[JPRT, 111th Congress]
[From the U.S. Government Publishing Office]
ACCOUNTABILITY FOR THE TROUBLED ASSET RELIEF PROGRAM
________
THE SECOND REPORT OF THE CONGRESSIONAL OVERSIGHT PANEL
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January 9, 2009.--Ordered to be printed
ACCOUNTABILITY FOR THE TROUBLED ASSET RELIEF PROGRAM
________
THE SECOND REPORT OF THE CONGRESSIONAL OVERSIGHT PANEL
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
January 9, 2009.--Ordered to be printed
________
46-500
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CONGRESSIONAL OVERSIGHT PANEL
Panel Members
Elizabeth Warren, Chair
Rep. Jeb Hensarling \1\
Richard H. Neiman
Damon Silvers
Sen. John E. Sununu
\1\ Rep. Hensarling did not approve this report.
C O N T E N T S
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Page
Executive Summary................................................ 1
Introduction..................................................... 4
Treasury Department Updates Since Prior Report................... 5
Questions About the $700 Billion: Discussion of Treasury's
Responses...................................................... 6
1. What Is Treasury's Strategy?.............................. 6
2. Is the Strategy Working to Stabilize Markets?............. 7
3. Is the Strategy Helping to Reduce Foreclosures?........... 8
4. What Have Financial Institutions Done with the Taxpayers'
Money Received So Far?................................... 8
5. Is the Public Receiving a Fair Deal?...................... 9
6. What Is Treasury Doing to Help the American Family?....... 9
7. Is Treasury Imposing Reforms on Financial Institutions
that Are Taking Taxpayer Money?.......................... 9
8. How Is Treasury Deciding Which Institutions Receive the
Money?................................................... 10
9. What Is the Scope of Treasury's Statutory Authority?...... 10
10. Is Treasury Looking Ahead?............................... 11
Treasury Department Response Grid................................ 12
Oversight Activities............................................. 39
Future Oversight Activities...................................... 40
About the Congressional Oversight Panel.......................... 41
Alternative Views................................................ 41
Appendix I: Letter from Congressional Oversight Panel Chair
Elizabeth Warren to Treasury Secretary Mr. Henry M. Paulson,
Jr., dated December 17, 2008................................... 44
Appendix II: Treasury Department Responses to Questions of the
First Report of the Congressional Oversight Panel, dated
December 30, 2008.............................................. 47
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ACCOUNTABILITY FOR THE TROUBLED ASSET RELIEF PROGRAM
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January 9, 2009.--Ordered to be printed
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EXECUTIVE SUMMARY
In its first report to Congress on December 10, 2008, the
Congressional Oversight Panel (COP or the Panel) posed ten
basic questions--in effect asking for an explanation of the
U.S. Department of Treasury's goals and methods for the
Troubled Asset Relief Program (TARP). The Panel's questions, in
turn, included a number of subsidiary questions, which sought
additional details from the Treasury. In total, the Panel
sought responses to 45 separate questions about the execution
of the authority granted to Treasury under the Emergency
Economic Stabilization Act (EESA) and the $350 billion in
taxpayer funds that has been ``effectively allocated'' under
that program. On December 30, 2008, Treasury responded to the
Panel with a 13-page letter. While the letter provided
responses to some of the Panel's questions and shed light on
Treasury's decision-making process, it did not provide complete
answers to several of the questions and failed to address a
number of the questions at all. To gain a more complete
understanding of what Treasury is doing and why, the Panel asks
Treasury to provide additional information clarifying its
earlier responses.
In order to exercise its legally-mandated oversight
functions, the Panel has initiated a number of fact-finding
efforts and independent investigations that will be the subject
of future reports. But the Panel's independent work does not
eliminate the need for Treasury to respond to the Panel's
questions. Some of these questions can be answered only by
Treasury (e.g., Treasury's strategic plans) and others seek to
clarify what appear to be significant gaps in Treasury's
monitoring of the use of taxpayer money (e.g., asking financial
institutions to account for what they have done with taxpayer
funds).
To ease the burden on Treasury and to make it clear
precisely which questions remain to be answered, the Panel has
constructed a grid with its original questions and Treasury's
responses. Although many questions remain outstanding, the
Panel highlights four specific areas that it believes deserve
special attention:
(1) Bank Accountability. The Panel still does not know what
the banks are doing with taxpayer money. Treasury places
substantial emphasis in its December 30 letter on the
importance of restoring confidence in the marketplace. So long
as investors and customers are uncertain about how taxpayer
funds are being used, they question both the health and the
sound management of all financial institutions. The recent
refusal of certain private financial institutions to provide
any accounting of how they are using taxpayer money undermines
public confidence.\2\ For Treasury to advance funds to these
institutions without requiring more transparency further erodes
the very confidence Treasury seeks to restore. Finally, the
recent loans extended by Treasury to the auto industry, with
their detailed conditions affecting every aspect of the
management of those businesses, highlights the absence of any
such conditions in the vast majority of TARP transactions. EESA
does not require recipients of TARP funds to make reports on
the use of funds. However, it is within Treasury's authority to
make such reports a condition of receiving funding, to
establish benchmarks for TARP recipient conduct, or to have
formal procedures for voluntary reporting by TARP recipient
institutions or formal guidelines on the use of funds. The
adoption of any one of these options would further the purposes
of helping build and restore the confidence of taxpayers,
investors, and policy makers.
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\2\ See, e.g., Matt Apuzzo, Where'd the Bailout Money Go? Shhhh,
It's a Secret, Associated Press (Dec. 22, 2008) (online at
apnews.myway.com/article/20081222/D957QL7O0.html).
(2) Transparency and Asset Evaluation. The need for
transparency is closely related to the issue of accountability.
The confidence that Treasury seeks can be restored only when
information is completely transparent and reliable. Currently,
Treasury's strategy appears to involve allocating the majority
of the $700 billion to ``healthy banks,'' banks that have been
assessed by their regulators as viable without federal
assistance. Of course, whether a bank is ``healthy'' depends
critically on the valuation of the bank's assets. If the banks
have not yet recognized losses associated with over-valued
assets, then their balance sheets--and Treasury's assessment of
their health--may be suspect.
Many understood the purpose of EESA to be providing
assistance to financial institutions that were ``unhealthy''
and at risk of failing. Such institutions were at risk, the
public was told, due to so-called toxic assets that were
impairing their balance sheets. EESA was designed to provide a
mechanism to remove or otherwise provide clear value to those
assets. The case of Citigroup illustrates this problem.
Treasury provided Citigroup with a $25 billion cash infusion as
part of the ``healthy banks'' program whereby Treasury made
nine initial investments in major banks. About two months
later, Treasury provided Citigroup with $20 billion in
additional equity financing, apparently to avoid systemic
failure, but it did not classify that investment as part of the
Systemically Significant Failing Institution program (SSFI
program). These events suggest that the marketplace assesses
the assets of some banks well below Treasury's assessment. To
date no such mechanism to provide more transparent asset
valuation has been developed, meaning that the danger posed by
those toxic assets remains unaddressed. The bubble that caused
the economic crisis has its foundations in toxic mortgage
assets. Until asset valuation is more transparent and until the
market is confident that the banks have written down bad loans
and accurately priced their assets, efforts to restore
stability and confidence in the financial system may fail.
(3) Foreclosures. The crisis in the housing sector
continues to affect any efforts at recovery. In enacting EESA,
Congress called upon Treasury to
implement a plan that seeks to maximize assistance for
homeowners and use the authority of the Secretary to
encourage the servicers of the underlying mortgages,
considering net present value to the taxpayer, to take
advantage of the HOPE for Homeowners Program under
section 257 of the National Housing Act or other
available programs to minimize foreclosures. In
addition, the Secretary may use loan guarantees and
credit enhancements to facilitate loan modifications to
prevent avoidable foreclosures.\3\
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\3\ Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-
343, at Sec. 109(a).
When Congress authorized the Panel, it specifically
requested that the Panel evaluate ``the effectiveness of
foreclosure mitigation efforts.'' \4\ While the statute
contemplates that foreclosure mitigation would be accomplished
through the purchase of mortgage-related assets, many believe
that Treasury has clear authority to use a portion of the $700
billion to address mortgage foreclosures in other ways. For
Treasury to take no steps to use any of this money to alleviate
the foreclosure crisis raises questions about whether Treasury
has complied with Congress's intent that Treasury develop a
``plan that seeks to maximize assistance for homeowners.'' \5\
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\4\ Id., at Sec. 125(b)(1)(A)(iv).
\5\ Id., at Sec. 109(a).
(4) Strategy. The Panel's initial concerns about the TARP
have only grown, exacerbated by the shifting explanations of
its purposes and the tools used by Treasury. It is not enough
to say that the goal is the stabilization of the financial
markets and the broader economy. That goal is widely accepted.
The question is how the infusion of billions of dollars to an
insurance conglomerate or a credit card company advances both
the goal of financial stability and the well-being of
taxpayers, including homeowners threatened by foreclosure,
people losing their jobs, and families unable to pay their
credit cards. It would be constructive for Treasury to clearly
identify the types of institutions it believes fall under the
purview of EESA and which do not and the appropriate uses of
TARP funds. The need for Treasury to address these fundamental
issues of strategy has only intensified since our last report.
The issues related to strategy have wider implications as
well. It appears that Treasury in its post-American
International Group, Inc. (AIG) actions is using public dollars
to support the value of equity in financial institutions. What
strategy lies behind that decision? What about other
alternatives? Would it be better and more cost effective to
encourage private capital investors to assume control of such
banks? Should those banks be required to maintain higher
capital or liquidity positions or to pay higher Federal Deposit
Insurance Corporation (FDIC) insurance premiums? Should we
focus on ensuring that systemically significant institutions
meet their fixed obligations and let the equity in such
institutions be fully at risk, as we did in AIG? Should we
simply let market forces work--letting sick banks fail and the
healthy banks take the business? The Panel does not embrace any
of these suggestions. Instead, it asks whether Treasury is
involved in that re-thinking process.
The Panel recognizes that Treasury has many pressing
obligations, and the Panel appreciates Treasury's efforts to
give timely responses. Ultimately, the Panel hopes that by
posing these questions and offering these comments that it can
be helpful to Treasury as it attempts to find more effective
tools to deal with the current financial crisis.
INTRODUCTION
Under Section 125(b) of EESA, the Congressional Oversight
Panel is charged with making regular reports on:
the use by the Secretary of the Treasury of
authority under EESA, including his contracting
authority and administration of the program;
the impact of purchases made under EESA on
the financial markets and financial institutions;
the extent to which the information made
available on transaction under the program has
contributed to market transparency; and
the effectiveness of foreclosure mitigation
efforts, and the effectiveness of the program from the
standpoint of minimizing long-term costs to the
taxpayers and maximizing the benefits for taxpayers.
In its first report to Congress, the Panel posed ten basic
questions and many subsidiary questions about Treasury's
exercise of its authority under EESA. These questions set the
framework for the related areas of inquiry that the Panel
intends to pursue. The Panel is seeking information and advice
from noted financial experts, academics, and the public. COP
also invites public contributions through field hearings or
through our website (cop.senate.gov).
The highlighted area of this January Oversight report is an
evaluation of Treasury's response to our December report. That
section is titled, ``Questions About the $700 Billion:
Discussion of Treasury's Responses.''
In addition to monthly reporting, the Panel is charged with
issuing a Special Report later this month on the topic of
regulatory reform. The Panel also intends to issue other
supplementary updates to Congress on a rolling basis, as
recommendations or other findings are identified.
The Panel pledges to do its best to keep Congress and the
public informed on the impact of Treasury's use of public funds
and the effectiveness of the program in achieving the
Congressional purposes, as stated in EESA, of (1) helping to
``restore liquidity and stability to the financial system of
the United States,'' and (2) ensuring that taxpayer funds are
used ``in a manner that protects home values, college funds,
retirement accounts and life savings; preserves homeownership
and promotes jobs and economic growth; maximizes overall
returns to the taxpayers of the United States; and provides
public accountability.'' \6\
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\6\ Id., at Sec. 2.
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TREASURY DEPARTMENT UPDATES SINCE PRIOR REPORT
In the past weeks, Treasury has created new programs and
expanded the scope of institutions eligible for TARP funding.
The Panel will continue to evaluate the terms and conditions of
the new programs and will provide updates on the effectiveness
of these efforts.
Automotive Industry Financing Program (AIFP). On
December 19, 2008, Treasury announced a plan to make emergency
TARP loans to General Motors Corporation and Chrysler LLC, to
avoid bankruptcy and prevent further financial harm to the
economy. In addition, on December 29, Treasury purchased $5
billion in senior preferred equity with an 8% dividend from
GMAC LLC. Under the agreement, GMAC issued warrants in the form
of additional preferred equity in an amount equal to 5% of the
preferred stock purchase. These warrants were exercised at the
close of the transaction and pay a 9% dividend. Treasury has
also agreed to lend up to $1 billion to General Motors to
facilitate their participation in a rights offering by GMAC, to
support GMAC's reorganization as a bank holding company. These
steps are part of the AIFP. The AIFP provides support both to
automobile manufacturers and automobile finance companies and
is a recognition by the administration of the critical
importance of this key industry to economic stability. The
Panel will be comparing and evaluating the appropriateness of
the terms and conditions connected with the receipt of TARP
funds across industries.
Asset Guarantee Program (AGP). On December 31,
2008, Treasury submitted a report to Congress that outlined the
AGP, which was established pursuant to Section 102 of EESA. The
program will provide guarantees for assets held by systemically
significant financial institutions. The previous guarantees
made to Citigroup that were announced on November 23 may come
under the umbrella of the AGP. The December 31 report contains
an overview of Treasury's thought process in structuring
guarantees, including the relative merits of various loss
positions and eligibility standards for participating
institutions. An evaluation of the AGP, including additional
conversations with Treasury to consider specifics of the
program, will be undertaken by the Panel.
Targeted Investment Program (TIP). On January 2,
2009, Treasury formalized the TIP, a new program for financial
institutions at risk of a loss of market confidence due to
market volatility. Eligibility considerations include whether
destabilization of the institution would cause systemic
disruptions to the nation's financial markets, credit, payments
and settlements systems, or would threaten asset prices or the
broader economy. The terms and conditions of the TIP, a program
that Treasury expects would only be used in exceptional cases,
are still under development. The Panel intends to dialog with
the Treasury to determine more specifically the conditions
under which TIP, as opposed to the SSFI program, would be used.
The Panel also intends to offer the new administration its
input in the administration's effort to design the parameters
of the TIP.
QUESTIONS ABOUT THE $700 BILLION: DISCUSSION OF TREASURY'S RESPONSES
On December 17, the Panel asked Treasury to respond to the
ten questions set forth in the Panel's first report. On
December 30, Treasury responded to the Panel's December 17
request. This section sets forth a summary and analysis of the
Treasury's response, and the next section includes a grid with
Treasury's answers and COP's response to those answers. (The
full text of the Panel's letter and Treasury's response are
included as Appendix I and II to this report.)
While Treasury's letter provided responses to some of the
Panel's questions and shed some light on Treasury's decision-
making process, it did not provide complete answers to several
of the questions and failed to address some of the questions at
all. The Panel is committed to making independent
determinations of the answers to our questions. That work must
begin, however, with an understanding of Treasury's thinking.
The Panel is concerned that Treasury's initial response to our
questions is not comprehensive and seems largely derived from
earlier Treasury public statements.
Treasury should provide an analysis of the
origins of the credit crisis and the factors that
exacerbated it. Only then will Congress be able to
determine the appropriate legislative responses.
Treasury should set forth the metrics by
which success of the TARP in meeting the Congressional
goals will be judged.
The Panel believes that, to date, Treasury's
actions to minimize avoidable foreclosures have not met
Congress' expectations. An upcoming Panel report will
make recommendations on the best ways to stem such
foreclosures.
Treasury should explain its basis for
determining that all healthy banks are eligible to
receive TARP funds, irrespective of whether they are in
the lending business or are otherwise systemically
significant.
1. What Is Treasury's Strategy? The Panel's first set of
questions asked about Treasury's strategy in administering the
TARP. There has been much public confusion over the purpose of
the TARP, and whether it has had any effect on the credit
markets, helped in price discovery for frozen assets, or
increased lending. The name ``Troubled Asset Relief Program''
indicated that original purpose of buying troubled assets, but
Treasury abruptly switched course and began making direct
investments in banks.
Treasury's response regarding its strategy was not limited
to its use of TARP funds:
Treasury's strategy is to work in coordination with
all government agencies to use all the tools available
to the government to achieve the following critical
objectives:
Stabilize financial markets and
reduce systemic risk;
Support the housing market by
avoiding preventable foreclosures and
supporting mortgage finance; and
Protect taxpayers.
Treasury's response to our questions lists numerous
initiatives that do not involve the use of TARP funds. While
the Panel agrees with Treasury's goals, our Congressional
mandate is to oversee the use of the TARP funds to determine if
these goals are met. In particular, the Panel sees no evidence
that Treasury has used TARP funds to support the housing market
by avoiding preventable foreclosures. For Treasury to meet the
stated intentions of EESA, Treasury must strengthen its efforts
in this regard.
The Panel also asked Treasury for its conclusions about the
nature and origins of the problem it is trying to address
through TARP. Treasury did not provide any such analysis of the
cause of the problem. The Panel believes, however, that it is
important for Treasury and our financial services regulators to
have an analysis of the causes and nature of the financial
crisis to be able to craft a strategy for addressing the
sources, and not solely the symptoms, of the problem or
problems.
2. Is the Strategy Working to Stabilize Markets? The
Panel's second set of questions dealt with whether Treasury's
strategy was working to stabilize financial markets and our
overall economy and to fulfill the other Congressional goals.
The Panel continues to believe that Treasury needs to set forth
the metrics by which these goals will be judged. Treasury's
response designates an assertion and two metrics that purport
to show that--in combination with other actions--Treasury's
strategy has worked. Treasury claims that the TARP capital
investments stemmed a series of financial institution failures
and made the financial system fundamentally more stable than it
was when Congress passed the legislation. It cites the
``average credit default swap spread'' for the eight largest
U.S. banks, which Treasury notes has declined by about 240
basis points since before Congress passed EESA. Treasury does
not state the dates of their measurements or note that credit
spreads have been extremely volatile over the fourth quarter.
The metric Treasury cites is the spread between the London
Interbank Offered Rate (LIBOR) and the Overnight Index Swap
rates (OIS). Treasury notes that 1-month and 3-month LIBOR-OIS
spreads have declined about 220 and 145 basis points,
respectively since the law was signed, and about 310 and 240
basis points, respectively, from their peak levels before the
Capital Purchase Program (CPP) was announced. While it is true
that the short-term spreads have contracted, they remain far
above historic averages. Moreover, the long-term bank spreads
remain extremely elevated. And, bank spreads represent a single
indicator on the broader financial crisis. There is a need to
have metrics that gauge the markets more broadly, as well as
other economic measures, in order to form any firm view of the
effectiveness of Treasury's strategy.
Although Treasury notes that it is also monitoring the
effects of capital infusions on lending, it does not state what
metrics it plans to use. While both tightened credit standards
and the economic slowdown undoubtedly have depressed lending,
these events do not justify the failure to measure whether the
TARP capital investments are having a positive effect on
lending. The Panel therefore hopes to learn how Treasury plans
to measure this important variable. The Panel stated in its
first report that it believed Treasury should monitor lending
at the individual TARP recipient level, and here the Panel
again restates that recommendation.
3. Is the Strategy Helping to Reduce Foreclosures? One of
Congress' stated goals was ``foreclosure mitigation efforts.''
The Panel's third question was whether Treasury's strategy with
respect to the TARP was reducing foreclosures. Treasury
responded with a resounding yes, although none of the actions
they credit with reducing foreclosures have a direct connection
to TARP funding. This includes (1) preventing the failure of
Fannie Mae and Freddie Mac, (2) Treasury and Fed programs to
purchase Government Sponsored Enterprise (GSE) mortgage-backed
securities, (3) attempts by the HOPE NOW Alliance, a coalition
of mortgage servicers, investors and counselors, to help
struggling homeowners by negotiating loan work-outs, (4) the
development by HOPE NOW and the American Securitization Forum
of a fast-track loan modification program to modify loans of
subprime ARM borrowers facing unaffordable rate resets, and (5)
the November 2008 industry announcement, along with HOPE NOW,
the Federal Housing Finance Agency (FHFA) and the GSEs, of a
streamlined loan modification program that builds on the
mortgage modification protocol developed by the FDIC for
IndyMac. A group of state attorneys general and banking
departments have criticized many existing loan modification
efforts, since many do nothing to reduce mortgage rates to
affordable amounts. \7\ More importantly, Treasury does not
cite recent statistics on re-default rates. Only if homeowners
have a realistic chance to remain current on their mortgages
can a modification be deemed effective.
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\7\ Conference of State Bank Supervisors State Foreclosure
Prevention Working Group, Analysis of Subprime Mortgage Service
Performance: Data Report No. 3 9-10 (Sept. 2008) (online at
www.csbs.org/Content/NavigationMenu/Home/SFPWGReport3.pdf).
4. What Have Financial Institutions Done With the
Taxpayers' Money Received So Far? The Panel's fourth area of
inquiry focused on what financial institutions have done with
the taxpayer money they received. As indicated in question 1
above, Treasury appears to believe the question is beside the
point because their goal for the CPP is to stabilize the
financial system and to restore confidence in financial
institutions. This, they believe, will eventually increase the
flow of credit. Treasury argues that there are several reasons
why the TARP investments will be slow to produce increased
lending: (1) The CPP began only in October 2008, and the money
must work its way into the system before it can have the
desired effect. (2) Because confidence is low, banks will
remain cautious about extending credit, and consumers and
businesses will remain cautious about taking on new loans. (3)
Credit quality at banks is deteriorating, which leads banks to
build up their loan loss reserves. For example, Treasury notes
that the level of loan loss provisioning by banks doubled in
the third quarter from one year ago. Treasury seems to be
suggesting these larger trends may be obscuring the effect of
TARP funds. The Panel understands the reasons why measurement
of banks' use of TARP funds may be difficult. Nevertheless, the
Panel believes such direct measurements at the level of
individual TARP recipient firms are important for determining
the extent to which the funds are having a direct benefit to
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businesses and consumers.
5. Is the Public Receiving a Fair Deal? The Panel's fifth
question dealt with whether the public is receiving a fair deal
from the CPP and other investments. Treasury states that its
investments are a good deal for the public for two reasons.
First, the government will own shares which Treasury expects to
yield a reasonable return and, second, the government will also
receive warrants for common shares in participating
institutions, which will allow the taxpayer to benefit from any
appreciation in the market value of the institution. The Panel
asked Treasury to compare the terms Treasury obtained for its
investments and terms obtained by private parties investing in
the same firms during the same period. Treasury did not believe
this comparison was relevant and made no comparison. Treasury
claims that, when measured on an accrual basis, the value of
the preferred stock is at or near par. Treasury does not
explain whether by ``accrual basis'' it means historical cost
accounting, in which case its statement is a tautology, or
whether it means some other method of accrual accounting.
Treasury states that when measured on a mark-to-market basis,
the value of some preferred stock may be judged lower than par,
particularly if the valuation date is the purchase date rather
than the announcement date, as equity markets have dropped
since the program was first announced.
Finally, Treasury argues that it is not making the CPP
investments for short-term gains. Rather, Treasury claims that,
over time, the taxpayers will be protected by ensuring the
stability of the financial system and by earning a return on
these investments when they are eventually liquidated.
6. What Is Treasury Doing to Help the American Family? The
Panel's sixth question was whether Treasury was using its
ownership position in banks to encourage them to take actions
to help American families. In particular, the Panel asked
whether Treasury's actions preserved access to consumer credit,
including student loans and auto loans at reasonable rates, and
whether Treasury was taking action to ensure that public money
could not be used to subsidize lending practices that are
exploitive, predatory, or otherwise harmful to customers.
Treasury answered that its TARP programs to preserve access
to consumer credit do not involve encouraging or mandating
banks to take consumer-friendly actions with respect to credit
cards or other consumer loans.
7. Is Treasury Imposing Reforms on Financial Institutions
that Are Taking Taxpayer Money? The Panel's seventh group of
questions concerned whether Treasury was requiring recipients
to undertake any particular reforms, including (1) the
presentation of a viable business plan, (2) the replacement of
failed executives and/or directors, (3) reforms designed to
prevent future crises, to increase oversight, and to ensure
better accounting and transparency, and (4) other appropriate
operational reforms.
Treasury responded that it has required recipients of CPP
funds to adhere to the executive compensation restrictions
required by EESA. In addition, Treasury barred any increase in
dividends for three years and restricted share repurchases.
Both the dividend increase and share buyback restrictions are
designed to prevent banks from taking capital out of the
financial system. Under the SSFI program, Treasury imposed
additional terms and conditions on AIG. AIG must meet
additional executive compensation, corporate expenses, and
lobbying restrictions.
While some executives at some financial institutions have
voluntarily reduced their compensation, there is no uniform
program in place. Treasury has the power to set the ``terms and
conditions'' of any purchase it makes using the TARP funds. The
Panel continues to ask Treasury to explain why it has not
required more of financial institutions, particularly in light
of both the steps taken by the United Kingdom in similar
circumstances and the extensive conditions imposed on auto
companies, as a condition for receiving TARP funds.
8. How Is Treasury Deciding Which Institutions Receive the
Money? The Panel's eighth question concerned Treasury's
decisions about which institutions would receive TARP money. In
response, Treasury referred the Panel to Treasury's website,
which showed the application form for TARP funds. The Panel was
not seeking the information about the technical process for
applying to participate in the progress, but rather whether
Treasury's approach to advance taxpayer money to all healthy
banks, regardless of the bank's business profile, constitutes
an effective use of funds. If the goal of the program was to
stabilize financial markets, then Treasury should have
standards for determining which banks are significant
participants in the capital markets. If the goal of the program
was to increase consumer and small business lending, then
Treasury should have standards for determining which banks are
active small business and consumer lenders or have committed to
lend to small businesses and consumers.
The Panel was also interested in Treasury's approach to the
effect TARP transactions were having on the structure of the
banking industry, and whether any such effects were the result
of a deliberate strategy on Treasury's part. Treasury did not
address this aspect of the Panel's question.
9. What Is the Scope of Treasury's Statutory Authority? The
Panel's ninth area of inquiry sought Treasury's opinion of the
scope of its statutory authority. It also sought information
about guarantees, credit insurance, joint stabilization
efforts, and transparency of prices under the Term Asset-Backed
Securities Loan Facility (TALF) program. In response, Treasury
quoted the language of EESA and said it was working on the
guaranty and credit insurance programs.
The Panel posed this question in order to understand
Treasury's interpretation of the statute in relation both to
the actions Treasury has taken so far under EESA and to actions
Treasury might take in the future. The pending arrangements
with the automobile industry suggest that more thinking must go
into this question than a mere rote recitation of the statute.
COP is particularly interested in what limits, if any, Treasury
sees to the definition of ``financial institution'' and
``troubled asset'' and hopes Treasury will provide its
assessment of whether those terms cover other businesses, such
as commercial real estate, manufacturers of consumer products,
and other businesses not directly involved in financial
services.
10. Is Treasury Looking Ahead? Finally, the Panel asked
whether Treasury was looking ahead. In particular, it asked
about likely challenges in implementing EESA and whether
Treasury believed it had adequate contingency plans if the
economy suffered further disruptions. Treasury responded that
it is actively engaged in developing additional programs to
strengthen our financial system so that credit flows to our
communities, and that it is confident that it is pursuing the
right strategy to stabilize the financial system and support
the flow of credit to our economy. But it did not share any
future plans or explain if any strategic planning for other
financial reversals is in place.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
OVERSIGHT ACTIVITIES
COP was established as part of EESA. It was formed on
November 26, 2008, and it issued its first report on December
10, 2008. That report posed ten questions that identified
central issues regarding the use of taxpayers' funds through
the TARP.
Since the first report, the following developments
pertaining to COP's oversight of the TARP took place:
On December 16, 2008, COP held a Field
Hearing in Clark County, Nevada to examine the roots of
the financial crisis and its impact on everyday
Americans. At the hearing, scores of local residents
turned out to personally voice their skepticism and
concern over the TARP's lack of transparency.
On December 17, 2008, Elizabeth Warren,
Chair of the Panel, sent a letter to Treasury Secretary
Henry Paulson on behalf of the Panel requesting that
Treasury answer the questions posed in the first
report.
On December 30, Treasury responded to the
Panel's December 17 request. Both the full text of
Professor Warren's letter and Treasury's response are
included in the Appendices to this report.
COP has engaged consultants to help us
determine if Treasury's investments in preferred stock
of various banking organizations under its Capital
Purchase Program were made on terms that minimize long-
term costs and maximize benefits to the taxpayers.
COP has received and reviewed more than
2,500 messages with stories, comments, or suggestions
through cop.senate.gov.
REPORT ON FIELD HEARING IN CLARK COUNTY, NEVADA
On December 16, 2008, COP held its first field hearing, in
Clark County, Nevada. Clark County suffered from over 30,000
foreclosures in 2008, an increase of nearly 300% from 2007.
Overall, Nevada has had the highest foreclosure rate in the
nation for 23 months.
The hearing took place at the Thomas and Mack Moot Court at
the University of Nevada-Las Vegas Law School. Three Panel
members attended the hearing: Elizabeth Warren, Richard H.
Neiman, and Damon Silvers.
At the hearing, the Panel sought information from a broad
spectrum of sources about the nature and cause of the current
financial situation, the impact of federal government actions
to date to address the economic crisis, and local initiatives
to address the crisis.
The Panel heard testimony from the following witnesses:
George Burns, Commissioner, Nevada Financial
Institutions Division
R. Keith Schwer, Director, Center for
Business and Economic Research, UNLV
Bill Uffelman, President and Chief Executive
Officer, Nevada Bankers Association
Gail Burks, President and Chief Executive
Officer, Nevada Fair Housing Center
Julie Murray, Chief Executive Officer, Three
Square Food Bank
Danny Thompson, Executive Secretary-
Treasurer, Nevada State AFL-CIO
Alfred Estrada, Resident of Clark County
The Panel also heard from the following elected officials:
Harry Reid, United States Senate Majority
Leader (D-NV)
Shelley Berkley, Congresswoman (D-NV)
Dina Titus, Congresswoman-elect (D-NV)
Senator Harry Reid, Representative Shelley Berkley and
Representative-elect Dina Titus emphasized the importance of
ensuring that the use of TARP funds benefit American working
families. George Burns, Keith Schwer, and Bill Uffelman
discussed the collapse of the housing bubble and the current
state of the Nevadan economy. The witnesses on the second
panel--Gail Burks, Julie Murray, Danny Thompson, and Alfred
Estrada--testified about the human consequences of the economic
downturn.
Video, a transcript and testimony from the Clark County
Field Hearing are available at cop.senate.gov.
The Panel owes a special thanks to UNLV President David
Ashley, UNLV Law School Dean John White and the Boyd School of
Law staff for their hospitality in hosting this event. The
Panel also owes thanks to Kenneth LoBene, the local Field
Office Director for the U.S. Department of Housing and Urban
Development, for providing them with a tour of local
neighborhoods severely impacted by foreclosures following the
hearing.
FUTURE OVERSIGHT ACTIVITIES
PUBLIC HEARINGS
Given its successful public hearing in Clark County,
Nevada, COP will continue to hold field hearings to shine light
on the causes of the financial crisis, the administration of
TARP, and the anxieties and challenges of ordinary Americans.
The next hearing will be on January 14, 2009 in Washington, DC.
UPCOMING REPORTS
In January 2009, COP will release a report providing
recommendations for reforms to the financial regulatory
structure. The report will provide a roadmap for a regulatory
system that will revitalize Wall Street, protect consumers, and
ensure future stability in the financial markets. In early
February, COP will release its third oversight report.
PUBLIC PARTICIPATION AND COMMENT PROCESS
The Panel encourages members of the public to visit its
website at cop.senate.gov. The website provides information
about COP and the text of COP's reports. In addition, concerned
citizens can share their stories, concerns, and suggestions
with the Panel through the website's comment feature. To date,
COP has received more than 2,500 comments, and COP looks
forward to hearing more from the American people. By engaging
in this dialogue, COP aims to enhance the quality of its ideas
and advocacy.
ABOUT THE CONGRESSIONAL OVERSIGHT PANEL
In response to the escalating crisis, on October 3, 2008,
Congress provided the U.S. Department of the Treasury with the
authority to spend $700 billion to stabilize the U.S. economy,
preserve home ownership, and promote economic growth. Congress
created the Office of Financial Stabilization (OFS) within
Treasury to implement a Troubled Asset Relief Program (TARP).
At the same time, Congress created COP to ``review the current
state of financial markets and the regulatory system.'' The
Panel is empowered to hold hearings, review official data, and
write reports on actions taken by Treasury and financial
institutions and their effect on the economy. Through regular
reports, COP must oversee Treasury's actions, assess the impact
of spending to stabilize the economy, evaluate market
transparency, ensure effective foreclosure mitigation efforts,
and guarantee that Treasury's actions are in the best interests
of the American people. In addition, Congress has instructed
COP to produce a special report on regulatory reform that will
analyze ``the current state of the regulatory system and its
effectiveness at overseeing the participants in the financial
system and protecting consumers.''
On November 14, 2008, Senate Majority Leader Harry Reid and
the Speaker of the House Nancy Pelosi appointed Richard H.
Neiman, Superintendent of Banks for the State of New York,
Damon Silvers, Associate General Counsel of the American
Federation of Labor and Congress of Industrial Organizations
(AFL-CIO), and Elizabeth Warren, Leo Gottlieb Professor of Law
at Harvard Law School to the Panel. With the appointment on
November 19 of Congressman Jeb Hensarling to the Panel by House
Minority Leader John Boehner, the Panel had a quorum and met
for the first time on November 26, 2008, electing Professor
Warren as its chair. On December 16, 2008, Senate Minority
Leader Mitch McConnell named Senator John E. Sununu to the
Panel, completing the Panel's membership.
In the production of this report, COP owes special thanks
to Adam Blumenthal for his help in interpreting financial
statistics and to Professor Adam Levitin for his assistance in
working through the foreclosure data. Ganesh Sitaraman provided
important drafting help and also deserves COP's special thanks.
ALTERNATIVE VIEWS
SEN. JOHN E. SUNUNU
The central portion of this report presents Treasury's
response to questions posed in the Panel's first report,
released on December 10, 2009, as well as an evaluation of
those responses. In many cases, the report highlights areas
where additional information may or should be provided to
better understand Treasury's motives in choosing specific
features of the TARP, measuring its performance, and monitoring
compliance. In these and other areas, the public is better
served by a process that is as clear and transparent as
possible.
Compiling this evaluation, and creating a panel report, is
a consensus process. As a result, its tone and emphasis cannot
perfectly reflect the priorities and language of every member.
Taken as a whole, I believe that the material presented in the
January Report will help increase the public's understanding of
the process to date, and, as such, I have supported its
release. In two areas, however, the approach taken is of
particular concern and deserves additional clarification.
First, in several places within the report text, language
is used which can easily be interpreted as suggesting that the
purpose of the TARP is to increase lending to the levels that
existed before the current financial crisis. (See, e.g., page
8: ``. . . or increased lending''; page 10: ``. . . why the
TARP investments will be slow to produce increased lending'';
page 13: ``. . . the goal of the program was to increase
consumer or small business lending . . .''). But the current
crisis was caused, in large part, by the extension of too much
credit to institutions and individuals that were not
creditworthy. This, in turn, has resulted in a broad and
dramatic de-leveraging of the global economy. When, and as, the
economy begins to recover, it will do so in an environment of
lower leverage, and, thus, lower levels of aggregate borrowing
than existed in 2007. This fact should not be ignored.
With regard to lending, the TARP is intended to help ensure
the availability of credit to individuals and businesses that
are creditworthy and that credit is made available at
sustainable levels over time. Language to this effect is used
on page 11 (``. . . the Panel asked whether Treasury's action
preserved access to consumer credit . . .''), but by omitting
it elsewhere, readers might easily, and incorrectly, conclude
that the TARP is intended to bring total borrowing back to pre-
crisis levels.
Second, while Treasury can and should provide additional
information to the public regarding the TARP's design, its
performance, and the compliance of firms receiving capital,
there are several questions posed in the Panel's December 10
report that are enormously difficult, if not impossible, to
answer with any certainty. Moreover, there are a few that are
best left unanswered.
Questions such as: ``3.8 Will lower rates lead to a large
enough pool of buyers to lead to a general increase in home
prices?'' and ``3.10 Will lower interest rates induce demand
for home ownership in the face of falling housing prices,
consumer uncertainty about the future of the economy and
unemployment, and the reasonable expectation that an even
better deal might be available in the future?'' require gross
assumptions about multiple economic indicators and human
behavior. In the current environment it is not practical to
attempt to accurately forecast such behavior.
Questions such as ``4.5 Is Treasury seeking to use TARP to
shape the future of the American financial system?'' and ``6.1
Does Treasury believe American families need to borrow more
money?'' contain vague and sweeping generalizations. No
Treasury Secretary should be asked to assert that ``American
families should borrow more'' or ``should borrow less'' as part
of the TARP oversight process. Families and consumers face
situations and circumstances that are unique, and those
situations and circumstances should be recognized as such.
The work of the Panel is important, and it should help
provide the public and Congress with useful information
regarding the design, operation, and performance of the TARP.
Thus, it is essential that every effort be made to use
unambiguous language and to ask direct and practical questions.
We must redouble efforts to do so in future reports.
APPENDIX I: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH
WARREN TO TREASURY SECRETARY MR. HENRY M. PAULSON, JR., DATED DECEMBER
17, 2008
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APPENDIX II: TREASURY DEPARTMENT RESPONSES TO QUESTIONS OF THE FIRST
REPORT OF THE CONGRESSIONAL OVERSIGHT PANEL, DATED DECEMBER 30, 2008
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