2010   Financial Report of the United States Government

Notes to the Financial Statements

Note 5. TARP Direct Loans and Equity Investments, Net

The TARP was authorized by the Emergency Economic Stabilization Act of 2008 (EESA or “The Act”). The Act gave the Secretary of the Treasury broad flexible authority to establish the TARP to purchase and guarantee mortgages, mortgage related securities, and other troubled assets from financial institutions. This permitted the Secretary of the Treasury to inject capital into, and receive equity interests in, banks and other financial institutions. Treasury established several programs under the TARP to help stabilize the financial system and restore the flow of credit to consumers and businesses, and tackle the foreclosure crisis. On October 3, 2010, the authority to make new commitments to purchase or guarantee troubled assets expired.

The following TARP programs were designed to stabilize the financial system and restore the flow of credit to consumers and businesses. Treasury made direct loans and made equity investments and entered into the asset guarantees program. The table below is a list of TARP programs and types.

Program Program Type
Capital Purchase Program Equity Investment/Subordinated Debentures
American International Group, Inc. Investment Program * Equity Investment
Targeted Investment Program Equity Investment
Automotive Industry Financing Program Equity Investment and Direct Loan
Consumer and Business Lending Initiative
Direct Loan, Subordinated Debentures and Equity Investments
Public-Private Investment Program Equity Investment and Direct Loan
Asset Guarantee Program Asset Guarantee
Housing Programs Under TARP ** Expenditure
* Formerly known as the Systemically Significant Failing Institutions Program.
** Housing Programs Under TARP are not designed to recoup money spent on loan modifications. As such, these programs do not include direct loans, equity investments, or asset guarantees.

TARP direct loans and equity investments, net and asset guarantee program balances as of September 30, 2010, and 2009 are as follows:

Troubled Asset Relief Program as of September 30
(In billions of dollars)
2010
2009
Direct Loans and Equity Investments, Net 142.5 237.9
Asset Guarantee Program 2.2 1.8
  Total 144.7 239.7

The direct loans and equity investments, net represents the estimated net outstanding amount of direct loans and equity investments.

The table below is a summary of TARP loans and equity investments.

Troubled Asset Relief Program Direct Loans and Equity Investments
as of September 30
(In billions of dollars)
Direct Loans and Equity Investments
Subsidy Cost Allowance
Net Direct Loans and Equity Investments
Subsidy Expense (Income) for the Fiscal Year
2010
2009
2010
2009
2010
2009
2010
2009
Automotive Industry Financing Program 67.3 73.8 (14.6) (31.5) 52.7 42.3 (16.6) 30.4
Capital Purchase Program 49.8 133.9 (1.5) 7.8 48.3 141.7 3.9 (15.0)
American International Group, Inc. Investment Program 47.5 43.2 (21.4) (30.0) 26.1 13.2 (7.7) 30.4
Public-Private Investment Program 13.7 - 0.7 - 14.4 - (0.7) -
Consumer and Business Lending Initiative 0.9 0.1 0.1 0.3 1.0 0.4 0.3 (0.3)
Targeted Investment Program - 40.0 - 0.3 - 40.3 (1.9) (1.9)
  Total 179.2 291.0 (36.7) (53.1) 142.5 237.9 (22.7) 43.6

Capital Purchase Program

In October 2008, Treasury began implementation of the TARP with the Capital Purchase Program (CPP), designed to help stabilize the financial system by assisting in building the capital base of certain viable U.S. financial institutions to increase the capacity of those institutions to lend to businesses and consumers and support the economy. Under this program, Treasury purchased senior perpetual preferred stock from qualifying federally or state regulated banks, savings associations, and certain bank and savings and loan holding companies (Qualified Financial Institution (QFI)). In addition to the senior preferred stock, Treasury received warrants from public QFIs to purchase shares of common stock. The senior preferred stock has a stated dividend rate of 5.0 percent through year five, increasing to 9.0 percent in subsequent years. The dividends are cumulative for bank holding companies and subsidiaries of bank holding companies and non-cumulative for others and payable when and if declared by the institution’s board of directors. QFIs that are Sub-chapter S corporations issued subordinated debentures in order to maintain compliance with the Internal Revenue Code. The maturity of the subordinated debentures is 30 years and interest rates are 7.7 percent for the first 5 years and 13.8 percent for the remaining years. For fiscal years 2010 and 2009, repayments totaled $81.4 billion and $70.7 billion, respectively.

American International Group, Inc. Investment Program (AIG)

Treasury provided assistance to AIG in order to prevent its disorderly failure as well as to prevent broader disruption to the financial markets. In November 2008, Treasury invested $40 billion in AIG’s cumulative Series D perpetual cumulative preferred stock with a dividend rate of 10.0 percent compounded quarterly. The $40 billion from Treasury was used to repay a portion of a loan from the FRBNY. On April 17, 2009, AIG and Treasury restructured their November 2008 agreement. Under the restructuring, Treasury exchanged $40 billion of cumulative Series D preferred stock for $41.6 billion of non-cumulative 10 percent Series E preferred stock. The amount of Series E preferred stock is equal to the original $40 billion plus dividends not paid as of April 17, 2009. In addition to the exchange, Treasury agreed to make available an additional $29.8 billion capital facility (Series F preferred stock) to allow AIG to draw additional funds if needed to assist in AIG’s restructuring. For the fiscal year ended September 30, 2010, and September 30, 2009, $4.3 billion and $3.2 billion, respectively, has been funded by Treasury to AIG under this additional capital facility. Consistent with SFFAS No. 2, the unused portion of the AIG capital facility is not recognized as an asset as of September 30, 2010 and 2009. As of September 30, 2010, AIG had not made any dividend payments on any of the perpetual preferred stock.

According to the terms of the preferred stock, if AIG misses four dividend payments, Treasury may appoint to the AIG board of directors, the greater of two members or 20.0 percent of the total number of directors of the Company. The ability to appoint such directors shall remain in place until dividends payable on all outstanding shares of the Series E Preferred Stock have been declared and paid in full for four consecutive quarterly dividend periods, subject to revesting for each and every subsequent missed dividend payment. On April 1, 2010, Treasury appointed two directors to the Company’s board as a result of non-payments of dividends. The additional two directors increased the total number of AIG directors to twelve. See Note 6–Beneficial Interest in Trust, for details on the announced plans for restructuring the Federal Government’s investments in AIG.

Targeted Investment Program (TIP)

The TIP was designed to prevent a loss of confidence in financial institutions that could result in significant market disruptions, threatening the financial strength of similarly situated financial institutions, impairing broader financial markets, and undermining the overall economy.

In fiscal year 2009, Treasury invested $20 billion in each of Bank of America and Citigroup under TIP. Under each agreement, the Treasury purchased $20 billion of perpetual preferred stock with an annual cumulative dividend rate of 8 percent and received a warrant for the purchase of common stock. In December 2009, Bank of America and Citigroup repaid the amounts invested by Treasury along with dividends through the date of repayment.

Automotive Industry Financing Program (AIFP)

The objective of the Automotive Industry Financing Program is to prevent a significant disruption of the American automotive industry, which would have a negative effect on the economy of the United States. The various activities undertaken by Treasury in the automotive industry include:

General Motors (GM)—In fiscal year 2009, the Treasury provided $49.5 billion to GM through various loan agreements including the initial loan for general and working capital purposes and the final loan for debtor in possession (DIP) financing while GM was in bankruptcy. Treasury assigned its rights in these loans (with the exception of $1.0 billion which remained in GM for wind down purposes and $7.1 billion that would be assumed) and previously received common stock warrants to a newly created entity (General Motors Company). General Motors Company used the assigned loans and warrants to credit bid for substantially all of the assets of GM in a sale pursuant to Section 363 of the Bankruptcy Code (see 11 U.S.C. 363). Upon closing of the Section 363 sale, the credit bid loans and warrants were extinguished and Treasury received $2.1 billion in 9.0 percent cumulative perpetual preferred stock and 60.8 percent of the common equity interest in General Motors Company. In addition, General Motors Company assumed $7.1 billion of the DIP loan, simultaneously paying $0.4 billion (return of warranty program funds), resulting in a balance of $6.7 billion. Recovery of the $1.0 billion remaining in GM is subject to the final outcome of the bankruptcy proceedings. During fiscal year 2010, Treasury had received the remaining $6.7 billion as full repayment of the DIP loan assumed.

As a result of General Motors Company’s initial public offering (IPO), in November 2010, Treasury sold 412 million shares of General Motors Company’s common stock. Treasury received approximately $13.5 billion in net proceeds, and its equity stake in General Motors Company decreased from 60.8 percent to 33.3 percent. The net proceeds per share received during IPO approximated Treasury’s valuation reflected in these financial statements as of September 30, 2010. In addition, on October 27, 2010, General Motors Company agreed to repurchase from Treasury the $2.1 billion in preferred stock at a price of 102 percent of the liquidation value of the preferred stock.

GMAC LLC Rights Offering—In December 2008, Treasury agreed, in principal, to lend up to $1.0 billion to GM for participation in a rights offering by GMAC (now known as Ally Financial, Inc.) in support of GMAC’s reorganization as a bank holding company. The loan was secured by the GMAC common interest acquired in the rights offering. The loan agreement specified that at any time, at the option of the lender (Treasury), the unpaid principal and accrued interest was exchangeable for the membership interest purchased by GM during the rights offering. The loan was funded for $884.0 million. In May 2009, Treasury exercised its exchange option under the loan and received 190,921 membership interests, representing approximately 35.36 percent of the voting interest at the time, in GMAC in full satisfaction of the loan.

GMAC—In December 2008, Treasury purchased preferred membership interests for $5.0 billion with an 8 percent annual distribution right (dividends) from GMAC. In May 2009, Treasury had invested $7.5 billion in 9 percent Mandatory Convertible Preferred Stock in GMAC to support its ability to originate new loans to Chrysler dealers and consumers, and help address GMAC’s capital needs. As of September 30, 2009, Treasury owned $13.1 billion in preferred shares in GMAC, through purchases and the exercise of warrants, in addition to 35.36 percent of the common equity in GMAC, as described previously under GMAC LLC Rights Offering.

In December 2009, Treasury invested $2.5 billion in 8 percent Trust Preferred Securities and $1.25 billion in GMAC’s Series F-2 shares which are convertible into GMAC common stock at the option of GMAC or Treasury. Absent an optional conversion, the Series F-2 shares automatically convert to common stock after 7 years from the issuance date. In addition, as part of the December 2009 transactions, Treasury exchanged its preferred membership interests and its 9 percent Mandatory Convertible Preferred Stock for a combination of additional Series F-2 convertible shares and GMAC’s common shares. The additional shares in GMAC common stock increased Treasury’s ownership in GMAC from 35.36 percent to 56.3 percent.

As of September 30, 2010, Treasury owned $2.7 billion of Trust Preferred Securities and $11.4 billion of Series F-2 Convertible Securities in GMAC, through purchases, exchanges, and the exercise of warrants, in addition to 56.3 percent of common equity in GMAC.

Chrysler Holding LLC (Chrysler)

In January 2009, Treasury provided a $4.0 billion General Purpose Loan to a parent company of Chrysler (Chrysler Holdings). On April 30, 2009, Chrysler filed for Chapter 11 bankruptcy. In May 2009, Treasury provided an additional $1.9 billion to Chrysler under the terms of a DIP credit agreement. On June 10, 2009, substantially all of the assets of Chrysler were sold to a newly-created entity (New Chrysler). Recovery of the DIP loan is subject to the bankruptcy process associated with the Chrysler assets remaining after the sale to New Chrysler.

In June 2009, Treasury entered into a credit agreement to lend an additional $6.6 billion. Also, New Chrysler assumed $0.5 billion of the General Purpose Loan, and the balance of $3.5 billion remained outstanding from the Chrysler Holdings. As of September 30, 2009, Treasury had funded approximately $4.6 billion of the $6.6 billion in new commitments to New Chrysler. Treasury also obtained other consideration relating to these new commitments, including a 9.85 percent equity interest in New Chrysler and additional notes with principal balances of approximately $0.3 billion and $0.1 billion.

As of September 30, 2009, Treasury had loans outstanding from New Chrysler of $5.1 billion and owned a 9.85 percent equity interest in New Chrysler and additional notes with principal balances of approximately $0.3 billion and $0.1 billion. In addition, as of September 30, 2009, Treasury had loans outstanding due from old Chrysler entities of $3.5 billion (General Purpose Loan) and $1.9 billion (DIP Loan).

In fiscal year 2010, pursuant to the terms of a settlement agreement, Treasury received approximately $1.9 billion and subsequently wrote-off the remaining $1.6 billion of the General Purpose Loan. As of September 30, 2010, Treasury had loans outstanding from New Chrysler of $5.1 billion and owned a 9.85 percent equity interest in New Chrysler and additional notes with principal balances of approximately $0.3 and $0.1 billion. Additionally, as of September 30, 2010, Treasury had an interest in an old Chrysler entity as a result of the $1.9 billion DIP Loan, recovery of which is subject to the bankruptcy process associated with the Chrysler assets remaining after the sale to New Chrysler.

The Consumer and Business Lending Initiative (CBLI)

The Consumer and Business Lending Initiative is intended to help unlock the flow of credit to consumers and small businesses. The following three programs were established to help accomplish this: Term Asset-Backed Securities Loan Facility (TALF), Small Business Administration (SBA) 7(a) Securities Purchase Program, and the Community Development Capital Initiative (CDCI)

TALF, which was created to help jump start the market for securitized consumer and small business loans, was created by the Board of Governors of the Federal Reserve System and Treasury to provide low-cost funding to investors in certain classes of ABS. Treasury participates in the program as part of Treasury’s Consumer and Business Lending Initiative by providing liquidity and credit protection to the FRBNY. As part of the program, the FRBNY has entered into a put agreement with the TALF, LLC, a special purpose vehicle created by the FRBNY. In the event of a TALF borrower default, the FRBNY will seize the collateral and sell it to the TALF, LLC under this agreement. Under the TALF, the FRBNY, as implementer of the TALF program, originates loans on a non-recourse basis to holders of certain AAA rated ABS. The TALF, LLC receives a monthly fee equal to the differences between the TALF loan rate and the FRBNY’s fee (spread) as compensation for entering into the put agreement. The accumulation of this fee will be used to fund purchases. In the event there are insufficient funds to purchase the collateral, Treasury has committed to invest up to $20.0 billion in non-recourse subordinate notes issued by the TALF, LLC. On July 19, 2010, the Treasury commitment was reduced to $4.3 billion. Treasury disbursed $0.1 billion upon creation of the TALF, LLC and the remainder can be drawn to purchase collateral in the event the accumulated fees are not sufficient to cover purchases. As of September 30, 2010, approximately $29.7 billion of loans due to FRBNY remained outstanding.

The SBA 7(a) Securities Purchase Program was created to provide additional liquidity to the SBA 7(a) market so that banks are able to make more small business loans. Under this program, Treasury purchases 7(a) Securities collateralized with 7(a) loans (these loans are guaranteed by the full faith and credit of the United States Government) packaged on or after July 1, 2008. As of September 30, 2010, the Department has entered into trades to purchase about $0.4 billion. Of this amount, about $0.2 billion has settled with the remaining trades to be settled by December 30, 2010.

The CDCI Initiative was created to provide additional low-cost capital to small banks to encourage more lending to small businesses. Under the terms of the initiatives, Treasury purchases senior preferred stock (or subordinated debt) from eligible CDFI financial institutions. The senior preferred stock has an initial dividend rate of 2 percent. CDFIs may apply to receive capital up to 5 percent of risk-weighted assets. To encourage repayment while recognizing the unique circumstances facing CDFIs, the dividend rate will increase to 9 percent after 8 years. CDFIs participating in the CPP, subject to certain criteria, were eligible to exchange, through September 30, 2010, their current CPP preferred shares (subordinated debt) for CDCI preferred shares (subordinated debt).

Public Private Investment Program (PPIP)

The PPIP is part of Treasury’s efforts to help restart the markets and provide liquidity for legacy assets. Under this program, Treasury makes equity and debt investments in investment vehicles (referred to as Public Private Investment Funds or “PPIFs”) established by private investment managers. The equity investment is used to match private capital and will equal not more than 50 percent of the total equity invested. The debt investment, at the option of the investment manager, equals to 50 percent or 100 percent of the total equity (including private equity). The PPIFs invest primarily in commercial mortgage-backed securities and non-agency residential MBS. At least 90 percent of the assets underlying any eligible asset must be situated in the United States. On September 30, 2009, Treasury signed limited partnership and loan agreements with two investment managers, committing to potentially disburse up to $6.7 billion. However, as of September 30, 2009, no private fund managers had made any investments and Treasury had not disbursed any funds for PPIP.

As of September 30, 2010, Treasury had signed definitive limited partnership and loan agreements with eight investment managers, committing to disburse up to $22.1 billion. During fiscal year 2010, Treasury disbursed $4.9 billion as equity investment and $9.2 billion as loans to these eight PPIFs.

Asset Guarantee Program (AGP)

The AGP provided guarantees for assets held by systemically significant financial institutions that face a risk of losing market confidence due in large part to a portfolio of distressed or illiquid assets. The AGP was applied with extreme discretion in order to improve market confidence in the systemically significant institution and in financial markets broadly.

In January 2009, Treasury finalized the terms of a guarantee agreement with Citigroup. Under the agreement, Treasury, FDIC, and the FRBNY provided protection against the possibility of large losses on an asset pool of approximately $301 billion of loans and securities which remained on Citigroup’s balance sheet. Treasury’s guarantee was limited to $5 billion. As a premium for the guarantee, Citigroup issued approximately $7.0 billion of cumulative preferred stock (subsequently converted to trust preferred securities with similar terms) with an 8.0 percent stated dividend rate and a warrant for the purchase of common stock; approximately $4.0 billion and the warrant was issued to Treasury and approximately $3.0 billion was issued to the FDIC. For fiscal years 2010 and 2009, the AGP’s subsidy income was about $1.5 billion and $2.2 billion, respectively.

On December 23, 2009, Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation and Citigroup terminated this program. The Government parties did not pay any losses under the program and kept $5.2 billion of $7 billion in trust preferred securities as well as warrants for common shares that were issued by Citigroup as consideration for such guarantee. On September 29, 2010, Treasury exchanged its remaining trust preferred securities for other Citigroup trust preferred securities containing market terms to facilitate a sale. On September 30, 2010, Treasury agreed to sell its trust preferred securities held for $2.2 billion. The sale was settled on October 5, 2010.

Housing Programs Under TARP

Fiscal year 2010 has seen an expansion of programs under TARP to provide stability for both housing market and homeowners. These programs assist homeowners who are experiencing financial hardships to remain in their homes while they get back on their feet or relocate to a more sustainable living situation. These programs fall into three initiatives:

As of September 30, 2010, and 2009, Treasury has committed up to $45.6 billion, and $27.1 billion, respectively, for these programs. From inception through September 30, 2010, approximately $0.5 billion have been disbursed.

For more details on the TARP, please see the Performance and Accountability Report for Treasury.


Last Updated:  December 07, 2011