Troubled Asset Relief Program:

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

GAO-09-161: Published: Dec 2, 2008. Publicly Released: Dec 2, 2008.

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

Treasury has taken a number of steps to stabilize U.S. financial markets and the banking system, including injecting billions of dollars in financial institutions. Through the capital purchase program (CPP)--a preferred stock and warrant purchase program--Treasury provided more than $150 billion in capital to 52 institutions as of November 25, 2008. GAO recognizes that TARP has existed for less than 60 days and that a new program of such magnitude faces many challenges, especially in this current uncertain economic climate. However, Treasury has yet to address a number of critical issues, including determining how it will ensure that CPP is achieving its intended goals and monitoring compliance with limitations on executive compensation and dividend payments. Moreover, further actions are needed to formalize transition planning efforts and establish an effective management structure and an essential system of internal control. To help ensure the program's integrity, accountability, and transparency, GAO recommends that Treasury (1) work with the bank regulators to establish a systematic means of determining and reporting in a timely manner whether financial institutions' activities are generally consistent with the purposes of CPP and help ensure an appropriate level of accountability and transparency; (2) develop a means to ensure that institutions participating in CPP comply with key program requirements (e.g., executive compensation, dividend payments, and the repurchase of stock); (3) formalize the existing communication strategy to ensure that external stakeholders, including Congress, are informed about the program's current strategy and activities and understand the rationale for changes in this strategy to avoid information gaps and surprises; (4) facilitate a smooth transition to the new administration by building on and formalizing ongoing activities, including ensuring that key OFS leadership positions are filled during and after the transition; (5) expedite OFS's hiring efforts to ensure that Treasury has the personnel needed to carry out and oversee TARP; (6) ensure that sufficient personnel are assigned and properly trained to oversee the performance of all contractors, especially for Contracts priced on a time and materials basis, and move toward fixed-price arrangements whenever possible; (7) continue to develop a comprehensive system of internal control over TARP, including policies, procedures, and guidance that are robust enough to protect taxpayers interests and ensure that the program objectives are being met; (8) issue final regulations on conflicts of interest quickly and review and renegotiate mitigation plans to enhance specificity and compliance; and (9) institute a system to effectively manage and monitor the mitigation of conflicts of interest.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Treasury publishes a monthly bank lending survey of the 22 largest CPP institutions to monitor their lending and intermediation activities including their small business lending. In conjunction with federal bank regulators, Treasury publishes on a quarterly basis an evaluation of changes in regulatory financial data for all CPP reporting institutions and non-CPP institutions that focuses on three broad categories: on- and off-balance sheet items, performance ratios and asset quality measures. All federal bank regulators, except the Federal Reserve, have developed examination polices and procedures to monitor CPP participants for compliance with CPP agreements and TARP requirements.

    Recommendation: We recognize that less than 60 days has passed since the program was created and the inherent difficulty of setting up any new program, especially during turbulent economic conditions. However, we have identified a number of areas that warrant Treasury's ongoing attention. Therefore, Treasury should take a number of actions aimed at improving the integrity, accountability, and transparency of TARP. Specifically, Treasury should work with the bank regulators to establish a systematic means of monitoring and reporting on whether financial institutions' activities are consistent with the purposes of CPP and help ensure an appropriate level of accountability and transparency.

    Agency Affected: Department of the Treasury

  2. Status: Closed - Implemented

    Comments: Treasury hired nine asset management firms to provide market advice about investments in financial institutions and corporations participating in TARP programs, and help monitor compliance with limitations on compensation, dividend payments, and stock repurchases. Treasury finalized its oversight policies for asset managers in April 2010 and developed qualitative and quantitative performance metrics based on the managers? core functions and responsibilities in July 2010. Treasury has created policies for ensuring that CPP institutions comply with restrictions on executive compensation and excessive or luxury expenditures. The interim final executive compensation rule established the Office of the Special Master for TARP Executive Compensation to address application of the rules to TARP recipients and their employees, administer reviews of bonuses, retention awards, and other compensation for employees of TARP recipients before February 17, 2009, and negotiate reimbursements. The rule also established compliance reporting and record-keeping requirements for executive compensation and corporate governance standards. Specifically, Treasury?s interim final rule requires that the principal executive officer and principal financial officer certify to actions to be taken by the compensation committee, board of directors, and the company itself with regard to executive compensation. Certifications from these officers are required to be filed within 90 days after the recipient?s fiscal year-end. All certifications and disclosures as well as correspondence are tracked and monitored by OFS Compliance within the Office of Internal Review. Instances of non-compliance with CPP requirements are reported to OFS Compliance, which evaluates them to determine if further action is required. Treasury also uses its custodian bank (Bank of New York Mellon) to collect information from a variety of sources, such as Securities and Exchange Commission filings and press releases, Bloomberg, and information provided by CPP participants to monitor dividend payments and stock repurchases and OFS refer instances of noncompliance to the Chief Risk and Compliance Office for further action if required. Treasury also publishes a monthly Dividend and Interest reports detailing monthly and cumulative dividends and interest payments received and missed payments for CPP and other TARP investments. These reports are posted on www.financialstability.gov.

    Recommendation: We recognize that less than 60 days has passed since the program was created and the inherent difficulty of setting up any new program, especially during turbulent economic conditions. However, we have identified a number of areas that warrant Treasury's ongoing attention. Therefore, Treasury should take a number of actions aimed at improving the integrity, accountability, and transparency of TARP. Specifically, Treasury should develop a means to ensure that institutions participating in CPP comply with key requirements of program agreements, including those covering limitations on executive compensation, dividend payments, and the repurchase of stock.

    Agency Affected: Department of the Treasury

  3. Status: Closed - Implemented

    Comments: Treasury has taken several steps to improve its communication strategy for TARP, , including launching its FinancialStability.gov Web site in March 2009 and forming a working group to help ensure that Treasury's communications strategy addresses both internal and external communications and is hiring appropriate staff to support the strategy. Treasury officials told us that key components of the strategy include (1) coordinating communication among OFS and Treasury's Office of Public Affairs and Office of Legislative Affairs to ensure that congressional and other external stakeholders receive timely information, (2) continuously improving the financial stability Web site, and (3) conducting outreach across the country on the homeownership preservation programs. To support these efforts, Treasury hired a communications director for OFS in June 2010 who works to support the communication strategy. In March 2011, OFS also hired a senior liaison for Legislative Affairs to provide OFS-specific outreach to Congress and respond to requests for information. Collectively, these actions will help Treasury to ensure external stakeholders, including Congress, are informed and updated about TARP programs in a timely manner.

    Recommendation: We recognize that less than 60 days has passed since the program was created and the inherent difficulty of setting up any new program, especially during turbulent economic conditions. However, we have identified a number of areas that warrant Treasury's ongoing attention. Therefore, Treasury should take a number of actions aimed at improving the integrity, accountability, and transparency of TARP. Specifically, Treasury should formalize the existing communication strategy to ensure that external stakeholders, including Congress and the public, are informed about the program's current strategy and activities as well as the rationale for changes in this strategy to avoid information gaps and shocks.

    Agency Affected: Department of the Treasury

  4. Status: Closed - Implemented

    Comments: GAO made this recommendation in the first 60-day report on the Troubled Asset Relief Program (TARP) because the program was new and its administration would transfer to the new administration in January 2009. Therefore, it was critical that Treasury ensure key processes and people were in place to facilitate the continued operation of the TARP program activities to the next administration. In GAO's January 2009 60-day mandated report on the TARP, GAO reported that Treasury took proactive steps to help ensure a smooth transition to the new administration by keeping positions filled and using an expedited hiring process, including direct hire authority. GAO determined that Treasury made efforts to ensure that key leadership positions remain filled after the transition to the new administration. Specifically, Treasury took steps to either (1) confirm that each interim chief would stay for a period covering the transition to the new administration; or (2) in cases where a leader was unlikely to stay beyond the transition, to work with the interim chief to find candidates to serve in the role on a permanent basis. Treasury facilitated continuity of operations through the transition for a number of other key positions. Also, OFS continued to use staff and other existing resources from other part of Treasury and the federal government, as well as the private sector. OFS's financial agents and contractors remained in place throughout the transition, providing institutional knowledge of past practices, continuity of operations, and expertise needed to carry out OFS policies and operations. Treasury also took steps to build and formalize ongoing activities, such as by establishing processes and documenting internal controls used to carry out the various new programs established under TARP and the associated financial transactions. In addition, OFS staff and the current administration kept the transition team informed of all activities and met with the transition team frequently. An official from the transition team told GAO that they were very satisfied with the coordination efforts made by the current administration to facilitate a smooth transition.

    Recommendation: We recognize that less than 60 days has passed since the program was created and the inherent difficulty of setting up any new program, especially during turbulent economic conditions. However, we have identified a number of areas that warrant Treasury's ongoing attention. Therefore, Treasury should take a number of actions aimed at improving the integrity, accountability, and transparency of TARP. Specifically, Treasury should develop a definitive transition plan by building on and formalizing ongoing activities to facilitate a smooth transition to the new administration, including ensuring that key OFS leadership positions are filled during and after the transition to the new administration.

    Agency Affected: Department of the Treasury

  5. Status: Closed - Implemented

    Comments: Since we issued our first TARP report in December 2008, Treasury has continuously improved upon its efforts to expedite hiring for its Office of Financial Stability (OFS) as we recommended. Specifically, as of August 3, 2009, Treasury reported that it had brought on board 194 full-time employees, including 19 detailees. This is a significant change from what we reported in our previous reports. Specifically, in December 2009, we reported that Treasury had 5 permanent staff and 137 detailees. Accordingly, Treasury has also become less reliant on OFS detailees over time as the TARP strategy has solidified. Treasury officials reported use of various hiring strategies to bring on board staff quickly. This includes direct-hire authority, standardization of hiring practices and promotion of current federal employees to higher level positions, among other things. Treasury's hiring efforts has enabled the organization to reach a steady state with sufficient resources to oversee TARP programs.

    Recommendation: We recognize that less than 60 days has passed since the program was created and the inherent difficulty of setting up any new program, especially during turbulent economic conditions. However, we have identified a number of areas that warrant Treasury's ongoing attention. Therefore, Treasury should take a number of actions aimed at improving the integrity, accountability, and transparency of TARP. Specifically, Treasury should continue OFS hiring efforts in an expeditious manner to ensure that Treasury has the personnel needed to carry out and oversee TARP.

    Agency Affected: Department of the Treasury

  6. Status: Closed - Implemented

    Comments: We made this recommendation in our first 60-day report on the Troubled Asset Relief Program (TARP) due to the importance of proper oversight of contractors, particularly those providing services on a time and materials basis. We reported in March 2009 that OFS had made progress in strengthening oversight of contractors and financial agents by ensuring sufficient personnel were assigned to oversight activities and that these personnel were appropriately trained. Treasury hired an executive-level contract administration manager for OFS, added staff to support TARP in the Procurement Services Division, and replaced all untrained executive-level Contracting Officers' Technical Representatives (COTR) with COTRs that have received the requisite formal training and certifications in their acquisition-related responsibilities. We also reported in March 2009 that OFS had made progress in using fixed-price contracting arrangements when the parties possessed sufficient knowledge of the requirements. Treasury and OFS officials have worked closely to analyze the use of time-and-materials arrangements to ensure such arrangements are only used when other contract types are not suitable. Considering the still-evolving nature of TARP's requirements, the ability of the parties to accurately anticipate the performance requirements and estimate costs, as required for fixed-price arrangements, is limited. This limitation places Treasury at risk of paying a higher fixed price for the services than it might otherwise pay under a time-and-materials contract. Treasury has gathered cost data from existing time-and-materials and labor-hour contracts to identify costs of recurring transactions to support the future negotiation of reasonable fixed pricing for follow-on work where appropriate.

    Recommendation: We recognize that less than 60 days has passed since the program was created and the inherent difficulty of setting up any new program, especially during turbulent economic conditions. However, we have identified a number of areas that warrant Treasury's ongoing attention. Therefore, Treasury should take a number of actions aimed at improving the integrity, accountability, and transparency of TARP. Specifically, Treasury should ensure that sufficient personnel are assigned and appropriately trained to oversee the performance of all contractors, especially those performing under contracts priced on a time and materials basis, and move toward greater reliance on fixed-price arrangements, whenever possible, as program requirements are better defined over time.

    Agency Affected: Department of the Treasury

  7. Status: Closed - Implemented

    Comments: In response to our recommendation, OFS adopted a framework for organizing the development and implementation of a comprehensive system of internal control for TARP activities. OFS developed an organizational structure that defines lines of authority and implemented policies and procedures to help ensure that program objectives are met. Furthermore, OFS addressed the five areas of internal control as specified in our Standards for Internal Control in the Federal Government: control environment, risk assessment, control activities, information and communications, and monitoring. In subsequent work, we have continued to monitor internal controls and identify areas where certain controls for specific programs, such as HAMP, could be improved. In our audit opinion for OFS?s fiscal year 2009 financial statements, we concluded that although internal controls could be improved, OFS maintained, in all material respects, effective internal control over financial reporting as of September 30, 2009. While OFS continues to have areas that merit improvement in its internal control structure, overall, OFS has implemented a comprehensive system of internal control that helps ensure that TARP program objectives are met and taxpayers? interest are protected.

    Recommendation: We recognize that less than 60 days has passed since the program was created and the inherent difficulty of setting up any new program, especially during turbulent economic conditions. However, we have identified a number of areas that warrant Treasury's ongoing attention. Therefore, Treasury should take a number of actions aimed at improving the integrity, accountability, and transparency of TARP. Specifically, Treasury should continue to develop a comprehensive system of internal control over TARP, including policies, procedures, and guidance for program activities that are robust enough to ensure that program's objectives and requirements are being met.

    Agency Affected: Department of the Treasury

  8. Status: Closed - Implemented

    Comments: Consistent with GAO's recommendation and as expeditiously as possible, on January 21, 2009 Treasury issued an interim regulation on TARP conflicts of interest which was effective immediately and applicable to retained entities defined to include contractors, financial agents, and subcontractors. [TARP Conflicts of Interest, 74 Fed. Reg. 3431-3436 (Jan. 21, 2009) (codified at 31 C.F.R. Part 31)]. Also consistent with GAO's recommendation, Treasury issued this regulation as an interim rule based on a determination that urgent and compelling circumstances and good cause existed that justified the promulgation of the interim rule without public comment. Treasury found it essential to issue conflict-of-interest regulations without delay so that anyone participating in the TARP program would have clear information as soon as possible on avoiding conflicts of interest. Treasury received public comments on the interim rule and anticipates that the process of developing a final rule will take more time. However, Treasury's action to issue this regulation as an interim rule is responsive to GAO?s recommendation to issue final regulations as expeditiously as possible. Specifically, with this action, Treasury put in place a set of clear requirements to address actual or potential conflicts that may arise during the selection of retained entities to be involved in the acquisition, valuation, management, and disposition of troubled assets or that may arise in the course of TARP services.

    Recommendation: We recognize that less than 60 days has passed since the program was created and the inherent difficulty of setting up any new program, especially during turbulent economic conditions. However, we have identified a number of areas that warrant Treasury's ongoing attention. Therefore, Treasury should take a number of actions aimed at improving the integrity, accountability, and transparency of TARP. Specifically, Treasury should issue final regulations on conflicts of interest involving Treasury's agents, contractors, and their employees and related entities as expeditiously as possible, and review and renegotiate mitigation plans, as necessary, to enhance specificity and compliance with the new regulations once they are issued.

    Agency Affected: Department of the Treasury

  9. Status: Closed - Implemented

    Comments: We made this recommendation in our first 60-day report on the Troubled Asset Relief Program (TARP) due to the importance of properly managing conflicts of interest issues that may arise with vendors seeking or performing work under TARP. We reported in March 2009 that discussions with OFS program and compliance officials, two TARP contractors, and a financial agent's senior contracts manager indicate that a mutual environment for sustained attention and control had taken root. Specifically, our discussions with OFS and TARP contractor officials indicated that all parties have a range of formal and informal processes in place, under which TARP contractors are expected to detect potential conflicts of interest. Once detected, the interim rule requires that potential conflicts be disclosed to Treasury within 5 business days. A disclosure can trigger a formal review by the OFS compliance officer, who is responsible for making a final determination. The processes include an ongoing dialogue among OFS officials and officials from TARP contractors and financial agents about new potential conflicts and, as needed, discussions about changes to contractors' mitigation plans to increase their effectiveness and conform with the interim rule. OFS has a formal written policy on mitigating conflicts of interest.

    Recommendation: We recognize that less than 60 days has passed since the program was created and the inherent difficulty of setting up any new program, especially during turbulent economic conditions. However, we have identified a number of areas that warrant Treasury's ongoing attention. Therefore, Treasury should take a number of actions aimed at improving the integrity, accountability, and transparency of TARP. Specifically, Treasury should institute a system to effectively manage and monitor the mitigation of conflicts of interest going forward.

    Agency Affected: Department of the Treasury

 

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