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N L SP E CT INSPE OR GE A ER AL CI D OG UB RA M TRO LE ASS E T R ELIEF PR SIGTARP Office of the Special Inspector General for the Troubled Asset Relief Program Advancing Economic Stability Through Transparency, Coordinated Oversight and Robust Enforcement Quarterly Report to Congress October 21, 2009 MISSION SIGTARP’s mission is to advance economic stability by promoting the efficiency and effectiveness of TARP management, through transparency, through coordinated oversight, and through robust enforcement against those, whether inside or outside of government, who waste, steal or abuse TARP funds. STATUTORY AUTHORITY SIGTARP was established by Section 121 of the Emergency Economic Stabilization Act of 2008 (EESA). Under EESA, the Special Inspector General has the duty, among other things, to conduct, supervise and coordinate audits and investigations of the purchase, management and sale of assets under the Troubled Asset Relief Program (TARP). In carrying out those duties, SIGTARP has the authority set forth in Section 6 of the Inspector General Act of 1978, including the power to issue subpoenas. Office of the Special Inspector General for the Troubled Asset Relief Program General Telephone: 202.622.1419 Hotline: 877.SIG.2009 SIGTARP@do.treas.gov www.SIGTARP.gov Contents Executive Summary Program Updates and Financial Overview of TARP The Role of Ratings Agencies in TARP and Beyond Oversight Activities of SIGTARP SIGTARP Recommendations on the Operation of TARP Report Organization 1 5 5 6 9 9 Section 1 The Office of the Special Inspector General for the Troubled asset relief program SIGTARP Creation and Statutory Authority SIGTARP Oversight Activities Since the July Quarterly Report 11 13 13 Section 2 TARP overview Financial Overview of TARP TARP Tutorial: Where Does TARP Money Come From Financial Institution Support Programs Asset Support Programs Automotive Industry Support Programs Homeowner Support Program Executive Compensation 29 31 34 55 72 89 94 106 Section 3 the impact of credit rating agencies on tarp and beyond Introduction Background on Credit Rating Agencies Credit Rating Market How the Federal Government Uses Ratings in Regulating the Financial Sector Role of Rating Agencies in the Financial Crisis Evolving Regulatory Environment 113 115 116 124 128 135 142 Section 4 tarp operations and administration TARP Administrative and Program Expenditures Current Contractors and Financial Agents Conflicts of Interest 149 151 152 152 Section 5 SIGTARP Recommendations Progress on Lessening the Term Asset-Backed Securities Loan Facility’s Reliance on Rating Agencies Developments Relating to HAMP Streamlining Developments in the Implementation of the Public-Private Investment Program Update on Recommendations and Lessons Learned from SIGTARP Audit Reports Tracking the Implementation of Recommendations in Previous Reports Endnotes appendices A. Glossary B. Acronyms and Abbreviations C. Reporting Requirements D. Transaction Detail E. Cross-Reference of Report to the Inspector General Act of 1978 F. Public Announcement of Audits* G. Key Oversight Reports and Testimonies* H. Correspondence I. Organizational Chart 155 157 158 159 161 165 173 181 185 187 191 216 – – 217 251 *Visit www.sigtarp.gov to view Appendix F: Public Announcement of Audits, and Appendix G: Key Oversight Reports and Testimonies for further reference material. EXECUTIVE SUMMARY investigations 2 special inspector general I troubled asset relief program quarterly report to congress I october 21, 2009 More than a year has now passed since the Emergency Economic Stabilization Act of 2008 (“EESA”) authorized creation of the Troubled Asset Relief Program (“TARP”), and preliminary assessments of TARP — both its effectiveness and its costs — can begin to be made. As to effectiveness, there are significant signs of improvement in the stability of the financial system. Although the causes for such improvement are many and complex, it appears that the dramatic steps taken by the U.S. Department of the Treasury (“Treasury”) and other agencies through TARP and related programs played a significant role in bringing the system back from the brink of collapse. On the other hand, the risk of foreclosure continues to affect too many Americans, unemployment continues its rise, and the stresses on the commercial real estate market threaten to increase the pressure on banks and small businesses alike yet again. On the cost side of the ledger, although it will take many years to assess all of the costs associated with TARP, financial and otherwise, this report begins to categorize them. It is useful to analyze any Governmental intervention in the market like TARP against three distinct types of cost: the financial cost to the taxpayers; the “moral hazard” damage to market incentives created by Government intervention; and a cost that has received scant attention thus far — the impact on Government credibility due to the failure to explain what is being done with billions of taxpayer dollars transparently and forthrightly. The past year has demonstrated that TARP’s costs, in each category, could prove to be substantial. • Financial Cost: Although several TARP recipients have repaid funds for what has widely been reported as a 17% profit, it is extremely unlikely that the taxpayers will see a full return on their TARP investments. Certain TARP programs, such as the mortgage modification component of the Making Home Affordable (“MHA”) program, which is scheduled to use $50 billion of TARP funds, will yield no direct return; for others, including the extraordinary assistance to American International Group, Inc. (“AIG”) and the auto companies, full recovery is far from certain. Some of these potential costs are discussed in Section 2 of this report, including a discussion of financial cost that is rarely considered — the cost associated with borrowing the money used to fund TARP. • Moral Hazard: Market behavior is bound to be impacted by the massive infusions of Government capital into the very institutions that caused the crisis; by the modifications of mortgages for homeowners who may have borrowed irresponsibly; and by the provision of cheap, non-recourse loans to incentivize the purchase of the same volatile and over-valued asset-backed securities (“ABS”) that were a major cause of the current crisis. The firms that were “too big to fail” last October are in many cases bigger still, many as a result of Governmentsupported and -sponsored mergers and acquisitions; the inherently conflicted rating agencies that failed to warn of the risks leading up to the financial crisis are still just as conflicted; and the recent rebound in big bank stock prices Moral Hazard: A term used in economics and insurance to describe the lack of incentive individuals have to guard against a risk when they are protected against that risk (for example, through an insurance policy). In the context of TARP, it refers to the danger that private-sector executives/investors/lenders may behave more recklessly believing that the Government has insulated them from the risks of their actions. 3 4 special inspector general I troubled asset relief program risks removing the urgency of dealing with the system’s fundamental problems. Absent meaningful regulatory reform, TARP runs the risk of merely re-animating markets that had collapsed under the weight of reckless behavior. Section 3 of this report addresses the role of rating agencies in particular, their crucial role in the financial system, and their impact on the current financial crisis. • Government Credibility: The Government’s capacity to address financial crises depends in no small measure on its credibility, both with market participants whose confidence is essential to stabilize the financial system and with the American public whose confidence is essential to underpin the political support required to take the difficult (and often expensive) steps that are needed. Unfortunately, several decisions by Treasury — including Treasury’s refusal to require TARP recipients to report on their use of TARP funds, its less-thanaccurate statements concerning TARP’s first investments in nine large financial institutions, and its initial defense of those inaccurate statements — have served only to damage the Government’s credibility and thus the long-term effectiveness of TARP. Notwithstanding TARP’s role in bringing the financial system back from the brink of collapse, it has been widely reported that the American people view TARP with anger, cynicism, and distrust. These views are fueled by the lack of transparency in the program. The beliefs of some, for example, that TARP funds went into a “black hole”; that TARP was created in secrecy to transfer wealth from taxpayers to Wall Street insiders (exacerbated by the announcement of billions of dollars of profits and record-setting bonus pools at TARP recipients while unemployment and foreclosures continue to rise); or that Treasury is just too closely aligned with the interests of Wall Street are only reinforced by Treasury’s failures of transparency. Despite the aspects of TARP that could reasonably be viewed as a substantial success, Treasury’s actions in this regard have contributed to damage the credibility of the program and of the Government itself, and the anger, cynicism, and distrust created must be chalked up as one of the substantial, albeit unnecessary, costs of TARP. Section 5 of this report reviews some of the unadopted recommendations of the Office of the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”), the adoption of which could help bring greater transparency to TARP and answer some of the criticisms of the program. In this report, SIGTARP endeavors to (i) explain the various TARP programs and how Treasury has used those programs through September 30, 2009; (ii) provide a description of what ratings agencies do and their role in the market, in Governmental decisions, and in TARP; (iii) describe what SIGTARP has done to oversee the various TARP programs since its Quarterly Report to Congress dated July 21, 2009 (the “July Quarterly Report”); and (iv) set forth new recommendations, and provide updates on past recommendations, relating to the operation of TARP. quarterly report to congress I october 21, 2009 PROGRAM UPDATES AND FINANCIAL OVERVIEW OF TARP TARP consists of 12 announced programs, of which 10 have been implemented. As of September 30, 2009, Treasury had announced commitments to spend $636.9 billion of the $699 billion maximum available for the purchase of troubled assets under TARP as authorized by Congress in EESA. Of this amount, approximately $454.3 billion had been expended through the 10 implemented programs to provide support for U.S. financial institutions, the automobile industry, the markets in certain types of ABS, and homeowners. As of September 30, 2009, 47 TARP recipients have paid back all or a portion of their principal or repurchased shares for an aggregate total of $72.9 billion of repayments, leaving $317.3 billion, or 45.4%, of TARP’s allocated $699 billion available for distribution. In addition to the principal repayments, Treasury has received interest and dividend payments on its investments, as well as revenue from the sale of its warrants. As of September 30, 2009, $9.5 billion in interest, dividends, and other income had been received by the Government, and $2.9 billion in sales proceeds had been received from the sale of warrants and preferred stock received as a result of exercised warrants. At the same time, some TARP participants have missed dividend payments: among Capital Purchase Program (“CPP”) participants, 46 have missed dividend payments to the Government, some of which made the payments on a later date. As of September 30, 2009, there was $75.7 million in outstanding unpaid CPP dividends. THE ROLE OF RATING AGENCIES IN TARP AND BEYOND Credit rating agencies play critically important roles in the financial markets, in Government decision making, and in several areas of TARP operations. Section 3 of this report describes these various roles so that the reader can understand the effects that the agencies have on TARP — and on the system in general — and so that the various proposals for reform of the ratings system can be evaluated in proper context. Among other things, Section 3 describes the background of the credit rating agencies, the basics of how they provide ratings for securities at issuance, and how they monitor the securities after issuance. The report goes on to discuss how ratings are used in the marketplace, the effect that ratings of securities have on the financial institutions that hold such securities, and the various ways that the Government uses ratings in the regulation of the financial markets and, in several ways, in the operation of TARP. Section 3 also addresses the role of rating agencies in the financial crisis, examining in particular the inherent conflicts of interest that the “issuer-pay” model poses; the agencies’ failure to assess properly the risk of 5 6 special inspector general I troubled asset relief program subprime mortgages and exotic financial products; and the extreme volatility posed by the effects of rating downgrades on the liquidity of financial institutions, with AIG as a prime example. Finally, Section 3 describes the outlines of various proposals that have been introduced to reform the credit rating system. OVERSIGHT ACTIVITIES OF SIGTARP Ponzi Scheme: An illegal pyramid scheme in which money from new investors is used to pay off earlier investors. Since the July Quarterly Report, SIGTARP has been actively engaged in fulfilling its vital investigative and audit functions as well as in building its staff and organization. SIGTARP’s Investigations Division has developed into a sophisticated whitecollar investigative agency. Through September 30, 2009, SIGTARP has opened 61 and has 54 ongoing criminal and civil investigations. These investigations include complex issues concerning suspected TARP fraud, accounting fraud, securities fraud, insider trading, bank fraud, mortgage fraud, mortgage servicer misconduct, fraudulent advance-fee schemes, public corruption, false statements, obstruction of justice, money laundering, and tax-related investigations. While the vast majority of SIGTARP’s investigative activity remains confidential, developments in several of SIGTARP’s investigations have become public over the past quarter, as discussed more fully in Section 1 of this report. • Federal Trade Commission v. Federal Housing Modification Administration, Inc.: On September 16, 2009, the Federal Trade Commission (“FTC”) filed a complaint against Federal Housing Modification Administration, Inc. (“FHMA”) and its principals in the U.S. District Court for the District of Columbia. With investigative support from SIGTARP, FTC alleged violations of the FTC Act and telemarketing sales rules by FHMA by misrepresenting itself as a Federal Government agency and falsely claiming that it would obtain mortgage modifications for consumers for a $3,000 fee. SIGTARP’s investigation of FHMA, in coordination with the U.S. Postal Inspection Service, is ongoing. • Gordon Grigg Sentenced to 10 Years’ Imprisonment: On August 6, 2009, Gordon B. Grigg, a financial advisor and owner of ProTrust Management, Inc., formerly based in Franklin, Tennessee, was sentenced to serve a 10-year prison term after pleading guilty to four counts of mail fraud and four counts of wire fraud in the U.S. District Court for the Middle District of Tennessee. The charges stemmed from a SIGTARP-assisted investigation into Grigg’s role in a Ponzi scheme which he promoted, in part, by marketing fictional TARPguaranteed debt. • Search Warrants Executed at Taylor, Bean & Whitaker Mortgage Corporation and Colonial Bancgroup: On August 3, 2009, SIGTARP, along with its Federal law enforcement partners, executed search warrants at quarterly report to congress I october 21, 2009 the offices of Colonial Bancgroup (“Colonial”) and Taylor, Bean & Whitaker Mortgage Corporation, formerly the nation’s 12th-largest loan originator and servicer. Prior to the execution of these warrants, SIGTARP had served subpoenas on Colonial after it had announced that it had received preliminary contingent approval from Treasury to receive $553 million in TARP funding. The funding was never made. On August 7, 2009, Colonial reported that it is the target of a criminal probe. This investigation is ongoing. • Bank of America Investigations: SIGTARP continues to play a significant role in the investigations by the New York State Attorney General’s Office, the Securities and Exchange Commission (“SEC”), and the Department of Justice (“DOJ”) into the circumstances of Bank of America’s merger with Merrill Lynch and its receipt of additional TARP funds under the Targeted Investment Program (“TIP”). Nearly 50% of SIGTARP’s ongoing investigations were developed in whole or in part through tips or leads provided on SIGTARP’s Hotline (877-SIG-2009 or accessible at www.SIGTARP.gov). Since its inception, the SIGTARP Hotline received and analyzed more than 7,000 contacts, running the gamut from expressions of concern over the economy to serious allegations of fraud. On the audit side, as of the initial drafting of this report, SIGTARP had issued its first four audit reports, which are addressed in greater detail in Sections 1 and 5. A fifth audit on AIG bonuses was subsequently issued and will be described in greater detail in SIGTARP’s next quarterly report. • Use of Funds: In July 2009, SIGTARP issued its first formal audit report concerning how recipients of CPP funds reported their use of such funds based upon a February 2009 survey that SIGTARP sent to 364 financial and other institutions that had completed TARP funding agreements through January 2009. For some respondents the infusion of TARP funds helped to increase lending; others were able to avoid a “managed” reduction of their activities; others reported that their lending activities would have come to a standstill without TARP funds; and others explained that they used TARP funds to acquire other institutions, invest in securities, pay off debts, or that they retained the funds to serve as a cushion against future losses. • External Influences: In August, SIGTARP issued an audit that examined undue external influences over the CPP decision-making process. SIGTARP found no information indicating that external inquiries on CPP applications had affected the decision-making process, but gaps in the internal controls by the Government agencies conducting the CPP application process made it impossible to determine if all attempts to influence TARP decisions were captured 7 8 special inspector general I troubled asset relief program by the audit. In connection with the audit, SIGTARP made recommendations regarding the improvement of internal controls and record keeping, which Treasury has adopted. • Executive Compensation: SIGTARP also issued in August an audit examining executive compensation restriction compliance. This audit examined the efforts of TARP recipients to comply with executive compensation restrictions in place at the time of SIGTARP’s survey of banks’ use of funds. • Original CPP and Bank of America Investments: Finally, SIGTARP recently released an audit examining the review and approval process associated with TARP assistance to the first nine CPP recipients, with emphasis on additional assistance to Bank of America subsequently authorized under TIP and the Asset Guarantee Program (“AGP”). The audit concludes that Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation (“FDIC”) implemented programs designed to help prevent a further deterioration of the economy and a significant risk of financial market collapse. The audit also finds that Treasury and other regulators’ descriptions of the financial conditions of the first nine institutions as “healthy” were inconsistent with the private beliefs of decision makers at Treasury and the Federal Reserve, and later proved to be inaccurate. In addition to the basic transparency concern that this inconsistency raises, by stating expressly that the “healthy” institutions would be able to increase overall lending, Treasury created unrealistic expectations about the institutions’ conditions and their ability to increase lending. Treasury lost credibility when lending at those institutions did not in fact increase and when subsequent events — the further assistance needed by Citigroup and Bank of America being the most significant examples — demonstrated that at least some of those institutions were not in fact healthy. SIGTARP is continuing work on audits described in the July Quarterly Report examining AIG counterparty payments, the CPP warrant valuation and disposition process, a use of funds follow-up assessment, governance issues where the Government holds large ownership interests, the status of Citigroup asset guarantees, and compliance procedures relating to the MHA mortgage modification program. SIGTARP anticipates that several of these audits will be released over the next quarter. In addition, SIGTARP has announced two new audits, as follows: • Automobile Dealership Closures: This audit, undertaken at the requests of Senator Jay Rockefeller and Congressman David Obey, examines the process used by GM and Chrysler to identify the more than 2,000 automobile dealerships that will be terminated in connection with the recent GM and Chrysler bankruptcies. The objectives of the audit will be to determine whether GM and quarterly report to congress I october 21, 2009 Chrysler developed and followed a fair, consistent, and reasonable documented approach; to understand the role of the Government in these decisions; and to establish to what extent the terminations will lead to cost savings or other benefits to GM and Chrysler. • Review of CPP Applications Receiving Conditional Approval: This audit will examine those CPP applications that received preliminary approval from the Treasury Investment Committee conditioned upon the institutions meeting certain requirements before funds were disbursed. One example was Colonial, which received CPP approval conditioned on Colonial raising $300 million in private capital. The audit will assess the basis for the decision to grant such conditional approvals and the bank regulators’ role in such decisions; whether and how timeframes are established for meeting such conditions; and whether internal controls are in place to ensure that the conditions are met before funds are disbursed. SIGTARP RECOMMENDATIONS ON THE OPERATION OF TARP One of SIGTARP’s oversight responsibilities is to provide recommendations to Treasury so that TARP programs can be designed or modified to facilitate effective oversight and transparency and to prevent fraud, waste, and abuse. In Section 5 of this report, SIGTARP provides updates on recommendations and a summary of the implementation of recommendations made in previous reports and in SIGTARP’s audits. In particular, Section 5 recounts: progress made by the Federal Reserve with respect to decreasing the influence of credit rating agencies in the operation of the Term Asset-Backed Securities Loan Facility (“TALF”); developments, both positive and negative, in Treasury’s operation of MHA’s mortgage modification program; and two new recommendations concerning PPIP to address Treasury actions that, if unaddressed, would limit SIGTARP’s ability to review changes to the PPIP compliance regime and to access certain documents that may be necessary to undertake oversight of this important program. REPORT ORGANIZATION The report is organized as follows: • Section 1 describes the activities of SIGTARP. • Section 2 describes how Treasury has spent TARP funds thus far and contains an explanation or update of each program, both implemented and recently announced. 9 10 special inspector general I troubled asset relief program • Section 3 discusses the role of rating agencies in the market, in Government decision making, and in the operation of TARP, and examines the agencies’ part in the financial crisis and the proposals for reforming the rating system. • Section 4 describes the operations and administration of the Office of Financial Stability, the office within Treasury that manages TARP. • Section 5 lays out SIGTARP’s recommendations to Treasury with respect to the operation of TARP. • The report also includes numerous appendices containing, among other things, figures and tables detailing all TARP investments through September 30, 2009. The goal is to make this report a ready reference on what TARP is and how it has been used to date. In the interest of making this report as understandable as possible, and thereby furthering general transparency of the program itself, certain technical terms are highlighted in the text and defined in the adjacent margin. In addition, portions of Sections 2 and 3 are devoted to tutorials explaining the financial terms and concepts necessary to obtain a basic understanding of the programs’ operations. section 1 The Office of the Special Inspector General for the Troubled Asset Relief Program investigations 12 special inspector general I troubled asset relief program quarterly report to congress I october 21, 2009 SIGTARP Creation and Statutory Authority The Office of the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”) was created by section 121 of the Emergency Economic Stabilization Act of 2008 (“EESA”). Under EESA, SIGTARP has the responsibility, among other things, to conduct, supervise, and coordinate audits and investigations of the purchase, management, and sale of assets under the Troubled Asset Relief Program (“TARP”) and, with certain limitations, any other action taken under EESA. SIGTARP is required to report quarterly to Congress to describe SIGTARP’s activities and to provide certain information about TARP over that preceding quarter. EESA gives SIGTARP the authorities listed in section 6 of the Inspector General Act of 1978, including the power to obtain documents and other information from Federal agencies and to subpoena reports, documents, and other information from persons or entities outside of Government. The Special Inspector General, Neil M. Barofsky, was confirmed by the Senate on December 8, 2008, and sworn into office on December 15, 2008. SIGTARP Oversight Activities Since the July Quarterly Report SIGTARP has continued to fulfill its oversight role in multiple parallel tracks: from making recommendations relating to preventing fraud and abuse prospectively; to auditing aspects of TARP both inside and outside of Government; to investigating allegations of fraud, waste, and abuse in TARP programs; to coordinating closely with other oversight bodies; all while trying to promote transparency in TARP programs. Providing Advice on Compliance and Fraud Prevention To further its goal of improving prospectively the compliance and fraud prevention aspects of TARP programs, SIGTARP has attempted to establish and maintain regular lines of communications with the personnel primarily responsible for running TARP, including those working within the U.S. Department of the Treasury’s Office of Financial Stability (“OFS”) and within other agencies who manage TARP-related programs or activities, including the bank regulators, the Federal Reserve Board, and the Federal Reserve Bank of New York (“FRBNY”), as follows: • SIGTARP personnel generally receive briefings concerning each new TARP initiative and developments in implemented programs when necessary. • The Special Inspector General and Deputy Special Inspector General typically meet weekly with the head of OFS, OFS’s Chief Compliance Officer, and OFS’s General Counsel to discuss ongoing issues and new developments. 13 14 special inspector general I troubled asset relief program • SIGTARP has established regular communication with officials from the Federal Reserve System (staff from the Federal Reserve Board of Governors and FRBNY) in connection with the Federal Reserve’s TARP-related programs. Generally, the U.S. Department of the Treasury (“Treasury”) and the other agencies have been cooperative in making their personnel available to SIGTARP and have responded to SIGTARP’s requests for documents and information. SIGTARP has endeavored, to the extent it has had an opportunity, to examine the planned framework for TARP initiatives before their terms are finalized and to make recommendations designed to advance oversight and internal controls and to prevent fraud, waste, and abuse within the programs. Since SIGTARP’s Quarterly Report to Congress dated July 21, 2009 (the “July Quarterly Report”), and in addition to recommendations made in formal audit reports, SIGTARP has made follow-up recommendations with regard to the Public-Private Investment Program (“PPIP”) final fund manager agreements within the Legacy Securities Program as well as modifications to the Home Affordable Modification Program (“HAMP”), which is part of the Making Home Affordable (“MHA”) program. These recommendations are discussed in Section 5 of this report. SIGTARP Audit Activity SIGTARP has initiated a total of 13 audit projects since its inception: 4 that were released as of the initial drafting of this report; 1 that has been subsequently released; 2 that are nearing completion; and 6 others on which work has commenced. Completed SIGTARP Audits As of the initial drafting of this report, SIGTARP had released its first four audit reports. Its fifth audit report, on American International Group (“AIG”) bonuses, was subsequently issued and will be described in detail in the next quarterly report. Use of Funds Audit SIGTARP’s first audit report, issued on July 20, 2009, examined how recipients of Capital Purchase Program (“CPP”) investments reported their use of such funds. In February 2009, SIGTARP sent survey letters to 364 financial and other institutions that had completed TARP funding agreements through January 2009. In response to those surveys, although most banks reported that they did not segregate or track TARP fund usage on a dollar-for-dollar basis, they were able to provide insights into their actual or planned future use of TARP funds. The details of this audit and its findings are described in SIGTARP’s July Quarterly Report, page 17. quarterly report to congress I october 21, 2009 Copies of the responses to SIGTARP’s February 2009 survey are posted on the Internet at www.sigtarp.gov/audit_useoffunds.shtml. External Influence Audit This audit report, issued on August 6, 2009, examined whether or to what extent external parties may have unduly influenced decision making by Treasury or bank regulators in approving bank applications for funding under CPP. In October 2008, Treasury established CPP to inject capital into healthy, viable U.S. financial institutions in order to stabilize financial markets and increase lending. OFS and each of the four Federal banking regulators — the Office of the Comptroller of the Currency (“OCC”), the Office of Thrift Supervision (“OTS”), the Federal Deposit Insurance Corporation (“FDIC”), and the Federal Reserve — implemented a standardized process to review applications from institutions. As of July 30, 2009, more than 2,700 institutions had submitted applications to regulators for CPP funding, regulators had submitted approximately 1,300 applications to Treasury for review, and Treasury had funded 660 applications. Within Treasury, an Investment Committee is responsible for making the final recommendation on whether an application should be approved. This audit examined the extent to which Treasury and the banking regulators have controls in place to safeguard against external influence over the CPP decision-making process and whether there were any indications of external parties having unduly influenced CPP decision making. SIGTARP auditors reviewed Treasury and regulatory policies, collected documents that recorded external communications, and interviewed officials to identify the controls over external communications. To determine possible indications of external influence, auditors reviewed the CPP applications and supporting documents for all institutions in which SIGTARP found an external inquiry. SIGTARP found limitations and inconsistencies in the logging of telephone and meeting conversations regarding individual CPP applicants, making it impossible to examine the impact of all potential external inquiries on the CPP process. Available information, however, gave little indication that external inquiries on CPP applications had affected the decision-making process. Of the 56 institutions SIGTARP identified as subjects of external inquiries, the analysis showed that, as of June 17, 2009, only 16 applications (29%) had been funded, 12 (21%) were still pending within Treasury or a banking agency, and 26 (47%) did not receive CPP funds because the institutions either withdrew or were recommended to withdraw their applications, failed, or were acquired during the application review process. Two institutions did not formally submit applications for funds. SIGTARP’s analysis of the funded applications showed that 13 of the 16 clearly met all of the criteria established by Treasury. The remaining three institutions did 15 16 special inspector general I troubled asset relief program For a description of regulatory capitalization standards, see SIGTARP’s July Quarterly Report, page 55. not meet all of the CPP quantitative criteria but were approved based on mitigating factors considered by Treasury and banking agency officials. For example, one application’s approval was contingent on the institution raising additional capital to bring it to a well-capitalized position, and another application’s approval focused on the bank’s management plan to address a weak performance ratio. These mitigating factors were not unique to institutions that were the subject of an external inquiry. SIGTARP did find unique mitigating factors affecting one institution, however. With respect to that institution, SIGTARP’s analysis indicated that discretion afforded this applicant in its approval was greater than that accorded other applications but was still consistent with applicable statutory requirements. In light of these findings, and to improve transparency and further guard against outside influence, SIGTARP made two recommendations: • Treasury should record the vote count for Investment Committee decisions. • Treasury and each individual participating Federal banking agency should improve existing control systems to document the occurrence and nature of external oral communication about actual and potential recipients of funding under CPP and other similar TARP-assistance programs to which they may be part of the decision making. Treasury concurred with these recommendations and stated that it has implemented them. Executive Compensation Audit SIGTARP’s third audit report, issued on August 19, 2009, is the first in a series of audits on executive compensation. The audit examined TARP recipients’ efforts to comply with evolving executive compensation restrictions. EESA placed restrictions on executive compensation for all TARP recipients, and, in February 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) amended the EESA executive compensation requirements. Neither EESA nor ARRA directly limits the annual base pay of senior executive officers; rather, executive compensation restrictions placed thus far on CPP recipients have more specifically targeted incentive compensation and severance payments. In February 2009, SIGTARP sent survey letters to 364 financial and other institutions that had completed TARP funding agreements through January 2009. The survey asked about the institutions’ efforts to comply with executive compensation restrictions in place at the time of the survey and plans to comply with subsequently enacted changes in requirements. In light of the timing of the survey, many of the responses reflected uncertainty and a wait-and-see attitude about the emerging guidelines and restrictions on executive compensation. Nevertheless, many respondents provided insights regarding their efforts to comply with the requirements as quarterly report to congress I october 21, 2009 they understood them. Survey responses regarding compliance with EESA bonus and severance pay restrictions varied from simple statements of compliance to detailed answers about efforts to assess compensation practices relative to the restrictions. Although some recipients expressed frustration with changing compensation guidance and legislation, many respondents noted actions they were taking at the time of the survey based on known requirements and with the understanding that final guidelines were pending. These actions included taking steps to assess risks and procure expert compensation consultants. The responses to this SIGTARP survey provide necessary context for examining the evolution of executive compensation requirements, adding clarity to what was required, and highlighting some relevant issues that could impact implementation of requirements going forward. As the executive compensation picture becomes clearer in the future, SIGTARP plans to conduct follow-up audits on this important topic to build on these initial findings. Original CPP and Bank of America Investments Audit SIGTARP’s fourth audit report, issued on October 5, 2009, examined the review and approval process associated with TARP assistance to the first nine CPP recipients, with emphasis on additional assistance to Bank of America subsequently authorized under the Targeted Investment Program (“TIP”) and the Asset Guarantee Program (“AGP”). The audit also examined selected issues and interactions among Treasury, Federal Reserve, and Bank of America officials in connection with Bank of America’s acquisition of Merrill Lynch and the timing of Government assistance under TIP and AGP following the acquisition. On October 13, 2008, Treasury made the first use of its authority granted under EESA by making capital injections into nine financial institutions, including Bank of America, under CPP. Merrill Lynch, which was facing severe financial problems and was in the process of being acquired by Bank of America, was also included in the initial nine banks. Following the completion of the acquisition of Merrill Lynch in January 2009, Bank of America received additional assistance under TIP and announced loss protections under AGP. This report addressed three issues: • the significant economic events in September 2008 that led Treasury to inject capital into the financial system • the rationale and criteria used to select these institutions compared to those used to select subsequent institutions for CPP participation • the basis for the decision by Treasury and Federal regulators to provide Bank of America with additional assistance following the acquisition of Merrill Lynch, and Federal efforts to forestall Bank of America from terminating the planned acquisition 17 18 special inspector general I troubled asset relief program The audit concluded that Treasury, the Federal Reserve, and FDIC implemented programs designed to help prevent further deterioration of the economy and significant risk of financial market collapse. Although it may be difficult in the near term to assess fully the impact of Treasury’s initial injections of capital to the first nine institutions on preventing an economic collapse, what is clear is that key Federal officials and senior industry leaders believed that the risks to the financial stability and economic growth of the United States and the rest of the world were too great for inaction. The audit also concluded that Treasury’s public description of the investments in the first nine institutions provided an important lesson for Treasury on using greater care and accuracy in describing its actions and rationales in future programs. In an October 14, 2008, statement announcing the investment in the original nine institutions, then-Secretary of the Treasury Henry Paulson stated: “These are healthy institutions, and they have taken this step for the good of the U.S. economy. As these healthy institutions increase their capital base, they will be able to increase their funding to U.S. consumers and businesses.” The nine institutions were similarly described as healthy in a joint statement released that same day by Treasury, the Federal Reserve, and FDIC, and in a separate statement released by Treasury. It is apparent, however, that senior Government officials had concerns, at the time the nine institutions were selected, about the health of at least some of those institutions. The Federal Reserve had concerns over the financial condition of several of these institutions individually and for all of them collectively absent some Governmental action; and Secretary Paulson noted concerns about the potential of an outright failure of one of the institutions. In addition to the basic transparency concern that this inconsistency raises, by stating expressly that the “healthy” institutions would be able to increase overall lending, Treasury may have created unrealistic expectations about the institutions’ conditions and their ability to increase lending. Treasury lost credibility when lending at those institutions did not in fact increase and when subsequent events — the further assistance needed by Citigroup and Bank of America being the most significant examples — demonstrated that at least some of those institutions were not healthy. Audits Nearing Completion Several additional audits are nearing completion, and SIGTARP plans to issue reports on at least the two following audits over the next quarter: • AIG Counterparty Payments: This audit, conducted at the request of Representative Elijah Cummings and 26 other Members of Congress, examines payments made to AIG counterparties on behalf of AIG, which has received the largest amount of financial assistance from the Government during the current quarterly report to congress I october 21, 2009 financial crisis. FRBNY reportedly made counterparty payments at 100% of face value to other financial institutions, including some foreign institutions and other financial institutions that had received financial assistance under TARP. Among other things, this audit will explore whether any efforts were made to negotiate a reduction in those payments. This report is expected to be issued in November 2009. • Follow-up Assessments of Use of Funds by TARP Recipients: This audit follows up on SIGTARP’s earlier use of funds audit. It focuses on use of TARP funds by recipients receiving extraordinary assistance under the Automotive Industry Financing Program (“AIFP”) as well as insurance companies receiving assistance under CPP. This review seeks to provide a more complete picture of use of funds across a broader category of TARP recipients. This report is expected to be issued by the end of 2009. Audits Underway SIGTARP has a number of other audits that have been announced and on which work has begun, including: • CPP Warrant Valuation and Disposition Process: This audit, which is being conducted in response to requests by Senator Jack Reed and Representative Maurice Hinchey, seeks to determine (i) the extent to which financial institutions have repaid Treasury’s investment under CPP and which warrants associated with that process were repurchased or sold; and (ii) what process and procedures Treasury has established to ensure that the Government receives fair market value for the warrants and the extent to which Treasury follows a clear, consistent, and objective process in reaching decisions where differing valuations of warrants exist. This audit complements a Congressional Oversight Panel (“COP”) report released on July 10, 2009, that examined the warrant valuation process. • Home Affordable Modification Program: According to Treasury, approximately three to four million homeowners could benefit from TARP’s HAMP, part of the broader MHA program. SIGTARP has launched an audit examining (i) the status of HAMP; (ii) the extent to which Treasury is measuring the program’s effectiveness; (iii) the extent to which lenders and loan servicers have developed capabilities to provide services under HAMP; and (iv) the challenges associated with HAMP implementation, execution, and assessment. • Governance Issues Where U.S. Holds Large Ownership Interest: SIGTARP received a request from Senator Max Baucus to undertake a body of work examining U.S. Government oversight of, and interaction with, the management of institutions such as AIG, General Motors (“GM”), Chrysler, and Citigroup, where the Government has or is approaching majority owner status. The audit, 19 20 special inspector general I troubled asset relief program which will be conducted jointly with the Government Accountability Office (“GAO”), will also examine the two mortgage giants Freddie Mac and Fannie Mae, which are under Government conservatorship. • Status of the Government’s Asset Guarantee Program with Citigroup: This review, requested by Representative Alan Grayson, addresses a series of questions about the Government’s guarantee of certain Citigroup assets through AGP such as (i) the basis on which the decision was made to provide asset guarantees to Citigroup and the process for selecting the loans and securities to be guaranteed; (ii) the characteristics of the assets deemed acceptable for inclusion in the program and how those assets differ from other Citigroup assets; (iii) whether adequate risk management controls are in place to mitigate the risks to the taxpayer; and (iv) what safeguards exist to protect taxpayer interests and what the losses on the portfolio have been thus far. • Automobile Dealership Closures: This audit, undertaken at the requests of Senator Jay Rockefeller and Representative David Obey, examines the process used by GM and Chrysler to identify the more than 2,000 automobile dealerships that will be terminated in connection with the recent GM and Chrysler bankruptcies. The objectives of the audit will be to determine whether GM and Chrysler developed and followed a fair, consistent, and reasonable documented approach; to understand the role of Government in these decisions; and to establish to what extent the terminations will lead to cost savings or other benefits to GM and Chrysler. • Review of CPP Applications Receiving Conditional Approval: This audit will examine those CPP applications that received preliminary approval from the Treasury Investment Committee conditioned upon the institutions meeting certain requirements before funds were disbursed. One example was Colonial Bancgroup (“Colonial”), which received CPP approval conditioned on Colonial raising $300 million in private capital. (As discussed later in this section, SIGTARP’s Investigations Division undertook a search warrant of Colonial offices in Florida, and Colonial has announced that it is the subject of a criminal investigation.) The audit will assess the basis for the decision to grant such conditional approvals and the bank regulators’ role in such decisions; whether and how timeframes are established for meeting such conditions; and whether internal controls are in place to ensure that the conditions are met before funds are disbursed. Materials related to SIGTARP’s audits, including the engagement letters describing the audits at the outset and the final audit reports themselves, can be found on SIGTARP’s website, www.SIGTARP.gov. Specific recommendations from audits released over the last quarter are discussed more fully in Section 5 of this report. quarterly report to congress I october 21, 2009 SIGTARP’s Investigations Activity SIGTARP’s Investigations Division has developed into a sophisticated white-collar investigative agency. Through September 30, 2009, SIGTARP has opened 61 and has 54 ongoing criminal and civil investigations. These investigations include complex issues concerning suspected TARP fraud, accounting fraud, securities fraud, insider trading, bank fraud, mortgage fraud, mortgage servicer misconduct, fraudulent advance-fee schemes, public corruption, false statements, obstruction of justice, money laundering, and tax-related investigations. While the vast majority of SIGTARP’s investigative activity remains confidential, developments in several of SIGTARP’s investigations have become public over the past quarter. • Federal Trade Commission v. Federal Housing Modification Administration, Inc.: On September 16, 2009, the Federal Trade Commission (“FTC”) filed a complaint against Federal Housing Modification Administration, Inc. (“FHMA”) and its principals in the U.S. District Court for the District of Columbia. With investigative support from SIGTARP, in partnership with the U.S. Postal Inspection Service (“USPIS”), FTC alleged violations of the FTC Act and telemarketing sales rules by FHMA by misrepresenting itself as a Federal Government agency or affiliate and falsely claiming that it would obtain mortgage modifications for consumers for a $3,000 fee. SIGTARP’s investigation of FHMA, in coordination with USPIS, is ongoing. • Gordon Grigg Sentenced to 10 Years’ Imprisonment: On August 6, 2009, Gordon B. Grigg, a financial advisor and owner of ProTrust Management, Inc., formerly based in Franklin, Tennessee, was sentenced to serve a 10-year prison term after pleading guilty to four counts of mail fraud and four counts of wire fraud in the U.S. District Court for the Middle District of Tennessee. The charges stemmed from Grigg’s role in embezzling nearly $11 million from his investor clients through false statements, including claims that Grigg was making investments in fictional “TARP-guaranteed debt.” SIGTARP participated in the investigation of Grigg and supported the prosecution along with its law enforcement partners, the Securities and Exchange Commission (“SEC”), the Federal Bureau of Investigation (“FBI”), USPIS, the Tennessee Department of Commerce and Insurance, and the Franklin, Tennessee, Police Department. The prosecution was handled by the United States Attorney’s Office for the Middle District of Tennessee. • Search Warrants Executed at Taylor, Bean & Whitaker Mortgage Corporation and Colonial Bancgroup: On August 3, 2009, SIGTARP, along with agents of the FBI, the Office of Inspector General of the Department of Housing and Urban Development (“HUD OIG”), and the FDIC Office of Inspector General (“FDIC OIG”), executed search warrants at Colonial and at the offices of Taylor, Bean & Whitaker Mortgage Corporation, formerly the 21 22 special inspector general I troubled asset relief program nation’s 12th-largest loan originator and servicer. Prior to the execution of these warrants, SIGTARP had served subpoenas on Colonial after Colonial had announced that it had received preliminary contingent approval from Treasury to receive $553 million in TARP funding. The funding was never made. On August 7, 2009, Colonial reported that it is the target of a criminal probe. This investigation is ongoing. • Bank of America Investigations: SIGTARP continues to play a significant role in the investigations by the New York State Attorney General’s Office, the SEC, and the Department of Justice (“DOJ”) into the circumstances of Bank of America’s merger with Merrill Lynch and its receipt of additional TARP funds under TIP. SIGTARP Hotline One of SIGTARP’s primary investigative priorities is to operate the SIGTARP Hotline and thus provide an interface with the American public to facilitate the reporting of concerns, allegations, information, and evidence of violations of criminal and civil laws in connection with TARP. Since its inception in February, the SIGTARP Hotline has received and analyzed more than 7,000 Hotline contacts. These contacts run the gamut from expressions of concern over the economy to serious allegations of fraud involving TARP, and almost half of SIGTARP’s investigations were generated in connection with Hotline tips. The SIGTARP Hotline is capable of receiving information anonymously, and confidentiality can and will be provided to the fullest extent possible. The American public can provide information by telephone, mail, fax, or online. SIGTARP has established a Hotline connection on its website at www.SIGTARP.gov. SIGTARP honors all applicable whistleblower protections. The SIGTARP Hotline has received and processed thousands of calls and faxes intended for Treasury’s MHA hotline. As a result of issues identified in these calls and faxes, the Investigations Division staff developed a series of recommendations intended to improve implementation of MHA. These recommendations were delivered as a Management Alert to OFS. OFS responded favorably to the alert, making several policy changes to the MHA program. For example, OFS added SIGTARP’s Hotline number to its MHA materials so that homeowners can report any MHA-related fraud allegations to SIGTARP for further review and investigation. Additionally, at the staff’s suggestion, OFS is considering the addition of contact numbers for both the mortgage servicing operators and the Homeowner’s HOPE Hotline. A copy of the Management Alert is included in Appendix H: “Correspondence.” quarterly report to congress I october 21, 2009 Coordination with Other Law Enforcement Agencies As part of its coordination role, SIGTARP has been active in forging partnerships with other criminal and civil law enforcement agencies. These relationships are designed to benefit both investigations originated by other agencies, when SIGTARP expertise can be brought to bear, and SIGTARP’s own investigations, which can be improved by tapping into additional resources. In this regard: • SIGTARP has continued to develop close working relationships with the FBI, the Internal Revenue Service Criminal Investigation Division (“IRS-CI”), USPIS, the United States Secret Service, U.S. Immigration and Customs Enforcement (“ICE”), the SEC, FTC, the investigations divisions of several offices within the Inspector General (“IG”) community, DOJ, and numerous United States Attorney’s Offices. • SIGTARP continues to organize the activities of the TALF-PPIP Task Force, a multi-agency working group consisting of SIGTARP, FBI, the SEC, IRS-CI, ICE, Treasury’s Financial Crimes Enforcement Network (“FinCEN”), USPIS, and the Office of the Inspector General of the Board of Governors of the Federal Reserve System. • The Special Inspector General is in regular contact with the SEC’s Director of the Enforcement Division, and SIGTARP has several ongoing investigations with the SEC. • SIGTARP has brought on board a detailee from the SEC to assist in SIGTARP investigations and to serve as a liaison with the SEC. • SIGTARP continues to coordinate with more than a dozen States Attorneys General. • SIGTARP continues to work closely with the New York High Intensity Financial Crime Area (“NY HIFCA”). NY HIFCA provides SIGTARP with two dedicated financial analysts, supervised by a Senior Special Agent from ICE, to provide database search and analytical support. This relationship has generated several complex ongoing investigations. • SIGTARP obtains access to Bank Secrecy Act (31 U.S.C. § 5311 et seq.) database services through FinCEN. SIGTARP is working with FinCEN to develop an advisory regarding TARP programs that will be sent to thousands of financial institutions. • SIGTARP organized and hosted securitization and hedge fund training for numerous law enforcement partners; the training was provided by subject matter experts from the SEC. 23 24 special inspector general I troubled asset relief program Coordination with Other EESA Oversight Bodies EESA, as amended, is explicit in mandating that SIGTARP coordinate audits and investigations into TARP with the other primary oversight bodies: the Financial Stability Oversight Board (“FSOB”), COP, and GAO. Numerous other agencies, both in the IG community and among criminal and civil law enforcement agencies, potentially have responsibilities that touch on TARP as well. SIGTARP takes seriously its mandate to coordinate these overlapping oversight responsibilities, both to ensure maximum coverage and to minimize duplicative requests of TARP managers. SIGTARP and its partners have continued to have significant success on this front since the July Quarterly Report. These coordination efforts include: • bi-weekly conference calls with staff from FSOB • regular meetings with staff from COP, with whom SIGTARP is conducting a coordinated audit project concerning the warrant valuation and repurchase process • frequent interactions with GAO to coordinate ongoing and planned work, including an overarching joint audit examining the Government’s role in the management of companies in which the Government holds a large ownership stake TARP-IG Council Due to the scope of the various programs under TARP, numerous Federal agencies have some role in administering or overseeing TARP programs. To further facilitate SIGTARP’s coordination role, the Special Inspector General founded and chairs the TARP Inspector General Council (“TARP-IG Council”), made up of the Comptroller General and those IGs whose oversight functions are most likely to touch on TARP issues. The Council meets regularly to discuss developments in TARP and to coordinate overlapping audit and investigative issues. The TARP-IG Council currently consists of: • • • • • • • • • • The Special Inspector General Inspector General of the Department of the Treasury Inspector General of the Board of Governors of the Federal Reserve System Inspector General of the Federal Deposit Insurance Corporation Inspector General of the Securities and Exchange Commission Inspector General of the Federal Housing Finance Agency Inspector General of the Department of Housing and Urban Development Treasury Inspector General for Tax Administration Inspector General for the Small Business Administration Comptroller General of the United States (head of GAO) or designee quarterly report to congress I october 21, 2009 Communications with Congress One of the primary functions of SIGTARP is to ensure that Members of Congress are kept adequately and promptly informed of developments in TARP initiatives and of SIGTARP’s oversight activities. To fulfill that role, the Special Inspector General and SIGTARP staff regularly brief Members and staff. More formally, during the quarter covered by this report, the Special Inspector General testified three times before Congressional committees. • On July 21, 2009, Special Inspector General Barofsky testified before the House Committee on Oversight and Government Reform, during a hearing entitled “Following the Money: Report of the Special Inspector General for the Troubled Asset Relief Program.” The hearing focused on SIGTARP’s July Quarterly Report, and Special Inspector General Barofsky discussed his recommendations to enhance the success of TARP and highlighted the major themes of his report. • The next day, July 22, 2009, Special Inspector General Barofsky testified before the Oversight Subcommittee of the House Committee on Financial Services, during a hearing entitled “TARP Oversight: Warrant Repurchases and Protecting Taxpayers.” The hearing examined warrants issued in connection with TARP. These warrants give Treasury the right to buy shares of TARP recipient stock at a set price at some point in the future and thus provide an opportunity for taxpayers to share in the upside for their TARP investments. • On September 24, 2009, Special Inspector General Barofsky testified before the Senate Committee on Banking, Housing and Urban Affairs, during a hearing entitled “Emergency Economic Stabilization Act: One Year Later.” In light of the first anniversary of EESA, the hearing examined how TARP is working. Copies of all of the Special Inspector General’s written testimony, hearing transcripts, and a variety of other materials associated with Congressional hearings since SIGTARP’s inception are posted at www.SIGTARP.gov/reports. Building the SIGTARP Organization From the day that the Special Inspector General was confirmed by the Senate, SIGTARP has worked to build its organization through various complementary strategies, including hiring experienced senior executives who can play multiple roles during the early stages of the organization, leveraging the resources of other agencies, and, where appropriate and cost-effective, obtaining services through SIGTARP’s authority to contract. Since the July Quarterly Report, SIGTARP has continued to make substantial progress in building its operation. 25 26 special inspector general I troubled asset relief program For information on the Ensign-Boxer Amendment, see SIGTARP’s July Quarterly Report, page 14. Hiring Each of SIGTARP’s divisions has continued the process of filling out its ranks. As of September 30, 2009, SIGTARP had more than 90 personnel, including detailees from other agencies, with several new hires to begin over the coming weeks. SIGTARP’s employees hail from many Federal agencies, including DOJ, FBI, IRS-CI, Air Force Office of Special Investigations, GAO, Department of Transportation, Department of Energy, the SEC, DOJ, U.S. Secret Service, United States Postal Service, U.S. Army Criminal Investigation Command, Naval Criminal Investigative Service, Treasury-Office of the Inspector General, Department of Energy-Office of the Inspector General, Department of TransportationOffice of the Inspector General, Department of Homeland Security-Office of the Inspector General, FDIC OIG, Office of the Special Inspector General for Iraq Reconstruction, and the HUD OIG. Hiring is actively ongoing, building to SIGTARP’s current goal of approximately 160 full-time employees. The SIGTARP organizational chart, as of September 30, 2009, is included in Appendix I: “Organizational Chart.” SIGTARP Budget Figure 1.1 SIGTARP FY 2010 PROPOSED BUDGET $ Millions, % of $48.4 Million Other $1.4 3% Transportation $3.1 Advisory $7.3 6% 15% 48% Personnel $23.2 28% Rent, Services $13.4 Section 121(j) of EESA provided $50 million in initial operating funds to SIGTARP. When SIGTARP was established and its initial operating resources were allocated, TARP was envisioned as a $700 billion asset purchase and guarantee program. In the months that followed, however, TARP evolved into 12 separate programs that could involve far more than $700 billion, significantly expanding the necessary scope of SIGTARP’s oversight operations and resource needs. SIGTARP anticipates that its total budget for FY 2010 will be $48.4 million, based on the assumption that it will reach its target of 160 staff by early 2010. Approximately 50% of SIGTARP’s non-personnel costs will be payments to other Government agencies for services provided. For a detailed breakdown of SIGTARP’s FY 2010 budget, see Figure 1.1. As noted in the July Quarterly Report, SIGTARP estimates that its initial operating funds will be expended by approximately the second quarter of FY 2010 and that an additional $28.3 million will be needed to fully fund operations through the fiscal year. Taking into account a portion of the $15 million in additional funds made available by the Ensign-Boxer Amendment, which SIGTARP expects to spend over three years (i.e., $5 million per year), SIGTARP has submitted a request to Treasury for a $23.3 million amendment to the FY 2010 budget submission. Although SIGTARP has been informed repeatedly by Treasury that it is taking steps to meet this budgetary need, as of the drafting of this report, SIGTARP’s budgetary needs for FY 2010 have not been met. quarterly report to congress I october 21, 2009 SIGTARP Independence and Position within Treasury On April 15, 2009, Treasury asked the Office of Legal Counsel of the Department of Justice (“OLC”) for an opinion on the following issues pertaining to SIGTARP: • whether SIGTARP is located within Treasury • whether the Special Inspector General was subject to the Secretary of the Treasury’s (“Treasury Secretary’s”) general supervision • whether Treasury’s compliance with SIGTARP’s document requests waives privileges applicable to the subject documents In response, SIGTARP made clear its position that the language and legislative history of section 121 of EESA unambiguously provides that SIGTARP is an independent entity within Treasury, that the Special Inspector General is not subject to the Treasury Secretary’s supervision, and that privileges are not bars to SIGTARP’s access to Treasury’s records and information. On August 7, 2009, Treasury withdrew its request for an OLC opinion. SIGTARP views such withdrawal as Treasury’s acknowledgement that SIGTARP is an independent entity within Treasury and that the Special Inspector General is not subject to the supervision of the Treasury Secretary. SIGTARP commends Treasury’s decision to bring to a close this needless distraction. Physical and Technical SIGTARP Infrastructure SIGTARP occupies office space at 1801 L Street, NW, in Washington, D.C., the same office building in which most Treasury officials managing TARP are located. SIGTARP is already occupying temporary quarters in that building while its two permanent floors are being renovated. SIGTARP anticipates occupying its permanent space by early 2010. SIGTARP has a website, www.SIGTARP.gov, on which it posts all of its reports, testimony, audits, contracts, and more. The website prominently features SIGTARP’s Hotline, which can also be accessed by phone at 877-SIG-2009 (877-744-2009). From the website’s inception through September 30, 2009, more than 26.5 million visitors have accessed SIGTARP’s website, and SIGTARP’s first three reports to Congress have been downloaded, collectively, almost 1.5 million times. 27 28 special inspector general I troubled asset relief program s ection 2 tarp overview 30 special inspector general I troubled asset relief program 31 quarterly report to congress I october 21, 2009 This section summarizes the activities of the U.S. Department of the Treasury (“Treasury”) in its management of the Troubled Asset Relief Program (“TARP”). It includes a financial overview and provides updates on established TARP programs, including the status of TARP executive compensation restrictions. Financial Overview of TARP As of September 30, 2009, Treasury had announced plans to spend up to $636.9 billion of the $699 billion maximum available under TARP as authorized by Congress in the Emergency Economic Stabilization Act of 2008 (“EESA”).1 Of this amount, approximately $454.3 billion had been expended through 10 implemented programs to provide support for U.S. financial institutions, companies, and individual mortgage borrowers.2 Treasury has indicated that it is operating TARP as essentially a “revolving fund” — as recipients of TARP funds repay the original principal that they received from Treasury, the TARP funds available to Treasury increase by that amount and are available for further investment in other TARP activities subject to the overall limit established by EESA. As of September 30, 2009, 47 TARP recipients have paid back all or a portion of their principal or repurchased shares for an aggregate total of $72.9 billion of repayments, leaving $317.3 billion, or 45.4% of TARP’s allocated $699 billion, available for distribution.3 Figure 2.1 provides a snapshot of the cumulative expenditures and repayments as of September 30, 2009. Figure 2.1 CUMULATIVE EXPENDITURES AND REPAYMENTS, AS OF 9/30/2009 $ Billions $317.3 $72.9 $698.8 $454.3 Total TARP Released TARP TARP TARP Expenditures Repayments Balance Remaining Notes: Numbers affected by rounding. From a budgetary perspective, expenditures are what Treasury has committed to spend (e.g., signed agreements with TARP fund recipients). Source: Treasury, Transactions Report, 10/2/2009. 32 special inspector general I troubled asset relief program Warrant: The right, but not the obligation, to purchase a certain number of shares of common stock at a fixed price. Common Stock: Equity ownership that entitles an individual to share in the corporate earnings and voting rights. Preferred Stock: Equity ownership that usually pays a fixed dividend, gives the holder a claim on corporate earnings superior to common stock owners, and has no voting rights. Preferred stock also has priority in the distribution of assets in the case of liquidation of a bankrupt company. Senior Subordinated Debenture: A subordinated debenture is a loan or security that is junior to other loans or securities with regards to the debt holders’ claims on assets or earnings. Senior debt holders get paid in full before subordinated debt holders get paid. There are additional levels of priority among subordinated debt holders. CPP invests in senior subordinated debt. In addition to the principal repayments, Treasury has received interest and dividend payments on its investments, as well as revenue from the sale of its warrants. These payments are deposited into Treasury’s general fund for the reduction of public debt and are not available to be re-issued by Treasury.4 As of September 30, 2009, $9.5 billion in interest, dividends, and other income had been received by the Government, and $2.9 billion in sales proceeds had been received from the sale of warrants and preferred stock received as a result of exercised warrants.5 Of the $454.3 billion expended through TARP, $381.4 billion remains outstanding (i.e., has not been paid back or repurchased) as of September 30, 2009, largely in the form of equity ownership. For those companies from which Treasury received equity and which have not yet repaid their TARP funds, Treasury, and therefore the American taxpayer, is a shareholder. Treasury received equity ownership interest in exchange for the overwhelming majority of its TARP investments. Treasury’s equity ownership came primarily in two forms: common stock and preferred stock, with the bulk of Treasury’s investments in preferred stock. In addition to its equity investment, Treasury also received senior subordinated debentures under various TARP programs. On September 24, 2009, the Assistant Secretary for Financial Stability testified before Congress that Treasury’s Office of Financial Stability (“OFS”) is audited by the Government Accountability Office (“GAO”) and “will publish its first set of annual financial statements on November 16th,” although Treasury has informed SIGTARP that this may be pushed back 30 days.6 The financial statements will include estimates of the value of Treasury’s TARP investments. As noted in the Office of the Special Inspector General for the Troubled Asset Relief Program’s (“SIGTARP’s”) Quarterly Report to Congress dated July 21, 2009 (the “July Quarterly Report”), Treasury also receives monthly valuations of its portfolio from its asset managers but has not shared them with the public. quarterly report to congress I october 21, 2009 TARP consists of 12 announced programs, of which 10 have been implemented. The programs can be categorized in four general groups depending on the type of support each was designed to provide: • Financial Institution Support Programs — These programs share a common, stated goal of stabilizing the financial market to avoid disruption and provide for a healthy economy. • Asset Support Programs — These programs attempt to support asset values and liquidity in the market by providing funding to certain holders or purchasers of assets. • Automotive Industry Support Programs — These programs were intended by Treasury to stabilize the American automotive industry. • Homeowner Support Program — This program and its initiatives were designed to help homeowners facing difficulty paying their mortgages by subsidizing loan modifications, loan servicer costs, and potential equity declines in bank holdings. Figure 2.2 provides a breakdown of how TARP funding is distributed between the four categories of programs. Figure 2.2 TARP EXPENDITURES BY SUPPORT CATEGORY, AS OF 9/30/2009 $ Billions, % of $454.3 Asset Support Programs $26.7 Homeowner Support Program $27.1 Automotive Industry Support Programs $81.1b Financial Institution Support Programs $319.5a Notes: Numbers affected by rounding. From a budgetary perspective, expenditures are what Treasury committed to spend (e.g., signed agreements with TARP fund recipients). a CPP funding of $70.7 billion had been repaid. b AIFP loan principal payments of $2.1 billion had been repaid. (Of the $2.1 billion, $0.6 billion was from AWCP.) Source: Treasury, Transactions Report, 10/2/2009. 33 34 special inspector general I troubled asset relief program TARP Tutorial: Where Does TARP Money Come From? TARP expenditures to date have been funded largely by increases in the national debt.7 EESA, the Act of Congress that created TARP, did not contain significant new taxes or other revenue-raising measures — making it necessary to fund TARP with debt. This is not unusual for emergency spending bills like EESA; because emergency spending bills are created outside of the annual budget cycle, they often do not have dedicated sources of funds.8 EESA, in section 118, authorized Treasury to fund TARP through public debt, and, in section 122, authorized an increase of the national debt to $11.315 trillion, up from $10.615 trillion.9 Subsequently, the American Recovery and Reinvestment Act (“ARRA”) authorized the increase of the national debt limit to its current level of $12.104 trillion. Taking on new debt is an action that has implications for the true cost of the U.S. Government’s financial rescue initiatives. This tutorial explains the mechanics of how TARP is funded and describes the factors that contribute to the true cost of TARP to the taxpayer. TARP Congressional Appropriations Process SIGTARP’s Initial Report to Congress dated February 6, 2009 (the “Initial Report”) provides an overview of EESA’s legislative background and the process by which it became law.10 Emergency appropriations, like the one provided for in EESA, have often been used by the Government to fund activities such as wartime operations, natural disaster recovery efforts, and, now, the financial crisis bailout. In order to understand the appropriations process for emergency spending bills, it is helpful to discuss briefly the Government’s annual budget process. The U.S. annual budget process is conceptually simple. In February of each year, the President submits the Administration’s budget to Congress. By April or May, the budget comAppropriation: Authority provided by law for Federal agencies to incur obligations and to make payments out of the Treasury for specified purposes. mittees in the Senate and House will have reviewed the budget and will pass a concurrent budget resolution setting the overall spending limits. Within those limits, the appropriations committees then develop individual appropriations bills (each covering a particular department or group of agencies) that generally must be passed by the end of the Federal fiscal year (September 30). There are almost eight months between the President’s submission of the initial budget request and the end of the fiscal year.11 Special appropriations rarely have that much time for approval. As outlined in SIGTARP’s Initial Report, the process of arriving at EESA was a complicated, but short, process. A request by the Executive Branch was submitted on September 20, 2008, and a formal version of the request was introduced as a bill in 35 quarterly report to congress I october 21, 2009 Figure 2.3 Congress. The bill was rejected initially, re-written, approved by the Senate on October 1, 2008, and approved by the House and signed into law by President George W. Bush on October 3, 2008. In total, just two weeks had elapsed for a $700 billion appropriations PERCENTAGE OF U.S. GOVERNMENT EXPENDITURES FUNDED THROUGH DEBT, 1990 − 2009 Percent of Total Expenditures bill. Furthermore, given the urgency of the situation, EESA granted Treasury a great deal of 50% discretion, which allowed for a streamlined approach to spending. 40 30 Creating Funds for TARP 20 The portion of Government spending funded with debt has been rising. In fiscal year 2009, 10 the year that TARP was funded, the Federal Government paid for approximately 46% of its 0 expenditures by issuing new debt.12 This contrasts with a 10-year average of 9% as seen -10 in Figure 2.3.13 This does not include the accumulation of other future liabilities such as -20 Social Security and Medicare.14 1990 2000 2009* Note: Numbers affected by rounding. 2009 figures are estimated. TARP Cash Flow Management The ultimate mix of tax revenues and debt proceeds used to fund TARP will be determined by the actual cash needs of the program. To meet cash outlay requirements, TARP will draw from the same general public debt operations that Treasury uses to fund other programs. Thus, it may be difficult to disaggregate specifically TARP-related borrowing from other Treasury borrowing. Periodically, Treasury estimates how many debt securities it will need to sell to meet all of its cash management goals and obligations, which may include the redemption of maturing securities. If it does not have sufficient funds on hand, it schedules a sale of U.S. Treasury securities to raise the funds. The Bureau of Public Debt (“BPD”) is the agency within Treasury that issues the securities and manages interest payments and redemp- Sources: White House, FY2010 President’s Budget, Historical Tables, http://www.whitehouse.gov/omb/budget/fy2010/ assets/hist0121.xls, accessed 10/7/2009. Figure 2.4 MONTHLY TARP OUTLAYS AGAINST MONTHLY TREASURY BORROWING, CUMULATIVE, 9/2008 – 8/2009 $ Billions $2000 1500 1000 tions. For the monthly U.S. debt issuances and TARP outlays since September 2008, see Figure 2.4. 500 0 SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG 20O8 20O9 Cumulative New U.S. Debt — All Purposes Cumulative TARP Outlays Note: Numbers affected by rounding. Sources: Treasury Financial Management Service, Monthly Treasury Statement, various, http://www.fms.treas.gov/mts/ backissues.html, accessed 9/30/2009; Treasury, Monthly Statement of the Public Debt of the United States, various, www.treasurydirect.gov/govt/reports/pd/ mspd/mspd.htm, accessed 9/30/2009. 36 special inspector general I troubled asset relief program Treasury Security Issuance Process Treasury Bill: A short-term debt obligation of the U.S. Government with a maturity of up to one year. Sold in denominations of $100 with maturities of 4 weeks, 13 weeks, 26 weeks, and 52 weeks. Sold at auction, with the price below face value (discount to par) determining the yield. Treasury Note: A marketable U.S. Government debt security with a fixed interest rate and a maturity between 1 and 10 years. Notes pay interest semi-annually. To finance the public debt, Treasury sells a range of instruments, including bills, notes, bonds, and Treasury Inflation-Protected Securities (“TIPS”) to institutional and individual investors through public auctions. The auctions occur regularly and have a set schedule, occurring more frequently for the shorter-duration instruments and less frequently for the longer-duration instruments. There are a number of steps to a Treasury auction. The schedule for Treasury auctions is usually set and announced at least six months in advance. The details of each specific auction are publicly disclosed within a week of the actual auction. Typically, investors who wish to purchase the new Treasury securities in the auction send their orders to their brokers or to one of 18 primary dealers of Treasury securities.15 The primary dealers are then required to bid in the auctions. When BPD holds an auction, bids are submitted electronically and monitored by three sites simultaneously, including the Treasury Bond: A marketable, fixedinterest U.S. Government debt security with a maturity of between 10 and 30 years; paying interest semi-annually. Federal Reserve Bank of New York (“FRBNY”). Bids are arranged from lowest to highest Treasury Inflation-Protected Securities (“TIPS”): A special type of Treasury note or bond that offers protection from inflation. TIPS pay interest semiannually, but the coupon payments and underlying principal are automatically increased to compensate for inflation as measured by the consumer price index (“CPI”). auction”) format, all winning bidders pay the same price for the securities. On issue day, Primary Dealers: Banks and securities broker-dealers that trade in U.S. Government securities with FRBNY for the purpose of carrying out open market operations. yield (highest to lowest price) until the desired amount of the offering has been reached. The yield refers to the effective interest rate that a security pays — the lower the yield, the cheaper it is for Treasury. Since auctions are conducted in a single price (or “Dutch Treasury delivers the securities to all auction winners, and the corresponding proceeds are deposited into the Treasury General Account at FRBNY. Individual investors may also bid in the auctions through Treasury’s auction website, TreasuryDirect. Most individuals who want to buy Treasuries at auction use TreasuryDirect rather than going through a broker, and most institutional investors do so by contacting the institutional sales desk of a broker-dealer. Treasury bonds, notes, and TIPS are issued with a stated interest rate on the face amount and they pay out interest to the holder at a regular interval (every six months). The price is determined at auction; the price can be less than, greater than, or equal to the face amount of the security. Alternatively, Treasury bills are issued at a discount from their face value ($100) and are paid at their par (face amount) at maturity. Unlike investors in bonds, notes, and TIPS, investors in Treasury bills will not receive regular interest payments; rather they will receive the full face value of the bill — in this case $100 — at its maturity. A $100 one-year bill, which sold for $95, would effectively mean an interest rate of 5.3% for investors (calculated as ($100 – $95)/$95). The purchase prices of the bills at auction are listed on Treasury’s auction results press release and are expressed as a price per hundred dollars.16 It is difficult to ascertain the identities of the investors who bought 37 quarterly report to congress I october 21, 2009 the Treasury debt used to pay for TARP. However, in the aggregate, the dominant investors in U.S. Government debt are Federal agencies. As seen in Figure 2.5, the Federal Government, including the Federal Reserve, owned a total of approximately 41.3% of the outstanding debt as of March 31, 2009. Cost of Capital Implications Because the source of funding for TARP was an increase in the national debt (EESA raised the statutory limit of U.S. debt to $11.315 trillion from $10.615 trillion), there is a long-term cost to taxpayers in terms of the interest that they must pay for the duration that any TARP funds remain outstanding.17 Fortunately, Treasury bonds are considered a relatively risk-free investment, and their interest rate is one of the lowest in the world. Yet, Treasury still must pay an interest rate that is sufficiently high enough to provide a positive real return to investors (the interest paid is greater than annual inflation). Although interest rates are currently low, the added debt and associated stimulus could eventually lead to the possibility of inflation, and the Federal Reserve might eventually have to raise interest rates in response. Also potentially affecting the Government’s cost of capital for TARP is the duration of the securities it issued to fund the program. Treasury has the ability to borrow short- Dutch Auction: Auction technique used for selling Treasury securities where investors bid different prices (yields) for different quantities of the offered security. Treasury selects the highest group of bids that sells the full offering, and all winning bidders pay the same price — the lowest bid within that winning group. For instance, three investors place bids for $500 million each worth of securities (on a $1 billion offering by Treasury). Treasury selects the two highest bidders (totaling $1 billion) and they both pay the price bid by the lower of the two winners. Figure 2.5 OWNERSHIP OF TREASURY SECURITIES, AS OF 3/31/2009 % of $11.1 trillion U.S. Government− Intra-Governmental Holdings 38.6% term, medium-term, and long-term funds, and the duration of Treasury’s debt instruments directly affects the cost of Treasury’s borrowing. Typically, the cost of borrowing is higher for longer-duration debt; the assumption is that shorter-term investments are less risky 29.4% Foreign and International (the change in interest rates is more predictable over a short period of time) and require a lower effective interest rate. For instance, a one-month Treasury bill issued on October 28, 2008 (the date of the first CPP investments), carried a 0.4% interest rate, while a Treasury security with 20 years to maturity carried a 4.5% interest rate.18 Although shorter-term debt is generally less expensive, it provides less certainty about future borrowing costs. When the Government goes back to the market to issue new debt to replace its maturing debt, the market may have changed and rates may have increased. Longer-term debt, on the other hand, allows the Government to know what its interest cost will be for a longer period of time. Methods for Calculating Interest Costs Determining the actual interest costs for Treasury’s TARP funds is difficult because, as the GAO observed in its recent report (“Troubled Asset Relief Program: One Year Later, Other Investors 7.9% Mutual Funds 6.4% State and Local Governments 4.7% Federal Reserve 4.4% Private Pension Funds 2.7% U.S. Savings Bonds 1.7% State and Local Pension Funds 1.6% Insurance Companies 1.3% Depository Institutions 1.1% Notes: Numbers affected by rounding. March 2009 is the most recent month with complete data available. Sources: Treasury Financial Management Service, Ownership of Federal Securities, www.fms.treas.gov/bulletin/b2009-3ofs.doc, accessed 9/30/2009; Treasury, Monthly Statement of the Public Debt of the United States, 3/31/2009, www.treasurydirect.gov/govt/reports/pd/mspd/2009/opds032009. pdf, accessed 10/7/2009. 38 special inspector general I troubled asset relief program Actions Are Needed to Address Remaining Transparency and Accountability Challenges”), “Treasury manages its cash position and debt issuances from a government-wide perspective, therefore it is generally not possible to match TARP disbursements with specific debt securities issued by Treasury and the related borrowing costs.”19 Thus, any interest cost calculation would require an estimate based on certain assumptions. Potential approaches to estimating interest rates include: • Short-term cost of borrowing. This method assumes that the entire program is funded by short-term borrowings (maturing between 91 and 270 days) that are rolled over into new short-term borrowings as they come due. Using an average of shortterm interest rates produces a much lower cost of borrowing than other methods but has the potential for higher volatility due to fluctuations in interest rates over time. Potentially useful in such short-term estimates is the “Economic Assumptions” section of the President’s annual budget submission, which provides a projected average 91-day Treasury bill rate across several years to calculate projected short-term interest costs for a range of Government programs. The document provides short-term borrowing cost estimates of 0.2% for fiscal year 2009 and 1.6% for fiscal year 2010.20 • Average blended cost of Treasury funds. A more medium-term approach is to attempt to use an index of short- and medium-term Treasury securities, since the duration of Treasury’s TARP investments has ranged from a few months to nearly a year. Freddie Mac maintains an index called the Federal Cost of Funds Index (“COFI”) — an average of short- and medium-term Treasury interest rates. According to COFI, the blended interest rates of U.S. Treasury securities issued at the time of TARP’s inception was approximately 2.7% and has dropped below 2% in the second half of fiscal year 2009.21 • “All-In” cost of Treasury borrowing. This method is used by many Federal credit agencies and reflects the blended cost of all Treasury borrowings, including long-term maturities. This rate has the lowest risk of future interest rate increases but is also generally more expensive. Potentially useful in such conservative estimates is the “Economic Assumptions” section of the President’s annual budget submission, which uses a projected average 10-year Treasury note rate to calculate projected interest costs for a variety of programs. The document provides long-term borrowing cost estimates of 2.8% for fiscal year 2009 and 4.0% for 2010.22 quarterly report to congress I october 21, 2009 Treasury’s TARP Interest Cost Estimates As cited in GAO’s report, Treasury used a short-term borrowing method for its estimates of TARP interest costs.23 To do so, Treasury’s Office of Fiscal Projections attempted to identify the actual debt offerings used to fund TARP expenditures. Treasury was able to identify three specific cash management bills (“CMBs”) used to fund the majority of the initial $115 billion of TARP disbursements in late October 2008. These CMBs averaged 221 days’ maturity at an average interest rate of 1.4%.24 Based on these calculations, Treasury “estimated TARP borrowing costs as a proportion of total monthly borrowing costs on a rolling basis since program inception. These borrowing costs include refinancing TARP when initial financing matured as well as the reduction of financing costs due to repayments.”25 Using this method, Treasury estimates that approximately 90% of the securities used to fund TARP were short-term bills, with interest rates between 0 and 1%. Treasury estimates that the dollar-weighted average cost of funding was below 0.9% for its TARP borrowings for a total interest cost of $2.3 billion, as of September 30, 2009.26 Calculations using an average blended cost of Treasury funds would indicate a cost of at least twice this amount, and an “all-in” estimate would yield an amount 3 to 4 times the $2.3 billion estimate.27 Other Factors Affecting Return on TARP Investments The $699 billion in potential TARP expenditures would account for approximately 6% of the national debt limit as specified in EESA section 122 (and 5% of the 2008 Gross Domestic Product (“GDP”)), or approximately $5,000 per U.S. taxpayer.28 Given the magnitude of this potential investment, it is important to pay close attention to the costs that affect the return on TARP investments. There has been considerable discussion of the potential return on investment (“ROI”) for TARP. Considering the size of the dividend payments from many TARP recipients and the value from exercising or selling warrants for shares of participating institutions, some observers have even posited that TARP may ultimately be deficit neutral, or even net positive, to Treasury and taxpayers. However, these estimates of return can be misleading. Each TARP program has different characteristics and potential for returns. HAMP, for example, is a pure incentive-payout program and results in no repayment of funds to Treasury; it is designed to produce benefits to the market, but not a direct monetary return to the taxpayers. On the other hand, there will be returns for CPP; but these returns will depend on Treasury’s ability to collect dividends, convert warrants into cash, and recover Cash Management Bill (“CMB”): A type of short-term Treasury bill sold by Treasury to meet temporary funding shortfalls. CMB maturities can range from a few days to more than six months, and auctions can be announced with less than one week’s notice. Return on Investment (“ROI”): A measure of the efficiency of one investment option versus other options. Calculated as a percentage: (the gain from an investment minus the cost of the investment) divided by the cost of that investment. 39 40 special inspector general I troubled asset relief program invested principal. In particular, failures to recover significant amounts of principal could Crowding Out: A term historically used to describe the impact on the private sector of heavy Government debt issuance. This drives up interest rates, forcing the private sector to pay more, and edging it out of the market. Just as private-sector issuances have to compete with the lending Treasury did for TARP, so too will other Treasury issuances be forced to pay the higher interest rates resulting from the TARP borrowing. Moral Hazard: A term used in economics and insurance to describe the lack of incentive individuals have to guard against a risk when they are protected against that risk (for example, through an insurance policy). In the context of TARP, it refers to the danger that private-sector executives/investors/ lenders may behave more recklessly believing that the Government has insulated them from the risks of their actions. entirely wipe out some of the early TARP returns. In addition to program-specific return characteristics, there are a wide range of costs that must be applied against any calculation of TARP ROI, foremost of which is the cost of capital that Treasury pays on the debt it uses to fund TARP investments, as previously discussed. This cost may have significant refinancing risk if, as Treasury asserted, TARP has been funded predominantly with short-term instruments. These short-term obligations must be refinanced continually, through subsequent Treasury auctions, or repaid. This cycle will continue until all TARP funds are repaid, and the interest rates of instruments from subsequent debt auctions may be heavily influenced by inflationary pressure which could drive up interest rates and result in a significant increase in the cost of financing TARP-related debt. The ultimate cost of TARP to U.S. taxpayers will not be known for some time, and in fact a true net cost may never be known with precision. Many factors have yet to be determined: the net recovery value of investments made by Treasury; the cost to the Federal Reserve, the Federal Deposit Insurance Corporation (“FDIC”), and other agencies acting in concert with TARP; the administrative costs of setting up OFS and the various oversight agencies, including SIGTARP; and other administrative expenses. However, the Congressional Budget Office (“CBO”) estimated the net cost of TARP as $356 billion (as of March 2009), which it later reduced to $159 billion (as of June 2009).29 The methodology used by CBO, however, does not include indirect costs or other externalities that will impact the costs of the program, both tangible and intangible, possibly including: • higher borrowing costs in the future as a result of increased Treasury borrowing levels • a potential ‘crowding out effect’ on prospective private-sector borrowers, potentially driving private-sector borrowers out of the market • moral hazard, or unnecessary risk-taking in the private sector due to the bailout • costs incurred by the other financial-rescue-related Federal agencies that have not yet been quantified quarterly report to congress I october 21, 2009 Financial Institution Support Programs The primary tool of TARP for assisting financial institutions thus far has been a direct investment of capital. Financial institutions, for TARP purposes, include banks, bank holding companies and, if deemed critical to the financial system, certain systemically significant institutions. • Capital Purchase Program (“CPP”). Under CPP, TARP funds are used to purchase directly preferred stock or subordinated debentures in qualified financial institutions. Treasury created CPP to provide funds to “stabilize and strengthen the U.S. financial system by increasing the capital base of an array of healthy, viable institutions, enabling them [to] lend to consumers and business[es].”30 As of September 30, 2009, Treasury had invested $204.6 billion in institutions through CPP.31 This represents 94% of the maximum projected funding total of $218 billion under the program, of which $70.7 billion had been repaid as of September 30, 2009.32 See the “Capital Purchase Program” discussion in this section for more detailed information. • Capital Assistance Program (“CAP”). Similar to CPP, the goal of CAP is to “ensure the continued ability of U.S. financial institutions to lend to creditworthy borrowers in the face of a weaker than expected economic environment and larger than expected potential losses.”33 As of September 30, 2009, no transactions had occurred under this program. See the “Capital Assistance Program” part of this section for a more detailed discussion on this program. • Systemically Significant Failing Institutions (“SSFI”) Program. Under the stated terms of the SSFI program, Treasury invests in systemically significant institutions to prevent their failure and the market disruption that would follow.34 As of September 30, 2009, Treasury, through SSFI, had made and is committed to make further investments in one institution — American International Group, Inc. (“AIG”). This support was provided through two transactions — $40 billion for the purchase of preferred stock from AIG to repay debt owed to the Federal Reserve and approximately $29.8 billion for an equity capital facility that AIG can draw on as needed.35 As of September 30, 2009, AIG had drawn down $3.2 billion in equity from the capital facility.36 See the “Systemically Significant Failing Institutions” portion of this section for a more detailed discussion of the AIG transactions. • Targeted Investment Program (“TIP”). The stated objective of TIP is to make targeted investments in financial institutions “to avoid significant market disruptions resulting from the deterioration of one financial institution that can threaten other financial institutions and impair broader financial markets and pose a threat to the overall economy.”37 As of September 30, 2009, Treasury had made two expenditures under this program totaling $40 billion — purchasing $20 billion of senior preferred stock from each of Citigroup and Bank Systemically Significant: A financial institution whose failure would impose significant losses on creditors and counterparties, call into question the financial strength of other similarly situated financial institutions, disrupt financial markets, raise borrowing costs for households and businesses, and reduce household wealth. Senior Preferred Stock: Shares that give the stockholder priority dividend and liquidation claims over junior preferred and common stockholders. 41 42 special inspector general I troubled asset relief program Illiquid Assets: Assets that cannot be quickly converted to cash. CPP invests in senior subordinated debt. Commercial Mortgage-Backed Securities (“CMBS”): A financial instrument that is backed by a commercial real estate mortgage or a group of commercial real estate mortgages that are packaged together. of America.38 In addition to the senior preferred stock, Treasury also received warrants of common stock for its investment in these financial institutions. See the “Targeted Investment Program” portion of this section for a more detailed discussion on these two transactions. • Asset Guarantee Program (“AGP”). Through AGP, Treasury’s stated goal is to use insurance-like protections to help stabilize at-risk financial institutions. AGP provides certain loss protections on a select pool of mortgage-related or similar assets held by participants whose portfolios of distressed or illiquid assets pose a risk to market confidence.39 Treasury, FDIC, and the Federal Reserve agreed to provide certain loss protections with respect to $301 billion in troubled assets held by Citigroup.40 Should Citigroup’s losses rise above $39.5 billion, Treasury is obligated to pay up to $5 billion in protection toward additional losses; as of September 30, 2009, Citigroup had not received any funds from AGP.41 A similar arrangement with Bank of America was announced on January 16, 2009; Bank of America, however, chose not to go through with the program. On September 21, 2009, Bank of America agreed to compensate the Government $425 million for the economic benefit it received while the market believed that the Government would be backing its assets. See the “Asset Guarantee Program” discussion in this section for more information on this program. Asset Support Programs The purpose of these programs is to support the liquidity and market value of assets owned by financial institutions. These assets may include various classes of asset-backed securities (“ABS”) and several types of loans. These programs seek to bolster the balance sheets of the financial firms and help free up capital so that financial institutions can extend more credit to support the U.S. economy. • Term Asset-Backed Securities Loan Facility (“TALF”). TALF was originally designed to increase the credit available for consumer and small-business loans through a Federal Reserve loan program backed by TARP funds. TALF provides non-recourse loans to investors secured by certain types of ABS including credit card loans, student loans, floorplan loans, insurance premium finance loans, loans guaranteed by the Small Business Administration (“SBA”), residential mortgage servicing advances, and commercial mortgage-backed securities (“CMBS”). According to Treasury, it will provide up to $80 billion42 of TARP funds to support this program (Treasury’s current TALF commitment is $20 billion, but should TALF exceed a total of $200 billion in loans extended by FRBNY, then Treasury will commit additional TARP funds). As of September 30, 2009, FRBNY had facilitated seven TALF subscriptions of non-mortgagerelated ABS, totaling approximately $47.3 billion of TALF borrowings.43 In addition, as of September 30, 2009, FRBNY had conducted four subscriptions for quarterly report to congress I october 21, 2009 CMBS for which $4.2 billion in loans were issued.44 An overview of TALF, later in this section, provides more information on these activities. • Public-Private Investment Program (“PPIP”). As originally announced, Treasury, in coordination with FDIC and the Federal Reserve, intended PPIP to improve the health of financial institutions and restart frozen credit markets through the purchase of legacy assets (e.g., legacy loans, CMBS, residential mortgage-backed securities (“RMBS”)).45 PPIP was intended to involve investments made through multiple Public-Private Investment Funds (“PPIFs”) in two subprograms — one to purchase real estate-related loans (“legacy loans”) and the other to purchase real estate-related securities (“legacy securities”) from financial institutions. FDIC launched a pilot Legacy Loans Program on July 31, 2009, with assets it had seized from bankrupt institutions. FDIC did not use TARP funds for this pilot program and is considering an expansion of this program without TARP funding.46 The Legacy Securities Program continues to develop, and on July 8, 2009, Treasury announced the selection of nine PPIF managers that will receive debt and equity financing of up to $30 billion in TARP funds during the initial capital-raising efforts for the PPIFs.47 Treasury has stated that PPIP, originally intended to involve up to $1 trillion in total funds, may involve up to $75 billion of TARP funds.48 See the “Public-Private Investment Program” discussion later in this section for details about the program structure and fund manager terms. • Unlocking Credit for Small Businesses (“UCSB”). Under UCSB, Treasury announced that it will begin purchasing up to $15 billion in securities backed by SBA loans.49 As of September 30, 2009, no transactions had occurred under this program. See the discussion of “Small Business Administration Loan Support” in this section for more information on the program. Automotive Industry Support Programs The stated objective of TARP’s automotive industry support programs is to “prevent a significant disruption of the American automotive industry, which would pose a systemic risk to financial market stability and have a negative effect on the economy of the United States.”50 • Automotive Industry Financing Program (“AIFP”). Under this program, Treasury made emergency loans to Chrysler Holding LLC (“Chrysler”), Chrysler Financial Services Americas LLC (“Chrysler Financial”), and General Motors Corporation (“GM”). In addition to these investments, Treasury purchased senior preferred stock from GMAC LLC (“GMAC”). Treasury also provided financing to Chrysler and GM to assist in their restructuring process. As of September 30, 2009, Treasury had expended or committed $76.9 billion in AIFP investments, of which $1.5 billion had been repaid.51 Treasury received an Legacy Assets: Also commonly referred to as troubled or toxic assets, legacy assets are real estate-related loans and securities (legacy loans and legacy securities) that remain on banks’ balance sheets that have lost value but are difficult to price due to the recent market disruption. Legacy Loans: Underperforming real estate-related loans held by a bank that it wishes to sell, but recent market disruptions have made difficult to price. Legacy Securities: Troubled real estaterelated securities (RMBS, CMBS), and other asset-backed securities (“ABS”) lingering on institutions’ balance sheets because their value could not be determined. 43 44 special inspector general I troubled asset relief program Pro Forma: In finance, refers to the presentation of hypothetical financial information assuming that certain assumptions will happen. 8% pro forma equity stake in Chrysler and a 61% equity stake in General Motors as partial repayment of TARP funds.52 See the discussion of “Automotive Industry Financing Program” later in this section for a detailed discussion on these companies. • Auto Supplier Support Program (“ASSP”). The stated purpose of ASSP is to provide Government-backed financing to break the adverse credit cycle affecting the auto suppliers and the manufacturers by “providing suppliers with the confidence they need to continue shipping their parts and the support they need to help access loans to pay their employees and continue their operations.”53 Treasury’s original commitment under this program was $5 billion, but as of September 30, 2009, it had been reduced to $3.5 billion — $1.0 billion for Chrysler and $2.5 billion for GM.54 After emerging from bankruptcy, the new, non-bankrupt GM and Chrysler assumed the debts associated with ASSP.55 See the discussion of “Auto Supplier Support Program” in this section for more information. • Auto Warranty Commitment Program (“AWCP”). The Auto Warranty Commitment Program was designed by the Administration with the intention of bolstering consumer confidence in automobile warranties on Chrysler- and GMbuilt vehicles. Under this program, Government-backed financing was to be provided for the warranties of cars sold during the Chrysler and GM restructuring periods. As reported in SIGTARP’s July Quarterly Report, Treasury funded $640.7 million toward this program — $280.1 million was made available to Chrysler and $360.6 million was made available to GM.56 As of September 30, 2009, the entire $640.7 million had been repaid with interest, and the program was terminated in July 2009.57 See the discussion of “Auto Warranty Commitment Program” in this section for more information. Homeowner Support Program The homeowner support program and its initiatives are aimed at assisting troubled homeowners and financial institutions holding the affected assets. • Making Home Affordable (“MHA”) Program. According to Treasury, MHA is a foreclosure mitigation plan intended to “help bring relief to responsible homeowners struggling to make their mortgage payments while preventing neighborhoods and communities from suffering the negative spillover effects of foreclosure, such as lower housing prices, increased crime, and higher taxes.”58 Within MHA, there are three major initiatives, only one of which involves TARP 45 quarterly report to congress I october 21, 2009 funds — the Home Affordable Modification Program (“HAMP”). Under HAMP, Treasury announced that up to $50 billion of TARP funds could be expended for this $75 billion program.59 As of September 30, 2009, $27.1 billion in TARP funds had been allocated to the program. See the “Making Home Affordable” discussion in this section for more detailed information. The following figures and tables provide a status summary of the implemented and announced TARP and TARP-related initiatives: • projected TARP funding by program (Figure 2.6) • expenditure levels by program as of September 30, 2009 (Table 2.1) • total potential funds subject to SIGTARP oversight as of September 30, 2009 (Table 2.2) • cumulative expenditures over time for implemented programs (Figure 2.7) • summary of dividend and interest payments received by program (Table 2.3) • expenditures by program snapshot as of September 30, 2009 (Figure 2.8) • summary of terms of TARP agreements (Table 2.4 and Table 2.5) • summary of largest warrant positions held by Treasury by program as of September 30, 2009 (Table 2.6) Figure 2.6 PROJECTED TARP FUNDING, BY PROGRAM $ Billions, % of $699 Billion UCSB 2% $15.0 ASSPd $3.5 1% AGP $5.0 1% TIP $40.0 MHA $50.0 6% 21% 6% CPP $218.0 ($70.7)a SSFI $69.8 10% PPIP $75.0 11% 20% 11% AIFP $77.6b,c ($2.1) 11% TALF $80.0e New Programs, or Remaining Funds for Existing Programs $138.0 Implemented Programs Announced Programs Remaining Funds For a reporting of all purchase, obligations, expenditures, and revenues of TARP, see Appendix C: “Reporting Requirements.” Notes: Numbers affected by rounding. Data as of 9/30/2009. Funding for Capital Assistance Program (“CAP”) to be determined. CPP funding of $70.7 billion had been repaid. AIFP loan principal payments of $2.1 billion had been repaid. (Repayment of $0.6 billion was from AWCP.) c For the purpose of this chart, AIFP includes the $641 million for AWCP, which was fully repaid as of 7/10/2009. d Treasury’s original commitment under this program was $5 billion, but was subsequently reduced to $3.5 billion effective 7/1/2009. e Treasury’s current TALF commitment is $20 billion but should TALF exceed a total of $200 billion in loans extended by FRBNY, then Treasury’s commitment could reach $80 billion. a b Sources: See final endnote. 46 special inspector general I troubled asset relief program Table 2.1 Expenditure Levels by Program, AS OF 9/30/2009 Authorized Under EESA Released Immediately Released Under Presidential Certificate of Need Released Under Presidential Certificate of Need & Resolution to Disapprove Failed Helping Families Save Their Homes Act of 2009 Total Released Less: Expenditures by Treasury Under TARPa Capital Purchase Program (“CPP”): Bank of Americab Citigroup JPMorganc Wells Fargo The Goldman Sachsc Morgan Stanley c Other Qualifying Financial Institutionsd CPP Total Systemically Significant Failing Institutions (“SSFI”) Program: American International Group, Inc. (“AIG”) SSFI Total Targeted Investment Program (“TIP”): Bank of America Corporation Citigroup, Inc. TIP Total Asset Guarantee Program (“AGP”): Citigroupe AGP Total Term Asset-Backed Securities Loan Facility (“TALF”): TALF LLCf TALF Total Automotive Industry Financing Program (“AIFP”): GM GMAC Chryslerg Chrysler Financialh AIFP Total Automotive Supplier Support Program (“ASSP”): GM Suppliers Receivables LLCi Chrysler Holding LLCi ASSP Total Automotive Warranty Commitment Program (“AWCP”): GM Chrysler AWCP Total ($ Billions) Amount Percent (%) Section Reference $700.0 $250.0 100.0 35.8% 14.3% 350.0 50.1% (1.2) $698.8 $25.0 25.0 25.0 25.0 10.0 10.0 84.6 (0.2%) 100.0% 3.6% 3.6% 3.6% 3.6% 1.4% 1.4% 12.1% $204.6 29.3% $69.8 10.0% 10.0% $40.0 2.9% 2.9% 5.7% $5.0 0.7% 0.7% $20.0 2.9% 2.9% $69.8 $20.0 20.0 $5.0 $20.0 $49.5 13.4 12.5 1.5 7.0% 1.9% 1.8% 0.2% “Financial Institution Support Programs” “Financial Institution Support Programs” “Financial Institution Support Programs” “Financial Institution Support Programs” “Asset Support Programs” “Automotive Industry Support Programs” $76.9 11.0% “Automotive Industry Support Programs” $3.5 0.4% 0.1% 0.5% “Automotive Industry Support Programs” $0.6 0.1% 0.0% 0.1% $2.5 1.0 $0.4 0.3 quarterly report to congress I october 21, 2009 Expenditure Levels by Program, AS OF 9/30/2009 Legacy Securities Public-Private Investment Program (“PPIP”) TCW Senior Mortgage Securities Fund, L.P. Invesco Legacy Securities Master Fund, L.P. PPIP Total Making Home Affordable (“MHA”): Countrywide Home Loans Servicing LP Wells Fargo Bank, NA CitiMortgage GMAC Mortgage Wachovia Mortgage American Home Mortgage Servicing J.P. Morgan Chase Bank Litton Loan Servicing Other Financial Institutionsj MHA Total Subtotal - TARP Expenditures TARP Repaymentsk Balance Remaining of Total Funds Made Available as of 9/30/2009 ($ Billions) Amount Percent (%) $3.3 3.3 0.5% 0.5% 1.0% $6.7 $4.5 2.5 2.1 3.6 1.4 1.2 2.7 1.1 8.1 $454.3 $(72.9) 0.6% 0.4% 0.3% 0.5% 0.2% 0.2% 0.4% 0.2% 1.2% 3.9% 65.0% (10.4%) $317.3 45.4% $27.1 Section Reference “Asset Support Programs” “Homeowner Support Program” Notes: Numbers affected by rounding. Expenditures do not reflect any repayments received. a From a budgetary perspective, expenditures are what Treasury has committed to spend (e.g., signed agreements with TARP fund recipients). b Bank of America’s share is equal to two CPP investments totaling $25 billion, which is the sum of $15 billion received on 10/28/2008 and $10 billion received on 1/9/2009. c These institutions repaid their CPP funds pursuant to Title VII, section 7001(g) of the American Recovery and Reinvestment Act of 2009. d Other Qualifying Financial Institutions (“QFIs”) include all QFIs that have received less than $10 billion through CPP. e Treasury committed $5 billion to Citigroup under AGP; however, this funding is conditional based on losses realized and may potentially never be expended. This amount is not an actual outlay of cash. f Treasury committed $20 billion to TALF; however only $100 million had been funded as of 9/30/2009. g According to Treasury, the 4/29/2009 $500 million expansion of the 1/2/2009 $4 million loan was de-obligated before being funded. Treasury de-obligated a further $1.9 billion in debtor-in-possession financing to Chrysler on 6/30/2009. h Treasury’s $1.5 billion loan to Chrysler Financial represents the maximum loan amount. The loan was incrementally funded until it reached the maximum amount of $1.5 billion on 4/9/2009. i Represents a special purpose vehicle (“SPV”) created by the manufacturer. Balance represents the maximum loan amount, which will be funded incrementally. Treasury’s original commitment under this program was $5 billion, but was subsequently reduced to $3.5 billion effective 7/1/2009. j Other Financial Institutions that have received less than $1 billion through MHA. k As of 9/30/2009, CPP repayments total $70.7 billion and AIFP loan repayments total $2.1 billion. Sources: Emergency Economic Stabilization Act, P.L. 110-343, 10/3/2008; Library of Congress, “A Joint Resolution Relating to the Disapproval of Obligations under the Emergency Economic Stabilization Act of 2008,” 1/15/2009, www.thomas.loc.gov, accessed 1/25/2009; Helping Families Save Their Homes Act of 2009, P.L. 111-22, 5/20/2009; Treasury, Transactions Report, 10/2/2009. 47 48 special inspector general I troubled asset relief program Table 2.2 Total Potential funds subject to sigtarp oversight, As of 9/30/2009 ($ Billions) Program Brief Description or Participant Total Projected Funding at Risk ($) Projected TARP Funding ($) Capital Purchase Program (“CPP”) Investments in 685 banks to date; 8 institutions total $134 billion; received $70.7 billion in capital repayments $218.0 $218.0 ($70.7) ($70.7) Automotive Industry Financing Program (“AIFP”) GM, Chrysler, GMAC, Chrysler Financial; received $1.5 billion in loan repayments Auto Supplier Support Program (“ASSP”) Government-backed protection for auto parts suppliers Auto Warranty Commitment Program (“AWCP”) Government-backed protection for warranties of cars sold during the GM and Chrysler bankruptcy restructuring periods; fully repaid on 7/10/2009 0.6 0.6 ($0.6) ($0.6) Unlocking Credit for Small Businesses (“UCSB”) Purchase of securities backed by SBA loans 15.0b 15.0 Systemically Significant Failing Institutions (“SSFI”) AIG investment 69.8c 69.8c Targeted Investment Program (“TIP”) Citigroup, Bank of America investments 40.0 40.0 Asset Guarantee Program (“AGP”) Citigroup, ring-fence asset guarantee Term Asset-Backed Securities Loan Facility (“TALF”) FRBNY non-recourse loans for purchase of assetbacked securities Making Home Affordable (“MHA”) Program Modification of mortgage loans Public-Private Investment Program (“PPIP”) Disposition of legacy assets; Legacy Loans Program, Legacy Securities Program (expansion of TALF) Capital Assistance Program (“CAP”) Capital to qualified financial institutions; includes stress test New Programs, or Funds Remaining for Existing Programs Potential additional funding related to CAP; other programs Total 76.9 76.9 ($1.5) ($1.5) 3.5a 3.5a 301.0 5.0 1,000.0 80.0d 75.0e 50.0 500.0 – 1,000.0 75.0 TBD TBD 138.0 138.0 $2,365.0 – $2,865.0 $698.8 Notes: Numbers affected by rounding. a Treasury’s original commitment under this program was $5 billion, but subsequently reduced to $3.5 billion effective 7/1/2009. b Treasury announced that it would purchase up to $15 billion in securities under the Unlocking Credit for Small Businesses program. c Actual TARP expenditures as of 9/30/2009. d Treasury’s current TALF commitment is $20 billion but should TALF exceed a total of $200 billion in loans extended by FRBNY, then Treasury’s commitment could reach $80 billion. e $75 billion is for mortgage modification. Sources: Treasury, Office of Financial Stability, Chief of Compliance and CFO, SIGTARP interview, 3/30/2009; Treasury, Transactions Report, 10/2/2009; Treasury, “Auto Supplier Support Program: Stabilizing the Auto Industry in a Time of Crisis,” 3/19/2009, http://www.treas.gov/press/releases/docs/supplier_support_program_3_18.pdf, accessed 3/19/2009; Treasury, “Unlocking Credit for Small Businesses Fact Sheet,” 3/17/2009, http://www.financialstability.gov/roadtostability/unlockingCreditforSmallBusinesses.html, accessed 6/10/2009; Treasury, “Treasury, Federal Reserve, and FDIC Provide Assistance to Bank of America,” 1/16/2009, http://www.treas.gov/press/releases/hp1356.htm, accessed 1/16/2009; Treasury Press Release, “U.S. Government Finalizes Terms of Citi Guarantee Announced in November,” 1/16/2009, http://www.financialstability.gov/latest/hp1358.html, accessed 6/8/2009; Treasury, “Financial Stability Plan Fact Sheet,” 2/10/2009, http://www.financialstability.gov/docs/fact-sheet.pdf, accessed 6/8/2009; Treasury, “Making Home Affordable: Updated Detailed Program Description,” 3/4/2009, http://www.treas.gov/press/releases/reports/housing_fact_sheet.pdf, accessed 6/10/2009; Treasury, “Public-Private Investment Program,” 4/6/2009, http://www.financialstability.gov/roadtostability/publicprivatefund.html, accessed 6/9/2009. quarterly report to congress I october 21, 2009 Figure 2.8 EXPENDITURES BY PROGRAM, SNAPSHOT Table 2.3 $ Billions, % of $454.3 Billion DIVIDEND and interest payments, by program ($ MIllions) Program PPIP $6.7 1% CPPa MHA $27.1 6% $6,789.7 SSFI —– TIP TIP $40.0 1,862.2 b AIFP 670.9 AGP 174.8 ASSP 5.9 Total $9,503.5 AGP $5.0 1% ASSP $3.5c 0.1% TALF $20.0 4% Amount AWCP $0.6d >0.1% 9% 45% CPP $204.6a SSFI $69.8 15% 17% AIFP $76.9b Notes: Numbers affected by rounding. Data as of 9/30/2009. a Includes $13 million fee received as part of the Banco Popular exchange. b Includes AWCP. Notes: Numbers affected by rounding. Data as of 9/30/2009. From a budgetary perspective, expenditures are what Treasury committed to spend (e.g., signed agreements with TARP fund recipients). Expenditures do not reflect any repayments received. a $70.72 billion of CPP funding had been repaid. b $1.5 billion of principal payments related to AIFP loans had been repaid. c Treasury’s original commitment under this program was $5 billion, but subsequently reduced to $3.5 billion effective 7/1/2009. d The $0.6 billion expended for AWCP was repaid on 7/10/2009. Source: Treasury, response to SIGTARP data call, 10/7/2009. Source: Treasury, Transactions Report, 10/2/2009. Figure 2.7 EXPENDITURES, BY PROGRAM, CUMULATIVE, 10/2008 – 9/2009 $ Billions $500 $6.7 $5.0 $27.0 $20.0 $40.0 a $81.1 400 300 PPIP AGP MHA TALF TIP Auto Programs $69.8 SSFI 200 b 100 0 $204.6 CPP 0 10/31 11/30 12/31 1/31 2/28 2008 3/31 4/30 5/31 6/30 7/31 8/31 9/30 2009 PPIP AGP MHA TALF TIP Auto Programs SSFI CPP Notes: Numbers affected by rounding. a Auto Programs include AIFP, ASSP, and AWCP. AIFP loan principal of $2.1 billion has been repaid. (Repayment of $0.6 billion was from AWCP.) AIFP commitment amount reduced through $2.4 billion de-obligation. (Not reflected on the Transactions Report.) b CPP funding of $70.7 billion has been repaid. Source: Treasury, Transactions Report, 10/2/2009. 49 50 special inspector general I troubled asset relief program Table 2.4 Equity Agreements TARP Program Company Date of Agreement CPP – Public 284 QFIs 10/14/2008a and later Cost Assigned $200.1 ($ Billions) Description of Investment Senior Preferred Equity Common Stock Purchase Warrants CPP – Private 352 QFIs 11/17/2008b and later $ 4.0 Preferred Equity Preferred Stock Purchase Warrants that are exercised immediately SSFI AIG 4/17/2009 $41.6c Non-Cumulative Preferred Equity Common Stock Purchase Warrants SSFI AIG 4/17/2009 $29.8d Non-Cumulative Preferred Equity Common Stock Purchase Warrants TIP Citigroup 12/31/2008 $20.0e Trust Preferred Securities Warrants TIP Bank of America 1/16/2009f $20.0 Senior Preferred Equity Warrants AIFP GMAC LLC 12/29/2008 $5.0 Senior Preferred Membership Interests Preferred Stock Purchase Warrants that are exercised immediately AIFP GMAC LLC 5/21/2009 $7.5 Mandatorily Convertible Preferred Stock Preferred Stock Purchase Warrants that are exercised immediately AIFP GMAC LLC 5/29/2009 $0.9 Common Equity Interest Notes: Numbers affected by rounding. a Announcement date of CPP Public Term Sheet. b Announcement date of CPP Private Term Sheet. c AIG exchanged Treasury’s $40 billion investment in cumulative preferred stock (obtained on 11/25/2008) for non-cumulative preferred stock, effectively cancelling the original $40 billion investment. d The Equity Capital Facility was announced as a $30 billion commitment, but Treasury reduced this amount by the value of the AIGFP Retention Payment amount of $165 million. e Citigroup exchanged its $20 billion senior preferred equity (obtained on 12/31/2008) for trust preferred securities. f Date as of the Treasury’s 1/27/2009 Transactions Report. The Security Purchase Agreement has a date of 1/15/2009. Sources: Treasury, Transactions Report, 10/2/2009; Treasury, “TARP Capital Purchase Program Agreement, Senior Preferred Stock and Warrants, Summary of Senior Preferred Terms,” 10/14/2008; Treasury, “TARP Capital Purchase Program Agreement, (Non-Public QFIs, excluding S Corps and Mutual Organizations) Preferred Securities, Summary of Warrant Terms,” 11/17/2008; Treasury, “Securities Purchase Agreement dated as of November 25, 2008 between American International Group, Inc. and United States Department of Treasury,” 11/25/2008; Treasury, “TARP AIG SSFI Investment, Senior Preferred Stock and Warrant, Summary of Senior Preferred Terms,” 11/25/2008; Treasury, “Securities Purchase Agreement dated as of January 15, 2009 between Citigroup, Inc. and United States Department of Treasury,” 1/15/2009; Treasury, “Citigroup, Inc. Summary of Terms, Eligible Asset Guarantee,” 11/23/2008; “Securities Purchase Agreement dated as of January 15, 2009 between Bank of America Corporation and United States Department of Treasury,” 1/15/2009; Treasury, “Bank of America Summary of Terms, Preferred Securities,” 1/16/2009; Treasury, “GMAC LLC Automotive Industry Financing Program, Preferred Membership Interests, Summary of Preferred Terms,” 12/29/2008; Treasury, response to SIGTARP data call, 10/7/2009. quarterly report to congress I october 21, 2009 Investment Information Dividends Term of Agreement 1 – 3% of risk weighted assets, not to exceed $25 billion for each QFI 5% for first 5 years, 9% thereafter Perpetual 15% of senior preferred amount — Up to 10 years 1 – 3% of risk weighted assets, not to exceed $25 billion for each QFI 5% for first 5 years, 9% thereafter Perpetual 5% of preferred amount 9% Perpetual $41.6 billion aggregate liquidation preference 10% Perpetual 2% of issued and outstanding common stock on investment date of 11/25/2008; warrant originally for 53,798,766 shares with a $2.50 exercise price; after 6/30/2009 split, it is for 2,689,938.30 shares with a $50 exercise price. -— Up to 10 years Up to $29.8 billion aggregate liquidation preference. As of 9/30/2009, aggregate liquidation preference of $3.2 billion. 10% Perpetual (life of the facility is 5 years) 150 common stock warrants outstanding; $0.00002 exercise price — Up to 10 years $20 billion 8% Perpetual 10% of total preferred stock issued; $10.61 exercise price — Up to 10 years $20 billion 8% Perpetual 10% of total preferred stock issued; $13.30 exercise price — Up to 10 years $5 billion 8% Perpetual 5% of preferred amount 9% Perpetual $7.5 billion 9% Converts to common equity interest after 7 years 5% of preferred amount 9% Converts to common equity interest after 7 years This equity interest was obtained by exchanging a prior debt obligation with General Motors. See “Debt Agreements” table for more information. — Perpetual 51 52 special inspector general I troubled asset relief program Table 2.5 Debt Agreements TARP Program Company Date of Agreement CPP - S-Corps 49 QFIs 1/14/2009a Cost Assigned $0.5 ($ Billions) Description of Investment Senior Subordinated Securities Senior Subordinated Security Warrants that are exercised immediately AIFP General Motors 12/31/2008 $19.8b AIFP General Motors 1/16/2009 $0.9 Debt Obligation AIFP Chrysler 1/2/2009 $4.8 Debt Obligation with Additional Note AIFP Chrysler Financial 1/16/2009 $1.5 Debt Obligation with Additional Note AIFP Chrysler 5/1/2009 $3.8 Debt Obligation with Additional Note AIFP Chrysler 5/27/2009 $6.6 Debt Obligation with Additional Note, Equity Interest AIFP General Motors 6/3/2009, amended 7/10/2009 ASSP GM Supplier Receivables LLC ASSP Chrsyler Receivables SPV LLC Notes: Numbers affected by rounding. a Announcement date of CPP S-Corporation Term Sheet. b Amount includes AWCP commitments. Debt Obligation with Warrants and Additional Note $30.1 Debt Obligation with Additional Note 4/9/2009 $2.5 Debt Obligation with Additional Note 4/9/2009 $1.0 Debt Obligation with Additional Note quarterly report to congress I october 21, 2009 Investment Information Interest / Dividends Term of Agreement Each QFI may issue senior securities with an aggregate principal amount of 1% - 3% of its risk-weighted assets, but not to exceed $25 billion. 7.7% for first 5 years; 13.8% thereafter 30 years Treasury will receive warrants to purchase an amount equal to 5% of the senior securities purchased on the date of investment. 13.8% 30 years This loan was funded incrementally; $4 billion funded on 12/31/2008, $5.4 billion funded on 1/21/2009, $4 billion funded on 2/17/2009. Subsequently, this loan was then amended; $2 billion on 4/22/2009 and $4 billion on 5/20/2009 (General Advances). In addition, on 5/27/2009, $361 million was set aside in an SPV for the AWCP (Warranty Advances). For General Advances - (i) the greater of (a) 3 Month LIBOR or (b) 2% plus (ii) 3%; For Warrant Advances (i) the greater of (a) 3 Month LIBOR for the related Interest Period or (b) 2% plus (ii) 3.5% 12/29/2011 This loan was exchanged for a portion of GM’s common equity interest in GMAC LLC on 5/29/2009. See “Equity Agreement” table for more information. 3 Month LIBOR + 3% 1/16/2012 Loan of $4 billion; Additional note of $267 million (6.67% of the maximum loan amount). Subsequently, this loan was then amended; $500 million on 4/29/2009, this amount was never drawn and subsequently de-obligated (General Advances). In addition, on 4/29/2009, $280 million was set aside in an SPV for the AWCP; this advance was repaid (Warrant Advances). For General Advances - (i) the greater of (a) 3 Month LIBOR or (b) 2% plus (ii) 3%; For Warrant Advances (i) the greater of (a) 3 Month LIBOR for the related Interest Period or (b) 2% plus (ii) 3.5% 1/2/2012 Loan was funded incrementally at $100 million per week until it reached the maximum amount of $1.5 billion on 4/9/2009. Additional note is $75 million (5% of total loan size), which vests 20% on closing and 20% on each anniversary of closing. LIBOR + 1% for first year LIBOR + 1.5% for remaining years 1/16/2014 Loan of $3.0 billion committed to Chrysler for its bankruptcy period. Subsequently, this loan was amended; $757 million was added on 5/20/2009. Treasury funded $1.9 billion during bankruptcy period. The remaining amount will be de-obligated. (i) the greater of (a) 3 Month Eurodollar or (b) 2% plus (ii) 3.0% 9/30/2009, subject to certain conditions Commitment to New CarCo Acquisition LLC (renamed Chrysler Group LLC on or about 6/10/2009) of up to $6.642 billion. The total loan amount is up to $7.142 billion including $500 million of debt assumed from Treasury’s 1/2/2009 credit agreement with Chrysler Holding LLC. The debt obligations are secured by a first priority lien on the assets of New CarCo Acquisition LLC (the company that purchased Chrysler LLC’s assets in a sale pursuant to section 363 of the Bankruptcy Code). For $2 billion: (i) The 3 Month Eurodollar Rate, plus (ii) (a) 5% or, on loans extended past the original maturity date, (b) 6.5%. For $5.142 billion note: (i) The 3 Month Eurodollar Rate plus 7.91% and (ii) an additional $17 million in PIK interest per quarter. For other notes: 3 Month Eurodollar Rate plus 7.91% For $2 billion note: 12/10/2011; provided that issuer may extend maturity for up to $400 million of principal to 6/10/2017. For other notes: 6/10/2017 Original $30.1 billion funded. Amended loan documents provided that $986 million of the original DIP loan was left for the old GM. In addition $7.1 billion was assumed by New GM of which $0.4 billion was repaid resulting in $6.7 billion remaining outstanding. Originally, (i) the greater of (a) 3 Month Eurodollar or (b) 2% plus (ii) 3.0%. For amounts assumed by New GM, the interest rates became (i) the greater of (a) 3 Month Eurodollar or (b) 2% plus (ii) 5% Originally 10/31/2009. For amounts assumed by New GM, June 10, 2015, subject to acceleration The original amount was $3.5 billion, but it was decreased permanently to $2.5 billion (i) the greater of (a) LIBOR for the related 4/9/2010 effective 7/1/2009. interest period or (b) two percent (2%) plus (ii) three and five-tenths percent (3.5%) The original amount was $1.5 billion, but it was decreased permanently to $1.0 billion (i) the greater of (a) LIBOR for the related 4/9/2010 effective 7/1/2009. interest period or (b) two percent (2%) plus (ii) three and five-tenths percent (3.5%) Sources: Treasury, “Loan and Security Agreement By and Between General Motors Corporation as Borrower and The United States Department of Treasury as Lender Dated as of December 31, 2008,” 12/31/2008. Treasury, “General Motors Corporation, Indicative Summary of Terms for Secured Term Loan Facility,” 12/19/2008; Treasury, “General Motors Promissory Note,” 1/16/2009; Treasury, “Loan and Security Agreement By and Between Chrysler Holding LLC as Borrower and The United States Department of Treasury as Lender Dated as of December 31, 2008,” 12/31/2008; Treasury, “Chrysler, Indicative Summary of Terms for Secured Term Loan Facility,” 12/19/2008; Treasury, “Chrysler LB Receivables Trust Automotive Industry Financing Program, Secured Term Loan, Summary of Terms,” 1/16/2009; OFS, response to SIGTARP draft report, 1/30/2009; Treasury, Transactions Report, 10/2/2009; Treasury, response to SIGTARP data call, 10/7/2009. 53 54 special inspector general I troubled asset relief program Table 2.6 LARGEST POSITIONS IN WARRANTS HELD BY TREASURY, BY PROGRAM, AS OF 9/30/2009 Transaction Date Participant Current Number of Outstanding Warrants Current Strike Price Stock Price as of 9/30/2009 In or Out of the Money? Amount “In the Money” or “Out of the Money” as of 9/30/2009 Capital Purchase Program (“CPP”): Bank of America Corporationa 10/28/2008 Bank of America Corporationa 1/9/2009 Citigroup Inc.b 10/28/2008 $30.79 $16.92 OUT ($13.87) $30.79 $16.92 OUT ($13.87) 210,084,034 $17.85 $4.84 N/A — 121,792,790 Co.c 10/28/2008 88,401,697 $42.42 $43.82 IN $1.40 Wells Fargo & Company 10/28/2008 110,261,688 $34.01 $28.18 OUT ($5.83) JPMorgan Chase & Systemically Significant Failing Institutions (“SSFI”) Program: AIGd 11/25/2008 2,689,938 $50.00 $44.11 OUT ($5.89) AIGd 4/17/2009 150 $0.00002 $44.11 IN $44.11 12/31/2008 188,501,414 $10.61 $4.84 OUT ($5.77) 1/16/2009 150,375,940 $13.30 $16.92 IN $3.62 1/16/2009 66,531,728 $10.61 $4.84 OUT ($5.77) Targeted Investment Program (“TIP”): Citigroup Inc. Bank of America Corporation Asset Guarantee Program (“AGP”): Citigroup Inc. Notes: Numbers affected by rounding. a According to Treasury, the Bank of America warrants were replaced with one warrant certificate for 121,792,790 total warrant shares. b According to Treasury, on 9/11/2009, an “extinguishment” transaction “made [warrants] worthless upon execution of Citi [Series M Common Stock Equivalent] to Common Exchange.” c This institution repaid its CPP funds pursuant to Title VII, section 7001(g) of the American Recovery and Reinvestment Act of 2009. Treasury still holds these warrants in its portfolio. d All warrant and stock data for AIG are based on the 6/30/2009 reverse stock split of 1 for 20. Sources: Treasury, Transactions Report, 10/2/2009; Treasury, response to SIGTARP data call, 10/7/2009; Capital IQ, Inc. (a division of Standard & Poor’s), www.capitaliq.com; Treasury, response to SIGTARP draft, 10/16/2009. 55 quarterly report to congress I october 21, 2009 Financial Institution Support Programs Treasury created five TARP programs that involve investment of capital or guarantee of assets in return for equity in financial institutions. Two investment programs, the Capital Purchase Program (“CPP”) and the Capital Assistance Program (“CAP”), are open to all qualifying financial institutions (“QFIs”). The other three programs, the Systemically Significant Failing Institutions (“SSFI”) program, Targeted Investment Program (“TIP”), and Asset Guarantee Program (“AGP”) are made available on a case-by-case basis to specific institutions needing exceptional assistance above that of CPP and CAP. Capital Purchase Program Treasury currently anticipates that $218 billion of TARP funds will eventually be invested in QFIs under CPP.60 According to Treasury, the intention of CPP is to invest in healthy, viable banks to promote financial stability, maintain confidence in the financial system, and permit institutions to continue meeting the credit needs of American consumers and businesses.61 For a summary of the distribution of CPP funding by participant — not including any repayment — see Figure 2.9. Status of Funds As of September 30, 2009, Treasury had purchased $204.6 billion in preferred stock and subordinated debentures from 685 different QFIs in 48 states, the District of Columbia, and Puerto Rico. See Figure 2.10 on the following page for the geographical distribution of all the QFIs that have received funding. For a full listing of CPP recipients, see Appendix D: “Transaction Detail.” For more information on the Capital Purchase Program, see SIGTARP’s July Quarterly Report, page 45. Figure 2.9 CPP EXPENDITURES, BY PARTICIPANT, CUMULATIVEa $ Billions, % of $204.6 Billion Bank of America $25.0 Other Institutions $84.6 12.2% 41.4% 12.2% 12.2% 12.2% 4.9% Morgan Stanley $10.0 JPMorgan Chase $25.0 Wells Fargo $25.0 Citigroup $25.0 4.9% Goldman Sachs $10.0 Notes: Numbers affected by rounding. Data as of 9/30/2009. Bank of America = Bank of America Corporation; JPMorgan Chase = JPMorgan Chase & Co.; Wells Fargo = Wells Fargo and Company; Citigroup = Citigroup Inc.; Goldman Sachs = The Goldman Sachs Group, Inc. a $204.6 billion represents total CPP funds expended before any CPP repayments. JPMorgan, Goldman Sachs, Morgan Stanley, and some other institutions have repaid their TARP funds under CPP. Source: Treasury, Transactions Report, 10/2/2009. 56 special inspector general I troubled asset relief program Figure 2.10 TRACKING CAPITAL PURCHASE PROGRAM INVESTMENTS ACROSS THE COUNTRY $10 Billion or More $1 Billion to $10 Billion $100 Million to $1 Billion $10 Million to $100 Million Less than $10 Million $0 Note: Banks in Montana and Vermont had not received any funds as of 9/30/2009. Source: Treasury, “Local Impact of the Capital Purchase Program,” 10/1/2009, www.financialstability.gov, accessed 10/5/2009. Table 2.7 Although the 8 largest investments accounted for $134.2 billion of the program, CPP has also had many more modest investments: 322 of the 685 recipients received $10 million or less. Table 2.7 and Table 2.8 show the distribution of the investments by size. cpp ORIGINAL investment summary Largest Capital Investment $25 Billion Smallest Capital Investment $301,000 Average Capital Investment $298.7 Million Median Capital Investment $11.3 Million Notes: Numbers affected by rounding. Data as of 9/30/2009. These numbers are based on total Treasury CPP investment since 10/28/2008. Bank of America Corporation, SunTrust Banks, Inc., and Yadkin Valley Financial Corporation each received investments in two separate transactions. Source: Treasury, Transactions Report, 10/2/2009. Table 2.8 CPP ORIGINAL Investment size $10 Billion or More $1 Billion to $10 Billion $100 Million to $1 Billion 6 19 57 Less than $100 Million 603 Total 685 Notes: Data as of 9/30/2009. These numbers are based on total Treasury CPP investment since 10/28/2008. Bank of America Corporation, SunTrust Banks, Inc., and Yadkin Valley Financial Corporation each received investments in two separate transactions. Source: Treasury, Transactions Report, 10/2/2009. Repayment of Funds As of September 30, 2009, 42 banks had repurchased some or all of their shares from Treasury, with Treasury receiving $70.7 billion in principal repayments. Figure 2.11 shows the amount of CPP funds outstanding, adjusted for repayments. Table 2.9 shows the share repurchases conducted as of September 30, 2009. In addition, Treasury had received $6.8 billion in dividends and interest from its CPP investments. Among CPP recipients, 46 QFIs have missed CPP dividend payments to the Government; some of these institutions made the payments on a later date. As of September 30, 2009, there were $75.7 million in outstanding CPP dividends. If a QFI misses six quarterly dividend payments, Treasury retains the right to elect two directors to sit on the QFI’s board. As of September 30, 2009, there were no participants subject to this penalty.62 57 quarterly report to congress I october 21, 2009 Table 2.9 CPP share repurchases, AS OF 9/30/2009 Amount of Repurchase ($ Millions) Repurchase Date Institution 3/31/2009 Centra Financial Holdings, Inc. $15.0 3/31/2009 Old National Bancorp 100.0 3/31/2009 Iberiabank Corporation 90.0 3/31/2009 Bank of Marin Bancorp 28.0 3/31/2009 Signature Bank 4/8/2009 Sun Bancorp, Inc. 89.3 4/15/2009 Shore Bancshares, Inc. 25.0 4/22/2009 First ULB Corp. 4/22/2009 FirstMerit Corporation 120.0 4.9 Independent Bank Corp. 4/22/2009 TCF Financial Corporation 361.2 5/5/2009 Sterling Bancshares, Inc. 125.2 5/13/2009 Alliance Financial Corporation 26.9 5/13/2009 Texas Capital Bancshares, Inc. 75.0 5/20/2009 Somerset Hills Bancorp 5/20/2009 SCBT Financial Corporation 5/27/2009 First Manitowoc Bancorp, Inc. 12.0 5/27/2009 First Niagara Financial Group 184.0 5/27/2009 Berkshire Hills Bancorp, Inc. 5/27/2009 Washington Federal Inc. 6/3/2009 HF Financial Corp. 6/3/2009 Valley National Bancorpa 200.0 6/17/2009 State Street Corporation 2,000.0 6/17/2009 U.S. Bancorp 6/17/2009 The Goldman Sachs Group, Inc. 6/17/2009 BB&T Corp. 3,133.6 6/17/2009 American Express Company 3,388.9 6/17/2009 The Bank of New York Mellon Corporation 6/17/2009 Morgan Stanley 6/17/2009 Northern Trust Corporation 6/17/2009 JPMorgan Chase & Co. 6/17/2009 Capital One Financial Corporation 3,555.2 7/8/2009 First Community Bankshares Inc. 41.5 7/15/2009 Old Line Bancshares, Inc. 7.0 8/5/2009 Bancorp Rhode Island, Inc. 30.0 8/12/2009 State Bankshares, Inc.b 8/26/2009 CVB Financial Corp.c 9/2/2009 Westamerica Bancorporationd 9/9/2009 Wesbanco Bank Inc. 9/9/2009 F.N.B. Corporation 9/16/2009 Manhattan Bancorp 9/30/2009 Centerstate Banks of Florida Inc. Notes: Numbers affected by rounding. a Valley National Bancorp repaid $75.0 million on 6/3/2009 and $125.0 million on 9/23/2009. b State Bankshares, Inc. repaid $12.5 million on 8/12/2009. It has a balance of $37.5 million still outstanding. c CVB Financial Corp. repaid $97.5 million on 8/26/2009 and $32.5 million on 9/2/2009. d Westamerica Bancorporation repaid $41.9 million on 9/2/2009. It has a balance of $41.9 million still outstanding. Source: Treasury, Transactions Report, 10/2/2009. SNAPSHOT OF CPP FUNDS OUTSTANDING AND REPAID, BY QUARTER $ Billions $200 125.0 4/22/2009 Total Figure 2.11 78.2 7.4 64.8 40.0 200.0 25.0 6,599.0 10,000.0 3,000.0 10,000.0 1,576.0 25,000.0 12.5 130.0 41.9 75.0 100.0 1.7 27.9 $70,717.0 150 $177.5 $177.5 $198.8 $0.4 $203.2 $204.6 $198.4 $70.1 $70.7 $133.1 $133.9 Q22009 Q32009 100 50 0 Q42008 Q12009 CPP Funds Outstanding at Quarter’s End CPP Funds Repaid at Quarter’s End Notes: Numbers affected by rounding. Data as of 9/30/2009. Source: Treasury, Transactions Report, 10/2/2009. 58 special inspector general I troubled asset relief program Table 2.10 lists the banks that have one or more outstanding dividend payments as of September 30, 2009. For a complete listing of CPP recipients and the institutions that have paid dividends or interest, see Appendix D: “Transaction Detail.” Table 2.10 UNPAID dividend payments under cpp, AS of 9/30/2009 Institution CIT Group Inc. Value of Unpaid Dividends $29,125,000 Popular, Inc. 11,687,500 First BanCorp 5,000,000 Pacific Capital Bancorp 4,515,850 First Banks, Inc. 4,024,825 Sterling Financial Corporation/Sterling Savings Bank 3,787,500 UCBH Holdings, Inc. 3,734,213 Anchor BanCorp Wisconsin, Inc. 2,979,167 Midwest Banc Holdings, Inc. 2,119,600 Dickinson Financial Corporation II 1,989,980 Central Pacific Financial Corp. 1,687,500 Seacoast Banking Corporation of Florida/Seacoast National Bank 1,250,000 Blue Valley Ban Corp 543,750 Centrue Financial Corporation 408,350 Royal Bancshares of Pennsylvania, Inc. 380,088 One United Bank 301,575 United American Bank 230,490 Pacific City Financial Corporation/Pacific City Bank 220,725 Commonwealth Business Bank 209,850 The Connecticut Bank and Trust Company 178,573 Peninsula Bank Holding Co. 162,500 Commerce National Bank 150,000 Citizens Bancorp 141,700 Pacific Coast National Bancorp 112,270 Premier Service Bank 105,972 Idaho Bancorp 94,013 Lone Star Bank 87,917 Pacific International Bancorp Inc 81,250 One Georgia Bank 80,766 Georgia Primary Bank 70,850 Saigon National Bank 54,378 Patterson Bancshares, Inc. 50,288 Grand Mountain Bancshares, Inc. 35,395 Fresno First Bank 33,357 Citizens Bank & Trust Company 32,700 Pacific Commerce Bank 31,961 Community Bank of the Bay 28,874 Community First Bank Total Source: Treasury, response to SIGTARP data call, 10/7/2009. 11,199 $75,739,924 quarterly report to congress I october 21, 2009 Repurchase of Warrants by Financial Institutions To maximize the benefit to the taxpayer, EESA mandated that Treasury receive warrants or senior debt instruments when it invests in troubled assets.63 The warrants provide Treasury the right to purchase shares of common stock in the case of publicly traded institutions, or, in the case of non-publicly traded institutions, preferred stock or debt at a fixed price.64 As of September 30, 2009, 21 public institutions had repurchased their warrants for a total of $2.9 billion, and 3 private institutions whose warrants were immediately exercised into preferred shares repurchased those shares for a total of $1.6 million. Some CPP recipients have announced that they will not be negotiating to repurchase their warrants; Treasury intends to auction these warrants on the public market before the end of 2009.65 For a list of private institutions that have repaid their TARP funds and repurchased their preferred shares as of September 30, 2009, see Table 2.11. Table 2.11 CPP repurchases of preferred shares resulting from immediate exercise of warrants (private), as of 9/30/2009 Number of Preferred Shares Amount of Repurchase ($ Millions) Centra Financial Holdings, Inc. 750 $0.8 First ULB Corp. 245 0.2 First Manitowoc Bancorp, Inc. 600 0.6 1,595 $1.6 Repurchase Date Institution 4/15/2009 4/22/2009 5/27/2009 Total Note: Numbers affected by rounding. Sources: Treasury, Transactions Report, 10/2/2009; OFS, response to SIGTARP data call, 9/30/2009. For more information on Treasury’s valuation methodologies for warrants, see SIGTARP’s July Quarterly Report, page 48. 59 60 special inspector general I troubled asset relief program For a list of public institutions that have repaid their TARP funds and repurchased their warrants as of September 30, 2009, see Table 2.12. SIGTARP has announced a pending audit that examines the procedures used by Treasury to ensure that the Government receives a fair market value for the warrants. Table 2.12 CPP warrant repurchases (public), as of 9/30/2009 Repurchase Date Institution Number of Warrants Repurchased Amount of Repurchase ($ Millions) 5/8/2009 Old National Bancorp 813,008 $1.2 5/20/2009 Iberiabank Corporationa 138,490 1.2 5/27/2009 FirstMerit Corporation 5/27/2009 Sun Bancorp, Inc. 952,260 5.0 1,543,376 2.1 5/27/2009 Independent Bank Corp. 481,664 2.2 0.9 6/17/2009 Alliance Financial Corporation 173,069 6/24/2009 First Niagara Financial Groupa 953,096 2.7 6/24/2009 Berkshire Hills Bancorp, Inc. 226,330 1.0 6/24/2009 Somerset Hills Bancorp 163,065 0.3 6/24/2009 SCBT Financial Corporation 303,083 1.4 6/30/2009 HF Financial Corp. 7/8/2009 State Street Corporationa 302,419 0.7 2,788,104 60.0 7/15/2009 U.S. Bancorp 32,679,102 139.0 7/22/2009 The Goldman Sachs Group, Inc. 12,205,045 1,100.0 7/22/2009 BB&T Corp. 13,902,573 67.0 7/29/2009 American Express Company 24,264,129 340.0 8/5/2009 The Bank of New York Mellon Corporation 14,516,129 136.0 8/12/2009 Morgan Stanley 65,245,759 950.0 3,824,624 87.0 8/26/2009 Northern Trust Corporation 9/2/2009 Old Line Bancshares, Inc. 141,892 0.2 9/30/2009 Bancorp Rhode Island, Inc. 192,967 1.4 175,810,184 $2,899.3 Total Notes: Numbers affected by rounding. a These institutions reduced the original amount of warrants issued through a qualified equity offering. Sources: Treasury, Transactions Report, 10/2/2009; OFS, response to SIGTARP data call, 9/30/2009. quarterly report to congress I october 21, 2009 Banco Popular Exchange Offering To improve the composition of its regulatory capital, on June 12, 2009, Popular, Inc. (“Banco Popular”) proposed that Treasury participate in a securities exchange, in which Treasury would exchange its Series C preferred shares in Banco Popular, which it acquired through CPP, for a new series of Banco Popular trust preferred securities (the “TARP Exchange”). In conjunction with this transaction, Banco Popular initiated an exchange with its other, non-TARP preferred shareholders through which those shareholders would receive common stock (the “non-TARP Exchange”). The non-TARP Exchange was completed on August 21, 2009, and the TARP Exchange was completed on August 24, 2009.66 Both exchanges bolstered Banco Popular’s regulatory capital position by increasing the amount of its tier one common equity (“T1 Common”). In the TARP exchange, Treasury exchanged $935 million in face value of preferred shares and received $935 million in face value of trust preferred securities.67 Prior to the TARP Exchange, Banco Popular announced that it was planning to suspend all dividend payments to its preferred shareholders. As a trust preferred shareholder, however, Treasury’s dividend payment will be protected. TARP’s new trust preferred securities will pay the same dividend rate as the previously held preferred shares. The TARP Exchange allowed Treasury’s cash flow from Banco Popular to remain unchanged. The TARP Exchange also placed Treasury in what is effectively a more senior capital position, meaning that, in the event of liquidation, Treasury’s trust preferred securities now have a higher-priority claim on Banco Popular’s assets. In connection with this transaction, Banco Popular paid a $13 million exchange fee to Treasury.68 The non-TARP and TARP Exchange benefitted Banco Popular by improving its regulatory capital levels. According to Banco Popular, the non-TARP Exchange generated approximately $900 million of T1 Common, and the TARP Exchange generated approximately $500 million in T1 Common. The $500 million represents “the difference between the book value of Series C Preferred Stock and the estimated fair value of the New Trust Preferred Securities.”69 Both exchange offerings raised Banco Popular’s tier one common risk-based ratio (“T1 Common Ratio”). The non-TARP Exchange initially raised Banco Popular’s T1 Common Ratio from 2.45% to 5.7%. Subsequently the TARP Exchange raised the ratio from 5.7% to 7.5%.70 In assessing the level of capital necessary for an institution to absorb losses, the Federal Reserve, in the Supervisory Capital Assessment Program (“SCAP”) stress test, used the T1 Common Ratio as one measure of capital adequacy.71 According to the Federal Reserve, to be considered “well-capitalized,” an institution generally must maintain a T1 Common Ratio of 4%.72 Tier One Common Risk-Based Ratio (“T1 Common Ratio”): Determines what percentage of a bank’s total assets is categorized as T1 Common. Under traditional Federal regulations, a bank with a T1 Common Ratio of 4% or greater is considered adequately capitalized. = T1 Common / Risk-weighted assets For more information on a bank’s capital structure, see SIGTARP’s April Quarterly Report, page 58, and SIGTARP’s July Quarterly Report, page 55. Securities Exchange: An agreement between a firm and investors, permitting the investors to exchange one class of securities for another. Trust Preferred Securities: A security that has both equity and debt characteristics created by establishing a trust and issuing debt to it. A company would create a trust preferred security to realize tax benefits, since the trust is tax deductible. Tier One Common Equity (“T1 Common”): Also known as tangible common equity (“TCE”), is calculated by removing all non-common elements from T1, e.g., preferred equity, minority interests, and trust preferred securities. It can be thought of as the amount that would be left over if the bank were dissolved and all creditors and higher levels of stock, such as preferred stock, were paid off. T1 Common is the highest “quality” of capital in the sense of providing a buffer against loss by claimants on the bank. T1 Common is used in calculating the tier one common risk-based ratio (“T1 Common Ratio”) which determines what percentage of a bank’s total assets is categorized as T1 Common. The higher the percentage, the better capitalized the bank. Preferred stock is an example of capital that is counted in T1, but not in T1 Common. 61 62 special inspector general I troubled asset relief program Treasury Lending Reports Treasury snapshots were instituted in January 2009 as a means to track progress toward the stated goal of CPP: “building a capital base of viable U.S. financial institutions, enabling them to continue lending to businesses and consumers during the unprecedented financial crisis and economic downturn.”73 The monthly intermediation snapshots focus on tracking the 22 largest CPP recipients. Acting on a recommendation from GAO, Treasury later announced that it would require all CPP participants to submit data for a new monthly lending report that would complement the original monthly intermediation snapshot. The initial report was released on June 1, 2009, and subsequent reports have been released on a monthly basis. July 2009 Monthly Intermediation Snapshot The most recent monthly intermediation snapshot for the 22 largest CPP recipients was released on September 15, 2009, reporting data for the period of July 1, 2009, to July 31, 2009. Treasury reviewed and analyzed the data and came to the following conclusions:74 • The 22 institutions originated a total of $282 billion in new loans — a 10% decrease from June to July. • Overall outstanding loan balances fell 1% due mainly to a decrease in demand from borrowers, payment of outstanding debt, and charge-offs by banks. • Banks continued to report that demand was well below normal market levels in the Commercial Real Estate (“CRE”) market and the Commercial & Industrial (“C&I”) market. • Total small business originations decreased by 14% from June to July. Because most small business originations are CRE or C&I originations, this decrease is in-line with overall declining trends. Table 2.13 july monthly lending report ($ trillions) Average Consumer Loans Outstanding Average Commercial Loans Outstanding Total Average Loans Outstanding $2.8 2.3 $5.0 Notes: Numbers affected by rounding. Data as of 7/31/2009. Source: Treasury, “Summary of CPP Monthly Lending Report Data,” no date, http://www.financialstability.gov/docs/surveys/ SummaryTable_Feb-July_2009.pdf, accessed 10/8/2009. CPP Monthly Lending Report The CPP Monthly Lending Report requires banks to report to Treasury on three data points each month: average consumer loans outstanding, average commercial loans outstanding, and total loans outstanding. The aggregate totals from the July report are listed in Table 2.13. There were 56 banks that did not report by the August 31, 2009, deadline.75 quarterly report to congress I october 21, 2009 63 Quarterly Analysis of Institutions in CPP Treasury recently released its first Quarterly Capital Purchase Program Report. This report provides data from the quarterly call reports that financial institutions are required to file with FDIC. For this analysis, institutions were divided into four groups, and Treasury analyzed the aggregate changes in each group from the fourth quarter of 2008 to the first quarter of 2009. The four different groups are summarized in Table 2.14.76 For all banks with more than $500 million in assets, Treasury reported that additional analysis was performed using reports filed with the Federal Reserve. According to the report, banks in all groups experienced positive overall asset growth in the fourth quarter of 2008. This growth either slowed or turned negative for all banks other than those in Group III (the banks that received CPP funds in the first quarter of 2009). Treasury acknowledges that “it is difficult to draw specific conclusions about the effectiveness of the CPP program from solely these ratios.” Treasury expects the effects will be better understood once there is data from a more significant number of quarters to compare.77 On September 16, 2009, Treasury sent a letter to SIGTARP explaining how subsequent quarterly reports will be expanded to address SIGTARP recommendations concerning use of funds reporting. Future reports will include data such as the institutions’ repayments of outstanding debt obligations and total investments. The next report is expected to be released in October 2009.78 Further discussion of Treasury’s actions in this regard is contained in Section 5: “SIGTARP Recommendations” in this report. Table 2.14 quarterly analysis groups Number of CPP Participants Average Asset Size of Number of Insured Insured Institutions Institutions ($ Billions) Group Description Group I Subsidiaries of the 21 largest CPP participants (as of March 31, 2009) 21 67 $125.6 Group II Subsidiaries of CPP participants that were funded in Q4 2008 193 295 3.0 Group III Subsidiaries of CPP participants that were funded in Q1 2009 318 368 1.0 Group IV Non-CPP participants (as of March 31, 2009) NA 7,516 0.5 Source: Treasury, “Quarterly Analysis of Institutions in the Capital Purchase Program 2009 Q1,” no date, http://www.financialstability. gov/docs/CPP/Report/Quarterly%20Analysis%20-%20Data%20Section%2007%2030%2009.pdf, accessed 9/30/2009. Call Report: Quarterly report of financial condition commercial banks file with their Federal and state regulatory agencies. For further discussion on Treasury’s quarterly CPP analysis and lending reports, see Section 5: “SIGTARP Recommendations” in this report. 64 special inspector general I troubled asset relief program For more information on CPP for Small Banks, see SIGTARP’s July Quarterly Report, page 45. CPP for Small Banks On May 13, 2009, Treasury announced an expansion of CPP for Small Banks.79 As of September 30, 2009, 35 banks have applied to this program and 24 banks have been funded a total of $187.7 million.80 Capital Assistance Program Bank Holding Company (“BHC”): A company that controls a bank. Typically, a company controls a bank through the ownership of 25% or more of its voting securities. Mandatorily Convertible Preferred (“MCP”) Share: A type of preferred share (ownership in a company that generally entitles the owner of the share to collect dividend payments) that can be converted to common stock under certain parameters at the discretion of the company — and must be converted to common stock by a certain time. Tier One Risk-Based Capital Ratio (“T1 Ratio”): A ratio which determines what percentage of a bank’s total assets is categorized as tier one capital (“T1”). T1 Ratio = T1 divided by risk-weighted assets. Tier One Capital (“T1”): Consists primarily of common equity (including retained earnings), limited types and amounts of preferred equity, certain minority interests, and limited types and amounts of trust preferred securities. T1 does not include goodwill and certain other intangibles. Certain other assets are also excluded from T1. It can be described as a measure of the bank’s ability to sustain future losses and still meet depositor’s demands. The Capital Assistance Program (“CAP”) was created to “ensure the continued ability of U.S. financial institutions to lend to creditworthy borrowers in the face of a weaker-than-expected economic environment and larger-than-expected potential losses.”81 CAP consists of two parts: • a “stress test” (also known as the Supervisory Capital Assessment Program (“SCAP”)) to evaluate the 19 largest bank holding companies’ (“BHCs’”) capital levels for their ability to withstand an adverse economic scenario • an application to Treasury for funding in the form of additional capital infusions or as a means to convert CPP investments to CAP mandatorily convertible preferred (“MCP”) shares (available to all QFIs) Supervisory Capital Assessment Program On May 7, 2009, the Federal Reserve released the results of the SCAP process, revealing that 9 out of 19 BHCs had sufficient capital to withstand the adverse scenario while maintaining a tier one risk-based capital ratio (“T1 Ratio”) in excess of 6% and a T1 Common Ratio in excess of 4%.82 As of September 30, 2009, six of the eight participating institutions had repaid their CPP funds in full and purchased their outstanding warrants from the Government, thus fully completing their CPP and CAP participation. The other two participating institutions repaid their principal capital investment but did not repurchase the outstanding warrants. The ninth BHC, MetLife, is not a TARP recipient.83 The Federal Reserve determined that 10 of the SCAP participants needed an approximate total of $75 billion in additional capital in order to meet the capital level deemed necessary to withstand the more adverse economic scenario. Should a BHC not meet its required SCAP buffer by November 9, 2009, it will have to take additional capital assistance through CAP. This may include either Treasuryapproved conversion of the BHCs’ CPP investment to CAP MCP shares or the issuance of new CAP MCP shares.84 Status of CAP According to Treasury, the funding deadline for CAP applicants is November 9, 2009. Applications initially go to the bank’s primary regulator, which will then forward the application to Treasury. In order to ensure compliance with this deadline, those institutions that were not subject to SCAP are encouraged to apply for CAP funding by October 15, 2009.85 QFIs can either apply directly for additional TARP quarterly report to congress I october 21, 2009 funding in the form of CAP MCP shares or apply to convert their CPP preferred shares in exchange for CAP MCP shares.86 As of September 30, 2009, Treasury had informed SIGTARP that there had not been any CAP applications forwarded to Treasury from the primary Federal banking regulators.87 For more information on CAP, see SIGTARP’s July Quarterly Report, page 52. Systemically Significant Failing Institutions Program According to Treasury, the Systemically Significant Failing Institutions (“SSFI”) program 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.”88 As of September 30, 2009, $69.8 billion had been allocated through the SSFI program to American International Group, Inc. (“AIG”), the sole participant.89 Status of SSFI Funds Treasury purchased $40 billion of preferred stock from AIG on November 25, 2008. On April 17, 2009, Treasury and AIG signed a securities exchange agreement in which Treasury exchanged its cumulative preferred stock (“Series D stock”) for non-cumulative preferred stock (“Series E stock”). As a result of this exchange, AIG has an additional obligation to Treasury of $1.6 billion in unpaid dividends from the Series D shares.90 As part of the April 17, 2009, agreement, Treasury also committed to fund a $29.8 billion equity capital facility. As of September 30, 2009, AIG had drawn down a total of $3.2 billion in equity from this facility.91 AIG Update Subsequent to SIGTARP’s July Quarterly Report, AIG, FRBNY, and Treasury have continued to work together to improve AIG’s overall health and viability through the use of the Government’s assistance package and AIG’s continued efforts at restructuring through asset dispositions and sales. AIG reported improved operational performance for the second quarter of 2009, in which the company turned its first quarterly profit since the third quarter of 2007.92 In addition, AIG stated that it expects to meet all of its maturing debt obligations primarily though the Treasury facility, the FRBNY facility, and the disposition of assets.93 Other recent AIG updates include the following items: • Borrowing Capacity: As of July 29, 2009, under its FRBNY credit facility, AIG had $40 billion in outstanding borrowings, $20 billion in remaining borrowing capacity, and accrued compounding interest and fees totaling $4.8 billion.94 • Dividend Payments: As of September 30, 2009, AIG had missed three dividend payments to Treasury. If AIG misses its fourth dividend payment on November 1, 2009, Treasury will have the right to elect directors to the AIG board.95 As of September 30, 2009, neither Treasury nor FRBNY had selected members of AIG’s board of directors. Cumulative Preferred Stock: A type of stock that requires a defined dividend payment. If the company does not pay the dividend, it still owes the missed dividend to the owner of the stock. Non-Cumulative Preferred Stock: A type of stock in which unpaid dividends do not accrue when a company fails to make a dividend payment. Equity Capital Facility: A commitment to invest equity capital in a firm under certain future conditions. For more information on AIG’s preferred stock purchase, the AIG exchange, or its equity capital facility, see SIGTARP’s July Quarterly Report, page 60. 65 66 special inspector general I troubled asset relief program • Management Change: On August 10, 2009, Robert H. Benmosche assumed the role of President and Chief Executive Officer (“CEO”), and Harvey Golub became the new Non-Executive Chairman of the Board.96 The former Chairman and CEO, Edward M. Liddy, retired.97 • Management Compensation Approval in Principle: Mr. Benmosche’s annual salary will consist of $3 million cash and $4 million in common stock that is generally not transferable until 2014. He will be eligible to receive an annual bonus of up to $3.5 million based on the achievement of objective performance goals. This common stock will generally not vest for two years and will not be transferable until a certain amount of AIG’s TARP assistance is repaid to Treasury. Kenneth Feinberg, the Special Master for TARP Executive Compensation, approved this contract in principle in August and gave his formal approval in a determination letter released by Treasury on October 2, 2009.98 AIG is the subject of three SIGTARP audits. The first examines the large bonus payments to employees in its Financial Products unit in March 2009. The second examines payments made to AIG’s counterparties by FRBNY. The third is part of a broader audit on Treasury’s governance of financial institutions in which it has acquired ownership interests. For more information on SIGTARP’s AIG audits, see Section 1: “SIGTARP’s Creation and Statutory Authority” in this report. Use of Funds Report As part of its equity capital facility agreement, AIG is required to submit a use of funds report describing its expected use of proceeds received under the transaction.99 According to AIG, the funds will be used to meet capital solvency requirements resulting from declines in the value of investments. Additional funds will be used to purchase shares of United Guaranty Corporation (“UGC”), an AIG subsidiary, provide capital support for UGC, and settle a payment with a UGC subsidiary.100 Targeted Investment Program and Asset Guarantee Program As of September 30, 2009, Treasury had invested a total of $40 billion of TARP funds in Citigroup and Bank of America through the Targeted Investment Program (“TIP”).101 The stated goal of TIP is to “strengthen the economy and protect American jobs, savings, and retirement security,” where “the loss of confidence in a financial institution could result in significant market disruptions that threaten the financial strength of similarly situated financial institutions.”102 Additionally, should Citigroup’s losses rise above $39.5 billion, Treasury is obligated to pay up to $5 billion in protection as part of its Asset Guarantee Program (“AGP”) toward additional losses in a $301 billion group of Citigroup’s assets. In consideration for this commitment, Treasury received $4.03 billion of preferred quarterly report to congress I october 21, 2009 stock.103 The stated goal of AGP is to use insurance protections to help stabilize at-risk financial institutions. Treasury insures a select pool of troubled assets and collects premiums in return.104 This program differs from other financial institution support programs in that Treasury does not invest TARP funds in the institution directly; rather, TARP funds are reserved to cover a portion of the possible losses in the selected assets. As of September 30, 2009, no payment had been made to Citigroup for AGP.105 Citigroup, Inc. As of September 30, 2009, Citigroup had received a total of $45 billion in investments and $5 billion in loss protection through three separate TARP programs. Table 2.15 shows the timing of these investments as well as the related dividend payments that Treasury received. Table 2.15 treasury’s investments in citigroup, As of 9/30/2009 ($ Billions) Date Program Amount Invested/ Committed Dividends Paid $0.93 10/28/2008 CPP $25.00 12/31/2008 TIP 20.00 0.93 1/16/2009 AGP 5.00 0.17 $50.00 $2.04 Total Note: Numbers affected by rounding. Sources: Treasury, Transactions Report, 10/2/2009; Treasury, response to SIGTARP data call, 10/7/2009. 67 68 special inspector general I troubled asset relief program For more information on the Citigroup exchange offering, see SIGTARP’s July Quarterly Report, page 66. Citigroup Exchange Treasury has not made any additional TARP investments in Citigroup since January 2009; however the initial investments have been modified through a series of securities exchange offerings. Figure 2.12 presents a timeline of key events. Through private, public, and Treasury CPP exchanges, Citigroup exchanged a total of approximately $58 billion of preferred and trust preferred securities into common stock. As a result, Treasury now holds 33.6% of Citigroup’s outstanding common stock.106 Additionally, on July 30, 2009, Treasury exchanged its TIP and AGP preferred shares for trust preferred shares. Details of the exchanges for private shareholders, public shareholders, and Treasury can be found in Table 2.16. The impact of the exchange on Citigroup’s capital structure can be seen in Table 2.17. Figure 2.12 CITIGROUP EXCHANGE OFFERING TIMELINE FEBRUARY 2009 FEBRUARY 27 Exchange offering is announced. MAY 2009 MAY 7 Exchange offering is amended. JUNE 2009 JULY 2009 JUNE 10 Exchange offering is finalized. JULY 23 Exchange offering is closed with private shareholders and Treasury (CPP). JULY 26 Preliminary results of exchange are announced. JULY 30 Exchange offering is closed with public shareholders and Treasury (CPP/TIP/AGP). Sources: Announced: Citigroup Inc, 8-K, 2/27/2009, http://www.sec.gov/Archives/edgar/data/831001/000095010309000421/ dp12698_8k.htm, accessed 10/7/2009; Amended: Citigroup Inc, 8-K, 5/11/2009, http://www.sec.gov/Archives/edgar/data/831001/ 000119312509106618/d8k.htm, accessed 10/7/2009; Finalized: Citigroup Inc, 8-K, 6/10/2009, http://www.sec.gov/Archives/edgar/data/ 831001/000095010309001394/dp13784_8k.htm, accessed 10/7/2009; Closed with private shareholders: Citigroup Inc, 8-K, 7/23/2009, http://www.sec.gov/Archives/edgar/data/831001/000095012309024819/y78424e8vk.htm, accessed 10/7/2009; Preliminary results announced: Citigroup Inc, 8-K, 7/27/2009, http://www.sec.gov/Archives/edgar/data/831001/000119312509155289/d8k.htm, accessed 10/7/2009; Closed with public shareholders: Citigroup Inc, 8-K, 7/30/2009, http://www.sec.gov/Archives/edgar/data/831001/ 000095012309027722/y78559e8vk.htm, accessed 10/7/2009. quarterly report to congress I october 21, 2009 Table 2.16 citigroup exchange offerings ($ billions) Private Exchange Public Exchange Treasury Exchange PreExchange PostExchange PreExchange PostExchange PreExchange PostExchange Private Shareholders $12.5 Convertible Preferred Securities $12.5 Common Stock — — — — Public Shareholders — — $20.3 Convertible and Non-convertible $20.3 Preferred and Trust Common Stock Preferred Securities — — Treasury $12.5 CPP Non-convertible $12.5 Preferred Common Stock Securities $12.5 CPP Preferred Stock $20 Billion TIP Preferred Stock and $5 Billion AGP Preferred Stock $25 Billion Trust Preferred Securities $12.5 Common Stock Sources: Citigroup, Inc, 10-Q, 8/7/2009, http://www.sec.gov/Archives/edgar/data/831001/000104746909007400/a2193853z10-q.htm, accessed 9/14/2009; Treasury, Transactions Report, 10/2/2009. Table 2.17 Citigroup’s capital structure Equity Type ($ Billions) Pre-Exchange Post-Exchange Tier 1 Common Equity (“T1 Common”) $27 $91 Tangible Common Equity (“TCE”) $40 $100 Source: Citigroup, Inc, 10-Q, 8/7/2009, http://www.sec.gov/Archives/edgar/data/831001/000104746909007400/ a2193853z10-q.htm, accessed 9/14/2009. Ring-Fence Update As of September 30, 2009, the list of Citigroup assets to be included in the AGP ring-fence had not yet been finalized. According to Treasury, the list is expected to be finalized by October 31, 2009.107 SIGTARP has announced an audit of AGP as it pertains to Citigroup. The audit will examine the basis for the decision to provide the guarantees, the process of selecting the assets in the ring-fence, the risk management controls in place, and the safeguards available to protect taxpayers’ interest. Use of Funds Report Under its TIP agreement, based on SIGTARP’s recommendations, Citigroup is required to submit a quarterly use of funds report. The report must include the following information: • how TARP funds were used • the implementation of internal controls for TARP funds • compliance or non-compliance with restrictions on use of TARP funds 69 70 special inspector general I troubled asset relief program On August 11, 2009, Citigroup released its “TARP Progress Report for Second Quarter 2009.” According to the report, Citigroup’s Special TARP Committee approved $6 billion in new initiatives during the second quarter. Of this $6 billion, $4 billion was allocated to support municipal letters of credit, and the remaining $2 billion was allocated to support lending facilities for mortgage originators. As of June 30, 2009, Citigroup had authorized $50.8 billion in initiatives supported by TARP capital.108 The report also describes Citigroup’s participation in the MHA program, detailing its efforts to modify mortgages and increase mortgage lending. In the second quarter of 2009, Citigroup reported that it worked to avoid foreclosures through various loss mitigation activities on more than $16 billion of mortgages it owns or services and funded approximately $31 billion in new mortgage loans.109 For more information on Bank of America’s participation in AGP, see SIGTARP’s April Quarterly Report, page 76. Bank of America As of September 30, 2009, Bank of America had received a total of $45 billion in three separate infusions of TARP funds. Table 2.18 shows the timing of these investments as well as the related dividend payments that Treasury had received. Bank of America originally sought protection under AGP but, on May 7, 2009, announced that it was no longer seeking such assistance.110 On September 21, 2009, in exchange for Treasury’s previous public commitment to provide additional funds, Bank of America agreed to pay $425 million to the Government.111 Of this $425 million, $276 million was paid to Treasury, $92 million was paid to FDIC, and $57 million was paid to the Federal Reserve. According to Treasury, the $276 million will be deposited into Treasury’s general fund for the reduction of public debt and will not be re-issued by Treasury for TARP.112 Table 2.18 treasury’s investments in bank of america, as of 9/30/2009 ($ Billions) Amount Invested Date Program 10/28/2008 CPP $15.00 1/9/2009 CPPa 10.00 1/16/2009 TIP Total $0.90 20.00 0.93 $45.00 $1.83 Notes: Numbers affected by rounding. a Bank of America received $10 billion on 1/9/2009 related to the Merrill Lynch acquisition. Source: Treasury, Transactions Report, 10/2/2009. Dividends Paid quarterly report to congress I october 21, 2009 Use of Funds Report Under its TIP agreement, based on SIGTARP’s recommendations, Bank of America is required to submit a quarterly use of funds report. The report must include the following information: • how TARP funds were used • the implementation of internal controls for TARP funds • compliance or non-compliance with restrictions on use of TARP funds According to the second edition of Bank of America’s “Quarterly Impact Report,” Bank of America lent more than $211 billion during the second quarter, some of which is presumably supported by TARP capital; however Bank of America’s report does not provide any details about the amount of lending that has occurred as a result of the increased capital provided by TARP.113 71 72 special inspector general I troubled asset relief program Asset Support Programs Commercial Mortgage-Backed Securities (“CMBS”): A financial instrument that is backed by a commercial real estate mortgage or a group of commercial real estate mortgages that are packaged together. Legacy CMBS: CMBS issued before January 1, 2009. Treasury, either on its own or in conjunction with the Federal Reserve, has announced three programs intended to support demand in financial markets for hardto-value assets and to restart the credit markets by supporting new loans: the Term Asset-Backed Securities Loan Facility (“TALF”), the Public-Private Investment Program (“PPIP”), and the Unlocking Credit for Small Businesses (“UCSB”) program. The Federal Reserve’s TALF program has been announced to provide up to $1 trillion in funding to institutions pledging asset-backed securities (“ABS”) as collateral. According to Treasury, it will provide up to $80 billion114 of TARP funds to support this program (Treasury’s current TALF commitment is $20 billion, but should TALF lending exceed $200 billion, then Treasury will commit additional TARP funds up to a total of $80 billion). On August 17, 2009, the Federal Reserve and Treasury announced the extension of TALF, beyond the originally contemplated termination date of December 31, 2009, to March 2010 for non-mortgagebacked ABS and legacy commercial mortgage-backed securities (“CMBS”), and June 2010 for newly issued CMBS.115 Through September 30, 2009, the Federal Reserve had facilitated 11 TALF subscriptions for a total of $51.5 billion in TALF loans: 7 subscriptions related to non-mortgage-backed ABS totaling approximately $47.3 billion in TALF loans, and 4 CMBS subscriptions resulting in $4.2 billion in TALF loans. As of September 30, 2009, $42.7 billion of the $51.5 billion in TALF loans settled remains outstanding.116 According to the Federal Reserve “the aggregated amount outstanding can vary from the aggregate amount requested or funded at subscription for reasons including prepayments and principal pay downs.”117 In addition to the expansion of TALF, PPIP, as announced, included two subprograms, the Legacy Loans Program and the Legacy Securities Program. The Legacy Loans Program was intended to utilize equity provided by Treasury and debt guarantees provided by FDIC to facilitate purchases of legacy mortgage loans held by banks. On July 31, 2009, FDIC launched a pilot sale of assets as a proposed funding mechanism for the Legacy Loans Program. No TARP funds were used in the sale.118 The Legacy Securities Program, on the other hand, utilizes equity provided by Treasury and debt potentially provided by Treasury, through TARP, and/or the Federal Reserve, through TALF, to facilitate purchases of legacy mortgage-backed securities (“MBS”) held by various financial institutions. Through the UCSB program, Treasury announced plans to purchase up to $15 billion in securities backed by Small Business Administration (“SBA”)guaranteed loans. quarterly report to congress I october 21, 2009 Term Asset-Backed Securities Loan Facility In November 2008, the Federal Reserve and Treasury announced TALF, under which FRBNY would issue up to $200 billion in loans to make credit available to consumers and small businesses; up to $20 billion in TARP funds would be used to purchase surrendered collateral of TALF loans.119 Subsequently, in February 2009, Treasury and the Federal Reserve announced that they were prepared to expand TALF to up to $1 trillion, which, according to Treasury, would include up to $80 billion of TARP funds.120 TALF has been divided into two parts: • lending program: originates loans to eligible borrowers • asset disposition facility (“TALF LLC”): a special purpose vehicle (“SPV”) used by FRBNY to purchase and manage any collateral surrendered by borrowers from the TALF lending program FRBNY manages both the lending program and TALF LLC. The funding for the lending program comes in the form of non-recourse loans issued by FRBNY. According to Treasury, the funding for TALF LLC will first come from a portion of interest payments made by borrowers from the lending program, then from Treasury’s use of up to $20 billion in TARP funds (should TALF lending exceed $200 billion then Treasury will commit additional TARP funds up to a total of $80 billion) to purchase subordinated debt from TALF LLC, and finally, from FRBNY. Because TALF loans are non-recourse, TALF borrowers may, at any time, walk away from their loans, surrendering their collateral to FRBNY, which would sell it to TALF LLC. That is, upon surrender, the TALF borrower would owe no more on their TALF loan, and TALF LLC would recover only whatever the collateral is worth. As of September 30, 2009, the Federal Reserve had not announced the surrender of any collateral to TALF LLC. Program Developments Subsequent to SIGTARP’s July Quarterly Report, a number of TALF program updates have been announced that, according to the Federal Reserve, promote the flow of credit to businesses and households, and facilitate the financing of some commercial properties.121 The following program-related developments occurred and are discussed in greater detail in this section: • The TALF deadline was extended, based on the type of collateral provided, to March 2010 (for newly issued ABS and legacy CMBS) and June 2010 (for newly issued CMBS). For more information on the mechanics of TALF, see SIGTARP’s April Quarterly Report, page 96 and SIGTARP’s July Quarterly Report, page 73. Non-Recourse Loan: A secured loan whereby the borrower is relieved of the obligation to repay the loan upon the surrender of the collateral. 73 74 special inspector general I troubled asset relief program CUSIP: Unique identifying number assigned to all registered securities (similar to a social security number). • Updates to legacy CMBS eligibility guidance were introduced. • Additional guidance was issued on eligible non-mortgage-backed ABS collateral. • Two changes were made to the procedures for evaluating non-mortgage-backed ABS collateral: a proposed rule related to eligible nationally recognized statistical rating organizations (“NRSROs”) and the implementation of a formal risk assessment for proposed collateral. • An additional collateral monitor that will be responsible for assessing the entire TALF portfolio was announced (Pacific Investment Management Company LLC (“PIMCO”)). • Three listings of accepted and rejected CUSIPs for legacy CMBS have been released. • TALF dealers were re-designated as TALF Agents, and four non-primary dealers were added to the list of eligible agents. • Six additional TALF subscriptions (for a total of 11 since the inception of the program) were conducted by FRBNY. • Program mechanics concerning TALF interaction with PPIP were updated, effectively limiting the amount of TALF debt that PPIP funds are eligible to receive. TALF Deadline Extension On August 17, 2009, the Federal Reserve and Treasury announced the extension of TALF beyond the originally contemplated termination date of December 31, 2009. For TALF loans collateralized by newly issued ABS and legacy CMBS, availability has been extended by FRBNY through March 2010 due to the continuing impairment of the markets. Additionally, TALF loans collateralized by newly issued CMBS will be made by FRBNY through June 2010 in order to provide the market enough time to arrange newly issued CMBS transactions.122 New Eligibility Rules for Commercial Mortgage-Backed Securities As discussed in SIGTARP’s July Quarterly Report, TALF collateral includes newly issued and legacy CMBS. For purposes of TALF, eligible CMBS collateral has been divided into two classes: newly issued (after January 1, 2009), and legacy CMBS (issued before January 1, 2009). According to the Federal Reserve, “the inclusion of CMBS as eligible collateral for TALF loans will help prevent defaults on economically viable commercial properties, increase the capacity of current holders of maturing mortgages to make additional loans, and facilitate the sale of distressed properties.”123 CMBS Criteria as of SIGTARP’s July Quarterly Report In May 2009, the Federal Reserve announced the inclusion of newly issued and legacy CMBS as eligible collateral for TALF loans. The Federal Reserve issued the quarterly report to congress I october 21, 2009 initial eligibility requirements for both newly issued and legacy CMBS; they include the following:124 • Eligible CMBS must evidence an interest in a trust fund consisting of fully funded mortgage loans and not other CMBS, other securities, interest rate swap or cap instruments, or other hedging instruments. • Eligible CMBS must have a credit rating in the highest long-term investmentgrade rating category from at least two TALF CMBS-eligible rating agencies and must not have a credit rating below the highest investment-grade rating category from any TALF CMBS-eligible rating agency. • Eligible CMBS must entitle its holders to payments of principal and interest. • Eligible CMBS must not be issued by an agency or instrumentality of the United States or a Government-sponsored enterprise. • Eligible CMBS must include a mortgage or similar instrument on a fee or leasehold interest in one or more income-generating commercial properties. For more information on the differences in eligibility criteria for newly issued and legacy CMBS, see SIGTARP’s July Quarterly Report, page 76. Updated CMBS Criteria as of September 30, 2009 In August 2009, FRBNY updated the eligibility requirements regarding CMBS. FRBNY stated that it will not fund a TALF loan if, during the risk assessment period, it finds that the potential borrower has a direct or indirect economic interest in the loans supporting the ABS collateral, or products or services relating to such collateral.125 Such a conflict of interest would make the application ineligible for a TALF loan. Additional Guidance on Eligibility of Existing ABS Collateral Subsequent to SIGTARP’s July Quarterly Report, FRBNY issued additional guidance related to specific loan classes for non-mortgage-backed securities. In particular, it will allow borrowers to pledge more than one security as collateral for a single loan in the case of Small Business Administration (“SBA”) 7(a) Pool Certificates (“pool certificates”).126 SBA 7(a) loans, which collateralize the pool certificates, are those made by participating lenders in the 7(a) program in which the Government guarantees a percentage of loans for small businesses that cannot otherwise obtain conventional loans at reasonable terms. In the revised guidance, each certificate must have a similar weighted average life so that together they fall under the same haircut percentage. For example, if two SBA 7(a) pool certificates have weighted average lives of two and four years, respectively, they are eligible to be pledged together with a haircut percentage of 5%. Should the weighted average life of two SBA 7(a) pool certificates be two and Small Business Administration (“SBA”) 7(a) Pool Certificates (“pool certificates”): 7(a) loans grouped together to form one security eligible as collateral against a TALF loan. Weighted Average Life: The average number of years for which each dollar of unpaid principal on a mortgage or loan remains outstanding. 75 76 special inspector general I troubled asset relief program Table 2.19 SBA Haircut percentages Average Life (years) 0-<1 1-<2 5% 5% 2-<3 3-<4 4-<5 5-<6 5% 5% 6% 5% 6-<7 6% Source: FRBNY, “Term Asset-Backed Securities Loan Facility: FAQs,” 9/1/2009, http://www.newyorkfed.org/markets/ talf_faq.html, accessed 9/14/2009. Floorplan: Revolving lines of credit used to finance inventories of items. six years, however, they do not share the same haircut percentage and therefore are not eligible to be pledged together as collateral for a single TALF loan.127 See Table 2.19 for details on the relationship between average life of SBA pool certificates and their respective TALF haircuts. Additionally, the Federal Reserve clarified what sorts of receivables were eligible in auto and non-auto floorplan ABS. Floorplan loans will include revolving lines of credit to finance dealer inventories of certain items. Table 2.20 shows a breakdown of what type of inventories are eligible under auto and non-auto floorplans. Changes to Procedures for Evaluating Non-Mortgage-Backed ABS Collateral Subsequent to SIGTARP’s July Quarterly Report, FRBNY announced two potential changes to its evaluation procedures for securities pledged as TALF collateral.128 The first is a new proposed rule that would provide a process by which FRBNY may determine the eligibility of credit rating agencies and their ratings for use in TALF.129 This new rule would apply to non-mortgage-backed ABS and would likely increase the number of TALF-eligible NRSROs. According to the Federal Reserve, the new rule “is intended to promote competition among NRSROs and ensure appropriate protection against credit risk for the U.S. taxpayer.”130 Table 2.20 fLOORPLAN ELIGIBILiTY Inventory Category Auto Cars X Light Trucks X Motorcycles X Non-Auto X Boats/Sports Vehicles X Appliances/Electronics X Construction/Manufacturing Equipment X Notes: Up to 5% of the receivables of an auto or non-auto ABS may be any type of floorplan receivable. Up to 5% of the receivables of a non-auto ABS may be receivables arising under asset-based lending facilities or loans secured by accounts receivable. Sources: FRBNY, “Term Asset-Backed Securities Loan Facility: FAQs,” 9/1/2009, http://www.newyorkfed.org/markets/ talf_faq.html, accessed 9/1/2009; Federal Reserve, response to SIGTARP draft report, 10/8/2009. quarterly report to congress I october 21, 2009 The second change to FRBNY’s collateral-evaluation procedures is the implementation of a formal risk assessment process for all non-mortgage-backed securities pledged as collateral for a TALF loan beginning with the November subscription date. This practice is similar to the existing risk assessment process for CMBS collateral. The formal process gives FRBNY the right to reject any ABS as collateral based on this risk assessment. According to the Federal Reserve, the change will enhance its “ability to ensure that TALF collateral complies with its existing high standards for credit quality, transparency, and simplicity of structure.”131 Proposed Rule for Evaluating NRSROs The Federal Reserve proposed a new rule governing FRBNY’s acceptance of credit ratings for non-mortgage-backed ABS proposed as TALF collateral. The rule is currently open for public comment until early November 2009. The new rule would require FRBNY to accept only credit ratings issued by a credit rating agency that is registered with the Securities and Exchange Commission (“SEC”) as an NRSRO for issuers of ABS that meet certain experience-based criteria and other requirements. Currently there are only three NRSROs that can rate all proposed TALF collateral, and five that can rate CMBS collateral. According to the Federal Reserve, limiting acceptable ratings to certain NRSROs would provide risk mitigation due to the higher standards such rating agencies must meet — such as “disclosure provisions and conflict of interest prohibitions that are prudent and relevant to the evaluation of credit ratings agencies with respect to TALF.”132 For more information on the NRSRO designation and SEC regulations on NRSROs established by the Credit Rating Agency Reform Act of 2006 (“CRARA”), see Section 3: “The Impact of Credit Rating Agencies on TARP and Beyond” of this report. Under the rule, FRBNY would review and accept a particular NRSRO and its credit ratings on proposed ABS collateral by using certain experience-based criteria. The proposed rule would require that, in order for an NRSRO to be accepted by TALF as a rating agency for securities based on a particular asset category, the NRSRO must have issued ratings on at least 10 transactions in that specific asset category within a three-year period. FRBNY divides the assets underlying the nonmortgage-backed ABS into four categories:133 • • • • Category 1: auto loans, floorplan loans, and equipment loans Category 2: credit card receivables and insurance premium finance loans Category 3: mortgage servicing advance receivables Category 4: student loans TALF’s current evaluation process for CMBS collateral, including its credit rating requirement, will remain unchanged and is outlined in SIGTARP’s July Quarterly Report, page 76. 77 78 special inspector general I troubled asset relief program Risk Assessment FRBNY announced the addition of a formal risk assessment process for nonmortgage-backed ABS pledged as collateral for a TALF loan. The TALF evaluation process for CMBS collateral already includes a risk assessment process that determines whether potential collateral meets certain criteria. For example, the securities must meet FRBNY’s TALF terms and conditions. In addition, the securities must satisfy the following general standards for TALF collateral:134 • Credit Quality: The ABS has the highest credit rating quality with minimal risk of default and low probability of deterioration in credit quality. • Transparency: Sufficient information is available for investors to make informed decisions about the collateral’s credit risk and the due diligence on the collateral completed by the issuer of the ABS. • Simplicity of Structure: Relationships between performance of the collateral of the ABS and the payments of the ABS are clear and uncomplicated. In order for FRBNY and the appropriate collateral monitor to have sufficient time to conduct the risk assessment, issuers of the proposed TALF-eligible ABS must provide to FRBNY all data on the ABS and its underlying collateral that it provided to any NRSRO when the ABS was rated. The information must be provided at least three weeks in advance of the applicable TALF subscription date. The issuer must also provide a written waiver to all NRSROs with which it has shared data regarding the proposed ABS. The written waiver permits the NRSRO to share its view of the securities’ credit quality with FRBNY. FRBNY will communicate the status of the risk assessment process, at a minimum, within two weeks of receipt of the required information.135 Additionally, FRBNY will be performing this risk assessment process on nonmortgage-backed ABS that have previously been accepted as TALF-eligible collateral. Issuers will not be required to provide information on the ABS as is required for newly proposed ABS. According to FRBNY, the results of this risk assessment process will not impact the eligibility of the previously accepted non-mortgage-backed ABS as long as the ABS continue to meet the collateral eligibility requirements.136 Collateral eligibility requirements for TALF collateral are outlined in SIGTARP’s April Quarterly Report, page 96. Role of the Collateral Monitors As discussed in SIGTARP’s July Quarterly Report, the Federal Reserve had retained the services of a collateral monitor, Trepp LLC, to evaluate TALF-eligible CMBS to ensure that specific risks to the Federal Reserve and Treasury are mitigated. On quarterly report to congress I october 21, 2009 August 4, 2009, FRBNY announced the hiring of PIMCO as an additional collateral monitor. According to FRBNY, both collateral monitors “will assist the New York Fed by providing valuation, modeling, analytics and reporting, as well as advising on these matters.”137 According to FRBNY, Trepp LLC will only be responsible for monitoring the CMBS collateral, while PIMCO will focus on the entire TALF portfolio (both mortgage-backed and non-mortgage-backed securities). With input from the collateral monitors on the valuations and analytics, FRBNY will make decisions regarding the eligibility of collateral — subsequently accepting or rejecting it for a TALF loan. After each subscription date, a listing of all CUSIPs for accepted and rejected collateral is then posted by FRBNY on its website.138 According to FRBNY, “the collateral monitors will not establish policies or make decisions for FRBNY, including decisions whether to reject a CMBS as collateral for a TALF loan or exclude loans from mortgage pools.”139 Other Roles of PIMCO in TARP and the CMBS Market As discussed in SIGTARP’s July Quarterly Report, PIMCO has held different roles in several programs. These roles include: • Asset Manager for FRBNY’s Agency MBS Purchase Program (left program as of 8/17/2009) • Asset Manager for FRBNY’s Commercial Paper Funding Facility • TALF Collateral Monitor In addition to being selected as a collateral monitor for the entire TALF portfolio, PIMCO plays a significant role in the MBS marketplace, which includes CMBS. MBS make up 61% of PIMCO’s $161 billion Total Return Fund, or approximately $98 billion of that portfolio.140 PIMCO also manages approximately $983 million of assets in its Mortgage-Backed Securities Fund.141 Under PIMCO’s TALF Collateral Monitor Agreement with FRBNY, certain PIMCO employees and independent contractors engaged by PIMCO are required to follow outlined procedures in order to establish an ethical wall to “protect the confidentiality” of the TALF collateral-related information and “mitigate any conflicts of interest by implementing measures designed to restrict access to such information.”142 The community of PIMCO employees and PIMCO-employed independent contractors engaged by PIMCO and working on the TALF contract are considered “Restricted Persons.” Any employee or contractor who has a For more information on collateral monitoring, see SIGTARP’s July Quarterly Report, page 80. 79 80 special inspector general I troubled asset relief program “substantive role” in developing and providing guidance to FRBNY is considered a “Special Restricted Person.”143 PIMCO’s conflict wall provisions include, but are not limited to, the following:144 • Identification of Restricted Persons: Restricted Persons shall be identified and listed — with all pertinent information — with the compliance department, subject to approval by FRBNY. • Physical Separation of Restricted Persons: Restricted Persons will all work in an environment physically segregated from the general trading, brokerage, and sales activities of PIMCO that may conflict with FRBNY and TALF. This separate location must be secure and limited to Restricted Persons and FRBNY. • Special Restricted Persons: Special Restricted Persons shall be prohibited from trading or valuing restricted ABS on behalf of anyone other than FRBNY. • Personal Trading of Restricted Persons: PIMCO’s code of ethics applies to all employees. Each Restricted Person may not purchase or sell any stock or debt securities of ABS, a bank or BHC, and any financial institution that is a recipient of TARP or any U.S. Government economic stabilization program. • Compliance Training and Monitoring: All Restricted Persons must complete compliance training specifically designed for the TALF program. Additionally, PIMCO will hire staff on a full-time basis to provide ongoing monitoring of its compliance policies and procedures and to assess its compliance program on an annual basis. • Incident Reporting: Employees and Restricted Persons of PIMCO will be required to immediately report any violation or suspected violation of the conflict wall provisions to the compliance department for review. Additionally, PIMCO will report the occurrence of any risk event to FRBNY. Additionally, FRBNY has the right to monitor PIMCO at any time during the term of their agreement. This includes, but is not limited to, inspections of records in PIMCO’s possession, an audit of PIMCO’s performance, and access to PIMCO property. PIMCO shall provide internal reporting to FRBNY of internal audit reviews, Sarbanes-Oxley certifications, and other types of reviews and audits.145 CMBS Acceptances and Rejections Each security potentially pledged as collateral for a TALF loan can be identified by its unique CUSIP number. As of September 30, 2009, FRBNY posts those CMBS CUSIPs accepted as collateral, but only lists those CMBS CUSIPs that have been rejected for reasons relating to the security itself. According to FRBNY, “rejections due to the failure to properly complete a TALF loan request form, the failure to provide a sales confirmation that meets the requirements of the [Master Loan and Security Agreement], borrower ineligibility, or the FRBNY’s assessment of the quarterly report to congress I october 21, 2009 reasonableness of the secondary market transaction price are not published.”146 FRBNY is currently considering whether it will publish accepted and rejected CUSIPs for the non-mortgage-backed ABS.147 As of September 30, 2009, FRBNY had accepted 177 legacy CMBS CUSIPs and rejected 4 legacy CMBS CUSIPs. According to FRBNY, it reserves the right to reject any CMBS as collateral based on the terms and conditions of the TALF program.148 According to FRBNY, the rejection of four CMBS was based on either a failure to meet the terms and conditions of the TALF program or the inability of the CMBS to pass a risk assessment requiring that the valuation of the proposed collateral perform to certain standards using adverse economic assumptions. This risk assessment assists FRBNY in the determination of whether the total amount of money lent to the borrower would exceed the total value of the CMBS should the market deteriorate.149 TALF Agents TALF borrowers must work through an agent dealer in interactions with FRBNY in order to participate in TALF. Originally, only primary dealers were eligible to serve in this agent role. On September 1, 2009, however, FRBNY announced that four non-primary dealers would also be allowed to function as TALF Agents. This is a designation that FRBNY now uses to describe both primary and non-primary dealers that play the role of representing borrowers participating in TALF. FRBNY President William C. Dudley stated that “establishing a wider network of TALF Agents as a distribution mechanism for TALF financing is an important step that should enable a broader range of investors to access the facility, leading up to a further improvement in the securitization market.”150 Under the FRBNY Terms and Conditions, the TALF Agents’ primary role is to act as an agent on behalf of a TALF borrower, which is no different from the role of a primary dealer. The TALF Agents’ duties include collecting information related to the borrower’s loan requests such as the amount, CUSIPs, and related prospectus documentation. The TALF Agent will also submit the requested loan amount with a package containing all information relative to the ABS collateral.151 According to FRBNY, a TALF Agent is required to apply its internal customer identification program and due diligence procedures (“Know Your Customer” program) to each borrower and represent that each borrower is eligible. A TALF Agent is required to provide FRBNY with information sufficient to describe the Agent’s customer risk assessment methodology prior to participation in the program.152 TALF Loan Activity As of September 30, 2009, FRBNY had conducted 11 subscriptions for TALF: 7 related to non-mortgage backed ABS and 4 related to CMBS. The 11 TALF subscriptions have resulted in $51.5 billion in TALF loans made to 160 TALF borrowers, Primary Dealer: Banks and securities broker-dealers that trade in U.S. Government securities with FRBNY for the purpose of carrying out open market operations. Non-Primary Dealer: Banks and securities broker-dealers that are not approved by FRBNY to trade in U.S. Government securities. TALF Agent: Financial institution that is a party to the Master Loan and Security Agreement and from time to time acts as an agent to the borrower. TALF Agents include primary and nonprimary broker-dealers. Primary Dealer List: BNP Paribas Securities Corp Banc of America Securities LLC Barclays Capital Inc. Cantor Fitzgerald & Co. Citigroup Global Markets Inc. Credit Suisse Securities (USA) LLC Daiwa Securities America Inc. Deutsche Bank Securities Inc. Goldman, Sachs & Co. HSBC Securities (USA) Inc. Jefferies & Company, Inc. J.P. Morgan Securities Inc. Mizuho Securities USA Inc. Morgan Stanley & Co. Incorporated Nomura Securities International, Inc. RBC Capital Markets Corporation RBS Securities Inc. UBS Securities LLC TALF-Eligible Non-Primary Dealer List: CastleOak Securities, LP Loop Capital Markets, LLC Wells Fargo Securities, LLC The Williams Capital Group, LP 81 82 special inspector general I troubled asset relief program of which 132 pledged non-mortgage-backed ABS collateral and 57 pledged CMBS collateral.153 Of the $51.5 billion in TALF loans settled, there are currently $42.7 billion of TALF loans outstanding.154 According to the Federal Reserve “the aggregated amount outstanding can vary from the aggregate amount requested or funded at subscription for reasons including prepayments and principal pay downs.”155 As of September 30, 2009, the subscriptions for newly issued CMBS had not resulted in any loan activity. Subscriptions Using Non-Mortgage-Backed Collateral As of September 30, 2009, FRBNY had facilitated seven TALF non-mortgagebacked ABS subscriptions, totaling approximately $47.3 billion in TALF loans. Table 2.21 includes all non-mortgage-backed ABS subscriptions since the inception of TALF. Subscriptions Using Commercial Mortgage-Backed Collateral As of September 30, 2009, FRBNY had facilitated four TALF CMBS subscriptions totaling approximately $4.2 billion in TALF loans. One subscription allowed the posting of newly issued CMBS as collateral, while the other three subscriptions Table 2.21 TALF Loans Originated by ABS Sector (Non-mortgage-backed Collateral) ABS Sector Auto Loans Student Loans Credit Card Receivables ($ billions) March 2009 April 2009 May 2009 June 2009 July 2009 August 2009 September 2009 Total $1.9 $0.8 $2.2 $3.3 $2.8 $0.6 $1.2 $12.7 — — 2.4 0.2 1.0 2.5 0.2 6.2 2.8 0.9 5.5 6.2 1.5 2.6 4.4 23.9 Equipment Loans — — 0.5 0.6 — — 0.1 1.2 Floorplan Loans — — — — — 1.0 — 1.0 Small-Business Loans — — 0.1 0.1 0.1 0.2 0.2 0.6 Servicing Advance Receivables — — — 0.5 0.0 a 0.1 — 0.6 Premium Finance — — — 0.5 — — 0.5 1.1 $4.7 $1.7 $10.6 $11.5 $5.4 $6.9 $6.5 $47.3 Total Notes: Numbers affected by rounding. Data as of 9/30/2009. As of 9/30/2009, $38.6 billion in TALF loans collateralized by non-mortgage-backed ABS were outstanding. The 10/2/2009 subscription was for approximately $2.5 billion in TALF loans. a The July 2009 servicing receivables TALF subscription was for approximately $34 million. For purposes of this table it rounds to $0.0 billion. Sources: FRBNY, “TALF non-CMBS Operations,” no date, http://www.newyorkfed.org/markets/talf_operations.html, accessed 9/24/2009; Federal Reserve, response to SIGTARP draft, 10/8/2009. quarterly report to congress I october 21, 2009 allowed both newly issued and legacy CMBS. The four newly issued CMBS subscriptions have not yet resulted in any TALF loan activity. For a summary of TALF CMBS loans by date and collateral asset category, see Table 2.22. Table 2.22 TALF Loans Originated (CMBS Collateral) Type of Collateral Assets Newly Issued CMBS Legacy CMBS Total ($ billions) May 2009 July 2009 August 2009 September 2009 Total $— $— $— $— $— — 0.7 2.2 1.4 4.2 $— $0.7 $2.2 $1.4 $4.2 Notes: Numbers affected by rounding. Data as of 9/30/2009. Of the $4.2 billion in TALF loans collateralized by CMBS, $4.1 billion were outstanding. Sources: FRBNY, “TALF non-CMBS Operations,” no date, http://www.newyorkfed.org/markets/talf_operations.html, accessed 9/24/2009; Federal Reserve, response to SIGTARP draft, 10/8/2009. Updated Program Mechanics Related to the Public-Private Investment Program As reported in SIGTARP’s July Quarterly Report, following a SIGTARP recommendation, OFS had stated that, “haircuts will be increased so that the combination of Treasury- and TALF-supplied debt will not exceed the total amount of TALF debt that would be available leveraging the PPIF equity alone.”156 On August 18, 2009, FRBNY announced that a Public-Private Investment Fund (“PPIF”) will be eligible to borrow from TALF if it has received Treasury debt financing equal to or less than 50% of the PPIF’s total equity (including private and Treasury-supplied equity). In addition, the PPIF will be required to satisfy all TALF borrower eligibility requirements.157 In order to make sure that the combination of Treasury- and TALF-supplied debt does not exceed the total amount of debt leveraging that could be achieved with only the PPIF equity, TALF haircuts for PPIFs will be adjusted 50% higher than they are for other borrowers.158 83 84 special inspector general I troubled asset relief program Public-Private Investment Program PPIF Managers: • AllianceBernstein, L.P. and its subadvisors Greenfield Partners, LLC, and Rialto Capital Management, LLC* • Angelo, Gordon & Co. and GE Capital Real Estate • BlackRock, Inc.* • Invesco Ltd.* • Marathon Asset Management, L.P. • Oaktree Capital Management, L.P. • RLJ Western Asset Management, L.P. • The TCW Group, Inc.* • Wellington Management Company, LLP* *Have signed final PPIP agreements as of the drafting of this report On March 23, 2009, Treasury, along with FDIC and the Federal Reserve, announced the Public-Private Investment Program (“PPIP”), intended to “repair the balance sheet of financial institutions and ensure that credit is available for households and businesses.”159 PPIP is designed to purchase legacy assets from institutions through various Public-Private Investment Funds (“PPIFs”), which are capitalized with private investment, public investment, and advantageous non-recourse debt financing. As of September 30, 2009, Treasury had committed $30 billion of equity and debt financing to PPIP.160 As of October 6, 2009, five PPIF managers, Invesco Ltd. (“Invesco”); The TCW Group, Inc. (“TCW”); AllianceBernstein, L.P. and its sub-advisors Greenfield Partners, LLC and Rialto Capital Management, LLC (“AllianceBernstein”); BlackRock, Inc. (“BlackRock”); and Wellington Management Company, LLP (“Wellington”), signed final PPIP agreements, each having raised at least $500 million in committed equity capital from private investors. The remaining four PPIFs are still in the capital-raising portion of the process.161According to Treasury, PPIP, as originally envisioned, could generate $500 billion to $1 trillion in legacy-asset purchasing power through three programs:162 Purchasing Power: The total amount of goods or services that can be purchased by a unit of currency. For the purpose of PPIP, purchasing power refers to the combined buying power of the PPIFs’ private capital, Treasury equity, and Treasury debt. • Legacy Loans Program: PPIFs purchase legacy loans with TARP funds, private equity capital, and FDIC-guaranteed debt. • Legacy Securities Program: PPIFs purchase legacy securities using TARP funds and private investment capital combined with TARP-issued debt. • Expanded TALF: The Federal Reserve expanded the eligible asset classes for TALF to include legacy CMBS. Receivership Assets: When an FDICinsured institution fails, FDIC is ordinarily appointed as receiver. In that capacity, it assumes responsibility for efficiently recovering the maximum amount possible from the disposition of the receivership’s assets and the pursuit of the receivership’s claims. Funds collected from the sale of assets and the disposition of valid claims are distributed to the receivership’s creditors in accordance with the priorities set by law. For more information on bankruptcy procedures, see SIGTARP’s July Quarterly Report, “TARP Tutorial: Bankruptcy,” page 97. Legacy Loans Program As announced, the Legacy Loans Program was designed to purchase legacy loans — hard-to-value real estate-related loans — from financial institutions. In the Legacy Loans Program as originally announced, Treasury would form PPIFs with private investors and would match the private investment dollar-for-dollar (i.e., for every $1 invested by the private investor, Treasury would invest $1). FDIC would provide a debt guarantee of either a 4-to-1 or 6-to-1 leverage ratio (i.e., debt-toequity ratio) on the pool of loans.163 The permissible amount of leverage would be predetermined by FDIC after an independent, third-party analysis of the loans. On July 31, 2009, FDIC launched the pilot sale of receivership assets, which did not use any TARP funds.164 Under the proposed funding mechanism, FDIC transferred a portfolio of residential mortgage loans it had seized through bank failures to a newly created limited liability company (the “LLC”) in exchange for a partial ownership interest in the LLC. FDIC then conducted a sale of an equity stake in the LLC.165 85 quarterly report to congress I october 21, 2009 On September 16, 2009, FDIC announced that Residential Credit Solutions, Inc. (“RCS”) was the winning bidder in the pilot sale. RCS paid $64 million for a 50% equity stake in the LLC (FDIC will maintain 50% ownership in the LLC). The LLC then borrowed $728 million from FDIC which received a note.166 FDIC guaranteed the note and plans to sell it at a later date. FDIC plans to analyze the results of this test sale to determine whether this mechanism can be used to remove troubled assets from the balance sheets of operational banks.167 As more information on the Legacy Loans Program becomes available, SIGTARP will provide updates through its future quarterly reports to Congress. Legacy Securities Program According to Treasury, “the goal of the Legacy Securities Program is to restart the market for legacy securities, allowing banks and other financial institutions to free up capital and stimulate the extension of new credit.”168 For the purposes of PPIP, legacy securities are ABS supported by real estate-related loans issued before January 1, 2009, and originally rated AAA (or an equivalent rating) by two or more NRSROs.169 Private investors and Treasury will co-invest in PPIFs to purchase these assets from financial institutions. Furthermore, Treasury will offer debt financing to the PPIF equal to or double the total private equity investment. Treasury, the PPIF manager (which is required to invest at least $20 million of its own money in the PPIF), and the private investors will share in PPIF profits on a pro rata basis. PPIF losses will be shared on a pro rata basis up to each participant’s investment amount. As of September 30, 2009, there were no asset purchases. Legacy Securities Program Updates On July 8, 2009, Treasury announced the selection of nine pre-qualified PPIF managers. Though Treasury did not approve any specific arrangements, it encouraged these PPIF managers to establish partnerships with small- , veteran- , minority- , and women-owned businesses that would provide a variety of services to PPIFs.170 The maximum matching by Treasury is $1.1 billion in equity and $2.2 billion in debt for each PPIF. As illustrated in Table 2.23, if all PPIF managers raise the maximum matched private capital, the program would create approximately $40 billion in purchasing power for legacy securities. As of September 30, 2009, two PPIF managers had signed final PPIP agreements. Subsequently, on October 5, 2009, three other PPIF managers executed their final PPIP agreements. These legal agreements define the terms and scope of the limited partnership, the PPIF’s financing options, investment restrictions, reporting requirements, solvency testing, and compliance rules. All five PPIF managers have each raised a minimum of $500 million in private-sector equity capital. Treasury anticipates that the remaining fund managers will each raise a minimum of $500 million in private-sector capital and sign final agreements in October 2009. Note: A short-term debt security, usually with a maturity of less than five years. For information on the Legacy Securities Program process, refer to SIGTARP’s July Quarterly Report, page 86. Pro Rata: Refers to dividing something among a group according to the proportionate share that each participant holds as a part of the whole. For information on the manager selection process for PPIP, refer to SIGTARP’s July Quarterly Report, page 87. Table 2.23 PPIP Purchasing Power ($ billions) Capital Source Private Investor Equity and PPIF Manager Equity Treasury Matching Equity Treasury Debt Total Individual PPIF Total Program $1.11 $10 1.11 10 2.22 20 $4.44 $40 Notes: Numbers affected by rounding. Funds illustrate the maximum equity matching and debt issuance by Treasury under PPIP. Source: Treasury Press Release, “Treasury Department Announces Additional Initial Closings of Legacy Securities Public-Private Investment Funds,” 10/6/2009, http://www. financialstability.gov/latest/tg_10052009.html, accessed 10/6/2009. 86 special inspector general I troubled asset relief program Derivative: A financial instrument whose value is based on (“derived from”) a different underlying asset, indicator, or financial instrument. Credit Default Swap (“CDS”): A contract where the seller receives a series of payments from the buyer in return for agreeing to make a payment to the buyer when a particular credit event outlined in the contract occurs (for example, if the credit rating on a particular bond or loan is downgraded or goes into default). It is commonly referred to as an insurance-like product where the seller is providing the buyer insurance-like protection against the failure of a bond. The buyer, however, does not need to own the asset covered by the contract, which means it can serve essentially as a “bet” against the underlying bond. Capital Call Notice: A capital call, or draw down, is an investment firm’s legal right to demand a portion of the money promised to it by an investor. Table 2.24 PPIP FUNDS RAISED ($ BILLIONS) Funding Source Private Investor Equity and PPIF Manager Equity Total $3.07 Treasury Matching Equity 3.07 Treasury Debt 6.13 Total $12.27 Notes: Numbers affected by rounding. Data as of 10/6/2009. Source: Treasury Press Release, “Treasury Department Announces Additional Initial Closing of Legacy Securities Public-Private Investment Funds,” 10/6/2009, http://www. financialstability.gov/latest/tg_10052009.html, accessed 10/8/2009. In the final agreements, Treasury added three important provisions to the original term sheets including reporting of trades in derivatives, adopting a luxuryexpense policy, and providing quarterly compliance certifications. First, Treasury, pursuant to SIGTARP’s recommendations, is requiring PPIF managers to disclose (to both Treasury and SIGTARP) any trades in derivative instruments in the manager’s or the manager’s affiliates’ non-PPIF funds where the value is connected to a PPIP-eligible asset held in the PPIF.171 This is in addition to the requirement in the original term sheet that all PPIF managers report any trades in eligible assets in the manager’s PPIF and non-PPIF funds. This is potentially a significant provision because there are many asset types or liability exposures, such as credit default swaps (“CDS”), that could be held in a manager’s non-PPIF fund and the value of which is predictably tied to eligible assets. Second, Treasury is requiring all PPIF managers to adopt a luxury expense policy within 90 days of signing the final agreement and to post the policy on the PPIF managers’ websites.172 Finally, Treasury is requiring fund managers to certify on a quarterly basis that they have materially complied with PPIF Compliance Rules that are part of the final agreement. Despite the addition of these important provisions to the final agreements and despite SIGTARP’s ongoing recommendation, Treasury did not impose strict information barriers, or “walls,” between the PPIF managers making investment decisions on behalf of the PPIF and those employees of the fund manager who manage non-PPIF funds. Although Treasury commits to match capital raised by the PPIF managers ranging from $500 million to $1.1 billion in equity, Treasury does not fund the PPIF immediately upon signing the final agreements with each fund manager.173 Treasury will instead fund the equity capital a minimum of 10 calendar days after receipt of a capital call notice from the PPIF to its private investors and Treasury, requesting the physical transference of capital to the PPIF account. On the tenth day, if Treasury verifies that the private investor money has come into the PPIF, Treasury will disburse its matching equity funds to the PPIF.174 As of October 6, 2009, PPIF managers Invesco, TCW, AllianceBernstein, BlackRock, and Wellington had collectively raised $3.07 billion of private-sector capital commitments, which Treasury matched dollar-for-dollar, for a total program equity capital commitment of $6.14 billion.175 In addition, Treasury announced it will provide debt financing of 100% of the total capital commitments for the PPIFs, bringing the total capitalization of the program to approximately $12.27 billion — of which Treasury is providing 75% ($9.20 billion).176 Table 2.24 provides a breakdown of the available PPIP debt and equity. 86 87 quarterly report to congress I october 21, 2009 Legacy Securities Contractors PricewaterhouseCoopers (“PWC”) and Bank of New York Mellon are assisting in the compliance and operating activities of PPIP, respectively. Treasury has hired PWC to assist in compliance activities. According to Treasury, some of the expected responsibilities of the compliance consultant include:177 • testing the PPIFs’ compliance with certain material aspects of PPIP rules as well as identifying fraud and potentially fraudulent behavior • reviewing allocation decisions and determining if the decisions are in compliance with PPIP policy • reporting on allocation decisions that were not in accordance with the compliance rules • determining the reasonableness of the valuation of the eligible assets in the fund managers’ individual PPIFs and non-PPIF funds • screening for illegal transactions such as system gaming which includes: asset flipping, proprietary front-running of trades for proprietary accounts, asset crossing between PPIFs, and asset round tripping The compliance consultant may also provide Treasury technical advice on matters needing attention after Treasury conducts regular reviews of the PPIFs and their activities.178 In addition, according to Treasury, all of the PPIF managers will utilize Bank of New York Mellon as the administrative agent, custodian, and valuation agent. In its capacity as administrative agent, Bank of New York Mellon collects PPIF documents such as: the loan documents, evidence of custodial and interest reserve accounts, financial statements, reports, and notices of material events (default, litigation, waste, fraud, and abuse). As custodian, it is responsible for providing “agreed-upon periodic reports” to Treasury on the PPIFs, determining and monitoring the deposit amount of the interest reserve account, and verification of applicable tests. As valuation agent, Bank of New York Mellon is also responsible for calculating the market value of eligible assets and temporary investments held by the PPIFs on a daily and monthly basis. System Gaming: Using the rules, policies, and procedures of a system against itself for purposes other than those originally intended by the system designers. Asset Flipping: Buying assets with the intention of reselling those assets in the short term. Front-Running: Entering into a trade while taking advantage of advance knowledge of pending orders from other investors. Asset Crossing: Buying or selling assets from other PPIFs or affiliates, either directly or through third parties. Round Tripping: Buying an asset from an entity and reselling the asset back to the entity or its affiliates. Temporary Investments: For the purposes of PPIP, they are cash, Treasuries, money market mutual funds, and interest rate hedges. 87 88 special inspector general I troubled asset relief program 7(a) Program: SBA loan program guaranteeing a percentage of loans for small businesses that cannot otherwise obtain conventional loans at reasonable terms. 504 Community Development Loan Program: SBA program combining Government-guaranteed loans with private-sector mortgage loans to provide loans of up to $10 million for community development. Small Business Administration Loan Support (formerly Unlocking Credit for Small Businesses) On March 16, 2009, Treasury announced the Unlocking Credit for Small Businesses (“UCSB”) program to encourage banks to extend more credit to small businesses.179 Under the UCSB program, Treasury stated that it would purchase up to $15 billion in securities backed by pools of Small Business Administration (“SBA”) loans from two SBA participating programs: the 7(a) Program and the 504 Community Development Loan Program. According to Treasury, the UCSB program is designed to provide banks the liquidity necessary to start writing new small-business loans again.180 On September 24, 2009, during Congressional testimony, Assistant Treasury Secretary for Financial Stability, Herbert Allison, noted that Treasury would soon announce further program details.181 As of September 30, 2009, no TARP funds had been expended under this program. 89 quarterly report to congress I october 21, 2009 Automotive Industry Support Programs During the current financial crisis, Treasury, through TARP, has launched three automotive programs: the Automotive Industry Financing Program (“AIFP”), the Auto Supplier Support Program (“ASSP”), and the Auto Warranty Commitment Program (“AWCP”). According to Treasury, these programs were established “to prevent a significant disruption of the American automotive industry that poses systemic risk to financial market stability and will have a negative effect on the real economy of the United States.”182 No new TARP funds have been committed to the automotive sector this quarter. As of September 30, 2009, Treasury’s commitments through these programs totaled $81.1 billion and were distributed to GM, Chrysler, GMAC, and Chrysler Financial. Treasury’s investments also provided some of the financing for GM and Chrysler during their recent restructuring periods. Both firms recently emerged from bankruptcy — Chrysler on June 10, 2009, and GM on July 10, 2009. According to a Congressional Oversight Panel (“COP”) report, then Senior Advisor on Auto Issues at Treasury, Ron Bloom, stated that “it was possible, but unlikely that taxpayers would recover all of the money they had invested in Chrysler and General Motors.” Mr. Bloom further stated that there is a “reasonable probability” that the money given to the post-bankruptcy entities (“New Chrysler” and “New GM”) would be recovered, but that there would be “much lower recoveries” for the “initial loans” provided to GM and Chrysler.183 According to the Auto Task Force, “initial loans” refer to pre-bankruptcy loans of $4 billion to Chrysler and $19.4 billion to GM. Treasury investments in the three TARP automotive industry support programs and any repayments of principal are summarized in Table 2.26 on the following page, categorized by the timing of the investment in relation to the firm’s progress through the bankruptcy process. Automotive Industry Financing Program As of September 30, 2009, Treasury had invested $76.9 billion through the Automotive Industry Financing Program (“AIFP”) to support the automotive manufacturing companies and their financing arms to “avoid a disorderly bankruptcy of one or more auto companies.”184 As of September 30, 2009, Treasury had received approximately $465 million in dividends and approximately $206 million in interest payments on these investments, and Chrysler Financial had paid back $1.5 billion in AIFP funds. Treasury’s AIFP investments, as well as the interest and dividends earned on the investments, are listed in Table 2.25. Auto Supplier Support Program On March 19, 2009, Treasury announced the $5 billion Auto Supplier Support Program (“ASSP”) in an effort to “help stabilize the auto supply base and restore credit flows in a critical sector of the American economy.”185 Because of the For a timeline of the Chrysler and GM bankruptcy proceedings, see SIGTARP’s July Quarterly Report, pages 106 and 108, respectively. Table 2.25 AIFP Status of FUnds, as of 9/30/2009 ($ Millions) Financial Institution GMa TARP Commitment Total Interest and Dividends Received $49,500 $178 Chryslera 12,542 55 GMAC 13,384 431 Chrysler Financial 1,500b 7 $76,926 $671 Total Notes: Numbers affected by rounding. a Post-bankruptcy, interest accrues in the note for GM and Chrysler. b Has been repaid. Sources: Treasury, Transactions Report, 10/2/2009; Treasury, response to SIGTARP draft report, 10/8/2009. 90 special inspector general I troubled asset relief program Table 2.26 TARP AUTOMOTIVE PROGRAMS COMMITMENTS AND REPAYMENTS, AS OF 9/30/2009 ($ BILLIONS) Chrysler Chrysler Financial GMAC GM Total Pre-Bankruptcy AIFP $4.0a $19.4 ASSP 1.0c 2.5d $1.5b 3.5 AWCPe 0.3 0.4 0.6 Subtotal $5.3 $22.3 AIFP $1.9f $30.1 $32.0 Subtotal $1.9 $30.1 $32.0 $1.5 $13.4 $13.4 $38.3 $42.4 In-Bankruptcy (DIP Financing) Post-Bankruptcy (Working Capital) AIFP $6.6g $6.6 Subtotal $6.6 $6.6 Subtotals by Program: AIFP $76.9 ASSP 3.5 AWCPe 0.6 Total Commitments Principal Repaid to Treasury Net Commitments $13.8 $52.4 $1.5 $13.4 ($0.3) ($0.4) ($1.5) $ — $81.1 ($2.1) $13.5 $52.0 $ — $13.4 $79.0 Notes: Numbers affected by rounding. a According to Treasury, the 4/29/2009 $500 million expansion of the 1/2/2009 $4 billion loan was de-obligated before being funded. b Has been repaid. c Announced as $1.5 billion, but was reduced to $1 billion on 7/8/2009. d Announced as $3.5 billion, but was reduced to $2.5 billion on 7/8/2009. e AWCP has been repaid in full and was terminated in July 2009. f According to Treasury, $1.9 billion of the original $3.8 billion of announced funding was de-obligated before being funded. g Approximately $4.7 billion of this commitment was provided in working capital; approximately $2 billion was used to pay senior secured lenders. Sources: Treasury, Transactions Report, 10/2/2009; Treasury, responses to SIGTARP draft reports, 7/13/2009 and 10/8/2009; Treasury Press Release, “Ron Bloom, Senior Advisor at the U.S. Treasury Department Written Testimony House Judiciary Commercial and Administrative Law Subcommittee ‘Ramifications of Auto Industry Bankruptcies, Part II,’” 7/21/2009, http://treas.gov/press/releases/ tg222.htm, accessed 9/9/2009. current credit crisis, suppliers had not been able to borrow from banks using their receivables as collateral. ASSP allowed auto parts suppliers to access Governmentbacked protection for money owed to them for the products they had shipped to manufacturers. The suppliers sold their receivables into the program at a discount, providing heavily relied upon operating capital for the suppliers. Treasury intended for this program to provide confidence to suppliers so they would continue to ship parts, pay employees, and continue operations.186 The program was available to all American auto companies; Chrysler and GM were the only two that decided to take advantage of the program.187 Each company created an SPV to hold the funding: Chrysler Receivable LLC and GM Supplier Receivable LLC.188 quarterly report to congress I october 21, 2009 Table 2.27 ASSP Status of FUnds, as of 9/30/2009 Financial Institution GM Supplier Receivable LLC Chrysler Receivable LLC Total ($ millions) TARP Commitments Principal Reductionsa Principal Outstanding Total Interest Received $3,500 ($1,000) $2,500 $3.6 1,500 (500) 1,000 2.3 $5,000 ($1,500) $3,500 $5.9 Notes: Numbers affected by rounding. a At the request of Chrysler and GM, on July 8, 2009, the original commitments were reduced to $1.0 billion and $2.5 billion, respectively. Sources: Treasury, Transactions Report, 10/2/2009; Treasury, response to SIGTARP data call, 10/8/2009. Under the original loan agreements for each SPV, the Treasury commitments could be decreased if the outstanding amounts did not exceed the commitments made on June 30, 2009. On July 8, 2009, the original commitments were reduced to $1.0 billion for Chrysler Receivable LLC and $2.5 billion for GM Supplier Receivable LLC.189 After emerging from bankruptcy, the new, non-bankrupt Chrysler and GM assumed the debts of the pre-bankruptcy SPVs.190 ASSP is continuing to operate and is scheduled to terminate in April 2010; New GM and New Chrysler can add receivables at their discretion. Table 2.27 summarizes the status of the ASSP investments. Auto Warranty Commitment Program On March 30, 2009, Treasury announced the creation of the Auto Warranty Commitment Program (“AWCP”), under AIFP, as a means to provide assurance to vehicle buyers that the warranties on any purchases made during the restructuring of Chrysler and GM would be guaranteed by the Government.191 Treasury made $641 million available to Chrysler and GM through two SPVs — Chrysler Warranty SPV LLC and GM Warranty LLC — to backstop warranties on new car sales. Both Chrysler and GM were able to honor their warranties during their restructuring periods and, according to Treasury, all $641 million in principal has been repaid with $5.5 million in interest.192 In July 2009, the AWCP was terminated. Automotive Companies Today As discussed in SIGTARP’s July Quarterly Report, Chrysler and GM went through bankruptcies in which each sold substantially all of their assets into newly created companies — New Chrysler and New GM. The corporate structure and ownership of these new companies changed dramatically, with Treasury now owning an 8% pro forma equity stake in New Chrysler and a 61% equity stake in New GM.193 Treasury’s investments in Chrysler and GM were initially debt obligations for the companies; as part of the bankruptcy proceedings, these investments were Pro Forma: In finance, refers to the presentation of hypothetical financial information assuming that certain assumptions will happen. For example, Table 2.28 sets forth the ownership interests in New Chrysler based on the assumption that Fiat will meet its performance goals and obtain an additional 15% of equity from the other equity holders. If the new equity stakes were not reported pro forma, the equity interest of the other equity participants would be higher to account for Fiat’s additional 15%. 91 92 special inspector general I troubled asset relief program restructured as common equity, preferred equity, and new debt. See the following discussion for details on the post-bankruptcy composition of Treasury’s investments in New Chrysler and New GM. Debtor-in-Possession (“DIP”): A company which is operating under Chapter 11 bankruptcy protection, which still technically owns its assets but is operating them to maximize the benefit to its creditors. Reorganization: Agreements between a company, its creditors, and the courts that allow the company to emerge from bankruptcy with an altered debt structure. Chrysler Treasury has committed a total of $13.8 billion in financing to Chrysler, including $1.3 billion in funding for ASSP and AWCP. The $12.5 billion committed directly to Chrysler was contributed in three stages: $4 billion was provided before bankruptcy, $1.9 billion was provided as debtor-in-possession (“DIP”) financing during bankruptcy, and $6.6 billion was provided as working capital after bankruptcy. Under the terms of the bankruptcy reorganization, Treasury’s investment was restructured into debt assumed and common equity. Of Treasury’s $12.5 billion commitment to Chrysler, $2.0 billion has not been drawn down and the remainder has been restructured in the following manner:194 • an 8% pro forma common equity interest in New Chrysler • $5.1 billion in debt owed by New Chrysler The owners of New Chrysler include Fiat, the United Auto Workers (“UAW”), Treasury, and the Canadian Government, as described in Table 2.28.195 Table 2.28 New Chrysler Stakeholder Equity Stake Fiat 20% 15% additional equity based on performancea UAW (VEBAb) 55% Treasury 8% Canadian Government 2% Notes: Numbers affected by rounding. Data as of 9/30/2009. The listed ownership percentages are based on the assumption that Fiat will achieve all three performance metrics. a Fiat can earn this 15% equity by achieving certain performance metrics. It would receive 5% for meeting each of three performance goals: produce a vehicle in a U.S. based Chrysler factory that performs 40 mpg or better; provide Chrysler with a distribution network in numerous foreign jurisdictions; and manufacture state-of-the-art, next generation engines at a U.S. Chrysler facility. b Voluntary Employee Beneficiary Association (“VEBA”). Sources: Treasury, “Obama Administration Auto Restructuring Initiative: Chrysler-Fiat Alliance,” 4/30/2009, www.financialstability.gov/docs/AIFP/Chrysler-restructuring-factsheet_043009. pdf, accessed 6/9/2009; Treasury, responses to SIGTARP draft reports, 7/9/2009 and 7/13/2009. Chrysler Financial In January 2009, Treasury loaned $1.5 billion to a bankruptcy-remote SPV to support Chrysler Financial retail loan originations. In July 2009, Chrysler Financial repaid the entire loan and $7.4 million in interest to Treasury.196 Chrysler Financial is no longer originating loans.197 GM Treasury has committed $52.4 billion of assistance to GM since December 2008, including $2.9 billion in commitments for ASSP and AWCP. Of the $49.5 billion committed directly to GM, $19.4 billion was provided pre-bankruptcy, and $30.1 billion was provided during bankruptcy. Unlike Chrysler, where some of Treasury’s investment has not been converted into New Chrysler equity and debt, all of Treasury’s investment in GM was either converted into New GM common stock, preferred stock, or debt assumed by New GM. Treasury’s $49.5 billion investment in GM is now a 61% common equity stake in New GM, $2.1 billion in preferred stock in New GM, and $7.1 billion of debt assumed by New GM (of which $360 million has been repaid as part of the wind-down of the warranty program).198 Under the terms of the bankruptcy reorganization, UAW, bondholders, Treasury, and the Governments of Canada and Ontario are the owners of New GM as listed in Table 2.29.199 quarterly report to congress I october 21, 2009 Table 2.29 New GM ($ Billions) Equity Stake Debt Assumed by New GM Preferred Stock in New GM UAW (VEBA)a 17.5% Warrants to purchase 2.5% $2.5 $6.5 Bondholders 10% Warrants to purchase 15% — — Treasury 61% $7.1 $2.1 Governments of Canada and Ontario 12% $1.3 $1.7 Stakeholder Notes: Numbers affected by rounding. Data as of 9/30/2009. Treasury did not publish pro forma data on equity ownership that would capture the dilutive effect of the exercise of warrants. a Voluntary Employee Beneficiary Association (“VEBA”). Sources: Treasury, “Obama Administration Auto Restructuring Initiative: General Motors Restructuring,” 6/1/2009, www.financialstability. gov/latest/05312009_gm-factsheet.html, accessed 6/10/2009; Treasury, responses to SIGTARP draft reports, 7/9/2009 and 7/13/2009. GMAC As reported in SIGTARP’s July Quarterly Report, Treasury invested $13.4 billion in GMAC and owns a 35.4% common equity stake. As of September 30, 2009, there have not been any updates to Treasury’s investment in GMAC. Treasury’s outstanding investment amount was $13.4 billion and it had received $431 million in dividend payments from GMAC. For more information on Treasury’s GMAC investment, see SIGTARP’s July Quarterly Report, page 112. 93 94 special inspector general I troubled asset relief program Homeowner Support Program Making Home Affordable Program Private-Label Mortgages: Loans that are not owned or guaranteed by Fannie Mae, Freddie Mac, or another Federal agency. Government-Sponsored Enterprises (“GSEs”): Private corporations created by the Government to reduce borrowing costs. They are chartered by the U.S. Government but are not considered to be direct obligations. For more information regarding HAMP eligibility, modifications, and incentive payments, see SIGTARP’s July Quarterly Report, page 114. The Making Home Affordable (“MHA”) Program was introduced by the Administration on February 18, 2009, and was intended to assist homeowners who are struggling to make their monthly mortgage payments. MHA comprises three major initiatives: a loan modification program, a loan refinancing program, and additional support to lower mortgage interest rates. Only the loan modification program, known as the Home Affordable Modification Program (“HAMP”), currently involves TARP funds.200 According to Treasury, HAMP is a $75 billion program that will lower monthly mortgage payments for homeowners by providing loan modification incentive payments to the servicers and loan holders (lenders or investors — referred to as investors in this section), and by protecting against further loss of collateral value.201 Of the $75 billion reserved for HAMP, $50 billion will be from TARP and will be used to modify private-label mortgages. Of the $50 billion for private-label mortgage modifications, $10 billion will be used to provide recently announced incentives through the Home Price Decline Protection (“HPDP”) program, which is intended to protect investors from potential price declines on modified mortgage properties.202 Treasury estimates that $4.6 billion of the $50 billion will be used for the Short Sale / Deeds-In-Lieu of Foreclosure (“SS/DIL”) program. This program, previously announced but not yet launched, will be discussed later in this section.203 The additional $25 billion in HAMP funding is provided under the Housing and Economic Recovery Act of 2008 (“HERA”) and will be used to modify mortgages that are owned or guaranteed by Government-sponsored enterprises (“GSEs”), particularly Fannie Mae and Freddie Mac.204 Status of Funds As of September 30, 2009, Treasury had signed agreements with 63 loan servicers allocating up to $27.1 billion under HAMP.205 Funds are not actually spent at the time they are allocated but only upon successful completion of certain loan modification milestones. Of the $27.1 billion that had been allocated, $950,000 had been spent on actual modifications as of September 30, 2009.206 To date, the largest allocation of incentive payments has been made to Countrywide Home Loans Servicing, LP, which will receive up to $4.5 billion in TARP funds. The average allocation to each servicer through HAMP is $429.6 million.207 Table 2.30 provides a detailed list of allocations made under HAMP as of September 30, 2009. quarterly report to congress I october 21, 2009 Table 2.30 home affordable modification program funding ALLOCATIONS, AS of 9/30/2009 Institution Ultimate Parent Company Adjusted Funding Capa Countrywide Home Loans Servicing LP Bank of America Corporation $ 4,465,420,000 GMAC Mortgage, Inc. GMAC 3,554,890,000 J.P. Morgan Chase Bank, NA JPMorgan Chase & Co. 2,684,870,000 Wells Fargo Bank, NA Wells Fargo & Company 2,475,080,000 CitiMortgage, Inc. Citigroup, Inc. 2,089,600,000 Wachovia Mortgage, FSB Wells Fargo & Company 1,357,890,000 American Home Mortgage Servicing, Inc N/A 1,218,820,000 Litton Loan Servicing LP 1,087,950,000 Goldman Sachs Group, Inc. Bank of America, N.A. Bank of America Corporation 967,120,000 Saxon Mortgage Services, Inc. Morgan Stanley 886,420,000 Select Portfolio Servicing Credit Suisse Group AG 782,500,000 EMC Mortgage Corporation JPMorgan Chase & Co. 707,370,000 OneWest Bank OneWest Bank Group, LLC 668,440,000 Ocwen Financial Corporation, Inc. N/A 655,960,000 National City Bank PNC Financial Services Group, Inc. 610,150,000 HomEq Servicing Barclays Bank PLC 552,810,000 Home Loan Services, Inc. Bank of America Corporation 494,030,000 Aurora Loan Services, LLC Aurora Bank, FSB 447,690,000 Nationstar Mortgage LLC N/A 251,700,000 Carrington Mortgage Services, LLC N/A 222,010,000 Green Tree Servicing LLC N/A 221,790,000 Wilshire Credit Corporation Bank of America Corporation 203,460,000 U.S. Bank National Association U.S. Bancorp 114,220,000 Bayview Loan Servicing, LLC Bayview Financial Holdings, L.P. 68,110,000 Wachovia Bank, N.A. Wells Fargo & Company 47,320,000 RG Mortgage Corporation R&G Financial Corporation 45,700,000 MorEquity, Inc. American International Group, Inc. 42,010,000 CCO Mortgage The Royal Bank of Scotland, PLC 29,590,000 Franklin Credit Management Corporation Franklin Credit Holding Corp. 27,510,000 PNC Bank, National Association PNC Financial Services Group, Inc. 18,230,000 17,540,000 Residential Credit Solutions Residential Credit Holdings, LLC Vantium Capital, Inc. N/A 6,000,000 Mortgage Center, LLC N/A 5,990,000 PennyMac Loan Services, LLC N/A 5,010,000 First Bank First Banks Inc. 4,930,000 AMS Servicing, LLC N/A 4,390,000 CUC Mortgage Corporation Credit Union Association of New York, Inc. 4,350,000 Servis One, Inc. N/A 4,220,000 Continued on next page. 95 96 special inspector general I troubled asset relief program home affordable modification program funding ALLOCATIONS, AS of 9/30/2009 (Continued) Adjusted Funding Capa Institution Ultimate Parent Company ShoreBank N/A 2,300,000 ORNL Federal Credit Union N/A 2,070,000 Central Florida Educators Federal Credit N/A Union 1,250,000 Purdue Employees Federal Credit Union N/A 1,030,000 Wescom Central Credit Union N/A 870,000 IBM Southeast Employees’ Federal Credit N/A Union 860,000 First Federal Savings and Loan N/A 770,000 Lake City Bank Lakeland Financial Corp. 600,000 RoundPoint Mortgage Servicing Corporation N/A 570,000 Horicon Bank Sword Financial Corporation 560,000 SEFCU N/A 440,000 Oakland Municipal Credit Union N/A 430,000 Bay Federal Credit Union N/A 410,000 Schools Financial Credit Union N/A 390,000 Mission Federal Credit Union N/A 370,000 Stanford Federal Credit Union Cardtronics, Inc. 300,000 Metropolitan National Bank Rogers Bancshares, Inc. 280,000 Lake National Bank N/A 250,000 Allstate Mortgage Loans & Investments, N/A Inc. 250,000 Yadkin Valley Bank Yadkin Valley Financial Corp. 240,000 Glass City Federal Credit Union N/A 230,000 Farmers State Bank Community Independent Bancorp, Inc. 80,000 Technology Credit Union N/A 70,000 Central Jersey Federal Credit Union N/A 30,000 Citizens First Wholesale Mortgage Company N/A 20,000 Chase Home Finance, LLCb JPMorgan Chase & Co. Total — $27,065,760,000 Notes: Numbers affected by rounding. a Funding cap amounts represent the funding allocated to each institution. Funds are not spent until successful completion of certain loan modifications milestones. b Chase Home Finance, LLC was allocated $3.5 billion on 4/13/2009. On 7/31/2009, the agreement was terminated and superseded by new agreements with J.P. Morgan Chase Bank, NA and EMC Mortgage Corporation. Sources: Treasury, Transactions Report, 10/2/2009; Factiva website, http://fce.factiva.com/pcs/default.aspx, accessed 6/24/2009; Capital IQ, Inc. (a division of Standard & Poor’s), www.capitaliq.com, accessed 7/6/2009; “Saxon, Who We Are,” https://www.saxononline.com/common/about/, accessed 10/6/2009; “Litton Loan Servicing LP–Overview,” http://www.fins.com/ Finance/Recruiter/companies/1789/Litton-Loan-Servicing-LP, accessed 10/19/2009. quarterly report to congress I october 21, 2009 Home Price Decline Protection (“HPDP”) Program On July 31, 2009, Treasury released a Supplemental Directive for HAMP outlining its Home Price Decline Protection (“HPDP”) program. The stated goal of the program is to “encourage additional investor participation and HAMP modifications in areas with recent price declines by helping to offset any incremental collateral loss on modifications that do not succeed.”208 The program is designed to provide incentives to mortgage-backed securities (“MBS”) investors to participate in HAMP. Through their ownership of MBS, these investors have an interest in the performance of the mortgages underlying the MBS. According to Treasury, HPDP is designed to address the fears of investors that may withhold their consent to a loan modification due to the potential future decrease in the value of the homes that secure the mortgages. In such a circumstance, the investor would suffer greater losses than it would under an immediate foreclosure. By providing incentive payments to mitigate that potential loss for a 24-month period, Treasury hopes to encourage more lenders and investors to modify loans. Under HPDP, Treasury has published a standard formula, based on the unpaid principal balance (“UPB”) of the mortgage, the projected decline in area home prices, and the loan-to-value (“LTV”) ratio, that will determine the size of the incentive payment. The projected home price decline is expressed in percentage terms and is based on recent trends in local home prices. The projection is determined by the percentage change in surrounding area home prices during the six months prior to the start of the HAMP modification.209 The Home Price Index Table is available on the Federal Housing Finance Agency website.210 The HPDP incentive payments will accrue monthly over a 24-month period and are paid out annually on the first and second anniversary of the initial HAMP trial period mortgage payment. Accruals are discontinued if the borrower loses good standing under HAMP by missing three mortgage payments (three mortgage payments are considered due and unpaid on the last day of the third month) or if the mortgage loan is paid in full. If mortgage payments are discontinued, investors will be entitled to receive all previously accrued incentive payments.211 Mortgage-Backed Securities (“MBS”): A pool of mortgages bundled together by a financial institution and sold as securities — a type of asset-backed security. Unpaid Principal Balance (“UPB”): Amount of a loan that is unpaid. This does not include additional charges. Loan-to-Value (“LTV”) Ratio: In real estate lending, the outstanding principal amount of the loan divided by the appraised value of the property. HAMP Trial Period: A 90-day trial period of reduced mortgage payments for the borrower. If all payments are successful, then the mortgage modification will be accepted into the MHA program and HAMP incentive payments will begin. For more information on HAMP trial modification incentives, see SIGTARP’s April Quarterly Report, page 113. 97 98 special inspector general I troubled asset relief program hpdp Program Example Players: Mr. Smith — homeowner, mortgage loan borrower Servicer — the firm that “services” Mr. Smith’s mortgage — collecting payments and generating reports. The servicer receives a fee for its services but does not have an ownership interest in Mr. Smith’s mortgage. Mr. Jones — the investor who holds the MBS, a part of which is based on Mr. Smith’s mortgage Step 1: Servicer Signs Up for HAMP and HPDP. Mr. Smith owns a singlefamily home in Santa Rosa, California, that he purchased for $250,000 and he has fallen behind on his payments. The UPB on the loan is currently $230,000. Mr. Smith approaches his loan servicer and asks if he can get a loan modification through HAMP. The servicer is at first reluctant, noting that the home’s current market value has declined to $215,000 and is thus now less than the UPB. After reviewing the terms of the program, the servicer decides to enter the loan into a HAMP modification, which will automatically apply HPDP incentives based on market conditions. There is no servicer incentive payment under HPDP; however, the servicer stands to receive an incentive payment through HAMP. Step 2: Servicer Rewrites the Mortgage. By enrolling in HPDP, the servicer is protecting the value of the MBS that funded the loan. The beneficiary of this protection is Mr. Jones, who invested in the MBS. As part of the loan modification, the servicer rewrites the mortgage downward by 6.5% from $230,000 to $215,000, the current market value of the home. HPDP incentives for the investor are partially “insuring” the mortgage collateral (the home) against future loss in value. Step 3: Servicer Calculates Incentive Payment. Suppose that, in the six months prior to the loan modification date, the Home Price Index for the Santa Rosa area decreased by 14%. This rate, calculated at the start of the loan modification, will be effective for the entire 24-month period of the HPDP incentive payments.212 quarterly report to congress I october 21, 2009 Under Treasury’s standard HPDP formula, Mr. Jones can collect $500 for each 1% drop in the value of the average home price in Santa Rosa. The HPDP payment is determined on a sliding scale based on certain characteristics of the loan adjustment. In this case, Mr. Jones would be entitled to collect the maximum amount for a 14% price decline — up to $7,000. Notice that the HPDP payment is not related to the lost value of Mr. Smith’s specific house, but rather is based on the average area home price decline for the six months prior to HAMP modification. These payments will not be affected if the home price subsequently increased during the modification period. Step 4: Servicer Collects HPDP Incentive Payment. Suppose Mr. Smith’s first HAMP trial period payment on his reduced mortgage is due October 2009 and that the total potential HPDP incentive award will accrue at $292 per month for 24 months totaling $7,000. If Mr. Smith loses good standing in December 2010, 14 months after the first trial payment, then Mr. Jones is eligible to receive 14 months worth of accrued incentive payments. In this case, he receives payment for 14 out of a possible 24 months, which is $4,083 of a possible $7,000 ((14/24)*$7,000). Payment for the first 12 months of good standing will be paid to Mr. Jones on October 1, 2010 (the first anniversary of the due date of the first mortgage trial period payment), and the additional $583 for months 13 and 14 of good standing will be paid to Mr. Jones on October 1, 2011 (the second anniversary of the due date of the first mortgage trial period payment). Table 2.31 shows how his incentive payment would be calculated. Table 2.31 HPDP payment example Potential Incentive Payment to Mr. Jones $7,000 Mr. Smith remains in Good Standing during first 12 months $3,500 Paid 10/1/2010 Mr. Smith loses Good Standing after 2 more months Total Payment Received by Mr. Jones $583 Paid 10/1/2011 $4,083 Source: Treasury, “Supplemental Directive 09-04: Home Affordable Modification Program – Home Price Decline Protection Incentives,” 7/31/2009, http://www.financialstability.gov/docs/press/SupplementalDirective7-31-09.pdf, accessed 9/1/2009. 99 100 special inspector general I troubled asset relief program Eligibility Each of the following criteria must be met in order for a loan to be eligible for HPDP incentive payments:213 • Trial modification under HAMP must begin on or after September 1, 2009.214 • Servicer must execute a Servicer Participation Agreement. • Borrower must successfully complete the trial period and execute a HAMP modification agreement. • HAMP modification must reduce the borrower’s monthly mortgage payment by at least 6%. Short-Sale / Deeds-In-Lieu of Foreclosure Program In May 2009, Treasury announced the outline of a program designed to provide alternatives to foreclosure entitled the Short-Sale / Deeds-In-Lieu of Foreclosure (“SS/DIL”) program. These alternatives to foreclosure are intended to provide a more orderly resolution for troubled properties — helping the borrowers, the investors, and the communities. A short sale is a sale that is conducted jointly by a borrower facing foreclosure and the holder of the mortgage. The goal is to sell the home before a foreclosure is finalized using the proceeds to satisfy a portion of the loan, with the agreement that the owner of the mortgage will forgive the balance. The borrower will still lose his home, and the mortgage holder will lose the difference between the outstanding mortgage amount and the short sale price, but a short sale can provide the following benefits over a traditional foreclosure: • A potentially better sales price on the house may be achieved because it is occupied and sold in an orderly fashion and is not an abandoned home sold at a distressed price in deteriorating condition. • The borrower has control over the timing of a move. • The borrower has the opportunity to negotiate better terms including lessened impact on his credit rating. • Investors can avoid the risks and costs of a lengthy foreclosure. A deed-in-lieu of foreclosure (“DIL”) is the method by which borrowers voluntarily give their deed to the bank rather than subject the bank to the formal legal process of foreclosure. The bank still has to dispose of the property, but many of the advantages of a short sale still accrue, such as the ability to control the timing and nature of the transaction. Both foreclosure alternatives also benefit the communities, as they lessen the potential for vacant and vandalized homes and reduce the number of discounted sales that can drive down all home equity values in the neighborhood. quarterly report to congress I october 21, 2009 According to Treasury’s program guidance, the SS/DIL program is expected to include a series of incentive payments for program participants. For each SS or DIL that is successfully completed, servicers and borrowers may each receive up to $1,000 and $1,500, respectively. In addition, for every three dollars an investor pays to a junior lender to get its assent to the transaction, Treasury will reimburse the investor for one dollar up to a maximum payment reimbursement of $1,000.215 Improving MHA Effectiveness and Efficiency Frustrated with the pace of program implementation, representatives of the Administration met with executives from MHA servicers on July 28, 2009, to discuss ways to improve the effectiveness and efficiency of the MHA program. They agreed on three steps to improve performance and reach the Administration’s established goal of initiating 500,000 trial modifications by November 1, 2009.216 According to Treasury, this milestone was reached on October 8, 2009.217 The first step agreed upon is to publicly report servicer-specific performance metrics on a monthly basis. These metrics include:218 • • • • the number of trial modification offers each servicer has extended the number of trial plans that are underway the number of final modifications the long-term success of those modifications The Administration and the servicers agreed to work together to develop better metrics that measure processing performance. These metrics may include:219 • • • • average borrower wait time for inbound borrower inquiries completeness and accuracy of information provided to applicants document handling response time for completed applications The final part of the plan requires Freddie Mac, the HAMP compliance agent, to develop a “second look” process. As part of this process, Freddie Mac will audit a sample of declined applications. For individual errors found during the audit, Freddie Mac will coordinate with the respective servicers. When errors prove more systemic, Freddie Mac will address general operational weaknesses. The stated goal of this process is to minimize the likelihood that applications are overlooked or inadvertently denied.220 For more information regarding the Servicer Performance Report, see the “Servicer Performance Report” discussion later in this section. 101 102 special inspector general I troubled asset relief program HAMP Compliance The compliance department within OFS has the primary responsibility to oversee and monitor Freddie Mac, the compliance agent for HAMP. OFS observed that Freddie Mac, since the inception of the program, was having difficulty meeting the deadlines of its planned audits and delivering key compliance reports as expected. More specifically, in late August, OFS assessed the first Servicer Performance Reviews that were completed by Freddie Mac. Based on this review, OFS had several specific areas of concern, including: unqualified staff to perform audits; trouble using extensions from statistical sampling to reach general results; inability to take a “risk-based” approach; inconsistent and incomplete audit workpapers; difficulty adapting to an “ever-evolving” HAMP; and too much reliance on contractors to perform the audits. Due to these concerns, OFS met with Freddie Mac senior officials to review these problem areas, to suggest several remediation steps, and to inform Freddie Mac that a new OFS compliance officer would be placed at Freddie Mac on a fulltime basis. Freddie Mac developed a detailed remediation plan with which OFS concurs. Steps include: • hiring a new program executive to lead Freddie Mac’s compliance efforts • restructuring Freddie Mac’s organization to better align with the goals of HAMP, including repositioning leaders and hiring new staff with the right skill sets • creating a quality assurance function at Freddie Mac that will report directly to Treasury • instituting a risk-based testing approach, as well as random audits • performing independent verification of controls and corrective actions • improving the timeliness of reporting to Treasury • developing one audit team to focus on the top-10 servicers, with quarterly audits being performed on such servicers • developing a second audit team to deal with all other servicers SIGTARP commends OFS compliance for recognizing the deficiencies at Freddie Mac and taking steps to remedy the situation. SIGTARP will monitor progress made on these issues. Servicer Performance Report The Administration released its first Servicer Performance Report on August 4, 2009.221 Subsequent reports have been released on a monthly basis. The stated purpose of this report is to “document the number of struggling homeowners already helped under the [MHA] program, provide information on servicer performance and expand transparency around the initiative.”222 quarterly report to congress I october 21, 2009 Overall Performance Metrics As of September 30, 2009, 63 servicers have signed Servicer Participation Agreements to modify loans under HAMP. A snapshot of HAMP modifications is shown in Table 2.32. Figure 2.13 shows the monthly increases in HAMP trial modifications started and HAMP trial plans extended to borrowers. Table 2.32 hamp snapshot Number of Trial Modificationsa 487,081 Number of Trial Period Plan Offers Extended to Borrowers (Cumulative)b 797,955 2,484,783 Number of Requests for Financial Information Sent to Borrowers (Cumulative) b Notes: Survey data provided by servicers. a Trial and permanent modifications as of 9/30/2009; based on numbers reported by servicers to the HAMP system of record. b Survey data provided by servicers as of 10/1/2009. Source: Treasury, “Making Home Affordable Program Servicer Report through September 2009,” 10/8/2009, http://www.treas.gov/press/releases/docs/MHA%20Public%20100809%20Final.pdf, accessed 10/8/2009. Figure 2.13 HAMP TRIAL MODIFICATIONS STARTED AND TRIAL PLANS EXTENDED 5/2009 – 9/2009 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 May (and prior) June July Aug Sept HAMP Trial Modifications (Cumulative) HAMP Trial Plans Extended to Borrowers (Cumulative) Source: Treasury, “Making Home Affordable Program Servicer Performance Report Through September 2009,” 10/8/2009, www.treas.gov/press/releases/docs/MHA%20Public% 20100809%20final.pdf, accessed 10/8/2009. 103 104 special inspector general I troubled asset relief program Table 2.33 HAMP Modification Activity by Servicer Estimated Eligible Mortgagesa Total Plan Offers Extendedb Trial Plan Offers as Share of Estimated Eligible Mortgages Trial Modifications Startedb Trial Modifications as Share of Estimated Eligible Mortgages Servicer Participation Date J.P. Morgan Chase Bank, NAc 4/13/2009 437,652 163,617 37% 117,196 27% Wells Fargo Bank, NA 4/13/2009 310,716 106,427 34% 62,989 20% CitiMortgage, Inc 4/13/2009 208,427 88,472 42% 68,248 33% Saxon Mortgages Services, Inc 4/13/2009 79,921 38,332 48% 32,931 41% Select Portfolio Servicing 4/13/2009 60,848 32,024 53% 15,706 26% GMAC Mortgage, Inc 4/13/2009 73,498 31,720 43% 19,331 26% Ocwen Financial Corporation, Inc 4/16/2009 68,088 10,650 16% 5,193 8% Bank of America, NAd 4/17/2009 875,917 156,120 18% 94,918 11% Wilshire Credit Corporation 4/20/2009 29,153 6,412 22% 2,929 10% Home Loan Services, Inc. 4/20/2009 45,822 279 1% 26 0% Green Tree Servicing LLC 4/24/2009 4,114 810 20% 474 12% Carrington Mortgage Services, LLC 4/27/2009 17,149 1,584 9% 584 3% Aurora Loan Services, LLC 5/1/2009 72,912 37,831 52% 23,889 33% Nationstar Mortgage LLC 5/28/2009 29,846 16,974 57% 8,413 28% Residential Credit Solutions 6/12/2009 1,831 364 20% 313 17% CCO Mortgage 6/17/2009 4,648 879 19% 158 3% RG Mortgage Corporation 6/17/2009 3,473 173 5% 64 2% National City Bank 6/26/2009 40,582 9,267 23% 3,845 9% 7/1/2009 75,074 2,896 4% 2,019 3% 7/1/2009 8,987 2,158 24% 196 2% Wachovia Mortgage, FSB e Bayview Loan Servicing, LLC MorEquity, Inc 7/17/2009 2,244 11 — — — American Home Mortgage Servicing Inc 7/22/2009 114,272 6,817 6% 440 0% HomeEq Servicing 8/5/2009 39,934 444 1% — — Litton Loan Servicing LP 8/12/2009 107,341 13,567 13% 2,229 2% OneWest Bank 8/28/2009 109,222 23,017 21% 5,217 5% U.S. Bank NA 9/9/2009 28,356 6,925 24% 863 3% Franklin Credit Management 9/11/2009 2,635 — — N/Af N/A Other SPA servicers — 4,684 185 4% 102 2% — 242,959 N/A N/A 18,808 8% 3,100,305 757,955 24% 487,081 16% g Other GSE servicers Total h Notes: a Estimated eligible mortgages with 60+ day delinquencies are as of 8/31/2009. b Trial plans offered and trial modifications started are as of 9/30/2009. c J.P. Morgan Chase Bank, NA includes EMC Mortgage Corporation. d Bank of America, NA includes Countrywide Home Loans Servicing LP. e Wachovia Mortgage FSB includes Wachovia Bank NA. f N/A denotes a newly signed servicer not yet fully reporting into the program. g Other SPA servicers are entities with less than 1,000 estimated eligible 60+ day delinquencies that have signed participation agreements with Treasury and Fannie Mae. h Other GSE servicers includes approximately 2,300 participants that service loans owned or guaranteed by Fannie Mae and Freddie Mac. Source: Treasury, “Making Home Affordable Program Servicer Report through September 2009,” 10/8/2009, http://www.treas.gov/press/releases/docs/MHA%20Public%20100809%20Final.pdf, accessed 10/8/2009. quarterly report to congress I october 21, 2009 Servicer Metrics Table 2.33 shows the HAMP modification activity by each servicer. Figure 2.14 shows the trial modifications started by each servicer as a percent of that respective servicer’s estimated number of eligible mortgages. Figure 2.14 TRIAL MODIFICATION TRACKER: TRIAL MODIFICATION STARTS AS A SHARE OF ESTIMATED ELIGIBLE MORTGAGES 40 35 30 25 20 15 10 5 0 HomeEq MorEquity Home Loan American Home Bayview Other SPA Servicers Litton RG Mortgage Wachovia US Bank CCO Carrington OneWest Ocwen Other GSE Servicers National City Wilshire Bank of America Green Tree Residential Credit Wells Fargo Select Portfolio GMAC J.P. Morgan Chase Nationstar CitiMortgage Aurora Saxon Notes: Numbers may be affected by rounding. Data as of 9/30/2009. September trials as a share of mortgages with 60+ day delinquencies on August 31, 2009. Source: Treasury, “Making Home Affordable Program Servicer Performance Report Through September 2009,” 10/8/2009, www.treas.gov/press/releases/docs/MHA%20Public% 20100809%20final.pdf, accessed 10/8/2009. 105 106 special inspector general I troubled asset relief program Executive Compensation For more information on the Rule and a summary of the timeline on TARP executive compensation restrictions, see SIGTARP’s July Quarterly Report, page 118. Restrictions on executive compensation have applied to TARP recipients since the program’s inception; section 111 of EESA detailed the original restrictions, which have been changed over time by statutory amendment, Treasury regulations, and notices. On February 17, 2009, section 111 of EESA was amended by section 7001 of the American Recovery and Reinvestment Act of 2009 (“ARRA”), which further required that Treasury publish regulations to implement ARRA amendments.223 On June 10, 2009, Treasury released its Interim Final Rule on TARP Standards for Compensation and Corporate Governance (the “Rule”).224 Following the release of the Rule, Treasury provided a 60-day period for public comment; the 60-day comment period concluded on August 14, 2009. Treasury is currently considering the public comments it received before issuing a Final Rule. The Rule “implement[s] ARRA provisions, consolidates all of the executive-compensationrelated provisions that are specifically directed at TARP recipients into a single rule (superseding all prior rules and guidance), and utilizes the discretion granted to the [Treasury] Secretary under the ARRA to adopt additional standards, some of which are adapted from principles set forth” in guidance previously provided by Treasury in February 2009.225 The Rule applies to entities that meet the Rule’s definition of a “TARP recipient,” i.e., “any entity that has received or holds a commitment to receive financial assistance” under TARP, or to an entity that owns 50% or more, or is 50% or more owned by the TARP recipient.226 As long as the TARP recipient has an outstanding “obligation” to the Federal Government (as defined in the Rule; this does not include warrants to purchase common stock), it must adhere to the guidelines set forth under the Rule.227 Several TARP programs, however, are exempt from the executive compensation restrictions outlined in the Rule as a result of certain program characteristics:228 • TALF participants are exempt from the Rule because they are not directly receiving TARP assistance. The TARP funds are used to purchase surrendered collateral in the program. • PPIP participants are exempt because no participant will own more than 9.9% of any PPIF (therefore, no participant will own 50% or more of TARP recipient, as required by the Rule). • MHA participants are exempt from the Rule by virtue of statutory language included in the ARRA amendments. quarterly report to congress I october 21, 2009 For a summary of the Rule’s executive compensation guidelines, see Table 2.34. Table 2.34 EXECUTIVE COMPENSATION: INTERIM FINAL RULE Standard Details Limits executive compensation for certain executives and highly compensated employees at companies receiving TARP funds Limits bonus payments to protect taxpayer investment Curtails the payment of golden parachutes Imposes clawback for any bonus based on materially inaccurate performance criteria Responsible for reviewing any compensation for senior executive officers and most highly paid employees at firms receiving exceptional assistance — with authority to disapprove plans where salary or other compensation is inappropriate, unsound or excessive Appoints a Special Master to review compensation plans at firms Reviews and approves compensation structure for any executive officers and the 100 most highly paid employees at those firms receiving exceptional assistance Possesses authority to negotiate for reimbursements on payments to senior executive officers and certain highly compensated employees prior to February 17, 2009 Golden Parachute: Any payment to an employee for departure for any reason, or any payment due to a change in control. Clawback: Recovery by the company of amounts paid to an employee based on materially inaccurate performance criteria. Exceptional Assistance: Companies receiving assistance under SSFI, TIP, AGP, and AIFP, and any future Treasury program designated by the Treasury Secretary as providing exceptional assistance. Currently includes AIG, Citigroup, Bank of America, GM, GMAC, and Chrysler. Makes determinations based on a clear set of principles Implements and expands upon key ARRA provisions consistent with February 4th proposals Sets additional compensation and governance standards to improve accountability and disclosure Extends required risk analysis of compensation to all employees of TARP firms Requires luxury expenditure policies for all TARP firms Institutes “Say on Pay” requirements for all TARP firms Prohibits tax gross-ups Requires additional perk disclosure Mandates disclosure of compensation consultants Tax Gross-up: A reimbursement of taxes owed with respect to any compensation. Perk: Personal benefit, including a privilege, or profit incidental to regular salary or wages. Note: Table taken verbatim from source document with Treasury edits as per SIGTARP draft, 10/7/2009. Source: Treasury Press Release, “Interim Final Rule on TARP Standards for Compensation and Corporate Governance,” 6/10/2009, http://www.treas.gov/press/releases/tg165.htm, accessed 9/8/2009. For more information on executive compensation issues and findings, refer to SIGTARP’s August 19, 2009, audit, “Despite Evolving Rules on Executive Compensation, SIGTARP Survey Provides Insights on Compliance.” 107 108 special inspector general I troubled asset relief program Luxury Expenditures The Rule requires that the board of directors of each TARP recipient adopt an excessive or luxury expenditure policy (the “Policy”). The Policy must be posted to each TARP recipient’s website within 90 days of the publication of the Rule, which was published on June 15, 2009. Under the Rule, excessive or luxury expenditures may include excessive expenditures in the following categories:229 • • • • entertainment or events office and facility renovations aviation or other transportation services other activities or events that are not reasonable expenditures for staff development or performance incentives The Rule requires that the Policy include the following elements:230 • categories of expenses prohibited or requiring prior approval • reasonable approval procedures for those expenses • certification process whereby the principal executive officer and principal financial officer certify that proper approval was obtained for any expenditures needing approval by a senior executive officer, any executive officer of a similar level of responsibility, or the board of directors • a requirement that violations be promptly reported internally • mandated accountability for adherence to the Policy Comparison of Luxury Expenditure Policies The luxury expenditure policies for five of the institutions designated by Treasury as receiving “exceptional assistance” under TARP (AIG, Bank of America, Citigroup, Chrysler, and GM) are illustrated in Table 2.35. All five of these institutions directly address luxury expenditures, reporting, and compliance with the Policy; however, certain institutions provide more detailed guidance than others. For example, Bank of America provides vague guidelines for luxury expenses, stating that “reasonable expenditures occur when the costs of entertainment or events do not exceed the expected benefit to the corporation.”231 Chrysler, by comparison, includes a detailed “Personal and Unallowable Expenses” chart in its policy outlining specific expenses such as spa services, country club dues, and tuxedos that are prohibited.232 The five institutions also have notable differences in their aircraft and transportation policy ranging from GM’s policy of “generally prohibiting” private aircraft travel, to Bank of America’s policy “encouraging” senior management to use corporate aircraft for “safety and efficiency purposes.”233 108 quarterly report to congress I october 21, 2009 Table 2.35 EXCEPTIONAL ASSISTANCE RECIPIENTS’ LUXURY EXPENDITURE POLICIES Entertainment or Events Office and Facility Renovations Aviation or Other Transportation AIG Required to have a clear business purpose, and not be excessive, and are otherwise consistent with the policy and guidelines and applicable laws. Celebratory events are prohibited, unless acknowledging key AIG career milestones or for holiday parties, and must be approved. Must be reasonable on a cost/benefit basis and advance AIG’s business objectives. Business unit managers are responsible for implementing appropriate monitoring and reviewing and escalating exceptions to the Chief Administrative Officer. Commercial travel must be pre-approved. Corporate aircraft is available solely for business purposes and is only permitted with written approval. Bank of America Based on: 1) revenue-generating potential of event 2) if it is an appropriate use of company resources 3) whether alternatives are available that would maximize cost savings and benefits • Based on industry standard. • Any variation requires senior management approval. Senior management is encouraged to use corporate aircraft when traveling on business for the corporation for safety and efficiency purposes. Any use of corporate aircraft outside “reasonable business development” or emergencies is considered excessive and is not allowed. All usage of the aircraft is controlled and scheduled centrally with periodic reporting of usage to senior management, thereby eliminating the likelihood of a violation of the policy. Citigroup • Must support a legitimate business purpose. • Limited to daily maximum per employee.a • Managed for efficiency and cost control. • Renovations of offices used by members of the Citigroup Executive Committee must be reviewed by the board of directors. • Corporate aircraft use requires written approval by a member of Citigroup’s Executive Committee and the Director of Citi Aviation. • Personal use by the Citigroup CEO must be subject to a written reimbursement agreement.b Chrysler • Expenses cannot be incurred exclusively or primarily for the benefit of employees unless such expenses are reasonable in amount and customary in nature. • Must be approved by a Senior Vice President or higher. Request must be submitted for proper Arrange for reasonably priced travel, approval. All renovations exceeding when available, through the internal travel $5 million must go through the CFO department. or a committee designated by the CFO. GM Must be part of prudent and appropriate business activities; demonstrate cost efficiency and avoiding impropriety in the use of funds. Appropriation requests are required for Private aircraft travel is generally prohibited. Prior approval is required in all acquisition or leasing of real estate or for the renovation or relocation of entire instances. or significant portions of facilities. Notes: a Citigroup’s daily maximum for entertainment and events is not publicly available. b Citigroup’s CEO has notified the board of directors that he will not use the corporate aircraft for personal use. Sources: AIG, “AIG Luxury Expenditure Policy,” 9/14/2009, http://www.aigcorporate.com/corpgovernance/AIG%20Luxury%20Expenditure%20Policy.pdf, accessed 9/24/2009; Bank of America, “Excessive or Luxury Expenditure Policy,” 9/2009, http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTUxNjN8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1, accessed 9/24/2009; Citigroup, “Luxury Expenditure Policy,” 9/14/2009, http://www.citigroup.com/citi/corporategovernance/data/lux_exp_policy.pdf, accessed 9/24/2009; Citigroup, Governance Documents, no date, http://www.citigroup.com/citi/ corporategovernance/docs.htm, accessed 9/24/2009, Chrysler, “Chrysler Group LLC Policy,” 9/14/2009, http://www.chryslergroupllc.com/pdf/expense_policy_07082009.pdf, accessed 9/24/2009; GM, “General Motors Expense Policy,” 9/14/2009, http://www.gm.com/corporate/investor_information/docs/corp_gov/GM_ExpensePolicy.pdf, accessed 9/24/2009. 109 110 special inspector general I troubled asset relief program Special Master Under the Rule, Treasury has created a new Office of the Special Master for TARP Executive Compensation (the “Special Master”) to review executive compensation at TARP recipients and ensure that compensation plans for certain employees of financial institutions receiving exceptional assistance are aligned with shareholder and taxpayer interests. TARP participants receiving exceptional assistance delivered their proposed executive compensation structures, and payments pursuant to those structures, for the senior executive officers and the 20 next most highly compensated employees to the Special Master in mid-August 2009.234 The Special Master concluded that the submissions with respect to these employees at all seven recipients of exceptional assistance were “substantially complete” for purposes of the Rule on August 31, 2009. The Rule requires that the Special Master issue an initial determination with respect to these proposals within 60 days of the receipt of a substantially complete submission.235 The responsibilities of the Special Master include:236 Senior Executive Officers (“SEOs”): A “named executive officer” of a TARP recipient as defined under Federal securities law, which generally includes the principal executive officer (“PEO”), principal financial officer (“PFO”), and the next three most highly compensated employees. • Review of Payments: review and approve any payments of compensation at TARP recipients that have received exceptional assistance for their 5 senior executive officers (“SEOs”) and 20 next most highly paid employees • Review of Structures: review and approve the structure of compensation at TARP recipients that have received exceptional assistance for their SEOs, executive officers, and 100 most highly compensated employees • Review of Prior Payments: review bonuses, retention awards, and other compensation paid to the SEOs and 20 next most highly compensated employees before February 17, 2009, by all TARP recipients and, where appropriate, negotiate reimbursements • Interpretation: provide advisory opinions with respect to the application of the Rule and whether compensation payments and plans are consistent with EESA, TARP, and the public interest Since taking office, the Special Master has made an initial ruling, approving “in principle” the pay package of the new AIG President and CEO, Robert Benmosche.237 The Special Master formally approved the proposed compensation structure for Mr. Benmosche in a letter released on October 2, 2009.238 Executive Compensation Reform beyond TARP On March 26, 2009, Treasury outlined its framework for regulatory reform to try to close the “gaps and weaknesses in [the U.S.] financial regulatory system.”239 As part of the overall regulatory reform agenda, Treasury proposed regulatory standards that would apply to all public companies and not just TARP recipients. On July 16, 2009, Treasury delivered draft legislation addressing executive compensation at all quarterly report to congress I october 21, 2009 public companies — “Say on Pay” and compensation committee independence. The “Say on Pay” legislation is intended to “encourage greater accountability … in setting compensation.”240 The compensation committee independence legislation is intended to further ensure that public companies’ compensation committees can accomplish their job of “negotiating executive compensation arrangements that protect long-term shareholder value.”241 Say on Pay The “Say on Pay” legislation would require all publicly traded companies to give shareholders a non-binding vote on the pay packages described in executive compensation disclosures.242 The vote would be based on disclosures detailing the forms of compensation paid — salary, bonuses, stock, and option awards — as well as the total compensation amounts. This bill would also mandate a separate vote on golden parachutes in the case of a merger or acquisition.243 The bill is designed to make the board of directors at every public company more accountable to the owners of the company and help align compensation plans with long-term value creation.244 Compensation Committees According to Treasury, the independence of directors on public companies’ compensation committees can be compromised in the following circumstances: when there are directors on the committee who may benefit from executives’ decisions; when the compensation committee is unable to bargain effectively with executives over complex compensation decisions; and when the committee relies on advice from possibly conflicted consultants or legal counsel.245 The compensation committee independence legislation would require that these committees be “independent in fact, and not just in name,” from outside influences.246 The Treasury-proposed legislation would ensure compensation committee independence through three standards:247 • by requiring “[m]embers of the compensation committee [to] meet exacting new standards for independence” (including standards that would, among other things, limit relationships with company management and prohibit independent directors from receiving payments from the company other than directors’ fees) • by requiring that any compensation consultants and legal consultants that compensation committees hire be independent from management • by giving compensation committees “the authority and funding to hire independent compensation consultants, outside counsel, and other advisors who can help ensure that the committee bargains for pay packages in the best interests of shareholders,” while, at the same time, requiring that “if the committee decides not to use its own compensation consultant, it explain that decision to shareholders” 111 112 special inspector general I troubled asset relief program S ec tion 3 the impact of credit rating agencies on tarp and beyond 114 special inspector general I troubled asset relief program quarterly report to congress I october 21, 2009 Introduction Credit rating agencies enjoy a position of significant influence in the U.S. and world financial system. There are three dominant agencies within the market: Moody’s Investor Services (“Moody’s”), Standard & Poor’s (“S&P”), and Fitch Ratings (“Fitch”). Financial market players, including broker-dealers, investment advisors, and investors, rely on credit rating agencies’ ratings of a security or issuer as an independent evaluation of credit risk; thus rating agencies play an important role in how financial institutions allocate their capital. Further, rating agencies have a direct impact on companies’ and governments’ cost of capital — the lower the credit rating, the more the debt issuer will have to pay in terms of interest. The power and influence of the rating agencies can often be seen in the marketplace, especially when they downgrade a security or issuer, as was the case with American International Group, Inc. (“AIG”) in 2008. This can serve as the death knell of a company, especially a financial institution whose livelihood revolves around raising capital at a cheaper rate than it earns on its investments. The U.S. Government reinforces the power of rating agencies by including in certain laws and regulations a reliance on high ratings. Since the onset of the financial crisis and the Government’s efforts to restore financial stability through the Troubled Asset Relief Program (“TARP”) and other measures, there has been considerable discussion of the extent to which rating agencies contributed to the crisis, particularly with regard to ratings they provided on securities based on subprime mortgages, and the prominent role they play in Government programs designed to address the crisis, including TARP. Rating agencies are often mentioned in the debate around reforming financial sector regulation — with many observers calling for substantial changes in the regulation of rating agencies, particularly changes designed to address the inherent conflicts of interest that rating agencies face in their business model. In fact, the European Union recently unveiled new rating agency regulations of its own stemming from the global financial crisis.248 The U.S. Government, however, while proposing some increased regulation of rating agencies, has not called for the type of significant overhaul of rating agencies that others have called for as part of its broad regulatory reform proposals. On October 5, 2009, the Securities and Exchange Commission (“SEC”) adopted several new final rules relating to rating agency regulation but re-opened others to further discussion, deferring final decision until a future date.249 These reform efforts have focused largely on disclosure and managing conflicts of interest, rather than on Government regulation of ratings substance and methodologies. Indeed, in Congressional testimony, Treasury’s Assistant Secretary for Financial Institutions stated that such efforts would be counterproductive: “The government should not be in the business of regulating or evaluating the methodologies themselves, or the Cost of Capital: The “price” a company must pay to finance an investment or project. For debt financing, this is the interest rate on any loans or bonds. For equity financing, it is the “opportunity cost” of using its capital elsewhere (i.e., what the company could have reasonably expected to earn from using its cash in a low-risk investment such as Government bonds). 115 116 special inspector general I troubled asset relief program performance of ratings. To do so would put the government in the position of validating private sector actors and would likely exacerbate over-reliance on ratings.”250 In this section, the Office of the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”) intends to provide an overview of rating agencies, their operations, and their prevailing role in the financial crisis (specifically their impact on TARP recipients and on TARP-related programs such as the Term Asset-Backed Securities Loan Facility (“TALF”) and the Public-Private Investment Program (“PPIP”)) in order to put into context the role of rating agencies. Background on Credit Rating Agencies What Credit Rating Agencies Do Due Diligence: The appropriate level of attention or care a reasonable person should take before entering into an agreement or a transaction with another party. In finance, often refers to the process of conducting an audit or review of documents and information prior to initiating a transaction. Transaction Cost: The tangible and intangible costs associated with buying or selling an asset. Tangible costs can include fees paid (such as to a broker when selling bonds or to lawyers for drafting documents), while intangible costs can include the time or effort spent reviewing documents and traveling to visit a client, for instance. When a company requires funds for investment or to pay expenses, it often seeks to borrow money through debt financing. Debt financing can come in several forms — with the most common being loans, bonds, and commercial paper (unsecured short-term debt issued by a company). When a company approaches a bank for a loan, the bank might conduct a thorough analysis of the prospective borrower’s creditworthiness. This process of evaluation is called due diligence, and the bank often takes a close look at a wide range of financial information from the prospective borrower — much as it might examine an individual’s financial health who has applied for a mortgage. The bank will look at the borrowers’ income to determine if they have the means to repay the debt over time and their debts to determine whether the prospective borrowers have other obligations that may interfere with their ability to repay, as well as a number of other factors. The process requires a great deal of disclosure and effort from both parties, which makes for a high transaction cost for the particular loan. A similar due diligence process must also be conducted when a company issues securities (such as asset-backed securities (“ABS”)). An ABS issuance is a security that packages together a number of underlying assets — such as mortgages, car loans, or student loans with similar characteristics — and makes regular interest payments to investors. The higher the risk level of the underlying assets, the higher the interest rate the securities will typically pay to investors. An investor in a corporate debt issuance must conduct due diligence to understand the risk of the issuing company, while the ABS investor must understand the risk of each underlying asset and the ABS structure. For a typical investor to properly understand the composition of the security and the inherent risk of the underlying assets, the transaction costs associated with conducting the due diligence could be significant. In the case of both debt and securities issuance, there are dozens or hundreds of prospective investors that would be subject to such transaction costs. quarterly report to congress I october 21, 2009 This is where rating agencies become involved in the process. A rating agency researches the risks of a prospective new security and of the security issuer and issues its opinion, or rating, to the universe of prospective investors. The issuer can be any number of organizations from a company (public or private), to a government (state, municipal, or national), to a special purpose vehicle (“SPV”) as is often the case in an ABS issuance. The rating agency conducts its research and assigns a rating, or score, to both the security and the issuer. A higher rating means lower risk and consequently a lower interest rate that the issuer will have to pay to investors. The rating given by a rating agency has significant implications for a company’s cost of capital. Prospective investors look at the score given by the rating agency and use it to help determine the interest rate they expect from the issuer. For instance, two companies issue bonds with a par value of $1,000. One has a top credit rating (AAA) and one has a significantly lower rating (BB). The relative riskiness of the company with the lower rating means that investors will demand that the company pay a higher interest rate to compensate for the higher risk that the bond will default. Rating agencies also monitor the ongoing creditworthiness of entities or securities. If, for instance, a company experiences a significant deterioration in its business that has the potential to impair the company’s ability to honor its debt obligations, a rating agency is likely to initiate a rating action — potentially changing the rating. First, it may put the company on “ratings watch,” meaning the rating agency is conducting a review of the current rating to determine if it should be maintained. If the rating agency determines that conditions no longer merit the current rating, the rating agency may downgrade the company and/or its securities to a lower rating. Conversely, a company or security can also be upgraded. Typically these rating actions are done gradually in notches or steps. The ratings issued by rating agencies are also often used by Government regulators to monitor the health of financial institutions. Financial companies such as money market mutual funds and insurance companies may be required by law to invest a certain portion of their assets in securities of a certain credit rating. Because money market mutual funds have an obligation to be among the safest (lowest risk) investments, regulators review the composition of their portfolios to determine whether they are sufficiently safe and, in so doing, place a premium on holding the highest-rated securities. Likewise, insurance companies have a range of available investment options but also have a responsibility to maintain sufficiently low-risk, liquid investments on hand to make good on any claims. Accordingly, by regulation, these financial institutions are required to hold some percentage of AAA-rated (the highest rating available) securities or cash. There can be regulatory consequences — such as penalties, suspension of license, or closure — should an institution not meet these requirements. Rating agencies are thus the arbiters of Special Purpose Vehicle (“SPV”): An off-balance-sheet legal entity that holds the transferred assets presumptively beyond the reach of the entities providing the assets (e.g., legally isolated). Par Value: The face value of a bond or security (for instance $1,000 or $100). When a bond trades on the market, the price can be above or below par. A price above par means the purchaser is paying a premium; a price below par means the purchaser is buying at a discount. Ratings Watch: A formal announcement by a rating agency informing investors that the issue or issuer rating is being reviewed to determine if the current rating is appropriate. Government Regulators: Government agencies responsible for overseeing the health and stability of a sector of the economy — in this case, the financial sector, through supervision and enforcement of regulations. 117 118 special inspector general I troubled asset relief program what securities qualify to be held for regulatory purposes, and any changes to ratings of securities can directly impact a financial institution’s regulatory compliance. Further, because regulators rely so heavily on credit ratings in carrying out their duties to ensure the solvency of regulated entities, errors by the rating agencies can have profound effects on those institutions. Historically, the credit rating agencies made their money by selling subscriptions to their ratings publications to the community of investors. Today, however, rating agencies make the vast majority of their income from the fees charged to issuers of the securities that they rate — the issuers pay the rating agency to assign a rating (commonly referred to as the “issuer-pay” model). This model is frequently cited as the principal conflict of interest for the rating agencies because of the tension between attracting new issuers and providing accurate ratings. Critics allege that, in order to maintain or increase revenues, rating agencies must lower their rating standards in order to provide more favorable ratings for clients (issuers). Rating agencies also receive fees from those same issuers for ongoing monitoring of the securities they rate. In addition to credit ratings, many rating agencies make a portion of their income from consulting services — advising companies, including prospective issuers, on how to structure securities issuances in a way to attract the highest possible rating and reduce their cost of capital. Some rating agencies refuse to issue credit ratings on companies for which they provide consulting services. Investment Grade: A quality classification for bond or debt securities (rated BBB/Baa or higher) that suggests the debt is likely to be repaid. Yield: The effective interest rate paid by a security. Background on Credit Ratings and Process Each rating agency provides a scale of ratings ranging from the highest rating (lowest likelihood of default), to the lowest (the highest likelihood of default). The term “investment grade” refers to debt securities that are judged by the rating agency as highly likely to repay and suitable for institutional investors. Conversely, the euphemism “junk” (sometimes called “speculative grade”) has come to mean anything that is not investment grade, and the risk of the issuer not meeting its payment obligations is high enough that an investor that must meet regulatory thresholds of conservatism and prudence (such as a pension fund) should avoid them. Table 3.1 provides an illustrative comparison of the ratings scales of the three largest rating agencies, Moody’s, S&P, and Fitch. As the table suggests, each has a different scale for long-term and short-term issues, and although the scoring used appears to be similar, there are subtle differences among the three. The ratings contained in the table are the most basic ratings for long- or short-term debt securities. The three rating agencies also provide ratings for the issuers themselves, as well as ratings for different types of structured finance products. The lower the rating, the greater the perceived risk and the more yield an investor will demand. Obviously, the effect on the issuer is the opposite: the lower the rating, the more it must pay or the lower the price it will get for its securities. For quarterly report to congress I october 21, 2009 instance, according to data available from the Federal Reserve Bank of St. Louis, the average rate paid by the highest-rated 30-year corporate bonds (AAA/Aaa) was 5.04% on September 30, 2009, compared to a rate of 6.17% for bonds rated BBB/ Baa — a full 1% difference for securities within the investment-grade category.251 Table 3.1 Credit Rating Scales of 3 Largest Agencies Moody’s Investor Services Band Rating Investment Grade Prime High grade Long Term Short Term Aaa AAA AA+ Aa2 Prime-1 Upper medium A1 grade A2 A3 Baa1 Baa2 Baa3 Speculative Grade or “junk” Speculative, but likely to repay Speculative, deterioration expected Long Term Aa1 Aa3 Lower medium grade Standard & Poor’s AA A+ Prime-3 ABBB+ BBB BBB- AA+ AA A-1 A-2 A-3 A+ A ABBB+ BBB BBB- Ba2 BB BB Ba3 BB- BB- B1 B+ B2 B B B- B- Caa1 CCC+ Substantial risk of default Caa2 CCC Highly vulnerable Caa3 CCC- Short Term F1+ AA- BB+ B3 In default A-1+ Ba1 Substantial risk of business interruption Near default Long Term AAA AAA Prime-2 Short Term Fitch Ratings F1 F2 F3 BB+ B B+ B Not Prime Ca C CCC C CCC- CC CC C C D D C D Sources: Moody’s (http://v3.moodys.com/ratings-process/Ratings-Definitions/002), S&P (http://www2.standardandpoors.com/ spf/pdf/fixedincome/Ratings_Definitons_Update.pdf), Fitch Ratings (http://www.fitchratings.com/web_content/ratings/fitch_ratings_definitions_and_scales.pdf), accessed 10/5/2009. 119 120 special inspector general I troubled asset relief program Collateralized Debt Obligations (“CDOs”): A financial instrument that entitles the purchaser to some portion of the cash flows from a portfolio of assets, which may include bonds, loans, mortgage-backed securities, or other CDOs. Rating Outlook: Guidance published by a rating agency indicating the mediumor long-term outlook for a company’s or security’s creditworthiness. Issuance Credit ratings are issued or edited at two key points: at security issuance and when an event or change in business conditions could affect the issuer or security creditworthiness and trigger an upgrade or downgrade. The issuance of a rating for a security, especially a structured finance security, is often an iterative process. Because the major rating agencies all publish their stated methodologies for determining a rating, it is routine for the investment bankers who structure the products to review these documents and attempt to structure the security in such a way as to receive the highest possible rating. If the issuer has questions about how to improve its rating (or methods for minimizing the perception of default risk), it will often ask rating agencies for comments or advice. In certain instances, an issuer will pay for consulting services to receive assistance in structuring the product and achieving a target credit rating. Securities Exchange Act Rule 17g-5(c), instituted in early 2009, expressly prohibits a rating agency from providing consulting services on issuances that it rates.252 Rating agencies can still provide consulting services, however, on issuances rated by another rating agency.253 Each of the major rating agencies publicly discloses its stated methodology and criteria for the instruments and institutions that it rates,254 however, an SEC study of the three largest rating agencies has found that none of the rating agencies had specific, comprehensive, written procedures for rating mortgage-backed securities (“MBS”) and collateralized debt obligations (“CDOs”).255 Surveillance (Ongoing Monitoring) The vast majority of ratings are monitored by analysts at the rating agency for the duration of the security term. This process is called surveillance. Surveillance is typically paid for by the issuer, with an annual surveillance fee negotiated at the time of original rating. As the business model for rating agencies shifted from subscriptions to issuerpay, the cost of maintaining and monitoring ratings has also shifted to the issuers. Issuers pay for surveillance because investors demand it as a requirement for purchasing the security. Just as a downgrade of an entity’s securities can affect its cost of raising capital on future issues, a lapse in ratings can also signify uncertainty about the entity’s creditworthiness. Additionally, an unrated security requires very high levels of regulatory capital making it undesirable for companies. One element of a rating agency’s surveillance services is a rating outlook which assesses the potential direction of an issuer’s long-term debt rating over the medium term (a two- to three-year credit horizon). Rating outlooks reflect the rating agency’s evaluation of trends or risks, including developments in the economy or the fundamental business conditions, that are weighed against their potential impact on the direction of the issuer’s credit rating. Rating agencies typically assign a rating outlook to all issuers for whom they provide long-term credit ratings. A rating quarterly report to congress I october 21, 2009 outlook can be “positive,” “negative,” “stable,” or “developing,” depending on the rating agency, and is not necessarily a precursor of a rating change or future credit watch action.256 Over the course of the security’s term, any number of events and developments could change the creditworthiness outlook of the security, or more generally the issuer itself. These events, such as an “operational or fiscal deterioration, an acquisition, a divestiture, or the announcement of a major share repurchase”257 would likely trigger a rating review and could ultimately lead to a rating action. A rating review by the rating agency analysts monitoring the security or issuer is the first step in the process of initiating a rating action (an upgrade, downgrade, or affirmation). If the analysts decide that a change to a rating may be merited, the rating agency may announce that the issue or issuer is being put on either “credit watch” for short-term changes or rating outlook for long-term changes. Credit watch is a list maintained by a rating agency highlighting rated entities that are experiencing an emerging situation which could materially affect their credit profile in the short term.258 Credit watch can be designated as “credit watch positive,” “credit watch developing,” or “credit watch negative.” These designations are intended to signal to investors that further analysis is being performed, although it does not necessarily mean that a rating change is inevitable. Rating Actions A rating action (downgrade or upgrade) can have a material impact on the cost of capital for a company or issuer. A downgrade of the issuer’s rating means that further issuances would be at a lower rating and the issuer would be required to pay a higher interest rate compared to other less-risky opportunities in the market. A change in rating can also have broader effects on the issuer’s business. A security’s upgrade or downgrade can have a direct impact on the finances of those companies holding the security on their books. For instance, if a bond is downgraded from AAA to AA, it could require all of the institutions that hold those bonds as reserves (low-risk, high-liquidity securities) to put aside additional capital per regulators’ requirements. As an example, consider a money market mutual fund that must invest 95% of its assets in securities with ratings in the top four long-term investment grades.259 A downgrade in one of its holdings can drive down the value of that fund (suddenly one of its holdings that was selected because of its low risk and volatility is no longer worth what it was before) and force the fund to sell the downgraded asset at a loss and replace it with other AAA-rated securities. Furthermore, some debt agreements have “ratings triggers” embedded in their contracts that can force a company to accelerate repayment of debt if its rating falls below a specified level (such as being downgraded to speculative grade or junk).260 There is considerable controversy surrounding the area of ratings surveillance in that a ratings action, especially a downgrade, can have a dramatic effect on the Credit Watch: Announcement by a rating agency of developments that may have a material impact on the creditworthiness (either positive, negative, or developing) of a company or security in the short term. Rating Review: A formal action by a rating agency to re-assess the creditworthiness of a company or security. Could lead to a change in rating outlook, initiation of credit watch, or a rating action. Rating Action: A modification (upgrade or downgrade) or confirmation of a company’s or security’s credit rating. 121 122 special inspector general I troubled asset relief program Margin Call: A broker’s demand on an investor using borrowed money (margin) to deposit additional cash or securities in its account if the value of its capital drops below a set percent of the total investment. SEC Net Capital Rule: A requirement that broker-dealers maintain a sufficient cushion of highly liquid assets (easily convertible to cash) in excess of liabilities to cover potential market, credit, and other risks if they should be required to liquidate. Capital Requirement: The amount of cash and easily liquidated assets that a financial institution needs to meet Government regulations and provide a cushion against losses. Liquidity: The ability to easily convert an asset to cash, without any significant loss in value or transaction cost. For more information on bank capital structure, see SIGTARP’s April Quarterly Report, “TARP Tutorial: Capital Structure,” page 58. viability of a company or the value of a security. Downgrades can trigger a domino effect of margin calls and collateral devaluations — the “death spiral” — that can force corporate failure. Nationally Recognized Statistical Rating Organizations An important development in the history of credit ratings occurred in 1975 with the creation of the nationally recognized statistical rating organizations (“NRSROs”) designator for certain rating agencies. The SEC made explicit reference to NRSROs for the first time in a 1975 amendment to Securities Exchange Act Rule 15c3-1 (the net capital rule).261 The net capital rule, which has been in use since the 1940s, sets minimum capital requirements for broker-dealers and links the determination of what assets can be considered capital to an evaluation of the riskiness of the assets.262 Capital requirements for a broker-dealer function similarly to the bank capital requirements discussed in SIGTARP’s Quarterly Report dated April 21, 2009 (the “April Quarterly Report”) — they are set by regulators to establish a minimum “cushion” against potential losses in the firm’s assets. Rather than allowing the securities firms to determine for themselves the riskiness of their assets, or allow them to receive inflated ratings from dubious organizations, the SEC decided to rely on the dominant three rating agencies, dubbing them NRSROs.263 The SEC would rely on the ratings assigned by NRSROs “solely for determining capital charges on different grades of debt securities under the Commission’s net capital rule for broker-dealers.”264 The rule requires broker-dealers to deduct a percentage of the value of their securities investments from their net worth (a capital charge, or haircut) because of the risk of loss in the investments. With the advent of the NRSRO designation, however, a broker-dealer could take a smaller haircut on securities that had received an investment-grade rating by one or more of the NRSROs because such a rating was deemed to correlate with liquidity (a greater liquidity implied lower potential losses if a firm needed to convert the assets to cash). According to former SEC Commissioner Isaac Hunt, securities with an investment-grade rating from an NRSRO “typically were more liquid and less volatile in price than those securities that were not so highly rated.”265 The three initial NRSROs were Moody’s, S&P, and Fitch.266 After the 2006 passage of the Credit Rating Agency Reform Act (“CRARA”), the number of NRSROs grew. As of September 30, 2009, there were 10 NRSROs; for a complete list of NRSROs, see Table 3.2. Since 1975, the NRSRO concept was incorporated into a number of additional SEC rules and regulations. Congress also began using the term in legislation as did U.S. and international financial sector regulators.267 Certain Federal regulators (as discussed in the “How the Federal Government Uses Ratings in Regulating the Financial Sector” portion of this section) use NRSRO ratings in their rules for quarterly report to congress I october 21, 2009 Table 3.2 Credit Rating agencies Designated as NRSRO Rating Agency Parent Company Notes Moody’s Investors Service, Inc. Moody’s Corporation Rating TALF issues Standard & Poor’s Ratings Services The McGraw-Hill Companies, Inc. Rating TALF issues Fitch, Inc. Fimalac S.A. Rating TALF issues Egan-Jones Ratings Co. A.M. Best Company, Inc. Insurance companies only DBRS Limited Rating TALF CMBS issues Rating and Investment Information, Inc. Realpoint LLC Rating TALF CMBS issues Japan Credit Rating Agency, Ltd. LACE Financial Corporation Sources: Capital IQ, www.capitaliq.com, accessed 9/15/2009; FRBNY Press Release “New York Fed Names Four Non-Primary Dealer Broker-Dealers as TALF Agents,” 9/1/2009, www.newyorkfed.org/newsevents/news/markets/2009/an090901.html, accessed 9/15/2009. calculating the risk-based capital of institutions, ultimately affecting how much capital the institutions have on hand to lend or invest. The increased regulatory reliance on ratings drove an increased demand for rating services by investors and securities issuers, that, combined with increased regulatory oversight of the securities industry, led to growth in the credit ratings industry. In other words, the expansion of, and reliance on, credit rating agencies was heavily influenced by the U.S. Government. Rating Agency Impact on Financial Institutions The financial services industry uses rating agencies to reduce the cost and effort of evaluating investments. Rather than each firm or investor exhaustively researching each potential investment and securities issuer, investors instead often rely on the judgments of rating agencies. The rating agencies centralize the work and perform analysis that would otherwise be done by the numerous investors in the market. Many of the most important effects of ratings on financial institutions come as the result of Government regulation; ratings play a critical role, for example, in how banks and other institutions value assets for regulatory capital. Beyond the regulators, many market participants have come to depend on rating agencies for a range of needs. First, ratings are used widely in permitted investments lists found in many investment firms’ policies. The largest investors in the capital markets are institutional investors — such as pension funds, insurance companies, mutual funds, trusts, and corporate or government treasury departments. Some of these institutions are concerned primarily with the preservation of capital — meaning that they generally value safety and predictability in their investments so they can reliably meet their obligations rather than risk eroding Permitted Investments List: A statement in the charter or policies of an organization (for instance, the prospectus of a mutual fund) detailing to stakeholders the nature or types of assets in which the institution is allowed to invest. To invest in assets not on the list could mean a breach in the fiduciary responsibility of the organization. 123 124 special inspector general I troubled asset relief program their capital through the pursuit of higher returns. In their charters, the trustees of such institutions draw up investment policies that typically include a permitted investments clause. In the case of a risk-averse institution, such as certain pension funds or museum trust funds, it is common for the permitted investments clause to restrict fund investments to securities rated AAA or AA, the highest and secondhighest ratings available. Because so many sectors of the investment world operate under similar requirements, these provisions create strong demand for the higherrated securities. This means that higher-rated securities will be able to borrow at much lower rates, and lower-rated securities may have trouble finding a market at all. Second, ratings are often used to re-balance institutional investors’ portfolios. Many investors, particularly institutional investors, set their strategies to optimize a certain mix of safe and speculative assets. These investors buy and sell securities on a daily, weekly, or monthly basis to maintain certain balances and ratios of ratings in their overall holdings. Thus, these investors constantly monitor any movements in securities’ or issuers’ ratings, and adjust their portfolio holdings accordingly. Third, ratings have an effect on the structure of new securities. The rating agencies effectively set the structures and the rules for credit programs, particularly structured financings (such as ABS, residential mortgage-backed securities (“RMBS”), and commercial mortgage-backed securities (“CMBS”)), and the issuers and their advisors structure their products accordingly in order to gain the highest possible rating. Through this process, the rating agencies implicitly define what transaction structures can receive inexpensive financing and what cannot. These are just a few of the ways in which rating agencies can influence the financial markets; their decisions may create new markets and can mean the end of others. Credit Rating Market In 2007, the credit rating industry had total revenues of approximately $6 billion.268 As cited in Congressional testimony, the three main NRSROs — Moody’s, S&P, and Fitch — currently account for 95% of the global market for credit ratings.269 Historically, rating agencies have focused on providing ratings on several primary market segments: • Sovereigns (countries’ or governments’ debts) • Municipalities and their issues (state or local governments or public authorities may issue debt to finance operations for specific projects such as infrastructure investments) • Corporate Issuers (the companies that issue securities to finance their operations) • Corporate Issues (the specific securities issued by companies to finance their operations) quarterly report to congress I october 21, 2009 • Financial Institutions (deposit-taking banks) • Insurance Companies Since the 1970s, however, structured finance, which includes asset-backed securitization and a range of other financial innovations, has become an increasingly prominent portion of the rating market. The asset-backed securitization ratings market experienced enormous growth since the late 1990s with the booms in telecommunications, the Internet, and especially housing. For example, total residential mortgage production in the United States grew from $639 billion in 1995 to $3.3 trillion in 2005, leading to approximately $6.5 trillion of securitized mortgages by year-end 2006.270 During this time period, Wall Street developed a range of new products that helped institutions package up debt or other obligations and resell streams of income from the new products to other investors. These products included CDOs and ABS — which included RMBS and CMBS. In fact, CDOs often comprised bundles of different ABS, and sometimes other CDOs. The growth of CDOs corresponded to a simultaneous growth of another product — an insurance-like contract against the default of a company or security called a credit default swap (“CDS”). Rating agencies provided ratings on all types of ABS and CDOs. Coinciding with the growth of the structured finance market, the combined revenues for Moody’s, S&P, and Fitch increased from $3 billion in 2002 to approximately $6 billion in 2007.271 Rating-Agency Fees The major rating agencies earn their income primarily through fees related to the process of issuing ratings under the issuer-pay model. Prior to the 1970s, rating agencies made the majority of their income from selling their ratings to investors who subscribed for regular reports — a method called “investor pay.”272 Now, although rating agencies continue to charge fees for other services, such as subscriptions, research reports, and consulting, such services provide a smaller portion of their rating revenues. The fees charged to issuers can be structured several ways:273 • a fixed-rate recurring fee for an issuer rating or for the surveillance of a rating • a one-time transaction fee based on a percentage (typically several hundredths of 1%) of the nominal value of a transaction-related offering • a combination of the two (such as a recurring or one-time fee covering both issuer and transaction/offering ratings) Furthermore, fees can differ across types of offerings — with structured Credit Default Swap (“CDS”): A contract where the seller receives a series of payments from the buyer in return for agreeing to make a payment to the buyer when a particular credit event outlined in the contract occurs (for example, if the credit rating on a particular bond or loan is downgraded or goes into default). It is commonly referred to as an insurance-like product where the seller is providing the buyer insurance-like protection against the failure of a bond. The buyer, however, does not need to own the asset covered by the contract, which means it can serve essentially as a bet against the underlying bond. 125 126 special inspector general I troubled asset relief program Table 3.3 Indicative Rating Fees (Issuance) Fee (corporate issuance) Fee (structured finance) Fitch Ratings 3 – 7 basis points (0.03 – 0.07%) 3 – 3.5 basis points (0.03 – 0.03%) Standard & Poor’s Ratings Services 3.25 – 4.25 basis points (0.0325 – 0.0425%) Up to 12 basis points (up to 0.12%) Rating Agency Example issuance fee: $1 billion RMBS $160,000 (@ 3.5 basis points) w/ fee cap $1,200,000 (@ 12 basis points) Source: FRBNY, “Understanding the Securitization of Subprime Mortgage Credit,” 3/2008, www/newyorkfed.org/research/staff_ reports/sr318.pdf, accessed 9/22/2009. Fitch Ratings Ltd., Response to SIGTARP October 2009 Quarterly Report, 10/26/2009. Ratings Shopping: Also known as “forum shopping”; the process where an issuer approaches a rating agency to receive a “preliminary rating” before it seeks an official rating. If it does not get the desired rating, the issuer proceeds to another rating agency until it receives the desired rating. product offerings typically having a higher fee than corporate issuances.274 Table 3.3, derived from a report by the Federal Reserve Bank of New York (“FRBNY”), illustrates the fees charged by S&P and Fitch (the report noted that Moody’s does not publish its fees). Many rating agencies make a portion of their income from sources other than issuing ratings and surveillance. These sources include their traditional source of revenue — subscriptions to ratings information services — but have also grown to incorporate specialized credit risk management software and the provision of consulting services around debt or structured finance issuances. In 2003, the SEC noted that “these businesses include ratings assessment services where, for an additional fee, issuers present hypothetical scenarios to the rating agencies to determine how their ratings would be affected by a proposed corporation action (e.g., a merger, asset sale, or stock repurchase).”275 Thus the rating agencies, for a fee, advise the companies on how they can structure their transactions to get the best ratings; since the enactment of Securities Exchange Act Rule 17g-5(c) in 2009, however, they can no longer do so for an issue they are rating.276 Even when no official consulting services were provided, the process of receiving fees for ratings has been cited as having inherent conflicts of interest. Due to the competition among the rating agencies, issuers often approach more than one rating agency to pursue the most favorable rating for a security issuance (“ratings shopping”). The issuer might approach several rating agencies to receive preliminary ratings on its prospective offering and then walk away from the ratings it does not like.277 As a result, an agency that consistently provides more conservative ratings may find itself losing market share. The potential conflicts of interest are even higher for situations where a rating agency receives consulting fees directly associated with helping an issuer to structure a security in order to maximize its credit rating while at the same time also being paid to assign a rating to a different security issued by that same issuer. Although some rating agencies claim that they have sufficient controls in place to prevent the provision of such services from affecting their ratings, others have made it a policy not to issue ratings for firms or securities for which they have quarterly report to congress I october 21, 2009 provided structuring advice. One of the smaller rating agencies, DBRS Limited (“DBRS”), explicitly prohibits its staff “from making recommendations to an obligator, issuer, underwriter or sponsor of a security about the corporate or legal structure, assets, liabilities, or activities of the obligator or issuer of the security for which DBRS intends to assign, or has assigned, a rating.”278 Credit Rating Agency Reform Act Following the various accounting scandals of the early 2000s involving companies that had been assigned top credit ratings despite their imminent downfall (such as Enron and WorldCom),279 Congress began to reexamine the role of NRSROs. Congress attempted to tighten oversight of the NRSROs with the 2006 passage of the Credit Rating Agency Reform Act (“CRARA”). One of the primary issues that CRARA tried to address was the concentrated nature of the credit rating industry. One of the principal barriers to entry for new competitors, prior to CRARA, was the requirement for a rating agency to be nationally recognized in order to achieve NRSRO status — a chicken-or-egg dilemma for many smaller rating agencies. Under CRARA, designation as an NRSRO is determined by an application process and an SEC vote.280 Although this change resulted in an increase in the number of NRSROs, the market share of the large three rating agencies remains largely unaffected. CRARA also attempted to address challenges to the independence and reliability of credit ratings, principally around information disclosure and the conflicts of interest inherent in the issuer-pay business model. Changes made under CRARA included:281 • authorizing the SEC to designate certain conflicts as “disclose-and-manage,” meaning the NRSRO must disclose conflicts of interest in its business and issue policies and procedures to mitigate against these conflicts • authorizing the SEC to prohibit certain conflicts outright, such as an NRSRO issuing ratings for an entity from which it receives more than 10% of its net revenue or an NRSRO downgrading or threatening to downgrade an existing security if it does not receive the issuer’s business on another issue Additionally, CRARA authorized the SEC to conduct “reasonable periodic, special, or other examination by representatives of the Commission.”282 To facilitate such oversight, CRARA required NRSROs to create and maintain a set of documents, which includes documenting their ratings methodologies as well as retaining any external and internal communications related to any ratings action.283 While CRARA sought to promote more competition in the credit rating market, reduce potential conflicts of interest, and promote more disclosure, its reforms were insufficient to prevent the damage of the 2007–2008 financial crisis.284 At 127 128 special inspector general I troubled asset relief program the time CRARA was passed, the subprime market had not yet imploded and the general reforms of CRARA were focused on problems identified in the post-Enron years. These reforms, when codified into rules in 2007 and 2008, did little to affect the dominance of the three largest NRSROs in the field of structured finance (where subprime risks were most highly concentrated).285 As a 2009 working paper from the International Monetary Fund (“IMF”) observed, “in the U.S., implementation of the 2006 Rating Act lagged the current crisis.”286 CRARA also explicitly prohibited the SEC from regulating the substance of ratings and did not address the quality and timeliness of monitoring activities.287 How the Federal Government Uses Ratings in Regulating the Financial Sector The U.S. Government institutions that regulate the financial sector are responsible for ensuring its soundness and safety. These regulators oversee certain institutions, such as deposit-taking banks, pension funds, and insurance companies, that have a fiduciary responsibility to their customers because, in many ways, peoples’ savings and future livelihoods are dependent on the stability of these entities. For certain types of institutions, these fiduciary restrictions clearly dictate that the institutions must invest a certain portion of their assets in relatively “risk-free” or AAA-rated securities. Illustrative Regulations Financial sector regulators that rely heavily on ratings include the SEC, the U.S. Commodity Futures Trading Commission (“CFTC”), Federal Deposit Insurance Corporation (“FDIC”), the Federal Reserve, the National Association of Insurance Commissioners (“NAIC”), the National Credit Union Association (“NCUA”), Office of the Comptroller of the Currency (“OCC”), Office of Thrift Supervision (“OTS”), Department of Housing and Urban Development (“HUD”), and the Federal Housing Financing Agency (“FHFA”). Since the introduction of NRSROs in 1975, the Federal Government and its regulatory institutions have issued a number of regulations that specify how credit ratings are to be used for regulatory purposes. Some examples of Federal regulatory references to credit ratings include those outlined in Table 3.4. quarterly report to congress I october 21, 2009 Table 3.4 Key Regulations Involving NRSRO credit ratings (continued) Pertains To Regulator Rule Description Banks Banking regulators: Fed, OCC, FDIC, OTS Standardized Approach to Risk-Based Capital The proposed “standardized approach” permits banks to use NRSRO ratings to determine risk weights for a broad range of exposures, including sovereign risk, corporate exposures, and securitization exposures, including exposures related to MBS. Employed by all banking regulators. Banks FDIC Code of Federal Regulations, Title 12, Banks & Banking § 325 FDIC’s incorporation of risk-based capital regulations from standardized approach states appropriate risk weightings for assets rated by NRSROs. Banks FDIC Code of Federal Regulations, Title 12, Banks & Banking § 346.19 Establishes risk-based premiums payable by insured banks to FDIC, depending on their level of capitalization. Relies on NRSROs to calculate risk-based capital determination of “adequately capitalized” versus “well capitalized” as determinant for premium payment. Banks Federal Reserve Board “Regulation H” (Code of Federal Regulations, Title 12, Banks & Banking § 208) Per the standardized approach — refers extensively to ratings, relying on the NRSRO designation for risk-based capital calculations, and other securities-related regulations for member banks in the Federal Reserve System. Banks Federal Reserve Board “Regulation F” (Code of Federal Regulations, Title 12, Banks & Banking §§ 206.3, 206.5) Regarding prudential standards for limiting liability in inter-bank relationships — a “bank rating agency” can be relied upon to assess the financial condition of a correspondent (whether or not the correspondent is adequately capitalized) or to select a correspondent. Banks Federal Reserve Board “Regulation Y” (Code of Federal Regulations, Title 12, Banks & Banking § 225) Per the standardized approach — establishes risk-based capital calculations for bank holding companies; refers extensively to ratings of NRSROs. Banks OCC Code of Federal Regulations, Title 12, Banks & Banking §§ 1.2, 1.5 Defines the term “investment grade” as being rated in one of the four highest rating categories by two or more NRSROs, or one NRSRO (if it has only been rated by one); establishes that “Investment Securities” must be investment grade to not be considered predominantly speculative. Requires banks to conduct proper due diligence on investment securities, if not rated by an NRSRO. Banks OCC Code of Federal Regulations, Title 12, Banks & Banking §3 Establishes risk-based capital ratings for banks regulated by OCC, per the standardized approach. Relies extensively on NRSRO ratings for capital requirements. Banks (Credit Unions) NCUA Code of Federal Regulations, Title 12, Banks & Banking § 703 Federal credit unions. Relies on NRSROs in setting permissible investments. Allows Federal Credit Unions to invest in certain securities (such as municipal bonds, mortgage notes, European financial option contracts) provided the securities or counterparties have a high enough credit rating as determined by an NRSRO. Banks (Credit Unions) NCUA Code of Federal Regulations, Title 12, Banks & Banking § 704.2, 704 App. A Corporate credit unions. Relies on NRSROs in setting permissible investments for purposes of measuring minimum capital. All investments, other than in corporate credit unions or in products of Government-Sponsored Enterprises (GSEs), must have long-term ratings no lower than AA- or short-term ratings no lower than A-1 (or equivalent). Additionally sets requirements for corporate credit unions to make additional investments such as derivatives and lower-rated securities. Banks (Foreign) FDIC Code of Federal Regulations, Title 12, Banks & Banking § 347 Whenever a foreign bank has an FDIC-insured U.S. branch, it must pledge assets to FDIC or its designee to protect the Deposit Insurance Fund in the event that FDIC is called on to pay for insured deposits of the branch. Ratings by NRSROs are relied upon in determining what types of assets may be pledged by the bank. Banks (Thrifts) OTS Code of Federal Regulations, Title 12, Banks & Banking § 567 Establishes risk-based capital ratings for banks regulated by OCC, per the standardized approach. Relies extensively on NRSRO ratings for capital requirements. BrokerDealers SEC Rule 15c3-1 (Net Capital Rule) under the Securities Exchange Act of 1934 (“Exchange Act”) Under the Net Capital Rule, which requires broker-dealers to deduct from their net worth certain percentages of the market value of their proprietary securities positions in calculating their net capital, broker-dealers may apply smaller deductions, or “haircuts,” against the market value of commercial paper rated in one of the three highest rating categories by at least two NRSROs and to nonconvertible debt securities and preferred stock rated in one of the four highest rating categories by at least two NRSROs. (Commission has proposed removing the references to NRSRO ratings.) Continued on next page. 129 130 special inspector general I troubled asset relief program Key Regulations Involving NRSRO credit ratings (continued) Pertains To Regulator Rule Description BrokerDealers SEC Rule 10b-10 under the Exchange Act Requires broker-dealers providing transaction confirmations to inform customers if a non-Government debt security is unrated by an NRSRO, if applicable. (Commission has proposed rescinding requirement.) BrokerDealers SEC Form X-17A-5 Part IIB, under section 17 of the Exchange Act A financial and operational report that must be completed by all broker-dealers that are registered with the SEC. Allows OTC derivatives dealers to employ NRSRO ratings to calculate credit risk weights of counterparties. (Commission has proposed removing references to NRSROs as well as the related substantive provisions of Net Capital Rule.) Corporate Debt SEC Rule 3a1-1 under the Exchange Act Distinguishes between investment-grade corporate debt and non-investmentgrade corporate debt based on NRSRO rating. (Commission has removed references to NRSROs in this rule as of 10/9/2009.) Corporate Debt SEC Regulation ATS under the Exchange Act Establishes different trading system access and compliance requirements for investment-grade and non-investment-grade corporate debt securities. (Commission has removed references to NRSROs in this rule as of 10/9/2009.) Corporate Debt SEC Form ATS-R and Form Pilot under the Exchange Act Registration forms delineating reporting requirements for investment-grade and non-investment-grade corporate debt securities. (Commission has removed references to NRSROs in this rule as of 10/9/2009.) Debt Issuers SEC Form S-3, under Securities Act of 1933 (the “Securities Act”) Issuers of certain debt securities that receive an investment-grade rating (typically, within an NRSRO’s top four rating categories) from an NRSRO are entitled to a streamlined registration process (short-form registration) under Form S-3. (Commission has proposed new guidelines for eligibility, not based on NRSRO ratings.) Debt Issuers SEC Form F-3, under the Securities Act A form used by foreign private issuers to register offerings of securities with the SEC. To be considered “investment grade,” primary offerings of non-convertible securities must be rated investment grade (typically, within an NRSRO’s top four rating categories) by at least one NRSRO. (Commission has proposed new guidelines for eligibility, not based on NRSRO ratings.) Debt Issuers SEC Rule 415, under the Securities Act Allows “mortgage-related securities” (rated in one of the two highest rating categories by at least one NRSRO), to be eligible for shelf registration. (Commission has proposed new guidelines for eligibility, not based on NRSRO ratings.) Debt Issuers SEC Rule 3a-7 under the Investment Company Act of 1940 (the “1940 Act”) Requires that structured financings offered to the general public are rated by at least one NRSRO in one of the four highest ratings categories. (Commission has proposed removal of references to NRSRO ratings.) Debt Issuers SEC Regulation FD - (Code of Federal Regulations, Title 17, Commodity & Security Exchanges § 243.100) Exempts issuers from public disclosure requirements for material non-public information provided to rating agencies (provided the rating agency’s ratings are publicly available). Debt Issuers SEC Rule 134 under the Securities Act Permits issuers to disclose certain ratings from NRSROs in “tombstone” advertisements and other non-prospectus information. (Commission has proposed amending rule to include all credit ratings agencies rather than only NRSROs.) Debt Issuers SEC Rule 436(g) under the Securities Act Issuers with credit rating from an NRSRO do not need to submit rating agency consent form along with issue registration. Exempts NRSROs from expert liability under section 11 of the Securities Act. (Commission has solicited comment on whether rule should be rescinded.) Housing Finance FHFA Code of Federal Regulations, Title 12, Banks & Banking § 1750 Establishes risk-based capital requirements for the GSEs, relying extensively on credit ratings from NRSROs in “stress tests” used for calculating risk-based capital requirements. Housing Finance FHFA Code of Federal Regulations, Title 12, Banks & Banking §§ 930, 932 Establishes risk-based capital requirements for Federal Homeloan Banks, relying extensively on credit ratings from NRSROs for determination of investment-grade rating and capital requirements related to securities and off-balance-sheet items. Housing Finance FHFA Code of Federal Regulations, Title 12, Banks & Banking § 955 Sets asset-quality requirements for participation in the Acquired Member Asset (“AMA”) program, which gives mortgage lenders an alternative to selling mortgages in the secondary market. Uses NRSRO designations in determining creditrisk-sharing structure and risk-based capital requirements for acquired assets. Continued on next page. quarterly report to congress I october 21, 2009 Key Regulations Involving NRSRO credit ratings (continued) Pertains To Regulator Rule Description Housing Finance FHFA Code of Federal Regulations, Title 12, Banks & Banking § 956 Sets permissible investment list for Federal Homeloan Banks, prohibiting them from investing in debt instruments that are not investment-grade, as determined by NRSROs (with certain exceptions). Establishes risk-based capital requirements for investments (based on NRSRO ratings). Housing Finance FHFA Code of Federal Regulations, Title 12, Banks & Banking § 966 Requires the Federal Homeloan Banks to acquire, and at all times maintain, the highest rating from an NRSRO rating on their consolidated obligations. Further requires each individual bank to maintain at least the second-highest rating from an NRSRO. Housing Finance HUD Code of Federal Regulations, Title 24, Housing and Urban Development § 266.100 To participate in a Federal Housing Administration (“FHA”) risk-sharing program for insured, affordable multifamily project loans, a potential housing finance agency must be rated “top-tier” by an NRSRO, and must maintain an overall A rating for its bonds. Insurance NAIC The FE Rule Securities rated and monitored by one or more NRSRO are automatically assigned an equivalent Securities Valuation Office (“SVO”) rating, rather than requiring the SVO to conduct its own valuation. Insurance NAIC Purposes & Procedures Manual Establishes guidelines enabling an NRSRO to be considered an Acceptable Rating Organization (“ARO”) for NAIC regulatory purposes. Insurance NAIC Policy Statement on Financial Regulation Standards (“SFRS”) Identifies laws and regulations that must be adopted by state insurance regulators, specifying the use of NAIC designations (which are interchangeable with those of NRSROs). Insurance NAIC Authorized Control Level Risk Based Capital Rule Establishes levels of regulatory intervention linked to defined risk-based capital (“RBC”) ratios of the assets of insurers. NAIC ratings (interchangeable with NRSROs) are used to set the reserve factor that an insurer must use to calculate the appropriate RBC charges a purchased asset should make against an insurer’s total RBC. Insurance NAIC Asset Valuation and Interest Maintenance Reserve (“AVR”) and Interest Maintenance Reserve (“IMR”) Certain insurance companies must reserve against potential credit-related and interest-related investment losses on all invested asset categories. AVR and IMR rely on the extent to which a debt security or MBS asset is upgraded/downgraded during the holding period — with losses being attributable to credit (more than one change in NAIC ratings classification — interchangeable with NRSROs), or interest (one or no change in rating category). Insurance NAIC Investment Law — The Medium Grade and Lower Grade Obligations Model Regulation Uses NAIC designations (interchangeable with NRSRO ratings) to set percentage limitations by credit quality — sets a maximum investment of 20% in mediumgrade securities designated NAIC 3, 4, 5, 6. Insurance NAIC Investment Law —- The Investment of Insurer’s Model Act Defined Limits Version Classifies investments in categories with percentage limitations for each. Criteria include a general diversification percentage and also a credit quality percentage, many of which rely on NAIC designations (interchangeable with NRSRO ratings). Insurance NAIC Investment Law — Investment of Insurer’s Model Act Defined Standards Version Requires an insurer to establish a minimum financial security benchmark, after which it may invest in any lawful investments. Limits the percentage of admitted assets that can be invested by reference to their NAIC designation (interchangeable with NRSRO ratings). Insurance NAIC Valuation of Securities — Statement of Statutory Accounting Principle (“SSAP”) NAIC’s accounting rules establish valuation guidance, driven by NAIC designations (interchangeable with NRSRO ratings) assigned to particular securities. Investment Advisors SEC Rule 206(3)-3T under the Investment Advisers Act of 1940 Provides a temporary means for investment advisors that are also registered broker-dealers to satisfy notice and consent requirements. Certain exclusions are based on NRSRO ratings. (Commission has proposed removal of references to NRSRO ratings.) Money Market Mutual Funds (MMF) SEC Rule 2a-7 under the 1940 Act Uses NRSRO credit ratings to determine permissible investments for MMFs (e.g., portfolio investments limited to securities that have received credit ratings from at least one NRSRO in one of the two highest short-term rating categories or, if unrated, are of comparable quality). (Commission has proposed amending rule to remove references to NRSRO ratings.) Continued on next page. 131 132 special inspector general I troubled asset relief program Key Regulations Involving NRSRO credit ratings (continued) Pertains To Regulator Rule Description NRSRO SEC Rule 17g-1 under the Exchange Act Prescribes how an NRSRO must apply to be registered with the Commission and keep its registration up-to-date, including mandating disclosure regarding ratings performance statistics, methodologies to determine and monitor credit ratings, organizational structure, code of ethics, policies for preventing misuse of material non-public information, and the firm’s conflicts of interest as well as its policies for managing conflicts of interest. NRSRO SEC Rule 17g-2 under the Exchange Act Requires an NRSRO to maintain certain financial and other records, document methodologies, and track communications with regard to a firm’s rating. NRSRO SEC Rule 17g-3 under the Exchange Act Requires an NRSRO to provide the SEC with audited financial statements and a variety of unaudited reports. NRSRO SEC Rule 17g-4 under the Exchange Act Requires an NRSRO to have procedures in place regarding material non-public information that it has received during the ratings process. NRSRO SEC Rule 17g-5 under the Exchange Act Prohibits an NRSRO from having any of a number of different types of conflicts. Also, requires an NRSRO to disclose and manage other conflicts of interest. NRSRO SEC Rule 17g-6 under the Exchange Act Prohibits an NRSRO from certain unfair, coercive, or abusive practices. Repurchase Agreements SEC Rule 5b-3 under the 1940 Act Allows a fund to treat the acquisition of a repurchase agreement as the acquisition of the securities collateralizing the repurchase agreement, based in part on the NRSRO rating of the securities. (Commission has removed references to NRSROs in this rule as of 10/9/2009.) Repurchase Agreements SEC Rule 5b-3 under the 1940 Act Requires the approval of an independent CPA for certain treatment on a refunded bond, unless the bond has the highest rating by an NRSRO. (Commission has removed references to NRSROs in this rule as of 10/9/2009.) Securities (Derivatives / Futures) CFTC Code of Federal Regulations, Title 17, Commodity & Security Exchanges § 30.7 Requires foreign FCMs that accept money, securities or property from U.S. customers to maintain, in a separate depository account, sufficient assets to cover current obligations to those customers. If depository is outside the United States and below a certain size, it may require a commercial paper rating of the two highest tiers from an NRSRO. Securities (Derivatives / Futures) CFTC Rule 4d(a) 2 under the Commodity Exchange Act (Code of Federal Regulations, Title 17, Commodity & Security Exchanges § 1.25) Establishes permissible investments for derivatives clearing organizations and future commission merchants (“FCMs”) holding customer segregated funds, in order to minimize exposure to credit, liquidity, and market risks. Relies on NRSRO ratings to determine allowable commercial paper, debt, and CD investments. Securities (Municipal) SEC Rule 10f-3 under the 1940 Act Permits funds to purchase municipal securities that have received a certain NRSRO rating. (Commission has removed references to NRSROs in this rule as of 10/9/2009.) Securities (Nonconvertible securities (debt & preferred), ABS) SEC Rule 101(c)(2), Rule 102(d) (2) of Regulation M under the Exchange Act Exempts from rule certain securities that are rated by an NRSRO in one of its categories signifying investment grade. (Commission has proposed removing the references to NRSRO ratings.) Sources: SEC, Rules and Regulations for the Securities and Exchange Commission and Major Securities Laws, http://www.sec.gov/about/laws/secrulesregs.htm, accessed 10/5/2009; SEC, response to SIGTARP draft report, 10/14/2009; Electronic Code of Federal Regulations, http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&tpl=%2Findex.tpl, accessed 10/5/2009; NAIC, “Staff Report: NAIC Use of NRSRO Ratings in Regulation,” 3/10/2009, http://www.naic.org/documents/committees_e_rating_agency_comdoc_naic_staff_report_use_of_ratings.doc, accessed 10/5/2009. 133 quarterly report to congress I october 21, 2009 Table 3.5 Comparison of Risk-Weighting Factors, across different Ratings ($100 bond) Long-Term Risk Weightings Regulatory Capital SIGTARP’s April Quarterly Report discussed the concept of regulatory capital and the effects that a bank’s financial situation can have on meeting its regulatory capital requirements. Banking regulators are concerned about safety and soundness, and one of the prime metrics they use to determine safety and soundness is the level of a bank’s net regulatory capital — a calculation that relies heavily on credit ratings. To calculate a net capital number, regulators divide a bank’s core capital (such as stock or retained earnings) by the value of its risk-weighted assets. Credit ratings provided by the rating agencies are frequently relied on by market participants to determine the risk weightings and the values of the assets. Regulators require banks to hold capital equal to 4 – 6% of their risk-weighted assets.288 FDIC uses risk weightings in the denominator of the formula that calculates the amount of regulatory capital a bank must hold to be considered adequately (4%) or well (6%) capitalized. Risk-weighted assets are calculated as the value of assets held by the bank, multiplied by the relevant risk weighting factor, as determined by the credit rating of the asset. In the numerator is the bank’s net capital. So, the formula (Net Capital / Risk-Weighted Assets) must equal 6% if the bank is to be considered well-capitalized. In short, the higher the risk category, the more capital a bank must hold for the formula to produce the 6% requirement. Table 3.5 captures FDIC’s risk weightings of assets by credit rating category. In short, the lower the credit rating of its assets, the more the bank must reserve (removing more funds from active use). Thus, downgrades of securities by rating agencies have a real effect on banks — forcing them into urgent action to either raise capital or shed the downgraded assets from their balance sheets. These requirements also have implications for a bank’s profitability — the higher the capital reserve required to meet regulatory standards, the lower the return on equity (“ROE”) for a fixed income investment. The bank must set aside capital that it would otherwise have free for making other investments or lending money to its customers — underscoring the clear link between the actions of rating agencies and the financial institutions’ profitability and ability to lend. When conducting a review of the soundness of a bank, the regulators typically check to make sure the regulatory capital calculations are done correctly. They do not, however, review the accuracy of the credit ratings, relying instead on the rating agencies. Long-Term Rating Category Risk Weight AAA, AA 20% A 50% BBB 100% BB (and lower) 200% Short-Term Risk Weightings Short-Term Rating Category A-1, P-1 Risk Weight 20% A-2, P-2 50% A-3, P-3 100% Source: Bank Holding Company Act of 1956, P.L. 511: Appendix A — Capital Adequacy Guidelines for Bank Holding Companies: Risk-Based Measure, http://www.fdic.gov/regulations/laws/rules/6000-1900.html, accessed 10/7/2009. Net Regulatory Capital: A regulatory metric that requires a bank to take into consideration the relative riskiness of its assets. Calculated as common equity minus intangibles. Core Capital: Also known as T1, refers to the common stock, perpetual noncumulative preferred stock, paid-in capital, and retained earnings of a bank. Risk-Weighted Assets: The amount of a bank’s total assets after applying an appropriate risk factor to each asset. Return on Equity (“ROE”): A measurement of how much profit a company generates with the money shareholders have invested. Calculated showing net income as a percentage of shareholders’ equity. If a bank must hold capital (equity) aside for regulatory purposes, it can make fewer investments, with implications for ROE. 134 special inspector general I troubled asset relief program Table 3.6 Example: Impact of Downgraded Asset on Capital RequirementS ($ millions) Before Downgrade After Downgrade Aaa B3 $100.0 $100.0 20% 200% Risk-Weighted Assets $20.0 $200.0 Net Capital Required $1.2 $12.0 — $10.8 Rating Face Value of Holding Risk Weighting Capital Raise Needed to Stay at 6% Risk-Weighted Capital Sources: FDIC, Part 325 — Capital Maintenance, Appendix A: Statement of Policy on Risk-Based Capital, http://www.fdic.gov/ regulations/laws/rules/2000-4600/html#fdic2000appendixatopart325, accessed 10/5/2009. Fallen Angel: In finance, can refer to a bond which held an investment-grade rating when issued, but has subsequently fallen to a much lower rating, or a once-popular investment that has fallen out of favor with investors and declined in value. Example: Rating Downgrade and the Effect on a Bank’s Balance Sheet In 2007, the rating agencies began to downgrade rapidly a large number of securities whose collateral was underperforming — especially ABS and CDOs. Subsequently, the rating agencies downgraded approximately $1.9 trillion in RMBS,289 with certain “fallen angels” being downgraded from AAA to junk over a short period, or even, in some cases, a single action. These downgrades had material effects on the viability of certain banks because of Federal capital requirement regulations. Table 3.6 illustrates how a downgraded RMBS might impact a bank’s ability to meet its capital requirements. The example in Table 3.6 shows a bank that had $100 million invested in a top-rated RMBS, such as the Impac Secured Assets Corp. Mortgage Pass-through Certificates, Series IMSA 2005-2 A1 (“Impac RMBS”), which had a Aaa rating from Moody’s as of March 12, 2008.290 Because of the securities’ Aaa rating, the bank’s investment in Impac RMBS was classified in FDIC’s 20% risk category, meaning that the bank must multiply its $100 million holding by 0.2 and further multiply that product by 0.06 (the desired capitalization level) to determine the amount of capital the bank must hold to satisfy regulatory requirements and be considered “well capitalized.” Thus, pursuant to the FDIC formula, to be considered well capitalized (net capital at 6% of risk-weighted assets), the bank must set aside $1.2 million net capital against that $100 million investment. By February 20, 2009, Moody’s had cut the rating of the Impac RMBS to B3 (15 notches) — moving it from prime to junk in less than a year. Consequently, the asset would be moved to the 200% risk category on the FDIC scale, and the bank would be required to reserve $12 million (or 10 times more than initially required quarterly report to congress I october 21, 2009 when the security was rated Aaa approximately one year before). This meant that the bank would have to raise an additional $10.8 million in capital if it wanted to continue holding the security. In order to increase regulatory capital from $1.2 million to $12 million, the bank would have to make some hard choices about how to raise that additional money. The bank’s options include: • Sell the RMBS (most likely at a loss because of the downgrade and the changed expectations for yield in the now-riskier securities) and acquire higher-quality, investment-grade assets of the same nominal amount. This would result in a reduction of cash or another asset due to the likely loss in value of the RMBS portfolio. • Retain the RMBS, but raise regulatory capital through issuing new equity, in the process diluting the value of existing shareholders’ holdings (and likely driving down the bank’s stock price). • Retain the RMBS, but raise cash by calling in $10.8 million of loans, reducing shareholders’ equity and profitability in the process, and harming its customers. In the current crisis, institutions responded to the widespread downgrades using various combinations of these options, which led to an overall reduction in lending, the crashing of prices in the MBS markets, and the large equity-raising efforts that occurred earlier this year. Role of Rating Agencies in the Financial Crisis Any assessment of the role of rating agencies in the creation or exacerbation of the financial crisis necessarily depends on an understanding of what factors caused the crisis. A Government Accountability Office (“GAO”) study in July 2009, entitled “Financial Crisis Highlights Need to Improve Oversight of Leverage at Financial Institutions and Across System,” places a large part of the blame on rising levels of leverage.291 Leverage enables a small amount of capital to control a much larger investment. This leverage was facilitated by the dramatic increase in availability of innovative financial products such as CDOs and MBS that allowed banks and institutions to remove loans and other assets from their balance sheets and issue new loans. The structured finance market grew dramatically over the years immediately preceding the crisis, corresponding with a similar growth in revenues among the dominant rating agencies. Later, it was discovered that a great portion of the products given high ratings by the rating agencies were not deserving of those high ratings, calling into question the credibility of the rating agencies’ work. Through Leverage: The ratio of a company’s debt to its equity. 135 136 special inspector general I troubled asset relief program a series of hearings in Congress, reports by the Federal Reserve, and studies by the SEC, it is clear that Federal regulators and overseers are focusing on the following ways in which the rating agencies contributed to the financial crisis: • Conflicts of Interest. Credit ratings have been portrayed as effectively being marketing devices for a company’s securities (AAA being the brand that sells the best), and that the rating agencies are paid by the promoters of the securities being sold. This contributed to issuers shopping among the credit rating agencies to determine which agency would offer the better ratings. In Congressional testimony, a former executive at Moody’s stated “a large part of the blame can be placed on the inherent conflicts of interest found in the issuer-pay business model and on rating shopping by issuers of structured securities. A drive to maintain or expand market share made the rating agencies willing participants in this shopping spree.”292 There has been anecdotal evidence that in the lead-up to the crisis, these conflicts of interest yielded highly suspect ratings as ratings shopping fed into a phenomenon referred to in the same testimony as a “race to the bottom.” The Moody’s executive stated that “originators of structured securities typically chose the agency with the lowest standards, engendering a race to the bottom in terms of rating quality.”293 An SEC study produced internal communications between two analysts at an NRSRO in which one analyst expressed concern that the firm’s “model did not capture ‘half’ of the deal’s risk, but that ‘it could be structured by cows and we would rate it.’”294 • Failure to Assess Subprime Risk Accurately. The financial crisis first reached critical proportion in the subprime mortgage markets, where ratings at times appeared to be lagging, not leading, the changes in valuation. Ratings of a corporate bond rely heavily on analysts’ experience and judgment, whereas ratings for MBS rely almost exclusively on financial models.295 If those models are flawed, it renders the ratings unreliable. A primary flaw was that these models relied on historical data (typically, 1992–2000) of mortgage default and foreclosure frequency rates, whereas loans made during 2001–2007 were very different and often much riskier. In Congressional testimony, the head of a small rating agency pointed to a second flaw in the models used by credit rating agencies in predicting housing markets — “the assumption was that the housing prices would increase. In fact, they embedded an acronym — the house appreciation rate,”296 sometimes also called the Home Price Appreciation (“HPA”). In Congressional testimony, a subprime fund manager commented that “at least one of the NRSROs was using HPA assumptions of +6% to +8% for 2006, 2007, and 2008 in their models for securitizations underwritten in 2006 and the first quarter of 2007.”297 Obviously, this assumption that housing prices would only go up has been proven to be inaccurate. Another shortcoming in the quarterly report to congress I october 21, 2009 models was that the rating agencies did not factor in the risk associated with the mortgage originators and their questionable practices on the overall risk of the underlying mortgage pool.298 • Overlooked Concentration of Risk in CDO Market. Rating agencies have been faulted for not correctly incorporating in their ratings the imbalances in the CDO market, and the concentrations of risk that were developing. A December 2006 email communication from an S&P analyst stated, as disclosed in a Congressional hearing, that “rating agencies continue to create an even bigger monster, the CDO market. Let’s hope we are all wealthy and retired by the time this house of cards falters.”299 • Poor Market Surveillance Contributed to Market Instability and Volatility. A downgrade to the rating of a particular security or institution can have enormous ripple effects throughout the economy, acting as a transmission mechanism for financial stresses. It has been observed that ratings often lagged the broader capital markets, which could be attributable to underinvestment and poor protocols in the area of surveillance. In its study, the SEC observed that “the surveillance processes used by the rating agencies appear to have been less robust than the processes used for initial ratings.”300 In the case of the structured finance securities, when downgrades happened they often came in a flood. As mentioned previously, approximately $1.9 trillion of securities lost their AAA status between mid-2007 and mid-2008 — with some being downgraded to junk in one action.301 For CDOs rated by Moody’s, the average downgrade was roughly seven notches (for example, Aaa to Baa1) as compared to a previous average of three to four notches prior to 2007.302 • Government-Endorsed Oligopoly. There is a perception that the NRSRO designation that helped established the prominence of the three large rating agencies in the 1970s continues to help them build an effective oligopoly, fueled by the Government’s reliance on NRSRO ratings through regulation, as described above. Similarly, the Connecticut Attorney General is investigating the requirements that the TALF program be limited to securities with AAA ratings from one of a subset of NRSROs. The Attorney General noted that the rating agencies stood to receive revenues of approximately $400 million from TALF transactions, despite being involved in the faulty ratings of the securities in the past. He likens the decision to “steering them cash to rebuild what they destroyed.”303 TARP Reliance on Credit Ratings The ratings issued by credit rating agencies, whether corporate or securities, impact a number of TARP programs, the TARP recipients, and ultimately the U.S. taxpayers. In particular, the following TARP-related programs have explicit provisions that rely on ratings issued by NRSROs: 137 138 special inspector general I troubled asset relief program Non-Agency RMBS: RMBS that are not guaranteed by a GovernmentSponsored Enterprise (“GSE”) such as Fannie Mae, Freddie Mac, or the Federal Home Loan Banks. • Term Asset-Backed Securities Loan Facility (“TALF”): Rating agencies play an integral role in TALF. TALF’s risk mitigation mechanism requires that the collateral pledged for TALF loans must achieve ratings of the highest long-term investment-grade rating category (i.e., AAA) from two or more of the TALFeligible NRSROs. Additionally, the collateral must have the highest rating from any TALF-eligible NRSRO and cannot be on review or on watch for downgrade by any of the approved NRSROs. The requirement that TALF can only involve AAA-rated securities has had a significant effect on the CMBS market, potentially enhancing the AAA market at the expense of others. For more detail on the structure of TALF, see Section 2: “TARP Overview” in this report. • Capital Assistance Program (“CAP”): In the Supervisory Capital Assessment Program (“SCAP”) stress test, credit ratings were among the factors considered in setting capital values. Lower credit ratings for the securities held in an institution’s investment portfolio meant that the institution would be required to raise more capital. • Public-Private Investment Program (“PPIP”): Assets eligible for inclusion in PPIP investments must have originally received a AAA rating (or equivalent) from two or more NRSROs. Eligible assets are CMBS and non-agency RMBS issued prior to January 1, 2009, that were originally rated AAA or an equivalent rating by two or more NRSROs without external credit enhancement and that are secured directly by the actual mortgage loans, leases, or other assets and not other securities.304 Credit Ratings Influence on TARP Recipients Beyond the TARP programs that explicitly rely on credit ratings from the NRSROs, a number of TARP programs were designed to address the needs of financial institutions that were directly and indirectly affected by ratings and ratings actions. These include: • Capital Purchase Program (“CPP”): Ratings downgrades affected many of the financial institutions that ultimately sought Government assistance through CPP. Ratings downgrades on banks’ portfolios of securities forced them to hold more regulatory capital, which most banks had difficulty raising privately, especially at the height of the financial crisis. • Systemically Significant Failing Institutions (“SSFI”): AIG’s credit rating decline was instrumental in its need for a taxpayer-funded rescue, as discussed below in the AIG case study. Example: The Downfall of AIG Prior to the crisis, AIG had a solid reputation, reliable earnings, and was generally perceived to be one of the stronger companies in the United States. Prior to March quarterly report to congress I october 21, 2009 2005, AIG had a AAA rating and was considered likely to honor its obligations and contracts. Through its insurance policies, it was able to extend its good credit rating to products that were unable to achieve an investment-grade rating on their own. Since the 1990s, AIG had become a central figure in the fixed-income securities market, underwriting the risk on a number of structured finance products, including volatile RMBS. As discussed in previous SIGTARP quarterly reports, RMBS and CMBS are financial instruments backed by mortgage loans (residential and commercial, respectively). The underlying loans, in turn, had been issued by mortgage lenders and banks. Most of these loans had been sold to Freddie Mac and Fannie Mae or Wall Street investment banks that would package them into bundles of loans sharing similar characteristics, turning them into a mortgage-backed security. This process, called securitization, would allow the mortgage lenders and banks to sell these loans, removing them from their balance sheet and use the cash from the sales to issue new loans. The MBS would then be sold to investors (other banks, pension funds, insurance funds) that were interested in the particular streams of income the products offered. A considerable challenge to this process was that many of these investors had a low risk tolerance and sought AAA-rated or comparable investment-grade securities. AIG, along with other Wall Street firms, developed a structuring approach that appeared to meet the desires of these prospective investors for high yields with low risks. The product AIG sold for this purpose, called a credit default swap (“CDS”), was essentially an insurance-like contract that provided protection to third-party investors against losses from the securities. AIG Financial Products Corp. (“AIGFP”), a subsidiary of AIG, sold the CDSs to investors who were buying the MBS, firms issuing the MBS, and unrelated investors. The MBS were often further bundled into CDOs. The underlying assets upon which AIGFP’s CDS contracts were written were generally CDOs. The firm purchasing the CDS (the “counterparty”) would pay AIG regular insurance premiums; if the security upon which the CDS contract was written, generally a CDO, should default, AIG would be obligated to make a payout to the counterparty. Due to its corporate AAA rating, AIG was able to enter into these insurance contracts without posting any collateral, a benefit that was not available to lower-rated firms. Included in these contracts was a provision that, should AIG’s credit rating be downgraded, AIG would be required to post collateral to ensure payment on these contracts. As of June 2008, AIG was counterparty to more than $400 billion of CDS, the majority of which it sold to banking institutions that used the instruments to manage their regulatory capital requirements.305 As reported in Congressional testimony, by 2005, the majority of CDS contracts issued by AIG were based on underlying securities, such as CDOs that were, in turn, backed by ABS, some of which were collateralized by subprime loans.306 In early 2005, some credit rating agencies began to question certain transactions and For more information on the securitization process, see SIGTARP’s April Quarterly Report, page 92. 139 140 special inspector general I troubled asset relief program Figure 3.1 AIG REPORTED COLLATERAL POSTINGS AIG SHARE PRICE AND S&P RATINGS (12/1/2007 − 11/1/2009) $ Billions $ per share 2005 2006 2007 2008 $1500a $40 35 1200 30 900 25 600 20 15 300 AAA AA+ AA AA- A- 10 5 0 JUNE 26 1990 OCTOBER 29 2004 MARCH 15 2005 NOVEMBER 10 2006 FEBRUARY 12 2008 MAY 8 2008 MAY 21 2008 SEPTEMBER 12 2008 SEPTEMBER 15 2008 MARCH 30 2005 JUNE 3 2005 Downgrade Stable Outlook Negative Outlook Watch Negative Share Price Collateral Postings Notes: Numbers affected by rounding. Collateral postings are presented above on the date provided in AIG’s SEC filings rather than on the filing date. a AIG conducted a reverse stock split of 1 for 20 on 6/30/2009. Sources: Reported Collateral: AIG, 10K and 10 Q filings, http://www.aigcorporate.com/investors/sec_filings.html, accessed 10/5/2009. Share Price and Ratings Information: S&P, “Testimony of Rodney Clark Managing Director, Ratings Services, Standard & Poor’s Financial Services LLC Before the Subcommittee on Capital Markets, Insurance, and GovernmentSponsored Enterprises United States House of Representatives,” 3/18/2009, http://www.house.gov/apps/list/hearing/financialsvcs_dem/rodney031809.pdf, accessed 9/28/2009; share price data from Google Finance. AIG’s creditworthiness in general. Although AIG still had a AAA rating, the firm was now closer to losing its AAA status. In addition, if the value of the securities that AIG was insuring fell, AIG was contractually obligated to produce quickly the collateral to its counterparty to make up for the difference in the drop in price of the security. That collateral could be either cash or AAA-rated securities. The more the value of the “insured” securities fell, the more collateral would be required. In the fourth quarter of 2007, the value of subprime RMBS fell so quickly that the market could no longer effectively price the securities, and counterparties began making significant collateral calls to AIG. Figure 3.1 shows a summary of AIG’s ratings changes by one rating agency, S&P, and the movement of AIG’s stock price and reported collateral calls. Select AIG Timeline Highlights: • March 30, 2005: S&P downgraded AIG from AAA to AA+, largely due, according to Congressional testimony of an S&P executive, to “the company’s involvement in a number of questionable financial transactions.”307 quarterly report to congress I october 21, 2009 • June 3, 2005: S&P lowered AIG’s rating to AA “based on significant accounting adjustments that had just been announced by the company.”308 For the next three years, S&P held AIG’s rating essentially stable. • February 12, 2008: S&P placed a negative outlook on AIG based on “concerns about the way AIG was determining the fair value of CDS it had entered into.”309 Of particular concern were the CDS guaranteeing “an array of structured finance securities, including securities backed by subprime residential mortgages.”310 • February 28, 2008: AIG announced that it had posted $5.3 billion in collateral “based on exposures, calculated in respect of super senior credit default swaps.”311 • May 8, 2008: AIG announced that it had posted an aggregate of $9.7 billion in collateral over the previous two years.312 A negative outlook on AIG was maintained throughout the summer of 2008. S&P lowered its rating on AIG further to AA-, in reaction to “the company’s announcement of an after-tax loss of $7.8 billion, including $5.9 billion in losses related to its CDS portfolio.”313 • August 2008: S&P announced that AIG’s actual credit-related losses in its CDS and investment portfolios would likely amount to approximately $8 billion. It would be considerably more if AIG were forced to mark its investments to market, or list its assets on its balance sheet at their current market value.314 • August 6, 2008: AIG announced that it had posted an aggregate of $16.5 billion in collateral.315 • September 2008: Following the Government takeovers of Freddie Mac and Fannie Mae, and the bankruptcy of Lehman Brothers, among other market disruptions, AIG’s financial condition deteriorated rapidly, exacerbated by “a sudden drop in the market value of AIG’s investments and, more importantly, the investments of third parties that had purchased CDS guarantees from AIG.”316 • September 12, 2008: S&P warned the market that it had placed AIG and its subsidiaries on credit watch negative. • September 15, 2008: S&P lowered its rating further to A-, based “primarily on a combination of AIG’s reduced flexibility in meeting collateral needs and its increasing CDS-related losses.”317 Following the S&P downgrade, AIG estimated that it would need “in excess of $20 billion in order to fund additional collateral demands and transaction termination payments.”318 • September 16, 2008: FRBNY extended an $85 billion borrowing facility to AIG.319 • As of September 30, 2009, $69.8 billion in TARP funds was committed to be made available to AIG, of which $43.2 billion has been drawn down.320 Much of the Federal Reserve and TARP support for AIG stemmed from AIG’s liquidity crisis related to the collateral AIG was contractually obligated to post 141 142 special inspector general I troubled asset relief program to counterparties. Indeed, it was largely fear of further AIG downgrades and the resulting systemic effect on the financial markets and the American retirement system that led Treasury to commit to make $70 billion of TARP funding available to AIG. In Congressional testimony, an S&P executive asserted that Government intervention was critical in stopping the decline of AIG ratings: “were it not for this government assistance, we believe that AIG’s creditworthiness would have continued to deteriorate.”321 Should that creditworthiness have been allowed to deteriorate further, financial institutions, companies, and individuals would have potentially been exposed to hundreds of billions of dollars in losses from AIG’s wide range of insurance and financial contracts.322 For instance, AIG’s corporate paper was widely held by money market mutual funds who maintain a net asset value of $1 per share; a default on that debt could have caused many funds to “break the buck,” potentially triggering a run on those funds and other financial institutions.323 Net Asset Value: A fund’s per-share value. Calculated by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of fund shares outstanding. Break the Buck: A decline below $1 in the net asset value (“NAV”) of a money market mutual fund. Evolving Regulatory Environment The SEC has implemented a number of regulatory initiatives aimed at increasing transparency within the credit rating market. Following the initial implementation of CRARA, the SEC promulgated two additional rounds of regulations, and continues to modify those regulations to require more robust disclosure with respect to ratings methodologies and further refine policies addressing potential conflicts of interest.324 Furthermore, Treasury has recently proposed legislation aimed at enhancing supervision of the rating agencies, including provisions to require all rating agencies to register as NRSROs. SEC Rule Changes — Round 1 Following the enactment of CRARA, in June 2007, the SEC initiated a registration program for NRSROs, implemented an application and ongoing disclosure form (“Form NRSRO”), and adopted six new rules. The newly adopted rules focused on the following issues: disclosure of information related to internal processes; retention of financial and compliance records; submission of audited financial statements to the SEC; the handling of non-public information; conflicts of interest; and prohibited practices.325 Following the intense scrutiny that began to fall on rating agencies in light of their role in the financial crisis, the SEC developed additional regulations. In February 2009, CRARA regulations were further expanded by the SEC when it adopted requirements related to three discrete areas: disclosure, records maintenance, and conflicts of interest. Specifically, the SEC required that rating agencies implement the following recommendations and adhere to the new restrictions:326 quarterly report to congress I october 21, 2009 Disclosure • provide greater specificity regarding how performance metrics are generated (Form NRSRO) • report whether and to what extent verification of underlying assets and an assessment of the quality of the originator are considered when determining a rating for a structured product • report the frequency of credit rating reviews (Form NRSRO) • report whether different models are used for surveillance (Form NRSRO) • provide the SEC an unaudited annual report of the number of ratings actions taken in the last fiscal year • publicly disclose, when an NRSRO has more than 500 ratings in a particular rating class, the credit rating histories for a random sample of 10% of their issuer-paid ratings Records Maintenance • record those instances when a quantitative model produced a different rating than was ultimately assigned to a structured product and provide rationale for the discrepancy • record all ratings actions by date from the initial credit rating to the current credit rating for all outstanding ratings Conflicts of Interest • prohibits NRSROs from issuing ratings for securities in which the NRSRO has consulted as to the structure of the transaction • prohibits fee discussions between rating agency credit analysts and issuers • prohibits credit analysts from accepting certain gifts from issuers Additionally, on July 14, 2009, the SEC announced plans to establish a branch of examiners specifically dedicated to conducting examination oversight of the NRSROs, per the authorities given the SEC under CRARA.327 Treasury Proposal On July 21, 2009, Treasury submitted recommendations to Congress with a number of provisions to strengthen oversight of credit rating agencies. Many of Treasury’s proposals were reflected in the actions later addressed by the SEC during its open meeting on September 17, 2009. Treasury’s proposal focused on mitigating potential conflicts of interest; increasing transparency and disclosure; strengthening SEC supervision; and reducing reliance on credit rating agencies. As announced by Treasury, the proposal would force rating agencies to take the following actions: Originator: The lead bank or underwriter for a structured finance product. 143 144 special inspector general I troubled asset relief program • • • • • • • • • forgo consulting services for companies they rate improve disclosure of conflicts of interest disclose fees associated with each rating report designate a compliance officer perform a look-back for any rating issued to a company if the analyst assigned to rate the security subsequently goes to work for the company require disclosure of preliminary ratings to discourage ratings shopping develop symbols to distinguish clearly risks of structured products disclose qualitative and quantitative risk measured in a rating provide full ratings history for issuer-paid credit ratings Treasury’s proposed legislation is intended to strengthen supervision of rating agencies through the establishment of an office within the SEC dedicated solely to supervision of the rating agencies. The Treasury proposal would require registration with the SEC and submission of documented rating methodologies. Additionally, Treasury and the SEC would work with The President’s Working Group on Financial Markets to eliminate references to ratings from existing regulations. SEC Rule Changes — Round 2 On September 17, 2009, the SEC held an open meeting to discuss strengthening oversight of credit rating agencies. During the meeting, the SEC voted unanimously to implement final rules, that, similar to the Treasury recommendations, were intended to further strengthen the regulatory framework for credit rating agencies.328 These actions will become law 30 days after the SEC publishes the rules in the Federal Register. The actions approved in the meeting: • enabled unsolicited ratings for structured finance products by ensuring access to information for all NRSROs • required annual compliance reports related to potential conflicts of interest • amended SEC rules and regulations to remove certain reference to NRSROs’ credit ratings • required additional disclosure regarding whether “ratings shopping” occurred • required NRSROs to disclose publicly, online, their history of ratings actions for any rating that the NRSRO initially made as of June 26, 2007 (no later than two years after the action is taken for subscriber-paid ratings, and within one year for issuer-paid ratings) As noted previously, September 17, 2009, final rules would eliminate references to NRSRO credit ratings in a number of SEC rules and forms. Table 3.7 captures those rules that were amended. quarterly report to congress I october 21, 2009 Additionally, the SEC extended the period for public comment regarding the elimination of certain Federal regulatory references to NRSRO credit ratings before eliminating them from regulations. The SEC will revisit the issue after the 60-day comment period. Table 3.8 captures those rules in which references to credit ratings might be eliminated. Alternative Regulatory Reform The rating agencies have been under an increasingly bright spotlight ever since the financial scandals of the early 2000s called the quality and independence of their ratings into question. The president of Moody’s commented in a House Oversight and Government Reform Committee hearing that “it turns out that ratings quality has surprisingly few friends: issuers want high ratings; investors don’t want ratings downgrades; short-sighted bankers labor short-sightedly to game the ratings agencies.”329 The SEC and other regulators, such as NAIC, have been reviewing their regulations to assess the impact of removing reference to NRSROs. In addition, regulators are looking for ways to improve rating agency transparency and disclosure and better manage conflicts of interest. There are a number of options for reforming the current system, however, that go further than the proposed SEC reforms. Many of these can be found in the wide range of recommendations made in Congressional testimony and other forums. SIGTARP does not endorse any particular proposed reform. Examples of these proposed reforms include: table 3.7 Proposed Eliminated References to NRSRO Credit Ratings Regulation Form/Rule Securities Exchange Act of 1934 Rule 3a-1 Securities Exchange Act of 1934 Regulation ATS Securities Exchange Act of 1934 ATS-R and Form Pilot Investment Company Act of 1940 Rule 5b-3 Investment Company Act of 1940 Rule 10f-3 Source: SEC, “Rules and Forms at Issue in Removal of References to NRSRO Credit Ratings,” 9/17/2009, www.sec.gov/ news/press/2009-200-rulesformsaffected.htm, accessed 9/21/2009. • Eliminate all reference to NRSROs in both securities and banking regulations: The SEC, in its September 17, 2009, actions, has initiated steps to reduce reliance on NRSRO ratings. SEC Commissioner Kathleen Casey, in a September 17, 2009, speech, commented that the SEC needs to “eliminate the government imprimatur given to certain debt analysts by removing NRSRO references in all of our rules.”330 At the same time, however, the banking regulators (the Federal Reserve, FDIC, OCC, and OTS) continue to move forward table 3.8 Open For Comment: Removal of References to NRSRO Credit Ratings Regulation Form/Rule Reference to NRSRO Removed Securities Exchange Act of 1934 Regulation M Determination of exception based on investment-grade rating Securities Exchange Act of 1934 Rule 10b-10 Requirement that broker-dealers inform customers if security is unrated Securities Exchange Act of 1934 Net Capital Rule All references related to the “haircut” Investment Company Act of 1940 Rule 3a-7 Definition of “investment company” structured finance vehicles Investment Company Act of 1940 Rule 5b-3 Repurchase Agreement for securities Investment Company Act of 1940 Rule 206(3)-3T Excludes securities from coverage Source: SEC, “Rules and Forms at Issue in Removal of References to NRSRO Credit Ratings,” 9/17/2009, www.sec.gov/news/press/2009-200-rulesformsaffected.htm, accessed 9/21/2009. 145 146 special inspector general I troubled asset relief program with risk-weighted capital regulations that explicitly rely on NRSRO ratings. The Mortgage Bankers’ Association, in a letter commenting on the SEC’s proposed changes of June and July 2008, observed that “these contradictory approaches, create the potential for the SEC and the banking regulatory agencies to promulgate final rules that are inconsistent or even contradictory in their approaches regarding reliance on ratings.”331 In Congressional testimony on September 30, 2009, Professor Lawrence White from New York University stated that the Administration’s proposals to reduce regulatory reliance on ratings seem to be largely lip service and do not go far enough.332 His advice is to eliminate references to NRSROs wherever they occur whether in securities regulations or in bank capital requirements: “Eliminate all regulatory reliance on ratings, by the SEC and by all other financial regulatory agencies — eliminate the force of law that has been accorded to these third-party judgments.”333 • Establish an “FASB” to set standards for credit ratings: In Congressional testimony on September 29, 2009, Eric Kolchinsky, former managing director for the business line responsible for rating subprime CDOs at Moody’s, suggested that the Government must finally acknowledge the quasi-regulatory role of NRSROs and regulate them in a similar way to the accounting profession, which also plays such a role. He suggests establishing an independent body, based on the model of the Financial Accounting Standards Board (“FASB”), to set public standards for “regulatory ratings” — “the agencies would still be free to publish their own ratings but would have to follow the public standards for any rating used in a regulatory manner.”334 Examples include simple fixes, such as standarizing, for regulatory purposes, the definition of the term “AAA,” which is used extensively but can have different definitions at different rating agencies. Mr. Kolchinsky suggested that “the public body could also determine what kinds of products are ‘rate-able’ and what kind of information is required of issuers for rating purposes.”335 • Promote a transition away from the issuer-pay model: Many observers focus on the issuer-pay model as the crux of the regulatory problem for credit rating agencies. That the rating agencies are paid by the corporations for whose securities they are supposed to provide an independent, unbiased evaluation is a fundamental conflict of interest. In the words of one subprime fund manager, “it would be like cattle ranchers paying the Department of Agriculture to rate the quality and safety of their beef.”336 In its examination of the three largest NRSROs, the SEC made several observations about this conflict. First, it noted that rating agency “analysts appeared to be aware, when rating an issuer, of the rating agency’s business interest in securing the rating of the deal.”337 Further, the SEC observed that “rating agencies do not appear to take steps to prevent considerations of market share and other business interests from the possibility quarterly report to congress I october 21, 2009 that they could influence ratings or ratings criteria.”338 The SEC has noted that “NRSROs that are compensated by subscribers appear less likely to be susceptible to ‘ratings shopping’ or reducing quality for initial ratings to induce revenues.”339 One resolution would be to prohibit expressly the issuer-pay model. However, this would be controversial for many market participants; in Congressional testimony, one industry expert describes the investor-pay model as one “that issuers and underwriters may fear (because a more independent rating agency may be more critical of issuers).”340 As a means of gradually imposing business model independence, Sean Egan (managing director at EganJones, a smaller NRSRO) suggested in Congressional testimony that “one way to do this would be to phase in a requirement that any rating agency, in order to maintain its NRSRO designation, derive a given percentage of its annual revenues from investors rather than relying almost exclusively on issuers.”341 Another option was advanced in Congressional testimony by Eric Baggesen of the California Public Employees Retirement System (“CALPERS”). Mr. Baggesen suggested that, since “there is a fundamental conflict of interest when the issuer pays the fees of the [rating agency],” the fees earned by the rating agencies might be made to “vest over a period of time equal to the average duration of the bonds rated. Fees should vest based on the performance of the original ratings and changes to those ratings over time relative to the credit performance of those bonds.”342 • Enforce better surveillance: Credit rating agencies have significant power in terms of their surveillance, related to the effect of a downgrade, but there is limited regulation on agencies’ surveillance. One observer, in Congressional testimony, asserts that “from a transparency perspective, the gravest problem today may be the staleness of debt ratings. As noted earlier, issuer-paid rating agencies earn no revenues from downgrades and may jeopardize their relationships with both issuers, investment banks, and many institutional investors (who must today typically write down the value of downgraded debt).”343 An SEC report in July 2008 found that rating agencies’ surveillance processes appear to have been less robust than their initial rating process.344 Many believe that enhanced standards for surveillance should be an integral part of any effort to restore the reliability of credit ratings. • Equal access to information: A fundamental advantage enjoyed by NRSROs over other rating agencies (and individual investors) is that NRSROs are exempt from the SEC Fair Disclosure rules (Regulation FD). In Congressional testimony, Mr. Egan stated that this exemption “can allow them special access to material non-public information from issuers of corporate debt.”345 Mr. Egan suggests that “this special treatment should be ended in order to ensure the uniform release of credit information to all market participants” — a move that 147 148 special inspector general I troubled asset relief program could help end the perception that NRSROs’ judgments are better informed and inherently more valuable than others.346 • Impose civil liability for negligence or fraud: Some observers have recommended the imposition of strict rules on rating agencies similar to those imposed on accounting firms by Sarbanes-Oxley, wherein both the senior management of a company and of its accounting firm must personally attest to the veracity of information contained in financial audits, opening themselves to personal civil liability. In Congressional testimony, Gregory Smith of the Colorado Public Employees’ Retirement Association noted that rating agencies are, similar to auditors, “financial gatekeepers.” He states that “financial gatekeepers are less likely to engage in negligent, reckless or fraudulent behavior if they are subject to a risk of liability for these behaviors. Ratings agencies, however, are currently immune from such checks.”347 Representative Paul Kanjorski, in a Congressional hearing, stated “by considering proposals aimed at better disclosure, real accountability, and perhaps even civil liability, we can advance that debate today and ultimately figure out how to get the regulatory fit just right.” On September 25, 2009, Representative Kanjorski introduced legislation to this effect — including the possible imposition of industry-wide liability for the actions of all rating agencies as a means of stimulating self-regulation.348 S ection 4 tarp operations and administration 150 special inspector general I troubled asset relief program quarterly report to congress I october 21, 2009 Under the Emergency Economic Stabilization Act of 2008 (“EESA”), Congress authorized the Secretary of the Treasury (“Treasury Secretary”) to build the operational and administrative infrastructure to support the Troubled Asset Relief Program (“TARP”) activities. EESA established an Office of Financial Stability (“OFS”) within the Department of Treasury (“Treasury”), which is responsible for the administration of TARP.349 Treasury has the authority to establish program vehicles, issue regulations, directly hire or appoint employees, enter into contracts, and designate financial institutions as financial agents of the Federal Government.350 In addition to permanent and interim staff, OFS relies on contractors and financial agents in legal, investment consulting, accounting, and other key service areas.351 TARP Administrative and Program Expenditures Treasury stated that it had incurred $50.8 million in TARP-related administrative expenditures and $115.6 million in programmatic costs to hire financial agents and legal firms through September 30, 2009.352 Table 4.1 summarizes the administrative expenditures.353 The majority of these costs are allocated to “personnel services” and “non-personnel services.” Table 4.1 TARP Administrative expenditures and obligations Budget Object Class Title Obligations for Period Ending 9/30/2009 Expenditures for Period Ending 9/30/2009 $14,173,433 $13,625,364 $14,173,433 $13,625,364 $268,128 $230,257 11,934 11,934 112,965 41,531 Personnel Services Personnel Compensation & Services Total Personnel Services Non-Personnel Services Travel & Transportation of Persons Transportation of Things Rents, Communications, Utilities & Misc. Charges Printing & Reproduction 395 395 68,060,362 36,497,220 Supplies & Materials 257,418 147,418 Equipment 232,054 222,675 — — Other Services Land & Structures Interest & Dividends 8 8 Total Non-Personnel Services $68,943,264 $37,151,439 Grand Total $83,116,697 $50,776,803 Note: Numbers affected by rounding. Source: Treasury, response to SIGTARP data call, 10/7/2009. 151 152 special inspector general I troubled asset relief program TARP operations are projected to cost a total of approximately $175 million for fiscal year 2009.354 Operational costs are not factored into any gains or losses on the TARP-related transactions and are not included in the $699 billion limit on asset purchases. Therefore, these expenditures will add to the Federal budget deficit regardless of whether the TARP transactions result in a gain or a loss for the Government.355 Current Contractors and Financial Agents As of September 30, 2009, Treasury had retained 66 outside contractors and financial agents, including 4 asset managers, to help administer TARP. As permitted under EESA, Treasury streamlined solicitation procedures and structured several agreements and contracts to allow for flexibility in obtaining the required services expeditiously. Table 4.2 lists outside vendors as of September 30, 2009.356 As required by EESA, the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”) provides biographical information for each person or entity hired to manage the Government’s troubled assets acquired through TARP.357 Subsequent to SIGTARP’s Quarterly Report to Congress, dated July 21, 2009 (“July Quarterly Report”), OFS has not hired any additional asset managers. OFS, however, is in the process of selecting a group of smaller firms to function as asset managers and will notify SIGTARP when a final decision has been made.358 Conflicts of Interest Within the framework of TARP procurement and contracting, actual or potential conflicts of interest can exist at the organizational level or pertain to an individual employee. Under EESA, the Treasury Secretary can issue regulations or guidelines to address and manage, or to prohibit, conflicts of interest that can arise in connection with the administration and execution of TARP.359 TARP-related conflicts of interest can arise under various circumstances, such as when retained entities (financial agents or contractors) perform similar work for Treasury and other clients. In these situations, retained entities may find that their duty to certain clients may impair their objectivity when advising Treasury or may affect their judgment about the proper use of non-public information. Conflicts may also arise from the personal interests of individuals employed by retained entities. Accordingly, Treasury has issued interim conflict-of-interest guidelines.360 These interim rules require interested contractors to provide sufficient information to evaluate the potential for organizational conflicts of interest and mitigation plans.361 The mitigation plan then becomes a binding term of the contract arrangement. On potential personal quarterly report to congress I october 21, 2009 conflicts of interest, the provisions require that managers and employees of a hired entity disclose any financial holdings or personal and familial relationships that could impair their objectivity.362 Retained entities are also required to take steps to protect non-public information and prevent its inappropriate use; this effort may include the use of non-disclosure agreements. Table 4.2 Outside Vendors Date Vendor Purpose Type of Transaction* 10/10/2008 Simpson, Thacher & Bartlett Legal Services BPA 10/11/2008 EnnisKnupp Investment and Advisory Services BPA 10/14/2008 Bank of New York Mellon Custodian and Cash Management Financial Agent 10/16/2008 PricewaterhouseCoopers Internal Control Services BPA 10/18/2008 Ernst & Young Accounting Services BPA 10/23/2008 GSA – Turner Consulting** Archiving Services IAA 10/29/2008 Hughes Hubbard & Reed Legal Services BPA 10/29/2008 Squire Sanders & Dempsey Legal Services BPA 10/31/2008 Lindholm & Associates** Human Resources Services Contract 11/7/2008 Thacher Proffitt & Wood*** Legal Services BPA 11/14/2008 Securities and Exchange Commission Detailees IAA 11/14/2008 CSC Systems and Solutions IT Services Procurement 12/3/2008 Trade and Tax Bureau – Treasury IT Services IAA 12/5/2008 Department of Housing and Urban Development Detailees IAA 12/5/2008 Washington Post Vacancy Announcement Procurement 12/10/2008 Thacher Proffitt & Wood*** Legal Services BPA 12/12/2008 Pension Benefit Guaranty Corporation Legal Services IAA 12/15/2008 Office of Thrift Supervision Detailees IAA 12/24/2008 Cushman and Wakefield of VA, Inc. Painting Procurement 1/6/2009 Office of the Controller of the Currency Detailees IAA 1/6/2009 State Department Detailees IAA 1/7/2009 Colonial Parking Parking Procurement 1/9/2009 Internal Revenue Service Detailees IAA 1/27/2009 Cadwalader Wickersham & Taft, LLP Legal Services BPA 1/27/2009 Whitaker Brothers Bus. Machines Office Machines Procurement 2/2/2009 Government Accountability Office Oversight IAA 2/9/2009 Pat Taylor and Associates, Inc.** Temporary Employee Services Contract Continued on next page. 153 154 special inspector general I troubled asset relief program Outside Vendors (continued) 2/12/2009 Locke Lord Bissell & Lidell LLP Legal Services Contract 2/18/2009 Freddie Mac Homeownership Program Financial Agent 2/18/2009 Fannie Mae Homeownership Program Financial Agent 2/20/2009 Congressional Oversight Panel Oversight IAA 2/20/2009 Simpson, Thacher & Bartlett Legal Services Contract 2/22/2009 Venable LLP Legal Services Contract 3/6/2009 Boston Consulting Group Management Consulting Support Contract 3/16/2009 EARNEST Partners Asset Management Services Financial Agent 3/23/2009 Heery International Inc. Architects Procurement 3/30/2009 McKee Nelson, LLP Legal Services Contract 3/30/2009 Sonnenschein Nath & Rosenthal Legal Services Contract 3/30/2009 Cadwalader Wickersham & Taft, LLP Legal Services Contract 3/30/2009 Haynes and Boone LLP Legal Services Contract 3/31/2009 FI Consulting** Modeling and Analysis BPA 4/3/2009 American Furniture Rentals** Office Furniture Procurement 4/17/2009 Herman Miller Office Furniture Procurement 4/17/2009 Bureau of Printing and Engraving Detailee IAA 4/21/2009 AllianceBernstein Asset Management Services Financial Agent 4/21/2009 FSI Group Asset Management Services Financial Agent 4/21/2009 Piedmont Investment Advisors Asset Management Services Financial Agent 5/4/2009 Federal Reserve Detailee IAA 5/14/2009 Phacil Inc.** FOIA Services Contract 5/14/2009 Department of Treasury – U.S. Mint Administrative Support IAA 5/22/2009 Department of Justice – ATF Detailee IAA 5/26/2009 Anderson, McCoy & Orta, LLP** Legal Services Contract 5/26/2009 Simpson, Thacher & Bartlett Legal Services Contract 6/5/2009 Internal Revenue Services Administrative Services Contract 6/8/2009 Department of Treasury – Financial Management Services IT Services IAA 6/29/2009 Department of Interior Website Testing IAA 7/15/2009 Judicial Watch Legal Advisory Contract 7/17/2009 Korn Ferry International Administrative Support Contract 7/30/2009 Cadwalader Wickersham & Taft, LLP Legal Advisory Contract 7/30/2009 Debevoise & Plimpton, LLF Legal Advisory Contract 7/30/2009 Fox Hefter Swibel Levin & Carol, LLF Legal Advisory Contract 8/11/2009 NASA Detailee IAA 9/2/2009 Knowledge Mosaic Inc** Administrative Services Contract 9/10/2009 Equilar, Inc.** Administrative Services Contract 9/14/2009 PricewaterhouseCoopers Asset Management Services Contract 9/30/2009 SNL Financial LC Administrative Services Contract Notes: *IAA= Inter-Agency Agreement, BPA = Blanket Purchase Agreement. **Small- or Women-, or Minority-Owned Small Business. ***Contract responsibilities assumed by Sonnenschein Nath & Rosenthal via novation Source: Treasury, response to SIGTARP data call, 10/7/2009. S e c tion 5 SIGtarp recommendations 156 special inspector general I troubled asset relief program quarterly report to congress I october 21, 2009 One of the responsibilities of the Office of the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”) is to provide recommendations to the U.S. Department of the Treasury (“Treasury”) and those other Federal agencies managing Troubled Asset Relief Program (“TARP”) initiatives so that the various TARP programs can be designed or modified to facilitate transparency and effective oversight and to prevent fraud, waste, and abuse. SIGTARP has made such recommendations in each of its quarterly reports to Congress and in several of its audit reports. This section discusses developments with respect to SIGTARP’s prior recommendations, sets forth several new recommendations, and, in the table at the end of this section, summarizes all past SIGTARP recommendations and notes the extent of their implementation. Appendix H: “Correspondence” sets forth Treasury’s written responses to these and prior SIGTARP recommendations. Progress on Lessening the Term Asset-Backed Securities loan Facility’s Reliance on Rating Agencies Beginning with SIGTARP’s Quarterly Report to Congress dated February 6, 2009 (the “Initial Report”), SIGTARP has been urging Treasury and the Federal Reserve Board, in their design of the Term Asset-Backed Securities Loan Facility (“TALF”), to rely less on the ratings of rating agencies and to use instead alternative underwriting analysis such as security-by-security screening of the asset-backed securities (“ABS”) posted as collateral. The Federal Reserve Board and the Federal Reserve Bank of New York (“FRBNY”), which operate TALF, had previously taken various steps to improve the credit protection and fraud prevention aspects of the program and had adopted this recommendation fully with respect to commercial mortgagebacked securities (“CMBS”) posted as collateral. With respect to other ABS, however, Treasury and the Federal Reserve had maintained that TALF’s anti-fraud and credit protection structures were sufficient and that security-by-security screening of ABS was unnecessary. While recognizing that the Federal Reserve, in adopting other SIGTARP recommendations, had greatly improved TALF, SIGTARP repeatedly sounded the alarm in subsequent reports regarding TALF’s continued reliance on credit rating agencies. The Federal Reserve recently modified the program to extend the security-by-security review to all ABS pledged as collateral, consistent with SIGTARP’s previous recommendations. Beginning with the November subscription, FRBNY, working with its collateral monitor, will engage in a formal risk-assessment process for all proposed collateral. Among other things, the formal process gives FRBNY the right to reject any ABS based on this risk assessment. Moreover, as part of the review process, the issuer of the ABS will be required to provide FRBNY with all data 157 158 special inspector general I troubled asset relief program provided to any rating agency along with a written waiver to all rating agencies with which it had shared data regarding the proposed ABS. The waiver will permit the rating agency to provide FRBNY any view it has of the credit quality of the ABS, irrespective of whether the rating agency ever issued a formal rating for the ABS. These provisions will mitigate the possibility of “ratings shopping,” i.e., jumping to another rating agency if the first one approached seems inclined to give an unfavorable rating. Although any reliance on rating agency determinations is problematic in light of the inherent conflicts presented by the rating agency system, as discussed more fully in Section 3 of this report, with these changes and the changes previously made, the role of the rating agencies in TALF is, appropriately, becoming one more of a backstop than a primary protection. These modifications represent further adoption of several SIGTARP recommendations and reflect the efforts of the Federal Reserve Board and FRBNY to continue monitoring and improving the compliance, risk management, and fraud prevention for TALF over time. Developments Relating to HAMP Streamlining In its earlier quarterly reports to Congress, SIGTARP reported on a series of recommendations with respect to the anti-fraud aspects of the Home Affordable Modification Program (“HAMP”), including that Treasury obtain verifiable, third-party information confirming a homeowner’s residence and income and that it conduct a closing-like procedure to ensure, among other things, that the homeowner is aware of the homeowner’s rights and obligations before the modification is completed. Treasury had adopted these recommendations in part as described in SIGTARP’s prior reports. Treasury has recently notified SIGTARP of certain changes to the administration of HAMP that affect these recommendations. Following consultation and an exchange of letters, included in Appendix H: “Correspondence,” SIGTARP can provide updates on three issues. First, on the positive side, Treasury has stated that its program administrator, Fannie Mae, will be developing processes to verify residence prior to funding. This is consistent with SIGTARP’s recommendation, and SIGTARP will monitor the implementation of these processes. The second and third changes relate to Treasury’s attempts to streamline the HAMP application process. As initially rolled out, HAMP required a homeowner to: 1. 2. submit an application for a modification then, if eligible, send in a signed Trial Plan Notice agreeing to the terms of the trial modification quarterly report to congress I october 21, 2009 3. upon successful completion of the trial period, sign and return the formal modification plan agreement documents In an effort to streamline this process, Treasury has decided to eliminate the requirement that the homeowner execute and return the Trial Plan Notice. SIGTARP acknowledges the need to improve the customer service aspects of HAMP (an issue about which SIGTARP has previously warned Treasury — SIGTARP sent Treasury a Management Alert in light of numerous complaints received on SIGTARP’s Hotline about HAMP customer service, included herein in Appendix H: “Correspondence”), but SIGTARP’s concern here is that reasonable steps be taken to ensure that homeowners are fully aware of their rights and obligations under HAMP. Although Treasury has rejected SIGTARP’s recommendation regarding the best practice to effect such warnings — a closing-like procedure — Treasury’s previous requirement for a signed acknowledgement from the homeowner on the Trial Plan Notice that he or she had received such information was a workable alternative. After SIGTARP expressed concerns about the removal of this safeguard, Treasury suggested that it could instead require the servicer to retain proof of mailing of the program details to the homeowner; this action, when coupled with homeowner’s signature on the final documents upon closing of the modification, may also prove to be a reasonable alternative, although SIGTARP encourages Treasury to monitor closely its effectiveness. Treasury also notified SIGTARP that it intended to do away with third-party income verification for most HAMP applicants. In light of the incentive to misstate income inherent in the program, SIGTARP objected to this modification. Treasury subsequently informed SIGTARP that, while it will be making some modifications to its processes, it will continue to require third-party income verification through the Internal Revenue Service. Developments in the Implementation of the Public-Private Investment Program In previous quarterly reports to Congress, SIGTARP made a series of recommendations related to the design of the Public-Private Investment Program (“PPIP”). Treasury adopted some of those recommendations and has rejected others, as summarized in Table 5.1 at the end of this section. This report does not discuss those recommendations further. Over the past quarter, however, Treasury has developed and begun executing the final agreements with the managers of the Public-Private Investment Funds (“PPIFs”), and the finalization of the documents has raised several new issues. 159 160 special inspector general I troubled asset relief program On the positive side, Treasury has changed its position on one issue, adopting, in part, one of SIGTARP’s recommendations that Treasury had previously indicated it would reject. SIGTARP previously recommended that Treasury should require PPIF managers to disclose to Treasury, as part of the Eligible Assets Watch List process, not only information about holdings in eligible assets (i.e., the mortgagebacked securities (“MBS”) being traded in the funds) across all of its and its affiliates’ funds and holdings, but also holdings and trades in related assets or exposures to related liabilities (such as derivative products like credit default swaps (“CDS”) or collateralized debt obligations (“CDOs”) tied to MBS). Treasury had previously indicated that it would require reporting on the eligible assets, but not on related assets. In the final agreements, however, Treasury has required the fund managers to include, in their reporting, trades and positions of any derivative instruments where the value is connected to an eligible asset held by the PPIF. This adoption of SIGTARP’s recommendation is an improvement in the program design. The final agreements also raise two issues that require follow-up recommendations. The first relates to potential future modification of the compliance rules. As detailed in SIGTARP’s Quarterly Report to Congress dated July 21, 2009 (the “July Quarterly Report”), pursuant to section 402 of the Helping Families Save Their Homes Act of 2009 (the “Ensign-Boxer Amendment”), Treasury was required by law to consult with SIGTARP in developing certain aspects of the PPIP compliance and conflict-of-interest regime, which it did. In the final PPIP agreements, however, Treasury has left open its ability to change those rules without consulting with or even giving notice to SIGTARP before such change occurs. Although Treasury’s stated rationale is that SIGTARP is not a party to the final agreements, it is not clear why that fact should affect whether SIGTARP is consulted or why the contract issue would trump Treasury’s statutory obligations. Although Treasury told SIGTARP that it is likely to discuss significant proposed amendments with SIGTARP, such consultation is, in SIGTARP’s view, best practice and may be legally required. Accordingly, SIGTARP makes the following recommendation: • PPIP Recommendation #1 — SIGTARP recommends that Treasury unambiguously commit to give SIGTARP notice of and an opportunity to comment upon any change to the PPIP compliance rules. In response to this recommendation, Treasury informed SIGTARP that it “will consult with [SIGTARP] before making any material changes in the compliance rules.” The second problematic issue relates to the final agreements’ provisions concerning access to the books and records of PPIF managers’ affiliates. In the final agreement, Treasury provides SIGTARP with access to the books and records of each PPIF, as is required by the Ensign-Boxer Amendment. Treasury, however, has quarterly report to congress I october 21, 2009 made the decision to deny SIGTARP access to the books and records that the PPIF managers’ affiliates are required to keep for activities that are conducted in connection with the PPIF as well as the acquisition or disposition of PPIP-eligible assets. This decision is particularly surprising given that Treasury itself has the contractual right to these same books and records. Treasury has stated that it will only provide SIGTARP access “in cases where Treasury has a disclosure or review right with respect to Reports and Financial Information.” SIGTARP does not fully understand why the fund manager’s affiliates’ books do not fall within this category in all cases; more fundamentally, access to the books and records of the PPIF manager’s affiliates’ transactions in connection with the PPIF and for PPIP-eligible assets may prove to be critical for oversight and enforcement. These are books and records that relate directly to the American taxpayer’s investment in the PPIF and could provide compelling evidence of a fund manager violating the conflict-of-interest provisions set forth in the PPIF agreements. SIGTARP will conduct oversight over all of the activities in connection with the PPIF whether it is given contractual rights or not. If Treasury refuses to give SIGTARP contractual access to books and records that are critical to identifying conflicts of interest, SIGTARP will not hesitate to obtain these same books and records using all of its tools, including SIGTARP’s subpoena authority, which may be necessary if such documents are material to a PPIF audit or investigation. To avoid this unnecessary complication, however: • PPIP Recommendation #2 — SIGTARP recommends that Treasury give SIGTARP explicit contractual access to all of the fund manager and affiliate information to which Treasury has access, including books and records for the fund managers’ affiliates. In response to this recommendation, Treasury cited SIGTARP’s access to other materials but did not directly address this recommendation. Update on Recommendations and Lessons Learned from SIGTARP Audit Reports As noted in Section 1 of this report, as of the initial drafting of this report, SIGTARP had released four audit reports. Its fifth audit report, on American International Group (“AIG”) bonuses, was subsequently issued and will be described in detail in SIGTARP’s next quarterly report. Of the four audit reports detailed in Section 1, three contained formal recommendations or lessons learned. Those recommendations and lessons learned are summarized below, along with a description of the responses of Treasury and the other agencies involved. For more information on PPIP safeguards and conflict mitigation, see SIGTARP’s July Quarterly Report, page 89. 161 162 special inspector general I troubled asset relief program Use of Funds Audit As discussed in detail in the July Quarterly Report, as a result of Treasury’s refusal to require reporting more broadly on actual TARP funds use, SIGTARP decided to undertake the task itself by conducting a survey of the more than 360 institutions that had received TARP funds through the end of January 2009. The results of the survey demonstrated that, despite the inherent fungibility of money, financial institutions are capable of providing descriptions of how they used TARP funds. Accordingly, in the July Quarterly Report, SIGTARP renewed its prior recommendation that Treasury require TARP recipients to submit periodic reports to Treasury on their use of funds, including what they were able to do with their TARP funds, such as lending, investments, acquisitions, and other activities, that they could not have conducted without TARP funding. In response to SIGTARP’s recommendation, on September 16, 2009, Treasury informed SIGTARP that it was expanding its Quarterly Capital Purchase Program (“CPP”) Report to include two additional use of funds categories that TARP recipients had mentioned in SIGTARP survey responses. Treasury said this expansion will begin with the next Quarterly CPP Report, scheduled to be released during October 2009. Although this expansion should provide some additional information on an aggregate basis, it falls short of meeting the goal of basic transparency regarding the use of TARP funds. Most importantly, it will only include aggregate data for all CPP institutions and will not report on this information for each individual institution. It will also not reflect the financial institution’s view of what steps it was able to take that it otherwise would not have been able to take absent its receipt of TARP funds. Although SIGTARP is encouraged that Treasury has apparently abandoned its prior position that it is impossible to measure and report on TARP recipients’ use of funds, SIGTARP remains puzzled as to why Treasury refuses to adopt the recommendation to report on each TARP recipient’s use of funds. While Treasury has indicated that it considers this recommendation “closed,” SIGTARP continues to urge Treasury’s full adoption of this recommendation. External Influence Audit As discussed in more detail in Section 1 of this report, this audit, the report of which was issued on August 6, 2009, examined whether or to what extent external parties may have influenced decision making by Treasury or bank regulators in approving bank applications for funding under CPP. SIGTARP found limitations and inconsistencies in the logging of telephone and meeting conversations regarding individual CPP applicants, making it impossible to examine the impact of all potential external inquiries on the CPP process. Available information, however, gave little indication that external inquiries on quarterly report to congress I october 21, 2009 CPP applications had affected the decision-making process. In light of these findings, and to improve transparency and further guard against outside influence, SIGTARP made two recommendations: • Treasury should record the vote count for the decisions of Treasury’s Investment Committee, which makes the final recommendation of whether or not to approve a CPP application. • Treasury and each individual participating Federal banking agency should improve existing control systems to document the occurrence and nature of external oral communication about actual and potential recipients of funding under CPP and other similar TARP-assistance programs to which they may be part of the decision making. Treasury concurred with SIGTARP’s recommendations and adopted them, announcing that it has implemented policies on external contacts similar to those that it has adopted with respect to applications for stimulus funds. Original CPP and Bank of America Investments Audit As discussed in more detail in Section 1 of this report, this audit, which was issued on October 5, 2009, examined the review and approval process associated with TARP assistance to the first nine CPP recipients, with emphasis on additional assistance to Bank of America subsequently authorized under the Targeted Investment Program (“TIP”) and the Asset Guarantee Program (“AGP”). The audit also examined selected issues and interactions among Treasury, Federal Reserve, and Bank of America officials in connection with Bank of America’s acquisition of Merrill Lynch and the timing of Government assistance under TIP and AGP following the acquisition. The audit concluded that Treasury, the Federal Reserve, and FDIC implemented programs designed to help prevent a further deterioration of the economy and a significant risk of financial market collapse. The audit also concluded that Treasury’s description of the investments in the first nine institutions in October 2008 highlights an important lesson for Treasury on using greater care and accuracy in describing its actions and rationales in future programs. In an October 14, 2008, statement announcing the investment in the original nine institutions, thenSecretary of the Treasury Henry Paulson stated: “These are healthy institutions, and they have taken this step for the good of the U.S. economy. As these healthy institutions increase their capital base, they will be able to increase their funding to U.S. consumers and businesses.” The nine institutions were similarly described as healthy in a joint statement released that same day by Treasury, the Federal Reserve, and FDIC, and in a separate statement released by Treasury. Notwithstanding these assertions, senior Government officials had concerns, 163 164 special inspector general I troubled asset relief program at the time the nine institutions were selected, about the health of at least some of those institutions. The Federal Reserve had concerns over the financial condition of several of these institutions individually and for all of them collectively absent some Governmental action; and Secretary Paulson noted concerns about the potential of an outright failure of one of the institutions. In addition to the basic transparency concern that this inconsistency raises, by stating expressly that the “healthy” institutions would be able to increase overall lending, Treasury may have created unrealistic expectations about the institutions’ conditions and their ability to increase lending. Treasury lost credibility when lending at those institutions did not increase and when subsequent events — the further assistance needed by Citigroup and Bank of America being the most significant examples — demonstrated that at least some of those institutions were not healthy. SIGTARP received official written responses to this audit report from both Treasury and the Federal Reserve. In a letter from its General Counsel, the Federal Reserve concurred with the report’s findings and expressly agreed “that an important lesson illustrated by the events that shocked the financial systems over the past two years is that transparency and effective communication are important to restoring and maintaining public confidence, especially during a financial crisis.” (emphasis added) Treasury, on the other hand, did not initially express as positive a position on SIGTARP’s findings. Although Treasury characterized the report as “a useful contribution,” it did not expressly state whether it concurred with the lesson learned that SIGTARP identified in the report. Indeed, Treasury’s response appears to take issue with SIGTARP’s call for careful consideration of public statements in a time of crisis, stating that “[w]hile people may differ today on how the contemporaneous announcements about the reasons for selecting the initial nine recipients should have been phrased, any review of such announcement must be considered in light of the unprecedented circumstances in which they were made.” In a subsequent statement, Treasury described such a review as a “second guess” of the statements made last fall. Although SIGTARP acknowledges the unprecedented circumstances that Treasury was operating under last fall, the lesson to be learned here is that it is precisely during such extraordinary times, as the Federal Reserve correctly noted, that the Government must exercise increased vigilance about accuracy and transparency in its statements to the public. It is axiomatic that the Government’s capacity to address financial crises depends in no small measure on its credibility, both with market participants whose confidence is essential to stabilize the financial system and with the American public whose confidence is essential to underpin the political support necessary to take the difficult (and often expensive) steps that are needed. Accuracy and transparency can enhance the public’s understanding of and quarterly report to congress I october 21, 2009 support for Government programs, whereas statements that are less-than-careful or forthright — like those made in this case — may ultimately undermine the public’s understanding and support for these same programs. This loss of public support could damage the Government’s credibility and have long-term, unintended consequences that actually hamper the Government’s ability to respond to crises. In response to this report, Treasury indicated that, not withstanding its earlier statements, it now concurs with the lesson learned from the audit, repeating verbatim the Federal Reserve’s response. Tracking the Implementation of Recommendations in Previous Reports SIGTARP has now made dozens of individual recommendations, and updating compliance of each one in narrative form would be impractical. The following table, Table 5.1, summarizes SIGTARP’s prior recommendations, gives an indication of SIGTARP’s view of the level of implementation to date, and provides a brief explanation for that view where necessary. For more details on the recommendations, readers are directed to SIGTARP’s earlier quarterly reports to Congress. Treasury’s views on the level of implementation of the recommendations are set forth in Appendix H: “Correspondence.” 165 Treasury should include language in new TARP agreements to facilitate compliance and oversight. Specifically, SIGTARP recommends that each program participant should (1) acknowledge explicitly the jurisdiction and authority of SIGTARP and other oversight bodies, as relevant, to oversee compliance of the conditions contained in the agreement in question, (2) establish internal controls with respect to that condition, (3) report periodically to the Compliance department of the Office of Financial Stability (“OFS-Compliance”) regarding the implementation of those controls and its compliance with the condition, and (4) provide a signed certification from an appropriate senior official to OFS-Compliance that such report is accurate. All existing TARP agreements, as well as those governing new transactions, should be posted on the Treasury website as soon as possible. Treasury requires all TARP recipients to report on the actual use of TARP funds. quickly determines its going-forward valuation meth* Treasury odology. begins to develop an overall investment strategy to * Treasury address its portfolio of stocks and decide whether it intends to * 2 3 4 5 6 7 X X X X X X X Partially Implemented Implemented Note: * Indicates that Treasury considers the recommendation closed and will take no further action. In formulating the structure of TALF, Treasury should consider requiring, before committing TARP funds to the program, that certain minimum underwriting standards and/or other fraud prevention mechanisms be put in place with respect to the ABS and/or the assets underlying the ABS used for collateral. exercise warrants of common stock. and expressly giving SIGTARP access to relevant documents and personnel. should include language in the automobile industry * Treasury transaction term sheet acknowledging SIGTARP’s oversight role 1 Recommendation SIGTARP RECOMMENDATIONS TABLE Table 5.1 In Process Not Implemented TBD Continued on next page. The Federal Reserve recently adopted mechanisms that address this recommendation. See discussion in this section. Treasury has begun implementing this recommendation. Treasury has made a determination that it does not intend at this time to exercise warrants except under certain circumstances related to mergers and acquisitions. Treasury has failed to adopt this recommendation for all but three TARP recipients. See discussion in this section. Treasury agreed to do so in late January, but as of the July Quarterly Report, hundreds of agreements had not yet been posted, and Treasury assured SIGTARP that all agreements would be posted by August 15, 2009. As of the drafting of this report, it still has not posted 78 CPP agreements on its website, but has promised that it will finally fulfill this commitment by November 1, 2009. SIGTARP will continue to monitor Treasury’s progress. Although Treasury has made substantial efforts to comply with this recommendation in many of its agreements, there have been exceptions, including in its agreements with servicers in MHA. Treasury has further stated that it will only implement this recommendation in circumstances that it deems “appropriate.” Comments 166 special inspector general I troubled asset relief program * 10 In TALF, Treasury should dispense with rating agency determinations and require a security-by-security screening for each legacy RMBS. Treasury should refuse to participate if the program is not designed so that RMBS, whether new or legacy, will be rejected as collateral if the loans backing particular RMBS do not meet certain baseline underwriting criteria or are in categories that have been proven to be riddled with fraud, including certain undocumented subprime residential mortgages. In TALF, Treasury should require significantly higher haircuts for all MBS, with particularly high haircuts for legacy RMBS, or other equally effective mitigation efforts. * * * 13 14 X X X X Partially Implemented Implemented Note: * Indicates that Treasury considers the recommendation closed and will take no further action. Treasury and the Federal Reserve should provide to SIGTARP, for public disclosure, the identity of the borrowers who surrender collateral in TALF. Treasury should formalize its valuation strategy and begin providing values of the TARP investments to the public. Treasury should oppose any expansion of TALF to legacy MBS without significant modifications to the program to ensure a full assessment of risks associated with such an expansion. 12 11 should give careful consideration before agreeing * Treasury to the expansion of TALF to include MBS without a full review 9 of risks that may be involved and without considering certain minimum fraud protections. * Agreements with TALF participants should include an acknowledgement that: (1) they are subject to the oversight of OFSCompliance and SIGTARP, (2) with respect to any condition imposed as part of TALF, that the party on which the condition is imposed is required to establish internal controls with respect to each condition, report periodically on such compliance, and provide a certification with respect to such compliance. 8 Recommendation SIGTARP RECOMMENDATIONS TABLE (continued) In Process X X X Not Implemented TBD Continued on next page. This recommendation has been implemented with respect to CMBS, and the Federal Reserve has announced that it will not be expanding TALF to RMBS. The Federal Reserve has announced that RMBS will not be eligible for TALF loans, rendering this recommendation moot. The Federal Reserve and Treasury continue to oppose this basic aspect of transparency in the TALF program. SIGTARP intends to revisit this issue with the Federal Reserve once a collateral surrender takes place. Although Treasury will provide a valuation in its annual financial statement using methodology governed by Federal accounting policies, it has not committed to making its estimate of the value of its investments public on a sufficient, more frequent basis — even though it is receiving monthly valuation summaries from its asset managers. This recommendation has been implemented with respect to CMBS, and the Federal Reserve has announced that it will not be expanding TALF to RMBS. This recommendation has been implemented with respect to CMBS, and the Federal Reserve has announced that it will not be expanding TALF to RMBS. Comments quarterly report to congress I october 21, 2009 167 Treasury should not allow Legacy Securities PPIFs to invest in TALF unless significant mitigating measures are included to address these dangers. All TALF modeling and decisions, whether on haircuts or any other credit or fraud loss mechanisms, should account for potential losses to Government interests broadly, including TARP funds, and not just potential losses to the Federal Reserve. Treasury should address the confusion and uncertainty on executive compensation by immediately issuing the required regulations. * * * * 17 18 19 should impose strict conflict-of-interest rules upon * Treasury PPIF managers across all programs that specifically address 22 X X X X X Partially Implemented Implemented Note: * Indicates that Treasury considers the recommendation closed and will take no further action. whether and to what extent the managers can (1) invest PPIF funds in legacy assets that they hold or manage on behalf of themselves or their clients or (2) conduct PPIF transactions with entities in which they have invested on behalf of themselves or others. provide periodic reporting on their actual use of TARP funds, (3) certify to OFS-Compliance, under the penalty of criminal sanction, that the report is accurate, that the same criteria of internal controls and regular certified reports should be applied to all conditions imposed on CAP participants, and (4) acknowledge explicitly the jurisdiction and authority of SIGTARP and other oversight bodies, as appropriate, to oversee conditions contained in the agreement. should require CAP participants to (1) establish an * Treasury internal control to monitor their actual use of TARP funds, (2) Treasury should significantly increase the staffing levels of OFS-Compliance and ensure the timely development and implementation of an integrated risk management and compliance program. 21 20 Treasury should design a robust compliance protocol with complete access rights to all TALF transaction participants for itself, SIGTARP, and other relevant oversight bodies. 16 expanded TALF, including minimum underwriting standards and other fraud prevention measures. should require additional anti-fraud and credit protec* Treasury tion provisions, specific to all MBS, before participating in an 15 Recommendation SIGTARP RECOMMENDATIONS TABLE (continued) X In Process X Not Implemented X TBD Continued on next page. Treasury has adopted some significant conflict-of-interest rules related to this recommendation, but has failed to impose other significant safeguards. Treasury has reported that in its draft documents it is including “most of the suggestions of SIGTARP,” but is refusing to adopt a use of funds reporting requirement. Although not immediate or final, Treasury did issue regulations on June 15, 2009. The Federal Reserve has adopted mechanisms that address this recommendation with respect to CMBS, and has announced that it will not be expanding TALF to RMBS. Comments 168 special inspector general I troubled asset relief program * In MHA, Treasury should require the servicer to compare the income reported on a mortgage modification application with the income reported on the original loan application. Additional anti-fraud protections should be adopted in MHA to verify the identity of the participants in the transaction and to address the potential for servicers to steal from individuals receiving Government subsidies without applying them for the benefit of the homeowner. In MHA, Treasury should require a closing-like procedure be conducted that would include (1) a closing warning sheet that would warn the applicant of the consequences of fraud; (2) the notarized signature and thumbprint of each participant; (3) mandatory collection, copying, and retention of copies of identification documents of all participants in the transaction; (4) verbal and written warnings regarding hidden fees and payments so that applicants are made fully aware of them; (5) the benefits to which they are entitled under the program (to prevent a corrupt servicer from collecting payments from the Government and not passing the full amount of the subsidies to the homeowners); and (6) the fact that no fee should be charged for the modification. X X X Partially Implemented Implemented Note: * Indicates that Treasury considers the recommendation closed and will take no further action. 28 27 26 * * 24 Treasury should require servicers in MHA to submit third-party verified evidence that the applicant is residing in the subject property before funding a mortgage modification. Treasury should require most-favored-nation clauses, PPIF managers to acknowledge that they owe Treasury a fiduciary duty, and that each manager adopt a robust ethics policy and compliance apparatus. * 25 Treasury should require that all PPIF fund managers (1) have stringent investor-screening procedures, including comprehensive “Know Your Customer” requirements at least as rigorous as that of a commercial bank or retail brokerage operation to prevent money laundering and the participation of actors prone to abusing the system, and (2) be required to provide Treasury with the identities of all of the beneficial owners of the private interests in the fund so that Treasury can do appropriate diligence to ensure that investors in the funds are legitimate. 23 Recommendation SIGTARP RECOMMENDATIONS TABLE (continued) X X In Process X Not Implemented TBD Comments Continued on next page. Treasury stated that its compliance agent Freddie Mac is refining its procedures to verify that incentive payments to servicers are applied to borrowers. See discussion in this section. See discussion in this section. Treasury’s agreements with PPIF managers include investor-screening procedures such as “Know Your Customer” requirements. Treasury has agreed that it will have access to any information in a fund manager’s possession relating to beneficial owners. However, Treasury is not making an affirmative requirement that managers obtain and maintain beneficial owner information. quarterly report to congress I october 21, 2009 169 Treasury should defer payment of the $1,000 incen* IntiveMHA, to the servicer until after the homeowner has verifiably MHA, Treasury should proactively educate homeowners * Inabout the nature of the program, warn them about modification MHA, Treasury should require its agents to keep track of the * Innames and identifying information for each participant in each Treasury should require the imposition of strict information barriers or “walls” between the PPIF managers making investment decisions on behalf of the PPIF and those employees of the fund management company who manage non-PPIF funds. Treasury should periodically disclose PPIF trading activity and require PPIF managers to disclose to SIGTARP, within seven days of the close of the quarter, all trading activity, holdings, and valuations so that SIGTARP may disclose such information, subject to reasonable protections, in its quarterly reports. 30 31 32 33 34 X X Partially Implemented Implemented Note: * Indicates that Treasury considers the recommendation closed and will take no further action. mortgage modification transaction and to maintain a database of such information. rescue fraudsters, and publicize that no fee is necessary to participate in the program. made a minimum number of payments under the mortgage modification program. any modification payments are made. MHA, Treasury should require that verifiable, third-party in* Information be obtained to confirm an applicant’s income before (continued) 29 Recommendation SIGTARP RECOMMENDATIONS TABLE In Process X X X Not Implemented X TBD Continued on next page. Although Treasury is developing a template for periodic reporting, those reports will only provide aggregated information on eligible asset investments in the PPIF. Treasury has not committed to providing full transparency to show where public dollars are invested by requiring periodic disclosure of every trade in the PPIF. Treasury has refused to adopt this significant anti-fraud measure designed to prevent conflicts of interest. This represents a material deficiency in the program. Treasury has refused to adopt this significant anti-fraud measure designed to detect insiders who are committing large-scale fraud. This represents a material deficiency in the MHA anti-fraud regime. Treasury continues to rely on servicer representations that the homeowner has made three trial payments before entering the program, but does not require any minimum payments after a mortgage enters the program. See discussion in this section. Comments 170 special inspector general I troubled asset relief program should more explicitly document the vote of each * Treasury Investment Committee member for all decisions related to the should improve existing control systems to document * Treasury the occurrence and nature of external phone calls and in- 40 41 X X X X Partially Implemented Implemented Note: * Indicates that Treasury considers the recommendation closed and will take no further action. person meetings about actual and potential recipients of funding under the CPP and other similar TARP-assistance programs to which they may be part of the decision-making. investment of TARP funds. * Treasury and FRBNY should (1) examine Moody’s assertions that some credit rating agencies are using lower standards to give a potential TALF security the necessary AAA rating and (2) develop mechanisms to ensure that acceptance of collateral in TALF is not unduly influenced by the improper incentives to overrate that exist among the credit agencies. Treasury should require PPIF managers to obtain and maintain information about the beneficial ownership of all of the private equity interests, and Treasury should have the unilateral ability to prohibit participation of private equity investors. 39 38 * Treasury should require PPIF managers to disclose to Treasury, as part of the Watch List process, not only information about holdings in eligible assets but also holding in related assets or exposures to related liabilities. The conditions that give Treasury “cause” to remove a PPIF manager should be expanded to include a manager’s performance below a certain standard benchmark, or if Treasury concludes that the manager has materially violated compliance or ethical rules. 36 37 Appropriate metrics be defined and an evaluation system be put in place to monitor the effectiveness of the PPIF managers, both to ensure they are fulfilling the terms of their agreements and to measure performance. 35 Recommendation SIGTARP RECOMMENDATIONS TABLE (continued) X In Process X X Not Implemented TBD Comments See discussion in this section. See discussion in this section. See discussion in this section. Treasury has agreed that it can have access to any information in a fund manager’s possession relating to beneficial owners. However, Treasury is not making an affirmative requirement that managers obtain and maintain beneficial owner information. Treasury will not adopt the recommendation to give itself unilateral ability to deny access to or remove an investor, stating that such a right would deter participation. See discussion in this section. Treasury has refused to adopt this recommendation relying solely on Treasury’s right to end the investment period after 12 months, during which time the PPIF manager’s performance may continue to fall below a standard benchmark potentially putting significant Government funds at risk. Treasury has indicated that it will substantively adopt this recommendation and is developing appropriate metrics. quarterly report to congress I october 21, 2009 171 172 special inspector general I troubled asset relief program quarterly report to congress I OCTOBER 21, 2009 Endnotes 1. Commitment source: Treasury, response to SIGTARP data call, 10/7/2009. The $699 billion represents the $700 billion authorized for TARP by EESA less the $1.2 billion reduction as a result of the Helping Families Save Their Homes Act of 2009 (Public Law 111-22). 2. From a budgetary perspective, what Treasury has committed to spend (e.g., signed agreements with TARP fund recipients). Treasury, Transactions Report, 10/2/2009, http://financialstability.gov/docs/ transaction-reports/Transactions_Report_09-30-09.pdf, accessed 10/5/2009. 3. As of September 30, 2009, 47 TARP recipients in various programs had repaid their TARP funds. Under the Capital Purchase Program (“CPP”) 44 TARP recipients had repaid a total $70.7 billion. Chrysler Financial, LLC had repaid its TARP funds under the Automotive Industry Financing Program (“AIFP”) totaling $1.5 billion, and the two participants under the Auto Warranty Commitment Program (“AWCP”) had repaid a total $641 million. 4. Emergency Economic Stabilization Act of 2008, P.L. 110-343, 10/3/2008. 5. Treasury, response to SIGTARP data call, 10/7/2009. 6. Treasury, “Press Release: Assistant Secretary for Financial Stability Herbert M. Allison, Jr. Written Testimony Senate Committee on Banking, Housing and Urban Affairs,” 9/24/2009, http://www.financialstability.gov/latest/09242009_testimony.html, accessed 10/12/2009. 7. Emergency Economic Stabilization Act of 2008, P.L. 110-343, section 122, 10/3/2008. 8. Emergency Economic Stabilization Act of 2008, P.L. 110-343, section 204, 10/3/2008. 9. EESA related information: Emergency Economic Stabilization Act of 2008, P.L. 110-343, 10/3/2008. Debt limit: Treasury, Monthly Statement of the Public Debt of the United States, 9/30/2008, http:// www.treasurydirect.gov/govt/reports/pd/mspd/2008/opds092008.pdf, accessed 9/10/2009; Treasury, Monthly Statement of the Public Debt of the United States, 10/31/2008, http://www.treasurydirect.gov/ govt/reports/pd/mspd/2008/opds102008.pdf, accessed 9/10/2009. 10. SIGTARP Initial Report to Congress, 2/6/2009, pp. 29-31. 11. Budget and Accounting Act of 1921 (31 U.S.C. 1105(1)), 1/8/2008, http://uscode.house.gov/download/pls/31C11.txt, accessed 9/27/2009. 12. White House, OMB, http://www.gpoaccess.gov/usbudget/fy10/pdf/hist.pdf, accessed 9/25/2009. 13. Office of Management and Budget, Historical Tables, Budget of the United States Government, FY 2009, “Summary of Receipts, Outlays, and Surpluses or Deficits,” p. 22, http://www.gpoaccess.gov/ USbudget/fy09/pdf/hist.pdf, accessed 10/2/2009. 14. White House, OMB, http://www.gpoaccess.gov/usbudget/fy10/pdf/hist.pdf, accessed 9/25/2009. 15. Federal Reserve Bank of New York, Primary Dealers, 09/18/2009, http://www.newyorkfed.org/aboutthefed/fedpoint/fed02.html, accessed 9/25/2009. 16. Treasury, “How Treasury Auctions Work,” http://www.treasurydirect.gov/instit/auctfund/work/work.htm, accessed 8/31/2009. 17. Treasury, Monthly Statement of the Public Debt of the United States, 9/30/2008, http://www.treasurydirect.gov/govt/reports/pd/mspd/2008/opds092008.pdf, accessed 9/10/2009; Treasury, Monthly Statement of the Public Debt of the United States, 10/31/2008, http://www.treasurydirect.gov/govt/reports/pd/mspd/2008/opds102008.pdf, accessed 9/10/2009. 18. Treasury, Historical Long Term Rates, http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/ltcompositeindex_historical.shtml, accessed 9/15/2009; Treasury, Daily Treasury Bill Rates, http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/daily_treas_bill_rates_historical_2008.shtml, accessed 9/15/2009. 19. GAO, “Troubled Asset Relief Program: One Year Later, Actions Are Needed to Address Remaining Transparency and Accountability Challenges,” 10/8/2009, http://www.gao.gov/new.items/d1016.pdf, accessed 10/9/2009. 20. White House, OMB, FY 2010 Presidential Budget, May 7, 2009, http://www.whitehouse.gov/omb/budget/fy2010/assets/assumptions.pdf, accessed 10/09/2009. 21. Freddie Mac, COFI index, http://www.freddiemac.com/news/finance/cof_index.htm, accessed 10/8/2009. 22. White House, OMB, FY 2010 Presidential Budget, May 7, 2009, http://www.whitehouse.gov/omb/budget/fy2010/assets/assumptions.pdf, accessed 10/9/2009. 23. GAO, “Troubled Asset Relief Program: One Year Later, Actions Are Needed to Address Remaining Transparency and Accountability Challenges,” 10/8/2009, http://www.gao.gov/new.items/d1016.pdf, accessed 10/9/2009. 24. Treasury, Office of Fiscal Projections, response to SIGTARP draft report, 10/8/2009. 25. Treasury, Office of Fiscal Projections, response to SIGTARP draft report, 10/8/2009. 26. Treasury, Office of Fiscal Projections, response to SIGTARP draft report, 10/8/2009; GAO, “Troubled Asset Relief Program: One Year Later, Actions Are Needed to Address Remaining Transparency and Accountability Challenges,” 10/8/2009, http://www.gao.gov/new.items/d1016.pdf, accessed 10/9/2009. 27. GAO, “Troubled Asset Relief Program: One Year Later, Actions Are Needed to Address Remaining Transparency and Accountability Challenges,” 10/8/2009, http://www.gao.gov/new.items/d1016.pdf, accessed 10/9/2009. 28. In FY 2006 there were 138.4 million U.S. individual income tax returns filed to the Internal Revenue Service. Source: IRS, Individual Income Tax Rates and Shares 2006, Winter 2009, http://www.irs. gov/pub/irs-soi/09winbulinincome.pdf, accessed 9/15/2009; National debt figure of $11.3 trillion, as authorized under EESA section 122; GDP for 2008 was $14.3 trillion. Source: U.S. Department of Commerce, Bureau of Economic Analysis, News Release, 3/26/2009, http://www.bea.gov/newsreleases/national/gdp/2009/pdf/gdp408f.pdf, accessed 9/15/2009. 29. CBO, Director’s Blog, 4/17/2009, http://cboblog.cbo.gov/?m=200904&paged=2 , accessed 9/15/2009; CBO, http://www.cbo.gov/ftpdocs/100xx/doc10056/MainText.4.1.shtml, accessed 8/30/2009. 30. Treasury, “Factsheet on Capital Purchase Program,” 3/17/2009, http://www.financialstability.gov/roadtostability/CPPfactsheet.htm, accessed 9/1/2009. 31. Treasury, Transactions Report, 10/2/2009, http://financialstability.gov/docs/transaction-reports/Transactions_Report_09-30-09.pdf, accessed 10/5/2009. 32. Source for funds invested and funds repaid is: Treasury, Transactions Report, 10/2/2009, http://financialstability.gov/docs/transaction-reports/Transactions_Report_09-30-09.pdf, accessed 10/5/2009. Source for projected funding total is: Treasury, Office of Financial Stability, Chief of Compliance and CFO, SIGTARP interview, 3/30/2009. 33. Treasury, “Treasury White Paper: The Capital Assistance Program and Its Role in the Financial Stability Plan,” no date, http://www.treas.gov/press/releases/reports/tg40_capwhitepaper.pdf, accessed 9/1/2009. 34. Treasury, “Programs,” 5/7/2009, http://www.financialstability.gov/roadtostability/programs.htm, accessed 9/1/2009. 35. The $40 billion Series D cumulative preferred shares were effectively converted to $41.6 billion Series D non-cumulative preferred without any cash outlay by Treasury. Treasury, Transactions Report, 10/2/2009, http://financialstability.gov/docs/transaction-reports/Transactions_Report_09-30-09.pdf, accessed 10/5/2009. 36. Treasury, response to SIGTARP data call, 10/7/2009. 37. Treasury, “Targeted Investment Program,” 3/26/2009, http://www.financialstability.gov/roadtostability/targetedinvestmentprogram.html, accessed 9/1/2009. 38. Treasury, Transactions Report, 10/2/2009, http://financialstability.gov/docs/transaction-reports/Transactions_Report_09-30-09.pdf, accessed 10/5/2009. 39. Treasury, Section 102 Report, 12/31/2008, http://www.treas.gov/press/releases/reports/0010208%20sect%20102.pdf, accessed 9/1/2009. 40. Treasury Press Release, “U.S. Government Finalizes Terms of Citi Guarantee Announced in November,” 1/16/2009, http://www.financialstability.gov/latest/hp1358.html, accessed 9/3/2009. 41. Treasury, Transactions Report, 10/2/2009, http://financialstability.gov/docs/transaction-reports/Transactions_Report_09-30-09.pdf, accessed 10/5/2009. 42. Treasury, response to SIGTARP data call, 7/8/2009. 43. This number was calculated by summing the March, April, May, June, July, August, and September TALF loan subscriptions. Federal Reserve Bank of New York, “Term Asset-Backed Securities Loan Facility,” no date, http://www.newyorkfed.org/markets/talf_operations.html, accessed 10/5/2009. 44. This number was calculated by summing the June, July, August, and September TALF CMBS loan subscriptions. FRBNY, “Term Asset-Backed Securities Loan Facility,” no date, http://www.newyorkfed. org/markets/talf_operations.html, accessed 10/5/2009. 45. Treasury, “Public-Private Investment Program,” 4/6/2009, http://www.financialstability.gov/roadtostability/publicprivatefund.html, accessed 9/4/2009. 46. FDIC, “Legacy Loans Program – Test of Funding Mechanism,” 7/31/2009, http://www.fdic.gov/news/news/press/2009/pr09131.html, accessed 9/22/2009. 47. Treasury Press Release, “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,” 7/8/2009, http://www.financialstability.gov/latest/tg_07082009.html, accessed 9/11/2009. 173 174 special inspector general I troubled asset relief program 48. Treasury, “Public-Private Investment Program,” 4/6/2009, http://www.financialstability.gov/roadtostability/publicprivatefund.html, accessed 9/4/2009. 49. Treasury, “Unlocking Credit for Small Businesses Fact Sheet,” 3/17/2009, http://www.financialstability.gov/roadtostability/unlockingCreditforSmallBusinesses.html, accessed 10/6/2009. 50. Treasury, “Guidelines for Automotive Industry Financing Program,” no date, http://www.financialstability.gov/docs/AIFP/AIFP_guidelines.pdf, accessed 9/1/2009. 51. Treasury, Transactions Report, 10/2/2009, http://financialstability.gov/docs/transaction-reports/Transactions_Report_09-30-09.pdf, accessed 10/5/2009. 52. 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Testimony of Rodney Clark, Managing Director, Ratings Services, Standard & Poor’s Financial Services LLC before the U.S. House of Representatives Subcommittee on Capital Markets and Government Sponsored Entities, 3/18/2009, http://www.house.gov/apps/list/hearing/financialsvcs_dem/rodney031809.pdf, accessed 9/10/2009. 317. Testimony of Rodney Clark, Managing Director, Ratings Services, Standard & Poor’s Financial Services LLC before the U.S. House of Representatives Subcommittee on Capital Markets and Government Sponsored Entities, 3/18/2009, http://www.house.gov/apps/list/hearing/financialsvcs_dem/rodney031809.pdf, accessed 9/10/2009. 318. AIG, 10-K, 3/2/2009, http://www.sec.gov/Archives/edgar/data/5272/000095012309003734/y74794e10vk.htm, accessed 10/5/2009. 319. 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Testimony of Professor John Coffee, Columbia University Law School, before the United States Senate Committee on Banking, Housing and Urban Affairs, 4/22/2008, http://banking.senate.gov/public/_ files/OpgStmtCoffeeSenateTestimonyTurmoilintheUSCreditMarkets.pdf, accessed 9/30/2009. 341. Testimony of Sean Egan, Managing Director, Egan-Jones Rating Co. before the House Committee on Oversight and Government Reform, 10/22/2008, http://oversight.house.gov/documents/20081022102906.pdf, accessed 8/26/2009. 342. Testimony of Eric Baggesen, Senior Investment Officer, California Public Employees’ Retirement System before the House Committee on Oversight and Government Reform, 9/30/2009, http://oversight. house.gov/documents/20090930084407.pdf, accessed 10/1/2009. 343. Testimony of Professor John Coffee, Columbia University Law School, before the United States Senate Committee on Banking, Housing and Urban Affairs, 4/22/2008, http://banking.senate.gov/public/_ files/OpgStmtCoffeeSenateTestimonyTurmoilintheUSCreditMarkets.pdf, accessed 9/30/2009. 344. SEC, Summary Report of Issues Identified in the Commission Staff’s Examinations of Select Credit Rating Agencies, 7/2008, http://www.sec.gov/news/studies/2008/craexamination070808.pdf, accessed 9/16/2009. 345. Testimony of Sean Egan, Managing Director, Egan-Jones Rating Co. before the House Committee on Oversight and Government Reform, 10/22/2008, http://oversight.house.gov/documents/20081022102906.pdf, accessed 8/26/2009. 346. Testimony of Sean Egan, Managing Director, Egan-Jones Rating Co. before the House Committee on Oversight and Government Reform, 10/22/2008, http://oversight.house.gov/documents/20081022102906.pdf, accessed 8/26/2009. 347. Testimony of Gregory Smith of the Colorado Public Employees’ Retirement Association before the Subcommittee on Capital Markets, Insurance, and Government Sponsored Entities of the Committee on Financial Services, 5/19/2009, http://www.house.gov/apps/list/hearing/financialsvcs_dem/gregory_w__smith_testimony.pdf, accessed 10/2/2009. 348. House Committee on Financial Services Press Release; “Kanjorski Circulates Discussion Draft of Accountability and Transparency in Credit Rating Agencies Act,” 9/25/2009, http://www.house.gov/apps/ list/press/financialsvcs_dem/presskanj_092509.shtml, accessed 10/2/2009. 349. Emergency Economic Stabilization Act of 2008, P.L. 110-343, 10/3/2008. 350. Emergency Economic Stabilization Act of 2008, P.L. 110-343, 10/3/2008. 351. Treasury, response to SIGTARP data call, 10/7/2009. 352. Treasury, response to SIGTARP data call, 10/7/2009. 353. Treasury, response to SIGTARP data call, 10/7/2009. 354. GAO-09-504, “Troubled Asset Relief Program: March 2009 Status of Efforts to Address Transparency and Accountability Issues,” 3/31/2009. 355. Congressional Budget Office Press Release, “Cost Estimate on Emergency Economic Stabilization Act of 2008,” 9/28/2008, www.cbo.gov/ftpdocs/98xx/doc9829/09-28-HonorableFrank.htm, accessed 1/15/2009. 356. Treasury, response to SIGTARP data call, 4/8/2009. 357. Emergency Economic Stabilization Act of 2008, P.L. 110-343, 10/3/2008. 358. Treasury response to SIGTARP Data Call, 10/7/2009. 359. Emergency Economic Stabilization Act of 2008, P.L. 110-343, 10/3/2008. 360. Treasury, “Interim Rule: TARP Conflicts of Interest,” 10/6/2008, www.financialstability.gov/docs/COI-Rule.pdf, accessed 1/15/2009. 361. TARP Conflicts of Interest, Interim Rule, Billing Code 4810-25-P, 1/21/2009. 362. GAO-09-161, “Troubled Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency,” 12/2/2008. 179 180 special inspector general I troubled asset relief program Sources for Figure 2.6: Treasury, Office of Financial Stability, Chief of Compliance and CFO, SIGTARP interview, 3/30/2009; Treasury, Transactions Report, 10/2/2009; Treasury, “Auto Supplier Support Program: Stabilizing the Auto Industry in a Time of Crisis,” 3/19/2009, http://www.treas.gov/press/releases/docs/supplier_support_program_3_18.pdf, accessed 3/19/2009; Treasury, “Unlocking Credit for Small Businesses Fact Sheet,” 3/17/2009, http://www.financialstability.gov/roadtostability/unlockingCreditforSmallBusinesses.html, accessed 6/10/2009; Treasury, “Treasury, Federal Reserve, and FDIC Provide Assistance to Bank of America,” 1/16/2009, http://www.treas.gov/press/releases/hp1356.htm, accessed 1/16/2009; Treasury Press Release, “U.S. Government Finalizes Terms of Citi Guarantee Announced in November,” 1/16/2009, http://www.financialstability.gov/latest/hp1358.html, accessed 6/8/2009; Treasury, “Financial Stability Plan Fact Sheet,” 2/10/2009, http://www.financialstability.gov/ docs/fact-sheet.pdf, accessed 6/8/2009; Treasury, “Making Home Affordable: Updated Detailed Program Description,” 3/4/2009, http://www.treas.gov/press/releases/reports/housing_fact_sheet.pdf, accessed 6/10/2009; Treasury, “Public-Private Investment Program,” 4/6/2009, http://www.financialstability.gov/roadtostability/publicprivatefund.html, accessed 6/9/2009. appendices A. Glossary B. Acronyms and Abbreviations C. Reporting Requirements D. Transaction Detail E. Cross-Reference of Report to the Inspector General Act of 1978 F. Public Announcement of Audits* G. Key Oversight Reports and Testimonies* H. Correspondence I. Organizational Chart 181 185 187 191 216 – – 217 251 *Visit www.sigtarp.gov to view Appendix F: Public Announcement of Audits and Appendix G: Key Oversight Reports and Testimonies, for further reference material. glossary I Appendix A I OCTOBER 21, 2009 glossary This appendix provides a glossary of terms that are used throughout the context of this report. 504 Community Development Loan Program: Small Business Administration (“SBA”) program combining Government-guaranteed loans with private-sector mortgage loans to provide loans of up to $10 million for community development. 7(a) Program: SBA loan program guaranteeing a percentage of loans for small businesses that cannot otherwise obtain conventional loans at reasonable terms. Appropriation: Authority provided by law for Federal agencies to incur obligations and to make payments out of the Treasury for specified purposes. Asset Crossing: Buying or selling assets from affiliates, either directly or through third parties. Asset Flipping: Buying assets with the intention of reselling those assets in the short term. Bank Holding Company: A company that controls a bank. Typically, a company controls a bank through the ownership of 25% or more of its voting securities. Break the Buck: A decline below $1 in the net asset value (“NAV”) of a money market mutual fund. Call Report: Quarterly report of financial condition commercial banks file with their Federal and state regulatory agencies. Cost of Capital: The “price” a company must pay to finance an investment or project. For debt financing, this is the interest rate on any loans or bonds. For equity financing, it is the “opportunity cost” of using its capital elsewhere (i.e., what the company could have reasonably expected to earn from using its cash in a low-risk investment such as Government bonds). Credit Default Swap (“CDS”): A contract where the seller receives a series of payments from the buyer in return for agreeing to make a payment to the buyer when a particular credit event outlined in the contract occurs (for example, if the credit rating on a particular bond or loan is downgraded or goes into default). It is commonly referred to as an insurance-like product where the seller is providing the buyer insurance-like protection against the failure of a bond. The buyer, however, does not need to own the asset covered by the contract, which means it can serve essentially as a “bet” against the underlying bond. Credit Watch: Announcement by a rating agency of developments that may have a material impact on the creditworthiness (either positive, negative, or developing) of a company or security in the short term. Crowding Out: A term historically used to describe the impact on the private sector of heavy Government debt issuance. This drives up interest rates, forcing the private sector to pay more, and edging it out of the market. Just as private-sector issuances have to compete with the lending Treasury did for TARP, so too will other Treasury issuances be forced to pay the higher interest rates resulting from the TARP borrowing. Capital Call Notice: A capital call, or draw down, is an investment firm’s legal right to demand a portion of the money promised to it by an investor. Cumulative Preferred Stock: A type of stock that requires a defined dividend payment. If the company does not pay the dividend, it still owes the missed dividend to the owner of the stock. Capital Requirement: The amount of cash and easily liquidated assets that a financial institution needs to meet Government regulations and provide a cushion against losses. CUSIP: Unique identifying number assigned to all registered securities (similar to a social security number). Cash Management Bill (“CMB”): A type of short-term Treasury bill sold by the Treasury to meet temporary funding shortfalls. CMB maturities can range from a few days to more than six months, and auctions can be announced with less than one-week notice. Clawback: Recovery by the company of amounts paid to an employee based on materially inaccurate performance criteria. Collateralized Debt Obligations (“CDOs”): A financial instrument that entitles the purchaser to some portion of the cash flows from a portfolio of assets, which may include bonds, loans, mortgage-backed securities, or other CDOs. Commercial Mortgage-Backed Securities (“CMBS”): A financial instrument that is backed by a commercial real estate mortgage or a group of commercial real estate mortgages that are packaged together. Common Stock: Equity ownership that entitles an individual to share in the corporate earnings and voting rights. Core Capital: Also known as T1, refers to the common stock, perpetual noncumulative, preferred stock, paid-in capital, and retained earnings of a bank. Debtor-in-Possession (“DIP”): A company which is operating under Chapter 11 bankruptcy protection, which still technically owns its assets but is operating them to maximize the benefit to its creditors. Derivative: A financial instrument whose value is based on (“derived from”) a different underlying asset, indicator, or financial instrument. Due Diligence: The appropriate level of attention or care a reasonable person should take before entering into an agreement or a transaction with another party. In finance, often refers to the process of conducting an audit or review of documents/information prior to initiating a transaction. Dutch Auction: Auction technique used for selling Treasury securities where investors bid different prices (yields) for different quantities of the offered security. Treasury selects the highest group of bids that sells the full offering and all winning bidders pay the same price — the lowest bid within that winning group. For instance, three investors place bids for $500 million each worth of securities (on a $1 billion offering by Treasury). Treasury selects the two highest bidders (totaling $1 billion) and they both pay the price bid by the lower of the two winners. Equity Capital Facility: A commitment to invest equity capital in a firm under certain future conditions. 181 182 Appendix a I glossary I OCTOBER 21, 2009 Exceptional Assistance: Companies receiving assistance under the programs for SSFI, TIP, AGP, and AIFP, and any future Treasury program designed by the Treasury Secretary as providing exceptional assistance. Currently includes AIG, Citigroup, Bank of America, GM, GMAC, Chrysler, and Chrysler Financial. Fallen Angel: In finance, can refer to a bond which held an investment grade rating when issued, but has subsequently fallen to a much lower rating, or a once-popular investment that has fallen out of favor with investors and declined in value. Floorplan: Revolving lines of credit used to finance inventories of items. Front Running: Entering into a trade while taking advantage of advance knowledge of pending orders from other investors. Moral Hazard: A term used in economics and insurance to describe the lack of incentive individuals have to guard against a risk when they are protected against that risk (for example, through an insurance policy). In the context of TARP, it refers to the danger that private-sector executives/investors/lenders may behave more recklessly knowing that the Government has insulated them from the risks of their actions. Mortgage-Backed Securities (“MBS”): A pool of mortgages bundled together by a financial institution and sold as securities — a type of assetbacked security. Net Asset Value: A fund’s per-share value. Calculated by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of fund shares outstanding. Golden Parachute: Any payment to an employee for departure for any reason, or any payment due to a change in control. Net Regulatory Capital: A regulatory metric that requires a bank to take into consideration the relative riskiness of its assets. Calculated as common equity minus intangibles. Government Regulators: Government agencies responsible for overseeing the health and stability of a sector of the economy, in this case, the financial sector, through supervision and enforcement of regulations. Non-Agency Residential Mortgage-Backed Securities (“RMBS”): RMBS that are not guaranteed by a Government-Sponsored Enterprise (“GSE”) such as Fannie Mae, Freddie Mac, or the Federal Home Loan Banks. Government-Sponsored Enterprises (“GSEs”): Private corporations created by the Government to reduce borrowing costs. They are chartered by the U.S. Government but are not considered to be direct obligations. Non-cumulative Preferred Stock: A type of stock in which unpaid dividends do not accrue when a company fails to make a dividend payment. HAMP Trial Period: A 90-day trial period of reduced mortgage payments for the borrower. If all payments are successful, then the mortgage modification will be accepted into the MHA program and HAMP incentive payments will begin. Illiquid Assets: Assets that cannot be quickly converted to cash. Investment Grade: A quality classification for bond or debt securities (rated BBB/Baa or higher) that suggests the debt is likely to be repaid. Non-Primary Dealer: Banks and securities broker-dealers that are not approved by FRBNY to trade in U.S. Government securities. Non-Recourse Loan: A secured loan whereby the borrower is relieved of the obligation to repay the loan upon the surrender of the collateral. Note: A short-term debt security, usually with a maturity of less than five years. Originator: The lead bank or underwriter for a structured finance product. Legacy Assets: Also commonly referred to as troubled or toxic assets, legacy assets are real estate-related loans and securities (legacy loans and legacy securities) that remain on banks’ balance sheets that have lost value but are difficult to price due to the recent market disruption. Par Value: The face value of a bond or security (for instance $1,000 or $100). When a bond trades on the market, the price can be above or below par. A price above par means the purchaser is paying a premium; a price below par means the purchaser is buying at a discount. Legacy Commercial Mortgage-Backed Securities (“CMBS”): CMBS issued before January 1, 2009. Perk: Personal benefit, including a privilege, or profit incidental to regular salary or wages. Legacy Loans: Underperforming real estate-related loans held by a bank that it wishes to sell, but recent market disruptions have made difficult to price. Permitted Investments List: A statement in the charter or policies of an organization (for instance, the prospectus of a mutual fund) detailing to stakeholders the nature or types of assets in which the institution is allowed to invest. To invest in assets not on the list could mean a breach in the fiduciary responsibility of the organization. Legacy Securities: Troubled real estate-related securities (residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”), and other asset-backed securities (“ABS”)) lingering on institutions’ balance sheets because their value could not be determined. Leverage: The ratio of a company’s debt to its equity. Liquidity: The ability to easily convert an asset to cash, without any significant loss in value or transaction cost. Loan-to-Value (“LTV”) Ratio: In real estate lending, the outstanding principal amount of the loan divided by the appraised value of the property. London Interbank Offered Rate (“LIBOR”): The interest rate that large banks in London charge each other for dollar-denominated funds. Mandatorily Convertible Preferred (“MCP”) Share: A type of preferred share (ownership in a company that generally entitles the owner of the share to collect dividend payments) that can be converted to common stock under certain parameters at the discretion of the company—and must be converted to common stock by a certain time. Margin Call: A broker’s demand on an investor using borrowed money (margin) to deposit additional cash or securities in its account if the value of its capital drops below a set percent of the total investment. Ponzi Scheme: An illegal pyramid scheme in which money from new investors is used to pay off earlier investors. Preferred Stock: “Equity ownership that usually pays a fixed dividend, gives the holder a claim on corporate earnings superior to common stock owners, and has no voting rights. Preferred stock also has priority in the distribution of assets in the case of liquidation of a bankrupt company.” Primary Dealer: Banks and securities broker-dealers that trade in U.S. Government securities with FRBNY for the purpose of carrying out open market operations. Private-Label Mortgages: Loans that are not owned or guaranteed by Fannie Mae, Freddie Mac, Ginnie Mae, or another Federal agency. Pro Forma: In finance, refers to the presentation of hypothetical financial information assuming that certain assumptions will happen. Pro Rata: Refers to dividing something among a group according to the proportionate share that each participant holds as a part of the whole. glossary I Appendix A I OCTOBER 21, 2009 Purchasing Power: The total amount of goods or services that can be purchased by a unit of currency. For the purpose of PPIP, purchasing power refers to the combined buying power of the PPIFs’ private capital, Treasury equity, and Treasury debt. Rating Action: A modification (upgrade or downgrade) or confirmation of a company’s or security’s credit rating. Senior Subordinated Debenture: A subordinated debenture is a loan or security that is junior to other loans or securities with regards to the debt holders’ claims on assets or earnings. Senior debt holders get paid in full before subordinated debt holders get paid. There are additional levels of priority among subordinated debt holders. CPP invests in senior subordinated debt. Rating Outlook: Guidance published by a rating agency indicating the medium- or long-term outlook for a company’s or security’s creditworthiness. Small Business Administration (“SBA”) 7(a) Pool Certificates: 7(a) loans grouped together to form one security eligible as collateral against a TALF loan. Rating Review: A formal action by a rating agency to re-assess the creditworthiness of a company or security. Could lead to a change in rating outlook, initiation of Credit Watch, or a rating action. Special Purpose Vehicle (“SPV”): An off-balance-sheet legal entity that holds the transferred assets presumptively beyond the reach of the entities providing the assets (e.g., legally isolated). Ratings Shopping: Also known as “forum shopping;” the process where an issuer approaches a rating agency to receive a “preliminary rating” before it seeks an official rating. If it does not get the desired rating, the issuer proceeds to another rating agency until it receives the desired rating. System Gaming: Using the rules, policies, and procedures of a system against itself for purposes other than those originally intended by the system designers. Ratings Watch: A formal announcement by a rating agency informing investors that the issue or issuer rating is being reviewed to determine if the current rating is appropriate. Receivership Assets: When an FDIC-insured institution fails, FDIC is ordinarily appointed as receiver. In that capacity, it assumes responsibility for efficiently recovering the maximum amount possible from the disposition of the receivership’s assets and the pursuit of the receivership’s claims. Funds collected from the sale of assets and the disposition of valid claims are distributed to the receivership’s creditors in accordance with the priorities set by law. Reorganization: Agreements between a company, its creditors, and the courts that allow the company to emerge from bankruptcy with an altered debt structure. Return on Equity (“ROE”): A measurement of how much profit a company generates with the money shareholders have invested. Calculated showing net income as a percentage of shareholders equity. If a bank must hold capital (equity) aside for regulatory purposes, it can make fewer investments, with implications for ROE. Return on Investment (“ROI”): A measure of the efficiency of one investment option versus other options. Calculated as a percentage: profit divided by the cost of the investment. Risk-Weighted Assets: The amount of a bank’s total assets after applying an appropriate risk factor to each asset. Round Tripping: Buying an asset from an entity and reselling the asset back to the entity or its affiliates. Secondary Market: The secondary market, also known as the aftermarket, is the financial market where previously issued securities and financial instruments such as stocks, bonds, options, and futures are bought and sold. SEC Net Capital Rule: A requirement that broker-dealers maintain a sufficient cushion of highly liquid assets (easily convertible to cash) in excess of liabilities to cover potential market, credit, and other risks if they should be required to liquidate. Securities Exchange: An agreement between a firm and investors, permitting the investors to exchange one class of securities for another. Senior Executive Officers (“SEOs”): A “named executive officer” of a TARP recipient as defined under Federal securities law, which generally includes the principal executive officer (“PEO”), principal financial officer (“PFO”), and the next three most highly compensated employees. Senior Preferred Stock: Shares that give the stockholder priority dividend and liquidation claims over junior preferred and common stockholders. Systemically Significant: A financial institution whose failure would impose significant losses on creditors and counterparties, call into question the financial strength of other similarly situated financial institutions, disrupt financial markets, raise borrowing costs for households and businesses, and reduce household wealth. T1: See the definition of Core Capital. TALF Agent: Financial institution that is a party to the Master Loan and Security Agreement and from time to time acts as an agent to the borrower. TALF Agents include primary and non-primary broker-dealers. Tax Gross-Up: A reimbursement of taxes owed with respect to any compensation. Temporary Investments: For the purposes of PPIP, they are cash, Treasuries, money market mutual funds, and interest rate hedges. Tier One Capital: Consists primarily of common equity (including retained earnings), limited types and amounts of preferred equity, certain minority interests, and limited types and amounts of trust preferred securities. T1 does not include goodwill and certain other intangibles. Certain other assets are also excluded from T1. It can be described as a measure of the bank’s ability to sustain future losses and still meet depositor’s demands. Tier One Common Equity (“T1 Common”): Also known as tangible common equity (“TCE”), is calculated by removing all non-common elements from T1, e.g., preferred equity, minority interests, and trust preferred securities. It can be thought of as the amount that would be left over if the bank were dissolved and all creditors and higher levels of stock, such as preferred stock, were paid off. T1 Common is the highest “quality” of capital in the sense of providing a buffer against loss by claimants on the bank. T1 Common is used in calculating the tier-one common risk-based ratio (“T1 Common Ratio”) which determines what percentage of a bank’s total assets is categorized as T1 Common. The higher the percentage, the better capitalized the bank. Preferred stock is an example of capital that is counted in T1, but not in T1 Common. Tier One Common Risk-Based Ratio (“T1 Common Ratio”): Determines what percentage of a bank’s total assets is categorized as T1 Common. Under traditional Federal regulations, a bank with a T1 Common Ratio of 4% or greater is considered adequately capitalized. = T1 Common / Risk-weighted assets Tier One Risk-based Capital Ratio (“T1 Ratio”): A ratio which determines what percentage of a bank’s total assets is categorized as tier one capital (“T1”). = T1 / Risk-weighted assets Transaction Cost: The tangible and intangible costs associated with buying or selling an asset. Tangible costs can include fees paid (such as to a broker when selling bonds or to lawyers for drafting documents), while intangible 183 184 Appendix a I glossary I OCTOBER 21, 2009 costs can include the time or effort spent reviewing documents, traveling to visit a client, for instance. Sources: Treasury Bill: A short-term debt obligation of the U.S. Government with a maturity of up to one year. Sold in denominations of $100 with maturities of 4 weeks, 13 weeks, 26 weeks, and 52 weeks. Sold at auction, with the price below face value (discount to par) determining the yield. Commodities and Futures Trading Commission, “CFTC Glossary,” no date, www.cftc.gov/educationcenter/ glossary/glossary_co.html, accessed 7/10/2009. Treasury Bond: A marketable, fixed-interest U.S. Government debt security with a maturity of between 10 and 30 years; paying interest semi-annually. Treasury Inflation-Protected Securities (“TIPS”): A special type of Treasury note or bond that offers protection from inflation. TIPS pay interest semi-annually, but the coupon payments and underlying principal are automatically increased to compensate for inflation as measured by the consumer price index (“CPI”). Treasury Note: A marketable U.S. Government debt security with a fixed interest rate and a maturity between 1 and 10 years. Purchasable directly from Treasury through an auction process or from a bank. Trust Preferred Securities: A security that has both equity and debt characteristics created by establishing a trust and issuing debt to it. A company would create a trust preferred security to realize tax benefits, since the trust is tax deductible. California State Senate, “Senate Bill 668,” 5/5/09, http://info.sen.ca.gov/pub/01-02/ bill/sen/sb_0651-0700/sb_668_bill_20010417_amended_sen.pdf, accessed 1/28/2009. FDIC, “Credit Card Securitization Manual,” no date, www.fdic.gov/regulations/examinations/credit_card_securitization/glossary.html, accessed 4/8/2009. FDIC, “Receivership Management Program,” 11/21/2008, www.fdic.gov/about/strategic/strategic/receivership.html, accessed 9/20/2009. Federal Housing Finance Agency, “Mortgage Markets and the Enterprises 2007,” www.fhfa.gov, July 2008, accessed 4/9/2009. Federal Reserve Board, comments on SIGTARP draft report, 1/29/2009. Federal Reserve response to SIGTARP draft, 7/10/2009. Fitch Ratings, “Fitch Ratings Definition,” no date, www.fitchratings.com/creditdesk/public/ratings_defintions/index.cfm, accessed 10/02/2009. FRBNY, “Primary Dealer List”, no date, http://www.newyorkfed.org/markets/pridealers_current.html, accessed 10/10/2009. FRBNY, “TALF FAQs,” 9/1/2009, www.newyorkfed.org/markets/talf_faq.html, accessed 9/1/2009. FRBNY, “Term Asset-Backed Securities Loan Facility: Terms and Conditions,” 3/19/2009, www.newyorkfed.org, accessed 3/27/2009. Comptroller of the Currency, “Floor Plan Loans: Comptroller’s Handbook,” May 1998, www.occ.treas.gov/handbook/floorplan1.pdf, accessed 4/13/2009. GAO, “Small Business Administration: Additional Guidance on Documenting Credit Elsewhere Decisions Could Improve 7(a) Program Oversight,” 2/12/2009, www.gao.gov/products/GAO-09-228, accessed 3/17/2009. HUD, “Glossary,” no date, www.hud.gov/offices/hsg/sfh/buying/glossary.cfm, accessed 4/8/2009. National Information Center, “Institution Types Defined,” www.ffiec.gov/nicpubweb/Content/HELP/ Institution%20Type%20Description.htm, accessed 1/28/2009. Unpaid Principal Balance (“UPB”): Amount of a loan that is unpaid. This does not include additional charges. Office of Financial Stability, response to SIGTARP draft, 7/9/2009. Warrant: “The right, but not the obligation, to purchase a certain number of shares of common stock at a fixed price.” SEC, “Mortgage-Backed Securities,” no date, www.sec.gov/answers/mortgagesecurities.htm, accessed 1/28/2009. Weighted Average Life: The average number of years for which each dollar of unpaid principal on a mortgage or loan remains outstanding. Small Business Administration, “Basic 7(a) Loan Programs,” www.sba.gov/services/financialassistance/ sbaloantopics/7a/, accessed 9/18/2009. Yield: The effective interest rate paid by a security. Treasury, “Ethical Standards and Conflict of Interest Rules for Public-Private Investment Fund Managers,” no date, Provided by SIGTARP 7/2/2009. SEC,”Citigroup Exchange Agreement,” 6/9/2009, http://www.sec.gov/Archives/edgar/ data/831001/000095010309000098/dp12291_ex1001.htm, accessed 6/10/2009. SEC,”Cusip,” www.sec.gov/answers/cusip.htm, accessed 4/6/2009. Treasury, “Decoder,” no date, www.financialstability.gov/roadtostability/decoder.htm, accessed 4/9/2009. Treasury, “Treasury Direct,” no date, www.treasurydirect.gov/instit/auctfund/work/auctime/auctime.htm, accessed 10/02/2009 Treasury, “Legacy Securities Public-Private Investment Program Compliance and Risk Management,” 7/2/2009, accessed 10/7/2009. Treasury, “Letter of Intent and Term Sheet,” 7/8/2009, www.financialstability.gov/docs/S-PPIP_LOI_TermSheets.pdf, accessed 7/8/2009. Treasury, “Securities Purchase Agreement dated as of April 17, 2009 between American International Group, Inc. and United States Department of the Treasury,” 4/17/2009, www.financialstability.gov/docs/ agreements/Series.F.Securities.Purchase.Agreement.pdf, accessed 6/8/2009. Treasury, “TARP Standards for Compensation and Corporate Governance,” 6/10/2009, www.financialstability.gov/docs/EC_IFR_FR_web60909.pdf, accessed 6/10/2009. Treasury, “Unlocking Credit for Small Businesses Fact Sheet,” 3/16/2009, www.treasury.gov/press/ releases/tg58.htm, accessed 3/17/2009. Treasury, “Home Affordable Modification Program Guidelines,” 03/14/2009, www.treas.gov/press/ releases/reports/modification_program_guidelines.pdf, accessed 10/2/2009. USDA, “Glossary,” no date, www.rurdev.usda.gov/regs/handbook/hb-1-3565/w6gloss.pdf, accessed 4/8/2009. Acronyms and abbreviations I Appendix B I october 21, 2009 Acronyms and Abbreviations ABS Asset-Backed Securities FDIC Federal Deposit Insurance Corporation AGP Asset Guarantee Program FHA Federal Housing Administration AIFP Automotive Industry Financing Program FHFA Federal Housing Finance Agency AIG American International Group, Inc. FHMA Federal Housing Modification Administration, Inc. AIGFP AIG Financial Products Corp. FinCEN Financial Crimes Enforcement Network AMA Acquired Member Assets Fitch Fitch Ratings ARO Acceptable Rating Organization FOIA Freedom of Information Act ARRA American Recovery and Reinvestment Act of 2009 FRBNY Federal Reserve Bank of New York ASSP Auto Supplier Support Program FSOB Financial Stability Oversight Board AVR Asset Valuation Reserve FTC Federal Trade Commission AWCP Auto Warranty Commitment Program GAO Government Accountability Office BHC Bank Holding Company GDP Gross Domestic Product BPD Bureau of Public Debt GM General Motors Corporation CAP Capital Assistance Program GMAC GMAC LLC CBO Congressional Budget Office GSE Government–Sponsored Enterprise CD Certificate of Deposit HAMP Home Affordable Modification Program CDO Collateralized Debt Obligation HERA Housing and Economic Recovery Act CDS Credit Default Swaps HPA Home Price Appreciation CEO Chief Executive Officer HPDP Home Price Decline Protection CFTC Commodity Futures Trading Commission HUD Department of Housing and Urban Development CMB Cash Management Bills HUD OIG CMBS Commercial Mortgage-Backed Securities Office of the Inspector General of the Department of Housing and Urban Development COFI Cost of Funds Index IAA Inter-Agency Agreement COP Congressional Oversight Panel ICE U.S. Immigration and Customs Enforcement CP Commercial Paper IG Inspector General CPA Certified Public Accountant IMF International Monetary Fund CPP Capital Purchase Program IMR Interest Maintenance Reserve CRARA Credit Rating Agency Reform Act CRE Commercial Real Estate CUSIP Credit Union System Investment Program C&I Commercial and Industrial DBRS DBRS Limited DIL Deed-In-Lieu of Foreclosure DIP Debtor in Possession DOJ Department of Justice EESA Emergency Economic Stabilization Act of 2008 FASB Financial Accounting Standards Board FBI Federal Bureau of Investigation FCM Futures Commission Merchant Initial Report SIGTARP’s Initial Report to Congress IRS-CI Internal Revenue Service Criminal Investigation LIBOR London Interbank Offered Rate LLC Limited Liability Company LTV Loan-to-Value MBS Mortgage-Backed Securities MCP Mandatorily Convertible Preferred Shares MHA Making Home Affordable MMF Money Market Mutual Fund Moody’s Moody’s Investors Services NAIC National Association of Insurance Commissioners NAV Net Asset Value 185 186 Appendix B I Acronyms and abbreviations I october 21, 2009 NCUA National Credit Union Administration TCE Tangible Common Equity the Committee Board Compensation Committee the Rule Interim Final Rule on TARP Standards for Compensation and Corporate Governance TIP Targeted Investment Program TIPS Treasury Inflation-Protected Securities Treasury U.S. Department of the Treasury UCSB Unlocking Credit for Small Businesses UGC United Guaranty Corporation UPB Unpaid Principal Balance USPIS U.S. Postal Inspection Service VEBA Voluntary Employees Association Beneficiary WFO FBI’s Washington Field Office NPV Net Present Value NRSRO Nationally Recognized Statistical Rating Organization NY HIFCA New York High Intensity Financial Crime Area OLC Office of Legal Counsel OMB Office of Management and Budget OTC Over the Counter OTS Office of Thrift Supervision OCC Office of the Comptroller of the Currency OFS Office of Financial Stability PIMCO Pacific Investment Management Company LLC PPIF Public-Private Investment Fund PPIP Public-Private Investment Program QFI Qualifying Financial Institution RBC Risk-Based Capital RMBS Residential Mortgage-Backed Securities ROE Return on Equity ROI Return on Investment S&P Standard & Poor’s SBA Small Business Administration SCAP Supervisory Capital Assessment Program SEC Securities and Exchange Commission SEO Senior Executive Officer SFRS Statement on Financial Regulations Standard SIGTARP Special Inspector General for the Troubled Asset Relief Program Special Master Office of the Special Master SPV Special Purpose Vehicle SS Short Sale SSAP Statement of Statutory Accounting Principles SSFI Systemically Significant Failing Institutions SVO Securities Valuation Office T1 Tier One Capital T1 Common Tier One Common Equity T1 Common Tier One Common Risk-Based Ratio Ratio T1 Ratio Tier One Risk-Based Capital Ratio TALF Term Asset-Backed Securities Loan Facility TARP Troubled Asset Relief Program TARP-IG Council TARP Inspector General Council Reporting Requirements I Appendix C I OCTOBER 21, 2009 Reporting Requirements This appendix provides Treasury’s responses to data call questions regarding the reporting requirements of the Special Inspector General for the Troubled Asset Relief Program outlined in EESA section 121, as well as a cross-reference to related data presented in this report and prior reports. Italics style indicates relevant narrative taken verbatim from source documents. # 1 EESA Section EESA Reporting Requirement Section 121(c)(A) A description of the categories of troubled assets purchased or otherwise procured by the Secretary. Treasury Response to SIGTARP Data Call Treasury posts several documents on its public website that are responsive to this question, available at http://www.financialstability.gov/latest/reportsanddocs.html. Specifically, tranche reports and reports required under section 105(a) of the Emergency Economic Stabilization Act of 2008 (EESA) describe, at a high level, Treasury’s programs and troubled asset purchases. The transaction reports describe these purchases in detail, including the type of asset purchased, the identity of the institution selling the asset, and the price Treasury paid for the asset. Other sources for this information are the determinations signed by the Secretary of the Treasury, designating certain financial instruments as “troubled assets” under section 3(9)(B) of EESA. Troubled asset determinations signed by the Treasury Secretary since June 30, 2009 [were provided to SIGTARP]. Below are program descriptions from Treasury’s FinancialStability.gov website, as of 9/30/2009: CPP: Treasury created the Capital Purchase Program (CPP) in October 2008 to stabilize the financial system by providing capital to viable financial institutions of all sizes throughout the nation. With a strengthened capital base, financial institutions have an increased capacity to lend to U.S. businesses and consumers and to support the U.S. economy. CAP: The purpose of the CAP is to restore confidence throughout the financial system that the nation’s largest banking institutions have a sufficient capital cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers. SSFI: Systemically Significant Failing Institution Program (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. AGP: The Asset Guarantee Program (AGP) provides government assurances for assets held by financial institutions that are critical to the functioning of the nation’s financial system, which face a risk of losing the critical confidence that is needed for them to continue to lend to other banks. TIP: Treasury created the Targeted Investment Program (TIP) to stabilize the financial system by making investments in institutions that are critical to the functioning of the financial system. This program focuses on the complex relationships and reliance of institutions within the financial system. Investments made through the TIP seek to avoid significant market disruptions resulting from the deterioration of one financial institution that can threaten other financial institutions and impair broader financial markets and pose a threat to the overall economy. TALF: The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business ABS at more normal interest rate spreads… Under the TALF, the Federal Reserve Bank of New York (FRBNY) will provide non-recourse funding to any eligible borrower owning eligible collateral... The U.S. Treasury’s Troubled Assets Relief Program (TARP) will purchase $20 billion of subordinated debt in an SPV created by the FRBNY. The SPV will purchase and manage any assets received by the FRBNY in connection with any TALF loans. Residual returns from the SPV will be shared between the FRBNY and the U.S. Treasury. SIGTARP Report Section Section 2: “TARP Overview” Appendix D: “Transaction Detail” 187 188 Appendix C I Reporting Requirements I OCTOBER 21, 2009 # EESA Section EESA Reporting Requirement Treasury Response to SIGTARP Data Call SIGTARP Report Section PPIP: To address the challenge of legacy assets, Treasury – in conjunction with the Federal Deposit Insurance Corporation and the Federal Reserve – has announced the Public-Private Investment Program as part of its efforts to repair balance sheets throughout our financial system and ensure that credit is available to the households and businesses, large and small, that will help drive us toward recovery... Using $75 to $100 billion in TARP capital and capital from private investors, the Public-Private Investment Program will generate $500 billion in purchasing power to buy legacy assets – with the potential to expand to $1 trillion over time. UCSB: The Treasury Department will begin making direct purchases of securities backed by SBA loans to get the credit market moving again, and it will stand ready to purchase new securities to ensure that community banks and credit unions feel confident in extending new loans to local businesses. AIFP: The objective of [AIFP] is to prevent a significant disruption of the American automotive industry, which would pose a systemic risk to financial market stability and have a negative effect on the economy of the United States... [Through AIFP, Treasury has provided] loans or equity investments to General Motors, GMAC, Chrysler, and Chrysler Financial in order to avoid a disorderly bankruptcy of one or more auto companies; such an event would pose a systemic risk to the country’s financial system. Treasury’s loans to the automobile industry forged a path for these companies to go through orderly restructurings and achieve viability. ASSP: [ASSP] will provide up to $5 billion in financing, giving suppliers the confidence they need to continue shipping parts, pay their employees and continue their operations. AWCP: The Treasury Department announced an innovative new program to give consumers who are considering new car purchases the confidence that even in this difficult economic period, their warrantees will be honored. This program is part of the Administration’s broader program to stabilize the auto industry and stand behind a restructuring effort that will result in stronger, more competitive and viable American car companies. HAMP (a program under MHA): The Home Affordable Modification Program has a simple goal: reduce the amount homeowners owe per month to sustainable levels to stabilize communities. This program will bring together lenders, investors, servicers, borrowers, and the government, so that all stakeholders share in the cost of ensuring that responsible homeowners can afford their monthly mortgage payments – helping to reach up to 3 to 4 million at-risk borrowers in all segments of the mortgage market, reducing foreclosures, and helping to avoid further downward pressures on overall home prices. 2 Section 121(c)(B) A listing of the troubled assets purchased in each such category described under [section 121(c)(A)]. Treasury posts transaction reports for all the troubled asset purchases on its public website Appendix D: within two business days after each transaction. Information on all transactions is available “Transaction at http://www.financialstability.gov/impact/transactions.htm. Since the publication of the Detail” SIGTARP Report in July, Treasury has continued to invest funds in financial institutions across the United States through the Capital Purchase Program (CPP). Guidelines for all TARP programs, which explain each program’s scope and purpose are also posted on Treasury’s website at http://www.financialstability.gov/roadtostability/programs.htm. Additional information about these programs and related purchases is available in tranche reports and Section 105(a) reports, which are posted on Treasury’s website. Information is also available in the troubled asset determinations [provided by Treasury to SIGTARP]. [Treasury also provided SIGTARP with] the latest transaction report dated September 30, 2009. 3 Section 121(c)(C) An explanation of the reasons the Secretary deemed it necessary to purchase each such troubled asset. Pursuant to Section (3)(9)(B) of EESA, the Secretary of the Treasury periodically designates financial instruments as “troubled assets” and submits written determinations to appropriate committees of Congress. [Treasury provided SIGTARP with] all troubled asset determinations signed by the Secretary of the Treasury since Treasury responded to SIGTARP’s previous data call on June 30, 2009. Additional information on the TARP programs associated with these “troubled assets,” including each program’s scope and purpose, can be found online at http://www.financialstability.gov/roadtostability/programs.htm. Section 2: “TARP Overview” 4 Section 121(c)(D) A listing of each financial institution that such troubled assets were purchased from. See #2 above See #2 Reporting Requirements I Appendix C I OCTOBER 21, 2009 # 5 6 7 8 EESA Section EESA Reporting Requirement Treasury Response to SIGTARP Data Call Section 121(c)(E) A listing of and detailed biographical information on each person or entity hired to manage such troubled assets. There have been no additional asset managers hired during the third quarter 2009 (from July 1, 2009 through September 30, 2009). OFS is in the process of selecting additional asset managers consistent with Treasury’s intentions and announcement to select a group of smaller asset managers to serve as Financial Agents in managing the portfolio of assets issued by banks and institutions participating in the Capital Purchase Program and other similar programs under EESA, and will inform SIGTARP once OFS selects the additional asset managers. Section 4: “TARP Operations and Administration” A current estimate of the total amount of troubled assets purchased pursuant to any program established under section 101, the amount of troubled assets on the books of the Treasury, the amount of troubled assets sold, and the profit and loss incurred on each sale or disposition of each such troubled asset. Treasury received payments in connection with the repayment by financial institutions of Treasury’s investment through the Capital Purchase Program. As of September 30, 2009, Treasury received a total of $70.7 billion in CPP repayments. Treasury incurred neither a profit nor a loss on the repayment of preferred shares since Treasury both purchased and sold the preferred shares at par. As of September 30, 2009, Treasury received a total of $2.9 billion from institutions repurchasing their warrants. Treasury also received $13 million in fees for the [Banco Popular] Exchange, and $276 million from Bank of America as AGP termination payment. Additional information on the repayments of Treasury’s investments under the CPP and proceeds from the sale of warrants are available in [the transaction report and FSP Budget report provided to SIGTARP]. Obligations by Program provided in Table C.1 below A listing of the insurance contracts issued under section 102. No new insurance contracts this quarter. Section 2: “TARP Overview” A detailed statement of all purchases, obligations, expenditures, and revenues associated with any program established by the Secretary of the Treasury under sections 101 and 102. Treasury provides information about TARP purchases, obligations, expenditures, and revenues on Treasury’s public website at www.financialstability.gov. Treasury posts a transaction report for each purchase of troubled assets two business days after the transaction. Treasury also posts a detailed financial statement as part of its monthly Congressional report under section 105(a) of EESA. The next section 105(a) report will be posted on the Financial Stability web site on October 9, 2009. Obligations by Program provided in Table C.1 below [Treasury provided] the most recent TARP/Financial Stability Plan Budget report (as of October 6, 2009) and TARP transactions report (as of October 2, 2009), which capture detailed information about TARP purchases, obligations, expenditures, and revenues. Section 4: “TARP Operations and Administration” Section 121(c)(F) Section 121(c)(G) Section 121(f) SIGTARP Report Section Appendix C: “Reporting Requirements” of SIGTARP’s April 21, 2009 and July 21, 2009 Quarterly Reports to Congress Section 2: “TARP Overview” Appendix D: “Transaction Detail” Appendix C: “Reporting Requirements” of SIGTARP’s April 21, 2009 and July 21, 2009 Quarterly Reports to Congress Section 2: “TARP Overview” Appendix D: “Transaction Detail” Note: Treasury’s current TALF committment is $20 billion but should TALF exceed a total of $200 billion in loans extended by FRBNY, then Treasury’s committment could reach $80 billion. Sources: Treasury, responses to SIGTARP data call, 9/30/2009 and 10/7/2009; Program Descriptions: Treasury, “Programs” webpage, http://www.financialstability.gov/roadtostability/programs.htm, accessed 10/5/2009; ASSP: “Treasury Announces Auto Suppliers Support Program,” 3/19/2009, http://www.financialstability.gov/latest/auto3_18.html, accessed 6/30/2009; AWCP, “Obama Administration’s New Warrantee Commitment Program,” no date, http://www.financialstability.gov/docs/WarranteeCommitmentProgram.pdf, accessed 6/30/2009; TALF: Federal Reserve, “Term Asset-Backed Securities Loan Facility (TALF) Frequently Asked Questions,” no date, http://www.federalreserve.gov/newsevents/press/monetary/monetary20090303a2.pdf, accessed 6/30/2009; MHA: “Making Home Affordable Updated Detailed Description Update,” 3/4/2009, http://www.treas.gov/press/releases/reports/housing_fact_sheet.pdf, accessed 10/5/2009. 189 190 Appendix C I Reporting Requirements I OCTOBER 21, 2009 Table C.1 TOTAL AMOUNT OF TROUBLED ASSETS PURCHASED AND HELD ON TREASURY’S BOOKS, AS OF 10/6/2009 ($ billions) Obligationsa Capital Purchase Program (“CPP”) Expendedb On Treasury’s Booksc $204.6 $204.6 $204.6 Systemically Significant Failing Institutions (“SSFI”) 69.8 43.2 43.2 Home Affordable Modification Program (“HAMP”) 27.3 — — Targeted Investment Program (“TIP”) 40.0 40.0 40.0 Automotive Industry Financing Program (“AIFP”) 81.1 75.9 75.9 5.0 — — 20.0 0.1 0.2 16.7 — 16.7 $464.5 $363.8 $380.6 Asset Guarantee Program (“AGP”) d Term Asset-Backed Securities Loan Facility (“TALF”) e Legacy Securities Public-Private Investment Program (PPIP) f Total Notes: Numbers affected by rounding. a Based on “Face Value obligations” from Treasury souce document (TARP/Financial Stability Plan Budget Table dated 10/6/2009). b According to Treasury, “Represents TARP cash that has left the Treasury.” Based on “Face Value Disbursed/Outlays” from Treasury source document (TARP/Financial Stability Plan Tracking Report). c According to Treasury, “All assets are currently carried at par value.” On Treasury’s Books indicates “totals obligated,” and therefore “on the books.” d According to Treasury, “Reflects negative subsidy of $-750 million off of the total $301 billion Citigroup guarantee not just the $5 billion portion guaranteed by Treasury via the TARP (Breakdown of $301B: $39.5B from Citi, $5B from the UST, $10B from the FDIC and $246.5B from the Federal Reserve).” e According to Treasury, “Up to $20B may be disbursed as credit protection for the $200B Federal Reserve Loan Facility. Treasury will only provide funding to cover assets put to the TALF SPV and will receive 90% of funds accumulated in the SPV (from Interest spreads on the $200B Federal Reserve Loan Facility) over a 3-5 year period. Expected receipts exceed the expected disbursements, resulting in a significant negative subsidy rate. Initial funding of $100M on 3/25/09.” f This table may not align with numbers contained in the Overview section because the Overview is as of 9/30/2009 and the data in this table provided by Treasury is as of 10/6/2009. Source: Treasury, response to SIGTARP data call, 10/8/2009; Treasury, response to SIGTARP draft, 10/14/2009. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Alpine Banks of Colorado–Glenwood Springs, CO2 AMB Financial Corp.–Munster, IN2 AmeriBank Holding Company– Collinsville, OK2 American Express Company– New York, NY4 American Premier Bancorp–Arcadia, CA2 Pref. Stock w/ Ex. Warr. American State Bancshares, Inc.– Great Bend, KS2 1/30/09 3/6/09 1/9/09 5/29/09 1/9/09 Pref. Stock w/ Warr. Annapolis Bancorp, Inc.–Annapolis, MD 1/30/09 11/21/08 Associated Banc–Corp–Green Bay, WI Bancorp Financial, Inc.– Oak Brook, IL2,10 Pref. Stock w/ Ex. Warr. 8/14/09 Bank of North Carolina–Thomasville, NC Bank of the Carolinas Corporation– Mocksville, NC 12/5/08 4/17/09 12/12/08 Bank of the Ozarks, Inc.–Little Rock, AR Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Bank of George– Las Vegas, NV2 Bank of Marin Bancorp–Novato, CA4 3/13/09 12/5/08 Pref. Stock w/ Warr. 8/5/2009 $75,000,000 $13,179,000 $31,260,000 $28,000,000 3/31/2009 $2,672,000 $17,000,000 $3,000,000 Pref. Stock w/ Ex. Warr. Bank of Commerce– Charlotte, NC2 1/16/09 11/14/08 Bank of Commerce Holdings– Redding, CA $15,000,000,000 $10,000,000,000 Pref. Stock w/ Warr. Pref. Stock w/ Warr. Bank of America Corporation–Charlotte, NC1,g 1/9/09 $1,004,000 $50,000,000 $8,600,000 $48,000,000 10/28/08 Bank of America Corporation–Charlotte, NCg Bank Financial Services, Inc.– Eden Prarie, MN2 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. 12/19/08 BancTrust Financial Group, Inc.– Mobile, AL Pref. Stock w/ Ex. Warr. BancPlus Corporation–Ridgeland, MS2 BancStar, Inc.–Festus, MO2 2/20/09 $30,000,000 $13,669,000 Pref. Stock w/ Warr. $21,100,000 Pref. Stock w/ Ex. Warr. $7,400,000 $525,000,000 $8,152,000 Pref. Stock w/ Ex. Warr. 4/3/09 12/19/08 Bancorp Rhode Island, Inc.– Providence, RI4 BancIndependent, Inc.–Sheffield, AL 7/10/09 2 Avenue Financial Holdings, Inc.–Nashville, Pref. Stock w/ Ex. Warr. TN2 3/13/09 2/27/09 Pref. Stock w/ Warr. Anchor BanCorp Wisconsin Inc.– Madison, WI 1/30/09 $110,000,000 $5,000,000 Sub. Debent. w/ Ex. Warr. AmFirst Financial Services, Inc.– McCook, NE8 8/21/09 Pref. Stock w/ Warr. $21,000,000 Pref. Stock w/ Warr. $52,000,000 Pref. Stock w/ Warr. 12/19/08 AmeriServ Financial, Inc–Johnstown, PA $6,000,000 $1,800,000 $3,388,890,000 6/17/2009 $2,492,000 $3,674,000 11/21/08 Ameris Bancorp–Moultrie, GA Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. $3,652,000 $70,000,000 Pref. Stock w/ Ex. Warr. Allied First Bancorp, Inc.–Oswego, IL $12,000,000 3/27/09 2 4/24/09 $2,986,000 $26,918,000 5/13/2009 Sub. Debent. w/ Ex. Warr. Pref. Stock w/ Ex. Warr. $6,514,000 $4,781,000 Alliance Financial Services Inc.– Saint Paul, MN8 Alliance Bancshares, Inc.–Dalton, GA 6/26/09 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. 6/26/09 Alaska Pacific Bancshares, Inc.– Juneau, AK 2/6/09 Pref. Stock w/ Warr. Alarion Financial Services, Inc.– Ocala, FL2 1/23/09 $12,720,000 $3,500,000 $10,000,000 $111,000,000 $16,369,000 $4,400,000 $12,000,000 Capital Investment Repayment Amount Date $28,000,000 $30,000,000 $3,388,890,000 $26,918,000 Capital Repayment Amount6 Capital Repayment Details (CONTINUED) 12/19/08 Alliance Financial Corporation– Syracuse, NY4 Adbanc, Inc–Ogallala, NE 1/30/09 2 1st United Bancorp, Inc.–Boca Raton, FL Pref. Stock w/ Ex. Warr. AB&T Financial Corporation–Gastonia, NC Pref. Stock w/ Warr. 3/13/09 1/23/09 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. 2 Pref. Stock w/ Warr. 2 1st Source Corporation–South Bend, IN Pref. Stock w/ Ex. Warr. 1/23/09 1st Enterprise Bank–Los Angeles, CA2 11/14/08 1st FS Corporation–Hendersonville, NC 2/13/09 Investment Description Pref. Stock w/ Warr. Purchase Date Institution 12/23/08 1st Constitution Bancorp–Cranbury, NJ Purchase Details CPP TRANSACTION DETAIL, AS OF 9/30/2009 Table D.1 $0 $0 $0 $0 Warrants Warrants 9/30/2009 Warrants 7/29/2009 Warrants 6/17/2009 Warrants Warrants Warrants $900,000 Final Disposition Proceeds $1,400,000 $340,000,000 Final Disposition Remaining Remaining Final Disposition Capital Investment Disposition Investment Amount Description Date Description Treasury Investment Remaining After Capital Repayment $26.53 $4.43 $7.70 $31.33 $5.50 $16.92 $16.92 $3.57 $24.98 $11.42 $3.00 $1.30 $1.80 $7.15 $33.90 $27.05 $5.80 $4.90 $16.30 $3.76 $7.52 $448 $17 $57 $163 $48 $146,385 $146,385 $63 $115 $1,460 $12 $28 $38 $98 $40,314 $125 $4 $13 $394 $19 $32 Market Current Stock Capitalization (in millions) Pricee 173,069 175,772 80,153 837,947 276,815 200,222 Number of Warrants Originally Issued $29.62 $4.16 $8.63 $27.23 $6.29 $30.79 $10.26 – $19.77 $4.08 $2.23 $2.40 $11.48 379,811 475,204 543,337 154,242 405,405 48,717,116 73,075,674 730,994 192,967 3,983,308 299,706 7,399,103 1,312,500 679,443 – 24,264,129 – $4.08 $6.55 $19.87 $8.59 $8.56 Strike Price (reflects updates)a 379,811 475,204 543,337 154,242 405,405 121,792,790 730,994 – 3,983,308 299,706 7,399,103 1,312,500 679,443 – – 175,772 80,153 837,947 276,815 210,233 $(3.09) $0.27 $(0.93) $4.10 $(0.79) $(13.87) $(6.69) – $(8.35) $(1.08) $(0.93) $(0.60) $(4.33) – – $1.72 $(1.65) $(3.57) $(4.83) $(1.04) Current Amount Number of “In the Outstanding Warrants Money” or (reflects “Out of the Money”e updates)a Warrant and Market Data for Publicly–Traded Companies $60,001 $108,474 $1,462,416 $61,381 $538,360 $22,147 $125,502 $199,217 $375,505 $98,194 $230,111 $3,114,167 $616,111 $121,232 $386,667 Income Payment to Treasury (Dividend or Interest)f $220,783 $688,333 $1,906,667 $70,034 $1,638,889 $171,857 $1,271,666 $941,667 $94,921 $2,531,250 $215,990 $1,085,417 $451,111 $61,501 $639,861 continued on next page Out Out Out In Out Out $897,916,667 Out – $485,535 $188,207 Out $19,250,000 Out Out Out Out $196,200 $20,710 – $74,367,308 – In Out Out Out Out In/Out of the Moneye transaction detail I Appendix d I October 21, 2009 191 Pref. Stock w/ Ex. Warr. BankGreenville–Greenville, SC2 2/13/09 Bar Harbor Bankshares–Bar Harbor, ME 1/16/09 Blue Ridge Bancshares, Inc.– Independence, MO2 Blue River Bancshares, Inc.– Shelbyville, IN2 Blue Valley Ban Corp–Overland Park, KS BNB Financial Services Corporation–New Pref. Stock w/ Ex. Warr. York, NY2 BNC Financial Group, Inc.–New Canaan, CT2 3/6/09 3/6/09 12/5/08 4/17/09 2/27/09 Pref. Stock w/ Warr. Butler Point, Inc.–Catlin, IL2 C&F Financial Corporation–West Point, VA Pref. Stock w/ Warr. 3/13/09 1/9/09 California Bank of Commerce– Lafayette, CA2 California Oaks State Bank– Thousand Oaks, CA2 Calvert Financial Corporation– Ashland, MO2 2/27/09 1/23/09 $4,767,000 $1,037,000 $3,300,000 Pref. Stock w/ Ex. Warr. $4,000,000 Pref. Stock w/ Ex. Warr. $44,000,000 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Cadence Financial Corporation– Starkville, MS 1/23/09 Pref. Stock w/ Ex. Warr. 12/23/08 Cache Valley Banking Company– Logan, UT2 1/9/09 $20,000,000 $607,000 $15,000,000 Business Bancshares, Inc.–Clayton, MO2 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. $11,000,000 Pref. Stock w/ Ex. Warr. Brotherhood Bancshares, Inc.– Kansas City, KS2 $2,400,000 4/24/09 $9,000,000 Pref. Stock w/ Warr. Brogan Bankshares, Inc.– Kaukauna, WI8 Sub. Debent. w/ Ex. Warr. $38,000,000 $23,864,000 $154,000,000 $5,586,000 $10,000,000 $20,093,000 $4,797,000 $7,500,000 $21,750,000 7/17/09 5/15/09 11/14/08 Broadway Financial Corporation– Los Angeles, CA 12/19/08 Bridgeview Bancorp, Inc.–Bridgeview, IL2 Pref. Stock w/ Ex. Warr. 12/23/08 Bridge Capital Holdings–San Jose, CA Sub. Debent. w/ Ex. Warr. Pref. Stock w/ Warr. Boscobel Bancorp, Inc–Boscobel, WI 5/15/09 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. $5,000,000 $12,000,000 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. $5,000,000 $10,000,000 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. 11/21/08 Boston Private Financial Holdings, Inc.– Boston, MA BNCCORP, Inc.–Bismarck, ND BOH Holdings, Inc.–Houston, TX2 1/16/09 3/6/09 8 Blackridge Financial, Inc.–Fargo, ND2 2 Blackhawk Bancorp, Inc.–Beloit, WI 3/13/09 $6,400,000 5/22/09 Sub. Debent. w/ Ex. Warr. Biscayne Bancshares, Inc.– Coconut Grove, FL8,10 6/19/09 2 $985,000 $1,635,000 Pref. Stock w/ Ex. Warr. Bern Bancshares, Inc.–Bern, KS2 Birmingham Bloomfield Bancshares, Inc– Pref. Stock w/ Ex. Warr. Birmingham, MI2 2/13/09 $40,000,000 5/27/2009 $2,892,000 $6,000,000 $10,800,000 $1,706,000 $3,133,640,000 6/17/2009 $18,751,000 $795,000 $124,000,000 4/24/09 Pref. Stock w/ Warr. Berkshire Bancorp, Inc.–Wyomissing, PA Pref. Stock w/ Ex. Warr. 6/12/09 12/19/08 Berkshire Hills Bancorp, Inc.– Pittsfield, MA4 Pref. Stock w/ Ex. Warr. Beach Business Bank– Manhattan Beach, CA2 1/30/09 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. BCB Holding Company, Inc.– Theodore, AL2 12/23/08 BCSB Bancorp, Inc.–Baltimore, MD 4/3/09 Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Banner County Ban Corporation– Harrisburg, NE2 2/6/09 11/14/08 BB&T Corp.–Winston-Salem, NC4 Pref. Stock w/ Warr. 11/21/08 Banner Corporation–Walla Walla, WA 2 $15,500,000 Pref. Stock w/ Ex. Warr. BankFirst Capital Corporation– Macon, MS2 1/23/09 $1,000,000 $12,639,000 Investment Description Bankers’ Bank of the West Bancorp, Inc.– Pref. Stock w/ Ex. Warr. Denver, CO2 Capital Investment Repayment Amount Date $40,000,000 $3,133,640,000 Capital Repayment Amount6 Capital Repayment Details (CONTINUED) 1/30/09 Purchase Date Institution Purchase Details CPP TRANSACTION DETAIL, AS OF 9/30/2009 $0 $0 Warrants 6/24/2009 Warrants 7/22/2009 Warrants Warrants Final Disposition Proceeds $1,040,000 $67,010,402 Final Disposition Remaining Remaining Final Disposition Capital Investment Disposition Investment Amount Description Date Description Treasury Investment Remaining After Capital Repayment $1.80 $17.00 $5.45 $7.00 $6.47 $9.50 $21.94 $8.56 $27.24 $34.00 $2.73 $21 $52 $9 $49 $444 $26 $305 $27 $18,566 $98 $52 Market Current Stock Capitalization (in millions) Pricee 104,910 1,707,989 Number of Warrants Originally Issued $5.76 $17.91 $7.37 $9.03 $8.00 $29.37 – $8.83 1,145,833 167,504 183,175 396,412 2,887,500 111,083 226,330 183,465 – 13,902,573 $26.81 $10.89 Strike Price (reflects updates)a 1,145,833 167,504 183,175 396,412 2,887,500 111,083 – 183,465 – 104,910 1,707,989 $(3.96) $(0.91) $(1.92) $(2.03) $(1.53) $(19.87) – $(0.27) – $7.19 $(8.16) Current Amount Number of “In the Outstanding Warrants Money” or (reflects “Out of the Money”e updates)a Warrant and Market Data for Publicly–Traded Companies $544,300 $22,759 $4,546,667 $27,553 $473,999 $373,117 Income Payment to Treasury (Dividend or Interest)f $34,083 $31,720 $100,916 $101,733 $1,320,000 $167,407 $600,000 $13,955 $252,063 $46,628 $50,340 $338,750 $1,357,656 $768,951 $5,646,667 $117,156 $240,708 $635,767 $122,010 $133,980 $211,458 $120,355 $288,850 $62,826 $230,111 $81,038 $27,483 $27,174 $877,778 $27,589 $177,125 $348,000 continued on next page Out Out Out Out Out Out – Out – $92,703,517 In Out In/Out of the Moneye 192 Appendix d I transaction detail I October 21, 2009 Pref. Stock w/ Ex. Warr. 1/23/09 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. 12/12/08 Capital Bank Corporation–Raleigh, NC 4/10/09 Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock Carolina Bank Holdings, Inc.– Greensboro, NC Carolina Trust Bank–Lincolnton, NC Carrollton Bancorp–Baltimore, MD Carver Bancorp, Inc–New York, NY3 1/9/09 2/6/09 2/13/09 1/16/09 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. CB Holding Corp.–Aledo, IL2 CBB Bancorp–Cartersville, GA2 CBS Banc-Corp.–Russellville, AL2 5/29/09 2/20/09 3/27/09 Center Bancorp, Inc.–Union, NJ 1/9/09 Pref. Stock w/ Ex. Warr. Central Bancorp, Inc.–Garland, TX2 Central Community Corporation– Temple, TX2 Central Federal Corporation–Fairlawn, OH Pref. Stock w/ Warr. 2/20/09 12/5/08 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Central Valley Community Bancorp– Fresno, CA Central Virginia Bankshares, Inc.– Powhatan, VA Centrix Bank & Trust– Bedford, NH2 Centrue Financial Corporation– St. Louis, MO Century Financial Services Corporation– Santa Fe, NM8 1/30/09 1/30/09 2/6/09 1/9/09 6/19/09 5/29/09 Chicago Shore Corporation–Chicago, IL Citizens & Northern Corporation– Wellsboro, PA $7,462,000 $24,990,000 Citizens Bancshares Corporation– Atlanta, GA3 3/6/09 Pref. Stock Citizens Bancshares Co.–Chillicothe, MO2 Pref. Stock w/ Ex. Warr. 5/29/09 $26,440,000 $25,000,000,000 $2,330,000,000 $10,400,000 Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. 12/23/08 Citizens Bancorp–Nevada City, CA2 1/16/09 10/28/08 Citigroup Inc.–New York, NY 11, h $7,000,000 $19,817,000 Pref. Stock w/ Ex. Warr. $10,000,000 Sub. Debent. w/ Ex. Warr. Chambers Bancshares, Inc.– Danville, AR8 Sub. Debent. w/ Ex. Warr. 2 $32,668,000 $7,500,000 $11,385,000 $7,000,000 $135,000,000 $11,300,000 $7,225,000 $22,000,000 $5,800,000 $22,500,000 $10,000,000 $15,000,000 3/31/2009 $27,875,000 9/30/2009 $2,250,000 $55,000,000 $10,000,000 $3,564,000 $11,560,000 $24,300,000 $2,644,000 $4,114,000 $3,000,000 $258,000,000 $38,970,000 $18,980,000 $9,201,000 $4,000,000 $16,000,000 $4,000,000 $3,555,199,000 6/17/2009 $5,100,000 $41,279,000 $4,700,000 $4,656,000 Capital Investment Repayment Amount Date $15,000,000 $27,875,000 $3,555,199,000 Capital Repayment Amount6 Capital Repayment Details (CONTINUED) Pref. Stock w/ Warr. 12/31/08 CIT Group Inc.–New York, NY 7/31/09 Pref. Stock w/ Warr. Central Pacific Financial Corp.– Honolulu, HI 1/9/09 Pref. Stock w/ Warr. Pref. Stock w/ Warr. 12/23/08 Central Jersey Bancorp–Oakhurst, NJ Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Central Bancorp, Inc.–Somerville, MA Central Bancshares, Inc.– Houston, TX2 2/27/09 12/5/08 1/30/09 Pref. Stock w/ Ex. Warr. Centra Financial Holdings, Inc.– Morgantown, WV2,4,7 1/16/09 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. CenterBank–Milford, OH2 Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. 11/21/08 Centerstate Banks of Florida Inc.– Davenport, FLb,5 5/1/09 12/12/08 Center Financial Corporation– Los Angeles, CA CedarStone Bank– Lebanon, TN2 2/6/09 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Catskill Hudson Bancorp, Inc– Rock Hil, NY2 12/23/08 Cecil Bancorp, Inc.–Elkton, MD Cathay General Bancorp–Los Angeles, CA Pref. Stock w/ Warr. 2/27/09 Pref. Stock w/ Warr. 12/5/08 11/21/08 Cascade Financial Corporation– Everett, WA Pref. Stock w/ Ex. Warr. 12/23/08 Capital Pacific Bancorp–Portland, OR2 Pref. Stock w/ Warr. Pref. Stock w/ Warr. 11/14/08 Capital One Financial Corporation– McLean, VA4 Capital Commerce Bancorp, Inc.– Milwaukee, WI2 Pref. Stock w/ Ex. Warr. 12/23/08 Capital Bancorp, Inc.–Rockville, MD2 CalWest Bancorp– Rancho Santa Margarita, CA2 Investment Description Purchase Date Institution Purchase Details CPP TRANSACTION DETAIL, AS OF 9/30/2009 Final Disposition $0 $0 $0 Preferred 4/15/2009 Stock 2 Warrants Warrants Preferred Stock Remaining Remaining Final Disposition Capital Investment Disposition Investment Amount Description Date Description Treasury Investment Remaining After Capital Repayment $750,000 Final Disposition Proceeds $14.79 $4.84 $1.21 $3.79 $3.76 $5.27 $2.52 $6.00 $2.65 $8.70 $7.89 $3.82 $7.53 $4.50 $8.09 $1.70 $5.50 $5.90 $4.00 $35.73 $4.98 $133 $110,741 $474 NA $10 $41 $72 $55 $11 $14 $190 $64 $110 $17 $401 $21 $14 $9 $14 $16,256 $56 Market Current Stock Capitalization (in millions) Pricee 749,619 Number of Warrants Originally Issued 508,320 263,542 158,133 1,585,748 268,621 336,568 234,742 250,825 864,780 173,410 261,538 1,846,374 863,442 205,379 86,957 357,675 $20.36 194,794 see note h 210,084,034 $3.94 88,705,584 $9.64 $6.48 $6.64 $12.77 $6.31 $3.22 $6.39 $16.67 $9.54 $8.65 $6.63 $20.96 $6.77 $6.72 $6.90 $6.71 $42.13 12,657,960 $8.26 Strike Price (reflects updates)a 194,794 88,705,584 508,320 263,542 158,133 1,585,748 268,621 336,568 234,742 125,413 864,780 173,410 261,538 1,846,374 863,442 205,379 86,957 357,675 12,657,960 749,619 $(5.57) see note h $(2.73) $(5.85) $(2.72) $(1.37) $(10.25) $(0.31) $(0.57) $2.31 $(8.78) $(5.72) $(1.12) $(2.13) $(12.87) $(5.07) $(1.22) $(2.71) $(6.40) $(3.28) Current Amount Number of “In the Outstanding Warrants Money” or (reflects “Out of the a Money”e updates) Warrant and Market Data for Publicly–Traded Companies $96,511 $1,393,167 $165,075 $142,394 Income Payment to Treasury (Dividend or Interest)f $351,007 $130,511 $571,690 $214,594 $308,344 $189,583 $2,362,500 $364,111 $250,868 $582,847 $171,221 $572,250 $347,222 $172,938 $1,196,303 $35,438 $1,856,250 $300,000 $101,966 $372,489 $507,668 $70,039 $47,340 $76,300 $8,958,333 $1,428,900 $550,947 $232,581 $105,000 $480,000 $140,489 $164,786 $287,533 $223,571 $767,494 $932,291,667 continued on next page Out Out $43,687,500 Out Out Out Out Out Out In Out Out Out Out Out Out Out Out Out Out $105,174,638 Out In/Out of the Moneye transaction detail I Appendix d I October 21, 2009 193 $9,950,000 CoastalSouth Bancshares, Inc.– Hilton Head Island, SC2,10 8/28/09 Pref. Stock w/ Ex. Warr. Community Bank of the Bay– Oakland, CA3 Community Bank Shares of Indiana, Inc.– Pref. Stock w/ Warr. New Albany, IN 1/16/09 5/29/09 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. 2/27/09 $20,000,000 $12,725,000 $17,806,000 $1,050,000 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Community First Bancshares Inc.– Union City, TN2 Community First Bancshares, Inc.– Harrison, AR2 Community First Inc.–Columbia, TN2 Community Holding Company of Florida, Inc.–Miramar Beach, FL2 3/20/09 4/3/09 2/27/09 2/6/09 $6,970,000 $12,643,000 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Community Financial Shares, Inc.– Glen Ellyn, IL2 5/15/09 $3,976,000 $17,680,000 $19,468,000 $1,747,000 $3,872,000 $52,000,000 12/19/08 Community Financial Corporation– Staunton, VA Community Business Bank– West Sacramento, CA2 12/19/08 Community Bankers Trust Corporation– Glen Allen, VA Pref. Stock Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Community Bancshares of Mississippi, Inc.–Brandon, MS2 Pref. Stock w/ Ex. Warr. Community Bancshares of Kansas, Inc.– Goff, KS2 3/6/09 Community Bancshares, Inc.– Kingman, AZ2,10 $500,000 Pref. Stock w/ Ex. Warr. Community 1st Bank– Roseville, CA2 1/16/09 9/11/09 $2,550,000 Pref. Stock w/ Ex. Warr. Commonwealth Business Bank– Los Angeles, CA2 1/23/09 7/24/09 $20,400,000 Sub. Debent. w/ Ex. Warr. Commonwealth Bancshares, Inc.– Louisville, KY8 5/22/09 $7,701,000 $5,000,000 Pref. Stock w/ Warr. $2,250,000,000 Pref. Stock w/ Warr. Commerce National Bank– Newport Beach, CA 1/9/09 $2,260,000 $76,898,000 $28,000,000 11/14/08 Comerica Inc.–Dallas, TX Columbine Capital Corp.– Buena Vista, CO2 2/27/09 Pref. Stock w/ Warr. $574,000 Pref. Stock w/ Warr. Colony Bankcorp, Inc.–Fitzgerald, GA 1/9/09 $10,000,000 11/21/08 Columbia Banking System, Inc.– Tacoma, WA ColoEast Bankshares, Inc.–Lamar, CO Colonial American Bank– West Conshohocken, PA2 2/13/09 3/27/09 $16,500,000 $64,450,000 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. 2 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. 1/9/09 Codorus Valley Bancorp, Inc.–York, PA 12/19/08 CoBiz Financial Inc.–Denver, CO $16,015,000 Pref. Stock w/ Warr. Coastal Banking Company, Inc.– Fernandina Beach, FL 12/5/08 Pref. Stock w/ Ex. Warr. $3,000,000 Pref. Stock w/ Ex. Warr. Clover Community Bankshares, Inc.– Clover, SC2 3/27/09 $400,000,000 Pref. Stock w/ Warr. 11/21/08 City National Corporation– Beverly Hills, CA $9,439,000 $4.16 $3.44 $7.50 $5.00 $29.67 $16.55 $6.69 $5.75 $4.98 $3.45 $38.93 $18 $74 $24 $13 $4,484 $444 $48 $23 $180 $9 $2,004 $46 $96 796,046 500,000 263,859 895,968 205,579 1,128,668 428,870 $5.40 $3.40 $7.56 $8.60 351,194 780,000 386,270 87,209 $29.40 11,479,592 $14.49 $8.40 $9.38 $10.79 $7.26 $53.16 $7.17 $2.56 17,578,125 351,194 780,000 386,270 87,209 11,479,592 796,046 500,000 263,859 895,968 205,579 1,128,668 428,870 17,578,125 $(1.24) $0.04 $(0.06) $(3.60) $0.27 $2.06 $(1.71) $(3.63) $(5.81) $(3.81) $(14.23) $(1.07) $(1.80) $287,757 $105,367 $691,875 $163,872 $57,480 $2,819,593 $840,000 $12,003 $275,528 $495,000 $2,112,528 $345,486 $29,926 $452,853 $254,280 $439,028 $94,978 $414,410 $101,131 $579,511 $205,495 $21,838 $11,902 $12,036 $69,510 $25,648 $394,615 continued on next page Out Out Out Out Out $84,687,500 In Out Out Out Out $62,675 Out $14,666,667 Out Out $10,125,000 Out Pref. Stock City National Bancshares Corporation– Newark, NJ3 $6.10 $0.76 $(1.03) 4/10/09 $20,500,000 $300,000,000 254,218 Pref. Stock w/ Warr. 254,218 Pref. Stock w/ Warr. $5.18 12/12/08 Citizens South Banking Corporation– Gastonia, NC $8 12/12/08 Citizens Republic Bancorp, Inc.–Flint, MI $4.15 $8,779,000 Pref. Stock w/ Warr. Income Payment to Treasury (Dividend or Interest)f 12/19/08 Citizens First Corporation– Bowling Green, KY In/Out of the Moneye $180,259 Current Amount Number of “In the Outstanding Warrants Money” or (reflects “Out of the Money”e updates)a $3,000,000 Market Current Stock Capitalization (in millions) Pricee Number of Warrants Originally Issued $6,300,000 Final Disposition Proceeds Strike Price (reflects updates)a Warrant and Market Data for Publicly–Traded Companies Pref. Stock w/ Ex. Warr. Citizens Commerce Bancshares, Inc.– Versailles, KY2 2/6/09 Remaining Remaining Final Disposition Capital Investment Disposition Investment Amount Description Date Description Final Disposition 12/23/08 Citizens Community Bank–South Hill, VA2 Pref. Stock w/ Ex. Warr. Capital Repayment Amount6 Treasury Investment Remaining After Capital Repayment $19,983 Citizens Bank & Trust Company– Covington, LA2 Capital Investment Repayment Amount Date Capital Repayment Details (CONTINUED) $2,400,000 Investment Description Pref. Stock w/ Ex. Warr. Purchase Date Institution 3/20/09 Purchase Details CPP TRANSACTION DETAIL, AS OF 9/30/2009 194 Appendix d I transaction detail I October 21, 2009 Pref. Stock w/ Warr. Community Partners Bancorp– Middletown, NJ Community Trust Financial Corporation– Ruston, LA2 1/30/09 1/9/09 $24,900,000 $10,650,000 Pref. Stock w/ Ex. Warr. Covenant Financial Corporation– Clarksdale, MS2 Crazy Woman Creek Bancorp, Inc.– Buffalo, WY2 Crescent Financial Corporation–Cary, NC Pref. Stock w/ Warr. 6/5/09 2/20/09 1/9/09 Pref. Stock w/ Warr. CVB Financial Corp–Ontario, CAb,4 12/5/08 F.N.B. Corporation–Hermitage, PA Farmers & Merchants Bancshares, Inc.– Houston, TX2 Farmers & Merchants Financial Corporation–Argonia, KS2 1/9/09 3/6/09 3/20/09 1/23/09 F&M Financial Corporation– Clarksville, TN2 2/13/09 Farmers Bank–Windsor, VA 2 F & M Financial Corporation– Salisbury, NC2 b,4 F & M Bancshares, Inc.–Trezevant, TN 1/30/09 2/6/09 2 F & C Bancorp, Inc.– Holden, MO8 5/22/09 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Sub. Debent. w/ Ex. Warr. Pref. Stock w/ Ex. Warr. $8,752,000 $442,000 $11,000,000 $100,000,000 $17,243,000 $17,000,000 $4,609,000 $2,993,000 $43,000,000 $8,750,000 12/19/08 Exchange Bank–Santa Rosa, CA2 $4,000,000 Pref. Stock w/ Ex. Warr. Enterprise Financial Services Group, Inc.– Pref. Stock w/ Ex. Warr. Allison Park, PA2 Equity Bancshares, Inc.–Wichita, KS2 $35,000,000 6/12/09 Pref. Stock w/ Warr. 12/19/08 Enterprise Financial Services Corp.– St. Louis, MO $34,000,000 $7,500,000 $17,949,000 $24,000,000 $306,546,000 1/30/09 Pref. Stock w/ Warr. Encore Bancshares Inc.–Houston, TX Pref. Stock w/ Warr. 12/5/08 ECB Bancorp, Inc.–Engelhard, NC 1/16/09 Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock w/ Warr. Eastern Virginia Bankshares, Inc.– Tappahannock, VA $38,235,000 $12,000,000 Sub. Debent. w/ Ex. Warr. Pref. Stock w/ Warr. $11,750,000 $1,224,558,000 $146,053,000 $20,445,000 $1,173,000 $2,639,000 $19,891,000 9/9/2009 9/2/2009 $130,000,000 8/26/2009 $2,400,000 $3,100,000 Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. 12/23/08 Emclaire Financial Corp.–Emlenton, PA East West Bancorp–Pasadena, CA 1/9/09 DNB Financial Corporation– Downingtown, PA 1/30/09 12/5/08 Discover Financial Services– Riverwoods, IL 3/13/09 Duke Financial Group, Inc.– Minneapolis, MN8 Dickinson Financial Corporation II– Kansas City, MO2 1/16/09 Eagle Bancorp, Inc.–Bethesda, MD Diamond Bancorp, Inc.–Washington, MO8 Sub. Debent. w/ Ex. Warr. 5/22/09 6/19/09 DeSoto County Bank–Horn Lake, MS 2/13/09 12/5/08 Deerfield Financial Corporation– Deerfield, WI8 5/15/09 Sub. Debent. w/ Ex. Warr. CVB Financial Corp–Ontario, CAb,4 D.L. Evans Bancorp–Burley, ID2 12/5/08 2/27/09 2 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Crosstown Holding Company–Blaine, MN2 Pref. Stock w/ Ex. Warr. CSRA Bank Corp.–Wrens, GA2 1/23/09 3/27/09 Pref. Stock w/ Ex. Warr. $5,000,000 Pref. Stock w/ Ex. Warr. Country Bank Shares, Inc.–Milford, NE2 $638,000 $7,525,000 Pref. Stock w/ Ex. Warr. Corning Savings and Loan Association– Corning, AR2 1/30/09 $3,285,000 2/13/09 Pref. Stock w/ Ex. Warr. Congaree Bancshares, Inc.–Cayce, SC2 $15,600,000 $24,000,000 $9,000,000 $2,600,000 Capital Investment Repayment Amount Date $100,000,000 $32,500,000 $97,500,000 Capital Repayment Amount6 Capital Repayment Details (CONTINUED) 1/9/09 12/19/08 Community West Bancshares–Goleta, CA Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. 12/23/08 Community Investors Bancorp, Inc.– Bucyrus, OH2 Investment Description Purchase Date Institution Purchase Details CPP TRANSACTION DETAIL, AS OF 9/30/2009 Final Disposition $0 $0 $32,500,000 Warrants Warrants Preferred Stock w/ Warrants Remaining Remaining Final Disposition Capital Investment Disposition Investment Amount Description Date Description Treasury Investment Remaining After Capital Repayment Final Disposition Proceeds $7.11 $9.25 $8.91 $17.10 $16.50 $8.08 $8.30 $9.58 $6.50 $16.23 $7.59 $4.80 $2.27 $4.18 $810 $119 $92 $24 $47 $48 $761 $178 $17 $8,809 $804 $46 $13 $30 Market Current Stock Capitalization (in millions) Pricee 1,669,521 833,705 521,158 288,462 Number of Warrants Originally Issued $11.52 $16.20 $14.01 $22.45 $18.57 $9.63 $15.15 $7.44 $9.46 1,302,083 324,074 364,026 50,111 144,984 373,832 3,035,109 770,867 186,311 $8.96 20,500,413 $11.68 $4.48 $4.49 $4.68 Strike Price (reflects updates)a 651,042 324,074 364,026 50,111 144,984 373,832 3,035,109 770,867 186,311 20,500,413 834,761 833,705 521,158 288,462 $(4.41) $(6.95) $(5.10) $(5.35) $(2.07) $(1.55) $(6.85) $2.14 $(2.96) $7.27 $(4.09) $0.32 $(2.22) $(0.50) Current Amount Number of “In the Outstanding Warrants Money” or (reflects “Out of the a Money”e updates) Warrant and Market Data for Publicly–Traded Companies $2,631,197 $395,477 $32,335 $55,355 $505,914 $4,739,583 $50,140 $325,709 $747,000 $82,128 $52,986 $222,133 $17,583 $107,407 $511,333 $784,800 $243,750 $91,318 Income Payment to Treasury (Dividend or Interest)f $1,327,605 $156,616 $318,229 $267,661 $9,699 $264,780 $3,333,333 $475,086 $486,413 $136,040 $57,907 $1,536,294 $258,332 $38,150 $1,147,222 $1,180,556 $241,667 $521,020 $720,000 continued on next page Out Out Out Out Out Out Out $10,643,958 In Out In $25,851,779 Out Out Out Out In/Out of the Moneye transaction detail I Appendix d I October 21, 2009 195 FC Holdings, Inc.–Houston, TX 8 Fidelity Bancorp, Inc–Baton Rouge, LA $10,000,000 First American Bank Corporation– Elk Grove Village, IL8 First American International Corp.– Brooklyn, NY3 First Bancorp–Troy, NC First BanCorp–San Juan, PR First BancTrust Corporation–Paris, IL First Bank of Charleston, Inc.–Charleston, Pref. Stock w/ Ex. Warr. WV2 Pref. Stock w/ Ex. Warr. First Alliance Bancshares, Inc.– Cordova, TN2 6/26/09 7/24/09 3/13/09 1/9/09 1/16/09 2/20/09 2/6/09 First Business Bank, N.A.– San Diego, CA2 4/10/09 First Citizens Banc Corp– Sandusky, OH First Colebrook Bancorp, Inc.– Colebrook, NH2 First Community Bancshares, Inc–OverlandPref. Stock w/ Ex. Warr. Park, KS2 1/23/09 3/20/09 5/15/09 $7,500,000 Pref. Stock w/ Warr. Sub. Debent. w/ Ex. Warr. First Defiance Financial Corp.– Defiance, OH First Eagle Bancshares, Inc.– Hanover Park, IL8 First Express of Nebraska, Inc.– Gering, NE2 12/5/08 9/11/09 2/6/09 Pref. Stock w/ Ex. Warr. $37,000,000 Pref. Stock w/ Warr. $5,000,000 $11,350,000 $41,500,000 Pref. Stock w/ Warr. 11/21/08 First Community Bankshares Inc.– Bluefield, VA5, b 11/21/08 First Community Corporation–Lexington, SC $14,800,000 $4,500,000 $23,184,000 $10,685,000 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. $2,200,000 $10,958,000 $25,000,000 $2,211,000 $100,000,000 $295,400,000 $7,350,000 $400,000,000 $65,000,000 $17,000,000 $50,000,000 Pref. Stock w/ Warr. 12/23/08 First Community Bank Corporation of America–Pinellas Park, FL First Choice Bank– Cerritos, CA2 Pref. Stock w/ Ex. Warr. First Capital Bancorp, Inc.–Glen Ellen, VA Pref. Stock w/ Warr. 2/13/09 Pref. Stock w/ Warr. 4/3/09 12/19/08 First California Financial Group, Inc– Westlake Village, CA Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. First Busey Corporation– Urbana, IL 3/6/09 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock Sub. Debent. w/ Ex. Warr. $3,422,000 $1,177,000 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. $3,742,000 $5,000,000 Sub. Debent. w/ Ex. Warr. 12/31/08 First Banks, Inc.–Clayton, MO2 First Bankers Trustshares, Inc.– Quincy, IL2 First Advantage Bancshares Inc.– Coon Rapids, MN2 5/22/09 1/16/09 $3,345,000 Financial Services of Winger, Inc.– Winger, MN8,10 7/31/09 2 Pref. Stock w/ Ex. Warr. Financial Security Corporation– Basin, WY2 2/13/09 $37,515,000 Pref. Stock w/ Warr. 12/23/08 Financial Institutions, Inc.–Warsaw, NY $3,408,000,000 Pref. Stock w/ Warr. 12/31/08 Fifth Third Bancorp–Cincinnati, OH $48,200,000 $3,000,000 Fidelity Resources Company–Plano, TX2 12/19/08 Fidelity Southern Corporation–Atlanta, GA Pref. Stock w/ Warr. 6/26/09 Pref. Stock w/ Ex. Warr. $7,000,000 $3,942,000 $7,289,000 $9,294,000 $21,042,000 $700,000 $12,000,000 $36,282,000 Pref. Stock w/ Warr. Sub. Debent. w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. $30,000,000 7/8/2009 Capital Investment Repayment Amount Date $41,500,000 Capital Repayment Amount6 Capital Repayment Details (CONTINUED) 12/19/08 Fidelity Financial Corporation–Wichita, KS2 Pref. Stock w/ Ex. Warr. 12/12/08 Fidelity Bancorp, Inc.–Pittsburgh, PA 5/29/09 12/19/08 FFW Corporation–Wabash, IN 2 12/19/08 FCB Bancorp, Inc.–Louisville, KY2 6/26/09 Farmers Enterprises, Inc.–Great Bend, KS Sub. Debent. w/ Ex. Warr. Farmers State Bankshares, Inc.– Holton, KS2 6/19/09 3/20/09 2 Farmers Capital Bank Corporation– Frankfort, KY 8 Investment Description Pref. Stock w/ Warr. Purchase Date Institution 1/9/09 Purchase Details CPP TRANSACTION DETAIL, AS OF 9/30/2009 Final Disposition $0 Warrants Remaining Remaining Final Disposition Capital Investment Disposition Investment Amount Description Date Description Treasury Investment Remaining After Capital Repayment Final Disposition Proceeds $14.91 $6.20 $12.62 $4.00 $5.24 $7.55 $4.80 $4.70 $3.05 $18.05 $9.97 $10.13 $3.06 $6.37 $17.88 $121 $20 $223 $17 $40 $22 $56 $266 $282 $301 $108 $8,057 $30 $19 $132 Market Current Stock Capitalization (in millions) Pricee 2,266,458 121,387 223,992 Number of Warrants Originally Issued $10.08 $8.69 $35.26 $7.02 $7.41 $6.55 $6.26 $13.07 $10.27 $15.82 $14.88 550,595 195,915 176,546 228,312 469,312 250,947 599,042 1,147,666 5,842,259 616,308 378,175 $11.72 43,617,747 $3.14 $8.65 $20.09 Strike Price (reflects updates)a 550,595 195,915 88,273 228,312 469,312 250,947 599,042 1,147,666 5,842,259 616,308 378,175 43,617,747 4,589,804 121,387 223,992 $4.83 $(2.49) $(22.64) $(3.02) $(2.17) $1.00 $(1.46) $(8.37) $(7.22) $2.23 $(4.91) $(1.59) $(0.08) $(2.28) $(2.21) Current Amount Number of “In the Outstanding Warrants Money” or (reflects “Out of the Money”e updates)a Warrant and Market Data for Publicly–Traded Companies $1,579,889 $22,254 $1,296,269 $236,250 $260,394 $332,072 $156,090 $15,547 $156,616 $900,000 Income Payment to Treasury (Dividend or Interest)f $143,063 $1,284,722 $416,167 $1,308,403 $344,295 $201,650 $98,782 $650,440 $60,616 $200,897 $819,444 $41,854 $2,208,333 $6,037,238 $316,403 $95,697 $194,746 $6,611,111 $1,950,000 $358,889 $244,725 $25,383 $14,792 $12,650 $137,764 $1,208,817 continued on next page In Out Out Out Out Out Out Out Out In Out Out $127,800,000 Out Out Out In/Out of the Moneye 196 Appendix d I transaction detail I October 21, 2009 Pref. Stock w/ Warr. Pref. Stock w/ Warr. Sub. Debent. w/ Ex. Warr. First Federal Bancshares of Arkansas, Inc.–Harrison, AR 12/23/08 First Financial Bancorp–Cincinnati, OH First Financial Bancshares, Inc.– Lawrence, KS8,10 First Financial Holdings Inc.– Charleston, SC First Financial Service Corporation– Elizabethtown, KY First Gothenburg Bancshares, Inc.– Gothenburg, NE2 First Guaranty Bancshares, Inc.– Hammond, LA2 3/6/09 6/12/09 12/5/08 1/9/09 2/27/09 8/28/09 First National Corporation– Strasburg, VA Pref. Stock w/ Ex. Warr. First NBC Bank Holding Company– New Orleans, LA2 3/13/09 3/20/09 Pref. Stock w/ Warr. 3/13/09 First Trust Corporation–New Orleans, LA8 Sub. Debent. w/ Ex. Warr. 2,4,7 First ULB Corp.–Oakland, CA First United Corporation–Oakland, MD First Vernon Bancshares, Inc.– Vernon, AL2,10 First Western Financial, Inc.–Denver, CO 6/5/09 1/23/09 1/30/09 6/12/09 2/6/09 2 Pref. Stock w/ Ex. Warr. First Texas BHC, Inc.–Fort Worth, TX2 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. First State Bank of Mobeetie– Mobeetie, TX2 3/6/09 $8,559,000 $6,000,000 $30,000,000 $4,900,000 4/22/2009 $17,969,000 $13,533,000 $731,000 $5,500,000 2/27/09 $10,900,000 Pref. Stock w/ Ex. Warr. First Southern Bancorp, Inc.– Boca Raton, FL2 First Southwest Bancorporation, Inc.– Alamosa, CO2 3/6/09 Pref. Stock w/ Ex. Warr. $7,400,000 $50,000,000 Pref. Stock w/ Warr. $33,000,000 $2,600,000 $15,349,000 $4,579,000 $72,927,000 $19,300,000 $17,390,000 $184,011,000 5/27/2009 $17,836,000 $13,900,000 $193,000,000 $116,000,000 $12,000,000 5/27/2009 First South Bancorp, Inc.–Lexington, TN8 Sub. Debent. w/ Ex. Warr. Pref. Stock w/ Warr. 1/30/09 7/17/09 12/23/08 First Sound Bank–Seattle, WA First Security Group, Inc.– Chattanooga, TN Pref. Stock w/ Ex. Warr. First Resource Bank–Exton, PA 2 2/20/09 1/9/09 Pref. Stock w/ Warr. First Priority Financial Corp.–Malvern, PA2 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. First Place Financial Corp.–Warren, OH First Reliance Bancshares, Inc.– Florence, SC2 3/13/09 3/6/09 1/30/09 Pref. Stock w/ Warr. 11/21/08 First PacTrust Bancorp, Inc.– Chula Vista, CA First Northern Community Bancorp– Dixon, CA Pref. Stock w/ Warr. 11/21/08 First Niagara Financial Group– Lockport, NYb,5,9 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Pref. Stock w/ Warr. First Midwest Bancorp, Inc.–Itasca, IL 2 First Merchants Corporation–Muncie, IN 12/5/08 $4,797,000 Pref. Stock w/ Ex. Warr. 2/20/09 $33,900,000 Pref. Stock w/ Ex. Warr. First Market Bank, FSB– Richmond, VA2 First Menasha Bancshares, Inc.– Neenah, WI2 2/6/09 2/13/09 First Manitowoc Bancorp, Inc.– Manitowoc, WI2,4,7 1/16/09 $30,000,000 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. First M&F Corporation–Kosciusko, MS 2/27/09 $10,000,000 $6,398,000 $3,223,000 Pref. Stock w/ Warr. Pref. Stock First Independence Corporation– Detroit, MI2,3 First Intercontinental Bank–Doraville, GA2 Pref. Stock w/ Ex. Warr. 8/28/09 3/13/09 $866,540,000 $20,699,000 $7,570,000 $20,000,000 $65,000,000 $3,756,000 $80,000,000 $16,500,000 Capital Investment Repayment Amount Date $4,900,000 $184,011,000 $12,000,000 Capital Repayment Amount6 Capital Repayment Details (CONTINUED) 12/12/08 First Litchfield Financial Corporation– Litchfield, CT Pref. Stock w/ Warr. 11/14/08 First Horizon National Corporation– Memphis, TN Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Pref. Stock w/ Warr. Investment Description Purchase Date Institution Purchase Details CPP TRANSACTION DETAIL, AS OF 9/30/2009 Final Disposition $0 $0 $0 Preferred 4/22/2009 Stock 2 Warrants 6/24/2009 Preferred 5/27/2009 Stock 2 Preferred Stock Warrants Preferred Stock Remaining Remaining Final Disposition Capital Investment Disposition Investment Amount Description Date Description Treasury Investment Remaining After Capital Repayment $245,000 $2,700,000 $600,000 Final Disposition Proceeds $10.57 $0.65 $3.85 $2.95 $6.40 $6.00 $12.33 $11.27 $6.97 $2.75 $6.50 $13.23 $13.47 $15.97 $12.05 $4.09 $65 $1 $63 $50 $27 $54 $2,258 $554 $148 $25 $15 $2,892 $63 $254 $620 $20 Market Current Stock Capitalization (in millions) Pricee 215,983 483,391 930,233 321,847 Number of Warrants Originally Issued $13.79 $9.73 $6.01 $2.98 $10.31 $7.39 – $22.18 $17.55 $8.77 $7.53 326,323 114,080 823,627 3,670,822 280,795 352,977 1,906,191 1,305,230 991,453 513,113 199,203 $9.60 12,743,235 $13.89 $20.17 $12.90 $7.69 Strike Price (reflects updates)a 326,323 114,080 823,627 3,670,822 280,795 352,977 – 1,305,230 991,453 513,113 199,203 26,857,216 215,983 483,391 930,233 321,847 $(3.22) $(9.08) $(2.16) $(0.03) $(3.91) $(1.39) – $(10.91) $(10.58) $(6.02) $(1.03) $3.63 $(0.42) $(4.20) $(0.85) $(3.60) Current Amount Number of “In the Outstanding Warrants Money” or (reflects “Out of the a Money”e updates) Warrant and Market Data for Publicly–Traded Companies $192,552 $600,000 $2,256,944 $53,341 $2,577,778 $364,375 Income Payment to Treasury (Dividend or Interest)f $244,897 $56,359 $812,500 $66,021 $293,128 $325,764 $18,611 $132,390 $321,777 $326,277 $238,444 $990,000 $76,755 $369,446 $121,314 $1,539,570 $707,667 $367,122 $4,753,618 $391,532 $319,855 $6,701,389 $2,819,444 $132,178 $969,964 $237,983 $700,000 $337,500 $147,229 continued on next page Out Out Out Out Out Out – Out Out Out Out In $32,615,603 Out Out Out Out In/Out of the Moneye transaction detail I Appendix d I October 21, 2009 197 Pref. Stock w/ Ex. Warr. Flagstar Bancorp, Inc.–Troy, MI Florida Bank Group, Inc.–Tampa, FL2 Florida Business BancGroup, Inc.– Tampa, FL2 1/30/09 7/24/09 2/20/09 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Sub. Debent. w/ Ex. Warr. Sub. Debent. w/ Ex. Warr. Fortune Financial Corporation– Arnold, MO2 FPB Bancorp, Inc.–Port St. Lucie, FL FPB Financial Corp.–Hammond, LA2 Franklin Bancorp, Inc.–Washington, MO Freeport Bancshares, Inc.–Freeport, IL8 8 Fort Lee Federal Savings Bank– Fort Lee, NJ2 5/22/09 4/3/09 12/5/08 1/23/09 5/22/09 5/8/09 Frontier Bancshares, Inc.–Austin, TX8 4/24/09 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Goldwater Bank, N.A.–Scottsdale, AZ2 Grand Capital Corporation–Tulsa, OK2 Grand Financial Corporation– Hattiesburg, MS8 Grand Mountain Bancshares, Inc.– Granby, CO2 GrandSouth Bancorporation– Greenville, SC2 Great River Holding Company– Baxter, MN8 Great Southern Bancorp–Springfield, MO Pref. Stock w/ Warr. 1/30/09 4/24/09 9/25/09 5/29/09 1/9/09 7/17/09 12/5/08 $4,000,000 $2,568,000 $1,607,000 $4,967,000 Pref. Stock w/ Ex. Warr. Gregg Bancshares, Inc.–Ozark, MO2 Guaranty Bancorp, Inc.– Woodsville, NH2 Pref. Stock w/ Ex. Warr. Guaranty Capital Corporation– Belzoni, MS3,8 Guaranty Federal Bancshares, Inc.– Springfield, MO 2/13/09 2/20/09 9/25/09 1/30/09 GulfSouth Private Bank– Destin, FL Gulfstream Bancshares, Inc.–Stuart, FL2 9/25/09 6/26/09 8,10 $825,000 $6,920,000 Pref. Stock w/ Ex. Warr. Greer Bancshares Incorporated– Greer, SC2 1/30/09 Pref. Stock w/ Ex. Warr. Sub. Debent. w/ Ex. Warr. Pref. Stock w/ Warr. Sub. Debent. $7,500,000 $7,500,000 $17,000,000 $14,000,000 $9,993,000 $651,000 Pref. Stock w/ Ex. Warr. Green City Bancshares, Inc.– Green City, MO2 $2,400,000 2/27/09 $72,278,000 Pref. Stock w/ Ex. Warr. Green Circle Investments, Inc.–Clive, IA2 Pref. Stock w/ Warr. $8,400,000 Sub. Debent. w/ Ex. Warr. $58,000,000 $9,000,000 Pref. Stock w/ Ex. Warr. 2/27/09 12/23/08 Green Bankshares, Inc.–Greeneville, TN Pref. Stock w/ Ex. Warr. Gold Canyon Bank–Gold Canyon, AZ2,10 6/26/09 $4,500,000 $3,076,000 Pref. Stock w/ Ex. Warr. Germantown Capital Corporation, Inc.– Germantown, TN2 3/6/09 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Georgia Primary Bank– Atlanta, GA2 5/1/09 $8,700,000 $2,443,320 Pref. Stock w/ Ex. Warr. Georgia Commerce Bancshares, Inc.– Atlanta, GA2 2/6/09 $6,000,000 $376,500,000 $3,000,000 $1,968,000 $35,000,000 $3,000,000 $5,097,000 Sub. Debent. w/ Ex. Warr. Gateway Bancshares, Inc.–Ringgold, GA2 Pref. Stock w/ Ex. Warr. 5/8/09 Pref. Stock w/ Warr. Sub. Debent. w/ Ex. Warr. Fresno First Bank–Fresno, CA2 12/23/08 Fulton Financial Corporation– Lancaster, PA Pref. Stock w/ Ex. Warr. Fremont Bancorporation–Fremont, CA 1/23/09 Pref. Stock w/ Ex. Warr. $3,240,000 $5,800,000 $3,100,000 $1,300,000 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. $15,000,000 $51,500,000 $12,000,000 $70,000,000 $266,657,000 $125,000,000 4/22/2009 Pref. Stock w/ Ex. Warr. 6/26/09 2 Foresight Financial Group, Inc.– Rockford, IL2 5/15/09 Pref. Stock w/ Warr. FNB United Corp.–Asheboro, NC 2/13/09 Pref. Stock w/ Ex. Warr. FNB Bancorp–South San Francisco, CA2 2/27/09 Pref. Stock w/ Warr. $9,495,000 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. FirstMerit Corporation–Akron, OH4 1/9/09 12/19/08 Flushing Financial Corporation– Lake Success, NY $20,471,000 Pref. Stock w/ Warr. Firstbank Corporation–Alma, MI $33,000,000 Investment Description Pref. Stock w/ Warr. Purchase Date Institution Capital Investment Repayment Amount Date $125,000,000 Capital Repayment Amount6 Capital Repayment Details (CONTINUED) 1/30/09 Purchase Details CPP TRANSACTION DETAIL, AS OF 9/30/2009 Final Disposition $0 Warrants 5/27/2009 Warrants Remaining Remaining Final Disposition Capital Investment Disposition Investment Amount Description Date Description Treasury Investment Remaining After Capital Repayment $5,025,000 Final Disposition Proceeds $5.90 $5.00 $23.71 $7.40 $3.10 $2.62 $11.40 $1.03 $19.03 $5.50 $15 $66 $317 $1,303 $6 $30 $343 $483 $1,634 $42 Market Current Stock Capitalization (in millions) Pricee 952,260 578,947 Number of Warrants Originally Issued $5.55 $17.06 $9.57 $10.25 $4.75 $3.50 $13.97 459,459 635,504 909,091 5,509,756 183,158 2,207,143 751,611 $0.62 64,513,790 – $8.55 Strike Price (reflects updates)a 459,459 635,504 909,091 5,509,756 183,158 2,207,143 751,611 64,513,790 – 578,947 $0.35 $(12.06) $14.14 $(2.85) $(1.65) $(0.88) $(2.57) $0.41 – $(3.05) Current Amount Number of “In the Outstanding Warrants Money” or (reflects “Out of the Money”e updates)a Warrant and Market Data for Publicly–Traded Companies $77,607 $26,805 $399,705 $67,818 $64,048 $99,081 $201,389 $61,949 $16,335 $204,375 $1,301,805 $305,200 $2,294,444 $251,563 $65,083 $7,221,960 $1,788,194 $893,750 Income Payment to Treasury (Dividend or Interest)f $54,815 $55,635 $460,417 $183,332 $22,720 $295,019 $16,576 $61,040 $2,328,958 $2,013,889 continued on next page Out Out In $294,300 $67,217 $75,790 $11,525 $119,546 $248,929 $88,108 Out $12,131,667 Out Out Out Out – Out In/Out of the Moneye 198 Appendix d I transaction detail I October 21, 2009 Pref. Stock w/ Ex. Warr. 2/20/09 Pref. Stock w/ Warr. HCSB Financial Corporation–Loris, SC Heartland Bancshares, Inc.–Franklin, IN2,10 Pref. Stock w/ Ex. Warr. 3/6/09 9/11/09 Hilltop Community Bancorp, Inc.– Summit, NJ2 1/30/09 Pref. Stock w/ Warr. Hometown Bancorp of Alabama, Inc.– Oneonta, AL2 Hometown Bancshares, Inc.–Corbin, KY HomeTown Bankshares Corporation– Roanoke, VA2,10 2/20/09 2/13/09 9/18/09 Pref. Stock w/ Ex. Warr. 5/1/09 HPK Financial Corporation–Chicago, IL Iberiabank Corporation–Lafayette, LAb,5,9 Pref. Stock w/ Warr. 12/5/08 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Pref. Stock w/ Warr. Illinois State Bancorp, Inc.–Chicago, IL2 Independence Bank–East Greenwich, RI2 Independent Bank Corp.–Rockland, MA4 5/22/09 1/9/09 1/9/09 12/12/08 Independent Bank Corporation–Ionia, MI Pref. Stock w/ Warr. Pref. Stock w/ Warr. 12/23/08 International Bancshares Corporation– Laredo, TX 12/23/08 Intervest Bancshares Corporation– New York, NY $25,000,000 $216,000,000 $27,000,000 $83,586,000 Pref. Stock w/ Warr. Pref. Stock w/ Warr. Integra Bank Corporation–Evansville, IN 2/27/09 $1,312,000 $72,000,000 $78,158,000 4/22/2009 $1,065,000 $6,272,000 $6,900,000 $6,000,000 $6,000,000 $2,295,000 $21,500,000 12/19/08 Intermountain Community Bancorp– Sandpoint, ID 6/3/2009 $90,000,000 3/31/2009 $4,205,000 $5,976,000 $1,552,000 $1,398,071,000 $4,000,000 $5,983,000 $25,000,000 $18,400,000 $10,000,000 $1,900,000 $3,250,000 $50,000,000 $26,000,000 12/12/08 Indiana Community Bancorp–Columbus, IN Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Idaho Bancorp–Boise, ID2 1/16/09 Indiana Bank Corp.–Dana, IN2 Pref. Stock w/ Ex. Warr. ICB Financial–Ontario, CA2 3/6/09 4/24/09 Pref. Stock w/ Ex. Warr. IBT Bancorp, Inc.–Irving, TX IBW Financial Corporation– Washington, DC2 3/27/09 Pref. Stock w/ Ex. Warr. Sub. Debent. 3/13/09 2 IBC Bancorp, Inc.–Chicago, IL 5/15/09 Pref. Stock w/ Ex. Warr. 3,8 Pref. Stock w/ Ex. Warr. Hyperion Bank– Philadelphia, PA IA Bancorp, Inc.–Iselin, NJ2,10 2/6/09 9/18/09 2 11/14/08 Huntington Bancshares–Columbus, OH Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Howard Bancorp, Inc.–Ellicott City, MD 2 Pref. Stock w/ Warr. 2/27/09 Pref. Stock w/ Warr. 12/19/08 Horizon Bancorp–Michigan City, IN 2 12/12/08 HopFed Bancorp–Hopkinsville, KY Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Home Bancshares, Inc.–Conway, AR 1/16/09 Pref. Stock w/ Ex. Warr. 12/23/08 HMN Financial, Inc.–Rochester, MN 2 Highlands State Bank–Vernon, NJ 5/8/09 $4,000,000 $3,091,000 2 Pref. Stock w/ Ex. Warr. $6,700,000 Highlands Independent Bancshares, Inc.– Pref. Stock w/ Ex. Warr. Sebring, FL2 $25,000,000 $21,000,000 3/6/09 Pref. Stock w/ Warr. Heritage Oaks Bancorp–Paso Robles, CA Pref. Stock w/ Warr. 11/21/08 HF Financial Corp.–Sioux Falls, SD4 3/20/09 $24,000,000 Pref. Stock w/ Warr. $40,000,000 $10,103,000 $81,698,000 11/21/08 Heritage Financial Corporation–Olympia, WA Heritage Bankshares, Inc.–Norfolk, VA2,10 Pref. Stock w/ Ex. Warr. $7,000,000 $12,895,000 $30,255,000 $425,000 $3,400,000,000 $6,800,000 $80,347,000 $7,000,000 Capital Investment Repayment Amount Date $78,158,000 $90,000,000 $25,000,000 Capital Repayment Amount6 Capital Repayment Details (CONTINUED) 11/21/08 Heritage Commerce Corp.–San Jose, CA Pref. Stock w/ Warr. 9/25/09 12/19/08 Heartland Financial USA, Inc.–Dubuque, IA Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Haviland Bancshares, Inc.–Haviland, KS2 3/13/09 12/19/08 Hawthorn Bancshares, Inc.– Lee’s Summit, MO Pref. Stock w/ Warr. Pref. Stock Harbor Bankshares Corporation– Baltimore, MD2,3 Hartford Financial Services Group, Inc.– Hartford, CT 7/17/09 6/26/09 Pref. Stock w/ Warr. 12/31/08 Hampton Roads Bankshares, Inc.– Norfolk, VA Hamilton State Bancshares– Hoschton, GA2 Investment Description Purchase Date Institution Purchase Details CPP TRANSACTION DETAIL, AS OF 9/30/2009 Final Disposition $0 $0 $0 Warrants 5/27/2009 Warrants 5/20/2009 Warrants 6/30/2009 Warrants Warrants Warrants Remaining Remaining Final Disposition Capital Investment Disposition Investment Amount Description Date Description Treasury Investment Remaining After Capital Repayment $2,200,000 $1,200,000 $650,000 Final Disposition Proceeds $3.53 $16.31 $2.60 $1.11 $8.50 $1.90 $22.13 $45.56 $4.71 $17.10 $10.05 $21.92 $3.75 $10.96 $7.35 $13.15 $4.71 $14.75 $15.00 $9.75 $26.50 $2.88 $29 $1,112 $22 $23 $29 $46 $463 $937 $3,297 $56 $36 $546 $16 $44 $57 $138 $56 $241 $57 $42 $8,696 $63 Market Current Stock Capitalization (in millions) Pricee 1,325,858 Number of Warrants Originally Issued 212,104 243,816 288,129 833,333 302,419 611,650 276,074 462,963 609,687 91,714 245,443 $5.42 $24.43 $6.20 $1.69 $17.09 $3.12 – – 691,882 1,326,238 653,226 7,418,876 188,707 3,461,538 481,664 276,980 $8.90 23,562,994 $17.68 $11.32 $26.03 $4.68 – $5.15 $13.04 $12.96 $20.10 $21.09 $17.78 $9.79 52,093,973 $9.09 Strike Price (reflects updates)a 691,882 1,326,238 653,226 7,418,876 188,707 3,461,538 – – 23,562,994 212,104 243,816 288,129 833,333 – 611,650 276,074 462,963 609,687 91,714 500,704 52,093,973 1,325,858 $(1.89) $(8.12) $(3.60) $(0.58) $(8.59) $(1.22) – – $(4.19) $(0.58) $(1.27) $(4.11) $(0.93) – $2.20 $0.11 $(8.25) $(5.35) $(6.09) $(8.03) $16.71 $(6.21) Current Amount Number of “In the Outstanding Warrants Money” or (reflects “Out of the a Money”e updates) Warrant and Market Data for Publicly–Traded Companies $26,444 $2,510,844 $185,452 Income Payment to Treasury (Dividend or Interest)f $9,771 $62,978 $152,161 $819,444 $621,000 $52,350 $86,125 $1,451,389 $837,778 $118,083 $45,401 $161,275 $666,667 $422,916 $880,000 $1,466,667 $2,677,879 $284,765 $991,692 $80,946 $805,556 $6,960,000 $885,000 $1,950,340 $725,625 $22,059 $2,430,000 $1,118,094 $34,812 $78,818 $124,306 $144,425 $138,067 $47,955 $1,450,000 continued on next page Out Out Out Out Out Out – – $44,426 Out $52,621,840 Out Out Out Out – In Out Out Out Out Out In $23,138,889 Out In/Out of the Moneye transaction detail I Appendix d I October 21, 2009 199 Lafayette Bancorp, Inc.–Oxford, MS2 Lakeland Bancorp, Inc.–Oak Ridge, NJ Lakeland Financial Corporation– Warsaw, IN LCNB Corp.– Lebanon, OH 2/20/09 2/6/09 2/27/09 1/9/09 Lincoln National Corporation– Radnor, PA Pref. Stock w/ Warr. 7/10/09 Lone Star Bank–Houston, TX2 Marine Bank & Trust Company– Vero Beach, FL2 Market Bancorporation, Inc.– New Market, MN2 Market Street Bancshares, Inc.– Mt. Vernon, IL8 3/6/09 2/20/09 5/15/09 Pref. Stock w/ Ex. Warr. Medallion Bank–Salt Lake City, UT2 Mercantile Bank Corporation– Grand Rapids, MI 2/27/09 5/15/09 Merchants and Planters Bancshares, Inc.–Toone, TN2 3/6/09 $1,700,000 MetroCorp Bancshares, Inc.–Houston, TX Pref. Stock w/ Warr. Metropolitan Bank Group, Inc.– Chicago, IL2 1/16/09 6/26/09 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Meridian Bank– Devon, PA Metro City Bank– Doraville, GA2 2/13/09 $71,526,000 $45,000,000 $7,700,000 $6,200,000 $1,881,000 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. $3,510,000 $3,500,000 $21,000,000 $11,800,000 $196,000,000 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. 1/30/09 2 Mercantile Capital Corp.– Boston, MA Merchants and Manufacturers Bank Corporation–Joliet, IL2 2/6/09 6/19/09 2 Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Maryland Financial Bank–Towson, MD2 MB Financial Inc.–Chicago, ILb 3/27/09 Pref. Stock w/ Warr. 12/5/08 $35,500,000 Pref. Stock w/ Ex. Warr. 12/19/08 Marquette National Corporation– Chicago, IL2 11/14/08 Marshall & Ilsley Corporation– Milwaukee, WI $1,715,000,000 $20,300,000 $2,060,000 $3,000,000 Sub. Debent. w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. $1,700,000 9/16/2009 $2,639,000 Manhattan Bancshares, Inc.– Manhattan, IL8 6/19/09 Pref. Stock w/ Warr. Manhattan Bancorp–El Segundo, CA 12/5/08 $57,000,000 $13,795,000 $3,370,000 $11,000,000 $600,000,000 $11,735,000 $15,000,000 $3,072,000 $25,223,000 $950,000,000 $17,280,000 Sub. Debent. w/ Ex. Warr. Pref. Stock w/ Warr. MainSource Financial Group, Inc.– Greensburg, IN 1/16/09 4 Pref. Stock w/ Ex. Warr. Madison Financial Corporation–Richmond, Pref. Stock w/ Ex. Warr. KY 3/13/09 12/23/08 Magna Bank–Memphis, TN2 Pref. Stock w/ Warr. Mackinac Financial Corporation– Manistique, MI 4/24/09 Pref. Stock Pref. Stock w/ Warr. Pref. Stock w/ Warr. M&F Bancorp, Inc.–Durham, NC2,3,10 Pref. Stock w/ Ex. Warr. 12/23/08 M&T Bank Corporation–Buffalo, NY 6/26/09 12/12/08 LSB Corporation–North Andover, MA 2/6/09 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Liberty Shares, Inc.–Hinesville, GA2 2/20/09 12/12/08 LNB Bancorp Inc.–Lorain, OH Pref. Stock Liberty Financial Services, Inc.– New Orleans, LA3 2/6/09 $5,645,000 $21,900,000 Liberty Bancshares, Inc.–Springfield, MO2 Pref. Stock w/ Ex. Warr. 2/13/09 $5,498,000 $57,500,000 Liberty Bancshares, Inc.–Jonesboro, AR2 Pref. Stock w/ Ex. Warr. Pref. Stock Legacy Bancorp, Inc.–Milwaukee, WI3 $5,830,000 $13,400,000 $56,044,000 $59,000,000 $1,998,000 $4,000,000 $470,000 $2,500,000,000 $10,449,000 1/23/09 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Capital Repayment Amount6 $1,700,000 $25,000,000,000 6/17/2009 $25,000,000,000 $4,000,000 Capital Investment Repayment Amount Date Capital Repayment Details (CONTINUED) 1/30/09 12/23/08 Leader Bancorp, Inc.–Arlington, MA2 Kirksville Bancorp, Inc.–Kirksville, MO KS Bancorp, Inc.–Smithfield, NC2 3/20/09 8/21/09 2 Katahdin Bankshares Corp.–Houlton, ME2 Pref. Stock w/ Ex. Warr. 11/14/08 KeyCorp–Cleveland, OH 1/30/09 10/28/08 JPMorgan Chase & Co.–New York, NY 4 Pref. Stock w/ Warr. Investment Description Sub. Debent. w/ Ex. Warr. Investors Financial Corporation of Pettis County, Inc.–Sedalia, MO8 Purchase Date Institution 5/8/09 Purchase Details CPP TRANSACTION DETAIL, AS OF 9/30/2009 Final Disposition $0 $0 Warrants Warrants Remaining Remaining Final Disposition Capital Investment Disposition Investment Amount Description Date Description Treasury Investment Remaining After Capital Repayment Final Disposition Proceeds $3.61 $4.20 $20.97 $8.07 $6.50 $6.80 $4.10 $62.32 $10.30 $6.69 $25.91 $10.99 $20.65 $7.50 $6.50 $43.82 $39 $36 $1,053 $2,971 $26 $137 $14 $7,351 $46 $49 $7,827 $73 $257 $179 $5,711 $172,325 Market Current Stock Capitalization (in millions) Pricee Number of Warrants Originally Issued 217,063 396,538 949,571 29,480 571,906 379,310 1,218,522 209,497 561,343 $8.75 $5.11 $29.05 771,429 616,438 1,012,048 $18.62 13,815,789 $8.65 $14.95 $4.35 $73.86 $10.74 $6.74 $10.92 13,049,451 $9.26 $21.20 $9.32 $10.64 35,244,361 $42.42 88,401,697 Strike Price (reflects updates)a 771,429 616,438 506,024 13,815,789 29,480 571,906 379,310 1,218,522 209,497 561,343 217,063 396,538 949,571 35,244,361 88,401,697 $(5.14) $(0.91) $(8.08) $(10.55) $(2.15) $(8.15) $(0.25) $(11.54) $(0.44) $(0.05) $14.99 $1.73 $(0.55) $(1.82) $(4.14) $1.40 Current Amount Number of “In the Outstanding Warrants Money” or (reflects “Out of the Money”e updates)a Warrant and Market Data for Publicly–Traded Companies $90,425 Income Payment to Treasury (Dividend or Interest)f $52,937 $79,863 $506,250 $851,277 $4,618,055 $457,800 $148,182 $603,406 $1,758,382 $148,904 $204,792 $402,000 $1,307,693 $1,548,750 $1,268,337 $425,793 $54,576 $72,213 $34,443 $66,347 $1,654,583 $484,526 $77,567 $169,583 $35,516 $530,580 $1,306,250 $227,311 $170,827 $45,276 $29,764 $100,144 $262,500 $300,113 $6,805,556 continued on next page Out Out Out Out $64,550,694 Out Out Out Out $19,333,333 Out Out In In Out Out $10,335 Out $94,097,222 $308,442 In $795,138,889 In/Out of the Moneye 200 Appendix d I transaction detail I October 21, 2009 Pref. Stock w/ Ex. Warr. 4/10/09 Mission Community Bancorp– San Luis Obispo, CA3 1/9/09 Naples Bancorp, Inc.– Naples, FL2 NC Bancorp, Inc.–Chicago, IL2 Northern States Financial Corporation– Waukegan, IL 2/20/09 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Northway Financial, Inc.– Berlin, NH2 Northwest Bancorporation, Inc.– Spokane, WA2 1/30/09 2/13/09 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. 11/14/08 Northern Trust Corporation–Chicago, IL4 Pref. Stock w/ Warr. Northern State Bank–Closter, NJ2 5/15/09 12/12/08 Northeast Bancorp–Lewiston, ME Pref. Stock w/ Warr. Pref. Stock w/ Warr. 1/9/09 North Central Bancshares, Inc.– Fort Dodge, IA Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. 12/23/08 Nicolet Bankshares, Inc.–Green Bay, WI2 New York Private Bank & Trust Corporation–New York, NY2 1/9/09 Pref. Stock w/ Warr. Sub. Debent. w/ Ex. Warr. Pref. Stock w/ Warr. New Hampshire Thrift Bancshares, Inc.– Newport, NH Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. 12/12/08 NewBridge Bancorp–Greensboro, NC NEMO Bancshares Inc.–Madison, MO 1/16/09 8 6/19/09 12/19/08 NCAL Bancorp–Los Angeles, CA2 6/26/09 Pref. Stock w/ Warr. $10,500,000 $10,000,000 $1,576,000,000 6/17/2009 $17,211,000 $1,341,000 $4,227,000 $10,200,000 $14,964,000 $52,372,000 $267,274,000 $10,000,000 $2,330,000 $10,000,000 $6,880,000 $150,000,000 $24,664,000 $67,000,000 $4,000,000 $32,382,000 $7,723,000 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. National Bancshares, Inc.–Bettendorf, IA2 Pref. Stock w/ Ex. Warr. 12/12/08 National Penn Bancshares, Inc.– Boyertown, PA 2/27/09 11/21/08 Nara Bancorp, Inc.–Los Angeles, CA 3/27/09 Pref. Stock w/ Ex. Warr. MS Financial, Inc.–Kingwood, TX2 3/27/09 12/23/08 MutualFirst Financial, Inc.–Muncie, IN Mountain Valley Bancshares, Inc.– Cleveland, GA2 9/25/09 $6,216,000 $13,000,000 $3,300,000 Pref. Stock w/ Ex. Warr. Capital Repayment Amount6 $1,576,000,000 $10,000,000,000 6/17/2009 $10,000,000,000 $4,734,000 $9,516,000 $14,700,000 $6,785,000 $1,834,000 $5,500,000 $5,116,000 $7,260,000 $10,000,000 $16,000,000 $700,000 $84,784,000 $5,222,000 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Morrill Bancshares, Inc.–Merriam, KS2 Moscow Bancshares, Inc.–Moscow, TN2 1/16/09 1/23/09 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Monument Bank–Bethesda, MD2 1/30/09 10/28/08 Morgan Stanley–New York, NY4 Pref. Stock w/ Ex. Warr. Moneytree Corporation–Lenoir City, TN2 3/13/09 12/19/08 Monarch Financial Holdings, Inc.– Chesapeake, VA Pref. Stock w/ Warr. Pref. Stock w/ Warr. 2/6/09 Monarch Community Bancorp, Inc.– Coldwater, MI Pref. Stock w/ Ex. Warr. Pref. Stock 12/19/08 Monadnock Bancorp, Inc.– Peterborough, NH2 12/23/08 Mission Valley Bancorp–Sun Valley, CA 3 Pref. Stock w/ Ex. Warr. Pref. Stock Pref. Stock w/ Ex. Warr. Mid–Wisconsin Financial Services, Inc.– Medford, WI2 Millennium Bancorp, Inc.– Edwards, CO2 2/20/09 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. 4/3/09 Midwest Regional Bancorp, Inc.– Festus, MO2 MidWestOne Financial Group, Inc.– Iowa City, IA 2/13/09 Midwest Banc Holdings, Inc.– Melrose Park , IL 12/5/08 2/6/09 Midtown Bank & Trust Company– Atlanta, GA2 2/27/09 $20,000,000 $10,189,000 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Midland States Bancorp, Inc.– Effingham, IL2 MidSouth Bancorp, Inc.–Lafayette , LA 1/23/09 1/9/09 $22,000,000 Pref. Stock w/ Warr. Middleburg Financial Corporation– Middleburg, VA 1/30/09 $10,000,000 Pref. Stock w/ Warr. $2,040,000 Capital Investment Repayment Amount Date Capital Repayment Details (CONTINUED) 12/19/08 Mid Penn Bancorp, Inc.–Millersburg , PA Metropolitan Capital Bancorp, Inc.– Chicago, IL2 Investment Description Purchase Date Institution Purchase Details CPP TRANSACTION DETAIL, AS OF 9/30/2009 $0 $0 Warrants 8/26/2009 Warrants 8/12/2009 Warrants Warrants Final Disposition Proceeds $87,000,000 $950,000,000 Final Disposition Remaining Remaining Final Disposition Capital Investment Disposition Investment Amount Description Date Description Treasury Investment Remaining After Capital Repayment $58.16 $3.80 $8.75 $16.50 $2.74 $9.48 $6.11 $6.95 $7.04 $30.88 $7.45 $3.57 $8.94 $0.71 $13.20 $13.05 $15.50 $14,040 $15 $20 $22 $43 $55 $748 $182 $49 $41,971 $43 $7 $77 $20 $90 $87 $54 Market Current Stock Capitalization (in millions) Pricee 264,706 260,962 198,675 4,282,020 208,768 208,202 73,099 Number of Warrants Originally Issued – $4.42 $9.33 $15.43 $3.06 $8.14 $15.30 $9.64 $7.77 3,824,624 584,084 67,958 99,157 2,567,255 184,275 1,470,588 1,042,531 625,135 – 65,245,759 $8.33 $3.90 $12.08 $2.97 $14.32 $15.85 $20.52 Strike Price (reflects updates)a – 584,084 67,958 99,157 2,567,255 184,275 1,470,588 1,042,531 625,135 – 264,706 260,962 198,675 4,282,020 208,768 208,202 73,099 – $(0.63) $(0.58) $1.07 $(0.32) $1.34 $(9.19) $(2.69) $(0.73) – $(0.88) $(0.33) $(3.14) $(2.26) $(1.12) $(2.80) $(5.02) Current Amount Number of “In the Outstanding Warrants Money” or (reflects “Out of the a Money”e updates) Warrant and Market Data for Publicly–Traded Companies $139,766 $218,981 $481,833 $178,107 $65,542 $177,222 $153,750 $145,080 $264,931 $420,000 $19,287 $824,289 $132,810 $600,000 $311,564 $595,833 $327,778 $38,605 Income Payment to Treasury (Dividend or Interest)f $161,342 $418,323 $18,270 $142,662 $306,000 $525,557 $1,767,555 $8,739,876 $290,278 $30,420 $357,278 $51,036 $5,062,500 $627,280 $2,456,667 $83,567 $1,043,420 continued on next page $289,305 $295,208 – $46,623,333 Out Out In Out In Out Out Out $190,099 $411,324 – $318,055,555 Out Out Out Out Out Out Out In/Out of the Moneye transaction detail I Appendix d I October 21, 2009 201 Pref. Stock w/ Warr. Pref. Stock w/ Warr. OceanFirst Financial Corp.– Toms River, NJ Ojai Community Bank–Ojai, CA2 12/5/08 1/16/09 1/30/09 12/5/08 Omega Capital Corp.–Lakewood, CO 4/17/09 OneFinancial Corporation– Little Rock, AR8,10 6/5/09 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. 1/16/09 Pref. Stock w/ Warr. 12/23/08 Parkvale Financial Corporation– Monroeville, PA Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Pathfinder Bancorp, Inc.–Oswego, NY Pathway Bancorp–Cairo, NE2 9/11/09 3/27/09 $3,690,000 Patterson Bancshares, Inc–Patterson, LA2 Pref. Stock w/ Ex. Warr. Peapack-Gladstone Financial Corporation– Pref. Stock w/ Warr. Gladstone, NJ 4/17/09 1/9/09 1/30/09 Pref. Stock w/ Warr. Pref. Stock w/ Warr. Peoples Bancorp Inc.–Marietta, OH 1/30/09 12/23/08 Peoples Bancorp of North Carolina, Inc.–Newton, NC PeoplesSouth Bancshares, Inc.– Colquitt, GA2 PFSB Bancorporation, Inc.– Pigeon Falls, WI2,10 3/6/09 9/11/09 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Peoples Bancorporation, Inc.–Easley, SC Pref. Stock w/ Ex. Warr. Peoples Bancshares of TN, Inc– Madisonville, TN2 4/24/09 3/20/09 2 $6,000,000 $9,960,000 $1,500,000 $12,325,000 $3,900,000 $12,660,000 $25,054,000 $39,000,000 $18,000,000 Penn Liberty Financial Corp.–Wayne, PA2 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Peninsula Bank Holding Co.–Palo Alto, CA Pref. Stock w/ Warr. Peoples Bancorp–Lynden, WA2 4/17/09 2/13/09 $28,685,000 $26,038,000 $3,727,000 $6,771,000 $6,000,000 $3,756,000 $31,762,000 $16,288,000 $100,000,000 $23,200,000 $6,500,000 $4,060,000 $4,120,000 $11,600,000 Pref. Stock w/ Ex. Warr. 12/19/08 Patriot Bancshares, Inc.–Houston, TX2 Pref. Stock w/ Ex. Warr. 12/19/08 Patapsco Bancorp, Inc.–Dundalk, MD2 Pascack Community Bank–Westwood, NJ2 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. 2/6/09 Pref. Stock w/ Warr. Parke Bancorp, Inc.–Sewell, NJ Pref. Stock w/ Ex. Warr. 1/30/09 Park Bancorporation, Inc.–Madison, WI2 12/23/08 Park National Corporation–Newark, OH 3/6/09 12/12/08 Pacific International Bancorp–Seattle, WA Pref. Stock w/ Warr. 12/23/08 Pacific Commerce Bank– Los Angeles, CA2 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pacific Coast National Bancorp– San Clemente, CA2 Pref. Stock w/ Ex. Warr. 12/19/08 Pacific City Financial Corporation– Los Angeles, CA2 12/23/08 Pacific Coast Bankers’ Bancshares– San Francisco, CA2 $16,200,000 $6,100,000 $180,634,000 OSB Financial Services, Inc.–Orange, TX8 Sub. Debent. w/ Ex. Warr. $3,216,000 $12,063,000 $17,300,000 $5,500,000 $2,816,000 $73,000,000 $100,000,000 3/31/2009 $7,000,000 7/15/2009 $2,080,000 $38,263,000 5/1/09 11/21/08 Pacific Capital Bancorp– Santa Barbara, CA Pref. Stock w/ Ex. Warr. $7,700,000 $13,500,000 Oregon Bancorp, Inc.–Salem, OR2 Pref. Stock Sub. Debent. w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Pref. Stock w/ Warr. $1,992,000 Capital Investment Repayment Amount Date $100,000,000 $7,000,000 Capital Repayment Amount6 Capital Repayment Details (CONTINUED) 4/24/09 12/19/08 OneUnited Bank–Boston, MA3 One Georgia Bank–Atlanta, GA 5/8/09 2 Old Second Bancorp, Inc.–Aurora, IL 1/16/09 2 Pref. Stock w/ Ex. Warr. Oak Valley Bancorp–Oakdale, CA Old Line Bancshares, Inc.–Bowie, MD 4 Oak Ridge Financial Services, Inc.– Oak Ridge, NC 1/30/09 12/12/08 Old National Bancorp–Evansville, IN Pref. Stock w/ Warr. Northwest Commercial Bank– Lakewood, WA2 Pref. Stock w/ Warr. Investment Description Pref. Stock w/ Ex. Warr. Purchase Date Institution 2/13/09 Purchase Details CPP TRANSACTION DETAIL, AS OF 9/30/2009 Final Disposition $0 $0 Warrants Warrants 5/8/2009 9/2/2009 Warrants Warrants Remaining Remaining Final Disposition Capital Investment Disposition Investment Amount Description Date Description Treasury Investment Remaining After Capital Repayment $1,200,000 $225,000 Final Disposition Proceeds $6.75 $13.05 NA $16.06 $9.20 $8.52 $58.34 NA $1.44 $5.73 $11.20 $6.38 $11.60 $4.30 $6.25 $37 $137 $15 $140 $50 $34 $826 NA $68 $79 $946 $25 $144 $33 $11 Market Current Stock Capitalization (in millions) Pricee $10.52 $18.86 $11.02 $28.63 $12.66 $8.15 $65.97 $7.63 $17.92 $13.43 – – $15.07 $5.78 $7.05 Strike Price (reflects updates)a 357,234 313,505 81,670 143,139 376,327 299,779 227,376 127,785 1,512,003 815,339 813,008 141,892 380,853 350,346 163,830 Number of Warrants Originally Issued 357,234 313,505 81,670 293,435 376,327 299,779 227,376 127,785 1,512,003 815,339 – – 380,853 350,346 163,830 $(3.77) $(5.81) NA $(12.57) $(3.46) $0.37 $(7.63) NA $(16.48) $(7.70) – – $(3.47) $(1.48) $(0.80) Current Amount Number of “In the Outstanding Warrants Money” or (reflects “Out of the Money”e updates)a Warrant and Market Data for Publicly–Traded Companies $296,663 $85,610 $212,741 $807,296 $1,056,250 $495,950 $177,924 $860,551 $15,645 $930,286 $77,852 $214,367 $107,478 $1,023,442 $441,133 $3,222,222 $558,443 $138,125 $110,635 $18,088 $407,418 $358,065 $2,107,397 $147,848 $54,048 $93,823 $272,996 $50,311 $2,119,028 $1,513,889 $213,889 $61,403 $1,110,690 $468,750 $208,542 $54,903 Income Payment to Treasury (Dividend or Interest)f continued on next page Out Out NA Out Out Out Out NA Out Out – – Out Out Out In/Out of the Moneye 202 Appendix d I transaction detail I October 21, 2009 Pref. Stock w/ Ex. Warr. Pierce County Bancorp– Tacoma, WA2 Pinnacle Bank Holding Company, Inc.– Orange City, FL2 3/6/09 Sub. Debent. w/ Ex. Warr. Premier Financial Corp–Dubuque, IA8 2 Premier Service Bank–Riverside, CA PremierWest Bancorp–Medford, OR Princeton National Bancorp, Inc.– Princeton, IL Private Bancorporation, Inc.– Minneapolis, MN2 PrivateBancorp, Inc.–Chicago, IL 5/22/09 2/20/09 2/13/09 1/23/09 2/27/09 1/30/09 $3,800,000 QCR Holdings, Inc.–Moline, IL RCB Financial Corporation–Rome, GA2, 10 Pref. Stock w/ Ex. Warr. Redwood Capital Bancorp–Eureka, CA2 Redwood Financial Inc.– Redwood Falls, MN2 2/13/09 6/19/09 1/16/09 1/9/09 Sandy Spring Bancorp, Inc.–Olney, MD Santa Clara Valley Bank, N.A.–Santa Paula, CA2 12/5/08 2/13/09 3/27/09 SBT Bancorp, Inc.–Simsbury, CT2 12/19/08 Santa Lucia Bancorp–Atascadero, CA Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Salisbury Bancorp, Inc.–Lakeville, CT Pref. Stock w/ Warr. 12/23/08 Saigon National Bank–Westminster, CA2 S&T Bancorp–Indiana, PA 1/16/09 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Sub. Debent. w/ Ex. Warr. Sub. Debent. w/ Ex. Warr. 3/13/09 Rogers Bancshares, Inc.–Little Rock, AR Royal Bancshares of Pennsylvania, Inc.– Narberth, PA 2 1/30/09 Riverside Bancshares, Inc.– Little Rock, AR8 5/15/09 2/20/09 River Valley Bancorporation, Inc.– Wausau, WI8 Pref. Stock w/ Ex. Warr. Rising Sun Bancorp–Rising Sun, MD 6/12/09 2 1/9/09 Pref. Stock w/ Ex. Warr. Reliance Bancshares, Inc.– Frontenac, MO2 Ridgestone Financial Services, Inc.– Brookfield, WI2 2/13/09 2/27/09 Pref. Stock w/ Ex. Warr. 11/14/08 Regions Financial Corp.–Birmingham, AL Pref. Stock w/ Warr. Regional Bankshares, Inc.–Hartsville, SC Pref. Stock w/ Ex. Warr. $4,000,000 $4,000,000 $2,900,000 $83,094,000 $8,816,000 $1,549,000 $108,676,000 $30,407,000 $25,000,000 $1,100,000 $15,000,000 $5,983,000 $10,900,000 $40,000,000 $3,500,000,000 $1,500,000 $2,655,000 2/13/09 $9,982,000 Pref. Stock w/ Ex. Warr. 2 Regent Bancorp, Inc.–Davie, FL Regent Capital Corporation–Nowata, OK2 Pref. Stock w/ Ex. Warr. $2,995,000 $38,237,000 $32,538,000 3/6/09 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Pref. Stock w/ Warr. 2/27/09 2 $8,900,000 Pulaski Financial Corp–Creve Coeur, MO $4,500,000 1/16/09 Pref. Stock w/ Ex. Warr. PSB Financial Corporation–Many, LA Puget Sound Bank–Bellevue, WA2 2/27/09 $9,270,000 $9,266,000 $151,500,000 $243,815,000 $4,960,000 $25,083,000 $41,400,000 $4,000,000 $6,349,000 $9,500,000 $6,784,000 $2,800,000 $35,000,000 $935,000,000 $11,949,000 $2,500,000 $87,631,000 $95,000,000 $4,389,000 $6,800,000 $3,000,000 Capital Investment Repayment Amount Date Capital Repayment Amount6 Capital Repayment Details (CONTINUED) 1/16/09 2 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. 3/13/09 Provident Community Bancshares, Inc.– Rock Hill, SC Pref. Stock w/ Warr. 11/14/08 Provident Bancshares Corp.–Baltimore, MDd Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Premier Bank Holding Company– Tallahassee, FL2 3/20/09 Sub. Debent. Premier Bancorp, Inc.–Wilmette, IL 3, 8 Prairie Star Bancshares, Inc.–Olathe, KS2 Pref. Stock w/ Ex. Warr. 5/8/09 4/3/09 Pref. Stock w/ Warr. Popular, Inc.–San Juan, PR12, f 12/5/08 11/21/08 Porter Bancorp Inc.–Louisville, KY Pref. Stock w/ Warr. Pref. Stock w/ Warr. Plumas Bancorp–Quincy, CA 1/30/09 Sub. Debent. w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Plato Holdings Inc.–Saint Paul, MN8,10 12/19/08 Plains Capital Corporation–Dallas, TX2 7/17/09 Pref. Stock w/ Warr. 12/12/08 Pinnacle Financial Partners, Inc.– Nashville, TNb Pref. Stock w/ Ex. Warr. Pref. Stock PGB Holdings, Inc.–Chicago, IL3 1/23/09 Investment Description 2/6/09 Purchase Date Institution Purchase Details CPP TRANSACTION DETAIL, AS OF 9/30/2009 Final Disposition Remaining Remaining Final Disposition Capital Investment Disposition Investment Amount Description Date Description Treasury Investment Remaining After Capital Repayment Final Disposition Proceeds $11.89 $16.28 $24.90 $12.96 $1.55 $6.21 $10.20 $7.57 $3.25 NA $24.46 $15.75 $2.71 $16.30 $2.83 $3.81 $12.71 $23 $268 $42 $358 $21 $7,379 $46 $78 $6 NA $1,163 $52 $67 $136 $1,810 $18 $419 Market Current Stock Capitalization (in millions) Pricee 237,712 534,910 Number of Warrants Originally Issued 521,888 778,421 178,880 2,374,608 1,290,026 155,025 1,038,462 299,829 $16.06 $19.13 $22.93 $31.53 $4.13 37,360 651,547 57,671 517,012 1,104,370 $10.88 48,253,677 $10.99 $6.27 $7.77 $9.57 $28.35 $24.27 $5.70 $17.51 $6.70 20,932,836 $7.54 $26.64 Strike Price (reflects updates)a 37,360 651,547 57,671 517,012 1,104,370 48,253,677 521,888 778,421 178,880 2,374,608 1,290,026 155,025 1,090,385 299,829 20,932,836 237,712 267,455 $(4.17) $(2.85) $1.97 $(18.57) $(2.58) $(4.67) $(0.79) $1.30 $(4.52) NA $(3.89) $(8.52) $(2.99) $(1.21) $(3.87) $(3.73) $(13.93) Current Amount Number of “In the Outstanding Warrants Money” or (reflects “Out of the a Money”e updates) Warrant and Market Data for Publicly–Traded Companies $323,619 $16,121 $3,130,888 $3,206,250 $105,629 $207,948 $78,750 Income Payment to Treasury (Dividend or Interest)f $41,330 $67,536 $240,272 $97,951 $120,233 $72,974 $966,547 $944,506 $142,382 $235,788 $195,616 $5,702,292 $6,603,323 $126,149 $703,718 $1,046,500 $122,798 $208,538 $140,749 $55,953 $1,283,333 $83,567 $131,111 $79,903 $2,885,208 $186,116 $3,154,623 $358,971 $738,021 continued on next page Out Out In Out Out $23,073 $220,238 $195,637 $277,224 $1,102,111 Out $131,736,111 Out In Out NA Out Out Out Out Out $33,777,778 Out Out In/Out of the Moneye transaction detail I Appendix d I October 21, 2009 203 Investment Description Pref. Stock w/ Warr. Security Business Bancorp– San Diego, CA2 Security California Bancorp– Riverside, CA2 Security Capital Corporation– Batesville, MS2,10 1/9/09 1/9/09 6/26/09 $6,815,000 South Financial Group, Inc.–Greenville, SC Pref. Stock w/ Warr. 12/5/08 Southern Community Financial Corp.– Winston–Salem, NC Southern First Bancshares, Inc.– Greenville, SC Southern Heritage Bancshares, Inc.– Cleveland, TN2 12/5/08 2/27/09 5/15/09 Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Southwest Bancorp, Inc.–Stillwater, OK Sovereign Bancshares, Inc.– Dallas, TX2 12/5/08 3/13/09 $50,000,000 8/12/2009 $15,000,000 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. State Bankshares, Inc.–Fargo, ND2,4 State Capital Corporation– Greenwood, MS2 1/16/09 2/13/09 10/28/08 State Street Corporation–Boston, MAb,5,9 Pref. Stock w/ Warr. $2,000,000,000 6/17/2009 $36,842,000 $60,000,000 Pref. Stock w/ Warr. State Bancorp, Inc.–Jericho, NY 12/5/08 Pref. Stock w/ Ex. Warr. Standard Bancshares, Inc.– Hickory Hills, IL2 4/24/09 $3,000,000 St. Johns Bancshares, Inc.– St. Louis, MO2 Pref. Stock w/ Ex. Warr. Spirit BankCorp, Inc.–Bristow, OK $30,000,000 $18,215,000 $70,000,000 $2,760,000 3/13/09 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. $9,550,000 $5,000,000 $4,862,000 $17,299,000 $42,750,000 $11,000,000 $12,900,000 3/27/09 2 SouthFirst Bancshares, Inc.– Sylacauga, AL2 6/12/09 Pref. Stock w/ Warr. Southern Illinois Bancorp, Inc.–Carmi, IL Southern Missouri Bancorp, Inc.–Poplar Bluff, MO 1/23/09 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. 12/5/08 2 Southern Bancorp, Inc.–Arkadelphia, AR3 Pref. Stock 1/16/09 Pref. Stock w/ Warr. SouthCrest Financial Group, Inc.– Fayetteville, GA2 7/17/09 $347,000,000 $3,070,000 Pref. Stock w/ Ex. Warr. Sound Banking Company– Morehead City, NC2 1/9/09 Pref. Stock w/ Ex. Warr. $8,653,000 Pref. Stock w/ Ex. Warr. Sonoma Valley Bancorp–Sonoma, CA2 2/20/09 $7,414,000 5/20/2009 Pref. Stock w/ Warr. Somerset Hills Bancorp– Bernardsville, NJ4 $120,000,000 3/31/2009 $1,700,000 $25,000,000 4/15/2009 $23,393,000 1/16/09 12/12/08 Signature Bank–New York, NY Pref. Stock w/ Warr. Sub. Debent. w/ Ex. Warr. Signature Bancshares, Inc.–Dallas, TX8 6/26/09 4 Pref. Stock w/ Warr. Pref. Stock w/ Warr. Shore Bancshares, Inc.–Easton, MD4 1/9/09 $10,750,000 Sub. Debent. w/ Ex. Warr. Security State Bank Holding-Company– Jamestown, ND8 5/1/09 11/21/08 Severn Bancorp, Inc.–Annapolis, MD $12,500,000 $18,000,000 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Security State Bancshares, Inc.– Charleston, MO2 2/20/09 $17,388,000 12/19/08 Security Federal Corporation–Aiken, SC Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. $5,803,000 $2,152,000 Pref. Stock w/ Ex. Warr. Security Bancshares of Pulaski County, Inc.–Waynesville, MO2 2/13/09 Pref. Stock w/ Ex. Warr. $5,677,000 Pref. Stock w/ Ex. Warr. Seaside National Bank & Trust– Orlando, FL2 $1,800,000 Pref. Stock w/ Ex. Warr. 12/23/08 Seacoast Commerce Bank– Chula Vista, CA2 $50,000,000 $64,779,000 5/20/2009 Capital Investment Repayment Amount Date $2,000,000,000 $12,500,000 $7,414,000 $120,000,000 $25,000,000 $64,779,000 Capital Repayment Amount6 Capital Repayment Details (CONTINUED) 1/23/09 12/19/08 Seacoast Banking Corporation of Florida– Pref. Stock w/ Warr. Stuart, FLb SCBT Financial Corporation–Columbia, SC4 Purchase Date Institution 1/16/09 Purchase Details CPP TRANSACTION DETAIL, AS OF 9/30/2009 $0 $37,500,000 $0 $0 $0 $0 Warrants Preferred Stock 2 7/8/2009 Warrants 6/24/2009 Warrants Warrants Warrants 6/24/2009 Warrants Warrants Warrants $275,000 $1,400,000 Final Disposition Proceeds $60,000,000 Final Disposition Remaining Remaining Final Disposition Capital Investment Disposition Investment Amount Description Date Description Treasury Investment Remaining After Capital Repayment $52.60 $8.45 $14.04 $10.80 $8.08 $2.98 $1.47 $8.10 $29.00 $16.73 $3.25 $13.10 $2.52 $28.10 $26,010 $124 $206 $23 $25 $50 $250 $42 $1,177 $141 $33 $32 $133 $357 Market Current Stock Capitalization (in millions) Pricee 163,065 595,829 172,970 556,976 137,966 1,179,245 303,083 Number of Warrants Originally Issued – $11.87 $14.92 $12.53 $7.85 $3.95 5,576,208 465,569 703,753 114,326 330,554 1,623,418 $5.15 10,106,796 – $30.21 $21.68 $6.30 $19.57 $6.36 – Strike Price (reflects updates)a – 465,569 703,753 114,326 330,554 1,623,418 10,106,796 – 595,829 172,970 556,976 137,966 589,623 – – $(3.42) $(0.88) $(1.73) $0.23 $(0.97) $(3.68) – $(1.21) $(4.95) $(3.05) $(6.47) $(3.84) – Current Amount Number of “In the Outstanding Warrants Money” or (reflects “Out of the a Money”e updates) Warrant and Market Data for Publicly–Traded Companies $100,416 $229,259 $127,686 $1,816,667 $19,414 $333,333 $857,744 $260,576 $331,163 $590,000 $124,729 $222,865 $189,751 $59,312 $173,614 $63,220 $388,889 $1,115,639 Income Payment to Treasury (Dividend or Interest)f $413,292 $1,576,806 $1,279,236 $1,008,250 $69,033 $626,750 $419,157 $2,430,556 $26,324 $331,597 $152,903 $66,243 $403,644 $1,484,375 continued on next page – $63,611,111 Out Out Out Out Out $319,306 $54,682 Out $12,048,611 – Out Out Out Out Out – In/Out of the Moneye 204 Appendix d I transaction detail I October 21, 2009 Stewardship Financial Corporation– Midland Park, NJ Stockmens Financial Corporation– Rapid City, SD2 Stonebridge Financial Corp.– West Chester, PA2 Suburban Illinois Bancorp, Inc.– Elmhurst, IL8 1/30/09 2/6/09 1/23/09 6/19/09 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Superior Bancorp Inc.–Birmingham, AL Surrey Bancorp– Mount Airy, NC2 12/5/08 1/9/09 SV Financial, Inc.–Sterling, IL Syringa Bancorp–Boise, ID2 Pref. Stock w/ Warr. 12/19/08 Tennessee Commerce Bancorp, Inc.– Franklin, TN The ANB Corporation–Terrell, TX 8/7/09 The Bank of Kentucky Financial Corporation–Crestview Hills, KY 2/13/09 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. The First Bancshares, Inc.– Hattiesburg, MS The Freeport State Bank–Harper, KS2 2/6/09 2/6/09 $301,000 $5,000,000 $25,000,000 $9,090,000 The First Bancorp, Inc.–Damariscotta, ME Pref. Stock w/ Warr. 1/9/09 12/19/08 The Elmira Savings Bank, FSB–Elmira, NY Pref. Stock w/ Warr. $20,749,000 $3,000,000,000 6/17/2009 $34,000,000 $4,021,000 $45,220,000 $20,000,000 $3,981,000 $75,000,000 5/13/2009 $3,000,000 $30,000,000 $2,000,000 $5,448,000 Pref. Stock w/ Ex. Warr. 4/8/2009 5/5/2009 $361,172,000 4/22/2009 $11,730,000 $9,720,000 $104,823,000 $8,000,000 $967,870,000 $13,644,000 $235,000,000 $4,000,000 $300,000,000 $2,000,000 $69,000,000 $1,350,000,000 $3,500,000,000 $89,310,000 $8,500,000 $15,000,000 $10,973,000 Pref. Stock w/ Warr. The Baraboo Bancorporation– Baraboo, WI2 12/19/08 The Connecticut Bank and Trust Company–Hartford, CT 1/16/09 10/28/08 The Bank of New York Mellon Corporation–Pref. Stock w/ Warr. New York, NY4 The Bank of Currituck–Moyock, NC 2 2/6/09 12/12/08 The Bancorp, Inc.–Wilmington, DE Texas National Bancorporation– Jacksonville, TX2 1/9/09 2 Texas Capital Bancshares, Inc.– Dallas, TX4 1/16/09 12/23/08 Tennessee Valley Financial Holdings, Inc.– Pref. Stock w/ Ex. Warr. Oak Ridge, TN2 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. 12/23/08 TCNB Financial Corp.–Dayton, OH2 11/14/08 TCF Financial Corporation–Wayzata, MN 4 Sub. Debent. w/ Ex. Warr. TCB Corporation– Greenwood, SC8,10 TCB Holding Company, Texas Community Pref. Stock w/ Ex. Warr. Bank– The Woodlands, TX2 8/28/09 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. 1/16/09 11/21/08 Taylor Capital Group–Rosemont, IL 1/16/09 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Sword Financial Corporation–Horicon, WI Sub. Debent. w/ Ex. Warr. 12/19/08 Synovus Financial Corp.–Columbus, GA 5/8/09 12/12/08 SVB Financial Group–Santa Clara, CA 4/10/09 2 12/12/08 Susquehanna Bancshares, Inc–Lititz, PA Pref. Stock w/ Warr. Pref. Stock w/ Warr. 11/14/08 SunTrust Banks, Inc.–Atlanta, GA Pref. Stock w/ Warr. 8 Pref. Stock w/ Warr. Pref. Stock w/ Warr. 12/31/08 SunTrust Banks, Inc.–Atlanta, GAc Sun Bancorp, Inc.–Vineland, NJ4 Sub. Debent. w/ Ex. Warr. Pref. Stock w/ Ex. Warr. $10,000,000 $15,568,000 Pref. Stock w/ Warr. $303,000,000 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Pref. Stock w/ Warr. c 1/9/09 12/19/08 Summit State Bank–Santa Rosa, CA Sterling Financial Corporation– Spokane, WA 12/12/08 Sterling Bancshares, Inc.–Houston, TX 12/5/08 $125,198,000 $42,000,000 Pref. Stock w/ Warr. $30,000,000 4 12/23/08 Sterling Bancorp–New York, NY $24,900,000 12/19/08 StellarOne Corporation–Charlottesville, VA Pref. Stock w/ Warr. Steele Street Bank Corporation– Denver, CO8,10 9/25/09 $11,019,000 Sub. Debent. w/ Ex. Warr. Stearns Financial Services, Inc.– St. Cloud, MN8 6/26/09 Capital Investment Repayment Amount Date $3,000,000,000 $75,000,000 $361,172,000 $89,310,000 $125,198,000 Capital Repayment Amount6 Capital Repayment Details (CONTINUED) Sub. Debent. w/ Ex. Warr. Investment Description Purchase Date Institution Purchase Details CPP TRANSACTION DETAIL, AS OF 9/30/2009 $0 $0 $0 $0 $0 Warrants Warrants Warrants 8/5/2009 Warrants 5/27/2009 Warrants Warrants Warrants $2,100,000 Final Disposition Proceeds $136,000,000 Final Disposition Remaining Remaining Final Disposition Capital Investment Disposition Investment Amount Description Date Description Treasury Investment Remaining After Capital Repayment $5.62 $18.60 $16.00 $4.12 $28.99 $21.16 $5.72 $16.84 $4.00 $13.04 $6.60 $3.75 $43.27 $5.89 $2.44 $22.55 $22.55 $5.28 $5.50 $9.27 $2.00 $7.31 $7.22 $14.75 $17 $181 $31 $15 $34,870 $119 $141 $601 $19 $1,676 $73 $1,801 $1,435 $508 $25 $11,249 $11,249 $122 $26 $52 $105 $597 $131 $335 Market Current Stock Capitalization (in millions) Pricee 1,543,376 239,212 127,119 6,437,677 2,615,557 516,817 302,623 Number of Warrants Originally Issued 708,116 3,028,264 1,923,792 6,008,902 274,784 1,960,405 758,086 461,538 3,199,988 1,462,647 $13.71 $16.60 $11.70 $4.65 54,705 225,904 116,538 175,742 – 14,516,129 $18.56 $3.46 $14.84 $9.75 $16.93 $10.75 $9.36 15,510,737 $49.78 $14.86 $5.38 $33.70 $44.15 11,891,280 – $5.33 $11.80 $7.06 $7.18 $12.19 $14.87 Strike Price (reflects updates)a 54,705 225,904 116,538 175,742 – 274,784 1,960,405 758,086 461,538 3,199,988 1,462,647 15,510,737 708,116 3,028,264 1,923,792 6,008,902 11,891,280 – 239,212 127,119 6,437,677 2,615,557 516,817 302,623 $(8.09) $2.00 $4.30 $(0.53) – $2.60 $2.26 $2.00 $(5.75) $(3.89) $(4.15) $(5.61) $(6.51) $(8.97) $(2.94) $(11.15) $(21.60) – $0.17 $(2.53) $(5.06) $0.13 $(4.97) $(0.12) Current Amount Number of “In the Outstanding Warrants Money” or (reflects “Out of the a Money”e updates) Warrant and Market Data for Publicly–Traded Companies $65,400 $2,395,833 $194,131,944 $1,103,971 $278,611 $195,770 $335,579 $445,421 $270,833 $6,733,333 $2,486,571 $1,353,333 $983,333 $284,351 Income Payment to Treasury (Dividend or Interest)f $75,694 $308,434 $7,931,250 $253,122 $859,444 $115,049 $1,526,175 $130,177 $1,218,750 $105,367 $983,333 $70,244 $7,925,719 $371,167 $3,843,511 $8,610 $131,250 $750,000 $297,950 $656,482 continued on next page Out In In Out – $95,416,667 In In In Out Out Out Out $31,724,628 Out Out $10,125,000 Out Out Out – Out Out Out Out Out Out In/Out of the Moneye transaction detail I Appendix d I October 21, 2009 205 TIB Financial Corp–Naples, FL 12/5/08 Tifton Banking Company–Tifton, GA Titonka Bancshares, Inc–Titonka, IA Todd Bancshares, Inc.–Hopkinsville, KY2 4/3/09 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Trinity Capital Corporation– Los Alamos, NM2 Tri–State Bank of Memphis– Memphis, TN2,3 TriState Capital Holdings, Inc.– Pittsburgh, PA2 TriSummit Bank–Kingsport, TN2 3/27/09 4/3/09 2/27/09 4/3/09 UBT Bancshares, Inc.–Marysville, KS 1/30/09 Union Bank & Trust Company– Oxford, NC2 $14,400,000 United Community Banks, Inc.– Blairsville, GA 12/5/08 University Financial Corp, Inc.– St. Paul, MN3,8 US Metro Bank–Garden Grove, CA 6/19/09 2/6/09 12/23/08 Uwharrie Capital Corp–Albemarle, NC2 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Sub. Debent. Pref. Stock w/ Ex. Warr. Universal Bancorp– Bloomfield, IN2 5/22/09 2 Pref. Stock w/ Warr. United Financial Banking Companies, Inc.–Vienna, VA2 Unity Bancorp, Inc.–Clinton, NJ 1/16/09 12/5/08 Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Sub. Debent. w/ Ex. Warr. United Bank Corporation– Barnesville, GA8 5/22/09 $8,700,000 $10,300,000 Pref. Stock w/ Warr. $10,000,000 $2,861,000 $11,926,000 $9,900,000 $20,649,000 $5,658,000 $180,000,000 $20,600,000 Pref. Stock w/ Warr. 12/23/08 United Bancorporation of Alabama, Inc.–Atmore, AL Pref. Stock w/ Ex. Warr. United American Bank–San Mateo, CA2 United Bancorp, Inc.–Tecumseh, MI $59,000,000 $3,194,000 $214,181,000 $298,737,000 $8,950,000 $50,236,000 $6,599,000,000 6/17/2009 $12,000,000 $215,000,000 $2,765,000 $23,000,000 $2,795,000 $35,539,000 $15,540,000 $3,700,000 $3,268,000 $76,458,000 $4,000,000 $2,117,000 $16,641,000 $3,800,000 $14,448,000 $37,000,000 $541,000 $1,697,000 $12,000,000 $5,450,000 $7,579,200,000 $7,500,000 $15,000,000 2/20/09 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Capital Repayment Amount6 $6,599,000,000 $10,000,000,000 6/17/2009 $10,000,000,000 Capital Investment Repayment Amount Date Capital Repayment Details (CONTINUED) 1/16/09 12/19/08 Union Bankshares Corporation– Bowling Green, VA 5/1/09 11/14/08 Umpqua Holdings Corp.–Portland, OR b 11/14/08 UCBH Holdings, Inc.–San Francisco, CA U.S. Century Bank–Miami, FL2 8/7/09 11/14/08 U.S. Bancorp–Minneapolis, MN Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. 4 5/29/09 Two Rivers Financial Group– Burlington, IA2 Pref. Stock w/ Warr. 11/21/08 Trustmark Corporation–Jackson, MS Pref. Stock Pref. Stock w/ Ex. Warr. 12/19/08 Tri–County Financial Corporation– Waldorf, MD2 2 Pref. Stock w/ Ex. Warr. Treaty Oak Bancorp, Inc.–Austin, TX2 Triad Bancorp, Inc.– Frontenac, MO2 1/16/09 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Sub. Debent. w/ Ex. Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. 3/27/09 12/12/08 TowneBank–Portsmouth, VA 2/6/09 2 12/23/08 Timberland Bancorp, Inc.–Hoquiam, WA 4/17/09 2 The Victory Bank–Limerick, PA2 2/27/09 12/19/08 Tidelands Bancshares, Inc– Mt. Pleasant, SC The State Bank of Bartley–Bartley, NE 9/4/09 8,10 The Private Bank of California– Los Angeles, CA2 The Queensborough Company– Louisville, GA2 2/20/09 1/9/09 Pref. Stock w/ Warr. 12/31/08 The PNC Financial Services Group Inc.– Pittsburgh, PA Pref. Stock w/ Ex. Warr. Pref. Stock w/ Ex. Warr. The Landrum Company–Columbia, MO 12/23/08 The Little Bank, Incorporated– Kinston, NC2 5/22/09 2 Investment Description Pref. Stock w/ Warr. Purchase Date Institution 10/28/08 The Goldman Sachs Group, Inc.– New York, NY4 Purchase Details CPP TRANSACTION DETAIL, AS OF 9/30/2009 Final Disposition $0 $0 Warrants 7/15/2009 Warrants 7/22/2009 Final Disposition Proceeds Warrants $139,000,000 $4.20 $5.00 $5.00 $6.00 $12.45 $10.60 $0.80 $21.86 $19.05 $12.75 $4.64 $2.96 $1.49 $48.59 $30 $440 $11 $30 $228 $883 $96 $41,796 $1,094 $299 $33 $13 $22 $22,420 $94,246 Number of Warrants Originally Issued 1,647,931 538,184 370,899 571,821 1,063,218 $4.05 $12.37 $14.85 $9.92 $20.94 $14.46 $5.71 764,778 2,132,701 104,040 311,492 422,636 2,221,795 7,847,732 – 32,679,102 $19.57 $21.31 $6.73 $3.79 $5.07 $67.33 16,885,192 – 12,205,045 Strike Price (reflects updates)a 764,778 2,182,297 104,040 311,492 422,636 1,110,898 7,847,732 – 1,647,931 538,184 370,899 571,821 2,180,023 16,885,192 – $0.15 $(7.37) $(9.85) $(3.92) $(8.49) $(3.86) $(4.91) – $(0.52) $(8.56) $(2.09) $(0.83) $(3.58) $(18.74) – Current Amount Number of “In the Outstanding Warrants Money” or (reflects “Out of the Money”e updates)a Warrant and Market Data for Publicly–Traded Companies Market Current Stock Capitalization (in millions) Pricee Warrants $1,100,000,000 $184.35 Remaining Remaining Final Disposition Capital Investment Disposition Investment Amount Description Date Description Treasury Investment Remaining After Capital Repayment Income Payment to Treasury (Dividend or Interest)f $13,758 $138,067 $7,883,333 $55,246 $584,967 $51,242 $742,471 $555,210 $77,300 $103,380 $2,580,458 $114,450 $42,310 $536,211 $67,883 $473,573 $1,284,722 $264,334 $351,222 $81,858 $142,847 $124,396 $716,980 $179,026 $6,250,000 $278,551 $331,889 $597,972 $1,933,889 $50,296 $8,061,535 $7,509,920 continued on next page Out Out Out Out Out Out Out – $195,220,417 Out Out Out Out Out $392,400 $144,409 Out $236,850,000 $263,417 $188,479 – $318,055,555 In/Out of the Moneye 206 Appendix d I transaction detail I October 21, 2009 Pref. Stock w/ Warr. $140,000,000 Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. 11/21/08 Western Alliance Bancorporation– Las Vegas, NVb 12/23/08 Western Community Bancshares, Inc.– Palm Desert , CA2 Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Pref. Stock w/ Ex. Warr. 12/12/08 Wilshire Bancorp, Inc.–Los Angeles, CA 12/19/08 Wintrust Financial Corporation– Lake Forest, IL Worthington Financial Holdings, Inc.– Huntsville, AL2 WSFS Financial Corporation– Wilmington, DE Yadkin Valley Financial Corporation– Elkin, NC Yadkin Valley Financial Corporation– Elkin, NC York Traditions Bank–York, PA2 5/15/09 1/23/09 1/16/09 7/24/09 4/24/09 11/14/08 Zions Bancorporation–Salt Lake City, UT Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock w/ Warr. Pref. Stock w/ Warr. 12/12/08 Wilmington Trust Corporation– Wilmington, DE $1,400,000,000 $4,871,000 $13,312,000 $36,000,000 $52,625,000 $2,720,000 $250,000,000 $62,158,000 $330,000,000 $300,000,000 $16,800,000 Pref. Stock w/ Ex. Warr. White River Bancshares Company– Fayetteville, AR2 2/20/09 12/19/08 Whitney Holding Corporation– New Orleans, LA $4,700,000 Pref. Stock w/ Ex. Warr. Western Reserve Bancorp, Inc– Medina, OH2 5/15/09 $6,855,000 Pref. Stock w/ Ex. Warr. 12/23/08 Western Illinois Bancshares Inc.– Monmouth, IL2 $7,290,000 $83,726,000 Pref. Stock w/ Warr. Westamerica Bancorporation– San Rafael, CA 2/13/09 $36,000,000 $75,000,000 $25,000,000,000 $400,000,000 $5,625,000 $6,633,000 Pref. Stock w/ Warr. Pref. Stock w/ Warr. 9/23/2009 6/3/2009 9/2/2009 9/9/2009 $200,000,000 5/27/2009 $26,380,000 $22,000,000 $110,000,000 $25,000,000 $1,500,000 12/31/08 West Bancorporation, Inc.– West Des Moines, IA Wesbanco Bank Inc.–Wheeling, WV4 Pref. Stock w/ Warr. 12/5/08 10/28/08 Wells Fargo & Company– San Francisco, CA Pref. Stock w/ Ex. Warr. Pref. Stock w/ Warr. Waukesha Bankshares, Inc.– Waukesha, WI2,10 6/26/09 Pref. Stock w/ Ex. Warr. 11/21/08 Webster Financial Corporation– Waterbury, CT WashingtonFirst Bank– Reston, VA2 11/14/08 Washington Federal Inc.–Seattle, WA 1/30/09 Pref. Stock w/ Warr. Pref. Stock w/ Warr. 1/16/09 Washington Banking Company– Oak Harbor, WA 12/19/08 Wainwright Bank & Trust Company– Boston, MA 4 Pref. Stock w/ Ex. Warr. 1/30/09 W.T.B. Financial Corporation– Spokane, WA2 Pref. Stock w/ Warr. 12/19/08 VIST Financial Corp.–Wyomissing, PA Pref. Stock w/ Ex. Warr. Vision Bank–Texas– Richardson, TX2 4/24/09 $4,700,000 $71,000,000 Pref. Stock w/ Ex. Warr. Virginia Company Bank– Newport News, VA2,10 6/12/09 12/12/08 Virginia Commerce Bancorp–Arlington, VA Pref. Stock w/ Warr. $300,000,000 $14,738,000 Village Bank and Trust Financial Corp– Midlothian, VA Pref. Stock w/ Warr. Pref. Stock w/ Warr. 5/1/09 11/14/08 Valley National Bancorp–Wayne, NJ4 11/14/08 Valley National Bancorp–Wayne, NJ 4 $16,019,000 $5,500,000 Valley Community Bank– Pleasanton, CA2 Pref. Stock w/ Ex. Warr. 12/12/08 Valley Financial Corporation–Roanoke, VA Pref. Stock w/ Warr. $7,700,000 Pref. Stock w/ Ex. Warr. Valley Commerce Bancorp–Visalia, CA2 Capital Investment Repayment Amount Date 1/9/09 Investment Description $41,863,000 $75,000,000 $41,863,000 $0 $0 $125,000,000 $100,000,000 $200,000,000 Final Disposition Preferred Stock w/ Warrants Warrants Warrants Preferred Stock w/ Warrants Preferred Stock w/ Warrants Remaining Remaining Final Disposition Capital Investment Disposition Investment Amount Description Date Description Treasury Investment Remaining After Capital Repayment $75,000,000 $225,000,000 Capital Repayment Amount6 Capital Repayment Details (CONTINUED) 1/30/09 Purchase Date Institution Purchase Details CPP TRANSACTION DETAIL, AS OF 9/30/2009 Final Disposition Proceeds $17.97 $4.67 $4.67 $26.64 $27.96 $7.34 $14.20 $9.54 $6.31 $52.00 $4.96 $15.46 $28.18 $12.47 $16.86 $9.26 $6.55 $5.85 $3.99 $4.01 $12.29 $3.43 $2,272 $75 $75 $165 $673 $216 $984 $646 $457 $1,519 $86 $411 $131,646 $850 $1,839 $88 $48 $34 $107 $17 $1,758 $16 Market Current Stock Capitalization (in millions) Pricee 3,282,276 1,707,456 492,164 390,071 364,078 2,696,203 499,029 2,297,090 344,742 Number of Warrants Originally Issued 3,282,276 1,707,456 492,164 390,071 364,078 2,696,203 499,029 2,411,945 344,742 $36.27 $7.30 $13.99 $45.08 $22.82 $9.82 $26.66 $17.10 $13.34 $50.92 $11.39 $25.61 5,789,909 273,534 385,990 175,105 1,643,295 949,460 1,856,714 2,631,579 1,574,213 246,640 474,100 439,282 5,789,909 385,990 175,105 1,643,295 949,460 1,856,714 2,631,579 787,107 246,640 474,100 439,282 $(18.30) $(0.76) $(9.32) $(18.44) $5.14 $(2.48) $(12.46) $(7.56) $(7.03) $1.08 $(6.43) $(10.15) $(5.83) $(5.81) $(0.71) $1.22 $(1.91) $(4.45) $0.04 $(0.42) $(6.37) $(3.54) Current Amount Number of “In the Outstanding Warrants Money” or (reflects “Out of the a Money”e updates) $34.01 110,261,688 110,261,688 $18.28 $17.57 $8.04 $8.46 $10.30 $3.95 $4.43 $18.66 $6.97 Strike Price (reflects updates)a Warrant and Market Data for Publicly–Traded Companies $540,642 $179,851 $227,311 Income Payment to Treasury (Dividend or Interest)f $40,351 $195,829 $5,361,111 $765,753 $721,111 $3,247,291 $819,444 $25,207 $43,377 $2,396,250 $212,882 $9,833,333 $445,083 $64,038 $240,778 $256,071 $5,133,333 $2,215,250 $1,125,000 $2,854,167 $81,866 $1,083,827 $1,476,424 $37,060 $8,194,444 $2,097,833 continued on next page Out $52,694,444 Out Out Out In Out Out $11,137,500 Out Out In Out Out Out $996,527,778 Out $14,666,667 Out In Out Out Out Out Out $11,201,389 Out In/Out of the Moneye transaction detail I Appendix d I October 21, 2009 207 Investment Description Capital Repayment Amount6 TOTAL CAPITAL REPAYMENT AMOUNT $70,717,027,000 TOTAL TREASURY CPP INVESTMENT AMOUNT $133,900,546,320 TOTAL PURCHASE AMOUNT $204,617,573,320 Capital Investment Repayment Amount Date Capital Repayment Details (CONTINUED) Final Disposition Remaining Remaining Final Disposition Capital Investment Disposition Investment Amount Description Date Description Treasury Investment Remaining After Capital Repayment Final Disposition Proceeds Market Current Stock Capitalization (in millions) Pricee Strike Price (reflects updates)a Number of Warrants Originally Issued Current Amount Number of “In the Outstanding Warrants Money” or (reflects “Out of the Money”e updates)a Warrant and Market Data for Publicly–Traded Companies In/Out of the Moneye Income Payment to Treasury (Dividend or Interest)f Sources: Treasury, responses to SIGTARP data call, 6/30/2009, 7/8/2009, 9/30/2009, 10/7/2009; Treasury, Transactions Report, 10/2/2009, www.treas.gov, accessed 10/6/2009; Market Data: Capital IQ, Inc. (a division of Standard & Poor’s), www.capitaliq.com, accessed 10/6/2009; Yahoo Finance, http:// finance.yahoo.com, accessed 10/7/2009, Treasury, response to SIGTARP draft, 10/16/2009. Notes: Numbers affected by rounding. Data as of 9/30/2009. Numbered notes taken verbatim from Treasury’s 10/2/2009 Transactions Report containing data as of 9/30/2009. 1 This transaction was included in previous Transaction Reports with Merrill Lynch & Co., Inc. listed as the qualifying institution and a 10/28/2008 transaction date, footnoted to indicate that settlement was deferred pending merger. The purchase of Merrill Lynch by Bank of America was completed on 1/1/2009, and this transaction under the CPP was funded on 1/9/2009. 2 Privately–held qualified financial institution; Treasury received a warrant to purchase additional shares of preferred stock (unless the institution is a CDFI), which it exercised immediately. 3 To promote community development financial institutions (CDFIs), Treasury does not require warrants as part of its investment in certified CDFIs when the size of the investment is $50 million or less. 4 Repayment pursuant to Title VII, Section 7001(g) of the American Recovery and Reinvestment Act of 2009. 5 Redemption pursuant to a qualified equity offering. 6 This amount does not include accrued and unpaid dividends, which must be paid at the time of capital repayment. 7 The proceeds associated with the disposition of this investment do not include accrued and unpaid dividends. 8 Subchapter S corporation; Treasury received a warrant to purchase additional subordinated debentures (unless the institution is a CDFI), which it exercised immediately. 9 In its qualified equity offering, this institution raised more capital than Treasury’s original investment, therefore, the number of Treasury’s shares underlying the warrant was reduced by half. 10 This institution participated in the expansion of CPP for small banks. 11 Treasury has three separate investments in Citigroup Inc. (“Citigroup”) under CPP, TIP, and AGP for a total of $49 billion. On 6/9/2009, Treasury entered into an agreement with Citigroup to exchange up to $25 billion of Treasury’s investment in Fixed Rate Cumulative Perpetual Preferred Stock, Series H (CPP Shares) “dollar for dollar” in Citigroup’s Private and Public Exchange Offerings. On 7/23/2009 and 7/30/2009, Treasury exchanged a total of $25 billion of the CPP shares for Series M Common Stock Equivalent (“Series M”) and a warrant to purchase shares of common stock. On 9/11/2009, Series M automatically converted to 7,692,307,692 shares of common stock and the associated warrant terminated on receipt of certain shareholder approvals. 12 On 8/24/2009, Treasury exchanged its Series C Preferred Stock issued by Popular, Inc. for a like amount of non tax–deductible Trust Preferred Securities issued by Popular Capital Trust III, administrative trustee for Popular, Inc. Popular, Inc. paid a $13 million exchange fee in connection with this transaction. a According to Treasury, “If a Share Dividend is declared on a common stock of a bank in which Treasury holds outstanding warrants, Treasury is entitled to additional warrants. The ‘Update’ netted is the amount of new warrant shares that have been received as a result of the corporate action.” Thus, the strike prices presented reflects these adjustments provided by Treasury. It appears that Treasury also adjusts the number of shares based on corporate actions as well. Those adjustments are also presented in the current number of outstanding warrants. b According to Treasury, these institutions executed Qualified Equity Offerings which “reduce the number of outstanding warrants held by Treasury.” c Treasury made two investments in SunTrust. Since the dividends could not be allocated between the transactions, they are presented on a combined basis. d According to Treasury, “Provident was purchase by M&T Bank (a public institution). Treasury is currently in the process of swapping the warrants issued by Provident for warrants issued by M&T Bank.” According to Treasury, “the closing of the merger of the two banks preferred shares and warrants have not yet taken place.” e When a warrant’s current market price rises above the strike price, it is considered “In the Money,” otherwise it is considered “Out of the Money.” Presented as of 9/30/2009. f Popular paid Treasury $13 million in fee income, reflected in the Payments to Treasury column. See note 12. g According to Treasury, “on 1/9/09 the original warrant was replaced by a new warrant certificate (not a second certificate to go along with the first one) for 121,792,790 total warrant shares. The new warrant also has a $30.79 Strike Price.” h According to Treasury, on 9/11/2009, an “extinguishment” transaction “made [warrants] worthless upon execution of Citi Series M Common Stock Equivalent to Common Exchange.” Purchase Date Institution Purchase Details CPP TRANSACTION DETAIL, AS OF 9/30/2009 208 Appendix d I transaction detail I October 21, 2009 4/17/09 AIG 11/25/08 AIG Date New York New York City Seller NY NY State Purchase Purchase Transaction Type TOTAL Preferred Stock w/ Warrants $69,835,000,000 $29,835,000,000 Par $40,000,000,000 Par 2 Pricing Investment Amount Mechanism Purchase Details Preferred Stock w/ Warrants Investment Description 4/17/09 Exchange Date Preferred Stock w/ Warrants1 Investment Pricing Amount Mechanism $40,000,000,000 Par Exchange Details Transaction Investment Type Description $44.11 $44.11 Stock Price Warrants and Market Data $5,936 $5,936 $0.00002 $50.00 150 2,689,938 Market Strike Price Outstanding Capitalization (reflects Number of (in millions) updates) Warrants $44.11 $(5.89) Amount “In the Money” or “Out of the Money”a In Out New York Charlotte NC NY State Purchase Purchase Transaction Type TOTAL Preferred Stock w/ Warrants Trust Preferred Securities Investment Description $40,000,000,000 $20,000,000,000 Par $20,000,000,000 Par Investment Pricing Amount Mechanism $16.92 $4.84 $146,385 $110,741 Market Stock Capitalization Price (in millions) $13.30 $10.61 Strike Price 150,375,940 188,501,414 Outstanding Number of Warrants $3.62 $(5.77) Amount “In the Money” or “Out of the Money”a Warrants and Market Data In Out In or Out of the Money?a $928,888,889 $933,333,333 Payment to Treasury Dividend Payments New York City NY State Guarantee Transaction Type Second-Loss Guarantee on Asset Pool Investment Description $5,000,000,000 Preferred Stock and Warrants Guarantee Limit Premium Received Transaction Detailsb $4.84 $110,741 Market Stock Capitalization Price (in millions) $10.61 Strike Price 66,531,728 $(5.77) Amount Outstanding “In the Money” Number of or “Out of the Warrants Money” a Warrants and Market Data Out In or Out of the Money? a $174,806,667 Payment to Treasury Dividend Payments Sources: Treasury, response to SIGTARP data call, 10/7/2009; Treasury, Transactions Report, 10/2/2009; Market Data: Capital IQ, Inc. (a division of Standard & Poor’s), www.capitaliq.com, accessed 10/6/2009. Notes: Numbers affected by rounding. Data as of 9/30/2009. Numbered notes taken from Treasury’s 10/2/2009 Transactions Report containing data as of 9/30/2009. 1 In consideration for the guarantee, Treasury received $4.03 billion of preferred stock, which pays 8% interest. 2 Treasury has three separate investments in Citigroup Inc. (“Citigroup”) under CPP, TIP, and AGP for a total of $49 billion. On 6/9/2009, Treasury entered into an agreement with Citigroup to exchange all of Treasury’s investments. On 7/30/2009, Treasury exchanged all of its Fixed Rate Cumulative Perpetual Preferred Stock Series G (AGP Shares), received as premium with the AGP agreement, “dollar for dollar” for Trust Preferred Securities. a When a warrant’s current market price rises above the strike price, it is considered “In the Money,” otherwise it is considered “Out of the Money.” b AGP transaction is a guarantee, not a purchase. Treasury received a premium including preferred stock and warrants as part of this transaction. 1/16/09 Citigroup Inc. 1,2 Name of Institution Date Note Seller AGP Transaction Detail, AS OF 9/30/2009 Table D.4 Source: Treasury, response to SIGTARP data call, 10/7/2009; Treasury, Transactions Report, 10/2/2009. Note: Numbers affected by rounding. Data as of 9/30/2009. Numbered notes taken from Treasury’s 10/2/2009 Transactions Report containing data as of 9/30/2009. 1 Treasury has three separate investments in Citigroup Inc. (“Citigroup”) under CPP, TIP, and AGP for a total of $49 billion. On 6/9/2009, Treasury entered into an agreement with Citigroup to exchange all of Treasury’s investments. On 7/30/2009, Treasury exchanged all of its Fixed Rate Cumulative Perpetual Preferred Stock, Series I (TIP Shares) “dollar for dollar” for Trust Preferred Securities. Bank of America Corporation 12/31/08 Citigroup Inc. 1/16/09 City 1 Name of Institution Date Note Seller TIP Transaction Detail, AS OF 9/30/2009 Table D.3 Source: Treasury, response to SIGTARP data call, 10/7/2009; Treasury, Transactions Report, 10/2/2009. $- $- In or Out Payments of the to Money? a Treasury Notes: Numbers affected by rounding. Data as of 9/30/2009. Numbered notes taken from Treasury’s 10/2/2009 Transactions Report containing data as of 9/30/2009. 1 On 4/17/2009, Treasury exchanged its Series D Fixed Rate Cumulative Preferred Shares for Series E Fixed Rate Non-Cumulative Preferred Shares with no change to Treasury’s initial investment amount. In addition, in order for AIG to fully redeem the Series E Preferred Shares, it has an additional obligation to Treasury of $1,604,576,000 to reflect the cumulative unpaid dividends for the Series D Preferred Shares due to Treasury through and including the exchange date. 2 The investment price reflects Treasury’s commitment to invest up to $30 billion less a reduction of $165 million representing retention payments AIG Financial Products made to its employees in March 2009. 3 This transaction does not include AIG’s commitment fee of an additional $165 million scheduled to be paid from its operating income in three equal installments over the five-year life of the facility. 3 Note Name of Institution SSFI Transaction Detail, as of 9/30/2009 Table D.2 transaction detail I Appendix d I October 21, 2009 209 3/3/09 1 TALF LLC Name of Institution Seller State Wilmington DE City Purchase TOTAL Debt Obligation w/ Additional Note $20,000,000,000 $20,000,000,000 N/A Pricing Investment Amount Mechanism Purchase Details Transaction Type Investment Description 9/30/09 UST/TCW Senior Mortgage Securities Fund, L.P. 9/30/09 Invesco Legacy Securities Master Fund, L.P. 9/30/09 Invesco Legacy Securities Master Fund, L.P. 2 1 2 State Wilmington DE Wilmington DE Wilmington DE Wilmington DE City Purchase Purchase Purchase Purchase Transaction Type TOTAL Debt Obligation w/ Contingent Proceeds Membership Interest Debt Obligation w/ Contingent Proceeds Membership Interest Investment Pricing Amount Mechanism $2,222,222,222 Par $1,111,111,111 Par $2,222,222,222 Par $1,111,111,111 Par $6,666,666,666 Purchase Details Investment Description Source: Treasury, response to SIGTARP data call, 10/7/2009; Treasury, Transactions Report, 10/2/2009. Note: Numbers affected by rounding. Data as of 9/30/2009. Numbered notes taken from Treasury’s 10/2/2009 Transactions Report containing data as of 9/30/2009. 1 The equity amount may be incrementally funded. Investment amount represents Treasury’s maximum obligation if the limited partners other than Treasury fund their maximum equity capital obligations. 2 The loan may be incrementally funded. Investment amount represents Treasury’s maximum obligation if Treasury and the limited partners other than Treasury fund 100% of their maximum equity obligations. 9/30/09 UST/TCW Senior Mortgage Securities Fund, L.P. 1 Seller Date Note Name of Institution PPIP Transaction Detail, as of 9/30/2009 Table D.6 Sources: Treasury, response to SIGTARP data call, 10/7/2009; Treasury, Transactions Report, 10/2/2009. Notes: Numbers affected by rounding. Data as of 9/30/2009. Numbered notes taken from Treasury’s 10/2/2009 Transactions Report containing data as of 9/30/2009. 1 The loan was funded through TALF LLC, a special purpose vehicle created by The Federal Reserve Bank of New York. The amount of $20,000,000,000 represents the maximum loan amount. The loan will be incrementally funded. Date Note TALF Transaction Detail, As of 9/30/2009 Table D.5 210 Appendix d I transaction detail I October 21, 2009 Date 1/16/09 1/2/09 4/29/09 4/29/09 5/1/09 5/20/09 12/29/08 12/31/08 4/22/09 5/20/09 5/27/09 6/3/09 7/10/09 12/29/08 5/21/09 5/27/09 Note 2 14, 21, c 4, 5, 21, c 4, 6, 21, b, c 7, c 8, c 1, 20 20, d 3, 20 9, 20 11, 20, b 13, 20 18, b 15 15 10 Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase TOTAL Debt Obligation w/ Additional Note, Equity Interest Preferred Stock w/ Exercised Warrants Preferred Stock w/ Exercised Warrants Debt Obligation w/ Additional Note, Equity Interest Debt Obligation w/ Additional Note Debt Obligation w/ Additional Note Debt Obligation w/ Additional Note Debt Obligation w/ Additional Note Debt Obligation w/ Warrants and Additional Note Debt Obligation Debt Obligation w/ Additional Note Purchase Purchase Debt Obligation w/ Additional Note Debt Obligation w/ Additional Note Debt Obligation w/ Additional Note Debt Obligation w/ Additional Note Debt Obligation w/ Additional Note Investment Description Purchase Purchase Purchase Purchase Purchase Transaction Type (CONTINUED) N/A N/A $79,966,778,971 $6,642,000,000 N/A $7,500,000,000 Par $5,000,000,000 Par $7,072,488,605 N/A $23,027,511,395 N/A $360,624,198 N/A $4,000,000,000 N/A $2,000,000,000 N/A $13,400,000,000 N/A $884,024,131 N/A $756,857,000 $3,043,143,000 $280,130,642 N/A $500,000,000 N/A $4,000,000,000 N/A $1,500,000,000 N/A Pricing Investment Amount Mechanism Purchase Details Total Treasury Investment Amount $77,826,024,131 New CarCo Acquisition LLC—Wilmington, DE GMAC LLC—Detroit, MI GMAC LLC—Detroit, MI General Motors Company— Detroit, MI General Motors Corporation—Detroit, MI General Motors Corporation—Detroit, MI General Motors Corporation—Detroit, MI General Motors Corporation—Detroit, MI General Motors Corporation—Detroit, MI General Motors Corporation—Detroit, MI Chrysler LLC—Wilmington, DE Chrysler LLC—Wilmington, DE Chrysler Holding LLC— Auburn Hills, MI Chrysler Holding LLC— Auburn Hills, MI Chrysler Holding LLC— Auburn Hills, MI Chrysler Financial Services Americas LLC—Farmington Hills, MI Name of Institution Seller AIFP TRANSACTION DETAIL, as of 9/30/2009 Table D.7 7/10/09 7/10/09 7/10/09 7/10/09 7/10/09 5/29/09 Date Exchange Exchange Exchange Exchange Exchange Exchange Transaction Type Preferred and common stock in General Motors Company 17, 18 Preferred and common stock in General Motors Company 16, 18 Preferred and common stock in General Motors Company 18 Preferred and common stock in General Motors Company 18 Preferred and common stock in General Motors Company 18 Equity Interest in GMAC 12, 15 Investment Description $44,357,709.98 $1,369,197,029.15 6/17/09 7/14/09 7/10/09 $360,624,198 Total Principal Repayment Amount $2,140,754,840 $22,041,706,310 Par $360,624,198 Par $4,000,000,000 Par $2,000,000,000 Par $13,400,000,000 Par $884,024,131 Par $51,136,083.81 5/18/09 $280,130,642 $31,810,122.11 4/17/09 7/10/09 $3,499,054.95 Principal Repayment Amount 19 3/17/09 Principal Investment Pricing Repayment Amount Mechanism Date Exchange Details Remaining Investment Description 6,711,864,407 Debt Obligation w/ Additional Note, Equity Interest - N/A - N/A 1,369,197,029 Debt Obligation w/ Additional Note 1,413,554,739 Debt Obligation w/ Additional Note 1,464,690,823 Debt Obligation w/ Additional Note 1,496,500,945 Debt Obligation w/ Additional Note Remaining Principal Amount Principal Repayment Details $55,237,713 $7,405,894 Interest Payment a NA Continued on next page. $430,611,111 $34,083,686 $143,526,108 see note a NA NA Dividend Payment a Payments to Treasury transaction detail I Appendix d I October 21, 2009 211 (CONTINUED) 4/9/09 4/9/09 1 2 Chrysler Receivables SPV LLC GM Supplier Receivables LLC Name of Institution Wilmington Wilmington City DE DE State Purchase Purchase INITIAL TOTAL Debt Obligation w/ Additional Note Debt Obligation w/ Additional Note Transaction Investment Type Description $5,000,000,000 $1,500,000,000 N/A $3,500,000,000 N/A $(500,000,000) ADJUSTED TOTAL $(1,000,000,000) 7/8/09 3 Adjustment Amount $3,500,000,000 $1,000,000,000 $2,500,000,000 Adjusted Investment Amount Adjustment Details 7/8/09 3 Investment Pricing Adjustment Amount Mechanism Date $2,300,564 $3,601,370 Payment to Treasury Dividend Payments Sources: Treasury, response to SIGTARP data call, 10/7/2009; Treasury, Transactions Report, 10/2/2009. Notes: Numbers affected by rounding. Data as of 9/30/2009. Numbered notes taken from Treasury’s 10/2/2009 Transactions Report containing data as of 9/30/2009. 1 The loan was funded through GM Supplier Receivables, LLC, a special purpose vehicle created by General Motors Corporation. The amount of $3,500,000,000 represents the maximum loan amount. The loan will be incrementally funded. The credit agreement was fully executed on 4/9/2009, but was made effective as of 4/3/2009. General Motors Company assumed GM Supplier Receivables LLC on 7/10/2009. 2 The loan was funded through Chrysler Receivables SPV LLC, a special purpose vehicle created by Chrysler LLC. The amount of $1,500,000,000 represents the maximum loan amount. The loan will be incrementally funded. The credit agreement was fully executed on 4/9/2009, but was made effective as of 4/7/2009. Chrysler Group LLC assumed Chrysler Receivables SPV LLC on 6/10/2009. 3 Treasury issued notice to the institution of the permanent reduced commitment on 7/8/2009; the reduction was effective on 7/1/2009. Date Note Seller ASSP Transaction Detail AUTOMOTIVE SUPPLIER SUPPORT PROGRAM, as of 9/30/2009 Table D.8 Source: Treasury, response to SIGTARP data call, 10/7/2009; Treasury, Transactions Report, 10/2/2009; Market Data: Capital IQ, Inc. (a division of Standard & Poor’s), www.capitaliq.com, accessed 10/6/2009. Continued on next page. Note: Numbers affected by rounding. Data as of 6/30/2009. Numbered notes taken from Treasury’s 7/2/2009 Transactions Report containing data as of 6/30/2009. 1 Treasury committed to lend General Motors Corporation up to $1,000,000,000. The ultimate level of funding was dependent upon the level of investor participation in GMAC LLC’s rights offering. The amount has been updated to reflect the final level of funding. 2 The loan was funded through Chrysler LB Receivables Trust, a special purpose vehicle created by Chrysler Financial. The amount of $1,500,000,000 represents the maximum loan amount. The loan was incrementally funded until it reached the maximum amount of $1.5 billion on 4/9/2009. 3 This transaction is an amendment to Treasury’s 12/31/2008 agreement with General Motors Corporation, which brought the total loan amount to $15,400,000,000. 4 This transaction is an amendment to Treasury’s 1/2/2009 agreement with Chrysler Holding LLC, increasing the total loan amount to $4,780,130,642. 5 The loan may be incrementally funded. 6 The loan will be used to capitalize Chrysler Warranty SPV LLC, a special purpose vehicle created by Chrysler LLC. 7 The terms of this transaction, first reported based on a binding term sheet fully executed on 5/1/2009 but made effective as of 4/30/2009, are now finalized and reflected in a credit agreement fully executed on 5/5/2009. Under the terms of the credit agreement, all commitment amounts were adjustedas follows: Treasury’s commitment amount is $3.04 billion of the total $4.1 billion debtor-in-possession (DIP) credit facility. The amount of $1.4 billion, of which Treasury’s share is $1.04 billion, is available in weekly disbursements under the terms of the Bankruptcy Court’s interim order approving the DIP credit facility; the balance will be available in weekly disbursements after certain Bankruptcy Court milestones are met. 8 This transaction is an amendment to Treasury’s DIP credit agreement with Chrysler LLC dated 5/5/2009 and increases Treasury’s commitment to $3,800,000,000. The amendment was fully executed on 5/20/2009, but was made effective as of 5/15/2009. 9 This transaction is an amendment to Treasury’s 12/31/2008 agreement with General Motors Corporation, which brought the total loan amount to $19,400,000,000, including the 4/22/2009 amendment. 10 The terms of this transaction, first reported based on a term sheet fully executed on 5/27/2009 for an amount up to $6.943 billion, are now finalized and reflected in a credit agreement fully executed on 6/10/2009. Under the terms of the credit agreement, Treasury made a new commitment to New CarCo Acquisition LLC (renamed Chrysler Group LLC on or about 6/10/2009) of up to $6.642 billion. The total loan amount is up to $7.142 billion including $500 million of debt assumed from Treasury’s 1/2/2009 credit agreement with Chrysler Holding LLC. The debt obligations will be secured by a first priority lien on the assets of New CarCo Acquisition LLC (the company that purchased Chrysler LLC’s assets in a sale pursuant to section 363 of the Bankruptcy Code). 11 This transaction is an amendment to Treasury’s 12/31/2008 agreement with General Motors Corporation, which brings the total loan amount to $19,760,624,198, including the 4/22/2009 and 5/20/2009 amendments. The $360 million loan will be used to capitalize GM Warranty LLC, a special purpose vehicle created by General Motors Corporation. On 7/10/2009, the principal amount was included in the $7.07 billion of debt assumed by the new GM, as explained in footnote 17. 12 Pursuant to its rights under the loan agreement with General Motors Corporation (GM) reported on 12/29/2009, Treasury exchanged its $884 million loan to GM for a portion of GM’s common equity interest in GMAC LLC. As a result of the exchange, Treasury holds a 35.4% common equity interest in GMAC LLC. 13 Under the terms of the $33.3 billion debtor-in-possession (DIP) credit agreement, Treasury’s commitment amount is $30.1 billion. Up to $15 billion is available pursuant to the interim order the Bankruptcy Court entered approving the DIP credit facility, of which Treasury’s share is $12.8 billion; the balance will be available shortly after the Bankruptcy Court’s final and non-appealable order approving the DIP credit facility. 14 Pursuant to the agreement originally reported on 5/27/2009 and fully executed on 6/10/2009 (explained in Footnote 10), $500 million of this deal’s debt will be assumed under that fully executed agreement. 15 GMAC LLC is now known as GMAC Inc. effective 6/30/2009. 16 This investment amount was funded as a prepayment of the new General Motors Company’s assumed note described in footnote 17. 17 On 7/10/2009, Treasury and Motors Liquidation Company (formerly known as General Motors Corporation) amended the 6/3/2009 DIP credit agreement for $30.1 billion between Treasury and General Motors Corporation. Under the terms of the amendment, the DIP loan and interest accruing thereunder were extinguished and exchanged for privately placed preferred and common equity in General Motors Company (the new GM) except for $986 million, which remained for the benefit of Motors Liquidation Company, and $7.07 billion, which was assumed by General Motors Company as a new obligation under the terms of a separate agreement (see footnote 18). In total, Treasury received $2.1 billion in preferred shares and 60.8% of the common shares of General Motors Company. 18 On 7/10/2009, Treasury and General Motors Company entered into an agreement under which General Motors Company assumed $7.07 billion of General Motors Corporation’s (now known as Motors Liquidation Company) obligation under its 6/3/2009 agreement with Treasury. 19 This amount does not include accrued and unpaid interest, which must be paid at the time of principal repayment. 20 General Motors Corporation is now known as Motors Liquidation Company. 21 Chrysler Holding LLC is now known as CGI Holding LLC. a The information provided by Treasury on principal, income, and dividends was not broken out by transaction. For purposes of this table, it is presented in aggregate for each AIFP participant. b This table include AWCP transactions. See notes 6 and 11. c This table does not reflect any de-obligations for Chrysler because they were not listed on the 10/2/2009 Transaction Report. d According to Treasury, “the GM Warrant was extinguished as part of the bankruptcy exit. It is no longer a holding of UST.” AIFP TRANSACTION DETAIL, as of 9/30/2009 212 Appendix d I transaction detail I October 21, 2009 Residential Credit Solutions CCO Mortgage RG Mortgage Corporation First Federal Savings and Loan Wescom Central Credit Union Citizens First Wholesale Mortgage Company Technology Credit Union National City Bank 6/12/09 6/17/09 6/17/09 6/19/09 6/19/09 6/26/09 6/26/09 6/26/09 Farmers State Bank Nationstar Mortgage LLC 5/28/09 7/17/09 Aurora Loan Services, LLC 5/1/09 PNC Bank, National Association Carrington Mortgage Services, Santa Ana LLC 4/27/09 MorEquity, Inc. Green Tree Servicing LLC 4/24/09 7/17/09 Wilshire Credit Corporation 4/20/09 7/17/09 Home Loan Services, Inc. 4/20/09 IBM Southeast Employees’ Federal Credit Union Countrywide Home Loans Servicing LP 4/17/09 Lake National Bank Bank of America, N.A. 4/17/09 7/10/09 Ocwen Financial Corporation, Inc. 4/16/09 7/10/09 Chase Home Finance, LLC 4/13/09 Wachovia Mortgage, FSB Saxon Mortgage Services, Inc. 4/13/09 Bayview Loan Servicing, LLC GMAC Mortgage, Inc. 4/13/09 7/1/09 Wells Fargo Bank, NA 4/13/09 7/1/09 CitiMortgage, Inc. 4/13/09 NJ TX PA IA MO UT State West Salem Pittsburgh Evansville Delray Beach Mentor Coral Gables Des Moines Miamisburg San Jose The Villages Anaheim Port Angeles San Juan Glen Allen Fort Worth Lewisville Littleton Saint Paul Beaverton Pittsburgh Simi Valley Simi Valley OH PA IN FL OH FL IA OH CA FL CA WA PR VA TX TX CO CA MN OR PA CA CA West Palm BeachFL Iselin Irving Ft. Washington Des Moines O’Fallon Salt Lake City Select Portfolio Servicing 4/13/09 City Name of Institution Date Servicer Modifying Borrowers’ Loans Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Transaction Type Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Investment Description HAMP Transaction Detail, as of 9/30/2009 Table D.9 $170,000 $54,470,000 $23,480,000 $870,000 $100,000 $44,260,000 $634,010,000 $294,980,000 $70,000 $30,000 $540,000 $770,000 $57,000,000 $16,520,000 $19,400,000 $101,000,000 $798,000,000 $195,000,000 $156,000,000 $366,000,000 $319,000,000 $1,864,000,000 $798,900,000 $659,000,000 $3,552,000,000 $407,000,000 $633,000,000 $2,873,000,000 $2,071,000,000 $376,000,000 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Cap of Incentive Payments on Behalf of Borrowers and to Servicers & Lenders/ Pricing Investors (Cap) 1 Mechanism 9/30/09 9/30/09 9/30/09 9/30/09 9/30/09 9/30/09 9/30/09 9/30/09 9/30/09 9/30/09 9/30/09 9/30/09 $(90,000) $(36,240,000) $18,530,000 $(10,000) $150,000 $22,419.57 $146,385 $1,081 $131,646 Market Capitalization (in millions) continued on next page $80,000 Updated portfolio data from servicer & HPDP initial cap $18,230,000 Updated portfolio data from servicer & HPDP initial cap $42,010,000 Updated portfolio data from servicer & HPDP initial cap $860,000 Updated portfolio data from servicer & HPDP initial cap $250,000 Updated portfolio data from servicer & HPDP initial cap $68,110,000 Updated portfolio data from servicer & HPDP initial cap $1,357,890,000 Updated portfolio data from servicer & HPDP initial cap $723,880,000 $23,850,000 $610,150,000 Updated portfolio data from servicer & HPDP initial cap $20,000 Updated portfolio data from servicer & HPDP initial cap $870,000 Updated portfolio data from servicer & HPDP initial cap $45,700,000 Updated portfolio data from servicer & HPDP initial cap $29,590,000 Updated portfolio data from servicer & HPDP initial cap $17,540,000 Updated portfolio data from servicer & HPDP initial cap $251,700,000 Updated portfolio data from servicer & HPDP initial cap $117,140,000 Updated portfolio data from servicer $447,690,000 Updated portfolio data from servicer & HPDP initial cap $459,550,000 Updated portfolio data from servicer $222,010,000 Updated portfolio data from servicer & HPDP initial cap $131,020,000 Updated portfolio data from servicer $221,790,000 Updated portfolio data from servicer & HPDP initial cap $91,010,000 Updated portfolio data from servicer $203,460,000 Updated portfolio data from servicer & HPDP initial cap $453,130,000 Updated portfolio data from servicer $494,030,000 Updated portfolio data from servicer & HPDP initial cap $447,300,000 Updated portfolio data from servicer $4,465,420,000 Updated portfolio data from servicer & HPDP initial cap $5,182,840,000 Updated portfolio data from servicer $967,120,000 Updated portfolio data from servicer & HPDP initial cap $804,440,000 Updated portfolio data from servicer $655,960,000 Updated portfolio data from servicer & HPDP initial cap $553,380,000 Updated portfolio data from servicer $— Termination of SPA $886,420,000 Updated portfolio data from servicer & HPDP initial cap $632,040,000 Updated portfolio data from servicer $3,554,890,000 Updated portfolio data from servicer & HPDP initial cap $1,017,650,000 Updated portfolio data from servicer $2,475,080,000 Updated portfolio data from servicer & HPDP initial cap 2 $2,410,010,000 Updated portfolio data from servicer $2,089,600,000 Updated portfolio data from servicer & HPDP initial cap $1,079,420,000 Updated portfolio data from servicer $782,500,000 Updated portfolio data from servicer & HPDP initial cap $660,590,000 Updated portfolio data from servicer Adjusted Cap Reason for Adjustment $315,170,000 $(10,000) $330,000 $(11,300,000) $13,070,000 $(1,860,000) $134,560,000 9/30/09 9/30/09 $16,140,000 $(11,860,000) 6/12/09 $(338,450,000) 9/30/09 $90,990,000 6/17/09 $(63,980,000) 9/30/09 $130,780,000 9/30/09 6/17/09 $(64,990,000) 6/17/09 $87,130,000 $(249,670,000) 9/30/09 $46,730,000 6/12/09 $128,300,000 9/30/09 $(717,420,000) 6/12/09 9/30/09 $162,680,000 $3,318,840,000 9/30/09 6/12/09 $5,540,000 $102,580,000 6/12/09 $(105,620,000) 6/12/09 9/30/09 $(3,552,000,000) $254,380,000 9/30/09 7/31/09 $225,040,000 $2,537,240,000 9/30/09 6/17/09 $384,650,000 $65,070,000 9/30/09 6/12/09 $(462,990,000) $1,010,180,000 9/30/09 6/17/09 $(991,580,000) $121,910,000 6/12/09 $284,590,000 9/30/09 Cap Adjustment Amount 6/12/09 Adjustment Date Adjustment Details transaction detail I Appendix d I October 21, 2009 213 American Home Mortgage Servicing, Inc Mortgage Center, LLC Mission Federal Credit Union First Bank Purdue Employees Federal Credit Union Wachovia Bank, N.A. J.P.Morgan Chase Bank, NA EMC Mortgage Corporation Lake City Bank Oakland Municipal Credit Union Oakland HomEq Servicing Litton Loan Servicing LP PennyMac Loan Services, LLC Servis One, Inc. OneWest Bank Stanford Federal Credit Union RoundPoint Mortgage Servicing Charlotte Corporation Horicon Bank Vantium Capital, Inc. Central Florida Educators Federal Credit Union U.S. Bank National Association CUC Mortgage Corporation ORNL Federal Credit Union Allstate Mortgage Loans & Investments, Inc. Metropolitan National Bank Franklin Credit Management Corporation Bay Federal Credit Union AMS Servicing, LLC Schools Financial Credit Union Glass City Federal Credit Union Maumee Central Jersey Federal Credit Union Yadkin Valley Bank 7/22/09 7/22/09 7/22/09 7/29/09 7/29/09 7/29/09 7/31/09 7/31/09 8/5/09 8/5/09 8/5/09 8/12/09 8/12/09 8/12/09 8/28/09 8/28/09 8/28/09 9/2/09 9/2/09 9/9/09 9/9/09 9/9/09 9/11/09 9/11/09 9/11/09 9/11/09 9/16/09 9/23/09 9/23/09 9/23/09 9/23/09 9/23/09 CA IN TX TX NC IN MO CA MI TX IL State Elkin Woodbridge Sacramento Buffalo Capitola Jersey City Little Rock Ocala Oak Ridge Albany Owensboro Lake Mary Plano Horicon Palo Alto Pasadena Titusville Calasbasa Houston NC NJ OH CA NY CA NJ AR FL TN NY KY FL TX WI NC CA CA PA CA TX North Highlands CA Warsaw Lewisville Lewisville Charlotte West Lafayette St. Louis San Diego Southfield Coppell Chicago ShoreBank 7/17/09 City Name of Institution Date Servicer Modifying Borrowers’ Loans Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Transaction Type Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Financial Instrument for Home Loan Modifications Investment Description HAMP Transaction Detail, as of 9/30/2009 $240,000 $30,000 $230,000 $390,000 $4,390,000 $410,000 $27,510,000 $280,000 $250,000 $2,070,000 $4,350,000 $114,220,000 $1,250,000 $6,000,000 $560,000 $570,000 $300,000 $668,440,000 $29,730,000 $6,210,000 $774,900,000 $674,000,000 $140,000 $420,000 $707,380,000 $2,699,720,000 $85,020,000 $1,090,000 $6,460,000 $860,000 $4,210,000 $1,272,490,000 $1,410,000 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Cap of Incentive Payments on Behalf of Borrowers and to Servicers & Lenders/ Pricing Investors (Cap) 1 Mechanism 9/30/09 9/30/09 9/30/09 9/30/09 9/30/09 9/30/09 9/30/09 9/30/09 9/30/09 9/30/09 9/30/09 9/30/09 9/30/09 9/30/09 9/30/09 Adjustment Date $(25,510,000) $(1,200,000) $313,050,000 $(121,190,000) $290,000 $180,000 $(10,000) $(14,850,000) $(37,700,000) $(60,000) $(1,530,000) $(490,000) $1,780,000 $(53,670,000) $890,000 Cap Adjustment Amount $75 $172,325.35 Market Capitalization (in millions) continued on next page $4,220,000 Updated portfolio data from servicer & HPDP initial cap $5,010,000 Updated portfolio data from servicer & HPDP initial cap $1,087,950,000 Updated portfolio data from servicer & HPDP initial cap $552,810,000 Updated portfolio data from servicer & HPDP initial cap $430,000 Updated portfolio data from servicer & HPDP initial cap $600,000 Updated portfolio data from servicer & HPDP initial cap $707,370,000 Updated portfolio data from servicer & HPDP initial cap $2,684,870,000 Updated portfolio data from servicer & HPDP initial cap $47,320,000 Updated portfolio data from servicer & HPDP initial cap $1,030,000 Updated portfolio data from servicer & HPDP initial cap $4,930,000 Updated portfolio data from servicer & HPDP initial cap $370,000 Updated portfolio data from servicer & HPDP initial cap $5,990,000 Updated portfolio data from servicer & HPDP initial cap $1,218,820,000 Updated portfolio data from servicer & HPDP initial cap $2,300,000 Updated portfolio data from servicer & HPDP initial cap Adjusted Cap Reason for Adjustment Adjustment Details 214 Appendix d I transaction detail I October 21, 2009 SEFCU 9/25/09 Albany City NY State Purchase Transaction Type Financial Instrument for Home Loan Modifications Investment Description N/A TOTAL CAP: $27,065,760,000 Total Initial Cap: $23,411,540,000 $440,000 Cap of Incentive Payments on Behalf of Borrowers and to Servicers & Lenders/ Pricing Investors (Cap) 1 Mechanism Adjustment Date Adjusted Cap Reason for Adjustment Total Cap Adjustments: $3,654,220,000 Cap Adjustment Amount Adjustment Details Market Capitalization (in millions) Source: Treasury, Transactions Report, 10/2/2009. 1 Notes: Numbers affected by rounding. Data as of 9/30/2009. Numbered notes taken from Treasury’s 10/2/2009 Transactions Report containing data as of 9/30/2009. The Cap of Incentive Payments represents the potential total amount allocated to each servicer and includes the maximum amount allotted for all payments on behalf of borrowers and payments to servicers and lenders/investors. The Cap is subject to adjustment based on the total amount allocated to the program and individual servicer usage for borrower modifications. Each adjustment to the Cap is reflected under Adjustment Details. 2 On July 31, 2009, the SPA with Chase Home Finance, LLC was terminated and superseded by new SPAs with J.P. Morgan Chase Bank, NA and EMC Mortgage Corporation. Name of Institution Date Servicer Modifying Borrowers’ Loans HAMP Transaction Detail, as of 9/30/2009 transaction detail I Appendix d I October 21, 2009 215 216 Appendix E I Cross Reference of Report to the Inspector General Act of 1978 | October 21, 2009 Cross-Reference of Report to the Inspector General Act of 1978 This appendix cross-references this report to the reporting requirements under the Inspector General Act of 1978 (P.L. 95-452), as amended, 5 U.S.C. APP. Section Statute (Inspector General Act of 1978) SIGTARP Action Report Reference Section 5(a)(1) “Description of significant problems, abuses, and deficiencies... ” List problems, abuses, and deficiencies from SIGTARP audits and investigations. Section 1: “The Office of the SIGTARP” Section 5: “SIGTARP Recommendations” Section 5(a)(2) “Description of recommendations for corrective action…with respect to significant problems, abuses, or deficiencies... ” List recommendations from SIGTARP audits and investigations. Section 1: “The Office of the SIGTARP” Section 5: “SIGTARP Recommendations” Section 5(a)(3) “Identification of each significant recommendation described in previous semiannual reports on which corrective action has not been completed...” List all instances of incomplete corrective action from previous semiannual reports. Section 5: “SIGTARP Recommendations” Section 5(a)(4) “A summary of matters referred to prosecutive authorities and the prosecutions and convictions which have resulted... ” List status of SIGTARP investigations referred to prosecutive authorities. Section 1: “The Office of the SIGTARP” Section 5(a)(5) “A summary of each report made to the [Treasury Secretary] under section 6(b)(2)... ” (instances where information requested was refused or not provided) List TARP oversight reports by Treasury, FSOB, SEC, GAO, COP, OMB, CBO, Federal Reserve, FDIC, and SIGTARP. Appendix G: “Key Oversight Reports and Testimonies” Section 5(a)(6) “A listing, subdivided according to subject matter, of each audit report issued...” showing dollar value of questioned costs and recommendations that funds be put to better use. List SIGTARP audits. Section 1: “The Office of the SIGTARP” Section 5(a)(7) “A summary of each particularly significant report... ” Provide a synopsis of significant SIGTARP audits. Section 1: “The Office of the SIGTARP” Section 5(a)(8) “Statistical tables showing the total number of audit reports and the total dollar value of questioned costs... ” Provide statistical tables showing dollar value of questioned costs from SIGTARP audits. As detailed in Section 1, “The Office of the SIGTARP,” SIGTARP has made significant findings in its audit reports. However, to date SIGTARP’s audits have not included questioned costs findings. Section 5(a)(9) “Statistical tables showing the total number of audit reports and the dollar value of recommendations that funds be put to better use by management...” Provide statistical tables showing dollar value of funds put to better use by management from SIGTARP audits. As detailed in Section 1, “The Office of the SIGTARP,” SIGTARP has made important findings in its audit reports. However, to date SIGTARP’s audits have not included funds put to better use findings. Section 5(a)(10) “A summary of each audit report issued before the commencement of the reporting period for which no management decision has been made by the end of reporting period, an explanation of the reasons such management decision has not been made, and a statement concerning the desired timetable for achieving a management decision...” Provide a synopsis of significant SIGTARP audit reports in which recommendations by SIGTARP are still open. Section 1: “The Office of the SIGTARP” Section 5(a)(11) “A description and explanation of the reasons for any significant revised management decision...” Explain audit reports in which significant revisions have been made to management decisions. As detailed in Section 1: “The Office of the SIGTARP,” and Section 5: “SIGTARP Recommendations,” SIGTARP has made noteworthy recommendations in its audit reports, and the majority of these recommendations have been agreed to. To date, no management decisions have been revised. Section 5(a)(12) “Information concerning any significant management decision with which the Inspector General is in disagreement...” Provide information where management disagreed with a SIGTARP audit finding. See discussion of Use of Funds Audit in Section 1: “The Office of the SIGTARP,” and Section 5: “SIGTARP Recommendations.” correspondence I Appendix H I OCTOBER 21, 2009 correspondence This appendix provides copies of the following correspondence: Correspondence Date From To Regarding 7/10/2009 SIGTARP Treasury Management Alert Regarding Possible MHA Program Internal Weaknesses 9/10/2009 Treasury Staff Treasury General Counsel Issuance of Instructions Regarding Communication with Outside Persons About EESA Funds and Recovery Act Funds 9/25/2009 SIGTARP Treasury Response to Recommendations Contained in SIGTARP’s July 21, 2009 Quarterly Report 10/2/2009 SIGTARP Treasury HAMP Streamlined Borrower Evaluation Process 10/15/09 Treasury SIGTARP Response to SIGTARP Recommendations on Treasury’s changes to the HAMP streamlined Borrower Evaluation Process 10/19/2009 Treasury SIGTARP SIGTARP October Quarterly Report 217 218 Appendix H I correspondence I OCTOBER 21, 2009 correspondence I Appendix H I OCTOBER 21, 2009 219 October 8, 2009 The changes under the heading “Borrower Income/Asset Documentation and Verification” in this Supplemental Directive are effective immediately for loans that are currently in a HAMP trial period where income has not yet been verified or for loans that are evaluated for HAMP on or after the date of this Supplemental Directive. The requirements under the heading “Servicer Response” in this Supplemental Directive are effective for loans that begin a trial period after the date of this Supplemental Directive. The new forms outlined in this document, with the exception of the RMA (the use of which is addressed below), may be utilized immediately but must be in use by March 1, 2010. Servicers should continue to use the Home Affordable Modification Cover Letter and Home Affordable Modification Agreement when providing the borrower with an agreement that outlines the terms of the final modification. The creation of a standard MHA Request for Modification and Affidavit form (RMA) that incorporates borrower income and expense information, a revised Hardship Affidavit, the SIGTARP fraud notice and portions of the current Home Affordable Modification Trial Period Plan; Updated and simplified income documentation and verification requirements; The conversion of the current Trial Period Plan to a notice that does not require a borrower signature; and Standardized borrower response timeframes. The significant changes described in this Supplemental Directive include: In Supplemental Directive 09-01, the Treasury Department (Treasury) announced the eligibility, underwriting and servicing requirements for the Home Affordable Modification Program (HAMP). Under HAMP, servicers apply a uniform loan modification process to provide eligible borrowers with affordable monthly payments for their first lien mortgage loans. This Supplemental Directive represents an ongoing effort to improve process efficiency by updating the borrower underwriting requirements in Supplemental Directive 09-01 and introducing revised model documentation for the program. The objectives of these changes are to streamline the program documentation requirements and standardize the evaluation process that servicers use to make a HAMP eligibility determination. Background Home Affordable Modification Program – Streamlined Borrower Evaluation Process Supplemental Directive 09-07 Supplemental Directive 09-07 Page 2 A borrower’s income documentation may not be more than 90 days old as of the date that such documentation is received by the servicer in connection with evaluating a mortgage loan for HAMP. There is no requirement to refresh such documentation during the remainder of the trial period. As an alternative, a servicer may require a borrower to submit the RMA and all required income or other documentation to verify the borrower’s financial information and eligibility prior to issuing a TPP Notice (verified income), attached as Exhibit D. Servicers may use recent verbal financial information obtained from the borrower (the term “borrower” includes any co-borrower) to assess the borrower’s eligibility for a trial period plan. A servicer may rely on this information to prepare and send to the borrower a TPP Notice (stated income), attached as Exhibit C. Following receipt of a completed and signed RMA and income or other required documentation, the servicer must verify the borrower’s financial information and eligibility, including completing a final Net Present Value (NPV) evaluation. Verbal and Verified Income Analysis There are two forms of Trial Period Plan Notices (TPP Notices) for use by servicers: stated income and verified income. They should be prepared as follows: The following information replaces in its entirety the guidance in Supplemental Directive 09-01, on pages 5 through 8, under the heading “Underwriting —Verifying Borrower Income and Occupancy Status.” The portions of that section that are in italics below are not changed from Supplemental Directive 09-01 but are included here for ease of reference. Borrower Income/Asset Documentation and Verification Servicers may require use of the RMA by all borrowers requesting consideration under HAMP or may continue to use other proprietary financial information forms that are substantially similar in content to the RMA. When provided by or on behalf of the borrower, the RMA must be accepted by servicers in lieu of any servicer specific form(s). When the RMA is not used, servicers must obtain an executed MHA Hardship Affidavit, an updated version of which (including the SIGTARP notice) is attached as Exhibit B. The use of “RMA” throughout the remainder of this Supplemental Directive shall refer to the RMA or its equivalent. Effective immediately, borrowers who want to be considered for HAMP may complete and submit to their servicer a RMA, a copy of which is attached to this Supplemental Directive as Exhibit A. All documents and forms described herein are posted on www.HMPadmin.com. The RMA, which includes a new borrower financial information section, is intended to replace in their entirety the current Hardship Affidavit and the SIGTARP notice, as well as elements from the current Trial Period Plan. Standard MHA Request Form 220 Appendix H I correspondence I OCTOBER 21, 2009 Supplemental Directive 09-07 Page 3 The servicer may not require a borrower to make an up-front cash contribution (other than the first trial period payment) for the borrower to be considered for HAMP. Servicers should include non-borrower household income in monthly gross income if it is voluntarily provided by the borrower and if there is documentary evidence that the income has been, and reasonably can continue to be, relied upon to support the mortgage payment. All nonborrower household income included in monthly gross income must be documented and verified by the servicer using the same standards for verifying a borrower’s income. Monthly Gross Income The borrower’s “monthly gross income” is the borrower’s income amount before any payroll deductions and includes wages and salaries, overtime pay, commissions, fees, tips, bonuses, housing allowances, other compensation for personal services, Social Security payments, including Social Security and adoption subsidies received by adults on behalf of minors or by minors intended for their own support, and monthly income from annuities, insurance policies, retirement funds, pensions, disability or death benefits, unemployment benefits, rental income and other income. If only net income is available, the servicer must multiply the net income amount by 1.25 to estimate the monthly gross income. All non-taxed income, including nontaxed social security income, is considered net income. Analysis of ARM Resets With respect to adjustable rate loans where there is a rate reset scheduled within 120 days after the date of the evaluation (a “Reset ARM”), the monthly mortgage payment used to determine eligibility will be the greater of (i) the borrower’s current scheduled monthly mortgage payment or (ii) a fully amortizing monthly mortgage payment based on the note reset rate using the index value as of the date of the evaluation (the “Reset Interest Rate”). With respect to adjustable rate loans that reset more than 120 days after the date of the evaluation, the borrower’s current scheduled monthly mortgage payment will be used to determine eligibility. Debt to Income Calculation The borrower will only qualify for HAMP if the verified income documentation confirms that the monthly mortgage payment ratio prior to the modification is greater than 31 percent. The “monthly mortgage payment ratio” is the ratio of the borrower’s current monthly mortgage payment to the borrower’s monthly gross income (or the borrowers’ combined monthly gross income in the case of co-borrowers). The “monthly mortgage payment” includes the monthly payment of principal, interest, property taxes, hazard insurance, flood insurance, condominium association fees and homeowner’s association fees, as applicable (including any escrow payment shortage amounts subject to a repayment plan). When determining a borrower’s monthly mortgage payment ratio, servicers must adjust the borrower’s current mortgage payment to include, as applicable, property taxes, hazard insurance, flood insurance, condominium association fees and homeowner’s association fees if these expenses are not already included in the borrower’s payment. The monthly mortgage payment does not include mortgage insurance premium payments or payments due to holders of subordinate liens. Supplemental Directive 09-07 Page 4 Self-employment Income. The most recent quarterly or year-to-date profit and loss statement for each self-employed borrower. Employment Income. Copies of the two most recent paystubs indicating year-to-date earnings. Tax Return. A borrower in imminent default may, in accordance with investor guidelines, be required to provide a signed copy of his or her most recent federal income tax return. All other borrowers may elect to provide signed federal income tax returns but are not required to do so. Whenever a borrower does not provide a tax return, the servicer must obtain the borrower’s tax return transcript by submitting the borrower’s Form 4506-T to the IRS for processing as provided above. Income Documentation Based on the type and source of a borrower’s income, the servicer will obtain and review the following documents to verify borrower financial information: Credit Report and Occupancy Verification In all cases, the servicer must obtain a credit report for each borrower or a joint report for a married couple who are co-borrowers to validate installment debt and other liens as described on page 10 of Supplemental Directive 09-01. Servicers should use the credit report to confirm that the property securing the mortgage loan is the borrower’s principal residence. The servicer is no longer required to verify the borrower’s principal residence using other documentation. If the credit report is inconsistent with other information provided by the borrower, the servicer must reconcile the inconsistency. The servicer should review the tax information for all borrowers to help verify income and identify discrepancies. If the tax information identifies income relevant to the HAMP decision that the borrower did not disclose on the RMA, the servicer must obtain other documentation to reconcile the inconsistency. In resolving inconsistencies servicers must use reasonable business judgment to determine whether such income is no longer being earned or has been reduced to the amounts disclosed on an RMA. IRS Form 4506-T All borrowers must provide a signed and completed IRS Form 4506-T (Request for Transcript of Tax Return). A servicer must submit the borrower’s Form 4506-T to the IRS for processing unless the borrower provides a signed copy of his or her most recent federal income tax return, including all schedules and forms (the federal income tax return and all schedules and forms shall be referred to herein as the federal income tax return). A servicer also must submit the borrower’s Form 4506-T to the IRS for processing when required by the Compliance Agent. Information Documentation Servicers are responsible for determining that any information provided by the borrower and which is needed to evaluate the request is complete and accurate. Servicers should request that the borrower provide the documentation listed below, but may, consistent with investor guidelines, substitute other reliable forms of verification when appropriate. correspondence I Appendix H I OCTOBER 21, 2009 221 Supplemental Directive 09-07 Page 5 Property Valuation Documentation Page 5 of Supplemental Directive 09-01 describes requirements for assessing property value for use in the NPV model. This supplemental directive amends the aging requirement for property 20% Threshold for Passive and Non-Wage Income. Notwithstanding the foregoing, all passive and non-wage income (including rental, part-time employment, bonus/tip, investment and benefit income) does not have to be documented if the borrower declares such income and it constitutes less than 20% of the borrower’s total income. Alimony, Separation Maintenance, and Child Support Income. Borrowers are not required to use alimony, separation maintenance or child support income to qualify for HAMP. However, if the borrower chooses to provide this income, it should be documented with (i) copies of the divorce decree, separation agreement or other legal written agreement filed with a court, or a court decree that provides for the payment of alimony or child support and states the amount of the award and the period of time over which it will be received, and (ii) evidence of receipt of payment, such as copies of the two most recent bank statements showing deposit amounts. Rental income. Rental income should be documented through the Schedule E – Supplemental Income and Loss of the most recent tax year. If the borrower is using income from the rental of a portion of the borrower’s principal residence, the income should be calculated at 75 percent of the monthly gross rental income, with the remaining 25 percent considered vacancy loss and maintenance expense. If the borrower is using rental income from properties other than the borrower’s principal residence, the income to be calculated for HAMP purposes should be 75 percent of the monthly gross rental income, reduced by the monthly debt service on the property (i.e., principal, interest, taxes, insurance, including mortgage insurance, and association fees), if applicable. The needed tax forms can be obtained either through a signed and executed 4506-T or the signed copy of the most recent federal income tax return if provided by the borrower. Unemployment Benefits. Evidence of the amount, frequency and duration of the benefits (usually obtained through a monetary determination letter). The unemployment income must continue for at least nine months from the date of the application. The duration of benefit eligibility – including federal and state extensions – may be evidenced by a screenshot or printout from the Department of Labor UI benefit tool, which is available at http://www.ows.doleta.gov/unemploy/ben_entitle.asp. Benefit Income (e.g., social security, disability, death benefits, pension, public assistance, adoption assistance). Evidence of (i) the amount and frequency of the benefits such as letters, exhibits, a disability policy or benefits statement from the provider, and (ii) receipt of payment, such as copies of the two most recent bank statements showing deposit amounts. Other earned income (e.g., bonus, commission, fee, housing allowance, tips, overtime). Reliable third party documentation describing the nature of the income (e.g. an employment contract or printouts documenting tip income). Supplemental Directive 09-07 Page 6 As described above, revised and updated TPP Notices are attached and replace the current cover letters and current Trial Period Plan. The TPP Notices describe the terms and conditions of the trial period plan and must be sent to borrowers as noted below in the section titled, “Servicer Trial Period Plan Notices Document Retention The document retention requirements described on pages 13 and 14 of Supplemental Directive 09-01 remain in effect. Additionally, servicers must make all documentation related to HAMP program available to Freddie Mac, as compliance agent for Treasury. Fannie Mae, in its capacity as a financial agent for the Treasury, will establish a fraud detection surveillance procedure using reported trial period data. When discrepancies or potential misrepresentations are identified, servicers will be notified during the trial period and will be required to take appropriate action to resolve the discrepancy prior to executing a final modification. Fraud Detection Servicers should not modify a mortgage loan if there is reasonable evidence indicating the borrower submitted income information that is false or misleading or if the borrower otherwise engaged in fraud in connection with the modification. Electronic Submission For all documents required by Treasury (other than for IRS Form 4506-T), electronic submission and signatures are acceptable. Borrower Signatures Unless a borrower or co-borrower is deceased or divorced, all parties who signed the original loan documents or their duly authorized representative(s) should sign the HAMP documents. Servicers may encounter circumstances where a co-borrower signature is not obtainable, for reasons such as mental incapacity, military deployment or contested divorce. Servicer should look to investor guidance when determining whether to accept a document without a coborrower’s signature. Document Perfection Servicers must use good business judgment when determining the level of perfection of the verification documents. Servicers may elect to accept documents with imperfections (blank fields, erasures, use of correction tape, inaccurate dates, etc.) if the servicer determines that the imperfections are immaterial to the business decision, are not indicative of fraud and do not impact the servicer’s ability to verify the completeness and accuracy of the borrower’s financial representations. valuation documentation. Property value information must be less than 90 days old on the date the servicer first evaluates the borrower for a HAMP trial period plan using the NPV model. The information will remain valid for the duration of the trial period and does not need to be updated for any subsequent NPV evaluation. 222 Appendix H I correspondence I OCTOBER 21, 2009 Supplemental Directive 09-07 Page 7 If the servicer determines that a borrower cannot be approved for a trial period plan, the servicer must communicate that determination to the borrower in writing and consider the borrower for another foreclosure prevention alternative. If the borrower is currently in a trial period plan pursuant to a stated income TPP Notice, send a written notice that the borrower has been approved for a HAMP modification pending timely receipt of all trial period payments. Send a TPP Notice (verified income) to the borrower, or If the servicer determines that the borrower is approved for a trial period plan, the servicer must either: Within 30 calendar days following the servicer’s receipt of a completed RMA, Form 4506-T and all required income and other information (including all required documentation and either the borrower's tax transcript or tax return when using the verified approach), the servicer must complete its evaluation of borrower eligibility and notify the borrower of its determination as follows: If the servicer determines that a borrower cannot be approved for a trial period plan, the servicer must communicate that determination to the borrower in writing and consider the borrower for another foreclosure prevention alternative. A written notice with information describing HAMP and including appropriate forms and a list of verification documents and a specific date by which documentation must be received -- if the servicer is evaluating borrower eligibility based on verified income information. The stated income TPP Notice -- if the servicer is evaluating borrower eligibility based on verbal income information and is prepared to offer the borrower a trial period plan. Within 10 business days following receipt of borrower financial information verbally or in a completed RMA, the servicer must acknowledge the borrower’s request for HAMP participation by sending the borrower one of the following documents: Servicer Response A borrower in a trial period plan who makes all required trial period payments, but does not sign and return current trial period plan prior to the end of the trial period, may receive a HAMP modification as long as the servicer has received all required trial period plan payments and all other HAMP-required documentation from the borrower, including a fully executed Home Affordable Modification Agreement. Response”. Borrowers are not required to sign or return the TPP Notice. Servicers should retain a copy of the TPP Notice in the borrower file and note the date that it was sent to the borrower. Timely receipt of the first payment under the TPP Notice is evidence of the borrower’s acceptance of the trial period plan and its terms and conditions. Exhibit A MHA Request for Modification and Affidavit correspondence I Appendix H I OCTOBER 21, 2009 223 CELL OR WORK NUMBER WITH AREA CODE CELL OR WORK NUMBER WITH AREA CODE Chapter 7 Chapter 13 Filing Date:_______________ Bankruptcy case number _____________________ Name of Insurance Co. ____________________________________ Insurance Co. Tel #: ______________________________________ Counselor’s Name: Counselor’s Phone Number: Counselor’s Email: Who pays the hazard insurance policy for your property? I do Lender Does Paid by Condo or HOA Yes No Is the policy current? If yes, please complete counselor contact information below. Have you contacted a credit-counseling agency for help? Yes No EMAIL ADDRESS DATE OF BIRTH Balance Contact Number Loan Number ______________________________________________________________________________________________________________________ Explanation (continue on back of page 3 if necessary): ________________________________________________________________________ Other ______________________________________________________________________________________________________________ My expenses have increased. For example: monthly mortgage My cash reserves, including all liquid assets, are insufficient to maintain my payment reset, high medical or health care costs, uninsured losses, current mortgage payment and cover basic living expenses at the same time. increased utilities or property taxes. My household income has been reduced. For example My monthly debt payments are excessive and I am overextended with my unemployment, underemployment, reduced pay or hours, decline creditors. Debt includes credit cards, home equity or other debt. in business earnings, death, disability or divorce of a borrower or co-borrower. I (We) am/are requesting review under the Making Home Affordable program. I am having difficulty making my monthly payment because of financial difficulties created by (Please check all that apply): HARDSHIP AFFIDAVIT (use back of request for explanation IF necessary) Lien Holder’s Name/Servicer If there are additional Liens/Mortgages or Judgments on this property, please name the person(s), company or firm and their telephone numbers. Is the property listed for sale? Yes No Yes No Have you received an offer on the property? Date of offer _________ Amount of Offer $_________ Agent’s Name: Agent’s Phone Number: Yes No For Sale by Owner? Who pays the Real Estate Tax bill on your property? I do Lender does Yes No Are the taxes current? Yes No $ _______ Condominium or HOA Fee Paid to: ____________________________________ Have you filed for bankruptcy? Yes No If yes: Yes No Has your bankruptcy been discharged? PROPERTY ADDRESS (IF SAME AS MAILING ADDRESS, JUST WRITE SAME) MAILING ADDRESS HOME PHONE NUMBER WITH AREA CODE HOME PHONE NUMBER WITH AREA CODE SOCIAL SECURITY NUMBER DATE OF BIRTH SOCIAL SECURITY NUMBER Investment Vacant CO-BORROWER Sell the Property Second Home Renter occupied CO-BORROWER’S NAME Keep the Property Primary Residence Owner Occupied Loan I.D. Number __________________________ BORROWER’S NAME BORROWER I want to: The property is my: The property is: Making Home Affordable Program Request For Modification and Affidavit (RMA) $ $ $ $ Overtime Child Support / Alimon y* Social Security/SSDI Other monthly income from $ $ $ $ $ $ $ $ $ $ $ Total Assets $ annuities, IRAs, Keogh plans, etc.) plans when calculating assets (401k, pension funds, Do not include the value of life insurance or retirement _____________________ Other ________________ (estimated value) Other Real Estate Other Cash on Hand Stocks / Bonds CDs Saving s/ Money Market Checking Account(s) Checking Account(s) * * * * * ALL INCOME MUST BE DOCUMENTED * * * * * * Total Debt/Expenses _____________________ $ $ $ $ $ $ $ $ $ $ 3 Household Assets BORROWER Ethnicity: I do not wish to furnish this information CO-BORROWER Hispanic or Latino Ethnicity: Not Hispanic or Latino Race: American Indian or Alaska Native Race: Asian Black or African American Native Hawaiian or Other Pacific Islander White Sex: Female Sex: Male To be Completed by Interviewer Interviewer’s Name (print or type) & ID Number This application was taken by: Interviewer’s Signature Date Face-to-face interview Mail ___________________________________________ Telephone Interviewer’s Phone Number (include area code) Internet I do not wish to furnish this information Hispanic or Latino Not Hispanic or Latino American Indian or Alaska Native Asian Black or African American Native Hawaiian or Other Pacific Islander White Female Male Name/Address of Interviewer’s Employer The following information is requested by the federal government in order to monitor compliance with federal statutes that prohibit discrimination in housing. You are not required to furnish this information, but are encouraged to do so. The law provides that a lender or servicer may not discriminate either on the basis of this information, or on whether you choose to furnish it. If you furnish the information, please provide both ethnicity and race. For race, you may check more than one designation. If you do not furnish ethnicity, race, or sex, the lender or servicer is required to note the information on the basis of visual observation or surname if you have made this request for a loan modification in person. If you do not wish to furnish the information, please check the box below. INFORMATION FOR GOVERNMENT MONITORING PURPOSES Alimony or Separation Maintenance income, unless you choose to have it considered by your servicer. member who is not a borrower please specify using the back of this form if necessary. You are not required to disclose Child Support, * Include combined income and expenses from the borrower and co-borrower (if any). If you include income and expenses from a household Total (Gross income) _____________________ etc) ________________ royalties, interest, dividends Car Payments Other ________________ $ $ Maintenance HOA/Condo Fees/Property Other (investment income, $ Food Stamps/Welfare Unemployment Income Net Rental Expenses $ Rents Received Alimony, child support Tips, commissions, bonus and payments payment per month) retirement plans self-employed income Loan(s) (total minimum Credit Cards / Installment Property Taxes Insurance Second Mortgage Payment First Mortgage Payment pensions, annuities or $ $ Monthly Gross wages 2 Monthly Household Expenses/Debt Number of People in Household ___________ INCOME/EXPENSES FOR HOUSEHOLD* 1 Monthly Household Income 224 Appendix H I correspondence I OCTOBER 21, 2009 ACKNOWLEDGEMENT AND AGREEMENT _________________________ ___________ Borrower Signature Date _________________________ __________ Co-Borrower Signature Date That all of the information in this document is truthful and the event(s) identified on page 1 is/are the reason that I need to request a modification of the terms of my mortgage loan, short sale or deed-in-lieu of foreclosure. I understand that the Servicer, the U.S. Department of the Treasury, or its agents may investigate the accuracy of my statements, may require me to provide supporting documentation. I also understand that knowingly submitting false information may violate Federal law. I understand the Servicer will pull a current credit report on all borrowers obligated on the Note. I understand that if I have intentionally defaulted on my existing mortgage, engaged in fraud or misrepresented any fact(s) in connection with this document, the Servicer may cancel any Agreement under Making Home Affordable and may pursue foreclosure on my home. That: my property is owner-occupied; I intend to reside in this property for the next twelve months; I have not received a condemnation notice; and there has been no change in the ownership of the Property since I signed the documents for the mortgage that I want to modify. I am willing to provide all requested documents and to respond to all Servicer questions in a timely manner. I understand that the Servicer will use the information in this document to evaluate my eligibility for a loan modification or short sale or deed-in-lieu of foreclosure, but the Servicer is not obligated to offer me assistance based solely on the statements in this document. I understand that the Servicer will collect and record personal information, including, but not limited to, my name, address, telephone number, social security number, credit score, income, payment history, government monitoring information, and information about account balances and activity. I understand and consent to the disclosure of my personal information and the terms of any Making Home Affordable Agreement by Servicer to (a) the U.S. Department of the Treasury, (b) Fannie Mae and Freddie Mac in connection with their responsibilities under the Homeowner Affordability and Stability Plan; (c) any investor, insurer, guarantor or servicer that owns, insures, guarantees or services my first lien or subordinate lien (if applicable) mortgage loan(s); (d) companies that perform support services in conjunction with Making Home Affordable; and (e) any HUD certified housing counselor. If you are aware of fraud, waste, abuse, mismanagement or misrepresentations affiliated with the Troubled Asset Relief Program, please contact the SIGTARP Hotline by calling 1-877-SIG-2009 (toll-free), 202-622-4559 (fax), or www.sigtarp.gov. Mail can be sent to Hotline Office of the Special Inspector General for Troubled Asset Relief Program, 1801 L St. NW, Washington, DC 20220. Be advised that you are signing the following documents under penalty of perjury. Any misstatement of material fact made in the completion of these documents including but not limited to misstatement regarding your occupancy in your home, hardship circumstances, and/or income will subject you to potential criminal investigation and prosecution for the following crimes: perjury, false statements, mail fraud, and wire fraud. The information contained in these documents is subject to examination and verification. Any potential misrepresentation will be referred to the appropriate law enforcement authority for investigation and prosecution. By signing the enclosed documents you certify, represent and agree that: “Under penalty of perjury, all documents and information I have provided to Lender in connection with this Agreement, including the documents and information regarding my eligibility for the program, are true and correct.” NOTICE TO BORROWERS If you have questions about this document or the modification process, please call your servicer at __________________. If you have questions about the program that your servicer cannot answer or need further counseling, you can call the Homeowner’s HOPE™ Hotline at 1-888-995-HOPE (4673). The Hotline can help with questions about the program and offers free HUD-certified counseling services in English and Spanish. 8. 6. 7. 5. 3. 4. 2. 1. In making this request for consideration under the Making Home Affordable Program I certify under penalty of perjury: Exhibit B MHA Hardship Affidavit correspondence I Appendix H I OCTOBER 21, 2009 225 Sell the Property Second Home Renter occupied HARDSHIP AFFIDAVIT Keep the Property Primary Residence Owner Occupied Investment Property Vacant DATE OF BIRTH Female Male To be Completed by Interviewer This application was taken by: Face-to-face interview Mail Telephone Internet American Indian or Alaska Native Asian Black or African American Native Hawaiian or Other Pacific Islander White Female Male Name/Address of Interviewer’s Employer Sex: I do not wish to furnish this information Hispanic or Latino Not Hispanic or Latino Race: CO-BORROWER Ethnicity: Interviewer’s Signature Date ___________________________________________ Interviewer’s Phone Number (include area code) Interviewer’s Name (print or type) & ID Number American Indian or Alaska Native Asian Black or African American Native Hawaiian or Other Pacific Islander White Race: Sex: I do not wish to furnish this information Hispanic or Latino Not Hispanic or Latino BORROWER Ethnicity: The following information is requested by the federal government in order to monitor compliance with federal statutes that prohibit discrimination in housing. You are not required to furnish this information, but are encouraged to do so. The law provides that a lender or servicer may not discriminate either on the basis of this information, or on whether you choose to furnish it. If you furnish the information, please provide both ethnicity and race. For race, you may check more than one designation. If you do not furnish ethnicity, race, or sex, the lender or servicer is required to note the information on the basis of visual observation or surname if you have made this request for a loan modification in person. If you do not wish to furnish the information, please check the box below. INFORMATION FOR GOVERNMENT MONITORING PURPOSES ______________________________________________________________________________________________________________________ Explanation (attach another page if necessary): ______ ________________________________________________________________________ Other ______________________________________________________________________________________________________________ My household income has been reduced. For example My monthly debt payments are excessive and I am overextended with my unemployment, underemployment, reduced pay or hours, decline creditors. Debt includes credit cards, home equity or other debt. in business earnings, death, disability or divorce of a borrower or co-borrower. My expenses have increased. For example: monthly mortgage My cash reserves, including all liquid assets, are insufficient to maintain the payment reset, high medical or health care costs, uninsured losses, payment on my mortgage loan and cover basic living expenses at the same time. increased utilities or property taxes. I (We) am/are requesting review under the Making Home Affordable program. I am having difficulty making my monthly payment because of financial difficulties created by (Please check all that apply): I want to: The property is my: The property is: PROPERTY ADDRESS (include city, state and zip): LOAN NUMBER SOCIAL SECURITY NUMBER DATE OF BIRTH SOCIAL SECURITY NUMBER LOAN SERVICER CO-BORROWER’S NAME BORROWER’S NAME Hardship Affidavit Making Home Affordable Program _________________________ ___________ Borrower Signature Date _________________________ __________ Co-Borrower Signature Date That all of the information in this document is truthful and the event(s) identified on page 1 is/are the reason that I need to request a modification of the terms of my mortgage loan, short sale or deed-in-lieu of foreclosure. I understand that the Servicer, the U.S. Department of the Treasury, or its agents may investigate the accuracy of my statements, may require me to provide supporting documentation, and that knowingly submitting false information may violate Federal law and may result in foreclosure. I understand the Servicer will pull a current credit report on all borrowers obligated on the Note. I understand that if I have intentionally defaulted on my existing mortgage, engaged in fraud or misrepresented any fact(s) in connection with this document, the Servicer may cancel any Agreement under the Home Affordable Modification Program and may pursue foreclosure on my home. I certify that: my property is owner-occupied; I intend to reside in this property for the next twelve months; I have not received a condemnation notice; and there has been no change in the ownership of the Property since I signed the documents for the mortgage that I want to modify. I am willing to provide all requested documents and to respond to all Servicer questions in a timely manner. I understand that the Servicer will use the information in this document to evaluate my eligibility for a loan modification or short sale or deed-in-lieu of foreclosure, but the Servicer is not obligated to offer me assistance based solely on the statements in this document. I understand that Servicer will collect and record personal information, including, but not limited to, my name, address, telephone number, social security number, credit score, income, payment history, government monitoring information, and information about account balances and activity. I understand and consent to the disclosure of my personal information and the terms of any Making Home Affordable Agreement by Servicer to (a) the U.S. Department of the Treasury, (b) Fannie Mae and Freddie Mac in connection with their responsibilities under the Homeowner Affordability and Stability Plan; (c) any investor, insurer, guarantor or servicer that owns, insures, guarantees or services my first lien or subordinate lien (if applicable) mortgage loan(s); (d) companies that perform support services in conjunction with Making Home Affordable; and (e) any HUD certified housing counselor. If you are aware of fraud, waste, abuse, mismanagement or misrepresentations affiliated with the Troubled Asset Relief Program, please contact the SIGTARP Hotline by calling 1-877-SIG-2009 (toll-free), 202-622-4559 (fax), or www.sigtarp.gov. Mail can be sent to Hotline Office of the Special Inspector General for Troubled Asset Relief Program, 1801 L St. NW, Washington, DC 20220. NOTICE TO BORROWERS Be advised that you are signing the following documents under penalty of perjury. Any misstatement of material fact made in the completion of these documents including but not limited to misstatement regarding your occupancy in your home, hardship circumstances, and/or income will subject you to potential criminal investigation and prosecution for the following crimes: perjury, false statements, mail fraud, and wire fraud. The information contained in these documents is subject to examination and verification. Any potential misrepresentation will be referred to the appropriate law enforcement authority for investigation and prosecution. By signing the enclosed documents you certify, represent and agree that: “Under penalty of perjury, all documents and information I have provided to Lender in connection with this Agreement, including the documents and information regarding my eligibility for the program, are true and correct.” If you have questions about this document or the modification process, please call your servicer at __________________. If you have questions about the program that your servicer cannot answer or need further counseling, you can call the Homeowner’s HOPE™ Hotline at 1-888-995-HOPE (4673). The Hotline can help with questions about the program and offers free HUD-certified counseling services in English and Spanish. 8. 6. 7. 5. 3. 4. 2. 1. In making this request for consideration under the Making Home Affordable Program I certify under penalty of perjury: ACKNOWLEDGEMENT AND AGREEMENT 226 Appendix H I correspondence I OCTOBER 21, 2009 Exhibit C Trial Period Plan Notice (Stated Income) [Loan number] 3. Signed and dated copy of the enclosed IRS Form 4506 T (Request for Transcript of Tax Return) for each borrower (borrowers who filed their tax returns jointly may send in one IRS Form 4506 T signed and dated by both of the joint filers), and 2. The enclosed [Select one] MHA Request for Modification & Affidavit (RMA) OR MHA Hardship Affidavit form completed and signed by all borrowers, and 1. Your first trial period payment of $ ________, In addition to making your trial period payments on time, you must send copies of all the documents that are checked below to _________________________________, no later than _______________ so that we can verify the financial information you already provided to us. Use the return envelope provided for your convenience. If the documents are not received by [insert the due date again], this offer will end and your loan will not be modified. How do I get a permanent modification? If you do not make each trial period payment in the month in which it is due, your loan may not be modified under the Home Affordable Modification Program. Why is there a trial period? The trial period offers you immediate payment relief while we process the paperwork to determine if we can offer you a permanent loan modification. It also gives you time to make sure that you can manage the lower monthly mortgage payment. Please note that your existing loan and its requirements remain in effect and unchanged during the trial period. What do I need to do first? To accept this offer, you must make a new monthly payment of $_______ for the next three months of the trial period. This payment is due on the first day of each month. So your first payment is due ________, your second payment is due _______ and your third payment is due ________. Send these payments instead of your normal monthly mortgage payment. Congratulations! You are approved to enter into a trial period plan under the Home Affordable Modification Program! This is the first step towards lowering your mortgage payments. Please read this letter so that you understand all the steps you need to take now to lower your mortgage payments permanently. Dear ______________ [Name] [Address 1] [Address 2] [Date] [Servicer Logo] correspondence I Appendix H I OCTOBER 21, 2009 227 If you are aware of fraud, waste, mismanagement, or misrepresentations affiliated with the Troubled Asset Relief Program, please contact SIGTARP at 1-877-SIG2009 (toll-free), 202-622-4559 (fax), or www.sigtarp.gov. Mail can be sent to Hotline Office of the Special Inspector General for Troubled Asset Relief Program, 1801 L St. NW, Washington, DC 20220. Homeowner’s HOPE™ Hotline If you have questions about the program that your servicer cannot answer or need further counseling, call the Homeowner’s HOPE™ Hotline at 1-888-995-HOPE (4673). The Hotline can help with questions about the program and offers access to free HUD-certified counseling services in English and Spanish. XXX XXX XXXX If you have further questions about this trial period plan or the program, please call your servicer at THE HOME AFFORDABLE MODIFICATION PROGRAM. DOCUMENTATION FOR EACH BORROWER ON TIME, WE WILL NOT BE ABLE TO DETERMINE WHETHER YOU QUALIFY FOR IF YOU DO NOT MAKE YOUR TRIAL PERIOD PAYMENTS OR DO NOT PROVIDE ALL REQUIRED, SIGNED AND COMPLETED Keep a copy of all documents for your records. Don’t send original income documentation. If you have other types of income, cannot locate the required documents, or have questions about the paperwork required, please contact us at [1.000.000.0000]. For borrowers who are current on their mortgage payments: [Optional – delete if not required by investor] Copies of the most recently filed signed federal tax return with all schedules, including Schedule E—Supplemental Income and Loss. * You are not required to disclose Child Support, Alimony or Separation Maintenance income, unless you choose to have it considered by your servicer. For each borrower who is relying on alimony or child support as qualifying income*: Copy of divorce or other court decree; or separation agreement or other written agreement filed with the court that states the amount and period of time over which it will be received, and Two most recent bank statement showing receipt of such payment. Two most recent bank statements showing receipt of such payment. For each borrower who has income such as social security, disability or death benefits, pension, adoption assistance, public assistance, or unemployment: Copy of benefits statement or letter from the provider that states the amount, frequency and duration of the benefit, and For each borrower who is self employed: Most recent quarterly or year to date profit/loss statement. For each borrower who receives a salary or hourly wages: Copy of your two most recent pay stubs that show year to date earnings. 4. Documentation that will be used by us to verify the income of each borrower. This documentation includes: Additional Information Will my interest rate and principal and interest payment be fixed after my loan is permanently modified? Once your loan is modified, your interest rate and monthly principal and interest payment will be fixed for the life of your mortgage unless your initial modified interest rate is below current market interest rates. In that case, the below market interest rate will be fixed for five years. At the end of the fifth year, your interest rate may increase by 1% per year until it reaches a cap. The cap will equal the market rate of interest being charged Are there incentives that I may qualify for if am current with my new payments? Once your loan is modified, you can earn a pay for success incentive for every month that you make on time payments beginning with the trial period Payments. Depending on your modified monthly payment, you may accrue up to $1,000 each year for five years for a total of $5,000. This important benefit, which will be applied to your principal balance each year after the anniversary date of your first trial period payment due date, will help you earn equity in your home by reducing the amount that you owe. However, you must remain current on your loan. You will lose this benefit if your modified loan becomes 90 days delinquent. When will I know if my loan can be modified permanently and how will the modified loan balance be determined? Once we confirm you are eligible for a Home Affordable Modification and you make all of your trial period payments on time, we will send you a modification agreement detailing the terms of the modified loan. Any difference between the amount of the trial period payments and your regular mortgage payments will be added to the balance of your loan along with any other past due amounts as permitted by your loan documents. While this will increase the total amount that you owe, it should not significantly change the amount of your modified mortgage payment as that is determined based on your total monthly gross income, not your loan balance. What happens if my verified income is different from the amount I told you verbally? During the trial period, we will verify your income based on the documentation you must provide. Your verified income will determine your eligibility for a permanent modification and its final terms. If your verified income is significantly higher than the income you told us, you may have to restart your trial period with a larger payment based on that higher income. Also, if your verified income is different from the amount you gave us verbally, you may no longer be eligible for a Home Affordable Modification. How was my new payment in the trial period determined? Your trial period payment is approximately 31% of your total gross monthly income, which you told us was $_________. The new payment includes principal and interest and an escrow amount of $________ to pay property taxes, insurance and other permissible escrow fees. If we were able to modify your loan today, based on the information you gave us, we estimate your modified interest rate would be ____%. If we modify your loan permanently after the trial period, the interest rate may be different due to a variety of factors that affect the terms of your final modification. If you did not have an escrow account before, the timing of your tax and insurance bills may require that you make a payment to cover any such bills when they come due. This is known as an escrow shortage. Your loan has an escrow shortage of $_______; this can either be paid in a lump sum when the loan is modified or over the next ____ years (or ______ months). If you wish to pay the total shortage as a lump sum, please contact us. What else should I know about this offer? If you make your new payments timely and submit the paperwork by the deadline, we will not conduct a foreclosure sale. You will not be charged any fees for this trial period plan or final modification. If your loan is modified, we will waive all unpaid late charges. Your credit score may be affected by accepting a trial period offer or modification. For more information about your credit score please go to http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre24.shtm. You may be required to attend credit counseling. 228 Appendix H I correspondence I OCTOBER 21, 2009 During trial period, any pending foreclosure action or proceeding will not be dismissed and may be immediately resumed if you fail to comply with the terms of the Trial Period Plan or do not qualify for a modification. A new notice of default, notice of intent to accelerate, notice of acceleration, or similar notice will not be necessary to continue the foreclosure action (foreclosure notices). You waive any and all rights to receive such foreclosure notices to the extent permitted by applicable law. However, if your property is located in Georgia, Hawaii, Missouri, or Virginia and a foreclosure sale is currently scheduled, the foreclosure sale will not be suspended and foreclosure may proceed if you do not make each and every trial period payment that is due through the end of the month preceding the month in which the foreclosure sale is scheduled to occur. For example, if a foreclosure sale is scheduled in February and you do not make your January and any earlier required trial period payment by the end of January, the foreclosure sale may proceed in these four states. If a foreclosure sale occurs pursuant to this provision, the Trial Period Plan will be deemed to have terminated. The servicer’s acceptance and posting of your new payment during the trial period will not be deemed a waiver of the acceleration of your loan or foreclosure action and related activities, and shall not constitute a cure of your default under your loan unless such payments are sufficient to completely cure your entire default under your loan. You agree that any prior waiver that allowed you to pay directly for taxes and insurance is revoked. You agree to establish an escrow account and to pay required escrows into that account. o You agree that all terms and provisions of your current mortgage note and mortgage security instrument remain in full force and effect and you will comply with those terms; and that nothing in the Trial Period Plan shall be understood or construed to be a satisfaction or release in whole or in part of the obligations contained in the loan documents. Your current loan documents remain in effect; however, you may make the trial period payment instead of the payment required under your loan documents: o If your monthly payment did not include escrows for taxes and insurance, you are now required to do so: o During the trial period, we may accept and post your trial period payments to your account and it will not affect foreclosure proceedings that have already been started. o We will not proceed to foreclosure sale during the trial period, provided you are complying with the terms of the trial period plan, except as detailed below: The terms of your trial period plan below are effective on the day you make your first trial period payment, provided you have paid it on or before ________________________. You and we agree that: Additional Trial Period Plan Information and Legal Notices If you have any questions or if you cannot afford the trial period payments shown above, but want to remain in your home, or if you have decided to leave your home but still want to avoid foreclosure, please call us at ### ### ####. We may be able to help you. by mortgage lenders on the day your modification agreement is prepared (the Freddie Mac Primary Mortgage Market Survey Rate for 30 year, fixed rate conforming mortgages). Once your interest rate reaches the cap, it will be fixed for the remaining life of your loan. Like your trial period payment, your new monthly payment will also include an escrow for property taxes, hazard insurance and other escrowed expenses. If the cost of your homeowner’s insurance, property tax assessment or other escrowed expenses increases, your monthly payment will increase as well. Exhibit D Trial Period Plan Notice (Verified Income) correspondence I Appendix H I OCTOBER 21, 2009 229 [Loan number] If you are aware of fraud, waste, mismanagement, or misrepresentations affiliated with the Troubled Asset Relief Program, please contact SIGTARP at 1-877-SIG2009 (toll-free), 202-622-4559 (fax), or www.sigtarp.gov. Mail can be sent to Hotline Office of the Special Inspector General for Troubled Asset Relief Program, 1801 L St. NW, Washington, DC 20220. Homeowner’s HOPE™ Hotline If you have questions about the program that your servicer cannot answer or need further counseling, call the Homeowner’s HOPE™ Hotline at 1-888-995-HOPE (4673). The Hotline can help with questions about the program and offers access to free HUD-certified counseling services in English and Spanish. If you have further questions about this trial period plan or the program, please call your servicer at XXX XXX XXXX How do I get a permanent modification? You must make all of your trial period payments by their due dates; if you do not make each of your trial period payments in the month in which it is due, your loan will not be modified under Making Home Affordable. Why is there a trial period? The trial period offers you immediate payment relief and it gives you time to make sure that you can manage the lower monthly mortgage payment. Please note that your existing loan and its requirements remain in effect and unchanged during the trial period. What do I need to do first? To accept this offer, you must make a new monthly payment of $_______ for the next three months of the trial period. This payment is due on the first day of each month. So your first payment is due ________, your second payment is due _______ and your third payment is due ________. Send these payments instead of your normal monthly mortgage payment. Congratulations! You are approved to enter into a trial period plan under the Making Home Affordable program! This is the first step towards lowering your mortgage payments. Please read this letter so that you understand all the steps you need to take now to lower your mortgage payments permanently. Dear ______________ [Name] [Address 1] [Address 2] [Date] [Servicer Logo] Will my interest rate and principal and interest payment be fixed after my loan is permanently modified? Once your loan is modified, your interest rate and monthly principal and interest payment will be fixed for the life of your mortgage unless your initial modified interest rate is below current market interest rates. In that case, the below market interest rate will be fixed for five years. At the end of the fifth year, your interest rate may increase by 1% per year until it reaches a cap. The cap will equal the market rate of interest being charged by mortgage lenders on the day your modification agreement is prepared (the Freddie Mac Primary Mortgage Market Survey Rate for 30 year, fixed rate conforming mortgages). Once your interest rate reaches the cap, it will be fixed for the remaining life of your loan. Like your trial period payment, your new monthly payment will also include an escrow for property taxes, hazard insurance and other escrowed expenses. If the cost of your homeowner’s insurance, property tax assessment or other escrowed expenses increases, your monthly payment will increase as well. Are there incentives that I may qualify for if am current with my new payments? Once your loan is modified, you can earn a pay for success incentive for every month that you make on time payments beginning with the trial period payments. Depending on your modified monthly payment, you may accrue up to $1,000 each year for five years for a total of $5,000. This important benefit, which will be applied to your principal balance each year after the anniversary date of your first trial period payment due date, will help you earn equity in your home by reducing the amount that you owe. However, you must remain current on your loan. You will lose this important benefit if your modified mortgage becomes 90 days delinquent. When will I know if my loan can be modified permanently and how will the modified loan balance be determined? Once you make all of your trial period payments on time, we will send you a modification agreement detailing the terms of the modified loan. Any difference between the amount of the trial period payments and your regular mortgage payments will be added to the balance of your loan along with any other past due amounts as permitted by your loan documents. While this will increase the total amount that you owe, it should not significantly change the amount of your modified mortgage payment as that is determined based on your total monthly gross income, not your loan balance. How was my new payment in the trial period determined? Your trial period payment is approximately 31% of your total gross monthly income, which is $_________. The new payment includes principal and interest and an escrow amount of $________ to pay property taxes, insurance and other permissible escrow fees. If we were able to modify your loan today, based on the information you gave us, we estimate your modified interest rate would be ____%. If we modify your loan permanently after the trial period, the interest rate may be different due to a variety of factors that affect the terms of your final modification. If you did not have an escrow account before, the timing of your tax and insurance bills may require that you make a payment to cover any such bills when they come due. This is known as an escrow shortage. Your loan has an escrow shortage of $_______; this can either be paid in a lump sum when the loan is modified or over the next ____ years (or ______ months). If you wish to pay the total shortage as a lump sum, please contact us. What else should I know about this offer? If you make your new payments timely, we will not conduct a foreclosure sale. You will not be charged any fees for this Trial Period Plan or final modification. If your loan is modified, we will waive all unpaid late charges. Your credit score may be affected by accepting a trial period offer or modification. For more information about your credit score please go to http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre24.shtm. You may be required to attend credit counseling. Additional Information 230 Appendix H I correspondence I OCTOBER 21, 2009 During trial period, any pending foreclosure action or proceeding will not be dismissed and may be immediately resumed if you fail to comply with the terms of the trial period plan or do not qualify for a modification. A new notice of default, notice of intent to accelerate, notice of acceleration, or similar notice will not be necessary to continue the foreclosure action (foreclosure notices). You waive any and all rights to receive such foreclosure notices to the extent permitted by applicable law. However, if your property is located in Georgia, Hawaii, Missouri, or Virginia and a foreclosure sale is currently scheduled, the foreclosure sale will not be suspended and foreclosure may proceed if you do not make each and every trial period payment that is due through the end of the month preceding the month in which the foreclosure sale is scheduled to occur. For example, if a foreclosure sale is scheduled in February and you do not make your January and any earlier required trial period payment by the end of January, the foreclosure sale may proceed in these four states. If a foreclosure sale occurs pursuant to this provision, the trial period plan will be deemed to have terminated. The servicer’s acceptance and posting of your new payment during the trial period will not be deemed a waiver of the acceleration of your loan or foreclosure action and related activities, and shall not constitute a cure of your default under your loan unless such payments are sufficient to completely cure your entire default under your loan. You agree that any prior waiver that allowed you to pay directly for taxes and insurance is revoked. You agree to establish an escrow account and to pay required escrows into that account. o You agree that all terms and provisions of your current mortgage note and mortgage security instrument remain in full force and effect and you will comply with those terms; and that nothing in the trial period plan shall be understood or construed to be a satisfaction or release in whole or in part of the obligations contained in the loan documents. Your current loan documents remain in effect; however, you may make the trial period payment instead of the payment required under your loan documents: o If your monthly payment did not include escrows for taxes and insurance, you are now required to do so: o During the trial period, we may accept and post your trial period payments to your account and it will not affect foreclosure proceedings that have already been started. o We will not proceed to foreclosure sale during the trial period, provided you are complying with the terms of the trial period plan, except as detailed below: The terms of your trial period plan below are effective on the day you make your first trial period payment, provided you have paid it on or before ________________________. You and we agree that: Additional Trial Period Plan Information and Legal Notices If you have any questions or if you cannot afford the trial period payments shown above, but want to remain in your home, or if you have decided to leave your home but still want to avoid foreclosure, please call us at ### ### ####. We may be able to help you. correspondence I Appendix H I OCTOBER 21, 2009 231 232 Appendix H I correspondence I OCTOBER 21, 2009 correspondence I Appendix H I OCTOBER 21, 2009 233 234 Appendix H I correspondence I OCTOBER 21, 2009 correspondence I Appendix H I OCTOBER 21, 2009 235 236 Appendix H I correspondence I OCTOBER 21, 2009 correspondence I Appendix H I OCTOBER 21, 2009 237 238 Appendix H I correspondence I OCTOBER 21, 2009 correspondence I Appendix H I OCTOBER 21, 2009 239 240 Appendix H I correspondence I OCTOBER 21, 2009 correspondence I Appendix H I OCTOBER 21, 2009 241 242 Appendix H I correspondence I OCTOBER 21, 2009 1 SIGTARP Recommendation 1: Treasury should require the imposition of strict information barriers or “walls” between the Public-Private Investment Program (PPIP) fund managers making investment decisions on behalf of the Public-Private Investment Fund (PPIF) and those employees of the fund management company who manage non-PPIF funds. Recommendations from the July 2009 Quarterly Report This report first presents Treasury's response to the new recommendations issued by SIGTARP in the July 2009 Quarterly Report, and then provides a status report on our actions to address the outstanding recommendations identified in the SIGTARP chart contained in the same quarterly report. We used the corresponding recommendation number from the SIGTARP chart to identify the actions Treasury has taken to address the relevant outstanding recommendations. We have not included in this summary response those recommendations that SIGTARP has confirmed that Treasury has “implemented,” specifically, 1, 17, 18, 19, 24, 25, 29, and 31. We also have not included those recommendations that Treasury has previously described in our summary responses the measures we have taken to address concerns raised by SIGTARP, and, based on previous conversation with SIGTARP officials, consider these recommendations as “closed,” specifically, 7, 8, 9, 10, 12, 13, 14, 15, 16, 21, 22, 23, 26, 28, 30, and 32. The summary response covers the eight recommendations identified in the July 2009 Quarterly Report and the remaining eight outstanding recommendations identified in the SIGTARP chart. The Treasury has given careful consideration to the 40 recommendations in SIGTARP's prior quarterly reports when taking actions to stabilize the financial system and restore the flow of credit. Treasury’s policies and programs currently address many of the issues raised in your recommendations, and in other cases, Treasury has taken specific actions to implement your recommendations. Treasury also has executed or will execute alternative approaches that we believe address some of the issues raised in your recommendations. When we believe a particular recommendation would not help carry out Treasury’s statutory duties under the Emergency Economic Stabilization Act (EESA), we have developed alternative ways to address the underlying concerns SIGTARP has raised and have explained the measures we are employing to do so to in our summary responses to SIGTARP and to Congress. The Department of the Treasury (Treasury) welcomes the recommendations on the Troubled Assets Relief Program (TARP) from the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP). This summary response serves as a status report on Treasury's response to recommendations contained in SIGTARP's February 2009, April 2009, and July 2009 Quarterly Reports. September 25, 2009 The U.S. Department of the Treasury Summary Response to SIGTARP Recommendations • 2 Effectiveness of achieving policy goals for programs for Legacy Assets – Metrics to measure the program’s effects on price discovery and restarting the Performance metrics will be evaluated across three principal areas: Treasury has substantively adopted this recommendation, and is developing appropriate metrics to monitor the effectiveness of the PPIP fund managers as well as the PPIP in general. Treasury is presently working with PPIP fund managers to establish expected reporting requirements. In addition, Treasury is hiring a fund advisor consultant that will assist in the ongoing evaluation, monitoring and reporting of each PPIF. Treasury currently expects to have selected this fund advisor consultant by mid-November and will solicit additional input from this firm in order to refine Treasury’s ongoing reporting requirements after that point. Treasury’s Response SIGTARP Recommendation 3: Treasury should have appropriate metrics defined and an evaluation should be put in place to monitor the effectiveness of the PPIF managers, both to ensure that they are fulfilling the terms of their agreements and to measure their performance against pre-established benchmarks and against each other. Treasury is currently developing a template for periodic reports to be publicly disclosed, which would provide aggregated information on Eligible Assets investments across the PPIFs. These reports will provide meaningful information regarding the performance of PPIF investments while protecting confidential, sensitive information related to the investment strategies and individual positions of each PPIF. Treasury’s Response SIGTARP Recommendation 2: Treasury should periodically disclose trading activity and require PPIF managers to disclose to SIGTARP, within seven days of the close of the quarter, all trading activity, holdings, and valuations so that SIGTARP may disclose such information, subject to reasonable protections, in its quarterly reports. Treasury does not believe this recommendation is necessary or appropriate for the PPIP, and has previously explained to SIGTARP officials the alternative ways that Treasury has addressed concerns raised by the SIGTARP in a supplemental letter dated July 2, 2009. As discussed, Treasury considers this recommendation closed. Treasury’s Response correspondence I Appendix H I OCTOBER 21, 2009 243 3 SIGTARP Recommendation 6: Treasury should require PPIF managers to obtain and maintain information about the beneficial ownership of all the private equity interests, and Treasury should have the unilateral ability to prohibit participation of private equity investors. Treasury accepts this recommendation and will require PPIP fund managers to disclose holdings in derivatives in non-PPIF funds where derivative values are related to Eligible Assets held in the PPIF. Treasury’s Response SIGTARP Recommendation 5: Treasury should require fund managers to disclose to Treasury, as part of the Watch List process outlined in the term sheet, info about holdings in eligible assets and holdings in related assets or exposure to related liabilities. Treasury does not believe this recommendation is necessary or appropriate for the PPIP, and previously explained the alternative ways that Treasury has addressed concerns raised by the SIGTARP in our supplemental letter dated July 2, 2009. As previously discussed, Treasury considers this recommendation closed. Treasury’s Response SIGTARP Recommendation 4: The conditions that give Treasury "cause" to remove a manager should be expanded to include a manager's performance below a certain standard benchmark, or if Treasury concludes that the manger has materially violated compliance or ethical rules. Treasury has the ability to end the investment period after 12 months in its sole discretion, and to the extent a certain PPIP fund manager is underperforming, Treasury and the private investors will have the ability to replace the General Partner of the PPIF. In addition, material violations of the Rules will be included as Events of Cause in the Partnership Agreements governing each PPIF. • • markets for Eligible Assets are expected to include pricing for Eligible Assets including benchmark indices (e.g. ABX and CMBX). Financial performance of a PPIF – Metrics are expected to include PPIF returns relative to appropriate fixed income benchmarks. Treasury will work with its fund advisor consultant to establish appropriate fixed income benchmarks with which to measure performance. Adherence to compliance regime – Treasury is presently discussing the applicability of compliance metrics with its compliance contractor. 4 In our continuing effort to improve the transparency of our programs, and in order to more closely adopt the recommendations in the SIGTARP report, Treasury is expanding its Quarterly Capital Purchase Program (CPP) Report to include additional categories of information included in the SIGTARP survey responses underlying the SIGTARP report, such as financial institutions’ repayments of their outstanding debt obligations and total Treasury's Response SIGTARP Recommendation 8: Treasury should require TARP recipients to submit periodic reports to Treasury on their use of funds, including what they were able to do with their TARP funds, such as lending, investments, acquisitions, and other activities that they could not have conducted without TARP funding. Treasury should also require TARP recipients to retain all supporting documentation in conjunction with any reporting requirement that Treasury may impose. Treasury and the Federal Reserve have discussed concerns about potential overrating or rating shopping with the rating agencies, and we will continue to develop and enhance our risk management tools and processes, where appropriate. The Treasury and Federal Reserve have a robust TALF risk management program that does not rely solely on ratings issued by rating agencies. Additionally, the Federal Reserve Bank of New York recently engaged collateral monitors to assess the risk associated with ABS and CMBS collateral. The collateral monitors, in addition to the credit ratings, conservative haircuts, interest premiums, and other terms and conditions, collectively serve to protect taxpayer interests. Treasury’s Response SIGTARP Recommendation 7: Treasury and the Federal Reserve Bank of New York should examine Moody’s assertions and develop mechanisms to ensure that acceptance of collateral in the Term Asset-Backed Securities Loan Facility (TALF) is not unduly influenced by the improper incentives to overrate that exist among the rating agencies. Treasury has adopted most of this recommendation, and explained measures employed to address the concerns raised by the SIGTARP in our summary response and supplemental letter, both dated July 2, 2009. As further explained in our supplemental letter, Treasury does not agree that having the unilateral ability to prohibit participation of private equity investors is necessary or appropriate for the PPIP. As previously discussed, Treasury considers this recommendation closed. Treasury's Response 244 Appendix H I correspondence I OCTOBER 21, 2009 5 SIGTARP Recommendation 2: Treasury should include language in new TARP agreements to facilitate compliance and oversight. Specifically, each program participant should (1) acknowledge explicitly the jurisdiction and authority of SIGTARP and other oversight bodies, as relevant, to oversee compliance of the conditions contained in the agreement in question, (2) establish internal controls with respect to that condition, (3) report periodically to the Compliance department of the Office of Financial Stability (“OFS-Compliance”) regarding the implementation of those Recommendations from the SIGTARP Chart The SIGTARP report provided descriptions of the general uses of capital by TARP recipients but did not contain quantitative data on such uses. By tracking the additional information discussed above, we believe that these reports will now capture all of the categories of information covered by SIGTARP’s audit responses. Moreover, because quantitative data used in these reports is based on data that is provided and reviewed by the financial institution's primary banking regulator, they constitute a more reliable and measurable way of tracking how financial institutions use their capital. In addition to the Monthly Lending and Intermediation Snapshot, Treasury provides an expanded CPP Monthly Lending Report that includes the monthly average outstanding balances of consumer loans and commercial loans and total loans from all CPP participants. Finally, Treasury publishes a Quarterly CPP Report that provides extensive detail on the financial positions and activities of both CPP and non-CPP banks based on regulatory data collected by each institution’s primary financial regulator. Most of the information contained in SIGTARP survey responses is already captured by Treasury’s Monthly Lending and Intermediation Snapshot, CPP Monthly Lending Report or Quarterly CPP Report. Specifically, these Treasury reports capture financial institution activities regarding lending, capital cushions and other reserves, and investments in mortgage-backed securities and asset-backed securities. Treasury publishes its Monthly Lending and Intermediation Snapshot to help measure the lending activities of the nation’s largest Capital Purchase Program (CPP) financial institutions. This report includes quantitative information on lending and other intermediation activities, as well as a qualitative section that allows banks to comment on the lending environment and the host of factors outside a bank’s control that affect lending levels, such as loan demand, borrower creditworthiness, capital markets liquidity and the macroeconomic environment. Although some of the largest recipients of TARP funds have recently repaid the assistance, Treasury has obtained their agreement to provide this information to Treasury for the remainder of 2009. investments. This expansion will begin with the next Quarterly CPP Report, scheduled to be released during October 2009. 6 Please see response below under Recommendation 11. SIGTARP Recommendation 5 Treasury should formalize its going-forward valuation methodology. Treasury has previously explained the alternative ways that Treasury has addressed concerns raised by the SIGTARP in our summary response dated July 2, 2009, and as described above, plans to expand its current quarterly report to capture all categories of uses of TARP funds identified by participants in response to SIGTARP's survey. As previously discussed, Treasury considers this recommendation closed. Treasury’s Response SIGTARP Recommendations 4: Treasury should require all TARP recipients to report on the actual use of TARP funds. Additionally, Treasury has posted all previously executed TARP agreements, except for approximately 78 CPP agreements. Treasury is working towards posting the remaining 78 CPP agreements, and expects to complete this task by November 1, 2009. Treasury continues to make progress on implementing this recommendation. Treasury posts all the agreements governing new transactions on its Financial Stability website. Treasury posts a redacted version of the new agreement for each transaction on the Treasury website ten business days from the closing date of the transaction. Treasury’s Response SIGTARP Recommendation 3: All existing TARP agreements, as well as those governing new transactions, should be posted on the Treasury website as soon as possible. Treasury will implement this recommendation with respect to new TARP programs going forward, as appropriate. Additional details on how Treasury has implemented this recommendation are available in our summary responses dated April 7, 2009 and July 2, 2009. As previously discussed, Treasury considers this recommendation closed. Treasury's Response controls and its compliance with the condition, and (4) provide a signed certification from an appropriate senior official to OFS-Compliance that such report is accurate. correspondence I Appendix H I OCTOBER 21, 2009 245 7 With respect to the recommendation on warrants, as previously stated in our summary response dated July 2, 2009, Treasury does not, at this time, intend to exercise the warrants except under certain circumstances related to mergers and acquisitions activity, although Treasury could consider exercising the warrants in the future. Treasury will review its policies from time to time to ensure they serve the goals of promoting financial stability and protecting the taxpayer. Treasury considers this recommendation closed. Treasury has been implementing this recommendation. In Treasury’s July 2, 2009 response to the SIGTARP’s April 21, 2009 Quarterly Report to Congress, Treasury described its investment strategy policy and asset management tenets prescribed by EESA. Treasury is refining the investment and asset management guidelines for CPP and the other programs which comprise the TARP portfolio. Such a strategy considers financial market stability and broader economic goals, taxpayer protection and transparency, a portfolio approach with discipline at the individual investment level, risk management at the portfolio, program and individual investment levels, and a disposition methodology which minimizes market disruption. Treasury’s Response SIGTARP Recommendation 6: Treasury should develop an overall investment strategy to address its portfolio of stocks and decide whether it intends to exercise warrants of common stock. Treasury agrees with SIGTARP that it is in the public interest to provide periodic disclosure of the estimated value of the TARP portfolio so that the public knows the value of the investments that Treasury has made. A valuation of the portfolio was previously provided as part of the President's 2010 Budget. Under Federal law, Treasury is required to provide a valuation of its investments in connection with the preparation of its annual financial statements. On November 16, 2009, Treasury will publish the financial statements for the fiscal year ended September 30, 2009. The methodology used for such valuation is governed by Federal accounting principles and the financial statements and the methodology are being audited by the GAO. Treasury’s Response SIGTARP Recommendation 11: Treasury should formalize its valuation strategy and begin providing values of the TARP investments to the public. 8 Freddie Mac, Treasury’s compliance agent for the Home Affordable Modification Program (“HAMP”), is in the process of refining procedures to verify that incentives paid Incentive payments to servicers include servicer incentives, investor payments, and borrower incentives. Payments represent (i) incentive payments to the servicer at the successful conclusion of the trial loan modification period (90-120 days) and (ii) payments to the servicer to be passed on to the investor as a partial offset to reduced interest income resulting from the loan modification. After one year (and annually thereafter, and for up to five years) payments to servicers also include borrower incentives, assuming the borrower is current, which would be applied to reduce the principal amount of the residential mortgage loan for the borrower. Treasury’s Response SIGTARP Recommendation 27: Additional anti-fraud protections should be adopted in MHA to verify the identity of the participants in the transaction and to address the potential for services to steal from individuals by receiving Government subsidies without applying them for the benefit of the homeowner. In the meantime, the compliance staff is receiving assistance from other OFS personnel, including those in the risk management, financial management, home ownership preservation and investment areas, to ensure that TARP participants are meeting their responsibilities under the investment agreements. In addition, Treasury is using Freddie Mac, Fannie Mae, and contractors to provide substantive expertise and program monitoring services under the direction of the compliance staff. Treasury has made significant progress in increasing staffing levels in its compliance functions; notably, we now have a team of executive compensation professionals and a dedicated lead of conflicts has joined the OFS-Compliance staff (overseeing conflicts issues involving contractors and financial agents). A number of other hires are in various stages of the hiring process and we expect a number of additional hires to begin work in the next few weeks in various functions within OFS-Compliance, including anti-fraud, conflicts, reporting, and oversight. In addition, Treasury has posted job descriptions and is reviewing resumes and conducting interviews to fill remaining compliance positions at all levels in the organization. When fully staffed, the compliance department will have senior compliance professionals and supporting teams overseeing each TARP program. Treasury’s Response SIGTARP Recommendation 20: Treasury should significantly increase the staffing levels of OFS-Compliance and ensure the timely development and implementation of an integrated risk management and compliance program. 246 Appendix H I correspondence I OCTOBER 21, 2009 9 Treasury also does not believe that additional anti-fraud protections are necessary to identify incentives paid to investors since the ownership of mortgage loans can change on a regular basis, as they are often traded in the secondary mortgage market, or in the case of any mortgage loans held in a securitization, the loans are held in a pooled trust and many investors may hold separate slices of this pooled trust. Freddie Mac will, as part of its servicer compliance reviews, reconcile on a sample basis the investor payments remitted to the servicer to verify that servicers are not retaining these incentives. Treasury does not believe that additional anti-fraud protections are necessary to identify borrowers and/or co-borrowers involved in HAMP because borrower incentives are in the form of a principal reduction of the related borrower’s residential mortgage loan, and thus, no cash payments are made to the borrowers. In addition, controls are in place to ensure that borrowers can receive benefit for only one modification to a first lien loan and, if applicable, only one modification to a second lien loan. to servicers are applied to the respective borrower participating in HAMP, and to investors. These compliance procedures will be performed by Freddie Mac on each HAMP participating servicer by reviewing a random sample of serviced mortgage loans, starting in October, since cash payments have only just begun (Treasury made payments to just one HAMP servicer in August). Through this random sampling, Freddie Mac’s procedures will look to verify that borrower incentives paid to servicers were properly applied to reduce the outstanding principal balance of the related borrower’s residential mortgage loan by tracing the incentives allocated to such loan. Freddie Mac will also look to verify that the investor incentives have been passed through to the related investors. Additional procedures include loan file reviews performed by Freddie Mac to verify that the loan exists, and that the data submitted by the servicer to the HAMP system of record is accurate. Freddie Mac will also use third party databases to verify the existence of the mortgaged property. correspondence I Appendix H I OCTOBER 21, 2009 247 248 Appendix H I correspondence I OCTOBER 21, 2009 correspondence I Appendix H I OCTOBER 21, 2009 249 250 Appendix H I correspondence I OCTOBER 21, 2009 organizational chart I Appendix I I OCTOBER 21, 2009 organizational chart 251 SIGTARP SIG-QR-09-04 202.622.1419 Hotline: 877.SIG.2009 SIGTARP@do.treas.gov www.SIGTARP.gov