MEMORANDUM

To: Republican Members of the Committee on Oversight and Government Reform

From: Republican Staff, Committee on Oversight and Government Reform

Re: Full Committee Hearing: “Following the Money: Report of the Special Inspector
General for the Troubled Asset Relief Program (SIGTARP)”

Hearing Date: Tuesday, July 21, 10:00 a.m.

On Tuesday, July 21, 2009, at 10:00 a.m., in room 2154 of the Rayburn House
Office Building, the Committee will hold a hearing entitled, “Following the Money:
Report of the Special Inspector General for the Troubled Asset Relief Program
(“SIGTARP”).”

The Majority Staff Memorandum lays out background information about TARP
and SIGTARP’s previous report, issued in April. The hearing will feature just one
witness, Special Inspector General Neil M. Barofsky. Mr. Barofsky was confirmed by
the Senate on December 8, 2008, and was sworn into office on December 15, 2008.

Mr. Barofsky will testify on the findings and recommendations included in

SIGTARP’s third quarterly report to Congress and will also present the findings of
SIGTARP’s first audit, entitled “SIGTARP Survey Demonstrates That Banks Can Provide
Meaningful Information on Their Use of TARP Funds.”

This memorandum lays out key background information and questions to be

addressed at the hearing as well as the Minority’s views about the critical issues related to
this matter.

1
Background

In response to severely contracted liquidity in global credit markets and

insolvency threats to investment banks and other institutions, as well as catastrophic
predictions and warnings by the Bush Administration, Congress passed the Emergency
Economic Stabilization Act (“EESA”) on October 3, 2008. Pursuant to EESA, the
Treasury Department created the Troubled Asset Relief Program (“TARP”), originally
promoted to Congress by then-Treasury Secretary Henry Paulson as a method of buying
up to $700 billion of “troubled” assets, defined generally as illiquid mortgage-backed
securities.

Within days of EESA’s passage, however, Mr. Paulson abruptly changed course,
marginalizing the purchase of toxic assets in favor of the injection of funds directly into
banks and other financial institutions through the use of TARP funds to purchase equity
stakes. Thus began the partial nationalization of the U.S. banking system. On October
13, 2008, ten days after Congress passed EESA, Mr. Paulson convened a meeting in
Washington with nine major bank CEOs in which he gave the “banks no choice but to
allow the government to take equity stakes in them.”1 At that meeting, Mr. Paulson, as
well as current Treasury Secretary Timothy Geithner, Federal Deposit Insurance
Corporation (“FDIC”) Chairwoman Sheila Bair and Federal Reserve Chairman Ben
Bernanke, forced these banks to sign “Major Financial Institution Participation
Commitments,” in which the CEOs sold the U.S. Government preferred shares and
warrants in exchange for $125 billion in TARP funds.2

According to Treasury officials, the final decision to abandon the toxic asset
purchases in favor of further capital injections was made on October 26, 2008, with then-
Secretary Paulson formally announcing the shift on November 12, 2008.3 As of June 12,
2009, the Bush and Obama Administrations have used TARP funds to partially
nationalize banks with the purchase of nearly $200 billion in preferred shares and
subordinated debt from 623 financial institutions, ranging from $301,000 to $25 billion
per institution.4

The Bush and Obama Administrations did not stop with a partial nationalization
of the banking sector, however. As the SIGTARP, Neil Barofksy, has written in his
prepared testimony for this hearing, “TARP funds are being used, or have been
announced to be used, in connection with 12 separate programs that … involve a total
(including TARP funds, loans and guarantees from other agencies, and private money)
that could reach nearly $3 trillion.”5

1
See JoAnne Allen, “Paulson gave banks no choice on government stakes: memos.” Reuters, May 14,
2009), available at http://www.reuters.com/article/newsOne/idUSTRE54D0NH20090514.
2
See http://www.judicialwatch.org/news/2009/may/judicial-watch-forces-release-bank-bailout-documents
3
See David Wessel, “Paulson Expected Criticism for Changing Course on TARP,” The Wall Street Journal,
(April 2, 2009), available at http://online.wsj.com/article/SB123867380519382149.html.
4
See U.S. Government Accountability Office, Troubled Asset Relief Program, June 2009 Status of Efforts
to Address Transparency and Accountability Issues, GAO-09-658, June 2009, at 15.
5
See Statement of Neil Barofsky, Special Inspector General Troubled Asset Relief Program Before the
House Committee on Oversight and Government Reform, July 21, 2009.

2
 In preparation for its third report to Congress and this hearing, SIGTARP
provided the Committee with the following chart detailing the nearly $3 trillion in
potential obligations subject to SIGTARP oversight:

TOTAL POTENTIAL FUNDS SUBJECT TO SIGTARP OVERSIGHT, AS OF 6/30/2009 ($ BILLIONS)

Total Projected Projected TARP

Program Brief Description or Participant Funding at Risk ($) Funding ($)

Capital Purchase Program (“CPP”) Investments in 649 banks to date; 8 $218.0 $218.0
institutions total $134 billion; received ($70.1) ($70.1)
$70.1 billion in capital repayments

Automotive Industry Financing GM, Chrysler, GMAC, Chrysler Financial; 79.3 79.3
Program (“AIFP”) received $130.8 million in loan repayments
(Chrysler Financial)

Auto Supplier Support Program Government-backed protection for auto 5.0 5.0
(“ASSP”) parts suppliers

Auto Warranty Commitment Government-backed protection for 0.6 0.6

Program (“AWCP”) warranties of cars sold during the GM and
Chrysler bankruptcy restructuring periods

Unlocking Credit for Small Purchase of securities backed by SBA loans 15.0 15.0
Businesses (“UCSB”)

Systemically Significant Failing AIG investment 69.8 69.8

Institutions (“SSFI”)

Targeted Investment Program (“TIP”) Citigroup, Bank of America investments 40.0 40.0

Asset Guarantee Program (“AGP”) Citigroup, ring-fence asset guarantee 301.0 5.0

Term Asset-Backed Securities Loan FRBNY non-recourse loans for purchase of 1,000.0 80.0
Facility (“TALF”) asset-backed securities

Making Home Affordable (“MHA”) Modification of mortgage loans 75.0 50.0

Program

Public-Private Investment Program Disposition of legacy assets; Legacy Loans 500.0 – 1,000.0 75.0
(“PPIP”) Program, Legacy Securities Program
(expansion of TALF)

Capital Assistance Program (“CAP”) Capital to qualified financial institutions; TBD TBD
includes stress test

New Programs, or Funds Remaining Potential additional funding related to CAP; 131.4 131.4
for Existing Programs other programs

Total $2,365.0 – $699.0

$2,865.0

Source: Written Statement of Neil Barofsky, July 21, 2009

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 While the above chart highlights the unprecedented government intervention in
the free market by the Bush and Obama Administrations through TARP, these programs
totaling nearly $3 trillion of potential obligations merely scratch the surface of the federal
government’s intrusion into the private sector in the name of financial and economic
stabilization. As Mr. Barofsky testifies in his written statement for today’s hearing,

[TARP] is just one part of a much broader Federal Government effort to stabilize
and support the financial system. Since the onset of the financial crisis in 2007,
the Federal Government, through many agencies, has implemented dozens of
programs that are broadly designed to support the economy and financial system.
The total potential Federal Government support could reach up to $23.7
trillion [emphasis added].6

Treasury’s Lack of Transparency with Regard to TARP

While it has proceeded with spending unparalleled amounts of taxpayer money,

the Treasury department has developed a pattern of providing little or no transparency
with regard to that spending, and continues to be unwilling to address transparency
concerns raised by SIGTARP and this Committee. The following is from SIGTARP’s
April 2009 quarterly report:

Treasury has indicated … that it will not adopt SIGTARP’s recommendation that
all TARP recipients be required to do the following:

• Account for use of TARP funds

• Set up internal controls to comply with such accounting
• Report periodically to Treasury on the results, with appropriate sworn
certifications7

Little has changed since SIGTARP’s April report. In his written testimony for
today’s hearing, Mr. Barofksy states:

Although Treasury has taken some steps towards improving transparency in

TARP programs, it has repeatedly failed to adopt recommendations that SIGTARP
believes are essential to providing basic transparency and fulfill Treasury’s stated
commitment to implement TARP “with the highest degree of accountability and
transparency possible.”8

Ranking Member Darrell Issa, in a letter to Treasury Secretary Geithner on May

5, 2009, also raised issues about Treasury’s lack of transparency, citing President
Obama’s promise of an unprecedented level of transparency and accountability for TARP

6
Id.
7
See SIGTARP, Quarterly Report to Congress, (April 21, 2009), at 137.
8
See note 5, supra.

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and President Obama’s dissatisfaction with the Bush Treasury’s “failure to track how the
money has been spent.”9 Ranking Member Issa wrote:

While President Obama came into office promising change, all we’ve seen from
your leadership at Treasury is a continuation of the Bush Administration’s failure
to ensure adequate transparency of the use of taxpayer dollars by participants in
the TARP.10

The Department of Treasury has refused repeatedly to require TARP recipients to

report on their use of taxpayer funds, calling such reporting “meaningless” because of the
inherent fungibility of money.11 However, on March 11, 2009, the House Oversight
Committee’s Domestic Policy Subcommittee received expert testimony from a variety of
sources that the technology exists and is readily available to track TARP recipients’ use of
taxpayer funds.12 Specifically, the Subcommittee learned that eXtensible Business
Reporting Language (“XBRL”), an XML-based technology standard for business
information, has the potential to make financial information disclosure more transparent
and more accessible to regulators, investors, and the general public. XBRL is already in
place as a reporting standard in approximately 40 countries around the world, including
China. Banks in the United States are currently required to disclose information to the
FDIC in XBRL format, and the SEC recently approved a final rule mandating the use of
XBRL for all public company reporting, with some companies required to comply
starting in June of 2009.

At the hearing, former Assistant Secretary for Financial Stability, Neel Kashkari,
assured the Subcommittee that he would look into technologies such as XBRL that would
allow real time tracking of TARP expenditures. Ranking Member Issa followed up with
Mr. Kashkari in a letter on March 25, 2009, asking him to report back after fulfilling his
commitment to address these issues.13 However, there was no response from Mr. Kashkari
before he left office.

SIGTARP pointedly summarizes the implications of Treasury’s lack of

transparency:

Unfortunately, in rejecting SIGTARP’s basic transparency recommendations, TARP

has become a program in which taxpayers (i) are not being told what most of the
TARP recipients are doing with their money, (ii) have still not been told how much
their substantial investments are worth, and (iii) will not be told the full details of how
their money is being invested. In SIGTARP’s view, the very credibility of TARP (and
thus in large measure its chance of success) depends on whether Treasury will

9
See President-elect Barack Obama remarks, (January 12, 2009), available at
http://firstread.msnbc.msn.com/archive/2009/01/12/1742292.aspx.
10
See letter, Darrell E. Issa to Timothy Geithner, (May 5, 2009).
11
See note 5, supra.
12
See House Committee on Oversight and Government Reform, Domestic Policy Subcommittee hearing,
TARP Oversight: Assessing Treasury’s Efforts to Prevent Waste and Abuse of Taxpayer Funds, (March 11,
2009), available at http://domesticpolicy.oversight.house.gov/story.asp?ID=2336.
13
See Letter from Ranking Member Darrell Issa to Neel Kashkari, March 25, 2009.

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 commit, indeed [sic] as in word, to operate TARP with the highest degree of
transparency possible.14

Given the unprecedented amount of taxpayer funding involved and the manner in
which it is being used by the Treasury Department, the American public deserves nothing
less than the greatest level of transparency. Treasury’s continued unwillingness to
provide basic transparency despite the many recommendations of SIGTARP and
Congress and the repeated demonstration that meaningful data from TARP recipients can
be gathered and easily disseminated is unacceptable.

SIGTARP Audit – Bank Use of TARP Funds

Treasury’s claim that TARP recipient reporting on use of funds would be

“meaningless” is further refuted by SIGTARP’s release on July 20, 2009, of its first
completed audit, in which nearly all banks surveyed by SIGTARP were able to provide
meaningful information about how they are utilizing TARP funds, including what actions
they are taking which they report they would otherwise not have been able to undertake
without TARP funds.15 SIGTARP’s key findings included:

• “More than 80 percent of the respondents cited the use of funds for lending or
how it helped them avoid reduced lending. Many banks reported that lending
would have been lower without TARP funds or would have come to a standstill.

• More than 40 percent of the respondents reported that they used some TARP
funds to help maintain the capital cushions and reserves required by their banking
regulators to be able to absorb unanticipated losses.

• Nearly a third of the respondents reported that they used some TARP funds to
invest in agency-mortgage backed securities. These actions provided immediate
support of the lending and borrowing activities of other banks and positioned the
banks for increased lending later.”16

The use of funds by nearly one-third of the banks to purchase mortgage-backed

securities primarily ensured by Fannie Mae and Freddie Mac is particularly revealing.
The risk of default on these securities is ultimately backed by the American taxpayer
through the now-explicit government backstop provided to Fannie and Freddie. This
means that taxpayers are effectively driving up the price of these securities (through
additional funds provided to the banks through TARP), and they then bear the risk of
default on the flip side of each transaction. SIGTARP’s audit notes that the banks targeted
these securities precisely because of the safety associated with them;17 if the underlying
mortgage borrowers default, the American taxpayers foot the bill.
14
See note 5, supra.
15
Id.
16
See “SIGTARP Survey Demonstrates that Banks Can Provide Meaningful Information on Their Use of
TARP Funds,” SIGTARP, July 20, 2009.
17
Id.

6
 In addition, SIGTARP’s audit notes that some banks are using TARP money to
invest in municipal bonds, with the asserted intent of “helping local communities.”18 This
means that federal taxpayers in Kansas may be effectively subsidizing the debt of the city
of San Francisco.

SIGTARP Concerns Regarding Public-Private Investment Program

On March 23, 2009, Treasury, the FDIC and the Federal Reserve announced the
Public-Private Investment Program (“PPIP”), an initiative to provide government funds
to leverage private sector purchases of illiquid toxic assets. Initially, PPIP was intended
to be a $500 billion to $1 trillion government commitment divided between two programs
– the Legacy Loans Program led by the FDIC and the Legacy Securities Program led by
Treasury. However, as of July 8, 2009, the Treasury-led Legacy Securities Program is the
only one slated for implementation. SIGTARP now reports that PPIP is expected to use
$75 billion of TARP money. 19 On July 8, 2009, the Treasury Department announced that
nine firms had been chosen to act as fund managers in the Legacy Securities Program20:

AllianceBernstein, LP and its sub-advisors Greenfield Partners, LLC and

Rialto Capital Management, LLC
Angelo, Gordon & Co., L.P. and GE Capital Real Estate
BlackRock, Inc.
Invesco Ltd.
Marathon Asset Management, L.P.
Oaktree Capital Management, L.P.
RLJ Western Asset Management, LP.
The TCW Group, Inc.
Wellington Management Company, LLP

In its April 2009 report to Congress, SIGTARP identifies numerous areas of

vulnerability within the PPIP program, including conflict of interest and collusion issues.
SIGTARP states that since its April report, Treasury worked with SIGTARP and others to
address some of these concerns as it has moved forward with the implementation of
PPIP; however, according to Mr. Barofsky’s written testimony:

Treasury has declined to adopt one of SIGTARP’s most fundamental

recommendations – that Treasury should require imposition of an informational
barrier or “wall” between the PPIF [Public Private Investment Fund] fund

18
Id.
19
See note 5, supra.
20
See Joint Statement by Secretary of the Treasury Timothy F. Geithner, Chairman of the Board of
Governors of the Federal Reserve System Ben S. Bernanke, and Chairman of the Federal Deposit Insurance
Corporation Sheila Bair on the Legacy Asset Program, (July 8, 2009), available at
http://www.ustreas.gov/press/releases/tg200.htm.

7
 managers making investment decisions on behalf of the PPIF and those
employees of the fund management company who manage non-PPIF funds.21

SIGTARP warns that failure to institute such a wall between PPIF and non-PPIF
operations at the private fund managers participating in the Legacy Securities Program
will create ample opportunity for mischief at taxpayer expense. For example, fund
managers may intentionally overpay for toxic securities in order to inflate the price of
similar assets which they already have an interest in. Since the PPIP intentionally
leverages taxpayer funds to stimulate toxic security purchases, any overpayment by the
fund managers will come primarily at the taxpayer’s expense. In addition, fund managers’
purchase of toxic securities will likely constitute “market moving” transactions,
foreknowledge of which may provide opportunities for fund managers to trade on this
inside information.22

In a meeting with Committee staff in preparation for this hearing, SIGTARP staff
stated that in four formal instances (the April 2009 SIGTARP quarterly report, two letters
from SIGTARP to Treasury, and the July 2009 SIGTARP quarterly report) and on
numerous informal occasions, SIGTARP staff have raised the need for an information
barrier within PPIF manager institutions to no avail. Treasury refuses to implement this
recommendation “despite the fact that such walls have been imposed upon asset
managers in similar contexts in other Government bailout-related programs, including by
Treasury itself in other TARP-related activities, and despite the fact that three of the nine
PPIF managers already must abide by similar walls in their work for those other
programs.”23

SIGTARP told Committee staff that the Treasury Department believes that if it
imposes such an informational barrier, PPIP fund managers will withdraw from the
program. However, the potential for PPIP fund managers to game the system in favor of
their non-PPIP business interests demands additional safeguards. Mr. Barofsky writes in
his testimony:

[f]ailure to impose a wall … will leave Treasury vulnerable to an accusation that

has already been leveled against it – that Treasury is using TARP to pick winners
and losers and that, by granting certain firms the PPIF manager status, it is
benefitting a chose few at the expense of the dozens of firms that were rejected, of
the market as a whole, and of the American taxpayer.24

The American people’s trust in government is at stake:

This reputational risk is not one that can be readily measured in dollars and cents, but
is rather a risk that could put in jeopardy the fragile trust the American people have in
TARP and, by extension, their Government.25
21
See note 5, supra.
22
See SIGTARP, Quarterly Report to Congress, (July 21, 2009).
23
Id.
24
See note 5, supra.
25
Id.

8
 Given the willingness of some of the PPIP private asset managers to consent to
the implementation of an appropriate “wall” around their actions in other government
programs, Treasury’s assertion that the managers may withdraw from PPIP if Treasury
imposes a similar requirement in this program is concerning. Treasury is effectively
insisting that not only must taxpayer money be used to leverage the purchase of toxic
assets, but also that the fund managers have the freedom to use information about these
purchases to inflate the value of other assets on their books. Thus, Treasury’s repeated
refusal to implement SIGTARP’s recommendation is very troubling.

Treasury Rejects SIGTARP Recommendation to Value TARP Assets

SIGTARP reports that Treasury continues to hide information about the value of
assets in Treasury’s TARP portfolio from the American people:

SIGTARP has recommended that Treasury begin reporting on the values of its
TARP portfolio so that taxpayers can get regular updates on the financial
performance of their TARP investments. Notwithstanding that Treasury has now
retained asset managers and is receiving such valuation data on a monthly basis,
Treasury has not committed to providing such information except on the
statutorily required annual basis.26

The repeated refusal of Treasury to adopt SIGTARP’s recommendation to reveal

this information to the American people is very troubling. The American people have a
right to know the value of the assets that have been purchased with their money.

SIGTARP Independence/OLC Issue

Recent news reports raise the disturbing possibility that the Treasury Department
may attempt to assert authority over SIGTARP, thereby impairing its effectiveness.27 In
response to inquiries by Ranking Member Issa and others, Mr. Barofksy provided email
exchanges between SIGTARP and the Treasury Department as well as background
information on the situation which show that, while Treasury has thus far not withheld
any documents from SIGTARP as it pursues its oversight and audit functions, SIGTARP
is concerned that the department may attempt to do so in the future.

Among the documents SIGTARP provided to Ranking Member Issa is an April

15, 2009, request from Bernard J. Knight, Jr., Treasury’s Assistant General Counsel and
Designated Agency Ethics Official to the Office of Legal Counsel (“OLC”) at the
Department of Justice. In this email, Treasury formally asked OLC to opine on whether
SIGTARP is subject to the supervision of the Secretary of the Treasury. In a letter to
26
Id.
27
See, e.g., Tom Hamburger and Peter Wallsten, “Dispute grows over TARP chief's powers,” (June 17,
2009), available at http://www.latimes.com/news/nationworld/nation/la-na-tarp-inspector18-
2009jun18,0,1073997.story.

9
Senator Charles Grassley and Ranking Member Issa on June 19, 2009, Mr. Barofksy
writes that SIGTARP

continues to believe the inquiry to OLC is unnecessary given the very clear intent
of Congress regarding our independence: an adverse ruling from OLC could
potentially have a serious impact on the independence of our agency and our
ability to carry out our mandate; and we believe that Treasury’s position on these
issues are entirely unfounded and have little chance of persuading OLC.28

At a time when the Treasury Department is in charge of spending taxpayer funds

at a level and pace unheard of in American history, the fact that the department is
attempting to exert greater control over the institution Congress intended to oversee its
actions deserves greater scrutiny.

Staff Contacts: Christopher Hixon, Mark Marin and Brien Beattie at 5-5074.

28
See letter from SIGTARP Neil Barofksy to Senator Charles Grassley and Representative Darrell Issa,
(June 19, 2009).

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