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CONGRESSIONAL OVERSIGHT PANEL

DECEMBER OVERSIGHT REPORT *

TAKING STOCK: WHAT HAS THE
TROUBLED ASSET RELIEF PROGRAM
ACHIEVED?

DECEMBER 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 DECEMBER OVERSIGHT REPORT

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1

CONGRESSIONAL OVERSIGHT PANEL

DECEMBER OVERSIGHT REPORT *

TAKING STOCK: WHAT HAS THE
TROUBLED ASSET RELIEF PROGRAM
ACHIEVED?

December 9, 2009.—Ordered to be printed

U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON

54–148

:

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

CONGRESSIONAL OVERSIGHT PANEL
PANEL MEMBERS
ELIZABETH WARREN, Chair
REP. JEB HENSARLING
PAUL S. ATKINS
RICHARD H. NEIMAN

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DAMON SILVERS

(II)

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CONTENTS

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Page

Glossary of Terms ....................................................................................................
Executive Summary .................................................................................................
Section One:
A. Overview .......................................................................................................
B. Background on the Origins and Evolution of the TARP ..........................
1. Chronology of the Financial Crisis ......................................................
2. The Initial Federal Response to the Crisis .........................................
C. The TARP’s Evolution .................................................................................
1. Capital Programs and Banking Sector Health ...................................
2. Credit for Consumers and Small Business .........................................
3. Mortgage Foreclosure Relief .................................................................
4. Auto Industry Assistance .....................................................................
5. The TARP as a Whole ...........................................................................
D. Expert Commentary on the TARP .............................................................
1. Consistency and Transparency ............................................................
2. Underlying Issues .................................................................................
3. Moral Hazard ........................................................................................
E. Accomplishments and Shortcomings: How Well Has the TARP Done
in Meeting its Statutory Objectives? ...........................................................
1. The TARP’s Contribution to Financial Stabilization and Economic
Recovery .................................................................................................
2. The TARP and the American Taxpayer ..............................................
3. Treasury as TARP Steward and Manager ..........................................
F. Conclusions ...................................................................................................
Section Two: Additional Views ...............................................................................
A. Damon Silvers ..............................................................................................
B. Richard Neiman ...........................................................................................
C. Representative Jeb Hensarling ...................................................................
D. Paul S. Atkins ..............................................................................................
Section Three: Correspondence with Treasury Update ........................................
Section Four: TARP Updates Since Last Report ...................................................
Section Five: Oversight Activities ..........................................................................
Section Six: About the Congressional Oversight Panel ........................................
Appendices:
APPENDIX I: UNPAID DIVIDEND PAYMENTS UNDER CPP AS OF
OCTOBER 31, 2009 ......................................................................................
APPENDIX II: LETTER FROM CHAIR ELIZABETH WARREN TO ASSISTANT SECRETARY HERB ALLISON, RE: WRITTEN RESPONSES FOR HEARING RECORD, DATED NOVEMBER 25, 2009 ...
APPENDIX III: LETTER FROM CHAIR ELIZABETH WARREN TO
SECRETARY TIMOTHY GEITHNER, RE: STRESS TESTS, DATED
NOVEMBER 25, 2009 ..................................................................................
APPENDIX IV: LETTER FROM CHAIR ELIZABETH WARREN TO
SECRETARY TIMOTHY GEITHNER, RE: CIT GROUP, INC., DATED
NOVEMBER 25, 2009 ..................................................................................
(III)

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V
1
4
5
5
9
13
13
39
51
59
63
79
81
82
84
85
85
90
92
95
98
98
101
104
137
139
140
142
143

144

146

148

150

IV
Page

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Appendices—Continued
APPENDIX V: ENDNOTES TO FIGURE 27: FEDERAL GOVERNMENT’S FINANCIAL STABILIZATION PROGRAMS (AS OF NOVEMBER 25, 2009)—CURRENT MAXIMUM EXPOSURES ............................

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153

Glossary of Terms
ABS
AIFP
AIG
AGP
ASSP
CBO
CDS
CIT
CMBS
CPP
CRE
EESA
FDIC
FRBNY
GSE
HAMP
HARP
IMF
IRR
LIBOR
LTV
MHA
OIS
OMB
PPIP
SBA
SEC
SIGTARP
SPA
S–PPIP
SSFI
TALF
TARP
TIP
TLGP

Asset-backed securities
Automotive Industry Financing Program
American International Group, Inc.
Asset Guarantee Program
Auto Supplier Support Program
Congressional Budget Office
Credit default swap
CIT Group, Inc.
Commercial mortgage-backed securities
Capital Purchase Program
Commercial real estate
Emergency Economic Stabilization Act of 2008
Federal Deposit Insurance Corporation
Federal Reserve Bank of New York
Government-sponsored enterprise
Home Affordable Modification Program
Home Affordable Refinancing Program
International Monetary Fund
Internal rate of return
London Interbank Offered Rate
Loan-to-value ratio
Making Home Affordable
Overnight Indexed Swaps
Office of Management and Budget
Public-Private Investment Program
Small Business Administration
U.S. Securities and Exchange Commission
Office of the Special Inspector General for the Troubled Asset Relief
Program
Securities purchase agreement
Legacy Securities PPIP
Systemically Significant Failing Institution Program
Term Asset-Backed Securities Loan Facility
Troubled Asset Relief Program
Targeted Investment Program
Temporary Liquidity Guarantee Program

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(V)

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DECEMBER OVERSIGHT REPORT

DECEMBER 9, 2009.—Ordered to be printed

EXECUTIVE SUMMARY *

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The financial crisis that gripped the United States last fall was
unprecedented in type and magnitude. It began with an asset bubble in housing, expanded into the subprime mortgage crisis, escalated into a severe freeze-up of the interbank lending market, and
culminated in intervention by the United States and other industrialized countries to rescue their banking systems.
The centerpiece of the federal government’s response to the financial crisis was the Emergency Economic Stabilization Act of
2008 (EESA), which authorized the Treasury Secretary to establish
the $700 billion Troubled Asset Relief Program (TARP) and created
the Congressional Oversight Panel to oversee the TARP. Now, at
the end of the first full year of TARP’s existence, the Panel is taking stock of the TARP’s progress: reviewing what the TARP has accomplished to date, and exploring where it has fallen short.
Although the TARP was a key element of the federal government’s response to the financial crisis, it was only one part of a
multi-pronged approach. The FDIC and the Federal Reserve undertook major initiatives that are also aimed at bolstering financial
stability. In addition, Congress enacted a fiscal stimulus measure
that was larger than the TARP. Foreign governments also acted to
rescue their banking systems, with consequences that echoed
through the U.S. system as well.
Because so many different forces and programs have influenced
financial markets over the last year, TARP’s effects are impossible
to isolate. Even so, there is broad consensus that the TARP was an
important part of a broader government strategy that stabilized the
U.S. financial system by renewing the flow of credit and averting
a more acute crisis. Although the government’s response to the crisis was at first haphazard and uncertain, it eventually proved decisive enough to stop the panic and restore market confidence. De* The Panel adopted this report with a 4–1 vote on December 8, 2009. Rep. Jeb Hensarling
voted against the report. Additional views are available in Section Two of this report.

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2
spite significant improvement in the financial markets, however,
the broader economy is only beginning to recover from a deep recession, and the TARP’s impact on the underlying weaknesses in
the financial system that led to last fall’s crisis is less clear.
Congress established broad goals for the Emergency Economic
Stabilization Act. It is apparent that, after 14 months, many of the
ongoing problems remain in the financial markets and the broader
economy:
• The availability of credit, the lifeblood of the economy,
remains low. Banks remain reluctant to lend, and many small
businesses and consumers are reluctant to borrow. Even as new
capital and earnings flow into banks, questions remain about
whether this money is being used to repair damaged balance sheets
rather than putting the money into lending.
• Bank failures continue at a nearly unprecedented rate.
There have been 149 bank failures between January 1, 2008 and
November 30, 2009. The FDIC, facing red ink for the first time in
17 years, must step in to repay depositors at a growing number of
failed banks. This problem may worsen, as deep-seated problems in
the commercial real estate sector are poised to inflict further damage on small and mid-sized banks.
• Toxic assets remain on the balance sheets of many large
banks. Some major financial institutions continue to hold the toxic
mortgage-related securities that contributed to the crisis, waiting
for a rebound in asset values that may be years away. These banks
may be considered ‘‘too big to fail,’’ but at the same time, they may
be too weak to play a meaningful role in keeping credit flowing
throughout the economy.
• The foreclosure crisis continues to grow. More than two
million families have lost their homes to foreclosure since the start
of this crisis, and countless more have lost their homes in shortsales or have turned their keys over to the lender. Foreclosure
starts over the next five years are projected to range from 8 to 13
million, but more than a year after the TARP was passed, it appears that the TARP’s foreclosure mitigation programs have not yet
achieved the scope, scale, and permanence necessary to address the
crisis.
• Job losses continue to escalate. The unprecedented government actions taken since last September to bolster the faltering
economy have not been enough to stem the rise of unemployment,
which in October was at its highest level since June 1983.
• Markets remain dependent on government support. The
market stability that has emerged since last fall’s crisis has been
in part the result of an extraordinary mix of government actions,
some of which will likely be scaled back relatively soon, and few
of which are likely to continue indefinitely. It is unclear whether
the market can yet withstand the removal of this support.
• Government intervention signaled an implicit government guarantee of major financial institutions, and
unwinding this guarantee poses a difficult long-term challenge. As yet, there is no consensus among experts or policymakers as to how to prevent financial institutions from taking
risks that are so large as to threaten the functioning of the nation’s
economy.

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While the TARP, along with other strong government action, can
be credited with stopping an economic panic, the program’s
progress toward the other goals set by Congress—goals that are
necessary for reestablishing stability in the financial system and
providing the tools for rebuilding the American economy—is less
clear.
Since its inception, the TARP has gone through several different
incarnations. It began as a program designed to purchase toxic assets from troubled banks, but it quickly morphed into a means of
bolstering bank capital levels. It was later put to use as a source
of funds to restart the securitization markets, rescue domestic
automakers, and modify home mortgages. The evolving nature of
the TARP, as well as Treasury’s failure to articulate clear goals or
to provide specific measures of success for the program, make it
hard to reach an overall evaluation. In its report of December 2008,
the Panel called on Treasury to make both its decision-making and
its actions more transparent. The Panel renews that call, as it has
done with every monthly report since then.
Despite the difficult circumstances under which many decisions
have been made, those decisions must be clearly explained to the
American people, and the officials who make them must be held accountable for their actions. Transparency and accountability may
be painful in the short run, but in the long run they will help restore market functions and earn the confidence of the American
people.

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4
SECTION ONE

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A. Overview
Congress created the Congressional Oversight Panel to oversee
the Executive Branch’s broad authority to use the $700 billion
Troubled Asset Relief Program (TARP). In carrying out its responsibilities under the Emergency Economic Stabilization Act of 2008
(EESA), the Panel has published 12 monthly reports and two special reports on a wide range of the TARP and related financial stabilization initiatives.
This month the Panel assesses what the TARP has accomplished
and where it has fallen short from various perspectives in the 14
months since its inception. The report describes the major elements
of the TARP—capital assistance for financial institutions, small
business and consumer lending initiatives, mortgage foreclosure
programs and assistance to two U.S. automakers—and their status,
including updates on particular issues since the Panel’s earlier reports on these same subjects. It looks at key economic indicators
and their behavior over the course of the crisis and what they appear to be telling us now. The report also summarizes the views
of academic and other experts whose analysis the Panel requested,
as well as the Panel’s recent hearing with five prominent economists and experts on the subject of financial sector crises.
Congress stated that its purpose in passing EESA was ‘‘to immediately provide authority and facilities that the Secretary of the
Treasury can use to restore liquidity and stability to the financial
system of the United States.’’ After reviewing the performance of
the disparate initiatives that Treasury has carried out under the
TARP’s authorizing legislation and the assessments of outside experts concerning that performance, this report concludes with a
look at how well the TARP has done as measured against the stated objectives of the Act and the espoused goals of Treasury leadership across two administrations.
This report includes some discussion of financial stability efforts
of both the Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC), but only inasmuch as those efforts augment or supplement Treasury’s actions under the TARP. The report does not include any detailed discussion of other government
responses to the financial crisis, such as the Housing and Economic
Recovery Act of 2008 and the American Recovery and Reinvestment Act of 2009, although the Panel is mindful of the difficulties
in separating the impact of the various government responses on
the overall U.S. economy. The report also does not attempt to bring
to light new information about the factors that may have contributed to the decision-making by government officials at the height
of the financial crisis, although such accounts by journalists and
other oversight bodies have informed the Panel’s framework for assessing the TARP.
In reviewing the performance of the TARP after a little over one
year, the Panel has benefitted from similar one-year assessments
from others. Treasury published a summary of the Administration’s
financial stabilization efforts in September, and it expects to release its formal accounting statements for the TARP for Federal
fiscal year 2009 (running from October 1, 2008 through September

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5
30, 2009) in mid-December. Treasury policy officials have also testified and given public presentations in recent months providing
their own review of the performance of the TARP. Assistant Secretary of the Treasury for Financial Stability Secretary Herb Allison testified before the Panel on October 22, 2009 and made several observations on the TARP and its impact after one year. Other
oversight groups such as the Government Accountability Office
have recently looked at the performance of the TARP.
The TARP is currently scheduled to expire on December 31,
2009. The Secretary of the Treasury is authorized under EESA to
extend the program through October 3, 2010, upon notification of
Congress. The Panel takes no position on the desirability of such
an extension.
B. Background on the Origins and Evolution of the TARP

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1. Chronology of the Financial Crisis
The global financial crisis that culminated in intervention by the
United States and other industrialized countries to rescue their
banking systems was largely the result of an asset bubble in housing, driven in part by the relatively low cost of credit. U.S. housing
prices reached their high point in mid-2006. At the market’s peak,
the average cost of a home was more than twice what it had been
just six and a half years earlier, a remarkable annual growth rate
of nearly 12 percent.1 Housing construction had likewise surged to
an unsustainable annual rate of 2.15 million new privately owned
units, and by 2006 unsold inventory began to pile up.2 Then house
prices began to ebb. The decline was initially not dramatic—prices
fell by less than 3 percent over the next 12 months.3 But it was
enough to undermine a key assumption behind the financial instruments that provided much of the support for the U.S. housing bubble—that housing prices never go down, at least not on a sustained
nationwide basis.4
The impact of falling home prices was felt early on in the
subprime mortgage market, where borrowers began defaulting on
mortgages that proved unaffordable as soon as prices stopped
climbing. Many of the mortgages that helped fuel the boom had
been premised on the assumption that borrowers would be able to
refinance before their mortgages reset to higher, unaffordable interest rates. But as soon as home prices stopped rising, it became
impossible for such borrowers, who had little or no equity in their
1 See Standard & Poor’s, S&P/Case-Shiller Home Price Indices—Instrument: Seasonally Adjusted
Composite
20
Index
(online
at
www2.standardandpoors.com/spf/pdf/index/
SAlCSHomePricelHistoryl092955.xls) (hereinafter ‘‘S&P/Case-Shiller Home Price Indices’’)
(accessed Dec. 7, 2009) (relating how the index rose from 100.59 in January 2000 to 206.15 in
May 2006, a rise of 11.99 percent, on average, per year).
2 See generally United States Census Bureau, New Privately Owned Housing Units Started in
the United States by Purpose and Design (online at www.census.gov/const/www/
quarterlylstartslcompletions.pdf) (accessed Dec. 7, 2009).
3 See S&P/Case-Shiller Home Price Indices, supra note 1.
4 See Bank of America, Remarks by Chairman and Chief Executive Officer Kenneth D. Lewis
at Los Angeles Town Hall: Mending our Mortgage Markets (July 9, 2008) (online at newsroom.bankofamerica.com/index.php?s=63&item=205) (‘‘Before this decade, we had a long history
of relatively stable appreciation in home values, averaging about 3–4% a year for more than
a century. But during that time, the conventional wisdom built that housing prices never go
down, except for brief corrections in the march upward’’).

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homes, to refinance.5 In June 2007 two Bear Stearns-sponsored
hedge funds that were heavily invested in subprime mortgages collapsed; Bear Stearns intervened with a private bailout.6 But the
market was becoming more volatile, as credit-rating agencies were
issuing more and more downgrades of bonds composed of souring
subprime mortgages. By the end of June, the three biggest rating
agencies had downgraded their ratings on 2,012 tranches, or slices,
of residential mortgage-backed securities. Just 16 days later, that
number had climbed to 3,079.7 Initially the downgrades were largely confined to the bonds’ lower-rated tranches.8 But investors
feared the losses would spread,9 and they did. Soon even the safest
pieces of these mortgage-backed bonds, those rated triple-A, were
being downgraded.10
The first major casualty was Bear Stearns. In addition to its exposure to risky mortgages, the 85-year-old investment bank had
come to rely heavily on short-term loans.11 These factors made
Bear Stearns especially vulnerable to a run, which came in March
2008. As the firm lost assets, its ability to borrow deteriorated. On
March 14, the Federal Reserve agreed to lend $29 billion as part
of a deal that allowed JPMorgan Chase to buy Bear Stearns.12
JPMorgan Chase ended up paying approximately $10 for each
share of Bear Stearns stock, or about six percent of its peak share
price.13 The government’s rescue of Bear Stearns established a new
5 See, e.g., Kristopher Gerardi, Adam Hale Shapiro, and Paul S. Willen, Subprime Outcomes:
Risky Mortgages, Homeownership Experiences, and Foreclosures, Federal Reserve Bank of Boston, Working Paper No. 07–15 (May 4, 2008) (online at www.bos.frb.org/economic/wp/wp2007/
wp0715.pdf) (‘‘[H]ouse price depreciation plays an important role in generating foreclosures. In
fact, we attribute much of the dramatic rise in Massachusetts foreclosures during 2006 and 2007
to the decline in house prices that began in the summer of 2005’’).
6 See Forest Asset Management, Hedge Funds: Don’t Bank On It, at 1–2 (Aug. 2008) (online
at forestmgmt.lightport.com/727830.pdf); see also The Bear Stearns Companies Inc., Presentation, Merrill Lynch Banking & Financial Services Investor Conference, at 3 (Nov. 14, 2007)
(online
at
www.bearstearns.com/includes/pdfs/investorlrelations/presentations/merrillllynch.pdf).
7 Standard & Poor’s had 767 downgrades through June 2007 and 1,346 through July 16, 2007.
For Moody’s, it was 479 through June and 933 through July 16. Fitch went from 766 downgrades to 800. See Fitch Ratings, U.S. Subprime Rating Surveillance Update, at 23–24 (July
2007)
(online
at
www.fitchratings.com/weblcontent/sectors/subprime/
SubprimelPresentationl07l2007.pdf).
8 Id. at 30.
9 See Markus K. Brunnermeir, Deciphering the 2007–08 Liquidity and Credit Crunch, 23 Journal of Economic Perspectives, no. 1, at 82–87 (Winter 2009) (online at www.princeton.edu/
markus/research/papers/liquiditylcreditlcrunch.pdf) (describing the ‘‘unnerve[ing]’’ effect of
mortgage-backed securities (MBS) downgrades on the broader ABS market).
10 See Office of the Comptroller of the Currency, Remarks of Comptroller John C. Dugan before
the Global Association of Risk Professionals (Feb. 27, 2008) (online at www.occ.treas.gov/ftp/release/2008-22a.pdf) (‘‘These better-than-triple A tranches were supposed to be the least risky
parts of the subprime securities pyramid. Instead they have generated the clear majority of reported subprime writedowns in capital markets, which in turn have been at the core of several
of the worst episodes of the market’s disruptions: the seizing up of the asset-backed commercial
paper market because of conduit and SIV investments in these instruments; the huge, surprising, and concentrated losses in commercial and investment banks that packaged and sold
subprime ABS CDOs; the large losses in regulated firms that thought they had conservatively
purchased ‘safe’ securities, including regional banks from as far away as Germany; and most
recently in the news, the large losses projected for monoline insurance companies that sold credit protection on these super-senior tranches’’).
11 See U.S. Securities and Exchange Commission, Office of Inspector General, SEC’s Oversight
of Bear Stearns and Related Entities: The Consolidated Supervised Entity Program, at v (Sept.
25, 2008) (online at www.sec-oig.gov/Reports/AuditsInspections/2008/446-b.pdf).
12 Federal Reserve Bank of New York, Summary of Terms and Conditions Regarding the
JPMorgan Chase Facility (Mar. 24, 2008) (online at www.newyorkfed.org/newsevents/news/markets/2008/rp080324b.html) (hereinafter ‘‘Summary of Terms and Conditions Regarding the
JPMorgan Chase Facility’’).
13 JPMorgan Chase, JPMorgan Chase and Bear Stearns Announce Amended Agreement
(March
24,
2008)
(online
at
www.jpmorgan.com/cm/cs?pagename=JPMlredesign/
JPMlContentlC/GenericlDetaillPagelTemplate&

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precedent. Previously, the government had allowed faltering investment banks, which are not insured by the federal government or
regulated like commercial banks, to go bankrupt, as Drexel
Burnham Lambert did in 1990.14
As 2008 wore on, conditions in the financial markets continued
to deteriorate. U.S. securitization markets, which had provided the
funding that fueled the housing boom, were severely contracting.
The number of privately securitized mortgages plunged from 1.75
million in 2006 to a mere 27,296 in 2008.15 In the first two quarters of that year, U.S. issuance of asset-backed securities, which include car loans, student loans, credit card lending, as well as home
equity loans, averaged about $58 billion, down from an average of
$175 billion per quarter between 2005 and the first half of 2007.16
In addition, the effects of the weak financial sector were now being
felt in the real economy, where unemployment had risen from a
low of 4.4 percent in March 2007 to 6.2 percent by August 2008.17
Foreclosure filings had more than doubled in just 16 months, from
147,708 in April 2007 to 303,879 in August 2008.18
Fear in the financial markets, which had been building, evolved
into a full-blown panic in September 2008. During a remarkable
19-day stretch, the federal government took over the two largest
players in the mortgage market, allowed a large investment bank
to go bankrupt, bailed out one of the world’s largest insurance companies, and steered a major financial institution through the largest bank failure in U.S. history. Treasury took Fannie Mae and
Freddie Mac into conservatorship on September 7.19 Lehman
Brothers failed on September 14.20 The next day, Bank of America
announced it was buying Merrill Lynch.21 The day after that, the
cid=1159339104093&c=JPMlContentlC); Ciovacco Capital Management, Forget the Spin, Bear
Stearns Was Given Away To Calm Markets (Mar. 17, 2008) (online at ciovaccocapital.com/
Article%20January%20Lows.pdf).
14 See Kenneth Ayotte and David A. Skeel, Jr., Bankruptcy or Bailouts?, Northwestern University School of Law Research Paper No. 09–05 (July 23, 2009) (online at papers.ssrn.com/sol3/
papers.cfm?abstractlid=1362639##).
15 Federal Financial Institutions Examination Council, Home Mortgage Disclosure Act National Aggregate Report—Instrument: Loans Sold by Tract in 2006, 2008 (online at
www.ffiec.gov/hmdaadwebreport/NatAggWelcome.aspx) (accessed Dec. 4, 2009).
16 Securities Industry and Financial Markets Association, US ABS Issuance (online at
www.sifma.org/uploadedFiles/Research/Statistics/SIFMAlUSABSIssuance.pdf) (hereinafter ‘‘US
ABS Issuance’’) (accessed Dec. 4, 2009).
17 United States Department of Labor, Bureau of Labor Statistics, Labor Force Statistics from
the
Current
Population
Survey
(online
at
data.bls.gov/PDQ/servlet/
SurveyOutputServlet?dataltool=latestlnumbers&serieslid=LNS14000000)
(hereinafter
‘‘Labor Force Statistics’’) (accessed Dec. 7, 2009).
18 For April 2007 data see Bloomberg, Mortgage Defaults Rise 62 Percent, RealtyTrac Reports
(May
15,
2007)
(online
at
www.bloomberg.com/apps/
news?pid=20601087&sid=a8IPzXdjD06o&refer=home) (quoting the RealtyTrac press release
which is no longer available online). For August 2008 data see RealtyTrac, Foreclosure Activity
Increases 12 Percent in August (Sept. 12, 2008) (online at www.realtytrac.com/
contentmanagement/pressrelease.aspx?channelid=9&accnt=0&itemid=5163).
19 U.S. Department of the Treasury, Statement by Secretary Henry M. Paulson, Jr. on Treasury and Federal Housing Finance Agency Action to Protect Financial Markets and Taxpayers
(Sept. 7, 2008) (online at www.ustreas.gov/press releases/hp1129.htm) (hereinafter ‘‘Secretary
Paulson Statements on Action to Protect Financial Markets and Taxpayers’’).
20 See United States Securities and Exchange Commission, Statement Regarding Recent Market Events and Lehman Brothers (Sept. 14, 2008) (online at www.sec.gov/news/press/2008/2008197.htm).
21 See Bank of America, Bank of America Buys Merrill Lynch Creating Unique Financial Services Firm (Sept. 15, 2008) (online at newsroom.bankofamerica.com/index.php?s=43&item=8255).

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government announced its bailout of AIG.22 Also on September 16,
the assets of a money-market mutual fund fell below $1 per share,
exposing investors to losses, an occurrence known as ‘‘breaking the
buck’’ that had not happened in the industry for 14 years.23 On
September 20, the Federal Reserve announced that it was allowing
Goldman Sachs and Morgan Stanley, the nation’s only two remaining large investment banks, to become bank holding companies,
giving them access to a key source of low-cost borrowing from the
Federal Reserve.24 On September 25, the FDIC took Washington
Mutual, the nation’s largest savings and loan, into receivership and
sold many of its assets to JPMorgan Chase.25
One particularly stark measure of the panic that had seized the
markets was the spread between the three-month London Interbank Offered Rate (LIBOR), which shows quarterly borrowing costs
for banks, and the Overnight Indexed Swaps (OIS) rate, which
shows the cost of extremely short-term borrowing. The spread between these two rates reflects what the market believes to be the
risk in lending money to a bank; it is therefore understood to be
a measure of the banking sector’s overall health.26 Prior to the
widespread market fears about subprime lending, this spread hovered at or below 10 basis points, or 0.1 percent. In late 2007, it rose
as high as 105 basis points, reflecting a significantly heightened
perception of risk. At the height of the financial crisis on October
10, 2008, the spread was 364 basis points.27 In the fall of 2008,
many major banks had large amounts of bad loans on their books,
leading to fears that they were insolvent.28 The problem was exacerbated by the big banks’ heavy use of leverage, their opaque balance sheets, and the complex structures of many of their holdings.29 As a result, lenders did not know whom to trust. At the
same time, the already impaired securitization markets were now
on the verge of shutting down. Issuance in the United States of
22 See Board of Governors of the Federal Reserve System, Press Release (Sept. 16, 2008) (online at www.federalreserve.gov/newsevents/press/other/20080916a.htm) (hereinafter ‘‘September
16 Press Release’’).
23 See The Reserve, Important Notice Regarding Reserve Primary Fund’s Net Asset Value (Nov.
26,
2008)
(online
at
www.reservefunds.com/pdfs/Press
Release
Prim
NAV
2008lFINALl112608.pdf); Christopher Condon, Reserve Primary Money Fund Falls Below $1
a
Share,
Bloomberg
(Sept.
16,
2008)
(online
at
www.bloomberg.com/apps/
news?pid=20601087&sid=a5O2y1go1GRU).
24 Goldman Sachs’ and Morgan Stanley’s ability to borrow from the Federal Reserve dated
back to March 2008, when the Primary Dealer Credit Facility was established, but that initiative was meant to be temporary. As bank holding companies, Goldman Sachs and Morgan Stanley would have permanent access to funding from the Federal Reserve. See Board of Governors
of the Federal Reserve System, Press Release (Sept. 21, 2008) (online at www.federalreserve.gov/
newsevents/press/bcreg/20080921a.htm).
25 See 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).
26 See Federal Reserve Bank of St. Louis, Economic Synopses: What the Libor-OIS Spread
Says (Number 24) (May 11, 2009) (online at research.stlouisfed.org/publications/es/09/
ES0924.pdf).
27 Bloomberg,
3
Mo
LIBOR–OIS
Spread
(online
at
www.bloomberg.com/apps/
cbuilder?ticker1=.LOIS3%3AIND) (hereinafter ‘‘3 Mo LIBOR–OIS Spread’’) (accessed Dec. 4,
2009).
28 For a more detailed view of which loans went bad and when, see Figure 9 in Section
1.C.1.c.i. See also Congressional Oversight Panel, Written Testimony of Center for Economic and
Policy Research Co-Director Dean Baker, Taking Stock: Independent Views on TARP’s Effectiveness, at 4 (Nov. 19, 2009) (online at cop.senate.gov/documents/testimony-111909-baker.pdf)
(hereinafter ‘‘Baker COP Testimony’’).
29 See Bank of England, Remarks as Prepared for Delivery by Mervyn King, Governor of the
Bank of England, to the Worshipful Company of International Bankers in London: Finance (Mar.
17, 2009) (online at www.bankofengland.co.uk/publications/speeches/2009/speech381.pdf).

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9
asset-backed securities fell from $63 billion in the second quarter
of 2008 to just $3.5 billion in the fourth quarter.30
2. The Initial Federal Response to the Crisis
The federal government’s initial responses to the financial crisis
were often ad hoc, with decisions made on an emergency basis.31
On March 13, 2008, during the run on Bear Stearns, the Federal
Reserve learned that, due to a large and sudden deterioration in
liquidity, the firm was one day from filing for bankruptcy. As
Chairman of the Board of Governors of the Federal Reserve System
Ben S. Bernanke later told Congress, there were numerous systemic factors for the Federal Reserve to consider as it contemplated
a possible bailout, including the effects that Bear Stearns’ failure
would have on the firm’s counterparties, the effects it would have
on confidence in the financial markets, and the effects that any resulting contraction in available credit would have on the U.S. economy.32 Within hours, the Federal Reserve decided to facilitate Bear
Stearns’ acquisition by JPMorgan Chase by extending a $29 billion
loan using its authority under Section 13(3) of the Federal Reserve
Act,33 which allows the Federal Reserve to lend to ‘‘any individual,
partnership, or corporation’’ under ‘‘unusual and exigent circumstances.’’ 34
In March 2008, at the same time that it was dealing with the
Bear Stearns collapse, the Federal Reserve also took further steps
to bolster financial markets and the economy with the creation of
two special liquidity facilities.35 These facilities served as backstops
in the marketplace by ensuring that firms that held less liquid assets had access to the cash they needed to fund their day-to-day operations. The government’s improvisations accelerated at a dizzying
rate in September 2008, as market forces repeatedly overwhelmed
whichever step the government had most recently taken. The decision by Treasury and the Federal Housing Finance Agency to take
control of Fannie Mae and Freddie Mac was driven by the two
firms’ thin capitalization, as well as the effects of falling home
prices, rising delinquency rates, and instability in the financial
markets.36 In addition, the firms’ enormous sizes—together they

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30 US

ABS Issuance, supra note 16.
31 See Steven M. Davidoff and David Zaring, Regulation by Deal: The Government’s Response
to the Financial Crisis, 61 ADMIN. L. REV. 463, 467 (2009) (available online at papers.ssrn.com/
sol3/papers.cfm?abstractlid=1306342) (characterizing the government’s role as ‘‘that of an extraordinarily vigorous dealmaker’’); Richard A. Posner, A Failure of Capitalism: The Crisis of
’08 and the Descent Into Depression (2009) (excerpted online at www.finreg21.com/lombardstreet/a-failure-capitalism-the-crisis-of-’08-and-the-descent-into-depression) (writing that the government responded to the crisis with ‘‘a series of improvisations’’).
32 Senate Banking Committee, Written Testimony of Ben S. Bernanke, chairman, Board of
Governors of the Federal Reserve System, Turmoil in U.S. Credit Markets: Examining the Recent Actions of Federal Financial Regulators, 110th Cong., at 2–3 (Apr. 3, 2008) (online at banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStorelid=0a0ec016-ad61-4736-b6e37eb61fbc0c69).
33 Summary of Terms and Conditions Regarding the JPMorgan Chase Facility, supra note 12.
34 12 U.S.C. § 343.
35 The new facilities were known as the Term Securities Lending Facility and the Primary
Dealer Credit Facility. One additional Federal Reserve special liquidity facility pre-dated the
market upheaval around the time of Bear Stearns’ collapse, though its size was expanded in
March 2008. The Term Auction Facility, which provided short-term liquidity to depository institutions, was created in December 2007.
36 See Secretary Paulson Statements on Action to Protect Financial Markets and Taxpayers,
supra note 19; see also Federal Housing Finance Agency, Statement of FHFA Director James
B.
Lockhart
(Sept.
7,
2008)
(online
at
www.ustreas.gov/press/releases/reports/
Continued

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held $5.4 trillion in guaranteed securities and outstanding debt, on
par with the federal government’s publicly held debt 37—raised the
possibility that their failure would have systemic consequences.
Then-Secretary of the Treasury Henry Paulson also cited Fannie
Mae’s and Freddie Mac’s ambiguous relationships with the government as a motivating factor for the backstops. Investors worldwide
had purchased Fannie and Freddie debt on the understanding that
the U.S. government implicitly stood behind it.38 Secretary Paulson
stated that under these circumstances the United States was
obliged to assist the firms.39
The reasoning behind the decision not to bail out Lehman Brothers is less clear. Then-Secretary Paulson insisted that he never
considered committing taxpayer funds to a Lehman rescue. Secretary Paulson cited ‘‘moral hazard,’’ the idea that firms will take
greater risks if they believe the government is prepared to bail
them out.40 Government officials including Timothy Geithner, then
President of the Federal Reserve Bank of New York (FRBNY),
Chairman Bernanke, and Secretary Paulson, ultimately decided
against a rescue.41 Treasury maintains that it doubted its legal authority to intervene in the collapse of Lehman, despite its role in
the Bear Stearns rescue.42
Subsequent media accounts present a more complicated picture—
supporting the view that the key decision-makers hoped to send a
message to the market by letting Lehman fail.43 Additionally,
Treasury may have been leery of the popular reaction to a rescue
that likely would have benefitted non-U.S. counterparties as much
as U.S. interests—a real risk, as evidenced by the impact of the
AIG rescue later.44 In any case, it would appear that the reasons
Chairman Bernanke cited for the bailout of Bear Stearns—the effects of a failure on counterparties, the effects on financial markets,
fhfalstatementl090708hp1128.pdf) (hereinafter ‘‘Statement of FHFA Director James B.
Lockhart’’).
37 Statement of FHFA Director James B. Lockhart, supra note 36.
38 Secretary Paulson Statements on Action to Protect Financial Markets and Taxpayers, supra
note 19.
39 Secretary Paulson Statements on Action to Protect Financial Markets and Taxpayers, supra
note 19.
40 White House, Press Briefing by Dana Perino and Secretary of the Treasury Henry Paulson
(Sept. 15, 2008) (online at georgewbush-whitehouse.archives.gov/news/releases/2008/09/
20080915-8.html).
41 Carrick Mollenkamp et al., Lehman’s Demise Triggered Cash Crunch Around Globe, Wall
Street Journal (Sept. 29, 2008) (online at online.wsj.com/article/SB122266132599384845.html).
42 See House Committee on Oversight and Government Reform, Testimony of Secretary Henry
M. Paulson, Bank of America and Merrill Lynch: How Did a Private Deal Turn Into a Federal
Bailout?
Part
III,
111th
Cong.,
at
6
(online
at
oversight.house.gov/
index.php?option=comlcontent&task=view&id=3690&Itemid=2); see also U.S. Department of
the Treasury, Letter from Assistant Secretary for Legislative Affairs Kevin I. Fromer to Senate
Finance Committee staff (Mar. 28, 2008) (online at finance.senate.gov/press/Bpress/2008press/
prb040108a.pdf) (describing Treasury’s role in the negotiations between the Federal Reserve
Bank of New York (FRBNY), Bear Stearns, and JPMorgan Chase).
43 Simon Johnson and James Kwak, Lehman Brothers and the Persistence of Moral Hazard,
Washington Post (Sept. 15, 2009) (online at www.washingtonpost.com/wp-dyn/content/article/
2009/09/15/AR2009091500943.html).
44 Barclays PLC, a British firm, had been interested in buying parts of Lehman’s operations
prior to Lehman’s failure, and eventually bought significant parts of the Lehman business as
part of the bankruptcy. AIG’s biggest counterparties included Societe Generale, a French firm,
and Deutsche Bank, a German firm. See Barclays PLC, Form 6–K (Sept. 15, 2008) (online at
sec.gov/Archives/edgar/data/312069/000119163808001621/barc200809156k.htm); see also Lehman
Brothers, Barclays to Acquire Lehman Brothers’ Businesses and Assets (Sept. 16, 2008) (online
at www.lehman.com/press/pdfl2008/0916lbarclayslacquisition.pdf); AIG, Counterparty Attachments
(Mar.
18,
2009)
(online
at
www.aig.com/aigweb/internet/en/files/
CounterpartyAttachments031809ltcm385-155645.pdf).

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and the impact on credit availability—also applied in the case of
Lehman Brothers.45
If policymakers hoped that Lehman’s demise would end the cycle
of bailouts, their strategy failed. Instead, the efforts to save the financial sector became more extensive and more frantic in the following days. One of the most urgent problems, AIG’s illiquidity,
suddenly emerged on the radar of top policymakers.46 With roughly
70 U.S. insurance companies, tens of billions of dollars of exposure
to counterparties, and operations in 130 countries, AIG was another firm that was seen as posing a systemic risk.47 Within days,
the Federal Reserve had agreed to lend the massive insurance company up to $85 billion.48 In this atmosphere of panic, Chairman
Bernanke and Secretary Paulson concluded that their only remaining option was to convince Congress to authorize an overwhelming
fiscal response. This idea—that the government needed to respond
to the crisis in a more comprehensive way—was the kernel of the
Troubled Asset Relief Program, or the TARP.
Even after Secretary Paulson and Chairman Bernanke decided
that a more systematic response was needed, they continued to improvise in response to the rapidly changing landscape. On September 19, the day after they held an emergency meeting with
Congressional leaders,49 Treasury announced a temporary government guarantee of holdings in money-market funds.50 And in another effort to restore confidence in money-market funds, the Federal Reserve announced the creation of yet another special liquidity
facility.51 Top officials at Treasury and the Federal Reserve also
worked behind the scenes to encourage numerous potential bank
45 But see Peter Van Doren, Lehman Brothers and Bear Stearns: What’s the Difference? (Sept.
25, 2008) (online at www.cato.org/publdisplay.php?publid=9665). This article notes that firms
in market economies go bankrupt all the time, and it explores the issue of whether the failure
of investment banks such as Lehman Brothers and Bear Stearns can lead to contagion to firms
that have no direct relationship with those bankrupt firms. The article describes without endorsing the view that investment banks can pose a contagion threat because of their use of overthe-counter financial derivatives. The article also briefly discusses the possibility that Bear
Stearns played a more important role in the derivatives market than Lehman Brothers, and
therefore posed a greater threat of contagion, as well as the possibility that Bear Stearns did
not pose a contagion threat and therefore should not have been rescued.
46 See U.S. Department of the Treasury, Letter from Assistant Secretary Herbert M. Allison,
Jr. to Special Inspector General Neil M. Barofsky re: SIGTARP Official Draft Report, in Factors
Affecting Efforts to Limit Payments to AIG Counterparties, at 41–42 (Nov. 16, 2009) (online at
www.sigtarp.gov/reports/audit/2009/FactorsAffectinglEffortsltolLimitlPaymentsl
tolAIGlCounterparties.pdf) (‘‘Literally overnight, government officials were faced with a difficult choice, and a choice that had to be made immediately: either let AIG go bankrupt or provide support’’).
47 AIG later revealed that after receiving government assistance, it paid more than $90 billion
to counterparties, including $12.9 billion to Goldman Sachs, $11.9 billion to Societe Generale,
and $11.8 billion to Deutsche Bank. American International Group, Counterparty Attachments
(Mar.
18,
2009)
(online
at
www.aig.com/aigweb/internet/en/files/
CounterpartyAttachments031809ltcm385-155645.pdf); see also Scott E. Harrington, The Financial Crisis, Systemic Risk, and the Future of Insurance Regulation, Issue Analysis: A Public Policy Paper of the National Association of Mutual Insurance Companies, at 9 (Sept. 2009) (online
at www.namic.org/advocatenews/pdfs/090922lharrington.pdf).
48 See September 16 Press Release, supra note 22.
49 See Speaker of the House of Representatives, Pelosi Comments on Bipartisan Congressional
Leaders’ Meeting with Paulson, Bernanke, and Cox (Sept. 18, 2008) (online at speaker.house.gov/
newsroom/pressreleases?id=0825).
50 The guarantee was announced following the news that one money-market fund, the Reserve
Fund, had broken the buck. The Reserve Fund held Lehman Brothers debt, which sparked fears
in the marketplace following Lehman’s failure. U.S. Department of the Treasury, Treasury Announces Guaranty Program for Money Market Funds (Sept. 19, 2008) (online at
www.treasury.gov/press/releases/hp1147.htm).
51 This facility was called the Asset-Backed Commercial Paper Money Market Mutual Fund
Liquidity Facility. See Board of Governors of the Federal Reserve System, Press Release (Sept.
19, 2008) (online at www.federalreserve.gov/monetarypolicy/20080919a.htm).

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12
mergers, including Citigroup-Goldman Sachs, Citigroup-Morgan
Stanley, Citigroup-Wachovia, Wachovia-Goldman Sachs, WachoviaMorgan Stanley, and JPMorgan Chase-Morgan Stanley.52 In the
end, none of those mergers happened.53 Then on September 21, the
Federal Reserve announced that Goldman Sachs and Morgan Stanley would be allowed to become bank holding companies, which was
interpreted as a signal that the government would not allow those
two firms to fail.
The decision by Chairman Bernanke and Secretary Paulson on
September 18 to enlist the help of Congress led to a three-page legislative proposal from Treasury on September 20. The plan would
have given Treasury the authority to spend up to $700 billion to
purchase ‘‘troubled assets,’’ namely ‘‘residential and commercial
mortgage-related assets.’’ 54 Over the next two weeks, the administration’s proposal was significantly modified and expanded, and
even defeated once in the House of Representatives, prior to being
signed into law on October 3, 2008. The law authorizes the Treasury Secretary to purchase not only mortgage-related securities
under the TARP, but also ‘‘any other financial instrument’’ the purchase of which the Secretary determines to be ‘‘necessary to promote financial market stability.’’ 55
What started as a contraction in the U.S. housing sector had now
spread around the globe, prompting emergency responses by numerous countries in September-October 2008.56 Shortly after the
comprehensive fiscal response was adopted in the United States,
European governments decided to respond in a similar fashion. On
October 8, British Prime Minister Gordon Brown announced a financial stability plan that included £50 billion ($87.5 billion) in
capital injections, £200 billion ($349.8 billion) in a special liquidity
program, and £250 billion ($437.2 billion) in guarantees to encourage inter-bank lending.57 On October 13, France announced a plan
that included ×320 billion ($429.4 billion) in guarantees and ×40
billion ($53.7 billion) in capital injections.58 On October 16, the
Swiss government used a capital injection of 6 billion francs ($5.3
billion) to take a 9.3 percent stake in UBS.59 And on October 17,
Germany’s parliament approved a ×480 billion ($645.6 billion) bank
bailout package.60
52 See

Andrew Ross Sorkin, Too Big To Fail (2009).
was soon bought by Wells Fargo and Morgan Stanley was stabilized by a capital
infusion from a Japanese bank, Mitsubishi UFJ Financial Group.
54 See U.S. Department of the Treasury, Fact Sheet: Proposed Treasury Authority to Purchase
Troubled Assets (Sept. 20, 2008) (online at www.ustreas.gov/press/releases/hp1150.htm).
55 The same law also establishes the Congressional Oversight Panel. Emergency Economic
Stabilization Act of 2008 (EESA), Pub. L. No. 110–343.
56 Bans or restrictions on short selling were imposed from Australia to the Netherlands. Ireland stepped in to guarantee deposits at its six largest banks. The Russian government injected
many billions of dollars into its banking system. Iceland nationalized its three largest banks.
For a lengthier discussion of the international response, see the Panel’s April report. Congressional Oversight Panel, April Oversight Report: Assessing Treasury’s Strategy: Six Months of
TARP, at 60–70 (Apr. 7, 2009) (online at cop.senate.gov/documents/cop-040709-report.pdf).
57 See British Prime Minister’s Office, £50 Billion Banking Package (Oct. 8, 2008) (online at
www.number10.gov.uk/Page17112).
58 Henry Samuel, Banking Bail-out: France Unveils ×360bn Package, Telegraph (U.K.) (Oct.
13, 2008) (online at www.telegraph.co.uk/finance/financetopics/financialcrisis/3190311/Bankingbail-out-France-unveils-360bn-package.html).
59 David Gow, Switzerland Unveils Bank Bail-out Plan, Guardian (U.K.) (Oct. 16, 2008) (online at www.guardian.co.uk/business/2008/oct/16/ubs-creditsuisse).
60 See Simon Morgan, Germany Adopts 480-bln-euro Bank Bail-out, Agence France-Presse
(Oct. 17, 2008) (online at uk.biz.yahoo.com/17102008/323/germany-adopts-480-bln-euro-bankbail.html).

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53 Wachovia

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For American families, the financial crisis caused a vast destruction of wealth. By September 2008, the bursting of the housing
bubble sent home prices down by 22 percent from their peak in
2006.61 When the financial markets reached their low point, in the
first quarter of 2009, the value of households’ financial assets had
also plummeted by about 20 percent from their 2007 peak.62 From
peak to trough, the net worth of households and non-profit organizations fell by $12.7 trillion.63 As a point of comparison, the U.S.
gross domestic product, which measures the market value of the
country’s annual output of final goods and services in a year, is
$14.3 trillion.64
C. The TARP’s Evolution
Although Secretary Paulson and Chairman Bernanke initially
had proposed to use TARP funds to buy troubled assets on the
books of the largest U.S. financial institutions, they soon realized
that this was impractical given the need for quick action. On October 14, 2008, Secretary Paulson summoned the heads of the nine
largest U.S. banks to Washington and told them that Treasury was
making direct capital injections into each of their institutions,
using a total of $125 billion of TARP resources. Over the following
weeks and months, under both Secretary Paulson and incoming
Secretary Geithner, Treasury made further capital stock purchases 65 in another 692 banks and used the TARP in conjunction
with Federal Reserve support to implement the extraordinary rescue of AIG. Treasury also used TARP resources to provide assistance to two major U.S. automobile companies and to fund a mortgage foreclosure relief grant program as part of the new Administration’s efforts to combat the unprecedented level of mortgage defaults and foreclosures in the United States. Finally, the TARP was
used in conjunction with Treasury and Federal Reserve efforts to
try to restart small business and consumer lending.
1. Capital Programs and Banking Sector Health
a. Background
The largest and most prominent use of TARP funding has been
the government’s efforts to provide capital assistance to U.S. banks.
The Capital Purchase Program (CPP), which provides capital injections into banks, was the first and largest TARP program. The Targeted Investment Program (TIP) and the Systemically Significant
Failing Institution (SSFI) Program also provide capital injections,
but they are narrower efforts aimed at providing exceptional assistance to large institutions considered critical to the functioning of
61 See

S&P/Case-Shiller Home Price Indices, supra note 1.
Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release:
Flow of Funds Accounts of the United States, Flows and Outstandings Second Quarter 2009, at
104 (Sept. 17, 2009) (online at www.federalreserve.gov/releases/z1/Current/z1.pdf) (hereinafter
‘‘Federal Reserve Statistical Release: Second Quarter 2009’’).
63 Id. at 104.
64 U.S. Department of Commerce, Bureau of Economic Analysis, Gross Domestic Product:
Third Quarter (Advance Estimate) (Oct. 29, 2009) (online at www.bea.gov/newsreleases/national/
gdp/gdpnewsrelease.htm).
65 These capital stock purchases, discussed in this section, were made through the TARP’s
Capital Purchase Program, Targeted Investment Program, and Systemically Significant Failing
Institution Program.

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62 See

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14
the financial system. Another exceptional assistance program is the
Asset Guarantee Program (AGP), under which the government has
guaranteed approximately $301 billion in Citigroup assets, thereby
insulating Citigroup from potential capital losses on those assets.
The Public-Private Investment Program (PPIP) provides yet another form of capital assistance by attempting to restart the markets for troubled securities that are currently weighing down bank
balance sheets. By removing these troubled securities from bank
balance sheets, or guaranteeing assets, the PPIP and AGP, respectively, alleviate some of the banks’ capital needs. Lastly, while the
FDIC’s Temporary Liquidity Guarantee Program (TLGP) does not
rely on TARP funds, it is another key part of the government’s support for the banking system.

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i. Capital Purchase Program 66
Treasury used the CPP to provide capital to banks and other financial institutions, usually by purchasing senior preferred stock.67
Treasury has stated that it only provided CPP funds to viable
banks.68 In order to give taxpayers an opportunity to participate in
the upside if a bank’s stock price rose, Treasury also received warrants to purchase common stock. The program has gone through
several phases; the application period for the final phase closed on
November 21, 2009.69 Financial institutions that have already received CPP funds may keep their money according to the terms of
the program, but Treasury will not disburse additional funds.70
Over the life of the program, the CPP has provided nearly $205 billion in capital to 692 financial institutions, including more than
300 small and community banks.71
Fifty financial institutions have redeemed their preferred stock,
and 30 of them have also repurchased their warrants.72 CPP recipi66 For more detail on the CPP, see the Panel’s February and July Reports. Congressional
Oversight Panel, February Oversight Report: Valuing Treasury’s Acquisitions, at 5–11 (Feb. 6,
2009) (online at cop.senate.gov/documents/cop-020609-report.pdf) (hereinafter ‘‘February Oversight Report’’); Congressional Oversight Panel, July Oversight Report: TARP Repayments, Including the Repurchase of Stock Warrants, at 8–17 (July 10, 2009) (online at cop.senate.gov/documents/cop-071009-report.pdf) (hereinafter ‘‘July Oversight Report’’).
67 Treasury has stated that for every $100 Treasury invested, it received preferred stock and
warrants worth about $100. However, in its February Report, the Panel performed a valuation
of Treasury’s initial investments under the capital programs and found that Treasury received
stock and warrants worth only approximately $66 for every $100 invested. February Oversight
Report, supra note 66, at 4.
68 U.S. Department of the Treasury, Capital Purchase Programs (updated Nov. 3, 2009) (online at www.financialstability.gov/roadtostability/capitalpurchaseprogram.html) (accessed Dec. 7,
2009). However, as discussed in Section (C)(1)(a), infra, there are questions as to whether Treasury adhered to this guideline.
69 U.S. Department of the Treasury, Frequently Asked Questions regarding the Capital Purchase Program (CPP) for Small Banks (online at www.financialstability.gov/docs/CPP/
FAQonCPPforsmallbanks.pdf) (hereinafter ‘‘FAQs on CPP for Small Banks’’) (accessed Dec. 7,
2009).
70 U.S. Department of the Treasury, The Next Phase of Government Financial Stabilization
and Rehabilitation Policies, at 36 (Sept. 14, 2009) (online at www.treas.gov/press/releases/docs/
Next%20Phase%20of%20Financial%20Policy,%20Final,%202009-09-14.pdf) (hereinafter ‘‘Next
Phase of Government Financial Stabilization’’).
71 See U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report
for Period Ending November 25, 2009 (Nov. 30, 2009) (online at www.financialstability.gov/docs/
transaction-reports/11-30-09%20Transactions%20Report%20as%20of%2011-25-09.pdf)
(hereinafter ‘‘November 25 Transactions Report’’); U.S. Department of the Treasury, Assistant Secretary
Allison Written Testimony for Congressional Oversight Panel (Oct. 24, 2009) (online at
www.financialstability.gov/latest/tgl10222009.html). The 20 top recipients of capital assistance
under the CPP, the TIP, and the SSFI Program received 89 percent of the $319.5 billion total
of these three programs’ funds.
72 This is as of November 25, 2009. November 25 Transactions Report, supra note 71. Treasury has stated that it will not hold the warrants after the preferred stock has been redeemed.

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ents may redeem their preferred stock only after receiving approval
from the federal banking agency that serves as their primary regulator.73 The redemption price of the preferred stock is set contractually, but Treasury repurchases the warrants at fair market
value, which is determined through a negotiation and appraisal
process between Treasury and the financial institution.74 Treasury
has determined that it will not hold warrants after a financial institution redeems its preferred stock.75 If a financial institution
does not wish to repurchase the warrants or if Treasury and the
financial institution cannot agree on a price through the appraisal
process, Treasury will auction them to the public.76
In the first half of this year, Treasury and the bank supervisors
engaged in the Supervisory Capital Assessment Program (SCAP),
comprehensive stress tests of the nation’s largest banks. According
to Treasury, these tests were a forward-looking exercise aimed at
determining whether these institutions had sufficient capital to
weather a longer and more severe economic downturn.77 The results showed that 10 of the 19 stress-tested institutions required
additional capital.78 The other nine were allowed to redeem their
preferred stock, subject to the approval of their primary federal
Three of these banks have agreed to allow Treasury to auction their warrants. Of the remaining
banks, Treasury is either currently negotiating the repurchase price or, for those which declined
to continue discussions, is preparing to auction the warrants. Treasury communications with
Panel staff (Dec. 4, 2009).
73 For a full discussion of the history and legal aspects of CPP repayment, see the Panel’s July
report. July Oversight Report, supra note 66, at 8–20.
74 U.S. Department of the Treasury, Securities Purchase Agreement: Standard Terms, at §§4.4,
4.9(c)(i) (online at www.financialstability.gov/docs/CPP/spa.pdf) (accessed Dec. 8, 2009); 12
U.S.C. 5223(a)(2)(B). For a more complete discussion of this topic, please see the Panel’s July
Oversight Report. See July Oversight Report, supra note 66, at 10–17. The process is different
for private banks. Treasury immediately exercised the warrants of private banks. The redemption price of the shares received on exercise was set in the contracts. The process is different
for private banks. Treasury immediately exercised the warrants of private banks. The redemption price of the shares received on exercise was set in the contracts.
75 U.S. Department of the Treasury, Treasury Announces Warrant Repurchase and Disposition
Process for the Capital Purchase Program (June 26, 2009) (online at www.financialstability.gov/
docs/CPP/Warrant-Statement.pdf ).
76 Treasury has announced it will auction the warrants of JPMorgan Chase, Capital One, and
TCF Financial Corporation through a modified Dutch auction process. U.S. Department of the
Treasury, Treasury Announces Intent to Sell Warrant Positions in Public Dutch Auction (Nov.
19, 2009) (online at www.financialstability.gov/latest/tgl11192009b.html). Treasury will allow
the banks to bid on their own warrants. On December 3, 2009, Treasury held a public auction
to sell Capital One’s warrants. At the auction, the warrants were priced at $146.5 million. U.S.
Department of the Treasury, Treasury Department Announces Pricing of Public Offering of Warrants to Purchase Common Stock of Capital One Financial Corporation (Dec. 4, 2009) (online
at www.financialstability.gov/latest/tgl12042009.html) (hereinafter ‘‘Capital One Warrant Purchase’’).
77 For a discussion of the stress tests, see the Panel’s June report. Congressional Oversight
Panel, June Oversight Report: Stress Testing and Shoring Up Bank Capital (June 9, 2009) (online at cop.senate.gov/documents/cop-060909-report.pdf) (hereinafter ‘‘June Oversight Report’’). If
a stress-tested institution required additional capital and could not raise it in the private markets, it could have access to additional TARP funds through the Capital Assistance Program
(CAP). The terms of this program were less favorable to the banks than were the terms of the
CPP.
78 Federal Reserve Board of Governors, The Supervisory Capital Assessment Program: Overview of Results, at 3 (May 7, 2009) (online at www.federalreserve.gov/newsevents/press/bcreg/
bcreg20090507a1.pdf). Nine of these 10 have raised the required capital in the private markets.
To date, GMAC is the only institution that has returned to the government for more financial
support. Treasury announced that it will provide any support to GMAC through the AIFP. U.S.
Department of the Treasury, Treasury Announcement Regarding the Capital Assistance Program
(Nov. 9, 2009) (online at www.financialstability.gov/latest/tgl11092009.html) (hereinafter
‘‘Treasury Announcement Regarding the CAP’’). Treasury staff has told the Panel that GMAC
will receive AIFP and not CAP funds because its previous injections had been through the AIFP.
In addition, Treasury staff stated that the terms of the AIFP are substantially similar to the
CAP. Treasury communications with Panel staff (Nov. 17, 2009).

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16
regulator.79 The 10 banks that required additional capital had to
raise this money in the private markets before they could redeem
their preferred stock. On June 17, 2009, 10 of the 19 stress-tested
banks repurchased their preferred stock.80 Together, they repurchased approximately $70 billion in preferred stock. Figure 1 shows
the total amount of CPP funds outstanding by month, with the
drop-off in June 2009 resulting from the wave of stock repurchases.
Though 10 of the 19 stress-tested banks have already repaid their
CPP funds, three of the four largest banks still hold their TARP
funds. Measured by assets, these three institutions constitute approximately 40 percent of the banking system.81 One of these
three, Bank of America, announced on December 2, 2009 that it
would repay all of its TARP funds after the completion of a securities offering.82

79 U.S. Department of the Treasury, FAQs on Capital Purchase Program Repayment and Capital Assistance Program (online at www.financialstability.gov/docs/FAQlCPP-CAP.pdf)
(accessed Dec. 7, 2009). A stress tested institution seeking to repay was also required to ‘‘be
able to demonstrate its financial strength by issuing senior unsecured debt for a term greater
than five years not backed by FDIC guarantees, in amounts sufficient to demonstrate a capacity
to meet funding needs independent of government guarantees.’’ U.S. Department of the Treasury, FAQs on Capital Purchase Program Repayment and Capital Assistance Program (online at
www.financialstability.gov/docs/FAQlCPP-CAP.pdf) (accessed Dec. 7, 2009).
80 The 10 banks that repaid are JPMorgan Chase, Goldman Sachs, Morgan Stanley, U.S.
Bancorp, Capital One, American Express, Bank of New York, State Street, Northern Trust, and
BB&T. November 25 Transactions Report, supra note 71.
81 See National Information Center, Top 50 BHCs (online at www.ffiec.gov/nicpubweb/nicweb/
Top50form.aspx) (accessed Dec. 7, 2009); Federal Reserve Board of Governors, Assets and Liabilities of Commercial Banks in the United States—H.8 (Dec. 4, 2009) (online at
www.federalreserve.gov/releases/h8/current/default.htm).
82 Bank of America, Bank of America to Repay Entire $45 Billion in TARP to U.S. Taxpayers
(Dec. 2, 2009) (online at newsroom.bankofamerica.com/index.php?s=43&item=8583) (hereinafter
‘‘Bank of America Repayment’’).
83 November 25 Transactions Report, supra note 71.

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FIGURE 1: CPP FUNDS OUTSTANDING BY MONTH (AS OF NOVEMBER 30, 2009) 83

17
Unlike other lending categories, Treasury only began publishing
small business lending information as of April 2009. U.S. Department of the Treasury, Treasury Department Monthly Lending and
Intermediation Snapshot Data for April 2009–September 2009
(Nov. 16, 2009) (online at www.financialstability.gov/impact/
monthlyLendingandIntermediationSnapshot.htm)
(hereinafter
‘‘Treasury Department Monthly Lending and Intermediation Snapshot Data for April 2009–September 2009’’).

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ii. Exceptional Assistance Programs
Treasury has used additional TARP funds to bolster the capital
bases of financial institutions that were deemed ‘‘critical to the
functioning of the financial system.’’ 84 The three beneficiaries of
this assistance have been AIG, Bank of America, and Citigroup.
Because these institutions are deemed to have received ‘‘exceptional assistance,’’ they are subject to more stringent guidelines on
executive compensation than other TARP recipients.85
Systemically Significant Financial Institutions Program. The
SSFI Program was ‘‘established to provide stability and prevent
disruptions to financial markets from the failure of institutions
that are critical to the functioning of the nation’s financial system.’’ 86 AIG, which has received nearly $70 billion in capital under
the SSFI Program,87 is the only recipient of funds under the program. AIG can continue to draw on the SSFI Program through
April 17, 2014. In exchange for each drawdown, Treasury will receive additional preferred AIG stock in the amount of the drawdown. The preferred stock carries a 10 percent dividend.88 Treasury has also received warrants to purchase common stock.89
Targeted Investment Program. Like the SSFI Program, the TIP
was intended to ‘‘stabilize the financial system by making investments in institutions that are critical to the functioning of the fi84 See
U.S. Department of the Treasury, Targeted Investment Program (online at
www.financialstability.gov/roadtostability/targetedinvestmentprogram.html) (hereinafter ‘‘Targeted Investment Program’’) (accessed Dec. 7, 2009) (the TIP ‘‘focuses on the complex relationships and reliance of institutions within the financial system. Investments made through the
TIP seek to avoid significant market disruptions resulting from the deterioration of one financial
institution that can threaten other financial institutions and impair broader financial markets
and pose a threat to the overall economy’’); U.S. Department of the Treasury, Programs (online
at www.financialstability.gov/roadtostability/programs.htm) (hereinafter ‘‘Treasury Programs’’)
(accessed Dec. 7, 2009) (the SSFI Program ‘‘was established to provide stability and prevent disruptions to financial markets from the failure of institutions that are critical to the functioning
of the nation’s financial system’’).
85 See 31 C.F.R. §§ 30.0–30.17; U.S. Department of the Treasury, Interim Final Rule on TARP
Standards for Compensation and Corporate Governance (online at www.treas.gov/press/releases/
reports/ec%20ifr%20fr%20web%206.9.09tg164.pdf) (accessed Dec. 7, 2009).
86 Treasury Programs, supra note 84.
87 The first round came through a purchase of $40 billion in preferred stock, on November
25, 2008. The initial purchase was of cumulative preferred stock. In April 2009, this was exchanged for $41.6 billion of non-cumulative preferred shares. This represented no change in
Treasury’s initial investment. See U.S. Department of the Treasury, Transactions Report (Oct.
27,
2009)
(online
at
www.financialstability.gov/docs/transaction-reports/10-2709%20Transactions%20Report%20as%20of%2010-23-09.pdf). The second was through the April
17, 2009 creation of an equity capital facility of approximately $30 billion. See U.S. Department
of the Treasury, Transactions Report (Oct. 27, 2009) (online at www.financialstability.gov/docs/
transaction-reports/10-27-09%20Transactions%20Report%20as%20of%2010-23-09.pdf).
88 See U.S. Department of the Treasury, Term Sheet Exchange of Series D Fixed Rate Cumulative Perpetual Preferred Stock for Series E Fixed Rate Non-Cumulative Perpetual Preferred
Stock
(Mar.
2,
2009)
(online
at
www.financialstability.gov/docs/agreements/
030209lAIGlTermlSheet.pdf).
89 Treasury’s funding of AIG is not the only government assistance to the insurance giant. AIG
has also received $96 billion in assistance from the Federal Reserve through a revolving credit
facility and loans extended to special purpose vehicles to buy AIG assets.

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18
nancial system.’’ 90 Just two financial institutions have received
TIP funds: Bank of America and Citigroup. Treasury announced
that it was providing a capital injection to Citigroup on November
23, 2008, and purchased $20 billion in preferred Citigroup stock on
December 31, 2008. The term sheet accompanying the announcement portrays the capital injection as a modified version of the
CPP.91 It was not until January 2, 2009 that TIP was given a
name and its guidelines were announced.92 Then on January 16,
2009, Treasury bought $20 billion in preferred stock from Bank of
America.93 The assistance provided under this program was in addition to the $25 billion that Citigroup had already received, and
the $15 billion that Bank of America (subsequently increased to
$25 billion, with the inclusion of Merrill Lynch’s funds) has already
received in CPP funds on October 28, 2008.94
Treasury required changes in senior management, and diluted
the interests of shareholders when the government received a 79.9
percent equity interest in AIG.95 By contrast, despite providing
Bank of America and Citigroup with exceptional assistance, Treasury did not require them to make changes in management. Furthermore, it did not dilute shareholder interests in Bank of America. Treasury has not explained the rationale behind the differences
in treatment.
Asset Guarantee Program.96 The AGP is an initiative by Treasury, along with the FDIC and the Federal Reserve, that initially
guaranteed approximately $301 billion of Citigroup’s assets.97 After
Citigroup received $25 billion in CPP funds in late October 2008,
its financial status continued to deteriorate. On November 23,
2008, Treasury, the FDIC and the Federal Reserve agreed to share
with Citigroup potential losses on a pool of its assets that Citigroup
identified as some of its riskiest.98 Treasury announced the aid in

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90 Targeted

Investment Program, supra note 84.
91 See U.S. Department of the Treasury, Summary of Terms: Preferred Securities (Nov. 23,
2008) (online at www.treas.gov/press/releases/reports/cititermsheetl112308.pdf) (‘‘Redemption:
In stock or cash, as mutually agreed between UST and Citi. Otherwise, redemption terms of
CPP preferred terms apply . . . Repurchases: Same terms as preferred issued in CPP’’).
92 U.S. Department of the Treasury, Treasury Releases Guidelines for Targeted Investment
Program (Jan. 2, 2009) (online at treasury.gov/press/releases/hp1338.htm); 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). The announcement on November
23, 2008 did not specify under which program Citigroup’s second injection fell. In fact, at that
time, the CPP was the only named program under the TARP.
93 See November 25 Transactions Report, supra note 71.
94 See November 25 Transactions Report, supra note 71.
95 See U.S. Department of the Treasury, Monthly 105(a) Report (Nov. 10, 2009) (online at
www.financialstability.gov/docs/105CongressionalReports/October%20105(a)l11.10.2009.pdf)
(‘‘the FRBNY received convertible preferred shares representing approximately 79.8% of the current voting power of the AIG common shares. These preferred shares were deposited in a trust,
created by the FRBNY. The U.S. Treasury (i.e., the general fund) is the beneficiary of this
trust’’).
96 For a full discussion of the AGP, see the Panel’s November report. Congressional Oversight
Panel, November Oversight Report: Guarantees and Contingent Payments in TARP and Related
Programs, at 13–27 (Nov. 6, 2009) (online at cop.senate.gov/documents/cop-110609-report.pdf)
(hereinafter ‘‘November Oversight Report’’).
97 Treasury had also entered into an agreement with Bank of America to provide a similar
guarantee, but it was never finalized. For a full description of the Citigroup and Bank of America guarantees, see the Panel’s November report. November Oversight Report, supra note 96,
at 13–27. From the beginning, Treasury had stated that AGP assistance would not be ‘‘widely
available.’’ U.S. Department of the Treasury, Report to Congress Pursuant to Section 102 of the
Emergency Economic Stabilization Act, at 1 (Dec. 31, 2008) (online at www.financialstability.gov/
docs/AGP/sec102ReportToCongress.pdf).
98 Board of Governors of the Federal Reserve System, Joint Statement by Treasury, Federal
Reserve, and the FDIC on Citigroup (Nov. 23, 2008) (online at www.federalreserve.gov/
newsevents/press/bcreg/20081123a.htm).

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19
conjunction with its announcement of Citigroup’s second capital infusion, this one under TIP.99

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iii. Public-Private Investment Program 100
PPIP, which is aimed at removing troubled assets from the balance sheets of financial institutions, was announced on March 23,
2009.101 The program aims to aid the recapitalization of financial
institutions and ultimately to support renewed lending by discovering prices in the illiquid market for troubled mortgage-related assets.102 It has two components: a program to be administered by
the FDIC that would fund the purchase of troubled whole loans,
and a program administered by Treasury that funds the purchase
of troubled securities. The first component has yet to exit its trial
phase,103 although Treasury recently stated that government officials are continuing to review applications from firms that would
share the cost of funding whole-loan purchases.104 Under the second component, known as the Legacy Securities PPIP (S–PPIP),
Treasury has agreed to invest up to $30 billion in both equity and
debt to buy troubled securities.
As of November 30, Treasury had invested roughly $23.3 billion,
which is slightly more than two-thirds of the funds designated for
the program.105 Treasury’s current $30 billion commitment to PPIP
is scaled down considerably from its initial plan of investing a total
of $75-$100 billion in the program’s two components.106 Eight of
the nine fund managers closed their funds between September 30
99 Overall, Treasury has provided $49 billion in capital assistance to Citigroup. Treasury’s initial CPP holdings of preferred stock were subsequently converted to 7.7 billion shares of common
stock priced at $3.25 per share, for a total value of $25 billion at the time of the conversion.
Treasury has also converted the form of its TIP and AGP holdings. On July 23, 2009, Treasury,
along with both public and private Citigroup debt holders, participated in a $58 billion exchange. As of November 30, 2009, Treasury’s common stock investment in Citigroup had a market value of $31.6 billion and represented 34 percent of the value of Citigroup common stock
outstanding.
100 For a complete discussion of the PPIP, see the Panel’s August report. Congressional Oversight Panel, August Oversight Report: The Continued Risk of Troubled Assets, at 48 (Aug. 11,
2009) (online at cop.senate.gov/documents/cop-081109-report.pdf) (hereinafter ‘‘August Oversight
Report’’).
101 The troubled assets, which Treasury refers to as legacy securities, include residential and
commercial mortgage-backed securities issued before 2009. See U.S. Department of the Treasury, Legacy Securities Investment Program (Legacy Securities PPIP) Additional Frequently Asked
Questions, at 13 (July 8, 2009) (online at www.treas.gov/press/releases/reports/legacylsecuritieslfaqs.pdf); U.S. Department of the Treasury, Treasury Department Releases Details on Public Private Partnership Investment Program (Mar. 23, 2009) (online at
www.ustreas.gov/press/releases/tg65.htm).
102 See U.S. Department of the Treasury, Troubled Assets Relief Program Eighth Tranche Report to Congress, at 8–9 (Oct. 7, 2009) (online at www.financialstability.gov/docs/
Eighth%20Tranche%20Reportl2009%2010%2007.pdf) (hereinafter ‘‘TARP Eighth Tranche Report’’).
103 The FDIC recently announced a pilot sale of troubled whole loans, which it conducted as
a test of the program’s funding mechanism. However, the pilot sale did not accomplish the program’s goal of removing toxic assets from bank balance sheets because the loans that were sold
came from a failed bank that the FDIC had already taken into receivership. See Federal Deposit
Insurance Corp., Legacy Loans Program—Winning Bidder Announced in Pilot Sale (Sept. 16,
2009) (online at www.fdic.gov/news/news/press/2009/pr09172.html).
104 See TARP Eighth Tranche Report, supra note 102, at 8.
105 See U.S. Department of the Treasury, Treasury Department Announces Additional Initial
Closing of Legacy Securities Public-Private Investment Fund (Nov. 30, 2009) (online at
www.financialstability.gov/latest/tgl11302009.html) (hereinafter ‘‘Treasury Announces Additional Initial Closing of Legacy Securities Public-Private Investment Fund’’).
106 See 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, and Chairman of the Federal Deposit Insurance Corporation Sheila Bair: Legacy Asset
Program (July 8, 2009) (online at www.financialstability.gov/latest/tgl07082009.html).

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20
and November 30, 2009.107 According to Treasury, these closed
funds were able to begin purchasing securities within a few weeks
of the closing.108
iv. Total Government Funding for Financial Institutions
Figure 2 shows how the government has used TARP funds in
conjunction with funding from the Federal Reserve and FDIC to
develop a package of capital programs. With a combination of direct outlays, loans, and guarantees, the government has committed
$617.8 billion to capital programs, well more than the $292.1 billion committed from the TARP. The Federal Reserve has committed $315.7 billion through guarantees and loans to AIG and
Citigroup. In addition, the FDIC has $10 billion of exposure
through its share of the Citigroup guarantee.109
FIGURE 2: FEDERAL GOVERNMENT’S CAPITAL PROGRAMS (AS OF NOVEMBER 30, 2009)110
[In billions of dollars]
Treasury
(TARP)

Program

Federal
Reserve

FDIC111

Total

AIG:
$69.8
0
0

$0
95.3
0

$0
0
0

$69.8
95.3
0

AIG subtotal ..........................................................................................
PPIP (Securities):
Outlays ..................................................................................................
Loans .....................................................................................................
Guarantees ............................................................................................

69.8

95.3

0

165.1

10
20
0

0
0
0

0
0
0

10
20
0

PPIP (securities) subtotal .....................................................................
PPIP (Loans):
Outlays ..................................................................................................
Loans .....................................................................................................
Guarantees ............................................................................................

30

0

0

30

0
0
0

0
0
0

0
0
0

0
0
0

PPIP (loans) subtotal ............................................................................
Bank of America:
Outlays ..................................................................................................
Loans .....................................................................................................
Guarantees ............................................................................................

0

0

0

0

45
0
................

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

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

45
0
0

Bank of America subtotal .....................................................................
Citigroup:
Outlays ..................................................................................................
Loans .....................................................................................................
Guarantees ............................................................................................

45

0

0

45

45
0
5

0
0
220.4

0
0
10

45
0
235.4

Citigroup subtotal .................................................................................
Capital Purchase Program (Other than Citigroup, Bank of America):
Outlays ..................................................................................................

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Outlays 112 ............................................................................................
Loans .....................................................................................................
Guarantees ............................................................................................

50

220.4

10

280.4

97

0

0

97

107 Treasury Announces Additional Initial Closing of Legacy Securities Public-Private Investment Fund, supra note 105; U.S. Department of the Treasury, Treasury Department Announces
Additional Initial Closing of Legacy Securities Public-Private Investment Fund (Nov. 5, 2009)
(online at www.financialstability.gov/latest/tgl11052009.html).
108 Treasury communications with Panel staff (Sept. 29, 2009).
109 The Panel has 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 calculates the total value of these resources at over $3 trillion, this would translate into the ultimate ‘‘cost’’ of the stabilization effort only if: (1) assets
do not appreciate; (2) no dividends are received, no warrants are exercised, and no TARP funds
are repaid; (3) all loans default and are written off; and (4) all guarantees are exercised and
subsequently written off.

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21
FIGURE 2: FEDERAL GOVERNMENT’S CAPITAL PROGRAMS (AS OF NOVEMBER 30, 2009)110—
Continued
[In billions of dollars]
Treasury
(TARP)

Program

Federal
Reserve

FDIC111

Total

Loans .....................................................................................................
Guarantees ............................................................................................
CPP (other than Citigroup, Bank of America) subtotal .......................

0
0
97

0
0
0

0
0
0

0
0
97

Capital Programs Total ....................................................................

$291.8

$315.7

$10

$617.58

110 November

25 Transactions Report, supra note 71. The Panel’s methodology and source citations for these figures can be found in the
corresponding endnotes for Figure 27.
111 This table does not include the FDIC’s Temporary Liquidity Guarantee Program.
112 The term ‘‘outlays’’ is used in this table as well as in Figure 27 to describe the disbursement of funds under the TARP, which are
broadly classifiable as purchases of debt or equity securities (e.g., debentures, preferred stock, exercised warrants, etc.). The outlays figures
are based on: (1) Treasury’s actual reported expenditures; and (2) Treasury’s anticipated funding levels as estimated by a variety of sources,
including Treasury pronouncements and GAO estimates. Anticipated funding levels are set at Treasury’s discretion, have changed from initial
announcements, and are subject to further change. Outlays as used here represent investments and assets purchases and commitments to
make investments and asset purchases and are not the same as budget outlays, which under section 123 of EESA are recorded on a ‘‘credit
reform’’ basis. Credit reform accounting is discussed in further detail in the Panel’s November report. November Oversight Report, supra note
96, at 11.

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Return on Investment. It is not yet possible to calculate the
amount of money that the capital programs as a whole will earn
or lose, and it will not be for some time. However, certain sources
of income and losses, such as the internal rate of return for banks
that have repurchased all of their CPP funds, are already apparent. Financial institutions that received CPP assistance have
bought back approximately $70 billion in preferred stock. As shown
in Figure 29, those funds comprise most of the $86.9 billion in cash
inflows that the TARP has generated through November 30, 2009.
This includes $10.2 billion in dividends and interest payments. In
addition, Treasury has collected $3.2 billion in payments for warrant repurchases.
In its July Report, the Panel analyzed the prices at which Treasury was allowing the financial institutions to repurchase their warrants. The Panel was concerned that Treasury was undervaluing
the warrants and/or not negotiating strongly enough.113 After the
July Report was released, several banks repurchased their warrants for prices very close to the Panel’s valuation: notably, Goldman Sachs, Morgan Stanley, and American Express. Figure 3
shows the Panel’s estimates for the values of warrants outstanding
as of November 30, 2009.
For banks that have fully repaid their TARP funds, the Panel
has calculated an internal rate of return (IRR), as shown in Figure
4. Because the preferred stock under the CPP paid fixed dividends
of 5 percent per year, the variation in this return comes from the
price the bank paid Treasury to repurchase its warrants. The taxpayers’ return has ranged from a low of 5.9 percent for Centerstate
Banks of Florida, which repurchased its warrants on October 28,
2009, to a high of 29.5 percent for American Express, which repurchased its warrants on July 29, 2009. Recent repurchases appear
to trend lower. This may be because these are small- and mediumsized banks to which Treasury applies a liquidity discount in its
valuation, while the Panel does not. This results in a lower price
113 July Oversight Report, supra note 66, at 8–17. For example, Old National Bancorp of
Evansville, Indiana, paid $1.2 million for warrants that analysts had valued at between $1.5
and $6.9 million.

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22
to estimate ratio for banks whose stock is either thinly traded or
not traded at all. The overall return is 17.1 percent for the 25
banks that have repurchased both their preferred stock and warrants. Had the warrants all been repaid at the Panel’s estimated
market value, the taxpayers would have received approximately
$198 million more than the banks paid. It is important to note,
however, that this return reflects only the healthiest banks, which
were able to repay their TARP funds already. As of November 30,
2009, 642 banks still held their CPP funds. It is still unknown
when they will repay and how much they will pay for their warrants.
FIGURE 3: WARRANTS OUTSTANDING VALUATION AS OF NOVEMBER 30, 2009
[In millions of dollars]
Institution

Investment date

Capital Purchase Program (CPP):
JPMorgan Chase ......................................................................
Wells Fargo .............................................................................
Hartford Financial ...................................................................
Bank of America .....................................................................
PNC .........................................................................................
Capital One 114 ........................................................................
Discover Financial ...................................................................
Fifth Third Bancorp .................................................................
Lincoln National ......................................................................
Comerica .................................................................................
Targeted Investment Program (TIP):
Bank of America .....................................................................
Citigroup .................................................................................
Asset Guarantee Program (AGP):
Citigroup .................................................................................
Systemically Significant Failing Institutions (SSFI) Program:
AIG ...........................................................................................
All Other Banks ................................................................................
Total ....................................................................................

Low
estimate

High
estimate

Best
estimate

10/28/2008
10/28/2008
6/26/2009
10/28/2008
12/31/2008
11/14/2008
3/13/2009
12/31/2008
7/10/2009
11/14/2008

$798.7
300.9
695.3
86.9
91.4
179.0
149.4
57.9
130.9
31.5

$2,035.8
1,734.9
1,068.2
1,135.3
530.8
343.7
217.0
313.7
225.0
144.5

$1,115.7
857.0
813.4
381.2
249.0
232.0
178.9
171.4
163.7
93.8

1/15/2009
12/31/2008

487.4
13.4

1,465.2
454.5

811.9
112.7

1/15/2009

4.8

160.6

40.0

11/25/2008
..............................

6.9
313.1

72.6
2,038.4

53.5
1,089.3

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

$3,347.5

$11,940.3

$6,363.4

114 Capital

One TARP warrants were sold through a Dutch auction process. The secondary public offering of the warrants was auctioned on
December 3, 2009 for $146.5 million. Capital One Warrant Purchase, supra note 76.

FIGURE 4: WARRANT REPURCHASES AS OF NOVEMBER 30, 2009
Investment
date

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Institution

Old National Bancorp
Iberiabank Corporation ......................
FirstMerit Corporation ......................
Sun Bancorp, Inc. ....
Independent Bank
Corp. ....................
Alliance Financial
Corporation ..........
First Niagara Financial Group ............
SCBT Financial Corporation ...............
Berkshire Hills
Bancorp, Inc. .......
Somerset Hills
Bancorp ...............

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QEO 115

Repurchase
date

Repurchase
amount

Panel valuation (best
est.)

Price/estimate (%)

IRR (%)

12/12/08

No

5/8/09

$1,200,000

$2,150,000

56

9.3

12/5/08

Yes

5/20/09

1,200,000

2,010,000

60

9.4

1/9/09
1/9/09

No
No

5/27/09
5/27/09

5,025,000
2,100,000

4,260,000
5,580,000

118
38

20.3
15.3

1/9/09

No

5/27/09

2,200,000

3,870,000

57

15.6

12/19/08

No

6/17/09

900,000

1,580,000

57

13.8

11/21/08

Yes

6/24/09

2,700,000

3,050,000

89

8.0

1/16/09

No

6/24/09

1,400,000

2,290,000

61

11.7

12/19/08

No

6/24/09

1,040,000

1,620,000

64

11.3

1/16/09

No

6/24/09

275,000

580,000

47

16.6

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23
FIGURE 4: WARRANT REPURCHASES AS OF NOVEMBER 30, 2009—Continued
Investment
date

Institution

HF Financial Corp. ...
State Street Corporation ......................
U.S. Bancorp ............
Old Line Bancshares,
Inc. ......................
The Goldman Sachs
Group, Inc. ...........
BB&T Corp. ..............
American Express
Company ..............
The Bank of New
York Mellon Corp.
Morgan Stanley ........
Northern Trust Corporation ...............
Bancorp Rhode Island, Inc. .............
Manhattan Bancorp
CVB Financial Corp
Centerstate Banks of
Florida Inc. ..........
Bank of Ozarks ........
Total ...........

QEO 115

Repurchase
date

Repurchase
amount

Panel valuation (best
est.)

Price/estimate (%)

IRR (%)

11/21/08

No

6/30/09

650,000

1,240,000

52

10.1

10/28/08
11/14/08

Yes
No

7/8/09
7/15/09

60,000,000
139,000,000

54,200,000
135,100,000

111
103

9.9
8.7

12/5/08

No

7/15/09

225,000

500,000

45

10.4

10/28/08
11/14/08

No
No

7/22/09
7/22/09

1,100,000,000
67,000,000

1,128,400,000
68,200,000

97
98

22.8
8.7

1/9/09

No

7/29/09

340,000,000

391,200,000

87

29.5

10/28/08
10/28/08

No
No

8/5/09
8/12/09

136,000,000
950,000,000

155,700,000
1,039,800,000

87
91

12.3
20.2

11/14/08

No

8/26/09

87,000,000

89,800,000

97

14.5

12/19/08
12/5/08
12/5/08

No
No
Yes

9/30/09
10/14/09
10/28/09

1,400,000
63,364
1,307,000

1,400,000
140,000
2,800,000

100
45
47

12.6
9.8
6.4

11/21/08
12/12/08

Yes
No

10/28/09
11/24/09

212,000
2,650,000

440,000
3,500,000

48
76

5.9
9.0

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

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

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

$2,903,547,364

$3,099,410,000

94

17.1

115 Some

banks engaged in a qualified equity offering, or QEO. A QEO is defined in the Securities Purchase Agreement as a sale before
2010 of shares that qualify as tier I capital that raises an amount of cash equal to the value of the preferred shares issued to Treasury. A
QEO would therefore lessen the value of the warrant.

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The TARP recently incurred its first direct losses. The failures of
three institutions—CIT Group, and two smaller banks—have resulted in a potential loss to taxpayers of up to $2.63 billion.116 In
addition, dozens of TARP recipients have missed dividend payments to Treasury. As of October 31, 2009, 38 banks have missed
dividend payments, and six additional banks have deferred November dividends.117 Banks have a variety of reasons for the missed
payments. Some have reported that they have the funds to pay the
dividends, but that safety and soundness laws restrict their ability
to pay dividends to any investor if the bank does not meet certain
levels of retained or cumulative earnings.118 A failure to pay dividends, however, can foretell larger problems for a bank. On November 5, Pacific Coast National Bancorp was the subject of an enforcement order from the Federal Reserve preventing it from paying
116 On November 1, 2009, small business lender CIT filed for bankruptcy, probably resulting
in a complete loss of the $2.3 billion in CPP funds that it had received in December 2008. CIT
has announced that all existing common and preferred shares will be cancelled in the bankruptcy. See CIT Group, CIT Board of Directors Approves Proceeding with Prepackaged Plan of
Reorganization with Overwhelming Support of Debtholders (Nov. 1, 2009) (online at
phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTkxNjh8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1). United Commercial Bank failed on November 7, 2009; it had received $298.7 million in CPP funds on November 14, 2008. Finally, on November 13, 2009, Pacific Coast National Bancorp, which received
$4.1 million in TARP funds on January 16, 2009, failed.
117 See Appendix I for a list of banks that have missed dividend payments.
118 See Christine Mitchell, Regulatory Hurdles Hinder Ability to Make TARP Dividend Payments, SNL Financial (Nov. 5, 2009) (online at www.snl.com/interactivex/article.aspx?Id=10294060&KPLT=2).

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24
dividends without prior approval from federal regulators.119 A
week later it failed.120
In addition to costing taxpayers, the recent bank failures call
into question Treasury’s assertion that CPP funds were only available to ‘‘healthy’’ or ‘‘viable’’ banks.121 Furthermore, The Wall
Street Journal recently performed an analysis of regulatory enforcement actions against TARP-recipient banks; such actions are
a sign that a bank’s health is deteriorating. The Journal found
that, in addition to the three banks that have failed, 24 other
TARP-recipient banks have received regulatory sanctions in 2009.
At least eight banks received TARP funds when regulators had already voiced concerns about the banks’ health.122 Citigroup’s need
for TIP funds only five weeks after Treasury provided it with CPP
funds further calls into question the assertion that CPP funds were
only available to ‘‘healthy’’ banks.123
b. Health of Banking Sector

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i. Bank Capital Levels
Capital levels are one measure of the banking sector’s health.
The stress tests measured the capital levels of the 19 largest bank
holding companies, requiring a capital buffer to protect them
through a more severe downturn.124 Eighteen banks either already
119 See Federal Reserve Bank of San Francisco, Written Agreement by and between Pacific
Coast National Bancorp, San Clemente, California at 2 (Nov. 5, 2009) (online at
www.federalreserve.gov/newsevents/press/enforcement/enf20091110a1.pdf).
120 See Federal Deposit Insurance Corporation, Failed Bank Information for Pacific Coast National Bank, San Clemente, CA (Nov. 13, 2009) (online at www.fdic.gov/bank/individual/failed/
pacificcoastnatl.html).
121 See SIGTARP, Emergency Capital Injections Provided to Support the Viability of Bank of
America, Other Major Banks, and the U.S. Financial System (Oct. 5, 2009) (online at
sigtarp.gov/reports/audit/2009/EmergencylCapital lInjections lProvided ltolSupport lthe
lViability lof lBank lof lAmerica . . . l100509.pdf) (determining that several of the initial CPP banks were not ‘‘healthy’’ at the time the investements were made); U.S. Department
of the Treasury, Factsheet on Capital Purchase Program (Mar. 17, 2009) (online at
www.financialstability.gov/roadtostability/CPPfactsheet.htm) (hereinafter ‘‘Factsheet on CPP’’)
(‘‘Participation is reserved for healthy, viable institutions’’). CIT Group is an example of an institution of questionable health that received CPP funds. It is a leading lender to small businesses,
and also has a depository bank. It suffered accelerating losses since 2Q 2007, and had difficulty
accessing credit in short-term debt markets, on which its business model was heavily reliant.
Treasury approved CIT’s application for CPP funds because it was the leading source of financing for small business, and it deemed it systemically significant—at least in the early days of
the crisis. It received $2.3 billion of CPP funds in December 2008. Immediately following its receipt of TARP money, CIT sought to enter the TLGP. CIT’s TLGP application with the FDIC
was pending for several months and was finally rejected in July 2009. Also in July, FRBNY
completed a stress-test of CIT Group and concluded that it would need to raise up to $4 billion
of funding. Treasury declined to make an additional CPP investment in CIT Group because it
did not believe that CIT had presented a viable business plan. CIT filed for Chapter 11 bankruptcy protection on November 1, 2009. CIT’s inability to access credit outside of the TLGP calls
into question whether other CPP institutions would be healthy without the government guarantee programs.
122 David Enrich, TARP Can’t Save Some Banks, Wall Street Journal (Nov. 17, 2009) (online
at online.wsj.com/article/SB100014240527487 04538404574539954068634242.html).
123 See SIGTARP, supra note 121. In addition, Merrill Lynch was selected to receive CPP
funds in October 2008, after Bank of America had agreed to acquire it in order to prevent
Merrill’s dissolution. See November 25 Transactions Report, supra note 71 (‘‘This transaction
was included in previous Transaction Reports with Merrill Lynch & Co., Inc. listed as the qualifying institution and a 10/28/2008 transaction date, footnoted to indicate that settlement was
deferred pending merger. The purchase of Merrill Lynch by Bank of America was completed on
1/1/2009, and this transaction under the CPP was funded on 1/9/2009’’).
124 The Federal Reserve developed the metrics for the more adverse scenario in February
2009. The most recent figures for those three metrics are a 2.8 percent increase in annual GDP
as of third quarter 2009, a 9.2 annualized unemployment rate as of November 2009, and a 8.5
annualized percent decrease in housing prices as of the end of September 2009. Compare this
to the more adverse scenario for calendar year 2009 having GDP falling 3.5 percent, housing
falling 22 percent, and unemployment at 8.9 percent.

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25
held capital that the supervisors considered adequate, or were subsequently able to raise additional capital in the private markets.
Tier 1 capital—also called core capital—is the highest quality capital that a bank can hold.125 A bank’s tier 1 capital ratio is the
ratio of its tier 1 capital to its risk-weighted assets.126 Figure 5
shows the stress tested institutions’ tier 1 capital levels in 3Q 2008
and in 3Q 2009. Most of these institutions have higher tier 1 capital levels than they did a year ago. A number of these have already repaid their CPP funds, making their higher capital levels
due in part to capital raised in the private markets.127
Public confidence in the adequacy of bank capital levels would be
enhanced through consistent financial reporting practices. The absence of consistent financial reporting practices and agreed upon
interpretations of relevant accounting rules make it difficult to
compare capital levels of different financial institutions.128

125 Tier 1 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.
126 Calculating risk-weighted assets is a complex process, but the concept is as simple as it
sounds. Assets are weighted based on their level of risk.
127 These higher capital levels are also due in part to earnings, some of which are a result
of various government guarantee programs and low-cost funds available to banks.
128 The Panel discussed this issue in depth in its August Report. August Oversight Report,
supra note 100.
129 This figure excludes four stress-tested institutions: Goldman Sachs, Morgan Stanley,
GMAC, and American Express. These institutions were excluded because data on their tier 1
capital levels for 3Q 2009 was not available. This is because they became bank holding companies at the end of or after the 3Q 2008. SNL Financial, Bank & Thrift Stress Test Tear Sheet
Continued

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FIGURE 5: TIER 1 CAPITAL RATIOS OF STRESS-TESTED INSTITUTIONS, THIRD QUARTER
2008 V. 2009 129

26
ii. Bank Capital Raising
Since the inception of the TARP, 211 banks, thrifts, and specialty
lenders have raised a total of $264.3 billion in capital from the private markets.130 One hundred and thirty of these institutions were
TARP recipients. Banks’ ability to raise capital in the private markets shows that investors are regaining confidence in the banking
sector. However, investor confidence may reflect the assumption of
an implicit guarantee hanging over the financial system. Investors
saw that the government stepped in to support institutions such as
Bank of America without wiping out shareholder stakes. This may
signal to the markets that shareholders in large institutions are
protected from total loss of their investment.

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iii. Borrowing by Financial Institutions
Borrowing by banks is crucial to maintaining sufficient liquidity
in the financial system. But at the height of the financial crisis,
bank debt issuance ground nearly to a halt. In September 2008,
banks issued only $661 million in debt, as compared to $109 billion
a year before. In October 2008, the FDIC announced that it would
guarantee bank debt under the TLGP, a program designed to promote borrowing by financial institutions.131 This voluntary FDIC
program, which is not a part of the TARP, provided a full guarantee to senior unsecured debt issued by participating banks.
In the last two months of 2008, participating institutions issued
$108 billion in senior unsecured debt. At the height of the program,
101 institutions had $346 billion in debt outstanding.132 There is
currently $315 billion in debt outstanding under the program, covering 88 institutions.133 Though the program ended on October 31,
2009, borrowing by financial institutions has continued. As of November 10, 2009, banks that had participated in the TLGP issued
a total of $5.5 billion of non-guaranteed debt.134 Banks are continuing to issue debt without the support of the FDIC guarantee,
though at lower amounts than they were issuing under the
TLGP.135 Figure 6 shows debt issued under the TLGP compared to
(online
at
www.snl.com/interactivex/TemplateBrowser.aspx?V
=V&Format=XLS&Doc=
9676136&File=7970111&SaveFileAs= Bank & Thrift Stress Test Tear Sheet) (accessed Dec. 7,
2009).
130 This is through November 30, 2009. See SNL Financial, Capital Raises Among Banks and
Thrifts (online at www.snl.com/InteractiveX/doc.aspx?ID=10162420) (accessed Dec. 4, 2009). This
includes common equity, perpetual preferred stock, and trust preferred stock. These three are
all elements of tier 1 capital. Of the four largest banks, Citigroup is the only one that has not
raised capital in the private markets. JPMorgan raised $5 billion in June, and Wells Fargo
raised $11 billion in November 2008. SNL Financial. Bank of America raised $13.4 billion in
May 2009, and announced that it will raise additional capital before repaying its TARP funds.
See Bank of America Repayment, supra note 82.
131 The TLGP has two programs: the debt guarantee program, and a second program that
guarantees deposit accounts above the $250,000 FDIC insurance limit. The Panel will only discuss the debt guarantee program here. A third government guarantee program, Treasury’s Temporary Guarantee Program for Money Market Funds, guaranteed money market funds and not
banks, so the Panel does not include it as a capital assistance program. The Panel discusses
the TGPMMF, and has a full discussion of the TLGP, in its November Report. See November
Oversight Report, supra note 96.
132 See Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the
Temporary Liquidity Guarantee Program (May 31, 2009) (online at www.fdic.gov/regulations /resources/TLGP/totallissuance5-09.html).
133 See Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the
Temporary Liquidity Guarantee Program (Oct. 31, 2009) (online at www.fdic.gov/regulations /resources/TLGP/totallissuance10-09.html).
134 Data provided under subscription by SNL Financial.
135 The $5.5 billion issued in November is lower than the $10.23 billion, a mixture of TLGP
and non-TLGP debt, issued in October 2009.

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27
non-TLGP senior debt issued by banks prior to and during the
term of the TLGP. Bank borrowing increased during the first two
quarters of the TLGP. This could be due to the availability of lower
cost guaranteed debt,136 or could be attributed to restored confidence in the financial system.
FIGURE 6: NON-TLGP SENIOR DEBT SINCE 4Q 2006, AND TLGP DEBT SINCE 4Q 2008 137

136 As shown in the Panel’s November report, banks saved between $13.4 and $29 billion in
borrowing costs by participating in the TLGP. See November Oversight Report, supra note 96,
at 69.
137 SNL
Financial, Financial Institutions Offering Activity (online at www1.snl.com/
interactivex/Template
Browser.aspx?V=V&Doc=10022881&File=
8302325&Format=XLS&SaveFileAs=Financial Institutions Offering Activity) (accessed Dec. 7,
2009). SNL template modified to provide specific data necessary to conduct analysis.
138 A credit default swap contract has a similar payoff structure to a put option.
139 Five-year CDS spread refers to the difference between the price of a CDS contract maturing in five years and the price of Treasury bonds with a similar maturity.
140 Even with the explicit and implicit guarantees of government support, U.S. banks remained exposed to overseas financial institutions.

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iv. Market Perception of Banks’ Health
The price of a credit default swap (CDS) contract on a specific
bank trading in the market offers an indication of the market’s
view of that bank’s health. Credit default swap contracts function
in a similar manner to insurance contracts.138 If a bank’s bondholders are worried about the bank defaulting on its debt, they can
buy default protection through a credit default swap to hedge their
bets. Therefore, the less healthy a bank is perceived to be, the more
expensive a CDS contract against that bank will be. As shown in
Figure 7, the 5-year CDS spreads for institutions AIG, JPMorgan
Chase, Wells Fargo, Goldman Sachs, Citigroup, Morgan Stanley,
Bank of America, Capital One, and American Express skyrocketed
in fall of 2008 and early 2009.139 CDS spreads remained high in
early 2009 because of continued uncertainty in the markets.140

28

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On average, five-year CDS spreads on these institutions went up
by 636 basis points at the height of the crisis, and have now fallen
532 basis points, to 104 basis points above the trough. Excluding
AIG from the list, on average the five-year CDS spreads went up
by 410 basis points at the height of the crisis, and have now fallen
371 basis points, to 39 basis points above the trough.141 This decline in CDS spreads shows a clear increase in CDS market participants’ confidence in major bank creditworthiness. It is unclear the
extent to which this decline in CDS spreads is due to confidence
in major banks’ stand-alone creditworthiness and to what degree
this decline reflects CDS market confidence in implicit government
guarantees of large banks. While it is no doubt true that the perception of an implicit guarantee has grown in the wake of the government response to the crisis, market participants lack a clear understanding of the scope of any such guarantee and the circumstances under which it would be exercised.

141 Data

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29

30
c. Macro Indicators of the Health of the Banking Sector
While it is difficult to isolate the effects of the TARP on the
banking sector, macroeconomic indicators provide some insight into
the effectiveness of the program in promoting the liquidity and stability of the sector. These gauges—lending levels, bank failures,
and bank consolidations—are relevant to assessing the impact of
the TARP. But because of the influence of other external factors,
they do not imply causation.
i. Lending by Financial Institutions 143
Bank lending activities are an indicator of financial sector
health, though it is important not to oversimplify the relationship
between the two. Treasury has stated that it limited capital injections from the CPP to healthy banks in order to ensure that the
funds were used for lending, and not merely to bolster recipient
banks’ balance sheets.144 Even healthy banks, however, have a
need to recapitalize after the losses of the past year. A bank looking to build its capital levels will allocate more funds to capital and
less to lending.
Figure 8 shows loan originations of the top 20 CPP recipients
through the life of the TARP. It includes all lending: consumer, real
estate, and commercial.145 The chart shows the degree to which
lending tightened for the period of October 2008 through September 2009. Since the enactment of EESA, loan originations by
these 20 institutions have decreased by 13.7 percent. Total average
loan balances decreased by 1 percent.146

143 The

report discusses small business lending in section C2b infra at 57.
Factsheet on CPP, supra note 121 (‘‘Participation [in the CPP] is reserved for healthy,
viable institutions that are recommended by their applicable federal banking regulator. Treasury’s intent is to provide immediate capital to stabilize the financial and banking system, and
to support the economy. . . . A necessary precursor to lending and economic recovery is a stable, healthy financial system. Healthy banks, not weak banks, lend to their communities and
the CPP is a program for healthy banks’’).
145 Specifically, it includes first mortgage, home equity lines of credit (HELOC), credit card,
other consumer, commercial and industrial renewal, commercial and industrial new commitments, CRE renewal, CRE new commitments, and small business lending.
146 See U.S. Department of the Treasury, Treasury Department Monthly Lending and Intermediation Snapshot Data for April 2009–September 2009 (Nov. 16, 2009) (online at
www.financialstability.gov/docs/surveys/SnapshotlDatalSeptemberl2009.xls). Data manipulated in order to exclude PNC and Wells Fargo. For further explanation of Panel methodology
see footnote 147.

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144 See

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31
FIGURE 8: TOTAL LOAN ORIGINATIONS OF SELECTED CPP RECIPIENTS SINCE INCEPTION
OF EESA 147

147 The Panel uses Treasury’s ‘‘Monthly Lending and Intermediation Snapshot’’ of the top 22
CPP participants to track specific categories of lending levels of the financial institutions that
benefitted the most from government assistance under the TARP. Two of these institutions,
PNC Financial and Wells Fargo, purchased large banks at the end of 2008. PNC Financial purchased National City on October 24, 2008 and Wells Fargo completed its merger with Wachovia
Corporation on January 1, 2009. The assets of National City and Wachovia are included as part
of PNC and Wells Fargo, respectively, in Treasury’s January lending report but are not differentiated from the existing assets or the acquiring banks. As such, there were dramatic increases
in the total average loan balances of PNC and Wells Fargo in January 2009. For example, PNC’s
outstanding total average loan balance increased from $75.3 billion in December 2008 to $177.7
billion in January 2009. The same effect can be seen in Wells Fargo’s total average loan balance
of $407.2 billion in December 2008 which increased to $813.8 billion in January 2009. The Panel
excludes PNC and Wells Fargo in order to have a more consistent basis of comparison across
all institutions and lending categories.
Unlike other lending categories, Treasury only began publishing small business lending information as of April 2009. U.S. Department of the Treasury, Treasury Department Monthly Lending and Intermediation Snapshot Data for April 2009–September 2009 (Nov. 16, 2009) (online
at www.financialstability.gov/impact/monthlyLendingandIntermediationSnapshot.htm) (hereinafter ‘‘Treasury Department Monthly Lending and Intermediation Snapshot Data for April
2009–September 2009’’).
148 Board of Governors of the Federal Reserve System, October 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices at 3 (online at www.federalreserve.gov/boarddocs
/snloansurvey/200911/fullreport.pdf) (hereinafter ‘‘Loan Officer Opinion Survey October 2009’’)
(accessed Dec. 7, 2009) (observing that ‘‘domestic banks indicated that they continued to tighten
standards and terms over the past three months on all major types of loans to businesses and
households’’).
149 Loan Officer Opinion Survey October 2009, supra note 148 (accessed Dec. 7, 2009).

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Banks remain cautious with respect to lending, even as they become better capitalized.148 In the Federal Reserve’s October 2009
survey of senior loan officers, 25 percent of respondents reported
tightening standards for prime residential real estate loans in the
last three months, while 15 percent reported tightening standards
for credit card loans in the last three months, and 15 percent reported tightening lending to all size businesses in the past three
months.149

32

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Banks continued to tighten lending, but less banks reported tightening than in late 2008.150 Banks might be holding more capital
in order to offset potential future losses on loans. The increases in
delinquencies and charge-offs shown in Figures 9 and 10 support
banks’ potential desire to hold cash to offset future losses on loans.
While it might be desirable for TARP recipients to increase lending to help the economy, banks may be reluctant to lend due to legitimate concern about increased default risks.151 As discussed in
Section 1.C.2.b, infra, Small Business Loans, for instance, carry
added risk in today’s economic climate. Chairman Bernanke recently noted that difficulties in obtaining credit may impede the
creation and expansion of small- and medium-sized businesses.152
Total delinquencies have risen dramatically since the second half
of 2007, as shown in Figure 9. While those secured by real estate
have the highest levels, delinquencies on loans to consumers have
also risen significantly.

150 Loan Officer Opinion Survey October 2009, supra note 148, at 3 (accessed Dec. 7, 2009).
In October 2008, 80 percent of banks reported tightening of lending to all size businesses, 70
percent reported tightening on prime residential real estate lending, and 60 percent reported
tightening lending for credit cards. Board of Governors of the Federal Reserve System, October
2008 Senior Loan Officer Opinion Survey on Bank Lending Practices (online at
www.federalreserve.gov/boarddocs/Snloan Survey/200811/fullreport.pdf) (accessed Dec. 7, 2009).
151 See Board of Governors of the Federal Reserve System, Remarks by Chairman Ben S.
Bernanke at the Economic Club of New York (Nov. 16, 2009) (online at www.federalreserve.gov/
newsevents /speech/bernanke20091116a.htm) (hereinafter ‘‘Remarks by Chairman Ben S.
Bernanke’’). Of course it is not clear how to define desired levels of lending. Few think that the
United States should return to 2007 levels of consumer borrowing but there is no broad consensus as to what level of lending would support economic expansion at this time.
152 Remarks by Chairman Ben S. Bernanke, supra note 151. see also Federal Reserve Board
of Governors, Minutes of the Federal Open Market Committee (Nov. 3–4, 2009) (online at
www.federalreserve.gov/monetary policy/fomcminutes20091104.htm) (‘‘Limited credit availability, along with weak aggregate demand, was viewed as likely to restrain hiring at small
businesses, which are normally a source of employment growth in recoveries’’).

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33

153 Board of Governors of the Federal Reserve, Charge-off and Delinquency Rates—Instrument:
Delinquencies/All
Banks
(online
at
www.federalreserve.gov/datadownload
/Choose.aspx?rel=CHGDEL) (accessed Dec. 7, 2009).

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FIGURE 9: TOTAL DELINQUENCIES AT ALL DOMESTIC COMMERCIAL BANKS, BY TYPE 153

34
Bank charge-offs have seen a similar rise in 2008 and 2009. In
general, a bank charges off a loan when it believes that it will not
be able to recover payment on it. The actual and potential for future losses on existing loans goes some way toward explaining why
banks, despite recapitalization, are reluctant to lend.

154 Id.

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FIGURE 10: NET-CHARGE-OFFS AT ALL DOMESTIC COMMERCIAL BANKS, BY TYPE 154

35
A number of factors could cause banks to pull back on lending.
A bank might decide to hold increased capital in the wake of the
severe impairment of bank funding markets or uncertainty regarding future changes in regulatory capital standards. Though they
are regaining strength, the continued impairment of securitization
markets reduces funding for bank loans. And banks might be concerned about upcoming changes to accounting rules that will require banks to move a large volume of securitized assets onto their
balance sheets.155 Some commentators have explained that current
credit tightening has followed historical patterns from recessions,
when credit risk understandably increases.156 There is also considerable concern that some of this decrease in credit may arise—as
in past banking crises—from the increased scrutiny given by bank
examiners to loans, including credit determinations and documentation, and the reaction of bank management to the prospect
of increased scrutiny.157
Banks’ willingness to lend is only one factor in the lending equation. A decline in lending levels may also reflect reduced demand
from borrowers rather than tightened conditions from creditors.
There is considerable evidence that demand for credit has fallen
over the past year.158 As Chairman Bernanke has explained:
The demand for credit also has fallen significantly: For
example, households are spending less than they did last
year on big-ticket durable goods typically purchased with
credit, and businesses are reducing investment outlays and
thus have less need to borrow. Because of weakened balance sheets, fewer potential borrowers are creditworthy,
even if they are willing to take on more debt. Also, writedowns of bad debt show up on bank balance sheets as reductions in credit outstanding.159
ii. Bank Failures
Banks of all sizes were affected by the shock to the financial sector. While many of the largest banks received unprecedented support, smaller banks have been allowed to fail and to be seized by
regulators. There were 149 bank failures between January 1, 2008
and November 30, 2009; 160 124 of these failures occurred in 2009,
with assets totaling $141.6 billion.161 This is the most bank failures since 1992, when 181 banks failed. Two of these 124 banks

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155 Remarks

by Chairman Ben S. Bernanke, supra note 151.
156 See Baker COP Testimony, supra note 28, at 4–5 (contending that ‘‘[t]here is no reason
to believe that the tightening of credit during this downturn is any greater than what should
be expected given the severity of the recession’’ and ‘‘to insist that [banks] make loans [to small
businesses] on which they expect to lose money’’ would ‘‘be questionable economic policy’’). But
see Remarks by Chairman Ben S. Bernanke, supra note 151 (‘‘Nevertheless, it appears that,
since the outbreak of the financial crisis, banks have tightened lending standards by more than
would have been predicted by the decline in economic activity alone’’).
157 See Congressional Oversight Panel, Testimony of Charles Calomiris, Taking Stock: Independent Views on TARP’s Effectiveness (Nov. 19, 2009) (online at cop.senate.gov/hearings/library/
hearing-111909-economists.cfm).
158 Loan Officer Opinion Survey October 2009, supra note 148, at 3.
159 Remarks by Chairman Ben S. Bernanke, supra note 151.
160 Data provided under subscription by SNL Financial.
161 See Federal Deposit Insurance Corporation, Failures and Assistance Transactions (online
at www2.fdic.gov/hsob/SelectRpt.asp?EntryTyp=30) (hereinafter ‘‘Failures and Assistance Transactions’’) (accessed Dec. 7, 2009).

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36
were TARP recipients.162 Many of these failed banks were smalland medium-sized banks with higher proportions of commercial
real estate loans.163 The FDIC’s Deposit Insurance Fund is feeling
the stress of these failures—it now carries a balance of negative
$8.2 billion.164 This is only the second time in the FDIC’s history
that the Fund balance has been below zero.
There are currently 552 banks on the FDIC’s watch list.165 This
implies that while the TARP may have stabilized the elements of
the banking sector that received TARP funds, there are still areas
of weakness in the sector stemming from the ongoing problems of
the general economy. FDIC Chairman Sheila Bair has predicted
bank failures will peak in 2010 and then decline.166
Figure 11 shows numbers of failed banks, and total assets of
failed banks since 1970. It shows that, although the number of
failed banks was significantly higher in the late 1980s than it is
now, the aggregate assets of failed banks during the current crisis
far outweigh those from the 1980s. At the high point in 1988 and
1989, 763 banks failed, with total assets of $309 billion.167 Compare this to 149 banks failing in 2008 and 2009, with total assets
of $473 billion.168

162 CIT

Group is not an FDIC insured institution, so it is not included on failed bank lists.
Federal Deposit Insurance Corporation, Failed Bank List (online at www.fdic.gov/bank/
individual/failed/banklist.html) (accessed Dec. 7, 2009); see also Office of the Comptroller of the
Currency, Comptroller Dugan Expresses Concern About Commercial Real Estate Concentrations
(Jan. 31, 2008) (online at www.occ.gov/ftp/release/2008-9.htm) (Describing that according to data
from the Office of the Comptroller of the Currency, between 2002 and 2008, the ratio of commercial real estate loans to capital at community banks nearly doubled to a record 285 percent. By
early 2008, nearly one-third of all community banks had commercial real estate concentrations
that exceeded 300 percent of their capital.); Maurice Tamman and David Enrich, Local Banks
Face Big Losses, Wall Street Journal (May 19, 2009) (online.wsj.com/article/
SB124269114847832587.html) (analyzing the relationship between commercial real estate loans
and small/medium-size banks, and concluding that many such banks could fail because of their
commercial real estate loan portfolios). For a more complete discussion of this topic, please see
the Panel’s August Oversight report. See August Oversight Report, supra note 100, at 4–5, 12,
18.
164 This negative balance includes a $38.9 billion contingent loss reserve that the FDIC has
already set aside to cover losses in the next year. See Federal Deposit Insurance Corporation,
FDIC-Insured Institutions Earned $2.8 Billion in the Third Quarter of 2009 (Nov. 24, 2009) (online at www.fdic.gov/news/news/press/2009/pr09212.html.) As the FDIC explains ‘‘[c]ombining
the fund balance with this contingent loss reserve shows total DIF reserves with a positive balance of $30.7 billion.’’ See id.
165 Id.
166 Michael S. Derby, FDIC’s Bair: Bank Failures Will Peak In 2010, Wall Street Journal (Nov.
10, 2009) (online at online.wsj.com/article/BT-CO-20091110-715147.html).
167 This is in 2005 inflation-adjusted numbers. Failures and Assistance Transactions, supra
note 161 (accessed on Dec. 7, 2009). The number of bank failures from 1988 and 1989 includes
the casualties of the savings and loan crisis. During these years regulatory changes forced closures of some institutions.
168 This is in 2005 inflation-adjusted numbers. Bank failures for 2009 are as of November 30,
2009. Failures and Assistance Transactions, supra note 161 (accessed on Dec. 7, 2009). This figure includes the failures of Washington Mutual and IndyMac, with assets of $307 billion and
$32 billion, respectively.

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163 See

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37
FIGURE 11: BANK FAILURES THROUGH NOVEMBER 30, 2009 (IN 2005 DOLLARS) 169

169 Failures and Assistance Transactions, supra note 161. Data total assets are adjusted for
inflation into 2005 dollars using the GDP price deflator. U.S. Department of Commerce: Bureau
of Economic Analysis, Gross Domestic Product: Implicit Price Deflator (online at research.stlouisfed.org/fred2/data/GDPDEF.txt) (accessed Dec. 7, 2009). This chart does not include the six banks that failed on December 4, 2009. One of these, AmTrust Bank, had total
assets of approximately $12.0 billion. Federal Deposit Insurance Company, Failed Bank List (online at www.fdic.gov/bank/individual/failed/banklist.html) (accessed Dec. 7, 2009).

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iii. Bank Consolidation
While an increasing number of small banks have failed over the
past year, the largest banks have grown larger. Figure 12 shows
the increasing market share held by the four largest U.S. banks in
the years 1998 through 2009.

38

170 SNL Financial, Deposit Market Share, 1998–2009 (online at www.snl.com/interactivex/
InDeposit
MarketshareDetail.aspx?ID=US&Number=
10&Refreshed=1&Year=2009
&Market=0&Ownership=0) (accessed Dec. 7, 2009).

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FIGURE 12: MARKET SHARE OF THE FOUR U.S. BANKS WITH THE MOST DEPOSITS IN
MARKET SINCE 1998 170

39
Bank consolidation has worrisome implications for moral hazard,
as long as there continues to be a perception in the market of an
implicit guarantee. As a small number of banks acquire a larger
share of the market and competition decreases, the systemic risk
they pose rises.171
d. Summary
As TARP capital assistance efforts wind down, the current condition of the banking sector is mixed. Treasury and regulators have
stated that the stress tests show that large banks, most of them
current or former TARP recipients, are in general adequately capitalized. That assertion is challenged by leading economists and experts on financial crises.172 Many small and medium banks, however, are in a more precarious situation.
2. Credit for Consumers and Small Business
Treasury has emphasized the use of the TARP ‘‘to restore the
flow of credit to small businesses and consumers.’’ 173 It has chosen
to allocate TARP funds directly for these purposes (i) by launching
a program with FRBNY to revive the loan securitization market
and providing $20 billion as a credit backstop as part of that program, and (ii) by committing up to $15 billion to purchase directly
securitized Small Business Administration loans. In addition,
Treasury has recently announced the broad outlines of a program
to provide capital assistance to small banks in return for commitments to lend to small business.174

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a. Asset Securitization—The Term Asset-Backed Securities Loan Facility
Since the mid-1980s, banks have increasingly chosen to finance
their consumer loans (primarily credit card, student, and auto
loans) by packaging those loans into securities sold to investors
through a process called securitization, creating an important channel for providing credit.175 The financial crisis froze the markets for
these ‘‘asset-backed securities,’’ in part in reaction to the general
credit crunch and in part in reaction to the crisis in the larger markets for securitized residential mortgages. Thus, Treasury and the
Federal Reserve Board saw revival of the securitization market as
171 This does not imply that bank consolidation is an intended policy, but it can be a side effect
of many bank failures. The FDIC is under a statutory mandate to achieve the ‘‘least cost resolution’’ of a failing or failed bank, and in the case of large failed banks such as Washington Mutual and Wachovia, the least cost solution requires them to be acquired by other large banks.
The statute does provide an exception from the least cost resolution mandate in situations in
which its application would cause ‘‘serious adverse effects on economic conditions or financial
stability’’ and an alternative action ‘‘would avoid or mitigate such adverse effects.’’ 12 U.S.C.
§ 1A1823(c)(4)(G)(i).
172 See Section D of this report, infra.
173 U.S. Department of the Treasury, The Financial Stability Plan: Deploying our Full Arsenal
to Attack the Credit Crisis on All Fronts (online at www.financialstability.gov/roadtostability)
(hereinafter ‘‘Financial Stability Plan’’) (accessed Dec. 7, 2009).
174 See White House, President Obama Announces New Efforts to Improve Access to Credit for
Small Businesses (Oct. 21, 2009) (online at www.whitehouse.gov/assets/documents/
smalllbusinesslfinal.pdf) (hereinafter ‘‘President Obama Announces Small Business Efforts’’).
The nature of the market for consumer and small business loans and the impact of the crisis
on those markets are discussed in detail in the Panel’s May 2009 report. See Congressional
Oversight Panel, May Oversight Report: Reviving Lending to Small Businesses and Families and
the Impact of TALF (May 7, 2009) (online at cop.senate.gov/documents/cop-050709-report.pdf)
(hereinafter ‘‘May Oversight Report’’).
175 The securitization process is described in the Panel’s May oversight report. May Oversight
Report, supra note 174, at 34–39.

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40
the way to revive credit to consumers and created the Temporary
Asset-Backed Securities Loan Facility (TALF) to produce that revival.176
The volume of asset-backed securities representing classes of consumer loans before the financial crisis, the drop in that volume
during the crisis, and its movement upward beginning in March
2009 are shown in Figure 13:

176 According to the Federal Reserve Board and Treasury, ‘‘over the past few years around a
quarter of all non-mortgage consumer credit’’ has been financed through securitization. U.S. Department of the Treasury, White Paper: Term Asset-Backed Securities Loan Facility (Mar. 3,
2009) (online at www.treas.gov/press/releases/reports/talflwhitelpaper.pdf) (hereinafter ‘‘TALF
White Paper’’).
177 Chart prepared by Panel staff using U.S. monthly ABS issuances data provided by Securities Industry and Financial Markets Association (SIFMA). As of the date of the report, data on
small business ABS issuances is unavailable prior to January 2009.

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FIGURE 13: MONTHLY TOTAL SBA, STUDENT LOAN, CREDIT CARD, AND AUTO ABS
ISSUANCES, 2006–2009 177

41

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The TALF is a credit facility through which FRBNY originally
committed up to $200 billion to lend to investors for the purchase
of securitized credit card, student, and automobile loans.178 The investors post the assets they purchase as collateral (security) for the
loans; because the loans are made on a ‘‘non-recourse’’ basis,179
FRBNY cannot recover more than the then-value of the assets if
the loan is not paid. Thus, whatever the amount of the original
loan, the risk that the loan will not be repaid lays with the government, not with the investors. The non-recourse feature creates an
economic subsidy—measured by the difference between the interest
rates that would be required by investors to buy asset-backed securities with and without non-recourse loans. The subsidy is reduced
somewhat because FRBNY will only make loans for something less
than the full value of the asset-backed securities the loans are used
to buy.180
The choice of non-recourse financing reflects the assessment of
Treasury and FRBNY that the risk of high levels of default had
made securitized loans largely unsalable during the financial crisis,
due to the high interest rates investors required to offset what they
perceived as increased risk; the ultimate result, in the agencies’
view, was reduction in the availability and an increase in the cost
of consumer credit.181 The TALF subsidy is intended to reduce or
eliminate that difference in two ways: (i) by creating competitive
conditions to drive down interest rates for securitized products, and
(ii) by funding a series of financings in which the feared level of
defaults do not occur.
Treasury’s economic commitment to the TALF is a relatively
minor one in relation to the originally projected size of the program, but it has committed $20 billion of TARP funds to bear and
is at risk for the first $20 billion of losses from TALF loans. At
present, approximately $62 billion in TALF loans has been requested,182 making the $20 billion Treasury backstop a significant
figure; posted collateral would have to decline in value by more
than 33 percent before the Treasury backstop would be exhausted
and loan losses would begin to be borne by FRBNY.

178 As discussed below, infra pages 54–60, the program also included Small Business Administration loans.
179 A non-recourse loan is one in which the lender has no right to look to the borrower for
repayment, but only to take control of the collateral, whatever its actual value.
180 See, e.g., Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility:
Terms and Conditions (Apr. 21, 2009) (online at www.newyorkfed.org/markets/talflterms.html).
As explained in the May report, this reduction is called a ‘‘haircut.’’ The haircut varies for the
asset class against which a loan is made and the duration of that loan. For a more complete
discussion of this topic, please see the Panel’s May Oversight Report. See Congressional Oversight Panel, May Oversight Report: Reviving Lending to Small Businesses and Families and the
Impact of TALF, at 42 (May 7, 2009) (online at cop.senate.gov/documents/cop-050709-report.pdf).
181 See TALF White Paper, supra note 176.
182 This figure includes both CMBS and non-CMBS loans requested as of December 3, 2009.
Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: Non-CMBS—
Recent Operations (online at www.newyorkfed.org/markets/TALFlrecentloperations.html)
(hereinafter ‘‘Term Asset-Backed Securities Loan Facility: Non-CMBS—Recent Operations’’)
(accessed Dec. 7, 2009); Federal Reserve Bank of New York, Term Asset-Backed Securities Loan
Facility:
CMBS—Recent
Operations
(online
at
www.newyorkfed.org/markets/
cmbsloperations.html) (accessed Dec. 4, 2009).

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42

183 Chart prepared by Panel staff using U.S. monthly ABS issuances data provided by SIFMA
and FRBNY. For FRBNY source data, see Federal Reserve Bank of New York, Term AssetBacked Securities Loan Facility: Recent Operations (online at www.newyorkfed.org/markets/
TALFlrecentloperations.html) (hereinafter ‘‘TALF Recent Operations’’) (accessed Dec. 3,
2009).

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FIGURE 14: TALF V. NON-TALF ABS ISSUANCE, MARCH 2009–NOVEMBER 2009 183

43
Three metrics can help evaluate the results of the TALF.
1. Changes in Amount of Securitizations. TALF’s direct contribution to credit for consumers is illustrated by Figure 14, which
shows that since TALF’s March 2009 launch, 39 percent of the
total amount of all credit card, student, and auto loan ABS has
been funded through the program.184 Over this period, total ABS
origination, excluding commercial mortgage-backed securities, increased, ranging from a low of $11.3 billion in April 2009 to a high
of $24.9 billion in June 2009, and averaging approximately $15.4
billion per month. While this represents an eightfold increase over
the average monthly level of such securitizations from September
2008 to February 2009, securitization levels have not returned to
pre-crisis levels.185 Figure 13 provides some sense of the historical
base level against which the contribution of the TALF (illustrated
in Figure 14) should be compared. A comparison of Figures 13 and
14 provides some sense of the historical base level against which
the contribution of the TALF, for the months TALF has been in existence, should be compared. Figure 15 below outlines the amount
of loans for various types of ABS that the TALF has financed.

184 Compare Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility:
Non-CMBS—Recent
Operations
(online
at
www.newyorkfed.org/markets/
TALFlrecentloperations.html) (accessed Dec. 7, 2009) with US ABS Issuance, supra note 16.
The text does not mean that 39 percent of every class of loans was the subject of TALF financing.
185 Pre-crisis securitization levels may not be an accurate measure of healthy securitization
practices; a portion of the growth of the ABS market was attributable to inflated demand for
these products during the pre-crisis credit bubble.
186 Chart prepared by Panel staff using U.S. monthly non-CMBS ABS issuances data provided
by FRBNY. See TALF Recent Operations, supra note 183.

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FIGURE 15: TALF LOAN FACILITIES BY COLLATERAL TYPE, MARCH 2009–NOVEMBER
2009 186

44
It is less clear that the TALF has increased the relative volume
of non-TALF securitizations. As seen in Figure 16, non-TALF consumer and small business ABS origination has yet to stabilize at
2008 levels. On average, during the first nine months of 2009,
these types of securitizations were down 23.3 percent versus 2008.
It is difficult to draw firm conclusions from these data, because
without further data it is extremely difficult to separate out the
various factors—continuing uncertainty about the risks of ABS, insufficient transparency in the ABS markets, and a general decline
in demand in a severe recession—that contribute to ABS levels.
FIGURE 16: ABS ISSUANCE WITHOUT TALF, 2006–2009 187

187 Chart prepared by Panel staff using U.S. monthly ABS issuances data provided by SIFMA
and FRBNY. For FRBNY source data, see TALF Recent Operations, supra note 183.

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2. Changes in Interest Rate Spreads. FRBNY and Treasury have
pointed to the narrowing of interest rate spreads for privately-financed securitizations as a metric for judging the TALF’s success,
because the closing of the spread indicates that investors are again
willing to enter the market based on the TALF’s pricing bellwether.
Figure 17 reflects both the widening of credit spreads during the
crisis as well as tightening of spreads since the establishment of
TALF.

45
FIGURE 17: ABS SPREADS OF SELECTED INDICATORS SINCE DECEMBER 2006 188

188 Chart prepared by Panel staff using data provided under subscription by BLOOMBERG
Data Services.

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A comparison of Figure 17 above with Figure 16 on the previous
page indicates that the narrowing of spreads is to some degree reflected in the volume of non-TALF ABS.
3. Changes in credit availability. The premise of the TALF is
that increasing the volume of asset securitizations will increase the
overall level of consumer credit. Figure 18, derived from statistics
published by the Federal Reserve System, provides a general picture of the continuing decline in consumer credit. Statistical evidence is hard to evaluate, however, because it is impossible to disentangle the continuation of the credit crisis from bank
deleveraging and the reduction of credit demand that reflects underlying difficulties in the economy.

46
FIGURE 18: PERCENT CHANGE IN CONSUMER CREDIT OUTSTANDING 189

189 Chart prepared by Panel staff using U.S. monthly non-CMBS ABS issuances data provided
by FRBNY. See TALF Recent Operations, supra note 183.

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Two additional facts should be noted. First, although the TALF
was originally to be devoted to consumer and small business loans,
various ABS categories were added throughout the program and,
on May 19, 2009, FRBNY announced that the TALF could also be
used by investors in pools of certain commercial mortgages—expanding the program beyond its original purpose. To date, $7.5 billion has been borrowed for commercial mortgage-backed securities
(CMBS) investments.
Second, the TALF is scheduled to end on March 31, 2010 for ABS
and legacy CMBS, and on June 30, 2010 for newly issued CMBS.
Given the small percentage of the $200 billion originally allocated
for the TALF that has been used thus far, and the fact that loan
requests have fallen off since their height in May ($10.6 billion requested) and June ($11.5 billion), it seems unlikely that the full
$200 billion will be used. During a meeting with Panel staff in October, Treasury staff stated that the decline in requests was attributable to the increase in the availability of less expensive financing
from private sources and therefore illustrated TALF’s success in its
goal of re-opening the ABS markets.

47

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b. Loans to Small Business
During the financial crisis, small business credit froze along with
the rest of the lending markets.190 On March 17, 2009, Treasury
outlined measures to ‘‘jumpstart credit markets for small businesses.’’ 191 Again, those measures were aimed at stimulating the
market for securitized loans. One measure was the inclusion in the
TALF of securities backed by the government-guaranteed portion of
Small Business Administration (SBA) 7(a) loans and the non-government-guaranteed first-lien mortgage loans affiliated with the
SBA’s 504 loan program in the TALF. The second was the direct
purchase of up to $15 billion in securities backed by SBA loans;
both measures were directed at the securitized loan market.192
(From 2006 through 2008, between 40 and 45 percent of the SBA
guaranteed portion of 7(a) loans were sold into the secondary market.) 193
The TALF originally attracted no interest from investors in
securitized 7(a) and 504 loans. The first TALF borrowing for a pool
of such loans, in the amount of approximately $86 million, occurred
as part of the May 5 TALF facility. To date, TALF loans based on
small business ABS originations represent only 2.98 percent of all
non-CMBS TALF transactions.194
Treasury has not yet made any purchases under its direct purchase program although it has allocated approximately $3 billion
for the program for 2009.195 It hopes to create its first actual pooling structure by year-end.196 It has noted that the lack of an earlier start to the program reflects both the typical uncertainties investors in the TALF exhibited,197 as well as the fact that ‘‘the secondary market [has begun] to return to more normal conditions.’’ 198
Unlike the TALF, Treasury’s program to purchase SBA-guaranteed securities does not utilize private-sector pricing. Rather,
Treasury would purchase securities directly from ‘‘pool assemblers’’
190 See May Oversight Report, supra note 174, at 52 (referring to the market freezing because
of (1) the tightening of the Prime versus LIBOR spread, which reduced the attractiveness of investment in securitized 7(a) loans (indeed, the return for investors had disappeared); (2) the
strained capacity of broker-dealers, who were unable to sell their current inventory and thereby
free up capital to buy and pool additional loans; (3) the reduced access to and increased cost
of credit for broker-dealers, who could not sell off inventory to pay off existing loans; and (4)
general uncertainty and fear in the marketplace).
191 See Financial Stability Plan, supra note 173.
192 Unable to shed the risk from their books, commercial lenders significantly curtailed their
lending activities.
193 Government Accountability Office, Small Business Administration’s Implementation of Administrative Provisions in the American Recovery and Reinvestment Act of 2009, at 6 (Apr. 16,
2009) (online at www.gao.gov/new.items/d09507r.pdf).
194 Calculation based upon data provided by FRBNY. See Term Asset-Backed Securities Loan
Facility: Non-CMBS—Recent Operations, supra note 182.
195 Government Accountability Office, Troubled Asset Relief Program: One Year Later, Actions
are Needed to Address Remaining Transparency, and Accountability Challenges, at 80 (Oct. 8,
2009) (online at www.gao.gov/new.items/d1016.pdf) (hereinafter ‘‘GAO: TARP One Year’’).
196 Treasury hired Earnest Partners, an independent investment manager with SBA-guaranteed loan experience, to guide its efforts to buy securitized SBA loans directly. U.S. Department
of the Treasury, Financial Agency Agreement for Asset Management Services for SBA Related
Loans and Securities (Mar. 16, 2009) (online at www.financialstability.gov/docs/
ContractsAgreements/TARP%20FAA%20SBA%20Asset%20Manager%20%20Final%20to%20be%20posted.pdf) (updated Nov. 12, 2009); see also SIGTARP, Quarterly Report to Congress, at 112 (Apr. 21, 2009) (online at www.sigtarp.gov/reports/congress/2009/
April2009lQuarterlylReportltolCongress.pdf).
197 See May Oversight Report, supra note 174, at 50.
198 U.S. Department of the Treasury, Unlocking Credit for Small Businesses: FAQ on Implementation (Mar. 17, 2009) (online at www.financialstability.gov/docs/FAQ-Small-Business.pdf)
(hereinafter ‘‘Unlocking Credit for Small Businesses: FAQ’’).

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and banks.199 Under the program, if Treasury engages in direct
purchases, it plans either to sell the securities to private investors
or pursue a buy-and-hold strategy, depending on market conditions.200 According to Treasury’s implementation documents,
‘‘Treasury and its investment manager will analyze the current and
historical prices for these securities’’ in order to ‘‘identify opportunities to purchase the securities at reasonable prices.’’ 201 Treasury
defines such prices as those that fulfill the dual objective of ‘‘[providing] sufficient liquidity to encourage banks to increase their
small business lending and [protecting] taxpayers’ interest.’’ 202 To
date, Treasury has not made any direct purchases under this program.203
On October 21, 2009, the White House announced a third small
business lending initiative, part of which uses TARP funds. Under
this initiative, Treasury will provide lower cost capital to community banks 204 to be used in small business lending.205 Participating
banks must submit small business lending plans and will be required to submit quarterly reports describing their small business
lending activities. If their lending plans are accepted, banks will
have access to capital at a dividend rate of 3 percent, more attractive terms than the 5 percent rate under the Capital Purchase Program. These small banks will be able to receive capital totaling up
to 2 percent of their risk weighted assets.206 For community development financial institutions 207 that can document that 60 percent
of their small business lending targets low-income communities or
underserved populations, this dividend rate will be only two percent.208 As currently conceived,209 this capital will be available
after the bank submits a small business lending plan, and may
only be used to make qualifying small business loans.210 Further
implementing details for this program have not been announced as
of the date of this report.
This program could be a more direct response to the problem of
small business lending because over 90 percent of small business
loans are not securitized.211
199 Pursuant to EESA, Treasury expects to receive warrants from the pool assemblers as additional consideration for the purchase of 7(a) and 504 first-lien securities. The pricing and exact
nature of the warrants is still under consideration by Treasury. Unlocking Credit for Small
Businesses: FAQ, supra note 198.
200 Id.
201 Id.
202 Id.
203 According to Treasury’s FAQ on Implementation, purchases of securities backed by SBA
7(a) loans were to begin by the end of March 2009, while purchases of securities backed by firstlien 504 loans were to begin by May due to ‘‘Treasury’s need to conduct a thorough risk analysis,
given that these securities are not government guaranteed.’’ Unlocking Credit for Small Businesses: FAQ, supra note 198; see also November 25 Transactions Report, supra note 71.
204 Community banks are banks with $1 billion or less in assets.
205 Small- and medium-sized banks are seen as effective vehicles for supporting small business
lending because banks with less than $1 billion in assets hold greater proportions of small business loans to all business loans. See President Obama Announces Small Business Efforts, supra
note 174.
206 See President Obama Announces Small Business Efforts, supra note 174 at 2.
207 Community development financial institutions, which are certified by the federal government, provide loans to underserved communities.
208 See President Obama Announces Small Business Efforts, supra note 174.
209 Id.
210 Id.
211 For a discussion of the relationship between small business lending and the securitization
of small business loans, see the Panel’s May report. See May Oversight Report, supra note 174,
at 50–52.

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49
c. Impact of Small Business Program
There is evidence that a rejuvenated secondary market for SBA
loans may negate Treasury’s need for direct purchases. Between
May and October, the total volume of loans settled from lenders to
brokers averaged $345 million, exceeding pre-crisis levels.212 By
comparison, in January total volume was $283.4 million. But it
should be noted that the amount of SBA lending is small in relation to the overall number of loans to small business.
FIGURE 19: SMALL BUSINESS ORIGINATIONS OF SELECTED CPP RECIPIENTS SINCE
MARCH 2009 (WITHOUT PNC OR WELLS FARGO) 213

212 Calculation

based on data provided by SIFMA.
to February 2009, information on new bank loan originations was sparse, untimely,
and incomplete. At Treasury’s request, the top 22 CPP banks began reporting this data in February 2009. See U.S. Department of the Treasury, Treasury Releases First Monthly Bank Lending Survey (Feb. 17, 2009) (online at www.financialstability.gov/latest/tg30.html). However, it
was not until the April 2009 lending survey that these banks first specified their small business
lending activities. Compare U.S. Department of the Treasury, Treasury Department Monthly
Lending and Intermediation Snapshot: Summary Analysis for April 2009, at 5 (June 15, 2009)
(online at www.financialstability.gov/docs/surveys/SnapshotAnalysisApril2009.pdf) with U.S. Department of the Treasury, Treasury Department Monthly Lending and Intermediation Snapshot:
Summary Analysis for March 2009, at 5 (May 15, 2009) (online at www.financialstability.gov/
docs/surveys/SnapshotAnalysisMarch2009.pdf). See footnote 147 supra for an explanation of the
exclusion from Figures 19 and 20 of lending by Wells Fargo and PNC.
Other CPP banks did not have the same monthly reporting requirement as the top 22 banks,
and have not provided any data on their small business lending activities. As a whole, the CPP
banks were only required to track average consumer loans outstanding, average commercial
loans outstanding, and average total loans outstanding. See U.S. Department of the Treasury,
About the Capital Purchase Program Monthly Lending Report, at 1 (online at
www.financialstability.gov/docs/About%20the%20CPP%20Monthly%20Lending%20Report.pdf)
(accessed Dec. 3, 2009).

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213 Prior

50
FIGURE 20: SMALL BUSINESS AVERAGE TOTAL LOANS OF SELECTED CPP RECIPIENTS
SINCE MARCH 2009 (WITHOUT PNC AND WELLS FARGO) 214

Small business lending has not returned to its pre-crisis levels.
And as seen in Figures 19 and 20, direct small business lending
across the top 22 CPP recipients has fallen or remained stagnant
since TALF’s inception. One explanation for this outcome is that
the top 22 CPP recipient banks have not resumed lending at precrisis levels in any loan category, increasing further the competition smaller businesses face to obtain a part of the shrinking loan
pool.215 Another explanation is that small business loans are currently not as lucrative for large banks as other types of lending.216
In either case, small business loans remain difficult to obtain.217
TALF has not necessarily succeeded in encouraging a broader expansion of consumer and small business credit. In the face of continued economic stagnation, such inaction could have drastic consequences for banks, businesses, and consumers alike.218

214 See

id.
Treasury Department Monthly Lending and Intermediation Snapshot Data for April
2009–September 2009, supra note 147.
216 Baker COP Testimony, supra note 28, at 4.
217 See Baker COP Testimony, supra note 28, at 4; Congressional Oversight Panel, Written
Testimony of Chief Economist and Co-founder of Moody’s Economy.com Mark Zandi, Taking
Stock: Independent Views on TARP’s Effectiveness, at 1 (Nov. 19, 2009) (online at cop.senate.gov/
documents/testimony–111909–zandi.pdf) (hereinafter ‘‘Zandi COP Testimony’’).
218 See Congressional Oversight Panel, Transcript of Hearing, Taking Stock: Independent
Views on TARP’s Effectiveness (Nov. 19, 2009) (Testimony of Mark Zandi) (publication forthcoming Jan. 2010) (online at cop.senate.gov/hearings/library/hearing-111909-economists.cfm)
(hereinafter ‘‘COP November Hearing Transcript’’).

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215 See

51
3. Mortgage Foreclosure Relief

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a. Background
On February 18, 2009, Treasury launched two foreclosure mitigation programs under an initiative that became known as Making
Home Affordable (MHA).219 These programs seek to refinance or
restructure loans made during the housing boom in order to prevent foreclosures, which result in homeowners losing their homes,
lenders incurring significant losses, and a wide range of costs imposed on communities.220
One of the MHA initiatives, the Home Affordable Refinancing
Program (HARP), is designed to assist homeowners in refinancing
mortgages owned or guaranteed by Fannie Mae or Freddie Mac
(the government-sponsored enterprises, or GSEs). HARP refinances
do not subsidize payment reductions or reduce principal; consequently, no government or GSE funds are used. The program
permits borrowers who are current on their mortgages to refinance
into more stable or affordable loans even if they have minimal or
no equity in their homes. Borrowers are eligible for this program
if the amount owed on their mortgage is up to 125 percent of the
home’s current value.221 Delinquent homeowners and those with
non-GSE mortgages are ineligible.222 To the extent that default
losses avoided due to HARP refinancings exceed the reduced yield
on the refinanced mortgages owned by the GSEs, the program will
improve the long-term financial outlook for the GSEs, thereby reducing their need for federal government support.
The other major MHA initiative, the Home Affordable Modification Program (HAMP), uses TARP dollars to facilitate the modification of delinquent mortgages. All loans under the conforming loan
limit, which is the amount above which the GSEs cannot purchase
mortgages, are HAMP-eligible; GSE ownership or guarantee is not
required. HAMP modifications are available for delinquent borrowers.223
HAMP facilitates modifications by making incentive payments: to
loan servicers, homeowners, and lenders. Unlike the capital assistance programs and the assistance to the auto industry, HAMP incentive payments are grants, so Treasury will not recover any of
219 Prior foreclosure mitigation initiatives include the private sector HOPE NOW Alliance, created in October 2007 and the Hope for Homeowners program within the Federal Housing Administration, signed into law in July 2008, as part of the Housing and Economic Recovery Act
of 2008.
220 See U.S. Department of the Treasury, Making Home Affordable Summary of Guidelines
(Mar. 4, 2009) (online at www.treas.gov/press/releases/reports/guidelines—summary.pdf) (hereinafter ‘‘Making Home Affordable Summary of Guidelines’’); see also Congressional Oversight
Panel, October Oversight Report: An Assessment of Foreclosure Mitigation Efforts After Six
Months, at 6–7 (Oct. 9, 2009) (online at cop.senate.gov/documents/cop-100909-report.pdf) (hereinafter ‘‘October Oversight Report’’).
221 The decision to accept loans with a loan-to-value ratio of up to 125 percent was announced
in July 2009, but implementation did not begin until September 1 at Fannie Mae and until October 1 at Freddie Mac. The minimum loan-to-value ratio for HARP loans is 80 percent.
222 U.S. Department of the Treasury, Making Home Affordable Borrower Frequently Asked
Questions (July 16, 2009) (online at makinghomeaffordable.gov/borrower-faqs.html#a2) (hereinafter ‘‘Making Home Affordable Borrower FAQs’’).
223 Borrowers must be at least 60 days delinquent before they can seek a loan modification.
See Making Home Affordable Summary of Guidelines, supra note 220; see also Making Home
Affordable Borrower FAQs supra note 222.

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the funds paid out.224 Altogether, Treasury has designated $75 billion for HAMP, including $50 billion in TARP funds.225 Using that
$50 billion pool of funds, which is for modifying loans that are not
owned or guaranteed by Fannie Mae or Freddie Mac, Treasury has
signed agreements with 79 servicers (representing over 85 percent
of all mortgages serviced in the United States under the agreements signed so far); under the current contracts, the maximum
payout of TARP funds from Treasury is $27.4 billion.226
HAMP’s goal is to make mortgage payments more affordable and
thus avert defaults. HAMP does so by requiring participating
servicers and lenders to offer modifications to all eligible borrowers
in their portfolios where the net present value of the modified loan
would exceed the net present value of the unmodified loan.227
Servicers are expected to comply with any private contractual restrictions on loan modifications, however.
HAMP modifications follow a standard template. The servicer or
lender is to offer to reduce the monthly mortgage payment to 31
percent of the borrower’s monthly income.228 This is done by first
capitalizing all arrearages, then reducing interest rates incrementally to as low as 2 percent, then stretching out the loan’s term if
possible, and then stretching out the loan’s amortization period
(forbearing on principal).229
HAMP modifications begin with a three-month trial modification.
If the borrower is current on payments at the end of the threemonth trial period and has provided full supporting documentation,
such as proof of income, then the modification becomes ‘‘permanent.’’ 230 Permanent modifications, however, only have fixed
monthly payments for five years. After five years, interest rates on
the modified loans are increased up to a cap.231 In addition, Treasury contributes cash toward interest-rate reductions, and it also
provides a variety of incentive payments to the defaulted homeowner, servicer, and lender. Treasury does not make any incentive
payments unless a modification becomes permanent.232
As of October 31, 2009, Treasury has expended $2,307,776 of the
$50 billion in TARP funding set aside for modification of non-GSE
loans. Of the money expended, $1,828,000 was used for servicer incentives; $82,500 went to servicers as a bonus for modifying current loans; $238,500 went to investors as a bonus for modifying
224 See Congressional Budget Office, The Troubled Asset Relief Program: Report on Transactions Through June 17, 2009 (June 2009) (online at www.cbo.gov/ftpdocs/100xx/doc10056/06–
29–TARP.pdf).
225 The remaining $25 billion, which is being used to perform HAMP modifications on loans
owned or guaranteed by Fannie Mae and Freddie Mac, comes from the Housing and Economic
Recovery Act of 2008 (HERA).
226 See November 25 Transactions Report, supra note 71.
227 The formula that is used to determine eligibility is known as a net present value test, or
NPV test. See Jordan D. Dorchuck, Net Present Value Analysis and Loan Modifications (Sept.
15,
2008)
(online
at
www.mortgagebankers.org/files/Conferences/2008/
RegulatoryComplianceConference08/
RC08SEPT24ServicingJordanDorchuck.pdf).
228 This ratio, a measure of loan affordability, is known as debt-to-income ratio or DTI.
229 U.S. Department of the Treasury, Home Affordable Modification Program Guidelines at 6–
7
(March
4,
2009)
(online
at
www.treas.gov/press/releases/reports/modificationlprogramlguidelines.pdf) (hereinafter ‘‘HAMP Guidelines’’).
230 Making Home Affordable Summary of Guidelines, supra note 220; October Oversight Report, supra note 220.
231 See U.S. Department of the Treasury, Making Home Affordable Updated Detailed Program
Description, at 4 (Mar. 4, 2009) (online at www.treas.gov/press/releases/reports/
housinglfactlsheet.pdf).
232 HAMP Guidelines, supra note 229.

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current loans; and $158,776 was expended for investor cost sharing
subsidies.233 Payments only occur for loans that have achieved permanent modification status. In total, 10 servicers have received
payments under HAMP.234

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b. Impact
The refinancing of loans under HARP began in April 2009.235 According to data from Treasury, 136,271 loans have been refinanced
under the program as of October 31, 2009.236 HARP accounted for
about 5 percent of the Fannie Mae and Freddie Mac loans that
were refinanced from April 1–September 30.237 Additional data
from Treasury show that 12.5 percent of HARP refinancings
(17,091 mortgages) have involved mortgages where the homeowner
has negative equity, but only .2 percent (272 mortgages) have been
for properties with a loan-to-value ratio (LTV) over 105 percent.238
These numbers should increase, however, as the program’s maximum LTV was only recently increased from 105 percent to 125
percent. While more information is needed to evaluate HARP fully,
the data that are currently available raise questions about whether
the program, as currently configured, will have a substantial impact on the foreclosure problem.
Over the next several years, Treasury aims to modify up to three
million to four million mortgages under the HAMP program.239
Yet, projections for foreclosure range from 8.1 million over the next
four years to as high as 13 million over the next five-plus years.240
Under the HAMP program between March 1 and October 31, 2009,
919,965 offers of trial modifications were extended to borrowers.241
From the offers extended, the program commenced 600,739 cumulative trial modifications, including restarts on duplicate borrowers.
In total, the program has started 595,536 trial modifications on
unique borrowers for the same time period.242 Although trial modifications started each month held steady or increased from February through September, no doubt due to the ramp up of the program, trials dropped off sharply in October, dropping from 155,875
233 In response to Panel requests, Treasury provided a broad range of data related to the mortgage market. Although not all of the data are confidential, portions are. These data are cited
in numerous places throughout the report, and are hereinafter cited as ‘‘Treasury Mortgage
Market Data.’’
234 Treasury Mortgage Market Data, id.
235 See Federal Housing Finance Agency, FHFA Refinance Report Shows Refinance Volumes
Dropped in September; Mortgage Rates Still Higher than the Spring, at 3 (Nov. 2, 2009) (online
at www.fhfa.gov/webfiles/15153/SeptlRefinancelFinallreportlandlreleasel11l2l09.pdf)
(hereinafter ‘‘FHFA Refinance Report’’).
236 Treasury Mortgage Market Data, supra note 233.
237 FHFA Refinance Report, supra note 235.
238 Treasury Mortgage Market Data, supra note 233.
239 U.S. Department of the Treasury, Making Home Affordable: Updated Detailed Program Description
(March
4,
2009)
(online
at
www.treas.gov/press/releases/reports/
housinglfactlsheet.pdf).
240 Goldman Sachs Global ECS Research, Home Prices and Credit Losses: Projections and Policy Options, at 16 (Jan. 13 2009) (available online at garygreene.mediaroom.com/file.php/
216/Global+Paper+No++177.pdf); Rod Dubitsky et al., Foreclosure Update: Over 8 Million Foreclosures Expected, Credit Suisse Fixed Income Research (Dec. 8, 2008) (online at www.nhc.org/
Credit%20Suisse%20
Update%2004%20Dec%2008.doc).
241 U.S. Department of the Treasury, Making Home Affordable Program: Servicer Performance
Report Through October 2009, at 3 (online at www.makinghomeaffordable.gov/docs/
MHA%20Public%20111009%20FINAL.PDF) (hereinafter ‘‘MHA Servicer Performance Report
Through October 2009’’).
242 Treasury Mortgage Market Data, supra note 233.

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trials started the previous month to 99,183.243 It is unclear why
the number of trials dropped and whether or not this trend will
continue into the future.
It is important to note two points regarding the trial modifications initiated so far under HAMP. First, many trial modifications
may fail to convert to permanent modifications. At the Panel’s October 22 hearing, Assistant Secretary Allison stated that Treasury’s
internal estimate before the program was launched was that 50–
75 percent of the trial modifications would be converted into
longer-term modifications.244 As of October 31, 2009, there were
only 10,187 permanent modifications, with a conversion rate, or
roll rate, of 4.69 percent for trial modifications commenced at least
three months ago.245 While this does not mean that the other 95.31
percent of trial modifications begun three months ago are failures,
it does mean that the vast majority of trial modifications have
failed to convert to permanent modifications on the three-month
timeline originally announced by Treasury.
These rates are not necessarily indicative of future HAMP performance, but Treasury has not provided the Panel with sufficient
information to determine fully why there have been so few conversions from trial to permanent modifications. Treasury has stated
that it will not be able to produce a more statistically accurate roll
rate until the first quarter of next year.246
One factor contributing to the paucity of permanent modifications is issues in gathering borrower documentation. HAMP trial
modifications can be initiated before homeowners provide any documentation of their income and assets,247 and that documentation,
which in many cases borrowers did not have to show in order to
get their original loans, is required to be produced before a loan
modification can exit the trial period. Because of difficulties in compiling documentation, Treasury has granted a two-month extension
to the trial periods of trial modifications commenced before September 1, 2009. The roll rate for loans made five months ago is
more encouraging at 38.24 percent,248 although the success of the
program over the long term will certainly require a much higher
rate.
A second major concern about HAMP is that many homeowners
who receive permanent modifications may redefault and ultimately
lose their homes in foreclosure sales.249 Data on loans modified
during the first quarter of 2008, prior to the launch of HAMP, show
that within one year of modification, 54 percent of the borrowers

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243 Id.
244 See Congressional Oversight Panel, Testimony of Treasury Assistant Secretary for Financial Stability Herbert M. Allison, Jr., Congressional Oversight Panel Hearing with Assistant
Treasury Secretary Herbert M. Allison, Jr. (Oct. 22, 2009) (publication forthcoming January
2010) (online at cop.senate.gov/hearings/library/hearing-102209-allison.cfm) (hereinafter ‘‘Allison
COP Hearing, Oct. 22’’).
245 Treasury Mortgage Market Data, supra note 233.
246 Allison COP Hearing, Oct. 22, supra note 246.
247 See U.S. Department of the Treasury, Obama Administration Kicks Off Mortgage Modification Conversion Drive (Nov. 30, 2009) (online at www.ustreas.gov/press/releases/tg421.htm).
248 Treasury Mortgage Market Data, supra note 233.
249 See Manuel Adelino, Kristopher Gerardi, & Paul S. Willen, Why Don’t Lenders Renegotiate
More Home Mortgages? Redefaults, Self-Cures, and Securitization, Federal Reserve Bank of Boston Working Paper 09–4 (July 6, 2009) (online at www.bos.frb.org/economic/ppdp/2009/
ppdp0904.pdf). See also October Oversight Report, supra note 220.

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were again delinquent by at least 60 days.250 As the Panel noted
in its October report, redefault rates are lower for modifications
that reduce monthly payments, with greater percentage decreases
in payments resulting in lower subsequent redefault rates. Nonetheless, redefault rates, even on modifications reducing payments
by 20 percent or more, were still a very high 34.1 percent.251 At
the Panel’s Oct. 22 hearing, Assistant Secretary Allison noted that
HAMP results in material reductions in borrowers’ payments.252
He later noted that Treasury’s baseline assumption for redefault
rates is 40 percent over the next five years.253 This assumption is
not based on the actual characteristics of HAMP modified loans;
adjusting for the actual characteristics of the loans, the predicted
redefault rate could be substantially higher.
HAMP is still too new to have conclusive data regarding redefaults. HAMP only began converting trials to permanent modifications in July, and 94 percent of the conversions to permanent
status happened in September and October. This means that only
580 permanent modifications have been in place for more than two
months. For the four months during which permanent modifications have been in place, the program has already seen eight redefaults.254 The causes of those redefaults are not known. If the 40
percent redefault estimate offered by Assistant Secretary Allison
holds true, approximately 4,075 of the current 10,187 permanent
modifications could be expected to redefault. It should also be noted
here that although HAMP is structured to protect taxpayers
against losses in cases where homeowners redefault on their modified loans, that protection is limited.255 Redefaults during the fiveyear modification period mean that taxpayer funds will be paid out
for modifications that nevertheless end in foreclosure.
The combination of failure to convert trial modifications to permanent modifications and redefaults on permanent modifications
means that HAMP’s ultimate impact may be significantly less than
the number of trial modifications initiated. The Panel emphasizes
that it is the number of foreclosures averted, not the number of
trial modifications offered or even trial modifications commenced,
that is the proper metric for evaluating HAMP.
The Panel has other serious concerns about the impact of Treasury’s efforts to reduce foreclosures. While many of the foreclosures
earlier in the financial crisis were the result of mortgages resetting
to higher rates, an issue that HAMP is designed to combat, an increasingly pressing problem involves foreclosures caused by unemployment, as the Panel showed in its October report.256 Since that
report was released, the U.S. unemployment rate has reached 10
250 These data only cover about two-thirds of the mortgage market. See Office of the Comptroller of the Currency and Office of Thrift Supervision, OCC and OTS Mortgage Metrics Report,
Second Quarter 2009, at 29 (online at www.occ.treas.gov/ftp/release/2009–118a.pdf) (hereinafter
‘‘OCC and OTS Mortgage Metrics Second Quarter 2009’’) (accessed Dec. 7, 2009).
251 Id.
252 Allison COP Hearing, Oct. 22, supra note 246.
253 See U.S. Department of the Treasury, Questions for the Record for U.S. Department of the
Treasury Assistant Secretary Herbert M. Allison Jr., at 3 (Oct. 22, 2009) (online at
cop.senate.gov/documents/testimony-102209-allison-qfr.pdf) (hereinafter ‘‘Questions for the
Record for Assistant Secretary Allison’’).
254 Treasury Mortgage Market Data, supra note 233.
255 See HAMP Guidelines, supra note 229.
256 See October Oversight Report, supra note 220, at 9–21.

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56
percent for the first time in 26 years.257 By comparison, when the
financial markets seized up in September 2008, the U.S. unemployment rate was at 6.2 percent, and when HAMP was announced in
February, unemployment had risen, but only to 8.1 percent.258 Furthermore, between September 2008 and November 2009, the more
expansive unemployment rate, which includes people who are
working less than they want to and those who have stopped looking for a job, rose from 11.2 percent to 17.2 percent.259 HAMP was
simply not designed to address foreclosures caused by unemployment, a point that Assistant Secretary Allison acknowledged at the
Panel’s Oct. 22 hearing, when he said that people with extremely
low incomes will not qualify for the program.260 Assistant Secretary Allison said that Treasury is actively looking at ways to address unemployment-related foreclosures.261
Treasury’s foreclosure prevention efforts thus far also do not
counteract the problem of negative equity. As the Panel’s October
report stated, there is a correlation between owing more than one’s
home is worth and defaulting on the mortgage—a higher correlation, in fact, than any other factor that has been identified, besides
the mortgage’s affordability.262 In the third quarter of 2009, 23 percent of U.S. single-family homes with mortgages had negative equity, and 11 percent owed more than 120 percent of their homes’
value, according to FirstAmerican CoreLogic, an increase from the
previous quarter.263 Another methodology calculates that nearly 34
percent of U.S. single-family homes with mortgages have negative
equity.264 This means that somewhere between one in four and one
in three mortgage holders have no home equity cushion in the
event of a major change in life circumstances, such as a divorce or
job relocation.265 And while Treasury’s programs have made mort257 Labor

Force Statistics, supra note 17.

258 Id.

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259 U.S.

Department of Labor, Bureau of Labor Statistics, Data Retrieval: Labor Force Statistics—Instrument: U–6, seasonally adjusted (online at www.bls.gov/webapps/legacy/
cpsatab12.htm) (accessed Dec. 7, 2009).
260 Assistant Secretary Allison did point out that that the Administration has taken other
steps to address unemployment. In addition, as Allison suggested, people who have the prospect
of getting unemployment insurance payments for at least nine months can count those payments as income when applying for a HAMP modification. See Congressional Oversight Panel,
Testimony of Treasury Assistant Secretary for Financial Stability Herbert M. Allison, Jr., Congressional Oversight Panel Hearing with Assistant Treasury Secretary Herbert M. Allison, Jr.
(Oct. 22, 2009) (publication forthcoming Jan. 2010) (online at cop.senate.gov/hearings/library/
hearing-102209-allison.cfm) (hereinafter ‘‘COP Hearing with Assistant Secretary Allison’’). See
also U.S. Department of the Treasury, Supplemental Documentation—Frequently Asked Questions Home Affordable Modification Program, at 20 (Nov. 12, 2009) (online at
www.hmpadmin.com/portal/docs/hamplservicer/hampfaqs.pdf).
261 See First American CoreLogic, Negative Equity Report as of September 30, 2009 (Nov. 24,
2009)
(online
at
www.facorelogic.com/newsroom/marketstudies/
negative-equity-report.jsp) (subscription required). See also COP Hearing with Assistant Secretary Allison, supra note 260, at 54, 55.
262 October Oversight Report, supra note 220, at 97.
263 See First American CoreLogic, Negative Equity Report as of September 30, 2009 (Nov. 24,
2009)
(online
at
www.facorelogic.com/newsroom/marketstudies/
negative-equity-report.jsp) (subscription required). See also Ruth Simon and James R. Hagerty,
One in Four Borrowers Is Underwater, Wall Street Journal (Nov. 24, 2009) (online at online.wsj.com/article/SB125903489722661849.html).
264 Id.
265 Nearly 10.7 million mortgages were in negative equity as of September 2009, out of 75.6
million owner-occupied residences. Nearly 13.0 million mortgages were in or near negative equity. See First American CoreLogic, Media Alert: First American CoreLogic Releases Q3 Negative Equity Data (available with registration online at www.facorelogic.com/newsroom/
marketstudies/
negative-equity-report.jsp) (accessed Dec. 7, 2009); see also U.S. Census Bureau, American Hous-

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57
gages more affordable, they have not significantly reduced the
amount of negative equity in modified and refinanced loans.266 Reducing loan principal is the only way to eliminate negative equity,
so Treasury should consider how its existing programs might be
adapted in ways that result in principal reductions.
Perhaps the most important way to evaluate the mortgage foreclosure relief efforts under the TARP is in relation to the number
of foreclosures. Are foreclosures rising or declining? Are Treasury’s
programs making a major dent in the problem? There has been a
small downturn in the number of new foreclosure filings since July,
but the data also show that foreclosures easily continue to outpace
HAMP modifications, as Figure 21 shows.
FIGURE 21: FORECLOSURE STARTS V. TRIAL MODIFICATIONS STARTED 267

ing Survey—Frequently Asked Questions (online at www.census.gov/hhess/www/housing/ahs/
ahsfaq.html) (accessed Dec. 4, 2009).
266 Treasury Mortgage Market Data, supra note 233.
267 MHA Servicer Performance Report Through October 2009, supra note 241, at 3; HOPE
NOW, Latest HOPE NOW Data Shows Workout Solutions Outpace Foreclosures More than 3 to
1
(Dec.
2,
2009)
(online
at
www.hopenow.com/press—release/files/
October%202009%20Data%20Release.pdf); Workout Plans (Repayment Plans + Modifications)
and Foreclosure Sales, July 2007–September 2009 (online at www.hopenow.com/industry-data/
HOPE%20NOW%20National%20
Data%20July07%20to%20Sep09%20v2.pdf) (accessed Dec. 7, 2009).
268 Treasury Mortgage Market Data, supra note 233. Mortgage Bankers Association, Delinquencies Continue to Climb in Latest MBA National Delinquency Survey (Nov. 19, 2009) (online
at www.mortgagebankers.org/NewsandMedia/PressCenter/71112.htm).

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In October 2009, there were 222,107 foreclosure starts, significantly more than the 99,183 HAMP trial modifications initiated in
the same month.268 In October there were also 94,450 completed
foreclosure sales. To keep pace, 95 percent of trial modifications in
October would have to convert to permanent modifications with no
redefaults on the modifications.

58
In addition, as Figures 22 and 23 show, both mortgage delinquencies and homes in foreclosure are substantially above their
level in February, when Treasury unveiled its foreclosure mitigation plans. According to the Mortgage Bankers Association’s National Delinquency Survey, 14.41 percent of all mortgages are delinquent or currently in foreclosure, an all-time high in the survey’s
37-year history.269 Cumulatively, since July 2007, there have been
more than two million foreclosure sales completed, and five and a
half million foreclosure starts, with prime foreclosures now surpassing subprime.270 As currently structured, HAMP appears capable of preventing only a fraction of foreclosures.

269 Mortgage Bankers Association, Delinquencies Continue to Climb in Latest MBA National
Delinquency Survey (Nov. 19, 2009) (online at www.mortgagebankers.org/NewsandMedia/
PressCenter/71112.htm).
270 HOPE NOW, Workout Plans (Repayment Plans + Modifications) and Foreclosure Sales,
July
2007–September
2009
(online
at
www.hopenow.com/industrydata/HOPE%20
NOW%20National%20Data%20July07
%20to%20Sep09%20v2.pdf) (accessed Dec. 7, 2009).
271 Mortgage Bankers Association, National Delinquency Survey.

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FIGURE 22: PERCENTAGE OF 1–4 FAMILY MORTGAGES IN 30–90 DAYS DELINQUENT 271

59
FIGURE 23: PERCENTAGE OF 1–4 FAMILY MORTGAGES IN FORECLOSURE 272

4. Auto Industry Assistance
a. Background
Apart from its efforts to use the TARP to help stabilize the financial system, Treasury has deployed more than $80 billion in TARP
funds to assist two U.S. auto manufacturers and their finance affiliates. With the onset of the financial crisis in the fall of 2008, the
challenges facing the auto industry—including rising gas prices,
tightening credit markets, declining consumer confidence, and rising unemployment—had become acute. By December, two major
domestic auto makers—Chrysler and GM—faced a sharp downturn
in income and a crippling lack of access to credit.273
On December 19, 2008, Chrysler and GM received bridge loans
totaling $17.4 billion.274 The government funding, which did not
end with those initial loans, came from a new TARP initiative
called the Automotive Industry Financing Program (AIFP). The
terms of the loans required both Chrysler and GM to demonstrate
their ability to achieve financial viability,275 and both companies
submitted their viability plans on February 17, 2009.

272 Mortgage

Bankers Association, National Delinquency Survey.
Nardelli, Written Testimony before the United States Senate Committee on Banking, Housing and Urban Affairs Committee, Hearing Examining the State of the Domestic Automobile Industry (Dec. 4, 2008) (online at banking.senate.gov/public/index.cfm?FuseAction=Files.
View&FileStorelid=c41857b2-7253-4253-95e3-5cfd7ea81393).
274 See U.S. Department of the Treasury, Loan and Security Agreement [GM] (Dec. 31, 2008)
(online
at
www.financialstability.gov/docs/agreements/GM%20Agreement%20
Dated%2031%20December%202008.pdf); U.S. Department of the Treasury, Loan and Security
Agreement [Chrysler] (Dec. 31, 2008) (online at www.financialstability.gov/docs/agreements
/Chyslerl12312008.pdf).
275 See White House, Fact Sheet: Financing Assistance to Facilitate the Restructuring of Auto
Manufacturers to Attain Financial Viability (Dec. 19, 2008) (online at georgewbushwhitehouse.archives.gov/news/releases/2008/12/20081219-6.html). The loans also imposed conditions related to operations, expenditures, and reporting.

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273 Robert

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The results of the Obama Administration’s review of those plans,
announced on March 30, were not encouraging with respect to either automaker. The Administration concluded that Chrysler could
not achieve viability as a stand-alone company and that it would
have to develop a partnership with another automotive company or
face bankruptcy.276 As for GM, the Administration concluded that
the automaker’s financial viability plan relied on overly optimistic
assumptions about the company and future economic developments.277
Both companies ultimately entered bankruptcy and, with the active involvement of the federal government, underwent radical
restructurings.278 Following those restructurings, American taxpayers owned about 10 percent of what is now known as New
Chrysler and 61 percent of New GM.279 The Administration has
stated that it intends to divest of its equity stakes in these companies as soon as practicable, and that it intends to manage those
stakes in a ‘‘hands-off’’ manner.280 Nevertheless, the federal government has exercised some initial influence over the companies’
corporate governance by appointing 10 members of GM’s 13–member board and four members of Chrysler’s nine-member board.281
Auto lender GMAC has been another large beneficiary of AIFP,
receiving $12.5 billion from the program between December 2008
and May 2009.282 Last month, Treasury announced that it expected to provide additional AIFP funds to GMAC.283 The firm requested more money because it has been unable to meet the capital
requirements imposed by the stress tests.284 The government has
not yet formally announced its rationale for granting GMAC’s request, nor has it finalized the size, form, or structure of GMAC’s
latest round of federal assistance.285
The AIFP includes two additional initiatives. The Auto Supplier
Support Program (ASSP), under which the government agreed to
276 See U.S. Department of the Treasury, Chrysler February 17 Plan: Determination of Viability, at 1 (Mar. 30, 2009) (online at www.financialstability.gov/docs/AIFP/Chrysler-Viability-Assessment.pdf).
277 See U.S. Department of the Treasury, GM February 17 Plan: Determination of Viability,
at 1 (Mar. 30, 2009) (online at www.financialstability.gov/docs/AIFP/GM-Viability-Assessment.pdf).
278 For a discussion of the details of the bankruptcy, see the Panel’s September report. See
Congressional Oversight Panel, September Oversight Report: The Use of TARP Funds in the
Support and Reorganization of the Domestic Automotive Industry, at 7–8 (Sept. 9, 2009) (online
at cop.senate.gov/documents/cop-090909-report.pdf) (hereinafter ‘‘September Oversight Report’’).
279 General Motors, The New General Motors Company Launches Today (July 10, 2009) (online
at www.sec.gov/Archives/edgar/data/1467858/000119312509150199/dex991.htm); First Lien Credit Agreement (Chrysler) at § 2.17(a) (June 10, 2009) (online at www.financialstability.gov/docs/
AIFP/newChrysler.pdf)
280 Congressional Oversight Panel, Written Testimony of Treasury Senior Advisor Ron Bloom,
Congressional Oversight Panel Field Hearing on the Auto Industry, at 10 (July 27, 2009) (online
at cop.senate.gov/documents/testimony-072709-bloom.pdf).
281 See Chrysler Group LLC, Formation of Chrysler Group LLC Board is Completed (July 5,
2009)
(online
at
www.chryslergroupllc.com/en/news/article/
?lid=formationlboard&year=2009&month=7); General Motors Company, Form 8–K (Aug. 7,
2009) (online at www.sec.gov/Archives/edgar/data/1467858/000119312509169233/d8k.htm).
282 November 25 Transactions Report, supra note 71, at 16 GMAC was the former financing
arm of pre-bankruptcy GM, but is now an independent company.
283 See Treasury Announcement Regarding the CAP, supra note 78.
284 See Treasury Announcement Regarding the CAP, supra note 78.
285 Treasury communications with Panel staff (Nov. 17, 2009). In answers to questions posed
by members of the Panel, Assistant Secretary Herb Allison has suggested that Treasury decided
to provide further aid to GMAC to ensure that GMAC is adequately capitalized to ‘‘provide a
reliable source of financing to both auto dealers and customers seeking to buy cars’’ to help ‘‘stabilize our auto financing market,’’ and to contribute ‘‘to the overall economic recovery.’’ Questions for the Record for Assistant Secretary Allison, supra note 253, at 9.

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61
guarantee payment for products shipped by participating suppliers,
even if the buyers went out of business, has committed $1 billion
to Chrysler and $2.5 billion to GM.286 Treasury also lent Chrysler
$280 million and GM $361 million to backstop their new vehicle
warranties. Both Chrysler and GM have since repaid those
loans.287
Figure 24 shows the current state of TARP funds used to support
the auto industry. Taking into account repayments and de-obligations, United States taxpayers have spent $49.5 billion of TARP
funds in support of GM and New GM, and about $12.5 billion of
TARP funds in support of Chrysler and New Chrysler. Investments
in GMAC, assistance to automotive suppliers, and other miscellaneous funds account for approximately $17 billion of TARP spending, bringing the TARP net support for the U.S. domestic automotive industry to approximately $79 billion as of November 30,
2009.
FIGURE 24: TARP FUNDS USED IN SUPPORT OF THE AUTO INDUSTRY (AS OF NOVEMBER 30, 2009)
Cumulative
obligations 288

Total amounts repaid and
de-obligated

Amounts invested 289

Chrysler ...................................................................
General Motors ........................................................
GMAC .......................................................................
Chrysler Financial 292 .............................................
Loan for GMAC rights offering 293 .........................
Auto Supplier Supports ...........................................

$15,222,130,642
49,860,624,198
12,500,000,000
1,500,000,000
884,024,131
3,500,000,000

290 $2,691,977,062

$12,530,153,580

360,624,198
—
1,500,000,000
—
—

291 49,500,000,000

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

83,466,778,971

4,552,601,260

78,914,177,711

12,500,000,000
884,024,131
294 3,500,000,000

288 This

column represents Treasury’s total obligation, or maximum exposure, to the automotive industry under the AIFP. The figure does not
reflect repayments, de-obligations or committed funds that have not been used.
289 The Amounts Invested are decreased by commitments that were not funded but includes amounts that are no longer owed such as the
amounts that were credit bid in the GM bankruptcy. For a more complete discussion, see September Oversight Report, supra note 273.
290 This figure reflects de-obligations ($2.4 billion) and repayments ($280 million). See November 25 Transactions Report, supra note 71, at
16.
291 This number reflects the $8.8 billion in loans and preferred stock outstanding as well as the original loan amounts that are now in the
form of equity.
292 Chrysler Financial completed its repayment of this obligation on July 14, 2009.
293 Represents loans to GM that have been converted to shares of GMAC and are currently not obligations of GM or GMAC. The GM loan
was terminated.
294 This figure does not reflect the amount outstanding under the program, but instead is the total amount available under the cap.

b. Impact
The government’s investments in Chrysler and GM will ultimately be judged based on the long-term viability of the companies,
as well as on the profits or losses the government incurs. Some preliminary information is now available on the recent performance
and future plans of the restructured automakers. It is important to
note, though, that many factors besides the government’s investments, most notably the Cash for Clunkers program, contributed to
the two firms’ financial results over the last several months.
On November 16, 2009, GM released preliminary results for the
third quarter of 2009, providing a first glimpse of the company’s
post-bankruptcy performance.295 Indicators were mixed. On one
286 See

November 25 Transactions Report, supra note 71, at 16.
November 25 Transactions Report, supra note 71, at 16.
preliminary results were not calculated in accordance with Generally Accepted Accounting Principles (GAAP). GM voluntarily filed the results with the SEC in a Form 8–K, in
which the company stated that in 2010 it will file financial statements with the SEC that comply with GAAP.
287 See

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295 These

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hand, GM lost about $1.2 billion in the third quarter of 2009, its
revenues were down significantly from a year earlier, and it continued to be burdened with restructuring costs.296 On the other hand,
the results ‘‘showed a healthier balance sheet, ample cash, and factory production much more in line with consumer demand[.]’’ 297
GM has said that it plans to repay $1 billion in federal loans by
December 2009, and that it hopes to repay an additional $6.7 billion by June 2010.298 Chrysler has not announced its third-quarter
results.299 It recently announced a five-year business plan under
which it predicts it will break even in 2010, make money in 2011,
and generate enough operating profit to pay back its government
loans by 2014.300
The most recent monthly U.S. sales data are more positive for
GM than for Chrysler. GM’s sales of cars and light trucks were up
by 4.7 percent between October 2008 and October 2009. Chrysler’s
sales in October, on the other hand, were down 30.4 percent from
a year earlier. Industry-wide sales were unchanged in October,
when compared to sales 12 months prior. Meanwhile, the sales
data from January to October 2009 are gloomy for both companies.
GM’s sales were down 33.6 percent compared with the same 10month period in 2008. Chrysler’s sales dropped 38.9 percent for the
first 10 months of the year. Across the auto industry, U.S. sales
were down 25.4 percent.301
Although it may be too early to render a comprehensive verdict
on the government’s intervention in the auto industry, the assistance almost certainly prevented Chrysler and GM from failing and
liquidating. Both the manufacturing sector and the broader economy may have suffered severe harm if the government had allowed
Chrysler and GM to disintegrate.302 On the cost side of the ledger,
it is unlikely that Treasury will recoup the full amount of its investment in Chrysler and GM even if the companies remain viable
296 See General Motors, General Motors Announces the New Company’s July 10–September 30
Preliminary Managerial Results (Nov. 16, 2009) (online at media.gm.com/content/media/us/en/
news/newsldetail.html/content/Pages/news/us/en/2009/Nov/1116learnings).
297 Bill Vlasic, G.M. Shows Signs of Recovery Despite New Loss, New York Times (Nov. 16,
2009)
(online
at
www.nytimes.com/2009/11/17/business/
17auto.html?lr=2&hp) (hereinafter ‘‘G.M. Shows Signs of Recovery Despite New Loss’’).
298 See G.M. Shows Signs of Recovery Despite New Loss, supra note 296.
299 New Chrysler and New GM are not public companies and are not required to file reports
with the Securities and Exchange Commission (SEC). Nevertheless, Ron Bloom, one of the leaders of Treasury’s auto team, has stated that both companies agreed to provide public ‘‘quarterly
report card[s].’’ See ‘‘Oversight of TARP Assistance to the Automobile Industry,’’ Transcript of
Hearing before the Congressional Oversight Panel, at 37–38 (July 27, 2009) (online at
cop.senate.gov/documents/transcript-072709-detroithearing.pdf ) (explaining that the companies’
reports would not rise to the level of ‘‘fully SEC-style’’ reports in the ‘‘near future,’’ but that
the companies would attempt to provide SEC-style reporting as soon as practicable and likely
even before undertaking IPOs). It is not clear whether the auto companies have met all of Treasury’s expectations with respect to reporting.
300 See
Chrysler Group LLC, Our Plan Presentation (Nov. 4, 2009) (online at
www.chryslergroupllc.com/business/).
301 See
Autodata, U.S. Light Vehicle Retail Sales (Oct. 2009) (online at
www.motorintelligence.com/fileopen.asp?File=SR-Sales-3.xls).
302 The Government Accountability Office estimates that the automotive industry, including
automakers, dealerships, and automotive parts suppliers, directly employs about 1.7 million people. See Government Accountability Office, Troubled Asset Relief Program: Continued Stewardship Needed as Treasury Develops Strategies for Monitoring and Divesting Financial Interests
in Chrysler and GM, GAO–10–151, at 5 (Nov. 2, 2009) (online at www.gao.gov/new.items/
d10151.pdf) (hereinafter ‘‘GAO: Continued Stewardship Needed’’). According to Steven Rattner,
previously one of the leaders of Treasury’s auto team, ‘‘the short-term effect of a Chrysler shutdown [alone] could [have been] 300,000 more unemployed, similar to what was lost across the
entire economy in the month of July [2009].’’ Steven Rattner, The Auto Bailout: How We Did
It,
CNN.com
(Oct.
21,
2009)
(online
at
money.cnn.com/2009/10/21/autos/autol
bailoutlrattner.fortune/index.htm?postversion=2009102104).

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and dramatically increase their market capitalization.303 In addition, as was discussed in the Panel’s September report, the government has incurred competing responsibilities by taking a significant ownership interest in private firms.304
5. The TARP as a Whole
a. Background
This report has heretofore analyzed Treasury’s actions within
separate parts of the TARP and drawn conclusions about the costs
and impacts of those targeted programs, while also studying broad
macroeconomic indicators that may shed additional light on individual programs’ successes and shortcomings. In this section, the
Panel undertakes a similar exercise with respect to the TARP as
a whole. This section also places the TARP within the broader context of the financial stabilization efforts of the Federal Reserve and
the FDIC by looking at how the Panel counts the money that has
been flowing out of and into TARP and the federal government’s
other financial stabilization programs, and discussing what has
happened to numerous macroeconomic indices since the TARP’s enactment in October 2008 and what conclusions we can draw from
the movements in those economic indicators.
b. Accounting for the TARP and Other Financial Stabilization Programs

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i. TARP’s Balance Sheet
Treasury is currently committed or obligated to spend $528.9 billion of TARP funds through an array of programs described earlier
in this report.305 Of this total, $401.5 billion is the net disbursement currently outstanding under the $698.7 billion statutory limit
for TARP expenditures. That leaves $297.2 billion, or 43 percent of
the statutory limit, available for fulfillment of funding commitments under existing programs and, potentially, for funding new
programs and initiatives.306 For each TARP initiative, Figure 25
shows how much money Treasury anticipated spending, how much
actually has been spent to date, how much has been returned, how
much is currently outstanding, and how much is available for future use.

303 See September Oversight Report, supra note 273, at 55–58; GAO: Continued Stewardship
Needed, supra note 302, at 25–28.
304 See September Oversight Report, supra note 273, at 79–83.
305 Treasury is scheduled to release detailed accounting statements for TARP in December.
For purposes of this report, the Panel must rely upon its own analysis of the financial status
of the TARP, and those of the Government Accountability Office (GAO), the Congressional Budget Office (CBO), and the Special Inspector General for the Troubled Asset Relief Program
(SIGTARP).
306 The calculation that $300.5 billion is available under the TARP is based on Treasury’s interpretation of EESA. According to Treasury, repaid TARP funds go into the U.S. Treasury’s
General Fund for the reduction of the public debt, and those repayments also create additional
headroom under the $698.7 billion statutory limit for Treasury’s use under TARP. The Panel
takes no position on Treasury’s interpretation of the law. U.S. Department of the Treasury,
Treasury Announces $68 Billion in Expected CPP Repayments (June 9, 2009) (online at
www.treas.gov/press/releases/tg162.htm).

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64
FIGURE 25: TARP ACCOUNTING (AS OF NOVEMBER 30, 2009)
[In billions of dollars]
Anticipated
funding

TARP Initiative

Actual
funding

Total repayments

Net funding
outstanding

Net funding
available

Capital Purchase Program (CPP) ..............................
Targeted Investment Program (TIP) ..........................
Systemically Significant Financial Institutions Program (SSFI) ...........................................................
Automobile Industry Financing Program (AIFP) ........
Asset Guarantee Program (AGP) ...............................
Capital Assistance Program (CAP):
Term Asset-Back Securities Lending Facility (TALF)
Public-Private Investment Partnership (PPIP) ..........
Supplier Support Program (SSP) ...............................
Unlocking SBA Lending .............................................
Home Affordable ........................................................
Modification Program (HAMP):
Total Committed ........................................................
Total Uncommitted ....................................................

$218.0
40.0

$204.7
40.0

$71.0
0

$133.7
40.0

307 $13.3

69.8
77.6
5.0

69.8
77.6
5.0

0
2.2
0

69.8
75.4
5.0

0
0
0

20.0
30.0
308 3.5
15.0
50.0

20.0
26.7
3.5
0
309 27.4

0
0
0
N/A
0

20.0
26.7
3.5
0
27.4

0
3.3
0
15.0
22.7

528.9
169.8

471.3
N/A

—
73.2

401.5
N/A

310 243.0

TOTAL ...........................................................

698.7

474.7

73.2

401.5

297.2

0

54.3

307 This

figure excludes the repayment of $71 billion in CPP funds. These funds are accounted for as uncommitted.
308 On July 8, 2009, Treasury lowered the total commitment amount for the program from $5 billion to $3.5 billion, reducing GM’s portion
from $3.5 billion to $2.5 billion and Chrysler’s portion from $1.5 billion to $1 billion. See U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending October 28, 2009, at 17 (Oct. 30, 2009) (online at
financialstability.gov/docs/transaction-reports/10–30–09%20Transactions%20Report%20as%20of%2010-28-09.pdf).
309 This figure reflects the total of all the caps set on payments to each mortgage servicer. See November 25 Transactions Report, supra
note 71.
310 This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($169.8 billion) and the repayments ($73.2
billion).

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Based on the amount of money spent to date, the biggest part of
the TARP consists of the programs that provide capital assistance
to financial institutions. Five such programs—the CPP, the SSFI,
the TIP, the PPIP and the AGP—comprise a total of 68 percent of
the net current investments of TARP funds, as Figure 26 shows.
By contrast, efforts to help the auto industry make up 20 percent
of the total; foreclosure prevention efforts make up 7 percent; and
efforts targeted at small business and consumer lending make up
just 5 percent of the total money outstanding.

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65
FIGURE 26: NET CURRENT INVESTMENT OF TARP FUNDS 311

311 See

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c. The TARP in the Context of Other Federal Government Stablilization Efforts
As was stated above, Treasury’s actions under the TARP have
been part of a larger stabilization effort that has included programs
run by the Federal Reserve and the FDIC. In fact, since the onset
of the stabilization effort, both the Federal Reserve and the FDIC
have been exposed on a nominal basis to substantially higher
losses than Treasury has under the TARP. The nature of the three
agencies’ exposures, however, has differed based on the structure
and risk profile of each specific agency initiative.

66
The Panel has classified the agencies’ stabilization efforts into
three broad categories: outlays, loans, and guarantees.312 As Figure
27 shows, currently the vast majority of Treasury’s net current investments of $401.5 billion is in the form of outlays,313 which reflects the fact that the majority of TARP initiatives have been
structured as equity investments or have eventually taken that
form. The Federal Reserve currently has a maximum possible exposure of $1.73 trillion, which includes loans, principally in the form
of programs to enhance liquidity, as well as substantial purchases
of GSE mortgage-backed securities and its guarantee of certain
Citigroup assets,314 which exposes the Federal Reserve to potential
losses of up to $220.4 billion.315 The FDIC’s maximum possible exposure is $666.7 billion, and 93 percent of that exposure is through
the TLGP, with the remaining amount representing the FDIC’s
provision for losses under its Deposit Insurance Fund.316 Altogether, the current estimate of the federal government’s maximum
possible exposure is $3.1 trillion,317 including uncommitted TARP
funds.318 However, this would translate into the ultimate ‘‘cost’’ of
the stabilization effort only if: (1) all uncommitted balances are
fully utilized; (2) assets do not appreciate; (3) all loans default and
are written off; and (4) all guarantees are exercised and subsequently written off. As many of these programs are phased out and
scaled back, it is clear that, while the scale and the attendant risks
of the government’s various initiatives were unprecedented, the direct financial cost to the government, measured in terms of losses
under the programs, will likely be a fraction of the maximum possible exposure.
FIGURE 27—FEDERAL GOVERNMENT’S FINANCIAL STABILIZATION PROGRAMS (AS OF NOVEMBER
25, 2009)—CURRENT MAXIMUM EXPOSURES *
[In billions of dollars]
Program

Treasury (TARP)

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AIG ..................................................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Bank of America ............................................................
Outlays ..................................................................

$69.8
i 69.8
0
0
45
iii 45

Federal Reserve

FDIC

$94.6
0
ii 94.6

0
0
0

Total

$0
0
0
0
0
0

$164.4
69.8
94.6
0
45
45

312 Outlays represent disbursements made with TARP funds, such as to purchase debt or equity securities. A guarantee is a promise to stand behind another’s obligation to a third party.
A guarantee, unlike a loan, requires no transfer of funds or assets. Outlays here do not technically correspond to outlays as measured in the federal budget.
313 See November 25 Transactions Report, supra note 71.
314 See Figure 27 infra.
315 See Appendix V footnote iv infra.
316 See Figure 27 infra.
317 See Figure 27 infra.
318 The federal government has significantly reduced its economic stabilization-related exposure in recent months. Since the Panel started tracking maximum possible exposure beginning
in its April 2009 report (reflecting data from March 2009), maximum exposure peaked at about
$4.5 trillion in May 2009 before gradually declining to its current level of about $3 trillion. The
decline in exposure over the last several months is largely attributable to the scaling back of
the Federal Reserve’s liquidity programs, most notably discount window lending and Term Auction Facility, and the retrenchment of certain guarantee programs. These figures do not include
further recent reductions in exposure due to the termination of Treasury’s Temporary Guarantee
Program for Money Market Mutual Funds, which extended from September 19, 2008 to September 18, 2009 and reflected a maximum potential exposure of about $3.2 trillion in its initial
phase, and the AGP’s never fully consummated guarantee of certain Bank of America assets
under the Asset Guarantee Program that was terminated in September 2009. See November
Oversight Report, supra note 96, at 35, 40–52.

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67
FIGURE 27—FEDERAL GOVERNMENT’S FINANCIAL STABILIZATION PROGRAMS (AS OF NOVEMBER
25, 2009)—CURRENT MAXIMUM EXPOSURES *—Continued
[In billions of dollars]
Program

Treasury (TARP)

Federal Reserve

FDIC

Total

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Loans .....................................................................
Guarantees ............................................................
Citigroup .........................................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees iv ........................................................
Capital Purchase Program (Other) ................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Capital Assistance Program ..........................................
TALF ................................................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
PPIF (Loans) x ................................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
PPIF (Securities) .............................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Home Affordable Modification Program .........................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Automotive Industry Financing Program .......................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Auto Supplier Support Program .....................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Unlocking Credit for Small Businesses .........................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Temporary Liquidity Guarantee Program .......................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Deposit Insurance Fund .................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Other Federal Reserve Credit Expansion .......................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Uncommitted TARP Funds ..............................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................

0
0
50
v 45
0
5
97
vi 97
0
0
TBD
20
0
0
viii 20
0
0
0
0
xi 30
10
20
0
50
xii 50
0
0
75.4
xiv 55.2
20.2
0
3.5
0
xv 3.5
0
15
xvi 15
0
0
0
0
0
0
0
0
0
0
0
0
0
0
243
TBA
TBA
TBA

0
0
220.4
0
0
220.4
0
0
0
0
TBD
180
0
ix 180
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1,237.9
1,008.5
xix 229.4
0
0
0
0
0

0
0
10
0
0
10
0
0
0
0
TBD
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
609
0
0
xvii 609
47.7
xviii 47.7
0
0
0
0
0
0
0
0
0
0

0
0
280.4
45
0
235.4
97
97
0
0
vii TBD
200
0
180
20
0
0
0
0
30
10
20
0
xiii 50
50
0
0
75.4
55.2
20.2
0
3.5
0
3.5
0
15.0
15
0
0
609
0
0
609
47.7
47.7
0
0
1,237.9
1,008.5229.4
0
0
24
TBA
TBA
TBA

Total .............................................................
Outlays xx ...........................................
Loans ...................................................
Guarantees xxi ....................................
Uncommitted TARP Funds ..................

698.7
387
43.7
25.0
243

1,732.9
1,008.5
504
220.4
0

666.7
47.7
0
619.0
0

xxii 3,054.7

* Associated footnotes are located in Appendix V.

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1,443.2
547.7
864.4
243

68

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With respect to the Federal Reserve and FDIC’s financial stabilization programs, the risk of loss varies significantly across the
programs listed here, as do the mechanisms for protecting taxpayers against such risk. The Federal Reserve’s liquidity programs
have generally included mechanisms designed to protect taxpayers
against program losses, most notably the use of loans with recourse
to collateral.319 The use of recourse loans limits the risk of losses
to taxpayers to the event of the borrower entering bankruptcy, and
losses under the Federal Reserve liquidity programs have not materialized. The Federal Reserve did take on substantial risk in creating three special purpose vehicles to purchase Bear Stearns and
AIG assets. However, in aggregate, the current principal on the
loans to these facilities is roughly equal to the market value of the
purchased real estate assets, which have rebounded from previous
lows. For the TLGP, the FDIC assesses a premium of up to one
percent on debt guarantees. While potential exposure under the
TLGP has been enormous, the premiums collected from participants have so far been more than adequate to protect against program losses.
Furthermore, the federal government’s total stabilization-related
exposure has been significantly reduced in recent months. Figure
28 shows the Federal Reserve’s and FDIC’s exposure as it has
changed since January 2007. The general trend shows the Federal
Reserve phasing out its liquidity programs and continuing to expand its portfolio of GSE mortgage-backed securities through new
purchases. Exposure attributable to the TLGP and the Federal Reserve’s support of Bear Stearns and AIG has been more stable in
recent months.

319 The Federal Reserve’s loans are over-collateralized and with recourse to other assets of the
borrower. If the assets securing a Federal Reserve loan realize a decline in value greater than
the ‘‘haircut’’ or excess collateral pledged to support the loan, the Federal Reserve is able to demand more collateral from the borrower. Similarly, should a borrower default on a recourse
loan, the Federal Reserve can turn to the borrower’s other assets to make the Federal Reserve
whole.

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69
FIGURE 28: FEDERAL RESERVE AND FDIC ASSISTANCE SINCE JANUARY 2007 320

320 Federal Reserve Liquidity Facilities include: Primary credit, Secondary credit, Central
Bank Liquidity Swaps: Primary dealer and other broker-dealer credit, Asset-Backed Commercial
Paper Money Market Mutual Fund Liquidity Facility, Net portfolio holdings of Commercial
Paper Funding Facility LLC, Seasonal credit, Term auction credit, Net Portfolio Holdings of
TALF LLC. Federal Reserve Mortgage Related Facilities include: Federal agency debt securities
and Mortgage-backed securities held by the Federal Reserve. Institution Specific Facilities include: Credit extended to American International Group, Inc., and the net portfolio holdings of
Maiden Lanes I, II, and III. All Federal Reserve figures reflect the weekly average outstanding
under the specific programs during the last week of the specified month. Board of Governors
of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1) (online at
www.federalreserve.gov/datadownload/Choose.aspx?rel=H41) (accessed Nov. 25, 2009). For related presentations of Federal Reserve data, see Board of Governors of the Federal Reserve System, Credit and Liquidity Programs and the Balance Sheet, at 2 (Nov. 2009) (online at
www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200911.pdf). The TLGP figure reflects the monthly amount of debt outstanding under the program. Federal Deposit Insurance
Corporation, Monthly Reports on Debt Issuance Under the Temporary Liquidity Guarantee Program (Dec. 2008–Oct. 2009) (online at www.fdic.gov/regulations/resources/TLGP/reports.html).
321 See November 25 Transactions Report, supra note 71.
322 See Figure 4 supra. The five privately owned banks that repurchased its warrants are
omitted from the chart.
323 November 25 Transactions Report, supra note 71.

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d. TARP Repayments and Income
As of November 30, 2009, a total of 50 banks have fully repaid
their preferred stock investments under the Capital Purchase Program.321 Of these banks, 30 have repurchased their CPP warrants
as well.322 The rate of repayments being made by CPP participants
has greatly slowed since June 2009, when twelve banks paid $68.4
billion to redeem their preferred shares. Three institutions, Goldman Sachs, JPMorgan Chase, and Morgan Stanley are responsible
for over 60 percent of all TARP repayments.323 As noted in Section
1(C), as of October 30, 2009, the rate of return on TARP investments in financial institutions that have completely exited the program is 17 percent, including preferred shares, dividends, and warrants.

70
Figure 29 shows that more than 85 percent of the money that
has flowed back to the TARP has been repayments under the CPP.
An additional 15 percent of the money has come from CPP dividends and warrant repurchases. The TARP’s other sources of income so far have been quite small by comparison.
FIGURE 29: TARP INCOME (AS OF OCTOBER 31, 2009) 324
[In billions of dollars]
TARP initiative

Repayments

Dividends

Interest

Warrant
repurchases

Total

CPP ..............................................................
TIP ...............................................................
Auto Initiatives ............................................
AGP ..............................................................
Bank of America Guarantee ........................

$71
......................
2.2
......................
......................

$6.8
2.3
0.5
.3
......................

$.01
N/A
.3
......................
......................

$3.2
0
N/A
......................
¥0.3

$81
2.3
3.0
.3
......................

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

73.2

9.9

.43

3.2

86.9

324 U.S.

Department of the Treasury, Cumulative Dividends Report as of Oct. 31, 2009 (Dec. 1, 2009) (online at
www.financialstability.gov/docs/dividends-interest-reports/August2009lDividendsInterestReport.pdf); November 25 Transactions Report, supra
note 71.

e. The TARP’s Impact on the Federal Budget and the
Deficit
While most federal expenditures are recorded in the federal
budget on a cash basis, credit programs are treated differently. For
credit programs, the discounted present value of the cash flows is
calculated and only this net gain or loss amount is recorded in the
budget. The relationship of this net gain or loss to the government
and the total cash disbursed produces a ‘‘subsidy rate.’’ EESA requires that TARP expenditures be treated as credit programs and
therefore a subsidy rate is calculated for them and only the net loss
or gain is recorded in the budget.325
In May 2009, the Administration projected that the TARP would
disburse $704 billion in federal fiscal year 2009, although TARP
outlays and its deficit impact were $261 billion, implying a weighted average subsidy rate of 37 percent. When the Administration
closed the books on fiscal year 2009 on September 30, the $261 billion outlay figure had fallen to $151 billion and this was, in effect,
TARP’s contribution to the federal deficit in 2009. According to recent press accounts, this net cost figure is likely to decline further
to approximately $42 billion 326 and the overall subsidy rate to 12
percent.327 The declining net cost to the federal government for the
TARP investments and loan guarantees undertaken in 2009 largely
reflects the fact that Treasury now estimates higher returns on its
CPP investments due largely to lower losses on, and faster repayments of, those investments, as well as the increased value of the
stock warrants Treasury holds.
Because TARP outlays reflect the discounted present value of
TARP cash flows, the resulting net cost that is recorded as an out325 Section

123 of EESA requires that TARP be treated on a credit reform basis.
difference between the amount recorded in the Administration’s end of year budget
report ($151 billion) and the final amount recorded on the Treasury’s books for FY 2009 (now
reported at $42 billion) is $109 billion; this implies that an adjustment (outlay reduction) of approximately that amount in the 2010 federal budget will be forthcoming.
327 See Jackie Calmes, U.S. Forecasts Smaller Loss From Bailout of Banks, New York Times
(Dec. 6, 2009) (online at www.nytimes.com/2009/12/07/business/07tarp.html). Treasury has confirmed the accuracy of this report.

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326 The

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71
lay in the federal budget provides a good measure of the economic
cost of the program. Consequently, the sum of the final outlay figures for each fiscal year provides a good measure of the current
projection of the ultimate economic cost of the program to the
American taxpayer. The published estimates in the latest budget
documents from the OMB show this total cost to be $341 billion for
the period 2009 through 2016; the latest estimate from the CBO for
the period 2009–2013 puts the total cost at $241 billion. Hence,
notwithstanding Treasury’s asserted authority to have $698.7 billion in cash disbursed at any point in time, the net cost of the
TARP program will in all likelihood be substantially less than $700
billion. This reflects both the fact that (1) the economic cost or subsidy rate has declined from the initial estimate and (2) as seen in
Figure 25 above, a large amount of the TARP’s authorized disbursement level is currently unutilized.

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f. Relevant Macroeconomic Indicators
The TARP was created during a period of severe global financial
disruption. In October 2009, the International Monetary Fund
(IMF) projected worldwide losses of $3.4 trillion stemming from the
crisis.328 By way of comparison, that is more money than the entire
federal government spent—$3.1 trillion—in fiscal year 2009.329 The
IMF estimates that $1.5 trillion in global bank write-downs have
yet to be recognized, with most of the losses coming from U.S., UK,
and Euro area banks.330 The expected loss of wealth, though lower
than earlier estimates, poses a challenge to governments seeking to
reinvigorate their economies. The United States has sought to support its banking sector so that it is able to weather the downtown,
and many banks have seen increasing success in raising capital
since the stress test results were released. As of November 30, U.S.
banks, including both those that did and did not receive government assistance, had raised $72.4 billion in common equity and
$49.7 billion in preferred equity in 2009.331
While conditions in the banking sector have improved, the overall shape of the recovery remains unclear. Economic contractions
that have their source in a banking crisis tend to be prolonged,332
and the current experience is no exception. There is a risk that a
new asset bubble will form, leading to another crash.333 There are
also risks that prices for homes and in the commercial real estate
sector will fall further, which would reduce the value of assets held
by banks. The economy has begun to expand once again, but unemployment remains high, and millions of American households con328 International Monetary Fund, Global Financial System Shows Signs of Recovery, IMF Says
(Sept. 30, 2009) (online at www.imf.org/external/pubs/ft/survey/so/2009/RES093009A.htm).
329 Office
of Management and Budget, Table S–1. Budget Totals (online at
www.whitehouse.gov/omb/rewrite/budget/fy2009/summarytables.html) (accessed Dec. 7, 2009).
330 International Monetary Fund, World Economic Outlook October 2009, at 5 (online at
www.imf.org/external/pubs/ft/weo/2009/02/pdf/text.pdf) (accessed Dec. 7, 2009).
331 SNL Financial, Bank and Thrift Capital Raises (online at www.snl.com/InteractiveX/article.aspx?CDID=A-9619028-11615&KPLT=4) (accessed Dec. 7, 2009).
332 See International Monetary Fund, World Economic Outlook, at 103–138 (Apr. 2009) (online
at www.imf.org/external/pubs/ft/weo/2009/01/pdf/text.pdf) (finding that recessions that are associated with financial crises have historically been longer and deeper, and featured weak recoveries).
333 See, e.g., Congressional Oversight Panel, Written Testimony of MIT Sloan School of Management Professor Simon Johnson, Taking Stock: Independent Views on TARP’s Effectiveness
(Nov. 19, 2009) (online at cop.senate.gov/documents/testimony-111909-johnson.pdf) (hereinafter
‘‘Johnson COP Testimony’’).

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72
tinue to live with the prospect of imminent foreclosure and the loss
of their homes.
i. Credit Risk
Credit spreads measure the differences in yields between different bonds. At the height of the financial crisis in the fall of 2008,
spreads between the safest bonds and those that carried greater
risk skyrocketed, reflecting instability in the financial markets, as
investors panicked and sought refuge in safer investments. Credit
spreads have fallen significantly since the creation of the TARP.
Treasury cites the improvement as a sign of TARP’s success, noting
that the largest declines occurred in markets receiving direct government support, such as asset-backed securities and debt by government-supported enterprises such as Fannie Mae and Freddie
Mac.334
The closely watched LIBOR–OIS spread provides another example of how credit conditions have improved.335 This spread measures the difference between the London Interbank Offered Rate
(LIBOR), which shows quarterly borrowing costs for banks, and the
Overnight Indexed Swaps rate (OIS), which measures the cost of
extremely short-term borrowing by financial institutions. As the
spread increases, market participants have greater fears about
whether counterparties will be able to deliver on their obligations.
After reaching a record high of 364 basis points, or 3.64 percent,
in October 2008, the spread fell to around 100 basis points in early
2009. It stood at 13 basis points on Nov. 17, 2009.336 The lower
spread means that the banking sector now has a significantly lower
cost of short-term capital than it did at the height of the crisis.
The TED spread, which is the difference between LIBOR and
short-term Treasury bill interest rates, is another indicator of perceived credit risk. A high TED spread shows an unwillingness by
investors to hold securities other than Treasury bills. After peaking
in late 2008, the TED spread has fallen to pre-crisis levels, as Figure 30 illustrates. A report by the Government Accountability Office (GAO) found that the announcement of the Capital Purchase
Program under the TARP had a statistically significant effect on
the TED spread, although the decline was not due solely to the
TARP.337 The GAO analysis supports Treasury’s claim that the
TARP had a positive effect on credit markets.

334 Next

Phase of Government Financial Stabilization, supra note 70, at 8.
Phase of Government Financial Stabilization, supra note 70, at 8.
336 Bloomberg, Fed to Cut Maximum Maturity of Discount Window Loans (Nov. 17, 2009) (online at www.bloomberg.com/apps/news?pid=20601068&sid=akC02cF4YHC4).
337 GAO: TARP One Year, supra note 195, at 36.

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335 Next

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FIGURE 30: TED SPREAD SINCE DECEMBER 1999 (IN BASIS POINTS) 338

338 SNL Financial, Historical Yields—Instruments: 3-month LIBOR, 3-month Treasury Bills
(online
at
www.snl.com/interactivex/dividendyields.aspx?
Refreshed=1&YieldViewType=1&Industry=0%2c18%2c3%2c1%2c2%
2c8%2c7%2c22%2c10%2c21%2c5%2c4) (accessed Dec. 7, 2009).

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ii. Credit to Businesses
While banks now have a lower short-term cost of capital, putting
them in a better position to lend, many borrowers have yet to see
a return to pre-crisis levels of credit availability. Commercial paper
is a form of debt that companies use to meet various short-term financial obligations, such as meeting their payrolls. Commercial
paper outstanding, a rough measure of short-term business debt, is
an indicator of the availability of credit for businesses. Since January 2007, total commercial paper outstanding has decreased by almost 37 percent, and it has fallen by more than 20 percent since
the enactment of EESA. The value of commercial paper outstanding reached a peak of $2.22 trillion in August 2007, fell to
$1.61 trillion by early October 2008, and fell further to $1.24 trillion in November 2009, as Figure 31 indicates. Figure 31 shows
that the declines have happened not just in the overall market, but
also in its various segments. These declines reflect not only a contraction of available credit to businesses, but also a drop in demand
for loans due to poor economic conditions.

74
FIGURE 31: COMMERCIAL PAPER OUTSTANDING 339

339 Board of Governors of the Federal Reserve System, Commercial Paper—Instrument: Commercial Paper, Monthly Outstanding; seasonally adjusted (online at www.federalreserve.gov/
datadownload/Choose.aspx?rel=CP) (accessed Dec. 7, 2009).
340 See Board of Governors of the Federal Reserve System, B.100 Balance Sheet of Households
and Nonprofit Organizations (Sept. 17, 2009) (online at www.federalreserve.gov/releases/z1/Current/z1r-5.pdf).
341 Next Phase of Government Financial Stabilization, supra note 70, at 12.

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iii. Housing Sector
The health of the residential real estate market is an important
economic indicator, both because of the housing sector’s vast size—
U.S. households held real estate worth $18.3 trillion in the second
quarter of 2009 340—and because families often have a great deal
of their wealth invested in their homes. It is important not to overstate the connection between the TARP and the state of the U.S.
housing market. Other government policies aimed at supporting
the housing sector, including historically low interest rates, the
Federal Reserve’s purchases of mortgage-related securities, the enactment of a tax credit for first-time homebuyers, and policies enacted at the Federal Housing Administration and at Fannie Mae
and Freddie Mac, which are currently in government conservatorship, have a more direct link to the state of the housing market
than the TARP does.
The financial crisis began in the U.S. housing sector, which has
seen large nationwide declines in home values. There are two
major indices of residential housing prices nationwide: the Federal
Housing Finance Agency House Price Index and the S&P/CaseShiller index. The 2009 data from both indices show signs of housing price stabilization, and prices are currently near their 2004–
2005 levels, as Figure 32 shows. However, Treasury recently cautioned that the residential real estate market had not reached a
firm bottom.341

75
To the extent the peak 2006 values were the result of a bubble, a
return to those levels is neither desirable nor anticipated. However,
the drop in housing prices represents a real loss in wealth to homeowners and investors.
FiGURE 32: CASE SHILLER AND FHFA HOME PRICE INDEXES 342

342 Standard & Poor’s, S&P/Case-Shiller Home Price Indices—Instrument: Seasonally Adjusted
Composite20
Index
(online
at
www2.standardandpoors.com/spf/pdf/index
/SAlCSHomePrice
l
Historyl102706.xls) (accessed Dec. 7, 2009); Federal Housing Finance Agency, U.S. and Census
Division Monthly Purchase Only Index (Instrument: USA, Seasonally Adjusted) (online at
www.fhfa.gov/Default.aspx?Page=87) (accessed Dec. 7, 2009). Most recent data available for both
measures are from September 2009.
343 National Association of Realtors, Existing-Home Sales Record Another Big Gain, Inventories Continue to Shrink (Nov. 23, 2009) (online at http://www.realtor.org/presslroom/newsl
releases/2009 /11/recordlbig).

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The current inventory of unsold homes offers another indicator
of the housing sector’s health. Too large an inventory puts downward pressure on prices; a six-month inventory is generally considered healthy. Inventories have been declining in recent months, as
Figure 33 shows, the result of declining construction levels and improving sales, although inventory remains well above historic
norms. At the end of October 2009, the inventory of unsold homes
stood at 3.57 million homes, which constitutes a seven-month supply. This was the first time in more than two years that the inventory of unsold homes fell as low as a seven-month supply.343

76
FIGURE 33: HOUSING INVENTORY 344

344 National Association of Realtors, Housing Inventory Data. Information provided in response to Panel request. Shaded areas represent periods of recession.

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Mortgage interest rates are yet another indicator of the housing
market’s current state. Low rates make home purchases more affordable, and they allow homeowners to refinance their mortgages
on favorable terms. Completely apart from the TARP, the federal
government has undertaken various efforts aimed at keeping mortgage rates low. These actions include the Federal Reserve’s decision to hold large volumes mortgage backed securities on its balance sheet and the government’s decision to serve as a backstop for
Fannie Mae and Freddie Mac. As Figure 34 shows, rates for 30year conventional mortgages rose somewhat earlier this year, but
are currently back to near historically low levels.

77
FIGURE 34: MORTGAGE RATES 345

Finally, as Figure 35 shows, home sales, of both new and existing
homes, are beginning to recover, although new home sales remain
well below historic averages.

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345 Board of Governors of the Federal Reserve System, Selected Interest Rates—Instruments:
Contract Rate on 30-Year Fixed Rate Conventional Home Mortgage, Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity (online at www.federalreserve.gov/datadownload/
Choose.aspx?rel=H.15) (accessed Dec. 7, 2009). Shaded areas represent periods of recession.
346 National Association of Realtors, New and Existing Home Sales. Information provided in
response to Panel request. Shaded areas represent periods of recession.

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FIGURE 35: NEW AND EXISTING HOME SALES 346

78
While not directly tied to the TARP and its foreclosure mitigation
programs, there is a relationship between foreclosures and key
housing indicators. Foreclosures, especially on the scale of the 8 to
13 million projected over the next five years, can directly affect
home prices and inventory. Foreclosures increase inventory by
flooding the market with bank-owned properties and drive down
home prices by an average of $7,200 per home.347

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iv. Commercial Real Estate
The commercial real estate (CRE) sector is also an important indicator of economic health. Unfortunately, like the residential real
estate sector, the CRE sector is faring poorly.
The Federal Reserve estimates that approximately $3.5 trillion of
CRE debt is currently outstanding, and that nearly $500 billion of
CRE loans will mature during each of the next few years.348 For
various reasons, however, commercial property values have declined sharply since 2007 and continue to fall.349 Meanwhile, banks
have become increasingly hesitant to extend new CRE credit or refinance existing debt,350 while another major source of CRE financing—the market for commercial mortgage-backed securities—has
largely shut down since the financial crisis began.351 Given these
trends, as well as high vacancy rates and weak rent growth, Deutsche Bank estimates that banks’ aggregate losses on recent-vintage
core CRE, construction, and multi-family loans could fall within the
$200 billion to $300 billion range, with the biggest losses involving
construction loans.352
As Figure 36 illustrates, smaller banks are disproportionately exposed to the CRE threat.

347 Center for Responsible Lending, Soaring Spillover: Accelerating Foreclosures to Cost Neighbors $502 Billion in 2009 Alone; 69.5 Million Homes Lose $7,200 on Average (May 7, 2009) (online
at
www.responsiblelending.org/mortgage-lending
/research-analysis/soaring-spillover-3-09.pdf).
348 See House Oversight and Government Reform, Subcommittee on Domestic Policy, Written
Testimony of Jon D. Greenlee, Associate Director of the Division of Banking Supervision and
Regulation for the Federal Reserve Board, Residential and Commercial Real Estate (Nov. 2,
2009) (online at federalreserve.gov/newsevents/testimony/greenlee20091102a.htm) (hereinafter
‘‘Residential and Commercial Real Estate’’).
349 See Deutsche Bank, The Future Refinancing Crisis in Commercial Real Estate, at 3 (Apr.
23, 2009) (online at cop.senate.gov/documents/report-042309-parkus.pdf) (‘‘Purely as a result of
the enormous changes in the available financing terms . . . , we estimate that commercial real
estate prices have declined 25–30% from their 2007 peak. On top of this, the impact of the worst
economic recession in decades on property cash flows will likely push them down [an] additional
15–20% . . .’’).
350 See Congressional Oversight Panel, Written Testimony of Jeffrey DeBoer, Chief Executive
Officer of the Real Estate Roundtable, Congressional Oversight Panel Field Hearing in New York
City on Corporate and Commercial Real Estate Lending, at 2 (May 28, 2009) (online at
cop.senate.gov/documents/testimony-052809-deboer.pdf).
351 See Residential and Commercial Real Estate, supra note 348 (‘‘The current fundamental
weakness in CRE markets is exacerbated by the fact that the CMBS market, which previously
had financed about 30 percent of originations and completed construction projects, has remained
closed since the start of the crisis’’).
352 Deutsche Bank, Q4 2009 CRE Outlook: Searching for a Bottom (Dec. 1, 2009); see also
Goldman Sachs, U.S. Commercial Real Estate Take III: Re-constructing Estimates for Losses,
Timing, at 11–13 (Sept. 29, 2009) (hereinafter ‘‘2009 CRE Outlook’’) (estimating $287 billion in
losses from core CRE and construction loans); Congressional Oversight Panel, August Oversight
Report: The Continued Risk of Troubled Assets, at 56 (Aug. 11, 2009) (noting that ‘‘the Panel’s
model of whole loan losses estimates potential core CRE and construction loan losses through
2010 of $81.1 billion at 701 banks with assets between $600 million and $80 billion’’).

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79
FIGURE 36: BANK EXPOSURE TO CORE CRE LOANS 353

D. Expert Commentary on the TARP

353 2009 CRE Outlook, supra note 352. The ‘‘Banks 1–4’’ group includes banks with total assets between $1.28 trillion and $2.25 trillion; the ‘‘Banks 5–19’’ group includes banks with total
assets between $130 billion and $890 billion; the ‘‘Banks 20–50’’ group includes banks with total
assets between $25 billion and $130 billion; the ‘‘Banks 50–97’’ group includes banks with total
assets between $10 billion and $25 billion; and the ‘‘Banks >=98’’ group includes banks with
total assets less than $10 billion. ‘‘Core’’ CRE does not include construction, multi-family, or
farm loans. See June Oversight Report, supra note 77.
354 Testifying before the Panel were Dean Baker, Co-Director of the Center for Economic and
Policy Research; Charles Calomiris, Henry Kaufman Professor of Financial Institutions at the
Columbia Business School; Simon Johnson, Professor of Global Economics and Management at
the MIT Sloan School of Management and Senior Fellow at the Peterson Institute for International Economics; Alex Pollock, Resident Fellow at the American Enterprise Institute; and
Mark Zandi, Chief Economist and Co-Founder of Moody’s Economy.com. Written testimony and
a video of the hearing are available on the Panel’s website (cop.senate.gov). An official transcript
of the hearing will be available online in January 2010.

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To date, only a handful of studies have attempted to evaluate, in
a comprehensive way, the effectiveness of the TARP. Thus, in October 2009, the Panel solicited the views of a broad range of economists and other academics. A number responded to the Panel’s solicitations. In addition, on November 19, 2009, the Panel held a
hearing to solicit expert views on the strengths and weaknesses of
the TARP. That hearing—titled ‘‘Taking Stock: Independent Views
on TARP’s Effectiveness’’—featured testimony from a distinguished
group of economists.354

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Several themes run throughout this body of commentary. Most
generally, commentators tend to agree that some sort of government intervention was necessary to stabilize the financial system,
and that the TARP has contributed materially to that project, at
least in the short term.355 As evidence, these commentators point
primarily to the easing of panic in the financial sector, as well as
various indicators of financial health—such as credit spreads, CDS
spreads for financial firms, and stock prices of financial firms—
which have improved demonstrably since the TARP’s inception.356
In a different but related vein, Professors Pietro Veronesi and
Luigi Zingales argue that Treasury’s capital injections program—
likely the most well-known aspect of the TARP—was both effective
and (relatively) efficient.357 In one of the few in-depth studies on
the topic, Professors Veronesi and Zingales examine the combined
impact of Treasury’s purchase of $125 billion in equity in the ten
largest banks and the FDIC’s provision of a three-year guarantee
of these banks’ new debt issuances—i.e., the ‘‘first’’ bailout (or the
‘‘Revised Paulson Plan’’). After factoring in costs to the taxpayers,
they conclude that this action generated $71 to $89 billion in total
economic value (accounting for a 30 percent deadweight taxation
cost).358 They further conclude that the Revised Paulson Plan was
the most cost effective of the three plans seriously considered by
the Bush Administration.359 Nevertheless, they argue that an even
more cost-effective method was never considered: namely, enacting
legislation to permit failing firms to enter special, pre-packaged
bankruptcies (i.e., with terms set by the government) wherein those
firms’ long-term debt would be converted into equity and current
equity holders would be wiped out unless they chose to exercise a
statutory option to purchase existing long-term debt at face
value.360
Those who acknowledge that TARP was necessary and reasonably effective recognize nevertheless that improvements in key financial and economic indicators cannot be attributed solely to the
TARP. Obviously, it remains difficult to disentangle the effects of
Treasury’s efforts under the TARP from the effects of the govern355 See, e.g., Congressional Oversight Panel, Written Testimony of Columbia Business school
Henry Kaufman Professor of Financial Institutions Charles Calomiris, Taking Stock: Independent Views on TARP’s Effectiveness, at 4 (Nov. 19, 2009) (online at cop.senate.gov/documents/
testimony-111909-calomiris.pdf) (hereinafter ‘‘Calomiris COP Testimony’’) (‘‘In my view, there is
no question that the recent crisis qualified as a state of the world in which government assistance to financial institutions was warranted’’); Johnson COP Testimony, supra note 333, at 1
(‘‘There is no question that passing the TARP was the right thing to do’’); Zandi COP Testimony,
supra note 217, at 1 (‘‘The Troubled Asset Relief Program has contributed significantly to restoring stability to the financial system. In turn, this financial stability has been instrumental to
ending the Great Recession’’); see also COP November Hearing Transcript, supra note 218 (Testimony of Simon Johnson) (‘‘[I]f the Congress had not passed TARP, you would have had a much
bigger disaster, irrespective of how the money had been used’’).
These views generally accord with the views of international institutions that have reviewed
the TARP. See International Monetary Fund, World Economic Outlook: Sustaining the Recovery,
at 67–71 (Oct. 2009) (online at imf.org/external/pubs/ft/weo/2009/02/pdf/text.pdf); Fabio Panetta
et al., An Assessment of Financial Sector Rescue Programmes, at 2–3 (July 2009) (online at
bis.org/publ/bppdf/bispap48.pdf).
356 See, e.g., Takeo Hoshi, Letter to Panel Staff, at 1 (Nov. 8, 2009).
357 See Pietro Veronesi & Luigi Zingales, Paulson’s Gift, NBER Working Paper, at 5 (Oct.
2009) (online at faculty.chicagobooth.edu/brian.barry/igm/Plgift.pdf) (hereinafter ‘‘Paulson’s
Gift’’). For a different but related analysis, see Dinara Bayazitova & Anil Shivdasani, Assessing
TARP (University of North Carolina Kenan-Flagler Business School Working Paper) (Aug. 25,
2009) (online at papers.ssrn.com/sol3/papers.cfm?abstractlid=1461884).
358 See Paulson’s Gift, supra note 357, at 3.
359 See Paulson’s Gift, supra note 357, at 32–36.
360 See Paulson’s Gift, supra note 357, at 36.

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81
ment’s other financial stability programs, including programs run
by the FDIC and the Federal Reserve. It is also difficult to isolate
the effects of the TARP—both on the financial sector and on the
broader economy—from the effects of increasing public confidence
and other macroeconomic factors.361 In general, however, most
commentators seem to accept the proposition that the TARP has
played a substantial role in calming and stabilizing the financial
system.362
Commentators also agree, however, that the TARP has suffered
from serious flaws, both in its design and its execution. Though
there are as many criticisms of the TARP as there are TARP commentators, these complaints fall into three main categories. First,
some commentators argue that the TARP has been implemented in
an ad hoc, opaque fashion, and that this lack of consistency and
transparency has undermined its effectiveness. Second, most agree
that the TARP has failed to address many of the underlying issues
plaguing the financial sector, including thin bank capitalization,
risky bank activity, and toxic assets on banks’ balance sheets.
Third, many agree that the TARP has failed to address the socalled ‘‘too big to fail’’ problem and its related moral hazards.

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1. Consistency and Transparency
One of the most common criticisms of the TARP is that it has
been implemented in an ad hoc fashion that lacks consistency and
transparency.363 Transparency problems plagued the program from
the beginning according to November hearing witness Dean Baker,
co-director of the Center of Economic and Policy Research. He argues that the TARP was articulated to the public largely as a
means to restart the commercial paper markets, stem foreclosures,
rein in executive compensation, and stimulate lending to small
businesses. Unfortunately, in his view, the TARP has failed to
achieve or even seriously pursue any of these goals.364 Thus, Dr.
Baker argues that public confidence in the TARP and the government’s other stabilization efforts has been undermined.365
A different but related criticism is leveled by November hearing
witness Charles Calomiris, Henry Kaufman Professor of Financial
Institutions at Columbia Business School. He maintains that
Treasury has never clearly and comprehensively articulated goals
and principles to guide its TARP activities. Rather, it has employed
‘‘ad hoc interventions, justified as they go along, which are inconsistent with one another and follow no clear set of discernible principles.’’ 366 As a result, he argues, the implementation of the program has been and will continue to be susceptible to ‘‘errors of
logic’’ and behind-the-scenes political dealmaking which tends to
361 A lack of certainty as to how much credit the TARP deserves for stabilizing the financial
system constitutes yet another important theme in the expert commentary. See, e.g., Baker COP
Testimony, supra note 28, at 1 (‘‘There are many factors that make it difficult to assess the effectiveness of the TARP, [the] most important one being the fact that the TARP was carried
through in conjunction with rescue efforts by the [FDIC] and the Federal Reserve Board’’); Roy
C. Smith, Letter to Panel Staff, at 1 (Oct. 23, 2009).
362 See, e.g., Martin Neil Baily and Douglas J. Elliott, Letter to Panel Staff, at 2 (Nov. 9,
2009); William Poole, Letter to Panel Staff, at 1 (Oct. 23, 2009).
363 See, e.g., Lawrence White, Letter to Panel Staff, at 1 (Nov. 20, 2009).
364 See COP November Hearing Transcript, supra note 218.
365 See COP November Hearing Transcript, supra note 218.
366 Calomiris COP Testimony, supra note 355, at 16.

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82
benefit well-connected but not necessarily deserving entities.367 November hearing witness Simon Johnson, Professor of Global Economics and Management at MIT Sloan School of Management and
senior fellow at the Peterson Institute for International Economics,
makes a similar point. He criticizes what he views as the TARP’s
‘‘prominent place of policy by deal.’’ All too often, he argues, ‘‘when
a major financial institution [ ] got into trouble, the Treasury Department and the Federal Reserve would engineer a bailout over
the weekend and announce that everything was fine on Monday.’’ 368
November hearing witness Alex Pollock, resident fellow at the
American Enterprise Institute, also takes issue with the lack of
clarity surrounding the TARP’s objectives and priorities, and
agrees with Professor Calomiris that the program’s lack of transparency has made it unacceptably susceptible to political considerations. In his view, the ‘‘principal goal [of TARP managers] should
be to run the program in a businesslike manner to return as much
of the involuntary investment as possible to its owners, along with
a reasonable overall profit.’’ 369 He therefore argues that ‘‘TARP
should have full, regular, audited financial statements, which depict its financial status and results, exactly as if it were a corporation.’’ 370 According to Mr. Pollock, it would have been far better for
transparency and accountability purposes if the TARP had been organized as a separate corporation, rather than within an existing
agency.371

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2. Underlying Issues
Some experts also argue that the TARP, while achieving a measure of short-term stability, has failed to address certain underlying
issues that may wreak havoc on the financial sector and the broader economy in the not-too-distant future.
For example, the CPP and the stress tests are commonly credited
with reviving private capital sources for capitalizing American
banks and making banks better prepared to weather future financial shocks—in other words, with ‘‘stabilizing’’ the financial sector.372 At the Panel’s November hearing, however, it became clear
that there is some disagreement as to whether even the largest
banks are in fact adequately capitalized and hence sufficiently stable.373 Much of this disagreement, it seems, stems from (1) com367 Calomiris COP Testimony, supra note 355, at 16–17 (‘‘Because assistance programs did not
flow from previously articulated guiding principles . . ., the rushed debates over TARP and
other policies were undisciplined and prone to errors of logic (like the use of warrants in preferred stock assistance), and political manipulation (like the multiple bailouts of GMAC)’’).
368 Johnson COP Testimony, supra note 333, at 6. Professor Johnson also takes both the Bush
and the Obama administrations to task for providing aid in ways that are difficult for taxpayers
to understand. See id. at 7 (‘‘As the crisis deepened and financial institutions needed more assistance, the government got more and more creative in figuring out ways to provide subsidies
that were too complex for the general public to understand’’).
369 See Congressional Oversight Panel, Written Testimony of American Enterprise Institute
Resident Fellow Alex J. Pollock, Taking Stock: Independent Views on TARP’s Effectiveness, at
3 (Nov. 19, 2009) (online at aei.org/docLib/Pollock-Testimony–11192009.pdf) (hereinafter ‘‘Pollock
COP Testimony’’).
370 Pollock COP Testimony, supra note 369, at 4.
371 See Pollock COP Testimony, supra note 369, at 3.
372 See, e.g., COP November Hearing Transcript, supra note 218 (Testimony of Mark Zandi)
(arguing that banks generally have enough capital to weather greater-than-projected losses on
their portfolios, including the toxic assets they continue to hold).
373 See COP November Hearing Transcript, supra note 218 (Testimony of Dean Baker), at 1
(‘‘So, I’d be a little less confident [that the banks are sufficiently capitalized]. And not to say

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mentators’ differing economic projections, and (2) the difficulty of
evaluating precisely banks’ capital positions.374
Toxic assets are a related point of concern. Commentators agree
that Treasury’s PPIP, which was designed to leverage private funds
to purchase such assets, has not been effective at removing these
assets from banks’ balance sheets.375 This is a significant issue
that the Panel addressed in its August report and that poses lingering challenges to economic recovery and restoring the banking
system to a healthy state.
In addition, some commentators fear that small- and mediumsized banks are particularly susceptible to future shocks, notwithstanding the fact that many have received TARP aid.376 These
banks tend to be disproportionately exposed to commercial real estate loans—loans which are widely expected to suffer heavy losses
in the coming years.377 Indeed, several small- and medium-sized
banks have already failed as a result of their commercial real estate exposure, and many more are expected to fail for similar reasons.378 Such failures threaten to further impede a broad economic
recovery.
Commentators have also expressed concerns about whether the
TARP has stimulated lending to businesses and consumers—a central justification for using TARP funds for capital infusions. For example, according to Paul Volcker, former chairman of the Board of
Governors of the Federal Reserve System, it remains unclear
whether the TARP has had a ‘‘significant and positive impact’’ on
the provision of credit to businesses and consumers.379 Joseph
Stiglitz argues that ‘‘one of the key promised benefits of the
TARP—restarting lending—has not materialized,’’ meaning that
the ‘‘hoped for benefits for the ‘real economy’ have not materialized.’’380 Indeed, some economists argue that TARP-recipient banks
have not only withdrawn credit from the marketplace, ‘‘but they
are doing so at an accelerating rate.’’381 Some experts point to
TARP-related causes for these phenomena, including Treasury’s dethat they’re all going to collapse, but I’m less confident about their soundness, going forward’’);
COP November Hearing Transcript, supra note 218 (Testimony of Simon Johnson) (‘‘So, yes, we
have a thinly capitalized banking system, as I said, relative to the—relative to the trajectory
of the economy. That’s the way I would put it—relative to what I’d see as the real risk scenario’’); see also James K. Galbraith, Letter to Panel Staff, at 1 (Nov. 8, 2009) (hereinafter ‘‘Galbraith Letter to Panel Staff’’) (‘‘The Treasury has not demonstrated that the purchase of preferred shares in the banking system helped to restore stability. Those purchases were addressed
to a question of solvency that they could not, given the vast overhang of toxic assets, have fully
resolved’’).
374 For a discussion of the difficulties inherent in evaluating banks’ capital positions, see August Oversight Report, supra note 100, at 18–37, 62.
375 See, e.g., Zandi COP Testimony, supra note 217, at 4–5.
376 See, e.g., COP November Hearing Transcript, supra note 218 (Testimony of Mark Zandi)
(‘‘I think that . . . many smaller bank institutions will fail, in large part because of their bad
lending—in large part related to the bad . . . commercial real estate lending, which is still being
played out’’).
377 See Goldman Sachs, U.S. Commercial Real Estate Take III: Re-constructing Estimates for
Losses, Timing, at 11–13 (Sept. 29, 2009).
378 See, e.g., Office of Inspector General, Federal Deposit Insurance Corporation, Material Loss
Review of Haven Trust Bank, Duluth, Georgia, at 9 (August 2009) (online at www.fdicoig.gov/
reports09/09–017.pdf); see also Office of Inspector General, Federal Reserve Board of Governors,
Material Loss Review of County Bank (September 2009) (online at www.federalreserve.gov/oig/
files/CountylBanklMLRl20090909.pdf).
379 Paul A. Volcker, Letter to Panel Staff, at 1 (Nov. 6, 2009).
380 See Joseph E. Stiglitz, Letter to Panel Staff, at 4 (Nov. 17, 2009); see also Richard Christopher Whalen, Letter to Panel Staff, at 1 (Nov. 9, 2009) (arguing that ‘‘there has been little
positive impact on the real economy as a result of the TARP’’).
381 Richard Christopher Whalen, Letter to Panel Staff, at 1 (Nov. 9, 2009).

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cision to accept preferred stock rather than common stock or other
assets in exchange for TARP funds,382 Treasury’s failure to require
banks receiving TARP funds to use those funds for lending,383 and
Treasury’s failure to direct a sufficient amount of TARP funds to
those parts of the financial sector (e.g., community banks) that are
heavily involved in lending to small- and mid-sized businesses.384
Others identify non-TARP-related factors such as decreased demand for credit and banks’ concerns about potential changes to accounting rules.385 According to November hearing witness Dr.
Baker, the current tightening of credit for businesses
[I]s typical of a recession. The complaints from business
owners over being denied credit are not qualitatively different than the complaints that were made in [the] 1990–
91 recession. Lenders will also tighten credit to business
during a downturn simply because otherwise healthy businesses are much risk[ier] prospects during a recession.
There is no reason to believe that the tightening of credit
during this downturn is any greater than what should be
expected given the severity of the recession.386
Finally, the government’s efforts to address the foreclosure crisis
have drawn little praise. As discussed above, for many reasons
those efforts may not help as many homeowners as originally projected. Meanwhile, as James Galbraith has observed, the ‘‘underlying financial conditions of the household sector’’—including new
home sales, new home construction, underwater mortgages and
mortgage delinquency rates—‘‘remain very grim’’ despite Treasury’s
efforts.387 Foreclosures have continued at a rate of nearly two million per year since the TARP was passed, and various projections
show that this pace is likely to continue through 2011 at least.388

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3. Moral Hazard
Much has been said about the costs of the TARP. Generally,
these discussions focus on a relatively narrow question: whether
taxpayers will be paid back for their TARP investments.389 No
382 See Linus Wilson & Yan Wendy Wu, Common (Stock) Sense About Risk-Shifting and Bank
Bailouts, at 2 (Working Paper) (Nov. 30, 2009) (online at papers.ssrn.com/sol3/papers.cfm?
abstractlid=1321666) (arguing that ‘‘[b]uying up common (preferred) stock is always the most
(least) ex ante- and ex post-efficient type of capital infusion, whether or not the bank volunteers
for the recapitalization’’).
383 See Joseph E. Stiglitz, Letter to Panel Staff, at 3 (Nov. 17, 2009) (‘‘As a major ‘owner’ of
the banks, the government could and should have used its potential control to increase lending,
to reduce abusive practices, and to direct lending to those activities most likely to energize the
economy.’’)
384 See Joseph E. Stiglitz, Letter to Panel Staff, at 2 (Nov. 17, 2009).
385 See infra at page 99.
386 Baker COP Testimony, supra note 28, at 4–5. Dr. Baker also notes that large corporations
are having little difficulty issuing commercial paper and long-term bonds, and that homebuyers
are not facing any unusual difficulty in securing loans. See Baker COP Testimony, supra note
28, at 4.
387 Galbraith Letter to Panel Staff, supra note 373, at 1.
388 See Dean Baker, Letter to Panel Staff, at 2 (Nov. 5, 2009).
389 Few believe that the taxpayers will be paid back in full for all of their TARP investments.
For example, November hearing witness Mark Zandi, chief economist and co-founder of Moody’s
Economy.com, estimates that ‘‘the ultimate cost to taxpayers of TARP is expected to be between
$100 and $150 billion.’’ Under Dr. Zandi’s projections,
[t]he most[] costly aspect of TARP will be the aid to the motor vehicle industry, which could
total up to nearly $50 billion. AIG will cost taxpayers up to $35 billion. Support to the housing
market is expected to cost as much as $30 billion. The CPP program is ultimately expected to
cost between $15 and $20 billion, while credit losses on the TALF and PPIP programs are expected to reach $10 billion. Some $5 billion will be lost on the small business lending program.

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doubt this is an important question. According to some commentators, however, these more quantifiable costs pale in comparison to
the so-called ‘‘moral hazard’’ costs of the TARP. These commentators reason as follows. By enacting the TARP, Congress made a
conscious decision to intervene in the market. One consequence of
this decision was to stabilize the financial sector. Another consequence, however, was to signal to the market that, going forward,
the government may step in to provide bailouts to certain systemically significant institutions—such as financial institutions and
auto manufacturers—should they face the risk of failure.390 As a
result, the market has been distorted in a way that could, absent
responses outside of the TARP, plague the financial sector and the
broader economy for the foreseeable future.391
E. Accomplishments and Shortcomings: How Well Has the
TARP Done in Meeting its Statutory Objectives?

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1. TARP’s Contribution to Financial Stabilization and Economic Recovery
As noted in the overview, the primary objective of the Congress
in passing EESA was to ‘‘restore liquidity and stability to the U.S.
financial system.’’ 392 EESA further calls for the authority it provides to be used to ‘‘promote jobs and economic growth.’’ 393 Similarly, Treasury officials stated that in implementing the TARP they
were seeking to ‘‘protect the U.S. economy’’ 394 and ‘‘the taxpayer,’’ 395 ‘‘prevent systemic risk,’’ 396 and ‘‘stabilize the financial
Zandi COP Testimony, supra note 217, at 3.
390 See, e.g., James K. Galbraith, Letter to Panel Staff, at 2 (Nov. 8, 2009) (‘‘Having once intervened decisively, the rules of the game are now changed, and participants will expect renewed
intervention, as necessary, along similar lines’’).
391 See, e.g., Calomiris COP Testimony, supra note 355, at 3 (‘‘If financial institutions know
that the government is there to share losses, risk-taking becomes a one-sided bet, and so more
risk is preferred to less. There is substantial evidence from financial history—including the behavior of troubled financial institutions during the current crisis itself—that this ‘moral hazard’
problem can give rise to huge loss-making, high-risk investments that are both socially wasteful
and an unfair burden on taxpayers’’); Johnson COP Testimony, supra note 333, at 3 (arguing
that the manner in which the TARP was implemented ‘‘exacerbated the perception (and the reality) that some financial institutions are ‘Too Big to Fail’ ’’—thereby lowering the borrowing
costs for such firms, incentivizing them to act in risky ways, and leaving the United States vulnerable to similar financial crises in the future); see also Edward Kane, Safety-Net Subsidies
Keep ‘‘Toxic’’ Assets Illiquid, at 2 (March 10, 2009).
392 12 U.S.C. § 5201; 12 U.S.C. § 5223.
393 12 U.S.C. § 5201.
394 See U.S. Department of the Treasury, U.S. Government Actions to Strengthen Market Stability (Oct. 14, 2008) (online at www.treas.gov/press/releases/hp1209.htm) (stating ‘‘Today we are
taking decisive actions to protect the U.S. economy . . .’’).
395 See House Committee on Financial Services, Written Testimony by Treasury Secretary
Henry M. Paulson Jr., Oversight of Implementation of the Emergency Economic Stabilization Act
of 2008 and of Government Lending and Insurance Facilities; Impact on Economy and Credit
Availability, 110th Cong., at 30 (Nov. 18. 2008) (online at www.financialstability.gov/latest/
hp1279.html) (‘‘It is my responsibility to use the authorities Congress provided to protect and
strengthen the financial system, and in so doing, protect the taxpayer’’); U.S. Department of the
Treasury, Interim Assistant Secretary for Financial Stability Neel Kashkari Update on the TARP
Program (Dec. 8, 2008) (online at www.treas.gov/press/releases/hp1321.htm) (hereinafter ‘‘Assistant Secretary Kashkari Update on TARP’’) (stating Treasury ‘‘acted with the following critical
objectives in mind . . . to protect taxpayers’’).
396 See U.S. Department of the Treasury, Remarks by Secretary Henry M. Paulson, Jr. on Financial Rescue Package and Economic Update (Nov. 21, 2008) (online at
www.financialstability.gov/latest/hp1265.html) (hereinafter ‘‘Remarks by Secretary Paulson on
Financial Rescue Package’’) (‘‘I believe we have taken the necessary steps to prevent a broad
systemic event’’); see also Assistant Secretary Kashkari Update on TARP, supra note 395.

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system.’’ 397 Treasury also said it would focus on bank lending to
restore economic growth.398
There is little doubt that—as virtually all of the experts the
Panel consulted agree—the TARP played an important role, along
with other emergency programs from the Federal Reserve and the
FDIC, in stabilizing the financial system. Following the failure of
Lehman Brothers and the government’s rescue of AIG in September 2008, government officials decided that a crisis of such
magnitude could not be contained through the use of monetary policy alone, and that a fiscal response was therefore imperative.399
The TARP became the government’s fiscal response. And the initial
TARP programs, which were aimed at shoring up the capital base
of financial institutions, did have a positive impact on market confidence. Shortly after the law that established the TARP was enacted, measures of risk in the banking sector began to decline. Between October 10, 2008 and mid-November 2008, interest-rate
spreads that reflect the willingness of banks to lend to each other
fell by more than 50 percent. These spreads remained highly volatile in late 2008, but on balance they have continued to fall, and
are currently back in the low range where they were prior to the
financial crisis.400
Treasury believes that the capital provided through the CPP has
been ‘‘essential in stabilizing the financial system, enabling banks
to absorb losses from bad assets while continuing to lend to consumers and businesses.’’ 401 In his testimony to the Panel, Assistant Secretary Allison also pointed to capital raising as a sign of
stabilization of the financial sector: ‘‘banks of all sizes have raised
over $80 billion in common equity and $40 billion in non-guaranteed debt.’’ 402 This would appear to reflect renewed confidence in
the U.S. banking system and its ultimate solvency and profitability, although there is the lingering question of the degree to
which investors now assume that the federal government has become the implicit guarantor of the largest American banks.
The role of the TARP in preventing an even worse economic recession is not as clear. The Federal Reserve relaxed monetary policy very rapidly beginning in September 2007 once the contraction
in the housing sector began. From a macroeconomic perspective,
the federal government’s massive deficit spending—only a portion
of which is attributable to the TARP—has undoubtedly played an
important role in fostering economic recovery as well. Support for
the housing sector through the Federal Housing Administration,
397 See Remarks by Secretary Paulson on Financial Rescue Package, supra note 396 (‘‘We
must continue to reinforce the stability of the financial system’’); Assistant Secretary Kashkari
Update on TARP, supra note 395.
398 See Assistant Secretary Kashkari Update on TARP, supra note 395 (‘‘Treasury expects
banks to increase their lending as a result of [TARP] investments’’).
399 See James B. Stewart, Eight Days: The Battle to Save the American Financial System, New
Yorker (Sept. 21, 2009) (available for purchase online at www.newyorker.com/reporting/2009/09/
21/090921falfactlstewart).
400 3
Mo LIBOR-OIS Spread, supra note 27; Bloomberg, TED Spread (online at
www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP%3AIND) (accessed Dec. 7, 2009). It should
be noted, however, that there is still a significant lack of liquidity and wide spreads in some
markets where the Federal Reserve is the dominant participant.
401 Congressional Oversight Panel, Written Testimony of Assistant Secretary of the Treasury
for Financial Stability Herbert M. Allison, Jr., Congressional Oversight Panel Hearing with Assistant Treasury Secretary Herbert M. Allison, Jr. (Oct. 22, 2009) (online at cop.senate.gov/documents/testimony-102209-allison.pdf) (hereinafter ‘‘Allison COP Testimony’’).
402 Allison COP Testimony, supra note 401.

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Fannie Mae, and Freddie Mac, as well as the Federal Reserve, also
constitute an important element in stabilizing the economy.
Except for the smaller institutions participating in its small business lending initiative, Treasury’s bank capitalization efforts are
now over. The question going forward is whether banks are currently adequately capitalized and will begin to expand their lending. This, in turn, is partly a function of the condition of bank balance sheets and the lingering issue of the toxic assets whose presence was the justification for creation of the TARP in the first
place.
The PPIP, Treasury’s main TARP initiative for removing toxic
assets from bank balance sheets, remains difficult to assess. This
program has only recently become operational. Treasury argues
that the mere announcement of the program in March helped to reassure investors, and as a result, prices increased for certain mortgage-related securities.403 Treasury further argues that because
banks are now better positioned to raise private capital, even if
they still own toxic assets, the purchase program is less important
today than it was when it was announced.404 However, the Panel
is concerned that as long as the value of these securities remains
unknown to investors, they will continue to weigh down the banks
and be an impediment to economic recovery.
The Panel is also concerned about the health of small banks,
which will be helped less by PPIP as it is currently implemented
than large banks will, because small banks generally hold whole
loans rather than securities.405 Those concerns are heightened by
the deteriorating commercial real estate market, another area
where smaller banks are heavily exposed. PPIP’s success or failure
will rest on whether it creates genuine price discovery that would
have been absent otherwise, and whether it provides a return on
the public’s investment.
As discussed in Part C above, Treasury has recently turned the
focus of its capital injection programs to small banks and the promotion of small business lending. Some of this has happened naturally, as larger banks have redeemed their CPP preferred, and
Treasury reopened CPP for small banks, thereby ‘‘reduc[ing] the
size of the Treasury’s investments in the banking system . . . shifting the mix of remaining CPP investments significantly toward
small and community banks.’’ 406
However, as noted earlier in the report, there remains disagreement on whether banks have adequate capital, notwithstanding
both the TARP capital they still have on their balance sheets and
their ability in many cases to acquire new capital from private investors. The stress tests have helped to bring some clarity here and
the disclosure of their results appears to have helped restore investors’ confidence in those large institutions tested. But the high and
rising level of unemployment continues to raise some concern about
the adequacy of the stress tests. As we have seen, banks currently
enjoy a low interest rate, steep yield curve environment, due to the
403 Allison

COP Testimony, supra note 401, at 3–4.
conversations with Panel staff (Nov. 4, 2009).
August Oversight Report, supra note 100, at 4.
406 Allison COP Testimony, supra note 401. The CPP expansion for small banks opened in
May 2009. The deadline for applications was November 21, 2009. FAQs on CPP for Small
Banks, supra note 69.
404 Treasury

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405 See

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actions of the Federal Reserve to increase and maintain liquidity
in the financial system. Yet there remain questions about the quality of certain assets on bank balance sheets, particularly those related to residential and commercial real estate. Further declines in
house prices nationwide, for example, could bring on renewed concerns about the quality of the assets at major TARP assisted banks
and raise concerns about the continuing need for the TARP to bolster bank capital positions. Likewise, the low interest rate, steep
yield curve environment is bolstering bank profitability in the short
run but may not last, bringing renewed concern about capital
strengthening.
Treasury has said that it realizes that increasing the availability
of credit to small businesses poses a complex challenge, one that
is intertwined with the issues of commercial real estate and the
economy as a whole. A recent survey found that 14 percent of small
business owners found it more difficult to get loans, compared to
three months earlier.407 Availability of credit was not the only factor contributing to this. Although 30 percent of those surveyed
found that their borrowing was down, much of this could be due
to a decline in the credit quality of borrowers, caused by the recession and declines in real estate values.408 A significant proportion
of small business lending depends on real estate as collateral;
therefore, a decline in real estate values will harm borrowers’ ability to get credit.409
TARP funds have also been used as part of the TALF effort to
kick-start the markets for various types of securities, including
those based on auto loans, credit card payments, and commercial
mortgages, but their impact is difficult to assess. Since this program’s inception, issuance of the types of securities that are eligible
for the program has risen dramatically, both with and without government backing, but these markets have not returned to their precrisis levels and a number of factors other than TALF may account
for much of this recovery.
Continuing problems, and possible upcoming shocks, in the commercial real estate market have also contributed to a contraction
in small business lending.410 Smaller banks, which provide a larger
proportion of small business lending, also hold larger proportions
of commercial real estate loans.411 With high levels of commercial
real estate assets on their balance sheets, they have less capacity
to engage in new and renewed lending. Treasury plans to use its
new small business lending program to provide banks that are oth407 National Federation of Independent Business, NFIB Small Business Economic Trends, at
2, 12 (Oct. 2009) (online at www.nfib.com/Portals/0/PDF/sbet/SBET200910.pdf) (hereinafter
‘‘NFIB Small Business Economic Trends’’).
408 See NFIB Small Business Economic Trends, supra note 407, at 2 (‘‘In addition, the continued poor earnings and sales performance has weakened the credit worthiness of many potential
borrowers’’). It should be noted that only slightly more than 300 small and community banks
out of roughly 7,400 such institutions have participated in CPP.
409 Treasury conversations with Panel staff (Nov. 4, 2009).
410 See, e.g., Federal Reserve Bank of Atlanta, Speech by Federal Reserve Bank of Atlanta
President and Chief Executive Officer Dennis P. Lockhart, to the Urban Land Institute Emerging
Trends in Real Estate Conference (Nov. 10, 2009) (online at www.frbatlanta.org/news/speeches/
lockhartl111009.cfm).
411 See Richard Parkus and Jing An, The Future Refinancing Crisis in Commercial Real Estate, Part II: Extensions and Refinements, at 23 (July 15, 2009) (‘‘[E]xposure [to commercial real
estate loans] increases markedly for smaller banks. For the four largest banks (on the basis of
total assets), this exposure is 12.3%, for the 5–30 largest banks, the exposure is 24.5%, while
for the 31–100 largest banks, the exposure grows to 38.9%’’).

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erwise viable with capital to increase lending to small businesses.
Assistant Secretary Allison explained that the small business lending program can help alleviate small banks’ CRE losses: ‘‘by providing [small banks with] access to additional capital we can help
them to withstand a deterioration of the value of [commercial real
estate] assets on their books.’’ 412 Treasury believes that the problems in the commercial real-estate market are material to the economy, but will not be overwhelming, and can be absorbed over time
through loan workouts and the bankruptcy process.413 However, as
discussed in Section 1.5.f.iv, the Federal Reserve estimates that almost $500 billion of CRE loans will mature annually for the next
several years, which could generate sizeable losses for the banks
exposed to this sector.
The Congress also made foreclosure mitigation a priority in
EESA, laying out that the authority under the Act was to be used
in a manner that ‘‘protects home values’’ 414 and ‘‘preserves homeownership.’’ 415 Treasury promised to use its new authorities to stabilize housing and mortgage finance,416 avoid preventable foreclosures,417 and keep low cost mortgage financing available.’’418
Treasury also promised to ‘‘increase foreclosure mitigation efforts’’ 419 and ‘‘enforce stronger oversight of the mortgage origination process.’’ 420
While more time is needed to evaluate fully Treasury’s substantial use of TARP funds to address the foreclosure crisis, it is not
too soon to make some preliminary judgments. Treasury met its
own goal of beginning 500,000 trial modifications by Nov. 1, but the
Panel has serious concerns about whether the program can keep
pace with the evolving nature of the foreclosure problem.421 Since
the publication of the Panel’s October report, which analyzed
Treasury’s foreclosure prevention efforts, new data has underscored
the Panel’s concern that Treasury’s mortgage modification program
is inadequate to address the foreclosure problem as it has evolved
over the last 10 months. In October, the Panel warned that a growing number of people cannot afford their mortgages because they
have lost their jobs, and Treasury’s existing programs are not designed to help them. Since then, the unemployment rate has
passed 10 percent, a level it last reached in 1983. Also in October,
the Panel warned that Treasury’s existing programs do not address
the problem of homeowners who owe more on their loans than their
homes are worth, a factor that’s correlated with foreclosures. Since
412 Allison

COP Testimony, supra note 401, at 57.
conversations with Panel staff (Nov. 4, 2009).
U.S.C. § 5201.
415 12 U.S.C. § 5201.
416 See Remarks by Secretary Paulson on Financial Rescue Package, supra note 396 (‘‘market
turmoil will not abate until the biggest part of the housing correction is behind us’’).
417 See Remarks by Secretary Paulson on Financial Rescue Package, supra note 396 (stating
Treasury ‘‘worked aggressively to avoid preventable foreclosures’’).
418 See Remarks by Secretary Paulson on Financial Rescue Package, supra note 396 (Paulson,
‘‘worked aggressively to . . . keep mortgage financing available’’).
419 See Remarks by Secretary Paulson on Financial Rescue Package, supra note 396. See Assistant Secretary Kashkari Update on TARP, supra note 395.
420 See Remarks by Secretary Paulson on Financial Rescue Package, supra note 396 (Of
course, it is already clear that we must address a number of significant issues, such as . . .
oversight of mortgage origination’’).
421 See Manuel Adelino, Kristopher Gerardi, and Paul S. Willen, Why Don’t Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, and Securitization, Federal Reserve Bank
of Boston Working Paper 09–4 (version of July 6, 2009) (online at www.bos.frb.org/economic/
ppdp/2009/ppdp0904.htm).
413 Treasury

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then, new data from the third quarter of 2009 showed that 23 percent of mortgage holders have negative equity in their homes. Lastly in October, the Panel warned that TARP mortgage modifications
were not keeping pace with foreclosures. HAMP has led to a total
of 10,187 permanent modifications as of the end of October 2009,
a fraction of the 89,810 completed foreclosure sales in September
alone.
It is too early to evaluate the impact of the TARP investments
in General Motors and Chrysler. Treasury notes that its actions
helped the two automakers to move unusually fast and efficiently
through the bankruptcy process.422 In addition, TARP assistance to
GM and Chrysler likely prevented a much sharper downturn in the
manufacturing sector and the broader economy. However, as the
Panel stated in its September report, Treasury seems likely to absorb losses on its investments in GM and Chrysler. In the long
term these expenditures should be judged based on the viability of
GM and Chrysler, as well as their ultimate ability to repay the taxpayers.
One final but very important element of the assessment of Treasury implementation of the statutory goals of EESA concerns the objectives of protecting the U.S. economy and preventing systemic
risk over the long term. As stressed by the experts whom the Panel
consulted, the major problem is that in executing the TARP, Treasury may have sown the seeds for a future crisis by demonstrating
that the government will come to the rescue of institutions that engage in excessive risk taking and are unprepared to deal with the
inevitable collapse. Further compounding this problem is the fact
that, as a result of the actions taken in the course of stemming this
economic crisis, the banking system has perhaps an increased number of ‘‘too big to fail’’ institutions, and they are even bigger in size.
This will be an important issue on which policymakers will need
to focus in the aftermath of the crisis and the winding down of the
TARP.

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2. The TARP and the American Taxpayer
While emphasizing the goals of restoring liquidity and stability
to the U.S. financial system, Congress also directed that the TARP
maximize overall returns and minimize overall costs to U.S. taxpayers 423 and that it ensure the most efficient use of taxpayer
funds 424 and minimize the impact on the national debt.425
From the perspective of public investors who stepped up at the
critical time when private investors had fled, Treasury has now
gotten back more than one-quarter of the money it spent on capital
injections,426 and has earned an annual rate of 17 percent on the
money invested with those institutions that have now repaid the
TARP investments. It is too soon to estimate how much of the over422 See generally Allison COP Testimony, supra note 401, at 5; Treasury conversations with
Panel staff (Nov. 4, 2009).
423 See 12 U.S.C. § 5201; 12 U.S.C. § 5223; 12 U.S.C. § 5224.
424 See 12 U.S.C. § 5213.
425 See 12 U.S.C. § 5213. See also 12 U.S.C. 5219 (In coordination with ‘‘identify[ing] opportunities for the acquisition of classes of troubled assets that will improve the ability of the Secretary to improve the loan modification and restructuring process and, where permissible, to
permit bona fide tenants who are current on their rent to remain in their homes under the
terms of the lease’’).
426 See Allison COP Testimony, supra note 401, at 3.

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all TARP investment taxpayers will ultimately recover, in part because the banks that have returned the money are the same banks
that needed it least. We do know that initial portions of the $80
billion invested in the auto industry are unlikely to be recovered
and that no return is expected on the $50 billion TARP mortgage
foreclosure program (HAMP). And the banks that have yet to repay
their TARP investments are no doubt holding larger amounts of
poorer quality assets.
As was the case with the savings and loan rescue in the 1980s
and 90s, the ultimate impact of TARP transactions on the national
debt will not be known for many years. That financial rescue is
now estimated to have cost roughly $150 billion in current dollars,
which was lower than earlier feared. Increasingly successful sales
of assets acquired early in that episode accounts for a portion of
that decline in overall cost to the government.427
As explained above, the best current estimates of the cost to the
U.S. taxpayer of the current financial crisis are much larger but
again perhaps not as large as initially feared. The latest estimates
from the budget agencies—OMB and CBO—imply that the ultimate cost of the TARP would be about $341 billion (OMB) and
$241 billion (CBO).
As the Panel pointed out in its February report, however, the
economic value of the assistance being provided is less easily assessed based upon the information Treasury has been releasing.
The Panel therefore contracted with a securities valuation firm and
published its findings in its February Report. The firm estimated
that of the $184 billion in TARP funds it analyzed, the securities
that Treasury received in exchange had a market value of only
$122 billion, or 66 percent, at the time Treasury announced its
agreement to buy them.428 Moreover, the action of injecting public
funds into the banks that have been assisted may have served to
provide these institutions with an implicit public guarantee of their
balance sheets, a guarantee for which no fee was charged.
This in turn relates to the larger question of the degree to which
Treasury has been forthcoming both in acknowledging the economic
value of the assistance that it has been providing to financial institutions and an explanation for the strategy in providing such assistance. As noted in the Zingales and Veronesi working paper,
banks with the greatest likelihood of experiencing a run benefited
the most from taxpayer assistance.429 Simply asserting that all recipient institutions were ‘‘healthy’’ is not accurate in this situation.
In this respect, Treasury’s initial implementation of its authority to
purchase bank assets and other financial instruments (e.g., preferred stock) lacked critical transparency and continues to be a
source of confusion in understanding the actual condition of the
427 See Timothy Curry and Lynn Shibut, The Cost of the Savings and Loan Crisis: Truth and
Consequences, Federal Deposit Insurance Corporation Banking Review, at 33 (Dec. 2000) (online
at www.fdic.gov/bank/analytical/banking/2000dec/brv13n2l2.pdf) (‘‘As of December 31, 1999, the
thrift crisis had cost taxpayers approximately $124 billion and the thrift industry another $29
billion, for an estimated total loss of approximately $153 billion. The losses were higher than
those predicted in the late 1980s, when the RTC was established, but below those forecasted
during the early to mid-1990s, at the height of the crisis’’).
428 See February Oversight Report, supra note 66, at 4, 27.
429 See Paulson’s Gift, supra note 357, at 3, 52.

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major banks that were the subject of the initial use of TARP resources.
3. Treasury as TARP Steward and Manager
Separate from the issues of how well the American economy is
performing after 14 months of the TARP’s existence and what has
the TARP done for the American taxpayer, there is also the question of how well Treasury, under two administrations, has performed in implementing the sweeping authority EESA provided.
EESA calls for ‘‘public accountability’’ in the exercise of the authority it provides.430 It also requires Treasury to ‘‘facilitate market
transparency’’ by making available to the public ‘‘a description,
amounts, and pricing of assets acquired under this Act.’’ In its initial implementation of EESA, Treasury committed to communicate
‘‘actions in an open and transparent manner.’’ 431
There is no question that Treasury had to implement the TARP
in
a
crisis
atmosphere.
Through
its
website
at
financialstability.gov, the Department has provided voluminous,
detailed transactions information, which has allowed the public to
monitor closely the funding provided to individual institutions and
under what terms, as well as repayments of investments, dividends
and interest received, and warrants repurchased. The regular release of online reports has greatly improved the public’s access to
important information such as the cumulative commitments of
TARP resources and the accounting for all of its funding. Publication of TARP accounting statements for federal fiscal year 2009
should provide further, highly useful information on how TARP resources have been utilized and how Treasury has been managing
them. Some critics argue, however, that the TARP should meet a
higher standard of private sector type accounting statements including issuance on a quarterly rather than just annual basis.432
Additional disclosures which the Panel believes would be desirable
include further information about modifications under HAMP and
a more complete picture of PPIP investment structures.
Further, certain transaction details have not been forthcoming,
such as the actual number of warrants Treasury holds for each financial institution.
Despite Treasury’s disclosures, questions continue to be raised as
to ‘‘where the money went.’’ The identity of the recipients of CPP
funds is well-known, and has been throughout the implementation
of the program. A list of recipients and whether their CPP funds
have been repaid is available on Treasury’s website,433 and
SIGTARP’s quarterly reports give the same information.434 The
public thus knows who has the money; what is somewhat less clear
is what the recipients did with it. The TARP securities purchase
agreements (SPAs) provide that the recipients will expand the flow
of credit to U.S. customers and modify mortgage terms but does not
430 12

U.S.C. § 5201.
Assistant Secretary Kashkari Update on TARP, supra note 395 (‘‘It is essential we
communicate our actions in an open and transparent manner to maintain [taxpayers’] trust’’).
432 Pollock COP Testimony, supra note 369, at 3.
433 See November 25 Transactions Report, supra note 71.
434 See Office of the Special Inspector General for the Troubled Asset Relief Program, Quarterly Report to Congress (Oct. 21, 2009) (online at www.sigtarp.gov/reports/congress/2009/
October2009lQuarterlylReportltolCongress.pdf).

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431 See

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specify how those objectives should be met, measured, or reported.435
Treasury’s standard response with respect to the ‘‘use of funds’’
issue is to point out that money is fungible and that it is not possible to correlate receipt of funds with a specific use of those
funds.436 Nevertheless, as the Panel and SIGTARP have noted,
Treasury could have conditioned receipt of TARP assistance upon
requirements to report the usage of those funds and the overall
lending activities of the institutions in question.
Treasury also states that it does not intend to tell banks how to
run their businesses.437 As discussed in Section B above, Treasury
does, however, track information on lending levels by the 22 largest
CPP recipients.438 SIGTARP attempted to address the ‘‘fungibility
of money’’ issue by asking CPP recipients to identify actions that
they would not have been able to take without TARP funding. In
July 2009, SIGTARP published a report whose title speaks for
itself: ‘‘SIGTARP Survey Demonstrates that Banks Can Provide
Meaningful Information on Their Use of TARP Funds.’’ 439
SIGTARP sent survey letters to more than 360 CPP recipients, and
summarized their responses. While respondents described the use
to which they put their CPP funds in general terms, they did not
quantify the amount of new lending or the incremental difference
435 The ‘‘recitals’’ to the form of Securities Purchase Agreement—Standard Terms used for
CPP transactions provide:
WHEREAS, the Company agrees to expand the flow of credit to U.S. consumers and businesses on competitive terms to promote the sustained growth and vitality of the U.S. economy;
WHEREAS, the Company agrees to work diligently, under existing programs, to modify the
terms of residential mortgages as appropriate to strength the health of the U.S. housing market
. . .;
See U.S. Department of the Treasury, Securities Purchse Agreement for Public Institutions (online at www.financialstability.gov/docs/CPP/spa.pdf) (accessed Dec. 7, 2009); U.S. Department of
the Treasury, Securities Purchase Agreement for Private Institutions (online at
www.financialstability.gov/docs/CPP/SPA-Private.pdf) (accessed Nov. 30, 2009). While it seems
clear that Treasury intended that CPP recipients should be agreeing to increase the flow of credit and the modification of mortgages, the language cited above is too vague to be useful and
not in a place where binding obligations are usually set out in a contract. Added to the fact
that there are no specific restrictions on use of funds or reequirements with respect to the reporting of such use, the SPAs seem to be a missed opportunity for monitoring the use of taxpayers’ funds.
436 See Office of the Special Inspector General for the Troubled Asset Relief Program,
SIGTARP Survey Demonstrates that Banks Can Provide Meaningful Information on Their Use
of TARP Funds, at 38–39 (July 20, 2009) (online at www.sigtarp.gov/reports/audit/2009/
SIGTARPlSurveylDemonstrateslThat—BankslCanlProvidelMeaningfull
%20InformationlOnlTheirlUselOflTARPlFunds.pdf). In its first report, in December
2008, the Panel noted the need for the companies that received TARP funds to explain how they
were using those funds. See Congressional Oversight Panel, Questions About the $700 Billion
Emergency Economic Stabilization Funds, at 4 (Dec. 10, 2008) (online at cop.senate.gov/reports/
library/ report-121008-cop.cfm).
437 See U.S. Department of the Treasury, Summary Response to SIGTARP Recommendations
in the April 21, 2009 SIGTARP Report, at 2 (July 2, 2009) (online at www.financialstability.gov/
docs/
dividends-interest-reports/Final%20Treasury%20Response
%20to%20
SIGTARP%20Recommendations %20%2807022009%29.pdf).
438 In 2008, when Treasury first began issuing its Monthly Lending and Intermediation Snapshot, it only followed the twenty largest CPP recipients. Treasury subsequently added two institutions to the list—American Express and Hartford. See U.S. Department of the Treasury,
Treasury Department Monthly Lending and Intermediation Snapshot, Summary Analysis for October–December 2008 (online at www.treas.gov/press/releases/reports/tg30-2-122008.pdf)
(accessed Dec. 4, 2009); see also U.S. Department of the Treasury, Treasury Department Monthly
Lending and Intermediation Snapshot, Summary Analysis for August 2009 (online at
www.financialstability.gov/docs/surveys/Snapshot%20Analysis%20
August%202009%20Data%2010%2014% 2009.pdf) (accessed Dec. 4, 2009).
439 Office of the Special Inspector General for the Troubled Asset Relief Program, SIGTARP
Survey Demonstrates that Banks Can Provide Meaningful Information on Their Use of TARP
Funds, at 5 (July 20, 2009) (online at www.sigtarp.gov/reports/audit/ 2009/SIGTARPlSurveyl
DemonstrateslThatlBankslCanlProvidelMeaningfull%20Informationl
OnlTheirlUsel OflTARPlFunds.pdf) (hereinafter ‘‘SIGTARP Survey Demonstrates that
Banks Can Provide Meaningful Information on Their Use of TARP Funds’’).

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in lending based on use of TARP funds.440 The Panel notes the limitations inherent in the SIGTARP survey due to the survey’s reliance on self-reporting, and the lack of uniform responses or any requirement of quantification. While it is possible to say that 300
banks, more than 80 percent of all respondents, reported increased
lending by reason of the TARP,441 it is not possible to use the survey itself as authority for anything more meaningful.
The Panel staff also reviewed the SEC filings and other public
disclosures of a number of banks (this group included the 17 of the
19 stress test banks that report to the SEC and the 10 largest CPP
recipients).442 While, as discussed above, strictly speaking it is not
possible to trace particular uses to TARP funds, some institutions
have made efforts to show how TARP funds affected their operations. For example, Citigroup, one of the largest TARP recipients,443 established a Special TARP Committee, which set up
guidelines consistent with the objectives and spirit of the program,
and internal controls to ensure that TARP funds would only be
used for lending and mortgage activities.444 Citigroup also separately publishes regular reports summarizing its TARP spending
initiatives.445 Similarly, although Associated Banc-Corp did not
segregate TARP funds from its regular account, it took measures
to ensure that the funds are readily identifiable, thereby allowing
its expenditure to be traced.446
The SEC filings and other public disclosures, like the responses
to the SIGTARP survey, are mixed both in terms of the level of detail provided and the thought that went into designing an approach
to answering the question ‘‘what did you do with the taxpayers’
money?’’ As Treasury points out, an exact correlation between
440 CPP recipients’ responses to SIGTARP’s inquiry included the following:
• More than 80 percent of the respondents cited the use of funds for lending or the avoidance
of reduced lending. Many banks reported that lending would have been lower without TARP
funds or would have come to a standstill.
• More than 40 percent of the respondents reported that they used some TARP funds to help
maintain the capital cushions and reserves required by their banking regulators.
• Nearly a third of the respondents reported that they used some TARP funds to invest in
agency-mortgage backed securities.
• A smaller number reported using some TARP funds to repay outstanding loans.
• Several banks reported using some TARP funds to buy other banks.
441 SIGTARP Survey Demonstrates that Banks Can Provide Meaningful Information on Their
Use of TARP Funds, supra note 439.
442 The 19 stress test institutions are: JPMorgan Chase & Co., Citigroup, Bank of America
Corp., Wells Fargo & Co., Goldman Sachs Group, Morgan Stanley, MetLife, PNC Financial Services Group, U.S. Bancorp, Bank of New York Mellon Corp., SunTrust Banks, Inc., State Street
Corp., Capital One Financial Corp., BB&T Corp., Regions Financial Corp., American Express
Co., Fifth Third Bancorp, Keycorp and GMAC LLC. The 10 largest CPP recipients are all stress
test banks. These recipients, in order of CPP funds received, are: Citigroup, JPMorgan Chase
& Co., Wells Fargo & Co., Bank of America, Goldman Sachs Group, Morgan Stanley, Bank of
New York Mellon, State Street Corporation, U.S. Bancorp, and Capital One Financial.
443 Under CPP, TIP and AGP, Treasury has invested a total of $49 billion in Citibank as of
Nov. 17, 2009. See November 25 Transactions Report, supra note 71.
444 U.S. Securities and Exchange Commission, Citigroup’s 2008 Annual Report on Form 10–
K
(Feb.
27,
2009)
(online
at
www.sec.gov/Archives/edgar/data/831001
/000119312509041237/d10k.htm); Citigroup, TARP Progress Report Third Quarter 2009 (Nov.
12,
2009)
(online
at
www.citigroup.com/citi/corporategovernance/data
/tarp/tarplprl3q09.pdf?ieNocache=105) (hereinafter ‘‘TARP Progress Report Third Quarter
2009’’).
445 See generally Citigroup, TARP Progress and Updates (online at www.citigroup.com/citi/
corporategovernance/tarp.htm) (accessed Dec. 4, 2009). ‘‘As of the end of the third quarter
[2009], Citi has authorized $53.8 billion in initiatives supported by investments it received
under the TARP capital programs.’’ TARP Progress Report Third Quarter 2009, supra note 444.
446 Office of the Special Inspector General for the Troubled Asset Relief Program, Associated
Banc-Corp: UST Sequence No. 76 (online at www.sigtarp.gov/reports/audit/UseOfFunds/
Associated%20Banc-Corp.pdf) (accessed Dec. 7, 2009).

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TARP funds received and loans made is never going to be feasible,
and the use of TARP funds for prescribed TARP objectives frees up
money received from other sources, lobbying, and other activities
that the taxpayers may find objectionable. Within these constraints, however, banks such as Citigroup made meaningful efforts
to show their use of TARP funds.447 Treasury could have asked the
SEC to send ‘‘Dear CFO’’ letters to all SEC-reporting TARP recipients, asking them to make the same kind of disclosures. It does not
appear that any such effort was made.
The terms of the CPP SPAs include the objective of promoting
the flow of credit to U.S. borrowers. The SPAs did not, however,
impose any specific geographic restrictions or reporting requirements on use or destination of funds. Additionally, as discussed
above, tracing particular uses of funds to a specific source is difficult. As a result, it is difficult to establish, in many cases, whether any TARP funds ended up outside the United States. Of course,
use of TARP funds for U.S. activities arguably frees up other funds
that those banks can use internationally, and many of the largest
CPP recipients had extensive international operations. With respect to Citigroup and AIG, TARP funds permitted the institution
to continue functioning and in that respect would logically have
benefitted non-U.S. customers, creditors and counterparties. On the
other hand, when non-U.S. countries helped their banks with capital infusions and debt guarantees, some of those funds will necessarily flow to U.S. counterparties.
F. Conclusions

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The financial crisis that gripped the United States last fall was
unprecedented in type and magnitude. There is broad consensus
that the TARP was an important part of a broader set of government actions that stabilized the U.S. financial system by renewing
the flow of credit and averting a more acute crisis. The financial
markets data that are chronicled in this report make a persuasive
case that the government’s actions, while initially halting, were
eventually decisive enough to stop the panic and restore confidence
among key financial institutions and actors. However, the TARP’s
impact on the underlying weaknesses in the financial system that
led to last fall’s crisis is less clear.
Congress established broad goals for EESA to help address the
economic collapse that was gripping the nation at the time of its
enactment. It is apparent that after fourteen months the TARP’s
programs have not been able to solve many of the ongoing problems Congress identified. Credit availability, the lifeblood of the
economy, remains low. In light of the weak economy, banks are reluctant to lend, while small businesses and consumers are reluctant to borrow. In addition, questions remain about the capitalization of many banks, and whether they are focusing on repairing
their balance sheets at the expense of lending. The FDIC, facing
447 In order to determine whether a bank had made meaningful efforts to show use of its
TARP funds, the Panel staff asked the following questions: Was data easily found in the bank’s
filings? Did the bank attempt to segregate, identify or otherwise follow the money? Did it set
up rules or guidelines? Did it specify acceptable and non-acceptable uses of funds, and by reference to what? How much quantification was there and how granular was the data? Does it
report use of funds on special reports?

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96
red ink for the first time in 17 years, must step in to repay depositors at a growing number of failed banks. This problem may well
worsen, as deep-seated problems in the commercial real estate sector are poised to inflict further damage on small and mid-sized
banks. Large banks have problems of their own. Some of them,
waiting for a rebound in asset values that may still be years away,
continue to hold the toxic mortgage-related securities that contributed to the crisis. Consequently, the United States continues to
face the prospect of banks too big to fail and too weak to play their
role adequately in keeping credit flowing throughout the economy.
The foreclosure crisis continues to grow. Furthermore, the market
stability that has emerged since last fall’s crisis has been in part
the result of an extraordinary mix of government actions, some of
which will likely be scaled back relatively soon, and few of which
are likely to continue indefinitely. The removal of this support too
quickly could undermine the economy’s nascent stability.
What Treasury has done with the nearly $700 billion in TARP
funds has not occurred in a vacuum. Since the TARP was enacted
in October 2008, the FDIC and the Federal Reserve have undertaken additional major initiatives that are aimed at bolstering financial stability. The Congress enacted a fiscal stimulus measure
that is larger than the TARP. The government has also taken numerous smaller actions, such as the enactment of the Cash for
Clunkers program, which boosted auto sales. All of these steps are
in addition to global market forces that are outside the government’s control, yet have a major impact on the U.S. economy. Still,
it is clear that the unprecedented government actions taken since
last September to bolster the faltering economy have not been
enough to stem the rise of unemployment, which (except for October) is currently at its highest level since June 1983.
While strong government action helped prevent a worse crisis, it
may have done so at a significant long run cost to the performance
of our market economy. Implicit government guarantees pose the
most difficult long-term problem to emerge from the crisis. Looking
ahead, there is no consensus among experts or policymakers as to
how to prevent financial institutions from taking risks that are so
large as to threaten the functioning of the nation’s economy. Congress is currently grappling with this issue as it considers how to
respond legislatively to the financial crisis. It is clear that a failure
to address the moral hazard issue will only lead to more severe crises in the future.
Since its inception, the TARP has gone through several different
incarnations. It began as a program designed to purchase toxic assets from troubled banks but quickly morphed into a means of bolstering bank capital levels. It was later put to use as a source of
funds to restart the securitization markets, rescue domestic automakers, and modify home mortgages. The evolving nature of the
TARP, as well as Treasury’s relative lack of fixed goals and measures of success for the program, make it hard to provide an overall
evaluation. But the Panel remains convinced, as it has been since
its inception, that Treasury should make both its decision-making
and its actions more transparent. Despite the difficult circumstances under which many decisions have been made, those decisions must be explained to the American people, and the officials

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who make them must be held accountable for their actions. Transparency and accountability may be painful in the short run, but in
the long run they will help restore market functions and earn the
confidence of the American people.

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SECTION TWO: ADDITIONAL VIEWS
A. Damon Silvers

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This separate view does not reflect a disagreement with the
Panel report in any respect. Rather I wish to say in a somewhat
briefer and perhaps blunter way what I believe the Panel report as
a whole says about TARP.
The Emergency Economic Stabilization Act of 2008 and the Troubled Asset Relief Program it created, in my opinion, were significant contributors to stabilizing a full blown financial panic in October 2008. It is clear to me that for that reason, we are better off
as a nation for the existence of TARP than if we had done nothing.
Of course this proposition is very hard to prove, but I am convinced
it is true. Many people deserve credit for doing TARP rather than
doing nothing, but three people who in particular deserve credit are
Federal Reserve Chairman Ben Bernanke, Treasury Secretary Timothy Geithner, and in particular, former-Treasury Secretary Henry
Paulson.
Further, we are better off that, in implementing TARP, then-Secretary Paulson and his colleagues chose to do capital infusions in
the form of the Capital Purchase Program rather than the initial
plan of asset purchases. The prospect of asset purchases did not
calm the markets, the announcement of capital infusions did. Furthermore, asset purchases at the richly subsidized prices the banks
had hoped for would have been profoundly unfair to the public. Any
other kind of asset purchases would certainly have had little impact on the panic and could have worsened it.
The reason, however, for the success of the CPP infusions into
the nine largest banks was, I believe, not that those infusions by
themselves made those institutions adequately capitalized or resolved the toxic asset problem. It worked because it was a credible
signal, together with other guarantees issued by Treasury and the
FDIC, that the United States government was guaranteeing the
solvency of the large banks.
The question then was, what price the Treasury would ask on behalf of the public for guaranteeing the large banks? Our February
report showed that in purchasing preferred stock from the large
banks the Treasury accepted significantly less in exchange for its
investment than private commercial parties were demanding at the
time.448 This mispricing was substantially driven by the decision to
price the preferred stock purchased from the large banks as if each
bank was equally healthy, a decision later criticized by the Special
Inspector General for TARP as based on a manifestly false
premise.449
This initial mispricing was followed by then-Secretary Paulson’s
decision to rescue first Citigroup and then Bank of America from
imminent bankruptcy without subjecting their shareholders to the
same levels of dilution that had been forced on AIG. This placed
448 Congressional Oversight Panel, February Oversight Report: Valuing Treasury’s Acquisitions
(Feb. 6, 2009) (online at cop.senate.gov/documents/cop-020609-report.pdf).
449 SIGTARP, Emergency Capital Injections Provided to Support the Viability of Bank of America, Other Major Banks, and the U.S. Financial System, at 17 (Oct. 5, 2009) (online at
sigtarp.gov/reports/audit/2009/EmergencylCapitallInjectionslProvidedlTolSupportlthelViabilityl
oflBankloflAmerica...l100509.pdf).

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the public in the position of rescuing the stockholders of banks. For
the previous seventy-five years, it had been a fundamental premise
of bank regulation that while a stable system required deposit insurance, and we might bail out other short term creditors and even
bondholders in a crisis, no public purpose was served by rescuing
stockholders. In fact the moral hazard issues created by such a
wealth transfer were profoundly dangerous.
After an initial period of deliberation, the Obama Administration
settled on an approach of trying to limit further capital infusions
into the banks while effectively pursuing a time-buying strategy.
This strategy led to improved transparency in some respects, such
as the release of the stress test results and the recognition that
some banks were stronger than others, opacity continued in other
areas. For example, in our August report we found it was not possible to determine the value of toxic assets on the books of the
large banks.450 It appeared in general that where transparency led
to the conclusion that the banks were strong, the approach was
transparency. Where transparency might have led to a different
conclusion, opacity continued. This is of course completely consistent with a time-buying strategy. The time-buying strategy so
far has worked in that so far there have been no further direct capital infusions into the major banks since President Obama took office.
However, though the consequences of the time-buying strategy
appear to be that while we have had no further capital infusions
into the large banks, it is unclear whether the large banks are actually healthy. Citigroup, Wells Fargo, and Bank of America were
not allowed to return their TARP money after the stress tests.
Those banks constitute approximately 40 percent of the nation’s
bank assets. Recently Bank of America announced its intention to
return TARP money after completing a public offering, though
questions have been raised by informed commentators like Andrew
Ross Sorkin as to whether Bank of America is really strong enough
to be allowed to return its TARP capital, and point to the lack of
lending on the part of Bank of America.451 Meanwhile, small banks
that do not benefit from either implicit or explicit guarantees are
failing at an alarming rate.
As a result of the continuing underlying weakness in the banking
system, banks appear reluctant to lend, particularly to small- and
medium-sized businesses. This dynamic has been cited by Federal
Reserve Chairman Bernanke as a key contributor to the high rate
of unemployment.452 In a parallel development, Treasury’s foreclosure relief programs seem to be designed with the first principle
of avoiding writedowns. This is again consistent with a goal of buying time for banks, but not consistent with a goal of stabilizing the
housing market or keeping American families in their homes.
These dynamics appear to have some resemblance to the forces
that led in different circumstances to Japan in the 1990s having a

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450 August

Oversight Report, supra note 100.
451 Andrew Ross Sorkin, Bailout Refund Is All About Pay, Pay, Pay, New York Times (Dec.
7, 2009) (online at www.nytimes.com/ 2009/12/08/ business/08sorkin.html).
452 Ben S. Bernanke, Speech at the Economic Club of New York (Nov. 16, 2009) (online at
www.federalreserve.gov/ newsevents/ speech/ bernanke20091116a.htm).

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decade long problem with bank weakness that contributed to prolonged economic weakness.
So the verdict on TARP is that it was a success at stabilizing a
serious financial crisis but that it has been characterized by a willingness to give public money to the banks at less than fair terms
to the public, and by a refusal to resolve fundamental problems
with the financial institutions it has rescued. These weaknesses in
TARP were not necessary. In some cases these weaknesses have
been addressed over time. Where these problems remain, and I believe they remain central to the nature of TARP today, they could
still be addressed.

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B. Richard Neiman
I voted for and support this month’s Report and my Additional
Views are related more to important matters of emphasis than to
specific conclusions. It is critical to remember in our analysis that
EESA was enacted and first implemented in the depths of a major
crisis, and the TARP was charged with multiple, complex, and
enormous responsibilities.

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1. TARP Has Significantly Improved the Stability of the Financial System
In my opinion the Report could be stronger in giving credit to
TARP for having achieved the primary statutory objective of restoring general financial stability and liquidity in the financial system,
including the restoration of functioning credit markets. There are
legitimate debates about specific causation (TARP was part of a coordinated set of responses) and about particular transactions
(methods of rescue or seizure of one institution or another). However, in comparison to the situation in October 2008, I give Congress, the Administration, and TARP a large share of credit for the
achievement of the primary objective under EESA.
The Panel has issued a series of reports that have closely examined TARP programs and transactions and we have been critical of
many aspects of implementation, including transparency and accountability. Yet, in this year-end review we should take a step
back and be clear and emphatic that a dominant success and objective was in fact achieved.
In hindsight it is difficult to remember how close the system was
to imploding and even more difficult to imagine what the consequences to the ‘‘real economy’’ might have been had the global financial system collapsed. It is not possible to adequately construct
that scenario. But for all the criticism Treasury has received for assisting in the rescue of Bear Stearns and allowing the failure of
Lehman Brothers, I shudder to imagine what might have happened
if AIG had been allowed to fail and been followed quickly by a series of major American banks and investment banks during those
weeks in early October 2008. They would not have simply ‘‘failed’’
in the traditional sense—the entire global financial system would
have seized and ground to a halt. The specter of the United States
government not acting in the face of such a crisis would have been
devastating to the world economy. The impacts on trade, on the
movement of goods, possibly on hunger and dislocation, and certainly on the American people’s confidence, can only be imagined.
Therefore I think this is a moment to give some appropriate credit to the Congress, the Treasury, and the Federal Reserve for acting decisively in the face of a potential disaster and to TARP for
playing a central role in averting that outcome.
2. Formidable Problems Remain in the General Economy,
Particularly With Respect to Mounting Foreclosures
In restoring liquidity and financial stability to the financial system, Treasury was charged with ensuring that TARP funds and its
authority under EESA ‘‘are used in a manner that . . . preserves

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homeownership and promotes jobs and economic growth.’’ 453 These
are very serious issues for the Treasury and for Congress and the
country. In some cases TARP results have been better; in other
cases worse.
I do not attribute primary responsibility for solving the problems
of general economic recovery to TARP programs, but I do think
that some TARP programs could have done, and still can do, much
better in promoting those goals.
On the positive side, the TARP capital support programs, including the SCAP, have generally been successful in promoting financial condition transparency, bringing private capital investment
back to the banking sector, and protecting taxpayer funds. The disagreement among our expert panel of witnesses about the current
adequacy of overall banking capital levels is, I believe, more related
to their differing views of the future economy and its impact on
bank capital than it is to their assessment of TARP’s effectiveness.
As for the asset-related programs, the TALF program has performed reasonably well in reviving functioning asset-backed securities markets for certain consumer credit asset classes. The PPIP
program was late in launching but can now be expected to play an
important role in creating a liquid market for troubled assets.
The auto companies’ rescue was generally well executed, albeit at
a cost, and at this point it has helped to mitigate the degree of job
dislocation in the general economy.
On the other hand, as the Report rightly points out in detail,
TARP has struggled to help homeowners and small businesses.
HAMP has made only limited progress for nine months now, and
the residential foreclosure crisis continues to mount. Moreover,
credit is not sufficiently available for small businesses and we are
entering a period of severe stress on commercial real estate loans.
Much more needs to be done.
Looking ahead, TARP needs to close the book on large institution
support and focus all of its energies on addressing the problems of
foreclosures, small business credit, and commercial real estate.
One proposal I have long called for is for Treasury to expand its
foreclosure prevention program to assist borrowers who risk foreclosure due to job loss or other temporary hardship. As the recession lingers, prime borrowers with mortgages that are otherwise affordable are increasingly falling into this category. I therefore have
been urging the use of TARP funds to support state emergency
mortgage assistance programs to help borrowers while they get
back on their feet. Innovative programs at the state level have
demonstrated that this idea can work.

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3. The Risk of Moral Hazard Goes Well Beyond the Implementation of TARP
Moral hazard, which is discussed in the Report, is a far ranging
effect that occurs anywhere the government interfaces with any of
the financial sector (e.g., bank debt support), private contracts (e.g.,
mortgages), and the general industrial economy (e.g., auto rescue).
TARP’s very enactment was a massive instance of government
intervention; presumably Congress reached the conclusion that the
453 §

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risks of not acting outweighed the risks of moral hazard that implementing TARP required.
Therefore, while moral hazard is a very real issue I do not believe it is appropriate to assign the lion’s share of responsibility for
moral hazard risk to the implementation of TARP programs. The
statute itself was an emergency act of moral hazard-inducing intervention. So it is not surprising to find moral hazard associated with
TARP—it was there from the beginning.
Extraordinary government efforts necessary to avoid system-wide
financial collapse last fall in some cases made institutions bigger
and more complex and interconnected. This was not a desirable
matter of policy but an unfortunate matter of exigency. In a crisis,
a larger company may be required to absorb the business of another large company quickly, consolidate management and operations, and provide uninterrupted service to customers and business partners.
The important lesson of moral hazard is that we need to address
‘‘too big to fail’’ not by criticizing or second guessing TARP, but by
renewing our efforts to create a systemic regulator and resolution
authority. This is the greatest legislative imperative for financial
reform and where our energies must be directed.
4. Going Forward—Reform of Financial Institutions Must Be
Considered
These outcomes of the crisis have only heightened the need to address systemic risk legislatively and to create an authority to unwind such institutions in an orderly fashion in event of failure.
They also highlight the debate about whether large financial institutions should be allowed to grow so large and complex in the
first place. Our national dialogue must include the debate over the
social responsibility and utility of banks subject to the federal safety net, and whether in addition to stronger capital requirements we
should consider restricting the level of risky activities that these
institutions are permitted to conduct (such as proprietary trading
and sponsorship of hedge funds). Proposals such as those made by
former Federal Reserve Chairman Paul Volcker warrant full consideration and discussion.

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5. Conclusion
TARP was instrumental in avoiding a global financial meltdown—a far worse scenario than we experience today—at a much
lower cost than was originally expected. Systemic stability and
functioning credit markets were a necessary pre-condition to be in
a position to tackle the problems relating to foreclosures, credit
availability, and economic growth. Going forward these are the
most important issues. TARP funds and programs must now focus
on them.

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C. Representative Jeb Hensarling
Although I commend the Panel and its staff for their efforts in
producing the December report, I do not concur with all of the
analysis and conclusions presented and, thus, dissent. I would like,
however, to thank the Panel for incorporating several of the suggestions I offered during the drafting process.

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Executive Summary
The Panel’s December report focuses on whether Treasury has
properly discharged its Congressional mandate under the Emergency Economic Stabilization Act of 2008—the enabling statute for
the Troubled Asset Relief Program. In my view, it is not possible
to assess the overall effectiveness of the TARP without acknowledging and thoughtfully analyzing the intended and unintended
consequences of the program and the manner in which it was implemented by Treasury. In making these determinations I analyzed
a series of specifically tailored metrics and inquired whether the
TARP (i) stabilized the U.S. financial system, (ii) promoted lending,
(iii) was implemented in a manner so as to protect the taxpayers,
(iv) enhanced systemic, implicit guarantee and moral hazard risks,
(v) enhanced political risk, (vi) promoted transparency and accountability, and (vii) was used for economic stimulus instead of financial stability.
Based upon this analysis I conclude that the TARP is failing its
mandate and offer the following summary of my findings.
• In order to end the abuses of the TARP as evidenced by the
Chrysler, General Motors (GM) and GMAC bailouts, misguided
foreclosure mitigation programs and the re-animation of reckless
behavior and moral hazard risks, Secretary Geithner should not extend the TARP but permit it to end on December 31, 2009.
• As of today, Treasury has approximately $297.2 billion of
TARP authority available to fund existing commitments and new
programs. As the EESA statute requires, all recouped and remaining TARP funds should go back into the Treasury general fund for
debt reduction. All revenues and proceeds from TARP investments
that have generated a positive return should also go for debt reduction.
• If the Secretary extends the TARP to October 31, 2010, I fear
the Administration will continue to employ taxpayer resources as
a revolving bailout fund to promote its politically favored projects
as was clearly evident in the Chrysler, GM and GMAC bailouts.
• While the programs offered by Treasury, the Federal Reserve
and the FDIC may very well have jointly assisted with the stabilization of the financial system over the past year, it seems quite
unlikely that the TARP—unassisted by the Federal Reserve and
the FDIC—would have stabilized the U.S. financial system.
• Although some criticize the TARP for its failure to jump start
new lending activity and for the creation of dysfunctional financial
institutions (zombie banks), others note that lending-for-the-sakeof-lending may sow the seeds of the next asset bubble and lead to
another round of non-performing loans and toxic securitized debt
instruments. Nevertheless, if the TARP is judged on the basis of
whether it successfully restarted the lending market for large and

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105
small business credit, it appears that it has again failed to meet
such expectation.
• It is difficult to conclude that Treasury has diligently discharged its taxpayer protection obligation given the TARP funds
that will most likely be lost with respect to AIG, the auto related
bailouts and the various foreclosure mitigation efforts.
• Instead of lessening systemic risk the TARP has exacerbated
the ‘‘too big to fail’’ problem by making the federal government the
implicit guarantor of the largest American financial institutions as
well as an undefined select group of business enterprises the failure of which might impede the Administration’s economic, social
and political agenda.
• By evidencing its willingness to rescue businesses that engage
in excessive risk taking and poor business judgment Treasury has
created needless implicit guarantee and moral hazard risks and
laid the foundation for another economic crisis. If the Administration provides a safety net from risky behavior no one should be surprised if the intended recipients accept the offer and engage in
such behavior. If the participants win their high risk bets they will
reap all of the benefits but if they lose the taxpayers will bear the
burden of picking up the pieces. It is possible that the TARP not
only increased the number of ‘‘too big to fail’’ institutions but the
size of such institutions as well.
• I remain troubled that the implementation of the TARP has
caused the private sector to incorporate the concept of ‘‘political
risk’’ into its analysis before engaging in any direct or indirect
transaction with the United States government. The realm of political risk is generally reserved for business transactions undertaken
in developing countries and not interactions between private sector
participants and the United States government. Following the
Chrysler and GM decisions it is possible that private sector participants may begin to view interactions with the United States government through the same jaundiced eye they are accustomed to
directing toward third-world governments.
• Treasury has often been less than forthcoming regarding matters of transparency and accountability. Treasury should provide
detailed financial statements to the taxpayers and operate its
TARP investments in a businesslike manner.
• The TARP was promoted as a way to provide ‘‘financial stability,’’ and the American Reinvestment and Recovery Act was promoted as a way to provide ‘‘economic stimulus.’’ Regrettably, the
TARP has evolved from a program aimed at financial stability during a time of crisis to one that increasingly resembles another attempt by the Administration to promote its economic, political and
social agenda through fiscal stimulus.
• The bankruptcy restructurings of Chrysler and GM and the recapitalization of GMAC were financed with TARP proceeds. These
cases serve as the poster child of why the TARP should end on December 31, 2009. The restructurings failed each of the standards
noted above by exacerbating implicit guarantee and moral hazard
risks, incorporating a heavy dose of political risk into private-public
sector interactions, offering little in the way of taxpayer protection,
transparency and accountability, and using funds dedicated to financial stability for economic stimulus.

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• Much like the auto industry interventions, HAMP and the Administration’s other foreclosure mitigation efforts to date have been
a failure. The Administration’s opaque foreclosure mitigation efforts have assisted only a small number of homeowners while
drawing billions of involuntary taxpayer dollars into a black hole.
• The best foreclosure mitigation program is a job, and the best
assurance of job security is economic growth and the adoption of
public policy that encourages and rewards capital formation and
entrepreneurial success. Without a robust macroeconomic recovery
the housing market will continue to languish and any policy that
forestalls such recovery will by necessity lead to more foreclosures.
A. Overview

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The Panel’s December report focuses on whether Treasury has
properly discharged its Congressional mandate under the Emergency Economic Stabilization Act of 2008 (EESA)—the enabling
statute for the Troubled Asset Relief Program (TARP).454 In assessing the overall effectiveness of the TARP I will analyze the program against each of the following metrics:
• stabilization of the U.S. financial system;
• increased lending activity;
• taxpayer protection;
• systemic, implicit guarantee and moral hazard risks;
• political risk;
• transparency and accountability; and
• financial stability v. economic stimulus.
I will also describe what I believe was the primary cause of the
financial crisis that the TARP was created to remedy. In addition
I will retrace my analyses of the Chrysler and General Motors
(GM) restructurings—the TARP’s lowest point—and the misguided
TARP funded foreclosure mitigation efforts.
Based upon this analysis I conclude that the TARP is failing its
mandate and recommend that Secretary Geithner not extend the
TARP but allow the program to terminate on December 31,
2009.455
454 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.
12 U.S.C. 5223.
455 See generally, Geithner Expects Bailout Program to End Soon, The Associated Press (Dec.
2, 2009) (online at www.nytimes.com/2009/12/03/business/economy/03derivatives.html) (‘‘Treasury Secretary Timothy F. Geithner affirmed Wednesday the administration’s intent to end the
$700 billion financial bailout program soon. Although Mr. Geithner did not provide details, he
said the government was close to the point at which ‘we can wind down this program’ and end
it. ‘Nothing would make me happier,’ he told the Senate Agriculture Committee’’); Jackie
Calmes, Repaid Bailout Money May Go to Jobless Benefits, New York Times (Dec. 3, 2009) (online at www.nytimes.com/2009/12/03/us/politics/03jobs.html) (‘‘Treasury Secretary Timothy F.
Geithner, testifying on Wednesday before the Senate Agriculture Committee, warned against
shuttering the program just yet, given the continued weakness in the banking, housing and real
estate markets. But Mr. Geithner said much of the $700 billion would not be needed, an indication of how far the financial industry has improved since Mr. Obama took office and prepared
to ask for up to $500 billion more. On Wednesday, Bank of America announced that it would
repay all of its $45 billion in bailout money before the end of the year’’); Michael Crittendon
and Sarah Lynch, Geithner Says TARP Is Winding Down, but Date Not Set, Wall Street Journal
(Dec. 3, 2009) (online at online.wsj.com/article/SB125976850821372893.html) (‘‘The Obama administration will outline its plan to end the government’s $700 billion financial rescue program
in the next few weeks, a top official said, though that doesn’t mean it will expire as scheduled

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Before beginning my analysis of the TARP I thought it would be
helpful to provide some perspective regarding the magnitude of the
taxpayer resources that have been dedicated to financial stability
and economic stimulus over the past year. The Wall Street Journal
recently reported that Treasury is considering the investment of up
to an additional $5.6 billion in GMAC.456 To date Treasury has invested $12.5 billion in GMAC. I am not aware of any serious claim
that the survival of GMAC is necessary for the financial stability
of our country. Remarkably, the up to $18 billion that ultimately
may be invested in GMAC represents a small drop in a large bucket relative to the trillions of dollars of taxpayer sourced funds presently committed to financial stability and economic stimulus. By
comparison, for fiscal year 2010 the National Institutes of Health
has requested just over $6 billion for cancer research.457 Although
the Panel is not charged with debating the allocation of limited
public resources, as taxpayers we may nevertheless question if
GMAC merits the equivalent of three years of taxpayer funded cancer research.
B. Primary Cause of the Financial Crisis

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Just as a history of bad management decisions did not preclude
Chrysler and GM from receiving TARP funds, the same is true of
Fannie Mae and Freddie Mac. It should be noted that their financial insolvency materialized after years of mismanagement—and
after years of enjoying the gold seal of the government’s implicit
guarantee. Fannie and Freddie exploited their congressionally
granted charters to borrow money at discounted rates. They dominated the entire secondary mortgage market and wildly inflated
their balance sheets. Because market participants long understood
that this government created duopoly was implicitly (and, now, explicitly) backed by the federal government, investors and underwriters chose to believe that if Fannie or Freddie touched something, it was safe, sound, secure, and most importantly ‘‘sanctioned’’ by the government. The results of those misperceptions
have had a devastating impact on our entire economy. Given
Fannie and Freddie’s market dominance, it should come as little
surprise that once they dipped into the subprime and Alt-A markets, lenders quickly followed suit. In 1995, HUD authorized
Fannie and Freddie to purchase subprime securities that included
loans to low-income borrowers and allowed the government sponsored enterprises (GSEs) to receive credit for those loans toward
their mandatory affordable housing goals. Fannie and Freddie
readily complied, and as a result, subprime and near-prime loans
by year end. ‘We are close to the point where we can wind down this program and stop making
new commitments,’ Treasury Secretary Timothy Geithner told a U.S. Senate panel Wednesday’’).
456 Dan Fitzpatrick and Damian Paletta, GMAC Asks for Fresh Lifeline, Wall Street Journal
(Oct.
29,
2009)
(online
at
online.wsj.com/article/SB125668489932511683.html?mod=
djemalertNEWS) (‘‘The U.S. government is likely to inject $2.8 billion to $5.6 billion of capital
into the Detroit company, on top of the $12.5 billion that GMAC has received since December
2008, these people said. The latest infusion would come in the form of preferred stock. The government’s 35.4% stake in the company could increase if existing shares eventually are converted
into common equity’’).
457 Senate Committee on Appropriations, Subcommittee on Labor, Health and Human Services, Education, and Related Agencies, Written Testimony of National Cancer Institute Director
John E. Niederhuber, Budget Request for FY 2010 (May 21, 2009) (online at legislative.cancer.gov/files/appropriations-2009-05-21.pdf).

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jumped from 9 percent of securitized mortgages in 2001 to 40 percent in 2006. In 2004 alone, Fannie and Freddie purchased $175
billion in subprime mortgage securities, which accounted for 44
percent of the market that year. Then, from 2005 through 2007,
the two GSEs purchased approximately $1 trillion in subprime and
Alt-A loans, and Fannie’s acquisitions of mortgages with less than
10-percent down payments almost tripled. As a result, the market
share of conventional mortgages dropped from 78.8 percent in 2003
to 50.1 percent by 2007 with a corresponding increase in subprime
and Alt-A loans from 10.1 percent to 32.7 percent over the same
period. These non-traditional loan products, on which Fannie and
Freddie so heavily gambled as their Congressional supporters encouraged them to ‘‘roll the dice a little bit more,’’ now constitute
many of the same non-performing loans which have contributed to
our current foreclosure troubles.458 Private sector lenders and
securitizers of mortgage backed securities lowered their diligence
and underwriting standards in order to compete with the heavily
subsidized duopoly resulting in unprecedented levels of mortgage
defaults and the near shut-down of our credit markets. Without the
reckless behavior of Freddie and Fannie it seems most unlikely
that a financial crisis of the magnitude we have experienced over
the past year would have developed.459
GAO noted in a September 2009 report:
While housing finance may have derived some benefits
from the enterprises’ activities over the years, GAO, federal regulators, researchers, and others long have argued
that the enterprises had financial incentives to engage in
risky business practices to strengthen their profitability
partly because of the financial benefits derived from the
implied federal guarantee on their financial obligations.460
In September 2008, Treasury put Fannie Mae and Freddie Mac
into conservatorship under the Federal Housing Finance Agency
(FHFA), effectively making taxpayers liable for their portfolios
which now total about $5.46 trillion (including mortgage-backed securities and other guarantees, as well as gross mortgage portfolios).461
458 Representative Jeb Hensarling, Additional Views to Congressional Oversight Panel, March
Oversight Report: Foreclosure Crisis: Working Towards a Solution (Mar. 6, 2009) (online at
cop.senate.gov/documents/cop–030609–report-view-hensarling.pdf).
459 In addition, for well over twenty years, federal policy has promoted lending and borrowing
to expand home ownership, through incentives such as the home mortgage interest tax exclusion, the FHA, discretionary HUD spending programs, and the Community Reinvestment Act
(CRA). CRA is an example of a program with the best of intentions having adverse, unintended
consequences on exactly the population it hopes to serve. It was initially authorized to prevent
‘‘redlining,’’ a term that refers to the practice of denying loans to neighborhoods considered to
be higher economic risks, by mandating banks lend to the communities where they take deposits. Since its passage into law in 1977, however, CRA has advanced at least two undesirable
outcomes: (1) some financial institutions completely avoided doing business in neighborhoods
and restricted even low-risk forms of credit, and (2) many institutions went the other way and
relaxed underwriting standards to meet CRA guidelines, thus opening the door to the development of certain risky products that have contributed to the problem of foreclosures. These lax
underwriting standards spread to Fannie and Freddie and ultimately to the private sector as
the role of the GSEs morphed from that of a liquidity provider to a promoter of home ownership.
460 Government Accountability Office, Analysis of Options for Revising the Housing Enterprises’ Long-term Structures (September 2009) (online at www.gao.gov/new.items/d09782.pdf).
461 Fannie Mae, Monthly Summary (July 2009) (online at www.fanniemae.com/ir/pdf/monthly/
2009/073109.pdf); Freddie Mac, Monthly Volume Summary (July 2009) (online at
www.freddiemac.com/investors/volsum/pdf/0709mvs.pdf).

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C. Analysis of the TARP
In my view, it is not possible to assess the overall effectiveness
of the TARP without acknowledging and thoughtfully analyzing the
intended and unintended consequences of the program and the
manner in which it was implemented by Treasury. Any analysis
that does not thoroughly consider the issues of implicit guarantee,
moral hazard, political risk, transparency and accountability, and
financial stability v. economic stimulus is myopic and of limited
benefit.

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1. Stabilization of U.S. Financial System
Any role that the TARP may have played over the past year in
stabilizing the financial system cannot be analyzed to the exclusion
of the programs adopted by the Federal Reserve and the FDIC. Although Treasury’s maximum exposure under the TARP totals
$698.7 billion, the Federal Reserve and the FDIC have maximum
exposures of $1.732 trillion and $666.7 billion, respectively.462
Any such analysis becomes more challenging when you consider
the broad array of programs adopted by Treasury, the Federal Reserve and the FDIC. Treasury—under TARP authority—rolled out
a dizzying group of programs including, among others:
• the Capital Purchase Program (CPP—the purchase of preferred stock in approximately 700 financial institutions);
• the Targeted Investment Program (TIP—exceptional assistance to Citigroup and Bank of America);
• the Systemically Significant Failing Institutions Program
(SSFI—exceptional assistance to AIG);
• the Asset Guarantee Program (AGP—the guarantee of certain assets of Citigroup);
• the Public-Private Investment Program (PPIP—purchase
of toxic assets from financial institutions);
• the Term-Asset Back Securities Loan Facility Program
(TALF—restart the securitization market);
• various small business programs;
• the Making Home Affordable Program (MHA—foreclosure
mitigation, including the Home Affordable Modification Program (HAMP) and the Home Affordable Refinancing Program
(HARP);
• the Automotive Industry Financing Program (AIFP—bailout of Chrysler, GM and GMAC); and
• the Auto Supplier Support Program (bailout of certain
auto suppliers).
The Federal Reserve has extended credit to AIG, advanced loans
under the TALF program, provided asset guarantees to Citigroup
and extended over $1 trillion in credit under, among others, its
Term Auction Facility, discount window program, Primary Dealer
Credit Facility, commercial paper facility programs, and GSE debt
securities and mortgage backed securities programs. The FDIC introduced the Temporary Liquidity Guarantee Program (TLGPguarantee of debt issued by certain financial institutions), structured a PPIP for whole loans, guaranteed assets of Citigroup and
462 See

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increased outlays to its deposit insurance fund.463 The Panel’s current and prior reports analyze many of these programs in detail.
While the programs offered by Treasury, the Federal Reserve
and the FDIC may very well have jointly assisted with the stabilization of the financial system over the past year, it seems quite
unlikely that the TARP—unassisted by the Federal Reserve and
the FDIC—would have stabilized the U.S. financial system.464
Interestingly, some who attribute relative success to certain aspects of the TARP offer only faint praise. Dr. Dean Baker, Co-Director, Center for Economic and Policy Research, provided the following testimony to the Panel:
There are many factors that make it difficult to assess
the effectiveness of the TARP, most important one being
the fact that the TARP was carried through in conjunction
with rescue efforts by the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board. The
money made available to the financial system through
these alternative mechanisms was considerably larger
than the amount made available through the TARP. Furthermore, there is no publicly available information on the
terms or the beneficiaries of the loans issued through the
Fed’s special lending facilities.
For this reason, there is no easy way to determine the
importance of TARP funds in stabilizing the financial system. Clearly, the TARP did play a role in stopping the
panic that was driving financial markets last year. Together with the other structures put in place, the TARP
did succeed in restoring stability to the financial system.
However, keeping the financial system operating is a
rather low bar. There is little doubt that the Federal Reserve Board, with its virtual unlimited ability to print
money, can prevent a financial collapse. The relevant question is whether the TARP, along with the other programs
put in place, restored stability in a way that best served
the real economy and also can be viewed as fair by the
American people. By these criteria, the TARP does not
score very well.465
Roy Smith, Professor of Finance, New York University Stern
School of Business, states in his written submission to the Panel
that the role of the TARP was relatively small compared to that
of the Federal Reserve. In his view, the greatest contribution of the
program was its announcement, which signaled that the government intended to act, while the actual accomplishments of the program are ‘‘relatively few and unimportant.’’ Professor Smith states
463 See

pp. 74–81 of the Panel’s December Report.
it has served as a barrier to private-sector investment and capital formation,
TARP has likely done much more to impede job creation and organic economic growth than it
has done to promote them. U.S. unemployment recently surpassed 10 percent for the first time
in 26 years and the broader definition of unemployment—including those who are underemployed and have stopped looking for work—recently jumped to 17.5 percent. Although the two
metrics have fallen to 10 percent and 17.2 percent, respectfully, such improvements, while encouraging, hardly signal a return to a robust employment market.
465 Congressional Oversight Panel, Written Testimony of Center for Economic and Policy Research Co-Director Dean Baker, Taking Stock: Independent Views on TARP’s Effectiveness, at 1
(Nov. 19, 2009) (online at cop.senate.gov/documents/testimonyµ09111909-baker.pdf).

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464 Because

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that Treasury’s highest priority should be to recover the TARP’s investment.466
William Isaac, chairman of the FDIC, 1981–1985, argues in his
written submission to the Panel that the TARP legislation did more
harm than good, and that the Federal Reserve, the FDIC and the
SEC had the tools necessary to alleviate the financial crisis without
taxpayer outlays. In Chairman Isaac’s view, Treasury lacked the
expertise and personnel to run the capital infusion program, and
as a result Treasury should have turned the program over to the
FDIC. Isaac criticizes Treasury for (i) forcing banks to participate
in the TARP, (ii) publicly announcing the stress tests, and (iii) taking the position that the TARP is a revolving fund.467
2. Lending
Dr. Baker offered the following written testimony to the Panel
regarding the lending activity of TARP recipients:
The one sector that clearly is having difficulty securing
credit is the small business sector. While this is an impediment to recovery, this sort of credit tightening is typical of
a recession. The complaints from business owners over
being denied credit are not qualitatively different than the
complaints that were made in 1990–91 recession. Lenders
will also tighten credit to business during a downturn simply because otherwise healthy businesses are much
risk[ier] prospects during a recession. There is no reason
to believe that the tightening of credit during this downturn is any greater than what should be expected given
the severity of the recession. To press banks to make more
loans in this context would be to insist that they make
loans on which they expect to lose money. This would be
questionable economic policy.468
Although some criticize the TARP for its failure to jump start
new lending activity and for the creation of dysfunctional financial
institutions (zombie banks), Dr. Baker notes that lending-for-thesake-of-lending may sow the seeds of the next asset bubble and
lead to another round of non-performing loans and toxic securitized
debt instruments. Nevertheless, if the TARP is judged on the basis
of whether it successfully restarted the lending market for large
and small business credit, it appears that it has again failed to
meet such expectation.
3. Taxpayer Protection
Roughly $71 billion of TARP funds have been paid back, mostly
from large financial institutions who received equity injections as
part of the CPP. In addition, Bank of America recently announced
that it will repay the full $45 billion with interest it has accessed
from the TARP. As Treasury unwinds several TARP programs
where the taxpayers have recouped their investments with interest,
the Panel should focus its attention on the new or existing pro466

Roy Smith, Letter to Panel Staff (Oct. 23, 2009).
Isaac, Letter to Panel Staff (Nov. 6, 2009).
Oversight Panel, Written Testimony of Center for Economic and Policy Research Co-Director Dean Baker, Taking Stock: Independent Views on TARP’s Effectiveness, at 4,
5 (Nov. 19, 2009) (online at cop.senate.gov/documents/testimony-111909-baker.pdf).
467 William

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grams that are likely more enduring and costly to the taxpayers.
The opportunity cost of not providing rigorous oversight in these
areas is high. These programs include taxpayer funds directed to
AIG, Chrysler, GM, GMAC, foreclosure mitigation, preferred and
common share purchases in Citigroup, Bank of America and hundreds of additional large and small financial institutions and other
initiatives. The Panel should undertake to analyze these programs
to determine if the investment of taxpayer funds is appropriate, authorized under EESA and adequately protected. This undertaking
is particularly important with respect to the TARP funded foreclosure mitigation programs since EESA requires the Panel to ‘‘ensure effective foreclosure mitigation efforts in light of minimizing
long-term taxpayer costs and maximizing taxpayer benefits.’’ It is
difficult to conclude that Treasury has diligently discharged its taxpayer protection obligation given the TARP funds that will most
likely be lost with respect to AIG, the auto related bailouts and the
various foreclosure mitigation efforts.

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4. Systemic, Implicit Guarantee and Moral Hazard Risks
Instead of reducing systemic risk the TARP has exacerbated the
‘‘too big to fail’’ problem by making the federal government the implicit guarantor of the largest American financial institutions as
well as an undefined select group of business enterprises the failure of which might impede the Administration’s economic, social
and political agenda.469 By evidencing its willingness to rescue
businesses that engage in excessive risk taking and poor business
judgment Treasury has created needless implicit guarantee and
moral hazard risks and laid the foundation for another economic
crisis. If the Administration provides a safety net from risky behav469 The Financial Times reports that thirty institutions have made the latest ‘‘too big to fail
list’’:
The list, which is not public, contains many of the multinational bank names that would be
widely expected: Goldman Sachs, JPMorgan Chase, Morgan Stanley, Bank of America Merrill
Lynch and Citigroup of the US; Royal Bank of Canada; UK groups HSBC, Barclays, Royal Bank
´ ´
of Scotland and Standard Chartered; UBS and Credit Suisse of Switzerland; France’s Societe
´ ´
Generale and BNP Paribas; Santander and BBVA from Spain; Japan’s Mizuho, Sumitomo
Mitsui, Nomura, Mitsubishi UFJ; Italy’s UniCredit and Banca Intesa; Germany’s Deutsche
Bank; and Dutch group ING.
The exercise follows the establishment of the FSB in the summer and is principally designed
to address the issue of systemically important cross-border financial institutions through the
setting up of supervisory colleges. These colleges will comprise regulators from the main countries in which a bank or insurer operates and will have the job of better coordinating the supervision of cross-border financial groups.
As a spin-off from that process, the groups on the list will also be asked to start drawing up
so-called living wills—documents outlining how each bank could be wound up in the event of
a crisis.
Regulators are keen to see living wills prepared for all systemically important financial
groups, but the concept has split the banking world, with the more complex groups arguing that
such documents will be almost impossible to draft without knowing the cause of any future crisis.
Patrick Jenkins and Paul J. Davies, Thirty Financial Groups on Systemic Risk List, Financial
Times
(Nov.
30,
2009)
(online
at
www.ft.com/cms/s/0/c680e0da-dd4e-11de-ad60–
00144feabdc0.html).
The Wall Street Journal recently reported regarding Treasury’s AIG exit strategy:
The bailout of AIG, owned 80% by taxpayers, is one of the most controversial of the government’s unpopular bailouts. Yet with so much taxpayer money at stake, the government is asserting its ownership.
AIG is the best example of why the government should never get itself in the position of even
having to make these tradeoffs, said Anil Kashyap, an economics professor at the University
of Chicago Booth School of Business. ‘‘It’s why you don’t want the government involved in the
private sector in the first place.’’
Deborah Solomon, AIG’s Rescue Bedevils U.S., Wall Street Journal (Nov. 23, 2009) (online at
online.wsj.com/article/SB10001424052748703819904574554241356640428.html).

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ior no one should be surprised if the intended recipients accept the
offer and engage in such behavior. If the participants win their
high risk bets they will reap all of the benefits but if they lose the
taxpayers will bear the burden of picking up the pieces. It is possible that the TARP not only increased the number of ‘‘too big to
fail’’ institutions but the size of such institutions as well.
Charles Calomiris, the Henry Kaufman Professor of Financial Institutions, Columbia Business School, stated in written testimony
before the Panel:
In my judgment, TARP and other interventions were not
designed properly, and consequently assistance programs
have resulted in less benefit to the economy than they
should have (in particular, have resulted in insufficient
mitigation of the credit crunch) and they have cost more
than they should have (in the form of excessive taxpayer
bearing of current losses, and unnecessary moral-hazard
incentive costs going forward).

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Government loans, guarantees and investments in troubled financial institutions (which even include potential
capital infusions into the GSEs), not to mention government purchases of assets (as originally contemplated
under the TARP plan, and as executed under the TALF
plan) have resulted in huge losses to taxpayers (Fannie
and Freddie and FHA subprime lending will account for
the lion’s share of these losses, as they alone will approach
half a trillion dollars) and remaining risks of future loss.
They also have changed the risk-taking behavior of financial institutions going forward. If financial institutions
know that the government is there to share losses, risktaking becomes a one-sided bet, and so more risk is preferred to less. There is substantial evidence from financial
history—including the behavior of troubled financial institutions during the current crisis itself—that this ‘‘moralhazard’’ problem can give rise to hugely loss-making, highrisk investments that are both socially wasteful and an unfair burden on taxpayers. 470 (emphasis in original.)
In order to avoid the creation of moral hazard risks, Professor
Calomiris advises that any government sponsored intervention incorporate the following concepts:
(1) Assistance should be offered only under rare circumstances. The purpose of assistance is not to prevent
the failure of one or a few institutions, per se; assistance
is only warranted when asymmetric information about the
incidence of losses in the financial system leads to a general breakdown in financial market buying and selling, resulting in a liquidity crisis, which makes it impossible or
excessively difficult for otherwise solvent borrowers to roll
470 Congressional Oversight Panel, Written Testimony of Charles Calomiris, Henry Kaufman
Professor of Financial Institutions, Columbia Business School, Taking Stock: Independent Views
on TARP’s Effectiveness, at 1, 3 (Nov. 19, 2009) (online at cop.senate.gov/documents/testimony111909-calomiris.pdf).

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over their debts, or for banks to prove their solvency to the
market in order to access needed capital to shore up their
positions.
(2) The design of assistance is crucial to maximizing its
effectiveness and minimizing its social costs; particularly
the allocation of the risk of loss between the private sector
and the government is crucial to the successful design of
assistance. Assistance should be selective, targeted toward
institutions worth saving, not basket cases. Government
should take a senior position in loss sharing; in discount
window lending that is ensured through collateralization of
loans; in preferred stock purchases, seniority is ensured
through the adequacy of common equity; in other assistance programs, it is achieved through the structure of
guarantees (e.g., their out-of-the-moneyness).
(3) The assistance toolkit must be diverse. The proper
structure of assistance depends on the severity of the systemic crisis being addressed; discount window lending may
be sufficient for dealing with liquidity crises that are not
very severe, bank preferred stock purchases by the government may make sense for more severe shocks, and other
mechanisms (organized rescues of failed institutions, or
guarantees attached to liabilities or assets) may be the
only effective tools to employ when the crisis is even more
severe. No matter which of the tools is employed, the other
principles (rarity, selectivity, and seniority) can and should
be adhered to.’’ 471 (emphasis in original).
Dr. Baker submitted the following testimony to the Panel regarding systemic risk:
The crisis itself led to further concentration in the financial sector, with the largest banks all having been encouraged to buy up bankrupt competitors. As a result, the largest banks now enjoy fairly explicit ‘‘too big to fail’’ protection. There also has been almost nothing done to restrain
the speculative practices of the major banks. Goldman
Sachs, in particular, stands out by virtue of the fact that
it is still acting as an investment bank (arguably, it can
better be described as a hedge fund), even though it is now
operating under the protective umbrella of the Federal Reserve Board and the FDIC. There does not appear to be
any effort to restrain its speculative activity.
Simon Johnson, the Ronald Kurtz Professor of Entrepreneurship,
MIT Sloan School of Management, stated in written testimony before the Panel:
If any country pursues (a) unlimited government financial support, while not implementing (b) orderly resolution
for troubled large institutions, and refusing to take on (c)
serious governance reform, it would be castigated by the
471 Congressional Oversight Panel, Written Testimony of Charles Calomiris, Henry Kaufman
Professor of Financial Institutions, Columbia Business School, Taking Stock: Independent Views
on TARP’s Effectiveness, at 6, 7 (Nov. 19, 2009) (online at cop.senate.gov/documents/testimony111909-calomiris.pdf).

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United States and come under pressure from the IMF. At
the heart of every crisis is a political problem—powerful
people, and the firms they control, have gotten out of
hand. Unless this is dealt with as part of the stabilization
program, all the government has done is provide an unconditional bailout. That may be consistent with a short-term
recovery, but it creates major problems for the sustainability of the recovery and for the medium-term. Serious
countries do not do this. Seen in this context, TARP has
been badly mismanaged.
*
*
*
*
*
The implementation of TARP exacerbated the perception
(and the reality) that some financial institutions are ‘‘Too
Big to Fail.’’ This lowers their funding costs, enabling them
to borrow more and to take more risk.

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The administration as much as said that the major
banks will all pass the stress tests, making it appear that
the results were foreordained. Essentially, this was used to
signal that the government stood behind the 19 banks in
the stress test and would not allow any of them to fail. Effectively, the government signaled which banks were Too
Big To Fail.472
Viral Acharya and Matthew Richardson, Professors of Finance,
New York University Stern School of Business, argue in their written submission to the Panel that the CPP did not include ‘‘sufficient strings attached,’’ and as a result created the expectation of
‘‘unconditional government support’’ in the future. Moving forward,
Professors Acharya and Richardson highlight the risks of moral
hazard, noting ‘‘it is not just about fighting the last war, but also
about the next one.’’ 473
Paul Volcker, former Chairman of the Federal Reserve, 1979–
1987, and member of the Economic Recovery Advisory Board,
states in his written submission to the Panel that Treasury ‘‘appears to have done a good job in structuring their capital investments,’’ but questions the extent to which the program is currently
having a positive impact on the flow of credit. Chairman Volcker
also notes the problems associated with moral hazard, concluding
that reform is necessary.474
William Poole, Senior Fellow, the Cato Institute, argues in his
written submission to the Panel that the core issue in the financial
system today is the subsidy to large banks created by the implicit
federal guarantee of bank liability. Citing a recent paper by Dean
Baker and Travis McArthur, Mr. Poole notes that the implicit subsidy may be as large as $34 billion per year. In addition to this
subsidy, the funding advantage enjoyed by large banks permits
them to grow larger, increasing the risks posed by banks that are
472 Congressional Oversight Panel, Written Testimony of Professor Simon Johnson, Ronald
Kurtz Professor of Entrepreneurship, MIT Sloan School of Management, Taking Stock: Independent Views on TARP’s Effectiveness, at 2, 3, 7 (Nov. 19, 2009) (online at cop.senate.gov/documents/testimony–111909–johnson.pdf).
473 Viral Acharya and Matthew Richardson, Letter to Panel Staff (received Nov. 6, 2009).
474 Paul A. Volcker, Letter to Panel Staff (Nov. 6, 2009).

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too big to fail. Poole also notes that efforts to control executive compensation are ‘‘unwise and will ultimately be ineffective.’’ 475
In a recent report, SIGTARP addressed the problem of moral
hazard, stating that ‘‘TARP runs the risk of merely re-animating
markets that had collapsed under the weight of reckless behavior.’’ 476 I am concerned that the TARP is again inflating the problem of moral hazard by providing government funded capital to institutions that contributed to the crisis, modifications to homeowners who may have taken on too much risk, and lower-cost loans
to spur the purchase of what may be volatile, high-priced asset
backed securities.
The SIGTARP report also discussed the cost of the TARP to the
government’s credibility. It claims, ‘‘Unfortunately, several decisions by Treasury—including Treasury’s refusal to require TARP
recipients to report on their use of TARP funds, its less-than accurate statements concerning TARP’s first investments in nine large
financial institutions, and its initial defense of those inaccurate
statements—have served only to damage the Government’s credibility and thus the long-term effectiveness of TARP.’’ 477 I do not
see how Treasury will be able to regain the public’s trust so long
as it continues to employ taxpayer sourced funds to make investments based upon the Administration’s economic, political and social agenda where there is diminished promise that such funds will
be fully recouped.478
475 William

Poole, Letter to Panel Staff (Oct. 23, 2009).
Quarterly Report to Congress, at 4 (Oct. 21, 2009) (online at sigtarp.gov/reports/
congress/2009/October2009lQuarterlylReportltolCongress.pdf).
477 Id.
478 There are three recent examples of the problems that may arise with respect to government financed investments in the private sector.
(i) A recent GAO report on the Chrysler and GM bailouts states:
As long as Treasury maintains ownership interests in Chrysler and GM, it will likely be pressured to influence the companies’ business decisions.
* * * * *
Treasury officials stated that they established such up-front conditions not solely to protect
Treasury’s financial interests as a creditor and equity owner but also to reflect the Administration’s views on responsibly utilizing taxpayer resources for these companies. While Treasury has
stated it does not plan to manage its stake in Chrysler or GM to achieve social policy goals,
these requirements and covenants to which the companies are subject indicate the challenges
Treasury has faced and likely will face in balancing its roles.
Government Accountability Office, Troubled Asset Relief Program: Continued Stewardship
Needed as Treasury Develops Strategies for Monitoring and Divesting Financial Interests in
Chrysler and GM (Nov. 2, 2009) (online at www.gao.gov/new.items/d10151.pdf).
(ii) Thomas E. Lauria, the Global Practice Head of the Financial Restructuring and Insolvency
Group at White & Case LLP, represented a group of senior secured creditors, including the
Perella Weinberg Xerion Fund (‘‘Perella Weinberg’’), during the Chrysler bankruptcy proceedings. On May 3, the New York Times reported:
In an interview with a Detroit radio host, Frank Beckmann, Mr. Lauria said that Perella
Weinberg ‘was directly threatened by the White House and in essence compelled to withdraw
its opposition to the deal under threat that the full force of the White House press corps would
destroy its reputation if it continued to fight.’
In a follow-up interview with ABC News’s Jake Tapper, he identified Mr. [Steven] Rattner,
the head of the auto task force, as having told a Perella Weinberg official that the White House
‘would embarrass the firm.’
Michael J. de la Merced, White House Denies Claims of Threat to Chrysler Creditor, New York
Times (May 3, 2009) (online at dealbook.blogs.nytimes.com/2009/05/03white-house-perellaweinberg-deny-claims-of-threat-to-firm/). See also News/Talk WJR 760 am, Frank Talks With
Tom Lauria, Who Represents a Group of Lenders That Object to the Chrysler Sale (May 1, 2009)
(online at www.760wjr.com/article.asp?id=1301727&spid=6525).
For a further discussion of the interactions between Mr. Rattner and Perella Weinberg see
William D. Cohan, The Final Days of Merrill Lynch, The Atlantic (Sept. 2009) (online at
www.theatlantic.com/doc/200909/bank-of-america) and Steve Fishman, Exit the Czar, New York
Magazine (Aug. 2, 2009) (online at nymag.com/news/features/58193/).

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476 SIGTARP,

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In my view and as supported by the above cited economists, the
TARP has created substantial and needless implicit guarantee and
moral hazard risks. In order to articulate these risks I offer the following analysis from the Panel’s November report on the government sponsored guarantee programs which also applies to the
broader TARP:
A larger issue arises when one considers the implicit
guarantees, those that are paid for by neither party, but
whose cost is borne by the taxpayer. The [government
sponsored guarantee programs] carry fees paid for by the
financial institutions. But their existence, and the existence of the other elements of the bailout of the financial
system, could imply that there is a permanent, and ‘‘free,’’
insurance provided by the government, especially for those
institutions deemed ‘‘too big to fail,’’ or ‘‘too connected to
fail.’’ There is an implication that, in the case of another
major economic collapse, the government will again step in
to prop up the financial system, especially the ‘‘too big to
fail’’ institutions. This moral hazard creates a real risk to
the system.
This ‘‘free’’ insurance causes a number of distortions in
the marketplace. On the financial institution side, it might
promote risky behavior. On the investor and shareholder
side, it will provide less incentive to hold management to
a high standard with regard to risk-taking. By creating a
class of ‘‘too big to fail’’ institutions, it has provided these
institutions with an advantage with respect to the pricing
of credit:
Creditors who believe that an institution will be regarded by the government as too big to fail may not price
into their extensions of credit the full risk assumed by the
institution. That, of course, is the very definition of moral
hazard. Thus the institution has funds available to it at a
price that does not fully internalize the social costs associated with its operations. The consequences are a diminuI requested Secretary Geithner to investigate the allegation and, to my disappointment, he
declined. Specifically, I submitted the following question for the record to the Secretary: ‘‘Will
you agree to conduct a prompt and thorough investigation of this matter by contacting Mr.
Rattner, Mr. Lauria and representatives of Weinberg Perella and submit your findings to the
Panel?’’
The Secretary responded: ‘‘SIGTARP will determine the appropriate actions with regards to
this issue. But as noted above, I would reiterate that Mr. Rattner categorically denies Mr.
Lauria’s allegations.’’
Again, I ask the Secretary to investigate this matter and report his findings to the Panel.
See my dissent from the September report on the auto bailouts. Representatives Jeb
Hensarling, Additional Views to Congressional Oversight Panel, September Oversight Report:
The Use of TARP Funds in the Support and Reorganization of the Domestic Automotive Industry
(Sept. 9, 2009) (online at cop.senate.gov/documents/cop-090909-report-additionalviews.pdf).
(iii) The Wall Street Journal recently reported:
Federal support for companies such as GM, Chrysler Group LLC and Bank of America Corp.
has come with baggage: Companies in hock to Washington now have the equivalent of 535 new
board members—100 U.S. senators and 435 House members.
Since the financial crisis broke, Congress has been acting like the board of USA Inc., invoking
the infusion of taxpayer money to get banks to modify loans to constituents and to give more
help to those in danger of foreclosure. Members have berated CEOs for their business practices
and pushed for caps on executive pay. They have also pushed GM and Chrysler to reverse core
decisions designed to cut costs, such as closing facilities and shuttering dealerships.
Neil King, Jr., Politiciand Butt In at Bailed-Out GM, Wall Street Journal (Oct. 29, 2009) (online at online.wsj.com/article/SB125677552001414699.html#mod=todays—us—page—one).

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tion of market discipline, inefficient allocation of capital,
the socialization of losses from supposedly market-based
activities, and a competitive advantage for the large institution compared to smaller banks.479
The implied guarantee of ‘‘too big to fail’’ institutions
might also result in a concentration of risk in this group,
resulting in greater danger to the taxpayer if and when
the government must step in again.
5. Political Risk
In addition to the implicit guarantee and moral hazard issues
discussed above, I am troubled that the implementation of the
TARP has caused the private sector to incorporate the concept of
‘‘political risk’’ into its analysis before engaging in any direct or indirect transaction with the United States government. While private sector participants are accustomed to operating within a complex legal and regulatory environment, many are unfamiliar with
the emerging trend of public sector participants to bend or restructure rules and regulations so as to promote their economic, social
and political agenda as was clearly evident in the Chrysler and GM
bankruptcies (described in more detail below). The realm of political risk is generally reserved for business transactions undertaken
in developing countries and not interactions between private sector
participants and the United States government. Following the
Chrysler and GM decisions it is possible that private sector participants may begin to view interactions with the United States government through the same jaundiced eye they are accustomed to
directing toward third-world governments. It’s disingenuous for the
Administration to champion transparency and accountability for
the private sector but neglect such standards when conducting its
own affairs. How is it possible for directors and managers of private sector enterprises to discharge their fiduciary duties and responsibilities when policy makers legislate and regulate without respect for precedent and without thoughtfully vetting the unintended consequences of their actions?
6. Transparency and Accountability
Although improvements have been made, Treasury has often
been less than forthcoming regarding matters of transparency and
accountability. I agree with Alex Pollock, a Resident Fellow with
the American Enterprise Institute, that Treasury should provide
detailed financial statements to the taxpayers and operate its
TARP investments in a businesslike manner. Mr. Pollock provided
the following testimony to the Panel:
The principal goal should be to run [TARP] in a businesslike manner to return as much of the involuntary investment as possible to its owners, along with a reasonable
overall profit. The predominant discipline should be that of
investment management, not politics.

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479 Board of Governors of the Federal Reserve System, Speech: Federal Reserve Board Governor Daniel K. Tarullo at the Exchequer Club, Washington D.C., Confronting Too Big to Fail
(Oct. 21, 2009) (online at www.federalreserve.gov/newsevents/speech/tarullo20091021a.htm).

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In my view, TARP should have full, regular, audited financial statements, which depict its financial status and
results, exactly as if it were a corporation. There should be
a balance sheet, with all assets, liabilities, accumulated
profits or losses, and contingencies. There should be a profit and loss statement and a statement of cash flows. The
expenses should include the interest cost of the Treasury
debt required to fund its disbursements, and like every financial operation, TARP management should be estimating probable losses on investments and reserving accordingly.
Had TARP been organized as a corporation, it would
have facilitated this accountability. But even with its status as a ‘‘program’’, we should insist on appropriate and
regular accounting. Everybody must agree with this basic
requirement for financial responsibility.
Moreover, TARP’s financial statements should include
line of business reporting. Logical separate profit and loss
reporting units would include: the Capital Purchase Program; automotive program; Citigroup; AIG; mortgage
modification (of course a total loss from the TARP point of
view); and small business and consumer programs.480

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7. Financial Stability v. Economic Stimulus
The TARP was promoted as a way to provide ‘‘financial stability,’’
and the American Reinvestment and Recovery Act (ARRA) was promoted as a way to provide ‘‘economic stimulus.’’ In testimony on
the still-nascent TARP, former Treasury Secretary Henry Paulson
reminded Congress, ‘‘[t]he rescue package was not intended to be
an economic stimulus or an economic recovery package; it was intended to shore up the foundation of our economy by stabilizing the
financial system. . .’’ 481 Regrettably, the TARP has evolved from
a program aimed at financial stability during a time of crisis to one
that increasingly resembles another attempt by the Administration
to promote its economic, political and social agenda through fiscal
stimulus. If the TARP is not being used for ‘‘economic stimulus,’’
then how else is it possible to explain the $81 billion bankruptcy
restructuring of Chrysler and GM, neither of which qualifies as a
‘‘financial institution’’ as required under EESA? In addition, the
United States government has agreed to transfer to Fiat part of the
equity it received in Chrysler if Fiat assists Chrysler in building
a car that produces 40 miles per gallon. What does this transfer
of United States government owned Chrysler stock to Fiat have to
do with ‘‘financial stability’’? No transparent end-game is in sight
for the TARP’s commitment to support Chrysler, GM and GMAC.

480 Congressional Oversight Panel, Written Testimony of American Enterprise Institute resident fellow Alex J. Pollock, Taking Stock: Independent Views on TARP’s Effectiveness (Nov. 19,
2009) (online at aei.org/docLib/Pollock-Testimonyµ-11192009.pdf).
481 U.S. Department of the Treasury, Testimony of Treasury Secretary Paulson before the
House Financial Services Committee (Nov. 18, 2008) (online at www.treasury.gov/press/releases/
hp1279.htm).

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D. Chrysler and GM Bankruptcies 482
The bankruptcy restructurings of Chrysler and GM and the recapitalization of GMAC were financed with TARP proceeds. These
cases serve as the poster child of why the TARP should end on December 31, 2009. If the TARP is extended to October 31, 2010, I
fear the Administration will continue to employ taxpayer resources
as a revolving bailout fund to promote its economic, social and political agenda as was clearly evident in the Chrysler, GM and
GMAC bankruptcy restructurings. These restructurings failed each
of the standards noted above by exacerbating implicit guarantee
and moral hazard risks, incorporating a heavy dose of political risk
into private-public sector interactions, offering little in the way of
taxpayer protection, transparency and accountability, and using
funds dedicated to financial stability for economic stimulus.483

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1. Policy Issues and Fundamental Questions Arising from
the Use of TARP Proceeds in the Chrysler and GM
Bankruptcies
Over the past year taxpayers have involuntarily ‘‘invested’’ over
$81 billion 484 in Chrysler, GM, GMAC and the other auto programs. According to a recent estimate from the CBO, the investment of TARP funds in the auto industry is expected to add $40
billion more to the deficit than CBO calculated just five months
earlier in March 2009.485 A reasonable interpretation of such an estimate provides that the American taxpayers may suffer a loss of
over 50 percent of the TARP funds invested in Chrysler, GM and
the other auto programs.486
482 In this section I borrow extensively from my dissent to the Panel’s September report on
the auto bailouts. Representative Jeb Hensarling, Additional Views to Congressional Oversight
Panel, September Oversight Report: The Use of TARP Funds in the Support and Reorganization
of the Domestic Automotive Industry (Sept. 9, 2009) (online at cop.senate.gov/documents/cop090909-report-additionalviews.pdf).
483 Edward Niedermeyer, Taking Taxpayers for a Ride, New York Times (Nov. 22, 2009) at
www.nytimes.com/2009/11/23/opinion/23niedermayer.html?lr=1&sq=taking taxpayers for a ride
niedermeyer
november22&st=cse&adxnnl=1&scp=1&adxnnlx=1259856084RhEqA9+sraJEUegFNAcvew).
484 According to the Panel’s December report, $2.2 billion of the funds advanced under the
Auto Industry Financing Program have been repaid. See Figure 25 of this Report, supra.
485 Congressional Budget Office, The Budget and Economic Outlook: An Update August 2009,
at 55–56 (online at www.cbo.gov/ftpdocs/105xx/doc10521/08–25-BudgetUpdate.pdf) (accessed Dec.
8, 2009). The report provides in part:
The improvement in market conditions results in a reduction in the subsidy rate associated
with the Capital Purchase Program (CPP)—a major initiative through which the government
purchases preferred stock and warrants (for the future purchase of common stock) from banks.
CBO has dropped the projected subsidy for the remaining investments in that program from
35 percent in the March baseline to 13 percent. The decrease in the estimated CPP subsidy cost
also reflects banks’ repurchase of $70 billion of preferred stock through June. Similarly, the estimated subsidy cost for other investments in preferred stock (for example, that of American
International Group) has also been reduced. Partially offsetting those reductions in projected
costs is the expansion of assistance to the automotive industry; CBO has raised its estimate of
the costs of that assistance by nearly $40 billion relative to the March baseline. (emphasis added).
In addition, our country faces a staggering deficit of $1.6 trillion in 2009, and a debt that
more-than-triples in ten years.
486 How is it possible that with the economic challenges facing our nation the Administration
chose to allocate such a significant share of the TARP to such questionable investments? How
much additional funding will be provided by the Administration for Chrysler and GM? What
is the strategy and timeline for recouping taxpayer dollars? See Keith Bradsher, G.M. is Said
to Agree to Sell Stakes to China Partner, New York Times (Dec. 3, 2009) (online at
www.nytimes.com/2009/12/04/business/global/04gm.html?hp). What are the metrics for determining whether or not Chrysler and GM are ‘‘successful,’’ and will the Administration continue
to provide assistance until this is attained?

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By making such an unprecedented investment in Chrysler and
GM 487 the Administration by definition chose not to assist other
Americans who are in need. With the economic suffering the American taxpayers have endured during the past two years one wonders why Chrysler and GM merited such generosity to the exclusion of other taxpayers. Why, indeed, did the United States government choose to reward two companies that have been arguably
mismanaged for many years at the expense of other hard working
taxpayers? More poetically, The New York Times on July 25 asked:
‘‘Why, after all, should the automakers receive the equivalent of a
Technicolor dreamcoat, giving them favorite-son status, when other
industries, like airlines and retailers, also have suffered from the
national recession?’’ More bluntly, the September 2009 issue of The
Atlantic simply cut to the bottom line: ‘‘Essentially, the government
was engineering a transfer of wealth from TARP bank shareholders
to auto workers, and pressuring other creditors to go along.’’ 488
The Chrysler and GM reorganizations represent a sad day for the
rule of law, the sanctity of commercial law principles and contractual rights, long term economic growth, and the ideal that the
United States government should not pick winners and losers.
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
economic, social and political objectives rather than to stabilize the
American economy as required by EESA. It has long been my view
that the United States government should not engage in the business of picking winners and losers and certainly should not allocate
its limited resources to favor one group of taxpayers over another.
Following the Chrysler and GM bankruptcies one has to question
what’s next in the Administration’s playbook—a bailout of the airline industry and its unionized workforce? What about Starbucks?

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2. Transfer of TARP Proceeds and Retirement Saving of Indiana School Teachers and Police Officers to the UAW
and the VEBAs
On a ‘‘before’’ v. ‘‘after’’ basis the Chrysler and GM bankruptcy
cases make little legal or economic sense.489 How is it possible that
487 In the bankruptcy proceedings for Chrysler and GM, (i) ‘‘Old Chrysler’’ sold substantially
all of its assets to ‘‘New Chrysler’’ and (ii) ‘‘Old GM’’ sold substantially all of its assets to ‘‘New
GM,’’ each pursuant to Section 363 of the United States Bankruptcy Code. For purposes of simplicity, I generally refer to these entities as ‘‘Chrysler’’ or ‘‘GM,’’ but occasionally employ other
terms as appropriate.
488 William D. Cohan, The Final Days of Merrill Lynch, The Atlantic (Sept. 2009) (online at
www.theatlantic.com/doc/200909/bank-of-america).
489 The Chrysler and GM bankruptcy rearranged the rights of the creditors and equity holders
as follows: Chrysler. Pursuant to the Chrysler bankruptcy, the equity of New Chrysler was allocated as follows:
(i) United States government (9.846 percent initially, but may decrease to 8 percent),
(ii) Canadian government (2.462 percent initially, but may decrease to 2 percent),
(ii) Fiat (20 percent initially, but may increase to 35 percent), and
(iii) UAW (comprising current employee contracts and a VEBA for retired employees) (67.692
percent, but may decrease to 55 percent).
The adjustments noted above permit Fiat to increase its ownership interest from 20 percent
to 35 percent by achieving specific performance goals relating to technology, ecology and distribution designed to promote improved fuel efficiency, revenue growth from foreign sales and
US based production.
Some, but not all, of the claims of the senior secured creditors were of a higher bankruptcy
priority than the claims of the UAW/VEBA.
Continued

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the Chrysler and GM VEBAs 490—unsecured creditors—received a
greater allocation of proceeds than the Chrysler senior secured
creditors or the GM bondholders? In other words, why did the
United States government spend tens of billions of dollars of taxpayer money to bailout employees and retirees of the UAW to the
detriment of other non-UAW employees and retirees—such as retired school teachers and police officers from the State of Indiana 491—whose pension funds invested in Chrysler and GM indebtedness? 492
What message do the Chrysler and GM holdings send to nonUAW 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 political relationships
of the UAW? What message do the Chrysler and GM bankruptcies
send to the financial markets—contractual rights of investors may
be ignored when dealing with the United States government?
In written testimony submitted to the Panel, Barry E. Adler, professor of law and business at New York University, noted:
There are at least two negative consequences from the
disregard of creditor rights. First, at the time of the deviation from contractual entitlement, there is an inequitable
The Chrysler senior secured creditors received 29 cents on the dollar ($2 billion cash for $6.9
billion of indebtedness).
The UAW/VEBA, an unsecured creditor, received (x) 43 cents on the dollar ($4.5 billion note
from New Chrysler for $10.5 billion of claims) and (y) a 67.692 percent (which may decrease to
55 percent) equity ownership interest in New Chrysler.
GM. Pursuant to the GM bankruptcy, the equity of New GM was allocated as follows:
(i) United States government (60.8 percent),
(ii) Canadian government (11.7 percent),
(iii) UAW (comprising current employee contracts and a VEBA for retired employees) (17.5
percent), and
(iv) GM bondholders (10 percent).
The bankruptcy claims of the UAW/VEBA and the GM bondholders were of the same bankruptcy priority.
The equity interest of the UAW/VEBA and the GM bondholders in New GM 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. It is important to note, however,
the warrants received by the UAW/VEBA and the GM bondholders are out of the money and
it’s possible they will not be exercised. As such, it seems likely that the UAW/VEBA and the
GM bondholders will hold 17.5 percent and 10 percent, respectively, of the equity of New GM.
The GM bondholders exchanged $27 billion in unsecured indebtedness for a 10 percent (which
may increase to 25 percent) common equity interest in New GM, while the UAW/VEBA exchanged $20 billion in claims for a 17.5 percent (which may increase to 20 percent) common equity interest in New GM and $9 billion in preferred stock and notes in New GM.
490 The Chrysler and GM VEBAs (voluntary employee benefit associations) administer and
fund the health and retirement plans of Chrysler and GM retirees.
491 The Chrysler senior secured debt and the GM bonds were held by pension funds (for the
benefit of retirees such as the Indiana school teachers and police officers), individuals (including
the retirees who have contacted my office to ask why they lost their savings but UAW employees
benefited) as well as different types of business entities.
492 If you trace the funds, TARP money was employed by New Chrysler and New GM to purchase assets of the old auto makers, yet a substantial portion of the equity in the new entities
was transferred to the VEBAs and, thus, not retained for the benefit of the American taxpayers
(who funded the TARP) or shared with other creditors of Old Chrysler and Old GM. Accordingly,
it’s hardly a stretch to conclude that TARP funds were transferred to the UAW and the VEBAs
after being funneled through New Chrysler and New GM. In addition, New Chrysler and New
GM entered into promissory notes and other contractual arrangements for the benefit of the
VEBAs, but not for the benefit of the other creditors of Old Chrysler and Old GM. Why did
the United States government—the controlling shareholder of New Chrysler and New GM—direct New Chrysler and New GM to make an exclusive gift of taxpayer funds to the VEBAs?
Why didn’t New Chrysler and New GM transfer more of their equity interests to the creditors
of Old Chrysler and Old GM? Why were Indiana school teachers and police officers and other
investors in the Chrysler senior secured indebtedness and the GM bonds in effect forced by the
Administration to transfer a portion of their claims against Chrysler and GM, respectively, to
the UAW and the VEBAs? That is, why did the Administration orchestrate two bankruptcy
plans whereby one group of employees and retirees was preferred to another?

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distribution of assets. Take the Chrysler case itself, where
the approved transaction well-treated the retirement funds
of the UAW. If such treatment deprived the secured creditors of their due, one might well wonder why the UAW
funds should be favored over other retirement funds, those
that invested in Chrysler secured bonds. Second, and at
least as importantly, when the bankruptcy process deprives a creditor of its promised return, the prospect of a
debtor’s failure looms larger in the eyes of future lenders
to future firms. As a result, given the holding in Chrysler,
and the essentially identical holding in the General Motors
case, discussed next, one might expect future firms to face
a higher cost of capital, thus dampening economic development at a time when the country can least well afford impediments to growth.493
In an article analyzing the Chrysler and GM bankruptcies, Mark
J. Roe and David A. Skeel, professors of law at Harvard University
and the University of Pennsylvania, respectively, noted:
Warren Buffett worried in the midst of the reorganization that there would be ‘‘a whole lot of consequences’’ if
the government’s Chrysler plan emerged as planned,
which it did. If priorities are tossed aside, as he implied
they were, ‘‘that’s going to disrupt lending practices in the
future.’’ ‘‘If we want to encourage lending in this country,’’
Buffett added, ‘‘we don’t want to say to somebody who
lends and gets a secured position that the secured position
doesn’t mean anything.’’494
In an op-ed in The Wall Street Journal, Todd J. Zywicki, professor of law at George Mason University, noted:
By stepping over the bright line between the rule of law
and the arbitrary behavior of men, President Obama may
have created a thousand new failing businesses. That is,
businesses that might have received financing before but
that now will not, since lenders face the potential of future
government confiscation. In other words, Mr. Obama may
have helped save the jobs of thousands of union workers
whose dues, in part, engineered his election. But what
about the untold number of job losses in the future caused
by trampling the sanctity of contracts today?495
In the September 2009 issue of The Atlantic, William D. Cohan
notes:
‘‘The rules as to how the government will act are not
what we learned,’’ explained Gary Parr, the deputy chairman of Lazard and one of the leading mergers-and-acquisitions advisers to financial institutions. ‘‘In the last 12
months, new precedents have been set weekly. The old
493 Congressional Oversight Panel, Written Testimony of Barry E. Adler, Field Hearing on the
Auto Industry (July 27, 2009) (online at cop.senate.gov/documents/testimony-072709-adler.pdf).
494 Mark Roe and David Skeel, Assessing the Chrysler Bankruptcy (Aug. 12, 2009) (online
atssrn.com/abstract=1426530).
495 Todd Zywicki, Chrysler and the Rule of Law, Wall Street Journal (May 13, 2009) (online
at online.wsj.com/article/SB124217356836613091.html).

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rules often don’t apply as much anymore.’’ He said the recent examples of the government’s aggression are ‘‘a really
big deal,’’ but adds, ‘‘I am not sure it is going to last a long
time. I sure hope not. I can’t imagine the markets will
function properly if you are always wondering if the government is going to step in and change the game.’’496
Richard A. Epstein, the James Parker Hall Distinguished Service
Professor of Law, The University of Chicago, the Peter and Kirsten
Bedford Senior Fellow, The Hoover Institution, and a visiting law
professor at New York University Law School, offered the following
analysis in the May 12, 2009 issue of Forbes:
The proposed bankruptcy of the now defunct Chrysler
Corp. is the culmination of serious policy missteps by the
Bush and Obama administrations. To be sure, the long
overdue Chrysler bankruptcy is a welcomed turn of events.
But the heavy-handed meddling of the Obama administration that forced secured creditors to the brink is not.
A sound bankruptcy proceeding should do two things:
productively redeploy the assets of the bankrupt firm and
correctly prioritize various claims against the bankrupt entity. The Chrysler bankruptcy fails on both counts.

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In a just world, that ignominious fate would await the
flawed Chrysler reorganization, which violates these wellestablished norms, given the nonstop political interference
of the Obama administration, which put its muscle behind
the beleaguered United Auto Workers. Its onerous collective bargaining agreements are off-limits to the reorganization provisions, thereby preserving the current labor
rigidities in a down market.
Equally bad, the established priorities of creditor claims
outside bankruptcy have been cast aside in this bankruptcy case as the unsecured claims of the union health
pension plan have received a better deal than the secured
claims of various bond holders, some of which may represent pension plans of their own.
President Obama—no bankruptcy lawyer—twisted the
arms of the banks that have received TARP money to
waive their priority, which is yet another reason why a
government ownership position in banks is incompatible
with its regulatory role. Yet the president brands the nonTARP lenders that have banded together to fight this
bogus reorganization as ‘‘holdouts’’ and ‘‘speculators.’’
Both charges are misinformed at best. A holdout situation arises when one party seeks to get a disproportionate
return on the sale of an asset for which it has little value
in use. Thus the owner of a small plot of land could hold
out for a fortune if his land is the last piece needed to assemble a large parcel of land. But the entire structure of
bankruptcy eliminates the holdout position of all creditors,
496 William D. Cohan, The Final Days of Merrill Lynch, The Atlantic (Sept. 2009) (online at
www.theatlantic.com/doc/200909/bank-of-america).

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secured and unsecured alike, by allowing the court to
‘‘cram’’ the reorganization down their throats so long as it
preserves the appropriate priorities among creditors and
offers the secured creditors a stake in the reorganized
business equal to the value of their claims. Ironically,
Obama’s Orwellian interventions have allowed unsecured
union creditors to hold out for more than they are entitled
to.
His charge of ‘‘speculation’’ is every bit as fatuous. Speculators (who often perform a useful economic function) buy
high-risk assets at low prices in the hope that the market
will turn in their favor. By injecting unneeded uncertainty
into the picture, Obama has created the need for a secondary market in which nervous secured creditors, facing
demotion, sell out to speculators who are better able to
handle that newly created sovereign risk. He calls on citizens to buy Chrysler products, but patriotic Americans will
choose to go to Ford, whose own self-help efforts have been
hurt by the Chrysler and GM bailouts.
Sadly, long ago Chrysler and GM should have been allowed to bleed to death under ordinary bankruptcy rules,
without government subsidy or penalty. Libertarians have
often remarked on these twin dangers in isolation. The
Chrysler fiasco confirms their deadly synergistic effect.497
In his testimony before the Judiciary Committee of the United
States House of Representatives, Andrew M. Grossman, senior
legal policy analyst, The Heritage Foundation, stated:
Also detrimental to General Motors and Chrysler is the
difficulty that they will have accessing capital and debt
markets. Lenders know how to deal with bankruptcy—it’s
a well understood risk of doing business. But the tough
measures employed by the Obama Administration to cram
down debt on behalf of the automakers were unprecedented and will naturally make lenders reluctant to do
business with these companies, for fear they could suffer
the same fate. Even secured and senior creditors, those
who forgo higher interest rates to protect themselves
against risks, suffered large, unexpected losses. So nothing
that either company can offer, no special status or security
measure, can fully assuage lenders’ fears that, in an economic downturn, they could be forced to accept far less
than the true value of their holdings. At best, if General
Motors and Chrysler have access to debt markets at all,
they will have to pay dearly for the privilege. At worst,
even high rates and tough covenants will not be enough to
attract interest.

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The Obama Administration’s transparent favoritism toward its political supporters in the United Auto Workers
497 Richard Epstein, The Deadly Sins Of The Chrysler Bankruptcy, Forbes (May 12, 2009) (online
at
www.forbes.com/2009/05/11/chrysler-bankruptcy-mortgage-opinions-columnists-epstein.html).

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Union may lead other unions to demand the same: hefty
payouts and ownership stakes in exchange for halfhearted
concessions. Lenders know now that the Administration is
unable to resist such entreaties. As one hedge fund manager observed, ‘‘The obvious [lesson] is: Don’t lend to a
company with big legacy liabilities, or demand a much
higher rate of interest because you may be leapfrogged in
bankruptcy.’’
Perhaps the most affected will be faltering corporations
and those undergoing reorganization—that is, the enterprises with the greatest need for capital. Lending money
to a nearly insolvent company is risky enough, but that
risk is magnified when bankruptcy ceases to recognize priorities or recognize valid liens. With private capital unavailable, larger corporations in dire straits will turn to
the government for aid—more bailouts—or collapse due to
undercapitalization, at an enormous cost to the economy.
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Financial institutions—enterprises that the federal government has already spent billions to strengthen—will also
be affected. Many hold debt in domestic corporations that
could be subject to government rescue, rendering their obligations uncertain. It is that uncertainty which transforms loans into impossible-to-value toxic assets and blows
holes in balance sheets across the economy.
Finally, there are the investors, from pension funds and
school endowments to families building nest eggs for their
future. General Motors bonds, like the debt of other longlived corporations, has been long regarded as a refuge from
the turmoil of equity markets. The once-safe investment
held directly by millions of individuals and indirectly,
through funds and pensions, by far more, are now at risk,
which will be reflected in those assets’ values.498

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3. The Use of TARP Funds in the Chrysler and GM Bankruptcies
Section 101(a)(1) of the EESA states that:
The Secretary [of the Treasury] is authorized to . . .
purchase, and to make and fund commitments to purchase,
troubled assets from any financial institution, on such
terms and conditions as are determined by the Secretary,
and in accordance with this Act and the policies and procedures development and published by the Secretary. (emphasis added).
A plain reading of the statute would necessarily preclude the employment of TARP funds for the benefit of the auto industry because, among other reasons, neither Chrysler nor GM qualifies as
a ‘‘financial institution.’’ If Chrysler and GM are somehow deemed
to qualify as ‘‘financial institutions,’’ then what business enterprise
498 Andrew M. Grossman, Bailouts, Abusive Bankruptcies, And the Rule of Law, Testimony before the Judiciary Committee of the United States House of Representatives (May 21, 2009) (online at www.heritage.org/Research/Economy/tst052209a.cfm).

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will fail to so qualify? If Congress had intended for the TARP to
cover all business enterprises it would not have incorporated such
a restrictive term as ‘‘financial institution’’ into EESA.
Further, a funding bill specifically aimed at assisting the auto industry was not approved by Congress. Nevertheless, the Bush Administration extended credit to Chrysler and GM and the Obama
Administration orchestrated the Chrysler and GM bankruptcies
which resulted in an investment of over $81 billion in the auto industry.
Since the authority for such an investment remains unclear, I requested that the Administration provide the Panel with a formal
written legal opinion justifying: 499
(i) the use of TARP funds to support Chrysler and GM prior
to their bankruptcies;
(ii) the use of TARP funds in the Chrysler and GM bankruptcies;
(iii) the transfer of equity interests in New Chrysler and
New GM to the UAW/VEBAs; and
(iv) the delivery of notes and other credit support by New
Chrysler and New GM for the benefit of the UAW/VEBAs.500
Such opinions have not been delivered.

499 In a written response to the Panel the Administration stated:
The Treasury described the authority to use TARP funds to finance the old Chrysler and GM
in bankruptcy court filings made on its behalf by the Department of Justice, specifically in the
Statement of the United States of America Upon The Commencement of General Motors Corporation’s Chapter 11 Case filed June 10, 2009, a copy of which has been provided to the Congressional Oversight Panel. In Judge Gerber’s final sale order in the GM bankruptcy case dated
July 5, 2009, also provided to the Congressional Oversight Panel, he wrote:
The U.S. Treasury and Export Development Canada (‘‘EDC’’), on behalf of the Governments
of Canada and Ontario, have extended credit to, and acquired a security interest in, the assets
of the Debtors as set forth in the DIP Facility and as authorized by the interim and final orders
approving the DIP Facility (Docket Nos. 292 and 2529, respectively). Before entering into the
DIP Facility and the Loan and Security Agreement, dated as of December 31, 2008 (the ‘‘Existing UST Loan Agreement’’), the Secretary of the Treasury, in consultation with the Chairman
of the Board of Governors of the Federal Reserve System and as communicated to the appropriate committees of Congress, found that the extension of credit to the Debtors is ‘‘necessary
to promote financial market stability,’’ and is a valid use of funds pursuant to the statutory authority granted to the Secretary of the Treasury under the Emergency Economic Stabilization
Act of 2008, 12 U.S.C. §§5201 et seq. (‘‘EESA’’). The U.S. Treasury’s extension of credit to, and
resulting security interest in, the Debtors, as set forth in the DIP Facility and the Existing UST
Loan Agreement and as authorized in the interim and final orders approving the DIP Facility,
is a valid use of funds pursuant to EESA.
The rationale and determination of the ability to use TARP funds applies equally to the financing provided to the new Chrysler. There was no new financing provided to New GM. Instead, cash flowed from old GM to new GM as part of the asset sale, and new GM assumed
a portion of the loan that Treasury had made to old GM.
The interests received by other stakeholders of Chrysler and GM including the UAW/VEBAs
were a result of negotiations between all stakeholders as described in detail by myself and
Harry Wilson in our depositions in the bankruptcy cases, transcripts of which have been provided to the Congressional Oversight Panel.
I find the response unhelpful and ask the Administration to provide a formal written legal
opinion supporting its position. Since Congress specifically rejected the bailout of Chrysler and
GM, under what theory and precedent did the Executive unilaterally invest $81 billion in these
non-financial institutions?
500 The promissory notes issued to the UAW/VEBAs are senior to the equity issued to the
United States government. Since the government controlled New Chrysler and New GM at the
time the notes were issued, it’s apparent that the government agreed to subordinate the TARP
claims held by the American taxpayers to the claims held by the UAW/VEBAs. What was the
purpose of the subordination except perhaps to prefer the claims of a favored class over the
claims of the taxpayers who funded the TARP?

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4. Analysis of the Chrysler and GM Cases by Bankruptcy
Scholars and Pressure on TARP Recipients
A number of bankruptcy academics at top-tier law schools have
questioned the holdings in the Chrysler and GM bankruptcies. In
the Chrysler and GM proceedings, Section 363 of the United States
bankruptcy code was used by the Administration to upset well established commercial law principles and the contractual expectations of the parties. As Professors Adler, Roe and Skeel note, the
Chrysler and GM bankruptcy courts required each Section 363 bidder to assume certain obligations of the UAW/VEBAs as part of its
bid. This means that potential purchasers could not simply acquire
the assets free and clear of the liabilities of the seller, but, instead,
were also required to assume certain of those liabilities. This requirement most likely chilled the bidding process and precluded
the determination of the true fair market value of the assets held
by Chrysler and GM. By disrupting the bidding process it’s entirely
possible that TARP proceeds were misallocated away from the
Chrysler senior secured creditors and the GM bondholders to the
UAW/VEBAs.501 Although I do not concur that EESA authorized
the use of TARP proceeds in the Chrysler and GM bailouts, it’s
nevertheless important to follow the TARP funds once they were
committed.
The technical bankruptcy laws issues are exacerbated because
the winning purchaser in the Chrysler and GM cases—entities directly or indirectly controlled by the United States government—
had virtually unlimited resources, which is certainly not the case
in typical private equity transactions. The matter becomes particularly muddled when you consider that a majority in interest of the
501 A summary of the analysis of Professors Adler, Roe and Skeel as well as a set of examples
are included in Appendix A to my Dissenting Views to the Panel’s September Auto Report. Representative Jeb Hensarling, Additional Views to Congressional Oversight Panel, September Oversight Report: The Use of TARP Funds in the Support and Reorganization of the Domestic Automotive Industry (Sept. 9, 2009) (online at cop.senate.gov/documents/cop-090909-reportadditionalviews.pdf).
The following example illustrates how the Administration used Section 363 of the bankruptcy
code to achieve its economic, social and political objectives at the expense of the American taxpayers and the Chrysler senior secured creditors and GM bondholders.
Assume Oldco (i.e., Old Chrysler or Old GM) has (i) assets with a fair market value (FMV)
of $70, (ii) secured debt (with liens on $40 FMV of assets) in an outstanding principal amount
of $90 held by Creditor 1, and (iii) unsecured debt in an outstanding principal amount of $50
held by Creditor 2. Creditor 1 in effect holds two claims, a $40 secured claim (equal to the FMV
of the assets securing Creditor 1’s claim) and a $50 unsecured claim (which together equal Creditor 1’s total claim of $90); and Creditor 2 holds a $50 unsecured claim. Any distribution on the
unsecured claims should be shared 50/50 percent (because each creditor holds a $50 unsecured
claim) under the ‘‘no unfair discrimination’’ rule of Chapter 11.
If, in a Section 363 sale, Newco (i.e., New Chrysler or New GM) purchased the Oldco assets
(with no assumption of Oldco liabilities) for $70 FMV, then the $70 cash proceeds would be distributed as follows: Creditor 1 would receive $55 ($40 secured position, plus $15 unsecured position), and Creditor 2 would receive $15.
Conversely, if in the Section 363 sale the bankruptcy court required Newco to assume Creditor
2’s debt of $50, then Newco would only pay $20 cash for the Oldco assets ($70 FMV of assets,
less $50 required assumption of Creditor 2’s debt). In such event, Creditor 1 would only receive
$20 (representing 100 percent of the cash sales proceeds from the Section 363 sale, but leaving
a shortfall of $70 ($90, less $20)). Creditor 2 would receive no proceeds from the Section 363
sale, but would quite possibly receive $50 in the future from Newco (the amount of Creditor 2’s
debt assumed by Newco).
Thus, without the required assumption of the $50 claim by Newco, Creditor 1 (the senior creditor) would receive $55 and Creditor 2 (the junior creditor) would receive $15. This result is consistent with commercial law principles and the contractual expectations of the parties. With the
required assumption, however, Creditor 1 would only receive $20 and Creditor 2 would receive
$50. The required assumption results in a shift of $35 from Creditor 1 to Creditor 2, a result
that is not consistent with commercial law principles, the contractual expectations of the parties
and the Chapter 11 reorganization rules.

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Chrysler senior secured debt was held by TARP recipients at a
time when there was much talk in the press about ‘‘nationalizing’’
some or all of these institutions. It is not difficult to imagine that
these recipients felt direct pressure to ‘‘get with the program’’ and
support the Administration’s proposal.502
Based upon the analysis of Professors Adler, Roe and Skeel, the
bankruptcy courts should have called a time-out and changed the
bidding procedure (i.e., no assumption of liabilities required), extended the time to submit a bid 503 and applied the protections af502 TARP recipients who were also Chrysler senior secured creditors included Citigroup,
JPMorgan Chase, Morgan Stanley and Goldman Sachs.
Michael J. de la Merced, Dissident Chrysler Group to Disband, New York Times (May 8, 2009)
(online at dealbook.blogs.nytimes.com/2009/05/08/oppenheimer-withdraws-from-dissident-chrysler-group/?scp=1&sq=TARP%20lender%20Chrysler%20pressure&st=cse). The article provides:
‘‘After a great deal of soul-searching and quite frankly agony, Chrysler’s non-TARP lenders
concluded they just don’t have the critical mass to withstand the enormous pressure and machinery of the US government,’’ Thomas E. Lauria, a partner of Mr. Kurtz’s and the lead lawyer
for the group. ‘‘As a result, they have collectively withdrawn their participation in the court
case.’’
With the group’s disbanding, a little over a week since it made itself public, a vocal obstacle
to Chrysler’s reorganization has subsided. The committee’s membership has shrunken by the
day as it faced public criticism from President Obama and others. That continued withdrawal
of firms led Oppenheimer and Stairway to conclude that they could not succeed in opposing the
Chrysler reorganization plan in court, the two firms said in separate statements.
In its first public statement last week, the ad hoc committee said that it consisted of about
20 firms holding $1 billion in secured debt. But hours after Mr. Obama criticized the firms as
‘‘speculators,’’ the group lost its first major member, Perella Weinberg Partners, which changed
its mind and signed onto the Chrysler plan.
In the September 2009 issue, The Atlantic reported:
As the crisis has receded this year, the government has remained aggressive, seeking business
outcomes it finds desirable with some apparent indifference to contractual rights. In Chrysler’s
bankruptcy negotiations in April, for example, Treasury’s plan offered the automaker’s seniordebt holders 29 cents on the dollar. Some debt holders, including the hedge fund Xerion Capital
Partners, believed they were contractually entitled to a much better deal as senior creditors
holding secured debt. But four TARP banks—JPMorgan Chase, Citigroup, Morgan Stanley, and
Goldman Sachs—which owned about 70 percent of the Chrysler senior debt at par (100 cents
on the dollar), had agreed to the 29-cent deal. By getting these banks and the other senior-debt
holders to accept the 29-cent deal and give up their rights to push for the higher potential payout they were entitled to, the government could give Chrysler’s workers, whose contracts were
general unsecured claims—and therefore junior to the banks’—a payout far more generous than
would otherwise have been possible or likely. Essentially, the government was engineering a
transfer of wealth from TARP bank shareholders to auto workers, and pressuring other creditors
to go along.
* * * * *
A somewhat similar story played out during GM’s bankruptcy—the government again put together a deal that looked to many like a gift to the United Auto Workers at the expense of bondholders, who were pressed hard to quickly take a deal that would leave them with 10 percent
of the equity of the reorganized company (plus some out-of-the-money warrants) when they likely would have been able to negotiate for more in a less well-orchestrated bankruptcy proceeding.’’ (emphasis added.)
William D. Cohan, The Final Days of Merrill Lynch, The Atlantic (Sept. 2009) (online at
www.theatlantic.com/doc/200909/bank-of-america).
In the Panel’s September Report I requested that SIGTARP investigate this matter.
503 Mr. Richard E. Mourdock, the Indiana State Treasurer, whose pension funds invested in
Chrysler senior secured indebtedness, provided the following testimony to the Panel:
The principal restriction was imposed by the time requirement that mandated the bankruptcy
be completed by June 15, 2009. Throughout the bankruptcy process, the government maintained
if the deal was not completed by that date that Fiat would walk away from its ‘‘purchase’’ of
20% of the Chrysler assets. From the beginning, the June 15 date was a myth generated by
the federal government. Fiat was being given the assets at no cost at a minimum value of
$400,000,000. Why would Fiat establish or negotiate such a date when they were to receive such
a bonanza? On the very day that the Chrysler assets were transferred to Fiat, the company’s
chairman stated to the media that the June 15th date never originated from them. The artificial
date drove the process in preventing creditors from having any opportunity to establish true values, prepare adequate cases, and therefore failed to protect their rights to the fullest provisions
of the law. The artificial date also forced the courts to act with less than complete information.
The U.S. [Second Circuit] Court of Appeals in its written opinion of August 9, 2009, denied
our pensioners standing pursuant to the argument that we could not prove, under any other
bankruptcy plan, we could have received more than the $0.29 we were offered. We believe this
was an error because the court used a liquidation value for the company rather than an ‘onContinued

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forded under the Chapter 11 reorganization rules. With those
changes the judicial holdings would have most likely appeared fair
and reasonable and could have served as a model for high-pressure
bankruptcies that followed. Without such changes, however, the
process was inherently flawed because we will never know if another bidder would have paid more for the gross assets (without
the assumption of any liabilities) of Chrysler or GM.504 As intentionally structured by the Administration, the bidding procedures
ultimately adopted for the Section 363 sales necessarily precluded
the determination of the true fair market value of the assets held
by Chrysler and GM. Without such determination, the appropriateness of the price paid for the assets of Old Chrysler and Old GM
as well as the appropriateness of the distribution made by Old
Chrysler and Old GM to the Chrysler senior secured creditors and
GM bondholders will remain in doubt.
E. TARP and Foreclosure Mitigation505

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Much like the auto industry interventions, HAMP and the Administration’s other foreclosure mitigation efforts to date have been
a failure.506 The Administration’s opaque foreclosure mitigation efforts have assisted only a small number of homeowners while
drawing billions of involuntary taxpayer dollars into a black
hole.507
going concern’ basis. We received written notice from the U.S. Bankruptcy Court of New York
by certified letter of our rights to file a claim on Monday, May 18, 2009, at 10:00 a.m. We were
advised in the letter that any evidence we wished to submit to make a claim against the submitted plan (in part, the $0.29), would have to include trade tickets, depositions, affidavits, documents of evidence to substantiate claims, and etc. and would have to be filed with the bankruptcy court on Tuesday, May 19, 2009, by 4:00 p.m. The bankruptcy of Chrysler was frequently
referred to as ‘‘the most complex bankruptcy in American history,’’ and yet we were given thirty
hours to respond. We feel this was clearly an error in the process that helped to reduce the
wealth of our beneficiaries.
Congressional Oversight Panel, Field Hearing on the Auto Industry, at 154 (July 27, 2009)
(online at cop.senate.gov/documents/transcript-072709-detroithearing.pdf).
504 It is also important to note that for these purposes it’s irrelevant if certain Chrysler or
GM creditors happened to have purchased their securities at a cheap price. The substantive
legal issue concerns whether their contractual rights were honored. Courts should not abrogate
well established commercial law principles and contractual expectations simply because an investor has earned a ‘‘reasonable return’’ on its investment. That’s not the rule of law, but the
law of political expediency.
505 In this section I borrow extensively from my dissent to the Panel’s October report on foreclosure mitigation. Representative Jeb Hensarling, Congressional Oversight Panel, October Oversight Report: An Assessment of Foreclosure Mitigation Efforts After Six Months (Oct. 9, 2009)
(online at cop.senate.gov/documents/cop-100909-report-hensarling.pdf).
506 Taxpayer protection is a guiding principle of EESA interwoven throughout the legislation,
including for foreclosure mitigation efforts. EESA gives the Panel a clear duty to provide information on foreclosure mitigation programs, but with the following caveat. Reports must include:
The effectiveness of foreclosure mitigation efforts and the effectiveness of the program from
the standpoint of minimizing long-term costs to the taxpayers and maximizing the benefits for
taxpayers.
12 U.S.C. 5223(b)(1)(A)(iv).
507 Housing GSEs—Government Sponsored Enterprises—Fannie Mae and Freddie Mac play
key roles in the Administration’s new housing policies. Funds from the Preferred Share Purchase Agreements, which allow the GSEs to draw up to $400 billion from Treasury, are being
deployed for foreclosure mitigation and refinancing efforts. Since Fannie Mae and Freddie Mac
are now under the conservatorship of the Federal Housing Finance Agency (FHFA), their concerns are now officially the taxpayer’s concerns—any losses they experience through MHA
should be a carefully considered part of a cost-benefit analysis.
Fannie Mae and Freddie Mac should be more forthcoming with respect to their foreclosure
mitigation efforts and use of taxpayer funds.

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1. 100 Percent Loss to the Taxpayers from the Administration’s Foreclosure Mitigation Efforts
While the CBO estimates that taxpayers will lose 100 percent of
the $50 billion in TARP funds committed to the Administration’s
foreclosure relief programs, the Administration appears inclined to
commit additional taxpayer funds in hopes of helping distressed
homeowners—both deserving and undeserving—with a taxpayer
subsidized rescue.508
While there may be some positive signals in our economy, recovery remains in a precarious position. The unemployment rate hovers around 10 percent and the broader definition of unemployment
exceeds 17 percent. This is unfortunate because the best foreclosure mitigation program is a job, and the best assurance of job
security is economic growth and the adoption of public policy that
encourages and rewards capital formation and entrepreneurial success. Without a robust macroeconomic recovery the housing market
will continue to languish and any policy that forestalls such recovery will by necessity lead to more foreclosures.
To date, despite the commitment of some $27 billion,509 only a
modest number of underwater homeowners have received a permanent modification of their mortgage.510 If the Administration’s goal
of subsidizing up to 9 million home mortgage refinancings and
modifications is met, the cost to the taxpayers will possibly exceed
the $75 billion already allocated to the MHA—Making Home Affordable—program,511 and it is likely that most (if not all) of it will
be not be recovered.

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2. Mortgage Holders Profit from Private Sector Foreclosure
Mitigation Efforts
Professor Alan M. White, an expert retained by the Panel, notes
in a paper attached to the Panel’s October Report the effectiveness
of non-subsidized voluntary foreclosure mitigation when he states:
508 Dealbook, Treasury Pushes Mortgage Firms for Loan relief, New York Times (Nov. 30,
2009) (online at dealbook.blogs.nytimes.com/2009/11/30/treasury-presses-banks-for-mortgage-relief/?scp=1&sq=Treasury%20Goodman%20November%2030&st=cse):
The Obama administration said Monday that it would increase the pressure on banks to help
troubled homeowners permanently lower mortgage payments. . .
* * * * *
Monday’s push was the latest evidence that a $75 billion taxpayer-financed effort aimed at
stemming foreclosures was struggling. Even as lenders have accelerated the pace at which they
are reducing mortgage payments for borrowers, most loans modified remain in a trial stage lasting up to five months, and only a fraction have been made permanent.
In its statement on Monday, the Treasury Department said that more than 650,000 borrowers
have received trial modifications under the program, called Making Home Affordable, and that
about 375,000 borrowers were scheduled to convert to permanent modifications by the end of
the year.
That would represent a sharp turnaround—last month, an oversight panel created by Congress reported that fewer than 2,000 of the 500,000 loan modifications then in progress had become permanent.
Jim Kuhnhenn, Strong Banks, Weak Credit: Treasury Rethinks TARP, ABC News (Nov. 24,
2009) (online at abcnews.go.com/Business/wireStory?id=9161503). Determination of costs is especially important if, as Treasury Secretary Geithner has stated, TARP is interpreted to be a ‘‘revolving facility.’’ Given the likelihood that he will extend TARP to October 31, 2010, it’s possible
that a substantial portion of the $700 billion TARP facility could be directed to foreclosure mitigation efforts.
509 Number as defined by the current ‘‘Total Cap’’ for the Home Affordable Modification Program, $27,382,460,000. U.S. Department of the Treasury, Transactions Report (Nov. 30, 2009)
(online
at
www.financialstability.gov/docs/transaction-reports/11-3009%20Transactions%20Report%20as%20of%2011-25-09.pdf).
510 See Section One, C.3. of the Panel’s December report.
511 The Making Home Affordable program presently consists of the HAMP—Home Affordable
Modification Program—and the HARP—Home Affordable Refinancing Program.

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Nevertheless, there is convincing evidence that successful modifications avoided substantial losses, while requiring only very modest curtailment of investor income. In
fact, the typical voluntary modification in the 2007–2008
period involved no cancellation of principal debt, or of pastdue interest, but instead consisted of combining a capitalization of past-due interest with a temporary (three to five
year) reduction in the current interest rate. Foreclosures,
on the other hand, are resulting in losses of 50% or more,
i.e. upwards of $124,000 on the mean $212,000 mortgage
in default.512
Significantly, he also quantifies the overall benefit of voluntary
foreclosure mitigation to investors by concluding:
The bottom line to the investor is that any time a homeowner can afford the reduced payment, with a 60% or better chance of succeeding, the investor’s net gain from the
modification could average $80,000 per loan or more. Two
million modifications with a 60% success rate could
produce $160 billion in avoided losses, an amount that
would go directly to the value of the toxic mortgage-backed
securities that have frozen credit markets and destabilized
banks.513
512 Since these numbers apparently include up to $9,000 of incentive payments, it appears
that the total cost to the taxpayers of all interest rate and principal adjustments is approximately $10,000 per modification, or approximately $2,000 per year ($167 per month) for the full
five-year HAMP modification period. Perhaps this is correct, but I question whether mortgage
loans may be successfully modified at such a relatively modest cost to the taxpayers under the
HAMP. It appears that Professor White did not independently calculate these amounts, but, instead, generally relied upon estimates provided by Treasury. It is unclear what methodology
Treasury employed except, perhaps, to divided the $50 billion of TARP funds initially allocated
to HAMP by 2.5 million modifications, or $20,000 per mortgage modification. Treasury’s approach, although employed by Professor White, should be augmented by the application of a
more comprehensive methodology. See generally Alan M. White, Annex B to Congressional Oversight Panel, October Oversight Report: An Assessment of Foreclosure Mitigation Efforts After Six
Months Potential Costs and Benefits of the Home Affordable Modification Program, at 118 (Oct.
9, 2009) (online at cop.senate.gov/documents/cop-100909-report.pdf).
513 If this is indeed the case, then why is it not in the best interest of each mortgage holder
to modify the mortgage loans in its portfolio? Why would a mortgage holder risk breaching its
fiduciary duties to its investor group by foreclosing on mortgaged property instead of restructuring the underlying loans? Why should the taxpayers subsidize the restructuring of mortgage
loans—whether through the HAMP or otherwise—if the mortgage holders may independent of
such subsidy, realize a net gain of approximately $80,000 per loan by voluntarily restructuring
their distressed mortgage loans?
Professor White seems to imply that without taxpayer funded subsidies the mortgage servicers
would be economically disinclined to modify distressed mortgage loans because of unfavorable
terms included in typical pooling and servicing agreements—the contracts pursuant to which
servicers discharge their duties to mortgage holders. Professor White writes:
While modification can often result in a better investor return than foreclosure, modification
requires ‘‘high-touch’’ individualized account work by servicers for which they are not normally
paid under existing securitization contracts (pooling and servicing agreements or ‘‘PSAs’’.)
Servicer payment levels were established by contracts that last the life of the mortgage pools.
Servicers of subprime mortgages agreed to compensation of 50 basis points, or 0.5% from interest payments, plus late fees and other servicing fees collected from borrowers, based on conditions that existed prior to the crisis, when defaulted mortgages constituted a small percentage
of a typical portfolio. At present, many subprime and alt-A pools have delinquencies and defaults in excess of 50% of the pool. The incentive payments under HAMP can be thought of as
a way to correct this past contracting failure.
* * * * *
Because mortgage servicers are essentially contractors working for investors who now include
the GSE’s, the Federal Reserve and the Treasury, we can think of the incentive payments under
HAMP as extra-contractual compensation for additional work that was not anticipated by the
parties to the PSAs at the time of the contract. (emphasis added).
Is the purpose of the HAMP to bail out servicers from their ‘‘contracting failure’’ through the
payment of ‘‘extra-contractual compensation’’? The taxpayers should not be charged with such

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Notwithstanding the complexity injected into the foreclosure
mitigation debate by the Administration, a solution appears relatively straightforward. If, as Professor White suggests, mortgage
holders stand to realize a net gain of approximately $80,000 from
restructuring each mortgage loan instead of foreclosing on the underlying property, the mortgage holders themselves should undertake to subsidize the ‘‘contracting failure’’ of their servicers out of
such gains. I appreciate that mortgage holders may not wish to
remit additional fees to their servicers, but, between mortgage
holders and the taxpayers, why should the taxpayers—through
TARP or otherwise—bear such burden? Taxpayers should not be
required to subsidize mortgage holders or servicers when foreclosure mitigation efforts appear to be in their own economic best
interests.
The Administration, by enticing mortgage holders and servicers
with the $75 billion HAMP and HARP programs (with a reasonable
expectation that additional funds may be forthcoming) has arguably caused them to abandon their market oriented response to the
atypical rate of mortgage defaults in favor of seeking hand-outs
from the government.514 All of the false starts with HAMP and the
other government programs may have in effect exacerbated the
foreclosure mitigation process by keeping private sector servicers
and mortgage holders on the sidelines waiting on a better deal
from the government. By creating a perceived safety net, the foreclosure mitigation efforts advocated by the Administration may encourage economically inefficient speculation in the residential real
estate market with its adverse bubble generating consequences.

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3. Taxpayer Protection and Shared Appreciation Rights
It is my understanding that the foreclosure mitigation programs
announced by Treasury do not provide Treasury or the mortgage
lenders with the ability to participate in any subsequent appreciation in the fair market value of the properties that serve as collateral for the modified or refinanced mortgage loans. Since one of
Treasury’s fundamental mandates is taxpayer protection, the incorporation of a shared appreciation right or equity kicker feature
would appear appropriate. Homeowners should not receive a windfall at the expense of the taxpayers and mortgage lenders who suffered the economic loss from restructuring their distressed mortgage loans.
For example, a $100,000, 6 percent home mortgage loan may be
modified by reducing the principal to $90,000 and the interest rate
to 5 percent. If the house securing the mortgage loan subsequently
appreciates by, say, $25,000, the taxpayers and the mortgage lender who shared the cost of the mortgage modification will not benefit
from any such increase in value. Such result seems inappropriate
and particularly unfair to the taxpayers. By modifying the mortgage loan and avoiding foreclosure, the taxpayers and the mortgage
lender have provided a distinct and valuable financial benefit to
the distressed homeowner that should be recouped to the extent of
a responsibility and I am disappointed that the Administration and Professor White would advocate such an approach.
514 It is difficult to fault mortgage holders and servicers for their rational behavior in accepting bailout funds that may enhance the overall return to their investors.

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any subsequent appreciation in the value of the house securing the
modified mortgage. A simple filing in the local real estate records
should make the shared appreciation feature self-effectuating upon
the sale or exchange of the applicable residence. In order to ensure
the integrity of the shared appreciation right, limitations should
apply regarding the ability of homeowners to obtain home equity
loans except when the proceeds of the loans are used to repay the
taxpayers for the costs incurred with respect to the mortgage modifications.
In addition, as I noted in my dissent to the Panel’s October report on foreclosure mitigation,515 it would also seem productive if
modified home mortgage loans were treated as recourse loans to
the homeowners instead of as in effect non-recourse loans under
the ‘‘anti-deficiency’’ laws of many jurisdictions.516

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4. Equity and Moral Hazard
Regardless of whether one believes foreclosure mitigation can
truly work, taxpayers who are struggling to pay their own mortgage should not be forced to bail out their neighbors through such
an inefficient and transparency-deficient program. The Administration appears to prioritize good intentions and wishful thinking over
taxpayer protection.
Any foreclosure mitigation effort must appear fair and reasonable to the American taxpayers. It is important to remember that
the number of individuals in mortgage distress reaches beyond individuals who have experienced an adverse ‘‘life event’’ or been the
victims of fraud. This complicates moral hazard issues associated
with large-scale modification programs. Distinct from a moral hazard question there is an inherent question of fairness as those who
are not facing mortgage trouble are asked to subsidize those who
are facing trouble.
In light of current statistics regarding the overall foreclosure
rate, an essential public policy question that must be asked regarding the effectiveness of any taxpayer-subsidized foreclosure mitigation program is: ‘‘Is it fair to expect approximately 19 out of every
20 people to pay more in taxes to help the 20th person maintain
their current residence?’’ Although that question is subject to individual interpretation, there is an ever-increasing body of popular
sentiment that such a trade-off is indeed not fair.517
515 Representative Jeb Hensarling, Congressional Oversight Panel, October Oversight Report:
An Assessment of Foreclosure Mitigation Efforts After Six Months, at 158–61 (Oct. 9, 2009) (online at cop.senate.gov/documents/cop-100909-report-hensarling.pdf).
516 Edward Pinto, Saving More Homes for the Same Money, Wall Street Journal (Dec. 6, 2009)
(online at online.wsj.com/article/SB10001424052748704342404574577853961145272.html).
517 State anti-deficiency laws also create significant moral hazard risks that will be exacerbated if Congress passes a cramdown amendment to the bankruptcy code. With these laws in
effect, the risk-reward mix underlying each mortgage and home equity loan will be bifurcated
with lenders assuming substantially all of the risks regarding the underlying value of the mortgaged property and homeowners receiving substantially all of the rewards. These laws may have
the unintended consequence of encouraging homeowners to reject their contractual responsibilities and service their mortgage obligations only when it’s in their economic self-interest. Since
option contracts are inherently more risky to lenders than traditional mortgage contracts, lenders may have little choice but to incorporate such risks into the interest rates and fees charged
on mortgage loans. The Administration should refrain from suggesting that Congress enact legislation that encourages individuals and families to invest in the housing market for speculative
purposes while permitting them to avoid their contractual obligations upon the occurrence of
adverse market conditions.
It is worth noting that the decision of individuals and families to speculate in the housing
market, while perhaps unwise, is not entirely irrational. While some may contend that the aver-

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Since there is no uniform solution for the problem of foreclosures,
a sensible approach should encourage multiple private sector mitigation programs that do not amplify taxpayer risk or require government mandates. Subsidized loan refinancing and modification
programs may provide relief for a select group of homeowners, but
they work against the majority who shoulder the tax burden and
make mortgage payments on time. Based upon the analysis of Professor White, little reason exists for government sponsored programs since it is in the best economic interest of the mortgage
holders to restructure troubled loans rather than to pursue a foreclosure remedy.
F. Secretary Geithner Should Not Extend the TARP but
Permit it to End on December 31, 2009

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In order to end the abuses of EESA as evidenced by the Chrysler
and GM bankruptcies, misguided foreclosure mitigation programs
and the re-animation of reckless behavior and moral hazard risks,
Secretary Geithner should not extend the TARP but permit it to
end on December 31, 2009. As of today, Treasury has approximately $297.2 billion of TARP authority available to fund existing
commitments and new programs.518 As the EESA statute requires,
all recouped and remaining TARP funds should go back into the
Treasury general fund for debt reduction. All revenues and proceeds from TARP investments that have generated a positive return should also go to the general fund. Neither the letter nor the
spirit of the law allow for TARP funds to be used as offsets for future spending programs, such as those currently being considered
by the Administration and Majority leadership.
Further, the TARP should be terminated due to:
• the desire of the taxpayers for TARP recipients to repay all
TARP-related investments sooner rather than later;
• the troublesome corporate governance and regulatory conflict of interest issues raised by Treasury’s ownership of equity
and debt interests in the TARP recipients;
• enhanced implicit guarantee and moral hazard risks;
• an increase in the number and size of ‘‘too big to fail’’ financial institutions;
• the absence of appropriate standards of transparency and
accountability in TARP-related disclosure by Treasury;
• the stigma associated with continued participation in the
TARP by the recipients; 519 and
• the use of the TARP (i) for economic stimulus instead of
EESA mandated financial stability and (ii) to promote the Adage consumer is too unskilled to comprehend seemingly sophisticated financial products, I would
argue to the contrary. With anti-deficiency, single-action and, perhaps, bankruptcy cramdown
laws in effect, borrowers will receive the bulk of any equity appreciation while lenders will bear
substantially all of the risk of loss arising from home mortgage loans. Most consumers are rational and react favorably to incentives that reward particular behavior. Providing economic and
legal incentives that encourage inappropriate speculation in the housing market is unwise and
fraught with adverse unintended consequences. That a bankruptcy cramdown law could help reinflate a housing bubble by encouraging reckless speculation and cause lenders to raise mortgage interest rates and fees justifies its rejection.
518 See Section One, C.5.b.i. of the Panel’s December report.
519 Dealbook, Bank of America’s TARP Move Helps Shed Stigma, New York Times (Dec. 3,
2009) (online at dealbook.blogs.nytimes.com/2009/12/03/move-to-repay-aid-helps-bank-of-americashed-stigma/?scp=2&sq=stigma%20bank%20of%20america&st=cse).

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ministration’s economic, social and political agenda as evidenced by, among others, the Chrysler and GM bankruptcies.
Some of the adverse consequences that have arisen for TARP recipients include, without limitation:
• the private sector must now incorporate the concept of ‘‘political risk’’ into its due diligence analysis before engaging in
any transaction with the United States government;
• corporate governance and conflict of interest issues; and
• the distinct possibility that TARP recipients—including
those who have repaid all CPP advances but have warrants
outstanding to Treasury—and other private sector entities may
be subjected to future adverse rules and regulations.
A recent report issued by SIGTARP provides an insightful analysis of the actual cost of the TARP.520
• Assuming that most financing for the TARP comes from shortterm Treasury bills, Treasury estimates the interest cost for TARP
funds spent to be about $2.3 billion, although SIGTARP says a
blended cost would double this amount and an ‘‘all-in’’ estimate
would triple or quadruple it.521
• Were the TARP to reach its $699 billion potential, it would
mean a $5,000 expenditure for each taxpayer.522 The TARP represents five percent of 2008 GDP.
• Other costs identified by SIGTARP include (i) higher borrowing
costs in the future as a result of increased Treasury borrowing levels, (ii) a potential ‘‘crowding out effect’’ on prospective private sector borrowers, potentially driving private sector borrowers out of
the market, (iii) moral hazard, or unnecessary risk-taking in the
private sector due to the bailout, and (iv) costs incurred by the
other financial-rescue-related federal agencies that have not yet
been quantified.
I introduced legislation—H.R. 2745—to end the TARP on December 31, 2009. In addition, the legislation:
• requires Treasury to accept TARP repayment requests
from well capitalized banks;
• requires Treasury to divest its warrants in each TARP recipient following the redemption of all outstanding TARP-related preferred shares issued by such recipient and the payment of all accrued dividends on such preferred shares;
• provides incentives for private banks to repurchase their
warrant preferred shares from Treasury; and
• reduces spending authority under the TARP for each dollar repaid.

520 SIGTARP, Quarterly Report to Congress (Oct. 21, 2009) (online at sigtarp.gov/reports/congress/2009/October2009lQuarterlylReportltolCongress.pdf).
521 A blended cost combines short- and medium-term Treasury securities, while an ‘‘all-in’’ cost
balances those with longer-term Treasury securities. If TARP is a medium- to longer-term program, either approach would seem more sensible than Treasury’s current short-term interest estimate.
522 The $5,000 ‘‘cost’’ per taxpayer assumes 138.4 million taxpayers are covering the full $699
billion.

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D. Paul S. Atkins
Although I concur with the report issued by the Panel today,
some aspects of the report should be elucidated. The report is careful to come to no outright conclusion regarding the TARP. The program is still in operation and distributing money (although at a
much diminished rate), and we are still much too close to the
events of last year to be able to obtain good data in order to render
a dispassionate analysis.
The basic question of this month’s report is: Has TARP been a
success? The response must be that we do not know. Not that the
program, together with larger government programs instituted by
the Federal Reserve and FDIC that dwarfed TARP in terms of taxpayer dollars put at risk, did not show some results. Indeed, the
Panel report on page 77, points out that the federal government
had almost $8 trillion of exposure through various programs to try
to cure the ills of the banking and finance industry, including
TARP’s $700 billion. With the injection of all of this money into the
system, something had to happen. The fact that these programs
had some effect does not answer the question of whether the resources were used wisely.
More time is needed to judge the short- and long-term ramifications of TARP and the other programs. The benefits that some ascribe to TARP only manifested themselves long after the program
was implemented. Looking at the equity markets, the banks hit
bottom in March 2009, months after the implementation of TARP.
The credit markets also took a while to recover. Does this length
of time between the implementation of TARP and the manifestation of supposed benefits indicate that exogenous factors might
have come into play?
A major cause of the turmoil in the financial markets last year
was the lack of transparency and the resulting lack of confidence
that investors had in bank balance sheets. The TARP infusions,
other than demonstrating that the government was willing to put
taxpayer money on the line and stood ready to bail banks out, did
not solve the transparency issue. In fact, the issue persists and affects valuation of financial firms. It did not help that the government at first claimed that TARP money would only be given to
‘‘healthy’’ banks. This claim proved to be manifestly false as even
some of the original recipients appear not to have been healthy.
One cannot view government programs only in the short term;
one must take into account the longer term. Otherwise, the analysis inevitably will be superficial because the full ramifications of
decisions are given little weight. With TARP, dangerous precedents
have been made and expectations established in the marketplace.
These include the unfortunate embrace of the principle of ‘‘too big
to fail’’ and the implicit guarantees that go with that doctrine. I am
pleased that the Panel will consider these issues in next month’s
report.
Under normal circumstances, TARP would be in the liquidating
phase because institutions are repaying the money they received.
Unfortunately, the Treasury seems to be trying to maximize its
power by improperly considering TARP to be like a revolving line
of credit, contrary to the intent of Congress and section 106(d) of

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EESA, which states: ‘‘Revenues of, and proceeds from the sale of
troubled assets purchased under this Act, or from the sale, exercise, or surrender of warrants or senior debt instruments acquired
in section 113 shall be paid into the general fund of the Treasury
for reduction of the public debt.’’ Moreover, the program may yet
be extended by the Treasury Secretary until October 2010, and it
may transform itself into something entirely different during that
time, given the nature of the hastily drafted statute that established TARP and the extreme flexibility with which the Treasury
apparently interprets its mandate and powers thereunder.
Already, $80 billion of TARP funds have been used to intervene
in General Motors, Chrysler, and GMAC, hardly major components
of the banking and finance system. The Treasury has announced
that it intends to dump billions more into GMAC, but the underlying problems of the automotive industry, including excessive
labor costs, inflexible work rules, and a poor product mix have yet
to be addressed. As the financial markets have stabilized, a continuation of TARP raises the prospect that Treasury will put funds
into other companies with only a tenuous connection to the financial markets, contrary to Congress’s intent. Thus, TARP should not
be extended. If more funds are needed in the future, Treasury
should go back to the current Congress and make its case.
During our hearing featuring five economists on November 19,
2009, I posed a question to Dr. Dean Baker as to whether things
would look different today in the financial industry if TARP had
never been established. He responded by saying that ‘‘I am not convinced that we’d be in a hugely different world.’’ Presumably, the
Treasury and the Federal Reserve would have found ways to muddle through, much as they had done during and after the collapse
of Bear Stearns. Dr. Baker further argued that ‘‘the biggest flaw
of TARP’’ was that ‘‘we rushed in with something that wasn’t well
thought out.’’ Indeed, some economists argue that the confusing roll
out of TARP in 2008 only made matters worse. Ultimately, however, had there been no TARP, we would not be facing all of the
unfortunate collateral consequences of TARP and a poorly thoughtout EESA.
As we move into 2010, perhaps into the final few months of this
Panel’s existence, we should be insisting that Treasury stick to the
intent of EESA and to a strict reading of the statute. In addition,
we should follow the advice of Mr. Alex Pollock, who appeared before the Panel on November 19, to insist that Treasury run TARP
as a business. Transparency, audited financial statements, and adherence to Congressional intent will foster accountability and taxpayer confidence.

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SECTION THREE: CORRESPONDENCE WITH TREASURY
UPDATE
On behalf of the panel, Chair Elizabeth Warren sent a letter on
November 25, 2009,523 to Secretary of the Treasury Timothy
Geithner, to follow up on a letter sent on September 15, 2009,524
and to request that the Secretary provide a timely response to the
questions contained therein regarding inputs, formulae, and other
information for the stress tests. The Panel has not yet received a
response from Secretary Geithner.
On behalf of the panel, Chair Elizabeth Warren sent a letter on
November 25, 2009,525 to Secretary of the Treasury Timothy
Geithner, to obtain information on Treasury’s assistance to CIT
Group, Inc. (CIT). Specifically, the letter inquires about the effects
of CIT’s recent bankruptcy on the taxpayers’ investment in the
company via the Capital Purchase Program (CPP), and whether
Treasury expects failures of more financial institutions participating in the CPP. The Panel has not yet received a response from
Secretary Geithner.
On behalf of the panel, Chair Elizabeth Warren sent a letter on
November 25, 2009,526 to Assistant Secretary of the Treasury for
Financial Stability Herbert M. Allison, Jr. The letter notes that Assistant Secretary Allison had yet to respond to a series of questions
for the record following his appearance before the Congressional
Oversight Panel on October 22, 2009, despite an initial request to
receive a response by November 18, 2009. The Panel received a response from Assistant Secretary Allison on December 1, 2009.527

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523 See

Appendix III of this report, infra.
524 See Appendix I of the Congressional Oversight Panel’s October Oversight Report. October
Oversight Report, supra note 220, at 207.
525 See Appendix IV of this report, infra.
526 See Appendix II of this report, infra.
527 Questions for the Record for Assistant Secretary Allison, supra note 253.

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SECTION FOUR: TARP UPDATES SINCE LAST REPORT
A. TARP Repayment
Since the Panel’s prior report, additional banks have repaid their
TARP investments under CPP. A total of 50 banks have repaid in
full their preferred stock TARP investments provided under the
CPP to date. Of these banks, 30 have repurchased their warrants
as well. Additionally, during the month of October, CPP participating banks paid $481.6 million in dividends and $125.8 million
in interest on Treasury investments.
Bank of America has been given leave by its regulator to repay
$45 billion in TARP funds. News reports stated that Bank of America would sell common equity to raise the funds for the repayment.
As of December 2, 2009, Bank of America reported that it had
raised $19.3 billion, and that it would be holding a shareholder
meeting to approve the issuance of additional shares to be sold for
this purpose.
B. CPP Monthly Lending Report
Treasury releases a monthly lending report showing loans outstanding at the top 22 CPP recipient banks. The most recent report, issued on November 16, 2009, includes data through the end
of September 2009, and shows that CPP recipients had $4.18 trillion in loans outstanding as of September 2009. This represents a
one percent decline in loans outstanding between the end of August
and the end of September.
C. Term Asset-Backed Securities Loan Facility (TALF)
At the November 17, 2009 facility, there were $1.4 billion in
loans requested for legacy CMBS, and $72.2 million for new CMBS.
By way of comparison, there were $2.1 billion in loans for legacy
CMBS requested at the October facility, and $1.4 billion at the
September facility. This month was the first facility in which there
was a request for TALF loans for new CMBS.
At the December 3, 2009 facility, there were $3 billion in loans
requested to support the issuance of ABS collateralized by loans in
the credit card, equipment, floorplan, small business, servicing advances, and student loan sectors. No loans in the auto and premium financing sectors were requested. By way of comparison,
there were $1.1 billion in loans requested at the November 3, 2009
facility to support the issuance of ABS collateralized by loans in
the auto, credit card, equipment, floorplan, small business, and student loan sectors.

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D. Public-Private Investment Funds
Treasury announced the initial closing of three more of the nine
funds pre-qualified as Fund Managers as part of the Public-Private
Investment Program. Treasury expects the final fund to close
shortly. As of November 30, 2009, Public-Private Investment Funds
have closed on $5.07 billion of private sector equity. This investment has been matched by Treasury for a total of $10.13 billion in

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equity capital. Treasury has also provided $10.13 billion of debt
capital.
E. Capital Assistance Program Closing
On November 9, 2009, Treasury announced that it would close
the CAP without making any investments through the program.
CAP was established to provide additional assistance to institutions subject to the stress tests. The only institution that was determined to need additional capital was GMAC. Treasury has announced that GMAC will receive the needed assistance through the
Automotive Industry Financing Program instead of through CAP.
F. Auctions to Sell Capital Purchase Program Warrants

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Treasury announced on November 19, 2009, that it would sell
several warrant positions received under the Capital Purchase Program. The sales would take place over the month following the announcement and would include Treasury’s warrant positions in
JPMorgan Chase & Co., Capital One Financial Corporation, and
TCF Financial Corporation. Each of these banks has already repurchased Treasury’s full preferred stock investment. The sales will be
conducted through registered public offerings using a Dutch auction method. The auction for Capital One began on December 1,
2009 and closed on December 3, 2009. This auction included
12,657,960 warrants to purchase common stock of Capital One and
the net proceeds from the sale, which should close on or around December 9, are expected to be $146.5 million.

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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 produced twelve oversight reports, as well as a special report
on regulatory reform, issued on January 29, 2009, and a special report on farm credit, issued on July 21, 2009. Since the release of
the Panel’s November oversight report assessing guarantees and
contingent payments, the following developments pertaining to the
Panel’s oversight of the Troubled Asset Relief Program (TARP) took
place:
• The Panel held a hearing in Washington, DC with several
prominent economists to discuss the effectiveness of the TARP. The
views of these experts informed this report.

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Upcoming Reports and Hearings
The Panel will release its next oversight report in January. The
report will assess Treasury’s strategy for exiting the TARP.
The Panel is planning its third hearing with Secretary Geithner
on December 10, 2009. The Secretary has agreed to testify before
the Panel once per quarter. His most recent hearing was on September 10, 2009.

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SECTION SIX: ABOUT THE CONGRESSIONAL OVERSIGHT
PANEL

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In response to the escalating crisis, on October 3, 2008, Congress
provided Treasury with the authority to spend $700 billion to stabilize the U.S. economy, preserve home ownership, and promote
economic growth. Congress created the Office of Financial Stability
(OFS) within Treasury to implement 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. Congress
subsequently expanded the Panel’s mandate by directing it to
produce a special report on the availability of credit in the agricultural sector. The report was issued on July 21, 2009.
On November 14, 2008, Senate Majority Leader Harry Reid and
the Speaker of the House Nancy Pelosi appointed Richard H.
Neiman, Superintendent of Banks for the State of New York,
Damon Silvers, Director of Policy and Special Counsel of the American Federation of Labor and Congress of Industrial Organizations
(AFL–CIO), and Elizabeth Warren, Leo Gottlieb Professor of Law
at Harvard Law School to the Panel. With the appointment on November 19, 2008, of Congressman Jeb Hensarling to the Panel by
House Minority Leader John Boehner, the Panel had a quorum and
met for the first time on November 26, 2008, electing Professor
Warren as its chair. On December 16, 2008, Senate Minority Leader Mitch McConnell named Senator John E. Sununu to the Panel.
Effective August 10, 2009, Senator Sununu resigned from the
Panel, and on August 20, 2009, Senator McConnell announced the
appointment of Paul Atkins, former Commissioner of the U.S. Securities and Exchange Commission, to fill the vacant seat.

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APPENDIX I: UNPAID DIVIDEND PAYMENTS UNDER CPP
AS OF OCTOBER 31, 2009

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UNPAID DIVIDEND PAYMENTS UNDER CPP AS OF OCTOBER 31, 2009 528
Value of unpaid
dividends

Institution

CIT Group Inc .................................................................................................................................................
Popular, Inc ....................................................................................................................................................
First BanCorp .................................................................................................................................................
Pacific Capital Bancorp .................................................................................................................................
First Banks, Inc ..............................................................................................................................................
Sterling Financial Corporation/Sterling Savings Bank ..................................................................................
UCBH Holdings, Inc ........................................................................................................................................
Anchor BanCorp Wisconsin, Inc .....................................................................................................................
Midwest Banc Holdings, Inc ..........................................................................................................................
Dickinson Financial Corporation II .................................................................................................................
Central Pacific Financial Corp .......................................................................................................................
Seacoast Banking Corporation of Florida/Seacoast National Bank ..............................................................
Blue Valley Ban Corp .....................................................................................................................................
Centrue Financial Corporation .......................................................................................................................
Royal Bancshares of Pennsylvania, Inc .........................................................................................................
One United Bank ............................................................................................................................................
United American Bank ...................................................................................................................................
Pacific City Financial Corporation/Pacific City Bank ....................................................................................
Commonwealth Business Bank ......................................................................................................................
The Connecticut Bank and Trust Company ...................................................................................................
Peninsula Bank Holding Co ...........................................................................................................................
Commerce National Bank ...............................................................................................................................
Citizens Bancorp ............................................................................................................................................
Pacific Coast National Bancorp .....................................................................................................................
Premier Service Bank .....................................................................................................................................
Idaho Bancorp ................................................................................................................................................
Lone Star Bank ...............................................................................................................................................
Pacific International Bancorp Inc ..................................................................................................................
One Georgia Bank ..........................................................................................................................................
Georgia Primary Bank ....................................................................................................................................
Saigon National Bank ....................................................................................................................................
Patterson Bancshares, Inc .............................................................................................................................
Grand Mountain Bancshares, Inc ..................................................................................................................
Fresno First Bank ...........................................................................................................................................
Citizens Bank & Trust Company ....................................................................................................................
Pacific Commerce Bank .................................................................................................................................
Community Bank of the Bay ..........................................................................................................................
Community First Bank ....................................................................................................................................

$29,125,000
11,687,500
5,000,000
4,515,850
4,024,825
3,787,500
3,734,213
2,979,167
2,119,600
1,989,980
1,687,500
1,250,000
543,750
408,350
380,088
301,575
230,490
220,725
209,850
178,573
162,500
150,000
141,700
112,270
105,972
94,013
87,917
81,250
80,766
70,850
54,378
50,288
35,395
33,357
32,700
31,961
28,874
11,199

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

$75,739,924

528 U.S.

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Department of the Treasury, Dividends and Interest Reports, May, 2009–October, 2009 (online at www.financialstability.gov/
latest/reportsanddocs.html); SIGTARP, Quarterly Report to Congress, at 58 (Oct. 21, 2009) (online at www.sigtarp.gov/reports/congress/
2009/October2009lQuarterlylReportltol Congress.pdf).

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APPENDIX II: LETTER FROM CHAIR ELIZABETH WARREN TO ASSISTANT SECRETARY HERB ALLISON, RE:
WRITTEN RESPONSES FOR HEARING RECORD, DATED
NOVEMBER 25, 2009

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APPENDIX III: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY GEITHNER, RE: STRESS
TESTS, DATED NOVEMBER 25, 2009

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APPENDIX IV: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY GEITHNER, RE: CIT
GROUP, INC., DATED NOVEMBER 25, 2009

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151

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APPENDIX V: ENDNOTES TO FIGURE 27: FEDERAL GOVERNMENT’S FINANCIAL STABILIZATION PROGRAMS
(AS OF NOVEMBER 25, 2009)—CURRENT MAXIMUM EXPOSURES
i This number includes investments under the SSFI Program: a $40 billion investment made on November 25, 2008, and a $30 billion investment committed on April
17, 2009 (less a reduction of $165 million representing bonuses paid to AIG Financial Products employees). See U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending November 25, 2009, (Nov. 30,
2009)
(online
at
www.financialstability.gov/docs/transaction-reports/11-3009%20Transactions%20Report%20 as%20of%2011-25-09.pdf).
ii This number represents the full $60 billion that is available to AIG through its
revolving credit facility with the Federal Reserve ($44.9 billion had been drawn
down as of November 27, 2009) and the outstanding principal of the loans extended
to the Maiden Lane II and III SPVs to buy AIG assets (as of November 19, 2009,
$16 billion and $19 billion respectively). Board of Governors of the Federal Reserve
System, Factors Affecting Reserve Balances of Depository Institutions and Condition
Statement
of
Federal
Reserve
Banks
(Nov.
27,
2009)
(online
at
www.federalreserve.gov/RELEASES/H41/20091127/). Income from the purchased assets is used to pay down the loans to the SPVs, reducing the taxpayers’ exposure
to losses over time. Board of Governors of the Federal Reserve System, Federal Reserve System Monthly Report on Credit and Liquidity Programs and the Balance
Sheet October 2009, at 17 (online at www.federalreserve.gov/monetarypolicy/files/
monthlyclbsreport200910.pdf) (accessed Dec. 7, 2009). On December 1, 2009, AIG
entered into an agreement with FRBNY to reduce the debt AIG owes the FRBNY
by $25 billion. In exchange, FRBNY received preferred equity interests in two AIG
subsidiaries. This also reduced the debt ceiling on the loan facility from $60 billion
to $35 billion. This figure does not reflect that agreement since the table is intended
to represent exposure as of November 30, 2009. American International Group, AIG
Closes Two Transactions That Reduce Debt AIG Owes Federal Reserve Bank of New
York by $25 billion (Dec. 1, 2009) (online at phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MjE4ODl8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1).
iii U.S. Department of the Treasury, Troubled Asset Relief Program Transactions
Report for Period Ending November 25, 2009, (Nov. 30, 2009) (online at
www.financialstability.gov/docs/transaction-reports/11-3009%20Transactions%20Report%20as%20of%2011-25-09.pdf). 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.
iv 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) (granting a 90 percent federal guarantee on all losses
over $29 billion after existing reserves (totaling a $39.5 billion first-loss position for
Citigroup) 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 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) (reducing the size of the
asset pool from $306 billion to $301 billion).
v U.S. Department of the Treasury, Transactions Report (Oct. 27, 2009) (online at
www.financialstability.gov/docs/transaction-reports/10-92709%20Transactions%20Report%20as%20of%2010-23-09.pdf). 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.
vi This figure represents the $218 billion Treasury has anticipated spending under
the CPP, minus the $50 billion investment in Citigroup ($25 billion) and Bank of
America ($25 billion) identified above, and the $71 billion in repayments that are
reflected as uncommitted TARP funds. This figure does not account for future repayments of CPP investments, nor does it account for dividend payments from CPP investments. See U.S. Government Accountability Office, Troubled Asset Relief Program June 2009 Status of Efforts to Address Transparency and Accountability
Issues, at 12 (online at www.gao.gov/new.items/d09658.pdf) (accessed Dec. 7, 2009);
U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending November 25, 2009 (Nov. 30, 2009) (online at

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www.financialstability.gov/docs/transaction-reports/11-3009%20Transactions%20Report%20 as%20of%2011-25-09.pdf).
vii The CAP was officially closed on November 9, 2009. Of the original 19 SCAP
participants, GMAC was the only institution that requested additional capital under
the CAP. U.S. Department of the Treasury, Treasury Announcement Regarding the
Capital Assistance Program (Nov. 9, 2009) (online at www.financialstability.gov/latest/tgl11092009.html). As of yet, further details of this transaction, including the
amount GMAC will receive, have not been released, and the Panel continues to reflect the program as dormant.
viii This figure represents a $20 billion allocation to the TALF special purpose vehicle on March 3, 2009. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending October 28, 2009 at 18 (Oct. 30, 2009)
(online
at
financialstability.gov/docs/transaction-reports/10-3009%20Transactions%20Report%20as%20of%2010–28-09.pdf). Consistent with the
analysis in the Panel’s August report, only $61.9 billion in TALF loans have been
requested as of December 3, 2009, the Panel continues to predict that TALF subscriptions are unlikely to surpass the $200 billion currently available by year’s end.
Congressional Oversight Panel, August Oversight Report: The Continued Risk of
Troubled Assets, at 10–22 (Aug. 11, 2009) (online at cop.senate.gov/documents/cop081109-report.pdf) (discussing criteria for constituting a ‘‘troubled asset’’).
ix This number is derived from the unofficial 1:10 ratio of the value of Treasury
loan guarantees to the value of Federal Reserve loans under the TALF. U.S. Department of the Treasury, Fact Sheet: Financial Stability Plan (Feb. 10, 2009) (online
at www.financialstability.gov/docs/fact-sheet.pdf) (describing the initial $20 billion
Treasury contribution tied to $200 billion in Federal Reserve loans and announcing
potential expansion to a $100 billion Treasury contribution tied to $1 trillion in Federal Reserve loans). Because Treasury is responsible for reimbursing the Federal
Reserve Board for $20 billion of losses on its $200 billion in loans, the Federal Reserve Board’s maximum potential exposure under the TALF is $180 billion.
x The Panel continues to account for this program as dormant. It appears unlikely
that resources will be expended under the PPIP Legacy Loans Program in its original design as a joint Treasury-FDIC program to purchase troubled assets from solvent banks. See also Federal Deposit Insurance Corporation, FDIC Statement on the
Status of the Legacy Loans Program (June 3, 2009) (online at www.fdic.gov/news/
news/press/2009/pr09084.html); Federal Deposit Insurance Corporation, Legacy
Loans Program—Test of Funding Mechanism (July 31, 2009) (online at
www.fdic.gov/news/news/press/2009/pr09131.html). The sales described in these
statements do not involve any Treasury participation, and FDIC activity is accounted for here as a component of the FDIC’s Deposit Insurance Fund outlays.
xi 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, and Chairman of the Federal Deposit Insurance Corporation Sheila Bair: Legacy Asset Program (July 8, 2009) (online at
www.financialstability.gov/latest/tgl07082009.html) (‘‘Treasury will invest up to
$30 billion of equity and debt in PPIFs established with private sector fund managers and private investors for the purpose of purchasing legacy securities’’); U.S.
Department of the Treasury, Fact Sheet: Public-Private Investment Program, at 4–
5
(Mar.
23,
2009)
(online
at
www.treas.gov/press/releases/reports/
ppiplfactlsheet.pdf) (outlining that, for each $1 of private investment into a fund
created under the Legacy Securities Program, Treasury will provide a matching $1
in equity to the investment fund; a $1 loan to the fund; and, at Treasury’s discretion, an additional loan up to $1). As of November 30, 2009, Treasury reported $17.8
billion in outstanding loans and $8.8 billion in membership interest associated with
the program, thus substantiating the Panel’s assumption that Treasury may routinely exercise its discretion to provide $2 of financing for every $1 of equity 2:1
ratio. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions
Report for Period Ending November 25, 2009 (Nov. 30, 2009) (online at
www.financialstability.gov/docs/transaction-reports/11-3009%20Transactions%20Report%20as%20of%2011-25-09.pdf).
xii U.S. Government Accountability Office, Troubled Asset Relief Program: June
2009 Status of Efforts to Address Transparency and Accountability Issues, at 2 (June
17, 2009) (GAO09/658) (online at www.gao.gov/new.items/d09658.pdf). Of the $50
billion in announced TARP funding for this program, $27.4 billion has been allocated as of November 30, 2009. U.S. Department of the Treasury, Troubled Asset
Relief Program Transactions Report for Period November 30, 2009, at 22 (Nov. 30,
2009)
(online
at
financialstability.gov/docs/transaction-reports/11-3009%20Transactions%20Report%20 as%20of%2011-25-09.pdf).

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xiii Fannie Mae and Freddie Mac, GSEs that were placed in conservatorship of the
Federal Housing Finance Housing Agency on September 7, 2009, will also contribute
up to $25 billion to the Making Home Affordable Program, of which the HAMP is
a key component. U.S. Department of the Treasury, Making Home Affordable: Updated Detailed Program Description (Mar. 4, 2009) (online at www.treas.gov/press/
releases/reports/housinglfactlsheet.pdf).
xiv U.S. Department of the Treasury, Troubled Asset Relief Program Transactions
Report for Period Ending November 25, 2009 (Nov. 30, 2009) (online at
www.financialstability.gov/docs/transaction-reports/11-3009%20Transactions%20Report%20 as%20of%2011-25-09.pdf). A substantial portion
of the total $80 billion in loans extended under the AIFP have since been converted
to common equity and preferred shares in restructured companies. $20.2 billion has
been retained as loans (with $7.7 billion committed to GM and $12.5 billion to
Chrysler). This figure represents Treasury’s current obligation under the AIFP.
There have been $2.1 billion in repayments and $2.4 billion in de-obligated funds
under the AIFP.
xv U.S. Department of the Treasury, Troubled Asset Relief Program Transactions
Report for Period Ending November 25, 2009 (November 30, 2009) (online at
www.financialstability.gov/docs/transaction-reports/11-3009%20Transactions%20Report%20 as%20of%2011-25-09.pdf).
xvi U.S. Department of the Treasury, Fact Sheet: Public-Private Investment Program, at 1 (Mar. 23, 2009) (online at www.treas.gov/press/releases/reports/
ppiplfactlsheet.pdf).
xvii 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. $315 billion of debt subject to
the guarantee was outstanding as of October 31, 2009. This represents approximately 52 percent of the cap. Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary Liquidity Guarantee Program: Debt
Issuance Under Guarantee Program (Sept. 30, 2009) (online at www.fdic.gov/regulations/resources/TLGP/totallissuance9-09.html) (updated Nov. 30, 2009). The FDIC
has collected $10.4 billion in fees and surcharges from this program since its inception in the fourth quarter of 2008. Federal Deposit Insurance Corporation, Monthly
Reports on Debt Issuance Under the Temporary Liquidity Guarantee Program (Oct.
31, 2009) (online at www.fdic.gov/regulations/resources/TLGP/fees.html) (updated
Nov. 30, 2009).
xviii 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 and the
first and second quarters of 2009. Federal Deposit Insurance Corporation, Chief Financial Officer’s (CFO) Report to the Board: DIF Income Statement (Fourth Quarter
2008) (online at www.fdic.gov/about/strategic/corporate/cfolreportl4qtrl08/income.html); Federal Deposit Insurance Corporation, Chief Financial Officer’s (CFO)
Report to the Board: DIF Income Statement (Third Quarter 2008) (online at
www.fdic.gov/about/strategic/corporate/cfolreportl3rdqtrl08/income.html);
Federal Deposit Insurance Corporation, Chief Financial Officer’s (CFO) Report to the
Board: DIF Income Statement (First Quarter 2009) (online at www.fdic.gov/about/
strategic/corporate/cfolreportl1stqtrl09/income.html); Federal Deposit Insurance
Corporation, Chief Financial Officer’s (CFO) Report to the Board: DIF Income Statement (Second Quarter 2009) (online at www.fdic.gov/about/strategic/corporate/
cfolreportl2ndqtrl09/income.html). This figure includes the FDIC’s estimates of
its future losses under loss share agreements that it has entered into with banks
acquiring assets of insolvent banks during these four quarters. Under a loss sharing
agreement, as a condition of an acquiring bank’s agreement to purchase the assets
of an insolvent bank, the FDIC typically agrees to cover 80 percent of an acquiring
bank’s future losses on an initial portion of these assets and 95 percent of losses
of another portion of assets. For example, see Federal Deposit Insurance Corporation, Purchase and Assumption Agreement Among FDIC, Receiver of Guaranty Bank,
Austin, Texas, FDIC and Compass Bank, at 65–66 (Aug. 21, 2009) (online at
www.fdic.gov/bank/individual/failed/guaranty-txlplandlalwladdendum.pdf).
xix In past reports, the Panel has classified as loans the Federal Reserve’s purchases of federal agency debt securities and mortgage-backed securities issued by
GSEs. With this report, the Panel adopts a different approach. Instead, these purchases will be accounted as outlays made under the Federal Reserve’s credit expansion effort. Federal Reserve Liquidity Facilities classified in this table as loans include: Primary credit, Secondary credit, Central bank liquidity swaps, Primary dealer and other broker-dealer credit, Asset-Backed Commercial Paper Money Market
Mutual Fund Liquidity Facility, Net portfolio holdings of Commercial Paper Funding Facility LLC, Seasonal credit, Term auction credit, Net Portfolio Holdings of

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TALF LLC, and loans outstanding to Bear Stearns (Maiden Lane I LLC). While the
Federal Reserve does not employ the outlays, loans and guarantees classification,
its accounting clearly separates its mortgage-related purchasing programs from its
liquidity programs. See Board of Governors of the Federal Reserve, Credit and Liquidity Programs and the Balance Sheet November 2009, at 2 (online at
www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200911.pdf) (accessed
Dec. 7, 2009).
xx The term ‘‘outlays’’ is used here to describe the use of Treasury funds under the
TARP, which are broadly classifiable as purchases of debt or equity securities (e.g.,
debentures, preferred stock, exercised warrants, etc.). The outlays figures are based
on: (1) Treasury’s actual reported expenditures; and (2) Treasury’s anticipated funding levels as estimated by a variety of sources, including Treasury pronouncements
and GAO estimates. Anticipated funding levels are set at Treasury’s discretion, have
changed from initial announcements, and are subject to further change. Outlays as
used here represent investments and assets purchases and commitments to make
investments and asset purchases and are not the same as budget outlays, which
under section 123 of EESA are recorded on a ‘‘credit reform’’ basis.
xxi 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.
xxii This figure is roughly comparable to the $3.0 trillion current balance of financial system support reported by SIGTARP in its July report. SIGTARP, Quarterly
Report to Congress, at 138 (July 21, 2009) (online at www.sigtarp.gov/reports/congress/2009/July2009lQuarterlylReportltolCongress.pdf). However, the Panel
has sought to capture additional anticipated exposure and thus employs a different
methodology than SIGTARP.

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