US Treasury SIGTARP: October 2011 Quarterly Report to Congress

8/3/2019 US Treasury SIGTARP: October 2011 Quarterly Report to Congress

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I A L I N

S P ECT O R G E N E R A L

T R O U B

L E D A S S E T R E L I E F P R

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O ice o the Special Inspector Generalor the Troubled Asset Relie ProgramSIGTARPSIGTARPAdvancing Economic Stability Through Transparency, Coordinated Oversight and Robust En orcementQuarterly Report to Congress

October 27, 2011


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CONTENTS

Executive Summary 3Program Updates and Financial Overview 10Oversight Activities of SIGTARP 11SIGTARP Recommendations on the Operation of TARP 12Report Organization 12

Section 1THE OFFICE OF THE SPECIAL INSPECTOR GENERAL FOR THETROUBLED ASSET RELIEF PROGRAM 13

SIGTARP Creation and Statutory Authority 15SIGTARP Oversight Activities Since the July 2011 Quarterly Report 16The SIGTARP Organization 25

Section 2TARP OVERVIEW 27

TARP Funds Update 29Financial Overview of TARP 32Housing Support Programs 51Financial Institution Support Programs 75

Asset Support Programs Automotive Industry Support Programs Executive Compensation 145

Section 3TARP OPERATIONS AND ADMINISTRATION 149

TARP Administrative and Program Expenditures 151Current Contractors and Financial Agents 152

Section 4SIGTARP RECOMMENDATIONS 161Recommendations Aimed at Increasing Servicer Performance

and Better Protecting Homeowners in TARPs Housing Programs 163Recommendations Regarding Community Banks 167Recommendations Regarding Treasurys Process for Contracting for

Professional Services Under TARP 169

Endnotes 185


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APPENDICES A. Glossary B. Acronyms and Abbreviations 213C. Reporting Requirements 216D. Transaction Detail 220E. Cross-Reference of Report to the Inspector General Act of 1978 293F. Public Announcements of Audits 294G. Key Oversight Reports and Testimony 295H. Correspondence 297I. Organizational Chart 311


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EXECUTIVE SUMMARY


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SPECIAL INSPECTOR GENERAL I TROUBLED ASSET RELIEF PROGRAM4


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QUARTERLY REPORT TO CONGRESS I OCTOBER 27, 2011

Through the Troubled Asset Relie Program (TARP), the American taxpayersbecame investors in hundreds o nancial institutions, the auto industry, and cer-tain markets or asset-backed securities, and the O ce o the Special InspectorGeneral or the Troubled Asset Relie Program (SIGTARP) serves on the rontline to protect those investments. SIGTARP is the only agency solely chargedwith a mission o transparency, oversight, and en orcement related to the taxpay-ers unprecedented investment o hundreds o billions o dollars in the privatesector. In order to ul ll its en orcement mission, SIGTARP investigates raud,waste, and abuse related to TARP. This month, as a result o an investigation by SIGTARP and its Federal law en orcement partners, the rst criminal chargeswere led against senior executives o a TARP bank when two senior executiveso United Commercial Bank (UCB) were charged in connection with an allegedscheme to de raud investors. The Department o Treasury (Treasury), and by extension the American taxpayer, became investors in UCBs holding company when it received more than $298 million in TARP unds. UCB was the rstTARP bank to ail and the taxpayers entire TARP investment is lost.

This past quarter, SIGTARP brought transparency to some o the largestbanks exit rom TARP as they pressured Federal banking regulators to expeditetheir TARP exit because o concerns over executive compensation restrictionsand a stigma associated with TARP participation. In stark contrast, approximately 400 smaller community banks remain in TARP and SIGTARP made recommen-dations that Treasury, in consultation with Federal banking regulators, developa clear TARP exit path or community banks. SIGTARP also published an auditquestioning $8.1 million in legal ees Treasury paid to law rms whose billsincluded block billing, either no or vague descriptions o work per ormed, unsup-ported expenses, and administrative charges not allowed under the contract.SIGTARP also made our new recommendations to improve servicer per ormancein TARPs housing programs.

SIGTARP INVESTIGATIONS

SIGTARP is a highly sophisticated white-collar investigative agency. Since the endo the last quarter, 13 individuals have been criminally charged and three individu-als have been criminally convicted as a result o SIGTARPs investigations. Thisbrings the total number o individuals charged criminally as a result o SIGTARPs

investigations to 51 individuals, including charges against 36 senior o cers o theirorganizations. Many o these individuals are awaiting trial. However, 28 individualshave been criminally convicted and 19 have been sentenced to prison terms, withothers awaiting sentencing. In some cases, individuals who were criminally chargedwere also charged in a civil complaint. SIGTARPs investigations have also resultedin civil charges against 37 individuals and 18 companies.

This month, SIGTARP agents, along with its law en orcement partners, arrestedEbrahim Shabudin, the ormer executive vice president o UCB, and Thomas Yu,the ormer senior vice president o UCB. The de endants are charged in a Federalindictment in connection with an alleged raudulent scheme that began in or about


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September 2008, to hide the banks true nancial condition rom investors, deposi-tors, regulators, Treasury, and the banks auditor. According to the indictment, theobjectives o the alleged raud scheme were to conceal, delay, and avoid publicly reporting the banks number o impaired loans and the banks true loan loss. Theobjective o the alleged scheme also included misleading investors through alsestatements and misleading bank regulators. The indictment charged that the de en-dants used a variety o raudulent accounting maneuvers and techniques to concealthat they alsi ed the banks books and records. In November 2008, Treasury became an investor in the bank when it received more than $298 million in TARPunds. The bank ailed on November 6, 2009. FDIC, which became the receiveror the bank, estimates that deposit insurance und losses rom UCBs ailure willbe $2.5 billion. The total loss to TARP is more than $298 million.

This quarter, SIGTARP has taken swi t en orcement action to shut downmortgage modi cation scams that prey on unsuspecting homeowners by takingtheir last dollars in exchange or alse promises o a mortgage modi cation underTARPs housing programs. SIGTARP agents arrested our individuals who calledtheir organization HOPE. The de endants were charged with allegedly de raudinghomeowners out o $3 million in up ront ees based on misrepresentations thatthe homeowners would receive a mortgage modi cation under HAMP. Also as aresult o a SIGTARP investigation, a housing counselor was convicted o a schemein which she gambled away money rom homeowners that was earmarked ormortgage modi cations. Finally, a Federal court ordered the closure o a decep-tive mortgage relie operation investigated by SIGTARP. SIGTARP will tenaciously work to shut down mortgage modi cation scams and hold accountable those whosteal rom homeowners under the alse promise o a mortgage modi cation.

TARP EXIT BY THE LARGEST BANKS

Last month, SIGTARP released an audit report that shed light on the e orts by Federal banking regulators and Treasury to get the largest banks out o TARP. Thereport ocuses on the exit path or the largest 17 TARP recipient banksknownas SCAP institutionswhich received 80% o all unds under TARPs CapitalPurchase Program (CPP). Treasury and the Federal banking regulators conduct-ed stress tests that determined the level o capital each bank needed to be strongenough to absorb its own losses in adverse market conditions so that it would not

pull down the entire nancial system. They used the results o those stress tests toset the criteria or these banks to exit TARP. The strongest nine banks immediately exited TARP, leaving eight in TARP that regulators considered to be weaker, includ-ing Bank o America, Citigroup, PNC, and Wells Fargo. To meet the stress testresults, regulators decided that these banks could expedite a TARP exit by issuing$1 in new common equity or every $2 in TARP repaid.

Just weeks later, the Federal banking regulators relaxed the criteria, bowing atleast in part to a desire to ramp back the Governments stake in nancial institu-tions and to pressure rom institutions seeking a swi t TARP exit to avoid executivecompensation restrictions and the stigma associated with TARP. The banks resisted


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regulators demands to raise capital. Regulators to varying degrees bent to theseconcerns, with FDIC the most persistent in insisting that banks raise more com-mon stock. The result was an ad hoc and inconsistent TARP repayment processwhere only Citigroup met the 1- or-2 criteria (when it was required to meet 1- or-1). By not waiting until the banks could meet the criteria, there was arguably amissed opportunity to urther strengthen the quality o each banks capital base.

The relaxing o the exit criteria raises the question as to why Federal bankingregulators went through the trouble o conducting the stress tests and setting TARPexit criteria based on those tests, i in the end they were not going to hold banks toit. The lessons o the nancial crisis and the events surrounding TARP repaymentsand exit demonstrate the importance o establishing strong capital requirementsand holding institutions strictly accountable to them. Financial stress continues topose obstacles to economic recovery even or the largest banks, in part due to a 9%unemployment rate, decreased consumer con dence in a constrained market, andnon-per orming mortgage loans and related securities. The nations largest banksare cutting jobs, streamlining operations through asset sales, and searching or new sources o revenue and capital. Berkshire Hathaway Inc. announced in late Augustthat it would invest $5 billion in Bank o America, ollowing a period in which Bank o Americas stock price plummeted.

Federal banking regulators and Treasury bear responsibility or ensuring thatthe nations systemically important nancial institutions hold enough capital toabsorb their own losses. During Congressional testimony in June 2011, then-FDICChairman Sheila Bair urther stressed, The single most important element o a

strong and stable banking system is its capital base. Capital is what allows an insti-tution to absorb losses while maintaining the con dence o its counterparties andcontinuing to be able to lend. Today, some institutions remain too big, too inter-connected, and too essential to the nancial system; their ailure could potentially trigger serious consequences to the broader economy. The greater nancial systemsneed or protection against the ailure o those institutions in the next possibledownturn is particularly acute.

COMMUNITY BANKS STILL IN TARP

This month, SIGTARP recommended that Treasury, in consultation with the bank-ing regulators, develop a clear TARP exit path or community banks. A commonmisperception is that most o the 707 TARP banks have paid back TARP, whenreally only the largest banks have exited TARP. Smaller and medium size banksare not exiting TARP with the same speed as the larger banks, with approximately 400 still in TARP. O these, nearly hal are not paying their TARP dividend and insome cases, the banks are operating under an order by their regulator. Compared tolarger banks, community banks may ace an uphill battle to exit TARP. Community banks do not have the same access to capital as the larger banks. They are more ex-posed to distressed commercial real estate related assets and non-per orming loans.

Small and medium-size banks play an important role in our nations economy and are the li eblood o many communities across the country. They provide credit


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to small businesses and armers, and serve customers in rural areas and smallmetropolitan areas not served by large banks. As Federal Reserve Chairman BenBernanke stated earlier this year, [l]ocal communities, ranging rom small townsto urban neighborhoods, are the oundation o the U.S. economy and communitiesneed community banks to help them grow and prosper. Furthermore, as ormerKansas City Federal Reserve Bank President Thomas Hoenig noted, Regional andcommunity banks are also typically locally owned and managed, which means they have an immediate and vested interest in the success o their local communities.To the extent community banks continue to ace a sluggish recovery, non-per orm-ing assets, and capital-raising challenges, their lending to consumers especially tosmall businesses will remain constricted.

Despite the dramatic e orts to expedite the exit o the largest banks rom TARP,there appears to be no corresponding concrete plan or community banks exit romTARP. The only exit strategy or smaller TARP banks that has been announced isthe Small Business Lending Fund (SBLF), which is identical to TARP in onekey respect: Government investment in private banks. Through this program,Treasury invested $4 billion in smaller banks. However, approximately hal o thosedollars went to swapping 137 TARP banks out o TARP and into this non-TARPGovernment program. This program ties increased lending to a dividend rate that isless than the TARP 5% dividend rate, but removes executive compensation restric-tions and any perceived TARP stigma, the two complaints SIGTARP heard romsome o the largest banks. Banks that were not paying their TARP dividend werenot eligible to apply or SBLF. However, 320 o the more than 500 banks then le tin TARP applied to swap into SBLF. For these banks, SBLF may have been theirTARP exit plan.

Community banks need a clear exit path out o TARP that is put into actionwell be ore a scheduled rise in the TARP dividend (beginning in the all o 2013 ormany banks). The best exit path or community banks should involve access to new capital to replace the TARP capital. A ter ve years, the 5% TARP dividend rate willrise to a very expensive 9%. SIGTARP is concerned that when the dividend rateincreases, many o these banks will remain in TARP but still be unable to accessnew capital. I that is the case, many will have no means either to exit TARP or topay their required dividend payments.

Treasury should commit to prudent stewardship o its TARP investments; itmust take action to ensure that as many banks as possible repay taxpayers and to

prepare to deal with the banks that cannot.

TARPS HOUSING PROGRAMS

The TARP- unded housing support programs continue to struggle to reach home-owners, with only $2.5 billion (5.4%) o the $45.6 billion in earmarked TARP undshaving been spent. There is disappointing participation in the signature Home

A ordable Modi cation Program (HAMP), due in large part to poor servicerper ormance. With just one year le t or new mortgage modi cations in HAMP, it isnot too late or Treasury to make changes to the program, and there remains much


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that it can do to improve. SIGTARP, through its hotline and anecdotally, continuesto hear about homeowner rustration with the per ormance o mortgage servicersrelated to HAMP. To address these concerns, SIGTARP made our new recom-mendations to improve servicer per ormance, which should lead to more amiliesstaying in their homes. Treasury has determined not to take any urther action toimplement SIGTARPs recommendations. Treasury is giving up a chance at mean-ing ul change and sadly, it is struggling homeowners who have the most to lose.

Treasury must take strong action to help as many additional struggling home-owners as it can be ore HAMP ends. Treasury recently published an estimate thatthere are 992,968 homeowners eligible or HAMP. The number o new permanentmortgage modi cations each month has hovered between 25,000 and 30,000.

While this represents real help or these homeowners, many additional homeown-ers could receive that same help. I the current rate continues, 520,000 to 600,000homeowners who are eligible or HAMP will not get a permanent modi cationbe ore HAMP expires. Rather than re use to act on SIGTARP recommendations,Treasury should orce servicers to change the status quo and help as many o theremaining eligible homeowners as possible stay in their homes.

One o homeowners great rustrations with TARPs housing programs hasbeen the servicers lack o communication or inaccurate, conficting, and con us-ing communication. SIGTARP recommended that Treasury require that servicercommunications with homeowners related to a change in their status or terms o an application, modi cation, or any other signi cant change a ecting the home-owners participation be in writing, which could be as simple as e-mail. Writtenchanges help reduce the likelihood that homeowners are misin ormed or con used,and oral noti cation is open to abuse with compliance di cult to assess. Treasurysresponse was that it already requires servicers to communicate in writing withthe borrower an average o ten times, and that soon a single point o contact willcommunicate with the borrower by phone, in writing or through email, until anal loss mitigation decision has been made. Given SIGTARPs continued Hotlinecomplaints, ten times is not su cient. Additionally, Treasurys response ignores theconcerns o participating homeowners who are receiving miscommunication romservicers on important milestones or changes.

There have been a number o serious homeowner complaints that many trialmodi cations last beyond the intended three months, that many trial modi ca-tions ail to ever convert to permanency, and that homeowners have trouble getting

timely responses when they escalate complaints. These complaints are borne outby hard acts, with 22% o trial modi cations lasting more than six months. Also, asSIGTARP raised in its last quarterly report, Treasury ound that three o the largestten servicers had inadequate scores or a category called second look, meaningthat homeowners were wrongly denied a conversion rom trial to permanent modi-cation. However, Treasury did not withhold any incentives rom these servicersor this problem. A ter SIGTARP raised problems with the second-look scores,those scores have improved, proving that more transparency can lead to servicerimprovements.


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SIGTARP made new recommendations designed to address these complaints,including that Treasury set benchmarks on what it deems to be acceptable per or-mance or conversion rates rom trial modi cations to permanent modi cations,length o trial modi cations, and timeline or resolving escalated cases. SIGTARPrecommended that Treasury measure all servicers against those benchmarks,because without acceptable benchmarks, servicers will continue their bad practicesand ultimately homeowners may su er. When any servicer (not just the top 10)ails to per orm at acceptable levels, SIGTARP recommended that Treasury vigor-ously en orce its rights, including using all available nancial remedies to orce ser-

vicer compliance with program rules through withholding, permanently reducing orclawing back incentive payments. Treasury decided not to take any urther action toimplement SIGTARPs recommendations, stating that it considered the recommen-

dations closed. Treasury stated that it has succeeded in improving servicer per or-mance with non- nancial remedies and withholding payments (temporarily) romtwo servicers. Treasury stated that it will exercise its nancial remedies when nec-essary. Given the wealth o homeowner complaints, i there are benchmarks in thisarea, Treasury is not adequately en orcing them against the 112 active servicers andadditional nancial remedies are necessary. For example, i Treasurys benchmark or acceptable lengths o trial modi cations is three to our months, SIGTARP isnot aware o any repercussion or servicers who exceed that time. With less than 1million struggling borrowers remaining eligible, and a window quickly closing onthe end o the program, Treasury must double its e orts to ensure that servicerscomply with program requirements. I Treasury does not take action to change thestatus quo o its compliance program, servicers will not take action to change theirstatus quo. Compliance with program guidelines is not, and must not be, voluntary.

PROGRAM UPDATES AND FINANCIAL OVERVIEW

TARP consists o 13 implemented programs. Because TARP investment authority expired on October 3, 2010, no new obligations may be made with TARP unds.However, dollars that have already been obligated to existing programs may stillbe expended. As o October 3, 2010, $474.8 billion had been obligated acrossTARP to provide support or U.S. nancial institutions, the automobile industry,the markets in certain types o asset-backed securities, and homeowners. O theobligated amount, $413.2 billion had been spent as o September 30, 2011, leav-

ing $52.1 billion in three programs remaining as obligated and available to spenda ter accounting or reductions in exposure related to the Asset Guarantee Program(AGP) and the termination o equity and debt acilities or AIG and Chrysler, re-spectively, that were never drawn down. According to Treasury, through September30, 2011, 266 TARP recipients, including 10 with the largest CPP investments,had paid back all o their principal or repurchased shares, and 19 TARP recipientshad made partial repayments by paying back some o their principal or repurchas-ing rom Treasury some o their pre erred shares, or an aggregate total o $276.3billion o repayments. According to Treasury, this le t $122.4 billion in TARP undsoutstanding as o September 30, 2011, a ter accounting or losses and write-o s.


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In addition to the principal repayments, Treasury has received interest and divi-dend payments on its investments, as well as revenue rom the sale o its warrants. According to Treasury, as o September 30, 2011, it had received $39.8 billion ininterest, dividends, and other income, including $9.1 billion in sales proceeds thathad been received rom the sale o warrants and pre erred stock received as a resulto exercised warrants. At the same time, some TARP participants have missed inter-est or dividend payments. Among CPP participants, 193 missed paying dividend orinterest to the Government as o September 30, 2011, or a total o $356.9 millionin unpaid CPP interest and dividends.

OVERSIGHT ACTIVITIES OF SIGTARP

SIGTARP actively strives to ul ll its audit and investigative unctions. Since itsinception, SIGTARP has issued 16 audit reports. Two have been issued sincethe end o the last quarter: Exiting TARP: Repayment by the Largest FinancialInstitutions and Legal Fees Paid Under the Troubled Asset Relie Program: AnExpanded Report. Section 1 o this report The O ce o the Special InspectorGeneral or the Troubled Asset Relie Program discusses SIGTARPs recently released audits.

SIGTARP is a highly sophisticated white-collar law en orcement agency. Aso September 30, 2011, SIGTARP had more than 150 ongoing criminal andcivil investigations, many in partnership with other law en orcement agencies.Since SIGTARPs inception, its investigations have delivered substantial results,

including:

criminal actions against 51 individuals, including 36 senior of cers (CEOs, own -ers, ounders, or senior executives) o their organizations

criminal convictions of 28 defendants, of whom 19 have been sentenced toprison (others are awaiting sentencing)

civil cases naming 37 individuals (including 25 senior of cers) and 18 corporateor other legal entities as de endants (in some instances an individual will aceboth criminal and civil charges)

asset recoveries of $151 million savings of $553 million in TARP funds that SIGTARP prevented from going to

the now- ailed Colonial Bank

Although much o SIGTARPs investigative activity remains con dential, overthe past quarter there have been signi cant public developments in several o SIGTARPs investigations. For a description o recent developments, includingthose relating to SIGTARP investigations into United Commercial Bank/UCBHHoldings, Inc., Home Owners Protection Economics, Inc., The Shmuckler Group,LLC, HomeFront, Inc., and Residential Relie Foundation, LLC, see Section 1o this report The O ce o the Special Inspector General or the Troubled AssetRelie Program.


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SIGTARP RECOMMENDATIONS ON THEOPERATION OF TARP

One o SIGTARPs oversight responsibilities is to provide recommendations toTreasury so that TARP programs can be designed or modi ed to acilitate e ectiveoversight and transparency and to prevent raud, waste, and abuse. Section 4 o this report SIGTARP Recommendations provides updates on existing recommen-dations and summarizes the implementation o previous recommendations.

This quarter, Section 4 includes discussions o SIGTARPs new recommen-dations on Treasurys housing programs, contracting or pro essional services,and community banks exit rom CPP. In an August 31, 2011, letter to Treasury,

SIGTARP made our recommendations aimed at improving transparency and ac-countability in the implementation o TARP housing programs. In its audit report,Legal Fees Paid Under the Troubled Asset Relie Program: An Expanded Report,released September 28, 2011, SIGTARP made ve new recommendations on how Treasury should improve its handling o contracts with law rms and increase tax-payer protections. In an October 11, 2011, letter to Treasury, SIGTARP made tworecommendations calling or a clear exit process or community banks rom CPP.

REPORT ORGANIZATION

The report is organized as ollows:

Section 1 discusses the activities of SIGTARP. Section 2 details how Treasury has spent TARP funds so far and contains an

explanation or update o each program. Section 3 describes the operations and administration of the Of ce of Financial

Stability, the o ce within Treasury that manages TARP. Section 4 discusses SIGTARPs recommendations to Treasury with respect to the

operation o TARP.

The report also includes numerous appendices containing, among other things,gures and tables detailing all TARP investments through September 30, 2011,except where otherwise noted.


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S E C T I O N 1THE OFFICE OF THE SPECIALINSPECTOR GENERAL FOR THETROUBLED ASSET RELIEF PROG


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SIGTARP CREATION AND STATUTORY AUTHORITYThe O ce o the Special Inspector General or the Troubled Asset Relie Program(SIGTARP) was created by Section 121 o the Emergency Economic Stabilization

Act o 2008 (EESA). Under EESA, SIGTARP has the responsibility, amongother things, to conduct, supervise, and coordinate audits and investigations o thepurchase, management, and sale o assets under the Troubled Asset Relie Program(TARP) and, with certain limitations, any other action taken under EESA.SIGTARP is required to report quarterly to Congress to describe SIGTARPs activi-ties and to provide certain in ormation about TARP over that preceding quarter.EESA gives SIGTARP the authorities listed in Section 6 o the Inspector General

Act o 1978, including the power to obtain documents and other in ormation romFederal agencies and to subpoena reports, documents, and other in ormation rompersons or entities outside the Government.

TARP investment authority expired on October 3, 2010. As a result, Treasury cannot make new purchases or guarantees o troubled assets. This termination o authority, however, does not a ect Treasurys ability to administer existing troubledasset purchases and guarantees. In accordance with Section 106(e) o EESA,Treasury may expend TARP unds a ter October 3, 2010, as long as it does so pur-suant to obligations entered into be ore that date. SIGTARPs oversight mandatedid not end with the expiration o Treasurys authorization or new TARP unding.Rather, under the authorizing provisions o EESA, SIGTARP is to carry out itsduties until the Government has sold or trans erred all assets and terminated all

insurance contracts acquired under TARP. In other words, SIGTARP will remainon watch as long as TARP assets remain outstanding.


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SIGTARP OVERSIGHT ACTIVITIES SINCE THE JU2011 QUARTERLY REPORTSIGTARP continues to ul ll its oversight role on multiple parallel tracks: inves-tigating allegations o raud, waste, and abuse in TARP programs; conductingoversight over various aspects o TARP and TARP-related programs and activitiesthrough audits and 85 recommendations; and striving to promote transparency inTARP and the Governments response to the nancial crisis as it relates to TARP.

SIGTARP Investigations ActivitySIGTARP is a highly sophisticated white-collar investigative agency. As o

September 30, 2011, SIGTARP had more than 150 ongoing criminal and civilinvestigations, many in partnership with other law en orcement agencies in orderto leverage resources throughout the Government. From SIGTARPs inception, itsinvestigations have delivered substantial results, including:

criminal actions against 51 individuals, including 36 senior o cers(CEOs, owners, ounders, or senior executives) o their organizations

criminal convictions o 28 de endants, o whom 19 have been sentenced toprison (others are awaiting sentencing)

civil cases naming 37 individuals (including 25 senior o cers) and 18 corporateor other legal entities as de endants (in some instances an individual will aceboth criminal and civil charges)

asset recoveries o $151 million savings o $553 million in TARP unds that SIGTARP prevented rom going

to the now- ailed Colonial Bank

SIGTARP investigates white-collar raud. These investigations include, orexample, accounting raud, securities raud, insider trading, bank raud, mortgageraud, raudulent mortgage modi cation schemes, alse statements, obstructiono justice, the t o trade secrets, money laundering, and tax crimes. Although themajority o SIGTARPs investigative activity remains con dential, over the pastquarter there have been signi cant public developments in several SIGTARPinvestigations.

United Commercial Bank/UCBH Holdings, Inc.SIGTARP agents, along with its law en orcement partners, arrested EbrahimShabudin and Thomas Yu, two ormer senior executives o United CommercialBank (UCB or the Bank). On September 15, 2011, a Federal grand jury sittingin the Northern District o Cali ornia returned an indictment against Shabudinand Yu. On October 11, 2011, the United States District Court or the NorthernDistrict o Cali ornia unsealed the our-count indictment which charges Shabudinand Yu with conspiracy, securities raud, alsi ying corporate books and records,and lying to auditors. Shabudin was an executive vice president at UCB and rom


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September 2008 through April 2009, he served as UCBs chie credit o cer andchie operating o cer. Yu was a senior vice president and rom June 2008 through June 2009, he served as UCBs credit risk and port olio manager.

UCB was a commercial bank headquartered in San Francisco, Cali ornia,with branch o ces throughout the United States as well as China. UCBs hold-ing company, UCBH Holdings, Inc. (UCBH), was a publicly traded company whose shares were registered with the U.S. Securities and Exchange Commission(SEC). In November 2008, Treasury became an investor in the Bank whenUCBH received approximately $298 million in TARP unds.

The indictment alleges that Shabudin and Yu, together with others, engaged ina raudulent scheme that began in or about September 2008, to hide the Bankstrue nancial condition rom investors, depositors, regulators, Treasury, and theBanks auditor. According to the indictment, the objectives o the alleged scheme tode raud were to conceal, delay, and avoid publicly reporting the Banks number o impaired loans and the Banks true loan loss. The objective o the alleged schemealso included misleading investors through alse statements and misleading Bank regulators. The indictment charged that the de endants used a variety o raudulentaccounting maneuvers and techniques to conceal that they alsi ed the Banksbooks and records. As a result, UCB is alleged to have issued alse and mislead-ing public statements and reports regarding its year-end nancial condition andper ormance. UCB became the rst TARP recipient bank to ail when it closed onNovember 6, 2009. FDIC estimates that deposit insurance und losses will be $2.5billion. Treasury will su er a complete loss on its more than $298 million TARPinvestment.

The investigation is ongoing. The case is being investigated by SIGTARP, theUnited States Attorneys O ce or the Northern District o Cali ornia, the FederalBureau o Investigation (FBI), the O ce o the Inspector General o the FederalDeposit Insurance Corporation (FDIC OIG), and the O ce o the InspectorGeneral o the Board o Governors o the Federal Reserve System (FRB OIG).

Home Owners Protection Economics, Inc.On August 9, 2011, SIGTARP agents, with its law en orcement partners, arrestedChristopher S. God rey, Dennis Fischer, Vernell Burris, Jr., and Brian M. Kelly. On

August 3, 2011, a ederal grand jury sitting in the District o Massachusetts returnedan indictment against the our de endants or allegedly perpetrating a raudulent

home loan modi cation scam through a company named Home Owners ProtectionEconomics, Inc. (HOPE). The 20-count indictment charges the our withconspiracy, wire raud, mail raud, and misuse o a government seal. God rey wasthe president and Fischer was the vice president o HOPE. Burris was the managerand primary trainer o HOPE telemarketers, and Kelly was one o the principaltelemarketers and a trainer or other HOPE telemarketers. God rey and Fischerwere charged with one count o conspiracy, nine counts o wire raud, nine countso mail raud, and one count o misuse o a Government seal. Burris and Kelly werecharged with one count o conspiracy, nine counts o wire raud, and nine counts o mail raud.


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The indictment alleges that, through a series o misrepresentations, the de en-dants and their employees induced thousands o nancially distressed homeownersto pay HOPE a $400-$900 up- ront ee in exchange or HOPEs home loan modi -cations, modi cation services, and so tware licenses. According to the indictment,the de endants misrepresented that, with their assistance, homeowners were virtually guaranteed to receive a loan modi cation under the Home A ordable Modi cationProgram (HAMP), which is a ederally- unded mortgage assistance program imple-mented under TARP. The indictment alleges urther misrepresentations by de en-dants, including that HOPE was a liated with the homeowners mortgage lender,that homeowners had been approved or a home loan modi cation, that homeownerscould stop making mortgage payments while they waited or HOPE to arrange theirloan modi cation, that HOPE would re und the up- ront ee i the modi cation wasunsuccess ul, and that HOPE was a non-pro t organization.

The indictment urther alleges that, in exchange or homeowners paying the up-ront ees, HOPE sent homeowners a do-it-yoursel application package that wasnearly identical to the application provided ree o charge by the U.S. Governmentthrough HAMP. Through these misrepresentations, it is alleged, HOPE was able topersuade thousands o homeowners collectively to pay more than $3 million in eesto HOPE.

This case is being investigated by SIGTARP, the FBI, the United States AttorneysO ce or the District o Massachusetts, and the Computer Crime and IntellectualProperty Section o the Department o Justices Criminal Division.

The Shmuckler Group, LLCHoward Shmuckler, who was indicted and arrested on November 10, 2010, oran alleged mortgage modi cation scam investigated by SIGTARP in partnershipwith the Prince Georges County States Attorneys O ce in Maryland, has now been charged in a Federal case. On July 21, 2011, a Federal grand jury sitting inthe Eastern District o Virginia returned an indictment against Howard Shmuckleror allegedly running a raudulent mortgage-rescue business that received substan-tial ees rom homeowners but ailed to modi y their mortgages. Shmuckler wascharged with seven counts o wire raud. On July 27, 2011, Shmuckler was ar-rested at his home in Virginia Beach, where he has been under electronic monitor-ing pending a November 2011 trial on this Maryland state charge.

According to the Federal indictment, Shmuckler owned and operated a mort-

gage-rescue business known as The Shmuckler Group (TSG), which claimed tobe the largest, most success ul group o pro essionals rom the Legal, Banking,Mortgage, Financing, Real Estate, Government, and International Sector comingtogether to help homeowners keep their homes in a manageable and a ordablemeans. The indictment alleges that Shmuckler alsely portrayed himsel to bean attorney licensed in Virginia and that he misrepresented that TSG had a 97percent success rate in obtaining loan modi cations. According to the indictment,Shmuckler also instructed clients to terminate contact with their mortgage compa-nies and to stop making payments to their lenders.


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The indictment urther alleges that alse representations by Shmuckler andTSG employees induced homeowners to pay ees ranging rom $2,500 to $25,000,or $3 million in total proceeds. TSG is alleged to never have acilitated a singlemortgage modi cation. It is also alleged that the companys loan modi cation suc-cess rate was substantially less than 97 percent.

The case brought in Federal court in Virginia resulted rom a joint investigationconducted by SIGTARP, FBI, the FDIC OIG, and the United States AttorneysO ce or the Eastern District o Virginia. The case brought in state court inMaryland resulted rom a joint investigation by SIGTARP, the O ce o the States

Attorney or Prince Georges County, and the Maryland Department o LaborLicensing and Regulations Financial Regulation Division.

HomeFront, Inc.On October 6, 2011, Lori J. Macakanja pled guilty in the U.S. District Court orthe Western District o New York to mail raud and the t o government money.Macakanja was ormerly employed as a housing counselor by HomeFront, Inc.(HomeFront), a HUD-approved housing counseling agency in Bu alo, New York.In her role as a housing counselor, Macakanja unlaw ully solicited and receivedmoney rom HomeFront clients by alsely claiming that the money would be usedor loan modi cations designed to prevent oreclosure on their homes, includingmortgage modi cations under HAMP. A ter receiving the unds, Macakanja usedthe money to gamble at casinos and to pay her own mortgage, and ailed to obtainloan modi cations or the victims. A total o 136 HomeFront clients were de raud-ed with losses totaling $300,000. The charges carry a maximum penalty o 20 yearsin prison, a ne o $250,000, or both. Macakanja is scheduled to be sentenced onFebruary 2, 2012.

As previously reported, on January 29, 2011, a criminal complaint was ledagainst Macakanja in the U.S. District Court or the Western District o New York charging her with mail raud and alsi ying documents in connection with thisscheme to de raud struggling homeowners seeking mortgage modi cations.

This case was investigated by SIGTARP, the U.S. Postal Inspection Service(USPIS), Housing and Urban Development O ce o Inspector General (HUDOIG), Internal Revenue Service (IRS), U.S. Secret Service (Secret Service),and FBI.

Residential Relief Foundation, LLCOn September 30, 2011, at the request o the Federal Trade Commission (FTC),the U.S. District Court or the District o Maryland shut down the operationso Residential Relie Foundation (RRF); Silver Lining Services, LLC; andtheir owners, James Holderness, Bryan Melanson, Michael Valenti, and JillianMelanson. The settlement agreement entered into between the FTC and thede endants bans the de endants rom participating in the mortgage assistance relie and debt relie industries and imposes a judgment o more than $10.5 millionagainst the de endants, which is the total amount the de endants made throughtheir deceptive conduct.


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As previously reported, the civil complaint led by the FTC as a result o an investigation by SIGTARP and the FTC alleged that the de endants violated Federallaw by alsely claiming that they would obtain loan modi cations, including underHAMP, and signi cantly lower mortgage payments or consumers in return orup ront ees. Consumers, who were assured quick results and a high success rate,were charged a $1,495 up- ront ee. The complaint also charged the de endantswith misrepresenting an a liation with the Federal Government, alsely claimingto have taken reasonable and appropriate measures to protect consumers personalin ormation rom unauthorized access, and improperly disposing o consumersin ormation in unsecured dumpsters, in violation o the FTC Act. The de endantsengaged in their conduct amid the publicity surrounding the availability o reemortgage loan assistance and modi cation programs, including HAMP as imple-mented under TARP by Treasury.

The settlement agreement also bars the de endants rom making misrepre-sentations about any product or service, including claims about their governmenta liation.

The case was investigated by SIGTARP and the FTC.

SIGTARP Audit ActivitySIGTARP has initiated 28 audits and two evaluations since its inception. SIGTARPhas issued 16 audit reports, including two since the close o the quarter ended June30, 2011. Among the ongoing audits and evaluations in process are reviews o : (i)application o the executive compensation criteria used by the O ce o the Special

Master or TARP Executive Compensation to determine executive compensationor seven TARP recipients that received exceptional assistance; (ii) criteria usedby Treasury to select states and programs to receive money under the Hardest HitFund; (iii) reasons or the development o CPP conditional approvals and the roleo the Federal bank regulators; and (iv) application o the HAMP net present

value test.

Recent Audits Released

Legal Fees Paid Under the Troubled Asset Relief Program: An Expanded ReportOn September 28, 2011, SIGTARP released the audit report, Legal Fees Paid

Under the Troubled Asset Relie Program: An Expanded Report. Conducted inresponse to a request by Senator Tom Coburn, M.D., this report addressed whetherTreasurys O ce o Financial Stabilitys (OFS) contracting processes or legalservices ensure: (1) contractors submit invoices ( ee bills) that accurately refectthe work per ormed; and (2) contractors charge air and reasonable prices.

Treasury has paid law rms millions o dollars or pro essional services relatedto TARP. SIGTARP audited Treasurys processes or contracting or and pay-ment to ve o these law rms. From the inception o TARP to March 31, 2011,OFS, which administers TARP, paid these ve law rms more than $27 millionin ees and expenses. As SIGTARP conducted its audit, it ound weaknesses in


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the contract and ee bills or the law rm Venable, LLP (Venable). In light o the magnitude o legal ees that continue to be paid, SIGTARP decided to issue areport designed to provide OFS an opportunity to quickly strengthen its policies,controls, and contracts to better protect taxpayers.

The our law rms covered in the new report were Simpson Thacher & BartlettLLP, Cadwalader Wickersham & Ta t LLP, Locke Lord Bissell & Liddell LLP,and Bingham McCutchen LLP. As o March 31, 2011, OFS paid these our rmsmore than $25.5 million. SIGTARP took a sample o $9.1 million o these ees andquestioned $8.1 million (89%). SIGTARP ound that their ee bills contained eitherno descriptions or vague descriptions o work per ormed, block billing, unsupportedexpense charges, and administrative charges that were not allowed under thecontract. As a result, OFS would not have been able to assess adequately the rea-sonableness o the ees it paid. Although SIGTARP questioned ee bills rom all o the law rms audited, this does not mean that all the ees and expenses SIGTARPquestioned were unreasonable.

The most striking examples o problematic ee bills were rom SimpsonThacher, which charged OFS $5.8 million in ees and expenses without provid-ing any description o the work per ormed and without providing any receipts, oradequate documentation, or expenses. Although OFS questioned some charges,resulting in resubmitted bills, it still paid $5.8 million or original and resubmit-ted bills that had no description o work and no contractually required receipts.OFS had no way o knowing whether these ees and expenses were allocable to thecontract, and reasonable and allowable as required under Federal acquisition rules.In addition, OFS overpaid Simpson Thacher $68,936 or its oreign subcontractor,even though the subcontractor was not preapproved and Simpson Thacher chargedas much as $520 per hour more than the maximum hourly rate under the contract.

SIGTARP ound that OFS then-existing legal service contracts and review pro-cedures at OFS caused it to all short in comparison to the best practices identi edby SIGTARP and used by other Federal entities. Although SIGTARP concludedthat the OFS process or awarding legal service contracts provided adequate pricecompetition and that the process complied with Federal acquisition requirements,SIGTARP ound weaknesses in both the OFS contracts with the law rms andOFS policies or reviewing legal ee bills. The OFS contracts or legal services withthese law rms do not contain su ciently detailed requirements or instructions onhow law rms should prepare ee bills or how they should describe discrete tasks

within each ee bill. In addition, the OFS employees who reviewed bills were notgiven speci c standards or instructions on how to review legal ee bills or accuracy and reasonableness. As a result, in some instances OFS overpaid or legal services.

The lack o speci c, documented invoice review procedures also meant that allinvoices were not subject to the same level or consistency o review. For example,in reviewing ee bills rom the law rms, some OFS employees rejected ee billsthat included labor categories such as counsel not included in the contract, whileothers approved and paid them. One OFS reviewer paid counsel at partner ratesand another paid them at associate rates. SIGTARP also noted that OFS paid orattorneys billed in labor categories other than those agreed to in the contract and

For more detail on billing problems thatSIGTARP found at Venable, LLP, seethe audit report Treasurys Process forContracting for Professional ServicesUnder TARP, released on April 14,2011, and discussed in SIGTARPs April2011 Quarterly Report to Congress,

pages 182-185.


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task orders. While this may have reduced OFS legal ees, the substitution o laborcategories and rates a ter contract award was not properly documented in contractmodi cations.

In response to the audit, Treasury neither agreed nor disagreed with SIGTARPsrecommendations but stated that it is committed to working with SIGTARP.Treasury also stated in its response that it was well positioned to judge the qual-ity and value o assistance provided by its contracted legal sta and to ensure thattaxpayer unds were used wisely.

The Federal regulations require that any ees paid be allocable to the contract,reasonable, and allowable. The bills that SIGTARP reviewed were well below industry standard. On one day Treasury received two bills rom Simpson Thacher one was or $200,000 and one was or $300,000. There is one entry on eachbill listing the contract language on scope o work, with no dates or date ranges,no timekeepers listed, no individual entries, no listing o how many hours wereinvolved, and no descriptions o work per ormed. These are not xed rate contracts,but rather hourly contracts that somehow ended up at surprisingly even dollargures o $200,000 and $300,000. Given these bills, there was no way or Treasury to know whether the work was reasonable.

Exiting TARP: Repayment by the Largest Financial InstitutionsOn September 29, 2011, SIGTARP released the audit report, Exiting TARP:Repayment by the Largest Financial Institutions which examined the processunder which the largest banks, known as SCAP institutions, exited TARP. This

report addressed the extent to which: (1) Treasury maintained a consistent andtransparent role in the TARP repayment process; and (2) Federal banking regula-tors consistently coordinated and evaluated TARP repayment requests.

Treasury and the Federal banking regulators conducted stress tests that de-termined the level o capital each bank needed to be strong enough to absorb itsown losses in adverse market conditions so that it would not pull down the entirenancial system. They used the results o those stress tests to set the criteria orthese largest banks to exit TARP. The strongest nine banks immediately exitedTARP, leaving eight in TARP that regulators considered to be weaker, includingBank o America, Citigroup, PNC, and Wells Fargo. To meet the stress test results,regulators decided that these banks could expedite a TARP exit by issuing $1 innew common equity or every $2 in TARP repaid.

SIGTARP ound that interagency sharing o data, vigorous debate among regu-lators, and hard-won consensus increased the amount and improved the quality o capital that these large banks were required to raise to exit TARP. FDIC was by arthe most persistent in insisting that banks raise more common stock. The checks-and-balances that resulted rom this interagency coordination helped to ensurethat the nations largest nancial institutions were better capitalized upon exitingTARP than prior to TARP. However, three aspects o the TARP exit process serve asimportant lessons learned rom the nancial crisis.


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First, Federal banking regulators relaxed repayment criteria or banks only weeksa ter the criteria were established, bowing at least in part to a desire to rampback the Governments stake in nancial institutions and to pressure by institu-tions seeking a swi t TARP exit. Those institutions wanted to avoid executivecompensation restrictions and the stigma associated with TARP participation.The large nancial institutions were notably persistent in their e orts to resistregulatory demands to issue common stock, seeking instead more creative,cheaper, and less sturdy alternatives that provide less short or long term lossprotection than common stock. Because the regulators ailed to adhere to theclearly and recently established requirements, the process to review a TARPbanks exit proposal was ad hoc and inconsistent, where only Citigroup met the1- or-2 criteria (when it was required to meet 1- or-1).

Second, by not waiting until the institutions were in a position to meet the1- or-2 provision entirely with new common stock, there was arguably a missedopportunity to urther strengthen the quality o each institutions capital base.Concerned about executive compensation restrictions and a lack o marketcon dence that might result rom being the last large TARP bank to exit, bankssuccess ully convinced regulators that it was the right time to exit TARP, andthat the market would not support a 1- or-2 common stock issuance.

Third, SIGTARP ound that Treasury encouraged TARP banks to expedite re-payment, opening Treasury to criticism that it put accelerating TARP repaymentahead o ensuring that institutions exiting TARP were su ciently strong to doso sa ely. Treasury Secretary Timothy F. Geithner told SIGTARP that puttingpressure on rms to raise private capital was part o a orce ul strategy o rais-ing capital early and We thought the American economy would be in a betterposition i [the rms] went out and raised capital. The result was a nearly simultaneous exit by Bank o America, Wells Fargo, and Citigroup, involving o -erings o a combined total o $49.1 billion in new common stock in an already ragile market.

The lessons o the nancial crisis and the events surrounding TARP repaymentsand exit demonstrate the importance o implementing strong capital requirementsand holding institutions strictly accountable to those requirements. Some o thenations largest nancial institutions had too little capital be ore the last crisis,which not only contributed to the crisis itsel but also precipitated the subsequent

bailouts. Banking regulators leveraged TARP repayment requirements to improvethe quality o capital held by the nations largest nancial institutions in the wakeo the nancial crisis, but relaxed those requirements shortly a ter establishingthem. Whether these institutions exited TARP with a strong and high-quality capi-tal structure su cient to absorb their own losses and survive adverse market condi-tions without urther a ecting the broader nancial system remains to be seen.

There will always be tension between the protection o the greater nancialsystem through robust capital requirements and the desire o individual nancialinstitutions to maximize pro ts. While striking the right balance is no easy task,


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regulators must remain vigilant against institutional demands to relax requirementswhile taking on ever more risk.In response to the report, the Federal Reserve Board noted that it care ully and

thoroughly analyzed requests to repay TARP and that it put limits on the extentto which institutions were allowed to substitute asset sales or common equity is-suance. FDIC did not provide a ormal response because unless there are recom-mendations or agency action or there are actual errors o consequence that FDICbelieves require correction, it does not typically provide a ormal written response.The O ce o Comptroller o the Currency (OCC) agreed with SIGTARPs overallconclusion regarding the importance o implementing strong capital requirementsand holding institutions accountable to such requirements. However, OCC strongly disagreed with SIGTARPs conclusion that the repayment process was ad hoc andinconsistent. OCC also disagreed with SIGTARPs conclusion that there was amissed opportunity to urther strengthen each institutions capital base. Treasury agreed with SIGTARPs conclusion that interagency coordination improved theterms o TARP repayment. Treasury also noted that its involvement in the TARPexit process was motivated by a belie that stabilizing the nancial system dependedupon the nations largest nancial institutions being able to raise private capitalagain, and that postponing the common stock o erings could have underminedinvestor con dence.

SIGTARP HotlineOne o SIGTARPs primary investigative priorities is to operate the SIGTARP

Hotline and thus provide a simple, accessible way or the American public to reportconcerns, allegations, in ormation, and evidence o violations o criminal andcivil laws in connection with TARP. From its inception in February 2009 throughSeptember 30, 2011, the SIGTARP Hotline has received and analyzed morethan 28,558 Hotline contacts. These contacts run the gamut rom expressionso concern over the economy to serious allegations o raud involving TARP, anda substantial number o SIGTARPs investigations were generated in connectionwith Hotline tips. The SIGTARP Hotline can receive in ormation anonymously.SIGTARP honors all applicable whistleblower protections and will provide con-dentiality to the ullest extent possible. SIGTARP urges anyone aware o waste,raud or abuse involving TARP programs or unds, whether it involves the FederalGovernment, state and local entities, private rms, or individuals, to contact its

representatives at 877-SIG-2009 or www.sigtarp.gov.

Communications with CongressOne o the primary unctions o SIGTARP is to ensure that members o Congressremain adequately and promptly in ormed o developments in TARP initiatives ando SIGTARPs oversight activities. To ul ll that role, the Acting Special InspectorGeneral and her sta meet regularly with and brie members and Congressionalsta .


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Additionally, on July 25 and 28, 2011, SIGTARPs Chie o Sta Mia Levinepresented open-ended brie ngs or House and Senate sta , respectively. The ocuso each brie ng was SIGTARPs July 2011 Quarterly Report.

Copies o the written testimony, hearing transcripts, and a variety o other mate-rials associated with Congressional hearings since SIGTARPs inception are postedat www.sigtarp.gov/reports.shtml.

THE SIGTARP ORGANIZATIONSIGTARP has worked to build its organization through various complementary strategies, leveraging the resources o other agencies, and, where appropriateand cost-e ective, obtaining services through SIGTARPs authority to contract.SIGTARP continues to make substantial progress in building its operation.

Hiring As o September 30, 2011, SIGTARP had 155 personnel, including two detaileesrom FHFA. SIGTARPs employees hail rom many Federal agencies, includingthe Justice Department, FBI, IRS-CI, Air Force O ce o Special Investigations,the Government Accountability O ce (GAO), the Congressional OversightPanel or TARP, the Transportation Department, the Energy Department, theSEC, the Secret Service, USPS, U.S. Army Criminal Investigation Command,Naval Criminal Investigative Service, Treasury-O ce o the Inspector General,Department o Energy-O ce o the Inspector General, Department o

Transportation-O ce o the Inspector General, Department o HomelandSecurity-O ce o the Inspector General, FDIC OIG, O ce o the SpecialInspector General or Iraq Reconstruction, and HUD OIG. SIGTARP employeesalso hail rom various private-sector businesses and law rms. Hiring is ongo-ing. The SIGTARP organizational chart, as o October 10, 2011, can be ound in

Appendix I: Organizational Chart.

BudgetOn February 2, 2010, the Administration submitted to Congress Treasurys s-cal year 2011 budget request, which included SIGTARPs ull initial request or$49.6 million. Public Law 112-10 Continuing Resolution provided $36.2 millionto SIGTARP or scal year 2011. Figure 1.1 provides a breakdown o SIGTARPsscal year 2011 operational budget, which refects an adjusted total spending plano $39.1 million. This includes, among other things, portions o SIGTARPs initialunding that have not yet been spent.

On February 14, 2011, the Administration submitted to Congress Treasurysscal year 2012 budget request, which included SIGTARPs unding request or$47.4 million. The scal year 2012 House mark and Senate mark both include ap-proximately $41.8 million. Figure 1.2 provides a detailed breakdown o SIGTARPsscal year 2012 budget, which refects a total operating plan o $46.6 million.

SIGTARP FY 2011PROPOSED OPERATING PLA($ MILLIONS, PERCENTAGE OF $39.1 MI

55%Salaand

$21

Travel/ Transportation

$1.4, 4%

23%

13%

5%

InteragencyAgreements

$9.1

Advisory Services$5.1

Other Services$2.0,

FIGURE 1.1

SIGTARP FY 2012PROPOSED BUDGET($ MILLIONS, PERCENTAGE OF $46.6 MI

Travel/ Transportation

$1.3, 3%

23%

8%

62%Salarand

$29.2

InteragencyAgreements

$10.6

Advisory Services$3.5

Other Services$2.0, 4%

FIGURE 1.2


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Physical and Technical SIGTARP InfrastructureSIGTARP occupies o ce space at 1801 L Street, NW, in Washington, DC, thesame o ce building in which most Treasury o cials managing TARP are located.For more e cient and e ective oversight across the nation, SIGTARP has regionalo ces in New York City, Los Angeles, San Francisco, and Atlanta.

SIGTARP has a website, www.SIGTARP.gov, on which it posts all o its reports,testimony, audits, contracts, and more. Since its inception, SIGTARPs website hashad more than 53 million web hits, and there have been more than 3.8 milliondownloads o SIGTARPs quarterly reports, which are available on the site. i

i In October 2009, Treasury started to encounter challenges with its website counting system, and, as a result, changed to a new systemin January 2010. SIGTARP has calculated the total number o website hits reported herein based on the number reported to SIGTARPas o September 30, 2009, plus an archived number provided by Treasury or October-December 2009 and in ormation generatedrom Treasurys new system rom January 2010 through September 2011. Another system that has been introduced counts a di erentmetric, page views. In the quarter ended September 30, 2011, the site recorded 29,009 page views; these are not comparable tofgures rom previous quarters.


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TARP OVERVIEWSECTION 2


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This section summarizes how the U.S. Department o the Treasury (Treasury)has managed the Troubled Asset Relie Program (TARP). This section alsoreviews TARPs overall nances, provides updates on established TARP componentprograms, and gives the status o TARP executive compensation restrictions.

TARP FUNDS UPDATEBecause TARP investment authority expired on October 3, 2010, no new obligations may be made with TARP unds. However, dollars that have already been obligated to existing programs may still be expended. As o October 3, 2010,

$474.8 billion had been obligated to 13 announced programs. O the obligatedamount, as o September 30, 2011, $413.2 billion had been spent and $52.1billion remained obligated and available to be spent a ter accounting or certainreductions in exposure. 1 According to Treasury, as o September 30, 2011, $122.4billion o TARP unds remained outstanding a ter accounting or losses andwrite-o s. 2

Initial authorization or TARP unding came through the Emergency EconomicStabilization Act o 2008 (EESA), which was signed into law on October 3,2008. 3 EESA appropriated $700 billion to restore liquidity and stability to thenancial system o the United States. 4 On December 9, 2009, the Secretary o theTreasury (Treasury Secretary) exercised the powers granted him under Section120(b) o EESA and extended TARP through October 3, 2010. 5 In accordancewith Section 106(e) o EESA, Treasury may expend TARP unds a ter October 3,2010, as long as it does so pursuant to obligations entered into be ore that date. 6

The Dodd-Frank Wall Street Re orm and Consumer Protection Act (Dodd-Frank Act), which became law (Public Law 111-203) on July 21, 2010, amendedthe timing and amount o TARP unding. 7 The upper limit o the Treasury Secretarys authority to purchase and guarantee assets under TARP was reduced to$475 billion rom the original $700 billion.

With the expiration o TARP unding authorization, no new expenditures may be made through most o the TARP programs because all obligated dollars havebeen spent. For three programs the Making Home A ordable (MHA) pro-gram, the Term Asset-Backed Securities Loan Facility (TALF), and the Public-

Private Investment Program (PPIP) dollars that were obligated but unspent aso October 3, 2010, are available to be spent up to the obligated amount. Table 2.1provides a breakdown o program obligations, expenditures, and obligations avail-able to be spent as o September 30, 2011. Table 2.1 lists 10 TARP sub-programs,instead o all 13, because it excludes the Capital Assistance Program (CAP),which was never unded, and summarizes three programs under AutomotiveIndustry Support Programs.

Obligations:De nite commitments

that create a legal liability or theGovernment to pay unds.



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TABLE 2.1OBLIGATIONS, EXPENDITURES, AND OBLIGATIONS AVAILABLE TO BE SPEN($ BILLIONS)

Program ObligationExpenditure

(As o 9/30/2011)

Availableto Be Spent

(As o 9/30/2011)

Housing Support Programs $45.6 $2.5 $43.1

Capital Purchase Program 204.9 204.9

Community DevelopmentCapital Initiative 0.6 0.2

a

Systemically Signi cantFailing Institutions 69.8 67.8

Targeted InvestmentProgram 40.0 40.0 Asset Guarantee Program 5.0

Term Asset-BackedSecurities Loan Facility 4.3 0.1 4.2

Public-Private InvestmentProgram 22.4 17.6 4.8

b

Unlocking Credit or SmallBusinesses 0.4 0.4

Automotive Industry SupportProgramsc 81.8 79.7

Total $474.8 $413.2 $52.1 d

Notes: Numbers may not total due to rounding. Obligation gures are as o 10/3/2010 and expenditure gures are as o 9/30/2011.Reductions in exposure were related to the Asset Guarantee Program and to the termination o equity and debt acilities or AIG andChrysler, respectively, that were never drawn down.a CDCI obligation amount o $570.1 million. There are no remaining dollars to be spent on CDCI. O the total obligation, $363.3 million

was related to CPP conversions or which no additional CDCI cash was expended and $100.7 million was or new CDCI expendituresor previous CPP participants. O the total obligation, only $106 million went to non-CPP institutions.

b Total obligation o $22.4 billion and expenditure o $17.6 billion or PPIP includes $356.3 million o the initial obligation to The TCWGroup, Inc. (TCW) that was unded. TCW subsequently repaid the unds that were invested in its PPIF; however, these dollars arenot included in the amount available to be spent. Invesco terminated its investment period on September 26, 2011, without ullydrawing down all committed equity and debt.

c Includes $80.7 billion or Automotive Industry Financing Program, $0.6 billion or Auto Warranty Commitment Program, and $0.4billion or Auto Supplier Support Program.

d The $5 billion reduction in exposure under AGP is not included in the expenditure total because this amount was not an actual cashoutlay.

Sources: Treasury, Transactions Report , 10/3/2011, accessed 10/14/2011; Treasury, Daily TARP Update, 10/3/2011, accessed10/17/2011; Treasury, response to SIGTARP data call, 10/5/2011.

Cost EstimatesSeveral Government agencies are responsible under EESA or generating costestimates or TARP, including the O ce o Management and Budget (OMB),the Congressional Budget O ce (CBO), and Treasury, whose estimated costs areaudited each year by the Government Accountability O ce (GAO). Beginningwith CBOs March 2009 cost estimate o a $356 billion loss and OMBs August2009 cost estimate o a $341 billion loss, the cost estimates have continued todecrease. 8

On November 15, 2010, Treasury issued its scal year audited agency nancialstatements or TARP, which contained its cost estimate as o September 30, 2010.Treasury estimated that the ultimate cost o TARP would be $78 billion, down rom



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its previous cost estimates o $101 billion on May 13, 2010, and $105 billion onMarch 31, 2010. 9

On February 14, 2011, OMB issued the Administrations scal year 2012budget proposal, which contained an estimated li etime cost estimate or TARPo $48 billion. In calculating the estimate, OMB used data as o November 30,2010. 10 The $48 billion estimate assumes that all housing unds will be spent.However, in its most recent 105(a) report to Congress, Treasury estimated that aso June 30, 2011, the ultimate cost o TARP would be $53.2 billion. 11

On March 29, 2011, CBO issued an updated TARP cost estimate based onits evaluation as o March 3, 2011. In it, CBO estimated that the ultimate cost o TARP would be $19 billion. 12

The most recent TARP program cost estimates rom each agency are listed inTable 2.2.

According to Treasury, the highest losses rom TARP are expected to comerom housing programs and rom assistance to AIG and the automotive industry. 13

A notable di erence exists between CBOs estimate or TARP housing programs,which assumes that only $13 billion o the $46 billion obligated will be spent, andTreasurys and OMBs assertions that all o the obligated unds will be expended. 14



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TABLE 2.2COST (GAIN) OF TARP PROGRAMS($ BILLIONS)

Program Name

OMB Estimate,Presidents FY 2012

Budget CBO Estimate

Treasury Estimate,TARP Audited

Agency FinancialStatement

Report issued:Data as o :

2/14/201111/30/2010

3/29/20113/3/2011

11/15/20109/30/2010

Housing SupportPrograms $46 $13 $46

CPP (6) (16) (11)

SSFI 12 14 37

TIP and AGP (7) (7) (8)

TALF 0 0 0

PPIP 0 0 (1)

Automotive IndustrySupport Programsa 20 14 15

Otherb * * *

Total $65 $19 c $78 d

Interest on Reestimatese (16)

Adjusted Total $48 d

Notes: Numbers may not total due to rounding.a Includes AIFP, ASSP, and AWCP.b Consists o CDCI and UCSB, both o which have estimated costs between negative $500 million and $500 million.c The estimate is be ore administrative costs and interest e ects.d The estimate includes interest on reestimates but excludes administrative costs.e Cumulative interest on reestimates is an adjustment or interest e ects on changes in TARP subsidy costs rom original subsidy

estimates; such amounts are a component o the de cit impacts o TARP programs but are not a direct programmatic cost.

Sources: OMB EstimateOMB, Analytical Perspectives, Budget o the United States Government, Fiscal Year 2012, 2/14/2011,www.whitehouse.gov/sites/de ault/ les/omb/budget/ y2012/assets/spec.pd , accessed 10/17/2011; CBO EstimateCBO,Report on the Troubled Asset Relie ProgramMarch 2011, 3/2011, www.cbo.gov/ tpdocs/121xx/doc12118/03-29-TARP.pd ,accessed 10/17/2011; Treasury EstimateTreasury, O ce o Financial Stability AgencyFinancial ReportFiscal Year 2010, 9/30/2010, http://www.treasury.gov/initiatives/ nancial-stability/brie ng-room/reports/agency_reports/Documents/2010%20OFS%20AFR%20Nov%2015.pd , accessed 10/24/2011.

FINANCIAL OVERVIEW OF TARPThe Dodd-Frank Act reduced TARPs maximum investment authority rom $698.8

billion to $475 billion. 15 The $698.8 billion represented the initial $700 billionauthorized or TARP by EESA less a $1.2 billion reduction as a result o theHelping Families Save Their Homes Act o 2009. 16 Treasury has obligated $474.8billion o the $475 billion. O the total obligations, $413.2 billion was expended aso September 30, 2011, through 13 announced programs intended to support U.S.nancial institutions, companies, and individual mortgage borrowers. 17

According to Treasury, as o September 30, 2011, 266 TARP recipients hadpaid back all o their principal or repurchased shares and 19 TARP recipientshad partially repaid their principal or repurchased their shares, or a total o $276.3 billion. 18 According to Treasury, as o that date, $122.4 billion o TARP



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unds remained outstanding, including losses and write-o s. There remainsapproximately $52.1 billion still available to be spent. 19 Figure 2.1 provides asnapshot o the cumulative obligations, expenditures, repayments, and exposurereductions as o September 30, 2011. According to Treasury, as o September 30,2011, the Government had also collected $39.8 billion in interest, dividends, andother income, including $9.1 billion in proceeds rom the sale o warrants andstock received as a result o exercised warrants. 20

Most o the outstanding TARP money is in the orm o equity ownership introubled, or previously troubled, companies. Treasury (and there ore the taxpayer)remains a shareholder in companies that have not repaid the Government.Treasurys equity ownership is largely in two orms common and pre erredstock although it also has received debt in the orm o senior subordinateddebentures .

As o September 30, 2011, obligated unds totaling $52.1 billion werestill available to be drawn down by TARP recipients under three o TARPs 13announced programs. 21 TARPs component programs all into our categories,depending on the type o assistance o ered:

Housing Support Programs These programs are intended to helphomeowners who are having trouble making their mortgage payments by subsidizing loan modi cations, loan servicer costs, potential equity declines, andincentives or oreclosure alternatives.

Financial Institution SupportPrograms These programs share a common

stated goal o stabilizing nancial markets and improving the economy. Asset Support Programs These programs attempt to support asset valuesand market liquidity by providing unding to certain holders or purchasers o assets.

Automotive Industry Support Programs These programs are intended tostabilize the U.S. automotive industry and promote market stability.

Housing Support ProgramsThe stated purpose o TARPs housing support programs is to help homeownersand nancial institutions that hold troubled housing-related assets. AlthoughTreasury originally committed to use $50 billion in TARP unds or these programs,

FIGURE 2.1

0

100

200

300

400

$500

CUMULATIVE TARP OBLIGATIEXPENDITURES, AND REPAYM($ BILLIONS)

Notes: Numbers may not total due to rounding. Obligatioreported as of 10/3/2010. Expenditures and repayments areductions in exposure reported as of 9/30/2011.a Expenditure total does not include $5 billion for AGP a

amount was not an actual cash outlay.b Repayments include $184.9 billion for CPP, $40 billion

TIP, $35.2 billion for auto programs, $1.3 billion for PP$15 billion for SSFI. The $15 billion payment for SSFIamounts applied to (i) pay accrued preferred returns andredeem the outstanding liquidation amount.

Sources: Treasury, Transactions Report, 10/3/2011; Treasresponse to SIGTARP data call, 10/14/2011.

TARPExpendituresa

TARPRepayme

TARPObligations

$276.3

$474.8

$413.2


Common Stock:Equity ownership entitlingan individual to share in corporateearnings and voting rights.

Pre erred Stock: Equity ownership thatusually pays a xed dividend be oredistributions or common stock ownersbut only a ter payments due to debtholders and depositors. It typically con ersno voting rights. Pre erred stock alsohas priority over common stock in thedistribution o assets when a bankruptcompany is liquidated.

Senior Subordinated Debentures:Debtinstrument ranking below senior debt butabove equity with regard to investorsclaims on company assets or earnings.


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it obligated only $45.6 billion.22

As o September 30, 2011, $2.5 billion, or 5.4% o this amount, has been expended.

Making HomeAffordable (MHA) Program According to Treasury, thisumbrella program or Treasurys oreclosure mitigation e orts is intended tohelp bring relie to responsible homeowners struggling to make their mortgagepayments, while preventing neighborhoods and communities rom su eringthe negative spillover e ects o oreclosure, such as lower housing prices,increased crime, and higher taxes. 23 MHA, or which Treasury has obligated$29.9 billion o TARP unds, consists o the Home A ordable Modi cationProgram (HAMP), which modi es rst-lien mortgages to reduce payments,the Federal Housing Administration (FHA) HAMP loan modi cation optionor FHA-insured mortgages (Treasury/FHA-HAMP), the U.S. Department o

Agriculture O ce o Rural Development (RD) HAMP (RD-HAMP), theHome A ordable Foreclosure Alternatives (HAFA) program, and the SecondLien Modi cation Program (2MP). 24 HAMP in turn encompasses variousinitiatives in addition to the modi cation o rst-lien mortgages, including,the Home Price Decline Protection (HPDP) program, the Home A ordableUnemployment Program (UP), and the Principal Reduction Alternative(PRA) program. 25 Additionally, the overall MHA obligation o $29.9 billionincludes $2.7 billion to support the Treasury/FHA Second-Lien Program(FHA2LP), which complements the FHA Short Re nance program (discussedlater) and is intended to support the extinguishment o second-lien loans. 26

As o September 30, 2011, MHA had expended $2.5 billion o TARPmoney. 27 Total expenditures in incentives and payments or HAFA were $68.9million in connection with 18,557 deed-in-lieu and short sale transactions.Expenditures in incentives and payments or 2MP were $50.4 million inconnection with 6,332 ull extinguishments, 1,597 partial extinguishments,and 37,776 permanent modi cations o second-liens. 28 As o September 30,2011, there were 340,300 active permanent rst-lien modi cations underthe completed TARP- unded portion o HAMP, an increase o 40,966 activepermanent modi cations over the past quarter. 29 For more detailed in ormation,including participation numbers or each o the MHA programs andsubprograms, see the Housing Support Programs discussion in this section.

FHA Short Re nance Program Treasury has allocated $8.1 billion o

TARP unding to this program to purchase a letter o credit to provide lossprotection on re nanced rst-liens. Additionally, to acilitate the re nancing o non-FHA mortgages into new FHA-insured loans under this program, Treasury has allocated approximately $2.7 billion in TARP unds or incentive paymentsto servicers and holders o existing second-liens or ull or partial principalextinguishments under the related FHA2LP; these unds are part o the overallMHA unding o $29.9 billion, as noted above. 30 As o September 30, 2011,there have been 334 re nancings under the program. 31 For more detailedin ormation, see the Housing Support Programs discussion in this section.



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Housing FinanceAgency (HFA) Hardest-HitFund (HHF) Thestated purpose o this program was to provide TARP unds to create measuresto help amilies in the states that have been hit the hardest by the a termatho the burst o the housing bubble. 32 Treasury obligated $7.6 billion or thisprogram in our increments: an initial amount o $1.5 billion made availableon June 23, 2010; a second amount o $600 million made available on August3, 2010; a third amount o $2 billion made available on September 23, 2010;and a nal amount o $3.5 billion made available on September 29, 2010. 33

As o September 30, 2011, $655.4 million had been drawn down by the statesrom the Hardest-Hit Fund, which includes unds or program expenses (directassistance to borrowers), administrative expenses and cash-on-hand. 34 For moredetailed in ormation, see the Housing Support Programs discussion in thissection.

Financial Institution Support ProgramsTreasury primarily invests capital directly into the nancial institutions it aids. ForTARP purposes, nancial institutions included banks, bank holding companies,and, i deemed critical to the nancial system, some systemically signi cantinstitutions .35

CapitalPurchase Program (CPP) Under CPP, Treasury directly purchased pre erred stock or subordinated debentures in quali ying nancialinstitutions (QFIs) .36 CPP was intended to provide unds to stabilize and

strengthen the U.S. nancial system by increasing the capital base o anarray o healthy, viable institutions, enabling them [to] lend to consumers andbusiness[es]. 37 Treasury invested $204.9 billion in 707 institutions throughCPP, which closed to new unding on December 29, 2009. As o September 30,2011, Treasury had received $184.9 billion (or 90.2% o Treasurys expendituresunder CPP) in principal repayments and proceeds rom sales o commonstock. 38 O the repaid amount, $355.7 million comes rom the principal thatwas converted rom CPP investments into CDCI investments and there ore stillrepresents outstanding obligations to TARP. 39 In addition, 137 institutions havere nanced their outstanding CPP investment into the Small Business LendingFund (SBLF). Treasury continues to manage its port olio o CPP investments,including, or certain struggling institutions, converting its pre erred equity ownership into a more junior orm o equity ownership, o ten at a discount topar value (which may result in a loss) in an attempt to preserve some value thatmight be lost i these institutions were to ail. For more detailed in ormation, seethe Capital Purchase Program discussion in this section.

Community Development Capital Initiative (CDCI) Under CDCI,Treasury used TARP money to buy pre erred stock in or subordinated debt romCommunity Development Financial Institutions (CDFIs) . Treasury intendedor CDCI to improve access to credit or small businesses in the countryshardest-hit communities. 40 Under CDCI, TARP made capital investmentsin the pre erred stock or subordinated debt o eligible banks, bank holding

Systemically Signi cant Institutions: Term re erring to any nancialinstitution whose ailure would impossigni cant losses on creditors andcounterparties, call into question thenancial strength o similar institutionsdisrupt nancial markets, raiseborrowing costs or households andbusinesses, and reduce householdwealth.

Quali ying Financial Institutions (QFPrivate and public U.S.-controlledbanks, savings associations, bankholding companies, certain savingsand loan holding companies, andmutual organizations.

Community Development FinancialInstitutions (CDFIs):Financialinstitutions eligible or Treasury undinto serve urban and rural low-incomecommunities through the CDFI Fund.CDFIs were created in 1994 by theRiegle Community Development andRegulatory Improvement Act. Theseentities must be certi ed by Treasury;certi cation con rms that they targetat least 60% o their lending and othereconomic development activitiesto areas underserved by traditionalnancial institutions.



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companies, thri ts, and credit unions.41

Eighty- our institutions have received$570.1 million in unding under CDCI. 42 However, 28 o these institutionsconverted their existing CPP investment into CDCI ($363.3 million o the$570.1 million) and ten o those that converted received combined additionalunding o $100.7 million under CDCI. 43 Only $106 million o CDCI money went to institutions that were not already TARP recipients.

Small BusinessLending Fund (SBLF) On September 27, 2010, thePresident signed into law the Small Business Jobs Act o 2010, which createdthe SBLF with a $30 billion authorization. The Administration intends orthe und to stimulate small-business lending. 44 Under SBLF, Treasury investscapital in banks and other nancial institutions with less than $10 billion inassets in return or pre erred shares or debt instruments, in a manner similar tothat ollowed under CPP and CDCI, albeit with incentives to increase certaintypes o lending and with ewer governance provisions. 45 On December 20,2010, Treasury published terms under which CPP and CDCI recipients arepermitted to re nance into SBLF. 46 Although this program operates outside o TARP, many TARP recipients converted their investments rom CPP to SBLFand thus will bene t rom lower dividend rates, non-cumulative dividends,and the removal o rules on executive compensation and luxury expenditures. 47 Treasurys authority to make SBLF investments expired on September 27,2011. As o that date, it had received 935 applications, o which 320 were romexisting TARP recipients (which includes 315 CPP participants and 5 CDCIparticipants). According to Treasury, it provided a total o $4.03 billion in SBLF

unding to 332 institutions, including 137 CPP participants.48

For more detailedin ormation, see the Small-Business Lending Initiatives discussion in thissection.

Systemically Signi cant Failing Institutions (SSFI) Program SSFIenabled Treasury to invest in systemically signi cant institutions to preventthem rom ailing. 49 Only one rm received SSFI assistance: AmericanInternational Group, Inc. (AIG). There were two TARP investments in AIG.On November 25, 2008, Treasury bought $

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