[JPRT, 111th Congress]
[From the U.S. Government Publishing Office]
CONGRESSIONAL OVERSIGHT PANEL
DECEMBER OVERSIGHT REPORT *
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TAKING STOCK: WHAT HAS THE
TROUBLED ASSET RELIEF PROGRAM ACHIEVED?
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
December 9, 2009.--Ordered to be printed
* Submitted under Section 125(b)(1) of Title 1 of the Emergency
Economic Stabilization Act of 2008, Pub. L. No. 110-343
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Washington, DC 20402-0001
CONGRESSIONAL OVERSIGHT PANEL DECEMBER OVERSIGHT REPORT
CONGRESSIONAL OVERSIGHT PANEL
DECEMBER OVERSIGHT REPORT *
__________
TAKING STOCK: WHAT HAS THE
TROUBLED ASSET RELIEF PROGRAM ACHIEVED?
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
December 9, 2009.--Ordered to be printed
* Submitted under Section 125(b)(1) of Title 1 of the Emergency
Economic Stabilization Act of 2008, Pub. L. No. 110-343
CONGRESSIONAL OVERSIGHT PANEL
Panel Members
Elizabeth Warren, Chair
Rep. Jeb Hensarling
Paul S. Atkins
Richard H. Neiman
Damon Silvers
C O N T E N T S
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Page
Glossary of Terms................................................ V
Executive Summary................................................ 1
Section One:
A. Overview.................................................. 4
B. Background on the Origins and Evolution of the TARP....... 5
1. Chronology of the Financial Crisis.................... 5
2. The Initial Federal Response to the Crisis............ 9
C. The TARP's Evolution...................................... 13
1. Capital Programs and Banking Sector Health............ 13
2. Credit for Consumers and Small Business............... 39
3. Mortgage Foreclosure Relief........................... 51
4. Auto Industry Assistance.............................. 59
5. The TARP as a Whole................................... 63
D. Expert Commentary on the TARP............................. 79
1. Consistency and Transparency.......................... 81
2. Underlying Issues..................................... 82
3. Moral Hazard.......................................... 84
E. Accomplishments and Shortcomings: How Well Has the TARP
Done in Meeting its Statutory Objectives?.................. 85
1. The TARP's Contribution to Financial Stabilization and
Economic Recovery...................................... 85
2. The TARP and the American Taxpayer.................... 90
3. Treasury as TARP Steward and Manager.................. 92
F. Conclusions............................................... 95
Section Two: Additional Views.................................... 98
A. Damon Silvers............................................. 98
B. Richard Neiman............................................ 101
C. Representative Jeb Hensarling............................. 104
D. Paul S. Atkins............................................ 137
Section Three: Correspondence with Treasury Update............... 139
Section Four: TARP Updates Since Last Report..................... 140
Section Five: Oversight Activities............................... 142
Section Six: About the Congressional Oversight Panel............. 143
Appendices:
APPENDIX I: UNPAID DIVIDEND PAYMENTS UNDER CPP AS OF OCTOBER
31, 2009................................................... 144
APPENDIX II: LETTER FROM CHAIR ELIZABETH WARREN TO ASSISTANT
SECRETARY HERB ALLISON, RE: WRITTEN RESPONSES FOR HEARING
RECORD, DATED NOVEMBER 25, 2009............................ 146
APPENDIX III: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY
TIMOTHY GEITHNER, RE: STRESS TESTS, DATED NOVEMBER 25, 2009 148
APPENDIX IV: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY
TIMOTHY GEITHNER, RE: CIT GROUP, INC., DATED NOVEMBER 25,
2009....................................................... 150
APPENDIX V: ENDNOTES TO FIGURE 27: FEDERAL GOVERNMENT'S
FINANCIAL STABILIZATION PROGRAMS (AS OF NOVEMBER 25,
2009)--CURRENT MAXIMUM EXPOSURES........................... 153
Glossary of Terms
ABS Asset-backed securities
AIFP Automotive Industry Financing
Program
AIG American International Group, Inc.
AGP Asset Guarantee Program
ASSP Auto Supplier Support Program
CBO Congressional Budget Office
CDS Credit default swap
CIT CIT Group, Inc.
CMBS Commercial mortgage-backed
securities
CPP Capital Purchase Program
CRE Commercial real estate
EESA Emergency Economic Stabilization
Act of 2008
FDIC Federal Deposit Insurance
Corporation
FRBNY Federal Reserve Bank of New York
GSE Government-sponsored enterprise
HAMP Home Affordable Modification
Program
HARP Home Affordable Refinancing
Program
IMF International Monetary Fund
IRR Internal rate of return
LIBOR London Interbank Offered Rate
LTV Loan-to-value ratio
MHA Making Home Affordable
OIS Overnight Indexed Swaps
OMB Office of Management and Budget
PPIP Public-Private Investment Program
SBA Small Business Administration
SEC U.S. Securities and Exchange
Commission
SIGTARP Office of the Special Inspector
General for the Troubled Asset
Relief Program
SPA Securities purchase agreement
S-PPIP Legacy Securities PPIP
SSFI Systemically Significant Failing
Institution Program
TALF Term Asset-Backed Securities Loan
Facility
TARP Troubled Asset Relief Program
TIP Targeted Investment Program
TLGP Temporary Liquidity Guarantee
Program======================================================================
DECEMBER OVERSIGHT REPORT
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December 9, 2009.--Ordered to be printed
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EXECUTIVE SUMMARY *
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\*\ The Panel adopted this report with a 4-1 vote on December 8,
2009. Rep. Jeb Hensarling voted against the report. Additional views
are available in Section Two of this report.
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The financial crisis that gripped the United States last
fall was unprecedented in type and magnitude. It began with an
asset bubble in housing, expanded into the subprime mortgage
crisis, escalated into a severe freeze-up of the interbank
lending market, and culminated in intervention by the United
States and other industrialized countries to rescue their
banking systems.
The centerpiece of the federal government's response to the
financial crisis was the Emergency Economic Stabilization Act
of 2008 (EESA), which authorized the Treasury Secretary to
establish the $700 billion Troubled Asset Relief Program (TARP)
and created the Congressional Oversight Panel to oversee the
TARP. Now, at the end of the first full year of TARP's
existence, the Panel is taking stock of the TARP's progress:
reviewing what the TARP has accomplished to date, and exploring
where it has fallen short.
Although the TARP was a key element of the federal
government's response to the financial crisis, it was only one
part of a multi-pronged approach. The FDIC and the Federal
Reserve undertook major initiatives that are also aimed at
bolstering financial stability. In addition, Congress enacted a
fiscal stimulus measure that was larger than the TARP. Foreign
governments also acted to rescue their banking systems, with
consequences that echoed through the U.S. system as well.
Because so many different forces and programs have
influenced financial markets over the last year, TARP's effects
are impossible to isolate. Even so, 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. 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. Despite significant
improvement in the financial markets, however, the broader
economy is only beginning to recover from a deep recession, and
the TARP's impact on the underlying weaknesses in the financial
system that led to last fall's crisis is less clear.
Congress established broad goals for the Emergency Economic
Stabilization Act. It is apparent that, after 14 months, many
of the ongoing problems remain in the financial markets and the
broader economy:
The availability of credit, the lifeblood of the
economy, remains low. Banks remain reluctant to lend, and many
small businesses and consumers are reluctant to borrow. Even as
new capital and earnings flow into banks, questions remain
about whether this money is being used to repair damaged
balance sheets rather than putting the money into lending.
Bank failures continue at a nearly unprecedented
rate. There have been 149 bank failures between January 1, 2008
and November 30, 2009. The FDIC, facing red ink for the first
time in 17 years, must step in to repay depositors at a growing
number of failed banks. This problem may worsen, as deep-seated
problems in the commercial real estate sector are poised to
inflict further damage on small and mid-sized banks.
Toxic assets remain on the balance sheets of many
large banks. Some major financial institutions continue to hold
the toxic mortgage-related securities that contributed to the
crisis, waiting for a rebound in asset values that may be years
away. These banks may be considered ``too big to fail,'' but at
the same time, they may be too weak to play a meaningful role
in keeping credit flowing throughout the economy.
The foreclosure crisis continues to grow. More
than two million families have lost their homes to foreclosure
since the start of this crisis, and countless more have lost
their homes in short-sales or have turned their keys over to
the lender. Foreclosure starts over the next five years are
projected to range from 8 to 13 million, but more than a year
after the TARP was passed, it appears that the TARP's
foreclosure mitigation programs have not yet achieved the
scope, scale, and permanence necessary to address the crisis.
Job losses continue to escalate. The unprecedented
government actions taken since last September to bolster the
faltering economy have not been enough to stem the rise of
unemployment, which in October was at its highest level since
June 1983.
Markets remain dependent on government support.
The market stability that has emerged since last fall's crisis
has been in part the result of an extraordinary mix of
government actions, some of which will likely be scaled back
relatively soon, and few of which are likely to continue
indefinitely. It is unclear whether the market can yet
withstand the removal of this support.
Government intervention signaled an implicit
government guarantee of major financial institutions, and
unwinding this guarantee poses a difficult long-term challenge.
As yet, there is no consensus among experts or policymakers as
to how to prevent financial institutions from taking risks that
are so large as to threaten the functioning of the nation's
economy.
While the TARP, along with other strong government action,
can be credited with stopping an economic panic, the program's
progress toward the other goals set by Congress--goals that are
necessary for reestablishing stability in the financial system
and providing the tools for rebuilding the American economy--is
less clear.
Since its inception, the TARP has gone through several
different incarnations. It began as a program designed to
purchase toxic assets from troubled banks, but it quickly
morphed into a means of bolstering bank capital levels. It was
later put to use as a source of funds to restart the
securitization markets, rescue domestic automakers, and modify
home mortgages. The evolving nature of the TARP, as well as
Treasury's failure to articulate clear goals or to provide
specific measures of success for the program, make it hard to
reach an overall evaluation. In its report of December 2008,
the Panel called on Treasury to make both its decision-making
and its actions more transparent. The Panel renews that call,
as it has done with every monthly report since then.
Despite the difficult circumstances under which many
decisions have been made, those decisions must be clearly
explained to the American people, and the officials who make
them must be held accountable for their actions. Transparency
and accountability may be painful in the short run, but in the
long run they will help restore market functions and earn the
confidence of the American people.
SECTION ONE
A. Overview
Congress created the Congressional Oversight Panel to
oversee the Executive Branch's broad authority to use the $700
billion Troubled Asset Relief Program (TARP). In carrying out
its responsibilities under the Emergency Economic Stabilization
Act of 2008 (EESA), the Panel has published 12 monthly reports
and two special reports on a wide range of the TARP and related
financial stabilization initiatives.
This month the Panel assesses what the TARP has
accomplished and where it has fallen short from various
perspectives in the 14 months since its inception. The report
describes the major elements of the TARP--capital assistance
for financial institutions, small business and consumer lending
initiatives, mortgage foreclosure programs and assistance to
two U.S. automakers--and their status, including updates on
particular issues since the Panel's earlier reports on these
same subjects. It looks at key economic indicators and their
behavior over the course of the crisis and what they appear to
be telling us now. The report also summarizes the views of
academic and other experts whose analysis the Panel requested,
as well as the Panel's recent hearing with five prominent
economists and experts on the subject of financial sector
crises.
Congress stated that its purpose in passing EESA was ``to
immediately provide authority and facilities that the Secretary
of the Treasury can use to restore liquidity and stability to
the financial system of the United States.'' After reviewing
the performance of the disparate initiatives that Treasury has
carried out under the TARP's authorizing legislation and the
assessments of outside experts concerning that performance,
this report concludes with a look at how well the TARP has done
as measured against the stated objectives of the Act and the
espoused goals of Treasury leadership across two
administrations.
This report includes some discussion of financial stability
efforts of both the Federal Reserve Board and the Federal
Deposit Insurance Corporation (FDIC), but only inasmuch as
those efforts augment or supplement Treasury's actions under
the TARP. The report does not include any detailed discussion
of other government responses to the financial crisis, such as
the Housing and Economic Recovery Act of 2008 and the American
Recovery and Reinvestment Act of 2009, although the Panel is
mindful of the difficulties in separating the impact of the
various government responses on the overall U.S. economy. The
report also does not attempt to bring to light new information
about the factors that may have contributed to the decision-
making by government officials at the height of the financial
crisis, although such accounts by journalists and other
oversight bodies have informed the Panel's framework for
assessing the TARP.
In reviewing the performance of the TARP after a little
over one year, the Panel has benefitted from similar one-year
assessments from others. Treasury published a summary of the
Administration's financial stabilization efforts in September,
and it expects to release its formal accounting statements for
the TARP for Federal fiscal year 2009 (running from October 1,
2008 through September 30, 2009) in mid-December. Treasury
policy officials have also testified and given public
presentations in recent months providing their own review of
the performance of the TARP. Assistant Secretary of the
Treasury for Financial Stability Secretary Herb Allison
testified before the Panel on October 22, 2009 and made several
observations on the TARP and its impact after one year. Other
oversight groups such as the Government Accountability Office
have recently looked at the performance of the TARP.
The TARP is currently scheduled to expire on December 31,
2009. The Secretary of the Treasury is authorized under EESA to
extend the program through October 3, 2010, upon notification
of Congress. The Panel takes no position on the desirability of
such an extension.
B. Background on the Origins and Evolution of the TARP
1. Chronology of the Financial Crisis
The global financial crisis that culminated in intervention
by the United States and other industrialized countries to
rescue their banking systems was largely the result of an asset
bubble in housing, driven in part by the relatively low cost of
credit. U.S. housing prices reached their high point in mid-
2006. At the market's peak, the average cost of a home was more
than twice what it had been just six and a half years earlier,
a remarkable annual growth rate of nearly 12 percent.\1\
Housing construction had likewise surged to an unsustainable
annual rate of 2.15 million new privately owned units, and by
2006 unsold inventory began to pile up.\2\ Then house prices
began to ebb. The decline was initially not dramatic--prices
fell by less than 3 percent over the next 12 months.\3\ But it
was enough to undermine a key assumption behind the financial
instruments that provided much of the support for the U.S.
housing bubble--that housing prices never go down, at least not
on a sustained nationwide basis.\4\
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\1\ See Standard & Poor's, S&P/Case-Shiller Home Price Indices--
Instrument: Seasonally Adjusted Composite 20 Index (online at
www2.standardandpoors.com/spf/pdf/index/
SA_CSHomePrice_History_092955.xls) (hereinafter ``S&P/Case-Shiller Home
Price Indices'') (accessed Dec. 7, 2009) (relating how the index rose
from 100.59 in January 2000 to 206.15 in May 2006, a rise of 11.99
percent, on average, per year).
\2\ See generally United States Census Bureau, New Privately Owned
Housing Units Started in the United States by Purpose and Design
(online at www.census.gov/const/www/quarterly_starts_completions.pdf)
(accessed Dec. 7, 2009).
\3\ See S&P/Case-Shiller Home Price Indices, supra note 1.
\4\ See Bank of America, Remarks by Chairman and Chief Executive
Officer Kenneth D. Lewis at Los Angeles Town Hall: Mending our Mortgage
Markets (July 9, 2008) (online at newsroom.bankofamerica.com/
index.php?s=63&item=205) (``Before this decade, we had a long history
of relatively stable appreciation in home values, averaging about 3-4%
a year for more than a century. But during that time, the conventional
wisdom built that housing prices never go down, except for brief
corrections in the march upward'').
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The impact of falling home prices was felt early on in the
subprime mortgage market, where borrowers began defaulting on
mortgages that proved unaffordable as soon as prices stopped
climbing. Many of the mortgages that helped fuel the boom had
been premised on the assumption that borrowers would be able to
refinance before their mortgages reset to higher, unaffordable
interest rates. But as soon as home prices stopped rising, it
became impossible for such borrowers, who had little or no
equity in their homes, to refinance.\5\ In June 2007 two Bear
Stearns-sponsored hedge funds that were heavily invested in
subprime mortgages collapsed; Bear Stearns intervened with a
private bailout.\6\ But the market was becoming more volatile,
as credit-rating agencies were issuing more and more downgrades
of bonds composed of souring subprime mortgages. By the end of
June, the three biggest rating agencies had downgraded their
ratings on 2,012 tranches, or slices, of residential mortgage-
backed securities. Just 16 days later, that number had climbed
to 3,079.\7\ Initially the downgrades were largely confined to
the bonds' lower-rated tranches.\8\ But investors feared the
losses would spread,\9\ and they did. Soon even the safest
pieces of these mortgage-backed bonds, those rated triple-A,
were being downgraded.\10\
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\5\ See, e.g., Kristopher Gerardi, Adam Hale Shapiro, and Paul S.
Willen, Subprime Outcomes: Risky Mortgages, Homeownership Experiences,
and Foreclosures, Federal Reserve Bank of Boston, Working Paper No. 07-
15 (May 4, 2008) (online at www.bos.frb.org/economic/wp/wp2007/
wp0715.pdf) (``[H]ouse price depreciation plays an important role in
generating foreclosures. In fact, we attribute much of the dramatic
rise in Massachusetts foreclosures during 2006 and 2007 to the decline
in house prices that began in the summer of 2005'').
\6\ See Forest Asset Management, Hedge Funds: Don't Bank On It, at
1-2 (Aug. 2008) (online at forestmgmt.lightport.com/727830.pdf); see
also The Bear Stearns Companies Inc., Presentation, Merrill Lynch
Banking & Financial Services Investor Conference, at 3 (Nov. 14, 2007)
(online at www.bearstearns.com/includes/pdfs/investor_relations/
presentations/merrill_lynch.pdf).
\7\ Standard & Poor's had 767 downgrades through June 2007 and
1,346 through July 16, 2007. For Moody's, it was 479 through June and
933 through July 16. Fitch went from 766 downgrades to 800. See Fitch
Ratings, U.S. Subprime Rating Surveillance Update, at 23-24 (July 2007)
(online at www.fitchratings.com/web_content/sectors/subprime/
Subprime_Presentation_07_2007.pdf).
\8\ Id. at 30.
\9\ See Markus K. Brunnermeir, Deciphering the 2007-08 Liquidity
and Credit Crunch, 23 Journal of Economic Perspectives, no. 1, at 82-87
(Winter 2009) (online at www.princeton.edu/markus/research/papers/
liquidity_credit_crunch.pdf) (describing the ``unnerve[ing]'' effect of
mortgage-backed securities (MBS) downgrades on the broader ABS market).
\10\ See Office of the Comptroller of the Currency, Remarks of
Comptroller John C. Dugan before the Global Association of Risk
Professionals (Feb. 27, 2008) (online at www.occ.treas.gov/ftp/release/
2008-22a.pdf) (``These better-than-triple A tranches were supposed to
be the least risky parts of the subprime securities pyramid. Instead
they have generated the clear majority of reported subprime writedowns
in capital markets, which in turn have been at the core of several of
the worst episodes of the market's disruptions: the seizing up of the
asset-backed commercial paper market because of conduit and SIV
investments in these instruments; the huge, surprising, and
concentrated losses in commercial and investment banks that packaged
and sold subprime ABS CDOs; the large losses in regulated firms that
thought they had conservatively purchased `safe' securities, including
regional banks from as far away as Germany; and most recently in the
news, the large losses projected for monoline insurance companies that
sold credit protection on these super-senior tranches'').
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The first major casualty was Bear Stearns. In addition to
its exposure to risky mortgages, the 85-year-old investment
bank had come to rely heavily on short-term loans.\11\ These
factors made Bear Stearns especially vulnerable to a run, which
came in March 2008. As the firm lost assets, its ability to
borrow deteriorated. On March 14, the Federal Reserve agreed to
lend $29 billion as part of a deal that allowed JPMorgan Chase
to buy Bear Stearns.\12\ JPMorgan Chase ended up paying
approximately $10 for each share of Bear Stearns stock, or
about six percent of its peak share price.\13\ The government's
rescue of Bear Stearns established a new precedent. Previously,
the government had allowed faltering investment banks, which
are not insured by the federal government or regulated like
commercial banks, to go bankrupt, as Drexel Burnham Lambert did
in 1990.\14\
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\11\ See U.S. Securities and Exchange Commission, Office of
Inspector General, SEC's Oversight of Bear Stearns and Related
Entities: The Consolidated Supervised Entity Program, at v (Sept. 25,
2008) (online at www.sec-oig.gov/Reports/AuditsInspections/2008/446-
b.pdf).
\12\ Federal Reserve Bank of New York, Summary of Terms and
Conditions Regarding the JPMorgan Chase Facility (Mar. 24, 2008)
(online at www.newyorkfed.org/newsevents/news/markets/2008/
rp080324b.html) (hereinafter ``Summary of Terms and Conditions
Regarding the JPMorgan Chase Facility'').
\13\ JPMorgan Chase, JPMorgan Chase and Bear Stearns Announce
Amended Agreement (March 24, 2008) (online at www.jpmorgan.com/cm/
cs?pagename=JPM_redesign/JPM_Content_C/Generic_Detail_Page_Template&
cid=1159339104093&c=JPM_Content_C); Ciovacco Capital Management, Forget
the Spin, Bear Stearns Was Given Away To Calm Markets (Mar. 17, 2008)
(online at ciovaccocapital.com/Article%20January%20Lows.pdf).
\14\ See Kenneth Ayotte and David A. Skeel, Jr., Bankruptcy or
Bailouts?, Northwestern University School of Law Research Paper No. 09-
05 (July 23, 2009) (online at papers.ssrn.com/sol3/
papers.cfm?abstract_id=1362639##).
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As 2008 wore on, conditions in the financial markets
continued to deteriorate. U.S. securitization markets, which
had provided the funding that fueled the housing boom, were
severely contracting. The number of privately securitized
mortgages plunged from 1.75 million in 2006 to a mere 27,296 in
2008.\15\ In the first two quarters of that year, U.S. issuance
of asset-backed securities, which include car loans, student
loans, credit card lending, as well as home equity loans,
averaged about $58 billion, down from an average of $175
billion per quarter between 2005 and the first half of
2007.\16\ In addition, the effects of the weak financial sector
were now being felt in the real economy, where unemployment had
risen from a low of 4.4 percent in March 2007 to 6.2 percent by
August 2008.\17\ Foreclosure filings had more than doubled in
just 16 months, from 147,708 in April 2007 to 303,879 in August
2008.\18\
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\15\ Federal Financial Institutions Examination Council, Home
Mortgage Disclosure Act National Aggregate Report--Instrument: Loans
Sold by Tract in 2006, 2008 (online at www.ffiec.gov/hmdaadwebreport/
NatAggWelcome.aspx) (accessed Dec. 4, 2009).
\16\ Securities Industry and Financial Markets Association, US ABS
Issuance (online at www.sifma.org/uploadedFiles/Research/Statistics/
SIFMA_USABSIssuance.pdf) (hereinafter ``US ABS Issuance'') (accessed
Dec. 4, 2009).
\17\ United States Department of Labor, Bureau of Labor Statistics,
Labor Force Statistics from the Current Population Survey (online at
data.bls.gov/PDQ/servlet/
SurveyOutputServlet?data_tool=latest_numbers&series_id=LNS14000000)
(hereinafter ``Labor Force Statistics'') (accessed Dec. 7, 2009).
\18\ For April 2007 data see Bloomberg, Mortgage Defaults Rise 62
Percent, RealtyTrac Reports (May 15, 2007) (online at
www.bloomberg.com/apps/news?pid=20601087&sid=a8IPzXdjD06o&refer=home)
(quoting the RealtyTrac press release which is no longer available
online). For August 2008 data see RealtyTrac, Foreclosure Activity
Increases 12 Percent in August (Sept. 12, 2008) (online at
www.realtytrac.com/contentmanagement/
pressrelease.aspx?channelid=9&accnt=0&itemid=5163).
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Fear in the financial markets, which had been building,
evolved into a full-blown panic in September 2008. During a
remarkable 19-day stretch, the federal government took over the
two largest players in the mortgage market, allowed a large
investment bank to go bankrupt, bailed out one of the world's
largest insurance companies, and steered a major financial
institution through the largest bank failure in U.S. history.
Treasury took Fannie Mae and Freddie Mac into conservatorship
on September 7.\19\ Lehman Brothers failed on September 14.\20\
The next day, Bank of America announced it was buying Merrill
Lynch.\21\ The day after that, the government announced its
bailout of AIG.\22\ Also on September 16, the assets of a
money-market mutual fund fell below $1 per share, exposing
investors to losses, an occurrence known as ``breaking the
buck'' that had not happened in the industry for 14 years.\23\
On September 20, the Federal Reserve announced that it was
allowing Goldman Sachs and Morgan Stanley, the nation's only
two remaining large investment banks, to become bank holding
companies, giving them access to a key source of low-cost
borrowing from the Federal Reserve.\24\ On September 25, the
FDIC took Washington Mutual, the nation's largest savings and
loan, into receivership and sold many of its assets to JPMorgan
Chase.\25\
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\19\ U.S. Department of the Treasury, Statement by Secretary Henry
M. Paulson, Jr. on Treasury and Federal Housing Finance Agency Action
to Protect Financial Markets and Taxpayers (Sept. 7, 2008) (online at
www.ustreas.gov/press releases/hp1129.htm) (hereinafter ``Secretary
Paulson Statements on Action to Protect Financial Markets and
Taxpayers'').
\20\ See United States Securities and Exchange Commission,
Statement Regarding Recent Market Events and Lehman Brothers (Sept. 14,
2008) (online at www.sec.gov/news/press/2008/2008-197.htm).
\21\ See Bank of America, Bank of America Buys Merrill Lynch
Creating Unique Financial Services Firm (Sept. 15, 2008) (online at
newsroom.bankofamerica.com/index.php?s=43&item=8255).
\22\ See Board of Governors of the Federal Reserve System, Press
Release (Sept. 16, 2008) (online at www.federalreserve.gov/newsevents/
press/other/20080916a.htm) (hereinafter ``September 16 Press
Release'').
\23\ See The Reserve, Important Notice Regarding Reserve Primary
Fund's Net Asset Value (Nov. 26, 2008) (online at www.reservefunds.com/
pdfs/Press Release Prim NAV 2008_FINAL_112608.pdf); Christopher Condon,
Reserve Primary Money Fund Falls Below $1 a Share, Bloomberg (Sept. 16,
2008) (online at www.bloomberg.com/apps/
news?pid=20601087&sid=a5O2y1go1GRU).
\24\ Goldman Sachs' and Morgan Stanley's ability to borrow from the
Federal Reserve dated back to March 2008, when the Primary Dealer
Credit Facility was established, but that initiative was meant to be
temporary. As bank holding companies, Goldman Sachs and Morgan Stanley
would have permanent access to funding from the Federal Reserve. See
Board of Governors of the Federal Reserve System, Press Release (Sept.
21, 2008) (online at www.federalreserve.gov/newsevents/press/bcreg/
20080921a.htm).
\25\ See Federal Deposit Insurance Corporation, JPMorgan Chase
Acquires Banking Operations of Washington Mutual (Sept. 25, 2008)
(online at www.fdic.gov/news/news/press/2008/pr08085.html).
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One particularly stark measure of the panic that had seized
the markets was the spread between the three-month London
Interbank Offered Rate (LIBOR), which shows quarterly borrowing
costs for banks, and the Overnight Indexed Swaps (OIS) rate,
which shows the cost of extremely short-term borrowing. The
spread between these two rates reflects what the market
believes to be the risk in lending money to a bank; it is
therefore understood to be a measure of the banking sector's
overall health.\26\ Prior to the widespread market fears about
subprime lending, this spread hovered at or below 10 basis
points, or 0.1 percent. In late 2007, it rose as high as 105
basis points, reflecting a significantly heightened perception
of risk. At the height of the financial crisis on October 10,
2008, the spread was 364 basis points.\27\ In the fall of 2008,
many major banks had large amounts of bad loans on their books,
leading to fears that they were insolvent.\28\ The problem was
exacerbated by the big banks' heavy use of leverage, their
opaque balance sheets, and the complex structures of many of
their holdings.\29\ As a result, lenders did not know whom to
trust. At the same time, the already impaired securitization
markets were now on the verge of shutting down. Issuance in the
United States of asset-backed securities fell from $63 billion
in the second quarter of 2008 to just $3.5 billion in the
fourth quarter.\30\
---------------------------------------------------------------------------
\26\ See Federal Reserve Bank of St. Louis, Economic Synopses: What
the Libor-OIS Spread Says (Number 24) (May 11, 2009) (online at
research.stlouisfed.org/publications/es/09/ES0924.pdf).
\27\ Bloomberg, 3 Mo LIBOR-OIS Spread (online at www.bloomberg.com/
apps/cbuilder?ticker1=.LOIS3%3AIND) (hereinafter ``3 Mo LIBOR-OIS
Spread'') (accessed Dec. 4, 2009).
\28\ For a more detailed view of which loans went bad and when, see
Figure 9 in Section 1.C.1.c.i. See also Congressional Oversight Panel,
Written Testimony of Center for Economic and Policy Research Co-
Director Dean Baker, Taking Stock: Independent Views on TARP's
Effectiveness, at 4 (Nov. 19, 2009) (online at cop.senate.gov/
documents/testimony-111909-baker.pdf) (hereinafter ``Baker COP
Testimony'').
\29\ See Bank of England, Remarks as Prepared for Delivery by
Mervyn King, Governor of the Bank of England, to the Worshipful Company
of International Bankers in London: Finance (Mar. 17, 2009) (online at
www.bankofengland.co.uk/publications/speeches/2009/speech381.pdf).
\30\ US ABS Issuance, supra note 16.
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2. The Initial Federal Response to the Crisis
The federal government's initial responses to the financial
crisis were often ad hoc, with decisions made on an emergency
basis.\31\ On March 13, 2008, during the run on Bear Stearns,
the Federal Reserve learned that, due to a large and sudden
deterioration in liquidity, the firm was one day from filing
for bankruptcy. As Chairman of the Board of Governors of the
Federal Reserve System Ben S. Bernanke later told Congress,
there were numerous systemic factors for the Federal Reserve to
consider as it contemplated a possible bailout, including the
effects that Bear Stearns' failure would have on the firm's
counterparties, the effects it would have on confidence in the
financial markets, and the effects that any resulting
contraction in available credit would have on the U.S.
economy.\32\ Within hours, the Federal Reserve decided to
facilitate Bear Stearns' acquisition by JPMorgan Chase by
extending a $29 billion loan using its authority under Section
13(3) of the Federal Reserve Act,\33\ which allows the Federal
Reserve to lend to ``any individual, partnership, or
corporation'' under ``unusual and exigent circumstances.'' \34\
---------------------------------------------------------------------------
\31\ See Steven M. Davidoff and David Zaring, Regulation by Deal:
The Government's Response to the Financial Crisis, 61 ADMIN. L. REV.
463, 467 (2009) (available online at papers.ssrn.com/sol3/
papers.cfm?abstract_id=1306342) (characterizing the government's role
as ``that of an extraordinarily vigorous dealmaker''); Richard A.
Posner, A Failure of Capitalism: The Crisis of '08 and the Descent Into
Depression (2009) (excerpted online at www.finreg21.com/lombard-street/
a-failure-capitalism-the-crisis-of-'08-and-the-descent-into-depression)
(writing that the government responded to the crisis with ``a series of
improvisations'').
\32\ Senate Banking Committee, Written Testimony of Ben S.
Bernanke, chairman, Board of Governors of the Federal Reserve System,
Turmoil in U.S. Credit Markets: Examining the Recent Actions of Federal
Financial Regulators, 110th Cong., at 2-3 (Apr. 3, 2008) (online at
banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore_id=0a0ec016-ad61-4736-b6e3-
7eb61fbc0c69).
\33\ Summary of Terms and Conditions Regarding the JPMorgan Chase
Facility, supra note 12.
\34\ 12 U.S.C. Sec. 343.
---------------------------------------------------------------------------
In March 2008, at the same time that it was dealing with
the Bear Stearns collapse, the Federal Reserve also took
further steps to bolster financial markets and the economy with
the creation of two special liquidity facilities.\35\ These
facilities served as backstops in the marketplace by ensuring
that firms that held less liquid assets had access to the cash
they needed to fund their day-to-day operations. The
government's improvisations accelerated at a dizzying rate in
September 2008, as market forces repeatedly overwhelmed
whichever step the government had most recently taken. The
decision by Treasury and the Federal Housing Finance Agency to
take control of Fannie Mae and Freddie Mac was driven by the
two firms' thin capitalization, as well as the effects of
falling home prices, rising delinquency rates, and instability
in the financial markets.\36\ In addition, the firms' enormous
sizes--together they held $5.4 trillion in guaranteed
securities and outstanding debt, on par with the federal
government's publicly held debt \37\--raised the possibility
that their failure would have systemic consequences. Then-
Secretary of the Treasury Henry Paulson also cited Fannie Mae's
and Freddie Mac's ambiguous relationships with the government
as a motivating factor for the backstops. Investors worldwide
had purchased Fannie and Freddie debt on the understanding that
the U.S. government implicitly stood behind it.\38\ Secretary
Paulson stated that under these circumstances the United States
was obliged to assist the firms.\39\
---------------------------------------------------------------------------
\35\ The new facilities were known as the Term Securities Lending
Facility and the Primary Dealer Credit Facility. One additional Federal
Reserve special liquidity facility pre-dated the market upheaval around
the time of Bear Stearns' collapse, though its size was expanded in
March 2008. The Term Auction Facility, which provided short-term
liquidity to depository institutions, was created in December 2007.
\36\ See Secretary Paulson Statements on Action to Protect
Financial Markets and Taxpayers, supra note 19; see also Federal
Housing Finance Agency, Statement of FHFA Director James B. Lockhart
(Sept. 7, 2008) (online at www.ustreas.gov/press/releases/reports/
fhfa_statement_090708hp1128.pdf) (hereinafter ``Statement of FHFA
Director James B. Lockhart'').
\37\ Statement of FHFA Director James B. Lockhart, supra note 36.
\38\ Secretary Paulson Statements on Action to Protect Financial
Markets and Taxpayers, supra note 19.
\39\ Secretary Paulson Statements on Action to Protect Financial
Markets and Taxpayers, supra note 19.
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The reasoning behind the decision not to bail out Lehman
Brothers is less clear. Then-Secretary Paulson insisted that he
never considered committing taxpayer funds to a Lehman rescue.
Secretary Paulson cited ``moral hazard,'' the idea that firms
will take greater risks if they believe the government is
prepared to bail them out.\40\ Government officials including
Timothy Geithner, then President of the Federal Reserve Bank of
New York (FRBNY), Chairman Bernanke, and Secretary Paulson,
ultimately decided against a rescue.\41\ Treasury maintains
that it doubted its legal authority to intervene in the
collapse of Lehman, despite its role in the Bear Stearns
rescue.\42\
---------------------------------------------------------------------------
\40\ White House, Press Briefing by Dana Perino and Secretary of
the Treasury Henry Paulson (Sept. 15, 2008) (online at georgewbush-
whitehouse.archives.gov/news/releases/2008/09/ 20080915-8.html).
\41\ Carrick Mollenkamp et al., Lehman's Demise Triggered Cash
Crunch Around Globe, Wall Street Journal (Sept. 29, 2008) (online at
online.wsj.com/article/SB122266132599384845.html).
\42\ See House Committee on Oversight and Government Reform,
Testimony of Secretary Henry M. Paulson, Bank of America and Merrill
Lynch: How Did a Private Deal Turn Into a Federal Bailout? Part III,
111th Cong., at 6 (online at oversight.house.gov/
index.php?option=com_content&task=view&id=3690&Itemid=2); see also U.S.
Department of the Treasury, Letter from Assistant Secretary for
Legislative Affairs Kevin I. Fromer to Senate Finance Committee staff
(Mar. 28, 2008) (online at finance.senate.gov/press/Bpress/2008press/
prb040108a.pdf) (describing Treasury's role in the negotiations between
the Federal Reserve Bank of New York (FRBNY), Bear Stearns, and
JPMorgan Chase).
---------------------------------------------------------------------------
Subsequent media accounts present a more complicated
picture--supporting the view that the key decision-makers hoped
to send a message to the market by letting Lehman fail.\43\
Additionally, Treasury may have been leery of the popular
reaction to a rescue that likely would have benefitted non-U.S.
counterparties as much as U.S. interests--a real risk, as
evidenced by the impact of the AIG rescue later.\44\ In any
case, it would appear that the reasons Chairman Bernanke cited
for the bailout of Bear Stearns--the effects of a failure on
counterparties, the effects on financial markets, and the
impact on credit availability--also applied in the case of
Lehman Brothers.\45\
---------------------------------------------------------------------------
\43\ Simon Johnson and James Kwak, Lehman Brothers and the
Persistence of Moral Hazard, Washington Post (Sept. 15, 2009) (online
at www.washingtonpost.com/wp-dyn/content/article/2009/09/15/
AR2009091500943.html).
\44\ Barclays PLC, a British firm, had been interested in buying
parts of Lehman's operations prior to Lehman's failure, and eventually
bought significant parts of the Lehman business as part of the
bankruptcy. AIG's biggest counterparties included Societe Generale, a
French firm, and Deutsche Bank, a German firm. See Barclays PLC, Form
6-K (Sept. 15, 2008) (online at sec.gov/Archives/edgar/data/312069/
000119163808001621/barc200809156k.htm); see also Lehman Brothers,
Barclays to Acquire Lehman Brothers' Businesses and Assets (Sept. 16,
2008) (online at www.lehman.com/press/pdf_2008/
0916_barclays_acquisition.pdf); AIG, Counterparty Attachments (Mar. 18,
2009) (online at www.aig.com/aigweb/internet/en/files/
CounterpartyAttachments031809_tcm385-155645.pdf).
\45\ But see Peter Van Doren, Lehman Brothers and Bear Stearns:
What's the Difference? (Sept. 25, 2008) (online at www.cato.org/
pub_display.php?pub_id=9665). This article notes that firms in market
economies go bankrupt all the time, and it explores the issue of
whether the failure of investment banks such as Lehman Brothers and
Bear Stearns can lead to contagion to firms that have no direct
relationship with those bankrupt firms. The article describes without
endorsing the view that investment banks can pose a contagion threat
because of their use of over-the-counter financial derivatives. The
article also briefly discusses the possibility that Bear Stearns played
a more important role in the derivatives market than Lehman Brothers,
and therefore posed a greater threat of contagion, as well as the
possibility that Bear Stearns did not pose a contagion threat and
therefore should not have been rescued.
---------------------------------------------------------------------------
If policymakers hoped that Lehman's demise would end the
cycle of bailouts, their strategy failed. Instead, the efforts
to save the financial sector became more extensive and more
frantic in the following days. One of the most urgent problems,
AIG's illiquidity, suddenly emerged on the radar of top
policymakers.\46\ With roughly 70 U.S. insurance companies,
tens of billions of dollars of exposure to counterparties, and
operations in 130 countries, AIG was another firm that was seen
as posing a systemic risk.\47\ Within days, the Federal Reserve
had agreed to lend the massive insurance company up to $85
billion.\48\ In this atmosphere of panic, Chairman Bernanke and
Secretary Paulson concluded that their only remaining option
was to convince Congress to authorize an overwhelming fiscal
response. This idea--that the government needed to respond to
the crisis in a more comprehensive way--was the kernel of the
Troubled Asset Relief Program, or the TARP.
---------------------------------------------------------------------------
\46\ See U.S. Department of the Treasury, Letter from Assistant
Secretary Herbert M. Allison, Jr. to Special Inspector General Neil M.
Barofsky re: SIGTARP Official Draft Report, in Factors Affecting
Efforts to Limit Payments to AIG Counterparties, at 41-42 (Nov. 16,
2009) (online at www.sigtarp.gov/reports/audit/2009/
FactorsAffecting_Efforts_to_Limit_Payments_ to_AIG_Counterparties.pdf)
(``Literally overnight, government officials were faced with a
difficult choice, and a choice that had to be made immediately: either
let AIG go bankrupt or provide support'').
\47\ AIG later revealed that after receiving government assistance,
it paid more than $90 billion to counterparties, including $12.9
billion to Goldman Sachs, $11.9 billion to Societe Generale, and $11.8
billion to Deutsche Bank. American International Group, Counterparty
Attachments (Mar. 18, 2009) (online at www.aig.com/aigweb/internet/en/
files/CounterpartyAttachments031809_tcm385-155645.pdf); see also Scott
E. Harrington, The Financial Crisis, Systemic Risk, and the Future of
Insurance Regulation, Issue Analysis: A Public Policy Paper of the
National Association of Mutual Insurance Companies, at 9 (Sept. 2009)
(online at www.namic.org/advocatenews/pdfs/090922_harrington.pdf).
\48\ See September 16 Press Release, supra note 22.
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Even after Secretary Paulson and Chairman Bernanke decided
that a more systematic response was needed, they continued to
improvise in response to the rapidly changing landscape. On
September 19, the day after they held an emergency meeting with
Congressional leaders,\49\ Treasury announced a temporary
government guarantee of holdings in money-market funds.\50\ And
in another effort to restore confidence in money-market funds,
the Federal Reserve announced the creation of yet another
special liquidity facility.\51\ Top officials at Treasury and
the Federal Reserve also worked behind the scenes to encourage
numerous potential bank mergers, including Citigroup-Goldman
Sachs, Citigroup-Morgan Stanley, Citigroup-Wachovia, Wachovia-
Goldman Sachs, Wachovia-Morgan Stanley, and JPMorgan Chase-
Morgan Stanley.\52\ In the end, none of those mergers
happened.\53\ Then on September 21, the Federal Reserve
announced that Goldman Sachs and Morgan Stanley would be
allowed to become bank holding companies, which was interpreted
as a signal that the government would not allow those two firms
to fail.
---------------------------------------------------------------------------
\49\ See Speaker of the House of Representatives, Pelosi Comments
on Bipartisan Congressional Leaders' Meeting with Paulson, Bernanke,
and Cox (Sept. 18, 2008) (online at speaker.house.gov/newsroom/
pressreleases?id=0825).
\50\ The guarantee was announced following the news that one money-
market fund, the Reserve Fund, had broken the buck. The Reserve Fund
held Lehman Brothers debt, which sparked fears in the marketplace
following Lehman's failure. U.S. Department of the Treasury, Treasury
Announces Guaranty Program for Money Market Funds (Sept. 19, 2008)
(online at www.treasury.gov/press/releases/hp1147.htm).
\51\ This facility was called the Asset-Backed Commercial Paper
Money Market Mutual Fund Liquidity Facility. See Board of Governors of
the Federal Reserve System, Press Release (Sept. 19, 2008) (online at
www.federalreserve.gov/monetarypolicy/20080919a.htm).
\52\ See Andrew Ross Sorkin, Too Big To Fail (2009).
\53\ Wachovia was soon bought by Wells Fargo and Morgan Stanley was
stabilized by a capital infusion from a Japanese bank, Mitsubishi UFJ
Financial Group.
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The decision by Chairman Bernanke and Secretary Paulson on
September 18 to enlist the help of Congress led to a three-page
legislative proposal from Treasury on September 20. The plan
would have given Treasury the authority to spend up to $700
billion to purchase ``troubled assets,'' namely ``residential
and commercial mortgage-related assets.'' \54\ Over the next
two weeks, the administration's proposal was significantly
modified and expanded, and even defeated once in the House of
Representatives, prior to being signed into law on October 3,
2008. The law authorizes the Treasury Secretary to purchase not
only mortgage-related securities under the TARP, but also ``any
other financial instrument'' the purchase of which the
Secretary determines to be ``necessary to promote financial
market stability.'' \55\
---------------------------------------------------------------------------
\54\ See U.S. Department of the Treasury, Fact Sheet: Proposed
Treasury Authority to Purchase Troubled Assets (Sept. 20, 2008) (online
at www.ustreas.gov/press/releases/hp1150.htm).
\55\ The same law also establishes the Congressional Oversight
Panel. Emergency Economic Stabilization Act of 2008 (EESA), Pub. L. No.
110-343.
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What started as a contraction in the U.S. housing sector
had now spread around the globe, prompting emergency responses
by numerous countries in September-October 2008.\56\ Shortly
after the comprehensive fiscal response was adopted in the
United States, European governments decided to respond in a
similar fashion. On October 8, British Prime Minister Gordon
Brown announced a financial stability plan that included
50 billion ($87.5 billion) in capital injections,
200 billion ($349.8 billion) in a special liquidity
program, and 250 billion ($437.2 billion) in
guarantees to encourage inter-bank lending.\57\ On October 13,
France announced a plan that included $320 billion ($429.4
billion) in guarantees and $40 billion ($53.7 billion) in
capital injections.\58\ On October 16, the Swiss government
used a capital injection of 6 billion francs ($5.3 billion) to
take a 9.3 percent stake in UBS.\59\ And on October 17,
Germany's parliament approved a $480 billion ($645.6 billion)
bank bailout package.\60\
---------------------------------------------------------------------------
\56\ Bans or restrictions on short selling were imposed from
Australia to the Netherlands. Ireland stepped in to guarantee deposits
at its six largest banks. The Russian government injected many billions
of dollars into its banking system. Iceland nationalized its three
largest banks. For a lengthier discussion of the international
response, see the Panel's April report. Congressional Oversight Panel,
April Oversight Report: Assessing Treasury's Strategy: Six Months of
TARP, at 60-70 (Apr. 7, 2009) (online at cop.senate.gov/documents/cop-
040709-report.pdf).
\57\ See British Prime Minister's Office, 50 Billion
Banking Package (Oct. 8, 2008) (online at www.number10.gov.uk/
Page17112).
\58\ Henry Samuel, Banking Bail-out: France Unveils $360bn Package,
Telegraph (U.K.) (Oct. 13, 2008) (online at www.telegraph.co.uk/
finance/financetopics/financialcrisis/3190311/Banking-bail-out-France-
unveils-360bn-package.html).
\59\ David Gow, Switzerland Unveils Bank Bail-out Plan, Guardian
(U.K.) (Oct. 16, 2008) (online at www.guardian.co.uk/business/2008/oct/
16/ubs-creditsuisse).
\60\ See Simon Morgan, Germany Adopts 480-bln-euro Bank Bail-out,
Agence France-Presse (Oct. 17, 2008) (online at uk.biz.yahoo.com/
17102008/323/germany-adopts-480-bln-euro-bank-bail.html).
---------------------------------------------------------------------------
For American families, the financial crisis caused a vast
destruction of wealth. By September 2008, the bursting of the
housing bubble sent home prices down by 22 percent from their
peak in 2006.\61\ When the financial markets reached their low
point, in the first quarter of 2009, the value of households'
financial assets had also plummeted by about 20 percent from
their 2007 peak.\62\ From peak to trough, the net worth of
households and non-profit organizations fell by $12.7
trillion.\63\ As a point of comparison, the U.S. gross domestic
product, which measures the market value of the country's
annual output of final goods and services in a year, is $14.3
trillion.\64\
---------------------------------------------------------------------------
\61\ See S&P/Case-Shiller Home Price Indices, supra note 1.
\62\ See Board of Governors of the Federal Reserve System, Federal
Reserve Statistical Release: Flow of Funds Accounts of the United
States, Flows and Outstandings Second Quarter 2009, at 104 (Sept. 17,
2009) (online at www.federalreserve.gov/releases/z1/Current/z1.pdf)
(hereinafter ``Federal Reserve Statistical Release: Second Quarter
2009'').
\63\ Id. at 104.
\64\ U.S. Department of Commerce, Bureau of Economic Analysis,
Gross Domestic Product: Third Quarter (Advance Estimate) (Oct. 29,
2009) (online at www.bea.gov/newsreleases/national/gdp/
gdpnewsrelease.htm).
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C. The TARP's Evolution
Although Secretary Paulson and Chairman Bernanke initially
had proposed to use TARP funds to buy troubled assets on the
books of the largest U.S. financial institutions, they soon
realized that this was impractical given the need for quick
action. On October 14, 2008, Secretary Paulson summoned the
heads of the nine largest U.S. banks to Washington and told
them that Treasury was making direct capital injections into
each of their institutions, using a total of $125 billion of
TARP resources. Over the following weeks and months, under both
Secretary Paulson and incoming Secretary Geithner, Treasury
made further capital stock purchases \65\ in another 692 banks
and used the TARP in conjunction with Federal Reserve support
to implement the extraordinary rescue of AIG. Treasury also
used TARP resources to provide assistance to two major U.S.
automobile companies and to fund a mortgage foreclosure relief
grant program as part of the new Administration's efforts to
combat the unprecedented level of mortgage defaults and
foreclosures in the United States. Finally, the TARP was used
in conjunction with Treasury and Federal Reserve efforts to try
to restart small business and consumer lending.
---------------------------------------------------------------------------
\65\ These capital stock purchases, discussed in this section, were
made through the TARP's Capital Purchase Program, Targeted Investment
Program, and Systemically Significant Failing Institution Program.
---------------------------------------------------------------------------
1. Capital Programs and Banking Sector Health
a. Background
The largest and most prominent use of TARP funding has been
the government's efforts to provide capital assistance to U.S.
banks. The Capital Purchase Program (CPP), which provides
capital injections into banks, was the first and largest TARP
program. The Targeted Investment Program (TIP) and the
Systemically Significant Failing Institution (SSFI) Program
also provide capital injections, but they are narrower efforts
aimed at providing exceptional assistance to large institutions
considered critical to the functioning of the financial system.
Another exceptional assistance program is the Asset Guarantee
Program (AGP), under which the government has guaranteed
approximately $301 billion in Citigroup assets, thereby
insulating Citigroup from potential capital losses on those
assets. The Public-Private Investment Program (PPIP) provides
yet another form of capital assistance by attempting to restart
the markets for troubled securities that are currently weighing
down bank balance sheets. By removing these troubled securities
from bank balance sheets, or guaranteeing assets, the PPIP and
AGP, respectively, alleviate some of the banks' capital needs.
Lastly, while the FDIC's Temporary Liquidity Guarantee Program
(TLGP) does not rely on TARP funds, it is another key part of
the government's support for the banking system.
i. Capital Purchase Program \66\
---------------------------------------------------------------------------
\66\ For more detail on the CPP, see the Panel's February and July
Reports. Congressional Oversight Panel, February Oversight Report:
Valuing Treasury's Acquisitions, at 5-11 (Feb. 6, 2009) (online at
cop.senate.gov/documents/cop-020609-report.pdf) (hereinafter ``February
Oversight Report''); Congressional Oversight Panel, July Oversight
Report: TARP Repayments, Including the Repurchase of Stock Warrants, at
8-17 (July 10, 2009) (online at cop.senate.gov/documents/cop-071009-
report.pdf) (hereinafter ``July Oversight Report'').
---------------------------------------------------------------------------
Treasury used the CPP to provide capital to banks and other
financial institutions, usually by purchasing senior preferred
stock.\67\ Treasury has stated that it only provided CPP funds
to viable banks.\68\ In order to give taxpayers an opportunity
to participate in the upside if a bank's stock price rose,
Treasury also received warrants to purchase common stock. The
program has gone through several phases; the application period
for the final phase closed on November 21, 2009.\69\ Financial
institutions that have already received CPP funds may keep
their money according to the terms of the program, but Treasury
will not disburse additional funds.\70\ Over the life of the
program, the CPP has provided nearly $205 billion in capital to
692 financial institutions, including more than 300 small and
community banks.\71\
---------------------------------------------------------------------------
\67\ Treasury has stated that for every $100 Treasury invested, it
received preferred stock and warrants worth about $100. However, in its
February Report, the Panel performed a valuation of Treasury's initial
investments under the capital programs and found that Treasury received
stock and warrants worth only approximately $66 for every $100
invested. February Oversight Report, supra note 66, at 4.
\68\ U.S. Department of the Treasury, Capital Purchase Programs
(updated Nov. 3, 2009) (online at www.financialstability.gov/
roadtostability/capitalpurchaseprogram.html) (accessed Dec. 7, 2009).
However, as discussed in Section (C)(1)(a), infra, there are questions
as to whether Treasury adhered to this guideline.
\69\ U.S. Department of the Treasury, Frequently Asked Questions
regarding the Capital Purchase Program (CPP) for Small Banks (online at
www.financialstability.gov/docs/CPP/FAQonCPPforsmallbanks.pdf)
(hereinafter ``FAQs on CPP for Small Banks'') (accessed Dec. 7, 2009).
\70\ U.S. Department of the Treasury, The Next Phase of Government
Financial Stabilization and Rehabilitation Policies, at 36 (Sept. 14,
2009) (online at www.treas.gov/press/releases/docs/
Next%20Phase%20of%20Financial%20Policy,%20Final,%202009-09-14.pdf)
(hereinafter ``Next Phase of Government Financial Stabilization'').
\71\ See U.S. Department of the Treasury, Troubled Asset Relief
Program Transactions Report for Period Ending November 25, 2009 (Nov.
30, 2009) (online at www.financialstability.gov/docs/transaction-
reports/11-30-09%20Transactions%20Report%20as%20of%2011-25-09.pdf)
(hereinafter ``November 25 Transactions Report''); U.S. Department of
the Treasury, Assistant Secretary Allison Written Testimony for
Congressional Oversight Panel (Oct. 24, 2009) (online at
www.financialstability.gov/latest/tg_10222009.html). The 20 top
recipients of capital assistance under the CPP, the TIP, and the SSFI
Program received 89 percent of the $319.5 billion total of these three
programs' funds.
---------------------------------------------------------------------------
Fifty financial institutions have redeemed their preferred
stock, and 30 of them have also repurchased their warrants.\72\
CPP recipients may redeem their preferred stock only after
receiving approval from the federal banking agency that serves
as their primary regulator.\73\ The redemption price of the
preferred stock is set contractually, but Treasury repurchases
the warrants at fair market value, which is determined through
a negotiation and appraisal process between Treasury and the
financial institution.\74\ Treasury has determined that it will
not hold warrants after a financial institution redeems its
preferred stock.\75\ If a financial institution does not wish
to repurchase the warrants or if Treasury and the financial
institution cannot agree on a price through the appraisal
process, Treasury will auction them to the public.\76\
---------------------------------------------------------------------------
\72\ This is as of November 25, 2009. November 25 Transactions
Report, supra note 71. Treasury has stated that it will not hold the
warrants after the preferred stock has been redeemed. Three of these
banks have agreed to allow Treasury to auction their warrants. Of the
remaining banks, Treasury is either currently negotiating the
repurchase price or, for those which declined to continue discussions,
is preparing to auction the warrants. Treasury communications with
Panel staff (Dec. 4, 2009).
\73\ For a full discussion of the history and legal aspects of CPP
repayment, see the Panel's July report. July Oversight Report, supra
note 66, at 8-20.
\74\ U.S. Department of the Treasury, Securities Purchase
Agreement: Standard Terms, at Sec. Sec. 4.4, 4.9(c)(i) (online at
www.financialstability.gov/docs/CPP/spa.pdf) (accessed Dec. 8, 2009);
12 U.S.C. 5223(a)(2)(B). For a more complete discussion of this topic,
please see the Panel's July Oversight Report. See July Oversight
Report, supra note 66, at 10-17. The process is different for private
banks. Treasury immediately exercised the warrants of private banks.
The redemption price of the shares received on exercise was set in the
contracts. The process is different for private banks. Treasury
immediately exercised the warrants of private banks. The redemption
price of the shares received on exercise was set in the contracts.
\75\ U.S. Department of the Treasury, Treasury Announces Warrant
Repurchase and Disposition Process for the Capital Purchase Program
(June 26, 2009) (online at www.financialstability.gov/docs/CPP/Warrant-
Statement.pdf ).
\76\ Treasury has announced it will auction the warrants of
JPMorgan Chase, Capital One, and TCF Financial Corporation through a
modified Dutch auction process. U.S. Department of the Treasury,
Treasury Announces Intent to Sell Warrant Positions in Public Dutch
Auction (Nov. 19, 2009) (online at www.financialstability.gov/latest/
tg_11192009b.html). Treasury will allow the banks to bid on their own
warrants. On December 3, 2009, Treasury held a public auction to sell
Capital One's warrants. At the auction, the warrants were priced at
$146.5 million. U.S. Department of the Treasury, Treasury Department
Announces Pricing of Public Offering of Warrants to Purchase Common
Stock of Capital One Financial Corporation (Dec. 4, 2009) (online at
www.financialstability.gov/latest/tg_12042009.html) (hereinafter
``Capital One Warrant Purchase'').
---------------------------------------------------------------------------
In the first half of this year, Treasury and the bank
supervisors engaged in the Supervisory Capital Assessment
Program (SCAP), comprehensive stress tests of the nation's
largest banks. According to Treasury, these tests were a
forward-looking exercise aimed at determining whether these
institutions had sufficient capital to weather a longer and
more severe economic downturn.\77\ The results showed that 10
of the 19 stress-tested institutions required additional
capital.\78\ The other nine were allowed to redeem their
preferred stock, subject to the approval of their primary
federal regulator.\79\ The 10 banks that required additional
capital had to raise this money in the private markets before
they could redeem their preferred stock. On June 17, 2009, 10
of the 19 stress-tested banks repurchased their preferred
stock.\80\ Together, they repurchased approximately $70 billion
in preferred stock. Figure 1 shows the total amount of CPP
funds outstanding by month, with the drop-off in June 2009
resulting from the wave of stock repurchases. Though 10 of the
19 stress-tested banks have already repaid their CPP funds,
three of the four largest banks still hold their TARP funds.
Measured by assets, these three institutions constitute
approximately 40 percent of the banking system.\81\ One of
these three, Bank of America, announced on December 2, 2009
that it would repay all of its TARP funds after the completion
of a securities offering.\82\
---------------------------------------------------------------------------
\77\ For a discussion of the stress tests, see the Panel's June
report. Congressional Oversight Panel, June Oversight Report: Stress
Testing and Shoring Up Bank Capital (June 9, 2009) (online at
cop.senate.gov/documents/cop-060909-report.pdf) (hereinafter ``June
Oversight Report''). If a stress-tested institution required additional
capital and could not raise it in the private markets, it could have
access to additional TARP funds through the Capital Assistance Program
(CAP). The terms of this program were less favorable to the banks than
were the terms of the CPP.
\78\ Federal Reserve Board of Governors, The Supervisory Capital
Assessment Program: Overview of Results, at 3 (May 7, 2009) (online at
www.federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf).
Nine of these 10 have raised the required capital in the private
markets. To date, GMAC is the only institution that has returned to the
government for more financial support. Treasury announced that it will
provide any support to GMAC through the AIFP. U.S. Department of the
Treasury, Treasury Announcement Regarding the Capital Assistance
Program (Nov. 9, 2009) (online at www.financialstability.gov/latest/
tg_11092009.html) (hereinafter ``Treasury Announcement Regarding the
CAP''). Treasury staff has told the Panel that GMAC will receive AIFP
and not CAP funds because its previous injections had been through the
AIFP. In addition, Treasury staff stated that the terms of the AIFP are
substantially similar to the CAP. Treasury communications with Panel
staff (Nov. 17, 2009).
\79\ U.S. Department of the Treasury, FAQs on Capital Purchase
Program Repayment and Capital Assistance Program (online at
www.financialstability.gov/docs/FAQ_CPP-CAP.pdf) (accessed Dec. 7,
2009). A stress tested institution seeking to repay was also required
to ``be able to demonstrate its financial strength by issuing senior
unsecured debt for a term greater than five years not backed by FDIC
guarantees, in amounts sufficient to demonstrate a capacity to meet
funding needs independent of government guarantees.'' U.S. Department
of the Treasury, FAQs on Capital Purchase Program Repayment and Capital
Assistance Program (online at www.financialstability.gov/docs/FAQ_CPP-
CAP.pdf) (accessed Dec. 7, 2009).
\80\ The 10 banks that repaid are JPMorgan Chase, Goldman Sachs,
Morgan Stanley, U.S. Bancorp, Capital One, American Express, Bank of
New York, State Street, Northern Trust, and BB&T. November 25
Transactions Report, supra note 71.
\81\ See National Information Center, Top 50 BHCs (online at
www.ffiec.gov/nicpubweb/nicweb/Top50form.aspx) (accessed Dec. 7, 2009);
Federal Reserve Board of Governors, Assets and Liabilities of
Commercial Banks in the United States--H.8 (Dec. 4, 2009) (online at
www.federalreserve.gov/releases/h8/current/default.htm).
\82\ Bank of America, Bank of America to Repay Entire $45 Billion
in TARP to U.S. Taxpayers (Dec. 2, 2009) (online at
newsroom.bankofamerica.com/index.php?s=43&item=8583) (hereinafter
``Bank of America Repayment'').
---------------------------------------------------------------------------
FIGURE 1: CPP FUNDS OUTSTANDING BY MONTH (AS OF NOVEMBER 30, 2009) \83\
---------------------------------------------------------------------------
\83\ November 25 Transactions Report, supra note 71.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Unlike other lending categories, Treasury only began
publishing small business lending information as of April 2009.
U.S. Department of the Treasury, Treasury Department Monthly
Lending and Intermediation Snapshot Data for April 2009-
September 2009 (Nov. 16, 2009) (online at
www.financialstability.gov/impact/
monthlyLendingandIntermediationSnapshot.htm) (hereinafter
``Treasury Department Monthly Lending and Intermediation
Snapshot Data for April 2009-September 2009'').
ii. Exceptional Assistance Programs
Treasury has used additional TARP funds to bolster the
capital bases of financial institutions that were deemed
``critical to the functioning of the financial system.'' \84\
The three beneficiaries of this assistance have been AIG, Bank
of America, and Citigroup. Because these institutions are
deemed to have received ``exceptional assistance,'' they are
subject to more stringent guidelines on executive compensation
than other TARP recipients.\85\
---------------------------------------------------------------------------
\84\ See U.S. Department of the Treasury, Targeted Investment
Program (online at www.financialstability.gov/roadtostability/
targetedinvestmentprogram.html) (hereinafter ``Targeted Investment
Program'') (accessed Dec. 7, 2009) (the TIP ``focuses on the complex
relationships and reliance of institutions within the financial system.
Investments made through the TIP seek to avoid significant market
disruptions resulting from the deterioration of one financial
institution that can threaten other financial institutions and impair
broader financial markets and pose a threat to the overall economy'');
U.S. Department of the Treasury, Programs (online at
www.financialstability.gov/roadtostability/programs.htm) (hereinafter
``Treasury Programs'') (accessed Dec. 7, 2009) (the SSFI Program ``was
established to provide stability and prevent disruptions to financial
markets from the failure of institutions that are critical to the
functioning of the nation's financial system'').
\85\ See 31 C.F.R. Sec. Sec. 30.0-30.17; U.S. Department of the
Treasury, Interim Final Rule on TARP Standards for Compensation and
Corporate Governance (online at www.treas.gov/press/releases/reports/
ec%20ifr%20fr%20web%206.9.09tg164.pdf) (accessed Dec. 7, 2009).
---------------------------------------------------------------------------
Systemically Significant Financial Institutions Program.
The SSFI Program was ``established to provide stability and
prevent disruptions to financial markets from the failure of
institutions that are critical to the functioning of the
nation's financial system.'' \86\ AIG, which has received
nearly $70 billion in capital under the SSFI Program,\87\ is
the only recipient of funds under the program. AIG can continue
to draw on the SSFI Program through April 17, 2014. In exchange
for each drawdown, Treasury will receive additional preferred
AIG stock in the amount of the drawdown. The preferred stock
carries a 10 percent dividend.\88\ Treasury has also received
warrants to purchase common stock.\89\
---------------------------------------------------------------------------
\86\ Treasury Programs, supra note 84.
\87\ The first round came through a purchase of $40 billion in
preferred stock, on November 25, 2008. The initial purchase was of
cumulative preferred stock. In April 2009, this was exchanged for $41.6
billion of non-cumulative preferred shares. This represented no change
in Treasury's initial investment. See U.S. Department of the Treasury,
Transactions Report (Oct. 27, 2009) (online at
www.financialstability.gov/docs/transaction-reports/10-27-
09%20Transactions%20Report%20as%20of%2010-23-09.pdf). The second was
through the April 17, 2009 creation of an equity capital facility of
approximately $30 billion. See U.S. Department of the Treasury,
Transactions Report (Oct. 27, 2009) (online at
www.financialstability.gov/docs/transaction-reports/10-27-
09%20Transactions%20Report%20as%20of%2010-23-09.pdf).
\88\ See U.S. Department of the Treasury, Term Sheet Exchange of
Series D Fixed Rate Cumulative Perpetual Preferred Stock for Series E
Fixed Rate Non-Cumulative Perpetual Preferred Stock (Mar. 2, 2009)
(online at www.financialstability.gov/docs/agreements/
030209_AIG_Term_Sheet.pdf).
\89\ Treasury's funding of AIG is not the only government
assistance to the insurance giant. AIG has also received $96 billion in
assistance from the Federal Reserve through a revolving credit facility
and loans extended to special purpose vehicles to buy AIG assets.
---------------------------------------------------------------------------
Targeted Investment Program. Like the SSFI Program, the TIP
was intended to ``stabilize the financial system by making
investments in institutions that are critical to the
functioning of the financial system.'' \90\ Just two financial
institutions have received TIP funds: Bank of America and
Citigroup. Treasury announced that it was providing a capital
injection to Citigroup on November 23, 2008, and purchased $20
billion in preferred Citigroup stock on December 31, 2008. The
term sheet accompanying the announcement portrays the capital
injection as a modified version of the CPP.\91\ It was not
until January 2, 2009 that TIP was given a name and its
guidelines were announced.\92\ Then on January 16, 2009,
Treasury bought $20 billion in preferred stock from Bank of
America.\93\ The assistance provided under this program was in
addition to the $25 billion that Citigroup had already
received, and the $15 billion that Bank of America
(subsequently increased to $25 billion, with the inclusion of
Merrill Lynch's funds) has already received in CPP funds on
October 28, 2008.\94\
---------------------------------------------------------------------------
\90\ Targeted Investment Program, supra note 84.
\91\ See U.S. Department of the Treasury, Summary of Terms:
Preferred Securities (Nov. 23, 2008) (online at www.treas.gov/press/
releases/reports/cititermsheet_112308.pdf) (``Redemption: In stock or
cash, as mutually agreed between UST and Citi. Otherwise, redemption
terms of CPP preferred terms apply . . . Repurchases: Same terms as
preferred issued in CPP'').
\92\ U.S. Department of the Treasury, Treasury Releases Guidelines
for Targeted Investment Program (Jan. 2, 2009) (online at treasury.gov/
press/releases/hp1338.htm); U.S. Department of the Treasury, Joint
Statement by Treasury, Federal Reserve and the FDIC on Citigroup (Nov.
23, 2008) (online at www.treas.gov/press/releases/hp1287.htm). The
announcement on November 23, 2008 did not specify under which program
Citigroup's second injection fell. In fact, at that time, the CPP was
the only named program under the TARP.
\93\ See November 25 Transactions Report, supra note 71.
\94\ See November 25 Transactions Report, supra note 71.
---------------------------------------------------------------------------
Treasury required changes in senior management, and diluted
the interests of shareholders when the government received a
79.9 percent equity interest in AIG.\95\ By contrast, despite
providing Bank of America and Citigroup with exceptional
assistance, Treasury did not require them to make changes in
management. Furthermore, it did not dilute shareholder
interests in Bank of America. Treasury has not explained the
rationale behind the differences in treatment.
---------------------------------------------------------------------------
\95\ See U.S. Department of the Treasury, Monthly 105(a) Report
(Nov. 10, 2009) (online at www.financialstability.gov/docs/
105CongressionalReports/October%20105(a)_11.10.2009.pdf) (``the FRBNY
received convertible preferred shares representing approximately 79.8%
of the current voting power of the AIG common shares. These preferred
shares were deposited in a trust, created by the FRBNY. The U.S.
Treasury (i.e., the general fund) is the beneficiary of this trust'').
---------------------------------------------------------------------------
Asset Guarantee Program.\96\ The AGP is an initiative by
Treasury, along with the FDIC and the Federal Reserve, that
initially guaranteed approximately $301 billion of Citigroup's
assets.\97\ After Citigroup received $25 billion in CPP funds
in late October 2008, its financial status continued to
deteriorate. On November 23, 2008, Treasury, the FDIC and the
Federal Reserve agreed to share with Citigroup potential losses
on a pool of its assets that Citigroup identified as some of
its riskiest.\98\ Treasury announced the aid in conjunction
with its announcement of Citigroup's second capital infusion,
this one under TIP.\99\
---------------------------------------------------------------------------
\96\ For a full discussion of the AGP, see the Panel's November
report. Congressional Oversight Panel, November Oversight Report:
Guarantees and Contingent Payments in TARP and Related Programs, at 13-
27 (Nov. 6, 2009) (online at cop.senate.gov/documents/cop-110609-
report.pdf) (hereinafter ``November Oversight Report'').
\97\ Treasury had also entered into an agreement with Bank of
America to provide a similar guarantee, but it was never finalized. For
a full description of the Citigroup and Bank of America guarantees, see
the Panel's November report. November Oversight Report, supra note 96,
at 13-27. From the beginning, Treasury had stated that AGP assistance
would not be ``widely available.'' U.S. Department of the Treasury,
Report to Congress Pursuant to Section 102 of the Emergency Economic
Stabilization Act, at 1 (Dec. 31, 2008) (online at
www.financialstability.gov/docs/AGP/sec102ReportToCongress.pdf).
\98\ Board of Governors of the Federal Reserve System, Joint
Statement by Treasury, Federal Reserve, and the FDIC on Citigroup (Nov.
23, 2008) (online at www.federalreserve.gov/newsevents/press/bcreg/
20081123a.htm).
\99\ Overall, Treasury has provided $49 billion in capital
assistance to Citigroup. Treasury's initial CPP holdings of preferred
stock were subsequently converted to 7.7 billion shares of common stock
priced at $3.25 per share, for a total value of $25 billion at the time
of the conversion. Treasury has also converted the form of its TIP and
AGP holdings. On July 23, 2009, Treasury, along with both public and
private Citigroup debt holders, participated in a $58 billion exchange.
As of November 30, 2009, Treasury's common stock investment in
Citigroup had a market value of $31.6 billion and represented 34
percent of the value of Citigroup common stock outstanding.
---------------------------------------------------------------------------
iii. Public-Private Investment Program \100\
---------------------------------------------------------------------------
\100\ For a complete discussion of the PPIP, see the Panel's August
report. Congressional Oversight Panel, August Oversight Report: The
Continued Risk of Troubled Assets, at 48 (Aug. 11, 2009) (online at
cop.senate.gov/documents/cop-081109-report.pdf) (hereinafter ``August
Oversight Report'').
---------------------------------------------------------------------------
PPIP, which is aimed at removing troubled assets from the
balance sheets of financial institutions, was announced on
March 23, 2009.\101\ The program aims to aid the
recapitalization of financial institutions and ultimately to
support renewed lending by discovering prices in the illiquid
market for troubled mortgage-related assets.\102\ It has two
components: a program to be administered by the FDIC that would
fund the purchase of troubled whole loans, and a program
administered by Treasury that funds the purchase of troubled
securities. The first component has yet to exit its trial
phase,\103\ although Treasury recently stated that government
officials are continuing to review applications from firms that
would share the cost of funding whole-loan purchases.\104\
Under the second component, known as the Legacy Securities PPIP
(S-PPIP), Treasury has agreed to invest up to $30 billion in
both equity and debt to buy troubled securities.
---------------------------------------------------------------------------
\101\ The troubled assets, which Treasury refers to as legacy
securities, include residential and commercial mortgage-backed
securities issued before 2009. See U.S. Department of the Treasury,
Legacy Securities Investment Program (Legacy Securities PPIP)
Additional Frequently Asked Questions, at 13 (July 8, 2009) (online at
www.treas.gov/press/releases/reports/legacy_securities_faqs.pdf); U.S.
Department of the Treasury, Treasury Department Releases Details on
Public Private Partnership Investment Program (Mar. 23, 2009) (online
at www.ustreas.gov/press/releases/tg65.htm).
\102\ See U.S. Department of the Treasury, Troubled Assets Relief
Program Eighth Tranche Report to Congress, at 8-9 (Oct. 7, 2009)
(online at www.financialstability.gov/docs/
Eighth%20Tranche%20Report_2009%2010%2007.pdf) (hereinafter ``TARP
Eighth Tranche Report'').
\103\ The FDIC recently announced a pilot sale of troubled whole
loans, which it conducted as a test of the program's funding mechanism.
However, the pilot sale did not accomplish the program's goal of
removing toxic assets from bank balance sheets because the loans that
were sold came from a failed bank that the FDIC had already taken into
receivership. See Federal Deposit Insurance Corp., Legacy Loans
Program--Winning Bidder Announced in Pilot Sale (Sept. 16, 2009)
(online at www.fdic.gov/news/news/press/2009/pr09172.html).
\104\ See TARP Eighth Tranche Report, supra note 102, at 8.
---------------------------------------------------------------------------
As of November 30, Treasury had invested roughly $23.3
billion, which is slightly more than two-thirds of the funds
designated for the program.\105\ Treasury's current $30 billion
commitment to PPIP is scaled down considerably from its initial
plan of investing a total of $75-$100 billion in the program's
two components.\106\ Eight of the nine fund managers closed
their funds between September 30 and November 30, 2009.\107\
According to Treasury, these closed funds were able to begin
purchasing securities within a few weeks of the closing.\108\
---------------------------------------------------------------------------
\105\ See U.S. Department of the Treasury, Treasury Department
Announces Additional Initial Closing of Legacy Securities Public-
Private Investment Fund (Nov. 30, 2009) (online at
www.financialstability.gov/latest/tg_11302009.html) (hereinafter
``Treasury Announces Additional Initial Closing of Legacy Securities
Public-Private Investment Fund'').
\106\ See U.S. Department of the Treasury, Joint Statement by
Secretary of the Treasury Timothy F. Geithner, Chairman of the Board of
Governors of the Federal Reserve System Ben S. Bernanke, and Chairman
of the Federal Deposit Insurance Corporation Sheila Bair: Legacy Asset
Program (July 8, 2009) (online at www.financialstability.gov/latest/
tg_07082009.html).
\107\ Treasury Announces Additional Initial Closing of Legacy
Securities Public-Private Investment Fund, supra note 105; U.S.
Department of the Treasury, Treasury Department Announces Additional
Initial Closing of Legacy Securities Public-Private Investment Fund
(Nov. 5, 2009) (online at www.financialstability.gov/latest/
tg_11052009.html).
\108\ Treasury communications with Panel staff (Sept. 29, 2009).
---------------------------------------------------------------------------
iv. Total Government Funding for Financial Institutions
Figure 2 shows how the government has used TARP funds in
conjunction with funding from the Federal Reserve and FDIC to
develop a package of capital programs. With a combination of
direct outlays, loans, and guarantees, the government has
committed $617.8 billion to capital programs, well more than
the $292.1 billion committed from the TARP. The Federal Reserve
has committed $315.7 billion through guarantees and loans to
AIG and Citigroup. In addition, the FDIC has $10 billion of
exposure through its share of the Citigroup guarantee.\109\
---------------------------------------------------------------------------
\109\ The Panel has broadly classified the resources that the
federal government has devoted to stabilizing the economy through a
myriad of new programs and initiatives as outlays, loans, or
guarantees. Although the Panel calculates the total value of these
resources at over $3 trillion, this would translate into the ultimate
``cost'' of the stabilization effort only if: (1) assets do not
appreciate; (2) no dividends are received, no warrants are exercised,
and no TARP funds are repaid; (3) all loans default and are written
off; and (4) all guarantees are exercised and subsequently written off.
FIGURE 2: FEDERAL GOVERNMENT'S CAPITAL PROGRAMS (AS OF NOVEMBER 30,
2009)110
[In billions of dollars]
------------------------------------------------------------------------
Treasury Federal
Program (TARP) Reserve FDIC111 Total
------------------------------------------------------------------------
AIG:
Outlays 112............. $69.8 $0 $0 $69.8
Loans................... 0 95.3 0 95.3
Guarantees.............. 0 0 0 0
-------------------------------------------
AIG subtotal............ 69.8 95.3 0 165.1
PPIP (Securities):
Outlays................. 10 0 0 10
Loans................... 20 0 0 20
Guarantees.............. 0 0 0 0
-------------------------------------------
PPIP (securities) 30 0 0 30
subtotal...............
PPIP (Loans):
Outlays................. 0 0 0 0
Loans................... 0 0 0 0
Guarantees.............. 0 0 0 0
-------------------------------------------
PPIP (loans) subtotal... 0 0 0 0
Bank of America:
Outlays................. 45 0 0 45
Loans................... 0 0 0 0
Guarantees.............. ......... ......... ......... 0
-------------------------------------------
Bank of America subtotal 45 0 0 45
Citigroup:
Outlays................. 45 0 0 45
Loans................... 0 0 0 0
Guarantees.............. 5 220.4 10 235.4
-------------------------------------------
Citigroup subtotal...... 50 220.4 10 280.4
Capital Purchase Program
(Other than Citigroup, Bank
of America):
Outlays................. 97 0 0 97
Loans................... 0 0 0 0
Guarantees.............. 0 0 0 0
CPP (other than 97 0 0 97
Citigroup, Bank of
America) subtotal......
-------------------------------------------
Capital Programs Total $291.8 $315.7 $10 $617.58
------------------------------------------------------------------------
\110\ November 25 Transactions Report, supra note 71. The Panel's
methodology and source citations for these figures can be found in the
corresponding endnotes for Figure 27.
\111\ This table does not include the FDIC's Temporary Liquidity
Guarantee Program.
\112\ The term ``outlays'' is used in this table as well as in Figure 27
to describe the disbursement of funds under the TARP, which are
broadly classifiable as purchases of debt or equity securities (e.g.,
debentures, preferred stock, exercised warrants, etc.). The outlays
figures are based on: (1) Treasury's actual reported expenditures; and
(2) Treasury's anticipated funding levels as estimated by a variety of
sources, including Treasury pronouncements and GAO estimates.
Anticipated funding levels are set at Treasury's discretion, have
changed from initial announcements, and are subject to further change.
Outlays as used here represent investments and assets purchases and
commitments to make investments and asset purchases and are not the
same as budget outlays, which under section 123 of EESA are recorded
on a ``credit reform'' basis. Credit reform accounting is discussed in
further detail in the Panel's November report. November Oversight
Report, supra note 96, at 11.
Return on Investment. It is not yet possible to calculate
the amount of money that the capital programs as a whole will
earn or lose, and it will not be for some time. However,
certain sources of income and losses, such as the internal rate
of return for banks that have repurchased all of their CPP
funds, are already apparent. Financial institutions that
received CPP assistance have bought back approximately $70
billion in preferred stock. As shown in Figure 29, those funds
comprise most of the $86.9 billion in cash inflows that the
TARP has generated through November 30, 2009. This includes
$10.2 billion in dividends and interest payments. In addition,
Treasury has collected $3.2 billion in payments for warrant
repurchases.
In its July Report, the Panel analyzed the prices at which
Treasury was allowing the financial institutions to repurchase
their warrants. The Panel was concerned that Treasury was
undervaluing the warrants and/or not negotiating strongly
enough.\113\ After the July Report was released, several banks
repurchased their warrants for prices very close to the Panel's
valuation: notably, Goldman Sachs, Morgan Stanley, and American
Express. Figure 3 shows the Panel's estimates for the values of
warrants outstanding as of November 30, 2009.
---------------------------------------------------------------------------
\113\ July Oversight Report, supra note 66, at 8-17. For example,
Old National Bancorp of Evansville, Indiana, paid $1.2 million for
warrants that analysts had valued at between $1.5 and $6.9 million.
---------------------------------------------------------------------------
For banks that have fully repaid their TARP funds, the
Panel has calculated an internal rate of return (IRR), as shown
in Figure 4. Because the preferred stock under the CPP paid
fixed dividends of 5 percent per year, the variation in this
return comes from the price the bank paid Treasury to
repurchase its warrants. The taxpayers' return has ranged from
a low of 5.9 percent for Centerstate Banks of Florida, which
repurchased its warrants on October 28, 2009, to a high of 29.5
percent for American Express, which repurchased its warrants on
July 29, 2009. Recent repurchases appear to trend lower. This
may be because these are small- and medium-sized banks to which
Treasury applies a liquidity discount in its valuation, while
the Panel does not. This results in a lower price to estimate
ratio for banks whose stock is either thinly traded or not
traded at all. The overall return is 17.1 percent for the 25
banks that have repurchased both their preferred stock and
warrants. Had the warrants all been repaid at the Panel's
estimated market value, the taxpayers would have received
approximately $198 million more than the banks paid. It is
important to note, however, that this return reflects only the
healthiest banks, which were able to repay their TARP funds
already. As of November 30, 2009, 642 banks still held their
CPP funds. It is still unknown when they will repay and how
much they will pay for their warrants.
FIGURE 3: WARRANTS OUTSTANDING VALUATION AS OF NOVEMBER 30, 2009
[In millions of dollars]
----------------------------------------------------------------------------------------------------------------
Low High Best
Institution Investment date estimate estimate estimate
----------------------------------------------------------------------------------------------------------------
Capital Purchase Program (CPP):
JPMorgan Chase.......................................... 10/28/2008 $798.7 $2,035.8 $1,115.7
Wells Fargo............................................. 10/28/2008 300.9 1,734.9 857.0
Hartford Financial...................................... 6/26/2009 695.3 1,068.2 813.4
Bank of America......................................... 10/28/2008 86.9 1,135.3 381.2
PNC..................................................... 12/31/2008 91.4 530.8 249.0
Capital One \114\....................................... 11/14/2008 179.0 343.7 232.0
Discover Financial...................................... 3/13/2009 149.4 217.0 178.9
Fifth Third Bancorp..................................... 12/31/2008 57.9 313.7 171.4
Lincoln National........................................ 7/10/2009 130.9 225.0 163.7
Comerica................................................ 11/14/2008 31.5 144.5 93.8
Targeted Investment Program (TIP):
Bank of America......................................... 1/15/2009 487.4 1,465.2 811.9
Citigroup............................................... 12/31/2008 13.4 454.5 112.7
Asset Guarantee Program (AGP):
Citigroup............................................... 1/15/2009 4.8 160.6 40.0
Systemically Significant Failing Institutions (SSFI)
Program:
AIG..................................................... 11/25/2008 6.9 72.6 53.5
All Other Banks............................................. ................. 313.1 2,038.4 1,089.3
--------------------------------
Total................................................. ................. $3,347.5 $11,940.3 $6,363.4
----------------------------------------------------------------------------------------------------------------
\114\ Capital One TARP warrants were sold through a Dutch auction process. The secondary public offering of the
warrants was auctioned on December 3, 2009 for $146.5 million. Capital One Warrant Purchase, supra note 76.
FIGURE 4: WARRANT REPURCHASES AS OF NOVEMBER 30, 2009
--------------------------------------------------------------------------------------------------------------------------------------------------------
Price/
Institution Investment QEO \115\ Repurchase Repurchase Panel valuation estimate IRR (%)
date date amount (best est.) (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Old National Bancorp....................................... 12/12/08 No 5/8/09 $1,200,000 $2,150,000 56 9.3
Iberiabank Corporation..................................... 12/5/08 Yes 5/20/09 1,200,000 2,010,000 60 9.4
FirstMerit Corporation..................................... 1/9/09 No 5/27/09 5,025,000 4,260,000 118 20.3
Sun Bancorp, Inc........................................... 1/9/09 No 5/27/09 2,100,000 5,580,000 38 15.3
Independent Bank Corp...................................... 1/9/09 No 5/27/09 2,200,000 3,870,000 57 15.6
Alliance Financial Corporation............................. 12/19/08 No 6/17/09 900,000 1,580,000 57 13.8
First Niagara Financial Group.............................. 11/21/08 Yes 6/24/09 2,700,000 3,050,000 89 8.0
SCBT Financial Corporation................................. 1/16/09 No 6/24/09 1,400,000 2,290,000 61 11.7
Berkshire Hills Bancorp, Inc............................... 12/19/08 No 6/24/09 1,040,000 1,620,000 64 11.3
Somerset Hills Bancorp..................................... 1/16/09 No 6/24/09 275,000 580,000 47 16.6
HF Financial Corp.......................................... 11/21/08 No 6/30/09 650,000 1,240,000 52 10.1
State Street Corporation................................... 10/28/08 Yes 7/8/09 60,000,000 54,200,000 111 9.9
U.S. Bancorp............................................... 11/14/08 No 7/15/09 139,000,000 135,100,000 103 8.7
Old Line Bancshares, Inc................................... 12/5/08 No 7/15/09 225,000 500,000 45 10.4
The Goldman Sachs Group, Inc............................... 10/28/08 No 7/22/09 1,100,000,000 1,128,400,000 97 22.8
BB&T Corp.................................................. 11/14/08 No 7/22/09 67,000,000 68,200,000 98 8.7
American Express Company................................... 1/9/09 No 7/29/09 340,000,000 391,200,000 87 29.5
The Bank of New York Mellon Corp........................... 10/28/08 No 8/5/09 136,000,000 155,700,000 87 12.3
Morgan Stanley............................................. 10/28/08 No 8/12/09 950,000,000 1,039,800,000 91 20.2
Northern Trust Corporation................................. 11/14/08 No 8/26/09 87,000,000 89,800,000 97 14.5
Bancorp Rhode Island, Inc.................................. 12/19/08 No 9/30/09 1,400,000 1,400,000 100 12.6
Manhattan Bancorp.......................................... 12/5/08 No 10/14/09 63,364 140,000 45 9.8
CVB Financial Corp......................................... 12/5/08 Yes 10/28/09 1,307,000 2,800,000 47 6.4
Centerstate Banks of Florida Inc........................... 11/21/08 Yes 10/28/09 212,000 440,000 48 5.9
Bank of Ozarks............................................. 12/12/08 No 11/24/09 2,650,000 3,500,000 76 9.0
------------------------------------
Total................................................ ........... ......... ........... $2,903,547,364 $3,099,410,000 94 17.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
\115\ Some banks engaged in a qualified equity offering, or QEO. A QEO is defined in the Securities Purchase Agreement as a sale before 2010 of shares
that qualify as tier I capital that raises an amount of cash equal to the value of the preferred shares issued to Treasury. A QEO would therefore
lessen the value of the warrant.
The TARP recently incurred its first direct losses. The
failures of three institutions--CIT Group, and two smaller
banks--have resulted in a potential loss to taxpayers of up to
$2.63 billion.\116\ In addition, dozens of TARP recipients have
missed dividend payments to Treasury. As of October 31, 2009,
38 banks have missed dividend payments, and six additional
banks have deferred November dividends.\117\ Banks have a
variety of reasons for the missed payments. Some have reported
that they have the funds to pay the dividends, but that safety
and soundness laws restrict their ability to pay dividends to
any investor if the bank does not meet certain levels of
retained or cumulative earnings.\118\ A failure to pay
dividends, however, can foretell larger problems for a bank. On
November 5, Pacific Coast National Bancorp was the subject of
an enforcement order from the Federal Reserve preventing it
from paying dividends without prior approval from federal
regulators.\119\ A week later it failed.\120\
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\116\ On November 1, 2009, small business lender CIT filed for
bankruptcy, probably resulting in a complete loss of the $2.3 billion
in CPP funds that it had received in December 2008. CIT has announced
that all existing common and preferred shares will be cancelled in the
bankruptcy. See CIT Group, CIT Board of Directors Approves Proceeding
with Prepackaged Plan of Reorganization with Overwhelming Support of
Debtholders (Nov. 1, 2009) (online at phx.corporate-ir.net/
External.File?item=UGFyZW50SUQ9MTkxNjh8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1).
United Commercial Bank failed on November 7, 2009; it had received
$298.7 million in CPP funds on November 14, 2008. Finally, on November
13, 2009, Pacific Coast National Bancorp, which received $4.1 million
in TARP funds on January 16, 2009, failed.
\117\ See Appendix I for a list of banks that have missed dividend
payments.
\118\ See Christine Mitchell, Regulatory Hurdles Hinder Ability to
Make TARP Dividend Payments, SNL Financial (Nov. 5, 2009) (online at
www.snl.com/interactivex/article.aspx?Id=10294060&KPLT=2).
\119\ See Federal Reserve Bank of San Francisco, Written Agreement
by and between Pacific Coast National Bancorp, San Clemente, California
at 2 (Nov. 5, 2009) (online at www.federalreserve.gov/newsevents/press/
enforcement/enf20091110a1.pdf).
\120\ See Federal Deposit Insurance Corporation, Failed Bank
Information for Pacific Coast National Bank, San Clemente, CA (Nov. 13,
2009) (online at www.fdic.gov/bank/individual/failed/
pacificcoastnatl.html).
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In addition to costing taxpayers, the recent bank failures
call into question Treasury's assertion that CPP funds were
only available to ``healthy'' or ``viable'' banks.\121\
Furthermore, The Wall Street Journal recently performed an
analysis of regulatory enforcement actions against TARP-
recipient banks; such actions are a sign that a bank's health
is deteriorating. The Journal found that, in addition to the
three banks that have failed, 24 other TARP-recipient banks
have received regulatory sanctions in 2009. At least eight
banks received TARP funds when regulators had already voiced
concerns about the banks' health.\122\ Citigroup's need for TIP
funds only five weeks after Treasury provided it with CPP funds
further calls into question the assertion that CPP funds were
only available to ``healthy'' banks.\123\
---------------------------------------------------------------------------
\121\ See SIGTARP, Emergency Capital Injections Provided to Support
the Viability of Bank of America, Other Major Banks, and the U.S.
Financial System (Oct. 5, 2009) (online at sigtarp.gov/reports/audit/
2009/Emergency_Capital _Injections _Provided _to_Support _the
_Viability _of _Bank _of _America . . . _100509.pdf) (determining that
several of the initial CPP banks were not ``healthy'' at the time the
investements were made); U.S. Department of the Treasury, Factsheet on
Capital Purchase Program (Mar. 17, 2009) (online at
www.financialstability.gov/roadtostability/CPPfactsheet.htm)
(hereinafter ``Factsheet on CPP'') (``Participation is reserved for
healthy, viable institutions''). CIT Group is an example of an
institution of questionable health that received CPP funds. It is a
leading lender to small businesses, and also has a depository bank. It
suffered accelerating losses since 2Q 2007, and had difficulty
accessing credit in short-term debt markets, on which its business
model was heavily reliant. Treasury approved CIT's application for CPP
funds because it was the leading source of financing for small
business, and it deemed it systemically significant--at least in the
early days of the crisis. It received $2.3 billion of CPP funds in
December 2008. Immediately following its receipt of TARP money, CIT
sought to enter the TLGP. CIT's TLGP application with the FDIC was
pending for several months and was finally rejected in July 2009. Also
in July, FRBNY completed a stress-test of CIT Group and concluded that
it would need to raise up to $4 billion of funding. Treasury declined
to make an additional CPP investment in CIT Group because it did not
believe that CIT had presented a viable business plan. CIT filed for
Chapter 11 bankruptcy protection on November 1, 2009. CIT's inability
to access credit outside of the TLGP calls into question whether other
CPP institutions would be healthy without the government guarantee
programs.
\122\ David Enrich, TARP Can't Save Some Banks, Wall Street Journal
(Nov. 17, 2009) (online at online.wsj.com/article/SB100014240527487
04538404574539954068634242.html).
\123\ See SIGTARP, supra note 121. In addition, Merrill Lynch was
selected to receive CPP funds in October 2008, after Bank of America
had agreed to acquire it in order to prevent Merrill's dissolution. See
November 25 Transactions Report, supra note 71 (``This transaction was
included in previous Transaction Reports with Merrill Lynch & Co., Inc.
listed as the qualifying institution and a 10/28/2008 transaction date,
footnoted to indicate that settlement was deferred pending merger. The
purchase of Merrill Lynch by Bank of America was completed on 1/1/2009,
and this transaction under the CPP was funded on 1/9/2009'').
---------------------------------------------------------------------------
b. Health of Banking Sector
i. Bank Capital Levels
Capital levels are one measure of the banking sector's
health. The stress tests measured the capital levels of the 19
largest bank holding companies, requiring a capital buffer to
protect them through a more severe downturn.\124\ Eighteen
banks either already held capital that the supervisors
considered adequate, or were subsequently able to raise
additional capital in the private markets. Tier 1 capital--also
called core capital--is the highest quality capital that a bank
can hold.\125\ A bank's tier 1 capital ratio is the ratio of
its tier 1 capital to its risk-weighted assets.\126\ Figure 5
shows the stress tested institutions' tier 1 capital levels in
3Q 2008 and in 3Q 2009. Most of these institutions have higher
tier 1 capital levels than they did a year ago. A number of
these have already repaid their CPP funds, making their higher
capital levels due in part to capital raised in the private
markets.\127\
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\124\ The Federal Reserve developed the metrics for the more
adverse scenario in February 2009. The most recent figures for those
three metrics are a 2.8 percent increase in annual GDP as of third
quarter 2009, a 9.2 annualized unemployment rate as of November 2009,
and a 8.5 annualized percent decrease in housing prices as of the end
of September 2009. Compare this to the more adverse scenario for
calendar year 2009 having GDP falling 3.5 percent, housing falling 22
percent, and unemployment at 8.9 percent.
\125\ Tier 1 capital is the sum of the following capital elements:
(1) common stockholders' equity; (2) perpetual preferred stock; (3)
senior perpetual preferred stock issued by Treasury under the TARP; (4)
certain minority interests in other banks; (5) qualifying trust
preferred securities; and (6) a limited amount of other securities.
\126\ Calculating risk-weighted assets is a complex process, but
the concept is as simple as it sounds. Assets are weighted based on
their level of risk.
\127\ These higher capital levels are also due in part to earnings,
some of which are a result of various government guarantee programs and
low-cost funds available to banks.
---------------------------------------------------------------------------
Public confidence in the adequacy of bank capital levels
would be enhanced through consistent financial reporting
practices. The absence of consistent financial reporting
practices and agreed upon interpretations of relevant
accounting rules make it difficult to compare capital levels of
different financial institutions.\128\
---------------------------------------------------------------------------
\128\ The Panel discussed this issue in depth in its August Report.
August Oversight Report, supra note 100.
---------------------------------------------------------------------------
FIGURE 5: TIER 1 CAPITAL RATIOS OF STRESS-TESTED INSTITUTIONS, THIRD
QUARTER 2008 V. 2009 \129\
---------------------------------------------------------------------------
\129\ This figure excludes four stress-tested institutions: Goldman
Sachs, Morgan Stanley, GMAC, and American Express. These institutions
were excluded because data on their tier 1 capital levels for 3Q 2009
was not available. This is because they became bank holding companies
at the end of or after the 3Q 2008. SNL Financial, Bank & Thrift Stress
Test Tear Sheet (online at www.snl.com/interactivex/
TemplateBrowser.aspx?V =V&Format=XLS&Doc=
9676136&File=7970111&SaveFileAs= Bank & Thrift Stress Test Tear Sheet)
(accessed Dec. 7, 2009).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
ii. Bank Capital Raising
Since the inception of the TARP, 211 banks, thrifts, and
specialty lenders have raised a total of $264.3 billion in
capital from the private markets.\130\ One hundred and thirty
of these institutions were TARP recipients. Banks' ability to
raise capital in the private markets shows that investors are
regaining confidence in the banking sector. However, investor
confidence may reflect the assumption of an implicit guarantee
hanging over the financial system. Investors saw that the
government stepped in to support institutions such as Bank of
America without wiping out shareholder stakes. This may signal
to the markets that shareholders in large institutions are
protected from total loss of their investment.
---------------------------------------------------------------------------
\130\ This is through November 30, 2009. See SNL Financial, Capital
Raises Among Banks and Thrifts (online at www.snl.com/InteractiveX/
doc.aspx?ID=10162420) (accessed Dec. 4, 2009). This includes common
equity, perpetual preferred stock, and trust preferred stock. These
three are all elements of tier 1 capital. Of the four largest banks,
Citigroup is the only one that has not raised capital in the private
markets. JPMorgan raised $5 billion in June, and Wells Fargo raised $11
billion in November 2008. SNL Financial. Bank of America raised $13.4
billion in May 2009, and announced that it will raise additional
capital before repaying its TARP funds. See Bank of America Repayment,
supra note 82.
---------------------------------------------------------------------------
iii. Borrowing by Financial Institutions
Borrowing by banks is crucial to maintaining sufficient
liquidity in the financial system. But at the height of the
financial crisis, bank debt issuance ground nearly to a halt.
In September 2008, banks issued only $661 million in debt, as
compared to $109 billion a year before. In October 2008, the
FDIC announced that it would guarantee bank debt under the
TLGP, a program designed to promote borrowing by financial
institutions.\131\ This voluntary FDIC program, which is not a
part of the TARP, provided a full guarantee to senior unsecured
debt issued by participating banks.
---------------------------------------------------------------------------
\131\ The TLGP has two programs: the debt guarantee program, and a
second program that guarantees deposit accounts above the $250,000 FDIC
insurance limit. The Panel will only discuss the debt guarantee program
here. A third government guarantee program, Treasury's Temporary
Guarantee Program for Money Market Funds, guaranteed money market funds
and not banks, so the Panel does not include it as a capital assistance
program. The Panel discusses the TGPMMF, and has a full discussion of
the TLGP, in its November Report. See November Oversight Report, supra
note 96.
---------------------------------------------------------------------------
In the last two months of 2008, participating institutions
issued $108 billion in senior unsecured debt. At the height of
the program, 101 institutions had $346 billion in debt
outstanding.\132\ There is currently $315 billion in debt
outstanding under the program, covering 88 institutions.\133\
Though the program ended on October 31, 2009, borrowing by
financial institutions has continued. As of November 10, 2009,
banks that had participated in the TLGP issued a total of $5.5
billion of non-guaranteed debt.\134\ Banks are continuing to
issue debt without the support of the FDIC guarantee, though at
lower amounts than they were issuing under the TLGP.\135\
Figure 6 shows debt issued under the TLGP compared to non-TLGP
senior debt issued by banks prior to and during the term of the
TLGP. Bank borrowing increased during the first two quarters of
the TLGP. This could be due to the availability of lower cost
guaranteed debt,\136\ or could be attributed to restored
confidence in the financial system.
---------------------------------------------------------------------------
\132\ See Federal Deposit Insurance Corporation, Monthly Reports on
Debt Issuance Under the Temporary Liquidity Guarantee Program (May 31,
2009) (online at www.fdic.gov/regulations /resources/TLGP/
total_issuance5-09.html).
\133\ See Federal Deposit Insurance Corporation, Monthly Reports on
Debt Issuance Under the Temporary Liquidity Guarantee Program (Oct. 31,
2009) (online at www.fdic.gov/regulations /resources/TLGP/
total_issuance10-09.html).
\134\ Data provided under subscription by SNL Financial.
\135\ The $5.5 billion issued in November is lower than the $10.23
billion, a mixture of TLGP and non-TLGP debt, issued in October 2009.
\136\ As shown in the Panel's November report, banks saved between
$13.4 and $29 billion in borrowing costs by participating in the TLGP.
See November Oversight Report, supra note 96, at 69.
---------------------------------------------------------------------------
FIGURE 6: NON-TLGP SENIOR DEBT SINCE 4Q 2006, AND TLGP DEBT SINCE 4Q
2008 \137\
---------------------------------------------------------------------------
\137\ SNL Financial, Financial Institutions Offering Activity
(online at www1.snl.com/interactivex/Template
Browser.aspx?V=V&Doc=10022881&File=
8302325&Format=XLS&SaveFileAs=Financial Institutions Offering Activity)
(accessed Dec. 7, 2009). SNL template modified to provide specific data
necessary to conduct analysis.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
iv. Market Perception of Banks' Health
The price of a credit default swap (CDS) contract on a
specific bank trading in the market offers an indication of the
market's view of that bank's health. Credit default swap
contracts function in a similar manner to insurance
contracts.\138\ If a bank's bondholders are worried about the
bank defaulting on its debt, they can buy default protection
through a credit default swap to hedge their bets. Therefore,
the less healthy a bank is perceived to be, the more expensive
a CDS contract against that bank will be. As shown in Figure 7,
the 5-year CDS spreads for institutions AIG, JPMorgan Chase,
Wells Fargo, Goldman Sachs, Citigroup, Morgan Stanley, Bank of
America, Capital One, and American Express skyrocketed in fall
of 2008 and early 2009.\139\ CDS spreads remained high in early
2009 because of continued uncertainty in the markets.\140\
---------------------------------------------------------------------------
\138\ A credit default swap contract has a similar payoff structure
to a put option.
\139\ Five-year CDS spread refers to the difference between the
price of a CDS contract maturing in five years and the price of
Treasury bonds with a similar maturity.
\140\ Even with the explicit and implicit guarantees of government
support, U.S. banks remained exposed to overseas financial
institutions.
---------------------------------------------------------------------------
On average, five-year CDS spreads on these institutions
went up by 636 basis points at the height of the crisis, and
have now fallen 532 basis points, to 104 basis points above the
trough. Excluding AIG from the list, on average the five-year
CDS spreads went up by 410 basis points at the height of the
crisis, and have now fallen 371 basis points, to 39 basis
points above the trough.\141\ This decline in CDS spreads shows
a clear increase in CDS market participants' confidence in
major bank creditworthiness. It is unclear the extent to which
this decline in CDS spreads is due to confidence in major
banks' stand-alone creditworthiness and to what degree this
decline reflects CDS market confidence in implicit government
guarantees of large banks. While it is no doubt true that the
perception of an implicit guarantee has grown in the wake of
the government response to the crisis, market participants lack
a clear understanding of the scope of any such guarantee and
the circumstances under which it would be exercised.
---------------------------------------------------------------------------
\141\ Data provided under subscription by BLOOMBERG Data Services.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
c. Macro Indicators of the Health of the Banking Sector
While it is difficult to isolate the effects of the TARP on
the banking sector, macroeconomic indicators provide some
insight into the effectiveness of the program in promoting the
liquidity and stability of the sector. These gauges--lending
levels, bank failures, and bank consolidations--are relevant to
assessing the impact of the TARP. But because of the influence
of other external factors, they do not imply causation.
i. Lending by Financial Institutions \143\
---------------------------------------------------------------------------
\143\ The report discusses small business lending in section C2b
infra at 57.
---------------------------------------------------------------------------
Bank lending activities are an indicator of financial
sector health, though it is important not to oversimplify the
relationship between the two. Treasury has stated that it
limited capital injections from the CPP to healthy banks in
order to ensure that the funds were used for lending, and not
merely to bolster recipient banks' balance sheets.\144\ Even
healthy banks, however, have a need to recapitalize after the
losses of the past year. A bank looking to build its capital
levels will allocate more funds to capital and less to lending.
---------------------------------------------------------------------------
\144\ See Factsheet on CPP, supra note 121 (``Participation [in the
CPP] is reserved for healthy, viable institutions that are recommended
by their applicable federal banking regulator. Treasury's intent is to
provide immediate capital to stabilize the financial and banking
system, and to support the economy. . . . A necessary precursor to
lending and economic recovery is a stable, healthy financial system.
Healthy banks, not weak banks, lend to their communities and the CPP is
a program for healthy banks'').
---------------------------------------------------------------------------
Figure 8 shows loan originations of the top 20 CPP
recipients through the life of the TARP. It includes all
lending: consumer, real estate, and commercial.\145\ The chart
shows the degree to which lending tightened for the period of
October 2008 through September 2009. Since the enactment of
EESA, loan originations by these 20 institutions have decreased
by 13.7 percent. Total average loan balances decreased by 1
percent.\146\
---------------------------------------------------------------------------
\145\ Specifically, it includes first mortgage, home equity lines
of credit (HELOC), credit card, other consumer, commercial and
industrial renewal, commercial and industrial new commitments, CRE
renewal, CRE new commitments, and small business lending.
\146\ See U.S. Department of the Treasury, Treasury Department
Monthly Lending and Intermediation Snapshot Data for April 2009-
September 2009 (Nov. 16, 2009) (online at www.financialstability.gov/
docs/surveys/Snapshot_Data_September_2009.xls). Data manipulated in
order to exclude PNC and Wells Fargo. For further explanation of Panel
methodology see footnote 147.
---------------------------------------------------------------------------
FIGURE 8: TOTAL LOAN ORIGINATIONS OF SELECTED CPP RECIPIENTS SINCE
INCEPTION OF EESA \147\
---------------------------------------------------------------------------
\147\ The Panel uses Treasury's ``Monthly Lending and
Intermediation Snapshot'' of the top 22 CPP participants to track
specific categories of lending levels of the financial institutions
that benefitted the most from government assistance under the TARP. Two
of these institutions, PNC Financial and Wells Fargo, purchased large
banks at the end of 2008. PNC Financial purchased National City on
October 24, 2008 and Wells Fargo completed its merger with Wachovia
Corporation on January 1, 2009. The assets of National City and
Wachovia are included as part of PNC and Wells Fargo, respectively, in
Treasury's January lending report but are not differentiated from the
existing assets or the acquiring banks. As such, there were dramatic
increases in the total average loan balances of PNC and Wells Fargo in
January 2009. For example, PNC's outstanding total average loan balance
increased from $75.3 billion in December 2008 to $177.7 billion in
January 2009. The same effect can be seen in Wells Fargo's total
average loan balance of $407.2 billion in December 2008 which increased
to $813.8 billion in January 2009. The Panel excludes PNC and Wells
Fargo in order to have a more consistent basis of comparison across all
institutions and lending categories.
Unlike other lending categories, Treasury only began publishing
small business lending information as of April 2009. U.S. Department of
the Treasury, Treasury Department Monthly Lending and Intermediation
Snapshot Data for April 2009-September 2009 (Nov. 16, 2009) (online at
www.financialstability.gov/impact/
monthlyLendingandIntermediationSnapshot.htm) (hereinafter ``Treasury
Department Monthly Lending and Intermediation Snapshot Data for April
2009-September 2009'').
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Banks remain cautious with respect to lending, even as they
become better capitalized.\148\ In the Federal Reserve's
October 2009 survey of senior loan officers, 25 percent of
respondents reported tightening standards for prime residential
real estate loans in the last three months, while 15 percent
reported tightening standards for credit card loans in the last
three months, and 15 percent reported tightening lending to all
size businesses in the past three months.\149\
---------------------------------------------------------------------------
\148\ Board of Governors of the Federal Reserve System, October
2009 Senior Loan Officer Opinion Survey on Bank Lending Practices at 3
(online at www.federalreserve.gov/boarddocs /snloansurvey/200911/
fullreport.pdf) (hereinafter ``Loan Officer Opinion Survey October
2009'') (accessed Dec. 7, 2009) (observing that ``domestic banks
indicated that they continued to tighten standards and terms over the
past three months on all major types of loans to businesses and
households'').
\149\ Loan Officer Opinion Survey October 2009, supra note 148
(accessed Dec. 7, 2009).
---------------------------------------------------------------------------
Banks continued to tighten lending, but less banks reported
tightening than in late 2008.\150\ Banks might be holding more
capital in order to offset potential future losses on loans.
The increases in delinquencies and charge-offs shown in Figures
9 and 10 support banks' potential desire to hold cash to offset
future losses on loans.
---------------------------------------------------------------------------
\150\ Loan Officer Opinion Survey October 2009, supra note 148, at
3 (accessed Dec. 7, 2009). In October 2008, 80 percent of banks
reported tightening of lending to all size businesses, 70 percent
reported tightening on prime residential real estate lending, and 60
percent reported tightening lending for credit cards. Board of
Governors of the Federal Reserve System, October 2008 Senior Loan
Officer Opinion Survey on Bank Lending Practices (online at
www.federalreserve.gov/boarddocs/Snloan Survey/200811/fullreport.pdf)
(accessed Dec. 7, 2009).
---------------------------------------------------------------------------
While it might be desirable for TARP recipients to increase
lending to help the economy, banks may be reluctant to lend due
to legitimate concern about increased default risks.\151\ As
discussed in Section 1.C.2.b, infra, Small Business Loans, for
instance, carry added risk in today's economic climate.
Chairman Bernanke recently noted that difficulties in obtaining
credit may impede the creation and expansion of small- and
medium-sized businesses.\152\
---------------------------------------------------------------------------
\151\ See Board of Governors of the Federal Reserve System, Remarks
by Chairman Ben S. Bernanke at the Economic Club of New York (Nov. 16,
2009) (online at www.federalreserve.gov/newsevents /speech/
bernanke20091116a.htm) (hereinafter ``Remarks by Chairman Ben S.
Bernanke''). Of course it is not clear how to define desired levels of
lending. Few think that the United States should return to 2007 levels
of consumer borrowing but there is no broad consensus as to what level
of lending would support economic expansion at this time.
\152\ Remarks by Chairman Ben S. Bernanke, supra note 151. see also
Federal Reserve Board of Governors, Minutes of the Federal Open Market
Committee (Nov. 3-4, 2009) (online at www.federalreserve.gov/monetary
policy/fomcminutes20091104.htm) (``Limited credit availability, along
with weak aggregate demand, was viewed as likely to restrain hiring at
small businesses, which are normally a source of employment growth in
recoveries'').
---------------------------------------------------------------------------
Total delinquencies have risen dramatically since the
second half of 2007, as shown in Figure 9. While those secured
by real estate have the highest levels, delinquencies on loans
to consumers have also risen significantly.
FIGURE 9: TOTAL DELINQUENCIES AT ALL DOMESTIC COMMERCIAL BANKS, BY TYPE
\153\
---------------------------------------------------------------------------
\153\ Board of Governors of the Federal Reserve, Charge-off and
Delinquency Rates--Instrument: Delinquencies/All Banks (online at
www.federalreserve.gov/datadownload /Choose.aspx?rel=CHGDEL) (accessed
Dec. 7, 2009).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Bank charge-offs have seen a similar rise in 2008 and 2009.
In general, a bank charges off a loan when it believes that it
will not be able to recover payment on it. The actual and
potential for future losses on existing loans goes some way
toward explaining why banks, despite recapitalization, are
reluctant to lend.
FIGURE 10: NET-CHARGE-OFFS AT ALL DOMESTIC COMMERCIAL BANKS, BY TYPE
\154\
---------------------------------------------------------------------------
\154\ Id.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
A number of factors could cause banks to pull back on
lending. A bank might decide to hold increased capital in the
wake of the severe impairment of bank funding markets or
uncertainty regarding future changes in regulatory capital
standards. Though they are regaining strength, the continued
impairment of securitization markets reduces funding for bank
loans. And banks might be concerned about upcoming changes to
accounting rules that will require banks to move a large volume
of securitized assets onto their balance sheets.\155\ Some
commentators have explained that current credit tightening has
followed historical patterns from recessions, when credit risk
understandably increases.\156\ There is also considerable
concern that some of this decrease in credit may arise--as in
past banking crises--from the increased scrutiny given by bank
examiners to loans, including credit determinations and
documentation, and the reaction of bank management to the
prospect of increased scrutiny.\157\
---------------------------------------------------------------------------
\155\ Remarks by Chairman Ben S. Bernanke, supra note 151.
\156\ See Baker COP Testimony, supra note 28, at 4-5 (contending
that ``[t]here is no reason to believe that the tightening of credit
during this downturn is any greater than what should be expected given
the severity of the recession'' and ``to insist that [banks] make loans
[to small businesses] on which they expect to lose money'' would ``be
questionable economic policy''). But see Remarks by Chairman Ben S.
Bernanke, supra note 151 (``Nevertheless, it appears that, since the
outbreak of the financial crisis, banks have tightened lending
standards by more than would have been predicted by the decline in
economic activity alone'').
\157\ See Congressional Oversight Panel, Testimony of Charles
Calomiris, Taking Stock: Independent Views on TARP's Effectiveness
(Nov. 19, 2009) (online at cop.senate.gov/hearings/library/hearing-
111909-economists.cfm).
---------------------------------------------------------------------------
Banks' willingness to lend is only one factor in the
lending equation. A decline in lending levels may also reflect
reduced demand from borrowers rather than tightened conditions
from creditors. There is considerable evidence that demand for
credit has fallen over the past year.\158\ As Chairman Bernanke
has explained:
---------------------------------------------------------------------------
\158\ Loan Officer Opinion Survey October 2009, supra note 148, at
3.
The demand for credit also has fallen significantly:
For example, households are spending less than they did
last year on big-ticket durable goods typically
purchased with credit, and businesses are reducing
investment outlays and thus have less need to borrow.
Because of weakened balance sheets, fewer potential
borrowers are creditworthy, even if they are willing to
take on more debt. Also, write-downs of bad debt show
up on bank balance sheets as reductions in credit
outstanding.\159\
---------------------------------------------------------------------------
\159\ Remarks by Chairman Ben S. Bernanke, supra note 151.
---------------------------------------------------------------------------
ii. Bank Failures
Banks of all sizes were affected by the shock to the
financial sector. While many of the largest banks received
unprecedented support, smaller banks have been allowed to fail
and to be seized by regulators. There were 149 bank failures
between January 1, 2008 and November 30, 2009; \160\ 124 of
these failures occurred in 2009, with assets totaling $141.6
billion.\161\ This is the most bank failures since 1992, when
181 banks failed. Two of these 124 banks were TARP
recipients.\162\ Many of these failed banks were small- and
medium-sized banks with higher proportions of commercial real
estate loans.\163\ The FDIC's Deposit Insurance Fund is feeling
the stress of these failures--it now carries a balance of
negative $8.2 billion.\164\ This is only the second time in the
FDIC's history that the Fund balance has been below zero.
---------------------------------------------------------------------------
\160\ Data provided under subscription by SNL Financial.
\161\ See Federal Deposit Insurance Corporation, Failures and
Assistance Transactions (online at www2.fdic.gov/hsob/
SelectRpt.asp?EntryTyp=30) (hereinafter ``Failures and Assistance
Transactions'') (accessed Dec. 7, 2009).
\162\ CIT Group is not an FDIC insured institution, so it is not
included on failed bank lists.
\163\ See Federal Deposit Insurance Corporation, Failed Bank List
(online at www.fdic.gov/bank/individual/failed/banklist.html) (accessed
Dec. 7, 2009); see also Office of the Comptroller of the Currency,
Comptroller Dugan Expresses Concern About Commercial Real Estate
Concentrations (Jan. 31, 2008) (online at www.occ.gov/ftp/release/2008-
9.htm) (Describing that according to data from the Office of the
Comptroller of the Currency, between 2002 and 2008, the ratio of
commercial real estate loans to capital at community banks nearly
doubled to a record 285 percent. By early 2008, nearly one-third of all
community banks had commercial real estate concentrations that exceeded
300 percent of their capital.); Maurice Tamman and David Enrich, Local
Banks Face Big Losses, Wall Street Journal (May 19, 2009)
(online.wsj.com/article/SB124269114847832587.html) (analyzing the
relationship between commercial real estate loans and small/medium-size
banks, and concluding that many such banks could fail because of their
commercial real estate loan portfolios). For a more complete discussion
of this topic, please see the Panel's August Oversight report. See
August Oversight Report, supra note 100, at 4-5, 12, 18.
\164\ This negative balance includes a $38.9 billion contingent
loss reserve that the FDIC has already set aside to cover losses in the
next year. See Federal Deposit Insurance Corporation, FDIC-Insured
Institutions Earned $2.8 Billion in the Third Quarter of 2009 (Nov. 24,
2009) (online at www.fdic.gov/news/news/press/2009/pr09212.html.) As
the FDIC explains ``[c]ombining the fund balance with this contingent
loss reserve shows total DIF reserves with a positive balance of $30.7
billion.'' See id.
---------------------------------------------------------------------------
There are currently 552 banks on the FDIC's watch
list.\165\ This implies that while the TARP may have stabilized
the elements of the banking sector that received TARP funds,
there are still areas of weakness in the sector stemming from
the ongoing problems of the general economy. FDIC Chairman
Sheila Bair has predicted bank failures will peak in 2010 and
then decline.\166\
---------------------------------------------------------------------------
\165\ Id.
\166\ Michael S. Derby, FDIC's Bair: Bank Failures Will Peak In
2010, Wall Street Journal (Nov. 10, 2009) (online at online.wsj.com/
article/BT-CO-20091110-715147.html).
---------------------------------------------------------------------------
Figure 11 shows numbers of failed banks, and total assets
of failed banks since 1970. It shows that, although the number
of failed banks was significantly higher in the late 1980s than
it is now, the aggregate assets of failed banks during the
current crisis far outweigh those from the 1980s. At the high
point in 1988 and 1989, 763 banks failed, with total assets of
$309 billion.\167\ Compare this to 149 banks failing in 2008
and 2009, with total assets of $473 billion.\168\
---------------------------------------------------------------------------
\167\ This is in 2005 inflation-adjusted numbers. Failures and
Assistance Transactions, supra note 161 (accessed on Dec. 7, 2009). The
number of bank failures from 1988 and 1989 includes the casualties of
the savings and loan crisis. During these years regulatory changes
forced closures of some institutions.
\168\ This is in 2005 inflation-adjusted numbers. Bank failures for
2009 are as of November 30, 2009. Failures and Assistance Transactions,
supra note 161 (accessed on Dec. 7, 2009). This figure includes the
failures of Washington Mutual and IndyMac, with assets of $307 billion
and $32 billion, respectively.
---------------------------------------------------------------------------
FIGURE 11: BANK FAILURES THROUGH NOVEMBER 30, 2009 (IN 2005 DOLLARS)
\169\
---------------------------------------------------------------------------
\169\ Failures and Assistance Transactions, supra note 161. Data
total assets are adjusted for inflation into 2005 dollars using the GDP
price deflator. U.S. Department of Commerce: Bureau of Economic
Analysis, Gross Domestic Product: Implicit Price Deflator (online at
research.stlouisfed.org/fred2/data/GDPDEF.txt) (accessed Dec. 7, 2009).
This chart does not include the six banks that failed on December 4,
2009. One of these, AmTrust Bank, had total assets of approximately
$12.0 billion. Federal Deposit Insurance Company, Failed Bank List
(online at www.fdic.gov/bank/individual/failed/banklist.html) (accessed
Dec. 7, 2009).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
iii. Bank Consolidation
While an increasing number of small banks have failed over
the past year, the largest banks have grown larger. Figure 12
shows the increasing market share held by the four largest U.S.
banks in the years 1998 through 2009.
FIGURE 12: MARKET SHARE OF THE FOUR U.S. BANKS WITH THE MOST DEPOSITS
IN MARKET SINCE 1998 \170\
---------------------------------------------------------------------------
\170\ SNL Financial, Deposit Market Share, 1998-2009 (online at
www.snl.com/interactivex/InDeposit MarketshareDetail.aspx?ID=US&Number=
10&Refreshed=1&Year=2009 &Market=0&Ownership=0) (accessed Dec. 7,
2009).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Bank consolidation has worrisome implications for moral
hazard, as long as there continues to be a perception in the
market of an implicit guarantee. As a small number of banks
acquire a larger share of the market and competition decreases,
the systemic risk they pose rises.\171\
---------------------------------------------------------------------------
\171\ This does not imply that bank consolidation is an intended
policy, but it can be a side effect of many bank failures. The FDIC is
under a statutory mandate to achieve the ``least cost resolution'' of a
failing or failed bank, and in the case of large failed banks such as
Washington Mutual and Wachovia, the least cost solution requires them
to be acquired by other large banks. The statute does provide an
exception from the least cost resolution mandate in situations in which
its application would cause ``serious adverse effects on economic
conditions or financial stability'' and an alternative action ``would
avoid or mitigate such adverse effects.'' 12 U.S.C. Sec.
1A1823(c)(4)(G)(i).
---------------------------------------------------------------------------
d. Summary
As TARP capital assistance efforts wind down, the current
condition of the banking sector is mixed. Treasury and
regulators have stated that the stress tests show that large
banks, most of them current or former TARP recipients, are in
general adequately capitalized. That assertion is challenged by
leading economists and experts on financial crises.\172\ Many
small and medium banks, however, are in a more precarious
situation.
---------------------------------------------------------------------------
\172\ See Section D of this report, infra.
---------------------------------------------------------------------------
2. Credit for Consumers and Small Business
Treasury has emphasized the use of the TARP ``to restore
the flow of credit to small businesses and consumers.'' \173\
It has chosen to allocate TARP funds directly for these
purposes (i) by launching a program with FRBNY to revive the
loan securitization market and providing $20 billion as a
credit backstop as part of that program, and (ii) by committing
up to $15 billion to purchase directly securitized Small
Business Administration loans. In addition, Treasury has
recently announced the broad outlines of a program to provide
capital assistance to small banks in return for commitments to
lend to small business.\174\
---------------------------------------------------------------------------
\173\ U.S. Department of the Treasury, The Financial Stability
Plan: Deploying our Full Arsenal to Attack the Credit Crisis on All
Fronts (online at www.financialstability.gov/roadtostability)
(hereinafter ``Financial Stability Plan'') (accessed Dec. 7, 2009).
\174\ See White House, President Obama Announces New Efforts to
Improve Access to Credit for Small Businesses (Oct. 21, 2009) (online
at www.whitehouse.gov/assets/documents/small_business_final.pdf)
(hereinafter ``President Obama Announces Small Business Efforts''). The
nature of the market for consumer and small business loans and the
impact of the crisis on those markets are discussed in detail in the
Panel's May 2009 report. See Congressional Oversight Panel, May
Oversight Report: Reviving Lending to Small Businesses and Families and
the Impact of TALF (May 7, 2009) (online at cop.senate.gov/documents/
cop-050709-report.pdf) (hereinafter ``May Oversight Report'').
---------------------------------------------------------------------------
a. Asset Securitization--The Term Asset-Backed Securities
Loan Facility
Since the mid-1980s, banks have increasingly chosen to
finance their consumer loans (primarily credit card, student,
and auto loans) by packaging those loans into securities sold
to investors through a process called securitization, creating
an important channel for providing credit.\175\ The financial
crisis froze the markets for these ``asset-backed securities,''
in part in reaction to the general credit crunch and in part in
reaction to the crisis in the larger markets for securitized
residential mortgages. Thus, Treasury and the Federal Reserve
Board saw revival of the securitization market as the way to
revive credit to consumers and created the Temporary Asset-
Backed Securities Loan Facility (TALF) to produce that
revival.\176\
---------------------------------------------------------------------------
\175\ The securitization process is described in the Panel's May
oversight report. May Oversight Report, supra note 174, at 34-39.
\176\ According to the Federal Reserve Board and Treasury, ``over
the past few years around a quarter of all non-mortgage consumer
credit'' has been financed through securitization. U.S. Department of
the Treasury, White Paper: Term Asset-Backed Securities Loan Facility
(Mar. 3, 2009) (online at www.treas.gov/press/releases/reports/
talf_white_paper.pdf) (hereinafter ``TALF White Paper'').
---------------------------------------------------------------------------
The volume of asset-backed securities representing classes
of consumer loans before the financial crisis, the drop in that
volume during the crisis, and its movement upward beginning in
March 2009 are shown in Figure 13:
FIGURE 13: MONTHLY TOTAL SBA, STUDENT LOAN, CREDIT CARD, AND AUTO ABS
ISSUANCES, 2006-2009 \177\
---------------------------------------------------------------------------
\177\ Chart prepared by Panel staff using U.S. monthly ABS
issuances data provided by Securities Industry and Financial Markets
Association (SIFMA). As of the date of the report, data on small
business ABS issuances is unavailable prior to January 2009.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The TALF is a credit facility through which FRBNY
originally committed up to $200 billion to lend to investors
for the purchase of securitized credit card, student, and
automobile loans.\178\ The investors post the assets they
purchase as collateral (security) for the loans; because the
loans are made on a ``non-recourse'' basis,\179\ FRBNY cannot
recover more than the then-value of the assets if the loan is
not paid. Thus, whatever the amount of the original loan, the
risk that the loan will not be repaid lays with the government,
not with the investors. The non-recourse feature creates an
economic subsidy--measured by the difference between the
interest rates that would be required by investors to buy
asset-backed securities with and without non-recourse loans.
The subsidy is reduced somewhat because FRBNY will only make
loans for something less than the full value of the asset-
backed securities the loans are used to buy.\180\
---------------------------------------------------------------------------
\178\ As discussed below, infra pages 54-60, the program also
included Small Business Administration loans.
\179\ A non-recourse loan is one in which the lender has no right
to look to the borrower for repayment, but only to take control of the
collateral, whatever its actual value.
\180\ See, e.g., Federal Reserve Bank of New York, Term Asset-
Backed Securities Loan Facility: Terms and Conditions (Apr. 21, 2009)
(online at www.newyorkfed.org/markets/talf_terms.html). As explained in
the May report, this reduction is called a ``haircut.'' The haircut
varies for the asset class against which a loan is made and the
duration of that loan. For a more complete discussion of this topic,
please see the Panel's May Oversight Report. See Congressional
Oversight Panel, May Oversight Report: Reviving Lending to Small
Businesses and Families and the Impact of TALF, at 42 (May 7, 2009)
(online at cop.senate.gov/documents/cop-050709-report.pdf).
---------------------------------------------------------------------------
The choice of non-recourse financing reflects the
assessment of Treasury and FRBNY that the risk of high levels
of default had made securitized loans largely unsalable during
the financial crisis, due to the high interest rates investors
required to offset what they perceived as increased risk; the
ultimate result, in the agencies' view, was reduction in the
availability and an increase in the cost of consumer
credit.\181\ The TALF subsidy is intended to reduce or
eliminate that difference in two ways: (i) by creating
competitive conditions to drive down interest rates for
securitized products, and (ii) by funding a series of
financings in which the feared level of defaults do not occur.
---------------------------------------------------------------------------
\181\ See TALF White Paper, supra note 176.
---------------------------------------------------------------------------
Treasury's economic commitment to the TALF is a relatively
minor one in relation to the originally projected size of the
program, but it has committed $20 billion of TARP funds to bear
and is at risk for the first $20 billion of losses from TALF
loans. At present, approximately $62 billion in TALF loans has
been requested,\182\ making the $20 billion Treasury backstop a
significant figure; posted collateral would have to decline in
value by more than 33 percent before the Treasury backstop
would be exhausted and loan losses would begin to be borne by
FRBNY.
---------------------------------------------------------------------------
\182\ This figure includes both CMBS and non-CMBS loans requested
as of December 3, 2009. Federal Reserve Bank of New York, Term Asset-
Backed Securities Loan Facility: Non-CMBS--Recent Operations (online at
www.newyorkfed.org/markets/TALF_recent_operations.html) (hereinafter
``Term Asset-Backed Securities Loan Facility: Non-CMBS--Recent
Operations'') (accessed Dec. 7, 2009); Federal Reserve Bank of New
York, Term Asset-Backed Securities Loan Facility: CMBS--Recent
Operations (online at www.newyorkfed.org/markets/cmbs_operations.html)
(accessed Dec. 4, 2009).
---------------------------------------------------------------------------
FIGURE 14: TALF V. NON-TALF ABS ISSUANCE, MARCH 2009-NOVEMBER 2009
\183\
---------------------------------------------------------------------------
\183\ Chart prepared by Panel staff using U.S. monthly ABS
issuances data provided by SIFMA and FRBNY. For FRBNY source data, see
Federal Reserve Bank of New York, Term Asset-Backed Securities Loan
Facility: Recent Operations (online at www.newyorkfed.org/markets/
TALF_recent_operations.html) (hereinafter ``TALF Recent Operations'')
(accessed Dec. 3, 2009).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Three metrics can help evaluate the results of the TALF.
1. Changes in Amount of Securitizations. TALF's direct
contribution to credit for consumers is illustrated by Figure
14, which shows that since TALF's March 2009 launch, 39 percent
of the total amount of all credit card, student, and auto loan
ABS has been funded through the program.\184\ Over this period,
total ABS origination, excluding commercial mortgage-backed
securities, increased, ranging from a low of $11.3 billion in
April 2009 to a high of $24.9 billion in June 2009, and
averaging approximately $15.4 billion per month. While this
represents an eightfold increase over the average monthly level
of such securitizations from September 2008 to February 2009,
securitization levels have not returned to pre-crisis
levels.\185\ Figure 13 provides some sense of the historical
base level against which the contribution of the TALF
(illustrated in Figure 14) should be compared. A comparison of
Figures 13 and 14 provides some sense of the historical base
level against which the contribution of the TALF, for the
months TALF has been in existence, should be compared. Figure
15 below outlines the amount of loans for various types of ABS
that the TALF has financed.
---------------------------------------------------------------------------
\184\ Compare Federal Reserve Bank of New York, Term Asset-Backed
Securities Loan Facility: Non-CMBS--Recent Operations (online at
www.newyorkfed.org/markets/TALF_recent_operations.html) (accessed Dec.
7, 2009) with US ABS Issuance, supra note 16. The text does not mean
that 39 percent of every class of loans was the subject of TALF
financing.
\185\ Pre-crisis securitization levels may not be an accurate
measure of healthy securitization practices; a portion of the growth of
the ABS market was attributable to inflated demand for these products
during the pre-crisis credit bubble.
---------------------------------------------------------------------------
FIGURE 15: TALF LOAN FACILITIES BY COLLATERAL TYPE, MARCH 2009-NOVEMBER
2009 \186\
---------------------------------------------------------------------------
\186\ Chart prepared by Panel staff using U.S. monthly non-CMBS ABS
issuances data provided by FRBNY. See TALF Recent Operations, supra
note 183.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
It is less clear that the TALF has increased the relative
volume of non-TALF securitizations. As seen in Figure 16, non-
TALF consumer and small business ABS origination has yet to
stabilize at 2008 levels. On average, during the first nine
months of 2009, these types of securitizations were down 23.3
percent versus 2008. It is difficult to draw firm conclusions
from these data, because without further data it is extremely
difficult to separate out the various factors--continuing
uncertainty about the risks of ABS, insufficient transparency
in the ABS markets, and a general decline in demand in a severe
recession--that contribute to ABS levels.
FIGURE 16: ABS ISSUANCE WITHOUT TALF, 2006-2009 \187\
---------------------------------------------------------------------------
\187\ Chart prepared by Panel staff using U.S. monthly ABS
issuances data provided by SIFMA and FRBNY. For FRBNY source data, see
TALF Recent Operations, supra note 183.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
2. Changes in Interest Rate Spreads. FRBNY and Treasury
have pointed to the narrowing of interest rate spreads for
privately-financed securitizations as a metric for judging the
TALF's success, because the closing of the spread indicates
that investors are again willing to enter the market based on
the TALF's pricing bellwether. Figure 17 reflects both the
widening of credit spreads during the crisis as well as
tightening of spreads since the establishment of TALF.
FIGURE 17: ABS SPREADS OF SELECTED INDICATORS SINCE DECEMBER 2006 \188\
---------------------------------------------------------------------------
\188\ Chart prepared by Panel staff using data provided under
subscription by BLOOMBERG Data Services.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
A comparison of Figure 17 above with Figure 16 on the
previous page indicates that the narrowing of spreads is to
some degree reflected in the volume of non-TALF ABS.
3. Changes in credit availability. The premise of the TALF
is that increasing the volume of asset securitizations will
increase the overall level of consumer credit. Figure 18,
derived from statistics published by the Federal Reserve
System, provides a general picture of the continuing decline in
consumer credit. Statistical evidence is hard to evaluate,
however, because it is impossible to disentangle the
continuation of the credit crisis from bank deleveraging and
the reduction of credit demand that reflects underlying
difficulties in the economy.
FIGURE 18: PERCENT CHANGE IN CONSUMER CREDIT OUTSTANDING \189\
---------------------------------------------------------------------------
\189\ Chart prepared by Panel staff using U.S. monthly non-CMBS ABS
issuances data provided by FRBNY. See TALF Recent Operations, supra
note 183.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Two additional facts should be noted. First, although the
TALF was originally to be devoted to consumer and small
business loans, various ABS categories were added throughout
the program and, on May 19, 2009, FRBNY announced that the TALF
could also be used by investors in pools of certain commercial
mortgages--expanding the program beyond its original purpose.
To date, $7.5 billion has been borrowed for commercial
mortgage-backed securities (CMBS) investments.
Second, the TALF is scheduled to end on March 31, 2010 for
ABS and legacy CMBS, and on June 30, 2010 for newly issued
CMBS. Given the small percentage of the $200 billion originally
allocated for the TALF that has been used thus far, and the
fact that loan requests have fallen off since their height in
May ($10.6 billion requested) and June ($11.5 billion), it
seems unlikely that the full $200 billion will be used. During
a meeting with Panel staff in October, Treasury staff stated
that the decline in requests was attributable to the increase
in the availability of less expensive financing from private
sources and therefore illustrated TALF's success in its goal of
re-opening the ABS markets.
b. Loans to Small Business
During the financial crisis, small business credit froze
along with the rest of the lending markets.\190\ On March 17,
2009, Treasury outlined measures to ``jumpstart credit markets
for small businesses.'' \191\ Again, those measures were aimed
at stimulating the market for securitized loans. One measure
was the inclusion in the TALF of securities backed by the
government-guaranteed portion of Small Business Administration
(SBA) 7(a) loans and the non-government-guaranteed first-lien
mortgage loans affiliated with the SBA's 504 loan program in
the TALF. The second was the direct purchase of up to $15
billion in securities backed by SBA loans; both measures were
directed at the securitized loan market.\192\ (From 2006
through 2008, between 40 and 45 percent of the SBA guaranteed
portion of 7(a) loans were sold into the secondary market.)
\193\
---------------------------------------------------------------------------
\190\ See May Oversight Report, supra note 174, at 52 (referring to
the market freezing because of (1) the tightening of the Prime versus
LIBOR spread, which reduced the attractiveness of investment in
securitized 7(a) loans (indeed, the return for investors had
disappeared); (2) the strained capacity of broker-dealers, who were
unable to sell their current inventory and thereby free up capital to
buy and pool additional loans; (3) the reduced access to and increased
cost of credit for broker-dealers, who could not sell off inventory to
pay off existing loans; and (4) general uncertainty and fear in the
marketplace).
\191\ See Financial Stability Plan, supra note 173.
\192\ Unable to shed the risk from their books, commercial lenders
significantly curtailed their lending activities.
\193\ Government Accountability Office, Small Business
Administration's Implementation of Administrative Provisions in the
American Recovery and Reinvestment Act of 2009, at 6 (Apr. 16, 2009)
(online at www.gao.gov/new.items/d09507r.pdf).
---------------------------------------------------------------------------
The TALF originally attracted no interest from investors in
securitized 7(a) and 504 loans. The first TALF borrowing for a
pool of such loans, in the amount of approximately $86 million,
occurred as part of the May 5 TALF facility. To date, TALF
loans based on small business ABS originations represent only
2.98 percent of all non-CMBS TALF transactions.\194\
---------------------------------------------------------------------------
\194\ Calculation based upon data provided by FRBNY. See Term
Asset-Backed Securities Loan Facility: Non-CMBS--Recent Operations,
supra note 182.
---------------------------------------------------------------------------
Treasury has not yet made any purchases under its direct
purchase program although it has allocated approximately $3
billion for the program for 2009.\195\ It hopes to create its
first actual pooling structure by year-end.\196\ It has noted
that the lack of an earlier start to the program reflects both
the typical uncertainties investors in the TALF exhibited,\197\
as well as the fact that ``the secondary market [has begun] to
return to more normal conditions.'' \198\
---------------------------------------------------------------------------
\195\ Government Accountability Office, Troubled Asset Relief
Program: One Year Later, Actions are Needed to Address Remaining
Transparency, and Accountability Challenges, at 80 (Oct. 8, 2009)
(online at www.gao.gov/new.items/d1016.pdf) (hereinafter ``GAO: TARP
One Year'').
\196\ Treasury hired Earnest Partners, an independent investment
manager with SBA-guaranteed loan experience, to guide its efforts to
buy securitized SBA loans directly. U.S. Department of the Treasury,
Financial Agency Agreement for Asset Management Services for SBA
Related Loans and Securities (Mar. 16, 2009) (online at
www.financialstability.gov/docs/ContractsAgreements/
TARP%20FAA%20SBA%20Asset%20Manager%20-%20Final%20to%20be%20posted.pdf)
(updated Nov. 12, 2009); see also SIGTARP, Quarterly Report to
Congress, at 112 (Apr. 21, 2009) (online at www.sigtarp.gov/reports/
congress/2009/April2009_Quarterly_Report_to_Congress.pdf).
\197\ See May Oversight Report, supra note 174, at 50.
\198\ U.S. Department of the Treasury, Unlocking Credit for Small
Businesses: FAQ on Implementation (Mar. 17, 2009) (online at
www.financialstability.gov/docs/FAQ-Small-Business.pdf) (hereinafter
``Unlocking Credit for Small Businesses: FAQ'').
---------------------------------------------------------------------------
Unlike the TALF, Treasury's program to purchase SBA-
guaranteed securities does not utilize private-sector pricing.
Rather, Treasury would purchase securities directly from ``pool
assemblers'' and banks.\199\ Under the program, if Treasury
engages in direct purchases, it plans either to sell the
securities to private investors or pursue a buy-and-hold
strategy, depending on market conditions.\200\ According to
Treasury's implementation documents, ``Treasury and its
investment manager will analyze the current and historical
prices for these securities'' in order to ``identify
opportunities to purchase the securities at reasonable
prices.'' \201\ Treasury defines such prices as those that
fulfill the dual objective of ``[providing] sufficient
liquidity to encourage banks to increase their small business
lending and [protecting] taxpayers' interest.'' \202\ To date,
Treasury has not made any direct purchases under this
program.\203\
---------------------------------------------------------------------------
\199\ Pursuant to EESA, Treasury expects to receive warrants from
the pool assemblers as additional consideration for the purchase of
7(a) and 504 first-lien securities. The pricing and exact nature of the
warrants is still under consideration by Treasury. Unlocking Credit for
Small Businesses: FAQ, supra note 198.
\200\ Id.
\201\ Id.
\202\ Id.
\203\ According to Treasury's FAQ on Implementation, purchases of
securities backed by SBA 7(a) loans were to begin by the end of March
2009, while purchases of securities backed by first-lien 504 loans were
to begin by May due to ``Treasury's need to conduct a thorough risk
analysis, given that these securities are not government guaranteed.''
Unlocking Credit for Small Businesses: FAQ, supra note 198; see also
November 25 Transactions Report, supra note 71.
---------------------------------------------------------------------------
On October 21, 2009, the White House announced a third
small business lending initiative, part of which uses TARP
funds. Under this initiative, Treasury will provide lower cost
capital to community banks \204\ to be used in small business
lending.\205\ Participating banks must submit small business
lending plans and will be required to submit quarterly reports
describing their small business lending activities. If their
lending plans are accepted, banks will have access to capital
at a dividend rate of 3 percent, more attractive terms than the
5 percent rate under the Capital Purchase Program. These small
banks will be able to receive capital totaling up to 2 percent
of their risk weighted assets.\206\ For community development
financial institutions \207\ that can document that 60 percent
of their small business lending targets low-income communities
or underserved populations, this dividend rate will be only two
percent.\208\ As currently conceived,\209\ this capital will be
available after the bank submits a small business lending plan,
and may only be used to make qualifying small business
loans.\210\ Further implementing details for this program have
not been announced as of the date of this report.
---------------------------------------------------------------------------
\204\ Community banks are banks with $1 billion or less in assets.
\205\ Small- and medium-sized banks are seen as effective vehicles
for supporting small business lending because banks with less than $1
billion in assets hold greater proportions of small business loans to
all business loans. See President Obama Announces Small Business
Efforts, supra note 174.
\206\ See President Obama Announces Small Business Efforts, supra
note 174 at 2.
\207\ Community development financial institutions, which are
certified by the federal government, provide loans to underserved
communities.
\208\ See President Obama Announces Small Business Efforts, supra
note 174.
\209\ Id.
\210\ Id.
---------------------------------------------------------------------------
This program could be a more direct response to the problem
of small business lending because over 90 percent of small
business loans are not securitized.\211\
---------------------------------------------------------------------------
\211\ For a discussion of the relationship between small business
lending and the securitization of small business loans, see the Panel's
May report. See May Oversight Report, supra note 174, at 50-52.
---------------------------------------------------------------------------
c. Impact of Small Business Program
There is evidence that a rejuvenated secondary market for
SBA loans may negate Treasury's need for direct purchases.
Between May and October, the total volume of loans settled from
lenders to brokers averaged $345 million, exceeding pre-crisis
levels.\212\ By comparison, in January total volume was $283.4
million. But it should be noted that the amount of SBA lending
is small in relation to the overall number of loans to small
business.
---------------------------------------------------------------------------
\212\ Calculation based on data provided by SIFMA.
---------------------------------------------------------------------------
FIGURE 19: SMALL BUSINESS ORIGINATIONS OF SELECTED CPP RECIPIENTS SINCE
MARCH 2009 (WITHOUT PNC OR WELLS FARGO) \213\
---------------------------------------------------------------------------
\213\ Prior to February 2009, information on new bank loan
originations was sparse, untimely, and incomplete. At Treasury's
request, the top 22 CPP banks began reporting this data in February
2009. See U.S. Department of the Treasury, Treasury Releases First
Monthly Bank Lending Survey (Feb. 17, 2009) (online at
www.financialstability.gov/latest/tg30.html). However, it was not until
the April 2009 lending survey that these banks first specified their
small business lending activities. Compare U.S. Department of the
Treasury, Treasury Department Monthly Lending and Intermediation
Snapshot: Summary Analysis for April 2009, at 5 (June 15, 2009) (online
at www.financialstability.gov/docs/surveys/
SnapshotAnalysisApril2009.pdf) with U.S. Department of the Treasury,
Treasury Department Monthly Lending and Intermediation Snapshot:
Summary Analysis for March 2009, at 5 (May 15, 2009) (online at
www.financialstability.gov/docs/surveys/SnapshotAnalysisMarch2009.pdf).
See footnote 147 supra for an explanation of the exclusion from Figures
19 and 20 of lending by Wells Fargo and PNC.
Other CPP banks did not have the same monthly reporting requirement
as the top 22 banks, and have not provided any data on their small
business lending activities. As a whole, the CPP banks were only
required to track average consumer loans outstanding, average
commercial loans outstanding, and average total loans outstanding. See
U.S. Department of the Treasury, About the Capital Purchase Program
Monthly Lending Report, at 1 (online at www.financialstability.gov/
docs/About%20the%20CPP%20Monthly%20Lending%20Report.pdf) (accessed Dec.
3, 2009).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
FIGURE 20: SMALL BUSINESS AVERAGE TOTAL LOANS OF SELECTED CPP
RECIPIENTS SINCE MARCH 2009 (WITHOUT PNC AND WELLS FARGO) \214\
---------------------------------------------------------------------------
\214\ See id.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small business lending has not returned to its pre-crisis
levels. And as seen in Figures 19 and 20, direct small business
lending across the top 22 CPP recipients has fallen or remained
stagnant since TALF's inception. One explanation for this
outcome is that the top 22 CPP recipient banks have not resumed
lending at pre-crisis levels in any loan category, increasing
further the competition smaller businesses face to obtain a
part of the shrinking loan pool.\215\ Another explanation is
that small business loans are currently not as lucrative for
large banks as other types of lending.\216\ In either case,
small business loans remain difficult to obtain.\217\ TALF has
not necessarily succeeded in encouraging a broader expansion of
consumer and small business credit. In the face of continued
economic stagnation, such inaction could have drastic
consequences for banks, businesses, and consumers alike.\218\
---------------------------------------------------------------------------
\215\ See Treasury Department Monthly Lending and Intermediation
Snapshot Data for April 2009-September 2009, supra note 147.
\216\ Baker COP Testimony, supra note 28, at 4.
\217\ See Baker COP Testimony, supra note 28, at 4; Congressional
Oversight Panel, Written Testimony of Chief Economist and Co-founder of
Moody's Economy.com Mark Zandi, Taking Stock: Independent Views on
TARP's Effectiveness, at 1 (Nov. 19, 2009) (online at cop.senate.gov/
documents/testimony-111909-zandi.pdf) (hereinafter ``Zandi COP
Testimony'').
\218\ See Congressional Oversight Panel, Transcript of Hearing,
Taking Stock: Independent Views on TARP's Effectiveness (Nov. 19, 2009)
(Testimony of Mark Zandi) (publication forthcoming Jan. 2010) (online
at cop.senate.gov/hearings/library/hearing-111909-economists.cfm)
(hereinafter ``COP November Hearing Transcript'').
---------------------------------------------------------------------------
3. Mortgage Foreclosure Relief
a. Background
On February 18, 2009, Treasury launched two foreclosure
mitigation programs under an initiative that became known as
Making Home Affordable (MHA).\219\ These programs seek to
refinance or restructure loans made during the housing boom in
order to prevent foreclosures, which result in homeowners
losing their homes, lenders incurring significant losses, and a
wide range of costs imposed on communities.\220\
---------------------------------------------------------------------------
\219\ Prior foreclosure mitigation initiatives include the private
sector HOPE NOW Alliance, created in October 2007 and the Hope for
Homeowners program within the Federal Housing Administration, signed
into law in July 2008, as part of the Housing and Economic Recovery Act
of 2008.
\220\ See U.S. Department of the Treasury, Making Home Affordable
Summary of Guidelines (Mar. 4, 2009) (online at www.treas.gov/press/
releases/reports/guidelines--summary.pdf) (hereinafter ``Making Home
Affordable Summary of Guidelines''); see also Congressional Oversight
Panel, October Oversight Report: An Assessment of Foreclosure
Mitigation Efforts After Six Months, at 6-7 (Oct. 9, 2009) (online at
cop.senate.gov/documents/cop-100909-report.pdf) (hereinafter ``October
Oversight Report'').
---------------------------------------------------------------------------
One of the MHA initiatives, the Home Affordable Refinancing
Program (HARP), is designed to assist homeowners in refinancing
mortgages owned or guaranteed by Fannie Mae or Freddie Mac (the
government-sponsored enterprises, or GSEs). HARP refinances do
not subsidize payment reductions or reduce principal;
consequently, no government or GSE funds are used. The program
permits borrowers who are current on their mortgages to
refinance into more stable or affordable loans even if they
have minimal or no equity in their homes. Borrowers are
eligible for this program if the amount owed on their mortgage
is up to 125 percent of the home's current value.\221\
Delinquent homeowners and those with non-GSE mortgages are
ineligible.\222\ To the extent that default losses avoided due
to HARP refinancings exceed the reduced yield on the refinanced
mortgages owned by the GSEs, the program will improve the long-
term financial outlook for the GSEs, thereby reducing their
need for federal government support.
---------------------------------------------------------------------------
\221\ The decision to accept loans with a loan-to-value ratio of up
to 125 percent was announced in July 2009, but implementation did not
begin until September 1 at Fannie Mae and until October 1 at Freddie
Mac. The minimum loan-to-value ratio for HARP loans is 80 percent.
\222\ U.S. Department of the Treasury, Making Home Affordable
Borrower Frequently Asked Questions (July 16, 2009) (online at
makinghomeaffordable.gov/borrower-faqs.html#a2) (hereinafter ``Making
Home Affordable Borrower FAQs'').
---------------------------------------------------------------------------
The other major MHA initiative, the Home Affordable
Modification Program (HAMP), uses TARP dollars to facilitate
the modification of delinquent mortgages. All loans under the
conforming loan limit, which is the amount above which the GSEs
cannot purchase mortgages, are HAMP-eligible; GSE ownership or
guarantee is not required. HAMP modifications are available for
delinquent borrowers.\223\
---------------------------------------------------------------------------
\223\ Borrowers must be at least 60 days delinquent before they can
seek a loan modification. See Making Home Affordable Summary of
Guidelines, supra note 220; see also Making Home Affordable Borrower
FAQs supra note 222.
---------------------------------------------------------------------------
HAMP facilitates modifications by making incentive
payments: to loan servicers, homeowners, and lenders. Unlike
the capital assistance programs and the assistance to the auto
industry, HAMP incentive payments are grants, so Treasury will
not recover any of the funds paid out.\224\ Altogether,
Treasury has designated $75 billion for HAMP, including $50
billion in TARP funds.\225\ Using that $50 billion pool of
funds, which is for modifying loans that are not owned or
guaranteed by Fannie Mae or Freddie Mac, Treasury has signed
agreements with 79 servicers (representing over 85 percent of
all mortgages serviced in the United States under the
agreements signed so far); under the current contracts, the
maximum payout of TARP funds from Treasury is $27.4
billion.\226\
---------------------------------------------------------------------------
\224\ See Congressional Budget Office, The Troubled Asset Relief
Program: Report on Transactions Through June 17, 2009 (June 2009)
(online at www.cbo.gov/ftpdocs/100xx/doc10056/06-29-TARP.pdf).
\225\ The remaining $25 billion, which is being used to perform
HAMP modifications on loans owned or guaranteed by Fannie Mae and
Freddie Mac, comes from the Housing and Economic Recovery Act of 2008
(HERA).
\226\ See November 25 Transactions Report, supra note 71.
---------------------------------------------------------------------------
HAMP's goal is to make mortgage payments more affordable
and thus avert defaults. HAMP does so by requiring
participating servicers and lenders to offer modifications to
all eligible borrowers in their portfolios where the net
present value of the modified loan would exceed the net present
value of the unmodified loan.\227\ Servicers are expected to
comply with any private contractual restrictions on loan
modifications, however.
---------------------------------------------------------------------------
\227\ The formula that is used to determine eligibility is known as
a net present value test, or NPV test. See Jordan D. Dorchuck, Net
Present Value Analysis and Loan Modifications (Sept. 15, 2008) (online
at www.mortgagebankers.org/files/Conferences/2008/
RegulatoryComplianceConference08/
RC08SEPT24ServicingJordanDorchuck.pdf).
---------------------------------------------------------------------------
HAMP modifications follow a standard template. The servicer
or lender is to offer to reduce the monthly mortgage payment to
31 percent of the borrower's monthly income.\228\ This is done
by first capitalizing all arrearages, then reducing interest
rates incrementally to as low as 2 percent, then stretching out
the loan's term if possible, and then stretching out the loan's
amortization period (forbearing on principal).\229\
---------------------------------------------------------------------------
\228\ This ratio, a measure of loan affordability, is known as
debt-to-income ratio or DTI.
\229\ U.S. Department of the Treasury, Home Affordable Modification
Program Guidelines at 6-7 (March 4, 2009) (online at www.treas.gov/
press/releases/reports/modification_program_guidelines.pdf)
(hereinafter ``HAMP Guidelines'').
---------------------------------------------------------------------------
HAMP modifications begin with a three-month trial
modification. If the borrower is current on payments at the end
of the three-month trial period and has provided full
supporting documentation, such as proof of income, then the
modification becomes ``permanent.'' \230\ Permanent
modifications, however, only have fixed monthly payments for
five years. After five years, interest rates on the modified
loans are increased up to a cap.\231\ In addition, Treasury
contributes cash toward interest-rate reductions, and it also
provides a variety of incentive payments to the defaulted
homeowner, servicer, and lender. Treasury does not make any
incentive payments unless a modification becomes
permanent.\232\
---------------------------------------------------------------------------
\230\ Making Home Affordable Summary of Guidelines, supra note 220;
October Oversight Report, supra note 220.
\231\ See U.S. Department of the Treasury, Making Home Affordable
Updated Detailed Program Description, at 4 (Mar. 4, 2009) (online at
www.treas.gov/press/releases/reports/
housing_fact_sheet.pdf).
\232\ HAMP Guidelines, supra note 229.
---------------------------------------------------------------------------
As of October 31, 2009, Treasury has expended $2,307,776 of
the $50 billion in TARP funding set aside for modification of
non-GSE loans. Of the money expended, $1,828,000 was used for
servicer incentives; $82,500 went to servicers as a bonus for
modifying current loans; $238,500 went to investors as a bonus
for modifying current loans; and $158,776 was expended for
investor cost sharing subsidies.\233\ Payments only occur for
loans that have achieved permanent modification status. In
total, 10 servicers have received payments under HAMP.\234\
---------------------------------------------------------------------------
\233\ In response to Panel requests, Treasury provided a broad
range of data related to the mortgage market. Although not all of the
data are confidential, portions are. These data are cited in numerous
places throughout the report, and are hereinafter cited as ``Treasury
Mortgage Market Data.''
\234\ Treasury Mortgage Market Data, id.
---------------------------------------------------------------------------
b. Impact
The refinancing of loans under HARP began in April
2009.\235\ According to data from Treasury, 136,271 loans have
been refinanced under the program as of October 31, 2009.\236\
HARP accounted for about 5 percent of the Fannie Mae and
Freddie Mac loans that were refinanced from April 1-September
30.\237\ Additional data from Treasury show that 12.5 percent
of HARP refinancings (17,091 mortgages) have involved mortgages
where the homeowner has negative equity, but only .2 percent
(272 mortgages) have been for properties with a loan-to-value
ratio (LTV) over 105 percent.\238\ These numbers should
increase, however, as the program's maximum LTV was only
recently increased from 105 percent to 125 percent. While more
information is needed to evaluate HARP fully, the data that are
currently available raise questions about whether the program,
as currently configured, will have a substantial impact on the
foreclosure problem.
---------------------------------------------------------------------------
\235\ See Federal Housing Finance Agency, FHFA Refinance Report
Shows Refinance Volumes Dropped in September; Mortgage Rates Still
Higher than the Spring, at 3 (Nov. 2, 2009) (online at www.fhfa.gov/
webfiles/15153/Sept_Refinance_Final_report_and_release_11_2_09.pdf)
(hereinafter ``FHFA Refinance Report'').
\236\ Treasury Mortgage Market Data, supra note 233.
\237\ FHFA Refinance Report, supra note 235.
\238\ Treasury Mortgage Market Data, supra note 233.
---------------------------------------------------------------------------
Over the next several years, Treasury aims to modify up to
three million to four million mortgages under the HAMP
program.\239\ Yet, projections for foreclosure range from 8.1
million over the next four years to as high as 13 million over
the next five-plus years.\240\ Under the HAMP program between
March 1 and October 31, 2009, 919,965 offers of trial
modifications were extended to borrowers.\241\ From the offers
extended, the program commenced 600,739 cumulative trial
modifications, including restarts on duplicate borrowers. In
total, the program has started 595,536 trial modifications on
unique borrowers for the same time period.\242\ Although trial
modifications started each month held steady or increased from
February through September, no doubt due to the ramp up of the
program, trials dropped off sharply in October, dropping from
155,875 trials started the previous month to 99,183.\243\ It is
unclear why the number of trials dropped and whether or not
this trend will continue into the future.
---------------------------------------------------------------------------
\239\ U.S. Department of the Treasury, Making Home Affordable:
Updated Detailed Program Description (March 4, 2009) (online at
www.treas.gov/press/releases/reports/
housing_fact_sheet.pdf).
\240\ Goldman Sachs Global ECS Research, Home Prices and Credit
Losses: Projections and Policy Options, at 16 (Jan. 13 2009) (available
online at garygreene.mediaroom.com/file.php/
216/Global+Paper+No++177.pdf); Rod Dubitsky et al., Foreclosure Update:
Over 8 Million Foreclosures Expected, Credit Suisse Fixed Income
Research (Dec. 8, 2008) (online at www.nhc.org/Credit%20Suisse%20
Update%2004%20Dec%2008.doc).
\241\ U.S. Department of the Treasury, Making Home Affordable
Program: Servicer Performance Report Through October 2009, at 3 (online
at www.makinghomeaffordable.gov/docs/
MHA%20Public%20111009%20FINAL.PDF) (hereinafter ``MHA Servicer
Performance Report Through October 2009'').
\242\ Treasury Mortgage Market Data, supra note 233.
\243\ Id.
---------------------------------------------------------------------------
It is important to note two points regarding the trial
modifications initiated so far under HAMP. First, many trial
modifications may fail to convert to permanent modifications.
At the Panel's October 22 hearing, Assistant Secretary Allison
stated that Treasury's internal estimate before the program was
launched was that 50-75 percent of the trial modifications
would be converted into longer-term modifications.\244\ As of
October 31, 2009, there were only 10,187 permanent
modifications, with a conversion rate, or roll rate, of 4.69
percent for trial modifications commenced at least three months
ago.\245\ While this does not mean that the other 95.31 percent
of trial modifications begun three months ago are failures, it
does mean that the vast majority of trial modifications have
failed to convert to permanent modifications on the three-month
timeline originally announced by Treasury.
---------------------------------------------------------------------------
\244\ See Congressional Oversight Panel, Testimony of Treasury
Assistant Secretary for Financial Stability Herbert M. Allison, Jr.,
Congressional Oversight Panel Hearing with Assistant Treasury Secretary
Herbert M. Allison, Jr. (Oct. 22, 2009) (publication forthcoming
January 2010) (online at cop.senate.gov/hearings/library/hearing-
102209-allison.cfm) (hereinafter ``Allison COP Hearing, Oct. 22'').
\245\ Treasury Mortgage Market Data, supra note 233.
---------------------------------------------------------------------------
These rates are not necessarily indicative of future HAMP
performance, but Treasury has not provided the Panel with
sufficient information to determine fully why there have been
so few conversions from trial to permanent modifications.
Treasury has stated that it will not be able to produce a more
statistically accurate roll rate until the first quarter of
next year.\246\
---------------------------------------------------------------------------
\246\ Allison COP Hearing, Oct. 22, supra note 246.
---------------------------------------------------------------------------
One factor contributing to the paucity of permanent
modifications is issues in gathering borrower documentation.
HAMP trial modifications can be initiated before homeowners
provide any documentation of their income and assets,\247\ and
that documentation, which in many cases borrowers did not have
to show in order to get their original loans, is required to be
produced before a loan modification can exit the trial period.
Because of difficulties in compiling documentation, Treasury
has granted a two-month extension to the trial periods of trial
modifications commenced before September 1, 2009. The roll rate
for loans made five months ago is more encouraging at 38.24
percent,\248\ although the success of the program over the long
term will certainly require a much higher rate.
---------------------------------------------------------------------------
\247\ See U.S. Department of the Treasury, Obama Administration
Kicks Off Mortgage Modification Conversion Drive (Nov. 30, 2009)
(online at www.ustreas.gov/press/releases/tg421.htm).
\248\ Treasury Mortgage Market Data, supra note 233.
---------------------------------------------------------------------------
A second major concern about HAMP is that many homeowners
who receive permanent modifications may redefault and
ultimately lose their homes in foreclosure sales.\249\ Data on
loans modified during the first quarter of 2008, prior to the
launch of HAMP, show that within one year of modification, 54
percent of the borrowers were again delinquent by at least 60
days.\250\ As the Panel noted in its October report, redefault
rates are lower for modifications that reduce monthly payments,
with greater percentage decreases in payments resulting in
lower subsequent redefault rates. Nonetheless, redefault rates,
even on modifications reducing payments by 20 percent or more,
were still a very high 34.1 percent.\251\ At the Panel's Oct.
22 hearing, Assistant Secretary Allison noted that HAMP results
in material reductions in borrowers' payments.\252\ He later
noted that Treasury's baseline assumption for redefault rates
is 40 percent over the next five years.\253\ This assumption is
not based on the actual characteristics of HAMP modified loans;
adjusting for the actual characteristics of the loans, the
predicted redefault rate could be substantially higher.
---------------------------------------------------------------------------
\249\ See Manuel Adelino, Kristopher Gerardi, & Paul S. Willen, Why
Don't Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures,
and Securitization, Federal Reserve Bank of Boston Working Paper 09-4
(July 6, 2009) (online at www.bos.frb.org/economic/ppdp/2009/
ppdp0904.pdf). See also October Oversight Report, supra note 220.
\250\ These data only cover about two-thirds of the mortgage
market. See Office of the Comptroller of the Currency and Office of
Thrift Supervision, OCC and OTS Mortgage Metrics Report, Second Quarter
2009, at 29 (online at www.occ.treas.gov/ftp/release/2009-118a.pdf)
(hereinafter ``OCC and OTS Mortgage Metrics Second Quarter 2009'')
(accessed Dec. 7, 2009).
\251\ Id.
\252\ Allison COP Hearing, Oct. 22, supra note 246.
\253\ See U.S. Department of the Treasury, Questions for the Record
for U.S. Department of the Treasury Assistant Secretary Herbert M.
Allison Jr., at 3 (Oct. 22, 2009) (online at cop.senate.gov/documents/
testimony-102209-allison-qfr.pdf) (hereinafter ``Questions for the
Record for Assistant Secretary Allison'').
---------------------------------------------------------------------------
HAMP is still too new to have conclusive data regarding
redefaults. HAMP only began converting trials to permanent
modifications in July, and 94 percent of the conversions to
permanent status happened in September and October. This means
that only 580 permanent modifications have been in place for
more than two months. For the four months during which
permanent modifications have been in place, the program has
already seen eight re-defaults.\254\ The causes of those
redefaults are not known. If the 40 percent redefault estimate
offered by Assistant Secretary Allison holds true,
approximately 4,075 of the current 10,187 permanent
modifications could be expected to redefault. It should also be
noted here that although HAMP is structured to protect
taxpayers against losses in cases where homeowners redefault on
their modified loans, that protection is limited.\255\
Redefaults during the five-year modification period mean that
taxpayer funds will be paid out for modifications that
nevertheless end in foreclosure.
---------------------------------------------------------------------------
\254\ Treasury Mortgage Market Data, supra note 233.
\255\ See HAMP Guidelines, supra note 229.
---------------------------------------------------------------------------
The combination of failure to convert trial modifications
to permanent modifications and redefaults on permanent
modifications means that HAMP's ultimate impact may be
significantly less than the number of trial modifications
initiated. The Panel emphasizes that it is the number of
foreclosures averted, not the number of trial modifications
offered or even trial modifications commenced, that is the
proper metric for evaluating HAMP.
The Panel has other serious concerns about the impact of
Treasury's efforts to reduce foreclosures. While many of the
foreclosures earlier in the financial crisis were the result of
mortgages resetting to higher rates, an issue that HAMP is
designed to combat, an increasingly pressing problem involves
foreclosures caused by unemployment, as the Panel showed in its
October report.\256\ Since that report was released, the U.S.
unemployment rate has reached 10 percent for the first time in
26 years.\257\ By comparison, when the financial markets seized
up in September 2008, the U.S. unemployment rate was at 6.2
percent, and when HAMP was announced in February, unemployment
had risen, but only to 8.1 percent.\258\ Furthermore, between
September 2008 and November 2009, the more expansive
unemployment rate, which includes people who are working less
than they want to and those who have stopped looking for a job,
rose from 11.2 percent to 17.2 percent.\259\ HAMP was simply
not designed to address foreclosures caused by unemployment, a
point that Assistant Secretary Allison acknowledged at the
Panel's Oct. 22 hearing, when he said that people with
extremely low incomes will not qualify for the program.\260\
Assistant Secretary Allison said that Treasury is actively
looking at ways to address unemployment-related
foreclosures.\261\
---------------------------------------------------------------------------
\256\ See October Oversight Report, supra note 220, at 9-21.
\257\ Labor Force Statistics, supra note 17.
\258\ Id.
\259\ U.S. Department of Labor, Bureau of Labor Statistics, Data
Retrieval: Labor Force Statistics--Instrument: U-6, seasonally adjusted
(online at www.bls.gov/webapps/legacy/cpsatab12.htm) (accessed Dec. 7,
2009).
\260\ Assistant Secretary Allison did point out that that the
Administration has taken other steps to address unemployment. In
addition, as Allison suggested, people who have the prospect of getting
unemployment insurance payments for at least nine months can count
those payments as income when applying for a HAMP modification. See
Congressional Oversight Panel, Testimony of Treasury Assistant
Secretary for Financial Stability Herbert M. Allison, Jr.,
Congressional Oversight Panel Hearing with Assistant Treasury Secretary
Herbert M. Allison, Jr. (Oct. 22, 2009) (publication forthcoming Jan.
2010) (online at cop.senate.gov/hearings/library/
hearing-102209-allison.cfm) (hereinafter ``COP Hearing with Assistant
Secretary Allison''). See also U.S. Department of the Treasury,
Supplemental Documentation--Frequently Asked Questions Home Affordable
Modification Program, at 20 (Nov. 12, 2009) (online at
www.hmpadmin.com/portal/docs/hamp_servicer/hampfaqs.pdf).
\261\ See First American CoreLogic, Negative Equity Report as of
September 30, 2009 (Nov. 24, 2009) (online at www.facorelogic.com/
newsroom/marketstudies/
negative-equity-report.jsp) (subscription required). See also COP
Hearing with Assistant Secretary Allison, supra note 260, at 54, 55.
---------------------------------------------------------------------------
Treasury's foreclosure prevention efforts thus far also do
not counteract the problem of negative equity. As the Panel's
October report stated, there is a correlation between owing
more than one's home is worth and defaulting on the mortgage--a
higher correlation, in fact, than any other factor that has
been identified, besides the mortgage's affordability.\262\ In
the third quarter of 2009, 23 percent of U.S. single-family
homes with mortgages had negative equity, and 11 percent owed
more than 120 percent of their homes' value, according to
FirstAmerican CoreLogic, an increase from the previous
quarter.\263\ Another methodology calculates that nearly 34
percent of U.S. single-family homes with mortgages have
negative equity.\264\ This means that somewhere between one in
four and one in three mortgage holders have no home equity
cushion in the event of a major change in life circumstances,
such as a divorce or job relocation.\265\ And while Treasury's
programs have made mortgages more affordable, they have not
significantly reduced the amount of negative equity in modified
and refinanced loans.\266\ Reducing loan principal is the only
way to eliminate negative equity, so Treasury should consider
how its existing programs might be adapted in ways that result
in principal reductions.
---------------------------------------------------------------------------
\262\ October Oversight Report, supra note 220, at 97.
\263\ See First American CoreLogic, Negative Equity Report as of
September 30, 2009 (Nov. 24, 2009) (online at www.facorelogic.com/
newsroom/marketstudies/
negative-equity-report.jsp) (subscription required). See also Ruth
Simon and James R. Hagerty, One in Four Borrowers Is Underwater, Wall
Street Journal (Nov. 24, 2009) (online at online.wsj.com/article/
SB125903489722661849.html).
\264\ Id.
\265\ Nearly 10.7 million mortgages were in negative equity as of
September 2009, out of 75.6 million owner-occupied residences. Nearly
13.0 million mortgages were in or near negative equity. See First
American CoreLogic, Media Alert: First American CoreLogic Releases Q3
Negative Equity Data (available with registration online at
www.facorelogic.com/newsroom/marketstudies/
negative-equity-report.jsp) (accessed Dec. 7, 2009); see also U.S.
Census Bureau, American Housing Survey--Frequently Asked Questions
(online at www.census.gov/hhess/www/housing/ahs/ahsfaq.html) (accessed
Dec. 4, 2009).
\266\ Treasury Mortgage Market Data, supra note 233.
---------------------------------------------------------------------------
Perhaps the most important way to evaluate the mortgage
foreclosure relief efforts under the TARP is in relation to the
number of foreclosures. Are foreclosures rising or declining?
Are Treasury's programs making a major dent in the problem?
There has been a small downturn in the number of new
foreclosure filings since July, but the data also show that
foreclosures easily continue to outpace HAMP modifications, as
Figure 21 shows.
FIGURE 21: FORECLOSURE STARTS V. TRIAL MODIFICATIONS STARTED \267\
---------------------------------------------------------------------------
\267\ MHA Servicer Performance Report Through October 2009, supra
note 241, at 3; HOPE NOW, Latest HOPE NOW Data Shows Workout Solutions
Outpace Foreclosures More than 3 to 1 (Dec. 2, 2009) (online at
www.hopenow.com/press--release/files/
October%202009%20Data%20Release.pdf); Workout Plans (Repayment Plans +
Modifications) and Foreclosure Sales, July 2007-September 2009 (online
at www.hopenow.com/industry-data/HOPE%20NOW%20National%20
Data%20July07%20to%20Sep09%20v2.pdf) (accessed Dec. 7, 2009).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
In October 2009, there were 222,107 foreclosure starts,
significantly more than the 99,183 HAMP trial modifications
initiated in the same month.\268\ In October there were also
94,450 completed foreclosure sales. To keep pace, 95 percent of
trial modifications in October would have to convert to
permanent modifications with no redefaults on the
modifications.
---------------------------------------------------------------------------
\268\ Treasury Mortgage Market Data, supra note 233. Mortgage
Bankers Association, Delinquencies Continue to Climb in Latest MBA
National Delinquency Survey (Nov. 19, 2009) (online at
www.mortgagebankers.org/NewsandMedia/PressCenter/71112.htm).
---------------------------------------------------------------------------
In addition, as Figures 22 and 23 show, both mortgage
delinquencies and homes in foreclosure are substantially above
their level in February, when Treasury unveiled its foreclosure
mitigation plans. According to the Mortgage Bankers
Association's National Delinquency Survey, 14.41 percent of all
mortgages are delinquent or currently in foreclosure, an all-
time high in the survey's 37-year history.\269\ Cumulatively,
since July 2007, there have been more than two million
foreclosure sales completed, and five and a half million
foreclosure starts, with prime foreclosures now surpassing
subprime.\270\ As currently structured, HAMP appears capable of
preventing only a fraction of foreclosures.
---------------------------------------------------------------------------
\269\ Mortgage Bankers Association, Delinquencies Continue to Climb
in Latest MBA National Delinquency Survey (Nov. 19, 2009) (online at
www.mortgagebankers.org/NewsandMedia/PressCenter/71112.htm).
\270\ HOPE NOW, Workout Plans (Repayment Plans + Modifications) and
Foreclosure Sales, July 2007-September 2009 (online at www.hopenow.com/
industrydata/HOPE%20
NOW%20National%20Data%20July07
%20to%20Sep09%20v2.pdf) (accessed Dec. 7, 2009).
---------------------------------------------------------------------------
FIGURE 22: PERCENTAGE OF 1-4 FAMILY MORTGAGES IN 30-90 DAYS DELINQUENT
\271\
---------------------------------------------------------------------------
\271\ Mortgage Bankers Association, National Delinquency Survey.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
FIGURE 23: PERCENTAGE OF 1-4 FAMILY MORTGAGES IN FORECLOSURE \272\
---------------------------------------------------------------------------
\272\ Mortgage Bankers Association, National Delinquency Survey.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
4. Auto Industry Assistance
a. Background
Apart from its efforts to use the TARP to help stabilize
the financial system, Treasury has deployed more than $80
billion in TARP funds to assist two U.S. auto manufacturers and
their finance affiliates. With the onset of the financial
crisis in the fall of 2008, the challenges facing the auto
industry--including rising gas prices, tightening credit
markets, declining consumer confidence, and rising
unemployment--had become acute. By December, two major domestic
auto makers--Chrysler and GM--faced a sharp downturn in income
and a crippling lack of access to credit.\273\
---------------------------------------------------------------------------
\273\ Robert Nardelli, Written Testimony before the United States
Senate Committee on Banking, Housing and Urban Affairs Committee,
Hearing Examining the State of the Domestic Automobile Industry (Dec.
4, 2008) (online at banking.senate.gov/public/
index.cfm?FuseAction=Files.
View&FileStore_id=c41857b2-7253-4253-95e3-5cfd7ea81393).
---------------------------------------------------------------------------
On December 19, 2008, Chrysler and GM received bridge loans
totaling $17.4 billion.\274\ The government funding, which did
not end with those initial loans, came from a new TARP
initiative called the Automotive Industry Financing Program
(AIFP). The terms of the loans required both Chrysler and GM to
demonstrate their ability to achieve financial viability,\275\
and both companies submitted their viability plans on February
17, 2009.
---------------------------------------------------------------------------
\274\ See U.S. Department of the Treasury, Loan and Security
Agreement [GM] (Dec. 31, 2008) (online at www.financialstability.gov/
docs/agreements/GM%20Agreement%20
Dated%2031%20December%202008.pdf); U.S. Department of the Treasury,
Loan and Security Agreement [Chrysler] (Dec. 31, 2008) (online at
www.financialstability.gov/docs/agreements
/Chysler_12312008.pdf).
\275\ See White House, Fact Sheet: Financing Assistance to
Facilitate the Restructuring of Auto Manufacturers to Attain Financial
Viability (Dec. 19, 2008) (online at georgewbush-
whitehouse.archives.gov/news/releases/2008/12/20081219-6.html). The
loans also imposed conditions related to operations, expenditures, and
reporting.
---------------------------------------------------------------------------
The results of the Obama Administration's review of those
plans, announced on March 30, were not encouraging with respect
to either automaker. The Administration concluded that Chrysler
could not achieve viability as a stand-alone company and that
it would have to develop a partnership with another automotive
company or face bankruptcy.\276\ As for GM, the Administration
concluded that the automaker's financial viability plan relied
on overly optimistic assumptions about the company and future
economic developments.\277\
---------------------------------------------------------------------------
\276\ See U.S. Department of the Treasury, Chrysler February 17
Plan: Determination of Viability, at 1 (Mar. 30, 2009) (online at
www.financialstability.gov/docs/AIFP/Chrysler-Viability-
Assessment.pdf).
\277\ See U.S. Department of the Treasury, GM February 17 Plan:
Determination of Viability, at 1 (Mar. 30, 2009) (online at
www.financialstability.gov/docs/AIFP/GM-Viability-Assessment.pdf).
---------------------------------------------------------------------------
Both companies ultimately entered bankruptcy and, with the
active involvement of the federal government, underwent radical
restructurings.\278\ Following those restructurings, American
taxpayers owned about 10 percent of what is now known as New
Chrysler and 61 percent of New GM.\279\ The Administration has
stated that it intends to divest of its equity stakes in these
companies as soon as practicable, and that it intends to manage
those stakes in a ``hands-off'' manner.\280\ Nevertheless, the
federal government has exercised some initial influence over
the companies' corporate governance by appointing 10 members of
GM's 13-member board and four members of Chrysler's nine-member
board.\281\
---------------------------------------------------------------------------
\278\ For a discussion of the details of the bankruptcy, see the
Panel's September report. See Congressional Oversight Panel, September
Oversight Report: The Use of TARP Funds in the Support and
Reorganization of the Domestic Automotive Industry, at 7-8 (Sept. 9,
2009) (online at cop.senate.gov/documents/cop-090909-report.pdf)
(hereinafter ``September Oversight Report'').
\279\ General Motors, The New General Motors Company Launches Today
(July 10, 2009) (online at www.sec.gov/Archives/edgar/data/1467858/
000119312509150199/dex991.htm); First Lien Credit Agreement (Chrysler)
at Sec. 2.17(a) (June 10, 2009) (online at www.financialstability.gov/
docs/AIFP/newChrysler.pdf)
\280\ Congressional Oversight Panel, Written Testimony of Treasury
Senior Advisor Ron Bloom, Congressional Oversight Panel Field Hearing
on the Auto Industry, at 10 (July 27, 2009) (online at cop.senate.gov/
documents/testimony-072709-bloom.pdf).
\281\ See Chrysler Group LLC, Formation of Chrysler Group LLC Board
is Completed (July 5, 2009) (online at www.chryslergroupllc.com/en/
news/article/?lid=formation_board&year=2009&month=7); General Motors
Company, Form 8-K (Aug. 7, 2009) (online at www.sec.gov/Archives/edgar/
data/1467858/000119312509169233/d8k.htm).
---------------------------------------------------------------------------
Auto lender GMAC has been another large beneficiary of
AIFP, receiving $12.5 billion from the program between December
2008 and May 2009.\282\ Last month, Treasury announced that it
expected to provide additional AIFP funds to GMAC.\283\ The
firm requested more money because it has been unable to meet
the capital requirements imposed by the stress tests.\284\ The
government has not yet formally announced its rationale for
granting GMAC's request, nor has it finalized the size, form,
or structure of GMAC's latest round of federal assistance.\285\
---------------------------------------------------------------------------
\282\ November 25 Transactions Report, supra note 71, at 16 GMAC
was the former financing arm of pre-bankruptcy GM, but is now an
independent company.
\283\ See Treasury Announcement Regarding the CAP, supra note 78.
\284\ See Treasury Announcement Regarding the CAP, supra note 78.
\285\ Treasury communications with Panel staff (Nov. 17, 2009). In
answers to questions posed by members of the Panel, Assistant Secretary
Herb Allison has suggested that Treasury decided to provide further aid
to GMAC to ensure that GMAC is adequately capitalized to ``provide a
reliable source of financing to both auto dealers and customers seeking
to buy cars'' to help ``stabilize our auto financing market,'' and to
contribute ``to the overall economic recovery.'' Questions for the
Record for Assistant Secretary Allison, supra note 253, at 9.
---------------------------------------------------------------------------
The AIFP includes two additional initiatives. The Auto
Supplier Support Program (ASSP), under which the government
agreed to guarantee payment for products shipped by
participating suppliers, even if the buyers went out of
business, has committed $1 billion to Chrysler and $2.5 billion
to GM.\286\ Treasury also lent Chrysler $280 million and GM
$361 million to backstop their new vehicle warranties. Both
Chrysler and GM have since repaid those loans.\287\
---------------------------------------------------------------------------
\286\ See November 25 Transactions Report, supra note 71, at 16.
\287\ See November 25 Transactions Report, supra note 71, at 16.
---------------------------------------------------------------------------
Figure 24 shows the current state of TARP funds used to
support the auto industry. Taking into account repayments and
de-obligations, United States taxpayers have spent $49.5
billion of TARP funds in support of GM and New GM, and about
$12.5 billion of TARP funds in support of Chrysler and New
Chrysler. Investments in GMAC, assistance to automotive
suppliers, and other miscellaneous funds account for
approximately $17 billion of TARP spending, bringing the TARP
net support for the U.S. domestic automotive industry to
approximately $79 billion as of November 30, 2009.
FIGURE 24: TARP FUNDS USED IN SUPPORT OF THE AUTO INDUSTRY (AS OF NOVEMBER 30, 2009)
----------------------------------------------------------------------------------------------------------------
Cumulative Total amounts repaid
obligations \288\ and de-obligated Amounts invested 289
----------------------------------------------------------------------------------------------------------------
Chrysler...................................... $15,222,130,642 \290\ $2,691,977,062 $12,530,153,580
General Motors................................ 49,860,624,198 360,624,198 \291\ 49,500,000,000
GMAC.......................................... 12,500,000,000 -- 12,500,000,000
Chrysler Financial 292........................ 1,500,000,000 1,500,000,000
Loan for GMAC rights offering 293............. 884,024,131 -- 884,024,131
Auto Supplier Supports........................ 3,500,000,000 -- \294\ 3,500,000,000
-----------------------------------------------------------------
Total..................................... 83,466,778,971 4,552,601,260 78,914,177,711
----------------------------------------------------------------------------------------------------------------
\288\ This column represents Treasury's total obligation, or maximum exposure, to the automotive industry under
the AIFP. The figure does not reflect repayments, de-obligations or committed funds that have not been used.
\289\ The Amounts Invested are decreased by commitments that were not funded but includes amounts that are no
longer owed such as the amounts that were credit bid in the GM bankruptcy. For a more complete discussion, see
September Oversight Report, supra note 273.
\290\ This figure reflects de-obligations ($2.4 billion) and repayments ($280 million). See November 25
Transactions Report, supra note 71, at 16.
\291\ This number reflects the $8.8 billion in loans and preferred stock outstanding as well as the original
loan amounts that are now in the form of equity.
\292\ Chrysler Financial completed its repayment of this obligation on July 14, 2009.
\293\ Represents loans to GM that have been converted to shares of GMAC and are currently not obligations of GM
or GMAC. The GM loan was terminated.
\294\ This figure does not reflect the amount outstanding under the program, but instead is the total amount
available under the cap.
b. Impact
The government's investments in Chrysler and GM will
ultimately be judged based on the long-term viability of the
companies, as well as on the profits or losses the government
incurs. Some preliminary information is now available on the
recent performance and future plans of the restructured
automakers. It is important to note, though, that many factors
besides the government's investments, most notably the Cash for
Clunkers program, contributed to the two firms' financial
results over the last several months.
On November 16, 2009, GM released preliminary results for
the third quarter of 2009, providing a first glimpse of the
company's post-bankruptcy performance.\295\ Indicators were
mixed. On one hand, GM lost about $1.2 billion in the third
quarter of 2009, its revenues were down significantly from a
year earlier, and it continued to be burdened with
restructuring costs.\296\ On the other hand, the results
``showed a healthier balance sheet, ample cash, and factory
production much more in line with consumer demand[.]'' \297\ GM
has said that it plans to repay $1 billion in federal loans by
December 2009, and that it hopes to repay an additional $6.7
billion by June 2010.\298\ Chrysler has not announced its
third-quarter results.\299\ It recently announced a five-year
business plan under which it predicts it will break even in
2010, make money in 2011, and generate enough operating profit
to pay back its government loans by 2014.\300\
---------------------------------------------------------------------------
\295\ These preliminary results were not calculated in accordance
with Generally Accepted Accounting Principles (GAAP). GM voluntarily
filed the results with the SEC in a Form 8-K, in which the company
stated that in 2010 it will file financial statements with the SEC that
comply with GAAP.
\296\ See General Motors, General Motors Announces the New
Company's July 10-September 30 Preliminary Managerial Results (Nov. 16,
2009) (online at media.gm.com/content/media/us/en/news/
news_detail.html/content/Pages/news/us/en/2009/Nov/1116_earnings).
\297\ Bill Vlasic, G.M. Shows Signs of Recovery Despite New Loss,
New York Times (Nov. 16, 2009) (online at www.nytimes.com/2009/11/17/
business/
17auto.html?_r=2&hp) (hereinafter ``G.M. Shows Signs of Recovery
Despite New Loss'').
\298\ See G.M. Shows Signs of Recovery Despite New Loss, supra note
296.
\299\ New Chrysler and New GM are not public companies and are not
required to file reports with the Securities and Exchange Commission
(SEC). Nevertheless, Ron Bloom, one of the leaders of Treasury's auto
team, has stated that both companies agreed to provide public
``quarterly report card[s].'' See ``Oversight of TARP Assistance to the
Automobile Industry,'' Transcript of Hearing before the Congressional
Oversight Panel, at 37-38 (July 27, 2009) (online at cop.senate.gov/
documents/transcript-072709-detroithearing.pdf ) (explaining that the
companies' reports would not rise to the level of ``fully SEC-style''
reports in the ``near future,'' but that the companies would attempt to
provide SEC-style reporting as soon as practicable and likely even
before undertaking IPOs). It is not clear whether the auto companies
have met all of Treasury's expectations with respect to reporting.
\300\ See Chrysler Group LLC, Our Plan Presentation (Nov. 4, 2009)
(online at www.chryslergroupllc.com/business/).
---------------------------------------------------------------------------
The most recent monthly U.S. sales data are more positive
for GM than for Chrysler. GM's sales of cars and light trucks
were up by 4.7 percent between October 2008 and October 2009.
Chrysler's sales in October, on the other hand, were down 30.4
percent from a year earlier. Industry-wide sales were unchanged
in October, when compared to sales 12 months prior. Meanwhile,
the sales data from January to October 2009 are gloomy for both
companies. GM's sales were down 33.6 percent compared with the
same 10-month period in 2008. Chrysler's sales dropped 38.9
percent for the first 10 months of the year. Across the auto
industry, U.S. sales were down 25.4 percent.\301\
---------------------------------------------------------------------------
\301\ See Autodata, U.S. Light Vehicle Retail Sales (Oct. 2009)
(online at www.motorintelligence.com/fileopen.asp?File=SR-Sales-3.xls).
---------------------------------------------------------------------------
Although it may be too early to render a comprehensive
verdict on the government's intervention in the auto industry,
the assistance almost certainly prevented Chrysler and GM from
failing and liquidating. Both the manufacturing sector and the
broader economy may have suffered severe harm if the government
had allowed Chrysler and GM to disintegrate.\302\ On the cost
side of the ledger, it is unlikely that Treasury will recoup
the full amount of its investment in Chrysler and GM even if
the companies remain viable and dramatically increase their
market capitalization.\303\ In addition, as was discussed in
the Panel's September report, the government has incurred
competing responsibilities by taking a significant ownership
interest in private firms.\304\
---------------------------------------------------------------------------
\302\ The Government Accountability Office estimates that the
automotive industry, including automakers, dealerships, and automotive
parts suppliers, directly employs about 1.7 million people. See
Government Accountability Office, Troubled Asset Relief Program:
Continued Stewardship Needed as Treasury Develops Strategies for
Monitoring and Divesting Financial Interests in Chrysler and GM, GAO-
10-151, at 5 (Nov. 2, 2009) (online at www.gao.gov/new.items/
d10151.pdf) (hereinafter ``GAO: Continued Stewardship Needed'').
According to Steven Rattner, previously one of the leaders of
Treasury's auto team, ``the short-term effect of a Chrysler shutdown
[alone] could [have been] 300,000 more unemployed, similar to what was
lost across the entire economy in the month of July [2009].'' Steven
Rattner, The Auto Bailout: How We Did It, CNN.com (Oct. 21, 2009)
(online at money.cnn.com/2009/10/21/autos/auto_
bailout_rattner.fortune/index.htm?postversion=2009102104).
\303\ See September Oversight Report, supra note 273, at 55-58;
GAO: Continued Stewardship Needed, supra note 302, at 25-28.
\304\ See September Oversight Report, supra note 273, at 79-83.
---------------------------------------------------------------------------
5. The TARP as a Whole
a. Background
This report has heretofore analyzed Treasury's actions
within separate parts of the TARP and drawn conclusions about
the costs and impacts of those targeted programs, while also
studying broad macroeconomic indicators that may shed
additional light on individual programs' successes and
shortcomings. In this section, the Panel undertakes a similar
exercise with respect to the TARP as a whole. This section also
places the TARP within the broader context of the financial
stabilization efforts of the Federal Reserve and the FDIC by
looking at how the Panel counts the money that has been flowing
out of and into TARP and the federal government's other
financial stabilization programs, and discussing what has
happened to numerous macroeconomic indices since the TARP's
enactment in October 2008 and what conclusions we can draw from
the movements in those economic indicators.
b. Accounting for the TARP and Other Financial
Stabilization Programs
i. TARP's Balance Sheet
Treasury is currently committed or obligated to spend
$528.9 billion of TARP funds through an array of programs
described earlier in this report.\305\ Of this total, $401.5
billion is the net disbursement currently outstanding under the
$698.7 billion statutory limit for TARP expenditures. That
leaves $297.2 billion, or 43 percent of the statutory limit,
available for fulfillment of funding commitments under existing
programs and, potentially, for funding new programs and
initiatives.\306\ For each TARP initiative, Figure 25 shows how
much money Treasury anticipated spending, how much actually has
been spent to date, how much has been returned, how much is
currently outstanding, and how much is available for future
use.
---------------------------------------------------------------------------
\305\ Treasury is scheduled to release detailed accounting
statements for TARP in December. For purposes of this report, the Panel
must rely upon its own analysis of the financial status of the TARP,
and those of the Government Accountability Office (GAO), the
Congressional Budget Office (CBO), and the Special Inspector General
for the Troubled Asset Relief Program (SIGTARP).
\306\ The calculation that $300.5 billion is available under the
TARP is based on Treasury's interpretation of EESA. According to
Treasury, repaid TARP funds go into the U.S. Treasury's General Fund
for the reduction of the public debt, and those repayments also create
additional headroom under the $698.7 billion statutory limit for
Treasury's use under TARP. The Panel takes no position on Treasury's
interpretation of the law. U.S. Department of the Treasury, Treasury
Announces $68 Billion in Expected CPP Repayments (June 9, 2009) (online
at www.treas.gov/press/releases/tg162.htm).
FIGURE 25: TARP ACCOUNTING (AS OF NOVEMBER 30, 2009)
[In billions of dollars]
----------------------------------------------------------------------------------------------------------------
Net
TARP Initiative Anticipated Actual Total Net funding funding
funding funding repayments outstanding available
----------------------------------------------------------------------------------------------------------------
Capital Purchase Program (CPP)................... $218.0 $204.7 $71.0 $133.7 \307\ $13.
3
Targeted Investment Program (TIP)................ 40.0 40.0 0 40.0 0
Systemically Significant Financial Institutions 69.8 69.8 0 69.8 0
Program (SSFI)..................................
Automobile Industry Financing Program (AIFP)..... 77.6 77.6 2.2 75.4 0
Asset Guarantee Program (AGP).................... 5.0 5.0 0 5.0 0
Capital Assistance Program (CAP):
Term Asset-Back Securities Lending Facility 20.0 20.0 0 20.0 0
(TALF)..........................................
Public-Private Investment Partnership (PPIP)..... 30.0 26.7 0 26.7 3.3
Supplier Support Program (SSP)................... \308\ 3.5 3.5 0 3.5 0
Unlocking SBA Lending............................ 15.0 0 N/A 0 15.0
Home Affordable.................................. 50.0 \309\ 27 0 27.4 22.7
.4
Modification Program (HAMP):
Total Committed.................................. 528.9 471.3 -- 401.5 54.3
Total Uncommitted................................ 169.8 N/A 73.2 N/A \310\ 243.
0
--------------------------------------------------------------
TOTAL...................................... 698.7 474.7 73.2 401.5 297.2
----------------------------------------------------------------------------------------------------------------
\307\ This figure excludes the repayment of $71 billion in CPP funds. These funds are accounted for as
uncommitted.
\308\ On July 8, 2009, Treasury lowered the total commitment amount for the program from $5 billion to $3.5
billion, reducing GM's portion from $3.5 billion to $2.5 billion and Chrysler's portion from $1.5 billion to
$1 billion. See U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period
Ending October 28, 2009, at 17 (Oct. 30, 2009) (online at financialstability.gov/docs/transaction-reports/10-
30-09%20Transactions%20Report%20as%20of%2010-28-09.pdf).
\309\ This figure reflects the total of all the caps set on payments to each mortgage servicer. See November 25
Transactions Report, supra note 71.
\310\ This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($169.8 billion)
and the repayments ($73.2 billion).
Based on the amount of money spent to date, the biggest
part of the TARP consists of the programs that provide capital
assistance to financial institutions. Five such programs--the
CPP, the SSFI, the TIP, the PPIP and the AGP--comprise a total
of 68 percent of the net current investments of TARP funds, as
Figure 26 shows. By contrast, efforts to help the auto industry
make up 20 percent of the total; foreclosure prevention efforts
make up 7 percent; and efforts targeted at small business and
consumer lending make up just 5 percent of the total money
outstanding.
FIGURE 26: NET CURRENT INVESTMENT OF TARP FUNDS \311\
---------------------------------------------------------------------------
\311\ See November 25 Transactions Report, supra note 71.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
c. The TARP in the Context of Other Federal Government
Stablilization Efforts
As was stated above, Treasury's actions under the TARP have
been part of a larger stabilization effort that has included
programs run by the Federal Reserve and the FDIC. In fact,
since the onset of the stabilization effort, both the Federal
Reserve and the FDIC have been exposed on a nominal basis to
substantially higher losses than Treasury has under the TARP.
The nature of the three agencies' exposures, however, has
differed based on the structure and risk profile of each
specific agency initiative.
The Panel has classified the agencies' stabilization
efforts into three broad categories: outlays, loans, and
guarantees.\312\ As Figure 27 shows, currently the vast
majority of Treasury's net current investments of $401.5
billion is in the form of outlays,\313\ which reflects the fact
that the majority of TARP initiatives have been structured as
equity investments or have eventually taken that form. The
Federal Reserve currently has a maximum possible exposure of
$1.73 trillion, which includes loans, principally in the form
of programs to enhance liquidity, as well as substantial
purchases of GSE mortgage-backed securities and its guarantee
of certain Citigroup assets,\314\ which exposes the Federal
Reserve to potential losses of up to $220.4 billion.\315\ The
FDIC's maximum possible exposure is $666.7 billion, and 93
percent of that exposure is through the TLGP, with the
remaining amount representing the FDIC's provision for losses
under its Deposit Insurance Fund.\316\ Altogether, the current
estimate of the federal government's maximum possible exposure
is $3.1 trillion,\317\ including uncommitted TARP funds.\318\
However, this would translate into the ultimate ``cost'' of the
stabilization effort only if: (1) all uncommitted balances are
fully utilized; (2) assets do not appreciate; (3) all loans
default and are written off; and (4) all guarantees are
exercised and subsequently written off. As many of these
programs are phased out and scaled back, it is clear that,
while the scale and the attendant risks of the government's
various initiatives were unprecedented, the direct financial
cost to the government, measured in terms of losses under the
programs, will likely be a fraction of the maximum possible
exposure.
---------------------------------------------------------------------------
\312\ Outlays represent disbursements made with TARP funds, such as
to purchase debt or equity securities. A guarantee is a promise to
stand behind another's obligation to a third party. A guarantee, unlike
a loan, requires no transfer of funds or assets. Outlays here do not
technically correspond to outlays as measured in the federal budget.
\313\ See November 25 Transactions Report, supra note 71.
\314\ See Figure 27 infra.
\315\ See Appendix V footnote iv infra.
\316\ See Figure 27 infra.
\317\ See Figure 27 infra.
\318\ The federal government has significantly reduced its economic
stabilization-related exposure in recent months. Since the Panel
started tracking maximum possible exposure beginning in its April 2009
report (reflecting data from March 2009), maximum exposure peaked at
about $4.5 trillion in May 2009 before gradually declining to its
current level of about $3 trillion. The decline in exposure over the
last several months is largely attributable to the scaling back of the
Federal Reserve's liquidity programs, most notably discount window
lending and Term Auction Facility, and the retrenchment of certain
guarantee programs. These figures do not include further recent
reductions in exposure due to the termination of Treasury's Temporary
Guarantee Program for Money Market Mutual Funds, which extended from
September 19, 2008 to September 18, 2009 and reflected a maximum
potential exposure of about $3.2 trillion in its initial phase, and the
AGP's never fully consummated guarantee of certain Bank of America
assets under the Asset Guarantee Program that was terminated in
September 2009. See November Oversight Report, supra note 96, at 35,
40-52.
FIGURE 27--FEDERAL GOVERNMENT'S FINANCIAL STABILIZATION PROGRAMS (AS OF NOVEMBER 25, 2009)--CURRENT MAXIMUM
EXPOSURES *
[In billions of dollars]
----------------------------------------------------------------------------------------------------------------
Treasury Federal
Program (TARP) Reserve FDIC Total
----------------------------------------------------------------------------------------------------------------
AIG............................................. $69.8 $94.6 $0 $164.4
Outlays..................................... i 69.8 0 0 69.8
Loans....................................... 0 ii 94.6 0 94.6
Guarantees.................................. 0 0 0 0
Bank of America................................. 45 0 0 45
Outlays..................................... iii 45 0 0 45
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Citigroup....................................... 50 220.4 10 280.4
Outlays..................................... v 45 0 0 45
Loans....................................... 0 0 0 0
Guarantees iv .............................. 5 220.4 10 235.4
Capital Purchase Program (Other)................ 97 0 0 97
Outlays..................................... vi 97 0 0 97
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Capital Assistance Program...................... TBD TBD TBD vii TBD
TALF............................................ 20 180 0 200
Outlays..................................... 0 0 0 0
Loans....................................... 0 ix 180 0 180
Guarantees.................................. viii 20 0 0 20
PPIF (Loans) x ................................. 0 0 0 0
Outlays..................................... 0 0 0 0
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
PPIF (Securities)............................... xi 30 0 0 30
Outlays..................................... 10 0 0 10
Loans....................................... 20 0 0 20
Guarantees.................................. 0 0 0 0
Home Affordable Modification Program............ 50 0 0 xiii 50
Outlays..................................... xii 50 0 0 50
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Automotive Industry Financing Program........... 75.4 0 0 75.4
Outlays..................................... xiv 55.2 0 0 55.2
Loans....................................... 20.2 0 0 20.2
Guarantees.................................. 0 0 0 0
Auto Supplier Support Program................... 3.5 0 0 3.5
Outlays..................................... 0 0 0 0
Loans....................................... xv 3.5 0 0 3.5
Guarantees.................................. 0 0 0 0
Unlocking Credit for Small Businesses........... 15 0 0 15.0
Outlays..................................... xvi 15 0 0 15
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Temporary Liquidity Guarantee Program........... 0 0 609 609
Outlays..................................... 0 0 0 0
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 xvii 609 609
Deposit Insurance Fund.......................... 0 0 47.7 47.7
Outlays..................................... 0 0 xviii 47.7 47.7
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Other Federal Reserve Credit Expansion.......... 0 1,237.9 0 1,237.9
Outlays..................................... 0 1,008.5 0 1,008.5229.4
Loans....................................... 0 xix 229.4 0 0
Guarantees.................................. 0 0 0 0
Uncommitted TARP Funds.......................... 243 0 0 24
Outlays..................................... TBA 0 0 TBA
Loans....................................... TBA 0 0 TBA
Guarantees.................................. TBA 0 0 TBA
---------------------------------------------------------------
Total................................... 698.7 1,732.9 666.7 xxii 3,054.7
Outlays xx ......................... 387 1,008.5 47.7 1,443.2
Loans............................... 43.7 504 0 547.7
Guarantees xxi ..................... 25.0 220.4 619.0 864.4
Uncommitted TARP Funds.............. 243 0 0 243
----------------------------------------------------------------------------------------------------------------
* Associated footnotes are located in Appendix V.
With respect to the Federal Reserve and FDIC's financial
stabilization programs, the risk of loss varies significantly
across the programs listed here, as do the mechanisms for
protecting taxpayers against such risk. The Federal Reserve's
liquidity programs have generally included mechanisms designed
to protect taxpayers against program losses, most notably the
use of loans with recourse to collateral.\319\ The use of
recourse loans limits the risk of losses to taxpayers to the
event of the borrower entering bankruptcy, and losses under the
Federal Reserve liquidity programs have not materialized. The
Federal Reserve did take on substantial risk in creating three
special purpose vehicles to purchase Bear Stearns and AIG
assets. However, in aggregate, the current principal on the
loans to these facilities is roughly equal to the market value
of the purchased real estate assets, which have rebounded from
previous lows. For the TLGP, the FDIC assesses a premium of up
to one percent on debt guarantees. While potential exposure
under the TLGP has been enormous, the premiums collected from
participants have so far been more than adequate to protect
against program losses.
---------------------------------------------------------------------------
\319\ The Federal Reserve's loans are over-collateralized and with
recourse to other assets of the borrower. If the assets securing a
Federal Reserve loan realize a decline in value greater than the
``haircut'' or excess collateral pledged to support the loan, the
Federal Reserve is able to demand more collateral from the borrower.
Similarly, should a borrower default on a recourse loan, the Federal
Reserve can turn to the borrower's other assets to make the Federal
Reserve whole.
---------------------------------------------------------------------------
Furthermore, the federal government's total stabilization-
related exposure has been significantly reduced in recent
months. Figure 28 shows the Federal Reserve's and FDIC's
exposure as it has changed since January 2007. The general
trend shows the Federal Reserve phasing out its liquidity
programs and continuing to expand its portfolio of GSE
mortgage-backed securities through new purchases. Exposure
attributable to the TLGP and the Federal Reserve's support of
Bear Stearns and AIG has been more stable in recent months.
FIGURE 28: FEDERAL RESERVE AND FDIC ASSISTANCE SINCE JANUARY 2007 \320\
---------------------------------------------------------------------------
\320\ Federal Reserve Liquidity Facilities include: Primary credit,
Secondary credit, Central Bank Liquidity Swaps: Primary dealer and
other broker-dealer credit, Asset-Backed Commercial Paper Money Market
Mutual Fund Liquidity Facility, Net portfolio holdings of Commercial
Paper Funding Facility LLC, Seasonal credit, Term auction credit, Net
Portfolio Holdings of TALF LLC. Federal Reserve Mortgage Related
Facilities include: Federal agency debt securities and Mortgage-backed
securities held by the Federal Reserve. Institution Specific Facilities
include: Credit extended to American International Group, Inc., and the
net portfolio holdings of Maiden Lanes I, II, and III. All Federal
Reserve figures reflect the weekly average outstanding under the
specific programs during the last week of the specified month. Board of
Governors of the Federal Reserve System, Factors Affecting Reserve
Balances (H.4.1) (online at www.federalreserve.gov/datadownload/
Choose.aspx?rel=H41) (accessed Nov. 25, 2009). For related
presentations of Federal Reserve data, see Board of Governors of the
Federal Reserve System, Credit and Liquidity Programs and the Balance
Sheet, at 2 (Nov. 2009) (online at www.federalreserve.gov/
monetarypolicy/files/monthlyclbsreport200911.pdf). The TLGP figure
reflects the monthly amount of debt outstanding under the program.
Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance
Under the Temporary Liquidity Guarantee Program (Dec. 2008-Oct. 2009)
(online at www.fdic.gov/regulations/resources/TLGP/reports.html).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
d. TARP Repayments and Income
As of November 30, 2009, a total of 50 banks have fully
repaid their preferred stock investments under the Capital
Purchase Program.\321\ Of these banks, 30 have repurchased
their CPP warrants as well.\322\ The rate of repayments being
made by CPP participants has greatly slowed since June 2009,
when twelve banks paid $68.4 billion to redeem their preferred
shares. Three institutions, Goldman Sachs, JPMorgan Chase, and
Morgan Stanley are responsible for over 60 percent of all TARP
repayments.\323\ As noted in Section 1(C), as of October 30,
2009, the rate of return on TARP investments in financial
institutions that have completely exited the program is 17
percent, including preferred shares, dividends, and warrants.
---------------------------------------------------------------------------
\321\ See November 25 Transactions Report, supra note 71.
\322\ See Figure 4 supra. The five privately owned banks that
repurchased its warrants are omitted from the chart.
\323\ November 25 Transactions Report, supra note 71.
---------------------------------------------------------------------------
Figure 29 shows that more than 85 percent of the money that
has flowed back to the TARP has been repayments under the CPP.
An additional 15 percent of the money has come from CPP
dividends and warrant repurchases. The TARP's other sources of
income so far have been quite small by comparison.
FIGURE 29: TARP INCOME (AS OF OCTOBER 31, 2009) 324
[In billions of dollars]
----------------------------------------------------------------------------------------------------------------
Warrant
TARP initiative Repayments Dividends Interest repurchases Total
----------------------------------------------------------------------------------------------------------------
CPP....................................... $71 $6.8 $.01 $3.2 $81
TIP....................................... ............ 2.3 N/A 0 2.3
Auto Initiatives.......................... 2.2 0.5 .3 N/A 3.0
AGP....................................... ............ .3 ............ ............ .3
Bank of America Guarantee................. ............ ............ ............ -0.3 ............
---------------------------------------------------------------------
Total............................... 73.2 9.9 .43 3.2 86.9
----------------------------------------------------------------------------------------------------------------
\324\ U.S. Department of the Treasury, Cumulative Dividends Report as of Oct. 31, 2009 (Dec. 1, 2009) (online at
www.financialstability.gov/docs/dividends-interest-reports/August2009_DividendsInterestReport.pdf); November
25 Transactions Report, supra note 71.
e. The TARP's Impact on the Federal Budget and the Deficit
While most federal expenditures are recorded in the federal
budget on a cash basis, credit programs are treated
differently. For credit programs, the discounted present value
of the cash flows is calculated and only this net gain or loss
amount is recorded in the budget. The relationship of this net
gain or loss to the government and the total cash disbursed
produces a ``subsidy rate.'' EESA requires that TARP
expenditures be treated as credit programs and therefore a
subsidy rate is calculated for them and only the net loss or
gain is recorded in the budget.\325\
---------------------------------------------------------------------------
\325\ Section 123 of EESA requires that TARP be treated on a credit
reform basis.
---------------------------------------------------------------------------
In May 2009, the Administration projected that the TARP
would disburse $704 billion in federal fiscal year 2009,
although TARP outlays and its deficit impact were $261 billion,
implying a weighted average subsidy rate of 37 percent. When
the Administration closed the books on fiscal year 2009 on
September 30, the $261 billion outlay figure had fallen to $151
billion and this was, in effect, TARP's contribution to the
federal deficit in 2009. According to recent press accounts,
this net cost figure is likely to decline further to
approximately $42 billion \326\ and the overall subsidy rate to
12 percent.\327\ The declining net cost to the federal
government for the TARP investments and loan guarantees
undertaken in 2009 largely reflects the fact that Treasury now
estimates higher returns on its CPP investments due largely to
lower losses on, and faster repayments of, those investments,
as well as the increased value of the stock warrants Treasury
holds.
---------------------------------------------------------------------------
\326\ The difference between the amount recorded in the
Administration's end of year budget report ($151 billion) and the final
amount recorded on the Treasury's books for FY 2009 (now reported at
$42 billion) is $109 billion; this implies that an adjustment (outlay
reduction) of approximately that amount in the 2010 federal budget will
be forthcoming.
\327\ See Jackie Calmes, U.S. Forecasts Smaller Loss From Bailout
of Banks, New York Times (Dec. 6, 2009) (online at www.nytimes.com/
2009/12/07/business/07tarp.html). Treasury has confirmed the accuracy
of this report.
---------------------------------------------------------------------------
Because TARP outlays reflect the discounted present value
of TARP cash flows, the resulting net cost that is recorded as
an outlay in the federal budget provides a good measure of the
economic cost of the program. Consequently, the sum of the
final outlay figures for each fiscal year provides a good
measure of the current projection of the ultimate economic cost
of the program to the American taxpayer. The published
estimates in the latest budget documents from the OMB show this
total cost to be $341 billion for the period 2009 through 2016;
the latest estimate from the CBO for the period 2009-2013 puts
the total cost at $241 billion. Hence, notwithstanding
Treasury's asserted authority to have $698.7 billion in cash
disbursed at any point in time, the net cost of the TARP
program will in all likelihood be substantially less than $700
billion. This reflects both the fact that (1) the economic cost
or subsidy rate has declined from the initial estimate and (2)
as seen in Figure 25 above, a large amount of the TARP's
authorized disbursement level is currently unutilized.
f. Relevant Macroeconomic Indicators
The TARP was created during a period of severe global
financial disruption. In October 2009, the International
Monetary Fund (IMF) projected worldwide losses of $3.4 trillion
stemming from the crisis.\328\ By way of comparison, that is
more money than the entire federal government spent--$3.1
trillion--in fiscal year 2009.\329\ The IMF estimates that $1.5
trillion in global bank write-downs have yet to be recognized,
with most of the losses coming from U.S., UK, and Euro area
banks.\330\ The expected loss of wealth, though lower than
earlier estimates, poses a challenge to governments seeking to
reinvigorate their economies. The United States has sought to
support its banking sector so that it is able to weather the
downtown, and many banks have seen increasing success in
raising capital since the stress test results were released. As
of November 30, U.S. banks, including both those that did and
did not receive government assistance, had raised $72.4 billion
in common equity and $49.7 billion in preferred equity in
2009.\331\
---------------------------------------------------------------------------
\328\ International Monetary Fund, Global Financial System Shows
Signs of Recovery, IMF Says (Sept. 30, 2009) (online at www.imf.org/
external/pubs/ft/survey/so/2009/RES093009A.htm).
\329\ Office of Management and Budget, Table S-1. Budget Totals
(online at www.whitehouse.gov/omb/rewrite/budget/fy2009/
summarytables.html) (accessed Dec. 7, 2009).
\330\ International Monetary Fund, World Economic Outlook October
2009, at 5 (online at www.imf.org/external/pubs/ft/weo/2009/02/pdf/
text.pdf) (accessed Dec. 7, 2009).
\331\ SNL Financial, Bank and Thrift Capital Raises (online at
www.snl.com/InteractiveX/article.aspx?CDID=A-9619028-11615&KPLT=4)
(accessed Dec. 7, 2009).
---------------------------------------------------------------------------
While conditions in the banking sector have improved, the
overall shape of the recovery remains unclear. Economic
contractions that have their source in a banking crisis tend to
be prolonged,\332\ and the current experience is no exception.
There is a risk that a new asset bubble will form, leading to
another crash.\333\ There are also risks that prices for homes
and in the commercial real estate sector will fall further,
which would reduce the value of assets held by banks. The
economy has begun to expand once again, but unemployment
remains high, and millions of American households continue to
live with the prospect of imminent foreclosure and the loss of
their homes.
---------------------------------------------------------------------------
\332\ See International Monetary Fund, World Economic Outlook, at
103-138 (Apr. 2009) (online at www.imf.org/external/pubs/ft/weo/2009/
01/pdf/text.pdf) (finding that recessions that are associated with
financial crises have historically been longer and deeper, and featured
weak recoveries).
\333\ See, e.g., Congressional Oversight Panel, Written Testimony
of MIT Sloan School of Management Professor Simon Johnson, Taking
Stock: Independent Views on TARP's Effectiveness (Nov. 19, 2009)
(online at cop.senate.gov/documents/testimony-111909-johnson.pdf)
(hereinafter ``Johnson COP Testimony'').
---------------------------------------------------------------------------
i. Credit Risk
Credit spreads measure the differences in yields between
different bonds. At the height of the financial crisis in the
fall of 2008, spreads between the safest bonds and those that
carried greater risk skyrocketed, reflecting instability in the
financial markets, as investors panicked and sought refuge in
safer investments. Credit spreads have fallen significantly
since the creation of the TARP. Treasury cites the improvement
as a sign of TARP's success, noting that the largest declines
occurred in markets receiving direct government support, such
as asset-backed securities and debt by government-supported
enterprises such as Fannie Mae and Freddie Mac.\334\
---------------------------------------------------------------------------
\334\ Next Phase of Government Financial Stabilization, supra note
70, at 8.
---------------------------------------------------------------------------
The closely watched LIBOR-OIS spread provides another
example of how credit conditions have improved.\335\ This
spread measures the difference between the London Interbank
Offered Rate (LIBOR), which shows quarterly borrowing costs for
banks, and the Overnight Indexed Swaps rate (OIS), which
measures the cost of extremely short-term borrowing by
financial institutions. As the spread increases, market
participants have greater fears about whether counterparties
will be able to deliver on their obligations. After reaching a
record high of 364 basis points, or 3.64 percent, in October
2008, the spread fell to around 100 basis points in early 2009.
It stood at 13 basis points on Nov. 17, 2009.\336\ The lower
spread means that the banking sector now has a significantly
lower cost of short-term capital than it did at the height of
the crisis.
---------------------------------------------------------------------------
\335\ Next Phase of Government Financial Stabilization, supra note
70, at 8.
\336\ Bloomberg, Fed to Cut Maximum Maturity of Discount Window
Loans (Nov. 17, 2009) (online at www.bloomberg.com/apps/
news?pid=20601068&sid=akC02cF4YHC4).
---------------------------------------------------------------------------
The TED spread, which is the difference between LIBOR and
short-term Treasury bill interest rates, is another indicator
of perceived credit risk. A high TED spread shows an
unwillingness by investors to hold securities other than
Treasury bills. After peaking in late 2008, the TED spread has
fallen to pre-crisis levels, as Figure 30 illustrates. A report
by the Government Accountability Office (GAO) found that the
announcement of the Capital Purchase Program under the TARP had
a statistically significant effect on the TED spread, although
the decline was not due solely to the TARP.\337\ The GAO
analysis supports Treasury's claim that the TARP had a positive
effect on credit markets.
---------------------------------------------------------------------------
\337\ GAO: TARP One Year, supra note 195, at 36.
---------------------------------------------------------------------------
FIGURE 30: TED SPREAD SINCE DECEMBER 1999 (IN BASIS POINTS) \338\
---------------------------------------------------------------------------
\338\ SNL Financial, Historical Yields--Instruments: 3-month LIBOR,
3-month Treasury Bills (online at www.snl.com/interactivex/
dividendyields.aspx?
Refreshed=1&YieldViewType=1&Industry=0%2c18%2c3%2c1%2c2%
2c8%2c7%2c22%2c10%2c21%2c5%2c4) (accessed Dec. 7, 2009).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
ii. Credit to Businesses
While banks now have a lower short-term cost of capital,
putting them in a better position to lend, many borrowers have
yet to see a return to pre-crisis levels of credit
availability. Commercial paper is a form of debt that companies
use to meet various short-term financial obligations, such as
meeting their payrolls. Commercial paper outstanding, a rough
measure of short-term business debt, is an indicator of the
availability of credit for businesses. Since January 2007,
total commercial paper outstanding has decreased by almost 37
percent, and it has fallen by more than 20 percent since the
enactment of EESA. The value of commercial paper outstanding
reached a peak of $2.22 trillion in August 2007, fell to $1.61
trillion by early October 2008, and fell further to $1.24
trillion in November 2009, as Figure 31 indicates. Figure 31
shows that the declines have happened not just in the overall
market, but also in its various segments. These declines
reflect not only a contraction of available credit to
businesses, but also a drop in demand for loans due to poor
economic conditions.
FIGURE 31: COMMERCIAL PAPER OUTSTANDING \339\
---------------------------------------------------------------------------
\339\ Board of Governors of the Federal Reserve System, Commercial
Paper--Instrument: Commercial Paper, Monthly Outstanding; seasonally
adjusted (online at www.federalreserve.gov/datadownload/
Choose.aspx?rel=CP) (accessed Dec. 7, 2009).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
iii. Housing Sector
The health of the residential real estate market is an
important economic indicator, both because of the housing
sector's vast size--U.S. households held real estate worth
$18.3 trillion in the second quarter of 2009 \340\--and because
families often have a great deal of their wealth invested in
their homes. It is important not to overstate the connection
between the TARP and the state of the U.S. housing market.
Other government policies aimed at supporting the housing
sector, including historically low interest rates, the Federal
Reserve's purchases of mortgage-related securities, the
enactment of a tax credit for first-time homebuyers, and
policies enacted at the Federal Housing Administration and at
Fannie Mae and Freddie Mac, which are currently in government
conservatorship, have a more direct link to the state of the
housing market than the TARP does.
---------------------------------------------------------------------------
\340\ See Board of Governors of the Federal Reserve System, B.100
Balance Sheet of Households and Nonprofit Organizations (Sept. 17,
2009) (online at www.federalreserve.gov/releases/z1/Current/z1r-5.pdf).
---------------------------------------------------------------------------
The financial crisis began in the U.S. housing sector,
which has seen large nationwide declines in home values. There
are two major indices of residential housing prices nationwide:
the Federal Housing Finance Agency House Price Index and the
S&P/Case-Shiller index. The 2009 data from both indices show
signs of housing price stabilization, and prices are currently
near their 2004-2005 levels, as Figure 32 shows. However,
Treasury recently cautioned that the residential real estate
market had not reached a firm bottom.\341\
To the extent the peak 2006 values were the result of a bubble,
a return to those levels is neither desirable nor anticipated.
However, the drop in housing prices represents a real loss in
wealth to homeowners and investors.
---------------------------------------------------------------------------
\341\ Next Phase of Government Financial Stabilization, supra note
70, at 12.
---------------------------------------------------------------------------
FiGURE 32: CASE SHILLER AND FHFA HOME PRICE INDEXES \342\
---------------------------------------------------------------------------
\342\ Standard & Poor's, S&P/Case-Shiller Home Price Indices--
Instrument: Seasonally Adjusted Composite20 Index (online at
www2.standardandpoors.com/spf/pdf/index
/SA_CSHomePrice _
History_102706.xls) (accessed Dec. 7, 2009); Federal Housing Finance
Agency, U.S. and Census Division Monthly Purchase Only Index
(Instrument: USA, Seasonally Adjusted) (online at www.fhfa.gov/
Default.aspx?Page=87) (accessed Dec. 7, 2009). Most recent data
available for both measures are from September 2009.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The current inventory of unsold homes offers another
indicator of the housing sector's health. Too large an
inventory puts downward pressure on prices; a six-month
inventory is generally considered healthy. Inventories have
been declining in recent months, as Figure 33 shows, the result
of declining construction levels and improving sales, although
inventory remains well above historic norms. At the end of
October 2009, the inventory of unsold homes stood at 3.57
million homes, which constitutes a seven-month supply. This was
the first time in more than two years that the inventory of
unsold homes fell as low as a seven-month supply.\343\
---------------------------------------------------------------------------
\343\ National Association of Realtors, Existing-Home Sales Record
Another Big Gain, Inventories Continue to Shrink (Nov. 23, 2009)
(online at http://www.realtor.org/press_room/news_
releases/2009 /11/record_big).
---------------------------------------------------------------------------
FIGURE 33: HOUSING INVENTORY \344\
---------------------------------------------------------------------------
\344\ National Association of Realtors, Housing Inventory Data.
Information provided in response to Panel request. Shaded areas
represent periods of recession.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mortgage interest rates are yet another indicator of the
housing market's current state. Low rates make home purchases
more affordable, and they allow homeowners to refinance their
mortgages on favorable terms. Completely apart from the TARP,
the federal government has undertaken various efforts aimed at
keeping mortgage rates low. These actions include the Federal
Reserve's decision to hold large volumes mortgage backed
securities on its balance sheet and the government's decision
to serve as a backstop for Fannie Mae and Freddie Mac. As
Figure 34 shows, rates for 30-year conventional mortgages rose
somewhat earlier this year, but are currently back to near
historically low levels.
FIGURE 34: MORTGAGE RATES \345\
---------------------------------------------------------------------------
\345\ Board of Governors of the Federal Reserve System, Selected
Interest Rates--Instruments: Contract Rate on 30-Year Fixed Rate
Conventional Home Mortgage, Market Yield on U.S. Treasury Securities at
10-Year Constant Maturity (online at www.federalreserve.gov/
datadownload/Choose.aspx?rel=H.15) (accessed Dec. 7, 2009). Shaded
areas represent periods of recession.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Finally, as Figure 35 shows, home sales, of both new and
existing homes, are beginning to recover, although new home
sales remain well below historic averages.
FIGURE 35: NEW AND EXISTING HOME SALES \346\
---------------------------------------------------------------------------
\346\ National Association of Realtors, New and Existing Home
Sales. Information provided in response to Panel request. Shaded areas
represent periods of recession.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
While not directly tied to the TARP and its foreclosure
mitigation programs, there is a relationship between
foreclosures and key housing indicators. Foreclosures,
especially on the scale of the 8 to 13 million projected over
the next five years, can directly affect home prices and
inventory. Foreclosures increase inventory by flooding the
market with bank-owned properties and drive down home prices by
an average of $7,200 per home.\347\
---------------------------------------------------------------------------
\347\ Center for Responsible Lending, Soaring Spillover:
Accelerating Foreclosures to Cost Neighbors $502 Billion in 2009 Alone;
69.5 Million Homes Lose $7,200 on Average (May 7, 2009) (online at
www.responsiblelending.org/mortgage-lending
/research-analysis/soaring-spillover-3-09.pdf).
---------------------------------------------------------------------------
iv. Commercial Real Estate
The commercial real estate (CRE) sector is also an
important indicator of economic health. Unfortunately, like the
residential real estate sector, the CRE sector is faring
poorly.
The Federal Reserve estimates that approximately $3.5
trillion of CRE debt is currently outstanding, and that nearly
$500 billion of CRE loans will mature during each of the next
few years.\348\ For various reasons, however, commercial
property values have declined sharply since 2007 and continue
to fall.\349\ Meanwhile, banks have become increasingly
hesitant to extend new CRE credit or refinance existing
debt,\350\ while another major source of CRE financing--the
market for commercial mortgage-backed securities--has largely
shut down since the financial crisis began.\351\ Given these
trends, as well as high vacancy rates and weak rent growth,
Deutsche Bank estimates that banks' aggregate losses on recent-
vintage core CRE, construction, and multi-family loans could
fall within the $200 billion to $300 billion range, with the
biggest losses involving construction loans.\352\
---------------------------------------------------------------------------
\348\ See House Oversight and Government Reform, Subcommittee on
Domestic Policy, Written Testimony of Jon D. Greenlee, Associate
Director of the Division of Banking Supervision and Regulation for the
Federal Reserve Board, Residential and Commercial Real Estate (Nov. 2,
2009) (online at federalreserve.gov/newsevents/testimony/
greenlee20091102a.htm) (hereinafter ``Residential and Commercial Real
Estate'').
\349\ See Deutsche Bank, The Future Refinancing Crisis in
Commercial Real Estate, at 3 (Apr. 23, 2009) (online at cop.senate.gov/
documents/report-042309-parkus.pdf) (``Purely as a result of the
enormous changes in the available financing terms . . . , we estimate
that commercial real estate prices have declined 25-30% from their 2007
peak. On top of this, the impact of the worst economic recession in
decades on property cash flows will likely push them down [an]
additional 15-20% . . .'').
\350\ See Congressional Oversight Panel, Written Testimony of
Jeffrey DeBoer, Chief Executive Officer of the Real Estate Roundtable,
Congressional Oversight Panel Field Hearing in New York City on
Corporate and Commercial Real Estate Lending, at 2 (May 28, 2009)
(online at cop.senate.gov/documents/testimony-052809-deboer.pdf).
\351\ See Residential and Commercial Real Estate, supra note 348
(``The current fundamental weakness in CRE markets is exacerbated by
the fact that the CMBS market, which previously had financed about 30
percent of originations and completed construction projects, has
remained closed since the start of the crisis'').
\352\ Deutsche Bank, Q4 2009 CRE Outlook: Searching for a Bottom
(Dec. 1, 2009); see also Goldman Sachs, U.S. Commercial Real Estate
Take III: Re-constructing Estimates for Losses, Timing, at 11-13 (Sept.
29, 2009) (hereinafter ``2009 CRE Outlook'') (estimating $287 billion
in losses from core CRE and construction loans); Congressional
Oversight Panel, August Oversight Report: The Continued Risk of
Troubled Assets, at 56 (Aug. 11, 2009) (noting that ``the Panel's model
of whole loan losses estimates potential core CRE and construction loan
losses through 2010 of $81.1 billion at 701 banks with assets between
$600 million and $80 billion'').
---------------------------------------------------------------------------
As Figure 36 illustrates, smaller banks are
disproportionately exposed to the CRE threat.
FIGURE 36: BANK EXPOSURE TO CORE CRE LOANS \353\
---------------------------------------------------------------------------
\353\ 2009 CRE Outlook, supra note 352. The ``Banks 1-4'' group
includes banks with total assets between $1.28 trillion and $2.25
trillion; the ``Banks 5-19'' group includes banks with total assets
between $130 billion and $890 billion; the ``Banks 20-50'' group
includes banks with total assets between $25 billion and $130 billion;
the ``Banks 50-97'' group includes banks with total assets between $10
billion and $25 billion; and the ``Banks >=98'' group includes banks
with total assets less than $10 billion. ``Core'' CRE does not include
construction, multi-family, or farm loans. See June Oversight Report,
supra note 77.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
D. Expert Commentary on the TARP
To date, only a handful of studies have attempted to
evaluate, in a comprehensive way, the effectiveness of the
TARP. Thus, in October 2009, the Panel solicited the views of a
broad range of economists and other academics. A number
responded to the Panel's solicitations. In addition, on
November 19, 2009, the Panel held a hearing to solicit expert
views on the strengths and weaknesses of the TARP. That
hearing--titled ``Taking Stock: Independent Views on TARP's
Effectiveness''--featured testimony from a distinguished group
of economists.\354\
---------------------------------------------------------------------------
\354\ Testifying before the Panel were Dean Baker, Co-Director of
the Center for Economic and Policy Research; Charles Calomiris, Henry
Kaufman Professor of Financial Institutions at the Columbia Business
School; Simon Johnson, Professor of Global Economics and Management at
the MIT Sloan School of Management and Senior Fellow at the Peterson
Institute for International Economics; Alex Pollock, Resident Fellow at
the American Enterprise Institute; and Mark Zandi, Chief Economist and
Co-Founder of Moody's Economy.com. Written testimony and a video of the
hearing are available on the Panel's website (cop.senate.gov). An
official transcript of the hearing will be available online in January
2010.
---------------------------------------------------------------------------
Several themes run throughout this body of commentary. Most
generally, commentators tend to agree that some sort of
government intervention was necessary to stabilize the
financial system, and that the TARP has contributed materially
to that project, at least in the short term.\355\ As evidence,
these commentators point primarily to the easing of panic in
the financial sector, as well as various indicators of
financial health--such as credit spreads, CDS spreads for
financial firms, and stock prices of financial firms--which
have improved demonstrably since the TARP's inception.\356\
---------------------------------------------------------------------------
\355\ See, e.g., Congressional Oversight Panel, Written Testimony
of Columbia Business school Henry Kaufman Professor of Financial
Institutions Charles Calomiris, Taking Stock: Independent Views on
TARP's Effectiveness, at 4 (Nov. 19, 2009) (online at cop.senate.gov/
documents/testimony-111909-calomiris.pdf) (hereinafter ``Calomiris COP
Testimony'') (``In my view, there is no question that the recent crisis
qualified as a state of the world in which government assistance to
financial institutions was warranted''); Johnson COP Testimony, supra
note 333, at 1 (``There is no question that passing the TARP was the
right thing to do''); Zandi COP Testimony, supra note 217, at 1 (``The
Troubled Asset Relief Program has contributed significantly to
restoring stability to the financial system. In turn, this financial
stability has been instrumental to ending the Great Recession''); see
also COP November Hearing Transcript, supra note 218 (Testimony of
Simon Johnson) (``[I]f the Congress had not passed TARP, you would have
had a much bigger disaster, irrespective of how the money had been
used'').
These views generally accord with the views of international
institutions that have reviewed the TARP. See International Monetary
Fund, World Economic Outlook: Sustaining the Recovery, at 67-71 (Oct.
2009) (online at imf.org/external/pubs/ft/weo/2009/02/pdf/text.pdf);
Fabio Panetta et al., An Assessment of Financial Sector Rescue
Programmes, at 2-3 (July 2009) (online at bis.org/publ/bppdf/
bispap48.pdf).
\356\ See, e.g., Takeo Hoshi, Letter to Panel Staff, at 1 (Nov. 8,
2009).
---------------------------------------------------------------------------
In a different but related vein, Professors Pietro Veronesi
and Luigi Zingales argue that Treasury's capital injections
program--likely the most well-known aspect of the TARP--was
both effective and (relatively) efficient.\357\ In one of the
few in-depth studies on the topic, Professors Veronesi and
Zingales examine the combined impact of Treasury's purchase of
$125 billion in equity in the ten largest banks and the FDIC's
provision of a three-year guarantee of these banks' new debt
issuances--i.e., the ``first'' bailout (or the ``Revised
Paulson Plan''). After factoring in costs to the taxpayers,
they conclude that this action generated $71 to $89 billion in
total economic value (accounting for a 30 percent deadweight
taxation cost).\358\ They further conclude that the Revised
Paulson Plan was the most cost effective of the three plans
seriously considered by the Bush Administration.\359\
Nevertheless, they argue that an even more cost-effective
method was never considered: namely, enacting legislation to
permit failing firms to enter special, pre-packaged
bankruptcies (i.e., with terms set by the government) wherein
those firms' long-term debt would be converted into equity and
current equity holders would be wiped out unless they chose to
exercise a statutory option to purchase existing long-term debt
at face value.\360\
---------------------------------------------------------------------------
\357\ See Pietro Veronesi & Luigi Zingales, Paulson's Gift, NBER
Working Paper, at 5 (Oct. 2009) (online at faculty.chicagobooth.edu/
brian.barry/igm/P_gift.pdf) (hereinafter ``Paulson's Gift''). For a
different but related analysis, see Dinara Bayazitova & Anil
Shivdasani, Assessing TARP (University of North Carolina Kenan-Flagler
Business School Working Paper) (Aug. 25, 2009) (online at
papers.ssrn.com/sol3/papers.cfm?abstract_id=1461884).
\358\ See Paulson's Gift, supra note 357, at 3.
\359\ See Paulson's Gift, supra note 357, at 32-36.
\360\ See Paulson's Gift, supra note 357, at 36.
---------------------------------------------------------------------------
Those who acknowledge that TARP was necessary and
reasonably effective recognize nevertheless that improvements
in key financial and economic indicators cannot be attributed
solely to the TARP. Obviously, it remains difficult to
disentangle the effects of Treasury's efforts under the TARP
from the effects of the government's other financial stability
programs, including programs run by the FDIC and the Federal
Reserve. It is also difficult to isolate the effects of the
TARP--both on the financial sector and on the broader economy--
from the effects of increasing public confidence and other
macroeconomic factors.\361\ In general, however, most
commentators seem to accept the proposition that the TARP has
played a substantial role in calming and stabilizing the
financial system.\362\
---------------------------------------------------------------------------
\361\ A lack of certainty as to how much credit the TARP deserves
for stabilizing the financial system constitutes yet another important
theme in the expert commentary. See, e.g., Baker COP Testimony, supra
note 28, at 1 (``There are many factors that make it difficult to
assess the effectiveness of the TARP, [the] most important one being
the fact that the TARP was carried through in conjunction with rescue
efforts by the [FDIC] and the Federal Reserve Board''); Roy C. Smith,
Letter to Panel Staff, at 1 (Oct. 23, 2009).
\362\ See, e.g., Martin Neil Baily and Douglas J. Elliott, Letter
to Panel Staff, at 2 (Nov. 9, 2009); William Poole, Letter to Panel
Staff, at 1 (Oct. 23, 2009).
---------------------------------------------------------------------------
Commentators also agree, however, that the TARP has
suffered from serious flaws, both in its design and its
execution. Though there are as many criticisms of the TARP as
there are TARP commentators, these complaints fall into three
main categories. First, some commentators argue that the TARP
has been implemented in an ad hoc, opaque fashion, and that
this lack of consistency and transparency has undermined its
effectiveness. Second, most agree that the TARP has failed to
address many of the underlying issues plaguing the financial
sector, including thin bank capitalization, risky bank
activity, and toxic assets on banks' balance sheets. Third,
many agree that the TARP has failed to address the so-called
``too big to fail'' problem and its related moral hazards.
1. Consistency and Transparency
One of the most common criticisms of the TARP is that it
has been implemented in an ad hoc fashion that lacks
consistency and transparency.\363\ Transparency problems
plagued the program from the beginning according to November
hearing witness Dean Baker, co-director of the Center of
Economic and Policy Research. He argues that the TARP was
articulated to the public largely as a means to restart the
commercial paper markets, stem foreclosures, rein in executive
compensation, and stimulate lending to small businesses.
Unfortunately, in his view, the TARP has failed to achieve or
even seriously pursue any of these goals.\364\ Thus, Dr. Baker
argues that public confidence in the TARP and the government's
other stabilization efforts has been undermined.\365\
---------------------------------------------------------------------------
\363\ See, e.g., Lawrence White, Letter to Panel Staff, at 1 (Nov.
20, 2009).
\364\ See COP November Hearing Transcript, supra note 218.
\365\ See COP November Hearing Transcript, supra note 218.
---------------------------------------------------------------------------
A different but related criticism is leveled by November
hearing witness Charles Calomiris, Henry Kaufman Professor of
Financial Institutions at Columbia Business School. He
maintains that Treasury has never clearly and comprehensively
articulated goals and principles to guide its TARP activities.
Rather, it has employed ``ad hoc interventions, justified as
they go along, which are inconsistent with one another and
follow no clear set of discernible principles.'' \366\ As a
result, he argues, the implementation of the program has been
and will continue to be susceptible to ``errors of logic'' and
behind-the-scenes political dealmaking which tends to benefit
well-connected but not necessarily deserving entities.\367\
November hearing witness Simon Johnson, Professor of Global
Economics and Management at MIT Sloan School of Management and
senior fellow at the Peterson Institute for International
Economics, makes a similar point. He criticizes what he views
as the TARP's ``prominent place of policy by deal.'' All too
often, he argues, ``when a major financial institution [ ] got
into trouble, the Treasury Department and the Federal Reserve
would engineer a bailout over the weekend and announce that
everything was fine on Monday.'' \368\
---------------------------------------------------------------------------
\366\ Calomiris COP Testimony, supra note 355, at 16.
\367\ Calomiris COP Testimony, supra note 355, at 16-17 (``Because
assistance programs did not flow from previously articulated guiding
principles . . ., the rushed debates over TARP and other policies were
undisciplined and prone to errors of logic (like the use of warrants in
preferred stock assistance), and political manipulation (like the
multiple bailouts of GMAC)'').
\368\ Johnson COP Testimony, supra note 333, at 6. Professor
Johnson also takes both the Bush and the Obama administrations to task
for providing aid in ways that are difficult for taxpayers to
understand. See id. at 7 (``As the crisis deepened and financial
institutions needed more assistance, the government got more and more
creative in figuring out ways to provide subsidies that were too
complex for the general public to understand'').
---------------------------------------------------------------------------
November hearing witness Alex Pollock, resident fellow at
the American Enterprise Institute, also takes issue with the
lack of clarity surrounding the TARP's objectives and
priorities, and agrees with Professor Calomiris that the
program's lack of transparency has made it unacceptably
susceptible to political considerations. In his view, the
``principal goal [of TARP managers] should be to run the
program in a businesslike manner to return as much of the
involuntary investment as possible to its owners, along with a
reasonable overall profit.'' \369\ He therefore argues that
``TARP should have full, regular, audited financial statements,
which depict its financial status and results, exactly as if it
were a corporation.'' \370\ According to Mr. Pollock, it would
have been far better for transparency and accountability
purposes if the TARP had been organized as a separate
corporation, rather than within an existing agency.\371\
---------------------------------------------------------------------------
\369\ See Congressional Oversight Panel, Written Testimony of
American Enterprise Institute Resident Fellow Alex J. Pollock, Taking
Stock: Independent Views on TARP's Effectiveness, at 3 (Nov. 19, 2009)
(online at aei.org/docLib/Pollock-Testimony-11192009.pdf) (hereinafter
``Pollock COP Testimony'').
\370\ Pollock COP Testimony, supra note 369, at 4.
\371\ See Pollock COP Testimony, supra note 369, at 3.
---------------------------------------------------------------------------
2. Underlying Issues
Some experts also argue that the TARP, while achieving a
measure of short-term stability, has failed to address certain
underlying issues that may wreak havoc on the financial sector
and the broader economy in the not-too-distant future.
For example, the CPP and the stress tests are commonly
credited with reviving private capital sources for capitalizing
American banks and making banks better prepared to weather
future financial shocks--in other words, with ``stabilizing''
the financial sector.\372\ At the Panel's November hearing,
however, it became clear that there is some disagreement as to
whether even the largest banks are in fact adequately
capitalized and hence sufficiently stable.\373\ Much of this
disagreement, it seems, stems from (1) commentators' differing
economic projections, and (2) the difficulty of evaluating
precisely banks' capital positions.\374\
---------------------------------------------------------------------------
\372\ See, e.g., COP November Hearing Transcript, supra note 218
(Testimony of Mark Zandi) (arguing that banks generally have enough
capital to weather greater-than-projected losses on their portfolios,
including the toxic assets they continue to hold).
\373\ See COP November Hearing Transcript, supra note 218
(Testimony of Dean Baker), at 1 (``So, I'd be a little less confident
[that the banks are sufficiently capitalized]. And not to say that
they're all going to collapse, but I'm less confident about their
soundness, going forward''); COP November Hearing Transcript, supra
note 218 (Testimony of Simon Johnson) (``So, yes, we have a thinly
capitalized banking system, as I said, relative to the--relative to the
trajectory of the economy. That's the way I would put it--relative to
what I'd see as the real risk scenario''); see also James K. Galbraith,
Letter to Panel Staff, at 1 (Nov. 8, 2009) (hereinafter ``Galbraith
Letter to Panel Staff'') (``The Treasury has not demonstrated that the
purchase of preferred shares in the banking system helped to restore
stability. Those purchases were addressed to a question of solvency
that they could not, given the vast overhang of toxic assets, have
fully resolved'').
\374\ For a discussion of the difficulties inherent in evaluating
banks' capital positions, see August Oversight Report, supra note 100,
at 18-37, 62.
---------------------------------------------------------------------------
Toxic assets are a related point of concern. Commentators
agree that Treasury's PPIP, which was designed to leverage
private funds to purchase such assets, has not been effective
at removing these assets from banks' balance sheets.\375\ This
is a significant issue that the Panel addressed in its August
report and that poses lingering challenges to economic recovery
and restoring the banking system to a healthy state.
---------------------------------------------------------------------------
\375\ See, e.g., Zandi COP Testimony, supra note 217, at 4-5.
---------------------------------------------------------------------------
In addition, some commentators fear that small- and medium-
sized banks are particularly susceptible to future shocks,
notwithstanding the fact that many have received TARP aid.\376\
These banks tend to be disproportionately exposed to commercial
real estate loans--loans which are widely expected to suffer
heavy losses in the coming years.\377\ Indeed, several small-
and medium-sized banks have already failed as a result of their
commercial real estate exposure, and many more are expected to
fail for similar reasons.\378\ Such failures threaten to
further impede a broad economic recovery.
---------------------------------------------------------------------------
\376\ See, e.g., COP November Hearing Transcript, supra note 218
(Testimony of Mark Zandi) (``I think that . . . many smaller bank
institutions will fail, in large part because of their bad lending--in
large part related to the bad . . . commercial real estate lending,
which is still being played out'').
\377\ See Goldman Sachs, U.S. Commercial Real Estate Take III: Re-
constructing Estimates for Losses, Timing, at 11-13 (Sept. 29, 2009).
\378\ See, e.g., Office of Inspector General, Federal Deposit
Insurance Corporation, Material Loss Review of Haven Trust Bank,
Duluth, Georgia, at 9 (August 2009) (online at www.fdicoig.gov/
reports09/09-017.pdf); see also Office of Inspector General, Federal
Reserve Board of Governors, Material Loss Review of County Bank
(September 2009) (online at www.federalreserve.gov/oig/files/
County_Bank_MLR_20090909.pdf).
---------------------------------------------------------------------------
Commentators have also expressed concerns about whether the
TARP has stimulated lending to businesses and consumers--a
central justification for using TARP funds for capital
infusions. For example, according to Paul Volcker, former
chairman of the Board of Governors of the Federal Reserve
System, it remains unclear whether the TARP has had a
``significant and positive impact'' on the provision of credit
to businesses and consumers.\379\ Joseph Stiglitz argues that
``one of the key promised benefits of the TARP--restarting
lending--has not materialized,'' meaning that the ``hoped for
benefits for the `real economy' have not materialized.''\380\
Indeed, some economists argue that TARP-recipient banks have
not only withdrawn credit from the marketplace, ``but they are
doing so at an accelerating rate.''\381\ Some experts point to
TARP-related causes for these phenomena, including Treasury's
decision to accept preferred stock rather than common stock or
other assets in exchange for TARP funds,\382\ Treasury's
failure to require banks receiving TARP funds to use those
funds for lending,\383\ and Treasury's failure to direct a
sufficient amount of TARP funds to those parts of the financial
sector (e.g., community banks) that are heavily involved in
lending to small- and mid-sized businesses.\384\ Others
identify non-TARP-related factors such as decreased demand for
credit and banks' concerns about potential changes to
accounting rules.\385\ According to November hearing witness
Dr. Baker, the current tightening of credit for businesses
---------------------------------------------------------------------------
\379\ Paul A. Volcker, Letter to Panel Staff, at 1 (Nov. 6, 2009).
\380\ See Joseph E. Stiglitz, Letter to Panel Staff, at 4 (Nov. 17,
2009); see also Richard Christopher Whalen, Letter to Panel Staff, at 1
(Nov. 9, 2009) (arguing that ``there has been little positive impact on
the real economy as a result of the TARP'').
\381\ Richard Christopher Whalen, Letter to Panel Staff, at 1 (Nov.
9, 2009).
\382\ See Linus Wilson & Yan Wendy Wu, Common (Stock) Sense About
Risk-Shifting and Bank Bailouts, at 2 (Working Paper) (Nov. 30, 2009)
(online at papers.ssrn.com/sol3/papers.cfm?
abstract_id=1321666) (arguing that ``[b]uying up common (preferred)
stock is always the most (least) ex ante- and ex post-efficient type of
capital infusion, whether or not the bank volunteers for the
recapitalization'').
\383\ See Joseph E. Stiglitz, Letter to Panel Staff, at 3 (Nov. 17,
2009) (``As a major `owner' of the banks, the government could and
should have used its potential control to increase lending, to reduce
abusive practices, and to direct lending to those activities most
likely to energize the economy.'')
\384\ See Joseph E. Stiglitz, Letter to Panel Staff, at 2 (Nov. 17,
2009).
\385\ See infra at page 99.
[I]s typical of a recession. The complaints from
business owners over being denied credit are not
qualitatively different than the complaints that were
made in [the] 1990-91 recession. Lenders will also
tighten credit to business during a downturn simply
because otherwise healthy businesses are much risk[ier]
prospects during a recession. There is no reason to
believe that the tightening of credit during this
downturn is any greater than what should be expected
given the severity of the recession.\386\
---------------------------------------------------------------------------
\386\ Baker COP Testimony, supra note 28, at 4-5. Dr. Baker also
notes that large corporations are having little difficulty issuing
commercial paper and long-term bonds, and that homebuyers are not
facing any unusual difficulty in securing loans. See Baker COP
Testimony, supra note 28, at 4.
Finally, the government's efforts to address the
foreclosure crisis have drawn little praise. As discussed
above, for many reasons those efforts may not help as many
homeowners as originally projected. Meanwhile, as James
Galbraith has observed, the ``underlying financial conditions
of the household sector''--including new home sales, new home
construction, underwater mortgages and mortgage delinquency
rates--``remain very grim'' despite Treasury's efforts.\387\
Foreclosures have continued at a rate of nearly two million per
year since the TARP was passed, and various projections show
that this pace is likely to continue through 2011 at
least.\388\
---------------------------------------------------------------------------
\387\ Galbraith Letter to Panel Staff, supra note 373, at 1.
\388\ See Dean Baker, Letter to Panel Staff, at 2 (Nov. 5, 2009).
---------------------------------------------------------------------------
3. Moral Hazard
Much has been said about the costs of the TARP. Generally,
these discussions focus on a relatively narrow question:
whether taxpayers will be paid back for their TARP
investments.\389\ No doubt this is an important question.
According to some commentators, however, these more
quantifiable costs pale in comparison to the so-called ``moral
hazard'' costs of the TARP. These commentators reason as
follows. By enacting the TARP, Congress made a conscious
decision to intervene in the market. One consequence of this
decision was to stabilize the financial sector. Another
consequence, however, was to signal to the market that, going
forward, the government may step in to provide bailouts to
certain systemically significant institutions--such as
financial institutions and auto manufacturers--should they face
the risk of failure.\390\ As a result, the market has been
distorted in a way that could, absent responses outside of the
TARP, plague the financial sector and the broader economy for
the foreseeable future.\391\
---------------------------------------------------------------------------
\389\ Few believe that the taxpayers will be paid back in full for
all of their TARP investments. For example, November hearing witness
Mark Zandi, chief economist and co-founder of Moody's Economy.com,
estimates that ``the ultimate cost to taxpayers of TARP is expected to
be between $100 and $150 billion.'' Under Dr. Zandi's projections,
[t]he most[] costly aspect of TARP will be the aid to the motor
vehicle industry, which could total up to nearly $50 billion. AIG will
cost taxpayers up to $35 billion. Support to the housing market is
expected to cost as much as $30 billion. The CPP program is ultimately
expected to cost between $15 and $20 billion, while credit losses on
the TALF and PPIP programs are expected to reach $10 billion. Some $5
billion will be lost on the small business lending program.
Zandi COP Testimony, supra note 217, at 3.
\390\ See, e.g., James K. Galbraith, Letter to Panel Staff, at 2
(Nov. 8, 2009) (``Having once intervened decisively, the rules of the
game are now changed, and participants will expect renewed
intervention, as necessary, along similar lines'').
\391\ See, e.g., Calomiris COP Testimony, supra note 355, at 3
(``If financial institutions know that the government is there to share
losses, risk-taking becomes a one-sided bet, and so more risk is
preferred to less. There is substantial evidence from financial
history--including the behavior of troubled financial institutions
during the current crisis itself--that this `moral hazard' problem can
give rise to huge loss-making, high-risk investments that are both
socially wasteful and an unfair burden on taxpayers''); Johnson COP
Testimony, supra note 333, at 3 (arguing that the manner in which the
TARP was implemented ``exacerbated the perception (and the reality)
that some financial institutions are `Too Big to Fail' ''--thereby
lowering the borrowing costs for such firms, incentivizing them to act
in risky ways, and leaving the United States vulnerable to similar
financial crises in the future); see also Edward Kane, Safety-Net
Subsidies Keep ``Toxic'' Assets Illiquid, at 2 (March 10, 2009).
---------------------------------------------------------------------------
E. Accomplishments and Shortcomings: How Well Has the TARP Done in
Meeting its Statutory Objectives?
1. TARP's Contribution to Financial Stabilization and Economic Recovery
As noted in the overview, the primary objective of the
Congress in passing EESA was to ``restore liquidity and
stability to the U.S. financial system.'' \392\ EESA further
calls for the authority it provides to be used to ``promote
jobs and economic growth.'' \393\ Similarly, Treasury officials
stated that in implementing the TARP they were seeking to
``protect the U.S. economy'' \394\ and ``the taxpayer,'' \395\
``prevent systemic risk,'' \396\ and ``stabilize the financial
system.'' \397\ Treasury also said it would focus on bank
lending to restore economic growth.\398\
---------------------------------------------------------------------------
\392\ 12 U.S.C. Sec. 5201; 12 U.S.C. Sec. 5223.
\393\ 12 U.S.C. Sec. 5201.
\394\ See U.S. Department of the Treasury, U.S. Government Actions
to Strengthen Market Stability (Oct. 14, 2008) (online at
www.treas.gov/press/releases/hp1209.htm) (stating ``Today we are taking
decisive actions to protect the U.S. economy . . .'').
\395\ See House Committee on Financial Services, Written Testimony
by Treasury Secretary Henry M. Paulson Jr., Oversight of Implementation
of the Emergency Economic Stabilization Act of 2008 and of Government
Lending and Insurance Facilities; Impact on Economy and Credit
Availability, 110th Cong., at 30 (Nov. 18. 2008) (online at
www.financialstability.gov/latest/hp1279.html) (``It is my
responsibility to use the authorities Congress provided to protect and
strengthen the financial system, and in so doing, protect the
taxpayer''); U.S. Department of the Treasury, Interim Assistant
Secretary for Financial Stability Neel Kashkari Update on the TARP
Program (Dec. 8, 2008) (online at www.treas.gov/press/releases/
hp1321.htm) (hereinafter ``Assistant Secretary Kashkari Update on
TARP'') (stating Treasury ``acted with the following critical
objectives in mind . . . to protect taxpayers'').
\396\ See U.S. Department of the Treasury, Remarks by Secretary
Henry M. Paulson, Jr. on Financial Rescue Package and Economic Update
(Nov. 21, 2008) (online at www.financialstability.gov/latest/
hp1265.html) (hereinafter ``Remarks by Secretary Paulson on Financial
Rescue Package'') (``I believe we have taken the necessary steps to
prevent a broad systemic event''); see also Assistant Secretary
Kashkari Update on TARP, supra note 395.
\397\ See Remarks by Secretary Paulson on Financial Rescue Package,
supra note 396 (``We must continue to reinforce the stability of the
financial system''); Assistant Secretary Kashkari Update on TARP, supra
note 395.
\398\ See Assistant Secretary Kashkari Update on TARP, supra note
395 (``Treasury expects banks to increase their lending as a result of
[TARP] investments'').
---------------------------------------------------------------------------
There is little doubt that--as virtually all of the experts
the Panel consulted agree--the TARP played an important role,
along with other emergency programs from the Federal Reserve
and the FDIC, in stabilizing the financial system. Following
the failure of Lehman Brothers and the government's rescue of
AIG in September 2008, government officials decided that a
crisis of such magnitude could not be contained through the use
of monetary policy alone, and that a fiscal response was
therefore imperative.\399\ The TARP became the government's
fiscal response. And the initial TARP programs, which were
aimed at shoring up the capital base of financial institutions,
did have a positive impact on market confidence. Shortly after
the law that established the TARP was enacted, measures of risk
in the banking sector began to decline. Between October 10,
2008 and mid-November 2008, interest-rate spreads that reflect
the willingness of banks to lend to each other fell by more
than 50 percent. These spreads remained highly volatile in late
2008, but on balance they have continued to fall, and are
currently back in the low range where they were prior to the
financial crisis.\400\
---------------------------------------------------------------------------
\399\ See James B. Stewart, Eight Days: The Battle to Save the
American Financial System, New Yorker (Sept. 21, 2009) (available for
purchase online at www.newyorker.com/reporting/2009/09/21/
090921fa_fact_stewart).
\400\ 3 Mo LIBOR-OIS Spread, supra note 27; Bloomberg, TED Spread
(online at www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP%3AIND)
(accessed Dec. 7, 2009). It should be noted, however, that there is
still a significant lack of liquidity and wide spreads in some markets
where the Federal Reserve is the dominant participant.
---------------------------------------------------------------------------
Treasury believes that the capital provided through the CPP
has been ``essential in stabilizing the financial system,
enabling banks to absorb losses from bad assets while
continuing to lend to consumers and businesses.'' \401\ In his
testimony to the Panel, Assistant Secretary Allison also
pointed to capital raising as a sign of stabilization of the
financial sector: ``banks of all sizes have raised over $80
billion in common equity and $40 billion in non-guaranteed
debt.'' \402\ This would appear to reflect renewed confidence
in the U.S. banking system and its ultimate solvency and
profitability, although there is the lingering question of the
degree to which investors now assume that the federal
government has become the implicit guarantor of the largest
American banks.
---------------------------------------------------------------------------
\401\ Congressional Oversight Panel, Written Testimony of Assistant
Secretary of the Treasury for Financial Stability Herbert M. Allison,
Jr., Congressional Oversight Panel Hearing with Assistant Treasury
Secretary Herbert M. Allison, Jr. (Oct. 22, 2009) (online at
cop.senate.gov/documents/testimony-102209-allison.pdf) (hereinafter
``Allison COP Testimony'').
\402\ Allison COP Testimony, supra note 401.
---------------------------------------------------------------------------
The role of the TARP in preventing an even worse economic
recession is not as clear. The Federal Reserve relaxed monetary
policy very rapidly beginning in September 2007 once the
contraction in the housing sector began. From a macroeconomic
perspective, the federal government's massive deficit
spending--only a portion of which is attributable to the TARP--
has undoubtedly played an important role in fostering economic
recovery as well. Support for the housing sector through the
Federal Housing Administration, Fannie Mae, and Freddie Mac, as
well as the Federal Reserve, also constitute an important
element in stabilizing the economy.
Except for the smaller institutions participating in its
small business lending initiative, Treasury's bank
capitalization efforts are now over. The question going forward
is whether banks are currently adequately capitalized and will
begin to expand their lending. This, in turn, is partly a
function of the condition of bank balance sheets and the
lingering issue of the toxic assets whose presence was the
justification for creation of the TARP in the first place.
The PPIP, Treasury's main TARP initiative for removing
toxic assets from bank balance sheets, remains difficult to
assess. This program has only recently become operational.
Treasury argues that the mere announcement of the program in
March helped to reassure investors, and as a result, prices
increased for certain mortgage-related securities.\403\
Treasury further argues that because banks are now better
positioned to raise private capital, even if they still own
toxic assets, the purchase program is less important today than
it was when it was announced.\404\ However, the Panel is
concerned that as long as the value of these securities remains
unknown to investors, they will continue to weigh down the
banks and be an impediment to economic recovery.
---------------------------------------------------------------------------
\403\ Allison COP Testimony, supra note 401, at 3-4.
\404\ Treasury conversations with Panel staff (Nov. 4, 2009).
---------------------------------------------------------------------------
The Panel is also concerned about the health of small
banks, which will be helped less by PPIP as it is currently
implemented than large banks will, because small banks
generally hold whole loans rather than securities.\405\ Those
concerns are heightened by the deteriorating commercial real
estate market, another area where smaller banks are heavily
exposed. PPIP's success or failure will rest on whether it
creates genuine price discovery that would have been absent
otherwise, and whether it provides a return on the public's
investment.
---------------------------------------------------------------------------
\405\ See August Oversight Report, supra note 100, at 4.
---------------------------------------------------------------------------
As discussed in Part C above, Treasury has recently turned
the focus of its capital injection programs to small banks and
the promotion of small business lending. Some of this has
happened naturally, as larger banks have redeemed their CPP
preferred, and Treasury reopened CPP for small banks, thereby
``reduc[ing] the size of the Treasury's investments in the
banking system . . . shifting the mix of remaining CPP
investments significantly toward small and community banks.''
\406\
---------------------------------------------------------------------------
\406\ Allison COP Testimony, supra note 401. The CPP expansion for
small banks opened in May 2009. The deadline for applications was
November 21, 2009. FAQs on CPP for Small Banks, supra note 69.
---------------------------------------------------------------------------
However, as noted earlier in the report, there remains
disagreement on whether banks have adequate capital,
notwithstanding both the TARP capital they still have on their
balance sheets and their ability in many cases to acquire new
capital from private investors. The stress tests have helped to
bring some clarity here and the disclosure of their results
appears to have helped restore investors' confidence in those
large institutions tested. But the high and rising level of
unemployment continues to raise some concern about the adequacy
of the stress tests. As we have seen, banks currently enjoy a
low interest rate, steep yield curve environment, due to the
actions of the Federal Reserve to increase and maintain
liquidity in the financial system. Yet there remain questions
about the quality of certain assets on bank balance sheets,
particularly those related to residential and commercial real
estate. Further declines in house prices nationwide, for
example, could bring on renewed concerns about the quality of
the assets at major TARP assisted banks and raise concerns
about the continuing need for the TARP to bolster bank capital
positions. Likewise, the low interest rate, steep yield curve
environment is bolstering bank profitability in the short run
but may not last, bringing renewed concern about capital
strengthening.
Treasury has said that it realizes that increasing the
availability of credit to small businesses poses a complex
challenge, one that is intertwined with the issues of
commercial real estate and the economy as a whole. A recent
survey found that 14 percent of small business owners found it
more difficult to get loans, compared to three months
earlier.\407\ Availability of credit was not the only factor
contributing to this. Although 30 percent of those surveyed
found that their borrowing was down, much of this could be due
to a decline in the credit quality of borrowers, caused by the
recession and declines in real estate values.\408\ A
significant proportion of small business lending depends on
real estate as collateral; therefore, a decline in real estate
values will harm borrowers' ability to get credit.\409\
---------------------------------------------------------------------------
\407\ National Federation of Independent Business, NFIB Small
Business Economic Trends, at 2, 12 (Oct. 2009) (online at www.nfib.com/
Portals/0/PDF/sbet/SBET200910.pdf) (hereinafter ``NFIB Small Business
Economic Trends'').
\408\ See NFIB Small Business Economic Trends, supra note 407, at 2
(``In addition, the continued poor earnings and sales performance has
weakened the credit worthiness of many potential borrowers''). It
should be noted that only slightly more than 300 small and community
banks out of roughly 7,400 such institutions have participated in CPP.
\409\ Treasury conversations with Panel staff (Nov. 4, 2009).
---------------------------------------------------------------------------
TARP funds have also been used as part of the TALF effort
to kick-start the markets for various types of securities,
including those based on auto loans, credit card payments, and
commercial mortgages, but their impact is difficult to assess.
Since this program's inception, issuance of the types of
securities that are eligible for the program has risen
dramatically, both with and without government backing, but
these markets have not returned to their pre-crisis levels and
a number of factors other than TALF may account for much of
this recovery.
Continuing problems, and possible upcoming shocks, in the
commercial real estate market have also contributed to a
contraction in small business lending.\410\ Smaller banks,
which provide a larger proportion of small business lending,
also hold larger proportions of commercial real estate
loans.\411\ With high levels of commercial real estate assets
on their balance sheets, they have less capacity to engage in
new and renewed lending. Treasury plans to use its new small
business lending program to provide banks that are otherwise
viable with capital to increase lending to small businesses.
Assistant Secretary Allison explained that the small business
lending program can help alleviate small banks' CRE losses:
``by providing [small banks with] access to additional capital
we can help them to withstand a deterioration of the value of
[commercial real estate] assets on their books.'' \412\
Treasury believes that the problems in the commercial real-
estate market are material to the economy, but will not be
overwhelming, and can be absorbed over time through loan
workouts and the bankruptcy process.\413\ However, as discussed
in Section 1.5.f.iv, the Federal Reserve estimates that almost
$500 billion of CRE loans will mature annually for the next
several years, which could generate sizeable losses for the
banks exposed to this sector.
---------------------------------------------------------------------------
\410\ See, e.g., Federal Reserve Bank of Atlanta, Speech by Federal
Reserve Bank of Atlanta President and Chief Executive Officer Dennis P.
Lockhart, to the Urban Land Institute Emerging Trends in Real Estate
Conference (Nov. 10, 2009) (online at www.frbatlanta.org/news/speeches/
lockhart_111009.cfm).
\411\ See Richard Parkus and Jing An, The Future Refinancing Crisis
in Commercial Real Estate, Part II: Extensions and Refinements, at 23
(July 15, 2009) (``[E]xposure [to commercial real estate loans]
increases markedly for smaller banks. For the four largest banks (on
the basis of total assets), this exposure is 12.3%, for the 5-30
largest banks, the exposure is 24.5%, while for the 31-100 largest
banks, the exposure grows to 38.9%'').
\412\ Allison COP Testimony, supra note 401, at 57.
\413\ Treasury conversations with Panel staff (Nov. 4, 2009).
---------------------------------------------------------------------------
The Congress also made foreclosure mitigation a priority in
EESA, laying out that the authority under the Act was to be
used in a manner that ``protects home values'' \414\ and
``preserves homeownership.'' \415\ Treasury promised to use its
new authorities to stabilize housing and mortgage finance,\416\
avoid preventable foreclosures,\417\ and keep low cost mortgage
financing available.''\418\ Treasury also promised to
``increase foreclosure mitigation efforts'' \419\ and ``enforce
stronger oversight of the mortgage origination process.'' \420\
---------------------------------------------------------------------------
\414\ 12 U.S.C. Sec. 5201.
\415\ 12 U.S.C. Sec. 5201.
\416\ See Remarks by Secretary Paulson on Financial Rescue Package,
supra note 396 (``market turmoil will not abate until the biggest part
of the housing correction is behind us'').
\417\ See Remarks by Secretary Paulson on Financial Rescue Package,
supra note 396 (stating Treasury ``worked aggressively to avoid
preventable foreclosures'').
\418\ See Remarks by Secretary Paulson on Financial Rescue Package,
supra note 396 (Paulson, ``worked aggressively to . . . keep mortgage
financing available'').
\419\ See Remarks by Secretary Paulson on Financial Rescue Package,
supra note 396. See Assistant Secretary Kashkari Update on TARP, supra
note 395.
\420\ See Remarks by Secretary Paulson on Financial Rescue Package,
supra note 396 (Of course, it is already clear that we must address a
number of significant issues, such as . . . oversight of mortgage
origination'').
---------------------------------------------------------------------------
While more time is needed to evaluate fully Treasury's
substantial use of TARP funds to address the foreclosure
crisis, it is not too soon to make some preliminary judgments.
Treasury met its own goal of beginning 500,000 trial
modifications by Nov. 1, but the Panel has serious concerns
about whether the program can keep pace with the evolving
nature of the foreclosure problem.\421\ Since the publication
of the Panel's October report, which analyzed Treasury's
foreclosure prevention efforts, new data has underscored the
Panel's concern that Treasury's mortgage modification program
is inadequate to address the foreclosure problem as it has
evolved over the last 10 months. In October, the Panel warned
that a growing number of people cannot afford their mortgages
because they have lost their jobs, and Treasury's existing
programs are not designed to help them. Since then, the
unemployment rate has passed 10 percent, a level it last
reached in 1983. Also in October, the Panel warned that
Treasury's existing programs do not address the problem of
homeowners who owe more on their loans than their homes are
worth, a factor that's correlated with foreclosures. Since
then, new data from the third quarter of 2009 showed that 23
percent of mortgage holders have negative equity in their
homes. Lastly in October, the Panel warned that TARP mortgage
modifications were not keeping pace with foreclosures. HAMP has
led to a total of 10,187 permanent modifications as of the end
of October 2009, a fraction of the 89,810 completed foreclosure
sales in September alone.
---------------------------------------------------------------------------
\421\ See Manuel Adelino, Kristopher Gerardi, and Paul S. Willen,
Why Don't Lenders Renegotiate More Home Mortgages? Redefaults, Self-
Cures, and Securitization, Federal Reserve Bank of Boston Working Paper
09-4 (version of July 6, 2009) (online at www.bos.frb.org/economic/
ppdp/2009/ppdp0904.htm).
---------------------------------------------------------------------------
It is too early to evaluate the impact of the TARP
investments in General Motors and Chrysler. Treasury notes that
its actions helped the two automakers to move unusually fast
and efficiently through the bankruptcy process.\422\ In
addition, TARP assistance to GM and Chrysler likely prevented a
much sharper downturn in the manufacturing sector and the
broader economy. However, as the Panel stated in its September
report, Treasury seems likely to absorb losses on its
investments in GM and Chrysler. In the long term these
expenditures should be judged based on the viability of GM and
Chrysler, as well as their ultimate ability to repay the
taxpayers.
---------------------------------------------------------------------------
\422\ See generally Allison COP Testimony, supra note 401, at 5;
Treasury conversations with Panel staff (Nov. 4, 2009).
---------------------------------------------------------------------------
One final but very important element of the assessment of
Treasury implementation of the statutory goals of EESA concerns
the objectives of protecting the U.S. economy and preventing
systemic risk over the long term. As stressed by the experts
whom the Panel consulted, the major problem is that in
executing the TARP, Treasury may have sown the seeds for a
future crisis by demonstrating that the government will come to
the rescue of institutions that engage in excessive risk taking
and are unprepared to deal with the inevitable collapse.
Further compounding this problem is the fact that, as a result
of the actions taken in the course of stemming this economic
crisis, the banking system has perhaps an increased number of
``too big to fail'' institutions, and they are even bigger in
size. This will be an important issue on which policymakers
will need to focus in the aftermath of the crisis and the
winding down of the TARP.
2. The TARP and the American Taxpayer
While emphasizing the goals of restoring liquidity and
stability to the U.S. financial system, Congress also directed
that the TARP maximize overall returns and minimize overall
costs to U.S. taxpayers \423\ and that it ensure the most
efficient use of taxpayer funds \424\ and minimize the impact
on the national debt.\425\
---------------------------------------------------------------------------
\423\ See 12 U.S.C. Sec. 5201; 12 U.S.C. Sec. 5223; 12 U.S.C.
Sec. 5224.
\424\ See 12 U.S.C. Sec. 5213.
\425\ See 12 U.S.C. Sec. 5213. See also 12 U.S.C. 5219 (In
coordination with ``identify[ing] opportunities for the acquisition of
classes of troubled assets that will improve the ability of the
Secretary to improve the loan modification and restructuring process
and, where permissible, to permit bona fide tenants who are current on
their rent to remain in their homes under the terms of the lease'').
---------------------------------------------------------------------------
From the perspective of public investors who stepped up at
the critical time when private investors had fled, Treasury has
now gotten back more than one-quarter of the money it spent on
capital injections,\426\ and has earned an annual rate of 17
percent on the money invested with those institutions that have
now repaid the TARP investments. It is too soon to estimate how
much of the overall TARP investment taxpayers will ultimately
recover, in part because the banks that have returned the money
are the same banks that needed it least. We do know that
initial portions of the $80 billion invested in the auto
industry are unlikely to be recovered and that no return is
expected on the $50 billion TARP mortgage foreclosure program
(HAMP). And the banks that have yet to repay their TARP
investments are no doubt holding larger amounts of poorer
quality assets.
---------------------------------------------------------------------------
\426\ See Allison COP Testimony, supra note 401, at 3.
---------------------------------------------------------------------------
As was the case with the savings and loan rescue in the
1980s and 90s, the ultimate impact of TARP transactions on the
national debt will not be known for many years. That financial
rescue is now estimated to have cost roughly $150 billion in
current dollars, which was lower than earlier feared.
Increasingly successful sales of assets acquired early in that
episode accounts for a portion of that decline in overall cost
to the government.\427\
---------------------------------------------------------------------------
\427\ See Timothy Curry and Lynn Shibut, The Cost of the Savings
and Loan Crisis: Truth and Consequences, Federal Deposit Insurance
Corporation Banking Review, at 33 (Dec. 2000) (online at www.fdic.gov/
bank/analytical/banking/2000dec/brv13n2_2.pdf) (``As of December 31,
1999, the thrift crisis had cost taxpayers approximately $124 billion
and the thrift industry another $29 billion, for an estimated total
loss of approximately $153 billion. The losses were higher than those
predicted in the late 1980s, when the RTC was established, but below
those forecasted during the early to mid-1990s, at the height of the
crisis'').
---------------------------------------------------------------------------
As explained above, the best current estimates of the cost
to the U.S. taxpayer of the current financial crisis are much
larger but again perhaps not as large as initially feared. The
latest estimates from the budget agencies--OMB and CBO--imply
that the ultimate cost of the TARP would be about $341 billion
(OMB) and $241 billion (CBO).
As the Panel pointed out in its February report, however,
the economic value of the assistance being provided is less
easily assessed based upon the information Treasury has been
releasing. The Panel therefore contracted with a securities
valuation firm and published its findings in its February
Report. The firm estimated that of the $184 billion in TARP
funds it analyzed, the securities that Treasury received in
exchange had a market value of only $122 billion, or 66
percent, at the time Treasury announced its agreement to buy
them.\428\ Moreover, the action of injecting public funds into
the banks that have been assisted may have served to provide
these institutions with an implicit public guarantee of their
balance sheets, a guarantee for which no fee was charged.
---------------------------------------------------------------------------
\428\ See February Oversight Report, supra note 66, at 4, 27.
---------------------------------------------------------------------------
This in turn relates to the larger question of the degree
to which Treasury has been forthcoming both in acknowledging
the economic value of the assistance that it has been providing
to financial institutions and an explanation for the strategy
in providing such assistance. As noted in the Zingales and
Veronesi working paper, banks with the greatest likelihood of
experiencing a run benefited the most from taxpayer
assistance.\429\ Simply asserting that all recipient
institutions were ``healthy'' is not accurate in this
situation. In this respect, Treasury's initial implementation
of its authority to purchase bank assets and other financial
instruments (e.g., preferred stock) lacked critical
transparency and continues to be a source of confusion in
understanding the actual condition of the major banks that were
the subject of the initial use of TARP resources.
---------------------------------------------------------------------------
\429\ See Paulson's Gift, supra note 357, at 3, 52.
---------------------------------------------------------------------------
3. Treasury as TARP Steward and Manager
Separate from the issues of how well the American economy
is performing after 14 months of the TARP's existence and what
has the TARP done for the American taxpayer, there is also the
question of how well Treasury, under two administrations, has
performed in implementing the sweeping authority EESA provided.
EESA calls for ``public accountability'' in the exercise of the
authority it provides.\430\ It also requires Treasury to
``facilitate market transparency'' by making available to the
public ``a description, amounts, and pricing of assets acquired
under this Act.'' In its initial implementation of EESA,
Treasury committed to communicate ``actions in an open and
transparent manner.'' \431\
---------------------------------------------------------------------------
\430\ 12 U.S.C. Sec. 5201.
\431\ See Assistant Secretary Kashkari Update on TARP, supra note
395 (``It is essential we communicate our actions in an open and
transparent manner to maintain [taxpayers'] trust'').
---------------------------------------------------------------------------
There is no question that Treasury had to implement the
TARP in a crisis atmosphere. Through its website at
financialstability.gov, the Department has provided voluminous,
detailed transactions information, which has allowed the public
to monitor closely the funding provided to individual
institutions and under what terms, as well as repayments of
investments, dividends and interest received, and warrants
repurchased. The regular release of online reports has greatly
improved the public's access to important information such as
the cumulative commitments of TARP resources and the accounting
for all of its funding. Publication of TARP accounting
statements for federal fiscal year 2009 should provide further,
highly useful information on how TARP resources have been
utilized and how Treasury has been managing them. Some critics
argue, however, that the TARP should meet a higher standard of
private sector type accounting statements including issuance on
a quarterly rather than just annual basis.\432\ Additional
disclosures which the Panel believes would be desirable include
further information about modifications under HAMP and a more
complete picture of PPIP investment structures.
---------------------------------------------------------------------------
\432\ Pollock COP Testimony, supra note 369, at 3.
---------------------------------------------------------------------------
Further, certain transaction details have not been
forthcoming, such as the actual number of warrants Treasury
holds for each financial institution.
Despite Treasury's disclosures, questions continue to be
raised as to ``where the money went.'' The identity of the
recipients of CPP funds is well-known, and has been throughout
the implementation of the program. A list of recipients and
whether their CPP funds have been repaid is available on
Treasury's website,\433\ and SIGTARP's quarterly reports give
the same information.\434\ The public thus knows who has the
money; what is somewhat less clear is what the recipients did
with it. The TARP securities purchase agreements (SPAs) provide
that the recipients will expand the flow of credit to U.S.
customers and modify mortgage terms but does not specify how
those objectives should be met, measured, or reported.\435\
---------------------------------------------------------------------------
\433\ See November 25 Transactions Report, supra note 71.
\434\ See Office of the Special Inspector General for the Troubled
Asset Relief Program, Quarterly Report to Congress (Oct. 21, 2009)
(online at www.sigtarp.gov/reports/congress/2009/
October2009_Quarterly_Report_to_Congress.pdf).
\435\ The ``recitals'' to the form of Securities Purchase
Agreement--Standard Terms used for CPP transactions provide:
WHEREAS, the Company agrees to expand the flow of credit to U.S.
consumers and businesses on competitive terms to promote the sustained
growth and vitality of the U.S. economy;
WHEREAS, the Company agrees to work diligently, under existing
programs, to modify the terms of residential mortgages as appropriate
to strength the health of the U.S. housing market . . .;
See U.S. Department of the Treasury, Securities Purchse Agreement
for Public Institutions (online at www.financialstability.gov/docs/CPP/
spa.pdf) (accessed Dec. 7, 2009); U.S. Department of the Treasury,
Securities Purchase Agreement for Private Institutions (online at
www.financialstability.gov/docs/CPP/SPA-Private.pdf) (accessed Nov. 30,
2009). While it seems clear that Treasury intended that CPP recipients
should be agreeing to increase the flow of credit and the modification
of mortgages, the language cited above is too vague to be useful and
not in a place where binding obligations are usually set out in a
contract. Added to the fact that there are no specific restrictions on
use of funds or reequirements with respect to the reporting of such
use, the SPAs seem to be a missed opportunity for monitoring the use of
taxpayers' funds.
---------------------------------------------------------------------------
Treasury's standard response with respect to the ``use of
funds'' issue is to point out that money is fungible and that
it is not possible to correlate receipt of funds with a
specific use of those funds.\436\ Nevertheless, as the Panel
and SIGTARP have noted, Treasury could have conditioned receipt
of TARP assistance upon requirements to report the usage of
those funds and the overall lending activities of the
institutions in question.
---------------------------------------------------------------------------
\436\ See Office of the Special Inspector General for the Troubled
Asset Relief Program, SIGTARP Survey Demonstrates that Banks Can
Provide Meaningful Information on Their Use of TARP Funds, at 38-39
(July 20, 2009) (online at www.sigtarp.gov/reports/audit/2009/
SIGTARP_Survey_Demonstrates_That--Banks_Can_Provide_Meaningful_
%20Information_On_Their_Use_Of_TARP_Funds.pdf). In its first report, in
December 2008, the Panel noted the need for the companies that received
TARP funds to explain how they were using those funds. See
Congressional Oversight Panel, Questions About the $700 Billion
Emergency Economic Stabilization Funds, at 4 (Dec. 10, 2008) (online at
cop.senate.gov/reports/library/ report-121008-cop.cfm).
---------------------------------------------------------------------------
Treasury also states that it does not intend to tell banks
how to run their businesses.\437\ As discussed in Section B
above, Treasury does, however, track information on lending
levels by the 22 largest CPP recipients.\438\ SIGTARP attempted
to address the ``fungibility of money'' issue by asking CPP
recipients to identify actions that they would not have been
able to take without TARP funding. In July 2009, SIGTARP
published a report whose title speaks for itself: ``SIGTARP
Survey Demonstrates that Banks Can Provide Meaningful
Information on Their Use of TARP Funds.'' \439\ SIGTARP sent
survey letters to more than 360 CPP recipients, and summarized
their responses. While respondents described the use to which
they put their CPP funds in general terms, they did not
quantify the amount of new lending or the incremental
difference in lending based on use of TARP funds.\440\ The
Panel notes the limitations inherent in the SIGTARP survey due
to the survey's reliance on self-reporting, and the lack of
uniform responses or any requirement of quantification. While
it is possible to say that 300 banks, more than 80 percent of
all respondents, reported increased lending by reason of the
TARP,\441\ it is not possible to use the survey itself as
authority for anything more meaningful.
---------------------------------------------------------------------------
\437\ See U.S. Department of the Treasury, Summary Response to
SIGTARP Recommendations in the April 21, 2009 SIGTARP Report, at 2
(July 2, 2009) (online at www.financialstability.gov/docs/ dividends-
interest-reports/Final%20Treasury%20Response %20to%20
SIGTARP%20Recommendations %20%2807022009%29.pdf).
\438\ In 2008, when Treasury first began issuing its Monthly
Lending and Intermediation Snapshot, it only followed the twenty
largest CPP recipients. Treasury subsequently added two institutions to
the list--American Express and Hartford. See U.S. Department of the
Treasury, Treasury Department Monthly Lending and Intermediation
Snapshot, Summary Analysis for October-December 2008 (online at
www.treas.gov/press/releases/reports/tg30-2-122008.pdf) (accessed Dec.
4, 2009); see also U.S. Department of the Treasury, Treasury Department
Monthly Lending and Intermediation Snapshot, Summary Analysis for
August 2009 (online at www.financialstability.gov/docs/surveys/
Snapshot%20Analysis%20 August%202009%20Data%2010%2014% 2009.pdf)
(accessed Dec. 4, 2009).
\439\ Office of the Special Inspector General for the Troubled
Asset Relief Program, SIGTARP Survey Demonstrates that Banks Can
Provide Meaningful Information on Their Use of TARP Funds, at 5 (July
20, 2009) (online at www.sigtarp.gov/reports/audit/ 2009/
SIGTARP_Survey_
Demonstrates_That_Banks_Can_Provide_Meaningful_%20Information_
On_Their_Use_ Of_TARP_Funds.pdf) (hereinafter ``SIGTARP Survey
Demonstrates that Banks Can Provide Meaningful Information on Their Use
of TARP Funds'').
\440\ CPP recipients' responses to SIGTARP's inquiry included the
following:
More than 80 percent of the respondents cited the use of
funds for lending or the avoidance of reduced lending. Many banks
reported that lending would have been lower without TARP funds or would
have come to a standstill.
More than 40 percent of the respondents reported that they
used some TARP funds to help maintain the capital cushions and reserves
required by their banking regulators.
Nearly a third of the respondents reported that they used
some TARP funds to invest in agency-mortgage backed securities.
A smaller number reported using some TARP funds to repay
outstanding loans.
Several banks reported using some TARP funds to buy other
banks.
\441\ SIGTARP Survey Demonstrates that Banks Can Provide Meaningful
Information on Their Use of TARP Funds, supra note 439.
---------------------------------------------------------------------------
The Panel staff also reviewed the SEC filings and other
public disclosures of a number of banks (this group included
the 17 of the 19 stress test banks that report to the SEC and
the 10 largest CPP recipients).\442\ While, as discussed above,
strictly speaking it is not possible to trace particular uses
to TARP funds, some institutions have made efforts to show how
TARP funds affected their operations. For example, Citigroup,
one of the largest TARP recipients,\443\ established a Special
TARP Committee, which set up guidelines consistent with the
objectives and spirit of the program, and internal controls to
ensure that TARP funds would only be used for lending and
mortgage activities.\444\ Citigroup also separately publishes
regular reports summarizing its TARP spending initiatives.\445\
Similarly, although Associated Banc-Corp did not segregate TARP
funds from its regular account, it took measures to ensure that
the funds are readily identifiable, thereby allowing its
expenditure to be traced.\446\
---------------------------------------------------------------------------
\442\ The 19 stress test institutions are: JPMorgan Chase & Co.,
Citigroup, Bank of America Corp., Wells Fargo & Co., Goldman Sachs
Group, Morgan Stanley, MetLife, PNC Financial Services Group, U.S.
Bancorp, Bank of New York Mellon Corp., SunTrust Banks, Inc., State
Street Corp., Capital One Financial Corp., BB&T Corp., Regions
Financial Corp., American Express Co., Fifth Third Bancorp, Keycorp and
GMAC LLC. The 10 largest CPP recipients are all stress test banks.
These recipients, in order of CPP funds received, are: Citigroup,
JPMorgan Chase & Co., Wells Fargo & Co., Bank of America, Goldman Sachs
Group, Morgan Stanley, Bank of New York Mellon, State Street
Corporation, U.S. Bancorp, and Capital One Financial.
\443\ Under CPP, TIP and AGP, Treasury has invested a total of $49
billion in Citibank as of Nov. 17, 2009. See November 25 Transactions
Report, supra note 71.
\444\ U.S. Securities and Exchange Commission, Citigroup's 2008
Annual Report on Form 10-K (Feb. 27, 2009) (online at www.sec.gov/
Archives/edgar/data/831001
/000119312509041237/d10k.htm); Citigroup, TARP Progress Report Third
Quarter 2009 (Nov. 12, 2009) (online at www.citigroup.com/citi/
corporategovernance/data
/tarp/tarp_pr_3q09.pdf?ieNocache=105) (hereinafter ``TARP Progress
Report Third Quarter 2009'').
\445\ See generally Citigroup, TARP Progress and Updates (online at
www.citigroup.com/citi/corporategovernance/tarp.htm) (accessed Dec. 4,
2009). ``As of the end of the third quarter [2009], Citi has authorized
$53.8 billion in initiatives supported by investments it received under
the TARP capital programs.'' TARP Progress Report Third Quarter 2009,
supra note 444.
\446\ Office of the Special Inspector General for the Troubled
Asset Relief Program, Associated Banc-Corp: UST Sequence No. 76 (online
at www.sigtarp.gov/reports/audit/UseOfFunds/
Associated%20Banc-Corp.pdf) (accessed Dec. 7, 2009).
---------------------------------------------------------------------------
The SEC filings and other public disclosures, like the
responses to the SIGTARP survey, are mixed both in terms of the
level of detail provided and the thought that went into
designing an approach to answering the question ``what did you
do with the taxpayers' money?'' As Treasury points out, an
exact correlation between TARP funds received and loans made is
never going to be feasible, and the use of TARP funds for
prescribed TARP objectives frees up money received from other
sources, lobbying, and other activities that the taxpayers may
find objectionable. Within these constraints, however, banks
such as Citigroup made meaningful efforts to show their use of
TARP funds.\447\ Treasury could have asked the SEC to send
``Dear CFO'' letters to all SEC-reporting TARP recipients,
asking them to make the same kind of disclosures. It does not
appear that any such effort was made.
---------------------------------------------------------------------------
\447\ In order to determine whether a bank had made meaningful
efforts to show use of its TARP funds, the Panel staff asked the
following questions: Was data easily found in the bank's filings? Did
the bank attempt to segregate, identify or otherwise follow the money?
Did it set up rules or guidelines? Did it specify acceptable and non-
acceptable uses of funds, and by reference to what? How much
quantification was there and how granular was the data? Does it report
use of funds on special reports?
---------------------------------------------------------------------------
The terms of the CPP SPAs include the objective of
promoting the flow of credit to U.S. borrowers. The SPAs did
not, however, impose any specific geographic restrictions or
reporting requirements on use or destination of funds.
Additionally, as discussed above, tracing particular uses of
funds to a specific source is difficult. As a result, it is
difficult to establish, in many cases, whether any TARP funds
ended up outside the United States. Of course, use of TARP
funds for U.S. activities arguably frees up other funds that
those banks can use internationally, and many of the largest
CPP recipients had extensive international operations. With
respect to Citigroup and AIG, TARP funds permitted the
institution to continue functioning and in that respect would
logically have benefitted non-U.S. customers, creditors and
counterparties. On the other hand, when non-U.S. countries
helped their banks with capital infusions and debt guarantees,
some of those funds will necessarily flow to U.S.
counterparties.
F. Conclusions
The financial crisis that gripped the United States last
fall was unprecedented in type and magnitude. There is broad
consensus that the TARP was an important part of a broader set
of government actions that stabilized the U.S. financial system
by renewing the flow of credit and averting a more acute
crisis. The financial markets data that are chronicled in this
report make a persuasive case that the government's actions,
while initially halting, were eventually decisive enough to
stop the panic and restore confidence among key financial
institutions and actors. However, the TARP's impact on the
underlying weaknesses in the financial system that led to last
fall's crisis is less clear.
Congress established broad goals for EESA to help address
the economic collapse that was gripping the nation at the time
of its enactment. It is apparent that after fourteen months the
TARP's programs have not been able to solve many of the ongoing
problems Congress identified. Credit availability, the
lifeblood of the economy, remains low. In light of the weak
economy, banks are reluctant to lend, while small businesses
and consumers are reluctant to borrow. In addition, questions
remain about the capitalization of many banks, and whether they
are focusing on repairing their balance sheets at the expense
of lending. The FDIC, facing red ink for the first time in 17
years, must step in to repay depositors at a growing number of
failed banks. This problem may well worsen, as deep-seated
problems in the commercial real estate sector are poised to
inflict further damage on small and mid-sized banks. Large
banks have problems of their own. Some of them, waiting for a
rebound in asset values that may still be years away, continue
to hold the toxic mortgage-related securities that contributed
to the crisis. Consequently, the United States continues to
face the prospect of banks too big to fail and too weak to play
their role adequately in keeping credit flowing throughout the
economy. The foreclosure crisis continues to grow. Furthermore,
the market stability that has emerged since last fall's crisis
has been in part the result of an extraordinary mix of
government actions, some of which will likely be scaled back
relatively soon, and few of which are likely to continue
indefinitely. The removal of this support too quickly could
undermine the economy's nascent stability.
What Treasury has done with the nearly $700 billion in TARP
funds has not occurred in a vacuum. Since the TARP was enacted
in October 2008, the FDIC and the Federal Reserve have
undertaken additional major initiatives that are aimed at
bolstering financial stability. The Congress enacted a fiscal
stimulus measure that is larger than the TARP. The government
has also taken numerous smaller actions, such as the enactment
of the Cash for Clunkers program, which boosted auto sales. All
of these steps are in addition to global market forces that are
outside the government's control, yet have a major impact on
the U.S. economy. Still, it is clear that the unprecedented
government actions taken since last September to bolster the
faltering economy have not been enough to stem the rise of
unemployment, which (except for October) is currently at its
highest level since June 1983.
While strong government action helped prevent a worse
crisis, it may have done so at a significant long run cost to
the performance of our market economy. Implicit government
guarantees pose the most difficult long-term problem to emerge
from the crisis. Looking ahead, there is no consensus among
experts or policymakers as to how to prevent financial
institutions from taking risks that are so large as to threaten
the functioning of the nation's economy. Congress is currently
grappling with this issue as it considers how to respond
legislatively to the financial crisis. It is clear that a
failure to address the moral hazard issue will only lead to
more severe crises in the future.
Since its inception, the TARP has gone through several
different incarnations. It began as a program designed to
purchase toxic assets from troubled banks but quickly morphed
into a means of bolstering bank capital levels. It was later
put to use as a source of funds to restart the securitization
markets, rescue domestic automakers, and modify home mortgages.
The evolving nature of the TARP, as well as Treasury's relative
lack of fixed goals and measures of success for the program,
make it hard to provide an overall evaluation. But the Panel
remains convinced, as it has been since its inception, that
Treasury should make both its decision-making and its actions
more transparent. Despite the difficult circumstances under
which many decisions have been made, those decisions must be
explained to the American people, and the officials who make
them must be held accountable for their actions. Transparency
and accountability may be painful in the short run, but in the
long run they will help restore market functions and earn the
confidence of the American people.
SECTION TWO: ADDITIONAL VIEWS
A. Damon Silvers
This separate view does not reflect a disagreement with the
Panel report in any respect. Rather I wish to say in a somewhat
briefer and perhaps blunter way what I believe the Panel report
as a whole says about TARP.
The Emergency Economic Stabilization Act of 2008 and the
Troubled Asset Relief Program it created, in my opinion, were
significant contributors to stabilizing a full blown financial
panic in October 2008. It is clear to me that for that reason,
we are better off as a nation for the existence of TARP than if
we had done nothing. Of course this proposition is very hard to
prove, but I am convinced it is true. Many people deserve
credit for doing TARP rather than doing nothing, but three
people who in particular deserve credit are Federal Reserve
Chairman Ben Bernanke, Treasury Secretary Timothy Geithner, and
in particular, former-Treasury Secretary Henry Paulson.
Further, we are better off that, in implementing TARP,
then-Secretary Paulson and his colleagues chose to do capital
infusions in the form of the Capital Purchase Program rather
than the initial plan of asset purchases. The prospect of asset
purchases did not calm the markets, the announcement of capital
infusions did. Furthermore, asset purchases at the richly
subsidized prices the banks had hoped for would have been
profoundly unfair to the public. Any other kind of asset
purchases would certainly have had little impact on the panic
and could have worsened it.
The reason, however, for the success of the CPP infusions
into the nine largest banks was, I believe, not that those
infusions by themselves made those institutions adequately
capitalized or resolved the toxic asset problem. It worked
because it was a credible signal, together with other
guarantees issued by Treasury and the FDIC, that the United
States government was guaranteeing the solvency of the large
banks.
The question then was, what price the Treasury would ask on
behalf of the public for guaranteeing the large banks? Our
February report showed that in purchasing preferred stock from
the large banks the Treasury accepted significantly less in
exchange for its investment than private commercial parties
were demanding at the time.\448\ This mispricing was
substantially driven by the decision to price the preferred
stock purchased from the large banks as if each bank was
equally healthy, a decision later criticized by the Special
Inspector General for TARP as based on a manifestly false
premise.\449\
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\448\ Congressional Oversight Panel, February Oversight Report:
Valuing Treasury's Acquisitions (Feb. 6, 2009) (online at
cop.senate.gov/documents/cop-020609-report.pdf).
\449\ SIGTARP, Emergency Capital Injections Provided to Support the
Viability of Bank of America, Other Major Banks, and the U.S. Financial
System, at 17 (Oct. 5, 2009) (online at sigtarp.gov/reports/audit/2009/
Emergency_Capital_Injections_Provided_To_Support_the_Viability_
of_Bank_of_America..._100509.pdf).
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This initial mispricing was followed by then-Secretary
Paulson's decision to rescue first Citigroup and then Bank of
America from imminent bankruptcy without subjecting their
shareholders to the same levels of dilution that had been
forced on AIG. This placed the public in the position of
rescuing the stockholders of banks. For the previous seventy-
five years, it had been a fundamental premise of bank
regulation that while a stable system required deposit
insurance, and we might bail out other short term creditors and
even bondholders in a crisis, no public purpose was served by
rescuing stockholders. In fact the moral hazard issues created
by such a wealth transfer were profoundly dangerous.
After an initial period of deliberation, the Obama
Administration settled on an approach of trying to limit
further capital infusions into the banks while effectively
pursuing a time-buying strategy. This strategy led to improved
transparency in some respects, such as the release of the
stress test results and the recognition that some banks were
stronger than others, opacity continued in other areas. For
example, in our August report we found it was not possible to
determine the value of toxic assets on the books of the large
banks.\450\ It appeared in general that where transparency led
to the conclusion that the banks were strong, the approach was
transparency. Where transparency might have led to a different
conclusion, opacity continued. This is of course completely
consistent with a time-buying strategy. The time-buying
strategy so far has worked in that so far there have been no
further direct capital infusions into the major banks since
President Obama took office.
---------------------------------------------------------------------------
\450\ August Oversight Report, supra note 100.
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However, though the consequences of the time-buying
strategy appear to be that while we have had no further capital
infusions into the large banks, it is unclear whether the large
banks are actually healthy. Citigroup, Wells Fargo, and Bank of
America were not allowed to return their TARP money after the
stress tests. Those banks constitute approximately 40 percent
of the nation's bank assets. Recently Bank of America announced
its intention to return TARP money after completing a public
offering, though questions have been raised by informed
commentators like Andrew Ross Sorkin as to whether Bank of
America is really strong enough to be allowed to return its
TARP capital, and point to the lack of lending on the part of
Bank of America.\451\ Meanwhile, small banks that do not
benefit from either implicit or explicit guarantees are failing
at an alarming rate.
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\451\ Andrew Ross Sorkin, Bailout Refund Is All About Pay, Pay,
Pay, New York Times (Dec. 7, 2009) (online at www.nytimes.com/ 2009/12/
08/ business/08sorkin.html).
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As a result of the continuing underlying weakness in the
banking system, banks appear reluctant to lend, particularly to
small- and medium-sized businesses. This dynamic has been cited
by Federal Reserve Chairman Bernanke as a key contributor to
the high rate of unemployment.\452\ In a parallel development,
Treasury's foreclosure relief programs seem to be designed with
the first principle of avoiding writedowns. This is again
consistent with a goal of buying time for banks, but not
consistent with a goal of stabilizing the housing market or
keeping American families in their homes. These dynamics appear
to have some resemblance to the forces that led in different
circumstances to Japan in the 1990s having a decade long
problem with bank weakness that contributed to prolonged
economic weakness.
---------------------------------------------------------------------------
\452\ Ben S. Bernanke, Speech at the Economic Club of New York
(Nov. 16, 2009) (online at www.federalreserve.gov/ newsevents/ speech/
bernanke20091116a.htm).
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So the verdict on TARP is that it was a success at
stabilizing a serious financial crisis but that it has been
characterized by a willingness to give public money to the
banks at less than fair terms to the public, and by a refusal
to resolve fundamental problems with the financial institutions
it has rescued. These weaknesses in TARP were not necessary. In
some cases these weaknesses have been addressed over time.
Where these problems remain, and I believe they remain central
to the nature of TARP today, they could still be addressed.
B. Richard Neiman
I voted for and support this month's Report and my
Additional Views are related more to important matters of
emphasis than to specific conclusions. It is critical to
remember in our analysis that EESA was enacted and first
implemented in the depths of a major crisis, and the TARP was
charged with multiple, complex, and enormous responsibilities.
1. TARP Has Significantly Improved the Stability of the Financial
System
In my opinion the Report could be stronger in giving credit
to TARP for having achieved the primary statutory objective of
restoring general financial stability and liquidity in the
financial system, including the restoration of functioning
credit markets. There are legitimate debates about specific
causation (TARP was part of a coordinated set of responses) and
about particular transactions (methods of rescue or seizure of
one institution or another). However, in comparison to the
situation in October 2008, I give Congress, the Administration,
and TARP a large share of credit for the achievement of the
primary objective under EESA.
The Panel has issued a series of reports that have closely
examined TARP programs and transactions and we have been
critical of many aspects of implementation, including
transparency and accountability. Yet, in this year-end review
we should take a step back and be clear and emphatic that a
dominant success and objective was in fact achieved.
In hindsight it is difficult to remember how close the
system was to imploding and even more difficult to imagine what
the consequences to the ``real economy'' might have been had
the global financial system collapsed. It is not possible to
adequately construct that scenario. But for all the criticism
Treasury has received for assisting in the rescue of Bear
Stearns and allowing the failure of Lehman Brothers, I shudder
to imagine what might have happened if AIG had been allowed to
fail and been followed quickly by a series of major American
banks and investment banks during those weeks in early October
2008. They would not have simply ``failed'' in the traditional
sense--the entire global financial system would have seized and
ground to a halt. The specter of the United States government
not acting in the face of such a crisis would have been
devastating to the world economy. The impacts on trade, on the
movement of goods, possibly on hunger and dislocation, and
certainly on the American people's confidence, can only be
imagined.
Therefore I think this is a moment to give some appropriate
credit to the Congress, the Treasury, and the Federal Reserve
for acting decisively in the face of a potential disaster and
to TARP for playing a central role in averting that outcome.
2. Formidable Problems Remain in the General Economy, Particularly With
Respect to Mounting Foreclosures
In restoring liquidity and financial stability to the
financial system, Treasury was charged with ensuring that TARP
funds and its authority under EESA ``are used in a manner that
. . . preserves homeownership and promotes jobs and economic
growth.'' \453\ These are very serious issues for the Treasury
and for Congress and the country. In some cases TARP results
have been better; in other cases worse.
---------------------------------------------------------------------------
\453\ Sec. EESA 2.
---------------------------------------------------------------------------
I do not attribute primary responsibility for solving the
problems of general economic recovery to TARP programs, but I
do think that some TARP programs could have done, and still can
do, much better in promoting those goals.
On the positive side, the TARP capital support programs,
including the SCAP, have generally been successful in promoting
financial condition transparency, bringing private capital
investment back to the banking sector, and protecting taxpayer
funds. The disagreement among our expert panel of witnesses
about the current adequacy of overall banking capital levels
is, I believe, more related to their differing views of the
future economy and its impact on bank capital than it is to
their assessment of TARP's effectiveness.
As for the asset-related programs, the TALF program has
performed reasonably well in reviving functioning asset-backed
securities markets for certain consumer credit asset classes.
The PPIP program was late in launching but can now be expected
to play an important role in creating a liquid market for
troubled assets.
The auto companies' rescue was generally well executed,
albeit at a cost, and at this point it has helped to mitigate
the degree of job dislocation in the general economy.
On the other hand, as the Report rightly points out in
detail, TARP has struggled to help homeowners and small
businesses. HAMP has made only limited progress for nine months
now, and the residential foreclosure crisis continues to mount.
Moreover, credit is not sufficiently available for small
businesses and we are entering a period of severe stress on
commercial real estate loans. Much more needs to be done.
Looking ahead, TARP needs to close the book on large
institution support and focus all of its energies on addressing
the problems of foreclosures, small business credit, and
commercial real estate.
One proposal I have long called for is for Treasury to
expand its foreclosure prevention program to assist borrowers
who risk foreclosure due to job loss or other temporary
hardship. As the recession lingers, prime borrowers with
mortgages that are otherwise affordable are increasingly
falling into this category. I therefore have been urging the
use of TARP funds to support state emergency mortgage
assistance programs to help borrowers while they get back on
their feet. Innovative programs at the state level have
demonstrated that this idea can work.
3. The Risk of Moral Hazard Goes Well Beyond the Implementation of TARP
Moral hazard, which is discussed in the Report, is a far
ranging effect that occurs anywhere the government interfaces
with any of the financial sector (e.g., bank debt support),
private contracts (e.g., mortgages), and the general industrial
economy (e.g., auto rescue). TARP's very enactment was a
massive instance of government intervention; presumably
Congress reached the conclusion that the risks of not acting
outweighed the risks of moral hazard that implementing TARP
required.
Therefore, while moral hazard is a very real issue I do not
believe it is appropriate to assign the lion's share of
responsibility for moral hazard risk to the implementation of
TARP programs. The statute itself was an emergency act of moral
hazard-inducing intervention. So it is not surprising to find
moral hazard associated with TARP--it was there from the
beginning.
Extraordinary government efforts necessary to avoid system-
wide financial collapse last fall in some cases made
institutions bigger and more complex and interconnected. This
was not a desirable matter of policy but an unfortunate matter
of exigency. In a crisis, a larger company may be required to
absorb the business of another large company quickly,
consolidate management and operations, and provide
uninterrupted service to customers and business partners.
The important lesson of moral hazard is that we need to
address ``too big to fail'' not by criticizing or second
guessing TARP, but by renewing our efforts to create a systemic
regulator and resolution authority. This is the greatest
legislative imperative for financial reform and where our
energies must be directed.
4. Going Forward--Reform of Financial Institutions Must Be Considered
These outcomes of the crisis have only heightened the need
to address systemic risk legislatively and to create an
authority to unwind such institutions in an orderly fashion in
event of failure.
They also highlight the debate about whether large
financial institutions should be allowed to grow so large and
complex in the first place. Our national dialogue must include
the debate over the social responsibility and utility of banks
subject to the federal safety net, and whether in addition to
stronger capital requirements we should consider restricting
the level of risky activities that these institutions are
permitted to conduct (such as proprietary trading and
sponsorship of hedge funds). Proposals such as those made by
former Federal Reserve Chairman Paul Volcker warrant full
consideration and discussion.
5. Conclusion
TARP was instrumental in avoiding a global financial
meltdown--a far worse scenario than we experience today--at a
much lower cost than was originally expected. Systemic
stability and functioning credit markets were a necessary pre-
condition to be in a position to tackle the problems relating
to foreclosures, credit availability, and economic growth.
Going forward these are the most important issues. TARP funds
and programs must now focus on them.
C. Representative Jeb Hensarling
Although I commend the Panel and its staff for their
efforts in producing the December report, I do not concur with
all of the analysis and conclusions presented and, thus,
dissent. I would like, however, to thank the Panel for
incorporating several of the suggestions I offered during the
drafting process.
Executive Summary
The Panel's December report focuses on whether Treasury has
properly discharged its Congressional mandate under the
Emergency Economic Stabilization Act of 2008--the enabling
statute for the Troubled Asset Relief Program. In my view, it
is not possible to assess the overall effectiveness of the TARP
without acknowledging and thoughtfully analyzing the intended
and unintended consequences of the program and the manner in
which it was implemented by Treasury. In making these
determinations I analyzed a series of specifically tailored
metrics and inquired whether the TARP (i) stabilized the U.S.
financial system, (ii) promoted lending, (iii) was implemented
in a manner so as to protect the taxpayers, (iv) enhanced
systemic, implicit guarantee and moral hazard risks, (v)
enhanced political risk, (vi) promoted transparency and
accountability, and (vii) was used for economic stimulus
instead of financial stability.
Based upon this analysis I conclude that the TARP is
failing its mandate and offer the following summary of my
findings.
In order to end the abuses of the TARP as
evidenced by the Chrysler, General Motors (GM) and GMAC
bailouts, misguided foreclosure mitigation programs and the re-
animation of reckless behavior and moral hazard risks,
Secretary Geithner should not extend the TARP but permit it to
end on December 31, 2009.
As of today, Treasury has approximately $297.2
billion of TARP authority available to fund existing
commitments and new programs. As the EESA statute requires, all
recouped and remaining TARP funds should go back into the
Treasury general fund for debt reduction. All revenues and
proceeds from TARP investments that have generated a positive
return should also go for debt reduction.
If the Secretary extends the TARP to October 31,
2010, I fear the Administration will continue to employ
taxpayer resources as a revolving bailout fund to promote its
politically favored projects as was clearly evident in the
Chrysler, GM and GMAC bailouts.
While the programs offered by Treasury, the
Federal Reserve and the FDIC may very well have jointly
assisted with the stabilization of the financial system over
the past year, it seems quite unlikely that the TARP--
unassisted by the Federal Reserve and the FDIC--would have
stabilized the U.S. financial system.
Although some criticize the TARP for its failure
to jump start new lending activity and for the creation of
dysfunctional financial institutions (zombie banks), others
note that lending-for-the-sake-of-lending may sow the seeds of
the next asset bubble and lead to another round of non-
performing loans and toxic securitized debt instruments.
Nevertheless, if the TARP is judged on the basis of whether it
successfully restarted the lending market for large and small
business credit, it appears that it has again failed to meet
such expectation.
It is difficult to conclude that Treasury has
diligently discharged its taxpayer protection obligation given
the TARP funds that will most likely be lost with respect to
AIG, the auto related bailouts and the various foreclosure
mitigation efforts.
Instead of lessening systemic risk the TARP has
exacerbated the ``too big to fail'' problem by making the
federal government the implicit guarantor of the largest
American financial institutions as well as an undefined select
group of business enterprises the failure of which might impede
the Administration's economic, social and political agenda.
By evidencing its willingness to rescue businesses
that engage in excessive risk taking and poor business judgment
Treasury has created needless implicit guarantee and moral
hazard risks and laid the foundation for another economic
crisis. If the Administration provides a safety net from risky
behavior no one should be surprised if the intended recipients
accept the offer and engage in such behavior. If the
participants win their high risk bets they will reap all of the
benefits but if they lose the taxpayers will bear the burden of
picking up the pieces. It is possible that the TARP not only
increased the number of ``too big to fail'' institutions but
the size of such institutions as well.
I remain troubled that the implementation of the
TARP has caused the private sector to incorporate the concept
of ``political risk'' into its analysis before engaging in any
direct or indirect transaction with the United States
government. The realm of political risk is generally reserved
for business transactions undertaken in developing countries
and not interactions between private sector participants and
the United States government. Following the Chrysler and GM
decisions it is possible that private sector participants may
begin to view interactions with the United States government
through the same jaundiced eye they are accustomed to directing
toward third-world governments.
Treasury has often been less than forthcoming
regarding matters of transparency and accountability. Treasury
should provide detailed financial statements to the taxpayers
and operate its TARP investments in a businesslike manner.
The TARP was promoted as a way to provide
``financial stability,'' and the American Reinvestment and
Recovery Act was promoted as a way to provide ``economic
stimulus.'' Regrettably, the TARP has evolved from a program
aimed at financial stability during a time of crisis to one
that increasingly resembles another attempt by the
Administration to promote its economic, political and social
agenda through fiscal stimulus.
The bankruptcy restructurings of Chrysler and GM
and the recapitalization of GMAC were financed with TARP
proceeds. These cases serve as the poster child of why the TARP
should end on December 31, 2009. The restructurings failed each
of the standards noted above by exacerbating implicit guarantee
and moral hazard risks, incorporating a heavy dose of political
risk into private-public sector interactions, offering little
in the way of taxpayer protection, transparency and
accountability, and using funds dedicated to financial
stability for economic stimulus.
Much like the auto industry interventions, HAMP
and the Administration's other foreclosure mitigation efforts
to date have been a failure. The Administration's opaque
foreclosure mitigation efforts have assisted only a small
number of homeowners while drawing billions of involuntary
taxpayer dollars into a black hole.
The best foreclosure mitigation program is a job,
and the best assurance of job security is economic growth and
the adoption of public policy that encourages and rewards
capital formation and entrepreneurial success. Without a robust
macroeconomic recovery the housing market will continue to
languish and any policy that forestalls such recovery will by
necessity lead to more foreclosures.
A. Overview
The Panel's December report focuses on whether Treasury has
properly discharged its Congressional mandate under the
Emergency Economic Stabilization Act of 2008 (EESA)--the
enabling statute for the Troubled Asset Relief Program
(TARP).\454\ In assessing the overall effectiveness of the TARP
I will analyze the program against each of the following
metrics:
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\454\ The EESA statute requires COP to accomplish the following,
through regular reports:
Oversee Treasury's TARP-related actions and use of
authority;
Assess the impact to stabilization of financial markets
and institutions of TARP spending;
Evaluate the extent to which TARP information released
adds to transparency; and
Ensure effective foreclosure mitigation efforts in light
of minimizing long-term taxpayer costs and maximizing taxpayer
benefits.
12 U.S.C. 5223.
---------------------------------------------------------------------------
stabilization of the U.S. financial system;
increased lending activity;
taxpayer protection;
systemic, implicit guarantee and moral
hazard risks;
political risk;
transparency and accountability; and
financial stability v. economic stimulus.
I will also describe what I believe was the primary cause
of the financial crisis that the TARP was created to remedy. In
addition I will retrace my analyses of the Chrysler and General
Motors (GM) restructurings--the TARP's lowest point--and the
misguided TARP funded foreclosure mitigation efforts.
Based upon this analysis I conclude that the TARP is
failing its mandate and recommend that Secretary Geithner not
extend the TARP but allow the program to terminate on December
31, 2009.\455\
---------------------------------------------------------------------------
\455\ See generally, Geithner Expects Bailout Program to End Soon,
The Associated Press (Dec. 2, 2009) (online at www.nytimes.com/2009/12/
03/business/economy/03derivatives.html) (``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''); Jackie
Calmes, Repaid Bailout Money May Go to Jobless Benefits, New York Times
(Dec. 3, 2009) (online at www.nytimes.com/2009/12/03/us/politics/
03jobs.html) (``Treasury Secretary Timothy F. Geithner, testifying on
Wednesday before the Senate Agriculture Committee, warned against
shuttering the program just yet, given the continued weakness in the
banking, housing and real estate markets. But Mr. Geithner said much of
the $700 billion would not be needed, an indication of how far the
financial industry has improved since Mr. Obama took office and
prepared to ask for up to $500 billion more. On Wednesday, Bank of
America announced that it would repay all of its $45 billion in bailout
money before the end of the year''); Michael Crittendon and Sarah
Lynch, Geithner Says TARP Is Winding Down, but Date Not Set, Wall
Street Journal (Dec. 3, 2009) (online at online.wsj.com/article/
SB125976850821372893.html) (``The Obama administration will outline its
plan to end the government's $700 billion financial rescue program in
the next few weeks, a top official said, though that doesn't mean it
will expire as scheduled by year end. `We are close to the point where
we can wind down this program and stop making new commitments,'
Treasury Secretary Timothy Geithner told a U.S. Senate panel
Wednesday'').
---------------------------------------------------------------------------
Before beginning my analysis of the TARP I thought it would
be helpful to provide some perspective regarding the magnitude
of the taxpayer resources that have been dedicated to financial
stability and economic stimulus over the past year. The Wall
Street Journal recently reported that Treasury is considering
the investment of up to an additional $5.6 billion in
GMAC.\456\ To date Treasury has invested $12.5 billion in GMAC.
I am not aware of any serious claim that the survival of GMAC
is necessary for the financial stability of our country.
Remarkably, the up to $18 billion that ultimately may be
invested in GMAC represents a small drop in a large bucket
relative to the trillions of dollars of taxpayer sourced funds
presently committed to financial stability and economic
stimulus. By comparison, for fiscal year 2010 the National
Institutes of Health has requested just over $6 billion for
cancer research.\457\ Although the Panel is not charged with
debating the allocation of limited public resources, as
taxpayers we may nevertheless question if GMAC merits the
equivalent of three years of taxpayer funded cancer research.
---------------------------------------------------------------------------
\456\ Dan Fitzpatrick and Damian Paletta, GMAC Asks for Fresh
Lifeline, Wall Street Journal (Oct. 29, 2009) (online at
online.wsj.com/article/SB125668489932511683.html?mod=
djemalertNEWS) (``The U.S. government is likely to inject $2.8 billion
to $5.6 billion of capital into the Detroit company, on top of the
$12.5 billion that GMAC has received since December 2008, these people
said. The latest infusion would come in the form of preferred stock.
The government's 35.4% stake in the company could increase if existing
shares eventually are converted into common equity'').
\457\ Senate Committee on Appropriations, Subcommittee on Labor,
Health and Human Services, Education, and Related Agencies, Written
Testimony of National Cancer Institute Director John E. Niederhuber,
Budget Request for FY 2010 (May 21, 2009) (online at
legislative.cancer.gov/files/appropriations-2009-05-21.pdf).
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B. Primary Cause of the Financial Crisis
Just as a history of bad management decisions did not
preclude Chrysler and GM from receiving TARP funds, the same is
true of Fannie Mae and Freddie Mac. It should be noted that
their financial insolvency materialized after years of
mismanagement--and after years of enjoying the gold seal of the
government's implicit guarantee. Fannie and Freddie exploited
their congressionally granted charters to borrow money at
discounted rates. They dominated the entire secondary mortgage
market and wildly inflated their balance sheets. Because market
participants long understood that this government created
duopoly was implicitly (and, now, explicitly) backed by the
federal government, investors and underwriters chose to believe
that if Fannie or Freddie touched something, it was safe,
sound, secure, and most importantly ``sanctioned'' by the
government. The results of those misperceptions have had a
devastating impact on our entire economy. Given Fannie and
Freddie's market dominance, it should come as little surprise
that once they dipped into the subprime and Alt-A markets,
lenders quickly followed suit. In 1995, HUD authorized Fannie
and Freddie to purchase subprime securities that included loans
to low-income borrowers and allowed the government sponsored
enterprises (GSEs) to receive credit for those loans toward
their mandatory affordable housing goals. Fannie and Freddie
readily complied, and as a result, subprime and near-prime
loans jumped from 9 percent of securitized mortgages in 2001 to
40 percent in 2006. In 2004 alone, Fannie and Freddie purchased
$175 billion in subprime mortgage securities, which accounted
for 44 percent of the market that year. Then, from 2005 through
2007, the two GSEs purchased approximately $1 trillion in
subprime and Alt-A loans, and Fannie's acquisitions of
mortgages with less than 10-percent down payments almost
tripled. As a result, the market share of conventional
mortgages dropped from 78.8 percent in 2003 to 50.1 percent by
2007 with a corresponding increase in subprime and Alt-A loans
from 10.1 percent to 32.7 percent over the same period. These
non-traditional loan products, on which Fannie and Freddie so
heavily gambled as their Congressional supporters encouraged
them to ``roll the dice a little bit more,'' now constitute
many of the same non-performing loans which have contributed to
our current foreclosure troubles.\458\ Private sector lenders
and securitizers of mortgage backed securities lowered their
diligence and underwriting standards in order to compete with
the heavily subsidized duopoly resulting in unprecedented
levels of mortgage defaults and the near shut-down of our
credit markets. Without the reckless behavior of Freddie and
Fannie it seems most unlikely that a financial crisis of the
magnitude we have experienced over the past year would have
developed.\459\
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\458\ Representative Jeb Hensarling, Additional Views to
Congressional Oversight Panel, March Oversight Report: Foreclosure
Crisis: Working Towards a Solution (Mar. 6, 2009) (online at
cop.senate.gov/documents/cop-030609-report-view-hensarling.pdf).
\459\ In addition, for well over twenty years, federal policy has
promoted lending and borrowing to expand home ownership, through
incentives such as the home mortgage interest tax exclusion, the FHA,
discretionary HUD spending programs, and the Community Reinvestment Act
(CRA). CRA is an example of a program with the best of intentions
having adverse, unintended consequences on exactly the population it
hopes to serve. It was initially authorized to prevent ``redlining,'' a
term that refers to the practice of denying loans to neighborhoods
considered to be higher economic risks, by mandating banks lend to the
communities where they take deposits. Since its passage into law in
1977, however, CRA has advanced at least two undesirable outcomes: (1)
some financial institutions completely avoided doing business in
neighborhoods and restricted even low-risk forms of credit, and (2)
many institutions went the other way and relaxed underwriting standards
to meet CRA guidelines, thus opening the door to the development of
certain risky products that have contributed to the problem of
foreclosures. These lax underwriting standards spread to Fannie and
Freddie and ultimately to the private sector as the role of the GSEs
morphed from that of a liquidity provider to a promoter of home
ownership.
---------------------------------------------------------------------------
GAO noted in a September 2009 report:
While housing finance may have derived some benefits
from the enterprises' activities over the years, GAO,
federal regulators, researchers, and others long have
argued that the enterprises had financial incentives to
engage in risky business practices to strengthen their
profitability partly because of the financial benefits
derived from the implied federal guarantee on their
financial obligations.\460\
---------------------------------------------------------------------------
\460\ Government Accountability Office, Analysis of Options for
Revising the Housing Enterprises' Long-term Structures (September 2009)
(online at www.gao.gov/new.items/d09782.pdf).
In September 2008, Treasury put Fannie Mae and Freddie Mac
into conservatorship under the Federal Housing Finance Agency
(FHFA), effectively making taxpayers liable for their
portfolios which now total about $5.46 trillion (including
mortgage-backed securities and other guarantees, as well as
gross mortgage portfolios).\461\
---------------------------------------------------------------------------
\461\ Fannie Mae, Monthly Summary (July 2009) (online at
www.fanniemae.com/ir/pdf/monthly/2009/073109.pdf); Freddie Mac, Monthly
Volume Summary (July 2009) (online at www.freddiemac.com/investors/
volsum/pdf/0709mvs.pdf).
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C. Analysis of the TARP
In my view, it is not possible to assess the overall
effectiveness of the TARP without acknowledging and
thoughtfully analyzing the intended and unintended consequences
of the program and the manner in which it was implemented by
Treasury. Any analysis that does not thoroughly consider the
issues of implicit guarantee, moral hazard, political risk,
transparency and accountability, and financial stability v.
economic stimulus is myopic and of limited benefit.
1. Stabilization of U.S. Financial System
Any role that the TARP may have played over the past year
in stabilizing the financial system cannot be analyzed to the
exclusion of the programs adopted by the Federal Reserve and
the FDIC. Although Treasury's maximum exposure under the TARP
totals $698.7 billion, the Federal Reserve and the FDIC have
maximum exposures of $1.732 trillion and $666.7 billion,
respectively.\462\
---------------------------------------------------------------------------
\462\ See Figure 27 on pp. 79-80 of the Panel's December Report.
---------------------------------------------------------------------------
Any such analysis becomes more challenging when you
consider the broad array of programs adopted by Treasury, the
Federal Reserve and the FDIC. Treasury--under TARP authority--
rolled out a dizzying group of programs including, among
others:
the Capital Purchase Program (CPP--the
purchase of preferred stock in approximately 700
financial institutions);
the Targeted Investment Program (TIP--
exceptional assistance to Citigroup and Bank of
America);
the Systemically Significant Failing
Institutions Program (SSFI--exceptional assistance to
AIG);
the Asset Guarantee Program (AGP--the
guarantee of certain assets of Citigroup);
the Public-Private Investment Program
(PPIP--purchase of toxic assets from financial
institutions);
the Term-Asset Back Securities Loan Facility
Program (TALF--restart the securitization market);
various small business programs;
the Making Home Affordable Program (MHA--
foreclosure mitigation, including the Home Affordable
Modification Program (HAMP) and the Home Affordable
Refinancing Program (HARP);
the Automotive Industry Financing Program
(AIFP--bailout of Chrysler, GM and GMAC); and
the Auto Supplier Support Program (bailout
of certain auto suppliers).
The Federal Reserve has extended credit to AIG, advanced
loans under the TALF program, provided asset guarantees to
Citigroup and extended over $1 trillion in credit under, among
others, its Term Auction Facility, discount window program,
Primary Dealer Credit Facility, commercial paper facility
programs, and GSE debt securities and mortgage backed
securities programs. The FDIC introduced the Temporary
Liquidity Guarantee Program (TLGP-guarantee of debt issued by
certain financial institutions), structured a PPIP for whole
loans, guaranteed assets of Citigroup and increased outlays to
its deposit insurance fund.\463\ The Panel's current and prior
reports analyze many of these programs in detail.
---------------------------------------------------------------------------
\463\ See pp. 74-81 of the Panel's December Report.
---------------------------------------------------------------------------
While the programs offered by Treasury, the Federal Reserve
and the FDIC may very well have jointly assisted with the
stabilization of the financial system over the past year, it
seems quite unlikely that the TARP--unassisted by the Federal
Reserve and the FDIC--would have stabilized the U.S. financial
system.\464\
---------------------------------------------------------------------------
\464\ Because it has served as a barrier to private-sector
investment and capital formation, TARP has likely done much more to
impede job creation and organic economic growth than it has done to
promote them. U.S. unemployment recently surpassed 10 percent for the
first time in 26 years and the broader definition of unemployment--
including those who are underemployed and have stopped looking for
work--recently jumped to 17.5 percent. Although the two metrics have
fallen to 10 percent and 17.2 percent, respectfully, such improvements,
while encouraging, hardly signal a return to a robust employment
market.
---------------------------------------------------------------------------
Interestingly, some who attribute relative success to
certain aspects of the TARP offer only faint praise. Dr. Dean
Baker, Co-Director, Center for Economic and Policy Research,
provided the following testimony to the Panel:
There are many factors that make it difficult to
assess the effectiveness of the TARP, most important
one being the fact that the TARP was carried through in
conjunction with rescue efforts by the Federal Deposit
Insurance Corporation (FDIC) and the Federal Reserve
Board. The money made available to the financial system
through these alternative mechanisms was considerably
larger than the amount made available through the TARP.
Furthermore, there is no publicly available information
on the terms or the beneficiaries of the loans issued
through the Fed's special lending facilities.
For this reason, there is no easy way to determine
the importance of TARP funds in stabilizing the
financial system. Clearly, the TARP did play a role in
stopping the panic that was driving financial markets
last year. Together with the other structures put in
place, the TARP did succeed in restoring stability to
the financial system.
However, keeping the financial system operating is a
rather low bar. There is little doubt that the Federal
Reserve Board, with its virtual unlimited ability to
print money, can prevent a financial collapse. The
relevant question is whether the TARP, along with the
other programs put in place, restored stability in a
way that best served the real economy and also can be
viewed as fair by the American people. By these
criteria, the TARP does not score very well.\465\
---------------------------------------------------------------------------
\465\ Congressional Oversight Panel, Written Testimony of Center
for Economic and Policy Research Co-Director Dean Baker, Taking Stock:
Independent Views on TARP's Effectiveness, at 1 (Nov. 19, 2009) (online
at cop.senate.gov/documents/testimony 09111909-baker.pdf).
Roy Smith, Professor of Finance, New York University Stern
School of Business, states in his written submission to the
Panel that the role of the TARP was relatively small compared
to that of the Federal Reserve. In his view, the greatest
contribution of the program was its announcement, which
signaled that the government intended to act, while the actual
accomplishments of the program are ``relatively few and
unimportant.'' Professor Smith states that Treasury's highest
priority should be to recover the TARP's investment.\466\
---------------------------------------------------------------------------
\466\ Roy Smith, Letter to Panel Staff (Oct. 23, 2009).
---------------------------------------------------------------------------
William Isaac, chairman of the FDIC, 1981-1985, argues in
his written submission to the Panel that the TARP legislation
did more harm than good, and that the Federal Reserve, the FDIC
and the SEC had the tools necessary to alleviate the financial
crisis without taxpayer outlays. In Chairman Isaac's view,
Treasury lacked the expertise and personnel to run the capital
infusion program, and as a result Treasury should have turned
the program over to the FDIC. Isaac criticizes Treasury for (i)
forcing banks to participate in the TARP, (ii) publicly
announcing the stress tests, and (iii) taking the position that
the TARP is a revolving fund.\467\
---------------------------------------------------------------------------
\467\ William Isaac, Letter to Panel Staff (Nov. 6, 2009).
---------------------------------------------------------------------------
2. Lending
Dr. Baker offered the following written testimony to the
Panel regarding the lending activity of TARP recipients:
The one sector that clearly is having difficulty
securing credit is the small business sector. While
this is an impediment to recovery, this sort of credit
tightening is typical of a recession. The complaints
from business owners over being denied credit are not
qualitatively different than the complaints that were
made in 1990-91 recession. Lenders will also tighten
credit to business during a downturn simply because
otherwise healthy businesses are much risk[ier]
prospects during a recession. There is no reason to
believe that the tightening of credit during this
downturn is any greater than what should be expected
given the severity of the recession. To press banks to
make more loans in this context would be to insist that
they make loans on which they expect to lose money.
This would be questionable economic policy.\468\
---------------------------------------------------------------------------
\468\ Congressional Oversight Panel, Written Testimony of Center
for Economic and Policy Research Co-Director Dean Baker, Taking Stock:
Independent Views on TARP's Effectiveness, at 4, 5 (Nov. 19, 2009)
(online at cop.senate.gov/documents/testimony-111909-baker.pdf).
Although some criticize the TARP for its failure to jump
start new lending activity and for the creation of
dysfunctional financial institutions (zombie banks), Dr. Baker
notes that lending-for-the-sake-of-lending may sow the seeds of
the next asset bubble and lead to another round of non-
performing loans and toxic securitized debt instruments.
Nevertheless, if the TARP is judged on the basis of whether it
successfully restarted the lending market for large and small
business credit, it appears that it has again failed to meet
such expectation.
3. Taxpayer Protection
Roughly $71 billion of TARP funds have been paid back,
mostly from large financial institutions who received equity
injections as part of the CPP. In addition, Bank of America
recently announced that it will repay the full $45 billion with
interest it has accessed from the TARP. As Treasury unwinds
several TARP programs where the taxpayers have recouped their
investments with interest, the Panel should focus its attention
on the new or existing programs that are likely more enduring
and costly to the taxpayers. The opportunity cost of not
providing rigorous oversight in these areas is high. These
programs include taxpayer funds directed to AIG, Chrysler, GM,
GMAC, foreclosure mitigation, preferred and common share
purchases in Citigroup, Bank of America and hundreds of
additional large and small financial institutions and other
initiatives. The Panel should undertake to analyze these
programs to determine if the investment of taxpayer funds is
appropriate, authorized under EESA and adequately protected.
This undertaking is particularly important with respect to the
TARP funded foreclosure mitigation programs since EESA requires
the Panel to ``ensure effective foreclosure mitigation efforts
in light of minimizing long-term taxpayer costs and maximizing
taxpayer benefits.'' It is difficult to conclude that Treasury
has diligently discharged its taxpayer protection obligation
given the TARP funds that will most likely be lost with respect
to AIG, the auto related bailouts and the various foreclosure
mitigation efforts.
4. Systemic, Implicit Guarantee and Moral Hazard Risks
Instead of reducing systemic risk the TARP has exacerbated
the ``too big to fail'' problem by making the federal
government the implicit guarantor of the largest American
financial institutions as well as an undefined select group of
business enterprises the failure of which might impede the
Administration's economic, social and political agenda.\469\ By
evidencing its willingness to rescue businesses that engage in
excessive risk taking and poor business judgment Treasury has
created needless implicit guarantee and moral hazard risks and
laid the foundation for another economic crisis. If the
Administration provides a safety net from risky behavior no one
should be surprised if the intended recipients accept the offer
and engage in such behavior. If the participants win their high
risk bets they will reap all of the benefits but if they lose
the taxpayers will bear the burden of picking up the pieces. It
is possible that the TARP not only increased the number of
``too big to fail'' institutions but the size of such
institutions as well.
---------------------------------------------------------------------------
\469\ The Financial Times reports that thirty institutions have
made the latest ``too big to fail list'':
The list, which is not public, contains many of the multinational
bank names that would be widely expected: Goldman Sachs, JPMorgan
Chase, Morgan Stanley, Bank of America Merrill Lynch and Citigroup of
the US; Royal Bank of Canada; UK groups HSBC, Barclays, Royal Bank of
Scotland and Standard Chartered; UBS and Credit Suisse of Switzerland;
France's Societe Generale and BNP Paribas; Santander and BBVA from
Spain; Japan's Mizuho, Sumitomo Mitsui, Nomura, Mitsubishi UFJ; Italy's
UniCredit and Banca Intesa; Germany's Deutsche Bank; and Dutch group
ING.
The exercise follows the establishment of the FSB in the summer and
is principally designed to address the issue of systemically important
cross-border financial institutions through the setting up of
supervisory colleges. These colleges will comprise regulators from the
main countries in which a bank or insurer operates and will have the
job of better coordinating the supervision of cross-border financial
groups.
As a spin-off from that process, the groups on the list will also
be asked to start drawing up so-called living wills--documents
outlining how each bank could be wound up in the event of a crisis.
Regulators are keen to see living wills prepared for all
systemically important financial groups, but the concept has split the
banking world, with the more complex groups arguing that such documents
will be almost impossible to draft without knowing the cause of any
future crisis.
Patrick Jenkins and Paul J. Davies, Thirty Financial Groups on
Systemic Risk List, Financial Times (Nov. 30, 2009) (online at
www.ft.com/cms/s/0/c680e0da-dd4e-11de-ad60-00144feabdc0.html).
The Wall Street Journal recently reported regarding Treasury's AIG
exit strategy:
The bailout of AIG, owned 80% by taxpayers, is one of the most
controversial of the government's unpopular bailouts. Yet with so much
taxpayer money at stake, the government is asserting its ownership.
AIG is the best example of why the government should never get
itself in the position of even having to make these tradeoffs, said
Anil Kashyap, an economics professor at the University of Chicago Booth
School of Business. ``It's why you don't want the government involved
in the private sector in the first place.''
Deborah Solomon, AIG's Rescue Bedevils U.S., Wall Street Journal
(Nov. 23, 2009) (online at online.wsj.com/article/
SB10001424052748703819904574554241356640428.html).
---------------------------------------------------------------------------
Charles Calomiris, the Henry Kaufman Professor of Financial
Institutions, Columbia Business School, stated in written
testimony before the Panel:
In my judgment, TARP and other interventions were not
designed properly, and consequently assistance programs
have resulted in less benefit to the economy than they
should have (in particular, have resulted in
insufficient mitigation of the credit crunch) and they
have cost more than they should have (in the form of
excessive taxpayer bearing of current losses, and
unnecessary moral-hazard incentive costs going
forward).
* * * * *
Government loans, guarantees and investments in
troubled financial institutions (which even include
potential capital infusions into the GSEs), not to
mention government purchases of assets (as originally
contemplated under the TARP plan, and as executed under
the TALF plan) have resulted in huge losses to
taxpayers (Fannie and Freddie and FHA subprime lending
will account for the lion's share of these losses, as
they alone will approach half a trillion dollars) and
remaining risks of future loss. They also have changed
the risk-taking behavior of financial institutions
going forward. If financial institutions know that the
government is there to share losses, risk-taking
becomes a one-sided bet, and so more risk is preferred
to less. There is substantial evidence from financial
history--including the behavior of troubled financial
institutions during the current crisis itself--that
this ``moral-hazard'' problem can give rise to hugely
loss-making, high-risk investments that are both
socially wasteful and an unfair burden on taxpayers.
\470\ (emphasis in original.)
---------------------------------------------------------------------------
\470\ Congressional Oversight Panel, Written Testimony of Charles
Calomiris, Henry Kaufman Professor of Financial Institutions, Columbia
Business School, Taking Stock: Independent Views on TARP's
Effectiveness, at 1, 3 (Nov. 19, 2009) (online at cop.senate.gov/
documents/testimony-111909-calomiris.pdf).
In order to avoid the creation of moral hazard risks,
Professor Calomiris advises that any government sponsored
---------------------------------------------------------------------------
intervention incorporate the following concepts:
(1) Assistance should be offered only under rare
circumstances. The purpose of assistance is not to
prevent the failure of one or a few institutions, per
se; assistance is only warranted when asymmetric
information about the incidence of losses in the
financial system leads to a general breakdown in
financial market buying and selling, resulting in a
liquidity crisis, which makes it impossible or
excessively difficult for otherwise solvent borrowers
to roll over their debts, or for banks to prove their
solvency to the market in order to access needed
capital to shore up their positions.
(2) The design of assistance is crucial to maximizing
its effectiveness and minimizing its social costs;
particularly the allocation of the risk of loss between
the private sector and the government is crucial to the
successful design of assistance. Assistance should be
selective, targeted toward institutions worth saving,
not basket cases. Government should take a senior
position in loss sharing; in discount window lending
that is ensured through collateralization of loans; in
preferred stock purchases, seniority is ensured through
the adequacy of common equity; in other assistance
programs, it is achieved through the structure of
guarantees (e.g., their out-of-the-moneyness).
(3) The assistance toolkit must be diverse. The
proper structure of assistance depends on the severity
of the systemic crisis being addressed; discount window
lending may be sufficient for dealing with liquidity
crises that are not very severe, bank preferred stock
purchases by the government may make sense for more
severe shocks, and other mechanisms (organized rescues
of failed institutions, or guarantees attached to
liabilities or assets) may be the only effective tools
to employ when the crisis is even more severe. No
matter which of the tools is employed, the other
principles (rarity, selectivity, and seniority) can and
should be adhered to.'' \471\ (emphasis in original).
---------------------------------------------------------------------------
\471\ Congressional Oversight Panel, Written Testimony of Charles
Calomiris, Henry Kaufman Professor of Financial Institutions, Columbia
Business School, Taking Stock: Independent Views on TARP's
Effectiveness, at 6, 7 (Nov. 19, 2009) (online at cop.senate.gov/
documents/testimony-111909-calomiris.pdf).
Dr. Baker submitted the following testimony to the Panel
---------------------------------------------------------------------------
regarding systemic risk:
The crisis itself led to further concentration in the
financial sector, with the largest banks all having
been encouraged to buy up bankrupt competitors. As a
result, the largest banks now enjoy fairly explicit
``too big to fail'' protection. There also has been
almost nothing done to restrain the speculative
practices of the major banks. Goldman Sachs, in
particular, stands out by virtue of the fact that it is
still acting as an investment bank (arguably, it can
better be described as a hedge fund), even though it is
now operating under the protective umbrella of the
Federal Reserve Board and the FDIC. There does not
appear to be any effort to restrain its speculative
activity.
Simon Johnson, the Ronald Kurtz Professor of
Entrepreneurship, MIT Sloan School of Management, stated in
written testimony before the Panel:
If any country pursues (a) unlimited government
financial support, while not implementing (b) orderly
resolution for troubled large institutions, and
refusing to take on (c) serious governance reform, it
would be castigated by the United States and come under
pressure from the IMF. At the heart of every crisis is
a political problem--powerful people, and the firms
they control, have gotten out of hand. Unless this is
dealt with as part of the stabilization program, all
the government has done is provide an unconditional
bailout. That may be consistent with a short-term
recovery, but it creates major problems for the
sustainability of the recovery and for the medium-term.
Serious countries do not do this. Seen in this context,
TARP has been badly mismanaged.
* * * * *
The implementation of TARP exacerbated the perception
(and the reality) that some financial institutions are
``Too Big to Fail.'' This lowers their funding costs,
enabling them to borrow more and to take more risk.
* * * * *
The administration as much as said that the major
banks will all pass the stress tests, making it appear
that the results were foreordained. Essentially, this
was used to signal that the government stood behind the
19 banks in the stress test and would not allow any of
them to fail. Effectively, the government signaled
which banks were Too Big To Fail.\472\
---------------------------------------------------------------------------
\472\ Congressional Oversight Panel, Written Testimony of Professor
Simon Johnson, Ronald Kurtz Professor of Entrepreneurship, MIT Sloan
School of Management, Taking Stock: Independent Views on TARP's
Effectiveness, at 2, 3, 7 (Nov. 19, 2009) (online at cop.senate.gov/
documents/testimony-111909-johnson.pdf).
Viral Acharya and Matthew Richardson, Professors of
Finance, New York University Stern School of Business, argue in
their written submission to the Panel that the CPP did not
include ``sufficient strings attached,'' and as a result
created the expectation of ``unconditional government support''
in the future. Moving forward, Professors Acharya and
Richardson highlight the risks of moral hazard, noting ``it is
not just about fighting the last war, but also about the next
one.'' \473\
---------------------------------------------------------------------------
\473\ Viral Acharya and Matthew Richardson, Letter to Panel Staff
(received Nov. 6, 2009).
---------------------------------------------------------------------------
Paul Volcker, former Chairman of the Federal Reserve, 1979-
1987, and member of the Economic Recovery Advisory Board,
states in his written submission to the Panel that Treasury
``appears to have done a good job in structuring their capital
investments,'' but questions the extent to which the program is
currently having a positive impact on the flow of credit.
Chairman Volcker also notes the problems associated with moral
hazard, concluding that reform is necessary.\474\
---------------------------------------------------------------------------
\474\ Paul A. Volcker, Letter to Panel Staff (Nov. 6, 2009).
---------------------------------------------------------------------------
William Poole, Senior Fellow, the Cato Institute, argues in
his written submission to the Panel that the core issue in the
financial system today is the subsidy to large banks created by
the implicit federal guarantee of bank liability. Citing a
recent paper by Dean Baker and Travis McArthur, Mr. Poole notes
that the implicit subsidy may be as large as $34 billion per
year. In addition to this subsidy, the funding advantage
enjoyed by large banks permits them to grow larger, increasing
the risks posed by banks that are too big to fail. Poole also
notes that efforts to control executive compensation are
``unwise and will ultimately be ineffective.'' \475\
---------------------------------------------------------------------------
\475\ William Poole, Letter to Panel Staff (Oct. 23, 2009).
---------------------------------------------------------------------------
In a recent report, SIGTARP addressed the problem of moral
hazard, stating that ``TARP runs the risk of merely re-
animating markets that had collapsed under the weight of
reckless behavior.'' \476\ I am concerned that the TARP is
again inflating the problem of moral hazard by providing
government funded capital to institutions that contributed to
the crisis, modifications to homeowners who may have taken on
too much risk, and lower-cost loans to spur the purchase of
what may be volatile, high-priced asset backed securities.
---------------------------------------------------------------------------
\476\ SIGTARP, Quarterly Report to Congress, at 4 (Oct. 21, 2009)
(online at sigtarp.gov/reports/congress/2009/
October2009_Quarterly_Report_to_Congress.pdf).
---------------------------------------------------------------------------
The SIGTARP report also discussed the cost of the TARP to
the government's credibility. It claims, ``Unfortunately,
several decisions by Treasury--including Treasury's refusal to
require TARP recipients to report on their use of TARP funds,
its less-than accurate statements concerning TARP's first
investments in nine large financial institutions, and its
initial defense of those inaccurate statements--have served
only to damage the Government's credibility and thus the long-
term effectiveness of TARP.'' \477\ I do not see how Treasury
will be able to regain the public's trust so long as it
continues to employ taxpayer sourced funds to make investments
based upon the Administration's economic, political and social
agenda where there is diminished promise that such funds will
be fully recouped.\478\
---------------------------------------------------------------------------
\477\ Id.
\478\ There are three recent examples of the problems that may
arise with respect to government financed investments in the private
sector.
(i) A recent GAO report on the Chrysler and GM bailouts states:
As long as Treasury maintains ownership interests in Chrysler and
GM, it will likely be pressured to influence the companies' business
decisions.
* * * * *
Treasury officials stated that they established such up-front
conditions not solely to protect Treasury's financial interests as a
creditor and equity owner but also to reflect the Administration's
views on responsibly utilizing taxpayer resources for these companies.
While Treasury has stated it does not plan to manage its stake in
Chrysler or GM to achieve social policy goals, these requirements and
covenants to which the companies are subject indicate the challenges
Treasury has faced and likely will face in balancing its roles.
Government Accountability Office, Troubled Asset Relief Program:
Continued Stewardship Needed as Treasury Develops Strategies for
Monitoring and Divesting Financial Interests in Chrysler and GM (Nov.
2, 2009) (online at www.gao.gov/new.items/d10151.pdf).
(ii) Thomas E. Lauria, the Global Practice Head of the Financial
Restructuring and Insolvency Group at White & Case LLP, represented a
group of senior secured creditors, including the Perella Weinberg
Xerion Fund (``Perella Weinberg''), during the Chrysler bankruptcy
proceedings. On May 3, the New York Times reported:
In an interview with a Detroit radio host, Frank Beckmann, Mr.
Lauria said that Perella Weinberg `was directly threatened by the White
House and in essence compelled to withdraw its opposition to the deal
under threat that the full force of the White House press corps would
destroy its reputation if it continued to fight.'
In a follow-up interview with ABC News's Jake Tapper, he identified
Mr. [Steven] Rattner, the head of the auto task force, as having told a
Perella Weinberg official that the White House `would embarrass the
firm.'
Michael J. de la Merced, White House Denies Claims of Threat to
Chrysler Creditor, New York Times (May 3, 2009) (online at
dealbook.blogs.nytimes.com/2009/05/03white-house-perella-weinberg-deny-
claims-of-threat-to-firm/). See also News/Talk WJR 760 am, Frank Talks
With Tom Lauria, Who Represents a Group of Lenders That Object to the
Chrysler Sale (May 1, 2009) (online at www.760wjr.com/
article.asp?id=1301727&spid=6525).
For a further discussion of the interactions between Mr. Rattner
and Perella Weinberg see William D. Cohan, The Final Days of Merrill
Lynch, The Atlantic (Sept. 2009) (online at www.theatlantic.com/doc/
200909/bank-of-america) and Steve Fishman, Exit the Czar, New York
Magazine (Aug. 2, 2009) (online at nymag.com/news/features/58193/).
I requested Secretary Geithner to investigate the allegation and,
to my disappointment, he declined. Specifically, I submitted the
following question for the record to the Secretary: ``Will you agree to
conduct a prompt and thorough investigation of this matter by
contacting Mr. Rattner, Mr. Lauria and representatives of Weinberg
Perella and submit your findings to the Panel?''
The Secretary responded: ``SIGTARP will determine the appropriate
actions with regards to this issue. But as noted above, I would
reiterate that Mr. Rattner categorically denies Mr. Lauria's
allegations.''
Again, I ask the Secretary to investigate this matter and report
his findings to the Panel.
See my dissent from the September report on the auto bailouts.
Representatives Jeb Hensarling, Additional Views to Congressional
Oversight Panel, September Oversight Report: The Use of TARP Funds in
the Support and Reorganization of the Domestic Automotive Industry
(Sept. 9, 2009) (online at cop.senate.gov/documents/cop-090909-report-
additionalviews.pdf).
(iii) The Wall Street Journal recently reported:
Federal support for companies such as GM, Chrysler Group LLC and
Bank of America Corp. has come with baggage: Companies in hock to
Washington now have the equivalent of 535 new board members--100 U.S.
senators and 435 House members.
Since the financial crisis broke, Congress has been acting like the
board of USA Inc., invoking the infusion of taxpayer money to get banks
to modify loans to constituents and to give more help to those in
danger of foreclosure. Members have berated CEOs for their business
practices and pushed for caps on executive pay. They have also pushed
GM and Chrysler to reverse core decisions designed to cut costs, such
as closing facilities and shuttering dealerships.
Neil King, Jr., Politiciand Butt In at Bailed-Out GM, Wall Street
Journal (Oct. 29, 2009) (online at online.wsj.com/article/
SB125677552001414699.html#mod=todays--us--page--one).
---------------------------------------------------------------------------
In my view and as supported by the above cited economists,
the TARP has created substantial and needless implicit
guarantee and moral hazard risks. In order to articulate these
risks I offer the following analysis from the Panel's November
report on the government sponsored guarantee programs which
also applies to the broader TARP:
A larger issue arises when one considers the implicit
guarantees, those that are paid for by neither party,
but whose cost is borne by the taxpayer. The
[government sponsored guarantee programs] carry fees
paid for by the financial institutions. But their
existence, and the existence of the other elements of
the bailout of the financial system, could imply that
there is a permanent, and ``free,'' insurance provided
by the government, especially for those institutions
deemed ``too big to fail,'' or ``too connected to
fail.'' There is an implication that, in the case of
another major economic collapse, the government will
again step in to prop up the financial system,
especially the ``too big to fail'' institutions. This
moral hazard creates a real risk to the system.
This ``free'' insurance causes a number of
distortions in the marketplace. On the financial
institution side, it might promote risky behavior. On
the investor and shareholder side, it will provide less
incentive to hold management to a high standard with
regard to risk-taking. By creating a class of ``too big
to fail'' institutions, it has provided these
institutions with an advantage with respect to the
pricing of credit:
Creditors who believe that an institution will be
regarded by the government as too big to fail may not
price into their extensions of credit the full risk
assumed by the institution. That, of course, is the
very definition of moral hazard. Thus the institution
has funds available to it at a price that does not
fully internalize the social costs associated with its
operations. The consequences are a diminution of market
discipline, inefficient allocation of capital, the
socialization of losses from supposedly market-based
activities, and a competitive advantage for the large
institution compared to smaller banks.\479\
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\479\ Board of Governors of the Federal Reserve System, Speech:
Federal Reserve Board Governor Daniel K. Tarullo at the Exchequer Club,
Washington D.C., Confronting Too Big to Fail (Oct. 21, 2009) (online at
www.federalreserve.gov/newsevents/speech/tarullo20091021a.htm).
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The implied guarantee of ``too big to fail''
institutions might also result in a concentration of
risk in this group, resulting in greater danger to the
taxpayer if and when the government must step in again.
5. Political Risk
In addition to the implicit guarantee and moral hazard
issues discussed above, I am troubled that the implementation
of the TARP has caused the private sector to incorporate the
concept of ``political risk'' into its analysis before engaging
in any direct or indirect transaction with the United States
government. While private sector participants are accustomed to
operating within a complex legal and regulatory environment,
many are unfamiliar with the emerging trend of public sector
participants to bend or restructure rules and regulations so as
to promote their economic, social and political agenda as was
clearly evident in the Chrysler and GM bankruptcies (described
in more detail below). The realm of political risk is generally
reserved for business transactions undertaken in developing
countries and not interactions between private sector
participants and the United States government. Following the
Chrysler and GM decisions it is possible that private sector
participants may begin to view interactions with the United
States government through the same jaundiced eye they are
accustomed to directing toward third-world governments. It's
disingenuous for the Administration to champion transparency
and accountability for the private sector but neglect such
standards when conducting its own affairs. How is it possible
for directors and managers of private sector enterprises to
discharge their fiduciary duties and responsibilities when
policy makers legislate and regulate without respect for
precedent and without thoughtfully vetting the unintended
consequences of their actions?
6. Transparency and Accountability
Although improvements have been made, Treasury has often
been less than forthcoming regarding matters of transparency
and accountability. I agree with Alex Pollock, a Resident
Fellow with the American Enterprise Institute, that Treasury
should provide detailed financial statements to the taxpayers
and operate its TARP investments in a businesslike manner. Mr.
Pollock provided the following testimony to the Panel:
The principal goal should be to run [TARP] in a
businesslike manner to return as much of the
involuntary investment as possible to its owners, along
with a reasonable overall profit. The predominant
discipline should be that of investment management, not
politics.
* * * * *
In my view, TARP should have full, regular, audited
financial statements, which depict its financial status
and results, exactly as if it were a corporation. There
should be a balance sheet, with all assets,
liabilities, accumulated profits or losses, and
contingencies. There should be a profit and loss
statement and a statement of cash flows. The expenses
should include the interest cost of the Treasury debt
required to fund its disbursements, and like every
financial operation, TARP management should be
estimating probable losses on investments and reserving
accordingly.
Had TARP been organized as a corporation, it would
have facilitated this accountability. But even with its
status as a ``program'', we should insist on
appropriate and regular accounting. Everybody must
agree with this basic requirement for financial
responsibility.
Moreover, TARP's financial statements should include
line of business reporting. Logical separate profit and
loss reporting units would include: the Capital
Purchase Program; automotive program; Citigroup; AIG;
mortgage modification (of course a total loss from the
TARP point of view); and small business and consumer
programs.\480\
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\480\ Congressional Oversight Panel, Written Testimony of American
Enterprise Institute resident fellow Alex J. Pollock, Taking Stock:
Independent Views on TARP's Effectiveness (Nov. 19, 2009) (online at
aei.org/docLib/Pollock-Testimony -11192009.pdf).
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7. Financial Stability v. Economic Stimulus
The TARP was promoted as a way to provide ``financial
stability,'' and the American Reinvestment and Recovery Act
(ARRA) was promoted as a way to provide ``economic stimulus.''
In testimony on the still-nascent TARP, former Treasury
Secretary Henry Paulson reminded Congress, ``[t]he rescue
package was not intended to be an economic stimulus or an
economic recovery package; it was intended to shore up the
foundation of our economy by stabilizing the financial system.
. .'' \481\ Regrettably, the TARP has evolved from a program
aimed at financial stability during a time of crisis to one
that increasingly resembles another attempt by the
Administration to promote its economic, political and social
agenda through fiscal stimulus. If the TARP is not being used
for ``economic stimulus,'' then how else is it possible to
explain the $81 billion bankruptcy restructuring of Chrysler
and GM, neither of which qualifies as a ``financial
institution'' as required under EESA? In addition, the United
States government has agreed to transfer to Fiat part of the
equity it received in Chrysler if Fiat assists Chrysler in
building a car that produces 40 miles per gallon. What does
this transfer of United States government owned Chrysler stock
to Fiat have to do with ``financial stability''? No transparent
end-game is in sight for the TARP's commitment to support
Chrysler, GM and GMAC.
---------------------------------------------------------------------------
\481\ U.S. Department of the Treasury, Testimony of Treasury
Secretary Paulson before the House Financial Services Committee (Nov.
18, 2008) (online at www.treasury.gov/press/releases/hp1279.htm).
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D. Chrysler and GM Bankruptcies \482\
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\482\ In this section I borrow extensively from my dissent to the
Panel's September report on the auto bailouts. Representative Jeb
Hensarling, Additional Views to Congressional Oversight Panel,
September Oversight Report: The Use of TARP Funds in the Support and
Reorganization of the Domestic Automotive Industry (Sept. 9, 2009)
(online at cop.senate.gov/documents/cop-090909-report-
additionalviews.pdf).
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The bankruptcy restructurings of Chrysler and GM and the
recapitalization of GMAC were financed with TARP proceeds.
These cases serve as the poster child of why the TARP should
end on December 31, 2009. If the TARP is extended to October
31, 2010, I fear the Administration will continue to employ
taxpayer resources as a revolving bailout fund to promote its
economic, social and political agenda as was clearly evident in
the Chrysler, GM and GMAC bankruptcy restructurings. These
restructurings failed each of the standards noted above by
exacerbating implicit guarantee and moral hazard risks,
incorporating a heavy dose of political risk into private-
public sector interactions, offering little in the way of
taxpayer protection, transparency and accountability, and using
funds dedicated to financial stability for economic
stimulus.\483\
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\483\ Edward Niedermeyer, Taking Taxpayers for a Ride, New York
Times (Nov. 22, 2009) at www.nytimes.com/2009/11/23/opinion/
23niedermayer.html?_r=1&sq=taking taxpayers for a ride niedermeyer
november22&st=cse&adxnnl=1&scp=1&adxnnlx=1259856084-
RhEqA9+sraJEUegFNAcvew).
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1. Policy Issues and Fundamental Questions Arising from the Use of TARP
Proceeds in the Chrysler and GM Bankruptcies
Over the past year taxpayers have involuntarily
``invested'' over $81 billion \484\ in Chrysler, GM, GMAC and
the other auto programs. According to a recent estimate from
the CBO, the investment of TARP funds in the auto industry is
expected to add $40 billion more to the deficit than CBO
calculated just five months earlier in March 2009.\485\ A
reasonable interpretation of such an estimate provides that the
American taxpayers may suffer a loss of over 50 percent of the
TARP funds invested in Chrysler, GM and the other auto
programs.\486\
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\484\ According to the Panel's December report, $2.2 billion of the
funds advanced under the Auto Industry Financing Program have been
repaid. See Figure 25 of this Report, supra.
\485\ Congressional Budget Office, The Budget and Economic Outlook:
An Update August 2009, at 55-56 (online at www.cbo.gov/ftpdocs/105xx/
doc10521/08-25-BudgetUpdate.pdf) (accessed Dec. 8, 2009). The report
provides in part:
The improvement in market conditions results in a reduction in the
subsidy rate associated with the Capital Purchase Program (CPP)--a
major initiative through which the government purchases preferred stock
and warrants (for the future purchase of common stock) from banks. CBO
has dropped the projected subsidy for the remaining investments in that
program from 35 percent in the March baseline to 13 percent. The
decrease in the estimated CPP subsidy cost also reflects banks'
repurchase of $70 billion of preferred stock through June. Similarly,
the estimated subsidy cost for other investments in preferred stock
(for example, that of American International Group) has also been
reduced. Partially offsetting those reductions in projected costs is
the expansion of assistance to the automotive industry; CBO has raised
its estimate of the costs of that assistance by nearly $40 billion
relative to the March baseline. (emphasis added).
In addition, our country faces a staggering deficit of $1.6
trillion in 2009, and a debt that more-than-triples in ten years.
\486\ How is it possible that with the economic challenges facing
our nation the Administration chose to allocate such a significant
share of the TARP to such questionable investments? How much additional
funding will be provided by the Administration for Chrysler and GM?
What is the strategy and timeline for recouping taxpayer dollars? See
Keith Bradsher, G.M. is Said to Agree to Sell Stakes to China Partner,
New York Times (Dec. 3, 2009) (online at www.nytimes.com/2009/12/04/
business/global/04gm.html?hp). What are the metrics for determining
whether or not Chrysler and GM are ``successful,'' and will the
Administration continue to provide assistance until this is attained?
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By making such an unprecedented investment in Chrysler and
GM \487\ the Administration by definition chose not to assist
other Americans who are in need. With the economic suffering
the American taxpayers have endured during the past two years
one wonders why Chrysler and GM merited such generosity to the
exclusion of other taxpayers. Why, indeed, did the United
States government choose to reward two companies that have been
arguably mismanaged for many years at the expense of other hard
working taxpayers? More poetically, The New York Times on July
25 asked: ``Why, after all, should the automakers receive the
equivalent of a Technicolor dreamcoat, giving them favorite-son
status, when other industries, like airlines and retailers,
also have suffered from the national recession?'' More bluntly,
the September 2009 issue of The Atlantic simply cut to the
bottom line: ``Essentially, the government was engineering a
transfer of wealth from TARP bank shareholders to auto workers,
and pressuring other creditors to go along.'' \488\ The
Chrysler and GM reorganizations represent a sad day for the
rule of law, the sanctity of commercial law principles and
contractual rights, long term economic growth, and the ideal
that the United States government should not pick winners and
losers.
---------------------------------------------------------------------------
\487\ In the bankruptcy proceedings for Chrysler and GM, (i) ``Old
Chrysler'' sold substantially all of its assets to ``New Chrysler'' and
(ii) ``Old GM'' sold substantially all of its assets to ``New GM,''
each pursuant to Section 363 of the United States Bankruptcy Code. For
purposes of simplicity, I generally refer to these entities as
``Chrysler'' or ``GM,'' but occasionally employ other terms as
appropriate.
\488\ William D. Cohan, The Final Days of Merrill Lynch, The
Atlantic (Sept. 2009) (online at www.theatlantic.com/doc/200909/bank-
of-america).
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Given the unorthodox reordering of the rights of the
Chrysler and GM creditors, a fundamental question arises as to
whether the Administration directed that TARP funds be used to
advance its economic, social and political objectives rather
than to stabilize the American economy as required by EESA. It
has long been my view that the United States government should
not engage in the business of picking winners and losers and
certainly should not allocate its limited resources to favor
one group of taxpayers over another. Following the Chrysler and
GM bankruptcies one has to question what's next in the
Administration's playbook--a bailout of the airline industry
and its unionized workforce? What about Starbucks?
2. Transfer of TARP Proceeds and Retirement Saving of Indiana School
Teachers and Police Officers to the UAW and the VEBAs
On a ``before'' v. ``after'' basis the Chrysler and GM
bankruptcy cases make little legal or economic sense.\489\ How
is it possible that the Chrysler and GM VEBAs \490\--unsecured
creditors--received a greater allocation of proceeds than the
Chrysler senior secured creditors or the GM bondholders? In
other words, why did the United States government spend tens of
billions of dollars of taxpayer money to bailout employees and
retirees of the UAW to the detriment of other non-UAW employees
and retirees--such as retired school teachers and police
officers from the State of Indiana \491\--whose pension funds
invested in Chrysler and GM indebtedness? \492\
---------------------------------------------------------------------------
\489\ The Chrysler and GM bankruptcy rearranged the rights of the
creditors and equity holders as follows: Chrysler. Pursuant to the
Chrysler bankruptcy, the equity of New Chrysler was allocated as
follows:
(i) United States government (9.846 percent initially, but may
decrease to 8 percent),
(ii) Canadian government (2.462 percent initially, but may decrease
to 2 percent),
(ii) Fiat (20 percent initially, but may increase to 35 percent),
and
(iii) UAW (comprising current employee contracts and a VEBA for
retired employees) (67.692 percent, but may decrease to 55 percent).
The adjustments noted above permit Fiat to increase its ownership
interest from 20 percent to 35 percent by achieving specific
performance goals relating to technology, ecology and distribution
designed to promote improved fuel efficiency, revenue growth from
foreign sales and US based production.
Some, but not all, of the claims of the senior secured creditors
were of a higher bankruptcy priority than the claims of the UAW/VEBA.
The Chrysler senior secured creditors received 29 cents on the
dollar ($2 billion cash for $6.9 billion of indebtedness).
The UAW/VEBA, an unsecured creditor, received (x) 43 cents on the
dollar ($4.5 billion note from New Chrysler for $10.5 billion of
claims) and (y) a 67.692 percent (which may decrease to 55 percent)
equity ownership interest in New Chrysler.
GM. Pursuant to the GM bankruptcy, the equity of New GM was
allocated as follows:
(i) United States government (60.8 percent),
(ii) Canadian government (11.7 percent),
(iii) UAW (comprising current employee contracts and a VEBA for
retired employees) (17.5 percent), and
(iv) GM bondholders (10 percent).
The bankruptcy claims of the UAW/VEBA and the GM bondholders were
of the same bankruptcy priority.
The equity interest of the UAW/VEBA and the GM bondholders in New
GM may increase (with an offsetting reduction in each government's
equity share) to up to 20 percent and 25 percent, respectively, upon
the satisfaction of specific conditions. It is important to note,
however, the warrants received by the UAW/VEBA and the GM bondholders
are out of the money and it's possible they will not be exercised. As
such, it seems likely that the UAW/VEBA and the GM bondholders will
hold 17.5 percent and 10 percent, respectively, of the equity of New
GM.
The GM bondholders exchanged $27 billion in unsecured indebtedness
for a 10 percent (which may increase to 25 percent) common equity
interest in New GM, while the UAW/VEBA exchanged $20 billion in claims
for a 17.5 percent (which may increase to 20 percent) common equity
interest in New GM and $9 billion in preferred stock and notes in New
GM.
\490\ The Chrysler and GM VEBAs (voluntary employee benefit
associations) administer and fund the health and retirement plans of
Chrysler and GM retirees.
\491\ The Chrysler senior secured debt and the GM bonds were held
by pension funds (for the benefit of retirees such as the Indiana
school teachers and police officers), individuals (including the
retirees who have contacted my office to ask why they lost their
savings but UAW employees benefited) as well as different types of
business entities.
\492\ If you trace the funds, TARP money was employed by New
Chrysler and New GM to purchase assets of the old auto makers, yet a
substantial portion of the equity in the new entities was transferred
to the VEBAs and, thus, not retained for the benefit of the American
taxpayers (who funded the TARP) or shared with other creditors of Old
Chrysler and Old GM. Accordingly, it's hardly a stretch to conclude
that TARP funds were transferred to the UAW and the VEBAs after being
funneled through New Chrysler and New GM. In addition, New Chrysler and
New GM entered into promissory notes and other contractual arrangements
for the benefit of the VEBAs, but not for the benefit of the other
creditors of Old Chrysler and Old GM. Why did the United States
government--the controlling shareholder of New Chrysler and New GM--
direct New Chrysler and New GM to make an exclusive gift of taxpayer
funds to the VEBAs? Why didn't New Chrysler and New GM transfer more of
their equity interests to the creditors of Old Chrysler and Old GM? Why
were Indiana school teachers and police officers and other investors in
the Chrysler senior secured indebtedness and the GM bonds in effect
forced by the Administration to transfer a portion of their claims
against Chrysler and GM, respectively, to the UAW and the VEBAs? That
is, why did the Administration orchestrate two bankruptcy plans whereby
one group of employees and retirees was preferred to another?
---------------------------------------------------------------------------
What message do the Chrysler and GM holdings send to non-
UAW employees whose pension funds invested in Chrysler and GM
indebtedness--you lose part of your retirement savings because
your pension fund does not have the special political
relationships of the UAW? What message do the Chrysler and GM
bankruptcies send to the financial markets--contractual rights
of investors may be ignored when dealing with the United States
government?
In written testimony submitted to the Panel, Barry E.
Adler, professor of law and business at New York University,
noted:
There are at least two negative consequences from the
disregard of creditor rights. First, at the time of the
deviation from contractual entitlement, there is an
inequitable distribution of assets. Take the Chrysler
case itself, where the approved transaction well-
treated the retirement funds of the UAW. If such
treatment deprived the secured creditors of their due,
one might well wonder why the UAW funds should be
favored over other retirement funds, those that
invested in Chrysler secured bonds. Second, and at
least as importantly, when the bankruptcy process
deprives a creditor of its promised return, the
prospect of a debtor's failure looms larger in the eyes
of future lenders to future firms. As a result, given
the holding in Chrysler, and the essentially identical
holding in the General Motors case, discussed next, one
might expect future firms to face a higher cost of
capital, thus dampening economic development at a time
when the country can least well afford impediments to
growth.\493\
---------------------------------------------------------------------------
\493\ Congressional Oversight Panel, Written Testimony of Barry E.
Adler, Field Hearing on the Auto Industry (July 27, 2009) (online at
cop.senate.gov/documents/testimony-072709-adler.pdf).
In an article analyzing the Chrysler and GM bankruptcies,
Mark J. Roe and David A. Skeel, professors of law at Harvard
University and the University of Pennsylvania, respectively,
---------------------------------------------------------------------------
noted:
Warren Buffett worried in the midst of the
reorganization that there would be ``a whole lot of
consequences'' if the government's Chrysler plan
emerged as planned, which it did. If priorities are
tossed aside, as he implied they were, ``that's going
to disrupt lending practices in the future.'' ``If we
want to encourage lending in this country,'' Buffett
added, ``we don't want to say to somebody who lends and
gets a secured position that the secured position
doesn't mean anything.''\494\
---------------------------------------------------------------------------
\494\ Mark Roe and David Skeel, Assessing the Chrysler Bankruptcy
(Aug. 12, 2009) (online atssrn.com/abstract=1426530).
In an op-ed in The Wall Street Journal, Todd J. Zywicki,
---------------------------------------------------------------------------
professor of law at George Mason University, noted:
By stepping over the bright line between the rule of
law and the arbitrary behavior of men, President Obama
may have created a thousand new failing businesses.
That is, businesses that might have received financing
before but that now will not, since lenders face the
potential of future government confiscation. In other
words, Mr. Obama may have helped save the jobs of
thousands of union workers whose dues, in part,
engineered his election. But what about the untold
number of job losses in the future caused by trampling
the sanctity of contracts today?\495\
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\495\ Todd Zywicki, Chrysler and the Rule of Law, Wall Street
Journal (May 13, 2009) (online at online.wsj.com/article/
SB124217356836613091.html).
In the September 2009 issue of The Atlantic, William D.
---------------------------------------------------------------------------
Cohan notes:
``The rules as to how the government will act are not
what we learned,'' explained Gary Parr, the deputy
chairman of Lazard and one of the leading mergers-and-
acquisitions advisers to financial institutions. ``In
the last 12 months, new precedents have been set
weekly. The old rules often don't apply as much
anymore.'' He said the recent examples of the
government's aggression are ``a really big deal,'' but
adds, ``I am not sure it is going to last a long time.
I sure hope not. I can't imagine the markets will
function properly if you are always wondering if the
government is going to step in and change the
game.''\496\
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\496\ William D. Cohan, The Final Days of Merrill Lynch, The
Atlantic (Sept. 2009) (online at www.theatlantic.com/doc/200909/bank-
of-america).
Richard A. Epstein, the James Parker Hall Distinguished
Service Professor of Law, The University of Chicago, the Peter
and Kirsten Bedford Senior Fellow, The Hoover Institution, and
a visiting law professor at New York University Law School,
offered the following analysis in the May 12, 2009 issue of
---------------------------------------------------------------------------
Forbes:
The proposed bankruptcy of the now defunct Chrysler
Corp. is the culmination of serious policy missteps by
the Bush and Obama administrations. To be sure, the
long overdue Chrysler bankruptcy is a welcomed turn of
events. But the heavy-handed meddling of the Obama
administration that forced secured creditors to the
brink is not.
A sound bankruptcy proceeding should do two things:
productively redeploy the assets of the bankrupt firm
and correctly prioritize various claims against the
bankrupt entity. The Chrysler bankruptcy fails on both
counts.
* * * * *
In a just world, that ignominious fate would await
the flawed Chrysler reorganization, which violates
these well-established norms, given the nonstop
political interference of the Obama administration,
which put its muscle behind the beleaguered United Auto
Workers. Its onerous collective bargaining agreements
are off-limits to the reorganization provisions,
thereby preserving the current labor rigidities in a
down market.
Equally bad, the established priorities of creditor
claims outside bankruptcy have been cast aside in this
bankruptcy case as the unsecured claims of the union
health pension plan have received a better deal than
the secured claims of various bond holders, some of
which may represent pension plans of their own.
President Obama--no bankruptcy lawyer--twisted the
arms of the banks that have received TARP money to
waive their priority, which is yet another reason why a
government ownership position in banks is incompatible
with its regulatory role. Yet the president brands the
non-TARP lenders that have banded together to fight
this bogus reorganization as ``holdouts'' and
``speculators.''
Both charges are misinformed at best. A holdout
situation arises when one party seeks to get a
disproportionate return on the sale of an asset for
which it has little value in use. Thus the owner of a
small plot of land could hold out for a fortune if his
land is the last piece needed to assemble a large
parcel of land. But the entire structure of bankruptcy
eliminates the holdout position of all creditors,
secured and unsecured alike, by allowing the court to
``cram'' the reorganization down their throats so long
as it preserves the appropriate priorities among
creditors and offers the secured creditors a stake in
the reorganized business equal to the value of their
claims. Ironically, Obama's Orwellian interventions
have allowed unsecured union creditors to hold out for
more than they are entitled to.
His charge of ``speculation'' is every bit as
fatuous. Speculators (who often perform a useful
economic function) buy high-risk assets at low prices
in the hope that the market will turn in their favor.
By injecting unneeded uncertainty into the picture,
Obama has created the need for a secondary market in
which nervous secured creditors, facing demotion, sell
out to speculators who are better able to handle that
newly created sovereign risk. He calls on citizens to
buy Chrysler products, but patriotic Americans will
choose to go to Ford, whose own self-help efforts have
been hurt by the Chrysler and GM bailouts.
Sadly, long ago Chrysler and GM should have been
allowed to bleed to death under ordinary bankruptcy
rules, without government subsidy or penalty.
Libertarians have often remarked on these twin dangers
in isolation. The Chrysler fiasco confirms their deadly
synergistic effect.\497\
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\497\ Richard Epstein, The Deadly Sins Of The Chrysler Bankruptcy,
Forbes (May 12, 2009) (online at www.forbes.com/2009/05/11/chrysler-
bankruptcy-mortgage-opinions-columnists-epstein.html).
In his testimony before the Judiciary Committee of the
United States House of Representatives, Andrew M. Grossman,
---------------------------------------------------------------------------
senior legal policy analyst, The Heritage Foundation, stated:
Also detrimental to General Motors and Chrysler is
the difficulty that they will have accessing capital
and debt markets. Lenders know how to deal with
bankruptcy--it's a well understood risk of doing
business. But the tough measures employed by the Obama
Administration to cram down debt on behalf of the
automakers were unprecedented and will naturally make
lenders reluctant to do business with these companies,
for fear they could suffer the same fate. Even secured
and senior creditors, those who forgo higher interest
rates to protect themselves against risks, suffered
large, unexpected losses. So nothing that either
company can offer, no special status or security
measure, can fully assuage lenders' fears that, in an
economic downturn, they could be forced to accept far
less than the true value of their holdings. At best, if
General Motors and Chrysler have access to debt markets
at all, they will have to pay dearly for the privilege.
At worst, even high rates and tough covenants will not
be enough to attract interest.
* * * * *
The Obama Administration's transparent favoritism
toward its political supporters in the United Auto
Workers Union may lead other unions to demand the same:
hefty payouts and ownership stakes in exchange for
halfhearted concessions. Lenders know now that the
Administration is unable to resist such entreaties. As
one hedge fund manager observed, ``The obvious [lesson]
is: Don't lend to a company with big legacy
liabilities, or demand a much higher rate of interest
because you may be leapfrogged in bankruptcy.''
Perhaps the most affected will be faltering
corporations and those undergoing reorganization--that
is, the enterprises with the greatest need for capital.
Lending money to a nearly insolvent company is risky
enough, but that risk is magnified when bankruptcy
ceases to recognize priorities or recognize valid
liens. With private capital unavailable, larger
corporations in dire straits will turn to the
government for aid--more bailouts--or collapse due to
undercapitalization, at an enormous cost to the
economy.
* * * * *
Financial institutions--enterprises that the federal
government has already spent billions to strengthen--
will also be affected. Many hold debt in domestic
corporations that could be subject to government
rescue, rendering their obligations uncertain. It is
that uncertainty which transforms loans into
impossible-to-value toxic assets and blows holes in
balance sheets across the economy.
Finally, there are the investors, from pension funds
and school endowments to families building nest eggs
for their future. General Motors bonds, like the debt
of other long-lived corporations, has been long
regarded as a refuge from the turmoil of equity
markets. The once-safe investment held directly by
millions of individuals and indirectly, through funds
and pensions, by far more, are now at risk, which will
be reflected in those assets' values.\498\
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\498\ Andrew M. Grossman, Bailouts, Abusive Bankruptcies, And the
Rule of Law, Testimony before the Judiciary Committee of the United
States House of Representatives (May 21, 2009) (online at
www.heritage.org/Research/Economy/tst052209a.cfm).
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3. The Use of TARP Funds in the Chrysler and GM Bankruptcies
Section 101(a)(1) of the EESA states that:
The Secretary [of the Treasury] is authorized to . .
. purchase, and to make and fund commitments to
purchase, troubled assets from any financial
institution, on such terms and conditions as are
determined by the Secretary, and in accordance with
this Act and the policies and procedures development
and published by the Secretary. (emphasis added).
A plain reading of the statute would necessarily preclude
the employment of TARP funds for the benefit of the auto
industry because, among other reasons, neither Chrysler nor GM
qualifies as a ``financial institution.'' If Chrysler and GM
are somehow deemed to qualify as ``financial institutions,''
then what business enterprise will fail to so qualify? If
Congress had intended for the TARP to cover all business
enterprises it would not have incorporated such a restrictive
term as ``financial institution'' into EESA.
Further, a funding bill specifically aimed at assisting the
auto industry was not approved by Congress. Nevertheless, the
Bush Administration extended credit to Chrysler and GM and the
Obama Administration orchestrated the Chrysler and GM
bankruptcies which resulted in an investment of over $81
billion in the auto industry.
Since the authority for such an investment remains unclear,
I requested that the Administration provide the Panel with a
formal written legal opinion justifying: \499\
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\499\ In a written response to the Panel the Administration stated:
The Treasury described the authority to use TARP funds to finance
the old Chrysler and GM in bankruptcy court filings made on its behalf
by the Department of Justice, specifically in the Statement of the
United States of America Upon The Commencement of General Motors
Corporation's Chapter 11 Case filed June 10, 2009, a copy of which has
been provided to the Congressional Oversight Panel. In Judge Gerber's
final sale order in the GM bankruptcy case dated July 5, 2009, also
provided to the Congressional Oversight Panel, he wrote:
The U.S. Treasury and Export Development Canada (``EDC''), on
behalf of the Governments of Canada and Ontario, have extended credit
to, and acquired a security interest in, the assets of the Debtors as
set forth in the DIP Facility and as authorized by the interim and
final orders approving the DIP Facility (Docket Nos. 292 and 2529,
respectively). Before entering into the DIP Facility and the Loan and
Security Agreement, dated as of December 31, 2008 (the ``Existing UST
Loan Agreement''), the Secretary of the Treasury, in consultation with
the Chairman of the Board of Governors of the Federal Reserve System
and as communicated to the appropriate committees of Congress, found
that the extension of credit to the Debtors is ``necessary to promote
financial market stability,'' and is a valid use of funds pursuant to
the statutory authority granted to the Secretary of the Treasury under
the Emergency Economic Stabilization Act of 2008, 12 U.S.C.
Sec. Sec. 5201 et seq. (``EESA''). The U.S. Treasury's extension of
credit to, and resulting security interest in, the Debtors, as set
forth in the DIP Facility and the Existing UST Loan Agreement and as
authorized in the interim and final orders approving the DIP Facility,
is a valid use of funds pursuant to EESA.
The rationale and determination of the ability to use TARP funds
applies equally to the financing provided to the new Chrysler. There
was no new financing provided to New GM. Instead, cash flowed from old
GM to new GM as part of the asset sale, and new GM assumed a portion of
the loan that Treasury had made to old GM.
The interests received by other stakeholders of Chrysler and GM
including the UAW/VEBAs were a result of negotiations between all
stakeholders as described in detail by myself and Harry Wilson in our
depositions in the bankruptcy cases, transcripts of which have been
provided to the Congressional Oversight Panel.
I find the response unhelpful and ask the Administration to provide
a formal written legal opinion supporting its position. Since Congress
specifically rejected the bailout of Chrysler and GM, under what theory
and precedent did the Executive unilaterally invest $81 billion in
these non-financial institutions?
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(i) the use of TARP funds to support Chrysler and GM
prior to their bankruptcies;
(ii) the use of TARP funds in the Chrysler and GM
bankruptcies;
(iii) the transfer of equity interests in New
Chrysler and New GM to the UAW/VEBAs; and
(iv) the delivery of notes and other credit support
by New Chrysler and New GM for the benefit of the UAW/
VEBAs.\500\
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\500\ The promissory notes issued to the UAW/VEBAs are senior to
the equity issued to the United States government. Since the government
controlled New Chrysler and New GM at the time the notes were issued,
it's apparent that the government agreed to subordinate the TARP claims
held by the American taxpayers to the claims held by the UAW/VEBAs.
What was the purpose of the subordination except perhaps to prefer the
claims of a favored class over the claims of the taxpayers who funded
the TARP?
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Such opinions have not been delivered.
4. Analysis of the Chrysler and GM Cases by Bankruptcy Scholars and
Pressure on TARP Recipients
A number of bankruptcy academics at top-tier law schools
have questioned the holdings in the Chrysler and GM
bankruptcies. In the Chrysler and GM proceedings, Section 363
of the United States bankruptcy code was used by the
Administration to upset well established commercial law
principles and the contractual expectations of the parties. As
Professors Adler, Roe and Skeel note, the Chrysler and GM
bankruptcy courts required each Section 363 bidder to assume
certain obligations of the UAW/VEBAs as part of its bid. This
means that potential purchasers could not simply acquire the
assets free and clear of the liabilities of the seller, but,
instead, were also required to assume certain of those
liabilities. This requirement most likely chilled the bidding
process and precluded the determination of the true fair market
value of the assets held by Chrysler and GM. By disrupting the
bidding process it's entirely possible that TARP proceeds were
misallocated away from the Chrysler senior secured creditors
and the GM bondholders to the UAW/VEBAs.\501\ Although I do not
concur that EESA authorized the use of TARP proceeds in the
Chrysler and GM bailouts, it's nevertheless important to follow
the TARP funds once they were committed.
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\501\ A summary of the analysis of Professors Adler, Roe and Skeel
as well as a set of examples are included in Appendix A to my
Dissenting Views to the Panel's September Auto Report. Representative
Jeb Hensarling, Additional Views to Congressional Oversight Panel,
September Oversight Report: The Use of TARP Funds in the Support and
Reorganization of the Domestic Automotive Industry (Sept. 9, 2009)
(online at cop.senate.gov/documents/cop-090909-report-
additionalviews.pdf).
The following example illustrates how the Administration used
Section 363 of the bankruptcy code to achieve its economic, social and
political objectives at the expense of the American taxpayers and the
Chrysler senior secured creditors and GM bondholders.
Assume Oldco (i.e., Old Chrysler or Old GM) has (i) assets with a
fair market value (FMV) of $70, (ii) secured debt (with liens on $40
FMV of assets) in an outstanding principal amount of $90 held by
Creditor 1, and (iii) unsecured debt in an outstanding principal amount
of $50 held by Creditor 2. Creditor 1 in effect holds two claims, a $40
secured claim (equal to the FMV of the assets securing Creditor 1's
claim) and a $50 unsecured claim (which together equal Creditor 1's
total claim of $90); and Creditor 2 holds a $50 unsecured claim. Any
distribution on the unsecured claims should be shared 50/50 percent
(because each creditor holds a $50 unsecured claim) under the ``no
unfair discrimination'' rule of Chapter 11.
If, in a Section 363 sale, Newco (i.e., New Chrysler or New GM)
purchased the Oldco assets (with no assumption of Oldco liabilities)
for $70 FMV, then the $70 cash proceeds would be distributed as
follows: Creditor 1 would receive $55 ($40 secured position, plus $15
unsecured position), and Creditor 2 would receive $15.
Conversely, if in the Section 363 sale the bankruptcy court
required Newco to assume Creditor 2's debt of $50, then Newco would
only pay $20 cash for the Oldco assets ($70 FMV of assets, less $50
required assumption of Creditor 2's debt). In such event, Creditor 1
would only receive $20 (representing 100 percent of the cash sales
proceeds from the Section 363 sale, but leaving a shortfall of $70
($90, less $20)). Creditor 2 would receive no proceeds from the Section
363 sale, but would quite possibly receive $50 in the future from Newco
(the amount of Creditor 2's debt assumed by Newco).
Thus, without the required assumption of the $50 claim by Newco,
Creditor 1 (the senior creditor) would receive $55 and Creditor 2 (the
junior creditor) would receive $15. This result is consistent with
commercial law principles and the contractual expectations of the
parties. With the required assumption, however, Creditor 1 would only
receive $20 and Creditor 2 would receive $50. The required assumption
results in a shift of $35 from Creditor 1 to Creditor 2, a result that
is not consistent with commercial law principles, the contractual
expectations of the parties and the Chapter 11 reorganization rules.
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The technical bankruptcy laws issues are exacerbated
because the winning purchaser in the Chrysler and GM cases--
entities directly or indirectly controlled by the United States
government--had virtually unlimited resources, which is
certainly not the case in typical private equity transactions.
The matter becomes particularly muddled when you consider that
a majority in interest of the Chrysler senior secured debt was
held by TARP recipients at a time when there was much talk in
the press about ``nationalizing'' some or all of these
institutions. It is not difficult to imagine that these
recipients felt direct pressure to ``get with the program'' and
support the Administration's proposal.\502\
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\502\ TARP recipients who were also Chrysler senior secured
creditors included Citigroup, JPMorgan Chase, Morgan Stanley and
Goldman Sachs.
Michael J. de la Merced, Dissident Chrysler Group to Disband, New
York Times (May 8, 2009) (online at dealbook.blogs.nytimes.com/2009/05/
08/oppenheimer-withdraws-from-dissident-chrysler-group/
?scp=1&sq=TARP%20lender%20Chrysler%20pressure&st=cse). The article
provides:
``After a great deal of soul-searching and quite frankly agony,
Chrysler's non-TARP lenders concluded they just don't have the critical
mass to withstand the enormous pressure and machinery of the US
government,'' Thomas E. Lauria, a partner of Mr. Kurtz's and the lead
lawyer for the group. ``As a result, they have collectively withdrawn
their participation in the court case.''
With the group's disbanding, a little over a week since it made
itself public, a vocal obstacle to Chrysler's reorganization has
subsided. The committee's membership has shrunken by the day as it
faced public criticism from President Obama and others. That continued
withdrawal of firms led Oppenheimer and Stairway to conclude that they
could not succeed in opposing the Chrysler reorganization plan in
court, the two firms said in separate statements.
In its first public statement last week, the ad hoc committee said
that it consisted of about 20 firms holding $1 billion in secured debt.
But hours after Mr. Obama criticized the firms as ``speculators,'' the
group lost its first major member, Perella Weinberg Partners, which
changed its mind and signed onto the Chrysler plan.
In the September 2009 issue, The Atlantic reported:
As the crisis has receded this year, the government has remained
aggressive, seeking business outcomes it finds desirable with some
apparent indifference to contractual rights. In Chrysler's bankruptcy
negotiations in April, for example, Treasury's plan offered the
automaker's senior-debt holders 29 cents on the dollar. Some debt
holders, including the hedge fund Xerion Capital Partners, believed
they were contractually entitled to a much better deal as senior
creditors holding secured debt. But four TARP banks--JPMorgan Chase,
Citigroup, Morgan Stanley, and Goldman Sachs--which owned about 70
percent of the Chrysler senior debt at par (100 cents on the dollar),
had agreed to the 29-cent deal. By getting these banks and the other
senior-debt holders to accept the 29-cent deal and give up their rights
to push for the higher potential payout they were entitled to, the
government could give Chrysler's workers, whose contracts were general
unsecured claims--and therefore junior to the banks'--a payout far more
generous than would otherwise have been possible or likely.
Essentially, the government was engineering a transfer of wealth from
TARP bank shareholders to auto workers, and pressuring other creditors
to go along.
* * * * *
A somewhat similar story played out during GM's bankruptcy--the
government again put together a deal that looked to many like a gift to
the United Auto Workers at the expense of bondholders, who were pressed
hard to quickly take a deal that would leave them with 10 percent of
the equity of the reorganized company (plus some out-of-the-money
warrants) when they likely would have been able to negotiate for more
in a less well-orchestrated bankruptcy proceeding.'' (emphasis added.)
William D. Cohan, The Final Days of Merrill Lynch, The Atlantic
(Sept. 2009) (online at www.theatlantic.com/doc/200909/bank-of-
america).
In the Panel's September Report I requested that SIGTARP
investigate this matter.
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Based upon the analysis of Professors Adler, Roe and Skeel,
the bankruptcy courts should have called a time-out and changed
the bidding procedure (i.e., no assumption of liabilities
required), extended the time to submit a bid \503\ and applied
the protections afforded under the Chapter 11 reorganization
rules. With those changes the judicial holdings would have most
likely appeared fair and reasonable and could have served as a
model for high-pressure bankruptcies that followed. Without
such changes, however, the process was inherently flawed
because we will never know if another bidder would have paid
more for the gross assets (without the assumption of any
liabilities) of Chrysler or GM.\504\ As intentionally
structured by the Administration, the bidding procedures
ultimately adopted for the Section 363 sales necessarily
precluded the determination of the true fair market value of
the assets held by Chrysler and GM. Without such determination,
the appropriateness of the price paid for the assets of Old
Chrysler and Old GM as well as the appropriateness of the
distribution made by Old Chrysler and Old GM to the Chrysler
senior secured creditors and GM bondholders will remain in
doubt.
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\503\ Mr. Richard E. Mourdock, the Indiana State Treasurer, whose
pension funds invested in Chrysler senior secured indebtedness,
provided the following testimony to the Panel:
The principal restriction was imposed by the time requirement that
mandated the bankruptcy be completed by June 15, 2009. Throughout the
bankruptcy process, the government maintained if the deal was not
completed by that date that Fiat would walk away from its ``purchase''
of 20% of the Chrysler assets. From the beginning, the June 15 date was
a myth generated by the federal government. Fiat was being given the
assets at no cost at a minimum value of $400,000,000. Why would Fiat
establish or negotiate such a date when they were to receive such a
bonanza? On the very day that the Chrysler assets were transferred to
Fiat, the company's chairman stated to the media that the June 15th
date never originated from them. The artificial date drove the process
in preventing creditors from having any opportunity to establish true
values, prepare adequate cases, and therefore failed to protect their
rights to the fullest provisions of the law. The artificial date also
forced the courts to act with less than complete information.
The U.S. [Second Circuit] Court of Appeals in its written opinion
of August 9, 2009, denied our pensioners standing pursuant to the
argument that we could not prove, under any other bankruptcy plan, we
could have received more than the $0.29 we were offered. We believe
this was an error because the court used a liquidation value for the
company rather than an `on-going concern' basis. We received written
notice from the U.S. Bankruptcy Court of New York by certified letter
of our rights to file a claim on Monday, May 18, 2009, at 10:00 a.m. We
were advised in the letter that any evidence we wished to submit to
make a claim against the submitted plan (in part, the $0.29), would
have to include trade tickets, depositions, affidavits, documents of
evidence to substantiate claims, and etc. and would have to be filed
with the bankruptcy court on Tuesday, May 19, 2009, by 4:00 p.m. The
bankruptcy of Chrysler was frequently referred to as ``the most complex
bankruptcy in American history,'' and yet we were given thirty hours to
respond. We feel this was clearly an error in the process that helped
to reduce the wealth of our beneficiaries.
Congressional Oversight Panel, Field Hearing on the Auto Industry,
at 154 (July 27, 2009) (online at cop.senate.gov/documents/transcript-
072709-detroithearing.pdf).
\504\ It is also important to note that for these purposes it's
irrelevant if certain Chrysler or GM creditors happened to have
purchased their securities at a cheap price. The substantive legal
issue concerns whether their contractual rights were honored. Courts
should not abrogate well established commercial law principles and
contractual expectations simply because an investor has earned a
``reasonable return'' on its investment. That's not the rule of law,
but the law of political expediency.
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E. TARP and Foreclosure Mitigation\505\
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\505\ In this section I borrow extensively from my dissent to the
Panel's October report on foreclosure mitigation. Representative Jeb
Hensarling, Congressional Oversight Panel, October Oversight Report: An
Assessment of Foreclosure Mitigation Efforts After Six Months (Oct. 9,
2009) (online at cop.senate.gov/documents/cop-100909-report-
hensarling.pdf).
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Much like the auto industry interventions, HAMP and the
Administration's other foreclosure mitigation efforts to date
have been a failure.\506\ The Administration's opaque
foreclosure mitigation efforts have assisted only a small
number of homeowners while drawing billions of involuntary
taxpayer dollars into a black hole.\507\
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\506\ Taxpayer protection is a guiding principle of EESA interwoven
throughout the legislation, including for foreclosure mitigation
efforts. EESA gives the Panel a clear duty to provide information on
foreclosure mitigation programs, but with the following caveat. Reports
must include:
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.
12 U.S.C. 5223(b)(1)(A)(iv).
\507\ Housing GSEs--Government Sponsored Enterprises--Fannie Mae
and Freddie Mac play key roles in the Administration's new housing
policies. Funds from the Preferred Share Purchase Agreements, which
allow the GSEs to draw up to $400 billion from Treasury, are being
deployed for foreclosure mitigation and refinancing efforts. Since
Fannie Mae and Freddie Mac are now under the conservatorship of the
Federal Housing Finance Agency (FHFA), their concerns are now
officially the taxpayer's concerns--any losses they experience through
MHA should be a carefully considered part of a cost-benefit analysis.
Fannie Mae and Freddie Mac should be more forthcoming with respect
to their foreclosure mitigation efforts and use of taxpayer funds.
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1. 100 Percent Loss to the Taxpayers from the Administration's
Foreclosure Mitigation Efforts
While the CBO estimates that taxpayers will lose 100
percent of the $50 billion in TARP funds committed to the
Administration's foreclosure relief programs, the
Administration appears inclined to commit additional taxpayer
funds in hopes of helping distressed homeowners--both deserving
and undeserving--with a taxpayer subsidized rescue.\508\
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\508\ Dealbook, Treasury Pushes Mortgage Firms for Loan relief, New
York Times (Nov. 30, 2009) (online at dealbook.blogs.nytimes.com/2009/
11/30/treasury-presses-banks-for-mortgage-relief/
?scp=1&sq=Treasury%20Goodman%20November%2030&st=cse):
The Obama administration said Monday that it would increase the
pressure on banks to help troubled homeowners permanently lower
mortgage payments. . .
* * * * *
Monday's push was the latest evidence that a $75 billion taxpayer-
financed effort aimed at stemming foreclosures was struggling. Even as
lenders have accelerated the pace at which they are reducing mortgage
payments for borrowers, most loans modified remain in a trial stage
lasting up to five months, and only a fraction have been made
permanent.
In its statement on Monday, the Treasury Department said that more
than 650,000 borrowers have received trial modifications under the
program, called Making Home Affordable, and that about 375,000
borrowers were scheduled to convert to permanent modifications by the
end of the year.
That would represent a sharp turnaround--last month, an oversight
panel created by Congress reported that fewer than 2,000 of the 500,000
loan modifications then in progress had become permanent.
Jim Kuhnhenn, Strong Banks, Weak Credit: Treasury Rethinks TARP,
ABC News (Nov. 24, 2009) (online at abcnews.go.com/Business/
wireStory?id=9161503). Determination of costs is especially important
if, as Treasury Secretary Geithner has stated, TARP is interpreted to
be a ``revolving facility.'' Given the likelihood that he will extend
TARP to October 31, 2010, it's possible that a substantial portion of
the $700 billion TARP facility could be directed to foreclosure
mitigation efforts.
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While there may be some positive signals in our economy,
recovery remains in a precarious position. The unemployment
rate hovers around 10 percent and the broader definition of
unemployment exceeds 17 percent. This is unfortunate because
the best foreclosure mitigation program is a job, and the best
assurance of job security is economic growth and the adoption
of public policy that encourages and rewards capital formation
and entrepreneurial success. Without a robust macroeconomic
recovery the housing market will continue to languish and any
policy that forestalls such recovery will by necessity lead to
more foreclosures.
To date, despite the commitment of some $27 billion,\509\
only a modest number of underwater homeowners have received a
permanent modification of their mortgage.\510\ If the
Administration's goal of subsidizing up to 9 million home
mortgage refinancings and modifications is met, the cost to the
taxpayers will possibly exceed the $75 billion already
allocated to the MHA--Making Home Affordable--program,\511\ and
it is likely that most (if not all) of it will be not be
recovered.
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\509\ Number as defined by the current ``Total Cap'' for the Home
Affordable Modification Program, $27,382,460,000. U.S. Department of
the Treasury, Transactions Report (Nov. 30, 2009) (online at
www.financialstability.gov/docs/transaction-reports/11-30-
09%20Transactions%20Report%20as%20of%2011-25-09.pdf).
\510\ See Section One, C.3. of the Panel's December report.
\511\ The Making Home Affordable program presently consists of the
HAMP--Home Affordable Modification Program--and the HARP--Home
Affordable Refinancing Program.
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2. Mortgage Holders Profit from Private Sector Foreclosure Mitigation
Efforts
Professor Alan M. White, an expert retained by the Panel,
notes in a paper attached to the Panel's October Report the
effectiveness of non-subsidized voluntary foreclosure
mitigation when he states:
Nevertheless, there is convincing evidence that
successful modifications avoided substantial losses,
while requiring only very modest curtailment of
investor income. In fact, the typical voluntary
modification in the 2007-2008 period involved no
cancellation of principal debt, or of past-due
interest, but instead consisted of combining a
capitalization of past-due interest with a temporary
(three to five year) reduction in the current interest
rate. Foreclosures, on the other hand, are resulting in
losses of 50% or more, i.e. upwards of $124,000 on the
mean $212,000 mortgage in default.\512\
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\512\ Since these numbers apparently include up to $9,000 of
incentive payments, it appears that the total cost to the taxpayers of
all interest rate and principal adjustments is approximately $10,000
per modification, or approximately $2,000 per year ($167 per month) for
the full five-year HAMP modification period. Perhaps this is correct,
but I question whether mortgage loans may be successfully modified at
such a relatively modest cost to the taxpayers under the HAMP. It
appears that Professor White did not independently calculate these
amounts, but, instead, generally relied upon estimates provided by
Treasury. It is unclear what methodology Treasury employed except,
perhaps, to divided the $50 billion of TARP funds initially allocated
to HAMP by 2.5 million modifications, or $20,000 per mortgage
modification. Treasury's approach, although employed by Professor
White, should be augmented by the application of a more comprehensive
methodology. See generally Alan M. White, Annex B to Congressional
Oversight Panel, October Oversight Report: An Assessment of Foreclosure
Mitigation Efforts After Six Months Potential Costs and Benefits of the
Home Affordable Modification Program, at 118 (Oct. 9, 2009) (online at
cop.senate.gov/documents/cop-100909-report.pdf).
Significantly, he also quantifies the overall benefit of
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voluntary foreclosure mitigation to investors by concluding:
The bottom line to the investor is that any time a
homeowner can afford the reduced payment, with a 60% or
better chance of succeeding, the investor's net gain
from the modification could average $80,000 per loan or
more. Two million modifications with a 60% success rate
could produce $160 billion in avoided losses, an amount
that would go directly to the value of the toxic
mortgage-backed securities that have frozen credit
markets and destabilized banks.\513\
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\513\ If this is indeed the case, then why is it not in the best
interest of each mortgage holder to modify the mortgage loans in its
portfolio? Why would a mortgage holder risk breaching its fiduciary
duties to its investor group by foreclosing on mortgaged property
instead of restructuring the underlying loans? Why should the taxpayers
subsidize the restructuring of mortgage loans--whether through the HAMP
or otherwise--if the mortgage holders may independent of such subsidy,
realize a net gain of approximately $80,000 per loan by voluntarily
restructuring their distressed mortgage loans?
Professor White seems to imply that without taxpayer funded
subsidies the mortgage servicers would be economically disinclined to
modify distressed mortgage loans because of unfavorable terms included
in typical pooling and servicing agreements--the contracts pursuant to
which servicers discharge their duties to mortgage holders. Professor
White writes:
While modification can often result in a better investor return
than foreclosure, modification requires ``high-touch'' individualized
account work by servicers for which they are not normally paid under
existing securitization contracts (pooling and servicing agreements or
``PSAs''.) Servicer payment levels were established by contracts that
last the life of the mortgage pools. Servicers of subprime mortgages
agreed to compensation of 50 basis points, or 0.5% from interest
payments, plus late fees and other servicing fees collected from
borrowers, based on conditions that existed prior to the crisis, when
defaulted mortgages constituted a small percentage of a typical
portfolio. At present, many subprime and alt-A pools have delinquencies
and defaults in excess of 50% of the pool. The incentive payments under
HAMP can be thought of as a way to correct this past contracting
failure.
* * * * *
Because mortgage servicers are essentially contractors working for
investors who now include the GSE's, the Federal Reserve and the
Treasury, we can think of the incentive payments under HAMP as extra-
contractual compensation for additional work that was not anticipated
by the parties to the PSAs at the time of the contract. (emphasis
added).
Is the purpose of the HAMP to bail out servicers from their
``contracting failure'' through the payment of ``extra-contractual
compensation''? The taxpayers should not be charged with such a
responsibility and I am disappointed that the Administration and
Professor White would advocate such an approach.
Notwithstanding the complexity injected into the
foreclosure mitigation debate by the Administration, a solution
appears relatively straightforward. If, as Professor White
suggests, mortgage holders stand to realize a net gain of
approximately $80,000 from restructuring each mortgage loan
instead of foreclosing on the underlying property, the mortgage
holders themselves should undertake to subsidize the
``contracting failure'' of their servicers out of such gains. I
appreciate that mortgage holders may not wish to remit
additional fees to their servicers, but, between mortgage
holders and the taxpayers, why should the taxpayers--through
TARP or otherwise--bear such burden? Taxpayers should not be
required to subsidize mortgage holders or servicers when
foreclosure mitigation efforts appear to be in their own
economic best interests.
The Administration, by enticing mortgage holders and
servicers with the $75 billion HAMP and HARP programs (with a
reasonable expectation that additional funds may be
forthcoming) has arguably caused them to abandon their market
oriented response to the atypical rate of mortgage defaults in
favor of seeking hand-outs from the government.\514\ All of the
false starts with HAMP and the other government programs may
have in effect exacerbated the foreclosure mitigation process
by keeping private sector servicers and mortgage holders on the
sidelines waiting on a better deal from the government. By
creating a perceived safety net, the foreclosure mitigation
efforts advocated by the Administration may encourage
economically inefficient speculation in the residential real
estate market with its adverse bubble generating consequences.
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\514\ It is difficult to fault mortgage holders and servicers for
their rational behavior in accepting bailout funds that may enhance the
overall return to their investors.
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3. Taxpayer Protection and Shared Appreciation Rights
It is my understanding that the foreclosure mitigation
programs announced by Treasury do not provide Treasury or the
mortgage lenders with the ability to participate in any
subsequent appreciation in the fair market value of the
properties that serve as collateral for the modified or
refinanced mortgage loans. Since one of Treasury's fundamental
mandates is taxpayer protection, the incorporation of a shared
appreciation right or equity kicker feature would appear
appropriate. Homeowners should not receive a windfall at the
expense of the taxpayers and mortgage lenders who suffered the
economic loss from restructuring their distressed mortgage
loans.
For example, a $100,000, 6 percent home mortgage loan may
be modified by reducing the principal to $90,000 and the
interest rate to 5 percent. If the house securing the mortgage
loan subsequently appreciates by, say, $25,000, the taxpayers
and the mortgage lender who shared the cost of the mortgage
modification will not benefit from any such increase in value.
Such result seems inappropriate and particularly unfair to the
taxpayers. By modifying the mortgage loan and avoiding
foreclosure, the taxpayers and the mortgage lender have
provided a distinct and valuable financial benefit to the
distressed homeowner that should be recouped to the extent of
any subsequent appreciation in the value of the house securing
the modified mortgage. A simple filing in the local real estate
records should make the shared appreciation feature self-
effectuating upon the sale or exchange of the applicable
residence. In order to ensure the integrity of the shared
appreciation right, limitations should apply regarding the
ability of homeowners to obtain home equity loans except when
the proceeds of the loans are used to repay the taxpayers for
the costs incurred with respect to the mortgage modifications.
In addition, as I noted in my dissent to the Panel's
October report on foreclosure mitigation,\515\ it would also
seem productive if modified home mortgage loans were treated as
recourse loans to the homeowners instead of as in effect non-
recourse loans under the ``anti-deficiency'' laws of many
jurisdictions.\516\
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\515\ Representative Jeb Hensarling, Congressional Oversight Panel,
October Oversight Report: An Assessment of Foreclosure Mitigation
Efforts After Six Months, at 158-61 (Oct. 9, 2009) (online at
cop.senate.gov/documents/cop-100909-report-hensarling.pdf).
\516\ Edward Pinto, Saving More Homes for the Same Money, Wall
Street Journal (Dec. 6, 2009) (online at online.wsj.com/article/
SB10001424052748704342404574577853961145272.html).
---------------------------------------------------------------------------
4. Equity and Moral Hazard
Regardless of whether one believes foreclosure mitigation
can truly work, taxpayers who are struggling to pay their own
mortgage should not be forced to bail out their neighbors
through such an inefficient and transparency-deficient program.
The Administration appears to prioritize good intentions and
wishful thinking over taxpayer protection.
Any foreclosure mitigation effort must appear fair and
reasonable to the American taxpayers. It is important to
remember that the number of individuals in mortgage distress
reaches beyond individuals who have experienced an adverse
``life event'' or been the victims of fraud. This complicates
moral hazard issues associated with large-scale modification
programs. Distinct from a moral hazard question there is an
inherent question of fairness as those who are not facing
mortgage trouble are asked to subsidize those who are facing
trouble.
In light of current statistics regarding the overall
foreclosure rate, an essential public policy question that must
be asked regarding the effectiveness of any taxpayer-subsidized
foreclosure mitigation program is: ``Is it fair to expect
approximately 19 out of every 20 people to pay more in taxes to
help the 20th person maintain their current residence?''
Although that question is subject to individual interpretation,
there is an ever-increasing body of popular sentiment that such
a trade-off is indeed not fair.\517\
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\517\ State anti-deficiency laws also create significant moral
hazard risks that will be exacerbated if Congress passes a cramdown
amendment to the bankruptcy code. With these laws in effect, the risk-
reward mix underlying each mortgage and home equity loan will be
bifurcated with lenders assuming substantially all of the risks
regarding the underlying value of the mortgaged property and homeowners
receiving substantially all of the rewards. These laws may have the
unintended consequence of encouraging homeowners to reject their
contractual responsibilities and service their mortgage obligations
only when it's in their economic self-interest. Since option contracts
are inherently more risky to lenders than traditional mortgage
contracts, lenders may have little choice but to incorporate such risks
into the interest rates and fees charged on mortgage loans. The
Administration should refrain from suggesting that Congress enact
legislation that encourages individuals and families to invest in the
housing market for speculative purposes while permitting them to avoid
their contractual obligations upon the occurrence of adverse market
conditions.
It is worth noting that the decision of individuals and families to
speculate in the housing market, while perhaps unwise, is not entirely
irrational. While some may contend that the average consumer is too
unskilled to comprehend seemingly sophisticated financial products, I
would argue to the contrary. With anti-deficiency, single-action and,
perhaps, bankruptcy cramdown laws in effect, borrowers will receive the
bulk of any equity appreciation while lenders will bear substantially
all of the risk of loss arising from home mortgage loans. Most
consumers are rational and react favorably to incentives that reward
particular behavior. Providing economic and legal incentives that
encourage inappropriate speculation in the housing market is unwise and
fraught with adverse unintended consequences. That a bankruptcy
cramdown law could help re-inflate a housing bubble by encouraging
reckless speculation and cause lenders to raise mortgage interest rates
and fees justifies its rejection.
---------------------------------------------------------------------------
Since there is no uniform solution for the problem of
foreclosures, a sensible approach should encourage multiple
private sector mitigation programs that do not amplify taxpayer
risk or require government mandates. Subsidized loan
refinancing and modification programs may provide relief for a
select group of homeowners, but they work against the majority
who shoulder the tax burden and make mortgage payments on time.
Based upon the analysis of Professor White, little reason
exists for government sponsored programs since it is in the
best economic interest of the mortgage holders to restructure
troubled loans rather than to pursue a foreclosure remedy.
F. Secretary Geithner Should Not Extend the TARP but Permit it to End
on December 31, 2009
In order to end the abuses of EESA as evidenced by the
Chrysler and GM bankruptcies, misguided foreclosure mitigation
programs and the re-animation of reckless behavior and moral
hazard risks, Secretary Geithner should not extend the TARP but
permit it to end on December 31, 2009. As of today, Treasury
has approximately $297.2 billion of TARP authority available to
fund existing commitments and new programs.\518\ As the EESA
statute requires, all recouped and remaining TARP funds should
go back into the Treasury general fund for debt reduction. All
revenues and proceeds from TARP investments that have generated
a positive return should also go to the general fund. Neither
the letter nor the spirit of the law allow for TARP funds to be
used as offsets for future spending programs, such as those
currently being considered by the Administration and Majority
leadership.
---------------------------------------------------------------------------
\518\ See Section One, C.5.b.i. of the Panel's December report.
---------------------------------------------------------------------------
Further, the TARP should be terminated due to:
the desire of the taxpayers for TARP
recipients to repay all TARP-related investments sooner
rather than later;
the troublesome corporate governance and
regulatory conflict of interest issues raised by
Treasury's ownership of equity and debt interests in
the TARP recipients;
enhanced implicit guarantee and moral hazard
risks;
an increase in the number and size of ``too
big to fail'' financial institutions;
the absence of appropriate standards of
transparency and accountability in TARP-related
disclosure by Treasury;
the stigma associated with continued
participation in the TARP by the recipients; \519\ and
---------------------------------------------------------------------------
\519\ Dealbook, Bank of America's TARP Move Helps Shed Stigma, New
York Times (Dec. 3, 2009) (online at dealbook.blogs.nytimes.com/2009/
12/03/move-to-repay-aid-helps-bank-of-america-shed-stigma/
?scp=2&sq=stigma%20bank%20of%20america&st=cse).
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the use of the TARP (i) for economic
stimulus instead of EESA mandated financial stability
and (ii) to promote the Administration's economic,
social and political agenda as evidenced by, among
others, the Chrysler and GM bankruptcies.
Some of the adverse consequences that have arisen for TARP
recipients include, without limitation:
the private sector must now incorporate the
concept of ``political risk'' into its due diligence
analysis before engaging in any transaction with the
United States government;
corporate governance and conflict of
interest issues; and
the distinct possibility that TARP
recipients--including those who have repaid all CPP
advances but have warrants outstanding to Treasury--and
other private sector entities may be subjected to
future adverse rules and regulations.
A recent report issued by SIGTARP provides an insightful
analysis of the actual cost of the TARP.\520\
---------------------------------------------------------------------------
\520\ SIGTARP, Quarterly Report to Congress (Oct. 21, 2009) (online
at sigtarp.gov/reports/congress/2009/
October2009_Quarterly_Report_to_Congress.pdf).
---------------------------------------------------------------------------
Assuming that most financing for the TARP comes
from short-term Treasury bills, Treasury estimates the interest
cost for TARP funds spent to be about $2.3 billion, although
SIGTARP says a blended cost would double this amount and an
``all-in'' estimate would triple or quadruple it.\521\
---------------------------------------------------------------------------
\521\ A blended cost combines short- and medium-term Treasury
securities, while an ``all-in'' cost balances those with longer-term
Treasury securities. If TARP is a medium- to longer-term program,
either approach would seem more sensible than Treasury's current short-
term interest estimate.
---------------------------------------------------------------------------
Were the TARP to reach its $699 billion potential,
it would mean a $5,000 expenditure for each taxpayer.\522\ The
TARP represents five percent of 2008 GDP.
---------------------------------------------------------------------------
\522\ The $5,000 ``cost'' per taxpayer assumes 138.4 million
taxpayers are covering the full $699 billion.
---------------------------------------------------------------------------
Other costs identified by SIGTARP include (i)
higher borrowing costs in the future as a result of increased
Treasury borrowing levels, (ii) a potential ``crowding out
effect'' on prospective private sector borrowers, potentially
driving private sector borrowers out of the market, (iii) moral
hazard, or unnecessary risk-taking in the private sector due to
the bailout, and (iv) costs incurred by the other financial-
rescue-related federal agencies that have not yet been
quantified.
I introduced legislation--H.R. 2745--to end the TARP on
December 31, 2009. In addition, the legislation:
requires Treasury to accept TARP repayment
requests from well capitalized banks;
requires Treasury to divest its warrants in
each TARP recipient following the redemption of all
outstanding TARP-related preferred shares issued by
such recipient and the payment of all accrued dividends
on such preferred shares;
provides incentives for private banks to
repurchase their warrant preferred shares from
Treasury; and
reduces spending authority under the TARP
for each dollar repaid.
D. Paul S. Atkins
Although I concur with the report issued by the Panel
today, some aspects of the report should be elucidated. The
report is careful to come to no outright conclusion regarding
the TARP. The program is still in operation and distributing
money (although at a much diminished rate), and we are still
much too close to the events of last year to be able to obtain
good data in order to render a dispassionate analysis.
The basic question of this month's report is: Has TARP been
a success? The response must be that we do not know. Not that
the program, together with larger government programs
instituted by the Federal Reserve and FDIC that dwarfed TARP in
terms of taxpayer dollars put at risk, did not show some
results. Indeed, the Panel report on page 77, points out that
the federal government had almost $8 trillion of exposure
through various programs to try to cure the ills of the banking
and finance industry, including TARP's $700 billion. With the
injection of all of this money into the system, something had
to happen. The fact that these programs had some effect does
not answer the question of whether the resources were used
wisely.
More time is needed to judge the short- and long-term
ramifications of TARP and the other programs. The benefits that
some ascribe to TARP only manifested themselves long after the
program was implemented. Looking at the equity markets, the
banks hit bottom in March 2009, months after the implementation
of TARP. The credit markets also took a while to recover. Does
this length of time between the implementation of TARP and the
manifestation of supposed benefits indicate that exogenous
factors might have come into play?
A major cause of the turmoil in the financial markets last
year was the lack of transparency and the resulting lack of
confidence that investors had in bank balance sheets. The TARP
infusions, other than demonstrating that the government was
willing to put taxpayer money on the line and stood ready to
bail banks out, did not solve the transparency issue. In fact,
the issue persists and affects valuation of financial firms. It
did not help that the government at first claimed that TARP
money would only be given to ``healthy'' banks. This claim
proved to be manifestly false as even some of the original
recipients appear not to have been healthy.
One cannot view government programs only in the short term;
one must take into account the longer term. Otherwise, the
analysis inevitably will be superficial because the full
ramifications of decisions are given little weight. With TARP,
dangerous precedents have been made and expectations
established in the marketplace. These include the unfortunate
embrace of the principle of ``too big to fail'' and the
implicit guarantees that go with that doctrine. I am pleased
that the Panel will consider these issues in next month's
report.
Under normal circumstances, TARP would be in the
liquidating phase because institutions are repaying the money
they received. Unfortunately, the Treasury seems to be trying
to maximize its power by improperly considering TARP to be like
a revolving line of credit, contrary to the intent of Congress
and section 106(d) of EESA, which states: ``Revenues of, and
proceeds from the sale of troubled assets purchased under this
Act, or from the sale, exercise, or surrender of warrants or
senior debt instruments acquired in section 113 shall be paid
into the general fund of the Treasury for reduction of the
public debt.'' Moreover, the program may yet be extended by the
Treasury Secretary until October 2010, and it may transform
itself into something entirely different during that time,
given the nature of the hastily drafted statute that
established TARP and the extreme flexibility with which the
Treasury apparently interprets its mandate and powers
thereunder.
Already, $80 billion of TARP funds have been used to
intervene in General Motors, Chrysler, and GMAC, hardly major
components of the banking and finance system. The Treasury has
announced that it intends to dump billions more into GMAC, but
the underlying problems of the automotive industry, including
excessive labor costs, inflexible work rules, and a poor
product mix have yet to be addressed. As the financial markets
have stabilized, a continuation of TARP raises the prospect
that Treasury will put funds into other companies with only a
tenuous connection to the financial markets, contrary to
Congress's intent. Thus, TARP should not be extended. If more
funds are needed in the future, Treasury should go back to the
current Congress and make its case.
During our hearing featuring five economists on November
19, 2009, I posed a question to Dr. Dean Baker as to whether
things would look different today in the financial industry if
TARP had never been established. He responded by saying that
``I am not convinced that we'd be in a hugely different
world.'' Presumably, the Treasury and the Federal Reserve would
have found ways to muddle through, much as they had done during
and after the collapse of Bear Stearns. Dr. Baker further
argued that ``the biggest flaw of TARP'' was that ``we rushed
in with something that wasn't well thought out.'' Indeed, some
economists argue that the confusing roll out of TARP in 2008
only made matters worse. Ultimately, however, had there been no
TARP, we would not be facing all of the unfortunate collateral
consequences of TARP and a poorly thought-out EESA.
As we move into 2010, perhaps into the final few months of
this Panel's existence, we should be insisting that Treasury
stick to the intent of EESA and to a strict reading of the
statute. In addition, we should follow the advice of Mr. Alex
Pollock, who appeared before the Panel on November 19, to
insist that Treasury run TARP as a business. Transparency,
audited financial statements, and adherence to Congressional
intent will foster accountability and taxpayer confidence.
SECTION THREE: CORRESPONDENCE WITH TREASURY UPDATE
On behalf of the panel, Chair Elizabeth Warren sent a
letter on November 25, 2009,\523\ to Secretary of the Treasury
Timothy Geithner, to follow up on a letter sent on September
15, 2009,\524\ and to request that the Secretary provide a
timely response to the questions contained therein regarding
inputs, formulae, and other information for the stress tests.
The Panel has not yet received a response from Secretary
Geithner.
---------------------------------------------------------------------------
\523\ See Appendix III of this report, infra.
\524\ See Appendix I of the Congressional Oversight Panel's October
Oversight Report. October Oversight Report, supra note 220, at 207.
---------------------------------------------------------------------------
On behalf of the panel, Chair Elizabeth Warren sent a
letter on November 25, 2009,\525\ to Secretary of the Treasury
Timothy Geithner, to obtain information on Treasury's
assistance to CIT Group, Inc. (CIT). Specifically, the letter
inquires about the effects of CIT's recent bankruptcy on the
taxpayers' investment in the company via the Capital Purchase
Program (CPP), and whether Treasury expects failures of more
financial institutions participating in the CPP. The Panel has
not yet received a response from Secretary Geithner.
---------------------------------------------------------------------------
\525\ See Appendix IV of this report, infra.
---------------------------------------------------------------------------
On behalf of the panel, Chair Elizabeth Warren sent a
letter on November 25, 2009,\526\ to Assistant Secretary of the
Treasury for Financial Stability Herbert M. Allison, Jr. The
letter notes that Assistant Secretary Allison had yet to
respond to a series of questions for the record following his
appearance before the Congressional Oversight Panel on October
22, 2009, despite an initial request to receive a response by
November 18, 2009. The Panel received a response from Assistant
Secretary Allison on December 1, 2009.\527\
---------------------------------------------------------------------------
\526\ See Appendix II of this report, infra.
\527\ Questions for the Record for Assistant Secretary Allison,
supra note 253.
SECTION FOUR: TARP UPDATES SINCE LAST REPORT
A. TARP Repayment
Since the Panel's prior report, additional banks have
repaid their TARP investments under CPP. A total of 50 banks
have repaid in full their preferred stock TARP investments
provided under the CPP to date. Of these banks, 30 have
repurchased their warrants as well. Additionally, during the
month of October, CPP participating banks paid $481.6 million
in dividends and $125.8 million in interest on Treasury
investments.
Bank of America has been given leave by its regulator to
repay $45 billion in TARP funds. News reports stated that Bank
of America would sell common equity to raise the funds for the
repayment. As of December 2, 2009, Bank of America reported
that it had raised $19.3 billion, and that it would be holding
a shareholder meeting to approve the issuance of additional
shares to be sold for this purpose.
B. CPP Monthly Lending Report
Treasury releases a monthly lending report showing loans
outstanding at the top 22 CPP recipient banks. The most recent
report, issued on November 16, 2009, includes data through the
end of September 2009, and shows that CPP recipients had $4.18
trillion in loans outstanding as of September 2009. This
represents a one percent decline in loans outstanding between
the end of August and the end of September.
C. Term Asset-Backed Securities Loan Facility (TALF)
At the November 17, 2009 facility, there were $1.4 billion
in loans requested for legacy CMBS, and $72.2 million for new
CMBS. By way of comparison, there were $2.1 billion in loans
for legacy CMBS requested at the October facility, and $1.4
billion at the September facility. This month was the first
facility in which there was a request for TALF loans for new
CMBS.
At the December 3, 2009 facility, there were $3 billion in
loans requested to support the issuance of ABS collateralized
by loans in the credit card, equipment, floorplan, small
business, servicing advances, and student loan sectors. No
loans in the auto and premium financing sectors were requested.
By way of comparison, there were $1.1 billion in loans
requested at the November 3, 2009 facility to support the
issuance of ABS collateralized by loans in the auto, credit
card, equipment, floorplan, small business, and student loan
sectors.
D. Public-Private Investment Funds
Treasury announced the initial closing of three more of the
nine funds pre-qualified as Fund Managers as part of the
Public-Private Investment Program. Treasury expects the final
fund to close shortly. As of November 30, 2009, Public-Private
Investment Funds have closed on $5.07 billion of private sector
equity. This investment has been matched by Treasury for a
total of $10.13 billion in equity capital. Treasury has also
provided $10.13 billion of debt capital.
E. Capital Assistance Program Closing
On November 9, 2009, Treasury announced that it would close
the CAP without making any investments through the program. CAP
was established to provide additional assistance to
institutions subject to the stress tests. The only institution
that was determined to need additional capital was GMAC.
Treasury has announced that GMAC will receive the needed
assistance through the Automotive Industry Financing Program
instead of through CAP.
F. Auctions to Sell Capital Purchase Program Warrants
Treasury announced on November 19, 2009, that it would sell
several warrant positions received under the Capital Purchase
Program. The sales would take place over the month following
the announcement and would include Treasury's warrant positions
in JPMorgan Chase & Co., Capital One Financial Corporation, and
TCF Financial Corporation. Each of these banks has already
repurchased Treasury's full preferred stock investment. The
sales will be conducted through registered public offerings
using a Dutch auction method. The auction for Capital One began
on December 1, 2009 and closed on December 3, 2009. This
auction included 12,657,960 warrants to purchase common stock
of Capital One and the net proceeds from the sale, which should
close on or around December 9, are expected to be $146.5
million.
SECTION FIVE: OVERSIGHT ACTIVITIES
The Congressional Oversight Panel was established as part
of EESA and formed on November 26, 2008. Since then, the Panel
has produced twelve oversight reports, as well as a special
report on regulatory reform, issued on January 29, 2009, and a
special report on farm credit, issued on July 21, 2009. Since
the release of the Panel's November oversight report assessing
guarantees and contingent payments, the following developments
pertaining to the Panel's oversight of the Troubled Asset
Relief Program (TARP) took place:
The Panel held a hearing in Washington, DC with
several prominent economists to discuss the effectiveness of
the TARP. The views of these experts informed this report.
Upcoming Reports and Hearings
The Panel will release its next oversight report in
January. The report will assess Treasury's strategy for exiting
the TARP.
The Panel is planning its third hearing with Secretary
Geithner on December 10, 2009. The Secretary has agreed to
testify before the Panel once per quarter. His most recent
hearing was on September 10, 2009.
SECTION SIX: ABOUT THE CONGRESSIONAL OVERSIGHT PANEL
In response to the escalating crisis, on October 3, 2008,
Congress provided Treasury with the authority to spend $700
billion to stabilize the U.S. economy, preserve home ownership,
and promote economic growth. Congress created the Office of
Financial Stability (OFS) within Treasury to implement a
Troubled Asset Relief Program. At the same time, Congress
created the Congressional Oversight Panel to ``review the
current state of financial markets and the regulatory system.''
The Panel is empowered to hold hearings, review official data,
and write reports on actions taken by Treasury and financial
institutions and their effect on the economy. Through regular
reports, the Panel must oversee Treasury's actions, assess the
impact of spending to stabilize the economy, evaluate market
transparency, ensure effective foreclosure mitigation efforts,
and guarantee that Treasury's actions are in the best interests
of the American people. In addition, Congress instructed the
Panel to produce a special report on regulatory reform that
analyzes ``the current state of the regulatory system and its
effectiveness at overseeing the participants in the financial
system and protecting consumers.'' The Panel issued this report
in January 2009. Congress subsequently expanded the Panel's
mandate by directing it to produce a special report on the
availability of credit in the agricultural sector. The report
was issued on July 21, 2009.
On November 14, 2008, Senate Majority Leader Harry Reid and
the Speaker of the House Nancy Pelosi appointed Richard H.
Neiman, Superintendent of Banks for the State of New York,
Damon Silvers, Director of Policy and Special 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, 2008, 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. Effective August 10, 2009, Senator Sununu
resigned from the Panel, and on August 20, 2009, Senator
McConnell announced the appointment of Paul Atkins, former
Commissioner of the U.S. Securities and Exchange Commission, to
fill the vacant seat.
APPENDIX I: UNPAID DIVIDEND PAYMENTS UNDER CPP AS OF OCTOBER 31, 2009
UNPAID DIVIDEND PAYMENTS UNDER CPP AS OF OCTOBER 31, 2009 \528\
------------------------------------------------------------------------
Value of unpaid
Institution dividends
------------------------------------------------------------------------
CIT Group Inc........................................ $29,125,000
Popular, Inc......................................... 11,687,500
First BanCorp........................................ 5,000,000
Pacific Capital Bancorp.............................. 4,515,850
First Banks, Inc..................................... 4,024,825
Sterling Financial Corporation/Sterling Savings Bank. 3,787,500
UCBH Holdings, Inc................................... 3,734,213
Anchor BanCorp Wisconsin, Inc........................ 2,979,167
Midwest Banc Holdings, Inc........................... 2,119,600
Dickinson Financial Corporation II................... 1,989,980
Central Pacific Financial Corp....................... 1,687,500
Seacoast Banking Corporation of Florida/Seacoast 1,250,000
National Bank.......................................
Blue Valley Ban Corp................................. 543,750
Centrue Financial Corporation........................ 408,350
Royal Bancshares of Pennsylvania, Inc................ 380,088
One United Bank...................................... 301,575
United American Bank................................. 230,490
Pacific City Financial Corporation/Pacific City Bank. 220,725
Commonwealth Business Bank........................... 209,850
The Connecticut Bank and Trust Company............... 178,573
Peninsula Bank Holding Co............................ 162,500
Commerce National Bank............................... 150,000
Citizens Bancorp..................................... 141,700
Pacific Coast National Bancorp....................... 112,270
Premier Service Bank................................. 105,972
Idaho Bancorp........................................ 94,013
Lone Star Bank....................................... 87,917
Pacific International Bancorp Inc.................... 81,250
One Georgia Bank..................................... 80,766
Georgia Primary Bank................................. 70,850
Saigon National Bank................................. 54,378
Patterson Bancshares, Inc............................ 50,288
Grand Mountain Bancshares, Inc....................... 35,395
Fresno First Bank.................................... 33,357
Citizens Bank & Trust Company........................ 32,700
Pacific Commerce Bank................................ 31,961
Community Bank of the Bay............................ 28,874
Community First Bank................................. 11,199
------------------
Total............................................ $75,739,924
------------------------------------------------------------------------
\528\ U.S. Department of the Treasury, Dividends and Interest Reports,
May, 2009-October, 2009 (online at www.financialstability.gov/ latest/
reportsanddocs.html); SIGTARP, Quarterly Report to Congress, at 58
(Oct. 21, 2009) (online at www.sigtarp.gov/reports/congress/ 2009/
October2009_Quarterly_Report_to_ Congress.pdf).
APPENDIX II: LETTER FROM CHAIR ELIZABETH WARREN TO ASSISTANT SECRETARY
HERB ALLISON, RE: WRITTEN RESPONSES FOR HEARING RECORD, DATED NOVEMBER
25, 2009
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
APPENDIX III: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY
GEITHNER, RE: STRESS TESTS, DATED NOVEMBER 25, 2009
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
APPENDIX IV: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY
GEITHNER, RE: CIT GROUP, INC., DATED NOVEMBER 25, 2009
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
APPENDIX V: ENDNOTES TO FIGURE 27: FEDERAL GOVERNMENT'S FINANCIAL
STABILIZATION PROGRAMS (AS OF NOVEMBER 25, 2009)--CURRENT MAXIMUM
EXPOSURES
i This number includes investments under the
SSFI Program: a $40 billion investment made on November 25,
2008, and a $30 billion investment committed on April 17, 2009
(less a reduction of $165 million representing bonuses paid to
AIG Financial Products employees). See U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Report for
Period Ending November 25, 2009, (Nov. 30, 2009) (online at
www.financialstability.gov/docs/transaction-reports/11-30-
09%20Transactions%20Report%20 as%20of%2011-25-09.pdf).
ii This number represents the full $60 billion
that is available to AIG through its revolving credit facility
with the Federal Reserve ($44.9 billion had been drawn down as
of November 27, 2009) and the outstanding principal of the
loans extended to the Maiden Lane II and III SPVs to buy AIG
assets (as of November 19, 2009, $16 billion and $19 billion
respectively). Board of Governors of the Federal Reserve
System, Factors Affecting Reserve Balances of Depository
Institutions and Condition Statement of Federal Reserve Banks
(Nov. 27, 2009) (online at www.federalreserve.gov/RELEASES/H41/
20091127/). Income from the purchased assets is used to pay
down the loans to the SPVs, reducing the taxpayers' exposure to
losses over time. Board of Governors of the Federal Reserve
System, Federal Reserve System Monthly Report on Credit and
Liquidity Programs and the Balance Sheet October 2009, at 17
(online at www.federalreserve.gov/monetarypolicy/files/
monthlyclbsreport200910.pdf) (accessed Dec. 7, 2009). On
December 1, 2009, AIG entered into an agreement with FRBNY to
reduce the debt AIG owes the FRBNY by $25 billion. In exchange,
FRBNY received preferred equity interests in two AIG
subsidiaries. This also reduced the debt ceiling on the loan
facility from $60 billion to $35 billion. This figure does not
reflect that agreement since the table is intended to represent
exposure as of November 30, 2009. American International Group,
AIG Closes Two Transactions That Reduce Debt AIG Owes Federal
Reserve Bank of New York by $25 billion (Dec. 1, 2009) (online
at phx.corporate-ir.net/
External.File?item=UGFyZW50SUQ9MjE4ODl8Q2hpbGRJRD0tMXxUeXBlPTM=&
t=1).
iii U.S. Department of the Treasury, Troubled
Asset Relief Program Transactions Report for Period Ending
November 25, 2009, (Nov. 30, 2009) (online at
www.financialstability.gov/docs/transaction-reports/11-30-
09%20Transactions%20Report%20as%20of%2011-25-09.pdf). This
figure includes: (1) a $15 billion investment made by Treasury
on October 28, 2008 under the CPP; (2) a $10 billion investment
made by Treasury on January 9, 2009 also under the CPP; and (3)
a $20 billion investment made by Treasury under the TIP on
January 16, 2009.
iv U.S. Department of the Treasury, Summary of
Terms: Eligible Asset Guarantee (Nov. 23, 2008) (online at
www.treasury.gov/press/releases/reports/
cititermsheet_112308.pdf) (granting a 90 percent federal
guarantee on all losses over $29 billion after existing
reserves (totaling a $39.5 billion first-loss position for
Citigroup) of a $306 billion pool of Citigroup assets, with the
first $5 billion of the cost of the guarantee borne by
Treasury, the next $10 billion by FDIC, and the remainder by
the Federal Reserve). See also U.S. Department of the Treasury,
U.S. Government Finalizes Terms of Citi Guarantee Announced in
November (Jan. 16, 2009) (online at www.treas.gov/press/
releases/hp1358.htm) (reducing the size of the asset pool from
$306 billion to $301 billion).
v U.S. Department of the Treasury, Transactions
Report (Oct. 27, 2009) (online at www.financialstability.gov/
docs/transaction-reports/10-927-
09%20Transactions%20Report%20as%20of%2010-23-09.pdf). This
figure includes: (1) a $25 billion investment made by Treasury
under the CPP on October 28, 2008; and (2) a $20 billion
investment made by Treasury under TIP on December 31, 2008.
vi This figure represents the $218 billion
Treasury has anticipated spending under the CPP, minus the $50
billion investment in Citigroup ($25 billion) and Bank of
America ($25 billion) identified above, and the $71 billion in
repayments that are reflected as uncommitted TARP funds. This
figure does not account for future repayments of CPP
investments, nor does it account for dividend payments from CPP
investments. See U.S. Government Accountability Office,
Troubled Asset Relief Program June 2009 Status of Efforts to
Address Transparency and Accountability Issues, at 12 (online
at www.gao.gov/new.items/d09658.pdf) (accessed Dec. 7, 2009);
U.S. Department of the Treasury, Troubled Asset Relief Program
Transactions Report for Period Ending November 25, 2009 (Nov.
30, 2009) (online at www.financialstability.gov/docs/
transaction-reports/11-30-09%20Transactions%20Report%20
as%20of%2011-25-09.pdf).
vii The CAP was officially closed on November 9,
2009. Of the original 19 SCAP participants, GMAC was the only
institution that requested additional capital under the CAP.
U.S. Department of the Treasury, Treasury Announcement
Regarding the Capital Assistance Program (Nov. 9, 2009) (online
at www.financialstability.gov/latest/tg_11092009.html). As of
yet, further details of this transaction, including the amount
GMAC will receive, have not been released, and the Panel
continues to reflect the program as dormant.
viii This figure represents a $20 billion
allocation to the TALF special purpose vehicle on March 3,
2009. U.S. Department of the Treasury, Troubled Asset Relief
Program Transactions Report for Period Ending October 28, 2009
at 18 (Oct. 30, 2009) (online at financialstability.gov/docs/
transaction-reports/10-30-
09%20Transactions%20Report%20as%20of%2010-28-09.pdf).
Consistent with the analysis in the Panel's August report, only
$61.9 billion in TALF loans have been requested as of December
3, 2009, the Panel continues to predict that TALF subscriptions
are unlikely to surpass the $200 billion currently available by
year's end. Congressional Oversight Panel, August Oversight
Report: The Continued Risk of Troubled Assets, at 10-22 (Aug.
11, 2009) (online at cop.senate.gov/documents/cop-081109-
report.pdf) (discussing criteria for constituting a ``troubled
asset'').
ix This number is derived from the unofficial
1:10 ratio of the value of Treasury loan guarantees to the
value of Federal Reserve loans under the TALF. U.S. Department
of the Treasury, Fact Sheet: Financial Stability Plan (Feb. 10,
2009) (online at www.financialstability.gov/docs/fact-
sheet.pdf) (describing the initial $20 billion Treasury
contribution tied to $200 billion in Federal Reserve loans and
announcing potential expansion to a $100 billion Treasury
contribution tied to $1 trillion in Federal Reserve loans).
Because Treasury is responsible for reimbursing the Federal
Reserve Board for $20 billion of losses on its $200 billion in
loans, the Federal Reserve Board's maximum potential exposure
under the TALF is $180 billion.
x The Panel continues to account for this
program as dormant. It appears unlikely that resources will be
expended under the PPIP Legacy Loans Program in its original
design as a joint Treasury-FDIC program to purchase troubled
assets from solvent banks. See also Federal Deposit Insurance
Corporation, FDIC Statement on the Status of the Legacy Loans
Program (June 3, 2009) (online at www.fdic.gov/news/news/press/
2009/pr09084.html); Federal Deposit Insurance Corporation,
Legacy Loans Program--Test of Funding Mechanism (July 31, 2009)
(online at www.fdic.gov/news/news/press/2009/pr09131.html). The
sales described in these statements do not involve any Treasury
participation, and FDIC activity is accounted for here as a
component of the FDIC's Deposit Insurance Fund outlays.
xi U.S. Department of the Treasury, Joint
Statement By Secretary of the Treasury Timothy F. Geithner,
Chairman of the Board Of Governors Of The Federal Reserve
System Ben S. Bernanke, and Chairman of the Federal Deposit
Insurance Corporation Sheila Bair: Legacy Asset Program (July
8, 2009) (online at www.financialstability.gov/latest/
tg_07082009.html) (``Treasury will invest up to $30 billion of
equity and debt in PPIFs established with private sector fund
managers and private investors for the purpose of purchasing
legacy securities''); U.S. Department of the Treasury, Fact
Sheet: Public-Private Investment Program, at 4-5 (Mar. 23,
2009) (online at www.treas.gov/press/releases/reports/
ppip_fact_sheet.pdf) (outlining that, for each $1 of private
investment into a fund created under the Legacy Securities
Program, Treasury will provide a matching $1 in equity to the
investment fund; a $1 loan to the fund; and, at Treasury's
discretion, an additional loan up to $1). As of November 30,
2009, Treasury reported $17.8 billion in outstanding loans and
$8.8 billion in membership interest associated with the
program, thus substantiating the Panel's assumption that
Treasury may routinely exercise its discretion to provide $2 of
financing for every $1 of equity 2:1 ratio. U.S. Department of
the Treasury, Troubled Asset Relief Program Transactions Report
for Period Ending November 25, 2009 (Nov. 30, 2009) (online at
www.financialstability.gov/docs/transaction-reports/11-30-
09%20Transactions%20Report%20as%20of%2011-25-09.pdf).
xii U.S. Government Accountability Office,
Troubled Asset Relief Program: June 2009 Status of Efforts to
Address Transparency and Accountability Issues, at 2 (June 17,
2009) (GAO09/658) (online at www.gao.gov/new.items/d09658.pdf).
Of the $50 billion in announced TARP funding for this program,
$27.4 billion has been allocated as of November 30, 2009. U.S.
Department of the Treasury, Troubled Asset Relief Program
Transactions Report for Period November 30, 2009, at 22 (Nov.
30, 2009) (online at financialstability.gov/docs/transaction-
reports/11-30-09%20Transactions%20Report%20 as%20of%2011-25-
09.pdf).
xiii Fannie Mae and Freddie Mac, GSEs that were
placed in conservatorship of the Federal Housing Finance
Housing Agency on September 7, 2009, will also contribute up to
$25 billion to the Making Home Affordable Program, of which the
HAMP is a key component. U.S. Department of the Treasury,
Making Home Affordable: Updated Detailed Program Description
(Mar. 4, 2009) (online at www.treas.gov/press/releases/reports/
housing_fact_sheet.pdf).
xiv U.S. Department of the Treasury, Troubled
Asset Relief Program Transactions Report for Period Ending
November 25, 2009 (Nov. 30, 2009) (online at
www.financialstability.gov/docs/transaction-reports/11-30-
09%20Transactions%20Report%20 as%20of%2011-25-09.pdf). A
substantial portion of the total $80 billion in loans extended
under the AIFP have since been converted to common equity and
preferred shares in restructured companies. $20.2 billion has
been retained as loans (with $7.7 billion committed to GM and
$12.5 billion to Chrysler). This figure represents Treasury's
current obligation under the AIFP. There have been $2.1 billion
in repayments and $2.4 billion in de-obligated funds under the
AIFP.
xv U.S. Department of the Treasury, Troubled
Asset Relief Program Transactions Report for Period Ending
November 25, 2009 (November 30, 2009) (online at
www.financialstability.gov/docs/transaction-reports/11-30-
09%20Transactions%20Report%20 as%20of%2011-25-09.pdf).
xvi U.S. Department of the Treasury, Fact Sheet:
Public-Private Investment Program, at 1 (Mar. 23, 2009) (online
at www.treas.gov/press/releases/reports/ppip_fact_sheet.pdf).
xvii This figure represents the current maximum
aggregate debt guarantees that could be made under the program,
which, in turn, is a function of the number and size of
individual financial institutions participating. $315 billion
of debt subject to the guarantee was outstanding as of October
31, 2009. This represents approximately 52 percent of the cap.
Federal Deposit Insurance Corporation, Monthly Reports on Debt
Issuance Under the Temporary Liquidity Guarantee Program: Debt
Issuance Under Guarantee Program (Sept. 30, 2009) (online at
www.fdic.gov/regulations/resources/TLGP/total_issuance9-
09.html) (updated Nov. 30, 2009). The FDIC has collected $10.4
billion in fees and surcharges from this program since its
inception in the fourth quarter of 2008. Federal Deposit
Insurance Corporation, Monthly Reports on Debt Issuance Under
the Temporary Liquidity Guarantee Program (Oct. 31, 2009)
(online at www.fdic.gov/regulations/resources/TLGP/fees.html)
(updated Nov. 30, 2009).
xviii This figure represents the FDIC's
provision for losses to its deposit insurance fund attributable
to bank failures in the third and fourth quarters of 2008 and
the first and second quarters of 2009. Federal Deposit
Insurance Corporation, Chief Financial Officer's (CFO) Report
to the Board: DIF Income Statement (Fourth Quarter 2008)
(online at www.fdic.gov/about/strategic/corporate/
cfo_report_4qtr_08/income.html); Federal Deposit Insurance
Corporation, Chief Financial Officer's (CFO) Report to the
Board: DIF Income Statement (Third Quarter 2008) (online at
www.fdic.gov/about/strategic/corporate/cfo_report_3rdqtr_08/
income.html); Federal Deposit Insurance Corporation, Chief
Financial Officer's (CFO) Report to the Board: DIF Income
Statement (First Quarter 2009) (online at www.fdic.gov/about/
strategic/corporate/cfo_report_1stqtr_09/income.html); Federal
Deposit Insurance Corporation, Chief Financial Officer's (CFO)
Report to the Board: DIF Income Statement (Second Quarter 2009)
(online at www.fdic.gov/about/strategic/corporate/
cfo_report_2ndqtr_09/income.html). This figure includes the
FDIC's estimates of its future losses under loss share
agreements that it has entered into with banks acquiring assets
of insolvent banks during these four quarters. Under a loss
sharing agreement, as a condition of an acquiring bank's
agreement to purchase the assets of an insolvent bank, the FDIC
typically agrees to cover 80 percent of an acquiring bank's
future losses on an initial portion of these assets and 95
percent of losses of another portion of assets. For example,
see Federal Deposit Insurance Corporation, Purchase and
Assumption Agreement Among FDIC, Receiver of Guaranty Bank,
Austin, Texas, FDIC and Compass Bank, at 65-66 (Aug. 21, 2009)
(online at www.fdic.gov/bank/individual/failed/guaranty-
tx_p_and_a_w_addendum.pdf).
xix In past reports, the Panel has classified as
loans the Federal Reserve's purchases of federal agency debt
securities and mortgage-backed securities issued by GSEs. With
this report, the Panel adopts a different approach. Instead,
these purchases will be accounted as outlays made under the
Federal Reserve's credit expansion effort. Federal Reserve
Liquidity Facilities classified in this table as loans include:
Primary credit, Secondary credit, Central bank liquidity swaps,
Primary dealer and other broker-dealer credit, Asset-Backed
Commercial Paper Money Market Mutual Fund Liquidity Facility,
Net portfolio holdings of Commercial Paper Funding Facility
LLC, Seasonal credit, Term auction credit, Net Portfolio
Holdings of TALF LLC, and loans outstanding to Bear Stearns
(Maiden Lane I LLC). While the Federal Reserve does not employ
the outlays, loans and guarantees classification, its
accounting clearly separates its mortgage-related purchasing
programs from its liquidity programs. See Board of Governors of
the Federal Reserve, Credit and Liquidity Programs and the
Balance Sheet November 2009, at 2 (online at
www.federalreserve.gov/monetarypolicy/files/
monthlyclbsreport200911.pdf) (accessed Dec. 7, 2009).
xx The term ``outlays'' is used here to describe
the use of Treasury funds under the TARP, which are broadly
classifiable as purchases of debt or equity securities (e.g.,
debentures, preferred stock, exercised warrants, etc.). The
outlays figures are based on: (1) Treasury's actual reported
expenditures; and (2) Treasury's anticipated funding levels as
estimated by a variety of sources, including Treasury
pronouncements and GAO estimates. Anticipated funding levels
are set at Treasury's discretion, have changed from initial
announcements, and are subject to further change. Outlays as
used here represent investments and assets purchases and
commitments to make investments and asset purchases and are not
the same as budget outlays, which under section 123 of EESA are
recorded on a ``credit reform'' basis.
xxi While many of the guarantees may never be
exercised or exercised only partially, the guarantee figures
included here represent the federal government's greatest
possible financial exposure.
xxii This figure is roughly comparable to the
$3.0 trillion current balance of financial system support
reported by SIGTARP in its July report. SIGTARP, Quarterly
Report to Congress, at 138 (July 21, 2009) (online at
www.sigtarp.gov/reports/congress/2009/
July2009_Quarterly_Report_to_Congress.pdf). However, the Panel
has sought to capture additional anticipated exposure and thus
employs a different methodology than SIGTARP.