Subject Heading Topic Collection for Financial Institutions http://www.gao.gov/docsearch/featured/subject_fininst Thu, 02 Dec 2010 10:24:56 -0500 GAO http://www.gao.gov/images/title_object.jpg http://www.gao.gov/ Feed provided by GAO. Click to visit. http://www.gao.gov/products/GAO-11-151 The Housing and Economic Recovery Act of 2008 (HERA) created the Federal Housing Finance Agency (FHFA) and gave it responsibility for, among other things, the supervision and oversight of the housing-related government-sponsored enterprises (GSE): Fannie Mae, Freddie Mac, and the 12 federal home loan banks. Specifically, FHFA was assigned responsibility for ensuring that each of the regulated entities operates in a fiscally safe and sound manner, including maintenance of adequate capital and internal controls, and carries out its housing and community development finance mission. HERA also requires FHFA to annually prepare financial statements, and further requires GAO to audit these statements. Pursuant to HERA's requirement, GAO audited FHFA's fiscal years 2010 and 2009 financial statements to determine whether (1) the financial statements were fairly stated, and (2) FHFA management maintained effective internal control over financial reporting. GAO also tested FHFA's compliance with selected laws and regulations. GAO is not making any recommendations in this report. In commenting on a draft of this report, FHFA stated that it was pleased with the results of the audit, and it would continue to work to enhance its internal controls and ensure the reliability of its financial reporting, its operational soundness, and public confidence in its mission. In GAO's opinion, FHFA's fiscal years 2010 and 2009 financial statements are fairly presented in all material respects. GAO also concluded that FHFA had effective internal control over financial reporting as of September 30, 2010. GAO found no reportable instances of noncompliance with the laws and regulations it tested. Because fiscal year 2009 was the first full year of FHFA's operations, fiscal year 2010 is the first year in which FHFA prepared comparative financial statements. As discussed in note 10, the fiscal year 2009 statement of net cost presents costs as one program for fiscal year 2009. For fiscal year 2010, FHFA tracked resource allocations and costs by strategic goal (responsibility segments), consistent with the strategic goals identified in its new strategic plan. Consequently, the fiscal year 2010 statement of net cost presents FHFA's costs by strategic goal. In early September 2008, Fannie Mae and Freddie Mac were placed into conservatorship by the Director of FHFA, with the stated intent to stabilize these entities. The assets, liabilities, and activities of the two entities, Fannie Mae and Freddie Mac, are not reflected in FHFA's fiscal years 2010 and 2009 financial statements, based on determinations by the Office of Management and Budget (OMB) and the Department of the Treasury (Treasury) that they do not meet the criteria for inclusion in the financial statements of the U.S. government or the Treasury under federal accounting concepts. Specifically, OMB and Treasury concluded this because the entities are not currently reflected in the federal government's budget and because the conservatorship arrangement is considered to be temporary. FHFA management concurred with this conclusion. Should circumstances change, this conclusion would need to be revisited. As of September 30, 2010, Fannie Mae and Freddie Mac have received about $148.2 billion in direct financial support from Treasury in exchange for Treasury's purchase of the entities' senior preferred stock. Over the longer term, Congress and the executive branch face difficult decisions on how to restructure the entities and promote housing opportunities while limiting the risks to taxpayers and the financial markets. GAO noted other less significant matters involving FHFA's internal controls and will be reporting separately to FHFA management on these matters. Mon, 15 Nov 2010 00:00:00 -0500 http://www.gao.gov/products/GAO-11-174 On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (EESA) was signed into law. EESA authorized the Secretary of the Treasury to implement the Troubled Asset Relief Program (TARP) and established the Office of Financial Stability (OFS) within the Department of the Treasury (Treasury) to do so. EESA requires the annual preparation of financial statements for TARP, and further requires GAO to audit these statements. GAO audited OFS's fiscal years 2010 and 2009 financial statements for TARP to determine whether, in all material respects, (1) the financial statements were fairly stated, and (2) OFS management maintained effective internal control over financial reporting. GAO also tested OFS's compliance with selected provisions of laws and regulations. In commenting on a draft of this report, the Acting Assistant Secretary, Office of Financial Stability, stated OFS concurred with the significant deficiency in its internal control over financial reporting that GAO identified. He also stated that OFS is committed to correcting the deficiency. In GAO's opinion, OFS's fiscal years 2010 and 2009 financial statements for TARP are fairly presented in all material respects. GAO also concluded that, although internal controls could be improved, OFS maintained, in all material respects, effective internal control over financial reporting as of September 30, 2010. GAO found no reportable noncompliance in fiscal year 2010 with the provisions of laws and regulations it tested. As of September 30, 2010 and 2009, net assets related to TARP direct loans, equity investments, and asset guarantee program had an estimated value of about $145.5 billion and $239.7 billion, respectively. In addition, for fiscal years 2010 and 2009, OFS reported an estimated subsidy income of $24.2 billion and subsidy cost of $41.4 billion, respectively related to its direct loans, equity investments, and asset guarantee program and net income of $23.1 billion and net cost of $41.6 billion, respectively for TARP. The estimated net cost of TARP transactions from inception through September 30, 2010, was $18.5 billion. In valuing TARP direct loans, equity investments, and asset guarantee program, OFS management considered and selected assumptions and data that it believed provided a reasonable basis for the estimated subsidy costs (income) reported in the financial statements; however, these assumptions and estimates 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 arising from the uniqueness of transactions for the multiple TARP initiatives and the lack of historical information and program experience upon which to base the estimates. In addition, there are significant uncertainties related to the potential effect of proposed transactions, such as the restructuring of American International Group, Inc., on the amounts that OFS will realize from its investments. As such, there will be differences between the net estimated values of the direct loans, equity investments, and asset guarantee program, 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 to the taxpayer. During fiscal year 2010, OFS sufficiently addressed the issues that resulted in a significant deficiency in fiscal year 2009 regarding OFS's verification procedures over the data used for asset valuations such that we no longer consider this to be a significant deficiency as of September 30, 2010. In addition, OFS addressed many of the issues related to the other significant deficiency we reported for fiscal year 2009 concerning its accounting and financial reporting processes. However, the remaining control issues along with other control deficiencies in this area that we identified in fiscal year 2010 collectively represent a continuing significant deficiency in OFS's internal control over its accounting and financial reporting processes. While this deficiency is not considered a material weakness, it merits management's attention. We will be separately reporting to OFS on additional details regarding this significant deficiency along with recommendations for corrective actions. Mon, 15 Nov 2010 00:00:00 -0500 http://www.gao.gov/products/GAO-11-47 Congress created the Troubled Asset Relief Program (TARP) to restore liquidity and stability in the financial system. The Department of the Treasury (Treasury), among other actions, established the Capital Purchase Program (CPP) as its primary initiative to accomplish these goals by making capital investments in eligible financial institutions. This report examines (1) the characteristics of financial institutions that received CPP funding and (2) how Treasury implemented CPP with the assistance of federal bank regulators. GAO analyzed data obtained from Treasury case files, reviewed program documents, and interviewed officials from Treasury and federal bank regulators. Mon, 04 Oct 2010 00:00:00 -0400 http://www.gao.gov/products/GAO-10-861 The Supervisory Capital Assessment Program (SCAP) was established under the Capital Assistance Program (CAP)--a component of the Troubled Asset Relief Program (TARP)--to assess whether the 19 largest U.S. bank holding companies (BHC) had enough capital to withstand a severe economic downturn. Led by the Board of Governors of the Federal Reserve System (Federal Reserve), federal bank regulators conducted a stress test to determine if these banks needed to raise additional capital, either privately or through CAP. This report (1) describes the SCAP process and participants' views of the process, (2) assesses SCAP's goals and results and BHCs' performance, and (3) identifies how regulators and the BHCs are applying lessons learned from SCAP. To do this work, GAO reviewed SCAP documents, analyzed financial data, and interviewed regulatory, industry, and BHC officials. The SCAP process appeared to have been mostly successful in promoting coordination, transparency, and capital adequacy. The process utilized an organizational structure that facilitated coordination and communication among regulatory staff from multiple disciplines and organizations and with the BHCs. Because SCAP was designed to help restore confidence in the banking industry, regulators took unusual steps to increase transparency by releasing details of their methodology and sensitive BHC-specific results. However, several participants criticized aspects of the SCAP process. For example, some supervisory and bank industry officials stated that the Federal Reserve was not transparent about the linkages between some of the test's assumptions and results. But most of the participants in SCAP agreed that despite these views, coordination and communication were effective and could serve as a model for future supervisory efforts. According to regulators, the process resulted in a methodology that yielded credible results. By design, the process helped to ensure that BHCs would be capitalized for a potentially more severe downturn in economic conditions from 2009 through 2010. SCAP largely met its goals of increasing the level and quality of capital held by the 19 largest U.S. BHCs and, more broadly, strengthening market confidence in the banking system. The stress test identified 9 BHCs that met the capital requirements under the more adverse scenario and 10 that needed to raise additional capital. Nine of the 10 BHCs were able to raise capital in the private market, with the exception of GMAC LLC, which received additional capital from the U.S. Department of the Treasury (Treasury). The resulting capital adequacy of the 19 BHCs has generally exceeded SCAP's requirements, and two-thirds of the BHCs have either fully repaid or begun to repay their TARP investments. Officials from the BHCs, credit rating agencies, and federal banking agencies indicated that the Federal Reserve's public release of the stress test methodology and results in the spring of 2009 helped strengthen market confidence. During the first year of SCAP (2009), overall actual losses for these 19 BHCs have generally been below GAO's 1-year pro rata loss estimates under the more adverse economic scenario. Collectively, the BHCs experienced gains in their securities and trading and counterparty portfolios. However, some BHCs exceeded the GAO 1-year pro rata estimated 2009 losses in certain areas, such as consumer and commercial lending. Most notably, in 2009, GMAC LLC exceeded the loss estimates in multiple categories for the full 2-year SCAP period. More losses in the residential and commercial real estate markets and further deterioration in economic conditions could challenge the BHCs, even though they have been deemed to have adequate capital levels under SCAP. This report recommends that the Federal Reserve complete a final 2-year SCAP analysis, and apply lessons learned from SCAP to improve transparency of bank supervision, examiner guidance, risk identification and assessment, and regulatory coordination. The Federal Reserve agreed with our five recommendations and noted current actions that it has underway to address them. Treasury agreed with the report's findings. Wed, 29 Sep 2010 00:00:00 -0400 http://www.gao.gov/products/GAO-10-782 In 2006, Congress passed the Credit Rating Agency Reform Act (Act), which intended to improve credit ratings by fostering accountability, transparency, and competition. The Act established Securities and Exchange Commission (SEC) oversight over Nationally Recognized Statistical Rating Organizations (NRSRO), which are credit rating agencies that are registered with SEC. The Act requires GAO to review the implementation of the Act. This report (1) discusses the Act's implementation; (2) evaluates NRSROs' performance-related disclosures; (3) evaluates removing NRSRO references from certain SEC rules; (4) evaluates the impact of the Act on competition; and (5) provides a framework for evaluating alternative models for compensating NRSROs. To address the mandate, GAO reviewed SEC rules, examination guidance, completed examinations, and staff memoranda; analyzed required NRSRO disclosures and market share data; and interviewed SEC and NRSRO officials and market participants. SEC's implementation of the Act involved developing an NRSRO registration program and an examination program. As currently implemented and staffed, both programs require further attention. (1) The process for reviewing NRSRO applications limits SEC staff's ability to fully ensure that applicants meet the Act's requirements. While SEC had registered 10 of 11 credit rating agency applicants as of July 2010, some staff memoranda to the Commission summarizing their review of applications described concerns that were not addressed prior to registration. According to staff, the 90-day time frame for SEC action on an application and the lack of an express authority to examine the applicants prior to registration prevented the concerns from being addressed prior to approval. Unlike other registration application programs that have built in greater authority and flexibility for their staff to clarify outstanding questions regarding applications before approval, the NRSRO registration program requires SEC to act within 90 days of receiving the application. As a result, staff recommended granting registration with ongoing concerns about NRSROs meeting the Act's requirements. (2) With its current level of staffing for NRSRO examinations, SEC's Office of Compliance Inspections and Examinations (OCIE) would likely not have been able to meet its routine examination schedule of examining the three largest NRSROs every 2 years and others every 3 years. OCIE has requested additional resources to fully staff the NRSRO examination program. While the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires SEC to establish an Office of Credit Ratings to conduct annual examinations of each NRSRO and staff the office sufficiently to carry out these examinations, SEC may face challenges in meeting the required examination timetable and providing quality supervision over NRSROs unless it develops a plan that clearly identifies staffing needs, such as requisite skills and training. While SEC has increased the amount of performance-related data NRSROs are required to disclose, the usefulness of the data is limited. First, SEC requires NRSROs to disclose certain performance statistics, increasing the amount of performance information available for some NRSROs. However, because SEC does not specify how NRSROs should calculate these statistics, NRSROs use varied methodologies, limiting their comparability. Second, SEC issued two rules requiring NRSROs to make certain ratings history data publicly available. However, the data sets do not contain enough information to construct comparable performance statistics and are not representative of the population of the credit ratings at each NRSRO. Without better disclosures, the information being provided will not serve its intended purpose of increasing transparency. In July 2008, SEC proposed amendments that would have removed references to NRSRO ratings from several rules. Since the implementation of the Act, the number of NRSROs has increased from 7 to 10; however, industry concentration as measured by NRSRO revenues, the number of entities rated, and the dollar volume of new asset-backed debt rated remains high. As part of an April 2009 roundtable held to examine oversight of credit rating agencies, SEC requested perspectives from users of ratings and others on whether it should consider additional rules to better align the raters' interest with those who rely on those ratings, and specifically, whether one business model represented a better way of managing conflicts of interest than another. SEC should identify the additional time frames and authorities it needs to review NRSRO applications, develop a plan to help ensure the NRSRO examination program is sufficiently staffed, improve NRSROs' performance-related disclosure requirements, and develop a plan to approach the removal of NRSRO references from its rules. SEC generally agreed with these recommendations. Wed, 22 Sep 2010 00:00:00 -0400 http://www.gao.gov/products/GAO-10-869 This is the Spanish Language summary of GAO-10-518. According to Census data, more than 12 million adults in the United States report they do not speak English well or at all. Proficiency in reading, writing, speaking, and understanding the English language appears to be linked to multiple dimensions of adult life in the United States, including financial literacy--the ability to make informed judgments and take effective actions regarding the current and future use and management of money. The Credit Card Accountability, Responsibility and Disclosure Act of 2009 mandated GAO to examine the relationship between fluency in the English language and financial literacy. Responding to this mandate, this report examines the extent, if any, to which individuals with limited English proficiency are impeded in their financial literacy and conduct of financial affairs. To address this objective, GAO conducted a literature review of relevant studies, reports, and surveys, and conducted interviews at federal, nonprofit, and private entities that address financial literacy issues and serve people with limited English proficiency. GAO also conducted a series of focus groups with consumers and with staff at community and financial organizations. GAO makes no recommendations in this report. Staff at governmental, nongovernmental, and private organizations that work with non-English speaking populations consistently told us that, in their experience, a lack of proficiency in English can create significant barriers to financial literacy and to conducting everyday financial affairs. For example, service providers and consumers with limited English proficiency told us that because most financial documents are available only in English, individuals with limited English proficiency can face challenges completing account applications, understanding contracts, and resolving problems, such as erroneous bills. In addition, financial education materials--such as print material, Web sites, broadcast media, and classroom curricula--are not always available in languages other than English and, in some cases, Spanish. Further, information and documents related to financial products tend to be very complex and can use language confusing even to native English speakers. In some cases, written financial materials are provided in other languages, but the translation may not be clear if it is not written using colloquial or culturally appropriate language. Interpretation (oral translation) can also be of limited usefulness if the interpreter does not fully understand or is not able to explain the material, a problem exacerbated by the fact that adults with limited English proficiency often receive assistance from their minor children. Many factors other than language also influence the financial literacy of individuals with limited English proficiency. For example, immigrants may lack familiarity with the U.S. financial system and its products, which can differ greatly from those in their native countries. Cultural differences can also play a role in financial literacy because different populations have dissimilar norms, attitudes, and experiences related to managing money. For instance, in some cultures carrying debt is viewed negatively, which may deter immigrants from such cultures from taking loans to purchase homes or cars and building credit histories. In addition, some studies have reported a correlation between financial literacy and levels of income and education. As a result of these issues, some service providers and advocates suggested that efforts to improve the financial literacy of people with limited English proficiency go beyond translation and also address underlying cultural and socioeconomic factors. Evidence suggests that people with limited English proficiency are less likely than the U.S. population as a whole to have accounts at banks and other mainstream financial institutions. They are also more likely to use alternative financial services--such as payday lenders and check-cashing services--that often have unfavorable fees, terms, and conditions. Further, the Federal Trade Commission and immigrant advocacy organizations have noted that some populations with limited English language skills may be more susceptible to fraudulent and predatory practices. Several service providers we spoke with said that financial education can play an important role in helping consumers with limited English proficiency avoid abusive and predatory practices. Wed, 04 Aug 2010 00:00:00 -0400 http://www.gao.gov/products/GAO-10-933T This testimony discusses our work on the Troubled Asset Relief Program (TARP), which Congress established on October 3, 2008 in response to the financial crisis that threatened the stability of the U.S. financial system and the solvency of many financial institutions. Under the original TARP legislation, the Department of the Treasury (Treasury) had the authority to purchase or insure $700 billion in troubled assets held by financial institutions. As we have seen, since TARP's inception Treasury has chosen to use those funds for a variety of activities, including injecting capital into key financial institutions, implementing programs to address problems in the securitization markets, providing assistance to the automobile industry and American International Group, Inc. (AIG), and working to help homeowners struggling to keep their homes. Today, some of these programs have been discontinued and others are winding down, but others--such as homeownership preservation programs--may continue for some time. Treasury has also seen some participating institutions repay their TARP funds as they recover their financial health. The prospect for repayment from some other institutions, both large and small, remains unclear. The Emergency Economic Stabilization Act (the act) that authorized TARP required GAO to report at least every 60 days on findings from our oversight of actions taken under the programs. We have been monitoring TARP programs since their inception and our reports have highlighted challenges facing many of these programs. To date, we have issued over 25 reports and testimonies related to TARP and made over 50 recommendations to improve the transparency and accountability of its operations. This statement today draws primarily on 7 reports we have issued since October 2009. Specifically, this statement focuses on (1) the nature and purpose of activities that have been initiated under TARP and ongoing challenges, (2) the process for making decisions related to unwinding TARP programs, and (3) indicators of credit conditions in markets targeted by TARP programs. To do our work, we reviewed our prior reports and other documents provided by Treasury's Office of Financial Stability (OFS) and conducted interviews with Treasury and OFS officials. In addition, we have updated the program's receipts and disbursements through June 30, 2010, and indicators of credit markets as of July 1, 2010. We conducted these performance audits between July 2009 and June 2010 and updated information in July 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Treasury has initiated a number of programs under TARP, some of which have ended or are being unwound. Others will continue. Among the programs no longer making commitments are the Capital Purchase Program (CPP) and Targeted Investment Program (TIP), while the Home Affordable Modification Program (HAMP) and new small business lending initiatives are expected to continue for some time. Although Treasury has received significant repayments of the funding it provided to financial institutions, some investments and loans could still result in substantial losses to the government. We have been monitoring TARP programs since their inception. In particular, Chrysler Group LLC and General Motors Company (GM) have shown some indications of progress toward returning to profitability, such as doing better than they and Treasury had initially projected in terms of revenues, operating earnings, and cash flow. However, the extent to which the federal government will fully recoup its investment in the auto industry is uncertain, and the companies face several challenges in the coming years. Since early 2009, we have also been monitoring the status of federal assistance to AIG and its financial condition using indicators we developed. In April 2010, we reported that our indicators showed that AIG's financial condition has remained relatively stable largely due to the federal assistance provided by the Federal Reserve and Treasury, but the extent to which the federal government will recoup its investment remains uncertain and will not only depend on the AIG's financial condition but also other market factors such as the performance of the insurance sectors and the credit derivatives markets that are beyond the control of AIG or the government. Many of our reports have also highlighted the challenges facing TARP programs and made recommendations to enhance transparency and accountability of its programs. We reported that while Treasury had taken some steps to address these challenges it urgently needed to finalize and implement the various components of HAMP and ensure the transparency and accountability of these efforts. We will continue to monitor these programs and have ongoing work on several facets of TARP, including those initiatives that have a small business focus. We have also reviewed Treasury's framework for deciding to extend TARP beyond December, 31, 2009, and found that the process was sufficient but could be strengthened for similar decisions that will need to be made in the future. Specifically, we found that the extent of coordination could be enhanced and formalized between Treasury and the Federal Deposit Insurance Corporation (FDIC) and recommended that Treasury formalize coordination with FDIC for future decisions. Although the authority for TARP is set to expire soon, Treasury will continue to face decisions in winding down programs, and many of these decisions will require interagency coordination. Because TARP will be unwinding concurrently with other important regulatory interventions, decisions about the sequencing of the exits from the programs will require regulators to work closely together. We have noted in past reports that some of the anticipated effects of TARP on credit markets and the economy had materialized and that some securitization markets had experienced a tentative recovery. Indicators we have been monitoring suggest that credit markets have been able to sustain their recovery despite the winding down of key programs initiated by the Federal Reserve, Treasury, FDIC and others. However, a slow recovery does not necessarily mean that TARP is ineffective, because in absence of TARP it is possible that foreclosure and delinquency rates would be higher. Finally, because any new TARP activity will be limited to home ownership preservation and small business lending programs, we will also continue to monitor indicators such as foreclosure and delinquencies as potential measures of the programs' success. Wed, 21 Jul 2010 00:00:00 -0400 http://www.gao.gov/products/GAO-10-792 The Federal Home Loan Bank System is a government-sponsored enterprise comprising 12 regionally-based Federal Home Loan Banks (FHLBank), the primary mission of which is to support housing finance and community and economic development. Each FHLBank makes loans (advances) to member financial institutions in its district, such as banks, which traditionally are secured by single-family mortgages. In 1999, the Gramm-Leach-Bliley Act (GLBA) authorized FHLBanks to accept alternative forms of collateral, such as agricultural and small business loans, from small members. GAO was asked to assess (1) factors that may limit the use of alternative collateral; and (2) selected aspects of the Federal Housing Finance Agency's, (FHFA) related regulatory oversight practices. GAO reviewed FHLBank policies and FHFA documentation; and interviewed FHLBank and FHFA officials, and a nongeneralizable random sample of 30 small lenders likely to have significant levels of agricultural or small business loans in their portfolios. FHLBank and FHFA officials cited several factors to help explain why alternative collateral represents about 1 percent of all collateral that is used to secure advances. These factors include a potential lack of interest by small lenders in pledging such collateral to secure advances or the view that many such lenders have sufficient levels of single-family mortgage collateral. Officials from two FHLBanks said their institutions do not accept alternative collateral at all, at least in part for these reasons. Further, FHLBank officials said alternative collateral can be more difficult to evaluate than single-family mortgages and, therefore, may present greater financial risks. To mitigate these risks, the 10 FHLBanks that accept alternative collateral generally apply higher discounts, or haircuts, to it than any other form of collateral, which may limit its use. For example, an FHLBank with a haircut of 80 percent on alternative collateral generally would allow a member to obtain an advance worth 20 percent of the collateral's value. While GAO's interviews with 30 small lenders likely to have significant alternative collateral on their books found that they generally valued their relationships with their local FHLBanks, officials from half said the large haircuts on alternative collateral or other policies limited the collateral's appeal. FHFA's oversight of FHLBank alternative collateral policies and practices has been limited. For example, FHFA guidance does not direct its examiners to assess the FHLBanks' alternative collateral policies. As a result, the FHLBanks have wide discretion to either not accept alternative collateral or apply relatively large haircuts to it. While the FHLBanks may view these policies as necessary to mitigate potential risks, 9 of the 12 FHLBanks did not provide documentation to GAO to substantiate such policies. Further, the documentation provided by three FHLBanks suggests that, in some cases, haircuts applied to alternative collateral may be too large. Also, the majority of the FHLBanks have not developed quantitative goals for products related to agricultural and small business lending, such as alternative collateral, as required by FHFA regulations. FHFA officials said that alternative collateral has not been a focus of the agency's oversight efforts because it does not represent a significant safety and soundness concern. However, in the absence of more proactive FHFA oversight from a mission standpoint, the appropriateness of FHLBank alternative collateral policies is not clear. FHFA should revise its examination guidelines to include periodic analysis of alternative collateral, and enforce its regulation pertaining to quantitative goals for products related to agricultural and small business lending. FHFA agreed with these recommendations. Tue, 20 Jul 2010 00:00:00 -0400 http://www.gao.gov/products/GAO-10-531 The Department of the Treasury's (Treasury) authority to purchase, commit to purchase, or commit to guarantee troubled assets was set to expire on December 31, 2009. This important authority has allowed Treasury to undertake a number of programs to help stabilize the financial system. In December 2009, the Secretary of the Treasury extended the authority to October 3, 2010. In our October 2009 report on the Troubled Asset Relief Program (TARP), GAO suggested as part of a framework for decision making that Treasury should coordinate with relevant federal agencies, communicate with Congress and the public, and link the decisions related to the next phase of the TARP program to quantitative analysis. This report discusses (1) the process Treasury used to decide to extend TARP and the extent of coordination with relevant agencies and (2) the analytical framework and quantitative indicators Treasury used to decide to extend TARP. To meet the report objectives, GAO reviewed key documents related to the decision to extend TARP, interviewed agency officials and analyzed financial data. The extension of TARP involved winding down programs while extending others, transforming the program to one focused primarily on preserving homeownership, and improving financial conditions for small banks and businesses. While the extension of TARP was solely the Treasury's decision, it was taken after significant deliberation and involved interagency coordination. Although sufficient for the decision to extend, the extent of coordination could be enhanced and formalized for any upcoming decisions that would benefit from interagency collaboration, especially with the Federal Deposit Insurance Corporation (FDIC). Treasury considered a number qualitative and quantitative factors for key decisions associated with the TARP extension. Important factors considered for the extension of new commitments centered on ongoing weaknesses in key areas of the economy. Treasury underscored that while analysis was possible on the needs or success of individual programs, the fragile state of the economy and remaining downside risks were difficult to know with certainty. Considering this uncertainty, Treasury wanted to extend TARP through October 2010 in order to retain resources to respond to financial instability. Going forward, Treasury could strengthen its current analytical framework by identifying clear objectives for small business programs and providing explicit linkages between TARP program decisions and the quantitative analysis or indicators used to motivate those decisions. GAO recommends that the Secretary of the Treasury (1) formalize coordination with FDIC for future TARP decisions and (2) improve the transparency and analytical basis for TARP program decisions. Treasury generally agreed with our recommendations. Wed, 30 Jun 2010 00:00:00 -0400 http://www.gao.gov/products/GAO-10-743R The Emergency Economic Stabilization Act of 2008 (EESA) requires that we annually audit the financial statements of the Troubled Asset Relief Program (TARP) which is implemented by the Office of Financial Stability (OFS). On December 9, 2009, we issued our audit report including (1) an unqualified opinion on OFS's financial statements for TARP as of and for the period ended September 30, 2009, and (2) an opinion that OFS maintained effective internal control over financial reporting as of September 30, 2009. We also reported that 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. Our December 9, 2009, audit report concluded that 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 audit report also identified two significant deficiencies in OFS's internal control over financial reporting. This report presents (1) more details concerning underlying specific control deficiencies that contributed to the two significant deficiencies identified in our audit report, (2) other less significant control deficiencies that we identified during our audit, and (3) related recommendations for corrective actions. While the deficiencies we identified are not considered material weaknesses, they warrant management's attention and action. The recommendations presented in this report are in addition to those we have made as part of the series of reports issued on our ongoing oversight of TARP. We identified two significant deficiencies in OFS's internal control over financial reporting concerning (1) accounting and financial reporting processes and (2) verification procedures over the data used for asset valuations. The significant deficiency concerning accounting and financial reporting processes was the combination of several underlying specific control deficiencies. Specifically, (1) OFS did not effectively implement its review and approval process for preparing its fiscal year 2009 financial statements and related disclosures for TARP; (2) OFS had not finalized its written 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; and (3) 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 developed and implemented other controls over TARP transactions and activities that reduced the risk of material misstatements resulting from these deficiencies. With regard to the second significant deficiency, OFS did not effectively implement its verification procedures for certain assumptions and 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. OFS reduced the risk of misstatements resulting from this data verification deficiency by performing procedures to assess the reasonableness of the model outputs, including comparison of the asset valuations calculated by the model with independently performed valuations. In addition to the two significant deficiencies, we identified other less significant control deficiencies related to (1) tracking executed agreements, (2) recording warrant transactions, and (3) reconciliations of disbursements to and refunds from the TARP custodian. We are making 17 recommendations related to OFS's significant deficiencies and 3 recommendations related to the other less significant control deficiencies. In commenting on a draft of this report, the Assistant Secretary for Financial Stability stated that OFS concurred with the recommendations in our draft report. Wed, 30 Jun 2010 00:00:00 -0400