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CONGRESSIONAL OVERSIGHT PANEL

JANUARY OVERSIGHT REPORT *

EXITING TARP AND UNWINDING ITS
IMPACT ON THE FINANCIAL MARKETS

JANUARY 13, 2010.—Ordered to be printed

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* Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic
Stabilization Act of 2008, Pub. L. No. 110–343

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CONGRESSIONAL OVERSIGHT PANEL JANUARY OVERSIGHT REPORT

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1

CONGRESSIONAL OVERSIGHT PANEL

JANUARY OVERSIGHT REPORT *

EXITING TARP AND UNWINDING ITS
IMPACT ON THE FINANCIAL MARKETS

JANUARY 13, 2010.—Ordered to be printed

U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON

54–422

:

2010

For sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800
Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

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* Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic
Stabilization Act of 2008, Pub. L. No. 110–343

CONGRESSIONAL OVERSIGHT PANEL
PANEL MEMBERS
ELIZABETH WARREN, Chair
PAUL S. ATKINS
RICHARD H. NEIMAN
DAMON SILVERS

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J. MARK MCWATTERS

(II)

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CONTENTS

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Page

Executive Summary .................................................................................................
Section One: January Report ..................................................................................
A. Overview .......................................................................................................
B. The Various Stages of ‘‘Exit’’ from the TARP ............................................
1. Secretary’s Authority and Obligations ................................................
2. Other Oversight and Management Entities .......................................
3. Effect on Other Related Programs .......................................................
4. EESA Requirements Relating to Use of TARP Profits, or Approach
to TARP Losses ......................................................................................
5. Continuing Market Effects of the TARP: The Implicit Guarantee ...
6. Certain Tax Issues Affecting TARP Exit ............................................
C. Historical Precedents: the RFC and the RTC ...........................................
1. The RFC .................................................................................................
2. The RTC .................................................................................................
3. Lessons from the RFC and the RTC ....................................................
D. Disposal of the Assets .................................................................................
1. Introduction ...........................................................................................
2. Treasury’s TARP Exit Strategy ...........................................................
3. Accounting for the TARP ......................................................................
4. CPP Preferred and Warrants ...............................................................
5. Citigroup ................................................................................................
6. AIG .........................................................................................................
7. Chrysler and GM ...................................................................................
8. GMAC .....................................................................................................
9. PPIP .......................................................................................................
10. TALF ....................................................................................................
11. Small Business Programs ...................................................................
E. Unwinding TARP Expenditure Programs .................................................
1. HAMP .....................................................................................................
2. Future Considerations ..........................................................................
F. What Remains and What Additional Assets Might Be Acquired? ...........
G: Unwinding Implicit Guarantees in a Post-TARP World ..........................
1. Regulatory Options ...............................................................................
2. Liquidation and Reorganization ...........................................................
3. International Aspects of Reform ..........................................................
4. Proposed Legislation .............................................................................
H. Conclusions and Recommendations ...........................................................
Section Two: Additional Views ...............................................................................
A. Damon Silvers ..............................................................................................
B. J. Mark McWatters and Paul S. Atkins .....................................................
Section Three: Correspondence with Treasury Update ........................................
Section Four: TARP Updates Since Last Report ...................................................
Section Five: Oversight Activities ..........................................................................
Section Six: About the Congressional Oversight Panel ........................................
(III)

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IV
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Appendices:
APPENDIX I: LETTER FROM SECRETARY TIMOTHY GEITHNER TO
CHAIR ELIZABETH WARREN, RE: STRESS TESTS, DATED DECEMBER 10, 2009 ........................................................................................
APPENDIX II: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY GEITHNER, RE: EXECUTIVE COMPENSATION,
DATED DECEMBER 24, 2009 ....................................................................
APPENDIX III: LETTER FROM CHAIR ELIZABETH WARREN TO
SECRETARY TIMOTHY GEITHNER, RE: CIT GROUP ASSISTANCE,
DATED JANUARY 11, 2010 ........................................................................

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JANUARY OVERSIGHT REPORT

JANUARY 13, 2010.—Ordered to be printed

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EXECUTIVE SUMMARY *
In its December oversight report, the Panel reviewed the successes and failures of the Troubled Asset Relief Program in 2008
and 2009. This month, the Panel focuses on the road ahead as
Treasury closes the TARP. Now that Treasury has acquired hundreds of billions of dollars in assets, how does it plan to unwind
its stake in the financial markets? How will Treasury balance its
desire to sell these assets quickly with its goals of promoting financial stability and strengthening the return to taxpayers? What
steps will Treasury take to unwind the implicit guarantee that the
federal government will always stand behind too big to fail banks?
In short, what is Treasury’s exit strategy?
Ending the TARP will involve several stages of exit. The first
milestone will be on October 3, 2010, when Treasury’s authority to
make new commitments to purchase assets, commit funds, and establish guarantees using TARP funds will expire. The end of this
authority will not, however, constitute the end of the TARP; Treasury will be authorized to continue making purchases using funds
that were committed in advance of the October 3, 2010 deadline.
Finally, after Treasury completes all of its TARP purchases, it will
hold a massive pool of financial assets likely worth hundreds of billions of dollars, and the process of unwinding some of these holdings may continue for a number of years.
As of December 31, 2009, Treasury’s largest TARP-related assets
include $58 billion in preferred securities issued by banks, $25 billion in Citigroup common stock, $46.9 billion in AIG preferred
stock, and $61 billion in shares and debt of GM and Chrysler.
Treasury also holds significant assets under the Public-Private In* The Panel adopted this report with a 5–0 vote on January 13, 2010.

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2
vestment Program, the Term Asset-Backed Loan Facility, and the
Capital Purchase Program, and it has announced plans to purchase
further assets under new programs such as the small business initiative.
The Emergency Economic Stabilization Act authorized Treasury
to hold its TARP assets until maturity or to sell them earlier.
Treasury has articulated three principles that guide its determination of when to sell assets: maintaining the stability of the financial
system, preserving the stability of individual financial institutions,
and maximizing the return on the taxpayers’ investment.
These principles may sometimes be at odds with one another. For
example, the most profitable moment to sell a TARP asset may not
be the moment that best promotes systemic stability or the moment
that best serves a particular institution. Furthermore, Treasury is
only one department of a much larger federal government, and the
broader government may have additional goals for the TARP, such
as preserving jobs or satisfying a political constituency.
The Panel is also concerned that, although Treasury has been
consistent in articulating its principles, the principles as announced are so broad that they provide Treasury with a means of
justifying almost any decision. This means that there is effectively
no metric to determine whether Treasury’s actions met its stated
goals. Because any approach may alternatively be justified as
maximizing profit, or maintaining the stability of significant institutions, or promoting systemic stability, almost any decision can be
defended. Measuring Treasury’s success against these metrics is
problematic.
As Treasury enters the next stage of its administration of the
TARP, it must learn from the mistakes it has made in the past—
in particular, its failure to follow the money used to bail out large
financial institutions. Because Treasury never required the institutions that received the first infusions of TARP funding to account
for their use of these funds, taxpayers have not had a clear understanding of how their money has been used. As Treasury embarks
on new programs, it must require that future recipients provide
much greater disclosure of their use of TARP dollars.
Finally, and perhaps most significantly, the TARP has raised the
long-term challenge of how best to eliminate implicit guarantees.
Belief remains widespread in the marketplace that, if the economy
once again approaches the brink of collapse, the federal government will inevitably rush in to rescue financial institutions deemed
too big to fail. This belief distorts prices, giving large financial institutions an advantage in raising capital that mid-sized and smaller banks—those not too big to fail—do not enjoy. These implicit
guarantees also encourage major financial institutions to take unreasonable risks out of the belief that, no matter what happens,
taxpayers will not allow their failure. So long as markets continue
to believe that an implicit guarantee exists, moral hazard will continue to distort prices and endanger the nation’s economy, even
after the last TARP program has been closed and the last TARP
dollar has been repaid.

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SECTION ONE: JANUARY REPORT
A. Overview

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On December 9, 2009, Treasury Secretary Timothy Geithner announced that the Troubled Asset Relief Program (TARP) would be
extended until October 3, 2010.1 Although it may take years to unwind some of the assets acquired under the TARP, once the program expires, no new commitments may be made with respect to
TARP funds and the end of the TARP will have begun.
In its December report, the Congressional Oversight Panel
looked at the entire program in order to assess what the TARP has
accomplished and where it has fallen short from various perspectives in the 14 months since its inception. This month the Panel
looks at what the TARP will leave behind when it ultimately is
wound down.
The TARP will leave behind a dual legacy: hard assets and an
even harder problem. As a result of expenditures under the TARP,
Treasury is now managing assets that rival in size a substantial
sovereign wealth fund. Treasury’s Office of Financial Stability
(OFS) is managing a diverse portfolio of assets, worth approximately $258.1 billion at December 31, 2009, which it eventually
must divest. Divesting these assets will call for a balance between
maximizing the return to taxpayers, maintaining financial stability, and continuing to pursue other stated objectives of the
TARP. There are, of course, also unavoidable political considerations that will affect these decisions, and that political context in
the current environment can shift quickly and unpredictably.
Devising an exit strategy from the market impact of the TARP
and related programs is even more difficult than deciding how and
when to dispose of the assets. The Panel has several times noted
the moral hazard that the financial rescue created: the market distortion arising from the belief among market participants and the
managers of financial institutions that the government will guarantee the obligations and preserve the shareholders of large financial institutions.2 Government intervention has created implicit
guarantees of some undefined portion of the financial system, and
any effective exit strategy from the TARP and related programs
must address how to unwind or withdraw that implicit guarantee.
The primary focus of this report is to follow the money: To summarize the assets and obligations that Treasury holds or owes as
a result of its expenditure of TARP funds, to explore how Treasury
plans to divest itself of those assets or obligations and get the taxpayers’ money back, and also to examine how the recipients intend
to make sure taxpayers are made whole. This implicates several
elements of the Panel’s mandate, particularly the use of the Secretary’s authority under the TARP, the effectiveness of the TARP
1 U.S. Department of the Treasury, Treasury Department Releases Text of Letter from Secretary Geithner to Hill Leadership on Administration’s Exit Strategy for TARP (Dec. 9, 2009)
(online at www.treasury.gov/press/releases/tg433.htm).
2 See Congressional Oversight Panel, November Oversight Report: Guarantees and Contingent
Payments in TARP and Related Programs (Nov. 6, 2009) (online at cop.senate.gov/documents/
cop-110609-report.pdf) (hereinafter ‘‘COP November Oversight Report’’).

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in minimizing costs and maximizing benefits to taxpayers, and contributions to transparency.3
As examined in more detail below, Treasury has described to the
Panel an exit strategy based on Treasury’s view of sound asset
management practices and Treasury’s understanding of the statutory obligations imposed by the Emergency Economic Stabilization
Act of 2008 (EESA), the law that led to the TARP’s establishment.
In this Report, the Panel discusses a number of questions that
arise from this approach. The Panel notes that the publication of
audited TARP financial statements has improved the transparency
of the program and provided some insight with respect to the value
of Treasury’s holdings.
This report also considers issues that arise with respect to further expenditures that may be made before the TARP expires; in
particular under Treasury’s small business initiatives and the continuing support provided to GMAC.
As for the broader and still evolving issue—the unwinding of the
implicit guarantees created by the financial rescue—the Panel reviews the current state of the debate and identifies the issues that
must be addressed before it can be said that the TARP has been
truly unwound.
B. The Various Stages of ‘‘Exit’’ from the TARP
1. Secretary’s Authority and Obligations
The end of the TARP will involve several stages of ‘‘exit’’: (1) The
end of the Secretary’s authority to purchase assets or commit
funds, and to establish guarantees for troubled assets, on October
3, 2010; (2) the expenditure of all funds committed for the purpose
of purchasing or supporting ‘‘troubled assets,’’ as defined by EESA,4
and (3) the eventual disposition of all assets held by Treasury that
were purchased through the TARP.
The first and most talked-about stage will come on October 3,
2010, when the Secretary’s authority to purchase troubled assets,
or to commit funds for the purpose of purchasing troubled assets,
will end.5 Originally, this authority was to end on December 31,
2009.6 The statute was written to permit the Secretary of the
Treasury to extend the program, however, until October 3, 2010,
provided he submitted to Congress ‘‘a written certification . . .
includ[ing] a justification of why the extension is necessary to assist American families and stabilize financial markets, as well as
the expected cost to the taxpayers for such an extension.’’ 7 On December 9, 2009, the Secretary sent such a certification to Speaker
of the House Nancy Pelosi and Senate Majority Leader Harry Reid,
stating his intention to exercise his authority to extend the TARP

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U.S.C. § 5233(b).
4 ‘‘Troubled assets’’ as defined by EESA includes both assets associated with mortgage-based
securities and ‘‘any other financial instrument that the Secretary, after consultation with the
Chairman of the Board of Governors of the Federal Reserve System, determines the purchase
of which is necessary to promote financial stability[.]’’ 12 U.S.C. § 5202(9). Under this definition,
valuable assets from healthy institutions may nonetheless be defined as ‘‘troubled assets’’ under
the statute if their purchase is deemed to promote stability.
5 See 12 U.S.C. § 5230.
6 12 U.S.C. § 5230(a).
7 12 U.S.C. § 5230(b).

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until October 2010.8 According to this certification, Treasury will
spend the remaining months of the TARP ‘‘terminating and winding down many of the government programs put in place last fall
[2008].’’ 9 New commitments in 2010 will be limited to the following
three areas:
• Mitigating foreclosures for homeowners;
• Providing capital to small and community banks, and
other efforts to facilitate small business lending; and
• Potentially increasing Treasury’s commitment to the Term
Asset-Backed Securities Loan Facility (TALF), a program administered by the Federal Reserve Bank of New York (FRBNY)
and aimed at unlocking the credit markets via loans for the
purchase of certain types of asset-backed and commercial mortgage-backed securities.10
The certification notes that ‘‘[b]eyond these limited new commitments, we will not use remaining EESA funds unless necessary to
respond to an immediate and substantial threat to the economy
stemming from financial instability.’’ 11
The end of the authority to purchase assets or commit funds for
their purchase will not, however, constitute a true ‘‘exit’’ from the
TARP. The statute permits Treasury to commit funds until October
3, 2010, but spend them after that date.12 Therefore, there may be
funds that have been committed but that, as of October 4, 2010,
have not yet been actually spent. It is too soon to know how many
such unfunded commitments may exist by October 3. The current
state of the various programs under the TARP, and the amounts
that could yet be expended, are discussed in Sections D and E.
Even after the Secretary’s authority to purchase assets has expired and all commitments have been funded, Treasury will still
likely hold billions of dollars worth of assets purchased through the
program. Treasury will have to provide for the management and
prudent sale of these assets, which may continue over a number of
years. Various sections of EESA contemplate such ongoing management and describe the structures that will remain in place to oversee and guide this process.
Section 5223 of EESA contains direct guidance to Treasury with
respect to its obligations in holding and selling assets. According to
this section, the Secretary shall: ‘‘hold the assets to maturity or for
resale for and until such time as the Secretary determines that the
market is optimal for selling such assets, in order to maximize the
value for taxpayers’’ and ‘‘sell such assets at a price that the Secretary determines, based on available financial analysis, will maximize return on investment for the Federal Government.’’ 13
Section 5216 of EESA provides specific details regarding Treasury’s authority. This section provides that the Secretary ‘‘may, at
8 U.S. Department of the Treasury, Letter from Secretary Geithner to Speaker Pelosi (Dec. 9,
2009) (online at www.financialstability.gov/docs/press/Pelosi%20Letter.pdf); U.S. Department of
the Treasury, Letter from Secretary Geithner to Senator Reid (Dec. 9, 2009) (online at
www.financialstability.gov/docs/press/Reid%20Letter.pdf).
9 Id.
10 Id.
11 Id.
12 Under 12 U.S.C. § 5216(e), the Secretary may continue to hold assets purchased under
TARP, and may purchase or fund purchases of assets after the October 3, 2010 expiration date
if the commitment to make such purchase was made by October 3, 2010.
13 12 U.S.C. § 5223(a)(2).

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any time, exercise any rights received in connection with troubled
assets purchased under this chapter’’ and that the Secretary has
the authority to ‘‘manage troubled assets purchased under this
chapter, including revenues and portfolio risks therefrom.’’ 14 As to
the sale of troubled assets, this section grants the Secretary the
ability to ‘‘at any time, upon terms and conditions and at a price
determined by the Secretary, sell, or enter into securities loans, repurchase transactions, or other financial transactions in regard to,
any troubled asset purchased under this chapter.’’ 15 The proceeds
from such sales as well as revenues from troubled assets are to be
paid into ‘‘the general fund of the Treasury for reduction of the
public debt.’’ 16
While it is clear that EESA contemplates some form of ongoing
management of TARP assets, the scope of that authority is less
clear. For example, section 5216 permits the Secretary to ‘‘exercise
any rights received in connection with’’ TARP assets, and section
106(b) authorizes the Secretary ‘‘to manage troubled assets purchased under this Act, including revenues and portfolio risks therefrom.’’ Clearly, if the Secretary purchased convertible preferred
stock before the expiration of the TARP, that stock could be converted, according to its terms, into common equity after the TARP
sunset date. The right to convert the stock was received in the
transaction by which Treasury acquired the asset.
That leaves the question of whether Treasury could exchange a
TARP asset for anything but cash after the sunset date. Suppose
that Treasury sought to exchange non-convertible preferred stock
after the sunset date for common stock in the same institution.
Such a transaction might be characterized as an exercise of a right
‘‘received in connection with’’ the original asset, but it could perhaps more appropriately be characterized as a means of purchasing
new common equity using the preferred stock, depending on the
facts of the situation.
The statute provides no guidance as to whether the Secretary’s
authority to ‘‘manage’’ an asset includes using the stock to obtain
a different class of stock, or whether such an exchange is permitted
if it can be shown to ‘‘reduce portfolio risk.’’ Whether an exchange,
for example, of preferred for common stock, can be shown to ‘‘reduce portfolio risk’’ depends on the facts of particular situations.
Treasury has stated that, while it is unwilling to speculate on such
hypothetical situations, its position is that if the February 2009
Citigroup exchange offer, in which preferred stock was exchanged
for common stock in an effort to bolster the company’s regulatory
capital, had occurred after the sunset date, Treasury would none14 12

U.S.C. § 5216(a), (b).
U.S.C. § 5216(c).
U.S.C. § 5216(d). Treasury apparently concedes that EESA bars the Secretary from taking amounts Treasury receives when stock and warrants are redeemed and spending those
amounts again, rather than using them to reduce the public debt (allowing section 106(d) of
EESA to operate). However, it argues that section 118 of EESA also permits the Secretary to
issue new government securities to raise new funds ‘‘[f]or the purposes of the authorities granted in [EESA],’’ including use to restore the TARP fund to full strength (roughly, the amount
by which the statutory funding ceiling exceeds outstanding purchases and commitments). See,
e.g., Congressional Oversight Panel, Questions for the Record for U.S. Department of the Treasury Secretary Timothy Geithner, at 13 (Sept. 23, 2009) (online at cop.senate.gov/documents/
testimony-091009-geithner-qfr.pdf). The Panel takes no position on the validity of this position.
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theless have the authority to engage in such a transaction as part
of its authority to manage TARP assets.17
Another issue involves the conditions under which the Secretary
may sell TARP assets. The Secretary has a statutory obligation to
hold TARP assets until the Secretary determines the market for
the sale of such assets is ‘‘optimal.’’ This may prove to be a difficult
standard to apply. Without the benefit of hindsight, determining
when a market is ‘‘optimal’’ for a particular sale is extraordinarily
difficult. As discussed in greater detail below, Treasury reads this
provision to require sales to forward the broad policy views required and implied by EESA. ‘‘Optimal’’ timing might therefore not
be the most profitable, but timing that best forwards Treasury’s
goals. As also discussed in Section D.2 below, such an understanding of ‘‘optimal timing’’ creates certain difficulties with regard
to oversight.
2. Other Oversight and Management Entities
The same section of EESA that provides the Secretary with the
authority to create the TARP also provides for the creation of the
Office of Financial Stability (OFS) to implement programs created
under the TARP.18 The section of EESA that provides a sunset
date for the authority granted the Secretary, however, explicitly excludes OFS from the sunset.19 No other section in EESA provides
an alternative sunset date for OFS. This office will remain the primary office for the administration, management, and disposition of
TARP assets.
In addition, the Financial Stability Oversight Board (FSOB), created by EESA,20 will remain in existence until 15 days after the
later of either the date the last troubled asset purchased has been
sold, or the last insurance contract entered into under the section
to guarantee troubled assets has expired.21 Because the statute
provides explicitly for the FSOB to continue until Treasury has
fully exited from all TARP-related transactions, this board is clearly intended to provide guidance not only for the implementation of
the TARP, but for the ongoing management and sale of TARP assets. EESA requires the Secretary to make monthly reports to the
FSOB regarding the current status of TARP programs and expenditures; this obligation continues until the date of the FSOB’s termination.
The three main oversight bodies for the TARP—the Special Inspector General for the Troubled Asset Relief Program (SIGTARP),
the Government Accountability Office (GAO), and the Panel—also
have duties that extend beyond the October 3, 2010, sunset date.
SIGTARP’s oversight obligations expire on the same date as the
17 Treasury

conversations with Panel staff (Nov. 20, 2009).
U.S.C. § 5211(a)(3)(A).
U.S.C. § 5230(a).
20 The FSOB’s members are the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve System, the Director of the Federal Housing Finance Agency, the
Chairman of the Securities Exchange Commission, and the Secretary of Housing and Urban Development. 12 U.S.C. § 5214(b). Its duties include reviewing ‘‘policies implemented by the Secretary and [the OFS] . . . including the appointment of financial agents, the designation of asset
classes to be purchased, and plans for the structure of vehicles used to purchase troubled assets.’’ 12 U.S.C. § 5214(a).
21 12 U.S.C. § 5214(h). For a detailed analysis of the programs created under § 5212, please
see the Congressional Oversight Panel’s November report. COP November Oversight Report,
supra note 2.
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FSOB terminates.22 GAO’s obligations expire on the later of the
date the last TARP asset is sold, or the last insurance contract
ends.23 The Panel’s obligations expire on April 3, 2011.24
3. Effect on Other Related Programs
Treasury’s exit from the TARP will have little to no effect on several programs that use TARP funds,25 or on other related programs
that are also aimed at stabilizing the country’s economy.
The Home Affordable Modification Program (HAMP), which aims
to assist homeowners seeking to avoid foreclosure, will be largely
unaffected by the end of the TARP. Treasury initially committed up
to $50 billion in TARP funds to this program, and as of the release
of this report, there has been no announcement that any additional
funds have been committed. But more funds may be committed in
the future. In Secretary Geithner’s recent letter extending the
TARP, he cited foreclosure mitigation as one of the areas where additional TARP commitments may be made in 2010. Furthermore,
the $50 billion in TARP funds already committed to HAMP may be
paid out even after the expiration of the TARP. Because these
funds are used to reduce homeowners’ mortgage payments, there
are no assets for Treasury to manage; therefore, no exit strategy
is necessary.26
Two other programs that use TARP funds, the TALF and the
Public-Private Investment Program (PPIP), will also be unaffected
because the TARP funds that they use have already been committed. To the extent that the TALF and the PPIP are used to purchase assets, the assets are held and managed by private entities
under the terms of the programs. Therefore, although OFS will
have continuing oversight responsibility for these programs and the
private entities that manage them, Treasury will not itself have responsibility for directly selling any assets purchased through these
programs. Furthermore, both programs have their own fixed termination dates. Loans made under the TALF must not have a term
limit beyond seven years and, currently, no loans may be made
past June 30, 2010.27 The investment funds established under the
PPIP have a ten-year termination date.
A small business initiative that was announced by the White
House in October 2009 has yet to take form.28 But to the extent
22 12

U.S.C. § 5231(h).
U.S.C. § 5226(e).
U.S.C. § 5233(f).
25 One of the stated purposes of the EESA is to preserve homeownership, and section 109 of
EESA directs the Secretary of the Treasury ‘‘[t]o the extent that [he] acquires mortgages, mortgage backed securities, and other assets secured by residential real estate’’ to ‘‘implement a plan
that seeks to maximize assistance for homeowners and use the authority of the Secretary to encourage the servicers of the underlying mortgages, considering net present value to the taxpayer, to take advantage of the HOPE for Homeowners Program . . . or other available programs to minimize foreclosures. In addition, the Secretary may use loan guarantees and credit
enhancements to facilitate loan modifications to prevent avoidable foreclosures.’’ 12 U.S.C.
§§ 5201(2)(B), 5219(a).
26 The Panel requested from Treasury a legal opinion on its HAMP authority. See, e.g., Congressional Oversight Panel, COP Hearing with Treasury Secretary Timothy Geithner (Dec. 10,
2009).
27 Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: Terms and
Conditions (Nov. 13, 2009) (online at www.newyorkfed.org/markets/talflterms.html) (hereinafter ‘‘TALF Terms and Conditions’’).
28 White House, Weekly Address: President Obama Says Small Business Must be at the Forefront of the Recovery (Oct. 24, 2009) (online at www.whitehouse.gov/the-press-office/weeklyaddress-president-obama-says-small-business-must-be-forefront-recovery).
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that it includes any outright expenditures, there will similarly be
no requirement for an exit strategy for assets. This does not mitigate the need for rigorous oversight of any such programs.29
Several related programs run by the Federal Deposit Insurance
Corporation (FDIC) and the Federal Reserve will likewise be unaffected by the TARP’s end. An FDIC program under which bank accounts are guaranteed up to $250,000, up from the earlier level of
$100,000, is unrelated to the TARP and will remain in place until
December 31, 2013. Similarly, certain financing that the Federal
Reserve has made available in response to the financial crisis is
unrelated to the TARP and will be unaffected by the TARP’s termination.
4. EESA Requirements Relating to Use of TARP Profits, or
Approach to TARP Losses
Most of the programs established in the TARP’s early days carry
the potential of a return on Treasury’s investments, which gives
rise to the question of what is the best use of any profits from the
TARP. While EESA provides that all profits are to be used to pay
down the national debt,30 there is an ongoing debate about what
to do with TARP funds going forward. Should the TARP instead realize a net loss, EESA provides that ‘‘the President shall submit a
legislative proposal that recoups from the financial industry an
amount equal to the shortfall in order to ensure that the Troubled
Asset Relief Program does not add to the deficit or national
debt.’’ 31
The fact that the TARP morphed from the asset purchase program contemplated by the legislation to a capital infusion program
complicated the issue somewhat, and later TARP programs such as
HAMP, which are not intended to produce any return at all, complicated it further. It currently appears that, although some capital-injection programs will show a profit, the TARP as a whole will
result in a loss.32 Even if the capital-injection programs show a
profit, these profits will have to be large enough to also make up
for outlays under programs such as HAMP, which are structured
without any contemplation of a return of capital or interest. It is
thus possible that legislation may result in financial institutions
being charged for losses made on investments in two automobile
companies and on foreclosure mitigation efforts. On the other hand,
it may be argued that many of the financial institutions that received TARP funds would not have survived absent such capital injections, or, even if they themselves were not short of capital,
would have been vulnerable had other giants in the industry fallen,
and therefore asking for these institutions to contribute to an overall TARP shortfall is appropriate. Ultimately, EESA specifies that
the determination of whether the program has made a loss is to be
29 See

Section E, infra.
U.S.C. § 5216(d).
U.S.C. § 5239.
32 Congressional Oversight Panel, Written Testimony of Treasury Secretary Timothy F.
Geithner (Dec. 10, 2009) (online at cop.senate.gov/documents/testimony-121009-geithner.pdf)
(hereinafter ‘‘Sec. Geithner Written Testimony’’); U.S. Department of the Treasury, Agency Financial Statement 2009, at 3 (Sept. 30, 2009) (online at www.treas.gov/press/releases/
OSF%20AFR%2009.pdf) (hereinafter ‘‘Agency Financial Statement 2009’’).
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made after October 3, 2013,33 and it may take several years for the
results of some of the investments made under the TARP to be
clear, although the TARP financial statements do calculate likely
profit or loss for all TARP investments in fiscal year 2009.34
5. Continuing Market Effects of the TARP: The Implicit
Guarantee
Even after the TARP has ended, it is likely that the effect of the
TARP and related programs on the market will continue for some
time. The decisions to rescue certain financial institutions have created an implicit government guarantee, the limits of which are unknown and the reasons for which are not fully articulated.35 This
guarantee goes beyond the so-called too big to fail problem: it is not
clear how far the guarantee extends into the smaller banks, and
even some of the banks subjected to the ‘‘stress tests’’—which some
commentators have viewed as the too big to fail list 36—seem to
pose no real threat to the financial system.37
Implicit guarantees affect the market’s view of these institutions,
and a perception that an institution will be protected by the government may in fact result in the government’s continued protection. Those institutions may factor the implicit guarantee into their
calculation of downside risk, assuming the government will backstop any failed investments while they preserve any upside. Such
risk calculations will have a ripple effect across the market as the
investment portfolios of the guaranteed institutions’ risk profiles
shift. For example, the government guarantees that were provided
to money market funds at the height of the financial crisis have
now officially lapsed, but at least one commentator has noted that
the implicit guarantees may linger, and may be influencing both
the funds’ investment decisions and their cost of capital.38 As discussed in the Panel’s November report, capital tends to be cheaper
for institutions that have strong guarantees, such as a guarantee
backed by the U.S. government.39 This has the dual effect of decreasing the cost of capital for the guaranteed institution and placing that institution at a competitive advantage over institutions
without such a guarantee. These guarantees have lowered the cost
33 See

12 U.S.C. § 5239.
amendment to a bill that passed the House on December 10, 2009 (see Section G.1,
infra) permits the FDIC to make an assessment for the Systemic Dissolution Fund used to repay
any shortfalls in the Troubled Asset Relief Program to ensure that such shortfalls do not add
to the deficit or national debt. Rep. Gary Peters, Amendment to the Wall Street Reform and Consumer Protection Act of 2009, Congressional Record, H14748–14750 (Dec. 11, 2009) (online at
frwebgate.access.gpo.gov/cgi-bin/getpage.cgi?dbname=2009lrecord&page=H14745&position=all).
One potential issue with this approach is that institutions that repaid their TARP funds in full
would be required to make up the shortfall for those banks that were unable to do so. During
a meeting with Panel staff on December 16, 2009, OFS Chief Counsel Timothy Massad said that
OFS was aware of this issue but that it was too early to consider any concrete plans for such
recoupment.
35 The ramifications of this may be visible in certain comments by rating agencies with regard
to Citigroup. See Section D.5(b), infra.
36 Thomas F. Cooley, The Need for Failure, Forbes.com (May 27, 2009) (online at
www.forbes.com/
2009/05/26/fdic-treasury-banks-too-big-to-fail-opinions-columnists-sheilabair.html).
37 Metlife, which operates in a confined segment of the financial services industry, was also
one of the nineteen entities selected for the stress tests. Federal Reserve Board of Governors,
The Supervisory Capital Assessment Program: Overview of Results, at 30 (May 7, 2009) (online
at www.federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf).
38 Daisy Maxey, Money Funds Again Take On Risk, Wall Street Journal (Nov. 16, 2009) (online at online.wsj.com/article/SB10001424052748703811604574534011795078126.html).
39 COP November Oversight Report, supra note 2, at 37.

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of capital for many institutions.40 Investors make similar calculations, taking on more risk when they are protected from the consequences of their decisions.41 If there is no new crisis and bailout,
the market-distorting effect of the TARP and related programs may
dissipate as institutions and investors come to believe that the government will not step in to save failing institutions, or at least
have no government bailout in their recent memories. The effect in
the period immediately following the TARP’s dissolution, however,
must be taken into account when analyzing market behavior, especially with regard to risk calculations.
The implicit guarantee that has now been created will not end
with the end of the TARP. The markets will assume that the government will intervene with a new TARP in the event of another
crisis, unless the government credibly establishes that this will not
happen. One of the first orders of business for the government as
part of the unwinding of the TARP must be to clarify or rein in the
implicit guarantee and the distortion it has on the markets.42
The term too big to fail has come to be used as shorthand for the
implicit guarantee and to describe institutions that the government
dare not let fail, because such failure would threaten to spread to
the larger economy.43 Such risk might be posed by reason of size
or by the impact a company’s failure would have on the financial
system. Size alone does not determine this status, although the size
of some institutions means that their collapse in markets that have
not properly addressed the risk could have a significant impact on
the economy. Financial institutions can also threaten the financial
system by reason of their concentration of derivative risk or by the
fact that they provide essential services, disruption of which could
result in significant dislocations in the financial system. The securities processing services, custody, and cash management and
treasury functions of some institutions are depended upon by so
40 COP November Oversight Report, supra note 2, at 37 (‘‘The research firm SNL Financial
(SNL) . . . found that the DGP saved issuers 39 percent in interest costs’’).
41 Moral hazard arises when the government agrees to guarantee the assets and obligations
of private parties and protect them from loss. The insured party might take greater risk, especially when the protected party is not required to purchase the protection. This ‘‘free’’ insurance
causes a number of distortions in the marketplace. On the financial institution side, it might
promote risky behavior. On the investor and shareholder side, it will provide less incentive to
hold management to a high standard with regard to risk-taking.
For an in depth discussion of moral hazard in the context of TARP programs, see the Panel’s
November report. COP November Oversight Report, supra note 2, at 70–72.
42 This process may have already begun with the failure of CIT in July 2009. Although the
company received $2 billion in CPP funds, the federal government did not provide additional
funding when it became clear that the company would not survive despite the capital injection.
CIT Group, Inc., CIT Announces That Discussions with Government Agencies Have Ceased (July
15,
2009)
(online
at
www.businesswire.com/portal/site/cit/
?ndmViewId=newslview&newsId=20090715006374&newsLang=en). CIT’s prepackaged bankruptcy plan was confirmed by a court in December. CIT Group, Inc., CIT Prepackaged Plan of
Reorganization Confirmed by Court (Dec. 8, 2009).
43 In this context, it is worth noting that ‘‘risk’’ is not the only multi-faceted concept. The too
big to fail shorthand implies that there is only one kind of failure: where the dissolution of the
relevant entity could create enormous labor or market disruptions. This arguably presents the
choice facing Treasury and the U.S. government as always between chaos or moral hazard: to
use concrete examples, that the only choices were either to let an entity—for example, Lehman
Bros.—collapse into chaos, and bring other entities with it, or to provide the entity—for example, AIG—with bail-outs, distorting the markets. Under other circumstances, however, these extreme poles might not have formed the models for government intervention. Put another way,
that these were the choices Treasury made in 2008–2009 does not mean that they were the only
choices available to it. This report, however, deals with the problem of exit, and therefore does
not address alternative actions that Treasury, the Bush or Obama Administrations, or Congress
could have taken in the crisis. The TARP program may not have been the only means of responding to the crisis, but in discussing exit from the TARP program, this report can only assess
exit from the choices that were actually made.

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many large entities that their loss could cause significant problems
in the global financial system. Risk is multi-faceted, and because
risk derives from the very different functions and activities of the
various financial institutions, it will be very difficult to find a onesize-fits-all definition of too big to fail.
In Section G of this report, the Panel reviews some of the options
that are currently being proposed to address the risks posed by too
big to fail institutions. The Panel takes no view on those options,
but notes that it is essential that the unwinding of the TARP includes steps to address the moral hazard and market distortion
that the TARP and related programs created.

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6. Certain Tax Issues Affecting TARP Exit
TARP exit strategy and the operation of the CPP are affected by
a series of Treasury Department decisions that limit the applicability of the Internal Revenue Code (Code) rules limiting the use
of a corporation’s net operating losses (NOLs).44 NOLs can reduce
the future income and hence the tax liability of a financial institution, or of any other corporation.45 Equally important, a bank holding company’s tier 1 regulatory capital will ordinarily include a
portion of its NOLs.46 Any cap on an institution’s available NOLs
could be expected to have a negative effect on the institution’s
value and regulatory capital position. If the institution has a large
number of NOLs, the effect is likely to be substantial.
The NOL limitation rules, contained in section 382 of the Code,
limit the annual availability of a corporation’s NOLs after a
‘‘change in control’’ of that corporation to a small percentage of the
otherwise usable amount.47 The corporation does not have to be
sold to trigger the limitation; a change in control occurs if the percentage of the corporation’s stock owned by any of its ‘‘five percent
shareholders’’ increases by more than 50 percent over a three-year
period, whether by the corporation’s sale or otherwise. A ‘‘five percent shareholder’’ is any shareholder that owns five percent or
more of the stock of the corporation. The stock owned by all shareholders who are not five percent shareholders is treated as being
owned by one or more groups which may be treated as five percent
shareholders, referred to as the ‘‘public groups.’’
The Internal Revenue Service (IRS) issued several notices (the
EESA Notices) containing guidance about the application of section
44 An NOL, conceptually, is the excess of a corporation’s deductions over its taxable income.
Section 382 also applies to what are called ‘‘built-in losses’’ (in simplest terms, the amount by
which the value of an asset is less than its cost), and its companion section 383 applies in a
similar way to the carryforward of unused tax credits. NOLs, built-in losses, and tax credits together form a corporation’s ‘‘deferred tax assets,’’ whose value is greater than the value of the
corporation’s NOLs alone. Although not technically correct, the term ‘‘NOL’’ is used here for ease
of presentation to refer to all three tax attributes.
45 A corporation is generally permitted to carry forward NOLs for 20 years, to offset its future
income.
46 12 CFR § 225 at appendix A.II.A.1. To summarize the rule, NOLs may constitute up to 10
percent of tier 1 capital, to the extent that the institution ‘‘is expected to realize [a tax deduction
by their use] within one year . . . based on its projections of future taxable income for that year
. . . .’’ 12 CFR § 225 at appendix A.II.B.4.a.i.
47 26 U.S.C. § 382. The limitation may be severe. If a change in control occurs, the amount
of income that the ‘‘post-change’’ corporation can offset by ‘‘pre-change’’ losses is capped at a
small percentage of the corporation’s value, which is roughly equal to its market capitalization.
This percentage, called ‘‘the long-term tax-exempt rate’’ and set monthly by the IRS, is currently
at 4.14 percent. Thus, at present, a corporation whose market capitalization was $1 billion could
use the NOLs generated before its change in control only to the extent of $41.4 million of taxable income each year.

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382 to institutions engaged in transactions with the Treasury Department under EESA. The Notices extended to transactions under
any of the TARP programs. The first three EESA Notices, issued
in October 2008, January 2009, and April 2009, allowed Treasury
to take, and the institutions to redeem eventually, stock and warrants without causing a change in ownership under section 382.48
Any other result would have increased substantially the uncertainty created by TARP and the potential cost of participation in
its programs. The tax and regulatory capital costs of participation
by financial institutions might well have greatly limited TARP’s effectiveness. All of the EESA Notices to date have been issued
under both the Secretary’s authority to issue income tax regulations and to issue ‘‘such regulations and other guidance as may be
necessary or appropriate to define terms or carry out the authorities or purposes of [EESA].’’ 49
In addition, the IRS issued a Notice at the end of September
2008, prior to the enactment of EESA, stating that important elements of section 382 would not apply to a change in ownership of
a bank.50 Any bank was allowed to rely on the Notice, but it was
identified as having been issued to facilitate the acquisition of
Wachovia by Wells Fargo and at least one other bank acquisition.51
That Notice was rescinded by Congress, however, as part of the
economic stimulus legislation, for any ownership change after January 16, 2009.52 The effective date excluded transactions under
48 IRS Notice 2008–100 (Oct. 15, 2008) (online at www.irs.gov/irb/2008-44lIRB/ar13.html);
IRS Notice 2009–14 (Jan. 31, 2009) (online at www.irs.gov/pub/irs-drop/n-09-14.pdf); IRS Notice
2009–38 (April 13, 2009) (online at www.irs.gov/irb/2009-18lIRB/ar09.html). Each of the Notices was described as ‘‘amplifying’’ and was designated as ‘‘superseding’’ the immediately prior
Notice. The first Notice applied only to preferred shares and warrants issued under the CPP.
The second expanded the treatment to include the TIP, SSFI, and the AIFP. It also added a
provision excepting from section 382 Treasury’s ownership of stock ‘‘other than preferred stock.’’
The April Notice extended the guidance to the CAP and AGP, and in anticipation of Treasury’s
exchange of preferred stock for common stock of Citigroup, exempted Treasury’s receipt of that
stock from section 382, even though such stock was not received directly under the TARP program. The Revenue Service had previously issued similar guidance for two pre-EESA transactions that were part of the financial stability effort.
49 12 U.S.C. § 5211(c)(5). In addition to the Secretary’s overall authority to issue income tax
regulations, section 382(m) specifically authorizes the Secretary to issue ‘‘such regulations as
may be necessary or appropriate to carry out the purposes of this section.’’ 26 U.S.C. § 382(m).
50 IRS Notice 2008–83 (Sept. 30, 2008) (online at www.irs.gov/irb/2008-42lIRB/ar08.html).
The items involved were ‘‘any deduction . . . for losses on loans or bad debts (including any
deduction for a reasonable addition to a reserve for bad debts).’’
51 See Crowell & Moring, Tax Notice Drives Wachovia Takeover Turmoil (Oct. 6, 2008) (online
at www.crowell.com/NewsEvents/Newsletter.aspx?id=1032); Baker Hostetler, IRS Net Operating
Loss Guidance to Banks (Oct. 9, 2009) (online at www.bakerlaw.com/irs-net-operating-lossguidance-to-banks-10-9-2008/); Press Release, Grassley Seeks Inspector General Review of Treasury Bank Merger Move (Nov. 14, 2008) (online at finance.senate.gov/press/Gpress/2008/
prg111408c.pdf) (‘‘The Notice, issued just days before Congress voted on the Emergency Economic Stabilization Act of 2008, appears to have had the effect of benefiting Wachovia Corporation executives and Wells Fargo . . . Treasury’s issuance of the Notice apparently enabled Wells
Fargo to take over Wachovia despite a pending bid from Citibank. Without the issuance of the
Notice, Wells Fargo would have only been able to shelter a limited amount of income. Under
the Notice, however, Wells Fargo could reportedly shelter up to $74 billion in profits’’). See also
Sen. Charles E. Schumer, Schumer Seeks Answers from IRS, Treasury on Tax Code Change That
Subsidizes Bank Acquisitions (Oct. 30, 2008) (online at schumer.senate.gov/newlwebsite/
record.cfm?id=304737) (‘‘Wells Fargo . . . stands to save $19.4 billion as a result of the tax
change, PNC Financial is estimated to save more than $5.1 billion in its takeover of Clevelandbased National City’’).
52 Congress found that:
(1) The delegation of authority to the Secretary of the Treasury under section 382(m) of the
Internal Revenue Code of 1986 does not authorize the Secretary to provide exemptions or special
rules that are restricted to particular industries or classes of taxpayers.
(2) Internal Revenue Service Notice 2008–83 is inconsistent with the congressional intent in
enacting such section 382(m).
Continued

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contracts entered into on or before January 16, so that the Notice
did apply to lift the section 382 limitations for the acquisition of
Wachovia. The accompanying Conference Committee Report mentioned without comment the EESA Notices that existed at the time
of the report.53
The fourth EESA Notice was issued in December 2009.54 The December Notice expands the prior guidance by stating that a sale by
the Treasury Department of stock it had received under any of the
EESA programs to a ‘‘public group,’’ that is, to a group of less than
five percent shareholders, would not trigger an ownership change.
The December Notice applies to all Treasury shareholdings. Its
most immediate application and likely most significant application,
however, is to the planned sale of the shares of Citigroup that
Treasury holds.55
The application of the section 382 limitations to Citigroup would
have been harsh.56
Citigroup reported deferred tax assets (DTA) of $38 billion as of
September 30, 2009, and stated that it would require ‘‘approximately $85 billion of taxable income during the respective carryforward periods to fully realize its U.S. federal, state and local
DTA.’’ 57 Given Citigroup’s current market capitalization of $80.02
billion, it could use its NOLs only to offset $3.31 billion in taxable
income annually, under the section 382 limitation.58
Of course, any application of the limitation would have also reduced Citigroup’s capital. Citigroup reported that as of September
30, 2009 ‘‘[a]pproximately $13 billion of [its] net deferred tax asset
is included in Tier 1 and Tier 1 Common regulatory capital.’’ 59
Citigroup reported that its tier 1 common and tier 1 regulatory capital were approximately $90 billion, and $126 billion respectively.
It is difficult to calculate the capital reduction that imposition of
the 382 limitations would cause, but the reduction would likely be
a significant percentage of the $13 billion, and Citigroup would
have been required to raise capital from other sources to restore its
(3) The legal authority to prescribe Internal Revenue Service Notice 2008–83 is doubtful.
American Recovery and Reinvestment Act (ARRA), Pub. L. No. 111–5, at § 1261 (2009).
53 Conference Report to Accompany H.R. 1, at 555–560, 111th Cong. (2009) (H.R. Rept. 111–
16) (online at legislative.nasa.gov/ConferenceReport%20111-16.pdf).
54 IRS Notice 2010–2 (Dec. 11, 2009) (online at www.irs.gov/pub/irs-drop/n-10-02.pdf).
55 This section does not discuss the possible impact of the December Notice on future sales
of stock held by Treasury under the Automotive Industry Financing Program, SSFI, or any common stock acquired by Treasury pursuant to its CPP warrants. However, as noted in the text,
the December notice is likely to have its greatest significance as applied to Citigroup because
any triggering of section 382 will likely reduce a financial institution’s tier 1 capital. in the value
of Citigroup’s NOLs and in the amount of its tier 1 capital.
56 Citigroup recognized the risk of the application of section 382. In early June 2009, as part
of its Exchange Offer with Treasury, and as described in its 2009 Third Quarter 10–Q, its Board
had adopted a ‘‘tax benefits preservation plan . . . to minimize the likelihood of an ownership
change [under section 382] and thus protect Citigroup’s ability to utilize certain of its deferred
tax assets, such as net operating loss and tax credit carry forwards, to offset future income.’’
However, the 10–Q continued: ‘‘[d]espite adoption of the [p]lan, future stock issuance our transactions in our stock that may not be in our control, including sales by the USG, may . . . limit
the Company’s ability to utilize its deferred tax asset and reduce its [tangible common equity]
and stockholders equity.’’ Citigroup, Quarterly Report for the Third Quarter of 2009 (10–Q), at
11 (online at www.citibank.com/citi/fin/data/q0903c.pdf?ieNocache=106) (hereinafter ‘‘Citigroup
Third Quarter 10–Q’’).
57 It is not possible, or very difficult, to discern from public information how much taxable income Citigroup would need in order to use its DTAs if it were subject to section 382 limitations.
Use of DTAs is not one to one against taxable income.
58 $3.23 billion is Citigroup’s market capitalization multiplied by the long-term tax exempt
rate. See supra note 47.
59 Citigroup Third Quarter 10–Q, supra note 56, at 11.

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capital position.60 Under the worst set of circumstances, such a reduction in tier 1 capital might have left Citigroup undercapitalized
and postponed its eligibility for exit from the TARP altogether.
By eliminating the section 382 limitations, the Treasury Department avoided either reducing the value of its shares (and the capital held by Citigroup) or being forced to sell its shares serially over
a period of years, in amounts small enough not to increase the
holdings of Citigroup’s public stockholders by more than five percent.
Nonetheless, the December Notice has attracted criticism as an
additional subsidy to Citigroup and a loss to the taxpayers.61 Section 382 is a highly reticulated statute, and this departure from its
operation, under the authority both of the Code and EESA, has
raised concerns.62
Congress’ rescission of the September 2008 Notice directed at the
Wells Fargo-Wachovia transaction is inconclusive.63 The legislation
indicated a congressional belief that section 382 was not intended
to apply differently to ‘‘particular industries.’’ 64 However, the Notice was arguably directed at private transactions and was announced before the enactment of EESA.65 In addition, by the time
Congress acted to reverse that Notice, the CPP, TIP, and SSFI
were in operation, and the significance of the EESA Notices was
apparent. The first two EESA Notices are cited in the ARRA Conference Committee Report without comment, positive or negative,
and Congress has taken no action, either in ARRA or thereafter to
rescind the EESA Notices.
Given the previous guidance, it is difficult to understand why
Treasury waited until December 2009 to extend the earlier guidance to a sale of its shares to the public.66 Treasury staff has indicated that, before the decision was made to sell the shares to the
public, it was possible that Citigroup would repurchase the shares
60 Without an ability to know the amount of the $13 billion figure made up of federal NOLs,
a precise calculation is impossible.
61 House Committee on Oversight and Government Reform, Subcommittee on Domestic Policy,
Opening Statement of Committee Chairman Dennis Kucinich, The U.S. Government as Dominant Shareholder: How Should Taxpayers’ Ownership Rights be Exercised? (Part II), at 3 (Dec.
17,
2009)
(online
at
oversight.house.gov/images/stories/
121709l111thlDPlOpeninglStatementlChairmanlKucinichl121709.pdf); Sen. Charles
Grassley, Grassley Urges Fair Tax Treatment for Small Businesses Compared to Large Banks
(Dec.
23,
2009)
(online
at
grassley.senate.gov/news/Article.cfm?customell
dataPageIDl1502=24632). Senator Jim Bunning has introduced a bill to rescind 2010–2, and
to require Treasury to receive congressional authorization for any future regulations under section 382 that provide an ‘‘exemption or special rule . . . which is restricted to dispositions of
instruments acquired by the Secretary.’’ S. 2916, 111th Cong. (Dec. 18, 2009).
62 Binyamin Appelbaum, U.S. gave up billions in tax money in deal for Citigroup’s bailout repayment, Washington Post (Dec. 16, 2009) (online at www.washingtonpost.com/wp-dyn/content/
article/2009/12/15/AR2009121504534.html) (quoting Robert Willens, a tax accounting expert,
that ‘‘I’ve been doing taxes for almost 40 years, and I’ve never seen anything like this, where
the IRS and Treasury acted unilaterally on so many fronts’’).
63 IRS Notice 2008-83 (Sept. 30, 2008) (online at www.irs.gov/irb/2008-42lIRB/ar08.html).
64 See ARRA, supra note 52.
65 Although EESA was close to enactment at the end of September, the consensus was that
the TARP would be used to purchase ‘‘troubled assets’’ from financial institutions. Congressional
Oversight Panel, August Oversight Report: The Continued Risk of Troubled Assets (Aug. 11,
2009) (online at cop.senate.gov/documents/cop-081109-report.pdf) (hereinafter ‘‘COP August
Oversight Report’’).
66 Some tax experts believe that the conclusion was implicit in the prior assurance that section
382 could not apply to any repurchase of CPP shares from Treasury. Amy Elliot, Criticism of
Notice Allowing Citigroup to Keep NOLs is Unfounded, Official Says, Tax Analysts (Dec. 17,
2009) (‘‘Most thought that ‘even if it wasn’t a redemption that shouldn’t matter,’’’ said Todd B.
Reinstein, a partner with Pepper Hamilton LLP. ‘‘If it was a sale to a public group it should
be the same treatment. This just . . . confirms that’’).

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itself, making the December Notice unnecessary; the Notice would,
however, have been necessary in any event with respect to the
other institutions in which Treasury continues to hold a common
stock interest.67 It is also possible that Treasury did not want to
run a risk of attracting a negative congressional reaction such as
that which led to the reversal of Notice 2008–83.
Treasury has pointed out to staff of the Panel that the December
Notice balances the policies of section 382 and EESA by limiting
the EESA relief to sales to the public and not to any freestanding
five percent shareholders. This avoids the primary thrust of section
382 by not creating any single shareholder or shareholders with
more than five percent of Citigroup stock through its sale. The limitation is significant, but its relevance in this case depends to some
degree on the relationship between the timing of the Notice and
Treasury’s decision to sell its Citigroup shares to the public.
Assistant Secretary of the Treasury for Financial Stability Herb
Allison’s initial response to the criticism of the December Notice,
in a letter to The Washington Post, emphasized that Treasury
could not avoid taxes because it did not pay taxes.68 The response
sidesteps the fact that section 382 applies to Citigroup, not Treasury, and that the operation of the statute is not limited to sales of
a company. A second argument, that Citigroup should not ‘‘be
treated differently simply because the government intervened’’
comes closer to the core of the matter. The December Notice eliminated what could have been a major obstacle to the severance of
Treasury’s ownership of Citigroup common stock. Without the Notice, Treasury could still have eliminated the costs of the section
382 limitations for Citigroup by selling its shares into the market
over a number of years, causing no revenue loss. Calculations of
the extent to which taxpayers benefited or not from the lifting of
the section 382 limitation are extremely difficult in any event, because they depend on assumptions about Citigroup’s income in future years if use of its NOLs had been limited, and the value to
the taxpayers of realizing an immediate gain from the sale of the
Citigroup shares.
Finally, the EESA Notices, however sound in themselves, illustrate again the inherent conflict implicit in Treasury’s administration of the TARP. In this case the conflict is a three-way one, pitting Treasury’s responsibilities as TARP administrator, regulator,
and tax administrator against one another. Perhaps the most troublesome aspect of the debate over the December Notice is posed by
this conflict, in the perception that income tax flexibility is especially, and quickly, available for large financial institutions at a
time of general economic difficulty.
C. Historical Precedents: the RFC and the RTC
The TARP is not the first U.S. government program to involve
large-scale U.S. government acquisition of private assets.69 The Re67 Treasury

conversations with Panel staff (Jan. 7, 2009).
Secretary Herbert Allison, Letter to the Editor, U.S. Isn’t Evading Taxes on
Citigroup, Washington Post (Dec. 22, 2009) (online at www.washingtonpost.com/wp-dyn/content/
article/2009/12/22/AR2009122200040.html).
69 See generally Congressional Oversight Panel, April Oversight Report: Assessing Treasury’s
Strategy: Six Months of TARP, at 35–50 (Apr. 7, 2009) (online at cop.senate.gov/documents/cop040709-report.pdf) (hereinafter ‘‘COP April Oversight Report’’).

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68 Assistant

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construction Finance Corporation (RFC) and the Resolution Trust
Corporation (RTC) provide prior models for the investment of public funds in struggling or insolvent private entities and the ensuing
public sector management and disposition of the acquired assets.
The RFC was established in 1932 and ultimately unwound in
1957,70 while the RTC was established in 1989 and ultimately terminated in 1995.71

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1. The RFC
President Herbert Hoover established the RFC in response to the
credit freeze of the Great Depression.72 The RFC provided liquidity
to struggling institutions through investments in preferred stock
and debt securities.73 Initially, the RFC provided liquidity for
healthier institutions but was prevented from offering long-term
capital to weaker institutions by restrictions such as high interest
rates, collateral requirements, and short-term lending requirements.74 The Emergency Banking Act of 1933, however, gave the
RFC the ability to offer investment capital, while looser collateral
requirements expanded the RFC’s lending capacity.75 Ultimately,
under President Franklin Roosevelt, successive expansions of authority helped the RFC evolve from its initial role as a short-term
lender into an agency that provided federal support for the credit
markets and became a major part of the New Deal program.76
The RFC investments in bank and industry capital took place in
the shadow of the Emergency Banking Act and President Franklin
Roosevelt’s nation-wide bank holiday. After the holiday, only those
banks that were liquid enough to do business were permitted to reopen. Banks with insufficient assets to return to depositors and
creditors were reorganized with RFC assistance or liquidated.77
The key steps the RFC followed in resolving failing banks have
been cited as a model method for dealing with bank failures: (1)
Write down a bank’s bad assets to realistic economic values; (2)
evaluate bank management and make any needed and appropriate
changes; (3) inject equity in the form of preferred stock but only
after the write-downs; and (4) receive the dividends and eventually
70 Congress terminated the lending power of the RFC in 1953, and its remaining duties were
transferred to other agencies in 1957. See The National Archives, Records of the Reconstruction
Finance Corporation, at 234.1 (online at www.archives.gov/research/guide-fed-records/groups/
234.html) (accessed Jan. 13, 2010) (hereinafter ‘‘Records of the RFC’’).
71 See Timothy Curry and Lynn Shibut, The Cost of the Savings and Loan Crisis: Truth and
Consequences, FDIC Banking Review, at 28 (Dec. 2000) (online at www.fdic.gov/bank/analytical/
banking/2000dec/brv13n2l2.pdf) (hereinafter ‘‘The Cost of the Savings and Loan Crisis: Truth
and Consequences’’).
72 James S. Olson, Saving Capitalism: The Reconstruction Finance Corporation and the New
Deal, 1933–1940, at 14–15 (1988) (hereinafter ‘‘Olson’’).
73 See Olson, supra note 72. The funds were provided to banks, railroads, financial institutions, commercial enterprises, industrial banks, farm collectives and a variety of other entities,
as well as to other agencies. See id. at 43–44. See generally Records of the RFC, supra note
70.
74 See Jesse Jones, 50 Billion Dollars: My Thirteen Years with the RFC (1932–1945), at 19,
520 (1951) (hereinafter ‘‘Jones’’); see also Olson, supra note 72, at 69.
75 See Olson, supra note 72, at 69.
76 See Olson, supra note 72, at 83, 88; see also Jones, supra note 74. In addition to financial
sector entities, the many recipients of RFC loans included department stores, fabric and paper
mills, and small business owners as well as banks and railroads. See id. at 184–85, 188, 190.
Jack Dempsey also received a loan, which he used to refurbish a restaurant. See id. at 190.
77 See Jones, supra note 74.

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recover the par value of the stock as the bank returns to profitability and full private ownership.78
The RFC’s involvement with the entities to which it provided
funds was neither hands-off nor consistently interventionist. Although the RFC was the largest investor in the country, its head,
Jesse Jones, expressed a preference for leaving competent executives in charge of their institutions, and preferred to offer advice
and capital without trying to control or manage the institutions.79
He stated generally that where he felt a bank was well run, the
RFC would not become involved with management.80 This general
philosophical approach, however, did not prevent Jones from intervening where he thought it necessary and suggesting management
and board changes for RFC debtors.81 In some cases, the RFC loan
was contingent upon the relevant entity accepting new management chosen by the RFC.82 Jones also certified the appropriateness
of the salaries received by executives at corporations accepting RFC
loans and instituted a declining scale of salary reductions, under
which cuts could exceed 50 percent.83 On the other hand, Jones did
not use the RFC to make economic and industrial policy decisions.84 Jones stated that he resisted what he considered the New
Dealers’ plans to use the RFC funds as a ‘‘grab bag’’ 85 and instead
ran the RFC according to business principles, using what he considered ‘‘proper accounting methods’’ to manage the RFC’s investments.86 In his memoirs, Jones stated that everyone assumed that
the RFC was to provide the emergency relief necessary for weathering the crisis. When private enterprise was in a position to in78 Federal Reserve Bank of Kansas City, Speech by President Thomas Hoenig: Too Big Has
Failed, at 7 (Mar. 6, 2009) (online at www.kc.frb.org/speechbio/hoenigPDF/Omaha.03.06.09.pdf).
79 See Jones, supra note 74, at 125–127.
80 See Jones, supra note 74, at 125–127.
81 See Charles Calomiris and Joseph Mason, How to Restructure Failed Banking Systems: Lessons from the U.S. in the 1930s and Japan in the 1990s, National Bureau of Economic Research,
at 20–24 (Apr. 2003) (online at papers.nber.org/papers/w9624.pdf?newlwindow=1).
82 The most famous instances of t his kind of RFC control were Continental Illinois Bank and
Trust Company and the Union Trust Company of Cleveland. See Olson, supra note 72, at 125;
Joseph R. Mason, Reconstruction Finance Corporation Assistance to Financial Intermediaries
and Commercial & Industrial Enterprise in the U.S., 1932–1937, at 20–21 (Jan. 17, 2000).
83 See Olson, supra note 72, at 125–126.
84 See Olson, supra note 74, at 127.
85 See Jones, supra note 74, at 290.
86 Congressional Oversight Panel, Written Testimony of Alex Pollock Taking Stock: Independent Views on TARP’s Effectiveness, at 3 (Nov. 19, 2009)(online at cop.senate.gov/documents/
testimony-111909-pollock.pdf) (hereinafter ‘‘Pollock COP Testimony’’). From its formation in
1932 onwards, the RFC and its subsidiaries prepared monthly financial statements setting forth
cumulative assets, liabilities, and shareholder capital. Where applicable, these ‘‘Statement[s] of
Condition’’ also listed the cumulative loan positions with recipient firms, including data such
as authorized loan amount, proceeds disbursed/not disbursed, and repayments. These loan statements included detailed footnotes. See generally Reconstruction Finance Corporation, Statement
of Condition (Dec. 31, 1934). In time, the RFC also added a ‘‘Statement of Income and Expense,’’
that more explicitly detailed income, expenses, and profits (losses). See Reconstruction Finance
Corporation, Statement of Condition (Dec. 31, 1937). By the 1930s, most publicly traded corporations produced some financial information for their investors. Principally, this meant two documents: the balance sheet and the income statement. The balance sheet was broadly divided into
two section: ‘‘assets’’ and ‘‘liabilities’’ (or ‘‘liabilities and capital’’). Income statements varied more
widely, but almost always had a description of revenues and expenses, and some statement of
profit and loss. See generally Mortimer Battey Daniels, Corporation Financial Statements, at 5–
7 (first edition 1934, reprinted 1980). Thus, the RFC financial statements mirrored those of its
non-government peers.
The financial statements prepared by OFS with rsepect to the TARP program, and the accompanying MD&A, provide extensive discussion of the results of all the TARP programs. The notes
to the statements are not easily accessible for a lay leader, but the MD&A is easier to read and
includes a short executive summary. Overall, Agency Financial Report seems broadly consistent
with the RFC precedent. Agency Financial Statement 2009, supra note 32; see Section D.3, infra.

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vest, he expected the RFC to cease operations.87 By the end of
1935, the RFC had loaned or invested $10.6 billion ($167.38 billion
in 2009 dollars) 88 in various businesses and government agencies,
often (although not always) without interfering in the operations of
the debtors.89 Most of the RFC’s investments in banks were ultimately recovered in full, and the RFC also received dividends from
those investments, although its investments in railroads were less
lucrative.90

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2. The RTC
The RTC was established as part of the effort to address the savings and loan crisis of the 1980s.91 Scholars have cited volatile interest rates, state and federal deregulation, market shifts and adverse economic conditions as factors contributing to the crisis.92 By
the end of 1986, 441 thrifts representing $113 billion were insolvent, and 533 thrifts representing $453 billion held severely impaired assets.93 Together, those insolvent and struggling thrifts
held nearly 50 percent of the assets in the industry.94
In response to the crisis, the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) created the RTC as
a limited-term entity. (Although originally intended to operate for
five years, it was extended twice, ultimately until 1995.) 95 It acted
as conservator or receiver of eligible insolvent institutions, and was
responsible for carrying assets of the insolvent institutions until it
could sell them.96 Its funding derived in part from the Resolution
Funding Corporation, which was partially supported by the Federal
Home Loan Banks and the Treasury and issued long-term bonds to
the public.97 Among other methods, the RTC created joint ventures
with private parties to help dispose of thrift assets. The private
sector partner purchased, managed and sold the assets, and shared
returns with the RTC.98 The RTC created 72 such joint ventures
between 1992 and 1995, which collectively held assets with a book
value of $21.4 billion.99
87 See Jones, supra note 74, at 191. The RFC also declined to provide loans to industries that
had access to private capital. See id.
88 A consumer price index inflation calculator is available via the Bureau of Labor Statistics
(online at data.bls.gov/cgi-bin/cpicalc.pl).
89 See Jones, supra note 74, at 127.
90 See Pollock COP Testimony, supra note 86, at 2–3.
91 See Lee Davison, Politics and Policy: The Creation of the Resolution Trust Corporation,
FDIC Banking Review, at 17–18 (July 2005) (online at www.fdic.gov/bank/analytical/banking/
2005jul/article2.pdf) (hereinafter ‘‘Politics and Policy: The Creation of the Resolution Trust Corporation’’).
92 See The Cost of the Savings and Loan Crisis: Truth and Consequences, supra note 71, at
27 (describing the factors contributing to the crisis and citing sources).
93 See id.
94 See id.
95 See Politics and Policy: The Creation of the Resolution Trust Corporation, supra note 91,
at 19; see also The Cost of the Savings and Loan Crisis: Truth and Consequences, supra note
71, at 28.
96 See The Cost of the Savings and Loan Crisis: Truth and Consequences, supra note 71, at
28–30.
97 See id.
98 Federal Deposit Insurance Corporation, Managing the Crisis: The FDIC and RTC Experience, Chronological Overview: Chapter 15 (Jan. 5, 2005) (online at www.fdic.gov/bank/historical/
managing/Chron/1992/index.html) (hereinafter ‘‘Managing the Crisis: The FDIC and RTC Experience’’).
99 See Ralph F. MacDonald III, Mark V. Minton, Sarah H. Eberhard, Brett P. Barragate,
Glenn S. Arden, James C. Olson, Valerie Pearsall Roberts, FDIC Delays the PPIP Legacy Loan
Continued

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By the end of its existence, the RTC had disposed of more than
$450 billion in assets, representing nearly 98 percent of the assets
that were its responsibility, and resolved 747 failed thrifts.100 Although the RTC ultimately realized losses from its investments,
the losses were lower than the estimates made during the earlyand mid-1990s, and the cost of intervention declined every year
after 1991.101 The savings resulted in part from the RTC’s decision
to follow conservative accounting principles and its efforts to avoid
overvaluing the assets it had acquired.102 In addition, the RTC
benefited from the economic recovery of the 1990s, which lessened
the rate of thrift failures and increased the prices that the RTC
could get for its thrift asset holdings.103

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3. Lessons from the RFC and the RTC
The RFC and the RTC were both established during extraordinary circumstances.104 For the RFC, the market collapse of the
Great Depression and the needs of the New Deal programs ultimately vested the agency with a role as an all-things lender and
fixer. The RTC, by contrast, had a more limited brief: to organize
and dispose of the mess left by the savings and loan crisis. TARP
funds are not directly available for the wide variety of possible recipients that received RFC funds,105 and in that sense the TARP
is more targeted. Unlike the RTC, however, Treasury under the
TARP has intervened in multiple types of market failures, and has
not restricted its actions to just one sector.
In addition, Treasury is not predominantly acting to liquidate the
entities that are part of the TARP, as did the RTC. Accordingly, it
is difficult to draw too many parallels between Treasury’s management of the TARP and either the RFC or the RTC. At a more abstract level, the crises to which the RTC and the RFC responded
involved the sequential failure of multiple regulated entities over
several years prior to government intervention.106 By contrast, the
TARP developed in response to rapidly-unfolding market events for
which, in some cases, there was no obvious precedent. That said,
however, in each situation—sale and management of assets for the
RTC, unwinding of investments for the RFC—the U.S. government
found itself in the position of a money-manager and/or conservator
of private sector assets, from which they ultimately divested, over
time, with attention to available returns and protection of government funds. When the RFC and the RTC had completed their
tasks, they were dissolved.
Treasury has informed the Panel that it interprets its obligations
in a way that, while not precisely analogous to the RFC and RTC
Program to Focus on Public-Private Programs to Sell Assets from Failed Bank, Jones Day (June
2009) (online at www.jonesday.com/pubs/pubsldetail.aspx?pubID=S6324).
100 See Managing the Crisis: The FDIC and RTC Experience, supra note 98; see also Lee
Davison, The Resolution Trust Corporation and Congress, 1989–1993, FDIC Banking Review, at
38 (Sept. 2006) (online at www.fdic.gov/bank/analytical/banking/2006sep/article2/article2.pdf).
101 See The Cost of the Savings and Loan Crisis: Truth and Consequences, supra note 71, at
33.
102 See id.
103 Early estimates of the losses were lower, in part because the forecasts had not predicted
the full extent of the crisis. See id.
104 For additional discussion of the RFC and the RTC, see COP April Oversight Report, supra
note 69, at 35–41, 44–50.
105 See Jones, supra note 74, at 190.
106 See COP April Oversight Report, supra note 69, at 35–41, 44–50.

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precedents, appears to rest on similar principles. Like its predecessors, Treasury has stated that it intends to act as a reluctant
shareholder and to exit while maximizing returns and preserving
stability.107 Treasury has stated that it does not intend to interfere
with day-to-day business decisions, relying instead on the management of the covered entities, although Treasury has initiated board
and management changes in some situations (for example, with
General Motors), much as the RFC did in some situations.108 Similarly, Treasury is experimenting with public-private partnerships
to manage and dispose of its assets.
D. Disposal of the Assets
1. Introduction
Treasury currently holds assets and obligations as part of a number of different programs created under the TARP. These programs
differ in scope, size, and state of maturity. The largest and most
prominent use of TARP funding has been Treasury’s injections of
capital into financial institutions. There are three different capital
injection programs under the TARP. The Capital Purchase Program (CPP) is the largest; under the CPP, 707 banks received capital injections totaling nearly $205 billion. The Targeted Investment Program (TIP) and American International Group, Inc. Investment Program (AIGIP), formerly known as the Systemically
Significant Failing Institutions Program (SSFI),109 are narrower efforts aimed at large institutions that Treasury and the bank regulators considered critical to the functioning of the financial system.110 The only institutions that received TIP funds were
Citigroup and Bank of America, each of which received $20 billion.
AIG, which has received approximately $45.3 billion through
AIGIP/SSFI to date, is that program’s only beneficiary. Treasury
has also provided capital assistance to banks outside the capital injection programs. Through the Asset Guarantee Program (AGP),

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107 See

Section D.2, infra (discussing the ‘‘three pillars’’).
108 See Congressional Oversight Panel, September Oversight Report: The Use of TARP Funds
in the Support and Reorganization of the Domestic Automotive Industry, at 20 (Sept. 9, 2009)
(online at cop.senate.gov/documents/cop-090909-report.pdf) (hereinafter ‘‘COP September Oversight Report’’).
109 Treasury, without public announcement, recently changed the name of the TARP’s SSFI
Program to the more positive sounding American International Group, Inc. Investment Program.
The Panel was made aware of this change only after reviewing OFS’ recently issued TARP financial statements for fiscal year 2009.
110 See U.S. Department of the Treasury, Joint Statement by Treasury, Federal Reserve and
the FDIC on Citigroup (Nov. 23, 2008) (online at www.treas.gov/press/releases/hp1287.htm)
(hereinafter ‘‘Joint Statement on Citigroup’’) (stating that the decision to provide Citigroup with
TIP assistance was based on the government’s commitment ‘‘to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth’’); U.S. Department of the
Treasury, Treasury, Federal Reserve and the FDIC Provide Assistance to Bank of America (Jan.
16, 2009) (online at www.treas.gov/press/releases/hp1356.htm) (stating that the objective of TIP
is to ‘‘foster financial market stability and thereby to strengthen the economy and protect American jobs, savings, and retirement security.’’); U.S. Department of the Treasury, Treasury to Invest in AIG Restructuring Under the Emergency Economic Stabilization Act (Nov. 10, 2008) (online at www.treas.gov/press/releases/hp1261.htm) (hereinafter ‘‘Treasury to Invest in AIG Restructuring Under EESA’’) (highlighting that AIG is a ‘‘systemically important company’’); Board
of Governors of the Federal Reserve System, Federal Reserve Board, with Full Support of the
Treasury Department, Authorizes the Federal Reserve Bank of New York to Lend up to $85 billion to the American International Group (AIG) (Sept. 16, 2008) (online at
www.federalreserve.gov/newsevents/press/other/20080916a.htm) (hereinafter ‘‘Federal Reserve
Board authorizes lending to AIG’’) (noting that the Federal Reserve Board ‘‘determined that, in
current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household
wealth, and materially weaker economic performance’’).

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Treasury, the FDIC, and the Federal Reserve guaranteed approximately $250.4 billion 111 in Citigroup assets until the termination
of this program on December 23, 2009. Three other programs—
TALF, PPIP and the small business initiative—account for a further $65 billion of TARP funds.
FIGURE 1: NET INVESTMENT AMOUNT IN TARP BY MONTH

111 The $250.4 billion of Citigroup’s assets reflected the value of the ring-fenced pool as of September 30, 2009. Citigroup Third Quarter 10–Q, supra note 56, at 35.
112 12 U.S.C. § 5201(1).
113 12 U.S.C. § 5216(a).

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2. Treasury’s TARP Exit Strategy
Treasury must balance several potentially conflicting interests in
managing its exit from the TARP. Because of the policy concerns
related to the TARP and, more broadly, the requirements of EESA,
Treasury has taken the position that it is not able to act simply
as a prudent money-manager, seeking only an exit strategy that
provides the best return on its investment.
The policy goals of EESA are laid out in several sections of the
statute. The overarching purpose of EESA is to ‘‘immediately provide authority and facilities that the Secretary of the Treasury can
use to restore liquidity and stability to the financial system of the
United States.’’ 112 While the Secretary ‘‘may, at any time, exercise
any rights received in connection with troubled assets purchased
under’’ EESA,113 he must also specifically consider, among other
concerns:
• Protecting the interests of taxpayers by maximizing overall
returns and minimizing the impact on the national debt;
• Providing stability and preventing disruption to financial
markets in order to limit the impact on the economy and protect American jobs, savings, and retirement security;
• The need to help families keep their homes and to stabilize
communities;

23
• In determining whether to engage in a direct purchase
from an individual financial institution, the long-term viability
of the financial institution in determining whether the purchase represents the most efficient use of funds[.] 114
Furthermore, the Secretary is to use his authority under EESA
‘‘in a manner that will minimize any potential long-term negative
impact on the taxpayer, taking into account the direct outlays, potential long-term returns on assets purchased, and the overall economic benefits of the program, including economic benefits due to
improvements in economic activity and the availability of credit,
the impact on the savings and pensions of individuals, and reductions in losses to the Federal Government.’’ 115 In carrying out this
authority, the Secretary is to ‘‘hold the assets to maturity or for resale for and until such time as the Secretary determines that the
market is optimal for selling such assets, in order to maximize the
value for taxpayers’’ and ‘‘sell such assets at a price that the Secretary determines, based on available financial analysis, will maximize return on investment for the Federal Government.’’ 116
Treasury has interpreted its various obligations to require a
management and exit strategy that rests on three pillars:
• Maintaining systemic stability;
• Preserving the stability of individual institutions; and
• Maximizing return on investment.117
Treasury officials have consistently stated that Treasury believes
‘‘the U.S. government is a shareholder reluctantly and out of necessity’’ and that Treasury ‘‘intend[s] to dispose of [its] interests as
soon as practicable, with the dual goals of achieving financial stability and protecting the interests of the taxpayers.’’ 118 This view,
Treasury has stated, is consistent with EESA in that EESA does
not specifically contemplate Treasury’s taking positions in private
companies or managing the day-to-day operations of these companies.119 Treasury has also noted that the American system is premised on privately-owned industry and that it is therefore contrary
to Treasury’s nature as a government entity to hold shares in these
companies. In an earlier meeting with Panel staff, a Treasury official noted that Treasury made its investments because it needed to
stabilize the country’s financial system, not because it needed a
way to make money.120 For that reason, he stated, exit from any
TARP position must be done in a way that promotes stability and
114 12

U.S.C. § 5213(1)–(4).
U.S.C. § 5223(a)(1).
U.S.C. § 5223(a)(2).
117 Treasury conversations with Panel staff (Dec. 3, 2009).
118 House Oversight and Government Reform Committee, Subcommittee on Domestic Policy,
Written Testimony of Assistant Secretary of the Treasury Herbert Allison, Jr., The Government
As Dominant Shareholder: How Should the Taxpayers’ Ownership Rights Be Exercised?, 111th
Cong.
(Dec.
17,
2009)
(online
at
oversight.house.gov/images/stories/Allisonl
TestimonylforlDec-17-09lFINALl2.pdf) (hereinafter ‘‘Allison Testimony before House Oversight and Government Reform Committee’’). As part of his testimony, Secretary Allison also discussed the major principles guiding Treasury’s role as a shareholder with regard to corporate
governance issues. These principles were: (1) as a reluctant shareholder, Treasury intends to
exit its positions as soon as practicable; (2) Treasury does not intend to be involved in the dayto-day management of any company; (3) Treasury reserves the right to set conditions on the receipt of public funds to ensure that ‘‘assistance is deployed in a manner that promotes economic
growth and financial stability and protects taxpayer value’’; and (4) Treasury will exercise its
rights as a shareholder in a commercial manner, voting only on core shareholder matters.
119 Treasury conversations with Panel staff (Jan. 8, 2010).
120 Treasury conversations with Panel staff (Dec. 3, 2009).
115 12

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116 12

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the policy goals of EESA, even if that means that Treasury must
hold securities longer than it would otherwise wish.
Treasury’s multi-faceted approach to managing and winding
down this program raises issues regarding an assessment of Treasury’s performance with respect to its exit. If Treasury’s only obligation were to maximize profit, the public would be able to compare
Treasury’s yield with yields on other similar investments and reach
a conclusion as to whether Treasury had fulfilled its mandate.121
Because Treasury identified a number of mandates to fulfill, any
action that fails to fulfill one may be attributed to a step toward
fulfilling another. Furthermore, two of the three pillars do not lend
themselves to quantitative measures of performance.
Because of the various policy concerns at issue and the three-pillar approach to TARP strategy laid out above, Treasury reads its
obligation to sell at a time that is ‘‘optimal’’ to encompass not only
a determination that such a sale will directly maximize the benefit
to taxpayers by fetching the highest price, but also a determination
that the sale will at least not undermine systemic stability.122
While the section of the statute in which this language resides
states that the sale must be at the time determined to be ‘‘optimal
. . . to maximize the value for taxpayers,’’ this section also applies
directly to an earlier subpart that directs the Secretary to use his
authority under EESA to minimize long-term negative impact on
taxpayers, taking into account ‘‘the direct outlays, potential longterm returns on assets purchase, and the overall economic benefits
of the program, including economic benefits due to the improvements in economic activity and the availability of credit, the impact
on the savings and pensions of individuals, and reduction in losses
to the Federal Government.’’ 123
While this position may be the best way to meet the various policy goals outlined above, it may prevent Treasury from taking advantage of a true buy-and-hold strategy that would allow greater
profits from companies on a strong upward trend over a years-long
period. Such a strategy would, however, conflict with Treasury’s position as a ‘‘reluctant shareholder’’ because it would require Treasury to hold shares for a long period of time.
These policy considerations raise an additional question: to what
extent will Treasury’s actions, whatever they may be, affect the
markets? Not only is there the potential for Treasury’s actions to
have such an effect simply because Treasury’s presence in the market is unlike that of a private firm, but the potential also exists for
purposeful impact on the markets. This potential might conflict
with Treasury’s stated goal of minimizing government intervention
in the markets and may raise objections from market participants
who might claim that Treasury was deliberately disrupting the
market. Treasury’s statements to date have not explained how it
will address this conundrum.
Although Treasury’s exit strategy from the TARP has not always
been transparent to the American public, Treasury has now clearly
articulated the principles upon which it is operating with respect
to exit strategy, however obscure the eventual application of those
121 The

comparison would be an imperfect one because no two investments are identical.
conversations with Panel staff (Dec. 3, 2009).
U.S.C. § 5223(a)(1).

122 Treasury
123 12

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hsrobinson on DSK69SOYB1PROD with HEARING

principles may be.124 The Panel does not take a view either with
respect to Treasury’s ‘‘reluctant shareholder’’ approach or with respect to the strategy that Treasury is following, but it acknowledges that the approach has been enunciated with the objective of
articulating a policy. In meetings and calls with the managers of
the various asset classes at Treasury, those managers were consistent in their articulation of the exit strategy and the principles
driving it.125
By comparison, in a previous Report the Panel suggested that
Treasury consider dealing with the shareholder duties that have
emerged from its investments in troubled companies by placing
those investments in a privately managed trust,126 thereby segregating these functions from the other oversight and intervention
obligations occasioned by the TARP.
The principal benefit of such a trust would be that the assets
could be managed for the sole benefit of the U.S. Treasury, and
would be insulated from undue political influence.127 While the creation of such a trust is authorized by the statute,128 and has been
considered by Treasury, Treasury has explained that the drawbacks of using a trust are currently outweighed by the benefits.129
The belief is that if a trust were created, it would be difficult to
determine which assets should be placed in the trust, and it would
be difficult to carry out Treasury’s policy goals—which include promoting market stability in addition to maximizing the benefit to
taxpayers.130 Treasury has also indicated that statutory requirements may prevent the implementation of a trust managed by an
independent trustee, because of EESA’s requirements for the Secretary to maintain supervision over investments held by vehicles
established by Treasury. Treasury has not ruled out the use of such
a trust when only a small pool of assets remain.131
The Panel is concerned that, although Treasury has been consistent in its description of its goals, the articulated principles are
so broad that they provide Treasury with an easy means of justifying almost any decision—effectively giving no metric to determine
whether Treasury’s actions met its stated goals. Because either
holding or selling, or a third approach, may alternatively be justified as maximizing profit, or maintaining the stability of significant
124 Allison Testimony before House Oversight and Government Reform Committee, supra note
118; Treasury conversations with Panel staff (Dec. 3, 2009); see Congressional Oversight Panel,
January Oversight Report: Accountability for the Troubled Asset Relief Program, at 4 (Jan. 9,
2009) (online at cop.senate.gov/documents/cop-010909-report.pdf).
125 In the course of drafting this report, Panel staff conducted extensive discussions with the
managers of the various asset classes at Treasury. See, e.g., Treasury conversations with Panel
staff (Dec. 15, 2009, Dec. 16, 2009, and Jan. 5, 2010) (discussing Citigroup and AIG).
126 See COP September Oversight Report, supra note 108, at 5.
127 Treasury statements make it clear that Treasury sees a clear distinction between ‘‘managing assets’’ (which Treasury sees as the government’s role) and ‘‘managing companies’’ (which
Treasury does not see as its role). Allison Testimony before House Oversight and Government
Reform Committee, supra note 118, at 5–6. While Treasury is clearly able to manage assets outside a trust, Treasury’s direct involvement in, for example, deciding when to sell Citigroup
shares, has the potential to send unintended signals to the markets, which signals would be
tempered if a trustee were making the decisions. Additionally, while Treasury intends to vote
its shares only on ‘‘core’’ shareholder matters, there are non-core matters that may be presented
to shareholders where a failure to vote could lead to a governance vacuum and where a trustee
could prove useful.
128 12 U.S.C. § 5219(c).
129 Treasury conversation with Panel staff (Dec. 15, 2009). Trusts are also as prone as any
group of people to suffer from disagreements among members or other internal politics.
130 Treasury conversation with Panel staff (Dec. 15, 2009).
131 Treasury conversation with Panel staff (Dec. 15, 2009).

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institutions, or promoting systemic stability, almost any decision
can be demonstrated to be forwarding one of these three principles.
3. Accounting for the TARP
EESA requires an annual financial statement prepared in accordance with generally accepted accounting principles and audited
in accordance with generally accepted auditing standards.132 On
December 10, 2009, Treasury issued financial statements for the
TARP for the federal fiscal year ending September 30, 2009.133 The
statements disclose that Treasury’s final estimate for the cost of
the transactions undertaken in fiscal year 2009 is $41.6 billion, approximately $110 billion lower than earlier estimated. This sizeable
‘‘downward reestimate’’ reflects improved equity prices and lower
projected loss rates on the investments made in 2009, as well as
faster repayment of some of those investments than was initially
anticipated. Similarly, over the full multi-year course of the TARP’s
operations, the expected cost of the program is now estimated at
$141 billion, roughly $200 billion lower than was initially forecast.134 Of this estimated $141 billion in losses, Treasury has acknowledged that roughly $60 billion is attributable solely to the
TARP investments in AIG and the auto companies.135
The TARP financial statements were prepared in accordance
with generally accepted accounting principles. EESA further requires that the budgetary cost of the TARP be calculated under the
rules of the Federal Credit Reform Act. This ‘‘credit reform’’ treatment means that TARP transactions are discounted to reflect the
time value of money and the market risk of those investments.136
As a result, the accounting and budget information that Treasury
publishes for the TARP are a good measure of the economic value
of the resources expended. The GAO audited the financial statements and stated that the Office of Financial Stability had maintained effective financial controls in all material respects.137
The next financial report on the TARP will be released by Treasury in early February 2010, at the time the President’s 2011 Budget is transmitted to the Congress. While normal practice has been
not to provide a further update of a particular federal program’s financial information until the time of the Midsession Review of the
budget on July 15th, Treasury has indicated that it expects to re-

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132 12

U.S.C. § 5226(b)(1).
133 See Government Accountability Office, Office of Financial Stability (Troubled Asset Relief
Program) Fiscal Year 2009 Financial Statements (Dec. 2009) (online at www.gao.gov/new.items/
d10301.pdf) (hereinafter ‘‘OFS FY09 Financial Statements’’).
134 The TARP Financial Statements were released on December 10, 2009. The Department of
the Treasury issued a press release which stated, ‘‘[a]s additional funds are disbursed, particularly for the housing initiative, the total cost of TARP is likely to rise, although it is anticipated
to be at least $200 billion less than the $341 billion estimate in the August 2009 Mid-Session
Review.’’ See U.S. Department of the Treasury, New Report Shows Higher Returns, Lower
Spending Under TARP Than Previously Projected (Dec. 10, 2009) (online at ustreas.gov/press/
releases/tg438.htm).
135 See House Oversight and Government Reform Committee, Subcommittee on Domestic Policy, Transcript Testimony of Assistant Secretary of the Treasury for Financial Stability Herbert
Allison, Jr., The Government As Dominant Shareholder: How Should the Taxpayers’ Ownership
Rights Be Exercised?, 111th Cong., (Dec. 17, 2009) (online at oversight.house.gov/
index.php?option=comlcontent&task=view&id=4722&Itemid=31) (hereinafter ‘‘Allison Testimony Transcript’’).
136 See 12 U.S.C. § 5232 (requiring that TARP transactions be measured for budget presentation purposes under credit reform procedures, but modified to reflect the market risk of those
transactions).
137 See OFS FY09 Financial Statements, supra note 133, at 1–2. GAO did note two internal
control deficiencies in the OFS financial systems which OFS agreed to rectify.

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lease interim financial reports on TARP transactions sometime between February and July 2010. The financial statements and accompanying ‘‘management’s discussion and analysis’’ (MD&A) provide discussion of the results of all the TARP programs.138 The
notes to the statements are not easily accessible for a lay reader,
but the MD&A is easier to read and includes a short executive
summary.
4. CPP Preferred and Warrants

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a. Acquisition of Assets and Current Value
Under the CPP, Treasury provided capital to financial institutions by purchasing senior preferred stock (CPP Preferred) or subordinated debentures. The purchases were made pursuant to a ‘‘Securities Purchase Agreement’’ (SPA), which has standard terms for
most banks.139 In addition, Treasury received warrants in order to
give taxpayers ‘‘an opportunity to participate in the equity appreciation of the institution.’’ 140 The CPP Preferred, which has no maturity date, pays quarterly dividends at a rate of five percent per
year for the first five years, and nine percent thereafter.141 The
issuing financial institution may redeem the CPP Preferred at any
time, subject to the requirement that regulators must approve the
repayment.142 The warrants, which have a 10-year life, may be exercised at any time.143 The exercise price of the warrants for public
financial institutions is based upon the 20-day average stock price

138 Panel staff compared the financial statements and MD&As with those of financial institutions, and also considered the MD&A in the light of the many pronouncements on MD&A disclosure by the Securities and Exchange Commission (SEC). The MD&A discusses each of the programs under the TARP, addressing the purpose and impact of each program, the way in which
assets were acquired, their current value, and the principles informing Treasury’s management
of the assets. The most significant criticisms that could be made of the MD&A are that: (a) a
more thorough explanation of the accounting principles used would be helpful, as the notes to
the financial statements, while thorough, are not written with the lay reader in mind; (b) more
‘‘forward-looking information’’ and a more expansive discussion of ‘‘trends and uncertainties’’
would be helpful; and (c) the graphic design and layout is distracting and inconsistent and could
have benefitted from some reader-friendly, ‘‘plain English’’ editing. The second and third points
are mitigated to some extent by the Executive Summary, which not all financial institutions provide, although the SEC encourages it. Commentators had urged that Treasury produce such disclosure. See Pollock COP Testimony, supra note 86, at 6.
139 The terms of SPAs vary somewhat by institution type—public, private, S-corporation, mutual holding company or mutual bank—but are substantially similar. See Congressional Oversight Panel, July Oversight Report: TARP Repayments, Including the Repurchase of Stock Warrants, at 7 (July 10, 2009) (online at cop.senate.gov/documents/copl071009lreport.pdf) (hereinafter ‘‘COP July Oversight Report’’).
140 See U.S. Department of the Treasury, Factsheet on Capital Purchase Program (updated
Mar. 17, 2009) (online at www.financialstability.gov/roadtostability/CPPfactsheet.htm) (hereinafter ‘‘CPP Factsheet’’); see also COP July Oversight Report, supra note 139, at 6 (‘‘[W]arrants
may be traded on public or private markets, and they can be highly valued by investors who
believe the share price of the issuing company is likely to rise above the strike price’’).
141 Dividends are cumulative for bank holding companies and their subsidiaries, and non-cumulative for banks. See COP July Oversight Report, supra note 139, at 8.
142 See id., at 10–11.
143 Id., at 8.

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of the underlying common shares.144 For non-public financial institutions, the exercise price is $0.01 per share.145
CPP funding ended on December 29, 2009.146 The program provided approximately $205 billion in capital to 707 financial institutions.147 CPP funding for qualifying financial institutions was
based upon the size of the institution.148 Of the 19 stress-tested financial institutions, 17 institutions received $164 billion through
CPP funding.149 As noted above, the issuing financial institution
may redeem the CPP Preferred at any time, subject to the requirement that regulators must approve the repayment.150 The redemption price of the CPP Preferred is set by the SPA, which provides
that the shares are to be redeemed at the principal amount of the
debt.151 Subject to compliance with applicable securities laws,
Treasury also has the ability to ‘‘sell, assign, or otherwise dispose
of’’ the CPP Preferred it holds.152 This means that the CPP Preferred could in theory be sold in private transactions to interested
investors, or they could be offered to the public in a resale registered with the SEC.153 The CPP-recipient institutions that report
to the SEC are required, under the terms of the SPAs, to file a
shelf registration statement, which would permit sales to the public.154 Treasury is not limited to public sales, however, and could
144 The warrant exercise price is calculated taking the average of the closing prices for the
20 trading days up to and including the day prior to the date on which the TARP Investment
Committee recommends that the Assistant Secretary for Financial Stability approve the investment. See U.S. Department of the Treasury, FAQs on Capital Purchase Program Repayment and
Capital Assistance Program, at 2 (May 2009) (online at www.financialstability.gov/docs/
FAQlCPP-CAP.pdf). In addition, the number of warrants issued is equal to 15 percent (5 percent for a private financial institution) of the face value of the preferred investment divided by
the exercise price. See U.S. Department of the Treasury, Term Sheet for CPP Preferred (online
at www.financialstability.gov/docs/CPP/termsheet.pdf) (hereinafter ‘‘Term Sheet for CPP Preferred’’).
145 U.S. Department of the Treasury, TARP Capital Purchase Program (Non-Public QFIs, excluding S Corps and Mutual Organizations) (online at www.financialstability.gov/docs/CPP/
Term%20Sheet%20-%20Private%20C%20Corporations.pdf).
146 Treasury conversations with Panel staff (Jan. 8, 2010). The application process ended on
November 21, 2009. See U.S. Department of the Treasury, FAQ on Capital Purchase Program
Deadline
(online
at
www.financialstability.gov/docs/
FAQ%20on%20Capital%20Purchase%20Program%20Deadline.pdf).
147 Treasury conversations with Panel staff (Jan. 8, 2010). See also U.S. Department of Treasury, Troubled Asset Relief Report, Monthly 105(a) Report—December 2009, at 10 (Jan. 11, 2010)
(online at financialstability.gov/docs/105CongressionalReports/December%20105(a)lfinall1-1110.pdf) (hereinafter ‘‘Monthly 105(a) Report’’).
148 As stated in the term sheets for both public and private institutions, ‘‘[e]ach [qualifying
financial institution] may issue an amount of Senior Preferred equal to not less than 1% of its
risk-weighted assets and not more than the lesser of (i) $25 billion and (ii) 3% of its risk weighted assets.’’ See Term Sheet for CPP Preferred, supra note 144, at 1. Risk weighted assets are
the total assets of a financial institution, weighted for credit risk. See U.S. Department of the
Treasury, Decoder (online at www.financialstability.gov/roadtostability/decoder.htm) (hereinafter
‘‘Treasury Decoder’’).
149 MetLife, Inc. did not receive CPP funding. In addition, GMAC received $13.4 billion under
the Automotive Industry Financing Program. See Section D.8, infra.
150 See COP July Oversight Report, supra note 139, at 10–11.
151 See COP July Oversight Report, supra note 139, at 10–11.
152 See U.S. Department of the Treasury, Securities Purchase Agreement: Standard Terms, at
§ 4.4 (online at www.financialstability.gov/docs/CPP/spa.pdf) (accessed Jan. 4, 2010).
153 The CPP financial institutions that report to the SEC are required, under the terms of the
SPA, to file a shelf registration statement, which would permit sales to the public. See SPA
§ 4.5(a)(i). In addition, Treasury could make sales in private transactions exempt from or not
subject to SEC registration.
154 See SPA, supra note 153, at 4.5(a)(ii). A shelf registration statement allows the financial
institution to offer and sell its securities for a period of up to two years. With the registration
‘‘on the shelf,’’ the financial institution, by simply updating regularly filed annual and quarterly
reports to the SEC can sell its shares in the market as conditions become favorable with a minimum of administrative preparation and expense.

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make sales in private transactions exempt from or not subject to
SEC registration.
After redemption of its CPP Preferred, a financial institution
may also repurchase its warrants,155 the warrants are ‘‘detachable’’
from the CPP Preferred,156 which means that they can trade separately. Treasury is required to purchase the warrants at ‘‘fair market value.’’ 157 The fair market value is determined using a negotiation and appraisal process between Treasury and the financial institution.158 If a financial institution does not wish to repurchase
its warrants,159 or the parties cannot agree on a fair price and neither party wishes to invoke the appraisal procedure, Treasury will,
as a matter of policy, auction the warrants to the public.160 Treasury staff has stated that it is Treasury’s policy to dispose of the
warrants as soon as practicable.161 Therefore, a financial institution may repurchase its warrants as soon as it redeems its preferred shares.162 To date, of the 58 163 financial institutions that
have redeemed fully their CPP Preferred, 31 164 financial institutions have also repurchased their warrants 165 and Treasury has
received approximately $2.9 billion from warrant redemptions.166
155 OFS Chief Counsel Timothy Massad confirmed in a meeting with Panel staff on December
15, 2009 that if Treasury sold its CPP Preferred to third party, a financial institution would
be allowed to repurchase its warrants once the sale is completed. Treasury conversations with
Panel staff (Dec. 15, 2009). See also COP July Oversight Report, supra note 139, at 8–17 (discussing the history and legal aspects of repayment of CPP Preferred and warrants
156 See SPA, supra note 153, at § 1.2.
157 See SPA, supra note 153, at § 4.9(a).
158 The repurchase process for a financial institution is a multi-step procedure starting with
the institution’s proposal to Treasury of its determination of the fair market value of the warrants. Treasury has a choice of whether to accept this proposed fair value. If Treasury and the
financial institution are unable to agree on the fair value determination, either party may invoke the appraisal procedure. In the appraisal procedure process, both Treasury and the financial institution select independent appraisers. If the appraisers fail to agree, a third appraiser
is hired, and subject to certain limitations, a composite valuation of the three appraisals is used
to establish fair market value. This composite valuation is determined to be the fair market
value and is binding on both Treasury and the financial institution. If the appraisal procedure
is not invoked, and neither party can agree on the fair market value determination, Treasury
then sells the warrants through the auction process. See Robert A. Jarrow, TARP Warrants
Valuation Methods (Sept. 22, 2009) (online at www.financialstability.gov/Jarrow%20TARP%20
Warrants%20Valuation%20Method.pdf) (hereinafter ‘‘TARP Warrants Valuation Methods’’).
In addition, the process is different for private banks. Warrants of private financial institutions are immediately exercisable. See COP July Oversight Report, supra note 139, at 11.
159 After the CPP preferred is redeemed, the financial institution has 15 days to decide whether it wishes to repurchase its warrants. See U.S. Department of the Treasury, Treasury Announces Warrant Repurchase and Disposition Process for the Capital Purchase Program (June
26, 2009) (online at www.financialstability.gov/latest/tgl06262009.html).
160 In November 2009, Treasury announced that it intended to conduct auctions to sell its warrant positions in JPMorgan Chase, Capital One Financial Corporation, and TCF Financial Corporation. The issuers were allowed to bid in these auctions. See U.S. Department of the Treasury, Treasury Announces Intent To Sell Warrant Positions in Public Dutch Auctions (Nov. 19,
2009) (online at www.ustreas.gov/press/releases/tg415.htm) (hereinafter ‘‘Treasury Announces
Intent To Sell Warrant Positions in Public Dutch Auctions’’).
161 See COP July Oversight Report, supra note 139.
162 See id.
163 Treasury conversations with Panel staff (Jan. 8, 2010). See also Monthly 105(a) Report,
supra note 147, at 11.
164 Treasury conversations with Panel staff (Jan. 8, 2010).
165 In its July Report, the Panel analyzed the prices at which Treasury was allowing the financial institutions to repurchase the warrants. The Panel was concerned that Treasury was undervaluing the warrants and/or not negotiating strongly enough. See COP July Oversight Report,
supra note 139, at 8–17. After the July report was released, several banks repurchased their
warrants for prices very close to the Panel’s valuation: notably, Goldman Sachs, Morgan Stanley, and American Express. Also after the release of the July Report, Treasury retained an expert to perform an independent review of its valuation methodology. He found that it was ‘‘consistent with industry best practice and the highest academic standards.’’ See TARP Warrants
Valuation Methods, supra note 158.
166 See U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report
for Period Ending December 30, 2009 (Jan. 4, 2010) (online at www.financialstability.gov/docs/
Continued

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In addition, as discussed in Section D.4.b below, Treasury has received approximately $1.1 billion in gross proceeds from third-party
auction sales. The following table shows the valuation of Treasury’s
current holdings of CPP Preferred, common shares, and warrants
as of December 31, 2009. In addition, the table shows the fair value
(Net Asset Value) of Treasury’s CPP Preferred and common share
holdings.
FIGURE 2: VALUATION OF CURRENT HOLDINGS OF CPP PREFERRED SHARES, COMMON SHARES,
AND WARRANTS AS OF DECEMBER 31, 2009
Preferred Shares
(billions of dollars)
Principal
Amount

Stress-Tested Financial Institutions
with CPP Preferred and/or Warrants Outstanding:
Wells Fargo & Company ...........
Bank of America Corporation 168 .................................
Citigroup, Inc. (Common
Shares) 169 ...........................
The PNC Financial Services
Group Inc. ............................
SunTrust Bank, Inc. .................
Regions Financial Corporation
Fifth Third Bancorp ..................
KeyCorp .....................................
GMAC, LLC ................................
Failed Banks Enrolled in CPP:
Pacific Coast National Bancorp
UCBH Holdings, Inc.173 ............
CIT Group .................................
All Other Banks ................................

Warrant Valuation
(millions of dollars)

Net Asset Value
as of
9/30/2009 167

Low Estimate

High Estimate

Best Estimate

$0.00

$0.00

$313.02

$1,727.96

$829.57

0.00

0.00

561.18

2,581.16

1,036.20

25.00

25.46

9.51

891.04

204.32

7.58
4.85
3.50
3.41
2.50
170 14.11

7.17
4.14
3.01
3.05
1.94
171 7.17

82.81
5.67
3.61
63.74
5.59

500.60
252.90
155.48
317.82
108.70

231.03
98.15
65.41
161.23
49.48

170

170

170

0.00
0.30
2.33
33.53

0.00
0.02
0.00
174 28.91

172 N/A

0.00
0.00
2,314.46

N/A
0.07
3.19
5,998.02

N/A
0.01
2.84
3,654.25

$97.11

$80.87

$3,359.59

$12,536.94

$6,332.49

Total .........................................
167 Except

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for Citigroup, Net Asset Value for December 31, 2009 is not available. Net Asset Value is the per share value on September 30,
2009 as disclosed in the TARP Financial Audit Report. See OFS FY09 Financial Statements, supra note 133, at 36. Except for Citigroup, Inc.,
Net Asset Value is calculated by dividing the total value of all securities in the financial institution’s portfolio, less any liabilities by the
number of shares outstanding. See note 174, infra. The Net Asset Value of Citigroup was calculated using the common stock closing price of
$3.31 on December 31, 2009 multiplied by Treasury’s common ownership of 7.7 billion shares. On September 30, 2009, Citigroup’s closing
price was $4.84 per share.
168 Warrant Valuation includes warrants outstanding from TIP investment (valuation of $459.1, $1,405.9, and $666.5 for Low, High, and
Best Estimates, respectively).
169 Warrant Valuation includes warrants outstanding from TIP (valuation of $6.4, $371.3, and $118.1 for Low, High and Best Estimates, respectively) and AGP investments (valuation of $2.3, $132.0, and $42.4 for Low, High, and Best Estimates, respectively).
170 On December 30, 2009, Treasury provided an additional commitment to GMAC of approximately $3.8 billion. The $3.8 billion of new
capital was provided in the form of $2.54 billion of Trust Preferred Securities (TruPs), which are senior to all other capital securities of
GMAC, and $1.25 billion of Mandatory Convertible Preferred Stock (MCP). In addition, Treasury received warrants, which were exercised, to purchase an additional $127 million of TruPs and $63 million of MCP. U.S. Department of the Treasury, Treasury Announces Restructuring of
Commitment to GMAC (Dec. 30, 2009) (online at ustreas.gov/press/releases/tg501.htm) (hereinafter ‘‘Treasury Announces Restructuring of Commitment To GMAC’’). See also Section D.8, infra.
171 The Net Asset Valuation of GMAC was based $12.5 billion of preferred stock held by GMAC prior to the additional financing. Net Asset
Value on December 31, 2009 is not available.
172 Pacific
Coast
National
Bancorp,
2008
Annual
Report,
Form
10–K,
Part
II,
Item
5
(online
at
www.sec.gov/Archives/edgar/data/1302502/000092708909000143/p–10k123108.htm). There are no warrants currently outstanding for Pacific
Coast National Bancorp. At the date of initial TARP CPP investment, Pacific Coast National issued a warrant to Treasury to purchase
206.00206 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series B, which Treasury immediately exercised in a cashless transaction, per the Company’s 2009 10–K. The valuation of Pacific Coast National’s preferred shares at September 30, 2009 was approximately
$154,000.
173 Agency Financial Statement 2009, supra note 32, at 34–35. The Net Asset Value of UCBH Holdings, Inc. includes warrants.
174 Treasury conversations with Panel staff (Jan. 5, 2010). The Net Asset Value of ‘‘All Other Banks’’ was provided by OFS as an aggregate
value. This is due to the inherent constraints of the model created and used by OFS in its valuation of CPP preferred stock and warrants, as
discussed with the OFS modeling team on December 22, 2009. In this regard, generating a net asset value for Treasury’s investment in a
specific financial institution requires each institution to be separately modeled. The man-hours and model run-time required prevent each financial institution from being modeled separately. As such, OFS has valued the stress-tested financial institutions and those receiving the
largest CPP investment and has provided an aggregate net asset value for Treasury’s holdings in the remaining financial institutions.

transaction-reports/1-4-10%20Transactions%20Report%20as%20of%2012-30-09.pdf) (hereinafter
‘‘TARP Transactions Report for Period Ending December 30, 2009’’).

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Of the 19 stress-tested financial institutions, there are currently
six that have not repaid their TARP funding.175 One of the six is
GMAC, which is discussed later in Section D.8.

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b. Disposal of CPP Assets and Recovery of TARP
Funds
In September 2009, Treasury issued a report that discussed the
next phase of its financial and rehabilitation efforts—what it describes as ‘‘moving from rescue of our financial system to a period
of stabilization, rehabilitation and rebuilding.’’ 176 The report stated
that the ‘‘next phase will focus on winding down those programs
that were once necessary to prevent systemic failure.’’ 177
The report stated that Treasury anticipated financial institutions
would repay another $50 billion in CPP Preferred over the next 12
to 18 months.178 To date, Treasury has received approximately
$122 billion from CPP recipients through principal repayments of
preferred stock repurchases, an amount in excess of the September
projection.179 The report does not discuss the timing of repayment
of the remaining balance of approximately $58 billion,180 which
largely comprises investments in approximately 600 smaller financial institutions. In this regard, Treasury has stated that it is looking at ‘‘lots of possibilities,’’ including market sales, but it is ‘‘nowhere near’’ a decision process.181 These smaller financial institutions have not publicly disclosed their intended exit strategy for
CPP repayment. Non-disclosure by these financial institutions may
be due to the fact that the banking regulators have not specifically
disclosed their criteria for allowing a financial institution to redeem
its CPP Preferred and the fact that some of these institutions may
be unable to redeem due to high loan losses and ‘‘vulnerable capital
ratios.’’ 182
Although Treasury has the ability to sell its CPP Preferred to
third parties either in a private or public offering, it currently has
no plans to use third-party sales.183 Treasury stated in the TARP
Financial Statements that although ‘‘it has not exercised these
175 MetLife, Inc. did not receive any funding. See Congressional Oversight Panel, June Oversight Report: Stress Testing and Shoring Up Bank Capital, at 15 (June 9, 2009) (online at
cop.senate.gov/documents/cop–060909–report.pdf) (hereinafter ‘‘COP June Oversight Report’’). As
of December 31, 2009, the following stress tested banks have not repaid their TARP funding:
PNC Financial Services Group, SunTrust Banks, Inc., Regions Financial Corp., Fifth Third
Bancorp, Keycorp, and GMAC LLC. See TARP Transactions Report for Period Ending December
30, 2009, supra note 166.
176 See U.S. Department of the Treasury, The Next Phase of Government Financial Stabilization and Rehabilitation Policies, at 1 (Sept. 14, 2009) (online at www.treas.gov/press/releases/
docs/Next%20Phase%20of%20Financial%20Policy,%20Final,%202009-09-14.pdf)
(hereinafter
‘‘Treasury Status Report on Financial Stabilization’’).
177 See Treasury Status Report on Financial Stabilization, supra note 176, at 1.
178 See Treasury Status Report on Financial Stabilization, supra note 176, at 3.
179 The $50 billion of projected repayments was based upon total repayments of approximately
$70 billion received by September 30, 2009. See Treasury Status Report on Financial Stabilization, supra note 176, at 3. In addition, Treasury estimated that total bank repayments ‘‘could
reach up to $175 billion by the end of 2010.’’ See Treasury Announces Intent To Sell Warrant
Positions in Public Dutch Auctions, supra note 160.
180 The remaining balance owed is based upon the cash outlay of $205 billion less cash repayments of $122 billion less $25 billion of Citigroup’s common shares.
181 Treasury conversations with Panel staff (Dec. 15, 2009).
182 Some financial institutions may continue to need the CPP funding due to ‘‘staggering loan
losses and vulnerable capital levels.’’ See Kevin Dobbs, For Some Regional Banks, TARP remains
necessary
(Jan
5,
2010)
(online
at
snl.com/InteractiveX/article.aspx?
Id=10545545&KPLT=4).
183 Treasury conversations with Panel staff (Dec. 3, 2009).

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hsrobinson on DSK69SOYB1PROD with HEARING

rights, it may do so in the future.’’ 184 Treasury’s preference, however, as it stated in the TARP Financial Statements and in meetings with Panel staff, is to hold the preferred stock with the objective of receiving redemption in full from the CPP participant, as opposed to selling to third parties at a likely discount.185 Similarly,
in the event of a severe downturn in the market, Treasury indicated that it would not immediately sell its CPP investments.
Treasury stated that it would need to evaluate its investment objectives (i.e., minimization of costs, maximization of returns to the
taxpayers, and preservation of market stability), before it would
sell those investments. In this regard, as stated in the TARP Financial Statements, ‘‘Treasury-OFS must also consider the limited
ability to sell an investment to a third party due to the absence of
a trading market or lack of investor demand, and the possibility of
achieving potentially higher returns through a later disposition.’’ 186 Accordingly, Treasury has not decided at what point the
option of selling to third parties might be used for any of the investments it currently holds, but has stated that this remains a
possible mode of exit to be considered in the future.187
With respect to a CPP recipient’s warrants, to date it has been
Treasury’s policy to conduct third party sales by auction.188 As a
result, Treasury has somewhat less leeway with respect to the disposal of warrants than it does with respect to the CPP Preferred.
Upon redemption of its CPP Preferred, a financial institution has
15 days to elect whether it will repurchase its warrants. If it does
not, Treasury will sell the warrants through auction sales.189 In
December 2009, Treasury conducted auctions to sell its warrant positions in JPMorgan Chase, Capital One, and TCF Financial Corporation, and received approximately $1.1 billion in gross proceeds.190 Treasury informed Panel staff that the next auction sale
will not take place before February 2010.191
As of December 31, 2009, 60 financial institutions, including
three that have declared bankruptcy, had outstanding dividend
payments to Treasury of approximately $140 million.192 TARP-re184 Treasury conversations with Panel staff (Dec. 3, 2009); Treasury conversations with Panel
staff (Dec. 15, 2009); See also OFS FY09 Financial Statements, supra note 133, at 73.
185 Treasury conversations with Panel staff (Dec. 15, 2009).
186 See OFS FY09 Financial Statements, supra note 133, at 68–69.
In connection with warrant sales, the Panel stated in its July report that ‘‘Treasury would
be more likely to maximize taxpayer returns if it sold the warrants through auctions,’’ since the
process is straightforward. See COP July Oversight Report, supra note 139.
187 Treasury conversations with Panel staff (Dec. 3, 2009); Treasury conversations with Panel
staff (Dec. 15, 2009). However, the Panel recommended in its June report that ‘‘[t]he CPP repayment process should be more transparent.’’ See COP June Oversight Report, supra note 175.
188 In November 2009, Treasury announced that it would conduct auctions for warrant positions it holds in financial institutions that have repaid CPP investments and do not reach agreement with Treasury on the warrant price. The auctions are done through a modified Dutch auction methodology that establishes a market price by allowing investors to submit bids at specified increments above a minimum price specified for each auction. See, Treasury Announces Intent To Sell Warrant Positions in Public Dutch Auctions, supra note 160.
189 Treasury conversations with Panel staff (Dec. 3, 2009).
190 Gross proceeds received for JPMorgan Chase, Capital One, and TCF Financial Corporation
were approximately $950 million, $148 million, and $9 million, respectively. See TARP Transactions Report for Period Ending December 30, 2009, supra note 166.
191 Treasury conversations with Panel staff (Dec. 3, 2009).
192 See SIGTARP, Quarterly Report to Congress, at 58 (Oct. 21, 2009) (online at
www.sigtarp.gov/reports/congress/2009/October2009lQuarterlylReportltolCongress.pdf)
(hereinafter ‘‘SIGTARP October Report’’). When institutions were given TARP assistance, there
was no time to perform any due diligence in view of the immediacy of the situation. However,
TARP was supposedly given to healthy banks but in many instances this was not the case. For
example, Citigroup needed further assistance from the TARP. In addition there are further dif-

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cipient financial institutions pay two different kinds of dividends—
cumulative dividends, which are paid by bank holding companies
and their subsidiaries, and non-cumulative dividends, which are
paid by banks—with different consequences for the funds’ potential
recovery. When CPP Preferred are redeemed, if cumulative dividends remain unpaid, Treasury will be paid any accrued and unpaid dividends. However, non-cumulative dividends do not have to
be paid, unless such dividends have been accrued.193
Of the $140 million in unpaid dividends, approximately $66 million represented unpaid cumulative dividends from the three failed
financial institutions.194 CIT filed for bankruptcy on November 1,
2009,195 while UCBH Holdings, Inc. (UCBH) and Pacific Coast National Bancorp (Pacific Coast) filed for bankruptcy on November 24,
2009, and December 17, 2009, respectively.196 Beyond dividend
payments, the amount that can be recovered from these three
failed institutions, if any, will depend on the outcome of the bankruptcy proceedings.197 As shown in Figure 2, on September 30,
2009, Treasury’s investment in CIT was valued at zero,198 and the
aggregate value of Treasury’s investments in UCBH and Pacific
Coast totaled approximately $22.5 million.199
In certain circumstances, TARP recipients may seek approval
from Treasury for exchange offers, recapitalizations, or other restructuring actions to improve their financial condition.200 Treasury evaluates each such proposal on a case-by-case basis, and before it grants approval of such transactions, it takes into account
the following principles: 201
• Pro forma capital position of the institution;
• Pro forma position of Treasury investment in the capital
structure;
• Overall economic impact of the transaction to the government;
• Guidance of the institution’s primary regulator; and
• Consistent pricing with comparable marketplace transactions.
During 2009, two exchange transactions were completed. In August, Popular, Inc. completed an exchange of $935 million of preferred stock held by Treasury for an identical amount of newly
ficulties in valuing an institution once the government provides external support, since values
tend to be inflated. See discussion below regarding the difficulties of valuation once there is government support. See also David Enrich, TARP Can’t Save Some Banks, Wall Street Journal
(Nov.
17,
2009)
(online
at
online.wsj.com/article/
SB10001424052748704538404574539954068634242.html).
193 At December 31, 2009, non-cumulated dividends totaled approximately $2.4 million. Information provided by Treasury on January 4, 2010.
194 Information provided by Treasury on January 4, 2010. On December 31,2009, CIT, UCBH
Holdings, and Pacific Coast National Bancorp owed $58.3 million, $7.5 million, and $168,000
in dividends, respectively.
195 See OFS FY09 Financial Statements, supra note 133, at 125.
196 Treasury conversation with Panel staff (Jan. 7, 2010).
197 See OFS FY09 Financial Statements, supra note 133.
198 See OFS FY09 Financial Statements, supra note 133, at 36. See also Figure 2.
199 The CPP investment in UCBH was valued at $22.5 million which include the warrants;
the CPP Investment in Pacific Coast was valued at $154,000. See OFS FY09 Financial Statements, supra note 133, at 125. See also Figure 2.
200 See OFS FY09 Financial Statements, supra note 133, at 70.
201 See OFS FY09 Financial Statements, supra note 133, at 70–71.

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issued trust preferred securities.202 Similarly, on December 11,
2009, Superior Bancorp completed an exchange of $69 million of
preferred stock held by Treasury for an identical amount of newly
issued trust preferred securities.203 Two exchange offers are currently pending with Independent Bank Corp 204 and Midwest Banc
Holdings.205 Treasury has stated that exchange transactions will
be approved only on a case-by-case basis once all the relevant information is evaluated.206
Panel staff asked Treasury whether it has considered divestment
alternatives such as a bundled sale of CPP Preferred issued by various banks. Treasury indicated that it would consider all types of
divestment alternatives, especially in regard to the relatively small
CPP investments in a large number of smaller institutions, as the
program winds down. At present, however, the focus is on an institution-by-institution approach.

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c. Analysis of Intended Exit Strategy
As noted above, CPP recipients may redeem their CPP Preferred
only after receiving approval from their primary banking regulators.207 The banking regulators have not specifically disclosed
their criteria for allowing a financial institution to redeem its CPP
Preferred,208 a lack of clarity that has led to frustration at some
banks.209 Until the banking regulators are more transparent about
their redemption policies, the Panel cannot assess the propriety of
Treasury’s investment strategy, which is to hold onto the stock
202 Banco Popular paid Treasury a $13 million exchange fee. See SIGTARP October Report,
supra note 192, at 61. See also, Popular, Inc., Form 10–Q for the quarter ended September 30,
2009, at 60 (online at www.sec.gov/Archives/edgar/data/763901/000095012309060126/
g20716e10vq.htm#107) (accessed Jan. 12, 2010).
203 On December 14, 2009, Superior Bancorp filed with the SEC a Form 8–K which announced
the completion of the exchange transaction with Treasury (online at www.sec.gov/Archives/
edgar/data/1065298/000114420409064449/v168906lex99.htm).
204 On November 25, 2009, Independent Bank Corp. filed a preliminary proxy statement asking its shareholders to vote on a potential exchange of the bank’s common stock for preferred
stock held by Treasury. See Independent Bank Corp., Preliminary Proxy Statement filed by Independent Bank Corp on November 25, 2009 (Nov. 25, 2009) (online at www.sec.gov/Archives/
edgar/data/39311/000092604409000561/ibc-prer14al093009.htm).
205 On December 3, 2009, Midwest Banc Holdings announced that it is in discussions with
Treasury regarding an exchange transaction (online at www.sec.gov/Archives/edgar/data/
1051379/000091384909000815/ex99-1.htm). Since this announcement, Midwest has entered into
a written agreement with the Federal Reserve Bank of Chicago and the Illinois Department of
Financial and Professional Regulation, Division of Banking (online at www.sec.gov/Archives/
edgar/data/1051379/000095012309073372/c55234e8vk.htm).
206 Treasury conversations with Panel staff (Dec. 15, 2009).
207 If Treasury sells its investment in CPP Preferred to a third party, approval by a financial
institution’s primary regulator is not required. Treasury conversations with Panel staff (Dec. 15,
2009).
208 As the Panel indicated in its August report, the banking regulators ‘‘see the stress test and
the repayment of assistance as working together to protect the bank’s balance sheet;’’ however
‘‘supervisory flexibility underlies the stress test’s assumptions.’’ See COP August Oversight Report, supra note 65, at 42.
209 Bank of America, Citigroup, and SunTrust have all expressed their frustrations with the
lack of clarity about the criteria for TARP repayment. In November, Bank of America announced
that it was ready and willing to repay TARP but was ‘‘waiting for the government to establish
the appropriate time.’’ See BofA, Feds at odds over when TARP gets repaid, Charlotte Observer
(Nov. 24, 2009) (online at www.charlotteobserver.com/597/story/1072637.html). Similarly,
Citigroup announced it was ready to repay its TARP funding, but said its regulators were undecided over the amount of capital it should raise. SunTrust’s Chairman and CEO views ‘‘the rules
for repaying TARP assistance as ever-changing.’’ See J. Scott Trubey, SunTrust CEO wants to
repay TARP, Atlanta Business Chronicle (Sept. 15, 2009) (online at atlanta.bizjournals.com/
atlanta/stories/2009/09/14/daily34.html); Samil Surendran, Citi’s plan to exit TARP hits roadblock
(Dec.
9,
2009)
(online
at
www.snl.com/InteractiveX/article.aspx?ID=10454610&BeginDate=12/09/2009&KPLT=2); David Enrich, Banks, U.S. Spar Over
TARP Repayments, Wall Street Journal (Dec. 7, 2009) (online at online.wsj.com/article/
SB10001424052748704825504574582311943469506.html).

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with the goal of eventually receiving redemption in full from the
CPP recipient, rather than selling to another investor at a likely
discount.
In addition, at the Panel’s December hearing Secretary Geithner
could not definitively answer the Panel’s questions in regard to the
banking regulators’ criteria for redemption. He stated that a financial institution would not be allowed to make repayments if it
would ‘‘leave the system or these financial institutions with inadequate capital.’’ 210 He further stated that a financial institution
would be required to ‘‘raise capital from the markets’’ so that it
‘‘can repay the taxpayer with interest.’’ 211 Secretary Geithner did
not, however, provide a definitive answer about whether a financial
institution would be required to raise the full amount of its TARP
debt.212 Although it is the banking regulators’ responsibility to disclose their criteria for allowing repayments, Treasury also should
be able to articulate this policy in view of the broader economic
issues it raises. This lack of clarity breeds uncertainty and instability in the financial markets and provides a disservice to taxpayers as well as investors.
To prevent a truly healthy bank from repaying its TARP funding
is a disservice to that bank’s investors as well as taxpayers.213 It
is, moreover, inconsistent with Treasury’s ‘‘systemic stability’’ principle. Repayment is, or should be, a signal of health to the markets,
and delaying repayment risks withholding valuable information
from the markets. Permitting premature repayment for whatever
reason, however, including escape from executive compensation
limitations,214 serves no public purpose if the institution in question cannot survive on its own. Financial institutions in 2010 will
be faced with a substantial amount of debt that will be maturing
over the next few years.215 This fact could lead to the government
having to decide whether to provide additional assistance if a repaying institution is not truly healthy. The Panel is concerned
about reports of dissent among the banking supervisors and ten210 See Congressional Oversight Panel, Transcript of Hearing with Treasury Secretary Timothy Geithner (Dec. 10, 2009) (publication forthcoming) (online at http://cop.senate.gov/hearings/
library/hearing-121009-geithner.cfm) (hereinafter ‘‘Dec. 10 Hearing Transcript’’).
211 See Dec. 10 Hearing Transcript, supra note 210.
212 See Dec. 10 Hearing Transcript, supra note 210.
213 Some commentators have pointed out that the replacement of CPP Preferred with common
stock, which is generally more expensive, places an additional burden on the ability of a TARP
recipient to earn its way back to profitability. See, e.g., James Kwak, Why Did Bank of America
Pay Back the Money? (Dec. 4, 2009) (online at baselinescenario.com/2009/12/04/why-did-bank-ofamerica-pay-back-the-money/).
214 For example, the financial press has indicated that Citigroup’s and Bank of America’s exit
from TARP was due to the release of executive compensation restrictions, especially in view of
Bank of America’s CEO search. See, e.g., Bradley Keoun, Citigroup Said to Near Accord on
TARP Repayment, US Stake Sale, Business Week (Dec. 13, 2009) (online at businessweek.com/
bwdaily/dnflash/content/dec2009/db20091213l027634.htm); David Mildenberg, Bank of America
TARP Payment May Aid Shares, Search, Bloomberg (Dec. 3, 2009) (online at bloomberg.com/
apps/news?pid=20601087&sid=a8MHKJc4D3bc).
215 Banks will have trillions of dollars of debt maturing over the next few years, potentially
forcing them to refinance their debt at substantially higher rates. Data provided under subscription by BLOOMBERG Data Services (Instrument: Map Debt, filtered for average maturity date
under 5 years). See also Carrick Mollenkamp and Serena Ng, Banks Scramble as Debt Comes
Due,
Wall
Street
Journal
(Nov.
25,
2009)
(online
at
online.wsj.com/article/
SB10001424052748703819904574554223793153390.html); Federal Deposit Insurance Corporation, FDIC Board Approves 2010 Operating Budget (Dec. 15, 2009) (online at www.fdic.gov/news/
news/press/2009/pr09228.html) (FDIC Chairman Sheila Bair explained that a 55 percent increase in the FDIC operating budget ‘‘will ensure that we are prepared to handle an even-larger
number of bank failures next year, if that becomes necessary, and to provide regulatory oversight for an even-larger number of troubled institutions’’).

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sions between Treasury and the supervisors, and the extent to
which institutions might be permitted to exit the TARP when not
financially stable.216 The underlying issue here relates to the bank
regulators’ position that their assessment of a bank’s condition
should remain confidential in order to maximize their effectiveness
in promoting bank safety and soundness. This traditional position
of the regulators conflicts with the need for Treasury as investor
in particular banks to know as much as possible about the financial
condition of those banks. In these circumstances, the regulators’
traditional lack of transparency may do a disservice to the taxpayers, investors, and to the marketplace in financial institutions’
securities.
There exists a range of views on how transparent Treasury
should be as it seeks to divest from its stakes in financial institutions. Vincent Reinhart, a fellow at the American Enterprise Institute and a former official at the Federal Reserve, states that ‘‘[b]y
and large, government officials are big fans of constructive ambiguity.’’ 217 While it may be beneficial for the government to retain
flexibility in certain situations, others disagree about the merits of
a policy of constructive ambiguity. For example, James B. Thomson, vice president of the Office of Policy Analysis at the Federal
Reserve Bank of Cleveland, has argued that a ‘‘policy of supervisory transparency is superior to constructive ambiguity.’’ 218 This
debate illustrates the inherent challenges and obstacles associated
with the government’s involvement in the private sector. In this regard, the government acknowledges that it does not function like
an ordinary investor; however, its investments are purely taxpayerfunded. This means that the government has a heightened responsibility to the taxpayers whose money is being spent, and an even
greater responsibility to be transparent and forthcoming about all
aspects of its reasoning and decision-making.
In its July report, the Panel examined the repurchase of stock
warrants. At that time, 11 public financial institutions had repur216 See, e.g., David Enrich and Damian Paletta, Discord Behind TARP Exits, Wall Street Journal (Dec. 18, 2009) (‘‘Bank regulators at the Federal Reserve and Federal Deposit Insurance
Corp. . . . have disagreed with other government officials about banks’ plans to repay government funds, and have privately complained that Treasury officials pushed them to allow banks
to quickly leave TARP, according to people familiar with the matter’’).
217 See Mark DeCambre, No Pity for Citi, New York Post (Sept. 4, 2009) (online at
www.nypost.com/p/news/business/nolpitylforlCitilF7vQTwjTr4ogsVyyEQ4K6N). Henry Kissinger first employed this term in the context of diplomatic negotiations, and it has been used
in economic policy to refer to a ‘‘policy of using ambiguous statements to signal intent while
retaining policy flexibility.’’ See, e.g., Marvin Goodfriend and Jeffrey M. Lacker, Limited Commitment and Central Bank Lending, Economic Quarterly Federal Reserve Bank of Richmond,
at 19–21 (Fall 1999) (hereinafter ‘‘Limited Commitment and Central Bank’’) (discussing the benefits and weaknesses of a policy of constructive ambiguity with regard to central bank lending).
218 James B. Thompson, On Systemically Important Financial Institutions and Progressive
Systemic Mitigation, Federal Reserve Bank of Cleveland, at 9 (2009) (online at clevelandfed.org/
research/policydis/pdp27.pdf); see also Limited Commitment and Central Bank, supra note 217,
at 19–21 (‘‘Constructive ambiguity in the absence of an ability to precommit may actually increase the drift toward expansion’’); see also International Monetary Fund, Global Economic
Prospects and Principles for Policy Exit, at 7 (2009) (‘‘Basic principles and plans for the exit and
beyond should be established early and communicated clearly and consistently by policymakers
to the public’’). Similarly, two officials from the Federal Reserve Bank of Boston refer to ‘‘less
than constructive ambiguity.’’ Jane Sneddon Little and Giovanni P. Olivei, Why the Interest in
Reform?, Rethinking the International Monetary System, Proceedings from the Federal Reserve
Bank of Boston Conference Series, at 81 (1999) (online at www.bos.frb.org/economic/conf/conf43/
41p.pdf). In addition, Reinhart has expressed doubts about the benefits of constructive ambiguity, stating that ‘‘[n]ow is the time to articulate an exit strategy.’’ Craig Torres and Scott
Lanman, Bernanke May Explain Fed Exit Strategy in Testimony Next Week, Bloomberg (July
13, 2009) (online at www.bloomberg.com/apps/news?pid=20601087&sid=aNU.UkT9EB68).

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chased their warrants from Treasury. The Panel’s analysis of the
numbers indicated that taxpayers had received only 66 percent of
the Panel’s best estimate of the value of the warrants.219 As the
Panel stated then, ‘‘[T]reasury should promptly provide written reports to the American taxpayers analyzing in sufficient detail the
fair market value determinations for any warrants either repurchased by a TARP recipient from Treasury or sold by Treasury
through an auction, and it should disclose the rationale for its
choice of an auction or private sale.’’ 220 In order to ensure that taxpayers receive the maximum value as financial institutions exit the
TARP, the Panel urged Treasury to make its process, reasoning,
methodology, and exit strategy absolutely transparent.221
Although there has not been the robust disclosure called for by
the Panel, the return to taxpayers has increased since the July report was published. Subsequent to the publication of the July report, an additional 25 financial institutions have repurchased their
warrants or sold warrants in auction sales, generating total aggregate proceeds to Treasury of $4.0 billion, which represented more
than 92 percent of the Panel’s best estimate of their values.222
With specific regard to large TARP recipients, in December 2009,
Treasury conducted auctions to sell its warrant positions in
JPMorgan Chase, Capital One, and TCF Financial Corporation,
and received approximately $1.1 billion in gross proceeds.223 Treasury stated that the auction sales were ‘‘a robust alternative to negotiations’’ since it received market price for the warrants.224 The
Panel’s analysis of the numbers indicated that the taxpayer received approximately 89 percent of the Panel’s best estimate of the
value of the warrants.225
As noted above, as the CPP program winds down, Treasury has
indicated to Panel staff that it would consider all types of divestment alternatives, especially in regard to relatively small CPP investments in a large number of smaller institutions. At present,
however, the focus is on an institution-by-institution approach.
219 See

COP July Oversight Report, supra note 139, at 27.
COP July Oversight Report, supra note 139, at 44–45.
Panel’s July report stated ‘‘. . . it is critical that Treasury make the process—the reason for its decisions, the way it arrives at its figures, and the exit strategy from our future use
of the TARP—absolutely transparent. If it fails to do so, the credibility of the decisions it makes
and its stewardship of the TARP will be in jeopardy.’’ COP July Oversight Report, supra note
139, at 4. Similarly, the Panel’s November report echoed the same concerns regarding transparency by stating, ‘‘. . . in light of these guarantees’ extraordinary scale and their risk to taxpayers, the Panel believes that these programs should be subject to extraordinary transparency.
The Panel urges Treasury to disclose greater detail about the rationale behind guarantee programs, the alternatives that may have been available and why they were not chosen, and
whether these programs have achieved their objectives.’’ See COP November Oversight Report,
supra note 2, at 4. Lastly, Panel Chair Elizabeth Warren stated in her September testimony
that ‘‘[i]n order to ensure that taxpayers would receive the maximum value as banks exited
TARP, the Panel urged Treasury to make its process, reasoning, methodology, and exit strategy
absolutely transparent.’’ See Senate Committee on Banking, Housing and Urban Affairs, Testimony of Elizabeth Warren, Emergency Economic Stabilization Act: One Year Later, 111th Cong.,
at 3 (Sept. 24, 2009) (online at cop.senate.gov/documents/testimony-092409-warren.pdf).
222 See TARP Transactions Report for Period Ending December 30, 2009, supra note 166.
223 Gross proceeds received for JPMorgan Chase, Capital One, and TCF Financial Corporation
were approximately $950 million, $147 million, and $9 million, respectively. See TARP Transactions Report for Period Ending December 30, 2009, supra note 166.
224 Treasury conversations with Panel staff (Dec. 15, 2009).
225 The valuation was derived by dividing total net proceeds received ($1.1 billion) by total aggregate value of Panel’s best estimate ($1.3 billion). For the individual auction sales of
JPMorgan Chase, Capital One, and TCF Financial Corporation, the taxpayers received 94 percent, 64 percent, and 81 percent, respectively, of the Panel’s best estimate of the value of the
warrants.
220 See

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One form of exit from the TARP that has not drawn much attention from commentators involves those TARP-recipient financial institutions that fail, an event that can be expected to wipe out the
taxpayers’ investment. Ironically, when no further government
intervention occurs, this kind of early and involuntary exit from
TARP may have the effect of reducing moral hazard and restoring
market discipline.
5. Citigroup

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a. Acquisition of Assets and Current Value
Between October 2008 and January 2009, Treasury invested a
total of $50 billion in Citigroup through three separate programs:
the CPP, the TIP, and the AGP.226 After Citigroup’s repayment of
trust preferred securities in December, Treasury currently holds
7.7 billion shares of Citigroup’s common stock, worth $25.49 billion
on December 31, 2009. Treasury is Citigroup’s largest shareholder,
with 27.04 percent of Citigroup’s equity.
The first Citigroup investment was made through the CPP. On
October 28, 2008, Treasury used the program to inject $25 billion
into Citigroup. Treasury received $25 billion face value of CPP Preferred and warrants to purchase 210,084,034 shares at a strike
price of $17.85. The second TARP investment in Citigroup was
made through the TIP. Although Citigroup’s TIP capital infusion
was announced on November 23, 2008 and finalized on December
31, 2008, the guidelines for the TIP were not announced until January 2, 2009.227 Under the TIP, Treasury purchased $20 billion in
preferred stock from Citigroup.228 This preferred stock paid dividends of 8 percent. Treasury also took warrants to accompany the
preferred stock. There are no standard terms for the TIP; terms
and conditions were determined on a case-by-case basis.229 Any institutions participating in the TIP were required to comply with
strict executive compensation standards.
226 The Panel notes that Treasury’s Transaction Reports state that the total TARP assistance
to Citigroup is $49 billion, based on the $25 billion CPP investment, $20 billion TIP investment,
and Treasury’s receipt of $4.03 billion in preferred stock under the AGP. While the total amount
Treasury has invested under the AGP is $4.03 billion, Treasury’s actual maximum loss position
under the AGP was $5 billion, which is the number used by the Panel since that represents
Treasury’s actual exposure. For further information on the AGP accounting, see Figure 22, infra.
The AGP agreement was structured so that losses on assets in the pool will be shared among
Citigroup, Treasury, the FDIC and the Federal Reserve. As of September 30, 2009, the total
asset pool was approximately $250.4 billion. U.S. Securities and Exchange Commission, Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for Citigroup
Inc., at 33–34 (Nov. 6, 2009) (online at www.sec.gov/Archives/edgar/data/831001/
000104746909009754/a2195256z10-q.htm). Citigroup would absorb up to $39.5 billion of initial
losses arising from the covered pool (losses of $8.1 billion had been recorded at September 30,
2009), and would then absorb 10 percent of any losses in excess of that amount. Id. The federal
government would absorb the remainder, with Treasury absorbing the first $5 billion in federal
liability, the FDIC absorbing the second $10 billion, and the Federal Reserve covering any further federal liability by way of a non-recourse loan to Citigroup. Id. The guarantee was structured to run for up to 10 years for residential assets and five years for non-residential assets.
Id.
227 See U.S. Department of the Treasury, Treasury Releases Guidelines for Targeted Investment Program (Jan. 2, 2009) (online at treasury.gov/press/releases/hp1338.htm) (hereinafter
‘‘Treasury Releases Guidelines for Targeted Investment Program’’); Joint Statement on
Citigroup, supra note 110.
228 TARP Transactions Report for Period Ending December 30, 2009, supra note 166;
Citigroup, Citi Issuance of $20 Billion Perpetual Preferred Stock and Warrants to U.S. Treasury
As Part of TARP Program (Dec. 31, 2008) (online at www.citigroup.com/citi/fin/data/
fs081231a.pdf).
229 Treasury Releases Guidelines for Targeted Investment Program, supra note 227.

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Under the AGP, Treasury, the FDIC, and the Federal Reserve
guaranteed, until the program was ended, approximately $250.4
billion of Citigroup’s assets.230 The guarantee, originally for $301
billion, followed a continuing deterioration of Citigroup’s financial
status after it received CPP funds. As consideration for the guarantee, Citigroup issued Treasury with $4.034 billion face value of
preferred stock (the AGP Preferred) 231 and warrants to purchase
66,531,728 shares of common stock at a strike price of $10.61.232
On July 30, 2009, Treasury and Citigroup agreed to exchange
Treasury’s $25 billion in CPP Preferred for 7.7 billion shares of
common stock priced at $3.25 per share. The two parties also
agreed to exchange Treasury’s $20 billion in TIP holdings and $4
billion of preferred stock acquired under the AGP into trust preferred securities.233 These exchanges took place as part of a larger
$58 billion exchange offer with public and private holders of
Citigroup’s debt in which Citigroup bolstered its common tangible
equity and thus its reserves. The company received shareholder approval for the exchange on September 3, 2009.234
On December 14, 2009, Citigroup, Treasury, and the regulators
announced an agreement regarding Citigroup’s plan to repay part
of its outstanding TARP assistance.235 Pursuant to the agreement,
230 According to Citigroup’s SEC filing for the third quarter of 2009, the total asset pool had
declined by approximately $50 billion on a GAAP basis to approximately $250.4 billion as of
September 30, 2009. See Citigroup Third Quarter 10–Q, supra note 56, at 33. COP November
Oversight Report, supra note 2 (describing the Citigroup and Bank of America guarantees).
From the beginning, Treasury had stated that AGP assistance would not be ‘‘widely available.’’
U.S. Department of the Treasury, Report to Congress Pursuant to Section 102 of the Emergency
Economic Stabilization Act, at 1 (Dec. 31, 2008) (online at www.financialstability.gov/docs/AGP/
sec102ReportToCongress.pdf).
231 The FDIC was issued $3.025 billion in preferred stock. Treasury and the FDIC’s holding
were exchanged for separate trust preferred securities with a coupon of 8 percent in the subsequent exchange offer.
232 The AGP Preferred have a perpetual life and pay dividends at 8 percent per annum. They
can be redeemed in stock or cash, as mutually agreed between Treasury and Citigroup, otherwise the redemption terms of CPP preferred terms apply. Citigroup is not permitted to pay common stock dividends, in excess of $0.01 per share per quarter, for a period of three years without
Treasury consent. With respect to repurchase rights, the same terms apply as for the CPP Preferred, meaning they could be sold in private transactions to interested investors, or that they
could be offered to the public in a resale registered with the SEC. Master Agreement Among
Citigroup Inc., Certain Affiliates of Citigroup Inc. Identified Herein, Department of the Treasury,
Federal Deposit Insurance Corporation and Federal Reserve Bank of New York (Jan. 15, 2009)
(online at www.financialstability.gov/docs/AGP/Citigroupl01152009.pdf).
233 The trust preferred securities are senior in right of repayment to preferred stock. They pay
dividends at 8 percent per annum, and are paid on a quarterly basis. The term is for 30 years.
Treasury may, subject to applicable securities laws, transfer, sell, assign, or otherwise dispose
of its trust preferred shares provided that it consults with Citigroup for the first three years
to see if such action is feasible. Upon regulatory approval, Citigroup has the right to redeem
such shares, either at its discretion or upon the occurrence of specified events, but cannot redeem less than all of the outstanding securities unless all accumulated and unpaid dividends
have been paid. In certain circumstances, these securities carry limited voting rights. These securities are also ranked equally, meaning payment thereon shall be made pro rata with the common securities, except in the case of default. Exchange Agreement dated June 9, 2009 between
Citigroup Inc. and United States Department of the Treasury, at Schedule A (June 9, 2009) (online
at
www.financialstability.gov/docs/agreements/08282009/
Citigroup%20Exchange%20Agreement.pdf).
234 Citigroup, Citi Announces Shareholder Approval of Increase in Authorized Common Shares,
Paving Way to Complete Share Exchange (Sept. 3, 2009) (online at www.citibank.com/citi/press/
2009/090903a.htm).
235 Treasury conversations with Panel staff (Dec. 15, 2009); see also Citigroup, Repaying TARP
and Other Capital Actions (Dec. 14, 2009) (online at www.sec.gov/Archives/edgar/data/831001/
000095012309070371/x80976bfwp.htm) (hereinafter ‘‘Repaying TARP and Other Capital Actions’’); U.S. Department of the Treasury, Treasury Statement Regarding Citigroup’s Intention
to Repay Taxpayers (Dec. 14, 2009) (online at www.financialstability.gov/latest/
prl12142009.html) (hereinafter ‘‘Treasury Statement Regarding Citigroup’s Intention to Repay
Taxpayers’’). As part of the agreement, Citigroup also decided to issue $1.7 billion of common
stock equivalents to its employees in January 2010 as a substitution for the cash they would
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Citigroup would repay Treasury the $20 billion it held in trust preferred securities and terminate its loss-sharing agreement under
the AGP, meaning that the government would no longer be liable
for any losses arising from the covered asset pool.236 To fund this
repayment, Citigroup successfully completed a securities offering of
$21.08 billion of equity securities, comprising $17 billion of common
stock (with an additional over-allotment option of 184.9 million
shares exercised on December 23, 2009) 237 and $3.5 billion of tangible equity units.238 On December 23, 2009, Citigroup completed
its TARP repayment and terminated its loss-sharing agreement
after Treasury permitted it to cancel $1.8 billion of the $7 billion
in AGP Preferred that Citigroup had issued to Treasury and the
FDIC as consideration.239 Following Citigroup’s repayment of the
$20 billion of trust preferred securities and the termination of the
loss-sharing agreement, Citigroup is no longer deemed a beneficiary of ‘‘exceptional financial assistance’’ under the TARP (even
though some AGP Preferred is still outstanding), meaning that it
will no longer be subject to the jurisdiction of Special Master for
Compensation Kenneth Feinberg.240
FIGURE 3: INCOME FROM CITIGROUP TARP INVESTMENTS AS OF NOVEMBER 30, 2009 241
Program

Dividends Earned

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CPP .......................................................................................................................................................
AGP .......................................................................................................................................................
TIP .........................................................................................................................................................

$932,291,666.67
255,486,666.66
1,333,333,333.33

have otherwise received. Subject to shareholder approval at the company’s annual meeting on
April 1, 2010, the common stock equivalents will be replaced by common stock.
236 Citigroup has used the proceeds from its offerings to repay Treasury’s TIP investments (the
preferred securities exchanged for trust preferred securities in July 2009). Trust preferred securities possess characteristics of both equity and debt issues. These securities are generally longterm, allow early redemption by the issuer, make periodic fixed or variable interest payments,
and mature at face value. When issued by a bank holding company such as Citigroup, trust preferred securities are treated as capital rather than as debt for regulatory purposes.
237 An over-allotment option is granting the underwriter in a public offering with the option,
for a period of anywhere from 15 to 45 days after the offering date, to purchase additional securities from the issuer (usually up to 15 percent of the shares being sold) at the initial price to
the public, in order to cover over-subscriptions for the securities.
238 Repaying TARP and Other Capital Actions, supra note 235; Citigroup, Forms 424(b) (Dec.
16,
2009)
(online
at
www.sec.gov/Archives/edgar/data/831001/000095012309071618/
y80953b2e424b2.htm
and
www.sec.gov/Archives/edgar/data/831001/000095012309071909/
y81064e424b2.htm) (SEC filings detailing the issuances of securities by Citigroup in connection
with the TARP repayment); Treasury conversations with Panel staff (Dec. 15, 2009).
239 Treasury conversations with Panel staff (Dec. 15, 2009); Treasury conversations with Panel
staff (Jan. 7, 2010); Allison Testimony before House Oversight and Government Reform Committee, supra note 118, at 11; Citigroup, Citi Completes $20 Billion TARP Repayment, Terminates Loss-Sharing Agreement (Dec. 23, 2009) (online at www.citigroup.com/citi/press/2009/
091223b.htm). In discussions with Panel staff, Treasury staff indicated that the $5.259 billion
in trust preferred securities that will be retained reflects a $1.8 billion reduction since the losssharing agreement was terminated after one year. Treasury will incur the $1.8 billion haircut
initially, but will receive up to $800 million of the Citigroup trust preferred securities currently
held by the FDIC, provided that Citigroup repays its outstanding debt issued under the FDIC’s
Temporary Liquidity Guarantee Program (TLGP).
240 Treasury conversations with Panel staff (Dec. 15, 2009); Treasury conversations with Panel
staff (Jan. 7, 2010). Although Citigroup is no longer considered a participant in the CPP due
to the exchange of CPP preferred securities for common stock, Treasury has specifically stated
that Citigroup will remain subject to EESA’s general corporate governance standards and executive compensation restrictions, as amended by the American Recovery and Reinvestment Act of
2009. This is because Treasury, when agreeing to the exchange, did not want to surrender the
leverage and taxpayer protections that these restrictions afford. In addition, Citigroup has
agreed to abide by Mr. Feinberg’s 2009 executive compensation determinations for its 100 most
highly compensated employees.

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FIGURE 3: INCOME FROM CITIGROUP TARP INVESTMENTS AS OF NOVEMBER 30, 2009 241—
Continued
Program

Dividends Earned

Total ............................................................................................................................................

$2,521,111,666.66

241 U.S.

Department of the Treasury, Cumulative Dividends Report as of November 30, 2009 (Dec. 18, 2009) (online at
www.financialstability.gov/docs/dividends-interest-reports/November%202009%20Dividends%20and%20Interest%20Report.pdf) (hereinafter ‘‘Cumulative Dividends Report as of November 30, 2009’’).

The following table shows Treasury’s holdings in Citigroup as of
December 31, 2009:
FIGURE 4: TREASURY HOLDINGS IN CITIGROUP AS OF DECEMBER 31, 2009
[Dollars in millions]
Asset

Number

Preferred Stock
(CPP).
Preferred Stock
(TIP).
Preferred Stock
(AGP).
Common Stock
(CPP).
Trust Preferred .......

Warrants (CPP, TIP,
AGP).

Total ..................
242 Treasury’s

Estimated Valuation as of 12/31/09

Revenues
Generated

Acquisition Cost

Low Estimate

High Estimate

Best Estimate

0 ............................

$25,000 .................

$932

....................

....................

N/A

0 ............................

$20,000 .................

933

....................

....................

N/A

0 ............................

$5,000 242 .............

175

....................

....................

N/A

7,692,307,692 .......

$25,000 .................

0

....................

....................

$25,462

....................

....................

1,871

Received in exchange for AGP
Preferred.
210,084,024
shares at
$17.85 (CPP).
188,501,414 at
$10.61 (TIP).
66,531,728 at
$10.61 (AGP).

$2,234 ...................

243 737

(Received as part
of CPP Preferred, TIP.
Preferred and AGP)

....................

$10

$891

204

...............................

....................

....................

....................

....................

...............................

...............................

....................

....................

....................

$27,537

potential maximum loss position under the AGP was $5 billion; Treasury received $4,034 billion in preferred stock under the

AGP.
243 Of

the total Trust Preferred revenues generated, $636 million relates to dividends received from TIP Trust Preferred securities.

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b. Disposal of Assets and Recovery of Expended
Amounts
As shown in Figure 4 above, Treasury owns trust preferred securities, common stock, and warrants for common stock in Citigroup.
The taxpayers’ money can be recovered from the trust preferred securities so long as Citigroup generates profits sufficient to make
dividend payments on them and eventually redeem them. Alternatively, the trust preferred securities could be sold into the markets. Recovery of the taxpayers’ investment in the common stock
and warrants depends on the performance of the common stock,
which in turn depends on Citigroup’s actual performance and the
market’s perception of its likely performance in the future. Treasury may sell its common stock holdings publicly or privately. Since
Citigroup has repaid its trust preferred securities, it may also repurchase its warrants issued under the TIP.244 The repurchase
244 See Securities Purchase Agreement dated December 31, 2008 between Citigroup Inc., as
Issuer and United States Department of the Treasury, at 4.9(a).

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42
must happen at ‘‘fair market value.’’ 245 As discussed above, fair
market value would be determined using a negotiation and appraisal process between Treasury and Citigroup. If Citigroup chooses not to repurchase its warrants, or if an agreement cannot be
reached on a fair price and neither party wishes to invoke the appraisal procedure, Treasury will auction the warrants to the public.
Unlike other auctions that have occurred relatively shortly after
the TARP recipient has repaid its TARP funds, Treasury has indicated that, if Citigroup’s warrants were to be auctioned to the public, the auction would not take place in the near future.246 This is
due to an agreement by Treasury to refrain from selling its common stock holdings until March 16, 2010, as well as the size of
those holdings.247
FIGURE 5: VALUE OF CITIGROUP’S STOCK SINCE OCTOBER 2008 248

Figure 5 above reflects the decline of and volatility in Citigroup’s
stock price since October 3, 2008, the date that President Bush
signed EESA into law. Throughout most of the period it has received TARP assistance, Citigroup’s stock price has been trading at
approximately $4 per share, and it plummeted to around $1 per
share in March 2009. Government intervention in the private sector has significantly influenced both Citigroup’s credit ratings and
stock price.249

245 Id.
246 Treasury

conversations with Panel staff (Jan. 7, 2010).
conversations with Panel staff (Jan. 7, 2010).
Financial, Citigroup Inc. Historical Stock Price (online at www.snl.com/InteractiveX/
historyCP.aspx?ID=4041896&Tabular=True&GraphType=3&Frequency=
0&TimePeriod2=9&BeginDate=1%2F13%2F2009&EndDate=
1%2F13%2F2010&ctl00%24ctl11%24IndexPreference=
default&ComparisonIndex2=25&ComparisonYield2=1&CustomIndex=0&ComparisonTicker2=&Action=Apply).
249 For further discussion on how government intervention impacts credit ratings and equity
pricing, see Section B.5, infra.
247 Treasury

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248 SNL

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The Panel notes that the government assistance has boosted
Citigroup’s credit ratings,250 and that although it is dif- ficult to
analyze Citigroup’s stock price, that price has been significantly affected by the extraordinary government intervention.
Pro-rating the original $25 billion ‘‘acquisition cost’’ of Citigroup
shares under the CPP against the number of shares received in the
exchange (ignoring shares already sold and warrants), Citigroup
shares need to be worth approximately $3.25 for Treasury to
‘‘break even.’’ In Citigroup’s December offering, Treasury agreed
initially to sell up to $5 billion of its shares in a concurrent secondary offering, while announcing plans to sell the remainder of its
shares over the next six to twelve months.251 Although Citigroup
managed to raise over $21 billion in the capital markets on December 16, 2009 (the largest equity offering in the U.S. equity markets), it priced the new shares at $3.15 each, below Treasury’s
break-even price.252 Rather than incur a $770 million loss, Treasury decided not to participate in the secondary offering and postponed plans to start divesting its common shares.253 Treasury has
now agreed not to sell its common stock until after March 16, 2010
and plans to sell the remainder of its holdings over the next 12
months.254 Until it does so, Treasury will remain the major shareholder.255 Because Treasury’s sales of its holdings in Citigroup
common stock would constitute a change in ownership, that sale
would not be feasible without the recent IRS guidance that allows
Treasury to conduct the sales and Citigroup to maintain its deferred tax assets, discussed above in Section B.6.256
On December 31, 2009, Citigroup’s stock price was $3.31 a share,
meaning that the value of Treasury’s remaining holdings in
250 Credit ratings tend to be higher than they would otherwise be, since government support
provides the public and stockholders an added degree of confidence in the company’s health. For
example, in its July 31, 2009 report, Standard & Poor’s gave Citigroup a credit rating of ‘‘A’’
but noted ‘‘the potential for additional extraordinary government support, if necessary,’’ and further stated that Citigroup’s rating ‘‘reflects a four-notch uplift from our assessment of
Citigroup’s stand-alone credit profile’’ (emphasis added). See also Fitch Ratings, Citigroup Inc.
(Nov. 2, 2009) (hereinafter ‘‘Fitch Ratings for Citigroup’’); Moody’s Investors Service, Global
Credit Research, Issuer Comment: Citigroup: Earnings Commentary—Third Quarter 2009 (Oct.
16, 2009) (hereinafter ‘‘Moody’s Earnings Commentary for Citigroup’’).
251 Treasury Statement Regarding Citigroup’s Intention to Repay Taxpayers, supra note 235.
252 As noted above, Citigroup’s offering was the largest offering in American history. Even before its offering occurred, Citigroup faced a number of factors that impacted its market pricing.
These included its size, its occurrence at year-end with resulting time constraints, its timing
after several similar types of transactions, including the Bank of America and Wells Fargo offerings to facilitate their TARP repayments (and the limited demand for financial stocks as a result), and eagerness on the part of Citigroup’s management to repay the TARP funds to get out
from under the government’s thumb. See Kevin Dobbs, Conditions improving, but Citi still faces
confidence crisis, SNL Financial (Jan. 7, 2010) (hereinafter ‘‘Conditions improving, but Citi still
faces confidence crisis’’) (suggesting that Citigroup’s pricing of the deal at 20 percent below its
announced target was due in part to ‘‘poor timing’’).
253 This decision underscores Treasury’s commitment to ‘‘protect[ing] the taxpayers’ investment.’’ Allison Testimony before House Oversight and Government Reform Committee, supra
note 118.
254 Allison Testimony before House Oversight and Government Reform Committee, supra note
118. As part of Treasury’s agreement to delay selling its common stock holdings for 90 days,
Citigroup agreed to compensate Treasury for all of the costs associated with its future common
stock sales, including commissions.
255 While Treasury remains the major shareholder, Treasury does not have any Citigroup
board seats. The Shareholders Agreement between Treasury and Citigroup stipulates that
Treasury will exercise its right to vote only on particular matters (e.g., the election or removal
of directors, major corporate transactions including mergers, dissolution, amendments to charter
or bylaws). On other issues, Treasury ‘‘will vote its shares in the same proportion’’ as all other
company shares are voted. Allison Testimony before House Oversight and Government Reform
Committee, supra note 118.
256 For further discussion on the recent IRS guidance and its tax impact, see discussion in
Section B.6.

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Citigroup common stock was $25.49 billion, and the value of the
warrants held, by the Panel’s best estimate, was $204.32 million.
By that measure, Citigroup stock would need to be worth approximately $3.25 a share for the TARP investment in common stock to
be repaid. The warrants derive from three separate investments in
Citigroup, and in each case were part of a package of securities
issued to Treasury, so it is difficult to attribute an ‘‘acquisition
cost’’ to specific components such as the warrants.257 As part of the
consideration for Treasury’s TARP investment, the warrants are
supposed to permit the taxpayers to benefit from the ‘‘upside’’ deriving from the government’s intervention.258
In conversations with Panel staff, Treasury indicated that it has
spent much time thinking about how to make an orderly exit from
Citigroup, and emphasized that there are many different possibilities for how to sequence the sales of its common stock holdings.259
According to Assistant Secretary Allison, Treasury concluded that
‘‘by gradually selling the shares, [it] will be in a better position to
achieve the best possible prices for the American public.’’ 260
With respect to Citigroup’s plans and strategies for future profitability, in the first quarter of 2009, Citigroup reorganized itself into
Citicorp and Citi Holdings, the former consisting of operations considered central to the bank’s future, including worldwide retail
banking, investment banking, and transaction services for institutional clients, and the latter holding the assets and business units
that Citigroup does not regard as its core business, such as asset
management and consumer lending, and which it will presumably
sell off.261 Citigroup has already made some material asset sales,
including brokerage and asset management business units, as set
out in Figure 6 below. Due in part to the current difficulties in obtaining what it considers to be reasonable prices, some of these
sales have been made at low prices.262 It remains unclear whether
Citigroup’s primary impetus for these sales was to strengthen its
capital base and reduce risk by concentrating on core business
areas and simplifying the institution, or to reduce government involvement with its business. As a result of these changes, as well
as reductions in headcount and expenses since the beginning of
2008, Citigroup stated it has raised ‘‘considerable capital’’ and has
built ‘‘considerable liquidity.’’ 263
257 Citigroup financial statements distinguish between preferred and warrants. However,
when the initial investments were made there were part of a package of securities.
258 As the Panel noted in its February Oversight Report, ‘‘[t]he warrants allowed the Treasury
to buy common stock of each institution for an additional amount—called the ‘‘exercise price’’—
that was calculated so that Treasury benefit [sic] if the value of the common stock increased.’’
Congressional Oversight Panel, February Oversight Report: Valuing Treasury’s Acquisitions, at
5 (Feb. 6, 2009) (online at cop.senate.gov/documents/cop-020609-report.pdf).
259 Treasury conversations with Panel staff (Dec. 3, 2009).
260 Allison Testimony Transcript, supra note 135.
261 Citigroup conversations with Panel staff (Dec. 4, 2009); see Bank of America—Merrill
Lynch Financial Services Conference, Presentation by Citigroup Vice Chairman Ned Kelly, at 1
(Nov. 11, 2009) (online at www.citigroup.com/citi/fin/data/p091111a.pdf?ieNocache=311) (hereinafter ‘‘Citigroup Ned Kelly Presentation’’); Citi Statement to the Congressional Oversight Panel
on Asset Sales and Business Divestitures (Dec. 22, 2009) (hereinafter ‘‘Citi Statement on Asset
Sales and Business Divestitures’’).
262 See Figure 6 and related footnotes identifying the amounts Citigroup has realized on its
asset sales as compared to Citigroup’s prior valuations of those assets.
263 Citigroup conversations with Panel staff (Dec. 4, 2009).

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FIGURE 6: CITIGROUP ASSET SALES 264
Asset Sold

Date of Sale

German Retail Banking Operation .........................................
Citigroup Global Services Limited ..........................................
Citigroup Technology Services Ltd .........................................
Smith Barney ..........................................................................
Three North American Partner Credit Card Portfolios ...........
Nikko Cordial Securities Inc ...................................................
Nikko Citi Trust and Banking Corporation .............................
Nikko Asset Management .......................................................
Portugal Credit Cards Business .............................................
Norwegian Consumer Finance Business ................................
Phibro LLC ..............................................................................
Diners Club North America 276 ...............................................
Primerica, Inc .........................................................................

12/5/2008 ..............................
12/31/2008 ............................
1/20/2009 ..............................
6/1/2009 ................................
8/31/2009 ..............................
10/1/2009 ..............................
10/1/2009 ..............................
10/1/2009 ..............................
11/30/2009 ............................
12/15/2009 ............................
12/31/2009 ............................
12/31/2009 ............................
Not closed (announced
11/5/2009).

Amount Realized

$6.6 billion 265
$512 million 266
$127 million 267
$2.75 billion 268
Undisclosed 269
$8.7 billion 270
$212 million 271
$844 million 272
Undisclosed 273
Undisclosed 274
∼$250 million 275
Undisclosed 277
TBD 278

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264 Citigroup had divested $281 billion in ‘‘non-core businesses and assets’’ from its Citi Holdings subsidiary at the end of Q3 2009.
Citigroup, Repaying TARP and Other Capital Actions, at 13 (Dec. 14, 2009) (online at www.citibank.com/citi/fin/data/p091214a.pdf). Citigroup
divested a further $25 billion in assets during Q4 2009. Id. This table only includes publicly disclosed transactions; other non-public transactions have taken place which, although not reflected in this table, are reflected in the $306 billion total. Citi Statement on Asset Sales and
Business Divestitures, supra note 261.
265 Citigroup, Citi Successfully Completes Sale of German Retail Banking Operation to Credit Mutuel-CIC (Dec. 5, 2008) (online at
´
www.citi.com/citi/press/2008/081205a.htm). Citigroup previously valued the assets at $15.6 billion, meaning that the sale took place at almost
a 50 percent discount. See id.
266 Citigroup, Citi Completes Sale of Citigroup Global Services Limited (Dec. 31, 2008) (online at www.citi.com/citi/press/2008/081231a.htm).
267 Citigroup,
Form 10–Q for the Quarterly Period Ending March 31, 2009, at 10 (Mar. 31, 2009) (online at
www.citigroup.com/citi/fin/data/q0901c.pdf?ieNocache=664); Citigroup, Citi Completes Sale of Citigroup Technology Services Ltd. (India) (Jan.
20, 2009) (online at www.citi.com/citi/press/2009/090120e.htm).
268 Citigroup sold 100 percent of its Smith Barney, Quilter and Australia private client networks in exchange for a 49 percent stake in a
joint venture with Morgan Stanley and an upfront cash payment of $2.75 billion. Citigroup, Form 10–Q for the Quarterly Period Ending June
30, 2009, at 14 (June 30, 2009) (online at www.citi.com/citi/fin/data/q0902c.pdf?ieNocache=410). CEO Vikram Pandit has publicly indicated
that Citigroup will eventually sell its stake in the joint venture. Matthias Rieker, Citi Plans to Shed Stake in Smith Barney, Wall Street Journal
(Sept. 17, 2009) (online at online.wsj.com/article/SB125312761700516895.html).
269 Citigroup,
Citi Holdings Update: Citi Sells Three Credit Card Portfolios (Aug. 31, 2009) (online at
www.citi.com/citi/press/2009/090831d.htm). Although Citigroup has not disclosed the terms of the sale, it previously valued the assets it sold
at $1.3 billion. Id.
270 Citigroup,
Form 10–Q for the Quarterly Period Ending September 30, 2009, at 99 (Sept. 30, 2009) (online at
www.citigroup.com/citi/fin/data/q0903c.pdf?ieNocache=909). Citigroup previously valued these assets at $23.6 billion. Id. at 11. Contemporaneous press reports indicate that robust bidding among major Japanese financial institutions took place for the right to acquire Nikko Cordial.
Alison Tudor, Citi’s Nikko Sale Ignites Japanese Bid War, Wall Street Journal (Apr. 2, 2009) (online at online.wsj.com/article/SB123863295192980917.html).
271 Citigroup, Citi Successfully Completes Sale of NikkoCiti Trust and Banking Corporation to Nomura Trust and Banking (Oct. 1, 2009) (online at www.citi.com/citi/press/2009/091001b.htm).
272 Citigroup, Citi Successfully Completes Sale of Nikko Asset Management to Sumitomo Trust (Oct. 1, 2009) (online at
www.citi.com/citi/press/2009/091001a.htm).
273 Citigroup,
Citi to Sell Portugal Credit Cards Business to Barclays Bank PLC (Sept. 29, 2009) (online at
www.citi.com/citi/press/2009/090929b.htm). Although Citigroup has not disclosed the terms of the sale, it previously valued the assets at
Ö644 million, about $938 million. See id.
274 Citigroup,
Citi to Sell Norwegian Consumer Finance Business to Gjensidige Bank ASA (Oct. 8, 2009) (online at
www.citi.com/citi/press/2009/091008a.htm). Although Citigroup has not disclosed the terms of the sale, it previously valued the assets it sold
at $470 million. Id.
275 Citigroup announced that it would sell Phibro LLC for a purchase price equal to the net asset value of the business. Citigroup, Citi to
Sell Phibro, LLC (Oct. 9, 2009) (online at www.citi.com/citi/press/2009/091009a.htm). Occidental announced that it anticipated the net asset
value of Phibro would be about $250 million when the deal closed. Occidental Petroleum, Occidental Petroleum Announces Acquisition of
Phibro (Oct. 9, 2009) (online at newsroom.oxy.com/portal/site/oxy/?ndmViewId=newslview&newsId=20091026006112&newsLang=en). Citing
government pressure to sell the energy-trading business, news reports characterized the sale price as ‘‘bargain-basement.’’ David Enrich, Ben
Casselman and Deborah Solomon, How Occidental Scored Citi Unit Cheaply, Wall Street Journal (Oct. 12, 2009) (online at online.wsj.com/article/SB125509326073375979.html).
276 Citigroup, Citi Sells Diners Club North America Business (Nov. 24, 2009) (online at www.citibank.com/citi/press/2009/091124a.htm)
(hereinafter ‘‘Citi Sells Diners Club North America Business’’).
277 Citi Sells Diners Club North America Business, supra note 276. Although Citigroup has not disclosed the terms of the sale, it previously
valued the assets involved at $1 billion.
278 Primerica, Inc. has filed the paperwork to conduct an initial public offering, with proceeds going to Citigroup, as part of a reorganization and eventual divestiture by Citigroup. U.S. Securities and Exchange Commission, Form S–1 Registration Statement: Primerica, Inc., at 1,
6–7, 39 (Nov. 5, 2009) (online at www.sec.gov/Archives/edgar/data/1475922/000119312509225601/ds1.htm). Citigroup attempted to sell
Primerica to another financial institution or other investor but could not find a buyer. David Enrich, An IPO of Primerica Will End a Citi Era,
Wall Street Journal (Nov. 6, 2009) (online at online.wsj.com/article/SB125746499148732279.html). The IPO has not yet taken place; Primerica
held $12.1 billion in assets as of June 30, 2009. U.S. Securities and Exchange Commission, Form S–1 Registration Statement: Primerica, Inc.,
at 11 (Nov. 5, 2009) (online at www.sec.gov/Archives/edgar/data/1475922/000119312509225601/ds1.htm).

c. Analysis of Intended Exit Strategy
Given the recent announcement by Citigroup concerning its
TARP repayment, the Panel notes that Treasury is left with 7.7 billion common shares, which it is free to sell at any time after the
90-day lockup period which expires on March 16, 2010, and $2.23
billion of trust preferred securities issued originally under the

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AGP.279 Given the regulators’ decision to allow Citigroup to repay,
there are only a few remaining prospective issues with respect to
Treasury’s exit strategy. This discussion focuses on those remaining challenges.
In making the decision to sell the 7.7 billion common shares that
it holds in Citigroup, Treasury will need to balance the desire to
exit ‘‘as soon as practicable’’ 280 with the need to maximize the return (or minimize the loss) to the American taxpayers and maintain institutional and systemic stability, as identified by EESA.281
There are strong arguments from a pure investment perspective for
Treasury to hold its investments as long as possible, with the expectation that equity values will increase and taxpayers will see a
greater return. The Panel notes that Treasury opted recently to
postpone divesting its common shares in order to avoid incurring
a $770 million loss. Instead, as discussed above, Treasury anticipates disposing of its remaining common stock holdings during the
next 12 months. At the current market price, Treasury’s common
shares are worth about $27.6 billion.282 Because the common
shares were converted from $25 billion of preferred shares, that is
a gain of more than $2 billion, or 10.4 percent, on paper. Even if
Treasury sells now at a profit, there remains the possibility that
it could be second-guessed if the shares were to increase in value
at a later date. In conversations with Panel staff, however, Treasury staff emphasized that Treasury is a ‘‘reluctant shareholder’’
and that the TARP was not designed primarily to make money.283
Treasury is not trying to pick trading spots, meaning that its actions are not driven purely by a desire to maximize shareholder
value.284 Due to its desire to preserve the stability of individual institutions, however, Treasury is unlikely to sell its stakes all at
once since that would likely depress the share price. As of December 9, 2009, Citigroup’s trading volume was averaging 471 million
shares per day, or about 6 percent of Treasury’s holdings. The challenge, therefore, is to dispose of its stakes in an orderly but deliberate fashion. Treasury’s interests in preserving institutional stability are also illustrated by its agreement to a 90-day lockup period. There has been some speculation that Treasury only agreed
to this after Citigroup notified Treasury of its challenges in attracting investors, some of whom indicated they would only buy shares
if Treasury agreed to such a restriction.285 The Panel notes that
Treasury previously had the capacity to sell its Citigroup common
shares at its discretion. By agreeing to the 90-day lockup period,
Treasury may have limited for a time its ability to sell when circumstances might be more favorable. On balance, Treasury’s ac279 For further discussion of the AGP termination and the related effect on the government’s
holding of trust preferred securities, see supra note 239.
280 Allison Testimony before House Oversight and Government Reform Committee, supra note
118, at 5.
281 See 12 U.S.C. § 5213.
282 This figure reflects Citigroup stock’s closing price as of Friday, January 8, 2010.
283 Treasury conversations with Panel staff (Dec. 15, 2009); Allison Testimony before House
Oversight and Government Reform Committee, supra note 118, at 5 (stating that ‘‘the U.S. government is a shareholder reluctantly and out of necessity. We intend to dispose of our interests
as soon as practicable, with the dual goals of achieving financial stability and protecting the
interests of the taxpayers’’).
284 Treasury conversations with Panel staff (Dec. 15, 2009).
285 David Enrich, Treasury Halts Plan to Sell Off Citi Stock, Wall Street Journal (Dec. 18,
2009) (online at online.wsj.com/article/SB126100573858094185.html).

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tions suggest the tensions and competing interests that exist in its
three-pillared management strategy. While it is difficult to determine which if any pillar has been the primary driving force behind
Treasury’s decision-making with respect to the disposition of its
Citigroup common stock holdings, Treasury’s strategy of intending
to balance taxpayer return, institutional stability and systemic stability, tips in favor of institutional and systemic stability, which are
now very much the same.
Since 2008, Citigroup has made some tangible progress in setting
forth a new strategic direction and working towards stability and
profitability. Chief Executive Officer Vikram Pandit’s strategy is to
dismantle the company’s financial supermarket structure, reduce
assets, and focus on the company’s core business operations contained in Citicorp (wholesale banking for large corporate clients
and retail banking for consumers).286 In recent months, Citigroup
has changed its senior management team, appointing a new chief
risk officer and making changes in finance, treasury, and consumer
and corporate banking. Citigroup recently named its fifth chief financial officer in five years. These actions were, in large part, a reaction to Citigroup’s continued poor asset quality performance.
While credit rating agencies such as Moody’s Investors Service note
that Citigroup’s current management is making progress in improving its risk management system, Moody’s concludes that ‘‘these
changes will take time to achieve and the complexity of the effort
is enormous.’’ 287 It is still too early to tell whether the new management slate has the commercial and retail banking experience
necessary. In addition, four new independent directors with substantial banking experience commenced service in 2009. The ultimate success of Citigroup’s strategy, however, is contingent upon
how soon the economy recovers. Given that Citigroup still remains
a large, complex company with 200 million customer accounts and
operations in over 100 countries, there remains the potential for a
return to profitability once economic recovery sets in. Thanks in
large part to the U.S. government’s substantial assistance,
Citigroup’s financial position has strengthened considerably, and
the company has nearly doubled its cash holdings to $244.2 billion
over the past year.
Citigroup’s record has been mixed, however, with regard to its reorganization and Mr. Pandit’s strategy of ‘‘reducing assets while
optimizing value and mitigating risk.’’ 288 Citigroup has made some
progress in reducing noncore operations with the completion of a
joint venture between its Smith Barney unit and Morgan Stanley’s
wealth management group, as well as with sale of Nikko Cordial
Securities and Nikko Asset Management. By December 2009,
Citigroup had conducted asset sales, business divestitures, and natural portfolio run-off, reducing Citi Holdings’ assets by $281 billion
286 Citigroup, Citi to Reorganize into Two Operating Units to Maximize Value of Core Franchise (Jan. 16, 2009) (online at www.citibank.com/citi/press/2009/090116b.htm) (quoting Mr.
Pandit as saying that ‘‘[g]iven the economic and market environment, we have decided to accelerate the implementation of our strategy to focus on our core businesses’’); Bank of America—
Merrill Lynch Financial Services Conference, Presentation by Citigroup Vice Chairman Ned
Kelly, at 1 (Nov. 11, 2009) (online at www.citigroup.com/citi/fin/data/p091111a.pdf). Citi Statement on Asset Sales and Business Divestitures, supra note 261.
287 Moody’s Investors Service, Global Credit Research, Credit Opinion: Citigroup Inc. (Oct. 1,
2009).
288 Citigroup Ned Kelly Presentation, supra note 261.

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since the first quarter of 2008. Citigroup expects an additional $25
billion reduction in assets resulting from the Nikko divestitures.289
On the other hand, Citigroup’s December 2009 fire sale of Phibro,
its commodity-trading arm and one of its few consistently profitable
business units, for only $250 million demonstrates the obstacles
Citigroup continues to face with maximizing value in a difficult
economic climate, and emphasizes the need for restrictions on the
sale of good assets.290 Much work remains until noncore assets are
reduced substantially, including the disposition of large noncore
businesses with substantial consumer credit exposure.291 Therefore, Citigroup’s intended further downsizing of Citi Holdings will
likely take place over several years.
In addition, some analysts have suggested that a significant
downside of Citigroup’s new strategy is that the institution’s operations have become less transparent. As compared to JPMorgan,
Wells Fargo, and Bank of America—institutions that are growing
and becoming more complex—these analysts argue that Citigroup
does a poorer job of explaining its strengths and weaknesses.292 In
their view, Citigroup needs to substantially improve disclosure in
its securities and banking business as well as more country-specific
information relating to its international consumer banking operations.293 While some of this lack of transparency may be due in
part to the complexity of Citigroup’s organization as compared to
other financial institutions, the Panel notes that the lack of transparency makes it very difficult to evaluate Citigroup’s progress and
efforts to regain profitability.
While the regulators have permitted Citigroup to repay, the critical question is whether Citigroup can become a viable and profitable financial institution again.294 After two consecutive quarterly
profits, Citigroup incurred a loss of $3.2 billion in the third quarter
of 2009, as consumer loan losses exceeded trading profits from its
bond and currency businesses.295 Citigroup’s credit card and mortgage units contributed to approximately $9.4 billion in consumer
losses for the third quarter alone. Analysts anticipate that
Citigroup will post a loss of 32 cents per share for the fourth quar-

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289 Citi

Statement on Asset Sales and Business Divestitures, supra note 261.
290 This illustration further underscores the influence of the U.S. government on TARP-recipient institutions, as Citigroup had intended to maintain its core profitable businesses while offloading its ‘‘legacy’’ businesses.
291 Such major noncore businesses include the CitiFinancial consumer loan business, the retail
partner credit card business, and Primerica Financial Services.
292 Conditions improving, but Citi still faces confidence crisis, supra note 252 (stating that
‘‘vagueness tends to raise concerns about weakness,’’ in large part due to its recent financial
troubles) (based on SNL interviews with Jeff Harte, Sandler O’Neill & Partners analyst, Jeff
Saut, chief investment strategist at Raymond James & Associates, and Christopher Whalen, a
managing director at Institutional Risk Analytics); see also Peter Eavis, Bright Lights, Transparent Citi, Wall Street Journal (Dec. 18, 2009) (online at online.wsj.com/article/
SB20001424052748703323704574602310167166196.html?) (‘‘For instance, Citicorp says its
Asian consumer operations have $92 billion of assets, but doesn’t disclose specifically where they
are, let alone the types of loans that exist in each country. Oddly, Citi has given a country
breakdown for the problematic businesses bunched under Citi Holdings, but not for Citicorp’’).
293 Conditions improving, but Citi still faces confidence crisis, supra note 252.
294 See discussion of the additional financial burden assumed by banks repaying CPP Preferred at Note 213, infra. See also Figure 7, infra, for a representation of changes in Citigroup’s
capital structure.
295 Furthermore, unlike JPMorgan Chase or Goldman Sachs, Citigroup’s operations have not
yet generated enough profits to cover potentially substantial write-downs in the future. In the
third quarter of 2009, its core business units did not show an increase in revenue.

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ter of 2009, marking its ‘‘eighth quarterly loss, on a per-share
basis, in the past nine reporting periods.’’ 296
FIGURE 7: CITIGROUP’S CAPITAL RATIOS SINCE THE FIRST QUARTER OF 2008 297

296 Conditions improving, but Citi still faces confidence crisis, supra note 252. While analysts
expect Citi to incur a fourth quarter loss, this is due in large part to one-time accounting
changes that Citi needed to take as part of its recent TARP repayment.
297 The Tier 1 ‘‘Well Capitalized’’ Capital ratio and Tier 1 ‘‘Well Capitalized’’ Common ratio
of 6 percent and 4 percent, respectively, are based on the Supervisory Capital Assessment Program’s desired ratio of capitalization for bank holding companies to ensure a sufficient capital
buffer against future economic challenges. See Board of Governors of the Federal Reserve System, Joint Statement by Secretary of the Treasury Timothy F. Geithner, Chairman of the Board
of Governors of the Federal Reserve System Ben S. Bernanke, Chairman of the Federal Deposit
Insurance Corporation Sheila Bair, and Comptroller of the Currency John C. Dugan regarding
The Treasury Capital Assistance Program and the Supervisory Capital Assessment Program
(May 6, 2009) (online at www.federalreserve.gov/newsevents/press/bcreg/20090506a.htm). The
Tier 1 Capital includes core capital. Tier 1 Common Capital includes Tier 1 Capital less noncommon elements (i.e., qualifying perpetual preferred stock, qualifying noncontrolling interests
in subsidiaries, and qualifying mandatorily redeemable securities of subsidiary trusts). For the
purposes of the SCAP, both ratios are stated as a percentage of risk-weighted assets. As losses
hit common equity first and dividend payment schedules are not fixed, the Tier 1 Common capital ratio drills deeper into the capital structure by showing the institution’s permanent loss absorption capacity. According to Citigroup’s press release on December 23, 2009, if the TARP repayment had been in effect at the end of Q3 2009, the Tier 1 Capital ratio would have been
11.0 percent and the Tier 1 Common Capital ratio would have been 9.0 percent.
298 This figure reflects Citigroup stock’s closing price as of Friday, January 8, 2010.
299 Citigroup, 2008 Annual Report on Form 10–K, at 170 (online at www.citigroup.com/citi/fin/
data/k08c.pdf?ieNocache=265) (hereinafter ‘‘Citigroup 2008 Annual Report on Form 10–K’’) (detailing aggregate annual maturities of long-term debt obligations (based on final maturity
dates)).

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While Citigroup’s stock has climbed back from a low of $1.02 per
share in March 2009 to its current price of $3.59,298 it remains unclear whether it can regain its footing and reemerge as a profitable
institution going forward. Citigroup’s market capitalization is currently less than Bank of America, JPMorgan Chase, and Wells
Fargo, all institutions that have repaid their TARP assistance in
full. Another lingering concern is whether Citigroup will be able to
refinance its obligations coming due in the next few years.
Citigroup has approximately $30 billion of debt coming due in
2010, plus $39.5 billion in 2011 and $59.3 billion in 2012.299

50
If Citigroup is unable to refinance at affordable rates or has insufficient cash to cover its maturing obligations, it may be forced to face
much higher borrowing costs, possibly resulting in renewed liquidity problems.
In addition, Citigroup’s exit from the TARP does not come without cost. As a result of its TARP repayments and accounting
charges taken on the value of the repaid trust preferred securities
and the termination of the AGP loss-sharing agreement, Citigroup
will incur a $10.1 billion pre-tax loss for the fourth quarter of
2009.300 The recent stock offering also caused substantial dilution
for existing Citigroup shares, including Treasury’s holdings. While
Citigroup has written down billions of dollars’ worth of mortgages
on its books, there are looming problems in its huge credit card and
mortgage portfolios.301 Citigroup raised interest rates on some
credit card holders to 29.99 percent in October 2009. Analysts at
Fitch Ratings predict that Citigroup will continue to need substantial loan loss reserves and that its operations will remain weak into
2010, but that write-downs on capital market exposures are expected to be much lower due to the large amount of write-downs
already incurred,302 while Standard & Poor’s predicts that
Citigroup ‘‘will likely face a tough credit cycle over the next two
years.’’ 303
Citigroup has been the recipient of substantial government assistance on at least three occasions over the past 80 years.304 If
Citigroup were to run into trouble again, perhaps because of some
market disruption, recent history suggests that the government
would not let it fail. The American people and Congress are forced
to place an enormous amount of faith and trust in Treasury and
the regulators’ decision to allow Citigroup to repay its TARP assistance in the hope that it will not return for further rescue in the
future. During his recent testimony before the Panel, Secretary
300 Repaying

TARP and Other Capital Actions, supra note 235.
& Poor’s has characterized Citigroup’s credit cards and residential mortgages as
‘‘[c]hief among its most problematic exposures.’’ Standard & Poor’s, Global Credit Portal,
Citigroup Inc. (July 31, 2009) (hereinafter ‘‘S&P Citigroup’’).
302 Fitch Ratings for Citigroup, supra note 250; Moody’s Earnings Commentary for Citigroup,
supra note 250 (expecting that loan loss provisions will rise over the next few quarters, ‘‘increasing the probability that Citigroup will report quarterly losses’’).
303 S&P Citigroup, supra note 301.
304 Prior to the TARP bailout, the U.S. government rescued Citigroup on at least two other
occasions. As part of its response to the Great Depression, the federal government instituted
several policies aimed at preventing the financial sector from failing. Because of these policies,
Citibank’s predecessor, National Bank, was able to weather the storm while thousands of smaller banks failed. The risky activities of National Bank that contributed to the crash prompted
Congress to pass the Glass-Steagall Act, which required the separation of commercial banking
activities from those of investment banks. Citibank, operating as Citicorp, was again bailed out
in the 1980s following the LDC (less-developed-country) debt crisis, in which several Latin
American countries were unable to meet interest payments on massive debts to large American
banks due to rising LIBOR rates (which were used to price credits to LDCs). In response to the
crisis, U.S. banking officials waived several capital and accounting standards, such as the requirement that banks set aside reserves to cover restructurings of loans. Without such regulatory forbearance, it is possible that Citicorp would have been deemed insolvent, thereby causing a widespread panic. See Robert A. Eisenbeis and Paul M. Horvitz, The Role of Forbearance
and Its Costs in Handling Troubled and Failed Depository Institutions, Reforming Financial Institutions in the United States, at 68 (George G. Kaufman ed., 1993) (‘‘Had these institutions
been required to mark their sometimes substantial holdings of underwater debt to market or
to increase loan-loss reserves to levels close to the expected losses on this debt (as measured
by secondary market prices), then institutions such as Manufacturers Hanover, Bank of America, and perhaps Citicorp would have been insolvent’’). By the 1990s, Citicorp had not fully recovered and so was again helped by a cash infusion from Saudi Prince Walid bin Talal. The
federal government simultaneously aided in this rescue by cutting interest rates so that large
banks could borrow money at low rates from the Federal Reserve, while lending at higher rates
to their customers.

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301 Standard

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Geithner expressed great confidence in the strength of the regulators’ decisions concerning repayment, and noted that the regulators would not allow or support premature repayment by a weak
institution.305 In addition, Secretary Geithner, on a separate occasion, responded to concerns that the regulators are allowing the
large financial institutions to exit from the TARP too quickly, calling the TARP repayments ‘‘good news for everyone.’’ 306 While such
statements and assurances are encouraging, the capital markets do
not seem so convinced.307 The repeated failure of Citigroup underscores the gravity and seriousness of these repayment decisions
and raises critical questions about the redesign of the institution
so that it is less likely to become a systemic risk in the future.
6. AIG

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a. Acquisition of Assets and Current Value
Along with Citigroup and Bank of America, AIG is one of the
largest recipients of TARP assistance, and has received even more
assistance from the Federal Reserve. Through a series of coordinated efforts, Treasury and the Federal Reserve have committed
over $182.3 billion to AIG since September 2008.308 Treasury’s
share of this commitment is $69.8 billion, which it holds under the
AIGIP/SSFI in the form of preferred shares (AIGIP/SSFI Preferred). As of December 31, 2009, $46.9 billion in principal amount
of the AIGIP/SSFI Preferred was outstanding. Like the TIP, the
AIGIP/SSFI was ‘‘established to provide stability and prevent disruptions to financial markets from the failure of institutions that
are critical to the functioning of the nation’s financial system’’ and
carries strict executive compensation guidelines.309 AIG is the only
institution to be provided assistance under this initiative.
The government’s assistance to AIG began on September 16,
2008—one day after the collapse of Lehman Brothers. FRBNY, pursuant to the authorization of the Federal Reserve and with the support of Treasury,310 provided AIG with an $85 billion revolving
305 Agency Financial Statement 2009, supra note 32 (noting that Treasury and the regulators
‘‘would not support’’ allowing institutions to repay their TARP assistance due to the institution’s
desire to increase executive compensation).
306 MarketWatch.com, Geithner Dismisses Worry Over Bank TARP Repayments, MarketWatch
(Dec. 15, 2009) (online at www.marketwatch.com/story/story/print?guid=3941CA39-8EB4-408CB147-1BBEE978EB14).
307 As discussed above, Citigroup priced its offering designed to facilitate its TARP repayment
at $3.15 per share on December 16, 2009, reflecting a 20 percent discount from the intended
target.
308 According to Treasury, each decision to provide assistance was driven by the recognition
that AIG faced increasing pressure on its liquidity following a downgrade in its credit ratings
in May and September 2008 and the real risk of further downgrades unless extraordinary steps
were taken. Treasury conversations with Panel staff (Dec. 3, 2009). While AIG tried to raise
additional capital in the private market in early September 2008, its attempt was unsuccessful.
AIG, in an unusual set of terms, agreed to post collateral upon downgrades in its credit ratings,
and also allowed counterparties to assert claims. The company’s destabilization can be attributed, in large part, to these terms.
309 U.S.
Department of the Treasury, Road to Stability: Programs (online at
www.financialstability.gov/roadtostability/programs.htm) (accessed Jan. 13, 2010). The Panel
notes, however, that Special Master Feinberg has exempted certain AIG executives from his default $500,000 cash salary cap after at least five employees reportedly threatened to resign because of the compensation limits. See Steve Eder and Paritosh Bensal, AIG executive resigns over
pay
limits,
Reuters
(Dec.
30,
2009)
(online
at
www.reuters.com/article/
idUSTRE5BT45E20091231).
310 The Board of Governors of the Federal Reserve System authorized FRBNY to lend under
section 13(3) of the Federal Reserve Act, which authorizes the Federal Reserve Board to make
secured loans to individuals, partnerships, or corporations in ‘‘unusual and exigent cirContinued

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credit facility.311 In exchange for the facility and $0.5 million,312
AIG agreed to establish a trust for the sole benefit of the United
States Treasury, providing the United States Treasury with a 77.9
percent voting interest in AIG, held in trust (the Trust Shares).313
While Treasury has a limited consultative role to the FRBNY in its
administration of the Trust,314 the Trust Shares are not technically
TARP assets.
On November 25, 2008, Treasury provided AIG with a $40 billion
capital infusion under the AIGIP/SSFI.315 Treasury received $40
billion face value of preferred shares and a warrant to purchase apcumstances’’ and when the borrower is ‘‘unable to secure adequate credit accommodations from
other banking institutions.’’ This authority was designed to allow the Federal Reserve to respond to emergency circumstances. It was amended in 1991 to allow the Federal Reserve to lend
directly to securities firms during financial crises.
311 Federal Reserve Board authorizes lending to AIG, supra note 110; Board of Governors of
the Federal Reserve System and U.S. Department of the Treasury, U.S. Treasury and Federal
Reserve Board Announce Participation in AIG Restructuring Plan (Mar. 2, 2009) (online at
www.federalreserve.gov/newsevents/press/other/20090302a.htm) (hereinafter ‘‘AIG Restructuring
Plan Announcement’’). The facility was subsequently revised:
• In November 2008, the initial $85 billion to be made available was reduced to $60 billion.
Additionally, the facility’s initial term of 24 months was extended to five years. These and other
changes in terms were prompted by the fact that credit rating agencies were prepared to further
downgrade the company’s credit ratings based upon their conclusion that the FRBNY revolving
credit facility, in the form of debt, made the company overleveraged.
• In March 2009 the Federal Reserve made several changes to the facility. The facility was
reduced from $60 billion to no less than $25 billion, in exchange for FRBNY taking preferred
interests in two special purpose vehicles created to hold all of the outstanding common stock
of American Life Insurance Company (ALICO) and American International Assurance Company
Ltd. (AIA), two life insurance holding company subsidiaries of AIG. While AIG will retain control of ALICO and AIA, FRBNY has certain governance rights in order to protect its interests.
The Federal Reserve also authorized FRBNY to make new loans, up to an aggregate amount
of approximately $8.5 billion, to special purpose vehicles (SPVs) created by these life insurance
subsidiaries, which would repay the loans from cash flows from designated blocks of existing
life insurance policies. The proceeds of these new FRBNY loans would be used to pay down an
equivalent amount of outstanding debt under the facility. On December 1, 2009, AIG announced
that it consummated these two debt-for-equity transactions by selling preferred equity stakes
in these two subsidiaries to FRBNY, thereby reducing AIG’s debt to FRBNY to $17 billion, excluding interest and fees. AIG’s recent decision to have a public stock offering for AIA on the
Hong Kong stock exchange (which might raise as much as $20 billion) is designed to help AIG
repay its government assistance.
312 As a discount, the initial commitment fee AIG paid for the Revolving Credit Facility was
reduced by $0.5 million and will not be repaid. Initially, AIG drew down $28 billion on this facility on September 17, 2008.
313 Federal Reserve Board authorizes lending to AIG, supra note 110.
The Credit Facility Trust Agreement provides that the trust is for the sole benefit of the
United States Treasury, meaning that any property distributable to the United States Treasury
as a beneficiary must be paid to the Treasury for deposit into the U.S. Treasury General Fund
as miscellaneous receipts. See AIG Credit Facility Trust Agreement, at § 1.01 (Jan. 16, 2009)
(online at www.newyorkfed.org/newsevents/news/markets/2009/AIGCFTAgreement.pdf) (hereinafter ‘‘AIG Credit Facility Trust Agreement’’).
The interest is in the form of preferred stock, convertible into AIG’s common stock. The AIG
Credit Facility Trust Agreement was not executed until January 16, 2009. On March 4, 2009,
AIG, as required by the Trust Agreement governing the Revolving Credit Facility, AIG agreed
to issue shares of convertible preferred stock an approximately 77.9 percent equity interest in
AIG to an independent trust for the sole benefit of the United States Treasury. The conversion
formula stipulates that the trust will receive 79.9 percent of AIG’s common stock, less the percentage of common stock that may be acquired by or for the benefit of the United States Treasury as a result of warrants or other convertible preferred stock held by Treasury. Treasury received a warrant to purchase a number of shares equal to two percent of AIG’s common stock
in connection with its November 2008 preferred stock purchase, and an additional warrant to
purchase AIG common stock in connection with its April 2009 preferred stock purchase. Subsequent to the initial agreement, a reverse stock split of AIG’s common stock increased the government’s equity interest to 79.8 percent.
314 Under section 1.02 of the Credit Facility Trust Agreement, FRBNY has to consult with the
Treasury Department in appointing the trustees. FRBNY also has to consult with the Treasury
with respect to filling any trustee vacancies. Trustees can be removed for engaging in criminal
conduct or if it has been reasonably determined by FRBNY, in consultation with Treasury, that
a trustee has ‘‘demonstrated untrustworthiness or to be derelict in the performance of his or
her duties.’’ AIG Credit Facility Trust Agreement, supra note 313.
315 Treasury to Invest in AIG Restructuring Under EESA, supra note 110; U.S. Department
of the Treasury, TARP AIG SSFI Investment Term Sheet (online at www.treas.gov/press/
releases/reports/111008aigtermsheet.pdf) (hereinafter ‘‘AIG SSFI Investment Term Sheet’’).

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hsrobinson on DSK69SOYB1PROD with HEARING

proximately two percent of the shares of AIG’s common stock.316
AIG used these funds to pay down $40 billion of the amounts under
the Revolving Credit Facility that FRBNY had provided in September, $72 billion of which was the maximum that had been
drawn down at that point, but the cumulative outstanding balance
was $69.25 billion on the particular days preceding the AIGIP/SSFI
infusion.317
During March and April 2009, Treasury and the Federal Reserve
provided additional assistance and further restructured the terms
of their existing assistance.318 On April 17, 2009, Treasury provided AIG with a commitment to invest an additional $29.8 billion
on certain terms and conditions. This facility, to be used on a
standby basis, allows AIG to issue to Treasury up to $29.8 billion
in AIGIP/SSFI Preferred over five years to meet its liquidity and
capital needs as they arise. Treasury will receive AIGIP/SSFI Preferred in the amount of each drawdown. In connection with providing AIG this additional commitment, Treasury received a warrant to purchase up to 3,000 shares of AIG common stock.319 As
of December 31, 2009, $5.3 billion had been drawn down under this
facility. AIG can continue to draw on the AIGIP/SSFI investments
through April 17, 2014, provided it remains in compliance with certain conditions.

316 AIG SSFI Investment Term Sheet, supra note 315. See Note 314 for further discussion of
the conversion calculation.
317 At the same time, the Federal Reserve created two separate lending facilities for AIG assets. In addition to authorizing FRBNY to restructure the terms of its revolving credit facility
to AIG, the Federal Reserve authorized FRBNY to create, and lend up to $22.5 billion to, an
SPV called Maiden Lane II LLC, designed to purchase residential mortgage-backed securities
from AIG life insurance companies. AIG will absorb the first $1 billion of losses due to its acquisition of a subordinated $1 billion interest in the facility. On December 12, 2008, FRBNY extended a $19.5 billion loan to Maiden Lane II LLC. The Federal Reserve further authorized
FRBNY to create and lend up to $30 billion to another SPV called Maiden Lane III LLC designed to purchase collateralized debt obligations (CDOs) from AIG’s counterparties. In two separate disbursements in November and December 2008, FRBNY funded Maiden Lane III LLC
with a $24.3 billion senior loan and AIG agreed to absorb the first $5 billion of losses after providing a $5 billion equity investment. AIG’s counterparties, in exchange for agreeing to terminate their credit default swap (CDS) contracts, were allowed to retain the $35 billion in collateral previously posted by AIG. TARP funds were not directly used in either the Maiden Lane
II or III transactions.
318 See Note 311, for further discussion of some of the key components of the March restructuring.
319 U.S. Department of the Treasury, U.S. Treasury and Federal Reserve Board Announce Participation in AIG Restructuring Plan (Mar. 2, 2009) (online at www.treas.gov/press/releases/
tg44.htm) (hereinafter ‘‘Participation in AIG Restructuring Plan Announcement’’).

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FIGURE 8: TREASURY’S PREFERRED STOCK HOLDINGS IN AIG 320

On April 17, 2009, the $40 billion face amount of AIGIP/SSFI
Preferred that Treasury received in its November 2008 AIGIP/SSFI
investment was exchanged for $41.6 billion 321 of noncumulative
preferred shares, allowing AIG to reduce its leverage and dividend
requirements.322
The following tables show Treasury’s and the Federal Reserve’s
holdings in AIG as of December 31, 2009.
FIGURE 9: DEPARTMENT OF TREASURY HOLDINGS IN AIG AS OF DECEMBER 31, 2009
[Dollars in millions]
Principal
Amount

Assets

AIGIP/SSFI
Non-Cumulative Preferred.

Acquisition
Cost

323 $46,900,000,000

Warrants ..................

326 53,798,766

$45,300

Received as part of
initial AIGIP/SSFI
investments.

Revenues
Generated

Estimated Value
as of 12/31/09

324 $0

N/A

325 $13,200

Low
$44.9

High
Best
$1,052.8 $556.4

320 The value of Treasury’s preferred stock holdings in AIG does not include the additional
obligations of $1.6 billion in cumulative unpaid dividends outstanding at the time of exchange
from cumulative preferred to non-cumulative preferred shares (April 17, 2009) and $165 million
commitment fee to be paid in three equal installments over the five-year life of the commitment
facility. See TARP Transactions Report for Period Ending December 30, 2009, supra note 166.
321 The $1.6 billion difference reflects a compounding of accumulated but unpaid dividends
owed by AIG to Treasury on the cumulative preferred stock.
322 Participation in AIG Restructuring Plan Announcement, supra note 319.

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323 The $1.6 billion difference between the principal amount and acquisition cost reflects a compounding of accumulated but unpaid dividends owed by AIG to Treasury.
324 According to Treasury, there have been no revenues generated from its AIGIP/SSFI investments in AIG because AIG has not declared or
paid any dividends since the inception of Treasury’s preferred equity investments.
325 This figure reflects Treasury’s estimated value of its AIGIP/SSFI investments in AIG as of September 30, 2009. Agency Financial Statement 2009, supra note 32, at 17.
326 AIG’s stock split 20 to 1 in April 2009. The U.S. Government will get 1/20th share of AIG common stock every warrant exercised, so the
government will get 2,690,088.3 shares of common stock if all warrants are exercised.

55
FIGURE 10: U.S. TREASURY HOLDINGS IN AIG AS OF DECEMBER 31, 2009
[Dollars in millions]
Asset

Number

Preferred Securities Convertible into Common, held by Trust ....................................

Estimated Value
as of 9/30/09
327 $23,500

100,000

327 According

to Treasury, ‘‘[t]he value recorded is based on the market value of the trust’s AIG holdings at September 30, 2009; as the
underlying AIG common stock is actively traded on the New York Stock Exchange, this represents the best independent valuation available for
the government’s beneficial interest.’’ U.S. Department of the Treasury, 2009 Agency Financial Report—Department of Treasury, at 182,
194–95 (online at www.treas.gov/offices/management/dcfo/accountability-reports/2009–afr.shtml). Treasury will re-value the trust each year
until the trust is liquidated.

FIGURE 11: FEDERAL RESERVE HOLDINGS IN AIG AS OF DECEMBER 31, 2009
[Dollars in millions]
Amount of
assistance
authorized

Asset

Outstanding
Balance

Revolving Credit Facility ..............................................................................................
Maiden Lane II .............................................................................................................
Maiden Lane III ............................................................................................................

328 $35,000

329 $22,000

330 22,500

331 15,700

332 30,000

333 18,200

Total ....................................................................................................................

87,500

55,900

328 The

facility was initially $85 billion but was reduced to $60 billion in November 2008, and further reduced to $35 billion in December

2009.
329 This amount includes outstanding principal and capitalized interest, net of unamortized deferred commitment fees and allowance for
loan restructuring.
330 While FRBNY was authorized to provide a loan to Maiden Lane II up to $22.5 billion, it lent only $19.5 billion of this amount.
331 As of December 31, 2009, the outstanding principal amount was $15.739 billion, and the accrued interest payable to FRBNY was $265
million. The net portfolio holdings of Maiden Lane II as of December 31, 2009, as defined by FRBNY, were $15.697 billion.
332 While FRBNY was authorized to provide a loan to Maiden Lane III up to $30 billion, it lent only $24.3 billion of this amount.
333 As of December 31, 2009, the outstanding principal amount was $18.159 billion, and the accrued interest payable to FRBNY was $340
million. The net portfolio holdings of Maiden Lane III as of December 31, 2009, as defined by FRBNY, were $22.660 billion.

hsrobinson on DSK69SOYB1PROD with HEARING

b. Disposal of Assets and Recovery of Expended
Amounts
The Administration and Treasury in particular have articulated
the view that public ownership of financial institutions is not a policy objective.334 While public ownership has been the outcome of
the federal government’s intervention in AIG, the primary objective
of Treasury and the Federal Reserve with respect to AIG is to stabilize the company enough to replace federal government assistance with private sector resources in order to create a ‘‘more focused, restructured, and viable economic entity as rapidly as possible.’’ 335
Treasury’s approach to its AIG investment now seems to have
shifted from balancing its three pillars of asset management to a
strategy based largely on preventing the detrimental effect on market confidence that would result if Treasury were to not deliver on
its promise to provide financial assistance, as well as preserving
the value of its investment.336 The public purpose in keeping the
AIG parent company solvent, therefore, is based on the govern334 Agency Financial Statement 2009, supra note 32; Allison Testimony before House Oversight and Government Reform Committee, supra note 118, at 5. The Administration has also
articulated a set of four guidelines that will govern its approach to managing ownership interests in financial and automotive companies. These include a desire not ‘‘to own equity stakes
in companies any longer than necessary,’’ and the objective ‘‘to dispose of its ownership interests
as soon as practicable.’’ White House, Fact Sheet: Obama Administration Auto Restructuring Initiative General Motors Restructuring (June 30, 2009) (online at financialstability.gov/latest/
05312009lgm-factsheet.html) (listing the guidelines governing the government’s ownership interests in financial institutions and automotive companies).
335 AIG Restructuring Plan Announcement, supra note 311.
336 Treasury conversations with Panel staff (Dec. 15, 2009).

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56
ment’s initial decision to not let AIG fail in September 2008, and
if the U.S. government were to act otherwise, it would jeopardize
not only its financial credibility, but also the value of its sizeable
investment.337
Earlier government pronouncements with respect to divestment
included maximizing value as an objective. In 2008, Treasury and
the Federal Reserve noted that the federal government ‘‘intends to
exit its support of AIG over time in a disciplined manner consistent
with maximizing the value of its investments and promoting financial stability.’’ 338 At the beginning of 2009, the focus appeared to
shift somewhat with the change in the overall market situation, toward a faster exit to the extent possible without destabilization.
Earlier this year, Secretary Geithner stated that the U.S. government ‘‘will continue our aggressive efforts to resolve the future status of AIG in a manner that will reduce the systemic risks to our
financial system while minimizing the loss to taxpayers. And we
will explore any and all responsible ways to accelerate this wind
down process.’’ 339 Moreover, when asked whether he would like to
see AIG ‘‘prosper, make a lot of money again and be successful’’ in
a recent Meet the Press interview, Secretary Geithner commented
that he would like to see AIG ‘‘bring down the risk that brought
that company to the edge of collapse and to restructure its business
so the taxpayer can get out.’’ 340 Treasury’s focus is clearly on medium-term exit rather than long-term investment, although AIG is
not expected to fully repay the government’s assistance for several
years.341
Similar to the CPP Preferred, the AIGIP/SSFI Preferred shares
have no mandatory redemption date, and can be disposed of, at
least in theory, to third parties.342 FRBNY’s Revolving Credit Facility is available until September 16, 2013. The government agencies are not, however, intending to remain involved in AIG through
that date.
While Treasury’s objective is to make an orderly exit ‘‘as soon as
practicable,’’ Treasury understands that the government’s exit from
AIG is constrained by the same factors that prompted the government to provide AIG with assistance in late 2008—the threat of
continued downgrades in the company’s credit ratings and the loss
in market confidence that would cause. Credit rating agencies such
as Moody’s have indicated that AIG’s current credit ratings are
maintained only because of the extraordinary government assistance,343 making the government extra cautious about any pre-

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337 Treasury

conversations with Panel staff (Dec. 15, 2009).
338 Board of Governors of the Federal Reserve System, Federal Reserve Board and Treasury
Department Announce Restructuring of Financial Support to AIG (Nov. 10, 2008) (online at
www.federalreserve.gov/newsevents/press/other/20081110a.htm); Treasury conversations with
Panel staff (Dec. 3, 2009).
339 U.S. Department of the Treasury, Letter from Secretary Geithner on AIG to House Speaker
Nancy Pelosi (Mar. 17, 2009) (online at www.treas.gov/press/releases/tg61.htm).
340 Interview with Treasury Secretary Timothy F. Geithner, Meet the Press with David Gregory, NBC (Nov. 1, 2009) (online at www.msnbc.msn.com/id/33562673/ns/meetlthelpress/).
341 Treasury conversations with Panel staff (Dec. 16, 2009); Treasury conversations with Panel
staff (Dec. 3. 2009).
342 See Securities Purchase Agreement dated as of April 17, 2009 between American International Group, Inc. and United States Department of the Treasury, at § 4.9 (online at
www.financialstability.gov/docs/agreements/Series.F.Securities.Purchase.Agreement.pdf).
343 Treasury conversations with Panel staff (Dec. 16, 2009); Treasury conversations with Panel
staff (Dec. 3, 2009); see Moody’s Investors Service, Issuer Comment: Moody’s sees AIG holding
its ground through 3Q09 (Nov. 9, 2009) (hereinafter ‘‘Moody’s sees AIG holding its ground

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mature exit that might trigger a ratings downgrade and thereby
destabilize AIG and the financial system. In Treasury’s view, therefore, the key to allowing the government to exit in an orderly fashion is to do so in a manner that allows AIG to maintain its credit
ratings on a stand-alone basis and to remain well-capitalized without government assistance.344 Given the extraordinary government
assistance provided to AIG, such an exit will take time to effectuate, but Treasury believes that it is the optimal way to protect
the value of its investments and to avoid causing a loss in market
confidence, as discussed above.345
Treasury’s AIGIP/SSFI investments are junior to the FRBNY’s
revolving credit facility, which is collateralized by all the assets of
AIG and of its principal non-regulated subsidiaries. This means
that AIG’s repayment of Treasury’s AIGIP/SSFI equity investments
can only occur after it has completely repaid the Revolving Credit
Facility.
The Federal Reserve expects that the Revolving Credit Facility
will be repaid from the proceeds of the sale of certain of AIG’s assets and businesses, including the future initial public offerings of
its two insurance company subsidiaries, the American International Assurance Company Ltd. (AIA) and the American Life Insurance Company (ALICO),346 the timing of which is contingent
upon market conditions.347 As discussed above, the ceiling on this
facility has been reduced gradually as a result of several
restructurings since September 2008, as well as certain asset sales
that have already occurred, and currently stands at $35 billion, of
through 3Q09’’); Moody’s Investors Service, Issuer Comment: AIG shows signs of stabilization but
risks remain, says GAO (Sept. 28, 2009) (hereinafter ‘‘AIG shows signs of stabilization but risks
remain’’).
344 Treasury conversations with Panel staff (Dec. 3, 2009).
345 Treasury conversations with Panel staff (Dec. 16, 2009).
346 With respect to the Maiden Lane facilities, FRBNY anticipates that its loans to Maiden
Lane II LLC and Maiden Lane III LLC, both of which have six-year terms but may be extended
at the Federal Reserve’s discretion, will be repaid with the proceeds from the interest and principal payments or proceeds from the liquidation of the assets held by the facilities. Letter from
Scott G. Alvarez, general counsel, Board of Governors of the Federal Reserve System, and Thomas C. Baxter, Jr., general counsel, Federal Reserve Bank of New York, to Neil Barofsky, special
inspector general, Troubled Asset Relief Program (Nov. 15, 2009). FRBNY has retained
BlackRock Financial Management Inc. to manage the Maiden Lane II and III asset portfolios,
with the objective of maximizing long-term cash flows to pay the loans (including principal, interest, and contingent interest), while ‘‘refraining from investment actions that would disturb
general financial market conditions.’’ Federal Reserve Bank of New York, Maiden Lane II Transactions (online at www.newyorkfed.org/markets/maidenlane2.html); Federal Reserve Bank of
New York, Maiden Lane III Transactions (online at www.newyorkfed.org/markets/
maidenlane3.html). The Federal Reserve has indicated that it plans to hold the Maiden Lane
assets until they mature or increase enough in value so as to allow the Federal Reserve to maximize its recovery through asset sales. AIG Restructuring Plan Announcement, supra note 311.
While these steps will take time, FRBNY expects that the proceeds from the asset sales ‘‘should
enable AIG to repay the New York Fed in full.’’ House Committee on Financial Services, Testimony of William C. Dudley, president and chief executive officer of the Federal Reserve Bank
of New York, Oversight of the Federal Government’s Intervention at American International
Group, 111th Cong., at 2 (Mar. 24, 2009) (hereinafter ‘‘Dudley Testimony before House Financial
Services Committee’’); Senate Committee on Banking, Housing, and Urban Affairs, Testimony
of Donald L. Kohn, vice chairman, Board of Governors of the Federal Reserve System, American
International Group: Examining what went wrong, government intervention, and implications for
future regulation, 111th Cong., at 10 (Mar. 5, 2009) (online at banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStorelid=aa8bcdf2-f42b-4a60-b6f6-cdb045ce8141) (stating that the investment manager for FRBNY projects that the Maiden Lane II and Maiden Lane
III loans ‘‘will be repaid over time with no loss to the taxpayer,’’ even under highly stressed
scenarios).
347 Federal Reserve Board authorizes lending to AIG, supra note 110.

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which $22 billion, including principal and interest, but net of any
fees, is outstanding.348
Once AIG repays the Revolving Credit Facility in full and thereby reduces its leverage, Treasury expects that AIG will be able to
access the capital markets on its own and consider different capital
market strategies to begin repaying its obligations to Treasury.349
As Assistant Secretary Allison stated, ‘‘[u]pon the repayment in full
of its debt to the FRBNY, AIG will then focus on building value in
its remaining insurance businesses, Chartis, Domestic Life and Retirement Services and American General and Valic, as well as
ILFC, its aircraft leasing business, and American General, its consumer finance business.’’ 350 Treasury has indicated, however, that
among the strategies AIG may pursue to facilitate the repayment
of the AIGIP/SSFI Preferred is a recapitalization pursuant to which
all or a portion of them would be converted into common stock.351
Such a recapitalization would boost AIG’s capital ratios, further
buttressing its ability to maintain an investment grade rating on
a stand-alone basis and facilitating Treasury’s exit from its investment by permitting it to sell common stock on the New York Stock
Exchange as market conditions permit.352
The stabilization of AIG ‘‘so that it no longer poses a disruptive
threat’’ 353 to the financial system and the economy will inevitably
be a multi-year process.354 This is especially the case given the current market conditions and continued economic uncertainty. As
Ben S. Bernanke, chairman of the Board of Governors of the Federal Reserve System, testified, ‘‘[h]aving lent money to avert the
risk of a global financial meltdown, we found ourselves in the uncomfortable situation of overseeing both the preservation of its
value and its dismantling, a role quite different from our usual activities.’’ 355 Chairman Bernanke further stated that ‘‘[u]sing our
rights as a creditor, we have worked with AIG’s new management
team to begin the difficult process of winding down [AIG Financial
Products] and to oversee the company’s restructuring and divestiture strategy.’’ 356
For its part, AIG has offered some insight into how it expects to
become profitable enough so that it can repay its government as348 For further discussion of the terms and current status of the revolving credit facility, see
footnote 311.
349 Treasury conversations with Panel staff (Dec. 16, 2009); Treasury conversations with Panel
staff (Dec. 3, 2009). For further discussion on Treasury’s recently published financial statements
which shows Treasury’s view as to the expected loss amount from TARP AIGIP investments in
AIG, see Section D.6, infra.
350 Allison Testimony before House Oversight and Government Reform Committee, supra note
118, at 11.
351 Treasury conversations with Panel staff (Dec. 16, 2009).
352 Treasury conversations with Panel staff (Dec. 16, 2009); see also Allison Testimony before
House Oversight and Government Reform Committee, supra note 118, at 11 (stating that ‘‘AIG
and Treasury are in active, ongoing discussions with regard to strategies to allow Treasury to
monetize its investment in AIG, once the FRBNY has been paid in full’’).
353 Dudley Testimony before House Financial Services Committee, supra note 346.
354 Treasury conversations with Panel staff (Dec. 3, 2009). Then-CEO Edward Liddy testified
in May that he expects AIG to take three to five years to complete its restructuring and repay
Treasury and the Federal Reserve. House Committee on Oversight and Government Reform,
Testimony of Edward Liddy, chief executive officer of AIG, AIG: Where is the Taxpayer Money
Going?, 111th Cong. (May 13, 2009) (online at oversight.house.gov/images/stories/documents/
20090512165421.pdf).
355 House Committee on Financial Services, Testimony of Ben S. Bernanke, chairman of the
Board of Governors of the Federal Reserve System, Oversight of the Federal Government’s Intervention at American International Group, 111th Cong., at 4 (Mar. 24, 2009).
356 Id.

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sistance. Since September 2008, the company has been focused on
executing an asset disposition plan, preserving and enhancing the
value of key business operations, and placing the company on a
path toward future profitability.357 AIG Chief Executive Officer
Robert Benmosche states that his immediate concerns are to restore stability and profitability to the company.358 At a town hallstyle meeting for company employees held in August 2009, Mr.
Benmosche stated that the company plans to rebuild businesses
and will not be pressured by the federal government into selling assets at ‘‘unfavorable prices.’’ 359 AIG owes ‘‘the U.S. government a
lot of money and we are not going to be able to pay it back just
by our profits,’’ he said, and, AIG ‘‘will sell some of the company
off but only at the right time at the right price.’’ 360 With respect
to the winding down of AIG Financial Products (AIGFP), the business unit whose derivative trades in part brought AIG to the brink
of collapse, Mr. Benmosche has emphasized maximizing asset values rather than selling the assets with speed.361 Furthermore, Mr.
Benmosche has postponed planned sales of an investment-advisory
unit and AIG’s two Japanese life insurance companies, in order to
build value in those assets. While the restructuring is still taking
place, Mr. Benmosche’s recent statements suggest that AIG is moving away from the path set by former Chief Executive Officer Edward Liddy, who planned to sell off units last year before they lost
value, but then delayed those plans as deteriorating economic conditions interfered with the company’s ability to engage in such
sales. In AIG’s view, the company has stabilized significantly from
where it was a year ago, and even six months ago.362 AIG management also believes that the current amount of U.S. government assistance is ‘‘sufficient for the restructuring process.’’ 363
The Trust Shares will be disposed of separately. They are held
in a trust for the benefit of the United States Treasury, overseen
by three independent trustees.364 Pursuant to the terms of the
Credit Facility Trust Agreement, the trustees are responsible for
managing the equity stake in matters such as voting and for establishing a plan to dispose of the shares over time, but must refrain
357 AIG conversations with Panel staff (Dec. 11, 2009). See also American International Group,
AIG Reports Third Quarter 2009 Results (Nov. 6, 2009) (online at www.aigcorporate.com/investors/2009lNovember/AIG%203Q09%20Press%20Release.pdf) (hereinafter ‘‘AIG Reports Third
Quarter 2009 Results’’) (highlighting the progress AIG has made in its restructuring efforts).
AIG’s restructuring plan has four key goals:
(1) Creation of strong, more independent insurance businesses worthy of investor confidence
to stabilize and protect the value of AIG’s important franchise businesses.
(2) Divestment of assets and implementation of restructuring program to enable repayment
of loans made by the U.S. government.
(3) Comprehensive review of AIG’s cost structure to significantly reduce operating costs.
(4) Wind-down of AIG’s exposure to certain financial products and derivatives trading activities to reduce excessive risk.
American International Group, Inc., The Restructuring Plan (online at www.aigcorporate.com/
restructuring/index.html) (accessed Jan. 13, 2010).
358 Hugh Son and Boris Cerni, Benmosche Says He’ll Rebuild Units to Repay U.S., Bloomberg
(Aug. 20, 2009) (online at www.bloomberg.com/apps/news?pid=20601087&sid=aMclXyXbD2HA).
359 Id.
360 Id.
361 Id.; AIG conversations with Panel staff (Dec. 11, 2009).
362 AIG conversations with Panel staff (Dec. 11, 2009).
363 AIG conversations with Panel staff (Dec. 11, 2009).
364 The three independent trustees are Jill M. Considine, former chairman of the Depository
Trust & Clearing Corporation; Chester B. Feldberg, former chairman of Barclays Americas; and
Douglas L. Foshee, president and chief executive officer of El Paso Corporation. The Treasury
Department has no control over the trust and cannot direct the trustees.

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from interfering in the day-to-day management of the company.365
The Credit Facility Trust Agreement provides that the trustees
must act ‘‘in or not opposed to the best interests of Treasury.’’ 366
The Credit Facility Trust Agreement further stipulates that the
trustees cannot be Treasury or FRBNY employees.
The articulated justification for establishing a trust was to avoid
conflicts of interest. The Credit Facility Trust Agreement provides,
‘‘to avoid any possible conflict with its supervisory and monetary
policy functions, FRBNY does not intend to exercise any discretion
or control over the voting and consent rights associated with the
Trust Stock.’’ 367 In exercising their discretion under the Credit Facility Trust Agreement, the trustees are advised, however, that
FRBNY believes that AIG ‘‘being managed in a manner that will
not disrupt financial market conditions, [is] consistent with maximizing the value of the Trust Stock.’’ 368 Any proceeds from the ultimate sale of the Trust Shares will go directly to the U.S. Treasury.
While a trust structure does provide some important benefits and
value, the Panel notes that there have been various criticisms
raised about the AIG trust structure. As the Panel noted in its September Oversight Report, Professor J.W. Verret articulated three
criticisms of the AIG trust structure in his May 2009 testimony before the House Oversight and Government Reform Committee.369
First, he discussed how the AIG trustees are required to ‘‘manage
the trust in the best interests of Treasury, rather than the U.S.
taxpayers specifically.’’ 370 Second, he believes that the trust should
require the trustees to act to maximize the value for the trust
beneficiaries.371 Third, Professor Verret raised concerns that the
Trust Agreement might allow trustees to benefit personally from
investment opportunities that belong to AIG.372 Some members of
Congress have also raised concerns about the AIG trust structure.
Representatives Darrell Issa (R–CA) and Spencer Bachus (R–AL)
have sent letters to Treasury and SIGTARP calling for an audit of
the AIG trust and setting out criticisms of the trust structure, including the ‘‘lack of standard fiduciary duties,’’ the Trust’s ‘‘broad
365 AIG

Credit Facility Trust Agreement, supra note 313.
Credit Facility Trust Agreement, supra note 313. Note that the trust is for the benefit
of the United States Treasury, not the United States Department of the Treasury. The AIG
Credit Facility Trust Agreement uses both terms without explaining the distinction, leaving
some question as to whether the Treasury Department is the trust’s beneficiary. As noted above,
the Agreement stipulates that ‘‘any property distributable to Treasury as beneficiary hereunder
shall be paid to Treasury for deposit into the General Fund as miscellaneous receipts.’’ Id. at
§ 1.01.
367 AIG Credit Facility Trust Agreement, supra note 313; Dudley Testimony before House Financial Services Committee, supra note 346 (stating that ‘‘[i]n light of the inherent conflicts that
would arise from either the U.S. government or the Federal Reserve exerting ownership control
over the world’s largest insurer, the Federal Reserve, with the support of the Treasury Department, directed in the loan agreement that an approximately 79.9 percent equity interest in AIG
be issued to an independent trust established for the sole benefit of the United States Treasury’’).
368 AIG Credit Facility Trust Agreement, supra note 313, at 2.0.
369 House Oversight and Government Reform Committee, Testimony of Professor J.W. Verret,
Panel II: AIG: Where is the Taxpayer’s Money Going? (May 13, 2009) (online at
oversight.house.gov/images/stories/documents/20090512175538.pdf) (hereinafter ‘‘Verret Testimony before House Oversight and Government Reform Committee’’). Professor Verret is an assistant professor of law at George Mason University, and a senior scholar with the Mercatus
Center. He has also served as a consultant for SIGTARP and the GAO on a corporate governance audit for TARP-recipient institutions.
370 Id.
371 Id.
372 Id.

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366 AIG

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indemnification of the actions of the trustees,’’ and lack of accountability on the part of the trustees.373 Congressman Gerry Connolly
(D–VA) has expressed some concern that the AIG trustees are not
independent enough from the Federal Reserve, and do not have
enough power relative to the Federal Reserve in exercising their
duties.374 Furthermore, Congressman Edolphus Towns (D–NY),
chairman of the House Committee on Oversight and Government
Reform, and Congressman John Tierney (D–MA), have both expressed concerns about the actual level of power the trustees have
over AIG decisions, the degree of transparency and accountability
their decisions have, and the overall lack of clarity as to what role
they play.375
For its part, the GAO has noted that any trust raises some important efficiency and management concerns since the structure
takes control of the investment out of the government’s hands substantially and requires the trustees to ‘‘develop their own mechanisms to monitor the investments and analyze the data needed to
assess the financial condition of the institutions or companies and
decide when to divest.’’ 376
Additionally, tensions have arisen between AIG, trustees, and
other government regulators, despite the existence of a trust.377
Recent press reports indicating that one of the AIG trustees was
contemplating whether to resign suggest the potential conflicts between trustees and other government regulators (e.g., the special
master for compensation) that can arise even when a trust structure is used.

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c. Analysis of Intended Exit Strategy
Earlier this year, no real exit strategy was apparent with respect
to AIG. At the Panel’s hearing on April 21, 2009, Secretary
Geithner was unable to explain clearly the Administration’s exit
strategy.378 Secretary Geithner could only point to the fact that the
federal government ‘‘came into this financial crisis without a legal
framework that allowed it to intervene and manage more effec373 Letter from Representatives Spencer Bachus and Darrell Issa to Neil Barofsky (Aug. 31,
2009); see also Letter from Representatives Spencer Bachus and Darrell Issa to Secretary Timothy F. Geithner (Aug. 31, 2009).
374 See House Committee on Oversight and Government Reform, Transcript Statement of Representative Connolly, AIG: Where is the Taxpayer Money Going?, 111th Cong. (May 13, 2009)
(questioning the distinction between the role of the trustees and ‘‘those members of the Federal
Reserve who sit in on’’ every board and committee meeting).
375 See House Committee on Oversight and Government Reform, Transcript Statement of
Chairman Towns, AIG: Where is the Taxpayer Money Going?, 111th Cong. (May 13, 2009) (stating ‘‘I’m just thinking that if you are trustees of a company that has set a record in losses, it
seems to me you should have something to say—should put something somewhere. I mean, if
not, you should feel extremely guilty’’ and also commenting that ‘‘it’s not clear to me and other
members here exactly what you do in terms of your role that you’re playing in this’’); House
Committee on Oversight and Government Reform, Transcript Statement of Representative
Tierney, AIG: Where is the Taxpayer Money Going?, 111th Cong. (May 13, 2009).
376 U.S. Government Accountability Office, Troubled Asset Relief Program: Status of Government Assistance Provided to AIG, GAO–09–975, at 18 (September 2009) (online at www.gao.gov/
new.items/d09975.pdf) (hereinafter ‘‘GAO Report on AIG’’).
377 In recent weeks, AIG has seen the departures of some of its senior management, including
its vice chairman for legal, human resources, corporate affairs, and corporate communications,
and its chief compliance and regulatory officer. These employees resigned due to the reduction
in base salary that was mandated by Special Master for Compensation Kenneth Feinberg.
378 Congressional Oversight Panel, Testimony of Treasury Secretary Timothy F. Geithner
(Apr. 21, 2009) (online at cop.senate.gov/documents/transcript-042109-geithner.pdf) (in response
to question from Rep. Hensarling).

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tively the risk posed by institutions like AIG . . . We still do not
have that authority today.’’
While the legal framework necessary for proper resolution of a
large failing financial institution still does not exist, improvements
in market conditions have allowed Treasury to better articulate an
exit strategy for AIG. Treasury’s intent to balance taxpayer return,
institutional stability and systemic stability, however, tips in favor
of institutional and systemic stability, which at present are very
much the same thing. Treasury believes that AIG still represents
a significant systemic weakness and would be given non-investment credit ratings by the rating agencies without government support, and any exit strategy is constrained by that fact.379 Additionally, changing circumstances mean that Treasury’s exit strategy
has to be adjusted on a continuous basis. While the initial plan by
the Federal Reserve and Treasury was to sell off certain divisions
of AIG quickly, Treasury and the Federal Reserve indicated in
their March announcement that deteriorating economic conditions
(and the difficulty of obtaining reasonable prices) had interfered
with that objective. Their goal became reducing the size of AIG by
disposing of assets once the market improves.380 AIG has had
mixed success in some of its restructuring plans, such as separating and strengthening core insurance businesses, divesting assets, reducing operating expenses, and winding down its exposure
to certain financial products and derivatives trading activities in
order to reduce risk. Given the complexity and extensiveness of
AIG’s restructuring, however, this is a process that will take several years.381 Even some critics of the AIG bailout recognize that
the U.S. government cannot end its assistance to AIG anytime soon
because of the size of its assistance as well as continued economic
uncertainty.382
With respect to timing, as with most TARP-related investments,
the U.S. government has stated that it would like AIG to repay its
federal assistance ‘‘as soon as practicable’’ (and AIG has also indicated a desire to do so as soon as possible),383 but it seems likely
that a complete disposition of Treasury’s holdings in AIG will occur
over several years, especially in light of the size of its stake as well
as its objective to achieve ‘‘full repayment’’ of the government assistance that AIG has received.384 The Panel notes that the AIG

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379 Treasury

conversations with Panel staff (Dec. 1, 2009).
380 AIG Restructuring Plan Announcement, supra note 311; Participation in AIG Restructuring Plan Announcement, supra note 319.
381 See AIG Reports Third Quarter 2009 Results, supra note 357 (noting that AIG’s wind-down
has slowed as the company expects to accomplish its restructuring plan ‘‘over a longer time
frame than originally contemplated’’); Treasury conversations with Panel staff (Dec. 3, 2009);
Treasury conversations with Panel staff (Dec. 16, 2009).
382 Professor Charles Calomiris, Henry Kaufman Professor of Financial Institutions at Columbia Business School, made the following statement with respect to AIG on an NPR radio broadcast in March 2009: ‘‘I’ve made most of my career talking about the dangers of rewarding failure
in financial institutions. So it’s especially ironic that I’m here on your program telling people
that right now, that isn’t the right answer. Yes, it doesn’t feel very good, it creates bad incentives, too. . . . But right now, we have to also deal with what the cards that were dealt. And
the cards that we’re dealt is a financial system, the brain center of the economy, that’s desperately in need of propping up. And if we don’t prop it up, we’re the ones who are going to
not get credit. We’re the ones who are going to suffer the consequences of a very depressed economy for a very long time. We’re the ones who are going to lose our jobs, our homes and our
retirement savings.’’ Interview with Charles Calomiris, Talk of the Nation, NPR radio broadcast
(Mar. 17, 2009) (online at www.npr.org/templates/transcript/transcript.php?storyId=102006900).
383 AIG conversations with Panel staff (Dec. 11, 2009).
384 Dudley Testimony before House Financial Services Committee, supra note 346, at 2. However, even Treasury believes that achieving this goal is doubtful, as its recently published finan-

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intervention is somewhat unique in that it involves both Treasury
and FRBNY, meaning that the actions of both Treasury and
FRBNY have an impact on what the U.S. government holds and
what steps might be taken in the future.
A ‘‘buy-and-hold’’ strategy, which appears to be the objective of
Treasury and the Federal Reserve, has several advantages. First,
a satisfactory return on collateralized debt obligations (CDOs) and
residential mortgage-backed securities (RMBS) purchased by Maiden Lane II LLC and Maiden Lane III LLC will likely take time,
given the current difficulties in obtaining reasonable prices for
these types of assets.385 Second, a long-term approach may increase AIG’s ability to repay its obligations to the federal government as economic conditions continue to improve. ‘‘The slower approach to restructuring could help AIG to generate more favorable
values from its business portfolio than would be the case under
rushed asset sales,’’ Moody’s Investors Service has noted.386 Third,
Mr. Benmosche has cautioned that corporate earnings will likely
remain subject to ‘‘continued volatility’’ as the company continues
its restructuring process. In early March 2009, AIG announced a
loss of $61.7 billion for the fourth quarter of 2008, the largest quarterly corporate loss in U.S. history. AIG only recently posted a second consecutive quarterly profit. Since AIG continues to rely heavily on the federal government for liquidity and capital, it is still too
early to know whether this recent trend in earnings will continue.
While Treasury might consider selling now and realizing a loss
or pursuing an orderly liquidation of AIG’s businesses outside the
bankruptcy process, Treasury indicated that such options do not
seem feasible or practical given the company’s substantial connections to various parts of the insurance and financial products sectors.387 First, the value of the taxpayers’ investment in AIG would
be jeopardized substantially in a liquidation, since Treasury would
receive little or no value on its preferred securities holdings; moreover, market confidence could be shaken by any such action by
Treasury.388 Second, Treasury discussed how it reached a mutual
agreement with the Federal Reserve to assist AIG under a unique
set of circumstances, largely due to the systemic risk concerns created by the company’s substantial size and exposure to various sectors of the financial markets, including insurance and credit default swaps (CDS) and derivatives.389 In conversations with Panel
staff, Treasury staff emphasized that its exit from AIG is constrained by the impact of credit rating agency downgrades, which
would trigger the posting of additional collateral.390
cial statements show Treasury’s estimate of the expected loss from TARP AIGIP investments
in AIG. See Section D.6, infra.
385 The Federal Reserve Bank of New York stated that this equity interest ‘‘has the potential
to provide a substantial financial return to the American people should the $85 billion loan, as
anticipated, provide AIG with the intended breathing room to execute a value-maximizing strategic plan.’’ Federal Reserve Bank of New York, Statement by the Federal Reserve Bank of New
York Regarding AIG Transaction (Sept. 29, 2008) (online at www.newyorkfed.org/newsevents/
news/markets/2008/an080929.html).
386 Moody’s sees AIG holding its ground through 3Q09, supra note 343.
387 Treasury conversations with Panel staff (Dec. 16, 2009).
388 Id.
389 Id.; Treasury conversations with Panel staff (Dec. 3, 2009).
390 AIG entered into credit-default swaps with counterparties who were authorized to require
AIGFP to post collateral upon the occurrence of certain events relating to the underlying CDOs,
including declines in market value as well as credit rating downgrades. Treasury conversations
Continued

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While most of the initial focus in the AIG intervention was on
the AIGFP transactions, Treasury points out that the intervention
was also driven by the positions of AIG’s insurance companies.391
Four major subsidiaries are consolidated with AIG. While each is
functionally regulated by the states where it is licensed, and each
state imposes its own capital requirements, Treasury noted that
the subsidiaries’ viability and performance are subject to the capacity to maintain investment-grade credit. To some, the notion that
several insurance players could cause the system to be destabilized
substantially seems unlikely, given that insurance underwriters
and agencies have gotten into trouble many times before, and no
major crisis has resulted. Panel staff pressed this issue with Treasury, and Treasury’s response underscores how the entirety of its
exit strategy with respect to AIG is based on the reaction of the
credit rating agencies.392 In Treasury’s view, if the government
does anything to cause a substantial credit downgrade for the AIG
parent, it would result in an unraveling of the business of its subsidiaries. AIG has made efforts to sell two of its insurance subsidiaries (American International Assurance Company Ltd. (AIA), and
American Life Insurance Company (ALICO)) in order to create
some independence from the parent and AIGFP.393 The credit rating agencies have indicated that if AIG were to sell off the remaining two insurance subsidiaries, such actions would substantially affect AIG’s ongoing business and thereby trigger further downgrades,394 unless the proceeds of the sales would be sufficient to
pay off all of the company’s debt, which is not likely.395 While a
downgrade of a parent does not necessarily result in the downgrade
of a well-capitalized subsidiary, A.M. Best, a leading credit rating
agency for the insurance industry, indicated to Treasury that if the
parent is no longer rated investment grade, it would be very difficult to maintain an investment grade rating on a subsidiary.396
While policyholders would likely be protected in the event of a
downgrade, Treasury noted that, given that there are 130 million
AIG life insurance policyholders, there would be significant interruption in the flow of insurance claim payments as a result of any
such downgrade, at least for some time.397 This would result in a
with Panel staff (Dec. 3, 2009). A significant portion of AIGFP’s Guaranteed Investment Agreements (GIAs), structured financing arrangements and financial derivative transactions included
provisions that required AIGFP, ‘‘upon a downgrade of AIG’s long-term debt ratings, to post collateral or, with the consent of the counterparties, assign or repay its positions or arrange a substitute guarantee of its obligations by an obligor with higher debt ratings.’’ American International Group, 2008 Annual Report, Form 10–K, Item 7 (online at www.aigcorporate.com/
investors/annualreportslproxy.html). In addition, certain downgrades of AIG’s long-term senior
debt ratings (resulting from various default events, including bankruptcy due to dissolution, insolvency, appointment of a conservator, etc.) would permit either AIG or the counterparties to
elect early termination of contracts. See 1992 ISDA section 5. (Treasury confirmed that AIG had
contracts with this type of wording.)
391 Treasury conversations with Panel staff (Dec. 16, 2009); Treasury conversations with Panel
staff (Dec. 3, 2009).
392 Treasury conversations with Panel staff (Jan. 5, 2010).
393 Treasury conversations with Panel staff (Jan. 5, 2010). As discussed in Note 312, AIG recently decided to have a public stock offering for AIA on the Hong Kong stock exchange (which
might raise as much as $20 billion).
394 According to Treasury, such downgrades would also trigger the remaining AIGFP debt, resulting in the need to post more collateral as counterparties would terminate the Guaranteed
Investment Agreements (GIAs), structured financing arrangements and financial derivative
transactions.
395 Treasury conversations with Panel staff (Jan. 5, 2010).
396 Treasury conversations with Panel staff (Jan. 5, 2010).
397 Treasury conversations with Panel staff (Dec. 3, 2009).

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‘‘loss of confidence among policyholders,’’ and a possible run in the
insurance industry, similar to a bank run.398
Furthermore, AIG remains exposed to financial products, including over $1 trillion notional value of credit-default swaps and other
derivatives, according to Treasury.399 As a result of this exposure,
any credit rating downgrade would, in Treasury’s view, cause serious destabilization and volatility in those markets, as counterparties liquidated their contracts and asserted their claims.400 Additionally, Treasury noted that such circumstances could result in
real discontinuity in pricing, and not just among the counterparties.401 The Panel notes, however, that many of these contracts are
partially canceling, so AIG’s net notional exposure is much smaller
than the notional value articulated by Treasury. According to the
Depository Trust & Clearing Corporation, AIG’s CDS gross notional
outstanding and net notional outstanding were $82.4 billion and
$7.4 billion, respectively, as of December 31, 2009.402 The gross notional outstanding represents the aggregate dollar value exposure
on all CDS contracts. The net notional outstanding, however, represents the maximum funds that would be transferred on outstanding credit default swaps from net sellers to net buyers were
a credit event to occur on December 31, 2009.
In some ways, it is difficult to assess the progress that AIG itself
is making towards restructuring because recent changes in senior
management have altered the company’s direction. The Economist
has characterized AIG’s strategy as ‘‘oscillat[ing] between retrenchment and rebirth, depending on who is in charge on any given
day.’’ 403 Based upon the available information, however, it seems
that AIG’s revised restructuring strategy, as articulated by Mr.
Benmosche, has resulted in some progress in the company’s path
toward stabilizing and repaying at least part of its government assistance. In his recent testimony before the Panel, Secretary
Geithner discussed how the company’s new board and management
are ‘‘working very hard and effectively’’ at strengthening AIG’s core
insurance business while reducing the AIGFP portfolio.404

398 Agency

Financial Statement 2009, supra note 32.
conversations with Panel staff (Dec. 3, 2009); Treasury conversations with Panel
staff (Dec. 16, 2009).
400 Treasury conversations with Panel staff (Dec. 3, 2009).
401 Treasury conversations with Panel staff (Dec. 3, 2009).
402 See The Depository Trust & Clearing Corporation, Trade Information Warehouse Credit Derivatives Data Report, Table 6: Top 1000 Reference Entities (Gross and Net Notional) for the
Week
ending:
2010–01–01
(www.dtcc.com/products/derivserv/
dataltableli.php?id=table6lcurrent) (accessed Jan. 6, 2010). AIG’s CDS notional outstanding
figures include the CDS gross and net notional outstanding for American General Finance Corp.
and International Lease Finance Corp., both of whom are subsidiaries of AIG Capital Corp., a
subsidiary of AIG. The CDS securities for American General Finance Corp. and International
Lease Finance Corp. trade under their own unique CDS tickers but are underneath the corporate AIG, Inc. umbrella and, therefore, represent CDS exposure for AIG, Inc. The CDS gross
notional outstanding and net notional outstanding for these two subsidiaries comprise $38.3 billion and $3.5 billion of the total gross and net notional outstanding for AIG, Inc.
403 The Living Dead, The Economist (Nov. 5, 2009) (online at www.economist.com/opinion/
displaystory.cfm?storylid=14803171) (arguing that AIG is the ‘‘biggest financial zombie of all’’).
404 Agency Financial Statement 2009, supra note 32.

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399 Treasury

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FIGURE 12: NET INCOME/(LOSS) ATTRIBUTABLE TO AIG
[Dollars in millions]
Q1 2008

Net Income/(Loss)

$(7,805)

Q2 2008

$(5,357)

Q3 2008

Q4 2008

$(24,468)

$(61,659)

Q1 2009

Q2 2009

$(4,353)

$1,822

Q3 2009

$455

As noted above and shown in Figure 12, AIG has now posted two
consecutive quarterly profits. These earnings results prompted
Moody’s to maintain its credit ratings on AIG in early November
2009 after concluding that the company should be able to repay its
Federal Reserve loans and ‘‘much or all’’ of Treasury’s TARP investments if financial markets continue to stabilize.405 In discussing the profits, AIG management highlights the company’s retention of existing customers as well as its ability to attract new
customers.406 Through October 31, 2009, AIG had entered into
agreements to sell or complete the sale of operations and assets
that are expected to generate roughly $5.6 billion in proceeds that
will, upon closing, be used to repay outstanding borrowings and reduce the amount of the FRBNY revolving credit facility.407 There
are also some indications that AIG has garnered success in selling
fixed annuities to bank customers and that more insurance customers are keeping their policies with AIG, both of which might
provide some positive news for the company’s future. On the other
hand, the Panel cannot determine if this is due to good business
practices, or simply a result of government involvement. This uncertainty emphasizes once again the difficulty the U.S. government
faces in backing out of this involvement.
The Panel notes, however, that it is still too early to reach conclusions about the effectiveness of AIG’s restructuring, and that the
company continues to face steep obstacles in its restructuring efforts and path toward profitability. AIG’s restructuring plan still
relies heavily on government assistance, and it will take more than
two profitable earnings quarters for the company to stabilize and
be able to repay the entirety of its government support. As the
GAO noted recently, ‘‘[t]he sustainability of any positive trends of
AIG’s operations and repayment efforts is not yet clear. The government’s ability to recoup the federal assistance money depends
on the ‘‘long-term health of AIG, its sales of certain businesses, and
the maturation or sales of assets in the Maiden Lanes, among
other factors.’’ 408 In a recent interview, Mr. Benmosche stated that
the company remains too large and unwieldy. ‘‘I feel strongly that
AIG is too big today—it is extremely complex to manage and we
need to make sure it’s more transparent, that it’s smaller, and that
we can make it on our own,’’ he said.409 As noted above, AIG has
made some preliminary progress with respect to its commitment to
split off two sizeable foreign life insurance units, which it said previously would be broken off before the end of 2009. AIG’s assets,
405 See

Moody’s sees AIG holding its ground through 3Q09, supra note 343.
conversations with Panel staff (Dec. 11, 2009).
Reports Third Quarter 2009 Results, supra note 357; American International Group,
SEC Form 10–Q, Third Quarter 2009 (online at www.aigcorporate.com/investors/
2009lNovember/2517447l17501T04lCNB.pdf) (hereinafter ‘‘AIG SEC Form 10–Q’’).
408 GAO Report on AIG, supra note 376, at 51.
409 Serena Ng, AIG Chief: Key Staff Suffer Financially, Wall Street Journal (Dec. 15, 2009)
(online at online.wsj.com/article/SB10001424052748703954904574596501071391332.html).
406 AIG

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many of which are derivative contracts tied to mortgage debt, could
again lose value, or the company could be forced to take losses as
it sells them off. Another issue of some concern is AIG’s ability to
refinance debt obligations as they come due in coming years. The
AIG parent company and two of its business units face significant
maturities in the near term,410 and whether AIG has the capacity
to refinance these debt obligations remains to be seen. As it writes
down the value of sold-off assets, AIG’s ability to achieve a long
run of profitable quarters will be impacted. For example, as a result of its recently completed debt-for-equity swap involving its two
life insurance subsidiaries with FRBNY, AIG will take a $5.7 billion restructuring charge in the fourth quarter of 2009, which will
likely offset any profits AIG has made in this same period. It is
also unclear at this time whether and to what extent AIG will be
able to access the capital markets, a necessary step before it can
repay its AIGIP/SSFI assistance, and whether AIG will be able to
maintain its single ‘‘A’’ credit rating or face further downgrades. In
addition, much of the recent improvement in AIG’s financial condition can be reasonably attributed to the substantial Treasury and
Federal Reserve assistance that AIG has received since late
2008.411
The most troublesome part of AIG remains AIGFP.412 As of September 30, 2009, the notional amount of the AIGFP derivatives
portfolio had been reduced by 28 percent from December 2008, with
a 13 percent reduction in the third quarter of 2009 alone, but
Maiden Lane III had not eliminated AIGFP’s exposure to credit default swaps.413 In discussions with Panel staff, Treasury expressed
confidence that the entire AIGFP will be unwound by the end of
2010.414 However, a recent AIG filing with the SEC suggests that
it remains unclear whether AIG will need to post additional collateral if credit markets experience continued deterioration and,
hence, whether it will be exposed to further losses as well as risks
for a much longer period of time.415 Given the continued economic
uncertainty, AIGFP is unable to predict accurately when it will be
able to retire its credit default swap portfolio in full.
The Panel notes the steps the government has taken to address
AIG’s systemic risk concerns and prevent it from facing imminent
collapse again, including a significant amount of information shar410 American International Group, 2008 Annual Report, Form 10–K, at 274–75 (online at
phx.corporate-ir.net/External.File?item=
UGFyZW50SUQ9Mjg0NHxDaGlsZElEPS0xfFR5cGU9Mw==&t=1) (detailing aggregate annual
maturities of long-term debt obligations (based on final maturity dates); AIG conversations with
Panel staff (Dec. 16, 2009).
411 See Moody’s sees AIG holding its ground through 3Q09, supra note 343; AIG shows signs
of stabilization but risks remain, supra note 343 (noting that the U.S. government has continued
to serve as AIG’s primary liquidity and capital source and that the ‘‘restructuring plan still relies heavily on government support.’’ In addition, Moody’s Investors Service emphasizes that its
current ratings on AIG ‘‘reflect [its] understanding that the government is committed to working
with the firm to maintain its ability to meet obligations as they come due throughout the restructuring process’’); see also GAO Report on AIG, supra note 376, at 43–51.
412 The Panel notes that SIGTARP issued a recent audit discussing the government’s intervention in AIG and the controversy over AIG counterparty payments and why they were paid at
par value. See SIGTARP, Audit: Factors Affecting Efforts to Limit Payments to AIG Counterparties,
at
25
(Nov.
17,
2009)
(online
at
www.sigtarp.gov/reports/audit/2009/
FactorslAffectinglEffortsltolLimitlPaymentsltolAIGlCounterparties.pdf).
413 See AIG Reports Third Quarter 2009 Results, supra note 357; see also AIG SEC Form 10–
Q, supra note 407.
414 Treasury conversations with Panel staff (Dec. 16, 2009); Allison Testimony before House
Oversight and Government Reform Committee, supra note 118, at 11.
415 See AIG SEC Form 10–Q, supra note 407.

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ing between Treasury and FRBNY personnel with respect to the
monitoring of AIG’s restructuring process.416 These steps by themselves do not mean, however, that the government’s exit will come
quickly or that the decision to intervene in AIG will prove to be a
profitable one. As discussed above, there are significant obstacles
to the company’s restructuring process, and Treasury’s most recent
estimates are that some significant portion of those funds will
never be recovered.417 Treasury appears not, however, to have been
seeking to maximize profits in this intervention.418
Treasury and the Federal Reserve have taken extraordinary
steps to keep AIG from facing bankruptcy. As discussed above, the
government’s exit strategy has to be adjusted on a continuous basis
due to changing circumstances, meaning that AIG’s restructuring
is an iterative process. While neither AIG management nor Treasury believes that additional assistance is necessary at this time,
Treasury and FRBNY continue to monitor the company’s restructuring process and financial condition closely.419 Treasury remains
cognizant of the fact, however, that it will be difficult for the company ‘‘to prosper under [the U.S. government’s] majority ownership,’’ and Treasury expressed the view that the U.S. government
would rather make an orderly exit out of AIG ‘‘than [make] a lot
of money on it.’’ 420
7. Chrysler and GM
a. Acquisition of Assets and Current Value
The government’s holdings in Chrysler and General Motors (GM)
derive from a sequence of events that started in late 2008, described more fully in the Panel’s September report.421 Facing a
crippling lack of access to the credit markets due to the global financial crisis, Chrysler and GM appealed to Congress for assistance. The government eventually provided assistance under a new
TARP initiative, the Automobile Industry Financing Program
(AIFP). Chrysler and GM received bridge loans of $4 billion and
$19.4 billion,422 respectively.423

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416 Treasury

conversations with Panel staff (Dec. 16, 2009).
417 In its recently issued TARP financial statements for the year ended September 30, 2009,
Treasury noted that the prospect for full repayment from the AIGP is doubtful. Unlike its banking investments, for which it expects to make money, Treasury does not have the same level
of confidence with respect to its efforts to stabilize AIG. As of September 30, 2009, Treasury
reports that AIGIP will result in a net cost to the taxpayers of $30.427 billion. As Secretary
Geithner stated in his recent testimony before the Panel, ‘‘[t]here is a significant likelihood we
will not be repaid from our investments in AIG.’’ COP December Geithner Hearing Transcript,
supra note 210. Assistant Secretary Allison confirmed the likelihood of losses on AIG, ‘‘[b]ased
on current valuations,’’ in his recent testimony before the House Oversight and Government Reform Committee. Allison Testimony Transcript, supra note 135.
418 Treasury conversations with Panel staff (Dec. 16, 2009).
419 Treasury conversations with Panel staff (Dec. 16, 2009); AIG conversations with Panel staff
(Dec. 11, 2009); Allison Testimony Transcript, supra note 135 (noting that Treasury ‘‘believe[s]
that the investments [it] made should be adequate’’).
420 Treasury conversations with Panel staff (Dec. 16, 2009); see also Allison Testimony Transcript, supra note 135 (noting that ‘‘[t]he TARP investments were not made to make money but
to help avert a collapse of our financial system’’).
421 See COP September Oversight Report supra note 108, at 7–23.
422 Treasury invested an initial amount of $13.4 billion in December 2008, and had loaned an
additional $6 billion to GM by June 2009. See Agency Financial Statement 2009, supra note 32,
at 34.
423 For the terms of the loans, see generally U.S. Department of the Treasury, Loan and Security Agreement [GM] (Dec. 31, 2008) (online at www.financialstability.gov/docs/agreements/
GM%20Agreement%20Dated%2031%20December%202008.pdf) (hereinafter ‘‘Loan and Security
Agreement [GM]’’); U.S. Department of the Treasury, Loan and Security Agreement [Chrysler]

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The loans were extended to Chrysler and GM under terms and
conditions specified in separate loan and security agreements.
Under the initial agreements, the Bush Administration required
each company to demonstrate its ability to achieve ‘‘financial viability,’’ which was defined as ‘‘positive net value, taking into account
all current and future costs,’’ and the ability to ‘‘fully repay the
government loan.’’ 424 In February 2009, both companies submitted
plans for achieving financial viability, which were reviewed by officials in the Administration.
The Administration concluded that Chrysler could not achieve viability as a stand-alone company and that it would have to develop
a partnership with another automotive company or face bankruptcy.425 The Administration concluded that GM’s financial viability plan relied on overly optimistic assumptions about the company
and future economic developments.426
Ultimately, both companies entered bankruptcy and, with debtorin-possession financing provided by the federal government,427 underwent significant restructuring. In the GM bankruptcy, some of
the debt owed to the U.S. government was converted into equity.
All told, U.S. taxpayers expended $49.9 billion of TARP funds in
conjunction with GM’s bankruptcy and the subsequent creation of
what is called New GM.428 The Chrysler transactions expended
$12.8 billion of TARP funding. Today, the U.S. government owns:
• 10 percent of the common equity of Chrysler;
• $7.1 billion in debt securities of Chrysler; 429
• 60.8 percent of the common equity of GM;
• $5.7 billion in debt securities of GM; 430 and
• $2.1 billion in GM preferred stock, paying a dividend of
nine percent.431
The following table shows the government’s current holdings and
the amounts expended to acquire those holdings:
(Dec. 31, 2008) (online at www.financialstability.gov/docs/agreements/Chyslerl12312008.pdf)
(hereinafter ‘‘Loan and Security Agreement [Chrysler]’’).
424 White House, Fact Sheet: Financing Assistance to Facilitate the Restructuring of Auto Manufacturers to Attain Financial Viability (Dec. 19, 2008) (online at georgewbushwhitehouse.archives.gov/news/releases/2008/12/20081219-6.html). The loans also imposed conditions related to operations, expenditures, and reporting.
425 U.S. Department of the Treasury, Chrysler February 17 Plan: Determination of Viability,
at 1 (Mar. 30, 2009) (online at www.financialstability.gov/docs/AIFP/Chrysler-ViabilityAssessment.pdf).
426 U.S. Department of the Treasury, GM February 17 Plan: Determination of Viability, at 1
(Mar. 30, 2009) (online at www.financialstability.gov/docs/AIFP/GM-Viability-Assessment.pdf).
427 Treasury provided a total of $8.5 billion in working capital and exit financing to facilitate
Chrysler’s Chapter 11 restructuring. U.S. Department of the Treasury, AIFP Outlays for COP
(Aug. 18, 2009). It provided a total of approximately $30.1 billion of financing to support GM’s
Chapter 11 restructuring. See also Allison Testimony before House Oversight and Government
Reform Committee, supra note 118, at 4.
428 COP September Oversight Report, supra note 108, at 54.
429 The $7.1 billion debt security consists of a $6.6 billion new commitment and $0.5 billion
in assumed debt. As of December 31, 2009, Chrysler has drawn approximately $4.6 billion. See
Agency Financial Statement 2009, supra note 32, at 35.
430 As of December 31, 2009, the outstanding principal balance is $5.7 billion. See Agency Financial Statement 2009, supra note 32, at 34; see also U.S. Department of the Treasury, Treasury Receives First Quarterly Repayment from General Motors (Dec. 18, 2009) (online at
treasury.gov/press/releases/tg456.htm) (hereinafter ‘‘Treasury Receives First Quarterly Repayment from GM’’).
431 Agency Financial Statement 2009, supra note 32, at 34–35; see also Allison Testimony before House Oversight and Government Reform Committee, supra note 118, at 5.

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FIGURE 13: GOVERNMENT HOLDINGS IN CHRYSLER AND GM 432
Number/Principal
Amount 433

Asset

Chrysler:
Common Stock (Class A) ...................
Floating Rate Notes ...........................
Total ..........................................

434 96,461
435 $7,142,000,000

........................................

Acquisition Cost

Aggregate Value
as of 9/30/09

........................................
........................................
436 $12,810,284,222

........................................
........................................
........................................

........................................
........................................
........................................
439 $49,860,624,198
........................................

........................................
........................................
........................................
........................................
440 42,300,000,000

GM:
Preferred Stock ...................................
Common Stock ...................................
Floating Rate Notes ...........................
Total ..........................................
Total for All Assets .........

434 437 3,898,305
434 438 304,131,356

$5,711,864,407
........................................
........................................

432 In December 2009, SIGTARP released a report on the use of TARP funds for GM, Chrysler, GMAC, Chrysler Financial Services, the Hartford Financial Services Group and Lincoln National Corporation. According to the report, GM used the $49.5 billion it received to pay operating
costs, aid in the wind-down of old GM, settle derivative positions, fund foreign subsidiaries, and provide a loan to GM Canada. By November
18, 2009, Chrysler had used $10.5 billion of the total $12.5 billion in Treasury funds, primarily for operating costs. See SIGTARP, Additional
Insight
on
Use
of
Troubled
Asset
Relief
Program
Funds,
at
5–6
(Dec.
10,
2009)
(online
at
www.sigtarp.gov/reports/audit/2009/AdditionallInsightlonlUseloflTroubledlAssetlRelieflProgramlFunds.pdf). In addition, also in
December 2009, the OFS released the Agency Financial Report for the year ending September 30, 2009. The report discusses the automotive
industry financing program and associated programs, as well as the valuation methodology that OFS uses to account for the investments. See
Agency Financial Statement 2009, supra note 32, at 33–36 and 53.
433 This table only lists the government’s holdings in Chrysler Group LLC and General Motors Holdings LLC, the ‘‘new’’ car companies as
detailed in the Panel’s September report. See COP September Oversight Report, supra note 108, at 60–63. The government also holds claims
in Chrysler Holding LLC and Motors Liquidation Company, the ‘‘old’’ car companies, which are currently in the process of being liquidated in
bankruptcy. See TARP Transactions Report for Period Ending December 30, 2009, supra note 166. These claims will be administered by the
bankruptcy court and it is unlikely that the government will be repaid. See COP September Oversight Report, supra note 108.
434 Treasury conversations with Panel Staff (Dec. 3, 2009). This number represents numbers of shares of stock, rather than dollar values.
435 The $7.1 billion amount consists of a $6.6 billion new commitment and $0.5 billion in assumed debt. As of December 31, 2009, Chrysler has drawn approximately $4.6 billion. See Agency Financial Statement 2009, supra note 32, at 35.
436 This figure represents the total amount of funds provided to Chrysler through the AIFP. It does not reflect the $280 million repayment
made by Chrysler on July 10, 2009 or the $2.4 billion in Treasury commitments to Chrysler that were unused and de-obligated. See COP September Oversight Report, supra note 108, at 60.
437 Treasury conversations with Panel Staff (Dec. 3, 2009). This number represents numbers of shares of stock, rather than dollar values.
438 Treasury conversations with Panel Staff (Dec. 3, 2009).
439 This figure represents the total amount of funds provided to General Motors through the AIFP. It does not reflect the $361 million repayment made by GM on July 10, 2009, or the $1 billion repayment made in December 2009. See COP September Oversight Report, supra
note 108, at 62–63; see also Treasury Receives First Quarterly Repayment from GM, supra note 430.
440 Agency Financial Statement 2009, supra note 32, at 17.

Treasury’s holdings in the automotive companies cannot be ascribed a definitive value. As an initial matter, following bankruptcy
proceedings, the ‘‘good’’ assets in GM and Chrysler are now held by
private companies, sometimes referred to as New GM and New
Chrysler, and there is at present no market for either the common
or the preferred shares. Accordingly, there is no trading data on
which to base a valuation. The companies are reorganizing their
varying properties—intellectual, physical, and human capital—increasing the uncertainty of valuation. Further, in addition to the
difficulty in valuing the shares of private companies (much less
those in such flux as GM and Chrysler), valuation incorporates
many assumptions, such as market risk and projected cash flows.
Experts will use different methodologies and professional judgment
to formulate these assumptions and, thus, their results may vary.
The TARP financial statements reflect expected losses of $30.4 billion from GM and Chrysler as of September 30, 2009.441 Office of
Management and Budget (OMB) and Congressional Budget Office
(CBO) valuations of the taxpayer subsidy rate in automotive industry have produced varying results.442 Nevertheless, both OMB’s
441 See

Agency Financial Statement 2009, supra note 32, at 18.
OMB calculated separate subsidy rates for TARP investment debt and equity transactions at 49 percent and 65 percent, respectively, while the CBO estimated an aggregate credit
subsidy rate for all TARP automotive industry support programs of 73 percent. See COP September Oversight Report, supra note 108, at 55–56. See generally Office of Management and
Budget, The President’s Budget for Fiscal Year 2010, at 983 (May 2009) (online at
www.whitehouse.gov/omb/budget/fy2010/assets/tre.pdf); Congressional Budget Office, The Trou-

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442 The

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and CBO’s subsidy estimates imply there is a high likelihood the
initial TARP financing to GM and Chrysler will not be repaid.443
b. Disposal of Assets and Recovery of Expended
Amounts
As discussed above, it is unlikely that the taxpayers will recover
the whole of their TARP expenditure in the automobile companies.444 The money that can be recovered will come in two forms.
First, both companies are indebted to the government. They must
make enough money to pay principal and interest on that debt.
Second, the government owns equity in both companies. Treasury
must sell that equity in order to realize the taxpayers’ investment.
Repaying the debt merely depends on the company staying solvent
long enough to make payments. Getting a return on equity investment depends on the company actually doing well enough for its
stock price to increase: that is more directly linked to good corporate strategies. The companies’ strategies are, therefore, discussed below in the context of the equity investment.

hsrobinson on DSK69SOYB1PROD with HEARING

i. Debt
The complex events leading to Treasury’s loans to GM and
Chrysler have resulted in a variety of debts outstanding, with different borrowers, terms, and maturity periods.445 The initial loan
and securities agreements between Treasury and Old GM and
Treasury and Old Chrysler have substantially similar terms.446
Each agreement stipulates that the respective company may obtain
financing from time to time, on an as-needed basis, and sets forth
a process for each company to request such funding. For both Old
Chrysler and Old GM, Treasury loans made under the applicable
agreements accrue interest at the London Interbank Offered Rate
(LIBOR) plus 3 percent,447 subject to increase upon nonpayment or
default to the ordinary interest rate plus another 5 percent.448
These loans are secured by a lien on and security interest in all
the respective company’s assets, including, for example, cash and
cash equivalents, intellectual property rights and its corresponding
bled Asset Relief Program: Report on Transactions Through June 17, 2009 (June 2009) (online
at www.cbo.gov/ftpdocs/100xx/doc10056/06-29-TARP.pdf).
443 See COP September Oversight Report, supra note 108, at 55–56.
444 Further, in recent testimony, Assistant Secretary for Financial Stability Herbert Allison
stated that the losses from the disbursements to AIG and the auto companies were likely to
be $60 billion. See Allison Testimony Transcript, supra note 135.
445 See generally U.S. Department of the Treasury, Auto Industry Financing Program (online
at www.financialstability.gov/roadtostability/autoprogram.html) (updated Jan. 7, 2010).
446 See generally Loan and Security Agreement [Chrysler], supra note 423.
447 U.S. Department of the Treasury, Warrant Agreement Between General Motors Corporation
and the U.S. Department of the Treasury, Appendix A, at 1–5 (Dec. 2008) (online at
www.financialstability.gov/docs/ContractsAgreements/GMagreement.pdf) (hereinafter ‘‘Warrant
Agreement Between GM and Treasury’’); Loan and Security Agreement [Chrysler], supra note
423, at Appendix A. By way of comparison, in October 2008, the Prime Rate (the rate at which
banks make short term-loans to businesses) was 4.56 percent, while the one-month LIBOR was
2.58 percent at the end of October 2008, and had been 3.24 percent a week earlier. See Board
of Governors of the Federal Reserve System, Bank Prime Loan (Frequency: Monthly) (online at
www.federalreserve.gov/Releases/H15/data/Monthly/H15lPRIMElNA.txt) (accessed Jan. 4,
2010); Market Data Center, Money Rates, Wall Street Journal (Oct. 31, 2008) (online at
online.wsj.com/mdc/public/page/2l3020-moneyrate-20081031.html?mod=mdclpastcalendar). It
is difficult, however, to evaluate the rates given to the automobile companies against other loans
given the extraordinary nature of the circumstances and the credit crunch.
448 Warrant Agreement Between GM and Treasury, supra note 447, at 17; Loan and Security
Agreement [Chrysler], supra note 423, at 17.

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royalties, and all other tangible and intangible property.449 Subsequent credit agreements between Treasury and GM and Treasury
and Chrysler provide for an interest rate that resets each quarter
to the greater of three-month LIBOR or the floor (2 percent), plus
a percentage that differs depending on the company and, in Chrysler’s case, the tranche involved. The interest rates may be determined by reference to a variety of interest rate markers and provide for an increased rate in the event of default.450
Absent an event of default, GM’s loans mature on July 10,
2015.451 The credit agreement between Treasury and GM provides
for quarterly mandatory prepayments of $1 billion from existing escrow amounts in addition to the obligation for such funds to be applied to repay the loan by June 30, 2010, unless extended. Absent
an event of default, a portion of Chrysler’s loans mature in December 2011, with the balance becoming due in June 2017.452 However, in the event of default, any loans to either GM or Chrysler
would become immediately due and payable.453 Treasury may
transfer any or all of its rights under the debt instruments at any
time. Chrysler and GM, however, may only transfer their rights
and obligations with the prior written consent of Treasury.454
In testimony before the Panel in July, Senior Advisor to the Secretary of the Treasury Ron Bloom, now also senior counselor on
manufacturing policy,455 expressed reservations about the likelihood of taxpayers recouping the entirety of their investment in
Chrysler and GM: ‘‘[U]nder certain assumptions, GM may be able
to pay off a high percentage of the total funds advanced by the taxpayers. Less optimistic, and in Treasury’s view more likely, scenarios involve a reasonable probability of repayment of substantially all of the government funding for new GM and new Chrysler,
and much lower recoveries for the initial loans.’’ 456 As of the end
449 Warrant Agreement Between GM and Treasury, supra note 447, at 29–30; Loan and Security Agreement [Chrysler], supra note 423, at 29–30.
450 Specifically, the interest rate may switch from the three-month Eurodollar Rate to the Alternate Base Rate (the higher of the Prime Rate announced by JPMorgan Chase Bank or the
federal funds rate plus 50 basis points). In an event of default, the interest rate for both companies resets to the then-applicable interest rate plus 2 percent. See U.S. Department of the Treasury, Second Amended and Restated Secured Credit Agreement among General Motors Co., the
Guarantors, and the United States Department of the Treasury, at section 2 (Aug. 12, 2009) (online
at
www.financialstability.gov/docs/AIFP/Binder1%20Second%20AR%20Credit
%20Agreement%20and%201-4%20Amendments%2011-23-09.pdf) (hereinafter ‘‘Second Amended
and Restated Credit Agreement’’); First Lien Credit Agreement among New Carco Acquisition
LLC and the Lenders Party Thereto Dated as of June 10, 2009, at section 2 (online at
www.financialstability.gov/docs/AIFP/4.%20Newco%20Credit%20Agreement.PDF). See also COP
September Oversight Report, supra note 108, at 66.
451 See Second Amended and Restated Credit Agreement, supra note 450, at section 2. The
original loans to Old GM mature on December 30, 2011. See Warrant Agreement Between GM
and Treasury, supra note 447, at 1.
452 See Allison Testimony before House Oversight and Government Reform Committee, supra
note 118, at 12.
453 See Warrant Agreement Between GM and Treasury, supra note 447, at 2.
454 See Warrant Agreement Between GM and Treasury, supra note 447, at 66; Loan and Security Agreement [Chrysler], supra note 423.
455 White House, President Obama Names Ron Bloom Senior Counselor for Manufacturing Policy (Sept. 7, 2009) (online at www.whitehouse.gov/thelpressloffice/President-Obama-NamesRon-Bloom-Senior-Counselor-for-Manufacturing-Policy/).
456 Congressional Oversight Panel, Transcript Testimony of Ron Bloom, Senior Advisor to the
Secretary of the Treasury and Senior Counselor on Manufacturing Policy, Field Hearing: Oversight of TARP Assistance to the Automobile Industry, 111th Cong. (July 27, 2009) (online at
cop.senate.gov/documents/transcript-072709-detroithearing.pdf ) (hereinafter ‘‘Ron Bloom Transcript Testimony’’).

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of 2009, Treasury has stated that it does not believe that there has
been any material change to this assumption.
For its part, Chrysler has expressed confidence that it will ‘‘make
good on the public’s investment as the economy begins to recover
and financing becomes available to dealers and consumers.’’ As Jan
Bertsch, a senior vice president of Chrysler, explained in her testimony at the Panel’s July hearing: ‘‘Our debt to the U.S. Treasury
is due in several different tranches. One would be in 2011, again
in 2016, and 2017. Our goal would definitely be, if possible, to pay
that back early. Part of the reason is the interest cost to the company is not immaterial, and so based on the interest rates that we
are paying, I think that it would be one of our definite goals to pay
that back early. But we see no issue in paying it back on time, certainly.’’ 457
On December 1, 2009, GM replaced then-CEO Fritz Henderson
with Edward Whitacre,458 who has since said that GM is considering repaying the (now) $5.7 billion it owes the government under
the secured notes through a lump-sum payment,459 and has stated
that GM will repay by June 2010.460 It should be noted, however,
that GM is not yet making any profits, and the payment will come
from an escrow account established as part of the bankruptcy reorganization,461 so that GM could not, strictly speaking, be said to
be earning money to pay the taxpayer.462

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ii. Equity
The Treasury auto team expects that both companies will eventually access the equity capital markets through IPOs,463 and as a
result, successful IPOs will form the basis for the recovery of the
taxpayers’ money. This strategy hinges directly on the ability of the
two companies to restructure and become profitable. At the mo457 Congressional Oversight Panel, Transcript Testimony of Jan Bertsch, Chrysler Senior Vice
President and Treasurer, Field Hearing: Oversight of TARP Assistance to the Automobile Industry, 111th Cong., at 82 (July 27, 2009).
458 See General Motors, Statement Attributed to Chairman Ed Whitacre (Dec. 1, 2009) (online
at media.gm.com/content/media/us/en/news/newsldetail.brandlgm.html/content/Pages/news/us/
en/2009/Dec/1201lGMlFritz).
459 See General Motors, GM CEO and Chairman Ed Whitacre: GM Leaders Expected to Show
Quick Results (Dec. 9, 2009) (online at media.gm.com/content/media/us/en/news/
newsldetail.brandlgm.html/content/Pages/news/us/en/2009/Dec/1209lwebchat). GM has since
repaid $1 billion of the sums outstanding. See Treasury Receives First Quarterly Repayment
from GM, supra note 430.
460 See General Motors, Statement Attributed to Chairman and Chief Executive Officer Ed
Whitacre
(Dec.
18,
2009)
(online
at
media.gm.com/content/media/us/en/news/
newsldetail.brandlgm.html/content/Pages/news/us/en/2009/Dec/1218lrepayment).
461 Proceeds in the amount of $16.4 billion from the $30.1 billion debtor-in-possession facility
were deposited in escrow and will be distributed to GM at its request if the following conditions
are met: (1) the representations and warranties GM made in the loan documents are true and
correct in all material respects on the date of the request; (2) GM is not in default on the date
of the request taking into consideration the amount of the withdrawal request; and (3) the
United States Department of the Treasury (UST), in its sole discretion, approves the amount
and intended use of the requested disbursement. U.S. Securities and Exchange Commission,
General Motors Co. Form 8–K (Sept. 2, 2009) (online at www.sec.gov/Archives/edgar/data/
1467858/000119312509220534/0001193125-09-220534-index.htm) (hereinafter ‘‘General Motors
Co. Form 8–K’’).
462 General Motors Co. Form 8–K, supra note 461; Allison Testimony before House Oversight
and Government Reform Committee, supra note 118, at 12. In December, 2009, GM made the
first of its quarterly payments to Treasury. See Treasury Receives First Quarterly Repayment
from GM, supra note 430.
463 See COP September Oversight Report, supra note 108, at 68–70. Chrysler and GM will require initial public offerings in order to become publicly-traded and access the capital markets.
As part of the bankruptcy proceeding, both Chrysler and GM sold the majority of their assets
to private companies. These companies are not public: they are neither SEC-registrants nor
traded on any exchange.

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ment, in a still-constrained credit market, and with the two companies facing pressure to rebuild themselves and under the perceived
threat of political interference,464 it is unclear whether either company in its current form could access the banks or the capital markets in the amounts and on the terms that they would require.
Since the public offering of these companies is the primary method
for recovery of taxpayers’ money, delays in or hindrances to accessing the capital markets will prolong Treasury’s involvement as a
shareholder, leading to greater uncertainty, both for the companies
and for Treasury.
Following the completion of a successful IPO, the Treasury auto
team has made clear that it intends to dispose of Treasury’s ownership stakes in Chrysler and GM ‘‘as soon as is practicable.’’ At least
with respect to GM, where Treasury holds 60.8 percent of the company, Treasury does not expect to sell its entire stake in the
IPO.465 The Stockholders Agreement calls for Treasury to use reasonable best efforts to effect an IPO by July 10, 2010.466 In its
Shareholder’s Agreement, Chrysler has agreed to file a shelf registration statement with the SEC either six months after an IPO
or on January 1, 2013, whichever is earlier.467
The Treasury auto team has not ruled out other ways of exiting
ownership of these companies and returning them to private hands,
but options such as selling Treasury’s stake to private equity investors seem unlikely at present.468 Treasury’s stake in Chrysler is
small enough that Treasury believes that it could exit ownership
of Chrysler promptly upon Chrysler’s filing of a shelf registration
statement. As noted above, Treasury’s stake in GM is sufficiently
large that it would be extremely difficult for Treasury either to find
a buyer or buyers, and it is not clear whether significant sales
would have a destabilizing effect on GM or on the markets. Treasury has stated, however, that when it is able to sell, it should do
so in a transparent and open manner so as to avoid additional destabilization.469
464 See COP September Oversight Report, supra note 108, at 68–69. Pursuant to its operating
agreement, GM will attempt to make a reasonable best efforts IPO by July 10, 2010. See Allison
Testimony before House Oversight and Government Reform Committee, supra note 118, at 12.
465 See Allison Testimony before House Oversight and Government Reform Committee, supra
note 118, at 12.
466 Stockholders Agreement by and among General Motors Company, United States Department
of the Treasury, 7176384 Canada Inc., and UAW Retiree Medical Benefits Trust, at 8 (July 10,
2009) (online at www.sec.gov/Archives/edgar/data/1467858/000119312509150199/dex101.htm)
(hereinafter ‘‘GM Stockholders Agreement’’); see also Agency Financial Statement 2009, supra
note 32, at 44.
467 Under the terms of the Chrysler Shareholders Agreement, Treasury can require Chrysler
to file a registration statement under the Securities Act of 1933 (a ‘‘demand registration’’); in
the case of an IPO, such demand notice can only be delivered by either (a) one or more holders
holding 10 percent or more of the equity securities, or (b) both Treasury and Canada. Shareholders Agreement Among Fiat Newco, United States Department of the Treasury, UAW Retiree
Medical Benefits Trust, Canada Development Investment Corporation, and the Other Members
Party Hereto, at section 3.2(a)(i) (filed May 12, 2009) In Re Chrysler LLC, S.D.N.Y. (No. 09 B
50002 (AJG)) (online at www.chryslerrestructuring.com/). Treasury cannot seek more than one
demand registration in any 12-month period, and cannot request more than five. Id., at section
3.2(a)(ii).
468 At a July 29, 2009 briefing with Panel staff, Treasury and Task Force staff indicated that,
at least at that point, no private equity investor has come along with demonstrated interest in
investing in these companies, and as of the end of 2009, this remains unchanged. Treasury conversations with Panel staff (Dec. 22, 2009). See generally Section D.7(c), infra.
There are also several pre-IPO contractual limitations on the public sale of Treasury’s ownership stakes in GM that are set out in the Stockholders Agreement. See GM Stockholders Agreement, supra note 466, at 8–9.
469 Treasury conversations with Panel staff (Dec. 22, 2009).

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In making the decision—or decisions—to sell the equity stakes
that it holds in the automotive companies, Treasury will have to
balance the desire to exit as soon as practicable, as articulated by
the President and the head of the Treasury auto team,470 with the
need to maximize the return or minimize the loss to taxpayers, as
dictated by EESA.471 Maximizing returns may, however, argue for
holding the investments for longer than Treasury would otherwise
prefer, bringing these two goals into conflict. It is not easy to time
the markets, and Treasury cannot force Chrysler’s board, at least,
to engage in an IPO. Until the companies go public through the
IPO process, Treasury’s primary and perhaps only option is to sell
its stake privately, which, as discussed above, remains an unlikely
event, although of the two, it would be more likely that Treasury
could sell the Chrysler stake privately. Once the companies become
public companies subject to SEC reporting requirements, Treasury’s options would be somewhat broader. Subject to certain conditions, Treasury could sell large stakes in SEC-registered secondary
offerings.472 Treasury could also sell smaller amounts of shares
into the public markets.473
Until it exits ownership of Chrysler and GM, Treasury will continue to be a substantial shareholder of these companies; however,
Treasury does not intend to take the activist role commonly associated with large private shareholders.474 Mr. Bloom, who was appointed to lead the Treasury auto team, has stated that President
Obama gave the Task Force two directives regarding its approach
to the automotive restructurings. First, the Task Force was to
avoid intervening in the day-to-day corporate management of GM
and Chrysler, and instead act as ‘‘a potential investor of taxpayer
resources’’ with the goal of promoting profitable companies that
contribute to economic growth without taxpayer support.475 Second,
the Task Force was to ‘‘behave in a commercial manner.’’ 476 The
Panel noted the tension between these dual roles in its September
oversight report. President Obama has stated that each company’s
470 See White House, Remarks by the President on General Motors Restructuring (June 1,
2009) (online at www.whitehouse.gov/thelpressloffice/Remarks-by-the-President-on-GeneralMotors-Restructuring/) (hereinafter ‘‘Remarks by the President on GM’’) (‘‘In short, our goal is
to get GM back on its feet, take a hands-off approach, and get out quickly.’’); see also COP September Oversight Report, supra note 108, at 69.
471 See 12 U.S.C. § 5213.
472 See Allison Testimony before House Oversight and Government Reform Committee, supra
note 118, supplemented by Treasury conversations with Panel staff (Dec. 22, 2009).
473 Shareholders that are ‘‘affiliates’’ of a company (in general, those with a significant stake
in the voting equity of the company, or the right to a board seat) may sell their shares in the
public markets without registration of the transaction with the SEC. SEC rules impose volume,
timing, and other restrictions on such sales. 17 CFR § 230.144 (2009). Any such sales by the
government are likely to have a significant impact on the securities market, which may suspect
a signal to the market with respect to the specific companies, the auto industries, or the economy in general. For this reason (and the general difficulty in timing the market discussed
above), holding these equity stakes in a trust, discussed in more detail below, might help to
manage the taxpayers’ stake more efficiently and maximize returns.
474 See Allison Testimony before House Oversight and Government Reform Committee, supra
note 118, at 5.
475 See Congressional Oversight Panel, Written Testimony of Ron Bloom, Senior Advisor to the
Secretary of the Treasury and Senior Counselor on Manufacturing Policy, Field Hearing: Oversight of TARP Assistance to the Automobile Industry, 111th Cong. (July 27, 2009) (online at
cop.senate.gov/documents/testimony-072709-bloom.pdf) (hereinafter ‘‘Ron Bloom Written Testimony’’).
476 See Senate Committee on Banking, Housing, and Urban Affairs, Testimony of Senior Advisor at the U.S. Department of the Treasury Ron Bloom, The State of the Domestic Automobile
Industry: Impact of Federal Assistance, 111th Cong. (June 10, 2009) (online at
banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStorelid=40341601-355c-4e6fb67f-b9707ac88e32).

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board of directors and management team are responsible for
achieving financial and operational restructuring as well as cultural changes at GM and Chrysler.477
Testifying before the Panel, Mr. Bloom reiterated that while the
government has a partial ownership stake in these companies, the
Task Force should manage its stake in a ‘‘hands off’’ manner, voting only on core governance issues such as the selection of directors
and other major corporate actions.478 Characterizing the Administration as a ‘‘reluctant shareholder’’ in GM and Chrysler, Mr.
Bloom also testified that Treasury would work with a ‘‘firm conviction to manage that investment commercially’’ and dispose of equity stakes ‘‘as soon as practicable.’’ 479 Further, the GM Shareholders’ Agreement provides that after GM’s IPO, Treasury will
only vote on certain matters, including elections to the board, certain major transactions, such as merger or dissolution, and matters
in which Treasury must vote its shares in order for the shareholders to take action. In the latter case, Treasury will vote its
shares in the same proportion (for, against, or abstain) as the other
shares are voted.480
While the Administration’s stated purpose is not to involve the
federal government in daily business decisions, Treasury cannot
entirely abrogate its responsibilities as a shareholder. Even if
Treasury restricts its participation to ‘‘core governance,’’ it must
reasonably and responsibly establish its interpretation of ‘‘core governance.’’ As an example, given the ongoing and sweeping changes
at both companies, a management succession plan—which SEC
staff has recently described as one of a board’s key functions—is
critical.481 If Treasury has not clearly established a policy for its
involvement in management succession plans, it should do so
promptly.
Treasury has been directed and intends to make minimal interventions in management, as well as shareholder decisions. Overall,
Treasury has expressed a firm commitment to its limited role. In
conversations with Panel staff, the Treasury auto team indicated
that they would, at most, share their opinions about strategy with
the management of the auto companies. The management of the
auto companies, however, is entirely responsible for setting strategy, and may ignore Treasury’s opinions as they please. A ‘‘hands
off’’ approach, however, may not provide the influence necessary to
achieve the cultural changes most likely to lead to sustained viability for Chrysler and GM. If the government maintains the role of
a disinterested shareholder, it may be difficult to protect taxpayer
interests in these companies. On the other hand, it may be similarly detrimental to taxpayer interests if Treasury is an involved
shareholder, as in this role Treasury arguably suffers from inher477 See Remarks by the President on GM, supra note 470; see also Ron Bloom Written Testimony, supra note 472.
478 See Ron Bloom Written Testimony, supra note 472; see also COP September Oversight Report, supra note 108, at 82–83.
479 Ron Bloom Written Testimony, supra note 472. See also Allison Testimony before House
Oversight and Government Reform Committee, supra note 118, at 5.
480 See Allison Testimony before House Oversight and Government Reform Committee, supra
note 118, at 6.
481 See Division of Corporation Finance, Securities and Exchange Commission, Shareholder
Proposals, Staff Legal Bulletin No. 14E (CF) (Oct. 27, 2009) (online at www.sec.gov/interps/legal/
cfslb14e.htm).

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ent conflicts of interest, politics, lack of knowledge, and lack of
competence.
Treasury’s position is that the government, as shareholder, distorts the market in such a way that the auto companies—and accordingly the taxpayers—will ultimately reap greater benefit from
a passive government shareholder. Where a typical shareholder can
be assumed to seek profit maximization, Treasury is concerned that
any shareholder activism on its part will be perceived through a
political rather than commercial lens. Treasury believes this would
harm the market as a whole in addition to harming the auto companies. Under this model, private shareholders, faced with a large
shareholder that acts with multiple, possibly political motivations,
would be more reluctant to invest in the company, delaying Treasury’s exit and the return of the company to private hands, and
overall reducing the value of Treasury’s investment.482 It is difficult to determine which of these approaches would cause more or
less harm to the markets in general or to the auto companies in
particular. It is also possible that the passive approach promotes
market stability in general at the expense of the taxpayers’ specific
investment in the auto companies.
To mitigate the potential conflicts of interest inherent in government ownership of Chrysler and GM shares, the Panel recommended in September that Treasury consider placing its Chrysler and GM shares in an independent trust that would be insulated
from political pressure and government interference.483 At a hearing on October 22, 2009, however, Assistant Secretary Allison questioned whether an independent trust would be an efficient use of
taxpayer funds given the requisite ‘‘administrative infrastructure’’
that would be involved.484 Treasury also has expressed concern
that a trust might be inconsistent with its supervisory obligations
under EESA. In February 2009, however, Secretary Geithner discussed the possibility of putting assets from the TARP, as then-constituted in the Capital Assistance Program, in a Financial Stability
Trust.485 The Capital Assistance Program ultimately closed without making any investments, and therefore no assets were ever
placed in the Financial Stability Trust.486
482 See Allison Testimony before House Oversight and Government Reform Committee, supra
note 118; Treasury conversations with Panel staff (Dec. 22, 2009). On the other hand, although
Treasury is concerned that its involvement may depress stock price, absent Treasury’s and the
U.S. Government’s intervention, the liquidated companies’ stock would have no value at all.
483 See COP September Oversight Report, supra note 108, at 114. In addition, Senator Warner
and Senator Corker have proposed the TARP Recipient Ownership Trust Act of 2009, which
would move any government private company shareholding over 20 percent into a trust with
instructions to liquidate the stakes by the end of 2011. See Sen. Bob Corker, Corker, Warner
Introduce TARP Recipient Ownership Trust Act of 2009 (June 17, 2009) (online at
corker.senate.gov/public/index.cfm?FuseAction=NewsRoom.NewsReleases&ContentRecordlid=
efcc93cf-0189-87f7-0c26-fb49c985a43f).
484 See Congressional Oversight Panel, Transcript Testimony of Treasury Assistant Secretary
for Financial Stability Herbert M. Allison, Jr., COP Hearing with Assistant Treasury Secretary
Herbert M. Allison, Jr., at 63 (Oct. 22, 2009).
485 U.S. Department of the Treasury, Secretary Geithner Introduces Financial Stability Plan
(Feb. 10, 2009) (www.treas.gov/press/releases/tg18.htm) (hereinafter ‘‘Secretary Geithner Introduces Financial Stability Plan’’).
486 U.S. Department of the Treasury, Treasury Announcement Regarding the Capital Assistance Program (Nov. 9, 2009) (online at www.financialstability.gov/latest/tgl11092009.html)
(hereinafter ‘‘Treasury Announcement Regarding the CAP’’).

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As part of its efforts to increase profitability, on November 4,
2009, Chrysler unveiled its five-year business plan.487 Under this
plan, the current Chairman of the Board, Robert Kidder, states
that Chrysler’s top priority will be to create a compelling brand and
product offering. In addition, Chrysler will leverage its alliance
with Italian automaker Fiat, manage its supply chain to match
customer demand and production, strengthen its dealer network,
cut fixed costs, develop its new MOPAR brand, build a strong team
and high performance culture, and adopt a financial plan that aims
to recapitalize the company. In conversations with Panel staff,
Chrysler maintained that it is happy with its progress in merging
with Fiat, and believes that it is creating a more efficient company.
Its product mix will include more fuel-efficient cars, and it believes
it is making progress in reducing the time-to-market for newer
products. Chrysler is also sensitive to the need to act quickly, and
believes that it has brought greater focus to its product offerings.488
GM also issued a five-year plan,489 which includes consolidating
facilities, streamlining brands and dealer networks, creating
‘‘fewer, better’’ vehicles, developing technologies to increase fuel efficiency, hybrids, advanced propulsion, and addressing unprofitable
foreign operations. On November 16, 2009, GM stated that its focus
is currently on ‘‘top line performance’’ and gaining market share by
offering ‘‘performance and value’’ to customers.490 In subsequent
conversations with Panel staff, GM stated that it believes that it
has made good progress on initiatives designed to increase its competitiveness, including: building plants that can switch between
products; developing a more versatile product mix, with more small
cars; building its four core brands and attempting to divest other
brands; and creating strategic alliances in overseas markets. GM
believes that the restructured business will be simpler and much
easier to manage as a result.491
Treasury has stated that the new companies are, in capital structure alone, fundamentally quite different from their prior incarnations. In addition to manufacturing changes and product shifts, the
restructured companies lack the debt that dogged old Chrysler and
old GM. They have lower overhead and a lower break-even point.
They compete in a smaller market and have simplified obligations
to fewer debt and equity holders. Treasury believes that these differences significantly distinguish the current auto companies from
their predecessors, and will help them to become profitable.492

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c. Analysis of Intended Exit Strategy
The crisis that beset Chrysler and GM was a long time coming,
even if its severity was unprecedented. As President Obama ob487 See generally Chrysler Group, Our Plan Presentation (Nov. 4, 2009) (online at
www.chryslergroupllc.com/business/?redir=cllc).
488 Chrysler conversations with Panel staff (Dec. 16, 2009).
489 See generally General Motors Corporation, 2009–2014 Restructuring Plan (Feb. 17, 2009)
(online at www.financialstability.gov/docs/AIFP/GMRestructuringPlan.pdf).
490 General Motors Corporation, General Motors Announces the New Company’s July 10–September 30 Preliminary Managerial Results (Nov. 16, 2009) (online at media.gm.com/content/
media/us/en/news/newsldetail.html/content/Pages/news/us/en/2009/Nov/1116learnings).
491 GM conversations with Panel staff (Dec. 15, 2009).
492 Allison Testimony before House Oversight and Government Reform Committee, supra note
118, at 5; Treasury conversations with Panel staff (Dec. 22, 2009).

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served in his speech on the GM bankruptcy, the crisis resulted
from a long series of poor business decisions, large legacy costs,
and failure to address a changing market.493 It is to be hoped that
the near-liquidation of these companies will impress upon their respective managements and employees the need to be more responsive to changes in markets, commodity prices, and consumer preferences. Both Chrysler and GM were resting upon a very long period of market dominance, and failed to respond promptly when it
was revealed that their influence had waned and their competitors
were more nimble and modern, both culturally and technologically.
High labor costs—from wages, benefits, and rigid work rules—further hampered GM’s and Chrysler’s competitiveness.494
Compounding the difficulty, the auto industry overall suffers from
a long time-to-market, relatively high fixed and variable costs, and
substantial infrastructure needs, which make it difficult for even a
flexible and adaptive company to move quickly. Reports that GM
is restructuring its bureaucracy are encouraging,495 although substantial additional changes will be needed for both companies to
again become profitable and permit Treasury to divest its holdings.
As discussed above, Treasury owns equity in and holds debt of
both Chrysler and GM. While repayments on the debt and successful IPOs are both dependent on revitalized companies, Treasury
will likely hold the equity stakes for longer than the debt will remain outstanding. The equity stakes, accordingly, are of greater
concern in a discussion of exit. Further, it is Treasury’s GM holding
that poses the most difficulty: Treasury’s stake in Chrysler is small
enough that Treasury could sell it shortly after a Chrysler IPO or
to a third-party buyer.496 The size of the GM holding therefore creates unique circumstances: In the absence of buyers for a block sale
or sales, in all probability, Treasury will sell its stake into the public market, and it probably cannot sell its entire stake simultaneously. Although it continues to evaluate the best methods for divesting its holdings in the GM equity, Treasury currently takes the
position that transparency—in the form of successive registered follow-on offerings—will best serve the markets and the taxpayers’ investment in the auto companies.497 If, by contrast, Treasury were
to sell its stake at less predictable or less transparent intervals,
Treasury believes that potential investors might be concerned
about unpredictable pressure on the stock price from Treasury’s
sales. Any such sales, however, must follow the IPO, and likely will
be subject to a lock-up as well. Treasury therefore probably cannot
sell even the larger part, much less all, of its equity stake until
years in the future.
It is unusual for any company to have a majority shareholder as
passive as Treasury intends to be. This stance, especially with respect to Treasury’s GM holding, may result in no other entity’s
493 See Remarks by the President on GM, supra note 470; see also COP September Oversight
Report, supra note 108, at 107–110.
494 House Select Committee on Global Warming, Testimony of Professor Peter Morici, The Energy Independence Implications of the Auto Bailout Proposal, 110th Cong., at 2 (Dec. 9, 2008)
(online at www.globalwarming.house.gov/tools/3q08materials/files/0068.pdf).
495 Treasury conversations with Panel staff (Dec. 22, 2009).
496 Allison Testimony before House Oversight and Government Reform Committee, supra note
118.
497 Allison Testimony before House Oversight and Government Reform Committee, supra note
118; Treasury conversations with Panel staff (Dec. 22, 2009).

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being able to play the traditional majority shareholder role, and
create a governance vacuum. This concern will intensify as the
auto companies return to being publicly traded companies. The
Panel’s September report suggested that Treasury consider holding
its auto company shares in a trust, to which Treasury has responded with a variety of concerns, from administrative costs to
statutory obligations. In addition to these concerns, establishing a
trust to hold the shares might: slow Treasury’s exit; prolong its involvement in the market; and make future interventions more palatable, any or all of which could set an inappropriate precedent.
However, particularly with respect to the GM stake, it may be
some time before Treasury is able to divest itself of its holdings.
GM will therefore have a deliberately disinterested and passive
majority shareholder for the foreseeable future, which may hamper
its ability to again become viable and may affect the value that the
capital markets place on it. This being the case, the Panel believes
that Treasury should continue to contemplate whether it should
place the automobile company shares, particularly the GM shares,
in a trust. In an earlier incarnation of the TARP, Treasury had
contemplated creating a trust for its financial sector investments.498 Treasury should revisit the discussions surrounding the
Financial Stability Trust to help determine whether any of the considerations in operation at that time might now be applicable to
the automobile company shares. If Treasury is of the opinion that
a trust is unnecessary at present, it should reconsider this position
at the time an IPO is being planned.499
The uncertainty surrounding the long-term prospects for these
investments, of course, raises additional issues. Investments without clear time frames for exit—if any—pose particularly difficult
questions about Treasury’s involvement in a commercial enterprise.
Even if Treasury believes that the taxpayers’ best interest is served
by its ‘‘hands-off’’ approach, it must nonetheless perform rigorous
diligence of its ongoing investment in search of good divestment
windows. If, instead, Treasury later determines that it should take
a more interventionist role, it must still find the appropriate balance between serving the taxpayers’ need and the significant problems posed by involving Treasury in management. In any case,
however, Treasury should not exit either company without establishing that it has a reasonable plan for long-term viability. The alternative, as discussed below, would be to reinstitute the full-scale
liquidation avoided through commitment of TARP funds.
The Panel is hopeful that both Chrysler and GM will return to
profitability in short order, making Treasury’s continued involvement unnecessary. The Panel also appreciates the auto task force’s
difficulty in balancing its role as a shareholder with its obligations
to the taxpayers and its decided reluctance to become actively involved in management. That said, while there are many ways in
which Treasury differs from a shareholder in the ordinary course,
one in particular is relevant to our discussion: what Treasury

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498 Secretary

Geithner Introduces Financial Stability Plan, supra note 485.
499 Other unconventional measures that Treasury might consider would include replacing its
common stock with a class of limited shares, and, drawing from private equity traditions, breaking its holding into six or more blocks and having private managers manage those holdings, actively exercising the governance rights that accompany the shares.

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should do if and when it determines that it has made a ‘‘bad investment.’’ A typical shareholder may decide that he or she no
longer wishes to hold a given investment, and may sell, generally
without much effect on the market. If, however, the automotive
companies prove unlikely to become profitable again, even if far in
the future, Treasury cannot simply sell and write off its investment. And if Treasury sees no possibility of a sale, then in the best
interests of the taxpayers, Treasury may need to contemplate its
only remaining means of exit—an orderly wind-down of the relevant company. Not only can this never be a casual decision, but
it must also involve deep and careful consideration of the effect on
all parties concerned—taxpayers, investors, suppliers, car owners,
and industrial workers, among others.
The consequences of liquidating one or both of these companies,
even if far into the future and in an orderly fashion, would likely
still be significant for the economy.500 The Panel is hopeful that the
global financial crisis that precipitated the TARP will not be repeated, and that if it is, the industries that require rescue will be
more robust. If there is a similar crisis, or if after some period of
time, one or both of GM and Chrysler appear unlikely to ever become profitable again, Treasury will face a difficult choice. Treasury should have procedures for the continuing evaluation of its investment in the automotive industry. This report discusses these
procedures in the context of divestment windows. These procedures
should be formulated with an awareness that Treasury may need
to consider exit even though the subject company or companies cannot continue without Treasury’s support. The Panel hopes that no
such action will ever be necessary, but believes that in order for
Treasury to have a comprehensive understanding of its role as an
investor, it must internally take note of this possibility. That said,
publication of precise metrics or timelines may be inadvisable, both
because they could limit Treasury’s discretion and could negatively
affect the companies. Treasury, at present, takes the view that the
auto companies will not be ripe for long-term evaluation until after
any IPO. While it is reasonable to look to the IPOs as a more concrete point at which to assess the auto companies, it is also appropriate for Treasury to consider, if not plan for, the longer term.501
8. GMAC
Since the results of the stress tests were announced in early
May,502 nine of the 10 bank holding companies that were identified
as needing to raise additional capital have met or exceeded their
capital raising requirements without government assistance.503
GMAC, which was unable to raise sufficient outside capital to meet
the capital buffer established by the stress tests, originally set at

500 See

COP September Oversight Report, supra note 108, at 7–23.
Panel understands that Treasury intends to begin a formal evaluation of its investment in the automobile companies shortly.
502 Treasury Announces Restructuring of Commitment To GMAC, supra note 170; COP June
Oversight Report, supra note 175, at 41.
503 Agency Financial Statement 2009, supra note 32, at 25.

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501 The

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$11.5 billion, is the only participant to seek additional TARP funds
from Treasury.504
At the conclusion of the stress tests in May 2009,505 Treasury
made a ‘‘down payment’’ of $7.5 billion but acknowledged that
GMAC would need additional capital support.506 On December 30,
2009, Treasury provided GMAC with $3.8 billion in new capital.507
This amount was $1.8 billion less than the remaining $5.6 billion
shortfall on the capital buffer calculated in May by the Federal Reserve under the stress tests.508 According to Treasury, the reduced
size of the capital injection was due to ‘‘less disruption’’ than anticipated in the GM and Chrysler restructurings.509 The Panel is not
aware of the stress tests being recalculated for any other bank that
participated in them, although it must be noted that GMAC is the
only participant that failed to meet the stress tests’ November 2009
deadline for raising additional capital.
The additional funds were provided in the form of $2.54 billion
in Trust Preferred Securities (TruPs) and $1.25 billion in Mandatory Convertible Preferred Stock (MCP).510 Treasury also received
warrants to purchase $127 million of TruPs and $63 million of
MCP, which it exercised upon closing.511 At the same time, Treas504 Prior to the December 2009 capital injection, Treasury owned $13.1 billion in preferred
shares in GMAC, and 35 percent of GMAC’s common equity. Of this $13.1 billion, $5.25 billion
was acquired in December 2008 when Treasury purchased $5 billion in preferred equity and received warrants for an additional $250 million in preferred equity. Treasury then acquired an
additional $7.875 billion in May 2009 when it purchased $7.5 billion of convertible preferred
shares and received warrants for an additional $375 million. Also, on May 29, 2009, Treasury
exercised its option to exchange a $884 million loan for the ownership interest that GM had
purchased, amounting to about 35 percent of the common membership interests in GMAC. OFS
FY09 Financial Statements, supra note 133, at 62, 74.
505 At the conclusion of the stress tests in May, the Federal Reserve announced that GMAC
required an additional $11.5 billion in capital, $9.1 billion of which had to be in the form of
fresh capital (as opposed to conversions). Treasury conversations with Panel staff (Jan. 8, 2010);
Treasury Announces Restructuring of Commitment To GMAC, supra note 170.
506 Of this $7.5 billion, $3.5 billion was used to add to GMAC’s required capital buffer, and
$4 billion was used to support new financing for Chrysler dealers and customers. Treasury conversations with Panel staff (Jan. 8, 2010). The term sheet for this investment stated that Treasury would invest ‘‘up to $5.6 billion’’ at a later date.
Treasury stated that it decided to ‘‘stage’’ its investments because it believed that the GM and
Chrysler bankruptcy proceedings might be less disruptive, and faster, than anticipated and because it wanted to give a new GMAC management team the opportunity to develop its own
strategy for raising capital. Treasury conversations with Panel staff (Jan. 8, 2010). Less disruptive bankruptcy proceedings would have the effect of lowering GMAC’s capital needs because
the value of the GM and Chrysler automobiles financed by GMAC and forming a large part of
its collateral, would be higher with GM and Chrysler standing behind their warranties. Id.; see
also Treasury Announces Restructuring of Commitment To GMAC, supra note 170; OFS FY09
Financial Statements, supra note 133, at 62 (‘‘GMAC is in discussions with the Treasury-OFS
regarding additional financing to complete GMAC’s post-SCAP capital needs up to the amount
of $5.6 billion, as previously discussed in May’’).
507 Treasury Announces Restructuring of Commitment To GMAC, supra note 170. The transaction closed and was funded on December 30, 2009. Treasury conversations with Panel staff
(Jan. 6, 2010). Treasury stated that it timed the transaction to close in fiscal year 2009 in order
to ‘‘clean up’’ GMAC’s balance sheet. Treasury conversations with Panel staff (Jan. 8, 2010).
508 Treasury Announces Restructuring of Commitment To GMAC, supra note 170; Treasury
Announcement Regarding the CAP, supra note 486 (‘‘[GMAC’s] capital need is expected to be
lower than anticipated at the time the SCAP results were announced’’); U.S. Department of the
Treasury, Questions for the Record for U.S. Department of the Treasury Assistant Secretary Herbert M. Allison Jr., at 9 (Oct. 22, 2009) (online at cop.senate.gov/documents/testimony-102209allison-qfr.pdf) (hereinafter ‘‘Questions for the Record for Secretary Allison’’); OFS FY09 Financial Statements, supra note 133, at 62 (‘‘GMAC is in discussions with the Treasury-OFS regarding additional financing to complete GMAC’s post-SCAP capital needs up to the amount of $5.6
billion, as previously discussed in May’’). A Wall Street Journal story in late October stated that
the capital injection would be between $2.8 billion and $5.6 billion. Dan Fitzpatrick and Damian
Paletta, GMAC Asks for Fresh Lifeline, Wall Street Journal (Oct. 19, 2009) (online at
online.wsj.com/article/SB125668489932511683.html?mod=djemalertNEWS).
509 Treasury Announces Restructuring of Commitment To GMAC, supra note 170.
510 Treasury Announces Restructuring of Commitment To GMAC, supra note 170.
511 Treasury Announces Restructuring of Commitment To GMAC, supra note 170.

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ury converted $5.25 billion of its preferred securities to MCPs
(which have a more advantageous conversion rate) and converted
$3 billion of its MCPs to common stock, increasing its ownership
stake from 35 percent to 56 percent.512 Treasury also took the opportunity to recut the terms of some of its existing securities, including the conversion terms. With its enlarged ownership stake,
Treasury has the right to appoint four directors to GMAC’s board
of directors.513 In total, Treasury now holds $2.67 billion in TruPs
and $11.4 billion in MCPs.
The additional capital was provided under the AIFP, rather than
under the Capital Assistance Program (CAP), which was established to provide capital to financial institutions in connection with
the stress tests.514 Treasury stated that it used the AIFP because
its previous capital injections had been through the AIFP and because of the relationship between GMAC and the automotive industry.515 The terms of the securities issued under the AIFP are also
more advantageous to Treasury.
GMAC intends to seek financing in the credit markets during
2010, and if it is able to access the equity markets, then Treasury
will be able to start unwinding its position. Treasury’s large MCP
position makes it likely that it will convert the MCPs and sell common stock in the market after an eventual IPO, although a private
sale cannot be ruled out.516 In either case, Treasury’s goal is to
‘‘dispose of the government’s interests as soon as practicable consistent with EESA goals.’’ 517 Treasury intends to sell its interests
in a timely and orderly manner that ‘‘minimizes financial market
and economic impact,’’ under what it determines to be appropriate
market conditions.518
In answers to questions posed by members of the Panel, Assistant Secretary Allison suggested that Treasury’s assistance to
GMAC has provided a ‘‘reliable source of financing to both auto
dealers and customers seeking to buy cars,’’ helped ‘‘stabilize our
auto financing market,’’ and contributed ‘‘to the overall economic
recovery.’’ 519 GMAC is a source of retail and wholesale financing
for both GM and Chrysler.520 Treasury has stated that if it refused
to support GMAC after providing assistance to GM and Chrysler,
it would undermine its own investments in the automotive companies. Treasury has also stated that denying support to GMAC in
December 2009 would have placed Treasury’s previous investments
512 Treasury

Announces Restructuring of Commitment To GMAC, supra note 170.
Announces Restructuring of Commitment To GMAC, supra note 170. The increase in ownership stake from 35 percent to 56 percent gave Treasury the right to appoint two
additional directors.
514 Id.; see also Congressional Oversight Panel, December Oversight Report: Taking Stock:
What Has the Troubled Asset Relief Program Achieved?, at 20 (Dec. 9, 2009) (online at
cop.senate.gov/documents/cop-120909-report.pdf) (hereinafter ‘‘COP December Oversight Report’’). Although Treasury provided the funds through the AIFP, it stated that it was ‘‘acting
on its previously announced commitment to provide capital to GMAC as identified in May as
a result of the Supervisory Capital Assessment Program (SCAP).’’ Treasury Announces Restructuring of Commitment To GMAC, supra note 170.
515 Treasury conversations with Panel staff (Jan. 8, 2010).
516 Agency Financial Statement 2009, supra note 32, at 102; Treasury conversations with
Panel staff (Jan. 8, 2010).
517 Agency Financial Statement 2009, supra note 32, at 44.
518 Agency Financial Statement 2009, supra note 32, at 40.
519 Questions for the Record for Secretary Allison, supra note 508, at 9; see also COP December Oversight Report, supra note 514, at 71.
520 Treasury conversations with Panel staff (Jan. 8, 2010).

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at risk, and that refusing assistance after promising it in May
would have had a detrimental effect on market confidence.521
In spite of Assistant Secretary Allison’s general statements about
the reasons for providing additional support to GMAC, Treasury
has not yet articulated a specific and convincing reason to support
the company. Treasury’s most recent announcement of assistance
states only that its ‘‘actions fulfill Treasury’s commitments made in
May to GMAC in a manner which protects taxpayers to the greatest extent possible.’’ 522 It has never stated that a GMAC failure
would result in substantial negative consequences for the national
economy. If Treasury has made such a determination, then it
should say so publicly. It does not appear that the support has
been made on the merits of the investment, particularly given
GMAC’s recent statements that it anticipates reporting fourth
quarter 2009 losses of approximately $5 billion.523 Treasury has
not indicated whether it will be open to providing additional financing to GMAC in the future.
Moreover, GMAC has received different treatment from all other
financial institutions that were subject to the stress tests. Unlike
other institutions, it was subjected to additional stress tests after
the initial stress test results were released in May, and unlike
other institutions, its capital buffer requirements were revised in
light of this second round of tests. GMAC was the only institution
that was allowed to benefit from post-May improvements in its financial position and in related sectors of the economy. In the face
of criticism about the merits of saving GMAC, Treasury owes the
public a more detailed and convincing explanation not only of its
rationale for providing substantial assistance to GMAC, but also of
its rationale for treating GMAC differently than other stress-tested
institutions.
9. PPIP
Treasury has committed up to $30 billion to be invested in the
Public-Private Investment Program (PPIP), a TARP initiative pairing Treasury with private investors to purchase mortgage-backed
securities as a means of jump-starting that market back into active
trading. Treasury announced the PPIP on March 23, 2009, as part
of its efforts to repair balance sheets distorted by toxic assets and
increase credit availability in the financial system.524 Although the
PPIP, when announced, included both a legacy loans program and
a legacy securities program, the legacy loan program has been postponed for the present.525 Because the loan program has not been
implemented, this report will address only the securities program.
521 Treasury

conversations with Panel staff (Jan. 8, 2010).
Announces Restructuring of Commitment To GMAC, supra note 170.
Financial Services, 2009 Fourth Quarter Strategic Actions (Jan. 5, 2009) (online at
phx.corporate-ir.net/External.File?item=
UGFyZW50SUQ9MjY1MzIxN3xDaGlsZElEPTM2MzQ5M3xUeXBlPTI=&t=1); Samuel Spies,
GMAC Expects to Report Q4 Loss of about $5B, SNL Financial (Jan. 5, 2010).
524 U.S. Department of the Treasury, Treasury Department Releases Details on Public Private
Partnership Investment Program (Mar. 23, 2009) (online at www.ustreas.gov/press/releases/
tg65.htm).
525 ‘‘Legacy securities’’ are defined as ‘‘Troubled real estate-related securities (residential mortgage-backed securities or commercial mortgage-backed securities), and other asset-backed securities lingering on institutions’ balance sheets because their value could not be determined.’’
Treasury Decoder, supra note 148.
522 Treasury

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523 GMAC

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The PPIP was designed to draw private capital into the legacy
securities market by creating public-private investment funds financed by private investors, whose capital contributions are
matched dollar-for-dollar by Treasury using TARP funds. The
funds may also obtain debt financing from Treasury equal to the
full value of the fund’s capital investments.526 The funds, called
PPIFs, are managed by fund managers who have been selected by
Treasury through an application process. According to Treasury,
those who were ultimately selected were chosen based on a combination of the following criteria:
1. Demonstrated capacity to raise a minimum amount of private sector capital;
2. Demonstrated experience investing in targeted asset
classes, including through performance track records;
3. A minimum amount (market value) of the targeted asset
classes currently under management;
4. Demonstrated operational capacity to manage the investments in a manner consistent with Treasury’s stated investment objectives while also protecting taxpayers; and
5. Headquartered in the United States (although the ultimate parent company need not be headquartered in the United
States).527
Treasury ultimately selected nine funds, all of which have succeeded in raising the private capital necessary to qualify as fund
managers under the program.528 As of December 31, 2009, Treasury has committed approximately $30 billion in eight funds.529 Of
the $30 billion invested under PPIP, $19.9 billion was committed
as senior debt and $9.9 billion as equity.530 Treasury received notes
in exchange for its loans, with the ‘‘same duration as the underlying fund.’’ 531
The PPIFs are structured as limited partnerships, with the Fund
Manager serving as General Partner and Treasury, along with the
other private investors, serving as Limited Partners. Under the
terms of the partnership agreements, the General Partners have
broad authority for the ‘‘management, operation and policy of the
Partnership,’’ which is ‘‘vested exclusively in the General Partner.’’ 532 Concerns have been expressed over Treasury’s apparent
lack of control over the funds and the funds’ lack of transparency
526 This

financing may include TALF financing, as described in Section D.10, infra.
Department of the Treasury, Guidelines for the Legacy Securities Public-Private Investment Program (accessed Jan. 6, 2010) (online at www.financialstability.gov/docs/
ProgramGuidelinesS-PPIP.pdf).
528 One fund was recently frozen under the Key Man provision of the partnership agreement
creating the fund due to the departure of the person named in that provision from the fund.
529 TARP Transactions Report for Period Ending December 30, 2009, supra note 166, at 19.
530 These amounts represent Treasury’s total commitment and not the actual amount disbursed. Id.
531 See U.S. Department of the Treasury, Public-Private Investment Program: $500 Billion to
$1 Trillion Plan to Purchase Legacy Assets (online at www.treas.gov/press/releases/reports/
ppip—whitepaper—032309.pdf) (accessed Jan. 12, 2010). This expiration term will apply unless
the note is accelerated in the event of default or the fund is dissolved earlier. See, e.g., U.S.
Department of the Treasury, Loan Agreement (online at www.financialstability.gov/docs/
Loan%20Agreement%20(redacted)%20-%20AB.PDF) (accessed Jan. 12, 2010).
532 Amended and Restated Limited Partnership Agreement for AllianceBernstein Legacy Securities
Master
Fund,
L.P.,
at
25
(online
at
www.financialstability.gov/docs/
AB%20Complete%20LPA%20(redacted).pdf). The partnership agreements for the remaining
PPIFs contain identical language.

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527 U.S.

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regarding their trading activities.533 Although the agreements require the General Partners to obtain Treasury approval for certain
actions, these actions are limited and generally involve the PPIFs
venturing beyond the prescribed terms of the program by, for example, purchasing assets other than those designated as ‘‘eligible
assets’’ under the terms of the program. Obviously, as partner in
the funds, Treasury has the right and ability to counsel the General Partners regarding investment strategy, but there is no provision in the agreements to provide Treasury with the ability to manage the assets directly or to dictate the General Partners’ management of the assets. Treasury has yet to implement any measures
to address these concerns.
Under the agreements, each fund is able to conduct business in
the legacy securities markets until the eighth anniversary of its inception, subject to a two-year extension with Treasury’s consent,
unless the fund is terminated earlier by the General Partner.534
Thus, the funds will be terminated and dissolved no later than
2020.535 After outstanding debt is repaid, any remaining funds will
be divided equally between Treasury (on account of its equity investment) and the private investor.
As of the date of this report, neither Treasury nor the funds have
disclosed the nature of the PPIFs’ investments.
While Treasury will have no direct role in selling the assets held
by the PPIFs, and therefore will not need as detailed an exit strategy as other programs will require, OFS will continue to have a responsibility to monitor the Fund Managers and the funds’ investments.

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10. TALF
Another small TARP program, the Term Asset-Backed Securities
Loan Facility (TALF), will require very little action to facilitate a
complete exit. FRBNY created the TALF in response to ‘‘near-complete halt’’ of the asset-backed securities (ABS) market in October
2008.536 Under the TALF, FRBNY provides non-recourse, three- to
five-year loans to eligible borrowers who pledge qualifying ABS or
commercial mortgage-backed securities.537 FRBNY receives month533 See COP August Oversight Report, supra note 65; SIGTARP, Quarterly Report to Congress,
at
171
(July
21,
2009)
(online
at
www.sigtarp.gov/reports/congress/2009/
July2009lQuarterlylReportltolCongress.pdf) (expressing concern over the lack of transparency in the PPIFs’ trading activities and holdings and requesting that Treasury take measures to address these concerns).
534 U.S. Department of the Treasury, Public-Private Investment Program (online at
www.financialstability.gov/roadtostability/publicprivatefund.html) (accessed Dec. 31, 2009) (providing redacted versions of every executed partnership agreement between Treasury and the private investor in establishing PPIFs).
535 Before Treasury and the private investor are paid on behalf of their capital investments,
the PPIF must first repay loans plus principle, if any, under TALF. As previously discussed in
this Section and Section D.9 supra, Treasury may also receive a portion of this debt repayment
as a result of its financing of TALF’s SPV.
536 See Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: Frequently Asked Questions (online at www.newyorkfed.org/markets/talflfaq.html) (hereinafter
‘‘TALF Frequently Asked Questions’’) (accessed Jan. 12, 2010) (‘‘The asset-backed securities
(ABS) market has been under strain for some months. This strain accelerated in the third quarter of 2008 and the market came to a near-complete halt in October’’).
537 In addition to other criteria, an ‘‘eligible borrower’’ must be a ‘‘U.S. company,’’ as defined
by FRBNY. See generally TALF Terms and Conditions, supra note 27. ‘‘Eligible collateral’’ includes ABS that have a long-term AAA credit rating and are backed by one or more of the following classes of securities: auto loans, student loans, credit card loans, equipment loans,
floorplan loans, insurance premium finance loans, small business loans fully guaranteed as to
principal and interest by the U.S. Small Business Association, receivables related to residential

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ly interest payments on these loans.538 As of December 31, 2009,
TALF loan requests totaled approximately $61 billion.539 Unless
FRBNY grants an extension,540 the TALF will no longer make new
loans after March 31, 2010 for loans collateralized by ABS, and
after June 30, 2010 for loans collateralized by commercial mortgage-backed securities.541
Treasury has currently committed up to $20 billion in TARP
funds under the TALF.542 This amount is incrementally funded
and, as of September 30, 2009, Treasury has only disbursed $100
million under the program.543 In exchange for any amount disbursed, Treasury will receive a promissory note bearing interest at
LIBOR plus 3 percent.544 Pursuant to an agreement to subordinate
its debt, Treasury’s loan will be repaid only after FRBNY’s loans,
if any, are paid in full with interest.545 This program is administered by FRBNY, and Treasury has limited discretion regarding its
management.
Because a TALF loan is non-recourse,546 if the borrower defaults,
FRBNY cannot take action against the borrower. Instead, FRBNY
takes ownership of the collateral. In turn, FRBNY sells the collateral to TALF, LLC,547 a special purpose vehicle (SPV) formed to facilitate this program. The SPV purchases the recovered collateral
from FRBNY at a price equal to the defaulted TALF loan amount,
plus accrued unpaid interest and fees.548 As of December 31, 2009,
no TALF loans have defaulted, and the SPV contains only $100
million of Treasury’s seed funding.549
Treasury’s $20 billion commitment to the TALF is to provide the
initial funding of this SPV.550 To the extent the SPV purchases asmortgage servicing advances (servicing advance receivables), or commercial mortgage loans. See
generally id.
538 See generally TALF Terms and Conditions, supra note 27.
539 Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: CMBS
(online at www.newyorkfed.org/markets/CMBSlrecentloperations.html) (accessed Jan. 12,
2010) (hereinafter ‘‘FRBNY CMBS Recent Operations’’); Federal Reserve Bank of New York,
Term Asset-Backed Securities Loan Facility: non-CMBS (online at www.newyorkfed.org/markets/
talfloperations.html) (accessed Jan. 12, 2010) (hereinafter ‘‘FRBNY non-CMBS Recent Operations’’).
540 TALF has already been granted one extension, which authorized this program to continue
beyond December 31, 2009, the original termination date. Board of Governors of the Federal Reserve System, Federal Reserve and Treasury Department Announce Extension to Term AssetBacked Securities Loan Facility (TALF) (Aug. 17, 2009) (online at www.federalreserve.gov/
newsevents/press/monetary/20090817a.htm).
541 TALF Terms and Conditions, supra note 27.
542 TARP Transactions Report for Period Ending December 30, 2009, supra note 166.
543 Agency Financial Statement 2009, supra note 32.
544 U.S. Department of the Treasury, Credit Agreement among TALF LLC as Borrower, FEDERAL RESERVE BANK OF NEW YORK, as Controlling Party, FEDERAL RESERVE BANK
OF NEW YORK, as the Senior Lender and UNITED STATES DEPARTMENT OF THE TREASURY, as the Subordinated Lender at 12 (Mar. 3, 2009) (online at www.financialstability.gov/docs/
SPV-Credit-Agt.pdf) (hereinafter ‘‘TALF Credit Agreement’’).
545 TALF Credit Agreement, supra note 544. FRBNY’s loans, if any, are secured by a first priority lien on all assets of the SPV. See U.S. Department of the Treasury, Security and Intercreditor Agreement among TALF LLC, as borrower, FEDERAL RESERVE BANK OF NEW YORK,
as Senior Lender, UNITED STATES DEPARTMENT OF THE TREASURY, as Subordinated
Lender, FEDERAL RESERVE BANK OF NEW YORK, as Controlling Party, and THE BANK
OF NEW YORK MELLON, as Collateral Agent (Mar. 3, 2009) (online at
www.financialstability.gov/docs/SPV-Sec-Agt.pdf).
546 ‘‘The TALF loan is non-recourse except for breaches of representations, warranties, and
covenants, as further specified in the MLSA.’’ TALF Frequently Asked Questions, supra note
536.
547 TARP Transactions Report for Period Ending December 30, 2009, supra note 166.
548 TALF Terms and Conditions, supra note 27.
549 Agency Financial Statement 2009, supra note 32, at 53.
550 TALF Terms and Conditions, supra note 27.

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sets exceeding $20 billion, FRBNY will loan the SPV the additional
funding. As mentioned above, FRBNY’s loan to the SPV, if any,
will be senior to Treasury’s loan. To the extent there are any assets
remaining in the SPV after both FRBNY and Treasury have been
repaid, those assets will be shared equally between FRBNY and
Treasury.551
Loans extended by Treasury and FRBNY to the SPV are due on
the 10th anniversary of the credit agreement, subject to extension
by FRBNY upon receipt of Treasury’s consent.552 Treasury has informed Panel staff that if an ABS sold to the SPV is underwater,
the SPV will hold the asset until it appreciates in value before disposing of it, thereby increasing the likelihood of Treasury being repaid in full and with interest.553 While potentially maximizing taxpayer returns, this exit strategy may also have the effect of prolonging the winding down process and therefore Treasury’s involvement in the market. Moreover, it will be the SPV created by
FRBNY that will manage any assets it holds.554 Consequently,
within the 10-year period after the execution of the credit agreement, Treasury has little to no control over when its loan will be
repaid.
11. Small Business Programs

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a. Programs
Treasury has yet to acquire any assets under its small business
initiatives, but it has committed $15 billion in TARP funds out of
the $35 billion it has allocated toward supporting small businesses
so far, to potentially do so.555 Treasury’s small business initiatives
are three-pronged: $20 billion pledged as credit protection under
the TALF, $15 billion directed to the purchase of Small Business
Administration (SBA)-guaranteed securities, and a still-evolving
initiative to provide capital assistance to small banks in return for
commitments to lend to small businesses.556 As relates to the first
two initiatives, Treasury may directly acquire assets should it elect
to purchase SBA-guaranteed securities, but it will not receive assets from its TALF credit protection pledge.557 It is still unclear
what assets, if any, Treasury may receive from its latest initiative.
551 Board of Governors of the Federal Reserve System, Term Asset-Backed Securities Loan Facility (TALF) Terms and Conditions (online at www.federalreserve.gov/newsevents/press/
monetary/monetary20081125a1.pdf) (hereinafter ‘‘TALF Terms and Conditions’’).
552 Assuming the agreement closed in 2009, FRBNY and Treasury loans would become due
in 2019. The credit agreement is considered ‘‘closed’’ upon the satisfaction or waiver of certain
preconditions stipulated therein. TALF Credit Agreement, supra note 544.
553 Treasury conversations with Panel staff (June 24, 2009).
554 Assuming the agreement closed in 2009, FRBNY and Treasury loans would become due
in 2019. The credit agreement is considered ‘‘closed’’ upon the satisfaction or waiver of certain
preconditions stipulated therein. TALF Credit Agreement, supra note 544.
555 U.S. Department of the Treasury, Fact Sheet: Unlocking Credit for Small Businesses (Oct.
19,
2009)
(online
at
www.financialstability.gov/roadtostability/unlockingCredit
forSmallBusinesses.html) (hereinafter ‘‘Small Business Fact Sheet’’).
556 Small Business Fact Sheet, supra note 555. Cf. U.S. Department of the Treasury, Consumer & Business Lending Initiative (July 17, 2009) (online at www.financialstability.gov/
roadtostability/lendinginitiative.html) (hereinafter ‘‘Consumer & Business Lending Initiative’’);
see White House, President Obama Announces New Efforts to Improve Access to Credit for Small
Businesses
(Oct.
21,
2009)
(online
at
www.whitehouse.gov/assets/documents/
smalllbusinesslfinal.pdf) (hereinafter ‘‘President Obama Announces New Small Business Efforts’’).
557 Small Business Fact Sheet, supra note 555; see TALF Terms and Conditions, supra note
551 (accessed Jan. 12, 2010).

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Under the TALF, as noted above, Treasury provides up to $20
billion of TARP funds as a credit backstop against first losses on
FRBNY’s overall $200 billion program commitment.558 At present,
approximately $62 billion in TALF loans have been requested.559
For Treasury’s backstop to be fully depleted, and for FRBNY to
incur any loan losses subsequently, posted collateral would need to
decline in value by more than one-third.
Another of Treasury’s small business initiatives calls for the purchase of up to $15 billion in securities backed by SBA loans: the
government-guaranteed portion of SBA 7(a) loans and the non-government-guaranteed first-lien mortgage loans affiliated with the
SBA’s 504 loan program.560 Although an active secondary market
traditionally allowed commercial lenders to sell the governmentguaranteed portion of their 7(a) loans, providing lenders with new
capital and allowing them to offer additional loans, beginning last
fall, the secondary market for SBA-guaranteed securities froze.561
Unable to shed the risk from their books, commercial lenders significantly curtailed their lending activities.562 Treasury enacted
this initiative in March 2009 to ‘‘jumpstart credit markets for small
businesses.’’ 563
Under the initiative, Treasury hired Earnest Partners, an independent investment manager with SBA-guaranteed loan experience, to guide its efforts to buy the securities.564 Unlike the TALF,
Treasury’s program to purchase SBA-guaranteed securities does
not utilize private-sector pricing. Rather, Treasury may purchase
securities directly from ‘‘pool assemblers’’ and banks.565 According
to Treasury’s implementation documents, ‘‘Treasury and its invest-

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558 Consumer

& Business Lending Initiative, supra note 556.
559 This figure includes both CMBS and non-CMBS loans requested as of December 3, 2009.
See FRBNY CMBS Recent Operations, supra note 539; FRBNY non-CMBS Recent Operations,
supra note 539.
560 Small Business Fact Sheet, supra note 555. Under its 7(a) Loan Program, the Small Business Administration (SBA) guarantees a portion of qualified loans made and administered by
commercial lenders. The SBA does not make 7(a) loans, nor fully guarantee them—the lender
and SBA share the risk that a borrower will not fully repay the loan. U.S. Small Business Administration, SBA Programs Office (online at www.sba.gov/financialassistance/borrowers/
guaranteed/7alp/index.html) (accessed Nov. 24, 2009).
561 From 2006 through 2008, between 40 and 45 percent of the SBA guaranteed portion of 7(a)
loans were sold into the secondary market. See Government Accountability Office, Small Business Administration’s Implementation of Administrative Provisions in the American Recovery
and Reinvestment Act of 2009, at 6 (Apr. 16, 2009) (online at www.gao.gov/new.items/
d09507r.pdf); Congressional Oversight Panel, May Oversight Report: Reviving Lending to Small
Businesses and Families and the Impact of the TALF, at 52 (May 7, 2009) (online at
cop.senate.gov/documents/cop-050709-report.pdf) (referring to the market freezing because of (1)
the tightening of the Prime versus LIBOR spread, which reduced the attractiveness of investment in securitized 7(a) loans (indeed, the return for investors had disappeared); (2) the strained
capacity of broker-dealers, who were unable to sell their current inventory and thereby free up
capital to buy and pool additional loans; (3) the reduced access to and increased cost of credit
for broker-dealers, who could not sell off inventory to pay off existing loans; and (4) general uncertainty and fear in the marketplace).
562 Small Business Fact Sheet, supra note 555.
563 Small Business Fact Sheet, supra note 555.
564 U.S. Department of the Treasury, Financial Agency Agreement for Asset Management Services for SBA Related Loans and Securities (Mar. 16, 2009) (online at www.financialstability.gov/
docs/ContractsAgreements/TARP%20FAA%20SBA%20Asset%20Manager%20%20Final%20to%20 be%20posted.pdf) (updated Nov. 12, 2009); See SIGTARP, Quarterly Report
to Congress, at 112 (Apr. 21, 2009) (online at www.sigtarp.gov/reports/congress/2009/
April2009lQuarterlylReportltolCongress.pdf).
565 Pursuant to EESA, Treasury expects to receive warrants from the pool assemblers as additional consideration for the purchase of 7(a) and 504 first-lien securities. The pricing and exact
nature of the warrants is still under consideration by Treasury. U.S. Department of the Treasury, Unlocking Credit for Small Businesses: FAQ on Implementation (Mar. 17, 2009) (online at
www.financialstability.gov/docs/FAQ-Small-Business.pdf) (hereinafter ‘‘Unlocking Credit for
Small Businesses: FAQ on Implementation’’).

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ment manager will analyze the current and historical prices for
these securities’’ in order to ‘‘identify opportunities to purchase the
securities at reasonable prices.’’ 566 Treasury defines such prices as
those that fulfill the dual objective of ‘‘[providing] sufficient liquidity to encourage banks to increase their small business lending and
[protecting] taxpayers’ interest.’’ 567
Treasury has $3 billion apportioned for its direct purchase program, and despite stating 7(a) and 504 purchases would begin by
May 2009, Treasury has not yet made any purchases under the
program.568 A rejuvenated secondary market for SBA loans, as
Treasury previously noted, has tempered the need for an earlier
start to the program.569 If Treasury does engage in direct purchases, it plans to either sell the securities to private investors or
pursue a buy-and-hold strategy, depending on market conditions.570
On October 21, 2009, the White House announced a third small
business lending initiative, part of which uses TARP funds. Under
this initiative, Treasury will provide low-cost capital to community
banks to be used in small business lending.571 Participating banks
must submit small business lending plans and will be required to
submit quarterly reports describing their small business lending
activities. If their lending plans are accepted, banks will have access to capital at a dividend rate of 3 percent, more attractive
terms than the 5 percent rate under the CPP. These small banks
will be able to receive capital totaling up to 2 percent of their risk
weighted assets.572 For community development financial institutions that can document that 60 percent of their small business
lending targets low income communities or underserved populations,573 this dividend rate will be only two percent. As currently
conceived,574 this capital will be available after the bank submits
a small business lending plan, and may only be used to make
qualifying small business loans.575 Further implementing details
for this program have not been announced as of the release of this
report.
566 Id.

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567 Id.
568 Government Accountability Office, Troubled Asset Relief Program: One Year Later, Actions
are Needed to Address Remaining Transparency, and Accountability Challenges, at 80 (Oct. 8,
2009) (online at www.gao.gov/new.items/d1016.pdf); Unlocking Credit for Small Businesses: FAQ
on Implementation, supra note 565.
569 Between May and October, the total volume of loans settled from lenders to broker averaged $344 million, exceeding pre-crisis levels. By comparison, in January total volume was $85.9
million. U.S. Department of the Treasury, SBA Host Small Business Financing Forum (Nov. 18,
2009) (online at www.financialstability.gov/latest/tg—11182009.html) (hereinafter ‘‘SBA Host
Small Business Financing Forum’’). See also Unlocking Credit for Small Businesses: FAQ on Implementation, supra note 565.
570 SBA Host Small Business Financing Forum, supra note 569.
571 Small- and medium-sized banks are seen as effective vehicles for supporting small business
lending because banks with less than $1 billion in assets hold greater proportions of small business loans to all business loans. See President Obama Announces New Small Business Efforts,
supra note 556.
572 See id.
573 Community development financial institutions, which are certified by the federal government, provide loans to underserved communities.
574 See President Obama Announces New Small Business Efforts, supra note 556.
575 See id.

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b. Future Considerations
Small businesses continue to experience an inability to access
credit.576 Treasury has indicated that measures to ‘‘get credit to
small businesses’’ will be a key driver in Treasury’s economic recovery strategy.577 At the Panel’s December hearing, Secretary
Geithner stated that new TARP investments would be limited to
‘‘housing, small business, and securitization markets that facilitate
consumer and small business loans.’’ 578 In the process of doing so,
the Secretary noted, Treasury is ‘‘reserving funds for additional efforts to facilitate small business lending.’’ 579
Treasury, in coordination with the SBA, held a Small Business
Financing Forum on November 18, 2009, convening ‘‘entrepreneurs,
small business owners, lenders, policymakers and regulators to assess additional ways to spur small business growth.’’ 580 Secretary
Geithner delivered a summary of participant views and recommendations to President Obama on December 3, 2009.
As of the date of this report, it is still unclear which proposals,
if any, the Administration is considering, and Treasury has not allocated additional TARP funds to support new small business initiatives beyond those discussed above.581 It is possible, however,
that small business initiatives will result in Treasury’s acquisition
of additional assets. As Secretary Geithner noted at the Panel’s December hearing, small banks have been reluctant to participate in
Treasury’s recent low-cost-capital initiative for fear of being stigmatized or having operating conditions attached.582 Because community bank lending is tied to small business growth, which often
feeds job creation, Treasury’s success in tailoring its small business
programs to facilitate such lending will be essential to the success
of Treasury’s adapted TARP strategy.
Moving forward, as other TARP programs wind down, Treasury
should be transparent about its eventual exit plans for programs
that are not yet under way.
E. Unwinding TARP Expenditure Programs

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Some of Treasury’s TARP initiatives will neither generate fees,
nor acquire assets with the potential to increase in value. These
initiatives constitute non-recoverable expenditures from the TARP,
whereby Treasury can only realize monetary losses on these programs. To date, this exposure relates solely to Treasury’s mortgage
foreclosure mitigation efforts, including disbursements or potential
disbursements, made under Treasury’s HAMP initiative and its
subprograms, but may also apply to the small business initiatives
576 See U.S. Department of the Treasury, Report to the President Small Business Financing
Forum (Dec. 3, 2009 (online at www.financialstability.gov/docs/Small%20Business%
20Financing%20Forum%20Report%20FINAL.PDF) (hereinafter ‘‘Report to the President Small
Business Financing Forum’’).
577 Agency Financial Statement 2009, supra note 32.
578 Id.
579 Id.
580 See Report to the President Small Business Financing Forum, supra note 576.
581 Senator Mark Warner has also offered a proposal calling for the reallocation of up to $40
billion in unused TARP funds to create a small business loan fund. Participating regional and
community banks would be required to contribute up to $10 billion and assume first-dollar
losses on the loans. On October 21, 2009, Senator Warner sent President Obama a letter signed
by 32 Senate colleagues seeking Administration backing for the proposal. Letter from Senator
Mark R. Warner to President Barack Obama (Oct. 21, 2009).
582 See Agency Financial Statement 2009, supra note 32.

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discussed above.583 HAMP is the largest of the Making Home Affordable programs and presents the most exposure for monetary
losses. As Secretary Geithner noted of HAMP at the Panel’s December 10, 2009 hearing, ‘‘expenditures through [HAMP] were
never intended to generate revenue.’’ 584 Rather, HAMP ‘‘was created to help mitigate foreclosure for responsible but at-risk homeowners.’’ 585

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1. HAMP
Under HAMP, Treasury allocated up to $50 billion from the
TARP to modify private-label mortgages. To prevent foreclosures,
Treasury shares the cost of reducing monthly payments on certain
delinquent loans and provides targeted incentives to borrowers, investors, and servicers that participate in the program.586 Treasury
currently estimates it will spend $48.756 billion for private-label
loans under HAMP. Of the initial $50 billion allocation, $1.244 billion will never be obligated due to the fact that TARP authority
was reduced by this amount under the Helping Families Save their
Home Act. Treasury has currently obligated $35.5 billion of the
amount, reflecting Treasury’s legal commitments to 102 servicers
as of December 31, 2009.587 Due to HAMP’s payment structure, including delayed payments and a long disbursement cycle, only a
fraction of TARP funds have been paid out to date.588
HAMP provides lenders/investors with cost-share payments for
up to five years for half the cost of reducing a borrower’s payment
from 38 percent to 31 percent of the borrower’s gross monthly income.589 Investors must pay for reducing the borrower’s payment
down to the 38 percent threshold before they are able to benefit
from the cost-share incentive.590
HAMP also provides targeted incentive payments for first- and
second-lien mortgage modifications. On first-lien mortgages, targeted incentives include an up-front payment of $1,000 to the
servicer for each successful modification following the completion of
the borrower’s trial period, and ‘‘pay for success’’ fees of up to
$1,000 annually for three years if the borrower remains current.591
Additional one-time incentives include $500 to servicers and $1,500
to investors if loans are successfully modified for distressed bor583 In keeping with the scope of this report, this section examines only Treasury’s monetary
exposure related to its mortgage foreclosure mitigation programs. For an in-depth assessment
of Treasury’s mortgage foreclosure mitigation efforts, see the Panel’s October 2009 report. See
Congressional Oversight Panel, October Oversight Report: An Assessment of Foreclosure Mitigation Efforts After Six Months (Oct. 9, 2009) (online at cop.senate.gov/documents/cop-100909report.pdf) (hereinafter ‘‘COP October Oversight Report’’); see also COP December Oversight Report, supra note 514.
584 Agency Financial Statement 2009, supra note 32.
585 Id.; OFS FY09 Financial Statements, supra note 133, at 3. (‘‘In particular, the $50 billion
Home Affordable Modification Program or ‘HAMP,’ is not designed to recoup money spent on
loan modifications to keep people in their homes.’’)
586 U.S. Department of the Treasury, Making Home Affordable Updated Detailed Program Description (Mar. 4, 2009) (online at www.treas.gov/press/releases/reports/housinglfactlsheet.pdf)
(hereinafter ‘‘MHA Program Description’’).
587 TARP Transactions Report for Period Ending December 30, 2009, supra note 166.
588 OFS FY09 Financial Statements, supra note 133. (Treasury’s FY 2009 net cost of operations of $41.6 billion includes the estimated net cost related to loans, equity investments, and
asset guarantees. Due to its program structure, the $50 billion HAMP has delayed payments
as well as a long disbursement cycle so the FY 2009 amounts include only $2 million in cost.)
589 MHA Program Description, supra note 586.
590 MHA Program Description, supra note 586.
591 MHA Program Description, supra note 586.

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rowers who are current but are in danger of imminent default.592
Homeowners also earn up to $1,000 towards principal balance reduction annually for five years contingent on their remaining current with payments.593 Treasury estimates that up to 50 percent
of at-risk mortgages have second liens.594 In order to address second lien debts, such as home equity lines of credit or second mortgages, HAMP encourages servicers to contact second lien holders
and negotiate the extinguishment of the second lien.595 Servicers
are eligible to receive payments of $500 per second lien modification, as well as success payments of $250 per year for three years,
provided the modified first loan remains current.596 Borrowers also
receive success payments for participating of $250 per year for up
to five years that are used to pay down the principal on the first
lien.597
Treasury utilizes mortgage servicers to carry out the process of
modifying mortgages. In exchange for agreeing to follow Treasury’s
standardized guidelines and process, participating servicers are eligible for the various program incentive payments. Under the
Servicer Participation Agreements, Treasury has authorized each
participating servicer to modify mortgages through December 31,
2012. Because mortgages will continue to be modified past the October 2010 expiration of TARP, it is important to consider how various aspects of the program will function.
HAMP modifications begin with a three-month trial modification
period for eligible borrowers, although the maximum trial period
was recently extended to allow borrowers additional time to provide
necessary documentation. After three months of successful payments at the modified rate and provision of full supporting documentation, the modification becomes permanent. December 31,
2012 will be the last date upon which servicers can commence a
new trial modification. Under current program guidelines, the last
date for a possible conversion to permanent status is May 1, 2013.
Presuming a HAMP modification remains current, incentive payments will extend into the future for five years after the trial modification converts to permanent status, long past the scheduled expiration of the TARP. Based on the final date for a modification to
become permanent, servicer incentive payments could continue
until May 1, 2016, and borrower incentive payments could continue
until May 1, 2018. Following the expiration of TARP and following
the expiration of servicers’ authority to continue making new modifications, scheduled payments will continue to be made by Fannie
Mae, Treasury’s financial agent, as they are currently. HAMP payments are made to servicers monthly via wire transfer in a consoli592 Imminent default determinations are made by servicers based on the borrower’s financial
condition in light of hardship as well as the condition of and circumstances affecting the property securing the mortgage. U.S. Department of the Treasury, Supplemental Documentation—
Frequently Asked Questions Home Affordable Modification Program (Nov. 12, 2009) (online at
www.hmpadmin.com/portal/docs/hamplservicer/hampfaqs.pdf) (hereinafter ‘‘Supplemental Documentation for HAMP’’).
593 MHA Program Description, supra note 586.
594 U.S. Department of the Treasury, Making Home Affordable: Program Update (Apr. 28,
2009) (online at www.financialstability.gov/docs/042809SecondLienFactSheet.pdf) (hereinafter
‘‘Making Home Affordable: Program Update’’).
595 Id.
596 Id.
597 Id.

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dated manner.598 Payments are remitted to servicers either for
themselves or on behalf of borrowers and investors.599 Servicers
apply payments made to borrowers directly to reducing the principal of the borrower’s mortgage.600 Cost-share payments to investors/security holders accrue monthly as of the completed modification, not from the start of the trial period. Servicers are responsible
for delivering these payments to the appropriate investors/security
holders.601
Treasury anticipates that HAMP expenses will increase significantly over time, ‘‘as more modifications of mortgage payments are
finalized between mortgage servicers and borrowers, resulting in
increased incentive payments.’’ 602 As more money flows, the need
for strong oversight becomes even more important. Freddie Mac
serves as Treasury’s compliance agent and monitors servicer payments to ensure the proper remittance of funds to investors/security holders and the proper application of funds to borrowers’ accounts.603 Freddie Mac will continue in this role after the expiration of the TARP.
Payments under HAMP are contingent on borrowers remaining
in ‘‘good standing.’’ A borrower loses good standing when an
amount equal to three full monthly payments is due and unpaid on
the last day of the third month in which payments were due. If this
occurs, good standing cannot be restored, and the borrower permanently loses eligibility to receive further incentives and reimbursements under HAMP. A borrower who fails a HAMP modification is
not eligible for another HAMP offer, even if the borrower fully
cures the delinquency. However, the servicer is obligated to work
with the borrower to attempt to cure their delinquency. If a cure
cannot be reached, the servicer must consider the borrower for ‘‘any
other home retention loss mitigation options that may be available.’’ If those options are unsuccessful, a short sale or deed-in-lieu
must be considered.604 Notwithstanding any future changes Treasury may make to the program, provisions addressing troubled
modifications and redefaults will not change following the expiration of the TARP or the cessation of additional modifications.
The October 2010 expiration of TARP will have one notable effect
on the foreclosure mitigation programs by freezing the maximum
number of modifications, even though the program will continue to
operate. The funds available to pay servicer, borrower, and investor
payments are capped based upon each servicer’s Servicer Participation Agreement.605 Treasury established the amount in each
servicer’s initial program participation cap by ‘‘estimating the number of HAMP modifications expected to be performed by each
598 Monthly incentive payments are distributed on a consolidated basis, rather than by individual loan. Supplemental Documentation for HAMP, supra note 592, at 25.
599 Fannie Mae provides loan-level accounting for the incentives. Id.
600 Making Home Affordable: Program Update, supra note 594.
601 Treasury is not providing guidance on how those funds are to be passed through to security
holders of securitization trusts.
602 See Agency Financial Statement 2009, supra note 32 (‘‘We need to continue to find ways
to help mitigate foreclosures for responsible homeowners . . .’’).
603 Supplemental Documentation for HAMP, supra note 592, at 25.
604 Supplemental Documentation for HAMP, supra note 592, at 25.
605 U.S. Department of the Treasury, Supplemental Directive 09–01 Introduction of the Home
Affordable Modification Program, at 23 (online at www.hmpadmin.com/portal/docs/
hamplservicer/sd0901.pdf) (hereinafter ‘‘Supplemental Directive for HAMP’’).

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servicer during the term of the HAMP.’’ 606 Once a servicer’s cap
is reached, a servicer cannot ‘‘enter into any agreements with borrowers intended to result in new loan modifications, and no payments will be made with respect to any new loan modifications.’’ 607
Treasury, at its sole discretion, can adjust a servicer’s cap based on
an updated estimate of the number of HAMP modifications the
servicer is expected to perform.608 For example, the total initial allocation to servicers was $23.6 billion, but the various allocations
have been increased by a total of $11.9 billion to the current cap
of $35.5 billion. However, Treasury will only commit funds to
servicers until TARP’s October 2010 expiration.609 This means that
after October 3, 2010, the maximum amount each servicer is authorized to modify under HAMP will be locked into place, and
Treasury can no longer increase a servicer’s cap, only decrease it,
through the end of the program.
2. Future Considerations
Moving forward, Treasury has stated that its focus will remain
on foreclosure mitigation as a key part of its new TARP commitment strategy.610 The prospect of future initiatives raises important questions about future expenditures, timetables, management,
supervision and enforcement, in addition to Treasury’s relationship
to servicers and borrowers going forward. At this time, Treasury
has not announced any changes to the foreclosure mitigation programs on these points. Further, as noted in the Panel’s October
2009 report, the foreclosure problem is far from abating, and with
rising unemployment, widespread deep negative equity, and recasts
on payment-option adjustable rate mortgages and interest-only
mortgages increasing in volume, there is no immediate sign of a
resolution to the foreclosure crisis in sight.611 While Treasury has
structured the Servicer Participation Agreements to allow servicers
to modify mortgages through 2012, it is unclear that Treasury
would have the authority to introduce any new foreclosure initiatives or make changes to existing programs past the October 2010
expiration of the TARP. Therefore, should Treasury intend to make
changes to address these matters, the changes would need to be
implemented relatively soon.
Treasury identified its key challenges related to HAMP going forward as three-fold: To reach more eligible borrowers, to help borrowers convert more modifications from trial to permanent, and to
increase transparency to assure the public that the program is
helping homeowners as intended.612 Of these objectives, borrower
606 Id.
607 Id.

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608 Id.
609 U.S. Department of the Treasury, Making Home Affordable Borrower Frequently Asked
Questions, at 11 (July 16, 2009) (online at www.financialstability.gov/docs/borrowerlqa.pdf).
610 See Agency Financial Statement 2009, supra note 32; Sec. Geithner Written Testimony,
supra note 32, at 5 (‘‘Second, we must fulfill EESA’s mandate to preserve home ownership, stimulate liquidity for small businesses, and promote jobs and economic growth. To do so, we will
limit new commitments in 2010 to three areas. We will continue to mitigate foreclosure for responsible American homeowners as we take the steps necessary to stabilize our housing market’’).
611 See COP October Oversight Report, supra note 583.
612 House Financial Services Committee, Written Testimony of Assistant Secretary Herbert Allison, The Private Sector and Government Response to the Mortgage Foreclosure Crisis 111th
Continued

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conversions is the ‘‘central focus.’’ 613 HAMP was not designed to
address foreclosures caused by unemployment, which now appears
to be a central cause of nonpayment. Testifying before the House
Financial Services Committee in December, Assistant Secretary Allison stated:
While our key focus is on helping as many borrowers as
quickly as possible under the current program, Treasury
recognizes that unemployment presents unique challenges
and is still actively reviewing various ideas and suggestions in order to improve implementation and effectiveness
of the program in this area.614
Finally, as Treasury winds down the foreclosure mitigation programs under the TARP, it must be cognizant of the intersection of
these programs with other non-TARP programs and initiatives,
which may also be unwound or changed. For example, the Federal
Reserve’s monetary policy has produced low interest rates, which
have stimulated greater demand for mortgage financed home purchases by lowering the cost of capital, and federal government support for the GSEs and the private label mortgage backed securities
market has also contributed to liquidity and thus lowered the costs
of mortgage capital. This level of support cannot continue indefinitely, however, and as long as foreclosures and real estate owned
inventory flood the housing market and contribute to an oversupply
of housing stock for sale, there will be strong downward pressure
on home prices.
F. What Remains and What Additional Assets Might Be
Acquired?

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Set forth above in Sections D and E is a summary of the TARP
initiatives that are open and closed to new expenditures. As of December 30, 2009, $65.5 billion of TARP funds have been committed
and not used and $336.2 billion of TARP funds remains uncommitted.615 On December 10, 2009, Secretary Geithner announced that
Treasury will continue to wind down programs put in place to address the crisis. During the fourth quarter of 2009, the CPP ended.
New TARP commitments in 2010 will be in three areas:
• Continuing foreclosure mitigation; 616
• Providing capital to small and community banks and reserve funds to facilitate small business lending; 617 and
• Increasing commitment to the TALF.618
In addition, if passed, the following proposed legislation includes
several provisions that would impact the TARP.
H.R. 4173, the Wall Street Reform and Consumer Protection Act
of 2009, passed the House of Representatives on December 11, 2009
by a vote of 223 to 202.619 The bill includes a series of measures
Cong. (Dec. 8, 2009) (online at www.house.gov/apps/list/hearing/financialsvcsldem/
herblallison.pdf).
613 Id.
614 Id.
615 See Figure 22.
616 For further discussion, see Section E, infra.
617 For further discussion, see Section D.11, infra.
618 For further discussion, see Section D.10, infra.
619 Wall Street Reform and Consumer Protection Act of 2009, H.R. 4173, 111th Cong. (2009).

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that would comprehensively reform the U.S. financial regulatory
structure. In addition, the bill includes the following TARP provisions:
• The bill would reduce the maximum allowable amount outstanding under TARP by $20.8 billion and use the money to
offset the excess costs of the bill.620
• An amendment offered by Rep. Barney Frank (D–MA),
adopted by a vote of 240 to 182, would authorize Treasury to
transfer $3 billion in funds available under EESA to the Department of Housing and Urban Development (HUD) to provide emergency low-interest loans to unemployed homeowners
in need of assistance in making mortgage payments and $1 billion to HUD’s Neighborhood Stabilization Program to assist
states and local governments with the redevelopment of abandoned and foreclosed homes.621
• Section 134 of EESA states that should TARP realize a net
loss, ‘‘the President shall submit a legislative proposal that recoups from the financial industry an amount equal to the
shortfall in order to ensure that the Troubled Asset Relief Program does not add to the deficit or national debt.’’ An amendment offered by Rep. Gary Peters (D–MI), adopted by a vote
of 225–198, would authorize the FDIC to make assessments on
large financial institutions to compensate for any such TARP
shortfall.622
The Senate Committee on Banking, Housing & Urban Affairs expects to mark up its version of this bill at the end of January 2010.
H.R. 2847, Jobs for Main Street Act of 2010, passed the House
of Representatives on December 16, 2009, by a vote of 217 to
212.623 The bill, which originated as the FY 2010 Commerce-Justice-Science appropriations bill, authorizes $154 billion for job creation and the extension of unemployment benefits. The bill would
reduce the maximum amount outstanding under the TARP by $150
billion and redirect $75 billion to create new jobs through infrastructure projects ($48.3 billion) and prevent layoffs of state and
local employees ($26.7 billion).624 The remaining $79 billion in
spending, not funded through the TARP, would pay for the extension of unemployment benefits and health insurance aid for the jobless, measures that were included in the $787 billion economic
620 Congressional Budget Office, Cost Estimate of H.R. 4173, Wall Street Reform and Consumer Protection Act of 2009 (Dec. 9, 2009) (online at www.cbo.gov/ftpdocs/108xx/doc10844/
hr4173asreported.pdf).
621 Representative Barney Frank, Wall Street Reform and Consumer Protection Act of 2009,
Congressional Record Vol. 155, No. 186: p. H14663–14664 (Dec. 10, 2009) (online at
frwebgate.access.gpo.gov/cgi-bin/getpage.cgi?position=all&page=H14663&dbname=2009lrecord).
622 Rep. Gary Peters, Amendment to the Wall Street Reform and Consumer Protection Act of
2009, Congressional Record, H14748–14750 (Dec. 11, 2009) (online at www.congress.gov/cgi-lis/
˜
query/D?r111:1:./temp/r111kAWb3J::).
623 Jobs for Main Street Act, H.R. 2847, 111th Cong. (2009).
624 In its March 2009 baseline projection, the Congressional Budget Office (CBO) estimated
that Treasury would use all of the spending authority available under the TARP. That baseline
was adopted as the Congress’ budget resolution baseline for scorekeeping purposes and is used
by CBO for estimating the budgetary impact of legislation until the Congress adopts a new baseline for scorekeeping purposes. Using the March baseline’s estimated average subsidy of 50 percent for the use of uncommitted TARP authority, the bill’s proposed reduction in authority of
$150 billion would result in outlay savings of $75 billion which would be redirected toward job
creation initiatives.

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stimulus package (Pub. L. 111–5) earlier this year. The Senate is
expected to act on this bill in January 2010.625
G. Unwinding Implicit Guarantees in a Post-TARP World
There are two kinds of tools available to counteract the effects
of implicit guarantees.626 One is to regulate the institutions that
are the beneficiaries of such risks in order to minimize the impact
of the guarantees. The second is to create a credible system in
which such institutions could be liquidated or otherwise reorganized so that failure is a real possibility.627 The options may work
alone or in concert. In the following section, this report lays out
several options that have been discussed by various commentators,
and describes legislative proposals by Congress and the current Administration. The Panel does not take a position as to whether any
of these options are advisable; the sole purpose in describing the
options available is to provide a brief survey of current thought on
this issue.
1. Regulatory Options
The regulatory options most often discussed at present include
the following broad categories:
a. Limitations on Size
One school of thought holds that size alone is a threat to the system.628 The proponents of this theory point out that just four of the
8,100 or so U.S. banks control nearly 40 percent of the deposits in
the U.S. banking system,629 that as of September 30, 2009, the four
625 Geof

Koss, House-Passed Jobs Measure Will Wait, CQ Weekly (Dec. 28, 2009).
is important to note that implicit guarantees from government subsidization or sponsorship exist in numerous markets. For example, before the mortgage crisis, Government Sponsored Enterprises (GSEs) such as Fannie Mae were thought to be shielded from aggregate credit
risks by implicit government backing, allowing them to take on debt at rates below those paid
by private institutions. See Karsten Jeske & Dirk Kreuger, Housing and the Macroeconomy: The
Role of Implicit Guarantees for Government-Sponsored Enterprises, Federal Reserve Bank of Atlanta
Working
Paper
2005–15
(Aug.
2005)
(online
at
papers.ssrn.com/sol3/
papers.cfm?abstractlid=811004). Some economists have argued that such implicit guarantees
contributed to the mortgage crisis. See Vernon L. Smith, The Clinton Housing Bubble, Wall
Street Journal (Dec. 18, 2007) (online at online.wsj.com/article/SB119794091743935595.html).
This report, however, addresses the effects of TARP and its aftermath and so is limited in scope
to the concerns created by the implicit guarantee to large financial institutions.
627 The Panel made a number of recommendations on this topic in its special report on regulatory reform. Congressional Oversight Panel, Modernizing the American Financial Regulatory
System: Recommendations for Improving Oversight, Protecting Consumers, and Ensuring Stability (Jan. 29, 2009) (online at cop.senate.gov/reports/library/report-012909-cop.cfm).
628 This seems to be the belief in Europe. Several large, struggling financial institutions have
instead been forced to sell off business units, leaving the parent companies smaller but, ostensibly, stronger. Most notably, Royal Bank of Scotland PLC in the UK, ABN Amro in the Netherlands, and Dexia SA in Belgium have all recently announced planned sell-offs. See The Royal
Bank of Scotland, RBS Announces Successful Sale of RBS Asset Management Fund Management
Assets (Jan. 8, 2010) (online at www.rbs.com/media/news/press-releases/2010-press-releases/
2010-01-08-asset-finance-sale.ashx) (quoting the RBS Group’s CFO, Bruce Van Suan as saying
‘‘This transaction represents another step in our plan to restructure RBS around its core customer franchises’’); Ministry of Finance of the Netherlands, Government Clears the Way for Integration of ABN Amro and Fortis Bank Netherlands (Nov. 19, 2009) (online at www.minfin.nl/
english/News/Newsreleases/2009/11/GovernmentlclearslthelwaylforlintegrationloflABNl
AMROlandlFortislBanklNederland) (citing letter from Dutch Minister of Finance to the
Dutch Lower House of Parliament stating that ‘‘the hiving off of business units is necessary’’);
Dexia, Societe General and Dexia Complete the Credit du Nord Transaction (Dec. 11, 2009) (online at www.dexia.com/docs/2009/2009lnews/20091210lcreditlnordlUK.pdf) (noting that
Dexia’s divestiture of its 20 percent stake in Credit du Nord is part of the Dexia Group’s restructuring plan).
629 These banks are Citigroup, Bank of America, Wells Fargo, and JPMorgan.

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largest banks held 37.9 percent of all domestic assets,630 and that
a collapse of any one of them could bring down the banking system,
if not large portions of the economy.631 While JPMorgan Chase
CEO Jamie Dimon argues that a regulatory system could be created to deal with the failure of very large banks, as the FDIC deals
with failed commercial banks,632 the ‘‘just too big’’ school points out
that the FDIC system is predicated on the existence of bigger
banks that can take over the assets of failed commercial banks,
and that no entity exists that can take over a failed very large
bank, except the U.S. government.633 Among the proponents of this
argument is former Federal Reserve Chairman Alan Greenspan,
who maintains that the solution to the too big to fail problem will
require ‘‘radical things,’’ such as the forced break-up of very large
banks, just as Standard Oil was broken up in 1911.634 Without
such action, Mr. Greenspan believes the implicit subsidy provided
to very large firms will result in ‘‘a moribund group of obsolescent
institutions, which will be a big drain on the savings of this society.’’ 635 David Moss, the John G. McLean Professor of Business Administration at Harvard Business School, suggests an alternative
solution to the too big to fail problem in which federal officials
identify financial institutions whose failure would pose a systemic
threat to the broader financial system and submit such institutions
to increased oversight and mandatory federal insurance.636
Others have suggested imposing limitations that prohibit banks
getting to a specified size. For example, Simon Johnson, Professor
of Global Economics and Management at the MIT Sloan School of
Management, has suggested that capping assets under management at a single financial institution at $100 billion may permit
such institutions to pass easily through the bankruptcy system, obviating the need for bailouts.637
Those in favor of retaining very large banks say there is a need
within the global economy for large banks capable of lending billions of dollars at a time. Gerald Corrigan, a managing director of
630 Specifically, four banks accounted for 37.9 percent of the assets of all insured U.S.-chartered commercial banks with assets of at least $300 million. See Board of Governors of the Federal Reserve System, Large Commercial Banks (online at www.federalreserve.gov/releases/lbr).
631 See, e.g., Joint Economic Committee, Written Testimony of Joseph Stiglitz, Professor, Columbia University, Too Big to Fail or Too Big to Save? Examining the Systemic Threats of Large
Financial Institutions, 111th Cong., at 2–3 (Apr. 21, 2009) (online at jec.senate.gov/
index.cfm?FuseAction=Files.View&FileStore‘id=6b50b609-89fa-4ddf-a799-2963b31d6f86).
632 Jamie Dimon, No More Too Big To Fail’, Washington Post (Nov. 13, 2009) (online at
www.washingtonpost.com/wp-dyn/content/article/2009/11/12/AR2009111209924.html).
633 See, e.g., Joint Economic Committee, Written Testimony of Thomas M. Hoenig, President,
Federal Reserve Bank of Kansas City, Too Big to Fail or Too Big to Save? Examining the Systemic Threats of Large Financial Institutions, 111th Cong., at 23–24 (Apr. 21, 2009) (online at
jec.senate.gov/index.cfm?FuseAction=Files.View&FileStorelidl5335d2cb-895a-4075-8db8a8b71e27f933).
634 Alan Greenspan, C. Peter McColough Series on International Economics: The Global Financial Crisis: Causes and Consequences, Council on Foreign Relations (Oct. 15, 2009) (online at
www.cfr.org/publication/20417/
clpeterlmccoloughlserieslonlinternationalleconomics.html) (hereinafter ‘‘Greenspan on
the Causes of the Crisis’’).
635 Id.
636 David Moss, An Ounce of Prevention: The Power of Public Risk Management in Stabilizing
the Financial System, Harvard Business School Working Paper No. 09–087 (Rev. Jan. 27, 2009)
(online at www.hbs.edu/research/pdf/09-087.pdf) (hereinafter ‘‘David Moss An Ounce of Prevention’’).
637 House Financial Services Committee, Written Testimony of Simon Johnson, Ronald A.
Kurtz Professor of Entrepreneurship, MIT’s Sloan School of Management, Systemic Risk: Are
Some Institutions too Big to Fail, and if so, What Should We Do About It?, 111th Cong. (July
21, 2009) (online at www.house.gov/apps/list/hearing/financialsvcsldem/simonljohnson.pdf)
(hereinafter ‘‘Johnson Testimony on Systemic Risk’’).

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Goldman Sachs & Co., has remarked that it is the size of large financial institutions ‘‘that allows [them] to meet the financing needs
of large corporations—to say nothing of the financing needs of sovereign governments.’’ 638 And while one commentator has noted
that ‘‘[t]he presumption . . . that big meant diversified and sophisticated and, therefore, less risky . . . proved false,’’ nonetheless,
‘‘the size of many of our financial institutions, despite its role in
bringing on the crisis, has also greatly benefited the U.S. economy’’
by ‘‘enabl[ing] our big financial firms to compete against others in
Europe and Asia’’ and that ‘‘[s]hould we fragment and constrain the
system and cap the size of banks, it would undoubtedly limit the
competitive level of service, breadth of products, and speed of execution,’’ leading clients to ‘‘turn to foreign banks that don’t face the
same restrictions.’’ 639
Martin Baily and Robert Litan of the Brookings Institution have
made the same argument, testifying before a Senate committee
that ‘‘[w]e need very large financial institutions given the scale of
the global capital markets, and, of necessity, some of these may be
‘too big to fail’ because of systemic risks. For U.S. institutions to
operate in global capital markets, they will need to be large.’’ 640
Messrs. Baily and Litan further argued that punishing banks for
becoming ‘‘too’’ successful will also have a negative impact on the
willingness of financial institutions to compete with each other.641
Opponents of the view that the global market demands very
large banks state that the need for a loan of $8 billion can be met
by eight smaller banks each lending $1 billion. They further argue
that these banks would compete against each other to provide the
best loan terms, improving market efficiency over the current scenario in which a handful of banks provide all of the capital.642
Such an arrangement would also spread out the risk so that the
majority of large transactions would not rest on a small number of
very large banks.643 One commentator has argued that large corporations do not typically use one megabank to complete a significant transaction, but that up to 11 such large banks may be necessary.644 To the extent that a company operates in multiple countries, this commentator argues, the company is likely to select the
best bank for its needs in each country or region, rather than rely638 E. Gerald Corrigan, Containing Too Big to Fail, Remarks at The Charles F. Dolan Lecture
Series, Fairfield University (Nov. 10, 2009) (online at www.fairfield.edu/documents/academic/
dsblcorriganlremarksl09.pdf).
639 Mortimer Zuckerman, Finding the Right Fix for ‘‘Too Big to Fail,’’ Wall Street Journal
(Nov.
25,
2009)
(online
at
online.wsj.com/article/
SB10001424052748704888404574550570805868530.html).
640 Senate Committee on Banking, Housing and Urban Affairs, Testimony of Martin Neil Baily
and Robert E. Litan, Regulating and Resolving Institutions Considered ‘‘Too Big to Fail,’’ 111th
Cong.
(May
6,
2009)
(online
at
banking.senate.gov/public/index.cfm?FuseAction=
Hearings.Hearing&HearinglID=7d66a948-69e4-407e-a895-04cec6a4f541) (hereinafter ‘‘Bailey
and Litan Testimony’’).
641 Bailey and Litan Testimony, supra note 640.
642 Cf. Johnson Testimony on Systemic Risk, supra note 637 (Dr. Johnson argues that ‘‘breaking up our largest banks would likely increase (rather than reduce) the availability of low-cost
financial intermediation services’’). Ilan Moscovitz and Morgan Housel, It’s Time to End ‘‘Too
Big To Fail,’’ The Motley Fool (Nov. 13, 2009) (online at www.fool.com/investing/general/2009/
11/13/its-time-to-end-too-big-to-fail.aspx) (hereinafter ‘‘It’s Time to End ‘Too Big To Fail’ ’’).
643 It’s Time to End ‘‘Too Big To Fail’’, supra note 642.
644 James Kwak, Who Needs Big Banks, The Baseline Scenario (Oct. 12, 2009) (online at
baselinescenario.com/2009/10/12/who-needs-big-banks/) (hereinafter ‘‘Who Needs Big Banks’’).

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101
ing on one-stop-shopping for its banking, countering the argument
that multinational companies need multinational banks.645
b. Limitations on Activities
Some commentators have advocated for the reinstatement of the
provisions of the Glass-Steagall Act, repealed in 1999, which precluded banks from acting as both investment banks and depository
institutions. Notably, in May 2009, Congressman Maurice Hinchey
(D–NY), with the support of fellow House members John Tierney
(D–MA), Jay Inslee (D–WA), John Conyers (D–MI), and Peter
DeFazio (D–OR), proposed an amendment that would reinstate
those provisions. In announcing the amendment, Representative
Hinchey stated that the repeal had created banks that provided
‘‘one stop shopping’’ with the result that ‘‘these banks were empowered to make large bets with depositors’ money and money they
didn’t really have. When many of those bets, particularly in the
housing sector, didn’t pan out, the whole deck of cards came crumbling down and U.S. taxpayers had to come to the rescue.’’ 646 Senators John McCain (R–AZ) and Maria Cantwell (D–WA) have recently introduced a bill in the Senate to prohibit certain affiliations
between commercial and investment banks.647
Paul Volcker, the former chairman of the Federal Reserve and
current chairman of the President’s Economic Recovery Advisory
Board, has also recommended reinstating a barrier between commercial and investment banks that, while not a full return to
Glass-Steagall as it previously existed, would be functionally similar to the barrier that existed under certain repealed sections of
that act. Mr. Volcker has proposed breaking up the largest banks
into investment houses and commercial banks, with government
assistance available only to the commercial banks.648 The commercial banks would take deposits, make loans, and trade securities for
their customers, but not for themselves. These banks would be eligible for government assistance if they were to falter. The investment banks, on the other hand, would be free to engage in riskier
behavior because they would be buying and selling their own securities, but they would not be rescued if they were poised to fail. According to Mr. Volcker, regulation is insufficient without separating
commercial banks from investment banks. ‘‘The [commercial]
banks,’’ he has stated, ‘‘are there to serve the public, and that is
what they should concentrate on. These other activities create conflicts of interest. They create risks, and if you try to control the
risks with supervision, that just creates friction and difficulties.’’ 649

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645 Id.
646 Office of Representative Maurice Hinchey, Hinchey to Introduce Amendment to Reinstate
Glass-Steagall Act to Break Up MegaBanks that Caused Financial Crisis (Dec. 7, 2009) (online
at www.house.gov/apps/list/press/ny22lhinchey/morenews/120709glassstegallamendment.html).
647 Banking Integrity Act of 2009, S. 2886, 111th Cong. (2009).
648 Charlie Rose, Paul Volcker: The Lion Lets Loose, BusinessWeek (Dec. 30, 2009) (online at
www.businessweek.com/magazine/content/10l02/b4162011026995.htm)
(interview
of
Mr.
Volcker in which Mr. Volcker explained his vision of the type of reform needed); see also Louis
Uchitelle, Volcker Fails to Sell a Bank Strategy, New York Times (Oct. 21, 2009) (online at
www.nytimes.com/2009/10/21/business/21volcker.html?lr=1) (hereinafter ‘‘Volcker Fails to Sell
a Bank Strategy’’) (quoting statements by Mr. Volcker on the same subject).
649 This position is not far from the ‘‘break-up-the-banks’’ position advocated by Alan Greenspan. Greenspan, however, seems opposed to reinstating Glass-Steagall at this juncture. Volcker
Fails to Sell a Bank Strategy, supra note 648. While similar in their desire to divide up the
Continued

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In response to these arguments, some commentators have stated
that the repealed portions of Glass-Steagall have had little impact
on the way traditional banks conduct their business, and that reinstating these portions would have implications in the international
sphere while doing nothing to prevent another crisis.650 These commentators note that commercial banks have suffered because of
their investment decisions with respect to mortgages, and other
types of traditional lending—activities permitted under GlassSteagall. The repeal of portions of Glass-Steagall permitted banks
to engage in underwriting and dealing in securities, but these commentators note, those activities have not caused banks to fail. Instead, they argue, it was overinvestment in mortgage backed securities that led to the crisis, a phenomenon that would not have
been prevented by Glass-Steagall.651 Former chairman of the law
firm Sullivan & Cromwell H. Rodgin Cohen recently stated, ‘‘If you
look at what happened, with or without Glass-Steagall, it would
have made no difference.’’ 652 Mr. Cohen and others point out that
both Bear Stearns and Lehman brothers were pure investment
banks, and so would not have been affected by the Glass-Steagall
prohibition on joint investment-commercial banks.653 Opponents of
the Act’s revival also argue that the Act was in place during the
savings and loan crisis of the 1980s, yet did not prevent that crisis.654 Furthermore, according to economist Mark Zandi, reinstating those portions of Glass-Steagall and ‘‘breaking up the banking system’s mammoth institutions would be too wrenching and
would put U.S. institutions at a distinct competitive disadvantage
`
vis-a-vis their large global competitors’’ who do not have such restrictions.655

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c. Increased Regulatory Oversight
Another school of thought holds that large institutions that pose
a systemic risk will and must exist, and that the best solution is
to increase regulation of these institutions proportionately to the
risk that they pose.656 Certain legislative proposals put forward in
banks, the rationale behind the two positions is not fully aligned. The Greenspan position holds
that the size of the banks themselves creates the risk, while Volcker’s position holds that it is
the inherent conflict within the banks that causes commercial banks to engage in risky behavior
befitting investment banks. Other commentators suggest simply spinning off the banks’ proprietary trading activities. See Roger Ehrenberg, Rethinking the Wall Street Business Model (Part
1) (Nov. 21, 2009) (online at www.informationarbitrage.com/2009/11/rethinking-the-wall-streetbusiness-model.html).
650 See, e.g., Peter Wallison, Did the ‘‘Repeal’’ of Glass-Steagall Have Any Role in the Financial
Crisis? Not Guilty. Not Even Close, Networks Financial Institute (Nov. 2009) (online at
papers.ssrn.com/sol3/papers.cfm?abstractlid=1507803) (hereinafter ‘‘Wallison Paper on GlassSteagall’’); Robert Pozen, Stop Pining for Glass-Steagall, Forbes.com (Oct. 5, 2009) (online at
www.forbes.com/forbes/2009/1005/opinions-glass-steagall-on-my-mind.html).
651 See, e.g., Wallison Paper on Glass-Steagall, supra note 650.
652 Alison Vekshin & James Sterngold, Reviving Glass-Steagall Means ‘‘War’’ on Wall Street,
BusinessWeek (Dec. 27, 2009) (online at www.businessweek.com/investor/content/dec2009/
pi20091228l523550.htm) (hereinafter ‘‘ ‘War’ on Wall Street’’).
653 ‘‘War’’ on Wall Street, supra note 652.
654 Would Reinstatement of Glass-Steagall Improve Banking?, American Banking News (Jan.
4, 2010) (online at www.americanbankingnews.com/2010/01/04/would-reinstatement-of-glasssteagall-improve-banking/).
655 House Financial Services Committee, Written Testimony of Mark Zandi, chief economist
and co-founder of Moody’s Economy.com, Systemic Risk: Are Some Institutions too Big to Fail,
and if so, What Should We Do About It?, 111th Cong. (July 21, 2009) (online at www.house.gov/
apps/list/hearing/financialsvcsldem/zandi.pdf).
656 See, e.g., Paul Krugman, Too Big to Fail FAIL, The New York Times (June 18, 2009) (online at krugman.blogs.nytimes.com/2009/06/18/too-big-to-fail-fail) (noting that systemic risk is
not a new concept and was a concern at least as of the Latin debt crisis in 1982. The solution,

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the House and Senate, and by the current Administration, hew
closely to this line. Under key provisions of these proposals, systemic risk would be managed through either new or newly empowered government entities and increased supervision and regulation
of financial institutions.657 These proposals are discussed in detail
in Section G.4 below.
Some have argued that increased regulation would only exacerbate the current problem of implicit guarantees by highlighting the
firms that require additional oversight, thus marking them as too
big to fail. Kevin Hassett of the American Enterprise Institute has
remarked that ‘‘[o]nce there is a public list of firms that are too big
to fail, they will have an enormous competitive advantage . . .
[s]ince government is backstopping them, they will be able to borrow at lower interest rates[.]’’ 658 SEC Commissioner Elisse Walter
has similarly testified that under proposed legislation creating a
council to monitor financial risk, ‘‘a real risk remains that market
participants will favor large interconnected firms, particularly
those identified as systemically important, over smaller firms of
equivalent creditworthiness, because of the belief that the government will step in and support such an institution, its bondholders,
or counterparties in times of crisis.’’ 659 Others have observed that
if interconnectedness results in systemic risk that must be regulated, there is no reason to stop at financial institutions; any large,
interconnected business must be similarly regulated—or there is no
need for such regulation because interconnectedness is not inherently risky.660 There is the additional difficulty of identifying potentially risky behavior in time to avert a financial crisis. In light
of the failure of many to predict the current crisis, the question
arises of what level of competence is required for an economist to
predict accurately which institutions will pose a threat to our financial system.661

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d. Charging Too Big To Fail Institutions Insurance
Fees or Taxes
Banks that are considered too big to fail receive the benefit of an
implicit taxpayer subsidy, since their cost of funding does not adequately reflect the potential costs of their rescue. Some of the reform proposals suggest that institutions that are found to pose systemic risks be assessed financial contributions for the risk they
he states, is to ‘‘[r]egulate and supervise, then rescue if necessary; there’s no way to make this
[financial system] automatic’’).
657 U.S. Department of the Treasury, Financial Regulatory Reform: A New Foundation, at 10–
19 (June 17, 2009) (online at www.financialstability.gov/docs/regs/FinalReportlweb.pdf).
658 Kevin Hassett, Obama’s Too-Big-to-Fail Plan Is Too Dumb to Pass, American Enterprise
Institute for Public Policy Research (Sept. 28, 2009) (online at www.aei.org/article/101075).
659 House Committee on Agriculture, Written Testimony of Securities and Exchange Commissioner Elisse Walter, Review of Financial Stability Improvement Act, 111th Cong. (Nov. 17,
2009) (online at agriculture.house.gov/testimony/111/h111709/Walter.pdf).
660 See Hal Scott, Do We Really Need a Systemic Regulator?, Wall Street Journal (Dec. 10,
2009) (online at online.wsj.com/article/SB10001424052748704342404574577870952276300.html).
661 One method of valuing risk that has been proposed in the past is to track the spread between the yield on a Treasury bond and on an institution’s own subordinated debt with a similar
maturity date. The rationale is that the spread should reflect the increased yield to balance the
increased risk presented by the institution. This notion has been challenged, however, by data
analysis that shows a lack of correlation between risk and yield spreads. C.N.V. Krishnan et
al., Monitoring and Controlling Bank Risk: Does Risky Debt Help?, The Journal of Finance (Feb.
2005); Diana Hancock and Myron L. Kwast, Using Subordinated Debt to Monitor Bank Holding
Companies: Is It Feasible?, The Federal Reserve Board of Governors (Apr. 27, 2001) (online at
www.federalreserve.gov/Pubs/FEDS/2001/200122/200122pap.pdf).

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pose, either before or after any failure occurs. A proposal introduced by House Financial Services Committee Chairman Barney
Frank would create an insurance fund within the FDIC similar to
that available to insure bank deposits to be used to ‘‘extend credit
to or guarantee obligations of solvent insured depository institutions or other solvent companies that are predominantly engaged
in activities that are financial in nature, if necessary to prevent financial instability during times of severe economic distress[.]’’ 662
This insurance would be funded by assessments on ‘‘large financial
companies’’ under terms in the Administration’s proposed regulatory reform legislation that would enable the FDIC to impose
‘‘risk-based assessments on bank holding companies based on their
total liabilities.’’ 663
At least one commentator has noted a flaw in this proposal. According to economist Dean Baker, because the fee is to be assessed
only after a bank faces failure, either the necessary funds are unlikely to be available, or other banks are unlikely to be willing to
make such payments.664 Whether the former or the latter scenario
applies, he writes, depends on whether the failing bank has gotten
into trouble by doing what everyone else was doing—in which case
all the other banks would be in just as much trouble and unable
to pay—or it was doing some unusual, risky thing—in which case
all the other banks would be unwilling to underwrite the failing
bank’s imprudence. David Moss of the Harvard Business School
has proposed, among other options, a system of federal capital insurance under which systemically significant institutions would be
publicly identified and then required to pay into a federal insurance fund on a regular basis.665 Premiums, as for any insurance
plan, would be keyed to the level of risk the insured posed, and
payments on claims would be limited to a pre-set amount.666 Mr.
Moss also believes that in the event of a failure, the federal government should not bail out or prop up the failing company, but
should take the company over and restructure, sell, or liquidate
it.667 Such measures, he believes, would result in a system where
no institution is too big to fail.
Another option may be a so-called Tobin tax, named after the
late economist James Tobin, which would impose a tax on crosscurrency financial transactions. While a Tobin tax has been most
often proposed as a means of funding projects for the public good,
today’s proponents envisage it as an emergency fund to be used to
support a faltering financial system. The most prominent proponent of the tax has been British Prime Minister Gordon Brown,
who reportedly raised the issue of creating such a tax during the

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662 Financial

Stability Improvement Act of 2009, H.R. 3996, § 1109(a) (2009).
663 Resolution Authority for Large, Interconnected Financial Companies Act of 2009, 1209(o)(1)
(2009). The House bill actually states that the assessments are to be made under 1609(o) of the
Administration’s proposal. No such section of that proposal exists while 1209(o) appears to include the provision to which the House bill intended to refer.
664 Dean Baker, Breaking Up the Banks is Hard to Do, The Guardian (Nov. 2, 2009) (online
at
www.guardian.co.uk/commentisfree/cifamerica/2009/nov/02/banking-regulation-us-congress/
print).
665 David Moss An Ounce of Prevention, supra note 636.
666 David Moss An Ounce of Prevention, supra note 636.
667 David Moss An Ounce of Prevention, supra note 636.

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November 2009 meeting of the finance ministers of the G–20.668
Secretary Geithner reportedly rejected the idea during the same
meeting.669 Opponents of the tax argue that the presence of such
an emergency fund may perpetuate moral hazard as institutions
begin to rely on the presence of the fund to backstop major
losses.670
e. Other Regulatory Options
Messrs. Baily and Litan, whose views on the need for large
banks are discussed above, argue that while the government should
not break up large banks, it should take steps to ensure that any
large-scale growth is ‘‘organic,’’ based on the banks’ own success,
and not the result of a merger. To this end, they argue, the government should review proposed mergers to prevent those that would
create an institution that might pose a systemic risk.671
2. Liquidation and Reorganization
The impact of implicit guarantees can also be substantially reduced if there are credible ways to liquidate or reorganize failing
businesses. In effect, if there are ways to permit such businesses
to fail, then they are no longer too big to fail. Several options are
under discussion.

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a. ‘‘Living Wills’’
There are many advocates of ‘‘living wills,’’ contingency plans creating a systematic regime under which an institution that posed a
systemic risk would be wound down, which also entails the institution reorganizing itself so that the plan can be effected in a crisis.672 Advocates argue that the existence of such plans would
avoid the shockwaves that the disorderly collapse of Lehman
Brothers caused and AIG threatened, but it is possible that the
very act of creating such plans might bring unexpected risks to the
attention of management in time for them to be addressed.673 Living wills could be used in conjunction with several of the other regulatory approaches being considered.
However, even commentators generally in favor of this concept
note that living wills are an incomplete tool without ensuring separation among an institution’s component parts. This separation can
take place along activity lines, where systemically critical functions
must have ring-fencing capable of protecting them during the
unwinding pursuant to the living will.674 The international com668 Gordon Brown’s Global Tax Trap, Wall Street Journal (Nov. 13, 2009) (online at
online.wsj.com/article/SB10001424052748704576204574531211500981726.html#printMode)
(hereinafter ‘‘Gordon Brown’s Global Tax Trap’’).
669 Gordon Brown’s Global Tax Trap, supra note 668.
670 Gordon Brown’s Global Tax Trap, supra note 668.
671 Bailey and Litan Testimony, supra note 640.
672 Among the proponents for such contingency plans are members of the House and Senate
and the President, who have included variations on this idea in their financial reform bills. See
Section G.4, infra.
673 One related proposal would have banks issue contingent convertible bonds, long-term debt
that would be convertible to equity upon a triggering event, providing the bank with access to
capital. A ‘‘living will’’ would be required in the event the new equity was insufficient to meet
the bank’s needs. See, e.g., the description in Section G.4(c) below of the bill that has been proposed in the Senate, which incorporates this proposal.
674 Senate Committee on Banking, Housing, and Urban Affairs, Written Testimony of Vincent
Reinhart, Resident Scholar, American Enterprise Institute, Establishing a Framework for SysContinued

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plexities of large, interconnected firms also may require that ringfencing or other separation by national operating units accompany
living wills.675 The absence of ring-fencing controls, along either
functional or national lines, means that an institution might collapse more tidily but not necessarily that the government will permit it to do so; until the government does, the moral hazard remains.676

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b. Resolution Authority
The problem with very large institutions, according to some, is
not that they are too big to fail, but that the proper structures do
not exist to enable their orderly failure.677 The Administration has
also proposed legislation granting the government resolution authority for systemically significant institutions that fall outside of
the FDIC’s existing resolution regime for commercial banks. Under
the proposed legislation, resolution authority would be available to
the Secretary of the Treasury upon determination, with positive
recommendations from the Federal Reserve and the appropriate
federal regulators, and in consultation with the President, that ‘‘the
financial institution in question is in danger of becoming insolvent
. . . its insolvency would have serious adverse effects on economic
conditions or financial stability in the United States; and . . . taking emergency action . . . would avoid or mitigate these adverse effects.’’ 678 A similar proposal has been drafted by the House.
In the Senate, Senators Bob Corker (R–TN) and Mark Warner
(D–VA) have introduced legislation that would vest resolution authority in the FDIC. This authority would extend only to depository
institutions and their holding companies, affiliates, and subsidiaries and would be available only when the FDIC determined that
a receivership was preferable to a resolution under Chapter 11
bankruptcy.679 Other Republican lawmakers, rejecting the view
that the federal government should determine which institutions
should receive government intervention in the event of failure,
have instead proposed improving the bankruptcy system to enable
it to process huge, complex bankruptcies such as AIG’s might have
been.680 A bill proposed in the House would amend the current
temic Risk Regulation, 111th Cong., at 9–10 (July 23, 2009) (online at banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStorelid=c00a4670-8edd-4a6e-947f-09afb555fa4d).
675 David G. Mayes, Banking Crisis Resolution Policy—Different Country Experiences, Norges
Bank Staff Memo, at 58–61 (2009) (online at www.norges-bank.no/upload/77285/
stafflmemol09l10.pdf).
676 See, e.g., Death Warmed Up, The Economist (Oct. 1, 2009) (online at www.economist.com/
businessfinance/displaystory.cfm?storylid=14558456).
677 According to Professor Charles Calomiris of the Columbia Business School, bankruptcy law
as it currently exists does not contemplate allowing ‘‘large, complex financial institutions to
enter bankruptcy, or receivership in the case of banks, because there is no orderly means for
transferring control of assets and operations, including the completion of complex transactions
with many counterparties perhaps in scores of countries via thousands of affiliates.’’ Charles
Calomiris, In the World of Banks, Bigger Can be Better, Wall Street Journal (Oct. 19, 2009) (online at online.wsj.com/article/SB10001424052748704500604574483222678425130.html). The solution, Mr. Calomiris believes, lies in constructing a system that would enable such a bankruptcy. As discussed below, various legislative proposals include provisions to address just this
concern.
678 U.S. Department of the Treasury, Treasury Proposes Legislation for Resolution Authority
(Mar. 25, 2009) (online at www.financialstability.gov/latest/tg70.html).
679 Resolution Reform Act of 2009, S. 1540, 111th Congress (2009).
680 The current bankruptcy system has been criticized as being ill-equipped to handle a bankruptcy such as AIG’s. Professor Stephen Lubben of Seton Hall Law School, for example, has
noted that the 2005 expansion of sections of the Bankruptcy Code that provide a ‘‘safe harbor’’
for the type of swap agreements at issue in AIG’s decline have exacerbated this problem. Ste-

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bankruptcy code to enable the orderly liquidation or reorganization
of non-bank financial institutions as a means of forestalling the
need for future bail-outs.681 These bills are discussed in greater detail below.

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c. Chapter 11
Some commentators have argued that Chapter 11 bankruptcy
principles should play a role in the extension of taxpayer money to
‘‘bail out’’ private businesses. Of these commentators, some propose
the increased use of prepackaged bankruptcy filings (commonly referred to as ‘‘pre-packs’’) before the government provides assistance,682 some favor ordinary bankruptcy filings in which the debtor’s operations come under court supervision and shareholders are
wiped out,683 and others propose implementing Chapter 11-like
measures without the business actually filing a petition with the
bankruptcy court.684 Any of these measures may help to unwind
implicit government guarantees by holding businesses and investors accountable for their actions.
In a Chapter 11 reorganization, a troubled company restructures
its business to emerge as viable and profitable.685 To this end,
under certain circumstances the business may wipe out existing
shareholder classes, renegotiate the terms or balances on its debt,
exchange preexisting debt for equity in the new business, replace
management, and undo fraudulent transfers or preferences.686
phen Lubben, Repeal the Safe Harbors, Seton Hall Public Law Research Paper No. 1497040(Nov.
1, 2009). One of the key functions of bankruptcy law is to freeze the debtor estate, prohibiting
any payments out of the debtor’s assets, until the entire estate and all claims on it have been
sorted out and preferences established. The safe harbor provisions exempt certain types of
agreements from this freeze and permit payment. Because the swap agreements fit into the safe
harbor provision, AIG’s trouble triggered what Professor Lubben describes as a ‘‘run’’ on the institution as CDS counterparties insisted on payment. Professor Lubben has therefore called for
a repeal of the safe harbor provision as a way to prevent a future situation like AIG’s. In contrast, Professor Edward R. Morrison of Columbia Law School has argued that the Bankruptcy
Code is inadequate to protect the economy from failing systemically significant institutions, and
a systemic risk regulator with the power to monitor and rescue institutions should be created.
Edward R. Morrison, Is the Bankruptcy Code an Adequate Mechanism for Resolving the Distress
of Systemically Important Institutions?, Temple Law Review (forthcoming) (available online at
papers.ssrn.com/sol3/papers.cfm?abstractlid=1529802).
681 Consumer Protection and Regulatory Enhancement Act, H.R. 3310, 111th Congress (2009).
682 See, e.g., Edward I. Altman and Thomas Philippon, Where Should the Bailout Stop?, in Restoring Financial Stability, at 355–61 (Viral V. Acharya and Matthew Richardson, eds., 2009).
683 See, e.g., Jennifer Chamberlain, The Big Three: Bailout or Bankruptcy?, Illinois Business
Law Journal (Mar. 7, 2009) (online at www.law.uiuc.edu/bljournal/post/2009/03/07/The-BigThree-Bailout-or-Bankruptcy.aspx); Paul Ingrassia, The Case for Chapter 11, Portfolio (Nov. 9,
2008)
(online
at
www.portfolio.com/news-markets/national-news/portfolio/2008/11/09/CanBankruptcy-Save-US-Carmakers/).
684 See, e.g., Global Economic Symposium, The Global Polity: The Future of Global Financial
Governance, at 4 (Sept. 2009) (online at www.global-economic-symposium.org/ges-2008-09/ges2009/downloads/session-handouts/the-global-polity/the-future-of-global-financial-governance
l2009).
685 See generally COP September Oversight Report, supra note 108, at 40 (providing an in
depth discussion of business restructuring under bankruptcy law).
686 A ‘‘fraudulent transfer’’ is a transfer for less-than-reasonably equivalent value made while
insolvent. A ‘‘preference’’ is an unusual payment to one creditor that prevents other creditors
from receiving a pro rata share of the assets. Professor Randy Picker, Bailouts and Phantom
Bankruptcies, The University of Chicago Law School Faculty Blog (Sept. 23, 2008) (online at
uchicagolaw.typepad.com/faculty/2008/09/bailouts-and-ph.html) (hereinafter ‘‘Bailouts and Phantom Bankruptcies’’).
Under these avoiding powers, creditors may be able to force outgoing executives to repay their
bonuses, thereby returning capital to the business. See Jesse Fried, Uncle Sam Should Claw
Back Wall Street Bonuses, Harvard Law School Forum on Corporate Governance and Financial
Regulation (Oct. 4, 2008) (online at blogs.law.harvard.edu/corpgov/2008/10/04/uncle-sam-shouldclaw-back-wall-street-bonuses) (hereinafter ‘‘Uncle Sam Should Claw Back Wall Street Bonuses’’).

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Often those who provide financing to the debtor are given liens at
a higher priority than existing creditors and shareholders.687
Congress amended the Bankruptcy Code in 2005 to exempt a
broad range of financial assets from bankruptcy rules.688 Swaps,
repurchase agreements, securities contracts, and other financial
products were exempted from the automatic stay that normally
prevents creditors from seizing a debtor’s assets after the filing of
a bankruptcy petition. Companies holding substantial financial assets may therefore find bankruptcy a less attractive way to resolve
financial distress, since creditors could continue to collect on some
contracts. Critics of the exemptions have argued that they hinder
the bankruptcy system’s ability to distribute property in an orderly
and equitable manner.689 Under the current rules, some creditors
may collect on their debts while others are stayed. This creates an
incentive for parties seeking to bypass the bankruptcy process to
structure contracts as swaps, securities contracts, or other exempt
categories of assets.
If Congress required a bankruptcy filing as a prerequisite to receiving assistance, the petition could be a regular bankruptcy or a
pre-pack. Pre-packs are Chapter 11 bankruptcies where the plans
of reorganization are prepared in advance of filing petitions with
the bankruptcy court. Pre-packs are formulated after negotiations
and with the cooperation of creditors and other invested parties.
Most of the legal issues litigated in the bankruptcy process are resolved as part of this out-of-court negotiation. This reduces the
time and cost spent in the actual bankruptcy process. The sooner
the restructuring under Chapter 11 is completed, the sooner the
company can return focus to its core operations.690
Commentators who propose pre-packs as a solution to reorganize
large businesses hope to take advantage of the debtor’s rights
under Chapter 11 at this reduced cost to the business. They propose that the government should make the extension of ‘‘bailout’’
funds contingent upon the distressed business filing a pre-pack
with the bankruptcy court.691 In doing so, shareholders could be
wiped out, creditors could take a haircut, misappropriated funds
could be returned to the business, and incompetent management
could be replaced. These repercussions would add to a business’s
incentive to steer itself away from the brink of disaster, and would
incentivize commercial creditors to pressure businesses to take
fewer risks. The same incentives could be created by mandating a
regular bankruptcy filing, and there is disagreement regarding the
cost savings associated with pre-packs.692 In either case, it could be
687 See COP September Oversight Report supra note 108, at 40–48 (discussing priority of
claims and general principles of bankruptcy law).
688 See 11 U.S.C. §§ 555–56, 559–61.
689 See, e.g., House Judiciary Committee, Subcommittee on Commercial and Administrative
Law, Written Testimony of Professor Jay Lawrence Westbrook, Exemption of Financial Assets
from Bankruptcy (Sept. 26, 2008) (online at www.judiciary.house.gov/hearings/pdf/
Westbrook080926.pdf).
690 Some of these pre-pack reorganizations are extremely large, but can nevertheless be accomplished in less than two months. See COP September Oversight Report, supra note 108, at 40
(discussing pre-packs under Chapter 11).
691 Jim Kuhnhenn, Bailout With a Price: Chapter 11 Bankruptcy, Associated Press (Nov. 20,
2008)
(online
at
seattletimes.nwsource.com/html/businesstechnology/
2008412177lapmeltdownbankruptcy.html).
692 Pre-packs may prove infeasible in the case of systemic failures, in which case regular filings may be the only form of bankruptcy relief available to debtors.

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argued that the bankruptcy requirement may counterbalance any
market distortion that arises from implicit guarantees, while allowing the government to intervene to save systemically important institutions. Other commentators argue the same result is possible
without actually utilizing the bankruptcy court.693 Instead of filing
a pre-pack, the government could make any taxpayer bailout contingent upon successful out-of-court negotiations between the distressed business and the invested parties. Thus, if the business
wants public funding, it must wipe out its shareholders, get its
creditors to agree to take a haircut, and replace its management.
This would have the same effect as filing a pre-pack—i.e., holding
managers and investors accountable for their actions and
incentivizing prudent decision making. Moreover, this approach
would also serve to wind down the government’s implicit guarantee.

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3. International Aspects of Reform
Federal Reserve Board Governor Daniel Tarullo recently remarked on the need for a resolution plan to contemplate the specific issues confronting a failing international institution. ‘‘Some of
those [insolvency] regimes may be substantively inconsistent with
one another, or may not account for the special characteristics of
a large international firm,’’ he noted.694 He further remarked that
‘‘an effective international regime would . . . likely require agreement on how to share the losses and possible special assistance associated with a global firm’s insolvencies.’’ Such ‘‘satisfyingly clean
and comprehensive solutions to the international difficulties occasioned by such insolvency,’’ he believes, however, ‘‘are not within
sight.’’ Professor Simon Johnson of the MIT Sloan School of Management has expressed similar concerns. Writing about last summer’s G–8 summit, he noted the lack of progress on ‘‘any kind of
international agreement that would be the essential complement to
a national legal authority (for example, in the United States or Europe), by providing a framework for ‘resolving’ the failure of a
major financial institution with cross-border assets and
liabilities[.]’’ 695 The tension between the need for such an international regulatory scheme and the difficulty of creating one, even
just for the European markets, was outlined by the deputy director
of the Monetary and Capital Markets Department of the International Monetary Fund, Jan Brockmeijer, in his remarks at a conference in Belgium this summer: ‘‘on the one hand, cross-border integration of European financial markets is desirable,’’ he stated.
‘‘But . . . at the same time, financial supervision remains fundamentally a national responsibility.’’ 696
693 See, e.g., Bailouts and Phantom Bankruptcies, supra note 108; Uncle Sam Should Claw
Back Wall Street Bonuses, supra note 686; Robert Reich, The Real Difference Between Bankruptcy and Bailout, Robert Reich’s Blog (Nov. 11, 2008) (online at robertreich.blogspot.com/2008/
11/real-difference-between-bankruptcy-and.html).
694 Federal Reserve Board of Governors, Speech by Daniel Tarullo, Supervising and Resolving
Large Financial Institutions (Nov. 10, 2009) (online at www.federalreserve.gov/newsevents/
speech/tarullo20091110a.htm).
695 Simon Johnson, What the G–8 Won’t Achieve, The New York Times (July 9, 2009) (online
at economix.blogs.nytimes.com/2009/07/09/what-the-g-8-wont-achieve/).
696 Jan Brockmeijer, Lessons of the Crisis for EU Financial Supervisory Policy, Remarks at
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The Basel Committee’s more modest approach suggests ring-fencing during periods of considerable financial distress. Such an approach would enable host countries to shore up institutions operating within their domestic borders. To do so, changes to existing
laws would need to allow for this particular framework to complement domestic regulatory aims. The approach would protect the
pertinent functions of the failing institution, but not the institution
itself. As a result, such efforts would limit financial contagion and
lessen the likelihood of moral hazard.697
4. Proposed Legislation
Legislative proposals from the Administration and both houses of
Congress have drawn from many of the proposals discussed above.

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a. Administration’s Proposal
Under a legislative proposal put forward by the current Administration, new government entities would provide ‘‘robust’’ supervision of the financial services sector. The proposed government entities include a Financial Services Oversight Council, a Consumer
Financial Protection Agency, and a National Bank Supervisor. The
Council would ‘‘identify emerging risks’’ and ‘‘advise the Federal
Reserve on the identification of firms whose failure could pose a
threat to financial stability due to their combination of size, leverage, and interconnectedness.’’ 698 The Consumer Financial Protection Agency would ‘‘protect consumers of credit, savings, payment,
and other consumer financial products and services, and to regulate providers of such products and services,’’ in part to minimize
aggregation of risk.699 The National Bank Supervisor would ‘‘conduct prudential supervision and regulation of all federally chartered depository institutions, and all federal branches and agencies
of foreign banks.’’ 700 The proposal also includes the creation of various offices within Treasury to improve oversight of systemically
significant institutions.
The Administration’s proposal also contemplates increased oversight of institutions that may pose a systemic risk, dubbed ‘‘Tier 1
financial holding companies,’’ and a greater concern for how individual firms may impact the overall economy. Tier 1 FHCs would
be subject to stricter and more conservative regulations regarding
capital levels and liquidity requirements,701 and might be subject
to standards and guidelines for executive compensation that aim to
align employees’ interests with those of long-term shareholders and
prevent incentives for excessive risk-taking. These firms would also
rope’s Financial System (Mar. 24, 2009) (online at www.imf.org/external/np/seminars/eng/2009/
eurfin/pdf/brockm.pdf).
697 Basel Committee on Banking Supervision, Report and Recommendations of the Cross-border Bank Resolution Group (Sept. 2009) (online at www.bis.org/publ/bcbs162.pdf) (hereinafter
‘‘Basel Committee Report’’).
698 U.S. Department of the Treasury, Financial Regulatory Reform: A New Foundation, Summary of Recommendations (online at www.financialstability.gov/docs/regs/FinalReportlweb.pdf)
(accessed Jan. 13, 2010).
699 Id.
700 Id.
701 Contingent capital bonds (commonly referred to as ‘‘CoCo bonds’’ or ‘‘CoCos’’) would be one
method a Tier 1 FHC could use to meet these more stringent requirements. CoCo bonds refer
to debt that may be converted to common equity when the issuer is under distress. This conversion occurs automatically upon triggering one or more contingencies (e.g., Tier 1 capital level
falls below specific threshold, market price contingency, etc.). As a result, the issuer is instantly
given a capital boost and is saved from having to raise fresh capital at high interest rates.

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be regulated with a macroeconomic view, taking into consideration
the effects that actions by the company might impose on the wider
economy. Finally, a Tier 1 FHC would be required to implement a
plan for an orderly winding down if the firm were to face insolvency.

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b. House Legislation
The Wall Street Reform and Consumer Protection Act passed the
House of Representatives on December 11, 2009, by a vote of 223–
202.702 The bill, which was introduced on December 2 by Financial
Services Committee Chairman Barney Frank (D–MA), incorporates
provisions from nine separate bills reported by the Financial Services, Energy and Commerce, and Agriculture committees. The bill,
H.R. 4173, would create an inter-agency oversight council charged
with identifying large, complex financial companies that pose a systemic risk to financial stability and economic growth. These firms
would be subject to heightened oversight, prudential regulation,
and reporting and disclosure requirements. The bill would also establish an orderly process for resolving large, failing financial firms
whose problems could not be addressed by a stricter regulatory regime or the bankruptcy process.
H.R. 4173 would establish a council of federal regulators, the Financial Services Oversight Council (‘‘the Council’’), to monitor the
financial system and regulate any financial company whose material financial distress could pose a threat to financial stability or
whose scope, size, scale, concentration, interconnectedness, or mix
of activities could pose a threat to economic stability.703 After consultation with a financial company’s regulator and upon a majority
vote of the Council members, the Council would be empowered to
place stricter regulatory standards on such company. This designation would subject a company that was not already subject to the
Bank Holding Company Act of 1956 (Pub. L. 84–511), to certain
provisions of the Act, which the Federal Reserve is responsible for
enforcing, as if the company were a financial holding company. The
Federal Reserve, as agent for the Council and in coordination with
appropriate supervisors, would be responsible for implementing
and enforcing heightened prudential standards. The heightened
standards imposed by the Federal Reserve would have to include:
• Risk-based and size-based capital requirements;704
• Leverage limits;
• Liquidity requirements;
• Concentration requirements;
• Prompt corrective action requirements;
• Resolution plan requirements; and
702 CQ House Actions Reports, No. 111–22 (Dec. 7, 2009) (describing the bill); CQ House Actions Reports, No. 111–20 (Dec. 14, 2009) (describing the vote).
703 Voting members of the council would include the secretary of the Treasury; the chair of
the Federal Reserve; Comptroller of the Currency; chair of the Securities and Exchange Commission; chair of the Commodity Futures Trading Commission; director of the Federal Housing
Financing Agency; chair of the National Credit Union Administration; and an appointed state
insurance commission and state-banking supervisor would serve on the council for up to two
years in a non-voting capacity.
704 When calculating new capital requirements, the Federal Reserve would have to take into
account the company’s off-balance sheet exposure, including financial derivatives obligations.
Companies subject to stricter prudential standards would be limited to a debt-to-equity ratio of
15 to 1.

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112
• Risk management requirements.
In addition to restrictions stipulated by the bill, the Federal Reserve, as agent for the Council, also would have authority to prohibit a firm from engaging in any credit transaction or disbursal
of capital it deemed a detriment to financial stability. Senior management of undercapitalized institutions would be subject to dismissal, and the Federal Reserve could require the submission of
quarterly stress tests from troubled companies. All financial companies subject to stricter regulatory standards would be required to
submit to the Federal Reserve and FDIC plans for an orderly and
rapid dissolution in the event of a severe financial crisis.
If, after the company were subjected to stricter regulatory standards, it continued to pose a grave threat to financial stability of the
economy, the Council could take several additional steps to limit
the danger posed by the company. The Council could modify the existing prudential standards, impose conditions on certain activities,
limit mergers and acquisitions, and restrict the company’s ability
to offer certain financial products. As a last resort, the Council,
with concurrence by the Secretary of the Treasury or the President,
could require a company to sell, divest, or otherwise transfer business units, branches, assets, or off-balance sheet items to unaffiliated companies.
H.R. 4173 would also grant to the FDIC the authority to dissolve
systemically important financial firms that are in default or in danger of default. The new mechanism would empower the FDIC—separate and apart from its authority to liquidate banks—to take over
and either wind down or act as a receiver for large, complex financial institutions that are in default or in danger of default, and
whose failure would threaten the financial system. The FDIC
would have the authority to make loans to a failing firm, guarantee
the obligations of a failing firm to its creditors, acquire common or
preferred shares in a failing firm, take a security interest in the
assets of a failing firm, and sell assets that the FDIC has acquired
from a failing firm. This authority, as it relates to an individual
firm, would be temporary and would last until the firm was placed
in receivership and liquidated. The dissolution process would not
affect financial institution liquidation processes already in place,
such as federal deposit insurance, Securities Investor Protection
Corporation (SIPC) protection, and state insurance insolvency regimes.
The FDIC would also have the authority to liquidate the company’s assets and organize a bridge financial company, or merge
the financial institution with another company, or transfer its assets and any liabilities. A maximum of $200 billion would be available to the FDIC to dissolve failing firms; $150 billion would come
from a Systemic Dissolution Fund that would be pre-funded by assessments on financial companies with more than $50 billion in assets and by hedge funds with more than $10 billion in assets. Assessments would be risk-based, so that more complex institutions
engaged in riskier activities would pay more. The remaining $50
billion could come from the Treasury’s general fund, as borrowing
that would be paid back through industry assessments, and would
be available only upon approval from Congress.

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The FDIC’s resolution authority could only be employed to ensure broader financial stability and not solely to preserve a particular failing institution. Shareholders in a failing institution
would not recoup any losses from the fund. The FDIC would also
be required to remove management responsible for the company’s
failure. Companies placed into receivership by the FDIC would be
subject to the executive compensation limits included in EESA
(Pub. L. 110–343).
Under the House bill, the FDIC’s appointment as receiver of a
financial institution would terminate at the end of one year, with
the ability to extend the appointment for two one-year periods. The
FDIC’s general receivership authority would sunset on December
31, 2013, unless Congress approved a joint resolution extending the
authority.
In addition, the bill would also create a Consumer Financial Protection Agency to oversee institutions providing financial services
and products to consumers, provide the Securities and Exchange
Commission (SEC) with expanded powers including the ability to
regulate the over-the-counter derivatives market, require hedge
funds and other private pools of capital to register with the SEC,
and introduce new regulations for credit rating agencies.
Republicans in the House unanimously opposed H.R. 4173. In the
area of resolution authority, some Republican members criticized
the systemic risk-related supervisory powers that the bill granted
to the Board of Governors of the Federal Reserve, a criticism that
was shared by some House Democrats. The Federal Reserve’s recent regulatory record and failure to anticipate the bursting of the
housing bubble give critics little faith that the Federal Reserve will
be an effective agent for identifying and regulating systemic
risk.705 The Federal Reserve’s mission, in their view, should be
modified to focus solely on monetary policy. In addition, some Republicans argue, although the bill is allegedly designed to end the
too big to fail phenomenon, it in fact gives the federal government
unlimited authority to prop up ailing financial institutions through
the new powers granted to the FDIC and the Council. And although the identity of those firms deemed to pose a systemic risk
is supposed to remain confidential, SEC disclosures and changes in
the identified firms’ behaviors or strategies could make it relatively
easy for market watchers to discern which firms are listed, according to the bill’s critics. Such a designation would foster favoritism
and reduce competition in the marketplace, providing an advantage
to the firms with the special designation. Finally, critics assert that
by funding the Systemic Dissolution Fund through assessments on
all financial companies with over $10 billion in assets, the bill
would penalize stable, profitable firms by making them pay for the
resolution of failed firms.706
The favored alternative of House Republicans is H.R. 3310, a bill
sponsored by the ranking member of the House Financial Services
705 House Republican Conference, Democrat Systemic Risk Legislation—Permanent Bailout
Mania for the Politically Significant (Nov. 16, 2009) (online at www.gop.gov/policy-news/09/11/
16/democrat-systemic-risk-legislation) (hereinafter ‘‘House Republican Conference on Systemic
Risk’’).
706 The Republican Cloakroom, Republican Leader John Boehner, Statement of Republican
Policy, H.R. 4173, Wall Street Reform and Consumer Protection Act (Dec. 9, 2009) (online at
http://repcloakroom.house.gov/news/DocumentSingle.aspx?DocumentID=159983).

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Committee, Representative Spencer Bachus. The Republican-sponsored Consumer Protection and Financial Regulatory Enhancement
Act would create a Market Stability and Capital Adequacy Board,
chaired by the Secretary of the Treasury, to examine interactions
of various areas of the financial system, and to issue recommendations to policymakers and regulators to stem potential systemic
risk. This bill would also provide the FDIC with enhanced resolution authority for large banks and create a new chapter of the
Bankruptcy Code for failing non-financial institutions.707 This new
chapter would facilitate coordination between regulators and the
courts to ensure technical and specialized expertise is applied when
dealing with complex institutions. Bankruptcy judges under this
proposal would also have the power to stay claims by creditors and
counterparties to prevent runs on troubled institutions.
c. Senate Bill
On November 10, 2009, Senate Banking Committee Chairman
Christopher Dodd (D–CT) unveiled a discussion draft for comprehensive financial regulatory reform.708 Unlike the House Financial Services Committee, which passed the components of the regulatory reform bill in piecemeal fashion, Senator Dodd intends to report one bill out of committee. Senator Dodd’s discussion draft proposes even more sweeping changes to the current financial regulatory framework than the bill that passed the House. For example,
it would consolidate all federal banking regulation in one agency,
the newly created Financial Institutions Regulatory Administration
(FIRA).
In order to address systemic risk, the discussion draft would
enact regulatory measures similar to those in the House bill, but
it would employ a much different institutional structure. Rather
than an inter-agency council of regulators, Senator Dodd’s proposal
would create an independent Agency for Financial Stability (AFS)
responsible for identifying, monitoring, and addressing systemic
risks posed by large, complex companies as well as products and
activities that can spread risk throughout the financial system. The
agency would be governed by a board of nine members and led by
an independent chairman, appointed by the President and confirmed by the Senate.709 The agency would collect and analyze data
on emerging risks to the financial system and would be empowered
to set strict prudential standards for firms identified as systemically important. Enhanced resolution authority would be vested in
the FDIC for companies that continued to pose a systemic risk.
Under Senator Dodd’s proposal, the Agency for Financial Stability would be empowered to regulate certain financial companies,
upon a determination by the Agency that the material financial
distress or failure of such a firm would pose a threat to financial
stability and economic growth. The agency would establish prudential standards and reporting and disclosure requirements on a
707 Protection

and Regulatory Enhancement Act, H.R. 3310, 111th Cong., 1st session (2009).
Draft (online at banking.senate.gov/public/lfiles/AYO09D44lxml.pdf).
board would include the secretary of the Treasury; chair of the Federal Reserve; the
chair of the Financial Institutions Regulatory Administration; head of the Consumer Financial
Protection Agency; chair of the Securities and Exchange Commission; chair of the Federal Deposit Insurance Corporation; chair of the Commodity Futures Trading Commission; and independent members, including the chair, appointed by the President and confirmed by the Senate.
708 Discussion

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709 The

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115
graduated scale based on the size and complexity of each firm. The
prudential standards would include risk-based capital requirements, leverage limits, liquidity requirements, concentration limits,
and prompt corrective action requirements. In addition, the companies would be required to establish a Board-level risk committee responsible for the oversight of the enterprise-wide risk management
practices of the company. The companies would also be required to
issue a minimum amount of contingent capital, long-term hybrid
debt convertible to equity if a company fails to meet prudential
standards or its conversion is deemed necessary by the AFS to preserve financial stability.
Each specified financial company would be required to develop a
plan for the rapid and orderly dissolution of the company in the
event of material financial distress or failure. The company would
report periodically to the AFS, FIRA, and FDIC on the resolution
plan, as well as the nature and extent of the company’s credit exposure and indebtedness to other financial companies. Upon review
of the resolution plan and credit exposure reports, FIRA and FDIC
could jointly determine that a resolution plan is not credible and
require the company to resubmit a revised plan. If the company
failed to provide a satisfactory plan within a specified timeframe,
FIRA and FDIC could impose more stringent prudential requirements and restrict certain growth, activities, and operations. In
consultation with AFS, the company could also be required to sell
certain assets and business operations.
Bank holding companies with total assets of over $10 billion
would automatically be subject to heightened prudential standards
and reporting and disclosure requirements without the need for an
AFS evaluation of their systemic significance. The stringency of the
heightened standards, which would include risk-based capital, leverage, and liquidity requirements, would increase on a graduated
scale based on the size of the company. The bank holding companies would be required to establish a risk committee to oversee all
risk-management practices.
The Dodd proposal gives FIRA, with FDIC serving as receiver,
the authority to break up firms posing a systemic risk on a caseby-case basis. Following consultation with AFS and FIRA, FDIC
would have a range of options at its disposal for resolving the institution, including making loans, purchasing debt obligations, purchasing or guaranteeing assets, purchasing an equity stake, taking
a lien on any or all assets, or liquidating the company by selling
or transferring all of its assets, liabilities, obligations, equity interests, or securities.
Senator Dodd’s proposal stipulates that any exercise of the enhanced resolution authority must be for the purpose of financial
stability and not for the purpose of rescuing or preserving a particular company. Shareholders in the company would not be eligible to recoup their investment until all other claims are fully paid.
The FDIC would be required to ensure that the management responsible for the failed condition of the company be removed. If
proceeds from the sale of the company or its assets were insufficient to cover the costs of the resolution, the difference would be
recouped from assessments on financial companies with assets of
over $10 billion.

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Shortly after Senator Dodd released his discussion draft, Senator
Richard Shelby, the ranking member of the Senate Banking Committee, announced his opposition to the bill and his intention to
draft his own alternative bill, in particular because of his opposition to the creation of a Consumer Financial Protection Agency and
his view that the legislation would institutionalize permanent bailout authority for the government.710 Senator Dodd has agreed to
work with Senator Shelby and other Republicans on the Banking
Committee in order to arrive at a bipartisan bill. The two sides are
currently negotiating.
H. Conclusions and Recommendations
Treasury holds, on behalf of the American taxpayer, a diverse
collection of assets that it must dispose of with all deliberate speed,
transparency, and good stewardship. In general Treasury has made
progress toward meeting these requirements, but it could improve
certain aspects of its performance.

hsrobinson on DSK69SOYB1PROD with HEARING

Strengthen Transparency and Accountability
In its past oversight reports, the Panel has repeatedly urged
Treasury to disclose greater detail about the goals, metrics, and future plans for the programs that it has launched and operated
under the TARP. This same exceptional degree of transparency will
remain critical as Treasury exits the TARP.
In particular, Treasury should disclose to the public more information about its plan for disposing of its assets. There are some
details that Treasury either cannot disclose (because of the need to
comply with securities laws, for example, or the need to work with
banking regulators using confidential information) or should not
disclose (because of the need to time the market for asset sales).
Treasury should, however, be transparent with respect to the constraints under which it operates (for example, any limits to Treasury’s authority on how and when to sell assets) and how it will balance its sometimes conflicting obligations to maintain systemic stability, preserve the stability of individual institutions, and maximize taxpayers’ return on investment. Treasury should also disclose the metrics that it is using to determine timing and manner
of sales, and Treasury should publicly explain its objectives so the
American people can measure its success.711 Though it is the banking regulators’ responsibility to disclose their criteria for allowing
repayments, Treasury also should be able to articulate this policy
in view of the broader economic issues it raises. This lack of clarity
breeds uncertainty and instability in the financial markets and
provides a disservice to taxpayers as well as investors.
Treasury should be particularly transparent with respect to any
plans to acquire additional assets or obligations under the TARP,
whether as a result of the TARP programs under which money remains to be expended, or as a result of arrangements with other
710 Senate Committee on Banking, Housing, and Urban Affairs, Opening Statement of Senator
Richard Shelby, Mark Up: Restoring American Financial Security Act, 111th Cong. (Nov. 19,
2009)
(online
at
shelby.senate.gov/public/index.cfm?FuseAction=PressRoom.Speeches&
ContentRecordlid=0da23880-802a-23ad-45c92c06baab4f5f&Regionlid=&Issuelid=&Countylid=).
711 See also COP September Oversight Report, supra note 108, at 112.

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governmental entities. If, for example, Treasury were to acquire
any of the assets that the Federal Reserve has acquired as a result
of its market interventions, those arrangements, and Treasury’s
plans for disposition of those assets, should be subject to the same
transparency considerations discussed above.
Reprising a theme of the Panel’s September report, Treasury
should also be more transparent with respect to corporate governance issues, including management succession issues, and provide
greater detail about the circumstances in which Treasury will be
involved in business decisions with respect to its investee companies.712 Greater clarity will help to reassure both taxpayers and
market participants about the scope of Treasury’s role as a major
investor in the private sector.
Because of the unprecedented nature of the TARP and the many
challenges involved in executing the sale of such an enormous pool
of assets, transparency is crucial to Treasury’s credibility and to
the functioning of the markets in which Treasury is now a key participant.

hsrobinson on DSK69SOYB1PROD with HEARING

Demand Greater Transparency from TARP Participants
The need for greater transparency in TARP programs is not limited to Treasury. Many TARP-recipient financial institutions have
provided very limited disclosures about their use of TARP funds,
denying taxpayers the opportunity to account precisely for their tax
dollars.
Any future recipient of TARP funds, including banks participating in the small business initiative, must be obligated to give
a complete accounting of what they did with the money and how
those actions served the objectives of the TARP.
Improve Operations to Protect Taxpayers
Exiting the TARP will be a lengthy and demanding process, and
a successful exit will require that Treasury have expertise in complex markets and instruments. Treasury should take steps to ensure that it will continue to be staffed, through final exit from the
TARP, with qualified and expert personnel. Treasury should also
give due consideration to each stage of its exit strategy, including
how it will handle the period in the future when only a few recipients are left in the system.
Treasury should also be frank in addressing the potential for conflicts of interest in light of the government’s dual role as investor
and overseer of the financial industry. To limit any conflicts of interest and facilitate an effective exit strategy, Treasury should continue to consider holding its TARP assets in a trust that would be
insulated from political pressure and government interference, especially as circumstances change. Any such trust, however, should
address the concerns discussed above, which have been raised by
Professor Verret and others, so that the trust assets are managed
in the best interests of taxpayers.
Treasury should provide quarterly TARP financial statements,
and consider improving the readability of its Management’s Discussion and Analysis.
712 See

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Take Steps to Resolve Implicit Guarantees
Perhaps the largest problem that Treasury faces is one that
Treasury cannot solve alone: the continued existence of a broad implicit guarantee that hangs over the markets. There are multiple
options available and there is broad agreement that a new approach to systemic risk regulation is necessary so that businesses
are not insulated from the effects of their own bad decisions.
In the aftermath of the government’s extraordinary economic stabilization efforts, markets may believe that too big to fail financial
institutions operate under an implicit guarantee: that the American taxpayer would bear any price, and absorb any loss, to avert
a financial meltdown. To the degree that lenders and borrowers believe that such an implicit guarantee remains in effect, moral hazard will continue to distort the market in the future, even after
TARP programs wind down. As Treasury contemplates an exit
strategy for the TARP and similar financial stability efforts, addressing the implicit guarantee of government support is critical.

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SECTION TWO: ADDITIONAL VIEWS

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A. Damon Silvers
The Panel’s January Report is an extraordinarily detailed survey
of many issues associated with the windup of the programs created
under the Emergency Economic Stabilization Act of 2008. Because
of the breadth of the Report, I think it is important to express in
one place clearly what I see as the problem with the direction the
TARP has taken in recent weeks.
In the course of several weeks in December 2009, the Board of
Governors of the Federal Reserve announced it was allowing three
of the nation’s largest banks to return their TARP monies—allowing Bank of America and Wells Fargo to escape TARP’s limitations
on executive pay, and allowing Citigroup to escape the extraordinary limits on executive pay associated with institutions receiving extraordinary aid, even though Citigroup continued to be the
beneficiary of tens of billions of TARP funds in the form of common
stock. Citigroup is now the only company in which the TARP holds
common stock that is not subject to the rulings of the Special Master on Executive Pay.
But despite the intense interest that the executives of Citigroup,
Bank of America and Wells Fargo appeared to have in the executive pay issue, that issue is a secondary one in relation to the repayment decision. The real issues are about systemic stability and
moral hazard.
In relation to systemic stability the question is—are these banks
really sound after repayment? Given their enormous size, if they
are not sound after repayment allowing them to repay would be a
profoundly irresponsible act, making another systemic financial crisis far more likely. Then there is the question of these large banks’
ability to withstand future economic and financial turmoil. It would
not be good for the country if it turned out that these repayment
transactions were high stakes bets on continued economic and financial stability.
It is very important that the public and Congress understand
that the Congressional Oversight Panel has no ability to answer
this critical question because (1) we have never received, despite
repeated requests, the algorithms at the heart of the stress tests
(see our earlier hearings and our correspondence with Secretary
Geithner); (2) we were unable to determine the extent of or the
value of the toxic assets that continue to be held by the major
banks (see our August 2009 report) and (3) because the bank regulators have never disclosed the criteria for allowing repayment.
Following the stress tests, each of these three banks began to
press to be allowed to repay their TARP funds. Because we do not
know what the criteria were for being allowed to repay, it is impossible to know when they met them. But it is puzzling to note that
in the case of Wells Fargo and Bank of America, the result of bank
regulators allowing repayment transactions not entirely funded by
new equity was to reduce those banks’ Pro forma Tier 1 capital ratios, a basic measure of bank capital strength, to below the level
that it had been at these banks at the end of the second quarter
of 2009, when the Treasury steadfastly refused to permit them to
repay TARP funds. One explanation for the regulator opposing

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transactions that weakened Tier I capital is that the regulators
were exclusively focused on measures of common equity capital
strength. But an approach focused on common stock is odd in the
context of the fact that all of TARP’s efforts to strengthen bank
capital have involved preferred stock infusions.
Then there is Citigroup. While our conversations with Treasury
and others on this matter are ongoing, we have yet to receive a satisfactory explanation for how it is possible that Citigroup, which
had a Tier 1 capital ratio of 11.92 percent at the end of 2008, and
was generally understood to be the walking dead, is now healthy
enough to be let out of TARP with a Pro forma Tier 1 capital ratio
post-repayment of 11.0 percent. Citigroup gets more puzzling in
light of several other facts: Citigroup posted net losses available to
common shareholders in the first and third quarters of 2009, and
most analysts believe it will lose money in the fourth quarter; its
equity offering ran into trouble; its stock price post-repayment is
just over $3 per share; and its total preferred and common equity
market capitalization is the same as it was at the beginning of
2009. Of course, by converting the majority of its TARP preferred
to common, then selling common to replace preferred at the close
to option value price of $3.25, Citigroup has been able to raise its
common equity ratios significantly. But does trading government
preferred stock for government common stock transform a sick
bank into a healthy bank?
As to moral hazard, repayment converts what had been a timebuying strategy into a fait accompli. We now know for certain that,
barring another systemic crisis requiring revisiting these issues,
the public has definitely rescued the shareholders, bondholders and
executives of these large banks from the consequences of their actions. What is far less clear is whether as a result we have strong,
stable banks able to play their proper role as provider of credit to
the real economy.

hsrobinson on DSK69SOYB1PROD with HEARING

Note on Recusal
In July, 2009, I recused myself from participation in any Panel
discussions about and votes on matters pertaining to General Motors, Chrysler or their financial affiliates, including but not limited
to GMAC. I did not vote on or participate in discussions related to
the Panel’s September Report, The Use of TARP Funds in Support
and Reorganization of the Domestic Automotive Industry. My vote
in favor of this Report and the Panel’s December Report, entitled
Taking Stock: What Has the Troubled Asset Relief Program
Achieved? should not be taken as an expression of opinion on sections of the report dealing with General Motors, Chrysler, or their
financial affiliates. Lastly, my votes in favor of this report and the
December Report were addressed only to those portions of the reports that did not relate to General Motors, Chrysler, or their financial affiliates.

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B. J. Mark McWatters and Paul S. Atkins

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We concur with the issuance of the January report and offer additional observations below. We thank the Panel for incorporating
suggestions offered during the drafting process.
1. Executive Summary
We offer the following summary of our analysis:
• Treasury should request that each TARP recipient submit
a formal exit strategy and update such strategy each calendar
quarter. Treasury should also provide the Panel with its written assessment of the exit strategies and updates submitted by
the TARP recipients.
• In order to expedite the swift metamorphosis of many
TARP recipients from insolvent to investment grade, the institutions were arguably subsidized through government-sponsored purchases of mortgage-backed securities and by the all
but unlimited investment of (and commitment to invest) public
funds in Fannie Mae, Freddie Mac and AIG. One may argue
that the government has created without meaningful public debate or analysis a series of ‘‘bad banks’’ within the Federal Reserve, Treasury, Fannie Mae, Freddie Mac, and AIG to accomplish what TARP alone failed to achieve. These ‘‘bad banks’’ or,
perhaps, ‘‘debt consolidation entities’’ operate by actually and
virtually removing toxic assets from the books of TARP recipients and other holders and issuers. The Federal Reserve and
Treasury have actually removed up to $1 trillion of troubled
assets from the books of TARP recipients and other holders
and issuers through outright purchases. The Federal Reserve
and Treasury have also virtually removed additional troubled
assets from the books of TARP recipients and other holders
and issuers by propping up the market values of such assets
and maintaining historically low mortgage rates.
• A question arises as to whether the termination of the AIG
credit default swaps (CDSs) at par—that is, without any discount or haircut—constituted an inappropriate subsidy of the
AIG counterparties—which included TARP recipients Goldman
Sachs, Merrill Lynch and Bank of America—and necessitated
the investment of additional TARP funds in AIG. Although
then-FRBNY President Geithner denies that the payments by
the Federal Reserve Bank of New York (FRBNY) constituted
a ‘‘backdoor bailout’’ of the AIG counterparties, without any
other explanation it is difficult to conclude that the FRBNY insisted that AIG terminate the CDSs other than as a mechanism to provide a direct—yet not particularly transparent—
government-sponsored subsidy to the AIG counterparties.
Without a better explanation of a straightforward business
purpose for these transactions, the taxpayers may be best
served by having Treasury seek recission from the AIG
counterparties, reversing cancellation of the CDS contracts and
requiring the counterparties to purchase the underlying
collateralized debt obligations (CDOs) at their $62.1 billion par
value.

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• Since Treasury is charged with protecting the interests of
the taxpayers who funded the Home Affordable Modification
Program (HAMP) and the other TARP programs, we recommend that Treasury’s foreclosure mitigation efforts be structured so as to incorporate an effective exit strategy by allowing
Treasury to participate in any subsequent appreciation in the
home equity of any mortgagor whose loan is modified under
HAMP or any other taxpayer subsidized program.
2. Required Submission of Proposed Exit Strategies by
TARP Recipients
One job of effective oversight is to assess the exit strategies proposed by TARP recipients and Treasury. In discharging this responsibility the Panel undertook in the January report to analyze
(i) how each major TARP recipient plans to repay its TARP funds,
(ii) how Treasury expects to recoup the TARP funds advanced to
each major TARP recipient, and (iii) each of these strategies for
transparency, effectiveness and taxpayer protection. The January
report serves as an intermediate step in an ongoing process, the ultimate effectiveness of which will depend upon the transparency
and accountability of the disclosure provided by the TARP recipients and Treasury. The Panel cannot claim unique expertise regarding the wide array of financial institutions and non-financial
institutions, such as Chrysler and General Motors, which have accepted TARP funds and, as such, must rely to a significant extent
upon good faith submissions by TARP recipients and Treasury.
In our view, Treasury should request that each TARP recipient
submit a formal exit strategy and update such strategy each calendar quarter. Treasury should also provide the Panel with its
written assessment of the exit strategies and updates submitted by
the TARP recipients. Because Treasury has stated that it has a ‘‘reluctant shareholder’’ investment strategy, the Panel and its staff,
together with outside experts and advisors, should commit periodically to offer updated assessments of the proposed exit strategies
for major TARP recipients as an addendum to the Panel’s monthly
reports. In our view, Treasury should exit each TARP investment
as soon as possible,713 and apply all proceeds received with respect
to each TARP investment permanently to repay the national
debt.714

hsrobinson on DSK69SOYB1PROD with HEARING

3. The Repayment of TARP Funds
It is encouraging that several of the most significant recipients
of TARP funds have been permitted by their regulators 715 to repay
713 It does not appear, however, that Treasury in fact is operating as a reluctant shareholder
in all instances. The investment of yet another $3.8 billion in GMAC—an apparently non-systemically significant financial institution—indicates a contrary strategy. Treasury’s exit strategy
with respect to GMAC remains a mystery. In addition, although the Panel in reports predating
our membership on the Panel, has encouraged Treasury to hold its TARP investments in a series of trusts, as the January report acknowledges, such a structure is problematic and we cannot recommend it.
714 Treasury has interpreted TARP as a ‘‘revolving facility’’ pursuant to which payments received under the program may be recycled and remitted to other TARP recipients. We disagree
with this analysis and contend that all such payments should be applied permanently to repay
the national debt.
715 We assume the applicable regulators have analyzed the many challenges facing financial
institutions, including, without limitation, (i) rising credit card, consumer and home equity loan
defaults, (ii) rising commercial real estate and private equity/leveraged buyout loan defaults, (iii)

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their TARP advances.716 It is more satisfying that many of these
recipients have funded their redemptions by successfully accessing
the private capital markets. We remain optimistic that many—if
not most—of these former TARP recipients will not return to business-as-usual, but will endeavor to operate with best practices in
corporate governance and risk management guidelines and policies.
As the December Report discussed, TARP is only a small part of
the total activity of the federal government to intervene in the financial markets in 2008, including larger government programs instituted by the Federal Reserve and the FDIC. TARP amounted to
approximately 10 percent of the total exposure of the taxpayer.

the loss of traditional profits centers due to recent regulatory changes, and (iv) the fall in loan
demand from borrowers. See Loan-Rate Differences are Challenges for Banks, Wall Street Journal
(Jan.
4,
2010)
(online
at
online.wsj.com/article/
SB10001424052748704162104574630570328742070.html).
716 Recipients of TARP funds appear eager to exit the program most likely because of the executive compensation restrictions as well as the general stigma associated with participation in
the program and the risk that Congress and Treasury will mandate the application of additional
adverse laws and regulations to such recipients.

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Insert offset folio 154 here 54422A.014

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Thus, we are troubled that some may view TARP as
monochromatic whereby any institution that receives regulatory
approval to redeem its TARP advances must necessarily be financially stable. This may not be the case. It is possible that but for
the other programs and intervening events, many TARP recipients
would not have been financially strong enough to receive regulatory
clearance to exit TARP.
Financial institutions (and the automobile companies) have received many direct and indirect financial and regulatory subsidies,
including:
• The support of TARP recipients by the Federal Reserve and
Treasury with non-TARP sourced funds; and

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• The settlement of AIG credit default swap obligations with
certain TARP recipients at par value (i.e., without any discount).
It is possible that these subsidies contributed to the alleged
transformation of a group of essentially insolvent banks in 2008
into non-TARP dependent financial institutions by the end of 2009.
These subsidies were delivered at significant cost, and the taxpayers—not the TARP recipients—will most likely ultimately bear
those costs.717
We have heard much lately about the success of TARP and how
the Capital Purchase Program—the original bailout program for
approximately 700 financial institutions—may actually yield an
overall net profit. This assessment appears premature and inappropriate. The final operating results of TARP should not be tallied
without including the costs of the other subsidies afforded TARP
recipients by the Federal Reserve, Treasury, Fannie Mae, Freddie
Mac, and AIG (channeling Federal Reserve money).

hsrobinson on DSK69SOYB1PROD with HEARING

a. Support by the Federal Reserve and Treasury of
TARP Recipients
Fannie Mae and Freddie Mac together own or guarantee approximately $5.5 trillion of the $11.8 trillion in U.S. residential mortgage debt and financed as much as 75 percent of new U.S. mortgages during 2009.718 On December 24, 2009, Treasury announced
that it would provide an unlimited amount of additional assistance
to the two government-sponsored enterprises (GSEs) as required
over the next three years.719 Treasury apparently took this action
out of concern that the $400 billion of support that it previously
committed to the GSEs could prove insufficient. Additional assistance by Treasury will also allow the GSEs to honor their mortgaged-backed securities (MBS) guarantee obligations and to absorb
further losses from the modification or write down of distressed
mortgage loans.720 Treasury also revised upwards to $900 billion
the cap 721 on the retained mortgage portfolio of each of the GSEs
which means the GSEs will not be forced to sell MBS into a distressed market just as the Federal Reserve is preparing to end its
program to purchase up to $1.25 trillion of MBS.722 The increased
717 It is also likely that a series of unintended consequences—such as the establishment of the
United States government as the implicit/explicit guarantor of certain ‘‘too big to fail’’ institutions—will gain sounder footing from these investments. We do not support the recently announced proposal to levy a special tax, fee or assessment against financial institutions. Such
a levy could impede lending in an already tight credit market.
718 Dawn Kopecki, Mortgage Anxieties Mean Limbo for Fannie and Freddie (Update 2),
Bloomberg
(Dec.
28,
2009)
(online
at
www.bloomberg.com/apps/
news?pid=newsarchive&sid=aLEn75100iNg#).
719 U.S. Department of the Treasury, Treasury Issues Update on Status of Support for Housing
Programs
(Dec.
24,
2009)
(online
at
www.treasury.gov/press/releases/
2009122415345924543.htm).
720 Nick Timiraos, Questions Surround Fannie, Freddie, Wall Street Journal (Dec. 30, 2009)
(online at online.wsj.com/article/SB20001424052748704234304574626630520798314.html#mod=
todaysluslmoneylandlinvesting).
721 The revised number should not be viewed as a ‘‘cap’’ since Treasury may again elect to
increase the amount of retained MBS.
722 Nick Timiraos, Questions Surround Fannie, Freddie, Wall Street Journal (Dec. 30, 2009)
(online
at
online.wsj.com/article/
SB20001424052748
704234304574626630520798314.
html#mod=todaysluslmoneylandlinvesting).
‘‘The relaxed portfolio limits calmed investor worries that Fannie and Freddie would be forced
to sell some of their mortgage holdings just as the Federal Reserve was preparing to wind down
its purchases of mortgage-backed securities next spring. The Federal Reserve’s commitment to

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commitment and revised cap enhance the likelihood that the GSEs
will undertake to make ‘‘large-scale’’ purchases of distressed MBS
for which they provided a guarantee.723 Presumably, the GSEs may
make such purchases from TARP recipients and other holders and
issuers, and it will be interesting to note how the GSEs elect to employ the proceeds of this unlimited facility.
As reflected on its November 25, 2009 balance sheet, the Federal
Reserve System holds $155 billion face-value federal agency debt
securities representing the direct obligations of Fannie Mae,
Freddie Mac and the Federal Home Loan Banks, and $852 billion
of face-value MBS representing securities guaranteed by Fannie
Mae, Freddie Mac or Ginnie Mae. Since November 26, 2008, the
Federal Reserve has increased its holdings of federal agency debt
securities by $143 billion, and the $852 billion of MBS is entirely
new since that date.724 In addition, Treasury anticipates that as of
December 31, 2009, it will have purchased $220 billion of GSEguaranteed MBS under the Housing and Economic Recovery Act of
2008 (HERA).725
It does not seem unreasonable to conclude that the actions of
Treasury and the Federal Reserve in support of the MBS market
and the GSEs also offered material assistance to many TARP recipients and expedited the exit of some recipients from the
TARP.726 By directly and indirectly (through the GSEs) funding
the acquisition of MBS 727 from TARP recipients and other holders
buy up to $1.25 trillion has helped to keep mortgage rates near record lows; without that support some economists have said that could rise to 6% by the end of 2010.
Others said the new flexibility means that Fannie and Freddie could replace the Federal Reserve as a big buyer of mortgage-backed securities, especially if weak demand for mortgagebacked securities from private investors drives rates higher.’’
723 Jody Chenn, Fannie Changes Clear Way for ‘Large-Scale’ Buyouts (Update 1), Bloomberg
(Dec.
28,
2009)
(online
at
www.bloomberg.com/apps/
news?pid=newsarchive&sid=aA7QrMCZHhRs#).
724 Board of Governors of the Federal Reserve System, Federal Reserve System Monthly Report
on Credit and Liquidity Programs and Balance Sheet (Dec. 2009) (online at federalreserve.gov/
monetarypolicy/files/monthlyclbsreport200912.pdf).
725 U.S. Department of the Treasury, Treasury Issues Update on Status of Support for Housing
Programs
(Dec.
24,
2009)
(online
at
www.treasury.gov/press/releases/
2009122415345924543.htm).
726 This is not to say that the overarching purposes and mechanics of the Treasury and Federal Reserve programs are necessarily transparent. A number of questions—without limitation—
are presented.
• What is the authority for Treasury’s unlimited assistance to the GSEs?
• Will the GSEs continue to use funds contributed by Treasury to guarantee the MBS purchased by the Federal Reserve?
• If so, are the taxpayers—through Treasury’s recently announced unlimited capital commitment to the GSEs—in effect bailing out the Federal Reserve for its efforts to create a liquid
one-buyer market for MBS?
• Is one of the principal purposes of these circular purchases, capital infusions and guarantee
payments simply to remove MBS from the books of TARP recipients (the original purpose of
TARP) and other holders and issuers at favorable prices to the sellers?
• Is the Federal Reserve in effect bailing out TARP recipients and other holders and issuers
of MBS?
• If so, will this action also placate foreign sovereigns and other holders and issuers that acquired GSE guaranteed MBS with the understanding that it was full faith and credit paper of
the United States government?
• Have the purchases of MBS by the Federal Reserve coupled with the unlimited assistance
from Treasury converted the implicit guarantee into an explicit guarantee of the GSEs by the
United States government?
• If so, under what authority was such action taken?
• Has the Federal Reserve or Treasury purchased any MBS from any TARP recipient or other
holder or issuer for consideration in excess of the then existing market value?
• If so, under what authority was such action taken?
727 To the extent Treasury or the Federal Reserve purchased MBS from TARP recipients for
consideration in excess of market value, it is possible that some or all of the spread should be
Continued

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and issuers, Treasury and the Federal Reserve added liquidity to
an all but frozen MBS market and no doubt enhanced the trading
value of such securities. It is difficult to imagine that the Federal
Reserve’s public commitment to purchase up to $1.25 trillion of
MBS did not materially move the market and permit holders of
MBS—including TARP recipients—to liquidate their investments
at more favorable pricing. Even if the Federal Reserve ends its program to purchase MBS within the next few months 728 the GSEs
could potentially pick up the slack by funding the acquisition of
MBS through Treasury’s recently announced expansion of its commitment to the GSEs. Further, by funding Fannie Mae’s and
Freddie Mac’s performance of their MBS guarantee obligations,
Treasury has directly supported the MBS market and, as such,
quite likely improved the net worth of many TARP recipients.
Similarly, by purchasing MBS and GSE-issued mortgage bonds, the
Federal Reserve has kept mortgage rates near historic lows,729
thereby facilitating mortgage loan originations and refinancings
and lessening the default rate on existing adjustable rate mortgage
loans—all of which have benefited many TARP recipients.
In order to expedite the swift metamorphosis of many TARP recipients from insolvent to investment grade, the institutions were
arguably subsidized through government-sponsored purchases of
MBS and by the all but unlimited investment of (and commitment
classified as a subsidy—without an offsetting additional reimbursement obligation—for the benefit of the selling TARP recipients. We question whether many TARP recipients would have sold
a material portion of their MBS portfolios for less than the original purchase price paid for the
securities due to the adverse effect the recognition of any resulting losses would have had on
their required capital ratios. In addition, these transactions would have provided lower ‘‘marks’’
for valuation purposes, which could have had significant adverse balance sheet and income
statement effects under FAS 157. Thus, the revision of the mark-to-market accounting rules
noted below in the text may have also encouraged TARP holders to defer any sales of MBS for
consideration less than their original purchase price. In addition to the cash infusion generated
from the sale of illiquid MBS at favorable prices, the selling TARP recipients may have been
able to book trading profits from the MBS dispositions and it is possible that some TARP recipients generated material trading gains by purchasing distressed MBS at well below par and selling the securities to Treasury or the Federal Reserve at or near par. These transactions would
have bolstered the recipient’s capital and expedited its exit from TARP.
The quantification of any such subsidy is not free from doubt since each MBS purchased by
Treasury or the Federal Reserve apparently carried a GSE guarantee and presumably would
have been paid pursuant to the terms of the guarantee contract assuming the guarantor remained solvent. Nevertheless, GSE guaranteed MBS presumably may trade below par if the
guarantee obligation has not been triggered (or has only been partially triggered) and the disposition of any such MBS by a TARP recipient for consideration in excess of its prevailing market price may in certain instances be viewed as a subsidy to the selling recipient. The recognition of significant subsidies would have improved the financial position and operating results
of TARP recipients and assisted their exit from the program. The cost of providing such subsidies to the TARP recipients will be borne by the taxpayers and not the recipients.
728 Fed may re-enter MBS market later in 2010—Market News, Reuters (Jan. 5, 2010) (online
at www.reuters.com/article/idUSN0530695520100105?type=marketsNews):
‘‘The Federal Reserve is discussing re-entering the mortgage-backed securities market later
this year if its buying power is needed to hold down interest rates, Market News said on Tuesday in a story citing Fed officials.
The $5 trillion agency mortgage-backed securities market may weaken when last year’s biggest buyer, the Federal Reserve, ends its $1.25 trillion agency MBS purchasing program at the
end of the first quarter of 2010.’’
See also, Fed Minutes Show Division on Emergency Steps, New York Times (Jan. 6, 2010) (online at www.nytimes.com/2010/01/07/business/07fed.html?hp); see also, Fed Plan to Stop Buying
Mortgages Feeds Recovery Worries, Wall Street Journal (Jan. 8, 2010) (online at online.wsj.com/
article/SB126291088200220743.html).
729 Although the purchases have reduced the cost of capital of the GSEs and lowered mortgage
rates, some analysts fear that the withdrawal of Federal Reserve support for the GSEs will lead
to an ‘‘asset collapse’’ while others note that such concerns are ‘‘overblown.’’ See Mortgage Anxieties Mean Limbo for Fannie and Freddie (Update 2), Bloomberg (Dec. 28, 2009) (online at
www.bloomberg.com/apps/news?pid=newsarchive&sid=aLEn75100iNg#); see also, Mortgage Bond
Rally May End, Rates Rise as Fed Stops Purchases, Bloomberg (Dec. 31, 2009) (online at
www.bloomberg.com/apps/news?pid=20601087&sid=aukqYVzx6x3w&pos=4).

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to invest) public funds in Fannie Mae, Freddie Mac and AIG. One
may argue that the government has created without meaningful
public debate or analysis a series of ‘‘bad banks’’ within the Federal
Reserve, Treasury, Fannie Mae, Freddie Mac and AIG 730 to accomplish what TARP alone failed to achieve. These ‘‘bad banks’’ or,
perhaps, ‘‘debt consolidation entities’’ operate by actually and virtually removing toxic assets from the books of TARP recipients and
other holders and issuers. The Federal Reserve and Treasury have
actually removed up to $1 trillion of troubled assets from the books
of TARP recipients and other holders and issuers through outright
purchases.731 The Federal Reserve and Treasury have also virtually removed additional troubled assets from the books of TARP
recipients and other holders and issuers by propping up the market
values of such assets and maintaining historically low mortgage
rates.
Although Treasury and the Federal Reserve have arguably bolstered the net worth of many TARP recipients by purchasing MBS
and investing in the two GSEs, much of the risk associated with
Treasury’s and the Federal Reserve’s investments will fall to the
taxpayers even though substantial benefits may inure to many
TARP recipients. Such actions by Treasury and the Federal Reserve have all but enshrined the ‘‘implicit guarantee’’ of the United
States government with respect to institutions that are deemed
‘‘too big or too interconnected to fail’’ and may have intentionally
or inadvertently subsidized the early exit from TARP of many recipients at an increasing cost of the taxpayers.

hsrobinson on DSK69SOYB1PROD with HEARING

b. AIG and Credit Default Swap Payments
On November 17, 2009, the Special Inspector General for TARP
(SIGTARP) issued a report addressing the termination of certain
AIG CDSs at par (SIGTARP Report).732 In order to close out the
AIG CDSs the FRBNY remitted $27.1 billion to the AIG counterparties (CPs) in return for $62.1 billion of face value CDOs held by
the CPs.733 The CPs were also permitted to retain $35 billion of
cash collateral previously pledged by AIG pursuant to the CDSs.
The CPs—which included TARP recipients Goldman Sachs, Merrill
Lynch and Bank of America—were paid the full face value of their

730 It is our understanding that many of the distressed assets of AIG are housed in a group
of special purpose vehicles with the common name ‘‘Maiden Lane LLC.’’
731 Treasury anticipates that it will have purchased approximately $220 billion face value of
mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae by December 31, 2009, and the Federal Reserve’s November 25, 2009 balance sheet discloses the purchase
of $852 billion face value of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac
or Ginnie Mae. See U.S. Department of the Treasury, Treasury Issues Update on Status of Support for Housing Programs (Dec. 24, 2009) (online at www.treasury.gov/press/releases/
2009122415345924543.htm; see also, Board of Governors of the Federal Reserve System, Federal
Reserve System Monthly Report on Credit and Liquidity Programs and Balance Sheet (Dec.
2009) (online at www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200912.pdf).
732 Office of the Special Inspector General for the Troubled Asset Relief Program, Factors Affecting Efforts To Limit Payments to AIG Counterparties (Nov. 17, 2009) (online at
www.sigtarp.gov/reports/audit/2009/FactorslAffectinglEffortsltol
LimitlPaymentsltolAIGlCounterparties.pdf).
733 Each AIG CDS was structured with the applicable CP based upon a unique set of facts.
The noted description is, by necessity, simplified.

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respective CDOs and the FRBNY failed in its efforts to receive a
discount in payment from any CP.734
A question arises as to whether the termination of the CDSs at
par—that is, without any discount or haircut—constituted an inappropriate subsidy of the CPs and necessitated the investment of additional TARP funds in AIG. According to the SIGTARP Report,
the CPs refused to accept a discounted payment and terminate the
CDSs for less than par because (i) the collateral previously posted
under the CDS contracts ($35 billion) plus the then fair market
value of the CDOs ($27.1 billion) equaled the full face value of the
CDOs ($62.1 billion), (ii) the United States government had clearly
signaled that it would not permit AIG to fail and, therefore, the
CDSs would be honored in full, (iii) certain CPs had hedged against
a default by AIG under the CDSs, and (iv) the CPs were entitled
to par value payments pursuant to the CDS contracts.735 Although
the FRBNY apparently asked the CPs to accept a discounted payment for the settlement of the CDSs, their efforts ultimately proved
unsuccessful.
These justifications proffered by the CPs, and accepted by the
FRBNY, are not compelling. If the CPs believed that the United
States government would not permit AIG to fail, then why did the
FRBNY insist on terminating the CDSs? If the CPs were confident
that AIG—or the FRBNY in its absence—would continue to post
collateral if the fair market value of the CDOs declined or that the
CDOs could be sold for their then market value if AIG collapsed,
then why not let the CPs assume that risk? If the CPs believed
that their third-party hedges against an AIG default would be honored in full, then (again) why not let the CPs assume that risk? Although the SIGTARP Report notes that then-FRBNY President
Geithner denies that the payments by the FRBNY constituted a
‘‘backdoor bailout’’ of the CPs,736 without any other explanation, it
is difficult to conclude that the FRBNY insisted that AIG terminate
the CDSs other than as a mechanism to provide a direct—yet not
particularly transparent—government-sponsored subsidy to the
CPs.737
Even if the FRBNY did not intend for the termination of the
CDSs to serve as a government-sponsored subsidy of the CPs, why
did the FRBNY fail to negotiate material discounts with each CP?
Although the CPs may have believed that (i) the United States government would not let AIG fail, (ii) AIG—or the FRBNY—would
continue to post collateral under the CDS contracts or that the
CDOs could be sold for their then market value if AIG collapsed,
734 The aggregate face amount of the underlying CDOs equaled $62.1 billion and the CPs received $27.1 billion from the FRBNY and were permitted to retain $35 billion of cash collateral
previously pledged under the CDS contracts. Id.
735 Office of the Special Inspector General for the Troubled Asset Relief Program, Factors Affecting Efforts to Limit Payments to AIG Counterparties, at 15 (Nov. 17, 2009) (online at
www.sigtarp.gov/reports/audit/2009/FactorslAffectinglEffortsltolLimitl
PaymentsltolAIGlCounterparties.pdf).
736 Office of the Special Inspector General for the Troubled Asset Relief Program, Factors Affecting Efforts to Limit Payments to AIG Counterparties, at 30 (Nov. 17, 2009) (online at
www.sigtarp.gov/reports/audit/2009/FactorslAffectinglEffortsltolLimitlPaymentsltol
AIGlCounterparties.pdf).
737 Is it likely that the market value of the referenced CDOs would have dropped from $27.1
billion to zero and necessitated that AIG post additional collateral of $27.1 billion? By terminating the CDS contracts at par, the FRBNY effectively assumed that the market value of the
CDOs would drop to zero within the very near term.

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and (iii) their third-party hedges would be honored in full, such assumptions were by no means free from doubt. All doubt was resolved, however, in favor of the CPs upon their receipt of cash payments from the FRBNY for the full par value of the CDOs. It
seems that the negation of these risks should have merited the termination of the CDS contracts at a material discount to par value.
In addition, other justifications exist for discounting the payments remitted by the FRBNY to the CPs. Prior to the termination
of the CDSs, the CPs held cash collateral of $35 billion. Yet, after
the termination of the CDSs, the CPs held actual cash in the same
amount. The transformation of cash collateral into actual cash
must have been of some benefit to the CPs.738 Further, prior to the
termination of the CDSs, the CPs held CDOs with a (falling) market value of $27.1 billion, but after the termination of the CDSs,
the CPs held actual cash in the same amount.739 In effect, the
FRBNY permitted—if not directly encouraged—the CPs to convert
illiquid cash collateral and illiquid CDOs into $62.1 billion of actual
cash. Trading cash collateral and CDOs with a problematic market
value for cash during a worldwide liquidity crunch must have been
of substantial benefit to the CPs. Why was the FRBNY unable to
terminate the CDSs at a material discount to par value? Why did
the FRBNY not insist on these discounts? Again, the inescapable
conclusion, without other facts, seems to be that this was a direct
government-sponsored subsidy to the CPs.
It is unlikely that the FRBNY (or the United States government)
has a basis to seek to unwind the termination of the CDSs or compel the CPs to promptly remit a suitable discount to the FRBNY.
It appears that the CPs—including several TARP recipients—received another taxpayer subsidy for which they hold no reimbursement obligation. Without this substantial subsidy, it is possible
that at least some of the CPs would not have been permitted by
their regulators to exit the TARP program on an expedited basis.
We recommend that the Panel investigate this matter in its upcoming report on AIG. Without a better explanation of a straightforward business purpose for these transactions, the taxpayers nevertheless may be best served by having Treasury seek recission
from the CPs, reversing cancellation of the CDS contracts and requiring the CPs to purchase the underlying CDOs at their $62.1
billion par value.

hsrobinson on DSK69SOYB1PROD with HEARING

4. Exit Strategy from HAMP and Other Foreclosure Mitigation Programs
The TARP-funded HAMP program carries a 100 percent subsidy
rate according to the General Accounting Office.740 This means
that the United States government will recover none of the $50 billion of taxpayer sourced TARP funds invested in the HAMP fore738 This assumes that posted collateral under these transactions was encumbered by contractual and legal restrictions.
739 At the time the FRBNY financed the termination of the AIG CDSs, the CDO market was
illiquid—if not frozen—and it is doubtful that lenders would have accepted CDOs as collateral
without the imposition of substantial discounts to their then significantly depressed market values.
740 Government Accountability Office, Financial Audit: Office of Financial Stability (Troubled
Asset Relief Program) Fiscal Year 2009 Financial Statements (Dec. 2009) (online at
www.gao.gov/new.items/d10301.pdf).

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closure mitigation program.741 The projected shortfall will become
more burdensome to the taxpayers as Treasury contemplates expanding HAMP or introducing additional programs targeted at
modifying or refinancing distressed home mortgage loans. Since
Treasury is charged with protecting the interests of the taxpayers
who funded HAMP and the other TARP programs, we recommend
that Treasury’s foreclosure mitigation efforts be structured so as to
incorporate an effective exit strategy by allowing Treasury to participate in any subsequent appreciation in the home equity of any
mortgagor whose loan is modified under HAMP or any other taxpayer subsidized program.742 In order to encourage the participation of mortgage lenders in Treasury’s foreclosure mitigation efforts, such lenders should also be granted the right—subordinate to
the right granted Treasury—to participate in any subsequent equity appreciation. The incorporation of an equity participation right
may be achieved by the filing of a one-page document in the local
real estate property records when the applicable home mortgage
loan is modified. The mechanics of such a feature may be illustrated by the following example of a typical home mortgage loan
modification.
Assume a homeowner borrows $200,000 and purchases a
residence in the same amount.743 The home subsequently
declines in value to $175,000 and the homeowner and the
mortgage lender agree to restructure the loan under a
TARP-sponsored foreclosure mitigation program pursuant
to which the outstanding principal balance of the loan is
reduced to $175,000 and Treasury advances $10,000 in
support of the restructure. Immediately after the modification the mortgage lender has suffered a $25,000 744 economic loss and Treasury has advanced $10,000 of TARP
funds. If the homeowner subsequently sells the residence
for $225,000, the $50,000 of realized equity proceeds 745
will be allocated in accordance with the following waterfall—the first $10,000 746 is remitted to reimburse Treasury for the TARP funds advanced under the foreclosure
741 Congressional Budget Office, The Troubled Asset Relief Program: Report on Transactions
Through June 17, 2009 (June 2009) (online at www.cbo.gov/ftpdocs/100xx/doc10056/06-29TARP.pdf).
742 Congressional Oversight Panel, Taking Stock: What Has the Troubled Asset Relief Program
Achieved?, Additional views of former panelist Congressman Jeb Hensarling (Dec. 9, 2009) (online at cop.senate.gov/documents/cop-120909-report-hensarling.pdf).
743 These facts illustrate the zero ($0.00) down-payment financings that were more common
a few years ago.
744 The $25,000 loss equals the $200,000 principal balance of the original loan, less the
$175,000 principal balance of the modified loan. The example does not consider the consequences of modifying the interest rate on the loan.
745 The $50,000 of realized equity proceeds equals the $225,000 sales price of the residence,
less the $175,000 outstanding balance of the modified loan. The example makes certain simplifying assumptions such as the absence of transaction and closing fees and expenses.
746 In order to more appropriately protect the taxpayers, the $10,000 advanced under the
TARP sponsored foreclosure mitigation program should accrue interest at an objective and
transparent rate of interest. For example, if the 30-year fixed rate of interest on mortgage loans
equals five-percent when the mortgage loan is modified, the $10,000 advance should accrue interest at such a rate and Treasury should be reimbursed the aggregate accrued amount upon
realization of the equity proceeds. If at such time $2,500 of interest has accrued, Treasury
should be reimbursed $12,500 ($10,000 originally advanced, plus $2,500 of accrued interest) instead of only the $10,000 of TARP proceeds originally advanced.

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mitigation program; the next $25,000 747 is remitted to the
mortgage lender to cover its $25,000 economic loss; and
the balance of $15,000 is paid to the homeowner.
Prior to the repayment of all funds advanced by Treasury and
the economic loss suffered by the mortgage lender the homeowner
should not be permitted to borrow against any appreciation in the
net equity value of the mortgaged property unless the proceeds are
applied in accordance with the waterfall noted above. That is, instead of selling the residence for $225,000 as assumed in the foregoing example, the homeowner should be permitted to borrow
against any net equity in the residence, provided $10,000 is remitted to Treasury and $25,000 is paid to the mortgage holder prior
to the homeowner retaining any such proceeds.748 Such flexibility
allows the homeowner to cash out the interests of Treasury and the
mortgage lender without selling the residence securing the mortgage loan. The modified loan documents should also permit the
homeowner to repay Treasury and the mortgage lender from other
sources such as personal savings or the disposition of other assets.749
We also recommend that to the extent permitted by applicable
law, Treasury should structure all mortgage loan modifications and
refinancings under HAMP and any other foreclosure mitigation
programs as recourse obligations to the homeowners. If the loans
are structured as non-recourse obligations, under state law or otherwise, the homeowners may have a diminished incentive to repay
Treasury the funds advanced under TARP.750
In our view, the incorporation of these specifically targeted modifications into each TARP funded foreclosure mitigation program
will enhance the possibility that Treasury will exit the programs at
a reduced cost to the taxpayers.

hsrobinson on DSK69SOYB1PROD with HEARING

5. Implicit Guarantees
The January report analyzes the difficulties that may arise when
the United States government directly or indirectly undertakes to
prevent certain systemically significant institutions from failing.
Although the government does not generally guarantee the assets
and obligations of private entities, its actions and policies may nevertheless send a clear message to the market that some institutions
are simply too big, or too interconnected, to fail. Once the government adopts such a policy it is difficult to know how and where to
draw the line. With little public debate, automobile manufacturers
were recently transformed into financial institutions so they could
be bailed out with TARP funds and an array of arguably non-sys747 The mortgage lender may also argue that its $25,000 loss should accrue interest in the
same manner as provided Treasury. In such event, the mortgage lender would be entitled to
recover $25,000, plus accrued interest upon the realization of sufficient equity proceeds.
748 Prudent underwriting standards should apply to all such home equity loans.
749 Treasury may wish to structure its foreclosure mitigation efforts so as to encourage the
early repayment of TARP funds by homeowners. Treasury, for example, could agree to a tenpercent discount or waive the accrual of interest on the TARP funds advanced if a homeowner
repays such funds in full within three years following the restructuring. Any such incentives
should appear reasonable to the taxpayers and should not negate the intent of the equity participation right. Mortgage lenders may also agree to similar incentives.
750 Roger Lowenstein, Walk Away From Your Home, New York Times (Jan. 7, 2009) (online
at www.nytimes.com/2010/01/10/magazine/10FOB-wwln-t.html?hp). The article implies that a recourse structure is of little benefit if the homeowner is otherwise judgment proof.

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temically significant institutions—such as GMAC 751—received
many billions of dollars of taxpayer funded subsidies. In its haste
to restructure favored institutions, the government may assume
the role of king maker—as was surely the case in the Chrysler and
GM bankruptcies—and dictate a reorganization structure that arguably contravenes years of well-established commercial and corporate law precedent. The unintended consequences of these actions linger in the financial markets and legal community long
after the offending transactions have closed and adversely—yet
subtly—affect subsequent transactions that carry any inherent risk
of future governmental intervention. The uninitiated may question
why two seemingly identical business transactions merit disparate
risk-adjusted rates of return or why some transactions appear overcollateralized or inexplicably complicated. The costs of mitigating
political risk in private sector business transactions are seldom
quantified or even discussed outside the cadre of businesspersons
and their advisors who structure, negotiate and close such transactions, yet such costs certainly exist and must be satisfied.
The resolution of the fundamental public policy issues arising
from implicit guarantee and political risk should remain with Congress.

751 Although Treasury indicates that GMAC was (again) saved so as to support its auto financing business, it also appears that substantial GMAC losses stem from speculation in the MBS
market. It is unclear why GMAC—a putative auto finance company—chose to speculate in the
MBS market. We recommend that the Panel investigate GMAC and the inherent ongoing subsidies that its taxpayer-supported operations afford to Chrysler and GM in contrast to their competitors.

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SECTION THREE: CORRESPONDENCE WITH TREASURY
UPDATE
Secretary of the Treasury, Timothy Geithner, sent a letter to
Chair Elizabeth Warren on December 10, 2009 752 in response to a
series of questions presented by the Panel regarding the Supervisory Capital Assessment Program (the ‘‘stress tests’’).
On behalf of the Panel, Chair Elizabeth Warren sent a letter on
December 24, 2009 753 to Secretary of the Treasury, Timothy
Geithner, requesting information with respect to the Emergency
Economic Stabilization Act of 2008 provisions governing executive
compensation at TARP-recipient financial institutions and regarding the authority of the Special Master for TARP Executive Compensation. The Panel requested a written response from Treasury
by January 13, 2010. The Panel has not yet received a response
from Secretary Geithner.
On behalf of the Panel, Chair Elizabeth Warren sent a letter on
January 11, 2010 754 to Secretary of the Treasury Timothy
Geithner, to follow-up on a letter sent on November 25, 2009,755 requesting information with respect to Treasury’s assistance to CIT
Group, Inc. As of the publication of this report, the Panel has not
received a response from Secretary Geithner.

752 See

Appendix I of this report, infra.
Appendix II of this report, infra.
Appendix III of this report, infra.
755 See Appendix IV of the Panel’s December oversight report. Congressional Oversight Panel,
December Oversight Report: Taking Stock: What Has the Troubled Asset Relief Program
Achieved? (Dec. 9, 2009) (online at cop.senate.gov/documents/cop-120909-report.pdf).

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753 See
754 See

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SECTION FOUR: TARP UPDATES SINCE LAST REPORT
A. Restructuring of Treasury’s Investment in GMAC
Treasury injected an additional $3.8 billion of capital into GMAC
on December 30, 2009. The $3.8 billion is divided into a $2.54 billion purchase of Trust Preferred Securities (TruPs), $127 million in
warrants to purchase TruPs exercised on December 30, a $1.25 billion purchase of Mandatory Convertible Preferred Stock (MCP),
and $63 million in warrants to purchase MCP exercised on December 30.
In addition, Treasury converted $3 billion of the $7.5 billion in
MCP it purchased in May 2009 into common equity; Treasury now
owns 56 percent of GMAC’s common stock, up from 35 percent
prior to this transaction. As a result, Treasury will appoint four
members of GMAC’s board of directors, up from two before the restructuring. The restructuring also converted Treasury’s preferred
stock and warrants, from a $5 billion purchase in December 2008,
into MCP. Treasury exercised warrants it held following both
transactions prior to the conversions, totaling $375 million and
$250 million, respectively.
Treasury made the additional purchases and restructured the investment in order to help GMAC satisfy its additional capital requirements under the Supervisory Capital Assistance Program
(SCAP) following the May 2009 stress tests. Treasury’s additional
commitment came in under the $5.6 billion Treasury previously estimated GMAC would require under SCAP.
For a more complete discussion of the restructuring of Treasury’s
GMAC investment, please see Section D.8 of this report.
B. CPP Monthly Lending Report
Treasury releases a monthly lending report showing loans outstanding at the top 22 CPP recipient banks. The most recent report, issued on December 14, 2009, includes data through the end
of October 2009. Treasury reported that the overall outstanding
loan balance at the top CPP recipients declined by one percent between the end of September 2009 and the end of October 2009.

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C. TARP Repayments
Since the Panel’s most recent oversight report, additional banks
have repaid their TARP investments under CPP. A total of 58
banks have repaid their preferred stock TARP investments provided under the CPP to date. Treasury has also liquidated the warrants it holds in 40 of these 58 banks.
Most notably, Bank of America and Wells Fargo & Company both
repaid their full $25 billion CPP investments. In addition, both
Bank of America and Citigroup repaid all $20 billion Treasury invested in both institutions through the TIP. Finally, General Motors repaid the first $1 billion of a $6.7-billion debt obligation to
Treasury remaining after GM’s bankruptcy proceedings. Similar
quarterly payments will continue until the debt is repaid.
During November 2009, Treasury received $1.87 billion in dividends and $13.5 million in interest from its investments.

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D. Asset Guarantee Program Termination
On December 23, 2009, Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation, and Citigroup terminated a
loss-sharing agreement on $301 billion of ring-fenced Citigroup assets reached under Treasury’s Asset Guarantee Program (AGP) in
January 2009 and expected to run for 10 years. As a result of the
early termination, Treasury cancelled $1.8 billion in Trust Preferred Securities, leaving Treasury with a little over $2.2 billion in
Trust Preferred Securities and a warrant for 66 million shares of
Citigroup common stock in exchange for the guarantee. This transaction was the only one ever consummated under the AGP, and
Treasury is terminating the program.
E. Public-Private Investment Program
On December 18, 2009, the last of the nine pre-qualified PPIP
fund managers, Oaktree Capital Management, L.P., closed a PPIF
transaction. As a result, Treasury has made available to fund managers its full complement of $30 billion financing, representing $10
billion in equity capital and $20 billion in secured debt financing.
As of December 22, 2009, Treasury reported that PPIP transactions totaling $24 billion in purchasing power had closed, representing $6 billion in private equity capital, $6 billion in Treasury
equity capital, and $12 billion in secured debt financing.
On January 4, 2010, Treasury entered into a wind-up and liquidation agreement with TCW Asset Management, one of the nine
pre-qualified PPIP fund managers. The agreement will unwind a
Treasury investment of $356.3 million, with a portion of the losses
backstopped by TCW.
F. Term Asset-Backed Securities Loan Facility (TALF)
At the December 14, 2009 facility, investors requested $1.3 billion in loans for legacy CMBS. Investors did not request any loans
for new CMBS. By way of comparison, investors requested $1.4 billion in loans for legacy CMBS at the November facility and $2.1
billion at the October facility. Investors requested $72.2 million in
loans for new CMBS at the November facility, the only loans requested for new CMBS during TALF’s operation.
At the January 7, 2010 facility, investors requested $1.1 billion
in loans to support issuance of ABS collateralized by loans in the
credit card, floorplan, and small business sectors. No loans were requested in the auto, equipment, premium financing, servicing advances, and student loan sectors. By way of comparison, at the December 3, 2009 facility, investors requested $3 billion in loans
collateralized by the issuance of ABS in the credit card, equipment,
floorplan, small business, servicing advances, and student loan sectors; investors did not request any loans in the auto or premium
financing sectors.

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G. Warrant Auctions
Treasury previously announced that it would sell its warrant positions in JPMorgan Chase & Co. and TCF Financial Corporation
through a modified Dutch auction process. The auction of

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JPMorgan Chase warrants closed on December 10, 2009, with proceeds to Treasury of $950.3 million. The auction of TCF Financial
warrants closed on December 15, 2009, with proceeds to Treasury
of $9.6 million.
H. Metrics
Each month, the Panel’s report highlights a number of metrics
that the Panel and others, including Treasury, the Government Accountability Office (GAO), Special Inspector General for the Troubled Asset Relief Program (SIGTARP), and the Financial Stability
Oversight Board, consider useful in assessing the effectiveness of
the Administration’s efforts to restore financial stability and accomplish the goals of EESA. This section discusses changes that have
occurred in several indicators since the release of the Panel’s December report.
• Interest Rate Spreads. Interest rate spreads have continued to
tighten since the Panel’s December report, showing further signs of
financial stability. Interest rates on overnight commercial paper
have returned to near pre-crisis levels. The interest rate spread for
AA asset-backed commercial paper, which is considered mid-investment grade, has decreased by nearly 8 percent since the Panel’s
December report and is at its lowest level since July 2007. Interest
rate spreads on overnight A2/P2 commercial paper, considered to
be lower quality, have decreased over 95 percent since the enactment of EESA.
FIGURE 14: INTEREST RATE SPREADS
Current Spread
(as of 12/31/09)

Indicator

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3 month LIBOR-OIS spread 756 ......................................................................
1 month LIBOR-OIS spread 757 ......................................................................
TED spread 758 (in basis points) ...................................................................
Conventional mortgage rate spread 759 ........................................................
Corporate AAA bond spread 760 .....................................................................
Corporate BAA bond spread 761 .....................................................................
Overnight AA asset-backed commercial paper interest rate spread 762 ......
Overnight A2/P2 nonfinancial commercial paper interest rate spread 763 ..

Percent Change
Since Last Report
(as of 11/30/09)

¥33
¥16
¥5
¥12.8
¥11.9
¥9.5
¥7.6
52.3

0.09
0.10
19
1.29
1.56
2.66
0.17
0.13

756 3 Mo LIBOR-OIS Spread, Bloomberg (online at www.bloomberg.com/apps/quote?ticker=.LOIS3:IND) (accessed Jan. 4, 2010) (hereinafter ‘‘3
Mo LIBOR-OIS Spread’’).
757 1 Mo LIBOR-OIS Spread, Bloomberg (online at www.bloomberg.com/apps/quote?ticker=.LOIS1:IND) (accessed Jan. 4, 2010).
758 TED Spread, SNL Financial.
759 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical Data (Instrument:
Conventional
Mortgages,
Frequency:
Weekly)
(online
at
www.federalreserve.gov/releases/h15/data/WeeklylThursdayl/H15lMORTGlNA.txt) (accessed Jan. 4, 2010); Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical Data (Instrument: U.S. Government
Securities/Treasury
Constant
Maturities/Nominal
10-Year,
Frequency:
Weekly)
(online
at
www.federalreserve.gov/releases/h15/data/WeeklylFridaylH15lTCMNOMlY10.txt) (hereinafter ‘‘Federal Reserve Statistical Release H.15’’)
(accessed Jan. 4, 2010).
760 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical Data (Instrument:
Corporate
Bonds/Moody’s
Seasoned
AAA,
Frequency:
Weekly)
(online
at
www.federalreserve.gov/releases/h15/data/WeeklylFridaylH15lAAAlNA.txt) (accessed Jan. 4, 2010); Federal Reserve Statistical Release
H.15, supra note 759 (accessed Jan. 4, 2010).
761 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical Data (Instrument:
Corporate
Bonds/Moody’s
Seasoned
BAA,
Frequency:
Weekly)
(online
at
www.federalreserve.gov/releases/h15/data/WeeklylFridayl/H15lBAAlNA.txt) (accessed Jan. 4, 2010); Federal Reserve Statistical Release
H.15, supra note 759 (accessed Jan. 4, 2010).
762 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data
Download
Program
(Instrument:
AA
Asset-Backed
Discount
Rate,
Frequency:
Daily)
(online
at
www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (hereinafter ‘‘Federal Reserve Statistical Release on Commercial Paper’’) (accessed
Jan. 4, 2010); Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data Download Program (Instrument: AA Nonfinancial Discount Rate, Frequency: Daily) (online at
www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Jan. 4, 2010). In order to provide a more complete comparison, this metric utilizes a five-day average of the interest rate spread for the last five days of the month.
763 Federal Reserve Statistical Release on Commercial Paper, supra note 762. In order to provide a more complete comparison, this metric
utilizes a five-day average of the interest rate spread for the last five days of the month.

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• LIBOR-OIS Spread. The LIBOR-OIS spread provides another example of how credit conditions have improved. This spread
measures the difference between LIBOR, which shows quarterly
borrowing costs for banks, and the Overnight Indexed Swaps rate
(OIS), which measures the cost of extremely short-term borrowing
by financial institutions. As the spread increases, market participants have greater fears about whether counterparties will be able
to deliver on their obligations. The lower spread means that the
banking sector now has a significantly lower cost of short-term capital than it did at the height of the crisis.764
FIGURE 15: 3 MONTH LIBOR-OIS SPREAD (AS OF DECEMBER 2009) 765

764 Federal Reserve Bank of St. Louis, What the Libor-OIS Spread Says (May 11, 2009) (online
at research.stlouisfed.org/publications/es/09/ES0924.pdf).
765 See 3 Mo LIBOR-OIS Spread, supra note 756.
766 SNL Financial, Historical Dividend Yield Values, 3 Month Libor (online at www1.snl.com/
InteractiveX/history.aspx?
RateList=1&Tabular=True&GraphType=
2&Frequency=0&TimePeriod2=
11&BeginDate=12%2F29%2F06&EndDate
=11%2F4%2F2009&SelectedYield2
=YID%3A63&ctl00%24ctl09%24IndexPreference=
default&ComparisonIndex2
=0&ComparisonYield2=1&CustomIndex=
0&ComparisonTicker2=&Action=Apply) (accessed Nov. 5, 2009) (hereinafter ‘‘Historical Dividend
Yield Values, 3 Month Libor’’); SNL Financial, Historical Dividend Yield Values, 3 Month Treasury
Bill
(online
at
www1.snl.com/InteractiveX/history.aspx?RateList
=1&Tabular=True&GraphType=2&Frequency=0&TimePeriod2=
11&BeginDate=12%2F29%2F06&EndDate
=11%2F4%2F2009&Selected
Yield2
=YID%3A63&ctl00%24ctl09%24IndexPreference=default&ComparisonIndex2
=0&ComparisonYield2=1&CustomIndex=0&ComparisonTicker2=&Action=Apply) (accessed Nov.
5, 2009).

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• TED Spread. The TED spread, which is the difference between LIBOR and short-term Treasury bill interest rates, is another indicator of perceived credit risk. After peaking in late 2008,
the TED spread has fallen to pre-crisis levels, as Figure 16 illustrates. The TED spread has continued to tighten since the Panel’s
December report, declining 5 percent since November 30, 2009.766

138
FIGURE 16: TED SPREAD SINCE OCTOBER 3, 2008 767

• Commercial Paper Outstanding. Commercial paper outstanding, a rough measure of short-term business debt, is an indicator of the availability of credit for enterprises. The amount of
commercial paper outstanding has decreased across the three categories the Panel measures since the December 2009 report. Financial commercial paper outstanding has decreased by over 9 percent
since the Panel’s last report while nonfinancial commercial paper
outstanding fell by over 13.5 percent.768 Commercial paper outstanding has continued to decrease since the enactment of EESA.
Asset-backed commercial paper outstanding has declined nearly 32
percent and nonfinancial commercial paper outstanding has decreased by over 49 percent since October 2008.769
FIGURE 17: COMMERCIAL PAPER OUTSTANDING
Current Level
(as of 12/31/09)
(billions of dollars)

Indicator

Asset-backed commercial paper outstanding (seasonally adjusted) 770 .......
Financial commercial paper outstanding (seasonally adjusted) 771 ..............
Nonfinancial commercial paper outstanding (seasonally adjusted) 772 .........
770 Federal
771 Federal

¥2.35
¥9.13
¥13.57

$485.8
578
103.1

Reserve Statistical Release on Commercial Paper, supra note 762.
Reserve Statistical Release on Commercial Paper, supra note 762.
Reserve Statistical Release on Commercial Paper, supra note 762.

767 Historical Dividend Yield Values, 3 Month Libor, supra note 766; Historical Dividend Yield
Values, 3 Month Libor, supra note 766.
768 Federal Reserve Statistical Release on Commercial Paper, supra note 762.
769 Federal Reserve Statistical Release on Commercial Paper, supra note 762.

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772 Federal

Percent Change
Since Last Report
(11/25/09)

139

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• Lending by the Largest TARP-recipient Banks. Treasury’s
Monthly Lending and Intermediation Snapshot tracks loan originations and average loan balances for the 22 largest recipients of CPP
funds across a variety of categories, ranging from mortgage loans
to commercial real estate to credit card lines. The data below exclude lending by two large CPP-recipient banks, PNC Bank and
Wells Fargo, because significant acquisitions by those banks since
October 2008 make comparisons difficult.773

773 PNC Financial and Wells Fargo purchased large banks at the end of 2008. PNC Financial
purchased National City on October 24, 2008 and Wells Fargo completed its merger with
Wachovia Corporation on January 1, 2009. The assets of National City and Wachovia are included as part of PNC and Wells Fargo, respectively, in Treasury’s January lending report but
are not differentiated from the existing assets or the acquiring banks. As such, there were dramatic increases in the total average loan balances of PNC and Wells Fargo in January 2009.
For example, PNC’s outstanding total average loan balance increased from $75.3 billion in December 2008 to $177.7 billion in January 2009. The same effect can be seen in Wells Fargo’s
total average loan balance of $407.2 billion in December 2008 which increased to $813.8 billion
in January 2009. The Panel excludes PNC and Wells Fargo in order to have a more consistent
basis of comparison across all institutions and lending categories.

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140
In October, these 20 institutions originated over $187 billion in
loans, a decrease of nearly one percent compared to September
2009.774
FIGURE 18: LENDING BY THE LARGEST TARP-RECIPIENT BANKS (WITHOUT PNC AND WELLS
FARGO) 775
Most Recent Data
(October 2009)
(millions of dollars)

Indicator

Total loan originations ..........................................................
Total mortgage originations .................................................
Small business originations .................................................
Mortgage refinancing ............................................................
HELOC originations (new lines & line increases) ................
C&I renewal of existing accounts ........................................
C&I new commitments .........................................................
Total average loan balances .......................................

$187,033
54,645
5,394
30,427
2,226
47,677
41,824
$3,398,679

Percent Change
Since
September 2009

Percent Change
Since
October 2008

¥0.67
0.84
8
¥0.15
¥1.98
¥12.6
19.7
¥0.89

¥14.3
23.4
776 5.6
62.1
¥53.2
¥17
¥29.1
¥0.7

775 Treasury Snapshot for October, supra note 774.
776 Treasury only began reporting data regarding small business originations in its April Lending Survey. U.S. Department of the Treasury,
Treasury Department Monthly Lending and Intermediation Snapshot (hereinafter ‘‘Treasury Snapshot for April’’).

• Housing Indicators. Foreclosure filings decreased by over seven
percent from October to November, and are nearly 10 percent
above the level of October 2008. Housing prices, as illustrated by
both the S&P/Case-Shiller Composite 20 Index and the FHFA
House Price Index, increased slightly in October.
FIGURE 19: HOUSING INDICATORS
Percent Change
From Data
Available at Time
of Last Report

Most Recent
Monthly Data

Indicator

Monthly foreclosure filings 777 ............................................
Housing prices—S&P/Case-Shiller Composite 20
Index 778 ..........................................................................
FHFA Housing Price Index 779 .............................................

Percent
Change Since
October 2008

¥7.7

306,627
145.4
199.41

9.7
¥7.3
¥1.91

0.37
0.64

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777 RealtyTrac, Foreclosure Activity Press Releases (online at www.realtytrac.com//ContentManagement/PressRelease.aspx) (accessed Jan. 4,
2010) (hereinafter ‘‘RealtyTrac Foreclosure Activity Data’’). The most recent data available is for October 2009.
778 Standard & Poor’s, S&P/Case-Shiller Home Price Indices (Instrument: Seasonally Adjusted Composite 20 Index) (online at
www.standardandpoors.com/prot/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&
blobheadervalue2=inline%3B+filename%3DSAlCSHomePricelHistoryl122925.xls&blobheadername2=Content-Disposition
&blobheadervalue1=application%2Fexcel&blobkey=id&blobheadername1=content-type&blobwhere=1243629218624&blobheadervalue3=UTF–8)
(hereinafter ‘‘S&P/Case-Shiller Home Price Indices’’) (accessed Jan. 4, 2010). The most recent data available is for October 2009.
779 Federal Housing Finance Agency, U.S. and Census Division Monthly Purchase Only Index (Instrument: USA, Seasonally Adjusted) (online at
www.fhfa.gov/webfiles/15321/MonthlyIndexlJan1991ltolLatest.xls) (accessed Jan. 4, 2010). The most recent data available is for October
2009.

774 U.S. Department of the Treasury, Treasury Department Monthly Lending and Intermediation Snapshot: Summary Analysis for October 2009 (Jan. 4, 2010) (online at
www.financialstability.gov/docs/surveys/SnapshotlDatalOctoberl2009.xls)
(hereinafter
‘‘Treasury Snapshot for October’’).

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141
FIGURE 20: FORECLOSURE FILINGS AS COMPARED TO THE CASE-SHILLER 20 CITY HOME
PRICE INDEX (AS OF OCTOBER 2009) 780

• Commercial Real Estate. The commercial real estate market
has continued to deteriorate since the Panel’s last report. New CRE
lending by the top 22 CPP recipients has decreased by over 71 percent since the enactment of EESA. Respondents to Treasury’s survey of the top 22 CPP participants reported that demand for C&I
and CRE loans was still below normal levels due to the lack of new
construction.781 A recent Goldman Sachs report notes that rent
growth in this market declined at an annualized rate of 8.7 percent
in the second quarter and estimates that there will be a total of
$287 billion in aggregated losses.
FIGURE 21: COMMERCIAL REAL ESTATE LENDING BY TOP 22 CPP RECIPIENTS (WITHOUT PNC AND
WELLS FARGO) 782
Current Level
as of 12/31/09)
(millions of dollars)

Indicator

CRE New Commitments ..........................
CRE Renewal of Existing Accounts ........
CRE Average Total Loan Balance ...........

$2,977
9,194
370,569

Percent Change Since EESA
Signed into Law (10/3/08)

¥4.07
¥11.9
¥1.16

¥71.7
2.2
¥1.14

Snapshot for October, supra note 735.

780 RealtyTrac Foreclosure Activity Data, supra note 777; S&P/Case-Shiller Home Price Indices, supra note 778. The most recent data available is for October 2009.
781 Treasury Snapshot for April, supra note 776. The Goldman Sachs Group, Inc., US Commercial Real Estate Take III: Reconstructing Estimates for Losses, Timing (Sept. 29, 2009).

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782 Treasury

Percent Change
Since September 2009

142
I. Financial Update
Each month, the Panel summarizes the resources that the federal government has committed to economic stabilization. The following financial update provides: (1) An updated accounting of the
TARP, including a tally of dividend income, repayments and warrant dispositions that the program has received as of November 30,
2009; and (2) an updated accounting of the full federal resource
commitment as of December 30, 2009.
1. TARP
a. Costs: Expenditures and Commitments
Treasury has committed or is currently committed to spend
$532.6 billion of TARP funds through an array of programs used
to purchase preferred shares in financial institutions, offer loans to
small businesses and automotive companies, and leverage Federal
Reserve loans for facilities designed to restart secondary
securitization markets.783 Of this total, $297 billion is currently
outstanding under the $698.7 billion limit for TARP expenditures
set by EESA, leaving $403.3 billion available for fulfillment of anticipated funding levels of existing programs and for funding new
programs and initiatives. The $297 billion includes purchases of
preferred and common shares, warrants and/or debt obligations
under the CPP, AIGIP/SSFI Program, PPIP, and AIFP; and a $20
billion loan to TALF LLC, the special purpose vehicle (SPV) used
to guarantee Federal Reserve TALF loans.784 Additionally, Treasury has allocated $35.5 billion to the Home Affordable Modification
Program, out of a projected total program level of $50 billion.

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b. Income: Dividends, Interest Payments, and CPP Repayments
As of December 30, 2009, a total of 58 institutions have completely repurchased their CPP preferred shares. Of these institutions, 37 have repurchased their warrants for common shares that
Treasury received in conjunction with its preferred stock investments; Treasury sold the warrants for common shares for three
other institutions at auction.785 Treasury received $50.9 million in
repayments from 13 CPP participants during December.786 The
vast majority of this total was repaid by two institutions—Bank of
America and Wells Fargo—that each repaid $25 billion received as
part of the CPP.787 Furthermore, Treasury closed its Targeted Investment Program (TIP) after Citigroup and Bank of America’s program repayments of $20 billion each ended any of TIP’s outstanding obligations. In addition, Treasury receives dividend payments on the preferred shares that it holds, usually five percent
783 EESA, as amended by the Helping Families Save Their Homes Act of 2009, limits Treasury
to $698.7 billion in purchasing authority outstanding at any one time as calculated by the sum
of the purchase prices of all troubled assets held by Treasury. Pub. L. No. 110–343, 115(a)–(b);
Helping Families Save Their Homes Act of 2009, Pub. L. No. 111–22, 402(f) (reducing by $1.26
billion the authority for the TARP originally set under EESA at $700 billion). For further discussion of pending legislation that may affect the total amount of TARP funds available, see Section
F, infra.
784 TARP Transactions Report for Period Ending December 30, 2009, supra note 166.
785 TARP Transactions Report for Period Ending December 30, 2009, supra note 166.
786 TARP Transactions Report for Period Ending December 30, 2009, supra note 166.
787 TARP Transactions Report for Period Ending December 30, 2009, supra note 166.

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per annum for the first five years and nine percent per annum
thereafter.788 In total, Treasury has received approximately $186.5
billion in income from repayments, warrant repurchases, dividends,
and interest payments deriving from TARP investments,789 and another $1.2 billion in participation fees from its Guarantee Program
for Money Market Funds.790

788 See, e.g., U.S. Department of the Treasury, Securities Purchase Agreement: Standard Terms
(online at www.financialstability.gov/docs/CPP/spa.pdf) (accessed Jan. 4, 2010).
789 See Cumulative Dividends Report as of November 30, 2009, supra note 241; TARP Transactions Report for Period Ending December 30, 2009, supra note 166.
790 U.S. Department of the Treasury, Treasury Announces Expiration of Guarantee Program
for Money Market Funds (Sept. 18, 2009) (online at www.treasury.gov/press/releases/tg293.htm).

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144
c. TARP Accounting
FIGURE 22: TARP ACCOUNTING (AS OF DECEMBER 30, 2009) 791
[Dollars in billions]
TARP Initiative

Capital Purchase Program
(CPP) 792 ..................................
Targeted Investment Program
(TIP) 793 ...................................
AIG Investment Program
(AIGIP)/Systemically Significant Failing Institutions Program (SSFI) .............................
Automobile Industry Financing
Program (AIFP) 795 ..................
Asset Guarantee Program
(AGP) 796 ..................................
Capital Assistance Program
(CAP) 798 ..................................
Term Asset-Backed Securities
Lending Facility (TALF) ...........
Public-Private Investment Partnership (PPIP) .........................
Supplier Support Program (SSP)
Unlocking SBA Lending ...............
Home Affordable Modification
Program (HAMP) .....................
Total Committed ..........................
Total Uncommitted ......................
Total ...................................

Anticipated
Funding

Actual Funding

Total Repayments

Funding Outstanding

Funding Available

$121.9

$83

$13.1

$218.0

$204.9

40.0

40.0

40

0

0

69.8

794 46.9

0

46.9

22.9

81.3

81.3

3.2

78.1

0

5.0

5.0

797 5.0

0

0

........................

........................

.........................

20.0

20.0

0

20.0

0

30.0

30.0
3.5
0

0
0
N/A

30.0
3.5
0

0
0
15.0

35.5
297
N/A
$297

14.5
65.5
801 336.2
802 $401.7

799 3.5

15.0
50.0
532.6
166.1
$698.7

800 35.5

467.1
N/A
$467.1

0
-170.1
$170.1

.........................

.........................

791 TARP

hsrobinson on DSK69SOYB1PROD with HEARING

Transactions Report for Period Ending December 30, 2009, supra note 166.
792 As of December 30, 2009, the CPP was closed. This figure reflects funds that were committed but unused. This information was provided by Treasury in response to Panel inquiry.
793 Both Bank of America and Citigroup repaid the $20 billion in assistance each institution received under the TIP on December 9 and December 23, 2009, respectively. Therefore the Panel accounts for these funds as repaid and as uncommitted. U.S. Department of the Treasury,
Treasury Receives $45 Billion in Repayments from Wells Fargo and Citigroup (Dec. 22, 2009) (online at
www.treas.gov/press/releases/20091229716198713.htm) (hereinafter ‘‘Treasury Receives $45 Billion from Wells Fargo and Citigroup’’).
794 In information provided by Treasury in response to a Panel request, AIG has completely utilized the $40 billion made available on November 25, 2008 and drawn-down $5.3 billion of the $29.8 billion made available on April 17, 2009. This figure also reflects $1.6 billion in
compounding of accumulated but unpaid dividends owed by AIG to Treasury due to the restructuring of Treasury’s investment from cumulative
preferred shares to non-cumulative shares. TARP Transactions Report for Period Ending December 30, 2009, supra note 166.
795 Treasury indicated that it would most likely not provide additional assistance to companies through the AIFP. Government Accountability
Office, Auto Industry: Continued Stewardship Needed as Treasury Develops Strategies for Monitoring and Divesting Financial Interests in Chrysler and GM, at 28 (Nov. 2009) (GAO–10–151) (online at www.gao.gov/new.items/d10151.pdf) (‘‘Although the immediate crisis of helping
Chrysler and GM maintain solvency has passed for now and Treasury has no plans for further financial assistance to the companies, the significant sums of taxpayer dollars that are invested in these companies warrant continued oversight’’). However, on January 5, 2010, Treasury
announced a restructuring of its investment in GMAC, which resulted in $3.8 billion in additional funds being provided to the company
through the AIFP.
796 Treasury, the Federal Reserve, and the Federal Deposit Insurance Company terminated the asset guarantee with Citigroup on December
23, 2009. The agreement was terminated with no losses to Treasury’s $5 billion second-loss portion of the guarantee. Citigroup did not repay
any funds directly, but instead terminated Treasury’s outstanding exposure on its $5 billion second-loss position. As a result, the $5 billion is
now accounted for as available. Treasury Receives $45 Billion from Wells Fargo and Citigroup, supra note 793.
797 Although this $5 billion is no longer exposed as part of the AGP and is accounted for as available, Treasury did not receive a repayment in the same sense as with other investments. See infra notes 806–807. Treasury did receive other income as consideration for the
guarantee, which is not a repayment and is accounted for in Figure 25. See id.
798 On November 9, 2009, Treasury announced the closing of this program and that only one institution, GMAC, was in need of further capital from Treasury. Treasury Announcement Regarding the CAP, supra note 486.
799 On July 8, 2009, Treasury lowered the total commitment amount for the program from $5 billion to $3.5 billion. This action reduced
GM’s portion from $3.5 billion to $2.5 billion and Chrysler’s portion from $1.5 billion to $1 billion. TARP Transactions Report for Period Ending
December 30, 2009, supra note 166.
800 This figure reflects the total of all the caps set on payments to each mortgage servicer and not the disbursed amount of funds for
successful modifications. TARP Transactions Report for Period Ending December 30, 2009, supra note 166.
801 This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($166.1 billion) and the repayments ($170.1
billion).
802 This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($166.1 billion) and the difference between
the total anticipated funding and the net current investment ($297 billion).

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145
FIGURE 23: TARP REPAYMENTS AND INCOME
[Dollars in billions]

TARP Initiative

Total ..............
CPP ...............
TIP .................
AIFP ...............
ASSP .............
AGP ...............
Bank of
America
Guarantee

Repayments
(as of
12/30/09)

$165.1
121.9
40
3.2
N/A
805 0

¥

Dividends 803
(as of
11/30/09)

Interest 804
(as of
11/30/09)

$11.7
8
2.7
0.75
N/A
0.26

¥

Warrant Repurchases
(as of
12/30/09)

$0.36
0.02
N/A
0.33
0.01
N/A

¥

$4.03
4.03
0
N/A
N/A
0

¥

Other Proceeds
(as of
12/30/09)

Total

¥
¥
¥
¥
¥
806 $2.23

$183.7
134
42.7
4.3
0.01
2.5

807 0.28

.28

803 See

Cumulative Dividends Report as of November 30, 2009, supra note 241.
804 See Cumulative Dividends Report as of November 30, 2009, supra note 241.
805 Although Treasury, the Federal Reserve, the FDIC, and Citigroup have terminated the AGP, and although Treasury’s $5 billion second-loss
position no longer counts against the $698.7 TARP ceiling, Treasury did not receive any repayment income. See infra notes 806–807. Treasury
did receive other income as consideration for the guarantee, which is not a repayment and is accounted for in Figure 25. See id.
806 As a fee for taking a second-loss position up to $5 billion on a $301 billion pool of ring-fenced Citigroup assets as part of the AGP,
Treasury received $4.03 billion in Citigroup preferred stock and warrants; Treasury exchanged these preferred stocks and warrants for trust
preferred securities in June 2009. Following the early termination of the guarantee, Treasury cancelled $1.8 billion of the trust preferred securities, leaving Treasury with a $2.23 billion investment in Citigroup trust preferred securities in exchange for the guarantee. U.S. Department
of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending December 30, 2009 (Jan. 4, 2010) (online at
www.financialstability.gov/docs/transaction-reports/1-4-10%20Transactions%20Report%20as%20of%2012-30-09.pdf).
807 Although Treasury, the Federal Reserve, and the FDIC negotiated with Bank of America regarding a similar guarantee, the parties never
reached an agreement. In September 2009, Bank of America agreed to pay each of the prospective guarantors a fee as though the guarantee
had been in place during the negotiations. This agreement resulted in payments of $276 million to Treasury, $57 million to the Federal Reserve, and $92 million to the FDIC. U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Bank of America Corporation, Termination Agreement, at 1–2 (Sept. 21, 2009) (online at
www.financialstability.gov/docs/AGP/BofA%20-%20Termination%20Agreement%20-%20executed.pdf).

hsrobinson on DSK69SOYB1PROD with HEARING

Rate of Return
As of December 30, 2009, the average internal rate of return for
all financial institutions that participated in the CPP and fully repaid the U.S. government (including preferred shares, dividends,
and warrants) is 14.4 percent.808 The internal rate of return is the
annualized effective compounded return rate that can be earned on
invested capital.

808 Participating privately-held qualified financial institutions provided Treasury with warrants to purchase additional preferred stock, which Treasury exercised immediately. TARP
Transactions Report for Period Ending December 30, 2009, supra note 166. The corresponding
figure does not reflect the repayment of private institutions’ preferred stock. The internal rate
of return for repayments by these institutions is 16.7 percent.

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146

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147

148
2. Other Financial Stability Efforts

hsrobinson on DSK69SOYB1PROD with HEARING

Federal Reserve, FDIC, and Other Programs
In addition to the direct expenditures Treasury has undertaken
through TARP, the federal government has engaged in a much
broader program directed at stabilizing the U.S. financial system.
Many of these initiatives explicitly augment funds allocated by
Treasury under specific TARP initiatives, such as FDIC and Federal Reserve asset guarantees for Citigroup, or operate in tandem
with Treasury programs, such as the interaction between PPIP and
TALF. Other programs, like the Federal Reserve’s extension of
credit through its section 13(3) facilities and SPVs and the FDIC’s
Temporary Liquidity Guarantee Program, operate independently of
TARP.
Figure 25 below reflects the changing mix of Federal Reserve investments. As the liquidity facilities established to face the crisis
have been wound down, the Federal Reserve has expanded its facilities for purchasing mortgage related securities. The Federal Reserve has announced that it intends to purchase $175 billion of federal agency debt securities and $1.25 trillion of agency mortgagebacked-securities.809 As of January 7, 2010, $160 billion of federal
agency (government-sponsored enterprise) debt securities and $909
billion of agency mortgage-backed-securities have been purchased.
The Federal Reserve has announced that these purchases will be
completed by April 2010.810

809 Board of Governors of the Federal Reserve System, Minutes of the Federal Open Market
Committee, at 10 (Dec. 15–16, 2009) (online at www.federalreserve.gov/newsevents/press/
monetary/fomcminutes20091216.pdf) (hereinafter ‘‘Minutes of the Federal Open Market Committee’’).
810 RealtyTrac Foreclosure Activity Data supra note 809, at 10 (‘‘In order to promote a smooth
transition in markets, the Committee is gradually slowing the pace of these purchases, and it
anticipates that these transactions will be executed by the end of the first quarter of 2010’’);
Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances (Jan. 7,
2010) (online at www.federalreserve.gov/Releases/H41/Current/).

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149
FIGURE 25: FEDERAL RESERVE AND FDIC FINANCIAL STABILITY EFFORTS 811

3. Total Financial Stability Resources (as of November 30,
2009)

811 Federal Reserve Liquidity Facilities include: Primary credit, Secondary credit, Central
Bank Liquidity Swaps, Primary dealer and other broker-dealer credit, Asset-Backed Commercial
Paper Money Market Mutual Fund Liquidity Facility, Net portfolio holdings of Commercial
Paper Funding Facility LLC, Seasonal credit, Term auction credit, Net Portfolio Holdings of
TALF LLC. Federal Reserve Mortgage Related Facilities Include: Federal agency debt securities
and Mortgage-backed securities held by the Federal Reserve. Institution Specific Facilities include: Credit extended to American International Group, Inc., and the net portfolio holdings of
Maiden Lanes I, II, and III. All Federal Reserve figures reflect the weekly average outstanding
under the specific programs during the last week of the specified month. Board of Governors
of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1) (online at
www.federalreserve.gov/datadownload/Choose.aspx?rel=H41) (accessed Jan. 4, 2010). For related
presentations of Federal Reserve data, see Board of Governors of the Federal Reserve System,
Credit and Liquidity Programs and the Balance Sheet, at 2 (Nov. 2009) (online at
www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200911.pdf). The TLGP figure reflects the monthly amount of debt outstanding under the program. Federal Deposit Insurance
Corporation, Monthly Reports on Debt Issuance Under the Temporary Liquidity Guarantee Program (Dec. 2008–Nov. 2009) (online at www.fdic.gov/regulations/resources/TLGP/reports.html).

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Beginning in its April report, the Panel broadly classified the resources that the federal government has devoted to stabilizing the
economy through myriad new programs and initiatives as outlays,
loans, or guarantees. Although the Panel calculates the total value
of these resources at over $3 trillion, this would translate into the
ultimate ‘‘cost’’ of the stabilization effort only if: (1) assets do not
appreciate; (2) no dividends are received, no warrants are exercised, and no TARP funds are repaid; (3) all loans default and are
written off; and (4) all guarantees are exercised and subsequently
written off.

150
With respect to the FDIC and Federal Reserve programs, the
risk of loss varies significantly across the programs considered
here, as do the mechanisms providing protection for the taxpayer
against such risk. As discussed in the Panel’s November report, the
FDIC assesses a premium of up to 100 basis points on TLGP debt
guarantees.812 In contrast, the Federal Reserve’s liquidity programs are generally available only to borrowers with good credit,
and the loans are over-collateralized and with recourse to other assets of the borrower. If the assets securing a Federal Reserve loan
realize a decline in value greater than the ‘‘haircut,’’ the Federal
Reserve is able to demand more collateral from the borrower. Similarly, should a borrower default on a recourse loan, the Federal Reserve can turn to the borrower’s other assets to make the Federal
Reserve whole. In this way, the risk to the taxpayer on recourse
loans only materializes if the borrower enters bankruptcy. The only
loans currently ‘‘underwater’’—where the outstanding principal
amount exceeds the current market value of the collateral—are two
of the three non-recourse loans to the Maiden Lane SPVs (used to
purchase Bear Stearns and AIG assets).
FIGURE 26: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF NOVEMBER 30, 2009)
[Dollars in billions]
Treasury
(TARP)

hsrobinson on DSK69SOYB1PROD with HEARING

Program

Total ...............................................................................
Outlaysi .................................................................
Loans .....................................................................
Guaranteesii ..........................................................
Uncommitted TARP Funds ....................................
AIG ..................................................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Bank of America ...........................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Citigroup ........................................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Capital Purchase Program (Other) ..............................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Capital Assistance Program .........................................
TALF ................................................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
PPIP (Loans)xi ...............................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
PPIP (Securities) ...........................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Home Affordable Modification Program ......................
812 COP

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$698.7
299.8
42.7
20
336.2
69.8
iii6938
0
0
0
v0
0
0
25
vi25
0
0
71.1
vii71.1
0
0
N/A
20
0
0
ix20
0
0
0
0
xii30
10
20
0
50

Federal
Reserve

$1,509.9
1,069.5
440.4
0
0
68.7
0
iv68.7
0
0
0
0
0
0
0
0
0
0
0
0
0
0
180
0
x180
0
0
0
0
0
0
0
0
0
0

FDIC

Total

$678.4
69.4
0
609
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

November Oversight Report, supra note 2, at 36.

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$2,887
1,438.7
483.1
629
336.2
138.5
69.8
68.7
0
0
0
0
0
25
25
0
0
71.1
71.1
0
0
viiiN/A
200
0
180
20
0
0
0
0
30
10
20
0
xiv50

151
FIGURE 26: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF NOVEMBER 30, 2009)—
Continued
[Dollars in billions]
Treasury
(TARP)

Program

hsrobinson on DSK69SOYB1PROD with HEARING

Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Automotive Industry Financing Program .....................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Auto Supplier Support Program ...................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Unlocking SBA Lending .................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Temporary Liquidity Guarantee Program ....................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Deposit Insurance Fund ...............................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Other Federal Reserve Credit Expansion ....................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Uncommitted TARP Funds ............................................

xiii50

0
0
xv78.2
59
19.2
0
3.5
0
xvi3.5
0
xvii15
15
0
0
0
0
0
0
0
0
0
0
0
0
0
0
336.2

Federal
Reserve

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1,261.2
xx1,069.5
xxi191.7
0
0

FDIC

Total

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
609
0
0
xviii609
69.4
xix69.4
0
0
0
0
0
0
0

50
0
0
75.4
75.4
19.2
0
3.5
0
3.5
0
15
15
0
0
609
0
0
609
69.4
69.4
0
0
1,261.2
1,069.5
191.7
0
336.2

iThe term ‘‘outlays’’ is used here to describe the use of Treasury funds under the TARP, which are broadly classifiable as purchases of
debt or equity securities (e.g., debentures, preferred stock, exercised warrants, etc.). The outlays figures are based on: (1) Treasury’s actual
reported expenditures; and (2) Treasury’s anticipated funding levels as estimated by a variety of sources, including Treasury pronouncements
and GAO estimates. Anticipated funding levels are set at Treasury’s discretion, have changed from initial announcements, and are subject to
further change. Outlays used here represent investment and asset purchases and commitments to make investments and asset purchases and
are not the same as budget outlays, which under section 123 of EESA are recorded on a ‘‘credit reform’’ basis.
iiAlthough many of the guarantees may never be exercised or exercised only partially, the guarantee figures included here represent the
federal government’s greatest possible financial exposure.
iiiThis number includes investments under the AIGIP/SSFI Program: a $40 billion investment made on November 25, 2008, and a $30 billion
investment committed on April 17, 2009 (less a reduction of $165 million representing bonuses paid to AIG Financial Products employees). As
of January 5, 2010, AIG had utilized $45.3 billion of the available $69.8 billion under the AIGIP/SSFI. This information was provided by Treasury in response to a Panel inquiry.
ivThis number represents the full $35 billion that is available to AIG through its revolving credit facility with the Federal Reserve ($22.2
billion had been drawn down as of December 31, 2009) and the outstanding principal of the loans extended to the Maiden Lane II and III
SPVs to buy AIG assets (as of December 31, 2009, $15.7 billion and $18 billion, respectively). Income from the purchased assets is used to
pay down the loans to the SPVs, reducing the taxpayers’ exposure to losses over time. Board of Governors of the Federal Reserve System, Federal Reserve System Monthly Report on Credit and Liquidity Programs and the Balance Sheet, at 17 (Oct. 2009) (online at
www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200910.pdf). On December 1, 2009, AIG entered into an agreement with FRBNY to
reduce the debt AIG owes the FRBNY by $25 billion. In exchange, FRBNY received preferred equity interests in two AIG subsidiaries. This also
reduced the debt ceiling on the loan facility from $60 billion to $35 billion. American International Group, AIG Closes Two Transactions That
Reduce Debt AIG Owes Federal Reserve Bank of New York by $25 billion (Dec. 1, 2009) (online at
phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MjE40D18Q2hpbGRJRD0tMXxUeXB1PTM=&t=1).
vBank of America repaid the $45 billion in assistance it had received through TARP programs on December 9, 2009. U.S. Department of
the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending December 30, 2009 (Jan. 4, 2010) (online at
www.financialstability.gov/docs/transaction-reports/1-4-10%20Transactions%20Report%20as%20of%2012-30-09.pdf) (hereinafter ‘‘TARP Transactions Report’’).
viAs of December 30, 2009, the U.S. Treasury held $25 billion of Citigroup common stock. See TARP Transactions Report, supra note v.
viiThis figure represents the $218 billion Treasury has anticipated spending under the CPP, minus the $25 billion investment in Citigroup
($25 billion) identified above, and the $121.9 billion in repayments that are reflected as available TARP funds. This figure does not account
for future repayments of CPP investments, nor does it account for dividend payments from CPP investments.
viiiOn November 9, 2009, Treasury announced the closing of the CAP and that only one institution, GMAC, was in need of further capital
from Treasury. GMAC, however received further funding through the AIFP, therefore the Panel considers CAP unused and closed. U.S. Department of the Treasury, Treasury Announcement Regarding the Capital Assistance Program (Nov. 9, 2009) (online at
www.financialstability.gov/latest/tgl11092009.html).
ixThis figure represents a $20 billion allocation to the TALF SPV on March 3, 2009. See TARP Transactions Report, supra note vi. As of
January 7, 2010, investors had requested a total of $64.3 billion in TALF loans ($9.2 billion in CMBS and $55 billion in non-CMBS). Federal
Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: CMBS (accessed Jan. 7, 2009) (online at
www.newyorkfed.org/markets/CMBSlrecentloperations.html); Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility:
non-CMBS (accessed Jan. 7, 2009) (online at www.newyorkfed.org/markets/talfloperations.html).

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152

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xThis number is derived from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the value of Federal Reserve loans under
the TALF. U.S. Department of the Treasury, Fact Sheet: Financial Stability Plan (Feb. 10, 2009) (online at
www.financialstability.gov/docs/fact-sheet.pdf) (describing the initial $20 billion Treasury contribution tied to $200 billion in Federal Reserve
loans and announcing potential expansion to a $100 billion Treasury contribution tied to $1 trillion in Federal Reserve loans). Because Treasury is responsible for reimbursing the Federal Reserve Board for $20 billion of losses on its $200 billion in loans, the Federal Reserve Board’s
maximum potential exposure under the TALF is $180 billion.
xiIt is unlikely that resources will be expended under the PPIP Legacy Loans Program in its original design as a joint Treasury-FDIC program to purchase troubled assets from solvent banks. See also Federal Deposit Insurance Corporation, FDIC Statement on the Status of the
Legacy Loans Program (June 3, 2009) (online at www.fdic.gov/news/news/press/2009/pr09084.html) and Federal Deposit Insurance Corporation,
Legacy Loans Program—Test of Funding Mechanism (July 31, 2009) (online at www.fidc.gov/news/press/2009/pr09131.html). The sales described in these statements do not involve any Treasury participation, and FDIC activity is accounted for here as a component of the FDIC’s
Deposit Insurance Fund outlays.
xiiU.S. Department of the Treasury, Joint Statement by Secretary of the Treasury Timothy F. Geithner, Chairman of the Board of Governors of
The Federal Reserve System Ben S. Bernanke, and Chairman of the Federal Deposit Insurance Corporation Sheila Bair: Legacy Asset Program
(July 8, 2009) (online at www.financialstability.gov/latest/tgl07082009.html) (‘‘Treasury will invest up to $30 billion of equity and debt in
PPIFs established with private sector fund managers and private investors for the purpose of purchasing legacy securities.’’); U.S. Department
of
the
Treasury,
Fact
Sheet:
Public-Private
Investment
Program,
at
4–5
(Mar.
23,
2009)
(online
at
www.treas.gov/press/releases/reports/ppiplfactlsheet.pdf) (outlining that, for each $1 of private investment into a fund created under the
Legacy Securities Program, Treasury will provide a matching $1 in equity to the investment fund; a $1 loan to the fund; and, at Treasury’s
discretion, an additional loan up to $1). As of December 30, 2009, Treasury reported $19.9 billion in outstanding loans and $9.9 billion in
membership interest associated with the program, thus substantiating the Panel’s assumption that Treasury may routinely exercise its discretion to provide $2 of financing for every $1 of equity 2:1 ratio. TARP Transactions Report, supra note v.
xiiiU.S. Government Accountability Office, Troubled Asset Relief Program; June 2009 Status of Efforts To Address Transparency and Accountability Issues, at 2 (June 17, 2009) (GAO09/658) (online at www.gao.gov/new.items/d09658.pdf). Of the $50 billion in announced TARP funding
for this program, $35.5 billion has been allocated as of December 30, 2009. See TARP Transactions Report, supra note v.
xivFannie Mae and Freddie Mac, government-sponsored entities (GSEs) that were placed in conservatorship of the Federal Housing Finance
Housing Agency on September 7, 2009, will also contribute up to $25 billion to the Making Home Affordable Program, of which the HAMP is a
key component. U.S. Department of the Treasury, Making Home Affordable: Updated Detailed Program Description (Mar. 4, 2009) (online at
www.treas.gov/press/releases/reports/housinglfactlsheet.pdf).
xvSee TARP Transactions Report, supra note v. A substantial portion of the total $81 billion in loans extended under the AIFP have since
been converted to common equity and preferred shares in restructured companies. $19.2 billion has been retained as first lien debt (with
$6.7 billion committed to GM, $12.5 billion to Chrysler). This figure ($78.2 billion) represents Treasury’s current obligation under the AIFP
after repayments.
xviSee TARP Transactions Report, supra note v.
xviiU.S.
Department of Treasury, Fact Sheet: Unlocking Credit for Small Businesses (Oct. 19, 2009) (online at
www.financialstability.gov/roadtostability/unlockingCreditforSmallBusinesses.html) (‘‘Jumpstart Credit Markets For Small Businesses By Purchasing Up to $15 Billion in Securities’’).
xviiiThis figure represents the current maximum aggregate debt guarantees that could be made under the program, which, in turn, is a
function of the number and size of individual financial institutes participating. $313 billion of debt subject to the guarantee has been issued
to date, which represents about 51 percent of the current cap, Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance
Under the Temporary Liquidity Guarantee Program: Debt Issuance Under Guarantee Program (Nov. 30, 2009) (online at
www.fdic.gov/regulations/resources/TLGP/totallissuance11-09.html) (updated Jan. 4, 2010). The FDIC has collected $10.3 billion in fees and
surcharges from this program since its inception in the fourth quarter of 2008. Federal Deposit Insurance Corporation, Monthly Reports on
Debt Issuance Under the Temporary Liquidity Guarantee Program (Nov. 30, 2009) (online at www.fdic.gov/regulations/resources/TLGP/fees.html)
(updated Jan. 4, 2010).
xixThis figure represents the FDIC’s provision for losses to its deposit insurance fund attributable to bank failures in the third and fourth
quarters of 2008 and the first, second and third quarters of 2009. Federal Deposit Insurance Corporation, Chief Financial Officer’s (CFO) Report
to
the
Board:
DIF
Income
Statement
(Fourth
Quarter
2008)
(online
at
www.fdic.gov/about/strategic/corporate/cfolreportl4qtrl08/income.html); Federal Deposit Insurance Corporation, Chief Financial Officer’s
(CFO)
Report
to
the
Board:
DIF
Income
Statement
(Third
Quarter
2008)
(online
at
www.fdic.gov/about/strategic/corporate/cfolreportl3rdqtrl08/income.html); Federal Deposit Insurance Corporation, Chief Financial Officer’s
(CFO)
Report
to
the
Board:
DIF
Income
Statement
(First
Quarter
2009)
(online
at
www.fdic.gov/about/strategic/corporate/cfolreportl1stqtrl09/income.html); Federal Deposit Insurance Corporation, Chief Financial Officer’s
(CFO)
Report
to
the
Board:
DIF
Income
Statement
(Second
Quarter
2009)
(online
at
www.fdic.gov/about/strategic/corporate/cfolreportl2ndqtrl09/income.html); Federal Deposit Insurance Corporation, Chief Financial Officer’s
(CFO)
Report
to
the
Board:
DIF
Income
Statement
(Third
Quarter
2009)
(online
at
www.fdic.gov/about/strategic/corporate/cfolreportl3rdqtrl09/income.html). This figure includes the FDIC’s estimates of its future losses
under loss-sharing agreements that it has entered into with banks acquiring assets of insolvent banks during these four quarters. Under a
loss-sharing agreement, as a condition of an acquiring bank’s agreement to purchase the assets of an insolvent bank, the FDIC typically
agrees to cover 80 percent of an acquiring bank’s future losses on an initial portion of these assets and 95 percent of losses of another portion of assets. See, for example Federal Deposit Insurance Corporation, Purchase and Purchase and Assumption Agreement Among FDIC, Receiver of Guaranty Bank, Austin, Texas FDIC and Compass Bank at 65-66 (Aug. 21, 2009) (online at
www.fdic.gov/bank/individual/failed/guaranty-txlplandlalwladdendum.pdf). In information provided to Panel staff, the FDIC disclosed
that there were approximately $132 billion in assets covered under loss-sharing agreements as of December 18, 2009. Furthermore, the FDIC
estimates the total cost of a payout under these agreements to be $59.3 billion. Since there is a published loss estimate for these agreements, the Panel continues to reflect them as outlays rather than as guarantees.
xxOutlays are comprised of the Federal Reserve Mortgage Related Facilities. The Federal Reserve balance sheet accounts for these facilities
under Federal agency debt securities and mortgage-backed securities held by the Federal Reserve. Board of Governors of the Federal Reserve
System, Factors Affecting Reserve Balances (H.4.1) (online at www.federalreserve.gov/datadownload/Choose.aspx?rel=H41) (accessed Jan. 4,
2010). Although the Federal Reserve does not employ the outlays, loans and guarantees classification, its accounting clearly separates its
mortgage-related purchasing programs from its liquidity programs. See Board of Governors of the Federal Reserve, Credit and Liquidity Programs and the Balance Sheet November 2009, at 2 (online at www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200911.pdf)
(accessed Dec. 7, 2009).
xxiFederal Reserve Liquidity Facilities classified in this table as loans include: Primary credit, Secondary credit, Central bank liquidity
swaps, Primary dealer and other broker-dealer credit, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, Net portfolio holdings of Commercial Paper Funding Facility LLC, Seasonal credit, Term auction credit, Net Portfolio Holdings of TALF LLC, and loans
outstanding to Bear Stearns (Maiden Lane I LLC). Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances
(H.4.1) (online at www.federalreserve.gov/datadownload/Choose.aspx?rel=H41) (accessed Jan. 4, 2010); see id.

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SECTION FIVE: OVERSIGHT ACTIVITIES
The Congressional Oversight Panel was established as part of
the Emergency Economic Stabilization Act (EESA) and formed on
November 26, 2008. Since then, the Panel has produced thirteen
oversight reports, as well as a special report on regulatory reform,
issued on January 29, 2009, and a special report on farm credit,
issued on July 21, 2009. Since the release of the Panel’s December
oversight report, which assessed the performance of the Troubled
Asset Relief Program (TARP) since its inception, the following developments pertaining to the Panel’s oversight of the TARP took
place:
• The Panel held a hearing in Washington, DC with Secretary
of the Treasury Timothy Geithner on December 10, his third appearance before the Panel. Secretary Geithner answered questions
relating to the Panel’s December oversight report, discussed the
TARP exit strategy, and provided an overview of how the TARP
would be used as it is extended into 2010. Secretary Geithner has
agreed to testify before the Panel once per quarter.

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Upcoming Reports and Hearings
The Panel will release its next oversight report in February. The
report will address the TARP’s role in mitigating continued concerns about the commercial real estate market.
The Panel is planning a field hearing in Atlanta on January 27,
2010. The hearing will discuss the implications of the troubled commercial real estate market on sustained financial stability.

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SECTION SIX: ABOUT THE CONGRESSIONAL OVERSIGHT
PANEL

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In response to the escalating crisis, on October 3, 2008, Congress
provided Treasury with the authority to spend $700 billion to stabilize the U.S. economy, preserve home ownership, and promote
economic growth. Congress created the Office of Financial Stability
(OFS) within Treasury to implement the Troubled Asset Relief Program. At the same time, Congress created the Congressional Oversight Panel to ‘‘review the current state of financial markets and
the regulatory system.’’ The Panel is empowered to hold hearings,
review official data, and write reports on actions taken by Treasury
and financial institutions and their effect on the economy. Through
regular reports, the Panel must oversee Treasury’s actions, assess
the impact of spending to stabilize the economy, evaluate market
transparency, ensure effective foreclosure mitigation efforts, and
guarantee that Treasury’s actions are in the best interests of the
American people. In addition, Congress instructed the Panel to
produce a special report on regulatory reform that analyzes ‘‘the
current state of the regulatory system and its effectiveness at overseeing the participants in the financial system and protecting consumers.’’ The Panel issued this report in January 2009. Congress
subsequently expanded the Panel’s mandate by directing it to
produce a special report on the availability of credit in the agricultural sector. The report was issued on July 21, 2009.
On November 14, 2008, Senate Majority Leader Harry Reid and
the Speaker of the House Nancy Pelosi appointed Richard H.
Neiman, Superintendent of Banks for the State of New York,
Damon Silvers, Director of Policy and Special Counsel of the American Federation of Labor and Congress of Industrial Organizations
(AFL–CIO), and Elizabeth Warren, Leo Gottlieb Professor of Law
at Harvard Law School to the Panel. With the appointment on November 19, 2008, of Congressman Jeb Hensarling to the Panel by
House Minority Leader John Boehner, the Panel had a quorum and
met for the first time on November 26, 2008, electing Professor
Warren as its chair. On December 16, 2008, Senate Minority Leader Mitch McConnell named Senator John E. Sununu to the Panel.
Effective August 10, 2009, Senator Sununu resigned from the
Panel, and on August 20, 2009, Senator McConnell announced the
appointment of Paul Atkins, former Commissioner of the U.S. Securities and Exchange Commission, to fill the vacant seat. Effective
December 9, 2009, Congressman Jeb Hensarling resigned from the
Panel and House Minority Leader John Boehner announced the appointment of J. Mark McWatters to fill the vacant seat.

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APPENDIX I: LETTER FROM SECRETARY TIMOTHY
GEITHNER TO CHAIR ELIZABETH WARREN, RE:
STRESS TESTS, DATED DECEMBER 10, 2009

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APPENDIX II: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY GEITHNER, RE: EXECUTIVE COMPENSATION, DATED DECEMBER 24, 2009

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APPENDIX III: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY GEITHNER, RE: CIT
GROUP ASSISTANCE, DATED JANUARY 11, 2010

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