FOR OFFICIAL USE ONLY UNTIL RELEASED BY THEHOUSE COMMITTEE ON FINANCIAL SERVICESSUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

STATEMENT OF NEIL BAROFSKYSPECIAL INSPECTOR GENERALTROUBLED ASSET RELIEF PROGRAM

BEFORE THEHOUSE COMMITTEE ON FINANCIAL SERVICESSUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONSJuly 22, 2009

Chairman Moore, Ranking Member Biggert and Members of the Committee, I am honored toappear before you today

deliver to this Committee my quarterly report to Congress.In the nine months since the Emergency Economic Stabilization Act of 2008 (“EESA”) authorizedcreation of the Troubled Asset Relief Program (“TARP”), the U.S. Department of the Treasury(“Treasury”) has created 12 separate programs involving Government and private funds of up toalmost $3 trillion. From programs involving large capital infusions into hundreds of banks and otherfinancial institutions, to a mortgage modification program designed to modify millions of mortgages,to public-private partnerships using tens of billions of taxpayer dollars to purchase “toxic” assetsfrom banks, TARP has evolved into a program of unprecedented scope, scale, and complexity.Moreover, TARP does not function in a vacuum but is rather part of the broader Government effortsto stabilize the financial system, an effort that includes dozens of inter-related programs operated bymultiple Federal agencies.

WARRANTS

Pursuant to one of the initial TARP programs, the Capital Purchase Program (“CPP”), Treasuryallocated $250 billion to provide funds to qualified financial institutions to build capital, increase theflow of financing, and support the economy. As of March 2009, Treasury forecast spending only$218 billion in this program.The economic terms of the CPP transactions were that, in exchange for the TARP infusions,Treasury received senior preferred stock of the banks that pays a 5% dividend for five years and 9%thereafter. Consistent with the terms of EESA, Treasury also received warrants – option to purchaseadditional stock. For publicly traded banks, Treasury received warrants of common stock; forprivately held banks, Treasury received warrants for additional preferred shares, which wereimmediately exercised. As banks repurchase their CPP investments, they have the option topurchase the warrants. How those warrants are valued is an important matter that greatly affects thetaxpayers’ return on these investments.As a part of SIGTARP’s oversight efforts, we have been coordinating our efforts with other agenciesto avoid duplication, and it has been my pleasure to work with my co-panelist from the GovernmentAccountability Office (“GAO”), Thomas McCool, and with the Congressional Oversight Panel (“thePanel”), chaired by co-panelist, Professor Elizabeth Warren. As a part of this coordination, on June10, 2009, SIGTARP entered into a special coordinated effort with the Panel to examine the pricing of warrants in the context of the return of CPP funds by TARP-recipients. The Panel issued a July 10,2009, report valuing the warrants that Treasury had bought to date. SIGTARP plans to conduct anaudit of the warrant repurchase/sale process and will have the benefit of the Panel valuations ascontext. SIGTARP’s audit will examine several key questions, including exanimation of the processTreasury has established to value the warrants for re-purchase, whether Treasury follows a clear andconsistent process in considering potentially differing valuations of warrants, and the extent to whichTreasury has established an objective basis for its ultimate valuation decisions. SIGTARP, if appropriate, will issue recommendations with the report of this audit.

OTHER AREAS OF INTEREST

SIGTARP has made a variety or recommendations concerning the TARP program and has workedhard to advance the general understanding of the TARP. With respect to recommendations, one of SIGTARP’s most important oversight responsibilities is to provide recommendations to Treasury sothat TARP programs can be designed or modified to facilitate effective oversight and transparencyand to prevent fraud, waste, and abuse. SIGTARP’s reports detail these recommendations andprovide updates on their implementation. Two categories of recommendations, however, are worthhighlighting in particular:

Transparency in TARP Programs

Although Treasury has taken some steps towards improving transparency in TARP programs, it hasrepeatedly failed to adopt recommendations that SIGTARP believes are essential to providing basictransparency and fulfill Treasury’s stated commitment to implement TARP “with the highest degreeof accountability and transparency possible.” SIGTARP’s July 21, 2009, Quarterly Report includesone new recommendation and there are several other additional unadopted recommendations fromprior quarterly reports:

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Use of Funds Generally:

One of SIGTARP’s first recommendations was that Treasuryrequire all TARP recipients to report on the actual use of TARP funds. Other than in a fewagreements (with Citigroup, Bank of America, and AIG), Treasury has declined to adopt thisrecommendation, calling any such reporting “meaningless” in light of the inherent fungibilityof money. SIGTARP continues to believe that banks can provide meaningful informationabout what they are doing with TARP funds — in particular what activities they would nothave been able to do but for the infusion of TARP funds. That belief has been supported bySIGTARP’s first audit, in which nearly all banks were able to provide such information.

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Valuation of the TARP Portfolio:

SIGTARP has recommended that Treasury beginreporting on the values of its TARP portfolio so that taxpayers can get regular updates on thefinancial performance of their TARP investments. Notwithstanding that Treasury has nowretained asset managers and is receiving such valuation data on a monthly basis, Treasury hasnot committed to providing such information except on the statutorily required annual basis.

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Disclosure of TALF Borrowers Upon Surrender of Collateral:

In TALF, the loans arenon-recourse, that is, the lender (Federal Reserve Bank of New York) will have no recourseagainst the borrower beyond taking possession of the posted collateral (consisting of asset-backed securities (“ABS”)). Under the program, should such a collateral surrender occur,TARP funds will be used to purchase the surrendered collateral. In light of this use of TARPfunds, SIGTARP has recommended that Treasury and the Federal Reserve disclose theidentity of any TALF borrowers that fail to repay the TALF loan and must surrender the ABScollateral.

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Regular Disclosure of PPIF Activity, Holdings, and Valuation:

In the PPIP LegacySecurities Program, the taxpayer will be providing a substantial portion of the funds(contributing both equity and lending) that will be used to purchase toxic assets in the Public-