On April 21, 2009, Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program, released his quarterly report to Congress.
As we’ve previously discussed, Barofsky has issued letters to many TARP Capital Purchase Program recipients requesting information on how the institutions have used the TARP funds and how the institution was addressing the executive compensation limits. As clarified in the report to Congress, SIGTARP sent letters to all recipients of TARP funds through January 30, 2009, a total of 364 recipients. There is no indication that SIGTARP will be sending any letters to subsequent recipients. SIGTARP received responses from all 364 recipients, a 100% response rate. (It’s amazing how much more likely one is to respond to a survey when threatened with government action if one doesn’t respond.)
In testimony before the Senate Finance Committee on March 31, 2009, Barofsky had indicated that while his analysis was ongoing, he had concluded that one thing “was apparent from the responses – complaints that it was impracticable or impossible for banks to detail how they used TARP funds were unfounded.” Barofsky does not repeat this conclusion in the report to Congress, but rather notes that the responses “provided a broad range of answers to the two sets of questions.” While some banks identified detailed and specific uses of the funds, others provided more general responses.
The SIGTARP report summarizes five conclusions based on a preliminary review of the responses received:
- Use of Funds: Respondents provided diverse answers on how TARP funds have been used; some common responses described use of TARP funds to: strengthen the bank’s capital base to provide a foundation for lending activities; retire debt; purchase MBS; increase credit lines; and make loans.
- TARP Impact on Lending: Some respondents spoke to new lending activities in relationship to actual TARP funds received, whereas others spoke of leveraging the funds to achieve greater lending than that related to the face value of TARP funds received. Some, however, noted that, although they were committed to making prudent commercial and consumer loans, growth of new loans had slowed as a result of the economy. Others noted that TARP funds permitted them to preserve an adequate level of capital so that they were able to maintain, or at least not severely reduce, their lending levels.
- Segregation of Funds: Some respondents indicated that the TARP equity investment was separately recorded as a discrete component of the bank’s capital, but the actual funds associated with the investment were not physically segregated from other cash funds; others cited efforts to segregate physically the funds or to manage them separately.
- Executive Compensation Compliance: Responses regarding compliance with executive compensation restrictions varied from simple statements of obvious compliance based on the size of their banks and compensation, to detailed answers regarding extensive efforts to assess compensation practices relative to restrictions associated with their funding agreements, including having retained expert consultants to help with the assessments — the latter not necessarily related to the amount of funding received or the size of the bank.
- Executive Compensation Regulation Uncertainty: Some responses related to executive compensation expressed frustration with changing guidance and legislation related to executive compensation requirements, as well as the lack of regulations concerning these changes, which has limited their ability to give a complete answer at this time; nonetheless, others noted actions they were taking at this time based on known requirements, recognizing that final guidelines have not yet been issued.
SIGTARP hopes to release a complete analysis of the survey responses as quickly as possible. SIGTARP has outsourced for a thorough review of the responses, with the contract calling for completion of their analysis by June 2009. SIGTARP further hopes to release two additional reports – one specifically on the use of funds and the other on executive compensation issues – during the summer.
According to the report, SIGTARP has initiated “almost 20 preliminary and full criminal investigations,” on a wide variety of subject matters, including large corporate and securities fraud matters affecting TARP investments, tax matters, insider trading, public corruption, and mortgage-modification fraud.
SIGTARP has also commenced six general audits:
- Use of Funds: SIGTARP’s first audit examines the use of TARP funds by TARP recipients, and is based upon a survey that SIGTARP sent to 364 TARP recipients that had received funds as of January 31, 2009.
- Executive Compensation Compliance: SIGTARP’s second audit, also based on SIGTARP’s survey, examines how TARP recipients are implementing controls with respect to applicable executive compensation restrictions.
- Bank of America: The third audit examines the review and approval processes associated with TARP assistance to Bank of America under three different TARP programs and examines Treasury’s decision making related to additional TARP assistance provided in connection with Bank of America’s acquisition of Merrill Lynch. Since its commencement, the audit’s scope has expanded to examine broadly Treasury’s decision making regarding the first nine institutions to be considered for funding under TARP.
- External Influences: The fourth audit examines whether, or to what extent, external parties may have sought to influence decision making by Treasury or bank regulators in considering and deciding on applications for funding from individual banks seeking TARP funds. This audit seeks to determine what procedures are in place to avoid undue outside influence on the process, whether there are any indications of any undue influence, and what actions might be needed to strengthen existing processes to avoid such undue influences in the future.
- AIG Bonuses: The next audit examines Federal oversight of executive compensation requirements, with a particular focus on recent payouts of large bonus payments to American International Group, Inc. (“AIG”) employees. SIGTARP has undertaken an audit to determine: (i) the extent to which the recent bonus payments were made in accordance with conditions imposed in return for TARP assistance, and (ii) Treasury’s monitoring of AIG’s executive compensation agreements and whether it was aware of the full range of executive compensation, bonus, and retention payments throughout AIG’s corporate structure.
- AIG Counterparty Payments: AIG, which has received the largest amount of financial assistance from the Government during the current financial crisis, reportedly made counterparty payments to other financial institutions, including foreign institutions and other TARP recipients, at 100% of face value. SIGTARP will examine the basis for the counterparty payments and seek to determine whether any efforts were made to negotiate a reduction in those payments.