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Highlights

The Term Asset-Backed Securities Loan Facility (TALF) was created by the Board of Governors of the Federal Reserve System (Federal Reserve) to help meet consumer and small business credit needs by supporting issuance of asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS). This report assesses (1) the risks TALF-eligible assets pose to the Troubled Asset Relief Program (TARP), (2) Department of the Treasury's (Treasury) role in decision making for TALF, and (3) the condition of securitization markets before and after TALF. GAO reviewed program documents, analyzed data from prospectuses and other sources, and interviewed relevant agency officials and TALF participants.

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Recommendations

Matter for Congressional Consideration

Matter Status Comments
To enable GAO to audit TARP support for TALF most effectively, Congress may wish to provide GAO with audit authority over all Federal Reserve operational and administrative actions taken with respect to TALF, together with appropriate access authority.
Closed - Implemented
On July 21, 2010, the Dodd Frank Act was enacted, which provides GAO authority to audit, on a one-time basis, certain Federal Reserve lending facilities, including the Term Asset-Backed Securities Loan Facility. The law requests that GAO assess operational and internal control elements of the facilities, among other things. The Act is consistent with our matter for congressional consideration.

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of the Treasury 1. To improve transparency of decision making on the use of TARP funds for TALF and to ensure adequate monitoring of risks related to TALF collateral, given the distressed conditions in the commercial real estate market, as part of its ongoing monitoring of TALF collateral, the Secretary of the Treasury should direct the Office of Financial Stability (OFS) to continue to give greater attention to reviewing risks posed by CMBSs.
Closed - Implemented
Treasury submitted information to GAO on continued conversations it has with the Federal Reserve Board and the Federal Reserve Bank of New York, which includes conversations on commercial mortgage-backed securities (CMBS) and their performance. Additionally, Treasury collects and tracks information on TALF collateral, including CMBS, and tracks those securities that are of potential concern. Such actions addressed our recommendation for Treasury to give greater attention to reviewing risks posed by CMBS.
Department of the Treasury 2. To improve transparency of decision making on the use of TARP funds for TALF and to ensure adequate monitoring of risks related to TALF collateral, the Secretary of the Treasury should direct the OFS to strengthen the process for making major program decisions for TALF and document how it arrives at final decisions with the Federal Reserve and FRBNY. Such decisions should include how Treasury considers expert and contractor recommendations and resolves those recommendations that differ from those of the Federal Reserve and FRBNY.
Closed - Implemented
The Department of Treasury, Office of Financial Stability, provided Program Update Procedures that identify roles and responsibilities for various offices within Treasury related to TALF decisions. In addition, the document stipulates approval processes for major decisions based on the budgetary and financial impacts of proposed TALF program changes. Further, the procedures explain how Treasury will consider any third-party analysis and that officials will draft a memo on important findings and their impact. Moreover, all related documentation will be saved as supporting evidence. These procedures address the intent of our recommendation on strengthening OFS's process for making and documenting major program decisions for TALF.
Department of the Treasury 3. To improve transparency of decision making on the use of TARP funds for TALF and to ensure adequate monitoring of risks related to TALF collateral, the Secretary of the Treasury should direct the OFS to conduct a review of what data to track and metrics to disclose to the public in the event that TALF LLC purchases surrendered assets from FRBNY. Such data and metrics should relate to the purchase, management, and sale of assets in TALF LLC that potentially impact TARP funds. Metrics related to TALF LLC could include periodic reports on the date and purchase price of assets; fluctuations in the market value of assets held; the date, price, and rationale when assets are sold; and the total amount of loans outstanding to Treasury.
Closed - Implemented
In responding to the recommendation, Treasury noted that currently no security has been put to the TALF LLC facility. Treasury also added that it is committed to providing transparency to the taxpayer while also protecting the taxpayer. In the event that assets are surrendered, Treasury plans to direct the public to the Federal Reserve to view public reports it maintains about its securities holdings. Because the Federal Reserve has primary operational responsibility for TALF, this solution meets the intent of GAO's recommendation to ensure that Treasury has a plan for publicly reporting on any TALF assets that are surrendered.

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