oversight

Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Years 2012 and 2011 Financial Statements

Published by the Government Accountability Office on 2012-11-09.

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

United States Government Accountability Office
Washington, DC 20548

           November 9, 2012

           Congressional Committees

           Subject: Financial Audit: Office of Financial Stability (Troubled Asset Relief Program)
           Fiscal Years 2012 and 2011 Financial Statements

           This report transmits the GAO auditor’s report on the results of our audit of the fiscal
           years 2012 and 2011 financial statements of the Office of Financial Stability
           (Troubled Asset Relief Program), which is incorporated in the enclosed Office of
           Financial Stability (Troubled Asset Relief Program) Agency Financial Report for
           Fiscal Year 2012.

           As discussed more fully in the auditor’s report that begins on page 41 of the
           enclosed agency financial report, we found

                   the financial statements are presented fairly, in all material respects, in
                    conformity with U.S. generally accepted accounting principles;
                   the Office of Financial Stability (OFS) maintained, in all material respects,
                    effective internal control over financial reporting as of September 30, 2012;
                    and
                   no reportable noncompliance in fiscal year 2012 with provisions of laws and
                    regulations we tested.

           The Emergency Economic Stabilization Act of 2008 (EESA)1 that authorized the
           Troubled Asset Relief Program (TARP) on October 3, 2008, requires that TARP,
           which is implemented by OFS,2 annually prepare and submit to Congress and the
           public audited fiscal year financial statements that are prepared in accordance with
           U.S. generally accepted accounting principles.3 EESA further requires that GAO
           audit TARP’s financial statements annually.4 We are also required under EESA to
           report at least every 60 days on the findings resulting from our oversight of the
           actions taken under TARP.5 This report responds to both of these requirements.

           We are sending copies of this report to the Secretary of the Treasury; the Assistant
           Secretary for Financial Stability; the Financial Stability Oversight Board; the Special

           1
             Pub. L. No. 110-343, div. A, 122 Stat 3765 (Oct. 3, 2008), codified in part, as amended, at 12 U.S.C. §§ 5201-
           5261.
           2
             Section 101 of EESA, 12 U.S.C. § 5211, established OFS within the Department of the Treasury to implement
           TARP.
           3
             Section 116(b) of EESA, 12 U.S.C. § 5226(b).
           4
             Section 116(b) of EESA, 12 U.S.C. § 5226(b).
           5
             Section 116 of EESA, 12 U.S.C. § 5226, requires the Comptroller General to report at least every 60 days on
           findings under section 116.

           Page 1                                   GAO-13-126R OFS’s Fiscal Years 2012 and 2011 Financial Statements
Inspector General for TARP; the Acting Director of the Office of Management and
Budget; interested congressional committees and members; and other interested
parties. In addition, the report is available at no charge on the GAO website at
http://www.gao.gov.

If you have questions about this report, please contact me at (202) 512-3406 or
engelg@gao.gov. Contact points for our Offices of Congressional Relations and
Public Affairs may be found on the last page of this report.




Gary T. Engel
Director
Financial Management and Assurance


Enclosure




Page 2                        GAO-13-126R OFS’s Fiscal Years 2012 and 2011 Financial Statements
List of Committees

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 Harold Rogers
Chairman
The Honorable Norman D. 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 3                         GAO-13-126R OFS’s Fiscal Years 2012 and 2011 Financial Statements
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 Sander Levin
Ranking Member
Committee on Ways and Means
House of Representatives




Page 4                      GAO-13-126R OFS’s Fiscal Years 2012 and 2011 Financial Statements
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY
                                                                                                            AGENCY FINANCIAL REPORT | FISCAL YEAR 2012




Table of Contents
   MESSAGE FROM THE ASSISTANT SECRETARY FOR FINANCIAL STABILITY ......................................... v
   EXECUTIVE SUMMARY................................................................................................................................................ vii

   Part 1: Management’s Discussion and Analysis
   Background, Mission, and OFS Organization Structure ................................................................................... 2
   Overview of TARP for Fiscal Year 2012 ................................................................................................................. 4
   Key Trends/Factors Affecting TARP Future Activities and Ultimate Cost............................................. 12
   Systems, Controls, and Legal Compliance ........................................................................................................... 14
   Limitations of the Financial Statements............................................................................................................... 17
   Operational Goals .......................................................................................................................................................... 18
   Operational Goal One: Ensure the Overall Stability and Liquidity of the Financial System .......... 18
       Capital Purchase Program.................................................................................................................................. 18
       Targeted Investment Program ......................................................................................................................... 20
       Asset Guarantee Program .................................................................................................................................. 20
       Community Development Capital Initiative ............................................................................................... 21
       Public-Private Investment Program .............................................................................................................. 21
       Term Asset-Backed Securities Loan Facility .............................................................................................. 23
       Small Business Administration 7(a) Securities Purchase Program .................................................. 23
       Automotive Industry Financing Program .................................................................................................... 24
       American International Group, Inc. (AIG) Investment Program ........................................................ 27
   Operational Goal Two: Prevent Avoidable Foreclosures and Preserve Homeownership.............. 28
   Operational Goal Three: Protect Taxpayers’ Interests.................................................................................. 33
   Operational Goal Four: Promote Transparency............................................................................................... 34

   Part 2: Financial Section
   MESSAGE FROM THE CHIEF FINANCIAL OFFICER (CF0) ............................................................................ 40
   GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT ............................................................. 41
      Appendix I: Management’s Report on Internal Control Over Financial Reporting .................... 47
      Appendix II: OFS Response to Auditor’s Report ....................................................................................... 48
   FINANCIAL STATEMENTS ......................................................................................................................................... 49
   NOTES TO THE FINANCIAL STATEMENTS......................................................................................................... 54
   REQUIRED SUPPLEMENTARY INFORMATION ................................................................................................. 86
   OTHER ACCOMPANYING INFORMATION – SCHEDULE OF SPENDING .................................................. 88

   Part 3: Appendices
          APPENDIX A: TARP GLOSSARY ........................................................................................................................ 91
          APPENDIX B: ABBREVIATIONS AND ACRONYMS.................................................................................... 93

   WEBSITES................................................................................................................................ .......... inside back cover




MESSAGE FROM THE ASSISTANT SECRETARY                                                                                                                                          iii
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY




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                                                                AGENCY FINANCIAL REPORT | FISCAL YEAR 2012




MESSAGE FROM THE ASSISTANT SECRETARY
FOR FINANCIAL STABILITY
                                          November 9, 2012

                              I am pleased to present the Office of Financial Stability’s (OFS) Agency
                              Financial Report for Fiscal Year (FY) 2012, which describes our
                              financial and performance results for the fourth year of the Troubled
                              Asset Relief Program (TARP). The report contains the financial
                              statements for TARP and the Government Accountability Office (GAO)
                              audit opinion on those financial statements, a separate opinion on
                              OFS’ internal control over financial reporting, and results of GAO’s
                              tests of OFS’ compliance with selected laws and regulations.

                              The Emergency Economic Stabilization Act of 2008 (EESA) established
                              OFS within the Office of Domestic Finance of the Department of the
                              Treasury to implement TARP, the purpose of which was to “restore the
                              liquidity and stability of the financial system”.

                               By any reasonable objective standards, TARP worked: it helped stop
widespread financial panic, it helped prevent what could have been a devastating collapse of our
financial system, and it did so at a cost that is far less than what most people expected at the time
the law was passed.

Four years after TARP’s establishment, OFS has made substantial progress in withdrawing the
extraordinary assistance that had to be provided during the financial crisis. OFS has moved quickly
to reduce the dependence of the financial system on emergency assistance, replacing public support
with private capital.

As of September 30, 2012, OFS has collected 88.5 percent of the $417.6 billion in program funds
disbursed under TARP. During fiscal year 2012, OFS has focused on winding down TARP overall
and can report the following significant highlights:

     •   Working with the Federal Reserve Bank of New York (FRBNY), we made substantial
         progress winding down the investments in American International Group. Inc. (AIG). The
         peak amount of assistance offered to AIG by the FRBNY and Treasury was $182.3 billion, a
         part of which was later cancelled, and an amount in excess of the total disbursed has now
         been recovered through repayments, sales and other income. OFS disbursed a total of $67.8
         billion to AIG and has collected $50.3 billion to date. Treasury still holds 15.9 percent of
         AIG’s outstanding common stock of which OFS holds 10.5 percent. Further detail is
         provided in the Executive Summary.

     •   We continued winding down the bank support programs. On May 3, 2012, we announced
         our exit strategy for the remaining investments in the Capital Purchase Program (CPP).
         That exit strategy uses a combination of repayments, restructurings, and auction sales.
         During fiscal year 2012, we collected $8.9 billion in repayments, sales, and dividends on
         CPP investments. As of September 30, 2012, we had collected a total of $267.0 billion for all
         TARP bank support programs through repayments, sales, dividends, interest, and other
         income – compared to the $245.5 billion that was initially invested.




MESSAGE FROM THE ASSISTANT SECRETARY                                                                    v
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



     •   We also reduced the overall amount that remains outstanding in OFS’ credit market
         programs. On January 24, 2012, we completed the wind down of the SBA 7(a) Securities
         Purchase Program, collecting $9 million more than we disbursed. Progress was also made
         winding down the Term Asset Backed Securities Loan Facility (TALF), when Treasury and
         the Federal Reserve agreed in June 2012 to further reduce the credit protection Treasury
         provides the TALF LLC from $4.3 billion to $1.4 billion because the outstanding TALF loan
         balances declined. In addition, OFS collected a total of $8.9 billion in fiscal year 2012
         through loan repayments, interest and equity distributions under the Public Private
         Investment Program (PPIP).

The financial and performance data included in this report are reliable and complete. For the fourth
consecutive year, OFS has earned unqualified opinions on its financial statements and its internal
control over financial reporting from the U.S. Government Accountability Office. In addition, OFS
successfully resolved its one fiscal year 2011 significant deficiency relating to internal control
surrounding financial reporting.

OFS’ authority to make new commitments expired on October 3, 2010. Since that time, our focus
has been managing the remaining TARP investments to protect taxpayers’ interests while
maintaining financial stability. We continue to achieve these measures while maintaining
comprehensive financial and performance accountability and transparency standards. OFS also
continues to implement the housing programs funded under TARP, which are designed to prevent
avoidable foreclosures, primarily by helping homeowners achieve mortgage modifications. There will
be a cost related to our assistance to helping people avoid foreclosure, which is money that was never
expected to be returned, but these efforts have directly helped more than one million people avoid
foreclosure and indirectly helped millions more by setting new standards throughout the mortgage
servicing industry.

Sincerely,




Timothy G. Massad
Assistant Secretary
Office of Financial Stability
                                                                AGENCY FINANCIAL REPORT | FISCAL YEAR 2012




EXECUTIVE SUMMARY
Treasury’s Office of Financial Stability (OFS)      Throughout fiscal year 2012, OFS focused
presents to the reader the Fiscal Year 2012         principally on (i) exiting remaining investments
Agency Financial Report for the Troubled Asset      in a timely and orderly manner consistent with
Relief Program (TARP), established by the           the duty to promote financial stability and
Department of the Treasury (Treasury)               protect taxpayers’ interests that maximizes the
pursuant to the Emergency Economic                  return for taxpayers, and (ii) continuing to help
Stabilization Act of 2008 (EESA). Four years        homeowners avoid preventable foreclosures.
after TARP’s establishment, substantial
progress has been made in stabilizing the           OFS has taken several steps toward executing
financial system and OFS has recovered most of      its strategy for winding down the TARP and
the assistance that was provided during the         exiting the remaining TARP programs.
crisis.
                                                         •     Treasury, including OFS, and the
Four years ago, the U.S. financial system was at               FRBNY made substantial progress in
risk of collapse and many major financial                      winding down the investments related
institutions were at risk of failure. Markets had              to the AIG, such that the total amounts
ceased to function. Without immediate and                      collected now exceed the combined
forceful government action, our country faced                  disbursements since inception. The
the possibility of a second Great Depression,                  peak amount of assistance offered to
which would have had profound consequences                     AIG by the FRBNY and Treasury was
for all Americans.                                             $182.3 billion, a part of which was later
                                                               cancelled, and an amount in excess of
In this environment of fear and panic, TARP                    the total disbursed has now been
was created as a central part of a series of                   recovered through repayments, sales
emergency measures. The goal of TARP, along                    and other income. Of these amounts,
with other federal government actions, was to                  OFS disbursed a total of $67.8 billion to
stop the panic and prevent a collapse of the U.S.              AIG and collected $50.3 billion to date.
financial system, and restore stability and                    During fiscal year 2012, Treasury,
liquidity to the system. TARP, in conjunction                  including OFS, substantially reduced
with other federal government actions, helped to               its common stock investment in AIG
prevent that collapse by helping stabilize the                 through several sales with $38.2
banking sector and unfreeze the markets for                    billion 1 in collections. As of September
credit and capital, bringing down the cost of                  30, 2012, Treasury held approximately
borrowing for businesses, individuals, and state               234 million shares of AIG common
and local governments, restoring confidence in                 stock, with a fair value of
the financial system and restarting economic
growth. TARP’s initiatives were done faster, and    1Because   the Treasury AIG common stock has
at a much lower cost, than many anticipated.
                                                    consisted of both “TARP shares” and “non-TARP
For a more comprehensive overview on the
                                                    shares” as discussed herein, a portion of the proceeds
impact of the combined actions of the Treasury,
                                                    received as well as the remaining common shares held
the Federal Reserve, and the Federal Deposit
                                                    are not included in the TARP financial statements.
Insurance Corporation (FDIC), please see “The
                                                    OFS manages the sale of both the TARP and non-
Financial Crisis Response in Charts,
http://www.treasury.gov/resource-center/data-       TARP AIG common shares on a pro-rata basis.
chart-                                              During fiscal year 2012, the collections from common
center/Documents/20120413_FinancialCrisisRes        stock sales consisted of $25.2 billion in respect of
ponse.pdf.                                          TARP shares (representing proceeds less than cost of
                                                    $9.9 billion) and $13.0 billion in respect of Treasury’s
As of October 3, 2010, OFS’ authority to make       non-TARP shares (which were provided to Treasury
new commitments under TARP expired.                 at no cost).




EXECUTIVE SUMMARY                                                                                        vii
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



           approximately $7.7 billion,                           continued decline in outstanding TALF
           representing approximately 15.9                       loans. In addition, collections under the
           percent 2 of the company. OFS’                        Public Private Investment Program
           preferred interests in an AIG SPV were                (PPIP) totaled $8.9 billion during fiscal
           also repaid in full, resulting in                     year 2012 through loan repayments,
           additional collections of $9.6 billion                interest and equity distributions. The
           during fiscal year 2012.                              outstanding balance on the program
                                                                 was reduced to $9.8 billion at the end of
       •   OFS has continued to wind down the                    the fiscal year.
           bank support programs, and, through
           September 30, 2012, had collections of      The estimated cost of TARP is significantly
           $267.0 billion in repayments, sales,        below original projections. In the August 2009
           dividends, interest, and fees –             Midsession Review of the President’s 2010
           compared to the $245.5 billion that was     Budget, the lifetime cost of TARP, based on
           initially invested. Of the 707 original     budget scoring conventions, was projected to be
           Capital Purchase Program (CPP)              $340.5 billion (assuming the full $700.0 billion of
           institutions, OFS held outstanding          TARP authority was utilized). Estimated
           investments in 290 banks as of              lifetime TARP cost have significantly decreased
           September 30, 2012. All participants in     since August 2009 with the most recent
           the Targeted Investment Program (TIP)       September 30, 2012 lifetime cost estimated at
           have fully repaid OFS and no claim          $59.7 billion (see table 5 for lifetime cost
           payments were made under the Asset          estimates as of September 30, 2012, 2011, 2010,
           Guarantee Program.                          and 2009). During this four year period, TARP’s
                                                       purchase authority decreased from $700 billion
       •   OFS also reduced the overall amount         to $467.0 billion. 3
           that remains outstanding in TARP’s
           credit market programs. The SBA 7(a)        The accrual-based cost of TARP activities from
           Securities Purchase Program, one of the     inception, on October 3, 2008, through
           credit market programs created under        September 30, 2012, based on the OFS financial
           TARP to help restart the flow of credit     statements, was $20.3 billion. Note that the
           to small businesses, was closed on          lifetime cost of TARP, based on budget scoring
           January 24, 2012. OFS invested $367         conventions, differs from the cost based on the
           million (excluding purchased accrued        OFS financial statements. Estimates of lifetime
           interest) in the program and collected      costs, based on budget scoring conventions,
           $376 million through sales, principal       assume that all planned expenditures are made
           and interest payments, representing         and, for certain programs, include additional
           approximately $9 million more in            assumptions about the impact of potential sale
           collections than funds disbursed. OFS       strategies. By contrast, the TARP financial
           also made progress winding down the         statement costs are based on transactions
           Term Asset Backed Securities Loan           through September 30, 2012. Thus, it does not
           Facility (TALF), when Treasury and the      include the committed but undisbursed funds for
           Federal Reserve agreed to further           housing programs as well as other programs, all
           reduce the credit protection OFS            of which are included in the expected lifetime
           provides the TALF, LLC from $4.3            cost for budget purposes. The $20.3 billion cost
           billion to $1.4 billion because of the      consists of $7.7 billion of reported TARP net
                                                       income in the OFS financial statements for fiscal
                                                       year 2012; $9.5 billion of reported TARP net cost
 Treasury’s shares consist of approximately 154
2

million TARP shares (10.5 percent of the total AIG
common shares outstanding) and 80 million non-         3The Dodd-Frank Wall Street Reform and Consumer
TARP shares (5.4 percent). The fair value of TARP      Protection Act (P.L. 111-203) amended EESA Section
and non-TARP shares as of September 30, 2012, was      115 authority to cap total purchase and guarantee
$5.1 billion and $2.6 billion, respectively.           authority at a cumulative $475.0 billion.




viii                                                                                    EXECUTIVE SUMMARY
                                                                AGENCY FINANCIAL REPORT | FISCAL YEAR 2012



for fiscal year 2011; $23.1 billion of reported       Since its inception, TARP has disbursed $417.6
TARP net income for fiscal year 2010 and the          billion in direct loans, equity investments, and
$41.6 billion of reported TARP net cost for the       support for the Treasury Housing Programs
period from inception through September 30,           under TARP; collected $326.8 billion from
2009. The change of $17.2 billion since fiscal        repayments and sales; received $23.0 billion in
year 2011 (i.e., $7.7 billion net income for fiscal   dividends, interest and fees; collected $9.7
year 2012 as compared to $9.5 billion net cost for    billion through warrant and additional note
fiscal year 2011) is primarily due to sales of AIG    sales; and received $10.2 billion in net proceeds
common stock at values higher than the market         from the sale and repurchase of assets in excess
value at September 30, 2011 and improvements          of costs. As of September 30, 2012, TARP had
in the market values of AIG, AIFP and CPP             $63.1 billion in gross outstanding direct loans
preferred and common stock investments still          and equity investments, which are valued at
held, net of an increase in the Housing program       $40.2 billion (excluding the receivables for the
cost between fiscal years.                            Asset Guarantee Program that was valued at
                                                      $1.0 billion as of September 30, 2012). In
The estimated lifetime cost of TARP reflects          addition, from inception through September 30,
several factors, including the cost of the            2012, TARP incurred costs related to Treasury
initiatives to help homeowners stay in their          housing programs of $5.7 billion and
homes, for which $45.6 billion has been               administrative costs of $1.1 billion.
committed and is assumed to be disbursed. Of
this amount, $5.5 billion has been disbursed          OFS continues to provide detailed information
through September 30, 2012; because payments          about TARP to ensure the highest level of
for modifications are made over time,                 transparency. OFS published a Two-Year
significantly more will be disbursed assuming         Retrospective Report on the Troubled Asset
the modifications stay in effect. OFS’ housing        Relief Program on October 5, 2010, and a
program disbursements were never intended to          corresponding Three-Year Anniversary Report
be recovered and OFS does not expect them to          on October 3, 2011. OFS anticipates publishing a
result in any repayments. The estimated               four year retrospective report on TARP in
lifetime cost also reflects primarily the costs       December 2012. These reports include detailed
related to investments in the auto companies.         information on TARP as well as the federal
In addition, there are costs related to the TARP      government’s additional emergency measures to
AIG investment (which excludes activity related       address the 2008 financial crisis. OFS also
to Treasury’s non-TARP AIG shares). These             publishes a monthly report to Congress on the
costs, which fluctuate in large part due to           program, a monthly report on its housing
changes in market prices of General Motors and        initiatives and a variety of other reports. Please
AIG common stock, are offset in part by income        refer to these documents at:
on TARP investments in banks and other                http://www.treasury.gov/initiatives/financial-
programs.                                                      stability/reports/Pages/default.aspx.




EXECUTIVE SUMMARY                                                                                       ix
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY




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x                                                                            EXECUTIVE SUMMARY
                                       AGENCY FINANCIAL REPORT | FISCAL YEAR 2012




MANAGEMENT‘S DISCUSSION AND ANALYSIS                                           0
    AGENCY FINANCIAL REPORT | FISCAL YEAR 2012




1      MANAGEMENT‘S DISCUSSION AND ANALYSIS
                                                                 AGENCY FINANCIAL REPORT | FISCAL YEAR 2012




Part 1: Management’s Discussion and Analysis
Background, Mission, and OFS Organization Structure
In order to appreciate the concentrated efforts of     purchasers and guarantors of home loans in the
the Administration to combat the financial crisis      mortgage market, came under severe stress.
and TARP’s contribution to these efforts, it is
useful to examine the origins and causes of the        By September 2008, for the first time in 80
crisis.                                                years, the U.S. financial system was at risk of
                                                       collapse. Using authority granted in July 2008,
In September 2008, the nation was in the midst         the Federal Housing Finance Agency placed
of one of the worst financial crises in our history.   Fannie Mae and Freddie Mac into
The financial institutions and markets that            conservatorship on September 7, 2008. A
Americans rely upon to protect their savings,          growing sense of panic was producing the classic
help finance their children’s education, and help      signs of a generalized run on the banks. People’s
pay their bills, and that businesses rely upon to      trust and confidence in the stability of major
make payroll, build inventories, fund new              institutions, and the capacity of the federal
investment, and create new jobs, were                  government to contain the damage, were
threatened, unlike at any time since the Great         vanishing.
Depression. Across the country, people were
rapidly losing confidence in our financial system      The U.S. system of regulation and supervision
and in the federal government’s ability to             had failed to constrain the excessive use of
safeguard their economic future.                       leverage and the level of risk in the financial
                                                       system and the United States entered this crisis
The causes of the crisis will be studied for years,    without adequate tools to manage it. The
and this report is not meant to provide a              Executive Branch did not have existing options
comprehensive analysis of why the crisis               for managing failures of systemically important
occurred. But some reasons are clear. Over the         non-bank financial institutions.
two decades preceding the crisis, the financial
system had grown rapidly in an environment of          The Department of the Treasury (Treasury), the
economic growth and stability. Risks grew in           Federal Reserve Board, the Federal Deposit
the system without adequate transparency. Lax          Insurance Corporation (FDIC), and other federal
regulations and loopholes in supervision let           government bodies undertook an array of
firms become highly leveraged and take on too          emergency actions to help prevent a collapse and
much risk. Ample credit around the world               the dangers posed to consumers, businesses, and
fueled an unsustainable housing boom in the            the broader economy. However, the severe
first half of the last decade. When the housing        conditions our nation faced required additional
market inevitably turned down, starting in 2006,       resources and authorities. Therefore, the Bush
the pace of mortgage defaults accelerated at an        Administration proposed the Emergency
unprecedented rate. By mid-2007, rising                Economic Stabilization Act (EESA) in late
mortgage defaults were undermining the                 September 2008, and with the support of
performance of many investments held by major          Democrats and Republicans in Congress, EESA
financial institutions.                                was enacted into law on October 3, 2008 and
                                                       TARP was established.
The crisis began in the summer of 2007 and
gradually increased in intensity and momentum          EESA also established the Office of Financial
over the course of the following year. A series of     Stability (OFS) within the Office of Domestic
major financial institutions, including                Finance of the Treasury to implement TARP.
Countrywide Financial, Bear Stearns, and               OFS’ mission is to carry out the authorities
IndyMac, were purchased under duress or failed;        given to the Secretary of the Treasury to
and Fannie Mae and Freddie Mac, the largest            implement TARP. Section 101 of EESA
                                                       authorized the Secretary of the Treasury to



MANAGEMENT‘S DISCUSSION AND ANALYSIS                                                                     2
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



establish TARP to “purchase, and to make and
fund commitments to purchase, troubled assets                                           Assistant Secretary for Financial         Chief
from any financial institution, on terms and                                                        Stability                    Counsel

conditions as are determined by the Secretary”.
EESA defines the terms “troubled assets” and
“financial institution” and provides other
requirements that must be met for any such
purchase. Section 102 of EESA also provides                Chief       Chief        Chief of
                                                                                  Management
                                                                                                   Chief of
                                                                                                    Home
                                                                                                                      Chief of     Chief       Chief

authority for a guarantee program for troubled
                                                        Investment   Financial                                        Internal   Reporting   Compliance
                                                                      Officer         and         Ownership                                    Officer
                                                          Officer                                                      Review     Officer
                                                                                   Operations    Preservation
assets. Section 109 of EESA provides authority
to assist homeowners. The Dodd-Frank Wall
Street Reform and Consumer Protection Act (the         The Office of the Chief Investment Officer (CIO)
Dodd-Frank Act) signed into law in July 2010           is responsible for program development and the
reduced total TARP purchase authority from             execution and management of all investments
$700.0 billion to a cumulative $475.0 billion.         made by either purchasing or insuring “troubled
                                                       assets” pursuant to EESA, other than TARP
Final purchase authority to make new                   housing programs.
commitments under TARP expired on October 3,
2010. This means no new commitments can be             The Office of the Chief Financial Officer (CFO)
made. OFS is continuing to implement                   has lead responsibility within OFS for budget
commitments made prior to the October 3                formulation and execution, cash management,
deadline for the TARP programs which are               accounting, financial systems, financial
disbursed over time. For those assets already          reporting, program and internal metrics
purchased, OFS will continue to wind down              analytics, modeling cash flows, and internal
TARP and manage the remaining TARP                     controls.
investments in order to recover as much of
taxpayers’ funds as possible.                          The Office of the Chief of Management and
                                                       Operations (CMO) is responsible for developing
OFS is headed by the Assistant Secretary for           the operating infrastructure and managing
Financial Stability, appointed by the President        internal operations in OFS.
with the advice and consent of the Senate.
Reporting to the Assistant Secretary for               The Office of the Chief of Homeownership
Financial Stability are seven major                    Preservation (HPO) is responsible for identifying
organizations: the Chief Investment Officer, the       opportunities to help homeowners and
Chief Financial Officer, the Chief of                  overseeing homeownership programs while also
Management and Operations, the Chief of                protecting taxpayers.
Homeownership Preservation, the Chief of OFS
Internal Review, the Chief Reporting Officer,          The Office of Internal Review (OIR) is
and the Chief Compliance Officer. A Chief              responsible for identifying the most significant
Counsel’s Office reports to the Assistant              risks that TARP faces, both internally and
Secretary and to the Office of the General             externally.
Counsel in the Department of Treasury.
                                                       The Office of the Chief Reporting Officer (CRO)
The OFS organization chart follows:                    is responsible for periodic reports to the
                                                       Congress as required by EESA.

                                                       The Office of the Chief Compliance Officer
                                                       (CCO), created in December 2011, is responsible
                                                       for establishing processes to help ensure that
                                                       TARP recipients, participants, contractors, and
                                                       agents conduct their TARP-related activities in
                                                       accordance with applicable laws, regulations,
                                                       program guidance, and contract requirements.


3                                                                                MANAGEMENT‘S DISCUSSION AND ANALYSIS
                                                                AGENCY FINANCIAL REPORT | FISCAL YEAR 2012



This office was previously part of the Office of      OFS is not envisioned as a permanent
Internal Review.                                      organization, so to the maximum extent possible
                                                      when economically efficient and appropriate,
The Office of the Chief Counsel reports               OFS utilizes private sector expertise in support
functionally to the Office of General Counsel at      of the execution of TARP programs. Fannie Mae
the Department of the Treasury and provides           and Freddie Mac accounted for 56.3 percent of
legal advice to the Assistant Secretary. The          the fiscal year 2012 administrative cost ($151
Office is involved in the structuring of OFS          million of $268 million) to assist OFS in the
programs and activities to ensure compliance          administration and compliance oversight of the
with EESA and with other laws and regulations.        Making Home Affordable Program.
The Office of the Chief Counsel is also               Additionally, asset managers were hired to serve
responsible for coordinating OFS’ work with the       as financial agents in assisting with managing
external oversight entities including the             the assets associated with several TARP
Government Accountability Office (GAO), the           programs. Private sector firms were also
Special Inspector General for TARP (SIGTARP),         engaged to assist with the significant volume of
the Financial Stability Oversight Board and the       TARP work in the areas of custodial services,
Congressional Oversight Panel (COP) through           accounting and internal controls, modeling,
the end of its existence on April 3, 2011.            administrative support, facilities, legal advisory,
                                                      financial advisory, and information technology.



Overview of TARP for Fiscal Year 2012
OFS Strategic Goal and Operational Goals                  •   Promote transparency.

EESA provided the Secretary of the Treasury           Details on programs developed in support of
with the authorities and facilities to help restore   these Operational Goals can be found later in
liquidity and stability to the U.S. financial         this Management’s Discussion and Analysis
system. EESA also provided specific authority         under Operational Goals. As noted earlier, the
to take certain actions to help prevent avoidable     focus of OFS is now to wind down the programs
foreclosures. As such, OFS’ strategic goal is to      that were statutorily implemented with a
ensure the overall stability and liquidity of the     mandate to stabilize the financial system and to
financial system, prevent avoidable foreclosures      continue to implement the programs for the
and preserve homeownership.                           housing market.

In light of this strategic goal, OFS established      Fiscal Year 2012 Financial Summary and
the following operational goals for TARP and          Cumulative Net Income
developed a number of programs to help
stabilize the U.S. financial system and the           EESA provided TARP authority to purchase or
housing market:                                       guarantee up to $700.0 billion in troubled
                                                      assets. 4 EESA spending authority would have
    •   Ensure the overall stability and liquidity    terminated December 30, 2009; however, as
        of the financial system.                      authorized under Section 120(b) of EESA, the
        • Make capital available to viable            Secretary of the Treasury certified the extension
            institutions.                             of TARP authority until October 3, 2010, with
        • Provide targeted assistance as
            needed.
        • Increase liquidity and volume in            4The Helping Families Save Their Homes Act of 2009,
            securitization markets.
                                                      Pub. L. No. 111-22, Div. A, amended the act and
    •   Prevent avoidable foreclosures and help       reduced the maximum allowable amount of
        preserve homeownership.                       outstanding troubled assets under the act by $1.3
    •   Protect taxpayer interests.                   billion, from $700.0 billion to $698.7 billion.



MANAGEMENT‘S DISCUSSION AND ANALYSIS                                                                    4
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



the submission of a written certification to           Results of TARP Operations (Fiscal Year
Congress.                                              2012 and Fiscal Year 2011)
The Dodd-Frank Act 5 amended EESA by                   OFS’ fiscal year 2012 net income from
capping total purchase and guarantee authority         operations of $7.7 billion includes the reported
at a cumulative $475.0 billion and limiting any        net income related to loans, equity investments,
new obligations to programs or initiatives that        and other credit programs. For the fiscal year
were initiated prior to June 25, 2010. OFS             ended September 30, 2012, OFS reported net
reduced TARP program allocations to conform to         subsidy income for six programs – the Capital
these limitations.                                     Purchase Program (CPP), the Community
                                                       Development Capital Initiative (CDCI), the
Based on operations for the year ended                 Term Asset-Backed Securities Loan Facility
September 30, 2012, OFS reports the following          (TALF), the SBA 7(a) Securities Purchase
key results:                                           Program, Asset Guarantee Program (AGP) and
                                                       the American International Group, Inc (AIG)
    •     Since its inception, TARP has disbursed      Investment Program. These programs
          $417.6 billion in direct loans, equity       collectively reported net subsidy income of $11.4
          investments and support for the              billion. Also, for the fiscal year ended
          Treasury housing programs under              September 30, 2012, OFS experienced net
          TARP.                                        subsidy cost for three programs – the Public-
                                                       Private Investment Program (PPIP), the
    •     In fiscal year 2012, OFS disbursed $1.0      Automotive Industry Financing Program (AIFP),
          billion for loans and equity investments     and the Federal Housing Agency Refinance
          as well as $3.1 billion in payments for      Program totaling $445 million. Fiscal year 2012
          Treasury housing programs under              expenses for the Treasury housing programs
          TARP, and reported net income from           under TARP of $3.0 billion and administrative
          operations of $7.7 billion.                  expenses of $268 million bring the total reported
                                                       fiscal year net income from operations to $7.7
    •     During fiscal year 2012, OFS received        billion, as shown in Table 1. For the fiscal year
          $49.9 billion from repayments of loans       ended September 30, 2011, the net cost of
          and repurchases and sales of                 operations was $9.5 billion as reflected in
          investments.                                 Table 1. These net income and net cost amounts
                                                       reported in the financial statements reflect only
    •     As of September 30, 2012, OFS reported
                                                       transactions through September 30, 2012 and
          $40.2 billion (excluding a $1.0 billion
                                                       September 30, 2011, respectively, and therefore
          receivable related to the Asset
                                                       are different than lifetime cost estimates made
          Guarantee Program) for the value of
                                                       for budgetary purposes.
          loans and equity investments
          outstanding.




5Pub.   L. 111-203.


5                                                                   MANAGEMENT‘S DISCUSSION AND ANALYSIS
                                                                     AGENCY FINANCIAL REPORT | FISCAL YEAR 2012



Table 1: Net Income (Cost) of TARP Operations
(Dollars in billions)1
                                                                                             From TARP’s
                                                    For the Year         For the Year        Inception
                                                    Ended                Ended               through
                                                    September 30,        September 30,       September 30,
TARP Program                                        2012                 2011                20123
Bank Support Programs
Capital Purchase Program                                        $ 1.9              $ 1.8                $ 14.9
Targeted Investment Program                                        ---               0.2                    4.0
Asset Guarantee Program                                           0.2                 ---                   3.9
Community Development Capital Initiative                           ---               0.1                  (0.2)
Credit Market Programs
Public-Private Investment Program                                (0.2)                1.8                    2.4
Term Asset-Backed Securities Loan Facility                         0.1                0.1                    0.5
SBA 7(a) Securities Purchase Program                               ---                 ---                   ---
Other Programs
Automotive Industry Financing Program                            (0.2)              (9.7)                (23.8)
American International Group Investment
                                                                  9.2               (1.6)                (15.2)
Program2
FHA-Refinance Program                                              ---                 ---                   ---
Total Net Subsidy Income (Cost)                                  11.0               (7.3)                (13.5)
Additional TARP (Costs)
Treasury Housing Programs Under TARP
(excluding FHA-Refinance Program)                                (3.0)              (1.9)                 (5.7)

Administrative Costs                                             (0.3)             (0.3)                 (1.1)
Total Net Income (Cost) of TARP Operations                      $ 7.7            $ (9.5)              $ (20.3)
1 Information in Table 1 is presented in billions of dollars to ensure consistency with other tables in this
Management’s Discussion and Analysis; similar information is presented in the financial statements in millions
of dollars.
2 The amounts for AIG reflect only the operations/activities of TARP and do not reflect proceeds received from

the sale of shares of AIG common stock held by Treasury outside of TARP (non-TARP shares). For further
details, see the discussion of the American International Group Investment Program, beginning on p. 28.
3Inception through September 30, 2012 column includes dollar amounts related to the ($18.5) billion net cost of

operations for the period from inception through September 30, 2010.

Over time the cost of TARP programs will                 actually disbursed, repayments to OFS from
change. As described later in the MD&A, and in           program participants or from sales of the
the OFS audited financial statements, these              investments, write-offs and losses, net
estimates are based in part on currently                 outstanding balance as of September 30, 2012,
projected economic factors. These economic               and cash inflows on the investments in the form
factors will likely change, either increasing or         of dividends, interest or other fees. As of
decreasing the lifetime cost of TARP.                    September 30, 2012, $49.4 billion of the $467.0
                                                         billion in purchase and guarantee authority
TARP Program Summary                                     remained unused. 6
Table 2 provides a financial summary for TARP
programs since TARP inception on October 3,              6OFS  tracks costs in accordance with Federal budget
2008, through September 30, 2012. For each               procedures. First, OFS enters into legally binding
program, the table provides utilized TARP                “obligations” to invest or spend the funds for TARP
authority (which includes purchases made, legal          programs. Then, funds are disbursed over time
commitments to make future purchases, and                pursuant to the obligations. In any given case, it is
                                                         possible that the full amount obligated will not be
offsets for guarantees made), the amount
                                                         disbursed.



MANAGEMENT‘S DISCUSSION AND ANALYSIS                                                                             6
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



Table 2: TARP Summary1
From TARP Inception through September 30, 2012
(Dollars in billions)
                                  Purchase                                                                           Received
                                  Price or                          Investment         Write-         Out-           from
                                  Guarantee         Total $         Sales and          offs and       standing       Invest-
                                  Amounts           Disbursed       Repayments         Losses3        Balance4       ments
Bank Support Programs
                                        $ 204.9         $ 204.9         $ (193.2)6       $ (3.0)         $ 8.7         $ 26.4
Capital Purchase Program5
Targeted Investment                          40.0           40.0              (40.0)              -              -         4.4
Program
                                              5.0               -                  -              -              -         3.0
Asset Guarantee Program

Community Development                         0.6             0.6                  -              -         0.6                 -
Capital Initiative
Credit Market Programs
Public Private Investment                    21.6           18.6               (8.8)              -         9.8            2.4
Program

Term Asset-Backed                             1.4             0.1                  -              -         0.1                 -
Securities Loan Facility
SBA 7(a) Securities                           0.4             0.4              (0.4)              -              -              -
Purchase Program
Other Programs
Automotive Industry
                                             79.7           79.7              (35.1)         (7.4)         37.2            5.7
Financing Program
American International
Group Investment                             67.8           67.8              (49.3)       (11.8)           6.7            1.0
Program2
Sub-total for Investment
                                           421.4           412.1            (326.8)        (22.2)          63.1           42.9
Programs
Treasury Housing
                                            45.67             5.5              N/A           N/A           N/A            N/A
Programs under TARP
Total for TARP Program                  $ 467.0         $ 417.6          $ (326.8)      $ (22.2)        $ 63.1         $ 42.9
1This table shows TARP activity for the period from inception through September 30, 2012, on a cash basis. Received from
investments includes dividends and interest income reported in the Statement of Net Cost, and proceeds from sale and
repurchases of assets in excess of costs.
2The amounts for AIG reflect only the operations of TARP and do not reflect proceeds received from the sale of shares of AIG

common stock held by Treasury outside of TARP (non-TARP shares). For further details, see the discussion of the American
International Group Investment Program, beginning on page 27.
3 Losses represent proceeds less than cost on sales of assets which are reflected in the financial statements within “net

proceeds from sales and repurchases of assets in excess of (less than) cost”.
4 Total disbursements less repayments, write-offs and losses do not equal the total outstanding balance because the

disbursements for the Treasury housing programs under TARP generally do not require (and OFS does not expect)
repayments.
5OFS received $31.9 billion in proceeds from sales of Citigroup common stock, of which $25.0 billion is included at cost in

investment sales, and $6.9 billion of net proceeds in excess of cost is included in Received from Investments.
6Includes $2.2 billion of SBLF refinancing outside of TARP and CDCI exchanges from CPP of $363 million.
7 Individual obligation amounts are $29.9 billion for the Making Home Affordable Program, $7.6 billion for the Hardest Hit

Fund, and $8.1 billion committed for the FHA-Refinance Program.



Most TARP funds have been used to make                           OFS has generally received dividends on the
investments in preferred stock or to make loans.                 preferred stock and interest payments on the


7                                                                                 MANAGEMENT‘S DISCUSSION AND ANALYSIS
                                                                     AGENCY FINANCIAL REPORT | FISCAL YEAR 2012



loans from the institutions participating in             OFS also received warrants in connection with
TARP programs. These payments represent                  most of its investments, which provides an
additional proceeds received on OFS’ TARP                opportunity for taxpayers to realize additional
investments. From inception through                      proceeds on investments. Since the program’s
September 30, 2012, OFS received a total of              inception, OFS has received $9.3 billion in gross
$23.0 billion in dividends and interest.                 proceeds from the disposition of warrants
                                                         associated with 169 CPP investments, both TIP
OFS has conducted several sales of its positions         investments, and AGP, consisting of (i) $3.9
in banking institutions as part of its exit              billion from issuer repurchases at agreed upon
strategy for winding down TARP. OFS plans to             values and (ii) $5.4 billion from auctions.
sell its investments in banks that are not               TARP’s Warrant Disposition Report is posted on
expected to be able to repay Treasury in the             the OFS website at the following link:
foreseeable future. These sales are being                http://www.financialstability.gov/latest/reportsa
conducted over time and in stages and include            nddocs.html.
both common and preferred stock. During fiscal
year 2012, OFS sold its positions in 40 banks for        Table 3 shows the breakdown of receipts for the
$1.3 billion in aggregate proceeds through               periods ended September 30, 2012 and 2011 for
individual public and private auctions resulting         all TARP programs combined as well as totals
in proceeds less than cost of $180 million for           for the period from inception through September
those investments.                                       30, 2012.




Table 3: TARP Receipts and Repayments on Investments/Loans 1
(Dollars in billions)
                                                For the Year           For the Year           From TARP’s
                                                   Ended                  Ended             inception through
                                               September 30,          September 30,           September 30,
                                                    2012                   2011                   20122
Dividends, Interest, Warrant
Repurchases and Additional Notes
Dividends and Interest                                    $ 2.9                  $ 3.7                 $ 23.0
Sales/Repurchases of Warrants and
Warrant Preferred Stock and                                   0.1                    1.5                    9.7
Additional Notes
Proceeds in Excess of Cost                                    0.4                   6.2                    10.2
Subtotal                                                      3.4                  11.4                    42.9

Investment/Loan Repayments
Sales/Repurchases/Repayments on
                                                            43.9                   66.5                  303.1
Investments3
Loan Principal Repaid                                       6.0                    6.3                   23.7
Subtotal                                                   49.9                   72.8                  326.8
Grand Total                                              $ 53.3                 $ 84.2                $ 369.7
1 This table shows TARP activity on a cash basis.
2 The total reported for Inception through September 30, 2012 column includes the $232.2 billion in receipts and
repayments related to the period from inception through September 30, 2010.
3 Includes $2.2 billion of SBLF refinancing outside of TARP and CDCI exchanges from CPP of $363 million.




MANAGEMENT‘S DISCUSSION AND ANALYSIS                                                                           8
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY




Summary of TARP Direct Loans and Equity Investments

Table 4 provides information on the estimated              Estimated Value of the Investment column
values of TARP direct loan and equity                      represents the present value of net cash inflows
investments by program, as of the end of fiscal            that OFS estimates it will receive from the loans
years 2012 and 2011. (Treasury housing                     and equity investments. These estimates include
programs under TARP are excluded from the                  market risk assumptions. For equity securities,
chart because no repayments are expected). The             this amount represents fair value. The total
Outstanding Balance column represents the                  difference of $22.9 billion (2012) and $42.3
amounts disbursed by OFS relating to the loans             billion (2011) between the two columns is
and equity investments that were outstanding               considered the “subsidy cost allowance” under
as of September 30, 2012 and 2011. The                     the Federal Credit Reform Act methods OFS
                                                           follows for budget and accounting purposes
                                                            (see Note 6 in the financial statements for
                                                            further discussion). 7

Table 4: Summary of TARP Direct Loans and Equity Investments
(Dollars in billions)
                                                                                                        Estimated
                                      Outstanding         Estimated Value         Outstanding             Value of
                                     Balance as of        of Investment as       Balance as of        Investment as
                                     September 30,        of September 30,       September 30,         of September
Program                                  20121                  2012                 20111                30, 2011
Bank Support Programs
Capital Purchase Program                        $ 8.7                 $ 5.7                $ 17.3                $12.4
Community Development
                                                    0.6                   0.4                   0.6                   0.4
Capital Initiative
Credit Market Programs
Public Private Investment
                                                    9.8                 10.8                  15.9                   18.4
Program
Term Asset-Backed
                                                    0.1                   0.7                   0.1                   0.6
Securities Loan Facility
SBA 7(a) Securities Purchase
Program                                             ---                    ---                  0.1                   0.1

Other Programs
Automotive Industry
                                                  37.2                  17.5                  37.3                   17.8
Financing Program
American International
                                                    6.7                   5.1                 51.1                   30.4
Group Investment Program
Total                                          $ 63.1                $ 40.2              $ 122.4               $ 80.1
1   Before subsidy cost allowance.




7 The subsidy cost in Table 1 and on the Statement of Net Cost, is composed of (1) the change in the subsidy
cost allowance, net of write-offs, (2) net intra-governmental interest cost, (3) certain inflows from the direct
loans and equity investments (e.g., dividends, interest, net proceeds from sales and repurchases of assets in
excess of cost, and other realized fees), and (4) the change in the estimated discounted net cash flows related to
the asset guarantee program and FHA-Refinance Program.


9                                                                          MANAGEMENT‘S DISCUSSION AND ANALYSIS
                                                              AGENCY FINANCIAL REPORT | FISCAL YEAR 2012



The ultimate cost of TARP will not be known for     Comparison of Estimated Lifetime TARP
some time. The financial performance of the         Costs Over Time
programs will depend on many factors such as
future economic and financial conditions, and       Market conditions and the performance of
the business prospects of specific institutions.    specific financial institutions are critical
The cost estimates are sensitive to slight          determinants of TARP’s estimated lifetime cost.
changes in model assumptions, such as general       The changes in the OFS estimates since TARP’s
economic conditions, specific stock price           inception through September 30, 2012, provide a
volatility of the entities in which OFS has an      good illustration of this impact. Table 5 provides
equity interest, estimates of expected defaults,    information on how OFS’ estimated lifetime cost
and prepayments. If OFS receives repayments         of TARP has changed over time. These costs
faster than expected and incurs lower than          fluctuate in large part due to changes in the
expected defaults, TARP’s ultimate cost on these    market prices of common stock for AIG and
investments may be lower than estimated.            General Motors (GM) and the estimated value of
Wherever possible, OFS uses market prices of        the Ally Financial (Ally) stock. This table
tradable securities to estimate the fair value of   assumes that all expected investments (e.g.
TARP investments. Use of market prices was          PPIP) and disbursements for Treasury housing
possible for TARP investments that trade in         programs under TARP are completed, and
public markets or are closely related to tradable   adhere to general government budgeting
securities. For those TARP investments that do      guidance. This table will not tie to the financial
not have direct analogs in private markets, OFS     statements since it includes investments and
uses internal market-based models to estimate       other disbursements expected to be made in the
the market value of these investments. All          future. Table 5 is consistent with the estimated
future cash flows are adjusted for market risk.     TARP lifetime cost disclosures on the OFS web
Further details on asset valuation can be found     site at:
in Note 6 of the Financial Statements.              http://www.treasury.gov/initiatives/financial-
                                                    stability/Pages/default.aspx.

                                                    The cost amounts in Table 5 are based on
                                                    assumptions regarding future events, which are
                                                    inherently uncertain.




MANAGEMENT‘S DISCUSSION AND ANALYSIS                                                                 10
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY




Table 5: Estimated Lifetime TARP Costs (Income)1
(Dollars in billions)
                                      Estimated Lifetime Cost (Income) as of September 30
Program                              20095            2010           2011             2012
Bank Support Programs
Capital Purchase Program              $ ( 14.6)       $ ( 11.2)       $ ( 13.0)       $ ( 14.9)
Targeted Investment Program                ( 1.9)         ( 3.8)           ( 4.0)         ( 4.0)
Asset Guarantee Program2                   ( 2.2)         ( 3.7)           ( 3.7)         ( 3.9)
Community Development
                                              0.4            0.3              0.2            0.2
Capital Initiative
Credit Market Programs
Public Private Investment
                                              1.4         ( 0.7)           ( 2.4)         ( 2.4)
Program
Term Asset-Backed Securities
                                           ( 0.3)         ( 0.4)           ( 0.4)         ( 0.5)
Loan Facility
SBA 7(a) Securities Purchase
                                             N/A              ---              ---            ---
Program
Other Programs
Automotive Industry Financing
                                            34.5           14.7             23.6           24.3
Program
American International Group
                                            56.8           36.9             24.3           15.3
Investment Program3
Subtotal                                    74.1           32.1             24.6           14.1
Treasury Housing Programs
                                            50.0           45.6             45.6           45.6
under TARP4
Total                                   $ 124.1         $ 77.7          $ 70.2          $ 59.7
1 Estimated program costs (+) or savings (in parentheses) over the life of the program, including interest on re-
estimates and excluding administrative costs.
2 Prior to the termination of the guarantee agreement, Treasury guaranteed up to $5.0 billion of potential losses

on a $301.0 billion portfolio of loans.
3 The amounts for AIG reflect only the operations of TARP and do not reflect proceeds received from the sale of

shares of AIG common stock held by Treasury outside of TARP (non-TARP shares). For further details, see the
discussion of the American International Group Investment Program, beginning on page 27.
4 Includes FHA-Refinance Program, which is accounted for under credit reform.
5 Estimated lifetime cost for 2009 includes funds for projected disbursements and anticipated obligations.




11                                                                        MANAGEMENT‘S DISCUSSION AND ANALYSIS
                                                               AGENCY FINANCIAL REPORT | FISCAL YEAR 2012




Key Trends/Factors Affecting TARP Future Activities and
Ultimate Cost
This section provides additional TARP analytic       disbursed in association with all Making Home
information and enhanced sensitivity analysis        Affordable (MHA) modifications made as of
focusing on the remaining TARP                       September 30, 2012, if all active modifications
dollars/continued taxpayer exposure and what is      were to remain current and receive incentives
likely to affect the expected future return. As of   for five years. The program is continuing to
September 30, 2012, one TARP program – the           enter into new modifications, as the termination
AIFP – has more than $10 billion still               date was extended to December 31, 2013.
outstanding and remains at the most risk of          Separately, $7.6 billion has been allocated for
additional taxpayer loss. Going forward, the         the Hardest Hit Fund and $8.1 billion for the
collections or costs from the AIFP and the           FHA Refinance Program.
expenditures for Treasury housing programs
under TARP are expected to most significantly        Sensitivity Analysis
affect the lifetime cost of TARP.
                                                     The ultimate value of TARP investments will
Automotive Industry Financing Program                only be known in time. Realized values will vary
                                                     from current estimates in part because economic
As of September 30, 2012, OFS’ gross AIFP            and financial conditions will change. Many
investments outstanding in GM and Ally               TARP investments do not have readily
Financial totaled $37.2 billion, with an             observable values and their values can only be
estimated value of $17.5 billion. The future         estimated by OFS.
value of OFS’ investment in GM will depend on
the market price of GM common stock, which is        Sensitivity analysis is one way to get some feel
affected by a variety of factors specific to the     for the degree of uncertainty around the OFS
financial condition and results of operations of     estimates. In the analysis reported here, OFS
GM as well as factors pertaining to the industry     focuses on the AIFP as it is the only remaining
and the overall economy, such as the                 program with investments in excess of $10.0
competitiveness of U.S. manufacturers, both          billion.
domestically and internationally, and
macroeconomic conditions (unemployment,
Gross Domestic Product growth, etc.) which           AIFP Analysis
affect the overall trends in auto sales. The         The most important inputs to the valuation of
future value of OFS’ investment in Ally will         OFS’ outstanding investments under the AIFP
depend on industry and macroeconomic factors         are the market price of New GM common stock
as well as company-specific factors, including in    and the change in the estimated value of Ally
particular the ability of the company to resolve     Financial common stock, which is driven by
the bankruptcy of its subsidiary, Residential        certain pricing metrics of comparable public
Capital, LLC (ResCap), in a timely and cost-         financial institutions. Table 6 shows the change
effective manner, and the proceeds realized from     in estimated value of OFS outstanding AIFP
the sale of its international operations.            investments based on a 10 percent increase and
                                                     10 percent decrease in the trading price of the
Treasury Housing Programs Under TARP                 New GM common stock and separately a 10
                                                     percent increase and 10 percent decrease in the
OFS committed $45.6 billion to fund Treasury         estimated value of the Ally Financial common
housing programs under TARP. From inception          stock. Figure A shows that the securities have
through September 30, 2012, $5.5 billion has         recently been trading within the range used in
been disbursed under these programs. Based           the analysis as well as outside of this range,
only on the permanent modifications in place as      illustrating the uncertainty around the cost
of September 30, 2012, OFS estimates that $10.5      estimates.
billion in incentive fees will ultimately be


MANAGEMENT‘S DISCUSSION AND ANALYSIS                                                                    12
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY




 Table 6: Impact on AIFP Valuation
 (Dollars in billions)          September 30, 2012
                                                                 Effect of 10%        Effect of 10%
                                Reported Value for
                                                                   Increase             Decrease
                                       AIFP
 Impact of GM on AIFP                 $17.55                        $18.68               $16.41
 % change from current                      N/A                     6.40%                (6.40)%
 Impact of Ally (formerly
                                           $17.55                   $18.16               $16.93
 GMAC) on AIFP
 % change from current                      N/A                     3.50%                (3.50)%

Figure A shows the daily closing price of the          September 30, 2012 was $22.75. The dashed
New GM common stock since the initial public           lines represent the high and low price used in
offering in November 2010. The closing price for       the sensitivity analysis.




13                                                                     MANAGEMENT‘S DISCUSSION AND ANALYSIS
                                                                  AGENCY FINANCIAL REPORT | FISCAL YEAR 2012




Systems, Controls, and Legal Compliance
                             MANAGEMENT ASSURANCE STATEMENT
  The Office of Financial Stability's (OFS) management is responsible for establishing and maintaining
  effective internal control and financial management systems that meet the objectives of the Federal
  Managers’ Financial Integrity Act (FMFIA), 31 U.S.C. 3512(c),(d). OFS has evaluated its
  management controls, internal controls over financial reporting, and compliance with the federal
  financial systems standards. As part of the evaluation process, we considered the results of extensive
  documentation, assessment and testing of controls across OFS, as well as the results of independent
  audits. We conducted our reviews of internal controls in accordance with FMFIA and Office of
  Management and Budget (OMB) Circular A-123.

  As a result of our reviews, management concludes that the management control objectives described
  below, taken as a whole, were achieved as of September 30, 2012. Specifically, this assurance is
  provided relative to Section 2 (internal controls) and 4 (systems controls) of FMFIA. OFS further
  assures that the financial management systems relied upon by OFS are in substantial compliance
  with the requirements imposed by the Federal Financial Management Improvement Act (FFMIA).

  OFS' internal controls are designed to meet the management objectives established by Treasury and
  listed below:

          (a) Programs achieve their intended results;
          (b) Resources are used consistent with overall mission;
          (c) Programs and resources are free from waste, fraud, and mismanagement;
          (d) Laws and regulations are followed;
          (e) Controls are sufficient to minimize any improper or erroneous payments;
          (f) Performance information is reliable;
          (g) System security is in substantial compliance with all relevant requirements;
          (h) Continuity of operations planning in critical areas is sufficient to reduce risk to
              reasonable levels; and
          (i) Financial management systems are in compliance with federal financial systems
              standards, i.e., FMFIA Section 4 and FFMIA.

  In addition, OFS management conducted its assessment of the effectiveness of internal control over
  financial reporting, which includes safeguarding of assets and compliance with applicable laws and
  regulations, in accordance with OMB Circular A-123, Management’s Responsibility for Internal
  Control, Appendix A, Internal Control over Financial Reporting. Based on the results of this
  evaluation, OFS provides unqualified assurance that internal control over financial reporting is
  appropriately designed and operating effectively as of September 30, 2012, with no related material
  weaknesses noted.
                                                    Sincerely,




                                                    Timothy G. Massad
                                                    Assistant Secretary for Financial Stability




MANAGEMENT‘S DISCUSSION AND ANALYSIS                                                                       14
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



Internal Control Program                               The SAT is chaired by the Deputy Chief
                                                       Financial Officer and includes representatives
OFS management remains committed to                    from all OFS functional areas. Furthermore,
maintaining effective internal controls in             OFS has an internal control framework in place
safeguarding taxpayer dollars while providing          that is based on the principles of the Committee
financial stability through the TARP. OFS              of Sponsoring Organizations of the Treadway
continues to have a high performing internal           Commission (COSO). The SAT leverages this
control program in compliance with the Federal         framework in communicating control objectives
Managers’ Financial Integrity Act (FMFIA).             across the organization and to its third party
The OFS Risk and Control Group (RCG) works             service providers.
closely with program managers and support
personnel to maintain robust internal controls         RCG operates under the direction of the Chief
across business functions. RCG also coordinates        Financial Officer (CFO) and is guided by the
with the OFS Office of Financial Agents (OFA)          SAT. RCG monitors the implementation of the
to ensure that third party service providers           internal control framework and is responsible
whose work has a potential financial reporting         for assessing the achievement of management
impact on OFS have well designed and effective         control objectives by:
internal control environments supporting the
TARP. During fiscal year 2012, OFS continued               •     Integrating management controls into
to implement effectively its internal control                    OFS business processes by:
environment as demonstrated below:
                                                                    o    Maintaining internal control
     •   Business processes supporting existing                          documentation,
         programs, including internal control
         activities, utilized increasingly well-                    o    Developing and designing
         defined policies and procedures and                             internal control responsibilities
         internal control documentation. OFS                             with business owners before
         management regularly monitors                                   major program transactions, and
         activities to confirm that control
         procedures are performed consistently                      o    Enhancing the monitoring of
         and as designed.                                                control effectiveness during or
                                                                         after significant new program
     •   OFS made significant progress in                                events;
         addressing findings and areas for
         improvement in the internal control               •     Conducting “lessons learned” sessions to
         environment identified through OFS'                     identify and remediate areas requiring
         self-assessment processes (e.g., OMB                    improvement;
         Circular A-123 internal controls over
         financial reporting assessment, annual            •     Performing periodic sample-based
         assurance statement process) and                        testing of key controls across mature
         through work performed by the oversight                 business processes; and,
         bodies (i.e., GAO and SIGTARP).
                                                           •     Monitoring feedback from oversight
     •   OFS continued to make improvements in                   bodies.
         information technology (IT) in fiscal year
         2012 to drive efficiencies through the        In addition, the internal control environment
         increased automation of the operational       supporting TARP undergoes continuous
         and accounting environments.                  improvement to remain effective and is subject
                                                       to significant third party oversight by the GAO
OFS has a Senior Assessment Team (SAT) to              and the SIGTARP.
guide the organization’s efforts to meet the
statutory and regulatory requirements                  The Assistant Secretary for Financial Stability
surrounding a sound system of internal control.        reports annually to the Under Secretary for


15                                                                      MANAGEMENT‘S DISCUSSION AND ANALYSIS
                                                              AGENCY FINANCIAL REPORT | FISCAL YEAR 2012



Domestic Finance on the adequacy of the various     increases agency payment recapture efforts by
internal controls throughout OFS to include         requiring reviews of all programs with annual
financial management systems compliance. This       payments of $1 million or more, if cost effective.
assurance statement covers OFS’ compliance          IPERA requires agencies to report information
with the FMFIA, the Federal Financial               on their significant improper payments and
Management Improvement Act (FFMIA) and              recapture audit programs to the President and
OMB Circular A-123 (Management’s                    Congress annually.
Responsibility for Internal Control). In order to
support the Assistant Secretary’s letter of         The elimination of improper payments is a major
assurance, the respective OFS functional areas      focus of OFS senior management. Managers are
prepare individual statements of assurance.         held accountable for developing and
These individual statements of assurance            strengthening financial management controls to
provide evidence supporting the achievement of      detect and prevent improper payments, and
OFS’ internal control objectives and disclose any   thereby better safeguard taxpayer dollars. OFS
noted internal control weaknesses.                  carried out its fiscal year 2012 IPERA review
                                                    per Treasury-wide guidance and did not assess
Information Technology Systems                      any programs or activities as susceptible to
                                                    significant erroneous payments. However,
In fiscal year 2012, OFS continued to utilize and   management did identify the following matter:
improve the Core Investment Transaction Flow
(CITF), TARP’s system of record and accounting          •   A number of Making Home Affordable
translation engine. OFS added standardized                  (MHA) investor cost share payments
management reports to CITF to improve its                   were erroneously calculated due to data
usefulness to management decision-making and                discrepancies between servicer files and
added functionality to capture key data elements            the MHA system of record. Data that
for use in preparing the financial statements               servicers upload to the MHA system of
and associated notes.                                       record is used to calculate these
                                                            incentive payments. The overall impact
Other systems are supported by financial                    of the data errors on incentive payments
agents, which provide services to OFS. The                  was immaterial, and OFS management
financial agency agreements maintained by the               required servicers to take action to
Treasury Office of the Fiscal Assistant Secretary           correct these data discrepancies.
in support of OFS require financial agents to
design and implement suitably robust security       In fiscal year 2012, OFS concluded that a
plans and internal control programs, to be          payment recapture audit was not cost effective
reviewed and approved by OFS at least               as all programs were deemed to have a low risk
annually.                                           of significant improper payments. For many
                                                    programs, OFS already has procedures in place
In addition, OFS utilizes financial systems         to review payments for completeness and
maintained by Treasury Departmental Offices         accuracy prior to and after disbursement.
and various Treasury bureaus. These systems         Management leveraged OFS’ extensive internal
are in compliance with federal financial systems    control testing results or other compliance
standards and undergo regular independent           activities to corroborate risk assessment results,
audits.                                             as well as the Bureau of the Public Debt’s
                                                    testing results over administrative
Compliance with the Improper Payments               disbursements.
Elimination and Recovery Act (IPERA)
                                                    On April 12, 2012, OMB issued Memorandum
The Improper Payments Elimination and               12-11 "Reducing Improper Payments through
Recovery Act of 2010 (IPERA) requires agencies      the 'Do Not Pay List,'" based on a Directive
to review their programs and activities annually    provided by the President in June 2010. The
to identify those susceptible to significant        President directed agencies to "review current
improper payments. IPERA significantly              pre-payment and pre-award procedures and



MANAGEMENT‘S DISCUSSION AND ANALYSIS                                                                 16
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



ensure that a thorough review of available
databases with relevant information on                     •     Third party service providers will
eligibility occurs before the release of any                     continue to support critical services as
Federal funds." In order to achieve this mission,                programs continue to wind down. OFS
the President directed the creation of a single                  will monitor these third parties closely to
point of entry through which agencies would                      safeguard the operational efficiency of
access relevant data before determining                          programs and processes.
eligibility for Federal funding commonly referred
to as the "Do Not Pay List." Prior to the release          •     As OFS programs conclude and staff
of this directive, OFS already had strong                        continues to decrease, OFS plans to
controls in place to help ensure payment                         streamline the number and depth of
eligibility. In fiscal year 2013 and beyond, OFS                 policies and procedures to make them
will, as appropriate, integrate the "Do Not Pay                  more efficient and reduce the
List” solution into its processes.                               maintenance burden. OFS will manage
                                                                 this process through the Senior
Areas for Improvement                                            Assessment Team to ensure that any
                                                                 resulting risk is minimal and controlled.
Over the next year, OFS management will focus
on maintaining its internal control environment            •     OFS has developed information
in several key areas as follows:                                 technology capabilities to increase
                                                                 efficiency and automate manual
     •   As programs continue to wind down,                      processes. Continuing to leverage
         OFS will remain vigilant to maintain                    existing information technology assets
         effective processes and controls. OFS                   will help reduce risks associated with
         management will take steps to sustain                   human error. In addition, OFS
         adequate segregation of duties and the                  management will continue to strengthen
         right level of institutional knowledge                  IT-related controls towards a more
         among remaining staff as the size of the                mature IT environment supporting core
         organization decreases.                                 business processes.


Limitations of the Financial Statements
The principal financial statements have been           (GAAP) for Federal entities and the formats
prepared to report the financial position and          prescribed by the OMB, the statements are in
results of operations of OFS’ TARP programs,           addition to the financial reports used to monitor
consistent with the requirements of 31 U.S.C.          and control budgetary resources which are
3515(b). While the statements have been                prepared from the same books and records.
prepared from the books and records of the OFS
and the Department of the Treasury in                  The statements should be read with the
accordance with section 116 of EESA and                realization that they are for a component of the
Generally Accepted Accounting Principles               U.S. Government, a sovereign entity.




17                                                                     MANAGEMENT‘S DISCUSSION AND ANALYSIS
                                                               AGENCY FINANCIAL REPORT | FISCAL YEAR 2012




Operational Goals
The following discussion of OFS goals and            Bank Support Programs (CPP, TIP,
TARP programs focuses largely on the                 AGP, CDCI)
significant events that occurred from
inception through fiscal year 2012. A more           Capital Purchase Program
comprehensive discussion of each program,
including its development and prior years’
performance, can be found in the TARP Two-           OFS launched the Capital Purchase Program
Year Retrospective, the TARP Three Year              (CPP), the largest and most significant
Anniversary Report, and the TARP Four Year           program under EESA, on October 14, 2008.
Retrospective (expected to be published in           Through the CPP, OFS provided capital
December 2012) which are available at:               infusions directly to banks and thrifts deemed
http://www.treasury.gov/initiatives/financial-       viable by their regulators to bolster the capital
stability/reports/Pages/default.aspx                 position of institutions of all sizes and, in
                                                     doing so, to build confidence in these
                                                     institutions and the financial system as a
Operational Goal One: Ensure                         whole. With the additional capital, CPP
the Overall Stability and                            participants were better equipped to
                                                     undertake new lending and continue to
Liquidity of the Financial                           provide other services to consumers and
System                                               businesses, even while absorbing write-downs
                                                     and charge-offs on loans that were not
The first and most significant goal of TARP          performing.
was to help restore stability to the financial
system. Despite recent volatility in the stock       In the period following the CPP
market and shocks in the global economy, the         announcement, OFS provided $204.9 billion in
U.S. financial system today is more stable           capital to 707 institutions of all sizes and
than it was during the midst of the 2008             types across the country, including more than
crisis.                                              450 small and community banks and 22
                                                     community development financial institutions
Financial markets and the economy continue           (CDFIs) (see Table 7 below). The largest
to recover. Credit remains available for             investment was $25.0 billion and the smallest
consumers and businesses. Financial                  was $301,000. As Table 7 illustrates, smaller
institutions hold more capital relative to risk      financial institutions make up the vast
than they did before the crisis hit. Most of the     majority of participants in the CPP. Of the
government’s emergency responses to the              707 applications approved and funded by OFS
crisis are being wound down in a way that            through the CPP by the time it closed to new
protects the public’s interest and 88.5 percent      institutions on December 31, 2009, 473 or 66.9
of TARP program investments have been                percent were institutions with less than $1.0
collected through repayments, sales,                 billion in assets.
dividends, interest and other income.



 Table 7: CPP Investment Profile

                                    CPP Participants                 Total TARP Investment
       Asset Range               Number          Percent            Amount          Percent
 <$1 billion                            473           66.9%                 $3.8           1.8%
 $1 billion - $10 billion               177           25.0%                 10.0           4.9%
 >$10 billion                            57             8.1%               191.1         93.3%
 Total                                  707            100%              $204.9           100%


MANAGEMENT‘S DISCUSSION AND ANALYSIS                                                                  18
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



OFS received preferred stock or debt
securities in exchange for these investments.             Auction (and Other) Sales
Most financial institutions participating in the
CPP pay OFS a dividend rate of five percent               To expedite the wind down of the CPP, OFS
per year, which will increase to nine percent             will periodically sell preferred stock and
per year after the first five years starting in           subordinated debt in CPP participants
fiscal year 2014. From inception of the                   through both public and private auctions.
program through September 30, 2012, OFS                   OFS generally employs a modified Dutch
has received approximately $193.2 billion in              auction 8 process, which establishes a market
CPP repayments/sales, along with                          price by allowing investors to submit bids at
approximately $11.8 billion in CPP dividends              specified increments. Additional guidance for
and interest, and $14.6 billion of proceeds in            public auctions is available in prospectuses
excess of cost that includes $6.9 billion in net          that are filed by the issuers of the preferred
proceeds received from the sale of Citigroup              stock prior to the opening of each public
common stock in excess of cost.                           auction. For private auctions, the procedures
                                                          are described in full in the applicable bidder
During fiscal year 2012, OFS has focused on               letter agreement.
winding down the CPP according to the exit
strategy it announced on May 3, 2012. That                OFS held its first Dutch auction of CPP
strategy includes a combination of repayments             preferred securities and debentures in March
in the case of banks which are expected to                2012, and has held five additional auctions
repay in the near future, selling OFS’                    since that date. OFS has sold its investments
positions in banks through auctions, and                  in 40 banks with an aggregate outstanding
restructuring some investments, typically in              balance of $1.5 billion. These auctions
connection with a merger or other plan of the             resulted in combined proceeds of $1.3 billion
bank to infuse capital, in a way that                     or $180 million in proceeds less than cost.
maximizes timely OFS collections and helps
avoid bank failures. The extent to which OFS              Restructurings
employs each of the individual options will
depend on market conditions and other                     Another component of OFS’ exit strategy for
factors.                                                  the CPP is to restructure certain investments
                                                          where a bank makes a proposal to do so. This
Repayments                                                is typically done in connection with a merger
                                                          or the bank’s plan to raise new capital.
Under the terms of the CPP, participating                 Treasury agrees to receive cash (sometimes at
financial institutions may repay the funds                a discount to the original “par” value of the
they received at any time, so long as they have           investment) or other securities, which can be
the approval of their regulators. OFS cannot              more easily sold. Treasury will participate in
demand repayment of CPP preferred stock,                  these transactions in limited cases and only if
nor is OFS’ approval required for financial               the terms help maximize collections on behalf
institutions to repay.                                    of taxpayers.

During fiscal year 2012, 95 financial
institutions fully repaid a total of $8.1 billion,
including proceeds from auctions and sales.               8During  this modified Dutch auction process,
Repayments were received from several of the              Treasury, with advice from its external asset
largest remaining banks in the program such               managers and the auction agents, publicly discloses
as Regions Financial Corp ($3.5 billion), Zion’s          a minimum bid for each auction. Bidders are able
                                                          to submit one or more independent bids at different
Bancorp ($1.4 billion), and M & T ($0.4
                                                          price-quantity combinations at or above the set
billion).                                                 minimum price. The auction agent does not
                                                          provide bidders with any information about the
                                                          bids of other bidders or auction trends, or with
                                                          advice regarding bidding strategies, in connection
                                                          with the auction.

19                                                                    MANAGEMENT‘S DISCUSSION AND ANALYSIS
                                                          AGENCY FINANCIAL REPORT | FISCAL YEAR 2012



OFS also received warrants to purchase            to those funds that these financial institutions
common shares or other securities from the        received under the CPP. In December 2009,
financial institutions at the time of the CPP     both participating institutions repaid their
investment. The purpose of the additional         TIP investments in full, with dividends. Total
securities is to provide opportunities for OFS    TIP dividends were about $3.0 billion during
to reap additional returns on the investments     the life of the program. OFS also received
made by it as CPP participants recover. From      warrants from each bank which provided the
inception of the program through September        taxpayer with additional gain on the
30, 2012, OFS has received nearly $7.7 billion    investments when OFS sold the BofA
in proceeds from the sale/repurchase of CPP       warrants in fiscal year 2010 for $1.2 billion
warrants.                                         and the Citigroup warrant in fiscal year 2011
                                                  for $190 million. TIP closed during fiscal year
For additional information, please see OFS’       2011 and resulted in a positive return for
Monthly Report to Congress (also known as         taxpayers.
the 105a Report), which can be found at:
http://www.treasury.gov/initiatives/financial-    Asset Guarantee Program
stability/reports/Pages/Monthly-Report-to-
Congress.aspx                                     Under AGP, OFS acted to support the value of
                                                  certain assets held by qualifying financial
                                                  institutions, by agreeing to absorb a portion of
Refinancing Through the Small Business            the losses on those assets. The program was
Lending Fund                                      conducted jointly by Treasury, the FRBNY
                                                  and the Federal Deposit Insurance
In fiscal year 2011, 137 CPP institutions         Corporation (FDIC). Like TIP, it was
refinanced their CPP investments totaling         designed for financial institutions whose
more than $2.2 billion using the Small            failure could harm the financial system and
Business Lending Fund (SBLF). These               reduce the potential for “spillover” to the
refinancing transactions moved the risk           broader financial system and economy. The
associated with these institutions’ repayments    AGP was used to assist BofA and Citigroup in
from OFS to SBLF. SBLF is not a TARP              conjunction with TIP investments in those
program and does not use TARP funds. The          institutions. The arrangement with BofA was
SBLF ceased making new commitments at the         terminated before it was formally finalized,
close of fiscal year 2011. As a result, there     with BofA paying OFS a termination fee.
were no SBLF refinances in fiscal year 2012.      Under the terms of the guarantee agreement
                                                  with Citigroup, OFS, the FDIC, and the
Targeted Investment Program                       FRBNY received a premium for the guarantee
                                                  of $7.0 billion in Citigroup preferred stock and
OFS established the Targeted Investment           warrants. Additional information on the two
Program (TIP) in December 2008. Through           institutions under AGP can be found in the
TIP, OFS sought to prevent a loss of              OFS’ fiscal year 2010 Agency Financial Report
confidence in critical financial institutions,    available at:
which could result in significant financial       http://www.treasury.gov/initiatives/financial-
market disruptions, threaten the financial        stability/reports/Pages/Annual-Agency-
strength of similarly situated financial          Financial-Reports.aspx.
institutions, impair broader financial markets,
and undermine the overall economy. TIP was        Although the guarantee was originally
considered “exceptional assistance” for           expected to be in place for five to ten years,
purposes of executive compensation                Citigroup requested that it be terminated in
requirements.                                     December 2009 in conjunction with its
                                                  repayment of $20 billion it received from the
OFS invested $20.0 billion in preferred stock     TIP. The banking regulators approved its
in each of two institutions – Bank of America     request in conjunction with Citibank's raising
(BofA) and Citigroup – under TIP, in addition     of more than $20 billion of private capital.



MANAGEMENT‘S DISCUSSION AND ANALYSIS                                                             20
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



In connection with the termination, Treasury              OFS completed funding under this program in
and the FDIC kept most of the premium paid                September 2010. The total investment
by Citigroup. Specifically, the government                amount for the CDCI program under TARP is
retained a total of $5.2 billion of the $7.0              $570 million for 84 institutions. Of this
billion of preferred stock (which had since               amount, $363 million resulted from 28 banks
been converted to trust preferred securities).            exchanging their investments under the CPP
OFS’ portion was $2.2 billion.                            into the CDCI. As of September 30, 2012, one
                                                          institution representing $7 million went into
The FDIC and OFS agreed that, subject to
                                                          receivership and OFS does not expect any
certain conditions, the FDIC would transfer to
                                                          collection on the associated preferred shares,
OFS $800 million of their Citigroup trust
                                                          and two institutions representing $3 million
preferred stock holding plus dividends thereon
                                                          have fully repaid OFS. Due to the unique
contingent on Citigroup repaying its
                                                          nature of these institutions and the difficulties
previously-issued FDIC guaranteed debt
                                                          faced by the communities they serve, OFS
under the FDIC’s Temporary Liquidity
                                                          designed this program to encourage
Guarantee Program which expires on
                                                          repayment over a longer period of time. So for
December 31, 2012. OFS sold its trust
                                                          the time being, OFS will continue to hold
preferred securities in October 2010 and the
                                                          these investments and will evaluate its
AGP warrants in January 2011, leaving only
                                                          options for exiting them at a later date.
the $800 million of trust preferred stock
receivable from the FDIC valued at $967
million (including dividends thereon held by
FDIC) at September 30, 2012. During fiscal
                                                          Credit Market Programs (PPIP,
year 2013, OFS expects to receive and                     TALF, SBA 7(a))
liquidate the $800 million Citigroup trust
preferred securities.                                     Public-Private Investment Program

The AGP is now closed and resulted in a                   During the financial crisis, many institutions
positive return for taxpayers. No OFS                     and investors were under extreme pressure to
payments were made under the program.                     reduce indebtedness. This de-leveraging
                                                          process pushed down the market prices for
Community Development Capital                             many financial assets, including troubled
Initiative                                                legacy securities (i.e., non-agency residential
                                                          mortgage-backed securities (RMBS) and
The CDFIs focus on providing financial                    commercial mortgage-backed securities
services to communities underserved by                    (CMBS)) below their fundamental value.
traditional banks, such as low- and moderate-             Institutions and investors were trapped with
income, minority, and other underserved                   these hard-to-value assets, marked at
communities. OFS launched the Community                   distressed prices on their balance sheets,
Development Capital Initiative to help viable             which constrained liquidity and the
certified CDFIs and the communities they                  availability of credit in these markets.
serve cope with effects of the financial crisis.
Under this program, CDFI banks and thrifts                The OFS designed the PPIP to facilitate the
received investments of capital with an initial           purchase of troubled legacy securities (i.e.,
dividend or interest rate of two percent,                 non-agency RMBS and CMBS) by providing
compared to the five percent rate generally               financing on attractive terms as well as a
offered under CPP. CDFI banks and thrifts                 matching equity investment made by private
applied to receive capital up to five percent of          investors. By drawing new private capital
risk-weighted assets. To encourage                        into the market for legacy RMBS and CMBS,
repayment while recognizing the unique                    PPIP was designed to help restart the market
circumstances facing CDFIs, the dividend rate             for these securities, thereby facilitating the
will increase to nine percent after eight years,          removal of these assets from financial
compared to five years under CPP.                         institutions’ balance sheets and allowing for



21                                                                    MANAGEMENT‘S DISCUSSION AND ANALYSIS
                                                                 AGENCY FINANCIAL REPORT | FISCAL YEAR 2012



more credit to become available for consumers            distributed to the investors, including OFS, in
and small businesses.                                    proportion to their equity capital investments.
                                                         OFS also receives warrants from the PPIFs,
Under the program, Public-Private                        which gives OFS the right to receive a
Investment Funds (PPIFs) were established                percentage of the profits that would otherwise
by private sector fund managers for the                  be distributed to the private partners that are
purpose of purchasing eligible legacy                    in excess of their contributed capital. The
securities from banks, insurance companies,              program structure allows for risk to be spread
mutual funds, pension funds, and other                   between the private investors and OFS and
eligible sellers as defined under EESA. OFS              provides taxpayers with the opportunity for
matches equity dollar-for-dollar and lends up            positive returns.
to the amount of equity raised by the PPIFs
for the purpose of purchasing eligible RMBS              PPIP Results
and CMBS from eligible financial institutions
under EESA.                                              Treasury originally committed approximately
                                                         $22.1 billion of equity and loans to the nine
PPIFs have the ability to invest in eligible             PPIFs. After completing their fundraising,
assets over a three-year investment period               PPIFs closed on approximately $7.4 billion of
ending in December 2012 for the remaining                private sector equity capital commitments,
PPIFs. They then have up to five additional              which were matched 100 percent by OFS,
years, which may be extended for up to two               representing $14.7 billion of equity capital
more years, to manage these investments and              commitments. In the aggregate, all nine
return the proceeds to OFS and the other                 PPIFs had $29.4 billion of total purchasing
PPIF investors. PPIP fund managers retain                power. The following is a summary of the
control of asset selection, purchasing, trading,         commitments and investments in individual
and disposition of investments. The profits              PPIFs as of September 30, 2012.
generated by a PPIF, net of expenses, will be

Table 8: OFS Commitments and Investments in PPIFs
(Dollars in billions)
                                                                                                 Total
                             Purchase                                  Amount        Other
PPIF                          Price
                                         Disbursements   Repayments
                                                                      Outstanding   Receipts3
                                                                                                 Cash
                                                                                                 Back
Angelo, Gordon & Co., LP
                                $ 3.6           $ 3.4        $ 1.1         $ 2.3       $ 0.6      $ 1.7
and GE Capital Real Estate
BlackRock, Inc                     2.1             1.5          0.2           1.3         0.2       0.4
Invesco Ltd.1                      2.0             1.7          1.7             -         0.2       1.9
Marathon Asset
                                   1.4             1.4          0.1           1.3         0.2       0.3
Management, LP
Oaktree Capital
                                   3.5             1.7          0.3           1.4           -       0.3
Management, LP
RLJ Western Asset
                                   1.9             1.9          1.4           0.5         0.4       1.8
Management, LP
The TCW Group, Inc2                0.4             0.4          0.4             -           -       0.4
Wellington Management
                                   3.4             3.4          0.4           3.0         0.3       0.7
Company, LLP
Alliance Bernstein1               3.3             3.2          3.2          0.00         0.5        3.7
Total                          $ 21.6          $ 18.6        $ 8.8         $ 9.8       $ 2.4     $ 11.2
1 Investment period has expired or been terminated.
2 Thefund has been closed.
3 Other receipts includes interest, investment income and proceeds in excess of cost.




Wind Down Status for PPIFs



MANAGEMENT‘S DISCUSSION AND ANALYSIS                                                                      22
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



                                                          authorized the FRBNY to extend up to $200.0
In March 2012, Invesco Legacy Securities                  billion in non-recourse loans to borrowers to
Master Fund (Invesco Ltd) became the second               enable the purchase of newly issued asset-
PPIF to sell its remaining investments,                   backed (including newly issued CMBS and
repaying all of the $1.2 billion in debt and              legacy CMBS) AAA-rated securities including
$581 million in equity capital invested by OFS            those backed by consumer loans, student
in the fund. Cumulatively, OFS received $18               loans, small business loans, and commercial
million in interest and $139 million of                   real estate loans. In return, the borrowers
proceeds in excess of original equity capital,            pledged the eligible collateral with a risk
including $3 million in warrant proceeds from             premium (“haircut”) as security for the loans.
Invesco Ltd.                                              Should a borrower default upon its TALF loan
                                                          or voluntarily surrender the collateral, it
In July 2012, RLJ Western formally                        would be seized and sold to TALF LLC, a
terminated its investment period. As of                   special purpose vehicle created by FRBNY to
September 30, 2012, RLJ Western has repaid                purchase and hold seized or surrendered
all of the $1.2 billion in debt and $144 million          collateral. Through September 30, 2012,
of the original $621 million in equity capital            TALF LLC has not purchased any collateral
invested by OFS. Cumulatively, OFS received               from the FRBNY.
$37 million in interest and $340 million of
proceeds in excess of original equity capital.            OFS originally committed to provide $20.0
                                                          billion in the form of a subordinated loan
As of September 2012, Alliance Bernstein also             commitment to TALF LLC. This commitment
substantially wound down the fund. As of                  was reduced to $4.3 billion after the program
September 30, 2012, Alliance Bernstein has                closed to new lending in June 2010, which
repaid all of the $2.1 billion in debt and all of         represented 10 percent of the outstanding
the $1.1 billion in equity capital invested by            TALF loans at the time. In June 2012, the
OFS in the fund. Cumulatively, OFS received               commitment was further reduced to $1.4
$58 million in interest and $448 million in               billion at a time when the outstanding loans
proceeds in excess of original equity capital.            were $3.5 billion. As of September 30, 2012,
                                                          $1.5 billion of TALF loans due to the FRBNY
OFS provides quarterly status reports on the              remained outstanding and the TALF program
program’s performance. For more information               has experienced no losses. OFS does not
on these holdings and the performance of the              expect any program cost to the taxpayers from
PPIFs, readers can refer to the most recent               this program.
PPIP Quarterly Report available at:
http://www.treasury.gov/initiatives/financial-            Small Business Administration 7(a)
stability/reports/Pages/Public-Private-                   Securities Purchase Program
Investment-Program-Quarterly-Report.aspx
                                                          Small businesses play an important role in
                                                          generating new jobs and growth in our
Term Asset-Backed Securities Loan                         economy. The SBA’s 7(a) Loan Guarantee
Facility                                                  Program assists start-up and existing small
                                                          businesses that face difficulty in obtaining
TALF was a joint Federal Reserve-OFS                      loans through traditional lending channels.
program that was designed to restart the
asset-backed securities (ABS) market that                 To help ensure that credit flows to
provide credit to consumers and small                     entrepreneurs and small business owners,
businesses, which had ground to a virtual                 OFS developed the SBA 7(a) Securities
standstill during the early months of the                 Purchase Program to purchase SBA-
financial crisis.                                         guaranteed securities from pool assemblers.
                                                          Purchasing securities from participating pool
Pursuant to its Federal Reserve Act Section               assemblers enabled them to purchase
13(3) authority, the Federal Reserve Board                additional small business loans from loan


23                                                                   MANAGEMENT‘S DISCUSSION AND ANALYSIS
                                                          AGENCY FINANCIAL REPORT | FISCAL YEAR 2012



originators. OFS invested in a total of 31 SBA    made by unions, dealers, creditors and other
7(a) securities with a value of approximately     stakeholders, and the restructurings were
$367 million (excluding purchased accrued         achieved through bankruptcy court
interest) between March and September 2010.       proceedings in a record time. As a result,
Those securities were comprised of 1,001 loans    General Motors Company (New GM) and
from 17 different industries, including retail,   Chrysler Group LLC (New Chrysler) are more
food services, manufacturing, scientific and      competitive and viable companies, supporting
technical services, health care, educational      American jobs and the economy. Operating
services, and others. Through its purchases,      results have improved, the industry has added
OFS injected much needed liquidity into this      jobs, and TARP investments have begun to be
market to help restart the flow of credit,        repaid.
enabling pool assemblers to purchase
additional small business loans from loan         In total, OFS disbursed $79.7 billion in loans
originators. Since OFS began its purchases,       and equity investments to GM, GMAC (now
the SBA 7(a) market has now recovered with        known as Ally Financial), Chrysler, and
new SBA 7(a) loan volumes returning to pre-       Chrysler Financial. Please see Note 6 of
crisis levels.                                    financial statements for further information
                                                  on the AIFP subsidy cost.
In January 2012, OFS sold its eight remaining
SBA 7(a) securities in the portfolio, marking     General Motors
the successful wind down of the SBA 7(a)
Securities Purchase Program. In total, OFS        OFS provided $49.5 billion under TARP to Old
collected $376 million through sales ($334        GM. The initial assistance was a $13.4 billion
million) and principal payments ($29 million)     loan in December 2008 to Old GM to fund
and interest payments ($13 million) over the      working capital. Under the loan agreement,
life of the program, representing cash            Old GM was required to submit a viable
collections of approximately $9 million more      restructuring plan. The first plan Old GM
than its original investment of $367 million.     submitted failed to establish a credible path to
                                                  viability, and the deadline was extended to
                                                  June 2009 for Old GM to develop an amended
                                                  plan. OFS loaned an additional $6.0 billion to
Other Programs
                                                  fund Old GM as it worked to submit a viable
                                                  restructuring plan. To achieve an orderly
Automotive Industry Financing Program             restructuring, Old GM filed for bankruptcy on
                                                  June 1, 2009. OFS provided $30.1 billion
The Automotive Industry Financing Program         under a debtor-in-possession financing
(AIFP) was launched in December 2008 to           agreement to assist Old GM during the
help prevent the disorderly liquidation of        restructuring. A newly formed entity, New
Chrysler and General Motors (GM) and thus a       GM purchased most of the assets of Old GM
significant disruption of the U.S. auto           under a sale pursuant to Section 363 of the
industry. The potential for such a disruption     bankruptcy code (363 Sale). When the sale to
at that time posed a significant risk to          New GM was completed on July 10, 2009,
financial market stability and threatened the     OFS converted most of its loans into 60.8
overall economy.                                  percent of the common equity in New GM and
                                                  $2.1 billion in preferred stock. At that time,
Recognizing both General Motors Corporation       OFS held $6.7 billion in outstanding loans
(Old GM) and Chrysler Holdings LLC (Old           which were repaid in full during fiscal year
Chrysler) were on the verge of potentially        2010. Approximately $986 million in loans to
disorderly liquidations, OFS extended             Old GM (now known as Motors Liquidation
temporary loans to GM and Chrysler in             Company) for wind-down costs associated with
December 2008. OFS agreed to provide              its liquidation remained outstanding.
additional funds conditioned on each company
and its stakeholders participating in a           Following confirmation of the plan for
fundamental restructuring. Sacrifices were        liquidation by the bankruptcy court, New GM


MANAGEMENT‘S DISCUSSION AND ANALYSIS                                                             24
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



emerged from the managed bankruptcy                       trades or dribble out programs, or a
process as a stronger, more viable, and more              combination of the above. OFS will continue
competitive company. In 2010, New GM                      to evaluate its options based on market
posted its first annual profit in six years.              conditions.
Since then, it has continued to add jobs and
post strong growth.
                                                          Chrysler
In November 2010, New GM completed its
initial public offering (IPO), with gross                 OFS disbursed a total of $12.4 billion to
proceeds to OFS of $13.6 billion, resulting in            Chrysler related entities including Old
OFS reporting net proceeds less than cost of              Chrysler and New Chrysler. During fiscal
$4.3 billion. The IPO reduced OFS’ ownership              year 2011, OFS fully exited its loans and
of New GM’s outstanding common stock by                   investment relating to Chrysler entities, six
nearly half. New GM then purchased all of                 years ahead of the scheduled maturity of its
OFS' preferred shares, further reducing the               loans. Of the $12.4 billion that was disbursed
OFS’s stake in the company.                               to Chrysler related entities under TARP, OFS
                                                          collected more than $11.1 billion through
In March 2011, the Plan of Liquidation for Old            principal repayments, sale of investments,
GM became effective and OFS’ $986 million                 and interest. While OFS retains a right to
loan to Old GM was converted to an                        receive proceeds from a liquidation trust, no
administrative claim. During fiscal year 2011,            significant future cashflows are expected.
OFS received payments totaling $111 million               The $12.4 billion disbursed to Chrysler related
from Motors Liquidation Company. During                   entities are made up primarily of the following
fiscal year 2012, OFS received payments of                transactions:
$26 million from Motors Liquidation
Company. OFS retains the right to recover                 In January 2009, OFS loaned $4.0 billion to
additional proceeds; however, any additional              Old Chrysler and the company was required
recovery is dependent on actual liquidation               to implement a viable restructuring plan. In
proceeds and pending litigation. OFS does not             fiscal year 2010, Old Chrysler repaid $1.9
expect significant additional recoveries on this          billion while a $500 million existing liability
administrative claim.                                     was assumed by New Chrysler. OFS wrote off
                                                          the remaining $1.6 billion of this loan.
As of September 30, 2012, OFS holds
approximately 500 million common stock
                                                          During fiscal year 2009 the Administration
shares with a value of $11.4 billion,
                                                          laid out a framework for Old Chrysler to
representing 31.9 percent of the outstanding
                                                          achieve viability by partnering with the
shares of common stock in New GM as
                                                          international car company Fiat and OFS
discussed in Note 6 to the OFS Financial
                                                          provided $1.9 billion to Old Chrysler under a
Statements. As of that date, OFS has collected
                                                          debtor-in-possession (DIP) financing
$24.0 billion of its total $51.0 billion
                                                          agreement for assistance during Old
investment 9.
                                                          Chrysler’s bankruptcy proceeding. The DIP
                                                          loan was extinguished by the bankruptcy
Since New GM is a publically-traded company               court in April 2010, including collateral
and its stock is highly liquid, OFS can exit its          security attached to the loan, and transferred
investment over time through sales of its                 to a liquidation trust. OFS retained the right
remaining common shares on the open                       to recover the proceeds from the liquidation of
market, through underwritten offerings, block             the specified collateral and received $40
                                                          million from the liquidation trust in fiscal
9                                                         year 2010, $8 million in fiscal year 2011, and
  GM $51.0 billion of assistance consists of a $49.5
                                                          $9 million in fiscal year 2012.
billion loan to Old GM, $884 million loan to old GM
to purchase GMAC rights, and $651 million in loans        In June 2009, a newly formed entity, Chrysler
for Supplier and Warranty Programs.                       Group LLC, (New Chrysler) purchased most of


25                                                                   MANAGEMENT‘S DISCUSSION AND ANALYSIS
                                                            AGENCY FINANCIAL REPORT | FISCAL YEAR 2012



the assets of Old Chrysler under a 363 sale.        Financial with a liquidation preference of $5.5
OFS provided a $6.6 billion loan commitment         billion into common stock. The conversion
to New Chrysler (of which $4.6 billion was          increased OFS’ common equity stake in Ally
disbursed), and received $384 million in            Financial from 56 percent to 74 percent of
additional notes and a 9.9 percent equity           total common shares outstanding.
ownership in New Chrysler.
                                                    In fiscal year 2011, Ally commenced work on
In May 2011, New Chrysler repaid $5.1 billion       an initial public offering which would have
in TARP loans, $384 million relating to             enabled OFS to begin exiting its common
additional notes received, and interest             stock investment. However, Ally was forced to
thereon, and terminated its ability to draw a       delay the IPO due to intensifying issues
remaining $2.1 billion TARP loan                    related to legacy liabilities of its subsidiary,
commitment. New Chrysler’s repayment came           ResCap, a residential mortgage company, as
six years before the scheduled maturity of          well as a general weakening in the IPO
those loans in 2017. In July 2011, OFS              market.
received $560 million in proceeds from the
sale of its remaining stake in New Chrysler to      In March 2011, OFS sold all of its Ally
Fiat. With the closing of this transaction,         Financial trust preferred securities at par.
OFS completed its exit from New Chrysler.           Aggregate proceeds from the sale totaled $2.7
                                                    billion. With the proceeds from this sale, OFS
                                                    has received $5.7 billion from Ally Financial
Ally Financial (formerly GMAC)                      from inception of the program through
                                                    September 30, 2012, including $3.0 billion in
                                                    dividends.
In December 2008, OFS made an initial
investment of $5.0 billion in GMAC. OFS also        In May 2012, ResCap filed to enter into a
lent $884 million of TARP funds to Old GM for       Chapter 11 reorganization process. ResCap,
the purchase of additional ownership interests      about one-tenth the size of Ally based on
in a rights offering by GMAC. In May 2009,          assets, is a separate and distinct company
federal banking regulators required GMAC to         from Ally that has its own board of directors
raise additional capital by November 2009 in        and creditors. OFS does not hold any equity,
connection with the Supervisory Capital             debt, or other direct investment in ResCap.
Assistance Program (SCAP)/stress test.              While it is unfortunate that a Chapter 11
Concurrently, OFS exercised its option to           filing became necessary for ResCap, OFS
exchange the loan with Old GM for 35.4              believes this action puts OFS in a stronger
percent of common membership interests in           position to continue recovering OFS’
GMAC. OFS also purchased $7.5 billion of            investment in Ally Financial. Ally’s
convertible preferred shares from GMAC in           automotive financing business has remained
May 2009, which enabled GMAC to partially           profitable and its retail banking operation has
meet the Supervisory Capital Assessment             grown. Concurrently with the filing by
Program (SCAP) requirements. In December            ResCap, Ally began exploring strategic
2009, OFS made additional investments of            alternatives for its international business in a
$3.8 billion in GMAC to enable GMAC to              manner that Ally believes will maximize value
satisfy the SCAP requirements and exchanged         for its shareholders.
certain preferred shares for common stock.
OFS provided the $3.8 billion in new capital in     As of September 30, 2012, OFS held 119
the form of $2.5 billion of trust preferred         million convertible preferred stock shares with
securities, which are senior to all other capital   a liquidation preference of $5.9 billion and 74
securities of the company, and $1.3 billion of      percent of Ally Financial’s outstanding
mandatory convertible preferred stock.              common stock as discussed in Note 6 to the
                                                    OFS Financial Statements.
In May 2010, GMAC changed its corporate
name to Ally Financial, Inc. In December
2010, OFS converted preferred stock in Ally


MANAGEMENT‘S DISCUSSION AND ANALYSIS                                                               26
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



OFS provided a total of $16.3 billion to GMAC             the chaotic environment of September 2008,
from December 2008 through December 2009                  the Federal Reserve and Treasury concluded
to help support its ability to issue new loans to         that AIG’s failure could be catastrophic.
GM and Chrysler dealers and consumers and                 Among other things, if AIG had failed, the
to address the company’s capital needs. As of             crisis would have almost certainly spread to
September 30, 2012, OFS has collected $5.7                the entire insurance industry, and its failure
billion, consisting of $3.0 billion in dividend           could have directly affected the savings of
receipts on the mandatory convertible                     millions of Americans. Therefore, Treasury
preferred, warranty preferred, and trust                  and the FRBNY took action to protect the U.S.
preferred securities (TruPS), and $2.7 billion            financial system.
from the sale of TruPS, (including $127
million of proceeds in excess of cost).                   During the fall of 2008, the Federal Reserve
                                                          and OFS took a series of steps to prevent
                                                          AIG’s disorderly failure and mitigate systemic
American International Group, Inc. (AIG)                  risks. The initial assistance to AIG was
Investment Program                                        provided by the FRBNY before the passage of
                                                          EESA and the creation of TARP. After EESA
The peak amount of assistance offered to AIG              became law, OFS and the Federal Reserve
by the FRBNY and Treasury was $182.3                      continued to work together to address the
billion, a part of which ($22.1 billion) was              challenges posed by AIG.
later cancelled, and an amount in excess of the
total disbursed has now been recovered                    In November 2008, OFS invested $40.0 billion
through repayments, sales and other income.               in senior preferred stock of AIG and it also
Through September 30, 2012, Treasury                      received warrants to purchase common shares
disbursed a total of $67.8 billion to AIG and             in the firm. The funds were used immediately
has collected $65.3 billion (of this, OFS                 to reduce the loans provided to AIG by the
disbursed $67.8 billion and collected $50.3               FRBNY. The preferred stock was
billion). Treasury’s collections include                  subsequently exchanged in April 2009, for face
proceeds from sales of a total of 1.4 billion AIG         value plus accrued dividends, into $41.6
common stock shares resulting in proceeds in              billion of a different series of preferred stock.
excess of costs for non-TARP shares of $15.0              Complete details on the AIG investment are
billion and proceeds less than cost of $11.8              available in the TARP Three Year
billion for TARP shares.                                  Anniversary Report and the TARP Two-Year
                                                          Retrospective Report which are both available
In September 2008, AIG was the largest                    at:
provider of conventional insurance in the                 http://www.treasury.gov/initiatives/financial-
world, with approximately 75 million                      stability/briefing-
individual and corporate customers in more                room/reports/agency_reports/Pages/default.as
than 130 countries. AIG’s assets exceeded $1              px.
trillion and insured 180,000 businesses and
other entities employing more than 100                    In fiscal year 2011, Treasury, including OFS,
million people in the U.S. It was a large                 FRBNY, the trustees of the AIG Credit
issuer of commercial paper and the second                 Facility Trust (the Trust) 10 and AIG
largest holder of U.S. municipal bonds.                   completed a restructuring of AIG and
                                                          Treasury, including OFS, and the FRBNY
Then, the financial crisis peaked in 2008.                began exiting their respective investments.
AIG’s parent holding company engaged in                   The restructuring, which was announced on
financial activities that were well beyond the            September 30, 2010 and completed in January
business of life insurance and property and
casualty insurance. Its financial products
unit was a significant participant in some of
                                                          10The independent trust established to manage the
the newest, riskiest, and most complex                    Department of Treasury’s beneficial interest in
transactions of the U.S. financial system. In             Series C preferred AIG shares.



27                                                                    MANAGEMENT‘S DISCUSSION AND ANALYSIS
                                                            AGENCY FINANCIAL REPORT | FISCAL YEAR 2012



2011, was a series of integrated transactions       the Treasury for the non-TARP shares of
and corporate actions designed to accelerate        $13.0 billion. The proceeds to OFS from such
the repayment of U.S. taxpayer funds and to         common stock sales were $9.9 billion less than
promote AIG’s transition from a majority            the cost of the shares.
government owned and supported entity to a
financially sound and independent entity. As        As of September 30, 2012, Treasury’s
part of the restructuring, AIG drew $20.3           remaining outstanding AIG investments
billion from the capital facility made available    consisted of 234 million shares of AIG common
by OFS, for a total of $27.8 billion drawn and      stock, consisting of 154 million TARP shares
AIG repaid FRBNY a total of $47.0 billion, as       and 80 million non-TARP shares. Treasury’s
a result of which AIG no longer had any             percentage ownership of AIG’s outstanding
outstanding obligations to the FRBNY                shares of common stock was 15.9 percent at
(although the FRBNY still had loans to two          such date (of which the TARP shares are 10.5
special purpose vehicles which acquired assets      percent and non-TARP shares are 5.4
from AIG). Following the restructuring, OFS’        percent). OFS’ remaining TARP shares have
total investment in AIG was $67.8 billion, and      a cost basis of $43.53 per share and have a
as of January 31, 2011, Treasury’s investment       fair market value of $5.1 billion, or $32.79 per
consisted of approximately 1.7 billion shares       share, as of September 30, 2012. The Treasury
of AIG common stock (1.1 billion shares owned       non-TARP shares, which were received from
by OFS and 563 million shares owned by the          the trust, are not owned by OFS and,
Treasury, which were received on the                consequently, are not included in the OFS
termination of the Trust), representing             financial statements and were provided to
ownership of 92 percent of the company (77          Treasury at no cost. The figure of $28.73 per
percent held by OFS and 15 percent held by          share is often referred to as Treasury’s “break-
the Treasury outside of OFS) as well as $20.3       even” price for AIG common stock sales in
billion of OFS’ preferred interests in two AIG      order for Treasury to recover the TARP AIG
SPVs. The AIG SPVs are wholly owned by              investment because that number averages the
AIG and consolidated on the AIG financial           cost over the TARP and non-TARP shares.
statements. The OFS owned 100 percent of            Additional discussion of the AIG investment
the preferred interests in the two AIG SPVs.        including subsidy cost can be found in Note 6
                                                    to the OFS Financial Statements.
Exiting the Government’s AIG Investment

During fiscal year 2012, AIG completed the
repayment of OFS’ preferred interests in the
                                                    Operational Goal Two: Prevent
AIG SPVs. In March 2012, OFS received $8.6          Avoidable Foreclosures and
billion in repayments of its preferred interest     Preserve Homeownership
in the AIG AIA SPV. This allowed for OFS’
preferred interests in AIG SPVs to be repaid
in full.                                            OFS established several programs under
                                                    TARP to address the historic housing crisis
During fiscal year 2012, the Treasury’s,            and important new reforms are being
including OFS’, common stock investment in          introduced in part because of TARP’s housing
AIG was also substantially reduced. Over the        programs. While the housing market remains
course of the year, OFS conducted four              fragile, there have been more than 1.2 million
offerings that sold a total of 1.2 billion shares   homeowner assistance actions taken through
of AIG common stock (consisting of 806              the Making Home Affordable (MHA) program
million TARP shares and 415 million                 (a joint TARP and government sponsored
Treasury non-TARP shares) at prices that            enterprise (GSE) initiative) to assist
                                                                      11

ranged from $29.00 per share to $32.50 per
share. Total proceeds from these fiscal year
2012 sales of AIG common stock amounted to          11GSEs involved in MHA include Fannie Mae and
$38.2 billion, consisting of $25.2 billion in       Freddie Mac.
proceeds to OFS and additional proceeds to


MANAGEMENT‘S DISCUSSION AND ANALYSIS                                                               28
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



struggling homeowners 12. In addition, TARP’s
housing programs have also transformed the                Making Home Affordable (MHA)
mortgage servicing industry. These programs
have changed industry standards and                       Launched in February 2009, MHA consists of
practices and have helped to make mortgage                several programs designed to help struggling
modifications become more sustainable and                 homeowners prevent avoidable foreclosures.
affordable. Since March 2009, there have been             The cornerstone of MHA is the Home
more than 3 million private-sector mortgage               Affordable Modification Program (HAMP).
modifications, in part because of the new                 HAMP is a first-lien mortgage modification
standards that TARP’s housing programs                    program that provides incentives to mortgage
have established.                                         servicers, investors, and homeowners to
                                                          reduce eligible homeowners’ monthly
Using authority granted under EESA, OFS                   payments to affordable levels. Under this
established two central housing programs                  program, OFS pays the incentives for the
under TARP. There is the MHA program,                     modification of loans not held by GSEs while
which includes the Home Affordable                        the GSEs bear the cost of modifications of
Modification Program (HAMP) and several                   loans held by the GSEs. HAMP is the largest
additional programs to help homeowners                    program within MHA and includes several
refinance or address specific types of                    additional components to complement first
mortgages. There is also the Hardest Hit                  lien modifications:
Fund (HHF) Program which commits $7.6
billion to the 18 hardest hit states, plus the                   •   The Principal Reduction Alternative
District of Columbia, to develop locally-                            (PRA), which was implemented in
tailored programs to assist struggling                               October 2010. PRA requires servicers
homeowners in their communities. In                                  of non-GSE loans to evaluate the
addition, OFS provided support for the                               benefit of principal reduction for
Federal Housing Administration’s Short                               mortgages with a loan-to-value (LTV)
Refinance Program that assists borrowers who                         ratio greater than 115.0 percent when
are current on their mortgage (or complete a                         evaluating a homeowner for a HAMP
trial payment plan) but owe more than their                          first lien modification. While servicers
home is worth, to refinance into an FHA-                             are required to evaluate homeowners
insured loan.                                                        for PRA, they are not required to offer
                                                                     principal reduction and generally may
To protect taxpayers, the MHA and HHF                                only do so when permitted by the
housing initiatives generally have pay-for-                          mortgage investor. PRA pays investors
success incentives: funds are disbursed only                         incentives for every dollar of principal
when transactions are completed and                                  forgiven, according to a sliding scale
thereafter only as long as those contracts                           depending on the degree to which the
remain in place. Therefore, funds will be                            homeowner's unmodified balance is
disbursed over many years. The total cost of                         greater than the market value of the
the Treasury housing programs under TARP,                            home and the delinquency status of
excluding administrative costs, cannot                               the homeowner at time of
exceed—and may be less than—$45.6                                    modification.
billion 13, which is the amount committed to
that purpose.                                                    •   The Home Affordable Unemployment
                                                                     Program (UP) requires participating
 726,253 of these actions were TARP funded
12                                                                   servicers to grant qualified
modifications.
                                                                     unemployed borrowers a forbearance
                                                                     period during which their mortgage
13 This amount includes $29.9 billion for MHA, $7.6                  payments are temporarily reduced or
billion for HHF, and $8.1 billion for FHA-Refinance                  suspended while they look for
programs.                                                            employment. At the end of this
                                                                     forbearance period, if the homeowner
                                                                     receives a HAMP modification, the

29                                                                      MANAGEMENT‘S DISCUSSION AND ANALYSIS
                                                          AGENCY FINANCIAL REPORT | FISCAL YEAR 2012



       forborne amount is capitalized onto        MHA Results
       the unpaid principal balance. This
       program does not require any               The incentives offered under MHA are helping
       payments from OFS.                         homeowners and assisting in stabilizing the
                                                  housing market. As of September 30, 2012, 96
   •   The Home Affordable Foreclosure            servicers are actively participating in MHA.
       Alternatives Program (HAFA), which         Between loans covered by these servicers and
       helps homeowners exit their homes          other loans owned or guaranteed by the GSEs,
       and transition to a more affordable        more than 85 percent of first-lien residential
       living situation through a short sale or   mortgage loans in the country are now held by
       deed-in-lieu of foreclosure. HAFA          servicers participating in the program. As of
       provides a defined process along with      September 30, 2012, OFS has commitments to
       incentives for these transactions.         fund up to $29.9 billion in MHA payments and
                                                  has disbursed $4.0 billion since inception.
   •   The Home Price Decline Program
       provides incentives to investors to        More than 1.2 million 14 homeowners
       partially offset losses from home price    participating in the HAMP programs have
       declines.                                  had their mortgage terms modified
                                                  permanently. This includes modifications on
                                                  both non-GSE loans (for which the cost is paid
Additional components of the MHA program          by TARP) and GSE loans (for which the cost is
include:                                          paid by the GSEs). Homeowners participating
                                                  in HAMP programs collectively have
   •   The Second Lien Modification               experienced a 38.0 percent median reduction
       Program (2MP), which provides              in their mortgage payments—more than $539
       incentives for second-lien holders to      per month. MHA has also encouraged the
       modify or extinguish a second-lien         mortgage industry to adopt similar programs
       mortgage when a modification has           that have helped millions more at no cost to
       been initiated on the first lien           the taxpayer.
       mortgage for the same property under
       HAMP.                                      OFS publishes quarterly assessments of
                                                  servicer performance, which contain data on
   •   The FHA-HAMP Program, which                compliance with program guidelines as well as
       provides similar servicer incentives as    program results metrics. Going forward, OFS
       HAMP for Federal Housing                   hopes these assessments will set the standard
       Administration (FHA) guaranteed            for transparency about mortgage servicer
       loans.                                     efforts to assist homeowners and encourage
                                                  servicers to correct identified instances of
   •   The Treasury/FHA Second Lien               noncompliance.
       Program (2LP), which provides
       incentives to servicers for                MHA performance highlights for fiscal year
       extinguishment of second liens for         2012 can be found at:
       borrowers who refinance their first        http://www.treasury.gov/initiatives/financial-
       lien mortgages under the FHA-              stability/reports/Pages/Making-Home-
       Refinance Program.                         Affordable-Program-Performance-Report.aspx

   •   The Rural Development (RD)-HAMP
       Program provides incentives for
       modified United States Department of
       Agriculture (USDA) guaranteed
       mortgages.
                                                   726,253 of these actions were TARP funded
                                                  14

                                                  modifications.




MANAGEMENT‘S DISCUSSION AND ANALYSIS                                                             30
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



Enhancements to MHA
                                                          Setting New Standards and Protecting
HAMP was originally intended to support                   Consumers
financial stability and help struggling
homeowners grappling with a verifiable                    The impact that MHA has had goes far beyond
financial hardship that put them at risk of               the individual homeowners that are receiving
foreclosure. It focuses on families who could             direct assistance under the program. It has
sustain their mortgage over the long term if              had a positive indirect effect on the mortgage
modified.                                                 market. In general, federal government
                                                          efforts to date have contributed to the gradual
In an effort to continue to provide meaningful            decline in the number of seriously delinquent
solutions to the housing crisis, OFS made                 mortgage loans (loans 90 or more days past
several enhancements to MHA during fiscal                 due or in the process of foreclosure). The
year 2012. This included extending the                    latest available data shows continued declines
application deadline from December 31, 2012               in the rate of serious delinquency, continuing
to December 31, 2013 and expanding                        the trend that began at the end of 2009. 15
eligibility to reach a broader pool of distressed
borrowers. Effective June 1, 2012, MHA                    MHA is also helping to make mortgage
eligibility expanded to include:                          modifications more affordable overall. It has
                                                          set standards that have been widely followed
     •   Homeowners who are applying for a                in the industry for making sure that mortgage
         modification on a home that is not               modifications are affordable and sustainable,
         their primary residence, but the                 such as the debt-to-income test, and for
         property is currently rented or the              determining whether modifications make
         homeowner intends to rent it.                    sense for the holder of the mortgage, such as
                                                          the HAMP net present value model.
     •   Homeowners who previously did not                Additionally, MHA helped to establish several
         qualify for HAMP because their debt-             new reforms throughout the mortgage
         to-income ratio was 31.0 percent or              servicing industry aimed at protecting
         lower.                                           consumers. These include:

     •   Homeowners who previously received                      •   Requiring the 20 largest participating
         a HAMP permanent modification, but                          mortgage servicers to establish a
         defaulted on their payments, therefore                      single point of contact for homeowners
         losing good standing.                                       seeking assistance, to ensure that a
                                                                     single, knowledgeable case manager
To encourage investors to consider or expand                         can guide them through the
the use of principal reduction, Treasury issued                      modification process;
program guidance on February 16, 2012
tripling financial incentives under PRA for                      •   Requiring participating mortgage
investors who agree to reduce principal for                          servicers to limit the practice of “dual
eligible underwater homeowners. The new                              tracking” – where mortgage servicers
program guidance applies to all permanent                            begin the foreclosure process while
modifications of non-GSE loans under HAMP                            simultaneously evaluating
that include PRA and have a trial period plan                        homeowners for assistance; and
effective date on or after March 1, 2012.
                                                                 •   Requiring participating mortgage
Additional information about the                                     servicers to provide qualified
enhancements is available on the MHA                                 unemployed homeowners with a
website:
http://www.treasury.gov/initiatives/financial-
stability/reports/Pages/Making-Home-                       Source: The Mortgage Bankers Association 2012
                                                          15

Affordable-Program-Performance-Report.aspx.               National Delinquency Survey.



31                                                                       MANAGEMENT‘S DISCUSSION AND ANALYSIS
                                                          AGENCY FINANCIAL REPORT | FISCAL YEAR 2012



       forbearance period of 12 months,           HHF Results
       subject to investor and regulator
       guidelines, during which their             The Hardest Hit Fund provides funding to 18
       monthly payments are temporarily           states and the District of Columbia (DC) to
       reduced while they look for a new job.     provide assistance to struggling homeowners
                                                  through locally-tailored programs. As of
MHA’s mortgage servicing standards served         September 30, 2012, all 18 states and the
as the basis for a joint state-Federal            District of Columbia were operating HHF
settlement with the country’s five largest        programs statewide and collectively have
mortgage loan servicers (Ally/GMAC, Bank of       drawn approximately $1.5 billion (19.7
America, Citigroup, JPMorgan Chase, and           percent) of the $7.6 billion allocated under the
Wells Fargo). The settlement is intended to       program. Each state draws down funds as
provide as much as $25.0 billion in relief to     they are needed. States have until December
distressed borrowers and direct payments to       31, 2017 to expend funds and must have no
States and the Federal government. The            more than 5.0 percent of their allocation on
agreement settled certain alleged violations of   hand before they can draw down additional
state and federal law based on the mortgage       funds.
loan servicing activities of the country’s five
largest mortgage loan servicers, including        All 19 HFAs are fully operational and have
claims of document-related foreclosure abuses.    created extensive infrastructures to operate
Treasury, including OFS, participated in the      these programs, including selecting and
negotiation of the settlement and shared          training networks of housing counselors to
knowledge gained through implementation of        assist with applications, creating homeowner
the Administration’s foreclosure prevention       portals to aid homeowners in applying for
programs, including MHA.                          assistance, and hiring underwriters and other
                                                  staff to review and approve applications. The
                                                  five largest servicers (Bank of America,
Housing Finance Agency Innovation Fund for        JPMorgan Chase, Wells Fargo, Citibank, and
the Hardest Hit Housing Markets (HFA              GMAC) are currently participating in
Hardest Hit Fund, or HHF)                         programs in all 18 states and the District of
                                                  Columbia, primarily through mortgage
In February 2010, the Obama Administration        payment assistance and mortgage loan
announced the Housing Finance Agency              reinstatement assistance.
(HFA) Innovation Fund for the Hardest Hit
Housing Markets (HFA Hardest Hit Fund, or         Although states needed time to build their
HHF), which allows state HFAs in the              operations and refine processes, a number of
nation’s hardest hit housing markets and high     states that have been up and running for
unemployment markets to design innovative,        longer periods of time are starting to show
locally targeted foreclosure prevention           substantial growth in the number of
programs. State HFAs design the state             borrowers assisted (e.g. California, Florida,
programs, tailoring the housing assistance to     Illinois, Michigan, North Carolina, Ohio and
their local needs. A total of $7.6 billion has    South Carolina). Each state submits a
been allocated for the HHF, out of the $45.6      quarterly report on the progress of its
billion committed for the housing programs        program. These reports include the states’
under TARP. Further information on the            performance on metrics set by OFS on various
funded programs is available at:                  aspects of their programs. Direct links to each
http://www.treasury.gov/initiatives/financial-    state’s most recent performance report can be
stability/programs/housing-                       found at:
programs/hhf/Pages/default.aspx.                  http://www.treasury.gov/initiatives/financial-
                                                  stability/TARP-
                                                  Programs/housing/Pages/Program-
                                                  Documents.aspx.




MANAGEMENT‘S DISCUSSION AND ANALYSIS                                                             32
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



During fiscal year 2012, OFS approved 40                  to this L/C, a reserve account has been pre-
program changes submitted by individual                   funded with $50 million in funds for OFS’
HFAs. These approved program changes                      share of any future loss claim payments. OFS
include:                                                  will be reimbursed for all unused amounts
                                                          from this account. As of September 30, 2012,
        •   A Nevada principal reduction                  there has not been substantial activity under
            program that leverages refinances             the program and no disbursements for loss
            under the Home Affordable                     claim payments under the FHA-Refinance
            Refinance Program (HARP); and                 Program have been made.

        •   A California program that uses                Housing Scorecard
            principal reduction in conjunction
            with a modification or recast.                The U.S. Department of Housing and Urban
                                                          Development (HUD) and OFS also release a
OFS continues to hold conversations with                  Monthly Housing Scorecard on the nation’s
HFAs, servicers, the GSEs, and other relevant             housing market. Each month the scorecard
stakeholders on ways to improve the delivery              presents key housing market indicators and
of foreclosure prevention assistance. Recent              highlights the impact of the Administration’s
discussion topics included enhancing states’              housing recovery efforts, including assistance
transition assistance programs, new ways to               to homeowners through the FHA and HAMP.
utilize funds for principal reduction, and                The Housing Scorecard is available at:
identifying ways to direct borrowers                      www.hud.gov/scorecard.
exhausting unemployment mortgage
assistance to other resources available                   Operational Goal Three: Protect
through servicers. OFS is working to identify
best practices, share lessons learned between             Taxpayers’ Interests
states, and develop other ways to provide
technical assistance to states with lower                 OFS manages TARP investments to minimize
participation volumes.                                    costs to taxpayers and receives income on its
                                                          holdings of preferred interests and other
Support for the FHA-Refinance Program                     TARP investments in the form of interest,
                                                          dividends and fees. OFS has taken a number
In March 2010, the Administration announced               of steps during fiscal year 2012 to dispose of
enhancements to an existing FHA program                   OFS’ outstanding investments in a manner
that will permit lenders to provide additional            that balances the need to exit these
refinancing options to homeowners who owe                 investments as quickly as practicable and
more than their homes are worth because of                maximize returns for taxpayers. OFS also
large declines in home prices in their local              takes steps to ensure that TARP recipients
markets. This program, known as the FHA-                  comply with any TARP-related statutory or
Refinance program, is intended to provide                 contractual obligations such as executive
more opportunities for qualifying mortgage                compensation requirements and restrictions
loans to be restructured and refinanced into              on dividend payments.
FHA-insured loans.
                                                          OFS is exiting investments as soon as
TARP funds have been made available up to                 practicable to reduce taxpayers’ exposure,
$8.1 billion in the aggregate to provide                  return TARP funds to reduce the federal debt,
additional coverage to lenders for a share of             and continue to replace government
potential losses on these loans and to provide            assistance with private capital in the financial
incentives to support the write-downs of                  system. OFS’s strategies for exit depend on
second liens and encourage participation by               the program and investment involved. In
servicers.                                                addition to repayments by participants, OFS
                                                          has disposed of investments to third parties
OFS has entered into a letter of credit (L/C) to
fund the FHA-Refinance Program. Pursuant

33                                                                   MANAGEMENT‘S DISCUSSION AND ANALYSIS
                                                           AGENCY FINANCIAL REPORT | FISCAL YEAR 2012



through public and private offerings and           compensation, lobbying, corporate expenses
auctions.                                          and internal controls and must provide
                                                   quarterly compliance reports.
In disposing TARP investments, OFS takes a
disciplined portfolio approach – reviewing         Additionally, all mortgage servicers
each investment level and closely monitoring       voluntarily participating in MHA have
risk and performance. In conducting the            contractually agreed to follow the MHA
portfolio management activities, OFS employs       program guidelines, which require the
a mix of dedicated professionals and external      servicer to offer an MHA modification to all
asset managers. These external asset               eligible borrowers and to have systems that
managers provide market specific information       can process all MHA-eligible loans. Servicers
such as market prices and valuations as well       are subject to periodic, on-site compliance
as detailed credit analysis using public           reviews performed by OFS’ compliance agent,
information on a periodic basis. OFS has also      Making Home Affordable-Compliance (MHA-
worked with external parties as underwriters       C), a separate, independent division of
and placement agents for asset sales.              Freddie Mac, to ensure that servicers’
                                                   obligations under MHA requirements are
Risk Assessment                                    being met. In fiscal year 2011, OFS began
                                                   publishing quarterly assessments of the ten
OFS has developed procedures to identify and       largest servicers and continued publishing
mitigate investment risk. These procedures         assessments throughout fiscal year 2012.
are designed to identify TARP recipients that      These assessments have provided a vehicle to
face a heightened financial risk and determine     identify core servicing issues.
appropriate responses to preserve OFS’
investment, on behalf of taxpayers, while
maintaining financial stability. Specifically,     Operational Goal Four: Promote
OFS’ external asset managers review publicly
available information to identify recipients for   Transparency
which pre-tax, pre-provision earnings and
capital may be insufficient to offset future       To protect taxpayers and help ensure that
losses and maintain required capital. For          every dollar is directed toward promoting
certain institutions, OFS and its external         financial stability, OFS established
asset managers engage in heightened                comprehensive accountability and
monitoring and due diligence that reflects the     transparency measures. OFS is committed to
severity and timing of the challenges.             operating its investment and housing
                                                   programs in full view of the public. This
                                                   includes providing regular and comprehensive
Compliance                                         information about how TARP funds are being
                                                   spent, who has received them and on what
OFS also takes steps to ensure that TARP           terms, and how much has been collected to
recipients comply with their TARP-related          date.
statutory and contractual obligations.
                                                   All of this information, along with numerous
Statutory obligations include executive
                                                   reports of different frequencies are posted on
compensation restrictions. Contractual
                                                   the Financial Stability section of the
obligations vary by investment type. For most
                                                   Treasury.gov website, which can be found at:
of OFS’ preferred stock investments, TARP
                                                   http://www.treasury.gov/initiatives/financial-
recipients must comply with restrictions on
                                                   stability/reports/Pages/default.aspx
payment of dividends and on repurchases of
junior securities, so that funds are not
distributed to junior security holders prior to
repayment of the federal government.
Recipients of exceptional assistance (currently
                                                   These reports include:
AIG, GM, and Ally) must comply with
additional restrictions on executive


MANAGEMENT‘S DISCUSSION AND ANALYSIS                                                              34
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



     •   A Daily TARP Update, which features              Treasury provides information about servicer
         detailed financial data related to each          performance through two types of data:
         TARP investment program including
         the status of disbursements and all                     •   Compliance data, which reflects
         collections by category;                                    servicer compliance with specific MHA
                                                                     guidelines; and
     •   A monthly report to Congress that
         details how TARP funds have been                        •   Program results data, which reflects
         used, the status of recovery of such                        how timely and effectively servicers
         funds by program, and information on                        assist eligible homeowners and report
         the estimated cost of TARP;                                 program activity.

     •   A quarterly report on PPIP that                  OFS also publishes information about HAMP
         provides detailed information on the             Activity by Metropolitan Statistical Area.
         funds, their investments, and returns.           These reports, released in conjunction with
         It is typically released within one              the monthly MHA Program Performance
         month after the end of each quarter;             Report, include mortgage modification activity
                                                          under HAMP by metropolitan area.
     •   A monthly report on dividend and
         interest payments;                               Additionally, OFS regularly publishes data
                                                          files related to MHA and transaction reports
     •   A report of each transaction (such as            that show activity related to MHA and HHF.
         an investment or repayment) within
         two business days of each transaction;           In order to improve transparency of the
         and                                              HAMP Net Present Value (NPV) model, which
                                                          is a key component of the eligibility test for
     •   A semi-annual report on warrant                  HAMP, OFS released the NPV white paper to
         dispositions.                                    the public. To ensure accuracy and reliability,
                                                          Freddie Mac, acting as OFS’ compliance
In addition, OFS posts to its website all                 agent, conducts periodic audits of servicers’
investment contracts defining the terms of                implementation of the model and requires
those investments within five to ten business             servicers to use models which meet OFS’ NPV
days of a transaction’s closing and all                   specifications or to revert back to OFS’ NPV
contracts with OFS service providers involved             application. As required by the Dodd-Frank
with TARP programs.                                       Act, OFS established a web portal that
                                                          borrowers can access to run a NPV analysis on
OFS is equally committed to operating its                 their own mortgages, and that borrowers who
housing programs transparently and making                 are turned down for a HAMP modification can
information available and accessible to the               use.
public.
                                                          In a continued commitment to enhanced
In conjunction with the Monthly Housing                   reporting and transparency, in January 2011,
Scorecard, each month Treasury releases a                 the Administration released the MHA Data
Making Home Affordable Program                            File which includes characteristics of program
Performance Report, which provides detailed               participants to date, including financial
metrics on the Making Home Affordable                     information, mortgage loan information before
(MHA) Program. Once per quarter, the MHA                  and after entering HAMP, performance in a
report is expanded to include detailed                    HAMP modification, and race/ethnicity data.
assessments of the performance of servicers               The MHA Data File offers mortgage loan-level
participating in the Making Home Affordable               data and is intended to allow for better
program.                                                  understanding of the impact of the program.




35                                                                      MANAGEMENT‘S DISCUSSION AND ANALYSIS
                                                            AGENCY FINANCIAL REPORT | FISCAL YEAR 2012



OFS applied the recommendations of an               October 2010. OFS anticipates publishing a
independent non-profit, non-partisan policy         fourth retrospective report in December 2012.
institute in preparing the MHA Data File to         These reports include information on TARP
ensure the privacy of participating                 programs and the effects of TARP and
homeowners. The release of the data file            additional emergency measures taken by the
fulfills a requirement within the Dodd-Frank        federal government to stabilize the financial
Act to make available loan-level data about         system following the 2008 crisis. Readers are
the program. OFS will update the file monthly       invited to refer to these documents at:
and will expand reporting to include newer          http://www.treasury.gov/initiatives/financial-
initiatives that are part of Making Home            stability/reports/Pages/default.aspx
Affordable. Researchers interested in using
the MHA Data File can access the file and           C. Oversight by Four Separate Agencies
user guide at:
http://www.treasury.gov/initiatives/financial-      Congress also established four avenues of
stability/reports/Pages/mha_publicfile.aspx.        oversight for TARP:

A. Audited Financial Statements                         •   The Financial Stability Oversight
                                                            Board, established by EESA
OFS prepares separate financial statements                  Section104;
for TARP on an annual basis. This is the
fourth OFS Agency Financial Report (AFR),               •   Specific responsibilities for the GAO
and includes the audited financial statements               as set out in EESA Section 116;
for the fiscal years ended September 30, 2012
and September 30, 2011. Additional reports              •   The Special Inspector General for
for prior periods are available at:                         TARP, established by EESA Section
http://www.treasury.gov/initiatives/financial-              121; and
stability/reports/Pages/Annual-Agency-
Financial-Reports.aspx                                  •   The Congressional Oversight Panel
                                                            (COP), established by EESA
In its first four years of operation, TARP’s                Section125. COP concluded its
financial statements received unqualified                   operations in accordance with EESA
audit opinions from its auditors, the GAO.                  on April 3, 2011.
OFS also received a Certificate of Excellence
in Accountability Reporting (CEAR 16) from          OFS has productive working relationships
the Association of Government Accountants           with all of these bodies, and cooperates with
for fiscal years 2011, 2010 and the period          each oversight agency’s effort to produce
ending September 30, 2009.                          periodic audits and reports that focus on the
                                                    many aspects of TARP. Individually and
B. TARP Retrospective Reports                       collectively, the oversight bodies’ audits and
                                                    reports have made and continue to make
In October 2011, OFS published the TARP             important contributions to the development,
Three-Year Anniversary Report. This serves          strengthening, and transparency of TARP
as an update to OFS’ comprehensive TARP             programs.
Two-Year Retrospective report issued in
                                                    D. Congressional Hearings and Testimony
 The Certificate of Excellence recognizes
16
                                                    OFS officials have testified in numerous
outstanding accountability reporting and is the
                                                    Congressional hearings since TARP was
highest form of recognition in Federal government
management reporting. AGA established the CEAR
                                                    created. Copies of the written testimony are
program in 1997 in conjunction with the Chief       available at:
Financial Officers Council and the U.S. Office of   http://www.treasury.gov/initiatives/financial-
Management and Budget to improve financial and      stability/news-room/Pages/default.aspx.
program accountability by streamlining reporting
and improving the effectiveness of such reports.



MANAGEMENT‘S DISCUSSION AND ANALYSIS                                                                 36
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY




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37                                                               MANAGEMENT‘S DISCUSSION AND ANALYSIS
                                           AGENCY FINANCIAL REPORT | FISCAL YEAR 2012




MESSAGE FROM THE CHIEF FINANCIAL OFFICER                                          38
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY




Part 2: Financial Report




39                                                               AUDITOR’S REPORT
                                                                        AGENCY FINANCIAL REPORT | FISCAL YEAR 2012




MESSAGE FROM THE CHIEF FINANCIAL OFFICER (CF0)
The Office of Financial Stability’s (OFS) Agency Financial Report for fiscal year 2012 provides readers
information on financial results relating to the Troubled Asset Relief Program (TARP) as required by the
Emergency Economic Stabilization Act (EESA) of 2008 and other laws. It is a critical part of our efforts to
ensure the highest level of transparency and accountability to the American people.

For fiscal year 2012, the Government Accountability Office (GAO) provided OFS unqualified audit opinions on
the fair presentation of our financial statements and the effectiveness of our internal control over financial
reporting. In addition, the auditors determined that we had no material weaknesses and successfully resolved
our one fiscal year 2011 significant deficiency relating to internal control over our accounting and financial
reporting processes.

I would like to acknowledge senior management’s commitment to good governance as well as the discipline,
transparency, and care exhibited by OFS employees in creating and executing our organization’s policies and
procedures. We were honored to have received the Certificate of Excellence in Accountability Reporting (CEAR)
award from the Association of Government Accountants for each of the three periods from inception through the
fiscal year 2011.

For fiscal year 2012, net income from operations was $7.7 billion, resulting in a cumulative net cost of
operations of $20.3 billion since inception. Cumulative net cost of operations consists of (1) total net subsidy
cost of $13.5 billion, and (2) housing costs and administrative costs of $5.7 billion and $1.1 billion, respectively.
Total cumulative net subsidy cost consists of net subsidy income from the CPP, TIP, AGP, PPIP, SBA and TALF
investments totaling $25.7 billion, primarily offset by net subsidy cost from investments in AIG of $15.2 billion,
and automobile company investments of $23.8 billion. The fiscal year 2012 net income from operations
primarily results from improvements related to American International Group, Inc. (AIG) since September 30,
2011, including an increase in the price per share of AIG common stock held as of September 30, 2012, and AIG
common stock sold during fiscal year 2012, as compared to the price per share of AIG common stock held as of
September 30, 2011.

During fiscal year 2012, OFS collected a total of $53.3 billion through repayments, sales, dividends, and other
receipts. OFS’ gross outstanding loan and investment balance as of September 30, 2012, was $63.1 billion
comprising $37.2 billion in AIFP, $9.8 billion in PPIP, $8.7 billion in CPP, $6.7 billion in TARP AIG, and the
remainder in CDCI and TALF. OFS is committed to exiting investments in a timely manner while maximizing
collections on behalf of the taxpayer.

In fiscal year 2012, OFS continued to maintain rigorous internal control processes around transaction
processing, disbursements, collections, and financial reporting. OFS further standardized and automated its
subsidiary ledger reporting supporting the validation and reconciliation of financial data and continued
enhancements to the Daily TARP Update report promoting transparency. In the upcoming fiscal year, OFS will
seek to streamline and simplify internal control processes in order to accommodate attrition in light of
decreasing investment balances. OFS will need to continue to rely on our operational partners to manage
investments and assure that we reconcile all transactions and investments balances to protect taxpayer
interests.

I feel fortunate to play a role in the continuing tradition of sound fiscal stewardship at OFS. This organization
recognizes the importance of a robust control environment and will continue to uphold the highest standards of
integrity as we carry out our fiduciary responsibilities to the American people.

Sincerely,




Lorenzo Rasetti
Chief Financial Officer




MESSAGE FROM THE CHIEF FINANCIAL OFFICER                                                                          40
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY




GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT




United States Government Accountability Office
Washington, DC 20548

                                          Independent Auditor’s Report

To the Assistant Secretary for Financial Stability

In accordance with the Emergency Economic Stabilization Act of 2008 (EESA), 17 we are
required to audit the financial statements of the Troubled Asset Relief Program (TARP),
which is implemented by the Office of Financial Stability (OFS). 18 In our audit of OFS’s
fiscal years 2012 and 2011 financial statements for TARP, we found

     •    the financial statements are presented fairly, in all material respects, in
          conformity with U.S. generally accepted accounting principles;
     •    OFS maintained, in all material respects, effective internal control over financial
          reporting as of September 30, 2012; and
     •    no reportable noncompliance in fiscal year 2012 with provisions of laws and
          regulations we tested.

The following sections discuss in more detail (1) these conclusions; (2) required
supplementary information and other information included with the financial statements;
(3) our audit objectives, scope, and methodology; and (4) OFS’s comments on a draft of
this report. In addition to our responsibility to audit OFS’s annual financial statements for
TARP, we also are required under EESA to report at least every 60 days on the findings
resulting from our oversight of the actions taken under TARP. 19 This report responds to
both of these requirements. We have issued numerous other reports on TARP in
connection with this 60-day reporting responsibility, which can be found on GAO’s
website at http://www.gao.gov.


17
  Pub. L. No. 110-343, div. A, 122 Stat 3765 (Oct. 3, 2008), codified in part, as amended, at 12 U.S.C. §§ 5201-5261. Section
116(b) of EESA, 12 U.S.C. § 5226(b), requires that the Department of the Treasury (Treasury) annually prepare and submit to
Congress and the public audited fiscal year financial statements for the Troubled Asset Relief Program (TARP) that are prepared in
accordance with generally accepted accounting principles. Section 116(b) further requires that GAO audit TARP’s financial statements
annually in accordance with generally accepted auditing standards.

18
  Section 101 of EESA, 12 U.S.C. § 5211, established OFS within Treasury to implement TARP.
19
 Section 116 of EESA, 12 U.S.C. § 5226, requires the Comptroller General to report at least every 60 days on findings under section
116.



41                                                                                                             AUDITOR’S REPORT
                                                                                   AGENCY FINANCIAL REPORT | FISCAL YEAR 2012




Opinion on Financial Statements

OFS’s financial statements for TARP, including the accompanying notes, present fairly,
in all material respects, in conformity with U.S. generally accepted accounting
principles, OFS’s assets, liabilities, and net position as of September 30, 2012 and
2011, and its net cost of operations, changes in net position, and budgetary resources
for the fiscal years then ended.

As discussed in notes 2 and 6 to OFS’s financial statements for TARP, the valuation of
TARP direct loans, equity investments, and the asset guarantee program is based on
estimates using economic and financial credit subsidy models. The estimates use
entity-specific as well as relevant market data as the basis for assumptions about future
performance, and incorporate an adjustment for market risk to reflect the variability
around any unexpected losses. In valuing the direct loans, equity investments, and the
asset guarantee program, OFS management considered and selected assumptions and
data that it believed provided a reasonable basis for the estimated subsidy allowance
and related subsidy cost or income reported in the financial statements. 20 However,
there are numerous factors that affect these assumptions and estimates, which are
inherently subject to substantial uncertainty arising from the likelihood of future changes
in general economic, regulatory, and market conditions. The estimates have an added
uncertainty resulting from the unique nature of certain TARP assets. As such, there will
be differences between the net estimated values of the direct loans, equity investments,
and asset guarantee program as of September 30, 2012 and 2011, which totaled $41.2
billion and $80.8 billion, respectively, and the amounts that OFS will ultimately realize
from these assets, and such differences may be material. These differences will also
affect TARP’s ultimate cost. Further, TARP’s ultimate cost will change as OFS
continues to incur costs relating to its Treasury Housing Programs. 21

As discussed in note 1 to the financial statements, while OFS’s financial statements for
TARP reflect activity of OFS in implementing TARP, including providing resources to
various entities to help stabilize the financial markets, the statements do not include the
assets, liabilities, or results of operations of these entities in which OFS has a significant
equity interest. According to OFS officials, OFS’s investments were not made to engage


20
  The subsidy cost or income is composed of (1) the change in the subsidy cost allowance, net of write-offs;
(2) net intragovernmental interest cost; (3) certain inflows from the direct loans and equity investments (e.g., dividends, interest,
net proceeds from sales and repurchases of assets in excess of cost, and other realized fees); and (4) the change in the estimated
discounted net cash flows related to other credit programs (asset guarantee program and Federal Housing Administration
refinance program).

21
  The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, title XIII, § 1302, 124 Stat. 1376,
2133 (July 21, 2010), (1) limited Treasury’s authority to purchase or guarantee troubled assets to a maximum of $475 billion; (2)
changed this limit to a cap on all purchases and guarantees made without regard to subsequent sale, repayment, or cancellation of
assets or guarantees; and (3) prohibited Treasury, under EESA, from incurring any obligations for a program or initiative unless
the program or initiative had already been initiated prior to June 25, 2010.




AUDITOR’S REPORT                                                                                                                    42
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



in the business activities of the respective entities, and OFS has determined that none
of these entities meet the criteria for a federal entity.


Opinion on Internal Control

OFS maintained, in all material respects, effective internal control over financial
reporting as of September 30, 2012, that provided reasonable assurance that
misstatements, losses, or noncompliance material in relation to the financial statements
would be prevented or detected and corrected on a timely basis. Our opinion on internal
control is based on criteria established under 31 U.S.C. § 3512 (c), (d), commonly
known as the Federal Managers’ Financial Integrity Act (FMFIA).

During fiscal year 2012, OFS sufficiently addressed the internal control issues related to
the significant deficiency 22 we reported for fiscal year 2011 concerning its accounting and
financial reporting processes such that we no longer consider this to be a significant
deficiency as of September 30, 2012.


Compliance with Laws and Regulations

Our tests of OFS’s compliance with selected provisions of laws and regulations for fiscal
year 2012 disclosed no instances of noncompliance that would be reportable under U.S.
generally accepted government auditing standards. The objective of our audit was not
to provide an opinion on overall compliance with laws and regulations. Accordingly, we
do not express such an opinion.


Required Supplementary Information

U.S. generally accepted accounting principles require that required supplementary
information (RSI) be presented to supplement the financial statements. 23 This
information, although not a part of the financial statements, is required by the Federal
Accounting Standards Advisory Board (FASAB), who considers it to be an essential part
of financial reporting for placing the financial statements in appropriate operational,
economic, or historical context. We did not audit and we do not express an opinion or
provide any assurance on the RSI because the limited procedures we applied do not
provide sufficient evidence to express an opinion or provide any assurance.
22
  A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material
weakness, yet important enough to merit attention by those charged with governance. A material weakness is a deficiency, or a
combination of deficiencies, in internal controls such that there is a reasonable possibility that a material misstatement of the
entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. A deficiency in internal control
exists when the design or operation of a control does not allow management or employees, in the normal course of performing
their assigned functions, to prevent or detect and correct misstatements on a timely basis.

23
  RSI is comprised of “Management’s Discussion and Analysis” and the “Combined Statement of Budgetary Resources” that are
included with the financial statements.


43                                                                                                                AUDITOR’S REPORT
                                                                         AGENCY FINANCIAL REPORT | FISCAL YEAR 2012




Other Information

OFS’s other information 24 contains a wide range of information, some of which is not
directly related to the financial statements. This information is presented for purposes of
additional analysis and is not a required part of the financial statements or RSI. Our
audit was conducted for the purpose of forming an opinion on OFS’s financial
statements. We did not audit and do not express an opinion or provide any assurance
on the other information.

Objectives, Scope, and Methodology

OFS management is responsible for (1) preparing the financial statements in conformity
with U.S. generally accepted accounting principles; (2) preparing, measuring, and
presenting the RSI in accordance with the prescribed guidelines in U.S. generally
accepted accounting principles; (3) preparing and presenting other information included
in documents containing the audited financial statements and auditor’s report, and
ensuring the consistency of that information with the audited financial statements and
the RSI; (4) establishing and maintaining effective internal control over financial
reporting and evaluating its effectiveness; and (5) complying with applicable laws and
regulations. OFS management evaluated the effectiveness of OFS’s internal control
over financial reporting as of September 30, 2012, based on the criteria established
under FMFIA. OFS management’s assertion based on its evaluation is included in
appendix I.

We are responsible for planning and performing the audit to obtain reasonable
assurance and to provide our opinion about whether (1) OFS’s financial statements are
presented fairly, in all material respects, in conformity with U.S. generally accepted
accounting principles and (2) OFS management maintained, in all material respects,
effective internal control over financial reporting as of September 30, 2012. We are also
responsible for (1) testing compliance with selected provisions of laws and regulations
that have a direct and material effect on the financial statements and (2) applying
certain limited procedures to the RSI and other information included with the financial
statements.

In order to fulfill these responsibilities, we

     •   examined, on a test basis, evidence supporting the amounts and disclosures in
         OFS’s financial statements;
     •   assessed the accounting principles used and significant estimates made by OFS
         management;

24
  Other information is comprised of information included with the financial statements, other than RSI and the
auditor’s report.




AUDITOR’S REPORT                                                                                                 44
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY




     •   evaluated the overall presentation of OFS’s financial statements;
     •   obtained an understanding of OFS and its operations, including its internal
         control over financial reporting;
     •   considered OFS’s process for evaluating and reporting on internal control over
         financial reporting that OFS is required to perform by FMFIA and Section 116(c)
         of EESA;
     •   assessed the risk of (1) material misstatement in OFS’s financial statements and
         (2) material weakness in its internal control over financial reporting;
     •   evaluated the design and operating effectiveness of OFS’s internal control over
         financial reporting based on the assessed risk;
     •   tested relevant internal control over OFS’s financial reporting;
     •   tested compliance with selected provisions of the following laws and regulations:
         EESA, as amended; the Antideficiency Act; the Federal Credit Reform Act of
         1990; the Dodd-Frank Wall Street Reform and Consumer Protection Act; and the
         Purpose Statute;
     •   conducted inquiries of management about the methods of preparing the RSI and
         compared this information for consistency with management’s responses to the
         auditor’s inquiries, the financial statements, and other knowledge we obtained
         during the audit of the financial statements, in order to report omissions or
         material departures from FASAB guidelines, if any, identified by these limited
         procedures;
     •   read the other information included with the financial statements in order to
         identify material inconsistencies, if any, with the audited financial statements; and
     •   performed such other procedures as we considered necessary in the
         circumstances.

An entity’s internal control over financial reporting is a process effected by those
charged with governance, management, and other personnel, the objectives of which
are to provide reasonable assurance that (1) transactions are properly recorded,
processed, and summarized to permit the preparation of financial statements in
conformity with U.S. generally accepted accounting principles, and assets are
safeguarded against loss from unauthorized acquisition, use, or disposition and (2)
transactions are executed in accordance with the laws governing the use of budget
authority and other laws and regulations that could have a direct and material effect on
the financial statements.

We did not evaluate all internal controls relevant to operating objectives as broadly
established under FMFIA, such as those controls relevant to preparing statistical reports
and ensuring efficient operations. We limited our internal control testing to testing
controls over financial reporting. Our internal control testing was for the purpose of
expressing an opinion on the effectiveness of internal control over financial reporting
and may not be sufficient for other purposes. Consequently, our audit may not identify
all deficiencies in internal control over financial reporting that are less severe than a
material weakness. Because of inherent limitations, internal control may not prevent or
detect and correct misstatements due to error or fraud, losses, or noncompliance. We
also caution that projecting any evaluation of effectiveness to future periods is subject to

45                                                                             AUDITOR’S REPORT
                                                       AGENCY FINANCIAL REPORT | FISCAL YEAR 2012



the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.

We did not test compliance with all laws and regulations applicable to OFS. We limited
our tests of compliance to selected provisions of laws and regulations that have a direct
and material effect on the financial statements for fiscal year 2012. We caution that
noncompliance may occur and not be detected by these tests and that such testing may
not be sufficient for other purposes.

We performed our audit in accordance with U.S. generally accepted government
auditing standards. We believe our audit provides a reasonable basis for our opinions
and other conclusions.




Agency Comments

In commenting on a draft of this report, the Assistant Secretary for Financial Stability
stated that OFS is proud to receive unqualified opinions on its financial statements and
its internal control over financial reporting. He also stated that OFS is committed to
maintaining the high standards and transparency reflected in these audit results. The
complete text of OFS’s comments is reprinted in its entirety in appendix II.




Gary T. Engel
Director
Financial Management and Assurance

November 5, 2012




AUDITOR’S REPORT                                                                              46
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY




Appendix I: Management’s Report on Internal Control Over
Financial Reporting

                                DEPARTMENT OF THE TREASURY
                                          WASHINGTON, D.C. 20220


ASSISTANT SECRETARY




                 Management’s Report on Internal Control over Financial Reporting


The Office of Financial Stability’s (OFS) internal control over financial reporting is a process affected
by those charged with governance, management, and other personnel, the objectives of which are to
provide reasonable assurance that (1) transactions are properly recorded, processed, and
summarized to permit the preparation of financial statements in conformity with U.S. generally
accepted accounting principles, and assets are safeguarded against loss from unauthorized
acquisition, use, or disposition; and (2) transactions are executed in accordance with the laws
governing the use of budget authority and other laws and regulations that could have a direct and
material effect on the financial statements.

OFS management is responsible for establishing and maintaining effective internal control over
financial reporting. OFS management evaluated the effectiveness of OFS’ internal control over
financial reporting as of September 30, 2012, based on the criteria established under 31 U.S.C.
3512(c), (d) (commonly known as the Federal Managers’ Financial Integrity Act).

Based on that evaluation, we conclude that, as of September 30, 2012, OFS’ internal control over
financial reporting was effective.



Office of Financial Stability




Timothy G. Massad
Assistant Secretary for Financial Stability




Lorenzo Rasetti
Chief Financial Officer


November 5, 2012


47                                                                                      AUDITOR’S REPORT
                                                                AGENCY FINANCIAL REPORT | FISCAL YEAR 2012




Appendix II: OFS Response to Auditor’s Report

                              DEPARTMENT OF THE TREASURY
                                       WASHINGTON, D.C. 20220


ASSISTANT SECRETARY


                                        November 7, 2012




Mr. Gary T. Engel
Director, Financial Management and Assurance
U.S. Government Accountability Office
441 G Street, N.W.
Washington, DC 20548

Dear Mr. Engel:

We have reviewed the Independent Auditor’s Report concerning your audit of the Office of
Financial Stability’s (OFS) fiscal year 2012 financial statements. OFS is proud to receive
unqualified opinions on our financial statements and our internal controls over financial
reporting. We are also pleased that you agree that OFS resolved our one fiscal year 2011
significant deficiency relating to internal control surrounding accounting and financial reporting
processes.

We appreciate the professionalism and commitment demonstrated by your staff throughout the
audit process. The process was valuable for us and resulted in concrete improvements in our
operations and financial management efforts.

OFS is committed to maintaining the high standards and transparency reflected in these audit
results as we carry out our responsibilities for managing the Troubled Asset Relief Program.

                                                    Sincerely,




                                                    Timothy G. Massad
                                                    Assistant Secretary for Financial Stability




AUDITOR’S REPORT                                                                                       48
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY




FINANCIAL STATEMENTS
The Office of Financial Stability (OFS) prepares
financial statements for the Troubled Asset Relief     assets, liabilities, or results of operations of
Program (TARP) as a critical aspect of ensuring        commercial entities in which the OFS has a
the accountability and stewardship for the public      significant equity interest.
resources entrusted to it and as required by
Section 116 of the Emergency Economic                  The Balance Sheet summarizes the OFS assets,
Stabilization Act of 2008 (EESA). Preparation of       liabilities and net position as of September 30,
these statements is also an important part of the      2012 and 2011. Intragovernmental assets and
OFS’ financial management goal of providing            liabilities resulting from transactions between
accurate and reliable information that may be          federal agencies are presented separately from
used to assess performance and allocate resources.     assets and liabilities from transactions with the
The OFS management is responsible for the              public.
accuracy and propriety of the information
contained in the financial statements and the          The Statement of Net Cost presents the net cost of
quality of internal controls. The statements are, in   (income from) operations for the years ended
addition to other financial reports, used to           September 30, 2012 and 2011.
monitor and control budgetary resources. The
OFS prepares these financial statements from its       The Statement of Changes in Net Position
books and records in conformity with the               presents the change in OFS’ net position for two
accounting principles generally accepted in the        components, Cumulative Results of Operations
United States for federal entities and the formats     and Unexpended Appropriations, for the years
prescribed by the Office of Management and             ended September 30, 2012 and 2011. The ending
Budget (OMB).                                          balances of both components of net position are
                                                       also reported on the Balance Sheet.
While these financial statements reflect activity
of the OFS in executing its programs, including        The Statement of Budgetary Resources provides
providing resources to various entities to help        information about funding and availability of
stabilize the financial markets, they do not           budgetary resources and the status of those
include, as more fully discussed in Note 1, the        resources for the years ended September 30, 2012
                                                       and 2011.




49                                                                                     FINANCIAL STATEMENTS
                                                                                          AGENCY FINANCIAL REPORT | FISCAL YEAR 2012




                                      Office of Financial Stability (Troubled Asset Relief Program)

                                                              BALANCE SHEET
                                                      As of September 30, 2012 and 2011


Dollars in Millions                                                                                   2012                 2011
ASSETS

Intragovernmental Assets:
    Fund Balance with Treasury (Note 3)                                                        $             75,495    $          83,342
    Asset Guarantee Program (Note 6)                                                                           967                  739
    Other                                                                                                          1                    -
Total Intragovernmental Assets                                                                               76,463               84,081

Cash on Deposit for Housing Program (Note 4)                                                                    50                   50
Troubled Asset Relief Program:
   Direct Loans and Equity Investments, Net (Note 6)                                                         40,231               80,104

Total Assets                                                                                    $        116,744       $      164,235


LIABILITIES

Intragovernmental Liabilities:
    Accounts Payable and Other Liabilities                                                     $                   2   $                2
    Due to the General Fund (Note 7)                                                                          9,714                4,591
    Principal Payable to the Bureau of the Public Debt (Note 8)                                              52,828              129,497
Total Intragovernmental Liabilities                                                                          62,544              134,090

Accounts Payable and Other Liabilities                                                                          87                   93
Liabilities for Treasury Housing Programs Under TARP:
    FHA-Refinance Program (Notes 5 and 6)                                                                          7                    1
    Making Home Affordable Program and Hardest Hit Fund (Note 5)                                               241                  343

Total Liabilities                                                                              $             62,879    $         134,527


Commitments and Contingencies (Note 9)                                                                         -                    -


NET POSITION


   Unexpended Appropriations                                                                   $             54,572    $          57,544
   Cumulative Results of Operations                                                                            (707)             (27,836)
Total Net Position                                                                             $             53,865    $          29,708


Total Liabilities and Net Position                                                              $        116,744       $         164,235



The accompanying notes are an integral part of these financial statements.




FINANCIAL STATEMENTS                                                                                                        50
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



                                            Office of Financial Stability (Troubled Asset Relief Program)
                                                            STATEMENT OF NET COST
                                                   For the Years Ended September 30, 2012 and 2011


Dollars in Millions                                                                                             2012               2011


STRATEGIC GOAL: TO ENSURE THE OVERALL STABILITY AND LIQUIDITY OF THE FINANCIAL SYSTEM, PREVENT AVOIDABLE
FORECLOSURES AND PRESERVE HOMEOWNERSHIP

Gross Cost of (Income from) Operations:
 Program Subsidy Cost (Income) (Note 6)
   Direct Loan and Equity Investment Programs                                                               $      (10,778) $              7,208
   Other Credit Programs                                                                                              (201)                   31
 Total Program Subsidy Cost (Income)                                                                               (10,979)                7,239

 Interest Expense on Borrowings from the Bureau of the Public Debt (Note 10)                                            2,252              3,827
 Treasury Housing Programs Under TARP (Note 5)                                                                          2,963              1,943
 Administrative Cost                                                                                                      268                315
Total Gross Cost of (Income from) Operations                                                                           (5,496)            13,324

Earned Revenue:
   Dividend and Interest Income - Programs (Note 6)                                                                    (2,733)            (3,476)
   Interest Income on Financing Account (Note 10)                                                                        (605)              (781)
   Subsidy Allowance Amortization (Note 10)                                                                             1,086                430
Total Earned Revenue                                                                                                   (2,252)            (3,827)

Total Net Cost of (Income from) Operations                                                                  $          (7,748) $           9,497


The accompanying notes are an integral part of these financial statements.




51                                                                                                                     FINANCIAL STATEMENTS
                                                                                                 AGENCY FINANCIAL REPORT | FISCAL YEAR 2012



                                           Office of Financial Stability (Troubled Asset Relief Program)

                                        STATEMENT OF CHANGES IN NET POSITION
                                                 For the Years Ended September 30, 2012 and 2011

                                                                                   2012                                     2011
                                                                                              Cumulative                                Cumulative
                                                                        Unexpended             Results of        Unexpended              Results of
Dollars in Millions                                                    Approprations          Operations        Approprations           Operations


Beginning Balanc es                                                $         57, 544      $      ( 27, 836) $         79, 783      $         ( 1, 546)

Budget ary Financ ing Sourc es
  Appropriations Rec eiv ed                                                   27,593                  -                 2,278                    -
  Appropriations Used                                                        (30,565)             30,565              (24,517)               24,517
Ot her Financ ing Sourc es                                                           -           (11,184)                    -              (41,310)
Tot al Financ ing Sourc es                                                     (2,972)            19,381              (22,239)              (16,793)

Net ( Cost of) Inc ome from Operat ions                                           -                7,748                   -                  (9,497)
Net Change                                                                    (2,972)             27,129              (22,239)              (26,290)

Ending Balanc es                                                   $         54, 572     $          ( 707) $          57, 544      $        ( 27, 836)


The accompanying notes are an integral part of these financial statements.




FINANCIAL STATEMENTS                                                                                                                   52
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



                                                    Office of Financial Stability (Troubled Asset Relief Program)
                                                   STATEMENT OF BUDGETARY RESOURCES
                                                          For the Years Ended September 30, 2012 and 2011

                                                                                                           2012                                  2011


                                                                                                             Nonbudgetary                          Nonbudgetary
                                                                                             Budgetary         Financing           Budgetary         Financing
Dollars in Millions                                                                          Accounts          Accounts            Accounts          Accounts


BUDGETARY RESOURCES
Unobligated Balances Brought Forward                                                      $       14,166     $       21,143    $        11,075    $        10,548
Recoveries of Prior Year Unpaid Obligations                                                          146              6,114              3,057              4,664
Borrowing Authority Withdrawn                                                                          -             (5,832)                 -             (1,368)
Actual Repayments of Debt, Prior-Year Balances                                                         -            (19,900)                 -             (7,996)
Unobligated Balance from Prior Year Budget Authority, Net                                         14,312              1,525             14,132              5,848

Appropriations                                                                                    27,593                  -              2,278                  -
Borrowing Authority                                                                                    -              2,659                  -             35,596
Spending Authority from Offsetting Collections                                                         -             21,695                  -             45,101
TOTAL BUDGETARY RESOURCES (Note 11)                                                      $        41,905     $       25,879    $        16,410    $        86,545

STATUS OF BUDGETARY RESOURCES
Obligations Incurred                                                                      $       27,555     $        8,248    $         2,244    $        65,402

Unobligated Balance:
 Apportioned                                                                                          41              3,946                 36                511
 Unapportioned                                                                                    14,309             13,685             14,130             20,632
Total Unobligated Balance                                                                         14,350             17,631             14,166             21,143
TOTAL STATUS OF BUDGETARY RESOURCES                                                      $        41,905     $       25,879    $        16,410    $        86,545

CHANGE IN OBLIGATED BALANCES
Obligated Balance Brought Forward:
    Unpaid Obligations                                                                    $       43,814     $       13,158    $        69,128    $        41,918
    Uncollected Customer Payments from Federal Sources                                                 -               (496)                 -            (23,816)
Obligated Balance, Net, Brought Forward                                                           43,814             12,662             69,128             18,102

     Obligations Incurred                                                                         27,555              8,248              2,244             65,402
     Gross Outlays                                                                               (30,675)            (9,366)           (24,501)           (89,498)
     Change in Uncollected Customer Payments from Federal Sources                                      -                147                  -             23,320
     Recoveries of Prior Year Unpaid Obligations                                                    (146)            (6,114)            (3,057)            (4,664)

Obligated Balance, Net, End of Period:
    Unpaid Obligations, Gross, End of Period                                                      40,548              5,926             43,814             13,158
    Uncollected Customer Payments from Federal Sources                                                 -               (349)                 -               (496)
OBLIGATED BALANCE, NET, END OF PERIOD                                                    $        40,548     $        5,577 $           43,814    $        12,662

BUDGET AUTHORITY AND OUTLAYS, NET
  Budget Authority, Gross                                                                $        27,593     $       24,354 $            2,278    $        80,697
  Actual Offsetting Collections                                                                        -            (81,269)                 -           (107,307)
  Change in Uncollected Customer Payments from Federal Sources                                         -                147                  -             23,320
BUDGET AUTHORITY, NET                                                                    $        27,593     $      (56,768) $           2,278    $        (3,290)

  Gross Outlays                                                                          $        30,675 $            9,366 $           24,501 $           89,498
  Actual Offsetting Collections                                                                        -            (81,269)                 -           (107,307)
  Net Outlays                                                                                     30,675            (71,903)            24,501            (17,809)
  Distributed Offsetting Receipts                                                                 (6,063)                 -            (61,832)                 -
AGENCY OUTLAYS, NET                                                                      $        24,612 $          (71,903) $         (37,331) $         (17,809)




The accompanying notes are an integral part of these financial statements.




53                                                                                                                                 FINANCIAL STATEMENTS
                                                                         AGENCY FINANCIAL REPORT | FISCAL YEAR 2012




NOTES TO THE FINANCIAL STATEMENTS


NOTE 1. REPORTING ENTITY
The Troubled Asset Relief Program (TARP) was               commitments to make purchases and offsets for
authorized by the Emergency Economic                       guarantees made) $467.0 billion as of September 30,
Stabilization Act of 2008 (EESA or “the Act”). The         2012 and $470.1 billion as of September 30, 2011.
Act gave the Secretary of the Treasury (the
Secretary) broad and flexible authority to establish       The TARP developed the following programs: the
the TARP to purchase and insure mortgages and              Capital Purchase Program (CPP); the Targeted
other troubled assets, which permitted the Secretary       Investment Program (TIP); the Community
to inject capital into banks and other commercial          Development Capital Initiative (CDCI); the Public-
companies by taking equity positions in those              Private Investment Program (PPIP); the Term Asset-
entities to help stabilize the financial markets.          Backed Securities Loan Facility (TALF); the SBA 7(a)
                                                           Securities Purchase Program (SBA 7(a)); the
The EESA established certain criteria under which          Automotive Industry Financing Program (AIFP); the
the TARP would operate, including provisions that          American International Group, Inc. (AIG) Investment
impact the budgeting, accounting, and reporting of         Program (formerly known as the Systemically
troubled assets acquired under the Act. Section            Significant Failing Institutions Program); the Asset
101(a) of the EESA provided the authority for the          Guarantee Program (AGP); and the Treasury Housing
Secretary to purchase troubled assets, and Section         Programs Under TARP (see Notes 5 and 6 for details
101(a)(3) of the EESA established the Office of            regarding all of these programs).
Financial Stability (OFS) to implement the TARP.
Section 102 of the EESA required the Secretary to          While these financial statements reflect the activity
establish a program to guarantee troubled assets           of the OFS in executing its programs, including
originated or issued prior to March 14, 2008,              providing resources to various entities to help
including mortgage-backed securities. Section 115 of       stabilize the financial markets, they do not include
the EESA limited the authority of the Secretary to         the assets, liabilities, or results of operations of
purchase troubled assets up to $700.0 billion              commercial entities in which the OFS has a
outstanding at any one time, calculated at the             significant equity interest. Through the purchase of
aggregate purchase prices of all troubled assets held.     troubled assets, the OFS has entered into several
Amendments to Section 115 of the EESA during the           different types of direct loan, equity investment, and
period ended September 30, 2009, reduced that              other credit programs (which consist of the AGP and
authority by $1.3 billion, from $700.0 billion to $698.7   the Federal Housing Administration (FHA)
billion. Section 120 of the EESA established that the      Refinance Program) with private entities. These
authorities under Sections 101(a), excluding Section       direct loans, equity investments, and other credit
101(a)(3), and Section 102 of the EESA would               programs were entered into with the intent of
terminate December 31, 2009, unless extended upon          helping to stabilize the financial markets and
submission of a written certification to Congress by       mitigating, as best as possible, any adverse impact
the Secretary of the Treasury. On December 9, 2009,        on the economy. These direct loans, equity
the Secretary extended the program authorities             investments, and other credit programs were not
through October 3, 2010. In July 2010, the Dodd-           entered into to engage in the business activities of
Frank Wall Street Reform and Consumer Protection           the respective private entities. Based on this intent,
Act amended Section 115 of the EESA, limiting the          the OFS concluded that such direct loans, equity
TARP’s authority to a total of $475.0 billion              investments, and other credit programs are
cumulative obligations (i.e. purchases and                 considered “bail outs”, under the provisions of
guarantees) and prohibiting any new obligations for        paragraph 50 of Statement of Federal Financial
programs or initiatives that had not been publicly         Accounting Concepts (SFFAC) No. 2, Entity and
announced prior to June 25, 2010. Of the maximum           Display. In addition, these entities are not included
$475.0 billion authority under the EESA, as amended,       in the Federal budget and, therefore, do not meet
OFS had utilized (including purchases made, legal          the conclusive criteria in SFFAC No. 2. As such, the


NOTES TO THE FINANCIAL STATEMENTS                                                                               54
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



OFS determined that none of these entities meet the        SPVs meet the conclusive or indicative criteria to be
criteria to be classified as a federal entity.             classified as a federal entity. As a result, the assets,
Consequently, their assets, liabilities, and results of    liabilities and results of operations of the SPVs are
operations were not consolidated in these OFS              not included in these OFS financial statements.
financial statements, but the value of OFS’                Additional disclosures regarding certain SPV
investments in such entities was recorded in OFS’          investments are included in Notes 2 and 6; see
financial statements.                                      PPIP, TALF and AIG Investment Program.

In addition, the OFS has made loans and                    The EESA established the OFS within the Office of
investments in certain Special Purpose Vehicles            Domestic Finance of the U. S. Department of the
(SPV) 25. SFFAC No. 2, paragraphs 43 and 44,               Treasury (Treasury). The OFS prepares stand-alone
reference indicative criteria such as ownership and        financial statements to satisfy EESA’s requirement
control to carry out government powers and                 for the TARP to prepare annual financial
missions, as criteria in the determination about           statements. Additionally, as an office of the
whether an entity should be classified as a federal        Treasury, its financial statements are consolidated
entity. The OFS has concluded that none of the             into Treasury’s Agency Financial Report.




25
  During 2012 and 2011, the OFS held investments in SPVs
under the TALF, PPIP and AIG Investment Programs.




55                                                                               NOTES TO THE FINANCIAL STATEMENTS
                                                                      AGENCY FINANCIAL REPORT l FISCAL YEAR 2012




NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting and                                 Consistent with its accounting policy for equity
                                                        investments in private entities, including SPV’s, the
Presentation                                            OFS accounts for its equity investments at fair
                                                        value. Since fair value is not defined in federal
The accompanying financial statements include the       accounting standards, following the hierarchy of
operations of the OFS and have been prepared from       accounting principles established in SFFAS No. 34,
the accounting records of the OFS in conformity         the OFS conforms to fair value definitions contained
with accounting principles generally accepted in the    in the private sector Financial Accounting
United States for federal entities (Federal GAAP),      Standards Codification (ASC) 820, Fair Value
and the OMB Circular A-136, Financial Reporting         Measurement. OFS defines fair value of its equity
Requirements, as amended. Federal GAAP includes         investments as the estimated amount of proceeds
the standards issued by the Federal Accounting          that would be received if the equity investments
Standards Advisory Board (FASAB). The FASAB is          were sold to a market participant in an orderly
recognized by the American Institute of Certified       transaction. Note 6 presents Direct Loan and Equity
Public Accountants (AICPA) as the official              Investments and the Asset Guarantee Program
accounting standards-setting body for the U.S.          receivable tabulated by the Level of Observation of
Government. As such, the FASAB is responsible for       the inputs used in the valuation process. Level 1
establishing Federal GAAP for Federal reporting         assets are measured using quoted market prices for
entities.                                               identical assets. Level 2 assets are measured using
                                                        observable market inputs other than direct market
The FASAB issued the Statement of Federal               quotes. Level 3 assets are measured using
Financial Accounting Standards (SFFAS) No. 34,          unobservable inputs.
The Hierarchy of Generally Accepted Accounting
Principles, Including the Application of Standards      The OFS uses the present value accounting concepts
Issued by the Financial Accounting Standards Board      embedded in SFFAS No. 2, Accounting for Direct
in July 2009. SFFAS No. 34 identifies the sources of    Loans and Loan Guarantees, as amended (SFFAS
accounting principles and the framework for             No. 2), to derive fair value measurements for its
selecting the principles used in the preparation of     equity investments in Levels 2 and 3. The OFS
general purpose financial reports of federal            concluded that some of the equity investments, such
reporting entities that are presented in conformity     as preferred stock, were similar to direct loans since
with Federal GAAP.                                      there was a stated rate and a redemption feature
                                                        which, if elected, required repayment of the amount
In addition to the above, Section 123(a) of the EESA    invested. Furthermore, consideration of market risk
requires that the budgetary cost of purchases of        provided a basis to arrive at a fair value
troubled assets and guarantees of troubled assets,      measurement. Therefore, the OFS concluded that
and any cash flows associated with authorized           SFFAS No. 2 (as more fully discussed below) should
activities, be determined in accordance with the        be followed for reporting and disclosure
Federal Credit Reform Act of 1990 (FCRA). Section       requirements of its equity investments.
123(b) (1) of the EESA requires that the budgetary
costs of troubled assets and guarantees of troubled     Federal loans and loan guarantees are governed by
assets be calculated by adjusting the discount rate     FCRA for budgetary accounting and the associated
for market risks. As a result of this requirement,      FASAB accounting standard SFFAS No. 2 for
the OFS considered market risk in its calculation       financial reporting. The OFS applies the provisions
and determination of the estimated net present          of SFFAS No. 2 when accounting and reporting for
value of its direct loans, equity investments and       direct loans and other credit programs. Direct loans
other credit programs for budgetary purposes.           disbursed and outstanding are recognized as assets
Similarly, market risk is considered in the             at the net present value of their estimated future
valuations for financial reporting purposes (see Note   cash flows. Outstanding asset guarantees are
6 for further discussion).                              recognized as liabilities or assets at the net present
                                                        value of their estimated future cash flows.



NOTES TO THE FINANCIAL STATEMENTS                                                                      56
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



Liabilities under the FHA-Refinance Program are            direct loans, equity investments, and other credit
recognized at the net present value of their               programs. These estimates are sensitive to slight
estimated future cash flows when the FHA                   changes in model assumptions, such as general
guarantees loans.                                          economic conditions, specific stock price volatility of
                                                           the entities in which the OFS has an equity interest,
For direct loans and equity investments, the subsidy       estimates of expected default, and prepayment
allowance account represents the difference between        rates. Forecasts of future financial results have
the face value of the outstanding direct loan and          inherent uncertainty, and the OFS’ TARP Direct
equity investment balance and the net present value        Loans and Equity Investments, Net and Asset
of the expected future cash flows or fair value, and is    Guarantee Program line items, as of fiscal year
reported as an adjustment to the face value of the         ends, primarily reflect relatively illiquid assets with
direct loan or equity investment.                          values that are sensitive to future economic
                                                           conditions and other assumptions. Estimates are
The OFS recognizes dividend income associated with         also prepared for the FHA-Refinance Program to
equity investments when declared by the entity in          determine the liability for losses.
which the OFS has invested and when received in
relation to any repurchases, exchanges and                 Credit Reform Accounting
restructurings. The OFS recognizes interest income
when earned on performing loans; interest income is        The FCRA provides for the use of program,
not accrued on non-performing loans. The OFS               financing, and general fund receipt accounts to
reflects changes, referred to as reestimates, in its       separately account for activity related to direct
determination of the value of direct loans, equity         loans, equity investments and other credit
investments, and other credit programs in the              programs. These accounts are classified as either
subsidy cost on the Statement of Net Cost annually.        budgetary or non-budgetary in the Statement of
                                                           Budgetary Resources. The budgetary accounts
The OFS has received common stock warrants,                include the program and general fund receipt
additional preferred stock (referred to as warrant         accounts, and the non-budgetary accounts consist of
preferred stock) or additional notes as additional         the credit reform financing accounts.
consideration for providing direct loans and equity
investments and for supporting the Asset Guarantee         As discussed previously, the OFS accounts for the
Program. The OFS accounts for the common stock             cost of direct loans, equity investments and other
warrants and warrant preferred stock received              credit programs in accordance with Section 123(a) of
under Section 113 of the EESA as fees under SFFAS          the EESA and the FCRA for budgetary accounting,
No. 2, and, as such, the proceeds received in any          and fair value and SFFAS No. 2 for financial
sales are credited to the subsidy allowance rather         reporting.
than to income.
                                                           Consistent with SFFAS No. 2 and FCRA, the OFS
Use of Estimates                                           maintains program accounts which receive
                                                           appropriations and obligate funds to cover the
The OFS has made certain estimates and                     subsidy cost of direct loans, equity investments and
assumptions relating to the reporting of assets,           other credit programs, and disburses the subsidy
liabilities, revenues, and cost to prepare these           cost to the OFS financing accounts. The financing
financial statements. Actual results could                 accounts are non-budgetary accounts that are used
significantly differ from these estimates. Major           to record all of the cash flows resulting from the OFS
financial statement lines that include estimates are       direct loans, equity investments and other credit
TARP Direct Loans and Equity Investments, Net,             programs. Cash flows include disbursements,
the Asset Guarantee Program and the Liabilities for        borrower repayments, repurchases, fees, recoveries,
Treasury Housing Programs Under TARP on the                interest, dividends, proceeds from the sale of stock
Balance Sheet, and related Program Subsidy Cost            and warrants, borrowings from and repayments to
(Income) on the Statement of Net Cost (see Note 6).        Treasury, negative subsidy and the subsidy cost
                                                           received from the program accounts, as well as
The most significant differences between actual            subsidy reestimates and modifications.
results and estimates may occur in the valuation of



57                                                                       NOTES TO THE FINANCIAL STATEMENTS
                                                                        AGENCY FINANCIAL REPORT l FISCAL YEAR 2012



The financing arrangements specifically for the           Treasury, and the OFS’ records are reconciled with
TARP activities are provided for in the EESA as           those of the Treasury on a regular basis.
follows: (1) borrowing for program funds under
Section 118 that constitute appropriations when           Available unobligated balances represent amounts
obligated or spent, which are reported as                 that are apportioned for obligation in the current
“appropriations” in these financial statements; (2)       fiscal year. Unavailable unobligated balances
borrowing by financing accounts for non-subsidy cost      represent unanticipated collections in excess of the
under the FCRA and Section 123; and (3)                   amounts apportioned which are unavailable.
establishment of the Troubled Assets Insurance            Obligated balances not yet disbursed include
Financing Fund (TAIFF) for the Asset Guarantee            undelivered orders and unpaid expended authority.
Program under Section 102(d).                             See Note 3.

The OFS uses general fund receipt accounts to             Troubled Asset Relief Program
record the receipt of amounts paid from the
financing accounts when there is a negative subsidy       Direct Loans and Equity
or negative modification (a reduction in subsidy cost     Investments, Net
due to changes in program policy or terms that
change estimated future cash flows) from the              Troubled Asset Relief Program Direct Loans and
original estimate or a downward reestimate.               Equity Investments, Net represents the estimated
Amounts in the general fund receipt accounts are          net outstanding amount of the OFS direct loans and
available for appropriations only in the sense that       equity investments. The direct loan and equity
all general fund receipts are available for               investment balances have been determined in
appropriations. Any assets in these accounts are          accordance with the provisions of SFFAS No. 2 or at
non-entity assets and are offset by                       fair value (see Note 6). Write-offs of gross direct
intragovernmental liabilities. At the end of the fiscal   loan and equity investment balances (presented in
year, the fund balance transferred to the U.S.            Note 6 table) are recorded when a legal event occurs,
Treasury through the general fund receipt account is      such as a bankruptcy with no further chance of
not included in the OFS’ reported Fund Balance            recovery or extinguishment of a debt instrument by
with Treasury.                                            agreement. Under SFFAS No. 2, write-offs do not
                                                          affect the Statement of Net Cost because the
SFFAS No. 2 requires that the actual and expected         written-off asset is fully reserved. Therefore, the
costs of federal credit programs be fully recognized      write-off removes the asset balance and the
in financial reporting. The OFS calculated and            associated subsidy allowance.
recorded initial estimates of the future performance
of direct loans, equity investments, and other credit
                                                          Asset Guarantee Program
programs. The data used for these estimates were
reestimated annually, at fiscal year-end, to reflect
                                                          During fiscal year 2010, the OFS and the Federal
adjustments for market risk, asset performance, and
                                                          Deposit Insurance Corporation (FDIC) entered into
other key variables and economic factors. The
                                                          a termination agreement with the Asset Guarantee
reestimate data was then used to estimate and
                                                          Program’s sole participant, Citigroup. As a result,
report the “Program Subsidy Cost (Income)” in the
                                                          in fiscal year 2011, the OFS sold securities and
Statement of Net Cost. A detailed discussion of the
                                                          warrants held in the program. The Intragovern-
OFS subsidy calculation and reestimate
                                                          mental Asset line item, Asset Guarantee Program,
assumptions, process and results is provided in
                                                          remaining on the Balance Sheet is the estimated
Note 6.
                                                          value of certain Citigroup trust preferred securities
                                                          including dividends collected, currently held by the
Fund Balance with Treasury                                FDIC for the benefit of OFS. Under the termination
                                                          agreement, the FDIC has agreed to transfer these
The Fund Balance with Treasury includes general,          securities to the OFS, less any losses on FDIC’s
financing and other funds available to pay current        guarantee of Citigroup debt, by December 31, 2012.
liabilities and finance authorized purchases. Cash        See Note 6.
receipts and disbursements are processed by the




NOTES TO THE FINANCIAL STATEMENTS                                                                        58
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY




General Property and Equipment                             Liabilities for the Treasury Housing
                                                           Programs Under TARP
Equipment with a cost of $50,000 or more per unit
and a useful life of two years or more is capitalized
                                                           There are three initiatives in the Treasury Housing
at full cost and depreciated using the straight-line
                                                           Programs: the Making Home Affordable Program,
method over the equipment’s useful life. Other
                                                           the Housing Finance Agency Hardest-Hit Fund and
equipment not meeting the capitalization criteria is
                                                           the FHA-Refinance Program. The OFS has
expensed when purchased. Software developed for
                                                           determined that credit reform accounting is not
internal use is capitalized and amortized over the
                                                           applicable to the Treasury Housing Programs Under
estimated useful life of the software if the cost per
                                                           TARP except for the FHA-Refinance Program.
project is greater than $250,000. However, OFS
                                                           Therefore, liabilities for the Making Home
may expense such software if management
                                                           Affordable Program and Housing Finance Agency
concludes that total period costs would not be
                                                           Hardest-Hit Fund are accounted for in accordance
materially distorted and the cost of capitalization is
                                                           with SFFAS No. 5, Accounting for Liabilities of the
not economically prudent. Based upon these
                                                           Federal Government. In accordance with this
criteria, the OFS reports no capitalized property,
                                                           standard, a liability is recognized for any unpaid
equipment or software on its Balance Sheet as of
                                                           amounts due and payable as of the reporting date.
September 30, 2012 and 2011.
                                                           The liability estimate, as of September 30, 2012 and
                                                           2011, is based on information about loan
Accounts Payable and Other                                 modifications reported by participating servicers for
Liabilities                                                the Making Home Affordable Program and
                                                           participating states for the Housing Finance Agency
Accounts Payable and Other Liabilities are amounts         Hardest-Hit Fund. See Note 5.
due to intragovernmental or public entities that are
anticipated to be liquidated during the next               At the end of fiscal year 2010, the OFS entered into
operating cycle (within one year from the balance          a loss-sharing agreement with the FHA to support a
sheet date).                                               program in which FHA would guarantee refinancing
                                                           for borrowers whose homes are worth less than the
                                                           remaining amounts owed under their mortgage
Due to the General Fund                                    loans, i.e. “underwater”. The liability for OFS’ share
                                                           of losses was determined under credit reform
Due to the General Fund represents the amount of           accounting and is shown as FHA-Refinance
accrued downward reestimates not yet funded,               Program, one of the Liabilities for Treasury Housing
related to direct loans, equity investments and other      Programs Under TARP, on the Balance Sheet. See
credit programs as of September 30, 2012 and 2011.         Notes 4, 5 and 6.
See Notes 6 and 7.
                                                           Unexpended Appropriations
Principal Payable to the Bureau of
the Public Debt                                            Unexpended Appropriations represents the OFS
                                                           undelivered orders and unobligated balances in
Principal Payable to the Bureau of the Public Debt         budgetary appropriated funds as of September 30,
(BPD) represents the net amount due for equity             2012 and 2011.
investments, direct loans and other credit programs
funded by borrowings from the BPD as of the end of         Cumulative Results of Operations
the fiscal year. Additionally, OFS borrows from the
BPD for payment of intragovernmental interest and          Cumulative Results of Operations, presented on the
payment of negative subsidy cost to the general            Balance Sheet and on the Statement of Changes in
fund, as necessary. See Note 8.                            Net Position, represents the net results of the OFS
                                                           operations not funded by appropriations or some
                                                           other source, such as borrowing authority, from
                                                           inception through fiscal year end. At September 30,
                                                           2012 and 2011, OFS had $755 million and $27.9



59                                                                       NOTES TO THE FINANCIAL STATEMENTS
                                                                       AGENCY FINANCIAL REPORT l FISCAL YEAR 2012



billion, respectively, of unfunded upward                an application of actuarial procedures developed to
reestimates that resulted in OFS reporting negative      estimate the liability for FECA benefits. The
Cumulative Results of Operations. The fiscal year        actuarial liability estimates for FECA benefits
2012 unfunded upward reestimates will be funded in       include the expected liability for death, disability,
fiscal year 2013. The fiscal year 2011 unfunded          medical, and miscellaneous costs for approved
upward reestimates were funded in fiscal year 2012.      compensation cases. Any FECA amounts relating to
Cumulative Results of Operations in 2012 and 2011        OFS employees are expensed as incurred.
also included $50 million reported as Cash on
Deposit for Housing Program on the Balance Sheet,        Employee Pension Benefits
see Note 4.
                                                         The OFS employees participate in either the Civil
Other Financing Sources                                  Service Retirement System (CSRS) or the Federal
                                                         Employees’ Retirement System (FERS) and Social
The Other Financing Sources line in the Statement        Security. These systems provide benefits upon
of Changes in Net Position for each year consists        retirement and in the event of death, disability or
primarily of downward reestimates. Each program’s        other termination of employment and may also
reestimates, upward and downward, are recorded           provide pre-retirement benefits. They may also
separately, not netted together.                         include benefits to survivors and their dependents,
                                                         and may contain early retirement or other special
Leave                                                    features. The OFS contributions to retirement plans
                                                         and Social Security, as well as imputed costs for
A liability for the OFS employees’ annual leave is       pension and other retirement benefit costs
accrued as it is earned and reduced as leave is          administered by the Office of Personnel
taken. Each year the balance of accrued annual           Management, are recognized on the Statement of
leave is adjusted to reflect current pay rates as well   Net Cost as Administrative Costs. Federal employee
as forfeited “use or lose” leave. Amounts are            benefits also include the Thrift Savings Plan (TSP).
unfunded to the extent current or prior year             For FERS employees, a TSP account is
appropriations are not available to fund annual          automatically established and the OFS matches
leave earned but not taken. Sick leave and other         employee contributions to the plan, subject to
types of non-vested leave are expensed as taken.         limitations. The matching contributions are
The liability is included in the Balance Sheet           recognized as Administrative Costs on the
amount for Accounts Payable and Other Liabilities.       Statement of Net Cost.


Employee Health and Life Insurance                       Related Parties
and Workers’ Compensation Benefits                       The nature of related parties and descriptions of
                                                         related party transactions are discussed within
The OFS employees may choose to participate in the       Notes 1 and 6.
contributory Federal Employees Health Benefit and
the Federal Employees Group Life Insurance
Programs. The OFS matches a portion of the
                                                         Reclassifications
employee contributions to each program. Matching
contributions are recognized as current operating        Reclassification of certain items of the 2011 financial
expenses.                                                statements has been made to conform to the 2012
                                                         presentation. For example, OMB Circular A-136
The Federal Employees’ Compensation Act (FECA)           changed the format of the Statement of Budgetary
provides income and medical cost protection to           Resources to align with the SF-133 Report on
covered Federal civilian employees injured on the        Budget Execution and Budgetary Resources for all
job, and employees who have incurred a work-             federal reporting entities. Fiscal year 2011 balances
related injury or occupational disease. Future           on the SBR were reclassified to conform to the new
workers’ compensation estimates are generated from       format.




NOTES TO THE FINANCIAL STATEMENTS                                                                       60
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY




NOTE 3. FUND BALANCES WITH TREASURY
Fund Balances with Treasury, by fund type and status, are presented in the following table.

                                                                              As of September 30,
              (Dollars in Millions)                                           2012          2011


              Fund Balances:
                 General Funds                                            $ 40,517      $ 43,542
                 Program Funds                                              14,382        14,438
                 Financing Funds                                            20,596        25,362
              Total Fund Balances                                         $ 75,495      $ 83,342


              Status of Fund Balances:
                 Unobligated Balances
                     Available                                            $  3,987      $    547
                     Unavailable                                            27,994        34,762
                 Obligated Balances Not Yet Disbursed                       43,514        48,033
              Total Status of Fund Balances                               $ 75,495      $ 83,342



Collections relating to the AGP are deposited in the       and 2011, the TAIFF balance was reduced for AGP-
Troubled Assets Insurance Financing Fund (which is         related downward reestimates, repayments of AGP-
within OFS Financing Funds balance) as required            related debt and payments of interest on AGP-
by the EESA Section 102(d). In fiscal years 2012           related debt due to the Bureau of the Public Debt.



NOTE 4. CASH ON DEPOSIT FOR HOUSING PROGRAM
As of September 30, 2012, and 2011, the OFS had            its agreement, the OFS is required to maintain a
$50 million on deposit with a commercial bank to           minimum amount of funds on deposit, depending
facilitate its payments of claims under the FHA-           upon the size of the program and potential claims.
Refinance Program as OFS’ agent. Under terms of            Unused funds will be returned to the OFS upon the
                                                           termination of the program and agreement.



NOTE 5. TREASURY HOUSING PROGRAMS UNDER TARP
Fiscal year 2012 saw a continued advancement of            3) FHA-Refinance Program.
programs designed to provide stability for both the
housing market and homeowners. These programs              MHA
assist homeowners who are experiencing financial
hardships to remain in their homes until their             In early 2009, Treasury launched the Making Home
financial position improves or they relocate to a          Affordable Program (MHA) to help struggling
more sustainable living situation. The programs fall       homeowners avoid foreclosure. Since its inception,
into three initiatives:                                    MHA has helped homeowners avoid foreclosure by
                                                           providing a variety of solutions to modify or
1) Making Home Affordable Program (MHA);                   refinance their mortgages, get temporary
2) Housing Finance Agency (HFA) Hardest-Hit                forbearance if they are unemployed, or transition
Fund; and                                                  out of homeownership via a short sale or deed-in-


61                                                                      NOTES TO THE FINANCIAL STATEMENTS
                                                                                         AGENCY FINANCIAL REPORT l FISCAL YEAR 2012



lieu of foreclosure. The cornerstone of MHA is the                   to a more affordable living situation through a short
Home Affordable Modification Program (HAMP),                         sale or deed-in-lieu of foreclosure. MHA includes
which provides eligible homeowners the opportunity                   several additional programs to help homeowners
to reduce their monthly mortgage payments to more                    refinance or address specific types of mortgages, in
affordable levels. Treasury also launched programs                   conjunction with the Federal Housing
under MHA to help homeowners who are                                 Administration (FHA), the United States
unemployed, “underwater” on their loans (those who                   Department of Agriculture (USDA), and the
owe more on their home than it is currently worth),                  Department of Veterans Affairs (VA).
or struggling with second liens. It also includes
options for homeowners who would like to transition                  Features of these initiatives follow:

                    Housing Program                                                         Features
   MHA
     Home Affordable Modification Program (HAMP)
         First Lien Modification Program                   Provides for upfront, monthly and annual incentives to servicers, borrowers
                                                           and investors who participate, whereby the investor and OFS share the costs
                                                           of modifying qualified first liens, conditional on borrower performance.
         Principal Reduction Alternative Program           Pays financial incentives to investors for principal reduction in conjunction
                                                           with a first lien HAMP modification.
         Home Price Depreciation Program (HPDP)            Provides financial incentives to investors to partially offset losses from home
                                                           price declines.
         Home Affordable Foreclosure Alternatives (HAFA)   Designed to assist eligible borrowers unable to retain their homes through a
                                                           HAMP modification, by simplifying and streamlining the short sale and deed-
                                                           in-lieu of foreclosure processes and providing financial incentives to servicers
                                                           and investors as well as relocation assistance to borrowers who pursue short
                                                           sales and deeds-in-lieu.
         Unemployment Forebearance Program (UP)            Offers assistance to unemployed homeowners through temporary
                                                           forebearance of a portion of their mortgage payments. This program does not
                                                           require any payments from OFS.
     FHA- HAMP                                             Provides mortgage modifications similar to HAMP, but for FHA-insured or
                                                           guaranteed loans offered by the FHA, V A or USDA.
     Second Lien Program (2MP)                             Offers financial incentives to participating servicers who modify second liens
                                                           in conjunction with a HAMP modification.
     Treasury/FHA Second Lien Program (FHA 2LP)            Provides for reduction or elimination of second mortgages on homes whose
                                                           servicers participate in the FHA Refinance Program.
     Rural Development Program (RD- HAMP)                  Provides for lower monthly payments on USDA guaranteed loans.
   HHF                                                     Provides targeted aid to families in the states hardest hit by the housing
                                                           market downturn and unemployment.
   FHA- Refinance Program                                  Joint initiative with HUD to encourage refinancing of existing underwater
                                                           mortgage loans not currently insured by FHA into FHA insured mortgages.



                                                                        investor incentives for PRA were tripled on first
In fiscal year 2012, the OFS made three changes                         liens and doubled on second liens.
to MHA programs, designed to provide relief to
more homeowners and to accelerate the housing                           All MHA disbursements are made to servicers
market recovery. First, the deadline for                                either for themselves or for the benefit of
homeowners to apply for MHA programs was                                borrowers and investors, and all payments are
extended from December 31, 2012 to December                             contingent on borrowers remaining in good
31, 2013. Secondly, HAMP program guidelines                             standing. To be considered for MHA programs,
were expanded through the introduction of a                             borrowers must apply by December 31, 2013.
second-level evaluation that expands the
population of homeowners eligible for the                               Fannie Mae, as the MHA Program Administrator,
programs by allowing for homes that are rental                          provides direct programmatic support as a third
properties, a flexible debt-to-income ratio                             party agent on behalf of the OFS. Freddie Mac
requirement, and by including previous HAMP                             provides compliance oversight of servicers as a
participants who lost good standing. Finally,                           third party agent on behalf of the OFS, and the
                                                                        servicers work directly with the borrowers to



NOTES TO THE FINANCIAL STATEMENTS                                                                                                     62
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



modify and service the borrowers’ loans. Fees                                  Development (HUD) which is intended to
paid to Fannie Mae and Freddie Mac are included                                encourage refinancing of existing underwater (i.e.
in administrative costs reported on the Statement                              the borrower owes more than the home is worth)
of Net Cost.                                                                   mortgage loans not currently insured by FHA into
                                                                               FHA-insured mortgages. HUD will pay a portion
HHF                                                                            of the amount refinanced to the investor and OFS
                                                                               will pay incentives to encourage the
The Housing Finance Agency (HFA) Hardest-Hit                                   extinguishment of second liens associated with
Fund was implemented in fiscal year 2010, and                                  the refinanced mortgages. OFS established a
provides targeted aid to families in the states hit                            letter of credit that obligated the OFS portion of
hardest by the housing market downturn and                                     any claims associated with the FHA-guaranteed
unemployment. States that meet the criteria for                                mortgages. The OMB determined that for
this program consist of Alabama, Arizona,                                      budgetary purposes, the FHA-Refinance Program
California, Florida, Georgia, Illinois, Indiana,                               cost is calculated under the FCRA, and
Kentucky, Michigan, Mississippi, Nevada, New                                   accordingly OFS determined that it was
Jersey, North Carolina, Ohio, Oregon, Rhode                                    appropriate to follow SFFAS No. 2 for financial
Island, South Carolina, Tennessee, as well as the                              reporting. Therefore, the liability is calculated at
District of Columbia. Approved states develop                                  the net present value of estimated future cash
and roll out their own programs with timing and                                flows. Homeowners can refinance into FHA-
types of programs offered targeted to address the                              guaranteed mortgages through December 31,
specific needs and economic conditions of their                                2014, and OFS will honor its share of claims
state. States have until December 31, 2017 to                                  against the letter of credit through 2020. As of
enter into agreements with borrowers.                                          September 30, 2012, 1,774 loans had been
                                                                               refinanced. As of September 30, 2011, 334 loans
In fiscal year 2012, HFAs made substantial                                     had been refinanced.
eligibility changes to existing programs (e.g.
Florida, New Jersey) and significantly modified                                OFS deposited $50 million with a commercial
principal reduction programs (e.g. Arizona,                                    bank as its agent to administer payment of claims
California and Nevada) incorporating                                           under the program; no claim payments have been
curtailments (i.e. unmatched principal reduction)                              made as of September 30, 2012. See Notes 4 and
that can be applied to all eligible loans including                            6. OFS paid $2 million each year in fiscal years
GSE loans that historically have not participated                              2012 and 2011 to maintain the letter of credit.
in principal reduction programs.
                                                                               The table below recaps housing program
                                                                               commitments as of September 30, 2012, and
FHA-Refinance Program                                                          payments and accruals as of September 30, 2012
                                                                               and 2011.
The FHA-Refinance Program is a joint initiative
with the Department of Housing and Urban


Treasury Housing Programs Under TARP
                                        Commitments as of       Fiscal Year Payments through September 30,            Accruals as of September 30,
(Dollars in Millions)                   September 30, 2012              2012                     2011                   2012                2011


MHA                                 $               29,871     $                2,202    $              1,282    $             241    $              343
HFA Hardest Hit Fund                                  7,600                       861                     599                  -                     -
FHA - Refinance*                                      8,117                          2                       2                 -                     -
Totals                              $               45,588     $                3,065    $              1,883    $             241    $              343

 *Payments do not include $50 million to establish reserve, shown on Balance Sheet as Cash on Deposit for Housing Program, nor the subsidy cost to fund
 OFS' share of defaults, which establishes the liability for losses, see Note 6. Payments are for the FHA-Refinance Program administrative expense only.




63                                                                                              NOTES TO THE FINANCIAL STATEMENTS
                                                                          AGENCY FINANCIAL REPORT l FISCAL YEAR 2012




NOTE 6. TROUBLED ASSET RELIEF PROGRAM DIRECT LOANS AND
EQUITY INVESTMENTS, NET AND OTHER CREDIT PROGRAMS
The OFS administers a number of programs                    into other credit programs, which consist of an asset
designed to help stabilize the financial system and         guarantee program and a loss-sharing program
restore the flow of credit to consumers and                 under the TARP. The table below recaps OFS
businesses. The OFS made direct loans and equity            programs by title and type:
investments under TARP. The OFS also entered


                          Program                                              Program Type
  Direct Loans and Equity Investments
    Capital Purchase Program                                Equity Investment/Subordinated Debentures
    Targeted Investment Program                             Equity Investment
    Community Development Capital Initiative                Equity Investment/Subordinated Debentures
    Public-Private Investment Program                       Equity Investment and Direct Loan
    Term Asset-Backed Securities Loan Facility              Subordinated Debentures
    SBA 7(a) Security Purchase Program                      Direct Loan
    Automotive Industry Financing Program                   Equity Investment and Direct Loan
    American International Group, Inc. Investment Program   Equity Investment
  Other Credit Programs
    Asset Guarantee Program                                 Asset Guarantee
    FHA-Refinance Program                                   Loss-sharing Program with FHA




Valuation Methodology                                       transactions or to purchase the assets held by OFS.
                                                            Accordingly, the measurement of the assets
                                                            attempts to represent the proceeds expected to be
The OFS applies fair value and the provisions of            received if the assets were sold to a market
SFFAS No. 2 to account for direct loans, equity             participant in an orderly transaction. The
investments and other credit programs. This                 methodology employed for determining market risk
standard requires measurement of the asset or               for equity investments generally involves a
liability at the net present value of the estimated         calibration to market prices of similar securities that
future cash flows. The cash flow estimates for each         results in measuring equity investments at fair
transaction reflect the actual structure of the             value. The adjustment for market risk for loans is
instruments. For each of these instruments,                 intended to capture the risk of unexpected losses,
analytical cash flow models generate estimated cash         but not intended to represent fair value, i.e. the
flows to and from the OFS over the estimated term           proceeds that would be expected to be received if the
of the instrument. Further, each cash flow model            loans were sold to a market participant. The OFS
reflects the specific terms and conditions of the           uses market observable inputs, when available, in
program, technical assumptions regarding the                developing cash flows and incorporating the
underlying assets, risk of default or other losses, and     adjustment required for market risk. For purposes
other factors as appropriate. The models also               of this disclosure, the OFS has classified its
incorporate an adjustment for market risk to reflect        programs’ asset valuations as follows, based on the
the additional return required by the market to             observability of inputs that are significant to the
compensate for variability around the expected              measurement of the asset:
losses reflected in the cash flows (the “unexpected
loss”).                                                     •   Quoted prices for Identical Assets (Level 1): The
                                                                measurement of assets in this classification is
The adjustment for market risk requires the OFS to              based on direct market quotes for the specific
determine the return that would be required by                  asset, e.g. quoted prices of common stock.
market participants to enter into similar



NOTES TO THE FINANCIAL STATEMENTS                                                                          64
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



•      Significant Observable Inputs (Level 2): The                         represent management’s best estimate of how a
       measurement of assets in this classification is                      market participant would assess the risk
       primarily derived from market observable data,                       inherent in the asset. These unobservable
       other than a direct market quote, for the asset.                     inputs are used because there is little to no
       This data could be market quotes for similar                         direct market activity.
       assets for the same entity.
                                                                     The table below displays the assets held by the
•      Significant Unobservable Inputs (Level 3): The                observability of inputs significant to the
       measurement of assets in this classification is               measurement of each value:
       primarily derived from inputs which generally

            (Dollars in Millions)                                                      As of September 30, 2012
                                                                          Quoted
                                                                         Prices for    Significant    Significant
                                                                         Identical     Observable    Unobservable
                                                                          Assets         Inputs         Inputs
                                                                         (Level 1)      (Level 2)      (Level 3)        Total

            Program
              Capital Purchase Program                                  $        327   $      -      $    5,407     $    5,734
              CDCI and TALF                                                        9          -           1,095          1,104
              Public-Private Investment Program                                  -            -          10,778         10,778
              Automotive Industry Financing Program                           11,376          -           6,170         17,546
              American International Group Inc. Investment Program             5,067          -               2          5,069
              Asset Guarantee Program                                            -            967           -              967
            Total TARP Programs                                         $     16,779   $      967    $   23,452     $   41,198



            (Dollars in Millions)                                                      As of September 30, 2011
                                                                          Quoted
                                                                         Prices for    Significant    Significant
                                                                         Identical     Observable    Unobservable
                                                                          Assets         Inputs         Inputs
                                                                         (Level 1)      (Level 2)      (Level 3)        Total

            Program
              Capital Purchase Program                                  $        202   $      -      $   12,240     $   12,442
              CDCI, TALF and SBA 7(a)                                            -            126           951          1,077
              Public-Private Investment Program                                  -            -          18,377         18,377
              Automotive Industry Financing Program                           10,091          -           7,747         17,838
              American International Group Inc. Investment Program            21,076        9,294           -           30,370
              Asset Guarantee Program                                            -            739           -              739
            Total TARP Programs                                         $     31,369   $   10,159    $   39,315     $   80,843




The following provides a description of the                          expected dividend payments and proceeds from
methodology used to develop the cash flows and                       repurchases and sales. The model assumes that the
incorporate the market risk into the measurement of                  key decisions affecting whether or not institutions
the OFS assets.                                                      pay their preferred dividends are made by each
                                                                     institution based on the strength of their balance
Financial Institution Equity Investments 26                          sheet. The model assumes a probabilistic evolution
                                                                     of each institution’s asset-to-liability ratio (the asset-
The estimated values of preferred equity                             to-liability ratio is based on the estimated fair value
investments are the net present values of the                        of the institution’s assets against its liabilities).
                                                                     Each institution’s assets are subject to uncertain
26   This consists of equity investments made under CPP and CDCI.
                                                                     returns and institutions are assumed to manage




65                                                                                     NOTES TO THE FINANCIAL STATEMENTS
                                                                         AGENCY FINANCIAL REPORT l FISCAL YEAR 2012



their asset-to-liability ratio in such a way that it       determine the expected cash flows to the OFS
reverts over time to a target level. Historical            through both the equity investments and loans.
volatility is used to scale the likely evolution of each
institution’s asset-to-liability ratio.                    Term Asset-Backed Securities Loan Facility
                                                           (TALF)
In the model, when equity decreases, i.e. the asset-
to-liability ratio falls, institutions are increasingly
                                                           For the loan associated with the TALF, the OFS
likely to default, either because they enter
                                                           model derives the cash flows to the Federal Reserve
bankruptcy or are closed by regulators. The
                                                           Bank of New York (FRBNY) TALF LLC SPV, and
probability of default is estimated based on the
                                                           ultimately the OFS, by simulating the performance
performance of a large sample of US banks over the
                                                           of underlying collateral. Loss probabilities on the
period 1990-2011. At the other end of the spectrum,
                                                           underlying collateral are calculated based on
institutions call their preferred shares when the
                                                           analysis of historical loan loss and charge-off
present value of expected future dividends exceeds
                                                           experience by credit sector and subsector. Historical
the call price; this occurs when equity is high and        mean loss rates and volatilities are significantly
interest rates are low. Inputs to the model include
                                                           stressed to reflect recent and projected performance.
institution specific accounting data obtained from
                                                           Simulated losses are run through cash flow models
regulatory filings, an institution’s stock price
                                                           to project impairment to the TALF-eligible
volatility, historical bank failure information, as
                                                           securities. Impaired securities are projected to be
well as market prices of comparable securities
                                                           purchased by the SPV, which could require
trading in the market. The market risk adjustment
                                                           additional OFS funding. Simulation outcomes
is obtained through a calibration process to the
                                                           consisting of a range of loss scenarios are
market value of certain trading securities of
                                                           probability-weighted to generate the expected net
financial institutions within TARP programs or
                                                           present value of future cash flows.
other comparable financial institutions. The OFS
estimates the values and projects the cash flows of
                                                           SBA 7(a) Securities Purchase Program (SBA
warrants using an option-pricing approach based on
the current stock price and its volatility.                7(a))
Investments in common stock which are exchange
traded are valued at the quoted market price as of         OFS held no SBA 7(a) securities as of September 30,
year end.                                                  2012. As of September 30, 2011, the valuation of
                                                           SBA 7(a) securities was based on the discounted
                                                           estimated cash flows of the securities.
Public-Private Investment Program (PPIP)

For the PPIP investments and loans made in the             Automotive Industry Financing Program
Public Private Investment Fund (PPIF) SPVs, the            (AIFP)
OFS estimates cash flows to the PPIF by simulating
the performance of the collateral supporting the           As of September 30, 2012 and 2011 the OFS held
residential mortgage-backed securities (RMBS) and          500 million shares of common stock in General
commercial mortgage-backed securities (CMBS) held          Motors Company (New GM) that were valued by
by the PPIF (i.e. performance of the residential and       multiplying the publicly traded share price by the
commercial mortgages). Inputs used to simulate the         number of shares held.
cash flows, which consider market risks, include
unemployment forecasts, home price                         As of September 30, 2012 and 2011, for investments
appreciation/depreciation forecasts, the current term      in Ally Financial’s (Ally, formerly known as GMAC,
structure of interest rates and historical pool            Inc.) common equity and mandatorily convertible
performance as well as estimates of the net income         preferred stock, which is valued on an “if-converted”
and value of commercial real estate supporting the         basis, the OFS used certain valuation multiples such
CMBS. The simulated cash flows are then run                as price-to-earnings, price-to-tangible book value,
through a financial model that defines distributions       and asset manager valuations to estimate the value
of the RMBS/CMBS to determine the estimated cash           of the shares. The multiples were based on those of
flows to the PPIF. Once determined, these cash             comparable publicly-traded entities. The
flows are run through the waterfall of the PPIF to         adjustment for market risk is incorporated in the



NOTES TO THE FINANCIAL STATEMENTS                                                                         66
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



data points used to determine the measurement for          scenarios. Because the resulting value greatly
Ally, since all points rely on market data.                exceeded the liquidation preference of the
                                                           investments in the SPVs, the SPVs were valued at
American International Group, Inc. (AIG)                   the liquidation preference. These interests were
Investment Program                                         liquidated during fiscal year 2012.

As of September 30, 2012, and 2011, the OFS held           Asset Guarantee Program (AGP)
154 million and 960 million shares, respectively, of
AIG common stock. Investments in AIG common                During fiscal year 2010, an agreement was entered
stock were valued at the quoted market price as of         into to terminate the guarantee of OFS to pay for
September 30, 2012 and 2011.                               any defaults on certain loans and securities held by
                                                           Citibank. As of September 30, 2012 and 2011, the
The OFS also held interests in certain AIG SPVs at         instruments within the AGP, consisting of Citigroup
September 30, 2011. To estimate the value of the           Trust Preferred Securities receivable from the FDIC
assets underlying the preferred interests in the           with an $800 million liquidation preference value
SPVs, OFS summed the value of the common equity            plus accrued dividends and interest, were valued in
shares held by the SPVs, any cash held in escrow           a manner broadly analogous to the previously
from previous asset sales, and the weighted average        described methodology used for financial institution
value of the remaining assets under different              equity investments.




67                                                                      NOTES TO THE FINANCIAL STATEMENTS
                                                                            AGENCY FINANCIAL REPORT l FISCAL YEAR 2012




Direct Loan and Equity Investment Programs

The following table recaps gross direct loans or            reconciliation of subsidy cost allowances as of and
equity investments, subsidy allowance, and net              for the years ended September 30, 2012 and 2011,
direct loans or equity investments by TARP                   are provided at the end of this Note for Direct Loans
program. Detailed tables providing the net                  and Equity Investments, detailed by program, and
composition, subsidy cost for new disbursements,            for the other credit programs separately.
modifications and reestimates, along with a
                                                            Descriptions and chronology of significant events by
                                                            program are after the summary table.

       (Dollars in Millions)                                                 As of September 30, 2012
                                                                     Gross Direct                  Net Direct
                                                                      Loans and                    Loans and
                                                                        Equity        Subsidy        Equity
                                                                     Invesments      Allowance    Invesments

       Program
         Capital Purchase Program                                     $      8,664   $     (2,930) $   5,734
         TALF and CDCI                                                         667             437     1,104
         Public-Private Investment Program                                   9,763           1,015    10,778
         Automotive Industry Financing Program                              37,252        (19,706)    17,546
         American International Group Inc. Investment Program                6,727          (1,658)    5,069
       Total Direct Loan and Equity Investment Programs                    $63,073       ($22,842)   $40,231



       (Dollars in Millions)                                                 As of September 30, 2011
                                                                     Gross Direct                  Net Direct
                                                                      Loans and                    Loans and
                                                                        Equity        Subsidy        Equity
                                                                     Invesments      Allowance    Invesments

       Program
         Capital Purchase Program                                     $     17,299   $     (4,857) $ 12,442
         TALF, CDCI and SBA 7(a)                                               798            279     1,077
         Public-Private Investment Program                                  15,943          2,434    18,377
         Automotive Industry Financing Program                              37,278        (19,440)   17,838
         American International Group Inc. Investment Program               51,087        (20,717)   30,370
       Total Direct Loan and Equity Investment Programs                   $122,405       ($42,301)  $80,104



                                                            Under this program, the OFS purchased senior
Capital Purchase Program
                                                            perpetual preferred stock from qualifying U.S.
                                                            controlled banks, savings associations, and certain
In October 2008, the OFS began implementation of
                                                            bank and savings and loan holding companies
the TARP with the Capital Purchase Program
                                                            (Qualified Financial Institution or QFI). The senior
(CPP), designed to help stabilize the financial
                                                            preferred stock has a stated dividend rate of 5.0
system by assisting in building the capital base of
                                                            percent through year five, increasing to 9.0 percent
certain viable U.S. financial institutions to increase
                                                            in subsequent years. The dividends are cumulative
the capacity of those institutions to lend to
                                                            for bank holding companies and subsidiaries of bank
businesses and consumers and support the economy.
                                                            holding companies and non-cumulative for others;
                                                            they are payable when and if declared by the
The OFS invested a total of $204.9 billion in 707
                                                            institution’s board of directors. QFIs that are Sub-
institutions under the CPP program between
                                                            chapter S corporations issued subordinated
October 2008 and December 2009.
                                                            debentures in order to maintain compliance with the



NOTES TO THE FINANCIAL STATEMENTS                                                                               68
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



Internal Revenue Code. The maturity of the                 Generally the transactions are entered into with
subordinated debentures is 30 years and interest           financial institutions in poor financial condition with
rates are 7.7 percent for the first 5 years and 13.8       a high likelihood of failure. As such, in accordance
percent for the remaining years. QFIs, subject to          with SFFAS No. 2, these transactions are considered
regulator approval, may repay the OFS’ investment          workouts and not modifications. The changes in cost
at any time.                                               associated with these transactions are captured in
                                                           the year-end reestimates.
In addition to the senior preferred stock, the OFS
received warrants, with a ten-year term, as required       During fiscal year 2012, OFS elected to sell selected
by section 113(d) of EESA, from public QFIs to             CPP investments to the public in auction sales.
purchase a number of shares of common stock.               Because auction sales were not considered in the
Subsequent to December 31, 2009, the OFS may               budget formulation estimate for the CPP program,
exercise any warrants held in whole or in part at          OFS recorded a modification increasing the cost of
any time. The OFS received warrants from non-              the program by $973 million.
public QFIs for the purchase of additional senior
preferred stock (or subordinated debentures if             In fiscal year 2012, OFS sold 40 CPP investments in
appropriate) with a stated dividend rate of 9.0            six separate auctions for total net proceeds of $1.3
percent (13.8 percent interest rate for subordinate        billion. These auction sales resulted in net proceeds
debentures) and a liquidation preference equal to 5.0      less than cost of $180 million. All other sales and
percent of the total senior preferred stock (additional    redemptions in the program for the fiscal year
subordinate debenture) investment. These warrants          resulted in net proceeds less than cost of $105
were immediately exercised and resulted in the OFS         million.
holding additional senior preferred stock
(subordinated debentures) (collectively referred to as     During fiscal year 2011, certain financial
“warrant preferred stock”) of non-public QFIs.             institutions participating in CPP became eligible to
                                                           exchange their OFS-held stock investments to
In fiscal year 2009, OFS entered into an exchange          preferred stock in the Small Business Lending Fund
agreement with the banking institution Citigroup,          (SBLF), a separate Department of the Treasury
under which OFS exchanged its original $25.0               program not a part of the TARP. Because this
billion CPP investment in senior preferred stock for       refinance was not considered in the formulation
7.7 billion common shares of Citigroup stock, at           estimate for the CPP program, a modification was
$3.25 per share. Between April 2010 and January            recorded in May 2011, resulting in a subsidy cost
2011, OFS sold all of its stock and warrants. During       reduction of $1.0 billion.
fiscal year 2011, OFS received $15.8 billion from the
sale of Citigroup common stock and warrants,               OFS made no write-offs of CPP investments in fiscal
resulting in proceeds from sales in excess of cost of      years 2012 or 2011. During fiscal year 2012, five
$3.9 billion. Total gross proceeds from Citigroup          institutions, in which OFS had invested $41 million,
sales between April 2010 and January 2011 were             were either closed by their regulators or declared
$31.9 billion.                                             bankruptcy. During fiscal year 2011, eight
                                                           institutions, in which OFS had invested $190
In addition to the above transactions, the OFS             million, were closed by their regulators. The OFS
entered into other transactions with various               does not anticipate recovery on these investments
financial institutions including exchanging existing       and therefore the values of these investments are
preferred shares for a like amount of non tax-             reflected at zero as of September 30, 2012 and 2011.
deductible Trust Preferred Securities, exchanging          The ultimate amount received, if any, from the
preferred shares for shares of mandatorily                 investments in institutions that filed for bankruptcy
convertible preferred securities and selling preferred     and institutions closed by regulators will depend
shares to financial institutions that were acquiring       primarily on the outcome of the bankruptcy
the QFIs that had issued the preferred shares.             proceedings and of each institution’s receivership.




69                                                                       NOTES TO THE FINANCIAL STATEMENTS
                                                                                            AGENCY FINANCIAL REPORT l FISCAL YEAR 2012



The following tables provide key data points related to the CPP for the fiscal years ending September 30,
2012 and 2011:

   CPP Participating Institutions                                                                       As of September 30,
                                                                                                 2012                           2011


   Cumulative Number of Institutions Participating                                                         707                               707
   Cumulative Institutions Paid in Full, Merged or Investments Sold                                        (234)                          (139)
   Institutions Transferred to CDCI                                                                         (28)                             (28)
   Institutions Refinanced to SBLF                                                                         (137)                          (137)
   Institutions Written Off After Bankruptcy or Receivership                                                    (2)                           (2)
   Number of Institutions with Outstanding OFS Investments                                                  306                              401
   Institutions in Bankruptcy or Receivership                                                               (16)                             (11)
   Number of CPP Institutions Valued at Year-End                                                           290                               390

   Of the Institutions Valued, Number that Have Missed One or More Dividend Payments                       158                               165




   CPP Investments
   (Dollars in Millions)                                                                    Fiscal Year 2012              Fiscal Year 2011


   Outstanding Beginning Balance, Investment in CPP Institutions, Gross                $                17,299        $                49,779
   Repayments and Sales of Investments                                                                   (8,223)                       (30,188)
   Losses from Sales and Repurchases of Assets in Excess of Cost                                           (412)                             (85)
   Refinanced to SBLF                                                                                       -                           (2,207)
   Outstanding Ending Balance, Investment in CPP Institutions, Gross                    $                 8,664       $                17,299


   Interest and Dividend Collections                                                   $                   572        $                 1,283
   Net Proceeds from Sales and Repurchases of Assets in Excess of (Less Than) Cost     $                   (285) $                      4,540



Targeted Investment Program                                               Community Development Capital
                                                                          Initiative
The Targeted Investment Program (TIP) was                                 In February 2010, the OFS announced the
designed to prevent a loss of confidence in financial                     Community Development Capital Initiative (CDCI)
institutions that could result in significant market                      to invest lower cost capital in Community
disruptions, threatening the financial strength of                        Development Financial Institutions (CDFIs). Under
similarly situated financial institutions, impairing                      the terms of the program, the OFS purchased senior
broader financial markets, and undermining the                            preferred stock (or subordinated debt) from eligible
overall economy.                                                          CDFIs. The senior preferred stock had an initial
                                                                          dividend rate of 2 percent. CDFIs could apply to
Under TIP, the OFS invested $20.0 billion in                              receive capital up to 5 percent of risk-weighted
Citigroup in December, 2008 and $20.0 billion in                          assets. To encourage repayment while recognizing
Bank of America in January, 2009. In December                             the unique circumstances facing CDFIs, the
2009, both institutions repaid the amounts invested                       dividend rate increases to 9 percent after eight
along with dividends through the date of repayment.                       years.
In fiscal year 2011, OFS sold its warrant from
Citigroup under TIP for $190 million and closed the                       For CDFI credit unions, the OFS purchased
program.                                                                  subordinated debt at rates equivalent to those
                                                                          offered to CDFIs and with similar terms. These
                                                                          institutions could apply for up to 3.5 percent of total
                                                                          assets - an amount approximately equivalent to the
                                                                          5 percent of risk-weighted assets available to banks
                                                                          and thrifts.



NOTES TO THE FINANCIAL STATEMENTS                                                                                                         70
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



                                                           current period interest to OFS; 4) to maintain a
CDFIs participating in the CPP, subject to certain         required interest reserve account; 5) to pay principal
criteria, were eligible to exchange, through               on the OFS loan when the minimum Asset Coverage
September 30, 2010, their CPP preferred shares             Ratio Test is not satisfied; 6) to pay other amounts
(subordinated debt) then held by OFS for CDCI              on interest rate hedges if not paid under step 2 ; 7)
preferred shares (subordinated debt). These                for additional temporary investments or to prepay
exchanges were treated as disbursements from               loans (both at the discretion of the PPIF); 8) for
CDCI and repayments to CPP. OFS invested a total           distributions to equity partners up to the lesser of 12
of $570 million ($363 million as a result of               months’ net interest collected or 8 percent of the
exchanges from CPP) in 84 institutions under the           funded capital commitments; 9) for loan
CDCI. During fiscal year 2012, one CDCI                    prepayments to OFS; and 10) for distribution to
institution, in which the OFS invested $7 million,         equity partners.
was closed by its regulator. The OFS does not
anticipate recovery on this investment and therefore       Each loan carries a financial covenant, the Asset
the value of the shares is reflected at zero as of         Coverage Ratio Test. The Asset Coverage Ratio Test
September 30, 2012.                                        generally requires the PPIF to maintain an Asset
                                                           Coverage Ratio equal to or greater than 150 percent.
In fiscal year 2012, OFS received $3 million in            The Asset Coverage Ratio is a percentage obtained
repayments and $11 million in dividends and                by dividing total assets of the PPIF by the principal
interest from its CDCI investments. In fiscal year         amount of the loan and accrued and unpaid interest
2011, OFS received no repayments and $11 million           on the loan. Failure to comply with the test could
in dividends and interest; no CDCI institutions were       require accelerated repayment of loan principal and
closed.                                                    prohibit the PPIF from borrowing additional funds
                                                           under the loan agreement.
Public-Private Investment Program
                                                           As a condition of its investment, the OFS also
The PPIP is part of the OFS’ efforts to help restart       received a warrant from each of the PPIFs entitling
the financial securities market and provide liquidity      the OFS to 2.5 percent of investment proceeds
for legacy securities. Under this program, the OFS         (excluding those from temporary investments)
(as a limited partner) made equity investments in          otherwise allocable to the non-OFS partners after
and loans to nine investment vehicles (referred to as      the PPIFs return of 100 percent of the non-OFS
Public Private Investment Funds or “PPIFs”)                partners’ capital contributions. Distributions
established by private investment managers                 relating to the warrants generally occur upon the
between September and December 2009. The OFS               final distribution of each partnership.
equity investments were used to match private
capital and equal 49.9 percent of the total equity         The PPIFs are allowed to purchase commercial and
invested. Each PPIF elected to receive a loan              non-agency residential mortgage-backed securities
commitment equal to 100 percent of partnership             (CMBS and RMBS, respectively) issued prior to
equity. The loans bear interest at one month               January 1, 2009, that were originally rated AAA or
LIBOR, plus one percent, payable monthly. The              an equivalent rating by two or more nationally
maturity date of each loan is the earlier of 10 years      recognized statistical rating organizations without
or the termination of the PPIF. The loan can be            external credit enhancement and that are secured
prepaid without penalty. Each PPIF terminates              directly by the actual mortgage loans, leases or other
eight years from its commencement, if not                  assets (eligible assets) and not other securities. The
previously terminated or extended with two 1-year          PPIFs may invest in the aforementioned securities
extensions, subject to approval of the OFS. The loan       for a period of 3 years using proceeds from capital
agreements also require cash flows from purchased          contribution, loans and amounts generated by
securities received by the PPIFs to be distributed in      previously purchased investments (subject to the
accordance with a priority of payments schedule            requirements of the waterfall). The three-year
(waterfall) designed to help protect the interests of      investment periods for the remaining PPIFs end by
secured parties. Security cash flows collected are         December 2012. The PPIFs are also permitted to
disbursed: 1) to pay administrative expenses; 2) to        invest in certain temporary securities, including
pay margin interest on permitted hedges; 3) to pay         bank deposits, U.S. Treasury securities, and certain



71                                                                       NOTES TO THE FINANCIAL STATEMENTS
                                                                       AGENCY FINANCIAL REPORT l FISCAL YEAR 2012



money market mutual funds. At least 90 percent of
the assets underlying any eligible asset must be         As of September 30, 2011, OFS had equity
situated in the United States. As of September 30,       investments in eight PPIFs outstanding of $5.5
2012, the PPIFs’ portfolios were comprised of            billion and loans outstanding of $10.4 billion for a
approximately 74 percent RMBS and 26 percent             total of $15.9 billion, valued at $18.4 billion. As of
CMBS. As of September 30, 2011, they held                September 30, 2012, and 2011, OFS had legal
approximately 79 percent RMBS and 21 percent             commitments to disburse up to $3.1 billion and $4.3
CMBS.                                                    billion, respectively, for additional investments and
                                                         loans to remaining PPIFs.
The PPIFs pay a management fee to the fund
manager from the OFS’ share of investment                Term Asset-Backed Securities Loan
proceeds. During the Investment Period, the
                                                         Facility
management fee is equal to 0.2 percent per annum
of the OFS’ capital commitment as of the last day of
                                                         The Term Asset-Backed Securities Loan Facility
the applicable quarter. Thereafter, the management
                                                         (TALF) was created by the Federal Reserve Board
fee is 0.2 percent per annum of the lesser of (a) the
                                                         (FRB) to provide low cost funding to investors in
OFS’ capital commitment as of the last day of the
                                                         certain classes of Asset-Backed Securities (ABS).
applicable quarter or (b) the OFS Interest Value as
                                                         The OFS agreed to participate in the program by
of the last day of the quarter.
                                                         providing liquidity and credit protection to the FRB.
During fiscal year 2012, OFS disbursed $245 million
                                                         Under the TALF, the Federal Reserve Bank of New
as equity investments and $803 million as loans to
                                                         York (FRBNY), as implementer of the TALF
PPIFs. During fiscal year 2011, OFS disbursed $1.1
                                                         program, originated loans on a non-recourse basis to
billion as equity investments and $2.3 billion as
                                                         purchasers of certain AAA rated ABS secured by
loans to PPIFs.
                                                         consumer and commercial loans and commercial
                                                         mortgage backed securities (CMBS). The FRBNY
During fiscal year 2012, the OFS received $124
                                                         ceased issuing new loans on June 30, 2010.
million in interest on loans and $5.6 billion in loan
principal repayments from the PPIFs and received
                                                         As of September 30, 2012, approximately $1.5 billion
$3.2 billion in equity distributions, of which $1.3
                                                         of loans due to the FRBNY remained outstanding.
billion was recognized as investment income, $223
                                                         At September 30, 2011, approximately $11.3 billion
million as proceeds in excess of cost and $1.7 billion
                                                         of loans due to the FRBNY remained outstanding.
as a reduction of the gross investment outstanding.
One PPIF partnership fully repaid its investors,
                                                         As part of the program, the FRBNY created the
including OFS, in 2012. Another terminated its
                                                         TALF, LLC, a special purpose vehicle that agreed to
investment period and repaid all equity capital by
                                                         purchase from the FRBNY any collateral it has
September 30, 2012; it is expected to distribute
                                                         seized due to borrower default. The TALF, LLC
additional funds and cease operations by December
                                                         would fund purchases from the accumulation of
2012.
                                                         monthly fees paid by the FRBNY as compensation
                                                         for the agreement. Only if the TALF, LLC had
During fiscal year 2011, the OFS received $123
                                                         insufficient funds to purchase the collateral did the
million in interest on loans and $868 million in loan
                                                         OFS commit to invest up to $20.0 billion in non-
principal repayments from the PPIFs and received
                                                         recourse subordinated notes issued by the TALF,
$735 million in equity distributions, of which $306
                                                         LLC. In July 2010, the OFS’ commitment was
million was recognized as dividend income, $91
                                                         reduced to $4.3 billion. In June 2012, the OFS’
million of proceeds in excess of cost and $338 million
                                                         commitment was reduced further, from $4.3 billion
as a reduction of the gross investment outstanding.
                                                         to $1.4 billion, in consultation with the FRBNY.
As of September 30, 2012, OFS had equity
                                                         The OFS disbursed $100 million upon creation of the
investments in six PPIFs outstanding of $4.1 billion
                                                         TALF, LLC and the remainder can be drawn to
and loans outstanding of $5.7 billion for a total of
                                                         purchase collateral in the event the fees are not
$9.8 billion. These investments and loans were
                                                         sufficient to cover purchases. The subordinated
valued at $10.8 billion.
                                                         notes bear interest at 1 Month LIBOR plus 3.0



NOTES TO THE FINANCIAL STATEMENTS                                                                       72
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



percent and mature 10 years from the closing date,         General Motors Company (New GM) and
subject to extension. Any amounts needed in excess         General Motors Corporation (Old GM)
of the OFS commitment and the fees would be
provided through a loan from the FRBNY. Upon
                                                           In the period ended September 30, 2009, the OFS
wind-down of the TALF, LLC (collateral defaults,
                                                           provided $49.5 billion to General Motors
reaches final maturity or is sold), available cash will
                                                           Corporation (Old GM) through various loan
be disbursed first to FRBNY and then to the OFS
                                                           agreements including the initial loan for general and
principal balances, secondly to FRBNY and then to
                                                           working capital purposes and the final loan for
the OFS interest balances and finally any remaining
                                                           debtor in possession (DIP) financing while Old GM
cash 10 percent to the FRBNY and 90 percent to the
                                                           was in bankruptcy. The OFS assigned its rights in
OFS.
                                                           these various loans (with the exception of $986
                                                           million which remained in Old GM for wind down
As of September 30, 2012 and 2011, no TALF loans
                                                           purposes and $7.1 billion that would be assumed)
were in default and consequently no collateral was
                                                           and previously received common stock warrants to a
purchased by the TALF, LLC.
                                                           newly created entity, General Motors Company
                                                           (New GM). New GM used the assigned loans and
SBA 7(a) Securities Purchase Program                       warrants to credit bid for substantially all of the
                                                           assets of Old GM in a sale pursuant to Section 363 of
In March 2010, the OFS began the purchase of               the Bankruptcy Code. During fiscal year 2009, upon
securities backed by Small Business Administration         closing of the Section 363 sale, the credit bid loans
7(a) loans (7(a) Securities) as part of the Unlocking      and warrants were extinguished and the OFS
Credit for Small Business Initiative. Under this           received $2.1 billion in 9.0 percent cumulative
program OFS purchased 7(a) Securities                      perpetual preferred stock and 60.8 percent of the
collateralized with 7(a) loans (these loans are            common equity in New GM. In addition, New GM
guaranteed by the full faith and credit of the United      assumed $7.1 billion of the DIP loan, simultaneously
States Government) packaged on or after July 1,            paying $361 million (return of warranty program
2008. In May 2011, OFS began selling its securities        funds), resulting in a net balance of $6.7 billion.
to investors. Sales were completed in January of           The assets received by the OFS as a result of the
2012 and the program closed.                               assignment and Section 363 sale were considered
                                                           recoveries of the original loans for subsidy cost
The OFS invested a total of $367 million (excluding        estimation purposes. During fiscal year 2010, the
purchased accrued interest) and received $363              OFS received the remaining $6.7 billion as full
million in principal payments and sales proceeds, as       repayment of the DIP loan assumed.
well as $13 million in interest on its securities over
the course of the program. During fiscal year 2012,        During fiscal year 2011, New GM repurchased its
the OFS sold its remaining SBA securities and              preferred stock for 102 percent of its liquidation
received proceeds of $127 million, including interest.     amount, $2.1 billion. As part of an initial public
During fiscal year 2011, the OFS received $236             offering by New GM in fiscal year 2011, the OFS
million in principal payments and $11 million in           sold 412 million shares of its common stock for $13.5
interest on its securities. As of September 30, 2012,      billion, at a price of $32.75 per share (net of fees).
OFS held no investment in SBA 7(a) securities. As          The sale resulted in net proceeds less than cost of
of September 30, 2011, OFS held $128 million of            $4.4 billion. During fiscal year 2012, OFS did not
SBA 7(a) securities.                                       sell any of its New GM common stock shares.

Automotive Industry Financing Program                      At both September 30, 2012, and 2011, the OFS held
                                                           500 million shares of the common stock of New GM
The Automotive Industry Financing Program (AIFP)           that represented approximately 32 percent of the
was designed to help prevent a significant                 common stock of New GM outstanding. Market
disruption of the American automotive industry,            value of the shares as of September 30, 2012 and
which could have had a negative effect on the              2011 was $11.4 billion and $10.1 billion,
economy of the United States.                              respectively.




73                                                                       NOTES TO THE FINANCIAL STATEMENTS
                                                                       AGENCY FINANCIAL REPORT l FISCAL YEAR 2012



On March 31, 2011, the Plan of Liquidation for Old
GM became effective and OFS’ $986 million loan           Under the terms of the bankruptcy agreement, the
was converted to an administrative claim. OFS            OFS committed to make a $7.1 billion loan to New
retains the right to recover additional proceeds but     Chrysler, consisting of $6.6 billion of new
recoveries are dependent on actual liquidation           commitments (of which $4.6 billion was funded) and
proceeds and pending litigation. OFS recovered $26       $500 million of assumed debt from the general
million in fiscal year 2012 and $111 million in fiscal   purpose loan with Old Chrysler. The loan was
year 2011 on the administrative claim. OFS does          secured by a first priority lien on the assets of New
not expect to recover any significant additional         Chrysler. The OFS also obtained other
proceeds from this claim.                                consideration including a 9.9 percent equity interest
                                                         in New Chrysler and additional notes with principal
GMAC LLC Rights Offering                                 balances of $284 million and $100 million. Fiat SpA
                                                         (the Italian automaker), the Canadian government
In December 2008, the OFS agreed, in principal, to       and the United Auto Workers (UAW) retiree
lend up to $1.0 billion to Old GM for participation in   healthcare trust were the other shareholders in New
a rights offering by GMAC LLC (now known as Ally         Chrysler.
Financial, Inc.) in support of GMAC LLC’s
reorganization as a bank holding company. The            In May 2011, New Chrysler repaid the $5.1 billion in
loan was secured by the GMAC LLC common                  loans outstanding ($4.6 billion in funded
interest acquired in the rights offering. The loan       commitments and $500 million assumed from Old
was funded for $884 million. In May 2009, the OFS        Chrysler), the additional notes totaling $384 million
exercised its exchange option under the loan and         and all interest due. New Chrysler’s ability to draw
received 190,921 membership interests,                   the remaining $2.1 billion loan commitment was
representing 35.4 percent of the voting interest at      terminated. In July 2011, Fiat SpA paid the OFS
the time, in GMAC LLC in full satisfaction of the        $560 million for its remaining equity interest in New
loan. As of September 30, 2012 and 2011, the OFS         Chrysler and for OFS’ rights under an agreement
continued to hold the ownership interests obtained       with the UAW retiree healthcare trust pertaining to
in this transaction (see further discussion of OFS’      the trust’s shares in New Chrysler.
GMAC holdings under Ally Financial Inc. in this
note).                                                   As a result of the fiscal year 2011 transactions, OFS
                                                         had no remaining interest in New Chrysler as of
Chrysler Group LLC (New Chrysler) and                    September 30, 2012 and 2011. Total net proceeds
Chrysler Holding LLC (Old Chrysler)                      received relating to the 2011 transactions were $896
                                                         million less than OFS’ cost. OFS continues to hold a
In the period ended September 30, 2009, the OFS          right to receive proceeds from a bankruptcy
invested $5.9 billion in Chrysler Holding LLC (Old       liquidation trust but no significant cash flows are
Chrysler), consisting of $4 billion for general and      expected. OFS received $9 million and $8 million
working capital purposes (the general purpose loan)      from the liquidation trust during fiscal years 2012
and $1.9 billion for DIP financing while Old             and 2011, respectively.
Chrysler was in bankruptcy. Upon entering
bankruptcy, a portion of Old Chrysler was sold to a      Ally Financial Inc. (formerly known as
newly created entity, Chrysler Group LLC (New            GMAC)
Chrysler). Under the terms of the bankruptcy
agreement, $500 million of the general purpose loan      The OFS invested a total of $16.3 billion in GMAC
was assumed by New Chrysler. In fiscal year 2010,        between December 2008 and December 2009, to help
the OFS received $1.9 billion on the general purpose     support its ability to originate new loans to GM and
loan and wrote off the remaining $1.6 billion.           Chrysler dealers and consumers and to help address
Recovery of the $1.9 billion DIP loan was subject to     GMAC’s capital needs. In May, 2010, GMAC
the liquidation of collateral remaining with Old         changed its corporate name to Ally Financial, Inc.
Chrysler. In fiscal year 2010, as part of a              (Ally). As a result of original investments,
liquidation plan, OFS’ DIP loan to Old Chrysler was      exchanges, conversions and warrant exercises, at
extinguished, and OFS retained a right to receive        September 30, 2010, the OFS held 450,121 shares of
proceeds from a liquidation trust.                       Ally common stock (representing 56.3 percent of the



NOTES TO THE FINANCIAL STATEMENTS                                                                       74
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



company’s outstanding common stock including               percent ownership of Ally common stock by the OFS.
ownership interests from the GMAC LLC Rights               In fiscal year 2012, the OFS received $534 million in
Offering previously discussed), 2.7 million shares of      dividends from Ally. In fiscal year 2011, the OFS
8 percent cumulative Trust Preferred Securities            received $839 million in dividends.
(TruPS) with a $1,000 per share liquidation
preference and 229 million shares of Ally’s Series F-      American International Group, Inc. (AIG)
2 Mandatorily Convertible Preferred Securities. The
                                                           Investment Program
Series F-2, with a $50 per share liquidation
preference and a stated dividend rate of 9 percent, is
                                                           The OFS provided assistance to systemically
convertible into Ally common stock at Ally’s option,
                                                           significant financial institutions on a case by case
subject to the approval of the Federal Reserve and
                                                           basis in order to help provide stability to institutions
consent by the OFS or pursuant to an order by the
                                                           that were deemed critical to a functioning financial
Federal Reserve compelling such conversion. The
                                                           system and were at substantial risk of failure as
Series F-2 security is also convertible at the option
                                                           well as to help prevent broader disruption to
of the OFS upon certain specified corporate events.
                                                           financial markets. OFS invested in one institution,
Absent an optional conversion, any Series F-2
                                                           AIG, under the program.
remaining will automatically convert to common
stock after 7 years from the issuance date. The
                                                           In November 2008, the OFS invested $40.0 billion in
applicable conversion rate is the greater of the (i)
                                                           AIG in the form of Series D 10 percent cumulative
initial conversion rate (0.00432) or (ii) adjusted
                                                           perpetual preferred stock (the “Series D” preferred
conversion rate (i.e., the liquidation amount per
                                                           stock) The OFS also received a warrant for the
share of the Series F-2 divided by the weighted
                                                           purchase of 54 million shares (adjusted to 2.7
average price at which the shares of common equity
                                                           million shares after a 20:1 reverse stock split) of AIG
securities were sold or the price implied by the
                                                           common stock. On April 17, 2009, AIG and the OFS
conversion of securities into common equity
                                                           restructured their November 2008 agreement.
securities, subject to antidilution provisions).
                                                           Under the restructuring, the OFS exchanged $40.0
                                                           billion of Series D preferred stock for $41.6 billion of
In December 2010, 110 million shares of the Series
                                                           AIG Series E 10 percent non-cumulative perpetual
F-2 preferred were converted into 531,850 shares of
                                                           preferred stock (the “Series E” preferred stock).
Ally common stock, resulting in the OFS holdings of
                                                           Additionally, the OFS agreed to make available to
Series F-2 preferred decreasing to 119 million
                                                           AIG a $29.8 billion equity capital facility from which
shares, and OFS holdings in common stock of Ally
                                                           AIG could draw funds, if needed, to assist in its
increasing to 981,971 shares, representing 73.8
                                                           restructuring. Under the equity capital facility, the
percent of Ally’s outstanding common stock.
                                                           OFS received AIG Series F 10 percent non-
                                                           cumulative perpetual preferred stock with no initial
During fiscal year 2011, the agreement between Ally
                                                           liquidation preference (the “Series F” preferred
and OFS regarding its TruPS was amended to
                                                           stock) and a warrant for the purchase of 3,000
facilitate OFS’ sale of its TruPS in the open market.
                                                           shares (adjusted to 150 shares after a 20:1 reverse
Because this amendment to agreement terms was
                                                           stock split of AIG common stock).
not considered in the formulation subsidy cost
estimate for the AIFP program, the OFS recorded a
                                                           The Series F liquidation preference increased with
modification resulting in a subsidy cost reduction of
                                                           any draw down by AIG on the facility, and the
$174 million. In March 2011, the OFS sold its
                                                           dividend rate applicable to these shares was payable
TruPS for $2.7 billion, resulting in proceeds in
                                                           quarterly, if declared, on the outstanding liquidation
excess of cost of $127 million.
                                                           preference. In fiscal year 2011, AIG drew $20.3
                                                           billion from the capital facility, for a cumulative
As of September 30, 2012 and 2011, the OFS held
                                                           total of $27.8 billion drawn.
981,971 shares of common stock (73.8 percent of
Ally’s outstanding common stock) and 119 million
                                                           On September 30, 2010, the Treasury, FRBNY and
shares of the Series F-2 preferred securities. The
                                                           AIG announced plans for a restructuring of the
Series F-2 are convertible into at least 513,000
                                                           Federal Government’s investments in AIG. The
shares of common stock, which, if combined with the
                                                           restructuring, which occurred January 14, 2011,
common stock currently owned, would represent 81
                                                           converted OFS’ $27.8 billion investment in Series F



75                                                                       NOTES TO THE FINANCIAL STATEMENTS
                                                                                     AGENCY FINANCIAL REPORT l FISCAL YEAR 2012



preferred stock into $20.3 billion of interests in two              In fiscal year 2012, OFS received $9.6 billion in
AIG SPVs subsidiaries (the “AIG SPVs”) and 168                      distributions from the AIG SPVs, paying off the
million shares of AIG common stock. The remaining                   investment balance of $9.1 billion, recording
$2.0 billion of undrawn Series F capital facility                   proceeds in excess of cost of $127 million, and
shares were exchanged for 20,000 shares of a new                    collecting $395 million of investment income
Series G Cumulative Mandatory Convertible                           (including $204 million capitalized and recognized
Preferred Stock (the “Series G” preferred stock)                    as income in fiscal year 2011). OFS also sold 806
equity capital facility under which AIG had the right               million shares of common stock for $25.2 billion.
to draw up to $2 billion. OFS’ $41.6 billion of Series              These proceeds were less than OFS’ cost by $9.9
E preferred stock was converted into 925 million                    billion.
shares of AIG common stock. [19] On May 27, 2011,
pursuant to agreement between the OFS and AIG,                      In fiscal year 2011, OFS received $11.5 billion in
and as a result of AIG’s primary public offering of its             distributions from the AIG SPVs, reduced its
common stock, the Series G equity capital facility,                 outstanding balance relating to the AIG SPVs by
which was undrawn, was canceled.                                    $11.2 billion and received investment income of $246
                                                                    million. OFS also capitalized investment income of
According to the terms of the preferred stock, OFS                  $204 million. Additionally, OFS received fees of
had the right to appoint members to the AIG board                   $165 million from AIG. In May 2011, OFS sold 132
of directors if AIG missed four scheduled dividend                  million shares of its AIG common stock for $3.8
payments. As a result of the nonpayment of                          billion. These proceeds were less than OFS’ cost by
dividends, in April 2010, OFS named two directors                   $1.9 billion.
to the AIG board, increasing the total size from ten
directors to twelve directors. In 2012, one of the two              At September 30, 2012, the OFS owned 154 million
OFS-appointed directors resigned from the AIG                       shares of AIG common stock, approximately 10.5
board, and as of September 30, 2012, the AIG board                  percent of AIG’s common stock equity. 20 Market
consists of eleven total directors. Additionally, until             value of the common stock shares was $5.1 billion.
Treasury’s overall ownership falls below 5 percent,
OFS retains the right to have observers at board                    At September 30, 2011, the OFS owned 960 million
meetings. All directors are subject to election                     shares of AIG common stock, approximately 50.8
annually by a majority shareholder vote at the                      percent of AIG’s common stock equity. 21 Market
Company’s annual meeting.                                           value of the common stock shares was $21.1 billion.
                                                                    OFS also owned preferred units in an AIG SPV with
                                                                    an outstanding balance of $9.3 billion, including
                                                                    capitalized investment income.




   Additionally, the AIG Credit Facility Trust between the
19

Federal Reserve Bank of New York and AIG was terminated and
the Department of the Treasury separately, not the OFS, received    20
                                                                      The Department of the Treasury, not OFS, owned 80 million
563 million shares of AIG common stock as part of the
                                                                    shares of AIG common stock, approximately 5.4 percent of AIG’s
restructuring transaction. At the completion of the restructuring
per the agreement, the Department of the Treasury, including        common stock equity, at September 30, 2012.
OFS, held 92.1 percent of AIG’s common stock. See the Agency
                                                                      The Department of the Treasury, not OFS, owned 495 million
                                                                    21
Financial Report for the Department of the Treasury for its
separate presentation and valuation of its shares of AIG common     shares of AIG common stock, approximately 26.1 percent of AIG’s
stock.                                                              common stock equity, at September 30, 2011.



NOTES TO THE FINANCIAL STATEMENTS                                                                                         76
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY




Subsidy Cost and Reestimates                               repayments, which reduced the remaining
                                                           investment by about one-half, in fiscal year 2012.
The recorded subsidy cost of a direct loan, equity
investment or other credit program is based upon           The downward reestimate for CPP of $816 million
the calculated net present value of expected future        for the year ended September 30, 2011, was the net
cash flows. The OFS’ actions, as well as changes in        result of receipts significantly greater than cost on
legislation that change these estimated future cash        the sale of Citigroup common stock offset by a
flows change subsidy cost, and are recorded as             decline in the estimated market values of the
modifications. The cost or reduction in cost of a          remaining outstanding investments due to market
modification is recognized when it occurs.                 conditions at September 30, 2011.

During fiscal year 2012, a modification occurred in        TIP
the CPP, increasing subsidy cost by $973 million.
During fiscal year 2011, modifications occurred in         The TIP program was closed in fiscal year 2011,
the AIFP (see Ally Financial Inc.) and CPP, reducing       with a final downward reestimate of $192 million,
subsidy cost by $1.2 billion.                              primarily due to a better than projected return on
                                                           warrant sales. OFS received cumulative receipts of
The purpose of reestimates is to update original           $4.4 billion on total investments of $40.0 billion.
program subsidy cost estimates to reflect actual cash
flow experience as well as changes in equity               CDCI
investment valuations or forecasts of future cash
flows. Forecasts of future cash flows are updated          The CDCI program continued to reflect improved
based on actual program performance to date,               investment performance, resulting in a $30 million
additional information about the portfolio,                downward reestimate for the year ended September
additional publicly available relevant historical          30, 2012.
market data on securities performance, revised
expectations for future economic conditions, and           The CDCI program reported improved investment
enhancements to cash flow projection methods.              performance, resulting in a $99 million downward
                                                           reestimate, for the year ended September 30, 2011.
For 2012 and 2011, financial statement reestimates
for all programs were performed using actual               PPIP
financial transaction data through September 30.
For 2012, a mix of market and security specific data       The $240 million upward reestimate for the PPIP for
publicly available as of August 31 and September           the year ended September 30, 2012, was due
30, 2012, was used for all programs. For 2011, a mix       primarily to accelerated repayments and changes in
of market and security specific data publicly              projected performance of the PPIP portfolio.
available as of August 31 and September 30, 2011,
was used for all programs, with the exception of
security specific data as of June 30, 2011 that was        The $1.8 billion downward reestimate for the PPIP
used for TALF and PPIP.                                    for the year ended September 30, 2011, was due
                                                           primarily to a decline in market risk projections,
Net downward reestimates for the fiscal years ended        program repayments, and changes in projected
September 30, 2012 and 2011, totaled $11.9 billion         performance of the PPIP portfolio.
and $11.6 billion, respectively. Descriptions of the
reestimates, by OFS Program, are as follows:               TALF

CPP                                                        The investments in the TALF continued to
                                                           experience improved market conditions and
The $2.9 billion downward reestimate for CPP for           accelerated repayments, resulting in a $96 million
the year ended September 30, 2012 was the result of        downward reestimate for the year ended September
improved market values of the outstanding                  30, 2012.
investments and the effect of receiving $8.2 billion in




77                                                                       NOTES TO THE FINANCIAL STATEMENTS
                                                                      AGENCY FINANCIAL REPORT l FISCAL YEAR 2012



In fiscal year 2011, the TALF program showed
improved market conditions, resulting in a $105         155 million shares at the September 30, 2012 price
million downward reestimate.                            of $32.79 per share.

SBA 7(a)                                                The $18.5 billion downward reestimate for the year
                                                        ended September 30, 2011 for the AIG Investment
The SBA 7(a) Securities Purchase Program was            Program was due primarily to subsidy cost
closed in fiscal year 2012, with a $1 million           estimates recorded for $20.3 billion of new
downward closing reestimate.                            disbursements during the fiscal year. Under budget
                                                        rules, the subsidy cost estimate for these new
The program reported a $6 million downward              disbursements was determined based upon subsidy
reestimate for fiscal year 2011, due to improved        rates formulated in April 2009, the period in which
investment performance.                                 OFS originally agreed to make the funding available
                                                        to AIG. At that time, OFS calculated a subsidy rate
                                                        of 98.98 percent, which resulted in an estimated
AIFP
                                                        subsidy cost of $20.1 billion associated with the
                                                        $20.3 billion disbursed in fiscal year 2011. OFS
The $230 million upward reestimate for the year
                                                        calculated a $16.7 billion downward reestimate
ended September 30, 2012, was due to a decline of
                                                        relating to these fiscal year 2011 disbursements that
$1.6 billion in the value of the Ally investment,
                                                        reflects improvements in AIG’s financial condition
partially offset by an increase in the common stock
                                                        since the original subsidy rate was formulated. The
market price of New GM, from $20.18 per share at
                                                        remainder of the downward reestimate was due to
September 30, 2011 to $22.75 per share at
                                                        the restructuring of the AIG investment to common
September 30, 2012.
                                                        stock offset by AIG’s financial condition at
                                                        September 30, 2011. At year end, the subsidy
The $9.9 billion in upward reestimate for the AIFP
                                                        allowance represented about 41 percent of the gross
for the year ended September 30, 2011, was due to a
                                                        outstanding AIG Investment Program balance.
decline of over $7.0 billion due to changes in the
common stock price of New GM since its IPO and a
                                                        Summary Tables
decline in the estimated value of Ally investments
due to market conditions.
                                                        The following detailed tables provide the net
                                                        composition, subsidy cost, modifications and
AIG Investment Program                                  reestimates and a reconciliation of the subsidy cost
                                                        allowance for each TARP Direct Loan or Equity
The $9.2 billion downward reestimate for the year       Investment Program for the years ended September
ended September 30, 2012 was due primarily to           30, 2012 and 2011. Other Credit Program narrative
sales of 806 million shares of common stock at prices   and detailed tables follow these summary tables.
higher than the September 30, 2011 price of $21.95
per share and the effect of valuing the remaining




NOTES TO THE FINANCIAL STATEMENTS                                                                      78
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



Troubled Asset Relief Program Loans and Equity Investments

                                                                                                                                                 CDCI-TALF-
(Dollars in Millions)                                                       TOTAL          CPP            PPIP          AIFP           AIG         SBA


As of September 30, 2012
Direct Loans and Equity Investment Programs:
Direct Loans and Equity Investments Outstanding, Gross                  $  63,073 $         8,664 $ 9,763           $ 37,252 $ 6,727 $                  667
Subsidy Cost Allowance                                                    (22,842)         (2,930)   1,015           (19,706)  (1,658)                  437
Direct Loans and Equity Investments Outstanding, Net                    $ 40,231 $          5,734 $ 10,778          $ 17,546 $ 5,069 $                1,104

New Loans or Investments Disbursed                                      $     1,048    $      -       $    1,048    $      -       $     -       $      -

Obligations for Loans and Investments not yet Disbursed                 $     4,358    $      -       $    3,058    $      -       $     -       $    1,300

Reconciliation of Subsidy Cost Allowance:
Balance, Beginning of Period                                 $ 42,301 $                     4,857     $   (2,434) $ 19,440         $ 20,717      $     (279)
   Subsidy Cost (Income) for Disbursements and Modifications        942                       973             (31)       -                -               -
   Dividend and Interest Income                                   2,733                       572          1,426       534              191              10
   Net Proceeds from Sales and Repurchases of Assets
       in Excess of (Less than) Cost                             (9,788)                     (285)           223               9       (9,735)              -
   Net Interest Income (Expense) on Borrowings from BPD
       and Financing Account Balance                             (1,626)                     (290)          (439)     (507)    (349)                     (41)
Balance, End of Period, Before Reestimates                      34,562                      5,827         (1,255)   19,476  10,824                     (310)
   Subsidy Reestimates - Upward (Downward)                     (11,720)                    (2,897)           240       230   (9,166)                   (127)
Balance, End of Period                                       $ 22,842 $                     2,930 $       (1,015) $ 19,706 $ 1,658 $                   (437)

Reconciliation of Subsidy Cost (Income):
  Subsidy Cost (Income) for Disbursements                               $       (31) $          - $          (31) $          -     $        - $           -
  Subsidy Cost (Income) for Modifications                                       973           973              -             -              -             -
  Subsidy Reestimates - Upward (Downward)                                   (11,720)       (2,897)           240           230         (9,166)         (127)
Total Direct Loan and Equity Investment Programs
   Subsidy Cost (Income)                                                $ (10,778) $       (1,924) $         209    $      230     $ (9,166) $         (127)

Note: There are no budget execution subsidy rates for FY 2012; the OFS authority expired October 3, 2010 with no additional commitments made after September 30,
2010.

                                                                                                                                                 CDCI-TALF-
(Dollars in Millions)                                                       TOTAL          CPP            PPIP          AIFP           AIG        SBA-TIP


As of September 30, 2011
Direct Loans and Equity Investment Programs:
Direct Loans and Equity Investments Outstanding, Gross                  $ 122,405 $ 17,299 $ 15,943                 $ 37,278 $ 51,087 $                 798
Subsidy Cost Allowance                                                    (42,301)   (4,857)  2,434                  (19,440) (20,717)                  279
Direct Loans and Equity Investments Outstanding, Net                    $ 80,104 $ 12,442 $ 18,377                  $ 17,838 $ 30,370 $               1,077

New Loans or Investments Disbursed                                      $    23,839    $      -       $    3,421    $      -       $ 20,292      $      126

Obligations for Loans and Investments not yet Disbursed                 $     8,479    $      -       $    4,279    $      -       $     -       $    4,200

Reconciliation of Subsidy Cost Allowance:
Balance, Beginning of Period                                 $ 36,745 $                     1,546 $         (676) $ 14,529 $ 21,405              $       (59)
   Subsidy Cost (Income) for Disbursements and Modifications    18,887                     (1,010)            (15)    (174)  20,085                        1
   Dividend and Interest Income                                   3,461                     1,283            428     1,280      450                       20
   Fee Income                                                       165                         -               -        -      165                        -
   Net Proceeds from Sales and Repurchases of Assets
       in Excess of (Less than) Cost                             (2,262)                    4,540             91        (5,165)        (1,918)          190
   Net Interest Income (Expense) on Borrowings from BPD
       and Financing Account Balance                             (3,016)                     (686)          (418)     (945)    (938)                     (29)
Balance, End of Period, Before Reestimates                      53,980                      5,673           (590)    9,525   39,249                     123
   Subsidy Reestimates - Upward (Downward)                     (11,679)                      (816)        (1,844)    9,915  (18,532)                   (402)
Balance, End of Period                                       $ 42,301 $                     4,857 $       (2,434) $ 19,440 $ 20,717 $                  (279)

Reconciliation of Subsidy Cost (Income):
  Subsidy Cost (Income) for Disbursements                               $    20,071 $         -    $          (15) $      -    $ 20,085 $                 1
  Subsidy Cost (Income) for Modifications                                    (1,184)       (1,010)              -        (174)        -                   -
  Subsidy Reestimates - Upward (Downward)                                   (11,679)         (816)        (1,844)       9,915   (18,532)               (402)
Total Direct Loan and Equity Investment Programs
   Subsidy Cost (Income)                                                $     7,208    $   (1,826) $      (1,859) $     9,741      $   1,553     $     (401)


Note: There are no budget execution subsidy rates for FY 2011; the OFS authority expired October 3, 2010 with no additional commitments made after September 30,
2010.




79                                                                                                           NOTES TO THE FINANCIAL STATEMENTS
                                                                        AGENCY FINANCIAL REPORT l FISCAL YEAR 2012




Other Credit Programs
                                                          had also invested in Citigroup through CPP and the
Asset Guarantee Program                                   TIP.

                                                          In December 2009, the USG Parties and Citigroup
The Asset Guarantee Program (AGP) provided
                                                          agreed to terminate the guarantee agreement.
guarantees for assets held by systemically
                                                          Under the terms of the termination agreement
significant financial institutions that faced a risk of
                                                          Citigroup cancelled $1.8 billion of the preferred
losing market confidence due in large part to a
                                                          stock previously issued to OFS. In addition, the
portfolio of distressed or illiquid assets.
                                                          FDIC agreed to transfer to the OFS $800 million of
                                                          their Trust Preferred Securities (TruPS) plus
Section 102 of the EESA required the Secretary to
                                                          dividends by December 31, 2012. The amount OFS
establish the AGP to guarantee troubled assets
                                                          will receive would be reduced by any losses FDIC
originated or issued prior to March 14, 2008,
                                                          incurs on its Citigroup guaranteed debt. The
including mortgage-backed securities, and
                                                          additional preferred shares from the FDIC were
established the Troubled Assets Insurance
                                                          included in the subsidy calculation for AGP, based
Financing Fund (TAIFF). The OFS completed its
                                                          on the net present value of expected future cash
only transaction under the AGP in January 2009,
                                                          inflows.
when it finalized the terms of a guarantee
agreement with Citigroup. Under the agreement,
                                                          In fiscal year 2011, the OFS sold its TruPS for $2.2
the OFS, the Federal Deposit Insurance Corporation
                                                          billion and sold additional warrants for $67 million,
(FDIC), and the FRBNY (collectively the USG
                                                          leaving only the $800.0 million of TruPS-related
Parties) provided protection against the possibility
                                                          receivable from the FDIC valued at $967 million on
of large losses on an asset pool of approximately
                                                          the OFS Balance Sheet at September 30, 2012. This
$301.0 billion of loans and securities backed by
                                                          receivable was valued at $739 million as of
residential and commercial real estate and other
                                                          September 30, 2011.
such assets, which remained on Citigroup’s balance
sheet. The OFS’ guarantee was limited to $5.0
                                                          For fiscal year 2012, the AGP program recorded a
billion.
                                                          $207 million downward reestimate, due to revised
                                                          expectations about the timing of receipt of dividends,
As a premium for the guarantee, Citigroup issued
                                                          interest on the dividends and the TruPS from the
$7.0 billion of cumulative perpetual preferred stock
                                                          FDIC. OFS expects to receive a cash transfer of
(subsequently converted to Trust Preferred
                                                          dividends and interest, along with the TruPS
Securities with similar terms) with an 8 percent
                                                          certificates from the FDIC, as scheduled, on
stated dividend rate and a warrant for the purchase
                                                          December 31, 2012. For fiscal year 2011, the
of common stock; $4.0 billion and the warrant were
                                                          program recorded an upward reestimate of $30
issued to the OFS, and $3.0 billion was issued to the
                                                          million due to a decline in market conditions.
FDIC. The OFS received $15 million in dividends on
the preferred stock during fiscal year 2011. These
                                                          The following table details the changes in the
dividends were deposited into the TAIFF. The OFS
                                                          receivable account and the AGP subsidy cost during
                                                          fiscal years 2012 and 2011:




NOTES TO THE FINANCIAL STATEMENTS                                                                        80
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



        Reconciliation of Asset Guarantee Program Receivable:
                                                                                              Fiscal Year
        (Dollars in Millions)                                                               2012       2011
        Balance, Beginning of Period                                                    $      739   $ 3,055
           Dividend Revenue                                                                      -         (15)
           Proceeds from Sales in Excess of Cost                                                 -     (2,301)
           Net Interest Expense on Borrowings from BPD and Financing Account Balance            21          30
        Balance, End of Period, Before Reestimates                                             760        769
           Subsidy Reestimates - (Upward) Downward                                             207         (30)
        Balance, End of Period                                                          $      967   $    739


        Reconciliation of Subsidy Cost (Income):
          Subsidy Reestimates - Upward (Downward)                                       $     (207) $        30
        Total Subsidy Cost (Income)                                                     $     (207) $        30




FHA-Refinance Program
                                                             guarantee resulted in a liability of $7 million at
The OFS has entered into a loss-sharing agreement            September 30, 2012 and a liability of $1 million at
with the FHA to support a program in which FHA               September 30, 2011. The liability was calculated,
guarantees refinancing of borrowers whose homes              using credit reform accounting, as the present value
were worth less than the remaining amounts owed              of the estimated future cash outflows for the OFS’
under their mortgage loans. In fiscal year 2011, the         share of losses incurred on any defaults of the
OFS established a $50 million account, held by a             disbursed loans. As of September 30, 2012, no
commercial bank, serving as its agent, from which            claims have been paid under the program.
any required reimbursements for losses will be paid
to third party claimants, including banks or other           Budget subsidy rates for the program, entirely for
investors.                                                   defaults, excluding modifications and reestimates,
                                                             were set at 4.0 percent and 1.26 percent for loans
During fiscal year 2012, $234 million of loans were          guaranteed in fiscal years 2012 and 2011,
disbursed by the FHA. As of September 30, 2012,              respectively.
1,774 loans that FHA had guaranteed, with a total
value of $307 million, had been refinanced under the         The program recorded a $3 million downward
program. During fiscal year 2011, $73 million of             reestimate for the year ended September 30, 2012,
loans were guaranteed by the FHA. As of                      due to a reduction in market risks and lower than
September 30, 2011, 334 loans that FHA had                   projected defaults.
guaranteed, with a total value of $73 million, had
been refinanced. OFS’ maximum exposure related               The following table details the changes in the FHA-
to FHA’s guarantee totaled $41 million and $6                Refinance Program Liability and the Subsidy Cost
million at September 30, 2012 and 2011,                      for the program during fiscal years 2012 and 2011:
respectively. OFS’

        Reconciliation of FHA- Refinance Program Liability
                                                                                              Fiscal Year
        (Dollars in Millions)                                                               2012       2011
        Balance, Beginning of Period                                                   $         1 $     -
           Subsidy Cost for Guarantees (Defaults)                                                9            1
        Balance, End of Period, Before Reestimates                                              10            1
           Subsidy Reestimates - Upward (Downward)                                              (3)           -
        Balance, End of Period                                                         $         7 $          1

        Reconciliation of Subsidy Cost (Income)
          Subsidy Cost for Guarantees (Defaults)                                       $         9 $          1
          Subsidy Reestimates - Upward (Downward)                                               (3)           -
        Total Subsidy Cost (Income)                                                    $         6 $          1



81                                                                          NOTES TO THE FINANCIAL STATEMENTS
                                                                        AGENCY FINANCIAL REPORT l FISCAL YEAR 2012




NOTE 7. DUE TO THE GENERAL FUND

As of September 30, 2012, the OFS accrued $9.7            accrued $4.6 billion of downward reestimates
billion of downward reestimates payable to the            payable to the General Fund. Due to the General
General Fund. As of September 30, 2011, the OFS           Fund is a Non-Entity liability on the Balance Sheet.

NOTE 8. PRINCIPAL PAYABLE TO THE BUREAU OF THE PUBLIC DEBT
(BPD)
Equity investments, direct loans and other credit         repayments to the BPD based on the analysis of its
programs accounted for under federal credit reform        cash balances and future disbursement needs. All
are funded by subsidy appropriations and                  debt is intragovernmental and covered by budgetary
borrowings from the BPD. The OFS also borrows             resources. See additional details on borrowing
funds to pay the Treasury General Fund for                authority in Note 11, Statement of Budgetary
negative program subsidy costs and downward               Resources.
reestimates (these reduce program subsidy cost) in
advance of receiving the expected cash flows that         Debt transactions for the fiscal years ended
cause the negative program subsidy or downward            September 30, 2012 and 2011, were as follows:
reestimate. The OFS makes periodic principal

                                                                               As of September 30,
        (Dollars in Millions)                                                 2012            2011


        Beginning Balance, Principal Payable to the BPD                   $   129,497 $        140,404
           New Borrowings                                                        2,658           35,974
           Repayments                                                          (79,327)         (46,881)
        Ending Balance, Principal Payable to the BPD                      $     52,828 $       129,497



Borrowings from the BPD by TARP program, outstanding as of September 30, 2012 and 2011, were as
follows:

                                                                               As of September 30,
        (Dollars in Millions)                                                 2012            2011


        Capital Purchase Program                                          $      5,150    $     19,003
        CDCI, TALF and SBA 7(a)                                                  1,020           1,165
        Public-Private Investment Program                                       16,317          23,792
        Automotive Industry Financing Program                                   17,845          32,419
        American International Group, Inc. Investment Program                   11,736          52,285
        Asset Guarantee Program                                                    760             833
        Total Borrowings Outstanding                                      $     52,828    $    129,497




As of September 30, 2012, borrowings carried              September 30, 2011, borrowings carried remaining
remaining terms ranging from 2 to 29 years, with          terms ranging from 3 to 30 years, with interest rates
interest rates from 1.0 percent to 4.4 percent. As of     from 1.0 percent to 4.7 percent.




NOTES TO THE FINANCIAL STATEMENTS                                                                          82
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY




NOTE 9. COMMITMENTS AND CONTINGENCIES
The OFS is party to various legal actions and claims       contingencies that would be considered probable or
brought by or against it. In the opinion of                reasonably possible for these cases; therefore, no
management and the Chief Counsel, the ultimate             liability was established. Refer to Note 5 for
resolution of these legal actions and claims will not      additional commitments relating to the TARP’s
have a material effect on the OFS financial                Housing Programs and Note 6 relating to Direct
statements. The OFS has not incurred any loss              Loan and Equity Investment Programs.



NOTE 10. STATEMENT OF NET COST

The Statement of Net Cost (SNC) presents the net           billion of intragovernmental costs relating to
cost of (income from) operations for the OFS under         interest expense on borrowings from the BPD and
the strategic goal of ensuring the overall stability       $781 million in intragovernmental revenues relating
and liquidity of the financial system, preventing          to interest income on financing account balances.
avoidable foreclosures and preserving
homeownership. The OFS has determined that all             Subsidy allowance amortization on the SNC is the
initiatives and programs under the TARP fall within        difference between interest income on financing
this strategic goal.                                       fund account balances, dividends and interest
                                                           income on direct loans, equity investments and other
The OFS SNC reports the annual accumulated full            credit programs from TARP participants, and
cost of the TARP’s output, including both direct and       interest expense on borrowings from the BPD.
indirect costs of the program services and output          Credit reform accounting requires that only subsidy
identifiable to TARP, in accordance with SFFAS No.         cost, not the net of other costs (interest expense and
4, Managerial Cost Accounting Concepts and                 dividend and interest income), be reflected in the
Standards.                                                 SNC. The subsidy allowance account is used to
                                                           present the loan or equity investment at the
The OFS SNC for fiscal year 2012 includes $2.3             estimated net present value of future cash flows.
billion of intragovernmental costs relating to             The OFS SNC includes $1.1 billion and $430 million
interest expense on borrowings from the BPD and            of subsidy allowance amortization for fiscal years
$605 million in intragovernmental revenues relating        2012 and 2011, respectively.
to interest income on financing account balances.
The OFS SNC for fiscal year 2011 includes $3.8



NOTE 11. STATEMENT OF BUDGETARY RESOURCES
The Statement of Budgetary Resources (SBR)                 resources in non-budgetary financing accounts were
presents information about total budgetary                 $86.5 billion.
resources available to the OFS and the status of
those resources. For the year ended September 30,          Permanent Indefinite Appropriations
2012, the OFS’ total resources in budgetary accounts
were $41.9 billion and resources in non-budgetary          The OFS receives permanent indefinite
financing accounts, including borrowing authority          appropriations annually, if necessary, to fund
and spending authority from collections of loan            increases in the projected subsidy costs of direct
principal, liquidation of equity investments, interest,    loans, equity investment and other credit programs
dividends and fees were $25.9 billion. For the year        as determined by the reestimation process required
ended September 30, 2011, the OFS’ total resources         by the FCRA.
in budgetary accounts were $16.4 billion and




83                                                                       NOTES TO THE FINANCIAL STATEMENTS
                                                                      AGENCY FINANCIAL REPORT l FISCAL YEAR 2012



Additionally, Section 118 of the EESA states that       Undelivered Orders
the Secretary may issue public debt securities and
use the resulting funds to carry out the Act and that   Undelivered orders as of September 30, 2012 were
any such funds expended or obligated by the             $40.2 billion in budgetary accounts and $5.9 billion
Secretary for actions authorized by this Act,           in non-budgetary financing accounts. Undelivered
including the payment of administrative expenses,       orders as of September 30, 2011 were $43.4 billion in
shall be deemed appropriated at the time of such        budgetary accounts and $13.2 billion in non-
expenditure or obligation.                              budgetary financing accounts.

Borrowing Authority                                     Explanation of Differences Between
The OFS is authorized to borrow from the BPD            the Statement of Budgetary
whenever funds needed to disburse direct loans and      Resources and the Budget of the
equity investments, and to enter into asset
guarantee and loss-sharing arrangements, exceed         United States Government
subsidy costs and collections in the non-budgetary
financing accounts. For the year ended September        Federal agencies and entities are required to explain
30, 2012, the OFS had borrowing authority available     material differences between amounts reported in
of $2.6 billion. For the year ended September 30,       the SBR and the actual amounts reported in the
2011, the OFS had borrowing authority available of      Budget of the U. S. Government (the President’s
$8.4 billion.                                           Budget).

The OFS uses dividends and interest received as         The President’s Budget for 2014, with the “Actual”
well as principal repayments on direct loans and        column completed for fiscal year 2012, has not yet
liquidation of equity investments to repay debt in      been published as of the date of these financial
the non-budgetary direct loan, equity investment        statements. The President’s Budget is currently
and other credit program financing accounts. These      expected to be published and delivered to Congress
receipts are not available for any other use per        in early February 2013. It will be available from the
credit reform accounting guidance.                      Government Printing Office.

                                                        The 2013 President’s Budget, with the “Actual”
Apportionment Categories of                             column completed for the year ended September 30,
Obligations Incurred: Direct versus                     2011, was published in February 2012, and
Reimbursable Obligations                                reconciled to the SBR. The only differences between
                                                        the two documents were due to:
                                                            • Rounding;
All of the OFS apportionments are Direct and are
                                                            • Expired funds that are not shown in the
Category B. Category B apportionments typically
                                                                Actual column of the President’s Budget;
distribute budgetary resources on a basis other than
                                                                and
calendar quarters, such as by activities, projects,
                                                            • A $32 million downward modification shown
objects or a combination of these categories. The
                                                                as an outlay and as a corresponding
OFS obligations incurred are direct obligations
                                                                distributed offsetting receipt in the SBR in
(obligations not financed from intragovernmental
                                                                2011 that was included in the President’s
reimbursable agreements).
                                                                Budget in fiscal year 2010.




NOTES TO THE FINANCIAL STATEMENTS                                                                      84
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY




NOTE 12. RECONCILIATION OF OBLIGATIONS INCURRED TO NET COST
OF (INCOME FROM) OPERATIONS
The OFS presents the SNC using the accrual basis                    between the two, and illustrates that the OFS
of accounting. This differs from the obligation-based               maintains reconcilable consistency between the two
measurement of total resources supplied, both                       types of reporting.
budgetary and from other sources, on the SBR. The
reconciliation of obligations incurred to net cost of               The Reconciliation of Obligations Incurred to Net
operations shown below categorizes the differences                  Cost of (Income from) Operations for the fiscal years
                                                                    ended September 30, 2012 and 2011 is as follows:

(Dollars in Millions)                                                                               2012                 2011


Resources Used to Finance Activities:
Budgetary Resources Obligated
 Obligations Incurred                                                                           $      35,803        $      67,646
  Actual Offsetting Collections and Recoveries                                                        (87,383)              (91,708)
  Offsetting Receipts                                                                                      (6,063)          (61,832)
Net Obligations                                                                                       (57,643)              (85,894)
Other Resources                                                                                                 1                   1
Total Resources Used to Finance Activities                                                            (57,642)              (85,893)


Resources Used to Finance Items Not Part of Net Cost of (Income from) Operations:
 Net Obligations in Direct Loan, Equity Investment and Asset Guarantee Financing Funds                 78,988               23,249
  Change in Resources Obligated for Goods, Services and Benefits Ordered but not yet Provided              3,157            25,330
  Resources that Fund the Acquisition of Assets                                                                 -                 (50)
  Resources that Fund Prior Period Expenses and Reestimates                                           (23,294)              23,562
Total Resources Used to Finance Items Not Part of Net Cost of (Income from) Operations                 58,851               72,091
Total Resources Used to Finance the Net Cost of (Income from) Operations                                   1,209            (13,802)

Components of Net Cost of (Income from) Operations that Will Not Require or Generate
Resources in the Current Period:
  Accrued Net Upward (Downward) Reestimates at Year-End                                                    (8,958)          23,293
 Other                                                                                                          1                   6
Total Components of Net Cost of (Income from) Operations that Will Not Require or Generate
Resources in the Current Period                                                                            (8,957)          23,299


Net Cost of (Income from) Operations                                                            $          (7,748) $            9,497




85                                                                                   NOTES TO THE FINANCIAL STATEMENTS
                                                                                                  AGENCY FINANCIAL REPORT l FISCAL YEAR 2012



Required Supplementary Information
                                          OFFICE OF FINANCIAL STABILITY (TROUBLED ASSET RELIEF PROGRAM)

                                          REQUIRED SUPPLEMENTARY INFORMATION
                                       COMBINED STATEMENT OF BUDGETARY RESOURCES
                                                          For the Year Ended September 30, 2012
                                                                          (Unaudited)


                                                                                                                       2012


                                                                                Combined                        TARP Programs                     TARP Administrative
                                                                                        Nonbudgetary                       Nonbudgetary                       Nonbudgetary
                                                                      Budgetary           Financing        Budgetary         Financing        Budgetary         Financing
Dollars in Millions                                                   Accounts            Accounts         Accounts          Accounts         Accounts          Accounts


BUDGETARY RESOURCES
  Unobligated Balances Brought Forward                                $    14,166       $      21,143      $   13,967      $     21,143       $       199     $              -
  Recoveries of Prior Year Unpaid Obligations                                 146               6,114             104             6,114                42                    -
  Borrowing Authority Withdrawn                                                   -            (5,832)                 -          (5,832)                 -                  -
  Actual Repayment of Debt, Prior-Year Balances                                   -           (19,900)                 -        (19,900)                  -                  -
  Unobligated Balance from Prior Year Budget Authority, Net                14,312               1,525          14,071             1,525               241                    -


  Appropriations                                                           27,593                      -       27,270                     -           323                    -
  Borrowing Authority                                                             -             2,659                  -          2,659               -                      -
  Spending Authority from Offsetting Collections                                  -            21,695                  -         21,695               -                      -
TOTAL BUDGETARY RESOURCES (Note 11)                                   $    41,905       $      25,879      $   41,341      $     25,879       $       564     $              -


STATUS OF BUDGETARY RESOURCES
  Obligations Incurred                                                $    27,555       $       8,248      $   27,270      $      8,248       $       285     $              -
  Unobligated Balance:
     Apportioned                                                                41              3,946                  -          3,946                 41                   -
    Unapportioned                                                          14,309              13,685          14,071            13,685               238                    -
  Total Unobligated Balance                                                14,350              17,631          14,071            17,631               279                    -
TOTAL STATUS OF BUDGETARY RESOURCES                                   $    41,905       $      25,879      $   41,341      $     25,879       $       564     $              -


CHANGE IN OBLIGATED BALANCES
Obligated Balance Brought Forward:
  Unpaid Obligations                                                  $    43,814       $      13,158      $   43,618      $     13,158       $       196     $              -
  Uncollected Customer Payments from Federal Sources                              -              (496)                 -           (496)                  -                  -
Obligated Balance, Net, Brought Forward                                    43,814              12,662          43,618            12,662               196                    -


  Obligations Incurred                                                     27,555               8,248          27,270             8,248               285                    -
  Gross Outlays                                                           (30,675)             (9,366)         (30,400)           (9,366)            (275)                   -
  Change in Uncollected Customer Payments from Federal Sources                    -               147                  -            147                   -                  -
  Recoveries of Prior Year Unpaid Obligations                                 (146)            (6,114)           (104)            (6,114)              (42)                  -


Obligated Balance, Net, End of Period:
 Unpaid Obligations, Gross, End of Period                                  40,548               5,926          40,384             5,926               164                    -
  Uncollected Customer Payments from Federal Sources                              -              (349)                 -           (349)                  -                  -
OBLIGATED BALANCE, NET, END OF PERIOD                                 $    40,548       $       5,577      $   40,384       $     5,577       $       164     $              -


BUDGET AUTHORITY AND OUTLAYS, NET
  Budget Authority, Gross                                             $    27,593       $      24,354      $   27,270      $     24,354       $       323     $              -
  Actual Offsetting Collections                                                   -           (81,269)                 -        (81,269)                  -                  -
  Change in Uncollected Customer Payments from Federal Sources                    -               147                  -            147                   -                  -
BUDGET AUTHORITY, NET                                                 $    27,593       $     (56,768) $       27,270      $    (56,768) $            323     $         -


  Gross Outlays                                                       $    30,675       $       9,366      $   30,400      $      9,366       $       275     $              -
  Actual Offsetting Collections                                                   -           (81,269)                 -        (81,269)                  -                  -
  Net Outlays                                                              30,675             (71,903)         30,400           (71,903)              275                    -
  Distributed Offsetting Receipts                                           (6,063)                    -        (6,063)                   -               -                  -
AGENCY OUTLAYS, NET                                                   $    24,612       $     (71,903) $       24,337      $    (71,903) $            275     $              -




REQUIRED SUPPLEMENTARY INFORMATION                                                                                                                                  86
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY



                                          OFFICE OF FINANCIAL STABILITY (TROUBLED ASSET RELIEF PROGRAM)

                                             REQUIRED SUPPLEMENTARY INFORMATION
                                          COMBINED STATEMENT OF BUDGETARY RESOURCES
                                                              For the Year Ended September 30, 2011
                                                                             (Unaudited)


                                                                                                                    2011


                                                                                  Combined                       TARP Programs                     TARP Administrative
                                                                                         Nonbudgetary                       Nonbudgetary                       Nonbudgetary
                                                                         Budgetary         Financing        Budgetary         Financing        Budgetary         Financing
Dollars in Millions                                                      Accounts          Accounts         Accounts          Accounts         Accounts          Accounts


BUDGETARY RESOURCES
  Unobligated Balances Brought Forward                                   $   11,075      $      10,548      $   10,949      $     10,548       $       126     $              -
  Recoveries of Prior Year Unpaid Obligations                                 3,057              4,664           3,018              4,664               39                    -
  Borrowing Authority Withdrawn                                                      -          (1,368)                 -          (1,368)                 -                  -
  Actual Repayment of Debt, Prior-Year Balances                                      -          (7,996)                 -          (7,996)                 -                  -
  Unobligated Balance from Prior Year Budget Authority, Net                  14,132              5,848          13,967              5,848              165                    -


  Appropriations                                                              2,278                     -        1,886                     -           392                    -
  Borrowing Authority                                                                -          35,596                  -         35,596               -                      -
  Spending Authority from Offsetting Collections                                     -          45,101                  -         45,101               -                      -
TOTAL BUDGETARY RESOURCES (Note 11)                                     $    16,410      $      86,545      $   15,853      $     86,545       $       557     $              -


STATUS OF BUDGETARY RESOURCES
  Obligations Incurred                                                  $     2,244      $      65,402      $    1,886      $     65,402       $       358     $              -
  Unobligated Balance:
     Apportioned                                                                 36                511                  -            511                36                    -
     Unapportioned                                                           14,130             20,632          13,967            20,632               163                    -
  Total Unobligated Balance                                                  14,166             21,143          13,967            21,143               199                    -
TOTAL STATUS OF BUDGETARY RESOURCES                                     $    16,410      $      86,545      $   15,853      $     86,545       $       557     $              -


CHANGE IN OBLIGATED BALANCES
Obligated Balance Brought Forward:
  Unpaid Obligations                                                     $   69,128      $      41,918      $   68,898      $     41,918       $       230     $              -
  Uncollected Customer Payments from Federal Sources                                 -         (23,816)                 -         (23,816)                 -                  -
Obligated Balance, Net, Brought Forward                                      69,128             18,102          68,898            18,102               230                    -


  Obligations Incurred                                                        2,244             65,402           1,886            65,402               358                    -
  Gross Outlays                                                              (24,501)          (89,498)         (24,148)          (89,498)            (353)                   -
  Change in Uncollected Customer Payments from Federal Sources                       -          23,320                  -         23,320                   -                  -
  Recoveries of Prior Year Unpaid Obligations                                 (3,057)           (4,664)          (3,018)           (4,664)              (39)                  -


Obligated Balance, Net, End of Period:
 Unpaid Obligations, Gross, End of Period                                    43,814             13,158          43,618            13,158               196                    -
  Uncollected Customer Payments from Federal Sources                                 -            (496)                 -            (496)                 -                  -
OBLIGATED BALANCE, NET, END OF PERIOD                                    $   43,814      $      12,662      $   43,618       $    12,662       $       196     $              -


BUDGET AUTHORITY AND OUTLAYS, NET
  Budget Authority, Gross                                               $     2,278      $      80,697      $    1,886      $     80,697       $       392     $              -
  Actual Offsetting Collections                                                      -        (107,307)                 -        (107,307)                 -                  -
  Change in Uncollected Customer Payments from Federal Sources                       -          23,320                  -         23,320                   -                  -
BUDGET AUTHORITY, NET                                                   $     2,278      $      (3,290)     $    1,886      $      (3,290) $           392     $              -


  Gross Outlays                                                         $    24,501      $      89,498      $   24,148      $     89,498       $       353     $              -
  Actual Offsetting Collections                                                      -        (107,307)                 -        (107,307)                 -                  -
  Net Outlays                                                                24,501            (17,809)         24,148            (17,809)             353                    -
  Distributed Offsetting Receipts                                            (61,832)                   -       (61,832)                   -               -                  -
AGENCY OUTLAYS, NET                                                     $    (37,331) $        (17,809)     $   (37,684) $        (17,809) $           353     $              -




87                                                                                                               REQUIRED SUPPLEMENTARY INFORMATION
                                                                                                  AGENCY FINANCIAL REPORT l FISCAL YEAR 2012




Other Accompanying Information – Schedule of Spending
                        OFFICE OF FINANCIAL STABILITY (TROUBLED ASSET RELIEF PROGRAM)
                                       OTHER ACCOMPANYING INFORMATION
                                            SCHEDULE OF SPENDING
                                        For the Years Ended September 30, 2012 and 2011
                                                             (Unaudited)
                                                                                           2012                             2011

                                                                                            Nonbudgetary                        Nonbudgetary
                                                                           Budgetary          Financing         Budgetary         Financing
Dollars in Millions                                                        Accounts           Accounts          Accounts          Accounts


WHAT IS AVAILABLE TO SPEND?
  Total Resources per Statement of Budgetary Resources (SBR)               $   41,905       $        25,879     $   16,410      $     86,545
  Less Amount Apportioned (not yet agreed to be spent)                             (41)              (3,946)            (36)            (511)
  Less Amount Unapportioned (not yet available to be spent)                    (14,309)             (13,685)        (14,130)         (20,632)

AMOUNT AVAILABLE TO SPEND - OBLIGATIONS INCURRED PER SBR                   $   27,555       $         8,248     $    2,244      $     65,402


HOW WAS THE AMOUNT SPENT?
  Personnel Compensation                                                   $       20        $          -       $       24      $        -
  Personnel Benefits                                                                   6                    -               6                  -
  Travel and Transportation                                                            1                    -               1                  -
  Supplies and Materials                                                               2                    -               -                  -
  Other Services                                                                  244                       3          322                     -
  Housing Program Incentive Payments                                            3,066                       -        1,935                     -
  Investments and Loans                                                                -              1,048                 -         23,839
  Interest                                                                             -              2,252                 -          3,828
  Subsidies, including Reestimates for Previously
        Disbursed Loans and Investments Outstanding22                          27,336                 6,063         22,213            61,831


TOTAL SPENDING - OUTLAYS PER SBR                                               30,675                 9,366         24,501            89,498

AMOUNT REMAINING TO BE SPENT (SPENT FROM PREVIOUSLY OBLIGATED
AUTHORITY)                                                                      (3,120)              (1,118)        (22,257)         (24,096)
AMOUNT AVAILABLE TO SPEND - OBLIGATIONS INCURRED PER SBR                   $   27,555       $         8,248     $    2,244      $     65,402




The Schedule of Spending presents an overview of how                  data used to populate both is the same.
and where the OFS is obligating and disbursing funds.
Obligations are legally binding agreements that result                The section “How Was the Amount Spent” presents
in outlays, immediately or in the future. The Schedule                disbursements, or outlays, for services received, supplies
presents total budgetary resources, gross outlays, and                purchased, subsidies paid and program loans or
total obligations in further detail than that provided on             investments made during 2012 or 2011, even if
the Statement of Budgetary Resources, although the                    obligations for those outlays were made in prior years. 22.




                                                                         Subsidies disbursed from nonbudgetary financing accounts consist
                                                                      22

                                                                      of negative subsidies and downward reestimates, which are reductions
                                                                      of subsidy cost, transferred from the financing accounts to the
                                                                      Treasury General Fund.


OTHER ACCOMPANYING INFORMATION - SCHEDULE OF SPENDING                                                                                              88
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY




Part 3: Appendices




89                                                               APPENDIX A. TARP GLOSSARY
                            AGENCY FINANCIAL REPORT l FISCAL YEAR 2012




APPENDIX A: TARP GLOSSARY                                          90
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY




APPENDIX A: TARP GLOSSARY
Asset-Backed Security (ABS): A financial                  that focuses on providing financial services to
instrument representing an interest in a pool             low- and moderate- income, minority and
of other assets, typically consumer loans.                other underserved communities, and is
Most ABS are backed by credit card                        certified by the CDFI Fund, an office within
receivables, auto loans, student loans, or other          OFS that promotes economic revitalization
loan and lease obligations.                               and community development.

Asset Guarantee Program (AGP): A TARP                     Debtor-In-Possession (DIP): A debtor-in-
program under which OFS, together with the                possession in U. S. bankruptcy law has filed a
Federal Reserve and the FDIC, agreed to                   bankruptcy petition but still remains in
share losses on certain pools of assets held by           possession of its property. DIP financing
systemically significant financial institutions           usually has priority over existing debt, equity
that faced a high risk of losing market                   and other claims.
confidence due in large part to a portfolio of
distressed or illiquid assets.                            Emergency Economic Stabilization Act
                                                          (EESA): The law that created the Troubled
Automotive Industry Financing Program                     Asset Relief Program (TARP).
(AIFP): A TARP program under which OFS
provided loans or equity investments in order             Government-Sponsored Enterprises (GSEs):
to avoid a disorderly bankruptcy of one or                Private corporations created by the U.S.
more auto companies that would have posed a               Government. Fannie Mae and Freddie Mac
systemic risk to the country’s financial                  are GSEs.
system.
                                                          Home Affordable Modification Program
Capital Purchase Program (CPP): A TARP                    (HAMP): A TARP program OFS established
program pursuant to which OFS invested in                 to help responsible but struggling
preferred equity securities and other                     homeowners reduce their mortgage payments
securities issued by financial institutions.              to affordable levels and avoid foreclosure.

Commercial Mortgage-Backed Securities                     Legacy Securities: CMBS and non-agency
(CMBS): A financial instrument representing               RMBS issued prior to 2009 that were
an interest in a commercial real estate                   originally rated AAA or an equivalent rating
mortgage or a group of commercial real estate             by two or more nationally recognized
mortgages.                                                statistical rating organizations without
                                                          ratings enhancement and that are secured
Commercial Paper (CP): An unsecured debt                  directly by actual mortgage loans, leases or
instrument with a short maturity period, 270              other assets and not other securities.
days or less, typically issued by large financial
institutions or other large commercial firms.             Making Home Affordable (MHA): A
                                                          comprehensive plan to stabilize the U.S.
Community Development Capital Initiative                  housing market and help responsible, but
(CDCI): A TARP program that provides low-                 struggling, homeowners reduce their monthly
cost capital to Community Development                     mortgage payments to more affordable levels
Financial Institutions to encourage lending to            and avoid foreclosure. HAMP is part of MHA.
small businesses and help facilitate the flow of
credit to individuals in underserved                      Mortgage-Backed Securities (MBS): A type of
communities.                                              ABS representing an interest in a pool of
                                                          similar mortgages bundled together by a
Community Development Financial                           financial institution.
Institution (CDFI): A financial institution



91                                                                            APPENDIX A. TARP GLOSSARY
                                                            AGENCY FINANCIAL REPORT l FISCAL YEAR 2012



Non-Agency Residential Mortgage-Backed              securities backed by the guaranteed portions
Securities: RMBS that are not guaranteed or         of the SBA 7(a) loans.
issued by Freddie Mac, Fannie Mae, any other
GSE, Ginnie Mae, or a U.S. federal                  Servicer: An administrative third party that
government agency.                                  collects mortgage payments, handles tax and
                                                    insurance escrows, and may even bring
Preferred Stock: Equity ownership that              foreclosure proceedings on past due mortgages
usually pays a fixed dividend and gives the         for institutional loan owners or originators.
holder a claim on corporate earnings superior       The loan servicer also generates reports for
to common stock owners. Preferred stock also        borrowers and mortgage owners on the
has priority in the distribution of assets in the   collections.
case of liquidation of a bankrupt company.
                                                    Targeted Investment Program (TIP): A TARP
Public-Private Investment Fund (PPIF): An           program created to stabilize the financial
investment fund established to purchase             system by making investments in institutions
Legacy Securities from financial institutions       that are critical to the functioning of the
under PPIP.                                         financial system.

Public-Private Investment Program (PPIP): A         Term Asset-Backed Securities Loan Facility
TARP program designed to support the                (TALF): A program under which the Federal
secondary market in mortgage-backed                 Reserve Bank of New York made term non-
securities. The program is designed to              recourse loans to buyers of AAA-rated Asset-
increase the flow of credit throughout the          Backed Securities in order to stimulate
economy by partnering with private investors        consumer and business lending.
to purchase Legacy Securities from financial
institutions.                                       Troubled Asset Relief Program (TARP): The
                                                    Troubled Asset Relief Program, which was
Qualifying Financial Institution (QFI):             established under EESA to stabilize the
Private and public U.S.-controlled banks,           financial system and prevent a systemic
savings associations, bank holding companies,       collapse.
certain savings and loan holding companies,
and mutual organizations.                           Trust Preferred Security (TruPS): A security
                                                    that has both equity and debt characteristics,
Residential Mortgage-Backed Securities              created by establishing a trust and issuing
(RMBS): A financial instrument representing         debt to it. TruPS are treated as capital, not
an interest in a group of residential real estate   debt, for regulatory purposes.
mortgages.
                                                    Warrant: A financial instrument that
SBA: U.S. Small Business Administration.            represents the right, but not the obligation, to
                                                    purchase a certain number of shares of
SBA 7(a) Securities Purchase Program: A             common stock of a company at a fixed price
TARP program under which OFS purchased




APPENDIX A: TARP GLOSSARY                                                                          92
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY




APPENDIX B: ABBREVIATIONS AND ACRONYMS
ABS     Asset-Backed Securities                                  LIBOR    London Interbank Offered Rate

AGP     Asset Guarantee Program                                  LTV       Loan-to-Value Ratio

AIFP    Automotive Industry Financing Program                    MBS       Mortgage-Backed Security

AIG     American International Group, Inc.                       MHA       Making Home Affordable Program

CBO     Congressional Budget Office                              NPV       Net Present Value

CDFI    Community Development Financial Institution              OFS       Office of Financial Stability

CMBS    Commercial Mortgage-Backed Securities                    OMB       Office of Management and Budget

CP      Commercial Paper                                         PPIF      Public-Private Investment Fund

COP     Congressional Oversight Panel                            PPIP      Public-Private Investment Program

CPP     Capital Purchase Program                                 PRA       Principal Reduction Alternative

CDCI    Community Development Capital Initiative                 QFI       Qualifying Financial Institution

DIP     Debtor-In-Possession                                     RMBS       Residential Mortgage-Backed
                                                                            Securities
EESA    Emergency Economic Stabilization Act of
        2008                                                     SIGTARP Special Inspector General for the
                                                                            Troubled Asset Relief Program
FCRA    Federal Credit Reform Act of 1990
                                                                 SPV        Special Purpose Vehicle
FHA     Federal Housing Administration
                                                                 TAIFF      Troubled Assets Insurance
FRBNY Federal Reserve Bank of New York
                                                                            Financing Fund
GAO     Government Accountability Office
                                                                 TALF      Term Asset-Backed Securities Loan
GSE     Government-Sponsored Enterprise                                     Facility

HAFA    Home Affordable Foreclosure Alternatives                 TARP      Troubled Asset Relief Program

HHF    Hardest Hit Fund                                          TIP       Targeted Investment Program

HAMP    Home Affordable Modification Program                     TruPS     Trust Preferred Securities

HPDP    Home Price Decline Protection                            USDA       U. S. Department of Agriculture

IPO     Initial Public Offering




93                                                                APPENDIX B: ABBREVIATIONS AND ACRONYMS
                                         AGENCY FINANCIAL REPORT l FISCAL YEAR 2012




WEBSITES




APPENDIX B: ABBREVIATIONS AND ACRONYMS                                          94
THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY




95                                                               APPENDIX B: ABBREVIATIONS AND ACRONYMS
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