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MISSION SIGTARP’s Mission is to advance economic stability by promoting the efficiency and effectiveness of TARP management, through transparency, through coordinated oversight, and through robust enforcement against those, whether inside or outside of Government, who waste, steal, or abuse TARP funds. STATUTORY AUTHORITY SIGTARP was established by Section 121 of the Emergency Economic Stabilization Act of 2008 (“EESA”) and amended by the Special Inspector General for the Troubled Asset Relief Program Act of 2009 (“SIGTARP Act”). Under EESA and the SIGTARP Act, the Special Inspector General has the duty, among other things, to conduct, supervise, and coordinate audits and investigations of any actions taken under the Troubled Asset Relief Program (“TARP”) or as deemed appropriate by the Special Inspector General. In carrying out those duties, SIGTARP has the authority set forth in Section 6 of the Inspector General Act of 1978, including the power to issue subpoenas. Office of the Special Inspector General for the Troubled Asset Relief Program General Telephone: 202.622.1419 Hotline: 877.SIG.2009 [email protected] www.SIGTARP.gov CONTENTS Executive Summary 3 Oversight Activities of SIGTARP 8 SIGTARP Recommendations on the Operation of TARP 9 Report Organization 10 Section 1 THE OFFICE OF THE SPECIAL INSPECTOR GENERAL FOR THE TROUBLED ASSET RELIEF PROGRAM 11 SIGTARP Creation and Statutory Authority 13 SIGTARP Oversight Activities Since the January 2012 Quarterly Report 13 The SIGTARP Organization 25 Section 2 TARP OVERVIEW 27 TARP Funds Update 29 Financial Overview of TARP 33 Housing Support Programs 54 Financial Institution Support Programs 78 Asset Support Programs 117 Automotive Industry Support Programs 135 Executive Compensation 142 Section 3 TARP AND SBLF: IMPACT ON COMMUNITY BANKS 145 Introduction 147 The U.S. Banking Industry 148 The Impact of TARP on Community Banks 152 SBLF as an Exit Strategy from TARP for Community Banks 157 Healthier Banks Exited TARP through SBLF 159 Recent Developments 167 Section 4 TARP OPERATIONS AND ADMINISTRATION 169 TARP Administrative and Program Expenditures 171 Current Contractors and Financial Agents 173 Section 5 SIGTARP RECOMMENDATIONS 183 Recommendations Regarding Changes to the Home Affordable Modification Program 185 Update on Recommendation Regarding MHA Servicer Compliance 189 Endnotes 206 APPENDICES A. Glossary 229 B. Acronyms and Abbreviations 233 C. Reporting Requirements 236 D. Transaction Detail 240 E. Cross-Reference of Report to the Inspector General Act of 1978 314 F. Public Announcements of Audits 315 G. Key Oversight Reports and Testimony 316 H. Correspondence 318 I. Organizational Chart 326 4 SPECIAL INSPECTOR GENERAL I TROUBLED ASSET RELIEF PROGRAM QUARTERLY REPORT TO CONGRESS I APRIL 25, 2012 5 After 3½ years, the Troubled Asset Relief Program (“TARP”) continues to be an active and significant part of the Government’s response to the financial crisis. It is a widely held misconception that TARP will make a profit. The most recent cost estimate for TARP is a loss of $60 billion. Taxpayers are still owed $118.5 billion (including $14 billion written off or otherwise lost). But the analysis should not be focused alone on money in and money out. TARP’s costs and legacies involve far more than just dollars and cents. Using a microscope to narrowly focus on the profit or loss of TARP risks losing sight of the bigger picture of whether TARP has been successful in meeting its goals and whether lessons learned from the financial crisis have been adequately implemented so that Treasury, banking regulators, and Congress do not find themselves in the position of rushing out another massive bailout of the financial industry,i.e. , TARP 2.0. While TARP and other Government responses to the financial crisis may have prevented the immediate collapse of our financial and auto manufacturing in- dustries, and improved stability since 2008, the tradeoff is not without profound long-term consequences. A significant legacy of TARP is increased moral hazard and potentially disastrous consequences associated with institutions deemed “too big to fail.” TARP’s legacy also includes the impact on consumers and homeowners from the large banks’ failure to lend TARP funds. TARP continues to be subject to criticism that TARP helped large banks but not homeowners. In addition, after 3½ years, community banks have an uphill battle to exit TARP because they cannot find new capital to replace TARP funds. Finally, TARP’s legacy includes white- collar crime that SIGTARP is uncovering and stopping. A recent working paper from Federal Reserve economists confirms that TARP encouraged high-risk behavior by insulating the risk takers from the consequences of failure – which is known as moral hazard. The Federal Reserve economists report- ed how the large banks that received Government bailouts through TARP are now taking more risks than banks that did not receive taxpayer money. According to the Federal Reserve economists, the loans that the bailed-out banks are making today are riskier than those of their non-bailed-out counterparts. In contrast, the Federal Reserve study indicates that community banks that received TARP funds are taking fewer risks than their larger counterparts, in part because they use the TARP funds to bolster their capital. Many of the same large banks have greatly increased their executive compensation despite the fact that regulators have stated that compensa- tion played a role in causing the crisis by encouraging risky behavior. As a nation, we cannot become complacent and allow improved financial stability to lead us to relax our guard or forget about the urgent need to implement reform. Some of the moral hazard effects of TARP may eventually be addressed by full implementation of the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). However, important work by Treasury and the regulators to implement the Dodd-Frank Act is far from complete. Nearly 400 rulemakings are required by 20 Government agencies. As former FDIC Chairman Sheila Bair stated in May 2011, “The outcome of the next financial crisis is already being determined by decisions regulators are making today in the Dodd-Frank implementation process.” 6 SPECIAL INSPECTOR GENERAL I TROUBLED ASSET RELIEF PROGRAM In 2008, Treasury and regulators were caught by surprise by the bursting of the housing bubble and the realization that the distress of even one too-big-to-fail institution could shake the very foundation of our financial system. The largest U.S. banks still dominate the industry – just as they did in 2008. The largest banks have gotten larger and more concentrated as a result of the financial crisis because some too-big-to-fail institutions acquired the assets of other banking institutions. According to Federal Reserve data, five financial institutions – JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., and Goldman Sachs Group Inc. – held $8.5 trillion in assets at the end of 2011, equal to 56 percent of U.S. economic output, whereas before the financial crisis, these institu- tions held approximately $6.1 trillion in assets, equal to 43 percent of U.S. eco- nomic output. JPMorgan Chase & Co., which held $2 trillion in total assets when the Dodd-Frank Act was signed in July 2010, reached $2.3 trillion in total assets by the end of 2011, according to Federal Reserve data. Donald Kohn, the former vice chairman of the Federal Reserve, states that “one of the bad outcomes, the adverse outcomes of the crisis, was the mergers that were of necessity undertaken when large banks were at risk. Some of the biggest banks got a lot bigger and the market got more concentrated.” Gary Stern, the former president of the Federal Reserve Bank of Dallas, recently commented that “market participants believe that nothing has changed, that too-big-to-fail is fully intact.” According to the Federal Reserve Bank of Dallas’ 2011 Annual Report, “the too-big-to-fail survivors of the financial crisis look a lot like they did in 2008,” and these institutions “remain a potential danger to the financial system.” In order to end “too big to fail,” Treasury and banking regulators must take effective action now using the tools given to them under the Dodd-Frank Act to convince the markets that the Government will not bail out institutions again. The Dodd-Frank Act gives regulators enhanced supervision for institutions deemed systemically significant (“SIFIs”). However, regulators have not proposed rules on the supervision and have been silent on how they will use their new authority. The Dodd-Frank Act grants the FDIC new resolution authority for the dismantling of SIFIs through plans called living wills, but the living wills are not due until July 2012 and the effectiveness of the resolution process remains to be seen, in part because there has been no indication of what actions regulators will take in response to the living wills. Treasury and the regulators have a benefit that was missing during the financial crisis – the benefit of time. It is vital that Treasury and the regulators act now when our nation is not in a financial crisis to make effective use of the authorities granted to them under the Dodd-Frank Act in order to safeguard taxpayers. Additionally, many of TARP’s goals have not been met. Even though the explicit goal of TARP’s Capital Purchase Program was to increase lending to U.S. consumers and businesses, the recent Federal Reserve working paper confirmed that the largest banks that received TARP funds did not increase their lending. In fact, these institutions have been lending less than their counterparts that did not receive a bailout. This may in part be due to Treasury’s failure to require or incen- tivize increased lending in exchange for TARP funds.

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