Assistance provided under this program is in addition  to the assistance provided by FRBNY. The Federal Response to the Current Financial Crisis Builds on Responses to Past Crises but Faces Unique Challenges

The government has a long history of intervening in markets during times  of crisis. Looking at the government’s role in providing assistance to large  companies dating back to the 1970s, we have identified three fundamental  principles that can serve as a framework for large-scale federal financial  assistance efforts and that still apply today. These principles are  identifying and defining the problem, determining the national interests  and setting clear goals and objectives that reflect them, and protecting the  government’s interests. These actions have been important in previous financial crises, but the  shear size and scope of the current crisis has presented some unique  challenges that affected the government’s actions. In addition to these principles, we have also reported on important  considerations for Treasury in monitoring and selling its ownership  interest in Chrysler and GM, which may also serve as useful guidelines for  its investments in AIG and Citi as well. Four Core Principles Guide Treasury’s Management of Its Ownership Interest

Recognizing the challenges associated with the federal government having  an ownership interest in the private market, the administration developed  several guiding principles for managing its TARP investments. In exceptional cases, the  government may determine that ongoing assistance is necessary but will  reserve the right to set upfront conditions to protect taxpayers, promote  financial stability, and encourage growth. After any up-front conditions are  in place, the government will protect the taxpayers’ investment by  managing its ownership stake in a hands-off, commercial manner. As a common shareholder, the  government will vote on only core governance issues, including the  selection of a company’s board of directors and major corporate events or  transactions. Specifically, the agreements with the  companies impose certain reporting requirements and include provisions  such as restrictions on dividends and repurchases, lobbying expenses, and  executive compensation. While all four institutions were subject to internal control requirements, as  set forth in the credit and other agreements that outline Treasury’s and the  companies’ roles and responsibilities, Chrysler and GM have agreed to (1)  produce a portion of their vehicles in the United States; (2) report to  Treasury on events related to their pension plans; and (3) report to  Treasury monthly and quarterly financial, managerial, and operating  information. Treasury has stated that it  plans to manage its equity interests in Chrysler and GM in a hands-off  manner and does not plan to manage its interests to achieve social policy  goals. Treasury Monitors a Number of Performance Benchmarks as Part of Its Oversight Effort

One of the principles guiding the government’s management of its  investments in the companies includes monitoring and communicating  information from company, industry, and economic indicators. Treasury has hired an outside asset management firm to monitor  its investment in Citigroup. The valuation process includes tracking  market conditions on a daily basis and collecting data on indicators such  as credit spreads, bond and equity prices, liquidity, and capital adequacy. To monitor its investment in AIG, Treasury also coordinates with FRBNY  in tracking liquidity, weekly cash forecasts and daily cash reports, among  other indicators. Our Ongoing Work Suggests That Different Management Strategies for Investments Have Advantages and Disadvantages and That Divestment Strategies Are Evolving

As part of our ongoing work with SIGTARP, we are reviewing the extent of  government involvement in the corporate governance and operations of  companies that have received exceptional assistance, Treasury’s  mechanisms for ensuring that companies are complying with key  covenants, and the government’s management of the investment and its  divestiture strategies. OFS  uses this strategy to manage its investment in Citi, Chrysler, and GM, and  the independent trustees of the AIG trust manage the government’s  common equity interest in AIG. According to officials we interviewed,  each structure—managing the investment directly or through a trust—has  advantages and disadvantages. First,  it affords the government the greatest amount of control over the  investment. For example, having the government  both regulate and hold an ownership interest in an institution or company  could create a conflict of interest and potentially expose the government  to external pressures. Conversely, a trust structure largely removes control of the investment  from the government. Although Treasury has stated that  it intends to sell the federal government’s ownership interest as soon as  doing so is practical, it has yet to develop exit strategies for unwinding  most of these investments. For Citi, Chrysler, and GM, Treasury will  decide when and how to divest its common shares. Given the  complexity and importance of this decision, we recently recommended  that Treasury develop criteria for evaluating the optimal method and  timing for divesting its equity stake.
Why GAO Did This Study

The recent financial crisis resulted in a wide-ranging federal response that included infusing capital into several major corporations. The Troubled Asset Relief Program (TARP) has been the primary vehicle for most of these actions. As a result of actions and others, the government is a shareholder in the American International Group (AIG), Citigroup Inc. (Citi), Chrysler Group LLC (Chrysler), and General Motors Company (GM), among others. As market conditions have become less volatile, the government has been considering how best to manage these investments and ultimately divest them. This testimony discusses (1) the government's approach to past crisis and challenges unique to the current crisis; (2) the principles guiding the Department of the Treasury's implementation of its authorities and mechanisms for managing its investments; and (3) preliminary views from GAO's ongoing work with the Special Inspector General for TARP on the federal government's monitoring and management of its investments. This statement builds on GAO's work since the 1970s on providing government assistance to large corporations and more recent work on oversight of the assistance and investments provided under TARP. In its November 2009 report, GAO recommended that Treasury ensure it has expertise needed to monitor its investment in Chrysler and GM and that it has a plan for evaluating the optimal method and timing for divesting this equity.

What GAO Found

Looking at the government's role in providing assistance to large companies dating back to the 1970s, we have identified principles that serve as a framework for such assistance; including identifying and defining the problem, setting clear goals and objectives that reflect the national interests, and protecting the government's interests. These actions have been important in the past, but the current financial crisis has unique challenges, including the sheer size and scope of the crisis, that have affected the government's actions. As a result, the government's response has involved actions on the national and international levels and oversight and monitoring activities tailored to specific institutions and companies. We have also reported on considerations important for Treasury's approach to monitoring its investments in the companies that received assistance. The administration developed several guiding principles for managing its ownership interest in AIG, Citigroup, Chrysler, and GM. It does not intend to own equity stakes in companies on a long-term basis and plans to exit from them as soon as possible. It reserves the right to set up-front conditions to protect taxpayers, promote financial stability, and encourage growth. It intends to manage its ownership stake in institutions and companies in a hands-off, commercial manner and to vote only on core governance issues, such as the selection of a company's board of directors. Treasury has also required companies and institutions that receive assistance to report on their use of funds and has imposed restrictions on dividends and repurchases, lobbying expenses, and executive compensation, among other things. As part of its oversight efforts, it also monitors a number of performance benchmarks. Chrysler and GM will submit detailed financial and operational reports to Treasury, while an asset management firm will monitor the data on Citi, including credit spreads, liquidity and capital adequacy. To monitor its investment in AIG, Treasury coordinates with the Federal Reserve Bank of New York in tracking liquidity and cash reports, among other indicators. Treasury directly manages its investment in Citi, Chrysler, and GM, but the common equity investment in AIG, obtained with the assistance of the Federal Reserve, is managed through a trust arrangement. Each of these management strategies has advantages and disadvantages. Directly managing the investment affords the government the greatest amount of control but could create a conflict of interest if the government both regulates and has an ownership share in the institutions and could expose the government to external pressures. A trust structure, which places the government's interest with a third party, could mitigate any potential conflict-of-interest risk and reduce external pressures. But a trust structure would largely remove accountability from the government for managing the investment. GAO is reviewing Treasury's plans for managing and divesting itself of its investments, but the plans are still evolving, and, except for Citi, Treasury has yet to develop exit strategies for unwinding the investments.