SIGTARP: Quarterly Report to Congress | October 26, 2010 26, | October Congress to Quarterly Report SIGTARP: NSPECTOR L I GE IA NE C R E A P L S T R M O A U R B G L O ED R A F P SSET RELIE Office of the Special Inspector General Q4 for the Troubled Asset Relief Program SIGTARPSIGTARP 2010 SIGTARPSIGTARP Advancing Economic Stability Through Transparency, Coordinated Oversight and Robust Enforcement SIG-QR-10-04 202.622.1419 Hotline: 877.SIG.2009 Quarterly Report to Congress [email protected] October 26, 2010 www.SIGTARP.gov 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 Program Updates and Financial Overview 13 Oversight Activities of SIGTARP 14 SIGTARP Recommendations on the Operation of TARP 15 Report Organization 16 Section 1 THE OFFICE OF THE SPECIAL INSPECTOR GENERAL FOR THE TROUBLED ASSET RELIEF PROGRAM 17 SIGTARP Creation and Statutory Authority 19 SIGTARP Oversight Activities Since the July 2010 Quarterly Report 19 SIGTARP Audit Activity 19 The SIGTARP Organization 38 Section 2 TARP OVERVIEW 41 TARP Funds Update 43 Financial Overview of TARP 46 Homeowners Support Programs 66 Financial Institution Support Programs 92 Asset Support Programs 128 Automotive Industry Support Programs 143 Executive Compensation 152 Section 3 THE ECONOMICS OF LOAN SERVICING 155 Introduction 157 Loan Servicers’ Function 157 Business Model 160 HAMP’s Effect on Loan Servicing 163 Six Servicing Scenarios 165 Section 4 TARP OPERATIONS AND ADMINISTRATION 177 TARP Administrative and Program Expenditures 179 Current Contractors and Financial Agents 180 Section 5 SIGTARP RECOMMENDATIONS 187 Recommendations Regarding Implementation of the Small Business Lending Fund 191 Recommendations Relating to Treasury’s Monitoring of Compliance with TARP Requirements by Companies Receiving Exceptional Assistance 194 Update on Treasury’s Adoption of SIGTARP’s Use of Funds Recommendation 196 Update on SIGTARP’s Recommendation that Treasury Periodically Disclose Public-Private Investment Funds (“PPIF”) Trading Activity 197 Endnotes 207 APPENDICES A. Glossary 226 B. Acronyms and Abbreviations 230 C. Reporting Requirements 232 D. Transaction Detail 236 E. Cross-Reference of Report to the Inspector General Act of 1978 300 F. Public Announcements of Audits 301 G. Key Oversight Reports and Testimonies 302 H. Correspondence 307 I. Organizational Chart 335 EXINVESTIGATIONSECUTIVE SUMMARY 4 SPECIAL INSPECTOR GENERAL I TROUBLED ASSET RELIEF PROGRAM QUARTERLY REPORT TO CONGRESS I OCTOBER 26, 2010 5 More than two years have passed since the Emergency Economic Stabilization Act of 2008 (“EESA”) authorized the creation of the Troubled Asset Relief Program (“TARP”). On October 3, 2010, Treasury’s authority to initiate new TARP invest- ments expired, marking a significant milestone in TARP’s history but also leading to the widespread, but mistaken, belief that TARP is at or near its end. As of October 3, $178.4 billion in TARP funds were still outstanding, and although no new TARP obligations can be made, money already obligated to existing programs may still be expended. Indeed, with more than $80 billion still obligated and available for spending, it is likely that far more TARP funds will be expended after October 3, 2010, than in the year since last October when U.S. Treasury Secretary Timothy Geithner (“Treasury Secretary”) extended TARP’s authority by one year. In short, it is still far too early to write TARP’s obituary. At the same time, TARP’s two-year anniversary is a fitting time for an in- terim assessment. To what extent has TARP met the goals set for it by the U.S. Department of the Treasury (“Treasury”) in announcing TARP programs and by Congress in providing Treasury authorization to expend TARP funds — avoiding financial collapse, “increas[ing] lending,” “maximiz[ing] overall returns to the taxpayers,” “provid[ing] public accountability,” “preserv[ing] homeownership,” and “promot[ing] jobs and economic growth” — and at what cost? In answering these questions, it is instructive to compare TARP’s impact on Wall Street with its impact on Main Street. By fulfilling the goal of avoiding a financial collapse, there is no question that the dramatic steps taken by Treasury and other Federal agencies through TARP and related programs were a success for Wall Street. Those actions have helped garner a swift and striking turnaround, accompanied by a return to profitability and seemingly ever-increasing executive bonuses. For large Wall Street banks, credit is cheap and plentiful and the stock market has made a tremendous rebound. Main Street, too, has reaped a significant benefit from the prevention of a complete collapse of the financial industry and domestic automobile manufac- turers, the ripple effects such collapses would have caused, and increased stock market prices. Main Street has largely suffered alone, however, in those areas in which TARP has fallen short of its other goals. As these quarterly reports to Congress have well chronicled and as Treasury itself recently conceded in its acknowledgment that “banks continue to report fall- ing loan balances,” TARP has failed to “increase lending,” with small businesses in particular unable to secure badly needed credit. Indeed, even now, overall lending continues to contract, despite the hundreds of billions of TARP dollars provided to banks with the express purpose to increase lending. As to the goal of “promot[ing] jobs and economic growth,” while job losses may have been far worse without TARP support, unemployment continues to hold at roughly 9.6%, 3% higher than at the start of the program. While large bonuses are returning to Wall Street, the 6 SPECIAL INSPECTOR GENERAL I TROUBLED ASSET RELIEF PROGRAM nation’s poverty rate increased from 13.2% in 2008 to 14.3% in 2009, and for far too many, the recession has ended in name only. Finally, the most specific of TARP’s Main Street goals, “preserving homeownership,” has so far fallen woefully short, with TARP’s portion of the Administration’s mortgage modification program yielding only approximately 207,000 (out of a total of 467,000) ongoing permanent modifications since TARP’s inception, a number that stands in stark contrast to the 5.5 million homes receiving foreclosure filings and more than 1.7 million homes that have been lost to foreclosure since January 2009. On the cost side of the ledger, the results have been mixed as well. It is un- doubtedly good news that recent loss estimates continue to suggest that the finan- cial costs of TARP may be far lower than earlier anticipated, with the most recent estimates placing the dollar loss at between $51 billion and $66 billion. But costs can involve far more than just dollars and cents. Any fair assessment of TARP must account for other costs that, while more difficult to measure, may be even more significant. For example, as SIGTARP has noted in past quarterly reports, increased moral hazard and concentration in the financial industry continue to be a TARP legacy. The biggest banks are bigger than ever, fueled by Government support and taxpayer-assisted mergers and acquisitions. And the repeated statements that the Government would stand by these banks during the financial crisis has given a significant advantage to the larger “too big to fail” banks, as reflected in their enhanced credit ratings borne from a market perception that the Government will still not let these institutions fail, although the impact of this cost may be blunted by recently enacted regulatory reform. Another even more fundamental non-financial cost, as SIGTARP warned in October 2009, is the potential harm to the Government’s credibility that has at- tended this program. Despite the recent surge in reporting on TARP’s successes, many Americans to continue to view TARP with anger, cynicism, and mistrust. While some of that hostility may be misplaced, much of it is based on entirely legitimate concerns about the lack of transparency, program mismanagement, and flawed decision-making processes that continue to plague the program. When Treasury refuses for more than a year to require TARP recipients to account for the use of TARP funds, or claims that Capital Purchase Program participants were “healthy, viable” institutions knowing full well that some are not, or when it provides hundreds of billions of dollars in TARP assistance to institutions, and then relies on those same institutions to self-report any violations of their obligations