OFFICE OF FINANCIAL STABILITY

Agency Financial Report

United StateS department of the treaSUry

office of financial Stability

2009

fiScal

year

Troubled Asset Relief Program

Office of Financial Stability

for the year ended September 30, 2009

Agency Financial Report

UNITED STATES DEPARTMENT OF THE TREASURY

OFFICE OF FINANCIAL STABILITY

2009

FISCAL

YEAR

Troubled Asset Relief Program

Office of Financial Stability

for the year ended September 30, 2009

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

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TABLE OF CONTENTS

Table of Contents

Message from the Assistant Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv

Part I: Management’s Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Section One: Background and Creation of the Troubled Asset Relief Program (TARP) . . . . . . . . . . . . 6

Mission and Organizational Structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Section Two: Overview and Analysis of the TARP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

TARP in Context: A Critical Pillar of a Coordinated Government Response . . . . . . . . . . . . . . . . . . . . . . . . . 9

OFS Strategic Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

TARP Timeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

FY 2009 Financial Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

The Impact of TARP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

External Assessments of TARP Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Section Three: Ensuring Stability and Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24

Capital Purchase Program (CPP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Capital Assistance Program (CAP) and the Supervisory Capital Assessment Program (SCAP). . . . . . . . . . . . . . . . 25

Targeted Investment Program (TIP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Asset Guarantee Program (AGP). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Consumer and Business Lending Initiative (CBLI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Public-Private Investment Program (PPIP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

AIG Investment Program (AIG). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Auto Industry Financing Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Section Four: Preventing Foreclosures and Preserving Homeownership . . . . . . . . . . . . . . . . . . .37

Section Five: Protecting Taxpayer Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Section Six: Promoting Transparency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Section Seven: Financial Accounting Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Section Eight: TARP Valuation Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Incorporating Market Risk in Valuation Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Sensitivity Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Section Nine: Systems, Controls, and Legal Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Management Assurance Statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Internal Control Program. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Improper Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Section Ten: Other Management Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

TABLE OF CONTENTS

iii

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

Section Eleven: Limitations of the Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Part II: Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Message from the Chief Financial Ofﬁcer (CFO) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Government Accountability Ofﬁce (GAO)’s Report on FY 2009 Financial Statements . . . . . . . . . . . . . . . . . . . . 71

Assistant Secretary’s Response to GAO Report on FY 2009 Financial Statements. . . . . . . . . . . . . . . . . . . . . . 79

Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Notes to the Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

TABLE OF CONTENTS

MESSAGE FROM ASSISTANT SECRETARY OF FINANCIAL STABILITY

I am pleased to provide the Oﬃce of Financial Stability’s Agency Financial Report for ﬁscal

year 2009. is report describes the activities and ﬁnancial results for the Troubled Asset

Relief Program (TARP) since its inception in October, 2008. e report includes the

ﬁnancial statements for the TARP and the Government Accountability Oﬃce’s audit opinion

on the ﬁnancial statements, a separate audit opinion on OFS’s internal controls over

ﬁnancial reporting, and results of tests of OFS’s compliance with selected laws and

regulations.

e Emergency Economic Stabilization Act of 2008 (EESA) established the Oﬃce of

Financial Stability (Treasury-OFS) within the Oﬃce of Domestic Finance of the Treasury

Department to implement the TARP. e OFS carries out the mission and objectives of the EESA: ensuring the overall

stability and liquidity of the ﬁnancial system; preventing avoidable foreclosures and helping preserve homeownership;

protecting taxpayer interests, and promoting transparency.

Treasury-OFS has made substantial progress toward meeting these objectives and goals by using TARP funds to help

rebuild conﬁdence in U.S. ﬁnancial institutions. For the period ended September 30, 2009, Treasury-OFS reports the

following key results:

Treasury-OFS disbursed $364 billion of the authorized $700 billion, most of it in the form of investments and $73 •

billion of those TARP funds have already been repaid.

As shown in greater detail in this report, Treasury-OFS reports an estimated net cost of $41.6 billion for the TARP •

disbursements made during the ﬁscal year.

e ultimate cost of TARP will not be known for some time. e combination of lower spending and higher expected •

returns has already signiﬁcantly lowered the estimated cost from our earlier estimates. However, as additional funds are

distributed, particularly for the housing initiative, the total cost is likely to rise.

Treasury-OFS also improved its operational eﬃciency by adopting a number of the recommendations made by our over-

sight bodies. We have beneﬁted from their involvement in the development of TARP programs and policies as we pursue

our common goal of carrying out the objectives of EESA.

e ﬁnancial and performance data included in this report are reliable and complete. e Government Accountability

Oﬃce rendered an unqualiﬁed (“clean”) audit opinion on the OFS ﬁnancial statements. e OFS has chosen to produce

an alternative to the consolidated Performance and Accountability Report, the attached Agency Financial Report. e OFS

will include its FY 2009 Annual Performance Report with its Congressional Budget Justiﬁcation and will post it on the

OFS website (www.ﬁnancialstability.gov) in February.

Sincerely,

Herbert M. Allison Jr.

Assistant Secretary

Oﬃce of Financial Stability

Message from the Assistant Secretary

for Financial Stability

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

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Part 1

Management’s Discussion & Analysis

For more information, see:

FinancialStability.gov

MakingHomeAffordable.gov

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

EXECUTIVE SUMMARY

Executive Summary

is report provides a summary of the activities of the

Troubled Asset Relief Program (TARP), which was

established under the Emergency Economic Stabilization

Act (EESA) last year. e purpose of TARP was to

restore the liquidity and stability of the ﬁnancial system.

While we will never know for certain what would have

happened without TARP, there is broad agreement today

that because of TARP and other governmental actions,

the United States averted a potentially catastrophic

failure of the ﬁnancial system.

is report also provides an update on the costs of TARP.

While EESA provided the Secretary of the Treasury with

the authority to purchase or guarantee $700 billion

to meet the objectives of the Act, it is clear today that

TARP will not cost taxpayers $700 billion. First, the

Treasury’s Oﬃce of Financial Stability (Treasury-OFS) is

unlikely to disburse the full $700 billion. In addition,

many of the investments under the program, particularly

those aimed at stabilizing banks, are expected to deliver

returns for taxpayers. is combination of lower spend-

ing and higher expected returns is expected to lower the

projected costs of TARP from the $341 billion estimate

in the President’s Mid-session Budget in August 2009.

During the period ended September 30, 2009, the

Treasury-OFS disbursed $364 billion of the authorized

$700 billion, most of it in the form of investments,

and $73 billion of those TARP funds have already been

repaid as of such date. In addition, for the period ended

September 30, 2009, the investments generated $12.7

billion in cash received through interest, dividends, and

the proceeds from the sale of warrants. For those TARP

disbursements in FY 2009, the Treasury-OFS reported

net cost of operations of approximately $41.6 billion

including administrative expenses. e reported net cost

of operations includes the estimated net cost related

to loans, equity investments, and asset guarantees. As

additional funds are distributed, particularly for the

housing initiative, the total cost is likely to rise, although

anticipated to remain substantially below the $341 bil-

lion estimate in the August 2009 Midsession estimate.

Four TARP programs reported net income in FY 2009:

the Capital Purchase Program, the Targeted Investment

Program, the Asset Guarantee Program, and the

Consumer and Business Lending Initiative. is net

income was oﬀset by reported net cost of the invest-

ments in AIG and the automotive companies, bringing

the net cost for these programs during FY 2009 to

approximately $41.4 billion.

As further disbursements are made in FY 2010 and

later, the costs of the TARP program are likely to

rise. In particular, the $50 billion Home Aﬀordable

Modiﬁcation Program or “HAMP,” is not designed

to recoup money spent on loan modiﬁcations to keep

people in their homes. In addition, the Treasury-OFS’

assistance to AIG includes an equity facility on which

$27 billion remained undrawn at ﬁscal year end, and

$30 billion of investments and loans under the Public

Private Partnership Program will largely be recorded

beginning in FY 2010.

e ultimate return on the outstanding TARP invest-

ments will depend on how the economy and ﬁnancial

markets evolve. e general improvement in economic

and ﬁnancial environment, early repayments of TARP

funds and reﬁnements to the valuation models have

signiﬁcantly lowered expected costs for the program

funds disbursed in FY 2009 by $110 billion below

the estimates made when the programs were initiated.

About $10 billion of that decline in costs stems from

early repayments of TARP funds.

ese estimates will change. e design and the precise

amounts of additional investments for small banks and

to facilitate small business lending have not yet been

determined. In addition, the ultimate return on TARP

investments is subject to signiﬁcant uncertainty as

market conditions evolve.

While this report provides updated information on

TARP’s costs, the initiative should be evaluated primar-

ily based on its impact on stabilizing the ﬁnancial

system. ese investments were not made to make

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

EXECUTIVE SUMMARY

money but to help prevent a collapse of our ﬁnancial

system and lay the foundation for economic recovery.

Today, the ﬁnancial system and the economy are

showing signs of stability. e cost of borrowing has

declined to pre-crisis levels for many businesses, states

and local governments, the government sponsored

enterprises (GSEs), and the banks. Housing markets

have shown signs of stabilization, and home prices have

ticked up in recent months, after three straight years of

declines. e economy grew in the third quarter, and

most private economists predict it will grow for the

remainder of this year and next.

at improvement in the economic and ﬁnancial

outlook since the spring reﬂects a broad and aggressive

policy response that included the ﬁnancial stability

policies implemented under TARP, eﬀorts to bolster

conﬁdence in the housing and mortgage markets under

the Housing and Economic Reform Act (HERA),

other ﬁnancial stability policies implemented by the

Federal Deposit Insurance Corporation and the Board

of Governors of the Federal Reserve System (Federal

Reserve), accommodative monetary policy, and the

Obama Administration’s ﬁscal stimulus package

implemented under the American Recovery and

Reinvestment Act of 2009.

While TARP was necessary, it has put the federal

government in the unwelcome position of owning

sizeable stakes in private sector companies. Given that

unusual position as a reluctant shareholder, Treasury-

OFS has established a core set of principles to guide its

actions. First and foremost, Treasury-OFS is seeking to

protect taxpayers by minimizing the long-term con-

sequences of the current economic and ﬁnancial crisis

with as little direct cost to the taxpayer as possible. As

economic and market conditions improve, Treasury-

OFS aims to dispose of its investments as quickly as

practicable, in a timely and orderly manner consistent

with the duty to promote ﬁnancial stability and protect

taxpayers’ interests.

To administer the programs under TARP, the Secretary

of the Treasury has established Treasury-OFS, which

is designed to be temporary in nature, but also highly

skilled and well equipped to handle the complexity of

TARP initiatives. At the same time, Treasury-OFS’ pro-

cess is designed to be highly transparent. Congress and

taxpayers are kept informed of TARP’s actions, results,

investments and costs through frequent and timely pub-

lic reports, daily communication with oversight bodies,

public responses to oversight reports, and direct outreach

to taxpayers through its websites: FinancialStability.

gov and MakingHomeAordable.gov.

Because of the magnitude and importance of these

programs, Congress established a strong oversight

structure to ensure accountability. e Government

Accountability Oﬃce (GAO), the Special Inspector

General for TARP (SIGTARP), the Congressional

Oversight Panel (COP) and the Financial Stability

Oversight Board (FINSOB) engage in frequent reviews

of TARP activities and have contributed to making the

programs stronger and more eﬀective.

Despite TARP’s positive record to date, and the

improving ﬁnancial and economic outlook, signiﬁcant

challenges remain for the ﬁnancial sector and our

economy. While the economy is growing again, jobs

are still being lost and the unemployment situation

continues to worsen. e pace of bank failures,

which tends to lag economic cycles, remains elevated.

Foreclosure rates also remain very high, and bank

lending has contracted, with credit standards tight.

Commercial real estate losses weigh heavily on many

banks, especially on smaller banks, impairing their

ability to extend new loans. Small businesses have

been particularly aﬀected because they rely heavily

on bank lending and do not have the ability to raise

capital through the securities markets.

While a number of TARP initiatives, particularly

those for large institutions, have begun to wind down,

Treasury-OFS continues to focus on stabilizing the

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

EXECUTIVE SUMMARY

housing markets as well as improving access to credit for

small businesses. Treasury-OFS is also mindful of the

fact that risks remain, and history suggests that exiting

too soon from policies designed to contain a ﬁnancial

crisis can signiﬁcantly prolong an economic downturn.

It is within this larger context that the Secretary of the

Treasury will evaluate and decide whether to extend

TARP authority past December 31, 2009.

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 1: BACKGROUND AND CREATION OF TARP

Section One:

Background and Creation of TARP

Stresses in U.S. ﬁnancial markets began to emerge

in 2007 as the performance of subprime mortgages

deteriorated signiﬁcantly, and losses on related securi-

ties began to climb. With the extent and distribution

of losses quite uncertain, concerns surfaced about the

ﬁnancial condition of banks and other ﬁnancial institu-

tions. Pressures in short-term funding markets esca-

lated and some oﬀ-balance sheet funding vehicles were

not able to renew their asset-backed commercial paper,

raising concerns about the ability of sponsoring banks

to meet funding needs. As a consequence, short-term

credit markets came under considerable pressure and

risk spreads in interbank funding markets and in some

segments of the commercial paper (CP) market rose

sharply. Announcements of large asset write-downs and

weak ﬁnancial reports for many large ﬁnancial institu-

tions in late 2007 raised additional concerns about the

resilience and capital adequacy of ﬁnancial counterpar-

ties and the likelihood of further large losses.

Continuing declines in mortgage loan performance,

market valuations of mortgage-related assets, and the

credit ratings of even so-called “super-senior” tranches

of structured ﬁnance securitizations heightened the

pressure on ﬁnancial institutions with signiﬁcant

known exposures in these areas. Market participants

became increasingly cautious and, in some cases,

unwilling to extend funding to the most-aﬀected

institutions, as in the case of Bear Stearns. In March

2008, the Federal Reserve, with the full support of

the Treasury, facilitated a merger of Bear Stearns with

JPMorgan Chase to prevent a disorderly collapse of

the ﬁrm and potentially severe spillover eﬀects in the

ﬁnancial markets. e condition of ﬁnancial guaran-

tors weakened, calling into question the value of the

insurance they had written, leading to declines in the

value of products insured by these entities. In March

2008, the Federal Reserve introduced two new liquid-

ity facilities (the Primary Dealer Credit Facility and the

Term Securities Lending Facility), which increased the

liquidity available to primary dealers.

Pressures in ﬁnancial markets initially appeared to ease

somewhat as a consequence of these actions. However,

housing conditions and the broader economy con-

tinued to deteriorate, and ﬁnancial institutions came

under renewed stress in the summer of 2008. Capital

market dislocations and volatility combined with losses

and expectations of further losses on mortgage-related

assets resulted in the debt spreads of Fannie Mae and

Freddie Mac widening and these two companies be-

coming unable to raise new capital or long-term debt.

In September, the Federal Housing Finance Agency

(FHFA) placed these ﬁrms into conservatorship while

obtaining backup capital and funding support from

Treasury under authority granted in July 2008 by the

Housing and Economic Recovery Act of 2008.

In mid-September, a series of events caused the crisis

to escalate. Lehman Brothers came under heightened

funding pressures, and on September 15, 2008, the

parent company ﬁled for bankruptcy protection.

American International Group, Inc. (AIG), a global

insurance company, experienced severe liquidity pres-

sures, necessitating assistance from the Federal Reserve,

with the concurrence of Treasury, on September 16,

2008, to prevent the potential for severe systemic

consequences from a disorderly failure of the ﬁrm.

In the wake of the bankruptcy of Lehman Brothers

and the near failure of AIG, spreads on interbank

borrowing jumped to a record high as banks sought

to safeguard their own liquidity and interbank lend-

ing volumes contracted sharply. Losses on Lehman

Brothers commercial paper caused a money market

mutual fund to experience Net Asset Valuations of

less than $1 per share (i.e., “breaking the buck”) and

investors accelerated withdrawals from prime money

market funds, forcing sales of their CP holdings. Total

CP outstanding fell sharply, leaving many ﬁnancial and

nonﬁnancial businesses with sharply reduced access

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 1: BACKGROUND AND CREATION OF TARP

to needed short-term funds. Many such institutions

tapped existing back-up lines of credit at banks, adding

to the pressure on liquidity funding needs of those

banks. To support the functioning of money market

mutual funds, on September 19, 2008, the Treasury

initiated an insurance program for existing balances at

money market mutual funds. In addition, the Federal

Reserve established the Asset-Backed Commercial

Paper Money Market Mutual Fund Liquidity Facility

(AMLF) to provide liquidity to money market mutual

funds that were holding asset-backed commercial

paper.

e loss of conﬁdence in ﬁnancial institutions also

contributed to the failure of Washington Mutual, the

largest U.S. thrift institution in September 2008. e

FDIC sold the banking operations of the institution to

JPMorgan Chase. Wachovia Corporation subsequently

came under intense funding pressures, and ultimately

was acquired by Wells Fargo & Co. Moreover, as the

ﬁnancial crisis intensiﬁed in the U.S. and abroad, risks

to the stability of the international ﬁnancial system

increased. To help ease liquidity pressures, the Federal

Reserve in coordination with other central banks

around the globe provided dollar liquidity to banking

institutions through reciprocal currency (or swap)

lines.

Accompanying the pressures in interbank and

other funding markets, and in light of the weakening

economy, banks continued to tighten their credit terms

and standards on loans to their customers. e tighter

terms and standards reduced credit availability, leaving

its imprint on economic activity. In the corporate bond

market, borrowing costs increased dramatically and

the spread of corporate yields to comparable maturity

Treasury yields rose, reﬂecting ﬁnancial market stresses

and a weakening economic outlook. Broad stock price

indexes fell sharply, nearly 15 percent in early October

2008, leaving them down about 40 percent since the

beginning of 2008.

is accumulation and conﬂuence of events placed se-

vere ﬁnancial stresses on ﬁnancial markets and institu-

tions, and strong pressures on institutions to deleverage

and restrain lending. Because of the dependence of our

economy on the ﬂow of credit, serious strains on credit

providers can impose disproportionately large costs on

the broader economy. Responding to these severe con-

ditions, the Treasury, Federal Reserve, Federal Housing

Finance Agency (FHFA), Federal Deposit Insurance

Corporation (FDIC), and other U.S. government

bodies undertook an array of unprecedented actions in

accordance with their respective authorities. However,

additional resources and authorities were needed to

help address the signiﬁcant problems in the ﬁnancial

markets and the dangers posed by such problems to

consumers, businesses, and the broader economy. To

provide additional resources and authorities, Congress

passed the Emergency Economic Stabilization Act of

2008 (EESA)

which was signed into law by President

George W. Bush on October 3, 2008. e purposes

of EESA were to provide authority and facilities that

the Secretary of the Treasury could use to restore

liquidity and stability to the ﬁnancial system of the

United States, and to ensure that such authority and

facilities were used in a manner that protected home

values, college funds, retirement accounts, and life

savings; preserved home ownership; promoted jobs

and economic growth; maximized overall returns to

the taxpayers of the United States; and provided public

accountability for the exercise of such authority.

MISSION AND ORGANIZATIONAL

STRUCTURE

e EESA established the Oﬃce of Financial Stability

(OFS) within the Oﬃce of Domestic Finance of the

Treasury Department to implement the TARP. e

mission of Treasury-OFS is to carry out the authorities

given to the Secretary of the Treasury to implement

the Troubled Asset Relief Program (TARP). Section

101 of EESA authorized the Secretary of the Treasury

to establish the TARP to “purchase, and to make and

1 e Emergency Economic Stabilization Act of 2008 (EESA),

Pub. L. No. 110-343, 122 Stat.3765 (2008), codiﬁed at 12

U.S.C. §§ 5201 et seq.

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 1: BACKGROUND AND CREATION OF TARP

fund commitments to purchase, troubled assets from

any ﬁnancial institution, on terms and conditions as

are determined by the Secretary”. EESA deﬁnes the

terms “troubled assets” and “ﬁnancial institution” and

provides other requirements that must be met for any

such purchase. e statute also provides authority for a

guarantee program for troubled assets.

Assistant Secretary

for

Financial Stability

Financial Agents (OFA)

Chief Counsel

Chief

Investment

Officer

Chief

Financial

Officer

Chief

Investment

Operations/Technology

Chief

Homeownership

Preservation Officer

Chief

Administrative

Officer

Chief

OFS Internal

Review

Chief

Reporting

Officer

Preservation Oﬃcer, the Chief Administrative Oﬃcer,

the Chief Reporting Oﬃcer, and the Chief for OFS

Internal Review. A Chief Counsel’s Oﬃce reports to

the Assistant Secretary and to the Oﬃce of the General

Counsel in the Department of Treasury.

Treasury-OFS organization chart is shown below:

EESA SECTION 101: DEFINITIONS

Troubled Assets are deﬁned by EESA as residential or

commercial mortgages and any securities, obliga-

tions or other instruments that are based on or

related to such mortgages, that in each case was

originated or issued on or before March 14, 2008,

the purchase of which the Secretary of the Treasury

determines promotes ﬁnancial market stability; and

any other ﬁnancial instrument that the Secretary of

the Treasury, after consultation with the Chairman

of the Board of Governors of the Federal Reserve

System, determines the purchase of which is neces-

sary to promote ﬁnancial market stability, but only

upon transmittal of such determination, in writing,

to the appropriate committees of Congress.

Financial Institutions are deﬁned by EESA as any

institution, including, but not limited to, any bank,

savings association, credit union, security broker

or dealer, or insurance company, established and

regulated under the laws of the United States or any

State, territory, or possession of the United States,

the District of Columbia, Commonwealth of Puerto

Rico, Commonwealth of Northern Mariana Islands,

Guam, American Samoa, or the United States

Virgin Islands, and having signiﬁcant operations in

the United States, but excluding any central bank

of, or institution owned by, a foreign government.

Treasury-OFS is headed by an Assistant Secretary of the

Treasury, appointed by the President with the advice

and consent of the Senate. Reporting to the Assistant

Secretary for Financial Stability are seven major

divisions: the Oﬃces of the Chief Investment Oﬃcer,

the Chief Financial Oﬃcer, the Chief for Investment

Operations/Technology, the Chief Homeownership

Additional information regarding the operations of

these divisions and other aspects of Treasury-OFS’

operations can be found in Section Ten [Other

Management Information] of this report.

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 2: OVERVIEW AND ANALYSIS OF THE TROUBLED ASSET RELIEF PROGRAM

Section Two:

Overview and Analysis of the Troubled Asset Relief Program

is section provides a broad overview of the TARP. It

begins by placing the program in context, explaining

why it was a necessary ingredient of a coordinated gov-

ernment response to contain and resolve the ﬁnancial

crisis. is is followed by a discussion of Treasury-OFS’

strategic goals, and how particular programs and activi-

ties were developed to meet each of these goals. Next,

this section presents the TARP ﬁnancial summary for

the period ended September 30, 2009. Finally, this

section concludes with a discussion of the aggregate

impact of TARP and other government ﬁnancial

policies on ﬁnancial markets and institutions. ese are

the metrics by which we evaluate success or failure of

government support policies.

TARP IN CONTEXT:

A CRITICAL PILLAR OF

A COORDINATED

GOVERNMENT RESPONSE

is crisis really began in August 2007. e Federal

Reserve, and to a lesser extent the FDIC, led the policy

response during the ﬁrst year of the crisis. Before

September 2008, the Federal Reserve was providing

sorely-needed liquidity to many ﬁnancial institutions,

which allowed them to meet near-term obligations.

e FDIC was insuring deposits, which helped quell

traditional bank runs, and it was resolving troubled

depository institutions, such as IndyMac.

But when stress in the system dramatically intensiﬁed

in the wake of the Lehman Brothers failure, investors

began to question whether the ﬁnancial system was

solvent and conﬁdence collapsed. A diﬀerent sort of

policy response was needed.

e Federal Reserve does not have the authority to

directly inject capital into banks and other ﬁnancial

institutions to address potential capital shortfalls.

Although it has expanded the scope of eligible borrow-

ers and collateral over the past few years, the Federal

Reserve’s liquidity provision is conﬁned to secured

lending against good collateral. is is a powerful, but

limited tool. e large amount of troubled assets held

by ﬁnancial institutions heightened the markets’ fears.

e FDIC has a broader toolset in some respects—

including the ability to inject capital or to purchase or

guarantee liabilities—but only for depository institu-

tions. is too proved a stabilizing factor. But in the

fall of last year the crisis spread well beyond traditional

banks, and threatened to exceed the limitations of the

FDIC’s capacity to eﬀectively respond. Investors feared

that U.S. ﬁnancial institutions needed, in the aggre-

gate, hundreds of billions of dollars to oﬀset potential

credit losses.

In this context the passage of EESA was essential. It

gave the Secretary of the Treasury temporary authority

to purchase and guarantee assets in a wide range of

ﬁnancial institutions and markets. As explained below,

that step, combined with the actions of other govern-

ment agencies and the Federal Reserve, helped prevent

the potential collapse of the U.S. ﬁnancial system. To

date, the cost has been considerably less than what was

originally projected. Today, EESA programs continue

to stabilize and rehabilitate still fragile markets and

institutions, while repayments of the government’s

investments over the past year have already begun.

OFS STRATEGIC GOALS

e purpose of EESA is to provide the Secretary of the

Treasury with the authorities and facilities necessary

to stabilize the U.S. ﬁnancial system. In addition, the

Secretary is directed to ensure that such authorities are

used in a manner that protects home values, college

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 2: OVERVIEW AND ANALYSIS OF THE TROUBLED ASSET RELIEF PROGRAM

funds, retirement accounts, and life savings; preserves

homeownership; promotes jobs and economic growth;

maximizes overall returns to taxpayers; and provides

public accountability. EESA also provided speciﬁc

authority to take certain actions to prevent avoidable

foreclosures.

In light of this statutory direction, Treasury-OFS

established the following as its operational goals:

Ensure the overall stability and liquidity of the 1.

ﬁnancial system.

a. Make capital available to viable institutions.

b. Provide targeted assistance as needed.

c. Increase liquidity and volume in securitization

markets.

Prevent avoidable foreclosures and help preserve 2.

homeownership.

Protect taxpayer interests.3.

Promote transparency.4.

1. Ensure the Overall Stability and Liquidity of the

Financial System

To ensure the overall stability and liquidity of the

ﬁnancial system, Treasury-OFS developed several

programs under the TARP that were broadly available

to ﬁnancial institutions. Under the Capital Purchase

Program (CPP), Treasury-OFS provided capital

infusions directly to banks and insurance companies

deemed viable by their regulators but in need of a

stronger asset base to weather the crisis. e Capital

Assistance Program (CAP) was developed to supple-

ment the Supervisory Capital Assessment Program

(SCAP), or “stress test” of the largest U.S. ﬁnancial

institutions. If these institutions were unable to raise

adequate private funds to meet the SCAP require-

ments, Treasury-OFS stood ready to provide additional

capital.

In addition, Treasury-OFS provided direct aid to

certain ﬁnancial industry participants through the

Targeted Investment Program (TIP) and the Asset

Guarantee Program (AGP), as well as the program

originally known as the Systemically Signiﬁcant Failing

Institutions (SSFI) program. ese programs were de-

signed to mitigate the potential risks to the system as a

whole from the diﬃculties facing these ﬁrms. (Because

SSFI was used only for investments in American

International Group, Inc. (AIG), such investments are

now referred to as the AIG Investment Program.)

Similarly, the Automotive Industry Financing

Program (AIFP) provided funding for General Motors

Corporation (GM) and Chrysler LLC (Chrysler), as

well as their ﬁnancing aﬃliates in order to prevent a

signiﬁcant disruption of the automotive industry that

would have posed a systemic risk to ﬁnancial markets

and negatively aﬀected the real economy. Treasury-

OFS’ actions helped GM and Chrysler undertake

massive and orderly restructurings through the bank-

ruptcy courts that have resulted in leaner and stronger

companies.

e Public-Private Investment Program (PPIP) was

established to facilitate price discovery and liquidity

in the markets for troubled real estate-related assets

as well as the removal of such assets from the balance

sheets of ﬁnancial institutions. In addition to these

initiatives, Treasury implemented the Consumer and

Business Lending Initiative (CBLI) to enhance liquid-

ity and restore the ﬂow of credit to consumers and

small businesses. e primary program through which

the CBLI operated in 2009 was the Term Asset-Backed

Securities Loan Facility (TALF). rough this combi-

nation of tools, the TARP helped strengthen a broad

set of ﬁnancial institutions and markets.

Details on all of these eﬀorts, including

program-speciﬁc results, can be found in Section

ree [Ensuring Stability and Liquidity].

2. Prevent Avoidable Foreclosures and Preserve

Homeownership

To prevent avoidable foreclosures and preserve home-

ownership, Treasury used authority granted under

EESA to establish the Home Aﬀordable Modiﬁcation

Program (HAMP) in February 2009. Other govern-

ment policies have helped keep home mortgage rates

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 2: OVERVIEW AND ANALYSIS OF THE TROUBLED ASSET RELIEF PROGRAM

at historic lows and allowed millions of Americans

to reﬁnance and stay in their homes. But because of

falling housing prices, many responsible homeowners

are unable to reﬁnance. Meanwhile, job losses and

reductions in working hours and beneﬁts are making

it harder for these Americans to pay their mortgages.

HAMP provides incentives to mortgage servicers,

investors, and homeowners to work together to reduce

an eligible homeowner’s monthly payments to levels

that are aﬀordable in light of the homeowner’s current

income. HAMP operations and program detail are

provided in Section Four [Preventing Foreclosures and

Preserving Homeownership].

3. Protect Taxpayer Interests

Government ﬁnancial programs, including TARP,

helped prevent the U.S. ﬁnancial system from collapse,

which could have resulted in a much more severe con-

traction in employment and production. e manner

in which TARP was implemented is also designed to

protect taxpayers and to compensate them for risk. For

example, in exchange for capital injections, recipients

of TARP funds have to adhere to corporate governance

standards, limit executive pay, and provide additional

reporting on lending activity. In addition, Treasury-

OFS generally received preferred equity, which pro-

vides dividends. e dividend rates increase over time

to encourage repayment.

Further, EESA stipulated that the taxpayer beneﬁt as

the institutions which received TARP funds recovered.

In connection with most investments, Treasury-OFS

also receives warrants for additional securities in the in-

stitutions. Under the broad programs described above,

the Treasury-OFS has priority over existing sharehold-

ers of TARP recipients for which TARP holds equity

investments. is gives taxpayers the ability to share in

the potential upside along with existing shareholders.

Finally, the Treasury-OFS seeks to achieve the goal of

protecting the taxpayer through the eﬀective manage-

ment and disposition of all TARP investments, as

detailed in Section Five [Protecting Taxpayer Interests].

4. Promote Transparency

EESA requires transparency and accountability.

Speciﬁcally, EESA requires Treasury to provide

Congress with a variety of reports. ese include

a monthly report to Congress on TARP activity, a

“tranche” report each time Treasury reaches a $50

billion spending threshold, and transaction reports

posted within two days detailing every TARP transac-

tion. In carrying out its operations, Treasury-OFS has

sought to not only meet the statutory requirements

but also to be creative and ﬂexible with respect to

additional transparency initiatives. Treasury-OFS

proactively provides to the public monthly Dividends

and Interest Reports reﬂecting dividends and interest

paid to Treasury-OFS from TARP investments, loans,

and asset guarantees, as well as monthly reports

detailing the lending activity of participants in the

Capital Purchase Program. All of these reports are

publicly available on FinancialStability.gov.

EESA also provided for extensive oversight of the

TARP, including by the Congressional Oversight

Panel, the Special Inspector General for the TARP,

and the Government Accountability Oﬃce. In addi-

tion, Treasury-OFS oﬃcials frequently testify before

Congress on the progress of TARP programs, and

Treasury-OFS staﬀ provide brieﬁngs to Congressional

staﬀ on programmatic developments.

Further details on these eﬀorts are provided in Section

Six [Promoting Transparency].

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 2: OVERVIEW AND ANALYSIS OF THE TROUBLED ASSET RELIEF PROGRAM

TARP TIMELINE

e following timeline illustrates major events in the implementation of the TARP.

TARP

Oct. 3, 2008 Congress

passes EESA, which

authorizes TARP

Nov. 10, 2008

Treasury an -

nounces that it

will purchase $40

billion in senior

preferred stock

from AIG

Jan. 27, 2009

Treasury

announces new

stepped up

rules to limit the

interests of lobby -

ists and special

interests in the

EESA process

Feb. 25, 2009

Treasury

announces

the Capital

Assistance

Program

June 17, 2009

Ten of the largest banks

repaid their CPP invest -

ments for over $68

billion in repayments to

Treasury

Feb. 4, 2009

Treasury issues

new guidelines

on executive

compensa -

tion for ﬁrms

participating in

TARP

Mar. 3, 2009

Treasury and the

Federal Reserve

launch TALF

Oct. 8, 2009

Treasury announces

a milestone of more

than 500,000 trial

loan modiﬁcations

in progress under

the Making Home

Aﬀordable Program

Sep. 30, 2009

Treasury announces

itial closings of

Legacy Securities

PPIP funds

Feb. 10, 2009

Treasury

announces

the Financial

Stability Plan

Mar. 23, 2009

Treasury and the

Federal Reserve

announce the Public-

Private Investment

Program (PPIP)

Oct. 21, 2009

President Obama

announces new

initiatives to

make it easier for

community banks

to lend to small

businesses

Feb. 17, 2009

Treasury releases

its ﬁrst Monthly

Lending and

Intermediation

Snapshot

May 15, 2009

Treasury receives $2.8

billion in dividend

payments from TARP

investments, the largest

amount of dividends

received in one day

Oct. 22, 2009

Special Master for

TARP Executive

Compensation

issues ﬁrst rulings

Nov. 9, 2009

Treasury announces

closure of Capital

Assistance Program

with no invest -

ments having been

made

Nov. 19, 2009

Treasury announces

its intention to

dispose of sev -

eral warrant positions

received in consider -

ation for investments

made under the CPP

Feb. 18, 2009

reasury announces the

Homeowner Aﬀord -

ability and Stability

Plan, which includes the

Home Aﬀordable

Modiﬁcation Program

June 1, 2009

Treasury releases its

ﬁrst CPP Monthly

Lending Report

Nov. 23, 2008

Treasury

announces the

Targeted Invest -

ment Program

(TIP) and Asset

Guarantee Pro -

gram (AGP)

Nov. 25, 2008

Treasury

announces it

will allocate

$20 billion to

back the Term

Asset-backed

Securities Loan

Facility (TALF)

Dec. 19, 2008

Treasury announces

the Auto

motive

Industry Financing

Program (AIFP)

and its plan for

stabilizing the na -

tion’s automotive

industry

Jan. 16, 2009

Treasury

announces

additional

executive

compensation

rules under

TARP

Oct. 14, 2008

Treasury announces executive com -

pensation rules under TARP

Oct. 14, 2008

Treasury announces the Capital Purchase Program

(CPP) and intention to purchase up to $250 billion in

preferred stock from ﬁnancial institutions

Timeline

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 2: OVERVIEW AND ANALYSIS OF THE TROUBLED ASSET RELIEF PROGRAM

FY 2009 FINANCIAL SUMMARY

FOR TARP

e EESA provided authority for the TARP to purchase

or guarantee up to $700 billion in troubled assets.

Treasury-OFS used this authority to help strengthen

the U.S. ﬁnancial system, restore health and liquidity

to credit markets to facilitate borrowing by consumers

and businesses, and prevent avoidable foreclosures in the

housing market. While the TARP should be evaluated

primarily based on its impact on stabilizing the ﬁnancial

system, a critical factor in the analysis is cost. While

EESA provided $700 billion in authority, the TARP has

not cost taxpayers $700 billion. Treasury-OFS used the

authority to make investments to stabilize the ﬁnancial

system and expects that much of the funding will be

repaid. While some of the TARP investments may result

in a cost, others are estimated to produce net income.

Treasury-OFS tracks costs in accordance with Federal

budget procedure. First, amounts are allocated or

budgeted to certain programs or needs within the

TARP. Allocations may change over time as needs are

reevaluated. Second, Treasury-OFS enters into legally

binding “obligations” to invest or spend the funds.

ird, funds are disbursed over time pursuant to the

obligations. In any given case, it is possible that the full

amount allocated will not be obligated, and that the

full amount obligated will not be disbursed.

Based on operations for the period ended September 30,

2009, Treasury-OFS reports the following key results:

Treasury-OFS entered into obligations with a face •

value of $454 billion in TARP authority during

the ﬁscal year.

In ﬁscal year 2009, Treasury-OFS disbursed $364 •

billion in TARP funds to make loans and equity

investments, and reported net cost of operations of

$41.6 billion.

During ﬁscal year 2009, Treasury-OFS received •

$72.8 billion of repayments on certain investments

and loans made early in FY 2009.

2 e Helping Families Save eir Homes Act of 2009, Pub. L.

No. 111-22, Div. A, amended the act and reduced the maximum

allowable amount of outstanding troubled assets under the act by

almost $1.3 billion, from $700 billion to $698.7 billion.

At September 30, 2009, Treasury-OFS reported •

$240 billion for the value of loans, equity invest-

ments, and asset guarantees.

Treasury-OFS’ FY 2009 net cost of operations of

$41.6 billion includes the total estimated net cost

related to loans, equity investments and asset guaran-

tees. e total ultimate cost of the TARP is expected to

be higher because additional investments and disburse-

ments have been made or will be made after FY 2009.

Due to its program structure, the $50 billion HAMP

has delayed payments as well as a long disbursement

cycle so the FY 2009 amounts include only $2 million

in cost. In addition, AIG has drawn an additional

$2.1 billion on its $29.8 billion equity capital facility

since September 30, 2009, and may draw down the

additional funds available to it,which may result in

additional cost. Including these costs as well as the

Public-Private Investment Program and other costs is

likely to signiﬁcantly increase the estimated lifetime net

cost for TARP. For programs where funds have been

obligated but not yet disbursed, the future outlays in

some cases are dependent on program subscription or

other uncertain factors. In addition, new commitments

may be made under TARP prior to EESA’s expiration.

As described further throughout this report, the valu-

ation of the TARP investments will naturally change

based on many factors.

As of September 30, 2009, Treasury-OFS currently

projects that four programs will produce a net return

to taxpayers. e Capital Purchase Program, the

Targeted Investment Program, the Asset Guarantee

Program, and the Consumer and Business Lending

Initiative had reported net income of $19.5 billion.

Also, as of September 30, 2009, Treasury-OFS reports

that two programs—the AIG Investment Program and

the Automotive Industry Financing Program—will

have net costs to taxpayers of $60.9 billion. Taking

into consideration the gains, the total net cost for

TARP to taxpayers, based on disbursements made as

of September 30, 2009, is reported to be $41.4 billion.

Accrued expenses for the HAMP as of September 30,

2009, of $2 million and administrative expenses for

the year of $167 million bring the total estimated net

costs to $41.6 billion, as shown in Table 1.

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 2: OVERVIEW AND ANALYSIS OF THE TROUBLED ASSET RELIEF PROGRAM

TABLE 1: NET INCOME (C0ST) OF TARP OPERATIONS

FOR THE PERIOD ENDED SEPTEMBER 30, 2009

($ IN MILLIONS)

Programs with Estimated Subsidy Income

Capital Purchase Program 15,033

Targeted Investment Program 1,927

Asset Guarantee Program 2,201

Consumer and Business Lending Initiative 339

Net Income (Cost) from Programs Above 19,500

Programs with Estimated Subsidy (Cost)

American International Group, Inc.

Investments (30,427)

Automotive Industry Financing Program (30,477)

Net (Cost) of Two Programs Above (60,904)

Total Net Subsidy Income (Cost) (41,404)

Additional TARP (Costs)

Home Affordable Modiﬁcation Program (2)

Administrative Costs (167)

Total Net (Costs) of TARP Operations (41,573)

Over time the ultimate cost of the TARP programs

may change. As described later in this MD&A, and in

Treasury-OFS audited ﬁnancial statements, these esti-

mates are based in part on currently projected economic

factors. Forecasts for these economic factors will likely

change, either increasing or decreasing the ultimate cost

of the TARP. HAMP expenses will increase signiﬁcantly

over time, as more modiﬁcations of mortgage payments

are ﬁnalized between mortgage servicers and borrowers,

resulting in increased incentive payments. ese pay-

ments are described in Section Four.

Table 2 provides a ﬁnancial summary for TARP

programs in FY 2009. For each program, the table

gives the face value of the amount obligated by each

program, the amount actually disbursed during the

ﬁscal year, repayments to Treasury-OFS during the

period from program participants, net outstanding

balance (the amount on the original investment that is

due to be repaid to Treasury) on September 30, 2009,

and cash inﬂows on the investments for each program

in the form of dividends, interest or other fees. As of

ﬁscal year end 2009, approximately $317 billion of

the $700 billion in purchase and guarantee authority

remained available, taking into account $72.8 billion

in repayments. However, this does not include the

full planned amounts for the HAMP, Public Private

Investment Program (PPIP), Consumer and Business

Lending Initiative, and other programs.

TABLE 2: TARP SUMMARY

AS OF SEPTEMBER 30, 2009

($ IN BILLIONS)

Purchase Price or

Guarantee Amounts

Total $

Disbursed

Investment

Repayments

Outstanding

Balance

Cash

Received from

Investments

Capital Purchase Program $ 204.6 $ 204.6 $ 70.7 $ 133.9 $ 9.7

Targeted Investment Program $ 40.0 $ 40.0 $ 0.0 $ 40.0 $ 1.9

Asset Guarantee Program $ 5.0 $ 0.0 $ 0.0 $ 0.0 $ 0.5

American International Group Investment

$ 69.8 $ 43.2 $ 0.0 $ 43.2 $ 0.0

Term Asset-Backed Securities Loan Facility $ 20.0 $ 0.1 $ 0.0 $ 0.1 $ 0.0

Public Private Investment Program

$ 6.7 $ 0.0 $ 0.0 $ 0.0 $ 0.0

Automotive Industry Financing Program $ 81.1 $ 75.9 $ 2.1 $ 73.8 $ 0.7

Home Affordable Modiﬁcation Program

$ 27.1 $ 0.0 NA NA $ 0.0

Totals $ 454.3 $ 363.8 $ 72.8 $ 291.0 $ 12.7

1/ This table shows the TARP activity for the period ended September 30, 2009, on a cash basis. Cash received from investments includes dividends and interest

income reported in the Statement of Net Cost and proceeds from repurchases of warrants and warrant preferred stock.

2/ The disbursed amount is lower than purchase price because of the $29.8 billion facility available to AIG of which only $3.2 billion was drawn at September

30, 2009. AIG drew an additional $2.1 billion from the facility on November 13, 2009.

3/ Reﬂects the face value of obligations as of September 30, 2009. As of that date, no fund managers had made any investments and Treasury-OFS expects to

provide a total of $30 billion in funding to the nine fund managers selected for PPIP.

4/ Reﬂects legal commitments to servicers as of September 30, 2009. Treasury-OFS has allocated $50 billion in total for the program. Payments are made to

servicers once temporary modiﬁcations are made permanent.

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 2: OVERVIEW AND ANALYSIS OF THE TROUBLED ASSET RELIEF PROGRAM

Most of the TARP funds have been used to make in-

vestments in preferred stock or make loans. Treasury-

OFS has generally received dividend on the preferred

stock and interest payments on the loans from the

institutions participating in TARP programs. ese

payments are a return on Treasury’s TARP invest-

ments. For the period ended September 30, 2009,

Treasury-OFS received a total of $9.8 billion in

dividends, interest and fees. Table 3 shows the break-

down of receipts for the period ended September 30,

2009 for all TARP programs combined.

Treasury-OFS also receives warrants in connection

with most of its investments, which provides an op-

portunity for taxpayers to realize an upside on invest-

ments. Treasury-OFS has begun to dispose of some of

its warrants as institutions repay their preferred share

investments. For the period ended September 30,

2009, twenty-four institutions have already repurchased

their warrants which generated $2.9 billion in receipts.

Table 4 provides information on the institutions that

have fully repurchased the CPP preferred shares and

repurchased warrants as well as those that have fully

repurchased their preferred shares but not their warrants.

(Treasury-OFS receives warrants for preferred stock in

the case of most private institutions, which are exer-

cised immediately. e receipts from warrants include

receipts from the repayment of such preferred shares,

or “warrant preferred stock”.)

TABLE 3: TARP FY 2009 RECEIPTS AND

REPAYMENTS ON INVESTMENTS/LOANS

FOR THE PERIOD ENDED SEPTEMBER 30, 2009

($ IN BILLIONS)

Dividends, Interest, Fees and Warrants Repurchases

Dividends and Fees $ 9.6

Interest $ 0.2

Repurchases of Warrants and Warrant Preferred Stock $ 2.9

Additional Notes $ 0.0

Subtotal $ 12.7

Investment/Loan Repayments

Repurchases/Repayments on preferred stock $ 70.7

Loan Principal Repaid $ 2.1

Subtotal $ 72.8

Grand Total $ 85.5

1/ This table shows the TARP activity for the period ended September 30,

2009, on a cash basis. The table includes receipts and repayments that

do not result in revenue in the Statement of Net Cost.

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL REpORT • FISCAL YEAR 2009

Section 2: overview and analySiS of the troubled aSSet relief Program

TABLE 4: REPURCHASES OF PREFERRED SHARES

($ IN MILLIONS)

Institution

Proceeds from

Preferred Shares

Redeemed

Total

Dividends

Received

Proceeds

from Warrants

Repurchased

Institutions with fully repurchased preferred shares and repurchased warrants or warrant preferred stock

Alliance Financial Corporation $ 26.9 $ 0.5 $ 0.9

American Express Company $ 3,388.9 $ 74.4 $ 340.0

Bancorp Rhode Island, Inc. $ 30.0 $ 0.9 $ 1.4

Bank of New York Mellon $ 3,000.0 $ 95.4 $ 136.0

BB&T Corp. $ 3,133.6 $ 92.7 $ 67.0

Berkshire Hills Bancorp, Inc. $ 40.0 $ 0.9 $ 1.0

Centra Financial Holdings, Inc. $ 15.0 $ 0.2 $ 0.8

First Manitowoc Bancorp, Inc. $ 12.0 $ 0.2 $ 0.6

First Niagara Financial Group $ 184.0 $ 4.8 $ 2.7

First ULB Corp. $ 4.9 $ 0.1 $ 0.2

FirstMerit Corporation $ 125.0 $ 1.8 $ 5.0

Goldman Sachs Group, Inc. $ 10,000.0 $ 318.1 $ 1,100.0

HF Financial Corp. $ 25.0 $ 0.7 $ 0.7

IberiaBank Corporation $ 90.0 $ 1.5 $ 1.2

Independent Bank Corp. $ 78.2 $ 1.1 $ 2.2

Morgan Stanley $ 10,000.0 $ 318.1 $ 950.0

Northern Trust Corporation $ 1,576.0 $ 46.6 $ 87.0

Old Line Bancshares, Inc. $ 7.0 $ 0.2 $ 0.2

Old National Bancorp $ 100.0 $ 1.5 $ 1.2

SCBT Financial Corporation $ 64.8 $ 1.1 $ 1.4

Somerset Hills Bancorp $ 7.4 $ 0.1 $ 0.3

State Street Corporation $ 2,000.0 $ 63.6 $ 60.0

Sun Bancorp, Inc. $ 89.3 $ 1.1 $ 2.1

U.S. Bancorp $ 6,599.0 $ 195.2 $ 139.0

Subtotal $ 40,597.0 $ 1,220.7 $ 2,900.9

Institutions with fully repurchased preferred shares but warrants are outstanding

Bank of Marin Bancorp $ 28.0 $ 0.5 $ —

Capital One Financial Corp $ 3,555.2 $ 105.2 $ —

Centerstate Banks of Florida Inc. $ 27.9 $ 1.2 $ —

CVB Financial Corp. $ 130.0 $ 4.7 $ —

F.N.B. Corporation $ 100.0 $ 3.3 $ —

First Community Bancshares Inc. $ 41.5 $ 1.3 $ —

JPMorgan Chase & Co. $ 25,000.0 $ 795.1 $ —

Manhattan Bancorp $ 1.7 $ 0.1 $ —

Shore Bancshares, Inc. $ 25.0 $ 0.3 $ —

Signature Bank $ 120.0 $ 1.8 $ —

Sterling Bancshares, Inc. $ 125.2 $ 2.5 $ —

TCF Financial Corporation $ 361.2 $ 7.9 $ —

Texas Capital Bancshares, Inc. $ 75.0 $ 1.2 $ —

Washington Federal S and L Association $ 200.0 $ 5.4 $ —

Wesbanco, Inc. $ 75.0 $ 2.9 $ —

Subtotal $ 29,865.6 $ 933.4 $ —

Institutions making partial repurchases of preferred shares and outstanding warrants

State Bankshares, Inc. $ 12.5 $ 1.6 $ —

Valley National Bancorp $ 200.0 $ 11.2 $ —

Westamerica Bancorporation $ 41.9 $ 2.2 $ —

Subtotal $ 254.4 $ 15.0 $ —

Total $ 70,717.0 $ 2,169.1 $ 2,900.9

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 2: OVERVIEW AND ANALYSIS OF THE TROUBLED ASSET RELIEF PROGRAM

e ultimate cost of the TARP will not be known for

some time. e ﬁnancial performance of the programs

will depend on many factors such as future economic

and ﬁnancial conditions, and the business prospects of

speciﬁc institutions. Table 5 provides information on

the estimated values of the TARP investments by pro-

gram, as of the end of FY 2009. (HAMP is excluded

from the chart because no repayments are required).

e estimates in Table 5 are based on assumptions

regarding future events, which are inherently uncer-

tain. e estimates are sensitive to a number of factors,

including changes in general economic conditions,

speciﬁc stock price volatility of the entities in which

Treasury-OFS has an equity interest, estimates of

expected defaults, and prepayments. If Treasury-OFS

experiences higher than currently projected early

repayments, TARP’s ultimate cost will decline further.

Sections Seven and Eight of this report describe the

methods used to determine the estimates.

In Table 5 below, the Outstanding Balance column repre-

sents the amounts paid by Treasury-OFS to acquire the

loans and equity investments that were outstanding as

of ﬁscal year end. e Estimated Value of Investment col-

umn represents the present value of net cash inﬂows that

Treasury-OFS estimates it will receive from the loans and

equity investments. For equity securities, this amount

represents fair value. e total diﬀerence of $53.1 billion

between the two columns is considered the “subsidy cost

allowance” under the Federal Credit Reform Act meth-

ods Treasury-OFS follows for budget and accounting

purposes (see Section Seven for further discussion).

3 To reconcile the subsidy cost allowance to the total subsidy cost

amount of $41.4 billion shown in Table 1 and on the Statement

of Net Cost, the $53.1 billion is adjusted by intragovernmental

interest cost, the net present value of the Asset Guarantee

Program, and certain inﬂows from the loans and equity invest-

ments (e.g., dividends, interest, proceeds from repurchase of

warrants by ﬁnancial institutions, and other realized fees).

TABLE 5: SUMMARY OF TARP INVESTMENTS

($ IN BILLIONS)

Program

Outstanding

Balance

Estimated

Value of

Investment

9/30/09

Capital Purchase Program $ 133.9 $ 141.7

Targeted Investment Program $ 40.0 $ 40.3

AIG Investment Program $ 43.2 $ 13.2

Automotive Industry Financing Program $ 73.8 $ 42.3

Term Asset-Backed Securities Loan

Facility

$ 0.1 $ 0.4

Total $ 291.0 $ 237.9

1/ Before subsidy cost allowance

Table 6 below shows the estimated net asset value for

the top ten CPP investments held as of September

30, 2009. e estimates shown below include only

estimates of the value of the preferred stock for each

institution. Treasury-OFS also holds warrants for each

institution and those warrants have additional value.

As Treasury-OFS will still need to negotiate a sale

price for the warrants, the estimated warrant value of

each institution cannot be disclosed without harming

Treasury-OFS’ ability to secure the best return for tax-

payers. rough an exchange process, Treasury-OFS

received common shares at $3.25 per share for the

originally issued preferred shares in Citigroup which

had an initial investment of $25 billion. e holdings

of Citigroup common shares had a market value of

$37.23 billion ($4.84 per share) as of September 30,

2009.

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 2: OVERVIEW AND ANALYSIS OF THE TROUBLED ASSET RELIEF PROGRAM

TABLE 6: TOP TEN CPP INVESTMENTS

($ IN BILLIONS)

Institution

Original

Investment

Estimated Net Asset

Value (excluding

warrants)

as of 9/30/09

Citigroup (Common Shares) $ 25.00 $ 37.23

Bank of America $ 25.00 $ 22.45

Wells Fargo $ 25.00 $ 23.47

PNC Financial $ 7.58 $ 7.17

SunTrust Bank $ 4.85 $ 4.14

Regions Bank $ 3.50 $ 3.01

Fifth Third Bancorp $ 3.41 $ 3.05

Hartford Financial $ 3.40 $ 3.11

Keycorp $ 2.50 $ 1.94

CIT Group $ 2.33 $ 0

Total $ 102.57 $ 105.57

1/ Does not reﬂect the impact of management’s expectation of an additional

$30 billion in early repayments.

Market conditions and the performance of speciﬁc

ﬁnancial institutions will be critical determinants of

the TARP’s ﬁnal cost. e changes in Treasury-OFS

estimates during the period ended September 30, 2009,

provide a good illustration of this impact. e estimated

net cost of programs implemented to date declined by

approximately $110 billion as compared to the estimates

made while the programs were being initiated in the

heart of the ﬁnancial market crisis last winter in large

part due to market stabilization seen to date and actual

and forecast repayments occurring at a faster rate than

originally anticipated. In the CPP program for example,

when the cost of the program was ﬁrst estimated by the

Congressional Budget Oﬃce and Treasury-OFS last

winter, the expectation was that the program would

lose about 18-22 percent.

In large part because of the

improved market conditions, Treasury-OFS estimated a

net income of about $15.0 billion for the period ended

September 30, 2009. Based on the repayments to date

and current market conditions, the major bank stabi-

lization programs, including the CPP and the TIP, are

4 “e Troubled Asset Relief Program: Report on Transactions

rough December 31, 2008.” Congressional Budget Oﬃce.

January 2009.

currently estimated to provide a net ﬁnancial return to

the taxpayer. e outstanding $174 billion in CPP and

TIP balances are estimated to be worth approximately

$182 billion. However, the outlook for repayments from

the auto industry investments and the AIG Investment

Program is less positive. Treasury-OFS estimates the

$117 billion originally invested in these programs is

currently valued at approximately $56 billion. ese

programs may result in a net ﬁnancial loss to taxpayers.

Table 7 provides information as to how the estimated

cost of the TARP has changed during the period ended

September 30, 2009. e positive amounts reﬂect an es-

timated income whereas negative amounts reﬂect a cost

or expense. For example, the $204.6 billion invested in

the CPP program was originally expected to cost about

$57 billion (in net present value cost). For the period

ended September 30, 2009, Treasury-OFS reported net

income of about $15 billion for CPP. is amount rep-

resents primarily the combination of actual dividends,

interest and realized fees, and the excess of estimated fair

value as of September 30, 2009, of the CPP investments

over original cost. Additional explanatory material on

how these estimates were developed can be found in

Sections Seven [Financial Accounting Policy] and Eight

[TARP Valuation Methodology].

TABLE 7: ESTIMATED CHANGE IN NET COST FOR THE

TARP PROGRAMS

($ IN BILLIONS)

Original

Estimate

Current

Estimate

Net

Change

Capital Purchase Program - 57.4 + 15.0 + 72.4

Targeted Investment Program - 19.6 + 1.9 + 21.5

Asset Guarantee Program + 1.0 + 2.2 + 1.2

AIG Investment Program - 31.5 - 30.4 + 1.1

Automotive Industry Financing

Program

- 43.7 - 30.4 + 13.3

Term Asset-Backed Securities

Loan Facility

+ 0.1 + 0.3 + 0.2

Subtotal - 151.1 - 41.4 + 109.7

Home Affordable Modiﬁcation

Program

- 27.1 - 27.1 0.0

Total - 178.2 - 68.5 + 109.7

1/ Original estimates completed on or near the initiation of each program

and adjusted for modiﬁcations. Amounts shown in both original and

current estimates are based on total program disbursements through FY

2009.

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 2: OVERVIEW AND ANALYSIS OF THE TROUBLED ASSET RELIEF PROGRAM

THE IMPACT OF TARP

Measuring the impact of the TARP in isolation is chal-

lenging. e health of the overall system and its impact

on the U.S. economy are the most important metrics

by which Treasury-OFS can measure the eﬀectiveness

of these policies. However, the cost of the ﬁnancial

system collapse that was likely averted by TARP and

the other government actions taken in the fall of 2008

and since then will never be known. Moreover, it is

diﬃcult to measure separately the impact of TARP as

it was part of a coordinated government response to

restore conﬁdence in our ﬁnancial system. A few TARP

programs were uniquely targeted to speciﬁc markets

and institutions. In those instances, Treasury-OFS can

measure performance more directly.

Conﬁdence in the stability of our ﬁnancial markets and

institutions has improved dramatically. Interbank lend-

ing rates, which reﬂect stress in the banking system,

have returned to levels associated with more stable

times. For example, the spread of one-month Libor to

the overnight index swap fell from a peak of about 340

basis points

last fall to roughly 10 basis points at the

end of October 2009, as shown in Figure 1. Credit-

default swap spreads for ﬁnancial institutions, which

measure investor conﬁdence in their health, have also

fallen signiﬁcantly. A measure of credit-default swaps

for the largest U.S. banks reached 450 basis points last

fall, as shown in Figure 2, and is just over 100 basis

points today. e TARP was a necessary step, but not

the only step, to achieving this recovery.

5 A basis point is one hundredth of a percentage point or 0.01

percent so 100 basis points equals 1 percent. Basis points are

often used to measure small changes in interest rates or yields on

ﬁnancial instruments.

FIGURE 1. Libor-OIS Spread (basis points)

Basis Points

Lehman FSP

1-Month 3-Month

100

150

200

250

300

350

400

2006 2007 2008 2009

Source: Bloomberg

FIGURE 2. Credit Default Spreads for Financial Institutions

(basis points)

Basis Points

Lehman FSP

100

150

200

250

300

350

400

450

500

2006 2007 2008 2009

Source: Bloomberg

Notes: Includes Bank of America, Citigroup, Goldman Sachs, JPMorgan,

Morgan Stanley, and Wells Fargo.

At the same time, borrowing costs have declined for

many businesses, homeowners, and municipalities.

Investment-grade corporate bond rates have fallen by

over 70 percent since last fall, and high-yield bond rates

have fallen by more than half. Fears of default on these

bonds have receded, providing further relief on prices.

e CDX investment-grade index (see Figure 3), an ag-

gregate measure of credit-default swaps for highly-rated

companies, has fallen about 35 percent from its October

2008 peak. Further, conventional 30-year mortgage rates

(see Figure 4) remain under ﬁve percent at historic lows.

AAA municipal bond rates are three percent, down from

ﬁve percent last fall.

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 2: OVERVIEW AND ANALYSIS OF THE TROUBLED ASSET RELIEF PROGRAM

FIGURE 3. Corporate Bond Spreads (basis points)

Basis Points

AA 5-Year BBB 5-Year

100

200

300

400

500

600

2006 2007 2008 2009

Source: Bloomberg

FIGURE 4. Conventional 30-Year Mortgage Rate (percent)

Basis Points

1985–1997 1998–2009

Source: Federal Reserve

As borrowing costs have come down, businesses have

raised about $900 billion in investment-grade debt and

over $100 billion in high-yield debt this year. While

much of the new issuance early this year was supported

by the federal government, private investors have

funded most new corporate debt in recent months. In

particular, banks have raised substantial capital from

private sources following the release of the results from

the federal government “stress test” of major U.S.

ﬁnancial institutions. Since the results were released,

banks have raised $80 billion in new common equity

and over $40 billion in debt that is not guaranteed by

the federal government.

FIGURE 5. Corporate Bond Issuance (US$ billions)

Dollars (in billions)

Government Guaranteed Not Guaranteed

$40

$80

$120

$160

$200

2008 2009

Source: JPMorgan

FIGURE 6. Net Common Issuance by U.S. Banks (US$ billions)

Dollars (in billions)

-$20

-$10

$10

$20

$30

$40

$50

$60

2001 2002 2003 20042000 2005 2006 2007 2008 2009

Source: SNL Financial

Notes: Excludes equity generated through asset sales and preferred

conversions. Negative ﬁgures represent net repurchases of equity.

Securitization markets that provide important channels

of credit for consumers and small businesses have also

improved, in large part because of programs launched

under the TARP. Announcements about TALF helped

narrow spreads in these markets even before the

program began operating. is trend has continued,

with spreads on TALF-eligible asset-backed securities

(ABS) back to pre-crisis levels today, and spreads on

non-TALF-eligible ABS more than 90 percent oﬀ their

peaks from last fall. Issuance of ABS backed by con-

sumer and business loans has averaged $14 billion per

month since the government launched TALF in March

2009, compared to about $1.6 billion per month in

the six months prior to the program’s launch. Issuance

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 2: OVERVIEW AND ANALYSIS OF THE TROUBLED ASSET RELIEF PROGRAM

not supported by the federal government program

accounted for about 40 percent of all such issuance in

October 2009. However, the overall size of securitiza-

tion markets remains small, relative to pre-crisis levels.

FIGURE 7. Spreads Between TALF-Eligible ABS and Treasury

Securities (basis points)

AAA 2-Yr/Auto ABS AAA 2-Yr/Credit Card ABS

Basis Points

Lehman FSP

100

200

300

400

500

600

700

800

2006 2007 2008 2009

Source: JPMorgan

FIGURE 8. Issuance of ABS Backed by Consumer and Small

Business Loans (US$, billions)

Dollars (in billions)

TALF-Eligible ABS Standard ABS

$10

$15

$20

$25

2007 2008 2009

Average Pre-TALF

(Sep. 2008 - Feb. 2009)

Average Post-TALF

(Mar. 2009 - Oct. 2009)

JAN

FEB

MAR

APR

MAY

JUN

JUL

AUG

SEP

DEC

AUG

JUN

JUL

AUG

SEP

OCT

NOV

OCT

Source: Federal Reserve

Legacy security prices have improved signiﬁcantly this

year. is is due in part to general market improve-

ment and in part to announcements for the Securities

PPIP. Most of the Public-Private Investment Funds

(PPIFs) have now been formed and are starting to

purchase legacy assets from banks. e PPIFs should

continue to contribute to price improvements in these

markets.

Stock markets have recovered substantial ground since

March, following 18 months of steep declines. e

S&P 500 has risen over 60 percent over the past six

months, and share prices for ﬁnancial companies in the

S&P 500 have doubled. At the same time, volatility in

stock markets is trending lower and approaching his-

torical norms. e implied volatility of the S&P 500,

as measured by the Chicago Board Options Exchange’s

Market Volatility (VIX), has fallen by over 70 percent

since its peak in October 2008 and is roughly at its

average since 1990. ese improvements reﬂect broad-

based conﬁdence not only in the ﬁnancial system, but

also the prospects for economic recovery.

Indeed, the American economy is growing again. It

expanded at an annual rate of 2.8 percent in the third

quarter of 2009, snapping four consecutive quarters

of negative growth. And private economists generally

expect moderate growth over the next year.

Meanwhile, housing markets are showing some signs of

stabilizing and household wealth is recovering, which

should stimulate consumer spending—vital to American

economic growth. anks in part to federal government

ﬁnancial policies, mortgage rates remain near historic

lows. Home prices have ticked up over the past six

months, after showing consistent declines since 2006.

For example, the seasonally adjusted S&P/Case-Shiller

U.S. National Home Price Index rose by 1.8 percent

and 1.9 percent in the second and third quarters,

respectively. Since March, sales of existing single-family

homes have increased by 20 percent and over 2.7

million mortgages have been reﬁnanced. Since Treasury-

OFS announced its Making Home Aﬀordable program,

over 650,000 trial modiﬁcations under HAMP have

been initiated, with roughly a few hundred completing

the trial period by September 30, 2009. Household net

worth increased by $2 trillion in the second quarter, the

ﬁrst increase since the third quarter of 2007.

However, the ﬁnancial and economic recovery faces

signiﬁcant headwinds. Although the unemployment

rate fell in November, it remains high at 10 percent.

is places enormous pressure on homeowners and

American families. Indeed, delinquencies of subprime

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 2: OVERVIEW AND ANALYSIS OF THE TROUBLED ASSET RELIEF PROGRAM

residential mortgages reached over 26 percent and con-

forming mortgages nearly seven percent in the third

quarter. And although RealtyTrac’s October report

shows a third straight month of decreasing foreclosure

activity, foreclosures are still up nearly 19 percent since

October 2008. Moreover, according to First American

CoreLogic, roughly one in four homeowners owed

more on their mortgages than the properties were

worth in the third quarter of 2009.

Bank lending also continues to contract, as shown in

Figure 10. In the third quarter, commercial and industrial

(C&I) loans outstanding contracted at an annual rate

of 27 percent, and commercial real estate (CRE) loans

outstanding at 8 percent. Small businesses rely on banks

for 90 percent of their ﬁnancing. Unlike large corpora-

tions, few can substitute credit from securities issuances.

e contraction in bank lending reﬂects a combination

of weak demand for credit and tightening standards

at the banks. e former is a function of the recession

preceded by a period of over expansion. e latter is

in part a function of the fact that many banks face

continued losses on outstanding exposures, in particular

in commercial real estate. FDIC-insured commercial

banks reported that net charge-oﬀs—that is, losses

that have occurred—increased to 2.9 percent as a share

of loans and leases in the third quarter, up from 0.6

percent before the recession. And delinquencies of com-

mercial real estate loans were nine percent in the third

quarter and increasing.

FIGURE 9. Mortgage Delinquencies (percent)

Subprime

Conforming

Subprime Conforming

12%

16%

20%

24%

28%

1998–2003 2004–2009

Source: Mortgage Bankers Association

FIGURE 10. Bank Loans, C&I and CRE (percent change, end of period)

C&I CRE

Percent

-25%

-20%

-15%

-10%

-5%

10%

15%

20%

2004 2005 2006 2007 2008 2009

Source: Federal Reserve

Bank failures and the number of problem banks

continue to increase. ere have been over 120 bank

failures through November 20, 2009, compared with

41 over the decade that preceded the current recession.

And the number of banks that the FDIC classiﬁes

as “problem institutions” has reached 552 this year,

compared with 76 in 2007 and 252 in 2008.

Banks’ willingness to lend also has a signiﬁcant impact

on consumer spending and, consequently, economic

growth. Macroeconomic Advisors, a consulting ﬁrm,

found that a 10-point increase in bank’s willingness to

make consumer installment loans yields a 0.3 percent-

age point increase in personal consumption expendi-

tures.

Figure 11 illustrates this relationship between

bank lending attitudes and consumer spending.

6 Macroeconomic Advisers, “Banks’ Willingness to Lend and PCE

Growth,” Oct. 8, 2008.

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 2: OVERVIEW AND ANALYSIS OF THE TROUBLED ASSET RELIEF PROGRAM

FIGURE 11. Banks’ Willingness to Lend and Personal Consumption

Expenditures (percent)

Percent

Percent yr/yr

-8

-4

-6

-2

-80

-40

-60

-20

1966 1971 1976 1981 1986 1991 1996 2001 2006

Real Personal

Consumption

Expenditures (left)

Banks’ Willingness

To Make Consumer

Installment Loans

(right)

Source: Federal Reserve, BEA

In this context, some federal government ﬁnancial

support is still necessary. In particular, the TARP can

help stimulate credit for small businesses and assist

responsible homeowners in avoiding foreclosures.

As discussed in more detail below, Treasury-OFS is

redirecting the TARP to meet these needs. Treasury-

OFS recently launched initiatives to provide capital

to small and community banks, which are important

sources of credit for small businesses. Treasury-OFS is

also working with the Small Business Administration,

Congress, and the small business community to design

other programs that will use TARP funds to get credit

ﬂowing again to these important engines of economic

growth.

EXTERNAL ASSESSMENTS

OF TARP PERFORMANCE

e United States Government Accountability Oﬃce

(GAO) is one of four oversight bodies explicitly desig-

nated by Congress to provide oversight of the TARP.

GAO’s October 2009 anniversary report on the TARP

provides a comprehensive and independent assess-

ment of various aspects of the TARP.

e GAO also

acknowledges that isolating and estimating the eﬀect of

TARP programs is challenging and that improvements

in credit markets cannot be attibuted solely to TARP

programs. e indicators that the GAO has monitored

over the past year suggest that there have been broad

improvements in credit markets since the announce-

ment of CPP, the ﬁrst TARP program. e GAO

notes, speciﬁcally, that:

e cost of credit and perceptions of risk declined •

signiﬁcantly in interbank, corporate debt, and

mortgage markets;

e decline in perceptions of risk (as measured by •

premiums over Treasury securities) in the inter-

bank market could be attributed in part to several

federal programs aimed at stabilizing markets that

were announced on October 14, 2008, including

CPP; and

e institutions that received CPP funds in the •

ﬁrst quarter of 2009 saw more improvement in

their capital positions than banks outside the

program.

Additional information on the assessments and activi-

ties of the TARP oversight entities can be found in

Section Nine [Systems, Controls, Legal Compliance

and Oversight].

7 Troubled Asset Relief Program: One Year Later, Actions Are

Needed to Address Remaining Transparency and Accountability

Challenges. Government Accountability Oﬃce. GAO-10-16.

October 8, 2009.

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 3: ENSURING STABILITY AND LIQUIDITY

Section Three:

Ensuring Stability and Liquidity

is section provides a description of each of the

programs established under the TARP to ensure stability

and liquidity, including results for each program to date.

CAPITAL PURCHASE PROGRAM

EESA was originally proposed as a means to buy

mortgage loans, mortgage-backed securities and certain

other assets from banks. However, the authorities

granted under EESA were broadened in the legislative

process to cover any ﬁnancial instrument whose pur-

chase the Secretary of the Treasury, after consultation

with the Chairman of the Federal Reserve, determines

necessary to promote ﬁnancial market stability. Shortly

following passage of EESA, it became clear to the

leaders of many G-7 nations that rapid action was

needed to provide capital to the ﬁnancial system as a

whole. Lending even between banks had practically

stopped, credit markets had shut down, and many

ﬁnancial institutions were facing severe stress. ere

was not suﬃcient time to implement a program to buy

mortgage related assets, which posed diﬃculties related

to valuing such assets and getting the holders of such

assets to sell them at current prices. In this context,

immediate capital injections into ﬁnancial institutions

were a necessary step to avert a potential collapse of the

system.

Given the high level of uncertainty in ﬁnancial markets

and the economy, even strong ﬁnancial institutions

began to hoard capital. Based on various market

indicators, it became clear that ﬁnancial institutions

needed additional capital to sustain a normal ﬂow of

credit to businesses and consumers during the ﬁnancial

turmoil and economic downturn. As a result, Treasury-

OFS launched the Capital Purchase Program (CPP),

its largest and most signiﬁcant program under EESA,

on October 14, 2008. Treasury-OFS initially com-

mitted over a third of the total TARP funding, $250

billion, to the CPP, which it lowered to $218 billion in

March 2009.

e CPP was designed to bolster the capital position

of viable institutions and, in doing so, to build conﬁ-

dence in these institutions and the ﬁnancial system as

a whole. With the additional capital, CPP participants

were better equipped to undertake new lending, even

while absorbing write downs and charge-oﬀs on loans

that were not performing.

Of the $250 billion commitment, Treasury-OFS

invested $125 billion in eight of the country’s largest

ﬁnancial institutions. e remaining $125 billion

was made available to qualifying ﬁnancial institu-

tions (QFIs) of all sizes and types across the country,

including banks, savings associations, bank holding

companies and savings and loan holding companies.

QFIs interested in participating in the program had to

submit an application to their primary federal bank-

ing regulator. e minimum subscription amount

available to a participating institution was one percent

of risk-weighted assets. e maximum subscription

amount was the lesser of $25 billion or three percent of

risk-weighted assets.

Over the weeks and months that followed the an-

nouncement of the CPP, Treasury-OFS provided

capital to 685 institutions in 48 states, including

more than 300 small and community banks, helping

to enable them to absorb losses from bad assets while

continuing to lend to consumers and businesses. e

largest investment was $25 billion while the smallest

was $301,000. To encourage continued participa-

tion by small and community banks, the application

window for CPP was reopened on May 13, 2009, for

banks with less than $500 million in assets, with an

application deadline of November 21, 2009.

Most banks participating in the CPP are to pay

Treasury-OFS a dividend rate of ﬁve percent per year,

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 3: ENSURING STABILITY AND LIQUIDITY

increasing to nine percent a year after the ﬁrst ﬁve

years. In the case of S-corporations, Treasury-OFS

acquires subordinated debentures. Treasury-OFS has

received $6.8 billion in CPP dividend and interest

payments for the period ended September 30, 2009.

As of September 30, 2009, 38 institutions had not

paid full dividends or interest payments. Under the

CPP, Treasury-OFS has a right to elect two directors to

the board of directors of an institution that misses six

or more dividend payments.

One measure of the CPP’s performance is the eﬀect on

lending by CPP participants. Lending typically falls

during a recession, and the current cycle is no excep-

tion. e Federal Reserve Board’s recent article U.S.

Credit Cycles: Past and Present examines how credit vol-

umes have evolved in the current economic downturn

relative to previous business cycle downturns using

the Federal Reserve’s Flow of Funds data.

Signiﬁcant

among the Federal Reserve’s ﬁndings is that despite

many unprecedented aspects of the current ﬁnancial

and economic turbulence, movements in credit vol-

umes in the current recession are similar to historical

patterns. In terms of looking more speciﬁcally at CPP

bank lending, each month Treasury-OFS asks CPP

participants to provide information about their lending

activity. As illustrated by Treasury-OFS’ Lending and

Intermediation Survey, the 22 largest CPP participants

have been able to sustain their lending activities during

this crisis, despite the signiﬁcant headwinds posed by

the recession, including increased bankruptcies, higher

unemployment and falling home prices. Details on the

Bank Lending Surveys can be found at http://www.

nancialstability.gov/impact/surveys.htm.

8 e article “U.S. Credit Cycles: Past and Present” can be found

at the following link: http://www.nancialstability.gov/docs/

CPP/Report/Fed%20US%20Credit%20Cycles%20072409.

pdf.

CAPITAL ASSISTANCE PROGRAM

AND THE SUPERVISORY CAPITAL

ASSESSMENT PROGRAM

In early 2009, the Federal banking agencies conducted

a one-time, forward-looking assessment or “stress

test”—known as the Supervisory Capital Assessment

Program (SCAP)—on the nineteen largest U.S. bank

holding companies (BHCs). e stress test assessed

whether these BHCs had the capital to continue

lending and absorb all potential losses resulting from

a more severe decline in economic conditions than

projected by economic forecasters. After completion of

the SCAP, the banking agencies concluded that ten of

these BHCs needed to raise a total of an additional $75

billion in capital to establish a buﬀer for more adverse

conditions. e remaining nine BHCs were found to

have suﬃcient capital to weather more adverse market

conditions.

In conjunction with this forward-looking test,

Treasury-OFS announced that it would provide capital

through the Capital Assistance Program (CAP) to

banks that needed additional capital but were unable

to raise it through private sources. e capital pro-

vided by the CAP would take the form of convertible

preferred stock. is program was made available to

all QFIs, not solely to those banks that underwent the

SCAP.

e design of the tests and their results were made

public, a highly unusual step that was taken because

of the unprecedented need to reduce uncertainty and

restore conﬁdence. By identifying and quantifying

potential capital shortfalls and requiring that additional

capital be raised to eliminate any deﬁciencies, the

SCAP ensured that these ﬁnancial institutions would

have suﬃcient capital to sustain their role as interme-

diaries and continue to provide loans to creditworthy

borrowers even if economic conditions suﬀered a severe

and extended deterioration.

Of the ten bank holding companies that were identi-

ﬁed as needing to raise more capital, nine have met or

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 3: ENSURING STABILITY AND LIQUIDITY

exceeded the capital raising requirements through pri-

vate eﬀorts. In the aggregate, these ﬁrms have increased

requisite capital by over $77 billion since the results of

the SCAP were announced. Treasury-OFS may provide

additional capital to GMAC under the Auto Industry

Financing Program to assist its fundraising eﬀorts to

meet the requirements of the SCAP.

Since the stress test results were released in early May,

banks of all sizes have raised over $80 billion in com-

mon equity and $40 billion in debt that is not guaran-

teed by the government. Importantly, that capital rais-

ing has enabled more than 40 banks to repay the TARP

investments made by Treasury-OFS. Treasury-OFS

has received over $70 billion in principal repayments,

and $9.7 billion in dividends, interest, warrants and

fees from CPP participants. In addition, Treasury-OFS

estimates that another $70 billion in repayments from

all TARP investments will occur over the next 12 to 18

months. Another measure of the eﬀectiveness of SCAP

and the CPP, as well as other government eﬀorts, is

that Treasury-OFS did not receive any applications for

CAP which terminated on November 9, 2009.

TARGETED INVESTMENT PROGRAM

Treasury-OFS established the Targeted Investment

Program (TIP) under the TARP in December 2008.

e TIP gave the Treasury-OFS the necessary ﬂexibil-

ity to provide additional or new funding to ﬁnancial

institutions that were critical to the functioning of the

ﬁnancial system. rough TIP, Treasury-OFS sought to

prevent a loss of conﬁdence in critical ﬁnancial institu-

tions, which could result in signiﬁcant ﬁnancial market

disruptions, threaten the ﬁnancial strength of similarly

situated ﬁnancial institutions, impair broader ﬁnancial

markets, and undermine the overall economy.

Eligibility to participate in the TIP was determined on

a case-by-case basis, depending on a number of factors.

Treasury-OSF considered, among other things:

e extent to which the failure of an institution •

could threaten the viability of its creditors and

counterparties because of their direct exposures to

the institution;

e number and size of ﬁnancial institutions that •

are perceived or known by investors or counterpar-

ties as similarly situated to the failing institution,

or that would otherwise be likely to experience

indirect contagion eﬀects from the failure of the

institution;

Whether the institution is suﬃciently important •

to the nation’s ﬁnancial and economic system that

a disorderly failure would, with a high probability,

cause major disruptions to credit markets or pay-

ments and settlement systems, seriously destabilize

key asset prices, or signiﬁcantly increase uncer-

tainty or loss of conﬁdence, thereby materially

weakening overall economic performance; and

e extent and probability of the institution’s •

ability to access alternative sources of capital and

liquidity, whether from the private sector or other

sources of government funds.

Treasury-OFS invested $20 billion in each of Bank

of America (BofA) and Citigroup under the TIP.

ese investments provide for annual dividends of

eight percent. ese investments also impose greater

reporting requirements and harsher restrictions on

the companies than under the CPP terms, including

restricting dividends to $0.01 per share per quarter,

restrictions on executive compensation, restrictions on

corporate expenses, and other measures. Assistance un-

der the TIP is also considered “exceptional assistance”,

which means that the recipient is also subject to greater

restrictions under the executive compensation rules.

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 3: ENSURING STABILITY AND LIQUIDITY

AMERICAN INTERNATIONAL GROUP,

INC. (AIG) INVESTMENT PROGRAM

Since September 2008, the Federal Reserve and

Treasury-OFS have taken a series of actions related to

AIG in order to prevent AIG’s disorderly failure and

mitigate systemic risks. ese actions addressed the

liquidity and capital needs of AIG, helping to stabilize

the company. Treasury-OFS provided this assistance

by purchasing preferred shares in AIG and also received

warrants to purchase common shares in the institution.

e assistance provided to AIG was deemed “exceptional

assistance” which means that the recipient is subject to

greater restrictions under the rules relating to executive

compensation. Further details on the AIG Investment

Program can be found in the AIG box.

AIG

In September 2008, prior to the passage of EESA, AIG faced severe liquidity pressures and potential insolvency. These pressures

grew acute the day after the bankruptcy ﬁling of Lehman Brothers, as ﬁnancial and credit markets ceased to function. Treasury

and Federal Reserve ofﬁcials feared that a disorderly failure of the company at that time posed a systemic risk to the ﬁnancial

system and the U.S. economy. The company had global operations and was a signiﬁcant participant in many ﬁnancial markets.

Through its subsidiaries, the company provided insurance protection to more than 100,000 entities, including small businesses,

municipalities, 401(k) plans, and Fortune 500 companies who together employ over 100 million Americans. The company

was also a signiﬁcant counterparty to a number of major ﬁnancial institutions. These commitments were reﬂected in tens of

thousands of contracts that touched millions of Americans and businesses.

The complexity of these insurance contracts and the exposure of the ﬁnancial system and economy to their default required

government intervention. The Federal Reserve provided an $85 billion credit facility in the form of secured loans to AIG on

September 16, 2008, to contain the ﬁnancial panic at least cost to the American taxpayer. At the time, the government was

constrained by the tools at its disposal. The Federal Reserve was not in a position to selectively impose haircuts on AIG

counterparties, or to know the long-term costs of its liquidity provision. Time was of the essence and the Federal Reserve faced a

binary choice: allow AIG to default on tens of thousands of contracts, further eroding conﬁdence in U.S. ﬁnancial institutions and

perpetuating market freezes, or provide secured credit to allow AIG to meet its near-term contractual obligations with millions of

insurance holders. The Federal Reserve chose the latter option, and, along with Treasury, has managed its investment in AIG to

facilitate an orderly restructuring of the company and to maximize repayments to taxpayers.

In November 2008, this assistance was restructured so that the company had more equity and less debt. Treasury-OFS purchased

$40 billion in cumulative preferred stock from AIG under the TARP, the proceeds of which were used to repay the Federal Reserve

loan in part. In April 2009, Treasury-OFS exchanged the $40 billion in cumulative preferred stock for $41.6 billion in non-cumula-

tive preferred stock and created an equity capital facility, under which AIG may draw up to $29.8 billion as needed in exchange

for issuing additional preferred stock to Treasury-OFS. As of September 30, 2009, AIG had drawn approximately $3.2 billion

from the facility. The preferred stock pays a noncumulative dividend, if declared, of ten percent per annum. The Federal Reserve

Bank of New York (FRBNY) has also provided additional assistance to AIG by funding special purpose entities which purchased

certain derivative contracts from AIG. In connection with its assistance to AIG, the FRBNY received convertible preferred stock

representing approximately 79.8 percent of the fully diluted voting power of the AIG common stock.

The preferred stock was deposited in a trust, which exists for the beneﬁt of the U.S. taxpayers. The FRBNY has appointed three

independent trustees who have the power to vote the stock and dispose of the stock with prior approval of FRBNY and after

consultation with Treasury. The trust agreement provides that the trustees cannot be employees of Treasury or the FRBNY. The

Department of the Treasury does not control the trust and cannot direct the trustees. Treasury-OFS, through its TARP investment,

owns other preferred stock that is not held in the trust and does not have voting rights except in certain limited circumstances.

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 3: ENSURING STABILITY AND LIQUIDITY

ASSET GUARANTEE PROGRAM

Pursuant to Section 102 of EESA, Treasury-OFS

established the Asset Guarantee Program (AGP) with

the same objective as the TIP of preserving ﬁnancial

market stability. e AGP, like the TIP, is a targeted

program aimed at maintaining the stability of systemi-

cally important ﬁnancial institutions and, thereby,

reducing the potential for problems at such an institu-

tion to “spillover” to the broader ﬁnancial system and

economy. More speciﬁcally, the AGP may be used

to provide protection against the risk of signiﬁcant

loss in a pool of assets held by a systemically signiﬁ-

cant ﬁnancial institution that faces a risk of losing

market conﬁdence due in large part to its holdings

of distressed or illiquid assets. By helping limit the

institution’s exposure to losses on illiquid or distressed

assets, the AGP can help the institution maintain the

conﬁdence of its depositors and other funding sources

and continue to meet the credit needs of households

and businesses.

e AGP has been applied with extreme discretion

and Treasury-OFS does not anticipate wider use of

this program. To date, Treasury-OFS has used this

program to assist Citigroup and began negotiations

with Bank of America (BofA) under the AGP which

BofA subsequently terminated. Further details on this

assistance can be found in the BofA and Citigroup

separate presentations.

Bank of America

Under the CPP, in October 2008, Treasury-OFS agreed

to purchase $15 billion of preferred stock from Bank of

America and $10 billion from Merrill Lynch. When Bank

of America completed its acquisition of Merrill Lynch at

the end of 2008, Treasury-OFS held a total of $25 billion of

preferred stock in Bank of America. This preferred stock has

a dividend rate of ﬁve percent per annum for the ﬁrst ﬁve

years and increases to nine percent thereafter. Under the

TIP, Treasury-OFS purchased an additional $20 billion in pre-

ferred stock from Bank of America in January 2009, which

pays a dividend of eight percent per annum. Treasury-OFS

also received warrants in both transactions.

In January 2009, Treasury-OFS, the Federal Reserve and

the FDIC entered into a term sheet for a potential loss

sharing arrangement under the AGP on a $118 billion pool

of ﬁnancial instruments owned by Bank of America. In May

2009, Bank of America announced its intention to terminate

negotiations with respect to the loss-sharing arrangement

and in September 2009, Treasury, the Federal Reserve,

the FDIC and Bank of America entered into a termination

agreement pursuant to which (i) the parties terminated

the related term sheet and (ii) Bank of America agreed to

pay a termination fee of $425 million to the government

parties, with $276 million going to Treasury-OFS. The fee

compensated the government parties for the value that

Bank of America had received from the announcement of

the negotiations with government parties to guarantee and

share losses on the pool of assets from and after the date

of the term sheet. The termination fee was determined

by taking the fee that would have been payable had the

guarantee been ﬁnalized.

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 3: ENSURING STABILITY AND LIQUIDITY

Citigroup

Under the CPP, Treasury-OFS purchased $25 billion in pre-

ferred stock from Citigroup in October 2008. This preferred

stock had a dividend rate of ﬁve percent per annum. Under

the TIP, Treasury-OFS purchased $20 billion in additional

preferred stock from Citigroup, Inc. in December 2008. That

preferred stock had a dividend rate of eight percent per

annum. Treasury-OFS also received warrants in both

transactions. As part of an exchange offer designed to

strengthen Citigroup’s capital, Treasury-OFS recently

exchanged all of its preferred stock in Citigroup for a com-

bination of common stock and trust preferred securities.

In January 2009, Treasury-OFS and Citigroup entered into

an agreement for Citigroup’s participation in the AGP.

Treasury-OFS guaranteed up to $5 billion of potential losses

incurred on a $301 billion pool of loans, mortgage-backed

securities, and other ﬁnancial assets held by Citigroup. The

Federal Reserve and the FDIC are also parties to this ar-

rangement. Treasury-OFS will not become obligated to pay

on its guarantee unless and until Citigroup has absorbed

$39.5 billion of losses on the covered pool. Treasury-OFS

would then cover 90 percent of all losses on the covered

pool, up to a maximum of $5 billion. In consideration

for the guarantee, Treasury-OFS received $4.03 billion

in preferred stock that pays an annual dividend of eight

percent. Treasury-OFS also received a warrant to purchase

approximately 66 million shares of common stock at a strike

price of $10.61 per share.

As part of the exchange offer noted above, Treasury-OFS

exchanged preferred stock received under the AGP for

an equivalent amount of trust preferred securities paying

interest at the same rate.

CONSUMER AND BUSINESS

LENDING INITIATIVE

Treasury-OFS designed two initiatives to restore

consumer and business lending in the period ended

September 30, 2009, the Term Asset-Backed Securities

Loan Facility (TALF) and the Unlocking Credit for

Small Business Initiative. Both programs are discussed

in more detail below.

1. TERM ASSET-BACKED SECURITIES

LOAN FACILITY

e asset-backed securities (ABS) and commercial

mortgage-backed securities (CMBS) markets over time

have funded a substantial share of credit to consumers,

businesses and real estate owners. In the third quarter

of 2008, the ABS market and CMBS markets came

to nearly a complete halt. Interest rate spreads on the

most highly-rated AAA tranches of ABS and CMBS

rose to levels outside their historical range, in certain

cases well over 7 to 15 times their average, respectively.

CMBS had accounted for almost half of all new com-

mercial mortgage originations in 2007. e disruption

of these markets contributed to the lack of credit to

households and businesses of all sizes, impacting U.S.

economic activity.

In November 2008, the Federal Reserve and Treasury

announced the creation of the Term Asset-Backed

Securities Loan Facility (TALF) and launched TALF

under the Financial Stability Plan on February 10,

2009. e TALF’s objective was to stimulate investor

demand for certain types of eligible ABS, speciﬁ-

cally those backed by loans to consumers and small

businesses, and ultimately, bring down the cost and

increase the availability of new credit to consumers

and businesses. Under the TALF, the Federal Reserve

extends up to $200 billion in three- and ﬁve-year

non-recourse loans to investors that agree to purchase

eligible consumer or small business ABS. Treasury-OFS

provides up to $20 billion of TARP monies in credit

protection to the Federal Reserve for losses arising

under TALF loans.

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 3: ENSURING STABILITY AND LIQUIDITY

e TALF was initially designed for newly or recently

originated AAA-rated ABS backed by student loans,

auto loans, credit card loans, and loans guaranteed

by the SBA. On March 19, 2009, Treasury-OFS and

the Federal Reserve announced that the TALF would

be expanded to include newly or recently issued

AAA-rated Asset Backed Securities (ABS) backed by

four additional types of consumer and business loans

—mortgage servicing advances, loans or leases relating

to business equipment, leases of vehicle ﬂeets, and

ﬂoor plan loans. ese new categories of collateral were

eligible for inclusion in the April 2009 TALF subscrip-

tion and funding process.

e Treasury-OFS and the Federal Reserve structured

the TALF to minimize credit risk to the U.S. govern-

ment to the greatest extent possible, consistent with

achieving the program’s purpose of encouraging lend-

ing to consumers and businesses. Investors take risk by

providing some of the capital to purchase the securi-

ties. e amount of private capital is measured in the

form of haircuts, which represents the investor’s equity

contribution. For example, if a borrower purchases an

ABS for $100 and that ABS has an assigned haircut of

15 percent, the borrower must put $15 at risk and can

receive only $85 in ﬁnancing. e haircut level varies

across asset class and maturity to take into account

any diﬀerences in risk. Finally, the borrower must also

make monthly or quarterly interest payments to the

federal government. e cost of the loan is 100 basis

points over a ﬁxed or ﬂoating rate benchmark, such as

the London Interbank Oﬀered Rate (“LIBOR”).

e Federal Reserve had originally authorized using the

TALF to make loans through December 31, 2009. To

promote the ﬂow of credit to businesses and house-

holds and to facilitate the ﬁnancing of commercial

properties, the Federal Reserve announced on August

17, 2009 that the TALF will continue to make loans

against newly issued ABS and previously issued CMBS

through March 31, 2010. In addition, TALF will make

loans against newly issued CMBS through June 30,

2010. e inclusion of CMBS as eligible collateral

helps prevent defaults on economically viable commer-

cial properties, increases the capacity of current holders

of maturing mortgages to make additional loans, and

facilitates the sale of distressed properties.

TALF Results

TALF’s impact on the securitization markets can be

measured by a number of indicators, including ABS

issuance—both TALF and non-TALF eligible, the

percentage decline in ABS and SMBS spreads from

the height of the ﬁnancial crisis, and the number and

composition of investors in the securitization market.

ABS Issuance: e market for new issuance of ABS

had shut down at the end of 2008 and remained

eﬀectively closed until TALF became operational.

Since March 2009, oﬀerings in the ABS markets have

gradually increased with nearly $86 billion of new ABS

issuance through October 2009. Of that amount, $49

billion of securities were purchased with TALF loans.

ese securities supported over 3.6 million consumer

and small business loans and leases, and over 132

million active credit card accounts. TALF has also

provided loans to purchase about $4.1 billion of legacy

CMBS securities (issued before January 1, 2009).

is re-starting of the securitization market translates

into increased consumer and small business lending

and, in some cases, lower loan rates for consumers. In

addition, investors are gaining conﬁdence in the mar-

ket’s ability to function without federal government

support. In March 2009, approximately 60 percent of

new ABS issuance was purchased with the support of

the TALF. By September 2009, that was down to 40

percent. e following chart (Figure 12) shows total

consumer ABS issuance and the portion backed by

TALF.

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 3: ENSURING STABILITY AND LIQUIDITY

FIGURE 12. Total Consumer ABS Issuance through September

Secondary market spreads: Since the peak of the

credit crisis, spreads for the asset classes eligible for

the program have decreased by 60 percent or more.

Spreads on credit card and auto loans have fallen from

a peak of 600 basis points to less than 100 basis points

over their benchmarks, the same levels that existed be-

fore Lehman Brothers’ bankruptcy ﬁling in September

2008. Spreads in the secondary market for CMBS have

come in from 1500 basis points over its benchmark to

300 basis points today. Prior to the beginning of the

crisis in August 2007, highly rated CMBS were priced

on average approximately 100 basis points over its

benchmark.

Borrower Composition: At the peak of the credit

crisis, there was little conﬁdence among institutional

investors in the capital markets. Investors eﬀectively

were standing on the sidelines. Since the implementa-

tion of TALF, there has been renewed conﬁdence in the

market. A range of institutional investors have become

active participants, including hedge funds, asset

managers, pension funds, and insurance companies.

With an increase in investor participation and thus

investor demand, required returns have fallen more

than half, in some cases, suggesting a return of risk

premiums to more “normalized” levels. Cash participa-

tion, speciﬁcally for TALF-eligible prime auto and

equipment transactions, has also increased, suggest-

ing investors’ decreasing reliance on TALF support.

Further, some transactions for speciﬁc asset classes with

shorter durations are being successfully completed

without TALF ﬁnancing, suggesting investor conﬁ-

dence in shorter-duration transactions.

TALF Loans to Date: As of September 30, 2009, no

securities used as collateral for TALF loans had been

surrendered to the Federal Reserve. In addition, as of

September 30, 2009, 13.6 percent of the total amount

of TALF loans, or $6.3 billion, had been repaid. Given

that the term of the TALF loans is three to ﬁve years,

this reﬂects the increasing health of the securitization

markets.

2. UNLOCKING CREDIT FOR SMALL

BUSINESSES PROGRAM

To help restore the conﬁdence needed for ﬁnancial

institutions to increase lending to small businesses,

Treasury announced a program to unlock credit for

small businesses on March 16, 2009. Under the pro-

gram, Treasury announced that it would make up to $15

billion in TARP funds available to purchase securities

backed by the Small Business Administration (SBA)-

guaranteed portions of loans made under the SBA’s 7(a)

loan program. e SBA’s 7(a) program is the SBA’s most

basic and widely used loan program.

Since Treasury’s announcement of this program, the

credit markets for small businesses have improved some-

what. e secondary market for guaranteed SBA loans,

for example, had essentially ceased working last fall and

had only $86 million in January re-sales. at market

improved notably this spring in the wake of Treasury’s

announcement, with $399 million settled from lenders

to broker-dealers in September 2009. As a result of this

improvement, as well as reluctance on the part of market

participants to accept TARP funds, Treasury-OFS found

that demand for its proposed program declined. As

of September 30, 2009, no funds had been disbursed

under the program, although it remains available.

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 3: ENSURING STABILITY AND LIQUIDITY

PUBLIC-PRIVATE INVESTMENT

PROGRAM

Treasury, in conjunction with the Federal Reserve and

the FDIC, announced the Public-Private Investment

Program (PPIP) on March 23, 2009, as a part of

the Financial Stability Plan. e PPIP is designed

to improve the condition of ﬁnancial institutions by

facilitating the removal of legacy assets from their bal-

ance sheets. Legacy assets include both real estate loans

held on banks’ balance sheets (legacy loans) as well as

securities backed by residential and commercial real

estate loans (legacy securities).

e PPIP should help restart the market and provide

liquidity for legacy assets, enabling ﬁnancial institu-

tions to make new loans available to households and

businesses. Legacy assets became a stumbling block

to the normal functioning of credit markets with the

bursting of the housing bubble. With the housing

market in decline, ﬁnancial institutions and investors

suﬀered signiﬁcant losses on these legacy assets. ese

losses drove ﬁnancial institutions to conserve capital,

reduce leverage and minimize exposure to riskier

investments. Many institutions did so by selling assets,

triggering a wide-scale deleveraging in these markets.

As the supply of assets being sold increased, prices

declined and many traditional investors exited these

markets, causing further declines in the demand and

the liquidity for these assets. is lack of liquidity

created signiﬁcant uncertainty regarding the value

of these legacy assets, which in turn raised questions

about the balance sheets of these ﬁnancial institutions,

compromising their ability to raise capital and con-

tinue lending.

e PPIP helps addresses this valuation concern.

rough PPIP, Treasury-OFS partners with experienced

investment managers and private sector investors

to purchase legacy assets. Rather than resolving the

uncertainty by having the government set the price for

these assets, the private sector investors compete with

one another to establish the price of the legacy assets

purchased under the PPIP. By drawing new private

sector capital into the market for legacy assets and

facilitating price discovery, the PPIP should increase

the liquidity for these legacy assets.

Treasury-OFS initially announced that it would

provide up to $100 billion for the PPIP. Because of

improvements in the market, this amount was reduced

to $30 billion. Under the PPIP, Treasury-OFS provides

equity and debt ﬁnancing to newly-formed public-

private investment funds (PPIFs) established by private

fund managers with private investors for the purpose of

purchasing legacy securities. ese securities are com-

mercial mortgage-backed securities and non-agency

residential mortgage-backed securities. To qualify for

purchase by a Legacy Securities PPIP (S-PPIP), these

securities must have been issued prior to 2009 and

have originally been rated AAA—or an equivalent

rating by two or more nationally recognized statistical

rating organizations – without ratings enhancement

and must be secured directly by the actual mortgage

loans, leases, or other assets.

e S-PPIP allows the Treasury-OFS to partner with

private investors in a way that increases the ﬂow of

private capital into these markets while maintaining

equity “upside” for the taxpayers. Under the principal

terms of the S-PPIP, Treasury-OFS partners with

pre-qualiﬁed fund managers that raise a minimum

amount of capital from private sources. Each manager

forms a Public Private Investment Fund or PPIF.

Treasury-OFS invests equity capital from the TARP in

each PPIF on a dollar-for-dollar basis, matching the

funds raised by these managers. In addition, Treasury-

OFS also provides debt ﬁnancing up to 100 percent

of the PPIF’s total equity capital, subject to certain

restrictions on leverage, withdrawal rights, disposition

priorities and other customary ﬁnancing protections.

Treasury-OFS not only participates pro rata in any

proﬁts or losses of the PPIF but also receives additional

potential equity upside in the form of warrants, as

required by EESA. Each fund manager will seek to

generate attractive returns for the PPIF through a

predominately long-term buy and hold strategy.

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 3: ENSURING STABILITY AND LIQUIDITY

On July 8, 2009, following a comprehensive two-

month application, evaluation and selection process,

Treasury-OFS pre-qualiﬁed nine fund managers to

participate in the S-PPIP based, in part, on a dem-

onstrated ability to invest in legacy assets and to raise

private capital for such investments. On September

30, 2009, two PPIFs signed limited partnership

agreements and loan agreements with Treasury-OFS,

resulting in a $6.7 billion commitment for Treasury-

OFS. As of September 30, 2009, these two PPIFs had

approximately $1.13 billion in private sector capital

commitments, which were matched 100 percent by

Treasury-OFS, representing total equity capital com-

mitments of $2.26 billion. Treasury-OFS is providing

debt ﬁnancing up to 100 percent of the total capital

commitments of each PPIF, representing in the ag-

gregate approximately $4.52 billion of total equity and

debt capital commitments. As of November 30, 2009,

eight PPIFs have signed agreements with Treasury-

OFS. Following signature of these agreements, each

fund manager has up to six months to raise additional

private capital to receive the full allocation of the

$3.3 billion in matching equity and debt capital from

Treasury-OFS. Assuming that each of the nine fund

managers raises enough private capital to receive the

full allocation from Treasury-OFS, the total purchasing

power of the PPIFs will be $40 billion, including $10

billion in private capital and the $30 billion Treasury-

OFS commitment. As of September 30, 2009, no fund

managers had made any investments and Treasury-

OFS had not disbursed any funds.

PPIP Results

Although purchases of assets under the program are

just beginning, the announcement of the program it-

self helped reassure investors. Since the announcement,

prices for non-agency mortgage-backed securities

have gone up substantially in price. Prime ﬁxed-rate

securities issued in 2006 that traded as low as $60 in

March have increased in value by over 40 percent as

markets have become more liquid. at improvement

in ﬁnancial market conditions has created the positive

backdrop that caused Treasury-OFS to proceed with

the program at a scale smaller than initially envisioned.

AUTOMOTIVE INDUSTRY

FINANCING PROGRAM

e Treasury-OFS established the Automotive Industry

Financing Program (AIFP) on December 19, 2008, to

help prevent a signiﬁcant disruption to the American

automotive industry, which would have posed a systemic

risk to ﬁnancial market stability and had a negative

eﬀect on the economy. Treasury-OFS announced a

plan to make emergency loans available from the TARP

under the AIFP to General Motors Corporation (GM)

and Chrysler LLC (Chrysler) to provide a path for these

companies to go through orderly restructurings and

achieve viability.

Treasury-OFS’ investments in the auto companies were

determined to be consistent with both the purpose

and speciﬁc requirements of EESA. Treasury-OFS

determined that the auto companies were and are

interrelated with entities extending credit to consumers

and dealers because of their ﬁnancing subsidiaries and

other operations, and that a disruption in the industry

or an uncontrolled liquidation would have had serious

eﬀects on ﬁnancial market stability, employment and

the economy as a whole. In addition, Congress provided

the Secretary of the Treasury broad authority by deﬁning

“ﬁnancial institutions” in EESA ﬂexibly so as not to be

limited to banks, savings institutions, insurance compa-

nies and similar entities. e auto companies qualiﬁed

as “ﬁnancial institutions” under EESA as they met the

basic requirements of the deﬁnition. In each case, they

were organized under Delaware law, had signiﬁcant U.S.

operations, were subject to extensive federal and state

regulation, and were not a central bank or institution

owned by a foreign government.

Treasury-OFS initially provided loans of $13.4 billion

to GM and $4 billion to Chrysler under the AIFP to

give the companies time to negotiate with creditors

and other stakeholders in order to prevent disor-

derly bankruptcies. Under the terms of the loans, each

company was required to prepare a restructuring plan

that included speciﬁc actions aimed at assuring: (i) the

repayment of the loan extended by TARP; (ii) the ability

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 3: ENSURING STABILITY AND LIQUIDITY

of the company to comply with applicable federal fuel

eﬃciency and emissions requirements and commence

the domestic manufacturing of advanced technology

vehicles in accordance with federal law; (iii) achievement

of a positive net present value; (iv) rationalization of

costs, capitalization, and capacity with respect to the

manufacturing workforce, suppliers and dealerships of

the company; and (v) a product mix and cost structure

that is competitive in the U.S. marketplace.

To oversee the federal ﬁnancial assistance—including

evaluating the restructuring plans—and to make deci-

sions about future assistance to the automakers, the loan

agreements provided for a presidential designee. Under

the terms of the loan agreements, because no presiden-

tial designee has been appointed to date, the Secretary

of the Treasury makes decisions on all matters involving

ﬁnancial assistance to the automakers, with input from

the National Economic Council.

To date, Treasury-OFS has provided approximately $76

billion in loans and equity investments to GM, Chrysler,

and their respective ﬁnancing entities. Further details on

these loans and the valuation of these investments can be

found in Section Eight [Valuation Methodology].

General Motors

On December 31, 2008, Treasury-OFS agreed to make

loans of $13.4 billion to General Motors Corporation to

fund working capital. Under the loan agreement, GM was

required to implement a viable restructuring plan by March

30, 2009. The Administration determined that the ﬁrst

plan GM submitted failed to establish a credible path to

viability, and the deadline was extended to June 1, 2009.

Treasury-OFS loaned an additional $6 billion to fund GM

during this period. To achieve an orderly restructuring, GM

ﬁled bankruptcy proceedings on June 1, 2009. Treasury-

OFS provided $30.1 billion under a debtor-in-possession

ﬁnancing agreement to assist GM through the restructuring

period. The new entity, General Motors Company (New GM)

purchased most of Old GM’s assets and began operating on

July 10, 2009.

Treasury-OFS converted most of its loans to the Old GM to

$2.1 billion of preferred stock and a 60.8 percent share of

the common equity in the New GM and a $7.1 billion debt

security note. $380 million of Treasury-OFS’ debt in the

new GM was immediately repaid with the termination of

the Auto Warranty Program, leaving $6.7 billion of loans

outstanding as of September 30, 2009. The New GM

currently has the following ownership: Treasury-OFS (60.8

percent), GM Voluntary Employee Beneﬁt Association (17.5

percent), the Canadian Government (11.7 percent), and Old

GM’s unsecured bondholders (10 percent).

FIGURE 13. New GM Ownership

17%

GM Voluntary

Employee

Benefit

Association

12%

Canadian

Government

10%

Old GM’s Unsecured

Bondholders

61%

U.S. Government

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 3: ENSURING STABILITY AND LIQUIDITY

Chrysler

On January 2, 2009, Treasury-OFS loaned $4 billion to

Chrysler. On March 30, 2009, the Administration determined

that the business plan submitted by Chrysler failed to dem-

onstrate viability and announced that in order for Chrysler

to receive additional taxpayer funds, it needed to ﬁnd a

partner with whom it could establish a successful alliance.

Chrysler made the determination that forming an alliance

with Fiat was the best course of action for its stakeholders.

Treasury-OFS continued to support Chrysler as it formed an

alliance with Fiat. In connection with Chrysler’s bankruptcy

proceedings ﬁled on April 30, 2009, Treasury-OFS provided

an additional $1.9 billion under a debtor-in-possession

ﬁnancing agreement to assist Chrysler in an orderly re-

structuring. On June 10, 2009, substantially all of Chrysler’s

assets were sold to the newly formed entity, Chrysler Group

LLC (New Chrysler). Treasury-OFS committed to loan $6.6

billion to New Chrysler in working capital funding, and as of

September 30, 2009, New Chrysler has drawn $4.6 billion

of this amount.

As of September 30, 2009, Treasury-OFS had a $7.1 billion

debt security from New Chrysler and held 9.9 percent of

the equity in New Chrysler. The original loans to Chrysler

remain outstanding, but have been reduced by $500 million

of debt that was assumed by New Chrysler. Current equity

ownership in New Chrysler is as follows: the Chrysler

Voluntary Employee Beneﬁt Association (67.7 percent),

Fiat (20 percent), Treasury-OFS (9.9 percent) and the

Government of Canada (2.5 percent).

FIGURE 14. New Chrysler Ownership

Canadian

Government

10%

U.S. Government

20%

Fiat

68%

The Chrysler

Voluntary

Employee Benefit

Association

In addition to the AIFP funds committed to the two

auto manufacturers, Treasury-OFS determined that

TARP assistance was also needed for the ﬁnancing

companies aﬃliated with these manufacturers. e

vast majority of automobile purchases in the U.S. are

ﬁnanced, including an estimated 80 to 90 percent

of consumer purchases and substantially all dealer

inventory purchases. Without the TARP’s assistance,

it is unlikely that the tightened credit markets would

have been able to provide the critical ﬁnancing needed

for consumers to purchase autos. A description of the

assistance provided to GMAC and Chrysler Financial

is provided below.

GMAC

GMAC is an important source of auto-related credit for

consumers and dealers and, through a subsidiary, is the

country’s ﬁfth largest mortgage servicer. It is also one of

the largest U.S. bank holding companies. On December

29, 2008, Treasury-OFS purchased $5 billion in preferred

equity from GMAC, and received an additional $250 million

in preferred equity through warrants that Treasury-OFS

exercised at closing. At the same time, Treasury-OFS also

agreed to lend up to $1 billion of TARP funds to GM (one of

GMAC’s owners), to enable GM to participate in GMAC’s

rights offering. GM drew $884 million under that commit-

ment on January 16, 2009.

In May 2009, banking regulators required GMAC to raise

additional capital by November 2009 in connection with

the SCAP or stress test. On May 21, 2009, Treasury-OFS

purchased $7.5 billion more of convertible preferred shares

from GMAC and received warrants that Treasury-OFS

exercised at closing for an additional $375 million in

convertible preferred shares. GMAC is in discussions with

the Treasury-OFS regarding additional ﬁnancing to complete

GMAC’s post-SCAP capital needs up to the amount of $5.6

billion, as previously discussed in May.

On May 29, 2009, Treasury-OFS exercised its option to ex-

change the $884 million loan for the ownership interest that

GM had purchased, amounting to about 35 percent of the

common membership interests in GMAC. As of September

30, 2009, Treasury-OFS owns $13.1 billion in preferred shares

in GMAC, through purchases and the exercise of warrants, in

addition to 35 percent of the common equity in GMAC.

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 3: ENSURING STABILITY AND LIQUIDITY

Chrysler Financial

On January 16, 2009, Treasury-OFS announced that it

would lend up to $1.5 billion to a special purpose vehicle

created by Chrysler Financial to enable Chrysler Financial

to ﬁnance the purchase of Chrysler vehicles by consumers.

To satisfy the EESA warrant requirement, the Chrysler

Financial special purpose vehicle issued additional notes

entitling Treasury-OFS to an amount equal to ﬁve percent of

the maximum loan amount. Twenty percent of those notes

vested upon the closing of the transaction, and additional

notes were to vest on each anniversary of the transaction

closing date. The loan was fully drawn by April 9, 2009.

On July 14, 2009, Chrysler Financial fully repaid the loan,

including the vested additional notes and interest.

AUTO SUPPLIER SUPPORT PROGRAM

Because of the credit crisis and the rapid decline in

auto sales, many of the nation’s auto parts suppliers

were struggling to access credit and faced uncertainty

about the prospects for their businesses. Suppliers that

ship parts to auto companies generally receive payment

approximately 45-60 days after shipment. In a normal

credit environment, suppliers can either sell or borrow

against those commitments, or receivables, in the inter-

im period to pay their workers and fund their ongoing

operations. However, due to the uncertainty about the

ability of the auto companies to honor their obliga-

tions, banks were unwilling to extend credit against

these receivables. On March 19, 2009, Treasury-OFS

announced the Auto Supplier Support Program (ASSP)

to help address this problem by providing up to $5

billion to domestic auto manufacturers to purchase

supplier receivables. With the emergence of New GM

and New Chrysler from bankruptcy proceedings and

with the threat of liquidation greatly reduced, credit

market access for suppliers has improved. As of July

1, 2009, the base commitment under the ASSP was

decreased to $3.5 billion. As of September 30, 2009,

Treasury-OFS has funded $413 million under the

ASSP. e loans used to ﬁnance the program must be

repaid within a year, unless extended. Treasury-OFS

expects these loans to be fully repaid by or before April

2010. e companies may still draw on the loans but

they are not expected to.

AUTO WARRANTY PROGRAM

On March 30, 2009, Treasury-OFS announced an

Auto Warranty Program designed to give consumers

considering new car purchases from domestic manu-

facturers the conﬁdence that warranties on those cars

would be honored regardless of the outcome of the

restructuring process. As of July 10, 2009, the program

was terminated after New GM and New Chrysler

completed the purchase of substantially all of the assets

of GM and Chrysler from their respective bankrupt-

cies. e $640 million advanced to GM and Chrysler

under the program has been repaid to Treasury-OFS;

Chrysler repaid the full amount with interest while

GM repaid only principal.

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 4: PREVENTING FORECLOSURES AND PRESERVING HOMEOWNERSHIP

Section Four:

Preventing Foreclosures and Preserving Homeownership

To mitigate foreclosures and help ensure homeowner-

ship preservation, Treasury announced a compre-

hensive $75 billion program, the Home Aﬀordable

Modiﬁcation Program (HAMP), in February 2009.

Treasury-OFS will provide up to $50 billion in fund-

ing through the TARP, while Fannie Mae and Freddie

Mac agreed to provide up to $25 billion of additional

funding. HAMP focuses on creating sustainably

aﬀordable mortgage payments for responsible home

owners who are making a good faith eﬀort to make

their mortgage payments, while mitigating the spillover

eﬀects of preventable foreclosures on neighborhoods,

communities, the ﬁnancial system and the economy.

HAMP is built around three core concepts. First, the

program focuses on aﬀordability. Every modiﬁcation

under the program must lower the borrower’s monthly

mortgage payment to no more than 31 percent of the

borrower’s monthly gross income, the “target monthly

mortgage payment ratio”. Second, the HAMP’s

pay-for-success structure aligns the interests of ser-

vicers, investors and borrowers in ways that encourage

loan modiﬁcations that will be both aﬀordable for

borrowers over the long term and cost-eﬀective for

investors and taxpayers. ird, the HAMP establishes

detailed guidelines for the industry to use in making

loan modiﬁcations with the goal of encouraging the

mortgage industry to adopt a sustainably aﬀordable

standard, both within and outside of the HAMP.

HAMP operates through the combined eﬀorts of the

Treasury Department, Fannie Mae, Freddie Mac,

mortgage loan servicers, investors and borrowers to

help qualifying homeowners who commit to making

modiﬁed monthly mortgage payments to stay in their

homes. In addition, the federal bank, thrift, and credit

union regulatory agencies have encouraged all federally

regulated ﬁnancial institutions that service or hold

residential mortgage loans to participate in the HAMP.

e following highlights some of the key terms and

conditions of HAMP:

Eligible Homeowners: e modiﬁcation plan •

was designed to be inclusive, with a loan limit of

$729,750 for single-unit properties, and higher

limits for multi-unit properties. Over 97 percent

of the mortgages in the country have a principal

balance within these limits.

Servicers’ Obligation to Extend Modiﬁcation •

Oﬀer: Servicers participating in HAMP are

required to apply a standardized net present

value (NPV) test to each loan that is at risk of

foreclosure—deﬁned as either at risk of imminent

default or in default. e NPV test compares the

net present value of cash ﬂows from the mortgage

if modiﬁed under HAMP and the net present

value of the cash ﬂows from the mortgage without

modiﬁcation. If the NPV test is positive—

meaning that the net present value of expected

cash ﬂows is greater if modiﬁed under the HAMP

than if the loan is not modiﬁed—the servicer must

extend an oﬀer to modify the loan in accordance

with HAMP guidelines, absent fraud or a con-

tractual prohibition limiting modiﬁcation of the

mortgage.

Reductions in Monthly Payments: Servicers are •

required to follow the waterfall outlined in the

program contracts in reducing the borrower’s

monthly payment to no more than 31 percent of

their monthly gross income. e interest rate ﬂoor

under HAMP is 2 percent. Further ﬂexibility is

provided if reducing the loan rate to 2 percent, by

itself, does not achieve the 31 percent threshold.

In that case, the servicers can extend the term of

the loan, up to 480 months, in order to achieve

the 31 percent payment threshold. e HAMP

also provides the servicer the option to reduce

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 4: PREVENTING FORECLOSURES AND PRESERVING HOMEOWNERSHIP

principal on a stand-alone basis to help reduce the

borrower’s monthly payment.

e HAMP includes a standardized set of procedures

that servicers must follow in modifying eligible loans

under the program and in estimating the expected

cash ﬂows of modiﬁed mortgages. e borrower must

remain current on their modiﬁed mortgage payments

for at least 90 days in order for a HAMP loan modiﬁ-

cation to become permanent.

To increase participation in HAMP and encourage

borrowers to remain current on loan modiﬁcations

under the program, Treasury-OFS provides targeted

incentives to borrowers, investors, and servicers that

participate in the program. ese incentives include

an up-front payment of $1,000 to the servicer for each

successful modiﬁcation after completion of the trial

period, and “pay for success” fees of up to $1,000 per

year for three years, provided the borrower remains

current. Additional one-time incentives of $500 to the

servicers and $1,500 to the investors are paid if loans

are modiﬁed for borrowers who are current but are in

danger of imminent default are successfully modiﬁed.

Homeowners will also earn up to $1,000 towards prin-

cipal balance reduction each year for ﬁve years if they

remain current and pay on time. Investors are entitled

to payment reduction cost-share compensation for up

to ﬁve years for half the cost of reducing the borrower’s

payment from a 38 percent to 31 percent threshold,

provided the borrower remains current. Investors must

pay for reducing the borrower’s payment down to the

38 percent threshold before they are able to beneﬁt

from the cost-share incentive. is requires investors

to take the ﬁrst loss for unaﬀordable and unsustainable

loans that were extended to borrowers.

HAMP RESULTS

e incentives oﬀered under HAMP have had a

substantial impact in helping American homeowners

and stabilizing the housing market, as detailed below:

As of October 31, 2009, 71 servicers have signed •

up for the HAMP. Between loans covered by

these servicers and loans owned or guaranteed by

the GSEs, approximately 85 percent of ﬁrst-lien

residential mortgage loans in the country are now

covered by the program. As of September 30,

2009, Treasury-OFS has made commitments to

fund up to $27.1 billion in HAMP payments.

As of October 31, 2009, these participating •

servicers have extended oﬀers on over 919,665

trial modiﬁcations.

Over 650,994 trial modiﬁcations are already •

underway, as of October 31, 2009.

HAMP SNAPSHOT THROUGH OCTOBER 2009

Number of Trial Modiﬁcations Started

650,994

Number of Trial Period Plan Offers Extended

to Borrowers

919,665

Number of Requests for Financial Information Sent

to Borrowers

2,776,740

1/ Active trial and permanent modiﬁcations as of October 31; based on

numbers reported by servicers to the HAMP system of record.

2/ Source: Survey data provided by servicers, through October 29.

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 5: PROTECTING TAXPAYER INTERESTS

Section Five:

Protecting Taxpayer Interests

e government’s response to the ﬁnancial crisis

including the actions taken under TARP, were neces-

sary to avoid an even greater deterioration or collapse

of the U.S. and global ﬁnancial systems , which would

have resulted in a far worse recession or even depres-

sion. TARP provided a form of taxpayer protection by

helping to achieve that basic objective. Treasury-OFS is

committed to ensuring that taxpayers are also pro-

tected with respect to how the TARP is implemented.

e taxpayers clearly assumed downside risk in the

TARP purchases and guarantees of troubled assets,

thus Treasury-OFS also seeks to protect the taxpayer

through the eﬀective management and disposition of

all TARP investments. EESA also stipulated that the

taxpayer beneﬁt from any potential upside on any

assistance transaction by requiring that Treasury receive

warrants in most investments. is section addresses

portfolio management topics such as:

Portfolio Overview1.

Guiding Principles2.

Portfolio Management Approach 3.

Exchange Oﬀers and Restructurings 4.

Treasury-OFS’s Actions as a Shareholder 5.

Compliance6.

Program Speciﬁc Considerations.7.

PORTFOLIO OVERVIEW

Treasury-OFS’s investments include:

Preferred stock: a majority of the TARP invest-1.

ments are in nonvoting perpetual preferred stock;

Common stock: currently, Treasury-OFS holds 2.

common stock in GM, GMAC, Chrysler and

Citigroup;

Warrants and senior debt instruments: in con-3.

nection with its investments in publicly traded

companies, Treasury-OFS has received, pursuant

to Section 113 of EESA, warrants to purchase

common stock at market price as of the time

of the investment. In the case of investments

in privately held companies, Treasury-OFS has

received warrants to purchase preferred stock at

a nominal price, which it exercised at closing, or

debt instruments issued by the TARP recipient;

Loans: Treasury-OFS has made loans to GM, 4.

Chrysler, and the special purpose vehicles under

TALF, AIFP, ASSP, and WCP, as well as signed

deﬁnitive loan agreements for the Public Private

Investment Funds (PPIFs); and

Fund investments: Treasury-OFS has signed 5.

limited partnership agreements to make equity

investments in the PPIFs.

GUIDING PRINCIPLES

Pursuant to Section 2 of EESA, Treasury-OFS has

made investments and entered into guarantee agree-

ments to “restore liquidity and stability to the ﬁnancial

system of the United States” in a manner which “maxi-

mizes overall returns to the taxpayers of the United

States”. Consistent with the statutory requirements,

Treasury-OFS’ four overarching portfolio management

guiding principles are as follows:

Protect taxpayer investments and maximize overall •

investment returns within competing constraints,

Promote stability for and prevent disruption of •

ﬁnancial markets and the economy,

Bolster market conﬁdence to increase private •

capital investment, and

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 5: PROTECTING TAXPAYER INTERESTS

Dispose of investments as soon as practicable, in a •

timely and orderly manner that minimizes ﬁnan-

cial market and economic impact.

Treasury-OFS’s asset management approach is designed

to implement the guiding principles. Treasury-OFS

protects taxpayer investments and promotes stability

through evaluating systemic and individual risk from

standardized reporting and proactive monitoring and

ensuring adherence to EESA and compliance with

contractual agreements. By avoiding involvement

in day to day company management decisions and

exercising its rights as a common shareholder only on

core governance issues, Treasury-OFS seeks to bolster

market conﬁdence to increase private capital investment.

Treasury-OFS also adheres to certain principles in con-

nection with restructurings or exchange oﬀers involving

TARP recipients, including minimizing taxpayer loss,

enhancing and preserving institutional viability, treat-

ing like investments across programs consistently, and

minimizing negative governmental impact. Such eﬀorts

help to prevent disruption of ﬁnancial markets and the

economy.

Treasury-OFS seeks to exit investments as soon as

practicable to remove Treasury-OFS as a shareholder,

eliminate or reduce Treasury-OFS downside tail risk

exposure, return TARP funds to reduce the federal debt,

and encourage private capital formation to replace fed-

eral government investment. e desire to achieve such

objectives must be balanced against a variety of other

objectives, including avoiding further ﬁnancial market

and/or economic disruption, and the potentially nega-

tive impact to the issuer’s health and/or capital raising

plans from Treasury-OFS’ disposition. Treasury-OFS

must also consider the limited ability to sell an invest-

ment to a third party due to the absence of a trading

market or lack of investor demand, and the possibility

of achieving potentially higher returns through a later

disposition. An issuer typically needs the approval of

its primary federal regulator in order to repay Treasury-

OFS and therefore regulatory approvals also aﬀect how

quickly an institution can repay.

Because of the size of certain positions as well as the

overall portfolio, successful disposition will take time,

as well as expertise. In addition, information about

Treasury-OFS’s intentions with respect to its invest-

ments could be material information and premature

release of such information could adversely aﬀect

the ability of Treasury-OFS to achieve its objectives.

erefore, Treasury-OFS will make public announce-

ments of its disposition plans when it is appropriate to

do so in light of these objectives and constraints.

PORTFOLIO MANAGEMENT

APPROACH

In managing the TARP investments, Treasury-OFS

takes a disciplined portfolio approach with a review

down to the individual investment level. Treasury-OFS

aims to monitor risk and performance at both the over-

all portfolio level and the individual investment level.

Given the unique nature and the size of the portfolio,

risk and performance are linked to the overall ﬁnancial

system and the economy. erefore, Treasury-OFS

conducts sensitivity analyses to contextualize the results.

Such analyses by their very nature are based upon

signiﬁcant assumptions.

In conducting the portfolio management activities,

Treasury-OFS employs a mix of dedicated profession-

als and external asset managers. ese external asset

managers provide market speciﬁc information such as

market prices and valuations as well as detailed credit

analysis using public information on a periodic basis.

A portfolio management leadership team oversees the

work of asset management employees organized on

a program basis, under which investment and asset

managers may follow individual investments.

Treasury-OFS tracks the fair market value of the assets

in the TARP portfolio on a regular basis. e value of

publicly traded common stock can be measured by

market quotations. Most of Treasury-OFS’ investments,

however, consist of securities and instruments for which

no market exists. Such securities include preferred

PUBLIC-PRIVATE INVESTMENT

PROGRAM

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 5: PROTECTING TAXPAYER INTERESTS

stocks, warrants, loans and other debt securities, as well

as common stock of private companies. As a result,

Treasury-OFS has developed internal, market-based

valuation models in consultation with Treasury-OFS’

external asset managers and in compliance with EESA.

For purposes of its ﬁnancial statements, Treasury-OFS

calculates valuations in accordance with the Federal

Credit Reform Act of 1990, as well as OMB guidelines.

e methodology is discussed further in Section Eight

[Valuation Methodology].

RISK ASSESSMENT

Treasury-OFS has developed procedures to identify and

mitigate investment risk. ese procedures are designed

to identify TARP recipients that are in a signiﬁcantly

challenged ﬁnancial condition to ensure heightened

monitoring and additional diligence and to determine

appropriate responses by Treasury-OFS to preserve

the taxpayers’ investment and minimize loss as well as

to maintain ﬁnancial stability. Speciﬁcally, Treasury-

OFS’ external asset managers review publicly available

information to identify recipients for which pre-tax,

pre-provision earnings and capital may be insuﬃcient

to oﬀset future losses and maintain required capital.

For certain institutions, Treasury-OFS and its external

asset managers engage in heightened monitoring and

due diligence that reﬂects the severity and timing of the

challenges.

Although Treasury-OFS relies on the recommenda-

tions of federal banking regulators in connection with

reviewing and approving applications for assistance,

Treasury-OFS does not have access to non-public

information collected by federal banking regulators

on the ﬁnancial condition of TARP recipients. To the

contrary, there is a separation between the responsibili-

ties of Treasury-OFS as an investor and the duties of

the government as regulator.

e data gathered through this process is used by

Treasury-OFS in consultation with its external manag-

ers and legal advisors to determine a proper course of

action. is may include making recommendations to

management or working with management and other

security holders to improve the ﬁnancial condition of

the company, including through recapitalizations or

other restructurings. ese actions are similar to those

taken by large private investors in dealing with troubled

investments. Treasury-OFS does not seek to inﬂuence

the management of TARP recipients for non-ﬁnancial

purposes.

EXCHANGE OFFERS AND

RECONSTRUCTURINGS

TARP recipients may also seek Treasury-OFS’ approval

for exchange oﬀers, recapitalizations or other restruc-

turing actions to improve their ﬁnancial condition.

Treasury-OFS evaluates each such proposal based on its

unique facts and circumstances, and takes into account

the following principles in all cases:

Pro forma capital position of the institution,•

Pro forma position of Treasury-OFS investment in •

the capital structure,

Overall economic impact of the transaction to the •

government,

Guidance of the institution’s primary federal •

supervisor, and

Consistent pricing with comparable marketplace •

transactions.

TREASURY-OFS’ ACTIONS AS A

SHAREHOLDER

Treasury-OFS’ role as a shareholder is to manage

the government’s investment and not to manage the

related company. Most of Treasury-OFS’ equity invest-

ments have been in the form of preferred stock. As is

typical for a preferred stock investor, Treasury-OFS

does not have voting rights except on certain limited

issues such as amendments to the charter and certain

transactions that could adversely aﬀect Treasury-OFS’

rights as an investor. In the event preferred dividends

are unpaid for six quarters (or four quarters in the

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 5: PROTECTING TAXPAYER INTERESTS

case of AIG preferred stock), Treasury-OFS has the

right to elect two directors to the board. Treasury-OFS

holds common shares in GM, GMAC, Chrysler and

Citigroup. In addition, the taxpayers are the beneﬁ-

ciaries of a trust that exercises 80 percent of the voting

rights of the outstanding AIG common stock. is

trust is controlled by three independent trustees who

exercise voting rights on behalf of the taxpayers and do

not report to Treasury-OFS.

Treasury-OFS has established the following four prin-

ciples to guide its actions as a common shareholder:

Reluctant shareholder: e government is a reluc-•

tant owner as a consequence of the ﬁnancial crisis

and the current recession. Treasury-OFS intends

to dispose of its investments as soon as practicable

and in conformity with the aforementioned

portfolio management principles;

Treasury-OFS will not interfere in the day-to-day •

management decisions of a company in which it

is an investor. Such interference might actually

reduce the value of those investments, impede

the companies’ successful transition to the private

sector, expose taxpayers to third party lawsuits,

and frustrate the federal government’s broader

economic policy goals;

Strong board of directors: Establishing an eﬀective •

board of directors that selects management with a

sound, long-term vision should restore a company to

proﬁtability and end the need for government sup-

port expeditiously. In cases where Treasury-OFS has

the ability to establish strong upfront conditions at

the time of investment, these may include changes to

the existing board of directors and management; and

Limited voting rights: e government intends to •

exercise its voting rights as a common shareholder

only with respect to core shareholder matters such

as board membership; amendments to corporate

charters or bylaws; mergers, liquidations, substantial

asset sales; and signiﬁcant common stock issuances.

COMPLIANCE

Treasury-OFS also takes steps to ensure that TARP

recipients comply with their TARP-related statutory and

contractual obligations. Statutory obligations include

executive compensation restrictions. Contractual

obligations vary by investment type. For most of

Treasury-OFS’ preferred stock investments, TARP

recipients must comply with restrictions on payment

of dividends and on repurchases of junior securities, so

that funds are not distributed to junior security holders

prior to repayment of the government. Recipients of

exceptional assistance must comply with additional

restrictions on executive compensation, lobbying,

corporate expenses and internal controls and must

provide quarterly compliance reports. For AIFP loans,

additional restrictions and enhanced reporting require-

ments are imposed, which is typical with debt invest-

ments compared to equity investments. Such enhanced

reporting requirements include bi-weekly status reports

(rolling 13-week cash forecast), monthly liquidity

analysis reports, and monthly budget reports covering

the current ﬁscal year.

PROGRAM SPECIFIC

CONSIDERATIONS

e following brieﬂy describes key contractual terms

and other characteristics of each program that af-

fect how Treasury-OFS will recover the TARP funds

invested in each institution.

CAPITAL PURCHASE PROGRAM (CPP)

e majority of Treasury-OFS’ investments under

TARP were made under the CPP program. Treasury-

OFS received preferred stock and warrants in return

for the capital it provided each institution. e

preferred stock is redeemable at the option of the issuer

at any time, subject to the approval of the primary

federal bank regulator. is means that the primary

federal bank regulator, such as the Federal Reserve

Bank or the FDIC, must determine that the issuer has

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 5: PROTECTING TAXPAYER INTERESTS

suﬃcient capital to repay Treasury-OFS. If permitted

to repay Treasury-OFS, the issuer must repay the full

amount of the investment plus any accrued dividends.

As of September 30, 2009, 42 issuers have repaid a

total of $70.7 billion of CPP investments. Treasury-

OFS did not require issuers to repay the preferred

stock by a particular date, because the preferred stock

would not have met the requirements for Tier 1 capital

had such a ﬁxed date been imposed. However, there

are incentives for issuers to repay. First, issuers are

subject to restrictions on executive compensation for as

long as the preferred stock is outstanding. In addition,

they are restricted in their ability to pay dividends to

common stockholders and to make other distributions

and repurchases. In addition, the dividend rate on

the preferred stock increases from ﬁve percent to nine

percent after ﬁve years.

Treasury-OFS also has the right to sell the preferred

stock to a third party. Treasury-OFS also has registra-

tion rights, which are rights to require the issuer to

assist Treasury-OFS in making a public sale of the

securities which can facilitate transfer. Although

Treasury-OFS has not exercised these rights, it may

do so in the future. In the case of Citigroup, Treasury-

OFS exchanged the CPP preferred shares for common

stock of Citigroup. Because the common stock is not

redeemable and because there is a large trading market

for Citigroup common stock, one potential manner in

which Treasury-OFS may exit this investment would

be by selling the stock in the market.

Much of Treasury-OFS’ warrant portfolio pertains to

CPP investments. Pursuant to the requirements of EESA,

Treasury receives warrants from TARP recipients in order

to give the taxpayers an opportunity to participate in any

increase in shareholder value that follows the invest-

ment. In the case of a CPP investment in a company

that is publicly traded, Treasury-OFS receives warrants to

acquire common stock with a price equal to 15 percent

of the senior preferred investment. e exercise price

on the warrants is the market price of the participating

institution’s common stock at the time of preliminary

approval calculated on a 20-trading day trailing aver-

age. In the case of an investment in a privately-held

company, Treasury-OFS receives warrants to purchase,

at a nominal cost, additional preferred stock equivalent

to ﬁve percent of the senior preferred investment.

Treasury-OFS exercises the latter kind of warrants at

closing of the senior preferred investment.

CPP Sale of Warrants

Issuers have a contractual right to repurchase the

warrants upon redemption of the preferred stock issued

to Treasury-OFS. In the event they do not repurchase,

Treasury-OFS will sell the warrants to third parties.

If an issuer wishes to repurchase its warrants, the issuer

and Treasury-OFS must agree on a price. e contract

provides for an independent appraisal procedure that

can be invoked by either party to determine this price.

Treasury-OFS has established a methodology for valuing

warrants for purposes of this process that it uses for all

banks, regardless of the size of the bank or the warrant

position. Treasury-OFS’ determination of the value of

any warrant is based on three categories of input: market

prices, ﬁnancial modeling, and outside consultants.

Further details on this valuation approach are provided

in Section Eight. If the bank and Treasury-OFS do not

agree on price and the appraisal procedure is invoked

by either party, then each party selects an independent

appraiser. ese independent appraisers will conduct

their own valuations and attempt to agree upon the fair

market value. If they agree on a price, that price becomes

the basis for repurchase of the warrants by the bank. If

these appraisers fail to agree, a third appraiser is hired,

and subject to some limitations, a composite valuation

of the three appraisals is used to establish the sale price.

Even if agreement is not reached within the aforemen-

tioned timeframe, an institution that has redeemed

its preferred stock can always bid to repurchase its

warrants at any time and Treasury-OFS can choose

whether to accept a bid. Similarly, Treasury-OFS

retains the right to sell the warrants to a third party at

a mutually agreed price. If following repayment of the

preferred stock, an institution notiﬁes Treasury-OFS

that it does not intend to repurchase its warrants, or

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 5: PROTECTING TAXPAYER INTERESTS

if an agreement is not reached, Treasury-OFS intends

to dispose of the warrants through public auctions.

Treasury-OFS has announced that the ﬁrst such

auctions would take place in early December. ese

auctions are conducted as modiﬁed “Dutch” auctions

which are registered under the Securities Act of 1933.

Only one issuer’s warrants will be auctioned in each

auction. In this format, qualiﬁed bidders may submit

one or more independent bids at diﬀerent price-

quantity combinations and the warrants will be sold at

a uniform price that clears the market.

TARGETED INVESTMENT PROGRAM

(TIP)

Treasury-OFS invested $20.0 billion in each of

Citigroup and Bank of America under TIP and

acquired preferred stock. In the case of Citigroup,

Treasury-OFS exchanged the preferred stock for

trust preferred securities, which are senior in right of

repayment to preferred stock but otherwise have many

similar terms. Both the Citigroup trust preferred

securities and the Bank of America preferred stock pay

dividends at eight percent per year. Treasury-OFS also

received warrants in connection with both investments.

e disposition considerations are similar to those

for CPP, including the fact that the issuers need the

approval of the primary banking regulators to repay the

trust preferred securities and preferred stock.

AUTOMOTIVE INDUSTRY

INVESTMENTS (AIFP/ASSP)

Treasury-OFS’ auto industry investments consist of

equity investments, largely in the form of common

stock, as well as loans. e loans must be repaid by

certain dates. e GM loan was recently amended to

require quarterly mandatory prepayments of $1 billion

from existing escrow amounts in addition to the obli-

gation for such funds to be applied to repay the loan

by June 30, 2010, unless extended. In addition, the

loan matures in July 2015. A portion of the Chrysler

loan also matures in December 2011 and the balance

in June 2017. Chrysler has recently announced that it

plans to repay the loan fully prior to maturity.

In the case of the equity investments, Treasury-OFS

holds primarily common stock in GM, Chrysler,

and GMAC. Because the companies are not publicly

traded at this time, there is no market for the common

stock. Treasury-OFS also holds preferred stock in GM

and GMAC. Of the $13.1 billion in preferred shares

in GMAC held by Treasury-OFS, $7.875 billion is

convertible at the option of GMAC subject to certain

conditions.

Contractual agreements govern disposition options

and timetables, and participants in AIFP are subject to

enhanced reporting requirements relative other TARP

recipients (discussed under “Compliance”). Treasury-

OFS will periodically evaluate both public and private

options to exit the equity investments under the AIFP.

For GM the most likely exit strategy is a gradual sell-

oﬀ of shares following a public oﬀering. Pursuant to

its operating agreement, General Motors will attempt

a reasonable best eﬀorts initial public oﬀering by July

10, 2010. is date marks the one-year anniversary of

the automaker’s exit from bankruptcy. For Chrysler

and GMAC, the exit strategy may involve either a

private sale or a gradual sell-oﬀ of shares following

a public oﬀering. In each case, Treasury-OFS’ goal

is to dispose of the government’s interests as soon as

practicable consistent with EESA goals. As described

below, Treasury will sell down, and ultimately sell oﬀ

completely its interests in a timely and orderly manner

that minimizes ﬁnancial market and economic impact.

At the same time, Treasury cannot control market

conditions and have an obligation to protect taxpayer

investments and maximize overall investment returns

within competing constraints.

Treasury-OFS has reduced the Automotive Supplier

Support Program (ASSP) aggregate commitment

from $5.0 billion to $3.5 billion. Treasury-OFS’

current funding equates to $0.4 billion, with GM and

Chrysler accounting for $0.3 billion and $0.1 billion,

respectively. Treasury-OFS does not anticipate in-

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 5: PROTECTING TAXPAYER INTERESTS

creased participation prior to the program’s April 2010

expiration.

AMERICAN INTERNATIONAL GROUP

(AIG)

Treasury-OFS holds preferred stock in AIG. As with

the CPP preferred, there is no mandatory repayment

date. AIG has replaced most of its board of directors,

as well as its chief executive oﬃcer since September

2008, and is presently engaged in a variety of restruc-

turing initiatives, including the divestment of assets

to enable repayment of loans made by the FRBNY, as

well as Treasury-OFS’ investment and the wind-down

of exposure to certain ﬁnancial product and derivative

trading activities to reduce excessive risk taking.

TERM ASSET BACKED LOAN FACILITY

(TALF)

Although Treasury-OFS has committed to provide up

to $20 billion in credit protection to the TALF special

purpose vehicle, Treasury-OFS has only funded $0.1

billion as of September 30, 2009. Additional fund-

ing will be required only if borrowers default on their

non-recourse loans and surrender the collateral for such

loans, which consists of asset-backed securities to the

FRBNY, which made the loans. In that event, Treasury-

OFS’ funds are used to reimburse the Federal Reserve

Bank, and the asset-backed securities would then be sold

to repay Treasury-OFS.

ASSET GUARANTEE PROGRAM (AGP)

is program, which currently includes only

Citigroup, diﬀers from other TARP ﬁnancial institu-

tion support programs in that Treasury-OFS does not

invest TARP funds in the institution directly. Rather,

TARP funds are reserved to cover a portion of the pos-

sible losses in the selected assets. In conjunction with

the transaction, Treasury-OFS received $4.0 billion

of preferred stock with identical terms as Citigroup’s

agreement under TIP. is investment is managed and

monitored in conjunction with TIP. As of September

30, 2009, no payment had been made to Citigroup

related to the covered asset pool. e preferred stock

can be redeemed or sold in the same manner as CPP

and TIP preferred stocks. Treasury-OFS also received

warrants in connection with this investment.

Treasury-OFS has a cross functional team of staﬀ over-

seeing and monitoring the covered asset pool under the

Citigroup AGP. Given the nature of the transaction, the

Treasury-OFS, FRBNY and FDIC work collaboratively

on overseeing the Citigroup AGP. Additionally, U.S.

Federal Parties have engaged outside independent service

providers to perform various business, compliances/

audit activities with respect to the covered asset pool.

PUBLIC-PRIVATE INVESTMENT

PROGRAM (PPIP)

Treasury-OFS’ investments in Public-Private

Investment Funds (PPIFs) are subject to diﬀerent

disposition considerations given the nature of the

investments. Treasury-OFS provides funds which are

used by the PPIF managers, together with private

capital, to purchase asset-backed securities. ese

asset-backed securities then yield principal, interest

and dividend payments to the PPIFs which are used to

repay Treasury-OFS for its loans, and provide distribu-

tions to Treasury-OFS and the private investors for

their equity investments.

Treasury-OFS’ management of these investments is

therefore focused on ensuring that the asset managers

comply with the requirements of the program, includ-

ing the detailed compliance rules that govern matters

such as conﬂicts of interest. Fund managers are re-

quired to disclose to and seek the approval of Treasury-

OFS with respect to certain fundamental corporate

policies that could impact the PPIFs. In addition,

there are restrictions on dealings with aﬃliates and

other interested parties, which will help ensure that the

PPIFs only enter into arm’s-length transactions.

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 6: PROMOTING TRANSPARENCY

Section Six:

Promoting Transparency

Treasury-OFS is committed to providing full disclosure

regarding the TARP. is includes information on how

the money has been spent, who has received it, and the

results of those investments. Providing such informa-

tion promotes transparency and insures accountability.

In order to meet these objectives, Treasury-OFS

operates under a core set of principles. First, Treasury-

OFS will provide detailed information on its programs

on a timely basis, including information on speciﬁc

institutions. Second, Treasury-OFS will provide that

information in accessible and usable formats. Finally,

Treasury-OFS will focus on answering the questions

that are most important to the public, the Congress or

the oversight bodies.

1. PROVIDING DETAILED AND TIMELY

INFORMATION

Treasury-OFS publishes a variety of reports that

provide information about TARP programs and trans-

actions, and Treasury-OFS activities. For the period

ended September 30 2009, Treasury-OFS published

the following reports and information, which are avail-

able publicly at www.ﬁnancialstability.gov:

86 transaction reports, in accordance with sec-•

tion 114 of EESA, which include details on every

investment in every institution under every program,

including dates and amounts invested, as well as pay-

ments received with respect to TARP investments,

10 Section 105(a) monthly congressional reports •

which provide qualitative program updates and

detailed ﬁnancial information on all programs,

7 Tranche Reports in accordance with Section •

105(b) of EESA, which outline the details of the

transactions related to each $50 billion increment

of TARP investments,

3 Dividend and interest reports,•

2 Making Home Aﬀordable program reports, •

7 Monthly Lending and Intermediation Snapshot •

reports and 7 CPP Monthly Lending Reports, and

2 Section 104(g) Financial Stability Oversight •

Board quarterly reports to the Congress.

All program descriptions, including term sheets and

forms of contracts, are also posted. Treasury-OFS has

used standard forms of contracts and thus within a

program there is little variation among the contracts

for all institutions. Treasury-OFS has also posted

investment contracts on Treasury-OFS website within

two business days of each transaction’s closing.

e monthly report to Congress, also known as the

Section 105(a) report, provides one of the most useful

ways to track the activities of TARP. It contains easy-

to-read charts showing how much money has been

spent and where the money is going by program. It

also contains charts on how much money has been re-

paid or returned to Treasury-OFS, descriptions of each

TARP program as well as highlights of new develop-

ments. For those who want more detail, the transaction

reports give details on each investment.

2. MAKING INFORMATION USABLE

AND ACCESSIBLE

A key element in Treasury-OFS’ public outreach eﬀort

is providing user-friendly resources online. Earlier this

year, Treasury-OFS launched a new website—www.

FinancialStability.gov—that provides a wealth of

information about the TARP. FinancialStability.gov

provides all of the TARP reports, lists the institutions

participating in the Treasury-OFS’ programs, and makes

available detailed contracts deﬁning those investments.

As of today, Treasury-OFS has posted nearly 700

investment contracts, in addition to terms and program

guidelines for all programs under EESA.

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 6: PROMOTING TRANSPARENCY

Treasury-OFS also launched the website www.

MakingHomeAﬀordable.gov to provide speciﬁc infor-

mation to homeowners on the Making Home Aﬀordable

Program and eﬀorts to mitigate the fore-closure crisis.

In addition, Treasury-OFS has launched an initiative to

ensure that its website meets the needs of all its users to

provide easily accessible data and information.

3. ANSWERING THE RIGHT

QUESTIONS

In being transparent with information, Treasury-OFS

has designed reports not only to be detailed and timely,

but also to answer the questions that observers most

frequently ask. For example, Treasury-OFS is often

asked about what banks are doing with their TARP

funds. So, in January 2009, Treasury-OFS launched

an important initiative to help the public easily assess

the lending and intermediation activities of the largest

CPP participants and more limited information for

smaller CPP participants. Treasury-OFS now publishes

monthly and quarterly lending surveys that contain

information on the lending and other activities of over

670 institutions that have received TARP funds.

Performance Metrics for FY 2010

Treasury-OFS has developed performance measures

related to each of its strategic goals for FY 2010.

Additional performance measures will evaluate the •

change in the capital ratios and lending of CPP

participants by comparing them to a control set of

banks with similar characteristics.

Treasury-OFS will continue to evaluate perfor-•

mance of the SCAP bank holding companies

(BHCs). Performance measures will include changes

in capital ratios and lending of the SCAP BHCs

versus control banks with similar characteristics.

Treasury-OFS will continue to track various per-•

formance measures for the TALF. ese measures

will include the TALF-eligible ABS issuance,

spreads in the secondary markets of RMBS, and

CMBS securities, as well as the spread between

secondary ABS and benchmarks.

Performance measures of the number of HAMP •

modiﬁcations (trial and permanent) entered into,

the redefault rate, and the change in average bor-

rower payments will be tracked.

Several speciﬁc measures will address taxpayer •

protection. First, Treasury-OFS will seek to have a

clean audit opinion on its ﬁnancial statements. In

addition, the ﬁnancial return for each program will

be evaluated against its benchmark (subsidy rate).

Finally, Treasury-OFS will report performance data

on how oversight issues are addressed and resolved.

Several indicators will measure performance on pro-•

moting transparency. First, Treasury-OFS will track

on-time reporting performance. Second, Treasury-

OFS will measure the degree of user satisfaction

with the TARP’s website, www.ﬁnancialstability.

gov, to determine areas for improvement. Finally, a

request response index will be created to provide the

public with a clear measure of timely performance.

HAMP Reporting

Treasury-OFS is improving performance and enhancing

transparency on the HAMP.

1. Servicer-speciﬁc results are now reported on a

monthly basis. These reports provide a transparent and

public accounting of individual servicer performance by

detailing the number of trial modiﬁcation offers extended.

2. Treasury-OFS is establishing speciﬁc operational

metrics. These metrics wil measure the performance

of each servicer, such as average borrower wait time in

response to inquiries, and the response time for completed

applications; and servicer performance will be included in

our monthly public report.

3. Treasury-OFS directed that Freddie Mac review

declined modiﬁcations. In its role as compliance agent,

Freddie Mac has developed a “second look” process by au-

diting samples of HAMP modiﬁcation applications that have

been declined. This will minimize the likelihood that borrower

applications are overlooked or that applicants are inadver-

tently or incorrectly denied a modiﬁcation. In addition, the

“second look” program is examining servicer non-performing

loan (NPL) portfolios to identify eligible borrowers that should

have been solicited for a modiﬁcation, but were not.

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 7: FINANCIAL ACCOUNTING POLICY

Under TARP, Treasury-OFS has made equity invest-

ments, loans and asset guarantees in a range of ﬁnan-

cial institutions. In exchange for these investments,

loans, and asset guarantees, Treasury-OFS, on behalf

of the taxpayer, has received ﬁnancial instruments—

equity, debt and warrants—from these companies. In

this report, Treasury-OFS is presenting a transparent

accounting of the current estimated cost of TARP,

which reﬂects estimates of the value of those invest-

ments, loans and asset guarantees. Treasury-OFS has

developed and presented the estimates in a way that is

consistent with the statutory reporting requirements.

e statutory reporting requirements for TARP in

this area are in some respects unique. Under EESA,

Treasury-OFS is required to determine the budgetary

cost of TARP under the general framework of credit

reform. Treasury-OFS has determined it was ap-

propriate to also use the credit reform framework for

ﬁnancial reporting purposes. EESA also requires that

the budgetary cost of TARP programs be determined

using a methodology that incorporates market risk.

is requirement means that TARP equity investments

similar to those that are publicly traded are valued in a

way that is analogous to the “fair value” standard that

private sector ﬁrms are required to use.

is section explains the applicable reporting re-

quirements, discusses how Treasury-OFS has met

the requirements, and describes how this reporting

methodology relates to commercial reporting concepts.

APPLICABLE BUDGET AND

ACCOUNTING STANDARDS

e Emergency Economic Stabilization Act of 2008

(EESA) requires that the cost of troubled assets

purchased or guaranteed be determined for budget-

ary accounting purposes in accordance with the

Federal Credit Reform Act of 1990 (FCRA). EESA

also requires that the cost calculations be adjusted for

market risk.

FCRA established a methodology for budgeting for

loans or loan guarantees issued by the federal govern-

ment. Under the FCRA, the budgets for loans and loan

guarantee programs reﬂect the expected cost of these ﬁ-

nancial arrangements, rather than just the cash ﬂows as

is typically the case for federal budgeting. For example,

when a federal agency enters into a loan guarantee,

no actual cash outﬂow from the government typically

occurs, however, the cash outﬂows and the expected

cost over the life of the guarantee may be substantial.

In contrast, when a federal agency provides a loan,

there is a substantial cash outﬂow at loan origination,

but the ultimate cost of that loan to the government

will depend on future repayments.

Rather than using a cash basis for credit programs,

which can be misleading, the FCRA calls for agencies

to record the “subsidy” cost of a loan or loan guaran-

tee at the time of the disbursement of the loan. e

subsidy cost is the net present value of all cash ﬂows as-

sociated with the credit transaction, usually calculated

by discounting all payments back to the current period

at the appropriate Treasury rate. Subsidy estimates

reﬂect both the terms of the underlying instrument

and the likelihood of repayment. For example, if a

loan carries a rate below the comparable Treasury rate,

that loan will generate a subsidy cost even if the loan

is expected to be fully repaid. e subsidy calculation

also reﬂects the risk that the borrower may not repay

the entire amount of the loan. e potential for less

than full repayment is reﬂected in the expected cash

ﬂows, which should reﬂect historical defaults on

similar instruments, and assumptions about possible

future economic performance.

Section Seven:

Financial Accounting Policy

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 7: FINANCIAL ACCOUNTING POLICY

e original subsidy cost estimate made at the time the

transaction occurs is updated each year to reﬂect the

actual cash ﬂows that occurred as well as any changes

in the expected future repayments from the borrower.

EESA mandated that the FCRA be used to determine

the cost of all TARP investments for budgetary pur-

poses, although the FCRA as originally designed did

not cover equity investments. Treasury-OFS concluded

that it was appropriate to apply FCRA to its preferred

stock purchases since preferred stock has a dividend

rate and regularly scheduled dividend payments,

similar to debt instruments.

e Federal Accounting Standards Advisory Board

(FASAB) has promulgated extensive accounting

guidance that establish Federal accounting practices

for loans and guarantees are consistent with the FCRA

method of budgeting for credit programs. TARP

investments in direct loans, such as those to the auto

industry, and asset guarantees are covered by existing

accounting standards. Speciﬁcally Statement of Federal

Financial Accounting Standards 2, Accounting for

Direct Loans and Loan Guarantees (SFFAS 2) provides

relevant accounting guidance for direct loans and loan

guarantees issued by federal entities and closely paral-

lels the FCRA provisions. Federal entities must record

loans disbursed as an asset, valued at the net present

value of expected future cash inﬂows. e diﬀerence

between the amount disbursed and the net present

value of expected cash inﬂows for loans is recorded as

a subsidy cost at the time of the loan disbursement.

Federal entities must book outstanding guarantees as

an asset or a liability, valued at the net present value of

the expected future cash ﬂows, with the corresponding

amount reﬂected in subsidy cost. Estimates of future

cash ﬂows are revised on an annual basis with changes

reﬂected as an increase or decrease in the subsidy allow-

ance and reﬂected in the Statement of Net Costs.

FASAB standards do not cover equity investments by

federal entities in private enterprises as the Federal

government generally does not make these types of

investments. Consistent with the accounting policy

for equity investments made by Treasury in private

entities, Treasury-OFS accounts for its equity invest-

ments at fair value, deﬁned as the estimated amount

of proceeds Treasury-OFS would receive if the

equity investments were sold to a market participant.

Treasury-OFS uses the present value accounting

concepts embedded in SFFAS No. 2 to derive fair

value measurements. Treasury-OFS concluded that

the equity investments were similar to direct loans in

that there is a stated interest rate and a redemption

feature which, if elected, requires repayment of the

amount invested. Furthermore, the EESA requirement

to consider market risk provides a basis to arrive at a

fair value measurement. erefore, Treasury-OFS uses

SFFAS No. 2 for reporting and disclosure requirements

of it equity investments. Treasury-OFS accounts for the

warrants received under Section 113 of EESA as fees

under SFFAS No. 2, as such the value of the warrants

is a reduction of the subsidy allowance.

MARKET RISK

EESA departed from the FCRA by requiring that an

adjustment for market risk be made to the interest rate

used to discount future expected cash ﬂows rather than

using the interest rate on comparable maturity Treasury

debt as the FCRA requires. is distinction values the

TARP equity investments as closely as possible to how

they would be priced in private markets. e incorpo-

ration of market risk is a departure from the standard

FCRA methodology and is an important factor in the

valuations included in Treasury-OFS ﬁnancial state-

ments. e loan and asset guarantee models include

an adjustment for market risk which is intended

to capture the risk of unexpected losses, but is not

intended to represent fair value.

TARP holds a variety of investments. e Citigroup

common stock is a standard ﬁnancial instrument

that trades in public markets and has a market price

that can be directly observed. Certain other TARP

investments are closely related to tradable securities.

Wherever possible Treasury-OFS has sought to use

market prices of traded equity securities in estimating

the fair value of TARP equity investments.

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 7: FINANCIAL ACCOUNTING POLICY

Most TARP equity investments do not have direct ana-

logs in private markets so Treasury-OFS uses internal

market-based models to estimate the fair value of these

investments. ese models have been benchmarked

to actual securities with observable market prices to

try and ensure, to the maximum extent possible, that

the model’s results actually reﬂect how the private

markets are pricing risk. As described in Section Eight

[Valuation], the valuation of Treasury-OFS’ equity

investments comes as close as possible to how private

ﬁnancial markets would price those instruments.

COMPARISON TO COMMERCIAL

REPORTING CONCEPTS

While commercial reporting standards vary, fair value

is the most common valuation approach for report-

ing relatively liquid equity investments like preferred

stock. For Treasury-OFS, adjusting our estimates to

reﬂect market risk ensures that the asset values reﬂect

a reasonable assessment of fair value, which can be

readily compared and evaluated based on commercial

investment information.

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 8: TARP VALUATION METHODOLOGY

is section describes the methodologies used to esti-

mate the value of the diverse set of TARP investments

made under EESA. Wherever possible, Treasury-OFS

has sought to use market prices of tradable securities

to make direct estimates of the market value of TARP

investments. Use of market prices was possible for

TARP investments that are standard ﬁnancial instru-

ments that trade in public markets or are closely related

to tradable securities. For those TARP investments that

do not have direct analogs in private markets, Treasury-

OFS uses internal market-based models to estimate the

market value of these investments as detailed below.

INCORPORATING “MARKET RISK” IN

VALUATION MODELS

Risk can be taken into account in a number of ways

when estimating the value of an asset. EESA requires

that the budgetary cost and risk of troubled assets

acquired under TARP be estimated in accordance with

the Federal Credit Reform Act of 1990 (FCRA) and

using a market adjusted discount rate. Where possible,

market prices are used to benchmark the values of

TARP investments.

e standard methodology under FCRA is to estimate

asset values as the net present value of expected cash

ﬂows, using Treasury rates for discounting. In that

approach, risk is reﬂected in the expected cash ﬂows.

For example, default risk on a loan would be reﬂected

in the fact that the expected cash ﬂows are less than the

contractual obligations.

EESA also requires for budgetary purposes that the

FCRA methodology be modiﬁed to include an adjust-

ment for market risk. Speciﬁcally, EESA requires that

instead of discounting future expected cash ﬂows at the

interest rate on comparable maturity Treasury debt, an

additional adjustment for market risk must be made.

For ﬁnancial reporting purposes, the market risk is

incorporated in the future expected cash ﬂows.

In eﬀect, the requirement to adjust the standard FCRA

methodology to reﬂect “market risk” means that for the

purposes of budget and accounting, TARP equity in-

vestments are valued as closely as possible to how they

would be priced in private markets. is requirement is

relatively easy to implement for TARP investments that

are closely related to securities with observable market

prices. However, where empirical models are needed to

estimate the value of non-standard TARP investments

those models must be benchmarked to ensure, to the

extent possible, that their results reﬂect the way public

markets price risk. is benchmarking is an important

part of valuation methodology.

e adjustment for “market risk” can be reﬂected in

either expected cash ﬂows or the discount rate used

to calculate net present values. Regardless of where

the adjustment is made, it should not have a mate-

rial impact on the results as long as those models are

benchmarked to suitable measures of market risk in an

appropriate manner.

CPP Investments

Under the CPP as detailed in Section ree [Ensuring

Stability], Treasury-OFS has provided capital to 685

qualiﬁed ﬁnancial institutions and received preferred

stock and warrants in return. To estimate the value of

these investments, Treasury-OFS has built two separate

statistical models: one to value the preferred stock

and one to value the warrants. Both valuation models

use standard methods employed in academe and the

ﬁnancial sector. An important aspect of these models is

the treatment of the implicit options embedded in the

assets; i.e., the ﬁnancial institution’s decision to repur-

chase the asset and Treasury-OFS’ decision to exercise

the warrants. ese models make use of a variety of in-

formation, including historical and current information

Section Eight:

TARP Valuation Methodology

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 8: TARP VALUATION METHODOLOGY

on the institution’s balance sheets, the term-structure of

interest rates, and equity prices and dividends.

e estimated values of CPP preferred equity invest-

ments are the net present values of the expected divi-

dend payments and repurchases. e model is used to

estimate the likely distribution of dividend payments

over time. Estimates of the ultimate cost of TARP will

decline further if early repayments are higher than

those currently built into the models. It is assumed

that the key decisions that aﬀect whether or not banks

pay their preferred dividends are made by each bank

based on the strength of their balance sheet. e model

assumes a probabilistic evolution of each bank’s asset

to liability ratio. Each institution’s assets are subject

to uncertain returns and institutions are assumed to

manage their asset to liability ratio in such a way that

it reverts over time to a target level. Historical volatil-

ity is used to scale the likely evolution of each banks’

assets-to-liabilities ratio.

In the model, when equity decreases, i.e. the asset-to-

liability ratio falls; institutions are increasingly likely

to default, either because they enter bankruptcy or are

closed by regulators. e probability of default is esti-

mated based on the performance of a large sample of

US banks over the period 1990-2008. At the other end

of the spectrum, institutions call their preferred shares

when the present value of expected future dividends

exceeds the call price; which occurs when equity is high

and interest rates are low.

e warrants for the purchase of common stock are

priced using an option-pricing model augmented for

the fact that exercising warrants infuses cash into an

institution and also dilutes current stockholders. e

model assumes optimal warrant exercise by Treasury-

OFS; that is, the warrants are exercised if the expected

present value of income from future optimal warrant

exercise is less than the current in-the-money value.

e key input to the model—the future volatility

of bank stock prices—is derived from the model for

preferred stock.

e basic preferred equity model is benchmarked to

the market pricing of risk. e model was used to esti-

mate the value of preferred equity instruments issued

by 18 of the CPP banks that trade actively in public

markets. ese particular instruments were chosen

because they share important characteristics with the

CPP instruments. In particular, these traded instru-

ments have very long maturities and are callable. e

stochastic assumptions that drive the evolution of bank

balance sheets in the model were then adjusted so the

model’s valuation of this portfolio of tradable securities

matched the observed market prices.

e only other adjustment to the model relates to

the banks’ repurchases of preferred securities from

Treasury-OFS. Treasury-OFS management, based on

public statements by individual banks, believes that a

signiﬁcant volume of CPP and TIP preferred shares is

likely to be repaid earlier than the model predicts. To

reﬂect this judgment, the model is adjusted to generate

approximately $70 billion in CPP and TIP repurchases

over the next twelve to eighteen months.

Treasury-OFS exchanged the CPP preferred shares

purchased from Citigroup for common stock. e

exchange rate was $3.25 per share resulting in Treasury-

OFS obtaining approximately 7.7 billion shares. e

value of these shares is the amount of shares held times

its market price.

TIP

Treasury-OFS provided funds to both Citigroup

and Bank of America under the Targeted Investment

Program through the purchase of additional preferred

shares. ese investments are valued in the same

manner that Treasury-OFS uses to value CPP invest-

9 Without this adjustment the CPP preferred equity model

predicts roughly $20 billion in repurchases over the next year.

e valuation model is altered both by directly imposing the

repurchases of those institutions that have stated plans to

repurchase soon, and by adding a small additional beneﬁt for

any institution that repays its TARP funds and exits the CPP.

is adjustment increases rates slightly to be consistent with a

reasonable forecast of future repurchases.

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 8: TARP VALUATION METHODOLOGY

ments in large institutions. As noted above, the model

assumes $70 billion in CPP and TIP repurchases.

AIG Investment Program

e method used to value AIG preferred shares is

broadly analogous to the approach used to value CPP

investments. However, greater uncertainty exists for

the valuation of preferred shares for AIG. First, the size

of Treasury-OFS’ holding of preferred shares rela-

tive to AIG’s total balance sheet makes the valuation

extremely sensitive to assumptions about the recovery

ratio for preferred shares should AIG enter default.

Second, no comparable traded preferred shares exist.

erefore, Treasury-OFS based the AIG valuation on

the observed market values of publicly traded assets on

either side of the liquidation preference of the preferred

stock; common stock (paid after preferred stock),

and the most junior subordinated debt (paid before

preferred stock). Further, based on certain publicly

available third party sources, assumptions about pay-

outs in diﬀerent outcomes and the probability of some

outcomes were made. Finally, external asset managers

provided estimated fair value amounts, premised on

public information, which also assisted Treasury-OFS

in its valuation. ese diﬀerent factors were all used in

determining the best estimate of the fair value of AIG

assets. e AIG Investment Program also includes an

equity capital facility that can be drawn upon at the

discretion of AIG.

AIFP

e valuation of equity-type investments was per-

formed in a manner that is broadly analogous to

the methodology used for CPP investments, with

reliance on publicly traded securities to benchmark

the assumptions of the valuation exercise. Debt with

potential value is valued using rating agency default

probabilities.

As part of the General Motors (GM) bankruptcy pro-

ceedings, Treasury-OFS received a 60.8 percent stake

in the common equity of General Motors Company

(New GM). Because the unsecured bond holders in

General Motors Corporation (Old GM) received 10

percent of the common equity ownership and warrants

in New GM, the expected recovery rate implied by the

current trading prices of the Old GM bonds provides

the implied value of the New GM equity. Treasury-

OFS used this implied equity value to account for its

equity stake in New GM.

For the GMAC equity instruments, Treasury-OFS

used the model to estimate the value of GMAC sub-

ordinated debt that trades actively in public markets.

e stochastic assumptions that drive the evolution

of the institution’s balance sheet in the model were

then adjusted so the model’s valuation of this security

matched the observed market price.

Treasury-OFS values direct loans using an analyti-

cal model that estimates the net present value of the

expected principal, interest, and other scheduled

payments taking into account potential defaults. In

the event of a ﬁnancial institution’s default, these

models include estimates of recoveries, incorporating

the eﬀects of any collateral provided by the contract.

e probability of default and losses given default are

estimated by using historical data when available, or

publicly available proxy data, including credit rating

agencies historical performance data.

Treasury-OFS also benchmarks the valuation of OFS’

holdings of auto securities against the assumptions

about the dynamics of future revenues and costs

provided by an inter-agency working group dealing

with the automotive industry.

TALF

Under the TALF program, Treasury-OFS will provide

funding of up to $20 billion as necessary for the

purchase of TALF collateral through a direct loan to

a Special Purpose Vehicle (SPV). e SPV collects

monthly interest spreads on all outstanding TALF

loans, as well as any income or sale proceeds from

purchased collateral. When the program is wound

down, Treasury-OFS will be repaid principal and inter-

est on the loan if funds are available, and will collect

90 percent of any proceeds remaining in the SPV. e

value of Treasury-OFS’ loan to the TALF SPV is the

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 8: TARP VALUATION METHODOLOGY

estimated net present value of the expected principal,

interest, and additional proceeds.

To derive the cash ﬂows to the SPV, and ultimately,

Treasury-OFS, the model simulates the performance

of underlying collateral. Loss probabilities on the

underlying collateral are calculated based on analysis of

historical loan loss and charge oﬀ experience by credit

sector and subsector. Historical mean loss rates and

volatilities are signiﬁcantly stressed to reﬂect recent

and projected performance. Simulated losses are run

through cash ﬂow models to project impairment to

the TALF eligible securities. Impaired securities are

projected to be purchased by the SPV, requiring ad-

ditional Treasury-OFS funding. Simulation outcomes

consisting of a range of loss scenarios are probability-

weighted to generate the expected net present value of

future cash ﬂows.

AGP

Under the AGP, Treasury-OFS received preferred

shares and warrants in exchange for providing a

guarantee on a pool of Citigroup’s assets. e value of

the AGP preferred shares and warrants is determined

in exactly the same manner that Treasury-OFS uses to

value CPP investments in large institutions. e cost

that Treasury-OFS expects to incur is based on pro-

jected losses on the asset pool under a weighted average

of diﬀerent possible loss scenarios.

e value of the AGP is the discounted expected cash

inﬂows from the preferred shares and warrants less the

expected costs of the TARP expenditures to make good

on the asset pool guarantees and adjusted for market risk.

Sensitivity Analysis

e ultimate value of TARP investments will only be

known in time. Realized values will vary from cur-

rent estimates in part because economic and ﬁnancial

conditions will change. Many TARP investments do

not have readily observable values and their values can

only be estimated by Treasury-OFS.

Sensitivity analysis is one way to get some feel for the

degree of uncertainty around Treasury-OFS estimates.

In the analysis reported here, Treasury-OFS focuses on

the largest components of the TARP, the assets held

under the Capital Purchase Program (CPP), as well as

preferred stock investments made under the Targeted

Investment Program (TIP). Second, Treasury-OFS

focuses on two of the most important inputs to the

valuation: i) whether and when the banks repay the

preferred stock, and ii) whether there are changes in

the market price of publicly-traded preferred stock

used as a benchmark for valuing the preferred stock

held in the TARP.

Prepayments: e CPP preferred stock carries a 5

percent dividend, which increases to 9 percent after

5 years. Banks able to repay would be likely to do so

at the 5-year point. However, some banks have repaid

early. Over $70 billion of the $204 billion of preferred

stock has already been repaid. e model forecasts ad-

ditional repayments over the next 18 months of $19.5

billion. Treasury-OFS increased that forecast by $50

billion for CPP and TIP combined to reﬂect additional

anticipated repayments over the next 12 months. As a

sensitivity analysis, Treasury-OFS computed the CPP

and TIP values without the additional $50 billion

of anticipated repayments. e result is shown in

Scenario 1 of Table 8.

Benchmark Preferred Stock: e valuation procedure

entails observing the market price of publicly-traded

preferred stock and calibrating the model (in particular

the risk premium) to match those prices. e calibrat-

ed model is then used to price the non-publicly traded

preferred stock held by the TARP. e benchmark

preferred stock consists of a portfolio of claims issued

by some of the same institutions with TARP preferred

stock. It is generally the larger institutions that have

issued preferred stock. e TARP preferred stock for

smaller institutions may not be exactly comparable,

but the bulk of TARP investments, as measured on a

dollar basis, are in large institutions.

e preferred stock calibration procedure imposes a

strict discipline on the model. If one parameter in the

model is changed, calibration to the market benchmark

will induce an oﬀsetting change in other parameters,

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 8: TARP VALUATION METHODOLOGY

with the result that the ﬁnal valuation is not altered

much. Changes in the price of the benchmark, how-

ever, have the potential to signiﬁcantly alter the valua-

tions. As a sensitivity analysis, Treasury-OFS increases

and decreases the value of the benchmark preferred

stock in the CPP and TIP by 10 percent. e result is

shown in Scenarios 2 and 3 of the following table.

To put this sensitivity analysis in perspective it is useful

to consider the range over which actual preferred shares

have moved in this crisis. Figure 15 shows the prices of

callable preferred shares of those CPP banks that have

such instruments outstanding. Since their troughs in

early March, these shares have recovered substantially.

Currently the basket of callable preferred shares for

CPP banks is trading at about 76 percent of their call

prices which leaves opportunity for further improve-

ment. Of course just last March these instruments

were trading for less than half their current value.

is considerable volatility, along with the sensitivity

analysis presented here, gives a good sense of the degree

of unavoidable uncertainty around the estimates of the

valuation of TARP investments presented here.

FIGURE 15. Prices of Callable Preferred Shares Issues by CPP

Banks, (Percent of Call Price)

Percent

CPP Repaid CPP Still Outstanding

CPP Launched

FSP

Valuation (8/30)

30%

40%

50%

60%

70%

80%

90%

100%

110%

2007 20092008

Note: Weighted averages of prices of callable preferred shares issued by

three CPP banks that have already repaid their TARP capital injections and

14 CPP banks that have not. Prices are expressed as a percent of the call

price. Source Bloomberg.

TABLE 8: MARKET VALUE SENSITIVITY

(DOLLARS IN BILLIONS)

Current

Market

Value

Scenario

Program

Additional

Repayments

Additional

Repayments

10%

Financial

Stock

Price

Increase

10%

Financial

Stock

Price

Decrease

CPP 133.0 127.7 141.8 123.7

% change

from current

N/A -4.03% 6.58% -7.01%

TIP 38.6 36.3 39.8 37.4

% change

from current

N/A -5.96% 3.05% -2.98%

Total 171.6 164.0 181.5 161.1

% change

from current

N/A -4.46% 5.78% -6.10%

1/ The difference between the values contained in this table and the ﬁnancial

statements is that the ﬁnancial statement values include the warrants.

2/ Assumes $70 billion in repayments over the next 12 to 18 months.

Other Sources of Sensitivity

Wherever possible Treasury-OFS has used direct

market proxies to estimate the value of TARP invest-

ments. e volatility of the market prices of the related

securities is an important indicator of the uncertainty

of our estimates of what the returns on TARP invest-

ments ultimately will be. For example, the price of

Citigroup common shares has ﬂuctuated in a range

from $2.6 to $5.2 per share just since the SCAP results

were announced in early May.

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 9: SYSTEMS, CONTROLS, AND LEGAL COMPLIANCE

Section Nine:

Systems, Controls, and Legal Compliance

MANAGEMENT ASSURANCE STATEMENT

e Treasury Oﬃce of Financial Stability’s (Treasury-OFS) management is responsible for establishing and

maintaining eﬀective internal control and ﬁnancial management systems that meet the objectives of the Federal

Managers’ Financial Integrity Act (FMFIA), 31 U.S.C. Section 3512(c), (d). Treasury-OFS has evaluated its

management controls, internal controls over ﬁnancial reporting, and compliance with the federal ﬁnancial

systems standards. As part of the evaluation process, Treasury-OFS considered the results of extensive docu-

mentation, assessment and testing of controls across Treasury-OFS, as well as the results of independent audits.

Treasury-OFS conducted its reviews of internal controls in accordance with the FMFIA and the Oﬃce of

Management and Budget (OMB’s) Circular A-123, Management’s Responsibility for Internal Control.

As a result of its reviews, Treasury-OFS management concludes that the management control objectives de-

scribed below, taken as a whole, were achieved as of September 30, 2009. Speciﬁcally, this assurance is provided

relative to Sections 2 (internal controls) and 4 (systems controls) of FMFIA. Treasury-OFS further assures that

the ﬁnancial management systems relied upon by Treasury-OFS are in substantial compliance with the require-

ments imposed by the Federal Financial Management Improvement Act (FFMIA). Treasury-OFS does not rely

on any ﬁnancial systems beyond those maintained by the Department of the Treasury and Fannie Mae.

Treasury-OFS’ internal controls are designed to meet the management objectives established by Treasury and

listed below:

Programs achieve their intended results eﬀectively and eﬃciently; a.

Resources are used consistent with the overall mission;b.

Programs and resources are free from waste, fraud, and mismanagement;c.

Laws and regulations are followed;d.

Controls are suﬃcient to minimize any improper or erroneous payments;e.

Performance information is reliable; f.

Systems security is in substantial compliance with all relevant requirements;g.

Continuity of operations planning in critical areas is suﬃcient to reduce risk to reasonable levels; andh.

Financial management systems are in compliance with federal ﬁnancial systems standards, i.e., FMFIA i.

Section 4/FFMIA.

In addition, Treasury-OFS management conducted its assessment of the eﬀectiveness of internal control

over ﬁnancial reporting, which includes safeguarding of assets and compliance with applicable laws and

regulations, in accordance with OMB Circular A-123, Management’s Responsibility for Internal Control,

Appendix A, Internal Control over Financial Reporting. Based on the results of this evaluation, Treasury-

OFS provides unqualiﬁed assurance that internal control over ﬁnancial reporting is appropriately designed

and operating eﬀectively as of September 30, 2009, with no related material weaknesses noted.

Sincerely,

Herbert M. Allison, Jr.

Assistant Secretary for Financial Stability

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 9: SYSTEMS, CONTROLS, AND LEGAL COMPLIANCE

Internal Control Program

e Emergency Economic Stabilization Act (EESA)

established the Oﬃce of Financial Stability (Treasury-

OFS) on October 3, 2008. Shortly thereafter, Treasury-

OFS funded $115 billion to eight ﬁnancial institutions

as part of the Capital Purchase Program. From the

inception of that initial program to the current day, the

importance of eﬀective internal controls in safeguard-

ing the use of taxpayer dollars to provide ﬁnancial

stability through the Troubled Asset Relief Program

(TARP) has remained a top priority of Treasury-OFS

management.

Whether deploying operational processes to support

new TARP programs or implementing complex budget

and ﬁnancial reporting processes to support its ﬁrst

year of operations, Treasury-OFS endeavors to establish

an eﬀective initial operating capability for internal con-

trols that are ﬁrst and foremost eﬀective at mitigating

risk. en, Treasury-OFS enhances the initial operat-

ing capability to a sustainable level that is eﬀective and

eﬃcient, and designed to meet the long-term needs of

its programs.

Treasury-OFS is committed to implementing an

eﬀective internal control program and has established

a Senior Assessment Team (SAT) to guide the oﬃce’s

eﬀorts to meet the statutory and regulatory require-

ments surrounding a sound system of internal control.

e SAT is chaired by the Deputy Chief Financial

Oﬃcer (DCFO) and includes representatives from

all Treasury-OFS functional areas. Further, Treasury-

OFS has deﬁned an Internal Control Framework

that is based on the principles of e Committee

of Sponsoring Organizations of the Treadway

Commission (COSO). e SAT leverages this frame-

work in communicating control objectives across the

organization and its third party service providers.

Treasury-OFS established an Internal Control Program

Oﬃce (ICPO) under the Oﬃce of the Chief Financial

Oﬃcer that is guided by the SAT and focuses on

managing the oﬃce’s internal control eﬀorts. e

ICPO monitors the implementation of the Internal

Control Framework and ensures the achievement of

management control objectives. e ICPO monitors

Treasury-OFS activities to ensure management control

objectives are achieved by:

Integrating management controls into Treasury-•

OFS business processes through:

Developing internal control documentation,

Reviewing internal control responsibilities with

process owners before major program execution

events, and,

Real-time monitoring of key control eﬀectiveness

during and after signiﬁcant program execution

events;

Conducting “lessons learned” sessions to identify •

and remediate areas requiring improvement;

Periodic testing of key controls; and,•

Monitoring feedback from third party oversight •

bodies.

In addition, the internal control environment sup-

porting TARP programs and Treasury-OFS activities

undergoes continuous improvement to remain eﬀective

and is subject to signiﬁcant third party oversight by

the Government Accountability Oﬃce (GAO) and the

Special Inspector General for the Troubled Asset Relief

Program (SIGTARP).

e Assistant Secretary for Financial Stability must

report annually to the Under Secretary for Domestic

Finance on the adequacy of the various internal

controls throughout the Oﬃce of Financial Stability,

to include ﬁnancial management systems compliance.

e Assurance Statement is required by the Federal

Managers’ Financial Integrity Act (FMFIA). In order to

support the Assistant Secretary’s letter of assurance, the

respective Treasury-OFS divisions prepare individual

statements of assurance. ese individual statements of

assurance provide evidence supporting the achievement

of Treasury-OFS-wide internal control objectives and

disclose any noted weaknesses.

Information Technology Systems

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 9: SYSTEMS, CONTROLS, AND LEGAL COMPLIANCE

For ﬁscal year 2009, Treasury-OFS did not directly

support any Information Technology (IT) systems.

Signiﬁcant IT systems used by TARP are supported by

various Departmental Oﬃces or bureaus that are part

of Treasury.

Other IT systems are supported by Financial Agents

which provide services to the U.S. Treasury. e

Financial Agency Agreements maintained by the

Treasury Oﬃce of the Fiscal Assistant Secretary in

support of Treasury-OFS require the Financial Agents

to design and implement suitably robust IT security

plans and internal control programs, to be reviewed

and approved by the Treasury at least annually.

Compliance with the Improper Payments

Information Act (IPIA)

e elimination of improper payments is a major focus

of Treasury-OFS executive management. Managers

are held accountable for developing and strengthening

ﬁnancial management controls to detect and prevent

improper payments, and thereby better safeguard

taxpayer dollars.

Treasury-OFS carried out its ﬁscal year 2009 IPIA

assessment per Treasury-wide guidance and did not

identify any programs or activities susceptible to

signiﬁcant erroneous payments. Treasury-OFS did not

identify any payments to incorrect payees or ineligible

recipients. Management will continue to monitor

disbursements and re-assess IPIA compliance as new

programs are initiated.

Areas for Improvement

Over the next year, OFS management is focused on

enhancing the maturity of its internal control environ-

ment in several key areas as follows:

Because of limited staﬃng and competing priori-•

ties among the various compliance activities and

TARP programs, independent monitoring of

contract requirements for TARP programs has

been constrained. Treasury-OFS has been chal-

lenged to develop suﬃcient resources to respond

to the number of requirements imposed by TARP

programs, the large number of participants in

those programs, and recommendations by the

oversight entities. Management is building the per-

sonnel resources to aggressively address a number

of compliance priorities, including for example,

monitoring Treasury-OFS’ contract compliance

status of CPP recipients’ compliance.

e system of record used to manage the Home •

Aﬀordable Modiﬁcation Program (HAMP)

requires increased functionality to meet the control

requirements of the program. Weaknesses in these

systems are currently mitigated by our detective in-

ternal controls. However, management recognizes

that these system shortfalls must be addressed in

the near term, as the volume and complexity of

these system functions increase.

EESA required the preparation of stand-alone •

ﬁnancial statements that would be audited by the

GAO. As a new entity, neither Treasury-OFS nor

our GAO auditors have previously been through

the statement preparation and auditing process for

this complicated entity. An additional complica-

tion resulted from EESA and OMB’s interpreta-

tion of the statute to require the application of

complex accounting required by the Federal Credit

Reform Act of 1990 to all of Treasury-OFS acqui-

sitions (i.e. equities, loans and asset guarantees).

Given these facts, Treasury-OFS faced a number

of challenges, including a shortage of experienced

credit reform staﬀ and evolving and untested

ﬁnancial reporting processes and controls. Given

the pace and evolution of the TARP programs

throughout the year and subsequent impact on

the accounting and ﬁnancial reporting areas,

certain accounting practices continued to evolve

throughout the period ended September 30, 2009.

In an eﬀort to keep pace with these changes,

management continues to focus its attention on

the development of robust processes that meet

business needs and internal control requirements.

In developing its accounting processes and con-

trols, management has sought to balance eﬀective

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 9: SYSTEMS, CONTROLS, AND LEGAL COMPLIANCE

risk mitigation, ﬂexibility to respond to new

programs, and eﬃciency through shared resources.

Accordingly, the maturation and formalization of

ﬁnancial capabilities and controls will continue

into ﬁscal 2010.

As noted in Section Seven, EESA mandated that the

FCRA be used to determine the cost of all TARP

investments for budgetary purposes. e FCRA calls

for agencies to record the “subsidy” cost of an invest-

ment at the time of the disbursement, which requires

the use of detailed models following the methodology

described in Section Eight. Due to a compressed

timeframe, management was not able to execute

the planned controls around manual data inputs in

the credit subsidy models in such a manner so as to

prevent non-material errors from occurring in the

ﬁnal re-estimate production process. Signiﬁcant errors

identiﬁed were corrected and amounts were properly

reﬂected in the ﬁnancial statements. In year one, our

internal controls over data inputs were intended to

provide full coverage of the models, but of necessity

our resources focused more on the high risk programs

and items. In ﬁscal year 2010, we will focus more

attention on improving internal control eﬀectiveness

in mitigating the risk of errors in data inputs for all

models.

Oversight Entities

Per the EESA requirements, Treasury-OFS has four

oversight entities with speciﬁc responsibilities with

regard to TARP, which are the Financial Stability

Oversight Board, the GAO, the Special Inspector

General for TARP, and the Congressional Oversight

Panel. A summary of the responsibilities and activities

of each of these entities is provided below.

Financial Stability Oversight Board

e Oversight Board was established by section 104

of the EESA to help oversee the Troubled Asset Relief

Program and other emergency authorities and facili-

ties granted to the Secretary of the Treasury under

the EESA. e Oversight Board is composed of the

Secretary of the Treasury, the Chairman of the Board of

Governors of the Federal Reserve System, the Director

of the Federal Housing Finance Agency, the Chairman

of the Securities and Exchange Commission, and the

Secretary of the Department of Housing and Urban

Development. rough Oversight Board meetings

and consultations between the staﬀs of the agencies

represented by each Member of the Oversight Board,

the Oversight Board reviews and monitors the develop-

ment and ongoing implementation of the policies and

programs under TARP to restore liquidity and stability

to the U.S. ﬁnancial system. e Oversight Board

meets each month, and receives presentations and

brieﬁngs from Treasury oﬃcials and, where appropri-

ate, other government oﬃcials, including oﬃcials from

the other agencies represented on the Oversight Board,

concerning the implementation and the eﬀects of the

programs established under TARP.

e Oversight Board also monitors Treasury’s responses

to the recommendations made by SIGTARP and the

GAO. roughout FY 2009, the Oversight Board

received updates on Treasury’s progress in address-

ing the issues raised by these oversight bodies with

respect to transparency, the establishment of internal

controls, compliance and risk monitoring, staﬃng and

Treasury’s communication strategy. In addition, staﬀ

of the Oversight Board and of the agencies represented

by each Member of the Oversight Board continued to

have regular discussions with representatives from the

SIGTARP and GAO to discuss recent and upcom-

ing activities of the oversight bodies. ese eﬀorts

continued to help facilitate coordinated oversight and

minimize the potential for duplication.

e Oversight Board issues a Quarterly Report for

each three-month period. Copies of approved minutes

of the Oversight Board’s meetings and the Quarterly

Reports are made available on the internet at: http://

www.ﬁnancialstability.gov/about/oversight.html.

GAO

Section 116(a)(3) of EESA stipulates that “the

Comptroller General [who heads the GAO] shall

submit reports of ﬁndings … regularly and no less

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 9: SYSTEMS, CONTROLS, AND LEGAL COMPLIANCE

frequently than once every 60 days, to the appropriate

committees of Congress.” “e Comptroller may also

submit special reports … as warranted by the ﬁndings

of its oversight activities.”

Treasury-OFS has a statutory obligation under

Section 116(b)(3) of EESA to take corrective actions

in response to audit deﬁciencies identiﬁed by the

Comptroller General or other auditor engaged by

the TARP or certify to the appropriate committees

of Congress that no action is necessary or appropri-

ate. In addition, under Section 236 of the Legislative

Reorganization Act of 1970, Treasury is required to

respond in writing to Congress within 60 days of the

issuance date of a GAO report.

Currently, the GAO is engaged in eight audits related to

TARP. Treasury-OFS responds to information requests

from the GAO by providing responsive documents

and other information and facilitating comprehensive

brieﬁngs on TARP programs with senior Treasury staﬀ.

In addition, Treasury-OFS apprises the GAO of key

developments in current and proposed programs and

policies under EESA.

To date, the GAO has issued 41 recommendations

in its reports issued in December 2008 and January,

March, June, July, October, and November 2009.

e recommendations have focused on the following

themes: (1) transparency, reporting, and account-

ability; (2) management infrastructure; and (3)

communication. In response to the recommendations,

Treasury-OFS has developed remediation plans and

actively communicates the status of its remediation

eﬀorts to the GAO and will continue to do so in FY

2010. Treasury-OFS has fully or partially implemented

32 of the recommendations and has responded or is in

the process of responding to six recommendations; the

remaining recommendations have been deemed closed

by the GAO and/or Treasury-OFS has taken no action.

Treasury-OFS’ actions in response to GAO recommen-

dations include:

Treasury-OFS delivered draft internal controls •

policies and procedures to GAO on June 30, 2009.

Many of the ﬁnal policies and procedures cover-

ing a majority of OFS were delivered to GAO on

September 30, 2009. e bulk of the remainder

of Treasury-OFS policies and procedures will be

delivered by December 31, 2009.

Treasury-OFS has completed draft risk assessments •

of TALF, CPP, HAMP, contracting and human

resources. Plans have been developed for high risk

areas.

Treasury-OFS continues to expeditiously hire •

personnel to carry out and oversee HAMP as well

as ﬁnalizing a comprehensive system of HAMP

internal controls.

Additional detail regarding Treasury-OFS’ prog-

ress on the GAO’s recommendations can be

found at http://www.ﬁnancialstability.gov/docs/

SummaryResponseGAO10-8-2009.pdf.

SIGTARP

e SIGTARP was created by section 121 of EESA.

e objectives of SIGTARP are to investigate and pre-

vent fraud, waste and abuse in TARP programs, while

trying to promote transparency in TARP programs.

SIGTARP must report to Congress each quarter

certain information about TARP over the preceding

quarter. As of September 30, 2009, SIGTARP has

issued three quarterly reports in February 2009, April

2009 and July 2009. SIGTARP also has a duty under

EESA to conduct audits and investigations of the pur-

chase, management, and sale of assets under any TARP

program, and with certain limitations, any other action

under EESA. As of September 30, 2009, SIGTARP

has completed four audits and is currently conducting

eleven audits that are at various stages.

Treasury-OFS has worked closely with SIGTARP

and maintains regular lines of communications with

the personnel conducting audits and investigations of

TARP programs. Treasury-OFS staﬀ also regularly pro-

vides updates to SIGTARP about program design and

implementation issues. Treasury-OFS has beneﬁted

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 9: SYSTEMS, CONTROLS, AND LEGAL COMPLIANCE

from their involvement in the development of TARP

programs and policies as we pursue our common goal

of carrying out the objectives of EESA, which are to

promote ﬁnancial stability and protect the interests of

the taxpayers.

As of September 30, 2009, SIGTARP has issued 41

individual recommendations in their reports. General

topics covered by SIGTARP’s recommendations

include reporting on use of TARP funds, valuation of

the TARP portfolio, and potential fraud vulnerabilities

associated with PPIP, TALF and HAMP. Treasury-OFS

has given careful consideration to the recommenda-

tions in SIGTARP’s prior reports, and has submitted

responses detailing what actions that Treasury-OFS has

taken or will take to address SIGTARP’s recommenda-

tions. Treasury-OFS’ policies and programs currently

address many of the issues raised by SIGTARP in their

recommendations, and in other cases Treasury-OFS

took speciﬁc action to implement SIGTARP’s recom-

mendations. Treasury-OFS also has or will execute

alternative approaches that we believe address some of

the issues raised by SIGTARP in their recommenda-

tions. SIGTARP has closed 29 of its recommendations

based on Treasury-OFS’ response to the SIGTARP

recommendations.

Congressional Oversight Panel

e Congressional Oversight Panel (COP’s) man-

date includes assessing the impact of Treasury-OFS’

spending to stabilize the economy, evaluating market

transparency, ensuring eﬀective foreclosure mitigation

eﬀorts, and guaranteeing that Treasury-OFS’ actions

are in the best interest of the American people.

e COP consists of ﬁve panel members appointed

as follows: 1 member appointed by the Speaker of the

House of Representatives; 1 member appointed by the

minority leader of the House of Representatives; 1 mem-

ber appointed by the majority leader of the Senate, 1

member appointed by the minority leader of the Senate,

and 1 member appointed by the Speaker of the House

of Representatives and the majority leader of the Senate,

after consultation with the minority leader of the Senate

and the minority leader of the House of Representatives.

e COP also employs a professional staﬀ, numbering

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 9: SYSTEMS, CONTROLS, AND LEGAL COMPLIANCE

approximately 27, who are responsible for carrying out

the day-to-day work of the Panel. e COP also reaches

out to experts, primarily academics, to conduct analysis

in support of their work.

EESA requires the COP to produce a report every 30

days examining Treasury’s eﬀorts and the impact on the

economy of those eﬀorts. e statute grants the COP

the authority to hold hearings, review oﬃcial data, and

write reports on actions taken by Treasury and ﬁnancial

institutions and their eﬀect on the economy. Generally,

the COP focuses on one program or topic each month

and produces a report that describes the program,

assesses its design and implementation and presents

recommendations. Many of their recommendations

have focused on issues of transparency and what they

see as the need to operate the programs in a way that

the public can understand exactly how their taxpayer

dollars are being used.

e COP staﬀ work in a fairly independent fashion,

using publically available documents and informa-

tion to develop the outlines of their reports. ey

also request information, documents, and data from

Treasury-OFS. Treasury-OFS regularly briefs COP staﬀ

on the topic of their current focus, as well as any new

initiatives or changes in Treasury-OFS programs.

e COP also convenes regular hearings on Capitol

Hill, usually timed to coincide with the issuance of their

reports. Treasury makes its senior staﬀ available to appear

before the COP as witnesses; the Secretary appears

before the COP on a quarterly basis, and Assistant

Secretary for Financial Stability Herb Allison is made

available as requested for other hearings. Other Treasury

oﬃcials have also appeared before the COP as requested.

To date, the COP has issued the following reports:

Questions About the $700 Billion Emergency •

Economic Stabilization Funds

Accountability for the Troubled Asset Relief Program•

Special Report on Regulatory Reform•

February Oversight Report: Valuing Treasury’s •

Acquisitions

Foreclosure Crisis: Working Toward a Solution•

Assessing Treasury’s Strategy: Six Months of TARP •

Stress Testing and Shoring Up Bank Capital •

Lending to Small Businesses and Families and the •

Impact of the TALF

TARP Repayments, Including the Repurchase of •

Stock Warrants

Special Report on Farm Loan Restructuring•

e Continued Risk of Troubled Assets•

e Use of TARP Funds in Support and •

Reorganization of the Domestic Automotive Industry

An Assessment of Foreclosure Mitigation Eﬀorts •

After Six Months

Guarantees and Contingent Payments in TARP •

and Related Programs

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 10: OTHER MANAGEMENT INFORMATION

Section Ten:

Other Management Information

Over the past year, Treasury-OFS has grown into an

organization of 198 full-time employees (101 career

civil servants, 85 term appointments, and 12 detailees)

who support the TARP. ese employees include 18

employees who report through the Department of the

Treasury’s Oﬃce of General Counsel and approximate-

ly 40 others outside of Treasury-OFS who continue

to provide support to the oﬃce on an as-needed basis.

Treasury-OFS continues to use direct-hire and other

appointments to expedite hiring of highly-qualiﬁed

candidates, which has enabled Treasury-OFS to reduce

the number of temporary and contract staﬀ and

strengthen the continuity and institutional knowl-

edge of the workforce. e FY 2009 Administrative

budget obligations totaled $248 million split between

salaries and beneﬁts of approximately $14 million and

non-personnel services, generally contracts, of approxi-

mately $234 million.

As noted in Section One, Treasury-OFS is made up of

seven divisions.

e Chief Investment Oﬃce (CIO) is responsible for

program development and the execution and manage-

ment of all investments made pursuant to EESA.

Investments can be made by either purchasing or in-

suring “troubled assets” (as deﬁned in EESA). e CIO

relies on contracted asset managers and a custodian to

assist in the management of acquired or insured assets.

e CIO also manages a contract with an investment

advisor who provides guidance on the selection of asset

managers.

e Oﬃce of the Chief Financial Oﬃcer (CFO) has

lead responsibility within Treasury-OFS for budget for-

mulation and execution, cash management, account-

ing, ﬁnancial systems, ﬁnancial reporting, and internal

controls. In each of these areas the CFO works closely

with the appropriate oﬃces within main Treasury.

e CFO manages Treasury-OFS budget, cash ﬂow

requirements and accounting support activities for

all of Treasury-OFS concentrating on accounting and

reporting activities required by the Federal Credit

Reform Act to include modeling of cash ﬂow and all

required re-estimates. e Oﬃce serves as liaison with

Government Accountability Oﬃce (GAO) staﬀ for

ﬁnancial statement reporting and internal controls.

For the FY 2009 reporting cycle, the OCFO led the

implementation of the OMB Circular A-123 internal

controls requirements for Treasury-OFS.

e Oﬃce of the Chief of Homeownership

Preservation is responsible for identifying opportunities

to help homeowners while also protecting taxpayers.

e key policy goals of the Oﬃce are to reduce the

number of principal residences lost to foreclosure and

to stabilize the value of homeownership in surrounding

communities through polices which impact homeown-

ers, home mortgage loans, lenders, servicers and their

communities. e priorities of the Oﬃce are to: imple-

ment the Administration’s loss mitigation program;

develop and implement a robust outreach program

targeted to at-risk homeowners; outline and imple-

ment strategies to regularly update the Administration,

Congress, the public, and other key stakeholders, on

results; and monitor, analyze and report on the results

of the loan modiﬁcation program.

e Oﬃce of the Chief Administrative Oﬃcer

(OCAO) is responsible for developing an oﬃce

infrastructure and managing internal operations

in Treasury-OFS. e OCAO works to integrate

Treasury-OFS investments, program, compliance, risk,

ﬁnance, and legal functions and facilitates communica-

tion across the organization. e OCAO supports the

execution of TARP programs and the management of

Treasury-OFS employees and contractual resources.

e OCAO works with the Assistant Secretary for

Financial Stability to set and execute goals and objec-

tives. e OCAO works with each Treasury-OFS

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

SECTION 10: OTHER MANAGEMENT INFORMATION

organizational entity to eﬀectively manage the budget,

facilities, information technology (IT), acquisition

management oversight, document ﬂows, physical

security and privacy, and workforce planning.

e Oﬃce of the Chief Counsel provides legal advice

to the Assistant Secretary. e Chief Counsel reports

to the Assistant General Counsel (Banking and

Finance) in Treasury’s Legal Division. e Oﬃce of

the Chief Counsel is responsible for the legal aﬀairs of

Treasury-OFS. e Oﬃce is involved in the structur-

ing of Treasury-OFS programs and activities to ensure

compliance with EESA and with other laws and regula-

tions and to insure the programs and activities are well

designed from a legal point of view. e Oﬃce assists

in responding to FOIA requests, the inquiries of over-

sight bodies such as the GAO and the Congressional

Oversight Panel (COP) and any litigation concerning

EESA or Treasury-OFS activities. e Oﬃce also

works on a variety of other legal matters pertaining to

Treasury-OFS operations.

e Oﬃce of Reporting is responsible for coordinat-

ing Treasury-OFS’ work with the external oversight

entities including the GAO, Special Inspector General

for TARP, Financial Stability Oversight Board and

the Congressional Oversight Panel. e Oﬃce also

prepares periodic reports to the Congress under EESA.

e Oﬃce of Internal Review (OIR) was recently

established within Treasury-OFS to ensure that proper

management controls are developed, in place, and

operating as intended. Management controls include

organization, policies, and procedures, all of which

are designed to help program and ﬁnancial managers

achieve results and safeguard the integrity of their

programs. e OIR also works with the other program

oﬃces to identify the most signiﬁcant risks that the

TARP faces including operational risk, credit risk,

market risk, and reputational risk. e oﬃce assesses

those risks (either quantitatively or qualitatively) and

works to ensure that the assessments are integrated

into the decision making processes of each business

line of the TARP and that risks are managed in a

consistent fashion across business lines. e OIR scope

of responsibilities also covers the compliance oversight

area including developing and implementing, in con-

junction with the relevant program oﬃces, processes

and procedures to provide for overall program compli-

ance with EESA. ese include the HAMP program

requirements, executive compensation, statutory

reporting, and conﬂict of interest requirements.

Treasury-OFS is not envisioned as a permanent

organization, so to the maximum extent possible and

appropriate, Treasury-OFS utilizes private sector ex-

pertise in support of the execution of TARP programs.

Fannie Mae and Freddie Mac accounted for almost

thirty percent of the non-personnel services to assist in

the administration and compliance, respectively, of the

Home Aﬀordable Modiﬁcation Program. Additionally,

asset managers were hired to serve as ﬁnancial agents in

managing the portfolio of assets associated with several

TARP programs. e balance of the non-personnel

private sector ﬁrms were engaged to assist with the

signiﬁcant volume of work associated with the TARP

in the areas of accounting and internal controls, ad-

ministrative support, facilities, legal advisory, ﬁnancial

advisory, and information technology.

PART 1 • MANAGEMENT’S DISCUSSION AND ANALYSIS

SECTION 11: LIMITATIONS OF THE FINANCIAL STATEMENTS

Section Eleven:

Limitations of the Financial Statements

e principal ﬁnancial statements have been prepared

to report the ﬁnancial position and results of opera-

tions of Treasury-OFS’ Troubled Asset Relief Program,

consistent with the requirements of 31 U.S.C.

3515(b). While the statements have been prepared

from the books and records of the Oﬃce of Financial

Stability and the Department of the Treasury in

accordance with section 116 of EESA and GAAP for

Federal entities and the formats prescribed by OMB,

the statements are in addition to the ﬁnancial reports

used to monitor and control budgetary resources which

are prepared from the same books and records.

e statements should be read with the realization that

they are for a component of the U.S. Government, a

sovereign entity.

OFFICE OF FINANCIAL STABILITY • AGENCY FINANCIAL REPORT • FISCAL YEAR 2009

is page left intentionally blank

Part 2

Agency Financial Statements

PART 2 • AGENCY FINANCIAL STATEMENTS

Message from the Chief Financial Officer

I am very pleased to submit the Oﬃce of Financial Stability’s (OFS) Annual Financial Report for FY 2009. is

report provides our stakeholders with meaningful ﬁnancial results and program performance as required by the

Emergency Economic Stabilization Act (EESA) and the Reports Consolidation Act. e unqualiﬁed audit opinion

provided by our auditor, the Government Accountability Oﬃce (GAO), on these ﬁnancial statements represents

an extraordinary achievement by OFS and Treasury staﬀ. e support of our contractors, staﬀ at the Oﬃce of

Management and Budget and the GAO audit team was invaluable to this success. I am exceptionally proud and

appreciative of the eﬀort and commitment made by everyone involved.

Under the EESA authority as described throughout this report, the government made unprecedented investments

in private entities through the Troubled Asset Relief Program (TARP). e unique features of the EESA programs,

as well as the statutory requirement that the budgetary cost of the programs be determined under the standards of

the Federal Credit Reform Act (FCRA), adjusted for market risk, meant that the OFS had to navigate unchartered

ground in Federal budget and accounting concepts. For these and related reasons, creating the accounting and

reporting infrastructure and internal control environment to support the development of the ﬁrst year ﬁnancial

statements for the TARP, was an extraordinary challenge.

As a start up organization with an unprecedented emergency mission to stabilize the nation’s ﬁnancial system, the

OFS moved swiftly to develop and implement eight new programs. e face value of the amounts obligated for

these programs in FY 2009 totaled $454 billion, nearly as much as the entire combined FY 2008 Federal non-

defense discretionary outlays. OFS’s budget, accounting, and ﬁnancial reporting policies and operations had to

be designed and executed simultaneously with the establishment of the new programs. OFS was able to leverage

a number of Treasury’s existing ﬁnancial management systems and resources, but also had to develop procedures,

reports, models, and methodologies from scratch.

All of the TARP initiatives except for the housing program are loans, guarantees or investments and are accounted

for using FCRA methods of net present value for budgeting and ﬁnancial reporting. Cost models (or “subsidy”

models as they are called under FCRA) had to be developed for all of the programs and unique transactions.

Never before has a Federal entity created as many subsidy cost models in such a short period made even more diﬃ-

cult by the vastness and complexity of TARP’s programs. While we and GAO identiﬁed some non-material errors

and opportunities for improvements in the models and processes, overall the results were outstanding, given the

magnitude of the eﬀort required this year. Because the credit and investment programs constitute the vast majority

of OFS’s ﬁnancial activity, continuing to build a very strong internal control process and high quality, state of the

art subsidy cost models is a top priority for us.

A consistent focus on internal control was a mainstay of the OFS’s eﬀorts. From the ﬁrst transactions in October,

2008, 23 days after passage of EESA, OFS instituted comprehensive controls around the highest risk elements

of the transaction lifecycle – for example the disbursement and receipt of funds and receipt of appropriate con-

sideration such as preferred shares and warrants associated with a transaction. OFS aggressively used prototyping

to establish an eﬀective process design, cross-functional meetings to ensure cohesion across areas, and real time

control monitoring of all transactions to improve accuracy in execution. We focused on core controls such as ap-

propriate levels of authorization and reconciliation of critical transaction information. Over the course of the year,

we were able to maturate much of our internal control capacity from heavily monitored, individual transactions, to

MESSAGE FROM THE CHIEF FINANCIAL OFFICER

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

documented, repeated processes with embedded control monitoring, automated control evidence collection, and

ongoing control testing.

Finally, OFS implemented the internal control requirements for ﬁnancial reporting under Appendix A of OMB

Circular A-123. OFS staﬀ within the Oﬃce of the Chief Financial Oﬃcer worked closely with the program and

other support oﬃces to develop a comprehensive sub-certiﬁcation and review process supporting management’s

interim and ﬁnal assurance statements.

Looking ahead, we plan to continue improving our ﬁnancial management capacity, including strengthening our

ﬁnancial reporting processes, developing additional or enhancing existing documentation supporting our policies,

and formalizing our ﬁnancial data management approach. We will be actively addressing GAO’s audit ﬁndings

and look forward to building on our successes this year to resolve the outstanding issues identiﬁed in this audit.

Successfully preparing the ﬁrst year ﬁnancial statements for the programs developed under the EESA required

extraordinary dedication and commitment. It has been a privilege to lead this eﬀort and I want to extend my

thanks to the many people who contributed to making this endeavor successful.

ank you for your interest in our FY 2009 Annual Financial Report.

Jennifer E. Main

Chief Financial Oﬃcer

MESSAGE FROM THE CHIEF FINANCIAL OFFICER

PART 2 • AGENCY FINANCIAL STATEMENTS

Government Accountability Office (GAO)’s Report

on FY 2009 Financial Statements

Page 5 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

United States Government Accountability Office

Washington, D.C. 20548

Page 5 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

To the Assistant Secretary for Financial Stability

Auditor’s Report

In accordance with the Emergency Economic Stabilization Act of 2008

(EESA),

we are required to audit the financial statements of the Troubled

Asset Relief Program (TARP), which is implemented by the Office of

Financial Stability (OFS).

In our audit of OFS’s financial statements for

TARP for the period from October 3, 2008, (date of OFS’s inception)

through September 30, 2009, we found

• the financial statements are presented fairly, in all material respects, in

conformity with U.S. generally accepted accounting principles;

• although internal controls could be improved, OFS maintained, in all

material respects, effective internal control over financial reporting as

of September 30, 2009; and

• no reportable noncompliance in the period ended September 30, 2009,

with provisions of laws and regulations we tested.

The following sections discuss in more detail (1) these conclusions; (2) our

conclusion on Management’s Discussion and Analysis (MD&A) and other

required supplementary and other accompanying information; (3) our audit

objectives, scope, and methodology; and (4) OFS’s comments on a draft of

this report. In addition to our responsibility to audit OFS’s annual financial

statements for TARP, we also are required under EESA to report at least

every 60 days on the findings resulting from our oversight of the actions

taken under TARP.

This report responds to both of these requirements. We

Section 116(b) of EESA, 12 U.S.C. § 5226(b), requires that the Department of the Treasury

(Treasury) annually prepare and submit to Congress and the public audited fiscal year

financial statements for TARP that are prepared in accordance with generally accepted

accounting principles. Section 116(b) further requires that GAO audit TARP’s financial

statements annually in accordance with generally accepted auditing standards.

Section 101 of EESA, 12 U.S.C. § 5211, established OFS within Treasury to implement TARP.

Section 116 of EESA, 12 U.S.C. § 5226, requires the U.S. Comptroller General to report at

least every 60 days, as appropriate, on findings resulting from oversight of TARP’s

performance in meeting the act’s purposes; the financial condition and internal controls of

TARP, its representatives, and agents; the characteristics of asset purchases and the

disposition of acquired assets, including any related commitments entered into; TARP’s

efficiency in using the funds appropriated for its operations; its compliance with applicable

laws and regulations; and its efforts to prevent, identify, and minimize conflicts of interest

among those involved in its operations.

GAO REPORT ON FY 2009 FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

Page 6 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

have issued numerous other reports on TARP in connection with this 60-

day reporting responsibility which can be found on GAO’s Web site at

http://www.gao.gov

Opinion on Financial

Statements

OFS’s financial statements for TARP, including the accompanying notes,

present fairly, in all material respects, in conformity with U.S. generally

accepted accounting principles, OFS’s assets, liabilities, and net position as

of September 30, 2009, and its net cost, changes in net position, and

budgetary resources for the period from October 3, 2008, (date of OFS’s

inception) through September 30, 2009.

As discussed in notes 2 and 6 to OFS’s financial statements for TARP, the

valuation of TARP direct loans, equity investments, and asset guarantees is

based on estimates using economic and financial credit subsidy models.

The estimates use entity-specific as well as relevant market data as the

basis for assumptions about future performance, and incorporate an

adjustment for market risk to reflect the variability around any unexpected

losses. In valuing the direct loans, equity investments, and asset

guarantees, OFS management considered and selected assumptions and

data that it believed provided a reasonable basis for the estimated subsidy

allowance and related subsidy costs reported in the financial statements.

However, there are a large number of factors that affect these assumptions

and estimates, which are inherently subject to substantial uncertainty

arising from the likelihood of future changes in general economic,

regulatory, and market conditions. The estimates have an added

uncertainty resulting from the unique nature of transactions associated

with the multiple initiatives undertaken for TARP and the lack of historical

program experience upon which to base the estimates. As such, there will

be differences between the net estimated values of the direct loans, equity

investments, and asset guarantees as of September 30, 2009, that totaled

$239.7 billion, and the amounts that OFS will ultimately realize from these

assets, and such differences may be material. These differences will also

affect the ultimate cost of TARP. Further, the ultimate cost will change as

The subsidy allowance represents the difference between the amounts paid by OFS to

acquire the direct loans and equity investments and the reported value of such assets. The

subsidy cost is composed of (1) the subsidy cost allowance, (2) net intragovernmental

interest cost, (3) certain inflows from the direct loans and equity investments (e.g.,

dividends, interest, proceeds from repurchase of warrants by financial institutions, and

other realized fees), and (4) the estimated discounted net cash flows related to the Asset

Guarantee Program.

GAO REPORT ON FY 2009 FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

Page 7 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

OFS continues to purchase troubled assets and incur related subsidy costs

as well as incur costs under other TARP initiatives.

OFS’s authority to

purchase or insure additional troubled assets expires on December 31,

2009, but may be extended by the Secretary of the Treasury to up to

October 3, 2010.

As discussed in note 1 to the financial statements, while OFS’s financial

statements reflect activity of OFS in implementing TARP, including

providing resources to various entities to help stabilize the financial

markets, the statements do not include the assets, liabilities, or results of

operations of commercial entities in which OFS has a significant equity

interest. According to OFS officials, OFS’s investments were not made to

engage in the business activities of the respective entities and OFS has

determined that none of these entities meet the criteria for a federal entity.

Opinion on Internal

Control

Although certain internal controls could be improved, OFS maintained, in

all material respects, effective internal control over financial reporting as

of September 30, 2009, that provided reasonable assurance that

misstatements, losses, or noncompliance material in relation to the

financial statements would be prevented or detected and corrected on a

timely basis. Our opinion on internal control is based on criteria

established under 31 U.S.C. § 3512(c), (d), commonly known as the Federal

Managers’ Financial Integrity Act (FMFIA).

Under EESA, as amended, OFS is authorized to purchase or insure up to almost $700

billion in troubled assets.

Section 120 of EESA, 12 U.S.C. § 5230, established that the authorities under Sections

101(a), excluding Section 101(a)(3), and Section 102, shall terminate on December 31, 2009.

Section 120 of EESA further established that the Secretary of the Treasury, upon submission

of a written certification to Congress, may extend the authority provided under these

sections of EESA to expire no later than 2 years from the date of the enactment of EESA

(Oct. 3, 2008).

GAO REPORT ON FY 2009 FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

Page 8 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

We identified two significant deficiencies

in OFS’s internal control over

financial reporting, which although not material weaknesses, are important

enough to merit management’s attention. These deficiencies, described in

more detail later in this report, concern OFS’s (1) accounting and financial

reporting processes, and (2) verification procedures for data used for asset

valuations.

We will be reporting additional details concerning these significant

deficiencies separately to OFS management, along with recommendations

for corrective actions. We also identified other deficiencies in OFS’s system

of internal control that we consider not to be material weaknesses or

significant deficiencies. We have communicated these matters to

management and, where appropriate, will report on them separately.

Significant Deficiencies

Since its creation on October 3, 2008, OFS has made significant progress in

building a financial reporting structure, including developing an internal

control system over TARP activities and transactions and addressing key

accounting and financial reporting issues necessary to enable it to prepare

financial statements, and receive an audit opinion on those statements, for

the period ended September 30, 2009. However, OFS’s financial reporting

structure continued to evolve throughout the year as new TARP programs

were implemented, which posed a challenge to OFS’s ability to establish a

comprehensive system of internal control while simultaneously reacting to

market events and implementing TARP initiatives. This challenge

contributed to the following two significant deficiencies in OFS’s internal

control that we identified.

Accounting and Financial

Reporting Processes

While OFS had developed and implemented controls over TARP

transactions and activities, we identified several control deficiencies that

collectively represented a significant deficiency in OFS’s internal control

A significant deficiency is a deficiency, or a combination of deficiencies, in internal control

that is less severe than a material weakness, yet important enough to merit attention by

those charged with governance. A material weakness is a deficiency, or a combination of

deficiencies, in internal control such that there is a reasonable possibility that a material

misstatement of the entity’s financial statements will not be prevented, or detected and

corrected on a timely basis. A deficiency in internal control exists when the design or

operation of a control does not allow management or employees, in the normal course of

performing their assigned functions, to prevent or detect and correct misstatements on a

timely basis.

GAO REPORT ON FY 2009 FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

Page 9 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

over its accounting and financial reporting processes. Specifically, OFS did

not effectively implement its review and approval process for preparing its

financial statements and related disclosures for TARP. We identified

incorrect amounts and inaccurate, inconsistent, and incomplete

disclosures in OFS’s draft financial statements, footnotes, and MD&A for

TARP that were significant, but not material, and that were not detected by

OFS. OFS revised the financial statements, footnotes, and MD&A to

address the issues that we identified. In addition, OFS had not finalized its

procedures related to its processes for accounting for certain program

transactions, preparing its September 30, 2009, financial statements, and its

oversight and monitoring of financial-related services provided to OFS by

asset managers and certain financial agents. Further, OFS did not have

proper segregation of duties over a significant accounting database it uses

in valuing its assets in that the same individual was responsible for

performing both the data entry and the reconciliation of the data output.

However, OFS had other controls over TARP transactions and activities

that reduced the risk of misstatements resulting from these deficiencies.

Properly designed and implemented controls over the accounting and

financial reporting processes are key to providing reasonable assurance

regarding the reliability of the balances and disclosures reported in the

financial statements and related notes in conformity with generally

accepted accounting principles.

Verification Procedures for

Data Input for Asset

Valuations

OFS did not effectively implement its verification procedures for certain

assumptions and related data that were input into the economic and

financial credit subsidy models used for the valuation of TARP direct loans,

equity investments, and asset guarantees. Specifically, we identified data

input errors to the estimation models, such as incorrect dividend rates and

maturity dates, that were not detected by OFS’s verification procedures.

Significant errors that we identified were corrected and amounts were

properly reflected in the September 30, 2009, financial statements. OFS did

perform procedures to assess the reasonableness of the model outputs,

including comparison of the asset valuations calculated by the model with

independently performed valuations. We believe that these procedures

reduced the risk of misstatements resulting from the data input errors.

Nonetheless, we believe the ineffective implementation of data input

verification procedures represents a significant deficiency in OFS’s internal

control warranting management’s attention. Effective verification of data

inputs used in the subsidy models is key to providing reasonable assurance

that the asset valuations and related subsidy cost are reliably reported in

the financial statements.

GAO REPORT ON FY 2009 FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

Page 10 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Compliance with Laws

and Regulations

Our tests of OFS’s compliance with selected provisions of laws and

regulations for the period ended September 30, 2009, disclosed no

instances of noncompliance that would be reportable under U.S. generally

accepted government auditing standards. The objective of our audit was

not to provide an opinion on overall compliance with laws and regulations.

Accordingly, we do not express such an opinion.

Consistency of Other

Information

OFS’s MD&A, other required supplementary information, and other

accompanying information contain a wide range of information, some of

which is not directly related to the financial statements. We did not audit

and we do not express an opinion on this information. However, we

compared this information for consistency with the financial statements

and discussed the methods of measurement and presentation with OFS

officials. On the basis of this limited work, we found no material

inconsistencies with the financial statements, U.S. generally accepted

accounting principles, or the form and content guidance in Office of

Management and Budget Circular No. A-136, Financial Reporting

Requirements.

Objectives, Scope, and

Methodology

OFS management is responsible for (1) preparing the financial statements

in conformity with U.S. generally accepted accounting principles; (2)

establishing and maintaining effective internal control over financial

reporting, and evaluating its effectiveness; and (3) complying with

applicable laws and regulations. Management evaluated the effectiveness

of OFS’s internal control over financial reporting as of September 30, 2009,

based on the criteria established under FMFIA. OFS management’s

assertion based on its evaluation is included in appendix I.

We are responsible for planning and performing the audit to obtain

reasonable assurance and provide our opinion about whether (1) OFS’s

financial statements are presented fairly, in all material respects, in

conformity with U.S. generally accepted accounting principles; and (2) OFS

management maintained, in all material respects, effective internal control

over financial reporting as of September 30, 2009. We are also responsible

for (1) testing compliance with selected provisions of laws and regulations

that have a direct and material effect on the financial statements, and (2)

performing limited procedures with respect to certain other information

accompanying the financial statements.

GAO REPORT ON FY 2009 FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

Page 11 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

In order to fulfill these responsibilities, we

• examined, on a test basis, evidence supporting the amounts and

disclosures in the financial statements;

• assessed the accounting principles used and significant estimates made

by management;

• evaluated the overall presentation of the financial statements;

• obtained an understanding of the entity and its operations, including its

internal control over financial reporting;

• considered OFS’s process for evaluating and reporting on internal

control over financial reporting that OFS is required to perform by

FMFIA and Section 116(c) of EESA;

• assessed the risk that a material misstatement exists in the financial

statements and the risk that a material weakness exists in internal

control over financial reporting;

• evaluated the design and operating effectiveness of internal control over

financial reporting based on the assessed risk;

• tested relevant internal control over financial reporting;

• tested compliance with selected provisions of the following laws and

regulations: EESA, as amended; the Antideficiency Act, as amended; the

Federal Credit Reform Act of 1990; and the Purpose Statute; and

• performed such other procedures as we considered necessary in the

circumstances.

An entity’s internal control over financial reporting is a process affected by

those charged with governance, management, and other personnel, the

objectives of which are to provide reasonable assurance that (1)

transactions are properly recorded, processed, and summarized to permit

the preparation of financial statements in conformity with U.S. generally

accepted accounting principles, and assets are safeguarded against loss

from unauthorized acquisition, use, or disposition; and (2) transactions are

executed in accordance with the laws governing the use of budget

GAO REPORT ON FY 2009 FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

Page 12 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

authority and other laws and regulations that could have a direct and

material effect on the financial statements.

We did not evaluate all internal controls relevant to operating objectives as

broadly established under FMFIA, such as those controls relevant to

preparing statistical reports and ensuring efficient operations. We limited

our internal control testing to testing controls over financial reporting.

Because of inherent limitations, internal control may not prevent or detect

and correct misstatements due to error or fraud, losses, or noncompliance.

We also caution that projecting any evaluation of effectiveness to future

periods is subject to the risk that controls may become inadequate because

of changes in conditions, or that the degree of compliance with the policies

or procedures may deteriorate.

We did not test compliance with all laws and regulations applicable to OFS.

We limited our tests of compliance to selected provisions of laws and

regulations that have a direct and material effect on the financial

statements for the period ended September 30, 2009. We caution that

noncompliance may occur and not be detected by these tests and that such

testing may not be sufficient for other purposes.

We performed our audit in accordance with U.S. generally accepted

government auditing standards. We believe our audit provides a reasonable

basis for our opinions and other conclusions.

Agency Comments

In commenting on a draft of this report, the Assistant Secretary, Office of

Financial Stability, stated OFS concurred with the two significant

deficiencies in its internal control over financial reporting that GAO

identified. He also stated that OFS is committed to correcting the

deficiencies. The complete text of OFS’s comments is reprinted in

appendix II.

Gary T. Engel

Director

Financial Management and Assurance

December 4, 2009

GAO REPORT ON FY 2009 FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

Page 105 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Appendix I

AppendixesManagement’s Report on Internal Control over

Financial Reporting

Appendix I

Assistant Secretary’s Response to GAO Report

on FY 2009 Financial Statements

ASSISTANT SECRETARY’S RESPONSE TO GAO REPORT ON FY 2009 FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

Page 106 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Appendix II

Comments from the Office of Financial

Stability

Appendix II

ASSISTANT SECRETARY’S RESPONSE TO GAO REPORT ON FY 2009 FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

Financial Statements

e OFS prepares ﬁnancial statements for the Troubled Asset Relief Program as a critical aspect of ensuring the

accountability and stewardship for the public resources entrusted to it and as required by Section 116 of EESA.

Preparation of these statements is also an important part of the OFS’ ﬁnancial management goal of providing ac-

curate and reliable information that may be used to assess performance and allocate resources. e OFS manage-

ment is responsible for the accuracy and propriety of the information contained in the ﬁnancial statements and

the quality of internal controls. e statements are, in addition to other ﬁnancial reports, used to monitor and

control budgetary resources. e OFS prepares these ﬁnancial statements from its books and records in confor-

mity with the accounting principles generally accepted in the United States for federal entities and the formats

prescribed by the Oﬃce of Management and Budget.

While these ﬁnancial statements reﬂect activity of the OFS in executing its programs, including providing resources

to various entities to help stabilize the ﬁnancial markets, they do not include, as more fully discussed in Note 1, the

assets, liabilities, or results of operations of commercial entities in which the OFS has a signiﬁcant equity interest. In

addition, comparative information is not available because OFS began operations on October 3, 2008.

e Balance Sheet summarizes the OFS assets, liabilities and net position as of the reporting date.

Intragovernmental assets and liabilities resulting from transactions between federal agencies are presented sepa-

rately from assets and liabilities from transactions with the public.

e Statement of Net Cost shows the net cost of operations for the reporting period.

e Statement of Changes in Net Position presents the OFS ending net position by two components -

Cumulative Results of Operations and Unexpended Appropriations. It summarizes the change in net position.

e ending balances of both components of net position are also reported on the Balance Sheet.

e Statement of Budgetary Resources provides information about funding and availability of budgetary re-

sources and the status of those resources at the end of the reporting period.

FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

OFFICE OF FINANCIAL STABILITY (TROUBLED ASSET RELIEF PROGRAM)

BALANCE SHEET

As of September 30, 2009

Dollars in Millions

ASSETS

Intragovernmental Assets:

Fund Balance with Treasury (Note 4) $ 97,733

Troubled Asset Relief Program:

Direct Loans and Equity Investments, Net (Note 6) 237,892

Asset Guarantee Program (Note 6) 1,765

Total Assets $ 337,390

LIABILITIES

Intragovernmental Liabilities:

Accounts Payable and Other Liabilities $ 5

Principal Payable to the Bureau of the Public Debt (Note 8) 143,335

Due to the General Fund (Note 3) 109,748

Total Intragovernmental Liabilities $ 253,088

Accounts Payable and Other Liabilities 73

Liability for Home Affordable Modiﬁcation Program (Note 5) 1

Total Liabilities $ 253,162

Commitments and Contingencies (Note 7)

NET POSITION

Unexpended Appropriations $ 84,229

Cumulative Results of Operations (1)

Total Net Position $ 84,228

Total Liabilities and Net Position $ 337,390

The accompanying notes are an integral part of these ﬁnancial statements.

FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY (TROUBLED ASSET RELIEF PROGRAM)

STATEMENT OF NET COST

For the Period Ended September 30, 2009

Dollars in Millions

Gross Cost:

Subsidy Cost (Note 6)

Direct Loan and Equity Investments Program $ 43,605

Asset Guarantee Program (2,201)

Total Program Subsidy Costs 41,404

Interest Expense on Borrowings from the Bureau of the Public Debt (Note 8) 6,436

Home Affordable Modiﬁcation Program (Note 5) 2

Administrative Cost 167

Total Gross Cost $ 48,009

Less Earned Revenue:

Dividend and Interest Income - Programs (Note 6) $ (9,503)

Interest Income on Fianancing Account (3,649)

Subsidy Allowance Amortized (Note 9) 6,716

Net Earned Revenue $ (6,436)

Total Net Cost of Operations $ 41,573

The accompanying notes are an integral part of these ﬁnancial statements.

FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

OFFICE OF FINANCIAL STABILITY (TROUBLED ASSET RELIEF PROGRAM)

STATEMENT OF CHANGES IN NET POSITION

For the Period Ended September 30, 2009

Dollars in Millions

Unexpended

Approprations

Cumulative

Results of

Operations

Beginning Balances, at Inception $ — $ —

Budgetary Financing Sources

Appropriations Received 238,268 —

Appropriations Used (154,039) 154,039

Other Financing Sources — (112,467)

Total Financing Sources 84,229 41,572

Net Cost of Operations — (41,573)

Ending Balances $ 84,229 $ (1)

The accompanying notes are an integral part of these ﬁnancial statements

FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY (TROUBLED ASSET RELIEF PROGRAM)

STATEMENT OF BUDGETARY RESOURCES

For the Period Ended September 30, 2009

Dollars in Millions

Budgetary

Accounts

Nonbudgetary

Financing

Accounts

BUDGETARY RESOURCES

Unobligated Balances Brought Forward, Inception $ — $ —

Budget Authority:

Appropriations 238,268 —

Borrowing Authority — 309,971

Spending Authority from Offsetting Collections

Earned: Collected — 243,072

Change in Unﬁlled Orders Without Advance — 28,927

Total Budget Authority 238,268 581,970

Permanently Not Available — (120,841)

TOTAL BUDGETARY RESOURCES (Note 10) $ 238,268 $ 461,129

STATUS OF BUDGETARY RESOURCES

Obligations Incurred:

Direct $ 210,112 $ 452,184

Unobligated Balance:

Apportioned and Available 28,156 7,009

Not Available — 1,936

TOTAL STATUS OF BUDGETARY RESOURCES $ 238,268 $ 461,129

CHANGE IN OBLIGATED BALANCES

Obligated Balance Brought Forward, Inception $ — $ —

Obligations Incurred 210,112 452,184

Gross Outlays (153,961) (372,982)

Change in Uncollected Customer Payments from Federal Sources — (28,927)

Obligated Balance, Net, End of Period:

Unpaid Obligations 56,151 79,202

Uncollected Customer Payments from Federal Sources — (28,927)

Obligated Balance, Net, End of Period $ 56,151 $ 50,275

NET OUTLAYS

Gross Outlays $ 153,961 $ 372,982

Offsetting Collections — (243,072)

Distributed Offsetting Receipts (2,720) —

NET OUTLAYS $ 151,241 $ 129,910

The accompanying notes are an integral part of these ﬁnancial statements

FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

Notes to the Financial Statements

NOTE 1. REPORTING ENTITY

e Troubled Asset Relief Program (TARP) was authorized by the Emergency Economic Stabilization Act of 2008

(EESA or “e Act”). e Act gave the Secretary of the Treasury (the Secretary) broad and ﬂexible authority to

establish the TARP to purchase and insure mortgages and other troubled assets, which permits the Secretary to

inject capital into banks and other commercial companies by taking equity positions in those entities, if needed, to

stabilize the ﬁnancial markets.

e EESA established certain criteria under which the TARP would operate, including provisions that impact

the budgeting, accounting, and reporting of troubled assets acquired under the Act. Section 101(a) of the EESA

provided the authority for the Secretary to purchase troubled assets, and Section 101(a)(3) of the EESA established

the Oﬃce of Financial Stability (OFS) to implement the TARP. Section 102 of the EESA required the Secretary to

establish a program to guarantee troubled assets originated or issued prior to March 14, 2008, including mortgage-

backed securities. Section 115 of the EESA limits the authority of the Secretary to purchase troubled assets up to

$700 billion

outstanding at any one time, calculated at the aggregate purchase prices of all troubled assets held.

ere was approximately $381.3 billion outstanding against the Section 115 authority as of September 30, 2009.

Section 120 of the EESA established that the authorities under Sections 101(a), excluding Section 101(a)(3) and

Section 102 of the EESA, shall terminate on December 31, 2009. Section 120 of the EESA further established that

the Secretary, upon submission of a written certiﬁcation to Congress, may extend the authority provided under the

Act to expire no later than 2 years from the date of the enactment of the Act (October 3, 2008).

Under the provisions of the EESA, the OFS implemented the TARP which resulted in the development of the fol-

lowing programs: the Capital Purchase Program; the Targeted Investment Program; the Asset Guarantee Program;

the Consumer and Business Lending Initiative; the Public-Private Investment Program; the American International

Group, Inc. Investment Program (formerly known as the Systemically Signiﬁcant Failing Institutions Program);

and the Automotive Industry Financing Program (see Note 6); as well as the Home Aﬀordable Modiﬁcation

Program (see Note 5).

While these ﬁnancial statements reﬂect the activity of the OFS in executing its programs, including providing

resources to various entities to help stabilize the ﬁnancial markets, they do not include the assets, liabilities,

or results of operations of commercial entities in which the OFS has a signiﬁcant equity interest. rough the

purchase of troubled assets, the OFS has entered into several diﬀerent types of direct loan, equity investment, and

asset guarantee arrangements with private entities. ese direct loans, equity investments, and asset guarantees were

made with the intent of helping to stabilize the ﬁnancial markets and mitigating, as best as possible, any adverse

impact on the economy. ese direct loans, equity investments, and asset guarantees were not made to engage

in the business activities of the respective private entities. Based on this intent, the OFS has concluded that such

direct loans, equity investments, and asset guarantees are considered “bail outs”, under the provisions of paragraph

50 of Statement of Federal Financial Accounting Concepts (SFFAC) No. 2, Entity and Display. In addition, these

entities do not meet the conclusive criteria in SFFAC No. 2. As such, OFS determined that none of these entities

1 e Helping Families Save eir Homes Act of 2009 (PubL. No. 111-22, Div. A, 123 Stat., 1632 (2009) amended the act to reduce the

maximum allowable amount of outstanding troubled assets under the act by almost $1.3 billion, from $700 billion to $698.7 billion. As

required under Section 102 of EESA, the $381.3 billion does not include a subtraction from the outstanding guarantee amount to reﬂect

the balance in the Troubled Assets Insurance Financing Fund.

NOTES TO THE FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

meet the criteria to be classiﬁed as a federal entity. Consequently, their assets, liabilities, and results of operations

are not consolidated in these OFS ﬁnancial statements.

In addition, the OFS has made investments in certain Special Purpose Vehicles

(SPV). SFFAC No. 2, paragraphs

43 and 44, reference indicative criteria such as ownership and control over an SPV to carry out government powers

and missions, as criteria in the determination of consolidation. e OFS has concluded that the lack of control over

the SPVs is the primary basis for determining that none of the SPVs meet the criteria to be classiﬁed as a federal

entity. As a result, the assets, liabilities and results of operations of the SPVs are not included in these OFS ﬁnancial

statements. e OFS has recorded the investments in private entities and investments in SPVs in accordance with

Credit Reform Accounting, as discussed below. Additional disclosures regarding these SPV investments are included

in these Notes.

e EESA established the OFS within the Oﬃce of Domestic Finance of the Department of the Treasury

(Treasury). e OFS prepares stand-alone ﬁnancial statements to satisfy EESA’s requirement for the TARP to

prepare annual ﬁnancial statements. Additionally, as an oﬃce of the Treasury, its ﬁnancial statements are consoli-

dated into Treasury’s department-wide ﬁnancial statements and Agency Financial Report.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF ACCOUNTING AND PRESENTATION

e accompanying ﬁnancial statements include the operations of the OFS and have been prepared from the

accounting records of the OFS in conformity with accounting principles generally accepted in the United States

for federal entities (Federal GAAP), and the Oﬃce of Management and Budget (OMB) Circular A-136, Financial

Reporting Requirements, as amended. Federal GAAP includes the standards issued by the Federal Accounting

Standards Advisory Board (FASAB). e FASAB is recognized by the American Institute of Certiﬁed Public

Accountants (AICPA) as the oﬃcial accounting standards-setting body for the U.S. Government. As such, the

FASAB is responsible for establishing Federal GAAP for Federal reporting entities.

In July 2009, the FASAB issued the Statement of Federal Financial Accounting Standards (SFFAS) No. 34, e

Hierarchy of Generally Accepted Accounting Principles, Including the Application of Standards Issued by the Financial

Accounting Standards Board. SFFAS No. 34 identiﬁes the sources of accounting principles and the framework for

selecting the principles used in the preparation of general purpose ﬁnancial reports of federal reporting entities

that are presented in conformity with Federal GAAP.

In addition to the above, Section 123(a) of the EESA requires that the budgetary cost of purchases of troubled

assets and guarantees of troubled assets, and any cash ﬂows associated with authorized activities, be determined in

accordance with the Federal Credit Reform Act of 1990 (FCRA). Section 123(b) (1) of the EESA requires that the

budgetary costs of troubled assets and guarantees of troubled assets be calculated by adjusting the discount rate for

market risks. As a result of this requirement, the OFS considered market risk in its calculation and determination of

2 e OFS has invested in SPV’s under the Consumer and Business Lending Initiative and the Automotive Industry Financing Program.

NOTES TO THE FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

the estimated net present value of its direct loans, asset guarantees, and equity investments for budgetary purposes.

Similarly, market risk is considered in valuations for ﬁnancial reporting purposes (see Note 6 for further discussion).

Consistent with the accounting policy for equity investments made by Treasury in private entities, the OFS ac-

counts for its equity investments at fair value, deﬁned as the estimated amount of proceeds the OFS would receive

if the equity investments were sold to a market participant. e OFS uses the present value accounting concepts

embedded in SFFAS No. 2, Accounting for Direct Loans and Loan Guarantees, to derive fair value measurements.

e OFS concluded that the equity investments were similar to direct loans in that there is a stated rate and a

redemption feature which, if elected, requires repayment of the amount invested. Furthermore, consideration of

market risk provides a basis to arrive at a fair value measurement. erefore, the OFS uses SFFAS No. 2 (as more

fully discussed below) for reporting and disclosure requirements of its equity investments.

Federal loans and loan guarantees are governed by FCRA for budgetary accounting and the associated FASAB

accounting standard SFFAS No. 2, as amended for ﬁnancial reporting. e OFS applies the provisions of the SFFAS

No. 2, as amended, when accounting for direct loans, equity investments, and asset guarantees. Direct loans and

equity investments disbursed and outstanding are recognized as assets at the net present value of their estimated

future cash ﬂows and outstanding asset guarantees are recognized as liabilities or assets at the net present value of

their estimated future cash ﬂows. e subsidy allowance account represents the diﬀerence between the face value

of the outstanding direct loan and equity investment balance and the net present value of the expected future cash

ﬂows, and is reported as an adjustment to the face value of the direct loan or equity investment. Consequently, direct

loans, asset guarantees, and equity investments, including investments in preferred and common stock and warrants

of public companies, are accounted for and reported by the OFS using credit reform accounting in accordance with

SFFAS No. 2, as amended.

e OFS recognizes dividend revenue associated with equity investments when declared by the entity in which OFS

has invested and when received in relation to any repurchases and restructuring. e OFS reﬂects changes in the value

of direct loans, equity investments, and asset guarantees in the subsidy cost on the Statement of Net Cost annually.

e OFS has received common stock warrants, additional preferred stock (referred to as warrant preferred stock) or

additional notes, as additional consideration for direct loans and equity investments made and asset guarantees entered

into. e OFS accounts for the warrants and warrant preferred stock received under Section 113 of EESA as fees

under SFFAS No. 2, and, as such, the value of the warrants and warrant preferred stock is a reduction of the subsidy

allowance.

USE OF ESTIMATES

e OFS has made certain estimates and assumptions relating to the reporting of assets, liabilities, revenues, and

cost to prepare these ﬁnancial statements. Actual results could signiﬁcantly diﬀer from these estimates. Major

ﬁnancial statement line items subject to estimates include Troubled Asset Relief Program Direct Loans and Equity

Investments, Net, Asset Guarantee Program, and related subsidy cost (see Note 6).

e most signiﬁcant diﬀerences between actual results and estimates may occur in the valuation of direct loans,

equity investments, and asset guarantees. e forecasted future cash ﬂows used to determine these amounts as of

September 30, 2009, are sensitive to slight changes in model assumptions, such as general economic conditions,

speciﬁc stock price volatility of the entities which the OFS has an equity interest, estimates of expected default,

NOTES TO THE FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

and prepayment rates. Forecasts of future ﬁnancial results have inherent uncertainty and the OFS’s Troubled

Asset Relief Program Direct Loans and Equity Investments, Net, and Asset Guarantee Program line items as of

September 30, 2009, are reﬂective of relatively illiquid, troubled assets whose values are particularly sensitive to

future economic conditions and other assumptions. Additional discussion related to sensitivity analysis can be

found in the Management Discussion and Analysis section of the Agency Financial Report.

CREDIT REFORM FOR ACCOUNTING

e FCRA provided for the use of program, ﬁnancing, and general fund receipt accounts to separately account

for activity related to loans and guarantees. ese accounts are classiﬁed as either budgetary or non-budgetary

in the Statement of Budgetary Resources. e budgetary accounts include the program and general fund receipt

accounts, and the non-budgetary accounts consist of the credit reform ﬁnancing accounts.

As discussed previously, the OFS accounts for the cost of purchases of troubled assets and guarantees of troubled

assets, and any cash ﬂows associated with authorized activities, including direct loans, in accordance with Section

123(a) of the EESA and the FCRA for budgetary accounting and SFFAS No. 2 for ﬁnancial reporting, except for

the Home Aﬀordable Modiﬁcation Program (HAMP) (see Note 5).

e authoritative guidance for ﬁnancial reporting is primarily contained in the SFFAS No. 2, as amended by the

SFFAS No. 18, Amendments to Accounting Standards for Direct Loans and Loan Guarantees, and the SFFAS No.

19, Technical Amendments to Accounting Standards for Direct Loans and Loan Guarantees.

In accordance with SFFAS No. 2, the OFS maintains program accounts which receive appropriations and obligate

funds to cover the subsidy cost of direct loans, equity investments and asset guarantees, and disburses the subsidy

cost to the OFS ﬁnancing accounts. e ﬁnancing accounts are non-budgetary accounts that are used to record

all of the cash ﬂows resulting from the OFS direct loans, equity investments and asset guarantees.

Cash ﬂows

include disbursements, repayments, repurchases, fees, recoveries, borrowings from the Treasury, interest, negative

subsidy and the subsidy cost received from the program accounts.

e ﬁnancing arrangements speciﬁcally for the TARP activities are provided for in the EESA as follows:

(1) borrowing for program funds under Section 118 that constitute appropriations when obligated or

spent, which are reported as “appropriations” in these ﬁnancial statements;

(2) borrowing by ﬁnancing accounts for non-subsidy cost under the FCRA and Section 123; and

(3) the Troubled Assets Insurance Financing Fund (TAIFF) under section 102(d).

e OFS has general fund receipt accounts which are used to record the receipt of amounts paid from the ﬁnanc-

ing accounts when there is a negative subsidy or negative modiﬁcation from the original estimate or a downward

reestimate. Amounts in the general fund receipt accounts are available for appropriations only in the sense that

all general fund receipts are available for appropriations. Any assets in these accounts are non-entity assets and

are oﬀset by intragovernmental liabilities. At the end of the ﬁscal year, the fund balance transferred to the U.S.

Treasury through the general fund receipt account is no longer included in the OFS’s fund balance reporting.

3 For the Asset Guarantee Program, OFS has established the Troubled Assets Insurance Financing Fund, as required by Section 102(d) of

the EESA which is the ﬁnancing account under FCRA for the Asset Guarantee Program.

NOTES TO THE FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

e SFFAS No. 2 requires that the actual and expected costs of federal credit programs be fully recognized in

ﬁnancial reporting. e OFS calculated and recorded an initial estimate of the future performance of direct loans,

equity investments, and asset guarantees. e data used for these estimates were reestimated at the ﬁscal year-end

to reﬂect adjustments for market risk, asset performance, and other key variables and economic factors. e

reestimate data was then used to estimate and report the “Subsidy Cost” in the Statement of Net Cost. A detailed

discussion of the OFS subsidy calculation and reestimate assumptions, process and results is provided in Note 6.

FUND BALANCE WITH TREASURY

e Fund Balance with Treasury includes general, ﬁnancing and other funds available to pay current liabilities

and ﬁnance authorized purchases. Cash receipts and disbursements are processed by the Treasury, and the OFS’s

records are reconciled with those of the Treasury on a regular basis.

Available unobligated balances represent amounts that are apportioned for obligation in the current ﬁscal year.

Unavailable unobligated balances represent unanticipated collections in excess of the amounts apportioned which

are unavailable. Obligated balances not yet disbursed include undelivered orders and unpaid expended authority.

TROUBLED ASSET RELIEF PROGRAM DIRECT LOANS AND EQUITY

INVESTMENTS, NET

Troubled Asset Relief Program Direct Loans and Equity Investments, Net represents the estimated net outstand-

ing amount of the OFS direct loans and equity investments, exclusive of the HAMP. e direct loan and equity

investment balances have been determined in accordance with the provisions of SFFAS No. 2 (see Note 6).

ASSET GUARANTEE PROGRAM

e Asset Guarantee Program represents the asset resulting from the net present value of the estimated cash

inﬂows that are in excess of the estimated future claim payments (see Note 6).

LIABILITIES FOR HOME AFFORDABLE MODIFICATION PROGRAM

Liabilities for Home Aﬀordable Modiﬁcation Program (HAMP) represent the liability for payments to servicers and

investors, and principal balance reduction payments for the account of borrowers under the HAMP are accounted

for in accordance with SFFAS No. 5, Accounting for Liabilities of the Federal Government. Under SFFAS No. 5, a

liability is recognized for any unpaid amounts due as of the reporting date. is liability includes amounts due from

the OFS to pay for beneﬁts and services provided under the terms of the HAMP as of the OFS’s reporting date

regardless of whether such payments have been reported to the OFS. e liability estimate is calculated based on

information reported by participating servicers.

e OFS has determined that credit reform accounting, is not applicable to HAMP since there are no incoming cash

ﬂows to be valued.

GENERAL PROPERTY AND EQUIPMENT

Equipment with a cost of $50 thousand or more per unit and a useful life of two years or more is capitalized at

full cost and depreciated using the straight-line method over the equipment’s useful life. Other equipment not

NOTES TO THE FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

meeting the capitalization criteria is expensed when purchased. Under this policy, the OFS had no capitalized

general property and equipment at September 30, 2009.

ACCOUNTS PAYABLE AND OTHER LIABILITIES

Accounts Payable and Other Liabilities are amounts due to intragovernmental or public entities that will generally

be liquidated during the next operating cycle (within one year from the balance sheet date).

PRINCIPAL PAYABLE TO THE BUREAU OF THE PUBLIC DEBT

Principal Payable to the Bureau of the Public Debt (BPD) represents the net amount due to the BPD for equity

investments, direct loans, and asset guarantees funded by borrowings from the BPD as of September 30, 2009

(see Note 8).

DUE TO THE GENERAL FUND

Due to the General Fund represents the amount of downward reestimates as of September 30, 2009, related to

direct loans, equity investments, and asset guarantees as of September 30, 2009 (see Notes 3 and 6).

UNEXPENDED APPROPRIATIONS

Unexpended Appropriations represents the OFS undelivered orders and unobligated balances as of

September 30, 2009.

CUMULATIVE RESULTS OF OPERATIONS

Cumulative Results of Operations, presented on the Balance Sheet and on the Statement of Changes in Net

Position, represents the net results of the OFS operations since inception, through September 30, 2009. e

Other Financing Sources in the Statement of Changes in Net Position consist primarily of transfers due to the

Treasury General Fund as of September 30, 2009, relating to the downward reestimates.

LEAVE

A liability for OFS employees’ annual leave is accrued as it is earned and reduced as leave is taken. Each year

the balance of accrued annual leave is adjusted to reﬂect current pay rates as well as forfeited “use or lose” leave.

Amounts are unfunded to the extent current or prior year appropriations are not available to fund annual leave

earned but not taken. Sick leave and other types of non-vested leave are expensed as taken.

EMPLOYEE HEALTH AND LIFE INSURANCE AND WORKERS’

COMPENSATION BENEFITS

e OFS employees may choose to participate in the contributory Federal Employees Health Beneﬁt and the

Federal Employees Group Life Insurance Programs. e OFS matches a portion of the employee contributions to

each program. Matching contributions are recognized as current operating expenses.

e Federal Employees’ Compensation Act (FECA) provides income and medical cost protection to covered

Federal civilian employees injured on the job, and employees who have incurred a work-related injury or occupa-

NOTES TO THE FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

tional disease. Future workers’ compensation estimates are generated from an application of actuarial procedures

developed to estimate the liability for FECA beneﬁts. e actuarial liability estimates for FECA beneﬁts include

the expected liability for death, disability, medical, and miscellaneous costs for approved compensation cases.

EMPLOYEE PENSION BENEFITS

e OFS employees participate in either the Civil Service Retirement System (CSRS) or the Federal Employees’

Retirement System (FERS) and Social Security. ese systems provide beneﬁts upon retirement and in the event

of death, disability or other termination of employment and may also provide pre-retirement beneﬁts. ey

may also include beneﬁts to survivors and their dependents, and may contain early retirement or other special

features. e OFS contributions to both retirement plans and Social Security, as well as imputed costs for pension

and other retirement beneﬁt costs administered by the Oﬃce of Personnel Management, are recognized on the

Statement of Net Cost as Administrative Costs. Federal employee beneﬁts also include the rift Savings Plan

(TSP). For FERS employees, a TSP account is automatically established and the OFS matches employee con-

tributions to the plan, subject to limitations. e matching contributions are also recognized as Administrative

Costs on the Statement of Net Cost.

NOTE 3. NON-ENTITY LIABILITIES

e OFS had approximately $109.7 billion in downward reestimates related to its Troubled Asset Relief Program

Direct Loans and Equity Investments, Net and Asset Guarantee Program which is a non-entity liability payable

due to the Treasury General Fund as of September 30, 2009 (see Note 6).

NOTE 4. FUND BALANCES WITH TREASURY

As of September 30, 2009, Fund Balances with Treasury, by fund type and status, consisted of the following:

(dollars in Millions)

Fund Balances:

General Funds $ 45,650

Program Funds 38,658

Financing Funds 13,425

Total Fund Balances $ 97,733

Status of Fund Balances:

Unobligated Balances

Available $ 35,165

Unavailable 1,936

Obligated Balances Not Yet Disbursed 60,632

Total Status of Fund Balances $ 97,733

NOTES TO THE FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

Included in the OFS Financing Funds is the premium collections of approximately $174.8 million related to the

Asset Guarantee Program (AGP) that are required by the EESA Section 102(d) to be maintained in the TAIFF (see

Note 6).

NOTE 5. THE HOME AFFORDABLE MODIFICATION PROGRAM

e Home Aﬀordable Modiﬁcation Program (HAMP) is designed to assist eligible homeowners who are experi-

encing ﬁnancial hardships to remain in their homes by providing reductions in their monthly mortgage payments

for up to ﬁve years. e HAMP provides for one-time, monthly, and annual incentives to servicers, borrowers,

and investors who participate in the program. On an ongoing basis, beyond such incentives, the OFS shares

equally in the cost of the reductions with the mortgage investors. Lastly, investors are paid a Home Price Decline

Protection payment to partially oﬀset losses from home price declines.

For the HAMP, Fannie Mae provides direct programmatic support as a third party agent on behalf of the OFS,

Freddie Mac provides compliance oversight as a third party agent on behalf of the OFS, and the servicers work

directly with the borrowers to modify and service the borrowers’ loans.

As of September 30, 2009, the OFS had entered into agreements with 63 servicers to provide up to approximately

$27.1 billion in payments and incentives to borrowers, servicers and investors. As of September 30, 2009, this

$27.1 billion was included in Obligations Incurred in the Statement of Budgetary Resources. All HAMP pay-

ments are made to servicers either for themselves or for the beneﬁt of borrowers and investors. Furthermore, all

payments are contingent on borrowers remaining current on their mortgage payments. As of September 30, 2009,

approximately $946.5 thousand in incentive payments had been paid to three servicers in incentive payments for

743 borrowers who had completed oﬃcial loan modiﬁcations.

Servicers have until December 31, 2012, to enter into mortgage modiﬁcations with borrowers.

As of September 30, 2009, the OFS had accrued approximately $1.4 million of ﬁrst lien incentive for modiﬁca-

tions under the HAMP program.

NOTE 6. TROUBLED ASSET RELIEF PROGRAM DIRECT LOANS AND EQUITY

INVESTMENTS, NET AND ASSET GUARANTEE PROGRAM

e OFS applies the provisions of SFFAS No. 2 to account for direct loans, equity investments and asset guaran-

tees. is standard requires measurement of the asset or liability at the net present value of the estimated future

cash ﬂows. e cash-ﬂow estimates for each transaction reﬂect the actual structure of the instruments. For each

of these instruments, analytical cash ﬂow models generate estimated cash ﬂows to and from the OFS over the

estimated term of the instrument. Further, each cash-ﬂow model reﬂects the speciﬁc terms and conditions of the

program, technical assumptions regarding the underlying assets, risk of default or other losses, and other factors

as appropriate. e models also incorporate an adjustment for market risk to reﬂect the additional return required

NOTES TO THE FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

by the market to compensate for variability around the expected losses reﬂected in the cash ﬂows (the “unexpected

loss”). e basic methods for each of these models are outlined below.

Direct Loans

e estimated future cash ﬂows for direct loans are derived using analytical models that estimate the cash ﬂows to

and from the OFS over the life of the loan. ese cash ﬂows include the scheduled principal, interest, and other

payments to the OFS, including estimated proceeds from equity interest obtained or additional notes. ese

models also include estimates of default and recoveries, incorporating the value of any collateral provided by the

contract. e probability and timing of default and losses relating to a default are estimated by using applicable

historical data when available, or publicly available proxy data, including credit rating agency historical perfor-

mance data.

In the case of the Term Asset-backed Securities Loan Facility (TALF), the OFS uses an analytical model to project

cash ﬂows to and from the OFS based on the estimated loan collateral performance, the estimated mix of collat-

eral funded through the TALF and the terms of the contracts.

e models include an adjustment for market risk which is intended to capture the risk of unexpected losses, but

are not intended to represent fair value, i.e. the proceeds that would be expected to be received if the loans were

sold to a market participant.

Equity Investments

Preferred stock cash ﬂows are projected using an analytical model developed to incorporate the risk of losses

associated with adverse events, such as failure of the institution or increases in market interest rates. e model

estimates how cash ﬂows vary depending on: 1) current interest rates, which may aﬀect the decision whether to

repay the preferred stock; and 2) the strength of a ﬁnancial institution’s assets. Inputs to the model include institu-

tion speciﬁc accounting data obtained from regulatory ﬁlings, an institution’s stock price volatility, historical bank

failure information, as well as market prices of comparable securities trading in the market. OFS estimates the

values and projects the cash ﬂows of warrants using an option-pricing approach based on the current stock price

and its volatility. Investments in common stock which are exchange traded are valued at the market price. e

result of using market prices, either quoted prices for the identical asset or quoted prices for comparable assets, is

that the equity investments are recorded at estimated fair value.

Asset Guarantees

e value of the asset guarantee reﬂects the net present value of estimated default-claim payments by the OFS, net

of income from recoveries on defaults, fees, or other income. Guarantee fees to date have been paid in the form

of preferred stock, subsequently converted to trust preferred stock, and a warrant to purchase common stock of

the ﬁnancial institution, whose value is modeled using the same methodology for other equity purchase programs,

discussed above. Default-claim payments are based on estimated losses on the guaranteed assets. Key inputs into

these estimates are forecasted gross domestic product, unemployment rates and home price depreciation, in a base

scenario and a stress scenario.

NOTES TO THE FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

Subsidy Cost

e recorded subsidy cost of a direct loan, equity investment or asset guarantee is based on a set of estimated

future cash ﬂows. OFS actions that change these estimated future cash ﬂows change subsidy costs and are re-

corded as a modiﬁcation. e cost of a modiﬁcation is recognized as a modiﬁcation expense, included in subsidy

cost, when the direct loan, equity investment, or asset guarantee is modiﬁed. During ﬁscal year 2009, modiﬁca-

tions occurred within the Capital Purchase Program, Consumer and Business Lending Initiative, the American

International Group, Inc. Investment Program, and the Automotive Industry Financing Program. See detailed

discussion related to each program and related modiﬁcations below. Total net modiﬁcation costs for the period

ended September 30, 2009, approximated $412.1 million.

EQUITY INVESTMENTS, DIRECT LOAN AND ASSET GUARANTEE PROGRAMS

e OFS administers a number of programs designed to help stabilize the ﬁnancial system and restore the ﬂow

of credit to consumers and businesses. e OFS has purchased direct loans and made equity investments and

entered into asset guarantees. e table below is a list and type of the OFS programs:

Program Program Type

Capital Purchase Program Equity Investment/Subordinated Debentures

Targeted Investment Program Equity Investment

Asset Guarantee Program Guarantee

Consumer and Business Lending Initiative Direct Loan

Public-Private Investment Program Equity Investment and Direct Loan

American International Group, Inc. Investment Program (*) Equity Investment

Automotive Industry Financing Program Equity Investment and Direct Loan

(*) Formerly known as the Systemically Signiﬁcant Failing Institutions Program

A description of each of these programs is provided below, and certain ﬁnancial data by program is provided in

the table at the end of this footnote.

CAPITAL PURCHASE PROGRAM

In October 2008, the OFS began implementation of the TARP with the Capital Purchase Program (CPP), de-

signed to help stabilize the ﬁnancial system by assisting in building the capital base of certain viable U.S. ﬁnancial

institutions to increase the capacity of those institutions to lend to businesses and consumers and support the

economy. Under this program, the OFS purchases senior perpetual preferred stock from qualifying U.S. con-

trolled banks, savings associations, and certain bank and savings and loan holding companies (Qualiﬁed Financial

Institution or QFI). e senior preferred stock has a stated dividend rate of 5.0% through year ﬁve, increasing

to 9.0% in subsequent years. e dividends are cumulative for bank holding companies and subsidiaries of bank

holding companies and non-cumulative for others and payable when and if declared by the institution’s board of

directors. Under the original terms of the senior preferred stock the QFI may not redeem the shares within the

ﬁrst three years of the date of the investment, unless it has received the proceeds of one or more Qualiﬁed Equity

Oﬀerings (QEO)

which results in aggregate gross proceeds to the QFI of not less than 25.0% of the issue price

4 A Qualiﬁed Equity Oﬀering is deﬁned as the sale by the QFI after the date of the senior preferred stock investment of Tier 1 perpetual

preferred stock or common stock for cash.

NOTES TO THE FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

of the senior preferred stock. QFIs that are Sub-chapter S corporations issued subordinated debentures in order

to maintain compliance with the Internal Revenue Code. e maturity of the subordinated debentures is 30 years

and interest rates are 7.7% for the ﬁrst 5 years and 13.8% for the remaining years.

In February 2009 and May 2009, the United States Congress passed the American Recovery and Reinvestment

Act of 2009 and the Helping Families Save eir Homes Act of 2009, respectively. ese acts contained amend-

ments to the EESA (EESA Amendments) which require the Secretary to allow QFIs to repay at any time, subject

to regulatory approval, regardless of whether the 25.0% or greater QEO was accomplished. e ability of a QFI

to repay the OFS investment prior to year 3 or a 25.0% QEO was not considered in the original subsidy cost

estimate. erefore, a modiﬁcation cost of $77.7 million was recorded as a result of these amendments.

In addition to the senior preferred stock, the OFS received warrants, as required by section 113(d) of EESA, from

public QFIs to purchase a number of shares of common stock. e warrants have an aggregate market price equal

to 15.0% of the total senior preferred stock investment. e exercise price and market value used to determine the

number of shares of common stock subject to the warrant was calculated based on the average of closing prices of the

common stock on the 20 trading days ending on the last day prior to the date the QFIs application was preliminarily

approved for participation in the program. e warrants include customary anti-dilution provisions. In the event

that a public QFI completes, prior to December 31, 2009, one or more QEOs with aggregate gross proceeds of not

less than 100.0% (100.0% QEO) of the senior perpetual preferred stock investment, the number of shares subject to

the warrants will be reduced by 50.0%. As of September 30, 2009, 19 QFIs reduced the number of shares available

under the warrants as a result of this provision. e warrants have a 10 year term. e OFS may exercise one half of

the warrants prior to the earlier of a 100.0% QEO, or December 31, 2009. Subsequent to December 31, 2009, OFS

may exercise any warrants held in whole or in part. e OFS considers the impact of potential future QEOs in the

valuation process.

e OFS received warrants from non-public QFIs for the purchase of additional senior preferred stock (or

subordinated debentures if appropriate) with a stated dividend rate of 9.0% (13.8% interest rate for subordinate

debentures) and a liquidation value equal to 5.0% of the total senior preferred stock (additional subordinate

debenture) investment. ese warrants were immediately exercised and resulted in the OFS holding additional se-

nior preferred stock (subordinated debentures) (collectively referred to as “warrant preferred stock”) of non-public

QFIs. e OFS did not receive warrants from banks considered Community Development Financial Institutions

(CDFIs). As of September 30, 2009, the OFS has invested in 20 institutions considered CDFIs.

e EESA Amendments previously discussed also allow the Secretary to liquidate warrants associated with repur-

chased senior preferred stock at the market price. In addition, a QFI, upon the repurchase of its senior preferred

stock, also has the contractual right to repurchase the common stock warrants at the market price.

In June 2009, the OFS entered into an exchange agreement with Citigroup. Under the terms of the agreement

the OFS exchanged $25.0 billion of its investment in senior preferred stock for a new series (Series M) of manda-

torily convertible preferred stock. e initial conversion price was $3.25 per share. In July 2009, the OFS received

the Series M shares, which were subsequently converted in September 2009 to approximately 7.7 billion common

shares of Citigroup. is exchange transaction was not considered in the original subsidy cost estimate for CPP.

As a result, the OFS recorded a modiﬁcation cost of approximately $1.8 billion for the ﬁscal year ended 2009.

e OFS also has investments in Citigroup through the TIP and AGP.

NOTES TO THE FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

During the period ended September 30, 2009, OFS invested approximately $204.6 billion in 685 institutions, in-

cluding small, community, regional, and national banks, as well as CDFIs, in 48 states, the District of Columbia,

and Puerto Rico. Approximately $70.7 billion of the OFS investments have been repurchased or redeemed

bringing the total gross investment balance as of September 30, 2009, to approximately $133.9 billion. In addi-

tion, during the period ended September 30, 2009, the OFS received under CPP approximately $6.8 billion in

dividends on senior preferred and warrant preferred stock and approximately $2.9 billion in proceeds from the

repurchase of warrants and warrant preferred stock. 38 QFIs have not declared and paid one or more dividends to

OFS under CPP as of September 30, 2009.

On November 1, 2009, a CPP participant, CIT Group, ﬁled for Chapter 11 Bankruptcy. e OFS had invested

$2.3 billion in senior preferred stock of CIT Group and received a warrant for the purchase of common stock.

e OFS does not expect a signiﬁcant recovery of its preferred stock investment. As such, this investment has

been reduced to zero in these ﬁnancial statements. e ultimate amount received, if any, from this investment

will depend on the outcome of the bankruptcy proceedings.

On November 6, 2009, a subsidiary of UCBH Holdings, Inc. (a CPP participant), United Commercial Bank,

was closed by its regulators. e OFS had invested approximately $298.7 million in senior preferred stock and

received a warrant for the purchase of common shares. e value of these shares, including the warrant, reﬂected

in these ﬁnancial statements is approximately $22.5 million as of September 30, 2009. e ultimate amount

received, if any, from this investment will depend on the outcome of the receivership.

On November 13, 2009, a subsidiary of Paciﬁc Coast National Bancorp. (a CPP participant), Paciﬁc Coast

National Bank, was closed by its regulators. e OFS had invested approximately $4.1 million in senior preferred

stock and received warrant preferred stock in the amount of $206 thousand. e value of the shares, includ-

ing the warrant preferred stock, reﬂected in these ﬁnancial statements is approximately $154 thousand as of

September 30, 2009. e ultimate amount received, if any, from this investment will depend on the outcome of

the receivership.

Further details on the outstanding senior preferred share investments and subordinated debentures under CPP

and the net investment amount including estimated cash ﬂows associated with the sale or exercise of the warrants,

as of September 30, 2009, are presented in the table at the end of this section.

TARGETED INVESTMENT PROGRAM

e Targeted Investment Program (TIP) was designed to prevent a loss of conﬁdence in ﬁnancial institutions that

could result in signiﬁcant market disruptions, threatening the ﬁnancial strength of similarly situated ﬁnancial

institutions, impairing broader ﬁnancial markets, and undermining the overall economy. e OFS considers in-

stitutions as candidates for the TIP on a case-by-case basis, based on a number of factors described in the program

guidelines. ese factors include the threats posed by destabilization of the institution, the risks caused by a loss

of conﬁdence in the institution, and the institution’s importance to the nation’s economy.

e OFS completed the ﬁrst transaction under the TIP in December 2008, when it invested $20.0 billion in

Citigroup cumulative perpetual preferred stock and received a warrant for the purchase of Citigroup common

stock. Under the agreement with Citigroup, the OFS receives an 8.0% annual dividend, payable quarterly, if and

when declared by Citigroups’ Board of Directors. As part of this agreement, Citigroup must implement rigorous

compensation standards and other restrictions on corporate expenditures. In June 2009, the OFS and Citigroup

NOTES TO THE FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

agreed to an exchange of the cumulative perpetual preferred stock issued under the TIP for a new series of trust

preferred securities. Citigroup issued subordinated debentures to a trust established by Citigroup, and the trust

issued trust preferred securities to the OFS. Interest and principal payments on the subordinated debentures are

passed-through to the trust preferred security holders. e trust preferred securities pay a quarterly distribution

at an annual rate of 8.0% to OFS. e subordinated debentures contain an interest deferral provision allowing

Citigroup to defer payment of interest for up to 5 years. e OFS will not receive distributions from the trust

preferred securities during a deferral period. Deferred interest is required to be paid upon termination of the

deferral period. As of September 30, 2009, Citigroup has not exercised its option to defer interest payments. e

subordinated debentures mature in 2039. As a result, the trust is scheduled to pay out the proceeds to the holders

of the trust preferred securities. In addition, the subordinated debentures can be prepaid by Citigroup at any time

prior to maturity, subject to consultation with the Federal Reserve, as long as the U.S. Government holds the

trust preferred securities. e terms of the new securities are substantially the same as the preferred stock origi-

nally received by the OFS and therefore the exchange transaction did not result in a modiﬁcation. e OFS also

has investments in Citigroup through the CPP and the AGP.

In January 2009, OFS completed its second transaction under the TIP, investing $20.0 billion in Bank of

America. Under the agreement with Bank of America, the OFS purchased $20.0 billion of cumulative perpetual

preferred stock and received a warrant for the purchase of Bank of America common stock. e preferred stock

purchased from Bank of America contains a stated annual dividend rate of 8.0%, payable quarterly, if declared.

Bank of America’s agreement under the TIP stipulated that the institution must implement rigorous executive

compensation standards and other restrictions on corporate expenditures. e OFS also has investments in Bank

of America through the CPP.

During the period ended September 30, 2009, OFS received approximately $1.9 billion in dividends under the

TIP. See the table presented at the end of this section for further details.

ASSET GUARANTEE PROGRAM

e Asset Guarantee Program (AGP) provides guarantees for assets held by systemically signiﬁcant ﬁnancial insti-

tutions that face a risk of losing market conﬁdence due in large part to a portfolio of distressed or illiquid assets.

e AGP is applied with extreme discretion in order to improve market conﬁdence in the systemically signiﬁcant

institution and in ﬁnancial markets broadly.

Section 102 of the EESA established the AGP to guarantee troubled assets originated or issued prior to March

14, 2008, including mortgage-backed securities, and established the Troubled Assets Insurance Financing Fund

(TAIFF). In accordance with Section 102(c) and (d) of the EESA, premiums from ﬁnancial institutions, are

collected and all fees are recorded by the OFS in the TAIFF. In addition, Section 102(c)(3) of the EESA requires

that the original premiums assessed are “set” at a minimum level necessary to create reserves suﬃcient to meet

anticipated claims. In the event there are insuﬃcient funds within the TAIFF for the payment of claims, amounts

are borrowed from the Treasury until suﬃcient funds are received into the TAIFF. In the event that the estimate

of claims exceeds the estimated future cash inﬂows, an upward reestimate would be recorded and amounts would

be transferred to the TAIFF as a subsidy expense.

e OFS completed its ﬁrst transaction under the AGP in January 2009, when it ﬁnalized the terms of a guar-

antee agreement with Citigroup. Under the agreement, the OFS, the Federal Deposit Insurance Corporation

NOTES TO THE FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

(FDIC), and the Federal Reserve Bank of New York (FRBNY) provided protection against the possibility of large

losses on an asset pool of approximately $301.0 billion of loans and securities backed by residential and com-

mercial real estate and other such assets, which remain on Citigroup’s balance sheet. e following loss-sharing

terms apply to the transaction: Citigroup absorbs the ﬁrst $39.5 billion in losses, and losses over the $39.5 billion

are shared by the U. S. government (90.0 %) and Citigroup (10.0 %) (the “second loss”). For the second loss,

the OFS absorbs up to $5.0 billion, then the FDIC absorbs up to $10.0 billion, and lastly the FRBNY funds any

U.S. government losses above the OFS and the FDIC commitments through a non-recourse loan. e guarantee

is in place for ten years for residential assets and ﬁve years for non-residential assets.

As a premium for the guarantee, Citigroup issued $7.0 billion of cumulative perpetual preferred stock with an

8.0 % stated dividend rate and a warrant for the purchase of common stock; approximately $4.0 billion and the

warrant were issued to the OFS, and approximately $3.0 billion was issued to the FDIC. As part of the agree-

ment, Citigroup submitted an executive compensation plan to the OFS and the FDIC for approval and must

comply with certain common stock dividend restrictions. e OFS has received approximately $174.8 million

in dividends on the preferred stock received as compensation for this arrangement. ese dividends have been

deposited into the TAIFF. e preferred stock originally issued to the OFS and the FDIC were exchanged for the

trust preferred securities discussed above under the TIP. e OFS has also invested in Citigroup through the CPP

and the TIP.

e net present value of the estimated cash inﬂows from the preferred stock and warrant received by the OFS

from Citigroup as a premium is greater than the estimated net present value of future claim payments, resulting

in an asset of approximately $1.8 billion, after reestimates, as of September 30, 2009.

In January 2009, the OFS, FDIC, FRBNY (together the USG Parties) and Bank of America signed a Summary

of Terms (Term Sheet) pursuant to which the USG Parties agreed to guarantee or lend against a pool of up to

$118.0 billion of ﬁnancial instruments consisting of securities backed by residential and commercial real estate

loans and corporate debt and related derivatives. In May 2009, prior to completing deﬁnitive documentation,

Bank of America notiﬁed the USG Parties of its desire to terminate negotiations with respect to the guarantee

contemplated in the Term Sheet. All parties agreed that Bank of America received value for entering into the

Term Sheet with the USG Parties and that the USG Parties should be compensated for out-of-pocket expenses

and a fee equal to the amount Bank of America would have paid for the guarantee from the date of the signing

of the Term Sheet through the termination date. Under the terms of the settlement, the U.S. Treasury received

$276.0 million for its role in the guarantee agreement through the OFS, the FRBNY received $57.0 million, and

the FDIC received $92.0 million. All the OFS funds received for the settlement were deposited in the TAIFF and

subsequently paid to the Treasury General Fund. e $276 million received by OFS pursuant to the settlement is

reﬂected in the OFS Statement of Net Cost as a reduction of the AGP subsidy cost.

CONSUMER AND BUSINESS LENDING INITIATIVE (CBLI)

Term Asset-Backed Securities Loan Facility

e Term Asset-Backed Securities Loan Facility (TALF) was created by the Federal Reserve Board (FRB) to

provide low cost funding to investors in certain classes of Asset Backed Securities (ABS). e OFS agreed to

participate in the program by providing liquidity and credit protection to the FRB.

NOTES TO THE FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

Under the TALF, the FRBNY, as implementer of the TALF program, originated loans on a non-recourse basis to

holders of certain AAA rated ABS secured by recently originated consumer and commercial loans and commercial

mortgage backed securities (New Issue CMBS). In addition to securities secured by recently originated loans,

CMBS issued prior to January 2009 and originally AAA rated (Legacy CMBS) are eligible collateral. TALF loans

have a term of 3 or 5 years and are secured solely by eligible collateral. Haircuts (a percentage reduction used for

collateral valuation) are determined based on the riskiness of each type of eligible collateral and the maturity of the

eligible collateral pledged to the FRBNY. e “haircuts” provide additional protection to OFS by exposing the

TALF borrowers to some risk of loss. Interest rates charged on the TALF loans depend on the weighted average

maturity of the pledged collateral, the collateral type and whether the collateral pays a ﬁxed or variable coupon

As part of the program, the FRBNY has entered into a put agreement with the TALF, LLC, a special purpose

vehicle created by the FRBNY. In the event of a TALF borrower default, the FRBNY will seize the collateral and

sell it to the TALF, LLC under this agreement. e TALF, LLC receives a monthly fee equal to the diﬀerence

between the TALF loan rate and the FRBNY’s fee (spread) as compensation for entering into the put agreement.

e accumulation of this fee will be used to fund purchases. In the event there are insuﬃcient funds to purchase

the collateral, the OFS has committed to invest up to $20.0 billion in non-recourse subordinate notes issued

by TALF, LLC. e subordinate notes bear interest at 1 Month LIBOR plus 3.0% and mature 10 years from

the closing date, subject to extension. e OFS disbursed $100.0 million upon creation of the TALF, LLC and

the remainder can be drawn to purchase collateral in the event the spread is not suﬃcient to cover purchases.

Any amounts needed in excess of the OFS commitment and the fee would be provided through a loan from the

FRBNY. Upon wind-down of TALF, LLC (collateral defaults, reaches ﬁnal maturity or is sold), the cash balance

will be disbursed according to the following payment priority:

FRBNY principal balance1.

OFS principal balance2.

FRBNY interest 3.

OFS interest 4.

Remaining cash balance – 90.0% to the OFS, 10.0% to the FRBNY5.

Subsequent to the initial cost estimates prepared for the TALF, certain changes were made to the terms of the

program, including increasing the term to 5 years and the addition of diﬀerent types of acceptable collateral.

ese program changes resulted in a modiﬁcation, increasing the original cost estimate by $8.0 million.

e TALF, LLC is owned and controlled by the FRBNY. e credit agreement between the OFS and the TALF,

LLC provides the OFS with certain rights consistent with a creditor but would not constitute control. As such

TALF, LLC is not a federal entity and the assets, liabilities, revenue and cost of TALF, LLC are not included in the

OFS ﬁnancial statements. e discussion below provides information on 1) the amount of TALF loans issued by

the FRBNY, by collateral class, and 2) the assets, liabilities, income and expense of the TALF, LLC.

e FRBNY has originated $50.9 billion in TALF loans

, of which about $42.7 billion is outstanding as of Sep-

tember 30, 2009. e average “haircut” was approximately 9.92% of the originated balance. As of September 30,

2009, all of the TALF loans performed as agreed. e table below shows the outstanding balance of the FRBNY

TALF loans as of September 30, 2009, by collateral type:

5 ese represent loans originated by the FRBNY and not the OFS. e intention of this disclosure is to show the activity in the program

and the types of collateral that could eventually be purchased by the TALF, LLC with funding provided by the OFS.

100

NOTES TO THE FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

Collateral Type

Loan Amount

(Dollars in Billions) % of Total

Auto $ 7.43 17.3 %

Credit Cards $ 21.61 50.6 %

Equipment $ 0.89 2.1 %

Floor Plan $ 1.01 2.4 %

Premium Finance $ 0.99 2.3 %

Servicing Advances $ 0.58 1.4 %

Small Business $ 0.46 1.1 %

Student Loan $ 5.63 13.1 %

New Issue CMBS $ 0.0 0.0 %

Legacy CMBS $ 4.13 9.7 %

Total $ 42.73 100.0 %

As of September 30, 2009, the TALF, LLC has assets of approximately $198.9 million consisting primarily of

investments in U.S. Treasury and Agency securities

. Total liabilities of the TALF, LLC are $101.8 million consist-

ing of the OFS subordinated note plus accrued interest. During the period ended September 30, 2009, the TALF,

LLC collected $99.1 million in fees and investment income and incurred $2.3 million in expenses, $1.8 million

of which is accrued interest on the OFS subordinated note. As of September 30, 2009, there were no TALF bor-

rower defaults and consequently no purchases of collateral by the TALF, LLC.

AMERICAN INTERNATIONAL GROUP, INC. INVESTMENT PROGRAM (AIG)

e OFS provides assistance to certain systemically signiﬁcant ﬁnancial institutions on a case by case basis in

order to provide stability to institutions that are critical to a functioning ﬁnancial system and are at substantial

risk of failure as well as to prevent broader disruption to ﬁnancial markets.

In November 2008, the OFS invested $40.0 billion in AIG’s cumulative Series D perpetual cumulative preferred

stock with a dividend rate of 10.0% compounded quarterly. On April 17, 2009, AIG and the OFS restructured

their November 2008 agreement. Under the restructuring, the OFS exchanged $40.0 billion of cumulative Series

D preferred stock for $41.6 billion of non-cumulative 10.0% Series E preferred stock. e amount of Series E

preferred stock is equal to the original $40.0 billion, plus approximately $733.0 million in undeclared dividends

as of the February 1, 2009, scheduled quarterly dividend payment date, $15.0 million in dividends compounded

on the undeclared dividends, and an additional $855.0 million in dividends from February 1, 2009, but not paid

as of April 17, 2009. AIG’s restructured agreement kept the quarterly dividend payment dates of May 1,

August 1, November 1, and February 1, as established by the original November 2008 agreement. e original

subsidy cost estimate did not consider this restructuring which resulted in a modiﬁcation cost of $127.2 million.

In addition to the exchange, the OFS agreed to make available an additional $29.8 billion capital facility to allow

AIG to draw additional funds if needed to assist in AIG’s restructuring. e OFS investment consists of Series

F non-cumulative perpetual preferred stock with an initial liquidation amount of $0.0. is liquidation amount

increases with any draw down by AIG on the facility. e dividend rate applicable to these shares is 10.0% and is

payable quarterly, if declared, on the outstanding liquidation amount. As of September 30, 2009, approximately

6 Agency securities refer to securities issued by either Ginnie Mae, Fannie Mae, Freddie Mac, or the Federal Home Loan Banks.

101

NOTES TO THE FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

$3.2 billion has been funded by the OFS to AIG under this additional capital facility. Consistent with SSFAS

No. 2, the unused portion of the AIG capital facility is not recognized as an asset as of September 30, 2009.

As of September 30, 2009, AIG has not made any dividend payments on any of the perpetual preferred stock.

Subsequently, AIG failed to make a dividend payment on November 2, 2009. Per the terms of the preferred

stock, if AIG misses 4 dividend payments, the OFS may appoint to the AIG board of directors, the greater of two

members or 20.0% of the total number of directors of the Company.

AUTOMOTIVE INDUSTRY FINANCING PROGRAM

e objective of the Automotive Industry Financing Program (AIFP) was to help prevent a signiﬁcant disruption

of the American automotive industry, which could have a negative eﬀect on the economy of the United States.

e discussion below details the various investments and loans made by the OFS in the automotive industry,

generally provided in chronological order.

e table below illustrates amounts originally disbursed and collected under AIFP. ese amounts are shown

before conversions, exchanges, or valuation. For a detailed discussion on the current status of the loans see the

narrative below the table.

(Dollars in Millions)

Amounts

Disbursed as of

September

30, 2009

Collection

of Interest,

Dividends, and

Additional Notes

Principal

Repayments

Amount Outstanding

before Conversions,

Exchanges, and

Valuation

GM General Purpose Loan including Working Capital Advances $ 19,400 $ 134 $ — $ 19,400

GMAC LLC Rights Offering 884 9 — 884

Chrysler Holding LLC General Purpose 4,000 53 — 4,000

Chrysler Financial 1,500 22 1,500 —

Auto Supplier Support Program 413 6 — 413

Auto Warranty Program 640 4 640 —

Chrysler Debtor-In-Possession 1,888 — — 1,888

Chrysler Exit 4,577 — — 4,577

GM Debtor-In-Possession 30,100 34 — 30,100

GMAC Preferred stock 5,000 265 — 5,000

GMAC Mandatorily Convertible Preferred Stock 7,500 165 — 7,500

Total $ 75,902 $ 692 $ 2,140 $ 73,762

General Motors (GM or old GM) General Purpose Loan including Working Capital

Advances

e OFS provided GM with a total of $13.4 billion in a three-year direct loan bearing interest at 3 Month

LIBOR (subject to a 2.0% ﬂoor), plus 3.0% and secured by various types of collateral. $4.0 billion of this loan

was funded in December 2008, an additional $5.4 billion in January, 2009, and an additional $4.0 billion in

February 2009. In April 2009, the OFS and GM amended this loan agreement to increase the maximum loan

amount from $13.4 billion to $15.4 billion, and on May 20, 2009 to increase the maximum loan amount from

$15.4 billion to $19.4 billion (these amendments are referred to as the Working Capital Advances) to provide

GM with adequate working capital to assist in the restructuring eﬀort. e additional amounts were funded upon

amendment, bringing the total funded under this loan to $19.4 billion. e agreement required GM to develop

and implement a restructuring plan to achieve long-term ﬁnancial viability and required compliance with certain

enhanced executive compensation and expense control requirements.

102

NOTES TO THE FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

Furthermore, the OFS received warrants for shares of GM common stock and an additional senior unsecured

note in the principal amount of $748.6 million. e purpose of this loan was to enhance the ability of GM and

its subsidiaries to pursue timely and aggressive production of energy-eﬃcient advanced technology vehicles;

preserve and promote the jobs of American workers employed directly by GM and its subsidiaries; safeguard

the ability of GM and its subsidiaries to provide retirement and health care beneﬁts for retirees and their depen-

dents; and stimulate manufacturing and sales of automobiles produced by GM. On June 1, 2009, GM ﬁled for

Chapter 11 bankruptcy. All rights under this loan were transferred to a newly created entity (GM NewCo) and

subsequently extinguished in connection with a successful credit bid for the assets of old GM. In addition, the

OFS received $134.4 million in interest while the loan was outstanding. See further discussion below under GM

Debtor-In-Possession.

GMAC LLC Rights Offering

In December 2008, the OFS agreed, in principal, to lend up to $1.0 billion to GM for participation in a rights

oﬀering by GMAC in support of GMAC’s reorganization as a bank holding company. e loan was secured by

the GMAC common interest acquired in the rights oﬀering. e loan agreement speciﬁed that at any time, at

the option of the lender (OFS), the unpaid principal and accrued interest was exchangeable for the membership

interest purchased, by GM, during the rights oﬀering. e note was funded for $884.0 million. In May 2009,

the OFS exercised its exchange option under the loan and received 190,921 membership interests, representing

approximately 35.36% of the voting interest, in GMAC in full satisfaction of the loan. In addition, OFS received

$9.1 million in interest while the loan was outstanding. e conversion to GMAC shares was not considered in

the original subsidy cost. As a result, a modiﬁcation was recorded reducing the estimated subsidy cost by approxi-

mately $1.6 billion.

Chrysler Holding LLC General Purpose

e OFS provided a three-year, $4.0 billion loan to Chrysler in January 2009, bearing interest at 3 Month

LIBOR (subject to a 2.0% ﬂoor) plus 3.0%. e loan was secured by various collateral including parts inventory,

real estate, and certain equity interests held by Chrysler. is agreement required Chrysler to submit a restructur-

ing plan to achieve long-term viability and required compliance with certain enhanced executive compensation

and expense-control requirements. Furthermore, the OFS received a senior unsecured note from Chrysler in the

principal amount of approximately $266.8 million, containing the same terms as the General Purpose loan. e

purpose of this loan was to: enhance the ability of Chrysler and its subsidiaries to pursue timely and aggressive

production of energy-eﬃcient advanced technology vehicles; preserve and promote the jobs of American workers

employed directly by Chrysler and its subsidiaries; safeguard the ability of Chrysler and its subsidiaries to provide

retirement and health care beneﬁts for retirees and their dependents; and stimulate manufacturing and sales of

automobiles produced by Chrysler.

On April 30, 2009, Chrysler ﬁled for Chapter 11 bankruptcy. Upon entering bankruptcy, a portion of Chrysler

was sold to a newly created entity (New Chrysler). Under the terms of the bankruptcy agreement, $500.0 million

of this loan was assumed by New Chrysler (see discussion under Chrysler Exit for discussion of note terms).

e balance remains outstanding and is in default. Any recovery of the remainder of this loan will depend on:

(a) Chrysler Holding’s obligation to pay the greater of $1.375 billion or 40.0% of the equity value of Chrysler

Financial to OFS should Chrysler Holding receive certain distributions from Chrysler Financial and, (b) proceeds

received from the sale of assets remaining in the bankrupt company. In addition, OFS received $52.1 million in

interest payments on this note.

103

NOTES TO THE FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

Chrysler Financial

In January, 2009, the OFS loaned $1.5 billion to Chrysler LB Receivables Trust (Chrysler Trust), a special

purpose entity created by Chrysler Financial, to ﬁnance the extension of new consumer auto loans. e ﬁve-year

loan bore interest at 1 Month LIBOR plus 1.0% for the ﬁrst year, 1.5% for the remaining term and was secured

by a senior secured interest in a pool of newly originated consumer automotive loans, and Chrysler served as a

guarantor for certain covenants of Chrysler Financial. Under the agreement, Chrysler Financial was required to

comply with the executive compensation and corporate governance requirements of Section 111(b) of the EESA,

as well as enhanced restrictions on executive compensation including the need to reduce by 40.0% its bonus pool

for Senior Executive Oﬃcers and Senior Employees. In lieu of warrants, the OFS received additional notes in an

amount equal to 5.0% of the maximum loan amount. e additional notes would vest 20.0% on the closing date

and 20.0% on each anniversary of the closing date and had other terms similar to the loan. e purpose of this

loan was to assist Chrysler Financial in providing retail ﬁnancing to purchasers of automobiles, light duty trucks

and recreational vehicles; to stimulate manufacturing and sales of automobiles produced by Chrysler’s aﬃliates;

preserve and promote the jobs of American workers employed directly by Chrysler’s aﬃliates and in related in-

dustries; and safeguard the ability of Chrysler to provide retirement and health care beneﬁts for their retirees and

their dependents. On July 14, 2009, the loan and additional note of $15.0 million were paid in full. In addition,

the OFS received $7.4 million in interest payments while this loan was outstanding.

Auto Supplier Support Program

In April 2009, the OFS committed $5.0 billion in ﬁnancing for the Auto Supplier Support Program, as follows:

$3.5 billion for GM suppliers and $1.5 billion for Chrysler suppliers. ese commitments were subsequently

reduced to $2.5 billion for GM suppliers and $1.0 billion for Chrysler suppliers per the loan agreement. Under

the program, suppliers are able to sell their receivable to a SPV, created by the respective automaker, at a discount.

e purchases of the receivables are funded by equity investments made by the automaker, cash payments made

by the automaker on previously purchased receivables or from draws on the OFS funding commitment. e

duration of the program is 12 months, extendable at the option of the OFS. Interest is charged on advances

under the facility at a rate of 3 Month LIBOR (subject to a 2.0% ﬂoor) plus 3.5%. In addition, the OFS received

a contingent payment note comprised of an exit fee equal to 4.0% of the adjusted commitment amount and

50.0% of the residual equity in the SPV after the program’s end date. is program provides suppliers with access

to government backed protection ensuring that money owed to them for the products they ship will be paid

regardless of what happens to the recipient car company. is provided suppliers with needed funding to oper-

ate their businesses and help unlock credit more broadly in the supplier industry. Purchases of receivables and

collection of amounts due from GM and Chrysler is performed by a third party service provider. Suppliers must

maintain qualifying commercial terms with the automakers to participate in the program. e OFS has provided

approximately $413.1 million of funding to this program. e bankruptcy of Chrysler and GM did not impact

this program, as both companies were allowed to continue paying suppliers while in bankruptcy. As of September

30, 2009, the OFS had received $5.9 million in interest under the Auto Supplier Support Program.

Auto Warranty Program

In April 2009 and May 2009, the OFS loaned approximately $280.0 million to Chrysler and $360.6 million

to GM, respectively, to capitalize SPVs created by Chrysler and GM to ﬁnance participation in the Warranty

Commitment Program (warranty program). e OFS also received additional notes as consideration for its loans in

an amount equal to 6.67% of the funded amounts. e warranty program covered all warranties on new vehicles

104

NOTES TO THE FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

purchased from Chrysler and GM during the period in which Chrysler and GM were restructuring. e program

was run by a third party program administrator with the backing of ﬁnancial resources allocated by the OFS,

Chrysler and GM. Chrysler and GM contributed 15.0% of the projected cost for warranty service on each covered

vehicle, with the OFS providing additional funds to cover 110.0% of the projected cost. e SPVs holding the

funds operated separately from Chrysler and GM and would transfer the necessary funds to a third-party to handle

all warranty claims even if Chrysler and GM entered into bankruptcy or went out of business. Both Chrysler and

GM have completed the Section 363

sales in June 2009 and July 2009, respectively. Upon completion of the

sale, the OFS received principal amounts due from both GM and Chrysler and terminated the warranty program.

Interest in the amount of $3.1 million was received by the OFS from Chrysler. No interest was received in con-

nection with the GM repayment. e GM additional note was assigned to the New GM as part of the bankruptcy

proceedings and extinguished as part of the credit bid for the assets of old GM. e Chrysler additional note is still

outstanding.

Chrysler Debtor-In-Possession

In May 2009, the OFS and the Canadian government jointly agreed to make a loan in the total amount of

$4.1 billion ($3.0 billion by the OFS and $1.1 billion by Canada) to Chrysler LLC in its capacity as debtor-in-

possession (DIP) in its bankruptcy case. In May 2009, the OFS increased its loan commitment in the DIP credit

agreement to $3.8 billion, and the Canadian government increased its commitment to $1.2 billion, bringing the

maximum loan amount to $5.0 billion. e loan interest rate was the 3 Month Eurodollar rate plus 3.0%. e

stated maturity was September 2009, with earlier maturity depending on the bankruptcy proceedings. Of the

$3.8 billion committed by the OFS, approximately $1.9 billion was funded during the bankruptcy. is DIP

loan provided the necessary liquidity to sustain Chrysler during the bankruptcy period. Upon the Section 363

sale of the Chrysler assets, the funding commitment was reduced to amounts previously drawn. As such, no

additional amounts were drawn from this facility. Recovery of the DIP loan is subject to the bankruptcy process

associated with the Chrysler assets remaining after the sale to New Chrysler.

Chrysler Exit

In May 2009, the OFS committed to make a loan to New CarCo Acquisition LLC (New Chrysler or Chrysler

Group LLC), the company that purchased the assets of Chrysler. e ﬁnal terms of the credit agreement resulted

in a loan to New Chrysler for approximately $7.1 billion. is amount consists of $6.6 billion of new funding

and $500.0 million of assumed debt

from the OFS January 2, 2009 credit agreement with Chrysler Holding

LLC. e loan was secured by a ﬁrst priority lien on the assets of Chrysler Group LLC. Funding of the loan

was available in two installments or tranches (B and C), each with varying availability and terms. e following

describes the terms of Tranches B and C.

e maximum funding under Tranche B was $2.0 billion and was funded on the closing date of the agreement.

Interest on Tranche B is 3 Month Eurodollar plus 5.0% margin (in certain situations, deﬁned in the agreement,

a rate other than the 3 Month Eurodollar rate will be applied. is rate, referred to as the Alternative Base Rate,

will be the greater of the Prime Rate, the Federal Funds Eﬀective rate plus 0.5% or the 3 Month Eurodollar rate

plus 1.0%. If this Alternative Base Rate is applied, the margin will be 4.0% versus the 5.0% if the 3 Month

Eurodollar Rate is used). Tranche B is due and payable on December 10, 2011, provided that the Chrysler Group

7 Section 363 refers to Section 363 of the Federal Bankruptcy Code, which allows companies in bankruptcy to sell assets in reorganization.

8 e assumed debt contains the same terms as the Tranche C loan with respect to mandatory prepayment, interest and maturity.

105

NOTES TO THE FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

LLC may elect to extend the maturity of up to $400.0 million of Tranche B to the Tranche C maturity date. If so

elected, the applicable margin will increase to 6.5% for Eurodollar and 5.5% for ABR loans, respectively.

e maximum funding under Tranche C is approximately $4.64 billion, of which approximately $2.58 billion

was funded on the closing date. Interest on Tranche B is 3 Month Eurodollar plus 7.91% margin (in certain

situations, deﬁned in the agreement, a rate other than the 3 Month Eurodollar rate will be applied. is rate,

referred to as the Alternative Base Rate, will be the greater of the Prime Rate, the Federal Funds Eﬀective rate

plus 0.5% or the 3 Month Eurodollar rate plus 1.0%. If this Alternative Base Rate is applied, the margin will be

6.91% versus the 7.91% if the 3 Month Eurodollar Rate is used). On June 10, 2016, the Tranche C loan shall be

prepaid to the extent the funded amount is greater than 50.0% of the closing date commitment amount, taking

into consideration amounts previously prepaid as a voluntary prepayment. e remaining balance of the Tranche

C loan is due and payable on June 10, 2017.

Interest on both the Tranche B and Tranche C will be payable in-kind through December 2009 and will be

added to the principal balance of the respective Tranche. In addition, additional in-kind interest will accrue in

the amount of $17.0 million per quarter. Such amount will be added to the Tranche C loan balance subject to

interest at the appropriate rate.

e OFS also obtained other consideration, including a 9.85% equity interest in Chrysler Group LLC and

additional notes

with principal balances of $288.0 million and $100.0 million

. As of September 30, 2009, the

OFS has funded approximately $4.6 billion under this facility.

GM Debtor-In-Possession

On June 1, 2009, GM ﬁled for Chapter 11 bankruptcy. As part of the ﬁling the OFS and the Canadian govern-

ment agreed to lend up to $33.3 billion under the terms of the DIP credit agreement; the OFS’s commitment

amount was $30.1 billion. e OFS funded the $30.1 billion of which approximately $986.0 million remains

outstanding as of September 30, 2009. In July 2009, the DIP credit agreement was amended to reﬂect the fact

that the amounts there under (other than approximately $986.0million that remained with GM for wind-down

in bankruptcy and $7.1 billion that was assumed by GM NewCo) were extinguished in connection with a suc-

cessful credit bid for the assets of old GM.

e OFS has assigned its rights in this loan as well as the General Purpose and Working Capital loans and previ-

ously received common stock warrants to a newly created entity (GM NewCo or General Motors Company). e

purpose of this GM NewCo was to obtain suﬃcient assets of GM out of bankruptcy to satisfy the original loans

disbursed to GM and discussed above, which it accomplished through a successful credit bid for the assets in a

sale pursuant to Section 363 of the Bankruptcy Code. Upon closing of the Section 363 sale, the General Motors

Company has assumed $7.1 billion of the DIP loan, simultaneously paying $0.4 billion (return of warranty pro-

gram funds), resulting in a balance of $6.7 billion. e loan has a term of 6 years and bears interest at 3 Month

Eurodollar (subject to a 2.0% ﬂoor) plus 5.0% and has a ﬁrst lien security interest in the assets of General Motors

Company. e OFS also received $2.1 billion in 9.0% cumulative perpetual preferred stock and 60.8% of the

common equity interest in General Motors Company. e assets received by the OFS as a result of the assign-

9 e additional notes bear the same interest rate and maturity as the Tranche C loan.

10 Interest begins to accrue on this note after certain events, deﬁned in the credit agreement, have taken place.

106

NOTES TO THE FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

ment and Section 363 sale are considered recoveries of the original loans for subsidy cost estimation purposes.

As of September 30, 2009, the OFS had received $34.1 million in dividends on GM preferred stock.

GMAC Preferred Stock

In December 2008, the OFS purchased preferred membership interests for $5.0 billion which were converted to

senior preferred stock with an 8.0% annual distribution right (dividends) from GMAC. Under the agreement,

GMAC issued warrants to the OFS to purchase, for a nominal price, additional preferred equity in an amount equal

to 5.0% of the preferred equity purchased. ese warrants were exercised at closing of the investment transaction.

e additional preferred stock provided for a 9.0% annual distribution right. e purpose of this investment was to

enable GMAC to restore liquidity to its ﬁnance businesses and restore stability to the domestic automobile industry

in the United States. As of September 30, 2009, the OFS has received $265.2 million in dividends associated with

these preferred and warrant preferred stock.

GMAC Mandatorily Convertible Preferred Stock

In May 2009, the OFS published a non-binding term sheet to invest $13.1 billion to support GMAC, subject to

deﬁnitive documentation and GMAC’s capital needs. e OFS has invested $7.5 billion (of the $13.1 billion) in

9.0% Mandatorily Convertible Preferred Stock in GMAC to support its ability to originate new loans to Chrysler

dealers and consumers, and help address GMAC’s capital needs. e preferred stock have a liquidation amount of

$50 per share and are convertible in whole or in part, at any time, at the option of GMAC, subject to the approv-

al of the Federal Reserve. Furthermore, GMAC shall not convert any of the stock to the extent such conversion

would result in the OFS owning in excess of 49% of GMAC’s common equity except (1) with the prior written

consent of the OFS, (2) pursuant to GMAC’s Capital Plan, or (3) pursuant to an order of the Federal Reserve

compelling such a conversion. e determination of the percentage of common equity owned by the OFS would

take into account the common stock currently owned by the OFS as a result of the conversion of the GMAC

Rights Oﬀering, previously discussed. Absent a previous conversion, the preferred stock will automatically

convert after 7 years. e conversion rate is 0.00432 units of common stock per unit of convertible preferred

stock. e remaining $5.6 billion (per the non-binding term sheet) is subject to the FRB’s review of GMAC’s

capital plan assessment of whether additional capital is needed. As of September 30, 2009, the remaining $5.6

billion has not been funded. e OFS had received approximately $165.4 million in dividends associated with

these preferred and warrant preferred stock.

PUBLIC-PRIVATE INVESTMENT PROGRAM

e Public-Private Investment Program (PPIP) is part of the OFS’s eﬀorts to help restart the market and provide

liquidity for legacy assets. Under this program, the OFS will make equity and debt investments in investment

vehicles (referred to as Public Private Investment Funds or “PPIFs”) established by private investment managers.

e equity investment will be used to match private capital and will equal not more than 50.0% of the total eq-

uity invested. e debt investment will be, at the option of the investment manager, equal to 50.0% or 100.0%

of the total equity (including private equity). e PPIFs are only allowed to purchase commercial mortgage-

backed securities and non-agency residential mortgage-backed securities issued prior to January 1, 2009 that were

originally rated AAA or an equivalent rating by two or more nationally recognized statistical rating organizations

without external credit enhancement and that are secured directly by the actual mortgage loans, leases or other

assets and not other securities. e PPIFs are also permitted to invest in certain temporary securities, including

bank deposits, U.S. Treasury securities, and certain money market mutual funds. At least 90 percent of the assets

underlying any eligible asset must be situated in the United States. On September 30, 2009, the OFS signed

107

NOTES TO THE FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

deﬁnitive limited partnership and loan agreements with two investment managers, committing to potentially

disburse up to $6.7 billion. As of September 30, 2009, no private fund managers had made any investments and

the OFS had not disbursed any funds.

Subsidy Reestimates

e purpose of reestimates is to update original program subsidy cost estimates to reﬂect actual cash ﬂow experi-

ence as well as changes in forecasts of future cash ﬂows. Forecasts of future cash ﬂows are updated based on

actual program performance to date, additional publicly available relevant historical market data on securities

performance, revised expectations for future economic conditions, and enhancements to cash ﬂow projection

methods. Financial statement reestimates for all programs were performed using actual ﬁnancial transaction data

through September 30, 2009. In accordance with credit reform guidance and to ensure the timely completion of

the credit reform reestimate process, market and security speciﬁc data publicly available as of September 30, 2009,

was used for the CPP, AGP, TIP and direct loan AIFP and data through August 31, 2009 was used for the equity

portion of AIFP, AIG and TALF in the reestimate calculations. e OFS assessed the key inputs of the reestimates

using data publically available as of September 30, 2009, and in its determination, there were no signiﬁcant

changes to the key inputs for the three programs for which August 31, 2009, data was used that would require a

revision to the reestimates.

Downward Reestimates for the ﬁscal year ended September 30, 2009, are as follows:

Program

Downward Reestimate Amounts

(Dollars in Millions)

Subsidy Interest Total

AGP $ (1,097) $ (77) $ (1,174)

Direct Loan

AIFP $ (9,039) $ (1,571) $ (10,610)

CBLI/TALF (222) (21) (243)

Subtotal Direct $ (9,261) $ (1,592) $ (10,853)

Equity Investment

CPP $ (68,558) $ (3,861) $ (72,419)

TIP (20,366) (1,101) (21,467)

AIG (845) (280) (1,125)

AIFP (2,331) (379) (2,710)

Subtotal Equity $ (92,100) $ (5,621) $ (97,721)

Total $ (102,458) $ (7,290) $ (109,748)

108

NOTES TO THE FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

Descriptions of the reestimates, by OFS Program, are as follows:

e approximately $1.2 billion in downward reestimates for the AGP is primarily due to improvements in market

conditions from when the guarantee was committed in January 2009. e improved market conditions resulted

in an increase in the projected AGP asset due to the net present value of the estimated cash inﬂows from the pre-

ferred stock and warrants received by OFS from Citigroup as a premium being greater than the estimated value of

future claim payments associated with the $5.0 billion asset guarantee.

e approximately $10.6 billion in downward reestimates for the direct loans-AIFP is primarily the result of the

post bankruptcy improved ﬁnancial position of one of the major companies participating in the program. e

$0.2 billion in downward reestimates for the TALF is entirely due to projected improved performance of the

securities within the program versus the original estimate.

e $70.7 billion in repurchases during ﬁscal year 2009 accounts for $9.7 billion of the $72.4 billion in

downward reestimates in the CPP. Projected repurchases of $30.0 billion in the next 12 months accounts for

approximately $5.4 billion, with the $57.3 billion balance in downward reestimates in the CPP primarily due to

improved market conditions from when the original estimate was made in December 2008.

e $21.5 billion in downward reestimates in the TIP is mostly due to improved market conditions from when

the original estimates were made in December 2008 and January 2009. Approximately $2.3 billion is due to a

$20.0 billion repurchase forecast within 12 months following September 30, 2009.

e $1.1 billion in downward reestimates for the AIG Investment Program and $2.7 billion in downward

reestimates for the AIFP equity programs are primarily due to improvements in market conditions from when the

equities were purchased resulting in a reduction in the projected costs of the programs.

Key ﬁnancial data for the Troubled Asset Relief Program Loans and Equity Investments and Asset Guarantee

Program are included in the following two tables:

1. Direct Loans and Equity Investments Outstanding, Gross, represent amounts paid by OFS to acquire

the loans and equity investments. Repurchases, redemptions, and repayments have been deducted

from these balances.

2. Net Direct Loans and Equity Investments represent the present value of net cash ﬂows that OFS

estimates it will receive from the loans and equity investments. For equity securities, this amount

represents fair value.

3. Subsidy Expense by component, subsidy cost allowance and a reconciliation of the subsidy cost

allowance illustrate the relationship between subsidy cost and asset value.

4. Reconciliation of subsidy cost by program, is also incorporated in the tables.

109

NOTES TO THE FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

OFFICE OF FINANCIAL STABILITY (TROUBLED ASSET RELIEF PROGRAM)

NOTES TO THE FINANCIAL STATEMENTS

For the Period Ended September 30, 2009

(Dollars in Millions) TOTAL CPP AIG TIP AIFP CBLI

Note 6: Troubled Asset Relief Program Loans and Equity Investments

Direct Loans And Equity Investment Programs:

Direct Loans and Equity Investments Outstanding, Gross $ 290,969 $ 133,901 $ 43,206 $ 40,000 $ 73,762 $ 100

Subsidy Cost Allowance (53,077) 7,770 (30,054) 341 (31,478) 344

Net Direct Loans and Equity Investments $ 237,892 $ 141,671 $ 13,152 $ 40,341 $ 42,284 $ 444

New Loans or Investments Disbursed $ 363,826 $ 204,618 $ 43,206 $ 40,000 $ 75,902 $ 100

Obligations for Loans and Investments not yet Disbursed $ 51,681 $ — $ 26,629 $ — $ 5,152 $ 19,900

BUDGET SUBSIDY RATE, EXCLUDING MODIFICATIONS

AND REESTIMATES: (see Note 1 below)

Interest Differential 5.97% -45.52% 9.31% 6.97% 5.87%

Defaults 25.60% 123.56% 48.38% 54.21% 0.00%

Other -4.58% 4.74% -8.84% -3.13% -110.10%

Total Budget Subsidy Rate 26.99% 82.78% 48.85% 58.05% -104.23%

Subsidy Cost by Component:

Interest Differential $ 4,175 $ 12,279 $ (17,280) $ 3,724 $ 5,446 $ 6

Defaults 161,297 52,655 46,906 19,352 42,384 —

Other (13,705) (9,414) 1,799 (3,536) (2,444) (110)

Total Subsidy Cost, Excluding Modiﬁcations and Reestimates $ 151,767 $ 55,520 $ 31,425 $ 19,540 $ 45,386 $ (104)

Reconciliation of Subsidy Cost Allowance:

Balance, inception $ — $ — $ — $ — $ — $ —

Subsidy cost for disbursements 151,767 55,520 31,425 19,540 45,386 (104)

Subsidy cost for modiﬁcations 412 1,866 127 — (1,589) 8

Interest and Dividend Collections 9,329 6,790 — 1,862 677 —

Warrants and additional notes 2,916 2,901 — — 15 —

Net Interest (to) from Treasury on borrowings and Financing

Account Balance (2,773) (2,428) (373) (276) 309 (5)

Balance, End of period, before reestimates $ 161,651 $ 64,649 $ 31,179 $ 21,126 $ 44,798 $ (101)

Subsidy Reestimates (108,574) (72,419) (1,125) (21,467) (13,320) (243)

Balance, End of period $ 53,077 $ (7,770) $ 30,054 $ (341) $ 31,478 $ (344)

Reestimates

Interest on Reestimate $ (7,213) $ (3,861) $ (280) $ (1,101) $ (1,950) $ (21)

Subsidy (101,361) (68,558) (845) (20,366) (11,370) (222)

Total Reestimates - (Decrease) in Subsidy Cost $ (108,574) $ (72,419) $ (1,125) $ (21,467) $ (13,320) $ (243)

Reconciliation of Subsidy Costs:

Subsidy cost for disbursements $ 151,767 $ 55,520 $ 31,425 $ 19,540 $ 45,386 $ (104)

Subsidy cost for modiﬁcations 412 1,866 127 $ — (1,589) 8

Subsidy Reestimates (108,574) (72,419) (1,125) (21,467) (13,320) (243)

Total Direct Loan and Equity Investment Programs

Subsidy Costs $ 43,605 $ (15,033) $ 30,427 $ (1,927) $ 30,477 $ (339)

Note 1: The rates reﬂected in the “Budget Subsidy Rate” table above are weighted rates for the program. To compensate for the weighting of the various risk category subsidy rates,

the “by component” dollar amounts reﬂected were computed as a ratio of the component rate to the total weighted subsidy rate multiplied by the subsidy expense for the program.

Therefore, the Total Subsidy Cost excluding modiﬁcations and reestimates will not equal the New Loans or Investments Disbursed multiplied by the Budget Subsidy Rate.

110

NOTES TO THE FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY (TROUBLED ASSET RELIEF PROGRAM)

NOTES TO THE FINANCIAL STATEMENTS

For the Period Ended September 30, 2009

(in Millions)

AGP

Asset Guarantee Program

Asset Guarantees Outstanding:

Oustanding Principal Amount of Guaranteed Assets, Face Value $ 301,000

Amount of Outstanding Principal Guaranteed $ 5,000

Asset for Asset Guarantee Program $ 1,765

BUDGET SUBSIDY RATE, EXCLUDING MODIFICATIONS AND REESTIMATES:

Defaults 43.62%

Fees and Other Collections -53.23%

Other -5.37%

Total Budget Subsidy Rate -14.98%

Subsidy Cost by Component:

Defaults 2,181

Fees and Other Collections (2,662)

Other (270)

Total Subsidy Cost, Excluding Modiﬁcations and Reestimates $ (751)

RECONCILIATION OF ASSET GUARANTEE PROGRAM:

Balance, Inception $ —

Subsidy cost (751)

Dividend Collections on Preferred Stock 175

Net Interest from Treasury on Borrowings and Financing Account Balance (15)

Balance, End of Period, Before Reestimate $ (591)

Subsidy Reestimate (1,174)

Balance, End of Period $ (1,765)

REESTIMATES:

Interest on Reestimate $ (77)

Subsidy (1,097)

Total Reestimates - (Decrease) in Subsidy Cost $ (1,174)

RECONCILIATION OF SUBSIDY COSTS:

Subsidy cost $ (751)

Subsidy reestimate (1,174)

Cancellation fees collected (276)

Total Asset Guarantee Program Subsidy Cost $ (2,201)

111

NOTES TO THE FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

NOTE 7. COMMITMENTS AND CONTINGENCIES

e OFS is party to various legal actions and claims brought by or against it. In the opinion of management and

General Counsel, the ultimate resolution of these legal actions and claims will not have a material eﬀect on the

OFS ﬁnancial statements as of September 30, 2009. e OFS has not incurred any loss contingencies that would

be considered probable or reasonably possible for these cases. Refer to Note 6 for additional commitments.

NOTE 8. PRINCIPAL PAYABLE TO THE BUREAU OF THE PUBLIC DEBT

Equity investments, direct loans, and asset guarantees accounted for under credit reform accounting are funded

by subsidy appropriations and borrowings from the BPD. e OFS also borrows funds to pay the Treasury

General Fund for negative subsidy costs and downward reestimates. e OFS makes periodic principal repay-

ments to the BPD based on the analysis of its cash balances and future disbursement needs. All debt is intra-

governmental and covered by budgetary resources. See additional details on borrowing authority in Note 10,

Statement of Budgetary Resources.

Debt transactions for the period ending September 30, 2009, are:

(Dollars in Millions)

Beginning Balance, Principal Payable to the BPD $ —

New Borrowings 215,593

Repayments

(72,258)

Ending Balance, Principal Payable to the BPD $ 143,335

Borrowings from the BPD by TARP Program that are outstanding as of September 30, 2009, are as follows:

(Dollars in Millions)

Capital Purchase Program $ 77,232

American International Group, Inc. Investment Program 12,531

Targeted Investment Program 20,460

Automotive Industry Financing Program 32,134

Consumer & Business Lending Initiative 204

Asset Guarantee Program

774

Total Borrowings Outstanding $ 143,335

Borrowings are payable to the BPD as collections are available and carry terms ranging from 2 to 30 years.

Interest rates on borrowings range from 1.0% to 4.5%. Interest expense for the period ended September 30,

2009, was $6.4 billion.

112

NOTES TO THE FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

NOTE 9. STATEMENT OF NET COST

e Statement of Net Cost (SNC) presents the net cost of operations for the OFS for the Department of the

Treasury strategic goal of ensuring that U.S. and World economies perform at full economic potential. e OFS

has determined that all initiatives and programs under the TARP fall within this strategic goal.

e OFS SNC reports the accumulated full cost of the TARP’s output, including both direct and indirect costs

of the program services and output identiﬁable to TARP, in accordance with SFFAS No. 4, Managerial Cost

Accounting Concepts and Standards.

e OFS SNC includes approximately $6.4 billion of intragovernmental costs relating to interest expense on bor-

rowings from the BPD and approximately $3.6 billion in intragovernmental revenues relating to interest income

on ﬁnancing account balances for the period ended September 30, 2009.

Subsidy Allowance Amortized on the SNC is the diﬀerence between interest income on ﬁnancing fund account

balances, dividends and interest income on direct loans, equity investments, and asset guarantees from TARP

participants, and interest expense on borrowings from the BPD. Credit reform accounting requires all costs on

the SNC for programs to be reﬂected only in the subsidy cost. e subsidy allowance account is used to present

the loan or equity investment at the estimated net present value of future cash ﬂows.

NOTE 10. STATEMENT OF BUDGETARY RESOURCES

e Statement of Budgetary Resources (SBR) presents information about total budgetary resources available to

the OFS and the status of those resources for the period ended September 30, 2009. e OFS’s total budgetary

resources were approximately $238.3 billion for the period ended September 30, 2009. Additionally, non-

budgetary resources including borrowing authority and spending authority from collections of loan principal,

liquidation of equity investments, interest and fees in ﬁnancing funds were approximately $461.1 billion for the

period ended September 30, 2009.

PERMANENT INDEFINITE APPROPRIATIONS

e OFS receives permanent indeﬁnite appropriations annually to fund increases in the projected subsidy costs

of loans and the OFS investment programs as determined by the reestimation process required by the FCRA. e

initial funding as a result of the reestimation process will occur in 2010.

Additionally, Section 118 of the EESA states that the Secretary may issue public debt securities and use the

resulting funds to carry out the Act and that any such funds expended or obligated by the Secretary for actions

authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the

time of such expenditure or obligation.

113

NOTES TO THE FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

BORROWING AUTHORITY

e OFS is authorized to borrow from the BPD when funds needed to disburse direct loans and investments, and

to enter into asset guarantee arrangements exceed subsidy costs and collections in the non-budgetary ﬁnancing

accounts. As of September 30, 2009, the OFS had available approximately $45.8 billion of borrowing authority.

e OFS uses dividends and interest received as well as principal repayments on direct loans and liquidation of

equity investments to repay debt in the non-budgetary loan and investment ﬁnancing accounts. ese receipts are

not available for any other use per credit reform accounting guidance.

APPORTIONMENT CATEGORIES OF OBLIGATIONS INCURRED:

DIRECT VS. REIMBURSABLE OBLIGATIONS

All of the OFS apportionments are Direct and are Category B. Category B apportionments typically distribute

budgetary resources on a basis other than calendar quarters, such as by activities, projects, objects or a combina-

tion of these categories. e OFS obligations incurred are direct obligations (obligations not ﬁnanced from

reimbursements).

UNDELIVERED ORDERS

Undelivered orders as of September 30, 2009, were approximately $56.1 billion in budgetary accounts, and ap-

proximately $79.2 billion in non-budgetary ﬁnancing accounts.

EXPLANATION OF DIFFERENCES BETWEEN THE STATEMENT OF BUDGETARY

RESOURCES AND THE BUDGET OF THE UNITED STATES GOVERNMENT

Federal agencies are required to explain material diﬀerences between amounts reported in the SBR and the actual

amounts reported in the Budget of the U.S. Government (President’s Budget). However, the President’s Budget,

which will include the FY 2009 actual amounts for OFS, has not yet been published. e President’s Budget is

expected to be published in February 2010 and will be made available from the U.S. Government Printing Oﬃce.

Since the ﬁnancial statements are published before the President’s Budget, a reconciliation is to be performed

between the prior year’s SBR and the actual amounts for that year published in the prior year’s President’s Budget.

Any signiﬁcant diﬀerences identiﬁed from this reconciliation are to be explained in the federal agency’s notes to its

ﬁnancial statements. Given that FY 2009 is the OFS’s ﬁrst year of operations, no prior year data was available to

perform a comparison.

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NOTES TO THE FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

NOTE 11. RECONCILIATION OF OBLIGATIONS INCURRED TO NET COST

OF OPERATIONS

e OFS presents the SNC using the accrual basis of accounting. is diﬀers from the obligation-based mea-

surement of total resources supplied, both budgetary and from other sources, on the SBR. e reconciliation

of obligations incurred to net cost of operations shown below categorizes the diﬀerences between the two, and

illustrates that the OFS maintains reconcilable consistency between the two types of reporting.

e Reconciliation of Obligations Incurred to Net Cost of Operations for the period ended September 30, 2009

is as follows:

(Dollars in Millions)

Resources Used to Finance Activities:

Obligations Incurred $ 662,296

Spending Authority from Offsetting Collections (271,999)

Offsetting Receipts (2,720)

Total Resources Used to Finance Activities 387,577

Resources Used to Finance Items Not Part of Net Cost:

Net Obligations in Loan and Investment Financing Funds (180,185)

Increase in Resources Obligated for Items Ordered but not yet Provided (56,073)

Total Resources Used to Finance Items Not Part of Net Cost (236,258)

Resources Used to Finance Net Cost 151,319

Components of Net Cost That Will Not Require or Generate Resources in the Current Period:

Downward Reestimate of Subsidy Cost (109,748)

Other 2

Total Components of Net Cost Not Requiring or Generating Resources in the Current Period (109,746)

Net Cost of Operations $ 41,573

115

NOTES TO THE FINANCIAL STATEMENTS

OFFICE OF FINANCIAL STABILITY • AgENCY FINANCIAL rEpOrT • FISCAL YEAr 2009

REQUIRED SUPPLEMENTARY INFORMATION

OFFICE OF FINANCIAL STABILITY (TROUBLED ASSET RELIEF PROGRAM)

COMBINED STATEMENT OF BUDGETARY RESOURCES

For the Period Ended September 30, 2009

Combined TARP Programs TARP Administrative Fund

(Dollars in Millions)

Budgetary

Accounts

Nonbudgetary

Financing

Accounts

Budgetary

Accounts

Nonbudgetary

Financing

Accounts

Budgetary

Accounts

Nonbudgetary

Financing

Accounts

BUDGETARY RESOURCES

Unobligated Balances Brought Forward,

Inception $ — $ — $ — $ — $ — $ —

Budget Authority:

Appropriations 238,268 — 237,989 — 279 —

Borrowing Authority — 309,971 — 309,971 — —

Spending Authority from Offsetting

Collections

Earned: Collected — 243,072 — 243,072 — —

Change in Unﬁlled Orders Without

Advance — 28,927 — 28,927 — —

Total Budget Authority 238,268 581,970 237,989 581,970 279

Permanently Not Available — (120,841) — (120,841) — —

TOTAL BUDGETARY RESOURCES $ 238,268 $ 461,129 $ 237,989 $ 461,129 $ 279 $ —

STATUS OF BUDGETARY RESOURCES

Obligations Incurred:

Direct $ 210,112 452,184 $ 209,863 452,184 $ 249 $ —

Unobligated Balance:

Apportioned and Available 28,156 7,009 28,126 7,009 30 —

Not Available — 1,936 — 1,936 — —

TOTAL STATUS OF BUDGETARY

RESOURCES $ 238,268 $ 461,129 $ 237,989 $ 461,129 $ 279 $ —

CHANGE IN OBLIGATED BALANCES

Obligated Balance Brought Forward, Inception $ — $ — $ — $ — $ — $ —

Obligations Incurred 210,112 452,184 209,863 452,184 249 —

Gross Outlays (153,961) (372,982) (153,871) (372,982) (90) —

Change in Uncollected Customer Payments

from Federal Sources — (28,927) — (28,927) — —

Obligated Balance, Net, End of Period:

Unpaid Obligations 56,151 79,202 55,992 79,202 159 —

Uncollected Customer Payments from

Federal Sources — (28,927) — (28,927) — —

Obligated Balance, Net, End of Period $ 56,151 $ 50,275 $ 55,992 $ 50,275 $ 159 $ —

NET OUTLAYS

Gross Outlays $ 153,961 $ 372,982 $ 153,871 $ 372,982 $ 90 $ —

Offsetting Collections — (243,072) — (243,072) — —

Distributed Offsetting Receipts (2,720) — (2,720) — — —

NET OUTLAYS $ 151,241 $ 129,910 $ 151,151 $ 129,910 $ 90 $ —

116

NOTES TO THE FINANCIAL STATEMENTS

PART 2 • AGENCY FINANCIAL STATEMENTS

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