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EXECUTIVE SUMMARY
A central question surrounding the Troubled Asset Relief Program (TARP) is whether the U.S.Department of the Treasury’s (Treasury) policy of injecting cash into financial institutions hasresulted in a fair deal for taxpayers. The focus of this report is a financial valuation study of theterms of Treasury’s program to invest capital in financial institutions. The report wascommissioned as part of the Congressional Oversight Panel’s continuing investigation into theterms of the TARP. The report was conducted for the Panel by its Advisory Committee onFinance and Valuation (Advisory Committee) and by the international valuation firm, Duff &Phelps Corporation; the Advisory Committee’s report is attached to this report and the longercomplete Duff & Phelps valuation report is posted on the Panel’s website.
The valuation report concludes that Treasury paid substantially more for the assets it purchasedunder the TARP than their then-current market value. The use of a one-size-fits-all investmentpolicy,The valuation reportwas enhanced by an accompanying legal analysis of the terms of the TARP transactions, whichis also attached to this report.
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Congressional Oversight Panel (online at cop.senate.gov).
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That policy includes creation of a uniform capital infusion program, acceptance of a limit on themarketability of the securities Treasury received, and terms that encourage institutions to replenish their privatecapital.
rather than the use of risk-based pricing more commonly used in market transactions,underlies the magnitude of the discount. A number of reasons for this result have beensuggested. The Panel has not determined whether these reasons are valid or whether they justifythe large subsidy that was created. In addition, the Panel has not made judgments about whetherthe decision-making underlying these investments was sound. The rationale for the Treasury’sapproach and the impact of this disparity will be subjects for the Panel’s continued study andconsideration. It is important, however, for the public to understand that in many cases Treasuryreceived far less value in stocks and warrants than the money it injected into financialinstitutions.The legal analysis concludes that the documentation for the investments was standardized. Theuse of standardized documents likely contributed to Treasury’s ability to obtain speed of execution and wide participation, but it meant Treasury could not address differences in creditquality among various capital infusion recipients through variations in contractual termsgoverning the investments or impose specific requirements on a particular recipient that mighthelp insure stability and soundness.The February report also provides an update on the Panel’s previous work, as well as a review of the key actions and changes at Treasury regarding the TARP since the Panel’s last report. In itsinitial report, on December 10, 2008, the Panel asked ten questions about the TARP and a seriesof sub-questions on the strategy, goals, methods, and operations of the program. In its nextreport, issued on January 9, 2009, the Panel analyzed Treasury’s response to the Panel’squestions and highlighted four specific areas where Treasury most needed to provide additionalinformation:
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