2012   Financial Report of the United States Government

Notes to the Financial Statements

Note 5. Troubled Asset Relief Program (TARP) — Direct Loans and Equity Investments, Net

The TARP was authorized by the EESA. This 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 designed to help stabilize the financial system, restore the flow of credit to consumers and businesses, and help prevent avoidable foreclosures. Under the TARP programs, Treasury made direct loans, equity investments, and entered into other credit programs. This authority to make new commitments to purchase or guarantee troubled assets expired on October 3, 2010.

The following table lists the TARP programs and types:

Program Program Type
American International Group, Inc. Investment Program Equity Investment
Public-Private Investment Program Equity Investment and Direct Loan
Automotive Industry Financing Program Equity Investment and Direct Loan
Capital Purchase Program Equity Investments/Subordinated Debentures
Other Programs Direct Loan, Subordinated Debentures and Equity Investments
Housing Programs under TARP* Expenditure and Loss Sharing
 
*Housing Programs under TARP are not designed to recoup money spent on loan modifications or payments on the loss sharing agreement. As such, these programs do not include direct loans, equity investments, or asset guarantees.

The table below is a summary of TARP—Direct Loans and Equity Investments, Net.

Troubled Asset Relief Program Direct Loans and Equity Investments
as of September 30, 2012, and 2011
 
Direct Loans and Equity Investments
Subsidy Cost Allowance
Net Direct Loans and Equity Investments
Subsidy Expense (Income) for the Fiscal Year
(In billions of dollars)
2012
2011
2012
2011
2012
2011
2012
2011
Automotive Industry Financing Program 37.2 37.3 -19.7 -19.4 17.5 17.9 0.2 9.7
Public-Private Investment Program 9.8 15.9 1 2.4 10.8 18.3 0.2 -1.9
Capital Purchase Program 8.7 17.3 -2.9 -4.9 5.8 12.4 -1.9 -1.8
American International Group, Inc. Investment Program 6.7 51.1 -1.7 -20.7 5 30.4 -9.2 1.6
All other 0.7 0.8 0.4 0.3 1.1 1.1 -0.1 -0.4
Total Troubled Asset Relief Program 63.1 122.4 -22.9 -42.3 40.2 80.1 -10.8 7.2

Automotive Industry Financing Program (AIFP)

The Automotive Industry Financing Program was designed to help prevent a significant disruption of the American automotive industry, which could have had 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, Treasury provided $49.5 billion to Old 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 Old GM was in bankruptcy. Treasury assigned its rights in these loans, with the exception of $1.0 billion which remained in Old GM, to a newly created entity New GM, which New GM used to credit bid for substantially all of the assets in Old GM. New GM and Treasury extinguished substantially all but $7.1 billion of these initial financing arrangements, and Treasury received $2.1 billion in 9.0 percent cumulative perpetual preferred stock and 60.8 percent of the common equity interest in New GM in fiscal year 2009. New GM also assumed $7.1 billion of the original DIP loan, which it fully repaid to Treasury in fiscal year 2010. During fiscal year 2011, pursuant to a letter agreement between Treasury and New GM, New GM repurchased its preferred stock for 102.0 percent of its liquidation amount, or $2.1 billion. Also in fiscal year 2011, as a result of the New GM initial public offering, Treasury sold approximately 412 million shares of its GM common stock for approximately $13.5 billion. As of September 30, 2012, and 2011, Treasury held 500 million shares of the common stock of New GM’s common stock shares outstanding (or approximately 32.0 percent). The fair values of Treasury’s holdings of New GM common stock as of September 30, 2012, and 2011, totaled approximately $11.4 billion and 10.1 billion, respectively. Treasury retains the right to recover additional proceeds relating to the liquidation of Old GM. However, Treasury does not expect these recoveries to be significant. Please see Note 28—Subsequent Events for additional information.

Ally Financial Inc. (formerly known as GMAC Inc.)—Between December 2008 and 2009, Treasury invested a total of $16.3 billion in GMAC Inc. to help support its ability to originate new loans to GM and Chrysler dealers and consumers, and to help address GMAC’s capital needs. GMAC changed its corporate name to Ally Financial, Inc. (Ally) in May 2010. Treasury held 981,971 shares of Ally’s outstanding common stock (or 73.8 percent) as of September 30, 2012 and 2011. As of September 30, 2012, and 2011, Treasury also held 119 million  shares of Ally Series F-2 Mandatorily Convertible Preferred Securities, with a $50 per share liquidation preference, with a stated dividend rate of 9.0 percent, and convertible into at least 513,000 shares of Ally common stock at Ally’s option, which is subject to an approval of the FRB and consent by Treasury or pursuant to an order by the FRB compelling such conversion. The Series F-2 security is also convertible at the option of Treasury upon certain specified corporate events. Absent any optional conversion, any F-2 remaining preferred shares will automatically convert to Ally common stock after 7 years from the issuance date. Treasury would own 81.0 percent ownership of Ally common stock when combined with the Ally common stock currently owned and conversion of the Series F-2 preferred stock into common stock.

Treasury held 2.7 million shares of 8.0 percent cumulative Trust Preferred Securities (TRuPS) with a $1,000 per share liquidation preference prior to fiscal year 2011. In March 2011, Treasury sold its TRuPs for $2.7 billion.

Chrysler Holding LLC (Chrysler)—In fiscal year 2009, Treasury provided $5.9 billion in loans to Chrysler Holding LLC (Old Chrysler). In April 2009, Old Chrysler filed for Chapter 11 bankruptcy, and in June 2009, substantially all of the Old Chrysler assets were sold to a newly-created entity (New Chrysler). In June 2009, New Chrysler assumed $0.5 billion of the loans to Old Chrysler, and Treasury committed to lend New Chrysler $6.6 billion (of which only $4.6 billion was funded), and received other consideration including 9.85 percent equity in New Chrysler and $0.4 billion in additional notes. In May 2011, New Chrysler repaid the $5.1 billion in loans outstanding, the $0.4 billion additional notes, and the associated interest. In July 2011, Fiat SpA paid Treasury $0.6 billion for all of its remaining equity interest and rights relating to New Chrysler. As of September 2012 and 2011, Treasury had no remaining interest in New Chrysler. As of these dates, Treasury continued to hold a right to receive proceeds from a bankruptcy liquidation trust, but no significant cashflows are expected.

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 made equity investments and loans to nine investment vehicles (referred to as Public Private Investment Funds or “PPIFs”) established by private investment managers. The PPIFs may invest in commercial mortgage-backed securities and non-agency residential MBS as well as in temporary securities, including bank deposits, U.S. Treasury securities and certain money market mutual funds. During fiscal year 2012, Treasury disbursed $0.2 billion as equity investment and $0.8 billion as loans to these PPIFs as compared to $1.1 billion as equity investment and $2.3 billion as loans in fiscal year 2011. On September 30, 2012, and 2011, Treasury had equity investments in PPIFs outstanding of $4.1 billion and $5.5 billion, and loans outstanding of $5.7 billion and $10.4 billion, for a total of $9.8 billion and $15.9 billion, respectively. In addition, as of September 2012, and 2011, Treasury had legal commitments to disburse up to $3.1 billion and $4.3 billion, respectively, for additional investments and loans in PPIFs.

Capital Purchase Program

In October 2008, Treasury began implementation of 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 with a stated dividend rate of 5.0 percent through year five, increasing to 9.0 percent in subsequent years, from qualifying U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies (Qualified Financial Institution). 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. In addition to the senior preferred stock, Treasury received warrants from public QFIs to purchase shares of common stock. QFIs that are Sub-chapter S corporations issued subordinated debentures; these subordinated debentures have a maturity of 30 years and interest rates of 7.7 percent for the first 5 years and 13.8 percent for the remaining years, and may repay Treasury subject to regulatory approval at any time. For fiscal years 2012 and 2011, repayments and sales totaled $8.2 billion and $30.2 billion, respectively.

American International Group, Inc. Investment Program (AIG)

Treasury provided assistance to help AIG in order to prevent its disorderly failure as well as to prevent broader disruption to the financial markets. In fiscal year 2009, Treasury made an investment in AIG (which, after being restructured in the same fiscal year) consisted of $41.6 billion of AIG’s non-cumulative 10.0 percent Series E preferred stock. Additionally, Treasury made available to AIG a $29.8 billion capital facility (non-cumulative 10.0 percent Series F preferred stock) under which AIG drew $27.8 billion to assist in its operational restructuring. In January 2011, AIG, Treasury, and Federal Reserve Bank of New York (FRBNY) restructured the U.S. Government’s investments in AIG. The restructuring converted the $41.6 billion Series E preferred stock and $27.8 billion investment in Series F equity capital facility into $20.3 billion of interest in AIG Special Purpose Vehicles (SPVs), and 1.1 billion shares of AIG common stock. The remaining $2.0 billion of undrawn Series F capital facility was converted to a new AIG equity capital facility, which subsequently reduced to zero later in fiscal year 2011. As described in Note 6—Non-TARP Investments in American International Group, Inc., as part of the restructuring, Treasury also received, on behalf of the General Fund, 563 million shares of AIG’s common stock in exchange for its beneficial interest in a Trust established by the FRBNY. Additionally, the credit facility between FRBNY and AIG was terminated. Upon completion of the restructuring, Treasury under TARP and the General Fund received a combined total of 1.7 billion shares (or 92.1 percent ownership) of AIG common stock.

Since the January 2011 restructuring, shares of AIG common stock have been sold. In fiscal years 2012 and 2011, Treasury sold 806 million and 132 million shares of AIG’s common stock under TARP for $25.2 billion and $3.8 billion, respectively. As of September 30, 2012, Treasury held 154 million shares of AIG’s common stock under TARP, with a fair value of approximately $5.1 billion, representing 10.5 percent of the AIG shares outstanding. As of September 30, 2011, Treasury held 960 million shares of AIG’s common stock under TARP, with a fair value of approximately $21.1 billion representing 50.8 percent of AIG shares outstanding. Refer to Note 6—Non-TARP Investments in American International Group, Inc., for the detail discussions on Non-TARP investments in AIG.

As of September 30, 2011, Treasury also owned preferred interests in an AIG SPV with an outstanding balance of $9.3 billion. In fiscal year 2012, the preferred interests in the AIG SPV were fully repaid. Please see Note 28—Subsequent Events for additional information.

Other Programs

Treasury implemented other programs under TARP to help unlock the flow of credit to consumers and small businesses. The following four programs were established to help accomplish this: Term Asset-Backed Securities Loan Facility (TALF), SBA 7(a) Securities Purchase Program, Community Development Capital Initiative (CDCI), and the Targeted Investment Program (TIP).

TALF, was created by the Federal Reserve FRBNY to provide low cost funding to investors in certain classes of Asset-Backed Securities (ABS). Treasury participated in the program by providing liquidity and credit protection to the FRBNY. Under the TALF, the FRBNY originated loans on a non-recourse basis to holders of certain AAA rated ABS. Interest rates charged on the TALF loans depend on the weighted-average maturity of the pledged collateral, the collateral type and whether the collateral pays fixed or variable interest. As part of the program, the FRBNY created the TALF, LLC, an SPV that agreed to purchase from the FRBNY any collateral it has seized because of borrower default. In the event there are insufficient funds to purchase the collateral, Treasury committed to invest up to $20.0 billion in non-recourse subordinate notes issued by the TALF, LLC. In fiscal year 2010, the Treasury commitment was reduced to $4.3 billion and further reduced in fiscal year 2012 to $1.4 billion. As of September 30, 2012 and 2011, approximately $1.5 billion and $11.3 billion of loans due to FRBNY remained outstanding, respectively.

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 purchased 7(a) Securities collateralized with 7(a) loans that were guaranteed by the full faith and credit of the U.S. Government. In May 2011, Treasury began selling its securities to bond market investors; sales were completed and the programs closed in January 2012. As of September 30, 2012, Treasury held no investment in SBA 7(a) securities.

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 purchased senior preferred stock (or subordinated debt) from eligible CDFI financial institutions with an initial dividend rate of 2.0 percent, increasing up to a maximum to 9.0 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).

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 $20.0 billion in each of Bank of America and Citigroup under TIP. In December 2009, both institutions repaid the invested amounts along with dividends through the date of repayment. In fiscal year 2010, Treasury received a total of $1.1 billion in dividends on the Bank of America and Citigroup investments and proceeds of $1.2 billion from the sale of Bank of America warrants. In fiscal year 2011, Treasury sold its warrants from Citigroup under TIP for $0.2 billion, and closed the program.

Housing Programs under TARP

Housing Programs under TARP are not designed to recoup money spent on loan modifications or payments on the loss sharing agreement. As such, these programs do not include direct loans, equity investments, or asset guarantees.

The following housing programs under TARP are designed to help prevent avoidable foreclosures. These programs provide incentives for mortgage modifications and other types of assistance in order to enable homeowners who are experiencing hardships to remain in their homes or relocate to more sustainable living situations. These programs fall into three initiatives:

As of September 30, 2012, and 2011, Treasury has committed up to $45.6 billion for these programs. Payments made under the housing programs under TARP for fiscal years 2012 and 2011, amounted to $3.1 billion and $1.9 billion, respectively. As of September 30, 2012, Treasury had $40.1 billion in total commitments outstanding for future payments under the housing programs.

For more details on the TARP, please see the Treasury’s Annual Financial Report.


Last Updated:  February 27, 2013