TALF was designed to reopen the securitization markets in an effort to  improve access to credit for consumers and businesses. The program  provides loans to certain institutions and business entities in return for  collateral in the form of securities that are forfeited if the loans are not  repaid. Treasury has pledged $20 billion  for TALF LLC—a special purpose vehicle created by FRBNY—to purchase  the underlying collateral associated with TALF loans in the event the loans  are not repaid. As  of December 2009, FRBNY has made about $61.6 billion in loans under  TALF. Of that amount, $47.5 billion in TALF loans remained outstanding as  of the end of December 2009. 1). For most TALF-eligible collateral, FRBNY will stop providing  new TALF loans in March 31, 2010, while new-issue CMBSs will be  accepted as collateral on new TALF loans through June 30, 2010. How TALF Works

A number of entities help administer the TALF program. FRBNY has a  precertification process to streamline the process for certain eligible  borrowers. Third,  Treasury and FRBNY analyses project minimal, if any, likelihood that  TARP funds will be used for TALF-related purchases, and Treasury  currently projects a profit from TALF. While TALF poses minimal risks to  TARP even in adverse market conditions, our analyses showed that  CMBSs held as collateral as of September 2009 potentially pose higher  risks than ABSs and under adverse conditions losses could exceed $500  million. Such risks include the risk that FRBNY might  not identify instances of material noncompliance with program  requirements by TALF participants. As shown in figure 5, the  level of enhancement for every TALF-eligible asset class increased. Documenting the basis  for decisions is an important part of the decision-making process. Moreover, documenting the rationale for major program decisions would  help ensure that the program objectives are being met and that it is  functioning as intended. Unless Treasury documents the rationale for  major program decisions that it made with the Federal Reserve, it cannot  demonstrate accountability for meeting the goals of TALF and could  unnecessarily place TARP funds at risk. Given the distressed conditions in the commercial real estate market,  as part of its ongoing monitoring of TALF collateral, continue to give  greater attention to reviewing risks posed by CMBSs. Appendix I: Objectives, Scope, and Methodology

The objectives of this report are to (1) analyze the risks that the Term  Asset-Backed Securities Loan Facility (TALF) presents to Troubled Asset  Relief Program (TARP) funds and therefore to taxpayers, (2) evaluate how  the Department of the Treasury (Treasury) analyzed the risk of TALF  assets and used this information in making decisions on TALF with the  Board of Governors of the Federal Reserve System (Federal Reserve) and  the Federal Reserve Bank of New York (FRBNY), and (3) assess the  condition of securitization and credit markets before and after TALF’s  implementation based on indicators tracked by Treasury and FRBNY. Because of these limitations, the evaluative content of this report  is limited to Treasury’s role of safeguarding TARP funds related to TALF  and we did not review or evaluate any monetary policy actions taken by  the Federal Reserve or FRBNY with respect to TALF. We also  reviewed other factors that have an impact on the risk to TARP funds and  taxpayers, including the return on equity for TALF borrowers, credit  enhancement of TALF securities, and the risks of asset-backed securities  (ABS) and commercial mortgage-backed securities (CMBS).
Why GAO Did This Study

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.

What GAO Found

TALF contains a number of risk management features that in turn likely reduce the risk of loss to TARP funds, but risks remain. TALF was designed to reopen the securitization markets in an effort to improve access to credit for consumers and businesses. The Federal Reserve Bank of New York (FRBNY), which manages TALF, is authorized to lend up to $200 billion to certain eligible borrowers in return for collateral in the form of securities that are forfeited if the loans are not repaid. To assist in this effort, Treasury has pledged $20 billion of TARP funds in the form of credit protection to the program in the event the loans are not repaid. As of December 2009, FRBNY has made about $61.6 billion in TALF loans, of which $47.5 billion remained outstanding. For most TALF-eligible collateral, FRBNY will stop providing new TALF loans in March 2010, while new-issue CMBSs will be accepted as collateral on new TALF loans through June 2010. Treasury and FRBNY analyses project minimal, if any, use of TARP funds for TALF-related losses, and Treasury currently anticipates a profit. While GAO found that the overall risks TALF poses to TARP funds are likely minimal, GAO analyses showed that CMBSs potentially pose higher risk of loss than ABSs. As shown in figure 1, ongoing uncertainty in the commercial real estate market and TALF exposure to legacy CMBSs warrant ongoing monitoring. Finally, TALF may present risks beyond the potential risks to TARP, such as the risk that FRBNY might fail to identify material noncompliance with program requirements by TALF participants. Because the Federal Reserve views TALF as a monetary policy tool, however, statutory limitations on GAO's authority prohibited GAO from auditing FRBNY's role in administering TALF. Treasury has not fully documented its rationale, as part of its decision-making processes, for reaching final decisions related to the risks of TALF--including decisions involving other agencies. For example, the outcomes of Treasury's internal analysis of the amount of equity that TALF borrowers should hold in TALF ABS collateral, along with other TALF program terms, sometimes differed from FRBNY's. However, there was no clear documentation or explanation of how the discrepancies were resolved or how final decisions were made with FRBNY. Documenting the rationale and basis for these decisions would increase transparency and strengthen internal controls for TALF decision-making processes. Moreover, a sound decision-making process would help ensure that TALF objectives are being met and that it is functioning as intended. Unless Treasury documents the basis for major program decisions that it made with the Federal Reserve, it cannot demonstrate accountability for meeting the goals of TALF and could unnecessarily place TARP funds at risk.