the change in the value of the OFS’
outstanding PPIP investment using the scenario
which produces the minimum amount of cash
flows to OFS and the maximum amount of cash
flows to OFS.

September 30, 2011
Reported Value for
PPIP

Maximum Cash
Flows

Minimum Cash
Flows

$ 18.38

$19.59

$18.28

N/A

4.6%

(2.4)%

MANAGEMENT‘S DISCUSSION AND ANALYSIS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

AIFP Analysis
The most important inputs to the valuation of
OFS’ outstanding investments under the AIFP
are the market price of New GM common stock
and the change in the estimated value of Ally
Financial common stock, which is driven by
certain pricing metrics of comparable public
financial institutions. Table 9 shows the change
in estimated value of OFS outstanding AIFP
investments based on a 10 percent increase and

10 percent decrease in the trading price of the
New GM common stock and separately a 10
percent increase and 10 percent decrease in the
estimated value of the Ally Financial common
stock. Figure B shows that the New GM
securities have recently been trading within the
range used in the analysis as well as outside of
this range, illustrating the uncertainty around
the cost estimates.

Table 9: Impact on AIFP Valuation
(Dollars in Billions)
September 30, 2011
Reported Value for
AIFP
Impact of GM on AIFP

Effect of 10%
Increase

Effect of 10%
Decrease

$17.84

% change from current
Impact of Ally (formerly GMAC)
on AIFP
% change from current
Figure B shows the daily closing price of the
New GM common stock since the initial public
offering in November 2010. The closing price for

$18.85

$16.83

N/A

5.7%

(5.7)%

$17.84

$18.61

$17.06

N/A

4.3%

(4.3)%

September 30, 2011 was $20.18. The dashed
lines represent the high and low price used in
the sensitivity analysis.

Figure B: Daily Price of GM Common Stock
45
40
35
30
25
$ Price 20
15
10
5
0

Daily Closing Price

MANAGEMENT‘S DISCUSSION AND ANALYSIS

Increase 10%

Decrease 10%

17

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

AIG Investment Program Analysis
The most important input to the valuation of
OFS’ outstanding investments under the AIG
Investment Program is the market price of AIG
common stock. As a sensitivity analysis, OFS
increased and decreased the value of the AIG

common stock by 10 percent. Table 10 shows
the impact on the value of OFS’ outstanding
investment in AIG as a result of a 10 percent
increase and a 10 percent decrease in the value
of the AIG common stock.

Table 10: Impact on AIG Investment Program Valuation
(Dollars in Billions)
September 30, 2011
Reported Value for AIG
Investment
AIG Investment Program
% change from current

Figure C shows the daily closing price of the AIG
common stock (closing price on September 30,
2011, was $21.95 per share) with the dashed
lines representing the prices used in the
sensitivity analysis. Figure C shows that the

$30.37

N/A

Effect of 10%
Increase

Effect of 10%
Decrease

6.9%

(6.9)%

$32.48

$28.26

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.

Figure C: Daily Price of AIG Common Stock
60
50
40
$ Price 30
20
10
0

Daily Closing Price

18

Increase 10%

Decrease 10%

MANAGEMENT‘S DISCUSSION AND ANALYSIS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

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, 2011. 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.
b.
c.
d.
e.
f.
g.
h.
i.

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 appropriately designed and
operating effectively as of September 30, 2011, with no related material weaknesses noted.

Sincerely,

Timothy G. Massad
Assistant Secretary for Financial Stability

MANAGEMENT‘S DISCUSSION AND ANALYSIS

19

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

Internal Control Program
OFS management remains committed to
maintaining effective internal controls in
safeguarding taxpayer dollars while providing
financial stability through the TARP. OFS
continues to have a high performing internal
control program in compliance with the Federal
Managers’ Financial Integrity Act (FMFIA).
OFS’ Internal Control Program Office (ICPO)
works closely with program managers and
support personnel to maintain robust internal
controls across business functions. ICPO also
coordinates with OFS’ Office of Financial Agents
(OFA) to ensure that third party service
providers whose work has a potential financial
reporting impact on OFS have well designed and
effective internal control environments
supporting TARP. During fiscal year 2011, OFS
made significant progress in continuing to
mature its internal control environment as
demonstrated below:
•

•

•

Business processes supporting existing
programs, including internal control
activities, matured through the use of
increasingly well-defined roles and
responsibilities and policies and
procedures. OFS management regularly
monitors activities to confirm that
control procedures are performed
consistently and as designed.
OFS made significant progress in
addressing findings and areas for
improvement in the internal control
environment identified through OFS' self
assessment processes (e.g., OMB
Circular A-123 internal controls over
financial reporting assessment, annual
assurance statement process) and
through work performed by the oversight
bodies (i.e., GAO, SIGTARP, and COP).
OFS made investments in information
technology (IT) in fiscal year 2011 to
drive efficiencies through the increased
automation of the operational and
accounting environment.

OFS has a Senior Assessment Team (SAT) to
guide the office’s efforts to meet the statutory
and regulatory requirements surrounding a

20

sound system of internal control. The SAT is
chaired by the Deputy Chief Financial Officer
and includes representatives from all OFS
functional areas. Furthermore, 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
communicating control objectives across the
organization and to its third party service
providers.
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
by:
•

Integrating management controls into
OFS business processes through:
o Maintaining internal control
documentation,
o Reviewing internal control
responsibilities with business
owners before major program
execution events, and
o Real-time monitoring of control
effectiveness during and after
significant program execution
events;

•

Conducting “lessons learned” sessions to
identify and remediate areas requiring
improvement;

•

Performing periodic sample-based
testing of key controls across mature
business processes; and,

•

Monitoring feedback from 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 GAO
and the SIGTARP.
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 OFS, to include

MANAGEMENT‘S DISCUSSION AND ANALYSIS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

financial management systems compliance. This
assurance statement covers OFS’ compliance
with the FMFIA, the Federal Financial
Management Improvement Act (FFMIA), and
OMB Circular A-123 Management’s
Responsibility for Internal Control. In order to
support the Assistant Secretary’s letter of
assurance, the respective OFS functional areas
prepare individual statements of assurance.
These individual statements of assurance
provide evidence supporting the achievement of
OFS’ internal control objectives and disclose any
noted internal control weaknesses.

Information Technology Systems
In fiscal year 2011, OFS continued to utilize and
improve the Core Investment Transaction Flow
(CITF), TARP’s system of record and accounting
translation engine. OFS added standardized
management reports to CITF to improve its
usefulness to management decision-making and
added functionality to capture
intradepartmental activity to facilitate year-end
financial reporting activity.
Other systems are supported by financial
agents, which provide services to OFS. The
Financial Agency Agreements maintained by the
Treasury Office of the Fiscal Assistant Secretary
in support of OFS require financial agents to
design and implement suitably robust security
plans and internal control programs, to be
reviewed and approved by OFS at least
annually.
In addition, OFS utilizes financial systems
maintained by Treasury Departmental Offices
and various Treasury bureaus. These systems
are in compliance with federal financial systems
standards and undergo regular independent
audits.
Compliance with the Improper Payments
Elimination and Recovery Act (IPERA)
The elimination of improper payments is a major
focus of OFS senior management. Managers are
held accountable for developing and
strengthening financial management controls to
detect and prevent improper payments, and
thereby better safeguard taxpayer dollars.

MANAGEMENT‘S DISCUSSION AND ANALYSIS

OFS carried out its fiscal year 2011 IPERA
review per Treasury-wide guidance and did not
assess any programs or activities as susceptible
to significant erroneous payments. OFS did not
identify any payments to incorrect payees or
ineligible recipients. However, management did
identify a small number of Making Home
Affordable (MHA) investor cost share payments
that were made in error due to unclear
guidelines related to escrow payments and data
integrity issues from servicers related to income.
The overall impact of these improper payments
was immaterial, and OFS management is
actively implementing corrective actions at the
servicer level to remedy this issue.
In coordination with OFS, Freddie Mac, one of
Treasury’s financial agents, first performed a
comprehensive analysis of potential Monthly
Investor Cost Share incentive overpayments and
underpayments in August and September 2010.
Subsequent to that analysis, Freddie Mac
provided servicers with additional guidance for
correctly calculating borrower income and
capturing the correct escrow data. As a result,
the error rates have dropped significantly in
fiscal year 2011. OFS and Freddie Mac expect
this error rate to continue to decrease as
servicers address additional issues. OFS will
continue to monitor this issue closely.

Areas for Improvement
Over the next year, OFS management will focus
on maturing its internal control environment in
several key areas as follows:
•

As programs continue to mature and
continue winding down, there is a
continued need for OFS to maintain
policies and procedures, which includes
updating or retiring documents as
appropriate.

•

OFS relies on financial agents to provide
many of the business processes and
controls supporting its programs. The
Treasury Housing programs, in
particular, have grown in scale and
complexity over the last year. OFS
continues to assess the adequacy of
internal controls provided by third
parties as they mature their program

21

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

capabilities. However, OFS will need to
heighten its oversight practices to
monitor controls as these programs
further mature.
•

The large number and complexity of
TARP programs and related transactions
pose challenges in the maintenance of
the supporting internal control
documentation and policies and
procedures. OFS needs to enhance its
ability to monitor and ensure consistency
across critical documents detailing the

controls in place to mitigate the risks
identified.
•

Limitations of the Financial Statements
The principal financial statements have been
prepared to report the financial position and
results of operations of the OFS’ TARP 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

22

Over the past year, OFS developed
information technology capabilities to
increase efficiency and automate manual
processes. Continuing this automation
will enhance OFS’ ability to reduce risks
associated with human error. In
addition, OFS management will continue
to strengthen IT-related controls
towards a more mature IT environment
supporting core business processes.

Principles (GAAP) for Federal entities and the
formats prescribed by the 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

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

Operational Goals
Operational Goal One: Ensure the
Overall Stability and Liquidity of
the Financial System
The following discussion of OFS goals and the
TARP programs focuses largely on the
significant events that occurred during fiscal
year 2011. A more comprehensive discussion of
each program, including its development and
prior years’ performance can be found in the
TARP Two-Year Retrospective and The TARP
Three Year Anniversary Report, which are
available at:
http://www.treasury.gov/initiatives/financialstability/briefingroom/reports/agency_reports/Pages/default.aspx.
The first and most significant goal of TARP is to
restore stability to the financial system. Despite
recent volatility in the stock market and shocks
in the global economy, the U.S. financial system
today is more stable than it was during the
midst of the 2008 crisis.
Financial markets and the economy continue to
recover. Credit remains available for consumers
and businesses. Financial institutions hold
more capital relative to risk than they did before
the crisis hit. Most of the government’s
emergency responses to the crisis are being
wound down and 76 percent of TARP
investments have been recovered through
repayments, sales, dividends, interest and other
income.

Bank Support Programs (CPP, TIP, AGP,
CDCI)

Capital Purchase Program
OFS launched the Capital Purchase Program
(CPP), the largest and most significant program
under EESA, on October 14, 2008. Through the
CPP, OFS provided capital infusions directly to
banks and thrifts deemed viable by their
regulators to bolster the capital position of
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 chargeoffs on loans that were not performing.
CPP investments were 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 savings and loan holding
companies. QFIs interested in participating in
the program had to submit an application to
their primary federal banking regulator.
In the period following announcement of the
CPP, 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 11 below). The largest
investment was $25 billion and the smallest was
$301,000. As Table 11 illustrates, smaller
financial institutions make up the vast majority
of participants in the CPP. Of the 707
applications approved and funded by OFS
through the CPP by the time it closed to new
institutions on December 31, 2009, 473 or 67
percent were institutions with less than $1
billion in assets.

Table 11:CPP Initial Investment Profile
(Dollars in billions)
CPP Participants
Asset Range
Number
Percent
<$1 billion
473
66.9%
$1 billion - $10 billion
177
25.0%
>$10 billion
57
8.1%
Total
707
100%

MANAGEMENT‘S DISCUSSION AND ANALYSIS

TARP Investment
Amount
Percent
3.8
1.8%
10.0
4.9%
191.1
93.3%
204.9
100%

23

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

OFS received preferred stock or debt securities
in exchange for these investments. Most
financial institutions participating in the CPP
pay OFS a dividend rate of five percent per year,
which will increase to nine percent a year after
the first five years. From inception of the
program through September 30, 2011, OFS has
received approximately $185 billion in CPP
repayments, along with approximately $11.2
billion in CPP dividends and interest and $6.9
billion in net proceeds received from the sale of
Citigroup common stock in excess of cost.

proceeds from the sale/repurchase of CPP
warrants.

As part of a June 2009 Exchange Agreement
between OFS and Citigroup, OFS exchanged the
$25 billion in preferred stock it received in
connection with Citigroup’s participation in CPP
for approximately 7.7 billion shares of common
stock at a price of $3.25 per share. In December
2010, OFS completed the sale of all remaining
2.4 million shares of common stock in Citigroup.
Proceeds were $10.5 billion, at a price per share
of $4.35. OFS had previously sold 5.3 billion
shares at an average price of $4.04 under four
trading plans during the period April to
December, 2010. The average selling price for
all 7.7 billion shares was $4.14 per share
compared to a cost of $3.25 per share. In
January 2011, OFS completed a public auction
of warrants to purchase Citigroup common
stock. Proceeds from the warrants associated
with the CPP, at an exercise price of $17.85,
totaled $54.6 million. 7

http://www.treasury.gov/initiatives/financialstability/results/cpp/Pages/default.aspx.

OFS also received warrants to purchase common
shares or other securities from the financial
institutions at the time of the CPP investment.
The purpose of the additional securities is to
provide opportunities for taxpayers to reap
additional returns on the investments made by
OFS as CPP participants recover. From
inception of the program through September 30,
2011, OFS has received nearly $7.6 billion in
7

As of September 30, 2011, OFS had exited from all
TARP investments (including CPP, TIP and AGP) in
Citigroup with proceeds greater than cost in the amount
of $12.3 billion on the $45 billion invested in the
institution. In addition to CPP proceeds reported above,
proceeds from the warrants associated with TIP and
AGP, with an exercise price of $10.61, totaled $257.6
million.

24

The CPP has already generated a positive return
to taxpayers; however, the ultimate return will
depend on several factors, including market
conditions and performance of individual
companies.
For additional information, please see the CPP
Quarterly Report and the Annual Use of Capital
Survey which can be found at:

Refinancing Through the Small Business
Lending Fund
As of September 30, 2011, 137 CPP institutions
have refinanced their CPP investments using
the SBLF totaling more than $2 billion. The
refinancing of CPP institutions into the SBLF
decreased projected costs to OFS by fully
repaying the total OFS investment in 137
institutions. These refinancing transactions
moved the risk associated with these
institutions’ repayments from OFS to SBLF.
Enacted into law as part of the Small Business
Jobs Act of 2010, the SBLF was established as a
$30 billion fund administered by Treasury that
encourages lending to small businesses by
providing capital to qualified community banks
with assets of less than $10 billion. SBLF is not
a TARP program and does not use TARP funds.

Targeted Investment Program
OFS established the Targeted Investment
Program (TIP) in December 2008. Through TIP,
OFS sought to prevent a loss of confidence in
critical financial institutions, which could result
in significant financial market disruptions,
threaten the financial strength of similarly
situated financial institutions, impair broader
financial markets, and undermine the overall
economy. TIP was considered “exceptional
assistance” for purposes of executive
compensation requirements.
OFS invested $20 billion in preferred stock in
each of two institutions --Bank of America
(BofA) and Citigroup -- under TIP, in addition to

MANAGEMENT‘S DISCUSSION AND ANALYSIS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

those funds that these financial institutions
received under the CPP. 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. OFS also
received warrants from each bank which
provided the taxpayer with additional gain on
the investments when OFS sold the BofA
warrant in fiscal year 2010 for $1.2 billion and
the Citigroup warrant in fiscal year 2011 for
$190.4 million. TIP is closed and resulted in a
positive return for taxpayers.

Asset Guarantee Program
Under the AGP, 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 Bank of New York and the FDIC. Like
TIP, 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. The
AGP was used to assist BofA and Citigroup in
conjunction with the TIP investments in those
institutions. The arrangement with BofA was
terminated before it was formally finalized, with
BofA paying OFS a termination fee. Under the
terms of the guarantee agreement with
Citigroup, OFS, the FDIC, and the FRBNY
received a premium for the guarantee of $7
billion in Citigroup preferred stock and
warrants. Additional information on the two
institutions under AGP can be found in the OFS’
FY 2010 Agency Financial Report available at:
http://www.treasury.gov/initiatives/financialstability/briefingroom/reports/agency_reports/Documents/2010%2
0OFS%20AFR%20Nov%2015.pdf.
In connection with the termination of the
Citigroup asset agreement in December 2009,
Citigroup cancelled $1.8 billion in preferred
stock previously issued to OFS. The FDIC and
OFS agreed that, subject to certain conditions,
the FDIC would transfer to OFS $800 million of
their Citigroup trust preferred stock holding
plus dividends thereon contingent on Citigroup
repaying its previously-issued FDIC debt under

MANAGEMENT‘S DISCUSSION AND ANALYSIS

the FDIC’s Temporary Liquidity Guarantee
Program which expires on December 31, 2012.
OFS sold the trust preferred securities in
October 2010 and the AGP warrants in January
2011, leaving only the $800 million of trust
preferred stock receivable from the FDIC valued
at $739 million at September 30, 2011.
The AGP is now closed and resulted in a positive
return for taxpayers. No OFS payments were
made under the program.

Community Development Capital Initiative
The CDFIs focus on providing financial services
to communities underserved by traditional
banks and financial services, such as low- and
moderate- income, minority, and other
underserved communities. 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 investments of capital with an
initial dividend or interest rate of 2 percent,
compared to the 5 percent rate generally offered
under CPP. CDFI banks and thrifts applied 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, compared to five years
under CPP.
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, which remained
outstanding as of September 30, 2011. Of this
amount, $363.3 million from 28 banks was
exchanged from investments under the CPP into
the CDCI.

Credit Market Programs (PPIP, TALF, SBA
7(a))
Public-Private Investment Program
During the financial crisis, many institutions
and investors were under extreme pressure to
reduce indebtedness. This de-leveraging process
pushed down the market prices for many
financial assets, including troubled legacy

25

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

securities (i.e., non-agency residential mortgagebacked securities (RMBS) and commercial
mortgage-backed securities (CMBS)) below their
fundamental value. Institutions and investors
were trapped with these hard-to-value assets,
marked at distressed prices on their balance
sheets, which constrained liquidity and the
availability of credit in these markets.
The PPIP was designed to purchase troubled
legacy securities (i.e., non-agency RMBS and
CMBS) by providing financing on attractive
terms as well as a matching equity investment
made by OFS. By drawing new private capital
into the market for legacy RMBS and CMBS,
PPIP was designed to help restart the market
for these securities, thereby facilitating the
removal of these assets from financial
institutions’ balance sheets and allowing for
more credit to become available for consumers
and small businesses.
OFS matches equity dollar-for-dollar and lends
up to the amount of equity raised by the PPIFs
established by private sector fund managers for
the purpose of purchasing eligible RMBS and
CMBS from eligible financial institutions under
EESA. During fiscal year 2011, OFS disbursed
$1.1 billion as equity investment and $2.3 billion
as loans to PPIFs. As of September 30, 2011,
OFS had equity investments in PPIFs
outstanding of $5.5 billion and loans outstanding
of $10.4 billion for a total of $15.9 billion. As of
September 30, 2011, the estimated value of
these investments and loans was approximately
$18.4 billion.
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
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 OFS, in proportion to their
equity capital investments. OFS also receives
warrants from the PPIFs, which gives 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

26

capital. The program structure allows for risk to
be spread between the private investors and
OFS and provides taxpayers with the
opportunity for positive returns.
For more information on these holdings and the
performance of the PPIFs, readers can refer to
the most recent PPIP Quarterly Report available
at:
http://www.treasury.gov/initiatives/financialstability/programs/Credit%20Market%20Progra
ms/ppip/Documents/PPIP%20Report%20092011.pdf

Term Asset-Backed Securities Loan Facility
TALF was a joint Federal Reserve-OFS program
that was designed to restart the asset-backed
securities (ABS) market that provide credit to
consumers and small businesses, which had
ground to a virtual standstill during the early
months of the financial crisis.
Pursuant to its Federal Reserve Act Section
13(3) authority, the Federal Reserve Board
authorized the Federal Reserve Bank of New
York (FRBNY) to extend up to $200 billion in
non-recourse loans to borrowers to enable the
purchase of newly issued asset-backed
(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, it 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, 2011, TALF LLC has not
purchased any collateral from the FRBNY.
OFS originally committed to provide $20 billion
in the form of a subordinated loan commitment
to TALF LLC. This commitment was later
reduced to $4.3 billion after the program closed
to new lending in June 2010, which represented
10 percent of the outstanding TALF loans at the
time. TALF LLC is able to use the funds to
purchase the underlying collateral associated
with the FRBNY TALF loans in the event a

MANAGEMENT‘S DISCUSSION AND ANALYSIS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

borrower surrendered the collateral or defaulted
upon its loan.
From inception through September 30, 2011,
OFS has loaned $100 million of the $4.3 billion
commitment. The maturity date on the OFS
loan to the TALF LLC is March 2019 with loans
made by the FRBNY through TALF maturing at
the latest by March 2015. As of September 30,
2011, the TALF program has experienced no
losses and all outstanding TALF loans are well
collateralized. 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, OFS does not expect
any cost to the taxpayers from this program.

Small Business Administration 7(a)
Securities Purchase Program
Small businesses play an important role in
generating new jobs and growth in our economy.
The SBA’s 7(a) Loan Guarantee Program assists
start-up and existing small businesses that face
difficulty in obtaining loans through traditional
lending channels.
To help ensure that credit flows to
entrepreneurs and small business owners, OFS
developed the SBA 7(a) Securities Purchase
Program to purchase SBA-guaranteed securities
from pool assemblers. Purchasing securities
from participating “pool assemblers” enabled
them to purchase additional small business
loans from loan originators. Since OFS began
purchasing SBA 7(a) securities, the SBA 7(a)
market has stabilized, as exhibited by new pool
issuance volumes returning to pre-crisis levels.
Under this program, OFS invested in total in 31
SBA 7(a) securities with a value of
approximately $368 million during fiscal year
2010. Those securities were comprised of 1,001
loans from 17 different industries, including
retail, food services, manufacturing, scientific
and technical services, healthcare, educational
services, and others. OFS has now sold a total of
16 securities for approximately $213.2 million.
OFS continues to hold 15 SBA 7(a) securities
with a gross outstanding balance as of
September 30, 2011, of approximately $127.6
million.

MANAGEMENT‘S DISCUSSION AND ANALYSIS

Other Programs
Automotive Industry Financing Program
The Automotive Industry Financing Program
(AIFP) was begun in December 2008 to help
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 General Motors Corporation
(Old GM) and Chrysler Holdings LLC (Old
Chrysler) were on the verge of potentially
disorderly liquidations, 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 a record time.
As a result, General Motors Company (New GM)
and Chrysler Group LLC (New Chrysler) 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.
Today, both companies have rebounded
significantly. New GM’s second quarter 2011
profit was its sixth consecutive profitable
quarter. Since emerging from bankruptcy, New
GM has added shifts at six of its plants to
address growing demand. A similar story is
playing out at New Chrysler as the company has
lowered its structural costs, become more
efficient, adopted new technologies, rejuvenated
its product line, and rebuilt its brand value.
Today, its market share continues to recover.
In total, OFS provided approximately $80 billion
in loans and equity investments to GM, GMAC
(now known as Ally Financial), Chrysler, and
Chrysler Financial. Please see Footnote 6 of
financial statements for further information on
the AIFP subsidy cost.

27

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

General Motors
OFS provided $50 billion under TARP to Old
GM, beginning with a $13.4 billion loan in
December 2008 to Old GM to fund working
capital. Under the loan agreement, Old GM was
required to submit a viable restructuring plan.
The first plan Old GM submitted failed to
establish a credible path to viability, and the
deadline was extended to June 2009 for Old GM
to develop an amended plan. OFS loaned an
additional $6 billion to fund Old GM as it
worked to submit a viable restructuring plan.
To achieve an orderly restructuring, Old GM
filed for bankruptcy on June 1, 2009. OFS
provided $30.1 billion under a debtor-inpossession financing agreement to assist Old
GM during the restructuring. A newly formed
entity, New GM purchased most of the assets of
Old GM under a sale pursuant to Section 363 of
the bankruptcy code (363 Sale). When the sale
to New GM was completed on July 10, 2009,
OFS converted most of its loans to 60.8 percent
of the common equity in the New GM and $2.1
billion in preferred stock. At that time, OFS
held $6.7 billion in outstanding loans which
were repaid in full during fiscal year 2010.
Approximately $986 million remained with Old
GM (now known as Motors Liquidation
Company) for wind-down costs associated with
its liquidation.
Following the July 2009 restructuring and also
as of September 30, 2010, New GM had the
following ownership: 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 percent). As part of the restructuring, New
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).
Several milestones were reached regarding OFS’
investment in New GM during fiscal year 2011.
•

28

In October 2010, OFS accepted an offer
from New GM to repurchase $2.1 billion
of the TARP preferred stock, conditioned
on the closing of the proposed initial
public offering of New GM’s common

stock. Under the agreement, New GM
would purchase the preferred stock at a
price per share of $25.50, which was
equal to 102 percent of the liquidation
preference. In December 2010, as
announced in October 2010, New GM
completed the repurchase of all New GM
preferred stock held by OFS for total
proceeds of $2.14 billion.
•

In November 2010, New GM completed
its initial public offering (IPO) with net
proceeds to OFS of $13.5 billion. The
price per share was $32.7525, which
represents the public sale price of $33
less underwriting discounts and fees,
with the sale resulting in net proceeds
less than cost of $4.4 billion. The IPO
reduced OFS’ ownership of New GM’s
outstanding common stock by nearly half
from 60.8 percent to 32 percent.

•

In March 2011, the Plan of Liquidation
for Old GM became effective and OFS’
$986 million loan to Old GM was
converted to an administrative claim.
OFS retained the right to recover
additional proceeds; however, any
additional recovery is dependent on
actual liquidation proceeds and pending
litigation. During fiscal year 2011, OFS
received payments totaling $111 million
from Motors Liquidation Company.

Chrysler
In January 2009, OFS loaned $4 billion to Old
Chrysler. Under the loan agreement, Old
Chrysler was required to implement a viable
restructuring plan. In March 2009, the
Administration determined that the business
plan submitted by Old Chrysler failed to
demonstrate viability and concluded that Old
Chrysler was not viable as a stand-alone
company. In fiscal year 2010, Old Chrysler
repaid $1.9 billion while $500 million was
assumed by New Chrysler (see below). OFS
wrote off the remaining $1.6 billion of this loan.
The Administration subsequently laid out a
framework for Old Chrysler to achieve viability
by partnering with the international car
company Fiat. As part of the planned
restructuring, in April 2009, Old Chrysler filed

MANAGEMENT‘S DISCUSSION AND ANALYSIS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

for bankruptcy protection. In May 2009, OFS
provided $1.9 billion to Old Chrysler under a
debtor-in-possession (DIP) financing agreement
for assistance during its bankruptcy proceeding.
The DIP loan was extinguished by the
bankruptcy court in April 2010, including
collateral security attached to the loan, and
transferred to a liquidation trust. OFS retained
the right to recover the proceeds from the
liquidation of the specified collateral and
received $40.2 million from the liquidation trust
in fiscal year 2010 and $7.8 million in fiscal year
2011.
In June 2009, a newly formed entity, Chrysler
Group LLC, (New Chrysler) purchased most of
the assets of Old Chrysler under a 363 sale.
OFS provided a $6.6 billion loan commitment to
New Chrysler (as of September 30, 2010, $2.1
billion remained undrawn), and received a 9.9
percent equity ownership in New Chrysler. The
agreement included the ability of Fiat to meet
specific performance related milestones which
would increase the ownership percentage of Fiat
and lower the ownership percentage of OFS. In
January, April and May 2011, Fiat met those
performance milestones, lowering the OFS
ownership percentage to 6.6 percent (6.0 percent
on a fully diluted basis).
•

In May 2011, New Chrysler repaid $5.1
billion in TARP loans and terminated its
ability to draw a remaining $2.1 billion
TARP loan commitment. Of the
repayment, $500 million was to partially
repay the January 2009 loan of $4
billion. New Chrysler’s repayment came
six years before the scheduled maturity
of those loans in 2017.

•

In July 2011, OFS received $560 million
in proceeds from the sale of its
remaining stake in New Chrysler to
Fiat. With the closing of this
transaction, OFS has fully exited its
investment in New Chrysler. Fiat paid
$500 million to OFS for its 98,461 shares
or 6 percent fully diluted equity interest
in New Chrysler. Fiat also paid $60
million to OFS for its rights under an
agreement with the UAW retirement
trust pertaining to the trust's shares in
New Chrysler.

MANAGEMENT‘S DISCUSSION AND ANALYSIS

From inception through September 30, 2011,
OFS has received more than $11.1 billion of the
$12.4 billion disbursed to Chrysler related
entities (primarily Old Chrysler and New
Chrysler) through principal repayments, sale of
stock, interest, and other collections. While OFS
still holds an interest in a liquidation trust, no
significant future recoveries are expected.
Accordingly, OFS is unlikely to fully recover the
difference of $1.3 billion.

Ally Financial (formerly GMAC)
In December 2008, OFS made an initial
investment of $5 billion in GMAC. OFS also lent
$884 million of TARP funds to Old GM (one of
GMAC’s owners) for the purchase of additional
ownership interests in a rights offering by
GMAC. In May 2009, federal banking
regulators required GMAC to raise additional
capital by November 2009 in connection with the
Supervisory Capital Assistance Program
(SCAP)/stress test. Also in May 2009, OFS
exercised its option to exchange the loan with
Old GM for 35.4 percent of common membership
interests in GMAC. OFS also purchased $7.5
billion of convertible preferred shares from
GMAC in May 2009, which enabled GMAC to
partially meet the Supervisory Capital
Assessment Program (SCAP) requirements. In
December 2009, OFS made additional
investments of $3.8 billion in GMAC to enable
GMAC to satisfy the SCAP requirements and
exchanged certain preferred shares for common
stock. OFS provided the $3.8 billion in new
capital in the form of $2.54 billion of Trust
Preferred Securities (TruPS), which are senior to
all other capital securities of the company, and
$1.25 billion of Mandatory Convertible Preferred
Stock.
In May 2010, GMAC changed its corporate name
to Ally Financial, Inc. In December 2010, OFS
converted additional preferred stock in Ally
Financial with a liquidation preference of $5.5
billion into common stock – a move designed to
accelerate OFS’ ability to exit its investment in
the company. The conversion increased OFS’
common equity stake in Ally Financial from 56
percent to 74 percent of total common shares
outstanding. In connection with this conversion,
OFS converted its preferred stock at 1.0 times
the book value of tangible common equity
balance as of September 30, 2010, subject to
29

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

certain adjustments. Ally Financial also agreed
to assist OFS in the sale or sales of its holdings
of TruPS on terms acceptable to OFS and Ally
Financial as soon as practical subject to certain
conditions.
In March 2011, OFS priced a secondary offering
at par for all of its Ally Financial trust preferred
securities. Aggregate proceeds from the offering
(together with a distribution fee) totaled
approximately $2.7 billion. With the proceeds
from this sale, OFS has received approximately
$5.1 billion from Ally Financial from inception of
the program through September 30, 2011,
including $2.4 billion in dividends and interest.
As of September 30, 2011, OFS holds $5.9 billion
of convertible preferred stock and 74 percent of
the outstanding shares of common stock in Ally
Financial as discussed in footnote 6 to the OFS
Financial Statements.

American International Group, Inc. (AIG)
Investment Program
In September 2008, 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 and 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.
Then, the financial crisis hit in October of 2008.
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
newest, riskiest, and most complex transactions
of the U.S. 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 could have directly
affected the savings of millions of Americans.
Therefore, the federal government took action to
protect the U.S. financial system.

30

During September, October, and November
2008, the Federal Reserve and OFS took a series
of steps to prevent AIG’s disorderly failure and
mitigate systemic risks. The initial assistance to
AIG was provided by the FRBNY before the
passage of EESA and the creation of TARP.
After EESA was enacted, the OFS and the
Federal Reserve continued to work together to
address the challenges posed by AIG.
In November 2008, OFS invested $40 billion in
senior preferred stock of AIG and it also received
warrants to purchase common shares in the
firm. The funds were used immediately to
reduce the loans provided to AIG by the FRBNY.
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. Complete details on the AIG
investment are available in at the TARP Three
Year Anniversary Report and the TARP TwoYear Retrospective Report which are both
available at:
http://www.treasury.gov/initiatives/financialstability/briefingroom/reports/agency_reports/Pages/default.aspx.
AIG is now experiencing a turnaround. The
company has completed a successful
restructuring. Having stabilized its operations,
AIG is now in a stronger position to repay the
OFS’ investments. As a result, during fiscal
year 2011, substantial progress has been made
in reducing OFS’ exposure to AIG.
•

In January 2011, Treasury, FRBNY, the
trustees of the AIG Credit Facility Trust
(the Trust) 8 and AIG completed the
Restructuring previously announced on
September 30, 2010. This series of
integrated transactions and certain
corporate actions was designed to
accelerate the repayment of U.S.
taxpayer funds and to promote AIG’s
transition from a majority government
owned and supported entity to a
financially sound and independent
entity. As part of the AIG restructuring

The independent trust established to manage the
Department of Treasury’s beneficial interest in Series
C preferred AIG shares.

8

MANAGEMENT‘S DISCUSSION AND ANALYSIS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

on January 14, 2011, AIG drew $20.3
billion from the capital facility made
available by OFS, for a total of $27.8
billion drawn. In the Restructuring, AIG
repaid FRBNY a total of $47 billion.
AIG no longer has any outstanding
obligations to the FBRNY (although the
FRBNY has loans to two special purpose
vehicles which acquired assets from
AIG). Following the Restructuring, OFS’
total investment in AIG was $68 billion,
and as of January 31, 2011, Treasury’s
investment consisted of approximately
1.655 billion shares of AIG common
stock (1.092 billion shares owned by OFS
and 562.9 million shares owned by the
Department, which were received on the
termination of the Trust), representing
ownership of 92 percent of the company
(77 percent held by OFS and 15 percent
held by the Treasury outside of OFS) as
well as $20.3 billion of Treasury OFS’
preferred equity interests in two AIG
owned Special Purpose Vehicles (SPVs).
The SPVs are wholly owned by AIG and
consolidated on the AIG financial
statements. The OFS owned 100 percent
of the preferred share interest in the two
SPVs. Generally, the SPVs pay the
Preferred Interest holder (i.e., OFS) a
return of 5 percent per annum.
•

•

•

Assets of the SPV’s included AIG equity
interests in AIA, MetLife, AIG Star Life
Insurance, AIG Edison Life Insurance,
Nan Shan Life Insurance, ILFC (Aircraft
Leasing entity) and Maiden Lane II and
III. AIG is to repay the SPV preferred
interest owned by OFS from
monetization of the non-cash assets of
the SPVs.
In February 2011, AIG sold its
subsidiaries, AIG Star Life Insurance
Co., Ltd. and AIG Edison Life Insurance
Company and repaid $2.1 billion to OFS,
which reduced the total outstanding
amount of Treasury- OFS’ preferred
equity interest in the SPVs from $20.3
billion to $18.2 billion.
In March 2011, AIG repaid OFS $6.9
billion, which further reduced the total
outstanding amount of OFS’ preferred

MANAGEMENT‘S DISCUSSION AND ANALYSIS

equity interests in the SPVs from $18.2
billion to $11.3 billion.
•

In May 2011, Treasury completed the
sale of 200 million shares of AIG
common stock at $29.00 per share for
$5.8 billion, with $3.8 billion in proceeds
to OFS, resulting in proceeds less than
cost of about $1.9 billion. 9

•

In August 2011, AIG repaid OFS $2.2
billion, including $0.2 billion in preferred
interest returns recognized as dividends,
which further reduced OFS’ preferred
equity interest in the SPVs from $11.3
billion to $9.3 billion. This repayment
was funded through proceeds from the
sale of AIG’s Nan Shan Life Insurance
subsidiary.

As of September 30, 2011, OFS’ remaining gross
outstanding TARP AIG related investments
amounted to $51.1 billion, which consists of 960
million shares of AIG common stock 10 (with a
cost basis of $43.53 per share and a market
value of $21.1 billion or $21.95 per share), and
approximately $9.3 billion of preferred equity
interests. As of September 30, 2011, the
aggregate value of the holdings of the SPV
greatly exceeds OFS’ preferred interests.
Therefore, OFS does not currently anticipate
incurring any loss from its SPV preferred
interests. Additional discussion of the AIG
investment including subsidy cost can be found
in footnote 6 of the OFS Financial Statements.

The sale consisted of 131,981,246 TARP shares and
68,018,754 non-TARP shares based upon the
Treasury’s pro-rata holding of those shares. The nonTARP shares are those received from the trust
established by the FRBNY for the benefit of the U.S.
government. Proceeds for non-TARP common stock
totaled $1.97 billion and are not reported in OFS
receipts.

9

10

OFS’ 960 million shares of AIG common stock
represent 50.8 percent of AIG’s total shares outstanding
as of September 30, 2011. Treasury, outside of TARP,
owns an additional 495 million shares of AIG common
stock which represent an additional 26.1 percent of
AIG’s total shares on a fully diluted basis.

31

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

Operational Goal Two: Prevent
Avoidable Foreclosures and
Preserve Homeownership
OFS established several programs under TARP
to combat the historic housing crisis and
important new reforms are being introduced in
part because of TARP’s housing programs.
While the housing market remains depressed,
TARP’s initiatives to assist struggling
homeowners have helped provide more
affordable permanent monthly mortgage
payments to over 850,000 homeowners and
provided an additional 18,000 homeowners (95
percent of these homeowners helped through
non-GSE programs) with alternative solutions to
foreclosure. In addition, TARP’s housing
programs have set new standard practices for
mortgage providers that have indirectly helped
millions more.
Examples include:
•

Establishing a single point of contact for
homeowners seeking assistance. This
critical reform is helping to prevent
homeowners from receiving conflicting
information about their options, while
providing them access to a single,
knowledgeable case manager who can
guide them through the modification
process.

•

Limiting the practice of “dual tracking” –
where service providers begin the
foreclosure process while simultaneously
evaluating homeowners for a
modification.

•

Requiring servicers to provide qualified
unemployed homeowners with a
forbearance period during which their
monthly payments are temporarily
reduced while they look for a new job.

•

Assessing servicers to ensure that they
are complying with OFS’ housing
program guidelines and are meeting
their obligations to homeowners fairly.

By introducing these and other new concepts,
OFS’ housing programs are serving as a national

32

laboratory for helping the private and non-profit
sectors address a foreclosure challenge on this
scale.
Using authority granted under EESA, OFS
established housing programs under TARP that
fall into three initiatives: the MHA program,
(which includes the HAMP), the Hardest Hit
Fund (HHF) and OFS’ support for the FHA
Refinance Program. Together these programs
make up a comprehensive housing program,
whose goal is to lower mortgage payments for atrisk borrowers, support loan modifications
aimed at providing sustainable, affordable
mortgage payments for borrowers, prevent
avoidable foreclosures and provide incentives to
investor/owners of loans, loan servicers, and
homeowners to participate in the program. To
protect taxpayers, the MHA and HHF housing
initiatives generally 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.
Rather than try and stop every foreclosure, OFS’
housing programs have focused on assisting
families with home loans that would be
sustainable over the long term if modified. For
borrowers whose mortgages could not be saved,
OFS’s programs have helped them to make a
more graceful and orderly transition to a more
sustainable living situation.
The total cost of the TARP housing programs,
excluding administrative costs, cannot exceed—
and may be less than—$45.6 billion, which is the
amount committed to that purpose.

Home Affordable Modification Program (HAMP)
HAMP is a first lien mortgage modification
program that provides incentives to mortgage
servicers, investors, and homeowners to reduce
eligible homeowners’ monthly payments to
affordable levels based on the homeowner’s
current income. Under this program, OFS pays
the incentives for the modification of loans not
held by government sponsored enterprises
(GSEs) while the GSEs bear the cost of
modifications of loans held by the GSEs. HAMP
is the largest program within MHA and includes

MANAGEMENT‘S DISCUSSION AND ANALYSIS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

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).

Before a mortgage can be 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 can earn up to $1,000 per year for
five years to reduce the amount of principal they
owe up to $5,000 by making timely payments on
permanently modified loans.

Additional Components of Making Home
Affordable
•

•

•

The FHA-HAMP Program provides the
same incentives as HAMP for Federal
Housing Administration (FHA)
guaranteed loans.
The Second Lien Modification Program
(2MP) provides incentives for second-lien
holders to modify or extinguish a secondlien mortgage when a modification has
been initiated on the first lien mortgage
for the same property under HAMP.
The Treasury/FHA Second Lien Program
(2LP) provides incentives to servicers for
extinguishment of second liens for

MANAGEMENT‘S DISCUSSION AND ANALYSIS

borrowers who refinance their first lien
mortgages under the FHA-Refinance
Program.
•

The Rural Development (RD)-HAMP
Program provides incentives for modified
United States Department of Agriculture
(USDA) guaranteed mortgages.

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 HFA Innovation Fund for the
Hardest Hit Housing Markets (HFA Hardest Hit
Fund, or HHF), which allow state HFAs in the
nation’s hardest hit housing markets and high
unemployment markets to design innovative,
locally targeted foreclosure prevention
programs. State HFAs design the state
programs, tailoring the housing assistance to
their local needs. Further information on the
funded programs is available at:
http://www.FinancialStability.gov/roadtostabilit
y/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 FHARefinance 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;

•

The mortgage investor must reduce the
amount owed on the original loan by at
least ten percent;

33

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

•
•

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 have been made available up to
approximately $8 billion in the aggregate to
provide additional coverage to lenders 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.
OFS has entered into a letter of credit (L/C) to
fund the FHA- Refinance Program. Pursuant to
this L/C, a reserve account has been pre-funded
with $50 million in funds for OFS’ share of any
future loss claim payments. OFS will be
reimbursed for all unused amounts from this
account. As of September 30, 2011, no
disbursements for loss claim payments under
the FHA- Refinance Program have been made.
MHA Results
The incentives offered under MHA are helping
homeowners and assisting in stabilizing the
housing market. Through September 30, 2011,
112 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, 2011, OFS has made
commitments to fund up to $29.9 billion in MHA
payments.
After 31 months, more than 1.7 million
homeowners participating in the OFS and GSE
HAMP programs have entered into trial
modifications that reduced their mortgage
payments to more affordable levels. Of these
homeowners, the OFS HAMP program has
helped almost 800,000 participants. Over
850,000 homeowners participating in the HAMP

34

programs have had their mortgage terms
modified permanently, with over 400,000 of
those participants from the OFS HAMP
program. Homeowners participating in both the
GSE and OFS HAMP programs collectively have
experienced a 37 percent median reduction in
their mortgage payments—more than $525 per
month. MHA has also spurred the mortgage
industry to adopt similar programs that have
helped millions more at no cost to the taxpayer.
OFS now publishes quarterly assessments of
servicer performance, which contain data on
compliance with program guidelines as well as
program results metrics. Going forward, OFS
hopes these assessments will set the standard
for transparency about mortgage servicer efforts
to assist homeowners and encourage servicers to
correct identified instances of noncompliance.
For the second quarter of calendar year 2011,
two servicers had been determined to need
substantial improvement. These servicers were
also in need of substantial improvement in the
first quarter, and their servicer incentives have
been withheld since June 1, 2011.
MHA performance highlights for fiscal year 2011
can be found at:
http://www.treasury.gov/initiatives/financialstability/results/MHAReports/Pages/default.aspx.
Hardest Hit Fund Results
The Hardest Hit Fund provides funding to 18
states and the District of Columbia (DC) to
provide assistance to struggling homeowners
through locally-tailored programs administered
by each respective HFA. $7.6 billion has been
allocated of the $45.6 billion committed for the
housing programs. From inception of the
program through September 30, 2011, a total of
$655 million has been drawn down from OFS by
the 18 states and DC. Each state has its own
timeline for implementation of their programs
and draws down funds as they are needed.
Housing Scorecard
The U.S. Department of Housing and Urban
Development (HUD) and OFS also release a
Monthly Housing Scorecard on the nation’s
housing market. Each month the scorecard
presents key housing market indicators and

MANAGEMENT‘S DISCUSSION AND ANALYSIS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

highlights the impact of the Administration’s
housing recovery efforts, including assistance to
homeowners through the FHA and the HAMP.
The Housing Scorecard is available at:
www.hud.gov/scorecard.

Operational Goal Three: Protect
Taxpayers’ Interests
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. OFS also takes steps to ensure that
TARP recipients comply with any TARP-related
statutory or contractual obligations such as
executive compensation requirements and
restrictions on dividend payments.
Consistent with the statutory requirements,
OFS’ four overarching portfolio management
guiding principles are as follows:
•

Protect taxpayer investments and
maximize overall investment returns
within competing constraints,

•

Promote stability for and prevent
disruption of financial markets and the
economy,

•

Bolster market confidence to increase
private capital investment, and

•

Dispose of investments as soon as
practicable, in a timely and orderly
manner that minimizes financial market
and economic impact.

OFS’ asset management approach protects
taxpayer investments and promotes stability
through evaluating systemic and individual risk
from standardized reporting, 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, OFS seeks to bolster market
confidence to increase private capital
investment.

MANAGEMENT‘S DISCUSSION AND ANALYSIS

OFS seeks to exit investments as soon as
practicable to remove OFS as a shareholder,
eliminate or reduce 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 maximizing
taxpayer returns, avoiding further financial
market and/or economic disruption, and the
potentially negative impact to the issuer’s health
and/or capital raising plans from OFS’
disposition. An issuer typically needs the
approval of its primary federal regulator in order
to repay OFS and therefore regulatory approvals
also affect how quickly an institution can repay.
In managing the TARP investments, OFS takes
a disciplined portfolio approach with a review
down to the individual investment level. OFS
aims to monitor risk and performance at both
the overall portfolio level and the individual
investment level. Given the nature and size of
the portfolio, risk and performance are linked to
the overall U.S. financial system and the
economy. In conducting the portfolio
management activities, OFS employs a mix of
dedicated professionals and external asset
managers. These external asset managers
provide market specific information such as
market prices and valuations as well as detailed
credit analysis using public information on a
periodic basis.
Risk Assessment
OFS has developed procedures to identify and
mitigate investment risk. These procedures are
designed to identify TARP recipients that are in
a significantly challenged financial condition to
ensure heightened monitoring and additional
diligence and to determine appropriate
responses by OFS to preserve the taxpayers’
investment and minimize loss as well as to
maintain financial stability. Specifically, 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, OFS and its external asset
managers engage in heightened monitoring and

35

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

due diligence that reflects the severity and
timing of the challenges.
Although OFS relied on the recommendations of
federal banking regulators in connection with
reviewing and approving applications for
assistance, OFS generally 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 OFS
as an investor and the duties of the federal
government as regulator.
The data gathered through this process is used
by OFS in consultation with its external managers and legal advisors to determine a proper
course of action. This may include making
recommendations to management or working
with management and other 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. OFS does not seek to
influence the management of TARP recipients
for non-financial purposes.
Compliance
OFS also takes steps to ensure that TARP
recipients comply with their TARP-related
statutory and contractual obligations. Statutory
obligations include executive compensation
restrictions. Contractual obligations vary by
investment type. For most of 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 (currently
AIG, GM, and Ally) must comply with additional
restrictions on executive compensation, lobbying,
corporate expenses and internal controls and
must provide quarterly compliance reports.
All servicers voluntarily participating in MHA
have contractually agreed to follow the MHA
program guidelines, which require the servicer
to offer a MHA modification to all eligible
borrowers and to have systems that can process
all MHA-eligible loans. Servicers are subject to
periodic, on-site compliance reviews performed
36

by OFS’ 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 wellcontrolled program that assists as many eligible
homeowners as possible to retain their homes
while taking reasonable steps to prevent waste,
fraud and abuse. OFS works closely with MHAC to design and refine the compliance program
and conducts quality assessments of the
activities performed by MHA-C. In fiscal year
2011, OFS began publishing quarterly
assessments of the ten largest servicers.
Warrant Sales Results
OFS adheres to a consistent process for
evaluating bids from institutions to repurchase
their warrants. Upon receiving a bid for a
warrant repurchase, OFS utilizes (i) market
quotes, (ii) independent, third party valuations,
and (iii) model valuations to assess the bid. OFS
began selling warrants back to banks that had
repaid the TARP investment in May 2009.
Since the program’s inception, OFS has received
more than $9.1 billion in gross proceeds from the
disposition of warrants associated with 93 CPP
investments and both TIP investments,
consisting of (i) $3.7 billion from issuer
repurchases at agreed upon fair market values
and (ii) $5.4 billion from auctions. For the 93
fully repaid CPP investments representing
$180.1 billion in capital, OFS has received an
absolute return (i.e., not annualized) of 4.8
percent from dividends and an added 4.2
percentage return from the sale of the warrants
for a total absolute return of 9.0 percent. For
the $40 billion TIP investments in Bank of
America and Citigroup, OFS received an
absolute return of 6.4 percent from dividends
and an added 3.8 percent return from the sale of
the warrants for a total absolute return of 10.2
percent. 11 These returns are not predictive of
the eventual returns on the entire CPP
portfolios. For the complete Warrant
11

Since some of the OFS’ warrant repurchases were
made in OFS’ first year, OFS has consistently reported
absolute returns for all warrant sales, rather than
annualizing for some sales and not others.

MANAGEMENT‘S DISCUSSION AND ANALYSIS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

Disposition Report, please visit:
http://www.treasury.gov/initiatives/financialstability/briefingroom/reports/other/Pages/default.aspx

•

Monthly reports detailing the progress of
modifications under the Making Home
Affordable program;

•

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; and
Quarterly assessments of the ten largest
mortgage servicers.

Operational Goal Four: Promote
Transparency
To protect taxpayers and help ensure that every
dollar is directed toward promoting financial
stability, OFS established comprehensive
accountability and transparency measures. OFS
publishes hundreds of reports and 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 countless reports over nearly
three years of the TARP’s existence. All of these
reports and information are posted on the OFS
website, www.FinancialStability.gov, including:
•

Lists of all the institutions participating
in TARP programs, and all of the
investments OFS has made;

•

All investment contracts defining the
terms of those investments within five to
ten business days of a transaction’s
closing;

•

All contracts with OFS service providers
involved with TARP programs;

•

A Daily TARP Update Report;

•

A TARP Tracker;

•

A report of each transaction within two
business days of completing the
transaction;

•

Monthly reports of dividend and interest
received;

•

Monthly reports to Congress, which
present updates on OFS investments
and programs in a clear, concise manner;

MANAGEMENT‘S DISCUSSION AND ANALYSIS

•

OFS has worked to maximize the transparency
of the housing program to borrowers and ensure
that servicers are held accountable. For
example, every borrower is entitled to a clear
explanation if he or she is determined to be
ineligible for a HAMP modification. OFS has
established denial codes that require servicers to
report the reason for modification denials in
writing to 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 Homeowners HOPETM
Hotline, a counseling service provided by the
Homeownership Preservation Foundation 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.
OFS increased transparency and public access to
the 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, acting as OFS’
compliance agent, conducts periodic audits of
servicers’ implementation of the model and
requires servicers to use models which meet
OFS’ NPV specifications or to revert back to
OFS’ NPV application. As required by the DoddFrank Act, OFS established 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.

37

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

In a continued commitment to enhanced
reporting and transparency, in January 2011,
the Obama Administration released the MHA
Data File which includes characteristics of
program participants to date, including financial
information, mortgage loan information before
and after entering HAMP, performance in a
HAMP modification, and race/ethnicity data.
The MHA Data File offers mortgage loan-level
data and is intended to allow for better
understanding of the impact of the program.
OFS applied the recommendations of an
independent non-profit, non-partisan policy
institute in preparing the MHA Data File to
ensure the privacy of participating homeowners.
The release of the data file fulfills a requirement
within the Dodd-Frank Act to make available
loan-level data about the program. OFS will
update the file monthly and will expand
reporting to include newer initiatives that are
part of Making Home Affordable. Researchers
interested in using the MHA Data File can
access the file and user guide at:
http://www.Treasury.gov/initiatives/financialsta
bility/results/Pages/mha_publicfile.aspx.
A. Audited Financial Statements
OFS prepares separate financial statements for
TARP on an annual basis. This is the third OFS
Agency Financial Report (AFR), and includes the
audited financial statements for the fiscal years
ended September 30, 2011 and September 30,
2010. Additional reports for prior periods are
available at: www.FinancialStability.gov.
In its first two years of operation, TARP’s
financial statements received unqualified
(“clean”) audit opinions from its auditors, the
GAO. OFS also received a Certificate of
Excellence in Accountability Reporting (CEAR)
from the Association of Government Accountants
for both fiscal year 2010 and the period ending
September 30, 2009.
B.

additional emergency measures taken by the
federal government to stabilize the financial
system following the 2008 crisis. Readers are
invited to refer to these documents at:
http://www.treasury.gov/initiatives/financialstability/briefingroom/reports/agency_reports/Pages/default.aspx.
C. Oversight by Four Separate Agencies
Congress also established four avenues of
oversight for TARP:
•

The Financial Stability Oversight Board,
established by EESA Section104;

•

Specific responsibilities for the GAO as
set out in EESA Section 116;

•

The Special Inspector General for TARP,
established by EESA Section 121; and

•

The Congressional Oversight Panel
(COP), established by EESA Section125.
COP concluded its operations in
accordance with EESA on April 3, 2011.

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.
D. Congressional Hearings and Testimony
OFS officials have testified in numerous
Congressional hearings since TARP was created.
Copies of the written testimony are available at:
www.FinancialStability.gov/latest/pressreleases.
html.

TARP Retrospective Reports

In October 2011, OFS published the TARP
Three-Year Anniversary Report. This serves as
an update to OFS’ comprehensive TARP TwoYear Retrospective report issued in October
2010. These reports include information on
TARP programs and the effects of TARP and
38

MANAGEMENT‘S DISCUSSION AND ANALYSIS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

Part 2: Financial Report

MANAGEMENT‘S DISCUSSION AND ANALYSIS

39

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

40

MANAGEMENT‘S DISCUSSION AND ANALYSIS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

MESSAGE FROM THE CHIEF FINANCIAL OFFICER (CF0)
The Office of Financial Stability’s (OFS) Agency Financial Report for fiscal year 2011 provides readers
information on financial results relating to the Troubled Asset Relief Program (TARP) as required by the
Emergency Economic Stabilization Act (EESA) of 2008 and other laws. It is a critical part of our efforts to
ensure the highest level of transparency and accountability to the American people.
For fiscal year 2011, the Government Accountability Office (GAO) provided OFS unqualified – “clean” -- audit
opinions on the fair presentation of our financial statements and the effectiveness of our internal control over
financial reporting. In addition, the auditors determined that we had no material weaknesses. However, GAO
continued to report one significant deficiency in internal control over our accounting and financial reporting
processes.
I would like to acknowledge senior management’s commitment to good governance as well as the discipline,
transparency, and care exhibited by OFS employees in creating and executing our organization’s policies and
procedures. We were honored to have received the Certificate of Excellence in Accountability Reporting (CEAR)
award from the Association of Government Accountants for both fiscal year 2010 and the period ending
September 30, 2009.
For fiscal year 2011, net cost of operations was $9.5 billion, resulting in a cumulative net cost of operations of
$28.0 billion since inception. The fiscal year 2011 net cost of operations primarily results from a decline in the
value of Ally Financial, reductions in the share prices of common stock holdings in General Motors and
American International Group, Inc. (AIG) and continued costs of the Treasury Housing Programs Under TARP.
The cumulative net cost of operations primarily consists of net subsidy cost on direct loans and/or equity
investments in AIG and automobile companies partially offset by net subsidy income related to TARP’s bank
support and credit market programs. During the past year, OFS focused on further strengthening its rigorous
internal control processes around obligations, transaction processing, disbursements, 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 2011, OFS enhanced its
subsidiary ledger for tracking TARP equity investments and loans and the supporting accounting data. This
strengthened system of record provides automated controls over reporting financial information with
appropriate system controls.
On October 3, 2010, the government’s authority to make new financial 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, our primary focus is on managing current investment assets and
implementing the housing programs.
I feel fortunate to play a role in the continuing tradition of sound fiscal stewardship at 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 people. Moving forward, we will
continue to strengthen our financial management capacity. In particular, we will continue to enhance our
procedures, documentation, and controls over our systems and processes to protect taxpayer interests and
ensure the highest levels of transparency in our activities.
Sincerely,

Lorenzo Rasetti
Chief Financial Officer

MESSAGE FROM THE CHIEF FINANCIAL OFFICER

41

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT

42

AUDITOR’S REPORT

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

AUDITOR’S REPORT

43

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

44

AUDITOR’S REPORT

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

AUDITOR’S REPORT

45

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

46

AUDITOR’S REPORT

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

AUDITOR’S REPORT

47

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

48

AUDITOR’S REPORT

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

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

AUDITOR’S REPORT

49

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

Appendix II: OFS Response to Auditor’s Report

50

AUDITOR’S REPORT

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

This page intentionally left blank.

AUDITOR’S REPORT

51

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

FINANCIAL STATEMENTS
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’ 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

52

commercial entities in which the OFS has a
significant equity interest.
The Balance Sheet summarizes the OFS assets,
liabilities and net position as of September 30,
2011 and 2010. 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 years ended September 30,
2011 and 2010.
The Statement of Changes in Net Position
presents the OFS ending net position by two
components - Cumulative Results of Operations
and Unexpended Appropriations as of September
30, 2011 and 2010. It summarizes the changes 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 for the years ended September 30, 2011
and 2010.

FINANCIAL STATEMENTS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

BALANCE SHEET

Office of Financial Stability (Troubled Asset Relief Program)
As of September 30, 2011 and 2010
Dollars in Millions

2011

2010

ASSETS
Intragovernmental Assets:
Fund Balance with Treasury (Note 3)
Asset Guarantee Program (Note 6)

$

$

80,104
$

-

815
-

-

Troubled Asset Relief Program:
Direct Loans and Equity Investments, Net (Note 6)

98,664

99,479

50

Cash on Deposit for Housing Program (Note 4)
Accounts Receivable

Total Assets

739

84,081

Total Intragovernmental Assets

Asset Guarantee Program (Note 6)

83,342

4

142,452

164,235

$

2

$

2,240

244,175

LIABILITIES
Intragovernmental Liabilities:
Accounts Payable and Other Liabilities
Due to the General Fund (Note 7)

Principal Payable to the Bureau of the Public Debt (Note 8)

Total Intragovernmental Liabilities

$

$

129,497

134,090

$

93

Accounts Payable and Other Liabilities
Liability for Treasury Housing Programs Under TARP (Notes 5 and 6)
Total Liabilities

4,591

$

344

134,527

140,404
165,521
134

$

-

Commitments and Contingencies (Note 9)

5

25,112

283

165,938
-

NET POSITION
Unexpended Appropriations

Cumulative Results of Operations

$

Total Net Position

$

Total Liabilities and Net Position

$

57,544

$

79,783

29,708

$

78,237

164,235

$

244,175

(27,836)

(1,546)

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

FINANCIAL STATEMENTS

53

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

STATEMENT OF NET COST

Office of Financial Stability (Troubled Asset Relief Program)
For the Years Ended September 30, 2011 and 2010

2011

Dollars in Millions

2010

STRATEGIC GOAL: TO ENSURE THE OVERALL STABILITY AND LIQUIDITY OF THE FINANCIAL SYSTEM,
PREVENT AVOIDABLE FORECLOSURES AND PRESERVE HOMEOWNERSHIP
Gross Cost (Income):
Subsidy Cost (Income) (Note 6)
Direct Loan and Equity Investment Programs
Other Credit Programs
Total Program Subsidy Cost (Income)

$

7,208
31
7,239

Interest Expense on Borrowings from the Bureau of the Public Debt (Note 10)
Treasury Housing Programs Under TARP (Note 5)
Administrative Cost
Total Gross Cost (Income)

3,827
1,943
315
13,324

Earned Revenue:
Dividend and Interest Income - Programs (Note 6)
Interest Income on Financing Account (Note 10)
Subsidy Allowance Amortization (Note 10)
Total Earned Revenue

$

(3,476)
(781)
430
(3,827)

Total Net Cost of (Income from) Operations

$

9,497

5,913
825
296
(17,169)
(7,242)
(1,173)
2,502
(5,913)
$

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

54

(22,698)
(1,505)
(24,203)

FINANCIAL STATEMENTS

(23,082)

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

STATEMENT OF CHANGES IN NET POSITION

Office of Financial Stability (Troubled Asset Relief Program)
For the Years Ended September 30, 2011 and 2010
2011

Dollars in Millions

Beginning Balances

Unexpended
Approprations
$

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

79,783

$

(1,546)

2010

Cumulative
Results of
Operations

Unexpended
Approprations
$

84,229

$

(1)

2,278
(24,517)
(22,239)

$

24,517
(41,310)
(16,793)

5,151
(9,597)
(4,446)

9,597
(34,224)
(24,627)

(22,239)

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

Cumulative
Results of
Operations

(9,497)
(26,290)

(4,446)

23,082
(1,545)

57,544

$

(27,836)

$

79,783

$

(1,546)

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

FINANCIAL STATEMENTS

55

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

STATEMENT OF BUDGETARY RESOURCES
Office of Financial Stability (Troubled Asset Relief Program)
For the Years Ended September 30, 2011 and 2010

2011

Nonbudgetary
Financing
Accounts

Budgetary
Accounts

Dollars in Millions

2010
Nonbudgetary
Financing
Accounts

Budgetary
Accounts

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 11)

$

11,075
3,057

$

2,278
-

10,548
4,664

$

77,914

$

16,410
16,410

$

$

2,244

$

65,402

$

36
14,130
16,410

$

511
20,632
86,545

28,156
1,173

$

8,945
39,364

5,151
-

69,440

34,480
34,480

$

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

$

23,405

$

150,226

$

142
10,933
34,480

$

7,692
2,856
160,774

107,307
(23,320)
177,113
(90,568)
86,545 $

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

$

Obligations Incurred
Gross Outlays
Recoveries of Prior Year Unpaid Obligations

NET OUTLAYS
Gross Outlays
Offsetting Collections
Distributed Offsetting Receipts
NET OUTLAYS

$

2,244
(24,501)
(3,057)

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

69,128
69,128

$

$
$

$

65,402
(89,498)
(4,664)

43,814
43,814

41,918
(23,816)
18,102

23,320

$

24,501 $
(61,832)
(37,331) $

13,158
(496)
12,662 $

89,498 $
(107,307)
(17,809) $

56,151
56,151

$

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

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

69,128
69,128

79,202
(28,927)
50,275

5,111

$

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

41,918
(23,816)
18,102

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

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

56

FINANCIAL STATEMENTS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

NOTES TO THE FINANCIAL STATEMENTS
NOTE 1. REPORTING ENTITY

The Troubled Asset Relief Program (TARP) was
authorized by the Emergency Economic
Stabilization Act of 2008 (EESA or “the Act”). The
Act gave the Secretary of the Treasury (the
Secretary) broad and flexible authority to establish
the TARP to purchase and insure mortgages and
other troubled assets, which permitted the Secretary
to inject capital into banks and other commercial
companies by taking equity positions in those
entities to help stabilize the financial markets.
The EESA established certain criteria under which
the TARP would operate, including provisions that
impact the budgeting, accounting, and reporting of
troubled assets acquired under the Act. Section
101(a) of the EESA provided the authority for the
Secretary to purchase troubled assets, and Section
101(a)(3) of the EESA established the Office of
Financial Stability (OFS) to implement the TARP.
Section 102 of the EESA required the Secretary to
establish a program to guarantee troubled assets
originated or issued prior to March 14, 2008,
including 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 DoddFrank 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 publicly announced prior
to June 25, 2010. Of the maximum $475 billion
authority under EESA, as amended, OFS had utilized
(including purchases made, legal commitments to

NOTES TO THE FINANCIAL STATEMENTS

make purchases and offsets for guarantees made)
$470.1 billion as of September 30, 2011 and $474.8
billion as of September 30, 2010.
The TARP developed the following programs: the
Capital Purchase Program (CPP); American
International Group, Inc. (AIG) Investment Program
(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 PublicPrivate 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
Notes 5 and 6).
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
other credit programs (which consist of the AGP and
the Federal Housing Administration (FHA)
Refinance Program) with private entities. These
direct loans, equity investments, and other credit
programs were entered into 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 other credit programs were not
entered into to engage in the business activities of
the respective private entities. Based on this intent,
the OFS concluded that such direct loans, equity
investments, and other credit programs 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.

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THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

Consequently, their assets, liabilities, and results of
operations were not consolidated in these OFS
financial statements, but the value of OFS’
investments in such entities was recorded in OFS’
financial statements.
In addition, the OFS has made loans and
investments in certain Special Purpose Vehicles
(SPV) 12. SFFAC No. 2, paragraphs 43 and 44,
reference indicative criteria such as ownership and
control to carry out government powers and
missions, as criteria in the determination about
whether an entity 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
certain SPV investments are included in Note 6, see
Term Asset-Backed Securities Loan Facility (TALF),
AIG Investment Program and the PPIP.
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 the
Department of the Treasury’s Agency Financial
Report.

The OFS invested in SPVs under the TALF, the Automotive
Industry Financing Program and the Public-Private Investment
Program. Additionally, in fiscal year 2011, part of the
investment in AIG was exchanged for preferred interests in
SPVs.
12

58

NOTES TO THE FINANCIAL STATEMENTS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

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.
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
other credit programs for budgetary purposes.
Similarly, market risk is considered in the

NOTES TO THE FINANCIAL STATEMENTS

valuations for financial reporting purposes (see Note
6 for further discussion).

Consistent with its accounting policy for equity
investments 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 in an orderly transaction. 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 and other credit
programs. 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 FHA
guarantees loans. 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.

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THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

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; interest income is
not accrued on non-performing loans. The OFS
reflects changes, referred to as reestimates, in the
value of direct loans, equity investments, and other
credit programs 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 received under Section 113 of EESA as fees
under SFFAS No. 2, and, as such, the proceeds
received when the warrants, warrant preferred stock
or additional notes are sold are credited to the
subsidy allowance rather than to income.

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 lines that include estimates are
TARP Direct Loans and Equity Investments, Net,
the Asset Guarantee Program and the Liability for
Treasury Housing Programs under TARP on the
Balance Sheet, and related Subsidy Cost on the
Statement of Net Cost (see Note 6).
The most significant differences between actual
results and estimates may occur in the valuation of
direct loans, equity investments, and other credit
programs. 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 in 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’
TARP Direct Loans and Equity Investments, Net
and Asset Guarantee Program line items as of fiscal
year end are reflective of relatively illiquid assets
whose values could be sensitive to future economic
conditions and other assumptions. Estimates are

60

also prepared for the FHA-Refinance Program to
determine the liability for losses. 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, equity investments and other credit
programs. 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 and other
credit programs 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 and other credit programs
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 other credit programs. 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, as well as
subsidy reestimates and modifications.
The financing arrangements specifically for the
TARP activities are provided for in the EESA as
follows: (1) Borrowing for program funds under

NOTES TO THE FINANCIAL STATEMENTS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

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)
establishment of the Troubled Assets Insurance
Financing Fund (TAIFF) for the Asset Guarantee
Program under Section 102(d).
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’ 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 initial estimates of the
future performance of direct loans, equity
investments, and other credit programs. The data
used for these estimates were reestimated at the
fiscal year-end to reflect adjustments for market
risk, asset performance, and other key variables and
economic factors. The reestimate data was then
used to estimate and report the “Subsidy Cost” in
the Statement of Net Cost. A detailed discussion of
the OFS subsidy calculation and reestimate
assumptions, process and results is provided in Note
6.

Fund Balance with Treasury
The Fund Balance with Treasury includes general,
financing and other funds available to pay current
liabilities and finance authorized purchases. Cash
receipts and disbursements are processed by the
Treasury, and the OFS’ records are reconciled with
those of the Treasury on a regular basis.

NOTES TO THE FINANCIAL STATEMENTS

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. The direct loan and equity
investment balances have been determined in
accordance with the provisions of SFFAS No. 2 (see
Note 6). Write-offs of gross direct loan and equity
investment balances (presented in Note 6 table) are
recorded when a legal event occurs, such as a
bankruptcy with no further chance of recovery or
extinguishment of a debt instrument by agreement.
Under SFFAS 2, write-offs 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
During fiscal year 2010, the OFS and the Federal
Deposit Insurance Corporation (FDIC) entered into
a termination agreement with the Asset Guarantee
Program’s sole participant, Citigroup. As a result,
the Asset Guarantee Program line item (nonintragovernmental asset) at September 30, 2010,
represented the net present value of the estimated
cash inflows from Citigroup trust preferred
securities and additional warrants that OFS held
after the guarantee was terminated. These
securities and warrants were sold by the OFS in
fiscal year 2011. The intragovernmental Asset
Guarantee Program line item is the estimated value
of certain Citigroup trust preferred securities
currently held by the FDIC for the benefit of OFS.
Under the termination agreement, the FDIC has
agreed to transfer these securities to the OFS, less
any losses on FDIC’s guarantee of Citigroup debt, by
December 31, 2012. See Note 6.

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THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

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 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, 2011 and 2010.

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 other credit programs
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.

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 other
credit programs as of September 30, 2011 and 2010.
See Notes 6 and 7.

62

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 FHA-Refinance Program. The OFS has
determined that credit reform accounting is not
applicable to the Treasury Housing Programs Under
TARP except for the FHA-Refinance Program.
Therefore, liabilities for the Making Home
Affordable Program and Housing Finance Agency
Hardest-Hit Fund 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. In accordance with this standard, 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. See
Note 5.
At the end of fiscal year 2010, the OFS entered into
a loss-sharing agreement with the FHA to support a
program in which FHA would guarantee refinancing
for borrowers whose homes are worth less than the
remaining amounts owed under their mortgage
loans. The liability for OFS’ share of losses was
determined under credit reform accounting and is
included in the Liability for Treasury Housing
Programs under TARP on the Balance Sheet. See
Notes 4, 5 and 6 for additional disclosures regarding
the FHA-Refinance Program.

Unexpended Appropriations
Unexpended Appropriations represents the OFS
undelivered orders and unobligated balances in
budgetary appropriated funds as of September 30,
2011 and 2010.

NOTES TO THE FINANCIAL STATEMENTS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

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. At September 30,
2011 and 2010, OFS had $27.9 billion and $1.5
billion, respectively, of unfunded upward
reestimates that resulted in OFS reporting negative
Cumulative Results of Operations. The fiscal year
2010 upward reestimates were funded in fiscal year
2011. The fiscal year 2011 unfunded reestimates
will be funded in fiscal year 2012. Cumulative
Results of Operations in 2011 also included $50
million reported as Cash on Deposit for Housing
Program on the Balance Sheet, see Note 4.

Other Financing Sources
The Other Financing Sources line in the Statement
of Changes in Net Position for each year consists
primarily of downward reestimates. Each program’s
reestimates, upward and downward, are recorded
separately, not netted together.

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.

NOTES TO THE FINANCIAL STATEMENTS

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 workrelated 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.

Employee Pension Benefits
The OFS employees participate in either the Civil
Service Retirement System (CSRS) or the Federal
Employees’ Retirement System (FERS) and Social
Security. These systems provide benefits upon
retirement and in the event of death, disability or
other termination of employment and may also
provide pre-retirement benefits. They may also
include benefits to survivors and their dependents,
and may contain early retirement or other special
features. The OFS contributions to 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
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.

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THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

NOTE 3. FUND BALANCES WITH TREASURY
Fund Balances with Treasury, by fund type and
status, are presented in the following table.

As of September 30,
(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

Collections relating to the AGP are deposited in the
Troubled Assets Insurance Financing Fund (which is
within OFS Financing Funds balance) as required
by the EESA Section 102(d). The TAIFF balance

2011

2010

$ 43,542
14,438
25,362
$ 83,342

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

547
34,762
48,033
$ 83,342

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

was reduced for AGP-related downward reestimates
and repayments of AGP-related debt due to the
Bureau of the Public Debt (see Note 6).

NOTE 4. CASH ON DEPOSIT FOR HOUSING PROGRAM
As of September 30, 2011, the OFS had $50 million
on deposit with a commercial bank to facilitate its
payments of claims under the FHA-Refinance
Program as OFS’ agent. Under terms of its

agreement, the OFS is required to maintain a
minimum amount of funds on deposit, depending
upon the size of the program and potential claims.
Unused funds will be returned to the OFS upon the
termination of the program and agreement.

NOTE 5. THE TREASURY HOUSING PROGRAMS UNDER TARP

Fiscal year 2011 saw a continued advancement 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 until their
financial position improves or they 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) FHA-Refinance Program.

64

MHA includes HAMP, FHA-HAMP, Second Lien
Program (2MP), Treasury/FHA Second Lien
Program (FHA 2LP), and the Rural Development
Program (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

NOTES TO THE FINANCIAL STATEMENTS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

partially offset losses from home price declines. In
fiscal year 2010, additional programs were
introduced under HAMP to complement the first
lien modification program and HPDP. The PRA
offers mortgage relief to eligible homeowners whose
homes are worth significantly less than the
remaining amounts outstanding under their first
lien mortgage. The 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 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.
Fiscal year 2010 also saw the introduction of
additional programs under MHA. These programs
include the FHA-HAMP which provides the same
incentives as HAMP for 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 first lien mortgages
under the FHA-Refinance Program. The RD-HAMP
provides HAMP incentives for mortgages
guaranteed by the U. S. Department of Agriculture.
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 of servicers 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.

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.
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 that
obligated the OFS portion of any claims associated
with the FHA-guaranteed mortgages. The OMB
determined that for budgetary purposes, the FHARefinance Program cost is calculated under the
FCRA, and accordingly OFS determined that it was
appropriate to follow SFFAS No. 2 for financial
reporting. Therefore, the liability is calculated at
the net present value of estimated future cash flows.
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, 2011, 334
loans had been refinanced and no claim payments
have been made under this program. 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 2011, OFS paid $2.0 million to maintain
the letter of credit; in fiscal year 2010, OFS paid
$3.0 million to establish the letter of credit. OFS
was required to deposit $50.0 million with a
commercial bank as its agent to administer payment
of claims under the program. See Notes 4 and 6.

The Housing Finance Agency (HFA) Hardest-Hit
Fund was implemented in fiscal year 2010, and
provides targeted aid to families in the states hit

NOTES TO THE FINANCIAL STATEMENTS

65

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

The table below recaps housing program
commitments as of September 30, 2011, and
payments and accruals as of September 30, 2011

and 2010. As noted above, the UP is structured so
that there is no financial impact on the OFS.

Treasury Housing Programs Under TARP
(Dollars in Millions)
Commitments as of

Fiscal Year Payments through September 30,

MHA
HAMP (1st Lien)
HPDP
PRA**
UP*
HAFA
FHA HAMP
2MP
2LP**
RD - HAMP**
HFA Hardest Hit Fund
FHA - Refinance***
Totals

$

$

29,884
N/A
7,600
8,117
45,601

$

$

Accruals as of September 30,

1,035
126
N/A
67
4
50
599
2
1,883

$

$

2010

2011

2010

2011

September 30, 2011

473
9
N/A
2
56
3
543

$

$

236
95
N/A
7
1
4
1
344

$

$

175
108
N/A
283

* No financial impact.
**No financial activity to date.

NOTE 6. TROUBLED ASSET RELIEF PROGRAM DIRECT LOANS AND
EQUITY INVESTMENTS, NET AND OTHER CREDIT PROGRAMS
***Payments do not include $50 million to establish reserve, shown on Balance Sheet as Cash on Deposit for Housing Program. Also see Note 6.

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 made direct loans and equity
investments under TARP. The OFS also entered
Program
Direct Loans and Equity Investments

into other credit programs, which consist of an asset
guarantee program and a loss-sharing program
under the TARP. The table below recaps OFS
programs by title and type:
Program Type

Capital Purchase Program

Equity Investment/Subordinated Debentures

Consumer and Business Lending Initiative:
Term Asset-Backed Securities Loan Facility

Subordinated Debentures

American International Group, Inc. Investment Program
Targeted Investment Program
Automotive Industry Financing Program

SBA 7(a) Security Purchase Program
Community Development Capital Initiative
Public-Private Investment Program
Other Credit Programs
Asset Guarantee Program
FHA-Refinance Program

66

Equity Investment
Equity Investment
Equity Investment and Direct Loan

Direct Loan
Equity Investment/Subordinated Debentures
Equity Investment and Direct Loan
Asset Guarantee
Loss-sharing Program with FHA

NOTES TO THE FINANCIAL STATEMENTS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

Valuation Methodology
The OFS applies the provisions of SFFAS No. 2 to
account for direct loans, equity investments and
other credit programs. 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 in an orderly transaction. 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,

NOTES TO THE FINANCIAL STATEMENTS

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 unobservable inputs are used because
there is little to no direct market activity.
The table below displays the assets held by the
observability of inputs significant to the
measurement of each value:

67

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

As of September 30, 2011

(Dollars in Millions)

Quoted
Prices for
Identical
Assets
Program
Capital Purchase Program
American International Group Inc. Investment Program
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 Programs

$

$

202
21,076
10,091
31,369

Quoted
Prices for
Identical
Assets
Program
Capital Purchase Program
American International Group Inc. Investment Program
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 Programs

Financial Institution Equity Investments 13
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 assetto-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
This consists of equity investments made under CPP, TIP and
CDCI.

13

68

$

$

9,294
126
739
10,159

Significant
Unobservable
Inputs

$

$

12,240
7,747
951
18,377
39,315

Total

$

$

12,442
30,370
17,838
1,077
18,377
739
80,843

As of September 30, 2010

(Dollars in Millions)

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.

Significant
Observable
Inputs

$

$

14,899
2,240
17,139

Significant
Observable
Inputs

$

$

Significant
Unobservable
Inputs

-

$

33,334
26,138
1
52,709

815
815

966
14,405
$ 127,553

Total

$

48,233
26,138
1
52,709

966
14,405
3,055
$ 145,507

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 assetto-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 1990-2010. 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 bank failure information, as
well as market prices of comparable securities
trading in the market. The market risk adjustment

NOTES TO THE FINANCIAL STATEMENTS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

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 as of
year end.
American International Group, Inc. (AIG)
Investment Program
As of September 30, 2011, the OFS held 960 million
shares of AIG common stock. Investments in AIG
common stock were valued at the quoted market
price as of September 30, 2011. The OFS also held
interests in certain AIG SPVs. To estimate the
value of the assets underlying the preferred
interests in the SPVs, OFS sums the value of the
common equity shares held by the SPVs, any cash
held in escrow from previous asset sales, and the
weighted average value of the remaining assets
under different scenarios. Because the resulting
value greatly exceeds the liquidation preference of
the investments in the SPVs, the SPVs were valued
at the liquidation preference.
For fiscal year 2010, the method used to measure
AIG preferred shares was broadly analogous to the
approach used to measure financial institution
preferred shares. However, the size of OFS’ holding
of preferred shares relative to AIG’s total balance
sheet made the valuation extremely sensitive to
assumptions about the recovery ratio for preferred
shares should AIG default. Also, no market prices
for comparable preferred shares existed. Therefore,
OFS based the AIG investment valuation on the
observed market values of publicly traded junior
subordinated debt, adjusted for OFS’ position in the
capital structure. Additionally, an external asset
manager provided estimated fair value amounts,
premised on public information, which were
considered by the OFS in its measurements.
Auto Industry Financing Program (AIFP)
Investments and Loans
As of September 30, 2011, the OFS held 500 million
shares of common stock in General Motors Company
(New GM) that were valued by multiplying the
publicly traded share price by the number of shares
held.

NOTES TO THE FINANCIAL STATEMENTS

As of September 30, 2010, OFS held a 60.8% stake
in the common stock of New GM. As New GM
common stock was not publicly traded as of
September 30, 2010, and 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 trading prices of the
Old GM bonds provided the implied value of the
New GM equity. OFS used this implied equity value
to account for its common stock ownership in New
GM as of September 30, 2010. As of September 30,
2010, investments in GM preferred shares were
valued in a manner broadly analogous to the
methodology used for financial institution equity
investments.
As of September 30, 2010, OFS held a 9.9% stake in
the common stock of Chrysler. As Chrysler common
stock was not publicly traded as of September 30,
2010, OFS created a pro forma balance sheet for
post-bankruptcy Chrysler and used the estimated
book value to account for its common stock
ownership in Chrysler.
As of September 30, 2010, OFS valued direct loans
to GM and Chrysler 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.
As of September 30, 2011 and 2010, for investments
in Ally Financial’s (Ally, formerly known as GMAC,
Inc.) common equity and mandatorily convertible
preferred stock, which is valued on an “if-converted”
basis, the OFS used certain valuation multiples such
as price-to-earnings, price-to-tangible book value,
and asset manager valuations to estimate the value
of the shares. The multiples were based on those of
comparable publicly-traded entities. As of
September 30, 2010, OFS estimated the value of
Ally’s trust preferred equity instruments based on

69

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

comparable publicly traded securities adjusted for
factors specific to Ally, such as credit rating. The
adjustment for market risk is incorporated in the
data points the OFS uses to determine the
measurement for Ally as all points rely on market
data.
Investments in Special Purpose Vehicles
In addition to the preferred interests in AIG SPVs
discussed previously in this section, the OFS made
certain investments in other financial instruments
issued by SPVs. Generally, the OFS estimates the
cash flows of these SPVs 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, which would require
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.
For the PPIP investments and loans made in the
Public Private Investment Funds (PPIF), the OFS
model derives estimated 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). Inputs used to simulate the cash flows,
which consider market risks, include unemployment
forecasts, home price appreciation/depreciation
forecasts, the current term structure of interest
rates and historical pool performance as well as

70

estimates of the net income and value of commercial
real estate supporting the CMBS.
The simulated cash flows are then run through the
waterfall of the RMBS/CMBS to determine the
estimated cash flows to the SPV. Once determined,
these 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.
SBA 7(a) Securities
The valuation of SBA 7(a) securities is based on the
discounted estimated cash flows of the securities.
Asset Guarantee Program (AGP)
During fiscal year 2010, an agreement was entered
into to terminate the guarantee of OFS to pay for
any defaults on certain loans and securities held by
Citibank. After the termination, the OFS still held
some of the trust preferred securities (initially
received as the guarantee fee) and warrants issued
by Citigroup and the potential to receive $800
million (liquidation preference) of additional
Citigroup trust preferred securities from the FDIC
(see further discussion of the Asset Guarantee
Program later in this note). As of September 30,
2011 and 2010, the instruments within the AGP
were valued in a manner broadly analogous to the
methodology used for financial institution equity
investments.

Direct Loan and Equity Investment
Programs
The following table recaps gross direct loan or equity
investment, subsidy allowance, and net direct loan
or equity investment by TARP program. Detailed
tables providing the net composition, subsidy cost
for new disbursements, modifications and
reestimates, along with a reconciliation of subsidy
cost allowances as of and for the years ended
September 30, 2011 and 2010, are provided at the
end of this Note for Direct Loans and Equity
Investments, detailed by program, and for the other
credit programs separately.
Descriptions and chronology of significant events by
program are after the summary table.

NOTES TO THE FINANCIAL STATEMENTS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

(Dollars in Millions)

As of September 30, 2011
Gross Direct
Loan or
Equity
Invesment

Program
Capital Purchase Program
$
17,299
American International Group Inc. Investment Program
51,087
Targeted Investment Program
Automotive Industry Financing Program
37,278
Consumer and Business Lending Initiative, which includes TALF,
SBA 7(a) Securities and CDCI
798
Public-Private Investment Program
15,943
Total Direct Loan and Equity Investment Programs
$122,405

(Dollars in Millions)

Subsidy
Allowance

$

Net Direct
Loan or
Equity
Invesment

(4,857) $ 12,442
(20,717)
30,370
(19,440)
17,838
279
2,434
($42,301)

1,077
18,377
$80,104

As of September 30, 2010
Gross Direct
Net Direct
Loan or
Loan or
Equity
Equity
Subsidy
Invesment
Invesment
Allowance

Program
Capital Purchase Program
$
49,779
American International Group Inc. Investment Program
47,543
Targeted Investment Program
Automotive Industry Financing Program
67,238
Consumer and Business Lending Initiative, which includes TALF,
SBA 7(a) Securities and CDCI
908
Public-Private Investment Program
13,729
Total Direct Loan and Equity Investment Programs
$179,197

$

(1,546) $ 48,233
(21,405)
26,138
1
1
(14,529)
52,709
58
966
676
14,405
($36,745) $142,452

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

NOTES TO THE FINANCIAL STATEMENTS

payable when and if declared by the institution’s
board of directors. QFIs that are Sub-chapter S
corporations issued subordinated debentures in
order to maintain compliance with the Internal
Revenue Code. The maturity of the subordinated
debentures is 30 years and interest rates are 7.7%
for the first 5 years and 13.8% for the remaining
years. QFIs, subject to regulator approval, may
repay the OFS’ investment at any time.
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. Prior to
December 31, 2009, in the event a public QFI
completed one or more qualified equity offerings

71

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

with aggregate gross proceeds of not less than
100.0% of the senior perpetual preferred stock
investment, the number of shares subject to the
warrants was reduced by 50.0%. 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 7 and 35 institutions considered
CDFIs were in the CPP portfolio as of September 30,
2011 and 2010, respectively.
The Secretary may liquidate the warrants
associated with repurchased senior preferred stock
at the market price.
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 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 fiscal year 2009, the OFS entered into an
exchange agreement with Citigroup under which the
OFS exchanged $25.0 billion of its investment in
senior preferred stock for 7.7 billion common shares
of Citigroup stock, at $3.25 per share. 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. The OFS

72

continued 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.
During fiscal year 2011, OFS received proceeds of
$15.8 billion from the sale of Citigroup common
stock, resulting in proceeds from sales in excess of
cost of $3.9 billion. By December 2010, the OFS had
sold all of its remaining Citigroup common stock.
Total gross proceeds from Citigroup stock sales
between April and December 2010, were $31.9
billion. Also in January 2011, OFS sold its Citigroup
warrants held under CPP, for a total of $54.6
million.
In addition to the above transactions, the OFS has
entered into other transactions with various
financial institutions including, exchanging existing
preferred shares for a like amount of non taxdeductible Trust Preferred Securities, exchanging
preferred shares for shares of mandatorily
convertible preferred securities and selling preferred
shares to financial institutions that were acquiring
the QFIs that had issued the preferred shares.
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.
During fiscal year 2011, certain financial
institutions participating in CPP became eligible to
exchange their OFS-held stock investments to
preferred stock in the Small Business Lending Fund
(SBLF), a separate Department of the Treasury
program not a part of the TARP. Because this
refinance was not considered in the formulation
estimate for the CPP program, a modification was
recorded in May 2011, resulting in a subsidy cost
reduction of $1.0 billion.
During fiscal year 2010, certain financial
institutions participating in CPP which are in good
standing became eligible to refinance their OFS-held
stock investments to preferred stock under the
Community Development Capital Initiative (CDCI)
of the Consumer and Business Lending Initiative
Program (CBLI). This was not considered in the
formulation estimate for the CPP program. As a
result, OFS recorded a modification subsidy cost

NOTES TO THE FINANCIAL STATEMENTS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

reduction of $31.9 million in the CPP program for
this option during fiscal year 2010.
In fiscal year 2011, OFS made no write off of CPP
investments. In fiscal year 2010, as a result of the
culmination of Chapter 11 bankruptcy proceedings,
the OFS wrote off its $2.3 billion investment in CIT
Group and will not recover any amounts associated
with it. In addition, during fiscal year 2011, eight
institutions, in which OFS had invested $190.3
million, were closed by their regulators. During
fiscal year 2010, four financial institutions, in which
OFS had invested $396.3 million, either filed for

bankruptcy or were closed by their regulators. The
OFS does not anticipate recovery on these
investments and therefore the value of these shares
are reflected at zero as of September 30, 2011 and
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 each institution’s receivership.
The following tables provide key data points related
to the CPP for the fiscal years ending September 30,
2011 and 2010:
At September 30,

CPP Participating Institutions
2011
Cumulative Number of Institutions Participating

2010
707

Cumulative Institutions Paid in Full, Merged or Investments Sold
Institutions Refinanced to SBLF

707

(139)
(137)

Institutions Transferred to CDCI

(80)

(28)

Institutions Written Off

(28)
-

(2)

Number of Institutions with Outstanding OFS Investments

(2)

401

Institutions in Bankruptcy or Receivership

597

(11)

(3)

Number of CPP Institutions Valued at Year-End

390

594

Cumulative Number of Institutions that Have Missed One or More Dividend Payments

181

132

CPP Investments
Fiscal Year 2011

(Dollars in Millions)

Outstanding Beginning Balance, Investment in CPP Institutions, Gross

$

Purchase Price, Current Year Investments
Repayments and Sales of Investments

49,779
-

Fiscal Year 2010
$

133,901
277

(30,188)
(85)

Writeoffs

(81,467)
(242)

-

Losses from Sales and Repurchases of Assets in Excess of Cost
Transfers to CDCI

(2,334)

-

Refinanced to SBLF

(2,207)

(356)
-

Outstanding Balance, Investment in CPP Institutions, Gross

$

17,299

$

49,779

Interest and Dividend Collections

$

1,283

$

3,131

Net Proceeds from Sales and Repurchases of Assets in Excess of Cost

$

4,540

$

6,676

American International Group, Inc. (AIG)
Investment Program

help prevent broader disruption to financial
markets. OFS invested in one institution (AIG)
under the program.

The OFS provided assistance to systemically
significant financial institutions on a case by case
basis in order to help provide stability to institutions
that are critical to a functioning financial system
and are at substantial risk of failure as well as to

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

NOTES TO THE FINANCIAL STATEMENTS

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THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

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.
Additionally, the OFS agreed to make available a
$29.8 billion capital facility from which AIG could
draw funds if needed to assist in its restructuring.
The OFS investment related to the capital facility
consisted 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 increased with any draw down by AIG on
the facility. The dividend rate applicable to these
shares was 10.0%, payable quarterly, if declared, on
the outstanding liquidation preference. As of
September 30, 2010, AIG had drawn $7.5 billion
from the facility. Under this capital facility,
consistent with SFFAS No. 2, neither a subsidy cost
nor an asset was recognized on the undrawn portion
of $22.3 billion at September 30, 2010. In fiscal year
2011, AIG drew $20.3 billion from the capital
facility, for a total of $27.8 billion drawn.
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, which occurred January 14, 2011,
converted OFS’ $27.8 billion investment in Series F
preferred stock into $20.3 billion of interests in AIG
SPVs and 167.6 million shares of AIG common
stock. The remaining $2.0 billion of undrawn Series
F capital facility shares were exchanged for 20,000
shares of Series G Cumulative Mandatory
Convertible Preferred Stock equity capital facility
under which AIG had the right to draw up to $2
billion. OFS’ initial $40 billion investment
previously exchanged for $41.6 billion of Series E
preferred stock was converted into 924.6 million
shares of AIG common stock. 14 On May 27, 2011,

pursuant to agreement between the OFS and AIG,
and as a result of AIG’s primary public offering of its
common stock, the Series G equity capital facility
was cancelled. In May 2011, the OFS sold 132.0
million shares of its AIG common stock for $3.8
billion. These proceeds were less than OFS’ cost by
$1.9 billion.
In fiscal year 2011, OFS received $11.5 billion in
distributions from the AIG SPVs, reduced its
outstanding balance relating to the AIG SPVs by
$11.2 billion and received dividends of $246 million.
OFS also capitalized dividend income of $204
million. Additionally, OFS received fees of $165.0
million from AIG. The OFS received no payments
from AIG in fiscal year 2010.
At September 30, 2011, the OFS owned 960 million
shares of AIG common stock, approximately 50.8%
of AIG’s common stock equity on a fully diluted
basis. 15 Market value of the common stock shares
was $21.1 billion. OFS also owned preferred units
in an AIG SPV with an outstanding balance of $9.3
billion.
According to the terms of the preferred stock, if AIG
missed four dividend payments, the OFS could
appoint to the AIG board of directors, the greater of
two members or 20.0% of the total number of
directors of the Company. 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. The two additional OFSappointed directors remained on the board as of
September 30, 2011.

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

14

Additionally, the AIG Credit Facility Trust between the
Federal Reserve Bank of New York and AIG was terminated and
the Department of the Treasury separately, not the OFS, received
562.9 million shares of AIG common stock from it as part of the
restructuring transaction. At the completion of the restructuring
per the agreement, the Department of the Treasury, including
OFS, held 92.1% of AIG’s common stock on a fully diluted basis.
See the Agency Financial Report for the Department of the

74

Treasury for its separate presentation and valuation of its shares
of AIG common stock.
15
The Department of the Treasury, not OFS, owned 494.9 million
shares of AIG common stock, approximately 26.1% of AIG’s
common stock equity, fully diluted, at September 30, 2011.

NOTES TO THE FINANCIAL STATEMENTS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

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.
Under TIP, the OFS invested $20 billion in
Citigroup in December, 2008 and $20 billion in Bank
of America in January, 2009. In December 2009,
both institutions repaid the amounts invested along
with dividends through the date of repayment. In
fiscal year 2010, OFS received a total of $1.1 billion
in dividends on the Bank of America and Citigroup
investments and proceeds of $1.2 billion from the
sale of Bank of America warrants. In fiscal year
2011, OFS sold its warrant from Citigroup under
TIP for $190.4 million and closed the program.

Automotive Industry Financing Program
The Automotive Industry Financing Program (AIFP)
was designed to help 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 Company (New GM) and
General Motors Corporation (Old GM)
In the period ended September 30, 2009, the OFS
provided $49.5 billion to General Motors
Corporation (Old 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 Old GM
was in bankruptcy. The OFS assigned its rights in
these various loans (with the exception of $986.0
million which remained in Old 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
(New GM). New GM used the assigned loans and
warrants to credit bid for substantially all of the
assets of Old GM in a sale pursuant to Section 363 of
the Bankruptcy Code. During fiscal year 2009, 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 in
New GM. In addition, New GM assumed $7.1 billion
of the DIP loan, simultaneously paying $360.6
million (return of warranty program funds),

NOTES TO THE FINANCIAL STATEMENTS

resulting in a net balance of $6.7 billion. The assets
received by the OFS as a result of the assignment
and Section 363 sale were considered recoveries of
the original loans for subsidy cost estimation
purposes.
During fiscal year 2010, the OFS 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 New GM preferred
stock and the loan prior to repayment, respectively.
At September 30, 2010, the OFS held 60.8% of the
common stock of New GM and $2.1 billion in
preferred stock.
During fiscal year 2011, pursuant to a letter
agreement, New GM repurchased its preferred stock
for 102% of its liquidation amount, $2.1 billion. As
part of an initial public offering by New GM in fiscal
year 2011, the OFS sold 412.3 million shares of its
common stock for $13.5 billion, at a price of $32.75
per share (net of fees). The sale resulted in net
proceeds less than cost of $4.4 billion. At September
30, 2011, the OFS held 500 million shares of the
common stock of New GM, which represents
approximately 32.0% of the common stock of New
GM outstanding. Market value of the shares as of
September 30, 2011 was $10.1 billion.
On March 31, 2011, the Plan of Liquidation for Old
GM became effective and OFS’ $986 million loan
was converted to an administrative claim. OFS
retains the right to recover additional proceeds but
recoveries are dependent on actual liquidation
proceeds and pending litigation. OFS recovered
$110.9 million in fiscal year 2011 on the
administrative claim. OFS does not expect to
recover any significant additional proceeds from this
claim.
GMAC LLC Rights Offering
In December 2008, the OFS agreed, in principal, to
lend up to $1.0 billion to Old GM for participation in
a rights offering by GMAC LLC (now known as Ally
Financial, Inc.) in support of GMAC LLC’s
reorganization as a bank holding company. The
loan was secured by the GMAC LLC common
interest acquired in the rights offering. The loan
was funded for $884.0 million. In May 2009, the

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THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

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 LLC in full
satisfaction of the loan. As of September 30, 2011
and 2010, the OFS continued to hold the ownership
interests obtained in this transaction (see further
discussion of OFS’ GMAC holdings under Ally
Financial Inc. in this note.).
Chrysler Group LLC (New Chrysler) and
Chrysler Holding LLC (Old Chrysler)

loan balance subject to interest at the appropriate
rate. In fiscal year 2010, the OFS recognized $344.4
million of paid-in-kind interest capitalized to these
loans and received $381.8 million of interest.
The OFS also obtained other consideration including
a 9.9% equity interest in New Chrysler and
additional notes with principal balances of $284
million and $100 million. Fiat SpA (the Italian
automaker), the Canadian government and the
United Auto Workers (UAW) retiree healthcare
trust were the other shareholders in New Chrysler.

In the period ended September 30, 2009, the OFS
invested $5.9 billion in Chrysler Holding LLC (Old
Chrysler), consisting of $4.0 billion for general and
working capital purposes (the general purpose loan)
and $1.9 billion for debtor in possession (DIP)
financing while Old Chrysler was in bankruptcy.
Upon entering bankruptcy, a portion of Old Chrysler
was sold to a newly created entity, Chrysler Group
LLC (New Chrysler). Under the terms of the
bankruptcy agreement, $500 million of the general
purpose loan was assumed by New Chrysler. In
fiscal year 2010, the OFS received $1.9 billion on the
general purpose loan and wrote off the remaining
$1.6 billion. Recovery of the $1.9 billion DIP loan
was subject to the liquidation of collateral remaining
with Old Chrysler. In fiscal year 2010, as part of a
liquidation plan, OFS’ DIP loan to Old Chrysler was
extinguished, and OFS retained a right to receive
proceeds from a liquidation trust. OFS received $7.8
million and $40.2 million from the liquidation trust
during fiscal years 2011 and 2010, respectively.

In May 2011, New Chrysler repaid both Tranche B
and C principal balances of $5.1 billion, the
additional notes totaling $384 million and all
interest due. New Chrysler’s ability to draw the
remaining $2.1 billion loan commitment was
terminated. In July 2011, Fiat SpA paid the OFS
$560 million for its remaining equity interest in New
Chrysler and for OFS’ rights under an agreement
with the UAW retiree healthcare trust pertaining to
the trust’s shares in New Chrysler.

Under the terms of the bankruptcy agreement, the
OFS committed to make a $7.1 billion loan to New
Chrysler, consisting of up to $6.6 billion of new
funding and $500 million of assumed debt from the
general purpose loan with Old Chrysler. The loan
was secured by a first priority lien on the assets of
New Chrysler. Funding of the loan was available in
two installments or tranches (B and C), each with
varying availability and terms. Tranche B provided
an additional $2.0 billion loan funded at closing.
Tranche C included the $500 million assumed from
the general purpose loan and provided $2.6 billion
funded at closing. Interest on both Tranches was
payable in kind through December 2009 and added
to the principal balance of the respective Tranche.
Interest was paid quarterly beginning March 31,
2010. Additional in kind interest was accrued at
$17.0 million a quarter and added to the Tranche C

In fiscal year 2009, the OFS provided approximately
$413.1 million of funding to this program, which was
not affected by the bankruptcy of Old Chrysler and
Old GM, as both companies were allowed to continue
paying suppliers while in bankruptcy. The $413.1
million was repaid in fiscal year 2010, along with
$9.0 million in interest and $101.1 million in fees
and other income, and the program was closed.

76

As a result of the fiscal year 2011 transactions, OFS
has no remaining interest in New Chrysler as of
September 30, 2011. Total net proceeds received
relating to these 2011 transactions were $896
million less than OFS’ cost. OFS continues to hold a
right to receive proceeds from a bankruptcy
liquidation trust but no significant cash flows are
expected.
Auto Supplier Support Program

Ally Financial Inc. (formerly known as GMAC
Inc.)
The OFS invested a total of $16.3 billion in GMAC
Inc. between December 2008 and December 2009, to
help support its ability to originate new loans to GM
and Chrysler dealers and consumers and to help
address GMAC’s capital needs. In May, 2010,
GMAC changed its corporate name to Ally Financial,

NOTES TO THE FINANCIAL STATEMENTS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

Inc (Ally). As a result of original investments,
exchanges, conversions and warrant exercises, at
September 30, 2010, the OFS held 450,121 shares of
Ally common stock (representing 56.3% of the
company’s outstanding common stock including
ownership interests from the GMAC LLC Rights
Offering previously discussed), 2.7 million shares of
8% cumulative Trust Preferred Securities (TRuPS)
with a $1,000 per share liquidation preference and
228.8 million shares of Ally’s Series F-2 Mandatorily
Convertible Preferred Securities. The Series F-2,
with a $50 per share liquidation preference and a
stated dividend rate of 9%, is convertible into Ally
common stock at Ally’s option, 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 security
is also convertible at the option of the OFS upon
certain specified corporate events. Absent an
optional conversion, any Series F-2 remaining will
automatically convert to common stock after 7 years
from the issuance date. The applicable conversion
rate is the greater of the (i) initial conversion rate
(0.00432) or (ii) adjusted conversion rate (i.e., the
liquidation amount per share of the Series F-2
divided by the weighted average price at which the
shares of common equity securities were sold or the
price implied by the conversion of securities into
common equity securities, subject to antidilution
provisions).
In December 2010, 110 million shares of the Series
F-2 preferred were converted into 531,850 shares of
Ally common stock, resulting in the OFS holdings of
Series F-2 preferred decreasing to 118.8 million
shares, and OFS holdings in common stock of Ally
increasing to 981,971 shares, representing 73.8% of
Ally’s outstanding common stock.
During fiscal year 2011, the agreement between Ally
and OFS regarding its TRuPS was amended to
facilitate OFS’ sale of its TRuPS in the open market.
Because this amendment to agreement terms was
not considered in the formulation subsidy cost
estimate for the AIFP program, the OFS recorded a
modification resulting in a subsidy cost reduction of
$174 million.
In March 2011, the OFS sold its TRuPS for $2.7
billion, resulting in proceeds in excess of cost of
$127.0 million.

NOTES TO THE FINANCIAL STATEMENTS

On March 31, 2011, the OFS announced that it had
agreed to be named as a selling shareholder of
common stock in Ally’s registration statement filed
with the Securities and Exchange Commission
(SEC) for a proposed initial public offering. Since
March 31, 2011, Ally has filed four amendments in
response to SEC comments; there has been no public
offering.
At September 30, 2011, the OFS held 981,971 shares
of common stock (73.8% of Ally’s outstanding
common stock) and 118.8 million shares of the
Series F-2 preferred securities. The Series F-2 are
convertible into at least 513,000 shares of common
stock, which, if combined with the common stock
currently owned, would represent 81% ownership of
Ally common stock by the OFS. In fiscal year 2011,
the OFS received $838.6 million in dividends from
Ally. In fiscal year 2010, the OFS received $1.2
billion in dividends.

Consumer and Business Lending
Initiative (CBLI)
The Consumer and Business Lending Initiative was
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.
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

77

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

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 (CMBS). 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,
2011, approximately $11.3 billion of loans due to the
FRBNY remained outstanding compared to
September 30, 2010, when approximately $29.7
billion of loans due to the FRBNY remained
outstanding.
As part of the program, the FRBNY created the
TALF, LLC, a special purpose vehicle that agreed to
purchase from the FRBNY any collateral it has
seized due to borrower default. The TALF, LLC
would fund purchases from the accumulation of
monthly fees paid by the FRBNY as compensation
for the agreement. Only if the TALF, LLC had
insufficient funds to purchase the collateral did the
OFS commit to invest up to $20.0 billion in nonrecourse subordinated notes issued by the TALF,
LLC. In July 2010, the OFS’ commitment was
reduced to $4.3 billion. 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 fees are not sufficient to cover
purchases. The subordinated notes bear interest at 1
Month LIBOR plus 3.0% and mature 10 years from
the closing date, subject to extension. Any amounts
needed in excess of the OFS commitment and the
fees would be provided through a loan from the
FRBNY. Upon wind-down of the TALF, LLC
(collateral defaults, reaches final maturity or is
sold), available cash will be disbursed first to
FRBNY and then to the OFS principal balances,
secondly to FRBNY and then to the OFS interest
balances and finally any remaining cash 10% to the
FRBNY and 90% to the OFS.
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 does 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.

78

As of September 30, 2011 and 2010, 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 purchased 7(a) Securities
collateralized with 7(a) loans (these loans are
guaranteed by the full faith and credit of the United
States Government) packaged on or after July 1,
2008. As of September 30, 2010, OFS had entered
into trades to purchase $356.3 million of these
securities (excluding purchased accrued interest), of
which $240.7 million had been disbursed.
Investments totaled $367.1 million (excluding
purchased accrued interest) by December 2010 when
OFS disbursements under the program were
completed. In May 2011, OFS began selling its
securities to bond market investors. During fiscal
year 2011, the OFS received $10.7 million in interest
and $235.8 million in principal payments on the
securities including returns from sales to other
investors. During fiscal year 2010, the OFS received
$1.0 million in interest and $2.5 million in principal
payments on these securities. As of September 30,
2011, OFS held $127.6 million of SBA 7(a)
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 purchased senior
preferred stock (or subordinated debt) from eligible
CDFIs. The senior preferred stock has an initial
dividend rate of 2 percent. CDFIs could 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.
For CDFI credit unions, the OFS purchased
subordinated debt at rates equivalent to those
offered to CDFIs and with similar terms. These
institutions could apply for up to 3.5 percent of total
assets - an amount approximately equivalent to the

NOTES TO THE FINANCIAL STATEMENTS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

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 CPP preferred shares
(subordinated debt) then held by OFS for CDCI
preferred shares (subordinated debt). These
exchanges were treated as disbursements from
CDCI and repayments to CPP. As of September 30,
2010, the OFS had invested $570.1 million ($363.3
million as a result of exchanges from CPP) in 84
institutions under the CDCI. No additional
disbursements were made in fiscal year 2011. No
repayments were received in fiscal years 2011 or
2010. During fiscal year 2011, OFS received $10.5
million in dividends and interest from its CDCI
investments.
Public-Private Investment Program
The PPIP is part of the OFS’ efforts to help restart
the financial securities market and provide liquidity
for legacy assets. Under this program, the OFS (as
a limited partner) made equity investments in and
loans to nine investment vehicles (referred to as
Public Private Investment Funds or “PPIFs”)
established by private investment managers
between September and December, 2009. The
equity investment was used to match private capital
and equaled approximately 50.0% of the total equity
invested. Each PPIF could elect to receive a loan
commitment from the OFS equal to either 50% or
100% of partnership equity at differing costs; all
chose 100%. The loans bear interest at 1 Month
LIBOR, plus 1.0%, payable monthly. The maturity
date of each loan is the earlier of 10 years or the
termination of the PPIF. The loan can be prepaid
without penalty. Each PPIF terminates in 8 years
from its commencement. The governing documents
of the funds allow for 2 one year extensions, subject
to approval of the OFS. The loan agreements also
require cash flows from purchased securities
received by the PPIFs to be distributed in
accordance with a priority of payments schedule
(waterfall) designed to help protect the interests of
secured parties. Security cash flows collected are
disbursed 1) to pay administrative expenses; 2) to
pay margin interest on permitted hedges; 3) to pay
current period interest to OFS; 4) to maintain a
required interest reserve account; 5) to pay principal
on the OFS loan when the minimum Asset Coverage
Ratio Test is not satisfied; 6) to pay other amounts

NOTES TO THE FINANCIAL STATEMENTS

on interest rate hedges if not paid under step 2 ; 7)
for additional temporary investments or to prepay
loans (both at the discretion of the PPIF); 8) for
distributions to equity partners up to the lesser of 12
months’ net interest collected or 8% of the funded
capital commitments; 9) for loan prepayments to
OFS and 10) for distribution to equity partners.
Each loan carries a financial covenant, the Asset
Coverage Ratio Test. The Asset Coverage Ratio Test
generally requires the PPIF to maintain an Asset
Coverage Ratio 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 and
prohibit the PPIF from borrowing additional funds
under the loan agreement.
As a condition of its investment, the OFS also
received a warrant from each of the PPIFs entitling
the OFS to 2.5% of investment proceeds (excluding
those from temporary investments) otherwise
allocable to the non-OFS partners after the PPIFs
return of 100% of the non-OFS partners’ capital
contributions. Distributions relating to the
warrants would occur generally upon the final
distribution of each partnership.
The PPIFs are allowed to purchase commercial and
non-agency residential mortgage-backed securities
(CMBS and RMBS, respectively) 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, 2011, the approximate split between
RMBS and CMBS was 79% RMBS and 21% CMBS.
As of September 30, 2010, the approximate split

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THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

between RMBS and CMBS was 82% RMBS and 18%
CMBS.

Other Credit Programs

The PPIFs pay a management fee to the fund
manager from the OFS’ share of investment
proceeds. During the Investment Period, the
management fee is equal to 0.2% per annum of the
OFS’ capital commitment as of the last day of the
applicable quarter. Thereafter, the management fee
will be equal to 0.2% per annum of the lesser of (a)
the OFS’ capital commitment as of the last day of
the applicable quarter or (b) the OFS Interest Value
as of the last day of the quarter.

Asset Guarantee Program

During fiscal year 2011, the OFS disbursed $1.1
billion as equity investments and $2.3 billion as
loans to PPIFs. During fiscal year 2010, OFS
disbursed $4.9 billion as equity investments and
$9.2 billion as loans to PPIFs. At September 30,
2011, OFS had equity investments in PPIFs
outstanding of $5.5 billion and loans outstanding of
$10.4 billion for a total of $15.9 billion. At
September 30, 2010, OFS had equity investments of
$4.8 billion and loans outstanding of $8.9 billion for
a total of $13.7 billion. In addition, as of September
30, 2011, OFS had legal commitments to disburse up
to $4.3 billion for additional investments and loans
to the eight remaining PPIFs.
During fiscal year 2011, the OFS received $122.7
million in interest on loans and $867.7 million in
loan principal repayments from the PPIFs. Also,
during fiscal year 2011, OFS received $735.0 million
in equity distributions, of which $305.7 million was
recognized as dividend income, $90.8 million of
proceeds in excess of cost and $338.5 million as a
reduction of the gross investment outstanding.
During fiscal year 2010, the OFS received $56.0
million in interest on loans, $72.0 million in loan
principal repayments and $151.8 million of income
on the equity investments.
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.

80

The Asset Guarantee Program 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.
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’ 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 $14.9 million and $265.2
million during the years ended September 30, 2011
and 2010, 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.

NOTES TO THE FINANCIAL STATEMENTS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

In December 2009, the USG Parties and Citigroup
agreed to terminate the guarantee agreement.
Under the terms of the termination agreement
Citigroup 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.
The amount OFS will receive would be reduced by
any losses FDIC incurs on its Citigroup guaranteed
debt. The additional preferred shares from the
FDIC are included in the subsidy calculation for
AGP, based on the net present value of expected
future cash inflows. Termination of the agreement
was not considered in the formulation estimates of
the guarantee and therefore a modification that
resulted in a subsidy cost reduction of $1.4 billion
was 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
for $2.2 billion. The Trust Preferred Securities are
valued at the sales price in the 2010 financial
statements. The sale settled on October 5, 2010, and
additional warrants were sold in January 2011 for
$67.2 million, leaving only the $800.0 million of
trust preferred stock related receivable from the
FDIC valued at $739 million on the OFS Balance
Sheet at September 30, 2011. This receivable was
valued at $815 million as of September 30, 2010.

defaults of the disbursed loans. See Note 6 table,
following and Note 5 above for further details.

FHA-Refinance Program

Financial statement reestimates for all programs
were performed using actual financial transaction
data through September 30, 2011 and 2010. For
2011, a mix of market and security specific data
publicly available as of August 31 and September
30, 2011, was used for the CPP, AIG Investment,
AIFP, SBA, CDCI and AGP programs. Security
specific data through June 30, 2011, with market
prices through August 31 and September 30, 2011,
was used for the PPIP and TALF programs. For
2010, a mix of market and security specific data
publicly available as of August 31 and September
30, 2010, was used for all programs except PPIP and
TALF, which used security specific data through
June 30 and market prices through August 31 and
September 30, 2010.

At the end of fiscal year 2010, the OFS entered into
a loss-sharing agreement with the Federal Housing
Administration (FHA) to support a program in
which FHA guarantees refinancing of borrowers
whose homes were worth less than the remaining
amounts owed under their mortgage loans. No loans
were refinanced in fiscal year 2010. In fiscal year
2011, the OFS established a $50.0 million account,
held by a commercial bank, serving as its agent,
from which any required reimbursements for losses
will be paid. At September 30, 2011, 334 loans that
FHA had guaranteed, with a total value of $73
million, had been refinanced under the program.
OFS’ maximum exposure related to FHA’s
guarantee totaled $5.7 million. After considering
FHA’s estimated default rates, this resulted in OFS
incurring a $1.0 million liability. The liability has
been calculated, using credit reform accounting, as
the present value of the estimated future cash
outflows for the OFS’ share of losses incurred on any

NOTES TO THE FINANCIAL STATEMENTS

Subsidy Cost and Reestimates
The recorded subsidy cost of a direct loan, equity
investment or other credit program is based upon
the calculated net present value of expected future
cash flows. The OFS’ actions, as well as changes in
legislation that change these estimated future cash
flows change subsidy cost, and are recorded as
modifications. The cost or reduction in cost of a
modification is recognized when it occurs.
During fiscal year 2011, modifications occurred in
the AIFP (see Ally Financial Inc.) and CPP, reducing
subsidy cost by $1.2 billion. During fiscal year 2010,
modifications occurred within AIFP, CPP and the
AGP, increasing subsidy cost by $47.9 million.
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.

The OFS assessed PPIP and TALF programs using
security specific data available as of September 30,
2011 and 2010 and, in its determination, there were
no significant changes to the portfolio characteristics

81

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

or performance that would require a revision to the
reestimates for the fiscal years.
Net downward reestimates for the fiscal years ended
September 30, 2011 and 2010, totaled $11.6 billion
and $30.2 billion, respectively. Descriptions of the
reestimates, by OFS Program, are as follows:
CPP
The downward reestimate for CPP of $816 million
for the year ended September 30, 2011, is the net
result of receipts significantly greater than cost on
the sale of Citigroup common stock offset by a
decline in the estimated market values of the
remaining outstanding investments due to market
conditions at September 30, 2011.
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.
AIG Investment Program
The $18.5 billion in downward reestimates for the
year ended September 30, 2011 for the AIG
Investment Program was due primarily to subsidy
cost estimates recorded for $20.3 billion of new
disbursements during the fiscal year. Under budget
rules, the subsidy cost estimate for these new
disbursements was determined based upon subsidy
rates formulated in April 2009, the period in which
OFS originally agreed to make the funding available
to AIG. At that time, OFS calculated a subsidy rate
of 98.98%, which resulted in an estimated subsidy
cost of $20.1 billion associated with the $20.3 billion
disbursed in fiscal year 2011. OFS calculated a
$16.7 billion downward reestimate relating to these
fiscal year 2011 disbursements that reflects
improvements in AIG’s financial condition since the
original subsidy rate was formulated. The
remainder of the downward reestimate was due to
the restructuring of the AIG investment to common
stock offset by AIG’s financial condition at
September 30, 2011. At year end, the subsidy
allowance represented about 41% of the gross
outstanding AIG Investment Program balance.

82

The $12.0 billion in downward reestimate for the
AIG Investment Program for the year ended
September 30, 2010, was due to an increase in the
estimated value of AIG assets and subordinated debt
and improvements in market conditions over the
period.
TIP
The TIP program was closed in fiscal year 2011,
with a final downward reestimate of $192 million,
primarily due to a better than projected return on
warrant sales. OFS received cumulative receipts of
$4.0 billion on total investments of $40.0 billion.
The $1.9 billion in net downward reestimate in the
TIP in fiscal year 2010 included $2.2 billion in
downward reestimate 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 $277.4
million upward reestimate from a slight reduction in
the estimated value of outstanding warrants.
AIFP
The $9.9 billion in upward reestimates for the AIFP
for the year ended September 30, 2011, was due to a
decline of over $7.0 billion due to changes in the
common stock price of New GM since its IPO and a
decline in the estimated value of Ally investments
due to market conditions.
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.
CBLI
The CBLI programs had a downward reestimate of
$210 million for the year ended September 30, 2011.
The TALF program showed improved market
conditions, resulting in a $105 million downward
reestimate. The SBA and CDCI programs reported
improved investment performance, resulting in $6
million and $99 million downward reestimates,
respectively.

NOTES TO THE FINANCIAL STATEMENTS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

The TALF and SBA 7(a) Securities Purchase
programs within the CBLI had a total upward
reestimate of $23.7 million for the year ended
September 30, 2010. The TALF program had a $23.3
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 risk. The CDCI program had a $7.3
million upward reestimate for the period.
PPIP
The $1.8 billion downward reestimates for the PPIP
for the year ended September 30, 2011, was due
primarily to a decline in market risk projections,
program repayments, and changes in projected
performance of the PPIP portfolio.
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.

NOTES TO THE FINANCIAL STATEMENTS

AGP
The AGP Citigroup TRuPS held by the FDIC
recorded an upward reestimate of $29.8 million for
the year ended September 30, 2011, due to a decline
in market conditions.
The AGP had a net $87.3 million downward
reestimate for the year ended September 30, 2010.
The reestimate amount excludes 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.
Summary Tables
The following detailed tables provide the net
composition, subsidy cost, modifications and
reestimates, a reconciliation of the subsidy cost
allowance and budget subsidy rates and subsidy by
component for each TARP direct loan, equity
investment or other credit programs for the years
ended September 30, 2011 and 2010. There were no
budget subsidy rates for fiscal year 2011, except for
the FHA-Refinance Program, and all disbursements
were from loans or investments obligated in prior
years.

83

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

Troubled Asset Relief Program Loans and Equity Investments
(Dollars in Millions)
TOTAL

CPP

AIG

TIP

As of September 30, 2011
Direct Loans and Equity Investment Programs:
Direct Loans and Equity Investments Outstanding, Gross
Subsidy Cost Allowance
Direct Loans and Equity Investments Outstanding, Net

$ 122,405 $ 17,299 $ 51,087 $
(42,301)
(4,857)
(20,717)
$ 80,104 $ 12,442 $ 30,370 $

New Loans or Investments Disbursed

$

23,839

$

-

$ 20,292

Obligations for Loans and Investments not yet Disbursed

$

8,479

$

-

$

Reconciliation of Subsidy Cost Allowance:
Balance, Beginning of Period
$ 36,745 $
Subsidy Cost (Income) for Disbursements and Modifications
18,887
Interest and Dividend Revenue
3,461
Fee Income
165
Net Proceeds from Sales and Repurchases of Assets
in Excess of (Less than) Cost
(2,262)
Net Interest Income (Expense) on Borrowings from BPD
and Financing Account Balance
(3,016)
Balance, End of Period, Before Reestimates
53,980
Subsidy Reestimates
(11,679)
Balance, End of Period
$ 42,301 $
Reconciliation of Subsidy Cost (Income):
Subsidy Cost (Income) for Disbursements
Subsidy Cost (Income) for Modifications
Subsidy Reestimates
Total Direct Loan and Equity Investment Programs
Subsidy Cost (Income)

$

$

20,071 $
(1,184)
(11,679)
7,208

$

-

1,546 $ 21,405
(1,010)
20,085
1,283
450
165
4,540

(1,918)

AIFP

-

CBLI

PPIP

$ 37,278 $ 798
(19,440)
279
$ 17,838 $ 1,077

$
$

15,943
2,434
18,377

$ -

$

-

$

126

$

3,421

$ -

$

-

$ 4,200

$

4,279

$

(1) $ 14,529 $
(174)
1,280
190

(5,165)

(58) $
1
20
-

(686)
(938)
3
(945)
(32)
5,673
39,249
192
9,525
(69)
(816)
(18,532)
(192)
9,915
(210)
4,857 $ 20,717 $ $ 19,440 $ (279) $
$ 20,085
(1,010)
(816)
(18,532)

$ -

(1,826) $

$ (192) $ 9,741

1,553

(192)

$

(676)
(15)
428
-

$
1 $
(174)
9,915
(210)
$ (209) $

91
(418)
(590)
(1,844)
(2,434)
(15)
(1,844)
(1,859)

Note: There are no budget execution rates for FY 2011; the OFS authority expired October 3, 2010 with no additional commitments made after September 30, 2010.

84

NOTES TO THE FINANCIAL STATEMENTS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

Troubled Asset Relief Program Loans and Equity Investments
(Dollars in Millions)

TOTAL

CPP

AIG

TIP

As of September 30, 2010
Direct Loans and Equity Investment Programs:
Direct Loans and Equity Investments Outstanding, Gross
Subsidy Cost Allowance
Direct Loans and Equity Investments Outstanding, Net

$

New Loans or Investments Disbursed

$

23,373

$

277

$ 4,338

$

Obligations for Loans and Investments not yet Disbursed

$

36,947

$

-

$ 22,292

$

$

53,077
7,533
6,977

$

(7,770) $ 30,054
(16)
4,293
3,131
-

$

Reconciliation of Subsidy Cost Allowance:
Balance, Beginning of Period
Subsidy Cost (Income) for Disbursements and Modifications
Interest and Dividend Revenue
Net Proceeds from Sales and Repurchases of Assets
in Excess of Cost
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 (Income):
Subsidy Cost for Disbursements
Subsidy Cost (Income) for Modifications
Subsidy Reestimates
Total Direct Loan and Equity Investment Programs
Subsidy Cost (Income)

$

179,197 $ 49,779 $ 47,543 $
(36,745)
(1,546) (21,405)
142,452 $ 48,233 $ 26,138 $

8,013

6,676

-

AIFP

1
1

CBLI

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

908
58
966

$
$

13,729
676
14,405

-

$

3,790

$

811

$

14,157

-

$

2,066

$ 4,339

$

8,250

(344) $
275
-

337
228

(341) $ 31,478
2,644
1,143
2,475
1,237

$

99

-

1

(4,690)
(3,934)
66,976
(30,231)
36,745 $

(2,018)
(981)
(161)
(1,309)
(2,334)
(1,600)
(2,331)
33,366
1,878
33,787
3,877
(11,961)
(1,879)
(19,258)
1,546 $ 21,405 $
(1) $ 14,529 $

$

6,067 $
1,466
(30,231)

16 $ 4,293 $
$ 1,146 $
(32)
1,498
3,877
(11,961)
(1,879)
(19,258)

275
31

$

337
(1,041)

$

(22,698) $

3,861

306

$

(704)

$

$ (7,668) $ (1,879) $ (16,614) $

Troubled Asset Relief Program Loans, Equity Investments and Asset Guarantee Program Budget Subsidy Rates:
AGP
CPP
AIG
TIP
AIFP
Budget Subsidy Rate, 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%
(Dollars in Millions)

Subsidy Cost by Component:
Interest Differential
Defaults
Fees and Other Collections
Other
Total Subsidy Cost, Excluding Modifications and Reestimates

PPIP

$

N/A

$

(71) $ 1,415
45
2,907
(8)
50
(29)
16 $ 4,293

$

N/A

$

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

(20)
(89)
31
(58) $

(201)
365
(1,041)
(676)

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 FY 2010 cohorts. These rates cannot be
applied to the direct loans disbursed during FY 2010 to yield the subsidy expense. The subsidy cost (income) for new loans reported in FY 2010 could result from disbursements of
loans from both FY 2010 cohorts and prior year cohorts. The subsidy cost (income) reported in FY 2010 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

85

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

Troubled Asset Relief Program - Other Credit Programs
Asset Guarantee Program
As Of September 30,
2011
2010

(Dollars in Millions)

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

$

739
739

$

$

FHA-Refinance Program
As Of September 30,
2011
2010

815
2,240
3,055

$

Guaranteed Loans Outstanding:
Maximum OFS Exposure on FHA Guaranteed Loans Outstanding,
Related to Loss Sharing Agreement

$

Total Liability for Losses

$

Reconciliation of Asset Guarantee Program/Liability for Losses
Balance, Beginning of Period
Subsidy Cost (Income) for Disbursements and Modifications
Dividend Revenue
Net Proceeds from Sales of Assets in Excess of Cost
Net Interest Expense on Borrowings from BPD
and Financing Account Balance
Balance, End of Period, Before Reestimates
Subsidy Reestimates
Balance, End of Period
Reconciliation of Subsidy Cost (Income)
Subsidy Cost for Guarantees/Losses
Subsidy Cost (Income) for Modifications
Subsidy Reestimates
Total Subsidy Cost (Income)
Budget Subsidy Rate, Excluding Modifications and Reestimates:
As of September 30, 2011
Interest Differential
Defaults
Fees and Other Collections
Other
Total Budget Subsidy Rate
Subsidy Cost by Component:
Interest Differential
Defaults
Fees and Other Collections
Other
Total Subsidy Cost, Excluding Modifications and Reestimates

$

(3,055) $
15
2,301

(1,765)
(1,418)
265
-

(30)
(769)
30
(739) $

(50)
(2,968)
(87)
(3,055)

$

$

30
30

$

N/A

$
$

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

$

$

$
$

N/A

N/A

$

$

-

(1) $

1
1
1

1
1

0.00%
1.26%
0.00%
0.00%
1.26%

$

N/A

6

1
1

-

$

-

$
$

-

$

N/A

N/A

Note: At September 30, 2010, the net present value of the future cash flows for the Asset Guarantee Program consisted 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 million, for a total of $3,055 million. At September 30, 2011, only the contingent payment from the FDIC remained outstanding. The other securities were
sold during fiscal year 2011.

86

NOTES TO THE FINANCIAL STATEMENTS

NOTE 7. DUE TO THE GENERAL FUND

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

As of September 30, 2011, the OFS accrued $4.6
billion of downward reestimates payable 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.

Equity investments, direct loans and other credit
programs 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 11, Statement of Budgetary
Resources.

NOTE 8. PRINCIPAL PAYABLE TO THE BUREAU OF THE PUBLIC DEBT
(BPD)

Debt transactions for the fiscal years ended
September 30, 2011 and 2010, were as follows:

As of September 30,
(Dollars in Millions)

2011
$

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

$

2010

140,404 $
35,974
(46,881)
129,497 $

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

Borrowings from the BPD by the TARP program, outstanding as of September 30, 2011 and 2010, were as
follows:
As of September 30,
(Dollars in Millions)

2011

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

Borrowings are paid to the BPD as collections are
available. As of September 30, 2011, borrowings
carried remaining terms ranging from 3 to 30 years,
with interest rates from 1.0% to 4.7%. As of

NOTES TO THE FINANCIAL STATEMENTS

$

$

19,003
52,285
32,419
1,165
23,792
833
129,497

2010
$

$

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

September 30, 2010, borrowings carried terms
ranging from 5 to 31 years. Interest rates on
borrowings ranged from 2.2% to 4.7%.

87

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

NOTE 9. 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

NOTE 10. STATEMENT OF NET COST

The Statement of Net Cost (SNC) presents the net
cost of (income from) operations for the OFS under
the strategic goal of ensuring the overall stability
and liquidity of the financial system, preventing
avoidable foreclosures and preserving
homeownership. The OFS has determined that all
initiatives and programs under the TARP fall within
this strategic goal.
The OFS SNC reports the annual 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 2011 includes $3.8
billion of intragovernmental costs relating to
interest expense on borrowings from the BPD and
$781.5 million in intragovernmental revenues

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, Equity Investments and Other Credit
Programs.

relating to interest income on financing account
balances. 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.
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 other
credit programs 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.

NOTE 11. STATEMENT OF BUDGETARY RESOURCES

The Statement of Budgetary Resources (SBR)
presents information about total budgetary
resources available to the OFS and the status of
those resources. For the year ended September 30,
2011, the OFS’ total resources in budgetary accounts
were $16.4 billion and resources in non-budgetary
financing accounts, including borrowing authority
and spending authority from collections of loan
principal, liquidation of equity investments, interest,
dividends and fees were $86.5 billion. For the year
ended September 30, 2010, the OFS’ total resources
in budgetary accounts were $34.5 billion and
resources in non-budgetary financing accounts were
$160.8 billion.

88

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 other credit 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,

NOTES TO THE FINANCIAL STATEMENTS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

including the payment of administrative expenses,
shall be deemed appropriated at the time of such
expenditure or obligation.

Borrowing Authority
The OFS is authorized to borrow from the BPD
whenever funds needed to disburse direct loans and
equity investments, and to enter into asset
guarantee and loss-sharing arrangements, exceed
subsidy costs and collections in the non-budgetary
financing accounts. For the year ended September
30, 2011, the OFS had borrowing authority available
of $8.4 billion. For the year ended September 30,
2010, the OFS had borrowing authority available of
$10.2 billion.
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 other credit 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).

NOTES TO THE FINANCIAL STATEMENTS

Undelivered Orders
Undelivered orders as of September 30, 2011, were
$43.4 billion in budgetary accounts and $13.2 billion
in non-budgetary financing accounts. Undelivered
orders as of September 30, 2010, were $68.7 billion
in budgetary accounts and $41.9 billion in nonbudgetary 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 SBR and the actual amounts reported in the
Budget of the U. S. Government (the President’s
Budget).
The President’s Budget for 2013, with the “Actual”
column completed for fiscal year 2011, 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 2012. The Budget will be available from
the Government Printing Office.
The 2012 Budget of the U. S. Government, with the
“Actual” column completed for the period ended
September 30, 2010, was published in February
2011, and reconciled to the SBR. The only
differences between the two documents were due to:
• Rounding;
• Expired funds that are not shown in the
Actual column of the budget; and
• A $32.1 million downward modification
transferred to the general fund shown in the
“Actual” column as an outlay at September
30, 2010, that was not recorded in the SBR
until 2011.

89

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

NOTE 12. RECONCILIATION OF OBLIGATIONS INCURRED TO NET COST
OF (INCOME FROM) OPERATIONS
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 fiscal years
ended September 30, 2011 and 2010 is as follows:

RECONCILIATION OF OBLIGATIONS INCURRED TO NET COST OF (INCOME FROM) OPERATIONS
2011

Dollars in Millions

2010

Resources Used to Finance Activities:
Budgetary Resources Obligated
Obligations Incurred

$

Spending Authority from Offsetting Collections and Recoveries
Offsetting Receipts

67,646

(91,708)

$

(61,832)

(118,860)

(85,894)

Net Obligations
Other Resources

(136,767)

1

1

(85,893)

Total Resources Used to Finance Activities
Resources Used to Finance Items Not Part of Net Cost of (Income from) Operations:
Net Obligations in Direct Loan, Equity Investment and Asset Guarantee Financing Funds

173,631

(191,538)

(136,766)

23,249

40,139

Change in Resources Obligated for Goods, Services and Benefits Ordered but not yet Provided

25,330

(12,639)

Resources that Fund Prior Period Expenses and Net Downward Reestimates

23,562

109,747

Total Resources Used to Finance the Net Cost of (Income from) Operations

(13,802)

Resources that Fund the Acquisition of Assets

(50)

-

72,091

Total Resources Used to Finance Items Not Part of Net Cost of (Income from) Operations

137,247

481

Components of Net Cost of (Income from) Operations that Will Not Require or Generate
Resources in the Current Period:
Accrued Upward (Downward) Reestimates at Year-End

23,293

Net Cost of (Income from) Operations

90

(23,563)

23,299

Other
Total Components of Net Cost of (Income from) Operations that Will Not Require or
Generate Resources in the Current Period

(23,563)

6

$

9,497

-

$

(23,082)

NOTES TO THE FINANCIAL STATEMENTS

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

REQUIRED SUPPLEMENTARY INFORMATION
COMBINED STATEMENT OF BUDGETARY RESOURCES
OFFICE OF FINANCIAL STABILITY (TROUBLED ASSET RELIEF PROGRAM)

For the Year Ended September 30, 2011
(Unaudited)

2011

Dollars in Millions

Combined
Nonbudgetary
Budgetary
Financing
Accounts
Accounts

TARP Programs
Nonbudgetary
Budgetary
Financing
Accounts
Accounts

TARP Administrative
Nonbudgetary
Budgetary
Financing
Accounts
Accounts

$

$

$

BUDGETARY RESOURCES
Unobligated Balances Brought Forward

Recoveries of Prior Year Unpaid Obligations
Budget Authority:
Appropriations

11,075
3,057

$

2,278

10,548

4,664

10,949

3,018

$

10,548

4,664

-

77,914

-

1,886

-

77,914

Earned: Collected

-

107,307

-

107,307

Anticipated for Rest of Year w/o Advances

-

-

-

-

Borrowing Authority

Spending Authority from Offsetting Collections
Change in Unfilled Orders Without Advance

-

Total Budget Authority

Permanently Not Available

TOTAL BUDGETARY RESOURCES (Note 10)

(23,320)

16,410

-

-

177,113

$

16,410

$

$

2,244

$

(90,568)

-

-

86,545

$

15,853

$

65,402

$

1,886

$

$

-

-

-

-

-

-

-

-

177,113

(90,568)

39

392

(23,320)

15,853

126

-

-

-

557

-

-

-

86,545

$

557

$

-

65,402

$

358

$

-

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

36

16,410

$

$

69,128

$

-

69,128

Obligations Incurred

15,853

$

41,918

$

68,898

$

(23,816)

1,886

43,814

$

$

24,501

$

(496)

36

557

$

-

41,918

$

230

$

-

(23,816)

358

43,618

$

89,498

$

24,148

$

-

(39)

13,158

$

-

-

-

(4,664)

(496)

-

-

(353)

23,320

43,618

-

230

65,402

12,662

-

-

$

-

-

163

86,545

(89,498)

(3,018)

13,158

20,632

18,102

(24,148)

(4,664)

43,814

-

68,898

23,320

$

511

$

-

-

13,967

86,545

(89,498)

(3,057)

Obligated Balance, Net, End of Period:
Unpaid Obligations

-

65,402

(24,501)

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

20,632

18,102

2,244

Gross Outlays

Obligated Balance, Net, End of Period

511

$

Obligated Balance, Net, Brought Forward

Uncollected Customer Payments from Federal Sources

14,130

-

196

-

-

12,662

$

196

$

89,498

$

353

$

$

353

-

-

NET OUTLAYS
Gross Outlays

Offsetting Collections

Distributed Offsetting Receipts

NET OUTLAYS

REQUIRED SUPPLEMENTARY INFORMATION

$

-

(61,832)

(37,331) $

(107,307)
-

(17,809)

$

-

(61,832)

(37,684) $

(107,307)
-

(17,809)

-

-

-

-

-

$

-

91

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

REQUIRED SUPPLEMENTARY INFORMATION
COMBINED STATEMENT OF BUDGETARY RESOURCES
OFFICE OF FINANCIAL STABILITY (TROUBLED ASSET RELIEF PROGRAM)

For the Year Ended September 30, 2010
(Unaudited)

2010

Dollars in Millions

Combined
Nonbudgetary
Budgetary
Financing
Accounts
Accounts

TARP Programs
Nonbudgetary
Budgetary
Financing
Accounts
Accounts

TARP Administrative
Nonbudgetary
Budgetary
Financing
Accounts
Accounts

$

$

$

BUDGETARY RESOURCES
Unobligated Balances Brought Forward

Recoveries of Prior Year Unpaid Obligations
Budget Authority:
Appropriations

$

8,945

39,364

28,126
1,118

$

8,945

39,364

-

Change in Unfilled Orders Without Advance

-

4,745

-

69,440

156,112

-

34,480

Earned: Collected

69,440

-

Spending Authority from Offsetting Collections

268,750

33,989

-

Total Budget Authority

Permanently Not Available

1,173

5,151

Borrowing Authority

TOTAL BUDGETARY RESOURCES (Note 10)

28,156

-

(5,111)

$

34,480

$

$

23,405

$

(107,976)

-

$

406

-

-

-

-

-

156,112

-

-

268,750

-

-

30

55

491

-

(5,111)

160,774

$

33,989

$

150,226

$

23,040

$

(107,976)

-

-

-

-

160,774

$

491

$

-

150,226

$

365

$

-

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

142

10,933

7,692

$

34,480

$

$

56,151

$

Obligated Balance, Net, Brought Forward

-

56,151

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

Uncollected Customer Payments from Federal Sources

Obligated Balance, Net, End of Period

33,989

$

79,202

$

55,992

$

(28,927)

-

55,992
23,040

(1,118)

(148,146)

-

$

69,128

$

$

9,255

$

491

$

-

79,202

$

159

$

-

(28,927)

68,898

$

148,146

$

9,016

$

-

-

365

-

(55)

-

(239)

-

-

41,918

(23,816)

-

159

5,111

$

-

-

$

(39,364)

18,102

85

160,774

150,226

68,898

-

41

(148,146)

-

41,918

(23,816)

2,856

50,275

(9,016)

5,111

69,128

-

$

(39,364)

(1,173)

7,692

160,774

150,226

(9,255)

Obligated Balance, Net, End of Period:
Unpaid Obligations

101

10,848

50,275

23,405

Gross Outlays

2,856

-

230

-

-

18,102

$

230

$

148,146

$

239

$

$

239

-

-

NET OUTLAYS
Gross Outlays

Offsetting Collections

Distributed Offsetting Receipts

NET OUTLAYS

92

-

(118,860)

$ (109,605) $

(156,112)
-

(7,966)

-

(118,860)

$ (109,844) $

(156,112)
-

(7,966)

-

REQUIRED SUPPLEMENTARY INFORMATION

$

-

-

-

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

Part 3: Appendices

93

APPENDIX A: TARP GLOSSARY

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

APPENDIX A: TARP GLOSSARY

Asset-Backed Security (ABS): A financial
instrument representing 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 financial 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.
Community Development Financial Institution
(CDFI): 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

94

promotes economic revitalization and
community development.
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 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 representing an interest in a pool of similar
mortgages bundled together by a financial
institution.
Non-Agency Residential Mortgage-Backed
Securities: RMBS that are not guaranteed or
issued by Freddie Mac, Fannie Mae, any other

APPENDIX A: TARP GLOSSARY

AGENCY FINANCIAL REPORT | FISCAL YEAR 2011

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.
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 estaterelated assets. The program is designed to
increase the flow of credit throughout the
economy by partnering 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.

Targeted Investment Program (TIP): A TARP
program that was created to stabilize the
financial system by making investments in
institutions that are critical to the functioning of
the financial system.
Term Asset-Backed Securities Loan Facility
(TALF): A program under which the Federal
Reserve Bank of New York makes term nonrecourse loans to buyers of AAA-rated AssetBacked 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.
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 common stock of a
company at a fixed price.

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 generates reports regarding
mortgage payments.

APPENDIX A: TARP GLOSSARY

95

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

APPENDIX B: ABBREVIATIONS and ACRONYMS
HHF

Hardest Hit Fund

HAMP

Home Affordable Modification Program

HPDP

Home Price Decline Protection

IPO

Initial Public Offering

LIBOR

London Interbank Offered Rate

LTV

Loan-to-Value Ratio

MBS

Mortgage-Backed Security

MHA

Making Home Affordable Program

NPV

Net Present Value

OFS

Office of Financial Stability

OMB

Office of Management and Budget

PPIF

Public-Private Investment Fund

PPIP

Public-Private Investment Program

PRA

Principal Reduction Alternative

2008

QFI

Qualifying Financial Institution

FCRA

Federal Credit Reform Act of 1990

RMBS

Residential Mortgage-Backed

FHA

Federal Housing Administration

ABS

Asset-Backed Securities

AGP

Asset Guarantee Program

AIFP

Automotive Industry Financing Program

AIG

American International Group, Inc.

BofA

Bank of America Corporation

CBLI

Consumer and Business Lending Initiative

CBO

Congressional Budget Office

CDFI

Community Development Financial Institution

CMBS

Commercial Mortgage-Backed Securities

CP

Commercial Paper

COP

Congressional Oversight Panel

CPP

Capital Purchase Program

CDCI

Community Development Capital Initiative

EESA

Emergency Economic Stabilization Act of

FRBNY Federal Reserve Bank of New York
GAO

Government Accountability Office

GSE

Government-Sponsored Enterprise

HAFA

Home Affordable Foreclosure Alternatives

Securities
SIGTARP Special Inspector General for the
Troubled Asset Relief Program
SPV

Special Purpose Vehicle

TALF

Term Asset-Backed Securities Loan
Facility

TARP
TIP

96

Troubled Asset Relief Program
Targeted Investment Program

APPENDIX B: ABBREVIATIONS AND ACRONYMS

Office of Financial Stability Websites:
www.FinancialStability.gov
www.MAKINGHOMEAFFORDABLE.gov

Documents Referenced in the AFR:
Three-Year Anniversary Report

http:/ /www.treasury.gov/initiatives/financial-stability/ Pages/default.aspx

Agency Financial Reports, including 2011, 2010 and 2009:

http:/ /www.treasury.gov/initiatives/financial-stability/briefing-room/reports/agency_reports/ Pages/default.aspx

Housing Scorecard:

http:/ /portal.hud.gov/hudportal/documents/huddoc?id=Sept2011NatlScorecard.pdf

Warrant Disposition Report:

www.treasury.gov/initiatives/financial-stability/briefing-room/reports/other/ Pages/default.aspx

Housing Finance Agency Hardest Hit Fund:

www.financialstability.gov/roadtostability/hardesthitfund.html

PPIP Quarterly Reports

http:/ /www.treasury.gov/initiatives/financial-stability/programs/ Credit%20Market%20Programs/ppip/ Documents/ PPIP%20Report%2009-2011.pdf

Making Home Affordable Monthly Reports:

http:/ /www.treasury.gov/initiatives/financial-stability/results/ MHA-Reports/ Pages/default.aspx

CPP Quarterly Report:

http:/ /www.treasury.gov/initiatives/financial-stability/results/cpp/ Pages/default.aspx.

THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY

98

APPENDIX B: ABBREVIATIONS AND ACRONYMS