2010   Financial Report of the United States Government

Management's Discussion & Analysis

Economic Recovery Efforts

This section provides an overview of the Economy at the end of FY 2010 and discusses the many important recovery efforts that have been initiated by the Department of the Treasury and across the Government.

The Economy in Fiscal Year 2010

A review of the Nation´s key macroeconomic indicators can help place the discussion of the Government´s financial results in a broader context. As summarized in Table 6, the economy began to grow again during FY 2010, after emerging in FY 2009 from the longest and deepest recession since World War II. During the recession, which began in December 2007 and ended in June 2009, payrolls fell by 7.3 million. Although employment rose during FY 2010, the unemployment rate remained relatively high.

Table 6: National Economic Indicators*
  FY 2010 FY 2009
Real GDP Growth 3.2% -2.7%
Residential Construction Growth -5.6% -21.4%
Average monthly private payroll job change (thousands) 58 -528
Unemployment rate (percent, end of period) 9.6% 9.8%
Consumer Price Index 1.1% -1.3%
CPI, excluding food and energy 0.8% 1.5%
Treasury constant maturity 10-year rate (end of period) 2.5% 3.3%
Moody's Baa bond rate (end of period). 5.6% 6.2%
*Some FY 2009 data may differ from the FY 2009 Report due to update and revision.

After falling by 2.7 percent during FY 2009, real GDP rose at an annual average rate of 3.2 percent over the four quarters of FY 2010. Quarterly performance was comparatively strong during the first and second quarters of FY 2010, with real GDP rising 5.0 percent and 3.7 percent, respectively. The pace of expansion slowed during the latter half of the fiscal year, and in the final quarter, real GDP grew 2.5 percent at an annual rate. The economy added nearly 691,000 private nonfarm payroll jobs during FY 2010, after losing 6.3 million private jobs during FY 2009. The unemployment rate remained high during FY 2010, edging down from 9.8 percent in September 2009 to 9.6 percent in September 2010. After declining outright in the previous fiscal year, consumer price inflation increased, mostly due to rising energy prices, but remained in check. Underlying inflation (the core rate, excluding food and energy) slowed to roughly half the rate of the previous fiscal year. Real wages rose, but at a much slower pace than the previous fiscal year´s strong gains, reflecting the combination of slower nominal wage growth and rising consumer prices. The level of corporate profits rose in FY 2010 after declining in each of the three previous fiscal years, although on a quarterly basis, growth was faster during the first half of the year than the latter half. Federal tax receipts rose and spending growth declined in FY 2010. As a result, the Federal unified budget deficit narrowed to $1,294 billion, or 8.9 percent of GDP (compared with 10 percent in FY 2009).

The following key points summarize economic performance in FY 2010:

The Economic Recovery Effort

In mid-September 2008, the Nation was in the midst of one of the worst financial crises in our history. The economy was contracting sharply. Fear of a possible depression froze markets. Immediate, strong action was needed to avoid a complete collapse of the financial system. The Department of the Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and other U.S. Government bodies undertook an array of unprecedented steps at that time to avert a collapse and continue to administer a number of programs to pave the way for sustained economic recovery.


The Housing and Economic Recovery Act of 2008 (HERA) established a new regulatory agency, the Federal Housing Finance Agency (FHFA), to regulate the housing Government-Sponsored Enterprises (GSEs), 11Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. FHFA placed Fannie Mae and Freddie Mac under conservatorship in September 2008 in order to preserve GSE assets and restore those GSEs to a sound and solvent financial condition. Pursuant to HERA, the Treasury Department took three additional steps to help ensure the solvency and liquidity of the GSEs:

The SPSPAs were designed to instill confidence in investors that Fannie Mae and Freddie Mac would remain viable entities critical to the functioning of the housing and mortgage markets. These agreements provide that the Government will make funding advances to the GSEs if, at the end of any quarter, the FHFA, acting as the conservator, determines that the liabilities of either GSE, individually, exceed its respective assets. The SPSPAs have helped ensure that Fannie Mae and Freddie Mac can continue to fulfill their critical role in the mortgage market by providing liquidity and stabilizing the market.

The maximum amount available to each GSE under this agreement was originally $100 billion and in May 2009 was raised to $200 billion. In December 2009, Treasury amended the SPSPAs to replace the existing $200 billion per GSE funding commitment cap with a formulaic cap for the next three years that will adjust upwards quarterly by the cumulative amount of any losses realized by either GSE and downward by the cumulative amount of any gains, but not below $200 billion per GSE, and will become fixed at the end of the three years, December 31, 2012. At the conclusion of the three-year period, the remaining commitment will then be fixed and available to be drawn per the terms of the agreements. As of September 30, 2010, Treasury´s cumulative payments to Fannie Mae and Freddie Mac were $85.1 billion and $63.1 billion, respectively, and a combined $359.9 billion has been accrued as a contingent liability. The losses the GSEs continue to report are largely the result of delinquencies and defaults on loans that were originated and guaranteed in 2006, 2007, and 2008. Less than one percent of losses have come from loans originated in 2009 and 2010.

The U.S. Government´s investment in and support of the GSEs through the SPSPAs was structured in such a way that virtually all profits in the companies revert to the Government in the form of dividends on the preferred shares in Fannie Mae and Freddie Mac. To get a true picture of the Government´s exposure in the companies, it is critical to factor in those dividends and net them against the draws that the companies make from Treasury. For instance, while for FY 2010, the GSE´s draws exceeded dividends by $40.5 billion, in the quarter ending September 30, 2010, the Government received more in dividend payments than the companies drew from the Treasury SPSPAs.12

The GSE MBS Purchase Program was created to help support the availability of mortgage credit by temporarily providing additional capital to the mortgage market. By purchasing those securities, Treasury has sought to broaden access to mortgage funding for current and prospective homeowners as well as to promote market stability. In total, the Treasury Department purchased MBS worth approximately $225.5 billion, $29.9 billion of which were purchased in FY 2010. In total, Treasury has received back $61.1 billion in principal and $13.9 billion in interest from MBS holdings. As of September 30, 2010, the valuation of MBS held under HERA programs was $172.2 billion. This activity, combined with purchases by the Federal Reserve, has helped bring down mortgage rates to historically low levels and provide liquidity and stability to housing markets. The GSE MBS purchase program and GSE credit facility expired on December 31, 2009.

HERA also established the HOPE for Homeowners Program,13 which provides another means of helping borrowers faced with foreclosure to refinance through the Federal Housing Administration.

EESA, TARP, and the Office of Financial Stability

The Emergency Economic Stabilization Act of 2008 (EESA) provided authority and facilities that the Secretary of the Treasury could use to restore liquidity and stability to the financial system of the United States, and ensured that such authority and facilities have been used in a manner that protected home values, college funds, retirement accounts, and life savings; preserved home ownership; promoted jobs and economic growth; maximized overall returns to the taxpayers of the United States; and provided public accountability for the exercise of such authority.

The EESA authorized the establishment of the Office of Financial Stability (Treasury-OFS) within the Office of Domestic Finance of the Treasury Department to implement the Troubled Asset Relief Program (TARP). TARP, in conjunction with other Federal Government actions, helped to unfreeze capital and credit markets, bringing down the cost of borrowing for businesses, individuals, and state and local governments, restoring confidence in the financial system, and restarting economic growth. TARP did so faster and at a much lower cost than anticipated.

The EESA provided authority for the TARP to purchase or guarantee up to $700 billion in troubled assets. Treasury-OFS used this authority to help strengthen the U.S. financial system, restore health and liquidity to credit markets to facilitate borrowing by consumers and businesses, and prevent avoidable foreclosures in the housing market. In December 2009, the Secretary of the Treasury certified the extension of TARP authority from its original termination date of December 30, 2009 until October 3, 2010. The Secretary identified two principal objectives for the extension of TARP – to preserve capacity to respond to unforeseen threats to financial stability and to address continuing challenges – and indicated that Treasury-OFS did not expect to use more than $550 billion of the $700 billion authorized by Congress. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act reduced the cumulative authority to $475 billion. Many of the investments under the program, particularly those aimed at stabilizing banks, have thus far delivered positive returns for taxpayers.

Due to improved market conditions, lower utilization of the program, and careful stewardship, the expected cost of TARP over its lifetime continues to decline on a budget basis, from $341 billion in the August 2009 Midsession Review of the President´s 2010 Budget (assuming the full $700 billion of TARP was utilized) to $117 billion in the FY 2011 President´s Budget released in February 2010 (assuming $546 billion of $700 billion TARP authority was utilized), to possibly less than $50 billion, if a proposed restructuring of AIG, as mentioned below, is completed as announced. Under the proposed restructuring, Treasury would receive 1.1 billion shares of AIG common stock in exchange for its TARP investment. This cost is based on the October 1, 2010 market price, but actual proceeds from any future sale would be based on the market price at the time of sale, which could differ materially from the October 1, 2010 market price. Treasury would receive an additional 563 million shares from the trust established by the Federal Reserve Bank of New York (FRBNY). It should be noted that the budget-basis lifetime cost of TARP differs from the cost reflected in the financial statements in that lifetime costs assume that all planned expenditures are made, whereas financial statement costs are based only on transactions through September 30, 2010. As such, the cost of TARP since inception as reported in the financial statements was $18.5 billion, consisting of $23.1 billion of reported TARP net income for FY 2010 and $41.6 billion of reported net cost for FY 2009.

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Chart G shows how TARP´s net investments have changed during FY 2010. Since its inception through September 30, 2010, Treasury disbursed $387.7 billion in direct loans and investments. Over half ($204.1 billion) of those TARP funds have been repaid, and the investments generated $27.8 billion from cash received through interest and dividends, as well as proceeds from the sale and repurchase of assets in excess of cost. As of September 30, 2010, TARP had $179.2 billion in gross outstanding direct loans and equity investments, valued at $142.5 billion.

Treasury is moving quickly to recover the Government´s investments. The Department aims to dispose of its investments as quickly as practicable, consistent with the duty to promote financial stability and to protect taxpayers´ interests.

Treasury also expanded its housing programs under TARP, launching the Housing Finance Agency (HFA) Innovation Fund for the Hardest Hit Housing Markets (HHF) to help state housing finance agencies provide additional relief to homeowners in the states hit hardest by unemployment and declines in home prices. In addition, Treasury and the Department of Housing and Urban Development (HUD) enhanced the FHA Refinance program to enable homeowners whose mortgages exceed the value of their homes to refinance into more affordable mortgages if their lenders agree to reduce the unpaid principal balance by at least ten percent.

Finally, it should be noted that the TARP cost estimates are only estimates, based on current market prices where available. Since market prices change, such estimates will change. The ultimate cost of the outstanding TARP investments is, therefore, subject to significant uncertainty and will depend on, among other things, how the economy, financial markets, and particular companies perform. Additional information concerning the TARP program and other related initiatives can be found at www.financialstability.gov.

The Recovery Act

Improvement in the economic and financial outlook since the spring of 2009 reflects a broad and aggressive policy response that included the initiatives and programs under HERA and TARP as discussed above, other financial stability policies implemented by the FDIC and the Board of Governors of the Federal Reserve, accommodative monetary policy, and the American Recovery and Reinvestment Act of 2009 (ARRA or the Recovery Act). The purpose of the original $787 billion ARRA package is to jump-start the economy and to create and save jobs. Approximately one-third of ARRA is dedicated to tax cuts for businesses and working families. Another third goes toward emergency relief for those who have borne the brunt of the recession. The final third is devoted to investments to create jobs, spur economic activity, and lay the foundation for future sustained growth. 14Cumulative ARRA amounts paid out by Federal agencies as of September 30, 2010 totaled $307.9 billion, as compared to $110.7 billion as of September 30, 2009. It is important to note that amounts spent by the Federal, State, and Local government agencies, as well as by the private sector are constantly changing. Readers may find the most up-to-date information on where and how these funds are being used at www.recovery.gov


11The housing GSEs (Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System) are chartered by the Federal Government and pursue a federally mandated mission to support housing finance. Some GSEs are distinctly established as corporate entities - owned by shareholders of stock traded on the New York Stock Exchange. The obligations of the housing GSEs are not guaranteed by the Federal Government, however, Treasury's actions under HERA provided significant financial support to the Fannie Mae and Freddie Mac.(Back to Content)

12Department of the Treasury FY 2010 Performance and Accountability Report, p. 21.(Back to Content)

13HOPE for Homeowners is a voluntary program for the refinancing of distressed loans by providing Federal Housing Administration insurance for refinanced loans that meet certain eligibility requirements. Both borrower and lender must agree to participate in the program.(Back to Content)

14 Agency Financial & Activity Reports as of September 30, 2010 and 2009. For more information, see the Recovery Act website at www.Recovery.gov. (Back to Content)

Last Updated:  December 07, 2011