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entitled 'Troubled Asset Relief Program: Additional Actions Needed to 
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Report to Congressional Committees: 

United States Government Accountability Office: 
GAO: 

December 2008: 

Troubled Asset Relief Program: 

Additional Actions Needed to Better Ensure Integrity, Accountability, 
and Transparency: 

GAO-09-161: 

GAO Highlights: 

Highlights of GAO-09-161, a report to congressional committees. 

Why GAO Did This Study: 

On October 3, 2008, the Emergency Economic Stabilization Act was signed 
into law. The act established the Office of Financial Stability (OFS) 
within the Department of the Treasury (Treasury) and authorized the 
Troubled Asset Relief Program (TARP). Every 60 days, the U.S. 
Comptroller General is required to report on a variety of areas 
associated with oversight of TARP. This report reviews (1) the 
activities that have been undertaken through TARP as of November 25, 
2008; (2) the structure of OFS, its use of contractors, and its system 
of internal controls; and (3) preliminary indicators of TARP’s 
performance. GAO reviewed documents related to TARP, including 
contracts, agreements, guidance, and rules. GAO also met with OFS, 
contractors, federal agencies, and officials from some participating 
institutions. GAO plans to continue to monitor these and other issues 
including future and ongoing capital purchases, other transactions 
undertaken as part of TARP (e.g., capital purchases in Citigroup and 
American International Group), and the status of other aspects of TARP. 

What GAO Found: 

Treasury has taken a number of steps to stabilize U.S. financial 
markets and the banking system, including injecting billions of dollars 
in financial institutions. Through the capital purchase program (CPP)—a 
preferred stock and warrant purchase program—Treasury provided more 
than $150 billion in capital to 52 institutions as of November 25, 
2008. GAO recognizes that TARP has existed for less than 60 days and 
that a new program of such magnitude faces many challenges, especially 
in this current uncertain economic climate. However, Treasury has yet 
to address a number of critical issues, including determining how it 
will ensure that CPP is achieving its intended goals and monitoring 
compliance with limitations on executive compensation and dividend 
payments. Moreover, further actions are needed to formalize transition 
planning efforts and establish an effective management structure and an 
essential system of internal control. To help ensure the program’s 
integrity, accountability, and transparency, GAO recommends that 
Treasury: 

* work with the bank regulators to establish a systematic means of 
determining and reporting in a timely manner whether financial 
institutions’ activities are generally consistent with the purposes of 
CPP and help ensure an appropriate level of accountability and 
transparency; 

* develop a means to ensure that institutions participating in CPP 
comply with key program requirements (e.g., executive compensation, 
dividend payments, and the repurchase of stock); 

* formalize the existing communication strategy to ensure that external 
stakeholders, including Congress, are informed about the program’s 
current strategy and activities and understand the rationale for 
changes in this strategy to avoid information gaps and surprises; 

* facilitate a smooth transition to the new administration by building 
on and formalizing ongoing activities, including ensuring that key OFS 
leadership positions are filled during and after the transition; 

* expedite OFS’s hiring efforts to ensure that Treasury has the 
personnel needed to carry out and oversee TARP; 

* ensure that sufficient personnel are assigned and properly trained to 
oversee the performance of all contractors, especially for Contracts 
priced on a time and materials basis, and move toward fixed-price 
arrangements whenever possible; 

* continue to develop a comprehensive system of internal control over 
TARP, including policies, procedures, and guidance that are robust 
enough to protect taxpayers interests and ensure that the program 
objectives are being met; 

* issue final regulations on conflicts of interest quickly and review 
and renegotiate mitigation plans to enhance specificity and compliance; 
and: 

* institute a system to effectively manage and monitor the mitigation 
of conflicts of interest. 

It is too soon to determine whether the program is having the intended 
effect on credit and financial markets. Moreover, given that U.S. 
regulators as well as foreign governments are continuing to take a 
variety of actions aimed at stabilizing markets and the economy, 
separately evaluating the impact of Treasury’s efforts under TARP will 
be difficult. Nevertheless, GAO has identified a number of preliminary 
indicators that when viewed collectively should signal whether TARP as 
well as other related programs may be functioning as intended. Among 
these preliminary indicators are trends in interest rate spreads, 
mortgage rates, mortgage originations, and foreclosures. 

Treasury has operated on parallel tracks in implementing the act. The 
following timeline highlights key actions associated with program 
implementation to date. 

Timeline of Key Treasury Activities (Program Activities, Selection of 
Financial Agents and Contractors, and Organizational Activities), as of 
November 25, 2008: 

Program activities: 

10/14: Treasury announces that it will purchase up to $250 billion in 
financial firms’ preferred stock under TARP via the Capital Purchase 
Program (CPP)Nine major financial institutions agree to participate in 
CPP. Treasury issued executive compensation guidelines on Tuesday, 
October 14, for three TARP areas: CPP, Troubled Asset Auction Program, 
and Systemically Significant Failing. 

10/20: Treasury, the Federal Reserve, the Office of the Comptroller of 
the Currency, the Office of Thrift Supervision, and the Federal Deposit 
Insurance Corporation issue application guidelines and other documents 
for all banks wishing to participate in CPP. 

10/28: Treasury disburses capital injections to 8 of the 9 banks slated 
to participate in the first round of the CPP, resulting in the purchase 
of $115 billion in senior preferred shares of 8 national financial 
institutions. 

10/31: Treasury issues form documents for publicly traded financial 
institutions applying for CPP participation. 

11/10: Treasury announces that it will purchase $40 billion in senior 
preferred stock from the American International Group (AIG) under SSFI. 

11/14: Deadline for financial institutions to apply for participation 
in CPP. 

11/17: Treasury announces purchases of almost $33.6 billion in senior 
preferred shares from 21 financial institutions under CPP. 

11/21: Treasury purchases about $2.9 billion in senior preferred shares 
from 23 financial institutions under CPP. 

11/25: Treasury purchases $40 billion in senior preferred shares from 
AIG under the SSFI program. 

Selection of financial agents and contractors: 

10/6: Treasury solicits financial institutions interested in providing 
custodial and asset management services for TARP. 

10/8: Responses due from financial institutions interested in providing 
custodial and asset management services for TARP. 

10/13: Treasury announces it will contract with EnnisKnupp & Associates 
to provide investment consultant services on TARP. 

10/14: Treasury announces Bank of New York Mellon selected as financial 
agent to provide custodian services for TARP. 

10/16: Treasury announces award of contract to Simpson, Thacher & 
Bartlett to provide legal advice on the implementation of the act. 

10/21: Treasury announces it will contract for accounting and internal 
controls support services from PricewaterhouseCoopers and Ernst and 
Young under the Federal Supply Schedule. 

10/29: Treasury contracts with Hughes Hubbard & Reed, LLP, and Squire 
Sanders & Dempsey, LLP to provide legal advice on implementation of 
CPP. 

11/7: Treasury announces solicitation for financial agents to provide 
Equity, Debt, Warrants Asset Management Services to implement CPP. 

Organizational activities: 

10/3: Congress passes P.L. 110-343, the Emergency Economic 
Stabilization Act (the act), which authorized TARP. 

10/6: Treasury Secretary appoints Interim Assistant Secretary of the 
Treasury for Financial Stability to oversee the Office of Financial 
Stability (OFS). 

10/7: First meeting of the Financial Stability Oversight Board, 
established under the act. 

10/13: Treasury identifies individuals to fill chief positions within 
the OFS on an interim basis. 

10/22: Treasury Department announces appointment of Interim Chief 
Investment Officer for TARP. 

11/12: Secretary Paulson provides update on priorities for spending 
remaining TARP funds, including plans to provide support for 
securitizing credit outside of the banking system. 

Source: GAO. 

[End of timeline] 

What GAO Recommends: 

Treasury generally agreed with GAO’s recommendations, but had a 
different perspective on the need to monitor how participating 
institutions are spending CPP funds. GAO believes that monitoring 
aggregate information across the participants would help ensure an 
appropriate level of transparency and accountability. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-161]. For more 
information, contact Thomas McCool (202)512-2642. 

[End of section] 

Contents: 

Letter: 

Scope and Methodology: 

Results in Brief: 

Background: 

Treasury Has Moved Quickly to Establish CPP, but Plans for Other 
Approaches for Strengthening Financial Markets Are Ongoing: 

Efforts to Establish the Office of Financial Stability Are Ongoing: 

Measuring the Impact of TARP on Credit Markets and the Economy Will Be 
Challenging: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Analysis: 

Appendix I: Comments from the Department of the Treasury: 

Appendix II: GAO Contacts and Staff Acknowledgments: 

Tables: 

Table 1: Amount of Capital Investment and Characteristics of the 
Qualified Financial Institutions Participating in the Capital Purchase 
Program, as of November 25, 2008: 

Table 2: Financial Agency Agreement and Contracts Awarded, as of 
November 25, 2008: 

Table 3: GAO's Standards for Internal Control in the Federal 
Government: 

Figures: 

Figure 1: Process for Accepting and Approving CPP Applications, as of 
November 21, 2008: 

Figure 2: Organization of the Office of Financial Stability, as of 
November 21, 2008: 

Figure 3: Three-Month LIBOR and 3-Month Treasury Bill Yield: 

Figure 4: Yields on Corporate Bonds (Aaa and Baa) Relative to 10-year 
Treasury: 

Figure 5: Mortgage Rates (30-Year Fixed Rate, Conforming) and Treasury 
Yields: 

Figure 6: Mortgage Originations: 

Figure 7: Percentage of Loans in Foreclosure: 

Abbreviations: 

ABS: asset-backed security: 

AIG: American International Group: 

CBO: Congressional Budget Office: 

CBOE: Chicago Board of Options Exchange: 

CDFI: Community Development Financial Institutions Fund: 

CFO: chief financial officer: 

COO: chief operating officer: 

COSO: Committee of Sponsoring Organizations of the Treadway Commission: 

CPP: Capital Purchase Program: 

FAR: Federal Acquisition Regulation: 

FDIC: Federal Deposit Insurance Corporation: 

FHA: Federal Housing Administration: 

FHFA: Federal Housing Finance Agency: 

GSA: General Services Administration: 

HUD: Department of Housing and Urban Development: 

IMF: International Monetary Fund: 

LIBOR: London Interbank Offered Rate: 

MBS: mortgage-backed security: 

OCC: Office of the Comptroller of Currency: 

OFS: Office of Financial Stability: 

OTS: Office of Thrift Supervision: 

QFI: qualified financial institution: 

SAS: Statement of Accounting Standards: 

SEC: Securities and Exchange Commission: 

SSFI: Systemically Significant Failing Institution: 

TALF: Term Asset-backed Securities Loan Facility: 

TARP: Troubled Asset Relief Program: 

[End of section] 

United States Government Accountability Office:
Washington, DC 20548: 

December 2, 2008: 

Congressional Committees: 

The current financial crisis has threatened the stability of the U.S. 
banking system and the solvency of numerous financial institutions at 
home and abroad. On October 3, 2008, Congress passed and the President 
signed the Emergency Economic Stabilization Act of 2008 (the act), 
which established the Office of Financial Stability (OFS) within the 
Department of the Treasury (Treasury) and authorized the Troubled Asset 
Relief Program (TARP). Among other things, the act provides Treasury 
with broad, flexible authorities to buy up to $700 billion in "troubled 
assets" and allows Treasury to purchase and insure mortgages and 
securities based on mortgages and, in consultation with the Chairman of 
the Board of Governors of the Federal Reserve System (Federal Reserve), 
purchase any other financial instrument (e.g., equities) deemed 
necessary to stabilize financial markets.[Footnote 1] 

Before the bill was passed, TARP's primary focus was expected to be the 
purchase of mortgage-backed securities (MBS) and whole loans. Within 2 
weeks of enactment, however, following similar action by several 
foreign governments and central banks, Treasury announced that it would 
make $250 billion of the $700 billion available to U.S. financial 
institutions through purchases of preferred stock. The Federal Reserve 
and the Federal Deposit Insurance Corporation (FDIC) also announced 
concurrent coordinated actions that were intended to increase 
confidence in the U.S. financial system. FDIC announced that it would 
temporarily guarantee certain senior debt of all FDIC-insured 
institutions and certain holding companies, as well as deposits in 
noninterest bearing deposit transaction accounts at insured depository 
institutions.[Footnote 2] The Federal Reserve announced the details of 
its Commercial Paper Funding Facility program, which provides a broad 
backstop to the commercial paper market by funding purchases of 3-month 
commercial paper from high-quality issuers.[Footnote 3] The Federal 
Reserve and FDIC, among others, have also announced a variety of other 
initiatives aimed at addressing the current crisis, including the 
Federal Reserve's creation of a funding facility to support a private- 
sector initiative designed to provide liquidity to U.S. money market 
investors and the temporary increase in FDIC deposit insurance 
coverage.[Footnote 4] 

The act requires the U.S. Comptroller General to report at least every 
60 days, as appropriate, on findings resulting from oversight of TARP's 
performance in meeting the purposes of the act; the financial condition 
and internal controls of TARP, its representatives, and agents; the 
characteristics of both asset purchases and the disposition of assets 
acquired, including any related commitments that are entered into; 
TARP's efficiency in using the funds appropriated for the program's 
operation; TARP's compliance with applicable laws and regulations; and 
TARP's efforts to prevent, identify, and minimize conflicts of interest 
of those involved in its operations. In response to this mandate, this 
report addresses (1) the nature and purpose of activities that have 
been initiated under TARP as of November 25, 2008; (2) the structure of 
OFS, its use of contractors, and its system of internal controls; and 
(3) preliminary indicators of TARP performance. 

Scope and Methodology: 

To determine the nature and purpose of TARP activities since the 
passage of the act on October 3, 2008, through November 25, 2008, we 
reviewed documents from OFS that described the amounts, types, and 
terms of Treasury's purchases of preferred stocks and equity warrants 
under the Capital Purchase Program (CPP).[Footnote 5] We reviewed 
documentation and interviewed officials from OFS and the four primary 
banking regulators that are responsible for reviewing CPP applications-
-FDIC, Federal Reserve, Office of the Comptroller of Currency (OCC), 
and Office of Thrift Supervision (OTS)--on the process for selecting 
financial institutions to participate in CPP. We compared the 
evaluation criteria used by each of the regulators to determine that 
they were consistent with the criteria approved by Treasury and 
reviewed additional guidelines provided by the banking regulators to 
their regional offices. For the first eight institutions that received 
CPP funds, we reviewed the individual case memorandums documenting 
Treasury's decision to invest in these institutions.[Footnote 6] We are 
in the process of reviewing the regulators' and Treasury's guidance. To 
understand the requirements of CPP, we reviewed the standard agreements 
signed by the participating institutions and interviewed senior 
officials from OFS and the banking regulators. In addition, we reviewed 
documentation from and interviewed senior officials at the eight 
participating institutions on how their participation in the program 
would affect their operations, including how they planned to use the 
capital injection and whether they intended to report separately on 
their activities associated with capital investments. Specifically, the 
institutions included in this review are the Bank of America Corp.; 
Bank of New York Mellon Corp.; Citigroup, Inc.; Goldman Sachs Group, 
Inc.; JPMorgan Chase & Co.; Morgan Stanley; State Street Corp.; and 
Wells Fargo & Co. We also met with OFS and regulatory officials to 
discuss their plans for ensuring compliance with the requirements of 
the agreements between Treasury and participants, including those 
limiting executive compensation and restricting CPP participants from 
increasing dividend payments or repurchasing common stock. We also 
reviewed Treasury's interim final rule and notices implementing the 
act's executive compensation rules. To determine the status of OFS's 
progress in establishing a program to insure troubled assets--a program 
that Treasury chose to implement through OFS in conjunction with TARP-
-we reviewed OFS's request for public comments on potential program 
design and the comments Treasury received, and met with OFS officials. 
For other approaches that Treasury was considering and had not fully 
implemented, we met with officials from OFS and reviewed public 
statements by Treasury officials to determine the status of their 
efforts to address TARP requirements. 

To determine how Treasury had structured OFS, we reviewed a draft 
organizational chart and other planning documents to understand the 
number and types of positions OFS was planning to fill. We also met 
with Treasury and OFS officials regularly to discuss their approach to 
staffing the office in the near and long terms. We also discussed with 
them Treasury's plan for the transition to the next administration. As 
part of our responsibility for monitoring internal controls for TARP 
and its agents and representatives, we began regular meetings with OFS 
officials to learn what the office was doing to develop such controls 
for the office's operations and for programs such as CPP. We also 
reviewed information provided by PricewaterhouseCoopers, the firm that 
Treasury retained to help develop a system of internal control, and met 
with PricewaterhouseCoopers officials to learn about the approach they 
are taking. We also met with Ernst & Young officials who are helping 
OFS develop accounting procedures for TARP. Because CPP is the first 
TARP program to disburse funds, we reviewed documentation provided by 
OFS and PricewaterhouseCoopers that described the controls established 
for the initial disbursements and steps taken to implement these 
controls. We also met with officials from the Bank of New York Mellon 
to discuss the system of internal control for functions related to 
services the bank plans to provide for TARP, as well as to review the 
bank's internal audit process and recent reports. Our review included a 
report by the Bank of New York Mellon's external auditor on the 
internal controls over the Bank of New York Mellon's trust and 
custodial services and selected internal audit reports on key functions 
that will support TARP services.[Footnote 7] 

To assess Treasury's approaches to acquiring services in support of 
TARP, we reviewed the financial agency agreement Treasury entered into 
and the contracts that Treasury awarded between October 3, 2008, and 
November 25, 2008.[Footnote 8] We also reviewed Treasury's procurement 
strategy, solicitations, and other agency documents related to those 
agreements and contracts, as well as the statutes, regulations, and 
guidance governing the award of financial agency agreements and 
contracts. As part of this review, we examined documentation outlining 
the steps Treasury had taken to promote the use of small business 
concerns--including those owned and controlled by women, minorities, 
veterans, and socially and economically disadvantaged individuals--in 
carrying out TARP, such as Treasury guidance on small business 
participation in procurements under the act. We reviewed the proposals 
submitted by the firms that signed the financial agency agreement or 
were awarded contracts in order to identify the approaches those firms 
proposed for using small businesses. In addition, we examined 
documentation outlining actual and potential conflicts of interest 
identified by the financial agents and contractors, as well as their 
proposed plans for mitigation of those conflicts. We also reviewed 
Treasury's interim guidelines for conflicts of interest related to the 
authorities granted under the act and the statutes and regulations 
related to organizational and personal conflicts of interest, 
postemployment restrictions, and standards of ethical conduct. 

Finally, to identify a preliminary set of indicators on the state of 
credit and financial markets that might be suggestive of the 
performance and effectiveness of TARP, we consulted Treasury officials 
and other experts and analyzed available data sources and the academic 
literature. We selected a set of preliminary indicators that offered 
perspectives on different facets of credit and financial markets, 
including perceptions of risk, cost of credit, and flows of credit to 
businesses and consumers.[Footnote 9] We assessed the reliability of 
the preliminary indicators presented and found that despite certain 
limitations and the fact that others could interpret these indicators 
differently, they were sufficiently reliable for our purposes. The data 
used to construct the indicators in this report came largely from the 
Federal Reserve. As these data are widely used, including by GAO and 
the Federal Reserve, and are considered to be a reliable and often 
definitive source for banking sector data, we conducted only a limited 
review of the data but ensured that the trends we found were consistent 
with other research. We also relied on data from the Chicago Board 
Options Exchange (CBOE), Inside Mortgage Finance, and Global Insight. 
We have relied on CBOE and Global Insight data for past reports, and we 
determined that considered together, these auxiliary data were 
sufficiently reliable for the purpose of presenting and analyzing 
trends in financial markets. 

We conducted this performance audit in October 2008 and November 2008 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

Results in Brief: 

As of November 25, 2008, Treasury's focus in implementing TARP has been 
on investing directly in regulated financial institutions through CPP, 
which is intended to provide financial institutions with additional 
capital through purchases of senior preferred stock. Treasury stated 
that it chose to implement CPP because it concluded that the worsening 
conditions in the financial market required a more immediate response 
than would have been possible through the purchase of mortgage-related 
assets. This shift in the direction of the program heightened the need 
for Treasury to proactively provide sufficient information to external 
stakeholders about not only the change in strategy but also the 
rationale for the new focus. As of November 25, 2008, Treasury had 
allocated $250 billion to CPP and purchased $115 billion in senior 
preferred shares of 8 national financial institutions and almost $36.5 
billion in senior preferred shares of 44 financial institutions. 
[Footnote 10] Treasury has stated that by building capital, CPP should 
help increase the flow of financing to U.S. businesses and consumers 
and support the U.S. economy. Treasury also has indicated that it 
intends to use CPP to encourage financial institutions to work to 
modify the terms of existing residential mortgages. Treasury has not 
yet determined if it will impose reporting requirements on the 
participating financial institutions. Such requirements would enable 
Treasury to monitor, to some extent, how the infusions were being used. 
Treasury and the banking regulators have taken important steps to 
ensure consistency in evaluating applications, but the extent to which 
regulators have provided guidance to their staff concerning denials of 
applications has varied. Institutions participating in CPP must comply 
with certain requirements regarding executive compensation--for example 
certain senior executives must repay any incentive or bonus 
compensation that was based on materially inaccurate financial 
statements. Treasury has not yet determined how it will monitor 
compliance with this or other requirements such as limitations on 
dividend payments and stock repurchases. It is also unclear what other 
approaches Treasury will pursue to meet the purposes of the act, 
including insuring mortgage-related assets. Treasury recently stated 
that it intends to purchase mortgage-related assets only on a targeted 
basis. In addition, Treasury has taken initial steps to gather comments 
on ways of using its authority to insure troubled assets and is 
exploring approaches to supporting loan modification efforts. Without a 
strong oversight and monitoring function, Treasury's ability to help 
ensure an appropriate level of accountability and transparency will be 
limited. Moreover, a strengthened communication strategy could help 
avoid information gaps as market conditions and TARP continue to 
evolve. 

Treasury quickly established an overall organizational structure for 
OFS, filled key leadership roles, and contracted for support services. 
Currently, it is working to hire the full complement (perhaps as many 
as 200 full-time-equivalent positions) of staff, and OFS officials said 
that about 48 employees were assigned to TARP as of November 21, 2008, 
including those from other Treasury offices, federal agencies, and 
organizations who were providing assistance on a temporary basis and 5 
permanent hires. Identifying and hiring the numbers and types of staff 
needed to successfully operate TARP will be challenging because of the 
evolving nature of the program and the transition to a new 
administration. While Treasury has filled key positions on an interim 
basis, these same issues may limit its ability to ensure that key 
leadership positions at OFS remain filled both during and after the 
transition, potentially creating uncertainty about the direction of the 
program and impeding efforts to effectively implement TARP. In addition 
to using permanent staff, OFS plans to rely on contractors and 
financial agents in several key areas. Treasury used expedited 
solicitation procedures and structured the agreements to allow for 
flexibility in procuring the required services. For the most part, the 
contracts awarded as of November 25, 2008, are priced on a time-and- 
materials basis, which provides for payments to the contractors based 
on a set labor rate for hours billed plus the cost of any materials. 
This type of pricing arrangement requires enhanced oversight. Treasury 
has also taken steps to help promote the use of small businesses in 
carrying out TARP and issued interim guidelines to address potential 
and actual conflicts of interest. As required by Treasury, the 
financial agent and contractors selected have identified a variety of 
potential and actual conflicts of interest and proposed a variety of 
solutions to mitigate identified conflicts. However, the agent and 
contractors have provided few written details on how they intend to 
implement mitigation plans or communicate related issues to OFS, and 
OFS has not yet developed a process for monitoring conflicts of 
interest. Recognizing the importance of internal controls, Treasury 
awarded one of the first contracts to PricewaterhouseCoopers to assist 
OFS in developing and implementing a comprehensive system of internal 
controls over TARP activities, including a risk-assessment framework. 
However, the rapid pace of implementation and evolving nature of the 
program have hampered efforts to put a comprehensive system of internal 
control in place. Instead OFS has focused on specific transaction 
controls as programs such as CPP are implemented. While OFS and 
PricewaterhouseCoopers are working to implement a comprehensive system 
of internal control, until such a system is fully developed and 
implemented, there is heightened risk that the interests of the 
government and taxpayers may not be adequately protected and that the 
program objectives may not be achieved in an efficient and effective 
manner. 

It is too soon to determine whether the program is having the intended 
effect on credit and other markets. While TARP's CPP could improve 
confidence in participating financial institutions and may have 
beneficial effects on credit markets, attributing any such improvement 
solely to TARP is problematic because of the range of actions that have 
been and are being taken to address the current crisis. These include 
coordinated efforts by the global community and U.S. regulators-- 
namely, FDIC, the Federal Reserve, and the Federal Housing Finance 
Agency (FHFA)--as well as actions by financial institutions to mitigate 
foreclosures. We have identified a set of preliminary indicators that 
we will monitor for indications of improvements in credit and financial 
markets, such as the narrowing of various interest rate spreads that 
signal perceptions about the level of risk associated with lending 
among banks, in corporate debt markets, and throughout the general 
economy and reductions in the cost of credit for banks, businesses, and 
consumers. Over time, additional effects might be apparent in credit 
flows that capture key developments in mortgage markets and the level 
of defaults and foreclosures. While these indicators may be suggestive 
of TARP's ongoing impact, which we will be monitoring, no single 
indicator or set of indicators will provide a definitive determination 
of the program's impact. Moreover, we plan to report on additional 
indicators as more data become available and as economic and credit 
conditions evolve. 

We recognize that less than 60 days has passed since the program was 
created and the inherent difficulty of setting up any new program, 
especially during turbulent economic conditions. However, we have 
identified a number of areas that warrant Treasury's ongoing attention. 
Therefore, we are recommending that Treasury take a number of actions 
aimed at improving the integrity, accountability, and transparency of 
TARP. Specifically, Treasury should: 

* work with the bank regulators to establish a systematic means of 
determining and reporting in a timely manner whether financial 
institutions' activities are generally consistent with the purposes of 
CPP; 

* develop a means to ensure that institutions participating in CPP 
comply with key requirements of their agreements with Treasury, 
including those covering limitations on executive compensation, 
dividend payments, and the repurchase of stock; 

* formalize the existing communication strategy to ensure that external 
stakeholders, including Congress and the public, are informed about the 
program's current strategy and activities as well as the rationale for 
changes in this strategy to avoid information gaps and surprises; 

* develop a definitive transition plan by building on and formalizing 
ongoing activities to facilitate a smooth transition to the new 
administration, including ensuring that key OFS leadership positions 
are filled during and after the transition to the new administration; 

* continue OFS hiring efforts in an expeditious manner to ensure that 
Treasury has the personnel needed to carry out and oversee TARP; 

* ensure that sufficient numbers of personnel are assigned and 
appropriately trained to oversee the performance of all contractors, 
especially those performing under contracts priced on a time and 
materials basis, and move toward greater reliance on fixed-price 
arrangements whenever possible as program requirements are better 
defined over time; 

* continue to develop a comprehensive system of internal controls over 
TARP including policies, procedures, and guidance for program 
activities that are robust enough to ensure that government's and 
taxpayers' interests are protected and that the program objectives and 
requirements are being met; 

* issue final regulations on conflicts of interest concerning its 
contractors and financial agents as expeditiously as possible and 
review and renegotiate mitigation plans as necessary to enhance 
specificity and compliance with the new regulations once they are 
issued; and: 

* institute a system to effectively manage and monitor the mitigation 
of conflicts of interest. 

We provided a draft of this report to Treasury for review and comment. 
We also provided excerpts of the draft report to the Federal Reserve, 
FDIC, OCC and OTS for review and comment. In written comments, Treasury 
generally agreed with the report and eight of the nine recommendations 
(see app. I). Treasury had a different perspective on what should be 
done to evaluate how institutions were using funds received under CPP, 
opting for development of general metrics for evaluating the overall 
success of CPP rather than working with bank regulators to establish a 
systematic means for determining whether financial institutions' uses 
of CPP funds were consistent with the purposes of the program, as we 
recommended. In technical comments, the Federal Reserve also expressed 
concern about whether Treasury needed to monitor individual 
institutions' use of CPP funds. As discussed in the draft, we agree 
that it will be important to develop a range of metrics to evaluate the 
overall success of CPP and we welcome continued discussions with 
Treasury and the bank regulators on general metrics to achieve this 
purpose. However, given the magnitude of funds provided to this 
program, these types of metrics alone will not provide the necessary 
transparency and accountability needed to ensure that participating 
institutions are using the funds in a manner that is consistent with 
the purposes of the act. As stated in the report, Treasury should build 
on the existing oversight mechanisms of the banking regulators to 
minimize any additional regulatory burden and develop a means of 
reviewing and reporting on planned and actual actions taken by 
participating financial institutions resulting from the additional 
funding received through CPP. Obtaining such information could help 
Treasury better monitor participating institutions' activities and 
provide an appropriate level of accountability and transparency. 
Moreover, such information aggregated across the participants would 
also provide an alternative basis to assess the effect of TARP in 
restoring liquidity and stability to the financial system. Treasury, 
the Federal Reserve, FDIC, OCC, and OTS also provided technical 
comments that we incorporated in the report, as appropriate. 

Background: 

The dramatic correction in the U.S. housing market precipitated a 
decline in the price of financial assets that were associated with 
housing, in particular mortgage assets based on subprime loans that 
lost value as the housing boom ended and the market underwent a 
dramatic correction. Some institutions found themselves so exposed that 
they were threatened with failure--and some failed--because they were 
unable to raise the necessary capital as the value of their portfolios 
declined. Other institutions, ranging from government-sponsored 
enterprises such as Fannie Mae and Freddie Mac to Wall Street firms, 
were left holding "toxic" mortgages that became increasingly difficult 
to value, were illiquid, and potentially had little worth. Moreover, 
investors not only stopped buying securities backed by mortgages but 
also became reluctant to buy securities backed by many types of assets. 
Because of uncertainty about the financial condition and solvency of 
financial entities, the prices banks charged each other for funds rose 
dramatically, and interbank lending effectively came to a halt. The 
resulting credit crunch made the financing on which businesses and 
individuals depend increasingly difficult to obtain as cash-strapped 
banks held onto their assets. By late summer of 2008, the potential 
ramifications of the financial crisis ranged from the continued failure 
of financial institutions to increased losses of individual savings and 
corporate investments and further tightening of credit that would 
exacerbate the emerging global economic slowdown that was beginning to 
take shape. 

In September 2008, the Secretary of the Treasury announced that he was 
working with the chairmen of the Federal Reserve and the Securities and 
Exchange Commission (SEC) and congressional leaders to develop a 
comprehensive approach to the crisis facing financial institutions and 
markets. Until that time, the administration had responded to the 
ongoing problems in the financial sector on a case-by-case basis, 
facilitating JPMorgan Chase's purchase of Bear Stearns, addressing 
problems at Fannie Mae and Freddie Mac, working with market 
participants to prepare for the failure of Lehman Brothers, and lending 
to American International Group (AIG) to allow it to sell some of its 
assets in an orderly manner. Although Treasury had begun to take a 
number of broader steps, including establishing a temporary guarantee 
program for money market funds in the United States, it decided that 
additional and comprehensive action was needed to address the root 
cause of the financial system's stresses. On September 20, 2008, 
Treasury proposed draft legislation to allow it to purchase up to $700 
billion in troubled mortgage-related assets. Although the legislation 
was initially rejected by the House of Representatives on September 29, 
the Senate passed an expanded version of the legislation on October 1, 
and on October 3, the act was passed by the House of Representatives 
and signed into law by the President. 

The act, as it relates to TARP, provides Treasury with the authority to 
purchase and insure certain types of troubled assets for the purposes 
of providing stability to and preventing disruptions in the economy and 
financial system and protecting taxpayers. The purposes of the act are 
to immediately provide authority and facilities that Treasury can use 
to restore liquidity and stability to the U.S. financial system and to 
ensure that these activities are consistent with protecting home 
values, college funds, retirement accounts, and life savings; 
preserving homeownership and promoting jobs and economic growth; 
maximizing overall returns to U.S. taxpayers; and providing public 
accountability for the exercise of authority under the act. 

In exercising its authorities, the act further states that Treasury 
must consider a variety of additional factors, including the following: 

* minimizing the impact on the national debt; 

* providing stability for and preventing disruption to financial 
markets; 

* considering the long-term viability of financial institution in 
determining whether a direct purchase represents the most efficient use 
of funds under the act; 

* ensuring that all financial institutions are eligible to participate 
in the program, regardless of size, geographic location, form of 
organization, or amount of assets eligible for purchase under the act; 

* providing financial assistance to financial institutions--including 
those serving low-and moderate-income populations and other underserved 
communities, and that have assets of less than $1 billion; that were 
well or adequately capitalized as of June 30, 2008; and that as a 
result of the devaluation of the preferred government-sponsored 
enterprises, will see their stock drop one or more capital levels--in a 
manner sufficient to restore the financial institutions to at least an 
adequately capitalized level; 

* ensuring stability for U.S. public instrumentalities, such as 
counties and cities, that may have suffered significant increased costs 
or losses in the current market turmoil; 

* considering the retirement security of Americans by purchasing 
troubled assets held by or on behalf of an eligible retirement plan; 
[Footnote 11] and: 

* considering the utility of purchasing other real estate owned and 
instruments backed by mortgages on multifamily properties. 

The act also requires several new and existing entities, in addition to 
the U.S. Comptroller General, to oversee the activities of OFS and 
TARP. For example, the legislation created the Financial Stability 
Oversight Board, which includes the Chairman of the Federal Reserve; 
the Secretary of the Treasury; the Director of FHFA; the Chairman of 
SEC, and the Secretary of Housing and Urban Development (HUD).[Footnote 
12] Moreover, it created a Special Inspector General for the program as 
well as a Congressional Oversight Panel.[Footnote 13] 

Treasury and federal and state regulators all play a role in regulating 
and monitoring the financial system. Historically, Treasury's mission 
has been to act as steward of U.S. economic and financial systems and 
to participate in and influence the global economy. As such, Treasury 
is responsible for a wide range of activities, helping to frame 
economic and financial policies and encourage sustainable economic 
growth. Among its many activities is working to predict and prevent 
economic and financial crises, positioning Treasury to take a leading 
role in addressing underlying issues such as those currently facing the 
U.S. financial system. The key federal banking regulators include the 
following: 

* Federal Reserve, which is responsible for (among other things) 
conducting the nation's monetary policy by influencing the monetary and 
credit conditions in the economy in pursuit of maximum employment, 
stable prices, and moderate long-term interest rates; supervising and 
regulating bank holding companies and banks that are members of the 
Federal Reserve System; and maintaining the stability of the financial 
system and containing systemic risk that may arise in financial 
markets; 

* FDIC, an independent agency created to help maintain stability and 
public confidence in the nation's financial system by insuring 
deposits, examining and supervising state-chartered banks that are not 
members of the Federal Reserve System, and managing receiverships; 

* OCC, which charters and supervises national banks; and: 

* OTS, which supervises savings associations (thrifts) and savings 
association holding companies. 

As discussed in the next section of this report, these bank regulators 
have a role in reviewing the applications of financial institutions 
applying for CPP. 

Treasury Has Moved Quickly to Establish CPP, but Plans for Other 
Approaches for Strengthening Financial Markets Are Ongoing: 

Treasury's focus on implementing TARP thus far has been on directly 
investing in regulated financial institutions through CPP, with federal 
banking regulators playing a role in evaluating potential participants. 
Treasury had purchased more than $150 billion in senior preferred 
shares of 52 financial institutions as of November 25, 2008. Treasury 
has stated that it intends to use CPP to encourage U.S. financial 
institutions to increase the flow of financing to U.S. businesses and 
consumers and to support the U.S. economy. Treasury has also indicated 
that it intends to use CPP to encourage financial institutions to work 
to modify the terms of existing residential mortgages. OFS has not yet 
determined if it will impose reporting requirements on the 
participating financial institutions that could enable OFS to monitor, 
to some extent, how the financial institutions are using capital 
infusions. Institutions participating in CPP have agreed to comply with 
certain requirements, such as limitations on executive compensation, 
dividend payments, and repurchases of stock. However, Treasury has not 
yet determined how it will ensure compliance with these requirements. 
The extent to which Treasury will pursue other approaches to 
strengthening financial markets, including insuring troubled assets, to 
meet the purposes of the act also remains uncertain. But without 
effective oversight, Treasury cannot ensure that those receiving funds 
are complying with CPP requirements. 

Treasury's Focus Has Shifted Away from the Purchase of Mortgage-related 
Assets: 

The act authorized the Secretary of the Treasury to purchase mortgages 
and MBS, and, in consultation with the Chairman of the Federal Reserve, 
to purchase other financial instruments if such purchases were deemed 
necessary to promote financial market stability. On October 13, 2008, 
consistent with conditions prescribed by the act, Treasury notified 
Congress that Treasury officials had determined that it would be 
necessary under TARP to purchase preferred stocks and warrants issued 
by certain financial institutions.[Footnote 14] On October 14, Treasury 
announced that it would make direct capital investments in financial 
institutions in exchange for preferred stocks and warrants through CPP. 
[Footnote 15] Treasury stated that strengthening capital via 
investments under this program was the swiftest mechanism to stabilize 
the financial markets, encourage interbank lending, and increase 
confidence in lenders and investors. Further, at the time Treasury 
stated that it planned to continue developing a program to purchase 
mortgages and MBS and would seek public comments on structuring a 
program to insure these assets. On November 12, Treasury announced that 
it would move away from purchasing mortgages and MBS as originally 
planned because it believed that such purchases were not the best use 
of TARP funds, although targeted purchases of such assets were still 
under consideration. Instead, Treasury planned to focus on extending 
capital investments to nonbank financial institutions and providing 
federal financing to investors of highly rated asset-backed securities 
(ABS) to lower the cost of and increase the availability of credit for 
consumers. The ABS market provides liquidity to financial institutions 
that provide small business loans and consumer lending such as auto 
loans, student loans, and credit cards. In addition, Treasury stated 
that it would develop strategies to stabilize the real estate market by 
encouraging loan modifications. While Treasury has used a variety of 
mechanisms to make sure the program is transparent, the shift in the 
direction of the program to CPP highlighted the need for Treasury to 
more actively provide sufficient information to external stakeholders 
(e.g., Congress and the public) about changes in its planned strategy 
and activities as well as the rationale for any shift to avoid future 
information gaps and surprises. 

Treasury Has Invested More than $150 Billion in 52 Financial 
Institutions: 

Treasury had made more than $150 billion in capital investments in 52 
financial institutions as of November 25, 2008. On October 14, 2008, in 
conjunction with similar actions by foreign governments and coordinated 
actions by the Federal Reserve and FDIC, Treasury announced that it 
planned to use $250 billion to purchase senior preferred shares in a 
broad array of qualifying financial institutions.[Footnote 16] Treasury 
approved $125 billion in capital purchases for nine of the largest 
public financial institutions considered by the federal banking 
regulators and Treasury to be systemically significant to the operation 
of the financial system. Together, these institutions hold about 55 
percent of U.S. banking assets. These nine institutions provide a 
variety of services, including retail and wholesale banking, investment 
banking, and custodial/processing services. According to Treasury 
officials, the nine financial institutions agreed to participate in 
part to signal the importance of the program to the stability of the 
financial system. On October 28, 2008, Treasury settled the capital 
purchase transactions with eight of these institutions for a total of 
$115 billion.[Footnote 17] According to Treasury, the remaining $10 
billion will be settled when the merger of Bank of America Corporation 
and Merrill Lynch & Co., Inc. is complete, sometime before January 31, 
2009. Table 1 provides information about the first eight institutions 
selected for capital investment as well as other investments.[Footnote 
18] 

Table 1: Amount of Capital Investment and Characteristics of the 
Qualified Financial Institutions Participating in the Capital Purchase 
Program, as of November 25, 2008: 

Purchases on October 28, 2008: 

Name of qualified financial institution: (Location of qualified 
financial institution): Bank of America Corp.; (Charlotte, N.C.); 
Capital purchased by Treasury (in millions): $15,000; 
Total company assets as of September 2008 (in millions): $1,831,000. 

Name of qualified financial institution: (Location of qualified 
financial institution): Bank of New York Mellon Corp.; (New York City, 
N.Y.); 
Capital purchased by Treasury (in millions): $3,000; 
Total company assets as of September 2008 (in millions): $268,000. 

Name of qualified financial institution: (Location of qualified 
financial institution): Citigroup, Inc.; (New York City, N.Y.); 
Capital purchased by Treasury (in millions): $25,000[A]; 
Total company assets as of September 2008 (in millions): $2,050,000. 

Name of qualified financial institution: (Location of qualified 
financial institution): Goldman Sachs Group, Inc.; (New York City, 
N.Y.); 
Capital purchased by Treasury (in millions): $10,000; 
Total company assets as of September 2008 (in millions): $1,082,000[B]. 

Name of qualified financial institution: (Location of qualified 
financial institution): JPMorgan Chase & Co.; (New York City, N.Y.); 
Capital purchased by Treasury (in millions): $25,000; 
Total company assets as of September 2008 (in millions): $2,251,000. 

Name of qualified financial institution: (Location of qualified 
financial institution): Morgan Stanley; (New York City, N.Y.); 
Capital purchased by Treasury (in millions): $10,000; 
Total company assets as of September 2008 (in millions): $987,000[C]. 

Name of qualified financial institution: (Location of qualified 
financial institution): State Street Corp.; (Boston, Mass.); 
Capital purchased by Treasury (in millions): $2,000; 
Total company assets as of September 2008 (in millions): $286,000. 

Name of qualified financial institution: (Location of qualified 
financial institution): Wells Fargo & Co.; (San Francisco, Calif.); 
Capital purchased by Treasury (in millions): $25,000; 
Total company assets as of September 2008 (in millions): $1,371,000[D]. 

Subtotal: 
Capital purchased by Treasury (in millions): $115,000; 
Total company assets as of September 2008 (in millions): $10,126,000. 

Purchases on November 14, 2008: 

Name of qualified financial institution: (Location of qualified 
financial institution): Bank of Commerce Holdings; (Redding, Calif.); 
Capital purchased by Treasury (in millions): $17; 
Total company assets as of September 2008 (in millions): $651. 

Name of qualified financial institution: (Location of qualified 
financial institution): 1st FS Corporation; (Hendersonville, N.C.); 
Capital purchased by Treasury (in millions): $16; 
Total company assets as of September 2008 (in millions): $670. 

Name of qualified financial institution: (Location of qualified 
financial institution): UCBH Holdings, Inc.; (San Francisco, Calif.); 
Capital purchased by Treasury (in millions): $299; 
Total company assets as of September 2008 (in millions): $13,044. 

Name of qualified financial institution: (Location of qualified 
financial institution): Northern Trust Corporation; (Chicago, Ill.); 
Capital purchased by Treasury (in millions): $1,576; 
Total company assets as of September 2008 (in millions): $79,244. 

Name of qualified financial institution: (Location of qualified 
financial institution): SunTrust Banks, Inc.; (Atlanta, Ga.); 
Capital purchased by Treasury (in millions): $3,500; 
Total company assets as of September 2008 (in millions): $174,777. 

Name of qualified financial institution: (Location of qualified 
financial institution): Broadway Financial Corporation; (Los Angeles, 
Calif.); 
Capital purchased by Treasury (in millions): $9; 
Total company assets as of September 2008 (in millions): $404. 

Name of qualified financial institution: (Location of qualified 
financial institution): Washington Federal Inc.; (Seattle, Wash.); 
Capital purchased by Treasury (in millions): $200; Total company assets 
as of September 2008 (in millions): $11,795. 

Name of qualified financial institution: (Location of qualified 
financial institution): BB&T Corp.; (Winston-Salem, N.C.); 
Capital purchased by Treasury (in millions): $3,134; 
Total company assets as of September 2008 (in millions): $137. 

Name of qualified financial institution: (Location of qualified 
financial institution): Provident Bancshares Corp.; (Baltimore, Md.); 
Capital purchased by Treasury (in millions): $152; 
Total company assets as of September 2008 (in millions): $6,410. 

Name of qualified financial institution: (Location of qualified 
financial institution): Umpqua Holdings Corp.; (Portland, Ore.); 
Capital purchased by Treasury (in millions): $214; 
Total company assets as of September 2008 (in millions): $8,328. 

Name of qualified financial institution: (Location of qualified 
financial institution): Comerica Inc.; (Dallas, Tex.); 
Capital purchased by Treasury (in millions): $2,250; 
Total company assets as of September 2008 (in millions): $65,153. 

Name of qualified financial institution: (Location of qualified 
financial institution): Regions Financial Corp.; (Birmingham, Ala.); 
Capital purchased by Treasury (in millions): 3,500; 
Total company assets as of September 2008 (in millions): 144,292. 

Name of qualified financial institution: (Location of qualified 
financial institution): Capital One Financial Corporation; (McLean, 
Va,); 
Capital purchased by Treasury (in millions): $3,555; 
Total company assets as of September 2008 (in millions): $154,803. 

Name of qualified financial institution: (Location of qualified 
financial institution): First Horizon National Corporation; (Memphis, 
Tenn.); 
Capital purchased by Treasury (in millions): $867; 
Total company assets as of September 2008 (in millions): $32,804. 

Name of qualified financial institution: (Location of qualified 
financial institution): Huntington Bancshares; (Columbus, Ohio); 
Capital purchased by Treasury (in millions): $1,398; 
Total company assets as of September 2008 (in millions): $54,661. 

Name of qualified financial institution: (Location of qualified 
financial institution): KeyCorp; (Cleveland, Ohio); 
Capital purchased by Treasury (in millions): $2,500; 
Total company assets as of September 2008 (in millions): $101,290. 

Name of qualified financial institution: (Location of qualified 
financial institution): Valley National Bancorp; (Wayne, N.J.); Capital 
purchased by Treasury (in millions): $300; 
Total company assets as of September 2008 (in millions): $14,288. 

Name of qualified financial institution: (Location of qualified 
financial institution): Zions Bancorporation; (Salt Lake City, Utah); 
Capital purchased by Treasury (in millions): $1,400; 
Total company assets as of September 2008 (in millions): $53,974. 

Name of qualified financial institution: (Location of qualified 
financial institution): Marshall & Ilsley Corporation; (Milwaukee, 
Wisc.); 
Capital purchased by Treasury (in millions): $1,715; 
Total company assets as of September 2008 (in millions): $63,501. 

Name of qualified financial institution: (Location of qualified 
financial institution): U.S. Bancorp; (Minneapolis, Minn.); 
Capital purchased by Treasury (in millions): $6,599; 
Total company assets as of September 2008 (in millions): $247,055. 

Name of qualified financial institution: (Location of qualified 
financial institution): TCF Financial Corporation; (Wayzata, Minn.); 
Capital purchased by Treasury (in millions): $361; 
Total company assets as of September 2008 (in millions): $16,511. 

Subtotal: 
Capital purchased by Treasury (in millions): $33,562; 
Total company assets as of September 2008 (in millions): $1,235,464. 

Purchases on November 21, 2008: 

Name of qualified financial institution: (Location of qualified 
financial institution): Ameris Bancorp; (Moultrie, Ga.); 
Capital purchased by Treasury (in millions): $52; 
Total company assets as of September 2008 (in millions): $2,258. 

Name of qualified financial institution: (Location of qualified 
financial institution): Associated Banc-Corp; (Green Bay, Wisc.); 
Capital purchased by Treasury (in millions): $525; 
Total company assets as of September 2008 (in millions): $22,487. 

Name of qualified financial institution: (Location of qualified 
financial institution): Banner Corporation/Banner Bank; (Walla Walla, 
Wash); 
Capital purchased by Treasury (in millions): $124; 
Total company assets as of September 2008 (in millions): $4,650. 

Name of qualified financial institution: (Location of qualified 
financial institution): Boston Private Financial; (Boston, Mass.); 
Capital purchased by Treasury (in millions): $154; 
Total company assets as of September 2008 (in millions): $7,022. 

Name of qualified financial institution: (Location of qualified 
financial institution): Cascade Financial Corporation; (Everett, 
Wash.); 
Capital purchased by Treasury (in millions): $39; 
Total company assets as of September 2008 (in millions): $1,552. 

Name of qualified financial institution: (Location of qualified 
financial institution): Centerstate Banks Of Florida Inc.; (Davenport, 
Fla.); 
Capital purchased by Treasury (in millions): $28; 
Total company assets as of September 2008 (in millions): $1,235. 

Name of qualified financial institution: (Location of qualified 
financial institution): City National Corporation; (Beverly Hills, 
Calif.); 
Capital purchased by Treasury (in millions): $400; 
Total company assets as of September 2008 (in millions): $16,331. 

Name of qualified financial institution: (Location of qualified 
financial institution): Columbia Banking System, Inc.; (Tacoma, Wash.); 
Capital purchased by Treasury (in millions): $77; 
Total company assets as of September 2008 (in millions): $3,105. 

Name of qualified financial institution: (Location of qualified 
financial institution): First Community Bancshares Inc.; (Bluefield, 
Va.); 
Capital purchased by Treasury (in millions): $42; 
Total company assets as of September 2008 (in millions): $1,967. 

Name of qualified financial institution: (Location of qualified 
financial institution): First Community Corporation; (Lexington, S.C.); 
Capital purchased by Treasury (in millions): $11; 
Total company assets as of September 2008 (in millions): $634. 

Name of qualified financial institution: (Location of qualified 
financial institution): First Niagra Financial Group; (Rockport, N.Y.); 
Capital purchased by Treasury (in millions): $184; 
Total company assets as of September 2008 (in millions): $9,008. 

Name of qualified financial institution: (Location of qualified 
financial institution): First Pactrust Bancorp, Inc.; (Chula Vista, 
Calif.); 
Capital purchased by Treasury (in millions): $19; 
Total company assets as of September 2008 (in millions): $846. 

Name of qualified financial institution: (Location of qualified 
financial institution): Heritage Commerce Corp; (San Jose, Calif.); 
Capital purchased by Treasury (in millions): $40; 
Total company assets as of September 2008 (in millions): $1,512. 

Name of qualified financial institution: (Location of qualified 
financial institution): Heritage Financial Corporation; (Olympia, 
Wash.); 
Capital purchased by Treasury (in millions): $24; 
Total company assets as of September 2008 (in millions): $905. 

Name of qualified financial institution: (Location of qualified 
financial institution): Hf Financial Corp.; (Sioux Falls, S. Dak.); 
Capital purchased by Treasury (in millions): $25; 
Total company assets as of September 2008 (in millions): $1,128. 

Name of qualified financial institution: (Location of qualified 
financial institution): Nara Bancorp, Inc.; (Los Angeles, Calf.); 
Capital purchased by Treasury (in millions): $67; 
Total company assets as of September 2008 (in millions): $2,598. 

Name of qualified financial institution: (Location of qualified 
financial institution): Pacific Capital Bancorp; (Santa Barbara, 
Calif.); 
Capital purchased by Treasury (in millions): $181; 
Total company assets as of September 2008 (in millions): $7,689. 

Name of qualified financial institution: (Location of qualified 
financial institution): Porter Bancorp Inc; (Louisville, Ky.); 
Capital purchased by Treasury (in millions): $35; 
Total company assets as of September 2008 (in millions): $1,596. 

Name of qualified financial institution: (Location of qualified 
financial institution): Severn Bancorp, Inc.; (Annapolis, Md.); 
Capital purchased by Treasury (in millions): $23; 
Total company assets as of September 2008 (in millions): $964. 

Name of qualified financial institution: (Location of qualified 
financial institution): Taylor Capital Group; (Rosemont, Ill.); 
Capital purchased by Treasury (in millions): $105; 
Total company assets as of September 2008 (in millions): $4,075. 

Name of qualified financial institution: (Location of qualified 
financial institution): Trustmark Corporation; (Jackson, Miss.); 
Capital purchased by Treasury (in millions): $215; 
Total company assets as of September 2008 (in millions): $9,086. 

Name of qualified financial institution: (Location of qualified 
financial institution): Webster Financial Corporation; (Waterbury, 
Conn.); 
Capital purchased by Treasury (in millions): $400; 
Total company assets as of September 2008 (in millions): $17,516. 

Name of qualified financial institution: (Location of qualified 
financial institution): Western Alliance Bancorporation; (Las Vegas, 
Nev.); 
Capital purchased by Treasury (in millions): $140; 
Total company assets as of September 2008 (in millions): $5,229. 

Subtotal: 
Capital purchased by Treasury (in millions): $2,910; 
Total company assets as of September 2008 (in millions): $123,393. 

Grand Total: 
Capital purchased by Treasury (in millions): $151,472; 
Total company assets as of September 2008 (in millions): $11,484,857. 

Sources: Treasury and SEC (Form 10-Q). 

Note: Table does not include the $10 billion purchase of Merrill Lynch 
& Co. preferred stock because the settlement of this purchase is 
pending completion of its merger with Bank of America. 

[A] On November 23, 2008, Treasury announced that it was purchasing an 
additional $20 billion in preferred shares from Citigroup, Inc. TARP 
funds were used, but this additional purchase was not part of CPP. 

[B] Data as of August 29, 2008. 

[C] Data as of August 31, 2008. 

[D] Based on estimated 12-31-08 Pro Forma financial statements to 
reflect the purchase of Wachovia Corporation. 

[End of table] 

Treasury made the remaining $125 billion available for additional 
qualified financial institutions. The period for public financial 
institutions to apply for the capital purchase ended on November 14, 
2008. As shown in table 1, Treasury purchased almost $33.6 billion of 
senior preferred stock in 21 financial institutions on November 14, 
2008 and an additional $2.9 billion in 23 financial institutions on 
November 21, 2008. The institutions varied in size, and purchases 
ranged from $9 million to $6.6 billion per institution. According to 
Treasury, it intends to make final eligibility and purchase decisions 
for qualifying financial institutions by the end of 2008. 

Terms of the Capital Purchase Program Agreements: 

Under CPP, a qualified financial institution can receive a minimum 
investment of 1 percent of its risk-weighted assets, up to the lesser 
of $25 billion or 3 percent of those risk-weighted assets.[Footnote 19] 
In exchange for the investment, Treasury receives shares of senior 
preferred stock that will pay dividends at a rate of 5 percent annually 
for the first 5 years and 9 percent annually thereafter. Such shares 
are nonvoting, except with respect to protecting investors' rights. The 
financial institutions can redeem their shares at their face value 
after 3 years. At any time before that time, however, the shares can be 
redeemed if the financial institution has received a minimum amount 
from "qualified equity offerings" of any Tier 1 perpetual preferred or 
common stock.[Footnote 20] Treasury may also transfer the senior 
preferred shares to a third party at any time. 

Treasury will also receive warrants to purchase a number of shares of 
common stock with a total market value equal to 15 percent of the 
senior preferred investment for publicly traded securities and 5 
percent for privately held securities. The exercise price on the 
warrants will generally be based on the market price of the 
participating institution's common stock at the date of the Treasury's 
acceptance of the financial institution's application to participate in 
CPP. The exercise price is reduced by 15 percent of the original 
exercise price on each 6-month anniversary of the issue date of the 
warrants if certain shareholder approvals are not obtained, subject to 
a maximum reduction of 45 percent of the original exercise price. 
[Footnote 21] In addition, the number of shares of common stock 
underlying the warrant held by Treasury are reduced by half if the 
qualified financial institution completes one or more "qualified equity 
offerings" and receives proceeds equal to the amount of the preferred 
shares prior to December 31, 2009. Bank officials we spoke with said 
that the option to reduce the number of shares underlying the warrants 
provided a powerful incentive to replace public capital with private 
capital before this date. 

The standardized terms require that dividends on the senior preferred 
stock be payable quarterly in arrears. According to a Treasury 
official, the first dividend payments will be due in December 2008 for 
some financial institutions, with the dividend accrual period beginning 
on October 28, 2008. These institutions are expected to pay a rate of 5 
percent of the capital investment per annum. As custodian, the Bank of 
New York Mellon will receive the dividends and wire the proceeds to the 
general fund of Treasury.[Footnote 22] 

Treasury also plans to make capital investments in privately held 
financial institutions and on November 17, 2008, issued new program 
terms for investing in these institutions. The deadline for privately 
held institutions to submit applications is December 8, 2008. Treasury 
is also developing program terms for S Corporations and mutual 
organizations (mutuals) but OFS officials noted that there were a 
number of challenges associated with structuring terms for these types 
of organizations.[Footnote 23] As of November 21, 2008, no final 
decisions had been made about the timing of any such program. 

Treasury Is Relying on Recommendations from the Bank Regulators to 
Select Qualified Financial Institutions for CPP: 

Treasury officials stated that they were relying extensively on the 
primary federal banking regulators in determining which institutions 
would be allowed to participate in CPP. Because the program is intended 
to provide capital to those institutions that can demonstrate their 
overall financial strength and long-term viability, OFS is relying on 
the banking regulators' examinations and experience with these 
institutions when it makes a final determination regarding their 
financial condition. The final decision regarding the selection of 
institutions to participate in CPP is made by OFS. Qualified financial 
institutions seeking capital to participate in the program were to send 
their applications directly to their primary federal banking 
regulators.[Footnote 24] 

Treasury, in consultation with the banking regulators, has developed a 
standardized process for evaluating the financial strength and 
viability of applicants. Specifically, financial institutions are 
encouraged to consult with their primary regulators for help about 
deciding whether to apply. For those institutions that decide to apply, 
the federal banking regulators evaluate applications based on certain 
factors, such as examination ratings, selected performance ratios. 
Federal banking regulators may also consider information on the 
intended deployment of capital injections, although guidance on this 
possibility varied across regulators. Institutions with the highest 
examination ratings are to receive presumptive approval from the 
banking regulators, and the regulators' recommendations are to be 
forwarded to OFS's Investment Committee for its advice and 
recommendation.[Footnote 25] Institutions with lower examination 
ratings or other considerations require further review and are to be 
referred to the CPP Council, which is made up of representatives from 
the four federal banking regulators, with Treasury officials as 
observers. Regulators and the CPP Council may consider other factors, 
such as the existence of a signed merger agreement involving the 
institution, confirmed private equity investment in the institution, 
and other factors that may offset the effect of lower examination 
ratings. Finally, those institutions with the lowest examination 
ratings are to receive a presumptive denial recommendation from the 
banking regulators. In these instances, the primary bank regulators may 
have further discussions with the applicants and encourage the 
institution to withdraw its application. The banking regulator or the 
CPP Council is to forward approval recommendations to OFS's Investment 
Committee, which further reviews the applications and may request 
additional analysis or information from the regulators or the CPP 
Council. Figure 1 provides an overview of the process for assessing and 
approving applications for capital purchases. 

Figure 1: Process for Accepting and Approving CPP Applications, as of 
November 21, 2008: 

[Refer to PDF for image] 

This figure is an illustration of the process for accepting and 
approving CPP applications, as of November 21, 2008: 

Intake: 

Qualified Financial Institution (QFI): 
(A) Application submitted to one of the PFRs[A]; (Primary Federal 
Regulators are: Federal Reserve; OCC; FDIC; OTS) 

Evaluation: 

(B) Application reviewed and decision memo sent; 
Presumptive approval recommendation; 
Recommendation[A] (through Capital Purchase Program Council, which is 
made up of representatives from the primary federal regulators (PFRs), 
with Treasury officials as observers); 
Presumptive denial recommendation[A] (through Capital Purchase Program 
Council); 

All recommendations are sent to the Investment Committee (Treasury 
officials). 

Final decisions: 

(C) Final decision made; 
Assistant Secretary for Financial Stability, Treasury approves or 
denies. 

[A] Stages where followup and/or reconsideration are possible. QFIs may 
contact regulators informally to inquire about their chances of getting 
recommended for approval. Treasury may encourage QFIs to withdrawal 
applications before they are denied. 

Sources: GAO analysis; Treasury; Art Explosion (images). 

[End of figure] 

Once its review is complete, the Investment Committee is to make 
recommendations to the Assistant Secretary for Financial Stability for 
final approval. According to OFS officials, denied applicants will not 
be publicly announced, and as of November 21, 2008, the primary 
regulators also told us that they had not recommended denial for any 
financial institutions. However, regulatory officials stated that 
institutions could withdraw their applications at any point in the 
process if it was unlikely that their applications would be approved. 
And according to bank regulators, some institutions have withdrawn 
their applications. The extent to which regulators provided additional 
internal guidance on processing applications that might not be approved 
varied. For example, three bank regulators provided additional written 
guidance to staff on how to handle applications that were not likely to 
be recommended for approval, while one bank regulator did not provide 
any additional guidance. We are also examining the reasonableness of 
steps taken to ensure that CPP and regulators' procedures are being 
consistently followed and will report our results in subsequent 
reports. 

OFS and the Regulators Have Not Decided How to Monitor Banks' Use of 
CPP Funds or How to Ensure Compliance with Purchase Agreements: 

It is unclear how OFS and the regulators will monitor participating 
institutions' use of the capital investments. The standard agreement 
between Treasury and the participating institutions includes a number 
of provisions, some in the "recitals" section at the beginning of the 
agreement and others that are detailed in the body of the agreement. 
The recitals refer to the participating institutions' future actions in 
general terms--for example, that "the Company agrees to expand the flow 
of credit to U.S. consumers and businesses on competitive terms" and 
"agrees to work diligently, under existing programs, to modify the 
terms of residential mortgages." Treasury and the regulators have 
publicly stated that they expect these institutions to use the funds in 
a manner consistent with the goals of the program, which include both 
the expansion of the flow of credit and the modification of the terms 
of residential mortgages. But it is unclear how OFS and the banking 
regulators will monitor how participating institutions are using the 
capital investments and whether these goals are being met. The standard 
agreement between Treasury and the participating institutions does not 
require that these institutions track or report how they plan to use, 
or do use, their capital investments. 

We spoke with representatives of the eight large institutions that 
initially received funds under CPP, and they told us that their 
institutions intended to use the funds in a manner consistent with the 
goals of CPP. Generally, the institutions stated that CPP capital would 
not be viewed any differently from their other capital--that is, the 
additional capital would be used to strengthen their capital bases, 
make business investments and acquisitions, and lend to individuals and 
businesses. With the exception of two institutions, institution 
officials noted that money is fungible and that they did not intend to 
track or report CPP capital separately. We will continue to monitor the 
activities of these institutions as well as the plans of others in 
future reports as well as any oversight provided by Treasury and its 
agents or the regulators. The banking regulators indicated that they 
had not yet developed any additional supervisory steps, such as 
requiring more frequent provision of certain call report data for 
participating institutions, to monitor participating institutions' 
activities.[Footnote 26] For example, it is unclear whether Treasury 
plans to leverage bank regulators, which in the case of the largest 
institutions have bank examiners on site, to conduct any oversight or 
monitoring related to CPP requirements. However, unless Treasury does 
additional monitoring and regular reporting, Treasury's ability to help 
ensure an appropriate level of accountability and transparency will be 
limited. 

In addition to the general recitals, the standard terms of the 
securities purchase agreements include specific requirements. 
Participating institutions' dividend payments are restricted for as 
long as Treasury's senior preferred shares are outstanding, and the 
institutions cannot redeem these senior preferred shares for 3 years 
except with proceeds from new capital obtained from the market. 
Treasury is in the early stages of determining how it plans to monitor 
compliance with these requirements. The agreements require that the 
financial institutions' benefit plans comply with the requirements for 
executive compensation contained in the act and guidance issued by 
Treasury before the date of Treasury's purchase of the preferred 
shares. On October 20, 2008, Treasury published in the Federal Register 
an interim final rule to provide guidance on the executive compensation 
provisions in the act applicable to participants in CPP. The interim 
final rule outlines four executive compensation requirements that apply 
to senior executive officers of institutions while Treasury holds 
equity or debt in the institution. Senior executive officers are 
generally the chief executive officer, the chief financial officer, and 
the three most highly compensated officers. A participating financial 
institution must meet the following requirements: 

* The institution's compensation committee must (1) review the senior 
executive officers' incentive and bonus compensation arrangements 
within 90 days of the CPP purchase to ensure the arrangements do not 
encourage unnecessary or excessive risk taking, (2) the compensation 
committee must meet at least annually with senior risk officers to 
review the relationship between the institutions' risk-management 
policies and the senior executive officer incentive arrangements, and 
(3) certify that it has completed the reviews. 

* Payments of bonus or incentive compensation that are made based on 
materially inaccurate earnings must be refunded to the institution by 
the senior executive officers. 

* No golden parachute payments will be made.[Footnote 27] 

* The institution must agree not to deduct for tax purposes executive 
compensation in excess of $500,000 per executive. 

Treasury officials said that they intended to develop a plan to ensure 
that participating institutions adhere to these requirements, including 
having Treasury's equity asset managers (yet to be selected) monitor 
financial institutions' compliance with certain requirements such as 
executive compensation and dividend restrictions. As discussed later in 
this report, internal controls are a major part of efficiently and 
effectively managing a program, and developing a process for monitoring 
participating financial institutions will be critical to identifying 
and addressing any potential problems in these institutions' compliance 
with program requirements. Treasury officials noted that once they have 
examined all public comments, they might add clauses or other 
components to the executive compensation rules to strengthen oversight 
of the executive compensation requirements. But at this point, the 
officials have not determined how Treasury will monitor executive 
compensation compliance. Bank regulators varied in their views about 
their oversight responsibilities related to compliance with executive 
compensation requirements and other required terms of CPP. For example, 
one regulator noted that it would rely on the institution's board of 
directors to assess compliance, and another regulator stated that it 
was Treasury's responsibility to provide such oversight. Without a 
consistent process for monitoring participating institutions, 
Treasury's ability to identify and address any potential problems in 
these institutions' compliance with program requirements will be 
limited. 

The Extent to Which Treasury Will Pursue Other Programs under TARP 
Remains Uncertain: 

The TARP legislation provides Treasury with broad authorities to 
establish programs that can purchase or insure "troubled assets." As 
previously mentioned, these assets can include mortgage-related assets 
and other financial instruments that Treasury, after consultation with 
the Federal Reserve, determines to be necessary to promote financial 
stability. Treasury has established a Systemically Significant Failing 
Institutions (SSFI) program under TARP. According to Treasury, unlike 
CPP, which is broad-based, a financial institution's participation in 
SSFI will be considered on a case-by-case basis. Moreover, there is no 
deadline for participation in this program. For example, on November 
10, 2008, Treasury announced that it would purchase $40 billion in 
senior preferred stock from AIG as part of a comprehensive plan to 
restructure federal assistance to this company, which Treasury views as 
systemically significant.[Footnote 28] These funds were disbursed on 
November 25, 2008. 

Treasury has also taken other targeted action. On November 23, Treasury 
announced that it would invest an additional $20 billion in Citigroup 
from TARP in exchange for preferred stock, with an 8 percent dividend 
to Treasury. Citigroup is to comply with enhanced executive 
compensation restrictions and implement FDIC's mortgage modification 
program. Treasury and FDIC will provide protection against unusually 
large losses on a pool of loans and securities on the books of 
Citigroup. The Federal Reserve will backstop residual risk in the asset 
pool through a nonrecourse loan. 

We plan to continue to monitor activities associated with both of these 
transactions in future reports. 

Treasury Decided Not to Pursue Further Development of the Mortgage- 
related Assets Purchase Programs: 

On November 12, 2008, Treasury announced that it had examined the 
benefits of purchasing troubled mortgage-related assets, including 
mortgage-backed securities and whole loans, and concluded that this 
approach would not be the best use of TARP funds at this time. Prior to 
this announcement, despite the creation of CPP, purchases of these 
assets were considered a key part of Treasury's planned strategy for 
stabilizing financial markets. Treasury had worked with the financial 
agent it had selected to provide custodian services to TARP (Bank of 
New York Mellon), bank regulators, and others to develop mechanisms for 
identifying and pricing mortgage-backed securities and whole loans. In 
addition, OFS started to identify asset managers to oversee acquired 
mortgage-backed securities and whole loans, but given that it would not 
be purchasing these mortgage-related assets, OFS officials said that it 
would not be seeking the services of these asset managers at this time. 

Treasury Has Taken Preliminary Steps to Establish a Program to Insure 
Troubled Assets: 

Under the act, Treasury is required to establish a program that insures 
troubled assets and protects investors from losses.[Footnote 29] On 
October 16, 2008, Treasury published in the Federal Register a request 
for public comment to identify potential approaches to structuring such 
an insurance program.[Footnote 30] In the notice, Treasury solicited 
comments on how to structure the program, identify institutions and 
assets for inclusion, and calculate premiums. In addition, Treasury 
requested comments on the types of events that should lead to an 
insurance payout and on approaches to setting a value for the payout. 
When the comment period closed, on October 28, Treasury had received 66 
comment letters from, among others, holding companies and financial 
services firms, consulting firms, and trade industry groups on how to 
structure the program. Treasury, as of November 21, 2008, had made no 
final decision regarding the design of the program. The comments 
suggested a range of program options. Recommendations focused on 
insuring asset-backed securities, in particular securities backed by 
consumer loans; providing insurance for guarantors' losses on their 
portfolios; and insuring loans to small businesses to facilitate 
lending. Many comments targeted securitized assets, and some comments 
indicated that the program should encompass a variety of assets and not 
just those related to mortgages. 

Treasury Is Examining Strategies to Mitigate Mortgage Foreclosures: 

Having decided against large purchases of troubled mortgage assets 
under TARP, Treasury stated that the agency was considering other ways 
to meet Congress' expectation that Treasury would work with lenders "to 
achieve aggressive loan modification standards" to mitigate 
foreclosures. As of November 25, 2008, it had not yet announced any 
specific programs. OFS has established and hired a chief for the Office 
of the Chief of Homeownership Preservation within OFS. The Director of 
Treasury's Community Development Financial Institutions Fund (CDFI) is 
serving as the interim chief for homeownership until a permanent chief 
is hired. According to OFS officials, the effort to staff this office 
with housing policy, community development, and economic research 
experts is ongoing. As of November 21, 2008, seven positions had been 
filled with federal government detailees, according to the Chief, and 
the recruitment and hiring process had begun for permanent positions. 
OFS has stated that it is working with other federal agencies, 
including FDIC, HUD, and FHFA, to explore alternatives to help 
homeowners under TARP. As OFS reviews foreclosure mitigation program 
options, it is considering a number of factors, including the cost of 
the program, the extent to which the program minimizes the recidivism 
of borrowers helped out of default, and the number of homeowners the 
program has helped or is projected to help remain in their homes, 
according to a senior official. A senior OFS official stated that the 
agency had considered loan modification strategies such as the program 
FDIC developed to convert nonperforming mortgages owned or serviced by 
IndyMac Federal Bank into affordable loans. Possible loan modification 
measures under such programs include interest rate reductions, extended 
loan terms, and deferred principal. 

Other similar programs under review, according to OFS, include 
strategies to guarantee loan modifications by private lenders. The HOPE 
for Homeowners program at the Federal Housing Administration (FHA) is 
one such program.[Footnote 31] According to FHA, lenders benefit by 
turning failing mortgages into performing loans. Other loan 
modification programs include those announced by FHFA in partnership 
with Treasury, such as a streamlined loan modification program for at- 
risk borrowers, to prevent foreclosures and mitigate losses. According 
to an OFS official, OFS is also considering what policy actions might 
be taken under CPP to encourage participating institutions to modify 
mortgages that are at risk of or in default. Although OFS has stated 
that it is contemplating these and other foreclosure mitigation 
strategies, including strategies that involve TARP funds and strategies 
that do not involve TARP funds, it has not announced a specific program 
structure. 

Treasury's Strategy Continues to Evolve and Will Focus More on Consumer 
Credit: 

In addition to CPP, the insurance program, and potential foreclosure 
mitigation programs, Treasury is considering additional strategies 
under TARP. According to the Treasury Secretary, the agency is 
evaluating a program to leverage TARP funds with matching capital from 
private investors. This type of program could address the needs of 
nonbank financial institutions that are not eligible to participate in 
CPP. However, OFS acknowledged that many nonbank credit providers were 
not directly regulated, possibly making taxpayer protection, a key goal 
of the act, more difficult to achieve. OFS is also considering 
strategies to increase the availability of consumer financing by 
improving the liquidity of the asset-backed securitization market. 
According to Treasury, a freezing of credit in this market has limited 
financing options for consumers for car loans, student loans, and 
credit card borrowing. According to the Secretary, Treasury has been 
looking for strategies to use its authority and funds under TARP to 
encourage private investors to purchase highly rated ABS to expand the 
flow of consumer credit. Treasury and the Federal Reserve Bank of New 
York announced on November 25, 2008, the creation of the Term Asset- 
Backed Securities Loan Facility (TALF), under which the Federal Reserve 
Bank of New York will lend up to $200 billion to holders of newly 
issued ABS for a term of at least 1-year. This credit facility is 
intended to create consumer credit by providing liquidity to ABS 
holders to issue new consumer credit-driven bonds. Using the funds 
available under TARP, Treasury will provide $20 billion in credit 
protection to the Federal Reserve for loans. This credit facility may 
expand to include other asset classes, such as commercial and certain 
residential mortgage-backed assets. 

Efforts to Establish the Office of Financial Stability Are Ongoing: 

Treasury has taken a number of major steps to set up OFS, including (1) 
establishing an organizational structure and filling key leadership 
positions and a number of staff positions within that structure, (2) 
selecting contractors and a financial agent to support TARP activities, 
and (3) beginning to develop an overall system of internal control for 
the program. However, OFS faces a number of challenges in completing 
its organizational activities. First, hiring the number and type of 
staff needed to successfully operate TARP, as well as ensuring that key 
leadership positions remain filled, will be challenging due to the 
rapid evolution of program activities and the fact that the office will 
soon be transitioning to a new administration. Further, Treasury has 
used contractors and a financial agent to play key roles in supporting 
the program, and it is taking initial steps to address conflicts of 
interest posed by their roles. But Treasury is still developing an 
oversight process for conflicts of interest involving its contractors 
and financial agents. These and other gaps in internal controls have 
resulted from the need to begin program activities before policies and 
procedures have been fully developed and implemented. While OFS 
recognizes the need to quickly develop and implement a comprehensive 
system of internal control for all TARP activities, these efforts have 
also been challenged by recent changes in the strategic direction of 
the program and uncertainties about further changes that may result 
once the new administration is in place. Successfully meeting all of 
these challenges is key to ensuring the efficient and effective 
operation of TARP now and in the future. 

An Organizational Structure Has Been Established for OFS: 

On October 6, 2008, in order to implement TARP and address growing 
concerns about the stability of the financial markets and the 
functioning of credit markets, Treasury established OFS and appointed 
an Interim Assistant Secretary of Financial Stability as its head. OFS 
is organized within Treasury's Office of Domestic Finance and reports 
to the Under Secretary for Domestic Finance. Soon after establishing 
OFS, Treasury created several functional areas within the office and 
hired interim chiefs to manage each of the major OFS functions (fig. 
2). According to OFS's current organizational outline, these interim 
chiefs and their major areas of responsibility are as follows: 

* Chief Investment Officer is responsible for administering TARP 
programs, such as CPP, and approving and managing all TARP investments. 

* Chief Risk Officer is responsible for identifying and assessing risks 
that TARP faces and for tracking and reporting measurements of those 
risks. 

* Chief Financial Officer (CFO) is responsible for the budget, 
financial statement reporting, accounting, and internal controls. 

* Chief Compliance Officer is responsible for ensuring program 
compliance with laws and regulations, including the executive 
compensation and conflicts of interest requirements under TARP. 

* Chief of Homeownership Preservation is responsible for overseeing 
efforts to reduce foreclosures and identify opportunities to help 
homeowners keep and protect their homes while also protecting 
taxpayers. 

In addition, OFS has a Chief Operating Officer (COO), who is 
responsible for helping to develop the infrastructure to support TARP, 
coordinating communications among the various units, and working with 
Treasury's administrative resources unit to ensure efficient and 
effective TARP operations. In addition, the COO is responsible for 
working with the CFO to manage the TARP budget.[Footnote 32] The OFS 
organizational structure also includes a Chief Counsel who is 
responsible for providing legal and policy advice to OFS on 
implementing TARP and complying with the provisions of the act, and a 
Senior Advisor, who provides direct support to the Assistant Secretary 
for Financial Stability in overseeing the implementation of TARP. 

Figure 2: Organization of the Office of Financial Stability, as of 
November 21, 2008: 

[Refer to PDF for image] 

This figure is an illustration of the organization of the Office of 
Financial Stability, as of November 21, 2008: 

Assistant Secretary for Financial Stability: 
- Senior Advisor; 
- Executive Assistant; 
- Chief Counsel; 
* Chief Operating Officer; 
- Executive Secretariat; 
* Chief Compliance Officer; 
* Chief Risk Officer; 
* Chief Investment Officer; 
* Chief Homeownership; 
* Chief Financial Officer. 

Source: Treasury. 

Note: The Chief Counsel reports directly to Treasury's Office of 
General Counsel. 

[End of figure] 

Treasury recognized that it needed to move quickly to fill the interim 
chief positions, for several reasons. First, the escalating financial 
crisis called for TARP to become operational as soon as Congress passed 
legislation to establish the program. Second, even before OFS was 
established, Treasury had contemplated engaging in various strategies 
to address the credit crisis and conducting a large number of financial 
transactions. Third, Treasury anticipated that a variety of factors 
could affect the timing, nature, and extent of the activities that OFS 
would administer. According to Treasury, its short-term strategy for 
staffing high-level OFS positions was to identify government employees 
inside Treasury and other federal agencies with the necessary skills 
and knowledge who could fill leadership positions on a temporary basis 
and establish a structure for administering the program going forward. 
The five interim chiefs have come from across government and beyond, 
including from OCC, the Federal Reserve, CDFI, the Export-Import Bank, 
and the International Monetary Fund (IMF), an international 
organization whose mission is to foster global monetary cooperation and 
secure financial stability. According to Treasury officials, the 
overall structure of OFS will remain appropriate for continuing to 
administer TARP regardless of the program's overall strategic 
direction. 

Effective Implementation of OFS's Organizational Structure Depends on 
Timely Hiring and Well-Coordinated Transition Planning Efforts: 

Treasury is in the process of recruiting and hiring well-qualified 
career staff who will be able to stay on in their positions on a long- 
term basis. OFS officials said that it had about 48 employees assigned 
to TARP as of November 21, 2008, including those from other Treasury 
offices, federal agencies, and organizations, who are providing 
assistance on a temporary basis. OFS's interim chiefs have each 
developed a needs assessment for their areas and have submitted these 
assessments to the COO, who is working with Treasury's human resources 
department to meet those needs. The chiefs identified about 130 
positions, although OFS officials have said that the office may require 
more (up to 200 full time equivalent employees) or less staff depending 
on the type and complexity of the various activities that OFS initiates 
under TARP and that hiring could be adjusted accordingly. Treasury is 
making efforts to meet the current estimate of needed staff by the end 
of December and is prioritizing its hiring process by filling senior 
career positions first. Consistent with the need to fill a large number 
of positions, Treasury officials said that they were reviewing a number 
of résumés from within and outside of the federal government to staff 
the organization as quickly as possible. As of November 21, 2008, 
Treasury had filled five permanent positions. 

OFS is also taking steps to help ensure that the key positions remain 
filled during and after the transition to the new administration. While 
Treasury officials said that some interim chiefs might be asked to stay 
to serve under the new administration, at present it is unclear how 
many of them ultimately will continue in their existing roles or for 
how long. Consequently, the interim chiefs have been tasked with 
developing a description of their current roles and responsibilities 
and helping identify their potential replacements. While Treasury 
expects that there will be many qualified candidates interested in 
chief officer positions, uncertainty over leadership and the strategic 
direction of the program may inhibit some of OFS's efforts to fill 
these key positions. OFS officials said that they planned to meet 
frequently with the incoming administration's transition team and that 
they planned to hire senior career staff who could effectively manage 
TARP activities during and after the transition. Filling needed 
positions will be a key step in the successful transition of the 
program to the new administration, and we plan to continue to monitor 
these activities as the transition to the new administration continues. 

Contractors and Financial Agents Will Provide Key Services for TARP: 

Treasury has used a financial agency agreement and a variety of 
contracts to acquire a range of services in support of TARP. To promote 
a timely and flexible approach to implementing the program, Treasury 
used expedited procedures to enter into the agreement and award the 
contracts and structured these arrangements to allow for flexibility in 
ordering the services required. Treasury has also taken steps to help 
promote the inclusion of small businesses in carrying out TARP. 

Contracts and Other Agreements Entered into by Treasury Provide for a 
Range of Services to Support TARP: 

Treasury has used two approaches to acquire the necessary services to 
support TARP. First, Treasury exercised its authority under the act to 
retain financial agents to provide services on its behalf. Treasury 
said that it would use financial agents when the required services 
involved managing public assets. Second, Treasury has entered into a 
variety of contracts and blanket purchase agreements under the Federal 
Acquisition Regulation (FAR) for legal, investment consulting, 
accounting, and other services that are generally available in the 
commercial sector. While the financial agency agreement and certain 
contracts were awarded primarily to assist with the purchase of 
troubled assets, Treasury officials explained that they were 
redirecting requirements within the scope of the contracts to support 
TARP's shift to CPP and made similar modifications to the financial 
agency agreement. 

Between October 3 and November 25, 2008, Treasury entered into one 
financial agent agreement and seven contractual arrangements in support 
of TARP, the details of which are summarized in table 2. In addition, 
we have preliminary information on three other contracts ranging from 
about $8,500 to $2.2 million for a budget model, legal services, and 
leased office space. We are continuing to review all contracts and 
agreements, including these three additional contracts. 

Table 2: Financial Agency Agreement and Contracts Awarded, as of 
November 25, 2008: 

Financial Agency Agreement: 

Bank of New York Mellon; 
Purpose: To provide custodian and cash management services; 
Date signed: 10/14/2008; 
Value: To be calculated based on percentage of value of assets managed; 
Agreement structure: Financial agency agreement; 
Pricing structure: Percentage of value of assets managed; 
Competition: Open competition: Submissions; received: 70; Submissions 
meeting qualifications: 10; Responses considered: 3. 

Contracts: 

Simpson, Thacher & Bartlett, LLP; 
Purpose: To serve as a legal adviser for implementing the Emergency 
Economic Stabilization Act; 
Date signed: 10/10/2008; 
Value: $5,000-$500,000; 
Agreement structure:Indefinite delivery/indefinite quantity contract; 
Pricing structure: Time and materials or firm-fixed price task orders; 
Competition: Other than full and open based on unusual and compelling 
urgency exception. Offerors solicited: 6; Offers received: 2. 

EnnisKnupp & Associates, Inc.; 
Purpose: To support development and maintenance of investment policies 
and guidelines and assist with the oversight of asset managers; 
Date signed: 10/11/2008; 
Value: $25,000 - $2,500,000; 
Agreement structure: Indefinite delivery/indefinite quantity contract; 
Pricing structure: Firm-fixed price task orders; 
Competition: Other than full and open based on unusual and compelling 
urgency exception. Offerors solicited: 6; Offers received: 3. 

Pricewaterhouse Coopers, LLP; 
Purpose: To help establish internal controls; 
Date signed: 10/16/2008; 
Value: Total amount of services ordered to date: $191,469; 
Agreement structure: Blanket purchase agreement; 
Pricing structure: Time and materials or firm-fixed price task orders; 
Competition: Request for quotes from 6 firms on the General Services 
Administration's (GSA) Federal Supply Schedules (the Schedule); Quotes 
received: 6. 

Ernst & Young, LLP; 
Purpose: To provide general accounting support and expert accounting 
advice; 
Date signed: 10/18/2008; 
Value: Total amount of services ordered to date: $492,007; 
Agreement structure: Blanket purchase agreement; 
Pricing structure: Time and& materials or firm-fixed price task orders; 
Competition: Request for quotes from 7 firms on the GSA Schedule; 
Quotes received: 6. 

Hughes Hubbard & Reed, LLP; 
Purpose: To provide legal services in connection with the capital 
purchase program; 
Date signed: 10/29/2008; 
Value: Total amount of services ordered to date: $1,411,300; 
Agreement structure: Blanket purchase agreement; 
Pricing structure: Time and materials or firm-fixed price task orders; 
Competition: Request for quotes from 5 firms on the GSA Schedule; 
Quotes received: 4. 

Squire Sanders & Dempsey, LLP; 
Purpose: To provide legal services in connection with the capital 
purchase program; 
Date signed: 10/29/2008; 
Value: Total amount of services ordered to date: $1,380,000; 
Agreement structure: Blanket purchase agreement; 
Pricing structure: Time & materials or firm-fixed price task orders; 
Competition: Request for quotes from 5 firms on the GSA Schedule; 
Quotes received: 4. 

Lindholm & Associates; 
Purpose: To provide Human Resources Support; 
Date signed: 10/31/2008; 
Value: $174,720 for base period of 6 months. Total value of base period 
plus all options is $710,528; 
Agreement structure: Order under the GSA Schedule; 
Pricing structure: Time and materials task orders; 
Competition: Quotes sought and received from 3 small businesses. 

Source: GAO analysis of Treasury documents. 

[End of table] 

Treasury Used Expedited Procedures to Award the Agreement and 
Contracts: 

Treasury used a variety of methods to expedite the process for entering 
into its agreement and awarding contracts for TARP. For the financial 
agency agreement, Treasury posted notices on its Web site on October 6 
seeking proposals to provide asset management and custodian services. 
Proposals were due by October 8. Although Treasury had not selected 
asset managers as of November 21, it moved quickly to complete the 
custodian agreement. Treasury said that of the 70 custodian proposals 
it received, 10 met minimum eligibility requirements, and 3 
institutions were invited to submit formal proposals and make face-to- 
face presentations. Treasury evaluated the three proposals and on 
October 14, 2008, selected Bank of New York Mellon to be the custodian 
for the asset purchase program for a term of 3 years. The parties later 
amended the agreement to provide for services under CPP. 

Treasury also used other than full and open competition to expedite the 
award of two contracts for services. To obtain legal services and the 
expertise of an investment consultant firm, Treasury used existing 
statutory authority as the basis to award contracts using other than 
full and open competition procedures. The specific exception Treasury 
used under this authority was unusual and compelling urgency.[Footnote 
33] Using market research that it had conducted, Treasury invited 
several firms to submit proposals on an expedited basis. Treasury 
received two proposals for legal services and three for investment 
services and was able to make awards in accordance with its announced 
criteria. Treasury also made five awards under schedules maintained by 
the General Services Administration (GSA). In all cases, Treasury 
solicited and awarded the contracts within a matter of days. 

Contracts Have Been Structured to Accommodate Treasury's Need for 
Flexibility: 

Treasury used contract structures and pricing arrangements designed to 
allow for flexibility in ordering the services required. Specifically, 
Treasury established blanket purchase agreements with several firms 
based on contracts previously awarded to those firms by the GSA. These 
blanket purchase agreements contain the basic terms and conditions 
governing the types of services the firms will provide to Treasury in 
support of TARP. As specific needs arise, the blanket purchase 
agreements allow Treasury to issue task orders to the firms describing 
the specific services required, establishing time frames, and setting 
pricing arrangements. Treasury established two 3-year agreements; other 
agreements were established for periods ranging from 6 to 24 months. In 
other instances, Treasury awarded new indefinite delivery/indefinite 
quantity contracts that, like the blanket purchase agreements, contain 
all necessary contract terms and conditions. As specific needs arise, 
Treasury issues a task order under the indefinite delivery/indefinite 
quantity contract. These contracts were established for 1 year or less. 
In general, the task orders under these contracts were awarded for 
periods of performance ranging from 2 weeks to 6 months. 

For the most part, the contracts and task orders awarded as of November 
25, 2008, including the blanket purchase agreements, are priced on a 
time and materials basis. This pricing mechanism provides for payments 
to the contractors based on set labor rates and the number of hours 
worked, plus the cost of any materials. Our prior work on such 
contracts recognized both the inherent flexibility of such arrangements 
and the highlighted need for close government supervision to ensure 
that costs are contained. Specifically, time and materials contracts 
are considered high risk for the government because they provide no 
positive incentive to the contractor for cost control or labor 
efficiency. Thus, the onus is on the government to monitor contractors 
to ensure that they are performing the work efficiently and controlling 
costs.[Footnote 34] 

A Treasury procurement official stated that time and materials pricing 
for its task orders had been necessary because of the uncertain nature 
of the work that would be required. As TARP requirements become more 
established, Treasury may award future task orders using fixed-price 
arrangements. Furthermore, the official outlined several steps his 
office was taking to ensure appropriate management and oversight of the 
time and materials contracts awarded as of November 25, 2008, including 
assigning additional oversight personnel to TARP procurements, ensuring 
that training requirements were met, and providing specific training on 
the tracking of billable costs. However, Treasury has not yet 
established a specific timetable for completing these steps. 

Treasury Has Taken Some Steps to Promote the Use of Small Businesses in 
TARP Activities: 

In a memo issued through its Web site, Treasury provided guidelines to 
small businesses for pursuing procurement opportunities. Treasury noted 
that while there were no requirements under its financial agent 
authority to set aside work for various designations of small 
businesses--including small business concerns owned and controlled by 
women, minorities, veterans, and socially and economically 
disadvantaged individuals--use of these groups was an evaluation factor 
during the selection process. Treasury further noted that any small 
businesses that did not meet the minimum requirements for award of the 
financial agency agreement could participate as subcontractors. 

For services obtained through procurement contracts, Treasury 
considered offerors' efforts to promote small business participation as 
part of its selection criteria. Specifically, for three of the 
contractual agreements it has awarded, Treasury evaluated the proposals 
received based in part on the offerors' approach to ensuring that small 
businesses had opportunities to participate. One of the contracted 
firms is a small business, while other awardees offered the following 
approaches to using small businesses: 

* One vendor has teamed with a minority small business firm as a 
subcontractor. 

* Another vendor plans to utilize two subcontractors: one woman-owned 
small business and one other small business. However, Treasury noted 
that the subcontractors' combined participation would amount to less 
than 1 percent of the contract's total value. 

* One other company stated that it intends to use a minority-and woman- 
owned small business enterprise as a subcontractor. 

Three contract proposals did not contain a plan for utilizing small 
businesses. 

Treasury Has Taken Initial Steps to Address Conflicts of Interest but 
Specific Policies and Procedures Have Yet to Be Established: 

Treasury's reliance on private sector resources to assist with 
implementing TARP has underscored the importance of addressing 
conflicts of interest issues. Treasury has taken some steps to address 
actual and potential conflicts of interest involving its financial 
agent and contractors, such as issuing interim guidelines and requiring 
that all those responding to solicitations provide a plan to mitigate 
any actual or potential conflicts of interest they or their proposed 
subcontractors may have. The financial agent and contractors that 
Treasury selected identified a variety of potential or actual conflicts 
of interest and proposed a variety of solutions to mitigate these 
conflicts. We plan to monitor closely the implementation of these 
mitigation plans. 

Treasury Has Issued Interim Guidelines and Plans to Issue Regulations 
on Conflicts of Interest: 

On October 6, 2008, Treasury issued interim conflict of interest 
guidelines. The guidelines identify conflict of interest issues for 
contractors to consider when submitting their proposals to assist with 
the act's implementation. Treasury's interim guidelines: 

* contemplate that Treasury could obtain nondisclosure and conflict of 
interest agreements before supplying an offeror with a solicitation; 

* encourage contractors to disclose all actual or potential conflicts 
of interest and develop mitigation plans; 

* note that Treasury's solicitations could include evaluation factors 
and criteria to assess contractors' conflict of interest mitigation 
plans; 

* restate Treasury's statutory authority and duty to oversee, evaluate, 
waive, negotiate, and mitigate conflicts of interest related to its 
contracts; and: 

* provide that a mitigation plan submitted in a proposal will become a 
binding contractual obligation. 

The guidelines will remain in effect until Treasury issues the 
regulations that are currently being drafted. 

Employees of Treasury's contractors and financial agents are not 
subject to the conflict of interest laws and regulations that govern 
the conduct of government employees. In prior work on defense 
contracting, GAO recommended that the Department of Defense 
contractually require its contractors to impose conflict of interest 
restrictions similar to those for federal employees on employees who 
were providing advice or assistance in mission-critical or in certain 
contracting matters.[Footnote 35] 

Treasury officials said that the agency intended to use existing 
statutory and regulatory postemployment restrictions to guide the 
actions of Treasury employees who might leave the agency. In addition, 
because these rules do not apply to employees of Treasury's 
contractors, Treasury's contracts awarded under TARP provide some 
postemployment limitations for contractors and their employees. For 
example, one solicitation for legal services prohibits attorneys 
assigned to work on the contract from representing other parties on 
issues related to the services performed both during the term of the 
contract and for 6 months thereafter. 

Contractors and Agents Have Identified Potential and Actual Conflicts 
of Interest: 

For each solicitation, Treasury required respondents to identify any 
actual or potential conflicts of interest that they would encounter in 
providing the services described and to explain how they would avoid, 
mitigate, or neutralize any conflicts concerning the company, its 
corporate parents, subsidiaries, affiliates, and proposed 
subcontractors. Among other situations, Treasury identified areas of 
possible conflict for respondents to consider, including personal, 
business, or financial interests related to the requested services and 
participation in TARP. In their responses to Treasury's requirements, 
six of the eight service providers selected as of November 25, 2008, 
identified potential or actual sources of conflict. According to our 
review, the identified conflicts generally involve organizational 
conflicts of interest, though some also involve personal conflicts of 
interest: 

* Five contractors indicated that they either already had clients or 
could have clients who were receiving TARP assistance. 

* One contractor indicated that a potential conflict of interest would 
arise if it received information proprietary to multiple clients with 
competing investment interests. 

* One company identified conflicts regarding troubled assets owned 
either directly by the company or by clients that were eligible for 
assistance under TARP. 

Contractors and Agents Have Proposed Plans to Mitigate Conflicts of 
Interest but Have Provided Few Details on Implementing Them: 

The financial agent and contractors have proposed various approaches to 
mitigating any actual or potential conflicts of interest. Awardees 
indicated that they would use their codes of conduct, company policies 
and procedures, senior executive meetings, confidentiality agreements, 
specialized information security methods, and open communication with 
Treasury to mitigate conflicts of interest. For example, two 
contractors indicated that their companies would create a secure 
information environment, provide training to relevant employees, and 
monitor their compliance with requirements. Another contractor said 
that it would execute nondisclosure agreements, develop a mitigation 
plan, provide oversight and training, and conduct regular monitoring of 
compliance for any conflicts of interest involving its personnel. One 
company proposed using a third-party agent to facilitate the sale of 
its troubled assets and an independent accounting firm to oversee the 
transfer of those assets. 

The submitted plans provided few details, however, on how the companies 
would notify and communicate with Treasury if conflicts were identified 
during the course of performance:[Footnote 36] 

* Two firms' plans indicated that they would either maintain an "open 
dialog" or would "work in good faith" with Treasury should conflicts of 
interest emerge. 

* Two other plans did not describe how the firms would address 
conflicts of interest or how they would notify Treasury. 

* By comparison, one plan indicated that the company would provide 
information on conflicts of interest to Treasury in its weekly reports 
and offer recommendations for addressing each issue. 

Treasury relies on its financial agents and contractors to disclose 
conflicts of interest. Treasury officials stated that while under 
current procedures, they might not know if an agent or contractor did 
not disclose a conflict, they believed that the consequences for 
nondisclosure were sufficiently severe to deter such behavior. Finally, 
Treasury has noted in its solicitations that it intends to oversee and 
enforce compliance with conflict of interest mitigation plans. For 
example, Treasury noted in one of its solicitations for legal services 
that it would incorporate the offeror's final negotiated conflict of 
interest mitigation plan into the contract and then oversee and enforce 
the contractor's compliance with the plan. At the time we conducted our 
work, however, Treasury was still in the process of developing an 
oversight mechanism for enforcing financial agents' and contractors' 
mitigation plans. 

OFS's Internal Control Structure Is Evolving As Program Activities Are 
Implemented: 

A key challenge facing OFS is the need to develop a comprehensive 
system of internal controls at the same time that it must react quickly 
to financial market events. Effective internal control is a major part 
of managing any organization to achieve desired outcomes and manage 
risk. As shown in table 3, GAO's Standards for Internal Control include 
five key elements.[Footnote 37] Internal controls include the program's 
policies, procedures, and guidance that help management ensure 
effective and efficient use of resources; compliance with laws and 
regulations; prevention and detection of fraud, waste, and abuse; and 
the reliability of financial reporting. OFS has hired 
PricewaterhouseCoopers to assist in the design and implementation of a 
system of internal control for TARP.[Footnote 38] Because of the rapid 
evolution of TARP, controls are being developed as various aspects of 
the program become operational. For example, once CPP became active, 
OFS and PricewaterhouseCoopers focused on developing and implementing 
internal controls related to the capital purchase transactions and 
documenting the control activities as they occurred. However, many key 
controls remain to be developed. Specific examples, which we noted 
earlier, are that OFS has not yet developed sufficient policies and 
processes for overseeing its contractors or overseeing whether 
participating institutions are adhering to the executive compensation 
requirements under CPP. 

Table 3: GAO's Standards for Internal Control in the Federal 
Government: 

(1) Control environment: creating a culture of accountability by 
establishing a positive and supportive attitude toward improvement and 
the achievement of established program outcomes. 

(2) Risk assessment: performing comprehensive reviews and analyses of 
program operations to determine if risks exist and the nature and 
extent of risks have been identified. 

(3) Control activities: taking actions to address identified risk areas 
and help ensure that management's decisions and plans are carried out 
and program objectives met. 

(4) Information and communication: using and sharing relevant, 
reliable, and timely financial and nonfinancial information in managing 
programs. 

(5) Monitoring: tracking improvement initiatives over time and 
identifying additional actions needed to further improve program 
efficiency and effectiveness. 

Source: GAO, Standards for Internal Control in the Federal Government, 
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999). 

[End of table] 

Going forward, it will be essential that OFS continue developing a 
comprehensive internal control structure that addresses all five 
standards. 

* A strong control environment will depend on OFS's management's 
ability to set and maintain an environment based on integrity and core 
values and on the competence of staff hired to manage and perform 
program operations. As noted earlier, OFS has taken the first steps by 
developing an organizational structure that defines lines of authority 
and has begun to hire permanent staff, but OFS may need to adjust these 
initial steps as the focus of TARP evolves. 

* A risk assessment for TARP will include consideration of all 
significant interactions between OFS and other parties, including banks 
receiving funds under CPP and the custodian for TARP activities, as 
well as internal factors that increase risk. This assessment is 
important, but again OFS will be challenged as the strategies developed 
to achieve TARP's objectives continue to evolve, a fact that could also 
affect the risks facing the program. Because TARP is a new and unique 
program dealing with unusual circumstances, the program will likely be 
faced with unique and complex risks. 

* Control activities for TARP will consist of the policies, procedures, 
and guidance that enforce management's directives and achieve effective 
internal control over specific program activities. Examples of such 
policies and procedures particularly relevant to TARP are (1) proper 
execution and accurate and timely recording of transactions and events, 
(2) controls to ensure compliance with program requirements, (3) 
establishment and review of performance measures and indicators, and 
(4) management reviews of performance and agency achievements. As noted 
earlier, the development of policies and procedures is occurring 
concurrently with program execution, thereby increasing the risk that 
the programs will not be implemented as intended or that transactions 
will not be processed properly. Further, documented policies, 
procedures and guidance will be critical tools for OFS staff, many of 
whom have yet to be hired and were not involved in the initial 
transactions. 

* Information and communication will be important to OFS managers in 
helping them achieve their responsibilities and goals within an 
effective internal control structure. Communication is particularly 
important because of the dynamic environment in which OFS is currently 
operating. OFS has begun to address external communication issues by 
posting information on Treasury's Web site as it becomes available, 
holding press conferences, speaking at industry events, and testifying 
at congressional hearings. 

* Monitoring activities include the systemic process of reviewing the 
effectiveness of the operation of the internal control system. These 
activities are conducted by management, oversight boards and entities, 
and internal and external auditors. Monitoring enables stakeholders to 
determine whether the internal control system continues to operate 
effectively over time. It also improves the organization's overall 
effectiveness and efficiency by providing timely evidence of changes 
that have occurred, or might need to occur, in the way the internal 
control system addresses evolving or changing risks. 

A robust system of internal control specifically designed to deal with 
the unique and complex aspects of TARP will be key to helping OFS 
management achieve the desired results from TARP. While OFS plans to 
implement such a system, there is heightened risk that without it the 
interests of the government and taxpayers may not be adequately 
protected and that the programs' objectives may not be achieved in an 
efficient and effective manner. Our ongoing monitoring efforts will 
continue to focus on the steps OFS is taking to develop and implement 
an effective internal control structure. 

Measuring the Impact of TARP on Credit Markets and the Economy Will Be 
Challenging: 

TARP's activities could improve market confidence in banks that choose 
to participate and have beneficial effects on credit markets, but 
several factors will complicate efforts to measure any impact. If TARP 
is having its intended effect, a number of developments might be 
observed in credit and other markets over time, such as reduced risk 
spreads, declining borrowing costs, and increased lending. However, 
several factors will make isolating and measuring the impact of TARP 
challenging, including simultaneous changes in economic conditions, 
changes in monetary and fiscal policy, and other programs introduced by 
the Treasury, the Federal Reserve, FDIC, and FHFA to support banks, 
credit markets, and other struggling institutions. As a result, any 
improvement in capital markets cannot be attributed solely to TARP nor 
will a slow recovery necessarily reflect its failure because of the 
effects of market forces and economic conditions outside of the control 
of TARP. Nevertheless, we have preliminarily identified some indicators 
that may be suggestive of TARP's impact over time. These indicators 
include measures of the perception of risk in interbank lending, 
consumer lending, corporate debt markets, and the overall economy. We 
have also identified a number of other indicators that we are also 
monitoring and may include in future reports. 

TARP Could Have a Number of Effects on Credit Markets and the Economy, 
but Several Factors Complicate Measuring the Impact: 

TARP activities as of November 25, 2008--specifically CPP--could 
improve market confidence in participating banks by improving their 
balance sheet, cash flow, and capital positions; reducing their 
perceived risk; and allowing them to borrow and raise capital at more 
favorable rates. To the extent that confidence in participating banks 
improves, the banks should be able to increase lending at lower rates 
and pass on some of their lower funding costs to their own customers. 
Moreover, the capital infusions could also increase the confidence of 
participating banks so that the banks increase business, interbank, and 
consumer lending rather than hoarding the capital or using it to 
purchase low-risk assets. However, some tension exists between the 
goals of improving banks' capital position and promoting lending--that 
is, the more capital banks use for lending, the less their overall 
capital position will improve. 

If TARP does have its intended impact, a number of these effects should 
appear in credit and other markets over time. Since the first eight 
banks received capital injections on October 28, 2008, it may well be 
too early to expect noticeable changes. However, if confidence in banks 
improves, the perceived risk of lending to banks should decline, and 
this development would be observed in declining risk premiums (the 
difference between risky and risk-free interest rates, such as rates on 
U.S. Treasury securities) for interbank lending and bank debt. With an 
improved capital position and lower funding costs, over time banks 
should be able to increase lending and pass some of their lower 
borrowing costs on to their customers. Further, improved market 
conditions may permit some borrowers to avoid foreclosures by enhancing 
the capacity and willingness of banks to refinance certain loans or 
modify others.[Footnote 39] Potentially, this development would lower 
risk premiums for and raise volumes of consumer and business lending. 
Because bank financing and capital markets are close substitutes for 
large businesses, declines in borrowing costs from banks could also 
reduce borrowing costs in capital markets.[Footnote 40] Over the long 
term, improvements in credit markets should have effects on real 
economic activity as lower borrowing costs boost demand for goods and 
services. Asset prices, such as stock prices, and risk premiums, 
although imperfect, are also important leading indicators of real 
economic activity.[Footnote 41] 

Changes in credit market conditions may not provide conclusive evidence 
of TARP's effectiveness, however, as other important policies and 
interventions can influence these markets. A number of government 
agencies, including FHFA, FDIC, Treasury (through approaches other than 
TARP), and the Federal Reserve have worked in a collaborative manner to 
attempt to restore financial stability. For example, FDIC announced 
that it would temporarily guarantee the senior debt of all FDIC-insured 
institutions and their holding companies. This guarantee may affect the 
interest rates on bank-issued debt and improve confidence in banks. In 
addition to lowering the federal funds rate and providing liquidity 
facilities for a range of assets and institutions, the Federal Reserve 
has begun intervening in the market for commercial paper, a move that 
is also intended to reduce the cost of borrowing in those markets. 
Moreover, as of November 21, the Federal Reserve had almost $900 
billion in loans outstanding to financial institutions. FHFA placed 
Fannie Mae and Freddie Mac in conservatorship in response to their 
deteriorating financial condition. 

In addition, Treasury announced that, under authority provided by the 
Housing and Economic Recovery Act of 2008, it planned to purchase 
mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac on 
the open market. As of September 30, 2008, Treasury reported that it 
had purchased about $3.3 billion in Fannie and Freddie MBS and intended 
to purchase additional securities.[Footnote 42] Moreover, on November 
25, 2008, the Federal Reserve announced that it was initiating a 
program to purchase up to $500 billion in mortgage-backed securities 
guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae and up to $100 
billion in direct obligations of Fannie Mae, Freddie Mac, and the 
Federal Home Loan Banks. According to the Federal Reserve, the action 
was intended to support housing markets and foster improved conditions 
in financial markets more generally. Because banks hold a significant 
amount of securities guaranteed by these institutions, which are 
central to liquid secondary mortgage markets, these actions may also 
affect investor and bank confidence and interest rates. Moreover, FHFA, 
in partnership with Treasury, has implemented a supplemental loan 
modification program for at-risk borrowers to prevent foreclosures and 
mitigate losses. 

General market forces will also complicate a determination of TARP's 
effectiveness. For example: 

* Recent and expected declines in general economic activity are likely 
to reduce lending and heighten perceived credit risk despite a host of 
U.S. government interventions. 

* Further declines in housing prices are possible as values fall to 
levels consistent with incomes and rents in local areas, possibly 
leading to additional foreclosures, asset write-downs, and an increase 
in the perceived risk of banks and other financial institutions with 
exposure to mortgage assets.[Footnote 43] 

* In the face of increased risk, banks may not raise interest rates 
much (if at all) but instead ration credit so that only borrowers with 
pristine credit receive loans. Furthermore, changes in both the supply 
of and demand for credit can influence interest rates, and interest 
rates charged by banks may also reflect the customers they choose 
rather than the cost of bank credit for all borrowers. 

Finally, any changes attributed to TARP may well be changes that (1) 
would have occurred anyway, (2) are enhanced or counteracted by other 
market fundamentals, or (3) can be attributed to other policy 
interventions, such as the actions of FDIC, the Federal Reserve, or 
other financial regulators. For these and other reasons, we will not 
know what would have happened in the absence of TARP. As a result, 
determining the effect of TARP as it is being implemented will be a 
challenge. 

Changes in Select Indicators over Time May Provide Insights about CPP's 
Impact: 

We considered a number of indicators that, although imperfect, may be 
suggestive of TARP's impact on credit and other markets. Currently, we 
have identified a number of preliminary indicators that are likely to 
capture interbank, mortgage, and nonbank lending activity as well as 
financial market risk perceptions and variables that are predictive of 
future real economic activity. At the very least, improvements in these 
measures would indicate improving conditions in credit markets. 
Further, given that CPP's goal is to improve the capital position of 
banks and promote lending, going forward we expect to monitor 
indicators that can provide some insight into the potential effects of 
the plan on capital ratios, the structure of liabilities, and net 
changes in lending at participating institutions. We continue to 
consider a variety of additional indicators, and as more data become 
available and as economic and credit conditions evolve, we plan to 
include them in future reports. 

Treasury-London Interbank Offered Rate (LIBOR) Spread (TED Spread): 

The TED Spread is the difference between an average of interest rates 
offered in the London interbank market for 3-month, dollar-denominated 
loans (known as LIBOR) and the interest rate on U.S Treasury bills with 
the same maturity. It is considered a key indicator of credit risk that 
gauges the willingness of banks to lend to other banks. Increases in 
the TED spread imply a bigger aversion to risk. That is, investors have 
a preference for safe investments (e.g., Treasuries) and charge a 
higher premium for loans to other institutions to compensate for 
greater perceived default risk. Figure 3 shows both the historical TED 
spread as well as an inset that focuses on the TED spread since 2006. 
The figure shows that the weekly TED spread increased to roughly 2 
percentage points (or 200 basis points) in early December 2007 and 
peaked at over 400 basis points for the week including October 17, 
2008.[Footnote 44] Between the announcement of the creation of CPP the 
week of October 14 and the week before Treasury disbursed capital 
injections to the eight banks initially participating in CPP (week of 
October 20), the spread declined 146 basis points. Decreases in the TED 
spread could reflect the fact that banks are more willing to lend to 
lend to other banks on terms that reflect greater confidence in the 
banking system (i.e., without demanding a large interest rate premium). 
From the date of the initial capital injections on October 28 to 
November 14, the TED spread declined by about 60 basis points. The 
LIBOR itself has declined, but so has the Treasury yield. However, 
during the week ending November 21, 2008, the LIBOR rate and the TED 
spread began to rise. 

Figure 3: Three-Month LIBOR and 3-Month Treasury Bill Yield, as of 
November 21, 2008: 

[Refer to PDF for image] 

This figure is a multiple line graph depicting the Three-Month LIBOR 
and 3-Month Treasury Bill Yield for the time period of 1982 through 
November 21, 2008. The vertical axis of the graph represents interest 
rates from 0 to 20%. The horizontal axis of the graph represents each 
week of the year from 1982 through November 21, 2008. In addition, an 
inset graph depicts the TED spread for the time period of 2006 through 
November 21, 2008. The data depicted in the inset graph follows: 

Year: 2006; Weekly TED spread: 
0.36; 
0.29; 
0.25; 
0.22; 
0.21; 
0.23; 
0.21; 
0.21; 
0.21; 
0.28; 
0.3; 
0.28; 
0.35; 
0.33; 
0.36; 
0.35; 
0.34; 
0.34; 
0.31; 
0.35; 
0.39; 
0.41; 
0.42; 
0.47; 
0.52; 
0.48; 
0.46; 
0.44; 
0.39; 
0.39; 
0.38; 
0.34; 
0.31; 
0.3; 
0.34; 
0.42; 
0.46; 
0.46; 
0.49; 
0.45; 
0.34; 
0.28; 
0.26; 
0.29; 
0.29; 
0.28; 
0.31; 
0.33; 
0.36; 
0.43; 
0.39; 
0.36. 

Year: 2007; Weekly TED spread: 
0.31; 
0.27; 
0.24; 
0.23; 
0.23; 
0.21; 
0.19; 
0.17; 
0.2; 
0.23; 
0.28; 
0.29; 
0.29; 
0.3; 
0.32; 
0.36; 
0.39; 
0.46; 
0.48; 
0.54; 
0.46; 
0.54
0.56; 
0.7; 
0.67; 
0.56; 
0.41; 
0.4; 
0.39; 
0.4; 
0.45; 
0.6; 
1.29; 
1.8; 
1.39; 
1.41; 
1.65; 
1.45; 
1.43; 
1.28; 
1.13; 
1.15; 
1.1; 
1.03; 
1.37; 
1.49; 
1.77; 
1.99; 
2.07; 
2.13; 
1.91; 
1.55. 

Year: 2008: Weekly TED spread: 
1.39; 
1.22; 
0.87; 
1.18; 
1.01; 
0.93; 
0.79; 
0.85; 
1.07; 
1.44; 
1.47; 
1.76; 
1.39; 
1.32; 
1.38; 
1.6; 
1.63; 
1.39; 
1.08; 
0.88; 
0.8; 
0.77; 
0.83; 
0.8; 
0.86; 
1.01; 
0.93; 
1.02; 
1.35; 
1.2; 
1.1; 
1.1; 
0.95; 
1.06; 
1.09; 
1.11; 
1.2; 
2.41; 
2.64; 
3.36; 
3.96; 
4.11; 
2.65; 
2.7; 
2.15; 
1.98; 
2.12. 

[End of figure] 

Source: Global Insight and Federal Reserve Bank of St. Louis. 

Note: Rates and yields are weekly percentages. Area between LIBOR and 
Treasury yield is the TED spread. 

[End of figure] 

Corporate Spreads: 

The economywide risk premium is measured in a number of ways, most 
commonly as the difference (spread) between Moody's Investors Service 
(Moody's) Baa bond rate and Moody's Aaa rate or between these rates and 
the relevant government bond yield.[Footnote 45] These spreads 
represent a premium lenders demand for taking on risk--that is, when 
spreads are high, market participants perceive more risk, warranting a 
higher rate of return. When credit market conditions improve, some 
narrowing of these spreads would be expected.[Footnote 46] Moody's 
describes Aaa bonds as "of the highest quality, with minimal credit 
risk" and Baa bonds as "subject to moderate credit risk" that "may 
possess certain speculative characteristics." As shown in figure 4, the 
various interest rate spreads show a common pattern--an increase in 
negative perceptions about risk, resulting in increasing spreads as 
seen over the past year (as shown in the inset) and at various points 
in the past 25 years, including the mid-1980s and early 2000s. Declines 
in these spreads would be indicative of improving credit conditions, 
but because these spreads may have been too narrow during the period 
leading up to the credit market turmoil (risk was underpriced), it is 
not clear how much these premiums should decline. Treasury has noted 
that although interbank lending rates have improved, U.S. companies 
continue to experience difficulties in issuing long-term debt at 
attractive rates. As of November 21, 2008, both corporate spreads were 
higher than they were the week prior to the initial capital injections. 

Figure 4: Yields on Corporate Bonds (Aaa and Baa) Relative to 10-year 
Treasury: 

[Refer to PDF for image] 

This figure is a multiple line graph depicting the yields on corporate 
bonds (Aaa and Baa) relative to 10-year Treasury during the time period 
1982 through 2008. The vertical axis of the graph represents interest 
rates from 0 to 18 percent. The horizontal axis of the graph represents 
the time period of 1982 through 2008. Represented on the graph are 
yields for: 
Moody's Baa; 
Moody's Aaa; 
10-year Treasury; 
Aaa/Baa-Treasury spread. 

Also depicted on the figure are inset graphs representing the Aaa-
Treasury spread and the Baa-Treasury spread on a weekly basis for the 
time period of 2006 though November 21, 2008. The data depicted in the 
inset graphs follows: 

Year: 2006; Weekly Aaa-Treasury spread: 
0.89; 
0.88; 
0.88; 
0.87; 
0.84; 
0.78; 
0.78; 
0.76; 
0.77; 
0.79; 
0.82; 
0.82; 
0.81; 
0.83; 
0.86; 
0.86; 
0.86; 
0.85; 
0.83; 
0.85; 
0.85; 
0.83; 
0.8; 
0.78; 
0.76; 
0.76; 
0.76; 
0.75; 
0.75; 
0.77; 
0.8; 
0.82; 
0.8; 
0.81; 
0.81; 
0.8; 
0.79; 
0.78; 
0.79; 
0.8; 
0.78; 
0.78; 
0.78; 
0.77; 
0.75; 
0.73; 
0.72; 
0.74; 
0.76; 
0.75; 
0.76; 
0.76. 

Year: 2007; Weekly Aaa-Treasury spread: 
0.65; 
0.64; 
0.64; 
0.64; 
0.64; 
0.65; 
0.66; 
0.67; 
0.7; 
0.72; 
0.73; 
0.74; 
0.77; 
0.8; 
0.79; 
0.75; 
0.76; 
0.75; 
0.77; 
0.72; 
0.71; 
0.68; 
0.65; 
0.69; 
0.71; 
0.71; 
0.7; 
0.71; 
0.71; 
0.76; 
0.86; 
0.99; 
1.15; 
1.23; 
1.22; 
1.25; 
1.24; 
1.2; 
1.18; 
1.15; 
1.11; 
1.11; 
1.15; 
1.15; 
1.21; 
1.27; 
1.36; 
1.35; 
1.4; 
1.43; 
1.39; 
1.36. 

2008; Weekly Aaa-Treasury spread: 
1.41; 
1.51; 
1.57; 
1.72; 
1.71; 
1.74; 
1.82; 
1.77; 
1.82; 
1.93; 
2.02; 
2.05; 
1.99; 
1.98; 
1.93; 
1.93; 
1.77; 
1.73; 
1.72; 
1.7; 
1.69; 
1.64; 
1.65; 
1.53; 
1.54; 
1.58; 
1.6; 
1.63; 
1.69; 
1.67; 
1.69; 
1.75; 
1.77; 
1.75; 
1.75; 
1.8; 
1.8; 
2.09; 
2.07; 
2.26; 
2.43; 
2.45; 
2.58; 
2.5; 
2.55; 
2.59; 
2.61. 

Year 2006; Weekly Baa-Treasury spread: 
1.84; 
1.83; 
1.83; 
1.8; 
1.76; 
1.72; 
1.71; 
1.67; 
1.66; 
1.67; 
1.7; 
1.7; 
1.7; 
1.7; 
1.71; 
1.7; 
1.66; 
1.61; 
1.6; 
1.65; 
1.67; 
1.67; 
1.66; 
1.66; 
1.68; 
1.68; 
1.67; 
1.66; 
1.68; 
1.67; 
1.69; 
1.71; 
1.71; 
1.72; 
1.74; 
1.73; 
1.7; 
1.69; 
1.72; 
1.74; 
1.72; 
1.71; 
1.65; 
1.63; 
1.61; 
1.6; 
1.6; 
1.63; 
1.65; 
1.65; 
1.66; 
1.65. 

Year: 2007; Weekly Baa-Treasury spread: 
1.61; 
1.59; 
1.58; 
1.56; 
1.56v
1.55; 
1.55; 
1.54; 
1.6; 
1.66; 
1.69; 
1.73; 
1.75; 
1.74; 
1.72; 
1.68; 
1.68; 
1.66; 
1.66; 
1.64; 
1.63; 
1.61; 
1.6; 
1.59; 
1.59; 
1.59; 
1.59; 
1.59; 
1.59; 
1.73; 
1.85; 
1.87; 
2; 
2.06; 
2.05; 
2.07; 
2.12; 
2.08; 
2.02; 
1.98; 
1.9; 
1.92; 
1.98; 
2; 
2.09; 
2.2; 
2.35; 
2.43; 
2.56; 
2.6; 
2.53; 
2.51. 

Year: 2008; Weekly Baa-Treasury spread: 
2.55; 
2.68; 
2.8; 
2.96; 
2.96; 
3.03; 
3.11; 
3.08; 
3.13; 
3.28; 
3.4; 
3.43; 
3.41; 
3.41; 
3.37; 
3.36; 
3.17; 
3.07; 
3.04; 
3.06; 
3.07; 
3.03; 
3.03; 
2.93; 
2.94; 
2.99; 
3.06; 
3.13; 
3.2; 
3.16; 
3.17; 
3.23; 
3.26; 
3.28; 
3.3; 
3.35; 
3.39; 
3.74; 
3.82; 
4.16; 
4.56; 
5.07; 
5.55; 
5.57; 
5.51; 
5.48; 
5.76. 

Source: Federal Reserve Bank of St. Louis. 

Note: Rates and yields are weekly percentages. The average for the week 
of November 21, 2008, is a midweek estimate. 

[End of figure] 

Mortgage Rates: 

The credit turmoil has raised concern about consumers' abilities to 
obtain funds, including mortgages, at rates consistent with economic 
fundamentals and individual risk characteristics. One of TARP's 
explicit goals is to enhance liquidity and promote lending to 
consumers, but high spreads between mortgage rates and Treasury yields 
indicate relatively high risk and low liquidity. Therefore, to the 
extent that credit and economic conditions improve, these spreads would 
narrow. Figure 5 shows that the weekly spread between conforming 
mortgage rates and Treasuries has widened significantly since 2004. 
[Footnote 47] As shown in the inset to the figure, from October 2007 
through October 2008, there was some improvement in this measure since 
peaking in early September 2008, however, the spread increased for the 
week ending November 21. 

Figure 5: Mortgage Rates (30-Year Fixed Rate, Conforming) and Treasury 
Yields, as of November 20, 2008: 

[Refer to PDF for image] 

This figure is a multiple line graph depicting the Mortgage Rates (30-
Year Fixed Rate, Conforming) and Treasury Yields, from 2004 through 
November 20, 2008. The horizontal axis of the graph represents interest 
rates from 0 to 8 percent. The horizontal axis of the graph represents 
the time period of 2004 through November 21, 2008. On the graph, lines 
represent the following: 
30-year fixed rate mortgage; 
10-year Treasury; 
Mortgage-Treasury spread. 

Also included in the figure is an inset graph depicting the Mortgage-
Treasury spread from 2007 through November 21, 2008, as follows: 

Year: 2007; Weekly Mortgage-Treasury spread; 
1.52; 
1.51; 
1.46; 
1.42; 
1.48; 
1.51; 
1.55; 
1.52; 
1.63; 
1.61; 
1.6; 
1.58; 
1.53; 
1.49; 
1.48; 
1.48; 
1.49; 
1.51; 
1.5; 
1.47; 
1.53; 
1.52; 
1.51; 
1.54; 
1.55; 
1.58; 
1.53; 
1.63; 
1.7; 
1.81; 
1.91; 
1.8; 
1.92; 
1.9; 
1.9; 
1.98; 
1.89; 
1.77; 
1.81; 
1.8; 
1.73; 
1.83; 
1.94v
1.87; 
1.92; 
2.02; 
2.16; 
2.16; 
1.99; 
1.99; 
2.02; 
1.96. 

Year: 2008; Weekly Mortgage-Treasury spread; 
2.13; 
2.02; 
1.97; 
1.9; 
2.01; 
2.01; 
2; 
2.19; 
2.46; 
2.42; 
2.62; 
2.48; 
2.33; 
2.33; 
2.34; 
2.21; 
2.22; 
2.23; 
2.2; 
2.15; 
2.14; 
2.05; 
2.11; 
2.17; 
2.22; 
2.36; 
2.35; 
2.47; 
2.28; 
2.52; 
2.48; 
2.53; 
2.61; 
2.64; 
2.61; 
2.66; 
2.27; 
2.24; 
2.25; 
2.4; 
2.25; 
2.44; 
2.3; 
2.54; 
2.38; 
2.36. 

Source: Federal Reserve Bank of St. Louis. 

Note: Rates and yields are weekly percentages. 

[End of figure] 

Mortgage Originations: 

Like other bank interest rates, mortgage rates may reflect the 
customers banks choose to lend to rather than the cost of credit for 
all potential customers. As such, the volume of new mortgage lending 
may also indicate the availability of credit, changes in credit risk, 
or demand for credit. As shown in figure 6, quarterly mortgage 
originations in the United States have fallen by over 50 percent since 
2005.[Footnote 48] While increases in mortgage interest rates have 
remained moderate, mortgage lending has decreased. To the extent that 
credit and economic conditions improve over time and interest rates 
remain stable, we would expect mortgage originations to stop declining 
and eventually rise, although it is not clear that this measure would 
or should return to the level seen in the period leading up to the 
credit market turmoil. 

Figure 6: Mortgage Originations, as of September 2008: 

[Refer to PDF for image] 

This figure is a line graph depicting Mortgage Originations from 2004 
through September 2008, as follows: 

Date: 2004, Q1; 
Amount: $647 billion. 

Date: 2004, Q2;	
Amount: $847 billion. 

Date: 2004, Q3;	
Amount: $707 billion. 

Date: 2004, Q4;	
Amount: $718 billion. 

Date: 2005, Q1;	
Amount: $665 billion. 

Date: 2005, Q2;	
Amount: $790 billion. 

Date: 2005, Q3;	
Amount: $875 billion. 

Date: 2005, Q4;	
Amount: $790 billion. 

Date: 2006, Q1;	
Amount: $705 billion. 

Date: 2006, Q2;	
Amount: $800 billion. 

Date: 2006, Q3;	
Amount: $755 billion. 

Date: 2006, Q4;	
Amount: $720 billion. 

Date: 2007, Q1;	
Amount: $680 billion. 

Date: 2007, Q2;	
Amount: $730 billion. 

Date: 2007, Q3;	
Amount: $570 billion. 

Date: 2007, Q4;	
Amount: $450 billion. 

Date: 2008, Q1;	
Amount: $490 billion. 

Date: 2008, Q2;	
Amount: $445 billion. 

Date: 2008, Q3;	
Amount: $300 billion. 

Source: Inside Mortgage Finance estimates. 

Note: Estimates of originations are based on information from FHA, VA, 
mortgage-backed securities and lenders and include refinances. 

[End of figure] 

Mortgage Foreclosures and Defaults: 

Going forward, we also plan to report on trends in foreclosures and 
delinquencies. Treasury officials have urged banks to work to modify 
and restructure loans whenever reasonable to avoid preventable 
foreclosures.[Footnote 49] Moreover, if CPP is effective, banks may be 
more able to refinance mortgage loans for creditworthy borrowers to 
keep monthly payments affordable. While it is too early to expect 
material changes in foreclosures and the most recent data preclude an 
assessment of trends since September 30, figure 7 establishes the 
historical context for continued monitoring. As the figure shows, the 
percentage of total loans foreclosures has reached 2.75--a level unseen 
in recent history. As noted earlier, outside of TARP a variety of 
parties are taking a number of actions to address the rising 
foreclosure rate. 

Figure 7: Percentage of Loans in Foreclosure, as of June 30, 2008: 

[Refer to PDF for image] 

This figure contains two graphs. The first is a line graph depicting 
the percentage of loans in foreclosure from 1979 through June 30, 2008. 
The vertical axis of the graph represents percentage from 0 to 3.00. 
The horizontal axis of the graph represents the time period from 1979 
through 2008, Q2. The line depicting the foreclosure rate shows a 
fairly steady increase from a rate of about 0.31% in 1979 to 1.08% in 
2005 Q1, then a steep increase until 2008 Q2. That steep increase is 
depicted on the second graph, as follows: 

Date: Q2, 2005; 
Foreclosure rate: 1%. 

Date: Q3, 2005; 
Foreclosure rate: 0.97%. 

Date: Q4, 2005; 
Foreclosure rate: 0.99%. 

Date: Q1, 2006; 
Foreclosure rate: 0.98%. 

Date: Q2, 2006; 
Foreclosure rate: 0.99%. 

Date: Q3, 2006; 
Foreclosure rate: 1.05%. 

Date: Q4, 2006; 
Foreclosure rate: 1.19%. 

Date: Q1, 2007; 
Foreclosure rate: 1.28%. 

Date: Q2, 2007; 
Foreclosure rate: 1.4%. 

Date: Q3, 2007; 
Foreclosure rate: 1.67%. 

Date: Q4, 2007; 
Foreclosure rate: 2.04%. 

Date: Q1, 2008; 
Foreclosure rate: 2.47%. 

Date: Q2, 2008; 
Foreclosure rate: 2.75%. 

Source: GAO analysis of Global Insight data. 

[End of figure] 

Other Financial and Credit Market Indicators May Be Useful as TARP 
Evolves: 

In addition to the preliminary indicators previously identified, we are 
evaluating the potential usefulness of a number of other indicators. 
This list is not definitive or exhaustive, and we expect to add new 
indicators and modify or drop others as we engage with Treasury, 
Federal Reserve, and other informed market participants. Moreover, some 
measures included may become more appropriate indicators as time 
progresses. 

* Prime lending rate (Federal Reserve). The prime lending rate is an 
interest rate banks charge to their most creditworthy customers and 
usually moves with the target Fed funds rate--an overnight interbank 
lending rate. Many variable rate consumer loans such as credit cards 
are linked to the prime rate. Like mortgage rates, the prime lending 
rate does not necessarily indicate the cost of credit to all potential 
borrowers. 

* Survey of lending standards (Federal Reserve). This survey asks 
senior loan officers at U.S. banks whether lending standards have 
tightened or eased. The most recent survey suggests a tightening in 
credit standards for approving applications for commercial and 
industrial loans. It also shows increased spreads of loan rates over 
banks' cost of funds, especially for riskier loans, in part because of 
the uncertain economic outlook, reduced tolerance for risk, and 
liquidity issues. 

* Commercial paper interest rates (Federal Reserve). Interest rates on 
financial and nonfinancial commercial paper should be indicative of 
liquidity and perceptions of risk in short-term debt markets. The 
spread between financial commercial paper and nonfinancial commercial 
paper indicates the cost of raising capital for financial institutions 
relative to their nonfinancial counterparts. 

* Changes in assets held by commercial banks (Call Report Data). Banks 
provide quarterly call report information to their regulators, 
including information on loan assets, among other things. This 
information could provide information about the quality and flow of 
credit. 

* Changes in household and business debt (Federal Reserve). These are 
indicators of the quantity and flow of credit. 

* Stock prices (Lexis Nexis Historical Quotes). Stock prices represent 
an important component of the cost of capital for publicly traded 
companies and impact the ability to secure loans. Stabilization of 
stock prices for banks participating in CPP and the financial sector in 
general would indicate a rebuilding of investor confidence and improve 
the ability of these companies to raise capital on the public market. 
Stock prices are also a leading indicator of real economic activity. 

* House prices (S&P/Case-Shiller, Office of Federal Housing Enterprise 
Oversight). By increasing liquidity, rebuilding confidence, and 
lowering borrowing costs, CPP may lead to improvements in both housing 
prices and foreclosure rates.[Footnote 50] The stabilization of housing 
markets is important to the valuation of MBS and other financial 
instruments central to current market conditions. 

* VIX (Chicago Board Options Exchange). The VIX is a measure of 
expected stock market volatility over the next 30 days, calculated as 
an index of the prices of options on the Standard & Poor's 500 Index. 
It is an indicator of uncertainty about the future price of stocks and 
general uncertainty about the economy. 

Conclusions: 

TARP is a new program that involves taking a number of steps to help 
revive the U.S. and global economies as they struggle through the 
current economic crisis. Given changing market conditions and the need 
to coordinate efforts both domestically and globally, Treasury must 
continue to strengthen its communication with external stakeholders, 
including Congress and the public, to ensure that members and the 
public understand Treasury's rationale for shifts in OFS's strategic 
direction. Because TARP is relatively new, and because the crisis makes 
immediate action imperative, Treasury is operating on a number of 
fronts concurrently. It is setting up programs and establishing 
oversight policies and procedures at the same time. As a result, we are 
seeing some lag in administrative efforts--for example, in internal 
controls--as the programs proceed. Treasury and the banking regulators 
have publicly stated that they expect participating institutions to use 
CPP funds in a manner consistent with the goals of the program by 
working to expand the flow of credit to promote sustained economic 
growth and modifying the terms of residential mortgages to strengthen 
the housing market. But Treasury has not yet set up policies and 
procedures to help ensure that CPP funds are being used as intended. 
Similarly, institutions participating in CPP are subject to specific 
restrictions on dividend payments or repurchasing shares as long as 
Treasury has preferred shares outstanding. But Treasury also has no 
policies and procedures in place for ensuring that the institutions are 
complying with these requirements or that they are using the capital 
investments in a manner that helps meet the purposes of the act. 
Although Treasury has hired a third party to help establish a system of 
internal controls, until control are in place to ensure that specific 
program requirements are met, Treasury cannot effectively hold 
participating institutions accountable for how they use the capital 
injections or provide strong oversight of compliance with the 
requirements under the act. 

Further, while Treasury has made progress in setting up OFS, it faces a 
number of ongoing challenges that must be addressed. First, timely 
completion of hiring efforts to bring OFS up to its full complement of 
staff, as well as effective succession planning for likely changes in 
key OFS leadership positions, is critical to ensuring the integrity of 
TARP both during and after the transition to the new administration. 
Second, Treasury has not yet finalized necessary oversight procedures 
for its growing number of contractors and financial agents, even though 
the use of time and materials contracts requires enhanced oversight of 
contractor performance. Third, while the financial agent and contractor 
arrangements will enhance Treasury's capabilities to administer TARP, 
the substantial reliance on the private sector raises issues related to 
the potential for conflicts of interest. Lacking a comprehensive and 
complete system to monitor conflicts of interest, Treasury runs the 
risk that it may not be able to ensure that conflicts are fully 
identified and appropriately addressed. This area is just one of 
several in which internal controls have yet to be established for TARP 
activities. While OFS is in the process of developing a comprehensive 
system of internal control, there is heightened risk that the interests 
of the government and taxpayers may not be adequately protected and 
that OFS may not achieve its mission in an effective and efficient 
manner. 

Finally, evaluating the impact of Treasury's efforts under TARP, which 
are intended to improve conditions in credit and other markets, will be 
challenging for a number of reasons. As we have noted, little time has 
passed since the initial infusion of capital into the institutions, and 
a variety of other programs and efforts directed at bolstering the 
economy and helping homeowners are still being considered. Further, in 
addition to TARP, U.S. regulators as well as foreign governments 
continue to take a variety of actions, including many coordinated 
efforts, aimed at stabilizing markets and the economy. Moreover, a 
number of other interventions and market forces themselves will affect 
future developments and make it difficult to isolate the effects of any 
program or action, not just TARP. To facilitate our assessment of 
TARP's activities going forward, we have identified a number of 
preliminary indicators that, when viewed collectively, should signal 
whether TARP as well as other programs are functioning as intended. 
Among these preliminary indicators are interest rate spreads, mortgage 
rates, and mortgage originations. We also have identified other 
indicators that may prove useful as TARP evolves. Together, these 
indicators should provide additional information to policymakers and 
others on the overall stability of our financial markets. 

Recommendations for Executive Action: 

We recognize that less than 60 days has passed since the program was 
created and the inherent difficulty of setting up any new program, 
especially during turbulent economic conditions. However, we have 
identified a number of areas that warrant Treasury's ongoing attention. 
Therefore, we are recommending that Treasury take a number of actions 
aimed at improving the integrity, accountability, and transparency of 
TARP. Specifically, Treasury should: 

* work with the bank regulators to establish a systematic means of 
monitoring and reporting on whether financial institutions' activities 
are consistent with the purposes of CPP and help ensure an appropriate 
level of accountability and transparency; 

* develop a means to ensure that institutions participating in CPP 
comply with key requirements of program agreements, including those 
covering limitations on executive compensation, dividend payments, and 
the repurchase of stock; 

* formalize the existing communication strategy to ensure that external 
stakeholders, including Congress and the public, are informed about the 
program's current strategy and activities as well as the rationale for 
changes in this strategy to avoid information gaps and shocks; 

* develop a definitive transition plan by building on and formalizing 
ongoing activities to facilitate a smooth transition to the new 
administration, including ensuring that key OFS leadership positions 
are filled during and after the transition to the new administration; 

* continue OFS hiring efforts in an expeditious manner to ensure that 
Treasury has the personnel needed to carry out and oversee TARP; 

* ensure that sufficient personnel are assigned and appropriately 
trained to oversee the performance of all contractors, especially those 
performing under contracts priced on a time and materials basis, and 
move toward greater reliance on fixed-price arrangements, whenever 
possible, as program requirements are better defined over time; 

* continue to develop a comprehensive system of internal control over 
TARP, including policies, procedures, and guidance for program 
activities that are robust enough to ensure that program's objectives 
and requirements are being met; 

* issue final regulations on conflicts of interest involving Treasury's 
agents, contractors, and their employees and related entities as 
expeditiously as possible, and review and renegotiate mitigation plans, 
as necessary, to enhance specificity and compliance with the new 
regulations once they are issued; and: 

* institute a system to effectively manage and monitor the mitigation 
of conflicts of interest going forward. 

Agency Comments and Our Analysis: 

We provided a draft of this report to the Department of the Treasury 
for review and comment. We also provided segments of the draft report 
to the Federal Reserve, FDIC, OCC and OTS for review and comment. In 
written comments, Treasury generally agreed with the report and eight 
of the nine recommendations (see app. I). Treasury stated that it had 
taken aggressive measures to stabilize credit markets, such as 
investing over $150 billion in financial institutions through CPP. 
Treasury also said that it had made significant progress in building an 
infrastructure to carry out its ongoing responsibilities to develop 
other programs, measure risk, monitor compliance, and ensure robust 
internal financial controls and that our report's recommendations would 
be helpful in implementing the work that remained to be done in these 
areas. Treasury stated that it had made significant efforts to ensure 
transparency and good communication with external stakeholders but 
acknowledged that more could and would be done in these areas. Treasury 
agreed that it needed to develop procedures to determine whether 
financial institutions were complying with the requirements explicitly 
imposed on them in the CPP agreements and under the statute but had a 
different perspective from our recommendation on what should be done to 
evaluate how institutions were using funds received under CPP. Treasury 
said that it would welcome further discussion on general metrics for 
evaluating the overall success of CPP in addressing the purposes of the 
act. In technical comments, the Federal Reserve also expressed concern 
about whether Treasury needed to monitor individual institutions' use 
of CPP funds, because data from any single institution would not 
indicate that the program's goals had been achieved. Instead, 
achievement of the goals would be reflected in the level of functioning 
of the financial marketplace as a whole. 

As discussed in the draft, we agree that it will be important to 
develop a range of metrics to evaluate the overall success of CPP, and 
we welcome continued discussions with Treasury and the regulators on 
general metrics to achieve this purpose. However, given the magnitude 
of funds provided to this program, these types of metrics alone will 
not provide the necessary transparency and accountability needed to 
ensure that participating institutions are using the funds in a manner 
that is consistent with the purposes of the act. As stated in the 
report, Treasury should build on the existing oversight mechanisms of 
the banking regulators to minimize any additional regulatory burden and 
develop a means for reviewing and reporting on planned and actual 
actions taken by participating financial institutions that result from 
the additional funding received through CPP. Obtaining such information 
could help Treasury better monitor participating institutions' 
activities and provide an appropriate level of accountability and 
transparency. Moreover, the information could also feed into an overall 
assessment of the effect of TARP in restoring liquidity and stability 
to the financial system. Treasury, the Federal Reserve, FDIC, OCC, and 
OTS also provided technical comments that we incorporated in the 
report, as appropriate. 

We are sending copies of this report to other interested congressional 
committees and members, Treasury, the federal banking regulators, and 
others. The report also is available at no charge on the GAO Web site 
at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact Richard J. Hillman at (202) 512-8678 or hillmanr@gao.gov, 
Thomas J. McCool at (202) 512-2642 or mccoolt@gao.gov, or Orice M. 
Williams at (202) 512-8678 or williamso@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. GAO staff who made major contributions to 
this report are listed in appendix II. 

Signed by: 

Gene L. Dodaro: 
Acting Comptroller General of the United States: 

[End of section] 

List of Congressional Addresses: 

The Honorable Robert C. Byrd: 
Chairman: 
The Honorable Thad Cochran: 
Ranking Member: 
Committee on Appropriations: 
United States Senate: 

The Honorable Christopher J. Dodd: 
Chairman: 
The Honorable Richard C. Shelby: 
Ranking Member: 
Committee on Banking, Housing, and Urban Affairs: 
United States Senate: 

The Honorable Kent Conrad: 
Chairman: 
The Honorable Judd Gregg: 
Ranking Member: 
Committee on the Budget: 
United States Senate: 

The Honorable Max Baucus: 
Chairman: 
The Honorable Charles E. Grassley: 
Ranking Member: 
Committee on Finance: 
United States Senate: 

The Honorable David R. Obey: 
Chairman: 
The Honorable Jerry Lewis: 
Ranking Member: 
Committee on Appropriations: 
House of Representatives: 

The Honorable John M. Spratt, Jr. 
Chairman: 
The Honorable Paul Ryan: 
Ranking Member: 
Committee on the Budget: 
House of Representatives: 

The Honorable Barney Frank: 
Chairman: 
The Honorable Spencer Bachus: 
Ranking Member: 
Committee on Financial Services: 
House of Representatives: 

The Honorable Charles B. Rangel: 
Chairman: 
The Honorable Jim McCrery: 
Ranking Member: 
Committee on Ways and Means: 
House of Representatives: 

[End of section] 

Appendix I: Comments from the Department of the Treasury: 

Department of The Treasury: 
Assistant Secretary: 
Washington, D.C. 

November 28, 2008: 

Mr. Thomas J. McCool: 
Director: 
Center for Economics, Applied Research and Methods: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, D.C. 20548: 

Dear Mr. McCool: 

Thank you for the opportunity to review the draft report entitled 
Troubled Assets Relief Program: Additional Actions Needed to Better 
Ensure Integrity, Accountability, and Transparency. The draft report 
fairly summarizes Treasury's progress in implementing the Emergency 
Economic Stabilization Act of 2008 (EESA), and we agree with the draft 
report's recommendations, except as noted below. 

Less than 60 days have elapsed since Congress passed and the President 
signed EESA into law. During this short time, Treasury has taken 
aggressive measures to stabilize credit markets. We designed and 
implemented the Capital Purchase Program (CPP) to inject equity into 
healthy financial institutions, drawing upon the judgment and expertise 
of hank regulators. To date, we have invested over $150 billion in 
financial institutions (banks and savings institutions and their 
holding companies). Treasury also instituted a program to address the 
risks posed by systemically significant failing institutions. At the 
same time, Treasury has made significant progress building an 
infrastructure that will carry out our ongoing responsibility to 
develop other programs, measure risk, monitor compliance, and ensure 
robust internal financial controls. The draft report acknowledges 
Treasury's progress in these areas and makes helpful recommendations 
about the work that remains to be done. 

We agree with the recommendations directed at building an Office of 
Financial Stability that is well-staffed and well-trained. We also 
agree that Treasury must continue to develop its internal controls, 
procedures, and policies for program activities. We believe that 
Treasury has made significant efforts to ensure transparency and good 
communication with our external stakeholders, but more can and will be 
done in these areas. 

Treasury also agrees with the recommendation that it should develop 
means to determine whether financial institutions are complying with 
the requirements explicitly imposed on them in our purchase agreements 
and under the statute. We have a different perspective, however, on 
what is needed to evaluate how individual institutions participating in 
the CPP are spending the funds they receive under the program. Treasury 
designed the capital purchase program to further the goals of EESA, 
which included a number of requirements applicable to individual 
financial institutions. Treasury is developing compliance programs for 
these requirements, and welcomes further discussion on general metrics 
for evaluating the overall success of the capital purchase program in 
addressing the purposes of EESA. 

Thank you again for the work that went into this draft report and the 
opportunity to comment on it. We appreciate the cooperation you have 
extended to us in implementing this important legislation. 

Signed by: 

Neel Kashkari: 
Interim Assistant Secretary: 
Office of Financial Stability: 

[End of section] 

Appendix II: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Richard J. Hillman, (202) 512-8678: 

Thomas J. McCool, (202) 512-2642: 

Orice M. Williams, (202) 512-8678: 

Staff Acknowledgments: 

In addition to the contacts named above, Linda Calbom, Mathew Scire, 
and William Woods (Lead Directors); Daniel Garcia-Diaz, Lawrence Evans, 
Jr., Kay Kuhlman, Harry Medina, and Carol Dawn Petersen (Lead Assistant 
Directors); and Allison Abrams, Marianne Anderson, Sonya Bensen, 
Patrick Breiding, Steven Brown, Angela Burriesci, Mason Calhoun, 
Timothy Carr, Tara Carter, Emily Chalmers, Rachel DeMarcus, Heather 
Digna, Lynda Downing, Matt Drerup, Abe Dymond, Katherine Eikel, Nancy 
Eibeck, Gary Engel, Paul Foderaro, Jeanette Franzel, Leon Gill, Daniel 
Gordon, Michael Hoffman, Joe Hunter, Ron Ito, Elizabeth Jimenez, John 
A. Krump, James Lager, Robert Lunsford, Stephanie May, Kimberly 
McGatlin, Jay R. McTigue, Marc Molino, Susan Offutt, Jose Oyola, 
Kenneth Patton, Jasminee Persaud, Susan Poling, Anthony Pordes, Barbara 
Roesmann, Susan Sawtelle, Jeremy Sebest, John Treanor, Karen Tremba, 
Katherine Trimble, Julie Trinder,and James Vitarello made contributions 
to this report. 

[End of section] 

Footnotes: 

[1] Pub. L. No. 110-343, sec. 3(9)(Oct. 3, 2008). The act requires that 
the appropriate committees of Congress be notified in writing that the 
Secretary of the Treasury, after consultation with the Federal Reserve 
Chairman, has determined that purchase of other financial instruments 
is necessary to promote financial market stability. 

[2] The FDIC established the two guarantee programs after a 
determination of systemic risk by the Secretary of the Treasury. FDIC 
may bypass the least cost method of resolving banks in extraordinary 
circumstances if the least cost method would have "serious adverse 
effects on economic conditions and financial stability" and if 
bypassing the least cost method would "avoid or mitigate such adverse 
effects." The systemic risk exception requires the approval of the FDIC 
Board of Directors, the Federal Reserve Board and the Secretary of the 
Treasury in consultation with the President. 12 U.S.C. §1823(c)(4)(G). 
FDIC believes that the guarantee programs promote financial stability 
by preserving confidence in the banking system and encourage liquidity 
in order to ease lending to creditworthy businesses and consumers. GAO 
is required to review the systemic risk determination and report to 
Congress on (1) the basis for the determination; (2) the purpose for 
the action; and (3) the likely effect of the determination and the 
action on the incentives and conduct of insured depository institutions 
and uninsured depositors. GAO's work on this mandate is ongoing. 

[3] Commercial paper is an unsecured, short-term debt instrument issued 
by a corporation, typically for the financing of accounts receivable, 
inventories, and meeting short-term liabilities. Maturities on 
commercial paper rarely range any longer than 270 days. 

[4] The Federal Reserve Bank of New York will provide senior secured 
funding to a series of special purpose vehicles to facilitate an 
industry-supported private sector initiative to finance the purchase of 
eligible assets from eligible investors. Eligible assets are to include 
U.S. dollar-denominated certificates of deposit, bank notes, and 
commercial paper issued by highly rated financial institutions and 
having remaining maturities of 90 days or less. Eligible investors 
include U.S. money market mutual funds and over time may include other 
U.S. money market investors. Congress has also temporarily increased 
FDIC deposit insurance from $100,000 to $250,000 per depositor through 
December 31, 2009. 

[5] An equity warrant is an option to buy the common stock of the debt 
issuer at a predetermined price on or before a specified expiration 
date. 

[6] Treasury has announced a $10 billion capital purchase for Merrill 
Lynch & Co., pending completion of its merger with Bank of America. 

[7] "Reports on the Processing of Transactions by Service 
Organizations" (Statement of Auditing Standards [SAS 70]) provides 
guidance on the factors an independent auditor should consider when 
auditing the financial statements of an entity that uses a service 
organization to process certain transactions. 

[8] A financial agency agreement is the document that establishes and 
governs the relationship between Treasury and its financial agent. A 
financial agent is a financial institution that has authority to hold 
deposits of public money and perform related services. See 31 U.S.C. 
pt. 202. A financial agent has a principal-agent relationship with 
Treasury and owes a fiduciary duty of loyalty and fair dealing to the 
United States. 

[9] No indicator on its own provides a definitive perspective on the 
state of markets; collectively, the indicators should provide a broad 
sense of stability and liquidity in the financial system and could be 
suggestive of the program's impact. However, it is difficult to draw 
conclusions about actual causality. 

[10] One additional purchase of $10 billion is pending until a merger 
is complete. 

[11] As described in clause (iii), (iv), (v), or (vi) of section 
402(c)(8)(B) of the Internal Revenue Code of 1986 (IRC), except that 
such authority shall not extend to any compensation arrangements 
subject to section 409A of the IRC. 

[12] The Chairman of the Federal Reserve was selected as the Chairman 
of the Oversight Board. 

[13] The Congressional Oversight Panel consists of five members, with 
the Speaker of the House, the House Republican Leader, the Senate 
Majority Leader, and the Senate Republican Leader each selecting one 
member. The fifth member is a joint selection by the Speaker of the 
House and the Senate Majority Leader. Its members are Richard H. 
Neiman, Superintendent of Banks in New York (appointed by the Speaker 
of the House); Representative Jeb Hensarling (appointed by the House 
Republican Leader); Elizabeth Warren, Harvard Law School (appointed by 
the Senate Majority Leader); Senator Judd Gregg (appointed by the 
Senate Republican Leader); and Damon Silvers, of the AFL-CIO Associate 
General Counsel, (jointly appointed by the Speaker of the House and the 
Senate Majority Leader). Others with oversight responsibilities include 
the Congressional Budget Office and the Office of Management and 
Budget. 

[14] See Section 3(9)(B) of the act. Treasury transmitted its 
determination to the appropriate committees of Congress on October 13, 
2008. 

[15] Generally, financial institutions include qualifying U.S.- 
controlled banks, savings associations, and certain bank and savings 
and loan holding companies. 

[16] The act authorized Treasury to draw up to $250 billion for 
immediate use and provided for an additional $100 billion if the 
President certifies that the additional funds are needed. A written 
certification that the additional $100 billion was necessary has been 
submitted. A final $350 billion is available under the act but is 
subject to congressional review. 

[17] In its October 2008 Monthly Treasury Statement of Receipts and 
Outlays of the United States Government, Treasury reported the $115 
billion it paid for the senior preferred shares as cash outlays. The 
Congressional Budget Office (CBO), in its Monthly Budget Review dated 
November 7, 2008, reported that, in its view, these stock purchases 
"should not be recorded on a cash basis but on a net present value 
basis, accounting for market risk, as specified in the Emergency 
Economic Stabilization Act." CBO's preliminary estimate for the present 
value cost of the stock purchases is $17 billion as compared to the 
$115 billion cash basis amount reported by Treasury. This cost reflects 
the estimated net amount of payments made and received by Treasury 
under the agreements, discounted for market risk and for interest in 
future years. The treatment of these stock purchases is being reviewed 
as part of our ongoing work. 

[18] As required under the act, Treasury publicly disclosed a 
description of the assets purchased, and the amounts and pricing of 
those assets for the capital purchases within 2 business days of 
completion. See section 114(a) of the act. 

[19] Risk-weighted assets are the total of all assets held by the bank 
that are weighted for credit risk according to a formula established in 
regulation by the Federal Reserve. 

[20] Tier 1 capital is the core measure of a bank's financial strength 
from a regulator's point of view. It consists of the types of capital 
considered the most reliable and liquid, primarily common stock and 
preferred stock. A "qualified offering" is the sale and issuance of 
Tier 1 qualifying perpetual preferred stock, common stock, or a 
combination of such stock for cash. Senior preferred may only be 
redeemed prior to 3 years from the date of investment if the proceeds 
of "qualified enquity offerings" result in aggregate gross proceeds to 
the financial institution of not less than 25 percent of the issue 
price of the senior preferred. Banks are required to hold 8 percent 
capital for regulatory purposes and historically, on average hold 
closer to 10 percent. Therefore, in terms of total capital, Treasury's 
capital infusions could equal about one-quarter to one-third of an 
institution's capital. 

[21] The issue date is the date that Treasury made the capital purchase 
of preferred stocks and warrants. In the case of the initial eight 
financial institutions that have reached settlement, this date is 
October 28, 2008. 

[22] Bank of New York Mellon is also a participant in CPP. We plan to 
review how OFS intends to mitigate and manage the conflict between Bank 
of New York Mellon's role as custodian and its participation in the 
program. 

[23] An S Corporation is a corporation that makes a valid election to 
be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code 
and thus does not pay any income taxes. Instead, the corporation's 
income or losses are divided among and passed through to its 
shareholders. A mutual organization is a company that is owned by its 
customers rather than by a separate group of stockholders. Many thrifts 
and insurance companies (for example, Metropolitan and Prudential) are 
mutual companies. 

[24] The primary federal regulator is generally the regulator 
overseeing the lead bank of the institution. Where the institution is a 
bank holding company, the primary federal regulator also consults with 
the Federal Reserve. 

[25] The committee membership includes the OFS's Chief Investment 
Officer (committee chair) and the assistant secretaries for Financial 
Markets, Economic Policy, Financial Institutions, and Financial 
Stability at Treasury. 

[26] A call report is a bank/thrift regulatory quarterly report that 
allows a regulator to monitor institution's financial condition. 

[27] A golden parachute is defined as any payment in the nature of 
compensation to a senior executive officer made on account of 
involuntary termination or in connection with any bankruptcy filing, 
receivership, or insolvency of the institution to the extent that the 
present value of the payment equals or exceeds three times the 
executive's average annual compensation over the preceding 5 years. 

[28] The restructuring plan also includes actions by the Federal 
Reserve aimed at restructuring the terms of its previous agreement. 

[29] The act specifies that the program would insure only troubled 
assets originated or issued prior to March 14, 2008. 

[30] 73 Fed. Reg. 61452 (Oct. 16, 2008), Department of the Treasury: 
Development of a Guarantee Program for Troubled Assets (Notice and 
Request for Comments). 

[31] Under the new FHA program, lenders can have loans in their 
portfolios refinanced into FHA-insured 40-year loans with fixed 
interest rates. The new insured mortgages cannot exceed 96.5 percent of 
the current appraised value of the homes, a provision that could 
require lenders to write down the existing mortgage amounts. Borrowers 
must also share a portion of the equity resulting from the new mortgage 
and the value of future appreciation. 

[32] In our prior work, we have reported that top leadership must set 
the direction, pace, and tone for agencies undergoing significant 
transformation and that the appointment of a chief operating officer is 
among the key practices available to help elevate attention on 
management issues and transformational change. See GAO, Results- 
Oriented Cultures: Implementation Steps to Assist Mergers and 
Organizational Transformations, [hyperlink, 
http://www.gao.gov/products/GAO-03-669] (Washington, D.C.: July 2, 
2003). 

[33] The Competition in Contracting Act authorizes agencies to limit 
competition when an unusual and compelling urgency precludes the use of 
full and open competition and delaying the contract would result in 
serious financial or other harm to the government. 41 U.S.C. § 253(c) 

[34] GAO, Defense Contracting: Improved Insight and Controls Needed 
over DOD's Time-and-Materials Contracts, [hyperlink, 
http://www.gao.gov/products/GAO-07-273] (Washington, D.C.: Sept. 17, 
2007). 

[35] GAO, Defense Contracting: Additional Personal Conflicts of 
Interest Safeguards Needed for Certain DOD Contractor Employees, 
[hyperlink, http://www.gao.gov/products/GAO-08-169] (Washington, D.C.: 
Mar. 7, 2008). 

[36] A recent FAR amendment, effective December 12, 2008, will require 
contractors to disclose promptly credible evidence of fraud and 
conflicts of interest to the appropriate inspector general and 
contracting officer. 73 Fed. Reg. 67064 (Nov. 12 2008) (to be codified 
at 41 C.F.R. §52-203-13(b)(3)). 

[37] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999). 

[38] According to PricewaterhouseCoopers, it plans to use the Committee 
of Sponsoring Organizations of the Treadway Commission's (COSO)- 
Enterprise Risk Management-Integrated Framework as the basis for 
providing assistance in developing the internal control model. COSO is 
a voluntary private sector organization whose purpose is to help 
businesses and other entities assess and enhance their internal control 
systems. This framework is consistent with GAO's Standards for Internal 
Control. 

[39] In an interagency statement, Treasury, FDIC, and the Federal 
Reserve encouraged banks and their regulators to work collectively to 
meet the needs of creditworthy borrowers and work with existing 
borrowers to avoid preventable foreclosures. 

[40] Capital markets are a larger source of business borrowing than 
banks, but consumers and small businesses do not generally have access 
to capital markets. 

[41] Real economic activity generally refers to measures of national 
income and the production of goods and services, such as gross domestic 
product and industrial production. 

[42] Treasury agreed to commit only up to $100 billion per government- 
sponsored enterprise to cover the enterprises' negative net worth. 

[43] Some changes in financial markets could occur because market 
participants may alter their behavior based on the announcement of a 
program in anticipation that specific action will be taken. In other 
words, if market participants believe risk will decline in the future, 
they will charge less for that risk in the present, assuming that the 
announcement is credible and the program is viewed as effective. 

[44] A basis point is a common measure used in quoting yield on bills, 
notes, and bonds and represents 1/100 of a percent of yield. It should 
be noted that while the spread is large, the actual LIBOR rate is lower 
than the average rate for 2005 through mid-2007. 

[45] Moody's Investors Service performs financial research and analysis 
on commercial and government entities. It also ranks the 
creditworthiness of borrowers using a standardized ratings scale. These 
spreads can also reflect a liquidity and/or prepayment premium. 
Moreover, some economic research also suggests that such interest rate 
spreads have predictive power for the real economy, although the 
inferences to be drawn vary across time and instruments and may send 
false signals. 

[46] Moreover, economic research also suggests that such interest rate 
spreads have predictive power for several real economy variables, such 
as industrial production, durable orders, the unemployment rate, 
personal income, capacity utilization, and consumption. 

[47] Conforming mortgages are mortgage loans that can be purchased by 
Fannie Mae and Freddie Mac. 

[48] This dropoff is consistent with the change in household mortgage 
debt as measured by the Federal Reserve's flow of funds data. 

[49] FDIC, Treasury, and the Federal Reserve have stated that lenders 
and servicers should (1) determine whether a loan modification would 
enhance the net present value of the loan before proceeding to 
foreclosure and (2) ensure that loans currently in foreclosure have 
been subject to such analysis. 

[50] While dominant causal effect may run from housing prices to 
foreclosures, foreclosures can also affect prices. To the extent that 
at-risk borrowers are able to refinance or restructure mortgages, 
prices may stabilize. Similarly, price stabilization can reduce 
foreclosure rates. However, independent of foreclosures, housing prices 
may simply be returning to their fundamental values after a long period 
of overvaluation. 

[End of section] 

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