oversight

Troubled Asset Relief Program: As Treasury Continues to Exit Programs, Opportunities to Enhance Communication on Costs Exist

Published by the Government Accountability Office on 2012-01-09.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               United States Government Accountability Office

GAO            Report to Congressional Addressees




January 2012
               TROUBLED ASSET
               RELIEF PROGRAM
               As Treasury Continues
               to Exit Programs,
               Opportunities to
               Enhance
               Communication on
               Costs Exist




GAO-12-229
                                               January 2012

                                               TROUBLED ASSET RELIEF PROGRAM
                                               As Treasury Continues to Exit Programs,
                                               Opportunities to Enhance Communication on Costs
                                               Exist
Highlights of GAO-12-229, a report to
congressional addressees




Why GAO Did This Study                          What GAO Found
The Emergency Economic Stabilization            Many TARP programs continue to be in various stages of unwinding and some
Act of 2008 authorized the Department           programs, notably those that focus on the foreclosure crisis, remain active. The
of the Treasury (Treasury) to create the        figure provides an overview of selected programs and the amount disbursed
Troubled Asset Relief Program (TARP),           and outstanding, as applicable. Treasury has articulated broad principles for
a $700 billion program designed to              exiting TARP, including exiting TARP programs as soon as practicable and
restore the liquidity and stability of the      seeking to maximize taxpayer returns, goals that at times conflict. Some of the
financial system. The act also requires         programs that Treasury continues to unwind, such as investments in American
that GAO report every 60 days on TARP           International Group, Inc. (AIG), require Treasury to actively manage the timing
activities. This report examines (1) the
                                                of its exit as it balances its competing goals. For other programs, such as the
condition and status of TARP programs;
                                                Capital Purchase Program (CPP)—which was created to provide capital to
(2) Treasury’s management of TARP
operations, including staffing for the
                                                financial institutions—Treasury’s exit will be driven primarily by the financial
Office of Financial Stability (OFS) and         condition of the participating institutions. Consequently, the timing of Treasury’s
oversight of contractors and financial          exit from TARP remains uncertain.
agents; and (3) what is known about the         Treasury continues to manage the various TARP programs using OFS staff,
direct and indirect costs of TARP. To do        financial agents, and contractors. Overall OFS staffing has declined slightly for
this work, GAO analyzed audited                 the first time as staff responsible for managing TARP investment programs and
financial data for various TARP                 those in term-appointed leadership positions have departed. However, staff in
programs; reviewed documentation
                                                some offices within OFS have increased—for example, in the Office of Internal
such as program terms and internal
                                                Review, which helps to ensure that financial agents and contractors comply with
decision memos; analyzed TARP cost
estimates from the Congressional                laws and regulations. Through September 30, 2011, about half of Treasury’s
Budget Office (CBO), the Office of              116 contracts remained active, along with 14 of the 17 financial agency
Management and Budget, and Treasury;            agreements. Treasury has continued to strengthen its management and
and interviewed CBO and OFS officials.          oversight of contractors and financial agents and conflict-of-interest
                                                requirements. In response to a GAO recommendation, OFS has finalized a plan
                                                to address staffing levels and expertise that includes identifying critical positions
What GAO Recommends                             and conducting succession planning, in light of the temporary nature of its work.

Treasury should enhance its program-            Treasury and CBO project that TARP costs will be much lower than the amount
specific press releases to the public by        authorized when the program was initially announced. Treasury’s fiscal year
consistently including lifetime cost            2011 financial statement, audited by GAO, estimated that the lifetime cost of
estimates when reporting on program             TARP would be about $70 billion—with CPP expected to generate the most
activities and results. Treasury agreed         lifetime income, or net income in excess of costs. OFS also reported that from
with our recommendation and plans to            inception through September 30, 2011, the incurred cost of TARP transactions
implement it by including a link to its         was $28 billion. Although Treasury regularly reports on the cost of TARP
cost reporting in future TARP program-          programs and has enhanced such reporting over time, GAO’s analysis of
specific press releases.                        Treasury press releases about specific programs indicate that information about
                                                estimated lifetime costs and income are included only when programs are
                                                expected to result in lifetime income. For example, Treasury issued a press
                                                release for its bank investment programs, including CPP, and noted that the
                                                programs would result in lifetime income, or profit. However, press releases for
                                                investments in AIG, a program that is anticipated to result in a lifetime cost to
                                                Treasury, did not include program-specific cost information. Although press
                                                releases for programs expected to result in a cost to Treasury provide useful
                                                transaction information, they exclude lifetime, program-specific cost estimates.
View GAO-12-229 or key components.
For more information, contact Thomas J.
McCool at (202) 512-2642 or mccoolt@gao.gov.


                                                                                        United States Government Accountability Office
Highlights of GAO-12-229 (Continued)



Consistently providing greater transparency about cost                           indirect costs associated with the moral hazard created
information for specific TARP programs could help                                by the government’s intervention in the private sector are
reduce potential misunderstanding of TARP’s results.                             more difficult to measure and assess.
While Treasury can measure and report direct costs,


Status of Selected Programs, as of September 30, 2011




Note: TARP programs with disbursements of less than $600 million are excluded. Outstanding assets are presented at book value.
a
 TARP-funded housing programs include a variety of programs to assist homeowners. Unlike the investment programs, TARP-funded housing programs
do not hold assets to manage and sell; therefore, there are no outstanding assets.
b
 Treasury no longer holds assets for this program that it must manage, though the Federal Deposit Insurance Corporation still holds Citigroup trust
preferred stock and Treasury could receive income when these assets are sold.




                                                                                                     United States Government Accountability Office
Contents


Letter                                                                                             1
                       Background                                                                  3
                       While Many TARP Programs Continue to Wind Down, Others
                          Remain Active                                                            8
                       Treasury Continues to Address Staffing Needs While Also Relying
                          on Financial Agents and Contractors to Support TARP
                          Administration and Programs                                            40
                       Although Estimated Lifetime TARP Costs Have Decreased
                          Significantly, Treasury Could Enhance Its Communication about
                          the Costs of TARP                                                      51
                       Conclusions                                                               57
                       Recommendation for Executive Action                                       58
                       Agency Comments and Our Evaluation                                        58

Appendix I             Scope and Methodology                                                     62



Appendix II            Information on Programs Treasury Has Exited                               67



Appendix III           Comments from the Department of the Treasury                              70



Appendix IV            GAO Contacts and Staff Acknowledgments                                    72



Related GAO Products                                                                             73



Tables
                       Table 1: List of Programs Supported by TARP Funding                         4
                       Table 2: Contracts and Financial Agency Agreements in Support of
                                TARP, Fiscal Years 2010 through 2011                             44
                       Table 3: Top Five Financial Agency Agreements                             45
                       Table 4: TARP Contracts, Financial Agency Agreements, and
                                Subcontracts with Small and Minority- and Women-Owned
                                Businesses through Fiscal Years 2010 and 2011                    46




                       Page i                                GAO-12-229 Troubled Asset Relief Program
Figures
          Figure 1: Timeline for TARP Implementation and Unwinding,
                   October 3, 2008, through December 30, 2011                         6
          Figure 2: Status of CPP, as of September 30, 2011                          10
          Figure 3: Status of Institutions that Received CPP Investments, as
                   of September 30, 2011                                             11
          Figure 4: Number of Institutions Missing Scheduled Dividend or
                   Interest Payments by Quarter, as of November 30, 2011             13
          Figure 5: Status of CDCI, as of September 30, 2011                         16
          Figure 6: Status of AIFP, as of September 30, 2011                         18
          Figure 7: GM’s Share Price from November 18, 2010, through
                   September 30, 2011, Compared to the IPO Share Price and
                   Post-IPO Share Price Needed to Recoup Treasury’s
                   Investment                                                        20
          Figure 8: Status of AIG Investment Program, as of September 30,
                   2011                                                              23
          Figure 9: Status of SBA 7(a) Securities Purchase Program, as of
                   September 30, 2011                                                26
          Figure 10: Status of TALF, as of September 30, 2011                        28
          Figure 11: Status of PPIP, as of September 30, 2011                        31
          Figure 12: TARP-funded Housing Programs, Amounts Obligated
                   and Disbursed, and Reported Activity through September
                   2011                                                              34
          Figure 13: HAMP Modifications Started Monthly from January 2010
                   through September 2011                                            36
          Figure 14: OFS Employees and Detailees, November 21, 2008,
                   through September 30, 2011                                        41
          Figure 15: Comparison of Treasury’s Lifetime Cost and Income
                   Estimates for TARP Programs, September 30, 2010, and
                   September 30, 2011                                                53
          Figure 16: Status of the Asset Guarantee Program, as of September
                   30, 2011                                                          68
          Figure 17: Status of the Targeted Investment Program, as of
                   September 30, 2011                                                69




          Page ii                                GAO-12-229 Troubled Asset Relief Program
Abbreviations

ABS                        asset-backed securities
AIFP                       Automotive Industry Financing Program
AIG                        American International Group, Inc.
CBO                        Congressional Budget Office
CDCI                       Community Development Capital Initiative
CDFI                       Community Development Financial Institutions
CMBS                       commercial mortgage-backed securities
CPP                        Capital Purchase Program
Dodd-Frank Act             Dodd-Frank Wall Street Reform and Consumer
                           Protection Act
EESA                       Emergency Economic Stabilization Act
Federal Reserve            Board of Governors of the Federal Reserve System
FRBNY                      Federal Reserve Bank of New York
FHA                        Federal Housing Administration
GM                         General Motors
HAMP                       Home Affordable Modification Program
IPO                        initial public offering
IRS                        Internal Revenue Service
MHA                        Making Home Affordable
Moody’s                    Moody’s Investors Service, Inc.
OFS                        Office of Financial Stability
OIR                        Office of Internal Review
OMB                        Office of Management and Budget
PPIF                       public-private investment fund
PPIP                       Public-Private Investment Program
SBA                        Small Business Administration
SPV                        special purpose vehicle
TALF                       Term Asset-backed Securities Loan Facility
TARP                       Troubled Asset Relief Program
Treasury                   Department of the Treasury




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Page iii                                        GAO-12-229 Troubled Asset Relief Program
United States Government Accountability Office
Washington, DC 20548




                                   January 9, 2012

                                   Congressional Addressees

                                   The Emergency Economic Stabilization Act (EESA) initially authorized
                                   $700 billion to assist financial institutions and markets, businesses,
                                   homeowners, and consumers through the Troubled Asset Relief Program
                                   (TARP). 1 This amount was intended to provide confidence that the U.S.
                                   government would help address the greatest threat the financial markets
                                   and economy had faced since the Great Depression. As the severity and
                                   immediacy of the 2008 financial crisis began to diminish, Congress
                                   reduced the authorized amount to $475 billion with the Dodd-Frank Wall
                                   Street Reform and Consumer Protection Act (Dodd-Frank Act). 2 TARP
                                   cost estimates were never projected to reach the authorized amounts and
                                   over time these projected costs have declined as some banks have
                                   repaid their assistance and other programs move closer to their
                                   termination dates. 3 However, an increasing number of banks that
                                   received Capital Purchase Program investments are falling behind on
                                   paying dividends related to their government assistance, and TARP-
                                   funded housing programs continue to struggle to address the ongoing
                                   foreclosure crisis.

                                   The Department of the Treasury (Treasury) is the primary agency
                                   implementing TARP and its activities have been broad in scope. Treasury
                                   established the Office of Financial Stability (OFS) to carry out TARP
                                   activities, which include injecting capital into key financial institutions,


                                   1
                                    EESA, Pub. L. No. 110-343, 122 Stat. 3765 (2008) (codified at 12 U.S.C. §§ 5201 et
                                   seq.). EESA originally authorized Treasury to purchase or guarantee up to $700 billion in
                                   troubled assets. The Helping Families Save Their Homes Act of 2009, Pub. L. No. 111-22,
                                   Div. A, 123 Stat. 1632 (2009), amended EESA to reduce the maximum allowable amount
                                   of outstanding troubled assets under EESA by almost $1.3 billion, from $700 billion to
                                   $698.741 billion.
                                   2
                                    The Dodd-Frank Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010), (1) reduced Treasury’s
                                   authority to purchase or insure troubled assets to a maximum of $475 billion and (2)
                                   prohibited Treasury, under EESA, from incurring any additional obligations for a program
                                   or initiative unless the program or initiative had already been initiated prior to June 25,
                                   2010.
                                   3
                                    The Department of the Treasury, the Congressional Budget Office, and the Office of
                                   Management and Budget provided cost estimates that were all below $700 billion; the
                                   highest estimate was about half of the $700 billion allocated for TARP.




                                   Page 1                                          GAO-12-229 Troubled Asset Relief Program
implementing programs to address problems in the securitization
markets, providing assistance to the automobile industry, and offering
incentives for modifying residential mortgages, among other activities.

As required by EESA, we have provided oversight of TARP activities
since they began in 2008. This 60-day report assesses the condition of
TARP as of September 30, 2011. 4 Specifically, it examines (1) the
condition and status of TARP programs; (2) Treasury’s management of
TARP operations, including staffing for OFS and oversight of contractors
and financial agents; and (3) what is known about the direct and indirect
costs of TARP.

To assess the condition and status of TARP programs, we analyzed
program-specific data on obligations, disbursements, income, and other
financial information from our audits of OFS’s financial statements;
reviewed program documentation such as program terms and internal
decision memos; and interviewed OFS officials responsible for TARP
programs and financial reporting. 5 We determined that the financial
information used in this report is sufficiently reliable to assess the
condition and status of TARP programs. We also leveraged our past
reporting on TARP, as well as that of the Congressional Oversight Panel
and the Special Inspector General for TARP, as appropriate. 6 To
understand OFS’s progress in staffing and its oversight of contractors and
financial agents we collected staffing data and trends from 2008 through
September 30, 2011; analyzed select contracts and financial agreements;
and interviewed OFS officials. We determined that the staffing data were
sufficiently reliable for our purposes by corroborating the data with other
sources. To determine what information was available about the costs of



4
 We have issued a TARP report at least every 60 days as required by EESA in Section
116, 12 U.S.C. § 5226 (codified at 12 U.S.C. § 5226). Unless otherwise noted, we provide
information throughout this report as of September 30, 2011.
5
 See GAO, Financial Audit: Office of Financial Stability (Troubled Asset Relief Program)
Fiscal Years 2011 and 2010 Financial Statements, GAO-12-169 (Washington, D.C.:
Nov.10, 2011), Financial Audit: Office of Financial Stability (Troubled Asset Relief
Program) Fiscal Years 2010 and 2009 Financial Statements, GAO-11-174 (Washington,
D.C.: Nov.15, 2010), and Financial Audit: Office of Financial Stability (Troubled Asset
Relief Program) Fiscal Year 2009 Financial Statements, GAO-10-301 (Washington, D.C.:
Dec. 9, 2009).
6
 Pursuant to EESA’s requirements, the Congressional Oversight Panel terminated on
April 3, 2011.




Page 2                                         GAO-12-229 Troubled Asset Relief Program
             TARP, we analyzed cost data from reports issued by the Congressional
             Budget Office (CBO), the Office of Management and Budget (OMB), and
             Treasury, focusing on Treasury cost estimates for our analyses. We also
             interviewed officials from CBO and Treasury about cost estimate
             methodologies.

             We conducted this performance audit from June 2011 to January 2012 in
             accordance with generally accepted government auditing standards.
             Those standards require that we plan and perform the audit to obtain
             sufficient, appropriate evidence to provide a reasonable basis for our
             findings and conclusions based on our audit objectives. We believe that
             the evidence obtained provides a reasonable basis for our findings and
             conclusions based on our audit objectives.


             When EESA was signed on October 3, 2008, the U.S. financial system
Background   faced a severe crisis that has rippled throughout the global economy,
             moving from the U.S. housing market to an array of financial assets and
             interbank lending. The crisis restricted access to credit and made the
             financing on which businesses and individuals depend increasingly
             difficult to obtain. Further tightening of credit exacerbated a global
             economic slowdown. During the crisis, Congress, the President, federal
             regulators, and others undertook a number of steps to facilitate financial
             intermediation by banks and the securities markets. In addition to
             Treasury’s efforts, policy interventions were led by the Board of
             Governors of the Federal Reserve System (Federal Reserve) and the
             Federal Deposit Insurance Corporation. While the banking crisis in the
             United States no longer presents the same level of systemic concerns as
             it did in 2008, the economy remains vulnerable, with unemployment
             higher than in the recent past. Globally, concerns about the stability of
             European banks and countries, especially Greece, escalated in 2011—
             demonstrating that problems remain in the global economy and financial
             markets.




             Page 3                                  GAO-12-229 Troubled Asset Relief Program
TARP Programs and                           The passage of EESA resulted in a variety of programs supported with
Implementation                              TARP funding. 7 (See table 1.)

Table 1: List of Programs Supported by TARP Funding

Program                                              Program description
American International Group, Inc. (AIG)             Provided support to AIG to avoid disruptions to financial markets as its financial
Investment Program (formerly Systemically            condition deteriorated.
Significant Failing Institutions Program)
Asset Guarantee Program                              Provided federal government assurances for assets held by financial institutions
                                                     that were viewed as critical to the functioning of the nation’s financial system.
                                                     Bank of America and Citigroup were the only two institutions that participated in
                                                     this program.
Automotive Industry Financing Program (AIFP)         Aimed to prevent a significant disruption of the American automotive industry
                                                     through government investments in certain domestic automakers—Chrysler and
                                                     General Motors (GM)—and auto financing companies Ally Financial (formerly
                                                     known as General Motors Acceptance Corporation, or GMAC) and Chrysler
                                                     Financial.
Capital Assessment Program                           Created to provide capital to institutions not able to raise it privately to meet
                                                     Supervisory Capital Assessment Program—or “stress test”—requirements. This
                                                     program was never used.
Capital Purchase Program (CPP)                       As the largest TARP program, CPP was designed to provide capital investments
                                                     to financially viable financial institutions. Treasury received preferred shares and
                                                     subordinated debentures, along with warrants.a
Consumer and Business Lending Initiative             •   Community Development Capital Initiative (CDCI) provided capital to
programs                                                 Community Development Financial Institutions (CDFI) by purchasing
                                                         preferred stock and subordinated debentures.
                                                     •   Small Business Administration (SBA) 7(a) Securities Purchase Program
                                                         provided liquidity to secondary markets for government-guaranteed small
                                                         business loans in SBA’s 7(a) loan program.
                                                     •   Term Asset-backed Securities Loan Facility (TALF) provided liquidity in
                                                         securitization markets for various asset classes to improve access to credit
                                                         for consumers and businesses.




                                            7
                                              For more information on these programs, see our two previous reports on TARP after its
                                            first and second year of implementation: GAO, Troubled Asset Relief Program: Status of
                                            Programs and Implementation of GAO Recommendations, GAO-11-74 (Washington,
                                            D.C.: Jan. 12, 2011), and Troubled Asset Relief Program: One Year Later, Actions Are
                                            Needed to Address Remaining Transparency and Accountability Challenges, GAO-10-16
                                            (Washington, D.C.: Oct. 8, 2009).




                                            Page 4                                             GAO-12-229 Troubled Asset Relief Program
Program                                             Program description
TARP-funded housing programs                        •   Making Home Affordable includes several housing programs. The primary
                                                        program has been the Home Affordable Modification Program (HAMP), under
                                                        which Treasury shares the cost of reducing monthly payments on first lien
                                                        mortgages with mortgage holders/investors and provides financial incentives
                                                        to servicers, borrowers, and mortgage holders/investors for loans modified
                                                        under the program.c
                                                    •   Hardest Hit Fund seeks to help homeowners in the states hit hardest by
                                                        unemployment and house price declines.
                                                    •   Support for the Department of Housing and Urban Development’s Federal
                                                        Housing Administration (FHA) Short Refinance program enables
                                                        homeowners whose mortgages exceed the value of their homes to refinance
                                                        into more affordable mortgages.
Public-Private Investment Program (PPIP)            Created to address the challenge of “legacy assets” as part of Treasury’s efforts
                                                    to repair balance sheets throughout the financial system. Treasury partnered with
                                                    private funds to purchase residential and commercial mortgage-backed securities.
Targeted Investment Program (TIP)                   Sought to foster market stability and strengthen the economy by making case-by-
                                                    case investments in institutions that Treasury deemed critical to the functioning of
                                                    the financial system. Bank of America and Citigroup were the only two institutions
                                                    that participated in this program.
                                           Source: GAO.
                                           a
                                            A warrant is an option to buy shares of common stock or preferred stock at a predetermined price on
                                           or before a specified date.
                                           b
                                            CDFIs are financial institutions that provide financing and related services to communities and
                                           populations that lack access to credit, capital, and financial services.
                                           c
                                            For more information on additional Making Home Affordable programs funded through TARP see
                                           GAO, Troubled Asset Relief Program: Treasury Continues to Face Implementation Challenges and
                                           Data Weaknesses in Its Making Home Affordable Program, GAO-11-288 (Washington, D.C.: Mar. 17,
                                           2011).


                                           Some of these programs have begun to unwind. 8 Figure 1 provides an
                                           overview of key dates for TARP implementation and the unwinding of
                                           some programs.




                                           8
                                            In addition to programs that are moving towards exit, the Asset Guarantee Program, the
                                           Capital Assessment Program, and the Targeted Investment Program are no longer active
                                           and Treasury no longer holds assets related to these programs that it must manage, as
                                           we have previously reported. For more information, see appendix II.




                                           Page 5                                                 GAO-12-229 Troubled Asset Relief Program
Figure 1: Timeline for TARP Implementation and Unwinding, October 3, 2008, through December 31, 2011




TARP Cost Estimates                    EESA requires that Treasury, OMB, and CBO report the costs of TARP.
                                       Section 105 of EESA directed Treasury to provide Congress with regular



                                       Page 6                                     GAO-12-229 Troubled Asset Relief Program
cost and transaction updates for TARP and section 202 addresses OMB’s
and CBO’s reporting duties. Specifically, OMB must prepare semiannual
reports for the President and Congress that include lifetime cost
estimates for Treasury’s TARP-related purchases and guarantees. 9
Treasury provides OMB with the program-specific transaction data and
cost calculations, which OMB reviews and approves before incorporating
into its semiannual reports. Section 202 also directed CBO to conduct
assessments of each OMB report, including the cost of purchases and
guarantees. These analyses must be included in a separate CBO report
issued within 45 days of each OMB semiannual report. 10

Treasury, OMB, and CBO report lifetime subsidy cost estimates (cost
estimates) for TARP and its direct loan, equity investment, and other
credit programs using the credit reform budgetary accounting
methodology established in the Federal Credit Reform Act of 1990. 11
Credit reform accounting requires that agencies develop a “subsidy” cost
of loans and loan guarantees at disbursement that considers projections
of future cash flows and the costs of financing. Administrative costs such
as personnel and travel expenses are not included. The subsidy cost is
the net present value of all cash flows associated with the transaction
calculated by discounting all future payments back to the current period at
one of two specific rates. The Federal Credit Reform Act of 1990 calls for
the use of an interest rate on comparable Treasury debt while EESA
requires Treasury to use an interest rate adjusted for market risk. These
subsidy costs are re-estimated annually to include actual cash flows and
changes in estimated future performance. According to Treasury, its
lifetime cost estimates represent the department’s best estimate of what
TARP and its programs will ultimately cost the taxpayer. 12



9
 Section 123 of EESA requires the use of credit reform accounting established by the
Federal Credit Reform Act of 1990 to calculate cost estimates for budgetary purposes for
TARP transactions that include equity investments, loans, and loan guarantees.
10
    See Sections 105 and 202 of EESA.
11
  Other credit programs consist of the Asset Guarantee Program and the FHA Short
Refinance Program. Federal Credit Reform Act of 1990, Pub. L. No. 101-508, Title XII,
Subtitle B, § 13201, 104 Stat. 1388, 1388-61 (1990).
12
  In some cases, these cost estimates suggest certain TARP programs could result in net
income for the taxpayer because the proceeds from Treasury’s investments (e.g.,
repayments, dividends, and interest payments) are expected to exceed costs. We refer to
these estimates as “lifetime income” estimates throughout the report.




Page 7                                         GAO-12-229 Troubled Asset Relief Program
                       TARP programs continue to wind down, and some programs have ended.
While Many TARP        Treasury has stated its goals for the exit process for many programs, but
Programs Continue to   as we and others have reported, these goals at times conflict. 13 Treasury
Wind Down, Others      has stated that when deciding to sell assets and exit TARP programs, it
                       will strive to:
Remain Active
                       •    protect taxpayer investment and maximize overall investment returns
                            within competing constraints,

                       •    promote the stability of financial markets and the economy by
                            preventing disruptions,

                       •    bolster markets’ confidence to increase private capital investment,
                            and

                       •    dispose of the investments as soon as it is practicable.

                       For example, we previously reported that deciding to unwind some of its
                       assistance to GM by participating in an initial public offering (IPO)
                       presented Treasury with a conflict between maximizing taxpayer returns
                       and exiting as soon as practicable. Holding its shares longer could have
                       meant realizing greater gains for the taxpayer, but only if the stock
                       appreciated in value. By participating in GM’s November 2010 IPO,
                       Treasury tried to fulfill both goals, selling almost half of its shares at an
                       early opportunity. Treasury officials stated that they strove to balance
                       these competing goals, but have no strict formula for doing so. Rather,
                       they ultimately relied on the best available information in deciding when to
                       start exiting this program.

                       Moreover, Treasury’s ability to exercise control over the timing of its exit
                       from TARP programs is limited in some cases. For example, Treasury will
                       likely decide when to exit AIG based on market conditions but Treasury
                       has less control over its exit from PPIP because the program’s exit
                       depends on the timing of each public-private investment fund (PPIF)
                       selling its investments. Treasury continues to face this tension in its goals



                       13
                         See GAO, TARP: Treasury’s Exit from GM and Chrysler Highlights Competing Goals,
                       and Results of Support to Auto Communities Are Unclear, GAO-11-471 (Washington,
                       D.C.: May 10, 2011). The Congressional Oversight Panel also noted these competing
                       goals. See Congressional Oversight Panel, January Oversight Report: Exiting TARP and
                       Unwinding Its Impact on the Financial Markets (Washington, D.C.: Jan. 14, 2010).




                       Page 8                                       GAO-12-229 Troubled Asset Relief Program
                                with a number of TARP programs as they continue to unwind. Throughout
                                this section we provide the status of each TARP program that remains
                                open or still holds assets that need to be managed, including when the
                                program will end (or stop acquiring new assets and no longer receive
                                funding) and when Treasury will exit the program (or sell assets it
                                acquired while the program was open). We also provide information on
                                outstanding assets, as applicable—both the book value and the market
                                value—as of September 30, 2011. 14 Also included are the lifetime
                                estimated costs for each program calculated by Treasury. Later in this
                                report we discuss the reasons for recent changes in several of Treasury’s
                                cost estimates between September 2010 and September 2011.


Many Programs Continue
to Wind Down, and
Treasury Faces Trade-offs
in Determining When to
Exit
Financial Strength Will         While repayments and income from CPP investments have exceeded the
Determine When Remaining        original outlays, financial strength will determine when remaining
CPP Institutions Exit Program   institutions exit the program. As we have reported, Treasury disbursed
                                $204.9 billion to 707 financial institutions nationwide from October 2008
                                through December 2009. 15 As of September 30, 2011, Treasury had
                                received $208.1 billion in repayment and income from its CPP
                                investments, exceeding the amount originally disbursed by $3.2 billion
                                (see fig. 2). The repayment and income amount included $182.4 billion in
                                repayments of original CPP investments, as well as $11.2 billion in
                                dividends, interest, and fees; $7.6 billion in warrant income; and $6.9
                                billion in net proceeds in excess of costs. After accounting for writeoffs
                                and realized losses on sales totaling $2.6 billion, CPP had $17.3 billion in




                                14
                                 Note that some numbers in our program figures will not total due to rounding.
                                15
                                  GAO-11-74. We also reported on CPP in Troubled Asset Relief Program: Opportunities
                                Exist to Apply Lessons Learned from the Capital Purchase Program to Similarly Designed
                                Programs and to Improve the Repayment Process, GAO-11-47 (Washington, D.C.: Oct. 4,
                                2010).




                                Page 9                                         GAO-12-229 Troubled Asset Relief Program
outstanding investments as of September 30, 2011. Treasury estimates
lifetime income of $13 billion for CPP as of September 30, 2011. 16

Figure 2: Status of CPP, as of September 30, 2011




a
 The total amount of repayments includes about $400 million from institutions that transferred to CDCI
and $2.2 billion from institutions that transferred to the Small Business Lending Fund.


According to data in a Treasury report, nearly half (317) of the 707
institutions that originally participated in CPP had exited the program as
of September 30, 2011. 17 Of the 317 institutions that have exited CPP,
about 40 percent, or 126 institutions, fully exited by repaying their



16
  Throughout this report we use “lifetime income” to refer to instances when cost
estimates suggest that certain TARP programs could result in net income for the taxpayer
because the proceeds from Treasury’s investments (e.g., repayments, dividends, and
interest payments) are expected to exceed costs.
17
 See Department of the Treasury, Troubled Asset Relief Program (TARP) Monthly 105(a)
Report-September 2011 (Washington, D.C.: Oct. 11, 2011).




Page 10                                               GAO-12-229 Troubled Asset Relief Program
investments. 18 Another 52 percent, or 165 institutions, exited CPP by
exchanging their securities under other federal programs: 28 through
CDCI and 137 through the Small Business Lending Fund (see fig. 3). 19 Of
the remaining 8 percent of CPP recipients that exited the program, 13
went into bankruptcy or receivership, 11 had their securities sold by
Treasury, and 2 merged with another institution.

Figure 3: Status of Institutions that Received CPP Investments, as of September 30,
2011




18
 Additionally, 12 institutions have made partial repayments but remain in the program.
19
  CDCI is a TARP program that provides capital to CDFIs that have a federal depository
institution supervisor. The program is structured like CPP but expands to include credit
unions and provides more favorable capital terms. The Small Business Lending Fund was
created by the Small Business Jobs Act of 2010, Pub. L. No. 111-240, 124 Stat. 2504
(2010), enacted on September 27, 2010. The Fund is a $30 billion capital support program
that encourages small and midsize banks and community development loan funds to lend
to small businesses.




Page 11                                        GAO-12-229 Troubled Asset Relief Program
Also, according to data in a Treasury report, as of September 30, 2011,
390 of the original 707 institutions remained in CPP but accounted for
only 8.4 percent of the original investments. Much of the $17.3 billion in
outstanding investments was concentrated in a relatively small number of
institutions. The largest single outstanding investment was $3.5 billion,
and the top four outstanding investments totaled $6.8 billion. The top 25
remaining CPP investments accounted for $11.3 billion.

The cumulative number of financial institutions that had missed at least
one scheduled dividend or interest payment by the end of the month in
which the payments were due rose from 164 as of November 30, 2010, to
226 as of November 30, 2011. 20 Institutions can elect whether to pay
dividends and may choose not to pay for a variety of reasons, including
decisions that they or their federal and state regulators make to conserve
cash and maintain (or increase) capital levels. Institutions are required to
pay dividends only if they declare dividends, although unpaid cumulative
dividends generally accrue and the institution must pay them before
making payments to other types of shareholders, such as holders of
common stock.

These 226 institutions had missed a cumulative total of 1,170 payments. 21
As of November 30, 2011, 184 institutions had missed three or more
payments, and 97 had missed six or more. The total amount of missed
dividend and interest payments was $429 million, although some of these
payments were later made prior to the end of the reporting month. On a
quarterly basis, the number of institutions missing dividend or interest
payments due on their CPP investments increased steadily from 8 in
February 2009 to 158 in November 2011, or about 42 percent of


20
  Under CPP terms, institutions pay cumulative dividends on their preferred shares,
except for banks that are not subsidiaries of holding companies, which pay noncumulative
dividends. Some other types of institutions, such as S corporations, received their CPP
investment in the form of subordinated debt and pay Treasury interest rather than
dividends. An S-corporation makes a valid election to be taxed under subchapter S of
chapter 1 of the Internal Revenue Code and thus does not pay any income taxes. Instead,
the corporation’s income or losses are divided among and passed through to its
shareholders.
21
  These figures differ from the number of dividend or interest payments outstanding
because some institutions made their payments after the end of the reporting month. CPP
dividend and interest payments are due on February 15, May 15, August 15, and
November 15 of each year, or the first business day subsequent to those dates. The
reporting period ends on the last day of the calendar month in which the dividend or
interest payment is due.




Page 12                                        GAO-12-229 Troubled Asset Relief Program
institutions still in the program (see fig. 4). 22 This increase occurred
despite reduced program participation, and the proportion of those
missing scheduled payments has risen accordingly. The number of
institutions missing payments stabilized in recent quarters; however, most
of these institutions had repeatedly missed payments. In particular, 119 of
the 158 institutions that missed payments in November 2011 had also
missed payments in each of the previous three quarters. Moreover, these
158 institutions had missed an average of 4.8 additional previous
payments, and only 7 had never missed a previous payment.

Figure 4: Number of Institutions Missing Scheduled Dividend or Interest Payments
by Quarter, as of November 30, 2011




Note: Dividend and interest payments are due on a quarterly basis. The number of participating
institutions on any given quarter did not reach 707 (i.e., the total number of institutions that
participated in CPP) because these institutions entered and exited the programs at different points in
time.




22
  In its dividend and interest reports, Treasury no longer considers a payment to be
missed or unpaid once the institution (1) repays its investment amount and exits CPP, (2)
repays dividends by way of capitalization at the time of exchange, or (3) enters bankruptcy
or its bank subsidiary is placed into receivership. We included such institutions in our
counts.




Page 13                                                GAO-12-229 Troubled Asset Relief Program
On July 19, 2011, Treasury announced that it had, for the first time,
exercised its right to elect members to the boards of directors of two of
the remaining CPP institutions. 23 In considering whether to nominate
directors, Treasury said that it would proceed in two steps. First, after an
institution misses five dividend or interest payments, Treasury sends OFS
staff members to observe board meetings. Second, once an institution
has missed six dividend payments, Treasury decides whether to
nominate a board member based on a variety of considerations, including
what it learns from the board meetings, the institution’s financial condition,
the function of its board of directors, and the size of its investment. 24

The financial strength of the participating institutions will largely determine
the speed at which institutions repay their investments and exit and the
amount of total lifetime income. Institutions will have to demonstrate that
they are financially strong enough to repay the CPP investments in order
to receive regulatory approval to exit the program. The institutions’
financial strength will also be a primary factor in their decisions to make
dividend payments, and institutions that continue to miss payments may
also have difficulty exiting CPP. Moreover, dividend rates will increase for
remaining institutions beginning in late 2013, up to 9 percent, which may
prompt institutions to repay their investments as that dividend increase
approaches. If broader interest rates are low, especially approaching the
dividend reset, banks could have further incentive to redeem their
preferred shares. Treasury will need to balance the goals of protecting
taxpayer-supported investments while expeditiously unwinding the
program. Treasury officials told us that Treasury’s practice was generally
to hold, rather than sell, its CPP investments. 25 As a result, Treasury’s
ability to exit the program largely depends on the ability of institutions to


23
  According to the standard terms of CPP, after participants have missed six dividend
payments—consecutive or not—Treasury can exercise its right to appoint two members to
the board of directors for that institution.
24
  Treasury reported that it might not nominate directors immediately after an institution
misses six payments but would develop a pool of candidates screened by executive
search firms it engaged. Board members whom Treasury nominates cannot be
government employees and must have the same fiduciary duties and obligations to the
institution’s shareholders as any other member of the board and receive the same
compensation from the institution.
25
   As noted in figure 3, Treasury has already sold some CPP investments. According to its
Section 105(a) reports Treasury may sell its holdings or exchange CPP securities “in
limited cases, in order to protect the taxpayers’ interest in the value of an investment and
to promote the objectives of EESA.”




Page 14                                          GAO-12-229 Troubled Asset Relief Program
                                repay their investments. However, Treasury officials noted that if
                                warranted, Treasury could change its practice in the future and sell its
                                investments. In an upcoming report, we plan to describe the financial
                                condition of the remaining CPP institutions and compare them with
                                institutions that already exited and those that never participated.

Financial Strength of CDCI      Treasury has disbursed $570 million to its 84 CDCI participants, 28 of
Participants Will Affect When   which had previously participated in CPP (see fig. 5). 26 As we previously
Treasury Exits the Program      reported, CDCI is structured similarly to CPP in that it provides capital to
                                financial institutions by purchasing equity and subordinated debt from
                                them. 27 No additional funds are available through the program, as CDCI’s
                                funding authority expired in September 2010. While no CDFIs have
                                repaid Treasury’s investment as of September 30, 2011, Treasury has
                                thus far received $10 million in dividend payments from CDCI
                                participants. Lastly, Treasury expects CDCI will cost approximately $182
                                million over its lifetime, almost a third of the $570 million obligated to the
                                program. Officials stated that CDCI has a cost, while CPP is estimated to
                                result in lifetime income, in part because CDCI provides a lower dividend
                                rate that increases the financing costs. CDCI also does not require
                                warrants of participating institutions, which would otherwise offset
                                Treasury’s costs.




                                26
                                  Institutions interested in transferring to CDCI from CPP were required to be (1) current
                                on dividend payments, (2) in good standing with CPP, and (3) in compliance with all
                                reporting requirements.
                                27
                                  While similar to CPP, CDCI differs from CPP in several important aspects: (1) CDCI
                                provides financial assistance to CDFIs, which in turn provide financial services to under-
                                served communities; (2) CDCI also provides assistance to credit unions, unlike CPP; and
                                (3) CDCI provides more favorable capital terms to its participants than CPP, including a
                                longer repayment period at a lower dividend rate. For more details, see GAO-11-74.




                                Page 15                                          GAO-12-229 Troubled Asset Relief Program
Figure 5: Status of CDCI, as of September 30, 2011




a
Treasury first announced CDCI in October 2009; however, the program first provided capital to
CDFIs in 2010.

Note: Treasury began holding common stock for CDCI after September 30, 2011.

As with CPP, Treasury must continue to monitor the performance of CDCI
participants because their financial strength will affect their ability to repay
Treasury and Treasury’s ability to exit the program. As of September 30,
2011, 5 of the 84 CDCI participants had missed at least one dividend or
interest payment, according to Treasury. While the continuing weak
economy could negatively affect distressed communities and the CDFIs
that serve them, the program’s low dividend rates may help participants
remain current on payments. When Treasury will exit CDCI is unknown
but the dividend rate that program participants pay increases in 2018,
which provides an incentive for some borrowers to repay before that rate
change occurs. As with CPP, Treasury officials indicated that while
Treasury’s current practice is to hold its CDCI investments, that strategy
could change and Treasury could opt to sell its CDCI shares.




Page 16                                              GAO-12-229 Troubled Asset Relief Program
Treasury’s Balancing of           Treasury has received more than $40 billion for its roughly $80 billion
Competing Goals and Market        AIFP investment, in large part from its participation in GM’s IPO and its
Conditions for AIFP Will Affect   exit from Chrysler. In November and December 2010, Treasury received
the Timing and Outcome of Its     $13.5 billion from its participation in GM’s IPO and $2.1 billion for selling
Future Exit                       preferred stock in GM. Treasury’s investment in Chrysler ended with the
                                  repayment of $5.1 billion in loans in May 2011 and the $560 million in
                                  proceeds that Treasury received from the sale of its remaining equity
                                  stake to Fiat in July 2011. Treasury received $2.7 billion from its sale of
                                  Ally Financial trust preferred securities in March 2011. 28

                                  Treasury’s timing of its exit from GM and Ally Financial—and ultimate
                                  return on its investment—will depend on how it balances its competing
                                  goals of maximizing taxpayer returns and selling its shares as soon as
                                  practicable. As figure 6 shows, all of the $37.3 billion in outstanding AIFP
                                  funds is from Treasury’s investments in GM and Ally Financial, including
                                  32 percent of GM’s common stock and 74 percent of Ally Financial’s
                                  common stock. 29




                                  28
                                    This amount includes $127 million of proceeds in excess of cost. Ally Financial was
                                  formerly known as the General Motors Acceptance Corporation, or GMAC.
                                  29
                                    If Treasury converted its mandatory convertible preferred securities, its common equity
                                  in Ally Financial would increase to more than 80 percent.




                                  Page 17                                         GAO-12-229 Troubled Asset Relief Program
Figure 6: Status of AIFP, as of September 30, 2011




                                         Note: Ally Financial was formerly known as the General Motors Acceptance Corporation, or GMAC.




                                         Page 18                                            GAO-12-229 Troubled Asset Relief Program
The timing of Ally Financial’s IPO will be critical to Treasury’s exit
strategy, but Ally Financial’s mortgage liabilities could hamper the
company’s efforts to launch an IPO and makes the timing of Treasury’s
exit from Ally Financial unknown. 30 On March 31, 2011, Ally Financial filed
a registration statement with the Securities and Exchange Commission
for a proposed IPO but a date has yet to be announced for the IPO.
Additionally, after six straight quarterly profits, including growing asset
balances for its auto loan business, the company posted a loss of $210
million in the third quarter of 2011, dropping from a profit of about $270
million in the third quarter of 2010, primarily due to losses in its mortgage
business. The company attributed these losses to the negative impact of
the mortgage servicing rights valuation, resulting from a decline in interest
rates and market volatility. Additionally, Ally Financial has $12 billion in
debt coming due in 2012.

Treasury officials told us that they continue to monitor market conditions
and other factors in determining a divestment strategy for GM, but share
prices would have to increase significantly from current levels to fully
recoup Treasury’s investment in GM. As we previously reported, GM’s
share price would have to increase by more than 60 percent from the IPO
share price of $33 to an average of more than $54 for Treasury to fully
recoup its investment. 31 However, over roughly the past year, GM’s
shares have traded far below the IPO share price—with shares closing
above $33 only twice since March 2011, and as of September 30, 2011,
the shares closed at $20.18 (fig. 7).




30
  Treasury has reported that given that it holds 74 percent of Ally Financial’s common
equity, it is likely to take 1 to 2 years following the IPO for the Treasury to dispose of its
ownership stake. Additionally, Treasury officials have not ruled out the possible sale of its
equity but noted that only a small number of institutions could digest an acquisition the
size of Ally Financial. Therefore, this course of action appears to be less feasible than an
IPO exit strategy.
31
  GAO-11-471. Additional reporting on AIFP appears in GAO, Troubled Asset Relief
Program: Automaker Pension Funding and Multiple Federal Roles Pose Challenges for
the Future, GAO-10-492 (Washington, D.C.: Apr. 6, 2010); Troubled Asset Relief
Program: Continued Stewardship Needed as Treasury Develops Strategies for Monitoring
and Divesting Financial Interests in Chrysler and GM, GAO-10-151 (Washington, D.C.:
Nov. 2, 2009); and Auto Industry: Summary of Government Efforts and Automakers’
Restructuring to Date, GAO-09-553 (Washington, D.C.: Apr. 23, 2009).




Page 19                                            GAO-12-229 Troubled Asset Relief Program
Figure 7: GM’s Share Price from November 18, 2010, through September 30, 2011, Compared to the IPO Share Price and Post-
IPO Share Price Needed to Recoup Treasury’s Investment




                                        The recent decline in the value of Ally Financial and reductions in the
                                        share prices of common stock holdings in GM highlight how market
                                        conditions contribute to the risk of AIFP. The projected lifetime cost of
                                        AIFP was $23.6 billion as of September 30, 2011, an increase from the
                                        $14.7 billion estimate as of September 30, 2010. This change is largely
                                        due to the decrease in the trading price of GM’s common stock and the
                                        decrease in the estimated value of Ally Financial. As Treasury balances
                                        its goals of exiting as soon as practicable and maximizing taxpayer
                                        returns, it will need to time its divestiture of GM and Ally Financial shares
                                        to help recover as much as possible of its investment. Treasury faces the
                                        tension of holding shares long enough to potentially recoup its
                                        investment, or divesting sooner, likely at a loss.

Treasury’s Plans to Sell AIG            In September 2008, prior to TARP, AIG received government assistance
Shares Are Driven by Market             in the form of a loan from the Federal Reserve Bank of New York
Conditions                              (FRBNY). In exchange, AIG provided shares of preferred stock to the AIG
                                        Credit Facility Trust created by FRBNY. These preferred shares were
                                        later converted to common stock and transferred to Treasury. In addition
                                        to this non-TARP support, Treasury provided TARP assistance to AIG in
                                        November 2008 by purchasing preferred shares that were also later
                                        converted to common stock. In late January 2011, following the



                                        Page 20                                    GAO-12-229 Troubled Asset Relief Program
recapitalization of AIG, Treasury owned 1.655 billion TARP and non-
TARP common shares in AIG. 32

Treasury began taking steps in January 2011 to unwind its interest in AIG
by conducting the first underwritten offering of its AIG common shares. As
we previously reported, Treasury sold 200 million TARP and non-TARP
shares in May 2011. 33 Overall, Treasury officials said that Treasury
realized a gain because the 200 million shares were sold at $29 per
share, which was more than Treasury’s overall cost basis of $28.7269 per
share. 34 Treasury’s 1.455 billion remaining shares after the sale consist of


32
  Specifically, in September 2008, a trust created by FRBNY received 100,000 shares of
Series C preferred stock and Treasury received a 77.9 percent voting interest in AIG, in
exchange for FRBNY providing AIG a revolving loan. This transaction predated TARP. In
November 2008, using TARP funds, Treasury purchased $40 billion in cumulative
preferred shares of Series D stock, which was exchanged in April 2009 for $41.6 billion of
Series E noncumulative preferred stock (the difference of $1.6 billion was in accumulated
but unpaid dividends on the Series D stock). That same month, also using TARP funds,
Treasury received 300,000 shares of Series F noncumulative preferred stock and a
warrant to purchase up to 3,000 shares of AIG common stock in exchange for providing
AIG a $29.835 billion equity facility. In January 2011, AIG was recapitalized and Treasury
exchanged its Series E and F preferred stock for 1.0921 billion shares of common shares.
We refer to these shares as “TARP shares.” Also in January, the trust exchanged its
Series C preferred stock for 562.9 million shares of common stock and subsequently
transferred these shares to Treasury (giving Treasury a total of 1.655 billion common
shares in AIG (or approximately 92 percent of the company). We refer to these shares as
“non-TARP shares.”
33
  The sale included about 132 million TARP AIG common shares on which Treasury had
a realized loss and about 68 million non-TARP AIG common shares on which Treasury
had a realized gain.
34
  See GAO, Troubled Asset Relief Program: The Government’s Exposure to AIG
Following the Company’s Recapitalization, GAO-11-716 (Washington, D.C.: July 18,
2011). As discussed in GAO-11-716, this calculation is based on a cash-in/cash-out
approach and reflects Treasury’s primary goal of recouping taxpayers’ costs. It includes
only the cost of the liquidation preferences in the Series E and Series F preferred
shares—$47.543 billion—to calculate a breakeven share price to be $28.73. Under a
different approach that captures $47.543 billion of liquidation preferences in Series E and
Series F preferred shares plus $1.605 billion of unpaid dividends and fees (for a total of
$49.148 billion), the breakeven share price would increase to approximately $29.70, which
represents the minimum average price at which Treasury would need to sell all of its
shares to fully recover the $49.148 billion. Additional AIG reporting includes GAO,
Troubled Asset Relief Program: Third Quarter 2010 Update of Government Assistance
Provided to AIG and Description of Recent Execution of Recapitalization Plan, GAO-11-46
(Washington, D.C.: Jan. 20, 2011); Troubled Asset Relief Program: Update of
Government Assistance Provided to AIG, GAO-10-475 (Washington, D.C.: Apr. 27, 2010);
and Troubled Asset Relief Program: Status of Government Assistance Provided to AIG,
GAO-09-975 (Washington, D.C.: Sept. 21, 2009).




Page 21                                         GAO-12-229 Troubled Asset Relief Program
960 million TARP and 495 million non-TARP shares. (AIG also sold 100
million shares of common stock during this offering.) The costs for
underwriting, Treasury’s financial advisors, and Treasury’s legal counsel
were paid by, and will continue to be paid by, AIG. Treasury, however,
pays the costs for assistance it receives from FRBNY. Based on the
September 30, 2011, market price of AIG common stock, in selling all of
its AIG common shares, Treasury expects to incur a lifetime cost of $24.3
billion for its TARP shares and receive income of $12.8 billion for its non-
TARP shares, giving it a lower than expected net estimated cost of $11.5
billion for assistance to AIG (see fig. 8). 35




35
  For example, in March 2010, CBO estimated that the cost of Treasury’s approximately
$70 billion in TARP assistance (the exchanged Series D/E and F stock mentioned in
footnote 34) to AIG would be about $36 billion. Unlike the other lifetime estimates reported
here, the lifetime income estimate of $12.8 billion for Treasury’s non-TARP shares has not
been audited by GAO, although it has been audited. The audited estimate was obtained
from the Department of the Treasury, Agency Financial Report (Washington, D.C.: Nov.
15, 2011).




Page 22                                          GAO-12-229 Troubled Asset Relief Program
Figure 8: Status of AIG Investment Program, as of September 30, 2011




                                        a
                                         When AIG was recapitalized in January 2011, Treasury exchanged all of its Series E preferred stock
                                        and some of its Series F preferred stock into common stock (the remainder of the Series F preferred
                                        stock was exchanged for preferred stock in AIA Aurora LLC and American Life Insurance Company
                                        Holdings LLC, two special purpose vehicles wholly owned by AIG). As a result of these exchanges,
                                        subsequent stock sale, and repayments on the special purpose vehicle preferred stock, Treasury now
                                        holds approximately 1.455 billion shares of AIG TARP common stock and about $8.858 billion in AIG
                                        TARP preferred interest (the AIA Aurora LLC special purpose vehicle).
                                        b
                                         During the AIG recapitalization, Treasury also exchanged its Series C shares of non-TARP preferred
                                        stock into common stock. Currently, Treasury holds 495 million shares of non-TARP common stock.

                                        AIG originally issued $16 billion of preferred shares in a special purpose
                                        vehicle (SPV) called AIA Aurora LLC (or AIA), an SPV created by FRBNY
                                        to hold shares of certain portions of AIG’s foreign life insurance
                                        businesses. Likewise, AIG issued $9 billion of preferred shares in an SPV
                                        called American Life Insurance Company (ALICO) Holdings LLC, which
                                        was created to hold AIG’s ALICO holdings. AIG issued the shares to
                                        FRBNY in December 2009 in exchange for a $25 billion reduction in
                                        FRBNY’s revolving loan to AIG. As part of the recapitalization plan
                                        executed on January 14, 2011, AIG redeemed FRBNY’s preferred shares



                                        Page 23                                              GAO-12-229 Troubled Asset Relief Program
by drawing down the Series F equity facility and selling assets. In turn,
FRBNY transferred to Treasury the proceeds, along with a cross
collateralization agreement against certain other AIG businesses, held for
sale. Since the recapitalization, AIG has used the additional sales
proceeds to reduce the remaining liquidation preferences of Treasury’s
preferred interests in the AIA and ALICO SPVs.

Treasury has not announced any time frames for selling its AIG
investments, but as it exits this assistance it needs to balance selling its
AIG stock as soon as practicable based on market conditions with
protecting taxpayers’ interests. Treasury officials said that the agency
would work to avoid economic losses during this exit. To that end,
Treasury officials said that the agency had waited to proceed with its first
underwritten offering of AIG common stock until (1) it reacquainted the
investment community with AIG and (2) AIG executed and closed other
transactions, such as the March 2011 sale of MetLife equity securities
and a subsequent March transaction that reduced the preferred interests
in the AIA SPV by approximately $5.6 billion. 36 The first underwritten
offering of Treasury’s AIG common shares occurred in May 2011.
Treasury expects to use underwritten offerings to sell most of its common
stock in AIG, with assistance from AIG. While Treasury generally prefers
to sell the common stock that it holds through underwritten offerings, it
could also decide to sell stock through other mechanisms, including more
frequent at-the-market offerings. 37

To sell its AIG stock, officials said that the agency planned to regularly
conduct analyses, consider market challenges, and rely on AIG to
facilitate Treasury’s offerings. Treasury officials have said that they would
continue to conduct analyses using factors such as AIG’s share price,
investor interest in AIG stock, and possible future restructuring. Treasury
officials also expect to face several challenges when disposing AIG stock.
First, because Treasury owns a significant amount of AIG stock—both as
a percentage of total company stock and in absolute terms—the amount
of shares the market can absorb may be limited. Second, continued price



36
  An “underwritten offering” is a method of issuing shares that targets one or more
underwriters, who buy them for their own account and then attempt to sell them to other
investors.
37
  An “at-the-market offering” is the sale of securities by an issuer into the public markets
at prevailing market prices.




Page 24                                           GAO-12-229 Troubled Asset Relief Program
                                   volatility in the domestic and global insurance markets could impede
                                   growth in these insurance markets. Third, the continued low interest rate
                                   environment could likely lead to lower investment incomes and overall
                                   profits for AIG, which in turn could affect Treasury’s opportunities to sell
                                   its AIG shares. According to Treasury officials, Treasury expects to rely
                                   on AIG to prepare and file certain paperwork with the Securities and
                                   Exchange Commission and provide other assistance when Treasury sells
                                   its remaining AIG shares. 38 Given the decline in AIG’s stock price since
                                   January 2011 and the recent volatility in the stock market, when
                                   Treasury’s exit will be completed is unknown. Treasury will also need to
                                   balance the tension of its competing goals by deciding whether it should
                                   exit even if the stock value is below Treasury’s break-even amount.

Treasury Continues Selling SBA     Treasury purchased 31 SBA 7(a) securities between March and
7(a) Securities to Expeditiously   September 2010 in an attempt to alleviate liquidity strains in secondary
Exit Markets                       markets for SBA 7(a) loans. 39 Treasury announced in June 2011 that it
                                   intended to sell these securities and has sold nearly three-quarters of the
                                   portfolio. As of October 2011, Treasury has sold 23 securities. Treasury
                                   has eight securities remaining to be sold and projects lifetime income of
                                   $3.9 million (see fig. 9).




                                   38
                                     This information is included in the registration rights portion of the December 2010
                                   recapitalization plan.
                                   39
                                     The SBA 7(a) program is SBA’s primary program for assisting small businesses to
                                   obtain access to credit when they cannot obtain it from private lending institutions. The
                                   program provides credit for working capital and other business needs.




                                   Page 25                                          GAO-12-229 Troubled Asset Relief Program
Figure 9: Status of SBA 7(a) Securities Purchase Program, as of September 30,
2011




Note: This figure represents financial information as of September 30, 2011. It does not include
information about securities sold after that date.

a
The program’s first activity was in March 2010, although it was first announced in March 2009.
b
 The program’s funding ended in September 2010, though some purchases that were previously
committed to prior to September were fulfilled after that date.

Treasury officials took into account market effects when they considered
exiting Treasury’s portfolio of SBA 7(a) securities. For example, Treasury
analyzed SBA lending and securitization volumes, which had recovered
to precrisis levels. 40 According to Treasury officials, Treasury also
consulted with its external advisor, EARNEST Partners, to understand the
potential effect of its sales on the markets. According to Treasury officials,
EARNEST Partners advised Treasury that its portfolio was small enough
not to affect liquidity in the $15 billion market for SBA 7(a) securities.
Moreover, the firm advised Treasury that it had received significant



40
  Our previous reporting on SBA 7(a) lending and securitization volumes demonstrated
declines during the onset of the financial crisis in 2008, though they recovered from their
lows in fiscal year 2010 based on SBA data. See GAO-11-74.




Page 26                                                GAO-12-229 Troubled Asset Relief Program
                               market interest in the securities after Treasury announced its intention to
                               sell them. Treasury officials concluded that it was an opportune time to
                               begin selling these securities without negatively affecting markets.

                               Treasury officials stated that they considered several tradeoffs in deciding
                               to sell the securities this year, rather than holding them for longer. Exiting
                               quickly appears to be the main consideration, although Treasury officials
                               stated that they balanced this with promoting financial stability and
                               protecting the taxpayer. To determine what prices are reasonable to
                               accept as it continues to sell these securities, Treasury requested market
                               price estimates from two companies for each security it held and
                               compared that to a break-even price and a reserve price, below which it
                               would require additional approvals to proceed with the sale. While
                               Treasury might have maximized taxpayer returns by holding the securities
                               longer, according to Treasury officials, it faced prepayment risk that could
                               have reduced the securities’ long-term earning potential. 41

Treasury Expects Lifetime      The Federal Reserve established TALF to reopen the securitization
Income from TALF and to Exit   markets in an effort to improve access to credit for consumers and
the Program by 2015            businesses. 42 Treasury agreed to contribute as much as $4.3 billion to
                               provide credit protection to FRBNY for TALF loans should borrowers
                               neglect to repay and subsequently surrender the asset-backed securities
                               (ABS) or commercial mortgage-backed securities (CMBS) pledged as




                               41
                                 Prepayment risk is the risk associated with the early, unscheduled return of principal.
                               Because Treasury paid a premium to purchase these securities, any prepayments would
                               result in losses for the amount that Treasury paid in excess of par.
                               42
                                 TALF provided loans to certain institutions and business entities in return for collateral in
                               the form of securities that are forfeited if the loans are not repaid. Securitization is a
                               process by which similar debt instruments—such as loans, leases, or receivables—are
                               aggregated into pools, and interest-bearing securities backed by such pools are then sold
                               to investors. These asset-backed securities (ABS) provide a source of liquidity for
                               consumers and small businesses because financial institutions can take assets that they
                               would otherwise hold on their balance sheets, sell them as securities, and use the
                               proceeds to originate new loans, among other purposes. Commercial mortgage-backed
                               securities (CMBS) are securitizations with cash flows backed by principal and interest
                               payments on a pool of loans on commercial properties. For additional information about
                               securitization and about TALF see GAO, Federal Reserve System: Opportunities Exist to
                               Strengthen Policies and Processes for Managing Emergency Assistance, GAO-11-696
                               (Washington, D.C.: July 21, 2011), and Troubled Asset Relief Program: Treasury Needs to
                               Strengthen Its Decision-Making Process on the Term Asset-Backed Securities Loan
                               Facility, GAO-10-25 (Washington, D.C.: Feb. 5, 2010).




                               Page 27                                           GAO-12-229 Troubled Asset Relief Program
collateral. 43 To date, Treasury has disbursed $100 million for start up
costs related to the TALF SPV, TALF LLC (see fig. 10). This SPV
receives a portion of the interest income earned on TALF loans that can
be used to purchase any borrower-surrendered collateral from FRBNY,
referred to as excess interest.

Figure 10: Status of TALF, as of September 30, 2011




a
 Although the program was first announced in November 2008, the first program activity was initiated
in March 2009.
b
 The book value of Treasury’s outstanding investments is the same as the $100 million contributed by
Treasury to the TALF SPV. The market value of Treasury’s outstanding investments is the net book
value for the $100 million TALF contribution calculated using Credit Reform Accounting.

FRBNY stopped issuing new TALF loans in 2010. 44 Treasury officials
report that FRBNY TALF loan balances have fallen from $29.7 billion in
September 2010 to $11.3 billion as of September 30, 2011. Agency



43
  Initially, Treasury was responsible for providing as much as $20 billion in credit
protection to FRBNY, but in July 2010, Treasury and the Federal Reserve agreed to
reduce the credit protection to $4.3 billion.
44
  TALF expired on March 31, 2010, for loans backed by ABS and legacy CMBS, and on
June 30, 2010, for loans backed by newly issued CMBS.




Page 28                                               GAO-12-229 Troubled Asset Relief Program
officials also indicated that all TALF loans are current and borrowers
continue to pay down their loans.

The excess interest in TALF LLC grew by more than 30 percent between
October 2010 and September 2011, from $523 million to $685.6 million.
As a result, if the TALF LLC balance exceeds the value of any
surrendered collateral, Treasury may not need to disburse any additional
funds for the program and could instead realize lifetime income, given
that it will receive 90 percent of funds remaining in TALF LLC after loans
are repaid and the program ends. In addition, the equity that borrowers
hold in TALF collateral has grown since TALF loans were first issued. 45
As of September 30, 2011, Treasury expects that TALF will result in
lifetime income of $421 million. Despite these positive trends, FRBNY and
Treasury staff continue to monitor market conditions and credit rating
agency actions that could affect TALF assets. Moreover, as we have
previously reported, market value fluctuations could affect future results.
In particular, continued volatility in global markets could be reflected in
CMBS pricing because, according to Treasury officials, CMBS has
exhibited greater correlation with investor sentiment and broad volatility in
other risk assets versus other types of ABS.

Treasury expects to exit TALF by 2015, although it does not have
complete control over its exit because its role in TALF is secondary to that
of the Federal Reserve. Treasury models loan repayments using TALF
loan terms and data provided by the Federal Reserve and projects
repayment schedules, collateral cash flows, prepayments, and
performance loss rates. Based on these analyses, Treasury expects that
the last TALF loan will be due in 2015. However, should any assets be
surrendered to TALF LLC, Treasury could be involved in TALF beyond
that date as it may be required to lend to TALF LLC to purchase and
manage assets until they are sold or reach maturity.




45
  The FRBNY establishes the “haircut” or amount of equity the borrower holds in TALF
collateral based on its weighted average life and market risks for each sector and sub
sector. The haircut is also the difference between the value of the TALF collateral and the
value of the loan. In other words, if haircuts have grown, the borrower has more equity in
the collateral and should be more likely to pay off the loan and keep the pledged collateral.
See GAO-10-25 for more details.




Page 29                                          GAO-12-229 Troubled Asset Relief Program
Remaining PPIP Funds   Treasury created PPIP, partnering with private funds, to purchase
Continue to Invest,    troubled mortgage-related assets from financial institutions. PPIFs are in
Although One Fund Is   their 3-year investment period, which starts at a fund’s inception date.
                       There were nine PPIFs established through PPIP. 46 The investment
Unwinding Prior to
                       period ends for each of the remaining PPIFs between October and
Expected End Date      December 2012, at which time the PPIFs can no longer draw money from
                       Treasury or make new investments. 47 Once the investment period ends,
                       PPIFs must begin the process of unwinding their positions and must
                       completely divest within 5 years—although Treasury can decide to extend
                       this period for up to two additional years for each PPIF. One fund notified
                       Treasury in September 2011 that it terminated its investment period and
                       therefore will no longer actively invest. Therefore, this fund has begun to
                       unwind.

                       According to Treasury, PPIFs have accessed about 80 percent of the
                       equity and debt available through Treasury and private investors as of
                       September 30, 2011, and have repaid a total of $1.2 billion in debt
                       financing as of September 30, 2011. Treasury estimates that PPIP will
                       ultimately result in lifetime income of about $2.4 billion (see fig. 11).
                       However, the ultimate results will depend on a variety of factors, including
                       when PPIFs choose to divest and the performance of the assets they
                       hold.




                       46
                        One PPIF liquidated in the first quarter of 2010.
                       47
                         PPIFs received an approximately equal share of equity from Treasury and private
                       investors. PPIFs also received access to credit from Treasury. PPIFs draw on these funds
                       to invest in eligible RMBS and CMBS.




                       Page 30                                          GAO-12-229 Troubled Asset Relief Program
Figure 11: Status of PPIP, as of September 30, 2011




a
 PPIFs began their investment periods in 2009. Active PPIFs will continue to invest until the
investment period ends in 2012. The program was first announced in March 2009.
b
The stipulated exit date is 2017, though the program could be extended through 2019.

While PPIFs are in the investment period, Treasury officials said that their
role is to follow the progress of each PPIF’s investment strategy, the risks
being taken in each portfolio, and the target returns for each portfolio. In
this role, Treasury staff and contractors monitor compliance with PPIP
terms. Also, Treasury has hired a contractor to provide investment fund
consulting and analysis of PPIF portfolios.




Page 31                                                GAO-12-229 Troubled Asset Relief Program
Current PPIP terms stipulate an exit by 2017. 48 Unlike some other TARP
programs, Treasury officials do not face the same consideration of
competing goals in exiting the program, given that the terms of the
program dictate when the PPIFs must wind down. However, Treasury
officials noted that PPIFs can liquidate at any time. Given that one PPIF
has chosen to end its investments as of September 30, 2011, it is
possible that if others follow the program could end sooner than
estimated. Such action by PPIFs would affect Treasury’s estimates for
future income from the program when it ends. Officials also noted that the
program was designed to encourage firms to deleverage after the
investment period, at which time PPIFs would no longer have access to
debt financing from Treasury. Once the investment period concludes, the
PPIFs can no longer access funds from Treasury and must pay down the
Treasury loan and make distributions to the partners as RMBS and
CMBS are sold. Officials noted that this program structure creates an
incentive for PPIFs to sell their assets promptly once their access to
Treasury credit ends. Treasury officials noted that they were not
concerned about the effect of PPIP’s eventual wind down on markets, as
the 5-year period for unwinding would likely mitigate any potential impact.




48
  While PPIP is scheduled to end in 2017, which is 8 years after the last PPIP was
initiated, it could be extended for 2 years. Such decisions would occur on a case-by-case
basis for each PPIF, depending on market conditions and other factors.




Page 32                                         GAO-12-229 Troubled Asset Relief Program
Unlike Most Other         To help meet EESA’s goals of preventing avoidable foreclosures and
Programs, TARP-Funded     preserving homeownership, Treasury has allocated $45.6 billion in TARP
Housing Programs Remain   funds to three programs: Making Home Affordable (MHA), which has
                          several components; Hardest Hit Fund (HHF); and the Department of
Ongoing and Represent     Housing and Urban Development’s Federal Housing Administration (FHA)
Direct Outlays of TARP    Short Refinance Program (see fig. 12). Treasury could potentially
Funds                     disburse TARP funds under these three programs for several more
                          years—until September 2020 in the case of the FHA Short Refinance
                          program. Unlike other TARP-funded programs, the expenditures under
                          these three housing programs are direct outlays of funds with no
                          provision for repayment. Given these characteristics, Treasury does not
                          face the same tension between exiting programs as soon as practicable
                          and maximizing taxpayer returns as it does with some other TARP
                          programs.




                          Page 33                               GAO-12-229 Troubled Asset Relief Program
Figure 12: TARP-funded Housing Programs, Amounts Obligated and Disbursed,
and Reported Activity through September 2011




a
 Borrowers have until December 31, 2012, to accept their trial period plan for HAMP by making a
timely first trial payment. Trial modifications must be successful for at least 3 months before
borrowers can convert into a permanent modification. Incentive payments can be made for up to 5
years after the date of conversion from a trial modification. Additionally, servicers can take several
months before submitting loan data for incentive payments. As a result, Treasury officials estimated
that the last HAMP incentive payment would likely occur sometime in mid-2018.
b
 Treasury’s estimated lifetime cost estimates reflect the actual outlay of funds to the housing
programs and do not utilize the same credit reform accounting as the other program-specific lifetime
cost estimates.

The centerpiece of Treasury’s MHA program is HAMP, which seeks to
help eligible borrowers facing financial distress avoid foreclosure by



Page 34                                                GAO-12-229 Troubled Asset Relief Program
reducing their monthly first lien mortgage payments to more affordable
levels (31 percent of their monthly income). 49 Treasury announced HAMP
on February 18, 2009. Borrowers have until December 31, 2012, to
accept an offered trial period plan by making a timely first trial period
payment. Under HAMP, Treasury shares the cost of lowering borrowers’
monthly payments from 38 to 31 percent of monthly income for a 5-year
period with the mortgage holder or investors. Treasury also provides a
series of incentive payments to servicers, investors, and borrowers if
specific program conditions are met. Treasury originally announced that
up to 3 to 4 million borrowers would be helped under HAMP. 50 Through
September 2011, Treasury reported that 856,974 permanent
modifications had been started and, as shown in figure 13, monthly
activity to date peaked during the early part of 2010. 51 These results likely
reflect Treasury’s decision to require all servicers starting on June 1,
2010, to perform full verification of borrower’s eligibility for HAMP before
initiating a trial modification (previously servicers were allowed to offer
trial modifications using unverified information provided by the borrower).
Monthly trial modification starts during September 2011 were the lowest
reported since January 2010. Treasury recently announced that it had
launched a nationwide advertisement campaign to increase awareness of
the MHA program among eligible homeowners.




49
  To be eligible for HAMP: (1) the property must be owner occupied and the borrower’s
primary residence; (2) the property must be a single-family property (one to four units) with
a maximum unpaid principal balance on the unmodified first lien mortgage that is equal to
or less than $729,750 for a one-unit property; (3) the loan must have been originated on or
before January 1, 2009; and (4) the monthly first lien mortgage payment must be more
than 31 percent of the homeowner’s gross monthly income.
50
  We have made a number of recommendations to Treasury regarding its efforts to
implement the MHA program. See GAO-11-288; Troubled Asset Relief Program: Further
Actions Needed to Fully and Equitably Implement Foreclosure Mitigation Programs,
GAO-10-634 (Washington, D.C.: June 24, 2010); and Troubled Asset Relief Program:
Treasury Actions Needed to Make the Home Affordable Modification Program More
Transparent and Accountable, GAO-09-837 (Washington, D.C: July 23, 2009). While
Treasury has taken various actions consistent with our recommendations, several of our
MHA-related recommendations remain open. See GAO, Troubled Asset Relief Program:
Status of GAO Recommendations to Treasury, GAO-11-906R (Washington, D.C.: Sept.
16, 2011).
51
 Under HAMP, borrowers must successfully complete a trial modification of at least 3
months (90 days) before receiving a permanent modification.




Page 35                                          GAO-12-229 Troubled Asset Relief Program
Figure 13: HAMP Modifications Started Monthly from January 2010 through September 2011




                                       In addition to HAMP, Treasury has implemented a number of additional
                                       MHA components that use TARP funds to augment or complement the
                                       HAMP first lien modification program: 52

                                       •   Home Affordable Foreclosure Alternatives Program. The Home
                                           Affordable Foreclosure Alternatives Program offers assistance to
                                           homeowners looking to exit their homes through a short sale or deed-
                                           in-lieu of foreclosure. Treasury offers incentives to eligible
                                           homeowners, servicers, and investors under the program. Through
                                           September 2011, servicers reported completing 18,043 short sales
                                           and 514 deeds-in-lieu under the program.




                                       52
                                         Treasury’s MHA program also has the Home Affordable Unemployment Program that
                                       does not entail the use of TARP or other federal program funds. The Unemployment
                                       Program provides temporary forbearance to homeowners who are unemployed and
                                       requires servicers participating in MHA to grant qualified unemployed borrowers a
                                       forbearance period during which their mortgage payments are temporarily reduced or
                                       suspended for a minimum of 12 months while they look for new jobs. Borrowers can apply
                                       for a HAMP modification upon finding employment or prior to the expiration of the
                                       forbearance period. Treasury reported that 14,996 Unemployment Program forbearance
                                       plans had been started through August 2011.




                                       Page 36                                       GAO-12-229 Troubled Asset Relief Program
•   Home Price Decline Protection Incentives. Home Price Decline
    Protection Incentives provides investors with additional incentives for
    HAMP modifications of loans on properties located in areas where
    home prices have recently declined and where investors are
    concerned that price declines may persist. Through September 2011,
    Treasury has paid about $135 million to investors in program
    incentives to support the HAMP modification of 83,028 loans.

•   Principal Reduction Alternative (PRA). PRA requires servicers of
    nongovernment sponsored enterprise loans to evaluate the benefit of
    principal reduction for mortgages with a loan-to-value ratio of 115
    percent or greater when evaluating a homeowner for a HAMP first lien
    modification. While servicers are required to evaluate homeowners for
    PRA, they are not required to reduce principal as part of the
    modification. PRA can be a component of a HAMP trial or permanent
    modification. Through September 2011, servicers reported having
    started 29,342 permanent modifications that had the principal reduced
    under PRA.

•   Second Lien Modification Program. The Second Lien Modification
    Program provides additional assistance to homeowners receiving a
    HAMP first lien permanent modification who have an eligible second
    lien with participating servicers. When a borrower’s first lien is
    modified under HAMP, participating program servicers must offer to
    modify the borrower’s eligible second lien according to a defined
    protocol. 53 This assistance can result in a modification or even full or
    partial extinguishment of the second lien. Through September 2011,
    servicers reported starting 45,705 second lien modifications, of which
    6,332 had the second lien fully extinguished.

•   Government loans (FHA- and RD-HAMP). FHA and the Department
    of Agriculture’s Rural Housing Services (RHS) have implemented
    programs to modify FHA-insured or RHS-guaranteed first lien
    mortgage loans in a manner complementary to HAMP. Each of these
    programs provides a borrower with an affordable monthly mortgage
    payment equal to 31 percent of his or her monthly gross income and


53
  In order to be eligible for a Second Lien Modification Program modification, the loan
must meet certain criteria. For example, it must have been originated on or before
January 1, 2009; have an unpaid balance of greater than $5,000 and have a
premodification monthly payment greater than $100; and can be modified only once under
the program.




Page 37                                       GAO-12-229 Troubled Asset Relief Program
    requires the borrower to complete a trial payment plan before the loan
    is permanently modified. If the modified FHA-insured or RHS-
    guaranteed mortgage loan meets Treasury’s eligibility criteria, the
    borrower and servicer can receive TARP-funded incentive payments
    from Treasury. Treasury reported that there were 4,671 permanent
    FHA-HAMP modifications that had been started through September
    2011. According to Treasury officials, servicers have not reported any
    activity for the Rural Development (RD)-HAMP program as of
    September 30, 2011.

•   Treasury/FHA Second Lien Program (FHA2LP). Under this program,
    Treasury will provide incentive payments to servicers and investors if
    they partially or fully extinguish second liens associated with an FHA
    Short Refinance. According to Treasury officials, no second liens have
    been extinguished, and no incentive payments have been made
    under the Treasury/FHA Second Lien Program as of September 30,
    2011.
To facilitate this refinance opportunity, Treasury will provide incentives
under its TARP-funded FHA2LP to servicers and investors that partially or
fully extinguish second liens associated with an FHA Short Refinance.
Servicers can receive a one-time payment of $500 for each second lien
extinguished under the program and investors are eligible for incentive
payments based on the amount of principal extinguished. According to
Treasury officials, servicers have reported no activity under FHA2LP as of
September 30, 2011.

In addition to the MHA program, Treasury has allocated $7.6 billion in
TARP funds for the Hardest Hit Fund (HHF), which seeks to help
homeowners in the states hit hardest by unemployment and house price
declines: Alabama, Arizona, California, Florida, Georgia, Illinois, Indiana,
Kentucky, Michigan, Mississippi, Nevada, New Jersey, North Carolina,
Ohio, Oregon, Rhode Island, South Carolina, and Tennessee plus the
District of Columbia. States were chosen because they have experienced
either steep home price declines or high levels of unemployment in the
economic downturn. According to Treasury, each state housing agency
gathered public input to implement programs designed to meet the
distinct challenges homeowners in their state were facing. As a result,
HHF programs vary across states, but services offered often include
mortgage payment assistance for unemployed homeowners and
reinstatement assistance to cover arrearages (e.g., one-time payment to
bring a borrower’s delinquent mortgage current). According to Treasury, it
paid approximately $700 million to the states for the HHF program as of



Page 38                                 GAO-12-229 Troubled Asset Relief Program
the end of September 2011 and the states reported having helped about
19,025 homeowners during this approximate time period.

Treasury has also allocated $8.1 billion in TARP funds to the FHA Short
Refinance program to enable homeowners whose mortgages exceed the
value of their homes to refinance into more affordable mortgages. This
opportunity allows borrowers who are current on their mortgage to qualify
for an FHA Short Refinance loan provided that the lender or investor
writes off the unpaid principal balance of the original first lien mortgage by
at least 10 percent. Treasury entered into a letter of credit facility with
Citibank in order to fund up to $8 billion of losses, if any, associated with
providing FHA Short Refinance loans originated on or before December
31, 2012. Treasury’s commitment extends until September 2020, and to
the extent that FHA experiences losses on those refinanced mortgage
loans, Treasury will pay claims up to the predetermined percentage after
the FHA has paid its portion of the claim. Treasury will also pay a fee to
the issuer of the letter of credit based on the amount of funds drawn
against the letter of credit and any unused amount. Treasury has
estimated that the letter of credit fee will be $55 million over the life of the
program. As of August 31, 2011, FHA had guaranteed 334 loans with a
total face value of $73 million under the refinance program. No defaults
had occurred on these guarantees to date. As of August 31, 2011,
Treasury has paid a total of $4.9 million to Citibank ($1.9 million during
fiscal year 2011) in fees as the letter of credit issuer.




Page 39                                   GAO-12-229 Troubled Asset Relief Program
Treasury Continues to
Address Staffing
Needs While Also
Relying on Financial
Agents and
Contractors to
Support TARP
Administration and
Programs

OFS Staffing Declined         As we have identified in previous reports, Treasury still faces staffing
Slightly for the First Time   challenges, including recent turnover stemming from the departure of
and Treasury Is Addressing    term-appointed staff, but it has been addressing these challenges. Overall
                              staffing numbers steadily increased from 2008 through 2010 but began
Turnover-Related Staffing     declining for the first time in 2011 (see fig. 14).
Issues




                              Page 40                                GAO-12-229 Troubled Asset Relief Program
Figure 14: OFS Employees and Detailees, November 21, 2008, through September
30, 2011




Also, as we previously reported in September 2011, OFS no longer has
detailees from other federal agencies. When OFS was first organized, it
relied on a significant number of staff from other agencies to start up new
TARP programs. With most TARP programs winding down, OFS officials
stated that OFS has begun to detail OFS staff to other Treasury
programs, such as the Small Business Lending Fund (SBLF), and other
federal agencies, such as the Bureau of Consumer Financial Protection.
From September 2010 through September 2011, about 65 staff left OFS,
according to Treasury officials.

As overall staffing numbers have declined, staffing levels within individual
OFS offices have fluctuated depending on staffing needs. In some offices,
for instance, staff levels have decreased. For example, in the Chief
Investment Office—which includes staff working on various TARP
programs, such as CPP—more than half of the staff departed from June
2010 to September 2011 (a decrease of 20 staff from 2010). Though
some Chief Investment Office staff were replaced with staff in other OFS


Page 41                                  GAO-12-229 Troubled Asset Relief Program
offices and staff that were new to Treasury, many were not replaced
because their skill sets were no longer needed given the wind-down
phase of investment programs. Conversely, staff have increased in
certain OFS offices where OFS management had identified specific
needs. For example, the number of staff in the Office of Internal Review
(OIR), which identifies risks and develops procedures for complying with
EESA, increased from June 2010 to September 2011. Treasury had been
seeking new staff with the skill set needed for this work, as we previously
reported, and officials stated that the increase reflected a need to
continue monitoring compliance among Treasury financial agents and
contractors. Treasury filled these positions in part by streamlining the
hiring process and better targeting its job announcements. Treasury
officials anticipate that staffing levels in most OFS offices will decrease
over time, though it will continue to seek talent for OIR, the Chief
Financial Office, and the TARP housing programs that remain active.

In addition to changes in staff numbers and office composition, OFS has
had a number of its leadership team depart since 2010. As we previously
reported, the Assistant Secretary of Financial Stability resigned on
September 30, 2010. His replacement is OFS’s former Chief Counsel,
who was sworn in as Assistant Secretary in July 2011. An acting Chief
Counsel has assumed the Assistant Secretary’s former role. Other staff in
leadership positions have resigned since we last reported in January
2011. The Chief Investment Officer and the Chief of Operations both left
OFS and were replaced internally by OFS staff members. Both of these
departing staff were in 3-year term senior executive service positions that
were set to expire, according to Treasury officials. The Chief of
Operations position is now held by a permanent staff member in an acting
capacity, while the Chief Investment Officer position remains a term
position. Program leadership has also changed for Treasury’s first and
largest program, CPP. Its director left Treasury in 2011 and was replaced
with another staff member from the Chief Investment Office.

Though OFS has experienced staff turnover and still faces staffing
challenges, OFS has been addressing these and other staffing issues.
For example:

•   As we previously reported, we recommended that OFS finalize its
    staffing plan. Treasury has implemented this recommendation, which
    should help OFS better ensure that it recognizes and addresses its




Page 42                                 GAO-12-229 Troubled Asset Relief Program
      staffing challenges, given that many staff still remain in term
      appointments. 54 As a result of this plan, OFS produced information on
      critical positions that should remain or be filled and successors for all
      of the chiefs and those in critical management positions directly below
      the chief level. OFS also plans to conduct succession planning for
      other staff below the management level.

•     OFS now hires predominantly term-appointed staff for a maximum of
      2 years, according to Treasury officials. Previously, it hired staff for
      “permanent” positions as well as term-appointed positions with a
      maximum of 4 years. Treasury officials noted that they made this
      change in recognition of the fact that most of its programs are winding
      down. Additionally, limiting new hires to shorter-term appointments
      reduces the number of staff that Treasury will need to absorb when
      OFS closes.

•     OFS has also filled or removed a number of vacancies to recognize
      that it is in a period of winding down. Specifically, OFS vacancies
      decreased from 61 in 2010 to 29 as of September 30, 2011.

In addition, OFS continues to address employee morale concerns. As we
previously reported, an employee survey in 2010 identified
communication and staff development as two areas for improvement.
According to Treasury officials, OFS took steps to address
communication concerns through a monthly newsletter; “lunch and learn”
sessions on a variety of topics; and briefings attended by senior Treasury
officials, such as the Secretary of the Treasury. To address concerns
about staff development, OFS officials said that they increased training
offerings and provided the opportunity to complete professional
development plans. Treasury has also been assisting term-appointed
staff. For example, Treasury officials stated that they have continued to
provide information sessions for those staff on term appointments that are
seeking permanent positions in the federal government. Officials also
noted that they have briefings on helping staff in term appointments
understand the terms of the appointment and to find opportunities for
detail positions to other agencies.




54
    See GAO-11-906R for more information.




Page 43                                     GAO-12-229 Troubled Asset Relief Program
Treasury Increased Its Use              Treasury continues to rely heavily on financial agents to support TARP
of Financial Agents and                 programs. According to OFS procedures, financial agency agreements
Contractors                             are used for services that cannot be provided with existing Treasury or
                                        contractor resources and generally involve inherently governmental
                                        functions. Since the start of TARP, Treasury has relied on financial
                                        agents for asset management, transaction structuring, disposition
                                        services, custodial services, and administration and compliance support
                                        for the TARP housing assistance programs. Through fiscal year 2011,
                                        Treasury awarded 17 financial agency agreements, of which 14 remain
                                        active. As shown in table 2, the total obligated value of financial agency
                                        agreements increased from about $327 million to about $547 million, or
                                        67 percent, from the end of fiscal year 2010 to the end of fiscal year 2011.
                                        Treasury awarded two new financial agency agreements in fiscal year
                                        2011 for transaction structuring and disposition services.

Table 2: Contracts and Financial Agency Agreements in Support of TARP, Fiscal Years 2010 through 2011

                               Obligated value
                                       through                             Obligated valuea           Increase from fiscal years 2010
                               fiscal year 2010                     through fiscal year 2011                   through 2011
Financial agency
agreements                        $327,355,188                                   $547,487,042             $220,131,854               67%
Contracts                          108,907,207                                    154,934,812               46,027,605                 42
Total                             $436,262,395                                   $702,421,854             $266,159,459               61%
                                        Source: GAO analysis of Treasury data.

                                        a
                                         Obligated value generally includes obligations from the beginning of TARP through the end of the
                                        fiscal year, according to agency officials.

                                        As shown in table 3, five financial agency agreements accounted for 87
                                        percent of the total obligated value through fiscal year 2011—about $476
                                        million out of about $547 million. The vast majority of these obligations,
                                        approximately $383 million, went to Fannie Mae and Freddie Mac, which
                                        provide administrative and compliance services, respectively, for HAMP. 55




                                        55
                                           Congress established Fannie Mae and Freddie Mac as for-profit, shareholder-owned
                                        corporations to stabilize and assist the U.S. secondary mortgage market and facilitate the
                                        flow of mortgage credit.




                                        Page 44                                                 GAO-12-229 Troubled Asset Relief Program
Table 3: Top Five Financial Agency Agreements

Financial agent (award date-                                            Obligated value           Obligated value    Percent increase
completion date including         TARP investment                    through fiscal year       through fiscal year    from fiscal year
options to extend agreement)      program                                          2010                      2011                2010
Fannie Mae                        HAMP                                          $126,712,000        $239,870,429                  89%
(2/18/2009-2/17/2019)
Freddie Mac                       HAMP                                            88,850,000          143,060,025                   61
(2/18/2009-2/17/2019)
Bank of New York Mellon           All programs                                    28,495,411           42,108,749                   48
(10/14/2008-10/14/2015)
AllianceBernstein                 •   CPP                                         22,399,943           33,213,445                   48
(4/21/2009-4/20/2018)             •   AIFP
                                  •   AIG Investments
FSI Group                         •   CPP                                         11,102,500           18,041,838                   63
(4/21/2009-4/20/2018)             •   Asset Guarantee
                                      Program
Total                                                                           $277,559,854        $476,294,486                  72%
                                       Source: GAO analysis of Treasury data.


                                       Treasury also heavily relies on contractors to help administer TARP
                                       programs. Treasury uses TARP contracts for a variety of legal,
                                       investment consulting, accounting, and other services and supplies.
                                       Through fiscal year 2011, Treasury had awarded or used 116 contracts
                                       and blanket purchase agreements, up from 81 last year, and about half of
                                       them remain active. 56 As shown in table 2, the total obligated value of
                                       these contracts has increased 42 percent since 2010, from $109 million to
                                       $155 million. About 75 percent of the contracts and blanket purchase
                                       agreements are relatively small (less than $1 million each). The two
                                       largest contracts are $33 million (with PricewaterhouseCoopers, LLP for
                                       internal control services) and $17 million (with Cadwalader, Wickersham
                                       & Taft, LLP for legal services).

                                       From the outset, Treasury encouraged small and minority- and women-
                                       owned businesses to pursue opportunities for TARP contracts and
                                       financial agency agreements. The number of contracts and financial
                                       agency agreements that went to small and minority-owned businesses
                                       increased since 2010 from 16 to 31 (as shown in table 4). Also, 6 of the


                                       56
                                         The 116 contracts and blanket purchase agreements include 6 contractual
                                       arrangements in which OFS is engaging vendors that have existing contracts with other
                                       Treasury offices or bureaus or with other federal agencies.




                                       Page 45                                                   GAO-12-229 Troubled Asset Relief Program
                                      17 total financial agency agreements and 25 of the 116 total contracts
                                      were with these businesses through 2011. In addition, 73 subcontracts
                                      under financial agency agreements and prime contracts went to small
                                      and/or minority- and women-owned businesses. As in previous years, the
                                      majority of these businesses participating in TARP are subcontractors.

Table 4: TARP Contracts, Financial Agency Agreements, and Subcontracts with Small and Minority- and Women-Owned
Businesses through Fiscal Years 2010 and 2011

                                                                               Fiscal year
                         2010        2011                    2010              2011             2010        2011           2010       2011
                                                                                             Subcontracts under
                                                                                             prime contracts and
                                                                                                  contracts under       Total participation
Business                                                   Financial agency                      financial agency                 by small
category                  Prime contractsa                     agreementsa                           agreementsb               businesses
Minority-ownedc              0             0                       5              5                16         16             21         21
Woman-owned                  2             5                       1              1                14         20             17         26
Other smalld                 8            20                       0              0                19         37             27         57
 Total                     10             25                       6              6                49         73             65        104
                                      Source: GAO analysis of Treasury data.

                                      a
                                          Data as of September 30, 2011. GAO’s analysis does not include task orders.
                                      b
                                       As of September 30, 2011, TARP financial agents and prime contractors had awarded 130
                                      subcontracts.
                                      c
                                       Includes both small and nonsmall minority-owned businesses and minority woman-owned
                                      businesses.
                                      d
                                       Includes small businesses, service-disabled veteran-owned small businesses, and small
                                      disadvantaged businesses.


Treasury Has Continued to             As we have reported, when Treasury began to quickly implement TARP
Strengthen Management                 initiatives in 2008, OFS had not finalized its procurement oversight
and Oversight of Financial            procedures and lacked comprehensive internal controls for contractors
                                      and financial agents. Further, it did not have a comprehensive compliance
Agents and Contractors                system to monitor and fully address vendor-related conflicts of interest.
and Conflicts-of-Interest             Last year we reported that OFS had put in place an appropriate
Requirements                          infrastructure to manage and monitor its network of financial agents and
                                      contractors. Specifically, by the end of fiscal year 2010, OFS had:

                                      •        defined organizational roles and responsibilities and established
                                               written policies and procedures for the management and oversight of
                                               TARP financial agents;




                                      Page 46                                                     GAO-12-229 Troubled Asset Relief Program
•    taken action to ensure that sufficient personnel were assigned and
     properly trained to oversee the performance of financial agents and
     contractors;

•    issued written procedures on measuring the performance of financial
     agents and installed qualitative and quantitative performance
     measures for several of its financial agents; and

•    issued regulations on conflicts of interest, established an internal
     reporting system for tracking all vendor conflict-of-interest
     certifications, inquiries, and requests for waivers, and completed
     renegotiations of three contracts that predated the regulations.

In fiscal year 2011, Treasury continued to strengthen its policies and
procedures for managing financial agents and contractors and conflicts of
interest. For example, contract administration personnel made
improvements to OFS’s contract record system, including controls and
clear deadlines for validating and certifying the completeness and
accuracy of the information. 57 According to an OFS official responsible for
contracting, contract administration personnel audited most of the items in
the record system by tracing the items back to source documents, and
found some areas that needed to be improved. Data fields that were used
for informational purposes only, such as the contract specialist’s
telephone number, were not selected for audit. Fields selected included
date of award, contractor, potential contract value, and socioeconomic
status. Contract actions were matched against data in the Federal
Procurement Data System-Next Generation before deciding whether the
items needed to be traced back to source documents. 58 According to the
official, new controls were established for adding new contract information
to the system and documentation procedures were developed to improve
data consistency.

The Office of Financial Agents (OFA) also expanded its implementation of
performance assessments of financial agents by issuing performance


57
  OFS’s contract record system is an Excel spreadsheet that contains the award date;
performance end date; obligations to date; socioeconomic category; description of
services; and other information related to its contracts, financial agency agreements, and
interagency agreements.
58
  The Federal Procurement Data System-Next Generation is the federal government’s
primary data system for tracking information on contracting actions.




Page 47                                          GAO-12-229 Troubled Asset Relief Program
measures and initiating assessments for five additional financial agents,
including Fannie Mae. Quarterly performance assessments are now
conducted for all of the active financial agents. OFA establishes
qualitative and quantitative performance measures, with input from the
financial agent, based on the core functions and responsibilities described
in each financial agency agreement. OFA staff review financial agents’
performance against the qualitative and quantitative measures and
prepare an overall performance assessment. The OFA reviews have
identified areas in which a financial agent is performing above
expectations or needs improvement. According to an OFA official, the
performance reviews have been an important management tool and
helped improve compliance through active communication and dialog with
the financial agents. For those financial agents eligible to receive
incentive payments, the performance reviews can affect the amount of
payment. 59 OFA may revise the performance measures annually to
ensure continued alignment with the financial agents’ scope of work and
OFS priorities.

The OIR took several actions to strengthen oversight of conflicts-of-
interest requirements over the last year. Specifically, we found the
following:

•    OIR began conducting on-site compliance reviews to determine
     whether financial agents’ internal controls and procedures are
     working. According to Treasury officials, six reviews were conducted
     in fiscal year 2011. Treasury found that five of the financial agents
     reviewed had reasonable internal controls in place. There were no
     significant findings, although OIR made some recommendations. The
     review of the remaining financial agent identified significant
     weaknesses in its controls and in organizational management and
     oversight. As a result of the review, the relationship with the financial
     agent was terminated. Thus far, the on-site compliance reviews have
     been of financial agents, but OIR plans to begin reviewing contractors
     in the near future.




59
  According to Treasury officials, incentive payments for exceeding performance
measures are not available for Freddie Mac, Fannie Mae, Lazard Frères, EARNEST
Partners, Morgan Stanley, Greenhill and Co., and Perella Weinberg Partners based on the
terms of the agreements.




Page 48                                       GAO-12-229 Troubled Asset Relief Program
•   In 2011, OIR began preparing a quarterly conflicts-of-interest
    feedback report for contractors. The report is shared with the
    Contracting Officer’s Technical Representatives and included in the
    contractor performance metrics that are incorporated into Contract
    and Agreement Review Board reports. 60 OIR’s reports describe and
    rate contractors’ performance during the quarter in identifying,
    mitigating, and disclosing conflicts of interest to the Treasury;
    submitting adequate conflicts-of-interest certifications in a timely
    manner; and expeditiously responding to requests for additional
    information, among other things.

•   In 2011, according to OFS’s Compliance Officer, OIR put in place a
    requirement that all new contractors and financial agents, as well as
    Contracting Officer’s Technical Representatives and OFA personnel
    with similar responsibilities, receive conflict-of-interest training. The
    training materials used are similar to those used before 2011, but the
    information presented is more consistent across all the training
    materials than it was before the formalization of the requirement.

•   OIR continued to review a large number of inquiries from financial
    agents and contractors about potential conflicts of interest. The total
    reviewed as of September 30, 2011, was about 1,300, compared to
    about 655 through fiscal year 2010. Reasons given by OIR for the
    increase in inquiries in fiscal year 2011 compared with prior fiscal
    years include the addition of several new contractors and financial
    agents in fiscal year 2011 and the initiation of new processes, such as
    on-site reviews of entities’ conflicts-of-interest controls. Forty-five of
    the 1,300 inquiries have resulted in waivers, including 8 waivers
    during fiscal year 2011. According to OFS’s Compliance Officer,
    examples of waivers include permitting contractors and financial
    agents to utilize Office of Government Ethics Form 450 in place of the
    Form 278 and allowing contractors and financial agents to use their
    own entertainment and gift policies in place of those in Treasury’s


60
  OFS’s Contract and Agreement Review Board, which is composed of program and
procurement executives, oversees OFS’s acquisition decisions. The Board centralizes
decisions regarding the office’s contracting and financial agency requirements, serving as
the deliberative body for determining whether to perform a function in house or to
outsource it. This formalized process was established in March 2009, after the urgency of
the initial stages of the financial crisis had subsided. Contracting Officer’s Technical
Representatives perform critical acquisition and technical functions, and contracting
officers rely on them to ensure that contracts are managed properly to meet mission
needs.




Page 49                                         GAO-12-229 Troubled Asset Relief Program
     conflicts-of-interest regulation. OIR has never waived an actual or
     potential conflict of interest.

Staffing related to management and oversight of financial agents,
contractors, and conflicts of interest has remained stable. However, a
temporary loss of contract administration positions occurred when the
Procurement Services Division transitioned to the Internal Revenue
Service (IRS) in fiscal year 2011 as part of a Treasury-wide consolidation
to improve departmental offices’ procurement. 61 Treasury hopes to realize
cost savings from the consolidation, improve internal controls and risk
management, and enhance employee career development. According to
an OFS contract administration official, several procurement positions
were lost in the transition to IRS because staff did not want to move to the
IRS facility in Oxon Hill, Maryland. IRS has agreed to staff a dedicated
team of ten individuals to support OFS, the same level as before the
move, and the team is currently being staffed by three federal employees
and two contractors, with plans to expand to six federal employees and
four contractors. According to the official, the procurement work is a
partnership between OFS and IRS, with OFS identifying vendors in
conjunction with IRS, IRS awarding the contracts, and OFS and IRS
sharing post-award duties, such as managing vendors, invoicing, and
keeping records. 62




61
  The former Procurement Services Division supported Treasury Departmental Offices
(DO) procurement, including domestic finance, economic policy, and general counsel, and
OFS was one of its customers. According to a Treasury acquisition procedures update in
August 2011, the IRS Procurement Office now supports DO as a result of transition of the
DO Procurement Services Division to the IRS Procurement Office. According to the
update, effective and efficient use of Treasury’s procurement resources is imperative to
responsible execution of the department’s procurement authority.
62
  In addition to OFS’s staffing, contracting, and financial agent agreement management,
we have also reviewed other elements of Treasury’s implementation of TARP. Since
2009, we have audited and issued an opinion on OFS’s financial statements and its
internal control over financial reporting. Our most recent financial statement audit
concluded that although certain internal controls could be improved, OFS maintained in all
material respects effective internal control over financial reporting as of September 30,
2011, that provided reasonable assurance that misstatements, losses, or noncompliance
material in relation to the financial statements would be prevented or detected and
corrected in a timely manner. See GAO-12-169.




Page 50                                         GAO-12-229 Troubled Asset Relief Program
                          While lifetime cost estimates for TARP have decreased since the
Although Estimated        government first provided assistance in 2008, the lifetime cost and
Lifetime TARP Costs       income estimates for specific TARP programs have fluctuated with
                          changes in program activity and the market value of Treasury’s TARP
Have Decreased            investments. Although Treasury issues several reports on the costs of
Significantly, Treasury   TARP, its communications about TARP costs in press releases is
Could Enhance Its         inconsistent and could be enhanced. Moreover, indirect costs such as
                          moral hazard are also associated with TARP and remain a concern.
Communication about
the Costs of TARP

Estimated Direct TARP     As of September 30, 2011, Treasury has incurred net costs of $28 billion,
Costs Have Decreased      while recent federal lifetime cost projections for TARP—which include
Significantly             both realized and future cash flows—have decreased. In 2009, the
                          Congressional Budget Office (CBO) estimated that TARP could cost $356
                          billion. 63 However, CBO’s most recent estimate, using November 2011
                          data, is approximately $34 billion. 64 Treasury’s fiscal year 2011 financial
                          statement, audited by GAO, reported that TARP would cost around $70
                          billion as of September 30, 2011, a decrease from about $78 billion
                          estimated as of September 2010. In general, the variation in CBO and
                          Treasury cost estimates is attributable to their timing—that is, market
                          conditions and program activities differed when the estimates were
                          developed. However, program participation assumptions for TARP-
                          funded housing programs explain the large difference between the CBO
                          and Treasury cost estimates. Treasury assumed that all of the $45.6
                          billion allocated to TARP housing programs would be utilized and, as a
                          result, estimated that they would cost $45.6 billion. Conversely, CBO
                          expected lower participation rates for the housing programs, resulting in a
                          cost estimate of $13 billion as of November 2011. While these differences
                          exist, CBO officials noted that as TARP continues to wind down,
                          Treasury’s and CBO’s lifetime cost estimates should be more similar. This
                          convergence of cost estimates is likely to occur as program costs become
                          clearer and more recipients repay their assistance—reducing the number



                          63
                            For more information on the cost estimate calculation, see Congressional Budget Office,
                          The Troubled Asset Relief Program: Report on Transactions through June 17, 2009
                          (Washington, D.C.: June 2009).
                          64
                            For CBO’s recent cost estimate, see Congressional Budget Office, Report on the
                          Troubled Asset Relief Program—December 2011 (Washington, D.C.: Dec. 16, 2011).




                          Page 51                                        GAO-12-229 Troubled Asset Relief Program
of outstanding TARP assets and the related uncertainty about how
market risks will affect the future value of these investments.

In our review of Treasury’s lifetime cost estimates for TARP’s equity
investment programs, we found that the estimates for some programs
changed only slightly, if at all, between September 2010 and September
2011, while others changed by a notable margin. For example, Treasury
estimated that CPP would result in lifetime income of $11.2 billion as of
September 2010 and its recent estimate as of September 2011 was
slightly higher at $13 billion (see fig. 15). This increase in CPP’s
estimated lifetime income was the result of proceeds in excess of costs
from the sale of Citigroup common stock offset by a decline in the
estimated market value of Treasury’s remaining CPP investments.
Additionally, Treasury’s lifetime cost estimate of $45.6 billion for TARP-
funded housing programs remained unchanged between September
2010 and September 2011 because Treasury continues to assume that
all of the $45.6 billion allocated to the housing programs will be utilized.

On the other hand, Treasury’s recent cost estimates for AIFP and
assistance to AIG changed markedly when compared to estimates as of
September 2010. Specifically, Treasury estimated a lifetime cost of $14.7
billion for AIFP as of September 2010 but that estimate increased to
$23.6 billion using September 2011 data due to a decline in the value of
Treasury’s equity investments in GM and Ally Financial. Additionally,
Treasury’s estimate for assistance to AIG decreased from $36.9 billion to
$24.3 billion between September 2010 and September 2011 as a result of
improvements in the financial condition of AIG since Treasury first
provided assistance and the restructuring of Treasury’s AIG investment to
common stock. However, as we have seen, the ultimate cost of the
assistance to AIG could be about $11.5 billion after factoring in the
estimated lifetime income of $12.8 billion from Treasury’s non-TARP
assistance to AIG. 65 As shown, lifetime cost estimates are likely to
fluctuate, particularly for investment programs like AIFP and the AIG
Investment Program, because future results rely heavily on the market
price of common stock.




65
  Treasury estimates lifetime income of approximately $12.8 billion from the sale of its
non-TARP AIG shares which could offset the estimated lifetime cost of $24.3 billion
associated with its TARP shares in AIG. See figure 8 in the AIG section for more details.




Page 52                                         GAO-12-229 Troubled Asset Relief Program
                            Figure 15: Comparison of Treasury’s Lifetime Cost and Income Estimates for TARP
                            Programs, September 30, 2010, and September 30, 2011




                            a
                             Although Treasury’s cost estimate for its AIG TARP common stock is $24.3 billion, the overall cost of
                            AIG, including the income expected from the AIG non-TARP common stock, could be approximately
                            $11.5 billion based on recent cost estimates (see AIG-related discussion earlier in this report).



Treasury’s Press Releases   Although Treasury regularly reports on the cost of TARP and its
Inconsistently Include      programs, it could improve the clarity and consistency of its
Cost Information            communications on TARP costs, specifically in its press releases about
                            specific programs. Treasury issues several reports—including the Agency
                            Financial Report, Monthly 105(a) Reports, and Transaction Reports—that
                            provide updates on the funds obligated and disbursed, repayments and
                            income, and gains and losses. Compared to Treasury’s past reporting
                            practices, recent versions of the Agency Financial Report and the Monthly
                            105(a) Reports clearly present Treasury’s lifetime cost estimates for
                            TARP and its programs. 66 However, Treasury’s press releases do not



                            66
                              For examples of Treasury’s lifetime subsidy cost estimates for TARP programs see
                            Department of the Treasury, Office of Financial Stability, Troubled Asset Relief Program
                            Agency Financial Report Fiscal Year 2010 (Washington, D.C.: 2010), and Department of
                            the Treasury, Troubled Asset Relief Program Monthly 105(a) Report—December 2010
                            (Washington, D.C.: Jan. 10, 2011).




                            Page 53                                               GAO-12-229 Troubled Asset Relief Program
consistently include these cost estimates. Rather, Treasury’s press
releases on specific TARP programs typically only include transaction-
oriented updates, such as disbursements and returns on Treasury’s
investments from repayments, dividends, and the sale of its assets. While
the transaction-oriented updates in Treasury’s press releases are
important, they do not provide the general public with the greater
context—the lifetime cost associated with individual programs. 67

Furthermore, it appears that over the last 2 years Treasury has included
lifetime cost estimates in some of its program-specific press releases for
programs expected to result in a lifetime income, while excluding these
estimates for programs expected to result in a cost for taxpayers. For
instance, a press release from April 2011 indicated that Treasury’s bank
programs were expected to result in a lifetime positive return of
approximately $20 billion. Other press releases for TARP banking
programs also include this reference to expected lifetime income.
However, during the same period Treasury did not include lifetime cost
estimates in its press releases for TARP programs that projected a cost to
the government, such as SBA 7(a), AIG, and AIFP. For example,
Treasury issued a press release in June 2011 that described its sale of
several SBA 7(a) securities. Treasury stated that the sale resulted in
overall gains and income. The content of this press release implied that
the program had earned a significant amount of money but did not
provide the more comprehensive lifetime cost estimate for the program,
which was $1 million at that time. In addition, over the last 2 years none of
Treasury’s press releases for AIG and AIFP (programs expected to cost
approximately $24.3 billion and $23.6 billion respectively, as of
September 30, 2011) have included the lifetime cost estimates associated
with the programs. 68 Rather, they have generally discussed Treasury’s
investment in the programs and revenues received. This inconsistent
disclosure of lifetime cost estimates raises concerns about the
consistency and transparency of Treasury’s press releases and suggests
a selective approach that focuses on reporting program lifetime income
and not lifetime costs.


67
 For additional information on the lifetime cost calculation required by the Federal Credit
Reform Act of 1990 see Treasury, Troubled Asset Relief Program Agency Financial
Report Fiscal Year 2010.
68
  As noted earlier in this report, the $24.3 billion is associated with TARP-related
assistance. Factoring in income of $12.8 billion for its non-TARP shares could result in a
net estimated cost of $11.5 billion.




Page 54                                          GAO-12-229 Troubled Asset Relief Program
                           As we have previously reported, transparency is important in the context
                           of TARP and the unprecedented government assistance it provided to the
                           financial sector. In discussing our questions about the press releases with
                           Treasury officials, they noted that they provide cost information in other
                           public reports. However, by improving the clarity of its communication on
                           the costs of TARP through consistently incorporating lifetime cost
                           estimates into its program press releases, Treasury could reduce
                           potential confusion and misunderstanding of TARP’s results. Treasury
                           would also be setting a precedent for cost reporting associated with any
                           future government interventions.


Despite Estimated          Though direct costs for TARP—including potential lifetime income—can
Decreases in TARP Costs,   be estimated and quantified, certain indirect costs connected to the
Government Interventions   government’s assistance are less easily measured. For example, as we
                           have previously reported, when the government provides assistance to
Such as TARP Can           the private sector, it may increase moral hazard that would then need to
Exacerbate Moral Hazard    be mitigated. 69 That is, in the face of government assistance, private firms
                           are motivated to take risks they might not take in the absence of such
                           assistance, or creditors may not price into their extensions of credit the
                           full risk assumed by the firm, believing that the government would provide
                           assistance should the firm become distressed.

                           EESA and the amendments made by the American Recovery and
                           Reinvestment Act of 2009 established a number of measures to mitigate
                           the moral hazard of TARP by requiring that participating institutions follow
                           certain requirements. These include providing Treasury with warrants in
                           exchange for TARP funds to allow taxpayers to benefit from any
                           appreciation of the company’s stock, and limiting certain bonuses and
                           golden parachute payments for certain highly compensated employees
                           and senior executive officers, as such payments can encourage
                           excessive risk-taking. Even with such requirements in place, however,
                           government intervention in the private sector can encourage market
                           participants to expect similar emergency actions. This belief diminishes
                           market discipline as it can weaken private or market-based incentives to




                           69
                             See GAO, Financial Assistance: Ongoing Challenges and Guiding Principles Related to
                           Government Assistance For Private Sector Companies, GAO-10-719 (Washington, D.C.:
                           Aug. 3, 2010).




                           Page 55                                      GAO-12-229 Troubled Asset Relief Program
properly manage risks and can in particular contribute to the perception
that some firms are “too big to fail.” 70

Government interventions can also have consequences for the banking
industry as a whole, including institutions that do not receive bailout
funds. For instance, investors may perceive the debt associated with
institutions that received government assistance as being less risky
because of the potential for future government bailouts. This perception
could lead them to choose to invest in such assisted institutions instead of
those that did not receive assistance. However, such effects may be
temporary, as evidenced by the recent downgrade by Moody’s Investors
Service, Inc. (Moody’s) of the long-term credit ratings of Bank of America
Corp. and Wells Fargo & Co. after the Dodd-Frank Act’s new regulatory
provisions were enacted into law, which aim to avoid or at least limit
future government bailouts to financial institutions. Moody’s stated that it
downgraded these credit ratings because it believes the government is
less likely to rescue these financial institutions now than it was during the
financial crisis. This rating change could affect their ability to access
financing with as favorable terms.

The Dodd-Frank Act included a number of provisions intended to address
the problem of “too big to fail” by strengthening oversight of financial
institutions. For example, the Dodd-Frank Act required the Federal
Reserve to implement enhanced prudential standards for bank holding
companies that are deemed systemically important and increased
oversight of certain nonbank financial companies. Specifically, the
Federal Reserve has been given supervisory authority over any nonbank
financial company that the Financial Stability Oversight Council




70
  The term “too big too fail” can also include “too interconnected to fail” and other terms
that signify that a failure of a particular institution would have a significant negative effect
on the broader financial system or economy.




Page 56                                             GAO-12-229 Troubled Asset Relief Program
              determines could pose a threat to the financial stability of the country. 71
              Also, the Dodd-Frank Act provided new reporting and resolution
              authorities to the Federal Deposit Insurance Corporation for certain large,
              systemic financial institutions, and requires those institutions to write
              plans for their unwinding. 72 However, if these new provisions fail to
              address the too big to fail phenomenon, future financial crises could
              emerge that may be similar or worse than the financial meltdown that
              escalated with the failures of Bear Stearns and Lehman Brothers in 2008.
              That is, some firms may see the government assistance that was
              provided during the last crisis as a promise of similar aid in the future and
              therefore have an incentive to continue engaging in risky activities.
              Ultimately, any moral hazard effects of the Dodd-Frank Act changes will
              not be known until financial institutions face another period of financial
              stress.


              As Treasury continues to unwind most TARP programs, the estimated
Conclusions   costs of TARP have decreased significantly from when Treasury first
              announced TARP. Treasury’s latest estimate of approximately $70 billion
              as of September 30, 2011, includes a large projection of lifetime income
              from CPP, and the cost estimates for assistance to AIG and the auto



              71
                 The purpose of the Financial Stability Oversight Council is to (1) identify risks to the
              financial stability of the U.S. from the financial distress, failure, or activities of large
              interconnected bank holding companies or nonbank financial companies; (2) promote
              market discipline by eliminating expectations that the government will shield shareholders,
              creditors, and other counterparties from losses in the event of failure; and (3) respond to
              emerging threats to the stability of the U.S. financial system. The Council is made up of
              the following voting members: the Secretary of the Treasury, the Chairman of the Federal
              Reserve, the Comptroller of the Currency, the Director of the Bureau of Consumer
              Financial Protection, the Chairman of the Securities and Exchange Commission, the
              Chairperson of the Federal Deposit Insurance Corporation, the Chairperson of the
              Commodity Futures Trading Commission, the Director of the Federal Housing Finance
              Agency, the Chairman of the National Credit Union Administration Board, and an
              independent member appointed by the President who is approved by the Senate and has
              insurance expertise. The Council’s nonvoting members include the Director of the Office
              of Financial Research, the Director of the Federal Insurance Office, a state insurance
              commissioner, state securities commissioner, and state banking supervisor.
              72
                On November 1, 2011, the Federal Deposit Insurance Corporation and the Federal
              Reserve published in the Federal Register a final rule implementing the resolution plan
              requirements for large bank holding companies and nonbank financial companies
              supervised by the Federal Reserve. The final rule is effective November 30, 2011. The
              Federal Deposit Insurance Corporation also issued a complementary interim final rule,
              published in September 2011 that is effective in January 2012.




              Page 57                                          GAO-12-229 Troubled Asset Relief Program
                     companies continue to fluctuate, demonstrating that such estimates are
                     subject to price movements in the market, among other factors, and could
                     change in the future. We found that Treasury enhanced some of its cost
                     reporting in the past year, although its press releases require
                     improvements. Such communications about specific programs include
                     information about estimated lifetime costs and income only when
                     programs are expected to result in lifetime income and not when they are
                     expected to result in a lifetime cost. This practice does not represent a
                     consistent approach to reporting to the public through press releases on
                     the costs of individual programs. As we have indicated in many past
                     reports on TARP, transparency remains a critical element to the
                     government’s unprecedented assistance to the financial sector. Such
                     transparency helps clarify to the public the costs of TARP assistance and
                     to understand how the government intervened in various markets.
                     Enhancing the transparency and clarity of these press releases will also
                     set a precedent for any future government interventions, should they ever
                     be needed.


                     To enhance transparency about the costs of TARP programs as Treasury
Recommendation for   unwinds its involvement, we recommend that the Secretary of the
Executive Action     Treasury enhance Treasury’s communications with the public, in
                     particular Treasury’s press releases, about TARP programs and costs by
                     consistently including information on estimated lifetime costs, especially
                     when reporting on program results. For example, Treasury should
                     consider including lifetime cost estimates, or references to Treasury
                     reports that include such information, in its press releases about specific
                     programs.


                     We provided a draft of this report to Treasury for its review and comment.
Agency Comments      Treasury provided written comments that we have reprinted in appendix
and Our Evaluation   III. Treasury also provided technical comments that we have incorporated
                     as appropriate.

                     In its written comments, Treasury agreed with our recommendation that it
                     could further enhance its communications about the costs of TARP
                     programs in its program-specific press releases, also noting that it has
                     established comprehensive accountability and transparency regarding
                     TARP. Treasury stated that it will implement our recommendation by
                     including a link to its Monthly 105(a) Report, which contains cost
                     estimates for each TARP program, in its future program-specific press
                     releases. Implementation of our recommendation through this practice


                     Page 58                                 GAO-12-229 Troubled Asset Relief Program
would provide a good opportunity for Treasury to clearly and fully
communicate TARP program costs to the public.


We are sending copies of this report to the Financial Stability Oversight
Board, Special Inspector General for TARP, interested congressional
committees and members, and Treasury. The report also is available at
no charge on the GAO website at http://www.gao.gov.

If you or your staffs have any questions about this report, please contact
Orice Williams Brown at (202) 512-8678 or williamso@gao.gov, A. Nicole
Clowers at (202) 512-8678 or clowersa@gao.gov, or Thomas J. McCool
at (202) 512-2642 or mccoolt@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. GAO staff who made major contributions to this report are
listed in appendix IV.




Thomas J. McCool
Director
Center for Economics, Applied Research and Methods




Page 59                                 GAO-12-229 Troubled Asset Relief Program
List of Addressees

The Honorable Daniel K. Inouye
Chairman
The Honorable Thad Cochran
Vice Chairman
Committee on Appropriations
United States Senate

The Honorable Tim Johnson
Chairman
The Honorable Richard C. Shelby
Ranking Member
Committee on Banking, Housing, and Urban Affairs
United States Senate

The Honorable Kent Conrad
Chairman
The Honorable Jeff Sessions
Ranking Member
Committee on the Budget
United States Senate

The Honorable Max Baucus
Chairman
The Honorable Orrin G. Hatch
Ranking Member
Committee on Finance
United States Senate

The Honorable Hal Rogers
Chairman
The Honorable Norm Dicks
Ranking Member
Committee on Appropriations
House of Representatives

The Honorable Paul Ryan
Chairman
The Honorable Chris Van Hollen
Ranking Member
Committee on the Budget
House of Representatives


Page 60                              GAO-12-229 Troubled Asset Relief Program
The Honorable Spencer Bachus
Chairman
The Honorable Barney Frank
Ranking Member
Committee on Financial Services
House of Representatives

The Honorable Dave Camp
Chairman
The Honorable Sandy Levin
Ranking Member
Committee on Ways and Means
House of Representative




Page 61                           GAO-12-229 Troubled Asset Relief Program
Appendix I: Scope and Methodology


             To assess the condition and status of all programs initiated under the
             Troubled Asset Relief Program (TARP), we collected and analyzed data
             about program utilization and assets held, as applicable, focusing
             primarily on financial information that we had audited in the Office of
             Financial Stability’s (OFS) financial statements, as of September 30,
             2011. As noted in the report, in some instances we provided more recent,
             unaudited financial information. The financial information includes the
             types of assets held in the program, obligations that represent the highest
             amount ever obligated for a program (to provide historical information on
             total obligations), disbursements, and income. We also provide
             information on program start dates, defining them based on the start of
             the first activity under a program, and we provide program end dates,
             based on official announcements or program terms from the Department
             of the Treasury (Treasury). Finally, we provide approximate program exit
             dates—either estimated by Treasury or actual if the exit already
             occurred—that reflect the time when a program will no longer hold assets
             that need to be managed. We also used OFS cost estimates for TARP
             that we audited as part of the financial statement audit and reviewed
             Congressional Budget Office (CBO) cost estimates from publicly available
             CBO reports. In addition, we tested OFS’s internal controls over financial
             reporting as it relates to our annual audit of OFS’s financial statements.
             The financial information used in this report is sufficiently reliable to
             assess the condition and status of TARP programs based on the results
             of our audits of fiscal years 2009, 2010, and 2011 financial statements for
             TARP. 1

             We also examined Treasury documentation such as program terms,
             decision memos, press releases, and reports on TARP programs and
             costs. Also, we interviewed OFS program officials to determine the
             current status of each TARP program, the role of TARP staff while most
             programs continue to unwind, and to update what is known about exit
             considerations for TARP programs. Other TARP officials we interviewed
             included those responsible for financial reporting. Additionally, in reporting
             on these programs and their exit considerations we leveraged our
             previous TARP reports and publications from the Special Inspector
             General for TARP and the Congressional Oversight Panel, as
             appropriate. In addition:




             1
              See GAO-12-169, GAO-11-174, and GAO-10-301.




             Page 62                                  GAO-12-229 Troubled Asset Relief Program
•   For the Capital Purchase Program, we used OFS’ reports to describe
    the status of the program, including amount of investments
    outstanding, the number of institutions that had repaid their
    investments, and the amount of dividends paid, among other things.
    In addition, we reviewed Treasury’s press releases on the program.
    We also relied on information that we have collected as part of our
    ongoing review of the financial condition of Capital Purchase Program
    institutions.

•   For the Community Development Capital Initiative, we interviewed
    program officials to determine how the program is managed and what
    repayment or exit concerns Treasury has for the program.

•   To update the status of the Automotive Industry Financing Program
    (AIFP) and Treasury’s plans for managing its investment in the
    companies, we leveraged our past work; reviewed information on
    Treasury’s exit from Chrysler, including Chrysler and Treasury press
    releases; reviewed information on Treasury’s plans for overseeing its
    remaining financial interests in General Motors (GM) and Ally
    Financial, including Administration and Treasury reports. To obtain
    information on the current financial condition of the companies, we
    reviewed information on GM’s and Ally Financial’s finances and
    operations, including financial statements and industry analysts’
    reports.

•   To update the status of the American International Group, Inc. (AIG)
    Investment Program (formerly the Systemically Significant Failing
    Institutions Program) we reviewed relevant documents from Treasury
    and other parties. For the AIG Investment Program, these documents
    included 105(a) reports provided periodically to Congress by
    Treasury, as well as reports produced by the Board of Governors of
    the Federal Reserve System, and the Federal Reserve Bank of New
    York, and other relevant documentation such as AIG’s financial
    disclosures and Treasury’s press releases. We also interviewed
    officials from each of these agencies and AIG.

•   For the Small Business Administration (SBA) 7(a) Securities Purchase
    Program, we analyzed data on Treasury purchases and dispositions
    of SBA 7(a) securities collected during our financial audit. We also
    reviewed decision memos on the disposition of the SBA 7(a) portfolio.
    In addition, we reviewed press releases about the program’s sales
    activity and income. We reviewed SBA 7(a) loan volume data




Page 63                                GAO-12-229 Troubled Asset Relief Program
    provided by Treasury and compared that to trends in our past reports
    related to SBA 7(a) lending and we also interviewed program staff
    about the status of the programs and plans for future sales.

•   For the Term Asset-Backed Securities Loan Facility (TALF), we
    reviewed program terms and requested data from Treasury about
    loan prepayments and TALF LLC activity. We also researched trends
    in the values of commercial mortgage-backed securities. Additionally,
    we interviewed OFS officials about their role in the program as it
    continues to unwind.

•   To update the status of the Public-Private Investment Program, we
    analyzed program quarterly reports, term sheets, and other
    documentation related to the public-private investment funds. We also
    interviewed OFS staff responsible for the program to determine the
    status of the program while it remains in active investment status.

•   To determine the status of Treasury’s TARP-funded housing
    programs, we obtained and reviewed Treasury’s published reports on
    the programs and servicer performance, documentation on projected
    cost estimates and disbursements for each of the programs, and
    guidelines and related updates issued by Treasury for each of the
    programs. In addition, we obtained information from and interviewed
    Treasury officials about the status of the TARP-funded housing
    programs, including numbers of borrowers helped and the actions
    Treasury had taken to address our prior recommendations.

•   To obtain the final status for three programs that Treasury exited and
    for which Treasury no longer holds assets that it must manage—the
    Asset Guarantee Program, Capital Assistance Program, and Targeted
    Investment Program—we reviewed Treasury’s recent reports and
    leveraged our past work.

To determine the proportion of permanent, term, and detailee staff in
OFS, we reviewed program data showing changes in the number of staff
over time and in each OFS office. We assessed this staffing data for
reliability by comparing it to organizational directories to ensure that the
changes were generally equivalent. We determined that the staffing data
was sufficiently reliable to show trends in OFS staffing. We also
interviewed agency officials to gain insight into the trends. Additionally,
we obtained program-specific staffing information from agency officials
during interviews to inform our discussion of the staffing needs of each
TARP program and any succession planning undertaken by OFS. Also,



Page 64                                  GAO-12-229 Troubled Asset Relief Program
we reviewed OFS documentation, such as the organizational directories,
to analyze any changes in leadership positions in OFS. To assess the
staffing challenges of OFS as TARP continues to wind down, we
reviewed past GAO reports and recommendations and the OFS staffing
and development plan, and we interviewed agency officials.

To assess OFS’s use of financial agents and contractors since TARP was
established in October 2008, we reviewed information on financial agents
and contractors from OFS’s contract record system and interviewed
Treasury contract officials about financial agency agreements, contracts,
and blanket purchase agreements as of September 30, 2011, that
support TARP administration and programs. We analyzed information
from the contract record system to update key details on the status of
TARP financial agents and contractors, such as total number of
agreements and contracts, type of services being performed, obligated
values, periods of performance, and share of work by small businesses.
Through discussions with Treasury officials responsible for the contract
record system and inquiries we made about selected data items, as well
as matching OFS’s contract list against data we obtained from the
Federal Procurement Data System-Next Generation, we determined that
data in the record system were sufficiently reliable for our purposes. To
assess OFS’s progress in strengthening its infrastructure for managing
and overseeing the performance of TARP financial agents and
contractors and addressing conflicts of interest that could arise with the
use of private sector firms, we reviewed various documents and
interviewed OFS officials about changes in fiscal year 2011 to its policies
and procedures regarding (1) management and oversight of TARP
financial agents and contractors and (2) monitoring and oversight
activities by the OFS team responsible for financial agent and contractor
compliance with TARP conflicts-of-interest requirements. We did not
review financial agents’ performance assessments or incentive payments.

To ascertain what is known about TARP costs, we reviewed the cost
reporting of CBO, the Office of Management and Budget (OMB), and
Treasury, including the credit reform accounting methods used to develop
cost estimates for TARP programs. For our analysis we focused on
Treasury’s cost estimates for the following reasons: (1) Treasury’s recent
financial statements and cost projections have been audited by GAO and
(2) estimates reported by OMB are based on numbers provided by




Page 65                                 GAO-12-229 Troubled Asset Relief Program
Treasury. 2 We interviewed officials from CBO and Treasury on the
methods used to calculate TARP costs and the reasons for any significant
differences among the cost estimates calculated by each agency. We
utilized data from our financial audit and leveraged other internal
resources related to credit reform accounting and the modeling of TARP
costs. We also reviewed Treasury’s press releases on the costs of TARP.
For our review of the moral hazards of TARP, we reviewed pertinent
legislation such as the Emergency Economic Stabilization Act and the
Dodd-Frank Wall Street Reform and Consumer Protection Act and utilized
previous GAO reports and Congressional Oversight Panel publications.

We conducted this performance audit from June 2011 to January 2012 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.




2
 Although Treasury provides OMB with TARP transaction and cost estimate data, OMB
may include different estimates in its reports than those reported by Treasury. For
instance, Treasury typically reports lifetime cost estimates for TARP programs that include
the interest on re-estimates whereas OMB often reports program lifetime cost estimates
that do not include the interest on re-estimates. For more details about the interest on re-
estimates, see Office of Management and Budget, Circular No. A-11, Part 5, Section 185
Federal Credit (Washington, D.C.: June 2008).




Page 66                                          GAO-12-229 Troubled Asset Relief Program
Appendix II: Information on Programs
Treasury Has Exited

                  This appendix includes information about TARP programs that Treasury
                  has exited and for which Treasury no longer holds assets to manage. We
                  provide an overview of the purpose of these programs, when they started
                  and ended, the status of funding, and the final lifetime costs or income of
                  the programs, as applicable.


                  The Asset Guarantee Program was established as the Treasury
Asset Guarantee   insurance program, which provided federal government assurances for
Program           assets held by financial institutions that were deemed critical to the
                  functioning of the U.S. financial system. Citigroup and Bank of America
                  were the only two institutions that participated in this program before it
                  was terminated. As previously reported, Bank of America paid Treasury
                  and others a fee for terminating the term sheet before any assets were
                  segregated. 1 Treasury sold the remaining assets that it held related to this
                  program in January 2011 with the sale of Citigroup warrants, though it
                  could receive future monies from trust preferred stock held by the Federal
                  Deposit Insurance Corporation. Treasury reports that lifetime income from
                  terminating the Bank of America agreement and exiting Citigroup-related
                  assets is $3.7 billion (see fig. 16).




                  1
                   For additional details on the Asset Guarantee Program, Capital Assistance Program, and
                  Targeted Investment Program, see GAO-11-74 and GAO-10-16.




                  Page 67                                       GAO-12-229 Troubled Asset Relief Program
                      Figure 16: Status of the Asset Guarantee Program, as of September 30, 2011




                      a
                      Treasury first announced assistance under this program in November 2008.
                      b
                       Treasury no longer holds assets for this program that it needs to manage, though the Federal
                      Deposit Insurance Corporation still holds Citigroup trust preferred stock and Treasury could receive
                      income when these assets are sold.



                      The Targeted Investment Program was designed to foster market stability
Targeted Investment   and thereby strengthen the economy by investing in institutions on a
Program               case-by-case basis that Treasury deemed critical to the functioning of the
                      financial system. Only two institutions—Bank of America and Citigroup—
                      participated in this program, and each received $20 billion in capital
                      investment, which both repaid in December 2009. Treasury auctioned the
                      Bank of America warrant that it received under the Targeted Investment
                      Program in March 2010. Treasury auctioned the Citigroup warrant in
                      January 2011. Treasury reports that lifetime income for this program
                      totals $4 billion (see fig. 17).




                      Page 68                                                GAO-12-229 Troubled Asset Relief Program
                     Figure 17: Status of the Targeted Investment Program, as of September 30, 2011




                     a
                     Treasury first announced assistance under this program in November 2008.



                     The Capital Assistance Program was designed to further improve
Capital Assistance   confidence in the banking system by helping ensure that the largest 19
Program              U.S. bank holding companies had sufficient capital to cushion themselves
                     against larger than expected future losses, as determined by the
                     Supervisory Capital Assessment Program—or “stress test”—conducted
                     by the federal banking regulators. The Capital Assistance Program was
                     announced in February 2009 and ended in November 2009. It was never
                     utilized.




                     Page 69                                            GAO-12-229 Troubled Asset Relief Program
Appendix III: Comments from the
              Appendix III: Comments from the Department
              of the Treasury



Department of the Treasury




              Page 70                                      GAO-12-229 Troubled Asset Relief Program
Appendix III: Comments from the Department
of the Treasury




Page 71                                      GAO-12-229 Troubled Asset Relief Program
Appendix IV: GAO Contacts and Staff
                  Appendix IV: GAO Contacts and Staff
                  Acknowledgments



Acknowledgments

                  Orice Williams Brown, (202) 512-8678 or williamso@gao.gov
GAO Contacts      A. Nicole Clowers, (202) 512-8678 or clowersa@gao.gov
                  Thomas J. McCool, (202) 512-2642 or mccoolt@gao.gov


                  In addition to the contacts named above, Gary Engel, Mathew J. Scirè,
Staff             and William T. Woods (lead Directors); Marcia Carlsen, Lawrance Evans,
Acknowledgments   Jr., Dan Garcia-Diaz, Lynda Downing, Kay Kuhlman, Harry Medina,
                  Joseph O’Neill, John Oppenheim, Raymond Sendejas, and Karen
                  Tremba (lead Assistant Directors); Emily Chalmers; Rachel DeMarcus;
                  John Forrester; Christopher Forys; Heather Krause; Robert Lee; Aaron
                  Livernois; Dragan Matic; Emily Owens; Erin Schoening; and Mel Thomas
                  have made significant contributions to this report.




                  Page 72                               GAO-12-229 Troubled Asset Relief Program
Related GAO Products
             Related GAO Products




             Financial Audit: Office of Financial Stability (Troubled Asset Relief
             Program) Fiscal Years 2011 and 2010 Financial Statements.
             GAO-12-169. Washington, D.C.: November 10, 2011.

             Troubled Asset Relief Program: Status of GAO Recommendations to
             Treasury. GAO-11-906R. Washington, D.C.: September 16, 2011.

             Troubled Asset Relief Program: The Government’s Exposure to AIG
             Following the Company’s Recapitalization. GAO-11-716. Washington,
             D.C.: July 28, 2011.

             Troubled Asset Relief Program: Results of Housing Counselors Survey
             on Borrowers’ Experiences with the Home Affordable Modification
             Program. GAO-11-367R. Washington, D.C.: May 26, 2011.

             Troubled Asset Relief Program: Survey of Housing Counselors about the
             Home Affordable Modification Program, an E-supplement to
             GAO-11-367R. GAO-11-368SP. Washington, D.C.: May 26, 2011.

             TARP: Treasury’s Exit from GM and Chrysler Highlights Competing
             Goals, and Results of Support to Auto Communities Are Unclear.
             GAO-11-471. Washington, D.C.: May 10, 2011.

             Management Report: Improvements Are Needed in Internal Control Over
             Financial Reporting for the Troubled Asset Relief Program.
             GAO-11-434R. Washington, D.C.: April 18, 2011.

             Troubled Asset Relief Program: Status of Programs and Implementation
             of GAO Recommendations. GAO-11-476T. Washington, D.C.: March 17,
             2011.

             Troubled Asset Relief Program: Treasury Continues to Face
             Implementation Challenges and Data Weaknesses in Its Making Home
             Affordable Program. GAO-11-288. Washington, D.C.: March 17, 2011.

             Troubled Asset Relief Program: Actions Needed by Treasury to Address
             Challenges in Implementing Making Home Affordable Programs.
             GAO-11-338T. Washington, D.C.: March 2, 2011.

             Troubled Asset Relief Program: Third Quarter 2010 Update of
             Government Assistance Provided to AIG and Description of Recent
             Execution of Recapitalization Plan. GAO-11-46. Washington, D.C.:
             January 20, 2011.


             Page 73                                  GAO-12-229 Troubled Asset Relief Program
Related GAO Products




Troubled Asset Relief Program: Status of Programs and Implementation
of GAO Recommendations. GAO-11-74. Washington, D.C.: January 12,
2011.

Financial Audit: Office of Financial Stability (Troubled Asset Relief
Program) Fiscal Years 2010 and 2009 Financial Statements.
GAO-11-174. Washington, D.C.: November 15, 2010.

Troubled Asset Relief Program: Opportunities Exist to Apply Lessons
Learned from the Capital Purchase Program to Similarly Designed
Programs and to Improve the Repayment Process. GAO-11-47.
Washington, D.C.: October 4, 2010.

Troubled Asset Relief Program: Bank Stress Test Offers Lessons as
Regulators Take Further Actions to Strengthen Supervisory Oversight.
GAO-10-861. Washington, D.C.: September 29, 2010.

Financial Assistance: Ongoing Challenges and Guiding Principles
Related to Government Assistance for Private Sector Companies.
GAO-10-719. Washington, D.C.: August 3, 2010.

Troubled Asset Relief Program: Continued Attention Needed to Ensure
the Transparency and Accountability of Ongoing Programs.
GAO-10-933T. Washington, D.C.: July 21, 2010.

Management Report: Improvements are Needed in Internal Control Over
Financial Reporting for the Troubled Asset Relief Program.
GAO-10-743R. Washington, D.C.: June 30, 2010.

Troubled Asset Relief Program: Treasury’s Framework for Deciding to
Extend TARP Was Sufficient, but Could be Strengthened for Future
Decisions. GAO-10-531. Washington, D.C.: June 30, 2010.

Troubled Asset Relief Program: Further Actions Needed to Fully and
Equitably Implement Foreclosure Mitigation Programs. GAO-10-634.
Washington, D.C.: June 24, 2010.

Debt Management: Treasury Was Able to Fund Economic Stabilization
and Recovery Expenditures in a Short Period of Time, but Debt
Management Challenges Remain. GAO-10-498. Washington, D.C.:
May 18, 2010.




Page 74                                  GAO-12-229 Troubled Asset Relief Program
Related GAO Products




Troubled Asset Relief Program: Update of Government Assistance
Provided to AIG. GAO-10-475. Washington, D.C.: April 27, 2010.

Troubled Asset Relief Program: Automaker Pension Funding and Multiple
Federal Roles Pose Challenges for the Future. GAO-10-492. Washington,
D.C.: April 6, 2010.

Troubled Asset Relief Program: Home Affordable Modification Program
Continues to Face Implementation Challenges. GAO-10-556T.
Washington, D.C.: March 25, 2010.

Troubled Asset Relief Program: Treasury Needs to Strengthen Its
Decision-Making Process on the Term Asset-Backed Securities Loan
Facility. GAO-10-25. Washington, D.C.: February 5, 2010.

Troubled Asset Relief Program: The U.S. Government Role as
Shareholder in AIG, Citigroup, Chrysler, and General Motors and
Preliminary Views on its Investment Management Activities.
GAO-10-325T. Washington, D.C.: December 16, 2009.

Financial Audit: Office of Financial Stability (Troubled Asset Relief
Program) Fiscal Year 2009 Financial Statements. GAO-10-301.
Washington, D.C.: December 9, 2009.

Troubled Asset Relief Program: Continued Stewardship Needed as
Treasury Develops Strategies for Monitoring and Divesting Financial
Interests in Chrysler and GM. GAO-10-151. Washington, D.C.: November
2, 2009.

Troubled Asset Relief Program: One Year Later, Actions Are Needed to
Address Remaining Transparency and Accountability Challenges.
GAO-10-16. Washington, D.C.: October 8, 2009.

Troubled Asset Relief Program: Capital Purchase Program Transactions
for October 28, 2008, through September 25, 2009, and Information on
Financial Agency Agreements, Contracts, Blanket Purchase Agreements,
and Interagency Agreements Awarded as of September 18, 2009.
GAO-10-24SP. Washington, D.C.: October 8, 2009.

Debt Management: Treasury Inflation Protected Securities Should Play a
Heightened Role in Addressing Debt Management Challenges.
GAO-09-932. Washington, D.C.: September 29, 2009.



Page 75                                  GAO-12-229 Troubled Asset Relief Program
Related GAO Products




Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. GAO-09-1048T. Washington,
D.C.: September 24, 2009.

Troubled Asset Relief Program: Status of Government Assistance
Provided to AIG. GAO-09-975. Washington, D.C.: September 21, 2009.

Troubled Asset Relief Program: Treasury Actions Needed to Make the
Home Affordable Modification Program More Transparent and
Accountable. GAO-09-837. Washington, D.C.: July 23, 2009.

Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. GAO-09-920T. Washington,
D.C.: July 22, 2009.

Troubled Asset Relief Program: Status of Participants’ Dividend
Payments and Repurchases of Preferred Stock and Warrants.
GAO-09-889T. Washington, D.C.: July 9, 2009.

Troubled Asset Relief Program: June 2009 Status of Efforts to Address
Transparency and Accountability Issues. GAO-09-658. Washington, D.C.:
June 17, 2009.

Troubled Asset Relief Program: Capital Purchase Program Transactions
for October 28, 2008, through May 29, 2009, and Information on Financial
Agency Agreements, Contracts, Blanket Purchase Agreements, and
Interagency Agreements Awarded as of June 1, 2009. GAO-09-707SP.
Washington, D.C.: June 17, 2009.

Auto Industry: Summary of Government Efforts and Automakers’
Restructuring to Date. GAO-09-553. Washington, D.C.: April 23, 2009.

Troubled Asset Relief Program: March 2009 Status of Efforts to Address
Transparency and Accountability Issues. GAO-09-504. Washington, D.C.:
March 31, 2009.

Troubled Asset Relief Program: Capital Purchase Program Transactions
for the Period October 28, 2008 through March 20, 2009 and Information
on Financial Agency Agreements, Contracts, and Blanket Purchase
Agreements Awarded as of March 13, 2009. GAO-09-522SP.
Washington, D.C.: March 31, 2009.




Page 76                                GAO-12-229 Troubled Asset Relief Program
Related GAO Products




Troubled Asset Relief Program: March 2009 Status of Efforts to Address
Transparency and Accountability Issues. GAO-09-539T. Washington,
D.C.: March 31, 2009.

Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. GAO-09-484T. Washington,
D.C.: March 19, 2009.

Federal Financial Assistance: Preliminary Observations on Assistance
Provided to AIG. GAO-09-490T. Washington, D.C.: March 18, 2009.

Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. GAO-09-474T. Washington,
D.C.: March 11, 2009.

Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. GAO-09-417T. Washington,
D.C.: February 24, 2009.

Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. GAO-09-359T. Washington,
D.C.: February 5, 2009.

Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. GAO-09-296. Washington, D.C.:
January 30, 2009.

Troubled Asset Relief Program: Additional Actions Needed to Better
Ensure Integrity, Accountability, and Transparency. GAO-09-266T.
Washington, D.C.: December 10, 2008.

Auto Industry: A Framework for Considering Federal Financial
Assistance. GAO-09-247T. Washington, D.C.: December 5, 2008.

Auto Industry: A Framework for Considering Federal Financial
Assistance. GAO-09-242T. Washington, D.C.: December 4, 2008.

Troubled Asset Relief Program: Status of Efforts to Address Defaults and
Foreclosures on Home Mortgages. GAO-09-231T. Washington, D.C.:
December 4, 2008.




Page 77                                GAO-12-229 Troubled Asset Relief Program
           Related GAO Products




           Troubled Asset Relief Program: Additional Actions Needed to Better
           Ensure Integrity, Accountability, and Transparency. GAO-09-161.
           Washington, D.C.: December 2, 2008.




(250612)
           Page 78                               GAO-12-229 Troubled Asset Relief Program
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