[JPRT, 110th Congress]
[From the U.S. Government Publishing Office]
========================================================================
QUESTIONS ABOUT THE $700 BILLION EMERGENCY ECONOMIC STABILIZATION
FUNDS
________
THE FIRST REPORT OF THE CONGRESSIONAL OVERSIGHT PANEL FOR ECONOMIC
STABILIZATION
[GRAPHIC] [TIFF OMITTED] CONGRESS.#13
December 10, 2008.--Ordered to be printed
QUESTIONS ABOUT THE $700 BILLION EMERGENCY ECONOMIC STABILIZATION FUNDS
U.S. GOVERNMENT PRINTING OFFICE
45-840 PDF WASHINGTON : 2008
----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free(866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC,
Washington, DC 20402-0001
________
THE FIRST REPORT OF THE CONGRESSIONAL OVERSIGHT PANEL FOR ECONOMIC
STABILIZATION
[GRAPHIC] [TIFF OMITTED] CONGRESS.#13
December 10, 2008.--Ordered to be printed
________
CONGRESSIONAL OVERSIGHT PANEL FOR ECONOMIC STABILIZATION
Panel Members
Elizabeth Warren, Chair
Rep. Jeb Hensarling \1\
Richard H. Neiman
Damon Silvers
\1\ Rep. Hensarling did not approve this report. See Press Release,
Hensarling Statement on First Congressional Oversight Panel Report,
Office of Representative Jeb Hensarling (R-TX), Dec. 9, 2008.
C O N T E N T S
----------
Page
Introduction..................................................... 1
Ten Questions from COP........................................... 4
Ten Questions from COP: Discussion............................... 5
1. What is Treasury's Strategy?.............................. 5
2. Is the Strategy Working to Stabilize Markets?............. 8
3. Is the Strategy Helping to Reduce Foreclosures?........... 9
4. What Have Financial Institutions Done With the Taxpayers'
Money Received So Far?................................... 11
5. Is the Public Receiving a Fair Deal?...................... 12
6. What is Treasury Doing to Help the American Family?....... 14
7. Is Treasury Imposing Reforms on Financial Institutions
That Are Taking Taxpayer Money?.......................... 16
8. How Is Treasury Deciding Which Institutions Receive the
Money?................................................... 17
9. What is the Scope of Treasury's Statutory Authority?...... 18
10. Is Treasury Looking Ahead?............................... 20
About COP........................................................ 20
Future Oversight Activities...................................... 21
Appendix: Statutory Authority of the Congressional Oversight
Panel.......................................................... 22
QUESTIONS ABOUT THE $700 BILLION EMERGENCY ECONOMIC STABILIZATION FUNDS
_______
December 10, 2008.--Ordered to be printed
_______
INTRODUCTION
The U.S. and the global economy have been in a steadily
accelerating downward spiral since the early spring of 2007.
The American family is at the epicenter of this crisis.
The headlines may belong to the financial markets and mega-
institutions, but the recession has visited every household in
the country. The crisis affects Americans' ability to pay their
bills, to secure their retirement, to continue their
educations, and to provide for their families. The unemployment
rate is the highest it has been in fourteen years.\2\ In the
last three months, 1.2 million Americans lost their jobs;
533,000 in November 2008 alone.\3\ Service sector employment
levels, in particular, fell far faster than expected last
month.\4\ One in ten mortgage holders is now in default, unable
to make payments on their homes.\5\ More than 200,000 families
and small businesses filed for bankruptcy protection in the
last two months.\6\ Middle- and lower-income families have
watched nervously as reductions in state funding threaten
college access and affordability.\7\ Retail sales continue to
fall,\8\ credit card defaults are rising,\9\ and savings rates
hover at zero.\10\ Shrinking retirement funds have left
millions of retired people to wonder how they will pay basic
expenses and millions more to wonder if they must continue
working until they die.\11\
---------------------------------------------------------------------------
\2\ Peter S. Goodman, U.S. Jobless Rate Hits 14-Year High, N.Y.
Times, Nov. 8, 2008, at A1.
\3\ Sudeep Reddy et al., Job Losses Worst Since 74: 533,000 Shed in
November, Wall St. J., Dec. 6, 2008, at A1.
\4\ Ellen Simon, Service Sector Shrinks As New Orders Fall In Nov.,
Associated Press, Dec. 3, 2008, available at http://news.yahoo.com/s/
ap/20081203/ap_on_bi_ge/economy_services.
\5\ James R. Hagerty & Deborah Soloman, U.S. News: Rising Number of
Homeowners in Trouble, Wall St. J., Dec. 6, 2008, at A2.
\6\ Caroline Humer, Consumer Bankruptcy Filings Jump Vs Year Ago,
Reuters, Dec. 3, 2008, available at http://www.reuters.com/article/
domesticNews/idUSTRE4B25U620081203.
\7\ Robert Tomsho, For College-Bound, New Barriers to Entry--Their
Budgets Squeezed, State Schools Cap Enrollment, Weigh Tuition
Increases; Fears for Lower-Income Students, Wall St. J., Dec. 3, 2008,
at D1.
\8\ Stephanie Rosenbloom, In November, Shoppers Cut Spending Even
More, N.Y. Times, Dec. 3, 2008, at B6.
\9\ Kristina Dell, With Defaults Rising, Is a Credit-Card Crisis
Looming, Nov. 14, 2008, Time, available at http://www.time.com/time/
business/article/0,8599,1859224,00.html.
\10\ Henry Kaufman, How the Credit Crisis Will Change the Way
America Does Business, Wall St. J., Dec. 6, 2008, at A11.
\11\ Robert Powell, Crisis Forces About One-In-Five Savers To Tap
Retirement Assets, MarketWatch, Dec. 4, 2008, available at http://
www.marketwatch.com/news/story/crisis-forces-about-one-in-five-savers/
story.aspx?guid=B2F244D0-CC95-4906-AF0F-4B8CB7AC2220.
---------------------------------------------------------------------------
A short summary of the economic history of the past few
months is grim.
Credit, when it is available, has become
dramatically more expensive for all borrowers, and some worry
it will get even more expensive next year.\12\
---------------------------------------------------------------------------
\12\ See John M. Berry, Borrowers Elbow for Position,
Bloomberg.Com, Dec. 4, 2008, available at http://www.bloomberg.com/
apps/news?pid=20601039&refer=columnist--berry&sid= aohbHGXFYtKU.
U.S. stock markets have lost more than 40% of
their value over the past year, and markets elsewhere in the
world have also declined sharply.\13\
---------------------------------------------------------------------------
\13\ See, e.g., Dow Jones Industrial Average, MSN Money, available
at http://moneycentral.msn.com/investor/charts/
chartdl.aspx?Symbol=%24indu.Dow.
In September, the federal government took control
of the two largest mortgage financing intermediaries, generally
---------------------------------------------------------------------------
known as Fannie Mae and Freddie Mac.
All three major U.S.-based auto companies have
told Congress they face the threat of imminent bankruptcy.
The largest U.S. commercial bank, Citigroup, and
the largest U.S. insurance company, AIG, have both received
substantial infusions of capital from the U.S. government, with
AIG under threat of imminent bankruptcy.
Two major investment banks, Bear Stearns and
Merrill Lynch, have disappeared in mergers. One major
investment bank, Lehman Brothers, has filed for protection
under the bankruptcy laws. The two largest remaining investment
banks, Goldman Sachs and Morgan Stanley, have transformed
themselves into bank holding companies.
The largest thrift savings banks, Washington
Mutual and IndyMac, have been taken over by their regulator.
The Federal Deposit Insurance Corporation has
placed 171 banks, with combined assets of $116 billion, on the
problem list as of September 30, 2008.\14\
---------------------------------------------------------------------------
\14\ Quarterly Banking Profile: Third Quarter 2008, FDIC 3
available at http://www2.fdic.gov/qbp/2008sep/qbp.pdf.
In response to the financial crisis, Congress passed the
Emergency Economic Stabilization Act of 2008, authorizing the
Treasury Department to commit up to $250 billion in taxpayer
dollars, to be followed by another $100 billion and another
$350 billion if warranted.\15\ The statute also created a
Congressional Oversight Panel.\16\ The Act's purposes are to
``restore liquidity and stability to the financial system of
the United States . . . in a manner that (A) protects home
values, college funds, retirement accounts, and life savings;
(B) preserves homeownership and promotes jobs and economic
growth; (C) promotes overall returns to the taxpayers of the
United States; and (D) provides public accountability.'' \17\
---------------------------------------------------------------------------
\15\ Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-
343 Sec. 115 (Oct. 3, 2008).
\16\ Id., at Sec. 125.
\17\ Id., at Sec. 2.
---------------------------------------------------------------------------
From the passage of the Emergency Economic Stabilization
Act of 2008 to the present date, Treasury has used its
authority under the Act to provide 87 banks with $165 billion
in exchange for preferred stock and warrants. Treasury further
used its authority to provide AIG with $40 billion in exchange
for preferred stock and warrants, and to provide Citigroup with
a further $20 billion in preferred stock and warrants. As part
of a program to guarantee approximately $306 billion in
Citigroup's troubled assets, Treasury receives $4 billion of
Citigroup preferred stock and warrants.\18\ Together, these
disbursements constitute approximately $1,900 per American
family, or almost 3% of the typical family's pre-tax
income.\19\
---------------------------------------------------------------------------
\18\ Capital Purchase Program Transaction Report, Nov. 25, 2008
available at http://www.treas.gov/initiatives/eesa/docs/
TransactionReport-11262008.pdf; id.; Summary of Terms, Nov. 23, 2008
available at http://www.treas.gov/press/releases/reports/
cititermsheet_112308.pdf; see also Troubled Asset Relief Program:
Additional Actions Needed to Better Ensure Integrity, Accountability,
and Transparency, GAO, 09-161, December 2008, at 16-20, 28.
\19\ See Current Population Survey, 2007 Social and Economic
Supplement, Table HINC-06, U.S. Census Bureau, available at http://
pubdb3.census.gov/macro/032007/hhinc/new06_000.htm.
---------------------------------------------------------------------------
This is not the full extent of the federal government's
actions to date. Treasury has worked in coordination with the
Federal Deposit Insurance Corporation, the Board of Governors
of the Federal Reserve System and other financial regulators.
The Federal Reserve has injected trillions of dollars of
liquidity into the financial system, dwarfing by an order of
magnitude expenditures by Treasury under the Act.\20\
---------------------------------------------------------------------------
\20\ The Fed's evolving liquidity toolkit, Reuters, Dec. 2, 2008,
available at http://www.reuters.com/article/bondsNews/
idUSN2635039920081202?sp=true.
---------------------------------------------------------------------------
This is the first report of the Congressional Oversight
Panel. We are here to investigate, to analyze and to review the
expenditure of taxpayer funds. But most importantly, we are
here to ask the questions that we believe all Americans have a
right to ask: who got the money, what have they done with it,
how has it helped the country, and how has it helped ordinary
people?
These questions, in greater detail, form the heart of this
report.
This report, issued two weeks after the Oversight Panel's
first meeting, does not attempt to answer the questions
Congress and the American people have about the use of the
powers granted to Treasury under the Emergency Economic
Stabilization Act of 2008. Rather we seek to pose those
questions clearly in the context of the events that have
occurred since the adoption of the Act in October. In doing so,
we intend to set the agenda for our future work and to advise
the Congress as to the issues that it will need to address in
the next Administration.
In framing these questions, the Oversight Panel has
benefited from its consultations with Treasury, Treasury's
Inspector General, the Government Accountability Office, and
the staff of the Federal Reserve Board. We intend to consult
with the newly appointed Special Inspector General as soon as
possible.\21\ The Oversight Panel in particular has benefited
from the report of the Government Accountability Office on the
implementation of the Emergency Economic Stabilization Act of
2008, dated December 2, 2008.\22\
---------------------------------------------------------------------------
\21\ Paul C. Light, Senate Confirms N.Y. Prosecutor As Inspector
General for Bailout, Wash. Post, available at http://
www.washingtonpost.com/wp-dyn/content/article/2008/12/08/
AR2008120803538.html.
\22\ Troubled Asset Relief Program: Additional Actions Needed to
Better Ensure Integrity, Accountability, and Transparency, GAO, 09-161,
December 2008.
---------------------------------------------------------------------------
In the months to come the Congressional Oversight Panel--
COP--will do its best to guarantee that public actions are
built on robust foundations that will strengthen the real
economy. The American people have an important role to play in
this process. As we continue our work on behalf of Congress and
the American people, we will issue monthly reports. But we will
always return to the American people, searching for answers and
asking more questions.
TEN QUESTIONS FROM COP
1. What is Treasury's Strategy? What does Treasury think
the central causes of the financial crisis are and how does its
overall strategy for using its authority and taxpayer funds
address those causes? What specific facts caused Treasury to
change its strategy in the last two months? What specific facts
changed that made the purchase of mortgage-backed assets a bad
idea within days of the request and what specific facts changed
again to make guaranteeing such assets a good idea a few weeks
later?
2. Is the Strategy Working to Stabilize Markets? What
specific metrics can Treasury cite to show the effects of the
$250B spent thus far on the financial markets, on credit
availability, or, most importantly, on the economy? Have
Treasury's actions increased lending and unfrozen the credit
markets or simply bolstered the banks' books? How does Treasury
expect to achieve the goal of price discovery for impaired
assets? Why does Treasury believe that providing capital to all
viable banks, regardless of business profile, is the most
efficient use of funds?
3. Is the Strategy Helping to Reduce Foreclosures? What
steps has Treasury taken to reduce foreclosures? Have those
steps been effective? Why has Treasury not generally required
financial institutions to engage in specific mortgage
foreclosure mitigation plans as a condition of receiving
taxpayer funds? Why has Treasury required Citigroup to enact
the FDIC mortgage modification program, but not required any
other bank receiving TARP funds to do so? Is there a need for
additional industry reporting on delinquency data,
foreclosures, and loss mitigations efforts in a standard
format, with appropriate analysis? Should Treasury be
considering others models and more innovative uses of its new
authority under the Act to avoid unnecessary foreclosures?
4. What Have Financial Institutions Done with the
Taxpayers' Money Received So Far? What have the companies who
received money from Treasury done with the money? Have the
companies used the funds in the way Treasury intended when it
disbursed them? How have institutions supported under the
Capital Purchase Program used their funds, and have they
leveraged the capital support to increase lending activity? Is
this different from the way funds were utilized for
institutions who received funds pursuant to the Systemically
Significant Failing Institutions plan?
5. Is the Public Receiving a Fair Deal? What is the value
of the preferred stock Treasury has received in exchange for
cash infusions to financial institutions? Are the terms
comparable to those received in recent private transactions,
such as those with Warren Buffett and the Abu Dhabi Investment
Authority?
6. What is Treasury Doing to Help the American Family? Does
Treasury believe American families need to borrow more money?
Have Treasury's actions preserved access to consumer credit,
including student loans and auto loans at reasonable rates?
What restrictions will Treasury put on credit issuers to assure
that taxpayer dollars are not used to subsidize lending
practices that are exploitive, predatory or otherwise harmful
to customers? What is Treasury doing to ensure that its
spending is directed in ways that maximize the impact on the
American economy?
7. Is Treasury Imposing Reforms on Financial Institutions
that are taking Taxpayer Money? Congress has told the auto
industry to reform its current practices before it could be
considered for taxpayer aid and the British are requiring
reforms on their banks as a precondition for capital infusions.
Has Treasury required banks receiving aid to:
Present a viable business plan;
Replace failed executives and/or directors;
Undertake internal reforms to prevent future
crises, to increase oversight, and to ensure better
accounting and transparency;
Undertake any other operational reforms?
8. How is Treasury Deciding Which Institutions Receive the
Money? What factors is Treasury using to determine which
institutions receive equity infusions, purchase of portfolio
assets, or insurance of portfolio assets? Is Treasury seeking
to use TARP money to shape the future of the American financial
system, and if so, how?
9. What is the Scope of Treasury's Statutory Authority?
What is Treasury's understanding of the statutory limits on its
use of funds? How does Treasury justify its decisions under the
Act in relation to its view of these limits? How is Treasury
carrying out its statutory mandate regarding credit insurance?
10. Is Treasury Looking Ahead? What are the likely
challenges the implementation of the Emergency Economic
Stabilization Act will face in the weeks and months ahead? Can
Treasury offer some assurance that it has worked out
contingency plans if the economy suffers further disruptions?
TEN QUESTIONS FROM COP: DISCUSSION
1. What is Treasury's Strategy? What does Treasury think
the central causes of the financial crisis are and how does its
overall strategy for using its authority and taxpayer funds
address those causes? What specific facts caused Treasury to
change its strategy in the last two months? What specific facts
changed that made purchase of mortgage-backed assets a bad idea
within days of the request and what specific facts changed
again to make guaranteeing such assets a good idea a few weeks
later?
Treasury has pursued a number of strategies using its
authority under the Emergency Economic Stabilization Act:
Strategy 1: Buying Mortgage-Related Assets. In
September 2008, Secretary Paulson requested authority for
Treasury to buy up to $700 billion in troubled mortgage-related
assets.\23\ According to the Secretary, purchasing the assets
would reduce systemic risk and increase confidence in
institutions holding these ``toxic assets.'' Although Congress
granted Treasury the authority to execute this plan on October
3, Treasury did not act on this authority.\24\
---------------------------------------------------------------------------
\23\ Press Release, FACT SHEET: Proposed Treasury Authority to
Purchase Troubled Assets, Sept. 20, 2008, available at http://
www.treas.gov/press/releases/hp1150.htm.
\24\ See GAO Report, supra note 18, at 1, 15-16.
Strategy 2: Purchasing Preferred Stocks and
Warrants to increase the capital base of banks. On October 14,
Treasury announced a plan to invest up to $250 billion into
financial institutions in exchange for preferred stocks and
warrants in order to ``significantly strengthen financial
institutions and improve their access to funding, enabling them
to increase financing of the consumption and business
investment that drive U.S. economic growth.'' \25\ Treasury
indicated that it still intended to make purchases of mortgage-
related assets from financial institutions.\26\
---------------------------------------------------------------------------
\25\ Press Release, Statement by Secretary Henry M. Paulson, Jr.,
on Actions to Protect the U.S. Economy, Department of Treasury, Oct.
14, 2008, available at http://www.treasury.gov/press/releases/
hp1205.htm; see also Mark Lander, U.S. Investing $250 Billion in Banks;
Dow Surges 936 Points, N.Y. Times, Oct. 14, 2008, at A1.
\26\ GAO Report, supra note 18, at 16.
Strategy 3: On November 12, Treasury announced
that it would not purchase troubled mortgage-related assets, as
it had asked for authority to do in September.\27\ Instead,
Secretary Paulson stated that Treasury was considering programs
that would allow non-bank financial institutions to participate
in the CPP if they secure an equivalent amount of capital from
private investors and providing federal financing to allow
private investors to purchase asset-backed securities.\28\
---------------------------------------------------------------------------
\27\ See Press Release, Statement by Secretary Henry M. Paulson on
Financial Rescue Package and Economic Update, Department of Treasury,
Nov. 12, 2008, available at http://www.treasury.gov/press/releases/
hp1265.htm.
\28\ See Press Release, Statement by Secretary Henry M. Paulson on
Financial Rescue Package and Economic Update, Department of Treasury,
Nov. 12, 2008, available at http://www.treasury.gov/press/releases/
hp1265.htm.
Strategy 4: On November 25, Treasury announced it
would participate in the Federal Reserve's Term Asset-Backed
Securities Loan Facility (TALF), a $200 billion program that
would provide financing to investors of highly rated asset-
backed securities, focused on student and auto loans, credit
card debt, and small business loans.\29\ According to Secretary
Paulson's statement announcing the program, ``[b]y providing
liquidity to issuers of consumer asset-backed paper, the
Federal Reserve facility will enable a broad range of
institutions to step up their lending, enabling borrowers to
have access to lower cost consumer finance and small business
loans.'' \30\
---------------------------------------------------------------------------
\29\ GAO Report, supra note 18, at 31; Press Release, Federal
Reserve, Nov. 25, 2008, available at http://www.federalreserve.gov/
newsevents/press/monetary/20081125a.htm.
\30\ Press Release, Secretary Paulson Remarks on Consumer ABS
Lending Facility, Department of Treasury, Nov. 25, 2008, available at
http://www.treasury.gov/press/releases/hp1293.htm.
Other Strategies: It has been widely reported that
Treasury is considering a plan to support the issuance of new
mortgages at a 4.5% interest rate through mortgage-backed
securities of Fannie Mae and Freddie Mac, which should enable
some consumers to purchase homes.\31\ In addition, Treasury has
stated it is considering other strategies, such as FDIC
Chairman Sheila Bair's proposal for restructuring residential
mortgages, streamlined loan modification programs for at-risk
borrowers, and guarantee of loan modifications by private
lenders.\32\
---------------------------------------------------------------------------
\31\ See, e.g., Edmund L. Andrews, Washington;'s New Tack: Helping
Home Buyers, N.Y. Times, Dec. 5, 2008, available at http://
www.nytimes.com/2008/12/05/business/05housing.html; Robert Schmidt &
Dawn Kopecki, Paulson Considers New Plan to Resuscitate U.S. Housing
Market, Bloomberg.Com, Dec. 4, 2008, available at http://
www.bloomberg.com/apps/news?pid=20601087&sid=aE1D2EJR0B2k.
\32\ Tami Luhby, FDIC's Bair Pushes Aggressive Mortgage Plan,
CNNMoney.Com, Nov. 14, 2008, available at http://money.cnn.com/2008/11/
14/news/economy/fdic_bair; GAO Report, supra note 17, at 29-30.
In empowering Treasury, Congress provided substantial
flexibility in the use of funds so Treasury could react to the
fluid and changing nature of the financial markets. With these
powers goes a responsibility to explain the reasons for the
uses made of them. With these monies go a responsibility to
ensure that the support to the economy from each dollar spent
is maximized consistent with the purposes of the Act. We ask
Treasury to articulate its vision of the problem, its overall
strategy to address that problem, and how its strategic shifts
since September 2008 fit into that overall strategy.
For example, efforts to increase the availability of credit
assume that the fundamental problem is a lack of liquidity. But
if Americans are more worried about their own economic
security--their employment prospects, their current expenses,
and their debt levels--then increasing liquidity will have
little impact on consumer spending.
Similarly, buying or guaranteeing some mortgage-backed
assets could help place a floor on the value of those assets
and move those toxic assets off the books of financial
institutions, reducing systemic risk and leaving the
institutions with higher-rated assets. But if those toxic
assets were over-valued across the board, due in part to
failures in the ratings systems,\33\ then it is not clear that
once Treasury has bought or guaranteed some securities that
investors would want the remaining assets that Treasury had not
purchased. Instead, investors may believe those assets remain
toxic. Uncertainty--or skepticism--over the value of these
assets would persist, making efforts to support the market
largely unsuccessful.
---------------------------------------------------------------------------
\33\ See generally Gretchen Morgenson, Debt Watchdogs: Tamed or
Caught Napping, N.Y. Times, Dec. 7, 2008, at A1.
---------------------------------------------------------------------------
In particular, Treasury needs to explain its understanding
of the role played by each of the following factors and by
their interaction: (1) capital inadequacy in financial
institutions; (2) lack of reliable information in credit
markets with respect to counterparty risk; (3) temporary
liquidity shortfalls in particular financial markets; (4)
falling real estate prices and rising foreclosure rates; (5)
stagnant family incomes and rising unemployment; (6) changes in
consumer borrowing capacity; (7) business and financial focus
on short-term gains to the detriment of long-term growth; (8)
effectiveness of regulatory oversight; (9) CPP participants'
involvement in and exposure to off balance sheet vehicles and
unregulated markets; and (10) broader long-term macroeconomic
imbalances.
If Treasury's understanding of the relative importance of
these issues and their interaction with each other is changing,
Treasury needs to explain how the dynamics of that process and
how their actions have changed in response. If other factors
are central to Treasury's thinking, those factors should be
identified and clearly explained.
The American people need to understand Treasury's
conception of the problems in the economy and its comprehensive
strategy to address those problems.
2. Is the Strategy Working to Stabilize Markets? What
specific metrics can Treasury cite to show the effects of the
$250B spent thus far on the financial markets, on credit
availability, or, most importantly, on the economy? Have
Treasury's actions increased lending and unfrozen the credit
markets or simply bolstered the banks' books? How does Treasury
expect to achieve the goal of price discovery for impaired
assets?
American taxpayers need to know that their money is having
a tangible effect on improving financial stability, credit
availability, and the economy as a whole. As a first step,
Treasury needs to provide a detailed assessment of whether the
funds it has spent so far have had any effect--for better or
worse--in these areas.
It is difficult to disaggregate the effects of
simultaneously-taken actions by the Federal Reserve, FDIC, and
other entities from Treasury's actions. Nonetheless, the
Oversight Panel believes it is a critical aspect of its mission
to attempt to assess the role that Treasury's actions under the
Act have played in the recent history of our economy.
The GAO has suggested a number of potential metrics for
evaluation: The TED spread (the difference between an average
of interests rates offered in the London interbank market and
Treasury bills), corporate spreads based on Moody's Aaa and Bbb
bond rates, mortgage rates, mortgage originations, mortgage
foreclosures and defaults, in addition to other metrics such as
call report data, stock prices, and house prices.\34\
---------------------------------------------------------------------------
\34\ GAO, supra note 18, at 49-57.
---------------------------------------------------------------------------
Treasury itself should respond to the GAO report in part by
attempting to define what the Department itself constitutes
success. This is important in terms of assessing both whether
changes need to be made in the Act and in terms of assessing
when direct governmental participation in financial markets and
financial institutions could be reduced.
In recent days Treasury has commented favorably on
developments in certain credit spreads such as the TED spread.
Treasury has not, however, explained the role it believes
interbank lending costs play compared to the importance of
other factors in both the credit markets and the economy that
appear to have deteriorated over the same time period, such as
corporate bond spreads, Treasury default swap costs, and
foreclosure data.
The Oversight Panel intends over time to make its own
assessment of the effectiveness of the TARP program in
achieving the objectives set forth by Congress. The Oversight
Panel would be greatly assisted in its effort if Treasury did
the same.
3. Is the Strategy Helping to Reduce Foreclosures? What
steps has Treasury taken to reduce foreclosures? How effective
have those steps been? Why has Treasury not generally required
financial institutions to engage in specific mortgage
foreclosure mitigation plans as a condition of receiving
taxpayer funds? Why has Treasury required Citigroup to enact
the FDIC mortgage modification program, but not required any
other bank receiving TARP funds to do so? Is there a need for
additional industry reporting on delinquency data,
foreclosures, and loss mitigations efforts in a standard
format, with appropriate analysis? Should Treasury be
considering other models and more innovative uses of its new
authority under the Act to avoid unnecessary foreclosures?
Federal Reserve Board Chairman Bernanke recently reported
that foreclosures in 2008 will number approximately 2.25
million.\35\ Neighbors see their home prices decline from
blighted nearby properties, and foreclosure sales saturate the
real estate market with low-priced inventory, further pushing
down home prices.\36\ Foreclosures also place a double burden
on local governments, as they impose direct costs from crime
and fires while eroding the local tax base. Global asset write
downs and credit losses relating to home mortgages currently
exceed $590 billion and may eventually rise to $1.4 trillion by
some estimates.\37\ Moreover, foreclosure rates have continued
to increase in recent months, and one in ten American mortgage
holders are now in default or foreclosure.\38\ Rapidly rising
unemployment is likely to increase mortgage defaults and drive
foreclosure rates even higher. Several economists have
identified the unresolved foreclosure crisis as a key causal
factor in financial instability and economic decline.
---------------------------------------------------------------------------
\35\ Speech: Chairman Ben S. Bernanke At the Federal Reserve System
Conference on Housing and Mortgage Markets, Dec. 4, 2008, available at
http://www.federalreserve.gov/newsevents/speech/bernanke20081204a.htm.
\36\ See Steve Matthews & Scott Lanman, Feds Kroszner Says
Foreclosures Harming Middle-Income Areas, BLOOMBERG.COM, Dec. 3, 2008,
available at http://www.bloomberg.com/apps/news?pid=
20601213&sid=aSwRduPiiLjc.
\37\ Yalman Onaran & Dave Pierson, Banks Subprime-Related Losses
Surge to $591 Billion, Bloomberg.com, Sep. 29, 2008, available at
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aSlW.imTKzY8;
IMF Urges Collective Central Bank Action, Sydney Morning Herald, Oct.
7, 2008, available at http://news.smh.com.au/business/imf-urges-
collective-central-bank-action-20081008-4w01.html.
\38\ Hagerty & Soloman, supra note 5.
---------------------------------------------------------------------------
As rising foreclosure rates continue to put downward
pressure on home prices, financial institutions will be forced
to recognize even greater losses. Each time a family loses its
home due to foreclosure, the value of every home within one
eighth of a mile declines nearly 1%.\39\ In 2002, when home
prices were rising, researchers estimated that the holders of a
loan are forced to recognize an average loss of $58,792 each
time they foreclose on a home.\40\ Losses are much greater,
however, when home prices are declining.
---------------------------------------------------------------------------
\39\ Dan Immergluck & Geoff Smith, The External Costs of
Foreclosure: The Impact of Single-Family Mortgage Foreclosures on
Property Values, 17 Hous. Poly Debate 57, 69, 72, 75 (2006), available
at http://www.fanniemaefoundation.org/programs/hpd/pdf/
hpd_1701_immergluck.pdf.
\40\ Amy C. Cutts & Richard K. Green, Innovative Servicing
Technology: Smart Enough to Keep People in Their Houses? (Freddie Mac,
Working Paper No. 04-03, 2004), available at http://www.freddiemac.com/
news/pdf/fmwp_0403_servicing.pdf (citing Craig Focardi, Servicing
Default Management: An Overview of the Process and Underlying
Technology (TowerGroup, Research Note No. 033-13C, 2002)).
---------------------------------------------------------------------------
Standard & Poor's, a ratings service, estimates that for
subprime mortgages originated in 2006, servicers will only be
able to recover 55% of the total value of the loan on a
foreclosed home. Total losses include direct costs, such as
legal fees and maintenance that average around 26% of the value
of a loan, as well as losses from missed mortgage payments and
declines in resale values.\41\ These losses are exacerbated by
the fact that the resale value for a foreclosed home is often
5% to 15% lower than the resale value of a comparable home sold
by the homeowner.\42\
---------------------------------------------------------------------------
\41\ Francis Parisi, The Anatomy of Loss Severity Assumptions In
U.S. Subprime RMBS, Standard & Poors, available at http://
www2.standardandpoors.com/portal/site/sp/en/us/page.article/
4,5,5,1,1204835910066.html.
\42\ Deep Dive into Subprime Mortgage Severity, Fixed Income
Research Report, Credit Suisse, June 19, 2008.
---------------------------------------------------------------------------
While Treasury has promoted voluntary mortgage assistance
through its HOPE NOW program, it is unclear what effect this
activity has had. Although there are data on the number of
people who have contacted HOPE NOW, there appear to be no
systematic data on the number of people who have negotiated
reductions in either the principal amounts of their mortgages
or in their monthly payments.
Preserving homeownership is an explicit purpose of the Act.
Under Section 109, the Treasury Secretary has the authority to
``use loan guarantees and credit enhancements to facilitate
loan modifications to prevent avoidable foreclosures.'' When
the Act was passed, Congress expected the primary use of the
authority under the Act to be to purchase troubled assets from
financial institutions. In that context, Treasury is required
to ``implement a plan to maximize assistance to homeowners''
and to encourage mortgage servicers to use the HOPE for
Homeowners Program or loan guarantees and credit enhancements
to facilitate loan modifications and prevent foreclosures
``[t]o the extent that the Secretary acquires mortgages,
mortgage-backed securities, and other assets secured by
residential real estate.'' \43\ Given Treasury's shift to
direct equity investments in financial institutions, the
Department should explain how its broad authority still
reflects the purposes of the act.
---------------------------------------------------------------------------
\43\ Emergency Economic Stabilization Act, supra note 15,
Sec. 109(a) (``the Secretary shall implement a plan that seeks to
maximize assistance for homeowners and use the authority of the
Secretary to encourage the servicers of the underlying mortgages,
considering net present value to the taxpayer, to take advantage of the
HOPE for Homeowners Program under section 257 of the National Housing
Act or other available programs to minimize foreclosures.'')
---------------------------------------------------------------------------
Treasury is reported to be considering a possible new
proposal for reducing rates on fixed 30-year mortgages to as
low as 4.5% by directing Fannie Mae and Freddie Mac to
guarantee and purchase these low-rate mortgages.\44\ The low
mortgage rate would be available only to those purchasing
homes, not those who hope to refinance.\45\ The goal of such a
program would be to encourage new buyers to enter the housing
market. The program does not appear to offer any help to
already distressed homeowners. Even if it were expanded to
permit refinancing, the nearly 20% of homeowners who have
negative equity in their homes will remain unable to refinance
their mortgages.\46\
---------------------------------------------------------------------------
\44\ Edmund L. Andrews, Washingtons New Tack: Helping Home Buyers,
N.Y. Times, Dec. 5, 2008, available at http://www.nytimes.com/2008/12/
05/business/05housing.html.
\45\ Id.
\46\ See Dan Levy, More U.S. Homeowners Have Mortgage Higher Than
House Is Worth, Bloomberg.Com, Oct. 31, 2008, available at http://
www.bloomberg.com/apps/news?pid=20601213&refer=home&sid=aYyk2_TLjGao.
---------------------------------------------------------------------------
If Treasury believes that offering low interest rates on
purchase-money mortgages to new homebuyers will help stem
foreclosures among existing homeowners, then Treasury should
articulate more clearly the process by which this will occur.
Is there a substantial body of potential homeowners who could
take advantage of these low rates, but who did not purchase
homes on easy credit during the mortgage bubble? Will lower
rates create a large enough pool of new home buyers to lead to
a general increase in home prices? As importantly, are the
assumptions underlying Treasury's plan still valid in a time of
great economic uncertainty for the households that would be
expected to take advantage of the lower mortgage rates? Will
lower interest rates induce demand for home ownership in the
face of falling housing prices, consumer uncertainty about the
future of the economy and employment, and the reasonable
expectation that an even better deal might be available in the
future?
Additionally, Treasury should explain what if any steps it
is taking to encourage mortgage servicers, including affiliates
of financial institutions that have received CPP or TALF
funding, to engage in loan modifications, participate in the
HOPE for Homeowners Program (in which none of the institutions
receiving CPP funds have participated), or take other steps to
minimize foreclosures. In particular, Treasury should explain
why foreclosure relief was not a condition of CPP funds.
Treasury should also consider the need for additional industry
reporting on delinquency data, foreclosures, and loss
mitigation in a standard format. Such data should be analyzed
by an appropriate bank regulatory agency, to assess the
effectiveness of each institution's efforts.
As part of its aid to Citigroup, Treasury required
Citigroup to implement the FDIC's mortgage modification
program.\47\ Separately and not in connection with Citigroup,
FDIC Chairman Sheila Bair has proposed a program that would
provide additional incentives for loan modifications by paying
servicers $1,000 to cover related expenses and by sharing up to
50% of the losses on modified loans that subsequently re-
default.
---------------------------------------------------------------------------
\47\ GAO Report, supra note 18, at 28.
---------------------------------------------------------------------------
The FDIC estimates that such a plan could avoid 1.5 million
foreclosures at a cost of $24.4 billion.\48\
---------------------------------------------------------------------------
\48\ Federal Deposit Insurance Corporation, FDIC Loss Sharing
Proposal to Promote Affordable Loan Modifications, Nov. 20, 2008,
available at www.fdic.gov/consumers/loans/loanmod/.
---------------------------------------------------------------------------
The Oversight Panel believes Treasury has an obligation to
explain its objection to the FDIC proposal and why its
objection to the FDIC proposal is not also relevant to
Citigroup.
4. What Have Financial Institutions Done With the
Taxpayers' Money Received So Far? What have the companies who
received money from Treasury done with the money? Have the
companies used the funds in the way Treasury intended when it
disbursed them? How have institutions supported under the
Capital Purchase Program used their funds, and have they
leveraged the capital support to increase lending activity? Is
this different from the way funds were utilized for
institutions who received funds pursuant to the Systemically
Significant Failing Institutions plan? Is Treasury seeking to
use TARP money to shape the future of the American financial
system, and if so, how?
In the course of its meetings with Treasury, the Inspector
General of Treasury, and the staff of the Federal Reserve, the
Oversight Panel has confirmed that the Office of Financial
Stabilization has administered the TARP program without seeking
to monitor the use of funds provided to specific financial
institutions.\49\ Interim Assistant Secretary for Financial
Stability Neel Kashkari has said that Treasury favors
monitoring through ``general metrics'' that look at the overall
economic effects of the disbursed funds.\50\
---------------------------------------------------------------------------
\49\ See also GAO Report, supra note 18, at 25.
\50\ Id., at 10.
---------------------------------------------------------------------------
The decision to measure the efficacy of TARP through
general economic metrics presents a difficult challenge. In the
short run, it is impossible because systemic economic effects
take time to manifest themselves. In the long run, such metrics
are problematic because other actors such as the Federal
Reserve, FDIC, and foreign governments are also taking
aggressive action to address the crisis. Using general metrics
could be a substitute for using no metrics at all, thus
committing taxpayer resources with no meaningful oversight.
If the funds committed under TARP have an intended purpose
and are not merely no-strings-attached subsidies to financial
institutions, then it seems essential for Treasury to monitor
whether the funds are used for those intended purposes. Without
that oversight, it is impossible to determine whether taxpayer
money is used in accordance with Treasury's overall economic
stabilization strategy. Treasury cannot simply trust that the
financial institutions will act in the desired ways; it must
verify.
Such efforts to measure the impact of public funds on
specific financial institutions have been underway in Great
Britain. Chancellor of the Exchequer Alastair Darling and Lord
Peter Mandelson, the Secretary for Business, Enterprise, and
Regulatory Reform, have required recapitalized banks to lend to
small and medium size enterprises.\51\ To demonstrate
compliance with the intended purpose of recapitalization,
Chancellor Darling and Lord Mandelson are using 2007 levels of
lending as a comparison.\52\ Treasury should consider metrics
it can use to measure compliance with the intended purposes of
its funds.
---------------------------------------------------------------------------
\51\ Jenny Booth, Darling to Order Recapitalised Banks to Lend to
Small Businesses, Times (London), Oct. 21, 2008, available at http://
www.timesonline.co.uk/tol/news/politics/article4985470.ece; Press
Release, Financial Support to the Banking Industry, HM Treasury,
available at http://www.hm-treasury.gov.uk/press_100_08.htm.
\52\ Press Release, Treasury statement on financial support to the
banking industry, HM Treasury, Oct. 13, 2008, available at http://
www.hm-treasury.gov.uk/press_105_08.htm.
---------------------------------------------------------------------------
The Oversight Panel believes the public has the right to
know how financial institutions that have received public money
are using that money. It also believes that Treasury should be
responsible for holding individual institutions accountable for
how they use the public's money.
5. Is the Public Receiving a Fair Deal? What is the value
of the preferred stock Treasury has received in exchange for
cash infusions to financial institutions? Are the terms
comparable to those received in recent private transactions,
such as those with Warren Buffett and the Abu Dhabi Investment
Authority?
The Oversight Panel believes that a critical aspect of its
mission is to determine whether the United States government
has received assets comparable to its expenditures under the
Emergency Economic Stabilization Act of 2008. To date, Treasury
has made two types of expenditures under the Act. The majority
of its expenditures have been cash infusions for which the
Department has received preferred stock with associated
warrants to purchase common stock. In the case of Citigroup,
however, Treasury has participated, together with the Federal
Deposit Insurance Corporation and the Federal Reserve Board, in
a guarantee supporting a pool of assets held by Citigroup.
Several major TARP recipient companies have received major
capital investments recently, including Mitsubishi's investment
in Morgan Stanley, Warren Buffett's investment in Goldman
Sachs, and the Abu Dhabi Investment Group's investment in
Citigroup.
On October 14, 2008, Mitsubishi UFJ (MUFJ) Financial Group
of Japan invested $9 billion in Morgan Stanley.\53\ In
exchange, MUFJ received a 21% stake in the company through
perpetual preferred shares with a 10% annual dividend.\54\
---------------------------------------------------------------------------
\53\ Aaron Lucchetti, Propped Up, Morgan Stanley Now Sets Forth to
Right Itself, Wall St. J., Oct. 14, 2008, at C1.
\54\ Id.
---------------------------------------------------------------------------
Warren Buffett announced on September 23, 2008 that he
would invest $5 billion into Goldman Sachs.\55\ In return,
Buffett's company, Berkshire Hathaway, received perpetual
preferred shares with a 10% annual dividend. If Goldman Sachs
wishes to buy back the preferred stock, it can do so at a
premium of 10%. Berkshire Hathaway also received warrants to
purchase common stock at $115 per share, up to $5 billion
within the next five years.\56\
---------------------------------------------------------------------------
\55\ Ben White, Buffett Deal at Goldman Seen as a Sign of
Confidence, N.Y. Times, Sep. 24, 2008, at A1.
\56\ Id.
---------------------------------------------------------------------------
In November 2007, the Abu Dhabi Investment Authority
invested $7.5 billion in Citigroup, amounting to 4.9% of
Citigroup's equity.\57\ The Abu Dhabi Investment Authority
received equity units that pay an 11% annual dividend and will
be converted into common stock in 2010 or 2011 at a price
between $31.83 and $37.24.\58\
---------------------------------------------------------------------------
\57\ Eric Dash & Andrew R. Sorkin, Citigroup Sells Abu Dhabi Fund
$7.5 Billion Stake, N.Y. Times, Nov. 27, 2007, available at http://
www.nytimes.com/2007/11/27/business/27citi.html?hp.
\58\ Id.
---------------------------------------------------------------------------
Under the CPP terms, Treasury receives senior preferred
shares paying annual dividends of 5% for five years and 9%
thereafter, and the shares can be redeemed at face value after
three years or, if the institution receives a minimum amount
from ``qualified equity offerings,'' prior to three years.\59\
In addition, Treasury receives warrants to purchase common
stock up to a market value of 15% of senior preferred
investment for public securities or 5% for private
securities.\60\ The exercise price is the financial
institution's market price of common stock on the day it is
accepted into the Capital Purchase Program.\61\ The exercise
price of the common stock warrants is reduced each six months
if shareholder approvals are not obtained or if the institution
completes a qualified equity offering prior to December 31,
2009.\62\
---------------------------------------------------------------------------
\59\ TARP Capital Purchase Program, Summary of Senior Preferred
Terms available at http://www.treas.gov/press/releases/reports/
document5hp1207.pdf.
\60\ Id.
\61\ Id.
\62\ Id., at 21-22.
---------------------------------------------------------------------------
The Oversight Panel intends to work with Treasury, the GAO,
and the Congressional Budget Office to determine the value of
the preferred stock acquired by Treasury at the time of
acquisition, particularly in light of these comparable
transactions, and to understand how these terms were negotiated
and determined. The Oversight Panel will also seek to
understand Treasury's plans for the terms of future capital
investments through the Capital Purchase Program in private
financial institutions, S-Corporations, and mutual
organizations.\63\
---------------------------------------------------------------------------
\63\ See id..
---------------------------------------------------------------------------
Under Section 102(c), the Secretary of the Treasury must
collect premiums from financial institutions whose financial
assets are insured, and those premiums must provide sufficient
reserves to meet any anticipated claims and to ensure that
taxpayer funds are safeguarded.
Treasury, the Federal Reserve, and the FDIC announced on
November 23 a plan to insure against the loss of $306 billion
in loans and mortgage-related securities held by Citigroup.\64\
Under the plan, Citigroup will take the first $29 billion in
potential losses, plus 10% of any additional losses.\65\
Treasury, the FDIC, and the Federal Reserve are responsible for
any additional losses, which could be up to nearly $250
billion.\66\ Citigroup will issue $4 billion in preferred stock
to Treasury Department and $3 billion in preferred stock to the
FDIC as a fee in exchange for the guarantee.\67\
---------------------------------------------------------------------------
\64\ Press Release, Joint Statement by Treasury, Federal Reserve
and the FDIC on Citigroup, Department of Treasury, Nov. 23, 2008,
available at http://www.ustreas.gov/press/releases/hp1287.htm.
\65\ Dan Wilchins & Jonathan Stempel, Citigroup Gets Massive
Government Bailout, Reuters, Nov. 24, 2008, available at http://
news.yahoo.com/s/nm/20081124/bs_nm/us_citigroup.
\66\ Id.
\67\ Summary of Terms, Department of Treasury, Nov. 23, 2008,
available at http://www.ustreas.gov/press/releases/reports/
cititermsheet_112308.pdf.
---------------------------------------------------------------------------
In relation to the asset guarantees provided to Citigroup,
Section 102 of the Emergency Economic Stabilization Act appears
to govern all insurance policies and other guarantees of the
value of financial institution assets. Section 102(c) requires
that the Secretary of the Treasury collect premiums from
financial institutions whose financial assets are insured
through this program. The premiums must provide sufficient
reserves to meet any anticipated claims and to ensure that
taxpayer funds are safeguarded. The Oversight Panel will seek
to understand whether the Citigroup guarantee falls under the
requirements of Section 102, and if so, whether it conforms
with these requirements.
6. What is Treasury Doing To Help the American Family? Does
Treasury believe American families need to borrow more money?
Have Treasury's actions preserved access to consumer credit,
including student loans and auto loans at reasonable rates?
What restrictions will Treasury put on credit issuers to assure
that taxpayer dollars are not used to subsidize lending
practices that are exploitive, predatory or otherwise harmful
to customers? What is Treasury doing to ensure that its
spending is directed in ways that maximize the impact on the
American economy?
On November 25, 2008, Treasury announced that it would
provide $20 billion of credit protection for the Federal
Reserve's Term Asset-Backed Securities Loan Facility (TALF),
which will finance investments in securities backed by
automobile loans, credit card loans, student loans, and small
business loans.\68\ In addition, since the beginning of the
CPP, American Express became a bank holding company, allowing
it to apply for a capital infusion of over $3 billion.\69\
---------------------------------------------------------------------------
\68\ Press Release, Treasury Provides TARP Funds to Federal Reserve
Consumer ABS Lending Facility, Nov. 25, 2008, available at http://
www.treas.gov/press/releases/hp1292.htm.
\69\ Eric Dash, American Express To Be Bank Holding Company, N.Y.
Times, Nov. 11, 2008, at B2.
---------------------------------------------------------------------------
American families are already loaded with debt. According
to Federal Reserve Board calculations, total U.S. consumer
debt, excluding loans secured by real estate, increased at an
average annual rate of 5.0% between 2003 and 2007, growing from
approximately $2.1 trillion to approximately $2.55
trillion.\70\ Total household debt outstanding in the U.S. now
exceeds annual national personal income.\71\ According to the
2004 Survey of Consumer Finances, 46% of American families
carry monthly credit card balances, and the average level of
credit card debt for those families is $5,100.\72\
---------------------------------------------------------------------------
\70\ Statistical Release, Consumer Credit G.19, Federal Reserve,
available at http://www.federalreserve.gov/releases/g19/current/.
\71\ See Credit Cards and Bankruptcy: Opportunities for Reform,
Hearing Before the Senate Comm. on the Judiciary, 110th Cong. (Dec. 4,
2008) (testimony of Prof. Robert M. Lawless), available at http://
judiciary.senate.gov/pdf/08-12-04LawlessTestimony.pdf.
\72\ 2004 Survey of Consumer Finances, Federal Reserve, available
at http://www.federalreserve.gov/PUBS/oss/oss2/2004/
scf2004home_modify.html.
---------------------------------------------------------------------------
The Oversight Panel believes that as the Treasury moves
toward using public money to support the secondary market for
credit card and other consumer debt, the Treasury, the public,
and Congress need to understand better the financial strains
affecting American families. While increased consumer spending
is an important part of economic stimulation and recovery, for
many families, incurring additional debt would only add to
their financial stress. There is evidence that relying on
borrowing by individuals as a form of economic stimulus has
proved destructive. In addition, there are questions about the
extent to which increased consumer spending stimulates the U.S.
economy when marginal consumer dollars are spent on imports.
Ultimately, sustainable consumer spending must depend upon
rising incomes and broadly shared prosperity, not debt.
In addition to the massive amounts of debt, the complexity
of individual credit products has made it impossible for even
the most sophisticated consumers to understand the implications
of debt for their future payment obligations.\73\ The
proliferation of intricate mortgage products--including hybrid
ARMs, option ARMs, and other exotic species featuring teaser
periods and balloon payments--contributed to the pattern of
home buyers taking on mortgages that were initially affordable
but that quickly became unmanageable. The Government
Accountability Office reported that credit card issuers charge
consumers up to three different interest rates depending on the
transaction and high punitive rates (some in excess of 30%); in
addition, average late payment fees have more than doubled
between 1995 and 2005.\74\ From the onset of the financial
crisis, credit card issuers have been accused of increasing
interest, accelerating fees and penalties and using more
aggressive debt collection practices.\75\
---------------------------------------------------------------------------
\73\ See generally GAO, Credit Cards: Increased Complexity in Rates
and Fees Heightens Need for More Effective Disclosures to Consumers,
GAO-06-929, September 2006, available at http://www.gao.gov/new.items/
d06929.pdf.
\74\ Id., at 5, 14, 18.
\75\ See, e.g., Liz Moyer, Holiday Surprise: More Credit Card Fees,
Forbes, Dec. 5, 2008, available at http://www.forbes.com/business/2008/
12/05/credit-card-fees-biz-wall-cx_lm_1205badcards.html; Abigail
Bassett, As Debt Grows, Collections Boom, CNNMoney.com, Nov. 26, 2008,
available at http://money.cnn.com/2008/11/25/pf/debt_collections/
?postversion=2008112611.
---------------------------------------------------------------------------
In the context of consumer credit, it is also important to
ask what restrictions Treasury will put on credit issuers to
assure that taxpayer dollars are not used to subsidize lending
practices that are exploitive, predatory or otherwise harmful
to customers.
In response to similar trends in the United Kingdom, the
U.K. government has required credit card companies to work with
consumers as a condition of receiving public funds. The U.K.
has required credit card issuers to suspend payments for 60
days in many cases of financial hardship.\76\
---------------------------------------------------------------------------
\76\ U.K. Credit Cards to Give Borrowers Extra 60 Days to Pay, Wall
St. J., Nov. 26, 2008, http://online.wsj.com/article/
SB122773056319560653.html.
---------------------------------------------------------------------------
Households that are struggling with debts--mortgages,
student loans, credit cards, car loans, payday loans, and other
credit devices--are at the center of the current crisis. Their
defaults have driven the losses on asset-backed securities that
have weakened balance sheets of financial institutions, and
their reduction in purchasing has contributed to the
contraction in economic activity. For Treasury's disbursements
to be effective in the context of the broader economic downward
spiral, Treasury must have a strategy that addresses this
underlying problem.
7. Is Treasury Imposing Reforms on Financial Institutions
That Are Taking Taxpayer Money? Congress has told the auto
industry to reform its current practices before it could be
considered for taxpayer aid and the British are requiring
reforms on their banks as a precondition for capital infusions.
Has Treasury required banks receiving aid to:
i. Present a viable business plan;
ii. Replace failed executives and/or directors;
iii. Undertake internal reforms to prevent future
crises, to increase oversight, and to ensure better
accounting and transparency;
iv. Undertake any other operational reforms?
Treasury has provided capital to financial institutions
under two programs, the CCP and SSFI. In general, the Act
provides the Secretary of the Treasury with broad authority to
set the conditions under which companies may receive aid. In
particular, Congress required that the Secretary determine
whether the public disclosure requirements for each financial
institution are sufficient to provide the public with an
accurate picture of that institution's true financial
position.\77\
---------------------------------------------------------------------------
\77\ Emergency Economic Stabilization Act, supra note 15,
Sec. 114(b) (``the Secretary shall determine whether the public
disclosure required for such financial institutions with respect to
off-balance sheet transactions, derivatives instruments, contingent
liabilities, and similar sources of potential exposure is adequate to
provide to the public sufficient information as to the true financial
position of the institutions. If such disclosure is not adequate for
that purpose, the Secretary shall make recommendations for additional
disclosure requirements to the relevant regulators.'')
---------------------------------------------------------------------------
It is unclear whether there have been any efforts to assess
the business plans, the management, or the accounting and
general transparency of firms receiving aid from the CPP.\78\
In order for the Big Three auto companies--Ford, Chrysler, and
GM--to be considered for any taxpayer aid, however, Congress
has proposed considerable reforms and presentation of viable
business plans.\79\ The British have imposed significant
reforms on their banks in the context of government aid during
the financial crisis. In exchange for recapitalization, the
British Treasury has required that Banks maintain 2007 levels
of lending to homeowners and small businesses, develop an
effective scheme for people to stay in their homes, reform
their compensation policies going forward, include the
Government in decisions on dividend policy, and provide the
Government with influence on the appointment of new independent
non-executive directors.\80\
---------------------------------------------------------------------------
\78\ See GAO Report, supra note 18, at 15.
\79\ See David M. Herszenhorn, Big Bailout for Detroit Fails for
Now, N.Y. Times, Nov. 21, 2008, at B1. Speaker Nancy Pelosi stated,
``Until we see a plan where the auto industry is held accountable and a
plan for viability on how they go into the future--until we see the
plan, until they show us the plan, we cannot show them the money.'' Id.
\80\ Press release, HM Treasury supra note 51; see also Steven
Erlanger & Katrin Bennhold, Governments on Both Sides of the Atlantic
Push To Get Banks To Lend, N.Y. Times, Nov. 7, 2008, at A6.
---------------------------------------------------------------------------
The Oversight Panel believes the public has a right to know
to what extent conditions have been imposed on financial
institutions receiving public funds, and if not, why not.
8. How Is Treasury Deciding Which Institutions Receive the
Money? What factors is Treasury using to determine which
institutions receive equity infusions, purchase of portfolio
assets, or insurance of portfolio assets? Is Treasury seeking
to use TARP money to shape the future of the American financial
system, and if so, how? Why does Treasury believe that
providing capital to all viable banks, regardless of business
profile, is the most efficient use of funds?
Treasury has informed both the Oversight Panel and the GAO
that its process for determining which banks receive aid from
TARP under the CPP is based on one criterion--the financial
viability of the institution. In doing so, Treasury relies on
recommendations from banking regulators to determine which
institutions will receive equity infusions.\81\ Bank regulators
consider bank examination ratings, selected performance ratios,
and, in some cases, the intended use of capital injections.\82\
Treasury has stated that the process is consistent for all
banks. Those with higher bank examination ratings are
presumptively approved by the regulators, while those with low
examination ratings are sent to the CPP Council, which may
consider additional factors such as the existence of a signed
merger agreement and private equity investment.\83\ Although no
bank has been denied, some institutions have withdrawn their
applications.\84\ As of December 9, Treasury had invested in 87
institutions.\85\ Of these capital infusions, $115 billion has
gone to 8 lenders.\86\
---------------------------------------------------------------------------
\81\ Release: Interim Assistant Secretary for Financial Stability
Neel Kashkari Testimony before the Senate Committee on Banking, Housing
and Urban Affairs, Oct. 23, 2008, available at http://www.treas.gov/
press/releases/hp1234.htm.
\82\ Id.
\83\ Id.
\84\ Id.
\85\ Capital Purchase Program Transaction Report, Dec. 9, 2008
available at http://www.treas.gov/initiatives/eesa/docs/
CPPTransaction%20ReportDec%209.pdf.
\86\ Id.
---------------------------------------------------------------------------
Some commentators are concerned that Treasury actions are
designed to drive consolidation in the banking industry by
directing funds to financial institutions that are willing to
purchase weaker banks.\87\ Opponents of concentration worry
about the too-big-to-fail dynamic encouraging excessive risk
taking by surviving institutions.
---------------------------------------------------------------------------
\87\ Mark Landler, U.S. Is Said To Be Urging New Mergers in
Banking, N.Y. Times, Oct. 21, 2008, at B1.
---------------------------------------------------------------------------
Others are concerned about too little thought about over-
supply in banking and the need to concentrate taxpayer
resources on backing up a more limited number of stronger
banks.\88\ Still others have expressed concern that with
Treasury intervention, the banks that behaved prudently and
whose balance sheets are strong are now losing their
comparative advantage in a crisis.\89\ Finally, concerns have
been expressed by some banks that their decision not to seek
TARP money has been perceived as a sign of weakness by
investors and business partners.
---------------------------------------------------------------------------
\88\ See, e.g., Peter Cohan, Washington Likely To Put Capital Into
Banks: A Great Idea if Done Right, BloggingStocks, available at http://
www.bloggingstocks.com/2008/10/09/washington-likely-to-put-capital-
into-banks-a-great-idea-if-don.
\89\ See, e.g., E. Scott Reckard, Which Banks Live or Die? Wielding
$250 Billion, U.S. May Decide, L.A. Times, Oct. 15, 2008, at A1; Nicole
Gelinas, Storm Proofing the Economy, Wall St. J., Oct. 28, 2008,
available at http://online.wsj.com/article/SB122513954599373277.html;
Evan Greenberg, The Insurance Industry Doesn't Need Subsidies, Wall St.
J., Oct. 31, 2008, available at http://online.wsj.com/article/
SB122541594014986703.html.
---------------------------------------------------------------------------
The Citigroup experience and the AIG experience raise
questions about assessments of institutional health and need by
Treasury and bank regulators. In assessing the health of
financial institutions, the Oversight Panel is interested in
the extent to which Treasury and bank regulators involved in
funding decisions have assessed future likely losses in
derivatives and troubled assets, and the implications for
funding levels necessary to restore specific institutions to
the point where they can resume normal lending practices.
The Oversight Panel believes it is critical for Congress
and the public, including participants in the banking industry,
to understand exactly what the criteria are for receiving money
under the TARP programs, what the strategic intentions of the
criteria are, if any, what the strategic effects of the
criteria are, and how the criteria advance the purposes of the
Act.
9. What is the Scope of Treasury's Statutory Authority?
What is Treasury's understanding of the statutory limits on its
use of funds? How does Treasury justify its decisions under the
Act in relation to its view of these limits? How is Treasury
carrying out its statutory mandate regarding credit insurance?
The Emergency Economic Stabilization Act of 2008 granted
the Secretary of the Treasury the authority both to purchase
and to insure ``troubled assets'' held by ``financial
institutions.'' \90\ Moreover, the Act defines ``troubled
asset'' as any residential or commercial mortgage-backed
security and related assets issued before March 14, 2008, and
``any other financial instrument that the Secretary, after
consultation with the Chairman of the Board of Governors of the
Federal Reserve System . . . determines the purchase of which
is necessary to promote financial market stability'' so long as
that determination is transmitted to Congress.\91\
---------------------------------------------------------------------------
\90\ Emergency Economic Stabilization Act, supra note 15, at
Sec. 101(a).
\91\ Id., at Sec. 3(9).
---------------------------------------------------------------------------
The term ``financial institution'' is defined as ``any
institution, including but not limited to any bank, savings
association, credit union, security broker or dealer, or
insurance company.'' \92\ The remainder of the definition
limits the definition to U.S. institutions not owned by a
foreign government. Treasury has purchased the preferred stock
of banks relying upon these definitions.
---------------------------------------------------------------------------
\92\ Id., at Sec. 3(5) (emphasis added).
---------------------------------------------------------------------------
Some have raised concerns that these purchases appear not
to be contemplated by the overall language of the Act, and have
questioned whether Treasury's interpretation of its authority
in fact places any substantive limits on the assets it could
buy, and from whom.
On the other hand, others, contemplating Treasury's refusal
to date to provide aid to U.S. automakers, have asked whether
in light of Treasury's generally broad interpretation of its
mandate, the refusal to aid the automakers, given their
significant role in the financial markets and the economy, is
arbitrary and not supported by the statute's broad definition
of both ``troubled asset'' and ``financial institution.'' \93\
---------------------------------------------------------------------------
\93\ See generally Greg Hitt, Auto Makers Force Bailout Issue--
Government Finds It Difficult to Deny Aid to Detroit in Wake of Wall
Street Rescue, Wall St. J., Nov. 10, 2008, at A3.
---------------------------------------------------------------------------
The Term Asset-Backed Securities Loan Facility (TALF)
program, authorized by the Federal Reserve Act, features $20
billion in TARP funds used to finance purchases of assets
backed by auto, student, credit card, and small business loans,
with any additional funding coming from the Federal Reserve
Bank of New York (FRBNY).\94\ This program will provide up to
$200 billion on a non-recourse basis to holders of assets
backed by new and recent loans.\95\ Under the TALF terms, the
first $20 billion comes from TARP and is subordinated to any
additional funds provided by FRBNY.\96\
---------------------------------------------------------------------------
\94\ Press Release, Federal Reserve, supra note 29.
\95\ Id.
\96\ TALF Terms and Conditions, Federal Reserve, available at
http://www.federalreserve.gov/newsevents/press/monetary/
monetary20081125a1.pdf.
---------------------------------------------------------------------------
The Citigroup loan guarantee discussed above similarly
commits the TARP to a $20 billion investment in conjunction
with guarantees offered by the FDIC and the Federal
Reserve.\97\
---------------------------------------------------------------------------
\97\ Press Release, Joint Statement by Treasury, Federal Reserve
and the FDIC on Citigroup, Department of Treasury, Nov. 23, 2008,
available at http://www.ustreas.gov/press/releases/hp1287.htm.
---------------------------------------------------------------------------
It is unclear what Treasury believes its authority and
obligations are surrounding guarantees in the context of the
limits placed on insurance in Section 102 of the Act. It is
also unclear what Treasury believes its limits are, if any, in
working with other regulators and government bodies to jointly
finance stabilization efforts. Lastly, it is unclear how
Treasury intends to fulfill its obligation under Section 114 of
the Act to ensure transparency when FRBNY is responsible for
implementing the TALF.
The Oversight Panel believes Congress and the public have a
vital interest in understanding how far Treasury sees its
authority under the TARP extending.
10. Is Treasury Looking Ahead? What are the likely
challenges the implementation of the Emergency Economic
Stabilization Act will face in the weeks and months ahead? Can
Treasury offer some assurance that it has worked out
contingency plans if the economy suffers further disruptions?
While there has been much discussion about the speed with
which the financial system seemed to deteriorate, there were
many signs of serious problems. Defaults rates on home
mortgages had been rising, concerns had been raised about the
quality of the commercial rating systems, distrust in the
valuations of asset-backed securities had surfaced, and the
extraordinary risks associated with unregulated (and
unmonitored) credit default swaps indicated that our financial
system was not unshakeable.\98\ While investors might be
forgiven their focus on short-term profits, it is the job of
our financial experts in the government to take the longer
perspective, to be alert to the possibilities of shocks, and to
have some thoughts about how those shocks might be addressed if
they arose.
---------------------------------------------------------------------------
\98\ See generally Matt Apuzzo, They Warned Us: US Was Told To
`Expect Foreclosures, Expect Horror Stories', Associated Press, Dec. 1,
2008, available at http://www.baltimoresun.com/business/nationworld/
sns-ap-meltdown-ignored-warnings,0,1683858.story.
---------------------------------------------------------------------------
Even in the context of a massive crisis, we cannot manage
one battle at a time. As we noted at the outset of this series
of questions, we need to hear a coherent strategy for managing
us out of this crisis. We note at the end of this series that
we also need to think ahead, both to where the next failures
may occur and to some principles which the government may
follow by way of response.
The Oversight Panel is very interested in the thinking of
Treasury and the other agencies with which it coordinates, such
as the FDIC and the Board of Governors of the Federal Reserve,
as to what the implications for the TARP program are of
possible future events such as the resetting of Alt-A loans, a
possible bankruptcy of one or more major auto makers, or a
change in the environment for financing TARP funding.\99\
---------------------------------------------------------------------------
\99\ See e.g. Charles Feldman, Alt-A Loans: The Crisis Yet to Come,
Biggerpockets, available at http://www.biggerpockets.com/renewsblog/
2008/05/20/alt-a-loans-the-crisis-yet-to-come; Bill Vlasic, G.M.,
Teering on Bankruptcy, Pleads for a Federal Bailout, N.Y. Times, Nov.
12, 2008; Nouriel Roubini, Desperate Measures by Desperate Policy
Makers in Desperate Times: the Fed Moves to Radically Unorthodox
Policies as Economy Is in Free Fall and Stag-Deflation Deepens, RGE
Monitor, Nov. 26, 2008, available at http://www.rgemonitor.com/roubini
monitor/254591/
desperate_measures_by_desperate_policy_makers_in_desperate_times_the
_fed_moves_to
_radically_unorthodox_policies_as_economy_is_in_free_fall_and_
stagdeflation_deepens.
---------------------------------------------------------------------------
This question connects to the first of our questions.
Planning for the future requires an overall strategic approach
to trying to address our financial and economic crisis. The
Oversight Panel does not expect Treasury to predict the future.
We are interested in learning more about how our government is
planning for it.
ABOUT COP
In response to the escalating crisis, on October 3, 2008,
Congress provided the U.S. Treasury with the authority to spend
$700 billion to stabilize the U.S. economy. Congress created
the Office of Financial Stabilization (OFS) within Treasury to
implement a Troubled Asset Relief Program (TARP). At the same
time, Congress created a Congressional Oversight Panel (COP) to
``review the current state of financial markets and the
regulatory system.'' COP is empowered to hold hearings, review
official data, and write reports on actions taken by Treasury
and financial institutions and their effect on the economy.
Through regular reports, COP must oversee Treasury's actions,
assess the impact of spending to stabilize the economy,
evaluate market transparency, ensure effective foreclosure
mitigation efforts, and guarantee that Treasury's actions are
in the best interest of the American people. In addition,
Congress has instructed COP to produce a special report on
regulatory reform that will analyze ``the current state of the
regulatory system and its effectiveness at overseeing the
participants in the financial system and protecting
consumers.''
On November 14, Senate Majority Leader Harry Reid and the
Speaker of the House Nancy Pelosi appointed Richard H. Neiman,
Superintendent of Banks for the State of New York, Damon
Silvers, Associate General Counsel of the American Federation
of Labor and Congress of Industrial Organizations (AFL-CIO),
and Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard
Law School to the Oversight Panel. With the appointment on
November 19 of Congressman Jeb Hensarling to the Oversight
Panel by House Minority Leader John Boehner, the Oversight
Panel had a quorum and met for the first time on November 26,
2008, electing Professor Warren as its chair.
This report was prepared under very tight time constraints.
COP owes special thanks to Ganesh Sitaraman, Dan Geldon, John
Beshears, and Cassie Walbrodt who helped with drafting, and
Heather Slavkin and Catherina Celosse, who were careful
editors. Students from the Harvard Law School provided critical
research under tight deadlines; COP offers thanks to Neal
Desai, Faisal Mohammed, Eric Nguyen, Jeff Pauker, Adam Pollet,
Walter Rahmey, Saritha Tice and Ting Yeh for their service.
FUTURE OVERSIGHT ACTIVITIES
PUBLIC HEARINGS
In the weeks ahead, COP will hold a series of field
hearings to shine light on the causes of the financial crisis,
the administration of TARP, and the anxieties and challenges of
ordinary Americans. The first of these hearings will occur next
week in Las Vegas, Nevada. At each hearing, COP members will
conduct a thorough investigatory process on behalf of American
taxpayers, consumers, and workers.
UPCOMING REPORTS
Next month, COP will release two public reports. On Jan.
10, it will release a report that examines the administration
of the TARP program, including the impact thereof on the
economy to date. On Jan. 20, COP will release a report
providing recommendations for reforms to the financial
regulatory structure. This report will provide a roadmap for a
regulatory system that would revitalize Wall Street, protect
consumers, and ensure future stability in our financial
markets. Through these reports, the Oversight Panel will reveal
the results of its investigations to the American people.
PUBLIC PARTICIPATION AND COMMENT PROCESS
COP will soon release a public website, which will provide
resources pertaining to the financial crisis, the TARP program,
and COP's ongoing efforts. The website will also offer
opportunities for concerned citizens to share their stories,
concerns, and suggestions with the Oversight Panel. By engaging
in this dialogue, COP aims to enhance the quality of its ideas
and advocacy on behalf of the American public.
APPENDIX: STATUTORY AUTHORITY OF THE CONGRESSIONAL OVERSIGHT PANEL
Emergency Economic Stabilization Act of 2008
Public Law No: 110-343
SEC. 125. CONGRESSIONAL OVERSIGHT PANEL.
(a) Establishment.--There is hereby established the
Congressional Oversight Panel (hereafter in this section
referred to as the `Oversight Panel') as an establishment in
the legislative branch.
(b) Duties.--The Oversight Panel shall review the current
state of the financial markets and the regulatory system and
submit the following reports to Congress:
(1) Regular reports.--
(A) In general.--Regular reports of the
Oversight Panel shall include the following:
(i) The use by the Secretary of
authority under this Act, including
with respect to the use of contracting
authority and administration of the
program.
(ii) The impact of purchases made
under the Act on the financial markets
and financial institutions.
(iii) The extent to which the
information made available on
transactions under the program has
contributed to market transparency.
(iv) The effectiveness of foreclosure
mitigation efforts, and the
effectiveness of the program from the
standpoint of minimizing long-term
costs to the taxpayers and maximizing
the benefits for taxpayers.
(B) Timing.--The reports required under this
paragraph shall be submitted not later than 30
days after the first exercise by the Secretary
of the authority under section 101(a) or 102,
and every 30 days thereafter.
(2) Special report on regulatory reform.--The
Oversight Panel shall submit a special report on
regulatory reform not later than January 20, 2009,
analyzing the current state of the regulatory system
and its effectiveness at overseeing the participants in
the financial system and protecting consumers, and
providing recommendations for improvement, including
recommendations regarding whether any participants in
the financial markets that are currently outside the
regulatory system should become subject to the
regulatory system, the rationale underlying such
recommendation, and whether there are any gaps in
existing consumer protections.
(c) Membership.--
(1) In general.--The Oversight Panel shall consist of
5 members, as follows:
(A) 1 member appointed by the Speaker of the
House of Representatives.
(B) 1 member appointed by the minority leader
of the House of Representatives.
(C) 1 member appointed by the majority leader
of the Senate.
(D) 1 member appointed by the minority leader
of the Senate.
(E) 1 member appointed by the Speaker of the
House of Representatives and the majority
leader of the Senate, after consultation with
the minority leader of the Senate and the
minority leader of the House of
Representatives.
(2) Pay.--Each member of the Oversight Panel shall
each be paid at a rate equal to the daily equivalent of
the annual rate of basic pay for level I of the
Executive Schedule for each day (including travel time)
during which such member is engaged in the actual
performance of duties vested in the Commission.
(3) Prohibition of compensation of federal
employees.--Members of the Oversight Panel who are
full-time officers or employees of the United States or
Members of Congress may not receive additional pay,
allowances, or benefits by reason of their service on
the Oversight Panel.
(4) Travel expenses.--Each member shall receive
travel expenses, including per diem in lieu of
subsistence, in accordance with applicable provisions
under subchapter I of chapter 57 of title 5, United
States Code.
(5) Quorum.--Four members of the Oversight Panel
shall constitute a quorum but a lesser number may hold
hearings.
(6) Vacancies.--A vacancy on the Oversight Panel
shall be filled in the manner in which the original
appointment was made.
(7) Meetings.--The Oversight Panel shall meet at the
call of the Chairperson or a majority of its members.
(d) Staff.--
(1) In general.--The Oversight Panel may appoint and
fix the pay of any personnel as the Commission
considers appropriate.
(2) Experts and consultants.--The Oversight Panel may
procure temporary and intermittent services under
section 3109(b) of title 5, United States Code.
(3) Staff of agencies.--Upon request of the Oversight
Panel, the head of any Federal department or agency may
detail, on a reimbursable basis, any of the personnel
of that department or agency to the Oversight Panel to
assist it in carrying out its duties under this Act.
(e) Powers.--
(1) Hearings and sessions.--The Oversight Panel may,
for the purpose of carrying out this section, hold
hearings, sit and act at times and places, take
testimony, and receive evidence as the Panel considers
appropriate and may administer oaths or affirmations to
witnesses appearing before it.
(2) Powers of members and agents.--Any member or
agent of the Oversight Panel may, if authorized by the
Oversight Panel, take any action which the Oversight
Panel is authorized to take by this section.
(3) Obtaining official data.--The Oversight Panel may
secure directly from any department or agency of the
United States information necessary to enable it to
carry out this section. Upon request of the Chairperson
of the Oversight Panel, the head of that department or
agency shall furnish that information to the Oversight
Panel.
(4) Reports.--The Oversight Panel shall receive and
consider all reports required to be submitted to the
Oversight Panel under this Act.
(f) Termination.--The Oversight Panel shall terminate 6
months after the termination date specified in section 120.
(g) Funding for Expenses.--
(1) Authorization of appropriations.--There is
authorized to be appropriated to the Oversight Panel
such sums as may be necessary for any fiscal year, half
of which shall be derived from the applicable account
of the House of Representatives, and half of which
shall be derived from the contingent fund of the
Senate.
(2) Reimbursement of amounts.--An amount equal to the
expenses of the Oversight Panel shall be promptly
transferred by the Secretary, from time to time upon
the presentment of a statement of such expenses by the
Chairperson of the Oversight Panel, from funds made
available to the Secretary under this Act to the
applicable fund of the House of Representatives and the
contingent fund of the Senate, as appropriate, as
reimbursement for amounts expended from such account
and fund under paragraph (1).