TARP

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The Troubled Asset Relief Program (TARP) is a program of the United States government to purchase assets and equity from financial institutions in order to strengthen the financial sector. The TARP Program was enacted as part of Public Law 110-343.

For an excellent general description of the TARP program see this page at Wikipedia.

Contents

SIGTarp says taxpayer commitment swells to $3.7 trillion

The federal government's full support for the financial system surged to $3.7 trillion over the last year, according to a top government watchdog.

That increase from $3 trillion comes despite large financial firms repaying bailout money and ongoing efforts to wind down the $700 billion financial rescue package passed by Congress at the end of 2008.

The new commitments and pledges are largely to support the housing market, Fannie Mae and Freddie Mac and other financial institutions, according to a report from Neil Barofsky, the special inspector general over the Troubled Asset Relief Program (TARP), the official name for the $700 billion bailout. The increase in federal government commitments is, "the equivalent of a fully deployed TARP program, largely without congressional action," Barofsky said. The $3.7 trillion sum does not necessarily represent the total risk to the government because many federal programs require collateral and others have overlap, the report said.

The report was also sharply critical of the Obama administration's efforts to reduce home foreclosures and shore up the housing market. Barofsky concluded that the administration's main housing program "continues to struggle" and that the number of permanent loan modifications under the program is "anemic."

Roughly 12 percent of eligible delinquent loans have received a permanent modification under the program, according to the latest Treasury Department data.

Barofsky said Treasury has failed to adopt a new system of goals and benchmarks for the program.

"Treasury's refusal to provide meaningful goals for this important program is a fundamental failure of transparency and accountability that makes it far more difficult for the American people and their representatives in Congress to assess whether the program's benefits are worth its very substantial cost," the report reads.

Rep. Darrell Issa (R-Calif.), top Republican on the House Committee on Oversight and Government Reform, criticized the Obama administration's housing efforts and its use of TARP funds.

"The fact that the Obama administration is treating TARP like its own personal slush-fund is beyond egregious and a complete betrayal of what the American people were told would be then when their tax-dollars were used to bailout Wall Street," Issa said.

Barofsky's office has 104 ongoing civil or criminal investigations.

TARP: Capital Purchase Program Transactions

This document presents a listing of capital purchases made in qualifying financial institutions (QFI) by the Department of the Treasury’s (Treasury) Office of Financial Stability under the Capital Purchase Program (CPP). CPP is one of the programs Treasury created under its Troubled Asset Relief Program (TARP) authorities and is intended to provide QFIs with additional capital through purchases of senior preferred stock, subordinated debt, and warrants. These purchases help to stabilize

  1. the QFIs by strengthening their capital base and
  2. the U.S. financial markets by increasing the flow of credit to U.S. businesses and consumers.

On October 14, 2008, Treasury established CPP and announced it would allocate $250 billion of the $700 billion in TARP funds to U.S. QFIs through purchases of preferred stock and subordinated debt. Of the $250 billion, Treasury approved $125 billion in capital purchases for nine of the largest public QFIs considered by the federal banking regulators and Treasury to be systemically significant to the operation of the financial system. (Ten billion dollars of the $125 billion was allocated for the purchase of one bank’s preferred stock, but was not paid until later because the settlement of the purchase was pending completion of its merger with another bank.)

The remaining $125 billion was made available for additional QFIs. In March 2009, Treasury adjusted its allocation for CPP from $250 billion to $218 billion. Treasury noted that the downward adjustment reflects the estimated funding needs of the program based on participation to date and the money it expects to receive from participants that repay their CPP investment.

From October 28, 2008, through September 25, 2009, Treasury made capital purchases of $204.6 billion in 685 QFIs. These purchases were made in QFIs of various sizes—in terms of total assets—and geographic locations. Total assets of participating QFIs ranged from about $10.7 million to more than $2 trillion. As of September 25, 2009, Treasury had disbursed about 94 percent of the $218 billion allocated to CPP. Capital purchases ranged from $301,000 to $25 billion per institution and represented investments in state-chartered and national banks and bank holding companies located in many states, the District of Columbia, and Puerto Rico. For standardized terms of the various types of QFIs—publicly held, privately held, S-corporations, and mutual institutions—that are eligible to participate in CPP, see GAO reports GAO-09-161, GAO-09-296, and GAO-09-658.

Sources for information included in this e-supplement include Treasury’s Web site listing of CPP transactions that have been funded (date funded, bank name, state located and amount funded), the Securities and Exchange Commission’s electronic filing database Interactive Data Electronic Applications (forms 10-Ks and 10-Qs), iBanknet.com, and company press releases for total assets.

This document also presents updated information on the 52 financial agency agreements, contracts, blanket purchase agreements, and interagency agreements entered into by Treasury between October 10, 2008, and September 18, 2009, to support its implementation of TARP. As of this time period, Treasury has entered into seven financial agency agreements and awarded 39 contracts and blanket purchase agreements to acquire a range of services in support of TARP administration and operations. In addition, Treasury is utilizing contractor support for internal controls, information technology, and financial advisory services through six interagency agreements.

If applicable, the contractor is noted as minority- or women-owned or other small business; completed; or subject to Treasury’s TARP conflict of interest regulations (under 31 C.F.R. Part 31). This document is based on our analysis of Treasury information and includes both new contracts and agreements and updates to existing contracts and agreements made since our June e-supplement (GAO-09-707SP). Since our June 2009 report, one contract was reclassified by Treasury as an interagency agreement.

To learn more, read our report GAO-10-16, Troubled Asset Relief Program: One Year Later, Actions Needed to Address Remaining Transparency and Accountability Challenges. We conducted our work from July 2009 to October 2009, in accordance with all sections of GAO’s Quality Assurance Framework that are relevant to our objectives. The framework requires that we plan and perform the engagement to obtain sufficient and appropriate evidence to meet our stated objectives and discuss any limitations in our work. We believe that the information and data obtained, and the analysis conducted, provide a reasonable basis for our findings.

Estimated TARP cost is cut by $200 billion

"The Obama administration, buoyed by a resurgent Wall Street, plans to cut the projected long-term cost of the Troubled Asset Relief Program by more than $200 billion, in a move that could smooth the way for the introduction of a new jobs program.

The White House and leaders in Congress are debating whether to use any of the remaining TARP funds for other domestic efforts, such as a jobs bill. Congress authorized $700 billion for the program during the height of the financial crisis.

The Treasury now estimates that over the next 10 years TARP will cost $141 billion at most, down from the $341 billion the White House projected in August. The reduction stems in large part from faster-than-expected repayments by some of the nation's largest banks, as well as less spending on programs to help shore up the financial sector.

The government's efforts appear to have helped stabilize the financial sector, and banks have already repaid the Treasury about $70 billion. Bank of America Corp. has said it will return its $45 billion investment as early as this week, and the government now expects total repayments to reach as much as $175 billion by the end of next year. Altogether, it invested $204 billion in 690 firms. The Treasury has also collected more than $10 billion in interest and dividend payments from firms in which it has invested.

The lower-than-expected TARP losses could help the White House tap remaining funds for a jobs program because the revised estimates will help bring down the projected federal budget deficit since the White House will be able to assume less spending associated with the program.

The White House has been under pressure to tame the $1.4 trillion budget deficit, which has ballooned as the U.S. borrows vast sums of money. But with unemployment at 10%, the administration is also under pressure to find ways to create new jobs. Lowering deficit projections could help alleviate concerns that a new jobs bill would further inflate the deficit.

President Barack Obama is expected to raise the idea of using repaid TARP funds for a jobs bill in a speech he plans to give on Tuesday. On Friday, White House press secretary Robert Gibbs acknowledged that repaid bailout money is "certainly being looked at" for a jobs bill.

Many Republicans are opposed to recycling TARP funds for a jobs bill, calling instead for the money to go toward reducing the deficit. House Minority Leader John A. Boehner (R., Ohio), on Bloomberg television Friday, called it "the worst idea" he had ever heard."

Treasury releases TARP warrant disposition report

The US Department of the Treasury today released a TARP Warrant Disposition Report. This report provides an overview of the warrants received by Treasury under the Capital Purchase Program (CPP) of the Troubled Asset Relief Program (TARP) as of December 31, 2009 and an explanation of the warrant disposition process and the results achieved on behalf of taxpayers.

The Emergency Economic Stabilization Act of 2008 (EESA) requires that Treasury receive warrants in connection with the purchase of troubled assets.

A major part of the TARP was the CPP. It was created in October 2008 to stabilize the financial system by providing capital to viable banks of all sizes nationwide. Under this program, Treasury invested $205 billion in 707 banks.

Under the CPP, Treasury purchased shares of senior preferred stock or other securities from qualifying U.S.-controlled banks, savings associations, and other financial institutions. As part of its investment, Treasury also received warrants to purchase shares of common stock or other securities from the banks. The purpose of the warrants was to provide taxpayers with an additional potential return on the government's investment.

To date, the disposition of warrants has succeeded in significantly increasing taxpayer returns on the CPP preferred investments that have been repaid. As of December 31, 2009, Treasury has received $4 billion in gross proceeds on the disposition of warrants in 34 banks, consisting of (i) $2.9 billion from repurchases by the issuers at agreed upon fair market values and (ii) $1.1 billion from auctions.1 For those 34 institutions, Treasury received an absolute return of 3.1% from dividends and an added 5.7% return from the sale of the warrants for a total absolute return of 8.8%.2 These returns are not predictive of the eventual return on the entire CPP portfolio.

When a bank repays the CPP investment, it has the right to repurchase its warrants at an agreed upon fair market value. The warrants do not trade on any market and do not have observable market prices. Accordingly, Treasury has established a methodology for evaluating a company's determination of fair market value. If a bank chooses not to repurchase its warrants, then Treasury intends to sell the warrants to a third party.

The first CPP warrant repurchase was completed in May 2009, and Treasury began the public sale of warrants to third parties in December 2009. Treasury follows a consistent process to dispose of the CPP warrants for all banks, regardless of the size of the institution or the warrant position. This process is designed to ensure that taxpayers receive fair market value for the CPP warrants whether they are repurchased by the issuer or sold to a third party.

At the end of 2009, Treasury held warrants in 18 institutions that have fully redeemed the CPP investment, and Treasury intends to sell those positions in the near future. Treasury also holds warrants in 230 public companies that have not repaid the CPP investments. In addition, Treasury also holds warrants in public companies in connection with other TARP programs, such as the Targeted Investment Program (TIP) and the Asset Guarantee Program (AGP). For example, Treasury holds warrants in Bank of America Corporation associated with both CPP (121,792,790 shares with an exercise price of $30.79) and TIP (150,375,940 shares with an exercise price of $13.30). Treasury's disposition process is the same for warrants acquired under all TARP programs.

Treasury outlines TARP exit

The U.S. government continues to reluctantly hold sizable investments in a handful of auto companies and financial firms, but hopes to exit from those positions in the next several years, a top Treasury Department official said Thursday.

"The government's role as a shareholder is to manage its investment, not to manage the company," Assistant Secretary Herbert Allison Jr. said in prepared remarks before a House panel.

Mr. Allison, who oversees the government's $700 billion financial rescue program, said the program has been successful. "Confidence in our financial system has improved, credit is flowing, and the economy is growing," he said.

Still, the government still holds sizable investments in Citigroup Inc.,American International Group Inc., Chrysler Group LLC and General Motors Co. Mr. Allison said the government wants to dispose of those holdings "as soon as practicable," and laid out the government's expected timeline for each of the companies.

Embattled insurer AIG, which received one of the more controversial government rescues last year, is still winding down its financial-products unit, Mr. Allison said, reducing the unit's notional exposure -- a measure of exposure to derivatives -- to $1 trillion now from $2 trillion in September 2008. The wind-down process is expected to be mostly done by the end of next year, he said.

Additionally, Mr. Allison said that the Treasury expects AIG to sell its international life-insurance businesses either next year or in early 2011. The government would receive the first dollars from the sale of those businesses.

He laid out similar exit strategies for Citigroup and the auto makers, predicting the Treasury will sell about $26.5 billion of Citigroup common stock "in an orderly fashion within six to 12 months." Similar plans are in place for the auto dealers, he said.

Specifically, Mr. Allison said GM will attempt an initial public offering in July, after which time the government plans to begin selling its stake in the company. A similar strategy is anticipated for Chrysler; the government will gradually sell off its shares following an IPO or a private sale to a third-party acquirer.

Overall, Mr. Allison said he couldn't estimate how much the government may make or lose on investments from TARP. He said Treasury's current valuation estimates suggest its investments in AIG and the auto companies show a $60 billion loss.

Mr. Allison declined to forecast the potential profit on the investment in Citigroup, but said a "small profit" could be possible if the Treasury counts the dividend payments it has received from the bank.

Geithner extends TARP until October 2010


" Treasury Secretary Timothy Geithner plans to tell Congress that the Obama administration will extend the $700 billion financial-rescue program until next October, according to people familiar with the matter.

While the Troubled Asset Relief Program expires on Dec. 31, Geithner can extend it by notifying Congress. A letter notifying Congress of the extension could come as soon as today, said the people, who declined to be identified. Andrew Williams, a Treasury Department spokesman, declined to comment.

The TARP, passed in October 2008 to prevent a collapse of the financial system, has drawn criticism from Congressional opponents of taxpayer-funded bailouts of banks including Citigroup Inc. The Obama administration, preparing the ground for an extension, has emphasized that the program may also be used to aid homeowners and small companies.

“There has rarely been a less loved or more necessary emergency program than TARP,” President Barack Obama said yesterday in a speech in Washington. “I’m asking my Treasury secretary to continue mobilizing the remaining TARP funds to facilitate lending to small businesses.”

In public comments about the program over the past several weeks, Geithner has cautioned that shutting it down too soon could hurt the economic recovery.

Unemployment Rate

Unemployment at 10 percent has sapped Obama’s approval ratings and threatens to cut into the Democratic Party’s majorities in Congress.

A year into Obama’s presidency, only 32 percent of poll respondents believe the country is headed in the right direction, down from 40 percent who said so in September, according to a Bloomberg National Poll.

The poll of 1,000 U.S. adults was conducted Dec. 3-7 by Selzer & Co., a Des Moines, Iowa-based firm. The margin of error is plus or minus 3.1 percentage points.

The Federal Reserve forecasts the jobless rate will range from 9.3 percent to 9.7 percent in the fourth quarter of 2010. Voters will cast ballots in congressional elections in November.

The Treasury said this week the ultimate cost of the program would probably be $200 billion less than the administration’s August estimate of $341 billion.

Banks have paid back $71 billion so far, and a planned repayment by Bank of America Corp. would bring that figure to $116 billion. Geithner, in an interview last week, said he expects the TARP to get as much as $175 billion from banks by the end of 2010.

House Majority Leader Steny Hoyer, a Maryland Democrat, said yesterday lawmakers may seek to finance between $75 billion and $150 billion in highway construction and other job-creating measures with unused TARP funds.

Congressional Republicans are opposed to any plan that would tap the financial bailout fund.

Geithner expects TARP to end soon

Treasury Secretary Timothy F. Geithner affirmed Wednesday the administration’s intent to end the $700 billion financial bailout program soon.

Although Mr. Geithner did not provide details, he said the government was close to the point at which “we can wind down this program” and end it.

“Nothing would make me happier,” he told the Senate Agriculture Committee.

Some lawmakers have been agitating for an exit from the politically unpopular bailout program, approved by Congress at the height of the financial crisis in October 2008 as a way to supply banks with fresh capital.

Mr. Geithner said legislation to bring transparency to the global, unregulated $600 trillion derivatives market was needed soon to restore confidence in the financial system. He faced friendly questioning from the agriculture panel, in sharp contrast to a sometimes contentious hearing two weeks ago by the Joint Economic Committee — with one lawmaker calling on him to resign.

But there was gentle prodding from some senators Wednesday regarding the Treasury Department’s so-called Troubled Assets Relief Program.

Mr. Geithner said at the Nov. 19 hearing that “substantial resources” remaining in the TARP fund would be used to pay down the national debt, which is being pushed higher by record deficits including a $1.42 billion imbalance for the budget year that ended Sept. 30. Even hundreds of billions of dollars would be a fraction of the $12 trillion debt, but it could lessen political unhappiness if portions of the bailout program are allowed to continue.

Geithner testifies before the COP on TARP

Treasury Secretary Geithner testified before the Congressional Oversight Panel (COP) and answered questions posed by members of the panel regarding its recent COP Report that was released yesterday, entitled “Taking Stock: What has the Troubled Asset Relief Program Achieved?” The COP report concluded that, although the Troubled Asset Relief Program has “played an important role in renewing the flow of credit and alleviating the effects of the financial markets crisis, many ongoing problems identified by Congress remain in the financial markets.” In addition, the panel asked questions related to the Treasury’s decision, announced yesterday, to extend TARP until October 3, 2010. This was the Secretary’s third appearance and TARP update before the panel, which was created to oversee the expenditure of TARP funds authorized by Congress in the Emergency Economic Stabilization Act of 2008 (EESA).

FSB cautions withdrawal of support

"The world’s biggest banks are still too optimistic about the state of their own finances and authorities should be wary of allowing some to exit government support, the Financial Stability Board said.

The FSB, a group of regulators charged by global leaders to rewrite global financial rules, said its findings were borne out by the self assessments of 20 global banks given to regulators. The FSB, which drew up a report for Group of 20 finance ministers, didn’t name the banks.

“Some banks became dependent on this assistance and don’t seem to be able to detach themselves from the public support,” FSB Chairman Mario Draghi told reporters today after a G-20 meeting in St. Andrews, Scotland. “Some jurisdictions may continue to support unsustainable business models.”

Governments spent more than $500 billion in the past year bailing out banks to shore up the financial system amid the worst crisis since the Great Depression. Banks that have received government support during the crisis should only be allowed to exit such programs when their finances are healthy enough to survive another downturn, the FSB said.

“While firms indicated that they had either fully or partially compiled with the most recommendations, the Senior Supervisors Group members found that these assessments were, in the aggregate, too positive,” said the FSB. “Much stronger ongoing management commitment to risk control” will be required to close the gap.’’

Market Conditions

With market conditions improving, banks ranging from Goldman Sachs Inc. to BNP Paribas SA, have left state support programs, in part to avoid stricter pay and lending demands imposed by the governments who were propping them up.

Finance ministries should be wary of institutions wanting to exit the programs too quickly, the FSB said.

“Authorities may want to delay exit in order to preserve their freedom of action in case conditions again worsen,” the report said. “A terminated program that subsequently needs to be reinstated could undermine the broader credibility of the official sectors’ policy response.”

The FSB also published a paper setting out the ways that policy makers can assess which banks and market instruments have “systemic importance” that make them too big to fail.

The paper, drawn up with the International Monetary Fund and the Bank for International Settlements, said the size of an institution, its links with other parts of the financial system and the capability of other organizations to pick up its work in a crisis all matter in identifying the most important banks."


International Monetary Fund, Bank for International Settlements, Financial Stability Board Report to G20 Finance Ministers and Governors

Guidance to Assess the Systemic Importance of Financial Institutions, Markets and Instruments:

Initial Considerations The attached report and background paper respond to a request made by the G20 Leaders in April 2009 to develop guidance for national authorities to assess the systemic importance of financial institutions, markets and instruments. The report outlines conceptual and analytical approaches to the assessment of systemic importance and discusses a possible form for general guidelines.

The report recognizes that current knowledge and concerns about moral hazard limit the extent to which very precise guidance can be developed. Assessments of systemic importance will necessarily involve a high degree of judgment, they will likely be time-varying and state-dependent, and they will reflect the purpose of the assessment. The report does not pre-judge the policy actions to which such assessments could be an input.

The report suggests that the guidelines could take the form of high level principles that would be sufficiently flexible to apply to a broad range of countries and circumstances, and it outlines the possible coverage of such guidelines. A set of such high level principles appropriate for a variety of policy uses could be developed, further, by the IMF, BIS and FSB, taking account of experience with the application of the conceptual and analytical approaches described here.

There are a number of policy issues where an assessment of systemic importance would be useful. One critical issue is the ongoing work to reduce the moral hazard posed by systemically important institutions. The FSB and the international standard setters are developing measures that can be taken to reduce the systemic risks these institutions pose, and the attached papers will provide a useful conceptual and analytical framework to inform policy discussions. A second area is the work to address information gaps that were exposed by the recent crisis (the subject of a separate report to the G20 from IMF staff and the FSB Secretariat), where assessments of systemic importance can help to inform data collection needs. A third area is in helping to identify sources of financial sector risk that could have serious macroeconomic consequences. We will keep you informed on our respective future policy work in these important areas.

GAO reports

TARP: GAO’s Oversight Role

We [GAO] have ongoing engagements reviewing the operations and activities of several TARP programs:

  • Capital Purchase Program,
  • Home Affordable Modification Program,
  • Automobile Industry Financing Program,
  • Systemically Significant Failing Institutions Program,
  • Public-Private Investment Program, and
  • Consumer & Business Lending Initiative/Term Asset-Back Securities Lending Facility.
  • Coordinated review with the Special IG-TARP.

GAO: Treasury needs to strengthen the Term ABS Loan Facility

TALF contains a number of risk management features that in turn likely reduce the risk of loss to TARP funds, but risks remain. TALF was designed to reopen the securitization markets in an effort to improve access to credit for consumers and businesses. The Federal Reserve Bank of New York (FRBNY), which manages TALF, is authorized to lend up to $200 billion to certain eligible borrowers in return for collateral in the form of securities that are forfeited if the loans are not repaid.

To assist in this effort, Treasury has pledged $20 billion of TARP funds in the form of credit protection to the program in the event the loans are not repaid. As of December 2009, FRBNY has made about $61.6 billion in TALF loans, of which $47.5 billion remained outstanding.

For most TALF-eligible collateral, FRBNY will stop providing new TALF loans in March 2010, while new-issue CMBSs will be accepted as collateral on new TALF loans through June 2010.

Treasury and FRBNY analyses project minimal, if any, use of TARP funds for TALF-related losses, and Treasury currently anticipates a profit.

While GAO found that the overall risks TALF poses to TARP funds are likely minimal, GAO analyses showed that CMBSs potentially pose higher risk of loss than ABSs.

As shown in figure 1, ongoing uncertainty in the commercial real estate market and TALF exposure to legacy CMBSs warrant ongoing monitoring. Finally, TALF may present risks beyond the potential risks to TARP, such as the risk that FRBNY might fail to identify material noncompliance with program requirements by TALF participants.

Because the Federal Reserve views TALF as a monetary policy tool, however, statutory limitations on GAO’s authority prohibited GAO from auditing FRBNY’s role in administering TALF.

GAO: The U.S. Government Role as Shareholder

Looking at the government’s role in providing assistance to large companies dating back to the 1970s, we have identified principles that serve as a framework for such assistance; including identifying and defining the problem, setting clear goals and objectives that reflect the national interests, and protecting the government’s interests. These actions have been important in the past, but the current financial crisis has unique challenges, including the sheer size and scope of the crisis, that have affected the government’s actions.

As a result, the government’s response has involved actions on the national and international levels and oversight and monitoring activities tailored to specific institutions and companies. We have also reported on considerations important for Treasury’s approach to monitoring its investments in the companies that received assistance. The administration developed several guiding principles for managing its ownership interest in AIG, Citigroup, Chrysler, and GM. It does not intend to own equity stakes in companies on a long-term basis and plans to exit from them as soon as possible. It reserves the right to set up-front conditions to protect taxpayers, promote financial stability, and encourage growth. It intends to manage its ownership stake in institutions and companies in a hands-off, commercial manner and to vote only on core governance issues, such as the selection of a company’s board of directors. Treasury has also required companies and institutions that receive assistance to report on their use of funds and has imposed restrictions on dividends and repurchases, lobbying expenses, and executive compensation, among other things. As part of its oversight efforts, it also monitors a number of performance benchmarks.

Chrysler and GM will submit detailed financial and operational reports to Treasury, while an asset management firm will monitor the data on Citi, including credit spreads, liquidity and capital adequacy. To monitor its investment in AIG, Treasury coordinates with the Federal Reserve Bank of New York in tracking liquidity and cash reports, among other indicators. Treasury directly manages its investment in Citi, Chrysler, and GM, but the common equity investment in AIG, obtained with the assistance of the Federal Reserve, is managed through a trust arrangement. Each of these management strategies has advantages and disadvantages. Directly managing the investment affords the government the greatest amount of control but could create a conflict of interest if the government both regulates and has an ownership share in the institutions and could expose the government to external pressures. A trust structure, which places the government’s interest with a third party, could mitigate any potential conflict-of-interest risk and reduce external pressures. But a trust structure would largely remove accountability from the government for managing the investment. GAO is reviewing Treasury’s plans for managing and divesting itself of its investments, but the plans are still evolving, and, except for Citi, Treasury has yet to develop exit strategies for unwinding the investments.

Chrysler and GM GAO TARP report

The Government Accountability Office (GAO) released a new report on the Troubled Asset Relief Program (TARP) entitled "Continued Stewardship Needed as Treasury Develops Strategies for Monitoring and Divesting Financial Interests in Chrysler and GM."

The report notes that, after authorizing more than $80 billion in financial assistance to the automotive industry over the past year, Treasury currently owns 9.85% of the equity of Chrysler, 60.8% equity and $2.1 billion in preferred stock of GM, and approximately $13.8 billion in debt obligations of the two companies.

8th GAO report on TARP

"While Treasury has been generally responsive to GAO’s prior 35 recommendations, GAO reiterates the importance of fully implementing several previous recommendations. GAO also makes three new recommendations. Specifically, the Secretary should:

  1. coordinate with the Federal Reserve and FDIC to help ensure that the decision to extend or terminate TARP is considered in a broader market context,
  2. document and communicate the results of its determination, and
  3. update its projected use of funds.

Treasury agreed with the first two recommendations.

With the third, it stated that Treasury regularly re-evaluates its funding needs.

However, GAO found that a thorough review of its estimates is warranted.

GAO testimony to the Senate Banking Committee, Sept 24

"Summary

TARP is one of many programs and activities the federal government has put in place over the past year to respond to the financial crisis. It represents a significant government commitment to stabilizing the financial system. For example, as of September 11, 2009, it had disbursed $363 billion to participating institutions. At the same time, TARP’s Capital Purchase Program (CPP) has shown evidence of some success in returning funds to the federal government.

Treasury has received almost $7 billion in dividend payments, about $2.9 billion in warrant liquidations, and over $70 billion in repurchases from institutions participating in CPP, as of August 31, 2009. But TARP still faces a variety of challenges. For example, CPP, the largest of the TARP programs, has hundreds of participating institutions. Because of its size, this program requires ongoing strong oversight to ensure that participants comply with the program’s requirements as we have recommended in prior reports.

In addition, most of the other investment-based TARP programs that have provided assistance to a few large individual institutions present Treasury with the challenge of determining when assistance is no longer needed. Further, amid concerns about the strategic direction of the program and lack of transparency, the new administration has attempted to provide a more strategic plan for using the remaining funds and has created a number of programs aimed at stabilizing the securitization markets and preserving homeownership.

While some programs, such as the Term Asset-backed Securities Loan Facility (TALF), are fully operational, others including the Home Affordable Modification Program (HAMP) and the Public-Private Investment Program (PPIP), are still new and face ongoing implementation and operational challenges.

Finally, even though substantial investments have been made to avert the collapse of American International Group, Inc. (AIG), General Motors Corporation (GM), and Chrysler LLC (Chrysler), the ultimate outcomes of these investments are unclear and will be influenced by the long-term viability of these entities.

Certain of these TARP investments were made with Treasury’s expectation that the disbursements would be returned to the federal government.

HAMP funds, however, are direct expenditures which are not expected to be repaid. But given the many challenges and uncertainties facing TARP programs, the total cost to the government of these programs remains unclear at this time.

OFS has continued to make progress in establishing a management infrastructure to administer TARP and oversee contractors and financial agents, but some challenges also remain in this area.

Though OFS now has close to 200 staff, some key senior positions remain unfilled on a permanent basis, such as the Chief Homeownership Preservation Officer and Chief Investment Officer.

Bringing on board permanent staff for these key positions is important in helping Treasury effectively administer TARP activities and ensuring accountability for program outcomes.

Treasury has strengthened its management and oversight of its contractors as its reliance on them to support TARP grew over the past year. OFS continues to make progress in developing a comprehensive system of internal control.

As we complete our first audit of OFS’s annual financial statements for TARP, we will be able to provide a more definitive view of TARP’s internal controls over financial reporting. Over the past year, OFS has also started to take steps to formalize its communication strategy and improve how it communicates with Congress and the public about TARP activities and the strategy for using TARP funds. Consistent and timely communication will continue to be an important function for Treasury as it continues to make important decisions on the use of TARP funds.

While isolating and estimating the effect of TARP programs continues to present a number of challenges, indicators that we have been following of the cost of credit and perceptions of risk in credit markets suggest broad improvement since the announcement of CPP in October 2008.

In particular, a significant improvement in the interbank market has been associated with the announcement of CPP and other programs outside TARP. Treasury has recently released a report that begins to discuss the next phase of its stabilization and rehabilitation efforts that also includes a range of indicators.4

Treasury’s authority to purchase or insure additional troubled assets will expire on December 31, 2009, unless the Secretary submits a written certification to Congress. Thus, Treasury will need to make decisions about providing new funding for TARP programs in the next few months.

A set of indicators could serve as part of an analytical basis for such a determination.

We recognize the challenges associated with implementing a program during a crisis and concurrently establishing a comprehensive system of internal control. In the last year, we have made 36 recommendations to Treasury aimed at helping to improve the accountability, integrity, and transparency of TARP.

Treasury has taken actions to address almost all of them and we continue to monitor those recommendations that may require additional action. We have continued to coordinate our work with entities created under the act that also were assigned oversight responsibilities for TARP, including the Congressional Oversight Panel, the Financial Stability Oversight Board, and the Special Inspector General for TARP (SIGTARP).

We are currently conducting a coordinated review with SIGTARP on U.S. government oversight over and interaction with the management of institutions, where the government is approaching or in effect has majority owner status.5

We also have ongoing engagements reviewing the operations and activities of several TARP programs, including CPP, HAMP, PPIP, TALF, the Supervisory Capital Assessment Program (“stress tests”), AIG, and the Automobile Industry Financing Program (AIFP).

GAO status report to Congress, July 23

Status of Efforts to Address Transparency and Accountability Issues

As of July 10, 2009, Treasury had disbursed about $361 billion of the roughly $700 billion in TARP funds (see table 1). Most of the funds (about $204 billion) went to purchase preferred shares and subordinated debentures of 651 financial institutions under the Capital Purchase Program (CPP), which continues to be OFS’s primary vehicle for stabilizing financial markets. At the same time that Treasury continues to purchase preferred shares in institutions, other institutions have paid over $70 billion to repurchase shares.

As of July 10, 2009, 12 of the 33 financial institutions that repurchased their preferred shares from Treasury had repurchased their warrants and 3 others had repurchased their warrant preferred stock from Treasury at an aggregate cost of about $80.3 million. Although OFS and the regulators have established criteria for accepting and approving CPP applications, the regulator’s criteria for determining when institutions can repurchase preferred stock from Treasury lack adequate transparency. While Treasury has provided some limited information about the warrant valuation process, it has yet to provide the level of transparency at the transaction level that would address questions about whether the department is getting the best price for taxpayers.

Treasury continued to operationalize its more recent programs, including the Capital Assistance Program (CAP). As part of this program, the Federal Reserve led the stress tests of the largest 19 U.S. bank holding companies, which revealed that 10 needed to raise additional capital to keep them strongly capitalized and lending even if economic conditions worsen. Whether any of the institutions will choose to participate in CAP has yet to be determined. While the Federal Reserve disclosed the stress test results, it had no plans to disclose information about the 19 institutions going forward.

What information, if any, is disclosed will be left to the discretion of the affected institutions raising a number of concerns, including that the institutions could disclose inconsistent or only selected information. Moreover, the Federal Reserve had not developed a mechanism to share information with OFS about the ongoing condition of the 19 bank holding companies that continue to participate in TARP programs. According to Treasury, its Financial Stability Plan has provided a basis for its communication strategy and Treasury plans to more regularly communicate with congressional committees of jurisdiction about TARP. However, this strategy is not fully implemented and all congressional stakeholders are not receiving information in a consistent or timely manner.

A key component of the communication strategy is the new www.financialstability.gov Web site, which is designed to provide the public with a more user friendly format for accessing information about TARP. But, Treasury has not yet measured the public’s satisfaction with the site.

While, OFS has made progress in establishing its management infrastructure, continued attention to hiring remains important, however, because some offices within OFS, including the Office of the Chief Risk and Compliance Officer, still have a number of vacancies that will need to be filled as TARP programs are fully implemented.

Treasury has also continued to build the network of contractors and financial agents to support TARP administration and operations that have been key to OFS’s efforts to develop and administer its TARP programs. Treasury has provided information to the public on procurement contracts and financial agency agreements, but has not included a breakdown of cost data by each entity. As a result, Treasury has missed an opportunity to provide additional transparency to its TARP operations.

GAO again notes the difficulty of measuring the effect of TARP’s activities. As shown in table 3, credit market indicators suggest general improvements in various markets since October 2008. Specifically, the cost of credit and perceptions of risk in credit markets (as measured by premiums over Treasury securities) have decreased in interbank, mortgage, and corporate bond markets. Empirical analysis of the interbank market, which showed signs of significant stress in 2008, suggests that the CPP and programs outside of the TARP announced in October of 2008 resulted in a statistically significant improvement in risk spreads even when other important factors were considered.

In addition, although Federal Reserve survey data suggest that lending standards remained tight, collectively the largest CPP recipients extended roughly $260 billion on average each month in new loans to consumers and businesses in the first quarter of 2009, up from $240 billion a month during the fourth quarter of 2008, according to the Treasury’s loan survey.

Similarly, total mortgage originations have increased from the third quarter of 2008, although foreclosures have increased to unprecedented highs. However, attributing any of these changes directly to TARP continues to be problematic because of the range of actions that have been and are being taken to address the current crisis. While these indicators may be suggestive of TARP’s ongoing impact, no single indicator or set of indicators can provide a definitive determination of the program’s impact.

We have continued to identify areas that warrant ongoing attention and focus in our most recent reports. Specifically, we recommended in our June report that Treasury take the following five actions as it continues to improve TARP and make it more accountable and transparent:

  • Ensure that the warrant valuation process maximizes benefits to taxpayers and consider publicly disclosing additional details regarding the warrant repurchase process, such as the initial price offered by the issuing entity and Treasury’s independent valuations, to demonstrate Treasury’s attempts to maximize the benefit received for the warrants on behalf of the taxpayer.
  • In consultation with the Chairmen of the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, the Comptroller of the Currency, and the Acting Director of the Office of Thrift Supervision, ensure consideration of generally consistent criteria by the primary federal regulators when considering repurchase decisions under TARP.
  • Fully implement a communication strategy that ensures that all key congressional stakeholders are adequately informed and kept up to date about TARP.
  • Expedite efforts to conduct usability testing to measure the quality of users’ experiences with the financial stability Web site and measure customer satisfaction with the site, using appropriate tools such as online surveys, focus groups, and e-mail feedback forms.
  • Explore options for providing to the public more detailed information on the costs of TARP contracts and agreements, such as a dollar breakdown of each vendor’s obligations, expenses, or both.

Finally, to help improve the transparency of CAP — in particular the stress tests results — we recommended that the Director of Supervision and Regulation of the Federal Reserve consider periodically disclosing to the public information on the aggregate performance of the 19 bank holding companies against the more adverse scenario forecast numbers for the duration of the 2-year forecast period and whether or not the scenario needs to be revised.

At a minimum, we recommended that the Federal Reserve provide the aggregate performance data to OFS program staff for any of the 19 institutions participating in CAP or CPP.

(See link above for full report and tables/charts)

GAO report on the Make the Home Affordable Program

The Government Accountability Office (GAO) released a report (GAO 09-837) entitled, “Treasury Actions Needed to Make the Home Affordable Program More Transparent and Accountable”. This report is the sixth in a series of reports required under Section 106 of the Emergency Economic Stabilization Act, which requires the GAO to release a report on TARP every 60 days.

GAO TARP report October, 2010

What GAO Recommends

If Treasury administers programs containing elements similar to those of CPP, Treasury should implement a process for monitoring all applicants that regulators recommend for withdrawal to ensure that similar applicants are treated equitably. To improve monitoring of regulators’ decisions on CPP repayments, Treasury should periodically collect and review information on the analysis supporting regulators’ decisions and provide feedback for regulators’ consideration on the extent to which they are evaluating similar institutions consistently. Treasury agreed to consider our recommendations. We also received technical comments from the Federal Reserve, FDIC, OCC, and Treasury and incorporated them as appropriate.

GAO report on assistance to AIG

RELIEF PROGRAM - Third Quarter 2010 - Update of Government Assistance Provided to AIG and Description of Recent Execution of Recapitalization Plan] United States Government Accountability Office, January, 2011

Congressional oversight and lawmaking

Senator Grassley challenges GM repayment source

"...Truth seekers the nation over, therefore, are indebted to Senator Charles E. Grassley, Republican of Iowa, who in recent days uncovered what he called a government-enabled “TARP money shuffle.” It relates to General Motors, which on April 21 paid the balance of its $6.7 billion loan under the Troubled Asset Relief Program.

G.M. trumpeted its escape from the program as evidence that it had turned the corner in its operations. “G.M. is able to repay the taxpayers in full, with interest, ahead of schedule, because more customers are buying vehicles like the Chevrolet Malibu and Buick LaCrosse,” boasted Edward E. Whitacre Jr., its chief executive.

G.M. also crowed about its loan repayment in a national television ad and the United States Treasury also marked the moment with a press release: “We are encouraged that G.M. has repaid its debt well ahead of schedule and confident that the company is on a strong path to viability,” said Timothy F. Geithner, the Treasury secretary.

Taxpayers are naturally eager for news about bailout repayments. But what neither G.M. nor the Treasury disclosed was that the company simply used other funds held by the Treasury to pay off its original loan.

Neil M. Barofsky, the inspector general overseeing the troubled asset program, revealed this detail when he spoke before the Senate Finance Committee on April 20.

“So it’s good news in that they’re reducing their debt,” Mr. Barofsky said of G.M. But he went on to note that G.M. was using other taxpayer money to make the loan repayment, according to the transcript of his testimony.

Armed with this information, Mr. Grassley fired off a letter to Mr. Geithner on April 22, asking for details of the transaction. “I am concerned ... that this announcement is not what it seems,” he wrote. “In fact, it appears to be nothing more than an elaborate TARP money shuffle.”

Mr. Grassley heard back from the Treasury last Tuesday. Herbert M. Allison Jr., assistant secretary for financial stability, confirmed that the money G.M. used to repay its bailout loan had come from a taxpayer-financed escrow account held for the automaker at the Treasury.

Emphasizing that the cash in the account was “the property of G.M.,” Mr. Allison said that the department had approved the company’s use of the money to retire the original debt because it was “consistent with Treasury’s goal of recovering funds for the taxpayer and exiting TARP investments as soon as practicable.”

It’s certainly understandable that G.M. would want to spin its repayment as proof of improving operations. But Mr. Grassley said he was troubled that the Treasury went along with the public relations campaign and didn’t spell out how the loan was retired.

“The public would know nothing about the TARP escrow money being the source of the supposed repayment from simply watching G.M.’s TV commercials or reading Treasury’s press release,” Mr. Grassley said in a speech on the Senate floor last Wednesday, saying that “many billions” of federal dollars remained invested in G.M.

“Much of it will never be repaid,” Mr. Grassley added. “The Congressional Budget Office estimates that taxpayers will lose around $30 billion on G.M.”

TARP transparency moves to the Senate

"Two months ago, we testified in support of a bill in the House (H.R. 1242) that would require the Treasury to create an almost-real-time database of TARP information. The bill's sponsor, Rep. Maloney, put together a large, bipartisan set of co-sponsors, and yesterday the bill passed the House unanimously. This bill continues to be an important step towards informing the public and the government about how TARP is working.

The TARP is one of the more complex and confusing programs in place today, and there is very little opportunity for observers to make sense of it. Even the Treasury doesn't have a comprehensive source for the information about the funds disbursed by TARP - and they administer the program. Creating the H.R. 1242 database would make this information available, giving the Treasury the same kinds of tools and information that Wall Street uses to analyze the financial sector. Especially in the realm of financial oversight, it's easy to see that this database will be an incredible benefit for the Special IG.

In our testimony, we called for the bill to include an explicit requirement for public access, and we are happy to see that this simple requirement is now in the bill. Providing for public access to the information will open doors for public watchdogs and provide vital transparency to the TARP.

The bill now moves to the Senate, where we hope that a similar bipartisan coalition can move transparency forward. We'll keep you posted.

House Financial Services Committee hearing Feb 25

2:00 p.m., Thursday, February 25, 2010, 2128 Rayburn House Office Building

Click here to watch live webcast of this hearing.

Witness List & Prepared Testimony:

  • Mr. Kenneth Feinberg, Special Master for TARP Executive Compensation, U.S. Department of the Treasury (Testimony)
  • Mr. Scott Alvarez, General Counsel, Board of Governors of the Federal Reserve System (Testimony)
  • Mr. Edward DeMarco, Acting Director, Federal Housing Finance Agency (Testimony)

H.R. 1242 passes House

Attached are the House debate and bill text for yesterday's TARP transparency legislation.

While the debate doesn't reference XBRL, it does reference the SEC and FDIC. To the extent existing SEC and FDIC XBRL systems could be leveraged to comply with the bill, it would of course to make sense to do so. (What would make even more sense would be for the rest of the government to standardize on XBRL whenever the benefits of doing so exceed the cost, taking into account savings and efficiency from being compatible with the SEC, FDIC, global business, and state and foreign governments.)

The bill passed 421-0; haven't heard anything on potential Senate action. Other relevant links include 1 and 2.

Frank proposes to use TARP funds to help home owners

"Rep. Barney Frank (D-Mass.) has unveiled legislation that would shift $3 billion of the $700 billion financial bailout in favor of emergency mortgage aid.

In an amendment to wide-ranging financial overhaul legislation that the House is expected to vote on by Friday, Frank wants to direct the $3 billion away from the Treasury Department to the Housing and Urban Development agency.

Frank has been pushing the federal government to take stronger action to help the housing market as it continues to suffer in the weak economy. Earlier this year he said money from the bailout, known officially as the Troubled Asset Relief Program (TARP), should help the housing market.

Frank's amendment comes as President Barack Obama and members of Congress look at new ways to stimulate the economy. The unemployment rate, although it fell modestly last month, rests at 10 percent.

Obama will speak at the Brookings Institution Tuesday and may outline additional economic measures. Congressional lawmakers are discussing a range of options, including an extension of unemployment benefits, aid to extend credit to small businesses, a work-share labor incentive program and possibly additional aid to states and cities.

Republicans have been adamantly opposed to redirecting bailout money to efforts to bolster the economy. They want the money to go toward paying down the national deficit."

COP audit finds TARP program effective

"The independent panel that oversees the government’s financial bailout program concluded in a year-end review that, despite flaws and lingering problems, the program “can be credited with stopping an economic panic.”

The Congressional Oversight Panel, which issued the report, was created in October 2008 by the same law that established the $700 billion Troubled Asset Relief Program. The panel has often been critical of the Treasury Department’s management of the bailout operation, especially at its start in the Bush administration but also under the Obama administration.

In the latest monthly report released on Wednesday, the panel again criticized the Treasury Department under Secretary Timothy F. Geithner for “failure to articulate clear goals or to provide specific measures of success for the program” as it has morphed over time from rescuing financial institutions to propping up securitization markets, auto manufacturers and home mortgages in danger of default. The panel also described the program’s foreclosure mitigation efforts as inadequate.

Mr. Geithner announced Wednesday that the administration would extend the bailout program until Oct. 3, 2010. In a letter, Mr. Geithner told lawmakers that the extension was needed to assist families and stabilize financial markets.

The assessment by the oversight panel coincides with the Obama administration’s expansion of TARP yet again, to extend credit to small businesses that cannot get loans from still-skittish banks. President Obama highlighted the new mandate in his economic speech on Tuesday, saying that the bailout program should now work for Main Street as well as Wall Street.

The Treasury’s lack of clarity about the program’s goals, the oversight panel said, made it hard to assess its overall effectiveness. Mr. Geithner is scheduled to testify on Thursday in his quarterly appearance before the five-member panel.

Also making it difficult to gauge the program’s impact, the panel said, is that other forces have helped rescue the financial system and the overall economy, including actions of the Federal Reserve and Federal Deposit Insurance Corp., the $787 billion stimulus program of spending and tax cuts that Mr. Obama and Congress enacted, and similar stimulus efforts by foreign governments.

“Even so,” the panel concluded, “there is broad consensus that the TARP was an important part of a broader government strategy that stabilized the U.S. financial system by renewing the flow of credit and averting a more acute crisis.”

It added, “Although the government’s response to the crisis was at first haphazard and uncertain, it eventually proved decisive enough to stop the panic and restore market confidence.”

The panel’s 134-page report noted that after 14 months of the program, problems remain. Banks resist making loans, toxic mortgage-related assets still clog big banks’ balance sheets and smaller banks are vulnerable to troubles in the commercial real estate sector.

Also, while up to 13 million more home foreclosures are projected over the next five years, the panel said, “TARP’s foreclosure mitigation programs have not yet achieved the scope, scale, and permanence necessary to address the crisis.”

The panel is chaired by Elizabeth Warren, a Harvard Law School professor, and includes Richard H. Neiman, New York state’s bank superintendent; Damon Silvers, special counsel for the AFL-CIO; Paul S. Atkins, a former Securities and Exchange Commission member, and Representative Jeb Hensarling, a Republican of Texas. Only Mr. Hensarling, an opponent of the program, voted against the report.

Its conditional good review of TARP coincides with the Treasury Department’s separate report this week that better-than-expected repayments, interest and other returns likely will mean that taxpayers will get back most of the $700 billion used to create TARP.

The bank bailouts are turning a small profit, Treasury said. It anticipated losses through next year of no more than $140 billion—about $200 billion less than forecast just four months ago—on payments extended to auto and insurance companies and for housing programs.

Mr. Obama added his own self-congratulatory praise in Tuesday’s economic speech, even as he acknowledged the program’s widespread unpopularity.

“Launched hastily -- understandably, but hastily -- under the last administration, the TARP program was flawed, and we have worked hard to correct those flaws and manage it properly,” Mr. Obama said. “And today, TARP has served its original purpose and at much-lower cost than we expected.”

TARP ‘almost certainly’ will bring loss to U.S.

"Neil Barofsky, the special inspector general for the $700 billion U.S. financial-industry bailout, said the program will “almost certainly” result in a loss to taxpayers.

“We need to temper or be realistic about our expectations, a dollar-for-dollar return is just highly unrealistic,” he said yesterday at the Bloomberg Washington Summit. “It’s almost certainly going to be a loss.”

Barofsky, who has been charged by Congress with policing the Troubled Asset Relief Program, also said he’s conducting 65 investigations of possible fraud. The former federal prosecutor has pressed the Treasury Department to be more open about the rescue of companies including insurer American International Group Inc. and automakers General Motors Co. and Chrysler LLC.

“Tens of billions of dollars are likely to be lost on the automotive bailout,” Barofsky said. In addition, some banks that received TARP money are failing, so the aid they received will be wiped out.

Barofsky also said he is working on a review of how the government exercises its rights as a shareholder in the auto companies, Citigroup Inc. and other firms in which it holds large stakes.

“We’re looking into this issue from the perspective of corporate governance,” Barofsky said. “What is the role the United States is playing in the management of these companies?”

Barofsky said his office is set to release an audit next week that looks at whether AIG paid more than necessary to banks including Goldman Sachs Group Inc. after the insurer’s bailout.

AIG Bailout

Lawmakers, frustrated with the cost of an AIG bailout that has expanded three times, have asked why about $50 billion was paid after the initial September rescue to banks that bought credit-default swaps from the firm.

Asked about the potential for fraud in the bailout program, Barofsky said the 65 open investigations range from complex securities matters to routine mortgage-fraud cases.

About half those probes were begun or aided by tips from corporate insiders, victims or the public that came into the office’s fraud hotline, Barofsky said.

“When I first took office, I can’t tell you how many times I’d be having a sit-down and warning about potential fraud in the program and I would hear a response basically saying, ‘Oh, they’re bankers, and they wouldn’t put their reputations at risk by committing fraud,’” he said.

“I think we’ve done a good job of instilling a greater degree of skepticism that what comes from Wall Street isn’t necessarily the Holy Grail,” he said.

‘Extremely Unlikely’

Last month, in a report to Congress, Barofsky said taxpayers are “extremely unlikely” to earn any return on the aid. He said it’s impossible to determine what the actual loss will be because some programs are still being rolled out by the government."

Allison testimony to the Congressional Oversight Panel

"Capital Purchase Program

...As you know, a key program under TARP has been the Capital Purchase Program (CPP), which has provided a total of $205 billion to 679 financial institutions, including over 300 small and community banks. This capital has been essential in stabilizing the financial system, enabling banks to absorb losses from bad assets while continuing to lend to consumers and businesses.

Treasury also worked with the federal banking regulators to develop a plan for "stress tests". This was a comprehensive, forward looking assessment of the capital held by the largest 19 US banks. The design of the tests and their results were made public, a highly unusual step taken because of the unprecedented need to reduce uncertainty and restore confidence.

Since the stress test results were released in early May, banks of all sizes have raised over $80 billion in common equity and $40 billion in non-guaranteed debt. Importantly, that capital raising has enabled more than 30 banks to repay the TARP investments made by Treasury. We have received over $70 billion in principal repayments, and over $6.5 billion in dividends, interest and fees from CPP participants. In addition, we expect banks to repay another $50 billion over the next 12 to 18 months.

Other metrics further support our conclusion that TARP capital has had a positive effect. First, the TED spread, which measures the difference between interbank lending rates and T-bills and is a measure of the risk in the banking system, had grown to 338 basis points (bps) in December 2008. As a point of reference, the TED spread rose to 219 points in December of 1930. At the end of last week, the TED spread was approximately 23 bps. Second, conditions in interbank markets have continued to improve. The spreads of LIBOR rates to overnight index swap ("OIS") rates, a useful measure of banks' short-term borrowing costs, declined in the third quarter (see Figure B below). The spreads of the one-month and 3-month LIBOR over OIS have narrowed to levels about equal to those prevailing before the financial crisis after having spiked to previously unforeseen levels. In line with these improvements in bank funding markets, the use of the Federal Reserve liquidity facilities directed at depository institutions has declined.

When the Obama Administration took office, the Treasury had outstanding commitments to banks under the CPP and other programs of $238 billion. Since mid-January, we have invested $11 billion in nearly 400 institutions, while receiving the repayments noted above of $70 billion. Thus, since January, we have reduced the size of the Treasury's investments in the banking system by $59 billion to $180 billion, shifting the mix of remaining CPP investments significantly toward small and community banks..."

Congressional Oversight Panel says continued risk for troubled assets

Source: Congressional Oversight Panel Releases Oversight Report on the Continued Risk of Troubled Assets August 11, 2009

The Congressional Oversight Panel (COP) today released its August oversight report, "The Continued Risk of Troubled Assets," which examines the economic implications of troubled assets and assesses Treasury's strategy for removing these assets from bank balance sheets. The Panel found that the future performance of the economy and the performance of the underlying loans, as well as the method of valuation of the assets, are critical to the continued operation of the banks.

Last fall, as increasing numbers of subprime mortgage-holders defaulted on their loans, the financial markets for these assets effectively ceased to function. In response to the crisis, Treasury proposed a major government program to move hundreds of billions of dollars in troubled assets off the banks books. But by the time the Troubled Asset Relief Program (TARP) was signed into law in early October, Treasury had decided to use TARP funds to pursue a different strategy: providing banks with a capital buffer to write-down many of their troubled assets and to build reserves for the future. Today, ten months later, substantial troubled assets remain on banks' balance sheets.

Treasury has launched the new Public-Private Investment Program (PPIP) in an effort to restart the mortgage-backed asset market. The Panel's report raises several questions about the program, including whether accounting rules that allow banks to carry assets at higher valuations will diminish their willingness to sell, and whether potential buyers may decline to participate due to concerns about political interference or government restrictions. PPIP could help to jump-start the troubled asset market, but serious questions remain about its effectiveness.

For smaller banks, those not among the 19 stress tested bank holding companies, troubled assets pose special challenges that have not been acknowledged. These banks' troubled assets are generally whole loans, which are not currently being addressed by Treasury's PPIP program. These banks also hold greater concentrations of commercial real estate loans, which pose a threat of high defaults. These banks also have more difficulty accessing the capital markets, which heighten concerns about their stability.

Treasury and relevant government agencies should move toward greater disclosure of the terms and volume of troubled assets on banks' balance sheets. Because banks typically disclose few details about the toxic assets on their books, it is difficult to gauge the magnitude of the risk that these assets pose to the financial system. Greater transparency would allow for better judgments about the scale of the problem and the adequacy of the government's response.

If the economy worsens beyond the levels considered in the recent stress tests, these tests should be repeated. Stress tests have the potential to gauge the impact of troubled assets on bank capitalization and to measure the risk that troubled assets could once again trigger instability. The Panel recommends that stress tests be adapted to consider the challenges facing smaller banks, including the adequacy of these banks' capital.

The full report can be found at cop.senate.gov.

S. 1242 "Government Ownership Exit Plan Act of 2009"

Official Summary

6/11/2009--Introduced. Government Ownership Exit Plan Act of 2009 - Prohibits the federal government from acquiring, directly or indirectly, any ownership interest in a troubled asset described in the Emergency Economic Stabilization Act of 2008 (EESA) that was purchased from a financial institution by the Secretary of the Treasury. Requires the Secretary to divest the government of any such interest not later than July 1, 2010, with exceptions allowing ownership interests of not more than six months if: (1) divestiture would have a significant adverse impact on taxpayers; and (2) there is a reasonable expectation that a waiver would allow recovery of the cost of acquiring such interest. Amends EESA to state that the limit of authority to purchase troubled assets is $700 billion (under current law, such limitation, reduced by $1.259 billion, is described as "outstanding at any one time"). Requires all repayments of obligations arising under EESA, and all proceeds from the sale of assets acquired by the government under that Act, to be paid into the general fund of the Treasury for reduction of the public debt. Makes it unlawful for an officer or employee of the executive branch to knowingly make, with the intent to influence, a communication regarding a significant management decision of a recipient of EESA assistance to any officer or employee of the recipient. Makes the Financial Stability Oversight Board responsible for reviewing the ownership interest termination provisions of this Act. Establishes requirements for reports by the Secretary on: (1) ownership interests; (2) plans for compliance with this Act, including for winding down and divestiture; and (3) ending conservatorship and direct ownership by the government of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation (Fannie Mae and Freddie Mac, respectively).

July 22 House Financial Services hearing

TARP Oversight: Warrant Repurchases and Protecting Taxpayers Subcommittee on Oversight and Investigations Hearing, July 22, 2009

Witnesses

Available Member Statements: Chairman Moore (KS)

July 21 House Oversight and Reform hearing

House Committee on Oversight and Government Reform held a hearing July 21 to discuss the release of the Special Inspector General for the Troubled Assets Relief Program’s (SIGTARP) quarterly report.

Additionally, a summary of a survey sent by SIGTARP to 360 financial institutions receiving TARP funding was provided to Treasury yesterday and concludes that such financial institutions are “able to provide insights into their actual or planned use of TARP funds” even if they do not segregate or track usage on a dollar-for-dollar basis.

This finding is somewhat at odds with Treasury’s position that it would be difficult and ineffective to have financial institutions report on their use of TARP funds.

"TARP for Main Street"

Source: ‘TARP for Main Street’ legislation introduced in House July 10, 2009, Investment Weekly

"A bill to provide low-cost loans to unemployed homeowners with delinquent mortgages was introduced yesterday by Rep. Barney Frank, D.-Mass., chairman of the House Financial Services Committee.

The bill, HR 3068, dubbed “TARP for Main Street,” would direct $2 billion of funds from the Troubled Asset Relief Program to emergency loans and assistance to homeowners who don’t qualify for other mortgage aid programs because they are unemployed.

The borrower’s home would be the collateral.

In addition, the bill would provide another $2 billion to stabilize mortgages for multifamily properties that are in default or foreclosure.

The bill would direct $1 billion from dividends generated by TARP to fund the National Affordable Housing Trust Fund, which was established last year to preserve and build affordable housing, and $1.5 billion for the Neighborhood Stabilization program for the redevelopment of foreclosed and abandoned properties.

[*] The money will come from dividends paid to the fed from the original tarp loan structure.

Hearing Review

House Financial Service Committee Hearing "H.R. 3068, Tarp for Main Street Act of 2009.", July 9, 2009 10:00 am.

The House Financial Service Committee Schedule held a hearing on July 9th entitled “H.R. 3068, TARP for Main Street Act of 2009.” The United States Treasury just received 6.7 Billion dollars in TARP relief dividends. A committee hearing was scheduled to investigate the best use of this money. In their opening statements, many Congressmen sitting on the committee expressed disdain at plans to reallocate the money to TARP during a hearing today: Rep. Garrett- New Jersey- using the dividends would turn TARP into a Ponzi scheme. The majority of the tarp money will be a loss so this small dividend ought to not be considered a profit. He is tired of the bailouts and the spending. Simple solution: Return the dollars to the treasury.

Texas Rep. There exists no provision for payback of TARP money in initial legislation. The disagreement is that this would become the first step towards spending the money outside of the appropriation process. Solution: The people in his district expect the money to be paid back to the treasury.

Rep. Royce (CA). The dividends should not be treated as profits. Especially in light of the interest created by the Debt created through TARP. Instead, dividends should be used to pay down debt. Repaid tarp must be repaid first instead of revolving line of credit.

The hearing then opened up witness testimony:

Mr. Frank Apeseche, Chief Executive Officer, Berkshire Property Advisors and the Berkshire Group on behalf of the National Multi Housing Council Housing issue- He seeks an appropriate definition of “mortgage loan default” and “at risk credit”. In other words, a threshold must be given that will trigger government action? He fears that without this government interference will interfere with contractual activities.

Brian Hudson- Penn. Finance Housing Agency- Struggling municipal bond market. Temporary economic condition. Spoke about the successful program H.E.M.A.P-giving statistics $442 million dollars at risk home loaners. Re-payments are recycled. 10,500 much less then the 35,000. The estimated average cost 9.5% hemap would be a great complement to other federal initiatives. Primarily unemployment based lending.

Damon Silver- AFL-CIO (also worked on trouble asset waste program through the Congressional oversite panel)– Predicted the likely continuation falling of housing prices, driven by unemployment necessitates the continued funding through this TARP dividend money. Fears there is a substantially threaten to the stabilization of our system.

Chris Warren- Chief regional Developer-City of Cleveland- Stated a hurricane of greed has swept through Cleveland. Now the city has spent 35 million o far on abandoned properties. Predatory practices- subprime fiasco was caused by the same institutions receiving TARP money. This is wrong.

Treasury oversight scrutinized

  • The TARP Inspector - Neil Barofsky told Huffington Post that because of the consolidation in the banking industry and the moral hazard created by the bailouts "I think we may be in a far more dangerous place today than we were a year ago.", Huffington Post Investigative Fund, Youtube,September 24, 2009, running time 5:00 minutes.

TARP probes jump 41% in 4Q09

The U.S. Troubled Asset Relief Program’s watchdog expanded investigations into misconduct in the $700 billion federal bank rescue program, increasing the number of opened cases by 41 percent in the fourth quarter.

Special Inspector General Neil Barofsky began 25 criminal and civil probes in the quarter, and had 77 total active cases, according to a quarterly report to Congress published today. Through the third quarter of 2009, the Washington-based office opened 61 cases with 54 active, he said at the time.

Examiners are looking into possible wrongdoing related to the financial-industry bailout, including insider trading, accounting violations, mortgage fraud, public corruption, obstruction of justice and money laundering, according to the report. Barofsky didn’t identify the targets of pending investigations, although details on a few cases have emerged.

Barofsky confirmed last week he is probing whether the Federal Reserve Bank of New York improperly limited release of information about payments to American International Group Inc.’s counterparties when the insurer was rescued.

AIG’s first rescue was an $85 billion credit line from the New York Fed. The bailout was expanded three times and is now valued at $182.3 billion.

Barofsky is also working with the Securities and Exchange Commission, Justice Department and the Federal Bureau of Investigation on the investigation into Bank of America’s merger with Merrill Lynch, the report said.

Barofsky, based in Washington, is opening a branch office in New York and satellite offices in Los Angeles and San Francisco to support the investigations. Calls to Barfosky’s toll-free hotline phone number rose 41 percent in the quarter, to 9,900, according to the report.

SIGTARP reports 2010

SIGTARP reports 2009

U.S. bailout program increased moral hazard: SIGTARP

"The U.S. government's $700 billion financial bailout program has increased moral hazard in the markets by infusing capital into banks that caused the financial crisis, a watchdog for the program said on Wednesday.

The special inspector general for the U.S. Treasury's Troubled Asset Relief Program (TARP) said the plan put in place a year ago was clearly influencing market behavior, and he repeated that taxpayers may never recoup all their money.

The bailout fund may have helped avert a financial system collapse but it could reinforce perceptions the government will step in to keep firms from failing, the quarterly report from inspector general Neil Barofsky said.

He said there continued to be conflicts of interest around credit rating agencies that failed to warn of risks leading up to the financial crisis. The report added that the recent rebound in big bank stocks risked removing urgency of dealing with the financial system's problems.

"Absent meaningful regulatory reform, TARP runs the risk of merely reanimating markets that had collapsed under the weight of reckless behavior," the report said. "The firms that were 'too big to fail' last October are in many cases bigger still, many as a result of government-supported and -sponsored mergers and acquisitions."

ANGER, CYNICISM, DISTRUST

The report cites an erosion of government credibility associated with a lack of transparency, particularly in the early handling of the program's initial investments in large financial institutions.

"Notwithstanding the TARP's role in bringing the financial system back from the brink of collapse, it has been widely reported that the American people view TARP with anger, cynicism and distrust. These views are fueled by the lack of transparency in the program," the report said.

The inspector general again urged Treasury to disclose more detailed information on how banks have used the taxpayer funds they have received.

The report voiced concerns about conflicts associated with the program's reliance on credit rating agencies and pointed out their key revenue source consists of fees collected from issuers of securities that they rate.

Among concerns raised by the report are that credit ratings were a key determinant in valuing banks' capital in regulatory stress tests earlier this year.

Lower credit ratings for securities held in an institution's investment portfolio meant that the institution would be required to raise more capital. Lower ratings also meant that financial institutions had more difficulty in raising private funds, making them more likely to turn to the government for help, the report said.

A Treasury and Fed securities loan facility also requires that paper pledged as collateral be rated at the highest long term category, or AAA.

"The requirement that TALF(Term Asset-Backed Securities Loan Facility) can only involve AAA-rated securities has had a significant effect on the commercial mortgage backed securities market potentially enhancing the AAA market at the expense of others."


Oversight panel says Treasury overpaid for warrants

Report of the Congressional Oversight Panel, July 10, 2009 (page 3)

"As Treasury makes these decisions about repayment, it is the Panel’s mandate to determine whether the taxpayer is receiving maximum benefit from the TARP. Because the warrants that accompanied TARP assistance represent the only opportunity for the taxpayer to participate directly in the increase in the share prices of banks made possible by public money, the price at which the warrants are sold is critical. To determine whether Treasury is valuing the warrants in a way that maximizes the taxpayers’ investments in the financial institutions, it is necessary to determine how much the warrants are worth.

The Panel uses the most widely-accepted mathematical model, presenting a detailed technical valuation of the warrants Treasury holds. The assumptions employed in the use of any model are crucial, and the report offers a range of estimates based on high, low and best estimate assumptions for certain key variables. The Panel was aided in its valuation efforts by three renowned finance experts, Professor Robert Merton, Professor Daniel Bergstresser, and Professor Victoria Ivashina, all of the Harvard Business School. The professors reviewed both the technical valuation model and the assumptions that were built into the model; they concluded that the approaches reported here were reasonable and that they produced reliable estimates.

Eleven small banks have repurchased their warrants from Treasury for a total amount that the Panel estimates to be only 66 percent of its best estimate of their value. If the warrants had been sold for their market value, taxpayers would have recovered $10 million more.

Treasury has to date sold warrants only from smaller banks. In those sales, liquidity discounts are likely to be a major factor in a way that they are not likely to be for large publicly traded institutions. If, however, liquidity discounts or any other rationales are accepted as a reason for taking only 66 percent of market value for the full group of warrants Treasury holds, the shortfall to taxpayers could be as much as $2.7 billion.

It is possible that policymakers may conclude that other objectives should override the goal of maximizing taxpayer returns. For example, Treasury has said that it wants to allow banks to operate again without TARP assistance as soon as they are strong enough to do so. Because warrant valuation is a difficult task, the Panel explores the possibility that Treasury should leave it to the markets by selling the warrants in an open, public auction. This has the benefit of stopping any speculation about whether Treasury has been too tough or too easy on the banks that want to repurchase their own warrants. It also permits the banks to bid for their own warrants – in direct competition with outsiders.

The report describes key provisions in the Treasury contracts with the banks and statutory provisions that govern warrant purchases. The Panel notes that Treasury is constrained in some ways by the provisions of the contracts governing the TARP investments in the banks."

SIGTARP will review companies receiving assistance

The Special Inspector General for the Troubled Asset Relief Program (SIGTARP) announced that it will review federal oversight and interaction with management for companies receiving exceptional financial assistance. July 17, 2009

Those identified in the memorandum as targets of the audit include American International Group (AIG), General Motors (GM), Chrysler, Citigroup, Fannie Mae and Freddie Mac. SIGTARP identified these companies based on the fact that federal investments have placed the government in a position that approaches, or effectively is, majority ownership or control.


Watchdog and Treasury clash

Source: Treasury clashes with Tarp watchdog on data Financial Times, July 21, 2009

"US bail-out efforts are having a significant impact on some credit markets, the Treasury and Federal Reserve said in a report yesterday, just as the watchdog for the rescue effort attacked a lack of transparency.

Neil Barofsky, special inspector-general for the troubled asset relief programme, said that the various US schemes to shore up banks and restart lending exposed federal agencies to a risk of $23,700bn - a vast estimate that was immediately dismissed by the Treasury.

He added in his own report to Congress that "disagreements remain" between the office of the special inspector-general for the troubled asset relief programme (Sigtarp) and Treasury over a scheme to shift toxic assets and that there were "fundamental vulnerabilities . . . relating to conflicts of interest and collusion, transparency, performance measures, and anti-money laundering".

The Treasury said the estimate for total liabilities was "inflated" and not "useful", including programmes that have never been used or were winding down and ignoring assets acquired by the government - such as equity in banks and carmakers - that offset the risk.

The dispute over the design of the huge intervention in the private sector - and extent of taxpayer exposure - will get a further airing tomorrow when Mr Barofsky appears before a congressional hearing.

It comes as the Financial Stability Oversight Board, made up of the Treasury, Fed and other regulators, released a broadly positive quarterly report into the financial rescue effort."

IG: Treasury 'failed' to adopt bailout safeguards

Source: IG: Treasury 'failed' to adopt bailout safeguards The Hill.com, July 20, 2009

"The government’s top watchdog over the $700 billion financial rescue package said the Treasury Department has "repeatedly failed" to adopt his recommendations that would make the program more transparent and accountable to taxpayers.

Neil Barofsky, the special inspector general over the Troubled Asset Relief Program (TARP), will tell lawmakers on Tuesday that taxpayers are being left in the dark about what banks are doing with bailout money, don't know the value of the government's investments and will not know the full extent of how the money is invested.

Barofsky said that while the TARP program that Congress passed amounts to $700 billion, the total federal government support since 2007 for the economy and the financial sector could reach a far higher figure of $23.7 trillion. The government has committed significantly more money through a variety of other federal agencies and programs.

While some steps have been taken, “it has repeatedly failed to adopt recommendations that Barofsky believes are essential to providing basic transparency …” Barofsky intends to tell lawmakers, according to prepared remarks obtained by The Hill.

"The very credibility of TARP (and thus in large measure its chance of success) depends on whether Treasury will commit, indeed as in word, to operate TARP with the highest degree of transparency possible," Barofsky says in the prepared remarks. He notes four recommendations from his office that have yet to be adopted, including one requiring banks to detail how they have used capital injections.

Barofsky is scheduled to testify on Tuesday before the House Committee on Oversight and Government Reform.

The Hill is seeking comment from the Treasury Department, which has yet to return calls.

In a separate report issued on Monday, Barofsky's office noted that banks have used government money for purposes other than increased lending, whether to build up capital cushions, repay debt or help finance acquisitions of other banks. His office is in the process of posting online responses to a survey of 360 banks receiving government aid.

Meanwhile, Barofsky's office has opened 35 criminal and civil investigations into issues including suspected accounting fraud, securities fraud, insider trading, mortgage servicer misconduct, mortgage fraud, public corruption, false statements and taxes.

"Treasury’s continued unwillingness to provide basic transparency despite the many recommendations of SIGTARP and Congress and the repeated demonstration that meaningful data from TARP recipients can be gathered and easily disseminated is unacceptable," said a memo prepared by Republicans on the oversight committee.

Barofsky's office also has audits nearly completed on executive compensation restrictions, controls over external influences on the awarding of capital, the selection off the first nine big banks to participate in TARP, the bonuses at AIG and the settling of derivatives with counterparties to AIG. The office is also conducting audits into how the government is valuing warrants that are part of the TARP program; a further assessment of how banks are using the TARP funds; governance issues in companies with large U.S. stakes; the status of taxpayer investments in Citigroup; and the government's efforts to shore up the housing market.

"This Administration promised an 'unprecedented level' of accountability and oversight, but as this report reveals, they are falling far short of that promise. In fact, the Treasury Department is actively obstructing transparency," said Rep. Darrell Issa (R-Calif.), ranking member on the oversight committee.

Barofsky said that his office and Treasury have consulted on the public-private investment program, but that a key recommendation has not been adopted. Barofsky recommended in April that Treasury should require a "wall" between the fund managers in the program and employees of those same companies who are managing separate funds not related to the program. Treasury has decided against that, according to the report.

"Failure to impose a wall," Barofsky said, will leave the government open to criticism "that Treasury is using TARP to pick winners and losers."

Estimated TARP subsidy rate rises

The estimated subsidy rate for transactions made under the Troubled Asset Relief Program has risen by 4 percent, according to a recent report by the Congressional Budget Office. In January, the CBO estimated the subsidy rate – the percentage of the initial TARP disbursement that reflects the true cost to the federal government of purchasing shares of stock from financial institutions – to be 32 percent, based on $293 billion in transactions.

In a June 17 report, the CBO subsidy rate estimate rose to 36 percent, based on $439 billion in transactions. The new estimate includes assistance to the auto industry and $70 billion in repayments by TARP recipients.

TARP lobbying disclosure - Sunlight Foundation

"Yesterday, I called the Treasury Department in one last ditch effort to find their TARP Lobbyist Contact Disclosure Forms. I did so as final due diligence before publishing this blogpost, earlier today, in which I evaluated the TARP lobbying disclosure rules. In it, I noted that the required disclosure forms were eerily absent from Treasury’s website.

This afternoon — voila! — 2 disclosure forms appeared. One form is dated 10/9/2009, and the other is dated 9/22/2009. Now, Treasury is required to publish these forms within 3 days of the lobbying contact, so we know that both of these forms were published outside of the 3 day window required by Treasury’s own rules. (At a minimum, they weren’t published here.)

What is also interesting is that there are only two lobbying contacts reported. This leads to a couple of possible implications: (1) Treasury has more forms to publish, perhaps some of which are late; or (2) Treasury has no more forms to publish right now. For the latter to be true, either no one has talked to Treasury about spending TARP funds over the last month, or the lobbying disclosure rules don’t have a lot of bite and missed capturing lobbying communications.

It will be interesting to see what appears on their website in the upcoming days and weeks. I am still waiting for that phone call back from Treasury about my question: where are the rest of the lobbying contact disclosure forms?"

Small banks struggling with repayments to TARP

"The U.S. taxpayers' investments in smaller banks are increasingly at risk.

In a sign that more banks are under great pressure from the recession, 34 financial institutions did not pay their quarterly dividends in August to the Treasury on funds obtained under the Troubled Asset Relief Fund (TARP).

The number almost doubled from 19 in May when payments were last made, and also raised questions about Treasury's judgment in approving these banks as "healthy," a necessary step for them to get TARP funding.

"The banks are not paying their dividends because they are worried about preserving capital," says Eric Fitzwater, associate director of research at SNL Financial.

The Treasury Department says it cannot force an institution to pay dividends. "For some banks, it may be prudent to exercise their right not to pay dividends in a particular month, and we respect their right to do so," says Meg Reilly, a Treasury spokeswoman. "To draw any broader conclusions about the state of the banking sector from one month is highly premature and speculative."

However, a lot of smaller banks are already under stress. Weighed down by foreclosures and delinquencies, 98 banks have failed so far this year, vs. 25 for all of last year. Besides insurer American International Group and lender CIT Group, most of the other non-payers are smaller institutions that received $400 million or less in TARP funds.

Top Republican on the House Financial Services Committee, Rep. Spencer Bachus, R-Ala., says: "We must ensure taxpayers are repaid."

Some say Treasury might have been too hasty in approving some banks for TARP funds.

"Perhaps the Treasury made assumptions that were a little bit too rosy," says Walter Todd, who invests in banks at Greenwood Capital. "My question is also whether the Treasury is staffed adequately to handle this tremendous undertaking."

Treasury has given $365 billion to 700 institutions from TARP. AIG, to which the government has pledged $180 billion, has accumulated $1.6 billion in unpaid dividends. And CIT, which received $2.3 billion from TARP, said in a regulatory filing that it is restructuring its debt and seeking approval from bondholders for a pre-packaged bankruptcy. If that happened, it would wipe out the entire government investment."

President to propose new capital for community banks

"President Barack Obama is set to announce an additional round of capital injections into community banks that can make the case they’ll use the money for small business lending, according to people briefed on the matter.

Obama is expected to make the announcement this afternoon at a visit to a small business in Maryland, where he will also increase the caps for loans backed by the Small Business Administration. The White House said small banks will have “better access” to money from the $700 billion Troubled Asset Relief Program.

Community banks will have another chance at a government capital injection if they can make the case that the money will aid small businesses, the people said. As in the past, the banks will need to show that they could survive without the additional funds, one of the people said.

Senate Democrats are pushing for more aid to small businesses to counter the perception that the administration is focusing on big banks. The announcement comes seven months after the Treasury’s March announcement of a $15 billion program to purchase pools of SBA loans, which so far has not been implemented.

“We see continued evidence that Wall Street has been stabilized, but to date it seems that Main Street continues to struggle to create new jobs,” wrote Senator Mark Warner, a Virginia Democrat on the banking committee, and 30 other lawmakers, in a letter to Obama yesterday. Co-signers include Senate Banking Committee Chairman Christopher Dodd of Connecticut."

U.S. Rescue May Reach $23.7 Trillion, Barofsky Says

Source: U.S. Rescue May Reach $23.7 Trillion, Barofsky Says July 20, 2009, Bloomberg

"U.S. taxpayers may be on the hook for as much as $23.7 trillion to bolster the economy and bail out financial companies, said Neil Barofsky, special inspector general for the Treasury’s Troubled Asset Relief Program.

The Treasury’s $700 billion bank-investment program represents a fraction of all federal support to resuscitate the U.S. financial system, including $6.8 trillion in aid offered by the Federal Reserve, Barofsky said in a report released today.

“TARP has evolved into a program of unprecedented scope, scale and complexity,” Barofsky said in testimony prepared for a hearing tomorrow before the House Committee on Oversight and Government Reform.

Treasury spokesman Andrew Williams said the U.S. has spent less than $2 trillion so far and that Barofsky’s estimates are flawed because they don’t take into account assets that back those programs or fees charged to recoup some costs shouldered by taxpayers.

“These estimates of potential exposures do not provide a useful framework for evaluating the potential cost of these programs,” Williams said. “This estimate includes programs at their hypothetical maximum size, and it was never likely that the programs would be maxed out at the same time.”

Barofsky’s estimates include $2.3 trillion in programs offered by the Federal Deposit Insurance Corp., $7.4 trillion in TARP and other aid from the Treasury and $7.2 trillion in federal money for Fannie Mae, Freddie Mac, credit unions, Veterans Affairs and other federal programs."

Exec Comp for TARP recipients

Treasury published an interim final rule (the "Rule") that provides long-awaited guidance on the executive compensation and corporate governance standards imposed by the Emergency Economic Stabilization Act of 2008 ("EESA"), as amended by the American Recovery and Reinvestment Act of 2009 ("ARRA")

On June 10, 2009, Treasury released a statement on compensation that sets forth five principles that are intended to be the basis for future guidelines to which all public companies, particularly financial institutions, would be subject. Treasury also released two fact sheets that anticipate proposed legislation on "say-on-pay" and compensation committee independence.

This memorandum outlines the Rule and announcements, and is divided into four sections, as follows:

  • (i) new guidance on preexisting ARRA provisions,
  • (ii) new compensation and governance standards added by the Rule,
  • (iii) the creation of the Office of the Special Master for TARP and
  • (iv) the compensation principles and legislative proposals recently announced by Treasury.

Key highlights of the Rule include:

  • A definition of "financial assistance" under the Troubled Asset Relief Program ("TARP") provides flexibility to structure investment funds under the Public-Private Investment Program ("PPIP") so that general partners and investment managers to those investment funds may be able to avoid the application of the TARP restrictions. Furthermore, the Rule indicates that a Term Asset-Backed Loan Facility ("TALF") borrower will not be deemed to have received "financial assistance" and therefore will also not be subject to the TARP restrictions.
  • A clarification of the definition of "highly compensated employees" to encompass employees that may not be executive officers and to specify how compensation should be calculated for this purpose.
  • An exception from the limitations on bonuses to certain commission payments, including for investment management services.
  • An expansion of ARRA's prohibition on golden parachute payments and a new prohibition tax gross-ups.
  • The creation of the Office of the Special Master for TARP, with unprecedented new powers to intervene in compensation decisions at certain financial institutions.
  • Anti-abuse measures to limit the avoidance of the executive compensation restrictions.

Source: Fried Frank



UK FSA "Approved persons" regime

"As the Director whose responsibilities include our Approved Persons regime, I am writing to clarify our new approach to approving and supervising persons performing significant influence functions (SIFs).

Our regulatory philosophy and more intrusive approach continue to place a great deal of emphasis on governance and consequently, the responsibilities of senior management of firms. In view of the shortcomings exposed by the financial crisis in the governance and risk management of some regulated firms, we made changes last year to how we approve and supervise persons performing SIFs, in particular we:

  • introduced procedures to interview, at our discretion, candidates applying to perform certain SIF roles in particular firms; and
  • placed greater emphasis on monitoring the performance of persons already performing SIF roles. This includes reviewing more critically the competence of persons performing SIFs as part of ARROW assessments.

Our expectations of persons performing SIFs are set out clearly in our rules and are well summarised by our Statements of Principle for Approved Persons (APER) contained in our Handbook. Our assessment of the competence of persons performing SIFs will be based on these expectations. We have also said previously that one of the key questions we expect relevant senior management of a firm to be able to answer is: What are the circumstances under which the firm will fail? In assessing competence, we will expect senior management to be able to demonstrate their understanding of the inherent risks in the business/markets and to articulate what plans are in place to mitigate the risk of failure..."

Ireland's TARP program

Ireland is providing a case study for what might have been if former U.S. Treasury Secretary Henry Paulson had gone ahead with a plan to buy banks’ hard-hit assets.

Irish taxpayers are guinea pigs in a government experiment to buy property loans from banks at prices higher than market values yet lower than the amounts banks carry them for on their books. Although markets are reacting favorably, there’s a good chance taxpayers will get stung.

If that happens, it will again show that governments need to confront head-on the troubles facing banks and economies, rather than hope time and taxpayer money will solve the problems. That’s especially important since some investors believe the Irish plan may provide a blueprint for banks across Europe.

So far, most nations have balked at making banks face up to their ailments directly. And they have been loathe to make creditors feel pain, wary of the mayhem that followed the collapse of Lehman Brothers Holdings Inc.

Ireland is no different. Banks such as Allied Irish Banks PLC and Bank of Ireland PLC are saddled with billions of euros of troubled real-estate loans. Rather than force bank shareholders or creditors to bear the brunt of these losses, the Irish government is trying the kind of switcheroo Paulson wanted to pull off.

Recall that Paulson first proposed that the Troubled Assets Relief Program buy toxic assets from banks. The idea was that TARP would unclog balance sheets and revive lending. That’s also the stated purpose of the Irish plan.

Price proved to be the sticking point in the U.S. last fall. Pay too much for the assets and it’s a stealth recapitalization of banks, and their shareholders, using taxpayer money. Banks, on the other hand, didn’t want to sell at low prices for fear that resulting hits to profit and equity might wipe them out.

The issue was never fully resolved as the U.S. Congress needed two tries to pass the plan. Then Paulson did an about- face and decided to use the $700 billion in TARP funds to purchase equity in banks. Since then, the idea of the government buying assets from banks has fizzled.

Ireland is following the original TARP blueprint. Irish Finance Minister Brian Lenihan last week announced that a special agency would buy 77 billion euros ($113 billion) of assets from five lenders. In doing so, the government would pay about 70 percent of the assets’ carrying value, or about 54 billion euros.

While that seems like a big haircut, the price might be as much as 15 percent above the assets’ estimated market value of about 47 billion euros.

The Irish government has maintained that it has few other options. It believes that forcing losses upon bank creditors would hamper the government’s own ability to raise funds.

The government also sees the plan, which has yet to be approved by the Irish parliament, or Dail, as a back-door way to borrow money to absorb losses. After exchanging bank assets for government-backed bonds, banks can pledge the bonds to the European Central Bank in return for cash.

The catch is that taxpayers may be paying even more than a 15 percent premium for the assets -- and so taking on more risk -- if the current market values still have room to fall. The government doesn’t think that’s the case; it is counting on Irish property values rising 10 percent over the next decade, allowing the plan to break even.

That may prove tough. Ireland’s property market became wildly overvalued during the so-called Celtic Tiger boom of this decade. Home-price appreciation outpaced the rate of growth seen in the U.S. Overdevelopment was rampant, even in rural areas.

Today, the Tiger has been declawed. Ireland is undergoing the worst recession of any industrialized nation since the Great Depression, according to the Economic and Social Research Institute in Dublin. Unemployment is at 12 percent and rising, while emigration is on the upswing.

The real-estate industry prognosis is bleak. “There is still no evidence of a recovery in the housing market -- either in building activity or demand,” analysts at BNP Paribas wrote in a report earlier this week. “Residential property prices will likely fall for the foreseeable future.”

As Bloomberg News’s Dara Doyle reported last week, the office vacancy rate in Dublin is more than double that of other European capitals, while as many as 35,000 new homes may be vacant across the country. That has created what are being dubbed ghost villages consisting of newly built and still unoccupied homes.

Keep in mind that if it weren’t for the fact that Ireland is part of the euro zone, the country now would likely be known as “the other Iceland.”

This backdrop makes it understandable that the Irish government felt it had to do something, anything to prop up the banking system. Still, there are alternatives short of nationalization.

Recapitalizations that make creditors and shareholders share in the pain, such as debt-for-equity swaps, should be an option. Ireland, like other countries, has to get over the notion that creditors are a sacred group who must be spared at all costs.

At the very least, the government shouldn’t ask taxpayers to wager so much on the hope that things will stop getting worse.

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