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CONGRESSIONAL OVERSIGHT PANEL

JUNE OVERSIGHT REPORT

STRESS TESTING AND
SHORING UP BANK CAPITAL

JUNE 9, 2009.—Ordered to be printed

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

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CONGRESSIONAL OVERSIGHT PANEL JUNE OVERSIGHT REPORT

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1

CONGRESSIONAL OVERSIGHT PANEL

JUNE OVERSIGHT REPORT

STRESS TESTING AND
SHORING UP BANK CAPITAL

JUNE 9, 2009.—Ordered to be printed

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

WASHINGTON

:

2009

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

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U.S. GOVERNMENT PRINTING OFFICE
50–104

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CONTENTS
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Executive Summary .................................................................................................
Section One: Stress Testing and Shoring Up Bank Capital .................................
A. Overview ......................................................................................................
B. The Stress Tests ..........................................................................................
C. Immediate Impact of the Stress Tests ......................................................
D. A Comment on the Supervisory Process ...................................................
E. Specific Limitations of the Stress Tests ....................................................
F. Independent Analysis of Stress Tests ........................................................
G. Next Steps ...................................................................................................
H. Issues ...........................................................................................................
I. Recommendations ........................................................................................
J. Conclusions ..................................................................................................
K. Tables ...........................................................................................................
Annex to Section One: The Supervisory Capital Assessment Program:
An Appraisal .....................................................................................................
Section Two: Additional Views ...............................................................................
Section Three: Correspondence With Treasury Update .......................................
Section Four: TARP Updates Since Last Report ...................................................
Section Five: Oversight Activities ..........................................................................
Section Six: About the Congressional Oversight Panel ........................................
Appendices: ...............................................................................................................
Appendix I: Letter from Chair Elizabeth Warren to Federal Reserve Chairman Ben Bernanke Regarding the Capital Assistance Program, dated May
11, 2009 .................................................................................................................
Appendix II: Letter from Chair Elizabeth Warren to Secretary Timothy
Geithner regarding the possibility of the Secretary appearing before a panel
hearing in June, dated May 12, 2009 .................................................................
Appendix III: Letter from Chair Elizabeth Warren to Secretary Timothy
Geithner and Federal Reserve Chairman Ben Bernanke regarding the Acquisition of Merrill Lynch by Bank of America, dated May 19, 2009 ..............
Appendix IV: Letter from Chair Elizabeth Warren to Secretary Timothy
Geithner regarding the Temporary Guarantee Program, dated May 26,
2009 .......................................................................................................................

(III)

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JUNE OVERSIGHT REPORT

JUNE 9, 2009.—Ordered to be printed

EXECUTIVE SUMMARY *
Across the country, many American families have taken a hard
look at their finances. They have considered how they would manage if the economy took a turn for the worse, if someone were laid
off, if their homes plummeted in value, or if the retirement funds
they had been counting on shrunk even more. If circumstances get
worse, how would they make ends meet? These families have examined their resources to figure out if they could weather more difficult times—and what they could do now to be better prepared. In
much the same spirit, federal banking regulators recently undertook ‘‘stress tests’’ to examine the ability of banks to ride out the
financial storm, particularly if the economy gets worse.
Treasury recognized the importance of understanding banks’
ability to remain well capitalized if the recession proved worse than
expected. Thus, Treasury and the Federal Reserve announced the
Supervisory Capital Assessment Program (SCAP) to conduct reviews or ‘‘stress tests’’ of the nineteen largest BHCs. Together these
nineteen companies hold two-thirds of domestic BHC assets. As described by Treasury, the program is intended to ensure the continued ability of U.S. financial institutions to lend to creditworthy borrowers in the event of a weaker-than-expected economic environment and larger-than-estimated losses.
The Emergency Economic Stabilization Act of 2008 (EESA) 1 specifically requires the Congressional Oversight Panel to examine the
Secretary of the Treasury’s use of his authority, the impact of the
Troubled Asset Relief Program (TARP) on the financial markets
and financial institutions, and the extent to which the information
made available on transactions under the TARP has contributed to
market transparency. In this report, the Panel examines the steps
Treasury has taken to assess the financial health of the nation’s
largest banks, the impact of these steps on the financial markets,
and the extent to which these steps have contributed to market

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* The Panel adopted this report with a unanimous 5–0 vote on June 8, 2009.
1 Emergency Economic Stabilization Act of 2008 (EESA), Pub. L. No. 110–343 (hereinafter
‘‘EESA’’).

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2
transparency. Understanding the recently completed stress tests
helps shed light on the assumptions Treasury makes as it uses its
authority under EESA. As Treasury uses the results of these tests
to determine what additional assistance it might provide to financial institutions, the tests also help determine the effectiveness of
the TARP in minimizing long-term costs to the taxpayers and
maximizing taxpayer benefits, thus responding to another key
mandate of the Panel.
As part of their regular responsibilities, bank examiners determine whether the banks they supervise have adequate capital to
see them through economic reversals. Typically, these bank supervisory examination results are kept strictly confidential. The stress
tests built on the existing regulatory capital requirements, but, because the stress tests were undertaken in order to restore confidence in the banking system, they included an unprecedented release of information.
The stress tests were conducted using two scenarios: one test
based upon a consensus set of economic projections and another
test using projections based on more adverse economic conditions.
The only results that have been released are those based on the adverse scenario. These test results revealed that nine of the nineteen
banks tested already hold sufficient capital to operate through 2010
under the projected adverse scenario; those banks will not be required to raise additional capital. Ten of the nineteen banks were
found to need additional capital totaling nearly $75 billion in order
to weather a more adverse economic scenario. Those banks that
need additional capital were required to present a plan to Treasury
by June 8, 2009, outlining their plans to raise additional capital.
All additional capital required under the stress tests must be
raised by November 9, 2009, six months after the announcement of
the stress test results. Some BHCs have already successfully raised
billions in additional capital.
Like the case of the family conducting its own stress test of personal finances, the usefulness of the bank stress test results depends upon the methods used and the assumptions that went into
conducting the examinations. To help assess the stress tests, the
panel engaged two internationally renowned experts in risk analysis, Professor Eric Talley and Professor Johan Walden, to review
the stress test methodology.
Based on the available information, the professors found that the
Federal Reserve used a conservative and reasonable model to test
the banks, and that the model provides helpful information about
the possible risks faced by BHCs and a constructive way to address
those risks. The criteria used for assessing risk, and the assumptions used in calibrating the more adverse case, have typically
erred on the side of caution and avoided many of the more dangerous simplifications present in some risk modeling.
The professors also raised some serious concerns. They noted
that there remain unanswered questions about the details of the
stress tests. Without this information, it is not possible for anyone
to replicate the tests to determine how robust they are or to vary
the assumptions to see whether different projections might yield
very different results. There are key questions surrounding how
the calculations were tailored for each institution and questions
about the quality of the self-reported data. It is also important to

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note that the stress test scenarios made projections only through
2010. While this time frame avoids the greater uncertainty associated with any projection further in the future, it may fail to capture substantial risks further out on the horizon. Based on the testimony by Deutsche Bank at the Panel’s May field hearing, the projected rise in the defaults of commercial real estate loans after
2010 raise concerns.
In evaluating the useful information provided by the stress tests,
as well as the remaining questions, the Panel offers several recommendations for consideration moving forward:
• The unemployment rate climbed to 9.4 percent in May, bringing the average unemployment rate for 2009 to 8.5 percent. If the
monthly rate continues to increase during the remainder of this
year, it will likely exceed the 2009 average of 8.9 percent assumed
under the more adverse scenario, suggesting that the stress tests
should be repeated should that occur.
• Stress testing should also be repeated so long as banks continue to hold large amounts of toxic assets on their books.
• Between formal tests conducted by the regulators, banks
should be required to run internal stress tests and should share
the results with regulators.
• Regulators should have the ability to use stress tests in the future when they believe that doing so would help to promote a
healthy banking system.
The Federal Reserve Board should be commended for releasing
an unprecedented amount of bank supervisory information, but additional transparency would be helpful both to assess the strength
of the banks and to restore confidence in the banking system. The
Panel recommends that the Federal Reserve Board release more information on the results of the tests, including results under the
baseline scenario. The Federal Reserve Board should also release
more details about the test methodology so that analysts can replicate the tests under different economic assumptions or apply the
tests to other financial institutions. Transparency will also be critical as financial institutions seek to repay their TARP loans, both
to assess the strength of these institutions and to assure that the
process by which these loans are repaid is fair.
Finally, the Panel cautions that banks should not be forced into
counterproductive ‘‘fire sales’’ of assets that will ultimately require
the investment of even more taxpayer money. The need for
strengthening the banks through capital increases must be tempered by sufficient flexibility to permit the banks to realize full
value for their assets.

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SECTION ONE: STRESS TESTING AND SHORING UP
BANK CAPITAL
A. OVERVIEW
The stress test is one of the two core parts of Treasury’s Capital
Assistance Program (CAP). It lays the foundation for the second
part of the CAP, the infusion of TARP funds to support some of the
nation’s largest financial institutions ‘‘as a bridge to private capital
in the future.’’ 2 The publication of the results of the stress tests involves a rare release of supervisory information by the Federal Reserve Board. EESA specifically requires the Panel to,
Examine [the] use by the Secretary [of the Treasury] of
authority under this Act . . . [t]he impact of purchases
made under the Act on the financial markets, and financial institutions, and [t]he extent to which the information
made available on transactions under the [TARP] has contributed to market transparency.3
1. INTRODUCTION

A banking organization’s capital is its economic foundation. It
serves as a cushion against losses and limits a bank’s ability to
grow, including by limiting the degree to which a bank can lend,
how many deposits it can take, and how it can otherwise raise
funds in the capital markets. The strength of a bank’s capital is a
barometer of its health, and decreases in the strength of its capital
or uncertainty about that strength can affect the willingness of
other financial institutions to deal with it. When an individual
bank’s capital is seriously depleted, it can fail. Bank failures and
uncertainty about the soundness of other banks can spread financial contagion across a national financial system, freezing lending,
fostering uncertainty in the capital markets, and perhaps even
threatening the deposits of ordinary citizens, although, in the
United States, the deposit insurance system managed by the Federal Deposit Insurance Corporation (FDIC) protects against that
threat.4 A bank’s ability to lend is directly related to its capital
strength.5 While government intervention has the potential to stabilize the system by shoring up bank capital, it can also risk further scaring away private capital by creating new forms of risk and
uncertainty.6

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2 U.S. Department of the Treasury, Treasury White Paper: The Capital Assistance Program
and its Role in the Financial Stability Plan, at 2 (online at www.treasury.gov/press/releases/reports/tg40lcapwhitepaper.pdf) (accessed May 15, 2009) (hereinafter ‘‘CAP White Paper’’).
3 EESA, supra note 1, at § 125(1)(A)(i)–(iii).
4 Deposit insurance—currently set at $250,000 per account—greatly reduces the risk of loss
of deposits by individuals in banks operating in the United States.
5 Congressional Oversight Panel, Testimony of Vice-President of the Federal Reserve Bank of
New York (FRBNY) Til Schuermann, Hearing on the Impact of Economic Recovery Efforts on
Corporate and Commercial Real Estate Lending, at 2 (May 28, 2009) (online at cop.senate.gov/
documents/testimony-052809-schuermann.pdf).
6 Once the solvency of a bank is in question, private investors may fear that government interference will dilute private capital or that the government will pay below-market prices for assets. That, in turn, can have a chilling effect on a bank’s ability to attract private capital. Perhaps in order to mitigate that chilling effect, Treasury has signaled its intention: (1) to divest
itself of the ownership stakes it may acquire in any private firm as quickly as practical; and
(2) to exert minimal influence on day-to-day operations even if in a position to do so. See U.S.
Department of the Treasury, Statement from Treasury Secretary Timothy Geithner Regarding
the Treasury Capital Assistance Program and the Supervisory Capital Assessment Program (May
7, 2009) (online at www.ustreas.gov/press/releases/tg123.htm).

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The danger of financial contagion surfaced early in the financial
crisis. During 2008, two large banking institutions, IndyMac Bank
($32.01 billion in assets) 7 and Washington Mutual Savings and
Loan ($307 billion) 8 were taken over by federal regulators, and
three other banking institutions, Wachovia Bank ($812.4 billion),9
the nation’s fourth largest commercial bank, National City Corporation ($143.7 billion),10 and Countrywide Financial Corporation
($211 billion) 11 were in danger of failing when they were taken
over by other institutions at the behest of the regulators.12
Within two weeks after the passage of EESA, Treasury began to
make direct capital transfers ‘‘to stabilize the financial system by
providing capital to viable financial institutions of all sizes
throughout the nation.’’ The transfers were made through various
TARP programs created under the authority of the EESA. As of
June 3, $199.4 billion had been transferred to 436 banks under the
TARP’s Capital Purchase Program (CPP).13
Two institutions, Citigroup and Bank of America, have received
additional support outside of the CPP. Through the Targeted Investment Program (TIP), Treasury purchased from Citigroup $20
billion in preferred shares, as well as a warrant to purchase common stock. Treasury and the FDIC also guaranteed a pool of $306
billion of loans and securities.14 Bank of America also received capital and guarantees under the TIP. It received $20 billion in capital
in exchange for preferred stock and a warrant. Treasury and the
FDIC agreed to guarantee a pool of $118 billion in loans, in exchange for preferred stock.15
In early February, Treasury and the Federal Reserve Board announced an accelerated effort to conduct comprehensive and simultaneous reviews of the nation’s 19 largest BHCs 16—those with

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7 Federal Deposit Insurance Corporation, FDIC Establishes IndyMac Federal Bank, FSB as
Successor to IndyMac Bank, F.S.B., Pasadena, California (July 11, 2008) (online at
www.fdic.gov/news/news/press/2008/pr08056.html).
8 Federal Deposit Insurance Corporation, JPMorgan Chase Acquires Banking Operations of
Washington Mutual (Sept. 25, 2008) (online at www.fdic.gov/news//news/press/2008/
pr08085.html).
9 Wachovia Corporation, Form 8–K (Oct. 10, 2008) (online at www.sec.gov/Archives/edgar/data/
36995/000119312508209190/d8k.htm).
10 PNC Financial Services Group, Inc., Form S–4 (Nov. 11, 2008) (online at www.sec.gov/Archives/edgar/data/713676/000095012308014864/y72384sv4.htm).
11 Countrywide Financial Corporation, Form 10–K (Feb. 29, 2008) (online at www.sec.gov/Archives/edgar/data/25191/000104746908002104/a2182824z10–k.htm) (latest asset report available).
12 This was in addition to the government-engineered takeover of the investment bank Bear
Stearns by JPMorgan Chase & Co., the government-engineered takeover of Merrill Lynch by
Bank of America, and the rescue of the American International Group (AIG) by the Federal Reserve Board and Treasury. PNC used $7.7 billion in Capital Purchase Program (CPP) funds to
aid in financing its acquisition of National City Corporation. PNC Financial Services Group,
Inc., Form 8–K (Oct. 24, 2008) (online at www.pnc.com/webapp/unsec/Requester?resource=/wcm/
resources/file/eb0fc043072db70/IRl8Kl102408lNCClAnnounce.pdf).
13 U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for
Period Ending June 3, 2009 (June 5, 2009) (online at www.financialstability.gov/docs/transaction-reports/transactions-report-060509.pdf) (hereinafter ‘‘June 5 TARP Transactions Report’’).
An additional $69.8 billion was transferred under the TARP to rescue AIG.
14 U.S. Department of the Treasury, Joint Statement by Treasury, Federal Reserve and the
FDIC on Citigroup (Nov. 23, 2008) (online at www.treas.gov/press/releases/hp1287.htm).
15 Board of Governors of the Federal Reserve System, Treasury, Federal Reserve, and the FDIC
Provide Assistance to Bank of America (Jan. 16, 2009) (online at www.federalreserve.gov/
newsevents/press/bcreg/20090116a.htm).
16 A BHC is essentially a corporation that owns one or more banks, but does not itself carry
out the functions of a bank. The advantage of this type of structure is that it allows the BHC
to raise capital more easily through, for instance, public offerings. Although Federal Reserve
Board regulations refer formally to BHCs as ‘‘banking organizations,’’ the Federal Reserve Board
Continued

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more than $100 billion in assets—to determine their ability to remain well capitalized if the recession led to deeper than expected
losses in the face of the nation’s increasing economic difficulties.
The effort, formally called the SCAP, is referred to more informally
as the ‘‘stress tests.’’ It is part of the broader CAP that is to be a
primary mechanism for direct capital assistance to the nation’s
largest BHCs for the remainder of the financial crisis.
While federal bank supervisors enforce various capital requirements even in times of economic growth,17 SCAP represents a special supervisory exercise tailored to the current crisis. The term
‘‘stress test’’ itself sums up the government’s objective—to create a
set of economic and operating assumptions to see how much
‘‘stress’’ the assumptions would place on each BHC’s capital position if they came to pass. The tests were designed to:
evaluat[e] expected losses and [whether the stress-tested
BHCs have] the resources to absorb those losses if economic conditions were to be more adverse than generally
expected [,] . . . determine whether an additional capital
buffer today, particularly one that strengthens the composition of capital, is needed for the banking organization
to comfortably absorb losses and continue lending even in
a more adverse environment.18
BHCs in need of a buffer have six months to raise the necessary
capital; the capital can in some cases come from additional TARP
investments made under the CAP.
The results of the stress tests were released in early May. The
Panel is devoting its June report to the details and results of the
tests for several reasons. The first is the crucial one: the weaknesses of America’s large banks, among other things, are at the
core of the financial crisis and the breakdown in lending that was
the immediate result of the crisis; while some believe that government policies contributed to the crisis, it is critical that government
policies to deal with this weakness are soundly conceived and wellexecuted.
There are several additional reasons to examine the stress tests.
These include the perspective they provide on the manner in which
the government is dealing with the country’s major lending institutions, as well as the information they have generated about the
condition of the BHCs themselves at a time when economic conditions continue to deteriorate.
Thus, the report sets out the way the stress tests work and the
assumptions on which they rest, evaluates those assumptions and
the models used to conduct the tests, seeks to understand the
stress test results, and makes recommendations about the future
of the testing process.

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uses the less formal designation in the document relating to the SCAP, as does this report. See
12 CFR Part 225, at Appendix A § 1.
17 A corporation’s capital consists simply of the amount by which the value of its assets exceeds the value of its obligations. See Annex to Section One of this report. Specific capital requirements for banks, insurance companies, securities broker-dealers, and other regulated industries fix a level of capital above that simple margin to create a level of safety to help ensure
that the regulated companies can meet their obligations and avoid failures that spill over into
the economic system.
18 CAP White Paper, supra note 2, at 2.

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2. BACKGROUND

a. Capital requirements
Capital requirements exist to protect against bank insolvency
and to reduce systemic risk. By enforcing these requirements, regulators: (1) ensure that banks have adequate capital to weather unexpected losses; (2) counteract market pressures on banks to take
excessive risks; (3) promote confidence among bank investors,
creditors, and counterparties; and (4) minimize the scale and
length of economic downturns. Capital requirements also protect
against what is called ‘‘moral hazard,’’ that is, the risk that a bank
will take undue risks because it believes any benefits will go to the
BHC executives and shareholders and any losses it suffers will be
covered either by deposit insurance or by the notion that the institution will be supported with government funds rather than allowed to fail.19
Because the stress tests focus on the adequacy of BHC capital,
a short look at how BHC capital works is appropriate. A BHC’s
capital is generally measured as the ratio of specified core (tier 1)
and supplementary (tier 2) capital elements on the firm’s consolidated balance sheet to its total assets. To compute the tier 1 ratio,
for instance, the firm’s tier 1 capital elements are included in the
numerator and the ‘‘risk-weighted’’ value of its assets are included
in the denominator.
For this purpose, tier 1 (core) capital is the sum of the following
capital elements: (1) common stockholders’ equity; (2) perpetual
preferred stock; (3) senior perpetual preferred stock issued by
Treasury under the TARP; (4) certain minority interests in other
banks; (5) qualifying trust preferred securities; and (6) a limited
amount of other securities. Tier 2 (supplementary) capital is made
up of the following capital elements: (1) the amount of certain reserves established against losses; (2) perpetual cumulative or noncumulative preferred stock; (3) certain types of convertible securities; (4) certain types of long-, medium-, and short-term debt securities; and (5) a percentage of unrealized gains from certain investment assets.
The SCAP capital buffer includes a four percent tier 1 common
capital ratio. Federal Reserve Board rules do not specifically define
tier 1 common capital, but this is the element of tier 1 capital that
is voting common stockholders’ equity (i.e., it excludes qualifying
trust and perpetual preferred stock, and qualifying minority interests). The supervisors have encouraged BHCs to hold as much of
their tier 1 capital in the form of common shareholder equity as
possible as this is the ‘‘most desirable capital element from a supervisory standpoint.’’ 20
The risk-weighted assets of an institution, which form the denominator of the capital ratio, represent the value of the institu-

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19 Minimum capital ratios are used by banking regulators to assign banks to one of five categories: (1) well capitalized; (2) adequately capitalized; (3) undercapitalized; (4) seriously undercapitalized; and (5) critically undercapitalized. Under banking regulations, insured depository
institutions falling in the last three categories are subject to a variety of ‘‘prompt corrective actions.’’ However, BHCs are not currently subject to the prompt corrective action regimen.
20 Board of Governors of the Federal Reserve System, BHC Supervision Manual, at
4060.3.2.1.1.3, 1281 (Jan. 2008) (online at www.federalreserve.gov/boarddocs/SupManual/bhc/
200807/bhc0708.pdf).

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tion’s assets, adjusted in some cases to reflect possibilities that the
assets will lose value after the computation is made. For example,
cash is assigned no risk ‘‘haircut,’’ because its face value cannot
vary. Similar adjustments are made for certain portions of an institution’s capital elements.21
General regulatory rules require a BHC to have a tier 1 capital
ratio of four percent, and a total (tier 1 plus tier 2) capital ratio
of eight percent of the holding company’s risk-weighted assets.22
b. Efforts to shore up bank capital under the TARP
The initial method chosen by Treasury to shore up bank capital
emphasized the direct transfer of TARP funds to BHCs in exchange
for preferred stock. A special change in banking regulations permits preferred stock purchased under the TARP to count as tier 1
capital.23 It does not, however, count as tier 1 common capital,
which the banking regulators are looking to bolster through the
stress tests.24
The first set of programs—the CPP, the Systemically Significant
Failing Institutions (SSFI) program, and the TIP—followed that
model. While the CPP was described as the ‘‘Healthy Banks Program,’’ it was in fact targeted at a broader range of banks. In contrast, the SSFI program and the TIP targeted institutions in financial distress.25
In February 2009, Secretary of the Treasury Geithner introduced
the CAP as a key component of the new Administration’s Financial
Stability Plan.26 The CAP has two fundamental components. The
CAP introduces a new, additional mechanism for Treasury to make
capital infusions. In exchange for capital injections through the
21 See

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12 CFR Part 225, at Appendix A III.C, Appendix E, Appendix G.
22 See 12 CFR Part 225, at Appendix A IV.A. BHCs are also required to maintain a leverage
ratio of three percent of tier 1 capital to total capital.
23 Board of Governors of the Federal Reserve System, Capital Adequacy Guidelines: Treatment
of Perpetual Preferred Stock Issued to the United States Treasury Under the Emergency Economic Stabilization Act of 2008, 74 Fed. Reg. 26081 (June 1, 2009) (final rule) (online at
edocket.access.gpo.gov/2009/pdf/E9–12628.pdf).
24 Board of Governors of the Federal Reserve System, The Supervisory Capital Assessment
Program: Overview of Results, at 2 (May 7, 2009) (online at www.federalreserve.gov/newsevents/
press/bcreg/bcreg20090507a1.pdf) (hereinafter ‘‘SCAP Results’’).
25 In addition to equity purchases, which are designed to shore up the capital position of troubled institutions, Treasury’s strategy includes programs that directly address the assets affecting bank balance sheets. One of the primary reasons banks are currently constrained in their
ability to lend to creditworthy borrowers is that they have a number of assets on their books
that have lost, or could lose, substantial value. In effect, they are conserving funds to cover
these losses (and thereby limiting the availability of credit in the economy). The Public-Private
Investment Program (PPIP) is basically designed to get these bad or ‘‘toxic’’ assets off the banks’’
balance sheets. Under the program, a number of investment funds will be created with a combination of TARP funds and private capital; these funds will then buy existing, bad assets from
banks. There will be two kinds of investment funds under PPIP: one backed by FDIC guarantees
that will purchase legacy loans; another that will be able to borrow from the Federal Reserve
Board in order to purchase legacy securities. The FDIC recently announced it would postpone
the implementation of the legacy loans program, and it is not yet clear when this program will
be put into effect. Federal Deposit Insurance Corporation, FDIC Statement on the Status of the
Legacy Loans Program (June 3, 2009) (online at www.fdic.gov/news/news/press/2009/
pr09084.html) (hereinafter ‘‘FDIC Loans Program Statement’’). Another part of Treasury’s strategy is the Term Asset-Backed Securities Loan Facility (TALF), a joint program between Treasury and the Federal Reserve Board. Through the TALF, the Federal Reserve Board provides
loans to investors that are secured by newly-issued, asset-backed securities (that are surrendered to the Federal Reserve Board if the borrower defaults). In case of default, Treasury buys
the surrendered securities from the Federal Reserve Board, in effect guaranteeing a certain
amount of losses the Federal Reserve Board potentially faces.
26 U.S. Department of the Treasury, Fact Sheet: Financial Stability Plan (online at
www.financialstability.gov/docs/fact-sheet.pdf) (accessed May 15, 2009) (hereinafter ‘‘Financial
Stability Plan Fact Sheet’’); U.S. Department of the Treasury, U.S. Treasury Releases Terms of
Capital Assistance Program (Feb. 25, 2009) (online at www.ustreas.gov/press/releases/tg40.htm).

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9
CPP, Treasury generally receives preferred stock and warrants to
purchase common stock. In exchange for capital injections through
the CAP, Treasury will receive mandatory convertible preferred securities (i.e., securities that the recipient bank can convert into
common equity), as well as warrants to buy additional common
stock of the institution receiving the infusion.27 Through conversion, recipient banks will be able to increase their tier 1 common
capital position as necessary if economic conditions deteriorate. The
ability to convert preferred stock to common equity is intended to
help institutions weather continued turbulence, but it also increases taxpayer risk without adding any new capital to the banks,
since the conversion is essentially a reorganization of a BHC’s capital structure moving the former preferred stockholders to a lower
priority of payment in the event the BHC is liquidated.
The other component of the CAP, and the basis upon which decisions regarding the need for capital infusions will be made, is the
stress tests under the SCAP. The stress tests are essential to the
CAP because they allow regulators to determine which institutions
may need additional capital over the next two year period and require the institutions that may need more capital to obtain that
capital now. Equally important, they increase the level and composition of the capital required, building banks’ capital buffers ‘‘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.’’ 28
The stated purpose of CPP infusions is to build up the capital
bases of BHCs so they can continue lending.29 CAP infusions are
specifically aimed at increasing capital buffers—in some cases beyond existing regulatory requirements—to safeguard against
worse-than-expected economic conditions.30 It is not yet clear, however, exactly how that more focused objective will affect Treasury’s
criteria for selecting recipients of infusions under the CAP.31 Nonetheless, what is clear is that Treasury is no longer applying the
same approach toward all BHCs (or at least those not in danger
of imminent collapse), as it did in its initial rounds of CPP infusions. Instead, Treasury is seeking to distinguish BHCs with weak
capital positions from BHCs with strong capital positions so that
it can tailor its actions accordingly.
The key to the CAP is the effort to measure bank capital,
through the stress tests, and then to shore up that capital before
more is needed. It is to the stress tests themselves that the report
now turns.

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27 Financial Stability Plan Fact Sheet, supra note 26, at 3. The issuance of warrants to purchase common stock in any financial institution receiving assistance under the TARP is required
by EESA, supra note 1, at 114(d).
28 CAP White Paper, supra note 2, at 1.
29 U.S. Department of the Treasury, Treasury Releases March Monthly Bank Lending Survey
(May 15, 2009) (online at www.treas.gov/press/releases/tg135.htm).
30 The bank supervisors will also require CAP applicants to submit a plan for how they intend
to use taxpayer funds. This requirement did not exist for CPP infusions.
31 The Panel has called on Treasury to be clearer about its criteria for selecting TARP recipients since its first report in December 2008. See Congressional Oversight Panel, Questions
About the $700 Billion Emergency Economic Stabilization Funds, at 4–8 (Dec. 10, 2008) (online
at cop.senate.gov/reports/library/report-121008-cop.cfm).

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B. THE STRESS TESTS
1. PURPOSE

According to the bank supervisors, and in some cases only after
very large infusions of capital by the U.S. taxpayer, most U.S.
banks now have capital levels in excess of the amounts required
under banking rules, though in the case of Citigroup and Bank of
America among others, only after large infusions of capital and
even larger asset guarantees from the federal government through
the TARP.32 Nonetheless, the realized and prospective losses created by the financial crisis and the impact of the country’s economic condition on banks’ revenues have substantially reduced,
and are expected to further reduce, the capital of some major
banks. Falling capital levels at major banks can lead to a broad
loss of confidence in bank solvency, particularly if there is a lack
of clear information as to the financial condition of the major
banks. Loss of confidence can become a self-fulfilling prophecy,
leading to the reluctance of banks to lend to one another (a key
component of the banking system’s operation), causing individual
banks to tighten credit by cutting back on lending in general, and
forcing regulators to pump funds into one bank or BHC after another on an ad hoc basis.
Treasury has described the stress testing program as a response
to these threats. First, it looks ahead, to build up bank capital in
advance to provide additional levels of protection against future potential losses. Second, by providing clear statements of the prospective condition of the BHCs tested—a departure from the past practice of keeping supervisory examination results strictly confidential—Treasury sought to restore confidence in the nation’s largest
banking organizations. Ultimately, stress testing has the potential
to: (1) establish confidence that BHCs with weaker capital positions
will be better equipped to weather future turbulence; and (2) signal
to the capital markets that some BHCs have strong capital positions.
2. THE ENTITIES TESTED

The SCAP applied exclusively to the 19 largest BHCs.33 Treasury
and the Federal Reserve Board state that they believe that those
institutions, which the agencies estimate hold approximately twothirds of domestic BHC assets and over one-half of the loans in the
U.S. banking system, must be strong if the ‘‘banking system [is] to
play its role in supporting a stronger, faster, and more sustainable
economic recovery.’’ 34 (The regulators have announced that they do

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32 Board of Governors of the Federal Reserve System, The Supervisory Capital Assessment: Design and Implementation, at 3 (Apr. 24, 2009) (online at www.federalreserve.gov/newsevents/
speech/bcreg20090424a1.pdf) (hereinafter ‘‘SCAP Design Report’’). Views that major U.S. banks
are not in fact well capitalized lie at the heart of disputes about the health of the nation’s financial system. These disputes are discussed further in Part H of Section One of this report.
33 Id. at 1.
34 SCAP Results, supra note 24, at 5; SCAP Design Report, supra note 32, at 4 (‘‘This capital
buffer should position the largest BHCs to continue to play their critical role as intermediaries,
even in a more challenging economic environment.’’). Among the BHCs subject to the stress tests
were several companies that had recently concluded significant mergers or acquisitions, including acquisitions of troubled institutions with the potential to impact the capital reserves of the
BHCs participating in the stress tests. This group included: (1) Bank of America, which acquired
Merrill Lynch in September 2008 and had purchased Countrywide Financial earlier last year;

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not intend to conduct stress tests for smaller BHCs, stating in joint
comments on the results of the stress tests that ‘‘smaller financial
institutions generally maintain capital levels, especially common
equity, well above regulatory capital standards.’’ Regulators should
nevertheless continue to closely monitor capital levels at the smaller institutions as part of the supervisory process, especially in light
of the failures of small banks that have already occurred.35)
While the majority of institutions to whom stress tests were applied are traditional BHCs, several others are not. Two of the largest ones, Goldman Sachs and Morgan Stanley, are investment
banking organizations that became BHCs in September 2008, at
the height of the financial crisis, in order to access the increased
capital that BHCs can obtain from the Federal Reserve Banks.
However, the primary activity of these companies remains investment rather than commercial banking.36 The credit card company
American Express and the former financial services arm of General
Motors, GMAC, also converted to BHCs for similar reasons in November and December of 2008, respectively, and qualified for the
stress tests based on their total assets at the end of 2008.37 In addition, the insurance company MetLife qualified as one of the largest BHCs, having become a BHC in 2001.38 Of course, by becoming
BHCs, these institutions subjected themselves to the more stringent capital requirements that apply to banks and to which they
were not previously subject.
The 19 BHCs taking part in the stress tests as part of the CAP
have already been the recipients of $217 billion in assistance
through various TARP programs. These include the CPP, and, in
the case of Citigroup and Bank of America, the TIP, and, in the
case of GMAC, the Automotive Industry Financing Program,39 although it should be noted that there are reports indicating that not
all of them actively sought such funds.40 (MetLife was the only
BHC that participated in the stress test that has not received
TARP aid.) In addition, Bank of America and Citigroup have received government guarantees on pools of their assets—totaling up
to $97.2 billion in the case of Bank of America and up to $244.8

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(2) JPMorgan Chase, which bought Bear Stearns and Washington Mutual; (3) Wells Fargo,
which currently holds Wachovia; and (4) PNC, which acquired National City Bank.
35 See Parts C and H of Section One of this report; Robert B. Albertson, Stress Test Consequences, Sandler O’Neill Partners (May 11, 2009) (online at www.sandleroneill.com/pdf/financialsl051109.pdf) (hereinafter ‘‘Stress Test Consequences’’). Fifty-one banks have failed since
September 2008. Federal Deposit Insurance Corporation, Failed Bank List (June 4, 2009) (online
at www.fdic.gov/bank/individual/failed/banklist.html).
36 Board of Governors of the Federal Reserve System, Press Release (Sept. 21, 2008) (online
at www.federalreserve.gov/newsevents/press/bcreg/20080921a.htm) (approving the applications
of Goldman Sachs and Morgan Stanley to become BHCs).
37 Board of Governors of the Federal Reserve System, Press Release (Nov. 10, 2008) (online
at www.federalreserve.gov/newsevents/press/orders/20081110a.htm) (approving the application
of American Express to become a BHC); Board of Governors of the Federal Reserve System,
Press Release (Dec. 24, 2008) (online at www.federalreserve.gov/newsevents/press/orders/
20081224a.htm) (approving the application of GMAC to become a BHC).
38 Board of Governors of the Federal Reserve System, Order Approving Formation of a Bank
Holding Company and Determination on a Financial Holding Company Election, at 7 (Feb. 12,
2001) (online at www.federalreserve.gov/boarddocs/press/BHC/2001/20010212/attachment.pdf).
39 See June 5 TARP Transactions Report, supra note 13. See also Part J of Section Two of
this report.
40 See, e.g., Damian Paletta, et al., At Moment of Truth, U.S. Forced Big Bankers to Blink,
Wall
Street
Journal
(Oct.
15,
2008)
(online
at
online.wsj.com/article/
SB122402486344034247.html).

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12
billion for Citigroup.41 A significant share of the preferred stock
that Treasury purchased in Citigroup is expected to be converted
to common equity in order to strengthen that company’s capital
structure.42
3. HOW THE STRESS TESTS WORKED

a. Overview
The stress tests first estimated the losses that the 19 BHCs
would likely suffer between now and the end of 2010 based on specified economic assumptions, resulting from:
• debtors defaulting on loans the BHCs had made to them;
• decreases in value in the securities the BHCs held as investments;
• (for the BHCs with large securities trading businesses)
losses on the trading of securities; 43 and
• the impact of revenues of falling transactional volume on
a fixed cost base, such as in the credit card market.
The tests then projected how much capital each BHC would have
after absorbing the estimated losses, at the end of 2010. It was at
this point that the supervisors determined the need for a capital
buffer. If the test resulted in tier 1 capital being less than six percent of risk-weighted assets, or tier 1 common capital being less
than four percent for a particular institution, that institution was
required to obtain additional capital by November 2009.44
The process builds on existing regulatory and accounting requirements 45 and does not introduce new measures of risk or change
the way banks’ risk is measured. The tests were affected only to
a limited extent by new accounting rules. Recent accounting guidance that allows more flexibility in calculating the value of securi-

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41 U.S. Department of the Treasury, Summary of Terms: Eligible Asset Guarantee (Jan. 15,
2009) (online at www.treas.gov/press/releases/reports/011508bofatermsheet.pdf) (hereinafter
‘‘Bank of America Asset Guarantee’’) (granting a $118 billion pool of Bank of America assets
a 90 percent federal guarantee of all losses over $10 billion, the first $10 billion in federal liability to be split 75/25 between Treasury and the FDIC and the remaining federal liability to be
borne by the Federal Reserve Board); U.S. Department of the Treasury, Summary of Terms: Eligible Asset Guarantee (Nov. 23, 2008) (online at www.treasury.gov/press/releases/reports/
cititermsheetl112308.pdf) (hereinafter ‘‘Citigroup Asset Guarantee’’) (granting a 90 percent federal guarantee on all losses over $29 billion of a $306 billion pool of Citigroup assets, with the
first $5 billion of the cost of the guarantee borne by Treasury, the next $10 billion by FDIC,
and the remainder by the Federal Reserve Board). See also U.S. Department of the Treasury,
U.S. Government Finalizes Terms of Citi Guarantee Announced in November (Jan. 16, 2009) (online at www.treas.gov/press/releases/hp1358.htm) (hereinafter ‘‘Final Citi Guarantee Terms’’)
(reducing the size of the asset pool from $306 billion to $301 billion).
42 U.S. Department of the Treasury, Treasury Announces Participation in Citigroup’s Exchange
Offering (Feb. 27, 2009) (online at www.financialstability.gov/latest/tg41.html).
43 These calculations included (under accepted accounting rules) the results of other entities
and businesses that the BHCs had recently acquired.
44 U.S. Department of the Treasury, Joint Statement by Secretary of the Treasury Timothy F.
Geithner, Chairman of the Board of Governors of the Federal Reserve System Ben S. Bernanke,
Chairman of the Federal Deposit Insurance Corporation Sheila Bair, and Comptroller of the Currency John C. Dugan: The Treasury Capital Assistance Program and the Supervisory Capital Assessment Program (May 6, 2009) (online at www.ustreas.gov/press/releases/tg121.htm). The various general components of capital are described supra.
45 This issue is discussed supra in Part A of Section One of this report. See also 12 CFR Part
225, at Appendix E § 4(b)(3).

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13
ties portfolios 46 was not taken into account in estimating losses. 47
On the other hand, accounting rules not yet in effect that will require off-balance sheet assets (such as special-purpose vehicles
formed to securitize banks’ assets) to be brought onto banks’ balance sheets were treated as already in effect, resulting in a more
conservative calculation.48
In estimating the losses, the banking supervisors took a ‘‘horizontal’’ approach, with specialized teams of personnel assessing
losses with respect to the same asset classes across all institutions,
in order to ensure that comparable assets were valued the same
way (or that differences were consistently and rationally applied)
for each BHC.49
b. Economic assumptions
The process used two sets of economic assumptions to create the
scenarios against which BHCs were ‘‘stress tested.’’ These were: a
‘‘baseline’’ scenario that assumed that economic conditions during
2009 and 2010 would follow the February 2009 ‘‘consensus estimate’’ of those conditions and a ‘‘more adverse’’ scenario that assumed that those conditions would be worse.
The two scenarios used different assumptions for the following
macroeconomic metrics: real Gross Domestic Product (GDP)
growth, unemployment rate, and housing price changes.
FIGURE 1: ECONOMIC SCENARIOS: BASELINE AND MORE ADVERSE ALTERNATIVES 50
2009

Real GDP Growth:
Average baseline 51 ..........................................................................................................................
Consensus Forecasts ..............................................................................................................
Blue Chip ................................................................................................................................
Survey of Professional Forecasters .........................................................................................
Alternative more adverse .................................................................................................................
Civilian unemployment rate: 52
Average baseline .............................................................................................................................
Consensus forecasts ...............................................................................................................
Blue Chip ................................................................................................................................
Survey of Professional Forecasters .........................................................................................
Alternative more adverse .................................................................................................................
House Prices: 53
Baseline ...........................................................................................................................................
Alternative more adverse .................................................................................................................

2010

¥2.0
¥2.1
¥1.9
¥2.0
¥3.3

¥2.1
2.0
2.1
2.2
0.5

8.4
8.4
8.3
8.4
8.9

8.8
9.0
8.7
8.8
10.3

¥14
¥22

¥4
¥7

50 SCAP Design Report, supra note 32, at
51 Baseline forecasts for real GDP growth

6.
and the unemployment rate equal the average of the projections released by Consensus Forecasts,
Blue Chip, and Survey of Professional Forecasters in February.

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46 Financial Accounting Standards Board, Determining Fair Value When the Volume and Level
of Activity for the Assets or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly (Apr. 9, 2009) (FSP FAS 157–4) (online at www.fasb.org/cs/BlobServer
?blobcol=urldata
&blobtable=MungoBlobs
&blobkey=id&blobwhere=
1175818748755
&blobheader= application%2Fpdf) (hereinafter ‘‘FASB Fair Value Staff Position’’); Financial Accounting Standards Board, Recognition and Presentation of Other-Than-Temporary Impairments
(Apr. 9, 2009) (FSP FAS 115–2 and FAS 124–2) (online at www.fasb.org /cs/BlobServer
?blobcol=urldata
&blobtable=
MungoBlobs&blobkey=
id&blobwhere=
1175818748856
&blobheader= application%2Fpdf).
47 The accounting guidance did affect the reduction in estimated capital required for those
BHCs whose first quarter performance exceeded original estimates, but the aggregate impact
of the accounting change appears to be limited. See further discussion later in this report, infra
note 79.
48 Financial Accounting Standards Board, Briefing Document: FASB Statement 140 and FIN
46 (May 18, 2009) (online at www.fasb.org/news/ 051809lfas140l andl fin46r.shtml); SCAP
Results, supra note 24, at 16.
49 Id. at 4.

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14
52 Unemployment data is collected monthly; the rates used here are projected averages for the year.
53 Percent change in the Case-Shiller 10-City Composite index from the fourth quarter of the previous year to the fourth quarter of the year
indicated.

As noted above, the baseline scenario was based on consensus
economic forecasts available in February 2009, and the adverse scenario was projected from that baseline. As further discussed below,
there was some criticism that both sets of assumptions were too optimistic at the time, and there was additional criticism when the
economy deteriorated further after the SCAP exercise began.54 The
final SCAP results were primarily reported on the basis of the
‘‘more adverse’’ scenario. While the Federal Reserve Board’s paper
on the methodology of the SCAP states that ‘‘[p]rojections under
two alternative scenarios allow for analysis of the sensitivity of a
firm’s business to changes in economic conditions,’’ 55 it is not clear
whether, with only one set of data, there is sufficient information
for analysts to run their own models based on alternative macroeconomic assumptions.
While the stress tests assumed stronger BHC future earnings
than the International Monetary Fund (IMF) has projected, the
tests adopted loan loss assumptions that were more conservative
than those used in the IMF model.56 The differences between various projections are summarized in Figure 2.
FIGURE 2: ALTERNATIVE ECONOMIC ASSUMPTIONS
Baseline
Metric

2009

GDP Growth ......................
Unemployment .................

IMF projections 57

More adverse
2010

¥2.0
8.4

2009

2.1
8.8

2010

¥3.3
8.9

0.5
10.3

2009

¥2.8
8.9

2010

Current data 58
(Most recent)

¥5.7 59
9.4 60

0.0
10.1

57 International Monetary Fund, World Economic Outlook: Crisis and Recovery, at 65 (Apr. 2009) (online at www.imf.org/external/pubs/ft/weo/
2009/01/pdf/text.pdf).
58 Because the baseline and adverse scenarios are projected as annual averages, they are not directly comparable to monthly or quarterly
data.
59 First quarter 2009, percent change from preceding quarter in chained 2000 dollars (preliminary figure). U.S. Department of Commerce,
Bureau of Economic Analysis, Gross Domestic Product, 1st quarter 2009 (preliminary) (May 29, 2009) (online at www.bea.gov/newsreleases/national/gdp/2009/gdp109p.htm) (hereinafter ‘‘Gross Domestic Product’’). This figure is up from the 6.3 percent decline in the fourth quarter of
2008. Id.
60 U.S. Department of Labor, Bureau of Labor Statistics, The Employment Situation: May 2009 (June 5, 2009) (USDL 09–0588) (online at
www.bls.gov/news.release/pdf/empsit.pdf) (hereinafter ‘‘Employment Situation’’). This figure is the unemployment rate through April 2009, the
last month for which data is available. The year-to-date average unemployment rate stands at 8.5 percent. See id. at 10.

The stress-tested BHCs were told to adapt the scenarios’ macroeconomic assumptions to their specific business activities when projecting their own losses and resources over 2009 and 2010. This
process included adapting assumptions for housing price changes to
account for local conditions, and, where the BHCs had international operations, adjusting the assumption that international
conditions would be as bad as those assumed for the United States.

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54 See, e.g., Ari Levy. ‘Stress Testing’ for U.S. Banking Industry May Not Live Up to Name,
Bloomberg (Feb. 26, 2009) (online at www.bloomberg. com/apps/news?pid=20601110&sid
=a.DoUvyCa0cE); John W. Schoen, Bank ‘Stress Test’ Draws Fire From Critics, MSNBC (Apr.
24, 2009) (online at www.msnbc.msn.com/id/30368110); Nouriel Roubini, Stress Testing the
Stress Test Scenarios: Actual Macro Data Are Already Worse than the More Adverse Scenario
for 2009 in the Stress Tests. So the Stress Tests Fail the Basic Criterion of Reality Check Even
Before They Are Concluded (Apr. 13, 2009) (online at www.rgemonitor.com/roubinil monitor/
256382/stressl testingl thel stressl testl scenariosl actuall macrol datal arel alreadyl worsel thanl thel morel adversel scenariol forl 2009l inl thel stressl
testsl sol thel stressl testsl faill thel basicl criterionl ofl realityl checkl evenl
beforel theyl arel concluded). See also Part H of Section One of this report.
55 SCAP Design Report, supra note 32, at 5.
56 See generally Douglas J. Elliot, Implications of the Bank Stress Tests, Brookings Institution,
at 8–9 (May 11, 2009) (online at brookings.edu//media/Files/rc/papers/2009/0511l bankl
stressl testsl elliott/0511l bankl stressl testsl elliott.pdf).

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In making these adaptations, the institutions were encouraged to
make additional appropriate assumptions of macroeconomic conditions based on the three governing metrics, and several BHCs developed their own assumptions as to interest rates, yield curves,
etc.
c. Loan loss projections
The BHCs were instructed by the supervisors to estimate losses
from failure to pay obligations through the end of 2012 for 12 separate loan categories,61 based on the value of the loans shown on the
BHCs’ books at the end of 2008. Accounting and banking rules require that banks carry loans on their books at their unpaid principal amount, reduced by a percentage reflecting the credit history
of the borrower and the general risk of nonpayment for loans of the
particular type. The remaining principal amount, less these provisions, is the amount that a BHC shows as assets on its balance
sheet. Loans are not ‘‘marked-to-market,’’ that is, they are not revalued by estimating what a BHC could receive for those loans if
it sold them. Thus, the losses the BHCs were required to estimate
were losses arising from borrowers’ failure to pay their obligations,
not losses arising from a drop in market value of existing loans,
and the use of a different valuation method for these loans might
have resulted in a rather different estimate of the required capital
buffer.62
With respect to this method of valuation of loans, see commentary in the Panel’s April Oversight Report:
Treasury has not explained its assumption that the
proper values for these assets are their book values—in
the case, for example, of land or whole mortgages—and
more than their ‘‘mark-to-market’’ value in the case of
ABSs, CDOs, and like securities; if values fall below those
floors, the banks involved may be insolvent in any event.63
In assessing their loan losses, the BHCs were told to add to their
loan inventory potential additional loans that could result from the
drawing down of existing credit lines by borrowers, and to add to
their balance sheets liabilities held in ‘‘special purpose vehicles’’
(SPVs) that had previously been excluded from capital calculations
and that might have to be taken back onto the balance sheets in
a stressed economic environment or due to accounting changes.64
It should be noted that the unanticipated on-boarding of off-balance
sheet assets played a significant role in the current financial crisis,65 and with consumer defaults rising, on-boarding SPVs might
be expected to account for a large proportion of estimated losses.

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61 These categories were: first lien (1) prime, (2) Alt-A, and (3) subprime mortgages; (4) closedend junior liens; (5) home equity lines of credit; (6) commercial & industrial loans; commercial
real estate (7) construction, (8) multifamily, and (9) non-farm, non residential loans; (10) credit
card loans; (11) other consumer loans; and (12) other loans. SCAP Design Report, supra note
32, at 18.
62 See Part H of Section One of this report.
63 Congressional Oversight Panel, April Oversight Report: Assessing Treasury’s Strategy: Six
Months of TARP, at 75 (Apr. 7, 2009) (online at cop.senate.gov/reports/library/report-040709cop.cfm) (hereinafter ‘‘Panel April Oversight Report’’).
64 SCAP Results, supra note 24.
65 See, e.g. Citigroup Inc., Citigroup’s 2008 Annual Report on Form 10–K, at 6–18 (online at
www.citigroup.com/citi/fin/data/k08c.pdf?ieNocache=677).

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The proportion of estimated losses due to on-boarding SPVs was
not disclosed by the supervisors.
Against this expanded loan inventory, BHCs were required to estimate their losses in each of the 12 loan categories under both scenarios. The banking supervisors provided the BHCs with a range
of indicative two-year cumulative loss rates for each category and
each scenario to guide their projections. For example, the supervisors provided an indicative loan loss rate of 7–8.5 percent for first
lien mortgages in the more adverse scenario. The BHCs adapted
this guidance to their particular situations to estimate the loan
losses they would suffer in each category of loans under each scenario. These estimates were provided to supervisors. In addition,
the BHCs were required to provide granular data about the particular characteristics of their portfolios (such as underwriting
practices, FICO scores and refreshed LTV information) so that the
supervisors could assess the reasonableness of the BHCs’ loan loss
estimates. BHCs were permitted to predict loss rates outside the
indicative ranges if they could provide strong supporting evidence
for the deviation, especially if their loan loss estimate fell below the
range minimum. Therefore, in certain categories and scenarios
some BHCs estimated that their loan loss rates would be above the
indicative range, while others ended up making estimates that fell
below the range.
Using the data presented by the BHCs, the supervisors made
their own estimates of loan losses on an asset-class-by-asset-class
basis, comparing loss projections for similar asset classes across institutions so that, for example, losses with respect to subprime
loans in a particular area originated in a particular period would
be estimated at the same rate for different BHCs, even if those
BHCs’ own estimates differed. Therefore, a divergence in loss rates
between BHCs in a given category of loans should indicate differences in portfolios, not differences in the BHCs’ own estimates.
Each BHC’s loss estimates ultimately relied on portfolio-specific
data regarding past performance, origination year, borrower characteristics and geographic distribution. These differences led to significant variation between BHCs in the ultimate loan loss estimates used by supervisors. For example, Capital One’s estimated
loss rate for first lien mortgages was 10.7 percent and BB&T Corporation’s rate was 4.5 percent.66
d. Projections of losses on securities
The BHCs were also required to estimate the losses that their securities portfolios would suffer through 2010 under both economic
scenarios.
The way securities are valued on a BHC’s balance sheet differs
from the way loans are treated and depends on what the BHC intends to do with those securities. Securities may be categorized as:
(1) ‘‘held to maturity’’ (HTM); (2) trading, that is, held for sale in
the near future; or (3) ‘‘available for sale’’ (AFS). Securities held to
maturity are carried on the BHC’s balance sheet at ‘‘amortized’’
cost (roughly, principal minus repayments), with that value further
reduced if the value of the security is considered subject to ‘‘other

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66 SCAP

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17
than temporary impairment’’ (OTTI). Securities available for sale
or in the trading portfolio are carried at ‘‘fair value,’’ which means
market value if there is a trading market for them, or at a value
estimated by the BHC if there is not.67
All 19 BHCs were instructed to estimate possible impairment
with respect to net unrealized losses on securities that they categorized as held to maturity and securities that they classified as
available for sale under both scenarios. For this analysis, securities
carried at fair value were marked to market as of December 31,
2008. Since a loss from impairment when a security is marked
down is recorded on the BHC’s income statement as a charge to income, the BHCs were also told to estimate the decrease in income
that would result from these devaluations.68
The recent FASB guidance on establishing ‘‘fair value’’ in illiquid
markets, which gave BHCs greater flexibility in valuing securities,
was not taken into account in estimating losses under the more adverse scenario in order to reflect greater uncertainty about realizable losses in stressful conditions.69 (The FASB guidance was
taken into account in estimating losses in the baseline scenario,
but the baseline scenario results were not published.) 70
BHCs with trading securities of $100 billion or more—Bank of
America, Citigroup, Goldman Sachs, JP Morgan Chase, and Morgan Stanley—were asked to provide projections of trading-related
losses for the more adverse scenario, including losses from their
‘‘counterparty’’ exposure risk with regard to credit default swap
and similar transactions. To calculate these losses, the BHCs conducted a stress test of their trading book positions and
counterparty exposures as of market close on February 20, 2009.
BHCs were told to disclose the positions that they included in this
analysis, the risk factors that were stressed, and the changes in

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67 ‘‘Fair value’’ is established in accordance with accounting rules. Where there is a market
for the securities, that market value is used. Where the market is illiquid, the rules permit the
owner to use other inputs to establish a price for its securities, taking into account current market pricing and conditions. In the recent market turmoil, the need to take market conditions
into account in creating valuation models for their securities meant that some institutions had
to realize significant losses on their portfolios of securities such as mortgage-backed ABSs, even
though those securities were still continuing to generate cash flow. In response to this situation,
the accounting authorities released guidance in April 2009, that permitted more flexibility in
the valuation of securities for which there was no liquid market. FASB Fair Value Staff Position, supra note 46. This guidance applied to financial statements for periods after June 15,
2009, with an early-adoption provision for periods ending no earlier than March 15, 2009. Thus,
the BHCs’ financial statements for the year ending December 31, 2008, were not affected by
the April FASB guidance.
68 SCAP Design Report, supra note 32, at 8. In deciding which securities should be treated
as having suffered an OTTI and thus need to be revalued at fair value as of December 31, 2008,
the supervisors took a conservative approach in the more adverse scenario, in that BHCs were
required to take into account the possibility that in adverse economic conditions they might not
be able to hold all their HTM securities until they matured, and may need to sell them before
recovery of their cost basis. The total impact of this requirement was small, as most HTM securities in the BHCs’ portfolios were low-risk Treasury securities and the like, but this approach
illustrates the conservative approach taken by the supervisors.
69 Critics have argued that the principal effect of the FASB rule change would be to allow
BHCs to simply avoid recording decreases in the value of their assets, undermining investor confidence and perhaps prolonging the crisis. See, e.g., House Committee on Financial Services,
Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, Testimony of Executive Director of the Center for Audit Quality Cynthia Fornelli, Mark-to-Market
Accounting: Problems and Implications, 111th Cong. (Mar. 12, 2009) (online at www.house.gov/
apps/list/hearing/financialsvcsldem/fornelli031209.pdf). In other words, the rule change may
allow BHCs that are actually insolvent to continue operating, a situation analogous to Japan’s
elimination of mark-to-market accounting early in its so-called ‘‘Lost Decade.’’ Id. However, this
debate largely turns on the question of whether the fundamental problem facing the financial
system is one of liquidity or valuation.
70 SCAP Design Report, supra note 32, at 14.

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variables that they used (such as changes in interest rates,
spreads, exchange rates, etc.).71
As with estimates of loan losses, the supervisors made their ultimate estimates of losses from securities portfolios using the estimates provided by the BHCs and applying ‘‘horizontal testing’’
across asset classes to ensure consistency.
e. Resources available to absorb losses
In addition to drawing on their capital, banks can absorb losses
with offsetting income and loss reserves set up precisely for that
purpose. The tests ‘‘stressed’’ both items.
The BHCs were instructed to project the main components of
their ‘‘pre-provision net revenue’’ (PPNR), which is net interest income plus non-interest income minus non-interest expense, under
both economic scenarios. The stress test review required BHCs to
explain in detail the assumptions they made in computing PPNR,
especially if those assumptions included an increase in business,
and any projections in excess of 2008 levels required strong supporting evidence.
A bank sets aside reserves in a current period to absorb anticipated future loan losses so that those losses do not affect overall
capital in the future period. The BHCs were instructed to estimate
the resources they would have available to absorb projected losses.
This would include the revenue that they earned in 2009 and 2010,
the reserves that they had set aside for losses at the end of 2008,
and any additions to those reserves projected to be made during
2009 and 2010. They were then asked to estimate the portion of
the year-end 2008 reserves that they would need to absorb credit
losses on their loan portfolio under each scenario while still ending
up on December 31, 2010, with sufficient reserves in light of their
loan portfolio on that date to absorb future losses at an elevated
(that is, stressed) rate. To the extent additional reserves would
likely be needed, income available to absorb losses (i.e., PPNR) was
reduced accordingly.
f. Adjustments
At the end of the first stage of the stress testing, the supervisors
translated the gains and losses they projected for each BHC into
changes in that BHC’s projected capital levels.
These amounts were first calculated on the basis of the BHCs’
results to December 31, 2008. As discussed in more detail below,
the initial results suggested that the aggregate capital needed for
the 19 BHCs to reach capital buffer targets in the more adverse
scenario would be $185 billion, ‘‘much of which’’ would have to be
in the form of tier 1 common capital.72

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71 The estimates of losses took into account the severe market stresses that occurred between
June 30, 2008 and December 31, 2008. This process goes beyond usual mark-to-market rules
and, in requiring the use of data from the most stressed markets in recent decades, might be
termed ‘‘mark to mayhem.’’
72 The summary of SCAP results does not specify the amounts of tier 1 common and other
tier 1 capital that comprise each holding company’s required buffer. The release says simply
that:
[c]apital needs are mainly in the form of tier 1 common capital, which reflects the fact that
while many institutions have a sufficient amount of capital, they need to take steps to improve
the quality of that capital . . . For ten of the participating BHCs, supervisors expect these
firms to raise additional capital or change the composition of their capital. As noted above, much

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The final calculation of the capital buffers reflected the effects of
acquisitions, new capital raised, and operating performance in the
first three months of 2009. These adjustments were substantial,
and reflected actions taken by some BHCs prior to the conclusion
of the stress tests to raise capital by selling subsidiaries or businesses, converting preferred stock into common stock or issuing
common shares, and, to a lesser extent, strong operating results
generated by some BHCs during the first quarter.73 Where a
BHC’s first quarter performance exceeded the supervisors’ estimate
of PPNR for that period, the amount by which it exceeded estimates was added to the estimate of resources available to absorb
losses, thus decreasing the required capital buffer.74 The impact of
‘‘Capital Actions and Effects of Q1 Results’’ is presented on a net
basis for each BHC, so it is not possible to see the specific effect
of each of these actions or results on a BHC’s capital or even
whether a particular BHC experienced an adjustment because of
its operating results.75 For the 19 BHCs, the total impact of Q1
2009 adjustments was to reduce the capital buffer needed by $110
billion, $87.1 billion of which was attributable to Citigroup, Inc.76
The adjustments for the additional three months reflects certain
accounting changes adopted in April 2009, to provide flexibility as
to the ‘‘fair value’’ that must be assigned to securities for which no
liquid market exists (for example, asset-backed securities for which
there is no market, or over-the-counter credit default swaps). Seven
BHCs adopted these accounting changes for their first quarter financial statements.77 Some securities that those BHCs had been
carrying on their books at ‘‘fair value’’ were revalued at a higher
price in light of the accounting changes, and the increase in these
values was recognized as income. On the other hand, some liabilities of those BHCs were also revalued as a result of the accounting
change, and the increase in these liabilities decreased the BHCs’
income. Where a BHC’s income for the first quarter of 2009 exceeded the supervisors’ original estimates for its revenues, as discussed
above,78 these revaluation-related increases (or decreases) would
have decreased (or increased) the amount of the capital buffer required. It is not possible to quantify the impact of these changes
on the basis of the information published, however. Because adjustments to the required capital buffer resulting from first quarter
performance are presented on a net basis, reflecting both revenues
and capital actions, it is not possible to identify which BHCs had
their buffer requirement reduced due to first quarter performance,
and thus whether any members of that group of BHCs adopted the
accounting guidance. It appears that the maximum possible impact

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of this need is for additional tier 1 common. For all of these firms, a raise of new common equity
of the amount indicated would be sufficient to ensure they will also have at least a six percent
tier 1 ratio at the end of 2010.
SCAP Results, supra note 24, at 16, 17.
73 Federal Reserve Board officials have informed Panel staff that the aggregate impact of all
first quarter 2009 PPNR on the required capital buffer was only $20 billion.
74 Id.
75 See Part H of Section One of this report.
76 This issue is discussed infra in Part B of Section One of this report.
77 These BHCs are: Bank of America, Bank of New York Mellon, Citigroup, JPMorgan Chase,
PNC, U.S. Bancorp, and Wells Fargo. The 19 BHCs tested report to the Securities and Exchange
Commission (SEC) and thus their financial statements are publicly available.
78 This issue is discussed infra in Part B of Section One of this report.

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20
of the accounting changes on required capital buffers would have
been approximately $5.6 billion.79
While several BHCs published income statements for the first
quarter of 2009 that included as revenue credit value adjustments
(CVA) resulting from the revaluation of their own debt, this ephemeral ‘‘revenue’’ was not included in the calculation of the PPNR
available to absorb losses.80
g. Calculation of the SCAP buffer
After making the adjustments just described, the supervisors
computed the additional amount, if any, required so that the BHCs
would reach the capital buffer ratio of six percent tier 1 capital and
four percent tier 1 common capital. The computation began with
measures of these capital elements at December 31, 2008, calculated in accordance with Federal Reserve Board rules.81 Using
the loss and revenue estimates discussed above, the supervisors
calculated the necessary capital buffer. In doing so, they examined
a range of capital metrics and factors, including tier 1 common and
overall capital, and including the composition of capital. The initial
assessment of capital need (relating to the BHCs’ capital position
as of December 31, 2008) was communicated to the BHCs in late
April.
As discussed below, Treasury released the results of the stress
tests on May 7, 2009. The reason for the time lag between communication to the banks and release of the results publicly may have
been due to the need to check for errors, omissions, and double
counting, but the Panel has not had access to documents that
would establish this fact. Nor is it possible to tell whether, or to
what extent, the numbers communicated to the banks in late April
differed from those released publicly.
4. RESULTS OF THE STRESS TESTS

On May 7, 2009, Treasury released the results of the stress
tests.82 (The results released dealt only with the impact of the
‘‘more adverse’’ economic scenario, not the baseline scenario.) Those
results showed that ten of the 19 BHCs required additional capital
to weather a ‘‘more adverse’’ economic scenario and that nine of the
19 BHCs already held a sufficient capital buffer and would not be
required to raise additional capital as a result of the stress test.83

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79 Based on SEC filings by the BHCs, which do not present such data in a standardized form,
the possible aggregate impact on required capital buffer ranges from an increase of approximately $240 million (if only the BHCs that recognized losses resulting from the accounting
change were allowed adjustments due to first quarter performance) to a decrease of approximately $5.6 billion (if only the BHCs that recognized income from accounting changes were allowed such adjustments. Of the latter figure, approximately $5 billion relates to Wells Fargo
alone. It should be noted that because the FASB guidance was not taken into account in estimating losses under the more adverse scenario (which was the only scenario for which results
were reported), the impact of the FASB guidance is limited to this measure alone (the increased
resources available to absorb losses) and only to the BHCs whose PPNR for the first quarter
of 2009 exceeded the supervisors’ estimates.
80 Revenue from such CVAs is routinely excluded from the calculation of tier 1 capital. See
generally 12 CFR part 225, at Appendix A § II.
81 This calculation starts with shareholders’ capital adjusted to remove certain accounting adjustments that may obscure the true value of shareholder equity. See 12 CFR part 225, Appendix A § II.
82 SCAP Results, supra note 24.
83 These nine banks are American Express, BB&T, Bank of New York Mellon, Capital One,
Goldman Sachs, J.P. Morgan Chase, MetLife, State Street, and USB.

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The results estimated that in aggregate the 19 BHCs included in
the SCAP would incur approximately $600 billion of additional
losses by the end of 2010.84 Residential mortgage and consumer
loans accounted for $322 billion, or 53.7 percent, of this $600 billion.85
The ten BHCs requiring capital are: Bank of America ($33.9 billion), Citigroup ($5.5 billion), Fifth Third Bancorp ($1.1 billion),
GMAC ($11.5 billion), KeyCorp ($1.8 billion), Morgan Stanley ($1.8
billion), PNC ($600 million), Regions Financial Corporation ($2.5
billion), SunTrust ($2.2 billion), and Wells Fargo & Company
($13.7 billion).86 These BHCs must raise the capital by November
9, 2009, six months after the announcement of the test results, and
they must submit a capital plan to their supervisors in early June
outlining how they will do so.
The supervisors broke BHCs’ assets into categories, or ‘‘buckets,’’
and disclosed the BHCs’ estimated losses for each bucket. Besides
first lien mortgages, the other buckets were second/junior lien
mortgages, commercial and industrial loans, commercial real estate
loans, credit card loans, securities (AFS and HTM), trading and
counterparty, and other, which included ‘‘other consumer and nonconsumer loans and miscellaneous commitments and obligations.’’ 87
Loss estimates within each bucket varied significantly between
the BHCs. For example, as noted above, BB&T’s estimated loss
rate on first lien mortgages through the end of 2010 was 4.5 percent, while Capital One was estimated to have a 10.7 percent loss
rate. This translated into an estimated loss for BB&T on first lien
mortgages of $1.1 billion, while Capital One was estimated to have
a $1.8 billion loss on its first lien book.88 The median loss rate on
first lien mortgages for all 19 participants was eight percent.89 The
Federal Reserve Board explained that such variations reflected
‘‘substantial differences in the portfolios across the BHCs, by borrower characteristics such as FICO scores, and loan characteristics
such as loan-to-value ratio, year of origination, and geography.’’ 90
An element of judgment was necessary in determining these loss
rates. It allowed the testing, for example, to reflect local conditions
with greater accuracy. However, because of the judgment involved,
the calculations cannot be reviewed or replicated. This diminishes
the reliability of the tests and the confidence that the public is able
to place in them.
The original testing measured capital levels as of the end of
2008. Since that time, a number of BHCs have taken steps that
have increased their capital, and thus, as discussed above, decreased the amount of capital buffer that they must raise. As of the
end of 2008, the 19 BHCs would have had to have raised a total

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84 SCAP Results, supra note 24, at 3. This $600 billion is in addition to losses recorded on
the banks’ balance sheets in the six quarters ending December 31, 2008.
85 SCAP Results, supra note 24, at 6.
86 SCAP Results, supra note 24, at 9.
87 SCAP Results, supra note 24, at 10. The BHCs expected losses were actually calculated
more granularly. The supervisors estimated BHC loan losses for 12 categories of loans and multiple categories of securities. The eight buckets that were disclosed were netted figures for some
of these smaller categories.
88 SCAP Results, supra note 24, at 9.
89 SCAP Results, supra note 24, at 10.
90 SCAP Results, supra note 24, at 10.

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22
of $185 billion in capital. As a result of capital actions and the results of Q1 2009 results, this figure decreased by $110.4 billion, to
a total of $74.6 billion.91 By far the largest portion of this decrease
is attributable to Citigroup, whose required capital buffer was reduced from $92.6 billion to $5.5 billion.92 The most important factor in the abrupt change in Citigroup’s adjustment was a $58.1 billion preferred stock exchange offer announced on February 27,
2009. This exchange offer involves conversion of up to $27.5 billion
in Citigroup preferred stock held by Treasury into Citigroup common stock 93 (increasing Treasury’s ownership in Citigroup to 36
percent).94 It also includes two pending sales of operating subsidiaries of Citigroup. In addition, Citigroup has sold a Japanese subsidiary 95 and announced a brokerage venture for Salomon Smith
Barney, for which Citigroup will book a gain.96
This unprecedented exercise reported that nine of the top 19
BHCs were adequately capitalized to withstand a serious downturn
in the economy over the next two years. It further reported to the
remaining banks a quantifiable amount of capital that they needed
to raise to remain well capitalized during this potential downturn.
C. IMMEDIATE IMPACT

OF THE

STRESS TESTS

The stress tests appeared to have an immediate impact on financial markets and public confidence.97
As soon as the results of the stress tests were announced, the
BHCs began raising capital to meet shortfalls. The 19 BHCs have
raised or publicly announced plans for raising $48.2 billion in new
debt and equity. Treasury has claimed that, in total, $56 billion in
capital-raising was planned as of May 20.98 Debt and equity
91 SCAP

Results, supra note 24, at 9.
Results, supra note 24, at 9.
Results, supra note 24, at 9; Citigroup Inc., Form 8–K (Feb. 27, 2009) (online at
www.sec.gov/Archives/edgar/data/831001/000095010309000421/dp12698l8k.htm).
94 Citigroup Inc., Citi To Exchange Preferred Securities for Common, Increasing Tangible Common Equity to as Much as $81 Billion (Feb. 27, 2009) (online at www.sec.gov/Archives/edgar/
data/831001/000095010309000421/dp12698lex9901.htm). Citigroup did not receive any additional government funds as the result of the conversion.
951A Citigroup Inc., Form 8–K (May 1, 2009) (online at www.sec.gov/Archives/edgar/data/
831001/000095014209000583/form8kl050109.htm).
96 Citigroup Inc., Morgan Stanley and Citi To Form Industry-Leading Wealth Management
Business Through Joint Venture (Jan. 13, 2009) (online at www.sec.gov/Archives/edgar/data/
831001/000095010309000089/dp12289lex9901.htm).
97 Various measures show the impact of the tests on the markets. CDS prices show that the
price of protecting against default in the large banks fell after the results of the tests were released. Alistair Barr and Ronald D. Orol, B. of A., Citi are Stress-Test Winners, CDS Prices Suggest, MarketWatch (May 8, 2009) (online at www.marketwatch.com/story/b-of-a-citi-are-stresstest-winners-group-says?dist=TQPlModlmktwN) (‘‘The cost of protecting against a default by
Citigroup and Bank of America dropped by more than a third this week, as news of the stresstest results leaked out, according to Credit Derivatives Research. The cost of default protection
on other banks and investment banks, including Morgan Stanley and Goldman Sachs has also
fallen a lot this week, the research firm said.’’). Short interest in the 19 banks fell by 20 percent
from May 7, 2009 through May 29, 2009. DataExplorers, Update: Stress Test for US Financials
(May
29,
2009)
(online
at
dataexplorers.com/sites/default/files/
Sector%20Focus%20Bank%20Stress%20Test%20-%20Update%20May%2029%202009.pdf).
Media reports reflect that many felt a general sense of relief on seeing the results. See e.g.,
After the Financial Stress Tests: Relief But Still Some Uncertainty, CNBC (May 8, 2009) (online
at www.cnbc.com/id/30640189); Jim Puzzanghera and E. Scott Reckard, Bank ‘Stress Test’ Results Hint at Economic Recovery, Los Angeles Times (May 8, 2009) (online at www.latimes.com/
business/la-fi-stress-tests8–2009may08,0,6880257.story).
98 Senate Committee on Banking, Housing, and Urban Affairs, Testimony of Secretary
Geithner, Oversight of the Troubled Asset Relief Program, 111th Cong. (May 20, 2009) (online
at
banking.senate.gov/public/index.cfm?FuseAction=Hearings.Testimony&HearinglID
=64feeb1d-f2c3-4f11-a298–800be9bd360d&WitnesslID=ae7c9f56-f16f-4b3c-b4e7-b5919e3ccd7c)
92 SCAP

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93 SCAP

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issuances reported for each BHC so far are set out in part K of Section One of this report.
Though the official results were released on Thursday, May 7,
2009, the results for many of the BHCs were reported in the press
prior to that date. By early that week, the public knew that ten of
the 19 BHCs would be required to raise additional capital.99 It also
knew the amount of capital required to be raised for some of the
BHCs. However, there appears to have been some confusion surrounding the reported numbers. Federal Reserve Board officials
have told the Panel that some of the reports revealed only the preliminary required capital, before it was adjusted for the effect of
capital actions and 2009 first quarter results. The officials further
suggested that, as a result of changes in the figures when the official results were released, many commentators mistakenly believed
that the delay in the release was the result of negotiations with the
BHCs.100 To gain a better understanding of the stress tests, on
March 30, the Panel requested that Treasury provide the Panel
with documents related to Treasury’s work on the stress tests. On
May 11, the Panel made a similar request of the Federal Reserve
Board. The Panel followed up with Treasury to reiterate its need
for access to the documents on May 26. On June 5, Treasury made
available to Panel staff a number of documents related to the
stress tests. On June 8, the Federal Reserve made additional documents available. Panel staff is reviewing the documents and expects to see more documents; the meaning of the documents reviewed to date remains unclear. The Panel expects to include information resulting from that review in a future report or update
where appropriate.
Although the SCAP involved only the nation’s 19 largest BHCs,
it spurred the private evaluation of smaller institutions. An analysis performed for the Financial Times showed that 7,900 U.S.
small and medium sized banks would need to raise $24 billion in
capital to achieve the capital buffer levels required of large BHCs
in the SCAP.101 The firm that conducted this analysis stated that
it expects that the stress test’s methodology and capital adequacy
focus will migrate to the broader U.S. banking system.102
D. A COMMENT

ON THE

SUPERVISORY PROCESS

The stress tests involved the submission of material by the 19
BHCs estimating their loss, income, and resource figures for the
test period. The banking supervisors evaluated the quality of the
BHCs’ submissions and made their own estimates of losses and resources to absorb those losses. As part of that process, supervisors

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(hereinafter ‘‘Geithner Testimony’’). The $8 billion difference is the result of Treasury using a
more lenient standard to decide whether a fund has been ‘‘planned’’ yet.
99 Damian Paletta and Deborah Solomon, More Banks Will Need Capital, Wall Street Journal
(May 5, 2009) (online at online.wsj.com/article/SB124148189109785317.html).
100 Arianna Huffington, The Stress Tests Fail the Smell Test, Huffington Post (May 5, 2009)
(online at www.huffingtonpost.com/arianna-huffington/the-stress-tests-fail-thelbl196350.html).
101 Saskia Scholtes, et al., Smaller US Banks Need Additional $24bn, Financial Times (May
17,
2009)
(online
at
www.ft.com/cms/s/0/79c47ffa-4306-11de-b7930014feabdc0,dwpluuid=ffa475a0-f3ff-11dc-aaad-0000779fd2ac.html)
(hereinafter
‘‘Financial
Times Study’’) (The Financial Times-commissioned study used metrics that differed from the
SCAP in two ways: (1) it did not adjust for first quarter performance; and (2) it was not able
to estimate loss rates with the same degree of individualized precision as the regulators).
102 Stress Test Consequences, supra note 35.

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used supporting information provided by the BHCs, as well as the
supervisors’ own knowledge and supervisory information. Supervisors also included their own independent benchmarks, such as
the indicative loan loss rates discussed above.
The supervisory teams performing the tests involved more than
150 examiners from the Federal Reserve Board, the Federal Reserve Banks, the Office of the Comptroller of the Currency (OCC),
and the FDIC. Additionally, specialist teams were assigned to examine loss projections for specific asset classes across all the BHCs.
This ensured that the same or similar assets would be valued the
same way in the projections for each institution, and that
counterparty risk, revenue projections, and loan loss would be
treated consistently across institutions. The BHCs had several
thousand people working to produce the raw data that informed
the stress tests. Additional advisory groups provided assistance
with accounting, regulatory capital, and financial and macroeconomic modeling.
The supervisory process, by its nature, always involves constant
interaction between the supervisor and the regulated entity, and
the SCAP process was no exception. The supervisors presented the
BHCs with indicative guidelines for loan loss rates, but the BHCs
were able to use alternative measures if they could prove to the supervisors (with adequate documentation) that the alternative was
more appropriate. The supervisors alone, however, decided whether
the loan loss rates used were appropriate. (The supervisors found
some BHCs’ submissions to be of a higher quality than others, and,
after the supervisors had presented the BHCs with their initial estimates, some BHCs presented the supervisors with more detailed
information in order to correct errors and double-counting that had
been reflected in their results.)
While SCAP in some ways represents a new and tougher approach by federal regulators, it does not constitute a genuine break
from past supervision methods and tactics, and was not intended
to be. The fact that regulators did not identify emerging systemic
risks prior to the crisis underscores the importance of scrutiny toward the supervisory role generally and the recent round of stress
testing.
E. SPECIFIC LIMITATIONS

OF THE

STRESS TESTS

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Any evaluation of the stress tests must start with both what the
tests are and what they are not. Supervisors have always regarded
regulatory capital as a baseline measure and have required additional capital (or changes in capital composition) for particular institutions when the situation warranted. The stress tests operate
under this premise but they are also a unique, cross-institution exercise. They are not a regulatory examination of the 19 BHCs, focused on capital adequacy, and do not test the BHCs’ overall safety
and soundness, as would a regular examination. In this and in
more granular ways, the SCAP builds from a starting point of existing bank supervision and conclusions about the health of the institutions at issue.
It is logical, in view of such a starting point, that the supervisors
relied on raw data that were produced by the BHCs themselves.
For example, the stress tests estimated the losses that might occur

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on first lien mortgages held by each BHC but did not test whether
the BHC held the total amount of mortgages that it said it did, or
whether it actually had enforceable liens on them.103 The tests
were not re-audits or re-examinations; they relied on BHC-generated figures whose assumptions were tests only. Thus, to a significant extent, the stress tests rely on the accuracy of the audit
and examination process, and the integrity and soundness of the
judgments and internal processes of the participating BHCs.104
The stress test results are presented as the estimates of the supervisors, not those of the institutions tested. The Federal Reserve
Board emphasizes that those institutions or other outside analysts
might have produced very different estimates, even using a similar
set of economic assumptions.105
F. INDEPENDENT ANALYSIS

OF

STRESS TESTS

The Panel asked Professors Eric Talley and Johan Walden to review the stress test methodology. Professor Talley is a Professor of
Law and the U.C. Berkeley School of Law (Boalt Hall), and Co-Director, the Berkeley Center for Law, Business, and the Economy;
he has been a Visiting Professor of Law at the Harvard Law School
during the 2008–2009 academic year. Professor Walden is a Professor in the Haas Finance Group of the U.C. Berkeley Haas School
of Business. Both are recognized experts in finance, asset pricing,
economic analysis of risk, and economic analysis of law. Their report, ‘‘The Supervisory Capital Assessment Program: An Appraisal’’
(the Appraisal), dated June 2009, is attached as Annex to Section
One.
The Appraisal contains an overview of the dominant approaches
in the finance literature for measuring risk using statistical models, attempting to understand and situate the approach used by the
Federal Reserve Board. It examines the relative strengths and
weaknesses of each model, as well as the systemic issue of model
uncertainty, resulting from the fact that there is no single consensus approach to measuring financial risk from multiple sources.
In this process, the Appraisal also highlights a number of statistical measures for quantifying risk from single sources, noting their
usefulness in developing models.
These models include: the Capital Adequacy Ratio (which measures the ratio of a bank’s equity capital to the risk-weighted value
of its assets), Value at Risk (VaR) (which captures the probability
of losses exceeding some specified threshold), and the Expected
Shortfall (which measures the expected amount of losses in the
103 Such

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matters would be covered by the regular audit and examination processes.
104 In its April report, the Panel noted that the success of the Reconstruction Finance Corporation in stabilizing the U.S. banking system during the Great Depression has since been attributed in large part to the forced write-downs of bank assets to realistic values as determined
by the RFC. Panel April Oversight Report, supra note 63, at 40. Similarly, the Panel noted that
Japan did not emerge from its ‘‘Lost Decade’’ until it began to rigorously examine the valuation
of bank assets in 2002, as part of a broader plan of uncovering the true health of the financial
system. Panel April Oversight Report, supra note 63, at 57–58.
105 For example, Bank of America argues that its internal projections show that the supervisors underestimated its future income over the next two years while, in many cases, overestimating its loan losses. Bank of America Corp., Stress Test: Bank of America Would Need $33.9
Billion More in Tier 1 Common (May 7, 2009) (online at investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-newsArticle&ID=1286200&highlight=).

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event that losses exceed the VaR threshold).106 While acknowledging the merits of such summary statistical measures, the Appraisal points out that these measurements classify risk quite
roughly and may neglect co-movement among assets, two factors
that greatly reduce the amount of information contained in the
final number.
After discussing the methods of evaluating single-source risk, the
Appraisal treats the problem of calculating a portfolio of risks,
highlighting three dominant approaches within the finance literature: Merton models (in which companies default at the maturity of a debt when their total asset value is less than the face
value of the debt), First Passage models (in which a company defaults if its asset value drops below a specified default trigger at
any time before maturity), and Reduced Form models (which rely
completely on empirical data to model default dependencies between firms in discrete periods of time).
On the basis of the conceptual and mathematical analyses that
it reflects, the Appraisal makes a number of points about the stress
tests. At the outset, it states that:
Based largely on information collected through public
document review and conference calls with representatives
from the Federal Reserve and the Treasury Department,
and taking into account the enormity of the task within a
short time horizon, we conclude that the Fed’s risk modeling approach has, on the whole, been a reasonable and
conservative one . . . For example, the macro-economic
scenarios they hypothesized under the adverse case appear
relatively extreme by historical standards, and the (purportedly one-time) sizing of the capital buffer was made
relatively stringent. Moreover, the general approach undertaken here appears to have avoided some of the more
dangerous simplifications manifest in certain types of risk
modeling . . . On the whole, then, our assessment is that
the SCAP stress tests have provided valuable information
to the public.107
The authors note that:
We warn the Panel that our knowledge of the Fed’s program is based largely on the same information possessed
by the panel, consisting of two reports, the first (describing
methodology) was issued on April 24, and the second (describing results) was issued on May 7. Beyond these reports, we were privy to a number of conference calls involving the Federal Reserve (twice) and the Treasury department (once).108
The Appraisal begins by explaining that in evaluating any model
of risk assessment . . . it is more constructive to use four criteria:
1. Intuitiveness: From a practical perspective, given the complexity of the problem and the limited time frame with which to ac-

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106 Also included are Standard Deviation and Mean Absolute Deviation (statistics commonly
used to measure risk).
107 See Annex to Section One of this report, at 2, 5.
108 Id. at 17.

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complish it, does the risk model employed appear to make intuitive
sense?
2. Robustness: Do the results continue to hold across alternative
model and/or parametric specifications?
3. Transparency: Are both the structure of the risk model and the
data inputs clear and transparent to outsiders? If the model is a
hybrid of multiple risk models, how clear is the hybridization process?
4. Replicability: Is it possible for a third party to gain access to
the same data, and to replicate the results within conventional
standards of error?
The authors note that the first two of these criteria relate to internal design considerations,109 while the third and fourth criteria,
in contrast, bear on how well the Federal Reserve Board’s approach
might be evaluated by outsiders.110 The Appraisal notes a number
of sound elements in the SCAP’s design. It states that:
• ‘‘The choice of a two year time horizon does not, ipso facto,
give us cause for concern (though it may necessarily require
updating on a going-forward basis)’’; 111
• ‘‘Using econometric models that relate loss rates to differing macroeconomic scenarios (baseline and more adverse) is
a sensible way to characterize loss exposure’’; 112
• ‘‘Assembl[ing] projections from multiple methodological approaches . . . helped to avoid some of the most extreme problems associated with model risk’’; 113
• ‘‘It [was] clearly sensible for the Fed to allow for tailoring
of individual BHC’s loss rates’’; 114
• ‘‘The Fed’s approach in specifying and sizing the required
SCAP capital buffer seems sensible, transparent, and
replicable [and] . . . within the time and information constraints [in which] they operated, the 6%/4% sizing was, at the
very least, a defensible first approximation.’’ 115
However, the Appraisal also states that ‘‘the SCAP’s design and
implementation do leave some open questions in our minds.’’ 116
The Appraisal’s overriding concern is that, although the stress
tests involve a mix of quantitative (modeling) and qualitative (judgments in application of modeling) elements, a lack of transparency
in the way the models were applied (even illustratively) makes it
impossible to replicate—and hence to evaluate—the stress tests in

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109 Id. at 18. ‘‘The multiple approaches to financial risk modeling, along with the special circumstances under which the SCAP was implemented make the first [criterion] extremely important. Due to the current high uncertainty in capital markets, and the attendant hazards of
model risk, the second [criterion] is also relatively crucial.’’
110 Id. (‘‘The third [criterion] encapsulates what is, in a sense, a minimal condition on observability that need be met; that is, so long as one presumes the competence and good faith of Fed
researchers, satisfying the transparency [criterion] is tantamount to understanding the material
steps undertaken in the enterprise. The fourth criterion—replicability—is a more stringent condition than transparency, effectively requiring that an outsider be able to directly verify the
Fed’s conclusions. It should be noted, however, that this criterion may be more difficult to satisfy
for a program such as SCAP, due to confidentiality issues within the BHCs being studied. We
believe, nevertheless, that the third and fourth [criteria] are material considerations, particularly given the high level of market uncertainty, the magnitude of resources at issue, and the
failure of state-of-the-art models to capture the market’s risk in 2008.’’)
111 Id. at 19.
112 Id. at 26.
113 Id. at 34.
114 Id.. at 29.
115 Id. at 31.
116 Id. at 5.

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any detail. For example, say the authors, the Appraisal could only
take a ‘‘broad-brush approach’’ to the SCAP, because:
• ‘‘The Fed evidently attempted to synthesize numerous alternative macro-economic models . . . with subjective judgments of experts across different domains’’; 117
• ‘‘The process by which the initial [loss models] became tailored to each BHC appeared analogously opaque.’’ 118
• The ‘‘Fed’s stress test formulation (and particularly the
derivation of the adverse case) is potentially subject to criticism as to transparency, its replicability, and its robustness’’
(for example, in its omission of interest rate, wage and price
inflation, and exchange risk that ‘‘play a significant role in assessing not only prospective default risks within asset classes
but potentially also asset valuations today’’).119
• ‘‘[T]here is effectively no way for a third party to replicate
(or even, evidently, selectively audit) the [loss projections]’’
used to conduct the stress tests.120 The Appraisal continues:
‘‘On the basis of our interactions with them, we believe the Fed
staff to be both professionally competent and acting in good
faith. It may therefore be acceptable to take them at their
word. Nevertheless, given the fact that the [loss ranges] constituted an important focal point for the SCAP stress tests, the
description of the process did not permit us to pierce through
their derivations at anything more than a general level.’’ 121
• ‘‘[T]he significant interaction required between supervisors
and the BHCs has the potential of undermining the objectivity
of the stress tests . . . It may well be that the Fed’s efforts [to
bolster the objectivity of the tests despite the necessary supervisor-BHC interaction] were wholly successful . . . but we are
not in a position to either confirm or reject this hypothesis. Indeed, when queried as to whether it would be possible to walk
us through one or two examples of the tailoring process for
specific (but anonymous) BHCs, Fed researchers reported that
such an exercise was not practically feasible.’’ 122
• ‘‘To the extent we have a concern [with the Fed’s approach
in specifying and sizing the required SCAP capital buffer] it
likely is rooted in a more general concern with . . . the appropriateness of a 2-year time horizon for projecting required capital buffers.’’ 123 This issue might have been dealt with by:
• Conducting a longer-term stress test (at least for longmaturing illiquid assets)
• Quantifying the faction of illiquid and highly risky assets with distant maturities the BHCs as a group, and
each BHC separate, have; or
117 Id.

at 3.
at 6.
at 23. Federal Reserve Board staff has told a Panel staff member that interest rate
assumptions were ‘‘built into’’ the macro-economic assumptions for the stress tests as well to
the data banks provided to the supervisors, that currency exchange risk was also built into that
data, and that inflation risk was now so low as to be difficult to factor in.
120 Id. at 25.
121 Id. at 25–26.
122 Id. at 27–28.
123 Id. at 29. See also, Lucian Bebchuk, Near-Sighted Stress Tests (May 20, 2009) (online at
www.forbes.com/2009/05/20/stress-tests-banking-opinions-contributors-maturity.html)
(hereinafter ‘‘Near-Sighted Stress Tests’’).
118 Id.

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119 Id.

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• Revisiting the SCAP approach periodically to reassess
risk profiles of these assets as they become more current.
• The SCAP does not explore the possibility that BHCs
‘‘may be able to use their own segmented corporate structure to compartmentalize (and thus externalize) risk, even
if they have an adequate capital buffer in the aggregate.’’ 124
G. NEXT STEPS
1. CAPITAL-RAISING

The ten BHCs estimated to require a capital buffer were required
to give the supervisors a Capital Plan by June 8, 2009, explaining
how they will raise equity capital. Their options include: (1) selling
stock to the markets or under the CAP; 125 (2) converting existing
preferred stock (whether privately held or issued under the CPP);
or (3) selling assets. Some of these options are preferable to others
and result in higher quality capital. Conversions of preferred to
common stock are the weakest option (as no new capital is added)
and new equity offerings for cash are the strongest. Asset sales fall
in between these options as they raise cash but diminish earnings
capacity. The plan must include dates by which the BHC plans to
take these actions, which must be completed by November 9, 2009.
The plans are not specifically required to address plans to repay
TARP funds. However, no bank can repay its TARP capital if this
would cause its capital levels to be inconsistent with ‘‘supervisory
expectations.’’ 126 It is unclear if these expectations will be the
same as the capital levels demanded by SCAP.
The most direct way for a BHC to increase its capital base is to
earn net income from its normal banking business and add that income to its capital accounts. Estimated PPNR for 2009 and 2010
(as adjusted by reference to performance in the first quarter of
2009) is already reflected in the SCAP calculation and therefore
BHCs cannot ‘‘earn their way out’’ of the capital buffer requirements.127
Next, a BHC can raise capital by selling assets, usually businesses or branches. For example, Citigroup recently announced
that it expects to gain $2.5 billion in tangible common equity
through the sale of its Japanese securities business.128 For its part,
Bank of America sold nearly a third of its stake in China’s second
largest bank.129 However, as discussed below, any sale risks a
transaction at a ‘‘fire sale’’ price because the buyer knows that the
124 Id.

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at 30.
125 If there are future CAP transactions, the Panel will need to consider a valuation exercise
similar to that in the February report.
126 Board of Governors of the Federal Reserve System, Federal Reserve Outlines Criteria It
Will Use to Evaluate Applications to Redeem U.S. Treasury Capital from Participants in Supervisory Capital Assessment Program. (June 1, 2009) (online at www.federalreserve.gov/
newsevents/press/bcreg/2009bcreg.htm).
127 To the extent that the BHCs’ revenues are strong, however, their ability to sell securities
will of course be enhanced.
128 Citigroup Inc., Citi to Sell Nikko Cordial Securities to Sumitomo Mitsui Banking Corporation and to Forge Alliance with Sumitomo Mitsui Financial Group (May 1, 2009) (online at
www.citigroup.com/citi/press/2009/090501a.htm).
129 Amy Or, BofA Raises US$7.3 Bln from CCB Share Sale to 4 Investors, Wall Street Journal
(May 13, 2009) (online at online.wsj.com/article/BT-CO-20090513-708215.html?mod=crnews).

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selling BHC must raise capital and is counting on the sale to do
so.
A BHC can also raise funds through the sale of additional common stock, the approach most in line with the requirements of the
supervisors following the stress tests. But the sale of common stock
is not without its own issues. First, existing shareholders’ interests
will be diluted by the new sale—that is, part of their investment
will in effect be shared with the new shareholders, diluting their
proportional ownership of the BHC and the value of their shares.
Of course, that may be a completely justified result, since, without
an infusion of billions of taxpayer dollars, the common stock of at
least some of these institutions would likely have become worthless.130 In addition, sale of a large block of shares to a single investor may shift control, or at least reconfigure the control, of the BHC
in question.
Such sales of common stock may be made to investors in the
open market or in a private offering, or the BHC may rely on the
CAP and issue mandatory convertible preferred stock (which will
be treated as tier 1 common) to Treasury.
The BHCs may also convert preferred stock into common stock,
as Citibank is in the process of doing. This conversion may include
existing preferred stock issued to private parties or the preferred
stock issued to Treasury under the CPP. Since this involves moving
Treasury’s assets to a more risky class of securities, Treasury has
stated that it expects such a conversion to be accompanied by new
capital raises or exchanges of private capital securities into common equity.131
2. TARP REPAYMENT

Many banks, including the BHCs involved in the stress tests,
have indicated their desire to repay funds received under TARP
programs, and several smaller banks have already done so.132 The
Panel’s next report will discuss certain issues arising from the
TARP repayment process in detail, but it is worth discussing the
interplay of the SCAP with TARP repayment.
BHCs that do not need to raise additional equity capital may be
permitted to repay TARP funds. The Federal Reserve Board has
designed criteria that it will use to determine whether to allow a
BHC to repay TARP funds.133 BHC applications for repayment
must be first approved by the primary federal supervisor before
being sent to Treasury. A BHC that wishes to repay funds must

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130 Since warrant holders, including the holders of stock options, are generally protected
against dilution by the terms of the warrants, a paradoxical result might be that the executives
who were in charge of the troubled institutions would incur far less loss (if stock values recovered) than ordinary common shareholders. Thus, where bank executives are compensated to any
extent by the issuance of stock or stock options, they may have a conflict of interest when deciding whether common stock, rather than a sale of assets, should be part of their BHC’s capital
plan.
131 U.S. Department of the Treasury, FAQs on Capital Purchase Program Repayment and
Capital Assistance Program, at 3 (online at www.financialstability.gov/docs/FAQl CPPCAP.pdf) (accessed June 8, 2009) (hereinafter ‘‘CPP FAQs’’).
132 As of May 27, 20 banks have repaid the TARP funds they received. Goldman Sachs, Morgan Stanley, BB&T, and JPMorgan, among others, have announced their intentions to repay
TARP funds as soon as possible. Brian Wingfield, Banks Ready To Throw in the TARP, Forbes
(June 1, 2009) (online at www.forbes.com/2009/06/01/banking-tarp-fed-business-beltwaytarp.html).
133 Board of Governors of the Federal Reserve System, Press Release (June 1, 2009) (online
at www.federalreserve.gov/newsevents/press/bcreg/20090601b.htm).

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show that it can issue debt without relying on TLGP. It must also
show that it has access to the public equity markets. Additional criteria that the Federal Reserve Board will consider include the
bank’s ability to continue to act as an intermediary for lending to
families and businesses, its ability to maintain appropriate capital
levels, its ability to ‘‘continue to serve as a source of financial and
managerial strength and support to its subsidiary bank(s) after the
redemption,’’ and its ability to meet ‘‘funding requirements and obligations to counterparties’’ while again lessening its reliance on
government funds and guarantees.134
Since the announcement that BHCs will need to use new, nonguaranteed capital to repay TARP funds, several BHCs have issued
non-guaranteed debt. However, these BHCs had to pay relatively
high interest rates on this debt.135 In addition to repaying the preferred stock issued under the CPP, BHCs will have to repurchase
the warrants that were issued at the same time.136 The price at
which those warrants will be repaid has already become a source
of controversy with respect to non-stress test banks.137 This issue
is one which the Panel will be paying close attention to in the near
future.138
H. ISSUES
1. THE CONTEXT AND PURPOSE OF THE STRESS TESTS

To date, $245 billion has been injected into the banking system
and an additional $69.8 billion into the American International
Group (AIG). After raising $75 billion more in public or private
funds, the nations’ largest banking institutions will be well capitalized enough to withstand further economic difficulties, at least during 2009 and 2010. It has to be noted that the $75 billion dollar
figure rests on existing taxpayer support of the banking system,
and the SCAP must be understood in this context. The stress tests’
stated purpose was to ensure that the BHCs were well capitalized
enough to withstand continued economic bad news and to continue
lending to qualified borrowers, but the subtext of the tests was to
calm the markets. The markets have been calmed, but it must be
134 Id.

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135 Since SCAP, the BHCs have raised $35 billion in stock and $13 billion in debt. The BHCs’
notes ranged from 271 basis points over U.S. Treasuries to 562 basis points over U.S. Treasuries. Compare the spread on Citigroup’s recent non-guaranteed debt offering, 8.765 percent tenyear notes (562.5 basis points over U.S. Treasuries) with a Citigroup debt offering prior to the
financial crisis, 5.773 percent ten-year notes (130 basis points over U.S. Treasuries). Citigroup
Inc., Form FWP (May 15, 2009) (online at www.sec.gov/Archives/edgar/data/831001/
000095012309008985/y77311fwfwp.htm); Citigroup Inc., Form FWP (Sept. 6, 2007) (online at
www.sec.gov/Archives/edgar/data/831001/000095012307012318/y39368afwp.htm). See Figure 5
for other recent BHC debt issuances.
136 See, e.g., U.S. Department of the Treasury, Securities Purchase Agreement Standard Terms,
at 42 (Oct. 26, 2008) (online at www.financialstability.gov/docs/agreements/BOAl 10262008.pdf)
(The agreement contains terms setting up a direct repurchase by Treasury of all bank securities
based on a negotiated fair market value. These terms cover the repurchase of warrants and do
not specifically provide for auctions to third parties as a method of pricing the repurchase.).
137 See, e.g., Old National Bancorp, Form 8–K (May 11, 2009) (online at www1.snl.com/Cache/
c7780441.htm) (first publicly-traded company to finalize repurchase of its warrants from Treasury); Linus Wilson, Valuing the First Negotiated Repurchase of the TARP Warrants, Social
Science Research Network (May 23, 2009) (online at papers.ssrn.com/sol3/papers.cfm?abstractl
id=1404069) (arguing that, based on economic models, that Treasury did not receive fair market
value for the Old National Bank warrants).
138 The effect on the projected capital buffers of potential repayment of CPP infusions was apparently not taken into account in computing whether an institution would require a capital
buffer or the size of that buffer.

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understood that the underlying regulatory and legal systems that
permitted the financial crisis to occur have not changed, and the
current financial position of the BHCs relies on massive amounts
of government assistance, the impact of which has not been clearly
identified in the supervisors’ assessment of the BHCs’ current and
future financial viability.
The supervisors’ releases indicate that infusions of funds under
the CAP may be necessary to make up any failure by the ten institutions to raise the necessary capital in the private market. But
there are other forms of government assistance whose impact on
the tests was not made clear.
The loan guarantees provided by Treasury and the FDIC and the
availability of funds through the various liquidity programs established by the Federal Reserve Board during the early days of the
crisis would appear to lower substantially the cost of funds for the
19 BHCs, presumably increasing their net income during the testing period. This raises the question of how solid those earnings
would be if the government programs were removed or if external
economic conditions caused the Federal Reserve Board to tighten
the money supply even modestly.
2. ISSUES RELATING TO THE DESIGN OF THE STRESS TESTS

The stress tests are conducted within the bounds of the current
supervisory context and do not represent a new measure or test of
risk. They start with the amounts and values projected by the tested institutions themselves. The extent to which the supervisors
delved deeply into the BHC-provided data to verify its accuracy is
unclear. This is not to question the good faith of either the supervisors or the tested institutions. But the experience of the last two
years cannot but cause some to question the adequacy of both the
risk management practices of many of the nation’s largest financial
institutions and of the scope of the supervisory regime to which
those institutions were subjected. As one serious example, the
stress test reports assert that the 19 BHCs tested are all well capitalized, but they do not discuss or rebut claims by a number of respected economists that at least some of the same banks are in fact
insolvent.139
Reliance on the present system may well be understandable in
view of the short time frame within which the tests had to be done,
but the time pressures could have been mitigated by a rolling set
of tests adjusted for operating results and changes in economic assumptions. Failure to do so may be seen as limiting the usefulness
of the tests.
A number of issues with the modeling techniques used in the
stress tests were noted by Professors Talley and Walden in their
report. These include a lack of sensitivity to the ownership structure of BHCs, the exclusion of a number of micro- and macroeconomic factors (such as interest rates and inflation), and the use

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139 Nouriel Roubini, According to Press Reports the IMF May Allegedly Be Increasing Its Estimate of Global Bank Losses to $4 Trillion, a Figure Consistent With Estimates by a Variety of
Independent Bank Analysts, RGE Monitor (Apr 10, 2009) (online at www.rgemonitor.com/
roubini-monitor/256364/according
ltolpresslreportslthe
limflmaylallegedlylbe
lincreasinglitslestimatelof
lgloballbankllossesllto
l4ltrillionlalfigurel
lconsistentlwithlestimateslby lallvarietyloflindependent lbanklanalysts).

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of the relatively short time horizon of two years. In their opinion,
these factors might have affected the results of the stress tests.140
When the two alternative economic scenarios were announced,
commentators immediately criticized the scenarios for insufficient
‘‘harshness.’’ 141 They stated that the baseline scenario especially
was too optimistic in light of an economy that at that time was deteriorating rapidly and beginning to follow the path of the more adverse scenario.142 Nouriel Roubini, for example, has suggested that
policymakers ‘‘used assumptions for the macro variables in 2009
and 2010 [for] both the baseline and more adverse scenarios that
are so optimistic that actual data for 2009 are already worse than
the adverse scenario.’’ 143 He has challenged the GDP, unemployment, and home prices assumptions in both the baseline and adverse scenarios.144 The OECD released baseline real GDP and unemployment projections that were equal to the SCAP’s more adverse scenario assumptions.145 On the other hand, some comparisons suggest that the assumptions are appropriate. In their review
of the stress test methodology, Professors Talley and Walden state
that, ‘‘[t]he criteria used for assessing risk, and the assumptions
[the Federal Reserve Board] made in calibrating the more adverse
case have typically erred on the side of caution.’’ 146 In the end, it
is not clear that we know whether the economic assumptions were
harsh enough or what the BHCs’ capital needs would be if the
economy continued along the path it appeared to be following in
February.
The ability to extrapolate the data by those wishing to modify
the model to use their own macroeconomic assumptions is somewhat limited. Treasury officials informed the staff of the Panel that
sufficient data would be available such that private analysts would
be able to build on the results disclosed, substituting their own assumptions with respect to the direction of the economy, and working out for themselves what the capital needs of the BHCs would
be under even more adverse conditions. The publicly announced results of the SCAP focused only on the more adverse scenario. The
model may be replicated,147 but it is not clear that private analysts
could use these data to build their own models or to test the
140 See

Annex to Section One of this report, at 23, 33, 34.
generally Douglas J. Elliott, Bank Stress Test Results, Brookings (May 18, 2009) (online
at www.brookings.edu/opinions/2009/0512l stressl testl results elliott.aspx); Paul Krugman,
Stressing the Positive, New York Times (May 7, 2008) (online at www.nytimes.com/2009/05/08/
opinion/08krugman.html) (‘‘The regulators didn’t have the resources to make a really careful assessment of the banks’ assets, and in any case they allowed the banks to bargain over what
the results would say. A rigorous audit it wasn’t.’’); Nouriel Roubini, Ten Reasons Why the Stress
Tests Are ‘‘Schmess’’ Tests and Why the Current Muddle-Through Approach to the Banking Crisis May Not Succeed, RGE Monitor (May 8, 2009) (online at www.rgemonitor.com/roubini-monitor/256694/tenl reasonsl whyl thel stressl testsl arel schmessl testslandl whyl
thel currentl muddle-throughl approach l tol thel bankingl crisisl mayl notl succeed) (hereinafter ‘‘Roubini Article’’); Edmund L. Andrews and Eric Dash, Government Offers Details of Bank Stress Test, New York Times (Feb. 25, 2009) (online at www.nytimes.com/2009/
02/26/business/economy/26banks.html) (hereinafter ‘‘Andrews and Dash Article’’).
142 Unemployment rose to 9.4 percent in April 2009. Employment Situation, supra note 60.
GDP fell 5.9 percent in the first quarter of 2009 from the previous quarter. Gross Domestic
Product, supra note 59.
143 Roubini Article, supra note 141; Andrews and Dash Article, supra note 141.
144 Id.
145 Organization for Economic Cooperation and Development, OECD Economic Outlook Interim Report, at 68 (Mar. 2009) (online at www.oecd.org/dataoecd/18/1/42443150.pdf).
146 See Annex to Section One of this report.
147 Stress Test Consequences, supra note 35.
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141 See

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34
strength of the supervisors’ modeling. Without the ability to replicate and re-test, the robustness of the model remains in question.
Professor Lucian Bebchuk, among others, has argued that the
failure to take into account mark-to-market values for ‘‘toxic assets,’’ necessarily undervalues bank liabilities to the extent that
those liabilities result in losses after 2010.148 This point is also
echoed in the report from Professors Talley and Walden.149 Professor Bebchuk notes that the total estimate of potential bank
losses published by the supervisors is as much as $600 billion and
that no attempt has been made ‘‘to come up with a precise estimate
of the extent to which, at the end of 2010, the economic value of
the troubled assets will fall below [their] face value.’’ 150 Bebchuk
acknowledges the Federal Reserve Board’s recognition of this problem, but he responds that:
To get a full picture of the banks’ situation, bank supervisors should estimate also the decline in the economic
value of banks’ positions with longer maturities. Only then
will the stress tests be able to deliver reliable figures for
the additional capital necessary to make the banking sector healthy and vigorous.151
This approach suggests a useful insight about what the stress
tests do and do not do. Their purpose is to compute the amounts
necessary, within the framework of existing supervisory and risk
management techniques, to keep BHCs well capitalized for two
years if a specified set of economic assumptions is borne out. What
they do not do is to compute the point at which BHCs will be
stressed beyond the breaking point—even under the supervisors’
view that BHCs are now well capitalized—based on their current
balance sheets. For example, banks hold $1.068 trillion in core
commercial real estate (CRE) loans.152 A recent study commissioned by Deutsche Bank suggests that the majority of losses on
CRE loans will not affect bank balance sheets for several more
years when poorly underwritten CRE loans made in the easy credit
years (e.g., 2005–2007) will reach maturity and will in many instances fail to qualify for refinancing:
FIGURE 3: ESTIMATE OF CORE CRE LOANS NOT QUALIFYING FOR REFINANCE, 2009–18 153
Maturing loans
Maturing year

2009
2010
2011
2012
2013
2014
2015
2016
2017

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

#

2,556
3,053
4,443
4,340
5,051
4,898
8,807
10,331
9,598

Loans not qualifying for refinance

Balance
(dollars in
billions)

#

18.1
33.0
42.6
56.3
39.1
47.8
89.0
123.9
127.4

Balance
(dollars in
billions)

923
1,375
2,510
2,675
2,635
2,986
5,587
6,295
5,827

%(#)

8.0
21.1
29.0
43.7
25.2
33.2
60.9
88.8
94.7

36.1
45.0
56.5
61.6
52.2
61.0
63.4
60.9
60.7

148 Near-Sighted

Stress Tests, supra note 123.
Annex to Section One of this report.
Stress Tests, supra note 123.
151 Near-Sighted Stress Tests, supra note 123.
152 Core CRE does not include construction, multi-family, or farm loans.
149 See

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150 Near-Sighted

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%($)

44.0
63.9
68.2
77.6
64.5
69.6
68.5
71.7
74.3

35
FIGURE 3: ESTIMATE OF CORE CRE LOANS NOT QUALIFYING FOR REFINANCE, 2009–18 153—
Continued
Maturing loans
Maturing year

Loans not qualifying for refinance

Balance
(dollars in
billions)

#

Balance
(dollars in
billions)

#

%(#)

%($)

2018 .....................................

895

4.2

108

1.4

12.1

33.7

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

53,972

581,542,418,727

30,921

406,163,154,040

57.3

69.8

153 This

data is used with permission of Deutsche Bank and was originally compiled in a different form for a Deutsche Bank special report. See Richard Parkus and Jing An, The Future Refinancing Crisis in Commercial Real Estate, at 3–4 (Apr. 23, 2009) (online at
cop.senate.gov/documents/report-042309-parkus.pdf). This report was also submitted as written testimony for the Panel’s May 28, 2009 hearing on Impact of Financial Recovery Efforts on Corporate and Commercial Real Estate Lending in New York.

As the report explains, the high percentage of loans not qualifying for refinancing, and hence in danger of default without significant injections of new equity, is attributable to the combined effects of stricter underwriting standards, steep declines in property
values, and reduced income streams to finance the loans because
of lower rents and increased vacancies.154 The findings are based
on quantitative data for commercial mortgage-backed securities
(CMBS), which constitute 25 percent of the core CRE market.
While the authors of the report state that there was insufficient
data to perform a detailed study in the larger non-CMBS sector,
the authors say they expect a similar if not higher level of maturity
defaults on non-securitized CRE bank portfolio loans because portfolio loans typically have shorter maturities (which would not allow
sufficient time for property values to recover from their present depressed levels) and higher risk profiles than CMBS.155 As another
hearing witness explained, however, it is possible that a higher
proportion of maturity defaults can be avoided in the non-CMBS
sector because banks face fewer legal and practical obstacles in attempting workouts with their borrowers.156 The extent to which
the stress tests, which were never intended to look more than two
or three years in the future, fully grapple with the prospect of massive future CRE loan defaults is uncertain.157
Several of the institutions tested were not traditional banking
enterprises, and yet, by choosing to become BHCs, have become
subject to the higher capital requirements of banks and the assumptions and analysis of risk that underlie those requirements. Is
this appropriate, or should certain BHCs be subjected to alternative measures of regulatory capital or be assessed for risk using
154 Id.

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at 11.
155 See Congressional Oversight Panel, Oral Testimony of Richard Parkus, Hearing on Corporate and Commercial Real Estate Lending (May 28, 2009) (hereinafter ‘‘Oral Testimony of
Richard Parkus’’).
156 See Congressional Oversight Panel, Oral Testimony of Kevin Pearson, Hearing on Corporate and Commercial Real Estate Lending (May 28, 2009).
157 At the Panel’s hearing in New York on May 28, 2009, there was disagreement among
Panel witnesses as to whether the stress tests’ use of a three-year analysis was sufficient to
account for the future strains on bank balance sheets attributable to a balloon in expected maturity defaults for CRE loans. See Oral Testimony of Richard Parkus, supra note 155 (‘‘I do, however, understand the timeframe for the stress test was, I believe, three years. And that, if that
is the case, that would, in my view, be fairly short, as many of the mortgages we are looking
at do not mature for quite a while.’’); Congressional Oversight Panel, Oral Testimony of Federal
Reserve Bank of New York Vice President of Bank Supervision Til Schuermann, Hearing on
Corporate and Commercial Real Estate Lending (May 28, 2009) (‘‘For sure, there are going to
be some of the losses that will occur after this horizon, but I think I feel comfortable that a
sizable portion of the commercial real estate exposure was, in fact, taken into account in the
stress test.’’).

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36
different tests? One issue (discussed above in ‘‘Specific Limitations
of the Stress Tests’’) is that the accuracy of the input (the data on
which the tests were performed) depended on prior supervisory examinations; in the present climate the nature of those examinations has itself been questioned, and the stress testing may ultimately improve the examinations themselves. The supervisors
noted that, in some cases, data initially presented were inaccurate
or resulted in double counting and that data was corrected and resubmitted. As noted above, no full re-examination of the tested
BHCs was possible in the time period in which the test occurred,
but that fact necessarily places some limitation on the tests’ results.
3. ISSUES RELATING TO THE PROCESS AND IMPLEMENTATION

The primary issue identified by Professors Talley and Walden
with the stress test process is the program’s lack of ‘‘transparency
to outsiders and replicability of its results.’’ They state that it
would be ‘‘virtually impossible for the third parties to replicate the
SCAP’s conclusions, or even major sub-components of it.’’ As a result, while they express the utmost trust in the Federal Reserve
Board’s assessment, they are ultimately unable to confirm any of
its conclusions.158
The supervisors informed the staff of the Panel that there was
no ‘‘negotiation’’ of the results of the SCAP and that the BHCs
were merely informed of the supervisors’ estimates, with adjustments arising only from the specified first quarter adjustments and
clear errors and omissions. The range of the adjustments permitted, however, and the lack of a full explanation of those adjustments necessarily raise questions in this regard. For example, it is
unclear how large an effect accounting changes had on the BHCs’
first quarter earnings,159 and how much of the resulting earnings
improvements flowed through to the adjustments that were made
with respect to the capital buffer by reason of earnings improvements. This leads to questions regarding whether the process could
have been better handled and whether there should have been
more transparency and clearer communication as to what exactly
was communicated to the BHCs, which BHCs were affected, and
which numbers were being adjusted.
Securities trading portfolios were specifically ‘‘stressed’’ only for
the five BHCs that were the largest traders (this is, for those with
trading accounts of $100 billion or more). That process showed very
large estimated losses in the securities trading portfolios of the five
BHCs for which the exercise was conducted. Given the size of those
losses, the way the stress tests take into account estimated securities trading losses of the BHCs with trading accounts of less than
$100 billion is unclear, and it is thus difficult to tell how or if those
losses have been appropriately accounted for.
4. THE IMPACT OF Q1 ADJUSTMENTS

Adjustments were presented on a net basis, and thus it is not
possible to see how much of the $110 billion reduction in capital
158 See

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159 For

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Annex to Section One of this report, at 34.
further discussion of the impact of the recent accounting changes, see supra note 80.

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37
buffer produced by the first quarter adjustments was due to sales
of assets and conversions of preferred securities and other capital
actions and how much was due to ‘‘strong PPNR.’’ 160 This approach undercuts the transparency of the process. It is also important because many commentators do not believe that the strong
earnings of the first quarter are likely to be repeated. Knowing how
much of the first quarter adjustments were due to earnings would
assist independent analysts in running their own versions of the
stress tests.
5. PRESENTATION OF DATA

While 12 categories of assets were measured, only eight categories of assets were reported out in the SCAP results, and some
assets were grouped together. For example, estimated losses on
‘‘First Lien Mortgages’’ are reported in aggregate, while first lien
mortgages were divided into prime, Alt-A, and sub-prime for the
purposes of estimation. Estimated losses in the various categories
of securities are also aggregated together. It is possible that significant information is obscured by the aggregation of data, and since
the public knew that 12 categories of assets were being measured,
some expectation of obtaining this information had been raised.
This aggregation prevented the public from fully replicating the
tests or from comparing the results of the testing on the 19 banks,
or other banks, with different variables.161 Neither Treasury nor
the supervisors have explained why this information was not made
available.
Because results are presented on the ‘‘more adverse’’ scenario
alone, the ability to extrapolate results from a single set of data is
impaired. Even though the ‘‘baseline’’ scenario was likely too optimistic, publishing the results from that scenario would have improved transparency and enabled private analysts, who can play an
important role in the way information is used, to present their own
predictions and analyses.
6. SHOULD STRESS TESTING BE REPEATED?

As discussed above, Treasury conducted a one-time stress test on
the 19 largest U.S. BHCs under the CAP. While Treasury intended
the CAP to ensure that BHCs have adequate capital cushions to
weather worse-than-anticipated economic conditions in the shortterm, it is uncertain whether Treasury will conduct any future
stress testing during or after the current crisis. It is uncertain
whether this expanded form of stress testing will or should become
a permanent fixture of the financial regulatory system. While
Treasury has created capital cushion requirements through yearend 2010 under the CAP, it has not required fundamental or permanent changes in capital adequacy requirements or general regulatory processes.
160 SCAP

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Results, supra note 24.
161 The Wall Street Journal and the Financial Times both applied the SCAP methodology to
small- and mid-size banks. However, they could not exactly replicate the testing. Financial
Times Study, supra note 101; Maurice Tamman and David Enrich, Local Banks Face Big Losses,
Wall
Street
Journal
(May
19,
2009)
(online
at
online.wsj.com/article/
SB124269114847832587.html).

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38
There are advantages and disadvantages of more permanent use
of stress testing. On one hand, regular stress testing of large banks
may enable regulators to: (1) limit the sorts of risk-taking that contributed to the current crisis; and (2) counterbalance the heightened moral hazard that the government, through TARP, has created for too-large-to-fail institutions.162 Moreover, the one-time nature of the stress tests is difficult to understand in light of how
rapidly, and sometimes radically, the fortunes of banking institutions have changed over the past two years. These rapid changes
led to some institutions requiring multiple capital infusions. For
example, both Citigroup and Bank of America, after participating
in the initial round of CPP investments, received emergency capital
infusions and asset guarantees which were eventually allocated to
the TIP program.163 Given the questions raised about the economic
assumptions incorporated into the baseline and adverse scenarios
of the stress tests and about the continuing uncertainty around the
value and terms for write-down of many bank assets, a strong case
can be made for six-month repetitions of the stress tests for the
next few years.
While comprehensive internal stress testing existed at banks
here and abroad even before the onset of the current crisis,164 there
is a justified skepticism about the sufficiency of bank risk management programs. In particular, internal testing lacks public transparency and accountability, which are especially important in the
case of too-big-to-fail institutions because of the government’s recent interventions. Additionally, bank executives can continue to
take excessive risks in the future—as they did prior to the current
crisis—regardless of whether or how they engage in internal stress
testing. Transparency, which the Federal Reserve Board has stated
is justified to restore confidence in the banking system, would also
be missing if stress testing were conducted within the context of
the normal supervisory process where results are not made public,
but stress tests as part of regular examinations still have merit in
and of themselves.
Regular government stress testing may lose support as time
passes because of debates over: (1) methodologies; (2) government
capacity and resources; and (3) the perception of negotiation between banks and their regulators.165
7. SHOULD STRESS TESTING BE EXPANDED TO A WIDER RANGE OF
BANKS?

Since the passage of EESA in October 2008, Treasury has devoted a great deal of attention and resources to so-called too-large-

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162 See Sebastian Mallaby, Stress Tests Forever, Washington Post (May 9, 2009) (online at
www.washingtonpost.com/wp-dyn/content/article/2009/05/07/AR2009050703538.html).
163 For more information, see Panel’s January and February reports. Congressional Oversight
Panel, Accountability for the Troubled Asset Relief Program (Jan. 9, 2009) (online at
cop.senate.gov/reports/library/report-010909-cop.cfm); Congressional Oversight Panel, Valuing
Treasury’s Acquisitions (Feb. 6, 2009) (online at cop.senate.gov/reports/library/report-020609cop.cfm).
164 See Bank for International Settlements (BIS), Stress Testing at Major Financial Institutions: Survey Results and Practice, at 2 (Jan. 2005) (online at www.bis.org/publ/cgfs24.pdf) (noting that stress testing is ‘‘becoming an integral part of the risk management frameworks of
banks and securities firms’’ and that it ‘‘benefits from its flexibility, comprehensibility and the
onus that it puts on management to discuss the risks that a firm is currently running.’’).
165 Stress testing under the CAP raised considerable concerns among observers. See, e.g., discussion earlier in this report, supra note 141.

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39
to-fail institutions. The health of these institutions has considerable bearing on the financial system because of the enormous value
of their combined assets and the breadth of their transactions involving other institutions and private citizens. Moreover, while
these institutions have complex structures and, in some cases,
branches and business ventures across the globe, efforts to stabilize
too-big-to-fail institutions may require fewer human resources overall than efforts to conduct a similar exercise for a far larger number of institutions ranging in size from just under $100 billion in
assets to the comparatively very small capitalization of some community banks. Moreover, the events of the financial crisis necessarily caused Treasury and the Federal Reserve Board to devote
particularly heavy focus to large institutions.
Nonetheless, Treasury has provided capital infusions under the
TARP to a wider range of institutions over the time since the passage of EESA. By focusing on small institutions in addition to large
ones, Treasury has sought to: (1) minimize line-drawing problems
inherent in providing capital infusions to only the largest institutions; (2) expand the geographic reach of its efforts; (3) increase the
overall breadth of its stabilizing influences; and (4) respond to concerns among taxpayers that TARP targeted only Wall Street, not
Main Street.
Despite Treasury’s overall strategy to include banks of all sizes
in its stabilization programs, Treasury and the Federal Reserve
Board chose not to include even a sample of smaller banks in stress
testing (even though those banks are eligible for infusions under
the CAP).166 BHCs not included in the stress tests are responsible
for one-third of the assets and close to half of the loans in the US
banking system.167 While the federal government’s capacity may be
strained by conducting stress tests on as many institutions as it
has given capital infusions, such an approach could: (1) have the
same general benefits as other efforts toward smaller banks, as discussed in the preceding paragraph; and (2) expand the reach and
potential benefits of the stress tests generally.
With the first round of stress testing complete, Treasury should
explain whether it intends to conduct stress tests on additional institutions in the future. If it does not intend to do so, Treasury
should explain more fully why it chose to make capital infusions
available to smaller institutions under the CPP, CAP, and other
programs but not to include those institutions in stress testing, and
therefore not require the same additional capital buffer of medium
and smaller institutions.
8. ISSUES REGARDING CAPITAL-RAISING AND RELATED ISSUES

The BHCs needing to establish an additional regulatory capital
buffer must present a plan to their supervisors by June 8 and complete the elements of that plan by November 9. This may have the
impact of limiting their bargaining power with respect to asset dispositions as potential counterparties know that the seller has to
raise funds in a ‘‘fire sale.’’ For example, Bank of America’s sale of
part of its holding in China Construction Bank was effected at a
166 Financial

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167 SCAP

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Stability Plan Fact Sheet, supra note 26.
Design Report, supra note 32, at 1.

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40
high 14 percent discount to CCB’s market price. The supervisors
may need to exercise flexibility in oversight of the BHCs’ capital
plans in order to make sure they are permitted to get the best price
possible in the sales of assets and their own securities.
It is unclear what the impact of the stress tests will be on the
PPIP program.168 To the extent the stress test may have been built
on unrealistic values for toxic assets, they will have created a disincentive to sell those assets at market prices, decreasing the likelihood of PPIP achieving its stated goals.169 On the other hand, to
the extent the stress tests have accurately revealed that some
banks are healthy, they may be more likely to sell toxic assets to
the PPIP program at realistic prices. If PPIP ends up setting inflated prices for toxic assets, it is harder to assess what effect the
stress tests will have on PPIP.
The SCAP did not take into account the possibility of repayment
of TARP funds. Only banks that do not need CAP funds will be
permitted to repay CPP funds,170 and they will only be permitted
to do so once they have proved they can issue debt securities without a government guarantee and with the approval of their supervisors. However, repayment will necessarily have an impact on the
capital of BHCs that repay TARP funds, and it might be argued
that more attention should be paid to the danger of driving down
capital after so much effort has been expended in shoring it up.
9. ISSUES RELATING TO THE BANKS NOT TESTED

The selection of the 19 largest BHCs, and not others, for the
stress tests may distort the BHC marketplace in a few ways. First,
by verifying that these 19 BHCs are healthy, the stress tests may
provide them with a competitive advantage against smaller banks
whose viability has not been confirmed. Second, the market might
interpret the selection of these 19 largest BHCs as an indication
that the supervisors consider them ‘‘too big to fail.’’ Both effects
could lead to market participants favoring the tested BHCs against
smaller competitors, distorting the marketplace.
I. RECOMMENDATIONS
• If economic conditions continue to worsen, raising the possibility that the ‘‘more adverse’’ scenario may be met or exceeded, the
stress tests of the 19 BHCs should be repeated under the more difficult economic assumptions, looking forward at least two years.171
It should be noted that as of June 5, 2009, the unemployment rate
for May had climbed to 9.4 percent 172 and the average for the first
five months of 2009 had reached 8.5 percent, compared with the assumed 2009 average of 8.9 percent under the more adverse sce-

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168 U.S. Department of Treasury, White Paper: Public Private Investment Program (Mar. 23,
2009) (online at www.treas.gov/press/releases/reports/ppipl whitepaperl 032309.pdf). PPIP
targets so-called ‘‘toxic assets’’—the troubled loans and securities on banks’’ balance sheets. The
immediate goal is to use a combination of private and public capital to buy ‘‘toxic assets.’’ The
intended result is to improve liquidity and promote bank lending.
169 U.S Banks Have $168 Billion Reason to Avoid PPIP, Bloomberg (May 29, 2009) (online at
www.bloomberg.com/apps/news?pid=20601208&sid=aa5Joz86l K6w&refer=finance).
170 CPP FAQs, supra note 131.
171 Additional stress tests that consider more alternatives—longer periods of time, more adverse conditions—would permit experts to evaluate the robustness of the tests and, if the results
remain strong, to develop more confidence in the strength of the financial institutions tested.
172 Employment Situation, supra note 60.

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41
nario. We recommend that Treasury publicly track the status of its
stress test macro-economic assumptions (unemployment, GDP, and
housing prices) and repeat the stress test if the adverse scenario
assumptions have been exceeded.
• Stress testing should be a regular feature of the 19 BHC’s examination cycle so long as an appreciable amount of toxic assets remain on their books, economic conditions do not substantially improve, or both. Public disclosure of the main results of such tests
should continue to be a part of this process. Between supervisory
stress tests, the BHCs should be required to run the stress tests
themselves, according to supervisory guidance, and to submit the
results as part of their ongoing supervisory examinations. Additionally, regulators should use stress tests on an ad hoc basis for all
banks or BHCs where circumstances, including the bank’s business
mix, dictate.
• More information should be released with respect to the results
of the stress tests. More granular information on estimated losses
by sub-categories (e.g., the 12 loan categories that were administered versus the eight that were released) should be disclosed. The
components of the first quarter adjustments should be disclosed,
showing more clearly the impact of capital actions and revenue.
Additional information will improve transparency of the process
and increase confidence in the robustness of the tests.
• The results of the stress tests under the ‘‘baseline’’ economic
scenario should be released or Treasury should explain why they
were not released.
• The CPP repayment process should be more transparent, and
information should be available to the public with respect to eligibility for repayment, the approval process, and the process for valuation and repurchase of warrants. Treasury should also make clear
how it proposes to use repaid TARP funds. The relationship of the
SCAP results to CPP repurchase must be completely transparent.
• Capital weaknesses must be addressed. At the same time, supervisors should be aware of the business needs of the BHCs. The
supervisors should be encouraged to exercise discretion and flexibility in oversight of the capital plans of the BHCs required to raise
a SCAP buffer. In particular, supervisors should be sensitive to the
need of BHCs to be able to time capital-raising and asset dispositions in response to market conditions and not to be forced into uneconomic transactions in order to meet inflexible timetables. This
discretion, however, should not be used as an excuse to avoid the
pressing need to address capital weaknesses.
J. CONCLUSIONS

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The three-month stress testing of the nation’s largest BHCs was
an unprecedented cross-supervisor effort, conducted in the midst of
a financial crisis and deteriorating national and international economic condition; the effort involved on the part of the more than
150 experts involved is highly commendable. It is also extremely
encouraging that the Federal Reserve Board has been willing to
make public information involving the tests on an almost unprecedented (although unfortunately incomplete) scale.
The tests must be placed in context. They were conducted solely
within the present supervisory context and are based on the prin-

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ciple that the supervisors can require capital in excess of the regulatory baseline when either bank or economic conditions dictate.
They are not a thorough re-examination of the banks involved (although they are based on the results of prior examinations), and
they rely on a combination of bank data, modeling based on particular economic assumptions, and qualitative judgments of the experienced examiners involved, many of whose conclusions have not
been made public.
Independent experts asked by the Panel to review the stress
tests found the economic modeling used to conduct them to be generally soundly conceived and conservative, based on the limited information available to those experts. And the addition of capital to
ten of the tested BHCs is certainly a good step forward. Moreover,
the stress-testing regimen can be valuable if it is firmly instituted
by the supervisors themselves for future periods and is repeated by
the supervisors if bank or economic conditions worsen to a greater
degree than assumed in the stress test modeling.
All the same, the stress tests should not be taken for more than
they are. As indicated above, they were conducted within the
present supervisory context only, and they are a temporary twoyear projection of a one-time capital buffer that need not be rebuilt.
They do not model BHC performance under ‘‘worst case’’ scenarios,
and as a result they do not project the capital necessary to prevent
banks from being stressed to near the breaking point. Most important, for some observers, they do not address the question whether
the values shown on bank balance sheets for certain classes of assets are too high; by restricting themselves to a two-year time
frame, their conclusions thus do not take into account the possibility that the asset values assumed (particularly for so-called toxic
assets) may undervalue bank liabilities to the extent that those liabilities result in losses after 2010.
The short-term effect of the stress tests was positive, and the financial markets have calmed to some extent. The Panel concludes
that it would be as much a mistake to dismiss the stress tests as
it would be to assign them greater value than they merit or in fact
that the supervisors claim for them. The fact that the holding companies have added certain amounts of capital on certain assumptions does not mean that the financial crisis is over or that the
holding companies are now free from the risk of the sort of crisisladen conditions many found themselves experiencing during 2008
and early 2009. While no one should gainsay the potentially positive results of the tests, it would be equally unwise to think that
those results reflect a diagnosis of all of the potential weaknesses
or create a necessarily sufficient buffer against future reverses for
the banking system.

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K. TABLES
FIGURE 4: BHCS SUBJECT TO THE STRESS TEST
Total BHC
assets 173
(as of
3/31/2009)
(dollars in
billions)

TARP capital
injections to
BHC 174
(to date)
(dollars in
billions)

Other
significant
entities in BHC
/ major recent
acquisitions

Name of BHC

Primary location

Bank of American Corporation.
JPMorgan Chase & Co .........

Charlotte, NC ......................

2,323.0

45.0

Merrill Lynch Countrywide

New York, NY ......................

2,079.0

25.0

Bear Stearns Washington
Mutual

New York, NY ......................
San Francisco, CA ..............
New York, NY ......................

1,823.0
1,286.0
926.0

45.0
25.0
10.0

New York, NY ......................
New York, NY ......................
Pittsburgh, PA ....................

626.0
491.0
286.0

10.0
0.0
7.6

Minneapolis, MN .................
New York, NY ......................

264.0
204.0

6.6
3.0

Detroit, MI ..........................
Atlanta, GA .........................
McLean, VA .........................

180.0
179.0
177.0

13.4
4.9
3.6

Boston, MA .........................
Winston-Salem, NC ............
Birmingham, AL .................

145.0
143.0
142.0

2.0
3.1
3.5

New York, NY ......................
Cincinnati, OH ....................
Cleveland, OH .....................

120.0
119.0
98.0

3.4
3.4
2.5

Citigroup, Inc .......................
Wells Fargo & Company ......
The Goldman Sachs Group,
Inc.
Morgan Stanley ....................
MetLife, Inc ..........................
PNC Financial Services
Group, Inc.
U.S. Bancorp ........................
The Bank of New York Mellon.
GMAC LLC ............................
SunTrust Banks, Inc ............
Capital One Financial Corporation.
State Street Corporation ......
BB&T Corporation ................
Regions Financial Corporation.
American Express Company
Fifth Third Bancorp ..............
KeyCorp ................................

Wachovia

National City

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173 National Information Center, Top 50 Bank Holding Companies Summary Page (online at www.ffiec.gov/nicpubweb/nicweb/Top50Form.aspx)
(accessed June 5, 2009). This web site compiles data on total BHC assets based on BHCs’ quarterly Consolidated Financial Statements (FR
Y–9C) and ranks BHCs by total assets on a quarterly basis. The data used in this chart comes from the most recent financial statements,
which include information through March 31, 2009. One bank that qualified for the stress tests because it held over $100 billion in total assets as of December 31, 2009—KeyCorp—no longer holds assets exceeding $100 billion. GMAC received an exemption from filing a FR Y–9C
form for the first quarter of 2009. See Board of Governors of the Federal Reserve System, Letter to David J. DeBrunner (Apr. 13, 2009) (online
at www.federalreserve.gov/boarddocs/legalint/BHCl ChangeInControl/2009/20090413a.pdf). Data on GMAC’s total assets was taken from the
company’s quarterly 10–Q filed with the SEC. See GMAC LLC, Form 10–Q (online at www.sec.gov/Archives/edgar/data/40729/
000119312509105735/d10q.htm) (accessed May 19, 2009).
174 June 5 TARP Transactions Report, supra note 13.

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44
FIGURE 5: CAPITAL-RAISING TO DATE
Company

Equity

American Express Co ...................

$500 million in stock 175 ............

Debt

Bank of America Corp .................
BB&T Corp ...................................
The Bank of New York Mellon
Corp.
Capital One Financial Corp .........

$20.8 billion in stock 177 ............
$1.5 billion in stock 178.
$1.2 billion in stock 179.
$1.6 billion in stock 180 ..............

Citigroup, Inc ...............................
Fifth Third Bancorp .....................
GMAC LLC ....................................
Goldman Sachs Group Inc.
JPMorgan Chase & Co .................
KeyCorp ........................................
MetLife Inc.
Morgan Stanley ............................

SCAP requirements

$3.0 billion of non-guaranteed
five- and ten-year notes 176.
$33.9 billion

$1 billion of non-guaranteed
five-year notes 181.
$2 billion of non-guaranteed
ten-year notes 182.

$5.5 billion
$1.1 billion
$11.5 billion

$5.0 billion in stock 183 ..............
$750 million in stock 185 ............

$2.5 billion of five-year notes 184.

$6.2 billion in stock 186 ..............

$4 billion of five and ten-year
notes 187.

PNC Financial Services Group Inc
Regions Financial Corp ...............
State Street Corp .........................

$600 million in stock 188 ............
$1.9 billion in stock 189 ..............
$2.0 billion in stock 190 ..............

SunTrust Banks, Inc ....................
U.S. Bancorp ................................
Wells Fargo & Co .........................

$1.8 billion
$1.8 billion

$1.4 billion in stock 192 ..............
$2.4 billion 193.
$8.6 billion in stock 194 ..............
$54.5 billion ................................

175 American

$600 million
$2.5 billion
$500 million of five-year, senior
notes 191.
$2.2 billion
$13.7 billion
$13 billion ...................................

$ 67.5 billion

Express Co., Form 8–K (June 1, 2009) (online at www.sec.gov/Archives/edgar/data/4962/000093041309003114/c57844l

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ex1.htm).
176 $1.25 billion of 7.25 percent five-year notes (527 basis points over U.S. Treasuries) and $1.75 billion of 8.125 percent ten year notes
(502 basis points over U.S. Treasuries). American Express Co., Form 8–K (May 20, 2009) (online at www.sec.gov/Archives/edgar/data/4962/
000093041309002795/c57673l 8k.htm)
177 Bank of America, Form 8–K (May 27, 2009) (online at www.sec.gov/Archives/edgar/data/4962/000093041309003114/c57844l ex1.htm).
178 BB&T Corp, Form 8–K (May 12, 2009) (online at www.sec.gov/Archives/edgar/data/92230/000119312509114095/d8k.htm).
179 Bank of New York Mellon Corp., Form 8–K (May 12, 2009) (online at www.sec.gov/Archives/edgar/data/1390777/000095012309008628/
y77159e8vk.htm).
180 Capital One Financial Corp., Form 8–K (May 11, 2009) (online at www.sec.gov/Archives/edgar/data/927628/000119312509107460/
d8k.htm).
181 7.494 percent five-year notes (540 basis points over U.S. Treasuries). One Financial Corp., Form FWP (May 20, 2009) (online at
www.sec.gov/Archives/edgar/data/927628/000119312509115052/dfwp.htm).
182 8.765 percent ten-year notes (562.5 basis points over U.S. Treasuries). Citigroup Inc.q, Form FWP (May 15, 2009) (online at
www.sec.gov/Archives/edgar/data/831001/000095012309008985/y77311fwfwp.htm).
183 JPMorgan Chase & Co., Form 8–K (June 1, 2009) (online at www.sec.gov/Archives/edgar/data/19617/000119312509122723/d8k.htm).
184 4.696 percent five-year notes (271 basis points over U.S. Treasuries). JPMorgan Chase & Co., Form FWP (May 13, 2009) (online at
www.sec.gov/Archives/edgar/data/19617/000001961709000793/fwp51309.htm).
185 Key Corp., Form 8–K (June 1, 2009) (online at www.sec.gov/Archives/edgar/data/19617/000119312509122723/d8k.htm).
186 Initial offering of $4 billion. Morgan Stanley, Form 8–K (May 8, 2009) (online at www.sec.gov/Archives/edgar/data/895421/
000095010309001058/dp13415l 8k.htm). Second offering of $2.2 billion. Morgan Stanley, Form 8–K (June 1, 2009) (online at www.sec.gov/
Archives/edgar/data/895421/000095010309001280/dp13673l 8k.htm).
187 $2 billion of 6.0 percent five-year notes (385 basis points over U.S. Treasuries) and $2 billion of 7.3 percent ten-year notes (399 basis
points over U.S. Treasuries). Morgan Stanley, Form FWP (May 8, 2009) (online at www.sec.gov/Archives/edgar/data/895421/
000090514809001909/efc9–0580l formfwp.htm).
188 PNC Financial Service Group, Inc., Form 8–K (May 20, 2009) (online at www.sec.gov/Archives/edgar/data/713676/000119312509119280/
d8k.htm).
189 Regions Financial Corp., Form 8–K (May 20, 2009) (online at www.sec.gov/Archives/edgar/data/1281761/000119312509115380/d8k.htm).
190 State Street Corp., Form 8–K (May 21, 2009) (online at www.sec.gov/Archives/edgar/data/93751/000119312509116176/d8k.htm).
191 4.3 percent five-year notes (196 basis points over U.S. Treasuries). State Street Corp., Form 8–K (May 22, 2009) (online at www.sec.gov/
Archives/edgar/data/93751/000119312509117661/d8k.htm).
192 SunTrust Banks, Inc., Form 8–K (June 1, 2009) (online at www.sec.gov/Archives/edgar/data/750556/000119312509121956/d8k.htm).
193 U.S. Bancorp., Form 8–K (May 11, 2009) (online at www.sec.gov/Archives/edgar/data/36104/000129993309002107/html 32711.htm).
194 Wells Fargo & Co., Form 8–K (May 8, 2009) (online at www.sec.gov/Archives/edgar/data/72971/000089882209000287/wfc8k.htm).

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FIGURE 6: BANKS THAT HAVE REPAID THEIR TARP FUNDS UNDER THE CPP AS OF MAY 29, 2009
CPP
Repayment
date

Bank

Washington Federal Inc ...
TCF Financial Corp ..........
First Niagara Financial
Group.
Iberiabank Corp ...............
Bank of Marin Bancorp ...
Old National Bancorp ......
Signature Bank ................
Sterling Bancshares, Inc
Berkshire Hills Bancorp,
Inc.
Alliance Financial Corporation.
FirstMerit Corporation ......
Sun Bancorp, Inc .............
Independent Bank Corp ...
Shore Bancshares, Inc ....
Somerset Hills Bancorp ...
SCBT Financial Corp .......
Texas Capital Bancshares, Inc.
Centra Financial Holdings, Inc/Centra Bank,
Inc.
First Mantowoc Bancorp,
Inc.
First ULB Corp .................
Valley National Bancorp ..
HF Financial Corp ............

CPP
Repayment
amount
(dollars in
millions)

Amount
remaining to
repay
(dollars in
millions)

Warrant
repurchase
amount
(dollars in
millions)

Does
Treasury
still hold
warrants?

05/27/2009
04/22/2009
05/27/2009

200.0
361.2
184.0

0
0
0

Y
Y
Y

03/31/2009
03/31/2009
03/31/2009
03/31/2009
05/05/2009
05/27/2009

90.0
28.0
100.0
120.0
125.2
40.0

0
0
0
0
0
0

N
Y
N
Y
Y
Y

05/13/2009

26.9

0

Y

04/22/2009
04/08/2008
04/22/2009
04/15/2009
05/20/2009
05/20/2009
05/13/2009

125.0
89.3
78.2
25.0
7.4
64.8
75.0

0
0
0
0
0
0
0

N
N
N
Y
Y
Y
Y

5.0 (05/27/2009)
2.1 (05/27/2009)
2.2 (05/27/2009)

03/31/2009

15.0

0

N

195 .8

05/27/09

12.0

0

N

.6 (05/27/2009)

04/22/09
06/03/09
06/03/09

4.9
75.0
25.0

0
225.0
0

N
Y
Y

.2 (04/22/2009)

1.2 (05/20/2009)
1.2 (05/08/2009)

(04/15/2009)

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195 For certain privately held institutions such as this one, Treasury immediately exercised a warrant for additional preferred shares. Upon
exiting TARP, the institution repurchased those additional shares for the total repurchase amount indicated.

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Annex to Section One: The Supervisory Capital Assessment
Program: An Appraisal

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105
SECTION TWO: ADDITIONAL VIEWS
A. REP. JEB HENSARLING
1. GENERAL PROGRAM OVERVIEW

As a member of the Congressional Oversight Panel (COP or the
panel) for the Troubled Asset Relief Program (TARP), it has become evident to me that, unfortunately, the program is no longer
being utilized for its intended purposes of financial stability and
taxpayer protection. It is being used instead to promote the economic, social and political agendas of the current administration.
As evidenced by TARP’s financing of two bankrupt auto makers,
multiple capital infusions into ‘‘healthy’’ institutions, increased
complexity for institutions wishing to repay TARP, I have come to
the conclusion that Congress’ original intent for financial stability
and taxpayer protection is no longer being respected and the program should be unwound.
2. BACKGROUND AND THE CONGRESSIONAL OVERSIGHT PANEL’S
STATUTORY RESPONSIBILITIES

On October 3, 2008, Congress voted to enact and the president
signed into law the Emergency Economic Stabilization Act of 2008
(EESA). The act provided the United States Treasury with the authority to spend $700 billion to stabilize the U.S. economy and prevent a systemic meltdown. The act also established two bodies with
broad oversight responsibilities: the COP and the Financial Stability Oversight Board (FSOB). The act placed audit responsibilities
in the GAO and a Special Inspector General for the Troubled Asset
Relief Program (SIGTARP).
While the oversight and audit organizations have some overlapping responsibilities, only the COP is specifically empowered to
hold hearings, take testimony, receive evidence, administer oaths
to witnesses, and review official data, and is required to write reports on the extent to which the information on transactions has
contributed to market transparency.196
The EESA statute requires COP to accomplish the following,
through regular reports:
• Oversee Treasury’s TARP-related actions and use of authority;
• Assess the impact to stabilization of financial markets and
institutions of TARP spending;
• Evaluate the extent to which TARP information released
adds to transparency; and
• Ensure effective foreclosure mitigation efforts in light of
minimizing long-term taxpayer costs and maximizing taxpayer
benefits.
All are tremendous responsibilities. However, the American people, through Congress, determined that each were necessary and
expressed confidence that the COP, as an organization and an arm
of Congress, was the right body to carry out the assigned tasks.

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196 Congressional Research Service, Emergency Economic Stabilization Act: Preliminary Analysis of Oversight Provisions (Nov. 20, 2008).

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It is no secret that I voted against EESA. However, as the only
sitting member of Congress on the COP, I have consistently expressed my commitment to ensure that the TARP program works,
that decisions made are based on merit and not political considerations, and most importantly, that the taxpayers are protected. I
respect the panel and each of its members and staff; however, I
fear that by choosing to focus much of its work on issues not central to our mandate the panel has missed critical opportunities to
provide effective oversight.
The American people have long understood that when it comes
to government actions, sunshine is the best disinfectant. The COP
is supposed to ensure that the sun is always shining when it comes
to Treasury’s actions and the use of TARP funds. However, due to
the panel’s pursuit of interesting topics for legislative and policy
debates, taxpayers have not received answers as to whether the
TARP program works, how decisions are being made or what the
banks are doing with the taxpayers’ money. A number of anecdotes
exist, but the panel has the ability to establish the facts.
As I have said in the past, effective oversight begins with a vigorous examination of those who administer the TARP. Unfortunately, the panel has conducted only one hearing with a Treasury
official during its six-month existence. As a starting point, I echo
my call that the panel hold a hearing each month with the Secretary of the Treasury or a senior designee with TARP management responsibilities. If the Treasury refuses to participate, the
panel should hold its officials to account for not participating. If the
panel refuses to call regular hearings with Treasury officials, the
American public and Congress should hold the panel to account for
negligence.
Additionally, effective taxpayer accountability requires that the
panel question TARP recipients. To date, the panel has questioned
3 institutions, representing 0.11 percent of total TARP authorization, out of over 600 197 TARP recipients. None of the major TARP
recipients have been questioned in a public hearing.
If presented with the opportunity, I believe the taxpayers would
pose the following types of questions to the TARP recipients in a
matter-of-fact, plainspoken American manner:
• Did the financial stability of the economy require that you accept TARP funds in the first place? Did your business model, risk
management techniques, compliance protocols and underwriting
standards threaten macroeconomic stability?
• If so, have you addressed those issues to ensure that taxpayers
won’t be called upon once again to infuse capital into your company? Please tell us what remedial actions you took and why you
think they will be effective.
• If the financial stability of our economy did not require a
TARP infusion into your company, did Treasury ‘‘force’’ you to accept any TARP funds? If so, please tell us what happened.
• When can taxpayers expect you to repay the TARP funds?

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197 Total number of financial institutions participating in Treasury’s Capital Purchase Plan.
See U.S. Department of the Treasury, Seventh Tranche Report to Congress (June 3, 2009) (online
at www.financialstability.gov/docs/TrancheReports/7thl Tranche-Report-Appendix.pdf).

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• To achieve the goal of financial stability, do you anticipate the
need for additional TARP funds? If so, how much and when will
you need the additional TARP funds?
• Has Treasury refused to permit you to repay all or any part
of your TARP funds in the name of financial stability? If so, please
tell us about your disagreement with Treasury.
• We realize that money is fungible, but please tell us what you
did with your TARP funds.
• Has Treasury or anyone from the government ‘‘encouraged’’ (or
directed) you to (i) extend credit to any person or entity or (ii) forgive or restructure any loan that may run counter to the goal of
your company’s financial stability?
• Using the TARP funds your company has received as leverage,
has Treasury or anyone from the government ‘‘assisted’’ (or directed) you in managing the affairs of your institution?
• Did your receipt of TARP funds result in new lending activity
or increased lending activity?
While the COP has reviewed a number of historical precedents
and commented on various policies, including how Iceland handled
its banking crisis, the panel cannot tell the American people what
safeguards Treasury has in place to ensure that TARP money is
not being wasted or if TARP money is being used in their best interest. The panel knows the answers to ancillary questions regarding how Spain, Germany, and Italy handled their banking crises,
but the panel cannot answer fundamental questions on how Treasury is handling the current crisis. For example, the COP should ascertain how Treasury measures success, how it will know when
TARP funds are no longer required, and what is Treasury’s exit
strategy. The taxpayers deserve to know answers to these fundamental questions, and it is the COP’s duty to help provide them.
As SIGTARP discussed at length in its last report, TARP has expanded a ‘‘tremendous’’ amount in scope, scale and complexity.198
I am including analysis of and questions about additional, key
TARP-related issues upon which the panel has so far failed to shed
light. I have also provided a few observations on the panel’s June
report.
a. Investigation of Chrysler’s and GM’s Bankruptcy and Restructuring
Under the terms of the proposed Chrysler restructuring plan, the
Chrysler senior secured creditors will receive 29 cents on the dollar
and the pension funds of the United Auto Workers (UAW), each an
unsecured creditor, will receive 43 cents on the dollar and a 55 percent equity ownership interest in the ‘‘new’’ Chrysler, even though
the claims of the senior secured creditors are of a higher bankruptcy priority than the claims of the UAW.199 The State of Indiana’s pension funds, one group of Chrysler’s secured creditors, filed
an appeal to the Chrysler sale, causing the bankruptcy judge to
freeze the proceedings. In their filing, the funds stated, ‘‘This at-

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198 Office of the Special Inspector General for the Troubled Asset Relief Program, Quarterly
Report to Congress (Apr. 21, 2009) (online at www.sigtarp.gov/reports/congress/2009/April2009l
Quarterlyl Reportl tol Congress.pdf) (hereinafter ‘‘SIGTARP April Report’’).
199 Chad Bray and Alex P. Kellog, Court Affirms Chrysler Sale but Puts Deal on Hold Until
Monday, Wall Street Journal (June 3, 2009) (online at online.wsj.com/article/
SB124423529553090069.html#mod=testMod).

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108
tack on the most fundamental of creditor rights has been funded,
orchestrated and controlled by Treasury, despite its complete lack
of statutory and constitutional authority to do so.’’ 200
Under the terms of the proposed GM restructuring plan, the
United States and Canadian governments, the UAW pension funds
and the GM bondholders will receive an initial common equity interest in GM of 72.5 percent, 17.5 percent and 10 percent, respectively. The equity interest of the UAW pension funds and the GM
bondholders may increase (with an offsetting reduction in each government’s equity share) to up to 20 percent and 25 percent, respectively, upon the satisfaction of specific conditions. The GM bondholders have been asked to swap $27 billion in debt for a 10–25
percent common equity interest in GM, while the UAW has agreed
to swap $20 billion in debt for a 17.5–20 percent common equity
interest and $9 billion in preferred stock and notes in GM.201 Apparently, even though the bankruptcy claims of the UAW pension
funds and the GM bondholders are of the same priority, the UAW
will receive a disproportionately greater distribution than the GM
bondholders in the reorganization.
Given the unorthodox reordering of the rights of the Chrysler
and GM creditors, a fundamental question arises as to whether the
Administration directed that TARP funds be used to advance its
policy and legislative objectives rather than to stabilize the American economy as required by EESA. In other words, did the Administration use any TARP funds as a carrot or stick? The Administration should also inform the American taxpayers regarding its proposed exit strategy from the Chrysler, GM and other TARP investments and whether it plans to reinvest such proceeds in other entities.
The panel has agreed to hold a public hearing on the Chrysler
and GM reorganizations. I commend the panel for this oversight effort. An effective hearing will take place as soon as possible in the
nation’s capitol and include senior Treasury officials, auto company
executives, union executives, TARP recipient bondholders, and nonTARP recipient bondholders, to name a few. In order to discharge
its specific duties and responsibilities under EESA in a professional
and timely manner, the panel should seek answers to the following
additional questions (among others):
• Why would certain Chrysler and GM creditors agree to accept
less than what they were contractually owed and entitled to receive
under bankruptcy law? 202

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200 Tiffany Kary, et al., Chrysler Says Indiana Pension Funds Can’t Win Appeal, Bloomberg
(June 4, 2009) (online at www.bloomberg.com/apps/news?pid=20601103&sid=aDSQ2KKXfDPI).
201 Peter Whoriskey, U.S. Gets Majority Stake in New GM, Washington Post (June 1, 2009)
(online
at
www.washingtonpost.com/wpdyn/content/article/2009/05/31/
AR2009053101959.html?sid=ST2009060100034).
202 Thomas Lauria, a senior bankruptcy and reorganization attorney with the international
law firm White & Case LLP, who represents a group of Chrysler creditors, recently stated on
CNBC that the Administration flagrantly violated constitutional principles by trampling on the
contractual rights of the Chrysler bondholders. This is a serious charge by a seasoned and well
respected attorney at a top-tier law firm and should be investigated by the panel. See Thomas
Lauria, Interview: GM, Bonds & Beyond, CNBC (May 13, 2009) (online at www.cnbc.com/id/
15840232?video=1122734987&play=1); Thomas Lauria, Interview: A Case of Gangster Government, CNBC (May 8, 2009) (online at www.cnbc.com/id/15840232?video=1118369112&play=1);
Thomas Lauria, Interview: White House Bullying Bondholders?, CNBC (May 6, 2009) (online at
www.cnbc.com/id/15840232?video=1116040367&play=1).

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• Specifically, what is the legal and business justification for preferring the claims of the UAW pension funds over the claims of (i)
the Chrysler senior secured creditors since the claims of such creditors are of a higher bankruptcy priority and should receive preferential treatment under bankruptcy law, and (ii) the GM bondholders since the claims of the UAW and the GM bondholders are
of the same bankruptcy priority (both unsecured) and should receive identical (or at least substantially similar) treatment under
bankruptcy law?
• Does it matter that some of the creditors were also TARP recipients? TARP beneficiaries who were also secured bondholders of
Chrysler—including Citigroup, JP Morgan Chase, Morgan Stanley,
and Goldman Sachs—agreed to the swap of $6.9 billion in debt for
just $2 billion in cash. Did these institutions acquiesce with the
knowledge that losses from their Chrysler holdings may be replenished with TARP funds? Were they pressured into doing so? How
would the taxpayer know whether or not Treasury channeled
TARP funds through these institutions as a backdoor way of financing the auto industry and, indirectly, UAW claims? Were any
of the GM bondholders TARP recipients?
• Why would TARP recipients (that by definition owe substantial
sums to the United States government) agree to settle bankruptcy
claims for less than the maximum amount allowable under bankruptcy law?
• Who authorized those decisions—the management of each
TARP recipient or Treasury acting as the de facto manager of the
TARP recipients—and what, if any, fiduciary duties were violated?
• If management of each such TARP recipient voluntarily agreed
to forgive part of its claim against Chrysler and GM, as applicable,
what was their legal basis for making such a gift?
• Why would TARP recipients agree to transfer part of their
bankruptcy claims to another creditor—the UAW—and not use
such amounts to repay their TARP loans?
• Did the Administration ‘‘reimburse’’ Chrysler and GM for any
TARP funds transferred to the UAW?
• Did the Administration choose to prefer one group of employees—UAW members and their retiree benefits fund—over other
non-UAW employees whose pension funds invested in GM bonds?
Under such an approach the retirement plans of the UAW employees would be enriched while the retirement plans of the non-UAW
employees would be diminished.
• What message does this send to the financial markets—should
investors expect their contractual rights to be ignored when dealing
with the United States government? How will the cases of GM and
Chrysler affect future financings and reorganizations?
• What message does this send to non-UAW employees whose
pension funds invested in Chrysler and GM indebtedness—you lose
part of your retirement savings because your pension fund does not
have the special relationships of the UAW?
• Is the Administration setting corporate policy and/or running
the day-to-day affairs of Chrysler and GM, including the two reorganizations? If so, under what authority?
• Did the Administration ‘‘force’’ Chrysler to accept a deal with
Fiat?

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• Have the Chrysler and GM boards of directors and officers
abandoned their fiduciary duties and acquiesced in the management decisions made by the Administration?
• Has the Administration appropriately discharged its fiduciary
duties in its role as the de facto manager of an insolvent Chrysler
and GM?
• Will the United States government be open to suit by private
parties based upon the breach of its fiduciary duties owed to Chrysler and GM and their shareholders and creditors?
• Should the panel recommend that SIGTARP, which performs
audits and investigations on abuse and fraud, investigate any such
inappropriate use of TARP funds?
• What is the Administration’s exit strategy regarding the investment of TARP funds in Chrysler and GM?
On top of a bankruptcy that will give the UAW a sweeter deal
than comparable GM creditors, there is also the wider concern that
GM is becoming another black hole for taxpayer dollars. The government will presumably receive a 72.5 percent initial ownership
stake in exchange for $50 billion of TARP funds committed so far.
Although the President has called the government a ‘‘reluctant’’
shareholder that will ‘‘take a hands-off approach, and get out
quickly,’’ the Administration has presented no exit strategy for its
ownership, nor any plan for recouping equity investments. In its
latest baseline, the Congressional Budget Office (CBO) estimated
that the TARP auto program carried about a 74 percent subsidy
rate for the taxpayer—a rate calculated before GM announced
bankruptcy and before loans were converted to what will amount
to common stock. Congress and the public still have little knowledge of how the Administration will manage the automaker, how
it assesses risks of taxpayer losses, and a strategy to unwind its
investment. These issues will require rigorous and ongoing investigation by the COP.
Regrettably, the consequences of these actions may not be limited
to Chrysler and GM but may resonate through and have a chilling
effect on the broader bond and capital markets. Once investors realize that their contracts may not be respected by the Administration, if they even agree to participate, they will demand interest
rate and other premiums to compensate for the enhanced risk.
Such expenses will be passed on to consumers and will render
American businesses at a competitive disadvantage to their foreign
counterparts. Following the well-stumbled path of unintended consequences, two misguided attempts perhaps to favor the UAW may
cause other hard working Americans to lose their jobs to business
enterprises organized in foreign countries that continue to respect
the sanctity of a contract. How can the Administration believe that
its actions in the Chrysler and GM reorganizations will go unnoticed by the investment community? These ‘‘technicalities’’ may
have not garnered the attention of most Americans but they are
front-and-center issues with financial institutions and their counsel
and investors. How can an Administration that is beating the drum
with one hand to encourage financial institutions to extend credit
poke the same financial institutions in the eye with the other
hand? I suspect this lesson has not been lost on the financial com-

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munity and may serve as one of the reasons for the community’s
tepid embrace of the TALF and PPIP programs.
b. Transparency of Bank of America’s Acquisition of Merrill Lynch
Recently, reports have appeared to the effect that Treasury ‘‘coerced’’ Bank of America into purchasing Merrill Lynch even though
Bank of America’s management concluded that the transaction was
not in the best interest of the bank and its shareholder. In May the
chair of the panel, Professor Elizabeth Warren, sent a letter to
Treasury Secretary Geithner requesting his ‘‘thoughts on the
issue.’’ In order to determine what actually occurred, the panel
should investigate whether Treasury threatened to withhold TARP
funds if Bank of America withdrew from the acquisition, when any
such threats were made and if such actions impacted Bank of
America’s decision to acquire Merrill Lynch.
c. TALF and PPIP
The COP’s April report indicates a lack of participation by potential investors in other government programs like the Term AssetBacked Securities Loan Facility (TALF) and the Public-Private Investment Program (PPIP), due to the uncertainty regarding changing terms and conditions of the programs.203 Although the Federal
Reserve announced that requests for participation in TALF increased $11.5 billion from last month, the program had a rocky
start and may pose a greater risk as it brings on commercial and
residential mortgage-backed securities (MBS).204 The PPIP, which
has not yet gone live, continues to be a program in limbo, and the
FDIC now says it will delay the sale of legacy loans.205
As we await further details and in order to discharge its specific
duties and responsibilities under EESA in a professional and timely manner, the panel should address the following inquiries:
• How have these uncertainties—specifically including the complex executive compensation rules, the threatened ‘‘outing’’ of certain AIG employees and their families, the alleged inequitable
treatment of certain creditors of Chrysler and GM, and the pending
SIGTARP investigations—affected the TALF and PPIP programs?
• Why haven’t hedge funds, private equity funds and other investors embraced the TALF and PPIP programs as anticipated by
Treasury?
• Has Treasury marketed these programs to passive foreign investors and tax exempt organizations (as well as the typical domestic investors) and what regulatory and other burdens prohibit or
limit the participation by such investors?
• Are the tax laws written so as to encourage passive foreign investors to invest in performing loans and securities but discourage
such investors from investing in distressed loans and securities?

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203 Jody Shenn, Dudley’s TALF Comments Add Signs of a PPIP Stall, Bloomberg (June 5,
2009) (online at www.bloomberg.com/apps/news?pid=newsarchive&sid=a2Wl7tAD6rEA).
204 Scott Lanman and Sarah Mulholland, Fed Says TALF Loan Requests Increase to $11.5 Billion,
Bloomberg
(June
2,
2009)
(online
at
www.bloomberg.com/apps/
news?pid=20601087&sid=aUonjouK30hU).
205 Margaret Chadbourn, FDIC Said to Delay PPIP Test Sale of Distressed Loans, Bloomberg
(June
2,
2009)
(online
at
www.bloomberg.com/apps/
news?pid=20601103&sid=aVLm8N96tvV0&refer=us).

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• Why hasn’t the panel called leaders in the financial and investment communities to testify as to why they consider the TALF and
PPIP programs unattractive?
• What do potential investors like and what do they dislike, and
why?
• Is it possible to address the ‘‘dislikes’’ in a reasonable and mutually beneficial manner?
• Why have some investors abandoned their participation in the
programs after expressing initial interest?
• What legal and financial impediments exist?
• What other impediments exist?
• If Treasury is struggling to introduce market-ready investment
programs, why hasn’t the panel offered its assistance?
I am certainly not suggesting that hedge fund managers be permitted to structure the programs de novo, but since Treasury desperately needs private capital to arrest the financial crisis it seems
entirely appropriate for the panel to solicit and consider the views
of the targeted investor classes. Treasury and the panel must remember that private sector investors have limited capital to deploy
and numerous attractive opportunities to consider and will not
chose to invest in any Treasury program unless they expect to earn
an appropriate risk adjusted rate of return without excessive administrative and regulatory burdens. These private sector institutions owe a fiduciary duty to their investors (which often include
pension funds and university endowments) and simply cannot allocate capital to off-market investments.
With the full knowledge that private dollars will not participate
unless they anticipate upside potential, the panel should also ask
Treasury to provide more detail on how it assesses downside risk
to the taxpayers of the TALF and PPIP programs. SIGTARP, for
example, has already made several recommendations to Treasury
on ways to reduce risk and the potential for fraud in TALF and
PPIP. It is extremely concerned with the inclusion of legacy residential MBS in TALF, stating the Treasury should screen individual securities, have more stringent requirements for loans used
as collateral, and require higher haircuts for all MBS. In addition,
SIGTARP believes that PPIP is ‘‘inherently vulnerable to fraud,
waste and abuse,’’ including various conflicts of interests between
participants.206
d. June COP Report
The report is fairly straightforward in that it focuses on the mechanics of the recently completed stress tests. Although I voted
‘‘yes’’ to the report, I offer the following questions and observations.
i. Underlying Legal and Regulatory System. Increased government involvement in our housing markets created significant distortions and disruptions. This increased involvement is contrary to
the oft-repeated, now disproven claims of proponents of expanded
government control of our economy that a ‘‘wave’’ of market deregulation over the last 20 years caused the current crisis. To the contrary, facts indicate that there were at least five key factors which
contributed to financial crisis, at least four of which were a direct

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206 SIGTARP

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result of government involvement. Those four factors—highly accommodative monetary policy by the Federal Reserve, continual
federal policies designed to expand home ownership, the congressionally-granted duopoly status of housing GSEs Fannie Mae and
Freddie Mac, and an anti-competitive government-sanctioned credit
rating oligopoly—are thoroughly discussed in the Joint Dissenting
Views to the COP’s ‘‘Special Report On Regulatory Reform’’ that I
offered along with Senator John Sununu along with a fifth factor
(failures throughout the mortgage securitization process that resulted in the abandonment of sound underwriting practices).207 As
such, a thorough recitation of those points here would be redundant.
ii. Further Information on Counterparty Risk. The current COP
report gives a broad overview of how bank holding companies
(BHCs) provided estimates of counterparty losses, potentially occurring from deterioration in the credit markets, under the two stress
test scenarios. But the fact remains that there is still a considerable amount of uncertainty about the inputs used to stress test
counterparty agreements like credit default swaps and similarlystructured products. The panel neglects to provide much detail beyond what the Federal Reserve’s SCAP ‘‘Design and Implementation’’ presents in its white paper. What was the interaction like between the BHCs, who ran the tests, and the Federal Reserve, who
supervised them? Was the Fed able to validate counterparty data?
There is also little discussion of disparate data among BHCs, and
how the Federal Reserve rationalized what is a complicated framework with interdependent assumptions on the risks of default. If
the financial institutions already have counterparty data available
to reasonably assess losses, were another set of market shocks to
occur, why is there still so much uncertainty about systemic risk?
Is there any way for the Federal Reserve to separate the potential
losses from agreements like credit default swaps from other potential trading losses? Information that addresses these questions
would enable COP to fulfill its responsibility of assessing how effective TARP funds have been in stabilizing financial markets.
iii. Application of the Mark-to-Market Rules. Was the methodology applied to the ‘‘more adverse’’ scenario too conservative? That
is, if the newly relaxed mark-to-market rules were applied to the
‘‘more adverse’’ scenario by how much would the additional capital
requirements have dropped? A lesser capital requirement would decrease the likelihood that the BHCs would have to raise equity capital by (i) selling stock in the market or under CAP, (ii) converting
preferred stock (whether privately held or issued under the CPP)
into common stock, or (iii) selling assets. No such alternative is in
the best interests of the taxpayers or the BHCs and, as such,
should be avoided unless necessary and appropriate. Perhaps prudent underwriting necessitates the use of the old mark-to-market
rules under the theory ABS securities will continue to be worth far
less than their face values. The panel should continue to investigate by how much the additional capital requirements would have

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207 Congressional Oversight Panel, Special Report on Regulatory Reform: Modernizing the
American Financial Regulatory System: Recommendations for Improving Oversight, Protecting
Consumers, and Ensuring Stability, at 54–89 (Jan. 29, 2009) (online at cop.senate.gov/documents/cop-012909-report-regulatoryreform.pdf).

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dropped if the recently modified mark-to-market rules were applied
to the ‘‘more adverse’’ scenario.
iv. ‘‘Negotiation’’ of Stress Tests. The report raises the question
as to whether the stress test results were ‘‘negotiated’’ between the
BHCs and their supervisors. The report notes that the supervisors
informed the staff of the panel that there was no ‘‘negotiation’’ of
the results except with respect to specific first quarter adjustments
and clear errors and omissions.
The report also asks if the process could have been better handled in a more transparent manner. Although such inquiry is no
doubt appropriate, absent evidence to the contrary, I think it might
be counterproductive to dig aggressively into the discussions between the BHCs and their supervisors because such discussions
were no doubt candid and may have indeed resulted in lower capital requirements for specific institutions. It’s naive to think otherwise. It does not follow, however, that the regulators were persuaded to recommend inappropriately low additional capital requirements for any institution. Regulated entities and their supervisors typically discuss (and argue) at length the results of an examination or audit. Through this back-and-forth process each side
presents its case and advocates the merits of its position. The regulated entity works to assist the regulator in better understanding
how the applicable regulations should apply to its business, financial position and operating results, and the regulator argues in support of its application of the regulations to the regulated entity.
This process is critical for the regulators because they are generally
significantly outnumbered by the employees of the regulated entities. Regulated entities and their supervisors must have an open
line of communication that permits each to speak frankly. Such
interaction and exchange of ideas between a regulated entity and
its supervisor by no means implies that the regulated entity acted
in an inappropriate manner or that the regulator conceded an issue
that is not in the best interest of the taxpayers. If credible evidence
develops to the contrary the panel should promptly investigate,
otherwise any investigation will most likely yield only the obvious:
the supervisors presented their results to the BHCs; the BHCs
commented on any inconsistencies, errors and omission; the supervisors made any modifications to their reports that they considered
appropriate in their sole and absolute discretion; and the results
were released.
v. CMBS. I continue to receive less than enthusiastic reports regarding the commercial real estate market. If all commercial real
estate loans and CMBSs were marked-to-market the additional
capital requirement could jump dramatically. The supervisors
should diligently monitor these loans and securities.
vi. Government Intervention, Exit Strategy and Related Issues.
The following sentences were included in a draft version of the
June report, but were not included in the final report. They are important issues to consider in the context of TARP’s effectiveness,
and I have included them below:
‘‘To the extent that BHCs rely on CAP funds in meeting their
capital buffer needs, all the issues involved in government ownership of companies’ common stock are raised. Promised Treasury
guidance as to the corporate governance principles that will be fol-

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lowed does not yet seem to have been published, and will be crucial.’’
‘‘Since government intervention in the markets causes uncertainty, and may make investors less likely to participate in capital
raising by the BHCs, the Administration should be as transparent
as possible with respect to policy issues regarding intervention.’’
‘‘Treasury should publish the corporate governance policies or
guidelines which it will follow as a shareholder in institutions requiring CAP funding.’’
In addition, and in order to discharge its specific duties and responsibilities under EESA in a professional and timely manner, the
panel should investigate the following related issues (among others):
• What is Treasury’s exit strategy with respect to each TARP investment? Treasury should specify its exit strategy on an entity-byentity basis with a time line and in sufficient detail.
• What TARP investments does Treasury expect to hold at the
end of 2009 and each of the next five years? Treasury should specify on an entity-by-entity basis and in sufficient detail.
• Does Treasury anticipate that it will need to make additional
investments in any of the current TARP recipients or any other entity? If so, in what amount, in what form, for what entity and for
what purpose?
• Does Treasury anticipate that it will reinvest any repaid TARP
funds, that is, is TARP a revolving credit/investment facility?
• Will Treasury remain a passive investor or will it undertake to
designate the directors and officers of the TARP recipients and in
substance exercise day-to-day control over the management and affairs of such entities?
• Will Treasury timely announce its decision to act in a passive
or active manner with respect to the TARP recipients so as to lessen the uncertainty regarding the large block of shares held by the
public sector?
• Will Treasury follow and respect applicable state corporate and
federal and state securities law?
• If the government acts as the de facto management of any
TARP recipient will it be liable to suit as a controlling person and
subject to all applicable federal and state corporate, securities and
other rules and regulations?
• What are the consequences of the United States government
serving as the de facto manager of Chrysler, GM and the largest
financial institutions?
• Will the government mandate which cars will be built and
which borrowers will qualify for loans?
• How will ‘‘non-subsidized’’ businesses compete with TARP recipients whose government shareholder may literally print money?
• Will TARP recipients receive favorable government contracts
or other direct or indirect subsidies the award of which is not based
upon objective and transparent criteria?
• Will TARP recipients promptly disclose all contractual arrangements (oral or written) between each TARP recipient and the
government, together with a detailed description of the contract, its
purpose, the transparent and open competitive bidding process un-

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dertaken and the arm’s length and market directed nature of the
contract?
• Will TARP recipients be able to obtain private or public credit
or enter into other contractual arrangements at favorable rates because of the implicit governmental guarantee of such indebtedness
and contracts?
• Will any such subsidies violate U.S. law or the laws of any foreign jurisdiction?
• How may all aspects of the relationship between each TARP
recipient and the government be made more transparent, accountable and beyond reproach?
• What are the best practices the government should adopt with
respect to its role as the sole TARP investor?
• Will employees (and members of their immediate families) of
the government that work with or supervise any TARP recipients
be barred from seeking employment or serving as a director with
TARP recipients or from working with any public policy shop, law
firm or other organization that represents any TARP recipients for
a period of, say, at least five-years following the departure from
government service of such employee?
• Will governmental employees (and members of their immediate
families) be barred from serving as directors, managers or employees of any TARP recipient during their government service?
• What corporate governance, compliance, risk management and
internal control protocols and procedures will the government
adopt with respect to its role as a creditor and shareholder of the
TARP recipients?
• Will the government in its capacity as a shareholder of each
TARP recipient undertake to abide by all insider trading, controlling shareholder and other applicable rules and regulations?
• Will the government exert disproportionate influence over
management relative to its actual ownership interests in the TARP
recipients?
• How will Treasury resolve any conflict of interest between its
role as a creditor or equity holder in any TARP recipient and as
a supervising governmental authority for any such TARP recipient?
• Will the IRS, SEC, Federal Reserve, FDIC and other governmental agencies be able to discharge their regulatory and enforcement responsibilities with respect to each TARP recipient without
political influence?
• Will management of the TARP recipients support the government’s slate of proposed directors and thus disenfranchise the remaining shareholders under the proxy rules?
• If Treasury plans to sell its common stock to the public what
are the appropriate benchmarks that will trigger such sales?
• Should Treasury sell its shares in the market (whereby the
TARP recipients will not share in the proceeds, but the TARP advances will be repaid) or should Treasury agree to retain its stock
and permit the TARP recipients to sell newly issued shares to
third-parties (whereby the TARP recipients will retain the proceeds
from the offering, but the TARP advances will remain outstanding)?

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SECTION THREE: CORRESPONDENCE WITH TREASURY
UPDATE
On behalf of the Panel, Chair Elizabeth Warren sent a letter on
May 11, 2009 to Federal Reserve Board Chairman Bernanke to request certain documents and information related to the SCAP and
to arrange a series of meetings to discuss SCAP.208 Negotiations
regarding the production of the requested materials are ongoing.
On behalf of the Panel, Chair Elizabeth Warren sent a letter to
Secretary Geithner on May 12, 2009, inviting him to testify before
the Panel on Wednesday, June 17, 2009.209 The Panel seeks to continue its public dialogue with Secretary Geithner, which began
with his first appearance before the Panel on April 21, 2009. The
letter specifically requests that the Secretary appear before the
Panel to discuss the results of the stress tests and the questions
the results raise concerning methodology, repayment of TARP
funds, and the next steps for the use of TARP money.
On behalf of the Panel, Chair Elizabeth Warren sent a letter on
May 19, 2009 to Secretary Geithner and Chairman Bernanke referencing public concern that Treasury and the Board had applied
strong pressure on Bank of America to complete its acquisition of
Merrill Lynch, despite Bank of America’s concerns about Merrill
Lynch’s deteriorating financial state.210 The letter cites this episode as an example of the conflicts of interest that can arise when
the government acts simultaneously as regulator, lender of last resort, and shareholder. The letter concludes by soliciting Secretary
Geithner’s and Chairman Bernanke’s thoughts on how to manage
these inherent conflicts to ensure that similar episodes do not undermine government efforts to stabilize the financial system in the
future.
On behalf of the Panel, Chair Elizabeth Warren sent a letter on
May 26, 2009, to Secretary Geithner requesting information about
Treasury’s Temporary Guarantee Program for Money Market
Funds, which is funded by TARP.211 The Temporary Guarantee
Program uses assets of the Exchange Stabilization Fund to guarantee the net asset value of shares of participating money market
mutual funds. The letter requests a description of the program mechanics and an accounting of its obligations and funding mechanisms.

208 See

Appendix
Appendix
Appendix
211 See Appendix
209 See

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210 See

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I of this report, infra.
II of this report, infra.
III of this report, infra.
IV of this report, infra.

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SECTION FOUR: TARP UPDATES SINCE LAST REPORT
In addition to the release of the stress test results on May 7,
2009 (see Section One of this report), Treasury and the Federal Reserve Board released data and made program adjustments to a
number of initiatives under the Financial Stability Plan since the
release of the Panel’s last oversight report.
A. AUTOMOTIVE INDUSTRY FINANCING PROGRAM (AIFP)

On June 1, 2009, a federal bankruptcy judge approved the sale
of the majority of Chrysler’s assets to the Italian automaker Fiat,
clearing the way for the company to exit the bankruptcy process.
On the same day, General Motors (GM) filed for chapter 11 bankruptcy following the approval of its revised viability plan by the
President’s Auto Industry Task Force. The Administration pledged
to support GM through an expedited chapter 11 proceeding with an
additional public investment of $30.1 billion under AIFP. The additional cash infusion will raise the total U.S. investment in GM to
$49.8 billion. In return, the government will receive $8.8 billion in
debt and preferred stock, giving it a 60 percent ownership stake in
the new GM.
B. ADDITIONAL CPP INVESTMENT IN GMAC

On May 21, 2009, Treasury announced a $7.5 billion preferred
equity investment in GMAC. GMAC was one of ten banks subjected
to ‘‘stress tests’’ under the SCAP determined to be in need of additional capital. Treasury mandated that the auto lender raise $9.1
billion in new tier 1 capital within six months. $3.5 billion of this
investment will go toward addressing the capital shortage. The remaining $4 billion will be used to support new financing for Chrysler dealers and customers, a condition of federal assistance. GMAC
must submit a plan for meeting the remainder of its capital needs
to Treasury by June 8. Treasury also announced its intention to exercise the right to exchange an earlier $884 million loan to GM for
common equity interests in GMAC, giving the government a 35.4
percent equity interest in GMAC.
C. TERM ASSET-BACKED SECURITIES LOAN FACILITY (TALF)

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The Federal Reserve Board approved the addition of legacy commercial mortgage-backed securities (Legacy CMBS) to the classes of
assets eligible for TALF loans. Legacy CMBS are those issued before January 1, 2009. Previously, the Board had announced it
would expand the range of acceptable TALF collateral to include
new CMBS (those issued after January 1, 2009) starting with the
June 16 subscription date. Legacy CMBS are expected to join TALF
beginning with the subscription in late July. The terms of TALF
coverage of Legacy CMBS will differ from those for other assets.
The haircut (adjusted for length of maturity) will be a standard 15
percent of par—the face amount—of the Legacy CMBS financed.
Because the haircut is based on par value, it will increase with
every dollar that the Legacy CMBS are valued below par. Thus, the
government compensation for risk increases as its collateral loses
value. The interest rate carry (the amount that can be earned in
excess of the interest paid to the New York Fed) will be capped at

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90 percent; this is the first explicit ceiling on TALF returns. The
cap amounts to a second haircut of six to eight percent.
On June 2, 2009, the Federal Reserve Bank of New York offered
its June TALF subscription on non-mortgage asset-backed securities (ABS). In the two hours the facility was open, $11.5 billion in
loans were requested. More than three quarters of the funds were
secured by assets backed by credit card debt ($6.2 billion) or auto
loans ($3.3 billion). As a point of comparison, there was a total of
$10.6 billion in loans at the May facility, $1.7 billion at the April
facility and $4.7 billion at the March facility.
D. MAKING HOME AFFORDABLE PROGRAM (MHA)

On May 14, 2009, Secretary Geithner and Housing and Urban
Development (HUD) Secretary Shaun Donovan announced two new
program components intended to help homeowners obtain modifications and stabilize property values in areas suffering from home
price declines.
1. Foreclosure Alternatives Program provides incentives for
servicers and borrowers to pursue short sales and deeds-in-lieu
(DIL) of foreclosure in cases where the borrower is generally eligible for a MHA modification but is unable to complete the process.
The program aims to simplify and streamline the short sale and
deed-in-lieu process by providing a standard process flow, minimum performance timeframes, and standard documentation.
2. Home Price Decline Protection Incentives will provide lenders
additional incentives for modifications in areas where home price
declines have been most severe and there is concern that the market has yet to bottom out. The program will provide cash payments
to lenders based on the rate of recent home price declines in a local
housing market, as well as the average cost of a home in that market. The incentive payments on all modified homes will help cover
the incremental collateral loss on those modifications that do not
succeed.
Treasury also released a progress report on MHA. According to
the report, since MHA was announced in early March, 14 servicers,
including the nation’s five largest, had signed contracts and begun
modifications under MHA. The servicers had extended offers on
over 55,000 trial modifications and mailed over 300,000 letters
with information about trial modifications to troubled borrowers.
E. PUBLIC-PRIVATE INVESTMENT PROGRAM (PPIP)

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On June 3, 2009, the FDIC announced that the June pilot auction of illiquid bank assets under the Legacy Loans Program (LLP),
one component of the Administration’s two-part Public-Private Investment Program (PPIP), would be postponed. According to the
FDIC, the auction was postponed because many banks have been
able to raise new capital without having to contemplate selling bad
assets through the LLP. The FDIC did not state when the postponed auction would take place. A pilot auction for receivership assets, those assets retained by the FDIC from failed banks, is scheduled to take place in July.

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F. CPP MONTHLY LENDING REPORT

Treasury released its first CPP Monthly Lending Report, a survey of all CPP participants designed to provide insight into their
lending activities. The report captures three data points on a
monthly basis: average outstanding balances of consumer loans,
commercial loans, and total loans from all CPP participants. This
first report includes data from 500 banks from February 2009 and
March 2009. The report shows that the total average outstanding
loans for all CPP participants were $5,279 billion in February 2009
and $5,237 billion in March 2009. The CPP Monthly Lending Report joins the Monthly Lending and Intermediation Snapshot of the
top 21 CPP participants (launched in January) as Treasury’s primary sources of public data on lending trends and loans outstanding from CPP institutions.
G. REPAYMENT OF TARP FUNDS

On June 1, 2009, the Federal Reserve Board released an outline
of the criteria it will use to evaluate applications to redeem Treasury capital from the 19 BHCs that participated in SCAP. The
Board’s primary requirements for approval are a demonstration on
the part of the BHC that it can access the long-term debt markets
without reliance on a guarantee from the FDIC and the ability to
successfully access public equity markets. Among other things, a
BHC must also demonstrate the ability to maintain certain minimum capital levels and to serve as a source of financial and managerial strength and support to its subsidiary banks. Redemption
approvals for an initial set of BHCs are expected to be announced
the week of June 8. Applications will be evaluated periodically
thereafter.
H. ADMINISTRATION PROPOSAL ON REGULATING OVER-THE-COUNTER
(OTC) DERIVATIVES

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On May 13, 2009, the Obama Administration announced its proposal for a comprehensive regulatory framework to cover all OTC
derivatives. In a letter to Congress, Secretary Geithner identified
the four broad objectives of the proposal: (1) preventing activities
in derivatives markets from posing risk to the financial system; (2)
promoting the efficiency and transparency of those markets; (3)
preventing market manipulation, fraud, and other market abuses;
and (4) ensuring that OTC derivatives are not marketed inappropriately to unsophisticated investors. The proposal requires legislative action to amend the Commodity Exchange Act and enhance
the regulatory authority of the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission
(SEC). Under the proposal, a new regulatory regime of OTC derivatives would require the clearing of all standardized OTC derivatives through regulated central counterparties, enhanced supervision and regulation of firms who deal in OTC derivatives by the
CFTC and the SEC, and stricter recordkeeping and recording requirements, including the movement of all standardized trades
onto regulated exchanges and regulated electronic execution systems.

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I. METRICS

The Panel’s April oversight report highlighted a number of
metrics that the Panel and others, including Treasury, the Government Accountability Office (GAO), Special Inspector General for
the Troubled Asset Relief Program (SIGTARP), and the Financial
Stability Oversight Board, consider useful in assessing the effectiveness of the Administration’s efforts to restore financial stability
and accomplish the goals of the EESA. The Panel’s May oversight
report described some significant movement that had occurred in a
few of the indicators in the time between the Panel’s April and
May reports. This report highlights changes that have occurred in
several indicators since the release of the Panel’s May report.
• Interest Rate Spreads. Several key interest rate spreads have
dropped significantly in recent weeks, most notably the 3-month
and 1-month LIBOR–OIS spreads and the TED spread. The Fed attributes the moderation of many of these spreads to its lending programs as well as to the somewhat improved general economic outlook.212
FIGURE 7: INTEREST RATE SPREADS
Current
spread
(as of
6/8/09)

Indicator

3-Month LIBOR–OIS Spread 213 .........................................................................................
1-Month LIBOR–OIS Spread 214 .........................................................................................
TED Spread 215 (in basis points) ......................................................................................
Conventional Mortgage Rate Spread 216 ...........................................................................
Corporate AAA Bond Spread 217 ........................................................................................
Corporate BAA Bond Spread 218 ........................................................................................
Overnight AA Asset-backed Commercial Paper Interest Rate Spread 219 ........................
Overnight A2/P2 Nonfinancial Commercial Paper Interest Rate Spread 220 ....................

Percent change since
last report
(5/7/09)

¥45.06
¥45.02
¥38.67
¥6.55
¥15.25
¥21.51
¥35.71
¥23.81

0.41
¥0.10
47.76
1.57
2.00
4.05
0.18
0.32

213 3-Mo

LIBOR–OIS Spread, Bloomberg (online at www.bloomberg.com/apps/quote?ticker=.LOIS3:IND) (accessed June 8, 2009).
LIBOR–OIS Spread, Bloomberg (online at www.bloomberg.com/apps/quote?ticker=.LOIS1:IND) (accessed June 8, 2009).
Spread, Bloomberg (online at www.bloomberg.com/apps/quote?ticker=.TEDSP:IND) (accessed June 8, 2009).
216 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical Data (Instrument: Conventional Mortgages, Frequency: Weekly) (online at www.federalreserve.gov/releases/h15/data/Weeklyl Thursdayl /H15l
MORTGl NA.txt) (accessed June 8, 2009); Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical Data (Instrument: U.S. Government Securities/Treasury Constant Maturities/Nominal 10-Year, Frequency: Weekly)
(online
at
www.federalreserve.gov/
releases/h15/data/Weeklyl Fridayl /H15l TCMNOMl Y10.txt) (accessed June 8, 2009) (hereinafter ‘‘Fed H.15 10-Year Treasuries’’).
217 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical Data (Instrument:
Corporate
Bonds/Moody’s
Seasoned
AAA,
Frequency:
Weekly)
(online
at
www.federalreserve.gov/
releases/h15/data/Weeklyl Fridayl /H15l AAAl NA.txt) (accessed June 8, 2009); Fed H.15 10-Year Treasuries, supra note 216.
218 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical Data (Instrument: Corporate Bonds/Moody’s Seasoned BAA, Frequency: Weekly) (online at www.federalreserve.gov/releases/h15/data/Weeklyl Fridayl
/H15l BAAl NA.txt) (accessed June 8, 2009); Fed H.15 10-Year Treasuries, supra note 216.
219 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data
Download Program (Instrument: AA Asset-Backed Discount Rate, Frequency: Daily) (online at www.federalreserve.gov/DataDownload/
Choose.aspx?rel=CP) (accessed June 8, 2009); Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data Download Program (Instrument: AA Nonfinancial Discount Rate, Frequency: Daily) (online at
www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed June 8, 2009) (hereinafter ‘‘Fed CP AA Nonfinancial Rate’’).
220 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data
Download Program (Instrument: A2/P2 Nonfinancial Discount Rate, Frequency: Daily) (online at www.federalreserve.gov/DataDownload/
Choose.aspx?rel=CP) (accessed June 8, 2009); Fed CP AA Nonfinancial Rate, supra note 219.
214 1-Mo
215 TED

• Commercial Paper Outstanding. Commercial paper outstanding, a rough measure of short-term business debt, is an indicator of the availability of credit for enterprises. Levels of financial,
nonfinancial, and asset-backed commercial paper continued to de-

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212 House Committee on the Budget, Testimony of Board of Governors of the Federal Reserve
System Chairman Ben S. Bernanke, Challenges Facing the Economy: The View of the Federal
Reserve, 111th Cong. (June 3, 2009) (online at budget.house.gov/hearings/2009/06.03.2009l
Bernankel Testimony.pdf).

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cline in May, indicating a sustained tightening of credit for businesses.
FIGURE 8: COMMERCIAL PAPER OUTSTANDING
Current level
(as of 6/8/09)
(dollars billions)

Indicator

Asset-Backed Commercial Paper Outstanding (seasonally adjusted) 221 ..................
Financial Commercial Paper Outstanding (seasonally adjusted) 222 .........................
Nonfinancial Commercial Paper Outstanding (seasonally adjusted) 223 ....................

Percent change
since last
report (5/7/09)

¥10.55
¥10.80
¥2.85

557.4
530.5
156.7

221 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data
Download Program (Instrument: Asset-Backed Commercial Paper Outstanding, Frequency: Weekly) (online at www.federalreserve.gov/
DataDownload/Choose.aspx?rel=CP) (accessed June 8, 2009).
222 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data
Download Program (Instrument: Financial Commercial Paper Outstanding, Frequency: Weekly) (online at www.federalreserve.gov/DataDownload/
Choose.aspx?rel=CP) (accessed June 8, 2009).
223 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data
Download Program (Instrument: Nonfinancial Commercial Paper Outstanding, Frequency: Weekly) (online at www.federalreserve.gov/
DataDownload/Choose.aspx?rel=CP) (accessed June 8, 2009).

• Lending by the Largest TARP-recipient Banks. Treasury’s
Monthly Lending and Intermediation Snapshot tracks loan originations and average loan balances for the 21 largest recipients of CPP
funds across a variety of categories, ranging from mortgage loans
to commercial and industrial loans to credit card lines. Originations increased across all categories of bank lending in March when
compared to February; 224 however, Treasury notes that this could
be due to the three additional business days in March or to a seasonal increase in loan activity in the closing days of a quarter. 225
A continued spike in refinancing activity is particularly noteworthy. Changes in average loan balances were relatively minor
from February to March, with mortgage and other consumer loan
balances up modestly and home equity, credit card, consumer and
industrial loan, and commercial real estate loan balances down
over the period.226 The data below exclude lending by two large
CPP-recipient banks, PNC Bank and Wells Fargo, because significant acquisitions by those banks since last October make comparisons difficult.
FIGURE 9: LENDING BY THE LARGEST TARP-RECIPIENT BANKS
Most recent data
(March 2009) (dollars
in billions)

Indicator

Total Loan Originations ............................................................
Mortgage Refinancing ...............................................................
Total Average Loan Balances ...................................................

220.2
53.1
3,390.2

Percent change
since february
2009

Percent change
since october
2008

30.80
11.04
¥0.96

0.91
183.04
¥0.95

• Loans and Leases Outstanding of Domestically-Chartered
Banks. Weekly data from the Federal Reserve Board track fluctuations among different categories of bank assets and liabilities. The
Federal Reserve Board data are useful in that they separate out
large domestic banks and small domestic banks. Loans and leases

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224 U.S. Department of the Treasury, Treasury Department Monthly Lending and Intermediation Snapshot Data for October 2008–March 2009 (May 15, 2009) (online at
www.financialstability. gov/docs/surveys/Snapshotl Datal March%202009.xls) (hereinafter
‘‘Treasury Snapshot March Summary Data’’).
225 U.S. Department of the Treasury, Treasury Department Monthly Lending and Intermediation Snapshot: March Summary Analysis (May 15, 2009) (online at www.financialstability.gov/
docs/surveys/SnapshotAnalysisMarch2009.pdf) (hereinafter ‘‘Treasury March Snapshot’’).
226 Id.

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123
outstanding for large and small domestic banks have remained
largely flat over the past month, with both falling slightly.227 However, while total loans and leases outstanding at large domestic
banks have dropped by over three percent since EESA was enacted,
total loans and leases outstanding at small domestic banks have increased by 1.37 percent over that time period.228
FIGURE 10: LOANS AND LEASES OUTSTANDING
Current level
(as of 6/8/09)
(dollars in
billions)

Indicator

Large Domestic Banks—Total Loans and Leases .........
Small Domestic Banks—Total Loans and Leases .........

Percent change
since last report
(5/7/09)

Percent change
since ESSA signed
into law (10/3/08)

¥0.13
¥0.14

3984.8
2480.3

¥3.32
1.37

• Housing Indicators. Foreclosure filings stayed relatively level
from March to April, increasing by a modest 0.25 percent, while remaining markedly above the level of last October. Housing prices,
as illustrated by the S&P/Case-Shiller Composite 20 Index, continued to dip in March. The index is down over ten percent since October 2008.
FIGURE 11: HOUSING INDICATORS
Percent change from
data
available at time of
last
report (5/7/09)

Most
recent
monthly
data

Indicator

Monthly Foreclosure Filings 229 .................................................
Housing Prices—S&P/Case-Shiller Composite 20 Index 230 ....

342,038
141.35

Percent
change
since
October
2008

0.25
¥2.17

22.35
¥10.02

229 RealtyTrac, Foreclosure Activity Press Releases (online at www.realtytrac.com//ContentManagement/PressRelease.aspx) (accessed June 8,
2009).
230 Standard & Poor’s, S&P/Case-Shiller Home Price Indices (Instrument: Seasonally Adjusted Composite 20 Index) (online at
www2.standardandpoors.com/spf/pdf/index/SAl CSHomePricel Historyl 052619.xls) (accessed June 8, 2009).

J. FINANCIAL UPDATE

In its April oversight report, the Panel assembled a summary of
the resources the federal government has committed to economic
stabilization. The following provides: (1) an updated accounting of
the TARP, including a tally of dividend income and repayments the
program has received as of June 3, 2009; and (2) an update of the
full federal resource commitment as of June 3, 2009.
1. TARP

a. Costs: Expenditures and Commitments
Through an array of programs used to purchase preferred shares
in financial institutions, offer loans to small businesses and auto
companies, and leverage Federal Reserve Board loans for facilities

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227 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.8:
Assets and Liabilities of Commercial Banks in the United States: Historical Data (Instrument:
Assets and Liabilities of Large Domestically Chartered Commercial Banks in the United States,
Seasonally adjusted, adjusted for mergers, billions of dollars) (online at www.federalreserve.gov/
releases/h8/data.htm) (accessed June 8, 2009).
228 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.8:
Assets and Liabilities of Commercial Banks in the United States: Historical Data (Instrument:
Assets and Liabilities of Small Domestically Chartered Commercial Banks in the United States,
Seasonally adjusted, adjusted for mergers, billions of dollars) (online at www.federalreserve.gov/
releases/h8/data.htm) (accessed June 8, 2009).

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124
designed to restart secondary securitization markets, Treasury has
committed to spend $645.8 billion, leaving $54.2 billion available
for new programs or other needs.231 Of the $645.8 billion that
Treasury has committed to spend, $434.7 billion has already been
allocated and counted against the statutory $700 billion limit.232
This includes purchases of preferred stock, warrants and/or debt
obligations under the CPP, TIP, SSFI Program, and AIFP initiatives, a $20 billion loan to TALF LLC, the special purpose vehicle
used to guarantee Federal Reserve Board TALF loans, and the $5
billion Citigroup asset guarantee already exchanged for a guarantee fee composed of additional preferred stock and warrants.233
Additionally, Treasury has allocated $15.2 billion to the Home Affordable Modification Program, out of a projected total program
level of $50 billion, but has not yet distributed any of these funds.
Treasury will release its next tranche report when transactions
under TARP reach $450 billion.
b. Income: Dividends and Repayments
Secretary Geithner’s testimony to the Senate Banking Committee
on May 20 included Treasury’s estimate of TARP funds remaining
for allocation as of May 18. Treasury provided two figures, $98.7
billion and $123.7 billion,234 the later including an estimated $25
billion in CPP investments that Treasury expects recipients to
repay or liquidate.235 Although describing this estimate as ‘‘conservative,’’ neither Secretary Geithner nor Treasury has identified
the institutions that will supply these anticipated repayments,
when they will supply these repayments, or any methodological
basis underpinning this figure. The total amount of CPP repayments currently stands at $1.772 billion.236
In addition, Treasury’s investment in preferred stock entitles it
to dividend payments from the institutions in which it invests, usually five percent per annum for the first five years and nine percent
per annum thereafter.237 Treasury has not yet begun to officially
report dividend payments on its transaction reports.
c. TARP Accounting as of June 3, 2009
FIGURE 12: TARP ACCOUNTING (AS OF JUNE 3, 2009)
[Dollars in billions]
Announced
funding

TARP Initiative

Total ...............................................................................
CPP ........................................................................

645.8
218.0

Purchase
price

Repayments

Dividend
income

238 434.7

239 1.8

240 6.2

199.4

1.8

4.8

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231 EESA limits Treasury to $700 billion in purchasing authority outstanding at any one time
as calculated by the sum of the purchases prices of all troubled assets held by Treasury. EESA,
supra note 1, at 115(a)–(b).
232 U.S Department of the Treasury, Seventh Tranche Report to Congress (June 3, 2009) (online at www.financialstability.gov/docs/TrancheReports/7thl Tranche-Report-Appendix.pdf).
233 June 5 TARP Transactions Report, supra note 13.
234 After these figures were provided to the Senate Committee on Banking, Housing, and
Urban Affairs, Treasury allocated an additional $44.5 billion of TARP funds in loans to GM,
GMAC, and Chrysler. Including these allocations would bring Treasury’s estimates to $54.2 billion and $79.2 billion, respectively.
235 Geithner Testimony, supra note 98.
236 June 5 TARP Transactions Report, supra note 13.
237 See, e.g., U.S. Department of the Treasury, Bank of New York Mellon, Securities Purchase
Agreement: Standard Terms, at A–1 (Oct. 28, 2008) (Annex A).

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FIGURE 12: TARP ACCOUNTING (AS OF JUNE 3, 2009)—Continued
[Dollars in billions]
Announced
funding

TARP Initiative

TIP .........................................................................
SSFI Program .........................................................
AIFP .......................................................................
AGP ........................................................................
CAP ........................................................................
TALF .......................................................................
PPIP .......................................................................
Supplier Support Program .....................................
Unlocking SBA Lending .........................................
HAMP .....................................................................
238 See June 5
239 See June 5
240 As of June

Purchase
price

40.0
70.0
80.3
12.5
TBD
80.0
75.0
5.0
15.0
50.0

Dividend
income

Repayments

40.0
69.8
80.3
5.0
0.0
20.0
0.0
5.0
0.0
15.2

0
0
0
0
0
0
0
0
0
0

1.1
0
0.2
0.1
0
0
0
0
0
0

TARP Transactions Report, supra note 13.
TARP Transactions Report, supra note 13.
3, 2009. This information was passed on by Treasury officials to Panel staff.

2. OTHER FINANCIAL STABILITY EFFORTS

a. Federal Reserve Board, FDIC, and Other Programs
In addition to the more direct expenditures Treasury has undertaken through TARP, the federal government has also engaged in
a much broader program directed at stabilizing the U.S. financial
system. Many of these programs explicitly augment Treasury
funds, like FDIC guarantees of securitization of PPIF Legacy Loans
or asset guarantees for Citigroup and Bank of America, or operate
in tandem with Treasury programs, such as the interaction between PPIP and TALF. Other programs, like the Federal Reserve
Board’s extension of credit through its § 13(3) facilities and special
purpose vehicles or the FDIC’s Temporary Liquidity Guarantee
Program, stand independent of TARP and seek to accomplish different goals.
b. Total Financial Stability Resources as of June 3, 2009
Beginning in its April report, the Panel broadly classified the resources that the federal government has devoted to stabilizing the
economy through a myriad of new programs and initiatives, as outlays, loans, or guarantees. Although the Panel has calculated the
total value of these resources at over $4 trillion, this would translate into the ultimate ‘‘cost’’ of the stabilization effort only if: (1) assets do not appreciate; (2) no dividends are received; no warrants
are exercised, and no TARP funds are repaid; (3) all loans default
and are written off; and (4) all guarantees are exercised and subsequently written off.
FIGURE 13: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF JUNE 3, 2009)
Federal
Reserve
Board

Treasury
(TARP)

Program

FDIC

Total

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700
466.4
86.9
92.5
54.2

2,440.7
0
2123.7
317
0

1,427.4
29.5
0
1,397.9
0

243 4,568.1

AIG ..................................................................................................
Outlays ..................................................................................
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Total ...............................................................................................
Outlays 241 .............................................................................
Loans .....................................................................................
Guarantees 242 .......................................................................
Uncommitted TARP Funds ....................................................

70
70

245 112.5

0
0

182.5
70

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495.9
2,210.6
1,807.4
54.2

126
FIGURE 13: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF JUNE 3, 2009)—
Continued
Federal
Reserve
Board

Treasury
(TARP)

Program

FDIC

Total

0
0

246 112.5

0

0
0

112.5
0

52.5

87.2
0
0
249 87.2

2.5
0
0
250 2.5

142.2
45
0
97.2

229.8
0
0
253 229.8

10
0
0
254 10

289.8
45
0
244.8

0
0

0
0
0
0

0
0
0
0

168
168
0
0

Capital Assistance Program ..........................................................

TBD

TBD

TBD

256 TBD

TALF ................................................................................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................

80
0
0
257 80

720
0
0

0
0
0
0

800
0
720
80

50
50
0
0

0
0
0
0

600
0
0
260 600

650
50
0
600

25

0
0
0
0

0
0
0
0

25
10
15
0

0
0
0
0

0
0
0
0

264 50

0
0
0
0

0
0
0
0

80.3
13.4
66.9
0

0
0
0
0

0
0
0
0

5
5
0
0

0
0

0
0
0
0

0
0
0
0

15
15
0
0

Temporary Liquidity Guarantee Program .......................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................

0
0
0
0

0
0
0
0

785.4
0
0
269 785.4

785.4
0
0
785.4

Deposit Insurance Fund .................................................................
Outlays ..................................................................................

0
0

0
0

29.5
270 29.5

29.5
29.5

Loans .....................................................................................
Guarantees ............................................................................
Bank of America ............................................................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................
Citigroup ........................................................................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................
Capital Purchase Program (Other) ................................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................

PPIF

247 45

0
248 7.5

50
251 45

0
252 5

168
255 168

(Loans) 259

..............................................................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................

PPIF (Securities) 261 .......................................................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................
Home Affordable Modification Program .........................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................
Automotive Industry Financing Plan ..............................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................

262 10

15
0
50
263 50

0
0
80.3
265 13.4
266 66.9

0

Auto Supplier Support Program .....................................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................

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Unlocking SBA Lending ..................................................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................

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0
0
15
268 15

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50
0
0

127
FIGURE 13: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF JUNE 3, 2009)—
Continued
Federal
Reserve
Board

Treasury
(TARP)

Program

Loans .....................................................................................
Guarantees ............................................................................

0
0

Other Federal Reserve Board Credit Expansion ............................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................

0
0
0
0

Uncommitted TARP Funds .............................................................

272 54.2

FDIC

Total

0
0

0
0

0
0

1,291.2
0
0

0
0
0
0

1,291.2
0
1,291.2
0

0

0

54.2

271 1,291.2

241 The

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term ‘‘outlays’’ is used here to describe the use of Treasury funds under the TARP, which are broadly classifiable as purchases of
debt or equity securities (e.g., debentures, preferred stock, exercised warrants, etc.). The outlays figures are based on: (1) Treasury’s actual
reported expenditures; and (2) Treasury’s anticipated funding levels as estimated by a variety of sources, including Treasury pronouncements
and GAO estimates. Anticipated funding levels are set at Treasury’s discretion, have changed from initial announcements, and are subject to
further change. The outlays concept used here represents cash disbursements and commitments to make cash disbursements and is not the
same as budget outlays, which under EESA § 123 are recorded on a ‘‘credit reform’’ basis.
242 While many of the guarantees may never be exercised or exercised only partially, the guarantee figures included here represent the federal government’s greatest possible financial exposure.
243 This figure differs substantially from the $2,476–2,976 billion range of ‘‘Total Funds Subject to SIGTARP Oversight’’ reported during testimony before the Senate Finance Committee on March 31, 2009. Senate Committee on Finance, Testimony of SIGTARP Neil Barofsky, TARP
Oversight: A Six Month Update, 111th Cong. (Mar. 31, 2009) (online at finance.senate.gov/hearings/testimony/2009test/033109nbtest.pdf).
SIGTARP’s accounting, designed to capture only those funds potentially under its oversight authority, is both less and more inclusive than the
Panel’s, and thus the two are not directly comparable. Among the differences, SIGTARP does not account for Federal Reserve Board credit extensions outside of the TALF or FDIC guarantees under the Temporary Liquidity Guarantee Program and sets the maximum Federal Reserve
Board guarantees under the TALF at $1 trillion.
244 This number includes both investments in AIG under the SSFI program: a $40 billion investment made on November 25, 2008, and a
$30 billion investment made on April 17, 2009 (less a reduction of $165 million representing bonuses paid to AIG Financial Products employees). June 5 TARP Transactions Report, supra note 13.
245 The value of loans extended by the Federal Reserve Board to AIG has been calculated according to a different methodology from that
used in previous Panel reports. Previously, this figure reflected the current balance sheet value of credit extended to AIG and the Maiden Lane
II and III SPVs. The Panel has replaced this measurement of government exposure with the maximum amounts the Federal Reserve Board is
authorized to loan, as described below.
This number represents the total credit line the Federal Reserve Board is authorized to extend to AIG ($60 billion) and the maximum
amount that the FRBNY is authorized to lend to the Maiden Lane II LLC ($22.5 billion) and Maiden Lane III LLC ($30 billion) special purpose
vehicles. See Board of Governors of the Federal Reserve System, Federal Reserve Board and Treasury Department Announce Restructuring of
Financial Support to AIG (Nov. 10, 2008) (online at www.federalreserve.gov/newsevents/press/other/20081110a.htm).
246 As of June 5, the value of loans outstanding to AIG stands at $84 billion. This includes $43 billion in loans directly provided to AIG as
well as $41 billion in the outstanding principal amount of loans extended to special purpose vehicles (approximately $18 billion to Maiden
Lane II and $23 billion to Maiden Lane III). See Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.4.1:
Factors Affecting Reserve Balances (June 4, 2009) (online at www.federalreserve.gov/releases/h41/Current/) (hereinafter ‘‘Fed Balance Sheet
June 4’’).
247 June 5 TARP Transactions Report, supra note 13. This figure includes: (1) a $15 billion investment made by Treasury on October 28,
2008 under the CPP; (2) a $10 billion investment made by Treasury on January 9, 2009 also under the CPP; and (3) a $20 billion investment
made by Treasury under the TIP on January 16, 2009.
248 Bank of America Asset Guarantee, supra note 41 (granting a $118 billion pool of Bank of America assets a 90 percent federal guarantee of all losses over $10 billion, the first $10 billion in federal liability to be split 75/25 between Treasury and the FDIC and the remaining federal liability to be borne by the Federal Reserve Board).
249 Bank of America Asset Guarantee, supra note 41.
250 Bank of America Asset Guarantee, supra note 41.
251 June 5 TARP Transactions Report, supra note 13. This figure includes: (1) a $25 billion investment made by Treasury under the CPP on
October 28, 2008; and (2) a $20 billion investment made by Treasury under TIP on December 31, 2008.
252 Citigroup Asset Guarantee, supra note 41 (granting a 90 percent federal guarantee on all losses over $29 billion of a $306 billion pool
of Citigroup assets, with the first $5 billion of the cost of the guarantee borne by Treasury, the next $10 billion by FDIC, and the remainder
by the Federal Reserve). See also Final Citi Guarantee Terms, supra note 41 (reducing the size of the asset pool from $306 billion to $301
billion).
253 Citigroup Asset Guarantee, supra note 41.
254 Citigroup Asset Guarantee, supra note 41.
255 This figure represents the $218 billion Treasury has anticipated spending under the CPP, minus the $50 billion investments in Citigroup
($25 billion) and Bank of America ($25 billion) identified above. This figure does not account for anticipated repayments or redemptions of
CPP investments, nor does it account for dividend payments from CPP investments.
256 Funding levels for the CAP have not yet been announced but will likely constitute a significant portion of the remaining $54.2 billion of
TARP funds.
257 Geithner Testimony, supra note 98, at 1; June 5 TARP Transactions Report, supra note 13. This figure represents: a $20 billion allocation to the TALF special purpose vehicle on March 3, 2009; Treasury’s announcement of an additional $35 billion dedicated to the TALF; and
$25 billion dedicated to supporting TALF loans to purchase legacy securities under the PPIP.
258 This number derives from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the value of Federal Reserve Board loans
under the TALF. See Financial Stability Plan Fact Sheet, supra note 26 (describing the initial $20 billion Treasury contribution tied to $200
billion in Federal Reserve Board loans and announcing potential expansion to a $100 billion Treasury contribution tied to $1 trillion in Federal
Reserve Board loans). Because Treasury is responsible for reimbursing the Federal Reserve Board for $80 billion of losses on its $800 billion
in loans, the Federal Reserve Board’s maximum potential exposure under the TALF is $720 billion.
259 Because PPIP funding arrangements for loans and securities differ substantially, the Panel accounts for them separately. Treasury has
not formally announced either total program funding level or the allocation of funding between the PPIP Legacy Loans Program and Legacy
Securities Program. However, the FDIC recently announced that it was postponing the implementation of the Legacy Loans program. See FDIC
Loans Program Statement, supra note 25. It is not yet clear whether this postponement will affect the allocation of TARP funds for the LLP.
260 U.S. Department of the Treasury, Fact Sheet: Public-Private Investment Program, at 2 (Mar. 23, 2009) (online at www.treas.gov/press/releases/reports/ppipl factl sheet.pdf) (hereinafter ‘‘Treasury PPIP Fact Sheet’’) (explaining that, for every $1 Treasury contributes in equity
matching $1 of private contributions to public-private asset pools created under the Legacy Loans Program, FDIC will guarantee up to $12 of
financing for the transaction to create a 6:1 debt to equity ratio). If Treasury ultimately allocates a smaller proportion of funds to the Legacy
Loans Program (i.e., less than $50 billion), the amount of FDIC loan guarantees will be reduced proportionally.

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261 In previous reports, the Panel projected that Treasury would split the $100 billion allocated to PPIP evenly between legacy loans and
legacy securities. However, it now appears that Treasury will allocate $25 billion to the TALF for legacy securities, implying that only $25 billion of TARP funds will be directly allocated to PPIF Legacy Securities.
262 Treasury PPIP Fact Sheet, supra note 260, at 4–5 (outlining that, for each $1 of private investment into a fund created under the Legacy Securities Program, Treasury will provide a matching $1 in equity to the investment fund; a $1 loan to the fund; and, at Treasury’s discretion, an additional loan up to $1). In the absence of further Treasury guidance, this analysis assumes that Treasury will allocate funds for
equity co-investments and loans at a 1:1.5 ratio, a formula that estimates that Treasury will frequently exercise its discretion to provide additional financing.
263 Government Accountability Office, Troubled Asset Relief Program: March 2009 Status of Efforts to Address Transparency and Accountability Issues, at 55 (Mar. 31, 2009) (GAO09/504) (online at www.gao.gov/new.items/d09504.pdf); Geithner Testimony, supra note 98. Of the
$50 billion in announced TARP funding for this program, only $15.2 billion has been allocated as of June 3, and no funds have yet been disbursed. See June 5 TARP Transactions Report, supra note 13.
264 Fannie Mae and Freddie Mac, government-sponsored entities (GSEs) that were placed in conservatorship of the Federal Housing Finance
Agency on September 7, 2009, will also contribute up to $25 billion to the Making Home Affordable Program, of which the HAMP is a key
component. See U.S. Department of the Treasury, Making Home Affordable: Updated Detailed Program Description (Mar. 4, 2009) (online at
www.treas.gov/press/releases/reports/housingl factl sheet.pdf).
265 June 5 TARP Transactions Report, supra note 13. This figure represents Treasury’s equity stake in GMAC.
266 June 5 TARP Transactions Report, supra note 13. Treasury’s initial allocation to GM was effectively a loan. Under the terms of the company’s pending bankruptcy proceedings the $49.9 billion in debt obligations to Treasury will be converted to a 60 percent stake in the restructured company and $8.8 billion in debt and preferred stock. See U.S. Department of the Treasury, Fact Sheet: Obama Administration Auto
Restructing Initiatives, General Motors Restructing (May 31, 2009) (online at www.financialstability.gov/latest/05312009l gm-factsheet.html).
It is less clear how Treasury’s $17 billion in loans to Chrysler will be affected by its bankruptcy proceedings. It appears that approximately
$9 billion lent before the Chrysler bankruptcy will be converted to an eight percent equity stake, while $8 billion will be retained as first-lien
debt. See U.S. Department of the Treasury, Obama Administration Auto Restructuring Initiative, Chrysler-Fiat Alliance (Apr. 30, 2009) (online at
www.financialstability.gov/latest/tgl043009.html).
267 June 5 TARP Transactions Report, supra note 13.
268 Geithner Testimony, supra note 98, at 15.
269 This figure represents the current maximum aggregate debt guarantees that could be made under the program, which, in turn, is a
function of the number and size of individual financial institutions participating. $334.6 billion of debt subject to the guarantee has been
issued to date, which represents about 43 percent of the current cap. Federal Deposit Insurance Corporation, Monthly Reports on Debt
Issuance under the Temporary Liquidity Guarantee Program: Debt Issuance under Guarantee Program (May 20, 2009) (online at www.fdic.gov/
regulations/resources/TLGP/totall issuance4–09.html).
270 This figure represents the FDIC’s provision for losses to its deposit insurance fund attributable to bank failures in the third and fourth
quarters of 2008. See Federal Deposit Insurance Corporation, Chief Financial Officer’s (CFO) Report to the Board: DIF Income Statement
(Fourth Quarter 2008) (online at www.fdic.gov/about/strategic/corporate/cfol reportl 4qtrl 08/income.html); Federal Deposit Insurance Corporation, Chief Financial Officer’s (CFO) Report to the Board: DIF Income Statement (Third Quarter 2008) (online at www.fdic.gov/about/strategic/corporate/cfol reportl 3rdqtrl 08/income.html). As of June 5, 2009, the FDIC had not yet released first quarter 2009 data.
271 This figure is derived from adding the total credit the Federal Reserve Board has extended as of June 3, 2009 through the Term Auction
Facility (Term Auction Credit), Discount Window (Primary Credit), Primary Dealer Credit Facility (Primary Dealer and Other Broker-Dealer Credit),
Central Bank Liquidity Swaps, loans outstanding to Bear Stearns (Maiden Lane I LLC), GSE Debt (Federal Agency Debt Securities), the value of
Mortgage Backed Securities Issued by GSEs, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, and Commercial
Paper Funding Facility LLC. See Fed Balance Sheet June 4, supra note 246. The level of Federal Reserve Board lending under these facilities
will fluctuate in response to market conditions and independent of any federal policy decisions.
This calculation is slightly changed from previous reports. The Panel previously looked at the balance sheet value of Federal Reserve Board
holdings in Maiden Lane I LLC and the Commercial Paper Funding Facility; in this report, the Panel calculates this figure as the outstanding
principal amount of the loans extended to these SPVs.
272 One potential use of uncommitted funds is Treasury’s obligation to reimburse the Exchange Stabilization Fund (ESF), currently valued at
$50.5 billion. See U.S. Department of Treasury, Exchange Stabilization Fund, Statement of Financial Position, as of April 30, 2009 (online at
www.ustreas.gov/offices/international-affairs/esf/esf-monthly-statement.pdf) (accessed June 5, 2009). Treasury must reimburse any use of the
fund to guarantee money market mutual funds from TARP money. See EESA, supra note 1, at § 131. In September 2008, Treasury opened its
Temporary Guarantee Program for Money Mutual Funds, U. S. Department of Treasury, Treasury Announces Temporary Guarantee Program for
Money Market Mutual Funds (Sept. 29, 2008) (online at www.treas.gov/press/releases/hp1161.htm). This program uses assets of the ESF to
guarantee the net asset value of participating money market mutual funds. Id. EESA § 131 protected the ESF from incurring any losses from
the program by requiring that Treasury reimburse the ESF for any funds used in the exercise of the guarantees under the program, which has
been extended through September 18, 2009. U.S. Department of Treasury, Treasury Announces Extension of Temporary Guarantee Program for
Money Market Funds (Mar. 31, 2009) (online at www.treas.gov/press/releases/tg76.htm).

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SECTION FIVE: OVERSIGHT ACTIVITIES
The Congressional Oversight Panel was established as part of
EESA and formed on November 26, 2008. Since then, the Panel
has issued six oversight reports, as well as its special report on regulatory reform, which was issued on January 29, 2009.
Since the release of the Panel’s May oversight report, the following developments pertaining to the Panel’s oversight of TARP
took place:
• The Panel held a hearing in New York City on May 28 entitled, ‘‘The Impact of Economic Recovery Efforts on Corporate and
Commercial Real Estate Lending.’’ Witnesses representing banks,
businesses, and the Federal Reserve Bank of New York discussed
the impact of the financial crisis on credit availability for mid-market businesses that rely on commercial and industrial loans and
commercial real estate loans to operate. Written testimony and
video from the hearing can be found on the Panel’s website at
http://cop.senate.gov/hearings/library/hearing-052809-newyork.cfm.
• At a Panel hearing on April 21, 2009, Secretary Geithner
pledged to arrange weekly Treasury briefings on TARP activities
for Panel staff. Based on the Secretary’s pledge, Panel staff has
since received numerous briefings on topics including the methodology and results of the stress tests, lending data from CPP participants, and home ownership programs.
• The Panel and Treasury have reached agreement on a protocol
for Treasury’s production of documents to the Panel. Treasury has
stated that it will begin production of requested documents shortly,
but no documents have been produced pursuant to this protocol as
of the date of this report. The Panel is in the process of negotiating
a similar protocol with the Federal Reserve Board.
Upcoming Reports and Hearings

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• The Panel will release its next oversight report in July. The report will provide an updated review of TARP activities and continue to assess the program’s overall effectiveness. The report will
also examine the terms of repayment of TARP money, including
the repurchasing of warrants.
• The Panel is currently working with Treasury to find a date
for Secretary Geithner to make his second appearance at a Panel
oversight hearing in June.
• The Panel is planning a field hearing in Detroit in early July
to hear testimony on Treasury’s administration of the Automotive
Industry Financing Program.
• On May 20, 2009, the President signed into law the Helping
Families Save Their Homes Act of 2009 (P.L. 111–22). Section 501
of the law requires the Panel to submit a special report to Congress
that provides an analysis of the state of the commercial farm credit
markets and considers the use of farm loan restructuring as an alternative to foreclosure by recipients of TARP assistance. To inform
its composition of this report, the Panel is planning a field hearing
on farm credit in the coming weeks.

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SECTION SIX: ABOUT THE CONGRESSIONAL OVERSIGHT
PANEL

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

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APPENDIX I: LETTER FROM CHAIR ELIZABETH WARREN
TO FEDERAL RESERVE CHAIRMAN BEN BERNANKE
REGARDING THE CAPITAL ASSISTANCE PROGRAM,
DATED MAY 11, 2009

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APPENDIX II: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY GEITHNER REGARDING
THE POSSIBILITY OF THE SECRETARY APPEARING
BEFORE A PANEL HEARING IN JUNE, DATED MAY 12,
2009

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APPENDIX III: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY GEITHNER AND FEDERAL RESERVE CHAIRMAN BEN BERNANKE REGARDING THE ACQUISITION OF MERRILL LYNCH BY BANK
OF AMERICA, DATED MAY 19, 2009

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APPENDIX IV: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY GIETHNER REGARDING
THE TEMPORARY GUARANTEE PROGRAM, DATED MAY
26, 2009

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