• Treasury Responds to GAO Recommendations on TARP Implementation
  • August 27, 2009
  • Law Firm: Alston & Bird LLP - Atlanta Office
  • On August 20, Treasury released a summary of actions it has taken in response to a series of recommendations from the Government Accountability Office (GAO).  These recommendations focus on Treasury’s implementation of and accountability for the Troubled Asset Relief Program (TARP).  Under Section 116 of the Emergency Economic Stabilization Act of 2008, the GAO is required to issue a report on Treasury’s operation of TARP every 60 days.  Treasury’s responses relate to 13 recommendations from the GAO’s June report and certain open items from earlier reports.

    The GAO recommendations and Treasury’s responses include the following:

    1. Treasury should continue to expeditiously hire personnel needed to carry out and oversee TARP.  As of August 3, 2009, Treasury’s Office of Financial Stability (OFS) had 194 full-time employees tasked with the implementation of TARP programs and formation of the policies and procedures necessary for achieving financial stability.  Treasury’s organizational plans call for the OFS to eventually be staffed with a total of 225 full-time employees.
    2. Treasury should develop a comprehensive system of internal control over TARP to ensure that policies, procedures and guidance for program activities comply with TARP objectives and requirements.  The Internal Control Framework was developed and implemented by Treasury to serve “as a guide to the establishment of internal controls for new programs….”  Treasury also monitors operational controls related to program asset acquisition, management and disposition activities.
    3. Treasury should ensure that future agreements entered into with financial institutions under the Capital Purchase Program (CPP) include a mechanism to allow Treasury to track the use of CPP funding and should seek similar information from existing CPP participants.  Treasury collects monthly lending data from all (CPP) participants and issues reports that include “information on average loans balances for consumer lending, commercial lending, and total lending.”  Treasury and the federal banking agencies are also conducting a quarterly analysis of the underlying financial conditions and selected activities of current CPP participants based on information available from Call and Thrift Financial Reports.  Finally, future capital infusions in financial institutions under the Capital Assistance Program (CAP) will require participants to “submit a plan for how they intend to use CAP capital to preserve and strengthen their lending capacity – specifically, to increase lending above levels relative to what would have been possible without government support.”
    4. Treasury should establish a process to ensure compliance with all CPP requirements, including executive compensation, dividend and stock repurchase restrictions.  Treasury has issued rules on executive compensation as required under the American Recovery and Reinvestment Act of 2009 which impose various reporting requirements for TARP recipients.  The reporting requirements vary depending on whether or not the participant has received exceptional assistance.  Treasury tracks compliance with other, non-executive compensation related limitations, such as dividend payments, limitations on dividends and stock repurchase restrictions, “using Bloomberg and other informational sources, such as SEC filings, press releases, and other reports compiled by OFS’s retained custodian bank, as well as information provided by CPP participants.”
    5. Treasury should develop and implement a risk-assessment process to monitor program status and identify any risks of potential inadequate funding of announced programs.  Treasury is in the process of developing a risk-assessment procedure that will set and identify internal operational objectives and risks, assign responsibility for risk mitigation actions and monitoring and reporting on compliance with these objectives and activities.
    6. A strategy should be developed to build and understanding of and support for the various TARP components, specifically actions to preserve homeownership.  A communication strategy should also be developed that ensures Congress is adequately informed and kept up to date on TARP programs.  OFS is developing an integrated communications plan to “address both internal and external communications and develop recommendations on how Treasury can best communicate the goals and progress of TARP programs to Congress, the general public, Treasury employees, and other stakeholders.”  To improve the public dissemination of TARP program information, Treasury has, among other things, created the FinancialStability.gov and MakingHomeAffordable.gov websites.  These websites provide public access to information on, and documents related to, Treasury’s TARP programs, policies and initiatives.
    7. OFS documentation of internal control procedures and publicly-available guidance on warrant exercise price determinations should be updated to reflect actual practices applied by OFS.  Treasury has established procedures for determining warrant exercise prices and has made these procedures publicly available on the FinancialStability.gov website.
    8. Treasury should review and renegotiate, as necessary, existing vendor conflicts-of-interest mitigation plans to enhance specificity and conformity with the new interim conflicts-of-interest rule.  “Treasury is actively renegotiating the contracts in place before the new Conflict of Interest interim final regulation became effective on January 21, 2009 and that remained active after April 30, 2009.”  Five of the eight contracts requiring modification have been successfully renegotiated, and Treasury is continuing to work to renegotiate the remaining three.
    9. Guidance should be issued to require that key communications and decisions regarding potential or actual vendor-related conflicts of interest be documented.  Written guidance on contractor and financial agent conflicts of interest was completed on June 18, 2009.
    10. Treasury should expedite efforts to conduct usability testing to measure the quality of users’ experiences with the financial stability Web site and measure customer satisfaction with the site, using appropriate tools such as online surveys, focus groups, and e-mail feedback forms.  Treasury began implementing such usability testing prior to receiving this recommendation from the GAO and has engaged consultants to conduct ongoing monitoring related to site usage.
    11. Treasury should consider additional options for providing to the public more detailed information on the costs of TARP contracts and agreements, such as a dollar breakdown of obligations and/or expenses.  “Treasury is assessing the feasibility of providing additional information about TARP Contracts and Agreements on its FinancialStability.gov website” and intends to update the “website to include descriptive information related to TARP Contracts and Agreements….”
    12. Treasury should ensure that its warrant valuation process maximizes benefits to taxpayers.  Treasury should also consider disclosing additional details regarding the warrant repurchase process, such as the initial price offered by the issuing entity and Treasury’s independent valuations, to demonstrate Treasury’s attempts to maximize the benefit received for the warrants on behalf of the taxpayer.  Treasury has implemented a written process for warrant repurchases.  “Treasury will begin publishing additional information on each warrant that is repurchased, including a bank’s initial and subsequent determinations of fair market value, if applicable.”
    13. Treasury should consult with the federal banking agencies to ensure consideration of generally consistent criteria by the primary federal regulators when considering repurchase decisions under TARP.  “Treasury is not in a position to dictate criteria that regulators should apply in making such decisions.”  The report notes that federal law “vests the primary regulator of each institution with the authority to determine whether and on what terms to permit the institution to reduce its capital, including by repurchasing or redeeming preferred stock held by Treasury.  To the extent different regulators may apply different criteria in making that determination, that variation is a function of the division of authority under the bank regulatory system.”