sigtarp | january 2011 quarterly report to congress

8/7/2019 SIGTARP | January 2011 Quarterly Report to Congress

1/325

SPE

CIAL

INSPECTORGENERAL

TROUBLEDASSETRELIEFPRO

GR

AM

Office of the Special Inspector Generalfor the Troubled Asset Relief Program

SIGTARPSIGTARPvancing Economic Stability Through Transparency, Coordinated Oversight and Robust EnforcementQuarterly Report to Congres

January 26, 201


2/325

MISSION

SIGTARP TARP , , , , w G, w w, TARP .

STATUTORY AUTHORITYSIGTARP w S 121 E ESz A 2008 (EESA) S IG T A R P A 2009 (SIGTARP A).U EESA SIGTARP A, S I G , , , k T A R P(TARP) S I G. I , SIGTARP S 6 I G A 1978, w .

Ofce o the Special Inspector Generalor the Troubled Asset Relie ProgramG T: 202.622.1419H: [email protected].


3/325

Contents

ec s 3Program Updates and Financial Overview 13

Oversight Activities o SIGTARP 14

SIGTARP Recommendations on the Operation o TARP 15

Report Organization 16

sc 1

the oiCe o the speCial inspeCtor General or thetroubled asset relie proGram 17

SIGTARP Creation and Statutory Authority 19

SIGTARP Oversight Activities Since the October 21 Quarterly Report 19

The SIGTARP Organization 34

sc 2tarp overview 37

TARP Funds Update 39

Financial Overview o TARP 43

Homeowner Support Programs 64

Financial Institution Support Programs 14Asset Support Programs 143

Automotive Industry Support Programs 159

Executive Compensation 17

sc 3tarp operations and administration 173

TARP Administrative and Program Expenditures 175

Current Contractors and Financial Agents 176

sc 4siGtarp reCommendations 183

Recommendations Regarding Implementation o the Small

Business Lending Fund 185

Recommendations Regarding CPP Restructurings and

Recapitalizations and Related SBLF Recommendation 191

Endnotes 22


4/325

appendiCes

A. Glossary

B. Acronyms and Abbreviations 225

C. Reporting Requirements 227

D. Transaction Detail 231

E. Public Announcements o Audits 33

F. Key Oversight Reports and Testimonies 34

G. Correspondence 38

H. Organizational Chart 322


5/325

investigationseXeCUtive sUMMaRY


6/325

speCial inspeCtor General i tRoUbled asset Relie pRogRaM44


7/325

quarterly report to ConGress iJanUaRY 26, 2011

This past quarter, the Oce o the Special Inspector General or the Troubled

Asset Relie Program (SIGTARP) marked its second anniversary. In the time

since its inception in December 28, SIGTARP has had notable success in ulll-

ing its goals o transparency, oversight and enorcement. Through nine quarterly

reports and 13 completed audits, SIGTARP has brought light to some o the

darkest areas o the nancial crisis and the Governments response to it, and has

provided 68 recommendations to Treasury. Treasurys adoption o many o these

recommendations has helped protect aspects o the Troubled Asset Relie Program

(TARP) against vulnerability to raud, with potential losses to raud unlikely to

come even close to standard expectations or a Government program. Where raud

has managed to slip in, SIGTARPs Investigations Division has already produced

outstanding results in bringing to justice those who have sought to prot crimi-nally rom TARP, with 45 individuals charged civilly or criminally with raud, o

whom 13 have been criminally convicted. SIGTARPs investigative eorts have

helped prevent $555.2 million in taxpayer unds rom being lost to raud. And with

142 ongoing investigations (including 64 into executives at nancial institutions

that applied or and/or received TARP unding through TARPs Capital Purchase

Program [CPP]), much more remains to be done.

Last quarter also marked the second anniversary or TARP. Now in its third year

o operation, TARP remains a study in contrasts. On the nancial side, TARPs

outlook has never been better. Not only did TARP unds help head o a cata-

strophic nancial collapse, but estimates o TARPs ultimate direct nancial cost to

the taxpayer have allen substantially, rom the Oce o Management and Budgets(OMB) August 29 estimate o $341 billion to a November 21 Congressional

Budget Oce (CBO) estimate o just $25 billion. Indeed, with the recent closing

o American International Group, Inc.s (AIG) recapitalization plan, there is a

chance that TARP may break even or possibly turn a prot on one o its most con-

troversial transactions, while General Motors Companys recent initial public o-

ering demonstrates Treasurys ability to exit some o its most dicult investments.

While Treasurys ultimate return on its investment depends on a host o variables

that are largely unknowable at this time, TARPs nancial prospects are today ar

better than anyone could have dared to hope just two years ago. At the same time,

a tunnel-vision ocus on the good nancial news should not distract rom the hard

work still ahead, with more than $16 billion in TARP unding still outstanding

and an additional $59.7 billion available to be spent, or rom the careul and neces-

sary assessment o TARPs signicant, non-nancial costs. Those costs include

the damage to Government credibility that has plagued the program, as detailed

in SIGTARPs October 21 Quarterly Report, the ailure o programs designed

to help Main Street rather than Wall Street, and perhaps TARPs most signicant

legacy, the moral hazard and potentially disastrous consequences associated with

the continued existence o nancial institutions that are too big to ail.


8/325


tarp t bg Earlier this month, SIGTARP published the audit report Extraordinary Financial

Assistance Provided to Citigroup, Inc., which examines a series o transactions

over several months that resulted in the Governments remarkable bailout o one

o the worlds largest nancial institutions. The report details how the Government

assured the world in 28 that it would use TARP to prevent the ailure o any

major nancial institution and then demonstrated its resolve by standing behind

Citigroup Inc., along with others such as AIG and Bank o America Corp. (Bank

o America). Indeed, public statements by then-Secretary o the Treasury Henry

Paulson in late 28 and Treasury Secretary Timothy Geithner in early 29 made

clear that they were ready, willing, and able to use TARP unds to ensure that not

one o the nations largest banks would be permitted to ail. While these state-ments and actions succeeded in reassuring troubled markets, they also did much

more: by eectively guaranteeing these institutions against ailure, they encour-

aged uture high-risk behavior by insulating the risk-takers who had proted so

greatly in the run-up to the crisis rom the consequences o ailure, and gave an

unwarranted competitive advantage, in the orm o enhanced credit ratings and

access to cheaper credit and capital, to institutions perceived by the market as

having an implicit Government guarantee. In many ways, TARP has thus helped

mix the same toxic cocktail o implicit guarantees and distorted incentives that led

to disastrous consequences or the Government-sponsored enterprises (GSEs)

the Federal National Mortgage Association (Fannie Mae) and the Federal Home

Loan Mortgage Corporation (Freddie Mac).Institutions such as Citigroup operate in an environment where size mat-

ters because the then-explicit and now implicit Government guarantee that they

will not be allowed to ail results in a gross distortion o a normally unctioning

market, where an institutions creditors, shareholders, and executives bear the

brunt o poor decisions, not the taxpayers. First, or executives at such institu-

tions, the Government saety net provides the motivation to take greater risks than

they otherwise would in search o ever-greater prots. This heads I win, tails the

Government bails me out mentality promotes behavior that, while it may ben-

et shareholders and executives in the short term i the risks pay o, increases

the likelihood o ailure and, thereore, the possibility o another taxpayer-unded

bailout. Second, an institutions too big to ail status has a dramatic impact on its

creditors and other counterparties, which then gives it an advantage over its smaller

competitors. Ratings agencies continue to give such institutions higher credit rat-

ings based on the existence o an implicit Government backstop. Creditors, in turn,

give those institutions access to debt at a price that does not ully account or the

risks created by their behavior. Cheaper credit is eectively a subsidy, which trans-

lates into greater prots, which allows the largest institutions to become even larger

relative to the economy and materially disadvantages smaller banks. The prospect


9/325


o a Government bailout also reduces market discipline, giving creditors, investors,

and counterparties less incentive to monitor vigilantly those institutions that they

perceive wont be allowed to ail. In short, the continued existence o institutions

that are too big to ail an undeniable byproduct o ormer Secretary Paulson

and Secretary Geithners use o TARP to assure the markets that during a time o

crisis that they would not let such institutions ail is a recipe or disaster. These

institutions and their leaders are incentivized to engage in precisely the sort o

behavior that could trigger the next nancial crisis, thus perpetuating a doomsday

cycle o booms, busts, and bailouts.

t d- ac t bg The Dodd-Frank Wall Street Reorm and Consumer Protection Act (Dodd-FrankAct or Act), signed into law by the President last July, was intended, in part, to

end too big to ail and to protect the American taxpayer by ending bailouts.

Secretary Geithner, testiying beore the Congressional Oversight Panel (COP) in

June 21, shortly beore the Acts passage, said The reorms will end too big to

ail.1 The Acts proponents cite several provisions as particularly important compo-

nents o this eort. These include, among others, creation o the Financial Stability

Oversight Council (FSOC), charged with, among other things, the responsibility

or developing the specic criteria and analytic ramework or assessing systemic

signicance; granting the Federal Reserve new power to supervise institutions

that FSOC deems systemically signicant; granting the Federal Deposit InsuranceCorporation (FDIC) new resolution authority or nancial companies deemed

systemically signicant; requiring the development o living wills designed to

assist in the orderly liquidation o such companies; and granting regulatory author-

ity to set more stringent capital, liquidity, and leverage requirements and to limit

certain activities that might increase systemic risk.

Whether these provisions, which rely heavily on the discretion and actions o

the nancial regulators, will ultimately be successul remains to be seen. First,

many commentators, rom Government ocals to nance academics to legisla-

tors, have expressed concern that the Act does not solve the problem. For example,

Kansas City Federal Reserve Bank President Thomas Hoenig has repeatedly

expressed doubt that our too-big-to-ail problem has been solved,2 noting in

December 21 that ater this round o bailouts, the ve largest nancial institu-

tions are 2 percent larger than they were beore the crisis. They control

$8.6 trillion in nancial assets the equivalent o nearly 6 percent o gross

domestic product. Like it or not, these rms remain too big to ail. Massachusetts

Institute o Technology proessor Simon Johnson argued in September 21 that

there is nothing [in the Act] that ensures our biggest banks will be sae enough

or small enough or simple enough so that in the uture they cannot demand


10/325


bailout the bailout potential exists as long as the government reasonably ears

global nancial panic i such banks are allowed to deault on their debts. Senators

Sherrod Brown and Ted Kauman, among others, have noted that too big to ail

isnt just the United States problem, but the worlds, and have argued that by itsel

the Dodd-Frank Act cannot provide theglobal regulatory ramework required to

resolve incredibly complex mega-banks operating in scores o countries. Senator

Kauman and others have also questioned the wisdom o delegating so much re-

sponsibility to the very same regulators who perormed so poorly in identiying the

most recent crisis beore it struck. Others, including Congressman Spencer Bachus

and Speaker o the House John Boehner, have expressed concern that the Dodd-

Frank Acts provisions, particularly those relating to designation and resolution, will

institutionalize Government bailouts.3

Second, the new authorities in the Dodd-Frank Act are a work in progress a

tremendous amount o research and rule making by FSOC, FDIC, and a host

o other regulators remains to be done. Their tasks will not be easy. Secretary

Geithner told SIGTARP in December 21, or example, that identiying institu-

tions as systemically signicant, one o the Acts premier mandates, depends too

much on the state o the world at the time, and that he believes you wont be able

to make a judgment about whats systemic and whats not until you know the na-

ture o the shock. I the Secretary is correct, and regulators have diculty properly

identiying non-banks as systemically signicant and thereore subject to the Acts

restrictions, then the Acts eectiveness will undoubtedly be undermined. Even

in the realm o the possible, the path regulators choose to take could make all thedierence. FDIC Chairman Sheila Bair, or example, has argued that FSOC should

use the Dodd-Frank Acts living will provisions as a tool to orce companies to

simpliy their operations and shrink their size i necessary to ensure that orderly

liquidation is possible:

Under Dodd-Frank, the FDIC and the Federal Reserve wield con-

siderable authority to shape the content o these [living will] plans.

I the plans are not ound to be credible, the FDIC and the Fed can

even compel the divestiture o activities that would unduly interere

with the orderly liquidation o these companies. The success or

ailure o the new regulatory regime will hinge in large part on how

credible those resolution plans are as guides to resolving those com-

panies. And let us be clear: we will require these institutions to make

substantial changes to their structure and activities i necessary to

ensure orderly resolution. I we ail to ollow through, and dont ensure

that these institutions can be unwound in an orderly ashion during a

crisis, we will have allen short o our goal o ending Too Big to Fail.

(Emphasis added.)4


11/325


I either Chairman Bairs position prevails, and the Dodd-Frank Act is used to

simpliy and shrink large institutions as necessary, or i some other eective regime

is adopted along with similar provisions being implemented internationally, then

perhaps in the long run the Act will have a chance to end too big to ail. In short,

the proo will be in the pudding, and the pudding is still being cooked.

Finally, even i all the required regulations are properly calibrated and ully

implemented, the ultimate success o the Dodd-Frank Act depends to a certain

degree on market perception. As long as the relevant actors (executives, ratings

agencies, creditors and counterparties) believe there will be a bailout, the problems

o too big to ail will almost certainly persist.

Federal Reserve Chairman Ben Bernanke, in a speech to community bankers in

March 21, summed up the problem this way:

The costs to all o us o having rms deemed too big to ail were

stunningly evident during the days in which the nancial system

teetered near collapse. But the existence o too-big-to-ail rms also

imposes heavy costs on our nancial system even in more placid

times. Perhaps most important, i a rm ispublicly perceived as too

big, or interconnected, or systemically critical or the authorities to

permit its ailure, its creditors and counterparties have less incentive

to evaluate the quality o the rms business model, its management,

and its risk-taking behavior. As a result, such rms ace limited mar-

ket discipline, allowing them to obtain unding on better terms thanthe quality or riskiness o their business would merit and giving them

incentives to take on excessive risks. (Emphasis added.)

In other words, unless and until institutions currently viewed as too big to

ail are either broken up so that they are no longer perceived to be a threat to the

nancial system, or a structure is put in place that gives adequate assurance to the

market that they will be let to suer the ull consequences o their own reckless-

ness, the prospect o more bailouts will continue to uel more bad behavior with

potentially disastrous results.

Thus ar, the Dodd-Frank Act appears not to have solved the perception prob-

lem. The largest institutions continue to enjoy access to cheaper credit based on

the existence o the implicit Government guarantee against ailure. Indeed, earlier

this month one o the worlds most infuential credit rating agencies, Standard

& Poors (S&P), announced its intention to make permanent the prospect o

Government support as a actor in determining a banks credit rating, a radical

change rom pre-TARP practice. According to S&P, We believe that banking

crises will happen again. We expect this pattern o banking sector boom and bust


12/325


and government support to repeat itsel in some ashion, regardless o governments

recent and emerging policy response.(Emphasis added.) S&P intends to recognize

government support throughout the cycle and not just during a crisis, and has

described the U.S. Governments likelihood o support or a systemically impor-

tant bank as moderately high. In short, S&P is telling the market that it does not

believe that the Dodd-Frank Act has yet ended the problems o too big to ail, and

given the discounts that such institutions continue to receive, the market seems to

be listening.

Secretary Geithner, in a December 21 interview with SIGTARP, likewise

acknowledged that despite the better tools provided by the Dodd-Frank Act, [i]n

the uture we may have to do exceptional things again i we ace a crisis as large as

the last one. To the extent that those exceptional things include taxpayer-support-ed bailouts,* his acknowledgement serves as an important reminder that TARPs

price tag goes ar beyond dollars and cents, and that the ultimate cost o TARP will

remain unknown until the next nancial crisis occurs.

hampAs SIGTARP discussed in its October 21 Quarterly Report, ater two years,

TARPs Main Street goals o increas[ing] lending, and promot[ing] jobs and

economic growth had been largely unmet, but it is TARPs ailure to realize its

most specic Main Street goal, preserving homeownership, that has had perhaps

the most devastating consequences. Treasurys central oreclosure prevention e-

ort designed to address that goal the Home Aordable Modication Program(HAMP) has been beset by problems rom the outset and, despite requent re-

tooling, continues to all dramatically short o any meaningul standard o success.

Indeed, even the good news o alling estimates or TARPs cost is driven in part

by the ineectiveness o HAMP and related programs, which provide or TARP-

unded grants and incentives. In its most recent TARP cost estimate, CBO cited

diminished expectations or participation in TARPs housing programs in lowering

its anticipated cost, estimating that all o Treasurys oreclosure programs combined

will spend only $12 billion out o an allocation o approximately $46 billion. While

Treasury continues to insist that HAMP will expend the ull allocation o TARP

unding, i CBO is correct then considerable TARP unds that could have been

made available through better program design and administration may well never

reach the distressed homeowners on Main Street whom Congress intended to ben-

et rom TARP just as much as the rebounding Wall Street nancial institutions.

Today, HAMP appears to be under siege, with a chorus o criticisms rom all

points on the ideological spectrum growing more insistent and calls or termination

* i w r sigtaRp rm h cx h rw, cu h rrc mh xc h c uur c cr, h scrry ghr w rrr h y uur u. Wh trury h u h qu ru scrry ghr r h cx whch w r sigtaRp u rrexrrry c ac Cru, ic., trury kr h rry u h scrry ghrw cuy rrr u h h d-rk ac w w u.


13/325


or a dramatic restructuring gaining traction. The numbers are remarkably discourag-

ing. According to RealtyTrac data, a record 2.9 million homes received oreclosure

lings in 21, up rom 2.8 million in 29, and 2.3 million in 28. RealtyTrac

predicts that lings will be 2% higher in 211, crossing the 3 million threshold.

Similarly, the rms data reveal that bank repossessions continue to increase, rom

just under 82, in 28 to over 918, in 29 to 1.5 million in 21.

In contrast, the number o permanent mortgage modications under HAMP

remains anemic there were just under 522, ongoing permanent modica-

tions as o December 31, 21, with approximately 238, o those unded by

and attributable to TARP. The remaining were unded outside o TARP by the

GSEs. A combined total o more than 792, trial and permanent modications

have been cancelled, with more than 152, trial modications still in limbo.These permanent modication numbers pale in comparison not only to oreclosure

lings, but also to Treasurys initial prediction that HAMP would help up to 3 to

4 million at-risk homeowners avoid oreclosure by reducing monthly payments to

sustainable levels.

While Treasury continues its astonishing silence by reusing to provide an

estimate, goal, or projection o the total number o permanent modications it

expects to complete and maintain, in December 21, the Congressional Oversight

Panel (COP) estimated that, i current trends hold, HAMP will result in only

7, to 8, eective permanent modications.5 Unortunately, COPs

dispiriting projection appears all too reasonable, with participation trends getting

worse and worse with each passing quarter. For example, HAMP produced only anet increase o slightly more than 18, permanent modications per month over

the most recent quarter, down 35% rom the quarter beore that, with the TARP

portion yielding only approximately 1, modications per month. And even

those who do obtain permanent modications still remain in danger o redeaulting

on their loans. That danger persists notwithstanding Treasurys attempt to launch

two programs unded by more than $12 billion in TARP unds to address one o

the leading indicators o redeault, underwater mortgages in which borrowers owe

more than their homes are worth. Treasury reported to SIGTARP that FHA Short

Renance, launched on September 7, 21, had only resulted in 15 renances as

o December 31, 21, and was unable to report any inormation about homeown-

er participation in its Principal Reduction Alternative program, which was available

to servicers in June 21 but ormally launched on October 1, 21.

As SIGTARP and the other oversight bodies have chronicled in audits and

reports, HAMPs ailure to have a material impact on the oreclosure crisis

has many causes, starting with a rushed launch based on inadequate analysis

and without ully developed rules, which has required requent changes to

program guidelines and caused unnecessary conusion and delay.6 Perhaps most

undamentally, Treasury has steadastly reused to adopt meaningul goals and

benchmarks or HAMP despite consistent and repeated recommendations rom


14/325


SIGTARP and the other TARP oversight bodies COP and the GovernmentAccountability Oce (GAO). Rather than develop meaningul goals and

metrics or the program, which would allow meaningul oversight, promote

accountability, and provide guidance or useul change, Treasury instead

has regularly changed its criteria or success, citing at dierent times the

total number o trial modication oers extended to borrowers, regardless o

whether they were accepted, and then the total number o trial modications,

regardless o whether they became permanent, which ar ewer than hal

have actually done. More recently, ater SIGTARP and others pointed out the

destructive impact o many ailed trial modications, Treasury has retreated to

arguing that a benet o HAMP has been its impact on private modications

that occur outside o the HAMP program. This too is a questionable measure

o success. While Treasury may deserve some credit or having had a positive,i inadvertent, impact on industry practice, according to the December 21

COP report, when pressed, Treasury acknowledges that there is no clear

causal link between HAMP and proprietary modications, which oten include

more unavorable terms or the borrower, are more likely to redeault, and

permit broader imposition o ees.7 Regardless o Treasurys stated criteria,

however, while HAMP may provide a signicant benet or those who are

ortunate enough to benet rom a sustainable permanent modication, given

the current pace o oreclosures, HAMPs achievements look remarkably

modest, and hope that this program can ever meet its original expectations is

slipping away.

scOne o the great rustrations with HAMP, as expressed by legislators, consumer

advocates, oversight bodies, and even Treasury itsel, has been the abysmal per-

ormance o loan servicers, which not only operate as the point o contact or

distressed homeowners seeking to participate in the program but also administer

the loans on behal o investors. Anecdotal evidence o their ailures has been

well chronicled. From the repeated loss o borrower paperwork, to blatant ailure

to ollow program standards, to unnecessary delays that severely harm borrowers

while beneting servicers themselves, stories o servicer negligence and misconduct

are legion, and the servicers conficts o interest in administering HAMP they

too oten have nancial interests that dont align with those o either borrowers or

investors have been described both by SIGTARP and COP.

Treasurys reaction to servicer non-compliance with the requirements o

HAMP and its related programs appears to be driven largely by the ear that orc-

ing servicers to comply with their contractual obligations will drive them away

rom HAMP. Despite nearly daily accounts o errors and more serious miscon-

duct, Treasury reports that it has yet to impose a nancial penalty on, or claw

back incentives rom, a single servicer or any reason other than ailure to provide


15/325


data. Treasury recently told COP that since participation by the servicers is purely

voluntary, our abilities to enorce specic perormance are extremely limited

and aggressive enorcement [is] dicult. This same ear o servicer withdrawal

was oered by Treasury in response to SIGTARPs recommendation that Treasury

reconsider its decision to make its Principal Reduction Alternative program entirely

voluntary, and Treasury continues to operate an appeals system that leaves the

ultimate decision o whether to approve or deny a modication squarely with the

servicer. At some point, Treasury needs to ask itsel what value there is in a pro-

gram under which not only participation, but also compliance with the rules, is

voluntary. TARPs oversight bodies SIGTARP, COP, and GAO have all called

on Treasury to get tough on servicers. Without meaningul servicer accountability,

the program will continue to founder. Treasury needs to recognize the ailings oHAMP and be willing to risk oending servicers. And i getting tough means risk-

ing servicer fight, so be it; the results could hardly be much worse.

As HAMP approaches its second anniversary, the time has come or Treasury

to set realistic and meaningul goals or its collective oreclosure prevention eorts,

even though those goals will necessarily be ar more modest than those envisioned

when the program was announced. Doing so, in conjunction with a thorough

reevaluation o its ailing programs and imposing discipline on servicers with real

penalties or violating program guidelines, will maximize the potential benets or

struggling homeowners going orward.

pRogRaM Updates and inanCial oveRvieWTARP consists o 13 implemented programs. Because TARP investment authority

expired on October 3, 21, no new obligations may be made with TARP unds.

However, dollars that have already been obligated to existing programs may still

be expended. As o October 3, 21, $474.8 billion had been obligated across

TARP to provide support or U.S. nancial institutions, the automobile industry,

the markets in certain types o asset-backed securities, and homeowners. O the

obligated amount, $389.8 billion had been spent as o December 31, 21, leaving

$8. billion in ve programs remaining as obligated and available to spend.

When including the January 14, 211, recapitalization o AIG, $41.1 billion had

been spent and $59.7 billion still remains available to spend. As o December 31,

21, 148 TARP recipients had paid back all or a portion o their principal or

repurchased shares, or an aggregate total o $235.4 billion o repayments and a

$5 billion reduction in exposure to possible uture liabilities, leaving $149.4 billion

in TARP unds outstanding (not including an additional $2.3 billion in TARP

unds expended in connection with the AIG recapitalization on January 14, 211).

In addition to the principal repayments, Treasury has received interest and divi-

dend payments on its investments, as well as revenue rom the sale o its warrants.

For a description o the role o loan servicers

in the residential mortgage business, and the

relationship between that role and HAMP,

see SIGTARPs October 2010 Quarterly

Report, Section 3: The Economics o Loan

Servicing.


16/325


As o December 31, 21, the Government had received $35.2 billion in interest,

dividends, and other income, including $1.2 billion in proceeds that had been

received rom the sale o warrants and preerred stock received as a result o exer-

cised warrants. At the same time, some TARP participants have missed dividend

payments: among CPP participants, 155 have missed dividend or interest payments

to the Government, although some o them made the payments on a later date. As

o December 31, 21, there were $276.4 million in unpaid CPP dividends.

oveRsigHt aCtivities o sigtaRp

SIGTARP actively strives to ulll its audit and investigative unctions. Since itsinception, SIGTARP has issued 13 audit reports, including two that have been

issued since the end o the last quarter. In addition to Extraordinary Financial

Assistance Provided to Citigroup, Inc., discussed earlier, SIGTARP also issued the

audit report, Selecting Fund Managers or the Legacy Securities Public-Private

Investment Fund. This document, released on October 7, 21, discussed the

process or selecting und managers to participate in the Public-Private Investment

Program. Detailed discussion o these audits is included in Section 1: The Oce

o the Special Inspector General or the Troubled Asset Relie Program o this

report, which also discusses SIGTARPs announcement o three new audit projects

during the past quarter, as well as 1 other previously announced audits in process.

SIGTARPs Investigations Division has developed into a highly sophisticatedwhite-collar investigative agency. As o December 31, 21, SIGTARP had 142

ongoing criminal and civil investigations, many in partnership with other law en-

orcement agencies. Since SIGTARPs inception, its investigations have delivered

substantial results, including:

asset recoveries o $151.8 million, with an additional estimated savings o

$555.2 million through raud prevention

civil or criminal actions against 45 individuals to date, including 22 senior

ocers (Chie Executive Ocers, owners, ounders, or senior executives) o

their organizations

criminal convictions o 13 deendants or raud

civil cases naming 12 corporate entities as deendants

Although much o SIGTARPs investigative activity remains condential,

over the past quarter there have been signicant public developments in several

o SIGTARPs investigations. For a description o recent developments, includ-

ing those relating to SIGTARP investigations into the Shmuckler Group, LLC,

the Residential Relie Foundation, Park Avenue Bank, Omni National Bank, and

Nations Housing Modication Center, see Section 1: The Oce o the Special

Inspector General or the Troubled Asset Relie Program o this report.


17/325


sigtaRp ReCoMMendations on tHeopeRation o taRpOne o SIGTARPs oversight responsibilities is to provide recommendations to

Treasury so that TARP programs can be designed or modied to acilitate eec-

tive oversight and transparency and to prevent raud, waste, and abuse. Section 4:

SIGTARP Recommendations includes new recommendations, provides updates

on existing recommendations, and summarizes implementation measures or previ-

ous recommendations.

This quarter, Section 4 includes a ollow-up discussion o recommendations

regarding the implementation o the Small Business Lending Fund (SBLF) that

were rst published in SIGTARPs October 21 Quarterly Report. SIGTARPexamines Treasurys response to three recommendations designed to ensure the

soundness o TARP recipients that may seek to enter SBLF and to prevent TARP

recipients rom receiving windall benets through SBLF without any relevant

increase in lending. While Treasury generally agrees with and is implement-

ing SIGTARPs recommendation that all institutions applying or SBLF invest-

ment undergo a new nancial health analysis, it has rejected the remaining two

SIGTARP recommendations. Those recommendations were designed to prevent

SBLF rom providing windall benets to existing CPP participants who renance

to SBLF and to reduce the risk o potentially needless harm to taxpayers. Section 4

reviews Treasurys responses in detail and sets orth SIGTARPs discussion o those

responses.Additionally, Section 4 provides two new SIGTARP recommendations related to

the recapitalization o Treasurys CPP investments, or their renancing into SBLF.

In the past, as part o its due diligence on CPP institutions seeking to recapitalize,

Treasury consulted with SIGTARP in advance o such action in order to determine

whether such institutions were the subject o an ongoing criminal investigation

by SIGTARP. Doing so gave Treasury the opportunity to avoid shiting the risk o

loss rom raud onto private investors who might participate in the restructuring

and to examine with particular care the inormation provided by the CPP institu-

tion. Recently, it appears that Treasury has stopped identiying these candidates

to SIGTARP in advance o a public announcement. As detailed in Section 4,

SIGTARP recommends that Treasury return to prior practice. In addition, because

similar concerns will arise when CPP recipients seek to renance into the SBLF

program, and at the same time seek additional taxpayer dollars, SIGTARP recom-

mends that Treasury should similarly consult with SIGTARP to learn whether the

entity is the subject o an ongoing investigation.


18/325


RepoRt oRganiZationThe report is organized as ollows:

Section 1 discusses the activities o SIGTARP.

Section 2 details how Treasury has spent TARP unds thus ar and contains an

explanation or update o each program.

Section 3 describes the operations and administration o the Oce o Financial

Stability, the oce within Treasury that manages TARP.

Section 4 discusses SIGTARPs recommendations to Treasury with respect to

the operation o TARP.

The report also includes numerous appendices containing, among other things,

gures and tables detailing all TARP investments through December 31, 21,

except where otherwise noted.


19/325

investigationsseCt ion 1tHe oiCe o tHe speCialinspeCtoR geneRal oR tHetRoUbled asset Relie pRogRaM


20/325



21/325


sigtaRp CReation and statUtoRY aUtHoRitYThe Oce o the Special Inspector General or the Troubled Asset Relie Program

(SIGTARP) was created by Section 121 o the Emergency Economic Stabilization

Act o 28 (EESA). Under EESA, SIGTARP has the responsibility, among

other things, to conduct, supervise, and coordinate audits and investigations o the

purchase, management, and sale o assets under the Troubled Asset Relie Program

(TARP) and, with certain limitations, other actions taken under EESA. SIGTARP

is required to report quarterly to Congress to describe SIGTARPs activities and to

provide certain inormation about TARP over that preceding quarter. EESA gives

SIGTARP the authorities listed in Section 6 o the Inspector General Act o 1978,

including the power to obtain documents and other inormation rom Federal agen-cies and to subpoena reports, documents and other inormation rom persons or

entities outside the Government.

TARP investment authority expired on October 3, 21. As a result, Treasury

cannot make new purchases or guarantees o troubled assets. This termination o

authority, however, does not aect Treasurys ability to administer existing troubled

asset purchases and guarantees. In accordance with Section 16(e) o EESA,

Treasury may expend TARP unds ater October 3, 21, as long as it does so pur-

suant to obligations entered into beore that date. SIGTARPs oversight mandate

did not end with the expiration o Treasurys authorization or new TARP unding.

Rather, under the authorizing provisions o EESA, SIGTARP is to carry out its

duties until the Government has sold or transerred all assets and terminated allinsurance contracts acquired under TARP. In other words, SIGTARP will remain

on watch as long as TARP assets remain outstanding.

sigtaRp oveRsigHt aCtivities sinCe tHeoCtobeR 2010 QUaRteRlY RepoRt

SIGTARP has continued to ulll its oversight role on multiple parallel tracks:

auditing various aspects o TARP and TARP-related programs and activities; in-

vestigating allegations o raud, waste, and abuse in TARP programs; coordinating

closely with other oversight bodies; and striving to promote transparency in TARP

programs.

siGtarp a acSIGTARP has initiated a total o 26 audits and two evaluations since its inception.

SIGTARP has issued a total o 13 audit reports, including two since the close o

the quarter ended September 3, 21. On October 7, 21, SIGTARP issued

Selecting Fund Managers or the Legacy Securities Public-Private Investment

Fund, and on January 13, 211, SIGTARP issued Extraordinary Financial


22/325


Assistance Provided to Citigroup, Inc. In the past quarter, SIGTARP also an-

nounced three new audit projects. In addition, 1 other previously announced

audits and evaluations are in progress; SIGTARP anticipates releasing reports on

those audits in the coming months.

scg mg lgc sc pc-pi On October 7, 21, SIGTARP released the audit report, Selecting Fund

Managers or the Legacy Securities Public-Private Investment Fund. The report

discussed the process or selecting und managers to participate in the Public-

Private Investment Program (PPIP). PPIP is designed to marry private capitalwith TARP unding to create individual investment unds, known as Public-Private

Investment Funds (PPIFs) that purchase certain mortgage-backed securities.

According to Treasury, the program was intended to restart the market or legacy

securities.

SIGTARP ound that Treasury constructed a reasonable architecture to accom-

plish its objective o identiying larger rms to manage PPIFs. It hired a law rm to

assist in designing the application and establishing the selection criteria. In review-

ing 141 applications, Treasury received assistance rom other Federal Government

agencies and rom an independent advisor with expertise in evaluating complex

investments. Treasury conducted a multi-stage evaluation process with each stage

reducing the number o applicants moving to the next stage, and perormed duediligence reviews. It also adequately documented the selection process. Treasury

determined, and SIGTARP agreed, that the legal structure o PPIP did not require

it to use the Federal Acquisition Regulation in selecting und managers.

While the selection process ultimately succeeded in creating nine privately

managed unds with the means to purchase almost $3 billion in distressed assets,

several aspects o the process are noteworthy:

Treasurys published selection criteria created conusion and uncertainty among

applicants. While Treasury published ve criteria, it did not state how many o

these criteria applicants were required to meet, or make clear how applicants

could demonstrate that they met the criteria. The application introduced urther

uncertainty with the caveat that Treasury only anticipated using the ve

criteria, suggesting that the criteria might change ater the applications were

submitted. Ater receiving only our applications, and dozens o requests or

clarication rom potential applicants, Treasury responded that it would use a

holistic approach in which ailure to meet any one criteria [would] not neces-

sarily disqualiy a proposal. Internally, Treasury interpreted this modication to

mean that all applicants had to meet our o the ve stated criteria in order to be

considered, though it did not reveal that interpretation to applicants.


23/325


Treasury rened its criteria during the selection process in a way that impaired

the transparency o the process. For example, in order or an applicant to be

deemed as meeting the criterion that it demonstrate it had the operational

capacity to manage unds consistent with Treasurys investment objective,

Treasury imposed an absolute requirement that each applicant demonstrate

that it had a minimum o $1 billion in total assets under management. Treasury

did not, however, disclose this change to applicants. This single, undisclosed

requirement had the eect o reducing the applicant pool by more than 4%.

While perhaps technically compliant with its public statement that no one

criterion would result in disqualication, this new undisclosed threshold had

the additional consequence that any applicants that ailed to meet it would alsoautomatically ail to meet a separate criterion that it have at least $1 billion in

eligible assets, so that one strike instantly became two, and with two strikes they

were out.

Treasurys published selection criterion that und managers have at least $1

billion in assets under management also risked unnecessarily discouraging ap-

plications rom smaller asset managers that might have had signicant expertise.

The eventual size o PPIP and the act that two-thirds o the selected managers

ailed to meet the threshold suggest that it was unnecessary.

Treasury gave an advantage to larger applicants with respect to the requirement

that applicants demonstrate a capacity to raise $5 million in private capital.

O 13 applicants that ailed to make a statement on whether or not they wouldbe able to raise the capital, Treasury passed the 1 that reerenced $7.5 billion

or more in total assets under management and rejected the three that reer-

enced between $1 billion and $3 billion in assets. Ater the application process

was completed, Treasury waived the $5 million threshold or the two PPIF

managers that could not meet it, putting into question the signicance o a

criterion that more than hal o the applicants were deemed unable to meet.

In sum, while Treasury designed and adequately documented a reasonable

selection process, the implementation o that process had several faws. First, the

initial selection criteria created conusion among applicants; subsequent attempts

at clarication ailed to remedy that conusion and were arguably misleading; and

Treasurys undisclosed modication to one criterion impaired transparency. Second,

the emphasis on the size o potential und managers, while perhaps understand-

able, not only threatened to discourage qualied potential applicants but also,

given the selections ultimately made, may have been unnecessary. As a result, the

taxpayer may have lost the benet o the participation o qualied, albeit smaller,

und managers because they were avoidably deterred rom applying or unnecessar-

ily rejected.


24/325


Finally, Treasury encouraged applicants to orm partnerships with small, vet-

eran-, minority-, and woman-owned private asset managers, which resulted in the

inclusion o one or more minority-owned partners or eight o the nine selected

und managers. But without guidance rom Treasury on either the nature or the

extent o the expected role o a minority partner, applicants were let to their own

interpretation, which resulted in the minority-owned businesses largely participat-

ing to raise capital, with only two actually involved in managing assets, and one

rm that appears to provide no assistance whatsoever.

Treasury responded to the report by letter dated October 4, 21. In its re-

sponse, Treasury described the audits summary o the und manager selection

process as inormative and likely to be helpul in explaining that process to the pub-

lic. Treasury also stated that it strongly disagree[s] with a number o [SIGTARPs]statements and conclusions regarding certain details o the und manager selection

process that [SIGTARP] believe[s] were not sucient. Treasury added that it will

continue to review the report and may respond more ully at a later date.

As o the drating o this report, Treasury had not provided a more complete

response to the audit. As a result SIGTARP, and thereore Congress and the public

at large, has no way o knowing what statements and conclusions Treasury sup-

posedly strongly disagrees with in its October 4, 21, letter. In that context,

it is important to note that Treasury was given an opportunity to review a discus-

sion drat o the report and to provide comments. Treasury did so, changes were

made to the report as appropriate, and at the end o that process, Treasury oered

no material actual objections to the drat audit report. Treasury might not agreewith how the audits conclusions portray Treasurys decision-making process on

the selection o und managers without a more complete response it is dicult

to know but Treasury has not challenged the essential underlying acts upon

which those conclusions are based. Indeed, Treasurys ailure to document in a

more complete response the statements in the report to which it supposedly so

strongly objects suggests that it simply is unable to so. SIGTARP strongly encour-

ages Treasury to avoid what has become a too-requent response to SIGTARPs

audit reports: issue a vague response at the time o publication suggesting that it

disagrees with the actual oundation o the report, along with an equally vague

promise to detail its objection at a later date, and then ail to do so. While perhaps

serving some short-term goal, such an approach betrays Treasurys ot-stated but

insuciently acted upon commitment to transparency.

e c ac p Cg, ic.(Cg)On January 13, 211, SIGTARP released the audit report Extraordinary Financial

Assistance Provided to Citigroup, Inc.The report examined the Governments deci-

sion to provide Citigroup extraordinary nancial assistance in late November 28,


25/325


the method o identiying the Citigroup assets that the Government would guaran-

tee as part o that assistance, and Citigroups termination o the assistance.

In November 28, even though it had received $25 billion rom TARPs

Capital Purchase Program just weeks earlier, Citigroup teetered on the brink o

ailure. Federal ocials, worried that Citigroup would ail absent a strong state-

ment o support rom the Federal Government, and that such ailure could cause

catastrophic damage to the economy, decided to rescue one o the worlds largest

nancial institutions. Late on November 23, 28, ollowing a rantic ew days

dubbed Citi weekend, Citigroup agreed to a Government proposal that would

provide Citigroup asset guarantees and a $2 billion capital inusion in exchange

or preerred shares o Citigroup stock. The essential purpose o the deal, as then

Treasury Secretary Henry Paulson and then Federal Reserve Bank o New YorkPresident Timothy Geithner later conrmed to SIGTARP, was to assure the world

that the Government would not let Citigroup ail.

SIGTARP ound that the Government constructed a plan that not only

achieved the primary goal o restoring market condence in Citigroup, but also

careully controlled the risk o Government loss on the asset guarantee. The

Government summarily rejected Citigroups initial proposal or an asset guarantee

and made a take-it-or-leave it oer that Citigroup only reluctantly accepted, against

the advice o Citigroup insiders who considered the Governments terms too ex-

pensive in light o the assistance provided. In the end, Citigroup accepted the deal

chiefy because o its expected impact on the markets perception o Citigroups

viability. Ater the deal was announced, that impact was immediate Citigroupsstock price stabilized, its access to credit improved, and the cost o insuring its debt

declined. And while the transactions hardly solved all o Citigroups problems

just months later the Government was compelled to signicantly restructure its

ownership interest in a manner that let it as Citigroups single largest common

stockholder the Government incurred no losses and even proted on its overall

investment in Citigroup by more than $12 billion. Nevertheless, two aspects o the

Citigroup rescue bear noting.

First, the conclusion o the various Government actors that Citigroup had to

be saved was strikinglyad hoc. While there was consensus that Citigroup was too

systemically signicant to be allowed to ail, that consensus appeared to be based

as much on gut instinct and ear o the unknown as on objective criteria. Citigroup

CEO Vikram Pandit summed up the eeling at the time when he told SIGTARP

that no one knew what the systemic eects o a Citigroup ailure would be, and no

one wanted to nd out.

Given the urgent nature o the crisis surrounding Citigroup, the ad hoc char-

acter o the systemic risk determination is not surprising, and SIGTARP ound

no evidence that the determination was incorrect. Nevertheless, the absence o


26/325


objective criteria or reaching such a conclusion raised concerns. Then-Director

o the Oce o Thrit Supervision John Reich, at the Federal Deposit Insurance

Corporation (FDIC) board meeting on November 23, 28, in which the FDIC

made its determination to proceed with the Citigroup transactions, observed that

there had been some selective creativity exercised in the determination o what

is systemic and whats not, and that there has been a high degree o pressure

exerted in certain situations, and not in others, and Im concerned about parity.

Concerns about selective creativity and parity could be addressed at least in part

by the development, in advance o the next crisis, o clear, objective criteria and a

detailed roadmap as to how those criteria should be applied. Treasury Secretary

Geithner told SIGTARP that he believed creating eective, purely objective criteria

or evaluating systemic risk is not possible, saying it depends too much on thestate o the world at the time. You wont be able to make a judgment about whats

systemic and whats not until you know the nature o the shock the economy is

undergoing. He also said that whatever criteria were developed in advance, markets

and institutions would adjust and migrate around them.

The Dodd-Frank Wall Street Reorm and Consumer Protection Act (Dodd-

Frank Act) charged the Financial Stability Oversight Council (FSOC) with

responsibility or developing the specic criteria and analytical ramework or

assessing systemic signicance. That process is under way. SIGTARP remains con-

vinced that even i some aspects o systemic signicance are necessarily subjective

and dependent on the nature o the crisis at the time, an emphasis on the develop-

ment o clear, objective criteria in advance o the next crisis would signicantly aiddecision makers burdened by enormous responsibility, extreme time pressure, and

uncertain inormation. It is also imperative that FSOC not simply accept the adapt-

ability o Wall Street rms to work around regulation, but instead maintain the

fexibility to respond in kind.

Second, the Governments actions with respect to Citigroup undoubtedly con-

tributed to the increased moral hazard that has been a direct byproduct o TARP.

While the year-plus o Government dependence let Citigroup a stronger institu-

tion, it remained, and arguably remains, an institution that is too big, too intercon-

nected, and too essential to the global nancial system to be allowed to ail. When

the Government assured the world in 28 that it would not let Citigroup ail, it

did more than reassure troubled markets it encouraged high-risk behavior by

insulating risk-takers rom the consequences o ailure.

Unless and until an institution such as Citigroup is either broken up, so that it

is no longer a threat to the nancial system, or a structure is put in place to assure

that it will be let to suer the ull consequences o its own olly, the prospect o

more bailouts will potentially uel more bad behavior with potentially disastrous

results. Notwithstanding the passage o the Dodd-Frank Act, which does give

the FDIC new resolution authority in nancial companies deemed systemically


27/325


signicant, the market still gives the largest nancial institutions an advantage over

smaller institutions by enabling larger rms to raise unds more cheaply, and enjoy

enhanced credit ratings based on the assumption that the Government remains as

a backstop. And because o the prospect o another Government bailout, executives

at such institutions might be motivated to take greater risks than they otherwise

would.

The Dodd-Frank Act was intended, in part, to address the problem o institu-

tions that are too big to ail. Whether it will successully address the moral

hazard eects o TARP remains to be seen, and there is much important work let

to be done. As Secretary Geithner told SIGTARP, while the Dodd-Frank Act gives

the Government better tools, and reduced the risk o ailures, [i]n the uture

we may have to do exceptional things again i the shock to the nancial system issuciently large. Secretary Geithners candor about the diculty o determining

whats systemic and whats not until you know the nature o the shock and the

prospect o having to do exceptional things again in such an unknowable uture

crisis is commendable. At the same time, it underscores a TARP legacy, the moral

hazard associated with the continued existence o institutions that remain too big

to ail. It also serves as a reminder that the ultimate cost o bailing out Citigroup

and other too big to ail institutions will remain unknown until the next nancial

crisis occurs.

Treasury responded to the report in a letter dated January 12, 211, which

broadly concurred with the report. The FDIC responded to the report in a letter

dated January 12, 211, which oered our clarications to the report. WhileSIGTARP did not incorporate the FDICs suggested changes, the letter was at-

tached to the audit report. The Federal Reserve responded to the report by letter

ater it was issued (although the letter was dated January 12, 211), which is repro-

duced in Appendix G. The Oce o the Comptroller o the Currency stated that it

would not provide a ormal response to the report.

a e uSIGTARP has ongoing audits and evaluations on 1 previously announced topics

and expects to issue those reports in the coming months.

ofc sc m dc ec CThis audit is examining the decisions o the Oce o the Special Master or TARP

Executive Compensation on executive compensation at rms receiving exceptional

TARP assistance. This audit assesses the criteria used by the Special Master to

evaluate executive compensation and whether the criteria were applied consistently.


28/325


C pc pg (Cpp) ac rcg CaThis audit is examining those CPP applications that received preliminary approval

rom Treasurys Investment Committee conditioned upon the institutions meet-

ing certain requirements beore unds were disbursed. One example was Colonial

Bancgroup Inc. (Colonial), which received CPP approval conditioned on its rais-

ing $3 million in private capital but was later the center o a major raud inves-

tigation initiated by SIGTARP that led to the indictment o Lee Farkas on charges

that he attempted to deraud Treasury o more than $55 million in connection

with its conditional approval o Colonials application or TARP unds. The audit

assesses the basis or the decision to grant such conditional approvals and the bankregulators roles in such decisions; whether and how timerames were established

or meeting such conditions; and whether internal controls were in place to ensure

that the conditions were met beore unds were disbursed.

t a-bc sc l c (tal) Cm vThis audit is examining the Federal Reserves basis or hiring collateral monitors or

the TALF program, the role o the collateral monitors, and the appropriateness o

the approved loan amounts.

ofc c s Ccg p scUndertaken at the request o Senator Tom Coburn, this audit is examining the pro-

cesses Treasury uses to procure proessional services in support o its management

o TARP, specically those to ensure that contract prices are air and reasonable

and that vendors invoices accurately refect the work perormed.

Cpp e sgThis audit is examining the process that Treasury and Federal banking regulators

established or banks to repay Treasury and exit CPP.

h a mfc pg (hamp) i CBuilding on SIGTARPs other audit work regarding HAMP, this audit is examin-

ing the extent to which Treasury has established a system o internal controls

or HAMP.8 This audit is also reviewing the reasons Treasury reported erroneous

re-deault rates through June in its Servicer Perormance Report and the cor-

rective actions Treasury is taking to help assure its uture perormance reports are

accurate.


29/325


ac hamp n p v (npv) tThis audit, conducted in response to a request rom Senator Je Merkley and eight

other Senators, is examining the ollowing issues: (i) whether participating loan

servicers are correctly applying the NPV test under the program; (ii) the extent to

which Treasury ensures that servicers are appropriately applying the NPV test per

HAMP guidelines when assessing borrowers or program eligibility; and (iii) the

procedures servicers ollow to communicate to borrowers the reasons or NPV test

ailure, as well as to identiy the ull range o loss mitigation options available to

such borrowers.

h h Undertaken at the request o Representative Darrell Issa, this audit is examin-

ing (i) the extent to which Treasury applied consistent and transparent criteria,

including applicable provisions o EESA, in selecting the states and programs to

receive money under the Hardest Hit Fund; (ii) the extent to which Treasury has

determined the programs to be unded by the Hardest Hit Fund are innovative as

compared to existing Federal and state programs; (iii) whether Treasury has put

sucient mechanisms in place to prevent waste, raud and abuse in the Hardest

Hit Fund; and (iv) the goals and metrics Treasury has adopted and reported to the

public or the operation o the Hardest Hit Fund.

dc-mg pc rgg Cg d t aUndertaken at the request o Representative Dennis Kucinich, this evaluation is

examining (i) the rationale behind Treasurys decision to issue Notice 21-2 (the

Notice) regarding Internal Revenue Code Section 382, which limits the amount

o net operating losses a corporation experiencing a change o ownership may use

to oset uture taxable income; (ii) whether Treasury was aware o the tax eect

that may result rom the Notices issuance; (iii) the identity o principal decision

makers involved in issuing the Notice; and (iv) the extent to which Treasurys policy

to timely dispose o TARP investments actored into the issuance decision.

a ac i G, ic. (aiG) sc

pAt the request o Senator Charles Grassley, SIGTARP is conducting an evaluation

and review o executive compensation regulations issued by Treasury in relation to

severance payments to certain ormer executives at AIG. Additionally, this evalu-

ation is examining the circumstances o an alleged confict o interest within the

Oce o the Special Master.


30/325


n a uOver the past quarter SIGTARP announced three new audit projects:

r t i G m C (Gm)This audit is examining Treasurys decision-making process relating to its substan-

tial investment in GM, specically (i) Treasurys process and plans, and its support-

ing analyses, or its actual and/or planned disposal o its investments in GM; and

(ii) the role Treasury played in reviewing, approving, or otherwise participating in

GMs decision to acquire AmeriCredit (now GM Financial).

r Gm dc t u p p h

w d a llp (d)This audit is examining GMs decision to top up Delphis pension plan or hourly

workers, including (i) Treasurys role in GMs decision to top up the pension plan;

and (ii) whether the Administration or the Automotive Task Force pressured GM to

provide additional unding or the plan.

ppip i CUndertaken at the request o Senator Claire McCaskill, this audit is examining

(i) the extent and eectiveness o Treasurys oversight and monitoring or each

PPIF; (ii) the extent to which each PPIP managers internal controls address the

compliance requirements o the limited partnership agreement and other applica-

ble laws and regulations; and (iii) the extent to which Treasury and PPIF managershave implemented controls to identiy, mitigate, and resolve potential conficts o

interest.

siGtarp ig acSIGTARPs Investigations Division has developed into a highly sophisticated white-

collar investigative agency. As o December 31, 21, SIGTARP had 142 ongoing

criminal and civil investigations (including investigations relating to executives at

64 nancial institutions that applied or and/or received unding under CPP) many

in partnership with other law enorcement agencies. Since SIGTARPs inception,

its investigations have delivered substantial results, including:

asset recoveries o $151.8 million, with an additional estimated savings o

$555.2 million through raud prevention

civil or criminal actions against 45 individuals to date, including 22 senior o-

cers (CEOs, owners, ounders or senior executives) o their organizations

criminal convictions o 13 deendants or raud

civil cases naming 12 corporate entities as deendants


31/325


SIGTARPs investigations concern suspected TARP raud, accounting raud,

securities raud, insider trading, bank raud, mortgage raud, mortgage servicer mis-

conduct, raudulent advance-ee schemes, public corruption, alse statements, ob-

struction o justice, thet o trade secrets, money laundering, perjury to Congress,

and tax-related investigations. While the majority o SIGTARPs investigative activ-

ity remains condential, over the past quarter there have been signicant public

developments in several o SIGTARPs investigations.

t sc G, llC (sc G)On November 18, 21, Howard Shmuckler was arrested pursuant to a 3-count

indictment obtained by the Prince Georges County States Attorneys Oce in

Maryland. Shmuckler owned and operated Shmuckler Group a company located inVienna, Virginia, that purportedly oered mortgage modication services. He was

charged with conspiracy, thet, and operating a business without a license, all relat-

ing to an alleged mortgage modication scam that took advantage o the publicity

surrounding the TARP-supported HAMP program.

According to a related cease and desist order issued by the Maryland

Commissioner o Financial Regulation, Shmuckler, along with two other

individuals and their aliated companies, are alleged to have collected more than

$1.2 million in upront ees rom 372 Maryland homeowners by alsely promising

to persuade banks to modiy the terms o the homeowners mortgages. According

to the same order, Shmuckler contracted with Nova Key LLC to market and sell

Shmuckler Group loan modication services to homeowners, including advertisingthat targeted Spanish-speaking homeowners who had obtained subprime mortgages

that they could not aord and who had allen behind on their mortgage payments.

The order urther alleges that: Shmuckler and his associates alsely promised

to return upront ees to homeowners or whom they ailed to obtain modica-

tions; alsely represented the progress o the homeowners loan modications; and

directed homeowners to stop making payments on their mortgage loans and not to

contact their lenders. According to the order, many o these homeowners subse-

quently lost their homes to oreclosure.

This case resulted rom a joint investigation conducted by SIGTARP, the Oce

o the States Attorney or Prince Georges County, and the Maryland Department

o Labor Licensing and Regulations Financial Regulation Division.

r r On November 17, 21, pursuant to court order, the Federal Trade Commission

(FTC) halted the operations o the Residential Relie Foundation and aliated

companies and individuals. This action, supported by SIGTARPs investigative e-

orts, was based on a civil complaint led by the FTC alleging that the deendants

violated Federal law by alsely claiming that they would obtain loan modications

and signicantly lower mortgage payments or consumers in return or upront


32/325


ees. The complaint also charges the deendants with misrepresenting an aliation

with the Federal Government, alsely claiming to have taken reasonable and ap-

propriate measures to protect consumers personal inormation rom unauthorized

access, and improperly disposing o consumers inormation in unsecured dump-

sters, in violation o the FTC Act.

Specically, the FTC complaint alleges that the deendants alsely claimed

their loan modication program could result in waiver o late payments, late ees,

and legal ees; conversion o adjustable rates to xed rates as low as 1%; reduc-

tion o principal balances; and up to 4% lower mortgage payments. According to

the FTC complaint, the Residential Relie Foundation used a logo similar to the

Great Seal o the United States and told consumers that it is nearly impossible or

homeowners to obtain mortgage modications on their own. Claiming quick resultsand a high success rate, the deendants charged a $1,495 up-ront ee, advised

homeowners to stop making mortgage payments, and alsely claimed that reports

the deendants created would enable homeowners to obtain the promised results,

according to the complaint. In addition, the FTC charged that in marketing debt

relie services or credit card debt, the deendants alsely told people they could

become debt ree in 12 to 36 months, remove late ees and penalties, and reduce

debts up to 5%.

At the FTCs request, a Federal court ordered a halt to the operation, appointed

a receiver, and roze the deendants assets, pending trial. The FTC action seeks to

stop the deendants deceptive claims permanently and make them oreit their ill-

gotten gains. SIGTARP provided investigative support in urtherance o the FTCscase. SIGTARPs investigation is ongoing.

p a bIn the continuing action concerning Park Avenue Bank, on January 4, 211,

Carlos Peralta pled guilty in the U.S. District Court or the Southern District o

New York to wire raud. Peralta participated in a raudulent investment scheme

through which he caused the pastors o a church in Coral Springs, Florida to wire

$13,94 rom a bank account in Florida to an account at the Park Avenue Bank in

Manhattan.

As previously reported, on October 8, 21, Charles Antonucci, the ormer

president and CEO o Park Avenue Bank, pled guilty in the U.S. District Court

or the Southern District o New York to oenses including securities raud,

making alse statements to bank regulators, bank bribery, and embezzlement o

bank unds. As noted in SIGTARPs Quarterly Report to Congress dated April 2,

21, Antonucci was arrested in March 21 ater attempting to steal $11 mil-

lion o TARP unds by, among other things, making raudulent claims about the

banks capital position. With his guilty plea, Antonucci became the rst deendant


33/325


convicted o attempting to steal rom the taxpayers investment in TARP. The ongo-

ing SIGTARP investigation is being conducted in partnership with the Federal

Bureau o Investigation (FBI), U.S. Immigration and Customs Enorcement

(ICE), the New York State Banking Department Criminal Investigations Bureau,

and the FDIC Oce o Inspector General (FDIC OIG).

o n b (o)Omni was a national bank headquartered in Atlanta. Omni ailed and was taken

over by the FDIC on March 27, 29. Prior to its ailure, Omni applied or, but did

not receive, TARP unding. As part o a mortgage raud task orce that also in-

cluded the U.S. Attorneys Oce or the Northern District o Georgia, FDIC OIG,

the Oce o the Inspector General or the Department o Housing and UrbanDevelopment (HUD OIG), the U.S. Postal Inspection Service (USPIS), and the

FBI, SIGTARP participated in several investigations concerning Omni that led to

criminal charges. SIGTARPs involvement, including an examination into whether

the various rauds had an impact on Omnis CPP application, is ongoing.

As a result o the investigation, on January 5, 211, Karim W. Lawrence, an

ocer and employee o Omni, pled guilty to charges o corruptly receiving commis-

sions or gits in exchange or procuring loans.

Previously, on August 3, 21, Brent Merriell was sentenced to three years and

three months in prison or his role in a scheme to prompt Omni to orgive $2.2

million in loans, having pled guilty to charges o making alse statements to the

FDIC and six counts o aggravated identity thet in connection with the scheme.Additionally, Jeery Levine, Omnis ormer executive vice president, pled guilty in

January 21 to charges o causing material overvaluations in the books, reports

and statements that were later submitted as part o Omnis TARP application. In

addition to Merriell and Levine, Mark Anthony McBride, Christopher Loving,

and Delroy Davy pled guilty in connection with this case to mortgage raud, mak-

ing alse statements to SIGTARP Special Agents, and bank raud and conspiracy

charges, respectively.

u l G (ulG)As described in the April 21 Quarterly Report, in March 21 SIGTARP, along

with USPIS, FBI, ICE, and the Orange County District Attorneys Oce, ex-

ecuted a publicly led search warrant obtained by the U.S. Attorney or the Central

District o Caliornia at the oces o United Law Group (ULG). This investiga-

tion ocuses on allegations that ULG, taking advantage o the publicity surround-

ing HAMP, engaged in a mortgage modication advance-ee scheme. The search

warrant adavit alleges that ULG charged struggling homeowners ees ranging

rom $1,5 to $12, without perorming services, while advising victims to


34/325


stop paying their mortgages and terminate contact with their lenders. The a-

davit urther alleges that many ULG customers subsequently lost their homes to

oreclosure.

On June 3, 21, ULG led or bankruptcy protection. On December 2,

21, as a direct result o SIGTARPs investigative eorts, the Honorable Robert

Kwan issued a preliminary injunction assigning control o a bank account held by

ULG containing client unds to ULGs bankruptcy trustee. The bankruptcy trustee

assigned to wind down the operations o ULG in Irvine, Caliornia, estimates that

approximately $1 million rom the seized account will be returned to the estate to

serve as restitution to victims. SIGTARPs investigation with its law enorcement

partners is ongoing.

n hg mfc C (nhmC)On October 14, 21, Roger Jones pled guilty to conspiracy to commit wire

raud in U.S. District Court or the Southern District o Caliornia. The charges

against Jones relate to his participation in an advance-ee scheme noted in previ-

ous SIGTARP quarterly reports. According to his indictment, Jones and others

took criminal advantage o the publicity surrounding the Administrations mortgage

modication eorts under HAMP. Operating companies under the names NHMC

or Federal Housing Modication Department, they used raudulent statements

and representations to induce customers to pay $2,5-$3, to purchase loan

modication services that were never delivered. For example, the indictment alleges

that they mailed solicitation letters in envelopes that deceptively bore a CapitolHill return address (in act merely a post oce box) and that were designed to

mimic ocial Federal correspondence. Court documents allege that the raud

grossed $9,. At his guilty plea, Jones admitted not only to participating in the

conspiracy but also to making material alse statements to SIGTARP agents that

signicantly obstructed or impeded an aspect o the SIGTARP investigation. Jones

sentencing is scheduled or early 211.

As previously reported, Glenn Steven Rososky and Michael Trap also pled

guilty in connection with this case. Trap pled guilty in March 21 to conspiracy to

commit raud and money laundering. Rososky pled guilty in June 21 to oenses

including money laundering, conspiracy to commit wire raud, and ling a alse

tax return. This case was jointly investigated with the Internal Revenue Service

Criminal Investigation, the FTC, the San Diego District Attorneys Oce, and the

United States Attorneys Oce or the Southern District o Caliornia, with the

support o the Treasury Financial Crimes Enorcement Network and the New York

High Intensity Financial Crime Area.

t tCw G, ic./t dl As described in greater detail on page 88 o the January 21 Quarterly Report,

on December 4, 29, The TCW Group, Inc. (TCW), one o the nine asset


35/325


managers selected by Treasury to participate in PPIP, dismissed Jerey Gundlach, a

key man under TCWs contract with Treasury, who served as TCWs chie invest-

ment ocer and the lead portolio manager o its PPIF. At that time, consistent

with the terms o the Limited Partnership Agreement between Treasury and TCW,

Treasury roze TCWs PPIF and halted all und transactions. On January 4, 21,

TCW withdrew as a manager in PPIP and its PPIF was liquidated.

On January 12, 21, Gundlach and others organized The DoubleLine

Funds (DoubleLine), a und management company. In an SEC ling on

December 9, 21, DoubleLine disclosed that on January 7, 21, TCW

commenced litigation against [DoubleLine] in the Superior Court o the State o

Caliornia, County o Los Angeles, Central District, alleging unair competition.

According to the SEC ling, the suit alleges, among other things, that Gundlachand other ormer TCW employees now at DoubleLine misappropriated TCWs

condential inormation and are using it to compete against TCW or assets under

management. Additionally, the ling disclosed that employees and ormer em-

ployees o [DoubleLine] have been interviewed by representatives o [SIGTARP],

and by the oce o the United States Attorney or the Southern District o New

York, in connection with the PPIP and in connection with the same allegations o

misappropriation o proprietary inormation made by [TCW] in its litigation against

[DoubleLine]. [DoubleLine] understands that the inquiry stems at least in part

rom a ederal grand jury inquiry. SIGTARPs investigation is ongoing.

siGtarp hOne o SIGTARPs primary investigative priorities is to operate the SIGTARP

Hotline and thus provide a simple, accessible way or the American public to report

concerns, allegations, inormation, and evidence o violations o criminal and

civil laws in connection with TARP. From its inception in February 29 through

December 31, 21, the SIGTARP Hotline has received and analyzed more

than 24, Hotline contacts. These contacts run the gamut rom expressions

o concern over the economy to serious allegations o raud involving TARP, and

a substantial number o SIGTARPs investigations were generated in connection

with Hotline tips. The SIGTARP Hotline can receive inormation anonymously.

SIGTARP honors all applicable whistleblower protections and will provide con-

dentiality to the ullest extent possible. SIGTARP urges anyone aware o waste,

raud or abuse involving TARP programs or unds, whether it involves the Federal

Government, state and local entities, private rms or individuals, to contact its

representatives at 877-SIG-29 or www.sigtarp.gov.

Cc CgOne o the primary unctions o SIGTARP is to ensure that members o Congress

remain adequately and promptly inormed o developments in TARP initiatives and

o SIGTARPs oversight activities. To ulll that role, the Special Inspector General

and his sta meet regularly with and brie members and Congressional sta:


36/325


On October 27 and 29, 21, SIGTARP Chie o Sta Christy Romero present-

ed open briengs or House and Senate sta, respectively. The ocus o each

brieng was SIGTARPs October 21 Quarterly Report.

Copies o the written testimony, hearing transcripts, and a variety o other mate-

rials associated with Congressional hearings since SIGTARPs inception are posted

at www.sigtarp.gov/reports.shtml.

C sc mOn November 2, 29, SIGTARP sent a letter to Treasury inquiring about the

constitutionality o its appointment o the Special Master or TARP Executive

Compensation (Special Master), pursuant to the Interim Final Rule on TARP

Standards or Compensation and Corporate Governance. Ater an exchange oletters with Treasury, on August 2, 21, SIGTARP submitted to the Oce

o Legal Counsel (OLC), Department o Justice, a request or a legal opinion

regarding the constitutionality o the Special Master under the Appointments

Clause o the United States Constitution. The General Counsel o the Treasury

Department joined in the request. (Copies o correspondence related to this ques-

tion are in Appendix H: Correspondence to the October 21 Quarterly Report

to Congress.)

In a November 5, 21, memorandum, the Oce o Legal Counsel expressed

its opinion that the Special Masters appointment is constitutional under the

Appointments Clause o the Constitution. A copy o the memorandum is attached

in Appendix G: Correspondence.

tHe sigtaRp oRganiZationFrom the day that the Special Inspector General was conrmed by the Senate,

SIGTARP has worked to build its organization through various complementary

strategies, leveraging the resources o other agencies, and, where appropriate

and cost-eective, obtaining services through SIGTARPs authority to contract.

SIGTARP continues to make substantial progress in building its operation.

hgAs o December 31, 21, SIGTARP had 139 ull-time personnel, including one

detailee rom the FBI. SIGTARPs employees hail rom many Federal agencies,

including the Department o Justice, FBI, the Internal Revenue Service Criminal

Investigation, Air Force Oce o Special Investigations, GAO, Department o

Transportation, Department o Energy, the Securities and Exchange Commission,

U.S. Secret Service, U.S. Postal Service, U.S. Army Criminal Investigation

Command, Naval Criminal Investigative Service, Treasury-Oce o the Inspector

General, Department o Energy-Oce o the Inspector General, Department

o Transportation-Oce o the Inspector General, Department o Homeland


37/325


Security-Oce o the Inspector General, FDIC OIG, Oce o the Special

Inspector General or Iraq Reconstruction, and the Department o Housing and

Urban Development Oce o Inspector General. SIGTARP employees also hail

rom various private sector businesses and law rms. Hiring is actively ongoing.

The SIGTARP organizational chart, as o January 3, 211, is included in

Appendix H: Organizational Chart.

bgSIGTARP expended $19.6 million in scal year 29 and $33.5 million in s-

cal year 21. In scal year 21, 51% o SIGTARPs budget went or personnel

costs and 29% or services provided by other Government agencies, as noted in the

breakdown o 21 unding provided by Figure 1.1.On February 2, 21, the Administration submitted to Congress Treasurys

scal year 211 budget request, which includes SIGTARPs ull initial request or

$49.6 million. Adjusting or the scal year 211 pay raise reduction, the annual

amount has been revised to $49.4 million. Public

sigtarp | january 2011 quarterly report to congress

Documents