How the Federal Government Acquired Its Equity Interest Varies by Institution, but Resulted from Assistance Aimed at Stabilizing Financial Markets, Housing Markets, or Individual Market Segments

The federal government’s equity interest was acquired in a variety of ways  and resulted from assistance aimed at stabilizing markets or market  segments. As of June 1, 2010, the government held an equity ownership  interest in the form of preferred or common shares in the five major  corporations—AIG, Chrysler, Citigroup, GM, GMAC—and the Enterprises. Of the 92  directors currently serving on these boards, 73 were elected since  November 2008 (table 2). Many of these new directors were nominated to their  respective boards because it was determined that a change in leadership  was required as a result of the financial crisis, while others were  designated by the government and other significant shareholders as a  result of their common share ownership. Companies must adhere to the executive compensation and corporate  governance rules as a condition for receiving TARP assistance. Nevertheless,  SIGTARP and GAO found that the level of government involvement in the  companies varied among the recipients, depending on whether Treasury  and other federal entities are investors, creditors, or conservators. For example, Treasury’s involvement in Bank of America, Citigroup, and  GMAC has been limited because, in exchange for its investments,  Treasury—as an investor—initially received preferred shares that did not  have voting rights except in certain limited circumstances, such as  amendments to the company charter, in the case of certain mergers, and  the election of directors to the companies’ boards in the event that  dividends are not paid for several quarters. However, FHFA, as the Enterprises’ conservator and regulator, has  instituted a number of requirements, policies, and practices that involve  them in the Enterprises. Being both a creditor and a shareholder in private companies creates  another conflict for the government. Appendix I: Objectives, Scope, and Methodology

The objectives of our report were to (1) describe how and why the  government obtained an ownership interest in the companies, (2) evaluate  the extent of government involvement in companies receiving exceptional  assistance, (3) describe the government’s monitoring of the companies’  financial viability and exit strategies, and (4) discuss the implications of  the government’s ongoing involvement in the companies. The report  focused on companies receiving exceptional assistance from the federal  government, including American Insurance Group (AIG), Bank of America  Corporation (Bank of America), Chrysler Group LLC (Chrysler), Citigroup,  Inc. (Citigroup), General Motors Company (GM), and GMAC, Inc. (GMAC),  as well as its involvement in Fannie Mae and Freddie Mac (Enterprises). Troubled Asset Relief Program: Continued Stewardship Needed as  Treasury Develops Strategies for Monitoring and Divesting Financial  Interests in Chrysler and GM. Troubled Asset Relief Program: Status of Government Assistance  Provided to AIG.
Why GAO Did This Study

The recent financial crisis resulted in a wide-ranging federal response that included providing extraordinary assistance to several major corporations. As a result of actions under the Troubled Asset Relief Program (TARP) and others, the government was a shareholder in the American International Group Inc. (AIG); Bank of America; Citigroup, Inc. (Citigroup); Chrysler Group LLC (Chrysler); General Motors Company (GM); Ally Financial/GMAC, Inc. (GMAC); and Fannie Mae and Freddie Mac (Enterprises). The government ownership interest in these companies resulted from financial assistance that was aimed at stabilizing the financial markets, housing finance, or specific market segments. This report (1) describes the government's ownership interest and evaluates the extent of government involvement in these companies, (2) discusses the government's management and monitoring of its investments and exit strategies, and (3) identifies lessons learned from the federal actions. This work was done in part with the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) and involved reviewing relevant documentation related to these companies and the federal assistance provided. GAO interviewed officials at Treasury, Federal Reserve, Federal Housing Finance Agency (FHFA), and the banking regulators, as well as the senior executives and relevant officials at the companies that received exceptional assistance.

What GAO Found

The extent of government equity interest in companies receiving exceptional assistance varied and ranged from owning preferred shares with no voting rights except in limited circumstances (Bank of America until it repurchased its shares in 2009) to owning common shares with voting rights (Chrysler, Citigroup, GM, and GMAC) to acting as a conservator (the Enterprises). In each case, the government required changes to the companies' corporate governance structures and executive compensation. For example, of the 92 directors currently serving on boards of these companies, 73 were elected since November 2008. Many of these new directors were nominated by their respective boards, while others were designated by the government and other significant shareholders as a result of their common share ownership. The level of involvement in the companies varied depending on whether the government served as an investor, creditor, or conservator. For example, as an investor in Bank of America, Citigroup, and GMAC, the Department of the Treasury (Treasury) had minimal or no involvement in their activities. As both an investor in and a creditor of AIG, Chrysler, and GM--as a condition of receiving assistance--the government has required some combination of the restructuring of their companies, the submission of periodic financial reports, and greater interaction with company personnel. FHFA--using its broad authority as a conservator--has instituted a number of requirements and practices that involve them in the Enterprises.