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Before the Committee on Financial Services, House of Representatives: 

United States Government Accountability Office: 


For Release on Delivery Expected at 10:00 a.m. EST: 

Wednesday, December 10, 2008: 

Troubled Asset Relief Program: 

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

Statement of Gene L. Dodaro: 

Acting Comptroller General of the United States: 



Mr. Chairman, Ranking Member Bachus, and members of the committee: 

I am pleased to be here today to discuss our first report on the newly 
created Troubled Asset Relief Program (TARP), which gave the Department 
of Treasury the authority to purchase and insure up to $700 billion in 
troubled assets held by financial institutions through the Office of 
Financial Stability (OFS).[Footnote 1] Treasury was granted this 
authority in response to the recent financial crisis that has 
threatened the stability of the U.S. banking system and the solvency of 
numerous financial institutions. Among other things, the Emergency 
Economic Stabilization Act (the act) that authorized TARP on October 3, 
2008, requires GAO to report at least every 60 days on findings 
resulting from our oversight of the status of actions taken under the 
program.[Footnote 2] My statement today is based on our December 2, 
2008, report. This report is the first under the act's mandate and 
covers the actions taken as part of TARP through November 25, 
2008.[Footnote 3] Our oversight work under the act is ongoing, and our 
next report will be issued by January 31, 2009. 

Like the report, this statement focuses on (1) the nature and purpose 
of activities that were initiated under TARP as of November 25, 2008; 
(2) the structure of OFS, its use of contractors, and its system of 
internal controls; and (3) preliminary indicators of TARP performance. 

To do this work, we reviewed documents related to TARP, including 
contracts, agreements, guidance, and rules. We also met with OFS, 
contractors, federal agencies, and officials from the eight large 
institutions that had received disbursements. Going forward, we plan to 
continue to monitor the issues highlighted in the report, as well as 
future and ongoing capital purchases, other more recent transactions 
undertaken as part of: 

TARP (e.g., capital purchases in Citigroup and American International 
Group), and the status of other aspects of TARP. We conducted this 
performance audit in October 2008 and November 2008 in accordance with 
generally accepted government auditing standards. Those standards 
require that we plan and perform the audit to obtain sufficient, 
appropriate evidence to provide a reasonable basis for our findings and 
conclusions based on our audit objectives. We believe that the evidence 
obtained provides a reasonable basis for our findings and conclusions 
based on our audit objectives. 


Treasury has taken a number of steps to try to stabilize the U.S. 
financial markets and banking system, including injecting billions of 
dollars into financial institutions. Although Treasury initially 
planned to buy mortgages and mortgage-related assets through TARP, 
Treasury shifted its focus to a preferred stock and warrant purchase 
program, known as the Capital Purchase Program (CPP). Treasury has 
provided more than $155 billion in capital to 87 institutions through 
CPP as of December 5, 2008. It has also established a Systemically 
Significant Failing Institution (SSFI) program, through which Treasury 
may invest in any financial instrument, including debt, equity, or 
warrants determined to be a troubled asset, and continues to explore 
other programs, including those focused on insurance, foreclosure 
mitigation, and consumer lending.[Footnote 4] As of December 5, 2008, 
Treasury had allocated a total of $335 billion of TARP funds and 
disbursed $195 billion to institutions under the various 
programs.[Footnote 5] While we recognize that TARP has existed for a 
short time and that a new program of such magnitude faces many 
challenges, especially in this current uncertain economic climate, we 
found that Treasury has yet to address a number of critical issues. 
These include determining how it will ensure that CPP is achieving its 
intended goals and monitoring compliance with limitations on executive 
compensation, dividend payments, and stock repurchases. Moreover, it 
has yet to formalize transition planning efforts given the upcoming 
shift to a new administration or to establish an effective management 
structure and an essential system of internal controls. In our report, 
we recommended that Treasury take nine actions to help ensure the 
program's integrity, accountability, and transparency. These would 
require that Treasury: 

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

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

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

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

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

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

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

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

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

In the short period covered by our report, Treasury has taken a number 
of important steps to set up TARP and to address the unfolding 
financial crisis. While immediate action is important, this urgency 
must be balanced against the need for strong management and oversight. 
Because Treasury is establishing oversight policies and procedures at 
the same time that it is setting up the program, we found some lag in 
its administrative efforts, which we have highlighted in this statement 
and discussed in detail in our report. Until these issues are resolved, 
there is heightened risk that the interests of the government and 
taxpayers may not be adequately protected and that OFS may not achieve 
its mission in an effective and efficient manner. We are continuing to 
follow up on these issues and to oversee new developments in the 
program, such as the foreclosure mitigation and insurance programs, 
SSFI, and minority contracting issues, as we prepare for our next 

We also have started to evaluate indicators that, when reviewed 
collectively, should provide information about the state of financial 
markets and credit flow. However, it is too soon to determine whether 
the program is having the intended effect on credit and financial 
markets. Further, isolating TARP's impact will be difficult because of 
the number of actions that have been taken by U.S. regulators and 
foreign governments to stabilize the markets and because we cannot say 
what would have happened in the absence of TARP and these other 
efforts. We will continue to monitor and report on these preliminary 
indicators, including trends in interest rate spreads, mortgage rates, 
mortgage originations, and foreclosures, and to identify additional 
indicators as the program evolves. 

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

Treasury allocated $250 billion to CPP and purchased $115 billion in 
senior preferred shares of eight national financial institutions on 
October 28, 2008, and about $40 billion in senior preferred shares of 
79 additional financial institutions on November 14, 21 and December 5, 
2008.[Footnote 6] Treasury and the regulators have publicly stated that 
they expect these institutions to use the funds in a manner consistent 
with the goals of the program, which include both the expansion of the 
flow of credit and the modification of the terms of residential 
mortgages. But it is unclear how OFS and the banking regulators will 
monitor how participating institutions are using the capital 
investments and whether these goals are being met. The standard 
agreement between Treasury and the participating institutions does not 
require that these institutions track or report how they use or plan to 
use their capital investments. Although Treasury has said that it 
expects the institutions to increase the flow of credit, Treasury has 
not yet determined whether it will impose reporting requirements on the 
participating financial institutions or whether it will leverage 
existing reporting requirements to the banking regulators to reduce the 
regulatory burden. While we understand that money is fungible, such 
monitoring and reporting requirements are critical to ensuring the 
transparency and accountability of CPP and would help Treasury to 
monitor how the infusions were being used in the aggregate across the 
participating institutions. We recommended that Treasury work with the 
bank regulators to establish a systematic means of determining and 
reporting in a timely manner whether financial institutions' activities 
are generally consistent with the purposes of CPP. Treasury had a 
different perspective on what should be done to evaluate how 
institutions were using funds received under CPP, and is opting for 
development of general metrics for evaluating the overall success of 
CPP rather than working with bank regulators to establish a systematic 
means for determining whether financial institutions' uses of CPP funds 
were consistent with the purposes of the program, as we recommended. 
While we agree that it will be important to develop a range of metrics 
to evaluate the overall success of CPP and we welcome continued 
discussions with Treasury and the bank regulators on general metrics to 
achieve this purpose, given the magnitude of funds provided to this 
program, these types of metrics alone will not provide the necessary 
transparency and accountability needed to ensure that participating 
institutions are using the funds in a manner that is consistent with 
the purposes of the act. Moreover, institution-level information 
aggregated across the participants would also provide an alternative 
basis to assess the effect of TARP in restoring liquidity and stability 
to the financial system. 

The standard terms of the securities purchase agreements also include 
certain requirements regarding executive compensation--for example, 
certain senior executives must repay any incentive or bonus 
compensation that was based on materially inaccurate financial 
statements. [Footnote 7] However, Treasury has not yet determined how 
it will monitor compliance with this or other requirements, such as 
limitations on dividend payments and stock repurchases. Without a 
strong oversight and monitoring function, Treasury's ability to ensure 
an appropriate level of accountability and transparency will be 
limited. Our related recommendation in this area is intended to bolster 
the program's accountability and transparency. 

The creation of CPP was a shift in the direction of TARP. Treasury's 
rationale for the shift was that purchasing troubled assets would not 
provide the immediate results that were needed, given the deepening 
crisis in financial markets. Treasury believed that purchasing 
preferred stocks and warrants from financial institutions would be the 
fastest way to stabilize the markets, encourage interbank lending, and 
increase confidence of lenders and investors.[Footnote 8] While 
Treasury has provided information on its Web page about its activities, 
this shift in the direction of the program heightened the need for 
Treasury to provide sufficient information to external stakeholders, 
such as Congress and the public, about not only the change in strategy 
but also the rationale for the new focus. Consequently, we urged 
Treasury to strengthen its communication strategy about plans for the 
program in order to avoid information gaps as market conditions and 
TARP evolve. 

It is unclear what other approaches Treasury will pursue to meet the 
purposes of the act, including purchasing and insuring mortgage-related 
assets. Treasury has established the SSFI program under TARP. According 
to Treasury, institutions will be considered for participation in SSFI 
on a case-by-case basis, and there is no deadline for participation in 
this program. For example, in early November, Treasury announced that 
it would purchase $40 billion in senior preferred stock from AIG as 
part of a comprehensive plan to restructure federal assistance to this 
company, which Treasury views as systemically significant. In addition, 
Treasury has taken initial steps to gather comments on ways of using 
its authority to insure troubled assets and is exploring approaches to 
supporting loan modification efforts. For example, Treasury solicited 
comments on how to structure the program, identify institutions and 
assets for inclusion, and calculate premiums in the Federal 
Register.[Footnote 9] Moreover, having decided against large purchases 
of troubled mortgage-related assets under TARP, Treasury stated that 
the agency was considering other ways to meet Congress's expectation 
that Treasury would work with lenders "to achieve aggressive loan 
modification standards" to mitigate foreclosures but has not yet 
developed a program to maintain homeownership, an area we continue to 
closely monitor.[Footnote 10] 

Efforts to Establish the Office of Financial Stability Are Ongoing: 

Treasury quickly established an overall organizational structure for 
OFS, filled key leadership roles on an interim basis, and contracted 
for support services. Currently, it is working to hire the full 
complement of staff (perhaps as many as 200 full-time-equivalent 
positions depending on the ultimate design of the program), and OFS 
officials said that about 48 employees were assigned to TARP as of 
November 21, 2008, including those from other Treasury offices, federal 
agencies, and organizations who were providing assistance on a 
temporary basis and 5 permanent hires. Identifying and hiring the 
numbers and types of staff needed to successfully operate TARP will be 
challenging because of the evolving nature of the program and the 
upcoming transition to a new administration. While Treasury has filled 
key positions on an interim basis, these same issues may limit its 
ability to ensure that key leadership positions at OFS remain filled 
both during and after the transition, potentially creating uncertainty 
about the direction of the program and impeding efforts to effectively 
implement and oversee TARP. Therefore, we made several recommendations 
aimed at facilitating a smooth transition to the new administration and 
ensuring effective oversight of the program. 

In addition to using permanent staff, OFS plans to rely on contractors 
and financial agents in several key areas. Treasury used expedited 
solicitation procedures and structured the agreements and contracts to 
allow for flexibility in obtaining the required services. Most of the 
contracts awarded thus far have been priced on a time-and-materials 
basis, which provides for payments based on a set hourly rate plus the 
cost of any materials. As we have noted in past work, this type of 
pricing arrangement requires enhanced oversight.[Footnote 11] Treasury 
has also taken steps to help promote the use of small businesses in 
carrying out TARP. In addition, Treasury has issued interim guidelines 
to address potential and actual conflicts of interest. As required by 
Treasury, the financial agent and contractors selected have identified 
a variety of potential and actual conflicts of interest and proposed a 
variety of solutions to mitigate identified conflicts. However, the 
agent and contractors have provided few written details on how they 
intend to implement mitigation plans or communicate related issues to 
OFS, and OFS has not yet developed a process for monitoring conflicts 
of interest. As a result, Treasury must continue to take steps to 
formalize its oversight of conflicts of interest and monitoring time- 
and-materials contracts. 

Recognizing the importance of internal controls, Treasury awarded one 
of the first contracts to PricewaterhouseCoopers to assist OFS in 
developing and implementing a comprehensive system of internal control 
over TARP activities, including a risk-assessment framework. However, 
the rapid pace of implementation and the evolving nature of the program 
have hampered efforts to put a comprehensive system of internal control 
in place. Instead, OFS has focused on specific transaction controls as 
programs such as CPP are implemented. While OFS and 
PricewaterhouseCoopers are working to implement a comprehensive system 
of internal controls, until such a system is fully developed and 
implemented there is heightened risk that the interests of the 
government and taxpayers may not be adequately protected and that the 
program objectives may not be achieved in an efficient and effective 

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

TARP's activities could improve market confidence in institutions that 
choose to participate and have beneficial effects on credit markets, 
but several factors will complicate efforts to measure any impact. If 
TARP is having its intended effect, a number of developments might be 
observed in credit and other markets over time, such as reduced risk 
spreads, declining borrowing costs, and increased lending. However, 
several factors will make isolating and measuring the impact of TARP 
challenging, including simultaneous changes in economic conditions, 
changes in monetary and fiscal policy, and other programs introduced by 
Treasury, the Federal Reserve, Federal Deposit Insurance Corporation, 
and Federal Housing Finance Agency to support banks, credit markets, 
and other struggling institutions. As a result, any improvement in 
capital markets cannot be attributed solely to TARP, nor will a slow 
recovery necessarily reflect its failure, because of the effects of 
market forces and economic conditions outside of the control of TARP. 
Moreover, little time has passed since the initial infusion of capital 
into the institutions, and a variety of other programs and efforts 
directed at bolstering the economy and helping homeowners are still 
being considered. Nevertheless, we have preliminarily identified some 
indicators to facilitate our assessment of TARP's activities. We 
believe that these preliminary indicators, when viewed collectively, 
should signal whether TARP and other programs are functioning as 
intended. Among these preliminary indicators are interest rate spreads, 
mortgage rates, and mortgage originations. We also have identified 
other indicators that may prove useful as TARP evolves. Together, these 
indicators should provide additional information to policymakers and 
others on the overall stability of our financial markets.[Footnote 12] 

Mr. Chairman and Ranking Member Bachus, I appreciate the opportunity to 
discuss this critically important issue and would be happy to answer 
any questions that you may have. Thank you. 


For further information on this testimony, please contact Thomas J. 
McCool on (202) 512-2642 or 

[End of section] 


[1] GAO, Troubled Asset Relief Program: Additional Actions Needed to 
Better Ensure Integrity, Accountability, and Transparency, GAO-09-161 
(Washington D.C.: Dec. 2, 2008). 

[2] The Emergency Economic Stabilization Act of 2008, Pub. L. No. 110- 
343(Oct. 3, 2008). The act requires the U.S. Comptroller General to 
report at least every 60 days, as appropriate, on findings resulting 
from oversight of TARP's performance in meeting the act's purposes; the 
financial condition and internal controls of TARP, its representatives, 
and agents; the characteristics of asset purchases and the disposition 
of acquired assets, including any related commitments entered into; 
TARP's efficiency in using the funds appropriated for its operations; 
its compliance with applicable laws and regulations; and its efforts to 
prevent, identify, and minimize conflicts of interest among those 
involved in its operations. 

[3] Selected transaction information in this statement has been updated 
through December 5, 2008. 

[4] The Secretary of the Treasury is to make the determination that the 
asset is a troubled asset, after consultation with the Chairman of the 
Board of Governors of the Federal Reserve System and notice to 

[5] As of December 5, 2008, Treasury had allocated $335 billion to 
various programs, including $250 billion to CPP, $40 billion to 
American International Group (AIG) under SSFI, $20 billion to 
Citigroup, and $20 billion to a Federal Reserve lending facility. To 
date, it had disbursed a total of $195 million of the $335 billion 
including $155 billion under CPP (excludes $10 billion committed to 
Merrill Lynch & Co., which has yet to be disbursed) and $40 billion to 

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

[7] Under CPP, a qualified financial institution can receive a minimum 
investment of 1 percent of its risk-weighted assets, up to the lesser 
of $25 billion or 3 percent of those risk-weighted assets. In exchange, 
Treasury receives shares of nonvoting senior preferred stock that pay 
dividends of 5 percent annually for 5 years and then 9 percent 
annually, redeemable after 3 years and earlier under certain 
conditions. Treasury will also receive warrants to purchase a number of 
shares of common stock at market-based prices. Among other things, the 
number of shares of common stock underlying a warrant can be reduced by 
half if a financial institution receives proceeds from one or more 
"qualified equity offerings" that equal the amount of the preferred 
shares by December 31, 2009. 

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

[9] 73 Fed. Reg. 61452 (Oct. 16, 2008), Department of the Treasury: 
Development of a Guarantee Program for Troubled Assets (Notice and 
Request for Comments). 

[10] GAO, Troubled Asset Relief Program: Status of Efforts to Address 
Defaults and Foreclosures on Home Mortgages, GAO-09-231T (Washington, 
D.C.: Dec. 4, 2008). 

[11] GAO, Defense Contracting: Improved Insight and Controls Needed 
over DOD's Time-and-Materials Contracts, GAO-07-273 (Washington, D.C.: 
June 29, 2007). 

[12] GAO-09-161, see pp. 49-57. 

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