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United States Government Accountability Office

United States Government Accountability Office

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Published by: subsidyscope_bailout on Oct 16, 2009
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GAO
United States Government Accountability Office
Report to Congressional Committees
TROUBLED ASSETRELIEF PROGRAMOne Year Later, Actions Are Needed to Address RemainingTransparency and AccountabilityChallenges
October 2009GAO-10-16
 
What GAO Found
United States Government Accountability Office
Why GAO Did This Study
H
ighlights
AccountabilityIntegrityReliability
October 2009
 
TROUBLED ASSET RELIEF PROGRAM
One Year Later, Action
s
Are Needed to Addre
ss
 Remainin
g
Tran
s
parency and AccountabilityChallen
g
e
s
 
Highlights of GAO-10-16,a report to congressional committees
Over the last year, TARP in general, and the Capital Purchase Program (CPP)in particular, along with other efforts by the Board of Governors of theFederal Reserve System (Federal Reserve) and Federal Deposit InsuranceCorporation (FDIC), have made important contributions to helping stabilizecredit markets. To illustrate, figure 1 shows that while it is difficult to isolatethe impact of TARP, the TED spread—a key indicator of credit risk thatgauges the willingness of banks to lend to other banks—has narrowed tolevels not seen since market turmoil began in late 2007. However, TARP is stilla work in progress, and many uncertainties and challenges remain. Forexample, while some CPP participants had repurchased over $70 billion in preferred shares and warrants as of September 25, 2009, whether Treasurywill fully recoup TARP assistance to the automobile industry and AmericanInternational Group Inc., among others, remains uncertain. Moreover, other programs, such as the Public-Private Investment Program and the Home Affordable Modification Program (HAMP) are still in varying stages of implementation.
Fi
g
ure 1: TED
S
pread, 3-Month LIBOR, and 3-Month Trea
s
ury Bill Yield, a
s
of
S
eptember 29,2009
012
3
456200920082007Interest ratesYear
LIBOR3-month Tre
as
uryTED
s
pre
a
d
S
ource: GAO
a
n
a
ly
s
i
s
of d
a
t
a
from Thom
s
on Reuter
s
D
a
t
as
tre
a
m.
BNP P
a
rib
as
 freeze
s
threeinve
s
tment fund
s
.M
a
 jor b
a
nk
s
begin to write down
s
ubprime mortg
a
ge lo
ss
e
s
.FDIC t
a
ke
s
over IndyM
a
c.Lehm
a
n b
a
nkruptcy;Merrill Lynchpurch
as
e
a
nnounced.W
as
hington Mutu
a
l clo
s
ed byOffice of Thrift
S
upervi
s
ion.
CPP announced alongwith Federal Reserveand FDIC programs.
Citigroup receive
s
 
a
ddition
a
l government
ass
i
s
t
a
nce.B
a
nk of Americ
a
receive
s
 
a
ddition
a
l government
ass
i
s
t
a
nce.
Capital AssistanceProgram StressTest resultsreleased.
Be
a
r
S
te
a
rn
s
receive
s
emergency lo
a
nfrom Feder
a
l Re
s
erve through JPMorg
a
n.F
a
nnie M
a
e
a
nd Freddie M
a
cpl
a
ced into con
s
erv
a
tor
s
hip.
Note: Rates and yields are daily percentages. The area
b
etween the LIBOR and Treas
u
ry yield is theTED spread.
 As of September 25, 2009, Treasury had disbursed almost $364 billion in TARPfunds; however, Treasury has yet to update its projected use of funds for most programs in light of current market conditions, program participation rates,and repurchases. Without more current estimates about expected uses of theremaining funds, Treasury’s ability to plan for and effectively execute the nextsteps of the program will be limited. Amid concerns about the direction andtransparency of TARP, the new administration has attempted to provide a
GAO’s eighth report assesses theTroubled Asset Relief Program’s(TARP) impact over the last year.Specifically, it addresses (1) theevolution of TARP’s strategy andthe status of TARP programs as of September 25, 2009; (2) theDepartment of the Treasury’s(Treasury) progress in creating aneffective management structure,including hiring for the Office of Financial Stability (OFS),overseeing contractors, andestablishing a comprehensivesystem of internal control; and (3)indicators of TARP’s performancethat could help Treasury decidewhether to extend the program.GAO reviewed relevantdocumentation and met withofficials from OFS, contractors,and financial regulators.
What GAO Recommend
s
 While Treasury has been generallyresponsive to GAO’s prior 35recommendations, GAO reiteratesthe importance of fullyimplementing several previousrecommendations. GAO also makesthree new recommendations.Specifically, the Secretary should(1) coordinate with the FederalReserve and FDIC to help ensurethat the decision to extend orterminate TARP is considered in abroader market context, (2)document and communicate theresults of its determination, and (3)update its projected use of funds.Treasury agreed with the first tworecommendations. With the third, itstated
that
Treasury regularlyre-evaluates its funding needs.However, GAO found that athorough review of its estimates iswarranted.
View GAO-10-16 or key components. For more information, contact Thomas J.McCool, 202-512-2642,mccoolt@gao.gov.
 
United States Government Accountability Office
 
Hi
g
hli
g
ht
s
of GAO-10-16 (continued)
more strategic direction for using the remaining funds.TARP has moved from investment-based initiatives to programs aimed at stabilizing the securitizationmarkets and preserving homeownership, and mostrecently at providing assistance to community banksand small businesses. While some programs, such asthe Term Asset-Backed Securities Loan Facility, appearto have generated market interest, others, such asHAMP, face ongoing implementation and operationalchallenges. Related to transparency, Treasury has takena number of steps to improve communication with the public and Congress, including launching a Web siteand preparing to hire a communications director forOFS to support these efforts.Treasury has also made significant progress inestablishing and staffing OFS; however, it mustcontinue to focus on filling critical leadership positions,including the Chief Homeownership PreservationOfficer and Chief Investment Officer, with permanentstaff. Treasury’s network of contractors and financialagents that support TARP administration andoperations has grown from 11 to 52. While Treasury hasan appropriate infrastructure in place, it must remain vigilant in managing and monitoring conflicts of interests that may arise with the use of private sectorsources.GAO again notes that isolating and estimating the effectof TARP programs remains a challenging endeavor. Asshown in table below, the indicators that GAO has beenmonitoring over the last year suggest that there havebeen broad improvements in credit markets since theannouncement of the first TARP program (CPP) andthat a number of anticipated effects of TARP havematerialized, although not necessarily due to TARPactions alone. Specifically, the cost of credit and perceptions of risk (as measured by premiums overTreasury securities) have declined significantly ininterbank, corporate debt, and mortgage markets.Further, our analysis of Treasury’s loan survey resultsover most of the past year shows that collectively thelargest CPP participants have reported extendingalmost $2.3 trillion in new loans since receiving $160billion in CPP capital. While Treasury has not fullydeveloped a comprehensive framework for assessingthe need for additional actions and evaluating programresults in a transparent manner, in a recent reportTreasury began to lay the foundation for such aframework and provided a number of financialindicators. A framework that utilizes indicators ormeasures of program effectiveness would help inweighing the benefits of TARP programs against thecost of employing additional taxpayer resources. Also,as Treasury considers further action under TARP andconsiders whether to extend the program beyondDecember 31, 2009, it will need to evaluate TARP in thebroader context of efforts by the Federal Reserve andFDIC to stabilize the financial system. Finally, Treasurywill need to document its analysis and effectivelycommunicate its reasoning to Congress and the American people for its decisions to be viewed ascredible.
Chan
g
e
s
in
S
elect Credit Market Indicator
s
, October 13, 200
8
, to
S
eptember 30, 2009Credit market rate
s
and
s
pread
s
 Indicator De
s
criptionBa
s
i
s
point chan
g
e from October 13,200
8
, to
S
eptember 30, 2009
LIBOR
3
-month London inter
b
ank offered rate (an average of interest ratesoffered on dollar-denominated loans)Down 446TED Spread Spread
b
etween
3
-month LIBOR and
3
-month Treas
u
ry yield Down 44
3
 Aaa
b
ond rate Rate on highest-q
u
ality corporate
b
onds Down 14
3
 Aaa
b
ond spread Spread
b
etween Aaa
b
ond rate and 10-year Treas
u
ry yield Down 85Baa
b
ond rate Rate on corporate
b
onds s
ub
 ject to moderate credit risk Down 26
3
 Baa
b
ond spread Spread
b
etween Baa
b
ond rate and 10-year Treas
u
ry yield Down 205Mortgage rates
3
0-year conforming loans rate Down 142Mortgage spread Spread
b
etween
3
0-year conforming loans rate and 10-year Treas
u
ry yieldDown 8
3
 
Quarterly mort
g
a
g
e volume and default
s
 
Indicator De
s
criptionChan
g
e from December 31, 200
8
toJune 30, 2009
Mortgage originations New mortgage loans Up $290
b
illion to $550
b
illionForeclos
u
re rate Percentage of homes in foreclos
u
re Up 100
b
asis points to 4.
3
0 percent
So
u
rce: GAO analysis of data
from Global Insight 
, the Federal Reserve, Thomson Re
u
ters Datastream, and
Inside Mortgage Finance 
.
Note: Rates and yields are daily except mortgage rates, which are weekly. Higher spreads (meas
u
redas premi
u
ms over Treas
u
ry sec
u
rities of compara
b
le mat
u
rity) represent higher perceived risk in lendingto certain
b
orrowers. Higher rates represent increases in the cost of
b
orrowing for relevant
b
orrowers.As a res
u
lt, “Down” s
u
ggests improvement in market conditions for credit market rates and spreads.Foreclos
u
re rate and mortgage origination data are q
u

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