	Some TARP Programs Are Winding Down, but Others Require Continued Attention

Since TARP was authorized, Treasury has implemented a range of  programs aimed at stabilizing the financial system and preserving  homeownership. As of June 30, 2010, it had disbursed $385 billion for  TARP loans and equity investments, and Treasury has already recouped  some of these disbursements (table 1). Bank capital programs authorized under TARP,  such as CPP, TIP, and the Capital Assistance Program (CAP), were  established to help stabilize the financial system and ensure the flow of  credit to businesses and consumers. In our past reports, we have made  numerous recommendations to strengthen transparency and  accountability of this key TARP program. For instance, we recommended  that Treasury report whether financial institutions’ activities are generally  consistent with the purposes of program. Since we last reported on the  financial condition of the auto industry in November 2009, Chrysler and  GM have shown some indications of progress towards returning to  profitability. Thus far,  according to Treasury officials, both companies are doing better than they  and Treasury had initially projected in terms of revenues, operating  earnings, and cash flow. While these steps indicate progress in the companies’ journey towards  profitability, the extent to which the federal government will recoup its  investment in the auto industry is uncertain, and the companies’ face  several challenges in the coming years. As part of that ongoing work, we are also reviewing the status of the  federal government’s efforts to assist workers and communities that have  relied on the auto industry for their economic base. American International Group, Inc (AIG) Investments. Since early 2009,  we have been monitoring the status of federal assistance to AIG and the  company’s financial condition using GAO-developed indicators and we  have issued two reports that include information on them. In the April  2010 report, our indicators showed that AIG’s financial condition had  remained relatively stable largely due to the federal assistance from the  Federal Reserve and Treasury. Similarly, the government’s ability to fully recoup the federal  assistance is uncertain and will be determined by the long-term health of  AIG, the company’s success in selling businesses as it restructures, and  other market factors such as the performance of the insurance sectors and  the credit derivatives markets that are beyond the control of AIG or the  government. In June 2010, we issued a report that expanded on our March testimony  and discussed Treasury’s actions to address the challenges that we had  outlined in the March hearing. We reported that while Treasury had taken  some steps to address these challenges it urgently needed to finalize and  implement the various components of HAMP and ensure the transparency  and accountability of these efforts. We will continue to monitor Treasury’s  implementation and management of HAMP-funded programs as part of our  ongoing oversight of TARP to ensure that these programs are  appropriately designed and operating as intended. TARP was also  intended to address problems in the securitization markets. We reported in February 2010 that TALF contained a number of features  to help reduce the risk of loss to TARP funds. Treasury’s Framework for Deciding to Extend TARP Was Sufficient, but Could be Strengthened For Future Decisions

In anticipation of the upcoming decisions on the future of TARP, the need  to unwind the extraordinary federal support across the board, and the  fragile state of the economy, we made recommendations to Treasury in  October 2009. As such, according to Treasury,  new commitments through October 3, 2010 will be limited to programs,  under the Making Home Affordable Program (MHA), including HAMP, and  small business lending programs. The Dodd-Frank Wall Street Reform and  Consumer Protection Act, passed by both the House and Senate and  expected to be signed by the President this week, would (1) reduce  Treasury’s authority to purchase or insure troubled assets to $475 billion  and (2) prohibit Treasury, under the act, from incurring any additional  obligations for a program or initiative unless the program or initiative had  already been initiated prior to June 25, 2010. However, we noted that  the extent of coordination could be enhanced and formalized, specifically  with the FDIC, for any upcoming decisions that would benefit from  interagency collaboration. Because TARP will be unwinding  concurrently with other important interventions by federal regulators,  decisions about the sequencing of the exits from various federal programs  will require bringing a larger body of regulators to the table to plan and  sequence the continued unwinding of federal support. Finally, we recommended  (1) formalizing coordination with FDIC for future TARP decisions and (2)  improving the transparency and analytical basis for TARP program  decisions. Though TARP will soon expire, Treasury will still need to work  with other agencies to effectively conduct a coordinated exit from TARP  and other government financial assistance. Indicators Suggest a Recovery in Credit Markets, but Isolating the Impact of TARP’s Foreclosure Mitigation and Small Business Lending Efforts Will Be Difficult

Many market observers have said that, taken together, the concerted  actions by Treasury and others helped avert a more severe financial crisis,  although some critics believe that the markets would have recovered  without government support. In our October 2009 and February 2010 reports we noted that  some of the anticipated effects of TARP on credit markets and the  economy had materialized and that some securitization markets had  experienced a tentative recovery. Indicators we have been monitoring suggest credit markets have  been able to sustain their recovery despite the winding down of key  programs initiated by the Federal Reserve, Treasury, FDIC and others. However, a slow recovery does  not necessarily mean that TARP is ineffective, because in absence of TARP  it is possible that foreclosure and delinquency rates would be higher. Given that any new TARP  activity will be limited to home ownership preservation and small business  lending programs, we will continue to monitor indictors such as  foreclosure and delinquencies as potential measures of the efficacy of  these programs. Financial Audit: Office of Financial Stability (Troubled Asset Relief  Program) Fiscal Year 2009 Financial Statements. Troubled Asset Relief Program: Treasury Actions Needed to Make the  Home Affordable Modification Program More Transparent and  Accountable.
Why GAO Did This Study

This testimony discusses our work on the Troubled Asset Relief Program (TARP), which Congress established on October 3, 2008 in response to the financial crisis that threatened the stability of the U.S. financial system and the solvency of many financial institutions. Under the original TARP legislation, the Department of the Treasury (Treasury) had the authority to purchase or insure $700 billion in troubled assets held by financial institutions. As we have seen, since TARP's inception Treasury has chosen to use those funds for a variety of activities, including injecting capital into key financial institutions, implementing programs to address problems in the securitization markets, providing assistance to the automobile industry and American International Group, Inc. (AIG), and working to help homeowners struggling to keep their homes. Today, some of these programs have been discontinued and others are winding down, but others--such as homeownership preservation programs--may continue for some time. Treasury has also seen some participating institutions repay their TARP funds as they recover their financial health. The prospect for repayment from some other institutions, both large and small, remains unclear. The Emergency Economic Stabilization Act (the act) that authorized TARP required GAO to report at least every 60 days on findings from our oversight of actions taken under the programs. We have been monitoring TARP programs since their inception and our reports have highlighted challenges facing many of these programs. To date, we have issued over 25 reports and testimonies related to TARP and made over 50 recommendations to improve the transparency and accountability of its operations. This statement today draws primarily on 7 reports we have issued since October 2009. Specifically, this statement focuses on (1) the nature and purpose of activities that have been initiated under TARP and ongoing challenges, (2) the process for making decisions related to unwinding TARP programs, and (3) indicators of credit conditions in markets targeted by TARP programs. To do our work, we reviewed our prior reports and other documents provided by Treasury's Office of Financial Stability (OFS) and conducted interviews with Treasury and OFS officials. In addition, we have updated the program's receipts and disbursements through June 30, 2010, and indicators of credit markets as of July 1, 2010. We conducted these performance audits between July 2009 and June 2010 and updated information in July 2010 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.

What GAO Found

Treasury has initiated a number of programs under TARP, some of which have ended or are being unwound. Others will continue. Among the programs no longer making commitments are the Capital Purchase Program (CPP) and Targeted Investment Program (TIP), while the Home Affordable Modification Program (HAMP) and new small business lending initiatives are expected to continue for some time. Although Treasury has received significant repayments of the funding it provided to financial institutions, some investments and loans could still result in substantial losses to the government. We have been monitoring TARP programs since their inception. In particular, Chrysler Group LLC and General Motors Company (GM) have shown some indications of progress toward returning to profitability, such as doing better than they and Treasury had initially projected in terms of revenues, operating earnings, and cash flow. However, the extent to which the federal government will fully recoup its investment in the auto industry is uncertain, and the companies face several challenges in the coming years. Since early 2009, we have also been monitoring the status of federal assistance to AIG and its financial condition using indicators we developed. In April 2010, we reported that our indicators showed that AIG's financial condition has remained relatively stable largely due to the federal assistance provided by the Federal Reserve and Treasury, but the extent to which the federal government will recoup its investment remains uncertain and will not only depend on the AIG's financial condition but also other market factors such as the performance of the insurance sectors and the credit derivatives markets that are beyond the control of AIG or the government. Many of our reports have also highlighted the challenges facing TARP programs and made recommendations to enhance transparency and accountability of its programs. We reported that while Treasury had taken some steps to address these challenges it urgently needed to finalize and implement the various components of HAMP and ensure the transparency and accountability of these efforts. We will continue to monitor these programs and have ongoing work on several facets of TARP, including those initiatives that have a small business focus. We have also reviewed Treasury's framework for deciding to extend TARP beyond December, 31, 2009, and found that the process was sufficient but could be strengthened for similar decisions that will need to be made in the future. Specifically, we found that the extent of coordination could be enhanced and formalized between Treasury and the Federal Deposit Insurance Corporation (FDIC) and recommended that Treasury formalize coordination with FDIC for future decisions. Although the authority for TARP is set to expire soon, Treasury will continue to face decisions in winding down programs, and many of these decisions will require interagency coordination. Because TARP will be unwinding concurrently with other important regulatory interventions, decisions about the sequencing of the exits from the programs will require regulators to work closely together. We have noted in past reports that some of the anticipated effects of TARP on credit markets and the economy had materialized and that some securitization markets had experienced a tentative recovery. Indicators we have been monitoring suggest that credit markets have been able to sustain their recovery despite the winding down of key programs initiated by the Federal Reserve, Treasury, FDIC and others. However, a slow recovery does not necessarily mean that TARP is ineffective, because in absence of TARP it is possible that foreclosure and delinquency rates would be higher. Finally, because any new TARP activity will be limited to home ownership preservation and small business lending programs, we will also continue to monitor indicators such as foreclosure and delinquencies as potential measures of the programs' success.