Treasury Npv

UNITED STATES DEPARTMENT OF THE TREASURY

OFFICE OF FINANCIAL STABILITY

Troubled Asset Relief Program:Two Year Retrospective

Troubled Asset Relief ProgramOffice of Financial Stability

October 2010

..

...ifthere'sonethingthathasunifiedDemocratsandRepublicans,andeverybodyinbetween,it'sthat

weallhatedthebankbailout.Ihatedit.Youhatedit.Itwasaboutaspopularasarootcanal.

ButwhenIranforPresident,IpromisedIwouldn'tjustdowhatwaspopularIwoulddowhatwas

necessary.Andifwehadallowedthemeltdownofthefinancialsystem,unemploymentmightbedouble

whatitistoday.Morebusinesseswouldcertainlyhaveclosed.Morehomeswouldhavesurelybeenlost.

SoIsupportedthelastadministration'seffortstocreatethefinancialrescueprogram.Andwhenwe

tookthatprogramover,wemadeitmoretransparentandmoreaccountable.Andasaresult,the

marketsarenowstabilized,andwe'verecoveredmostofthemoneywespentonthebanks.

PresidentObama,January27,2010

TARPSummaryTable:

As of September 30, 2010

Bank capital programs 250$ 245$ 192$ 78% 26.8$ Automotive companies 82$ 80$ 11$ 14% 2.6$ AIG 70$ 48$ Credit Markets Public Private Investment Program 1 22.4$ 1 14.2$ 0.43$ 3% 0.2$ Term Asset-Backed Loan Facility 4.3$ 0.1$ SBA 7a Securities Purchase Program 0.4$ 0.4$ *Community Development Capital Initiative 0.8$ 0.6$ Treasury housing programs 2 45.6$ 3 0.5$ 4 n/a n/a n/a Totals $475 $388 $204 53% $30*Less than $10 million as of 8/31/2010

1/ Amount was $30 billion, but was reduced to $22 billion in July 2010.2/ Treasury's housing expenditures are not expected to be repaid and Treasury does not receive income or warrants related to these programs.

3/ Amount was $50 billion, but was reduced to approximately $46 billion in July 2010.

4/ Expenditures under the housing programs are made incrementally over time.

Maximum Allocation Total Spent Repayments % Repaid Income

..................................................................................................................................................TroubledAssetReliefProgramTwoYearRetrospectiveOctober2010 i

TableofContents..

..................................................................................................................................................TroubledAssetReliefProgramTwoYearRetrospectiveOctober2010 ii

Section

Page

1. MessagefromtheActingAssistantSecretary.......................................................................... 1

2. ExecutiveSummary.................................................................................................................. 2

3. TARPOverview......................................................................................................................... 9 A. TheFinancialCrisisandtheNeedfortheTroubledAssetReliefProgram....................... 9 B. TheBushAdministrationsActionsUnderTARP.............................................................. 9 C. TheObamaAdministrationsActionsUnderTARP.......................................................... 10 D. TARPWillCostaFractionofWhatWasExpected........................................................... 13 E. ExitFromTARPPrograms................................................................................................ 14 F. FinancialRegulatoryReform........................................................................................... 15

4. StabilizationoftheFinancialMarkets..................................................................................... 16 A. TARPContributedtoFinancialStability........................................................................... 16 B. TARPWasPartoftheGovernmentsCoordinatedEfforts.............................................. 20 C. ChallengesLieAheadtoAchievingaFullRecovery.................................. 20

5. TARPProgramDescriptions...................................................................................................... 22 A. CapitalPurchaseProgram................................................................................................. 22 B. SupervisoryCapitalAssessmentProgramandCapitalAssistanceProgram..................... 28 C. TargetedInvestmentProgram.......................................................................................... 29 D. AssetGuaranteeProgram................................................................................................. 30 E. WarrantDispositions........................................................................................................ 32 F. CommunityDevelopmentCapitalInitiative..................................................................... 33 G. TermAssetBackedSecuritiesLoanFacility...................................................................... 34 H. PublicPrivateInvestmentProgram.................................................................................. 37 I. SBA7(a)SecuritiesPurchaseProgram.............................................................................. 42 J. AutomotiveIndustryFinancingProgram......................................................................... 44 K. AmericanInternationalGroup,Inc.(AIG)......................................................................... 49

6. RetrospectiveontheTARPHousingInitiatives......................................................................... 58 A. TheCrisis.......................................................................................................................... 58 B. PolicyResponses.............................................................................................................. 60 C. DesignofHAMP............................................................................................................... 61 D. HAMPTargeting............................................................................................................... 64 E. EarlySuccessesandChallenges....................................................................................... 65 F. TheSecondPhaseofHAMP............................................................................................. 69 G. Accomplishments............................................................................................................. 72 H. TransparencyandAccountability..................................................................................... 75 I. LookingAheadforHousing.............................................................................................. 76 J. SummaryDescriptionofHousingPrograms..................................................................... 77

7. ExecutiveCompensation.......................................................................................................... 80

8. U.S.GovernmentasaShareholder.......................................................................................... 83

TableofContents..

..................................................................................................................................................TroubledAssetReliefProgramTwoYearRetrospectiveOctober2010 iii

Section

Page

9. AccountabilityandTransparency............................................................................................. 84 A. ComprehensiveMeasures............................................................................................... 84 B. AuditedFinancialStatements......................................................................................... 84 C. OversightbyFourSeparateAgencies............................................................................. 85 D. CongressionalHearingsandTestimony.......................................................................... 85

10. AdditionalResources............................................................................................................... 86 A. Glossary........................................................................................................................... 86 B. LinkstoFurtherInformation........................................................................................... 92

1.MessagefromtheActingAssistantSecretaryforFinancialStability..

..................................................................................................................................................TroubledAssetReliefProgramTwoYearRetrospectiveOctober2010 1

October5,2010

LadiesandGentlemen:October3,2010markedthesecondanniversaryoftheEmergencyEconomicStabilizationActthatcreatedtheTroubledAssetReliefProgram(TARP)andtheendoftheauthoritytomakenewfinancialcommitments.Therefore,thisisanappropriatetimetoreflectonwhatTARPhasaccomplished.TheTARPwas,andis,anenormouscommitmentoftaxpayermoney.AndTARPhasbeenunpopularforgoodreasonnoonelikesusingtaxdollarstorescuefinancialinstitutions.However,byobjectivemeasures,TARPworked.Twoyearslater,ourfinancialsystemisstable,morethan$204billionofTARPfundshavebeenrepaid,onlyaquarteroftheoriginal$700billionauthorizationremainsoutstanding,thetotalestimatedcostofTARPhasbeencutbymorethanthreefourths,taxpayershavereceived$30billioninincome,andtheTARPbankprogramsareontracktomakesolidreturnsfortaxpayers.TheultimatecostofTARPandourotherfinancialpolicieswilldependonhowfinancialmarketsandtheeconomyperforminthefuture.Iffinancialandeconomicconditionsdeteriorate,prospectsforTARPinvestmentswillalsodeteriorate.ButinlightoftherecentlyannouncedAIGrestructuringandwhenvaluedatcurrentmarketprices,TreasurynowestimatesthatthetotalcostofTARPwillbeabout$50billion.Inaddition,usingthesameassumptions,weestimatethatthecombinedcostofTARPprogramsandotherTreasuryinterestsinAIGwillbeabout$30billion.ThecostsareexpectedtocomefromlossesrelatedtoTARPinvestmentsinautocompaniesandinitiativestohelpresponsiblehomeownersavoidforeclosure.Goingforward,theDepartmentoftheTreasurywillcontinuetomanagetheinvestmentsprudentlywhileworkingwiththecompaniestorecoverasmuchofthetaxpayersfundsaspossible.Wewillalsocontinueoureffortstohelpdistressedhomeowners.AndwewilltakethesestepswhilemaintainingcomprehensiveaccountabilityandtransparencyfortheTARPprograms.Thismilestonealsomarkedthedeparture,onSeptember30,2010,ofHerbertM.Allison,Jr.astheAssistantSecretaryforFinancialStability.AsSecretaryGeithnerhassaid,thefactthatTARPisnowregardedbymanyexpertsasoneofthemosteffectiveemergencyprogramsinfinancialhistoryisadirectresultofHerbsleadership."Sincerely,TimothyG.MassadActingAssistantSecretaryforFinancialStability

2.ExecutiveSummary..


October3,2010markedthesecondanniversaryoftheEmergencyEconomicStabilizationAct(EESA)thatcreatedtheTroubledAssetReliefProgram(TARP)andtheendoftheauthoritytomakenewfinancialcommitments.EESAwasanintegralpartofthegovernmentsprogramtoresolvethefinancialcrisisof2008andearly2009.AlongsidetheactionsoftheFederalReserveandtheFDIC,andthetaxcutsandinvestmentssetforthintheAmericanRecoveryandReinvestmentAct,thefinancialactionsauthorizedunderEESAwerecriticalinpreventingadevastatingcollapseofourfinancialsystemandrestartingeconomicgrowth.Wenowhaverecoveredmostoftheinvestmentswemadeinthebanks.TaxpayerswilllikelyearnaprofitontheinvestmentsthegovernmentmadeinbanksandAIG,withTARPlosseslimitedtoinvestmentsintheautomobileindustryandhousingprograms.Andwehavealreadyreturnedhundredsofbillionsofunusedauthoritytothetaxpayertohelpreduceourdebtandfuturebudgetdeficits.TARP,ofcourse,wasnottheanswertoallofAmericaschallenges,andwehavemanystillahead.TheU.S.economyishealing,butataslowerpacethanweneed.MillionsofAmericansarestilloutofworkandatriskoflosingtheirhomes.Smallbusinessesinmanypartsofthecountrystillfinditveryhardtogetaccesstocredit.Americanfamiliesarestillworkingtoreducedebtandrebuildtheirsavings.Andalthoughthedirectfiscalcostoftheemergencyfinancialprogramswilllikelybeaverysmallfractionofinitialprojectionsandsignificantlylowerthanthesavingsandloancrisisofthe1980s,theoverallfiscalandeconomiccostsofthiscrisisaresubstantial,andwilltakesignificantlymoretimetoaddress.Therecordofthefinancialprogramsisdefinedbythefollowingkeyaccomplishments:

1. TARPwasremarkablyeffectiveinhelpingtounfreezethemarketsforcreditandcapital,bringdownthecostofborrowing,restoreconfidenceinthefinancialsystem,andrestarteconomicgrowth.

Atthepeakofthecrisis,bankswerenotmakingnewloanstobusinesses,oreventooneanother.Businessescouldnotgetfinancinginourcapitalmarkets.Municipalitiesandstategovernmentscouldnotissuebondsatreasonablerates.Thesecuritizationmarketswhichprovidefinancingforcreditcards,studentloans,autoloansandotherconsumerfinancinghadbasicallystoppedfunctioning.Theeconomywascontractingatanacceleratingrate,withmillionsofAmericanslosingtheirjobs.Bythemiddleof2009,becauseofthecombinedimpactofthegovernmentsfinancialprograms,borrowingrateshadfallensharplyforbusinesses,individuals,andstateandlocalgovernments.Companieswereabletofundthemselvesinprivatemarketsbyissuingequityandlongtermdebt.Housingpricesbegantostabilize.ThevalueofthesavingsofAmericanworkershadbeguntorecover.Andeconomicgrowthturnedfromnegativetopositive.


Figure2A:

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2. TheprojectedcostsofTARPhavefallenbyabout$300billion.Independentobservers,suchastheCongressionalBudgetOffice,initiallyprojectedthatTARPwouldcost$350billionormore.Now,becauseofthesuccessoftheprogram,TARPwilllikelycostafractionofthisamount.WeexpectthatTARPinvestmentsinthebanksandthecreditmarketprogramswillbeprofitable.TherecentlyannouncedrestructuringofAIGwillacceleratethegovernmentsexitontermsthatarelikelytoleadtoanoverallprofitonthegovernmentssupportforAIG,includingthevalueofTreasurysinterestsinAIGheldoutsideofTARP.MostofthecostofTARPisexpectedtocomefromtwosources:expectedlossesrelatedtoTARPinvestmentsinautocompaniesandinitiativestohelpresponsiblehomeownersavoidforeclosure.

TheultimatecostofTARPandourotherfinancialpolicieswilldependonhowfinancialmarketsandtheeconomyperforminthefuture.Iffinancialandeconomicconditionsdeteriorate,prospectsforTARPinvestmentswillalsodeteriorate.ButinlightoftherecentlyannouncedAIGrestructuringandwhenvaluedatcurrentmarketprices,TreasurynowestimatesthatthetotalcostofTARPwillbeabout$50billion.Inaddition,usingthesameassumptions,weestimatethatthecombinedcostofTARPprogramsandotherTreasuryinterestsinAIGwillbeabout$30billion.



Figure2B:

($U.S. billions)

TARP Bank Programs 16 2/

AIG (TARP) -5 3/

TARP Credit Market Programs 4/ 1 2/

TARP Auto Programs -17 2/

TARP Housing Programs -46 2/

Total TARP Cost -51

Other Treasury AIG Investments 22 5/

Total Treasury Cost -29

5/ After the proposed restructuring of AIG, Treasury will receive 563 million shares of AIG common in connection with the wind-down of the Federal Reserve credit facility, in addtion to the shares noted in footnote 3. Valuing those shares at the market closing price for October 1 of $38.86 per share implies a profit to the Treasury of $21.9 billion.

Preliminary Treasury Estimates of the impact of TARP Programs and Other Treasury Investments in AIG on the Federal Budget 1/

2/ Preliminary estimates for end August. Change for autos from previously-published estimate primarlly reflects increase in valuation of investments in Ally Financial Inc. (formerly known as GMAC, Inc.). due to improved market conditions.3/ After the proposed restructuring of AIG, TARP will hold 1.09 billion shares of AIG common stock, plus preferred equity interests in SPVs of approximately $22.3 billion, against a cost basis of $69.8 billion. Valuing the common equity at the market close for October 1 of $38.86 per share implies a net cost of -$5.1 billion.4/ Includes PPIP, TALF, CDCI and SBA.

1/ Estimates for AIG reflect the impact of the recently announced restructuring of the government's interests in the firm. Treasury and the Federal Reserve made several investments in AIG. These investments have been restructured over time and are closely intertwined. In particular, Treasury holds investments in AIG in two forms: equity investments made through TARP and equity provided to a trust for Treasury's benefit in connection with the Federal Reserve's creation of a credit facility for AIG.

OutsideofTARP,weexpecttoincursubstantiallossesfromFannieMaeandFreddieMac(GovernmentSponsoredEnterprises,orGSEs),throughcapitalinjectionsfromTreasurytotheGSEsthroughthePreferredStockPurchaseAgreements(PSPAs).TheselossesstemfrompoorcreditchoicesandbadriskmanagementdecisionsbeforetheFederalHousingFinanceAgency(FHFA)placedtheGSEsinconservatorshipinlate2008notactionstakenin2009or2010.However,asubstantialpartofthegovernmentsprojectedlossesonitssupportfortheGSEswillbeoffsetbyrevenuefromtwosources.UnderauthorityprovidedbytheHousingandEconomicRecoveryAct(HERA),Treasurypurchasedmorethan$200billioninmortgagebackedsecuritiesguaranteedbytheGSEs.Thoseinvestmentsaregeneratingnotablereturns.Inaddition,asaresultofitsemergencyfinancialprograms,remittancesfromFederalReserveoperationstotheFederalBudgethaveincreasedsharplyin2009and2010,andtheyareprojectedtoremainelevatedforsometime.Whileconsiderableuncertaintyremains,revenuesfromthesetwosourceswillsignificantlyoffsettolikelylosseselsewhere.WecurrentlyexpectthattheoveralldirectfiscalcostofallourfinancialinterventionswillbelessthanonepercentofGDP.Thisresultisnotablecomparedpastsystemicfinancialcrises.AnInternational



MonetaryFundstudyfoundthattheaveragenetfiscalcostofresolvingroughly40bankingcrisessince1970was13percentofGDP.AndaccordingtotheGovernmentAccountabilityOffice(GAO),thenetfiscalcostofcleaninguptheU.S.savingsandloancrisiswas2.4percentofGDP.Theseestimatesprovideameaningfulwaytocomparethedirectfiscalcostofresolvingfinancialcrisesacrosscountriesandtime.However,ourestimatesdonotreflectthefulleconomicandfiscalcostsofthiscrisis,whethermeasuredinthemillionsofAmericansstillsearchingforwork,thelostincomeforbusiness,ortheimpactoftherecessiononFederalandStatebudgets.ButbecauseTARPwassoeffectiveatmuchlowercostthanexpected,weareinamuchstrongerpositionthanwewouldotherwisehavebeentoaddresstheverysubstantialeconomicchallengeswestillfaceasacountry.

3. Wearemovingquicklytorecoverthegovernmentsinvestmentsandtowithdrawfromthefinancialsystem.

Wehavealreadymadesubstantialprogressinrecoveringtaxpayerinvestments,endingemergencygovernmentprograms,andexitingfromthefinancialsystem.Inthemostacutephaseofthecrisisattheendof2008,TARPpreferredstockinvestmentsweremadeinfinancialinstitutionsthatheldapproximately88percentofthetotalassetsofourbankingsystem.Today,weholdpreferredstockinvestmentsinfinancialinstitutionsthatholdapproximately10percentofthetotalassetsofthesystem.Injusttwoyears,wehavealreadyrecoveredthreefourthsoftheTARPfundsinvestedinbanks,andwehavegenerated$27billioninincomefromourinvestmentsinbanks.WewillfinishsellingourinvestmentinCitigroupearlynextyear.WewillalsoexitfromgovernmentinvestmentsinAIGandtheautomotiveindustrymuchfasterthananyonepredicted.GeneralMotorsisplanninganinitialpublicofferingforlaterthisyearthatwillallowustobegintoselldown,andAIGhasannouncedarestructuringplanthatwillacceleratethetimelineforrepayingthegovernmentandputtaxpayersinaconsiderablystrongerpositiontorecoupourinvestmentinthecompany.Figure2C:

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* Excludes Citigroup common stock holdings which should be sold by early 2011.

10.1




Wehaveclosedorareintheprocessofwindingdownnearlyallotheremergencygovernmentprograms.TreasuryterminatedtheMoneyMarketFundGuaranteeprogramlastyear,resultinginaprofittotaxpayers.TheFDICsTemporaryLiquidityGuaranteeProgram(TLGP)fordebtisclosedtonewcommitments,andthelevelofparticipationintheTLGPfortransactionaccountshasfallentoroughlyonequarterofitspeak.NearlyalloftheFederalReservesliquidityprogramshavebeenshutdownandgeneratedsignificantrevenues.

4. TwocriticalelementsoftheObamaAdministrationsstrategywerethestresstesttoforcebankstoraiseprivatecapitalandaseriesofinnovativeprogramstojumpstartcreditmarketsandfinancingforconsumers,businesses,andhomeowners.

WhenPresidentObamatookofficemanywereconvincedthattheonlywaytostabilizethebankingsystemwaswithlargeadditionalinjectionsofpubliccapitalornationalizationstepsthatwouldhaveentailedsignificantrisksandcosts.ThePresidentchoseadifferentpath,subjectingmajorU.S.financialinstitutionstoastresstestandforcingthemtostrengthencapitalthroughprivatefundraising.SincetheresultsofthetestswerereleasedlastMay,thoseinstitutionshaveraisedintheaggregateover$150billioninprivatecapital.Onlyoneofthe19institutionssubjectedtothetestsneededtoaccessTARPaftertheresultswerereleased.AndallbutsixofthoseinstitutionshaverepaidallTARPfundstheyreceivedataprofittotaxpayers.OnepopularmisconceptionisthatTreasuryundertheObamaAdministrationinjectedmassiveamountsofTARPfundsintolargebanks.Infact,sinceJanuary20,2009,Treasuryhasprovidedonly$11billiontobanksunderCPP,alargepartofwhichwenttooverfourhundredsmallandcommunitybanks.Meanwhile,thegovernmenthasgottenoutofthebusinessofguaranteeingnewlyissuedbankdebt.Nearly50percentofsuchnewissuancewasguaranteedbythegovernmentinJanuary2009.Thegovernmenthasnotguaranteedonedollarofnewissuancein2010.WhentheAdministrationtookoffice,thecreditmarketsthathelpprovideaccesstoloanstoconsumersandbusinesseshadfrozen.TreasuryeffortstounfreezethesemarketsincludingthroughtheTermAssetBackedSecuritiesLoanFacility(TALF),thePublicPrivateInvestmentProgram(PPIP),andtheSBA7(a)SecuritiesPurchaseProgramhavehelpedtomakecreditmoreavailableandareexpectedtogeneraterevenuesnotcostsfortaxpayers.SincethegovernmentlaunchedTALFinMarch2009,pricesforsecuritiesbackedbyconsumerandbusinessloanshaveimprovedsignificantlyandnewissuanceofsuchassetbackedsecuritieshasaveraged$12billionpermonth,comparedtolessthan$2billionpermonthinthesixmonthspriortotheprogramslaunch.Similarly,sincetheannouncementofPPIPinMarch2009,pricesforeligibleresidentialandcommercialmortgagebackedsecurities(i.e.,RMBSandCMBS)haveincreasedbyasmuchas75percent.Asaresult,bothprogramshavehelpedremovesignificantimpedimentstonewcreditforconsumers,businesses,andhomeowners.Inaddition,underTARP,TreasurylaunchedtheMakingHomeAffordableProgram(MHA),whichincludestheHomeAffordableModificationProgram(HAMP).After18months,HAMPhashelpedmorethan1.3millionhomeownersbyreducingtheirmortgagepaymentstomoreaffordablelevels.Thisincludesmorethan460,000homeownerswhosemortgagetermshavebeenmodifiedpermanently.Thesehomeownershaveexperienceda36percentmedianreductionintheirmortgagepaymentsmorethan$500permonthamountingtoatotal,programwidesavingsforhomeownersofmorethan$3.2billion.MHAhasalsospurredthemortgageindustrytoadoptsimilarprogramsthathavehelpedmillionsmoreatnocosttothetaxpayer.



Inaddition,TreasurylaunchedtheHousingFinanceAgency(HFA)InnovationFundfortheHardestHitHousingMarkets(HFAHardestHitFund,orHHF)tohelpstatehousingfinanceagenciesprovideadditionalrelieftohomeownersinthestateshithardestbyunemploymentandhousepricedeclines,andTreasuryandtheDepartmentofHousingandUrbanDevelopment(HUD)enhancedtheFHAShortRefinanceprogramtoenablemorehomeownerswhosemortgagesexceedthevalueoftheirhomestorefinanceintomoreaffordablemortgagesiftheirlendersagreetoreduceprincipalbyatleast10%.TheU.S.financialsystemismuchstrongertoday,andinastrongpositiontosupporteconomicrecovery.Thepolicyresponsetothecrisishasbroughtaboutanessentialrestructuringofthefinancialsystem.Theweakestpartsofthefinancialsystemnolongerexist.Ofthe20largestfinancialinstitutionsinthefallof2008,fournolongerexistasindependententities,fiveweresubjecttomajorinterventionsbyregulators,twoagreedtobecomesubjecttomuchgreateroversight,and10havehadsignificantchangesinseniormanagement.Thefirmsthatremainhadtomeetamarkettestforviabilitytheyhadtodemonstratetheycouldraisesubstantialamountsofprivatecapital.Today,ourfinancialsystemhassubstantiallyhigherlevelsofcapitalrelativetoriskthanbeforethecrisisandmorecapitalrelativetoglobalcompetitors.Atthesametime,weledtheeffort,workingwithothercountries,todesignandimposehighercapitalrequirementsinternationallysothatbankswillnotbecomesoundercapitalizedagain.AndtheDoddFrankWallStreetReformandConsumerProtectionActof2010(theDoddFrankAct)willsignificantlyreducethethreatoffuturefinancialcrises.Nolongerwillamajornonbankfirmescapecomprehensivesupervisionandcapitalrequirements.Nolongerwillthegovernmentbeleftwithoutthetoolsitneedstowinddownamajorfirmintheeventofamajorfinancialcrisis.Nolongerwillderivativesortheshadowbankingsystembeleftinthedark.Andnolongerwillconsumersbeleftwithoutadequateprotectionorthebasicinformationtheyneedtomakesoundchoices.Thenextstageoffinancialrepair.Eventhoughthemostdangerousphaseofthefinancialcrisisisbehindus,westillhavesubstantialworktodotorepairthedamage.TheAdministrationwillcontinuetohelpresponsiblebutatriskhomeowners,whilereformingtheU.S.housingfinancesystem.InadditiontotheMHA,theHFAHardestHitFundandFHAShortRefinanceprogramsdiscussedabove,TreasurycontinuestosupportnewhousingcreditthroughthePreferredStockPurchaseAgreementswithFannieMaeandFreddieMac(theGSEs).TreasuryisalsoworkingwithHUDandotheragenciestodevelopproposalstoreformU.S.housingfinanceandrestructuretheGSEs.Inrecentmonths,wehavereceivedinputfromavarietyofstakeholderstoinformthatprocess,andhaveheldconferencestoheartheviewsofcitizenadvocacygroups,economists,investors,marketresearchers,originators,securitizers,servicers,andprivatemortgageinsurersonreform.WewillprovideacomprehensivereformproposaltoCongressbyJanuary2011andwillworktoensurethenewsystemwilldeliveramorestablehousingmarketwithstrongerregulationandaclearerroleofgovernmentwithlessriskbornebytheAmericantaxpayer.Whereguaranteesorsupportisprovided,itwillbeexplicitandpricedappropriately.



BeyondthemeasurestakenunderEESA,wearecontinuingtoprovidesupportforsmallbusinesses,manyofwhicharestillstrugglingtoaccesscredit,expandandhirenewworkers.Lastweek,thePresidentsignedintolawtheSmallBusinessJobsAct.ThislegislationestablishestwonewandseparateTreasurylendinginitiatives:aSmallBusinessLendingFundthatwillprovideupto$30billionincapitaltocommunitybankswithincentivestoincreasetheirsmallbusinesslending,andaStateSmallBusinessCreditInitiativethatwillspur$15billioninprivatesectorlendingbystrengtheningsmallbusinessprogramsthreatenedbystatebudgetcuts.TheSmallBusinessJobsActalsoincludesenhancementstoSBAprogramsthatwillhelpcreditworthysmallbusinessesaccessloans,aswellaseightnewsmallbusinesstaxcutsthatprovideincentivesforsmallbusinessestoinvestandexpand.Finally,thereisstillworktobedoneinmanagingourremainingTARPcommitments.Foreclosuremitigationprogramswillcontinuetorequiresubstantialoversightofmortgageservicerstoensurethattheseinitiativesareeffectivelyimplemented.WhilemostofthelargestbankshaverepaidtheirobligationstoTARP,westillhaveinvestmentsinover600banks.Wewillworkwiththeseinstitutions,andtheirregulators,toacceleraterepaymentwhereappropriate.WewillalsoworktoensurethatrestructuringplansforourinvestmentsinAIGandtheautoindustryareexecutedsuccessfully.Andwewillcontinuetobetransparentinallofourefforts.WhenTARPwascreated,theworldarounduswasfallingapart.Andinthatmoment,whenfamiliesandbusinesseswereworriedlikeneverbeforeabouttheirbasiceconomicsecurity,leadersfrombothpartiesstoodup,stoodtogether,andasAmericans,didwhatwasbestforthecountry.Theydidsomethingunpopular,butnecessary.Andwearemuchbetteroffasaresult.

3.TARPOverview..


Inthisoverview,wediscusswhyTARPwasnecessary,theresultsandcurrentstatusoftheactionstakenunderTARP,itscosts,itseffectonachievingstabilizationoffinancialmarkets,andTreasurysplanstowinddowntheprogram.A. TheFinancialCrisisandtheNeedfortheTroubledAssetReliefProgram.InSeptember2008,thenationwasinthemidstofoneoftheworstfinancialcrisesinourhistory.ThefinancialinstitutionsandmarketsthatAmericansrelyupontoprotecttheirsavings,helpfinancetheirchildrenseducation,andhelppaytheirbills,andthatbusinessesrelyupontomakepayroll,buildinventories,fundnewinvestments,andcreatenewjobs,werethreatenedunlikeatanytimesincetheGreatDepression.Acrossthecountry,peoplewererapidlylosingconfidenceinourfinancialsystemandinthegovernmentsabilitytosafeguardtheireconomicfuture.

Thecausesofthecrisiswillbestudiedforyears,andthisreportisnotmeanttoprovideacomprehensiveanalysisofwhythecrisisoccurred.Butsomereasonsareclear.Overthetwodecadesprecedingthecrisis,thefinancialsystemhadgrownrapidlyinanenvironmentofeconomicgrowthandstability.Risksgrewinthesystemwithoutadequatetransparency.Laxregulationsandloopholesinsupervisionletfirmsbecomehighlyleveragedandtakeontoomuchrisk.Amplecreditaroundtheworldfueledanunsustainablehousingboominthefirsthalfofthelastdecade.Whenthehousingmarketinevitablyturneddown,startingin2006,thepaceofmortgagedefaultsacceleratedatanunprecedentedrate.Bymid2007,risingmortgagedefaultswereunderminingtheperformanceofmanyinvestmentsheldbymajorfinancialinstitutions.

Thecrisisbeganinthesummerof2007andgraduallyincreasedinintensityandmomentumoverthecourseofthefollowingyear.Aseriesofmajorfinancialinstitutions,includingCountrywideFinancial,BearStearns,andIndyMac,failed;andFannieMaeandFreddieMac,thelargestpurchasersandguarantorsofhomeloansinthemortgagemarket,cameunderseverestress.BySeptember2008,forthefirsttimein80years,theU.S.financialsystemwasatriskofcollapse.Agrowingsenseofpanicwasproducingtheclassicsignsofageneralizedrunonthebanks.Peoplestrustandconfidenceinthestabilityofmajorinstitutions,andthecapacityofthegovernmenttocontainthedamage,werevanishing.

Oursystemofregulationandsupervisionhadfailedtoconstraintheexcessiveuseofleverageandthelevelofriskinthefinancialsystem,andtheUnitedStatesenteredthiscrisiswithoutadequatetoolstomanageit.TheExecutiveBranchdidnothaveexistingoptionsformanagingfailuresofsystemicallyimportantnonbankfinancialinstitutions.TheTreasuryDepartment,theFederalReserve,theFDIC,andothergovernmentbodiesundertookanarrayofemergencyactionstopreventacollapseandthedangersposedtoconsumers,businesses,andthebroadereconomy.However,thesevereconditionsournationfacedrequiredadditionalresourcesandauthorities.Therefore,theBushAdministrationproposedEESAinlateSeptember,andwiththesupportofDemocratsandRepublicansinCongress,itwasenactedintolawonOctober3,2008.

B. TheBushAdministrationsActionsunderTARPTheTARPwasoriginallyproposedasameansforthegovernmenttobuymortgageloans,mortgagebackedsecuritiesandcertainotherassetsfrombanks.Thefactthatitwasnotusedforthispurposepromptlyafterpassagehasledtocriticismoftheprogram.However,byearlyOctober2008,lendingevenbetweenbankshadpracticallystopped,creditmarketshadshutdown,andmanyfinancialinstitutionswerefacingsevere

3.TARPOverview..


stress.Itwasalsoclearthattherewasnotsufficienttimetoimplementaprogramtobuymortgagerelatedassets,giventhechallengesofvaluingtroubledassetsandquicklybuildingtheadministrativeinfrastructuretopurchaselargevolumesofthoseassets.Inthiscontext,immediatecapitalinjectionswereneededtostabilizethebanksandavertapotentialcatastrophe.Thelawprovidedforthisapproach,becausetheauthoritieshadbeenbroadenedinthelegislativeprocesstocoverthepurchaseofanyfinancialinstrumentiftheSecretaryoftheTreasury,afterconsultationwiththeChairmanoftheFederalReserve,determinedthiswasnecessarytopromotefinancialstability.Thiswasalsotheapproachthatmanyothercountriestookatthattime.Therefore,theBushAdministrationlaunchedtheCapitalPurchaseProgramandlatertheTargetedInvestmentProgramtoprovidethissupport.UndertheBushAdministration,duringthefallandwinterof2008,TARPfundswereusedasfollows:

$234billionwasinvestedinbanksandthrifts,including$165billionineightofthelargest

financialinstitutionsinthecountry,andadditionalfundswerecommittedtoguaranteeassetsoftwoofthelargestbanks;

$40billionwasinvestedinAmericanInternationalGroup(AIG),alongwithadditionalfundsfrom

theFederalReserve;and Approximately$20billioninloanswasprovidedtotheautoindustry.

C. TheObamaAdministrationsActionsunderTARPInJanuary2009,PresidentelectObamafacedacombinationofacutefinancialandeconomicchallenges.Theeconomywasinafullfledgedrecession.Thenationhadlostover3.5millionjobsin2008,andwaslosingadditionaljobsattherateofroughly750,000permonthinthefirstquarterof2009.Businessesaroundtheworldwerecuttingbackinvestmentsthatareessentialtogrowth.Tradeamongnationshadcontractedsharply.Homepriceswerefalling,andforeclosureswereincreasing.Insteadofcatalyzingrecovery,thefinancialsystemwasworkingagainstrecovery.Thesystemwasstillfragile,andtherecessionwasputtingevengreaterpressureonbanks.Thisdangerousdynamicneededtobehaltedimmediately.TogetherwiththefiscalstimulusenactedundertheAmericanRecoveryandReinvestmentAct,theFinancialStabilityPlanannouncedinFebruary2009laidouttheObamaAdministrationscomprehensive,forcefulandsustainedcommitmenttoensurethestabilityofthefinancialsystem,assistinthecleanupoflegacyassets,jumpstarttheprovisionofnewcreditforhouseholdsandbusinesses,andsupportdistressedhousingmarkets.Aspartofthatplan,theTreasuryDepartmenthastakenthefollowingactionsunderTARPoverthelast20months:

1. RecapitalizingtheBankingSystem

Ourfinancialsystemneededtoberecapitalized.Butprivatecapitalcouldnotberaiseduntiltheconditionofthemajorfinancialinstitutionswasmadeclear.Treasuryworkedwiththefederalbankingregulatorstodevelopacomprehensive,forwardlookingstresstestforthenineteenlargestbankholdingcompaniestodeterminewhichoneswouldneedmorecapitaltoremainwellcapitalizedifeconomicconditionsdeterioratedsignificantlymorethanexpected.Thestresstestwasconductedwithunprecedentedopennessandtransparency,whichhelpedrestoremarketconfidenceinourfinancialsystem.Sincecompletionofthestresstest,thesebankshaveraisedanaggregateofmorethan$150billioninprivate

3.TARPOverview..


capital,andtwelveofthestresstestbanksthathadTARPinvestmentshaverepaidthegovernmentinfull.Treasuryallowedbanksneedingcapitaltoapplyforfurtherassistancefromthegovernment,butonlyonedidso.TreasuryestimatesthatthecapitalprogramsdevelopedunderTARPtosupportallbanks,takentogether,willresultinagaintothetaxpayer.SeeSection5ProgramDescriptions,pages2233.

2. JumpstartingtheCreditMarketsthatareCriticaltoProvidingFinancingtoConsumersandBusinesses

Becausethecrisishadfrozencreditmarkets,Treasurylaunchedthreeprogramstohelprestartthem:

TheTermAssetBackedSecuritiesLoanFacility(TALF),ajointprogramwiththeFederalReserve,helpedtorestarttheassetbackedsecuritizationmarketsthatprovidecredittoconsumersandsmallbusinesses;

TheLegacySecuritiesPublicPrivateInvestmentProgram(PPIP),matchedTARPfundswith

privatecapitaltopurchaselegacymortgagerelatedsecurities;and TheSBA7(a)SecuritiesPurchaseProgram,inwhichTreasurycommittedtohelpunlockcreditfor

smallbusinessesbyprovidingcapitalinexchangeforsecuritiesbackedbysmallbusinessloans.Treasuryestimatesthattheseprograms,takentogether,willresultinminimalornocostsunderTARP.SeeSection5ProgramDescriptions,pages3443.

3. StabilizingtheAutomotiveIndustryandAIGTreasuryprovidedadditionalassistancetoGMandChryslerontheconditionthatthosecompaniesfundamentallyrestructuretheirbusinesses.Theserestructuringsinvolvedsacrificesfromallstakeholdersshareholders,unions,autodealers,andcreditorsandhaveenabledthecompaniestobecomemorecompetitive.Thisassistancealsohelpedthemanysuppliersandancillarybusinessesthatdependontheautomotiveindustry.

TreasuryalsotookstepstorestructuretheassistancethathadbeenprovidedtotheAmericanInternationalGroup,Inc.(AIG)undertheBushAdministration.ThisinvolvedmakinganadditionalcommitmentofsupportandworkingwithAIGtowardrepayingthegovernmentbysellingnoncorebusinessesandcompletingotherrestructuringinitiatives.

InTreasurysmostrecentofficialestimate,theseinvestmentswillresultinaportionofthecostsunderTARP.However,theprospectsforrepaymenttothetaxpayerareimprovingasthecompaniescontinuetostrengthen.SeeSection5ProgramDescriptions,pages4457.

4. SupportforSmallandMidSizedBanksWhiletheObamaAdministrationmadenofurtherinvestmentsinthenationslargestbanks,Treasuryinvested$11billioninmorethan400otherbanksandthrifts,mostofwhichweresmallandcommunitybanks.Inrecognitionofthefactthattheyhadfeweralternativestoraisecapital,thesmallestbankswerealsogivenadditionaltimetoapplyforassistance.Becausecommunitydevelopmentfinancialinstitutionsservesmallbusinessesandconsumersinthecommunitieshardesthitbytherecession,communitieswhich

3.TARPOverview..


aretypicallyunderservedbylargefinancialinstitutions,aspecialprogramwasestablishedtohelptheseinstitutions.SeeSection5ProgramDescriptions,page33.

5. HelpingResponsiblebutStrugglingHomeownersWhentheObamaAdministrationtookoffice,thenationshousingmarkethadbeeninbroaddeclinefor18months.EESAauthoritiesenabledTreasurytodevelopavoluntaryprogramthatwouldsupportservicerseffortstomodifymortgages,consistentwiththeprotectionoftaxpayers.Whiletheseriouseffectsoftherecessionandfinancialcrisisonthehousingmarketandforeclosurespersist,thisAdministrationhastakenaggressiveactiononmanyfronts,includingunderTARP,andhasmadeconsiderableprogressinhelpingtostabilizethehousingmarket.

TreasurylaunchedtheMakingHomeAffordable(MHA)program,whichincludestheHomeAffordableModificationProgram(HAMP),underTARP.HAMPhashelpedhundredsofthousandsofresponsiblehomeownersreducetheirmortgagepaymentsbyanaverageof$500permonthandavoidforeclosure.MHAhasalsospurredthemortgageindustrytoadoptsimilarprogramsthathavehelpedmillionsmoreatnocosttothetaxpayer.

Asthehousingcrisishasevolved,TreasuryhasrespondedtotheunemploymentandnegativeequityproblemsbyadjustingHAMPandinstitutingadditionalprograms.Forexample:

TreasurylaunchedtheHousingFinanceAgency(HFA)HardestHitFundtohelpstatehousing

financeagenciesprovideadditionalrelieftohomeownersinthestateshithardestbyunemploymentandhousepricedeclines.

TreasuryandtheDepartmentofHousingandUrbanDevelopment(HUD)enhancedtheFHA

ShortRefinanceprogramtoenablemorehomeownerswhosemortgagesexceedthevalueoftheirhomestorefinanceintomoreaffordablemortgages.

Toprotecttaxpayers,MHAhousinginitiativeshavepayforsuccessincentives:fundsarespentonlywhentransactionsarecompletedandthereafteronlyaslongasthosecontractsremaininplace.Therefore,fundswillbedisbursedovermanyyears.Thetotalcostofthehousingprogramscannotexceedandmaybelessthan$46billion,whichistheamountcommittedtothatpurpose.SeeSection6RetrospectiveontheTARPHousingInitiatives,pages5879.

6. RecoveringTARPFundsOneofTreasurysprimaryobjectiveshasbeentogetTARPdollarsback.Sofar,morethan$200billionhasbeenreturned.Inaddition,TARPinvestmentshavegenerated$30billionofproceedstotaxpayers,intheformofdividendandinterestpaymentsandsalesofwarrants.Thesalesofwarrantshavebeenparticularlysuccessful.ThelawthatcreatedTARPrequires,inmostcases,aninstitutionreceivingTARPfundstogiveTreasurywarrantsthatallowtaxpayerstoparticipateinpotentialadditionalreturnswhentheinstitutionregainsfinancialstability.Bynegotiatingeffectivelywithbanksseekingtorepurchasetheirwarrantsdirectly,andbyeffectivelyauctioningthewarrantsofbanksthatelectnottorepurchase,Treasuryhasreceivedover$8billioninadditionalrevenuefortaxpayers.

3.TARPOverview..

Figure3A:TARPIncomeasofSeptember30,2010

Bank capital programs

$18.6

PPIP$0.2

Automotive programs

$2.8

Bank warrant sales$8.2

Source: Treasury

SeeSection5ProgramDescriptions,page26,foradescriptionofcertaininstitutionsintheCapitalPurchaseProgramthatrepresentlossesonTARPinvestments.

7. ImplementingExecutiveCompensationRestrictionsThelawthatcreatedTARP(asamendedbytheAmericanRecoveryandReinvestmentActof2009(ARRA))imposesrestrictionsontheexecutivecompensationoftopmanagementofthoseinstitutionsthatreceivedTARPfunds.Treasuryimplementedregulationstoenforcetheserestrictions,whichincludedcreatingtheOfficeoftheSpecialMasterforExecutiveCompensation.TheSpecialMasterhastakenstepstoensurethatexecutivepayattheTARPfirmsreceivingexceptionalassistancepromoteslongtermvaluecreationandfinancialstability.

8. ComprehensiveAccountabilityandTransparencyTreasuryhasoperatedtheTARPprogramswithcomprehensivestandardsforaccountabilityandtransparency.Voluminousdataandinformationhavebeenmadepublicandavailabletotaxpayers,observersandCongressonthewebsiteswww.FinancialStability.govandwww.MakingHomeAffordable.gov.ThisincludesallcontractsgoverninganyinvestmentorexpenditureofTARPfunds,andmorethan275reportsovertwoyears.TreasurywillalsopublishinNovembercomprehensiveauditedfinancialstatementsfortheTARPprograms,forthefiscalyearendingSeptember30,2010,aswedidforthepreviousfiscalyear.D. TARPWillCostaFractionofWhatWasExpectedItisclearthatTARPwillcosttaxpayersafractionofthe$700billionoriginallyauthorized.TheTreasuryDepartmentseffortshaveconsistentlyreducedtheprogramscost.Wewillnotusemorethan$475billionofTARPfunds,includingamountsalreadyexpendedandrecovered,andweexpecttorecovermostofthosefunds,otherthanthefundsspentonhousingprograms,whichwerenotintendedtobereturned.


3.TARPOverview..


InJuly2010,theObamaAdministrationandCongresscappedtheamountthatcouldbeinvestedunderTARPat$475billion,aonethirdreductionfromtheoriginalcommitmentauthorizedbyCongress.

Morethan$204billionofTARPfundsexpendedhavebeenrepaidincludingmorethanseventyfivepercentofthemoneyinvestedinlargebanks.

TARPinvestmentshavealreadygeneratedreturnstotaxpayersfromdividends,interestand

salesofwarrantsandothersecuritiesof$30billion. ThepayforsuccessfeaturesofTARPsMHAhousingprogramsassurethattaxpayerfunds

areusedonlytotheextentthatprogramsachieveintendedresults.Inaddition,theTARPhousingprogramshavealsocausedmortgageservicerstoadoptsimilarprogramsthathavehelpedmillionsmorehomeownersatnocosttothetaxpayer.

TheultimatecostofTARPandourotherfinancialpolicieswilldependonhowfinancialmarketsandtheeconomyperforminthefuture.IffinancialandeconomicconditionsdeteriorateprospectsforTARPinvestmentswillalsodeteriorate.ButthemostuptodateTreasuryestimatesforTARPprograms,includingtheimpactoftheAIGrestructuring,nowsuggestthattotalfiscalimpactofTARPwillbetoincreasetheFederaldeficitbyabout$50billion.Moreover,otherTreasuryinvestmentsinAIGareexpectedtogenerateapositivereturnofabout$20billion.SeeFigure2BPreliminaryTreasuryEstimatesoftheImpactofTARPProgramsandOtherTreasuryInvestmentsinAIGontheFederalBudgetinSection2ExecutiveSummary,page4.E. ExitStrategyandWindDownFinalpurchaseauthoritytomakecommitmentsunderTARPexpiredonOctober3,2010.Thismeansnonewcommitmentstoinvestfundscanbemade.TheDepartmentoftheTreasurywillcontinuetowinddownTARPandmanagetheremainingTARPinvestmentsprudentlyinordertorecoverasmuchoftaxpayersfundsaspossible.

1. TARPInvestmentsAsofSeptember30,2010,Treasuryhasapproximately$184billioninTARPinvestmentsandcommitmentsoutstanding,inover600banks,theautomotiveindustry,AIG,thePublicPrivateInvestmentProgramfundsandthepurchasedSBA7(a)securities1,butexclusiveofthehousinginitiatives.Treasuryintendstorecoverordisposeoftheseinvestmentsassoonaspracticable.Butgenerally,Treasurycannotdemandrepayment,sorecoveryrequiresthattheinstitutionsreplacegovernmentsupportwithprivatecapital.Thismeansthatthetimingofrepaymentsbyvariousinstitutionswilldiffer,aswillthetimeswhenthevariousTARPprogramsterminate.Forexample,underthebankcapitalsupportprograms,somefinancialinstitutionsarethrivingandhavetheabilitytorepayTreasurynoworintheverynearfuture.OtherinstitutionswillneedmoretimetorecoverandrepayTreasury,asexpectedgiventheunevenimpactofthisfinancialcrisis.ExitfromthelargestremaininginvestmentswhichareintheautomotiveindustryandAIGwillalsotaketimeinordertoprotectthereturnsforthetaxpayer.

1Theamountoutstandingmaybeadjustedasfurtherrepaymentsarereceivedandcommittedbutundisbursedamountsforinvestmentsaremade.

3.TARPOverview..


Inmostcases,theTARPinvestmentisintheformofnonvotingpreferredstock,forwhichTreasurycannotdemandrepayment.Incertaincases,Treasuryownscommonstock:inGM(61percentoftheoutstandingshares)forwhichaninitialpublicofferingisexpectedbeforeyearend;AllyFinancial(formerlyGMAC,56percent);Chrysler(9percent);andCitigroup(12.4percentasofSeptember30,2010).UponconsummationoftherestructuringplanforAIGannouncedonSeptember30,2010,TreasurywillbethemajorityshareholderofAIG.

2. HousingInitiatives

InthisnextphaseofTARP,Treasurywillalsocompletetheimplementationofthehousinginitiatives.HAMP,theprincipalTARPhousingprogram,isdesignedsothatmostfundsaredisbursedoverafiveyearperiod,onapayforsuccessbasis.Thisensuresthattaxpayerdollarsareusedonlyaslongasmortgagemodificationsremainineffectandborrowerscontinuetofulfilltheirresponsibilities.ServicersthatparticipateinHAMPcancontinuetomakemortgagemodificationsthroughtheendof2012.TheHFAHardestHitFundpermitsparticipatingstatehousingagenciestoprovidesupportthroughtheirprogramsuntilaslateas2017,dependingonavailablefunding.AndtheFHAShortRefinanceprogramisdesignedtoenablehomeownerstorefinancetheirmortgageloansandreducetheiroverallmortgagedebtthroughtheendof2012.InmuchthesamewaythatHAMPsfirstlienmodificationprogramhasprovidedanationalblueprintformortgagemodifications,thesenewprogramswillcontinuetoreshapethemortgageservicingindustryandpromoteindustrystandardizationofshortsale,refinanceandprincipalreductionprograms.However,theircostcannotexceedandmaybelessthanthe$46billionallocated.F. FinancialRegulatoryReformTheactionstakentocombatthefinancialcrisiswere,inpart,theresultofafundamentalfailureofthestructureoffinancialregulation.Regulatorsdidnothavethetoolstobreakapartorwinddownafailingfinancialfirmwithoutputtingtheentirefinancialsystematrisk.TheFDICsresolutionauthoritywaslimitedtoinsureddepositoryinstitutionsanddidnotincludetheirholdingcompanies.Withoutchangestothesystem,thereisariskthatTARPandothergovernmentactionshadcreatedmoralhazard.Thatis,becausethefederalgovernmentsteppedintoprovideassistance,theprivatesectormayassumefederalgovernmentsupportwillbethereiftheyagaincauseasystemicrisktoourfinancialsystem.Therefore,beginningin2009,theObamaAdministrationfoughttopassacomprehensivefinancialreformlawtoreininexcessiveriskinourfinancialsystemsothatwewillnothavetoagainresorttoaTARPlikeprogram.InJulythisyear,CongresspassedandPresidentObamasignedintolawthecomprehensivefinancialreformlegislation,theDoddFrankWallStreetReformandConsumerProtectionActof2010.TherulestoimplementtheDoddFrankActarecurrentlybeingwritten.Amongotherthings,thelegislationwill:

Givethefederalgovernmenttheauthoritytoshutdownandbreakapartlargenonbankfinancialfirmswhoseimminentfailuremightthreatenthebroadersystem;

PutinplaceaConsumerFinancialProtectionBureautopromotetransparencyandconsumerchoice,andtopreventabusiveanddeceptivepractices;

Givefinancialregulatorsthetoolstheyneedtocollectdataandanalyzeriskintheentirefinancialsystem,beyondindividualfirmsandmarkets,andtoidentifyandcurbrecklessrisktaking,sothatwecanhelppreventfuturecrises;and

Createasafer,moretransparentderivativesmarket.

4.StabilizationoftheFinancialMarkets..


ThereisbroadconsensusthattheTARPwasanimportantpartofabroadergovernmentstrategythat

stabilizedtheU.S.financialsystembyrenewingtheflowofcreditandavertingamoreacutecrisisit

eventuallyproveddecisiveenoughtostopthepanicandrestoremarketconfidence.

CongressionalOversightPanel,TakingStock:WhatHastheTroubledAssetReliefProgramAchieved?,(December2009),page4.

A. TARPContributedtoFinancialStabilityTheTroubledAssetReliefProgramhassucceededfaster,andatamuchlowercost,thanexpected.TARPhasplayedacriticalroleinhelpingtostabilizethefinancialsystemandinputtingtheeconomyinabetterpositiontoconfrontthechallengesthatlieahead.Emergencygovernmentprogramshelpedtostabilizefinancialmarketsbyrebuildingconfidenceinourfinancialsystem,makingitpossibleforU.S.homeowners,consumers,andbusinessestoborrowatlowercostsandtheU.S.torecovermorerapidlyfromasevererecession.Financialmarketdatashowsthatconditionshavesignificantlyimprovedsincethefallof2008.

Fearthatourmajorfinancialinstitutionscouldfailhasreceded. Creditmarketsimportanttoconsumersandsmallbusinesseshavereopened. Businessesareabletoraiserecordamountsofcapitalinprivatemarkets. Mortgagerateshavebeenbroughtdowntohistoricallows. Municipalitiesareabletoborrowathistoricallylowrates.

Whilesubstantialprogresshasbeenmade,oureconomystillhasalongwaytogotogetbacktonormal.Unemploymentisunacceptablyhighandthehousingmarkethasnotyetstabilized.Inthebankingsystem,chargeoffsforresidential,consumer,andcommercialloansarestillhigh,andtheFDICprojectsthattherateofbankfailureswillremainhighforsometime.Despiteofferingrelativelylowborrowingcosts,bankscontinuetoreportfallingloanbalances.Thisreflectsthefactthatwehaveenduredadifficultrecessionandmanyborrowersandlendersarereducingdebtafteraperiodofaggressivegrowthinleverage.Butitmeansthatmanyresponsibleconsumersandbusinessesarestillfindingitdifficulttogetnewcredit.Nevertheless,thankstothecoordinatedandforcefulactionsofCongress,theObamaAdministration,theFederalReserve,theFDIC,andotherregulatoryagencies,theU.S.financialsystemismuchstrongertodaythanitwasinthefallof2008andearly2009.

1. TARPrestoredconfidenceinthefinancialsystem,loweringborrowingcostsforbusinesses,homeowners,andmunicipalities.

TheprimarypurposeofTARPwastorestoretheliquidityandstabilityofourfinancialsystem.Thatsystemplaysacriticalroleinoureconomy,forexample,byhelpingbusinessesraisefundsandpayemployees,providingconsumerswithconvenientformsofcredit,financingeducation,andallowingmillionsofAmericanstoownhomes.InSeptember2008,bankswerenotmakingnewloanstobusinesses,oreventooneanother.Businessescouldnotgetfinancinginourcapitalmarkets.Municipalitiesandstategovernmentscouldnotissuebondsatreasonablerates.Thesecuritizationmarketswhichprovidefinancingforcreditcards,studentloans,autoloansandotherconsumerfinancinghadbasicallystoppedfunctioning.


TARPprovidedthebufferthatthesystemneeded.Inconjunctionwiththestresstestsofourmajorbanks,ithelpedforcethesystemtoraiseprivatecapital.AndmorebroadlyTARPprovidedabackstopthatallowedthecreditmarketstostartworkingagain.Figure4AshowsbankborrowingcostsrelativetoTreasuryborrowingcostoverthecourseofthecrisis.Duringthefinancialcrisisin2008,therewasadrasticspikeincostofbankborrowingcosts,followedbyanimproved,lowercostofborrowingafterimplementationoftheTARPandtheObamaAdministrationsFinancialStabilityPlan.Figure4A:SpreadBetweenInterBankDepositRatesandYieldsonShorttermTreasuryBills

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LehmanBrothersfailure

Treasuryandthe FederalReservelaunchTALF

Stress test resultsannounced

BearStearnsacquiredbyJPMorgan

Financial StabilityPlan

FollowingthepassageofTARPandtheannouncementorimplementationofTARPprograms,borrowingcostsdeclinedformanybusinesses,homeowners,andmunicipalities.Investmentgradecorporatebondspreadsfellbyalmost70percentin2009.Yieldsonhighqualitymunicipalbondratesfelltothreepercentin2009,downfromfivepercentinfall2008.ThattranslatedintorealsavingsforAmericansandenabledoureconomytobegintorecover.



Figure4B:

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2. Lowerborrowingcostshaveallowedbusinessestotapprivatefundingsourcesandmajorfinancialinstitutionstorecapitalizewithprivatefunds.

Asborrowingcostshavecomedown,businesseshaveraisedsubstantialcapitalfromprivatesourcesin2009and2010.Corporations,forexample,raisedover$1trillionininvestmentgradedebtandover$180billioninhighyielddebtin2009.Whilemuchofthenewissuanceinearly2009wassupportedbygovernmentguarantees,privateinvestorsfundedmostnewcorporatedebtwithoutpublicsupportinlate2009andin2010.Nearly50percentofnewissuancewasguaranteedbythegovernmentinJanuary2009.Nonewissuancehasbeengovernmentguaranteedin2010.Theoverallstrengthinthefundingmarketshascontinuedinto2010.Thepaceofhighyieldissuancesofarthisyearisactuallyhigherthanin2009.Figure4C:

Itisimportanttonotethat,banksmanagedtoraisesubstantialprivatecapitalfollowingthereleaseoftheresultsfromthefederalgovernmentstresstestofmajorU.S.financialinstitutions.Inthemonthsaftertheresultswerereleased,banksissuedover$100billioninnewcommonequity.Asaresult,theU.S.bankingsystemismuchbettercapitalizedtoday



3. SecuritizationmarketshavecomebacktolifeasaresultofTALFandotherinitiatives.Securitizationmarketsthatprovideimportantchannelsofcreditforconsumersandsmallbusinesseshavealsoimproved,inlargepartbecauseofprogramslaunchedundertheTARP.AnnouncementsabouttheTermAssetBackedSecuritiesLoanFacility(TALF)helpednarrowspreadsinthesemarketsevenbeforetheprogrambeganoperating.In2009,spreadsonTALFeligibleassetbackedsecurities(ABS)fellbacktoprecrisislevelsandspreadsonnonTALFeligibleABSweredownmorethan90percentfromtheirpeaksinthefallof2008.SincethegovernmentlaunchedTALFinMarch2009,issuanceofABSbackedbyconsumerandbusinessloanshaveaveraged$12billionpermonth,comparedtolessthan$2billionpermonthinthesixmonthspriortotheprogramslaunch.Andaswithcorporatebonds,newissuanceintheABSmarkethasshiftedfrompublicsupporttopurelyprivatefinancing. Pricesforimpairedsecuritiesthatconstrainbanklendingalsoimprovedsignificantlystartingin2009.ThiswasdueinparttogeneralmarketimprovementandinparttoannouncementsforthePublicPrivateInvestmentProgram,whichwasdesignedtoremovethesesecuritiesfrombanks.MostofthePublicPrivateInvestmentFundswereformedbytheendof2009andhadstartedtopurchaselegacysecurities.SincetheannouncementofPPIPinMarch2009,pricesofbenchmarkindicesforthenonagencyresidentialmortgagebackedsecuritiesandcommercialmortgagebackedsecuritieshaveappreciatedbetween60percentand100percent.ThesepositivedevelopmentsreducedtheneedforPPIPatthelevelsoriginallycontemplated.

4. Housingmarketsstabilizedtosomedegree.FollowingtheimplementationofTARP,housingmarketsbeganshowingsomesignsofstabilizingandwealthrecovery,whichshouldstimulateconsumerspendingvitaltoAmericaneconomicgrowth.Thanksinparttofederalgovernmentfinancialpolicies,mortgageratesremainnearhistoriclows.HomepricesstabilizedinMarch2009,followingconsistentdeclinessince2006.Forexample,theS&P/CaseShillerU.S.20CityCompositeHomePriceIndexexperienceda3percentyeartoyearincreaseinJuly,comparedtoa19percentyeartoyeardeclineinMarch2009.TheObamaAdministrationshousinginitiativesunderTARPwereintendedtohelppreventavoidableforeclosuresandstabilizethehousingmarket.EighteenmonthsintotheHAMPprogram,over1.3millionhomeownershaveseentheirmonthlymortgagepaymentsreducedtoaffordablelevels,includingover460,000whoareinpermanentmodifications.Figure4D:

Source:FederalReserve




TheTARPhousinginitiativeshavealsospurredmortgageservicerstoadoptsimilarprograms,enhancingtheircapacitytoengagewithhomeownerstomodifymortgagesandprovideadditionalsolutionstoavoidforeclosure.Thishashelpedmillionsmorehomeownersatnocosttothetaxpayer.

5. TheinvestmentsintheAutomotiveIndustryandAIGaccomplishedtheirpurposetheywerecriticaltomaintainingfinancialstability.

TheBushAdministrationprovidedloanstoGMandChryslerinDecember2008toavoiduncontrolledliquidationsintheindustrythatcouldhaveresultedinmillionsofjoblosses.TheObamaAdministrationprovidedadditionalassistancetoGMandChryslerontheconditionthatthosecompanieswouldfundamentallyrestructuretheirbusinesses.Inthe14monthssinceGMandChrysleremergedfrombankruptcy,theautoindustryhasincreasedemploymentby62,100jobsandismuchstronger.SomeTARPfundshavealreadybeenreturned,andGMispoisedforaninitialpublicoffering,whichwillallowthegovernmenttobeginsellingdownitsTARPinvestment.

BeforethecrisistherewasinsufficientregulationandoversightofAIG,andnoneofthegovernmentagencieswithsupervisoryauthorityhadamechanismtoprovidefortheorderlyunwinding,dismantling,sale,orliquidationofaglobal,nonbankfinancialinstitutionlikeAIG.But,today,theriskstooureconomyposedbyAIGhavebeenreduced.OnSeptember30,2010,AIGandthegovernmentannouncedarestructuringplanthatwillacceleratethegovernmentsexitandputsusinastrongerpositiontorecovertaxpayersinvestments.B. TARPWasPartoftheGovernmentsCoordinatedEffortsAscreditconditionshaveimproved,theU.S.economyhasstoppedcontractingandstartedtogrowagain.Thenumberofjobsisalsogrowing,althoughataslowpace.Afterfourconsecutivequartersofnegativegrowth,theeconomyexpandedatanannualrateof1.6percentinthethirdquarterof2009andhascontinuedtogrowsince.Theunemploymentratehasfallenfromapeakof10.1percentinOctober2009to9.6percentinAugust.EconomicexpertsAlanBlinderandMarkZandi2findthatTARPhasbeenasubstantialsuccessinhelpingtheeconomysnapbackmorerapidlythanwouldbeexpectedfromearly2009whentheU.S.wassufferingasevereeconomicdownturn.BlinderandZandiestimatethatwithoutgovernmentinterventionU.S.realGDPwouldhavefallenroughlythreetimeswhatweactuallyexperienced,andtheunemploymentratewouldhavepeakedat16.5percent.C. ChallengesLieAheadToAchievingaFullRecoveryThefinancialandeconomicrecoverystillfacessignificantheadwinds.TARPandthebroaderresponsetothefinancialcrisishavebeensuccessfulincriticalways.ThosepolicieshavecontainedthemostsignificantfinancialcrisisourcountryhasfacedsincetheGreatDepression.Buttheeconomyhasalongwaytogotorecoverfullyfromthedeepcontractiongeneratedbythecrisis.Thecontractioninmanycategoriesofbanklendingreflectsacombinationofpersistentweakdemandforcreditandtightlendingstandardsatthebanks,amidstcontinuedpressureonmanybankbalancesheets,particularlyfromcommercialmortgagelosses.Banklendingcontinuestocontractoverall,althoughthepaceofcontractionhasmoderatedandsomecategoriesoflendingaregrowingagain.For

2BlinderandZandi,HowtheGreatRecessionWasBroughttoanEnd,July27,2010.



example,commercialandindustrialloanscontractedatanannualrateof27percentinthethirdquarterof2009,buttheyexpandedinthethirdquarterof2010.Suchloansareparticularlyimportantforsmallbusinesses,whichgenerallycannotraisemoneybyissuingdebtinsecuritiesmarkets.Figure4E:

Source:FederalReserveAssetsandLiabilitiesofBanks(H.8).Note:Adjustedformergeractivityandaccountingchanges

AlthoughRealtyTracreportsthatJuly2010foreclosureactivitywas10percentlowerthaninJuly2009,foreclosureswerestillupnearly20percentsinceJuly2008,andJuly2010markedtheseventeenthconsecutivemonthofforeclosureactivityexceeding300,000filings.

5.TARPInvestmentProgramDescriptions..


A. CapitalPurchaseProgramEESAwasoriginallyproposedasameanstobuymortgageloans,mortgagebackedsecuritiesandcertainotherassetsfrombanks.However,theauthoritiesgrantedunderEESAwerebroadenedinthelegislativeprocesstocoveranyfinancialinstrumentwhosepurchasetheSecretaryoftheTreasury,afterconsultationwiththeChairmanoftheFederalReserve,determinesnecessarytopromotefinancialmarketstability.ShortlyfollowingpassageofEESA,lendingevenbetweenbankshadpracticallystopped,creditmarketshadshutdown,andmanyfinancialinstitutionswerefacingseverestress.Giventhehighlevelofuncertaintyinfinancialmarketsandtheeconomy,evenstrongfinancialinstitutionsbegantohoardcapital.Therewasnotsufficienttimetoimplementaprogramtobuymortgagerelatedassets,whichposeddifficultiesrelatedtovaluingsuchassetsandgettingtheholdersofsuchassetstosellthematcurrentprices.Basedonmarketindicators,itbecameclearthatfinancialinstitutionsneededadditionalcapitaltosustainanormalflowofcredittobusinessesandconsumersduringthefinancialturmoilandeconomicdownturn.Inthiscontext,immediatecapitalinjectionsintofinancialinstitutionswereanecessarysteptoavertapotentialcollapseofthesystem.Asaresult,TreasurylaunchedtheCapitalPurchaseProgram(CPP),thelargestandmostsignificantprogramunderEESA,onOctober14,2008.TreasuryinitiallycommittedoverathirdofthetotalTARPfunding,$250billion,totheCPP,whichwaslaterloweredto$218billioninMarch2009.Atthecloseoftheprogram,Treasuryhadinvestedapproximately$205billionundertheCapitalPurchaseProgram.

1. ProgramandGoals

TheCapitalPurchaseProgramwasdesignedtobolsterthecapitalpositionofviableinstitutionsofallsizesand,indoingso,tobuildconfidenceintheseinstitutionsandthefinancialsystemasawhole.Withtheadditionalcapital,CPPparticipantswerebetterequippedtoundertakenewlendingandcontinuetoprovideotherservicestoconsumersandbusinesses,evenwhileabsorbingwritedownsandchargeoffsonloansthatwerenotperforming.Ofthe$250billionintotalpossiblecommitments,Treasuryinvested$125billionineightofthecountryslargestfinancialinstitutions.3Theremaining$125billionwasmadeavailabletoqualifyingfinancialinstitutions(QFIs)ofallsizesandtypesacrossthecountry,includingbanks,savingsandloanassociations,bankholdingcompaniesandsavingsandloanholdingcompanies.QFIsinterestedinparticipatingintheprogramhadtosubmitanapplicationtotheirprimaryfederalbankingregulator.Theminimumsubscriptionamountavailabletoaparticipatinginstitutionwasonepercentofriskweightedassets.Themaximumsubscriptionamountwasthelesserof$25billionorthreepercentofriskweightedassets.InthemonthsfollowingannouncementoftheCapitalPurchaseProgram,Treasuryprovided$205billionincapitalto707institutionsin48states,includingmorethan450smallandcommunitybanksand22certifiedcommunitydevelopmentfinancialinstitutions(CDFIs)(seechart5Abelow).Thelargestinvestmentwas$25billionandthesmallestwas$301,000.ThefinalinvestmentundertheCPPwasmadeinDecember2009.TheCPPfundswerenotgivenasgrants.Treasuryreceivedpreferredstockordebtsecuritiesinexchangefortheseinvestments.ThereisnofixeddateonwhichthebanksmustredeemthepreferredstockorrepayTreasury.ThisisnecessaryfortheinvestmenttoqualifyasTier1capitalunder

3In2008,thesebanksrepresentedmorethanhalfofallbankassets.



regulatoryrequirements.However,thereareincentivesforthebankstorepay.4InstitutionsmayrepayTreasuryafterconsultationwiththeappropriatefederalregulator.Todate,Treasuryhasreceivedapproximately$152billioninCPPrepayments.

MostbanksparticipatingintheCapitalPurchaseProgrampayTreasuryadividendrateoffivepercentperyear,whichwillincreasetoninepercentayearafterthefirstfiveyears.InthecaseofSubchapterScorporations,Treasuryacquiressubordinateddebentures.Thesubordinateddebentureinterestrateis7.7percentperyearforthefirstfiveyearsand13.8percentthereafter;however,thetotalamountofScorporationdividendspayableperyearislessthan$40million.Todate,Treasuryhasreceivedapproximately$10billioninCPPdividendsandinterestand$3billioninotherincomefromthesaleofCitigroupcommonstock(inexcessoftherecoveredprincipalamount).TreasuryalsoreceivedwarrantstopurchasecommonsharesorothersecuritiesfromthebanksatthetimeoftheCPPinvestment.Thepurposeoftheadditionalsecuritiesistoprovideopportunitiesfortaxpayerstoreapadditionalreturnsontheirinvestmentsasbanksrecover.Todate,Treasuryhasreceivedmorethan$8billioninproceedsfromthesaleofCPPandTIPwarrants.Seepage32foradescriptionofthewarrantsandtheirsalebyTreasury.

a. RoleofbankregulatorsManyhaveaskedhowTreasurydecidedwhichbankswouldreceivefunds.Theprogramwasopentoallinstitutionsandaprocesswasestablishedtoensuredecisionsweremadeinafair,impartialandconsistentmanner.TheprocessalsohelpedensurethattheprogramfulfilledTreasurysstatutoryresponsibilitiestopromotefinancialstabilityandprotectthetaxpayer.TheprocessrequiredthataQFIapplytothefederalagencythatisitsprimaryregulatortheFederalReserve,theFDIC,theOfficeoftheComptrolleroftheCurrencyortheOfficeofThriftSupervision.Theapplicationhadtoreceivethepositiverecommendationoftheregulator.Theregulatorsaremostfamiliarwiththeseinstitutionsbecausetheyperformperiodicsafetyandsoundnessexaminationsthatincludedetailedanalysesofthebanksoverallfinancialconditionsandoperations,e.g.,capital,assets,management,earnings,liquidity,andsensitivitytomarketrisk.Regulatorsalsoexaminetheinstitutionsforcompliancewithapplicablelawsandregulations.Nonetheless,Treasurydidnotdeferentirelytotheregulators.Treasuryconducteditsownreviewofeveryapplicationthatreceivedapositivefundingrecommendationfromtheregulators.TreasurystaffreviewedthesuccessfulapplicationsandpresentedthemtoaninternalTARPinvestmentcommittee,whichinturnmaderecommendationstotheAssistantSecretaryforFinancialStabilityforafinaldecision.Thisprocesswascriticaltoensuringobjectivedecisionmaking.TheSpecialInspectorGeneralforTARPdidanextensivereviewoftheprocessandconcludedinitsAugust2009reportthatthatitwasamostlyclearprocessenhancedbymultiplereviewsandcontrolmechanisms.

4ThecontracttermsincludeanumberofincentivestoencouragebankstoreplaceTARPinvestmentswithprivatecapital.Thesetermsincludeaprovisiontoincreasethedividendrateovertime,arestrictiononthebankfrompayingdividendstoitscommonshareholdersandarestrictiononrepurchasingsharesuntilthebankrepaystheTARPpreferredstock.


b. SmallinstitutionsTheCapitalPurchaseProgramisoftencharacterizedasabigbankprogramandmanypeopleerroneouslybelievethatsmallinstitutionsdidnotbenefitfromthisprogram.Infact,smallerfinancialinstitutionsmakeupthevastmajorityofparticipantsintheCPP.Ofthe707applicationsapprovedandfundedbyTreasurythroughtheCapitalPurchaseProgrambythetimeitclosedonDecember31,2009,473or67percentwereinstitutionswithlessthan$1billioninassets.Treasuryrecognizedthat,toallowsmallinstitutionstoparticipateinCPP,theprogramwouldneedtoaccommodatemorethanonecorporatestructure.Tothatend,TreasurypreparedCPPtransactionaldocumentsforprivateinstitutions,mutualorganizations,andScorporationsinadditiontothedocumentsforpubliclytradedinstitutions.Thevarietyofdocumentsaddressedthestructuralcomplexityofincludinglargeandsmallinstitutions.Therateatwhichapplicationsweresubmitteddeclinedrapidlyinearly2009andover650bankswithdrewnewapplications.Severalreasonshavebeencitedforthis.OnewasthatinFebruary2009,CongressadoptedmorerestrictiveexecutivecompensationrequirementsonallTARPrecipients.Asecondwasthatmanybanksfelttherewasastigmaassociatedwithparticipationintheprogram.Athirdwasthattheseverityofthecrisishadlessenedsomewhat.InMay2009,aftermanylargerinstitutionsstartedraisingcapitalfromtheprivatedebtandequitymarkets,TreasuryreopenedtheCPPapplicationwindowforinstitutionswithlessthan$500millioninassets.Thisinitiativegavesmallerinstitutions,whichdidnothavethesameaccesstothecapitalmarketsaslargerinstitutions,anopportunitytoreceiveadditionalCPPinvestments,andTreasuryincreasedtheamountofcapitalavailabletosmallerinstitutionsundertheprogram.Originally,institutionswereeligibleforaCPPcapitalinvestmentthatrepresenteduptothreepercentofriskweightedassets.UponreopeningtheCPPforsmallerinstitutions,Treasuryraisedtheamountoffundsavailabletofivepercentofriskweightedassets,anddidnotrequireadditionalwarrantsfortheincrementalinvestment.ThechartbelowindicatestheassetsizeofthebanksparticipatingintheCapitalPurchaseProgram.Figure5A:

AssetRange* Number Percent Amount Percent$10bn 57 8.1% 191.1 93.3%Total 707 100% 204.9 100%

Source: SNLFinancia l ;Treasury

CPPParticipants InvestmentCPPInitialInvestmentProfile($inbillions)




c. TARPbankinvestmentswerestructuredasnonvotingpreferredstock,whichprovidedcrucialcapitalsupportwithoutcreatinggovernmentcontrol

AsdescribedinSection3onpage10,in2008Treasurydecidedthatthemosteffectivewaytotrytostabilizethenationsfinancialsystemwastoprovidecapitaltobanks.ThevastmajorityofTARPinvestmentsweremadeintheformofnonvotingpreferredstock.Inordertoachievetheobjectiveofprovidingcapitalsupport,andmeetbankregulatoryrequirementsforTier1capital,TARPcouldnotrequirethatabankrepayTreasuryatafixeddate,asonewouldwithaloan.Preferredstockgenerallyisnonvoting(exceptinlimitedcircumstances),whilecommonstockhasfullvotingrights.Therefore,mostTARPinvestmentsarenonvoting.ThepreferredstockdoesnotentitleTreasurytoboardseatsorboardobservers,exceptintheeventdividendsarenotpaidforsixquarters,inwhichcaseTreasuryhastherighttoelecttwodirectorstotheboard.

2. StatusasofSeptember2010

a. RepaymentsgettingTARPfundsbackBanksmayrepayTreasuryundertheconditionsestablishedinthepurchaseagreementsasamendedbytheARRA.Treasuryalsohastherighttosellthesecurities.However,Treasurydoesnothavetherighttoforcerepayment.TherepaymentpriceisequaltowhatTreasurypaidfortheshares,plusanyunpaiddividendsorinterest.AsofSeptember30,2010,Treasuryhasreceivedover$152billioninCPPrepayments.Ofthatamount,approximately$13.4billionofrepaymentsisfromthesalesofCitigroupcommonstockthroughSeptember30,2010.

b. Returnsfortaxpayers

1) Dividendandinterestpayments

Asistypicalforapreferredstockinvestment,banksmustdecidewhethertopaythedividends;theycanelectinsteadtoconservetheircapital.Treasuryreceivedcumulativedividendswherepermittedbyapplicableregulation.Thatis,ifthedividendsarenotpaidinanyquarter,theyareaddedtotheliquidationpreference,thusincreasingtheclaimoftheholderofthepreferred.Inothercases,thedividendswerenoncumulative.CPPparticipantsareallowedtomakedividendpaymentswiththeapprovaloftheirprimaryfederalregulator.Butifabankfailstopaydividendsforsixquarterlyperiods,Treasuryhastherighttoappointtwodirectorstothebanksboard.AsofSeptember30,2010,totaldividendsandinterestreceivedfromCapitalPurchasePrograminvestmentsisapproximately$10billion.Inaddition,thesalesofCitigroupcommonstockthroughSeptember30,2010havegenerated$3billionofincome(inexcessoftherecoveredprincipalamountoftheCitigroupinvestmentreferredtoabove).

2) OverallreturnsTheCPPwasasuccessnotonlyinstabilizingthefinancialsystem.Itwillalsogenerateapositivereturntotaxpayers,aswillthebanksupportprograms(CapitalPurchaseProgram,TargetedInvestmentProgramandAssetGuaranteeProgram)takenasawhole.Currently,Treasuryestimatesthatthenet



gainforallthreeprogramscombinedwillbe$16billion.Thisisonlyanestimateanditwilldependonseveralfactors,includingmarketconditionsandperformanceofindividualcompanies.SomeinitialobserversoftheCPPinvestmentswerecritical,forexample,thatTreasuryoverpaidtomaketheinvestmentsineightofthenationslargestfinancialinstitutionsand/orthattheinstitutionswouldnotbeabletorepay.Infact,allofthoseinstitutionshaverepaidthegovernmentinfullwiththeexceptionofCitigroupwherepartoftheinvestmentisintheformofcommonstockwhichthegovernmentiscurrentlyintheprocessofselling.Inthatcase,thegovernmentexpectstocompleteitsexitbyearlynextyear.Fortheseveninstitutionswhichhavefullyrepaid,ourinternalrateofreturnonacombinedbasiswas11percent.WehavealsorealizedagainonourCitigroupsalestodateandexpecttorealizeagainoverallbasedonthecurrentmarketprice.

3) Certaininstitutions;missedpaymentsandappointmentofdirectorsThereturnsrealizedfrominvestmentsintheCapitalPurchaseProgramwillbepartiallyoffsetbylossesoninvestmentsincertaininstitutions.AsofSeptember30,2010,fiveinstitutionshavebeendeclaredbankruptorhadtheirbankingsubsidiaryplacedinreceivership(CITGroupInc.,UCBHHoldings,Inc.,MidwestBancHoldings,Inc.,SonomaValleyBancorp,andPacificCoastNationalBancorp),whichrepresentatotalinvestmentof$2.73billion.Todate,togetherwiththe$242millionofrealizeddiscountonsales,asdescribedlaterinthisreport,lossesoninvestmentsareapproximately$3billion.ForthequarterlydividendpaymentdueinAugust2010,123institutionsmissedpayments5,consistingof96cumulativedividendpayments(approximately$41.5million),19noncumulativedividendpayments(approximately$1.8million),andeightScorporationinterestpayments(approximately$1.6million).Todate,21bankshavemissedfourpayments,15bankshavemissedfive,sixbankshavemissedsix,andonebankhasmissedseven.

Treasuryhasreleasedguidanceontheexerciseofitscontractualrighttonominatememberstoaninstitutionsboardofdirectors.Directorscannotbegovernmentemployeesandbylawtheymustactintheinterestsofallshareholders,notasTreasurysorthetaxpayersrepresentative.Treasurywillprioritizebanksinpartbasedonwhetheritsinvestmentexceeds$25million.Inaddition,Treasurywillseekabankspermissiontohaveanobserverattendboardmeetingsonceaninstitutionmissesfivedividends.Theobserverscanbegovernmentemployees.ThisproactivestepwillhelpTreasurydeterminewheretheappointmentofdirectorswouldbemosteffective.Iftherighttonominatememberstoaboardofdirectorsofabankbecomesexercisable,Treasurywilldeterminewhethertonominateuptotwomembersbasedonanevaluationoftheconditionoftheinstitutionandthefunctioningofitsboardofdirectors.

4) ExchangesandrestructuringstopreservevalueandprotecttaxpayerInterestsInlimitedcases,inordertoprotectthetaxpayersinterestinthevalueofaCPPinvestmentandtopromotefinancialstability,TreasurymayexchangetheCPPpreferredstockforothersecurities.TreasuryevaluateswhethertoparticipateinanexchangeoftheCPPpreferredstockonthebasisofenablingthebanktogetnewinvestorstoprovideadditionalcapital,toconductacapitalrestructuringortostrengthenitscapitalpositionandfinancialcondition.Exchangesmadeonthisbasismaybeataratelessthanpar,andsalesbyTreasurytoanewinvestormaybemadeatadiscount.Treasuryhas

5Dataexcludestheinstitutionsthathaveenteredbankruptcyorreceivershipatthetimethequarterlypaymentwasdue.



describedtheconsiderationsforevaluatingexchangesandrestructuringsintheAgencyFinancialReportforFY2009,page41.

c. UseoffundsbybanksparticipatingintheCapitalPurchaseProgramTreasuryworkedwiththeOfficeoftheSpecialInspectorGeneralfortheTroubledAssetReliefProgram(SIGTARP)onaUseofCapitalSurvey.ThescopeoftheannualUseofCapitalSurveycoverslending,financialintermediation,andcapitalbuildingactivitiesofeachfinancialinstitutionaftertheinvestmentoffundsundertheCPPfromthedatethefundswereinitiallyreceiveduntiltheendofthefourthquarter2009.TreasurysenttheUseofCapitalSurveytoCPPparticipantsinMarch2010,andreceivedsurveyresponsesfromthemajorityofCPPparticipants.TreasurypostedallsubmittedsurveysfromindividualCPPrecipientsandpublishedthenamesofthefinancialinstitutionsthatfailedtosubmitasurveyresponsetoTreasury,ontheFinancialStability.govwebsite.Additionally,Treasurypostedasummaryofquantitativedata(summarybalancesheetandincomestatementinformationfromeachinstitutionsregulatoryfilings)foreachindividualCPPrecipientontheFinancialStability.govwebsite.

d. ComparativelendingbyCPPbanksThecapitalthatremainsinplaceatmanysmallandmediumsizedbanksisfacilitatingnewlendingwhiletheyabsorblossesfromlegacyassets.Indeed,atbankswithlessthan$1billioninassetsthatreceivedTARPcapital,mediantotalloanshavegrown3.3percentsince2008Q3,comparedwith1.6percentforcomparablysizedinstitutionsthatdidnotreceiveTARPfunds.Thedifferenceisevenlargerforcommercialandindustrialloans,andforcommercialrealestateloans,whichareespeciallyimportantforsmallbusinesses.



B. SupervisoryCapitalAssessmentProgram(StressTest)andCapitalAssistanceProgramWhiletheinvestmentsmadeundertheCapitalPurchaseProgramhelpedpreventacollapse,Treasuryalsofocusedonhowtorecapitalizethesystemwithprivatecapital,sothatgovernmentsupportcouldbepaidback.Butinlate2008andearly2009confidenceinourfinancialsystemhadbeenseverelyeroded;investorsquestionedwhetherinstitutionswerehealthyenoughtosurvive,anddoubtedwhethermanyinstitutionsreallyknewtheirtruecondition.Therefore,acriticalpartoftheFinancialStabilityPlanannouncedbytheObamaAdministrationwastoconductastresstestonthemajorbankstodeterminetheirhealth,andtodosoinanopenandtransparentmannersothatthemarketwouldknowwhichbanksneededmorecapital.Inconjunctionwiththisforwardlookingtest,TreasuryannouncedthatitwouldprovidecapitalunderTARPthroughtheCapitalAssistanceProgram(CAP)tobanksthatneededadditionalcapitalbutwereunabletoraiseitthroughprivatesources.

1. ProgramandGoalsInearly2009,TreasuryworkedwiththeFederalbankingagenciestodeveloptheonetime,forwardlookingassessmentorstresstestknownastheSupervisoryCapitalAssessmentProgram(SCAP)onthenineteenlargestU.S.bankholdingcompanies(BHCs).Thedesignofthetestsandtheirresultsweremadepublic,anovelstepthatwastakenbecauseoftheunprecedentedneedtorestoreconfidence.Byidentifyingandquantifyingpotentialcapitalshortfallsandrequiringthatadditionalcapitalberaisedtoeliminateanydeficiencies,theSCAPensuredthatthesefinancialinstitutionswouldhavesufficientcapitaltosustaintheirroleasintermediariesandcontinuetoprovideloanstocreditworthyborrowersevenifeconomicconditionssufferedasevereandextendeddeterioration.Thestresstestfoundthatnineofthelargestbankholdingcompanieshadadequatecapitaltowithstandmoresevereeconomicconditions.Ofthetenbankholdingcompaniesthatwereidentifiedasneedingtoraisemorecapital,ninemetorexceededthecapitalraisingrequirementsthroughprivateefforts.Onlyoneinstitution,AllyFinancial(formerlyGMAC),requiredadditionalfundsunderTARPtomeetitsSCAPrequirements,whichwasprovidedthroughtheAutomotiveIndustryFinancingProgram,notCAP.

2. StatusasofSeptember2010SincetheresultsoftheSCAPwerereleasedinMay2009,intheaggregate,thestresstestfirmshaveincreasedrequisitecapitalbyover$150billion.Importantly,thatcapitalraisinghasenabledmorethan80bankstorepaytheTARPinvestmentsmadebyTreasury.TheCapitalAssistanceProgramwasofferedtoallbanksandQFIs,notsolelytothosebanksthatunderwenttheSCAP.AnothermeasureoftheeffectivenessofSCAPandtheCPP,aswellasothergovernmentefforts,isthatTreasurydidnotreceiveanyapplicationsforCAPwhichterminatedonNovember9,2009.



C. TargetedInvestmentProgramTreasuryestablishedtheTargetedInvestmentProgram(TIP)inDecember2008.TheprogramgavetheTreasurythenecessaryflexibilitytoprovideadditionalornewfundingtofinancialinstitutionsthatwerecriticaltothefunctioningofthefinancialsystem.TheTIPwasconsideredexceptionalassistanceforpurposesofexecutivecompensationrequirements(seeSection7).

1. ProgramandGoalsThroughtheTargetedInvestmentProgram,Treasurysoughttopreventalossofconfidenceincriticalfinancialinstitutions,whichcouldresultinsignificantfinancialmarketdisruptions,threatenthefinancialstrengthofsimilarlysituatedfinancialinstitutions,impairbroaderfinancialmarkets,andunderminetheoveralleconomy.EligibilitytoparticipateintheTIPwasdeterminedonacasebycasebasis,anddependedonanumberoffactors.Treasuryconsidered,amongotherthings:

Theextenttowhichthefailureofaninstitutioncouldthreatentheviabilityofitscreditorsandcounterpartiesbecauseoftheirdirectexposurestotheinstitution;

Thenumberandsizeoffinancialinstitutionsthatareperceivedorknownbyinvestorsor

counterpartiesassimilarlysituatedtothefailinginstitution,orthatwouldotherwisebelikelytoexperienceindirectcontagioneffectsfromthefailureoftheinstitution;

Whethertheinstitutionissufficientlyimportanttothenationsfinancialandeconomic

systemthatadisorderlyfailurewould,withahighprobability,causemajordisruptionstocreditmarketsorpaymentsandsettlementsystems,seriouslydestabilizekeyassetprices,orsignificantlyincreaseuncertaintyorlossofconfidence,therebymateriallyweakeningoveralleconomicperformance;and

Theextentandprobabilityoftheinstitutionsabilitytoaccessalternativesourcesofcapital

andliquidity,whetherfromtheprivatesectororothersourcesofgovernmentfunds.

Treasuryinvested$20billionineachofBankofAmericaandCitigroupundertheTargetedInvestmentProgram,whichinvestmentswereinadditiontothosethatthebanksreceivedundertheCPP.LiketheCapitalPurchaseProgram,Treasuryinvestedinpreferredstock,andreceivedwarrantstopurchasecommonstockintheinstitutions.However,theTIPinvestmentsprovidedforannualdividendsofeightpercent,whichwashigherthantheCPPrate,andalsoimposedgreaterreportingrequirementsandmoreoneroustermsonthecompaniesthanundertheCPPterms,includingrestrictingdividendsto$0.01pershareperquarter,restrictionsonexecutivecompensation,restrictionsoncorporateexpenses,andothermeasures.

2. StatusasofSeptember2010InDecember2009,bothparticipatinginstitutionsrepaidtheirTIPinvestmentsinfull,withdividends.TotaldividendsreceivedfromTargetedInvestmentPrograminvestmentswas$3billion.Treasuryalsoreceivedwarrantsfromeachbankwhichprovidethetaxpayerwithadditionalgainontheinvestments.Asaconsequence,theprogramisclosedandresultedinapositivereturnfortaxpayers.



D. AssetGuaranteeProgram

1. ProgramandGoalsUndertheAssetGuaranteeProgram(AGP),Treasuryactedtosupportthevalueofcertainassetsheldbyqualifyingfinancialinstitutions,byagreeingtoabsorbaportionofthelossesonthoseassets.TheprogramwasconductedjointlybyTreasury,theFederalReserveandtheFDIC.LiketheTargetedInvestmentProgram,itwasdesignedforfinancialinstitutionswhosefailurecouldharmthefinancialsystemandreducethepotentialforspillovertothebroaderfinancialsystemandeconomy.Morespecifically,theAssetGuaranteeProgramwasusedtohelpcertainfinancialinstitutionsfacingapotentiallossofmarketconfidencedueinlargeparttotheirholdingsofdistressedorilliquidassets.Byhelpingtolimittheinstitutionsexposuretolossesonilliquidordistressedassets,theAssetGuaranteeProgramhelpedtheinstitutionmaintaintheconfidenceofdepositorsandotherfundingsourcesandcontinuetomeetthecreditneedsofhouseholdsandbusinesses.TheAGPwasusedinalimitedfashiontoassistBankofAmericaandCitigroupinconjunctionwiththeTargetedInvestmentPrograminvestmentsinthoseinstitutions.

a. BankofAmericaInJanuary2009,Treasury,theFederalReserveandtheFDICagreedinprincipletosharepotentiallossesona$118billionpooloffinancialinstrumentsownedbyBankofAmerica,consistingofsecuritiesbackedbyresidentialandcommercialrealestateloansandcorporatedebtandderivativetransactionsthatreferencesuchsecurities,loansandassociatedhedges.Ifthearrangementhadbeenfinalized,TreasuryandtheFDICwouldhavereceivedpreferredstockandwarrantsasapremiumfortheguarantee.Theannouncementofthetransaction(andtheCitigrouptransactiondiscussedbelow)waswidelywelcomedbythemarketsandcontributedimmediatelytohelpingrestoreinvestorconfidenceinthefinancialinstitutionandthebankingsystemgenerally.InMay2009,beforethetransactionwasfinalized,BankofAmericaannounceditsintentiontoterminatenegotiationswithrespecttothelosssharingarrangementandinSeptember2009,thegovernmentandBankofAmericaenteredintoaterminationagreement.BankofAmericaagreedtopayaterminationfeeof$425milliontothegovernment,$276millionofwhichwenttoTreasury.ThefeecompensatedthegovernmentforthevaluethatBankofAmericahadreceivedfromtheannouncementofthegovernmentswillingnesstoguaranteeandsharelossesonthepoolofassetsfromandafterthedateofthetermsheet.Theterminationfeewasdeterminedbyreferencetothefeesthatwouldhavebeenpayablehadtheguaranteebeenfinalized.Noclaimsforlosspaymentsweremade

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