View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

CONGRESSIONAL OVERSIGHT PANEL

JULY OVERSIGHT REPORT *

TARP REPAYMENTS, INCLUDING THE
REPURCHASE OF STOCK WARRANTS

JULY 10, 2009.—Ordered to be printed

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00001

Fmt 6012

Sfmt 6012

E:\HR\OC\B720A.XXX

B720A

E:\Seals\Congress.#13

tjames on DSKG8SOYB1PROD with HEARING

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

tjames on DSKG8SOYB1PROD with HEARING

CONGRESSIONAL OVERSIGHT PANEL JULY OVERSIGHT REPORT

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00002

Fmt 6019

Sfmt 6019

E:\HR\OC\B720A.XXX

B720A

1

CONGRESSIONAL OVERSIGHT PANEL

JULY OVERSIGHT REPORT *

TARP REPAYMENTS, INCLUDING THE
REPURCHASE OF STOCK WARRANTS

JULY 10, 2009.—Ordered to be printed

U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON

50–720

:

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

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00003

Fmt 5012

Sfmt 5012

E:\HR\OC\B720A.XXX

B720A

E:\Seals\Congress.#13

tjames on DSKG8SOYB1PROD with HEARING

*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
SEN. JOHN SUNUNU
REP. JEB HENSARLING
RICHARD H. NEIMAN

tjames on DSKG8SOYB1PROD with HEARING

DAMON SILVERS

(II)

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00004

Fmt 5904

Sfmt 5904

E:\HR\OC\B720A.XXX

B720A

CONTENTS
Page

tjames on DSKG8SOYB1PROD with HEARING

Executive Summary .................................................................................................
Section One: .............................................................................................................
A. Background ..................................................................................................
B. Understanding Warrants ............................................................................
C. Statutory and Contractual Provisions Governing Repurchase and Warrants under TARP .........................................................................................
D. Repayments of CPP and TIP Capital Investments ...................................
E. Valuing TARP Warrants .............................................................................
F. Alternatives for Disposing of TARP Warrants ..........................................
G. Issues ............................................................................................................
H. Conclusion—Policy Choices and Trade-Offs ..............................................
Annexes to Section One:
ANNEX A: Technical Explanation of Warrant Valuation Methods .............
ANNEX B: Analysis of the Old National Bancorp Warrants ........................
Section Two: Additional Views ...............................................................................
A. Richard H. Neiman ......................................................................................
B. Congressman Jeb Hensarling .....................................................................
H. John Sununu ...............................................................................................
Section Three: Correspondence with Treasury Update ........................................
Section Four: TARP Updates Since Last Report ...................................................
Section Five: Oversight Activities ..........................................................................
Section Six: About the Congressional Oversight Panel ........................................
Appendices:
APPENDIX I: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY GEITHNER REQUESTING INFORMATION ON
THE REPAYMENT OF TARP ASSISTANCE, DATED JUNE 12, 2009 .
APPENDIX II: LETTER FROM SECRETARY TIMOTHY GEITHNER
IN RESPONSE TO CHAIR WARREN’S LETTER REQUESTING INFORMATION ON THE REPAYMENT OF TARP ASSISTANCE,
DATED JULY 1, 2009 ..................................................................................
APPENDIX III: LETTER FROM CHAIR ELIZABETH WARREN AND
PANEL MEMBER RICHARD NEIMAN TO SECRETARY TIMOTHY
GEITHNER REQUESTING ASSISTANCE WITH THE PANEL’S
OVERSIGHT OF FEDERAL FORECLOSURE MITIGATION EFFORTS, DATED JUNE 29, 2009 .................................................................

(III)

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00005

Fmt 5904

Sfmt 5904

E:\HR\OC\B720A.XXX

B720A

1
4
4
5
7
14
16
23
28
37
39
46
49
49
50
59
61
62
72
74

75

79

92

tjames on DSKG8SOYB1PROD with HEARING

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00006

Fmt 5904

Sfmt 5904

E:\HR\OC\B720A.XXX

B720A

JULY OVERSIGHT REPORT

JULY 10, 2009.—Ordered to be printed

EXECUTIVE SUMMARY *

tjames on DSKG8SOYB1PROD with HEARING

In late 2008, our economy faced an exceptional crisis, and Congress created the Troubled Asset Relief Program (TARP) in an effort to stabilize the financial system. Through the TARP, taxpayers
invested billions of dollars in the nation’s financial institutions.
These actions imposed an enormous risk on taxpayers. If the
TARP failed to stabilize the financial system, the entire economy
could collapse. Even if the system stabilized after huge infusions of
taxpayer funds, if some institutions were unable to recover taxpayers could be paying the debts for generations. While these risks
were looming, then-Treasury Secretary Henry Paulson argued that
TARP assistance could be used to rescue the economy and generate
a profit for taxpayers. When Congress authorized the commitment
of $700 billion to rescue the financial system, it decided that taxpayers should have the opportunity to share in a potential upside
if the banks returned to profitability.
The opportunity to profit from TARP investments comes through
special securities called warrants. Banks that received financial assistance were required to give the government warrants for the future purchase of some of their common shares. Simply put, warrants are the right to buy shares of a company at a set price at
some point in the future. For example, a warrant might allow
Treasury to buy shares of a bank for ten dollars at any time in the
next ten years. If the share price rises above ten dollars, Treasury
could pay less than market value for the shares, then sell them and
turn a profit. In this way, the banks were repaying the taxpayers
for their investment by sharing some of their future profitability.
* The

VerDate Nov 24 2008

00:33 Jul 30, 2009

Panel adopted this report with a unanimous 5–0 vote on July 10, 2009.

Jkt 050720

PO 00000

Frm 00007

Fmt 6659

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

tjames on DSKG8SOYB1PROD with HEARING

2
Currently many banks want to exit the TARP program by repaying their financial assistance and repurchasing their warrants from
Treasury. Treasury is permitting ten of the nation’s largest bank
holding companies—representing more than one third of the nation’s banking assets—to repay the financial assistance they received eight months ago. Any exit from the TARP system implicates an important policy question: if the banks give up federal
support prematurely, will the economy suffer as a result? The
Panel has not reached a consensus on whether it is wise policy to
release banks from the TARP program at this time, but our June
report on the bank stress tests raised key questions about whether
we know enough about the banks’ overall health.
As Treasury makes these decisions about repayment, it is the
Panel’s mandate to determine whether the taxpayer is receiving
maximum benefit from the TARP. Because the warrants that accompanied TARP assistance represent the only opportunity for the
taxpayer to participate directly in the increase in the share prices
of banks made possible by public money, the price at which the
warrants are sold is critical. To determine whether Treasury is valuing the warrants in a way that maximizes the taxpayers’ investments in the financial institutions, it is necessary to determine how
much the warrants are worth.
The Panel uses the most widely-accepted mathematical model,
presenting a detailed technical valuation of the warrants Treasury
holds. The assumptions employed in the use of any model are crucial, and the report offers a range of estimates based on high, low
and best estimate assumptions for certain key variables. The Panel
was aided in its valuation efforts by three renowned finance experts, Professor Robert Merton, Professor Daniel Bergstresser, and
Professor Victoria Ivashina, all of the Harvard Business School.
The professors reviewed both the technical valuation model and the
assumptions that were built into the model; they concluded that
the approaches reported here were reasonable and that they produced reliable estimates.
Eleven small banks have repurchased their warrants from Treasury for a total amount that the Panel estimates to be only 66 percent of its best estimate of their value. If the warrants had been
sold for their market value, taxpayers would have recovered $10
million more.
Treasury has to date sold warrants only from smaller banks. In
those sales, liquidity discounts are likely to be a major factor in a
way that they are not likely to be for large publicly-traded institutions. If, however, liquidity discounts or any other rationales are
accepted as a reason for taking only 66 percent of market value for
the full group of warrants Treasury holds, the shortfall to taxpayers could be as much as $2.7 billion.
It is possible that policymakers may conclude that other objectives should override the goal of maximizing taxpayer returns. For
example, Treasury has said that it wants to allow banks to operate
again without TARP assistance as soon as they are strong enough
to do so.
Because warrant valuation is a difficult task, the Panel explores
the possibility that Treasury should leave it to the markets by selling the warrants in an open, public auction. This has the benefit
of stopping any speculation about whether Treasury has been too

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00008

Fmt 6659

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

3

tjames on DSKG8SOYB1PROD with HEARING

tough or too easy on the banks that want to repurchase their own
warrants. It also permits the banks to bid for their own warrants—
in direct competition with outsiders.
The report describes key provisions in the Treasury contracts
with the banks and statutory provisions that govern warrant purchases. The Panel notes that Treasury is constrained in some ways
by the provisions of the contracts governing the TARP investments
in the banks.
It should be noted that Treasury is just beginning its warrant repurchase program. Banks have bought back only a fraction of one
percent of all warrants issued, and the prices paid thus far may not
be representative of what is to come. As always, it is critical that
Treasury make the process—the reason for its decisions, the way
it arrives at its figures, and the exit strategy from or future use
of the TARP—absolutely transparent. If it fails to do so, the credibility of the decisions it makes and its stewardship of the TARP
will be in jeopardy.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00009

Fmt 6659

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

4
SECTION ONE
Ten of the nation’s largest financial institutions, and some smaller institutions, have repaid the amounts they received under the
TARP by redeeming the preferred shares Treasury received when
the assistance was provided. Their redemption of the preferred
shares entitles them to buy back the warrants to purchase their
common shares that Treasury also received at that time.
The preferred shares and pending warrant repayments raise important questions about the TARP:
• the extent to which repayment of TARP assistance is yet
appropriate, and if so, on what terms and timing, in light of
the still uncertain economic recovery;
• the appropriate circumstances for repayment;
• the extent to which the relationship between the strength
of individual institutions and the strength of the financial system should govern timing of repayment;
• the price at which Treasury should dispose of the warrants
it holds, and the way it should do so;
• the statutory and contractual obligations that affect Treasury’s ability to set a price for warrant repurchase;
• the fair market value of the warrants; and
• the policy considerations that should govern the price that
Treasury accepts for its warrants.
In its past reports, the Panel examined questions about the policy, strategy and execution of the TARP’s approach to bank assistance. This report begins an effort to evaluate the details of the exit
strategy from the TARP that are emerging from the actions Treasury and the Federal Reserve Board are now taking.
In doing so, the Panel recognizes that repayment of TARP assistance and disposition of TARP warrants raise different, albeit related, issues. The former is the foundation of the government strategy for stabilizing the nation’s financial system. The warrants represent only 15 percent of the value of Treasury’s investment in the
banks that have received assistance (at the time of that investment). But Congress required institutions receiving TARP assistance to issue the warrants to permit the public to share in the increase in share values that investment of billions of dollars of the
public’s money made possible. Thus examination of issues relating
to both repayment and warrants can shed light on Treasury’s objectives and strategy during what appears to be a critical phase in the
implementation of the TARP.
A. BACKGROUND

tjames on DSKG8SOYB1PROD with HEARING

Between October 14, 2008 and June 26, 2009, Treasury injected
more than $240 billion into over 600 of the nation’s bank holding
companies (BHCs) and independent banking institutions through
the TARP in exchange for preferred shares and warrants to buy
common shares of each institution involved.1 These capital injec1 U.S. Department of the Treasury, TARP Transactions Report for the Period Ending June 30,
2009 (July 2, 2009) (online at www.financialstability.gov/docs/transaction-reports/transactionsreportl070209.pdf) (hereinafter ‘‘July 2 TARP Transactions Report’’). The injections were part
of Treasury’s Capital Purchase Program (the ‘‘CPP’’), except for two $20 billion transactions that
were part of Treasury’s Targeted Investment Program (the ‘‘TIP’’).

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00010

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

5
tions appear to have contributed to stabilizing, or at least softening, last year’s severe downturn in the U.S. financial system, although as the Panel has noted elsewhere, it is not entirely clear
what positive effects TARP assistance has had on the availability
or terms of credit.2
During the winter and spring of this year, the Federal Reserve
Board oversaw the Supervisory Capital Assessment Program (the
‘‘stress tests’’ or ‘‘SCAP’’) that was the subject of the Panel’s June
report.3 The stress tests’ results, released on May 7, 2009, determined that ten of the nation’s nineteen largest BHCs must raise
an additional capital buffer totaling $74.6 billion in all, to meet
capital requirements that the Federal Reserve Board has set in
light of current economic conditions.4
On June 17, ten of the nation’s largest BHCs repaid the TARP
capital infusions they received eight months ago, spending a total
of $68.2 billion to redeem their preferred shares from Treasury
(with the approval of Treasury and the Federal Reserve Board).
The institutions, and amounts repaid, included: JPMorgan Chase
($25 billion), Morgan Stanley ($10 billion), Goldman Sachs ($10 billion), US Bancorp ($6.6 billion), Capital One Financial ($3.5 billion), American Express ($3.4 billion), BB&T ($3.1 billion), Bank of
New York Mellon ($3 billion), State Street ($2 billion), and Northern Trust ($1.6 billion). In addition, as of July 2, 2009, repayments
have been made by 22 small and private banks, for a total of $1.9
billion. All told, $70.2 billion in Capital Purchase Program (CPP)
assistance has been repaid. The systemic risks posed by BHCs with
$100 billion or more in assets are different than those posed by
other BHCs or smaller community banks, but the issues raised in
this report—the relationship of the return of capital assistance to
the size and health of a bank, the policies that should govern approval of return of assistance, and the value of the warrants held
by Treasury in the bank, apply equally to both.
In May 2009, Treasury issued ‘‘FAQs on Capital Purchase Program Repayment,’’ which included a general statement of the policy
used in determining whether to approve TARP repayments; on
June 1, 2009, the Federal Reserve Board issued more detailed
guidelines on the criteria for approval for the stress-tested BHCs.5
B. UNDERSTANDING WARRANTS

tjames on DSKG8SOYB1PROD with HEARING

A warrant is a security that permits the holder to buy a specified
number of common shares (the ‘‘underlying’’ shares) at a specified
price (the ‘‘strike price’’) on or before a specified date (the ‘‘expira2 See Congressional Oversight Panel, April Oversight Report: Assessing Treasury’s Strategy:
Six Months of TARP at 27–35 (April 7, 2009) (online at cop.senate.gov/documents/cop-040709report.pdf) (hereinafter ‘‘Panel April Report’’); Congressional Oversight Panel, May Oversight Report: Reviving Lending to Small Businesses and Families and the Impact of the TALF (May 7,
2009) (online at cop.senate.gov/documents/cop-050709-report.pdf) (hereinafter ‘‘Panel May Report’’); Congressional Oversight Panel, June Oversight Report: Stress Testing and Shoring Up
Bank Capital at 135–139 (June 9, 2009) (online at cop.senate.gov/documents/cop-060909report.pdf) (hereinafter ‘‘Panel June Report’’).
3 Id, at 6–56.
4 Board of Governors of the Federal Reserve System, The Supervisory Capital Assessment Program: Overview of Results (May 7, 2009) (online at http://www.federalreserve.gov/newsevents/
press/bcreg/bcreg20090507a1.pdf).
5 See infra note 25.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00011

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

6

tjames on DSKG8SOYB1PROD with HEARING

tion’’). With a couple of technical caveats,6 warrants can be considered a form of call option and are often issued as ‘‘sweeteners’’ with
fixed-income securities, such as preferred shares or debt (much like
employee stock options are used to enhance compensation packages). When warrants are issued, their strike price is usually set
above the current share price; they generally have no value if exercised immediately because the holder could immediately buy shares
on an exchange at a lower price. However, warrants may be traded
on public or private markets, and they can be highly valued by investors who believe the share price of the issuing company is likely
to rise above the strike price. Typically, prospective warrant investors will use mathematical models to calculate the value of warrants based on the probability of the share price rising above the
warrant’s strike price.
When a holder exercises its rights under a warrants agreement,
the company must issue new common shares. This necessarily has
the effect of reducing the percentage of the company owned by existing shareholders (known as ‘‘dilution’’). The prospect of potential
dilution means that the issuance of warrants tends to depress the
trading price of the common shares to some extent.7
When warrants are issued in conjunction with other securities,
as in the CPP, and valued and traded separately from the preferred shares (i.e., they are ‘‘detachable’’),8 the issuer allocates a
corresponding value as paid-in capital on its balance sheet.9 This
value is based on the fair value of the securities relative to the fair
value of the warrants at the time of issuance and does not change
in subsequent financial statements.10
When a company offers or sells securities, the transaction must
be registered with the SEC under the Securities Act of 1933,11 unless the transaction is exempt from registration. Private sales, such
as the CPP transactions with Treasury, are exempt from registration. However, if the original holder wishes to have the ability to
sell the warrants into the public markets (which is permitted in the
case of the CPP warrants) the issuer must have agreed to register
the public resale of the warrants.12
6 Including a warrant’s potential dilutive effect and its balance sheet treatment, discussed
infra.
7 Such price declines reflect the potential for each share of common stock to represent less
ownership control. Stock exchange rules temper the impact of this dilution by requiring shareholder votes in the event that the proposed issuance would increase the outstanding number
of shares by more than 20 percent. See New York Stock Exchange, Listed Company Manual
§ 312.03(c)(1); NASDAQ Stock Market, Equity Rules § 5635(a)(1)(A).
8 Financial Accounting Standards Board, Accounting for Derivative Instruments and Hedging
Activities, 12, 16 (FAS No. 133) (June 1998) (as amended by FAS No. 155).
9 Letter from James Kroeker, Securities and Exchange Commission, and Russell Golden, Financial Accounting Standards Board, to Assistant Secretary David G. Nason, U.S. Department
of the Treasury (Oct. 24, 2008) (online at financialstability.gov/docs/CPP/secfasbletter.pdf).
10 When the warrants are exercised, the value allocated to the warrants is removed from the
‘‘stock warrants outstanding’’ account and, together with the cash received on exercise, credited
to the stock account for par or stated value, with any excess over the par value being credited
to the ‘‘additional paid-in capital’’ account. When warrants are reacquired, the amount paid in
excess of the amount assigned to warrants at issuance is charged to retained earnings. If warrants are reacquired at a price less than the amount originally assigned to them, the difference
is credited to additional paid-in capital.
11 Securities Act of 1933, Pub. L. No. 73–22, § 5 (codified at 15 U.S.C. § 77(a) et seq.).
12 Securities Purchase Agreement, infra note 15 at § 4.5(p).

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00012

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

7
C. STATUTORY AND CONTRACTUAL PROVISIONS GOVERNING
REPURCHASE AND WARRANTS UNDER TARP

tjames on DSKG8SOYB1PROD with HEARING

The Emergency Economic Stabilization Act of 2008 (EESA) authorizes Treasury to purchase financial instruments.13 Through the
CPP and Targeted Investment Program (TIP), Treasury bought
$203.2 billion and $40 billion, respectively, of preferred shares from
financial institutions. Preferred shares entitle the holder to a fixed
rate of dividend, and in that respect function somewhat like a loan
to the institution. EESA also requires that any such purchase of financial instruments from financial institutions must be accompanied by the issuance to Treasury of warrants to purchase common shares of the institution, so that taxpayers can benefit from
a rise in the price of the institution’s shares, presumably reflecting
the value of the assistance Treasury has provided.14
The terms of the preferred shares and the warrants are governed
both by statute and by individual contracts with each institution
receiving assistance. Each bank’s agreement with Treasury includes a Securities Purchase Agreement (SPA) and a Form of Warrant to Purchase Common Stock (Form of Warrant), which are attached to a Letter Agreement.15 These documents set out the detailed terms of each security.
The statute, the contracts, and Treasury policy interact to shape
the terms of the preferred shares and warrants, including terms relating to their redemption or repurchase. The statutory provision
regarding repurchases has been amended twice since EESA was
enacted. As discussed in more detail below, initially the repayment
of preferred shares and warrants was made somewhat difficult for
banks. EESA was then amended to allow a bank to repay with the
approval of its supervisor, and to mandate that Treasury liquidate
the warrants on redemption of the preferred shares.16 In May
2009, EESA was further amended to provide Treasury with discretion as to whether to hold or liquidate the warrants upon a bank’s
redemption of the preferred shares. Because the contracts were entered into under the original statutory regime, Treasury has needed to adapt to the amendments. It has done so through both its policy and changes to the contracts. The end result, as described in
this section, is a process created by a combination of the statute,
13 Emergency Economic Stabilization Act of 2008, Pub. L. No. 110–343 (online at
frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110lconglbills&docid=f:h1424enr.txt.pdf)
(codified at 12 U.S.C. § 5201 et seq.) (hereinafter ‘‘EESA’’), as amended by Pub. L. No. 111–5,
§ 7001 and Pub. L. No. 111–22, § 403.
14 EESA, supra note 13 § 113(d)(2)(a) (codified at 12 U.S.C. § 5223(d)(2)(A)) (‘‘[The] terms and
conditions of any warrant . . . shall . . . at a minimum, be designed . . . to provide for reasonable participation by the Secretary, for the benefit of taxpayers, in equity appreciation in the
case of a warrant or other equity security . . . and to provide additional protection for the taxpayer against losses from sale of assets by the Secretary under [EESA] and the administration
expenses of the TARP.’’); EESA, supra note 13, § 113(d)(1) (codified at 12 U.S.C. § 5223(d)(1))
(providing that the warrants may be to purchase either nonvoting common stock, common stock
with respect to which Treasury agrees not to exercise voting power, or preferred shares of any
institution from which Treasury purchases financial instruments. If the institution involved is
privately-held, the warrant may be ‘‘for common or preferred stock or a senior debt institution
from such institution.’’).
15 The terms of these documents vary somewhat by institution type—public, private, S-corporation, mutual holding company, or mutual bank—but are substantially similar. See, e.g., U.S.
Department of the Treasury, Securities Purchase Agreement: Standard Terms (online at
www.financialstability.gov/docs/CPP/spa.pdf) (hereinafter ‘‘Securities Purchase Agreement’’);
U.S. Department of the Treasury, Form of Warrant to Purchase Common Stock (online at
www.financialstability.gov/docs/CPP/warrant.pdf) (hereinafter ‘‘Form of Warrant’’).
16 See infra notes 23 and text accompanying note 44; Section One Part C(2) of this report.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00013

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

8
contract, and policy. Under this process, a bank may redeem its
preferred shares only with the approval of its supervisor, as required by EESA, after which it may repurchase its warrants at a
price determined by a specific valuation procedure, as required by
the contracts.
1. PREFERRED SHARES

a. Terms of Preferred Shares
The CPP preferred shares pay cumulative 17 dividends of five
percent per year for the first five years of the program.18 They are
senior to the institution’s common shares, have an equal preference
to existing preferred shares, and are non-voting.19

tjames on DSKG8SOYB1PROD with HEARING

b. Redemption of Preferred Shares
In the same way that loans are repaid, preferred shares are ‘‘redeemed’’ by the institution paying back the ‘‘liquidation’’ amount of
the shares, equivalent to the principal amount of a loan.20 There
are both statutory and contractual provisions that govern when
and how this happens.
i. Timing. EESA, as amended, sets requirements for the timing
of redemption of these investments. Originally, under the SPAs,
BHCs were not permitted to repay TARP funds within the first
three years unless they had completed a qualified equity offering
(QEO) of at least 25 percent of the issue price.21 A QEO is a sale
before 2010 of shares that qualify as tier 1 capital that raises an
amount of cash equal to the value of the preferred shares issued
to Treasury.22 The American Recovery and Reinvestment Act of
2009 (ARRA) amended EESA, adding section 111(g), which now
provides that, ‘‘subject to consultation with the appropriate federal
banking agency [Treasury] shall permit a TARP recipient to repay
[CPP preferred] without regard to whether the financial institution
has replaced such funds from any other source or to any waiting
period. . . .’’ 23
Repayment applications must be approved by the bank’s supervisor before they are sent to Treasury.24 The Federal Reserve
Board has indicated that supervisors will weigh an institution’s de17 A bank that is not a subsidiary of a holding company pays non-cumulative dividends at the
same rates. U.S. Department of the Treasury, TARP Capital Purchase Program Senior Preferred
Stock and Warrants Summary of Senior Preferred Terms (online at www.treas.gov/press/
releases/reports/document5hp1207.pdf) (hereinafter ‘‘CPP Term Sheet’’).
18 In the sixth year, the dividends are raised to 9 percent. U.S. Department of the Treasury,
Factsheet on Capital Purchase Program (Mar. 17, 2009) (online at www.financialstability.gov/
roadtostability/CPPfactsheet.htm) (hereinafter ‘‘CPP Factsheet’’).
19 The preferred stock do have ‘‘class voting rights on (i) any authorization or issuance of
shares ranking senior to the Senior Preferred, (ii) any amendment to the rights of Senior Preferred, or (iii) any merger, exchange or similar transaction.’’ CPP Term Sheet, supra note 17.
In addition, ‘‘[i]f dividends on the Senior Preferred are not paid in full for six dividend periods,
whether or not consecutive, the Senior Preferred will have the right to elect 2 directors. The
right to elect directors will end when full dividends have been paid for four consecutive dividend
periods.’’ CPP Term Sheet, supra note 17.
20 In transactions of preferred shares generally, the amount paid for preferred shares is not
always equal to their liquidation amount.
21 If the bank did such a qualified equity offering, it could redeem up to the amount of the
proceeds that it had received in the qualified equity offering. CPP Term Sheet, supra note 17.
22 Securities Purchase Agreement, supra note 15, 4.4.
23 American Recovery and Reinvestment Act of 2009 (ARRA), Pub. L. 111–5, § 7001 (online
at
frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111lconglbills&docid=f:h1enr.txt.pdf)
(hereinafter ‘‘ARRA’’).
24 Id.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00014

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

9

tjames on DSKG8SOYB1PROD with HEARING

sire to repay its TARP assistance against the contribution of that
assistance to the institution’s overall soundness, capital adequacy
and ability to lend.25 BHCs must also have a comprehensive internal capital assessment process.26 In addition, prior to repayment,
the eighteen stress-tested BHCs that received TARP funds must
have a post-repayment capital base consistent with the stress test
capital buffer, and must demonstrate their financial strength by
issuing senior unsecured debt for terms greater than five years, not
backed by FDIC guarantees, and in amounts sufficient to demonstrate a capacity to meet funding needs independently.27
The Federal Reserve summarizes the criteria that it will use in
determining whether to allow repayment as requiring that stresstested banks wishing to repay ‘‘have a robust longer-term capital
assessment and management process geared toward achieving and
maintaining a prudent level and composition of capital commensurate with the BHC’s business activities and firm-wide risk profile.’’ 28 Representative Hensarling, one of the five members of the
Panel, has introduced legislation that would codify the Federal Reserve’s criteria as part of EESA.29 The Panel takes no position on
the bill.
In testimony before the Panel on April 21, 2009, Secretary of the
Treasury Timothy Geithner said the ‘‘ultimate test’’ for repayment
would be whether an individual bank’s repayment would result in
a reduction in the overall credit available to the economy.30 While
any repayment would reduce capital and thus funds available for
lending, some banks are raising capital from the private markets,
thereby replenishing that capital.
The original contractual terms of the SPAs concerning approval
and timing of redemption of the preferred shares have been superseded by the statutory amendments, as described above.31 Treasury
has announced that banks can redeem CPP preferred under terms
other than those specified in the SPA.32
ii. Pricing. The statute sets no terms for the price Treasury must
obtain for the preferred shares it holds, other than the general
statutory injunction that it should administer the Act in a manner
that will ‘‘minimize any potential long-term negative impact on the
taxpayer.’’ 33 The contractual provisions governing the preferred
shares provide that they are to be redeemed at ‘‘liquidation preference,’’ essentially the principal amount of the debt. In addition,
25 Board of Governors of the Federal Reserve System, Joint Statement by Secretary of the
Treasury Timothy F. Geithner, Chairman of the Board of Governors of the Federal Reserve System Ben S. Bernanke, Chairman of the Federal Deposit Insurance Corporation Sheila Bair, and
Comptroller of the Currency John C. Dugan on the Treasury Capital Assistance Program and
the Supervisory Capital Assessment Program (May 6, 2009) (online at www.federalreserve.gov/
newsevents/press/bcreg/20090506a.htm).
26 Id.
27 Id.
28 Id.
29 H.R. 2745, TARP Repayment and Termination Act of 2009, 111th Cong. (hereinafter ‘‘H.R.
2745’’).
30 Congressional Oversight Panel, Testimony of Treasury Secretary Timothy Geithner (Apr.
21, 2009).
31 See supra notes 22, 23, and accompanying text.
32 U.S. Department of the Treasury, FAQs addressing Capital Purchase Program (CPP)
changes under the American Recovery and Reinvestment Act of 2009 (Feb. 26, 2009) (online at
www.financialstability.gov/docs/CPP/CPP-FAQs.pdf).
33 EESA, supra note 13, § 113(a)(1) (codified at 12 U.S.C. § 5223).

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00015

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

10
the institution must repay any dividends that are owed but unpaid
on the shares.34
2. WARRANTS

a. Terms of warrants
The warrants have a ten year life. Treasury can exercise or
transfer half of the warrants it holds at any time; the other half
can be exercised after 2009 if the bank has not engaged in a
QEO.35
For BHCs that are public companies,36 the warrants must be exercisable for an amount of common shares of the bank with a
value, at the time of the investment, equal to 15 percent of the
amount of the preferred shares purchased by Treasury from the
issuer. Because the maximum amount of preferred shares eligible
for the CPP is generally the lesser of $25 billion and three percent
of the bank’s risk-weighted assets, warrants for $3.75 billion in
value of the bank’s common shares are the maximum amount that
may be issued by a single institution. The bank’s shareholders
must approve the issuance of the warrant shares, the increase in
the number of underlying shares to cover the warrants, or both.
The actual number of shares subject to the warrants is set by
reference to the market price for the common shares of the issuer
on the date of the preferred share investment, calculated on a 20trading day trailing average. Thus, if warrants for common shares
equal to $1 billion in value were to be issued and the 20-trading
day average stock price was $10, then the bank must issue warrants for 100 million shares of the common shares.
The number of underlying shares covered by the warrants is subject to two possible adjustments. First, the shares subject to warrant could be changed by standard anti-dilution adjustments. Thus,
if the issuer splits its stock on a two for one basis (issuing two
shares in place of every existing share), the number of shares subject to the CPP warrants in the previous example would be increased from 100 to 200 million. On the other hand, the number
of shares subject to the warrants is decreased by 50 percent if the
issuer engages, before December 31, 2009, in a QEO in which it receives gross proceeds of at least 100 percent of the liquidation price
of the preferred shares.37
34 Securities

Purchase Agreement, supra note 15, § 4.4.
of Warrant, supra note 15, § 13(H). As a contractual condition to a bank’s redemption
of its preferred stock, Treasury requires that the bank sign a ‘‘cross-receipt.’’ This cross-receipt
has the effect of exchanging the original warrants issued to Treasury for ‘‘substitute warrants’’
that are identical to the original warrants except for the removal of the qualified equity offering
50 percent warrant decrease provision. The cross-receipt also eliminates the warrant transfer
restrictions contained in the Securities Purchase Agreement. A bank is not, however, required
to provide a substitute warrant if it informs Treasury of its plans to repurchase the warrants
immediately.
36 Private banks issue warrants to purchase preferred shares ‘‘having an aggregate liquidation
preference equal to 5 percent of the Preferred amount on the date of investment.’’ The underlying shares of a private bank warrant have the same rights as the preferred shares, except
that they pay dividends of 9 percent per year. U. S. Department of the Treasury, TARP Capital
Purchase Program (Non-Public QFIs, excluding S Corps and Mutual Organizations) Preferred
Securities Summary of Preferred Terms (Nov. 19, 2008) (online at www.financialstability.gov/
docs/CPP/Term%20Sheet%20-%20Private%20C%20Corporations.pdf) (hereinafter ‘‘CPP Term
Sheet for Private Banks’’).
37 Form of Warrant, supra note 15, § 13(H). See text accompanying supra note 35 for a definition of ‘‘Qualified Equity Offering.’’

tjames on DSKG8SOYB1PROD with HEARING

35 Form

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00016

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

11
The strike price of the warrants is determined in the same way
as the number of shares subject to warrant, that is, the price is set
at the 20-trading day trailing average price of the common shares
on the date Treasury’s investment is made. Thus, if the 20-day average stock price is $10, the holder of the warrant must pay $10
for each share of stock when it exercises the warrant.38 Private
bank warrants carry an exercise price of $0.01 per share. Treasury
has announced that it will immediately exercise private bank warrants.39
Treasury agrees to waive its voting rights with respect to any
voting stock it receives when it exercises its warrants.40 This restriction does not apply to any person to whom Treasury transfers
the shares or warrants.

tjames on DSKG8SOYB1PROD with HEARING

b. Repurchase of warrants
i. Timing of Repurchase. Timing of repurchase is governed by
both statutory and contractual provisions. Treasury is of the opinion that the contractual provisions are the more constraining.
The statute originally permitted Treasury to convert a warrant
to cash or exercise it when Treasury decided that doing so would
allow the public reasonable gain from an increase in the price of
the stock involved, and that ‘‘the market [was] optimal for such assets, in order to maximize the value for taxpayers.’’ 41 The amendment that eliminated conditions on redemption of preferred shares
also required Treasury to ‘‘liquidate’’ the warrants it held when the
assistance was repaid (i.e., when the preferred shares Treasury
held were redeemed).42 A further amendment to the same provision
resulted in language that attempts to restore Treasury’s discretion
regarding the timing of warrant repurchases.43 EESA now provides
that Treasury ‘‘may liquidate warrants associated with such assistance.’’ 44
The SPAs governing Treasury’s purchase of preferred shares and
warrants were executed before the EESA amendment concerning
the timing of warrant repurchases became law. The SPAs grant the
redeeming financial institution the right to repurchase the warrants upon notice to Treasury (after it has redeemed its preferred
shares).45 Treasury staff has informed the Panel that Treasury is
contractually bound by the timing provisions of the SPAs. In addition, Treasury staff has stated that it is Treasury’s policy to dispose
38 The exercise price, however, is subject to reduction if necessary shareholder consents are
not obtained; the maximum reduction is 45 percent.
39 CPP Term Sheet for Private Banks, supra note 36.
40 Securities Purchase Agreement, supra note 15, § 4.6. This provision reflects the requirements of EESA. See 12 U.S.C. § 5223(d)(1)(A).
41 EESA, supra note 13, § 113(a)(2)(A) (codified at 12 U.S.C. § 5223(a)(2)(A)).
42 ARRA, supra note 23, § 7001.
43 Helping Families Save Their Homes Act of 2009, Pub.L. 111–22, § 403 (May 20, 2009) (online
at
frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111lcongl
bills&docid=f:s896enr.txt.pdf) (amending 12 U.S.C. § 5221). Floor statements made by the provision’s sponsor and the committee chairman support a plain meaning analysis and explain that
the sponsors’ intentions were to grant Treasury authority to time warrant repurchases in order
to maximize financial returns on the warrants to taxpayers. See Statement of Senator Jack
Reed, Congressional Record S5114 (May 5, 2009); Statement of Senator Christopher Dodd, Congressional Record, S5115 (May 5, 2009).
44 ARRA, supra note 23, § 7001.
45 Securities Purchase Agreement, supra note 15, § 4.9(a). Though the amended section 111(g)
of EESA expressly provides Treasury discretion as to when to allow repurchase of the warrants,
it does not explicitly override the contracts.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00017

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

12

tjames on DSKG8SOYB1PROD with HEARING

of the government’s investments as soon as practicable.46 Therefore, a bank may repurchase its warrants as soon as it has redeemed its preferred shares.
Although Treasury is bound by the statute and the contracts, it
does have flexibility both in the negotiation process and in the inputs used in modeling value. As noted above, EESA provides that
the terms and conditions of the warrants be designed ‘‘at a minimum . . . to provide for reasonable participation by the Secretary,
for the benefit of taxpayers, in equity appreciation’’ and ‘‘that the
Secretary may sell, exercise, or surrender a warrant . . . based on
[these] conditions.’’ 47 The negotiation step of the contractual valuation procedure (discussed in detail in the next section), requires
that Treasury and the bank ‘‘promptly meet to resolve the objection
and agree on the Fair Market Value.’’ 48 In order to provide for
‘‘reasonable participation in equity appreciation,’’ Treasury could
take a tougher negotiating position, possibly resulting in a higher
fair market value. Treasury is not bound as to the basis on which
it will agree or disagree with the bank’s proposed fair market
value. Of course, there are many considerations that Treasury
must balance in its decision making, and this is only one of them.
If the bank informs Treasury that it will repurchase the warrants, then it must go through the valuation procedure in the SPA,
described below.
ii. Repurchase Price. From a statutory point of view, Treasury is
required to repurchase warrants ‘‘at market price.’’ 49 As discussed
below, the SPAs executed for each TARP transaction provide for repurchase of the warrants at ‘‘fair market value,’’ reflecting the statutory requirement that TARP assets are to be sold ‘‘at a price that
the Secretary determines, based on available financial analysis,
will maximize return on investment for the Federal Government.’’ 50
The SPAs set out a procedure for valuing the warrants of a public bank when the bank invokes its right to repurchase its warrants.51 After a bank has redeemed 100 percent of its preferred
shares (or Treasury has transferred the preferred shares to an unaffiliated third party), the bank may repurchase the warrants
issued in conjunction with those preferred shares.52
The first step in this procedure is that the bank’s board of directors must propose the fair market value of the warrants, using the
opinion of an independent, nationally-recognized investment banking firm. (The Panel assumes that none of the firms used have, or
is an affiliate of a BHC or bank that has, received TARP assistance
46 See U.S. Department of the Treasury, Treasury Announces Warrant Repurchase and Disposition Process for the Capital Purchase Program (June 26, 2009) (online at
www.financialstability.gov/latest/tgl06262009.html) (hereinafter ‘‘Treasury Warrant Repurchase Announcement’’) (‘‘The President has clearly stated that his objective is to dispose of the
government’s investments in individual companies as quickly as is practicable.’’).
47 EESA, supra note 13, § 113(d)(2) (codified at 12 U.S.C. § 5223(d)(2)).
48 Securities Purchase Agreement, supra note 15, § 4.9(c)(ii).
49 ARRA, supra note 23, § 7001. Initially the statute required repurchase at a price set by the
Secretary, subject to the overriding condition specified above, namely that the price constitutes
‘‘a reasonable participation . . . in equity appreciation,’’ and ‘‘additional protection against
losses from the sale of [TARP] assets . . .’’ ARRA overrode that language to require that warrants be liquidated at ‘‘current market price,’’ and the subsequent amendment produced the language in the text, calling for liquidation at ‘‘market price.’’
50 EESA, supra note 13, § 113(a)(2)(B) (codified at 12 U.S.C. § 5223(a)(2)(B)).
51 Securities Purchase Agreement, supra note 15, § 4.9.
52 Securities Purchase Agreement, supra note 15, § 4.9(a).

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00018

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

13

tjames on DSKG8SOYB1PROD with HEARING

and issued TARP warrants. Were this assumption to prove incorrect, serious conflict of interest questions would arise.)
The bank’s board presents the valuation to Treasury, which has
ten days to object to the valuation. Though it is not specified in the
SPA, Treasury will have determined its own fair market value,
working with outside investment banks and consultants. Treasury
uses several methods to determine fair market value. These include
obtaining quotes from a group of investment banks and investment
companies that have volunteered their time,53 creating their own
model using a binomial American-style options model, performing
a fundamental analysis of the bank, and using outside, paid consultants, who use a slightly different binomial American style options model.54
If Treasury objects to the bank’s proposed fair market value,
then representatives of Treasury and the bank have ten days to
meet to resolve the objection and agree on a fair market value. If
Treasury and the bank cannot agree on a fair market value during
that period, either party may invoke the Appraisal Procedure.
By invoking the appraisal process a bank can require Treasury
to allow it to repurchase the warrants, so long as the repurchase
is made ‘‘as soon as practicable’’ after the fair market value has
been determined. The Appraisal Procedure provides that each
party chooses an independent appraiser.55 If within 30 days after
their appointment, the independent appraisers cannot agree on a
fair market value, a third appraiser is chosen by mutual consent
of the two appraisers. This third appraiser will provide its fair
market value within 30 days of its appointment. The average of all
three appraisals is binding on both Treasury and the bank.56 If the
bank wishes to repurchase the warrants, the bank and Treasury
are bound by the appraised value. Treasury staff has told Panel
staff that the bank, however, is not bound to repurchase the warrants and may revoke its notice exercising its right to repurchase
the warrants; the bank may restart the repurchase process at any
time—unless Treasury has disposed of the shares in the interim—
by initiating a new round of valuations and subject to the same
terms.
Like a public bank, a private bank may repurchase its warrants
once it has redeemed its preferred shares. Private bank warrants’
values are established in the SPAs at a specified dollar amount, so
they do not go through the same valuation procedure. As mentioned earlier, Treasury exercises private bank warrants immediately upon issuance. Private bank warrants have a liquidation
53 These investment banks’ and investment consultants’ names are not disclosed to the public.
They include both domestic and global entities. Some of the domestic entities’ parent companies
received CPP funds. Treasury staff has informed Panel staff that when Treasury solicits quotes
for the warrants, it uses a mix of banks whose parents have received CPP and those that have
not. Treasury has put into place careful conflict of interest rules governing firms that assist
Treasury with the warrant valuation process.
54 The Panel’s methodology for determining the fair market value of the CPP and TIP warrants, and its comparison to Treasury’s methodology, is discussed in detail in Annex A of this
report.
55 The costs of the appraisal process are borne by the bank. Securities Purchase Agreement,
supra note 15, § 4.9(c)(i).
56 Securities Purchase Agreement, supra note 15, § 4.9(c)(ii). If one of the three appraisals is
disparate from the middle appraisal by more than twice the amount that the other appraisal
is disparate from the middle appraisal, such appraisal is disregarded in the determination of
the average.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00019

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

14
amount of the full value of the preferred shares that Treasury received on exercise. Therefore, to repurchase the underlying shares
of the warrant, a private bank must pay five percent of Treasury’s
non-warrant equity investment.57 H.R. 2745 would, for the period
through the end of September 2009, allow private banks to repurchase the underlying shares associated with the warrants issued at
the time of the CPP investment at the price that Treasury paid for
the warrants, i.e., one cent per share.58
If the bank chooses not to repurchase its warrants, Treasury may
sell them to third party investors.59 Treasury has told the Panel
that the Secretary had discretion to determine the time period for
liquidating the warrants, and that in accordance with Treasury policy to dispose of ownership interests as soon as possible, it will auction the warrants within several months of a bank’s delivery of a
substitute warrant.60
Alternately, Treasury may choose to exercise the warrant at any
time.61 If Treasury has exercised the warrants and still holds the
shares received on exercise, the bank may repurchase the shares
on the open market, or Treasury may sell the shares to a third
party.62
D. REPAYMENTS

OF

CPP

AND

TIP CAPITAL INVESTMENTS

tjames on DSKG8SOYB1PROD with HEARING

On June 17, nine of the stress-tested BHCs and one other BHC
redeemed their CPP preferred shares from Treasury, in aggregate
returning almost $68.2 billion of taxpayer funds provided under the
TARP. The annualized return on Treasury’s investments in these
banks is at least five percent, due to the required five percent annual dividends paid to CPP preferred shares.63 It will not be possible to calculate an internal rate of return (IRR) with any precision until Treasury has sold the warrants it holds for these banks’
shares (or sells its shares after exercising the warrants). However,
even after Treasury sells the warrants for these banks, the IRR realized on these particular investments—likely the safest of the
whole program—would not be representative of the potential return on the entire TARP portfolio. (IRRs for the few small banks
that have repurchased their warrants are presented in Section E
below.)
Following the results of the stress tests, and the subsequent capital-raising by BHCs which required a strengthened capital buffer,
57 CPP Term Sheet for Private Banks, supra note 36, at 2; See also Schedule A to Warrant
to Purchase Preferred Stock, First Southwest Bancorporation (Mar. 6, 2009) (online at
www.financialstability.gov/docs/agreements/03202009/First%20Southwest%20Bancorpation.pdf).
58 H.R. 2745, supra note 29.
59 At this point, Treasury may sell all the warrants. This is because when the bank determines that it will repurchase the preferred shares, it must deliver to Treasury a substitute warrant instrument that eliminates the 50 percent qualified equity offering adjustment. See U.S.
Department of the Treasury, Acknowledgment of Repurchase (Public Issuers) (online at
www.financialstability.gov/docs/CPP/UST%20Acknowledgement%20of%20Repurchase%20
(Public%20Issuers).pdf).
60 Letter from Secretary Timothy Geithner, U.S. Department of the Treasury, to Chair Elizabeth Warren, Congressional Oversight Panel (July 1, 2009) (attached as Appendix II of this report, infra).
61 If Treasury exercises the warrants before December 31, 2009 and before the preferred
shares are repurchased, it may only exercise half of the warrants, as the other half are subject
to cancellation if the bank makes a qualified equity offering before that date. Securities Purchase Agreement, supra note 15, § 4.4.
62 Securities Purchase Agreement, supra note 15, § 4.9(a).
63 Accrued dividends are paid upon the repurchase of the CPP preferred shares.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00020

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

15
the appropriate bank supervisor or supervisors authorized repayments based on their determination that these banks possessed
adequate capital safety buffers to absorb losses through 2010 if economic conditions continue to deteriorate.64 Additionally, the banks
were required to satisfy a number of conditions set by the Federal
Reserve, notably the demonstrated ability to access public equity
markets and raise five-year debt without an FDIC guarantee.65
The Federal Reserve also evaluated whether repayment would
have an adverse effect on the future operations of the bank or financial markets.66
It should be noted, however, that although these banks are no
longer being supported directly by the TARP, they remain eligible
to use the FDIC’s Temporary Liquidity Guarantee Program,67 as
well as other indirect support through the Federal Reserve’s various liquidity programs. Except for the Term Asset-Backed Securities Loan Facility (TALF), which is currently set to expire at the
end of 2009, these programs were recently extended through February 2010.68 All told, the Federal Reserve’s balance sheet has expanded by almost $1.2 trillion since August 2007.69
FIGURE 1: CPP REPAYMENTS AS OF JULY 2, 2009
Institution

3/31/2009 ....................................
3/31/2009 ....................................
3/31/2009 ....................................
3/31/2009 ....................................
3/31/2009 ....................................
4/8/2009 ......................................
4/15/2009 ....................................
4/22/2009 ....................................
4/22/2009 ....................................
4/22/2009 ....................................
4/22/2009 ....................................
5/5/2009 ......................................
5/13/2009 ....................................
5/13/2009 ....................................
5/20/2009 ....................................
5/20/2009 ....................................
5/27/2009 ....................................
5/27/2009 ....................................
5/27/2009 ....................................
5/27/2009 ....................................

tjames on DSKG8SOYB1PROD with HEARING

Date

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

Bank or BHC
type

Repurchase amount

$120,000,000
100,000,000
90,000,000
28,000,000
15,000,000
89,310,000
25,000,000
361,172,000
125,000,000
78,158,000
4,900,000
125,198,000
75,000,000
26,918,000
64,779,000
7,414,000
200,000,000
184,011,000
40,000,000
12,000,000

Public
Public
Public
Public
Private
Public
Public
Public
Public
Public
Private
Public
Public
Public
Public
Public
Public
Public
Public
Private

64 Only the results of the stress tests under the adverse scenario were published, which assumed for 2009: a 3.3 percent decline in GDP, 8.9 percent unemployment, and a 22 point decline
in the Case-Shiller 10-city composite index of housing prices.
65 Board of Governors of the Federal Reserve System, Federal Reserve Outlines Criteria It
Will Use to Evaluate Applications to Redeem U.S. Treasury Capital from Participants in Supervisory Capital Assessment Program (June 1, 2009) (online at www.federalreserve.gov/
newsevents/press/bcreg/20090601b.htm).
66 Id.
67 The FDIC’s Temporary Liquidity Guarantee Program (TLGP) essentially guarantees the
senior unsecured debt issued by financial institutions, allowing them in effect to obtain financing at reduced rates; without the threat of default, the risk premium included in the interest
charged for the debt is reduced substantially. Currently, the TLGP guarantees some $285 billion
of debt of 34 BHCs, thrift holding companies, and other non-FDIC-insured financial institutions.
68 Board of Governors of the Federal Reserve System, Federal Reserve Announces Extensions
of and Modifications to a Number of its Liquidity Programs (June 25, 2009) (online at
www.federalreserve.gov/newsevents/press/monetary/20090625a.htm).
69 See Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release
H.4.1: Factors Affecting Reserve Balances (July 2, 2009) (online at www.federalreserve.gov/
releases/h41/Current/) (accessed July 2, 2009) (hereinafter ‘‘Fed Balance Sheet July 2’’).

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00021

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

16
FIGURE 1: CPP REPAYMENTS AS OF JULY 2, 2009—Continued
Date

Institution

6/3/2009 ......................................
6/3/2009 ......................................
6/17/2009 ....................................
6/17/2009 ....................................
6/17/2009 ....................................
6/17/2009 ....................................
6/17/2009 ....................................
6/17/2009 ....................................
6/17/2009 ....................................
6/17/2009 ....................................
6/17/2009 ....................................
6/17/2009 ....................................

Valley National Bancorp .........................................
HF Financial Corp. .................................................
JPMorgan Chase & Co. ..........................................
Morgan Stanley ......................................................
The Goldman Sachs Group ....................................
US Bancorp ............................................................
Capital One Financial Corporation ........................
American Express Company ...................................
BB&T Corp. .............................................................
Bank of New York Mellon .......................................
State Street Corporation ........................................
Northern Trust Corporation ....................................

75,000,000
25,000,000
25,000,000,000
10,000,000,000
10,000,000,000
6,599,000,000
3,555,199,000
3,388,890,000
3,133,640,000
3,000,000,000
2,000,000,000
1,576,000,000

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

32 Banks ................................................................

Bank or BHC
type

Repurchase amount

70,124,589,000

Public
Public
Public
Public
Public
Public
Public
Public
Public
Public
Public
Public

E. VALUING TARP WARRANTS
Before presenting the Panel’s estimates of the value of Treasury’s
CPP, TIP and Asset Guarantee Program (AGP) warrants, it is useful to briefly note the major conceptual approaches to making such
estimates and to explain the methodology used by the Panel. A
more detailed discussion of the most widely-used warrant valuation
methodologies and the choices and assumptions made by the Panel
in the approach it used is provided in Annex A.
1. CONCEPTUAL APPROACHES

tjames on DSKG8SOYB1PROD with HEARING

An important consideration in valuing a warrant is its intrinsic
value, given by the difference between the current share price and
the warrant’s strike price. Intrinsic value represents the value of
the warrant if it were exercised at the current moment, and is a
useful measure of a warrant’s worth if it is close to expiration or
if it will be exercised early. However, intrinsic value reveals only
a snapshot value at the current moment, not what the value of the
warrant may be when it expires or at any other time. It does not
take into account the likelihood that the stock price will increase
prior to the warrant’s expiration, a particularly important consideration given the ten-year term of the TARP warrants. Because intrinsic value ignores the value of future stock movement, it is not
used by market participants to value the TARP warrants. More
likely, potential investors will value warrants using either the binomial options pricing model or the Black-Scholes model.
The binomial options pricing model 70 values a warrant based on
how the price of its underlying shares may change over the warrant’s term.71 The binomial model has a number of advantages that
stem from breaking down a warrant’s term into a number of discrete time increments. An analyst using a binomial model may
change his input assumptions at different periods of the evaluation—for example, the assumed volatility of the underlying shares’
70 John Cox, Stephen Ross & Mark Rubinstein, Option Pricing: A Simplified Approach, Journal of Financial Economics (Mar. 1979) (hereinafter ‘‘CRR Binomial Paper’’).
71 The binomial model produces a tree of stock prices at specified time increments, calculates
the intrinsic value of the warrant at expiration (based on the estimated stock price distribution),
and then works backwards through earlier branches to calculate the current value of the warrant.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00022

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

17

tjames on DSKG8SOYB1PROD with HEARING

price movements can be varied over time. Similarly, a binomial
model can account for the possibility that a warrant will be exercised early if the share price exceeds a certain threshold.
The Black-Scholes model 72 has been the industry standard for
option valuation since it was first published in 1973.73 The popularity of Black-Scholes is largely based on its ease of use; it can be
calculated on a hand-held calculator with only a few inputs.74 A
Black-Scholes valuation is a specific version of the binomial model
in which it is assumed that all inputs are constant over time. Both
derive an expected value for a warrant based on the probability of
the warrant’s underlying share price exceeding its strike price.
As is true of all models, the validity of either a Black-Scholes or
a binomial analysis depends on the input assumptions used. If one
uses equivalent assumptions, these models tend to produce very
similar results.75 The most significant cause of divergence between
different warrant valuations comes from the assumptions made
about the future volatility and dividend yield of the underlying
shares. Future volatility is particularly difficult to predict. Nonetheless, nearly all market participants, government agencies, specialist firms and corporations value warrants through models that
use future volatility as an input.76 Future volatility can be estimated in a number of ways, resulting in a range of possible volatility assumptions and a range of possible warrant values.77
There are two commonly used methods for estimating the future
volatility of a stock. The first is to calculate volatility from historical prices changes. Many different volatility assumptions for the
binomial or Black-Scholes Models can be justified from historical
figures. An analyst’s choice of the time period over which he or she
will measure historical volatility as an estimate of future volatility
can have a large effect on a valuation. As the past two years have
been particularly turbulent, the volatility figures derived from this
period are high and may not be representative of the volatility of
bank stock prices over the next ten years, and will likely overvalue
72 Fischer Black & Myron Scholes, The Pricing of Options and Corporate Liabilities, Journal
of Political Economy (1973) (online at www.math.uwaterloo.ca/mboudalh/BS1973.pdf) (hereinafter ‘‘Black-Scholes Paper’’).
73 Mark Rubinstein, Implied Binomial Trees, Journal of Finance (July 1994) (online at
www.haas.berkeley.edu/groups/finance/WP/rpf232.pdf) (hereinafter ‘‘Implied Binomial Trees’’)
(‘‘This [the Black-Scholes] model is widely viewed as one of the most successful in the social
sciences and has [sic] perhaps (including its binomial extension) the most widely used formula,
with embedded probabilities, in human history.’’).
74 The inputs of the Black-Scholes model are the strike price of the option, the underlying
stock price, the time to expiration of the option, the risk-free interest rate, the volatility of the
underlying stock price, and the dividend yield of the underlying stock.
75 Mathematically, Black-Scholes is essentially the limit of the binomial model as the number
of steps taken approaches infinity. A binomial valuation, given the same assumptions, thus converges on the Black-Scholes valuation.
76 See, e.g., Congressional Oversight Panel, Duff & Phelps Final Valuation Report to
the Congressional Oversight Panel (Feb. 4, 2009) (online at cop.senate.gov / documents /
cop-020609-report-dpvaluation.pdf); Financial Accounting Standards Board, Statement of
Financial Accounting Standards No. 123 (Oct. 1995) (FSP FAS 157–4) (online at www.fasb.org /
cs /
BlobServer? blobcol = urldata&blobtable = MungoBlobs&blobkey = id&blobwhere =
1175818755677&blobheader=application%2Fpdf); Congressional Budget Office, The Troubled
Asset Relief Program: Report on Transactions Through June 17, 2009 (June 2009) (online at
www.cbo.gov/ftpdocs/100xx/doc10056/06-25-TARP.pdf).
77 Consider the example of a warrant to buy one share of Company X at $150 that expires
in one year. X’s common stock is currently trading at $100 and the risk free rate (i.e., the Treasury rate) is one percent. Under Black-Scholes, if X’s stock price volatility is modeled at 30 percent, the warrant would be valued at $1.59; with volatility at 60 percent, the warrant would
be valued at $10.91. If the volatility is below 15 percent, the warrant is estimated to be worth
less than three cents.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00023

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

18
the warrants. On the other hand, using volatilities calculated from
the past ten years may undervalue warrants if one believes that
bank shares will be more volatile over the next decade than they
have been in the previous one.
The second approach to estimating future stock price volatility is
to use implied volatility from the market. While implied volatility
has certain drawbacks, particularly the fact that the market’s implied volatility may be over a different future time period than the
term of the warrant being valued,78 using implied volatility to
value a warrant provides a better picture of ‘‘fair market value’’ because it uses actual market information to estimate this important
input assumption.
2. METHODOLOGY USED IN THIS REPORT 79

tjames on DSKG8SOYB1PROD with HEARING

The Panel adopted a modified Black-Scholes analysis to value the
warrants held by Treasury.80 As discussed in Annex A, the modifications were necessary to account for two aspects of the TARP
warrants that distinguish them from the type of options BlackScholes was designed to analyze: dilution 81 and dividend yield.82
The Panel did not apply a liquidity discount in its valuation. If
Treasury can hold the warrants to expiration, then the value of the
warrants to Treasury should not include a liquidity discount because Treasury does not need to sell them. Further, any liquidity
discount for the larger institutions, whose warrants constitute the
bulk of Treasury’s portfolio by value, would likely be small since
their shares are heavily traded.
The Panel developed high, low and best estimates for the value
of the warrants that Treasury held on July 6, 2009, based on varying estimates of stock price volatility. In the high estimate, the volatility input for each bank was the maximum of several historical
and implied volatility measures of its stock price.83 In the low estimate, the volatility input for each bank was the minimum of the
same set of volatility measures. In the best estimate, the volatility
input for 18 of the banks was derived from the implied volatility
of publicly-traded, long dated options on those banks’ shares. The
warrants for these 18 banks’ shares represent 89 percent of the
total value of Treasury’s warrant portfolio. For the remaining
banks, the best estimate volatility input for each bank was the
78 For example, across most banks for which there are data, the market is expecting volatility
to decrease over time. Thus, using short term implied volatility to value long term warrants
would overvalue the warrants.
79 A full discussion of the Panel’s methodology is included in Annex A.
80 In applying the Black-Scholes model rather than a binomial model, the Panel assumed that
the risk free rate, the dividend yield, and the stock price volatility of each bank would be constant through time. Market participants and finance professors with whom Panel staff consulted
thought these were reasonable assumptions given the purposes of the analysis.
81 Unlike options, which grant a claim to already-issued stock, the exercise of a warrant requires the company to issue new common shares, which has the effect of reducing the percentage of the company owned by existing shareholders (known as ‘‘dilution’’).
82 Dividend yield represents an investor’s return on investment if the stock is not sold, calculated by the ratio of annual dividends per share to share price.
83 These Panel’s measures were: the (i) two, (ii) five and (iii) ten year historical volatilities
ending on July 2, 2009; the ten year historical volatilities ending on (iv) July 2, 2008, (v) July
2, 2007, (vi) July 3, 2006, (vii) July 4, 2005, (viii) July 2, 2004, (ix) July 2, 2003, (x) July 2,
2002, (xi) July 2, 2001, (xii) July 3, 2000, (xiii) July 2, 1999; and (xiv) the midpoint of implied
volatilities of call and put options on the underlying stock expiring after Dec 31, 2010 as calculated on July 2, 2009. When any of these measures was unavailable, it was removed from
the set of possible volatility inputs. All historical volatilities were calculated from daily returns,
adjusted for dividends and capital changes.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00024

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

19
longest of the available one, two, five and ten year historical volatility measures of the bank’s share price.84 For all estimates, each
bank’s dividend yield input was set equal to its five-year average
dividend yield. The only difference in assumptions for the three estimates was the volatility input.85
As noted above in Section C, the CPP warrants have a reduction
provision such that if a recipient bank has a QEO of 100 percent
of the CPP investment by the date of the preferred redemption or
December 31, 2009, whichever comes sooner, then half of Treasury’s warrants are eliminated.86 To simplify the analysis, the Panel
assumed that unless a BHC had already redeemed its preferred
and held a QEO by July 2, 2009, then it would not do so by the
end of this year. This seems a reasonable assumption considering
that of the 32 banks which had redeemed their preferred shares by
July 2, 2009, only three had a QEO prior to repayment.87 To the
extent that there is a possibility that CPP-recipient banks will
have QEOs prior to redeeming their TARP preferred shares or the
end of the year, the Panel’s valuation of the warrants should be
discounted accordingly.
Using Black-Scholes, the Panel also estimated the value of the
warrants that Treasury has already sold.88 These valuations were
performed as of the date of the sale to enable a comparison between the fair market value of the repurchased warrants, as calculated by Black-Scholes, and the compensation Treasury actually
received for them.89 Other than adjusting for the transaction dates,
the Panel used the same methodology for valuing the past sales as
that applied to outstanding TARP warrants.
The Panel was aided in its valuation efforts by three finance experts, Professor Robert Merton, Professor Daniel Bergstresser and
Professor Victoria Ivashina, all of the Harvard Business School.
These three professors independently reviewed both the technical
valuation model and the assumptions that were built into the models; they concluded that the approaches reported here were reasonable and that they produced reliable estimates.
3. RESULTS

tjames on DSKG8SOYB1PROD with HEARING

The Panel’s high, low and best estimates for the aggregate value
of Treasury’s warrants as of July 6, 2009 are $12.3 billion, $4.7 bil84 The implied volatility input for each bank was set equal to the midpoint of implied
volatilities of call and put options on the bank’s shares expiring after Dec. 31, 2010 as calculated
on July 2, 2009.
85 All three estimates used each bank’s closing price on July 2, 2009 as the model’s share price
input. The risk free rate input was calculated as the yield on ten year Treasury bonds on July
2, 2009, adjusted to be made continuous.
86 See supra notes 34, 35, and accompanying text.
87 These three banks were State Street, First Niagara and Iberiabank. U.S. Department of the
Treasury, Troubled Asset Relief Program: Transactions Report For Period Ending June 30, 2009
(July 2, 2009) (online at www.financialstability.gov/docs/transaction-reports/transactionsreportl070209.pdf).
88 As of July 2, 2009, 11 banks have repurchased their warrants: Treasury sold its warrants
in Old National Bank, Iberiabank, FirstMerit, Sun Bancorp, Alliance Financial, Independent
Bank Co., First Niagara Financial Group, Berkshire Hills Bancorp, Somerset Hills Bancorp, HF
Financial and SCBT Financial. No third party buyers were involved in these transactions—
Treasury sold the warrants back to the banks which originally issued them—and only
Iberiabank and First Niagara had conducted a QEO by the time the warrants were sold. Id.
89 The valuations of Treasury’s remaining portfolio of warrants on July 6, 2009 cannot be compared against future transactions that involve these warrants as the values of the warrants can
change over time. Transactions can only be evaluated against fair market value on the date of
the transaction.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00025

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

20
lion and $8.1 billion, respectively. The range between the Panel’s
high and low estimates is driven by different volatility assumptions
in the Black-Scholes model. The future volatility and dividend yield
of the banks’ underlying shares are difficult to predict.90 The Panel
accounted for this uncertainty by casting a wide net across what
it considers reasonable boundaries in developing high and low volatility estimates.
As shown in figure 2, the Panel’s valuation of the warrants falls
within the same broad ranges as the estimates of Credit Suisse,
University of Louisiana at Lafayette Assistant Professor Linus Wilson, and Bloomberg.91 It is important to remember that these studies were performed on different dates, so some variation would be
expected. Among other reasons for these studies being incompatible, the value of Treasury’s warrants is highly correlated to the
fluctuating share prices of CPP-recipient banks. To the extent that
these shares have changed in value between the dates of the different valuation analyses, the warrants have altered in value accordingly.
FIGURE 2: COMPARISON OF PANEL’S VALUATION WITH OTHER VALUATIONS
[All values are presented in millions]

Valuation by

Valuation of

Result

COP Valuation of Comparable
(as of 7/6/09)
Low

Credit

Suisse 92

(6/2/09) ....

Linus Wilson 93 (6/10/09) ...
Bloomberg 94 (5/22/09) .......
CBO 95 (6/17/09) .................

Stress Test Banks ex. Keycorp (CPP Warrants only).
Stress Test Banks (CPP, TIP, and AGP) .....
JPMorgan, Morgan Stanley, and Goldman
Sachs.
CPP Warrants Only .....................................

Best

High

$5,680

$3,470

$5,590

$8,410

9,900
4,000

3,930
2,400

6,960
2,830

10,630
4,120

6,000

4,310

6,940

10,520

92 Credit

tjames on DSKG8SOYB1PROD with HEARING

Suisse Warrant Report, supra note 91. Credit Suisse used standard volatilities to calculate a Black-Scholes value for the CPP investments in the 18 of the 19 stress tested BHCs (it did not value warrants in Keycorp), producing a median estimate of $5.7 billion, and a
range of $5.2 to $7.8 billion.
93 Wilson Cancelation Probabilities, supra note 91. Wilson estimates the value of the warrants held by the government for the 19 stress
test banks using the same model as the Panel (Black-Scholes-Merton modified with Galai-Schneller). The higher estimates he obtained are
likely the result of differing volatility assumptions. Wilson calculates implied volatilities derived from short term options, which represent the
market’s prediction of variations in stock price over the next few months. For most securities, such short-term predictions tend to be much
higher than what the market’s prediction of volatility would be for longer periods such as those for which the warrants are available to be
exercised (10 years). Wilson’s methodology also adjust for the predicted likelihood of qualified equity offerings by BHCs, a step considered unnecessary by the Panel.
94 Bloomberg Warrant Article, supra note 91. Information on methodology is unavailable. Bloomberg does not break down its valuations by
individual BHC.
95 The CBO analysis did not consider the effect of Treasury’s requirement that banks which repay their preferred before Dec. 31, 2009 must
sell their warrants immediately or replace Treasury’s warrants with substantially similar ones that are stripped of the QEO provision.

90 Conversely, strike price, expiration date, underlying share price and the risk free rate are
all known or easy to estimate.
91 See Linus Wilson, Valuing the First Negotiated Repurchase of the TARP Warrants (May 23,
2009) (online at http://papers.ssrn.com/sol3/papers.cfm?abstractlid=1404069) (Professor Wilson
examines Old National Bancorp, the first of the CPP recipient banks to repurchase its CPP warrants. He concludes that the warrants were sold back to Old National Bancorp at a discounted
price.); Linus Wilson, A Model for Estimating the Cancellation Probabilities of TARP Warrants,
University of Louisiana at Lafayette (June 16, 2009) (online at http://papers.ssrn.com/sol3/
papers.cfm?abstractlid=1413442) (hereinafter ‘‘Wilson Cancelation Probabilities’’) (Professor
Wilson creates a model for estimating the value, and likelihood of cancelation, of TARP warrants. The established formula can be used in evaluating Treasury’s negotiation performance.);
Edward Tom and Sveinn Palsson, The Valuation of TARP Warrant (Part I and II)s, Credit
Suisse Research Report (May 26, 2009, June 2, 2009) (hereinafter ‘‘Credit Suisse Warrant Report’’) (Credit Suisse used 10 year mean realized volatility to calculate a Black-Scholes value
for the CPP investments in the 19 stress-tested banks, coming up with a median estimate of
$5.7 billion, and a range of $5.2 to $7.8 billion); Mark Pittman, TARP Warrants Show Banks
May Reap ‘‘Ruthless Bargain’’, Bloomberg (May 22, 2009) (online at www.bloomberg.com/apps/
news?pid=20601206&sid=ae2fQFMrDer4) (hereinafter ‘‘Bloomberg Warrant Article’’).

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00026

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

21
Most of the value of Treasury’s portfolio of warrants comes from
only a few banks. By value, the warrants in JP Morgan Chase,
Bank of America, Morgan Stanley, Goldman Sachs, Citigroup and
Wells Fargo account for 70 percent of the total value. Figure 3
below shows high, low and best estimates for Treasury’s ten most
valuable holdings of warrants.
FIGURE 3: PANEL ESTIMATE OF VALUE OF WARRANTS
[All values are presented in millions]
Institution

Investment date

Low estimate

High estimate

Best estimate

Bank Of America .................................
JP Morgan Chase .................................
Wells Fargo & Co .................................
Goldman Sachs Group .........................
Morgan Stanley ....................................
Citigroup ..............................................
American Express ................................
PNC Financial Services Group .............
Bank Of New York Mellon ....................
Capital One Financial ..........................
All Other Banks ...................................

10/28/08, 1/9/09 & 1/16/09 ...............
10/28/08 ..............................................
10/28/08 ..............................................
10/28/08 ..............................................
10/28/08 ..............................................
10/28/08, 12/31/08 & 1/16/09 ...........
1/9/09 ..................................................
12/31/08 ..............................................
10/28/08 ..............................................
11/14/08 ..............................................
..............................................................

$430
660
340
940
800
70
220
70
120
110
950

$1,850
1,560
1,480
1,250
1,310
1,030
370
330
240
210
2,640

$1,130
1,020
1,020
940
870
560
300
190
160
140
1,720

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

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

4,710

12,270

8,050

tjames on DSKG8SOYB1PROD with HEARING

In its analysis of warrants already repurchased, the Panel finds
that, in general, Treasury has been selling its warrants back to
banks at below market value. In the aggregate, Treasury sold its
warrants in these banks for $18.7 million. Figure 4 below compares
the repurchase price paid by these 11 banks and the Panel’s valuation of the warrants on the date of repurchase. It also shows
Treasury’s total internal rate of return (IRR) on its investments in
each of these banks, including its return on preferred shares and
warrants. A more complete discussion of the sources of the difference between Treasury’s results and the Panel’s estimates of the
value of the warrants sold to date in the context of one particular
such warrant sale, Old National Bancorp, can be found in Annex
B.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00027

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

tjames on DSKG8SOYB1PROD with HEARING

VerDate Nov 24 2008
00:33 Jul 30, 2009
Jkt 050720

FIGURE 4: WARRANT REPURCHASES AS OF JULY 2, 2009
[All values presented in thousands]
Repurchase
date

Repurchase
amount

Panel
valuation
(best est.)

Price/est.
(percent)

IRR 97
(percent)

PO 00000
Frm 00028
Fmt 6602

Inv. date

QEO 96

Old National ..................................................
Iberiabank .....................................................
FirstMerit .......................................................
Sun Bancorp .................................................
Independent Bank .........................................
Alliance Financial .........................................
First Niagara Financial .................................
Berkshire Hills ...............................................
Somerset Hills ...............................................
SCBT Financial ..............................................
HF Financial ..................................................

12/12/08 ......................................................
12/5/08 ........................................................
1/9/09 ..........................................................
1/9/09 ..........................................................
1/9/09 ..........................................................
12/19/08 ......................................................
11/21/08 ......................................................
12/19/08 ......................................................
1/16/09 ........................................................
1/16/09 ........................................................
1/21/09 ........................................................

No .................................................................
Yes ...............................................................
No .................................................................
No .................................................................
No .................................................................
No .................................................................
Yes ...............................................................
No .................................................................
No .................................................................
No .................................................................
No .................................................................

5/8/09
5/20/09
5/27/09
5/27/09
5/27/09
6/17/09
6/24/09
6/24/09
6/24/09
6/24/09
6/30/09

$1,200
1,200
5,052
2,100
2,200
900
2,700
1,040
275
1,400
650

$2,150
2,010
4,260
5,580
3,870
1,580
3,050
1,620
580
2,290
1,240

56
60
118
38
57
57
89
64
48
61
52

9.3
9.4
20.3
15.3
15.6
13.8
8.0
11.3
16.6
11.7
10.1

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

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

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

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

18,690

28,230

66

11.6

96The

issue is discussed infra Part C Section one of this report. Upon a qualified equity offering, the number of shares underlying Treasury’s warrants is halved.
97This is the total return Treasury has received on its investment in each bank. The calculation includes returns from dividends, preferred shares repayments and warrant repurchases. The IRRs in this figure very slightly underestimate the
actual rate of return because the Panel assumed that all dividends were paid on the date of repurchase of the preferred, when in fact they were paid quarterly.

22

Sfmt 6602

Institution

E:\HR\OC\B720A.XXX
B720A

23
The results show that in its sales of warrants Treasury has received about 66 percent of the Panel’s best estimate of fair market
value. These results may suggest that Treasury has not been successful in receiving fair market value for its warrants and in maximizing taxpayer returns. On the other hand, factors not included
in the Panel’s model, such as the illiquidity of the warrants—especially for smaller institutions—may explain the difference between
the amount that Treasury has received for its sold warrants and
the Panel’s valuation of those warrants.
In interpreting these results, it is important to bear in mind the
scale of the warrant repurchases as compared to the total warrant
portfolio. The sold warrants represent less than one quarter of one
percent of the Panel’s best estimate of the value of Treasury’s warrant portfolio on July 6, 2009. Thus, these sold warrants represent
a very small slice of the outstanding warrants, and Treasury’s relative performance in selling them may not accurately predict its
success in selling the balance of the warrants it holds.
The results also show that Treasury received a 12 percent rate
of return on the 11 CPP investments in public banks that have
fully exited the TARP. However, this rate of return is not predictive of the rate of return Treasury will receive across its entire
TARP portfolio because it only reflects the return on these 11 early
repaying banks. These banks are among the healthiest of the
TARP-recipient banks and thus Treasury’s return on these banks
is likely to be higher than its return on its aggregate TARP investment.98 Further, this rate of return does not factor in the likelihood
that some banks, including systemically significant institutions,
may be unable to repay their TARP investments.
F. ALTERNATIVES

FOR

DISPOSING

OF

TARP WARRANTS

tjames on DSKG8SOYB1PROD with HEARING

Although, thus far, Treasury has sold warrants back only to the
banks which issued them, as discussed in Section C it may sell the
warrants to any party subject to the following two restrictions:
first, before December 31, 2009, or, if earlier, the date when a bank
redeems its preferred, Treasury may sell only half of its warrants
in that bank; second, after a bank redeems its preferred it may negotiate to repurchase its warrants, and, if this fails, the bank may
invoke an appraisal procedure which leads to a binding price at
which Treasury must sell.99
Thus, Treasury’s options are dictated by whether a bank has redeemed its preferred shares. Before a bank redeems its preferred,
Treasury can sell half of its warrants in that bank to any party.
After a bank redeems its preferred, Treasury must allow that bank
a chance to negotiate the repurchase of its warrants if the bank
wishes to do so. If the negotiations reach an impasse and the appraisal procedure is not invoked, or if the procedure is invoked but
the bank is not willing to purchase at the resulting binding price,
then Treasury can sell all of its warrants in that bank on the open
market. In other words, if the parties cannot agree on a price and
if the bank is unwilling to purchase at the price determined by the
98 Each bank’s TARP repayment is conditioned on that bank’s supervisors finding that the
bank is sufficiently capitalized to no longer need a government investment. Thus, only healthy
banks have been able to repay. Supra note 23.
99 The issue is discussed supra in Part C of Section One of this report.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00029

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

24
appraisers, then Treasury may sell its warrants through a public
auction or other public sale.
1979 CHRYSLER LOAN GUARANTEE
The federal government has received warrants before in
exchange for providing credit support to ensure a company’s viability. The federally-guaranteed loan made to a
teetering Chrysler Corporation in 1980 is one example. In
that case, the federal government seemed to make a profit
on its loan to Chrysler when the warrants were sold.
The Chrysler Corporation Loan Guarantee Act of 1979
was officially signed into law on January 7, 1980. It created the Chrysler Corporation Loan Guarantee Board,
which was responsible for determining the conditions for
making a commitment to guarantee third party loans to
Chrysler. Any loans made under the Act had to be repaid
by December 30, 1990, and the amount outstanding at any
time was not to exceed $1.5 billion.100
Chrysler used $1.2 billion of the $1.5 billion in loan
guarantees. In return for the loan guarantees, the federal
government received warrants to purchase 14.4 million
shares of Chrysler stock at $13 per share until 1990.101 At
the time they were granted in 1980, Chrysler stock was
selling for about $5 a share.
After receiving the loans, Chrysler’s fortunes changed for
the better. Between 1980 and 1982, the corporation
downsized a significant amount of its operations, cutting
roughly half of its work force,102 and quickly returned to
profitability.103 By the first half of 1982, the company
made a profit of $482.2 million. It repaid its government
guaranteed notes in June and August of 1982.104
The U.S. government auctioned the Chrysler warrants
on September 12, 1983. At the auction, Chrysler purchased
the warrants for $311 million.105 Chrysler officials said
that they sought to avoid having the warrants converted
into common shares because conversion would dilute the
value of the current shares. The stocks that the warrants
purchased represented 12 percent of Chrysler’s shares outstanding. Chrysler also had the option of retiring the warrants at no cost. It chose not do so, though, because it did
not want to forgo $187 million in income it could earn from
the exercise of the warrants.106
Whether or not Treasury actually made a profit on the
sale of its Chrysler warrants is subject to debate. Prior to
1992, federal loan guarantees were treated as a contingent
liability of the U.S. government for budgetary purposes. As
a result, a loan guarantee resulted in no cost to the budget
100 Chrysler

Corporation Loan Guarantee Act of 1979, Pub. L. No. 96–185.

101 Id.

tjames on DSKG8SOYB1PROD with HEARING

102 Thomas

J. Lueck, Chrysler Tops Bids to Buy Back Stock Rights, New York Times (Sep.

13, 1983).
103 Id.
104 Id.
105 Id.
106 Id.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00030

Fmt 6602

Sfmt 6969

E:\HR\OC\B720A.XXX

B720A

25
unless and until the guarantee was called and resulted in
an actual loss. Under this budgeting convention, the federal government could show a $311 million profit on its
loan guarantees and warrant for Chrysler Corporation in
the early 1980s. Today, however, the cost of a similar loan
guarantee would require an upfront appropriation to cover
the possibility of default. No such estimate was made at
the time, however, so it cannot be determined whether
such an estimate would have been greater or less than the
$311 million the government received upon sale of the
warrants.
1. SELLING TARP WARRANTS THROUGH NEGOTIATION WITH THE BANKS

tjames on DSKG8SOYB1PROD with HEARING

Treasury sold its warrants in Old National Bank, Iberiabank,
FirstMerit, Sun Bancorp, Alliance Financial, Independent Bank
Co., First Niagara Financial Group, Berkshire Hills Bancorp, Somerset Hills Bancorp, HF Financial and SCBT Financial through exclusive negotiations with the issuing banks. These banks initiated
the negotiations by first redeeming Treasury’s preferred shares and
then invoking their right to repurchase the warrants they had
issued to Treasury. None of these banks invoked the appraisal procedure; they all reached a negotiated agreement with Treasury on
the price to be paid for the warrants.
When negotiating with a bank on the repurchase price of that
bank’s warrants, Treasury makes an assessment of the warrant’s
fair market value. Treasury’s valuation process has four inputs:
comparable market data, warrant pricing models, fundamental
company analysis and an outside consultant’s appraisal.107 First,
Treasury finds comparable securities that are publicly traded and
solicits quotes from market participants on the warrants being valued to develop a market perspective of their fair value. Second,
Treasury utilizes an American-style binomial option pricing model
and a Black-Scholes option pricing model to develop a theoretical
value for the warrants. Treasury calculates the volatility input for
this model from both implied and historical volatility measures—
Treasury uses the average 60-day trailing volatility for the last ten
years to determine a stock’s historical volatility. For each bank,
Treasury develops a dynamic volatility curve, which generally
shows volatility decreasing over time from current levels to historic
norms.108 Third, Treasury performs a fundamental analysis of the
repurchasing bank’s performance, looking at growth projections,
price-to-book ratios, and other indicators of financial health.
Fourth, Treasury obtains an outside consultant’s appraisal of the
warrants. In addition to the four inputs, Treasury may also include
a liquidity discount in its valuation of the warrants. This discount
ranges from zero to 50 percent and is determined by analyzing factors such as (1) a potential buyer’s ability to hedge its warrant position by shorting the company’s stock, and (2) the volume of
shares traded. An additional discount may be applied for insol107 On June 26, 2009 Treasury released information on its valuation procedure. In conversations with Panel staff, Treasury provided further insight into its method. Treasury Warrant Repurchase Announcement, supra note 46.
108 Generally, the blended volatility of this curve is slightly above the historical ten-year volatility of repurchasing bank’s shares.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00031

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

26

tjames on DSKG8SOYB1PROD with HEARING

vency risk over the ten-year period. Using these inputs, Treasury
develops a range of acceptable values at which it will sell the warrants. It should also be noted that Treasury has devoted a team to
valuing the warrants and that each warrant sale must meet the
approval of a four-person committee and the Assistant Secretary
for Financial Stability.109
This is a sophisticated valuation procedure and likely results in
a reasonable valuation for the warrants. Nonetheless, it may not
produce a maximization of taxpayers’ return on the warrants. As
discussed above, for the warrants it had sold by July 2, 2009,
Treasury only received 66 percent of the Panel’s best estimate valuation. There are several reasons why this may be the case.
Treasury may be generous to banks in its valuation of the warrants. Treasury is restricted by the terms of its warrant contracts,
which require it to give banks the right to repurchase their warrants at ‘‘fair market value.’’ This is a nebulous term in the absence of market exchanges, so Treasury has considerable leeway in
determining the fair market value for which it will sell the warrants. Treasury’s model may lead to a lower valuation than is necessary in at least two ways. First, Treasury’s use of average 60-day
trailing volatility over ten years as its measure of historical volatility leads to a lower volatility model input and a lower warrant
valuation than would the use of other historical volatility measures.110 Other measures, such as historical daily volatility, as used
by the Panel, result in higher volatility inputs and higher valuations. These other, higher volatility measures are in common use
and are legitimate inputs for option pricing models. Second, Treasury includes significant liquidity discounts in valuing the warrants.
If Treasury can hold the warrants to expiration, it is not clear that
their valuation should include a liquidity discount at all.111 Even
if a liquidity discount is merited, the discount Treasury applies is
significantly larger than that used by other accredited valuation
firms.112
Further, banks may not be willing to pay as much as other market participants for warrants in their own equity. The only way
Treasury can maximize taxpayers’ return on their investment is to
sell its warrants to the buyers who are willing to pay the best
price. To the extent that a bank is unwilling to pay as much as
other market participants, a two-party exclusive negotiation process necessarily fails to maximize returns because it excludes other
buyers who may be willing to pay higher prices. On the other hand,
109 U.S. Department of the Treasury, Treasury Announces Repurchase and Disposition Process
for the Capital Purchase Program (June 26, 2009) (online at www.financialstability.gov/docs/
CPP/Warrant-Statement.pdf).
110 Treasury’s measure of historic volatility, average 60-day trailing volatility for ten years,
is distinct from ten year historic volatility. When calculated for the same time period, the two
measures will vary significantly because they are different mathematical computations.
Inputting Treasury’s measure of historic volatility, the average 60-day trailing volatility for ten
years, into the Panel’s model results in a valuation of $5.5b for Treasury’s outstanding warrants.
By comparison, the Panel derived its volatility assumptions from implied volatilities for some
banks and ten year historical volatilities for the rest of the banks, valuing the warrants at
$8.1b. Using only the ten year historic volatilities for all of the banks results in a valuation
of $7.5b.
111 The issue is discussed infra in Part C of Section One and Annex B of this report.
112 In its February report to the Panel on the value of Treasury’s TARP assets, the valuation
firm Duff and Phelps’ used a zero to 20 percent liquidity discount range. Duff and Phelps, Valuation Report to the Congressional Oversight Panel (Feb. 4, 2009) (online at cop.senate.gov/documents/cop-020609-report-dpvaluation.pdf).

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00032

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

27
it is possible that a bank will actually pay a premium over other
market participants to keep its warrants from trading into unknown hands in the market.
Finally, in conversations with Panel staff, Treasury staff has explained that its valuation model is designed to arrive at a ‘‘correct
and reasonable’’ valuation, not a valuation that maximizes taxpayer returns. Treasury then uses this valuation as its first bid in
negotiations with each repurchasing bank. To the extent that
Treasury’s initial valuation is then lowered as part of the negotiation process, Treasury’s good faith effort to reach agreement is resulting in valuations that are below its own model’s valuation of
fair market value. On the other hand, Treasury is contractually obligated to negotiate. The warrant contracts stipulate that if Treasury rejects a bank’s valuation of its warrants, then it must work
to ‘‘resolve the objection[s] and to agree upon a Fair Market
Value.’’ 113
2. SELLING WARRANTS TO THE MARKET

tjames on DSKG8SOYB1PROD with HEARING

Treasury would be more likely to maximize taxpayer returns if
it sold the warrants through auctions. The reason is straightforward: an auction would cause the warrants to be allocated to the
buyers willing to pay the highest price, and competitive pressures
in the bidding process may push bids up. By setting proper reserve
values, Treasury can protect itself against a failed auction and ensure that it will at least receive fair market value. Equally important, auctions can put upward pressure on negotiated transactions
by setting new, higher transaction precedents and by showing that
a secondary market for these warrants exists, leading to a smaller
liquidity discount in the negotiated transactions.
Selling the warrants through auctions would have auxiliary policy benefits to Treasury. Auctions would enable Treasury to sell at
least half of its warrants immediately. By returning these warrants
to the private market, auctions would further Treasury’s aim of
exiting its equity positions in TARP-recipient banks as soon as possible. Auctions would also require significantly less time commitment from Office of Financial Stability (OFS) staff and could easily
be outsourced if Treasury preferred. Finally, auctions would have
the additional benefit of promoting transparency in Treasury’s disposition of the warrants.
To be sure, there are obstacles to using an auction process.
Banks have the contractual right to an exclusive negotiation for
their warrants following the redemption of their preferred shares.
Thus, there is a period following a bank’s redemption of its preferred shares when Treasury cannot auction its warrants in that
bank. However, Treasury may auction half a bank’s warrants even
before the bank redeems its preferred. Treasury could initiate this
process immediately. More importantly, Treasury could use the
threat of an auction as a bargaining chip in discussions with banks
to ensure that negotiated transactions are consummated at fair
market value. Selling some warrants through auctions would make
it clear to all banks that Treasury has well-developed and viable
113 Securities

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

Purchase Agreement, supra note 15, at § 4.9.

PO 00000

Frm 00033

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

28
options if the bank does not offer an adequate price for the warrants.
Other obstacles are related to whether there are sufficient bidders for auctions to be successful. It is possible that the illiquidity
of these securities—especially for smaller institutions—will cause
investors to stay away, and many potential bidders are banks that
may be restricted from bidding because of regulations on interbank ownership. Interest may be further depressed by investor concerns regarding the risk of bank insolvency over the warrants’ ten
year horizon, the limited ability of investors to hedge the warrants,
and pessimism about the bank sector in general. Further, rather
than buy Treasury’s warrants in any given bank, an investor may
find it much simpler to invest in the bank directly or to buy call
options. On the other hand, it is hard to believe that an auction
with a proper reserve value would ever achieve a lower valuation
than a negotiation.
Ultimately, open market transactions are the only way to determine true ‘‘fair market value.’’ In his testimony before the Panel
on June 24, 2009, Assistant Secretary Allison explained this in relation to the toxic assets on bank balance sheets: ‘‘We can have our
theories, [but] in the last analysis that’s why you have financial
markets. You have to have liquid interchanges and then the truth
will come out as to what the assets are actually worth.’’114 The
same should be said about pricing Treasury’s warrants.
G. ISSUES

tjames on DSKG8SOYB1PROD with HEARING

In reaching a judgment with the bank supervisors to allow a particular bank to repay its TARP assistance and in determining the
price, time and manner at which it will sell the warrants it holds
in that bank, Treasury must take into account two overriding statutory considerations:
(1) protecting the interests of taxpayers by maximizing overall returns and minimizing the impact on the national debt;
[and] (2) providing stability and preventing disruption to financial markets in order to limit the impact on the economy and
protect American jobs, savings, and retirement security.115
EESA also recognizes that the two objectives complement one another:
The Secretary shall use the authority under this Act in
a manner that will minimize any potential long-term negative impact on the taxpayer, taking into account the direct
outlays, potential long-term returns on assets purchased,
and the overall economic benefits of the program, including
economic benefits due to improvements in economic activity and the availability of credit, the impact on the savings
and pensions of individuals and reductions in losses to the
Federal Government.116
114 Congressional Oversight Panel, Testimony of Assistant Treasury Secretary for Financial
Stability Herbert Allison, Jr., Hearing with Assistant Treasury Secretary Herbert Allison (June
24, 2009) (online at cop.senate.gov/hearings/library/hearing-062409-allison.cfm).
115 EESA, supra note 13, § 103 (1) and (2) (codified at 12 U.S.C. § 5213(1) and (2)). § 5213 lists
seven additional facts that Treasury must take into consideration in administering EESA.
116 12 U.S.C. 5223 § 113(a)(1).

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00034

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

29
The public has a strong interest in recovering the money spent
to provide assistance to the financial system. But it also has an important stake in restoration of stability to the financial markets as
part of a general economic recovery. Treasury must balance the
public interests in financial stabilization and economic growth.
In this section, the Panel examines issues Treasury faces in trying to reach such a balance. It looks in turn at the problem from
the perspective of the financial stabilization program and of the
BHCs and banks subject to the program.
1. FINANCIAL STABILIZATION PROGRAM

Treasury has consistently stated that the decision by the government to take ownership positions in financial institutions was a result of emergency conditions, and, consequently, it intends to limit
its involvement in management of those institutions and to divest
itself of its preferred shares ownership positions in financial institutions 117 as soon as financial conditions normalize.118 As referenced above, the Federal Reserve Board has indicated that its approval for repayment (and hence to a substantial degree its determination that emergency conditions no longer affect the BHC or
bank whose repayment is permitted) is based on (i) capital to lend,
(ii) ability to maintain the capital levels that supervisors expect,
and (iii) ability to satisfy counterparty risk while reducing reliance
on government capital. Three important additional considerations
not mentioned prominently in Treasury statements are (i) various
regulatory and related considerations involving Treasury’s maintenance of bank ownership interests (ii) the status of funds repaid to
Treasury, and (iii) the remaining period of Treasury’s TARP authority.

tjames on DSKG8SOYB1PROD with HEARING

a. Financial Stability and the Stress Tests
The ‘‘restor[ation] of liquidity and stability to the financial system of the United States’’ is a primary purpose for Congressional
authorization of the TARP.119 The critical judgment in approving
repayment, as the Federal Reserve Board criteria for approval for
stress-tested BHCs recognize, is the ability of those BHCs to
‘‘maintain core capital levels consistent with supervisory expecta117 Treasury owns common stock in Chrysler LLC and is in the process of converting preferred
stock into common stock for Citicorp. Treasury contains convertible preferred shares in AIG and
GMAC and is in the process of receiving common stock in GM (NewCo). The origin and terms
of disposition for those equity interests are outside the scope of this report.
118 See, e.g., Treasury Warrant Repurchase Announcement, supra note 46 (‘‘The President has
clearly stated that his objective is to dispose of the government’s investments in individual companies as quickly as is practicable.’’); U.S. Department of the Treasury. Secretary Geithner Introduces Financial Stability Plan (Feb. 10, 2009) (online at www.treasury.gov/press/releases/
tg18.htm) (‘‘We believe our policies must be designed to mobilize and leverage private capital,
not to supplant or discourage private capital. When government investment is necessary, it
should be replaced with private capital as soon as possible.’’); U.S. Department of Treasury,
Treasury White Paper: The Capital Assistance Program and Its Role in the Financial Stability
Plan (February 9, 2009) (online at http://www.ustreas.gov/press/releases/reports/tg40l
capwhitepaper.pdf) (‘‘[T]o the extent that significant government stake in a financial institution
is an outcome of the program [Capital Assistance Program], our goal will be to keep the period
of government ownership as temporary as possible and encourage the return of private capital
to replace government investment.’’).
119 EESA, supra note 13, 2 (1).

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00035

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

30

tjames on DSKG8SOYB1PROD with HEARING

tions.’’ 120 The Board has also linked adequate capital to ability to
lend.121
In its evaluation of the stress tests,122 the Panel cited the finding
of its academic experts that the economic modeling used to conduct
the tests was generally soundly conceived and conservative (based
on the information available). It stated that ‘‘the addition of capital
to ten of the tested BHCs is certainly a good step forward,’’ although it also concluded that the tests ‘‘should not be taken for
more than they are’’ because ‘‘they do not project the capital necessary to prevent banks from being stressed to near the breaking
point.’’ 123
When one turns to repayment of TARP assistance, two of the
Panel’s observations about the stress tests are particularly relevant. The first is that ‘‘the stress-testing regimen can be valuable
if it is firmly instituted by the supervisors themselves for future periods and is repeated by the supervisors if bank or economic conditions worsen to a greater degree than assumed in the stress test
modeling.’’ 124 Second, it emphasized that ‘‘[t]he fact that the holding companies have added certain amounts of capital on certain assumptions does not mean that the financial crisis is over or that
the holding companies are now free from the risk of the sort of crisis-laden conditions many found themselves experiencing during
2008 and early 2009.’’ 125
Because the Federal Reserve Board’s repayment standards require the institution involved to be able to maintain the capital ratios set by the stress tests, it is important that no repayments compromise that ability. Some commentators believe that U.S. banks
are unlikely to experience a ‘‘lost decade’’ that beset banks in
Japan in the 1990s because, unlike Japan, U.S. banks will have
well performing loans and will be able to ‘‘earn’’ their way out of
future solvency problems.126 In this respect, the various loan facilities and guarantees on bank debt that have been instituted by the
FDIC can be viewed not simply as an effort to restore confidence
and liquidity in the banking system, but also as a mechanism to
aid banks’ efforts to earn their way to solvency. Other commentators are less sanguine and have argued that the possibility of further or renewed economic decline, insufficient private investment,
and immense commercial real estate and other debts to be refi120 Board of Governors of the Federal Reserve System, Federal Reserve outlines criteria it will
use to evaluate applications to redeem U.S. Treasury capital from participants in Supervisory
Capital Assessment Program, supra note 65.
121 Board of Governors of the Federal Reserve System, The Supervisory Capital Assessment
Program: Overview of Results (May 7, 2009) (online at www.federalreserve.gov/newsevents/press/
bcreg/bcreg20090424a1.pdf)() (‘‘Given the heightened uncertainty about the economy and potential losses in the banking system, and the potential in the current environment for adverse economic outcomes to be magnified through the banking system, supervisors believe it prudent for
large BHCs to hold substantial capital to absorb losses should the economic downturn be longer
and deeper than now anticipated.’’).
122 Panel June Report, supra note 2, at 30–35.
123 The Panel gave the supervisors themselves credit for not over-emphasizing the scope of the
tests, which they made clear were conducted within ‘‘the present supervisory framework.’’ Panel
June Report, supra note 2, at 49–50 (‘‘[I]t would be as much a mistake to dismiss the stress
tests as it would be to assign them greater value than they merit or in fact that the supervisors
claim for them.’’).
124 Panel June Report, supra note 2, at 50.
125 Panel June Report, supra note 2, at 50.
126 Mark Trumbull, Ten US Banks To Repay TARP Money, The Christian Science Monitor
(June 9, 2009) (online at features.csmonitor.com/economyrebuild/2009/06/09/ten-us-banks-torepay-tarp-money/) (citing Goldman Sachs economist Jan Hatzius that U.S. banks should have
sufficient profit streams on good loans ‘‘to offset even a rising tide of losses through 2010.’’).

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00036

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

31
nanced will limit the ability of the banking system to earn its way
to health.127
b. Macroeconomic conditions
The goal of the stress tests was the ability of the tested institutions to maintain current levels of activity based on an ‘‘adverse
scenario’’ for deterioration of economic conditions through the end
of 2010.128 Thus, the state of the economy is a crucial element for
any decision to approve repayment of TARP assistance.
As shown in the table below, two key economic measures used
in the stress test continue to show troublesome trends and pessimistic IMF forecasts.
Baseline

More adverse

IMF projections

Current
data 129

Metric
2009

GDP Growth ......................................
Unemployment Rate .........................
129 Because

2010

¥2.0
8.4

2.1
8.8

2009

¥3.3
8.9

2010

0.5
10.3

2009

¥2.6 130
8.9 132

2010

0.0
10.1

(Most
recent)

¥5.5 131
9.5 133

the baseline and adverse scenarios are projected as annual averages, they are not directly comparable to monthly or quarterly

data.
130 International

Monetary Fund, World Economic Outlook: Update, at 2 (July 8, 2009) (online at www.imf.org/external/pubs/ft/weo/2009/
update/02/pdf/0709.pdf).
131 First quarter 2009, percent change from preceding quarter in chained 2000 dollars (final figure, revised from the preliminary estimate
of ¥5.7 percent). U.S. Department of Commerce, Bureau of Economic Analysis, Gross Domestic Product, 1st quarter 2009 (final) (June 25,
2009) (online at www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm) (accessed July 9, 2009). This figure is up from the 6.3 percent
decline in the fourth quarter of 2008. Id.
132 International Monetary Fund, World Economic Outlook: Crisis and Recovery, at 65 (Apr. 2009) (online at www.imf.org/external/pubs/ft/weo/
2009/01/pdf/text.pdf).
133 U.S. Department of Labor, Bureau of Labor Statistics, The Employment Situation: June 2009 (July 2, 2009) (USDL 09–0742) (online at
www.bls.gov/news.release/pdf/empsit.pdf) (accessed July 6, 2009) (hereinafter ‘‘Employment Situation’’). This figure is the unemployment rate
through June 2009. The year-to-date average unemployment rate stands at 8.67 percent. See Id. at 11.

Thus, the supervisors must consider the possibility of unrealized
losses in commercial real estate, credit card, and other sectors that
have not yet shown up on bank balance sheets. This issue is particularly important in the case of small commercial and regional
banks, some of which have extensive commercial real estate loans
on their portfolios that are not now mature, but may face defaults
upon maturity.134

tjames on DSKG8SOYB1PROD with HEARING

c. Government’s dual role
A benefit from repayment of TARP assistance is the end of the
government’s conflicting roles as regulator of the very institutions
in which it owns shares and on whose profitability repayment of
public funds depends. Specific regulatory policies, for example
those affecting capital levels, the application of accounting conven127 See, e.g., The Economist, Less Wobbly Now: The Process of Returning Banks to Private
Ownership Begins (June 9, 2009) (online at www.economist.com/businessfinance/
displayStory.cfm?story—id=13811147); Martin Neil Baily and Douglas J. Elliott, Brookings Institution, The US Financial and Economic Crisis: Where Does It Stand and Where Do We Go
from Here?, at 11–13 (June 2009) (online at www.brookings.edu//media/Files/rc/papers/2009/
0615leconomiclcrisislbailylelliott/0615leconomiclcrisislbailylelliott.pdf)
(concluding
that there is ‘‘wide band of uncertainty’’ regarding future bank capital requirements given future
credit losses in categories such as commercial real estate, commercial and industrial loans, and
credit cards).
128 Board of Governors of the Federal Reserve System, The Supervisory Capital Assessment
Program: Overview of Results, at 2 (May 7, 2009) (online at www.federalreserve.gov/newsevents/
press/bcreg/bcreg20090507a1.pdf). ; Panel June report, supra note 2.
134 Panel June Report, supra note 2 at 41–42; Richard Parkus and Jing An, The Future Refinancing Crisis in Commercial Real Estate, at 3–4 (Apr. 23, 2009) (online at cop.senate.gov/documents/report-042309-parkus.pdf); Maurice Tamman and David Enrich, Local Banks Face Big
Losses, Wall Street Journal (May 19, 2009) (online at online.wsj.com/article/
SB124269114847832587.html).

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00037

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

32
tions to financial reporting by BHCs or banks, and conflicts among
regulators of various parts of BHCs, are complicated by the government’s dual interests.
d. Future of the TARP
The most difficult problem raised by repayment of TARP assistance may prove to be its impact on Treasury’s ability to respond
to a second wave of financial distress. Treasury believes that it can
maintain TARP assistance up to a ceiling of $700 billion until expiration of its authority to make new TARP purchases.135 But its authority to expend funds to reinfuse capital into the nation’s financial institutions through the purchase of bank securities or of assets on an institution’s books terminates at the end of 2009, unless
the Secretary of the Treasury extends that authority until October
3, 2010.136 But at that point any additional expenditure depends
on Congressional action further extending EESA.137
Treasury has evidently made the decision that repayment of
TARP assistance will not affect the government’s ability to respond
to future crises, and Secretary Geithner has stated that the decision whether or not to extend the TARP or seek Congressional approval for a further extension of the TARP has not been made.138
However, the lack of a publicly-expressed position about the future
is worrisome. The Panel noted in its June report that both its own
independent experts and other commentators have expressed a concern that the results of the tests understate the risks that existing
loans will result in substantial losses in 2011, following the twoyear period for which the stress testing occurred.
2. WARRANT REPURCHASE

tjames on DSKG8SOYB1PROD with HEARING

The issues surrounding warrant repurchase are relatively simple.
Although they may constitute only a limited portion of the value
of Treasury’s total investment in the institutions involved, the warrants are the only vehicle through which the public can realize a
return on its investment in addition to the dividends paid on the
preferred shares for the relatively short period for which the stock
will prove to have been held. The warrants cover a ten-year period,
however, and as noted in the valuation discussion above, their
value likely more accurately reflects the market’s long-term assess135 Treasury’s position, as most recently been expressed in a letter from Secretary Geithner
to Senator David Vitter, is that the interaction of various sections of EESA produces the following result: (i) Treasury’s authority to purchase ‘‘troubled assets’’ is ‘‘limited to $700 billion
outstanding at any one time,’’ (ii) amounts repaid to Treasury must be returned to the government’s general accounts, and (iii) repaid funds free up an additional amount of space under the
ceiling, and Treasury can use the proceeds of the sale of government securities to restore that
amount to the fund from which TARP expenditures can be made, so long as the fund does not
somehow exceed $700 billion. See EESA, supra note 13, § 106 (d), 115(a), 118 (codified at 12
U.S.C. §§ 5216(d), 5225(a), 5228). Treasury’s reading is disputed. An attempt to amend EESA
to make it clear that all repayments simply reduce remaining expenditure authority failed in
the Senate 48–47. S. Amend. 1030, (May 5, 2009) (online at http://thomas.loc.gov/cgi-bin/
bdquery/z?d111:SP1030:). H.R. 2745 would amend EESA to reach the same result. H.R. 2745,
supra note 29, adding § 137(d)(2) to EESA.
136 H.R. 2745, supra note 29, would amend EESA to eliminate the ability of the Secretary to
extend Treasury’s TARP authority.
137 EESA, supra note 13, § 120. Expiration of the authority to make new expenditures does
not affect Treasury’s ability to hold or repurchase preferred stock. EESA, supra note 13, 106(e)
(codified at 12 U.S.C. § 5216(e)). 12 USC 5216(e).
138 U.S. Treasury Secretary Timothy Geithner, Testimony to the Senate Committee on Banking, Housing, and Urban Affairs (June 18, 2009).

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00038

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

33
ment of the prospects of institutions whose operations Treasury
stabilized.
As indicated above, Treasury’s choices in continuing to hold the
warrants it now holds are limited by the SPAs. But even if it continues to hold warrants in institutions that repay their assistance
but do not opt to repurchase their warrants, Treasury should consider carefully its alternative courses of action. There is, of course,
a chance for equity appreciation greater than that predicted by
present valuation; but there is likewise a chance that by continuing
to hold warrants their potential value will drop, wiping out any upside that can be captured by taxpayers. However, the scenario in
which bank stock prices fall is also likely to be a scenario in which
banks’ capital positions are weaker than they are today.
The disposition of the warrants is of direct financial interest to
the public. For that reason, it is especially important that Treasury
be absolutely transparent about the nature and substance of the
decisions it is making and the reasons for those decisions. The
Panel has emphasized the need for transparency in administration
of the TARP since its first report, and it is disheartening to have
received the following response from Secretary Geithner about warrant valuation data:
It is not Treasury’s policy to publish estimates of the fair
market value of its investments made under the Troubled
Asset Relief Program (‘‘TARP’’). In the present case, Treasury believes it would not be in the taxpayer’s interest for
Treasury to disclose any valuations it has performed in
connection with warrants whose repurchase is currently
pending or that may be repurchased in the near term.139
However, warrants are still only 15 percent of the original CPP
investment. Since it is the healthy banks that are currently repaying, the value of their respective warrants has no doubt gone up.
In this respect, early sales of these warrants may leave Treasury
holding the warrants of weaker institutions with lower stock prices
and less likelihood of appreciation in the value of their warrants,
at least in the immediate future.
The Panel recognizes that Treasury must protect proprietary information and use care to avoid giving other institutions information that would prejudice the interests of the taxpayer, but it must
make any decision to restrict disclosure for these reasons only in
the most thoughtful and judicious manner. Transparency throughout the negotiation process is essential for accountability and acceptance of the valuations.
3. THE FINANCIAL INSTITUTIONS’ PERSPECTIVE

tjames on DSKG8SOYB1PROD with HEARING

Financial institutions, especially large ones, appear to want to
repay their TARP assistance as soon as they can obtain approval
to do so. In some cases, of course, they may feel that they simply
do not need the money any longer. However, there are likely several additional reasons for pursuing prompt repayment of the
TARP investments.
139 Letter from Secretary Timothy Geithner to Congressional Oversight Panel Chair Elizabeth
Warren (July 1, 2009) (attached as Appendix II to this report).

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00039

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

34

tjames on DSKG8SOYB1PROD with HEARING

Despite the Administration’s consistent statements that its policy
is not to be involved in bank management and to cease to hold
ownership positions in banks as soon as practicable,140 Treasury
retains influence over the business decisions and internal governance of institutions in which it holds substantial preferred shares
and warrant interests. Although ownership of preferred shares or
warrants convertible into nonvoting common shares does not provide the sort of leverage that common shares ownership does, holding a substantial block of preferred shares with the terms of the
Treasury preferred (discussed below) significantly constrains aspects of the issuing institution. Such constraints, for example,
hinder the ability to pay dividends or engage in certain capital
transactions, in exchange for bolstering the institution’s capital.
Replacing the Treasury investment with independently raised equity frees the institution from those constraints. At the same time,
however, repayment of TARP assistance will not free an institution
from the scope of the enhanced supervisory regime that has evolved
during the worst months of the crisis as that regime would apply
to the institution in any event.
The second motivation for prompt repayment of TARP investments has to do with the specific rules or conditions to which
TARP recipients are subject. The prime examples involve executive
compensation and corporate governance restrictions applicable to
TARP recipients. While banks were aware that they were subject
to restrictions upon entrance into the CPP,141 they point to new
provisions established in ARRA and by subsequent Treasury regulatory action142 that are retroactively applicable to past recipients
of TARP financial assistance who have not yet repaid Treasury. As
the American Bankers Association explained in a letter sent to the
House of Representatives opposing additional restrictions on executive compensation for CPP recipients because of the impact of uncertainty on business operations, ‘‘the risk of unilateral changing of
140 See supra note 46 Congrerssional Oversight Panel Hearing, Testimony of Herbert Allison,
Assistant Secretary of the Treasury for Financial Stability (June 24, 2009) (‘‘We are very reluctant shareholders in corporations. We don’t want to be in that position.’’).
141 CPP contracts contained a covenant obligating recipients to implement the executive compensation provisions required under section 111(b) of the EESA and any Treasury regulations
implementing the section promulgated by the closing date of the investments. Section 111(b)
provisions included: (1) a prohibition on TARP recipients from receiving tax deductions for bonuses above $500,000 for top five senior executives; (2) a clawback provision for any top five
executives who knowingly engage in providing inaccurate information that is used to calculate
their bonuses; and (3) a golden parachute restriction that prevents top five top executives from
receiving severance bonuses in excess of three years’ compensation.
By contract, Treasury imposed more stringent requirements on SSFI program and TIP investments beyond those required by the section 111(b) regulations. Most notably, the size of the
2008 and 2009 bonus pools for AIG, Citigroup, and BofA were capped. In February 2009, Treasury imposed new compensation requirements for future CAP recipients that were slightly more
restrictive than those applicable to their CPP counterparts and retroactively applicable requirements for recipients of ‘‘exceptional assistance,’’ including restricting non-restricted stock compensation to $500,000 for senior executives, imposition of non-binding say-on-pay shareholder
votes, expanding the number of executives subject to clawback and golden parachute payments,
and mandating exposure on company policy on luxury expenditures. U.S. Department of the
Treasury, Press Release: Treasury Announces New Restrictions on Executive Compensation
(Feb. 4, 2009) (available at www.treasury.gov/press/releases/tg15.htm).
142 Robin Sidel, U.S. Gets TARP Payback from 10 Banks, Wall Street Journal (June 18, 2009)
(http://online.wsj.com/article/SB124524619467123215.html) (‘‘some bankers complained it had
outlived its purpose and imposed needless complications on compensation and other decisions.’’).

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00040

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

35

tjames on DSKG8SOYB1PROD with HEARING

the rules at any time . . . is extremely disruptive to sound business planning.’’ 143
With respect to employee compensation, ARRA’s amendment of
EESA’s executive compensation and corporate governance restrictions and Treasury’s subsequent regulatory action has subjected
CPP recipients to restrictions that are, in many respects, stronger
and more far reaching than those that they faced under the CPP
contracts and pre-ARRA regulations.144 In one respect, however,
ARRA’s amendment to section 111 of EESA has benefitted banks
seeking to be free from executive compensation regulations: if a
bank redeems all of its CPP preferred shares, it is immediately free
from these conditions regardless of whether Treasury still holds
warrants for the purchase of its common shares.145
Banks have argued that TARP-related executive compensation
restrictions are making it difficult for them to attract or retain talented executives and employees because these employees can be
better compensated by financial services firms free of the restrictions. These include private equity and hedge funds,146 large international financial institutions such as HSBC or Barclays that are
ineligible to receive TARP funds, and firms that have freed themselves of the restraints by redeeming their CPP preferred shares.
In addition to executive compensation and corporate governance
restrictions, TARP-recipient banks are subject to restrictions on
hiring foreign workers. The Employ American Workers Act
(EAWA), section 1611 of ARRA, prohibits any recipient of funding
under Title I of EESA or section 13 of the Federal Reserve Act
from hiring new H–1B workers unless they had offered positions to
equally- or better-qualified U.S. workers, and it prevents recipients
from hiring H–1B workers in occupations in which they have laid
off U.S. workers.147 Hence, while EAWA applies to CPP recipients,
repayments will not necessarily free banks from its restrictions
such as restraints on hiring foreign workers.
143 See Memorandum from Floyd Stoner, American Bankers Associations to Members of the
House of Representatives (March 30, 2009) (online at www.aba.com/NR/rdonlyres76DCD3072D7E-48A6-A10F-623175F0AEAD/59034/ExecComplABAHouseLetterl033009.pdf).
144 As compared to EESA’s original provisions, the new requirements cover more employees
(in some cases expanding their scope from five senior executives to twenty and, in cases of exceptional assistance recipients, an additional 100 most highly compensated employees). They
also contain stricter restrictions on bonus and severance payments, encompass additional corporate governance standards, and are in part enforced by the new Treasury office of Special
Master for TARP Executive Compensation. In addition, by regulation, Treasury has created a
Special Master for TARP Executive Compensation who has authority to review any compensation (payments) for senior executive officers and next 20 most highly compensated employees
at firms receiving exceptional assistance; to approve the compensation structure for the next 100
highly compensated employees of such firms; and to issue advisory opinions on the compensation
and compensation structure at non-exceptional assistance TARP recipients. See ARRA, supra
note 23, § 7001; U.S. Department of the Treasury, Interim Final Rule on TARP Standards for
Compensation and Corporate Governance (accessed June 12, 2009) (online at www.treas.gov/
press/releases/reports/ec%20ifr%20fr%20web%206.9.09tg164.pdf); U.S. Department of the Treasury, Press Release: U.S. Department of the Treasury, Interim Final Rule on TARP Standards
for Compensation and Corporate Governance (June 10, 2009) (online at www.treas.gov/press/
releases/tg165.htm).
145 ARRA, supra note 23, § 7001.
146 Edmund Andrews and Eric Dash, Stimulus Plan Places New Limits on Wall St. Bonuses,
New York Times (Feb. 13, 2009) (online at www.nytimes.com/2009/02/14/business/economy/
14pay.html) (‘‘Top economic advisers to President Obama adamantly opposed the pay restrictions, according to Congressional officials, warning lawmakers behind closed doors that they
went too far and would cause a brain drain in the financial industry during an acute crisis.
. . . Others warned that because of the rules, firms might lose their best traders and managers
to hedge funds and foreign banks.’’).
147 ARRA, supra note 23, § 1611(b).

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00041

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

36

tjames on DSKG8SOYB1PROD with HEARING

Banks also explain that they are motivated to repay TARP funds
as soon as possible so they can be free of conditions currently imposed by contract, statute, or regulation on recipients and the uncertainty related to the possibility of new conditions in the future.148
The SPA places restrictions on a bank’s dividend and repurchase
abilities. These restrictions apply until the earlier of the date the
bank redeems its shares, when the shares are transferred to a
third party, or three years after the CPP preferred shares’
issuance.149 There are two dividend restrictions. The first is a common restriction for preferred shares that gives dividend payments
to preferred shareholders priority over dividend payments to common or junior preferred shares. The second dividend restriction is
much less common, and quite favorable to Treasury. It caps for a
period of time the amount of dividends that the bank can pay on
its common shares The cap is set at the amount of the last regular
quarterly cash dividend prior to October 14, 2008.150 The stock repurchase restrictions are parallel to the dividend restrictions.151
The bank may not redeem common or junior preferred shares if
dividends on the preferred have not yet been paid. Redemption of
common and junior preferred shares is prohibited during the times
in which dividends are capped.
These restrictions improve the value of the warrants by preventing banks from paying excessive dividends, which, in turn,
could impair the bank’s capital structure and ultimately negatively
impact the value of its shares. Moreover, these restrictions protect
the value of the preferred shares by prioritizing dividend payments
to preferred shareholders over those of junior preferred and common shareholders.
Finally, a number of institutions argue that they were forced directly or indirectly by Treasury and their supervisors to participate
in the CPP in the interests of stability of the financial system as
a whole. They may be worried that, especially after the stress tests,
their failure to repay the assistance they receive will have unfair
consequences in the way the markets assess their strength. Some,
especially small, banks may worry about general public anger at
‘‘bailout banks.’’ 152
148 Eric Dash, 10 Large Banks Allowed to Exit U.S. Aid Program, New York Times (June 10,
2009) (online at www.nytimes.com/2009/06/10/business/economy/10tarp.html) (‘‘The banks are
eager to escape TARP and the restrictions that come with it, particularly the limits on how
much they can pay their 25 most highly compensated workers.’’); Deborah Solomon, Nine Banks
to Repay TARP Money, Wall Street Journal (June 9, 2009) (online at online.wsj.com/article/
SB124450458046896047.html) (‘‘many [TARP recipients] are uncomfortable with the restrictions
that come with the government’s investment, including on pay, dividends and stock buybacks’’);
Robin Sidel, U.S. Gets TARP Payback from 10 Banks, Wall Street Journal (June 18, 2009) (online at online.wsj.com/article/SB124524619467123215.html ) (‘‘some bankers complained it had
outlived its purpose and imposed needless complications on compensation and other decisions’’);
Stephen Labaton, Some Banks, Feeling Chained, Want to Return Bailout Money, New York
Times (Mar. 10, 2009) (online at www.nytimes.com/2009/03/11/business/economy/11bailout.html)
(‘‘One of the biggest concerns of the banks is that the program lets Congress and the administration pile on new conditions at any time.’’).
149 Securities Purchase Agreement, supra note 15, § 4.8(a).
150 Securities Purchase Agreement, supra note 15, § 4.8(a)(i). The dividend amount is subject
to certain adjustments, for stock splits, etc.
151 The repurchase of common stock is economically equivalent to a dividend.
152 Eric Dash, Four Small Banks Are the First to Pay Back TARP Funds, New York Times
(Mar. 10, 2009) (online at www.nytimes.com/2009/04/01/business/01bank.html) (‘‘About 500
small banks have received $73.7 billion. But the purpose of the TARP money and the public
perception of the fund have changed since then. What was billed as a program intended to help
healthy banks increase lending and swallow up troubled rivals widened to include a number

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00042

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

37
The reasons why many banks may be seeking to repay their CPP
investments promptly may also help to explain why some institutions have declined to participate in the TARP. Since the introduction of the CPP, a total of 372 banks have withdrawn their applications after receiving preliminary approval by Treasury. On occasion, this situation has arisen when Treasury or the regulator had
reason to believe that a bank would not receive final approval, and
therefore encouraged it to withdraw voluntarily (so as not to create
a disclosable event). In the vast majority of cases, however, it was
entirely the bank’s decision not to take the funds.153
H. CONCLUSION—POLICY CHOICES

AND

TRADE-OFFS

tjames on DSKG8SOYB1PROD with HEARING

The repayment of more than one-third of the financial assistance
provided under the CPP portion of the TARP, by financial institutions comprising approximately one-third of bank and bank holding
company assets, marks a turning point in the TARP and requires
careful examination of Treasury’s exit strategy for the program. If
the program has contributed to the restoration of stability in the
nation’s financial system, forming an important piece of the broader economic recovery effort, then the timing and manner in which
the TARP is wound down is as important as the way it was begun.
The judgments involved in the timing of the decision to permit
repayment of financial assistance are not simple. Government ownership of substantial interests in the financial institutions that it
is supposed to regulate presents substantial challenges, in part because it runs the risk of appearing to prefer some institutions in
which it has made investments over others. However, that difficulty has been inherent in the TARP from the beginning. The
question now is whether there have been sufficient changes in the
last eight months in the condition of the nation’s largest financial
institutions and the state of the nation’s economic recovery to justify repayment of TARP assistance.
The banks that have been permitted to repay have for the most
part been able to raise funds in the equity markets. But there is
little firm evidence that their lending figures have improved or that
their capital condition will remain firm. The stress tests, as the
Panel’s June report made clear, are a step forward, but do not resolve the issue. Moreover, there are questions about whether the
economy has improved to a sufficient degree to eliminate the capital buffer the assistance created, or whether weak loans and similar assets have been sufficiently eliminated from the institutions’
of struggling banks. . . ‘We don’t want to be touched by the stigma attached to firms that had
taken money,’ said Scott A. Shay, the chairman of Signature Bank.’’); David Segal, We’re Dull,
Small Banks Say, but Have Profits, New York Times (May 11, 2009) (online at http://
www.nytimes.com/2009/05/12/business/12small.html) (‘‘[C]ommunity bankers have felt compelled
in recent months to mount public relations campaigns to emphasize their fiscal health and in
some cases to announce they rejected Troubled Asset Relief Program, or TARP, funds. Some
have held cookouts, others have held ‘reassurance’ meetings in their lobbies, hoping to educate
customers and prevent panics. All are dealing with banker jokes and the occasional wisecrack.’’);
Bob Davis and Jon Hilsenrath, Federal Intervention Pits ‘Gets’ vs. ‘Get-Nots,’ Wall Street Journal
(June 15, 2009) (online at http://online.wsj.com/article/SB124501974568613573.html) (‘‘Some
businesses are trying to tap this antibailout sentiment. Worthington National Bank has erected
billboards around Fort Worth, Texas, boasting that it hasn’t been bailed out—a shot at a crosstown rival that took federal cash.’’).
153 Weekly data reported to the Panel by Treasury do not distinguish between banks that
withdrew after receiving approval and those that withdrew at any time, but it would appear
that voluntary withdrawals, rare occurrences in the last months of 2008, increased in frequency
starting around the second week of January.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00043

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

38

tjames on DSKG8SOYB1PROD with HEARING

balance sheets. In addition, the desire of banks to free themselves
of various regulatory restrictions imposed on TARP recipients cannot in any way influence the policy of Treasury and the Federal Reserve Board in determining whether and when to allow TARP assistance to be repaid.
The Panel’s valuations offer reasonable estimates of the fair market value of the warrants. They may help Treasury as it balances
the return to the taxpayer indicated by its own estimates of value
and the host of other relevant market, regulatory and economic factors applicable to the disposition of sophisticated financial instruments. In addition, Treasury should promptly provide written reports to the American taxpayers analyzing in sufficient detail the
fair market value determinations for any warrants either repurchased by a TARP recipient from Treasury or sold by Treasury
through an auction, and it should disclose the rationale for its
choice of an auction or private sale. Most important, Treasury
should undertake to negotiate the disposition of the warrants in a
manner that is as transparent and fully accountable as possible.
As the Panel has made clear since its beginning, transparency is
essential—perhaps now more than ever. Treasury and the Federal
Reserve Board must explain fully and clearly to the public the reasons for approval for repayment of financial assistance. Treasury
must be equally transparent about the way warrants are valued,
the exit strategy for, or future use of the TARP. Without such
transparency, the credibility of the decisions of Treasury and the
Federal Reserve Board and of Treasury’s stewardship of the TARP
can only fall into serious question.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00044

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

ANNEX A: Technical Explanation of Warrant Valuation
Methods
This annex provides background on the most commonly used
methods of valuing warrants and an explanation of the assumptions the Panel made in applying one such method to calculate the
value of the TARP warrants.
The most prominent warrant valuation model is Black-Scholes,
which has been the method of choice since it was first published
in 1973.154 Since that time, it has seen many extensions and modifications, but the main theoretical and mathematical basis for the
method has remained the same. Another method, the binomial options pricing model, introduced by Cox, Ross and Rubinstein in
1979,155 relies on many of the ideas set forth in Black-Scholes
while approaching the mathematical calculations in a very different manner. Finally, the simplest valuation of an option is its
intrinsic value, which values the option solely on its moneyness.156
These three methods are representative of the majority of valuation
techniques used today, and most traders use models based on one
of these three models.
The intrinsic value of a warrant is calculated by the simple equation:
Warrant Price = Current Share Price ¥ Strike Price

(1)

tjames on DSKG8SOYB1PROD with HEARING

The resultant value is the net gain a trader would realize upon
exercising the warrant and selling the underlying stock at any
given moment. This value is very useful in determining the prices
of warrants very near the end of their terms, and for modeling hypothetical early executions of non-European options.157 However, in
valuing warrants that are not near their expiration date, and especially in valuing Long-Term Equity Anticipation Securities
(LEAPs) 158 such as the warrants issued under the TARP, using intrinsic value to model fair market value presents significant problems. These problems stem from its one major flaw—the assumption that no matter the term, a warrant’s value is the difference
between the underlying share price and the warrant’s strike price.
While intrinsic value can provide useful information about the
154 Fischer Black & Myron Scholes, The Pricing of Options and Corporate Liabilities, Journal
of Political Economy, Vol. 81 No. 3 (May/June 1973) 637–654.
155 John Cox, Stephen Ross & Mark Rubinstein, Option Pricing: A Simplified Approach, Journal of Financial Economics (July 1979) Vol. 7 229–263.
156 Moneyness is the property of an option that describes the relationship between its strike
price and the current share price of the underlying stock. An option is ‘‘In The Money’’ when
its strike price is less than the underlying’s current share price, ‘‘At The Money’’ when its strike
is equal to it the underlying’s share price, and ‘‘Out of The Money’’ when its strike is above
the current share price.
157 European options are options which can only be exercised on the day they expire. The most
prevalent type of non-European option is the American option, which can be exercised on any
day until it expires.
158 Long-Term Equity AnticiPation securities are options that have an expiry date more than
one year away.

(39)

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00045

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

40

tjames on DSKG8SOYB1PROD with HEARING

value of a warrant if exercised immediately, it says very little
about the future value of that warrant or its value on the open
market, as there is always a positive probability that the underlying stock price will increase. Since intrinsic value ignores the
value of future stock movement and the time option captured in a
warrant, the TARP warrants must be worth more than their intrinsic value.
The binomial options pricing model and the Black-Scholes model
rely on many of the same assumptions: efficient markets, no transaction costs, Brownian motion,159 and lognormal growth.160 For the
binomial model, these assumptions allow a binomial tree to be constructed that follows a random walk of the underlying share prices,
where the term of the option is split into different periods. The first
period consists of one point that represents the current share price.
From this, using the model inputs,161 a possible increase in the
share price and a possible decrease are calculated. These newly calculated points represent the two possible prices which could be attained by the stock in the next period. This process is continued
through all of the periods in the model until the warrant’s term is
complete. This process creates a lattice of interconnecting possible
future paths of the underlying share price. From this result, option
prices are calculated backward from the final period to determine
the appropriate price, given the statistical probabilities of the outcomes, of the option in the original period.
While a Black-Scholes valuation relies on a continuous model of
share prices, the binomial model operates in discrete periods of
time. Because of this, the binomial model has a number of beneficial features, all of which stem from its ability to incorporate different assumptions at different periods in a warrants term. Further, it allows for the modeling of American options which can be
exercised early.162 However, the ability to add these features results in a more sophisticated set of inputs, creating a more complicated and less reproducible model as a result.
The lack of reproducibility caused by the use of sophisticated and
complex inputs is one of the major problems of the binomial model.
Since the Panel attempted a transparent valuation of the TARP
warrants, it used a Black-Scholes model, which uses only a few
simple inputs.
The most popular option pricing model is Black-Scholes, which
has been an industry standard since it was first introduced and is
routinely used by options traders. To value an option, the BlackScholes model sets up a fully hedged portfolio, which is long the
underlying stock and short the option. Since in an efficient market
a portfolio cannot exist with a guaranteed return greater than the
159 A theory developed by Robert Brown to describe the random movements of particles in suspensions, which was later quantified by Einstein and Smoluchowski and used to prove the existence of atoms. The mathematical model describes random movement and is often used in many
fields to mathematically describe random events. In this context, it is used to describe the random motion of stock prices.
160 At this limit, or after a large number of periods, the result of the Binomial Options Pricing
Model becomes equivalent to the pricing of the Black-Scholes model with respect to the valuation of European Options. Lognormal growth, an underlying tenant of Black-Scholes, is found
to be a property at the limit as well.
161 The assumption of no arbitrage allows the model to assume that all of the stocks information is appropriately incorporated into the share price.
162 An American option can be exercised at any time until the expiration date. By contrast,
a European option can only be exercised on the expiration date.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00046

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

41
risk free rate, this perfectly hedged portfolio must earn the risk
free rate. This parity can be expanded out through stochastic calculus to a partial differential equation which has the closed-form
solution:163

163 This expansion is made possible by a number of assumptions including: the assumption
that stock prices ‘‘follow a random walk, in continuous time with a variance rate proportional
to the square of the stock price. Thus the distribution of possible stock prices at the end of any
finite interval is lognormal.’’ Black-Scholes Paper, supra 72, at 640. In equations (2) (3) and (4),
N(d) refers to cumulative normal density function, w(x,t) refers to the price of the warrant with
respect to the share price of the underlying(x) and time(t). (r) refers to the risk free interest
rate, and (c) refers to the strike price. (v) refers to the volatility of the underlying.
164 Rubinstein Implied Binomial Trees Paper, supra note 73 (‘‘The [Black-Scholes] formula can
be implemented in a fraction of a second on widely available low-cost computers and calculators.
In many situations of practical relevance, the inputs can be easily measured and the related
securities are traded in highly efficient markets. This model is widely viewed as one of the most
successful in the social sciences and has perhaps (including its binomial extension) the most
widely used formula, with embedded probabilities, in human history.’’).
165 Chicago Board Options Exchange, Product Specification: Equity LEAPS (online at
www.cboe.com/Products/EquityLEAPS.aspx) (accessed July 8, 2009) (‘‘Expirations Months: May
be up to 39 months from the date of initial listing, January expiration only.’’ However, there
may be some FLEX options with terms as long as 15 years, however these are custom instruments, and not traded, listed, or priced like regular options, and therefore unusable for the purposes of this analysis.).

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00047

Fmt 6604

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

Insert graphic folio 53 50720A.001

tjames on DSKG8SOYB1PROD with HEARING

The popularity of the Black-Scholes model is driven by its ease
of use, which is the product of its closed form solution. Anyone can
plug in the standard inputs required for valuing any option and
then solve the equation for the value of the option. The model is
also preferred by options traders because it has a high degree of
accuracy. Although some believe that the binomial model is more
accurate, the Black-Scholes model’s ease of use has made it the industry standard for valuing warrants, as acknowledged by many
respected options experts, including Mark Rubinstein, the co-creator of the binomial method.164
It is important to note that the Black-Scholes model, as well as
every other popular options pricing model, was created to reflect
the prices of options with short terms, ranging from days to
months. As no options are traded on the Chicago Board Options
Exchange (CBOE) with terms longer than three years,165 it is very
difficult to come up with a ‘‘fair market value’’ of the TARP warrants which have terms of ten years. The lack of publicly traded
comparable derivatives makes any valuation of ten-year warrants
difficult.
More generally, there is the problem of lack of knowledge about
most of the inputs to the model. For example, while ten-year Treasury bills factor in what the market expects the interest rate risk
for the next ten years to be, it is impossible to know the validity
of the market’s expectations. Thus, once again, it is important to
note that the value that we are searching for here is not based on

tjames on DSKG8SOYB1PROD with HEARING

42
our expectations of the future, but rather our estimate of the market’s expectations. Because the goal of the Panel’s valuations was
to estimate the value the financial markets would place on these
warrants, we tried to use the inputs most likely to be used by prospective buyers.
The input that is the least defined in the Black-Scholes model
and has the largest effect on the price of the warrant is the volatility of the underlying stock price. Volatility is defined as the
standard deviation of the continuously compounding returns of a
stock. It is clear from this definition that there are an almost infinite number of variations of the calculation of this number. The
volatility is important in the Black-Scholes model because it features prominently in both of the probability calculations in the
closed-form solution, meaning that differing values of volatility can
create substantial differences in the final valuations of the warrants. The following example illustrates this point with respect to
the Black-Scholes model. Assume that a warrant to buy one share
of company XYZ at $150 expires in one year, that XYZ is currently
trading at $100 and that the risk free rate is one percent. If XYZ’s
volatility is 30 percent, the warrant is worth $1.59, but if the volatility is 60 percent, the warrant is worth $10.91. In fact, if the volatility is below 15 percent, the warrant is virtually worthless.
There are two main ways to estimate the future volatility of a
stock. The first is to calculate it from historical prices. Any time
period can be used to measure volatility, although standard practice dictates that the time period chosen be at least three months
and at most ten years backward from the valuation day. An analyst’s choice of the time period over which he or she will measure
historical volatility as an estimate of future volatility can have a
large effect on a valuation. For example, since the past two years
have been particularly turbulent, the volatility figures derived from
this period are high and may not be representative of the volatility
of stocks over the next ten years. Using these volatility figures to
value the TARP warrants would likely lead to an overvaluation. On
the other hand, using volatilities calculated from the past ten years
may undervalue the warrants if one believes that shares will be
more volatile over the next decade than they have been in the previous one. Modulating the time period over which historical volatility is calculated can affect the valuation of the warrants in some
banks by more than an order of magnitude. Apart from the time
period over which volatility is measured, historical volatility measures also differ based on the time increments from which they calculate variance in returns: days, weeks, months, or other lengths
of time.
The second method of determining volatility of a stock is to derive its ‘‘implied volatility.’’ Implied volatility of a stock is calculated by solving the Black-Scholes equation for volatility after
plugging in the market price of a publicly traded option on that
stock. This process yields the market’s estimate of the stock’s volatility, following from the Black-Scholes assumption that all of a security’s information is incorporated into its price. While this number has its drawbacks, particularly because publicly traded options
do not have terms nearly as long as the TARP warrants, it is the
best estimate of the market’s current perception of volatility.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00048

Fmt 6604

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

43
While these two methods of calculating volatility are the most
widely used, and thus the most useful in estimating the fair market value of the TARP warrants, there are a number of other methods that can be used to calculate volatility. One example is the calculation of volatility from credit default swaps (CDS). Using
Merton’s model, which defines an option on a stock as an option on
the underlying firm’s assets, it is possible to translate CDS spreads
into implied volatilities, which is useful, since the market for tenyear CDSs is more liquid than the market for ten-year options.
However, calculations based on CDSs rely on the Merton model’s
characterization of equity, which may be incorrect due to the different tiers debt and equity represent in a firm’s capital structure.
This method for calculating volatility is most appropriately used
‘‘when the long-term prospects of a company are driven by downside credit concerns rather than upside growth potential.’’ 166 In today’s market of relatively low stock prices and extensive government support for the financial sector, it appears that share prices
for banks are more likely to be determined by the potential for rebound, as opposed to potential failures due to credit problems. This
means that CDS spreads are not likely to be as useful in calculating the value of TARP warrants.
While the lack of a specific method for calculating volatility creates uncertainty in the determination of Black-Scholes values, the
model may also fail to account for a number of other factors which
affect the value of options. One overlooked factor is the dividend
yield. Dividend yield is calculated as the ratio of annual dividends
per share to share price. The dividend yield represents an investor’s return on investment if the stock is not sold. While the BlackScholes model assumes that companies do not issue dividends,
most do, and dividends create a premium for holding the underlying stock compared to the warrant. As a result, all other things
being equal, the higher the dividend yield of the underlying stock,
the lower the value of the warrant. Since many of the companies
for which Treasury holds warrants issue dividends, it is necessary
to adjust for this factor in any valuation of its holdings.
While the Black-Scholes model provides insight into the pricing
of short term European call options on stocks that do not pay dividends, it does not provide a proper valuation for American LEAPs
on companies that pay dividends, like the TARP warrants. In order
to price these securities, it is necessary to use some of the many
extensions that have been developed for Black-Scholes since its inception. The first extension was created by Robert C. Merton in
1973 before the Black-Scholes paper was published. This extension
allows for the integration of dividends into the Black-Scholes model
by making the assumption that ‘‘since the warrant owner is not entitled to any part of the dividend return, he only considers that
part of the expected dollar return to the common stock due to price
appreciation.’’ 167 This extension is used as the standard for pricing
options that have a dividend-issuing underlying stock, and has
been adopted in the methodology used by the Panel in this report.
tjames on DSKG8SOYB1PROD with HEARING

166 Credit

Suisse Valuation Report, supra note 91.
C. Merton, Theory of Rational Option Pricing, The Bell Journal of Economics and
Management Science, at 170 (Spring 1973).
167 Robert

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00049

Fmt 6604

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

44
The other extension that the Panel used is that of Galai and
Schneller.168 This extension accounts for the fact that warrants are
fundamentally different from call options, since exercising a warrant causes an increase in the number of outstanding shares, diluting common equity holders. This means that—all other things
being equal—a stock is worth less after the exercise of a warrant
than it was before exercise. In order to account for this, the BlackScholes value of the option is calculated, multiplied by the ratio of
the number of warrants to the number of fully diluted shares, and
then this value is added to the share price to create a new share
price input. The Black-Scholes value is calculated again, using this
new share price input. This process is carried out repeatedly until
the Black-Scholes values converge, at which point dilution has been
sufficiently factored out of the warrant’s price. This final value is
then multiplied by the ratio of the number of shares outstanding
to the number of shares outstanding plus the number of warrants
to arrive at a warrant valuation that considers the effect of dilution.
A FINAL NOTE ON THE CONVERGENCE OF THE BINOMIAL AND BLACKSCHOLES METHODS

tjames on DSKG8SOYB1PROD with HEARING

The binomial method and the Black-Scholes model are both used
extensively to model the values of warrants. In fact, FAS 123(R)
states that, ‘‘A lattice model (for example, a binomial model) and
a closed-form model (for example, the Black-Scholes-Merton formula) are among the valuation techniques that meet the criteria
required by this Statement for estimating the fair values of employee share options and similar instruments,’’ acknowledging both
Black-Scholes-Merton and the binomial method as valid in pricing
stock options issued as compensation.169 The Panel has chosen to
use the Black-Scholes method for the reasons described above. In
fact, however, the choice does not matter, because, given the same
inputs, the binomial method converges on Black-Scholes as the
number of nodes in the binomial tree grows (see Figure 5). In fact,
the Black-Scholes equations are merely the closed form solution of
the binomial model in the special case that inputs are constant and
that the number of nodes is taken to the limit. From this, it is clear
that any difference in the valuations of warrants is due not to the
choice of the binomial or Black-Scholes model, but rather the input
assumptions that are made.

168 Dan Galai and Meir I. Schneller, Pricing of Warrants and the Value of the Firm, The Journal of Finance, at 1333–1342 (Dec. 1978).
169 While executive compensation options are not the same as TARP warrants, they share certain characteristics, such as their long terms. Thus, methods acceptable for valuing executive
compensation options are also probably appropriate for valuing TARP warrants. Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 123(R): ShareBased Payment (October 1995).

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00050

Fmt 6604

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00051

Fmt 6604

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

Insert graphic folio 57 50720A.002

tjames on DSKG8SOYB1PROD with HEARING

45

ANNEX B: Analysis of the Old National Bancorp Warrants

tjames on DSKG8SOYB1PROD with HEARING

This annex compares Treasury’s valuation and sale of its Old National Bancorp warrants with the Panel’s valuation of those warrants and illustrates the general valuation processes carried out by
Panel staff and Treasury. As noted in the text, 11 BHCs have already repurchased their warrants for $18.69 million. Old National
Bancorp was the first BHC to do so.
Headquartered in Evansville, Indiana, Old National Bancorp is
a BHC with $8.3 billion in assets.170 Its stock is traded on the New
York Stock Exchange under the ticker ONB. ONB received a $100
million CPP investment on December 12, 2008. The bank then repaid its CPP investment on March 31, 2009 at par value. In the
interim, it paid over $1.5 million in dividends to Treasury. Upon
repayment of its CPP investment, ONB entered into negotiations
with Treasury to buy back warrants for 813,008 shares of its stock,
which it had issued to Treasury in conjunction with the initial CPP
investment in December. On May 8, ONB completed the repurchase of these warrants for $1.2 million. Using a Black-ScholesMerton model extended by Galai-Schneller, as described in Annex
A of this report, the Panel staff valued these warrants at $2.15 million.
The standard inputs to any warrant valuation model are the
strike price of the warrant, the expiration date, the underlying
share price, the future dividend yield, the future volatility of the
underlying shares, and the risk free rate over the term of the warrant. The Panel staff and Treasury used the same strike price and
expiration date, $18.45 and December 12, 2018 respectively, as inputs to their models for the ONB warrants. The Panel staff used
the closing share price on May 7, 2009, the day before the ONB
transaction closed, for the underlying share price input. The share
price on this day was $13.78. Treasury used the 20-day trailing average share price on April 22, $13.15. It is unclear to the Panel
staff why Treasury used this unconventional input, particularly
when it yields a lower valuation than the most recent closing share
price would.
Dividend yield, which is the ratio of dividends paid to share
price, must be forecast for the term of the warrant being valued.
Obviously, in the case of the TARP warrants, predicting the dividend issuances of TARP recipients for the next ten years is difficult. Market participants informed Panel staff that they would
typically seek the input of securities analysts who follow the company in question in order to obtain predictions for dividend yield.
To preserve the clarity and reproducibility of the Panel’s methodology, Panel staff elected to forgo this process.
170 Board of Governors of the Federal Reserve System, Bank Holding Company Peer Group
Reports: Peer Group 2, at 28 (Mar. 31, 2009) (online at www.ffiec.gov/nicpubweb/content/
BHCPRRPT/REPORTS/BHCPRlPEER/March2009/PeerGroupl2lMarch2009.pdf).

(46)

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00052

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

47

tjames on DSKG8SOYB1PROD with HEARING

Instead, the Panel staff used an alternative standard practice,
predicting future dividends from average historical dividend yields.
This number is calculated by averaging the dividends paid over a
particular period of time and then dividing them by the average
market price per share during that period.171 The Panel used
ONB’s five-year average dividend yield, 4.19 percent. Treasury
used ONB’s ten-year average dividend yield, 3.69 percent. Treasury’s assumption may seem more logical as the historical period it
analyzes mirrors the duration of the TARP warrants. However, the
Panel staff believes that the more recent past is more indicative of
future bank dividend policy.172 Thus, the Panel staff, in consultation with academics and market participants, used a five-year average dividend yield to predict the future dividend performance of
ONB and the other TARP recipients. In the case of ONB, the difference between the five and ten-year average dividend yields was
only 50 basis points.
The choice of volatility input has a large effect on any warrant
valuation. There are two main ways to predict future volatility, implied volatility and historical volatility. Implied volatility is derived
from publicly traded comparable options, through solving an extended Black-Scholes model for volatility. Implied volatility is what
the market predicts volatility will be over the term of the comparable option.
Historical volatility is calculated from the historical returns of a
stock. It assumes a log normal distribution of returns. The historical volatility of a stock over a period of time is calculated as the
standard deviation of the natural log of the interim returns in that
period. Different interim returns can be used: daily, weekly, or
monthly returns, for example, would all be acceptable.173
Both methods of calculating volatility are valid. However, as
many TARP recipients have only thinly traded options with short
durations, Panel staff believes that the implied volatilities calculated from these options are unreflective of the market’s long
term volatility expectations. For example, the implied volatility calculated from ONBLW call options on ONB, which had a strike
price of $17.50 and a maturity date of December 12, 2009, was estimated by the Panel to be 57.2%.174 The Panel staff believes that
this figure is more indicative of the market’s expectations for ONB
short term volatility than its volatility over the next ten years.
The drawbacks in using implied volatility to value the ONB warrants led Panel staff to use historical volatility instead. The most
important assumption in calculating historical volatility is the period over which it will be measured. In this case, the most standard
choice is to calculate the historical volatility from the date of the
valuation backward for the term of the option. For example, the
TARP warrants all have terms of ten years, so the ten-year historical volatility would be the most appropriate estimate of volatility
171 Average Dividend Yield = Average Dividends Over Period ÷ Average Share Price Over Period × 100
172 It is also important to note that TARP recipients’ dividend payments are capped at the
amount of the last regular quarterly cash dividend prior to October 14, 2008 while the government continues to hold preferred shares in them. Therefore, dividend yields for banks which
have not repaid their TARP investments are likely to be lower than they have been in the past.
173 Theoretically the choice of interim period should not have an effect on the volatility measurement.
174 Option price was calculated from the average of the closing bid and ask prices.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00053

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

48

tjames on DSKG8SOYB1PROD with HEARING

over the next ten years. Following standard practice, the Panel
staff calculated ONB’s ten-year historical volatility from daily returns for the period ending May 7, 2009 at 34.12%. This value was
used in the Panel’s model to arrive at a best estimate of the value
of the ONB warrants.
Treasury also calculated volatility over a ten-year period for the
TARP recipients, but used a very different and unorthodox method.
Treasury used ‘‘the average 60-day trailing volatility for the last
ten years’’ to determine each BHC’s historical volatility.’’ 175 Specifically, Treasury’s ten-year volatility measure is calculated by
taking the arithmetic average of the 60-day trailing historical
volatilities for each day over the past ten years.176 According to calculations performed by Panel staff, Treasury’s procedure results in
a ten-year volatility measure for ONB of 27.5%, more than 650
basis points lower than the Panel’s ten-year volatility measure. In
consultation with academics and market participants, Panel staff
has determined that over any time period Treasury’s estimation of
historical volatility will, in almost all cases, yield volatilities that
are lower than those calculated by more standard methods. As a
result of this difference, ceteris paribus, Treasury’s valuation of the
TARP warrants will be significantly lower than valuations using
more standard volatility inputs.
Some portion of the difference between the Panel’s estimate of
the value of the ONB warrants, $2.15 million, and the price actually received by Treasury, $1.2 million, can be explained by the differing share price, dividend yield and volatility assumptions as discussed above. However, in its final determination of the ONB warrants’ fair market value, Treasury also applied a liquidity discount.
For thinly traded stocks, such as ONB, Treasury believes that its
warrant positions are too large to be sold for their model value on
the open market. Therefore, Treasury applies a liquidity discount
to better approximate what they believe the warrants’ fair market
value would be. Treasury staff has told Panel staff that these liquidity discounts range from zero to 50 percent depending on the
recipient institution. Treasury staff has also indicated that they
have applied discounts from 15 to 35 percent in transactions to
date. As discussed above,177 it is unclear whether liquidity discounts of this magnitude should be applied in valuing TARP warrants or even if they should be applied at all.
One final observation, based upon market data, calls into question the adequacy of the price Treasury received for its ONB warrants. On May 7, 2009, the day before ONB repurchased its warrants, the last bid on the ONBLW option—an option on ONB stock
with a strike price of $17.50 and a duration of 7 months—was
$0.75, while the last asking price was $1.35. Backing out Treasury’s sale price for the ONB warrants yields a value of $1.48 per
warrant. This means that Treasury sold the ten-year warrants it
held in ONB for 13 cents per share more than the asking price of
a comparable option with a term of only seven months.
175 U.S. Department of Treasury, Treasury Announces Warrant Repurchase and Disposition
Process for the Capital Purchase Program, supra note 46.
176 Treasury further adjusts this number downward to compensate for unusual volatility during the financial crisis beginning in late 2007. Treasury also considers implied volatility numbers, but has not given the Panel any guidance on how.
177 See Section One Part F of this report.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00054

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

49
SECTION TWO: ADDITIONAL VIEWS
A. Richard H. Neiman
I agree with the main thrust of this month’s report that the warrants need to be valued carefully and at fair market value by
Treasury and that the process should be conducted with as much
transparency as possible. While I voted for the report, I am providing these Additional Views to clarify my positions and to add
some perspective, particularly on issues where the Panel did not
reach consensus.
1. BENEFITS TO THE U.S. TAXPAYER

The total benefit to the American taxpayer has to take into account the non-financial as well as the financial returns. The financial returns include repayment of the principal of the preferred
stock loans, the dividends received, and the value of the warrants.
The non-financial benefits include the important policy objectives
that have been achieved on behalf of the American people of stabilizing and reviving the financial system during a very difficult period of time. The CPP program has achieved and continues to
achieve objectives and we should not lose sight of this. I think that
this report focuses at times too narrowly on the warrants to the exclusion of other important components of return.

tjames on DSKG8SOYB1PROD with HEARING

2. EXIT STRATEGY

I support the Administration’s and Treasury’s stated policy objective to exit the warrant holdings as soon as practicable after the
banks have repaid their preferred stock under the CPP. Government capital support for the banks was the product of crisis conditions and the government should exit these investments as soon as
conditions stabilize. I would not support selling the warrants while
the preferred stock is outstanding; nor do I think it would be wise
to hold the warrants for any protracted period after the preferred
stock is repaid in an effort to maximize value by trying to time the
markets.
I think it is sound policy that the banks have the opportunity to
elect to repurchase their warrants at market prices, as they do
under the Security Purchase Agreements, before a market auction
is held. The Chrysler sidebar in the report demonstrates that the
warrant issuer (in that case Chrysler; in this case the banks) will
often have the greatest motivation to purchase its warrants in
order to prevent share dilution. Then, if the banks elect not to repurchase or if a fair market value cannot be agreed upon, a fully
transparent auction should be held.
I also believe that the Federal Reserve and other banking regulators have described a very reasonable and robust process to
screen banks for eligibility to repay the taxpayer’s investment, as
outlined at pages 9–10 of the report. Therefore I think that this
process should be allowed to work and that the return of the banks
to private capital markets should be encouraged wherever it is
deemed appropriate.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00055

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

50
3. IMPACT OF SMALL BANK REPURCHASES

The report draws certain conclusions based on an analysis of the
warrants of eleven small banks that have already been repurchased. I believe that reasonable minds can disagree about the appropriateness of liquidity discounts and complex volatility measures. As the report points out these warrants were a fraction of one
percent of the value of all warrants outstanding. We should be cautious before extrapolating too many conclusions about the entire repurchase program based on these early and small redemptions.
Hopefully lessons can be learned from these early efforts.
4. NEED FOR GREATER TRANSPARENCY

I believe it is vital from this point forward, especially with the
very large repaying banks’ warrants coming up for repurchase or
auction in the near future, that there be greater disclosure and
transparency than there has been until now. In this regard I am
encouraged by Treasury’s June 26 commitment to greater transparency by:
[P]ublishing additional information on each warrant that
is repurchased, including a bank’s initial and subsequent
determinations of fair market value, if applicable. Following the completion of each repurchase, Treasury will
also publish the independent valuation inputs used to assess the bank’s determination of fair market value.178
Disclosure as described above should substantially improve the
transparency of the warrant repurchase process going forward.
B. Rep. Jeb Hensarling

tjames on DSKG8SOYB1PROD with HEARING

I concur with the issuance of the July report subject to the following observations.179 Treasury should accept the panel’s estimates of fair market value as good faith guidance worthy of careful
consideration along with its own estimates of value and the host
of other relevant market, regulatory and economic factors applicable to the disposition of sophisticated financial instruments. I object, however, to any inference that (i) the panel’s estimates reflect
‘‘the’’ fair market value of the warrants, instead of an estimate of
such value, (ii) the panel’s estimates should necessarily serve as
the ‘‘floor’’ in a negotiated private party transaction or the ‘‘reserve
price’’ in an auction, (iii) an auction of the warrants will necessarily
yield a more favorable return to Treasury than a privately negotiated sale, and (iv) holding the warrants for the intermediate to
long-term will necessarily yield a more favorable return to Treasury.
The determination of ‘‘fair market value’’ for financial instruments as complex as the warrants issued by the TARP recipients
to Treasury requires a thoughtful and judicious mixture of
science—financial models such as Black-Scholes—and art—an appreciation of the dynamics that influence the actions of market participants. Treasury should resist the temptation to rely upon
science to the exclusion of art. It is worthwhile to recall the lessons
178 See,
179 I

VerDate Nov 24 2008

00:33 Jul 30, 2009

Treasury Warrant Repurchase Announcement, supra note 46.
commend the panel and its staff for their efforts in producing the report.

Jkt 050720

PO 00000

Frm 00056

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

51
of the past year or so and the hubris of financial modelers who asserted with profound conviction that, for example, credit default
swaps issued over mortgage backed securities were virtually free of
risk and that AAA-rated tranches of collateralized debt obligations
were investment grade securities. Financial analysts may counter
by claiming that their models incorporate an appropriate mixture
of inputs and risk analysis and as such may be trusted to yield
market ready results. In many instances that is no doubt true but
in other cases it is critical for the decision makers to leave the
models and sit down at the table and engage in the art of negotiation. I encourage Treasury to reflect upon the lessons of this financial crisis in negotiating the disposition of its warrants.

tjames on DSKG8SOYB1PROD with HEARING

1. PANEL’S ATTEMPT TO ESTIMATE THE VALUE OF THE TARP
WARRANTS

The warrant valuation process involves more than merely plugging numbers into a financial model, Black-Scholes or otherwise.
Such determination requires the careful exercise of judgment which
comes from a seasoned understanding of the business operations
and prospects for each TARP recipient. Experienced investment
professionals may disagree on fundamental concepts such as volatility and other subjective inputs as well as whether Treasury
should pursue a negotiated private sale or an auction of the warrants. Given the various permutations of potential inputs it is generally counterproductive to argue that one professionally rendered
well-vetted assumption or approach is more reasonable than or inherently preferable to another. What is clear, however, is that
Treasury should adopt a surgical approach that focuses on each
particular transaction and not on a one-size-fits-all approach that
misses the subtle distinctions that certainly exist among the various TARP recipients.
At this time it appears that Treasury and the TARP recipients
are reasonably well positioned to appreciate the multitude of factors that influence a negotiated determination of fair market value
pursuant to the terms of the Securities Purchase Agreements
(SPAs). Specifically, the SPAs, under certain circumstances, provide each TARP recipient with the right to repurchase its warrants
granted to Treasury at a fair market value price. If the parties fail
to agree on the valuation price an appraisal process is triggered.
If the fair market value price established by the appraisers is not
acceptable to a TARP recipient such recipient may reject the price
and not purchase its warrants from Treasury. In addition and
under certain circumstances, Treasury has the right to sell the
TARP warrants to third-parties through an auction process. Under
both procedures the fair market value of the warrants will be determined pursuant to market oriented terms by well-advised adverse parties who are negotiating at arm’s length without a compelling need to purchase or sell. I am concerned that the TARP recipients and market participants may view the panel’s report as an attempt to prospectively second-guess future determinations of fair
market value undertaken in accordance with the SPAs and the

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00057

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

52

tjames on DSKG8SOYB1PROD with HEARING

policies adopted by Treasury.180 Any such perception may disrupt
an otherwise orderly valuation process.181
If the panel’s determination of fair market value is too low, the
American taxpayers may not receive the benefit of their bargain,
and if the panel’s determination is too high, Treasury may fail in
its efforts to sell the warrants back to the TARP recipients or to
third-parties pursuant to the market oriented procedures provided
in the SPAs. The latter result may cause Treasury to hold the warrants for the intermediate to long-term even though the President
has clearly stated that his objective is to dispose of the warrants
‘‘as quickly as is practicable.’’ 182 Although I disagree with the
President on many issues, I concur with this determination given
(i) the profound difficulty in valuing the warrants and advantageously timing the market, (ii) the inherent risk associated with
holding investments of this nature, (iii) the clear desire of the
American taxpayers for the TARP recipients to repay all TARP related investments sooner rather than later, (iv) the troublesome
corporate governance and regulatory conflict of interest issues
raised by Treasury’s continued ownership of the TARP warrants,
and (v) the stigma associated with continued participation in the
TARP program by the recipients.183 If the panel disagrees with the
President on this issue the report should clearly indicate such dissent, but the valuation process itself should not directly or indirectly work to influence Treasury’s holding period of the TARP
warrants. Such result will occur if the panel accepts input metrics
180 Although I do not object to the undertaking, I nevertheless question the necessity of the
Panel’s attempt to determine the fair market value of the warrants since the procedures provided in the SPAs for the disposition of the warrants as well as the internal procedures adopted
by Treasury for the valuation of the warrants appear market oriented and reasonable in form
and substance. Since the report does not provide any indication that the process outlined in the
SPAs is inherently flawed (i.e., substantially off-market or subject to manipulation or abuse) or
that Treasury or any TARP recipient is not acting in good faith, it is arguably premature for
the Panel to attempt to value the warrants.
In the February report I concurred with the Panel’s attempt to value the preferred stock and
warrants acquired by Treasury from the TARP recipients. As with the February report, I concur
with the issuance of this report. However, I believe the circumstances have changed considerably since then. At the time the February report was written, no TARP recipient was prepared
or permitted to redeem its warrants issued to Treasury and the valuation served an appropriate
purpose. Since February 6, 2009, when the Panel’s report on ‘‘Valuing Treasury’s Assets’’ was
released, events have materially changed. The American Recovery and Reinvestment Act of 2009
was signed into law on February 17, 2009, which requires Treasury to permit TARP recipients
to repay Capital Purchase Plan assistance without replacement of capital from other sources.
Since then, several TARP recipients have either redeemed or are preparing to redeem their warrants. As such, I believe that any attempt to value the warrants on a prospective basis is far
more nuanced than the approach taken in February and much more likely to influence in an
inappropriate and unintentional manner the actions of Treasury, the TARP recipients and market participants as they negotiate the redemption and sale of the warrants pursuant to the
SPAs.
181 It is worth noting that although the TARP warrants have also been valued by Credit
Suisse, Bloomberg, Professor Linus Wilson and the CBO, the Panel’s report will most likely receive greater media attention and become the de facto third-party appraisal.
182 On June 26, 2009 Treasury released information on its valuation procedure. The release
contains the following statement: ‘‘The President has clearly stated that his objective is to dispose of the government’s investments in individual companies as quickly as is practicable. In
reaching the judgment to dispose of the warrants in the manner described, Treasury considered
a range of options including holding the warrants for a longer term or until their expiration.
Under those alternate scenarios, there was no certainty that we would realize higher values,
and it was not appropriate for the government to be exercising discretionary judgment on timing
market sales.’’ U.S. Department of Treasury, Treasury Announces Warrant Repurchase and Disposition Process for the Capital Purchase Program, supra note 46.
183 More precisely, I believe that Treasury should promptly/immediately dispose of its TARP
warrants. If the somewhat vague notion of ‘‘as quickly as is practicable’’ is interpreted by Treasury to encompass an intermediate to long-term holding period for the TARP warrants, then I
disagree with such approach.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00058

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

53

tjames on DSKG8SOYB1PROD with HEARING

and assumptions that overvalue the warrants and chill the resale
market.184
Evidence of my concern may be found in the panel’s report. In
a passage destined to grab its share of media attention the panel
concludes that ‘‘Treasury has received about 66% of the Panel’s
best estimate of fair market value’’ from the sale of its warrants
back to eleven TARP recipients (the ‘‘Redeeming Issuers’’).185 The
implication is clear—Treasury is virtually giving the warrants back
to the issuers. What should the American taxpayers make of this
claim? Should they conclude that Treasury and its advisors are incompetent or that they negotiated the repurchase of the warrants
in bad faith and in contravention of the letter and spirit of the
SPAs? If the panel believes that Treasury acted in an untoward
manner or is simply not up to the task then it should clearly state
such position and promptly investigate.
If we assume that Treasury discharged is duties and responsibilities in good faith (and the report does not suggest to the contrary)
then we are left with a fairly pedestrian disagreement between
Treasury and the panel regarding the valuation of the warrants;
that is, a good faith difference of opinion exists between Treasury’s
experts and the panel’s experts regarding the fair market value of
the warrants issued to Treasury by the Redeeming Issuers. As stated above, reasonable minds may differ regarding these matters and
modestly different assumptions may materially affect the valuation
of warrants with a ten-year term. It is possible that the panel selected inputs destined to yield the highest possible ‘‘reasonable’’ set
of valuations for the warrants of the Redeeming Issuers. Such approach, however, is of little benefit if it yields fair market value
prices for the warrants that neither the TARP recipient nor the
market is willing to pay. The panel should appreciate that the use
of financial models to value ten-year term warrants will at best
only offer a ‘‘sticker price’’ and, like careful consumers, sophisticated market participants seldom pay ‘‘sticker.’’ 186
184 I do not intend to imply that the Panel has intentionally attempted to overvalue the TARP
warrants. Instead, I believe the Panel may have taken the perspective of the ‘‘seller’’ of the warrants and as such the Panel should appreciate that the ‘‘buyer’’ may have a materially different
perspective regarding fair market value.
185 See Section E.3. of the report.
186 It is not at all surprising that the negotiated sales prices fell short of the estimates generated by the financial models, particularly those that do not incorporate liquidity discounts and
other appropriate adjustments. It appears reasonable to conclude that in the context of the
TARP warrants (and other sophisticated financial instruments) any estimate of fair market
value derived from financial models will merely serve as the starting point for the negotiation
of a mutually agreeable valuation and under limited circumstances will such price be accepted
by an adverse party without challenge. It also appears that Treasury terminated negotiations
with two or so TARP recipients and that the recipients did not invoke the appraisal process.
As such, Treasury will most likely seek to dispose of those warrants in an auction in accordance
with its current policy. Such action indicates that Treasury will not accept a significantly offmarket price and will employ an auction where appropriate.
It is worth noting that the Panel states in Section E.3. of the report that ‘‘These results may
suggest that Treasury has not been successful in receiving fair market value for its warrants
and in maximizing taxpayer returns. On the other hand, factors not included in the Panel’s
model, such as the illiquidity of the warrants especially for smaller institutions may explain the
difference between the amount that Treasury has received for its sold warrants and the Panel’s
valuation of those warrants.’’
Since it appears that liquidity discounts and other adjustments may be applicable to some
or all of the Redeeming Issuers, it is interesting that the Panel did not attempt to incorporate
such discounts into their fair market estimates. It seems that any statement by the Panel regarding the price received by Treasury for the warrants of the Redeeming Issues should note
such qualification.
Continued

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00059

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

54

tjames on DSKG8SOYB1PROD with HEARING

The report also suggests that Treasury may receive a greater return on its investment if it disposes of its warrants pursuant to an
auction process rather than privately negotiated transactions with
the TARP recipients.187 While I generally subscribe to the panel’s
reasoning it is important to note that such approach should not be
applied on a de facto basis. For example, with respect to the disposition of the warrants issued by the Redeeming Issuers it is entirely possible that a viable auction market did not exist for the
warrants of such institutions and may not exist for the warrants
of any other TARP recipient the common stock of which is thinly
traded. It is also possible that similar liquidity, marketability, minority interest and other appropriate discounts and adjustments
were demanded by the Redeeming Issuers as well as the group of
potential auction participants and that Treasury after analyzing
these inputs simply elected to proceed with the least burdensome
and costly approach.188
Treasury will not be served by any ‘‘failed auctions’’ and it should
only go to market when its investment advisors are all but assured
of a successful disposition at an appropriate price. Simply rolling
out an auction with a Black-Scholes generated ‘‘reserve price’’ without conducting a thoughtful market-check is fraught with peril. I
cannot help but wonder how the markets would have responded if
Treasury had set a reserve price at or near the panel’s ‘‘Best Estimate’’ price for the warrants of the Redeeming Issuers. It is not unreasonable to suspect that Treasury may have suffered one or more
failed auctions. This is a serious concern because Treasury cannot
afford to lose credibility with market participants or TARP recipients. It will be interesting to note how the fair market value determinations provided by the panel will appear in a year or so and
how many market dispositions will occur at or near the panel’s
‘‘Best Estimate’’ price.
It is also not unreasonable to expect that a TARP recipient may
be the highest bidder for its warrants. A repurchasing institution
may possess material inside information regarding its business operations and prospects that permits it to pay a premium over a
pure market price. In addition, a TARP recipient may pay a premium over market so as to cancel its warrants, increase its earning
per share and, perhaps, its market capitalization.189 These complex
matters must be considered on a case-by-case basis. It is certainly
no secret that the public shares of many TARP recipients have
traded at steep discounts over the past year or so and, as such, it
is not unreasonable to think that the market will apply a similar
In the same section the Panel also states that the warrants redeemed by the Redeeming
Issuers represent ‘‘less that one quarter of one percent of the Panel’s best estimate of the value
of Treasury’s warrant portfolio as of July 6, 2009’’ and that ‘‘Treasury’s relative performance
in selling them may not accurately predict its success in selling the balance of the warrants
it holds.’’
187 See Section F.2. of the report.
188 In Section E.2. of the report the Panel states ‘‘[i]f Treasury can hold the warrants to expiration, then the value of the warrants to Treasury does not include a liquidity discount because
Treasury does not need to sell them.’’ It does not follow that Treasury’s ability (which it clearly
has) to hold the warrants for their full ten-year term should dictate such a holding period. As
noted, several compelling public policy issues favor an early disposition of the warrants.
189 Warrants sold in an auction remain outstanding while warrants repurchased by the issuer
may be cancelled. Warrants sold in an auction, however, do not deplete the resources of the
issuer since the acquisition price is funded by the third-party purchaser and not by the issuer.
In addition, financial accounting, regulatory and tax considerations may favor one approach over
the other.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00060

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

55
discount to the warrants of such institutions. Treasury and its advisors should consider these factors in analyzing its exit strategy
and should select the approach that best fits the particular facts
and circumstances. I disagree with any inference in the report to
the effect that an auction of the TARP warrants will necessarily
yield a more favorable return to Treasury than a privately negotiated sale.
Although I am willing to grant Treasury and the TARP recipients reasonable latitude in discharging their duties and responsibilities under the SPAs, Treasury should promptly provide written reports to the American taxpayers analyzing in sufficient detail
the fair market value determinations for any warrants either repurchased by a TARP recipient from Treasury or sold by Treasury
through an auction. Since an auction may yield the most favorable
result for Treasury in some instances and a privately negotiated
sale in others, Treasury should disclose its rationale for pursuing
one method instead of the other. Treasury should also undertake
to negotiate the disposition of the warrants in a transparent and
fully accountable manner with the stipulation that Treasury should
not be required to place itself (and the American taxpayers) in an
adverse negotiating position by disclosing proprietary information
that TARP recipients could use to their advantage in subsequent
negotiations. If Treasury finds it necessary to omit from disclosure
certain information that could be harmful to negotiations were it
made public, it must do so in only in the most thoughtful and judicious manner.
2. TREASURY’S HOLDING PERIOD FOR THE TARP WARRANTS

tjames on DSKG8SOYB1PROD with HEARING

The report may be interpreted to reflect the theme that Treasury
will somehow ‘‘leave money on the table’’ at the expense of the
American taxpayers unless it holds the TARP warrants for the intermediate to long-term. Such impression is misguided since
(among other reasons) it is exceedingly difficult to predict the value
of financial securities and time the markets over the short term
much less the ten-year term of the TARP warrants.190
I appreciate that modern corporate finance has developed many
fascinating econometric models whereby certain securities may be
valued with some degree of relative precision. The report does a
fine job of describing many of these techniques, such as the binomial options pricing and Black-Scholes models. While these models
are remarkably sophisticated, they suffer from the same problem
endemic to all mathematical equations—they are entirely dependent upon the input variables selected. A thoughtful (and, perhaps,
lucky) selection of variables may yield meaningful results; other190 If we look back ten years to the summer of 1999 our economy was in the middle of the
dot com expansion and many (if not most) investors viewed the financial markets as exceedingly
robust. Just a few months later the economy commenced a significant contraction—the dot com
collapse. September 11 followed with yet another material disruption in the markets. The economy recovered and the value of investment securities (such as the TARP warrants) steadily rose
in value only to fall dramatically beginning around the summer of 2007. To say that the past
ten years have yielded unpredictable results in the financial markets is an understatement.
As such, any attempt by Treasury to time the disposition of its ten-year term warrants with
any degree of meaningful precision may be met with disappointment. It is also possible that
Treasury may sell the warrants in a few years at a greater price than is available in the near
term but actually earn a lower return on a risk adjusted present value basis.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00061

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

56

tjames on DSKG8SOYB1PROD with HEARING

wise the old adage of ‘‘garbage in, garbage out’’ will prevail.191 Predicting inputs, such as ‘‘volatility,’’ and market adjustments, such
as ‘‘liquidity discounts,’’ over the next ten years for incorporation
into the TARP warrant valuation models is problematic at best.192
In addition, valuations have a short shelf life. What may appear
reasonable today may look hopelessly out of date within a relatively short period of time.193 As such, any attempt to reflect or
represent the panel’s valuations as ‘‘the’’ fair market value of the
warrants is misguided.194 Decision makers at Treasury should not
subjugate their exercise of judgment regarding the disposition or
retention of any of the TARP warrants solely to the results generated by financial models.
The report also correctly notes that many recipients have been
stigmatized by their association with TARP and wish to leave the
program as soon as their regulators permit. Some of the adverse
consequences that have arisen for TARP recipients include, without
limitation, executive compensation restrictions, corporate governance and conflict of interest issues, employee retention difficulties
and the distinct possibility that TARP recipients (including those
who have repaid all CPP advances but have warrants outstanding
191 Many trading strategies adopted by hedge funds and other alternative investment vehicles
employ sophisticated econometric models. They often perform as advertised and yield superior
risk adjusted returns, but occasionally they fail in a spectacular and public manner as occurred
with Long Term Capital Management in 1998 and other investment funds over the past two
years.
192 See Annex A to the report which includes: ‘‘It is important to note that the Black-Scholes
model, as well as every other popular options model, was created to reflect the prices of options
with short terms, ranging from days to months. As no options are traded on the CBOE with
terms longer than three years, it is very difficult to come up with a ‘‘fair market value’’ of the
TARP warrants which have terms of ten years. The lack of publicly traded comparable derivatives makes any valuation of ten year warrants difficult.
‘‘More generally, there is the problem of lack of knowledge about most of the inputs to the
model. For example, while ten year Treasury bills factor in what the market expects the interest
rate risk for the next ten years to be, it is impossible to know the validity of the market’s expectations. Thus, once again, it is important to note that the value that we are searching for here
is not based on our expectations of the future, but rather our estimate of the market’s expectations. The goal of the Panel’s valuations is to estimate the value the financial markets would
place on these warrants, and thus for the inputs to our model, we try to use the inputs most
likely to be used by prospective buyers.
‘‘The input that is the least defined in the Black-Scholes model and has the largest effect on
the price of the warrant is the volatility of the underlying stock price. Volatility is defined as
the standard deviation of the continuously compounding returns of a stock. It is clear from this
definition that there are an almost infinite number of variations of the calculation of this number. The volatility is important in the Black-Scholes model because it features prominently in
both of the probability calculations in the closed-form solution, meaning that differing values
of volatility can create substantial differences in the final valuations of the warrants. The following example illustrates this point with respect to the Black-Scholes model. Assume that a
warrant to buy one share of company XYZ at $150 expires in one year, that XYZ is currently
trading at $100 and that the risk free rate is one percent. If XYZ’s volatility is 30 percent, the
warrant is worth $1.59, but if the volatility is 60 percent, the warrant is worth $10.91. In fact,
if the volatility is below 15 percent, the warrant is virtually worthless.’’
The preceding example emphasizes the sensitivity of financial models to changes in the various input variables. Since it is my understanding that financial models may be ‘‘manipulated’’
or ‘‘gamed’’ but still yield ‘‘perfectly defensible results,’’ Treasury should remain circumspect regarding fair market value determinations generated by financial models without a real world
market-check.
193 As an example, according to The New York Times, Citigroup closed at $52.52 on July 9,
2007 and at $2.62 on July 8, 2009. Who would have predicted such results?
194 The report reflects this concept in Section H as follows: ‘‘The Panel’s valuations offer reasonable estimates of the fair market value of the warrants. They may help Treasury as it balances the return to the taxpayer indicated by its own estimates of value and the host of other
relevant market, regulatory and economic factors applicable to the disposition of sophisticated
financial instruments.’’
Although quite helpful, I remain concerned that others may construe the Panel’s estimates
as somehow reflective of a single set of ‘‘correct’’ values.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00062

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

57
to Treasury) may be subjected to future adverse rules and regulations.195
For these and other reasons, I recommend that Treasury not operate under any inherent bias in favor of holding the TARP warrants for the intermediate to long-term as opposed to disposing of
the warrants over the near term.196 Fortunately, Treasury concurs
with this perspective.197 In electing to dispose of its warrants it appears that Treasury appreciates that the warrants represent high
risk, difficult to value investment securities that are subject to the
vagaries of the markets and may materially diminish in value. The
panel should not discourage Treasury from promptly selling its
warrants back to the TARP recipients or from offering the warrants for sale in the market pursuant to the SPAs. As noted, the
exit strategy undertaken by Treasury with respect to the warrants
of each TARP recipient must be carefully crafted to the facts and
circumstances of that recipient as well as the prevailing market
conditions in effect at the time of the proposed disposition.198
3. OTHER ISSUES

In Section G.1.c. of the report the Panel states:
A benefit from repayment of TARP assistance is the end
of the government’s conflicting roles as regulator of the
very institutions in which it owns shares and on whose
profitability repayment of public funds depends. Specific
regulatory policies, for example those affecting capital levels, the application of accounting conventions to financial
reporting by BHCs or banks, and conflicts among regulators of various parts of BHCs, are complicated by the
government’s dual interests.
In Section G.3. of the report the Panel states:
Despite the Administration’s consistent statements that
its policy is not to be involved in bank management and
to cease to hold ownership positions in banks as soon as
practicable, Treasury retains influence over the business
decisions and internal governance of institutions in which
it holds substantial preferred stock and warrant interests.
Although ownership of preferred shares or warrants convertible into nonvoting common shares does not provide
the sort of leverage that common stock ownership does,
holding a substantial block of preferred stock with the
terms of the Treasury preferred (discussed below) significantly constrains aspects of the issuing institution. Such
constraints, for example, hinder the inability to pay divi-

tjames on DSKG8SOYB1PROD with HEARING

195 See

Sections G(1)(c) and G(3) of the report.
196 As noted above, I believe that Treasury should promptly dispose of its warrants for the
following reasons: (i) the profound difficulty in valuing the warrants and advantageously timing
the market, (ii) the inherent risk associated with holding investments of this nature, (iii) the
clear desire of the American taxpayers for the TARP recipients to repay all TARP related investments sooner rather than later, (iv) the troublesome corporate governance and regulatory conflict of interest issues raised by Treasury’s continued ownership of the TARP warrants, and (v)
the stigma associated with continued participation in the TARP program by the recipients.
197 See footnote 184.
198 I recently introduced legislation (H.R. 2745, supra note 29 that would require Treasury to
divest its warrants in each TARP recipient following the redemption of all outstanding TARPrelated preferred shares issued by such recipient and the payment of all accrued dividends on
such preferred shares.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00063

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

58
dends or engage in certain capital transactions, in exchange for bolstering the institution’s capital). Replacing
the Treasury investment with independently raised equity
frees the institution from those constraints.
The second motivation for prompt repayment of TARP investments has to do with the specific rules or conditions to which
TARP recipients are subject. The prime examples involve executive
compensation and corporate governance restrictions applicable to
TARP recipients. While banks were aware that they were subject
to restrictions upon entrance into the CPP, banks point to new provisions established in ARRA and by subsequent Treasury regulatory action that are retroactively applicable to past recipients of
TARP financial assistance who have not yet repaid Treasury.’’
I concur with these remarks and recommend that Treasury
promptly proceed to dispose of its TARP warrants.
4. TERMINATION OF TARP

I reject any implication contained in the report to the effect that
the TARP program should be extended, or that well capitalized
TARP recipients should be prevented from redeeming their preferred stock and warrants issued to Treasury.
5. TARP AS A REVOLVING FACILITY

From my review of the EESA statute I am not convinced that
Treasury may re-advance funds that have been repaid by the TARP
recipients. The panel should ask Treasury to provide a formal written legal opinion regarding the matter.

tjames on DSKG8SOYB1PROD with HEARING

6. PRIVATE BANK WARRANTS

The report briefly notes several of the unique issues that have
arisen with respect to the repurchase of private bank warrants. I
introduced legislation (H.R. 2745) to end the TARP program on December 31, 2009. In addition, the legislation (i) requires Treasury
to accept TARP repayment requests from well capitalized banks,
(ii) 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, (iii) provides incentives for private banks to repurchase their warrant preferred shares from
Treasury, and (iv) reduces spending authority under the TARP program for each dollar repaid. The legislation enables private banks
to repurchase the exercised warrant preferred shares on or before
September 30, 2009 at their pre-exercise price. As such, private
banks that typically issued warrant preferred shares to Treasury
for $0.01 per share may repurchase the shares for $0.01 per share.
This legislation provides that each bank must be current on all
dividends to be eligible for repayment. The policy objective for economically encouraging private banks to repurchase their warrant
preferred shares relates to the structural differences between private and public bank warrants. Pursuant to the SPAs, private
banks are economically encouraged to delay the repurchase of their
warrant preferred shares so as to decrease the overall cost to the
private banks of their participation in the TARP program.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00064

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

59

tjames on DSKG8SOYB1PROD with HEARING

C. John Sununu
This Report represents a good faith attempt to describe the factors that must be weighed by Treasury, Regulators, Congress, and
Financial Institutions as the capital issued under the TARP is returned to the Treasury. By offering a detailed examination of these
issues at the beginning of this process, the Congressional Oversight
Panel will help ensure that Treasury and Congress place the maximum value on transparency and consistency in the management
of the CPP. These two qualities are essential to sustaining public
confidence in both government and the financial marketplace.
In his Additional Views, Panel member Richard Neiman highlights several key questions for policy makers: considering the nonfinancial returns of the TARP, maintaining a clear policy for
exiting Treasury’s warrant holdings in a timely fashion, and exercising caution in drawing conclusions based upon repayments by
just a few small banks. These are very important issues, and in
each area I share the concerns he describes in detail. I also wish
to add several points of emphasis and clarification:
• Treasury and Congress should be particularly mindful that retroactive changes in policy, process, or contracts undermine confidence in TARP programs and discourages participation. Both effects make any given program less likely to fulfill its objectives. As
Treasury works to protect taxpayer interests during the CPP repayment process, it should work to increase transparency while operating within the spirit and letter of agreements that govern the
CPP transactions.
• Both the current and previous administrations have made
clear policy determinations to exit their warrant holdings as soon
as is practicable as banks redeem preferred shares under the CPP.
This policy is consistent with the original intent of the legislation,
reduces downside risk to taxpayers, and conforms to the original
share purchase agreements. Equally important, this policy sends
an important signal to the public and to investors that the Federal
Government does not wish to exert undue control or influence over
firms that are on solid financial footing.
• In most cases, the value of warrants held by Treasury will
prove difficult to calculate with precision due to the broad assumptions that must be made with regard to both the volatility and liquidity of the underlying securities. In such an event, Treasury has
taken important steps in defining a clear process for repayments
under CPP, utilizing independent firms for valuation, and establishing an approach for resolving differences in valuations that may
arise.
• As a final point, it should be noted that the Executive Summary states that ‘‘The Panel has not reached a consensus on
whether it is wise policy to release banks from the TARP program
at this time . . .’’ This phrase suggests that the Treasury has (or
should have) the power to force healthy banks that meet all regulatory requirements to hold CPP issued securities. I do not believe
that such powers were ever contemplated by Congress in authorizing TARP. Nor do I believe that it is the responsibility of the Congressional Oversight Panel to determine which banks should be eligible (or required) to participate in TARP.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00065

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

60

tjames on DSKG8SOYB1PROD with HEARING

As can be seen in the Panel Report, taxpayers will see a positive
rate of return for all repayments that have been approved to date
by Treasury under the CPP—even if the value of warrants were excluded. While it is important that taxpayers receive fair value for
these securities, it is equally important that the principal objectives
of TARP, namely a stable financial system, be realized and sustained. The best way to ensure balance between these goals is to
allow the principles of transparency and consistency to guide the
hand of policy makers in the months ahead.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00066

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

61
SECTION THREE: CORRESPONDENCE WITH TREASURY
UPDATE
On behalf of the Panel, Chair Elizabeth Warren sent a letter to
Secretary Geithner on June 12, 2009, requesting information about
Treasury’s announcement on June 9, 2009, to allow ten of the largest U.S. financial institutions participating in the CPP to repay
their TARP funds.199 The letter seeks answers to several key questions raised by the TARP repayments and additional information
relating to Treasury’s valuations of warrants outstanding, repurchased, and of those ten institutions with which it is in warrant
repurchase negotiations. The letter specifically requests a meeting
between Panel staff and Treasury staff about the TARP repayments and the treatment of warrants as part of those repayments.
On July 1, 2009, Secretary Geithner responded by letter 200 to this
request. The letter, noting that Treasury staff has recently held
two meetings with Panel members Richard H. Neiman and Damon
Silvers and Panel staff concerning these issues, represented Treasury’s response to the Panel’s questions and information requests.
Treasury provided copies of the recently issued warrants policy
press release and FAQ and a written responses to each of the Panel’s questions and information requests, which Panel staff is currently reviewing.
Chair Elizabeth Warren and Panel member Richard H. Neiman
sent a letter to Secretary Geithner on June 29, 2009, requesting assistance with the Panel’s oversight of federal foreclosure mitigation
efforts.201 In particular, the letter references how the lack of adequate mortgage data has hampered policymaking and notes Secretary Geithner’s decision to include data collection requirements
for mortgage loans participating in President Obama’s Making
Home Affordable (MHA) program, announced on February 18,
2009. In order to evaluate the effectiveness of foreclosure mitigation efforts, the letter requests copies of the data collected under
the MHA program, as well as relevant reports, to be delivered on
a monthly basis.

tjames on DSKG8SOYB1PROD with HEARING

199 See
200 See
201 See

VerDate Nov 24 2008

00:33 Jul 30, 2009

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

Jkt 050720

PO 00000

Frm 00067

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

62
SECTION FOUR: TARP UPDATES SINCE LAST REPORT
A. INTERIM FINAL RULE ON TARP STANDARDS FOR COMPENSATION
AND CORPORATE GOVERNANCE

On June 10, 2009, Treasury released interim regulations implementing the executive compensation and corporate governance provisions governing TARP recipients set forth in the American Recovery and Reinvestment Act of 2009 (ARRA), announced a set of principles for future executive compensation reform for all public corporations, and proposed two legislative initiatives designed to advance these principles. In announcing the interim rule, Secretary
Geithner outlined five principles for reform of executive compensation: (1) compensation plans should properly measure and reward
performance; (2) compensation should be structured to account for
the time horizon of risks; (3) compensation practices should be
aligned with sound risk management; (4) retirement packages
should align with executive and shareholder interests; (5) and compensation process should be transparent and accountable. The Administration also indicated that it would propose new legislation to
provide compensation committees with independence similar to the
independence of audit committees under Sarbanes-Oxley, and to
provide the SEC authority to require non-binding annual say-onpay votes on compensation for the top five executives and golden
parachutes for executives at all public companies.
B. REGULATION REFORM PROPOSAL

On June 17, 2009, Treasury released the Administration’s proposal entitled ‘‘Financial Regulatory Reform: A New Foundation,’’
detailing its agenda and recommendations for rebuilding financial
supervision and regulation. The Administration’s plan touches almost every corner of financial markets, from tougher consumer protection policies to stricter rules over exotic financial products, such
as credit derivatives. The plan would bring many of the financial
products and companies that previously operated outside of the
banking system under federal scrutiny. In its proposal, Treasury
announced five principles for financial regulatory reform: (1) promote robust supervision and regulation of financial firms; (2) establish comprehensive regulation of financial markets; (3) protect consumers and investors from financial abuse; (4) provide the government with the tools it needs to manage financial crises; and (5)
raise international regulatory standards and improve international
cooperation.
On June 30, 2009, the Obama Administration sent a 150-page
proposal to Congress for a new agency to oversee consumer lending
and other financial activity, the Consumer Financial Protection
Agency. The proposed agency would consolidate regulatory authority now spread over multiple agencies and would have the authority to monitor and introduce regulation aimed at ensuring transparency in consumer financial products.

tjames on DSKG8SOYB1PROD with HEARING

C. CONFIRMATION OF HERBERT ALLISON AS ASSISTANT SECRETARY
FOR FINANCIAL STABILITY

On June 19, 2009, the Senate confirmed Herbert Allison as Assistant Secretary for Financial Stability. In this role, Mr. Allison
will develop and coordinate Treasury programs related to financial

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00068

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

63
stability, including the TARP. Mr. Allison’s prior positions include
President and Chief Executive Officer of Fannie Mae, Chairman,
President, and Chief Executive Officer of TIAA-CREF, and President and Chief Operating Officer of Merrill Lynch.
D. TREASURY ANNOUNCES PROCESS FOR REPAYMENT OF CPP

On June 9, 2009, Treasury announced that ten of the largest
Capital Purchase Program (CPP) participants had been approved
to repay the TARP funds they had received. The repayment is expected to be approximately $68 billion.
On June 26, 2009, Treasury announced the process by which
TARP recipients would be able to repurchase the warrants issued
as part of the Capital Purchase Program in 2008. Under these
terms, once a bank has repaid the TARP money, it has 15 days to
submit a determination of fair market value to Treasury. Treasury,
within 10 days, may either accept the determination or, if it is unable to reach agreement on the value with the bank, may use the
appraisal process outlined in the relevant transaction documents.
According to the appraisal process, Treasury and the bank each select an independent appraiser. Once the appraisers have conducted
their own valuations, they will attempt to agree on a fair market
price. If they fail to agree, a third appraiser is hired and a composite value from the three appraisers is used as the fair market
price.
E. TERM ASSET-BACKED SECURITIES LOAN FACILITY (TALF)

The Federal Reserve Bank of New York held a special subscription on June 16, 2009, for TALF loans secured by new commercial
mortgage-backed securities (CMBS). There were no requests made
for loans on that date. The Bank intends to hold a special subscription for legacy CMBS (those issued before January 1, 2009) in late
July.
During the regular TALF subscription on July 7, 2009, $5.4 billion in loans was requested. As a point of comparison, there were
$11.5 billion in loans requested at the June facility, $10.6 billion
requested at the May facility, $1.7 billion at the April facility, and
$4.7 billion at the March facility. The July 7 subscription included
requests for loans secured by asset-backed securities in the auto,
credit card, servicing advances, small business, and student loan
sectors. There were no requests for loans in the equipment, floor
plan, or premium finance sectors. The July 7 subscription was not
available for loans secured by CMBS; a special CMBS subscription
is planned for later this month.

tjames on DSKG8SOYB1PROD with HEARING

F. GENERAL MOTORS BANKRUPTCY PLAN APPROVED

On July 5, 2009, Judge Robert Gerber of the Bankruptcy Court
for the Southern District of New York approved a bankruptcy plan
for General Motors that would permit the auto maker to emerge
from bankruptcy as soon as mid-July. Under the plan, NGMCO,
Inc., an entity funded by the U.S. Treasury, would purchase substantially all of GM’s assets. NGMCO would then change its name
to General Motors Company and continue most of former GM’s
business with a more streamlined product portfolio. The new GM
will remain headquartered in Detroit, Michigan, and will be led by

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00069

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

64
Fritz Henderson as president and CEO, and Edward Whitacre as
chairman of the board of directors. Of the common stock for the
new GM, 60.8 percent will be owned by the US Treasury, 17.5 percent by the UAW Retiree Medical Benefits Trust; 11.7 percent by
the governments of Canada and Ontario, and ten percent by old
GM.
G. CPP MONTHLY LENDING REPORT

Treasury releases a monthly lending report showing loans outstanding for CPP recipients. The most recent report includes data
up through the end of April 2009 and shows that CPP recipients
had $5.15 billion in loans outstanding as of April 30, 2009. This
represents a 0.67 percent decline in loans between the end of
March and the end of April.
H. FUND MANAGERS FOR PPIP LEGACY SECURITIES FUNDS
SELECTED

On July 8, 2009, Treasury, the Federal Reserve, and the FDIC
issued a joint release announcing the selection of nine applicants
for pre-qualification as PPIP fund managers. Ten small, veteran-,
minority-, and/or women-owned firms were also selected to partner
with the fund managers to provide asset management, capital raising, broker-dealer, research, advisory, investment sourcing, and
fund administration services. The pre-qualified firms will have
twelve weeks to raise $500 million in equity, $20 million of which
must be provided by the firms themselves. Once this money has
been raised, the PPIP funds will receive matching $500 million in
Treasury equity, and will be eligible for additional governmentsponsored financing.
I. METRICS

tjames on DSKG8SOYB1PROD with HEARING

In recent months, the Panel’s oversight reports have highlighted
a number of metrics that the Panel and others, including Treasury,
the Government Accountability Office (GAO), Special Inspector
General for the Troubled Asset Relief Program (SIGTARP), and the
Financial Stability Oversight Board, consider useful in assessing
the effectiveness of the Administration’s efforts to restore financial
stability and accomplish the goals of the EESA. This section discusses changes that have occurred in several indicators since the
release of the Panel’s June report.
• Interest Rate Spreads. Key interest rate spreads have leveled off to some extent following precipitous drops between the
Panel’s May and June oversight reports. While there was no general pattern in interest rate spread movement in recent weeks
(some decreased modestly while others increased modestly),
spreads remain well below the crisis levels seen late last year, and
Treasury and Federal Reserve officials continue to cite the moderation of these spreads as a key indicator of a stabilizing economy.202
202 See Congressional Oversight Panel, Testimony of Assistant Treasury Secretary for Financial Security Herbert Allison, Jr., Hearing with Assistant Treasury Secretary Herbert Allison
(June 24, 2009)(online at cop.senate.gov/hearings/library-062409-allison.cfm)(‘‘There are tentative signs that the financial system is beginning to stabilize and that our efforts have made
an important contribution. Key indicators of credit market risk, while still elevated, have
dropped substantially.’’)

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00070

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

65
FIGURE 6: INTEREST RATE SPREADS
Current Spread (as of
7/9/09)

Indicator

Percent Change Since
Last Report (6/8/09)

0.31
0.11
32.94
1.79
1.87
3.65
0.18
0.27

¥24.39
10.00
¥31.03
14.01
¥6.50
¥9.88
0.00
¥15.63

3 Month LIBOR-OIS Spread 203 ....................................................................................
1 Month LIBOR-OIS Spread 204 ....................................................................................
TED Spread 205 (in basis points) ................................................................................
Conventional Mortgage Rate Spread 206 .....................................................................
Corporate AAA Bond Spread 207 ..................................................................................
Corporate BAA Bond Spread 208 ..................................................................................
Overnight AA Asset-backed Commercial Paper Interest Rate Spread 209 ..................
Overnight A2/P2 Nonfinancial Commercial Paper Interest Rate Spread 210 ..............
203 3

Mo LIBOR-OIS Spread, Bloomberg (online at www.bloomberg.com/apps/quote?ticker=.LOIS3:IND1) (accessed July 9, 2009).
Mo LIBOR-OIS Spread, Bloomberg (online at www.bloomberg.com/apps;/quote?ticker=.LOIS1:IND1) (accessed July 9, 2009).
Spread, Bloomberg (online at www.bloomberg.com/apps/quote?ticker=.TEDSP:IND) (accessed July 9, 2009).
206 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical Data (Instrument: Conventional Mortgages, Frequency: Weekly) (online at www.federalreserve.gov/releases/h15/data/WeeklylThursdayl/
H15lMORTGlNA.txt) (accessed July 9, 2009); Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15:
Selected Interest Rates: Historical Data (Instrument: U.S. Government Securities/Treasury Constant Maturities/Nominal 10-Year, Frequency:
Weekly) (online at www.federalreserve.gov/releases/h15/data/WeeklylFridayl/H15lTCMNOMlY10.txt) (accessed July 9, 2009) (hereinafter
‘‘Fed H.15 10-Year Treasuries’’).
207 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical Data (Instrument: Corporate Bonds/Moody’s Seasoned AAA, Frequency: Weekly) (online at www.federalreserve.gov/releases/h15/data/WeeklylFridayl/
H15lAAAlNA.txt) (accessed July 9, 2009); Fed H.15 10-Year Treasuries, supra note 206.
208 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical Data (Instrument: Corporate Bonds/Moody’s Seasoned BAA, Frequency: Weekly) (online at www.federalreserve.gov/releases/h15/data/WeeklylFridayl/
H15lBAAlNA.txt) (accessed July 9, 2009); Fed H.15 10-Year Treasuries, supra note 206.
209 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data
Download
Program
(Instrument:
AA
Asset-Backed
Discount
Rate,
Frequency:
Daily)
(online
at
www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed July 9, 2009); Board of Governors of the Federal Reserve System, Federal
Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data Download Program (Instrument: AA Nonfinancial Discount Rate,
Frequency: Daily) (online at www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed July 9, 2009) (hereinafter ‘‘Fed CP AA Nonfinancial Rate’’).
210 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data
Download
Program
(Instrument:
A2/P2
Nonfinancial
Discount
Rate,
Frequency:
Daily)
(online
at
www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed July 9, 2009).
204 1

205 TED

• Commercial Paper Outstanding. Commercial paper outstanding, a rough measure of short-term business debt, is an indicator of the availability of credit for enterprises. While financial
commercial paper outstanding saw an increase last month, assetbacked and nonfinancial commercial paper levels have continued to
drop, with both falling by nearly 20 percent since early June.
FIGURE 7: COMMERCIAL PAPER OUTSTANDING
Current Level (as of
7/9/09) (dollars billions)

Indicator

Asset-Backed Commercial Paper Outstanding (seasonally adjusted) 211 ..................
Financial Commercial Paper Outstanding (seasonally adjusted) 212 .........................
Nonfinancial Commercial Paper Outstanding (seasonally adjusted) 213 ....................

tjames on DSKG8SOYB1PROD with HEARING

211 Board of Governors of the Federal Reserve System, Federal Reserve Statistical
Download
Program
(Instrument:
Asset-Backed
Commercial
Paper
www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed July 9, 2009).
212 Board of Governors of the Federal Reserve System, Federal Reserve Statistical
Download
Program
(Instrument:
Financial
Commercial
Paper
www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed July 9, 2009).
213 Board of Governors of the Federal Reserve System, Federal Reserve Statistical
Download
Program
(Instrument:
Nonfinancial
Commercial
Paper
www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed July 9, 2009).

Percent Change Since
Last Report (6/8/09)

¥18.06
4.46
¥19.89

$456.75
554.15
125.49

Release: Commercial Paper Rates and Outstandings: Data
Outstanding,
Frequency:
Weekly)
(online
at
Release: Commercial Paper Rates and Outstandings: Data
Outstanding,
Frequency:
Weekly)
(online
at
Release: Commercial Paper Rates and Outstandings: Data
Outstanding,
Frequency:
Weekly)
(online
at

• Lending by the Largest TARP-recipient Banks. Treasury’s
Monthly Lending and Intermediation Snapshot tracks loan originations and average loan balances for the 21 largest recipients of CPP
funds across a variety of categories, ranging from mortgage loans
to commercial and industrial loans to credit card lines. Originations decreased across nearly all categories of bank lending in April

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00071

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

66
when compared to March.214 Lenders surveyed by Treasury attribute this decline in originations to seasonality and a decrease in
demand.215 The dramatic drop in commercial and industrial and
commercial real estate originations is particularly noteworthy, with
originations in both categories decreasing by over 30 percent.
Banks reported that demand for these commercial loans was well
below normal levels; further, banks predicted that this lower demand would continue through the remainder of the second quarter
of 2009.216 Average loan balances fell across all categories from
March to April, with banks reporting that borrowers are paying
down existing debt.217 The data below exclude lending by two large
CPP-recipient banks, PNC Bank and Wells Fargo, because significant acquisitions by those banks since last October make comparisons difficult.
FIGURE 8: LENDING BY THE LARGEST TARP-RECIPIENT BANKS
Most recent
data
(April 2009)
(dollars in
millions)

Indicator

Percent
change
since March
2009

Percent
change
since October
2008

Total Loan Originations ..........................................................................................
C&I New Commitments ...........................................................................................
CRE New Commitments ..........................................................................................
Mortgage Refinancing .............................................................................................

$199,284
32,488
3,470
49,009

¥9.48
¥37.15
¥30.78
¥7.74

¥8.66
¥44.89
¥67.03
161.13

Total Average Loan Balances .................................................................................

3,358,294

¥0.94

¥1.88

tjames on DSKG8SOYB1PROD with HEARING

• Loans and Leases Outstanding of Domestically-Chartered Banks. Weekly data from the Federal Reserve Board track
fluctuations among different categories of bank assets and liabilities. The Federal Reserve Board data are useful in that they separate out large domestic banks and small domestic banks. Loans
and leases outstanding for large and small domestic banks both fell
last month.218 However, total loans and leases outstanding at
small domestic banks remain slightly above last October’s level,
while total loans and leases outstanding at large banks have
dropped by over 4.4 percent since that time.219
214 U.S. Department of the Treasury, Treasury Department Monthly Lending and Intermediation Snapshot Data for October 2008–April 2009 (June 15, 2009) (online at
www.financialstability.gov/docs/surveys/SnapshotlDatalApril%202009.xls)(hereinafter ‘‘Treasury Snapshot April Summary Data’’).
215 U.S. Department of the Treasury, Treasury Department Monthly Lending and Intermediation Snapshot: Summary Analysis for April 2009 (June 15, 2009) (online at
www.financialstability.gov/docs/surveys/SnapshotAnalysisApril2009.pdf)(hereinafter
‘‘Treasury
April Lending Snapshot’’).
216 Id.
217 Id.
218 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.8:
Assets and Liabilities of Commercial Banks in the United States: Historical Data (Instrument:
Assets and Liabilities of Large Domestically Chartered Commercial Banks in the United States,
Seasonally adjusted, adjusted for mergers, billions of dollars) (online at www.federalreserve.gov/
releases/h8/data.htm) (accessed July 9, 2009).
219 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.8:
Assets and Liabilities of Commercial Banks in the United States: Historical Data (Instrument:
Assets and Liabilities of Small Domestically Chartered Commercial Banks in the United States,
Seasonally adjusted, adjusted for mergers, billions of dollars) (online at www.federalreserve.gov/
releases/h8/data.htm) (accessed July 9, 2009).

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00072

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

67
FIGURE 9: LOANS AND LEASES OUTSTANDING
Current level
(as of 7/9/09)
(dollars in billions)

Indicator

Percent
change
since last report (6/8/09)

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

3,939.9
2,449.0

¥1.13
¥1.26

¥4.41
0.09

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

• Housing Indicators. Foreclosure filings fell by roughly six
percent from April to May, while remaining nearly 15 percent
above the level of last October. Housing prices, as illustrated by the
S&P/Case-Shiller Composite 20 Index, continued to dip in April.
The index remains down over ten percent since October 2008.
FIGURE 10: HOUSING INDICATORS
Most recent
monthly data

Indicator

Monthly Foreclosure Filings 220 ...............................................................................
Housing Prices–S&P/Case-Shiller Composite 20 Index 221 ....................................

Percent
change from
data available
at time of
last report (6/
8/09)

Percent
change since
October 2008

321,480
140.1

¥6.01
¥0.88

14.99
¥10.82

220 RealtyTrac, Foreclosure Activity Press Releases (online at www.realtytrac.com//ContentManagement/PressRelease.aspx) (accessed July 9,
2009).
221 Standard & Poor’s, S&P/Case-Shiller Home Price Indices (Instrument: Seasonally Adjusted Composite 20 Index) (online at
www2.standardandpoors.com/spf/pdf/index/SAlCSHomePricelHistoryl063055.xls (accessed July 9, 2009).

J. FINANCIAL UPDATE

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

tjames on DSKG8SOYB1PROD with HEARING

a. Costs: Expenditures and Commitments
Through an array of programs used to purchase preferred shares
in financial institutions, offer loans to small businesses and auto
companies, and leverage Federal Reserve loans for facilities designed to restart secondary securitization markets, Treasury has
committed to spend $645.5 billion, leaving $60.8 billion available
for new programs or other needs.222 Of the $645.5 billion that
Treasury has committed to spend, $441 billion has already been allocated and counted against the statutory $698.7 billion limit.223
This includes purchases of preferred shares, warrants and/or debt
obligations under the CPP, TIP, SSFI Program, and AIFP, a $20
billion loan to TALF LLC, the special purpose vehicle used to guar222 EESA limits Treasury to $700 billion in purchasing authority outstanding at any one time
as calculated by the sum of the purchases prices of all troubled assets held by Treasury. EESA,
supra note 13, § 115(a)–(b) (codified at 12 U.S.C. 5225(a)–(b)); Helping Families Save Their
Homes Act of 2009, Pub. L. No. 111–22, sec. 402(f) (online at frwebgate.access.gpo.gov/cgi-bin/
getdoc.cgi?dbname=111lconglbills&docid=f:s896enr.txt.pdf) (reducing by $1.26 billion the authority for the TARP originally set under EESA at $700 billion).
223 This figure does not include the repurchases of CPP preferred shares.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00073

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

68
antee Federal Reserve TALF loans, and the $5 billion Citigroup
asset guarantee already exchanged for a guarantee fee composed of
additional preferred shares and warrants.224 Additionally, Treasury has allocated $18 billion to the Home Affordable Modification
Program, out of a projected total program level of $50 billion, but
has not yet distributed any of these funds. Treasury will release its
next tranche report when transactions under the TARP reach $450
billion.
b. Income: Dividends and Repayments
Following the repayments of CPP infusions by nine of the stresstested BHCs, the total amount of TARP repayments surged from
just under $2 billion to over $70 billion.225 In addition, Treasury’s
investment in preferred shares entitles it to dividend payments
from the institutions in which it invests, usually five percent per
annum for the first five years and nine percent per annum thereafter.226 Treasury has not yet begun to officially report dividend
payments on its transaction reports.
c. TARP Accounting as of July 2, 2009
FIGURE 11: TARP ACCOUNTING (AS OF July 2, 2009)
[Dollars in billions]
Announced
Funding

TARP Initiative

Total ...........................................................................
CPP ....................................................................
TIP .....................................................................
SSFI Program .....................................................
AIFP ...................................................................
AGP ....................................................................
CAP ....................................................................
TALF ...................................................................
PPIP ...................................................................
Supplier Support Program ................................
Unlocking SBA Lending .....................................
HAMP .................................................................

Purchase Price

638
218
40
70
80
5
TBD
80
75
5
15
50

227 441

Repayments

Dividend Income

228 70.124

229 6.651

70.124
0
0
0
0
0
0
0
0
0
0

5.255
1.128
0
0.160
0.108
0
0
0
0
0
0

203.2
40
69.8
80
5
0
20
0
5
0
230 18.0

227 See

July 2 TARP Transaction Report, supra note 224.
July 2 TARP Transaction Report, supra note 224.
of June 30, 2009. This information was provided to the Panel by Treasury staff.
230 Reflects the cap set on payments to each mortgage servicer. See July 2 TARP Transactions Report, supra note 224.
228 See
229 As

2. OTHER FINANCIAL STABILITY EFFORTS

tjames on DSKG8SOYB1PROD with HEARING

Federal Reserve, FDIC, and Other Programs
In addition to the more direct expenditures Treasury has undertaken through the TARP, the federal government has also engaged
in a much broader program directed at stabilizing the U.S. financial system. Many of these programs explicitly augment Treasury
funds, like FDIC guarantees of securitization of PPIP Legacy Loans
or asset guarantees for Citigroup, or operate in tandem with Treasury programs, such as the interaction between PPIP and TALF.
224 U.S. Department of the Treasury, Troubled Asset Relief Program: Transactions Report For
Period Ending June 30, 2009. (July 2, 2009) (online at www.financialstability.gov/docs/transaction-reports/transactions-reportl070209.pdf) (hereinafter ‘‘July 2 TARP Transaction Report’’).
225 Id. See also Section One, Part F of this report (providing a table with detailed information
on repurchases to date).
226 See, e.g., Securities Purchase Agreement, supra note 15.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00074

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

69
Other programs, like the Federal Reserve’s extension of credit
through its § 13(3) facilities and special purpose vehicles or the
FDIC’s Temporary Liquidity Guarantee Program, stand independent of the TARP and seek to accomplish different goals.
3. TOTAL FINANCIAL STABILITY RESOURCES AS OF JULY 2, 2009

Beginning in its April report, the Panel broadly classified the resources that the federal government has devoted to stabilizing the
economy through a myriad of new programs and initiatives, as outlays, loans, or guarantees. Although the Panel has calculated the
total value of these resources at over $4 trillion, this would translate into the ultimate ‘‘cost’’ of the stabilization effort only if: (1) assets do not appreciate, (2) no dividends are received, no warrants
are exercised, and no TARP funds are repaid, (3) all loans default
and are written off, and (4) all guarantees are exercised and subsequently written off.
FIGURE 12: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF JULY 2, 2009)
[Dollars in billions]
Treasury
(TARP)

tjames on DSKG8SOYB1PROD with HEARING

Program

Total ...............................................................................
Outlays 231 .............................................................
Loans .....................................................................
Guarantees 232 .......................................................
Uncommitted TARP Funds ....................................
AIG ..................................................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Bank of America ...........................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees 236 .......................................................
Citigroup ........................................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Capital Purchase Program (Other) ..............................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Capital Assistance Program .........................................
TALF ................................................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
PPIF (Loans) 246 ............................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
PPIF (Securities) ...........................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Home Affordable Modification Program ......................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Automotive Industry Financing Program .....................
Outlays ..................................................................
Loans .....................................................................

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00075

Fmt 6602

698.7
516.6
36.3
85
60.8
70
234 70
0
0
45
237 45
0
0
50
238 45
0
239 5
168
242 168
0
0
TBD
80
0
0
244 80
45
45
0
0
30
248 12.5
17.5
0
50
249 50
0
0
251 80
252 66.1
13.8

Sfmt 6602

Federal
Reserve

2,197.2
0
1967.4
230
0
100
0
235 100
0
0
0
0
0
229.8
0
0
240 229.8
0
0
0
0
TBD
720
0
245 720
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

FDIC

Total

1,372.7
37.7
0
1,335
0
0
0
0
0
0
0
0
0
10
0
0
241 10
0
0
0
0
TBD
0
0
0
0
540
0
0
247 540
0
0
0
0
0
0
0
0
0
0
0

E:\HR\OC\B720A.XXX

B720A

233 4,268.6

554.3
2,003.7
1,649.8
60.8
170
70
100
0
45
0
0
0
289.8
45
0
244.8
168
168
0
0
243 TBD
800
0
720
0
585
45
0
540
30
12.5
17.5
0
250 50
50
0
0
80
66.1
13.8

70
FIGURE 12: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF JULY 2, 2009)—
Continued
[Dollars in billions]
Treasury
(TARP)

Program

tjames on DSKG8SOYB1PROD with HEARING

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

0
5
0
253 5
0
15
25415
0
0
0
0
0
0
0
0
0
0
0
0
0
0
258 60.8

Federal
Reserve

FDIC

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1,147.4
0
257 1,147.4
0
0

0
0
0
0
0
0
0
0
0
785
0
0
255 785
37.7
256 37.7
0
0
0
0
0
0
0

Total

0
5
0
5
0
15
15
0
0
785
0
0
785
37.7
037.7
0
0
1,147.4
0
1,147.4
0
60.8

231 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. The outlays concept used here represents cash disbursements and commitments to make cash disbursements and is not the
same as budget outlays, which under § 123 of EESA are recorded on a ‘‘credit reform’’ basis.
232 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.
233 This figure differs substantially from the $2,476–2,976 billion range of ‘‘Total Funds Subject to SIGTARP Oversight’’ reported during testimony before the Senate Finance Committee on March 31, 2009. Senate Committee on Finance, Testimony of SIGTARP Neil Barofsky, TARP
Oversight: A Six Month Update, 111th Cong. (Mar. 31, 2009). SIGTARP’s accounting, designed to capture only those funds potentially under its
oversight authority, is both less and more inclusive than the Panel’s, and thus the two are not directly comparable. Among the differences,
SIGTARP does not account for Federal Reserve credit extensions outside of the TALF or FDIC guarantees under the Temporary Liquidity Guarantee Program and sets the maximum Federal Reserve guarantees under the TALF at $1 trillion.
234 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). July
2 TARP Transaction Report, supra note 224.
235 This number represents the full $60 billion that is available to AIG through its revolving credit facility with the Federal Reserve ($43.5
billion had been drawn down as of July 1) and the outstanding principle of the loans extended to the Maiden Lane II and III special purpose
vehicles (AIG SPVs) to buy AIG assets (as of July 1, $17.5 billion and $22.4 billion respectively). See Fed Balance Sheet July 2, supra note 69.
The Panel continues to calculate the exposure attributable to the revolving credit facility at $60 billion. However, whereas previously the Panel
had calculated the exposure attributable to the AIG SPVs at the initially announced amount of Federal Reserve loans to the SPVs, we have
changed our methodology. Based on its review of new Federal Reserve documents, the Panel now believes that its previous methodology overstated the Federal Reserve’s exposure to AIG. The initially announced amount of loans was based on the Federal Reserve’s estimated cost to
purchase a particular pool of AIG assets. However, the value of these assets declined by the time the AIG SPVs purchased them, necessitating a smaller loan than was initially announced. Furthermore, income from the purchased assets is used to pay down the loan, reducing
the taxpayers’ exposure to losses over time. See Board of Governors of the Federal Reserve System, Federal Reserve System Monthly Report on
Credit and Liquidity Programs and the Balance Sheet, at 14–16 (June 2009) (online at www.federalreserve.gov/newsevents/
monthlyclbsreport200906.pdf ); Letter from Federal Reserve Chairman Benjamin Bernanke to Congressional Oversight Panel Chair Elizabeth
Warren (June 26, 2009).
236 Based on its review of newly available information from the Federal Reserve, the Panel has revised its calculation of support provided
to Bank of America by excluding from the total the $118 billion asset guarantee agreement between Bank of America, the Federal Reserve,
Treasury, and the FDIC. U.S. Department of the Treasury, Summary of Terms: Eligible Asset Guarantee (Jan. 15, 2009) (online at
www.treas.gov/press/releases/reports/011508bofatermsheet.pdf). The reason for the change is that it is now clear that, despite preliminary
agreement, the asset guarantee was never signed; it is not currently in effect, and will likely not be consummated. House Committee on
Oversight and Government Reform, Testimony of Federal Reserve Chairman Ben Bernanke, Bank of America and Merrill Lynch: How Did a Private Deal Turn Into a Federal Bailout? Part II, 111th Cong. (June 25, 2009).
237 July 2 TARP Transaction Report, supra note 224. 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.
238 July 2 TARP Transaction Report, supra note 224. 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.
239 Citigroup Asset Guarantee (granting a 90 percent federal guarantee on all losses over $29 billion of a $306 billion pool of Citigroup assets, with the first $5 billion of the cost of the guarantee borne by Treasury, the next $10 billion by FDIC, and the remainder by the Federal
Reserve). 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).
240 Id.
241 Id.
242 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. This figure does not account for anticipated repayments or redemptions of
CPP investments, nor does it account for dividend payments from CPP investments.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00076

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

71

tjames on DSKG8SOYB1PROD with HEARING

243 Funding levels for the CAP have not yet been announced but will likely constitute a significant portion of the remaining $60.8 billion of
TARP funds.
244 Senate Committee on Banking, Housing, and Urban Affairs, Testimony of Secretary Geithner, Oversight of the Troubled Asset Relief
Program, 111th Cong., at 1 (May 20, 2009) (online at banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStorelid=b64da0f59f9b-448a-a352-ad0590543ef9) (hereinafter ‘‘May 20 Geithner Testimony’’); July 2 TARP Transactions Report, supra note 224. This figure represents: a $20 billion allocation to the TALF special purpose vehicle on March 3, 2009; Treasury’s announcement of an additional $35 billion
dedicated to the TALF; and $25 billion dedicated to supporting TALF loans to purchase legacy securities under the PPIP.
245 This number derives from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the value of Federal Reserve loans under
the TALF. See 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 $80 billion of losses on its $800 billion in loans, the Federal Reserve Board’s maximum potential exposure
under the TALF is $720 billion.
246 Because PPIP funding arrangements for loans and securities differ substantially, the Panel accounts for them separately. Treasury has
not formally announced either total program funding level or the allocation of funding between the PPIP Legacy Loans Program and Legacy
Securities Program. Treasury has indicated that, of the $100 billion maximum allocation to the PPIP, it plans to disburse $25 billion to the
TALF for the financing of the PPIP Legacy Securities program, and $30 billion to the Legacy Securities Program as initial equity and debt
funding (leaving at most $45 billion to be allocated to the Legacy Loans Program). 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). However, the FDIC has postponed the implementation of the Legacy Loans program, see 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). It is not yet clear how this postponement will affect the allocation of TARP funds for the PPIP.
247 Id at 2–3 (explaining that, for every $1 Treasury contributes in equity matching $1 of private contributions to public-private asset pools
created under the Legacy Loans Program, FDIC will guarantee up to $12 of financing for the transaction to create a 6:1 debt to equity ratio).
If Treasury ultimately allocates a smaller proportion of funds to the Legacy Loans Program (i.e., less than $45 billion), the amount of FDIC
loan guarantees will be reduced proportionally.
248 Id at 4–5 (outlining that, for each $1 of private investment into a fund created under the Legacy Securities Program, Treasury will provide a matching $1 in equity to the investment fund; a $1 loan to the fund; and, at Treasury’s discretion, an additional loan up to $1). In
the absence of further Treasury guidance, this analysis assumes that Treasury will allocate funds for equity co-investments and loans at a
1:1.5 ratio, a formula that estimates that Treasury will frequently exercise its discretion to provide additional financing.
249 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, only $18.0 billion has been allocated as of June 30, and no funds have yet been disbursed. See July 2 TARP Transactions Report, supra note 224.
250 Fannie Mae and Freddie Mac, government-sponsored entities (GSEs) that were placed in conservatorship of the Federal Housing Finance
Housing Agency on September 7, 2009, will also contribute up to $25 billion to the Making Home Affordable Program, of which the HAMP is a
key component. See U.S. Department of the Treasury, Making Home Affordable: Updated Detailed Program Description (Mar. 4, 2009) (online at
www.treas.gov/press/releases/reports/housinglfactlsheet.pdf).
251 Figures do not total due to rounding.
252 July 2 TARP Transactions Report, supra note 224. A substantial portion of the total $80.0 billion in loans extended under the AIFP has
since been converted to common equity and preferred shares in restructured companies. Only $13.8 billion has been retained as first lien
debt (with $6.7 billion committed to GM and $7.1 billion to Chrysler), which is classified below as loans.
253 July 2 TARP Transactions Report, supra note 224.
254 May 20 Geithner Testimony, supra note 244, at 15.
255 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. $345.8 billion of debt subject to the guarantee has been
issued to date, which represents about 44 percent of the current cap. Federal Deposit Insurance Corporation, Monthly Reports on Debt
Issuance Under the Temporary Liquidity Guarantee Program: Debt Issuance Under Guarantee Program (May 31, 2009) (online at www.fdic.gov/
regulations/resources/TLGP/totallissuance5-09.html) (updated June 17, 2009).
256 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 quarter of 2009. See Federal Deposit Insurance Corporation, Chief Financial Officer’s (CFO) Report to the Board:
DIF Income Statement (Fourth Quarter 2008) (online at www.fdic.gov/about/strategic/corporate/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).
257 This figure is derived from adding the total credit the Federal Reserve Board has extended as of June 3, 2009 through the Term Auction
Facility (Term Auction Credit), Discount Window (Primary Credit), Primary Dealer Credit Facility (Primary Dealer and Other Broker-Dealer Credit),
Central Bank Liquidity Swaps, loans outstanding to Bear Stearns (Maiden Lane I LLC), GSE Debt (Federal Agency Debt Securities), Mortgage
Backed Securities Issued by GSEs, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, and Commercial Paper Funding Facility LLC. See Fed Balance Sheet July 2, supra note 69. The level of Federal Reserve lending under these facilities will fluctuate in response to market conditions and independent of any federal policy decisions.
258 One potential use of uncommitted funds is Treasury’s obligation to reimburse the Exchange Stabilization Fund (ESF), currently valued at
$52.1 billion. See U.S. Department of Treasury, Exchange Stabilization Fund, Statement of Financial Position, as of May 31, 2009 (online at
www.ustreas.gov/offices/international-affairs/esf/esf-monthly-statement.pdf) (accessed July 2, 2009). Treasury must reimburse any use of the
fund to guarantee money market mutual funds from TARP money. See EESA, supra note 13, at § 131. In September 2008, Treasury opened its
Temporary Guarantee Program for Money Mutual Funds, U.S. Department of Treasury, Treasury Announces Temporary Guarantee Program for
Money Market Mutual Funds (Sept. 29, 2008) (online at www.treas.gov/press/releases/hp1161.htm). This program uses assets of the ESF to
guarantee the net asset value of participating money market mutual funds. Id. § 131 of EESA protected the ESF from incurring any losses
from the program by requiring that Treasury reimburse the ESF for any funds used in the exercise of the guarantees under the program,
which has been extended through September 18, 2009. U.S. Department of Treasury, Treasury Announces Extension of Temporary Guarantee
Program for Money Market Funds (Mar. 31, 2009) (online at www.treas.gov/press/releases/tg76.htm).

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00077

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

72
SECTION FIVE: OVERSIGHT ACTIVITIES

tjames on DSKG8SOYB1PROD with HEARING

The Congressional Oversight Panel was established as part of
EESA and formed on November 26, 2008. Since then, the Panel
has issued seven oversight reports, as well as its special report on
regulatory reform, which was issued on January 29, 2009. Since
the release of the Panel’s June oversight report, the following developments pertaining to the Panel’s oversight of the TARP took
place:
• Chair Elizabeth Warren, on behalf of the Panel, and Special
Inspector General for the Troubled Asset Relief Program Neil M.
Barofsky sent a joint letter on June 10, 2009 to Chairman Christopher J. Dodd and Ranking Member Richard C. Shelby of the Senate Committee on Banking, Housing, and Urban Affairs, and
Chairman Barney Frank and Ranking Member Spencer Bachus of
the House Financial Services Committee, to notify them of a special coordinated effort between SIGTARP and the Panel to examine
the pricing of warrants in the context of the repayment of TARP
funds by TARP-recipient institutions.259 The letter discusses the
Panel’s plans to release its valuation estimates and analysis relating to the pricing of warrants which Treasury holds in relation to
its Capital Purchase Program (‘‘CPP’’) investments with its July
monthly report, and SIGTARP’s plans to conduct an audit of Treasury’s warrant repurchase/sale process.
• The Panel held a hearing on June 24, 2009 with newly confirmed Assistant Secretary of the Treasury for Financial Stability
Herbert Allison regarding the Troubled Asset Relief Program. Written testimony and video from the hearing can be found on the Panel’s website at http://cop.senate.gov/hearings/library/hearing–
062409–allison.cfm.
• The Helping Families Save Their Homes Act of 2009 (P.L. 111–
22), signed into law on May 20, 2009, requires the Congressional
Oversight Panel to issue a special report on farm loan restructuring. To assist in this mandate, the Panel held a hearing on July
7, 2009 in Greeley, Colorado, on the subject of commercial farm
credit markets and the use of farm loan restructuring as an alternative to foreclosure. It heard testimony from representatives of
the USDA, farm credit lenders, and farmers themselves. It also had
the opportunity to hear from the Greeley community on issues related to farm credit. Written testimony and audio from the hearing
can be found on the Panel’s website at http://cop.senate.gov/hearings/library/hearing–070709–farmcredit.cfm.
• At a Panel hearing on April 21, 2009, Secretary Geithner
pledged to arrange weekly Treasury briefings on TARP activities
for Panel staff. Based on the Secretary’s pledge, Panel staff has
since received numerous briefings on topics including banks’ repayment of preferred shares and warrants, TALF and PPIP, the stress
tests, and Treasury’s plan to purchase directly securities backed by
Small Business Administration (SBA) 7(a) loans.
• Panel staff has reviewed documents pertaining to the stress
tests, provided by both Treasury and the Federal Reserve Board of
Governors. Several other document requests sent to Treasury are
still pending.
259 See

VerDate Nov 24 2008

00:33 Jul 30, 2009

Appendix IV of this report, infra.

Jkt 050720

PO 00000

Frm 00078

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

73
• The Panel has sent letters to the largest mortgage servicing
companies that have not yet signed a contract to formally participate in the Making Home Affordable foreclosure mitigation program. This letter inquires, among other things, if the servicer intends to participate, how it is handling loan modifications, and
what barriers and obstacles might limit participation in the program. This is part of the Panel’s continuing oversight of foreclosure
mitigation efforts.
UPCOMING REPORTS

AND

HEARINGS

tjames on DSKG8SOYB1PROD with HEARING

• The Panel will release its next oversight report in August. The
report will provide an updated review of TARP activities and continue to assess the program’s overall effectiveness. The report will
also examine the issue of troubled assets, their role in the economic
crisis, and how the TARP addresses them.
• On July 21, 2009, the Panel will release a report in which it
provides an analysis of the state of the commercial farm credit
markets and considers the use of farm loan restructuring as an alternative to foreclosure. This report is pursuant to section 501 of
the Helping Families Save Their Homes Act of 2009 (P.L. 111–22).
• The Panel is planning a field hearing in Detroit on July 27,
2009 to hear testimony on Treasury’s administration of the Automotive Industry Financing Program.

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00079

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

74
SECTION SIX: ABOUT THE CONGRESSIONAL OVERSIGHT
PANEL

tjames on DSKG8SOYB1PROD with HEARING

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

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00080

Fmt 6602

Sfmt 6602

E:\HR\OC\B720A.XXX

B720A

tjames on DSKG8SOYB1PROD with HEARING

APPENDIX I: LETTER FROM CHAIR ELIZABETH WARREN
TO SECRETARY TIMOTHY GEITHNER REQUESTING INFORMATION ON THE REPAYMENT OF TARP ASSISTANCE, DATED JUNE 12, 2009

(75)

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00081

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00082

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

Insert offset folio 98 here 50720A.004

tjames on DSKG8SOYB1PROD with HEARING

76

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00083

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

Insert offset folio 99 here 50720A.005

tjames on DSKG8SOYB1PROD with HEARING

77

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00084

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

Insert offset folio 100 here 50720A.006

tjames on DSKG8SOYB1PROD with HEARING

78

tjames on DSKG8SOYB1PROD with HEARING

APPENDIX II: LETTER FROM SECRETARY TIMOTHY
GEITHNER IN RESPONSE TO CHAIR WARREN’S LETTER REQUESTING INFORMATION ON THE REPAYMENT
OF TARP ASSISTANCE, DATED JULY 1, 2009

(79)

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00085

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00086

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

Insert offset folio 102 here 50720A.007

tjames on DSKG8SOYB1PROD with HEARING

80

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00087

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

Insert offset folio 103 here 50720A.008

tjames on DSKG8SOYB1PROD with HEARING

81

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00088

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

Insert offset folio 104 here 50720A.009

tjames on DSKG8SOYB1PROD with HEARING

82

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00089

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

Insert offset folio 105 here 50720A.010

tjames on DSKG8SOYB1PROD with HEARING

83

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00090

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

Insert offset folio 106 here 50720A.011

tjames on DSKG8SOYB1PROD with HEARING

84

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00091

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

Insert offset folio 107 here 50720A.012

tjames on DSKG8SOYB1PROD with HEARING

85

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00092

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

Insert offset folio 108 here 50720A.013

tjames on DSKG8SOYB1PROD with HEARING

86

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00093

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

Insert offset folio 109 here 50720A.014

tjames on DSKG8SOYB1PROD with HEARING

87

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00094

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

Insert offset folio 110 here 50720A.015

tjames on DSKG8SOYB1PROD with HEARING

88

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00095

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

Insert offset folio 111 here 50720A.016

tjames on DSKG8SOYB1PROD with HEARING

89

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00096

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

Insert offset folio 112 here 50720A.017

tjames on DSKG8SOYB1PROD with HEARING

90

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00097

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

Insert offset folio 113 here 50720A.018

tjames on DSKG8SOYB1PROD with HEARING

91

tjames on DSKG8SOYB1PROD with HEARING

APPENDIX III: LETTER FROM CHAIR ELIZABETH WARREN AND PANEL MEMBER RICHARD NEIMAN TO SECRETARY TIMOTHY GEITHNER REQUESTING ASSISTANCE WITH THE PANEL’S OVERSIGHT OF FEDERAL
FORECLOSURE MITIGATION EFFORTS, DATED JUNE
29, 2009

(92)

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00098

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00099

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

Insert offset folio 115 here 50720A.019

tjames on DSKG8SOYB1PROD with HEARING

93

VerDate Nov 24 2008

00:33 Jul 30, 2009

Jkt 050720

PO 00000

Frm 00100

Fmt 6604

Sfmt 6604

E:\HR\OC\B720A.XXX

B720A

Insert offset folio 116 here 50720A.020

tjames on DSKG8SOYB1PROD with HEARING

94