[Senate Hearing 112-]
[From the U.S. Government Printing Office]
CONGRESSIONAL OVERSIGHT PANEL
JANUARY OVERSIGHT REPORT *
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AN UPDATE ON TARP SUPPORT FOR THE DOMESTIC AUTOMOTIVE INDUSTRY
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
January 13, 2011.--Ordered to be printed
* Submitted under Section 125(b)(1) of Title 1 of the Emergency
Economic Stabilization Act of 2008, Pub. L. No. 110-343
CONGRESSIONAL OVERSIGHT PANEL JANUARY OVERSIGHT REPORT
CONGRESSIONAL OVERSIGHT PANEL
JANUARY OVERSIGHT REPORT *
__________
AN UPDATE ON TARP SUPPORT FOR THE DOMESTIC AUTOMOTIVE INDUSTRY
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
January 13, 2011.--Ordered to be printed
* Submitted under Section 125(b)(1) of Title 1 of the Emergency
Economic Stabilization Act of 2008, Pub. L. No. 110-343
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CONGRESSIONAL OVERSIGHT PANEL
Panel Members
Sen. Ted Kaufman, Chairman
Richard H. Neiman
Damon Silvers
J. Mark McWatters
Kenneth Troske
C O N T E N T S
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Page
Executive Summary................................................ 1
Section One:
A. Introduction.............................................. 4
B. Overview of Government Intervention....................... 5
1. Summary of Government Intervention in Auto
Manufacturing and Financing Industries................. 5
C. Current State of the Domestic Automotive Industry......... 15
1. Capacity Reductions................................... 15
2. Lower Labor Costs..................................... 16
3. Resiliency in Market Share............................ 16
4. Pricing............................................... 17
5. Outlook............................................... 18
D. General Motors............................................ 20
1. Context............................................... 20
2. More Recent Developments.............................. 23
3. Outlook............................................... 29
4. Treasury's Exit Strategy.............................. 33
E. Chrysler.................................................. 38
1. Context............................................... 38
2. Outlook............................................... 48
3. Analysis of the Government's Exit Strategy Based on
Likely Repayment Scenarios............................. 53
F. GMAC/Ally Financial....................................... 57
1. Context............................................... 57
2. Outlook............................................... 66
3. Analysis of Intended Exit Strategy.................... 74
G. Auto Supplier Support Program............................. 85
1. Background............................................ 85
2. TARP Intervention..................................... 86
3. Current Status of Auto Supplier Industry.............. 86
H. Analysis of Treasury's Interaction with all Three
Companies in Light of Government's Objectives.............. 87
1. Summary of Principles upon which Government Says it
Will Conduct its Involvement in Private Companies...... 87
2. Has Treasury Abided by its own Principles?............ 88
3. Has Treasury Used its Limited Authority Effectively?.. 91
4. Was Treasury Right in Establishing These Guidelines
for Itself?............................................ 94
I. Conclusions and Recommendations........................... 95
Section Two: Additional Views
A. J. Mark McWatters and Professor Kenneth R. Troske......... 101
Section Three: TARP Updates Since Last Report.................... 106
Section Four: Oversight Activities............................... 133
Section Five: About the Congressional Oversight Panel............ 134
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JANUARY OVERSIGHT REPORT
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January 13, 2011.--Ordered to be printed
_______
EXECUTIVE SUMMARY *
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* The Panel adopted this report with a 4-0 vote on January 12,
2011.
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Since the Panel's last comprehensive review of TARP support
for the domestic automotive industry in September 2009,
Treasury's automotive investments have, in financial terms,
starkly improved. As of September 2009, the Congressional
Budget Office (CBO) estimated that taxpayers would lose $40
billion on their automotive investments. Today, CBO has reduced
its loss estimate to $19 billion, and the three largest
recipients of automotive bailout funds--General Motors (GM),
Chrysler, and GMAC/Ally Financial--all appear to be on the path
to financial stability.
While it remains too early to tell whether Treasury's
intervention in and reshaping of the U.S. automotive industry
will prove to be a success, there can be no question that the
government's ambitious actions have had a major impact and
appear to be on a promising course. Even so, the companies that
received automotive bailout funds continue to face uncertain
futures, taxpayers remain at financial risk, concerns remain
about the transparency and accountability of Treasury's
efforts, and moral hazard lingers as a long-run threat to the
automotive industry and the broader economy.
Treasury is currently unwinding its stakes in GM, Chrysler,
and GMAC/Ally Financial. Of those companies, GM is furthest
along in the process of repaying taxpayers. It conducted an
initial public offering (IPO) on November 18, 2010, and
Treasury used the occasion to sell a portion of its GM holdings
for $13.5 billion. This sale represents a major recovery of
taxpayer funds, but it is important to note that Treasury
received a price of $33.00 per share--well below the $44.59
needed to be on track to recover fully taxpayers' money. By
selling stock for less than this break-even price, Treasury
essentially ``locked in'' a loss of billions of dollars and
thus greatly reduced the likelihood that taxpayers will ever be
repaid in full.
Treasury has explained its decision to sell at a loss by
saying that it wished to unwind government ownership of the
automobile industry as quickly as possible. This justification
may very well be reasonable, but it is difficult to evaluate.
Because Treasury has cited different, conflicting goals for its
automotive interventions at different times--saying, for
example, that it wished to save American jobs, to produce the
best possible return to taxpayers, or to return the company to
private ownership as rapidly as possible--it is difficult for
the Panel or any outside observer to judge whether Treasury's
results in fact qualify as successful.
The other major automotive manufacturer to receive
government assistance, Chrysler, remains a private company.
Because Treasury has already absorbed $3.5 billion in losses on
loans made to the pre-bankruptcy Chrysler, the prospect for a
full recovery of taxpayers' money depends upon Treasury's
ability to sell its ownership of Chrysler at a profit. However,
as Treasury owns only 10 percent of the company's stock, it has
very limited ability to influence the timing of an eventual
public offering. The remaining 90 percent of Chrysler was
parceled out to several other parties, including the Italian
automotive manufacturer Fiat, through the bankruptcy process--
but while this approach may have saved Chrysler from
liquidation, the result is that Treasury has little authority
to act in taxpayers' interests. Another source of concern is
Treasury's hasty unwinding of its position in Chrysler
Financial, in which taxpayer returns appear to have been
sacrificed in favor of an unnecessarily accelerated exit,
further compounded by apparently questionable due diligence.
The final major recipient of automotive-related aid, GMAC/
Ally Financial, represents a curious case. GMAC/Ally Financial
is a financial company, not a manufacturer; it operates in many
fields entirely unrelated to the automotive industry.
Traditionally, however, the company has provided the bulk of
financing to GM car dealerships, as well as significant
financing to individual purchasers of GM vehicles. As such,
Treasury saw the survival of GMAC/Ally Financial as critical to
its broader automotive rescue.
Since the Panel's report on GMAC/Ally Financial in March
2010, the company has experienced three consecutive quarters of
profits and has reduced the risk in its mortgage portfolio.
Even so, taxpayers likely will not begin to recover their
investment until GMAC/Ally Financial conducts an IPO. Treasury
has had significant leverage over the IPO's timing due to its
preferred stock holdings, but regrettably, Treasury has been
inconsistent in acknowledging this leverage. Treasury's
reluctance to recognize its own influence may represent an
effort to claim a coherent ``hands off'' shareholder approach,
despite the unique circumstances that apply to GMAC/Ally
Financial.
The ``hands off'' approach may in itself raise questions.
Treasury has asserted that, even if one of the automotive
companies had announced an entirely unrealistic business plan,
Treasury would not have intervened. In more practical terms,
Treasury declined to block GM's purchase of AmeriCredit, a
subprime financing company, even though AmeriCredit may
ultimately compete against GMAC/Ally Financial and thus damage
that company's ability to repay taxpayers. Although Treasury's
``hands off'' approach may have reassured market participants
about the limited scope of government intervention, it may also
have forced Treasury to leave unexplored options that would
have benefited the public.
Treasury is now on course to recover the majority of its
automotive investments within the next few years, but the
impact of its actions will reverberate for much longer.
Treasury's rescue suggested that any sufficiently large
American corporation--even if it is not a bank--may be
considered ``too big to fail,'' creating a risk that moral
hazard will infect areas of the economy far beyond the
financial system. Further, the fact that the government helped
absorb the consequences of GM's and Chrysler's failures has put
more competently managed automotive companies at a
disadvantage. For these reasons, the effects of Treasury's
intervention will linger long after taxpayers have sold their
last share of stock in the automotive industry.
SECTION ONE:
A. Introduction
In late 2008 and early 2009, the federal government
undertook the unprecedented rescue of two of the three major
U.S.-based automobile manufacturers, as well as a major
automotive financing company. These interventions were
accomplished using resources from the Troubled Asset Relief
Program (TARP), a program that Congress created with passage of
the Emergency Economic Stabilization Act (EESA) in October 2008
and which was aimed primarily at preventing economic collapse
by restoring stability in the financial sector. This month the
Congressional Oversight Panel looks at what the TARP has
accomplished in the automobile sector and the prospects for
recovering the taxpayer's investments in the three rescued
firms: General Motors, Chrysler, and GMAC/Ally Financial.\1\
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\1\ Effective May 15, 2010, GMAC Financial Services changed its
name to Ally Financial Inc. Except where the distinction is otherwise
significant, this report refers to this company as ``GMAC/Ally
Financial.''
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The Panel first reviewed the actions of Treasury in
rescuing GM and Chrysler in a September 2009 report. That
report asked whether the actions taken to that point to rescue
GM and Chrysler served merely to forestall a decision
ultimately to liquidate those companies or to intervene with
still more government assistance to make them viable. It
remains too early to render a conclusive verdict on that
question. But the events of the intervening 16 months allow a
tentative judgment: GM and Chrysler are both more viable firms
than they were in December 2008 with GM on a credible path to
recovery but Chrysler's outlook more uncertain. Likewise, the
degree to which Treasury will be successful in recovering the
taxpayer's investment in these firms has become more apparent
for GM than for Chrysler. The intervening time since the
Panel's last report on the GM and Chrysler rescues has also
allowed for some greater understanding of how Treasury would
behave as an investor in both firms. What remains uncertain is
whether the improvement in both companies is directly
attributable to Treasury's intervention or to the more general
improvement of the economy. In addition, there remains a great
deal of uncertainty about the long-run impact of the
government's significant intervention in the operations of
these private firms.
In its March 2010 report, the Panel examined the actions of
Treasury, closely related to its investments in GM and
Chrysler, in supporting the auto financing firm GMAC/Ally
Financial. That report noted that there were lingering
unresolved issues related to GMAC/Ally Financial's emerging
business strategy. In the 10 months since that report was
issued, the firm's operating performance has improved
considerably, but Treasury's exit strategy remains unclear.
The use of TARP resources to prevent the collapse of two of
the three domestic automakers was and continues to be
controversial. Policymakers confronting this situation in
November and December 2008 had several courses of action,
ranging from doing nothing to full adoption of the rescue plans
proposed by the companies. It is possible that private sector
financial firms, such as private equity funds or hedge funds,
may have stepped up to provide financing for some of GM's or
Chrysler's more desirable assets at a later date. However, it
is unclear to what extent broad-based private sector emergency
funding to buy both firms in their entirety was a feasible
option in the midst of the credit market crisis during the fall
of 2008. It was the judgment of the Bush Administration, a
judgment confirmed by many knowledgeable market participants at
the time, that such a private sector intervention was unlikely.
Hence, the Bush Administration chose a middle-of-the-road
option, providing the firms with TARP-financed loans sufficient
to tide them over for a few months but leaving it to a new
administration to make its own assessments as to the long-term
viability of GM and Chrysler and ultimately to choose to put
the firms through expedited bankruptcy proceedings.
In contrast to its interventions in the financial sector,
where assistance was provided to banks without requiring
sweeping changes in their management and operations, government
intervention in the auto sector has been noteworthy for the
major restructuring that was required as a condition for
receiving government financing. While it remains too early to
tell whether Treasury's intervention in and reshaping of the
U.S. auto industry will prove to be a success, there can be no
question that the government's ambitious actions have had a
major impact. Completion of an IPO of GM stock is an especially
significant milestone that serves to highlight the timeliness
of an updated assessment of the TARP's performance in rescuing
the U.S. auto and auto financing industries. These favorable
events, however, must be thoughtfully balanced against the
moral hazard risks created by the taxpayer's bailout of the
three institutions and the ongoing implicit guarantee of the
government. By bailing out GM, Chrysler, and GMAC/Ally
Financial, the government sent a powerful message to the
marketplace--some institutions will be protected at all cost,
while others must prosper or fail based upon their own business
judgment and acumen. We regret that Treasury has focused solely
on the apparent success of the GM IPO in assessing the rescues
of the three institutions to the distinct exclusion of the
moral hazard risks arising from the bailouts.
B. Overview of Government Intervention
1. Summary of Government Intervention in Auto Manufacturing and
Financing Industries
a. Condition of the Domestic Auto Industry in 2008
Even prior to the onset of the financial crisis, the
domestic automotive industry was facing severe challenges and
strains. Not only had foreign competitors steadily increased
their market share, and rising fuel prices softened demand, but
Chrysler and GM faced additional challenges posed by legacy
costs and a series of poor strategic decisions.
With the onset of the financial crisis, the challenges
facing the auto industry--which now also included tightening
credit markets, declining consumer confidence, decreased
demand, and rising unemployment--became acute.\2\ The tightened
credit market was especially significant not only because it
impacted the automakers' access to debt market/bank financing,
but also because 90 percent of consumers finance automobile
purchases through loans, either directly from the
manufacturers' financing arms or through third-party financial
institutions, all of which experienced increased difficulty in
late 2008 in raising capital to finance such loans.\3\ The
particularly weak condition of Chrysler Financial and GMAC/Ally
Financial exacerbated the plummeting sales at GM and Chrysler
as the credit markets seized up.\4\ Ford did not need
government assistance in large part because it conducted a
massive refinancing in 2006, which provided the company with a
credit facility that it could draw down as needed as the credit
markets tightened considerably for other auto makers.
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\2\ For a discussion of the factors leading up to the government's
decision to support the automotive industry, see Congressional
Oversight Panel, September Oversight Report: The Use of TARP Funds in
the Support and Reorganization of the Domestic Automotive Industry, at
7-23 (Sept. 9, 2009) (online at cop.senate.gov/documents/cop-090909-
report.pdf) (hereinafter ``September 2009 Oversight Report'').
\3\ House Judiciary, Subcommittee on Administrative Law, Written
Testimony of Ron Bloom, senior advisor, U.S. Department of the
Treasury, Ramifications of Automotive Industry Bankruptcies, Part II,
at 1 (July 21, 2009) (online at judiciary.house.gov/hearings/pdf/
Bloom090721.pdf).
\4\ GMAC/Ally Financial and Chrysler Financial were spun off from
their parents in 2006 and 2007, respectively, but their enduring
operational and economic interdependence is illustrated by the largely
stable share of GM dealer financing provided by GMAC/Ally Financial and
Chrysler dealer financing provided by Chrysler Financial (until GMAC/
Ally Financial took over Chrysler Financial's floorplan business in May
2009).
Relying on outside industry estimates, Treasury stated that the
impact of letting GMAC/Ally Financial and Chrysler Financial fail
(together with credit conditions at the time) would likely have been a
further immediate decline of 1.5 to 2.5 million domestic automobile
sales, primarily because of these companies' roles in providing
floorplan financing to GM and Chrysler dealers. Treasury believes that
such a decline in sales would, in turn, have immediately threatened the
economic viability of GM and Chrysler. Treasury conversations with
Panel staff (Feb. 2, 2010); Congressional Oversight Panel, Joint
Written Testimony of Ron Bloom, senior advisor to the Secretary of the
Treasury, and Jim Millstein, chief restructuring officer, U.S.
Department of the Treasury, COP Hearing on GMAC Financial Services, at
3 (Feb. 25, 2010) (online at cop.senate.gov/documents/testimony-022510-
treasury.pdf).
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b. Rescues of Chrysler and GM
By the beginning of December 2008, GM and Chrysler could no
longer secure the credit they needed to conduct their day-to-
day operations.\5\ The CEOs of Chrysler and GM appeared before
Congress and appealed for government assistance to help them
remain in business, but they were unable to muster sufficient
congressional support to get a rescue bill through the Senate.
Unless they could raise billions of dollars in new financing
from private investors, they faced bankruptcy and probable
liquidation.
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\5\ Senate Committee on Banking, Housing and Urban Affairs, Written
Testimony of Robert Nardelli, chairman and chief executive officer,
Chrysler LLC, The State of the Domestic Automobile Industry, Part II
(Dec. 4, 2008) (online at banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore_id=c41857b2-7253-4253-95e3-
5cfd7ea81393).
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Typically, when a firm reaches a financial crisis as severe
as the ones facing GM and Chrysler in the fall of 2008, the
firm files for bankruptcy in federal court. This invokes a
process where there are two possible courses of action: either
the firm is salvaged but reorganized using interim debtor in
possession (DIP) financing, or the firm is liquidated.\6\ But
the circumstances in the global credit markets in November and
December 2008 were unlike any the financial markets had seen in
decades. U.S. domestic credit markets were frozen in the wake
of the Lehman bankruptcy, and international sources of funding
were extremely limited. Cross-border lending was decreasing due
to a domestic bias in lending, concerns over cross-currency and
foreign exchange swap markets, and higher regulatory capital
charges.\7\ In September 2008, China had already reduced its
holdings of U.S. subprime mortgage-backed securities by
approximately $6 billion.\8\ Furthermore, several sovereign
wealth funds that had stepped in to provide funding for U.S.
firms were beginning to face losses on their investments. For
example, the Abu Dhabi Investment Authority purchased $7.5
billion worth of Citigroup convertible bonds in early November
2007,\9\ only to see the share price plummet over the next 12
months.\10\ Consequently, according to Treasury, bankruptcy
with reorganization of the two auto companies using private DIP
financing did not appear to be an option by late fall 2008,
leaving liquidation of the firms as the more likely course of
action absent a government rescue.
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\6\ Debtor-in-possession financing is a loan made to a firm in
bankruptcy to allow it to continue operating. The DIP loan is senior to
the other claims on the firm in bankruptcy.
\7\ International Monetary Fund, Global Financial Stability Report:
Responding to the Financial Crisis and Measuring Systemic Risk, at 8
(Apr. 2009) (online at www.imf.org/External/Pubs/FT/GFSR/2009/01/pdf/
text.pdf).
\8\ As of June 30, 2007, the Bank of China Limited, a state-owned
commercial bank, held $8.97 billion of U.S. subprime ABS. By the end of
the third quarter 2008, this amount dropped to $3.3 billion. Bank of
China Limited, Interim Report 2007, at 23 (online at www.boc.cn/en/
invester/ir3/200812/P020081212710228274350.pdf) (accessed Jan. 11,
2011); Bank of China Limited, Report for the Third Quarter ended 30
September 2008, at 9 (online at www.boc.cn/en/invester/ir3/200812/
P020081212712640132355.pdf) (accessed Jan. 11, 2011).
\9\ Citigroup, Inc., Press Release: Citi to Sell $7.5 Billion of
Equity Units to Abu Dhabi Investment Authority (Nov. 26, 2007) (online
at www.citigroup.com/citi/press/2007/071126j.htm).
\10\ Data accessed through Bloomberg Data Service (Jan. 11, 2011).
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Facing the prospect of the collapse of GM and Chrysler, and
with the option of a privately financed DIP bankruptcy
proceeding foreclosed because of the extraordinary conditions
in the credit markets, President George W. Bush on December 19,
2008 announced a government-funded rescue package for the
automotive industry--the Automotive Industry Financing Program
(AIFP). The rescue package broadened the allocation of TARP
assistance to the domestic automotive industry.\11\
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\11\ Then-Secretary Paulson did not use the name ``Automotive
Industry Financing Plan'' at the time of the announcement. See
generally U.S. Department of the Treasury, Secretary Paulson Statement
on Stabilizing the Automotive Industry (Dec. 19, 2008) (online at
www.financialstability.gov/latest/hp1332.html) (hereinafter ``Secretary
Paulson Statement on Stabilizing the Automotive Industry'').
Nonetheless, the investments to GM and Chrysler were made under this
program. See generally U.S. Department of the Treasury, Troubled Asset
Relief Program Transactions Report for Period Ending February 1, 2010,
at 15 (Feb. 3, 2010) (online at www.financialstability.gov/docs/
transaction-reports/2-3-10%20Transactions%20Report%20as%20of%202-1-
10.pdf).
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The White House estimated when it made the announcement
that ``the direct costs of American automakers failing and
laying off their workers in the near term would result in a
more than 1 percent reduction in real GDP growth and about 1.1
million workers losing their jobs, including workers for
automotive suppliers and dealers.'' \12\ This estimate was
produced by the Council of Economic Advisors and reflected the
direct job losses at GM and Chrysler, their suppliers, and
dealerships over the short term, i.e., roughly six months.\13\
Over the longer term, it is highly likely that the assets of
these firms--particularly those related to the production of
the more successful truck and minivan models--would have been
brought back into production by competing firms such as Ford or
the international auto manufacturers that build vehicles in the
United States. Alternatively, the production capacity of the
remaining firms might have been expanded to supply additional
vehicles and employ additional workers. Likewise, while there
would have been adjustments in supplier relationships and
dealer networks, these changes would have created partially
offsetting new employment, as those firms sought to fill the
void created by the exit from the marketplace of two large auto
manufacturers.
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\12\ See George W. Bush White House Archives, Fact Sheet: Financing
Assistance to Facilitate the Restructuring of Auto Manufacturers to
Attain Financial Viability (Dec. 19, 2008) (online at georgewbush-
whitehouse.archives.gov/news/releases/2008/12/20081219-6.html)
(hereinafter ``George W. Bush White House Archives Fact Sheet'').
\13\ Panel conversations with Edward Lazear, Professor of
Economics, Stanford University, and Chairman of the President's Council
of Economic Advisors, 2006-2009 (Jan. 4, 2011).
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The AIFP called for an investment of $13.4 billion in GM
and Chrysler by mid-January 2009 and additional funding for GM
of up to $4.0 billion.\14\ In announcing the plan, then-
Treasury Secretary Henry Paulson stated that EESA provided him
with the authority to make the investment, even as he
acknowledged that ``the purpose of [the TARP] program and the
enabling legislation is to stabilize our financial sector.''
\15\ This marked a reversal of the Administration's previous
stance that automakers were ineligible to receive TARP
assistance.\16\
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\14\ See U.S. Department of the Treasury, Indicative Summary of
Terms for Secured Term Loan Facility [GM], at Appendix A (Dec. 19,
2008) (online at www.treasury.gov/press-center/press-releases/
Documents/gm%20final%20term%20_%20appendix.pdf); U.S. Department of the
Treasury, Indicative Summary of Terms for Secured Term Loan Facility
[Chrysler], at Appendix A (Dec. 19, 2008) (online at www.treasury.gov/
press-center/press-releases/Documents/
chrysler%20final%20term%20_%20appendix.pdf).
\15\ Secretary Paulson Statement on Stabilizing the Automotive
Industry, supra note 11 (``Treasury will make these loans using
authority provided for the Troubled Asset Relief Program. While the
purpose of this program and the enabling legislation is to stabilize
our financial sector, the authority allows us to take this action.
Absent Congressional action, no other authorities existed to stave off
a disorderly bankruptcy of one or more auto companies''); September
2009 Oversight Report, supra note 2, at Section G.1.
\16\ House Committee on Financial Services, Testimony of Henry M.
Paulson, Jr., secretary, U.S. Department of the Treasury, Transcript:
Oversight of Implementation of the Emergency Economic Stabilization Act
of 2008 and of Government Lending and Insurance Facilities: Impact on
the Economy and Credit Availability, at 18-19 (Nov. 18, 2008) (online
at frwebgate.access.gpo.gov/cgi-bin/
getdoc.cgi?dbname=110_house_hearings&docid=f:46593.pdf) (stating that
``[t]he TARP was aimed at the financial system. That is what the
purpose is. That is what we talked about with the TARP . . . I don't
see [preventing the failure of one or more automotive companies] as the
purpose of the TARP. Congress passed legislation that dealt with the
financial system's stability.'').
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The terms of the loans required both Chrysler and GM to
demonstrate to the government their ability to achieve
financial viability, and both companies submitted their
viability plans on February 17, 2009.\17\ The results of the
Obama Administration's review of those plans were announced on
March 30, 2009.\18\ Both companies ultimately entered
bankruptcy and, with the active involvement of the federal
government, underwent radical restructurings through ``363
sales'' (conducted under Section 363(b) of the U.S. Bankruptcy
Code), which allow a business to sell all or substantially all
of its assets and leave only the remainder of the assets for
distribution in a Chapter 11 plan.\19\ Following those
restructurings and after eventually providing a total of $63.1
billion in support, American taxpayers owned about 10 percent
of what is now known as New Chrysler and 61 percent of New
GM.\20\
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\17\ See George W. Bush White House Archives Fact Sheet, supra note
12. The loans also imposed conditions related to operations,
expenditures, and reporting.
\18\ The Administration concluded that Chrysler could not achieve
viability as a stand-alone company and that it would have to develop a
partnership with another automotive company or face bankruptcy. As for
GM, the Administration concluded that the automaker's financial
viability plan relied on overly optimistic assumptions about the
company and future economic developments.
\19\ In GM's 363 sale, certain assets of Old GM (the automotive
company that went into bankruptcy) were purchased by New GM (the
company formed to buy the assets and financed by Treasury). As a part
of this transaction, New GM also assumed certain liabilities of Old GM.
Chrysler also engaged in a similar 363 sale.
For a discussion of the details of the bankruptcy, see September
2009 Oversight Report, supra note 2, at 7-8.
\20\ As a result of the GM IPO on November 17, 2010, Treasury has
reduced its ownership stake in GM to 33 percent. For further discussion
concerning the government's exit strategy for GM, see Section D.4,
infra.
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c. Auto Suppliers and Warranties
The TARP's assistance to the automotive industry includes
two additional initiatives. First, as a result of the downturn
in the economy, automotive suppliers had great difficulty
accessing credit. Consequently, on March 19, 2009, Treasury
announced the Auto Supplier Support Program (ASSP), under which
the government agreed to guarantee payment for products shipped
by participating suppliers, even if the buyers went out of
business.\21\ Through the ASSP, Treasury committed $1.0 billion
to Chrysler and $2.5 billion to GM, though each company drew
down smaller amounts. Those funds have since been repaid.
Second, the automotive companies' widely publicized
vulnerability in late 2008 and early 2009 also raised concerns
that consumers might not purchase Chrysler and GM automobiles
for fear that the companies could not back their warranties.
Accordingly, Treasury lent Chrysler $280 million and GM $361
million to backstop their new vehicle warranties. Both Chrysler
and GM have since repaid those loans.
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\21\ In order to unlock credit further, participating suppliers
could also sell their receivables into the program (run through
American automotive manufacturers that agreed to participate in the
program) at a discount before maturity. The supplier would pay a small
fee for the right to participate in the program. Although all domestic
automotive manufacturers were eligible, only Chrysler and GM chose to
participate.
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d. Rescues of Chrysler Financial and GMAC/Ally Financial
Treasury states that as it considered using TARP funds to
rescue Chrysler and GM, it came to the conclusion that they
could not survive without Chrysler Financial's and GMAC/Ally
Financial's financial underpinning, respectively. Without
access to ``floorplan financing''--that is, loans to auto
dealers to allow them to purchase their inventories--many
dealers would have been forced to close their doors. In
addition, despite the relatively competitive retail lending
environment, GM and Chrysler relied on GMAC/Ally Financial and
Chrysler Financial, respectively, for a substantial portion of
their consumer auto financing.\22\
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\22\ For further discussion concerning the relationship between GM
and GMAC/Ally Financial and Chrysler and Chrysler Financial, see
Congressional Oversight Panel, March Oversight Report: The Unique
Treatment of GMAC Under the TARP, at 57-74 (Mar. 10, 2010) (online at
cop.senate.gov/documents/cop-031110-report.pdf) (hereinafter ``March
2010 Oversight Report'').
---------------------------------------------------------------------------
GMAC/Ally Financial's need for assistance in late 2008
arose from mortgage market investments that had incurred severe
losses. On December 24, 2008, four days after President Bush
announced the AIFP, the Federal Reserve Board approved GMAC/
Ally Financial's application to become a bank holding company
(BHC).\23\ As part of this approval, the Federal Reserve
required GMAC/Ally Financial to raise $7 billion in new equity.
To satisfy this requirement, Treasury provided GMAC/Ally
Financial with $5 billion in emergency funding under the AIFP
on December 29, 2008, and GMAC/Ally Financial made an equity
rights offering to its existing shareholders for $2
billion.\24\
---------------------------------------------------------------------------
\23\ Board of Governors of the Federal Reserve System, Order
Approving Formation of Bank Holding Companies and Notice to Engage in
Certain Nonbanking Activities, at 2 (Dec. 24, 2008) (online at
www.federalreserve.gov/newsevents/press/orders/orders20081224a1.pdf).
\24\ Treasury made a loan commitment to GM, which already owned a
stake in GMAC/Ally Financial, of up to $1 billion in order to
participate in the equity rights offering; however, only $884 million
was drawn and used. U.S. Department of the Treasury, Troubled Asset
Relief Program Transactions Report for the Period Ending December 30,
2010, at 18-19 (Dec. 30, 2010) (online at www.financialstability.gov/
docs/transaction-reports/12-30-
10%20Transactions%20Report%20as%20of%2012-30-10.pdf) (hereinafter
``Treasury Transactions Report'').
---------------------------------------------------------------------------
Subsequently, GMAC/Ally Financial was one of 19 firms
included in the government's ``stress tests.'' \25\ When the
stress tests revealed that GMAC/Ally Financial needed to
increase its capital, funding that it was unable to raise in
the markets, the government extended further investments of
$7.5 billion in May 2009 and $3.8 billion in December 2009.\26\
Treasury's investment in GMAC/Ally Financial now consists of
73.8 percent of the company's common stock, $2.7 billion in
trust-preferred securities, and $5.9 billion in mandatory
convertible preferred (MCP) shares.
---------------------------------------------------------------------------
\25\ The stress tests were designed to ensure that the nation's
largest financial institutions could withstand a sharp economic
downturn.
\26\ Of the $7.5 billion investment provided in May 2009, $4.0
billion was provided to GMAC/Ally Financial related to its partial
acquisition of Chrysler Financial in May 2009. Treasury explained that
it began to orchestrate the transfer of most of Chrysler Financial's
business into GMAC/Ally Financial because it realized in the spring of
2009 that by July 2009, Chrysler Financial would be unable to meet its
financing requirements. Treasury conversations with Panel staff (Feb.
2, 2010).
---------------------------------------------------------------------------
The assistance to Chrysler and Chrysler Financial was
interwoven due to the common ownership of those two entities.
On January 16, 2009, Treasury made a $1.5 billion loan directly
to Chrysler Financial, which has since been repaid.\27\ On
January 2, 2009, as part of its broader assistance to Chrysler,
Treasury provided a $4.0 billion loan to Chrysler Holding, an
entity owned by Cerberus Management.\28\ Both Chrysler and
Chrysler Financial were subsidiaries of Chrysler Holding at the
time. In connection with the loan to Chrysler Holding, Treasury
was entitled to the first $1.375 billion of proceeds from
Chrysler Financial that would have flowed to Chrysler Holding
and 40 percent of any additional proceeds that Chrysler
Financial paid to Chrysler Holding after certain other
distributions were made.\29\ As part of the bankruptcy process,
$500 million of the $4.0 billion loan was assumed by New
Chrysler, leaving Chrysler Holding with a $3.5 billion loan.
---------------------------------------------------------------------------
\27\ Treasury Transactions Report, supra note 24, at 18-19.
\28\ Treasury Transactions Report, supra note 24, at 18-19;
Cerberus Capital Management, L.P., Company Profiles: Chrysler Holding
LLC (online at webcache.googleusercontent.com/
search?q=cache:bcyLZouJF04J:www.cerberuscapital.com/profiles/
chrysler.html+cerberus+chrysler+holdings`cd=4`hl=en`ct=clnk`gl=us)
(accessed Jan. 1, 2011).
\29\ Treasury Transactions Report, supra note 24, at 18-19.
---------------------------------------------------------------------------
On May 17, 2010, Treasury announced that it had settled
with Chrysler Holding and extinguished the loan for $1.9
billion in consideration for the government's 40 percent
interest in Chrysler Financial, a settlement that it noted was
above the valuation determined in an analysis by investment
bank Keefe, Bruyette and Woods, but which would nevertheless
result in a loss of $1.6 billion on the initial $3.5 billion
loan.\30\ Seven months later, on December 21, 2010, TD Bank
Group announced that it had agreed to purchase Chrysler
Financial from Cerberus Management for approximately $6.3
billion.\31\ Using this sale price, Treasury's right to 40
percent of Chrysler Financial's equity would have been worth
$2.5 billion, representing a $600 million difference from the
$1.9 billion Treasury settled for in May 2010.
---------------------------------------------------------------------------
\30\ U.S. Department of the Treasury, Chrysler Financial Parent
Company Repays $1.9 billion in Settlement of Original Chrysler Loan
(May 17, 2010) (online at www.financialstability.gov/latest/
pr_05172010c.html).
\31\ Toronto-Dominion Bank, TD Bank Group to Acquire Chrysler
Financial (Dec. 21, 2010) (online at mediaroom.tdbank.com/
index.php?s=43`item=271). The $6.3 billion sale price included $400
million of goodwill.
---------------------------------------------------------------------------
The rush to exit Chrysler Financial--compounded by
incomplete due diligence--may have resulted in an unnecessarily
subpar return for taxpayers, preventing Treasury from recouping
more of its prior $1.6 billion loss. Presumably, Treasury's
stance as a reluctant shareholder underscored the rationale for
an expedited exit in this investment.\32\ However, such an
approach was still in marked contrast to Treasury's longer-term
(and generally successful) investment mentality in other
instances (for example, GMAC/Ally Financial, Chrysler).
Further, Treasury apparently conducted limited valuation due
diligence, focusing on the merits of the offer from Cerberus in
the context of an expected wind-down of the Chrysler Financial
platform. Cerberus had operated Chrysler Financial in run-off
mode, and Treasury had valued it as such in the context of the
offer from Cerberus. While Treasury relied primarily on a
valuation premised on the wind-down assumption, Treasury also
states that they considered other inputs to evaluate fully the
offer from Cerberus. However, aside from providing an
accompanying net-present-value analysis in response to
subsequent Panel requests, Treasury was unable to provide any
documentation to support this claim of a multi-pronged
valuation exercise that encompassed a potential bid from a
strategic buyer.
---------------------------------------------------------------------------
\32\ With GMAC/Ally Financial moving quickly into the business of
providing Chrysler financing, Treasury announced in late 2009 that
Chrysler Financial had begun to wind down the minimal portion of its
operations not assumed by GMAC/Ally Financial and aimed to complete the
process by December 31, 2011. See Letter from Kenneth R. Feinberg,
special master for TARP executive compensation, to Tracy Hackman, vice
president, general counsel and secretary, Chrysler Financial, Proposed
Compensation Payments and Structures for Senior Executive Officers and
Most Highly Compensated Employees, Annex A, at A5 (Oct. 22, 2009)
(online at www.financialstability.gov/docs/
20091022%20Chrysler%20Financial%202009%20Top%2025%20Determination.pdf).
---------------------------------------------------------------------------
After this settlement, Treasury no longer had any interest
in or claim on Chrysler Financial, leaving Cerberus as the sole
owner of the company. Cerberus, recognizing the inherent value
of the Chrysler Financial platform to potential strategic
bidders (i.e., other financial institutions seeking a foothold
in the auto lending market), sought to cash in on the value of
the franchise. Thomas Gilman, CEO of Chrysler Financial,
explained that, ``During this time our origination engine was
idling, but we knew we had a valuable franchise and so we
continue[d] to make strategic investments in the core
competencies of our operations in technology, process and
talent.'' \33\
---------------------------------------------------------------------------
\33\ Toronto-Dominion Bank, Acquisition of Chrysler Financial by
Toronto-Dominion Bank (Dec. 21, 2010) (hereinafter ``Acquisition of
Chrysler Financial by Toronto-Dominion Bank''). Transcript provided by
SNL Financial.
During a recent interview, Chrysler Financial CEO Tom Gilman said
the company was in liquidation mode and winding down its loan portfolio
for most of 2010. The company currently has 1,850 employees after
eliminating over 50 percent of its staff (about 2,000 positions) during
the last two years, and its loan portfolio balance declined from $50
billion to under $10 billion as it generally stopped underwriting new
loans over the past year. David Shepardson, TD Bank to buy Chrysler
Financial, Detroit News (Dec. 21, 2010) (online at detnews.com/article/
20101221/AUTO01/12210375).
---------------------------------------------------------------------------
Following Treasury's sale, Chrysler Financial benefited
from the lifting of restrictions associated with the TARP
assistance provided to Chrysler Holding, as well as capital
investments Cerberus made in order to enhance further the
strategic options for company going forward.\34\ As Mr. Gilman
explained following the acquisition by TD Bank, ``the ultimate
solution for Chrysler Financial is to find a strong partner
that could provide stable and long-term financing to support
the needs of our customers and our dealers.'' \35\
---------------------------------------------------------------------------
\34\ Acquisition of Chrysler Financial by Toronto-Dominion Bank,
supra note 33. Transcript provided by SNL Financial. (Thomas Gilman,
Chrysler Financial CEO, said ``[W]e paid all debt and we paid all the
U.S. government TARP funds that we received. Obviously, any
restrictions related to TARP have now been lifted.''). Restriction
associated with the loan included the limitation of new business lines
and major investments. U.S. Department of the Treasury, Loan and
Security Agreement By and Between The Borrower Listed on Appendix A as
Borrower and The United States Department of the Treasury as Lender, at
56 (Dec. 31, 2008) (online at www.financialstability.gov/docs/AIFP/
Chrysler%20LSA%20as%20of%2005-26-10.pdf) (``No Loan Party will engage
to any substantial extent in any line or lines of business activity
other than the businesses generally carried on by the Loan Parties as
of the Effective Date or businesses reasonably related thereto.''); Id.
at 58 (``No Loan Party intends to make any Investment, except Permitted
Investments. If any Loan Party shall make a Permitted Investment not in
the ordinary course of business in an amount greater than $100,000,000,
such Loan Party shall comply with provisions'').
\35\ Acquisition of Chrysler Financial by Toronto-Dominion Bank,
supra note 33. Transcript provided by SNL Financial.
---------------------------------------------------------------------------
e. Differences between Automotive Industry and Financial
Institution Interventions
The Administration has articulated a set of uniform
principles to govern its ownership interests in financial and
automotive companies. One such set of principles is that in
``exceptional cases'' where the government feels it is
necessary to respond to a company's request for substantial
assistance, Treasury will reserve the right to establish
upfront conditions as necessary including requirements for new
viability plans as well as changes to boards of directors and
management.\36\ Treasury determined that seven institutions--
AIG, Citigroup, Bank of America, GM, GMAC/Ally Financial,
Chrysler, and Chrysler Financial--should be deemed
``exceptional assistance'' recipients.
---------------------------------------------------------------------------
\36\ Congressional Oversight Panel, Written Testimony of Ron Bloom,
senior advisor, U.S. Department of the Treasury, COP Field Hearing on
the Auto Industry (July 27, 2009) (online at cop.senate.gov/documents/
testimony-072709-bloom.pdf); The White House, Fact Sheet: Obama
Administration Auto Restructuring Initiative General Motors
Restructuring (June 30, 2009) (online at financialstability.gov/latest/
05312009_gm-factsheet.html) (hereinafter ``White House Fact Sheet on
General Motors Restructuring'').
---------------------------------------------------------------------------
In practice, however, there were clear differences between
the treatment of banks and the automobile manufacturers that
received TARP assistance, and even among those considered to be
``exceptional cases.'' Both Chrysler and GM faced government-
mandated restructurings. In comparison, Treasury has generally
not forced TARP recipient financial institutions to reorganize,
nor, with the exception of AIG, has it changed their boards and
managements.\37\ Treasury's assistance to Bank of America and
Citigroup--two ``exceptional assistance'' recipients--was not
conditioned on restructuring or management changes. Even in the
case of GMAC/Ally Financial--a financial institution that, like
GM and Chrysler, was assisted as part of the TARP's Auto
Industry Financing Program--Treasury chose not to put the firm
through bankruptcy.
---------------------------------------------------------------------------
\37\ As with the automotive companies, some of AIG's management has
been replaced and the company has undergone a restructuring that has
resulted in two of its profitable foreign insurance divisions being
spun-off and its financial products division significantly cut back.
However, the Federal Reserve and Treasury chose not to use the
Bankruptcy Code to restructure AIG.
---------------------------------------------------------------------------
Moreover, while Treasury has not generally exercised a
significant role in restructuring the management of most of the
financial institutions that received TARP capital investments,
it has done so with the largest and most distressed TARP
recipients, and this is particularly true of those assisted
under the AIFP--GM, GMAC/Ally Financial, and Chrysler. Of
course, in the cases of GM, AIG, and GMAC/Ally Financial,
Treasury's ability to effect management changes may have been
at least facilitated by its majority ownership positions. In
contrast to the treatment of Chrysler and GM shareholders, who
were wiped out, those with equity stakes in AIG, Citigroup, and
GMAC/Ally Financial have seen their positions severely diluted
by the government, but they have not been wiped out.
Furthermore, unlike many creditors of the automotive companies,
who were wiped out, companies with contractual ties to AIG, for
instance those that owned AIG-originated credit default swap
(CDS) contracts, were made whole.
f. Current State of Government's Investments
There are currently $51.5 billion in TARP funds outstanding
under the AIFP.\38\ Figure 1 shows the current state of TARP
funds used to support the auto industry. In total, U.S.
taxpayers spent $49.9 billion in support of GM, about $12.8
billion in support of Chrysler, and $17.2 billion in support of
GMAC/Ally Financial. The assistance to automotive suppliers
accounts for approximately $3.5 billion of TARP commitments,
bringing the gross TARP support for the U.S. domestic
automotive industry to approximately $84.8 billion.
---------------------------------------------------------------------------
\38\ This figure is composed of the $81.3 billion in total
assistance provided to the automotive companies less the $26.4 billion
in repayments and less the $3.5 billion in losses associated with the
AIFP. Treasury Transactions Report, supra note 24, at 18-19.
FIGURE 1: AIFP ASSISTANCE BY COMPANY AS OF DECEMBER 30, 2010
[Millions of dollars] \39\
----------------------------------------------------------------------------------------------------------------
% of % of Assistance
Total Total Total Investment Total Lost Currently
Invested AIFP Repaid Repaid Extinguished Obligated
----------------------------------------------------------------------------------------------------------------
GMAC/Ally Financial........................ $17,174 21 - 0 - \40\ $17,1
74
General Motors............................. 49,861 61 $(22,717) 46 - 27,144
Chrysler Financial......................... 1,500 2 (1,500) 100 - -
Chrysler................................... 12,810 16 (2,180) 17 ($3,488) 7,142
--------------------------------------------------------------------
Total AIFP............................. $81,345 - ($26,397) - ($3,488) $51,459
----------------------------------------------------------------------------------------------------------------
\39\ Treasury Transactions Report, supra note 24, at 18.
\40\ As of December 30, 2010, Treasury had converted $9.4 billion of its investment in GMAC/Ally Financial into
common stock. For further information regarding these conversions, see Section F.2.b of this report.
Figure 2 illustrates the proportion of TARP funds expended
and repaid in support of the auto industry compared to the
amounts used for other purposes.
FIGURE 2: TARP FUNDS REPAID AS A PORTION OF TOTAL EXPENDED BY PROGRAM
TYPE \41\
---------------------------------------------------------------------------
\41\ The ``Foreclosure Prevention'' category includes the Home
Affordable Modification Program (HAMP), the Hardest Hit Fund, and the
Federal Housing Administration (FHA) Short Refinance program. It should
be noted that these programs were not designed to solicit repayment.
The ``Other Stability programs'' category includes the Term Asset-
Backed Loan Facility (TALF), the Public-Private Investment Partnership
(PPIP), and the Small Business Administration 7(a) Securities Purchase
Program.
[GRAPHIC] [TIFF OMITTED] T3381.001
As shown above, a significant amount of the AIFP assistance
remains outstanding, particularly in comparison to the bank
recapitalizations conducted under the TARP. In addition,
compared to the TARP bank recapitalization and other stability
programs, it is generally taking Treasury a longer period of
time to dispose of its AIFP investments. The longer disposition
process is largely the result of the nature of Treasury's
investments in each program. While most of Treasury's banking
sector investments (with the exception of investments in
Citigroup and a small number of other banks) were limited to
purchases of senior preferred stock or subordinated debentures
(the terms of which allowed the recipient the right to redeem
at any time, subject to regulatory approval), Treasury's AIFP
investments are a combination of loans, preferred stock, and
common stock. Since common stock interests in GM, Chrysler, and
GMAC/Ally Financial now form the majority of Treasury's
remaining AIFP investments, the disposition of these ownership
interests will depend on the condition of the equity capital
markets, the state of the auto sector, and the broader economic
outlook. As with the disposition of Treasury's investment in
insurance giant AIG, the complete disposition of Treasury's
AIFP investments could take place over several years.
At this point, it is impossible to determine whether
Treasury's assistance through the AIFP will have a long-term
financial cost or gain. The Panel examines this issue, as well
as the context for government assistance and likely exit
strategies for each company, in more depth below.
C. Current State of the Domestic Automotive Industry
U.S. auto companies have significantly improved their
operating performance over the past year, moving from losses to
profits in recent quarters. Automakers restructured during the
global recession by cutting brands, closing factories, and
laying off workers, positioning themselves for higher profits
once consumer demand increased. Since the automakers have
recently demonstrated that they can generate profits at a much
lower level of sales, the industry may be well positioned to
exploit any increased demand.\42\ The industry's improved
efficiency has allowed automakers to become more flexible and
better able to meet changing consumer demands, while still
remaining profitable. Improved production procedures and lower
inventory have resulted in fewer discounts on new car sales,
improving the profitability on each car sold. Investor
enthusiasm for GM's IPO in November 2010 demonstrates a more
favorable outlook for the auto companies since the
restructurings of GM and Chrysler, in large part because of
structural cost reductions, resulting in leaner and more
efficient business models, and boosting optimism for the
possibility of more sustainable profits over the long term.
---------------------------------------------------------------------------
\42\ For further discussion concerning the outlook for the auto
industry, see Section C.5, infra.
---------------------------------------------------------------------------
These fundamental changes across the industry are outlined
below. Restructuring efforts at the individual companies are
outlined in more detail in the corresponding GM, Chrysler, and
GMAC/Ally Financial sections of this report.
1. Capacity Reductions
Restructuring during the economic downturn has resulted in
increased factory and labor usage and reduced vehicle
inventory. As Figure 3 below illustrates, the North American
production capacity of the big three automakers steadily
declined from 2001 to 2004, before declining more sharply in
recent years. In comparison, the utilization rate, a metric
that measures the degree to which companies exploit their
existing production capacity, is projected to increase from a
trough of 47 percent in 2009 to 80 percent in 2012. The
reduction in production capacity, combined with a more
efficient use of inputs, demonstrates that the nation's largest
three automakers have taken steps to align their size and
production with a more subdued market backdrop.
FIGURE 3: NORTH AMERICAN CAPACITY OF BIG 3 AUTOMAKERS COMPARED TO
CAPACITY UTILIZATION RATE \43\
---------------------------------------------------------------------------
\43\ Capacity is defined here as two 8-hour work shifts per day
times the average number of work days (240) per year at the maximum
possible facility line rate (vehicles produced per hour). Utilization
is production divided by capacity. Data provided by CSM.
[GRAPHIC] [TIFF OMITTED] T3381.002
2. Lower Labor Costs
Industry-wide labor costs are also substantially lower,
primarily due to the following:
A reduction in the number of salaried employees;
\44\
---------------------------------------------------------------------------
\44\ For example, GM's U.S. salaried headcount is currently 24,000,
versus 30,000 in 2008 and 34,000 in 2007 (down 20 percent and 29
percent, respectively). GM's U.S. hourly workforce, which is almost
completely made up of UAW members, is currently 46,000, down from
62,000 in 2008 and 78,000 in 2007. (Deutsche Bank Investment Research).
---------------------------------------------------------------------------
Salary declines resulting from the hiring of Tier
2 workers, who are new hires with average wages of $33 per
hour. Tier 1 employees, who have been employed for longer, have
average wages of $58 per hour;
A shift in responsibility for employee health-
care costs as a result of a 2007 agreement with the UAW; \45\
and
---------------------------------------------------------------------------
\45\ In large part due to the shifting of healthcare costs to the
UAW in the 2007 agreement, hourly labor costs within Chrysler, Ford,
and GM have now declined to approximately $58 per hour, approaching the
levels at U.S. plants operated by Japanese automakers and falling below
historical levels of $65 per hour. Colin Langan, 10% Margins in the
``New'' US Auto Industry, UBS Investment Research, at 5 (Nov. 15, 2010)
(hereinafter ``UBS Investment Research Paper'').
---------------------------------------------------------------------------
Streamlined job classifications, which help
improve assembly line productivity.
Overall, the cost bases at Chrysler, Ford, and GM are some
35 percent lower in 2010 than they were in 2005 and 20 percent
lower than they were in 2007.\46\
---------------------------------------------------------------------------
\46\ Id. at 1. UBS states that automakers ``are now profitable at
very low levels of utilization, which bodes well for operating leverage
as sales demand continues to recover.''
---------------------------------------------------------------------------
3. Resiliency in Market Share
Since the 1980s, American automakers have been losing
ground in their home market, but they started to reverse that
trend in 2010, at the expense of their Japanese rivals. This
reflects gains in the U.S. auto market by Ford and a retreat by
Toyota after a series of Toyota recalls over the past year.
After shedding or eliminating four brands as part of its
restructuring, GM's share has fallen from 19.7 percent in 2009
to 18.3 percent at present,\47\ while Chrysler's share has
slightly improved from 9.0 percent in 2009 to approximately 9.5
percent. Chrysler's improvement in market share has been aided
by a shift to lower-margin sales of ``fleet'' vehicles to
rental car agencies and other commercial buyers.
---------------------------------------------------------------------------
\47\ General Motors Company, Q3 2010 Results, at 6 (Nov. 10, 2010)
(online at media.gm.com/content/dam/Media/gmcom/investor/2010/Q3-Chart-
Set.pdf) (hereinafter ``GM Q3 2010 Results'').
---------------------------------------------------------------------------
FIGURE 4: BIG 3 TOTAL U.S. MARKET SHARE, 1980 TO 2010 \48\
---------------------------------------------------------------------------
\48\ Data provided by Wards Auto.
[GRAPHIC] [TIFF OMITTED] T3381.003
4. Pricing
Finally, the industry has also benefited from a reduction
in sales promotions (as its inventory management has improved,
in line with a more sustainable utilization rate), which has
resulted in a steadily higher average transaction price per
vehicle sold. Figure 5 below shows the average transaction
price per vehicle as a percentage of the Manufacturer Suggested
Retail Price (MSRP). This measure reached a trough of 75
percent in August of 2009 as the industry struggled to unload
unsold inventory, but has since increased to 84 percent in
October 2010, eclipsing pre-crisis levels.
FIGURE 5: TRANSACTION PRICE AS A PERCENTAGE OF MSRP \49\
---------------------------------------------------------------------------
\49\ Data compiled by CNW Research. MSRP is defined as Manufacturer
Suggested Retail Price. The MSRP is the average sticker price of
vehicles sold; Transaction Price excludes taxes, fees, and aftermarket
products.
[GRAPHIC] [TIFF OMITTED] T3381.004
5. Outlook
Putting all of the aforementioned factors together, the
industry's financial outlook has improved considerably over the
past two years. Despite a historically weak backdrop of U.S.
sales, the industry is now reporting strong profits. The
combination of greatly reduced capacity, generally stable
market share, and improved pricing has more than offset
persistently weak (but improving) demand. Thus, many industry
observers believe that an improvement in the economy will
result in a disproportionate increase in profitability, as the
industry will be able to increase production without incurring
meaningful new investment costs. Meanwhile, sales outside the
United States--particularly in the emerging markets of Brazil,
Russia, India, and China--are pacing an improving long-term
sales outlook, as these markets overtake the United States as
the key driver of incremental industry demand.
The auto industry's average U.S. seasonally adjusted annual
rate (SAAR) for the year-to-date period through the end of
December 2010 is 12.5 million sales. This compares to 11.1
million in the corresponding year-ago period.\50\ However, this
level is still 29 percent below the average SAAR of 16.3
million in the 10 years preceding 2006. Nonetheless, the
industry's lower cost base has made it possible for the auto
companies to return to profitability at this level.\51\
Industry experts forecast improvements in sales of roughly one
million units per year for both 2011 and 2012.\52\
---------------------------------------------------------------------------
\50\ Bureau of Economic Analysis, Supplemental Data: Auto Vehicles
(Instrument: Light Total--seasonally adjusted at annual rates
(Millions)) (online at www.bea.gov/national/xls/gap_hist.xls) (accessed
Jan. 11, 2011). Standard & Poor's views on the extent of the sales
rebound are conservative given the sluggish economic recovery, but it
expects sales to improve again in 2011 to approximately 12.8 million
units. Despite the improvement, this figure is still below the 2008
sales numbers. PricewaterhouseCoopers (PwC), while noting concerns
about the ``waning strength'' of an economic recovery and ``dimming
prospects for marked improvement in 2011,'' states that North America's
light vehicle landscape has continued to produce ``convincing signs of
near-term stability in terms of sales and assembly.''
PricewaterhouseCoopers, North America Analyst Briefing (Nov. 2010). For
its part, Goldman Sachs is forecasting 2011 and 2012 sales at 13
million and 14 million, respectively, as it believes that additional
pent-up demand ``will help drive a steeper recovery in auto sales as
some of these macro concerns abate.'' The Goldman Sachs Group, Inc.,
Americas: Automobiles: See Upside to 3Q Consensus Post Our Volume
Driven Est. Revisions (Oct. 19, 2010) (hereinafter ``Goldman Sachs
Estimate Revisions''). In late October, Goldman Sachs also projected a
2013 SAAR estimate of 15 million. It is important to underscore,
however, that these levels are still well below historic ``normalized''
sales.
\51\ Standard & Poor's anticipates that recovering light vehicle
sales and inventory rebuilding in the United States will boost
production volumes by more than 10 percent in 2010. Standard & Poor's,
Industry Report Card: Busy Production Lines Are Fueling Global
Automakers' Operating Profits And Credit Quality (Oct. 4, 2010).
\52\ An average of five analyst forecasts for SAAR improves from
11.6 million vehicles sold in 2010 to 12.6 million in 2011. The same
analysts estimate that the 2012 SAAR will be 13.8 million vehicles.
Averages are comprised of forecasts from PricewaterhouseCoopers
Autofacts, CSM Worldwide, IHS Global Insight, J.D. Power, and IRN.
Original Equipment Suppliers Association, The State of the Supplier
Industry, at 8 (Nov. 10, 2010) (hereinafter ``The State of the Supplier
Industry'').
---------------------------------------------------------------------------
FIGURE 6: LIGHT VEHICLE SALES, AUTOS AND TRUCKS, MILLIONS OF UNITS SOLD
(SAAR) \53\
---------------------------------------------------------------------------
\53\ Bureau of Economic Analysis, Auto and Truck Seasonal
Adjustment Data (Dec. 2, 2010) (online at bea.gov/national/xls/
gap_hist.xls); Shaded areas reflect periods of economic recession as
defined by the National Bureau of Economic Research. See National
Bureau of Economic Research, U.S. Business Cycle Expansions and
Contractions (online at www.nber.org/cycles/cyclesmain.html) (accessed
Jan. 11, 2011). 2011 and 2012 data is an average projection comprised
of SAAR projections from PricewaterhouseCoopers Autofacts, CSM
Worldwide, IHS Global Insight, J.D. Power & Associates, and IRN. The
State of the Supplier Industry, supra note 52.
[GRAPHIC] [TIFF OMITTED] T3381.005
As noted earlier, the auto industry is also benefitting
from rising global sales. According to estimates by J.D. Power
& Associates, worldwide light vehicle sales may rise to 71.1
million vehicles, surpassing the previous record of 70.3
million units in 2007. These forecasts highlight the importance
of non-U.S. markets to the viability and profitability of the
U.S. auto companies: GM sells far more cars outside the United
States than it does domestically. While GM North America
delivered 661,000 vehicles in the third quarter of 2010, GM
delivered 567,000 vehicles in China alone, an additional
391,000 in Europe, and another 447,000 in the rest of the
globe. GM holds 18.3 percent of Brazil's market share, same as
its U.S. market share.\54\ (However, earnings overall are still
strongly driven by North America. GM reported in the third
quarter of 2010 that $2.1 billion of its earnings before
interest and taxes (EBIT) came from its North American branch,
whereas its European branch lost $0.6 billion, and the rest of
its international operations only earned $0.6 billion.) This
global growth in sales has been paced by rapid increases in
demand in Brazil, Russia, India, and China, which now account
for 34 percent of industry sales, compared to 9 percent in
2000.\55\ Within the next five years, the percentage of sales
in these countries and other developing markets is forecast to
outstrip that of mature markets (North America, Europe, and
Japan).\56\
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\54\ GM Q3 2010 Results, supra note 47, at 6, 11, 15.
\55\ UBS Investment Research, US (not BRIC) is Key NT Growth Market
(Nov. 11, 2010) (hereinafter ``UBS Investment Research Paper on Growth
Market'').
\56\ As recently as 2006, the United States accounted for more than
a quarter of the global market, whereas in 2010, the United States
accounted for a mere 16.3 percent of global demand. J.D. Power &
Associates, however, predicts that China's share of the world market
will climb from 10 percent in 2006 to 21 percent in 2013. Efraim Levy,
Industry Surveys: Autos & Auto Parts, Standard & Poor's Research, at
15-16 (June 24, 2010).
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Some industry analysts are very bullish on the U.S. auto
recovery, taking the view that improved capacity usage, reduced
labor costs, and global platforms can produce sustainable
profits.\57\ The global auto industry, however, is highly
cyclical and sensitive to changes in consumer sentiment,
employment, interest rates, gasoline prices, and general
economic activity.\58\ In the absence of any improvements in
the United States in employment, housing, credit-based
spending, and the equity markets, a near-term recovery in
demand for automobiles may be harder to achieve.\59\
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\57\ UBS points out that ``significant structural changes made by
the U.S. auto market in the last year have already resulted in enhanced
operating margins, despite the low levels of sales.'' While the United
States has not historically been a profitable market for domestic
automakers, UBS estimates profitability will be approximately 10
percent for the industry going forward, based on the combination of
capacity reductions, reduced labor costs, and improved outlook. In UBS'
view, ``[c]ombined with the ongoing sales recovery, these cost cuts
paint a very bright picture for the `new' North American auto industry
over the next five years.'' UBS Investment Research Paper on Growth
Market, supra note 55; UBS Investment Research Paper, supra note 45.
\58\ Goldman Sachs concludes that the key risk for the auto sector
``remains the pace of sales growth whose outlook is tied intimately to
consumer sentiment and the outlook for housing and employment in the
U.S.'' PricewaterhouseCoopers notes that while consumer credit has
thawed substantially over the past year, and lending standards have
eased, many consumers ``are voluntarily and involuntarily absent from
the new vehicle market,'' due in large part to widespread deleveraging
and lenders' limited capacity to extend financing to potential buyers
with ``newly tarnished credit.'' Goldman Sachs Estimate Revisions,
supra note 50. See also UBS Investment Research Paper, supra note 45.
\59\ PricewaterhouseCoopers, North America Analyst Briefing (Nov.
2010).
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D. General Motors
1. Context
a. Background and the Government Intervention
One of America's largest and most storied corporations, GM
enjoyed a highly profitable stretch during the 1990s. Its stock
price peaked above $93 in April 2000, up from $27.50 in late
1991. This decade of success was built largely on sales of GM's
light trucks and sport utility vehicles (SUVs), as well as the
high profit margins generated by GMAC/Ally Financial, a finance
arm that initially focused on automobiles, but over time
evolved into a more diversified financial services firm. By
2005, though, GM was losing money. High gasoline prices had
dampened consumer demand for its vehicles, which lagged behind
competitors in fuel efficiency, and its market share declined.
GM was also hurt by an unsustainable cost structure, largely
due to the high cost of its retiree health care and pension
benefits. GM's investment in automobile design lagged behind
competitors, which led to further erosion in the company's
market share. It all added up to a spiral of decline.
In 2006, GM sold much of its ownership in GMAC/Ally
Financial, which at the time remained profitable. The two firms
remained highly interdependent under agreements that kept GMAC/
Ally Financial as the largest financier of GM automobile
purchases. But the sale of GMAC/Ally Financial proved to be a
stop-gap measure for GM, since in 2007 the automaker posted a
staggering loss of more than $38 billion. The recession that
began in December 2007 took a toll on all manufacturers in the
highly cyclical auto industry, but GM, with its high fixed
costs and increasingly uncompetitive vehicles, was particularly
vulnerable. In the fall of 2008, amid the credit crisis, the
firm was unable to fund its operations using private-sector
lenders, and appealed to Congress for an emergency bailout.
The Bush and Obama Administrations provided multiple rounds
of TARP assistance to GM, culminating in a rapid bankruptcy
restructuring in June 2009.\60\ Out of this process, a new
company emerged: General Motors Company (New GM).\61\ This new
entity shed Old GM's least valuable assets and most burdensome
liabilities.\62\ To help achieve the transition to a new,
leaner company, Treasury invested a total of $49.9 billion in
GM.\63\
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\60\ September 2009 Oversight Report, supra note 2, at 3, 19.
\61\ The company effectively came into being on July 10, 2009, when
GM sold its ``good'' assets under Section 363 of the Code to a new,
government-owned entity, General Motors Company (New GM). Order (I)
Authorizing Sale of Assets Pursuant to Amended and Restated Master Sale
and Purchase Agreement with NGMCO, Inc., a Treasury-Sponsored
Purchaser; (II) Authorizing Assumption and Assignment of Certain
Executory Contracts and Unexpired Leases in Connection with the Sale;
and (III) Granting Related Relief, In Re General Motors Corp., S.D.N.Y.
(No. 09-50026 (REG)) (July 5, 2009) (online at
docs.motorsliquidationdocket.com/pdflib/2968_order.pdf). See also
September 2009 Oversight Report, supra note 2, at 19.
\62\ See White House Fact Sheet on General Motors Restructuring,
supra note 36. For purposes of this report, the General Motors that
existed prior to the 2009 restructuring is referred to as ``Old GM.''
Its formal name is now Motors Liquidation Company.
\63\ This figure includes investments in both Old GM and New GM.
Treasury Transactions Report, supra note 24, at 18-19. Foreign
governments provided assistance as well. The governments of Canada and
Ontario invested a net of $9.5 billion in loans to GM, resulting in an
11.7 percent ownership stake. GM also arranged a revolving bridge
facility with the German federal government with a commitment amount of
=1.5 billion, equivalent at the time to $2.1 billion. That loan was
repaid, in full, and extinguished on November 24, 2009. September 2009
Oversight Report, supra note 2, at 31; General Motors Company,
Amendment No. 9 to Form S-1: Preliminary Prospectus, at 61 (Nov. 17,
2010) (online at www.sec.gov/Archives/edgar/data/1467858/
000119312510262471/ds1a.htm) (hereinafter ``GM Amendment No. 9 to Form
S-1: Preliminary Prospectus'').
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b. Impact of Changes in Tax Rules
Like certain other TARP recipients, GM may receive
additional benefits from the government as a result of certain
Treasury-issued guidance \64\ concerning the rules applicable
to carrying forward net operating losses (NOLs).\65\ The
ability to carry forward an NOL allows corporations to offset
future taxable income with losses from prior years, thereby
reducing future tax liabilities.\66\ However, the use of NOL
carryforwards is subject to various limitations. One provision
in the Internal Revenue Code limits the amount of taxable
income that a corporation may offset in years following an
ownership change.\67\
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\64\ The so-called EESA Notices, in reference to the law that
established the TARP, include: Notice 2008-100, which concerned
recipients of TARP funds under the Capital Purchase Program; Notice
2009-14, which extended the guidance in Notice 2008-100 to instruments
issued under the Targeted Investment Program and the Automotive
Industry Financing Program; Notice 2009-38, which extended the prior
guidance to the Asset Guarantee Program and the Systemically
Significant Failing Institutions Program, among other actions; and
Notice 2010-2, which in part provides guidance on the impact of
Treasury's sale of stock that it was issued under the TARP programs
covered by the prior guidance. In the American Recovery and
Reinvestment Act of 2009, Congress provided an exception to the section
382 limitations on loss carryovers for certain ownership changes of
certain TARP recipients, including GM. See American Recovery and
Reinvestment Act of 2009, Pub. L. No. 111-5, at Sec. 382(n) (2009).
\65\ A net operating loss (NOL) is the excess of a corporation's
deductions over its taxable income. The future benefit of an NOL is
considered a deferred tax asset for financial accounting purposes.
\66\ Under Section 172 of the Internal Revenue Code, a corporation
is allowed to carry forward the amount of any unrecognized net
operating loss in the current taxable year to be recognized in future
taxable years. In general, Section 172 provides that a net operating
loss for the current taxable year may be carried back two taxable
years, and carried forward for up to 20 taxable years. For financial
accounting purposes, limitations on the use of an NOL carryforward may
reduce the amount a corporation is able to reflect as a deferred tax
asset on its financial statements, and in turn could negatively affect
value of such corporation.
\67\ In general, an ownership change occurs if the percentage of a
corporation's stock owned by one or more ``5-percent shareholders''
increases by more than 50 percentage points over the lowest percentage
of stock of such corporation owned by such shareholders at any time
during the three-year period that ends on the date of the triggering
event. Some events that can increase the percentage of stock owned by a
5-percent shareholder include a merger or acquisition of the
corporation, sales of stock to 5-percent shareholders, redemptions, and
new issuances of stock. A ``5-percent shareholder'' is any shareholder
that owns 5 percent or more of the stock of the corporation. The stock
owned by all shareholders who are not 5-percent shareholders is treated
as being owned by one or more ``public groups,'' which may be treated
as 5-percent shareholders.
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This limitation would have had a significant impact on
numerous TARP recipients, since several of them experienced a
change in ownership, as a result of government investments and
the disposition of those investments. Treasury issued several
notices that applied only to TARP recipients, and addressed the
application of the ownership change rules in the context of the
government's investment in TARP recipients.\68\ These notices
established the definition of ``change in ownership'' as
applied to TARP recipients, in general ignoring changes in the
government's equity ownership in determining whether a ``change
in ownership'' has occurred. GM was a beneficiary of the tax
notices, while Chrysler and GMAC/Ally Financial did not benefit
because they were limited liability companies at the time they
received government funds and were treated as pass-through
entities for federal income tax purposes.
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\68\ The Secretary possesses the authority to issue income tax
notices under 12 U.S.C. Sec. 5211(c)(5). In addition, Section 382(m)
specifically authorizes the Secretary to issue ``such regulations as
may be necessary or appropriate to carry out the purposes of this
section.'' 26 U.S.C. Sec. 382(m). See also Congressional Oversight
Panel, January Oversight Report: Exiting TARP and Unwinding Its Impact
on the Financial Markets, at 16-20 (Jan. 13, 2010) (online at
cop.senate.gov/documents/cop-011410-report.pdf) (hereinafter ``January
2010 Oversight Report'').
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GM has reported approximately $9.1 billion in U.S. federal
and state NOL carry-forwards.\69\ The actual financial impact
of Treasury's tax notices to GM is difficult to determine and
will depend on the company's future income.\70\ Nonetheless,
the favorable rules provided in the notices are likely to
affect GM's value.
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\69\ Total operating loss and tax credit carryforwards as of
December 31, 2009 were $18.9 billion, of which $9.1 billion related to
U.S. federal and state net operating loss carryforwards. General Motors
Company, Amendment No. 5 to Form S-1: Preliminary Prospectus, at F-123
(Nov. 3, 2010) (online at www.sec.gov/Archives/edgar/data/1467858/
000119312510246019/ ds1a.htm) (hereinafter ``GM Amendment No. 5 to Form
S-1: Preliminary Prospectus'').
\70\ See January 2010 Oversight Report, supra note 68, at 16-22.
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It is important to note that the change-in-ownership
restrictions were intended to prevent companies from buying
other firms for the purpose of benefitting from their tax
losses. GM's situation following the government rescue was a
different case, since the government did not invest in GM with
the purpose of benefitting from GM's tax losses. Nonetheless,
the Panel has noted previously with respect to TARP-recipient
banks that the favorable tax guidance pitted ``Treasury's
responsibilities as TARP administrator, regulator, and tax
administrator against one another,'' and that these notices
fuel ``the perception that income tax flexibility is
especially, and quickly, available for large financial
institutions at a time of general economic difficulty.'' \71\
This observation would appear to apply with equal validity to
Treasury's rescue of GM. On the other hand, it is possible that
the favorable tax guidance will contribute to greater
profitability and market value of GM, which will in turn
enhance the value, and improve the recovery, of the taxpayers'
investment.\72\
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\71\ January 2010 Oversight Report, supra note 68, at 22. The
Special Inspector General for the Troubled Asset Relief Program
(SIGTARP) has initiated an evaluation of Treasury's decision-making
process in providing TARP recipients a waiver from the NOL carry-
forward rules. SIGTARP seeks to determine the rationale behind the
waiver, whether Treasury was aware of any tax effect that might result
from the waiver, the identity of the decision-makers involved in
issuing the waiver, and the extent to which Treasury's policy to
dispose of TARP investments in a timely manner factored into the
decision to issue a waiver. Office of the Special Inspector General for
the Troubled Asset Relief Program, Engagement Memo--Review of the
Section 382 Limitation Waiver for Financial Instruments Held by
Treasury (Aug. 10, 2010) (online at www.sigtarp.gov/reports/audit/2010/
Engagement%20Memo%20-%20Review%20
of%20the%20Section%20382%20Limitation%20Waiver%20for%20Financial
%20Instruments%20Held%20by%20Treasury.pdf).
\72\ In addition, although the notices permit certain TARP
recipients to enjoy a tax benefit that they would have otherwise been
denied, other carry-forward benefits have been denied to TARP
recipients. As discussed in more detail in the Panel's May 2010 report,
TARP recipients were excluded from the extension of the NOL benefit
that was included in the Worker, Homeownership, and Business Assistance
Act of 2009. The Act permitted taxpayers with net operating losses in
2008 and 2009 to apply those losses to tax payments made in five
preceding tax years, rather than only to payments made in the two
preceding tax years. As the Panel noted, this exclusion may have
contributed to the development of the TARP ``stigma,'' as ``bank
industry sources have stated that when banks accepted TARP funds, they
had no reason to anticipate that their status as TARP recipients would
cause them to be denied access to subsequent benefits afforded to their
non-TARP competitors.'' Congressional Oversight Panel, May Oversight
Report: The Small Business Credit Crunch and the Impact of the TARP, at
71 (May 13, 2010) (online at cop.senate.gov/documents/cop-051310-
report.pdf). See also Internal Revenue Service, Questions and Answers
for The Worker, Homeownership, and Business Assistance Act of 2009--
Section 13 5-year Net Operating Loss (NOL) Carryback (Feb. 24, 2010)
(online at www.irs.gov/newsroom/ article /0,,id=217370,00.html).
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2. More Recent Developments
Following the formation of New GM, approximately $39.3
billion of Treasury's original investment was converted into
common equity, resulting in a government stake representing
60.8 percent of GM's common equity.\73\ The remaining
government investment was split between $7.1 billion in debt,
$2.1 billion in New GM preferred stock, and $986 million in the
form of a loan to Old GM. In a series of payments between July
2009 and April 2010, GM repaid the $7.1 billion in debt that it
owed to Treasury.\74\ New GM has also repurchased from Treasury
the $2.1 billion in New GM preferred stock.\75\ The $986
million government loan to Old GM remains outstanding.
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\73\ September 2009 Oversight Report, supra note 2, at 64, 69.
\74\ Treasury Transactions Report, supra note 24, at 18-19.
\75\ U.S. Department of the Treasury, General Motors Repays
Taxpayers $2.1 Billion, Completing Repurchase of Treasury Preferred
Stock (Dec. 15, 2010) (online at www.financialstability.gov/latest/
pr_12152010.html). The preferred stock was Series A fixed-rate
cumulative perpetual, which paid a 9 percent dividend. General Motors
Company, Form 10-Q for the Quarterly Period Ended September 30, 2010,
at 36 (Nov. 10, 2010) (online at www.sec.gov/Archives/edgar/data/
1467858/000119312510255233/d10q.htm) (hereinafter ``GM Form 10-Q'').
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After GM's bankruptcy, Treasury officials played a
significant role in the selection of a new CEO, Edward
Whitacre, Jr., who was named to the position on December 1,
2009.\76\ Treasury also appointed four members of the GM
board.\77\ On August 12, 2010, GM announced that Mr. Whitacre
would step down as CEO on September 1, 2010 and be replaced by
Daniel Akerson, a Treasury-appointed member of GM's board of
directors.\78\ As a recipient of ``exceptional financial
assistance,'' GM is also subject to the executive compensation
determinations of Patricia Geoghegan, Treasury's Special Master
of TARP Executive Compensation, who replaced Kenneth Feinberg
as ``pay czar.'' \79\
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\76\ See Steven Rattner, Overhaul, at 250 (2010).
\77\ Following the bankruptcy proceedings, five new members were
appointed to the 12-member board of New GM. Treasury's four
appointments were Daniel Akerson (now GM's CEO), managing director of
the private equity firm Carlyle Group; David Bonderman, co-founding
partner of TPG Capital; Robert Krebs, retired chairman and chief
executive of Burlington Northern Santa Fe railroad; and Patricia Russo,
former chief executive of telecommunications company Alcatel-Lucent. To
represent its stake, the Canadian government appointed Carol
Stephenson, dean of Richard Ivey School of Business at the University
of Western Ontario, to the Board. GM Amendment No. 9 to Form S-1:
Preliminary Prospectus, supra note 63, at 196.
\78\ Mr. Akerson had served on the board since July 2009 and had
previously served as a managing director of the Carlyle Group. General
Motors Company, GM Announces CEO Succession Process (Aug. 12, 2010)
(online at media.gm.com/content/media/us/en/news/news_detail.
brand_gm.html/content/Pages/news/us/en/2010/Aug/0812_transition).
\79\ In addition, the Special Master will continue to oversee GM's
compensation practices until the company repays all of the funds it
received under the AIFP. See TARP Standards for Compensation and
Corporate Governance, 31 CFR Sec. 30.1 (June 15, 2009) (online at
ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr`sid=188bec27fb299
580f359697139ae586a`rgn=div5`view=text`node=31:1.1.1.1.28`idno=31)
(defining ``exceptional financial assistance'' as ``any financial
assistance provided under the Programs for Systemically Significant
Failing Institutions, the Targeted Investment Program, the Automotive
Industry Financing Program, and any new program designated by the
Secretary as providing exceptional financial assistance.''). The
Special Master had authority to render individual compensation
determinations for the top 25 most highly paid employees at GM, as well
as to review compensation structures for the next 75 employees. On
October 23, 2009, he released his determinations for the top 25, which
reduced cash compensation by 31 percent compared to 2008 and by 46
percent compared to 2007. Total direct compensation decreased by 24.7
percent compared to 2008. Letter from Kenneth R. Feinberg, special
master for TARP executive compensation, to Gregory E. Lau, executive
director for Global Compensation, General Motors, Proposed Compensation
Payments and Structures for Senior Executive Officers and Most Highly
Compensated Employees, at Exh. 1 (Oct. 22, 2009) (online at
www.financialstability.gov/docs/
20091022%20GM%202009%20Top%2025%20Determination.pdf).
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On July 22, 2010, GM announced the $3.5 billion acquisition
of AmeriCredit, an automotive finance firm that specializes in
subprime auto lending.\80\ Several of GM's competitors, such as
Ford and Toyota, have in-house financing divisions, which are
often called ``captive'' financing arms. And following GM's
sale of GMAC/Ally Financial in 2006, industry analysts cited
GM's lack of a captive financing arm as a competitive
disadvantage.\81\ Now that GM has acquired AmeriCredit, GM says
that it still considers GMAC/Ally Financial to be a key
strategic partner, but that AmeriCredit provides GM with more
financial alternatives, and that AmeriCredit provides an auto
financing platform that GM can build out.\82\
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\80\ General Motors Company, GM to Acquire AmeriCredit (July 22,
2010) (online at media.gm.com/content/media/us/en/news/
news_detail.brand_gm.html/content/Pages/news/us/ en/2010/July/
0722_americredit). The deal closed effective October 1, 2010. General
Motors Company, General Motors Announced Its Acquisitions of
AmeriCredit Corp. Will Close Effective October 1, 2010 (Sept. 29, 2010)
(online at www.gm.com/investors/announcements-events/
event.jsp?id=3533539). SIGTARP has initiated an audit that will look at
Treasury's role in reviewing, approving, or otherwise participating in
GM's decision to acquire AmeriCredit. Office of the Special Inspector
General for the Troubled Asset Relief Program, Engagement Memo--Review
of Treasury's Investment in General Motors Company (Oct. 26, 2010)
(online at www.sigtarp.gov/reports/audit/2010/Engagement%20Memo%20-
%20Review%20
of%20Treasury%27s%20Investment%20in%20General%20Motors%20Company.pdf).
\81\ See Congressional Oversight Panel, Testimony of Michael Ward,
analyst, Soleil-Ward Transportation Research, Transcript: COP Hearing
on GMAC Financial Services, at 87 (Feb. 25, 2010) (online at
frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname
=111_senate_hearings`docid=f:56723.pdf).
\82\ General Motors Company conversations with Panel staff (Dec. 3,
2010).
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Throughout much of 2010, GM was preparing for an initial
public offering (IPO), a process that promised to allow
Treasury to sell its stake in GM's common stock.\83\ The final
underwriting agreement consisted of 35 underwriters, both large
and small firms.\84\ Treasury negotiated an underwriting fee of
0.75 percent, as opposed to a more customary figure of 2 or 3
percent for an IPO of comparable size.\85\ Although the IPO was
expected to price at a range of between $26 and $29, strong
investor enthusiasm during the company's road show
presentations resulted in the offering being six times
oversubscribed.\86\ Subsequently, the price was increased to
$33.\87\
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\83\ An initial public offering (IPO) occurs when a private company
issues stock to the public for the first time. Prior to the IPO, the
issuing institution works with an underwriting firm to determine the
type of security to issue, the price, and the timing of the offering.
\84\ Underwriters market shares to their clients. The underwriting
syndicate included Morgan Stanley, J.P. Morgan, Merrill Lynch,
Citigroup, Barclays Capital, Credit Suisse, Deutsche Bank, Goldman
Sachs & Co., RBC Capital Markets, Banco Bradesco BBI, CIBC World
Markets, Commerz Markets, BNY Mellon Capital Markets, ICBC
International Securities, Itau BBA USA Securities, Lloyds TSB Bank,
China International Capital Corporation HK Securities, Loop Capital
Markets, Williams Capital Group, Soleil Securities Corporation, Scotia
Capital (USA), Piper Jaffray & Co., SMBC Nikko Capital Markets, Sanford
C. Bernstein & Co., Cabrera Capital Markets, Castle Oak Securities, CF
Global Trading, C.L. King & Associates, FBR Capital Markets, Gardner
Rich, Lebenthal & Co., M.R. Beal & Company, Muriel Siebert & Co. and
Samuel A. Ramirez & Company. UBS was omitted from the final list amid
reports that a sales analyst within the firm distributed an
unauthorized e-mail to an institutional client regarding the valuation
of GM. Morgan Stanley and J.P. Morgan Securities served as the primary
book runners.
\85\ Bill Canis, Baird Webel, and Gary Shorter, General Motors'
Initial Public Offering: Review of Issues and Implications for TARP,
Congressional Research Service, at 12-13 (Nov. 10, 2010) (online at
www.crs.gov/Products/R/PDF/R41401.pdf) (hereinafter ``GM's Initial
Public Offering: Implications for TARP'').
\86\ GM Amendment No. 5 to Form S-1: Preliminary Prospectus, supra
note 69. See General Motors Company, General Motors Announces Increase
in Size of Public Offering of Common Stock (Nov. 17, 2010) (online at
media.gm.com/content/media/us/en/news/news_detail.brand_gm.html/
content/Pages/news/global/en/2010/1117_amendment). See also GM's
Initial Public Offering: Implications for TARP, supra note 85, at 12.
According to press reports, in the run-up to the IPO, senior officials
within the company marketed the IPO to a wide range of international
investors in order to attract the broadest investor base possible.
These investors included GM's partner in China--SAIC--as well as
several sovereign wealth funds. See David Welch and Jeffrey McCracken,
GM Said to Approach Sovereign Wealth Funds to Boost Stock Sale,
Bloomberg News (Oct. 5, 2010) (online at www.bloomberg.com/news/2010-
10-05/gm-is-said-to-approach-sovereign-wealth-funds-to-boost-initial-
stock-sale.html); Clare Baldwin, Soyoung Kim, and Philipp Halstrick, GM
IPO Multiple Times Oversubscribed, International Business Times (Nov.
12, 2010) (online at www.ibtimes.com/articles/81505/20101112/gm-ipo-
multiple-times-oversubscribed-sources.htm).
\87\ General Motors Company, Amendment No. 8 to Form S-1:
Preliminary Prospectus (Nov. 16, 2010) (online at www.sec.gov/Archives/
edgar/data/1467858/000119312510261467/ds1a.htm).
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The IPO took place on November 18, 2010, when GM common
stock began trading under the ticker ``GM'' on the New York
Stock Exchange (NYSE).\88\ Total funds generated in this
offering were $23.1 billion, before accounting for underwriting
fees and commissions.\89\ Based on total funds raised, the IPO
was the largest IPO in U.S. history.\90\
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\88\ GM also began trading under ``GMM'' on the Toronto Stock
Exchange.
\89\ In addition to $18.1 billion in common equity, the company
issued $5.0 billion in preferred stock. The preferred stock issuance
consisted of Series B mandatory convertible junior preferred shares,
which pay a dividend of 4.75 percent. Data accessed from Bloomberg on
Nov. 19, 2010.
\90\ While the GM common stock offering was second only to Visa's
2008 IPO, the total funds raised by GM exceeded those raised by Visa.
See Visa Investor Relations, Visa Inc., Largest IPO in US History (Mar.
19, 2008) (online at phx.corporate-ir.net/
phoenix.zhtml?c=129145&p=irol-newsArticle&ID=1120295&highlight=).
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GM's stock performed well throughout its first day of
trading, with the common stock settling at a price of
$34.19.\91\ President Obama applauded the IPO, noting that
``American taxpayers are now positioned to recover more than my
administration invested in GM.'' \92\ He stated that because
GM's management had made the ``tough decisions necessary to
make themselves more competitive in the 21st century--the
American auto industry--an industry that's been the proud
symbol of America's manufacturing might for a century; an
industry that helped to build our middle class--is once again
on the rise.'' \93\
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\91\ Shares of preferred stock closed at $50.45. Data accessed from
Bloomberg on November 19, 2010.
\92\ The White House, Remarks by the President on General Motors
(Nov. 18, 2010) (online at www.whitehouse.gov/the-press-office/2010/11/
18/remarks-president-general-motors).
\93\ Id.
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On November 26, 2010, GM announced that its underwriters
exercised in full their so-called over-allotment options to
purchase an additional 71.7 million shares of common stock from
the selling stockholders, for a total of $2.37 billion, plus an
additional 13 million shares of mandatory convertible junior
preferred stock from the company, for a total of $650
million.\94\
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\94\ General Motors Company, General Motors Announces Underwriters'
Exercise of Over-allotment Options (Nov. 26, 2010) (online at
www.gm.com/news-article.jsp?id=/content/Pages/news/us/en/2010/Nov/
1126_exercise.html).
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Net proceeds from the sale of common stock for existing GM
shareholders totaled $18.0 billion. Net proceeds from the sale
of preferred stock were $4.9 billion, which compared favorably
to GM's November 17 estimate of preferred stock proceeds of
$3.9 billion-$4.4 billion,\95\ bringing the total net proceeds
to $22.9 billion. Some of GM's proceeds from the sale of the
preferred shares went to redeem Treasury's $2.1 billion in
preferred stock holdings. GM anticipates that it will
contribute $2.0 billion in common stock to its U.S. hourly and
salaried pension plans, in addition to a $4.0 billion cash
contribution to the pension plans that it announced on December
2, 2010.\96\
---------------------------------------------------------------------------
\95\ GM Amendment No. 9 to Form S-1: Preliminary Prospectus, supra
note 63, at 9.
\96\ GM anticipated that it would use approximately 43 percent of
the preferred proceeds to purchase Treasury's Series A preferred
holdings. It planned to use the remainder of the proceeds--supplemented
with cash on hand--to make the cash pension contribution. See General
Motors Company, Form 424B1: Final Common Prospectus, at 38 (Nov. 18,
2010) (online at www.sec.gov/Archives/edgar/data/1467858/
000119312510263484/d424b1.htm) (hereinafter ``GM Form 424B1: Final
Common Prospectus''); General Motors Company, GM Makes $4 Billion
Pension Plan Contribution (Dec. 2, 2010) (online at www.gm.com/news-
article.jsp?id=/content/Pages/news/us/en/2010/Dec/1202_pension.html)
(hereinafter ``GM Makes $4 Billion Pension Plan Contribution'').
---------------------------------------------------------------------------
In total, the sales of GM stock produced $13.5 billion in
receipts to the Treasury.\97\ Including exercise of the over-
allotment option, Treasury sold over 412 million shares of the
total 550 million shares sold. Treasury still holds more than
500 million shares, or 33.3 percent ownership of GM.\98\ During
its first three weeks on the NYSE, GM's stock traded at between
$33.17 and $34.89 per share. Figure 7 shows the amount and
current status of the government's various investments in GM.
Of the $49.9 billion in government assistance, $27.2 billion
currently remains outstanding.
---------------------------------------------------------------------------
\97\ U.S. Department of the Treasury, Taxpayers Receive Additional
$1.8 Billion in Proceeds from GM IPO (Dec. 2, 2010) (online at
www.financialstability.gov/latest/pr_12022010.html).
\98\ An over-allotment option is an agreement between an issuer and
its underwriter granting the underwriter the option to purchase and
then resell additional shares to the investing public. Usually the
over-allotment option is exercised by the underwriter if the demand
before and after pricing is strong. Treasury's 33.3 percent ownership
stake in GM is calculated on a basic--not fully diluted--share basis.
FIGURE 7: TARP INVESTMENT IN GM
[Millions of dollars]
----------------------------------------------------------------------------------------------------------------
Original Original Cumulative
Investment Assistance Original Exchange Current Investment Amount Repaid
Date Amount Investment Type Investment Type Amount
----------------------------------------------------------------------------------------------------------------
12/29/2008.... $884 Loan............ Exchanged for -- --
GMAC Equity.
12/31/2008.... 13,400 Loan with Old GM debt New GM common $13,400
additional credit bid; New equity.
notes. GM equity
received.
4/22/2009..... 2,000 Loan with Old GM debt New GM common 2,000
additional credit bid; New equity.
notes. GM equity
received.
5/20/2009..... 4,000 Loan with Old GM debt New GM common 4,000
additional credit bid; New equity.
notes. GM equity
received.
5/27/2009..... 361 Loan with Old GM debt New GM common 361 $361
additional credit bid; New equity.
notes. GM equity
received.
6/3/2009...... 30,100 Loan with ................ ................ 30,100
additional
notes (see
breakdown
below).
.......... ................ Old GM debt New GM common 19,942
credit bid; New equity.
GM equity
received.
.......... ................ Became New GM New GM loan..... 7,072 6,712
loan.
.......... ................ Became New GM New GM preferred 2,100 2,139
preferred stock. stock.
.......... ................ Remained Old GM Old GM loan..... 986
loan.
-------------------------------------------------------------------------------------------------
Total......... $50,745 ................ ................ ................ $49,861 99 $22,717
----------------------------------------------------------------------------------------------------------------
\99\ This figure includes $13.5 billion in proceeds from the GM IPO that are not directly tied to a particular
tranche of investment made in GM prior to its bankruptcy. Therefore, these funds are not accounted for as a
line item, but instead are credited solely to the total line.
[GRAPHIC] [TIFF OMITTED] T3381.006
3. Outlook
While Treasury's investment in GM provided a backstop for a
company on the brink of failure, the rescue forced taxpayers to
bear considerable risk, risk they will continue to bear until
Treasury disposes of the remainder of its investment in the
company. This section examines the viability of GM, an issue
that will impact the outcome of the government's investment in
the company.
a. GM's Emerging Business Model
GM's strategy for improving its business model focuses on
four key areas: (1) streamlining operations so as to improve
capacity utilization; \100\ (2) reducing labor costs; (3)
strengthening competitiveness in international markets; and (4)
reducing financial leverage in order to improve the company's
balance sheet.\101\
---------------------------------------------------------------------------
\100\ The capacity utilization rate measures the amount of output
currently being produced by the firm relative to the maximum amount of
output it could produce given its current inputs.
\101\ See General Motors Company, GM Retail Roadshow, at 5, 10, 17
(Nov. 18, 2010) (online at cop.senate.gov/documents/gm-
publicoffering.pdf) (hereinafter ``GM Retail Roadshow''); GM
conversations with Panel staff (Dec. 3, 2010). GM's CEO and CFO have
stated in the media that their goal is to get GM to zero debt. See
CNBC, GM Aiming for No Debt on Balance Sheet: CEO (Nov. 18, 2010)
(online at classic.cnbc.com/id/40251271/). GM's CFO, Chris Liddell,
stated that this goal could realistically be reached in three to five
years. See The Inside Track with Deirdre Bolton & Erik Schatzker,
Interview with GM CFO Chris Liddell, Bloomberg News (Nov. 18, 2010)
(findarticles.com/ p/news-articles/ceo-wire/mi_8092/is_20101118/chris-
liddell-bloomberg- tv/ai_n56320173/?tag=content;col1).
---------------------------------------------------------------------------
i. Streamlining Operations
GM is taking a number of steps in order to streamline its
operations. First, it plans to reduce the total number of
plants it operates in the United States from the 47 it had in
2008 to 34 by the end of 2010 and to 31 by 2012.\102\
---------------------------------------------------------------------------
\102\ GM Form 424B1: Final Common Prospectus, supra note 96, at 55,
60.
---------------------------------------------------------------------------
Second, GM has reduced the number of brands it offers in
the United States from eight to four. GM's four core brands are
Chevrolet, GMC, Cadillac, and Buick, which is the fastest
growing automotive brand in the United States.\103\ GM has
discontinued or divested Pontiac, Saturn, Saab, and
Hummer.\104\ October 2010 calendar-year-to-date retail sales
for GM's four core brands were up 15 percent, and total sales
were up 22 percent.\105\ Year-to-date through October, GM's
four core brands sold 85,737 more units than its eight brands
sold during the same period in 2009.\106\
---------------------------------------------------------------------------
\103\ General Motors Company, Q2 2010 Results, at 6 (Aug. 12, 2010)
(online at media.gm.com/content/dam/Media/gmcom/investor/2010/Q2-Chart-
Set.pdf) (hereinafter ``GM Q2 2010 Results'').
\104\ GM Form 424B1: Final Common Prospectus, supra note 96, at 19.
\105\ General Motors Company, Form 8-K for the Period Ended
November 3, 2010, at 5 (Nov. 5, 2010) (online at www.sec.gov/Archives/
edgar/data/1467858/ 000119312510249908/d8k.htm).
\106\ Id. at 5.
---------------------------------------------------------------------------
Third, GM has also announced a goal of reducing its number
of domestic dealerships from approximately 5,000 as of
September 30, 2010 to 4,500 by the end of 2010. GM expects
these reductions to produce cost savings over time, but it also
recognizes that they could also have the effect of reducing
GM's U.S. market share.\107\ Despite these closings, GM
continues to maintain an independent international network of
21,000 dealers.\108\
---------------------------------------------------------------------------
\107\ GM Form 424B1: Final Common Prospectus, supra note 96, at 19.
These closings are substantially fewer in number than GM initially
announced. See Office of the Special Inspector General for the Troubled
Asset Relief Program, Factors Affecting the Decisions of General Motors
and Chrysler to Reduce Their Dealership Networks, at 1 (July 19, 2010)
(SIGTARP 10-008) (online at www.sigtarp.gov/reports/ audit/2010/
Factors%20Affecting%20the%20 Decisions%20of%20 General%20Motors%20
and%20 Chrysler%20to%20 Reduce%20Their%20 Dealership%20
Networks%207_19_2010.pdf) (stating that GM announced on June 2, 2009
that it planned to ``wind down'' 1,454 of its 5,591 dealerships by
October 2010).
\108\ GM maintains that the scale of this dealer network
strengthens its ability to compete in markets outside the United
States. See GM Form 424B1: Final Common Prospectus, supra note 96, at
3.
---------------------------------------------------------------------------
As a result of these efforts, as well as an underlying
improvement in sales, UBS estimates that GM's capacity
utilization, which measures the company's actual output as a
percentage of its potential output, will improve from 43
percent in 2009 to 74 percent in 2010.\109\ UBS expects GM's
capacity utilization to fall in 2011 before rising again in
2012 and beyond.\110\
---------------------------------------------------------------------------
\109\ UBS Investment Research Paper, supra note 45, at 4.
\110\ UBS Investment Research, General Motors Company: Why Buy Now?
(Dec. 15, 2010) (hereinafter ``UBS Investment Research Paper'').
---------------------------------------------------------------------------
ii. Reducing Labor Costs
GM has sought to use the restructuring to reduce the cost
of its hourly labor force.\111\ More specifically, it has
reduced the number of its employees, restructured its labor
agreement, and transferred its health care obligations to the
UAW's Voluntary Employee Benefit Association (VEBA).\112\
Overall, GM states that it has reduced its U.S. hourly labor
costs from $16 billion in 2005 to $5 billion in 2010.\113\ It
also states that it has reduced the number of hourly employees
in the United States from 111,000 in 2005 to 50,000 in
2010.\114\ Since 2008, the company has reduced its global
workforce by about 35,000 employees, including about 11,000
hourly employees in United States,\115\ though the number of
employees has risen since GM emerged from bankruptcy in 2009.
The company believes, and industry analysts concur, that a more
competitive cost structure will allow GM to compete better for
market share.
---------------------------------------------------------------------------
\111\ GM Form 424B1: Final Common Prospectus, supra note 96, at 3.
\112\ GM Form 424B1: Final Common Prospectus, supra note 96, at 3.
\113\ The 2010 labor cost figure is an estimate that GM used in its
retail roadshow. GM Retail Roadshow, supra note 101, at slide 17. See
also Moody's Investors Service, Credit Opinion: General Motors Company
(Oct. 29, 2010) (hereinafter ``Moody's Credit Opinion: General Motors
Company'') (``This shift in the industry's operating structure has been
the result of significant headcount reductions, the elimination of
excess capacity, and the implementation of a new UAW contract.'').
\114\ The 2010 employee figure is an estimate that GM used in its
retail roadshow. GM Retail Roadshow, supra note 101, at slide 17.
\115\ UBS Investment Research Paper, supra note 110, at 6.
---------------------------------------------------------------------------
iii. Improving International Competitiveness
GM also states that it is enhancing its competitiveness in
international markets. According to the presentation GM used in
its retail road show,\116\ it is refocusing on emerging
markets, with a particular focus on Brazil, Russia, India, and
China.\117\ In 2009, 72 percent of GM's total sales volume came
from outside the United States, including 39 percent from
emerging markets.\118\ GM's market share in Brazil, Russia,
India, and China grew from 9.8 percent in 2004 to 12.7 percent
in 2009.\119\ It has the number one market share position in
those four nations as a whole, and it occupies the top spot in
China as well.\120\ GM projects that Brazil, Russia, India, and
China have the largest growth potential of any markets in the
world.\121\
---------------------------------------------------------------------------
\116\ A roadshow is a presentation to potential institutional or
retail investors prior to the initial stock offering.
\117\ GM Retail Roadshow, supra note 101, at slide 10.
\118\ GM Form 424B1: Final Common Prospectus, supra note 96, at 1.
\119\ GM Form 424B1: Final Common Prospectus, supra note 96, at 3.
\120\ In the BRIC countries, GM had a share of 13 percent in 2009,
compared to 11 percent for Volkswagen, 4 percent for Toyota, and 3
percent for Ford. The company's market share in China, specifically,
was 13.3 percent in 2009. GM Retail Roadshow, supra note 101, at slide
9; GM Form 424B1: Final Common Prospectus, supra note 96, at 3.
\121\ GM Retail Roadshow, supra note 101, at slide 10.
---------------------------------------------------------------------------
iv. Reducing Leverage
GM is seeking to reduce its leverage in order to lower the
cost of servicing its debt and become less vulnerable to the
ups and downs of the automotive industry's business cycle.\122\
GM also intends to fund its pension plans fully. To that end,
GM on December 2, 2010, announced the aforementioned voluntary
$4 billion cash contribution to its U.S. pension plans.\123\
More broadly, the company stated in its November 2010 public
offering presentation that it has $24 billion in available
liquidity, as compared to about $35 billion in underfunded
pension obligations, debt, and perpetual preferred shares.\124\
Reducing its debt burden should allow GM to strengthen its
credit rating; the company is seeking to achieve a strong
investment grade rating.\125\
---------------------------------------------------------------------------
\122\ General Motors Company conversations with Panel staff (Dec.
3, 2010).
\123\ GM Makes $4 Billion Pension Plan Contribution, supra note 96.
\124\ The $35 billion consists of $13 billion in underfunded U.S.
pension obligations, $10 billion in underfunded non-U.S. pension
obligations, $7 billion in perpetual preferred stock, and $5 billion in
debt. GM Retail Roadshow, supra note 101, at slide 19.
\125\ GM Retail Roadshow, supra note 101, at slide 19.
---------------------------------------------------------------------------
b. Results
GM's most recent financial statements provide four key
indicators of improvement in overall performance: revenue and
sales, credit ratings, market share, and access to
financing.\126\ While it may be too soon in the business cycle
to discern trends, GM's initial financial and operating ratios
are improving. Both return on assets and return on sales have
increased gradually through 2010.\127\ In total, GM sold 8.2
million units worldwide during the 12-month period ending
September 30, 2010.\128\ Net revenue totals for each of the
first three quarters of 2010 were more than $30 billion.\129\
(These revenue totals are comparable to GM's revenue results in
2009. In the second half of 2009, GM's total net sales and
revenue were $57.5 billion.)\130\ However, as analysts have
noted, the company is able to sell its products at higher
prices and has improved its margins materially.\131\ In North
America specifically, sales in the third quarter of 2010 were
$21.5 billion versus $14.4 billion in the same quarter a year
prior.\132\ In addition, GM expanded its North American
operations by adding 3,000 employees between January 1 and
September 30, 2010.\133\ On November 30, GM announced plans to
hire an additional 1,000 engineers and researchers in
Michigan.\134\
---------------------------------------------------------------------------
\126\ In its presentation to retail investors for its upcoming IPO,
the company presented guidance for the following metrics: earnings
before interest and taxes (EBIT), EBIT margin, and free cash flow for
both the middle of the business cycle and at the high end of the cycle.
These projections provide insight into how management foresees GM's
performance in 2011 and beyond. The company's EBIT mid-point
projections are $12 billion at mid-cycle and $18 billion at high-cycle.
The company's midpoint projections for free cash flow are $9 billion at
mid-cycle and $15 billion at high cycle. GM Retail Roadshow, supra note
101, at slide 18.
\127\ See General Motors Company, Q3 Financial Highlights, at 6, 7
(2010) (online at media.gm.com/content/dam/Media/gmcom/investor/2010/
Q3-Financial-Highlights.pdf); General Motors Company, Q2 Financial
Highlights, at 6, 7 (2010) (online at media.gm.com/content/dam/Media/
gmcom/investor/2010/Q2-Financial-Highlights.pdf); GM Form 10-Q, supra
note 75, at 1, 2. Return on assets is defined as net income divided by
total assets. Profit margin is defined as net income divided by sales.
These metrics are computed by taking the following data points from the
quarterly filings: net income, total assets, and net sales.
\128\ GM Retail Roadshow, supra note 101, at slide 9.
\129\ GM Q3 2010 Results, supra note 47, at 2.
\130\ General Motors Company, Form 10-K for the Fiscal Year Ended
December 31, 2009, at 39 (Apr. 7, 2010) (online at www.sec.gov/
Archives/edgar/data/1467858/000119312510078119/d10k.htm).
\131\ David Whiston, General Motors Company Has Reinvented Itself,
Morningstar, at 5, 15 (Nov.18, 2010).
\132\ Joseph Amaturo, A Lot of ``Old'' GM in the ``New'' GM,
Buckingham Research Group, at 47 (Dec. 6, 2010) (hereinafter
``Buckingham Research Group Paper'').
\133\ GM Form 424B1: Final Common Prospectus, supra note 96, at
190.
\134\ General Motors Company, GM to Add 1,000 Electric Vehicle
Engineering and Development Jobs in Michigan (Nov. 30, 2010) (online at
media.gm.com/content/media/us/en/news/news_detail.brand_gm.html/
content/Pages/news/us/en/2010/Nov/1130_jobs.html).
---------------------------------------------------------------------------
On October 6, 2010, the credit rating agency Fitch gave GM
the Issuer Default Rating \135\ of BB-, non-investment grade or
speculative, the same as Ford.\136\ While GM has considerably
less debt than Ford, Fitch noted that GM's large pension
obligations dwarf those of Ford. GM is rated as having a stable
outlook by four different credit agencies.\137\ While it is not
clear what GM's credit ratings would be absent government
support, Standard & Poor's states that it does not give GM a
ratings boost because of the government's investment.\138\
---------------------------------------------------------------------------
\135\ The issuer default rating is an indicator given by credit
rating agencies to potential investors of debt securities, which
estimates the likelihood of default and relative creditworthiness of
securities issued by a certain company.
\136\ Fitch Ratings, Fitch Assigns Initial [BB-] IDR to General
Motors (Oct. 6, 2010) (online at www.businesswire.com/news/home/
20101006006853/en/Fitch-Assigns-Initial-BB--IDR-General-Motors).
\137\ The ratings agencies include DBRS, Fitch, Moody's, and
Standard & Poor's. GM Form 424B1: Final Common Prospectus, supra note
96, at 134.
\138\ Standard & Poor's does, however, refer to GM as a government-
related entity, albeit one whose importance to the government is
limited because of the expectation that the government will reduce its
ownership in GM. Standard & Poor's, Global Credit Portal RatingsDirect:
General Motors Co., at 2-3 (Nov. 11, 2010); E-mail from Standard &
Poor's to Panel staff (Dec. 9, 2010).
---------------------------------------------------------------------------
GM is seeking to lower its ``breakeven point,'' the number
of cars that the company needs in order for its revenues to
equal its costs. Doing so, will enable GM to remain profitable
even at the bottom of the business cycle. In its U.S.
operations, GM has reduced its break-even point from an
industry-wide sales total of 15.5 million units in the third
quarter of 2007 to less than 11 million units in the fall of
2010.\139\ In 2007, GM needed a 25 percent market share, or
roughly 3.88 million vehicles sold out of a market of 15.5
million, in order to break even. Today, GM needs a market share
of less than 19 percent, or approximately 2.09 million vehicles
sold out of a market of 11 million.\140\ In sum, GM is now able
to break even with a smaller share of a smaller market. This
improvement has been driven in part by the reduction in labor
costs, in addition to improvements in vehicle pricing.\141\ For
example, average transaction prices for the Chevrolet Equinox
are up $3,900 from 2009 to 2010, and Buick LaCrosse average
transaction prices are up $7,500 over the same period.\142\
---------------------------------------------------------------------------
\139\ GM Form 424B1: Final Common Prospectus, supra note 96, at 3.
See also Moody's Credit Opinion: General Motors Company, supra note
113, at 1 (``GM's Ba2 CFR reflects the company's strong position in
developing markets, a competitive cost structure in North America, an
improving domestic product portfolio, and a significantly stronger
balance sheet and liquidity position as a result of the bankruptcy
reorganization process.'').
\140\ See GM Retail Roadshow, supra note 101, at slide 16.
\141\ GM Q3 2010 Results, supra note 47, at 10.
\142\ GM Retail Roadshow, supra note 101, at slide 6.
---------------------------------------------------------------------------
GM's overall market share has been falling in both the
United States and Europe. In the United States, GM's market
share fell from 28.6 percent in 2002 to 22.2 percent in 2008,
and then to an estimated 19.0 percent in 2010. In Europe, GM's
market share fell from 10.2 percent in 2000 to 9.3 percent in
2008, and then to 8.1 percent in 2010.\143\ GM's post-
bankruptcy declines in market share likely stem at least in
part from the company's decision to discontinue certain brands
and to reduce consumer incentives for vehicle purchases.
---------------------------------------------------------------------------
\143\ UBS Investment Research Paper, supra note 110, at 11-15.
---------------------------------------------------------------------------
4. Treasury's Exit Strategy
Between April and November 2010, Treasury interacted
closely with GM in an attempt to ensure that Treasury had all
relevant market demand information prior to the IPO to help
determine how much of its stock it should sell and at what
price.\144\ Treasury conducted due diligence, relying heavily
on the input of its advisor, Lazard Ltd. Lazard also handled
many of the direct interactions with the IPO's underwriters. In
making determinations about the volume and price of its stock
sales, Treasury states that it sought to abide by its
shareholder principles, balancing the desire to exit as soon as
practicable against its objective of maximizing the value of
the taxpayers' investment. Consistent with these principles,
according to Treasury, it sought to leave GM in charge of day-
to-day management decisions, including the selection of
underwriters and timing of the IPO. Treasury also worked
closely with the underwriters--rather than the company--to
determine the timing and pricing of the government's sale of GM
stock.\145\ GM states that it decided the timing of the IPO,
though it did have discussions with Treasury about the issue.
The company also states that Treasury's primary role was
related to how many shares it would eventually choose to
sell.\146\
---------------------------------------------------------------------------
\144\ For a more detailed discussion of the government's
shareholder principles and their implementation, see Section B, infra.
\145\ Treasury conversations with Panel staff (Nov. 22, 2010).
\146\ General Motors Company conversations with Panel staff (Dec.
3, 2010).
---------------------------------------------------------------------------
Treasury sold nearly 40 percent of its equity stake through
the IPO. Despite the possibility that the value of GM's equity
could increase within the next year as a result of a continued
market recovery, the seasoning of GM's management, and a slate
of new automobiles due to be released, Treasury maintains that
it decided not to postpone the sale of its shares--or revise
the amount being offered--for several reasons. While market
risk and execution risk were two significant concerns, Treasury
also said that it was important to signal to the market that
the government intended to exit its investment and return the
funding of the company to private hands.\147\
---------------------------------------------------------------------------
\147\ See Moody's Investors Service, GM's IPO--A Better Balance
Sheet and Maybe Even More Car Customers, at 1 (Nov. 22, 2010)
(hereinafter ``Moody's Paper on GM's Balance Sheet''); Treasury
conversations with Panel staff (Nov. 22, 2010). Treasury also expressed
concern that shareholders from Old GM could disrupt the pricing process
had they gained control of their shares before the IPO.
---------------------------------------------------------------------------
After the offering, Treasury's total stake in the company
fell from 60.8 percent to 36.9 percent. When the underwriters
exercised their over-allotment option on November 26,
Treasury's stake fell to 33.3 percent.\148\ As is customary for
many IPOs, Treasury will be unable to begin selling the
remainder of its investment for 180 days following the IPO.
After this lock-up period ends, Treasury maintains that it will
look to sell the remainder of its shares in accordance with its
shareholder principles and subject to market events.\149\
---------------------------------------------------------------------------
\148\ GM Form 424B1: Final Common Prospectus, supra note 96, at
236.
\149\ Treasury conversations with Panel staff (Nov. 22, 2010).
---------------------------------------------------------------------------
a. Analysis of Treasury's Exit Strategy
The strong investor demand for GM's IPO stands in stark
contrast to the company's predicament in the fall of 2008. Yet
despite the improvements that GM has achieved in a relatively
short period of time, there is still uncertainty regarding the
taxpayers' investment in GM. This section examines GM's efforts
to transform itself into a far more viable entity. While the
outlook is more positive than it was two years ago, the GM
investment is still likely to result in an overall loss for
taxpayers.
i. GM Emerged from the Restructuring as a Far More Viable
Business
According to industry analysts, GM has emerged from the
restructuring as a far more viable business, positioned to take
advantage of its streamlined cost structure and a competitive
labor situation to return to profitability.\150\ That GM is a
much improved business is evidenced by its results from the
first three quarters of 2010,\151\ as well as the strong demand
for shares in the IPO.\152\ The company has successfully
executed many of its core objectives for the restructuring:
streamlining its capacity, shedding labor costs, and refocusing
its efforts on high-growth international markets. Although,
significant uncertainty remains for the company, the company's
efforts to refocus its business strategy and shed costs have
substantially increased the likelihood that taxpayers will
suffer minimal losses on their investment, or perhaps even be
repaid in full.
---------------------------------------------------------------------------
\150\ See, e.g., Moody's Paper on GM's Balance Sheet, supra note
147, at 1 (``This progress on the product portfolio front is supported
by the IPO's positive messages about both the improving financial
health of GM and the reduction in government ownership of the
company.'').
\151\ See Section D.3.b.
\152\ See Section D.2.
---------------------------------------------------------------------------
ii. Uncertainty Remains
The Panel has identified three sources of uncertainty that
could have a negative impact on GM's stock price: international
markets, GM's long-term competitive viability, and GM's long-
term obligations and legacy liabilities. From the perspective
of U.S. taxpayers, this uncertainty is important because
Treasury is likely to continue to hold a stake in GM through
most of 2011 and perhaps into 2012.
International Markets
The company still faces uncertainty with respect to certain
operating units going forward, particularly in Europe, which
accounts for 22 percent of the company's sales.\153\ GM has a
restructuring plan for its European operations, similar to its
U.S. plan, that seeks to cut European capacity by 20 percent,
reduce labor costs by about $320 million per year, and improve
the weak image of the Opel brand among European consumers.\154\
But GM's restructuring plans in Europe are lagging behind its
American efforts--the company will not complete the European
restructuring for at least a year.\155\ In the meantime GM is
generating significant losses in Europe.\156\
---------------------------------------------------------------------------
\153\ Buckingham Research Group Paper, supra note 132, at 2.
\154\ See UBS Investment Research Paper, supra note 110, at 11-12.
\155\ Moody's Credit Opinion: General Motors Company, supra note
113, at 2.
\156\ See Moody's Credit Opinion: General Motors Company, supra
note 113, at 2.
---------------------------------------------------------------------------
In addition, competition will likely increase in many of
GM's higher growth markets. GM's market share in developing
nations has been growing: the company is first in Chinese
market share, third in Brazilian market share, and third in
Russian market share. But analysts believe that GM's foothold
in these markets is somewhat unstable, given the sharp
competition, and they project that GM's market share in Brazil
and China will decline by 2015.\157\ Early indicators suggest
that this trend may have already begun, as reflected in a
market share decline in Brazil from 19.9 percent to 18.3
percent during 2010.\158\ Furthermore, the potential upside for
GM in China is limited by the fact that it is required to
operate as a joint venture that only takes a proportional share
of the profits.\159\ On the other hand, GM starts from a strong
position in China, Brazil, and Russia, and any future losses in
market share may be more than offset by the growth of those
markets.
---------------------------------------------------------------------------
\157\ UBS Investment Research Paper on Growth Market, supra note
55, at 11-12.
\158\ GM Q3 2010 Results, supra note 47, at 15.
\159\ See UBS Investment Research Paper on Growth Market, supra
note 55, at 1.
---------------------------------------------------------------------------
Competitive Viability
There are also questions about the competitive viability of
GM over both the short term and the long term. In the short
term, the questions involve what is generally seen as a
lackluster product launch schedule in 2011, particularly in the
United States, where its market share faces pressure from
Ford.\160\ GM launched 28 new vehicles in 2010, but just four
of those launches were in the United States. The story for 2011
is similar, with 27 product launches planned, of which four are
for the United States. GM's product lineup is expected to
improve in later years, with 37 product launches, including 15
U.S. launches, planned for 2013.\161\
---------------------------------------------------------------------------
\160\ See UBS Investment Research Paper, supra note 110, at 1-3.
\161\ GM Retail Roadshow, supra note 101, at slide 13.
---------------------------------------------------------------------------
Over the long term, there are still questions about GM's
ability to develop new products that respond to--or drive--
market demand. In particular, the company must be able to
compete in the development of fuel-efficient technologies. To
that end, it is encouraging that the electric Chevrolet Volt
was recently named Motor Trend's 2011 Car of the Year,\162\ but
the outcome of GM's large investment in the Volt remains
unclear. The Volt will compete against an increasingly crowded
field of fuel-efficient vehicles, including the new Nissan
Leaf. It is unclear whether the Volt, which uses lithium
batteries that will eventually need to be replaced, will
prevail over the hybrid technology being pursued by
competitors.\163\
---------------------------------------------------------------------------
\162\ Motor Trend, 2011 Motor Trend Car of the Year: Chevrolet Volt
(online at www.motortrend.com/oftheyear/car/
1101_2011_motor_trend_car_of_the_year_chevrolet_volt/index.html).
\163\ See Buckingham Research Group Paper, supra note 132, at 30-
31.
---------------------------------------------------------------------------
Senior officials at GM expect the Chevrolet Cruze to become
an alternative to the Ford Focus, Honda Civic, and Toyota
Corolla in the small-car segment--traditionally a less
profitable but rather large segment of U.S. car sales--but at
this point the newly launched Cruze lacks a significant track
record of sales in the United States. Moreover, while it is
encouraging that average transaction prices have increased in
GM's crossover segment--vehicles that combine elements of cars
and SUVs--such increases have not been as widespread in GM's
car and truck portfolios.\164\
---------------------------------------------------------------------------
\164\ Average Transaction Price (ATP) increases are as follows:
crossovers are 11 percent, cars are 9 percent, and trucks are 6
percent. GM Q2 2010 Results, supra note 103, at 8.
---------------------------------------------------------------------------
Long-Term Obligations and Legacy Liabilities
While GM shed many of its most onerous liabilities during
the restructuring, several long-term obligations remain.
Estimates differ on how much money GM will need to contribute
to underfunded pensions and other post-retirement employee
benefits (OPEB) over the short and long term. The company has
disclosed that as of September 30, 2010, its underfunded
pension liability was $29.4 billon.\165\ At the same time, GM's
underfunded OPEB stood at $9.4 billion.\166\ The company
expects to disburse nearly $8.4 billion per year from 2011-2014
in net benefit payments for its U.S. pension plans, plus $1.4
billion per year for its non-U.S. pensions plans.\167\
---------------------------------------------------------------------------
\165\ GM Q3 2010 Results, supra note 47, at 20.
\166\ GM Q3 2010 Results, supra note 47, at 20.
\167\ GM Form 424B1: Final Common Prospectus, supra note 96, at
138.
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Old GM, whose remaining assets include unsold manufacturing
plants and equipment, also has significant legacy liabilities
that could eventually impose costs on taxpayers. Old GM has
created four separate trusts to pay off environmental claims,
unsecured creditors, asbestos claims, and litigation claims.
More than 70,000 claims for more than $275 billion have been
made against all four Old GM trusts, but more than $150 billion
in claims have been resolved or eliminated.\168\ It is unclear
what the recovery rate on claims will be. In August 2010, Old
GM proposed a bankruptcy plan that would make $536 million
available to handle environmental claims. In October 2010, Old
GM agreed to a $773 million settlement to resolve its
liabilities at 89 Old GM sites.\169\ The company anticipates
the majority of the environmental remediation will be completed
or under way in five years.\170\
---------------------------------------------------------------------------
\168\ Motors Liquidation Company, Motors Liquidation Company Files
Joint Chapter 11 Plan, at 1-2 (Aug. 31, 2010) (online at
www.motorsliquidation.com/PressReleases.aspx) (hereinafter ``Motors
Liquidation Company Files Joint Chapter 11 Plan'').
\169\ U.S. Environmental Protection Agency, Motors Liquidation
Company (f/k/a General Motors (GM) Corporation) Bankruptcy Settlement
(Oct. 20, 2010) (online at www.epa.gov/compliance/resources/cases/
cleanup/cercla/mlc/index.html).
\170\ Motors Liquidation Company Files Joint Chapter 11 Plan, supra
note 168, at 2.
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In the event that there are more than $35.0 billion in
unsecured claims against Old GM, New GM will be obligated to
issue shares of its common stock to Old GM, diluting Treasury's
and other shareholders' stakes in New GM.\171\ Treasury also
continues to have direct exposure to Old GM as a result of its
$986 million loan to the company.
---------------------------------------------------------------------------
\171\ The $35.0 billion threshold refers specifically to unsecured
claims that do not have a priority on Old GM's assets and are allowed
as part of the bankruptcy proceeding. GM Amendment No. 5 to Form S-1:
Preliminary Prospectus, supra note 69, at 11. Of course, the dilution
to Treasury would occur only if Treasury remains a shareholder at that
point.
---------------------------------------------------------------------------
iii. Taxpayers Likely to Suffer Some Losses on Their
Investment in GM
To date, Treasury has provided only aggregate data on
projected losses across the auto sector, and it has not yet
provided data on projected losses by each individual
institution. On September 30, 2010, Treasury estimated an
overall loss of $14.7 billion to the government from federal
support of GM, Chrysler, and GMAC/Ally Financial.\172\ Speaking
more recently to the Automotive Press Association, Steven
Rattner, former head of the Presidential Task Force on the Auto
Industry, estimated Treasury's loss exposure on the entire
automotive rescue at less than $10 billion.\173\ While it is
not clear precisely how much Treasury expects to lose on its GM
investment specifically, its aggregate projections suggest that
it envisions at least some losses on GM.\174\
---------------------------------------------------------------------------
\172\ U.S. Department of the Treasury, Office of Financial
Stability Agency Financial Report: Fiscal Year 2010, at 11 (Nov. 15,
2010) (online at www.financialstability.gov/docs/
2010%20OFS%20AFR%20Nov%2015.pdf) (hereinafter ``OFS Agency Financial
Report'').
\173\ See Christine Tierney, David Shepardson, and Christina
Rogers, Rattner Predicts `Huge Success' for GM IPO, The Detroit News
(Nov. 16, 2010) (online at detnews.com/article/20101116/AUTO01/
11160370/Rattner-predicts-%E2%80%98huge-success%E2%80%99-for-GM-IPO).
\174\ Treasury maintains that it does not expect that the IPO will
change the loss rate on the AIFP because Treasury had carried GM at
book value on its books. Treasury conversations with Panel staff (Nov.
22, 2010).
---------------------------------------------------------------------------
Pricing the GM IPO far below the break-even price may have
had the effect of greatly reducing the likelihood that
taxpayers will be fully repaid, as full repayment will not be
possible unless the government is able to sell its remaining
shares at a far higher price. However, it is impossible to know
if a longer-term investment horizon by the government (via an
IPO at a later date) would have allowed Treasury to sell its
shares at a more favorable price, closer to its break-even cost
basis. Prior to the IPO, Treasury needed to sell each of its
shares for an aggregate price of $44.59 in order to break
even.\175\ After the initial public offering and the exercising
of the over-allotment option by the underwriters, Treasury will
need to sell its remaining stake--500,065,254 shares--for an
average of $52.75 in order to recoup fully its investment.\176\
If one subtracts out the value of GM's various dividend and
interest payments to Treasury, the break-even share price rises
to $54.28.
---------------------------------------------------------------------------
\175\ Panel staff estimates are derived from the amount of debt
converted to equity divided by the common shares given to Treasury.
\176\ Panel staff estimates. The break-even price includes
underwriting commissions and discounts paid in order to sell Treasury's
common shares in the initial public offering (IPO) of GM in November.
The break-even price also includes dividend and interest payments on
the debt and preferred stock portion of Treasury's investment, payments
received from Motors Liquidation Company, GM Supplier program, and the
premium paid to redeem its Series A preferred stock.
---------------------------------------------------------------------------
However, the Panel recognizes that it is impossible to time
the market, and that delaying the IPO would have exposed
Treasury to the risk that the price that buyers were willing to
pay for GM stock would fall. Moreover, as detailed in Section
H.1, retaining the stock for a long period could have
conflicted with the government's stated objective of disposing
of its shares ``as soon as practicable.'' There was also the
possibility that a delay would have resulted in uncertainty in
the market, as Treasury was concerned about how Old GM
bondholders--who received 10 percent of the stock in New GM--
would exercise their rights in the wake of the
restructuring.\177\ Aside from a delay, Treasury had two
additional alternatives: to sell a smaller percentage of its
holdings in an IPO and a larger portion in subsequent secondary
offerings, or to use the IPO to dispose of as many shares as
possible, no matter the price.
---------------------------------------------------------------------------
\177\ Treasury conversations with Panel staff (Nov. 22, 2010).
---------------------------------------------------------------------------
While it is difficult to ascertain whether the government
could have been more flexible in its timing, or whether a
delayed timeline would have resulted in a higher return for
taxpayers, the decision to sell a large number of shares below
the break-even price decreased the chances that taxpayers will
be repaid in full.\178\
---------------------------------------------------------------------------
\178\ Estimating the likelihood and size of losses may be
complicated by GM's reporting practices. In its recent regulatory
filings, the company disclosed that internal controls relating to its
financial reporting may present a risk going forward. It stated that
``[w]e have determined that our disclosure controls and procedures and
our internal control over financial reporting are currently not
effective. The lack of effective internal controls could materially
adversely affect our financial condition and ability to carry out our
business plan.'' GM Form 424B1: Final Common Prospectus, supra note 96,
at 30. Treasury maintains that it is comfortable with the sufficiency
of the company's reporting, that investors did not raise concerns about
this issue during the roadshow, and that the company's board and
management are devoting time and energy to addressing the issue.
Treasury conversations with Panel staff (Nov. 22, 2010).
---------------------------------------------------------------------------
E. Chrysler
1. Context
a. Background and the Government Intervention
Chrysler, long the smallest of the ``Big Three'' U.S.
automakers, first faced bankruptcy and turned to the U.S.
government for help in the late 1970s. At that time, Chrysler
petitioned for and received $1.5 billion in federal government
loan guarantees. The loans were then repaid in 1983, ahead of
schedule. In 1984, Chrysler introduced the minivan, which has
remained a major source of sales for the company ever since. In
1987, Chrysler bought American Motors Corporation (AMC),
including the Jeep brand, another important contributor to the
company's sales.\179\ In 1997, following several years of
strong performance, Chrysler was acquired by Daimler-Benz of
Germany for $37 billion, in what was the largest foreign
takeover of a U.S. firm to that date. In 2007, after several
years of losses, Daimler effectively paid for Cerberus Capital,
a U.S. private equity fund, to assume control of Chrysler, in
an 80-20 partnership.
---------------------------------------------------------------------------
\179\ Chrysler Group LLC, Chrysler Historical Timeline (online at
www.media.chrysler.com/newsrelease.do?id=2210&mid=) (accessed Jan. 11,
2011).
---------------------------------------------------------------------------
Following several years of losses, Chrysler faced imminent
bankruptcy in late 2008, having lost $5.3 billion in the first
three quarters of that year alone.\180\ Chrysler's losses were
due to its poor sales performance and high fixed costs. In
December 2008, the Bush Administration announced that it would
use the TARP to assist Chrysler.\181\ On January 2, 2009,
Treasury loaned $4 billion to Chrysler Holdings, the parent of
Old Chrysler,\182\ as a temporary measure, while Chrysler
prepared a longer-term viability plan. The viability plan
prepared by Chrysler was rejected by President Obama's Auto
Task Force on March 30, 2009, which concluded that Chrysler
required a partner to achieve long-term viability.\183\ Fiat,
the Italian automobile manufacturer, was selected to take
management control of Chrysler.\184\ As detailed further below,
in order to entice Fiat to take control of Chrysler's
management, Fiat was offered a path to majority ownership of
the company through various agreements signed as part of the
restructuring. Consequently, Fiat is very much in control of
how Chrysler's continued viability and valuation will evolve.
---------------------------------------------------------------------------
\180\ Data provided by Chrysler (Jan. 11, 2011).
\181\ See Section B for a description of the initial decision to
support the automakers.
\182\ Old Chrysler is used to refer to the automaker before June
10, 2009. The assets that did not carry over to New Chrysler, including
the Chrysler name, remained in a company now known as Old Carco.
\183\ The White House, Determination of Viability Summary:
Chrysler, LLC (Mar. 30, 2009) (online at www.whitehouse.gov/assets/
documents/Chrysler_Viability_Assessment.pdf).
\184\ The White House, Obama Administration New Path to Viability
for GM & Chrysler (Mar. 30, 2009) (online at www.whitehouse.gov/assets/
documents/Fact_Sheet_GM_Chrysler.pdf).
---------------------------------------------------------------------------
As part of Chrysler's pre-planned bankruptcy, Treasury
provided financing that ultimately reached $3.8 billion, of
which $1.9 billion was disbursed.\185\ To capitalize New
Chrysler, which came into existence on June 10, 2009, Treasury
provided an additional loan facility of $6.6 billion repayable
in two tranches under the First Lien Credit Agreement.\186\ In
addition, New Chrysler assumed $500 million of the $4 billion
loaned to Chrysler Holdings, bringing the total face value of
the Treasury loan exposure to New Chrysler to $7.1 billion.
Treasury has effectively written off $3.5 billion associated
with its Chrysler investment. This total includes the $1.6
billion portion of the loan to Chrysler Holdings that was not
assumed by New Chrysler due to bankruptcy law and financial
reasons, as well as the entirety of the $1.9 billion in DIP
financing.\187\ Treasury received a 9.8 percent equity stake in
New Chrysler pursuant to the restructuring agreements.\188\
---------------------------------------------------------------------------
\185\ Treasury Transactions Report, supra note 24. On April 29,
2009, an additional $280,130,642 was lent to Chrysler Holdings to
support a Special Purpose Vehicle (SPV) for Chrysler's warranties.
\186\ Treasury Transactions Report, supra note 24; Chrysler Group
LLC, Consolidated Financial Statements as of December 31, 2009 and for
the Period from June 10, 2009 to December 31, 2009, at 20 (Apr. 21,
2010) (online at www.chryslergroupllc.com/pdf/news/
2009_q4_year_end.pdf). Two billion dollars is due on December 10, 2011
and pays an interest rate of the London Interbank Offered Rate (LIBOR)
plus 5 percent; this is referred to as the Tranche B loan. Of the
remaining $4.6 billion, half is due on June 10, 2016 and the remainder
on June 10, 2017. This remainder pays an interest rate of LIBOR plus
7.91 percent, and is referred to as the Tranche C Commitments.
\187\ U.S. Department of the Treasury, First Lien Credit Agreement
Between Chrysler Group LLC and the U.S. Department of the Treasury
(June 10, 2009) (online at www.financialstability.gov/docs/AIFP/
New%20Chrysler%20through%20Fourth%20Amendment.pdf); Treasury
conversations with Panel staff (Dec. 22, 2010); Treasury Transactions
Report, supra note 24.
\188\ U.S. Department of the Treasury, Amended and Restated Limited
Liability Company Operating Agreement of Chrysler Group LLC, at 86
(June 10, 2009) (online at www.financialstability.gov/docs/AIFP/
Binder1%20-
%20Chrysler%20redacted%20corporate%20docs%20as%20posted%2012-09.pdf)
(hereinafter ``Chrysler LLC Operating Agreement'').
---------------------------------------------------------------------------
As with its other AIFP investments, Treasury's current
primary focus with respect to Chrysler is to recover the TARP
funds it has provided to that firm. However, the manner in
which the investment was structured limits Treasury's ability
to control the course of events at Chrysler. In addition to
Fiat and Treasury, there are two other participants in the
Chrysler restructuring: the UAW's VEBA and the Canadian
government. These actors have their own sets of interests and
incentives, which adds an additional layer of complexity to the
transaction and may further constrain Treasury's ability to
exercise its rights fully. Moreover, as detailed below, the
complex and interrelated contractual arrangements involving the
various parties make it difficult to assess the level of
recovery for the taxpayers under various possible future
scenarios, including a potential Chrysler IPO.
The government is likely to recover the TARP loans provided
to Chrysler directly,\189\ but any additional recovery will
depend on when and under what conditions Treasury will be able
to sell its equity stake. This section examines the structure
of the government's investment in Chrysler, as well as the most
likely potential exit scenarios and their consequences.
---------------------------------------------------------------------------
\189\ See Section E.3 for a detailed discussion.
---------------------------------------------------------------------------
For a table summarizing the monies paid to the various
Chrysler entities over time, see Figure 9 below.
FIGURE 9: TARP INVESTMENTS IN CHRYSLER
[Millions of dollars] \190\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Original Cumulative
Original Investment Assistance Original Investment Exchange Current Investment Investment Amount Amount Lost
Date Amount Type Type Amount Repaid
--------------------------------------------------------------------------------------------------------------------------------------------------------
1/2/2009.............. $4,000 Debt Obligation w/ $500 million assumed by Loan.................... $3,500 $1,900 $(1,600)
Additional Note. New Chrysler on 5/27/09.
4/29/2009............. 280 Debt Obligation w/ ........................ Loan.................... 280 280
Additional Note.
5/1/2009.............. 1,888 Debt Obligation w/ ........................ Loan.................... 1,888 ......... \191\ (1,888)
Additional Note.
5/27/2009............. 6,642 Debt Obligation w/ $500 million assumed by Loan.................... \192\ 7,14
Additional Note. New Chrysler on 5/27/09. 2
---------------------------------------------------------------------------------------------------------------------------------
Total................. $12,810 ......................... ........................ ........................ $12,810 $2,180 $(3,488)
--------------------------------------------------------------------------------------------------------------------------------------------------------
\190\ Treasury Transactions Report, supra note 24.
\191\ While Treasury does not account for this loan as a loss due to potential recoveries in the future, it has stated that it does not expect material
returns. As of December 30, 2010, $48.1 million has been recovered from asset sales associated with this loan. Treasury Transactions Report, supra
note 24.
\192\ As of September 30, 2010, $4.6 billion of this total has been drawn down and is outstanding. Chrysler Group LLC, Unaudited Interim Condensed
Consolidated Financial Statements as of September 30, 2010 and for the Three and Nine Months Ended September 30, 2010, at 15 (Nov. 8, 2010) (online at
www.chryslergroupllc.com/pdf/business/q3_2010_financial_statements.pdf) (hereinafter ``Chrysler Consolidated Financial Statements'').
[GRAPHIC] [TIFF OMITTED] T3381.007
b. Current Ownership Structure and Possible Changes
Chrysler is currently owned by four parties: Treasury, the
Canadian Government, the UAW's VEBA, and Fiat. Each of these
parties contributed funds or resources to New Chrysler and
received equity and/or debt claims on Chrysler in exchange for
its contribution. Furthermore, several agreements between these
four parties give specific parties the right to increase their
equity stakes in Chrysler. In particular, Fiat has a variety of
options to achieve majority ownership of the company.
Fiat owns a 20 percent equity stake, along with management
control of Chrysler, which it received in exchange for Chrysler
gaining access to various Fiat technologies and Fiat's
international distribution networks.\194\ Fiat did not make any
cash contribution in exchange for this equity stake in
Chrysler. The Canadian government invested in New Chrysler,
through a $2.2 billion loan,\195\ and received 2.5 percent of
the equity.\196\ Also as part of the restructuring, the UAW's
VEBA took a note with a face value of $4.7 billion,\197\ and
67.7 percent of the equity in New Chrysler,\198\ in exchange
for various concessions on wages and benefits,\199\ and the
assumption of responsibility for health care costs for retired
UAW Chrysler workers. This initially left Treasury with the
remaining 9.8 percent of equity.\200\
---------------------------------------------------------------------------
\194\ This discussion does not reflect the impact of the January
10, 2011 announcement that Chrysler has met one of three incentive
goals and thereby Fiat has increased its equity ownership position from
20 to 25 percent. Chrysler Group LLC, Chrysler Group LLC Meets First of
Three Performance Events; Fiat Increases Ownership to 25 percent (Jan.
10, 2011) (online at www.media.chrysler.com/
newsrelease.do?id=10453&mid=2) (hereinafter ``Chrysler Meets First of
Three Performance Events'').
\195\ U.S. Department of the Treasury, Obama Administration Auto
Restructuring Initiative (Apr. 30, 2009) (online at
www.financialstability.gov/latest/tg_043009.html). For every three U.S.
dollars that Treasury loaned Chrysler, the Canadian government loaned
one Canadian dollar to the company. The U.S. dollar amount of the
Canadian government loan has fluctuated over time with changes in the
exchange rate between the U.S. and Canadian dollars.
\196\ Chrysler LLC Operating Agreement, supra note 188, at 86.
\197\ Chrysler Consolidated Financial Statements, supra note 192,
at 11.
\198\ Chrysler LLC Operating Agreement, supra note 188, at 86.
\199\ The White House, Obama Administration Auto Restructuring
Initiative (Apr. 30, 2009) (online at www.whitehouse.gov/the-press-
office/obama-administration-auto-restructuring-initiative) (hereinafter
``Obama Administration Auto Restructuring Initiative'').
\200\ Chrysler LLC Operating Agreement, supra note 188, at 86.
---------------------------------------------------------------------------
The four equity owners of Chrysler are all party to the
Amended and Restated Limited Liability Company Operating
Agreement of Chrysler Group LLC (Operating Agreement), which
governs how Chrysler is currently being strategically
managed.\201\ This agreement, signed on June 10, 2009,\202\
contains numerous clauses that can lead to a change in
Chrysler's ownership structure. Several clauses give Fiat
certain rights to increase its equity, while others grant
certain rights to the other parties, including Treasury. These
agreements work with each other, and actions by one party in
some cases are necessary to trigger the right of other parties
to exercise their respective options. Going forward, much will
depend on whether and when a Chrysler IPO occurs.
---------------------------------------------------------------------------
\201\ Chrysler LLC Operating Agreement, supra note 188, at 86.
\202\ The Equity Subscription Agreement, The VEBA Call Option
Agreement, The UST Call Option Agreement, The Equity Recapture
Agreement, The Master Transaction Agreement, and The First Lien Credit
Agreement were also signed on June 10, 2009 and collectively determine
the interests, rights, and obligations of all the parties under the
various possible scenarios.
---------------------------------------------------------------------------
i. Fiat's Options to Increase its Equity Share
Fiat may increase its equity ownership in Chrysler in a
number of ways. It is important to note, however, that Fiat may
only acquire a controlling interest after Chrysler repays all
TARP and Canadian government loans extended to it. First, the
Operating Agreement provides that Fiat's equity stake will
increase by 5 percent if and when each of the following
performance targets \203\ is met:
---------------------------------------------------------------------------
\203\ These performance targets are referred to as ``Class B
Events.'' See Chrysler LLC Operating Agreement, supra note 188, at
Section 3.4.
---------------------------------------------------------------------------
Chrysler builds a 40 mile-per-gallon (MPG) car in
the United States;
Chrysler builds a next-generation engine in a
U.S. factory, based on Fiat technology; \204\
---------------------------------------------------------------------------
\204\ This discussion does not reflect the impact of the January
10, 2011 announcement that Chrysler has met one of three incentive
goals and thereby Fiat has increased its equity ownership position from
20 to 25 percent. Chrysler Meets First of Three Performance Events,
supra note 194.
---------------------------------------------------------------------------
Fiat sells Chrysler vehicles through its
international distribution network.\205\
---------------------------------------------------------------------------
\205\ Obama Administration Auto Restructuring Initiative, supra
note 199.
---------------------------------------------------------------------------
If all three targets are met, then Fiat's equity stake will
increase by 15 percent, and it will own 35 percent of
Chrysler's equity--without having to make any payments to the
other equity holders. As Fiat's ownership share increases to 35
percent, that of the other three owners will be diluted; the
VEBA will then directly own 55 percent of the equity, Treasury
8 percent, and the Canadian government 2 percent.\206\
---------------------------------------------------------------------------
\206\ Chrysler LLC Operating Agreement, supra note 188, at 86.
---------------------------------------------------------------------------
To date, the company has not met any of the targets that
would trigger an increase in Fiat's equity stake of New
Chrysler. However, it is generally expected that these targets
will ultimately be reached.\207\
---------------------------------------------------------------------------
\207\ This discussion does not reflect the impact of the January
10, 2011 announcement that Chrysler has met this incentive goal and
thereby Fiat has increased its equity ownership position from 20 to 25
percent. Chrysler Meets First of Three Performance Events, supra note
194.
All analyst reports on Fiat reviewed in Section E.2.c., for
example, assume Fiat's stake to be at least 35 percent. Chrysler has
indicated that it believed the three targets would be reached. Chrysler
Group LLC conversations with Panel staff (Dec. 8, 2010).
---------------------------------------------------------------------------
In addition to meeting these performance targets, Fiat has
other avenues to increase its equity ownership, providing the
opportunity to gain majority control of Chrysler. The following
options are available to Fiat:
Fiat has the right to increase its equity stake
by up to 16 percent, under certain conditions, diluting the
other three parties proportionally (the Incremental Equity Call
Option).\208\ The exercise of this option may occur before,
simultaneous to, or after a Chrysler IPO, provided that
Chrysler has repaid the TARP and Canadian government loans. The
price for this option is set at a market-based formulaic price
prior to the IPO or a market price after the IPO.
---------------------------------------------------------------------------
\208\ Chrysler LLC Operating Agreement, supra note 188, at Section
3.5.
---------------------------------------------------------------------------
Fiat also has a right to buy up to 40 percent of
the VEBA's equity stake at a market-based formulaic price prior
to the IPO or a market price after the IPO, subject to an
adjustment for taxes (the VEBA Call Option).\209\
---------------------------------------------------------------------------
\209\ VEBA Call Option Agreement (June 10, 2010). This option gives
Fiat the right to buy up to 4.4 percent of Chrysler's diluted equity
(assuming all Class B events have occurred) no more than once every six
months, starting July 1, 2012 and running until either (1) June 30,
2016, (2) 22 percent of the equity has been so purchased, or (3) the
Treasury exercises its right to call the VEBA's equity under the Equity
Recapture Agreement.
---------------------------------------------------------------------------
Fiat has a right to buy any and all equity
interest that Treasury may have in Chrysler (the Treasury Call
Option).\210\ This option may be exercised by Fiat during the
12-month period following the repayment in full of all TARP
loans at an exercise price equal to a market price in the event
that a Chrysler IPO takes place, or using a ``dueling
investment banks'' method to determine the price
otherwise.\211\ Even though this agreement makes use of market
prices in the event an IPO has happened, it nevertheless gives
Fiat certain control over when Treasury could sell any
remaining equity it might have. This could conflict with
Treasury's ability to maximize its return from the investment,
because Fiat controls the timing of the event.
---------------------------------------------------------------------------
\210\ U.S. Department of the Treasury, UST Call Option Agreement
Regarding Equity Securities of New Carco Acquisition LLC, at 183 (June
10, 2009) (online at www.financialstability.gov/docs/AIFP/
Chrysler%20LLC%20Corporate%20as%20of%2012-01-10.pdf).
\211\ Id. at 183. The ``dueling investment banks'' method is as
follows: both the buyer and seller select an investment bank to value
the claim. If the two valuations are within 10 percent of each other,
then the average is taken as the sale price. If the two estimates
differ by more than 10 percent, then a third investment bank is
appointed and the average of the closest two valuations is used as the
sale price.
---------------------------------------------------------------------------
ii. Treasury's Rights
The various options and rights granted to some of the
parties in other agreements, beyond those mentioned above, mean
that the current equity ownership percentages do not
necessarily reflect the true economic interests of the various
entities. One such agreement is the Equity Recapture Agreement,
signed between Treasury and the UAW's VEBA on June 10, 2009.
This agreement entitles Treasury to all proceeds from the sale
of any of the VEBA's equity stake in Chrysler above a threshold
amount, set at $4.25 billion and growing from January 1, 2010
at 9 percent per year (Threshold Amount).\212\ The agreement
also gives Treasury the right to acquire the entirety of the
VEBA's equity stake for the then-applicable Threshold
Amount.\213\ This means that if the equity valuation of
Chrysler exceeds a certain level, then Treasury and not the
VEBA would be the majority economic beneficiary of such an
increase in valuation.\214\ As a practical matter, with the
expiration of the TARP, Treasury does not currently have funds
available to exercise its call option absent further
congressional action to appropriate resources to Treasury's
Auto Industry Financing Program.\215\ As described above,
Treasury will still passively benefit from any sales by the
VEBA of its equity above the Threshold Amount, but in this case
the VEBA will control the timing and volume of any sales.
Hence, the expiration of the TARP may effectively preclude
Treasury from following a more aggressive course of action to
maximize the taxpayer's return on their investment in Chrysler.
A private investor would likely choose the more aggressive path
to maximizing profits. However, as described further below,
Treasury, as a government entity, is not merely an investor and
has a number of competing policy priorities to take into
consideration.\216\
---------------------------------------------------------------------------
\212\ U.S. Department of the Treasury, Equity Recapture Agreement,
at 161 (June 10, 2009) (online at www.financialstability.gov/docs/AIFP/
Chrysler%20LLC%20Corporate%20as%20of%2012-01-10.pdf) (hereinafter
``Equity Recapture Agreement''). The Equity Recapture Agreement also
gives Treasury the right to receive payments in 2014, 2016, and 2018
from the VEBA based on the value of the option, if the Threshold Amount
has not yet been reached at those dates.
\213\ Under the terms of the agreement, Treasury can buy the asset,
the VEBA's equity in Chrysler, at any time for the Threshold Amount,
less any cash already received by the VEBA for Chrysler equity sold.
However, an agreement between Treasury and the Canada Development
Investment Corporation (CDIC) requires that 20 percent of any receipts
to Treasury under the Equity Recapture Agreement be transferred to the
CDIC. U.S. Department of the Treasury, April 30, 2009 Letter Agreement,
at 178 (June 10, 2009) (online at www.financialstability.gov/docs/AIFP/
Chrysler%20LLC%20Corporate%20as%20of%2012-01-10.pdf).
\214\ For example, if the equity valuation of Chrysler reaches a
required multiple of the Threshold Amount (approximately $10 billion on
January 1, 2012), then Treasury would be entitled to the benefit of 52
cents for each subsequent dollar increase in Chrysler's valuation. In
other words, should Chrysler succeed and be valued at such a level, or
higher, Treasury would be the marginal beneficiary of 80 percent of the
VEBA's 55 percent equity interest (with CDIC owning 20 percent of this
interest), which would bring Treasury's total economic interest in
Chrysler to 52 percent, a majority.
\215\ U.S. Department of the Treasury, Troubled Asset Relief
Program--Two year Retrospective (Oct. 2010) (online at
www.financialstability.gov/docs/
TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf)
(``October 3, 2010 marked the second anniversary of the Emergency
Economic Stabilization Act that created the Troubled Asset Relief
Program (TARP) and the end of the authority to make new financial
commitments'').
\216\ See analysis in Section E.
---------------------------------------------------------------------------
The accompanying box shows the various claims on Chrysler
and among the four parties at the present time. It also
illustrates how Fiat and the other stakeholders are likely to
exercise the options they hold going forward over the next two
years.
[GRAPHIC] [TIFF OMITTED] T3381.008
[GRAPHIC] [TIFF OMITTED] T3381.009
2. Outlook
a. Company Business Plan
Chrysler has changed numerous aspects of its business as
part of its emergence from bankruptcy and its new relationship
with Fiat. It has restructured its brands, reduced its U.S.
dealership network, introduced new models, improved its U.S.
market share, reduced its capacity, and negotiated lower labor
costs.\217\ Following initial cutbacks, Chrysler has recently
begun to add employees. All of these actions, together, have
returned Chrysler to operational profitability, although it
continues to report net losses stemming from the interest
expense on the TARP loans.\218\
---------------------------------------------------------------------------
\217\ For exact figures, see Section E.
\218\ Chrysler Consolidated Financial Statements, supra note 192,
at 2.
---------------------------------------------------------------------------
On November 4, 2009, Chrysler unveiled its five-year
business plan.\219\ Chrysler stated that it plans to have four
brands--Dodge, Ram Trucks, Jeep, and Chrysler--but to have them
sold through unified dealerships. Ram had been a sub-brand of
Dodge for nearly 30 years. Unlike GM, Chrysler has not closed
any of its pre-bankruptcy brands, although Chrysler had only
three brands pre-bankruptcy, compared to eight at GM.
---------------------------------------------------------------------------
\219\ Chrysler Group LLC, Our Plan Presentation (Nov. 4, 2009)
(online at www.chryslergroupllc.com/business/) (hereinafter ``Chrysler
Plan Presentation'').
---------------------------------------------------------------------------
Like GM, Chrysler has reduced its number of dealers in the
United States. The logic is that with fewer dealers, the
remaining dealers will sell more vehicles, reach a higher level
of profitability, and so be able to afford a greater level of
investment in their dealerships. This investment, which
Chrysler is pushing under the name ``Project Genesis,'' aims to
create more customer-friendly showrooms.\220\
---------------------------------------------------------------------------
\220\ Chrysler Group LLC, Our Plan Presentation: Presentation 9--
U.S. Network Development (Nov. 4, 2009) (online at
www.chryslergroupllc.com/pdf/business/us_network_development.pdf).
---------------------------------------------------------------------------
Chrysler has introduced several new models since emerging
from bankruptcy on June 10, 2009. The most significant from a
revenue perspective has been the new Jeep Grand Cherokee
introduced in May 2010.\221\ This model has sold 66 thousand
units to date.\222\ Discussions have begun to use the same
underlying platform to produce a luxury SUV under Fiat's
Maserati brand.\223\ Chrysler is also preparing to launch the
Chrysler 200, which will replace the Chrysler Sebring. The Ram
truck brand has had some critical success, notably winning
Texas Truck of the Year,\224\ but its sales performance has
failed to match that of the GM and Ford pickup lines in
2010.\225\ Overall truck sales for Chrysler are up 13 percent
for the first 11 months of 2010 as compared to the same period
in 2009. Equivalent sales, however, have increased 17 percent
at GM and 22 percent at Ford for the same period.\226\
Chrysler's minivan segment saw a revamped model introduced for
model year 2011.
---------------------------------------------------------------------------
\221\ Chrysler Group LLC, Chrysler Group LLC Celebrates Production
Launch of All-new 2011 Jeep Grand Cherokee at Detroit Plant; Announces
Second Shift (May 21, 2010) (online at www.chryslergroupllc.com/news/
archive/2010/05/21/chrysler_celebrates_prod_launch_2011jgc_05212010).
\222\ Data provided by Chrysler for full year 2010 worldwide sales
(Jan. 10, 2011).
\223\ Chrysler Plan Presentation, supra note 219.
\224\ Chrysler Group LLC, Ram, Jeep Bring Home High Honors at Texas
Truck Rodeo (Oct. 24, 2010) (online at blog.chryslergroupllc.com/
blog.do?id=1215&p=entry).
\225\ UBS Investment Research, Retail & Fleet Registrations Q3
2010, at 15 (Dec. 16, 2010).
\226\ Automotive News, Data Center (Instrument: U.S. light-vehicle
sales by nameplate, Nov. & YTD) (Dec. 1, 2010) (hereinafter
``Automotive News Data Center'').
---------------------------------------------------------------------------
Figure 11 below shows the evolution over the last eight
years of Chrysler's sales in the United States, by far its
largest market. The importance to Chrysler of the light truck
segment, which includes the minivan, pickup, and SUVs, is
clear, as this segment has consistently been responsible for
the majority of Chrysler's sales in the United States.
Chrysler's market share has seen a slight uptick in 2010 year-
to-date versus 2009, which has been driven by its performance
in the car market.\227\ Additionally, Chrysler's average
transaction price has increased $1,900 since March 2009.\228\
---------------------------------------------------------------------------
\227\ Id. As of November, 2010, Chrysler's U.S. car market share
was 5.1 percent, up from 4.3 percent in 2009. On the other hand,
Chrysler's U.S. truck market share actually declined from 14.4 percent
in 2009 to 14.1 percent as of November 2010.
\228\ As of June 2010, the average transaction price was $27,300.
Data provided by Chrysler (Jan. 10, 2011).
---------------------------------------------------------------------------
FIGURE 11: CHRYSLER U.S. VEHICLE SALES BY SEGMENT, 2003 TO PRESENT
\229\
---------------------------------------------------------------------------
\229\ The 2010 data includes information through November 2010.
Automotive News Data Center, supra note 226.
[GRAPHIC] [TIFF OMITTED] T3381.010
Operationally, Chrysler now has one fewer plant than it did
prior to bankruptcy, but it should be noted that this reflects
both the closure of four major plants offset by Chrysler's
purchase of a bankrupt supplier's three factories.\230\ This
capacity reduction, together with contractual changes that have
reduced labor costs, has lowered the volume at which Chrysler
breaks even to 1.65 million units.\231\
---------------------------------------------------------------------------
\230\ Data provided by Chrysler (Jan. 10, 2011).
\231\ Chrysler Group LLC, Our Plan Presentation: Presentation 16--
Financial Review (Nov. 4, 2009) (online at www.chryslergroupllc.com/
pdf/business/financial_review.pdf) (hereinafter ``Chrysler Plan
Presentation: Presentation 16--Financial Review'').
---------------------------------------------------------------------------
Fiat has also begun its efforts to re-enter the U.S.
market. On November 17, 2010, Chrysler announced 130
dealerships that have been selected to sell Fiat vehicles.\232\
These dealerships will be distinct from the dealerships that
sell the Chrysler family of vehicles, although some Fiat
dealerships were sold to existing Chrysler dealers. Chrysler
began building the Fiat 500, also known as the Cinquecento, in
the fourth quarter of 2010, and will start selling the vehicles
in North America in 2011.
---------------------------------------------------------------------------
\232\ Chrysler Group LLC, Chrysler Group LLC Selects Dealers to
Represent Fiat Brand in the U.S. (Nov. 17, 2010) (online at
www.media.chrysler.com/newsrelease.do?id=10325&mid=2).
---------------------------------------------------------------------------
Since emerging from bankruptcy, Chrysler's financial
performance has been burdened by the significant and costly
debt it still carries, much of it related to the TARP.\233\
Figure 12 below shows several key financial and operational
metrics for Chrysler and how they have evolved before and after
bankruptcy.
---------------------------------------------------------------------------
\233\ Chrysler's TARP loans have a weighted, based on carrying
value, average effective interest rate of 9.36 percent. Chrysler
Consolidated Financial Statements, supra note 192, at 12.
FIGURE 12: CHRYSLER FINANCIAL AND OPERATIONAL RESULTS, MID-2007 TO Q3 2010 \234\
----------------------------------------------------------------------------------------------------------------
Vehicles Net Cash Employees
Vehicles Sold, Revenue Modified EBITDA Income Flow at end of
Period Sold U.S. (USD (USD (USD (USD Period
(000s) (000s) millions) millions) \235\ millions) millions) (000s)
----------------------------------------------------------------------------------------------------------------
8/4/07 to 12/31/07........... 1,081 828 26,561 ............... (639) ......... 76
2008......................... 2,007 1,453 48,477 ............... (16,844) ......... 56
1/1/09-6/30/09 \236\......... 656 471 11,082 ............... (4,425) ......... 50
Q4 2009...................... 318 216 9,434 398 (2,691) ......... 48
Q1 2010...................... 334 235 9,687 787 (197) 1,498 50
Q2 2010...................... 407 292 10,478 855 (172) 481 52
Q3 2010...................... 401 293 11,018 937 (84) 419 52
----------------------------------------------------------------------------------------------------------------
\234\ Data provided by Chrysler (Jan. 11, 2011).
\235\ Chrysler Group LLC, Q3 2010 Results Review, at 4 (Nov. 8, 2010) (online at www.chryslergroupllc.com/ pdf/
business/q3_2010_webcast_presentation.pdf).
\236\ The following metrics for this time period are as of June 9, 2009: vehicles sold, revenue, and net income
data. Data provided by Chrysler (Jan. 11, 2011).
b. Government Exit Strategy
Treasury currently has both debt and equity claims on
Chrysler. Treasury's total outstanding debt claims on New
Chrysler, including additional notes and payment-in-kind
interest considerations, have a total face value of $5.8
billion.\237\ Furthermore, Chrysler still retains the right to
draw up to an additional $2.1 billion in funding pursuant to
the original loan agreement.\238\ These loans are due to be
paid back in tranches, with the last tranche due in 2017.\239\
Given Chrysler's efforts to refinance its TARP loans,\240\ its
stated desire to repay the TARP loans by 2014,\241\ its pending
application for loans from Department of Energy's Advanced
Technology Vehicles Manufacturing Loan Program (ATVM),\242\ and
the continued positive cash flow from the automotive
business,\243\ it is likely that all the loans extended to
Chrysler under the TARP will be repaid, possibly in advance of
the contractual due dates. Therefore, most of the uncertainty
regarding Treasury's financial return on the Chrysler
intervention stems from the unpredictability of Treasury's
ultimate recovery from its equity stake.
---------------------------------------------------------------------------
\237\ Chrysler Consolidated Financial Statements, supra note 192,
at 12.
\238\ Chrysler Consolidated Financial Statements, supra note 192,
at 15. In addition to the $500 million in debt New Chrysler assumed
from Old Chrysler, the company has drawn $4.6 billion of the $6.6
billion made available to the company on May 27, 2009, leaving $2.1
billion available for the company to draw down.
\239\ Chrysler Consolidated Financial Statements, supra note 192,
at 12.
\240\ Chrysler Plan Presentation, supra note 219.
\241\ Chrysler Plan Presentation: Presentation 16--Financial
Review, supra note 231.
\242\ See footnote 259, infra, for a discussion of the ATVM loan
program and Chrysler's application for funds from the program.
\243\ Chrysler Consolidated Financial Statements, supra note 192,
at 4.
---------------------------------------------------------------------------
Plans for the sale of Treasury's equity stake have not been
formally divulged. Chrysler is currently a privately held
company with no publicly traded equity against which to value
Treasury's equity stake.\244\ Sergio Marchionne, the CEO of
Chrysler and Fiat, has publicly stated that he expects to take
Chrysler public via an IPO sometime in 2011. How much, if any,
of Treasury's stake could be sold at that point is unclear. The
eventual monies received by Treasury for its investments in
Chrysler will depend on Chrysler's financial and operational
performance, if and when Chrysler's equity becomes publicly
traded and, to a large degree, the actions of Fiat and the
VEBA. If Chrysler's equity does not immediately become publicly
traded after the TARP loans get repaid, then the return on
investment will depend to an even bigger extent on the actions
of Fiat and could be lower as a result.\245\ In his most recent
comments, the Fiat CEO has indicated that he considers it
possible that Fiat will go over the 50 percent ownership mark
in 2011.\246\
---------------------------------------------------------------------------
\244\ As of December 30, 2010, Treasury held 9.8 percent of the
equity in Chrysler, but this will be diluted to 8 percent if and when
Chrysler and Fiat meet the performance targets for Fiat's increased
equity stake. Treasury also has an effective economic interest in 80
percent of the VEBA's 55 percent equity stake, see Section E.1.b.ii for
details.
\245\ For analysis of Treasury's likely exit scenarios, see Section
E.3, infra.
\246\ Bloomberg Data Service, Fiat May Increase Chrysler Stake to
51% Before IPO (Jan. 3, 2011) (hereinafter ``Bloomberg Data Service'')
(``I think it is possible. I don't know whether it is likely, but it is
possible that we'll go over the 50 percent mark if Chrysler decides to
go to the markets in 2011,'' Sergio Marchionne, 58, told reporters at
the Milan stock exchange today. ``It will be advantageous if that
happens.'').
---------------------------------------------------------------------------
c. Valuing Chrysler's Equity
Determining an appropriate valuation for Chrysler's equity,
in the absence of trading of its equity on a public exchange,
is difficult and involves a large amount of subjective
assessment. However, there are ways of estimating a value: (1)
the Operating Agreement contains a pricing formula for several
of Fiat's options to buy additional equity of Chrysler, and (2)
equity research analysts who cover Fiat have estimated values
for Fiat's stake in Chrysler. Under most of these valuations,
Treasury's rights under the Equity Recapture Agreement have
positive value.
The Operating Agreement provides a valuation method to be
used in the absence of public trading. The valuation is the
product of the most recent four quarters' earnings and a
market-assigned ``multiple,'' which relies on valuations of
other comparable automobile manufacturers, and deducts the
company's debt according to certain rules.\247\ Applying that
valuation methodology to Chrysler's financial results for the
third quarter of 2010 results in an estimate of Treasury's
equity stake in Chrysler of $2.8 billion.\248\
---------------------------------------------------------------------------
\247\ Chrysler LLC Operating Agreement, supra note 188 (see the
Definitions Addendum).
\248\ Calculations were done based on the formula in the Operating
Agreement, using third quarter 2010 (Q3 2010) financial results for
Chrysler and other automotive manufacturers, as subsequently described.
The average EV/EBITDA T12M (Enterprise Value to Earnings Before
Interest, Tax, Depreciation, and Amortization on a Trailing 12 Month
basis) (the market ``multiple'') for all Reference Automotive
Manufacturers is 7.96 through Q3 2010. Excluding the outliers, as per
the Operating Agreement formula, lowers the figure to 6.84, which is
still higher than the Fiat EV/EBITDA T12M Multiple of 4.68 as of the
end of the third quarter of 2010. Bloomberg Financial Service.
Chrysler's EBITDA in the 12 months prior to the end of the third
quarter of 2010 were $2,977 million ($398 million + $787 million + $855
million + $937 million). Chrysler Group LLC, Unaudited Interim
Condensed Consolidated Financial Statements as of September 30, 2010
and for the Three and Nine Months Ended September 30, 2010, at 15 (Nov.
8, 2010) (online at www.chryslergroupllc.com/pdf/business/
q3_2010_financial_statements.pdf); Chrysler Group LLC, Chrysler Group
LLC Reports Financial Results for the Period Ended March 31, 2010 (Apr.
21, 2010) (online at www.chryslergroupllc.com/news/archive/2010/04/21/
2010_q1_press_release). Applying the 4.68 Fiat Multiple to Chrysler's
EBITDA of $2,977 million yields an enterprise value of $13,932 million,
less net debt of $3,766 million, which gives a total equity value for
Chrysler of $10,166 million. The value to Treasury is the 9.8 percent
of $10,166 million, or $1.0 billion for the direct equity, and
approximately $1.8 billion for the proceeds to Treasury under the
Equity Recapture Agreement.
---------------------------------------------------------------------------
This result is very sensitive to the earnings period and
the pool of comparable firms. In particular, earnings for the
fourth quarter of 2009 were particularly bad for Chrysler.\249\
Further, the Operating Agreement provides that the multiple
used for the valuation of Chrysler may not exceed Fiat's
multiple,\250\ which is currently the lowest in the
industry.\251\ This effectively limits the implied valuation of
Chrysler. And according to analyst reports, certain plans
announced by Fiat will further lower Fiat's--and in turn
Chrysler's--multiple,\252\ for the purposes of assessing how
much Fiat must pay to acquire additional equity in Chrysler
using several of the options it has.
---------------------------------------------------------------------------
\249\ Chrysler Group LLC, Chrysler Group LLC First Quarter (Q1)
2010 Financial Results Analyst Webcast, at 2 (May 10, 2010) (online at
www.chryslergroupllc.com/pdf/business/may10_presentation.pdf).
\250\ Chrysler LLC Operating Agreement, supra note 188 (see the
Definitions Addendum).
\251\ Bloomberg Data Service.
\252\ On April 21, 2010, Fiat announced its plans to ``demerge''
its industrial goods divisions from the automotive divisions. See
Sergio Marchionne, Fiat Investor Day: The Five Year Plan (online at
www.fiatgroup.com/en-us/mediacentre/press/Documents/2010/
THE%20FIVE%20YEAR%20PLAN%20-%20Adress%20from%20Sergio%20Marchionne.pdf)
(accessed Jan. 11, 2011). Analysts predict this will further lower the
overall multiple applied to Fiat. The Goldman Sachs Group, Inc.,
Breaking Up is Easy to Do; Reiterating Conviction Buy, at 32 (Sept. 24,
2010) (hereinafter ``Goldman Sachs Paper on Fiat''). A lower multiple
for Fiat would further limit the implied valuation of Chrysler under
the Operating Agreement. Fiat's possible divestment of Ferrari would
also lower the Fiat multiple. Barclays Capital, Fiat SPA--Crystallising
Option Value--Move to 1-OW, at 8 (Dec. 7, 2010) (hereinafter ``Barclays
Capital Paper on Fiat''). Treasury has not discussed this with any of
the Operating Agreement parties, including Fiat. Treasury conversations
with Panel staff (Nov. 28, 2010).
---------------------------------------------------------------------------
Equity analysts who cover Chrysler provide another source
of valuation estimates. Figure 13 below shows the values
attributed to Fiat's stake in Chrysler in the most recent
research notes published by four firms.
FIGURE 13: ANALYST EVALUATIONS OF CHRYSLER EQUITY VALUE
----------------------------------------------------------------------------------------------------------------
Size of Valuation
Fiat's Valuation of Chrysler
Firm Date Equity of Fiat's Equity
Stake Stake (USD (USD
(Percent) millions) millions)
----------------------------------------------------------------------------------------------------------------
Goldman Sachs \253\....................... Sept. 24, 2010............... 35 2,857 8,162
Kepler \254\.............................. April 26, 2010............... 51 5,225 10,245
Credit Agricole \255\..................... April 23, 2010............... 35 4,319 11,459
Deutsche Bank \256\....................... April 22, 2010............... 35 0 0
----------------------------------------------------------------------------------------------------------------
\253\ Goldman Sachs Paper on Fiat, supra note 252, at 32. Figures converted from Euros to U.S. dollars using the
U.S. Treasury's rate of exchange as of December 31, 2010. U.S. Department of the Treasury, Treasury Reporting
Rates of Exchange (Instrument: Euro Zone--Euro) (accessed Jan. 11, 2011) (online at www.fms.treas.gov/
intn.html#rates) (hereinafter ``Treasury Reporting Rates of Exchange'').
\254\ Kepler Research, Wishful Thinking, at 6 (Apr. 26, 2010).
\255\ Cheuvreux: Credit Agricole Group, A New Fiat in the Making, at 2 (Apr. 23, 2010) (online at
www.borsaitaliana.it/bitApp/viewpdf.bit?location=/media/star/db/pdf/86353.pdf). Figures converted from Euros
to U.S. dollars using the U.S. Treasury's rate of exchange as of December 31, 2010. Treasury Reporting Rates
of Exchange, supra note 253.
\256\ Deutsche Bank, The Great Divide--Initial Thoughts, at 3 (Apr. 22, 2010) (online at www.borsaitaliana.it/
media/star/db/pdf/88399.pdf).
As for the debt owed by Chrysler, as part of the five-year
business plan announced on November 4, 2009, Chrysler detailed
its plan to repay its obligations to Treasury, as well as those
owed to the Canadian government.\257\ Chrysler projected
repaying all TARP loans by the end of 2014. This would be
several years in advance of when the loans mature. Chrysler's
desire to end its connection with the TARP ahead of time
reflects its desire to achieve a cheaper source of financing
going forward.\258\ However, the five-year business plan also
projected that Chrysler would receive $3 billion in Department
of Energy loans, $1 billion in each year from 2010 to
2012.\259\
---------------------------------------------------------------------------
\257\ Chrysler Plan Presentation: Presentation 16--Financial
Review, supra note 231. Chrysler has reiterated this plan in
conversations with Panel staff. Chrysler conversations with Panel staff
(Dec. 10, 2010).
\258\ Chrysler conversations with Panel staff (Dec. 10, 2010).
\259\ The loans, under the Advanced Technology Vehicle
Manufacturing (ATVM) program, charge an interest rate equivalent to
Treasury's cost of funds, which is lower than interest on the TARP
loans. See U.S. Department of Energy, Advanced Technology Vehicles
Manufacturing Incentive Program, 73 Federal Register 66721 (Nov. 12,
2008) (interim final rule). Based on the current difference between
these interest rates, the cost savings to Chrysler, and the associated
loss to Treasury, would be worth approximately $180 million per year.
The ATVM loans have the potential to extend beyond 2017, the current
date by which Chrysler must repay all of its obligations to the TARP.
---------------------------------------------------------------------------
If Chrysler succeeds in meeting its five-year business
plan, and with potential help from any Department of Energy
loans extended to Chrysler, the TARP will have all the debt
owed to it repaid by 2014, in advance of Chrysler's contractual
obligations.\260\
---------------------------------------------------------------------------
\260\ When Sergio Marchionne was asked about the use of ATVM funds
on an analyst call he said: ``As you well know, cash is fungible. So to
the extent that we produce cash from operations, cash can be used, not
to be redeployed in the investment cycle, but to go back and repay
existing indebtedness. So at the end of the day, we need to have those
funds [ATVM loans] targeted for capital and engineering and development
efforts, but in the scheme of things, they will all end up in the same
pot and how we use that cash to repay who is really up to Chrysler.''
Chrysler Plan Presentation, supra note 219, at 61st minute. The Panel
notes that if ATVM funds were used to repay TARP loans, this result
would reflect policy choices made pursuant to the ATVM program and does
not appear to violate either the terms of the ATVM program or the terms
of EESA, even though it may raise concerns regarding Chrysler's
financial health.
---------------------------------------------------------------------------
3. Analysis of the Government's Exit Strategy Based on Likely Repayment
Scenarios
For a successful government exit to be carried out, all
TARP loans would need to be repaid, and Treasury would need to
divest its equity stake in Chrysler and recover sufficient
value to compensate the taxpayer for the Chrysler-related
losses of $3.5 billion. As noted earlier, much will depend on
Treasury's ability to maximize its return from the sale of its
equity stake and whether or not Chrysler has an IPO.
Treasury currently has debt instruments outstanding to
Chrysler with a total face value of $5.8 billion. Under the
scenarios laid out above, Treasury is likely to recover the
full amount of its outstanding TARP loans to Chrysler ahead of
time whether or not an IPO occurs.\261\ In addition, Treasury
has lost $3.5 billion on loans made to Old Chrysler. For
Treasury to recover all the funds that it has invested in
Chrysler, both Old and New, then all the loans have to be
repaid, and Treasury's equity stake would have to yield at
least $3.5 billion to make up for the losses to date. Based on
just the 8 percent of Chrysler's equity that will be directly
held by Treasury at the time of any potential sale, Chrysler
would have to be valued at approximately $44 billion to cover
the losses to date.\262\ This is roughly in line with the
amount reported in the Panel's September 2009 report, which
calculated the break-even valuation of Chrysler at $57.5
billion.\263\ For comparison, when Chrysler was acquired by
Daimler in 1998, it was valued at $37 billion, which adjusted
for inflation would equate to $49 billion today.\264\ Prior to
that acquisition, Chrysler had never been so highly
valued.\265\
---------------------------------------------------------------------------
\261\ See Section E.2.b, supra, for a discussion.
\262\ This figure is derived as follows: ($3.5 billion (amount
written off on Old Chrysler and Chrysler Holdings loans)/8 percent
(Treasury's equity stake, assuming all three performance targets are
met)). Consideration of the time value of money and/or the riskiness of
the securities held by Treasury would push the break-even point higher.
\263\ September 2009 Oversight Report, supra note 2, at 46. The
difference is due to Chrysler-related losses being lower than were
expected in 2009.
\264\ This calculation uses Consumer Price Index data for May 1998
and October 2010. U.S. Department of Labor, Consumer Price Index: All
Urban Consumers (Nov. 17, 2010) (online at ftp://ftp.bls.gov/pub/
special.requests/cpi/cpiai.txt).
\265\ Bloomberg Data Service.
---------------------------------------------------------------------------
As discussed above, the Equity Recapture Agreement between
Treasury and the VEBA may change the picture because of the
additional economic interest it grants to Treasury. If Treasury
were able to exercise fully its rights under this agreement,
then Treasury's stake would be a considerably larger share of
Chrysler. This in turn would mean that it would be possible for
the valuation of Chrysler to be significantly lower in order
for the TARP to recoup fully its investment and maximize return
for the taxpayers.\266\ Exact calculations are difficult as
they depend on the date of sale. Assuming a January 1, 2012
sale date for the entire equity stakes of both Treasury and the
VEBA, for example, Chrysler's equity would have to be valued at
approximately $14.5 billion for Treasury to recoup the $3.5
billion that it has lost on Chrysler-related loans to date,
which would make it easier for Treasury to recover all of its
investments in Chrysler.
---------------------------------------------------------------------------
\266\ See Section E.1.b for an analysis of the various exit
strategies and their respective costs and benefits to the taxpayers.
---------------------------------------------------------------------------
As noted above, Treasury does not currently have the
ability to appropriate funds to acquire the VEBA's equity. If
Chrysler does well financially and the VEBA's sales of equity
reach the Threshold Amount, then any equity sales above that
level will benefit Treasury.\267\ In this case, however, the
VEBA and not Treasury will have control over the timing and
execution of these sales. In addition, Fiat's ability to
control the timing of the exercise of its option to buy
Treasury's entire equity stake in Chrysler after repayment of
the TARP loans could limit the ability of Treasury to recoup
the maximum possible amount from its equity stake and its
claims to the VEBA's equity stake.
---------------------------------------------------------------------------
\267\ For a discussion of Treasury's rights to the VEBA's equity,
see Section E.1.b, supra.
---------------------------------------------------------------------------
Figure 14 below includes the key dates when the various
rights take effect to facilitate the following discussion of
possible repayment scenarios.
95FIGURE 14: CHRYSLER TIMELINE
------------------------------------------------------------------------
Date Event Source
------------------------------------------------------------------------
12/10/2011............ $2.08 billion of loan to Chrysler Group LLC
Chrysler from Treasury is financial
due; $500 million CAD statements.
from Canadian loan is
also due.
7/1/2012.............. VEBA Call Option VEBA Call Option
activates, allowing Fiat Agreement.
to purchase up to 40
percent of VEBA's equity
stake in Chrysler..
1/1/2013.............. Fiat's Class B rights, the Operating Agreement.
performance targets,
expire; after this date
Fiat may acquire a stake
equivalent to that it
could have acquired under
the Class B rights, but
by paying a price
equivalent to that of the
Incremental Equity Call
Option--this is the
Alternative Call Option.
1/1/2013.............. Starting on this date, a Operating Agreement.
simple majority, 51
percent, of Chrysler's
equity holders can force
an IPO.
6/10/2016............. Half of the remaining Chrysler Group LLC
balance on Treasury loans financial
to Chrysler are due. statements.
7/1/2016.............. VEBA Call Option expires.. VEBA Call Option
Agreement.
6/10/2017............. Remaining balance on Chrysler Group LLC
Treasury loans to financial
Chrysler are due. statements.
------------------------------------------------------------------------
a. Possible Scenarios for a Sale of Treasury's Equity Stake
It appears that Treasury has a chance to recover some or
all of the previously lost amounts through gains on the equity
stake. Treasury is guided by a number of different principles
for its involvement in private companies and, as with GM, it
needs to balance its desire to exit as soon as practicable
against its objective of maximizing the value of the taxpayers'
investment.\268\ The level of return Treasury can realize for
the taxpayers, however, is uncertain at this point. In addition
to unpredictable market developments, the complex nature of the
restructuring transaction and the competing and potentially
conflicting sets of interests among the parties may constrain
Treasury's freedom to act in the best interest of the
taxpayers. As noted earlier, much will depend on the conditions
under which Treasury and the VEBA will be able to dispose of
their equity stakes. Two possible scenarios are described
below.
---------------------------------------------------------------------------
\268\ See a summary of Treasury's principles in Section H.1, infra.
---------------------------------------------------------------------------
i. Large IPO Exit Scenario
As discussed above, repayment in full of Chrysler's
government loans is a pre-condition for Fiat to gain majority
control of the company. An IPO may happen whether or not Fiat
has a majority ownership of Chrysler's shares, but if Fiat can
reach a 51 percent equity stake in Chrysler before January 1,
2013, it will have sole control over the timing of a Chrysler
IPO.\269\ In Fiat's second quarter 2010 analyst call, its CEO
stated that the priority for the IPO was to allow the VEBA to
sell its stake in Chrysler for cash that it can use to invest
and meet its obligations for the health care of the retired UAW
workers.\270\ Chrysler also expects the other equity owners
eventually to sell their stakes.\271\
---------------------------------------------------------------------------
\269\ Chrysler LLC Operating Agreement, supra note 188, at Section
14.1. Starting January 1, 2013 a simple majority of Chrysler's equity
owners can force the company to have an IPO.
\270\ Chrysler Plan Presentation, supra note 219.
\271\ Chrysler Group LLC conversations with Panel staff (Dec. 9,
2010).
---------------------------------------------------------------------------
An IPO would likely take place in late 2011 or 2012.\272\
Fiat would have the option to increase its equity stake to a
majority by exercising the Incremental Equity Call Option
either prior to or concurrently with the IPO. For this to
happen, Chrysler would need to have repaid all of its
government loans by that time. In a large IPO package scenario
Fiat would exercise its option simultaneously with the IPO, and
Treasury would be able to sell its entire direct equity stake
at that time. The ultimate level of recovery for Treasury would
depend on the market for Chrysler's shares and, to some degree,
on the VEBA's actions.\273\
---------------------------------------------------------------------------
\272\ Chrysler Group LLC conversations with Panel staff (Dec. 9,
2010).
\273\ The VEBA is unlikely to be able to dispose of its entire
equity stake at once, but since Treasury gets the benefit of the VEBA
sales above the Threshold Amount, it will be affected by the volume and
timing of these sales. For a discussion see Section E.1.b. Treasury's
right to receive income from such sales survives its exit as a
shareholder of Chrysler. Moreover, as noted above, if Treasury did
increase its equity stake by exercising its rights under the VEBA
option agreement, Treasury could realize a higher return on its
investment. VEBA's actions are not under Treasury's control, but the
Panel notes that the lack of resources for Treasury to exercise fully
its rights may limit the level of return to the taxpayer.
---------------------------------------------------------------------------
ii. Delayed IPO
As discussed earlier, Fiat has a number of ways to increase
its equity stake to a majority position, which can precede a
Chrysler IPO.\274\ The main reason why Fiat may prefer to delay
an IPO is to be able to have Chrysler repay its loans \275\ and
so allow Fiat to exercise the entire Incremental Equity Call
Option more cheaply prior to an IPO.\276\ This would save Fiat
a significant amount of money because instead of paying
Chrysler market price for the new equity, it would be able to
purchase the stake (and dilute the other shareholders) at a far
lower cost based on a valuation methodology tied to inputs that
could artificially lower Chrysler's value as opposed to what
the equity might sell for in an IPO.\277\ According to
analysts, exercising the option prior to an IPO would mean up
to a $2 billion savings for Fiat,\278\ which would translate
into a corresponding loss for Chrysler. This in turn would
lower the value of the company in a subsequent IPO and result
in a loss for the other owners of Chrysler, including
Treasury.\279\ The Fiat CEO's most recent remarks implying that
his company may go beyond a 50 percent ownership of Chrysler in
2011 has reinforced analyst opinions that Fiat would try to
save money and acquire majority ownership by exercising the
Incremental Equity Call Option prior to an IPO.\280\
---------------------------------------------------------------------------
\274\ See Section E.1.b, supra.
\275\ To prepay the TARP and Canadian government loans, Chrysler
would need the approval of a simple majority of its Board of Directors.
Assuming that all three performance targets are met, Fiat would only
need the agreement of one more director, either the VEBA director, the
Canadian director, or one of the three Treasury directors. Chrysler LLC
Operating Agreement, supra note 188, at Sections 5.1 and 5.8.
\276\ Chrysler LLC Operating Agreement, supra note 188, at Section
3.5. This gives Fiat the right to buy 16 percent of the equity using
either a public market price or the valuation formula described in
E.2.c. This option can only be exercised once Chrysler has repaid the
monies borrowed from the TARP and from the Canadian Government. Funds
received by Chrysler for the Incremental Equity Call Option can be used
simultaneously to repay the TARP loans. Recent reports from analysts
covering Fiat indicate that Fiat may float some of its interest in
Ferrari and Marelli, a parts supplier, ahead of a Chrysler flotation. A
possible explanation for floating these two components of Fiat is to
raise the necessary funds to exercise the Incremental Equity Call
Option.
\277\ As described in Section E.2.c, supra, the Operating
Agreement's formula for the valuation of Chrysler uses a market
``multiple'' tied to that of Fiat, which is the lowest in the industry,
to calculate the value of Chrysler. See footnote 248, supra, for a
detailed discussion on the calculation of market multiples.
\278\ Barclays Capital Paper on Fiat, supra note 252, at 8. (``We
estimate a pre-IPO transaction could save Fiat between $1.0bn and
$2.7bn compared to a post IPO deal. Adjusted for debt assumed by Fiat,
we calculate ROI in a 40-100% range.''); UBS Investment Research,
Chrysler: Pre vs Post IPO Take-over, at 1 (Dec. 15, 2010) (hereinafter
``UBS Investment Research Paper on IPO'').
\279\ A similar logic applies to Fiat's rights under the VEBA Call
Option Agreement. VEBA Call Option Agreement (June 10, 2010). This also
has implication for Treasury's return due the Equity Recapture
Agreement. Equity Recapture Agreement, supra note 212, at 161.
\280\ Bloomberg Data Service, supra note 246 (``It looks cheaper
for Fiat to get 51 percent of Chrysler before the IPO,'' said Philippe
Houchois, a London-based analyst at UBS AG, who estimates that Fiat
could save $1 billion to $2.7 billion if it exercises the option before
a Chrysler listing. ``It's a positive scenario for Fiat shares.''). For
analysis, see UBS Investment Research Paper on IPO, supra note 278, at
1.
---------------------------------------------------------------------------
The exit options available to Treasury underlie the fact
that Treasury's intervention in Chrysler was done in a distinct
manner within the TARP by giving Fiat significant rights and
benefits at the outset. The Panel notes that this may have
saved Chrysler from dissolution, but the conflicting interests
inherent in the structure of the intervention going forward may
restrict Treasury's ability to maximize return for the
taxpayers as it unwinds the government's ownership position.
F. GMAC/Ally Financial
1. Context
a. Brief History of the Company
For most of its history, GMAC Financial Services/Ally
Financial was a wholly owned subsidiary of GM. As GM's captive
finance arm, GMAC/Ally Financial provided GM dealers with the
financing necessary to acquire and maintain automobile
inventories and to provide customers with a means to finance
automobile purchases.\281\ Over time, the company's operations
expanded and diversified to include insurance, mortgages,
commercial finance, and online banking.\282\ However, the
decline in the last decade in GM's credit rating negatively
impacted GMAC/Ally Financial's credit ratings and increased the
cost of financing GM automobile sales. These circumstances,
coupled with GMAC/Ally Financial's branching out into other
lending sectors outside the auto industry, called into question
GMAC/Ally Financial's ownership and governance structure. As a
result, on November 30, 2006, GM sold 51 percent of the equity
in GMAC/Ally Financial to an investment consortium led by
Cerberus Capital Management, L.P. (Cerberus) for about $14
billion. GMAC/Ally Financial emerged as an independent global
financial services company, but GMAC/Ally Financial's
operations continued to have many attributes of a captive
finance arm's relationship with an automaker.\283\
---------------------------------------------------------------------------
\281\ Captive financing organizations can be structured as legally
separate subsidiaries or distinct business lines, but they exist
primarily as extensions of their corporate parents. Their purpose is to
facilitate the parent corporation's sale of goods or services by
providing debt and/or lease financing to the parent's customers. See
Standard & Poor's, Captive Finance Operations (Apr. 17, 2009) (online
at www2.standardandpoors.com/spf/pdf/media/
Captive_Finance_Operations.pdf).
\282\ For further discussion concerning GMAC/Ally Financial's
diversification efforts, see March 2010 Oversight Report, supra note
22, at 11-13.
\283\ While GMAC/Ally Financial may no longer be a captive in the
legal sense after it became an independent finance company in 2006, it
maintains close ties with GM in many ways as a result of the
contractual codification of its historical relationship with GM. For
example, as part of the 2006 sale, GMAC/Ally Financial and GM entered
into several service agreements that codified the mutually beneficial
historic relationship between the companies. One of these agreements
was the United States Consumer Financing Services Agreement (USCFSA),
which, among other things, provided that GM would use GMAC/Ally
Financial exclusively whenever it offered vehicle financing and leasing
incentives to customers. (As described below, this agreement was
modified when GMAC/Ally Financial became a bank holding company in
December 2008.) For further discussion of the USCFSA, see Section
F.3.b, infra. GMAC/Ally Financial also remains the leading floorplan
finance franchise for GM dealers.
---------------------------------------------------------------------------
b. What Precipitated Government Assistance?
A combination of factors led to the government's decision
to provide assistance to GMAC/Ally Financial.\284\ GMAC/Ally
Financial reported a net loss of $2.5 billion for the third
quarter of 2008,\285\ bringing its losses over five consecutive
quarters to $7.9 billion. By late 2008, Residential Capital,
LLC (ResCap), GMAC/Ally Financial's global real estate finance
business, was incurring debilitating losses due to the downturn
in the housing market, especially due to its significant
subprime mortgage exposure. Its automotive financing operations
were severely weakened by the financial crisis and GM's
precarious situation, both of which constricted credit, sharply
reduced demand, and moved GMAC/Ally Financial closer toward
insolvency.\286\
---------------------------------------------------------------------------
\284\ For further discussion concerning the factors that
precipitated government assistance, see March 2010 Oversight Report,
supra note 22, at 11-17, 32-42.
\285\ GMAC LLC, GMAC Financial Services Reports Preliminary Third
Quarter 2008 Financial Results (Nov. 5, 2008) (online at
media.gmacfs.com/index.php?s=43&item=286).
\286\ For further discussion concerning GMAC/Ally Financial's
business and why it was failing, see March 2010 Oversight Report, supra
note 22, at 11-17, 32-42.
---------------------------------------------------------------------------
As detailed in the Panel's March 2010 report, Treasury
presents a two-fold justification for its intervention in GMAC/
Ally Financial. First, Treasury states that it acted because of
GMAC/Ally Financial's significance to the automotive industry
and to GM and Chrysler in particular. As Treasury considered
using funds from the TARP to rescue GM and Chrysler in December
2008, it quickly came to the conclusion that GM could not
survive without GMAC/Ally Financial's financial underpinning.
In particular, GMAC/Ally Financial provided GM dealers with
almost all of their ``floorplan financing''--that is, loans to
purchase their inventory. Without access to this credit, many
dealers would have been forced to close their doors. Second,
Treasury states that it acted because of GMAC/Ally Financial's
inclusion in the stress tests, pursuant to which Treasury
committed to provide funds for bank holding companies that
could not raise funds privately.\287\ Over time, Treasury
states that it approached the issue of continuing to support
GMAC/Ally Financial from the position that it must follow
through on its commitments, even if the commitments are not
legally enforceable, in order to maintain the credibility of
the federal government. These rationales are circular, since
GMAC/Ally Financial would not have been included in the stress
tests had the government not intervened in December 2008 by
expediting the company's application for bank holding company
status in order to prevent General Motors from liquidating.
---------------------------------------------------------------------------
\287\ See March 2010 Oversight Report, supra note 22, at 57-78.
---------------------------------------------------------------------------
The particular issues associated with GMAC/Ally Financial's
near-collapse make this government intervention unique. As the
Panel discussed in its March 2010 report, the solvency issue
that the company faced in late 2008 owed to poor management
decisions related to mortgage market investments that rapidly
collapsed once the housing market downturn began. Furthermore,
unlike the legacy shareholders and creditors of GM and
Chrysler--companies that underwent restructuring via the
bankruptcy process--the legacy stakeholders of GMAC/Ally
Financial (for example, Cerberus) were rescued along with the
company because the government opted not to place GMAC/Ally
Financial into bankruptcy.
c. Government Support Efforts
The U.S. government has spent a total of $17.2 billion to
support GMAC/Ally Financial under the TARP. Currently, after
Treasury's December 2010 conversion of $5.5 billion of its
$11.4 billion in mandatory convertible preferred stock in Ally
Financial into common stock, Treasury's remaining investment
consists of $2.7 billion in trust preferred securities (TruPS),
$5.9 billion in mandatory convertible preferred stock, and a
73.8 percent common equity ownership stake.\288\ Conversion of
Treasury's remaining MCPs would increase the government's
equity ownership in the company to approximately 82 percent.
---------------------------------------------------------------------------
\288\ U.S. Department of the Treasury, Treasury Converts Nearly
Half of Its Ally Preferred Shares to Common Stock (Dec. 30, 2010)
(online at www.treasury.gov/press-center/press-releases/Pages/
tg1014.aspx) (hereinafter ``Treasury Converts Ally Preferred Shares to
Common Stock'').
---------------------------------------------------------------------------
GMAC/Ally Financial received funds on three separate
occasions: in December 2008, May 2009, and December 2009.\289\
The government's support efforts are illustrated in Figure 15
below.
---------------------------------------------------------------------------
\289\ For further discussion concerning the government's ``staged''
investments in GMAC/Ally Financial, see March 2010 Oversight Report,
supra note 22, at 42-57.
On December 29, 2008, Treasury purchased $5 billion in GMAC/Ally
Financial Senior Preferred Stock and also received warrants for an
additional $250 million in preferred equity. Second, Treasury made an
additional purchase of $7.5 billion of GMAC/Ally Financial Mandatory
Convertible Preferred Stock on May 21, 2009, increasing its investment
to $12.5 billion. Additionally, on May 29, 2009, Treasury accepted Old
GM's 35.4 percent equity stake in GMAC/Ally Financial in exchange for
the $884 million loan given to Old GM in December 2008. Finally,
Treasury authorized an additional investment of $3.8 billion in the
form of $2.54 billion of Trust Preferred Securities (TruPs) and $1.25
billion of MCPs on December 30, 2009. At this time, $3 billion of the
initial December 2008 investment was converted to common stock,
bringing Treasury's control of GMAC/Ally Financial to 56.3 percent.
In May 2009, the terms of the MCPs specified that GMAC/Ally
Financial could convert the stock at any time, but if the conversion
would result in Treasury owning more than 49 percent of the company,
then GMAC/Ally Financial would need Treasury's approval or an order
from the Federal Reserve. The terms of this MCP were revised in
exchange for Treasury's additional investment in December 2009. After
the December 2009 investment, GMAC/Ally Financial could only convert
the MCPs if it received prior written approval from Treasury or an
order from the Federal Reserve. As part of the terms of its December
2009 investment, Treasury also acquired ``a `reset' feature on the
entirety of its MCP holdings such that the conversion price under which
its MCPs can be converted into common equity will be adjusted in 2011,
if beneficial to Treasury, based on the market price of private capital
transactions occurring in 2010.'' U.S. Department of the Treasury,
Treasury Announces Restructuring of Commitment To GMAC (Jan. 5, 2010)
(online at www.financialstability.gov/latest/pr_1052010.html)
(hereinafter ``Treasury Announces Restructuring of Commitment To
GMAC''). See also U.S. Department of the Treasury, Contract [GMAC], at
482 (May 21, 2009) (online at www.financialstability.gov/docs/AIFP/
Posted%20to%20AIFP%20Website%20-%20GMAC%202009.pdf) (``The Series F-2
shall be convertible to common stock, in whole or in part, at the
applicable Conversion Rate at the option of the holder upon specified
corporate events, including any public offering of GMAC's common stock,
certain sales, mergers or changes of control at GMAC''). This feature
preserves Treasury's ability to assess whether it is advantageous to
Treasury to convert considering all the facts and circumstances
available at the time.
On December 30, 2010, Treasury announced it is converting $5.5
billion of its MCP holdings in GMAC/Ally Financial into common stock.
See Treasury Converts Ally Preferred Shares to Common Stock, supra note
288.
FIGURE 15: TARP INVESTMENT IN GMAC/ALLY FINANCIAL
[Millions of dollars] \290\
----------------------------------------------------------------------------------------------------------------
Cumulative
Original Original Original Current Amount Amount
Investment Assistance Investment Type Exchange Investment Type Investment Repaid Lost
Date Amount Amount
----------------------------------------------------------------------------------------------------------------
12/29/2008.... 5,000 Preferred Stock Exchange for Convertible \291\ $5,2
w/Exercised convertible Preferred 50
Warrants. preferred Stock.
stock.
12/29/2008.... 884 Loan to General Extinguished in Common Stock... 884
Motors. consideration
for 35.4
percent of
GMAC/Ally
Financial
common stock.
5/21/2009..... 7,500 Convertible $3 billion Convertible \292\ 7,87
Preferred Stock exchanged for Preferred 5
w/Exercised common stock. Stock.
Warrants.
12/30/2009.... 2,540 Trust Preferred ............... Trust Preferred 2,667
Securities w/ Securities w/
Exercised Exercised
Warrants. Warrants.
12/30/2009.... 1,250 Convertible ............... Convertible 1,313
Preferred Stock Preferred
w/Exercised Stock w/
Warrants. Exercised
Warrants.
-------------------------------------------------------------------------------------------------
Total......... $17,174 ................ ............... ............... $17,989
----------------------------------------------------------------------------------------------------------------
\290\ Treasury Transactions Report, supra note 24, at 18-19.
\291\ Includes exercised warrants.
\292\ Includes exercised warrants.
[GRAPHIC] [TIFF OMITTED] T3381.011
FIGURE 17: TREASURY'S INVESTMENTS IN GMAC/ALLY FINANCIAL \294\
---------------------------------------------------------------------------
\294\ Warrants for MCPs and Preferred Equity were immediately
exercised and are included. Treasury Announces Restructuring of
Commitment To GMAC, supra note 289; Treasury Transactions Report, supra
note 24, at 18-19.
[GRAPHIC] [TIFF OMITTED] T3381.012
While Treasury holds a controlling interest in GMAC/Ally
Financial, lesser interests are held by General Motors, the GM
Trust (which was established as part of GM's bankruptcy and is
managed by an independent trustee), the private equity company
Cerberus, and third party investors, who purchased a portion of
Cerberus' legacy stake.\295\ The current ownership composition
of GMAC/Ally Financial is illustrated in Figure 18 below.
---------------------------------------------------------------------------
\295\ Although the third-party investors received their share in
distributions from Cerberus, they are not Cerberus affiliates and will
not necessarily act in concert with Cerberus. As part of the conditions
to the approval of the BHC application, none of these third-party
investors own, hold, or control more than 5 percent of the voting
shares or 7.5 percent of the total equity of GMAC/Ally Financial. The
Federal Reserve describes them as sophisticated investors who are
independent of Cerberus and each other. Board of Governors of the
Federal Reserve System, GMAC LLC; IB Finance Holding Company, LLC:
Order Approving Formation of Bank Holding Companies and Notice to
Engage in Certain Nonbanking Activities, Federal Reserve Bulletin, Vol.
95, Legal Developments: Fourth Quarter, 2008 (May 29, 2009) (online at
www.federalreserve.gov/pubs/bulletin/2009/legal/q408/order6.htm). As
private equity investors, none of these parties are required to
disclose their identities publicly under applicable law, and Cerberus
generally avoids the spotlight whenever possible. Cerberus
Institutional Partners, L.P., Letter to Investors, at 6 (Jan. 22, 2008)
(online at online.wsj.com/public/resources/documents/WSJ-LB-
cerberus080214.pdf).
---------------------------------------------------------------------------
FIGURE 18: GMAC/ALLY FINANCIAL'S CURRENT OWNERSHIP STRUCTURE (as of 12/
30/2010) \296\
---------------------------------------------------------------------------
\296\ Ally Financial Inc., Ally Financial Announces Conversion of
Certain U.S. Treasury Investments into Common Equity (Dec. 30, 2010)
(online at media.ally.com/index.php?s=43&item=438).
[GRAPHIC] [TIFF OMITTED] T3381.013
d. Current Company Structure
Since the beginning of 2010, GMAC/Ally Financial's
operations have centered on three business segments:
Dealer and retail automotive financing services
(including insurance for consumers, automotive dealerships, and
other businesses);
Mortgage activities focusing primarily on the
residential real estate market in the United States, with some
international operations; this segment includes the operations
of ResCap; and
Commercial finance activities that provide
secured lending products and other financing.
FIGURE 19: THIRD QUARTER 2010 GMAC/ALLY FINANCIAL GROSS REVENUE BY
SEGMENT \297\
---------------------------------------------------------------------------
\297\ Not reflected in this pie chart is the fact that the
Corporate Segment recorded a $535 million loss for the third quarter of
2010. The Corporate segment is composed of the Commercial Finance
Group, certain equity investments, other corporate activities, the
residual impacts from corporate funds transfer pricing and treasury
asset liability management activities, and reclassifications and
eliminations between the reportable operating segments. Ally Financial
Inc., Form 10-Q For the Quarterly Period Ended September 30, 2010, at
80 (Nov. 9, 2010) (online at www.sec.gov/Archives/edgar/data/40729/
000119312510252419/d10q.htm) (hereinafter ``Ally Financial Form 10-
Q'').
[GRAPHIC] [TIFF OMITTED] T3381.014
e. Recent Developments
GMAC/Ally Financial is one of the world's largest financial
services companies with approximately $173.2 billion of assets
as of September 30, 2010.\298\ The third quarter of 2010 marked
the third straight profitable quarter for GMAC/Ally Financial
(net income of $278 million), with all segments and entities
profitable, including ResCap and Ally Bank, which is GMAC/Ally
Financial's online bank.\299\
---------------------------------------------------------------------------
\298\ Id. at 79.
\299\ Id. at 82, 94.
---------------------------------------------------------------------------
According to its most recent quarterly earnings report,
GMAC/Ally Financial has made progress on several important
fronts since the Panel last provided an in-depth examination of
the company in its March 2010 oversight report.\300\ These
recent developments are discussed in more detail below.
---------------------------------------------------------------------------
\300\ Ally Financial Inc., 3Q10 Earnings Review, at 3 (Nov. 3,
2010) (online at phx.corporate-ir.net/External.File?item=
UGFyZW50SUQ9MzQ2Nzg3NnxDaGlsZElEPTQwMjMzOHxUeXBlPTI=&t=1) (hereinafter
``Ally Financial 3Q10 Earnings Review'').
---------------------------------------------------------------------------
First, GMAC/Ally Financial's core auto finance business has
now seen seven consecutive profitable quarters, primarily due
to general improvement in the auto market and GMAC/Ally
Financial's increased penetration of both GM and Chrysler
consumer auto originations.\301\
---------------------------------------------------------------------------
\301\ While GMAC/Ally Financial's share of GM-subvented financing
has declined from 76 percent in 2006 to 20 percent as of the third
quarter of 2010, GMAC/Ally Financial's share of Chrysler-subvented
financing has increased since 2009, along with its shares of GM and
Chrysler direct-to-consumer loans.
---------------------------------------------------------------------------
As Chrysler is also now increasing its U.S. market share in
the wake of the Toyota recalls and a downsized GM, GMAC/Ally
Financial has potential for further growth in this market. On
April 30, 2009, GMAC/Ally Financial entered into a legally
binding term sheet with Chrysler to provide automotive
financing products and services to Chrysler dealers and
customers, which made GMAC/Ally Financial the ``preferred
provider of new wholesale financing for Chrysler dealer
inventory.'' \302\ On August 6, 2010, GMAC/Ally Financial
entered into another agreement with Chrysler, which replaced
and superseded the April 2009 term sheet. GMAC/Ally Financial
is Chrysler's preferred provider of new wholesale financing for
dealer inventory in the United States, Canada, Mexico, and
other international markets. Chrysler is obligated to provide
GMAC/Ally Financial with certain exclusivity privileges,
including the use of GMAC/Ally Financial for designated minimum
threshold percentages of certain of Chrysler's retail financing
subvention programs. (A subvented loan is one where the auto
manufacturer provides an incentive to the lender to offer a
lower interest rate than it would otherwise offer.) The
agreement extends through April 30, 2013, with automatic one-
year renewals unless either GMAC/Ally Financial or Chrysler
provides sufficient notice of nonrenewal. In addition, GMAC/
Ally Financial was named the preferred lender for Fiat in the
United States on September 30, 2010 (owing to its existing
relationship with Chrysler).\303\
---------------------------------------------------------------------------
\302\ GMAC LLC, GMAC Financial Services Enters Agreement to Provide
Financing for Chrysler Dealers and Customers (Apr. 30, 2009) (online at
gmacfs.mediaroom.com/index.php?s=43&item=324). The April 2009 term
sheet contemplated a more definitive agreement.
\303\ Ally Financial 3Q10 Earnings Review, supra note 300, at 3.
---------------------------------------------------------------------------
While its North American operations have continued to drive
results, the performance of GMAC/Ally Financial's international
operations has also improved. GMAC/Ally Financial is
experiencing strong auto loan originations in China, Brazil,
and the United Kingdom.\304\ With a continued focus on
streamlining its auto business, GMAC/Ally Financial's
International Automotive Finance segment sold its Argentina
auto finance business and signed an agreement to sell its
Ecuador auto finance business during the third quarter of 2010.
---------------------------------------------------------------------------
\304\ Ally Financial 3Q10 Earnings Review, supra note 300, at 17.
---------------------------------------------------------------------------
Second, after recognizing approximately $18.3 billion in
mortgage-related losses during the 2007-2009 period, GMAC/Ally
Financial continues to make progress in liquidating legacy
mortgage assets at levels above their sharply reduced carrying
value. During the third quarter of 2010, ResCap sold
approximately $11.0 billion worth of European mortgage assets
and businesses to affiliates of hedge fund and private equity
firm Fortress Investment Group.\305\ This transaction means
that GMAC/Ally Financial has effectively exited the European
mortgage market. As of November 3, 2010, GMAC/Ally Financial
sold $1.9 billion of held-for-sale legacy mortgage assets at
gains. The company's management believes that it has
``effectively de-risked the mortgage business.'' \306\ GMAC/
Ally Financial has stated that it is considering a number of
strategic alternatives with respect to ResCap, including asset
sales, spin-offs, or other potential transactions.\307\
---------------------------------------------------------------------------
\305\ Ally Financial Inc., Ally Financial Completes Sales of
European Mortgage Assets and Operations (Oct. 1, 2010) (online at
media.ally.com/index.php?s=43&item=419).
\306\ Ally Financial Inc., Transcript: Q3 2010 Earnings Call, at 5
(Nov. 3, 2010) (hereinafter ``Ally Financial Transcript: Q3 2010
Earnings Call'').
\307\ Ally Financial Inc., Form 10-Q for the Quarterly Period Ended
June 30, 2010, at 10 (Aug. 6, 2010) (online at www.sec.gov/Archives/
edgar/data/40729/000119312510181437/d10q.htm); Ally Financial Form 10-
Q, supra note 297, at 10-11. It does not appear, however, that GMAC/
Ally Financial will completely dispose of ResCap, since it plans to
shift its mortgage operations to focus on agency servicing and
originations.
---------------------------------------------------------------------------
In response to questions concerning irregularities in
foreclosure document procedures, which have raised questions
about the validity of foreclosures and led to new uncertainties
in the mortgage industry, GMAC/Ally Financial states that it
continues to monitor closely delinquency and claims trends as
well as new repurchase requests, entered into settlements with
Freddie Mac and Fannie Mae in 2010 under which it made one-time
payments to the GSEs for the release of repurchase obligations,
and increased its reserve for mortgage repurchases during the
third quarter of 2010.
Finally, GMAC/Ally Financial continues to make progress in
accessing the capital markets, improving its funding profile
and reducing legacy costs. Ally Bank has taken on a more
prominent funding role within the company. The bank's deposits
and certificate of deposit (CD) retention rate have increased,
and the overall firm's cost of funds has declined by over 100
basis points, or 1 percentage point, since becoming a bank
holding company.\308\
---------------------------------------------------------------------------
\308\ See Ally Financial 3Q10 Earnings Review, supra note 300, at
3; Ally Financial Inc., 2Q10 Earnings Review, at 26 (Aug. 3, 2010)
(online at phx.corporate-ir.net/
External.File?item=UGFyZW50SUQ9MzI0MjM1M3xDaGlsZElEPTM5MTY3NXxUeXBlPTI=&
t=1) (hereinafter ``Ally Financial 2Q10 Earnings Review''); GMAC
Financial Services, Preliminary 2010 First Quarter Results (May 3,
2010) (online at phx.corporate-ir.net/
External.File?item=UGFyZW50SUQ9NDQxMjF8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1);
GMAC Financial Services, Preliminary 2009 Fourth Quarter Results (Feb.
4, 2010) (online at phx.corporate-ir.net/External.File?item=
UGFyZW50SUQ9MjkzNTh8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1).
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2. Outlook
a. Company Strategy/Business Plan
A greatly improved market backdrop and a longer-term
investment mentality on the part of Treasury, GMAC/Ally
Financial's principal shareholder, have facilitated a strategy
aimed at repaying the government and cultivating a sustainable
independent business strategy. At the beginning of 2010
(several months into the tenure of new CEO Michael A.
Carpenter), GMAC/Ally Financial announced six objectives for
the company, which include becoming the leading global auto
finance provider for dealers and consumers, improving its
liquidity position and access to the capital markets, reducing
the risk in its mortgage operations, improving cost structure,
and transitioning fully into a bank holding company.\309\
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\309\ Ally Financial 2Q10 Earnings Review, supra note 308, at 28.
Ally Financial Transcript: Q3 2010 Earnings Call, supra note 306, at 1.
During the third quarter 2010 earnings call, Mr. Carpenter stated that
the company believes it has ``become a fully-fledged bank holding
company,'' so it will no longer report on its progress relating to that
objective anymore.
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At a high level, GMAC/Ally Financial's business plan is
focused on achieving these six objectives, which are designed
to position the company toward profitability and stability
through a combination of higher earnings, reductions in balance
sheet risk, the shedding of unproductive businesses, and
improved access to the capital markets (at a lower cost of
capital). The status of the company's progress on each of these
fronts is discussed in more detail below.
Auto Finance. GMAC/Ally Financial has become the number one
U.S. new car lender (according to AutoCount, an automotive
industry data source), and the company expects to maintain that
position.\310\ GMAC/Ally Financial's auto finance franchise
also has nearly three times the market share of its five
largest competitors.\311\
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\310\ Ally Financial Transcript: Q3 2010 Earnings Call, supra note
306, at 1. This statistic reflects data for the first half of 2010.
\311\ Ally Financial 3Q10 Earnings Review, supra note 300, at 6.
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GMAC/Ally Financial's U.S. penetration for the third
quarter of 2010 currently stands as follows: \312\
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\312\ Ally Financial 3Q10 Earnings Review, supra note 300, at 6.
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84 percent of GM dealer stock (as compared to 73
percent for the third quarter of 2009);
76 percent of Chrysler dealer stock (as compared
to 67 percent for the third quarter of 2009);
34 percent of GM consumer sales (as compared to
32 percent for the third quarter of 2009); and
49 percent of Chrysler consumer sales (as
compared to 21 percent for the third quarter of 2009).
While GMAC/Ally Financial is a leader in floorplan finance
(as evidenced by the figures listed above), it states that it
is also repositioning its auto finance franchise balance sheet
to both reduce the scope of its subvented business with GM and
to focus on a more balanced origination and leasing mix. See
Figure 20 below.\313\ GMAC/Ally Financial has also increased
its lending to consumers with super-prime and prime credit
ratings, while reducing its near-prime and non-prime
exposures.\314\ Going forward, one of GMAC/Ally Financial's
major focuses will be to expand its presence in the used
vehicle market, which is approximately twice the size of the
new vehicle market in terms of volume,\315\ but where borrowers
generally have weaker credit quality.
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\313\ General Motors may elect to sponsor incentive programs (on
both retail contracts and leases) by supporting financing rates below
standard rates at which GMAC/Ally Financial purchases retail contracts.
Subvention is the manner in which GM pays for exclusive promotions
offered through GMAC/Ally Financial. This practice is akin to a
marketing expense.
\314\ Ally Financial Transcript: Q3 2010 Earnings Call, supra note
306, at 9.
\315\ Ally Financial Transcript: Q3 2010 Earnings Call, supra note
306, at 3.
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FIGURE 20: GMAC/ALLY FINANCIAL CONSUMER AUTO FINANCING VOLUME BY SECTOR
\316\
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\316\ Ally Financial Form 10-Q, supra note 297.
[GRAPHIC] [TIFF OMITTED] T3381.015
Access to Capital Markets. A core component of GMAC/Ally
Financial's viability going forward (and a precursor to an IPO)
is its ability to access the capital markets. For calendar year
2010, GMAC/Ally Financial had completed approximately $36
billion of new secured, unsecured funding and asset-backed
securities (ABS) transactions in 2010 (and excluding growth in
deposits).\317\
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\317\ Ally Financial 3Q10 Earnings Review, supra note 300, at 3.
---------------------------------------------------------------------------
Mortgage Operations. The company has completed a strategic
review of its mortgage operations. Since it marked $2.0 billion
in mortgage assets to fair value in the fourth quarter of 2009
(due to the reclassification of certain international mortgage
assets and businesses and domestic mortgage assets from held-
for-investment (HFI) to held-for-sale (HFS), and management's
intent to sell certain mortgage-related assets and thereby
reduce volatility in GMAC/Ally Financial's financial results),
GMAC/Ally Financial has made continued progress in reducing its
legacy mortgage risk. The remaining mortgage assets are
predominantly non-economic exposures and assets supporting its
agency origination and servicing business.\318\ As reflected in
Figure 21 below, the total assets in GMAC/Ally Financial's
mortgage operations portfolio have declined from $147 billion
to $41 billion (with $20.5 billion remaining at ResCap) between
2006 and the end of the third quarter of 2010, while the slight
uptick seen in asset values over the course of 2010 reflects
the improved market backdrop for mortgage assets.\319\
---------------------------------------------------------------------------
\318\ Ally Financial 3Q10 Earnings Review, supra note 300, at 8.
\319\ Ally Financial 3Q10 Earnings Review, supra note 300, at 8.
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FIGURE 21: RESCAP AND MORTGAGE OPERATIONS ASSETS \320\
---------------------------------------------------------------------------
\320\ Ally Financial Form 10-Q, supra note 297.
[GRAPHIC] [TIFF OMITTED] T3381.016
Ally Bank. With respect to increasing the importance of
Ally Bank within the overall company's funding structure, Ally
Bank increased its deposit base by $1.8 billion in the third
quarter (a 29 percent increase, year-over-year) and achieved an
88 percent CD retention rate. Banking operations now comprise
29 percent of GMAC/Ally Financial's total funding.\321\ GMAC/
Ally Financial expects that Ally Bank will continue to expand
to represent a greater proportion of GMAC/Ally Financial's
funding over time.
---------------------------------------------------------------------------
\321\ Ally Financial Transcript: Q3 2010 Earnings Call, supra note
306.
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Cost Reductions. GMAC/Ally Financial has also made progress
with respect to its objective of reducing controllable expenses
by approximately $600 million during 2010. Its quarterly
expenses for the third quarter of 2010 were $146 million less
than those of the prior year period.\322\
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\322\ Ally Financial Transcript: Q3 2010 Earnings Call, supra note
306.
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b. Government Exit Strategy
As discussed above, Treasury's outstanding investment in
GMAC/Ally Financial is $17.2 billion, which includes $5.9
billion in MCPs, $2.7 billion in TruPs, and 73.8 percent of the
common equity of GMAC/Ally Financial.\323\
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\323\ If Treasury were to convert its remaining $5.9 billion of
MCPs prior to an IPO at the same conversion terms used in the December
2010 conversion (i.e., same conversion price and conversion ratio), its
common equity ownership percentage would increase to 81.7 percent.
---------------------------------------------------------------------------
Treasury has identified four tasks with which GMAC/Ally
Financial must continue to demonstrate progress in order for
any government exit strategy to be successful.\324\ First,
GMAC/Ally Financial must demonstrate consistent access to
secured and unsecured funding sources. Second, GMAC/Ally
Financial must demonstrate a consistent track record of
profitability. Third, GMAC/Ally Financial must mitigate market
concerns regarding the risk related to its mortgage operations.
Finally, GMAC/Ally Financial must be able to demonstrate to
equity investors that its bank franchise will continue to grow
at an attractive rate.
---------------------------------------------------------------------------
\324\ Treasury conversations with Panel staff (Nov. 18, 2010).
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As with Chrysler (and until recently with GM) Treasury's
stake in GMAC/Ally Financial--common, TruPs, and MCPs \325\--is
fundamentally illiquid. Accordingly, Treasury's large common
stock position in GMAC/Ally Financial, a non-public company,
can be sold only in private sales unless and until GMAC/Ally
Financial launches an IPO. Hence, the U.S. government's exit
strategy for GMAC/Ally Financial relies primarily upon an IPO
tentatively scheduled, per GMAC/Ally Financial management, for
2011. Treasury intends to sell its interests in a timely and
orderly manner that ``minimizes financial market and economic
impact,'' under what it determines to be appropriate market
conditions.\326\ Consistent with its approach overall,
Treasury's goal is to ``dispose of the government's interests
as soon as practicable consistent with EESA goals.'' \327\ When
asked at the Panel's recent hearing about the timetable for a
GMAC/Ally Financial IPO, Secretary Geithner stated that it
would happen ``[a]s quickly as we can do it,'' emphasizing that
Treasury is ``going to move as quickly as we can to replace the
government's investments with private capital, take those firms
public, and figure out a way to exit as quickly as we can. And
we're working very hard with the management and board of Ally
to achieve that outcome.'' \328\ While noting that he does not
know how soon the IPO will happen, Secretary Geithner stated
that ``it's going to be much sooner than we thought six months
ago.'' \329\
---------------------------------------------------------------------------
\325\ TruPs have elements of both common equity and debt, are
senior to all other common equity of GMAC/Ally Financial, and have no
contractual restrictions on transfer (other than requirements that
certificates bear certain legends and other similar restrictions set
forth in the Declaration of Trust for the Trust), while MCPs, which are
convertible at the Federal Reserve's option, would require conversion
before they can be marketed. See Treasury Announces Restructuring of
Commitment To GMAC, supra note 289; U.S. Department of the Treasury,
Decoder (online at www.financialstability.gov/roadtostability/
decoder.htm) (accessed Jan. 11, 2011); U.S. Department of the Treasury,
The Treasury Capital Assistance Program and the Supervisory Capital
Assessment Program, Joint Statement by Secretary of the Treasury
Timothy F. Geithner, Chairman of the Board of Governors of the Federal
Reserve System Ben S. Bernanke, Chairman of the Federal Deposit
Insurance Corporation Sheila Bair, and Comptroller of the Currency John
C. Dugan (May 6, 2009) (online at www.financialstability.gov/latest/
tg91.html); GMAC, Inc., Summary of Trust Preferred Securities and
Warrant Terms (May 21, 2009) (online at financialstability.gov/docs/
AIFP/Posted%20to%20AIFP%20Website%20-%20GMAC%202009.pdf).
\326\ U.S. Department of the Treasury, Office of Financial
Stability Agency Financial Report: Fiscal Year 2009, at 40 (Dec. 10,
2009) (online at www.treasury.gov/about/organizational-structure/
offices/Mgt/Documents/OFS%20AFR%2009_24.pdf) (hereinafter ``OFS FY2009
Agency Financial Report''); Treasury conversations with Panel staff
(Nov. 18, 2010).
\327\ OFS FY2009 Agency Financial Report, supra note 326, at 44.
Given that Treasury currently holds 73.8 percent of GMAC/Ally
Financial's common equity, it is likely to take one to two years
following the IPO for Treasury to dispose completely of its ownership
stake. Treasury conversations with Panel staff (Jan. 5, 2011).
\328\ Congressional Oversight Panel, Testimony of Timothy F.
Geithner, secretary, U.S. Department of the Treasury, Transcript: COP
Hearing with Treasury Secretary Timothy Geithner (Dec. 16, 2010)
(online at cop.senate.gov/hearings/library/hearing-121610-geithner.cfm)
(publication forthcoming).
\329\ Id.
---------------------------------------------------------------------------
As it has done with its stake in Citigroup, and as it plans
to do for its stake in AIG, Treasury recently converted $5.5
billion of its MCP interest (nearly half of its preferred
shares) into common stock.\330\ In addition to providing more
clarity on the government's equity stake (and potential
shareholder dilution), Treasury's conversion also helps GMAC/
Ally Financial in two significant ways.\331\ First, as a result
of the conversion and the consequent dilution of the equity
interest in GMAC/Ally Financial held by or on behalf of GM, the
Federal Reserve has determined that Ally Bank and GM will no
longer be treated as ``affiliates'' for purposes of Sections
23(a) and 23(b) of the Federal Reserve Act, which, among other
things, impose limitations on transactions between banks and
their affiliates.\332\ Since Ally Bank is a source of cheap
financing in part because it is the beneficiary of federal
deposit insurance, it is cheaper and more cost-effective for
GMAC/Ally Financial to use its bank as the core piece of its
auto finance operations. This Federal Reserve decision will
allow GMAC/Ally Financial to use Ally Bank to fund an
increasing amount of GM retail and dealer loans.\333\ Second
(and, according to Treasury, the more important ramification),
the conversion was intended to strengthen GMAC/Ally Financial's
capital structure by increasing the proportion of equity in the
form of common stock (and, therefore, conforming GMAC/Ally
Financial's equity account to that more typical of a bank
holding company and improving its leverage ratios). This factor
largely determined the timing of Treasury's conversion, as
Treasury determined it would be beneficial to allow the company
to conform its capital structure to that of a more typical bank
holding company before it starts to market itself to investors
ahead of an upcoming IPO.\334\
---------------------------------------------------------------------------
\330\ Treasury Converts Ally Preferred Shares to Common Stock,
supra note 288.
\331\ Treasury conversations with Panel staff (Jan. 5, 2011).
\332\ Transactions between Ally Bank and GM will, however, continue
to be subject to regulation and examination by the bank's primary
federal regulator, the Federal Deposit Insurance Corporation. Ally
Financial Inc., Form 8-K (Dec. 30, 2010) (online at www.sec.gov/
Archives/edgar/data/40729/000119312510291571/d8k.htm).
After it became a bank holding company, GMAC/Ally Financial
requested on two occasions that the Federal Reserve Board grant Ally
Bank an exemption from Section 23(a) of the Federal Reserve Act.
Section 23(a) restricts the amount of ``covered transactions'' between
a bank and its affiliates. According to the Federal Reserve Board, the
``twin purposes of section 23(a) are (i) to protect against a
depository institution suffering losses in transactions with affiliates
and (ii) to limit the ability of an institution to transfer to its
affiliates the subsidy arising from the institution's access to the
federal safety net.'' Board of Governors of the Federal Reserve System,
Transactions Between Member Banks and Their Affiliates, 67 Fed. Reg.
76560, 76560 (Dec. 12, 2002) (final rule). The safety net consists of
deposit insurance, the Federal Reserve's discount window, and other
banking regulatory tools designed to protect financial markets and
participants.
Section 23(a), however, authorizes the Board to grant an exemption
if it finds that doing so is in the public interest and consistent with
the statute's purposes. 12 U.S.C. Sec. 371c(f)(2); 12 CFR
Sec. 223.43(a). On December 24, 2008, the Board granted GMAC/Ally
Financial's request for an exemption for retail loans, and on May 21,
2009, it granted GMAC/Ally Financial's extended request for an
exemption for both retail and dealer loans.
For further details and discussion concerning Section 23(a) of the
Federal Reserve Act and GMAC/Ally Financial's receipt of Section 23(a)
waivers, see March 2010 Oversight Report, supra note 22, at 23-25.
\333\ In the company's view, the Section 23(a) limitations were
impacting their business with GM. GMAC/Ally Financial conversations
with Panel staff (Jan. 5, 2011).
\334\ In addition to seeking an improved capital structure prior to
the company's efforts to market itself to investors, Treasury also
stated that were other factors that influenced the timing of its
December 2010 conversion. First, by year-end 2010, GMAC/Ally Financial
had demonstrated a track record of overall profitability for three
consecutive quarters. Second, GMAC/Ally Financial made headway in
reducing the risk in its mortgage portfolio during 2010. By year-end
2010, GMAC/Ally Financial had entered into settlements with Fannie Mae
and Freddie Mac to resolve potential repurchase exposure related to
mortgage loans sold to the GSEs. In addition, the company sold its
European mortgage operations, representing approximately $11.0 billion
of assets. Treasury conversations with Panel staff (Jan. 5, 2011).
---------------------------------------------------------------------------
The conversion helps GMAC/Ally Financial raise equity in
the capital markets in the future, and improves GMAC/Ally
Financial's ability to raise debt financing as loss-absorbing
common equity increases.\335\ GMAC/Ally Financial's management
is pleased with the timing and terms of Treasury's conversion
and believes that there are no other steps the government would
need to take before the company pursues an IPO. It remains too
early, however, to speculate on the impact of this transaction
on an IPO and Treasury's exit strategy because Treasury still
retains $5.9 billion in MCPs and $2.7 billion in TruPS.\336\ At
this time, Treasury's strategy for the disposition of those
interests remains unclear.
---------------------------------------------------------------------------
\335\ According to JPMorgan Chase, if Treasury converts its GMAC/
Ally Financial preferred stake into common equity, GMAC/Ally Financial
should be able to lower its leverage as preferred dividends could
decline by $1 billion. A conversion of some or all of Treasury's
preferred stake into common equity should likely ``further improve
Ally's leverage ratios in the event of an IPO.'' J.P. Morgan, North
America Credit Research, Ally Financial Inc.: 3Q10 Preview (Nov. 1,
2010) (hereinafter ``Ally Financial 3Q10 Preview'').
\336\ While investor confidence and interest in an IPO has
presumably been increased because the recent conversion provides some
reassurance to the markets that Treasury does not intend to retain its
ownership stake in GMAC/Ally Financial over the long term, some
investors might be hesitant to buy shares that could later be
substantially diluted through a conversion by the government.
As part of the terms of Treasury's December 2010 conversion, GMAC/
Ally Financial also agreed to assist Treasury in the sale of a portion
of its holdings of TruPs on terms acceptable to Treasury and GMAC/Ally
Financial as soon as practical, subject to certain conditions.
GMAC/Ally Financial's working assumption is that the company will
redeem Treasury's remaining MCPs as part of the IPO, meaning that GMAC/
Ally Financial will need to raise additional equity to pay back
Treasury. GMAC/Ally Financial conversations with Panel staff (Jan. 5,
2011).
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Alternatively, Treasury has noted that it would be
impossible to rule out a sale of GMAC/Ally Financial.\337\ The
company would entertain any bids that might come in, and
Treasury, as the majority shareholder, would have a significant
influence on any discussions and the decision on whether to
accept such a bid.\338\ Treasury has stated, however, that only
a small number of institutions could digest an acquisition of
this magnitude, so this course of action appears less feasible
than an IPO exit strategy.\339\
---------------------------------------------------------------------------
\337\ Treasury conversations with Panel staff (Nov. 18, 2010).
\338\ Treasury conversations with Panel staff (Nov. 18, 2010).
\339\ Treasury conversations with Panel staff (Nov. 18, 2010).
---------------------------------------------------------------------------
As part of its exit strategy, Treasury should ensure that
legacy private sector stakeholders in GMAC/Ally Financial do
not see any return until U.S. taxpayers recoup their entire
investment.
c. Valuing GMAC/Ally Financial's Equity
Since GMAC/Ally Financial is a private company, and its
business platform is unique, it is difficult to conduct a clear
analysis of its current value. As comparables, Treasury
currently uses for the GMAC/Ally Financial valuation 35
publicly traded companies across the bank, thrift, and
specialty lender sectors.\340\ Through an analysis of the
market performance of these comparables, by using the average
price-to-book value for this imperfect peer group, it is
possible to estimate a market capitalization for GMAC/Ally
Financial.\341\ During 2010, the 35 comparable firms traded
between 102 and 132 percent of their book value. Applying this
range of multiples to GMAC/Ally Financial--with a reported book
value of $21 billion as of the third quarter of 2010--values
the equity of the entire firm between $21.4 billion and $27.7
billion.\342\ Hence, this methodology values the Treasury's
73.8 percent equity stake between $15.8 billion and $20.4
billion.\343\ However, as noted, this is a crude yardstick
given that GMAC/Ally Financial has a differentiated business
model focused on the auto finance sector. Further, the
company's book value calculation is likely to change before an
IPO.
---------------------------------------------------------------------------
\340\ Treasury conversations with Panel staff (Jan. 10, 2011).
Treasury requested that the identity of the 35 companies be withheld.
\341\ The book value of a company, in this instance, is the
difference between a company's assets and its liabilities. The market
capitalization is broadly defined as the dollar value of a company.
\342\ Bloomberg Data Service; SNL Financial. This analysis is based
on GMAC/Ally Financial's third quarter 2010 total asset figure of
$173.2 billion, its total liabilities of $152.2 billion and its implied
book value, the difference between assets and liabilities, of $21.0
billion. The analysis uses the price-to-book ratios of the 35
comparables and averages the results for each trading day for the full-
year 2010. The implied trading ranges for the comparables are as
follows: low estimate (102 percent), median estimate (113 percent),
average estimate (114 percent), and high estimate (132 percent).
\343\ As discussed in Section B.1.d, Treasury has converted or
exchanged $9.4 billion (both a loan and preferred stock) of its
investment in GMAC/Ally Financial for the 73.8 percent equity stake it
currently holds, therefore valuing Treasury's common interests in the
company above the amount it invested to receive those interests. This
does not, however, account for the remaining debt instruments Treasury
holds in the company, or the difficulty in liquidating such a large
equity position.
---------------------------------------------------------------------------
In conversations with Panel staff, Mr. Carpenter and other
senior officers from GMAC/Ally Financial's management stated
that its public offering, if priced at or near book value,
could help facilitate the conversion of the Treasury's
remaining MCPs, which would help the company ultimately repay
the government in full.\344\ As Figure 22 below illustrates,
the average price-to-book of Treasury's 35 comparables has
recovered dramatically from its 2009 trough and has remained
above 100 percent for the entirety of 2010. The performance of
these comparables, which are used by Treasury's Office of
Financial Supervision (OFS) to monitor the value of its
investments,\345\ appears to be positive for GMAC/Ally
Financial, signaling a market perception at this time that
comparable companies are valued at a multiple high enough to
provide for full Treasury repayment. While the comparables show
a positive trend in the market valuation of their businesses,
there is a clear disparity between the performance of the
broader universe of Treasury comparables and that of a more
specifically tailored peer group, which may provide a closer--
but still imperfect--representation of the value of GMAC/Ally
Financial. As demonstrated in Figure 22 below, the average
price-to-book ratios of the nation's four largest banks (Bank
of America, JPMorgan, Citigroup, and Wells Fargo), as well as
CIT Group, a large specialty lender, have traded within a
relatively narrow band over the past 12 months, underperforming
a larger universe of financial firms. As of December 31, 2010,
the price-to-book ratio of those five larger financial sector
companies was 25 percent lower than that of the universe of
smaller companies.
---------------------------------------------------------------------------
\344\ GMAC/Ally Financial conversations with Panel staff (Dec. 6,
2010).
\345\ Treasury conversations with Panel staff (Nov. 18, 2010).
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FIGURE 22: PRICE-TO-BOOK RATIO OF GMAC/ALLY FINANCIAL COMPARABLES \346\
---------------------------------------------------------------------------
\346\ Bloomberg Data Service. Note that Large Cap Comparables
refers to Bank of America, Citigroup, Wells Fargo, JPMorgan Chase, and
CIT Group.
[GRAPHIC] [TIFF OMITTED] T3381.017
3. Analysis of Intended Exit Strategy
a. The Timetable for Treasury's Exit Strategy
As discussed above, GMAC/Ally Financial has taken steps to
mitigate some of the poor management decisions made in the past
(most notably with respect to the company's substantial
mortgage market exposure). As economic conditions have
improved, the potential for Treasury to recoup its investment
increased as market prices for capital transactions improved
throughout 2010. In recent conversations with Panel staff,
Treasury representatives have expressed confidence about the
progress the company has made over the course of 2010 and the
prospects for the taxpayers to be repaid pending the completion
of an IPO.
Treasury pointed to three key developments that underscore
their optimism.\347\
---------------------------------------------------------------------------
\347\ Treasury conversations with Panel staff (Nov. 18, 2010).
---------------------------------------------------------------------------
First, they noted the improvements in the
company's liquidity profile, with approximately $30 billion of
new secured and unsecured funding transactions and an increase
in the number of deposits at Ally Bank.
Second, they noted that the outlook for GMAC/Ally
Financial has become more favorable as the valuations for
financial companies have increased since the early part of
2010.\348\
---------------------------------------------------------------------------
\348\ Noting that although there is no company that is a perfect
match against which to measure GMAC/Ally Financial's prospects,
Treasury is nonetheless pleased with the general improvements in
valuation of companies that are at least somewhat comparable to GMAC/
Ally Financial. Treasury conversations with Panel staff (Nov. 18,
2010).
---------------------------------------------------------------------------
Finally, Treasury discussed how the company's
core business has remained profitable for three consecutive
quarters.
Treasury's cause for optimism on both the company's
progress and an upcoming IPO, however, might be premature. As
discussed above, the Panel notes that the valuations for
financial companies have not improved as much as Treasury
stated. It is likely that mortgage market valuations have had
the biggest impact on GMAC/Ally Financial (largely as a result
of the company's efforts to stem the bleeding at ResCap). While
GMAC/Ally Financial has now had three consecutive quarters of
overall profitability, this likely owes more to the
improvements in the ResCap mortgage portfolio than to anything
else.
Moreover, with respect to GMAC/Ally Financial's improved
liquidity, an analysis of GMAC/Ally Financial's five-year
credit default swap (CDS) spreads, a market indicator of
perceived risk of a company's default, provides insight into
the market's perception of the company's health. Using Ford
Motor Credit (FMCC), a better capitalized company without the
same degree of mortgage exposure, as a comparable provides a
basis of comparison. The movement in GMAC/Ally Financial's CDS
spread illustrates the dramatic improvement in market sentiment
towards the company following the announcement that the
Treasury would provide assistance to the company on December
29, 2008. The 14.8 percent decline in GMAC/Ally Financial's CDS
spread between December 30, 2010 and January 5, 2011, as
compared to the 2.0 percent decline in Ford Motor Credit's CDS
spread during the same period, further demonstrates the
improvement in market opinion following Treasury's conversion
of $5.5 billion of preferred interests in GMAC/Ally Financial
into common stock.\349\ However, the current low spreads on its
CDS, and its position relative to Ford Motor Credit--a company
with a stronger balance sheet--show that GMAC/Ally Financial is
apparently still benefitting from the support provided by
Treasury as well as a market belief that the support will
remain intact for the foreseeable future (which helps it secure
funding at a lower cost).
---------------------------------------------------------------------------
\349\ On the day prior to the announcement--December 29, 2010--
GMAC/Ally Financial's 5-year CDS spread was 270.9 basis points and Ford
Motor Credit's was 218.5 basis points. On January 5, 2011, these
metrics were 230.8 and 214.1 basis point, respectively. Bloomberg Data
Service.
---------------------------------------------------------------------------
FIGURE 23: CREDIT DEFAULT SPREADS ON GMAC/ALLY FINANCIAL AND FORD MOTOR
CREDIT \350\
---------------------------------------------------------------------------
\350\ Bloomberg Data Service.
[GRAPHIC] [TIFF OMITTED] T3381.018
b. Key Variables/Risks Going Forward that Might Impact the
Exit Strategy and Government Returns
As with its ownership stakes in GM and Chrysler, there are
certain variables and risks associated with Treasury's ability
to divest its ownership stake in GMAC/Ally Financial
successfully. As detailed below, the exit strategy timetable
for GMAC/Ally Financial is somewhat complicated because the
company's outlook is tied substantially to two key sectors--the
auto industry and mortgage market--and the outlook for both
remains uncertain. A successful exit strategy will, however,
continue to depend upon positive--and improving--earnings as
well as greater clarity about the company's medium-term
strategy to grow Ally Bank, manage the GM relationship,
maintain a mortgage portfolio with a more conservative risk/
reward calculus, and seize other growth opportunities. Since a
public offering is the most likely method for recovery of
taxpayers' money, if GMAC/Ally Financial experiences delays or
obstacles in accessing the equity capital markets, this will
prolong Treasury's involvement as a shareholder and could
potentially impact GMAC/Ally Financial's ability to repay its
government assistance.
i. Performance of U.S. Auto Retail Market
Given how the largest percentage of GMAC/Ally Financial's
net revenue during the third quarter of 2010 was related to
North American auto finance, GMAC/Ally Financial faces the
classic monoline concentration risk--it is a company that
focuses primarily on operating in one specific financial area.
The company's viability and future profitability are,
therefore, intimately tied to the performance of the U.S.
retail auto market.\351\
---------------------------------------------------------------------------
\351\ Treasury conversations with Panel staff (Nov. 18, 2010). See
also Ally Financial Form 10-Q, supra note 297, at 80.
---------------------------------------------------------------------------
On one hand, GMAC/Ally Financial's efforts to increase
lending to consumers with super-prime and prime credit ratings
(while reducing its near-prime and non-prime exposures), as
discussed above, have resulted in higher quality originations
that will likely minimize the risk of delinquencies and
necessitate lower loss provisions (at least in the short term).
Additionally, it might be at least somewhat prudent for a
company to have such a disproportionate exposure to the auto
finance business, since this asset class category is very
attractive from a risk point of view, and has been one of the
most resilient asset classes in the banking business.
On the other hand, however, the global auto industry is
highly cyclical and sensitive to changes in consumer sentiment,
employment, gasoline prices, interest rates, and general
economic activity.\352\ GMAC/Ally Financial's focus on this
sector--and its continued close relationships with GM and
Chrysler--concentrates the risk to GMAC/Ally Financial of any
decline in the automotive industry. The success of GMAC/Ally
Financial's auto finance franchise (and, in large part, that of
GMAC/Ally Financial as a company), therefore, in large part
depends upon credit quality and the pace of auto sales growth,
which is tied to the rate of economic recovery, consumer
sentiment, and the outlook for housing and employment in the
United States. Further, GMAC/Ally Financial's prior major
effort at diversification (albeit under an earlier management
team) beyond the automotive industry, ResCap, was clearly not
successful. While GMAC/Ally Financial has started to focus on
building a presence in the used-car sector, where prices are
currently at an all-time high,\353\ it is unclear what level of
revenue this sector will generate for GMAC/Ally Financial going
forward, but it will become less valuable if prices decline.
---------------------------------------------------------------------------
\352\ See Section C.5, supra.
\353\ Decreased consumer confidence in the economy is driving more
people to purchase used cars, putting increased pricing pressure on a
limited supply of vehicles. Inventory is low due to the current
shortage of lease returns and trade-ins for vehicles of this type.
---------------------------------------------------------------------------
ii. Relationship with GM
GM recently acquired AmeriCredit, an auto finance company
with total assets of $10 billion, to meet customer demand for
leasing and non-prime financing for GM vehicles. GMAC/Ally
Financial's auto finance franchise focuses on prime retail and
dealer financing, while AmeriCredit focuses on subprime retail
financing exclusively.\354\ If GM changes AmeriCredit's
business model and expands its financing operations, however,
GMAC/Ally Financial would lose some of its GM market share to
AmeriCredit. While GMAC/Ally Financial continues to emphasize
how it maintains an ``important, mutually beneficial
relationship'' with GM,\355\ GM's acquisition of AmeriCredit
raises the question as to whether GMAC/Ally Financial will
continue to be uniquely positioned to serve GM dealers and
customers.
---------------------------------------------------------------------------
\354\ Ally Financial 2Q10 Earnings Review, supra note 308, at 7.
However, there is room for competition between the two in the leasing
market, as the economy recovers, and some lease programs may be more
suitable to a captive financier.
\355\ Ally Financial 2Q10 Earnings Review, supra note 308, at 7.
---------------------------------------------------------------------------
GMAC/Ally Financial's current relationship with GM is
shaped by the shared historical relationship between the two
entities since 1919. Until 2006, GMAC/Ally Financial was a
wholly owned subsidiary of GM, functioning as GM's captive
financing arm with the interests of both entities very closely
aligned. As part of the 2006 sale, GMAC/Ally Financial and GM
entered into several service agreements that ``codified the
mutually beneficial historic relationship between the
companies.'' \356\ One of these agreements was the United
States Consumer Financing Services Agreement (USCFSA), which
provided that GM would use GMAC/Ally Financial exclusively
whenever it offered vehicle financing and leasing incentives to
customers.\357\ The parties agreed to maintain this
relationship for 10 years. As consideration for this
arrangement, GMAC/Ally Financial pays GM an annual exclusivity
fee and agrees to meet specified targets with respect to
consumer retail and lease financings of new GM vehicles. On
December 29, 2008, after the Federal Reserve approved GMAC/Ally
Financial's application to become a bank holding company, GM
and GMAC/Ally Financial agreed to modify certain terms and
conditions of the USCFSA.\358\ The modified USCFSA is in effect
until December 24, 2013, but certain provisions terminate in
January 2011.\359\ In addition, the subvention agreements
between GM and GMAC/Ally Financial have been continued through
these contractual agreements.\360\
---------------------------------------------------------------------------
\356\ GMAC LLC, Form 10-K for the Fiscal Year Ended December 31,
2008, at 40 (Feb. 27, 2009) (online at www.sec.gov/Archives/edgar/data/
40729/000119312509039567/d10k.htm) (hereinafter ``GMAC Form 10-K'').
\357\ Id. at 40.
\358\ Id. at 40.
\359\ Id. at 40. These amendments include the following:
(1) The parties agreed that for a two-year period (until 2011), GM
could offer retail financing incentive programs through an alternative
financing source under certain conditions. Following that two-year
period, GM would be able to offer any incentive programs on a graduated
basis through alternative financing sources, along with GMAC/Ally
Financial, provided that the pricing satisfies certain requirements.
(2) The parties agreed to eliminate the requirement that GMAC/Ally
Financial satisfy certain lending and underwriting targets in order to
remain the exclusive underwriter of special promotional loan programs
offered by GM. GM offered GMAC/Ally Financial the right to finance
these special programs for retail consumers for a five-year period.
(3) The parties eliminated the exclusivity arrangement with respect
to promotional programs for GM dealers, and this change will be phased
out over time.
(4) The parties agreed that GMAC/Ally Financial would no longer
have an obligation to lend to a particular wholesale or retail
customer, provide operating lease financing products, or be required to
pay a penalty or receive lower payments or incentives for refusing to
lend to a customer or for failing to satisfy individual or aggregate
lending targets. GMAC/Ally Financial can also make loans to any third
party and will use its own underwriting standards in making loans,
including GM-related loans.
\360\ See, e.g., GMAC Form 10-K, supra note 356, at 162; GMAC,
Inc., Form 10-K for the Fiscal Year Ended December 31, 2009, at 43-44
(Mar. 1, 2010) (online at www.sec.gov/Archives/edgar/data/40729/
000119312510043252/d10k.htm) (hereinafter ``GMAC Form 10-K'').
---------------------------------------------------------------------------
These contractual modifications mean that GMAC/Ally
Financial will be engaging in a sizeable renegotiation with its
biggest operating partner in the near future. While the USCFSA
relates mainly to subvented GM financing, GMAC/Ally Financial's
share of which is proportionately less important now than what
it once was, it is likely that before GMAC/Ally Financial can
pursue an IPO, potential investors would like further
clarification on GMAC/Ally Financial's relationship with GM
going forward, especially given how critical GMAC/Ally
Financial's relationships with GM dealers and customers are to
its balance sheet.\361\ This may include a renegotiated
operating agreement between GM and GMAC/Ally Financial that
would explicitly prevent AmeriCredit from overtaking GMAC/Ally
Financial's floorplan and consumer financing, at least for the
indefinite future.\362\
---------------------------------------------------------------------------
\361\ Industry analyst conversations with Panel staff (Nov. 16,
2010).
\362\ Industry analyst conversations with Panel staff (Nov. 16,
2010).
---------------------------------------------------------------------------
While GM's AmeriCredit acquisition does not pose a near-
term threat to GMAC/Ally Financial's business, it could
represent a longer-term strategy by GM to grow its own captive
financing arm organically.\363\ GM currently benefits from its
relationship with GMAC/Ally Financial because Ally Bank (as a
federally insured depository institution) has a lower cost of
capital than captive finance companies such as Ford Motor
Credit, leading some industry analysts to conclude that this
remains an excellent arrangement for GM.\364\ As the Panel
stated in its March 2010 report, however, ``it would not be
unreasonable for a potential equity investor to question
whether [GMAC/Ally Financial]'s relationship with GM is
designed to serve GM's rather than [GMAC/Ally Financial]'s
shareholders' interests.'' \365\ In that context, GMAC/Ally
Financial's non-captive status subjects it to greater risk from
GM: the relationship could sour, and GMAC/Ally Financial could
lose its preferred provider role, and/or GM could, in fact,
form its own, new captive finance company.\366\ If any of this
were to happen, investor enthusiasm for a potential GMAC/Ally
Financial IPO might be dampened, absent any evidence of other
tangible growth opportunities. GMAC/Ally Financial has become
the preferred finance company in the United States for Saab,
Suzuki, Thor Industries (the world's largest manufacturer of
recreational vehicles), and Fiat over the course of 2010, but
it is unclear how much business these relationships will
generate for GMAC/Ally Financial going forward, and it appears
that current revenue projections are fairly small. An IPO
requires a prospective investor to believe either that GMAC/
Ally Financial's relationship with GM is sufficiently stable to
sustain it as a separate company, or that GMAC/Ally Financial
can expand adequately (through growth strategies for Ally Bank,
Chrysler, other automotive companies, the used car market, or
otherwise) to handle the risk of a reduced relationship with
GM. The public equity markets have never had an opportunity to
evaluate this question, and their assessment remains unknown.
---------------------------------------------------------------------------
\363\ Although a substantial loss in GM business would have a
meaningful impact on GMAC/Ally Financial's ongoing viability because
the company's auto finance platform has not yet undergone sufficient
diversification, it is likely that an unwinding of GM's relationship
with GMAC/Ally Financial would happen over the long term, which would
allow for the impact of the loss to be spread over a period of time.
\364\ Industry analyst conversations with Panel staff (Dec. 3,
2010).
\365\ March 2010 Oversight Report, supra note 22, at 108-109.
\366\ The Panel also notes that GM might be further incentivized to
form its own new captive finance company (or build AmeriCredit's
platform) because it is beneficial to have a finance arm particularly
during very tough markets, as it provides some protection if other
lenders walk away. Industry analyst conversations with Panel staff
(Nov. 10, 2010).
---------------------------------------------------------------------------
FIGURE 24: GMAC/ALLY FINANCIAL'S AUTO FINANCE LOAN ORIGINATIONS THROUGH
DECEMBER 20, 2010 (PERCENT OF UNITS ORIGINATED) \367\
---------------------------------------------------------------------------
\367\ Data from GMAC/Ally Financial.
[GRAPHIC] [TIFF OMITTED] T3381.019
iii. Turmoil in the Mortgage Market
GMAC Mortgage, a subsidiary of GMAC/Ally Financial, is the
fifth largest U.S. mortgage servicer.\368\ As the Panel
discussed in its November 2010 report, in the fall of 2010,
reports began to surface of problems with foreclosure
documentation.\369\ GMAC Mortgage announced on September 24,
2010 that it had identified irregularities in its foreclosure
document procedures, which have raised questions about the
validity of some of its foreclosures. GMAC/Ally Financial
temporarily suspended evictions and foreclosure sales by GMAC
Mortgage in 23 states during September after an employee
testified that he signed foreclosure documents without ensuring
their accuracy.
---------------------------------------------------------------------------
\368\ House Financial Services, Subcommittee on Housing and
Community Opportunity, Written Testimony of Thomas Marano, chief
executive officer, Mortgage Operations, Ally Financial Inc., Robo-
Signing, Chain of Title, Loss Mitigation, and Other Issues in Mortgage
Servicing, at 1 (Nov. 18, 2010) (online at financialservices.house.gov/
Media/file/hearings/111/Marano111810.pdf) (hereinafter ``Thomas Marano
Testimony'') (stating that GMAC Mortgage ``is currently the fifth
largest residential mortgage servicer in the United States . . . '').
\369\ See Congressional Oversight Panel, November Oversight Report:
Examining the Consequences of Mortgages Irregularities for Financial
Stability and Foreclosure Mitigation, at 7-8 (Nov. 16, 2010) (online at
cop.senate.gov/documents/cop-111610-report.pdf) (hereinafter ``November
2010 Oversight Report'').
---------------------------------------------------------------------------
These developments raise two important issues: (1) the
validity of some of GMAC Mortgage's foreclosures given the
irregularities in its documentation procedures; and (2) the
amount of exposure GMAC/Ally Financial could face from mortgage
repurchases.
With respect to the first issue, as of November 3, 2010,
GMAC Mortgage has reviewed 9,523 foreclosure affidavits and,
where necessary, has re-executed some.\370\ Fewer than 15,500
additional affidavits are being reviewed and, when necessary,
will be remediated.\371\ According to GMAC/Ally Financial, the
review has shown ``no evidence of inappropriate foreclosure to
date,'' and GMAC Mortgage ``is confident that the decisions
behind foreclosure proceedings were sound.'' \372\ Corrective
actions will be taken as necessary, according to the company,
and company management expects that the vast majority of cases
will be remediated over the next few months.
---------------------------------------------------------------------------
\370\ Ally Financial 3Q10 Earnings Review, supra note 300, at 10.
\371\ Ally Financial 3Q10 Earnings Review, supra note 300, at 10.
\372\ Ally Financial 3Q10 Earnings Review, supra note 300, at 10.
See also Thomas Marano Testimony, supra note 368, at 1.
---------------------------------------------------------------------------
With respect to the second issue, GMAC Mortgage, like other
underwriters/issuers, is required to make representations and
warranties about the mortgage loans to the purchaser or
securitization trust when selling mortgage loans through whole-
loan sales or securitizations. This may require it to
repurchase mortgage loans as a result of borrower fraud or if a
payment default occurs on a mortgage loan shortly after its
origination. Over the course of 2010, GMAC/Ally Financial
entered into settlements with Fannie Mae and Freddie Mac, under
which it made one-time payments to Fannie Mae and Freddie Mac
for the release of repurchase obligations relating to mortgage
loans sold to the GSEs.\373\ This means that its remaining
exposure is to potential repurchase obligations related to
mortgage loans sold to private institutions to be securitized.
Estimates of potential repurchase claims are subject to change
as GMAC Mortgage provides more clarity on its exposure. Some
analysts see GMAC/Ally Financial as a ``well capitalized
company with considerable liquidity and earnings power,''
despite the risk of negative publicity surrounding mortgage
uncertainties.\374\ Furthermore, while the company's current
repurchase reserve might not be sufficient to resolve all
future claims, these issues will likely take years to settle,
which would thereby spread the impact of the liability over a
period of time and mitigate capital outflows.\375\ The
repurchase exposure is the primary concern of both GMAC/Ally
Financial's management and investors, rather than the
foreclosure irregularities issue.\376\ Because the 2009 stress
tests considered the ability of financial institutions to
remain well-capitalized only until the end of 2010, however,
the stress tests offer limited reassurance that major bank
holding companies like GMAC/Ally Financial will remain well-
capitalized in the months and years to come, especially if the
economic recovery remains sluggish. Even the prospect of such
losses could damage GMAC/Ally Financial's reputation, its
ability to raise capital, and its ability to pursue an
IPO.\377\ If the company is unable to assuage investor concerns
on this front, the timing of a potential IPO could be impacted.
---------------------------------------------------------------------------
\373\ In March 2010, GMAC/Ally Financial's subsidiaries, GMAC
Mortgage and Residential Funding Company, LLC, made a one-time payment
to Freddie Mac for the release of repurchase obligations relating to
mortgage loans sold to Freddie Mac prior to January 1, 2009. The
release does not cover any of GMAC/Ally Financial's potential
repurchase obligations related to mortgage loans sold to Freddie Mac
after January 1, 2009 or GMAC/Ally Financial's potential repurchase
obligations related to ``private-label'' mortgage securities (mortgage
loans sold to private institutions) to be securitized. This agreement
also does not cover any of GMAC/Ally Financial's obligations with
respect to loans where its subsidiary Ally Bank is the owner of the
servicing. Ally Financial Form 10-Q, supra note 297, at 77.
On December 27, 2010, GMAC/Ally Financial announced that ResCap and
certain ResCap subsidiaries reached a settlement with Fannie Mae for
the release of repurchase obligations relating to mortgage loans sold
to Freddie Mac. The agreement covers loans serviced by GMAC Mortgage on
behalf of Fannie Mae prior to June 30, 2010, and all mortgage-backed
securities that Fannie Mae purchased prior to the settlement, including
private-label securities. ``The settlement was for approximately $462
million and releases ResCap and its subsidiaries from liability related
to approximately $292 billion of original unpaid principal balance (and
$84 billion of current UPB) on these loans.'' ResCap and Fannie Mae
also reached an arrangement with respect to ``ResCap's payment of
mortgage insurance proceeds where mortgage insurance coverage is
rescinded or canceled.'' This agreement does not cover other
contractual obligations that ResCap has with Fannie Mae (e.g., those
that may arise in connection with mortgage servicing), and excludes
Ally Bank. Ally Financial Inc., Ally Financial's Mortgage Subsidiaries
Reach Agreement With Fannie Mae on Repurchase Exposure (Dec. 27, 2010)
(online at media.ally.com/index.php?s=43&item=437).
\374\ Ally Financial 3Q10 Preview, supra note 335. Based upon
assumptions of delinquency rates, put-back rates, put-back acceptance,
and loss severity on the $310.6 billion of loans originated by GMAC/
Ally Financial during 2006-2008, JPMorgan Chase estimated in November
2010 that mortgage put-backs will cost the company $1.4 billion of
incremental capital. While this potential magnitude is significant,
JPMorgan Chase believes GMAC/Ally Financial can ``easily fund potential
liabilities'' with its existing liquidity or estimated 2010 net income
and notes that the firm increased its mortgage repurchase reserve by $1
billion in 2009 to end the year with a $1.2 billion reserve.
\375\ Ally Financial 3Q10 Preview, supra note 335, at 2.
\376\ GMAC/Ally Financial conversations with Panel staff (Dec. 6,
2010); Industry analyst conversations with Panel staff (Dec. 1, 2010).
\377\ Moody's Investors Service, Issuer Comment: Problems at GMAC
Servicing and Ally Financial Are Credit Negative (extracted from
Moody's Weekly Credit Outlook) (Sept. 27, 2010) (noting that GMAC/Ally
Financial may need to increase its marketing expense to help offset or
overcome the reputational damage associated with these developments).
---------------------------------------------------------------------------
In conversations with Panel staff, Treasury representatives
noted that they believe GMAC/Ally Financial's exposure is
manageable, and asserted that the risk profile of GMAC Mortgage
is no worse or better than that of its peers.\378\ In addition,
they stated that they have not dictated GMAC/Ally Financial's
response to the foreclosure irregularities issue, but have
handled the issue in a ``routine'' manner, consistent with its
core principles as a ``reluctant shareholder.'' \379\ According
to GMAC/Ally Financial, however, Mr. Carpenter has met with
Treasury Acting Assistant Secretary for Financial Stability Tim
Massad regularly on this topic.\380\ While GMAC/Ally Financial
management concurs that Treasury has not told the company how
to respond to this issue, they note that Treasury remains a
``very concerned shareholder'' on this topic.\381\
---------------------------------------------------------------------------
\378\ Treasury conversations with Panel staff (Nov. 18, 2010).
\379\ Treasury conversations with Panel staff (Dec. 21, 2010).
\380\ These meetings have been requested by both GMAC/Ally
Financial and Treasury. GMAC/Ally Financial conversations with Panel
staff (Dec. 14, 2010).
The Panel also notes the company's recent testimony on this topic.
See, e.g., Thomas Marano Testimony, supra note 368.
\381\ GMAC/Ally Financial conversations with Panel staff (Dec. 13,
2010).
---------------------------------------------------------------------------
iv. Has GMAC/Ally Financial Sufficiently Reduced the Risk
in its Mortgage Portfolio?
As discussed above, one of GMAC/Ally Financial's core goals
has been to review the mortgage strategy and reduce the risk in
its mortgage operations business. During the earnings call for
the third quarter of 2010 (and in conversations with Panel
staff), Mr. Carpenter stated that the company has ``effectively
de-risked the mortgage business.'' \382\ While ResCap was again
profitable in the third quarter of 2010 (with net income of $38
million) and has required no additional capital or liquidity
support, there continues to be a risk that ResCap will not be
able to meet its debt service obligations.\383\ Although GMAC/
Ally Financial's mortgage operations proved to be a poor
strategy in the past, its plans to retain and expand its
mortgage servicing/origination business (rather than selling
off the entire ResCap business) are much less balance sheet
intensive and lower risk than mortgage originations. It remains
unclear whether GMAC/Ally Financial has reduced the risk in its
mortgage portfolio completely, in large part because the
company's outstanding contingent liabilities (including
repurchase claims) and any remaining legal exposure could
present risks going forward.\384\
---------------------------------------------------------------------------
\382\ Ally Financial Transcript: Q3 2010 Earnings Call, supra note
306; Ally Financial 3Q10 Earnings Review, supra note 300, at 40.
\383\ Ally Financial Form 10-Q, supra note 297, at 10.
\384\ Industry analyst conversations with Panel staff (Dec. 1,
2010).
---------------------------------------------------------------------------
v. Maintaining a Robust Liquidity Profile
As noted above, GMAC/Ally Financial faces multiple
impediments to profitability, especially amid a fragile
economic and market recovery. At the parent company level,
GMAC/Ally Financial must maintain sufficient liquidity to
support its non-bank asset originations, debt maturities,
interest and dividends, and investments/loans to operating
subsidiaries. GMAC/Ally Financial must continue to demonstrate
unfettered and non-government-sponsored access to the third-
party credit markets, including wholesale financing markets,
and must continue to make headway in reducing its cost of
capital.
A key challenge facing GMAC/Ally Financial will be
maintaining robust liquidity. GMAC/Ally Financial suffers from
significant amounts of maturing debt, as reflected below in
Figure 25. GMAC/Ally Financial has $21.5 billion coming due in
2011 and $19.8 billion in 2012. In the second quarter of 2009,
the company received approval to issue debt up to $7.4 billion
under the FDIC's Temporary Liquidity Guarantee Program
(TLGP).\385\ Pursuant to the program, it issued $4.5 billion of
unsecured long-term debt, which included $3.5 billion of senior
fixed-rate notes and $1.0 billion of senior floating rate
notes. Both types of notes are due in December 2012.\386\ On
October 30, 2009, GMAC/Ally Financial issued an additional $2.9
billion of unsecured debt in the form of senior fixed-rate
notes. These notes are due in October 2012.\387\ If GMAC/Ally
Financial is unable to refinance at affordable rates or has
insufficient cash to cover its maturing obligations, it may
face even higher borrowing costs, possibly resulting in renewed
liquidity problems.
---------------------------------------------------------------------------
\385\ GMAC Form 10-K, supra note 360, at 83.
\386\ GMAC Form 10-K, supra note 360, at 83.
\387\ GMAC Form 10-K, supra note 360, at 83.
---------------------------------------------------------------------------
FIGURE 25: LONG-TERM DEBT MATURITIES AS OF SEPTEMBER 30, 2010_ALLY
FINANCIAL (EXCLUDING RESCAP) \388\
---------------------------------------------------------------------------
\388\ Regarding ResCap long-term debt, $716 million is set to
mature in 2011, $358 million is set to mature in 2012, $1,236 million
is set to mature in 2013, $809 million is set to mature in 2014, and
$1,011 million is set to mature during and after 2015. There was no
ResCap long-term debt scheduled to mature in 2010. These amounts
exclude ResCap debt held by GMAC/Ally Financial and collateralized
borrowings in securitized trusts. Ally Financial Form 10-Q, supra note
297, at 31.
[GRAPHIC] [TIFF OMITTED] T3381.020
vi. Ally Bank's Strategy is a Work in Progress
As discussed above, Ally Bank provides GMAC/Ally Financial
with a source of liquidity in both the retail and wholesale
markets. Ally Bank also provides diversified funding (including
deposits) for the automotive financing unit. This strategy has
several components. GMAC/Ally Financial is simultaneously
integrating Ally Bank with the auto lending business while
expanding its retail banking offerings. GMAC/Ally Financial is
aware that its combination of retail online banking and
wholesale automotive financial services is untested but
believes that it offers good value to Ally Bank's customers
while simultaneously involving Ally Bank effectively in the
automotive lending side of the business.
GMAC/Ally Financial has been engaged in an aggressive
marketing campaign for Ally Bank. Among other things, Ally Bank
has been attempting to interest depositors by offering CD rates
that have been and remain among the highest available
nationally.\389\ Some analysts also believe that there is long-
term uncertainty with Ally Bank's funding strategy due to both
the risks associated with changing its operational and funding
model to one focused on banking and those risks associated with
whether an internet banking platform can meet the funding
requirements of a large-scale company such as GMAC/Ally
Financial.\390\ In addition, since Ally Bank's current deposit
mix is rate sensitive, GMAC/Ally Financial could be subject to
some amount of volatility due to the potential for loss of
customers and deposit amounts due to rate shifts.\391\ In order
to support Ally Bank's expansion and sustain its capital
strength, the GMAC/Ally Financial parent company will
``probably need to inject significant cash capital over the
next few years.'' \392\ The extent to which GMAC/Ally Financial
will need to provide Ally Bank with cash infusions remains
unclear.
---------------------------------------------------------------------------
\389\ Bankrate.com, CD Investment Rates (online at
www.bankrate.com/cd.aspx) (accessed Jan. 11, 2011). This strategy has
been politically contentious as regulators view unusually high rates as
an indication of instability. For example, in the summer of 2009, Ally
Bank's rates were more than double the national average. This prompted
the American Bankers Association (ABA) to write a letter of complaint
to the FDIC and the FDIC to issue new regulations setting a variety of
standards for the interest rates permissible for insured depository
institutions that are not well capitalized. For further discussion
concerning the controversy surrounding Ally Bank's interest rates and
the viability of Ally Bank's strategy going forward, see March 2010
Oversight Report, supra note 22, at 105-107. See also Bankrate.com, CD
Investment Rates (online at www.bankrate.com/funnel/cd-investments/cd-
investment-
results.aspx?local=false&tab=CD&prods=15&ic_id=CR_searchCDNational_cd_1y
rCD_V1) (accessed Jan. 11, 2011).
\390\ Moody's Investors Service, Global Credit Research, Liquidity
Risk Assessment: Ally Financial Inc., at 1 (Oct. 15, 2010) (hereinafter
``Moody's Liquidity Risk Assessment'').
\391\ Id. at 1. While Ally Bank has demonstrated strong CD
retention rates, Moody's believes that ``these deposits are rate
sensitive and therefore less sticky than demand deposits offered
through traditional branch networks.''
Given the very limited product suite at Ally Bank, some analysts
believe that Ally Bank's deposits function more like brokered deposits
(or ``hot money'') than core deposits at more conventional banks.
Industry analyst conversations with Panel staff (Dec. 1, 2010).
Brokered deposits are large deposits that deposit brokers shop among
depository institutions looking for high rates and are usually viewed
as risky for the depository institution. They are short-term
investments, which have been associated with high rates of bank
failures. See Mindy West and Chris Newbury, Brokered and High-Cost
Deposits, FDIC Interagency Minority Depository Institutions National
Conference Presentation, at 33, 40 (July 2009) (online at www.fdic.gov/
regulations/resources/minority/events/interagency2009/Presentations/
Brokered.pdf). See also L.J. Davis, Chronicle of a Debacle Foretold,
Harper's Magazine, at 53-54 (Sept. 1990).
One analyst considers Ally Bank's proportion of brokered deposits
and lack of restrictions on deposit withdrawals to be a warning sign of
bank instability. See Congressional Oversight Panel, Written Testimony
of Christopher Whalen, senior vice president and managing director,
Institutional Risk Analytics, COP Hearing on GMAC Financial Services,
at 18 (Feb. 25, 2010) (online at cop.senate.gov/documents/testimony-
022510-whalen.pdf); Congressional Oversight Panel, Testimony of
Christopher Whalen, senior vice president and managing director,
Institutional Risk Analytics, Transcript: COP Hearing on GMAC Financial
Services, at 91-98 (Feb. 25, 2010) (online at frwebgate.access.gpo.gov/
cgi-bin/getdoc.cgi?dbname=111_senate_hearings&docid=f:56723.pdf).
\392\ Moody's Liquidity Risk Assessment, supra note 390, at 1.
---------------------------------------------------------------------------
Ultimately, Ally Bank appears to be both critical to GMAC/
Ally Financial and is very much a work in progress. The Panel
notes that Ally Bank may ultimately need to move toward a more
traditional banking model (with a branch network) and broaden
its footprint via other offerings. These possibilities,
however, are not on the immediate horizon and would be
impractical for the company to accomplish before the
government's exit.\393\
---------------------------------------------------------------------------
\393\ GMAC/Ally Financial conversations with Panel staff (Dec. 6,
2010).
---------------------------------------------------------------------------
G. Auto Supplier Support Program
1. Background
Generally, automotive suppliers ship parts to auto
manufacturers and receive payment 45-60 days later. Under
normal market conditions, suppliers can either sell or borrow
against the payment commitments, known as receivables. In early
2009, the downturn in the economy and uncertainty regarding the
future of GM and Chrysler resulted in tightening credit for
auto suppliers. Banks stopped providing credit against supplier
receivables. On March 19, 2009, in order to address this
situation and to provide overall structural support for the
auto industry, Treasury announced the creation of the Auto
Supplier Support Program (ASSP).\394\
---------------------------------------------------------------------------
\394\ U.S. Department of the Treasury, Auto Supplier Support
Program: Stabilizing the Auto Industry at a Time of Crisis (Mar. 19,
2009) (online at www.treasury.gov/press-center/press-releases/
Documents//supplier_support_program_3_18.pdf).
---------------------------------------------------------------------------
2. TARP Intervention
When the ASSP was created, up to $5 billion in financing
was made available through the TARP. Participating suppliers
could access a government-backed guarantee of eligible
receivables or sell receivables into the program. A fee was
charged for participation in the ASSP, and receivables were
sold into the program at a discount.\395\ While all domestic
automotive manufacturers were eligible for the program, only
Chrysler and GM participated.
---------------------------------------------------------------------------
\395\ The credit insurance cost participants 2 percent, while
selling receivables into the program carried a 3 percent cost. U.S.
Department of Commerce, Office of Transportation and Machinery, On the
Road: U.S. Automotive Parts Industry Annual Assessment, at 19 (2010)
(online at trade.gov/wcm/groups/internet/documents/article/
auto_reports_parts2010.pdf).
---------------------------------------------------------------------------
Two special-purpose vehicles (SPVs), GM Supplier
Receivables LLC and Chrysler Receivables SPV LLC, were created
to administer the program for GM and Chrysler, respectively.
Originally, $3.5 billion was committed to the GM SPV, and $1.5
billion was dedicated to the Chrysler counterpart. On July 1,
2009, Treasury reduced the total amount available under the
ASSP to $3.5 billion, with $2.5 billion being reserved for GM's
SPV and $1 billion for the Chrysler SPV. As Figure 26 details,
through the life of the program, only $413.1 million of the
$3.5 billion in available funding was drawn down. Treasury's
commitment to lend to the SPVs terminated in April 2010.\396\
All funds outstanding under the ASSP were repaid, and Treasury
earned a total of $14.9 million in interest as well as $101.1
million in proceeds from additional notes.\397\
---------------------------------------------------------------------------
\396\ The GM SPV closed on April 5, 2010, and the Chrysler SPV
closed on April 7, 2010. Treasury Transactions Report, supra note 24,
at 19.
\397\ The additional notes were financial instruments that Treasury
took from the Chrysler and GM SPVs as part of their agreement to
participate in the program; the notes provided Treasury the opportunity
to recognize upside gains on its investments. As dictated in the
legislation that created the TARP, the Emergency Economic Stabilization
Act, financial instruments such as warrants were to be provided to
Treasury in consideration for its investment in participating
institutions. As the law states, instruments such as warrants, or
additional debentures in the case of the ASSP, were created ``to
provide for reasonable participation by the Secretary, for the benefit
of taxpayers, in equity appreciation in the case of a warrant or other
equity security, or a reasonable interest rate premium, in the case of
a debt instrument.'' 12 U.S.C. Sec. 5223(d)(2)(A)(i).
FIGURE 26: AUTO SUPPLIER SUPPORT PROGRAM METRICS
[Millions of dollars]
----------------------------------------------------------------------------------------------------------------
Proceeds
Original Adjusted Amount Interest from
Commitment Commitment Drawn Down Paid Additional
Notes
----------------------------------------------------------------------------------------------------------------
GM Receivables LLC............................. $3,500 $2,500 $290.0 $9.1 $56.5
Chrysler Receivables SPV LLC................... 1,500 1,000 123.1 5.8 44.5
----------------------------------------------------------------
Total.......................................... $5,000 $3,500 $413.1 $14.9 $101.1
----------------------------------------------------------------------------------------------------------------
3. Current Status of Auto Supplier Industry
Standard indicators appear to show a stabilization in the
automotive supplier industry as industry-wide consolidation
increases. While there were 62 automotive supplier bankruptcies
in 2009, there were only 5 failures in 2010.\398\ Furthermore,
the auto supplier industry's capacity utilization rate, an
indicator of the degree to which an enterprise uses its ability
to produce, is currently 60.5 percent. While this figure is
significantly higher than it was at its trough of 45.9 percent
during the crisis, it remains notably lower than the pre-crisis
level, when it was typically above 70 percent.\399\ This has
led to ongoing consolidation of the supplier industry. Ford,
GM, and Chrysler have announced reductions of 53, 30, and 50
percent, respectively, in their direct supply bases.\400\
---------------------------------------------------------------------------
\398\ Data provided by the Original Equipment Suppliers Association
in response to a Panel request (Nov. 30, 2010).
\399\ Data provided by the Original Equipment Suppliers Association
in response to a Panel request (Jan. 7, 2011).
\400\ The State of the Supplier Industry, supra note 52, at 17.
This measure is based on number of direct suppliers each manufacturer
states it will use going forward. For example, Ford has stated that it
will have 750 direct suppliers in the future as compared to the 1,600
it currently relies upon.
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H. Analysis of Treasury's Interaction with all Three Companies in Light
of Government's Objectives
1. Summary of Principles upon which Government Says it Will Conduct its
Involvement in Private Companies
In numerous hearings, reports, and statements to the press,
Treasury has articulated four guiding principles for its
involvement in private industry in the wake of the financial
crisis, and specifically for its involvement with the
automotive industry.
First, the government has cast itself as a ``reluctant
shareholder.'' It has stated that: ``[t]he government has no
desire to own equity stakes in companies any longer than
necessary, and will seek to dispose of its ownership interests
as soon as practicable. Our goal is to promote strong and
viable companies that can quickly be profitable and contribute
to economic growth and jobs without government involvement.''
Second, Treasury has said that it will ``reserve the right
to set upfront conditions to protect taxpayers, promote
financial stability, and encourage growth. When necessary,
these conditions may include restructurings similar to that now
underway at GM as well as changes to ensure a strong board of
directors that selects management with a sound long-term vision
to restore their companies to profitability and to end the need
for government support as quickly as is practically feasible.''
Third, Treasury has stated its commitment to ``managing its
ownership stake in a hands-off, commercial manner.'' This
includes a commitment not to ``interfere with or exert control
over day-to-day company operations.'' To the extent that
Treasury appoints any board members, it has stated that ``[n]o
government employees will serve on the boards or be employed by
these companies.''
Finally, Treasury has stated that it will vote its shares
only ``on core governance issues, including the selection of a
company's board of directors and major corporate events or
transactions.'' \401\
---------------------------------------------------------------------------
\401\ White House Fact Sheet on General Motors Restructuring, supra
note 36.
---------------------------------------------------------------------------
Put together, these principles illustrate an approach to
government intervention that seeks to minimize the government's
role, dampen any leverage the government has simply by virtue
of its unique authority as sovereign, and present itself as a
shareholder that behaves in most cases as a private shareholder
would, while still protecting the assets of the people of the
United States.\402\
---------------------------------------------------------------------------
\402\ Whether the use of the TARP for the support of the automotive
industry is a legitimate use of TARP funds is an issue that the Panel
has addressed at length. September 2009 Oversight Report, supra note 2,
at 70-79.
---------------------------------------------------------------------------
Given the principles Treasury has laid out for its own
involvement with the American automobile industry, three
questions arise: (1) has Treasury abided by its own principles;
(2) has Treasury used its limited powers effectively; and (3)
was Treasury correct in establishing these guidelines as an act
of prudent government restraint, or did the guidelines
unnecessarily tie Treasury's hands at a time when greater
government action, or at least shareholder activism, was
necessary.
2. Has Treasury Abided by its own Principles?
As to the first question, the answer seems to be a
qualified yes. According to the information the Panel has
received from Treasury and the companies, it seems that
Treasury has kept to the guidelines it established for itself.
It is unclear, however, whether given its status, the
government can actually be a passive investor. On the whole,
Treasury's involvement in the companies has been restricted to
participation in periodic calls with management to obtain
information, appointing directors as permitted by the shares
Treasury holds, and voting on a limited number of issues. At
present, Treasury staff speaks with management at GM and
Chrysler at least monthly and with management at GMAC/Ally
Financial on a regular basis. In most cases, it is the
companies that contact Treasury to convey new information such
as earnings reports, or other relevant data. During these
calls, company management provides Treasury with updated
information on current operations and financial information,
including updates on revenue, market share, domestic and
international sales, and any corporate highlights as well as a
review and analysis of the companies' balance sheets.\403\
Treasury maintains that these calls are one-way; Treasury's
role is to listen to the information provided by management,
and does not respond with any directives or requests of
management.\404\ In the wake of allegations of irregularities
in GMAC/Ally Financial's mortgage foreclosures, however,
Treasury did take the initiative to contact the company for
additional information regarding the irregularities.
---------------------------------------------------------------------------
\403\ Data provided by Treasury (Dec. 9, 2010).
\404\ Treasury conversations with Panel staff (Nov. 18 and 22,
2010).
---------------------------------------------------------------------------
Treasury has described these calls as the type that any
large shareholder might have with company management, although
it is unlikely that a large private shareholder would actually
be as passive as Treasury describes. For the most part, the
companies also describe their interactions with Treasury as
being similar to interactions with other major shareholders.
For example, Chrysler has stated that it provides all of its
owners, including Treasury, with the same information about its
operations and financial results each month. GM has stated that
Treasury expressed a desire to be kept apprised of progress but
had no intention to influence the company's progress, and that
Treasury has stayed true to that intent. Moreover, GM has
confirmed that Treasury's role in determining the timing of its
IPO was extremely limited and that Treasury left the decision
in the hands of GM management. Chrysler has similarly stated
that Treasury has not provided input on the proposed timing for
that company's IPO.
Treasury has said that, in the period preceding the GM IPO,
its interactions with GM were much more frequent than they had
been previously.\405\ This increased activity, however,
Treasury has attributed solely to its need to perform due
diligence as a large shareholder. GM has affirmed this view,
and has also confirmed Treasury's position that the decision
about when to have the IPO was made primarily by the company.
Treasury and the Canadian government both had demand rights
that would have enabled them to force an IPO by a certain date
if the company had not begun the process, but the need to
exercise those rights did not arise. Treasury has acknowledged
that waiting a year or 18 months may have given GM time to
improve its value even further, but noted that the company had
determined that it was ready for an IPO.\406\
---------------------------------------------------------------------------
\405\ Treasury conversations with Panel staff (Nov. 22, 2010).
\406\ The exact timing of the IPO was impacted by the holiday
season. Treasury has stated that there was a consensus that if the IPO
did not happen by mid-November 2010, it would have to wait until after
the holidays and possibly until the spring for a receptive market.
Treasury conversations with Panel staff (Nov. 22, 2010). As discussed
in Sections C and D, supra, the company has taken several steps in the
course of restructuring that have made it a more attractive investment,
including streamlining its operations and improving its efficiency.
---------------------------------------------------------------------------
In general, GMAC/Ally Financial has described its
interactions with Treasury in the same way. Preparations for
GMAC/Ally Financial's potential IPO, however, have presented
some challenges that have led to a different dynamic in the
interactions between GMAC/Ally Financial and Treasury with
regard to this issue. As the Panel discussed in its March 2010
report, Treasury's treatment of GMAC/Ally Financial has not
adhered as firmly to the principles on which Treasury has
claimed to base all of its TARP investment decisions.\407\ For
Treasury to suggest otherwise in conversations with Panel staff
may reveal a bias to present a consistent narrative regarding
its shareholder principles, rather than acknowledging the
unique circumstances that its stake in GMAC/Ally Financial may
present.
---------------------------------------------------------------------------
\407\ March 2010 Oversight Report, supra note 22.
---------------------------------------------------------------------------
This is illustrated by the rigidity with which Treasury
articulates these principles in explaining its interactions
with the company--descriptions that often lack the transparency
that would illustrate the unique factors that understandably
impact Treasury's GMAC/Ally Financial exit strategy.
Treasury initially informed the Panel on November 22, 2010
that the timing of a potential IPO was entirely up to GMAC/Ally
Financial. However, this assertion neglected to acknowledge the
practical impact of the continued uncertainty regarding the
potential conversion status of the Treasury's MCPs, and the
obvious hurdle this would present in terms of proceeding with
an IPO. Although Treasury later acknowledged that the timing of
the conversion would impact the timing of the IPO, Treasury
still maintained that the conversion of its MCP holdings was
not a prerequisite for the company to proceed with an IPO.
After a portion of the MCPs were converted, however, Treasury
finally cited this move as a necessary step towards the IPO
during a conversation with oversight bodies on January 5, 2011,
and now appears somewhat more hesitant to reassert its prior
claims of GMAC/Ally Financial's independence to pursue its IPO
on its own timetable.\408\ Treasury's stated rationale for
timing the conversion tacitly confirms the fact that a GMAC/
Ally Financial IPO would be impeded by a delay on Treasury's
part in converting its MCPs into common shares, and seems to
contradict Treasury's earlier statement that GMAC/Ally
Financial could hold its IPO without waiting for Treasury to
convert the MCPs.\409\ In any case, the Panel recognizes that
this may be a prudent (but belated) acknowledgement of the
unique factors that understandably complicate the IPO process
for GMAC/Ally Financial.
---------------------------------------------------------------------------
\408\ In something of a departure from its involvement in GM,
Treasury would not state unequivocally that the timing of a GMAC/Ally
Financial IPO is solely in company management's hands. Treasury
conversations with Panel staff (Jan. 5, 2011).
\409\ Treasury also cited the need to bolster GMAC/Ally Financial's
capital structure and its recent settlement with Fannie Mae on mortgage
repurchase claims as affecting the timing of the conversion. During the
same meeting, Treasury articulated, for the first time, the need to
conduct the conversion in order to remove GMAC/Ally Financial from the
strictures of section 23(a) of the Federal Reserve Act, which limits
the transactions between a bank and its non-bank affiliates (in this
instance, GM). Treasury conversations with Panel staff (Jan. 5, 2011).
GMAC/Ally Financial was granted an exemption from this rule in 2008 and
in 2009. See March 2010 Oversight Report, supra note 22, at 23-25.
---------------------------------------------------------------------------
Treasury, in its role as shareholder, has also appointed a
number of new members to the board of each company. At GM,
Treasury has appointed 10 of the current 12 board members,
including Dan Akerson, who was later named CEO by the company's
directors. Treasury has appointed four members to the Chrysler
board, and three to GMAC/Ally Financial's board, with an
additional member currently undergoing the vetting process for
appointment. As a result of converting a portion of its GMAC/
Ally Financial MCPs into common shares, Treasury has also
acquired the right to appoint two more members to the company's
board. In seeking candidates for these positions, Treasury used
private search companies, such as might be used by a private
shareholder seeking to appoint directors to a large
corporation.
As a common stockholder, Treasury has the right to vote its
shares on various issues. In accordance with its commitment to
vote only on ``core governance issues,'' Treasury has exercised
its right three times, all at GM: the appointment of board
members; a stock split that immediately preceded the IPO; and a
charter amendment for the preservation of tax assets. These
actions fall squarely within the category of ``core governance
issues'' and are the type on which a large private shareholder
would usually vote. Treasury has never voted its shares in
Chrysler or GMAC/Ally Financial.
Based on the information that Treasury has provided to the
Panel, it appears that Treasury has been following its
guidelines and has taken no action that a private shareholder
could not take. This does not mean, however, that Treasury's
position as a majority shareholder, or even as a shareholder at
any level, has had no impact on the companies. It may be
impossible for a government agency to hold a stake in a private
company without having a greater impact than a private
shareholder. First, Treasury's stake is more visible than that
of any other shareholder. Because the American people have a
direct interest in the companies, the companies' every movement
is of potential interest to the press. Second, Treasury makes
larger waves with each of its movements than a private investor
does. The fact that Treasury intends to have a ``hands-off''
approach does not mean that its voice does not seem louder to
the companies than those of other shareholders.
Treasury's ownership stake may have both a positive and
negative impact on the companies' share prices. For example,
there may be a perception in the market--particularly among
debt investors--that the government stands behind the
companies, regardless of whether the government has that
intention, thereby making credit available to the companies on
more favorable terms than they would have otherwise received.
As discussed in Section F.3.a, the current spreads on GMAC/Ally
Financial credit default swaps support this assumption. On the
negative side, potential investors may fear that Treasury would
wield influence disproportionate to its holdings, and that
Treasury's presence is not a positive backstop, but an ongoing
sign of the companies' inherent weaknesses.\410\
---------------------------------------------------------------------------
\410\ See September 2009 Oversight Report, supra note 2, at 80-102
(discussing the tensions inherent in government ownership of private
enterprise). Moreover, GM has indicated that it believes that some
potential consumers may be disinclined to buy automobiles from the
companies due to dissatisfaction with the government's policies. The
company was unwilling to provide documentation to support this claim,
as it views this analysis as confidential and proprietary.
---------------------------------------------------------------------------
3. Has Treasury Used its Limited Authority Effectively?
To analyze the success of Treasury's intervention in the
automotive industry, there must first be a definition of
``success.'' Treasury has provided its own views on what would
constitute a success. In testimony before the Panel, senior
Treasury advisor Ronald Bloom defined success as primarily a
question of return on investment: ``the greater percentage of
the money that we invested that we get back, the greater
success.'' \411\ The investment was not, however, made purely
for the purpose of seeing a return on those funds. Mr. Bloom
also testified to the importance of job preservation and listed
a number of other measures for determining whether the program
was successful, including the question of ``whether these
companies have addressed the long-term problems that we
identified,'' such as ``a declining market share, a poor
profitability profile'' and failing to increase their ability
to provide ``good, stable jobs.'' \412\ Austan Goolsbee,
Chairman of the Council of Economic Advisers, appeared in a
recent video released by the White House to explain the
``Rebirth of the American Auto Industry.'' According to Mr.
Goolsbee, although taxpayers may soon see a return of the funds
invested, the investment ``was never really about the stock
market. It was about saving American jobs.'' \413\
---------------------------------------------------------------------------
\411\ Congressional Oversight Panel, Testimony of Ron Bloom, senior
advisor, U.S. Department of the Treasury, Transcript: COP Field Hearing
on the Auto Industry, at 38 (July 27, 2009) (online at cop.senate.gov/
documents/transcript-072709-detroithearing.pdf) (hereinafter
``Transcript: Testimony of Ron Bloom'').
\412\ Id. at 38-39.
\413\ The White House, The White House Whiteboard: The Rebirth of
the American Auto Industry, at 3:15 (Nov. 18, 2010) (online at
www.whitehouse.gov/photos-and-video/video/2010/11/18/white-house-white-
board-rebirth-american-auto-industry) (hereinafter ``The White House
Whiteboard: The Rebirth of the American Auto Industry'').
---------------------------------------------------------------------------
If the success of the overall automotive rescue, and of the
government's means of implementing that program in accordance
with the principles listed in Section H.1, above, is measured
by Treasury's ability to meet its own definition of success,
the program must: (1) provide a return on investment; (2)
create or at least preserve jobs that would have otherwise been
lost; and (3) set the companies on a path toward ongoing
stability. Treasury's challenge, given its goals, lies not only
in the difficulty of the goals themselves, but also in the fact
that they may be mutually exclusive at times. For example, the
best way to improve the return on investment and shore up the
companies for the future may be to cut jobs. Also, to the
extent that these companies have conflicting interests,
Treasury may be placed in an untenable position. Historically,
GMAC/Ally Financial has had close to a monopoly position in
providing financing for GM dealers as well as a large share of
the GM consumer financing market. This position is beneficial
to GMAC/Ally Financial but not to GM and may have led to
borrowers receiving more expensive loans than they might have
obtained in a more competitive market. Treasury, as a
stakeholder in both GM and GMAC/Ally Financial, can support
neither GMAC/Ally Financial's dominant market position nor the
entrance of greater competition without potentially undermining
its investment in one company or the other. Moreover, judging
Treasury solely by its ability to meet goals it set for itself
may lead to a result that is overly favorable to Treasury. The
goals articulated by Treasury may include certain assumptions
about the proper role of government and the needs of the
American economy that are not shared by all.
As described in detail elsewhere in this report,\414\ the
likelihood that taxpayers will receive a full return of their
money depends on a variety of market factors that are
impossible to predict with perfect accuracy. A certain portion
of the funds have already been repaid, however, and the current
prospect for a significant return is more favorable than it was
as of the Panel's September 2009 report on the automotive
industry. Using Mr. Bloom's yardstick, therefore, the program
has been more successful than many had predicted.
---------------------------------------------------------------------------
\414\ See Sections D, E, and F.
---------------------------------------------------------------------------
Additional repayment at this point, however, turns in large
part on Treasury's ability to sell off its entire stake in each
company, including its sizeable remaining stake in GM. As
discussed in Sections D, E, and F, above, Treasury faces
challenges in each case. In the case of GM, Treasury still
holds a substantial share of the common stock, which it must
sell at a price approximately 64 percent above the IPO price to
realize a profit on the government's overall investment.
Investor interest in GM must therefore remain high enough to
absorb such a large number of shares. GMAC/Ally Financial faces
various uncertainties before investors are likely to welcome an
IPO. And, in the case of Chrysler, the earliest an IPO is
likely to occur is 2012, making it difficult to predict both
Treasury's ability to sell its entire stake and the amount
Treasury is likely to receive in such a sale. In any case, $3.5
billion of Treasury's investment in Chrysler has already been
written off, so even a very successful IPO is unlikely to
recoup all of the money invested in that company. Moreover, as
discussed in Section E above, Treasury holds only an 8 percent
equity stake in Chrysler and is unlikely to be able to exercise
its call option to obtain more. This leaves Treasury with a
stake that is too small either to command a control premium or
to exercise any control over the timing of the IPO. Finally, it
is not clear whether the market will have an appetite for
shares of another large American auto company soon after the GM
IPO.
The case of Chrysler Financial may provide an example of
the government forgoing potential upside in order to exit an
investment as quickly as possible. The issue is not that the
implied value of Chrysler Financial increased by 33 percent in
the seven months following the sale of Treasury's stake to
Cerberus in May 2010. The Panel acknowledges that there is no
exact science to determining the most opportune time to exit an
investment. Rather, the government's exercise of due diligence
in response to the overture from Cerberus to buy out its stake
appears to have been surprisingly limited and did not envision
other valuation scenarios for Chrysler Financial that would
involve a strategic buyer for the asset. Clearly, both Cerberus
and Chrysler Financial, on the other hand, recognized the value
in the platform and subsequently sought to maximize the value
of the business following the government's exit in preparation
for a sale to a strategic buyer.
As the Panel has discussed in earlier reports, the cost of
any program initiated under EESA cannot be measured solely by
the amount of money returned to the public coffers.\415\ The
cost must also include a calculation of the risk that the
American people assumed while the loans or investments were
outstanding.\416\ And it must include some accounting of the
potential future effects on the industry and the wider economy,
such as the heightened risk of moral hazard among American
automobile companies, or among any large corporations, leading
these companies and the market to assume that they have an
implicit guarantee from the government (i.e., that they are
``too big to fail,'' or at least will receive generous
government support to ease the bankruptcy process). Even if
such effects cannot be determined until years into the future,
their potential must be taken into account when measuring the
success of the automobile programs.
---------------------------------------------------------------------------
\415\ See, e.g., Congressional Oversight Panel, September Oversight
Report: Assessing the TARP on the Eve of Its Expiration, at 95-104
(Sept. 16, 2010) (online at cop.senate.gov/documents/cop-091610-
report.pdf).
\416\ In addition, Treasury has already written off $3.5 billion in
funds invested in the domestic automotive industry. See Figure 1.
---------------------------------------------------------------------------
It is also difficult to determine how many jobs were saved
through the government's intervention. In the aforementioned
White House video presentation, Mr. Goolsbee states that
hundreds of thousands of American workers are currently
employed at GM plants, dealerships, and auto suppliers instead
of ``going out and looking for new work.'' \417\ But, as
discussed in Sections C and D, above, GM has also shed
thousands of jobs as part of its bid to return to
profitability. It is likely true that, had the company faced a
prolonged disruption in operations as part of the bankruptcy
process, either because the company was liquidated or because
there was a significant delay in finding DIP financing, a much
larger number of GM employees, if not all, may have been laid
off.\418\ The exact number of jobs ultimately saved is
difficult to determine. For example, some of the workers
included in Mr. Goolsbee's calculation, such as those working
for suppliers, may have served customers in addition to GM and
may not have been laid off in the event of a GM liquidation. In
addition, if the rescue of the automotive industry ultimately
proves unsuccessful, then these jobs were not truly saved;
instead, unemployment for these workers was delayed at a cost
to the American taxpayers.\419\ It is likely, however, that,
had GM's bankruptcy been a more prolonged process, a larger
number of workers would likely have lost their jobs.\420\
---------------------------------------------------------------------------
\417\ The White House Whiteboard: The Rebirth of the American Auto
Industry, supra note 413, at 3:36. An earlier White House estimate
placed the figure at 1.1 million jobs saved by the entire automobile
industry rescue. George W. Bush White House Archives Fact Sheet, supra
note 12.
\418\ For a full discussion of the bankruptcy options available to
GM and Chrysler, see September 2009 Oversight Report, supra note 2.
\419\ To the extent that the rescue of the automotive industry is
viewed as a job preservation program, it is not clear that such a
program aimed solely at a single industry was the best use of funds for
this purpose. The Panel takes no position on this issue, however.
\420\ On the other hand, it should be noted that employment in the
motor vehicle and parts industry declined by 40 percent between
November 2006 and November 2010, from 1.1 million to 650,000.
---------------------------------------------------------------------------
The final issue with respect to the effectiveness of the
government's intervention is whether these companies are now on
the path to long-term stability. Because the issues that
determine long-term stability are often the same issues that
determine a company's valuation, these factors overlap
substantially with the question of whether and to what extent
Treasury may recover its investment and exit its positions in
these companies. As discussed in prior sections of this report,
GMAC/Ally Financial has been profitable for the last three
quarters, GM's earnings have increased in each of the last four
quarters, and Chrysler has been consistently repaying its
debts. GM and Chrysler nonetheless face a number of challenges.
Both are seeking additional market share in the small-car
sector, which is extremely competitive. Both must also convince
consumers that they are creating reliable, quality cars, since
their reputation in this area has been declining in recent
years.\421\ GMAC/Ally Financial must overcome its current
trouble with foreclosure irregularities, and must establish a
stable business model for automotive financing and leasing, one
that is not overly dependent on GM in light of GM's acquisition
of AmeriCredit. GMAC/Ally Financial also faces uncertainty
related to its heavy concentration in the automotive industry.
Even if the three companies' financials are relatively sound
now, the domestic automotive sector as a whole must make a
strong comeback in order for them to thrive.
---------------------------------------------------------------------------
\421\ As discussed in Sections D and E above, though, both have
made definite strides in this area.
---------------------------------------------------------------------------
4. Was Treasury Right in Establishing These Guidelines for Itself?
Treasury's determination to set and abide by its own
guidelines may be an exemplary exercise in government
restraint, or it may be an unnecessary and harmful restriction
on government in a time when government intervention was
necessary. The guidelines, to the extent that they were
followed, provided some reassurance to the markets that
Treasury's actions would be circumscribed and no more
unpredictable than those of the average private investor.
Moreover, given the public's preference for free-market
commerce instead of government-owned enterprise, the guidelines
may have assuaged some objections to Treasury's actions. They
also may have provided a check on Treasury at times when the
temptation to take more aggressive action arose and ensured
that rules established with a cooler head prevailed.
On the other hand, Treasury created certain risk for the
American people by imposing restrictions on its actions. The
American people had a large amount of money at stake in private
companies. Treasury arguably had a duty to protect those
resources to the best of its ability, and voluntarily
refraining from action could have been a way of doing less than
that. Treasury staff has said that even if one of the companies
had taken a step that, even to an industry outsider, would
appear foolhardy, Treasury would not have stepped in to prevent
the company from pursuing its plan. It does not appear that any
of the companies involved with the TARP has had any intention
of taking highly risky or questionable marketing or investment
decisions, let alone actually having done so. Hence, Treasury's
self-restraint does not seem to have ultimately had any harmful
effects in practice.
There are, however, other opportunities that may have been
lost. As discussed in the Panel's March 2010 report on GMAC/
Ally Financial, it appears that the option to merge the company
back into GM, making GMAC/Ally Financial again a captive
finance arm, was not considered, despite certain potential
advantages. The Panel has no opinion on whether merging the
companies would actually have been the correct course, but it
is disconcerting that the option was not thoroughly examined.
This lack of consideration raises questions about whether other
options that may have maximized benefits to the taxpayer were
also left unexplored due to Treasury's avowed hands-off stance.
I. Conclusions and Recommendations
The financial crisis laid bare the challenges facing the
domestic U.S. auto industry. The cumulative impact of a series
of strategic and competitive missteps over the preceding decade
came to the fore in the fall of 2008. While the Panel has
previously questioned the government's perception of its policy
choices during various stages of the crisis, there is little
doubt that in the absence of massive government assistance, GM,
Chrysler, and GMAC/Ally Financial faced the prospect of
bankruptcies and potential liquidation, given the apparent
dearth of available financing from the private sector. In the
context of a fragile economy and the financial crisis (which
severely restricted both corporate and consumer credit), the
failure of these companies could have had significant near-term
consequences in terms of job losses and the performance of the
broader U.S. economy. Although the assets of GM and Chrysler
(plants and equipment, employees, brand recognition) would have
had value to other firms over the longer term, it was in the
context of these adverse near-term consequences that both the
Bush and Obama Administrations provided assistance to the auto
sector.
The Panel takes no position on the decision to support the
auto industry, a topic addressed in our September 2009 report.
All told, the Bush and Obama Administrations provided $81.4
billion in assistance to these three companies (as well as $3.5
billion for auto suppliers). Unlike assistance to the banks,
much of the government's investment still hangs in the balance,
with 66 percent of overall assistance still outstanding.
Treasury is now on course to recover the majority of its
automotive investments within the next few years, but the
impact of its actions will reverberate for much longer.
Treasury's rescue suggested that any sufficiently large
American corporation may be considered ``too big to fail,''
broadening moral hazard risk from its TARP rescue actions
beyond the financial sector. Further, the fact that the
government helped absorb the consequences of GM's and
Chrysler's failures has put more competently managed automotive
companies at a disadvantage. Still, while the government
perhaps set a dangerous precedent of expanding the notion of
``too-big-to-fail'' to the non-financial sector, the terms on
which this support was provided offered considerably less
comfort to legacy shareholders and creditors, at least to those
of Chrysler and GM, than it did to the equity and debt holders
of rescued financial firms.
While the outlook for the return on taxpayer funds has
improved considerably over the past 12 months, there is still a
long road ahead, particularly for GMAC/Ally Financial and
Chrysler. Improving industry fundamentals--signified by GM's
recent IPO--highlight a more hospitable backdrop since the
Panel's last report on the auto sector in September 2009. This
backdrop corresponds with improved operating fundamentals, as
GM and Chrysler have shed costs and positioned themselves to
produce profits at much lower levels of output. Market shares
have generally stabilized, as has vehicle pricing since
manufacturers no longer need to offer generous incentives to
reduce overladen inventories. GMAC/Ally Financial has benefited
from an improving backdrop for mortgage assets, allowing the
firm to reduce the crushing overhang of its mortgage exposure,
as well as reverse at least a portion of prior asset write-
downs.
Against this improving backdrop, GM has reported improving
earnings in each of the past four quarters. GMAC/Ally Financial
is now in the black after reporting losses throughout 2009, and
Chrysler's performance has improved materially with the help of
its alliance with Fiat. (While operationally profitable,
interest payments on TARP loans have prevented a bottom-line
return to profitability at Chrysler.)
Treasury's calculations of potential taxpayer losses of
$14.7 billion on total assistance of $81.3 billion to these
three firms could ultimately prove conservative, but
significant risks remain, given that the amount recovered will
depend heavily on public market valuations of each firm's
shares into 2011 and beyond.\422\ Below is a brief summary of
the status of Treasury's investments in GM, Chrysler, and GMAC/
Ally Financial.
---------------------------------------------------------------------------
\422\ OFS Agency Financial Report, supra note 172, at 11; Treasury
Transactions Report, supra note 24, at 18-19.
---------------------------------------------------------------------------
GM: Of the $49.9 billion in total assistance, the
government has thus far recouped $22.7 billion.\423\ As of
December 31, 2010, the government's unsold stake is valued at
$18.4 billion, which would represent a total taxpayer loss of
$7.9 billion.
---------------------------------------------------------------------------
\423\ Total funds recovered to date excludes dividends and interest
of $766 million paid to Treasury through December 31, 2010.
---------------------------------------------------------------------------
Chrysler: Only $2.2 billion in total assistance
has been recouped,\424\ and $3.5 billion in loans are
considered a loss. However, the improved financial performance
of the company indicates that Treasury's remaining loans to
Chrysler may in fact be ultimately recovered. As discussed in
Section E, for the government to recoup losses already incurred
to Old Chrysler, the equity value of a potential IPO would have
to exceed $14.5 billion.\425\
---------------------------------------------------------------------------
\424\ Total funds recovered to date excludes interest of $580
million paid to Treasury through December 31, 2010.
\425\ Certain assumptions apply to this estimate. See Section E.3
for a fuller discussion.
---------------------------------------------------------------------------
GMAC/Ally Financial: Significant equity
investments in GMAC/Ally Financial imply greater risk and more
uncertainty in the lead-up to a potential IPO in 2011, although
the improved operating performance--similar to that of GM and
Chrysler--bodes well for a meaningful return on the $17.2
billion in total assistance to GMAC/Ally Financial. This being
said, GMAC/Ally Financial is now the last TARP recipient
standing--after the accelerated Citigroup exit and recent
announcements about exiting AIG--for which the government has
control of its exit and not articulated a clear exit strategy.
These rescue efforts by the government employed
differentiated strategies with varying levels of risk to the
taxpayer. While GM and Chrysler were put through bankruptcy,
GMAC/Ally Financial was not, to the relative benefit of its
legacy shareholders and creditors. Whereas the government
shouldered the entire rescue of GM, it enlisted Fiat as a
partner for Chrysler, which is a smaller and less economically
significant automobile manufacturer than GM.
While the Panel has outlined various scenarios that could
see taxpayers recover a meaningful amount of this assistance
over the next two years, the financial returns on these
investments do not tell the entire story and should not
overshadow the Administration's broader objectives in providing
assistance to the auto industry.
Unlike the intervention in the financial sector, the
government in this case sought a broad restructuring of the
underlying industry, and it was able to pursue this objective
given its controlling stake in some of the impacted companies.
Given the broader restructuring aims--as well as countering the
threat of imminent and massive job losses--it is perhaps not
surprising that the government has offered various benchmarks
beyond a strict tally of the full return of the taxpayer's
assistance to measure its success in this endeavor. While
senior Treasury advisor Ronald Bloom once defined success
solely in monetary terms--``the greater percentage of the money
that we invested that we get back, the greater success''
\426\--on other occasions Mr. Bloom and others in the
Administration have cited the dual mandates of jobs
preservation and effecting lasting fundamental reform of the
auto sector.
---------------------------------------------------------------------------
\426\ Transcript: Testimony of Ron Bloom, supra note 411, at 38.
---------------------------------------------------------------------------
As outlined in this report, there are examples of
conflict--some inevitable, others not--between Treasury's core
principles. In particular, the government has sought to present
a consistent narrative of its role as a reluctant shareholder.
In the case of GMAC/Ally Financial, transparency that would
illustrate the unique circumstances of specific investments and
explain certain actions by Treasury has sometimes been
sacrificed in favor of retaining the appearance of a consistent
narrative. This unnecessarily undermines the spirit of
transparency critical to the effectiveness of the TARP.
Another recent example of this conflict between Treasury's
principles involves Chrysler Financial, where meaningful
incremental taxpayer returns appear to have been sacrificed in
favor of an unnecessarily accelerated exit, further compounded
by apparently questionable due diligence. The Panel notes that
questions stemming from this transaction are not motivated by
the fact that seven months following Treasury's exit, Chrysler
Financial sold at a price that was 33 percent higher than the
value of the company implied by Treasury's settlement price.
Rather, the government's due diligence on the sale of its stake
to Cerberus was surprisingly limited in scope. Treasury focused
on the merits of the offer at hand and apparently neglected to
contemplate more favorable valuation scenarios that may have
resulted from a competitive bidding process of eager strategic
buyers looking to acquire and invest in the Chrysler Financial
platform. Given the apparent success of the longer-term
investment mindset that has characterized the government's
management of its AIG and GMAC/Ally Financial investments,
Treasury's haste to exit Chrysler Financial is perplexing.
A final tally on the return of taxpayer assistance and a
report card on longer-term reform efforts remain premature.
Early returns indicate that the government's intervention in
the auto sector--leaving aside any assessment of the relative
merits of providing that assistance in the first place--has
been surprisingly successful, both in terms of financial
returns from assistance and the rebound in the companies'
performance. The Panel notes that GM and Chrysler are now
adding jobs after their initial downsizings. However, as noted,
a more robust scorecard, one that weighs the positives from
government intervention, such as the near-term preservation of
jobs and prevention of a deeper contraction in the economy,
versus the negatives, including the investment of substantial
taxpayer dollars and the precedent set by government
intervention into the private sector, is required to evaluate
fully the government's actions. Nonetheless, this longer-term
assessment should not obscure the near-term focus on recovering
as much value as possible for the taxpayer. At the same time,
the Panel recognizes that absent sustainable reform that
produces a smaller auto industry subject to the discipline of
the private capital markets, improved returns on taxpayer
assistance could mask longer-term risks.
Likewise, the relatively improved outlook should not
overshadow serious questions that prevent a more transparent
assessment of the government's efforts. These questions arise
from the fact that, having intervened on a massive scale and
outlined sweeping mandates for the reform of the industry, the
government--by its own account--then chose largely to retreat
to the sidelines, performing run-of-the-mill oversight of its
investments and leaving the heavy lifting to the government's
designees on the companies' boards of directors.
Treasury has consistently (and often vociferously) asserted
that it will not interfere or otherwise seek to influence the
strategic management of the companies in which it holds a
stake. The Panel recognizes the importance of a hands-off
approach to day-to-day business operations and recognizes that
crossing this line in certain instances can raise troubling
questions regarding the government's role in the private
sector. However, many would argue that this line had long since
been crossed, given the government's initial decision to
provide assistance to the auto industry, and to pretend
otherwise today begs credulity.
In the case of GMAC/Ally Financial, the Panel recommended
previously that Treasury explore the possibility of value-
enhancing strategic arrangements that would seek to maximize
the government's aggregate stake in both GM and GMAC/Ally
Financial. Subsequently, rather than seeking a closer
relationship with GMAC/Ally Financial, GM has chosen to build
its own auto financing subsidiary via the acquisition of
AmeriCredit. While such a move may seemingly make strategic
sense for GM, it is not clear if the value to the government,
as a shareholder in GM, outstrips the potential negative impact
of this acquisition to the government's stake in GMAC/Ally
Financial. Treasury's deliberate refusal to take a portfolio
investment approach to managing its holdings across the auto
sector appears to be inconsistent with the rationale for its
decision to rescue GMAC/Ally Financial, which was to help GM
continue to finance car sales, particularly to its dealership
network.\427\
---------------------------------------------------------------------------
\427\ A similar portfolio analysis might have been undertaken at
the time of the initial decision to rescue Chrysler, exploring the
alternative of letting Chrysler fail in order to bolster the prospects
of the remaining domestic auto manufacturers, particularly GM.
---------------------------------------------------------------------------
The Panel recognizes two potential positive developments
from Treasury's hands-off approach. Namely, GM's efforts to
establish its own captive auto finance subsidiary will likely
improve the competitive dynamics in this market by reducing the
company's reliance on GMAC/Ally Financial. Further, any
residual moral hazard in the marketplace related to the
perception that GMAC/Ally Financial is too interconnected with
GM to be allowed to fail would likely be mitigated by GM's
development of its own captive financing subsidiary.
The Panel makes the following recommendations:
The Administration should enhance disclosure in
the budget and financial statements for the TARP by reporting
on the valuation assumptions (``credit reform'' subsidy rates)
for the individual companies included in the overall subsidy
rate for the AIFP.
The Panel recognizes that it is in the private
sector's and the government's interest for Treasury to exit its
investments as soon as practicable. However, Treasury should be
cognizant that this may not in all instances be in the
taxpayer's best interest. The Panel urges Treasury to consult
independent third parties to assess these determinations in the
future to identify instances where a longer investment horizon
may meaningfully improve the outlook for the taxpayer's return
on its investment.
Treasury sought to assure the Panel during its
February 2010 hearing on GMAC/Ally Financial that legacy
private sector stakeholders in the company would not see any
return until and if the U.S. taxpayer recoups its entire
investment. The Panel recommends that Treasury expand on this
assertion, clarifying its approach to the treatment of legacy
shareholders in GMAC/Ally Financial as the government's exit
plan moves forward. Aside from the consequences to the
taxpayer's interest, clarifying the treatment of legacy
shareholders will help preserve market discipline going
forward.
Given the scale of government intervention and
the desire not to repeat this episode, it may be in the
taxpayer's interest that Congress commission independent
researchers to periodically assess the long-term fallout from
the collapse of the auto industry and the subsequent government
intervention, including the risk to taxpayers stemming from
future disruptions to the auto market from economic, credit
market or other potential threats. Related to these efforts,
Congress should also follow up by contracting with independent
researchers and market analysts to develop more credible
estimates of the impact of the bailout of GM, GMAC/Ally
Financial, and Chrysler on economic performance and employment.
SECTION TWO: ADDITIONAL VIEWS
A. J. Mark McWatters and Professor Kenneth R. Troske
We concur with the issuance of the January report and offer
the additional observations below. We appreciate the efforts
the Panel and staff made incorporating our suggestions offered
during the drafting of the report.
We wish to make the following points.
In the closing days of 2008 when GM, Chrysler,
and GMAC/Ally Financial faltered, the American taxpayers--not
the Department of Treasury--stood as the last safe-haven for
these distressed institutions. In return for their generosity
the CBO estimates that the taxpayers stand to lose
approximately $19 billion on their investments.\428\ This is
real money, enough to finance the construction of over four
Nimitz-class aircraft carriers (at $4.5 billion each) or fund
approximately 25 years of NIH-sponsored breast cancer research
(at $765 million per year).\429\
---------------------------------------------------------------------------
\428\ See Congressional Budget Office, Report on the Troubled Asset
Relief Program--November 2010, at 5 (Nov. 18, 2010) (online at
www.cbo.gov/ftpdocs/119xx/doc11980/11-29-TARP.pdf).
\429\ See U.S. Navy, Fact File: Aircraft Carriers (online at
www.navy.mil/navydata/fact_display.asp?cid=4200&tid=200&ct=4) (accessed
Jan. 12, 2011); U.S. Department of Health and Human Services, National
Institutes of Health, Estimates of Funding for Various Research,
Condition and Disease Categories (RCDC) (Feb. 1, 2010) (online at
report.nih.gov/rcdc/
categories/).
---------------------------------------------------------------------------
Treasury's primary role in the restructuring of
GM, Chrysler, and GMAC/Ally Financial was to act as a funding
conduit for the taxpayer sourced capital infusions. These
institutions have, not surprisingly, performed reasonably well
over the past several months due to the strength of their
foreign markets, the recovery of their domestic markets, the
replacement of their directors and senior management, the de-
leveraging of their balance sheets, the renegotiation of their
collective bargaining agreements, the recovery of the capital
markets, the tepid recovery of the general economy, and, of
course, the ``gift'' of $19 billion or so of taxpayer funds. It
remains to be seen, however, if these companies can remain on
the path to financial recovery and independence from taxpayer-
sourced subsidies.
The Panel concludes in the report: ``there is
little doubt that in the absence of massive government
assistance, GM, Chrysler, and GMAC/Ally Financial faced the
prospect of bankruptcies and potential liquidation.'' \430\
---------------------------------------------------------------------------
\430\ See Section I, supra.
---------------------------------------------------------------------------
While bankruptcy did follow for GM and Chrysler and
probably should have followed for GMAC/Ally Financial,
we remain skeptical that the companies would have been
liquidated and sold off for scrap value absent direct
intervention by the government. The brisk turn-around
of the three institutions over the past two years
indicates that even in the last quarter of 2008
substantial inherent value existed within each company.
Despite claims to the contrary, we still have trouble
concluding that Chevrolet, Cadillac, Buick, GMC trucks,
and Jeep, as well as GMAC/Ally Financial's auto finance
business, among others, were worth next to nothing in
the closing days of 2008 and, but for the taxpayer-
funded bailouts, would have failed and left hundreds of
thousands temporarily unemployed. It would have been
preferable for these institutions to have been
reorganized by private sector participants, with,
perhaps, debtor-in-possession financing guaranteed to a
limited extent by the government. It is difficult to
accept that private sector strategic buyers, private
equity firms, hedge funds, and sovereign wealth funds
were not willing and able to orchestrate the successful
reorganizations or restructurings of the three
distressed companies. Once the government entered the
picture and signaled its intent to bail out the
institutions with its unlimited taxpayer-financed
checkbook, it is hardly surprising that private sector
participants demurred. Under such circumstances, it is
not possible for even the most sophisticated,
motivated, and financially secure of private sector
firms to prevail.
The Panel states in the report:
Treasury is now on course to recover the
majority of its automotive investments within
the next few years, but the impact of its
actions will reverberate for much longer.
Treasury's rescue suggested that any
sufficiently large American corporation--even
if it is not a bank--may be considered ``too
big to fail,'' creating a risk that moral
hazard will infect areas of the economy far
beyond the financial system. Further, the fact
that the government helped absorb the
consequences of GM's and Chrysler's failures
has put more competently managed automotive
companies at a disadvantage. For these reasons,
the effects of Treasury's intervention will
linger long after taxpayers have sold their
last share of stock in the automotive
industry.\431\
---------------------------------------------------------------------------
\431\ See Section I, supra.
---------------------------------------------------------------------------
The Panel states in the report:
These favorable events, however, must be
thoughtfully balanced against the moral hazard
risks created by the taxpayer's bailout of the
three institutions and the ongoing implicit
guarantee of the government. By bailing out GM,
Chrysler, and GMAC/Ally Financial, the
government sent a powerful message to the
marketplace--some institutions will be
protected at all cost, while others must
prosper or fail based upon their own business
judgment and acumen. We regret that Treasury
has focused solely on the apparent success of
the GM IPO in assessing the rescues of the
three institutions to the distinct exclusion of
the moral hazard risks arising from the
bailouts.\432\
---------------------------------------------------------------------------
\432\ See Section A, supra.
---------------------------------------------------------------------------
The Panel also states in the report:
As the Panel has discussed in earlier reports,
the cost of any program initiated under EESA
cannot be measured solely by the amount of
money returned to the public coffers. The cost
must also include a calculation of the risk
that the American people assumed while the
loans or investments were outstanding. And it
must include some accounting of the potential
future effects on the industry and the wider
economy, such as the heightened risk of moral
hazard among American automobile companies, or
among any large corporations, leading these
companies and the market to assume that they
have an implicit guarantee from the government
(i.e., that they are ``too big to fail,'' or at
least will receive generous government support
to ease the bankruptcy process). Even if such
effects cannot be determined until years into
the future, their potential must be taken into
account when measuring the success of the
automobile programs.\433\
---------------------------------------------------------------------------
\433\ See Section H.3, supra.
In our view, the above passages represent the most
significant analysis provided in the report. The TARP
has all but created an expectation, if not an emerging
sense of entitlement, that certain financial and non-
financial institutions are simply ``too-big-or-too-
interconnected-to-fail'' and that the government will
promptly honor the implicit guarantee issued for the
benefit of any such institution that suffers a reversal
of fortune. This is the enduring legacy of the TARP.
Unfortunately, by offering a strong safety net funded
with unlimited taxpayer resources, the government has
encouraged potential recipients of such largess to
undertake inappropriately risky behavior secure in the
conviction that all profits from their endeavors will
inure to their benefit and that large losses will fall
to the taxpayers. The placement of a government
sanctioned thumb-on-the-scales corrupts the fundamental
tenets of a market economy--the ability to prosper and
---------------------------------------------------------------------------
the ability to fail.
Following the bailouts of GM, Chrysler, and GMAC/Ally
Financial and the potential loss of $19 billion or more
of taxpayer-sourced funds, is it realistic to expect
that the government will permit these companies to fail
the next time around? We have our doubts. More
significantly, the directors, managers, and employees
of these institutions most likely appreciate the
benefits afforded by the government's implicit
guarantee, but it remains to be seen whether they also
appreciate the attendant moral hazard risks.
Although not the subject of this report, we would
be remiss if we did not note that commentators have questioned
the treatment of certain classes of creditors in the GM and
Chrysler bankruptcies as well as certain procedures adopted by
and rulings of the bankruptcy courts.\434\
---------------------------------------------------------------------------
\434\ See September 2009 Oversight Report, supra note 2, at 148
(from the Additional Views of former Panel member Congressman Jeb
Hensarling).
Regarding this matter, Barry E. Adler, the Petrie
Professor of Law and Business, New York University,
---------------------------------------------------------------------------
offered the following testimony to the Panel:
The rapid disposition of Chrysler in Chapter 11
was formally structured as a sale under
Sec. 363 of the Bankruptcy Code. While that
provision does, under some conditions, permit
the sale of a debtor's assets, free and clear
of any interest in them, the sale in Chrysler
was irregular and inconsistent with the
principles that undergird the Code.
The most notable irregularity of the Chrysler
sale was that the assets were not sold free and
clear . . . That is, money that might have been
available to repay these secured creditors was
withheld by the purchaser to satisfy unsecured
obligations owed the UAW. Thus, the sale of
Chrysler's assets was not merely a sale, but
also a distribution--one might call it a
diversion--of the sale proceeds seemingly
inconsistent with contractual priority among
the creditors.
Given the constraint on bids, it is conceivable
that the liquidation value of Chrysler's assets
exceeded the company's going-concern value but
that no liquidation bidder came forward because
the assumed liabilities--combined with the
government's determination to have the company
stay in business--made a challenge to the
favored sale unprofitable, particularly in the
short time frame afforded. It is also possible
that, but for the restrictions, there might
have been a higher bid for the company as a
going concern, perhaps in anticipation of
striking a better deal with workers. Thus, the
approved sale may not have fetched the best
price for the Chrysler assets. That is, the
diversion of sales proceeds to the assumed
liabilities may have been greater than the
government's subsidy of the transaction, if
any, in which case the secured creditors would
have suffered a loss of priority for their
claims. There is nothing in the Bankruptcy Code
that allows a sale for less than fair value
simply because the circumstances benefit a
favored group of creditors.\435\
---------------------------------------------------------------------------
\435\ Congressional Oversight Panel, Written Testimony of Barry E.
Adler, Charles Seligson Professor of Law, New York University School of
Law, COP Field Hearing on the Auto Industry, at 2-3 (July 27, 2009)
(online at cop.senate.gov/documents/testimony-072709-adler.pdf).
---------------------------------------------------------------------------
In addition, with respect to the bailout of GMAC/Ally
Financial, the Panel offered the following observations
in its March 2010 report:
Although the Panel takes no position on whether
Treasury should have rescued GMAC, it finds
that Treasury missed opportunities to increase
accountability and better protect taxpayers'
money. Treasury did not, for example, condition
access to TARP money on the same sweeping
changes that it required from GM and Chrysler:
it did not wipe out GMAC's equity holders; nor
did it require GMAC to create a viable plan for
returning to profitability; nor did it require
a detailed, public explanation of how the
company would use taxpayer funds to increase
consumer lending.
Moreover, the Panel remains unconvinced that
bankruptcy was not a viable option in 2008. In
connection with the Chrysler and GM
bankruptcies, Treasury might have been able to
orchestrate a strategic bankruptcy for GMAC.
This bankruptcy could have preserved GMAC's
automotive lending functions while winding down
its other, less significant operations, dealing
with the ongoing liabilities of the mortgage
lending operations, and putting the company on
sounder economic footing. The Panel is also
concerned that Treasury has not given due
consideration to the possibility of merging
GMAC back into GM, a step which would restore
GM's financing operations to the model
generally shared by other automotive
manufacturers, thus strengthening GM and
eliminating other money-losing operations.\436\
---------------------------------------------------------------------------
\436\ March 2010 Oversight Report, supra note 22, at 4. See also
id. at 122 (from the Additional Views of Panel member J. Mark McWatters
and former Panel member Paul S. Atkins).
SECTION THREE: TARP UPDATES SINCE LAST REPORT
A. Ally Financial Mandatory Convertible Preferred Exchange to Common
Stock
On December 30, 2010, Treasury converted $5.5 billion of
its total convertible preferred stock in GMAC/Ally Financial
into 531,850 shares of common stock of the company, following
the terms of conversion. Treasury currently holds $5.9 billion
of GMAC/Ally Financial's convertible preferred stock, $2.7
billion in Trust Preferred securities, and 73.8 percent of the
common stock.
B. Metrics
Each month, the Panel's report highlights a number of
metrics that the Panel and others, including Treasury, the
Government Accountability Office (GAO), the Special Inspector
General for the Troubled Asset Relief Program (SIGTARP), and
the Financial Stability Oversight Board, consider useful in
assessing the effectiveness of the Administration's efforts to
restore financial stability and accomplish the goals of EESA.
This section discusses changes that have occurred in several
indicators since the release of the Panel's December 2010
report.
1. Financial Indices
Financial Stress. The St. Louis Financial Stress Index, a
proxy for financial stress in the U.S. economy, has decreased
by more than half since the Panel's December 2010 report. The
index has decreased more than 80 percent since its post-crisis
peak in June 2010. Furthermore, the recent trend in the index
suggests that financial stress continues moving toward its
long-run norm. The index has decreased by more than four
standard deviations since EESA was enacted in October 2008.
FIGURE 27: ST. LOUIS FEDERAL RESERVE FINANCIAL STRESS INDEX \437\
---------------------------------------------------------------------------
\437\ Federal Reserve Bank of St. Louis, Series STLFSI: Business/
Fiscal: Other Economic Indicators (Instrument: St. Louis Financial
Stress Index, Frequency: Weekly) (online at research.stlouisfed.org/
fred2/series/STLFSI) (accessed Jan. 3, 2011). The index includes 18
weekly data series, beginning in December 1993 to the present. The
series are: effective federal funds rate, 2-year Treasury, 10-year
Treasury, 30-year Treasury, Baa-rated corporate, Merrill Lynch High
Yield Corporate Master II Index, Merrill Lynch Asset-Backed Master BBB-
rated, 10-year Treasury minus 3-month Treasury, Corporate Baa-rated
bond minus 10-year Treasury, Merrill Lynch High Yield Corporate Master
II Index minus 10-year Treasury, 3-month LIBOR-OIS spread, 3-month TED
spread, 3-month commercial paper minus 3-month Treasury, the J.P.
Morgan Emerging Markets Bond Index Plus, Chicago Board Options Exchange
Market Volatility Index, Merrill Lynch Bond Market Volatility Index (1-
month), 10-year nominal Treasury yield minus 10-year Treasury Inflation
Protected Security yield, and Vanguard Financials Exchange-Traded Fund
(equities). The index is constructed using principal components
analysis after the data series are de-meaned and divided by their
respective standard deviations to make them comparable units. The
standard deviation of the index is set to 1. For more details on the
construction of this index, see Federal Reserve Bank of St. Louis,
National Economic Trends Appendix: The St. Louis Fed's Financial Stress
Index (Jan. 2010) (online at research.stlouisfed.org/publications/net/
NETJan2010Appendix.pdf).
[GRAPHIC] [TIFF OMITTED] T3381.021
Stock Market Volatility. Stock market volatility, as
measured by the Chicago Board Options Exchange Volatility Index
(VIX), continues to decrease. The VIX has fallen by more than
half since its post-crisis peak in May 2010 and has declined 18
percent since the Panel's December 2010 report. As of January
3, 2011, volatility was 13 percent higher than its post-crisis
low on April 12, 2010.
FIGURE 28: CHICAGO BOARD OPTIONS EXCHANGE VOLATILITY INDEX \438\
---------------------------------------------------------------------------
\438\ Data accessed through Bloomberg Data Service (Jan. 3, 2011).
The CBOE VIX is a key measure of market expectations of near-term
volatility. Chicago Board Options Exchange, The CBOE Volatility Index--
VIX, 2009 (online at www.cboe.com/micro/vix/vixwhite.pdf) (accessed
Jan. 3, 2011).
[GRAPHIC] [TIFF OMITTED] T3381.022
Interest Rates. As of January 3, 2011, the 3-month and 1-
month London Interbank Offer Rates (LIBOR), the prices at which
banks lend and borrow from each other, were 0.30 and 0.26,
respectively.\439\ Both rates have decreased slightly since the
Panel's December 2010 report. The 3-month and 1-month LIBOR
remain below their post-crisis highs in June 2010. Over the
longer term, interest rates remain extremely low relative to
pre-crisis levels, reflecting the impact of the actions of
central banks and institutions' perceptions of reduced risk in
lending to other banks.
---------------------------------------------------------------------------
\439\ Data accessed through Bloomberg Data Service (Jan. 3, 2011).
FIGURE 29: 3-MONTH AND 1-MONTH LIBOR RATES (AS OF JANUARY 3, 2011)
------------------------------------------------------------------------
Percent Change from Data
Indicator Current Available at Time of Last
Rates Report (12/1/2010)
------------------------------------------------------------------------
3-Month LIBOR \440\.......... 0.30 (0.2)
1-Month LIBOR \441\.......... 0.26 (1.8)
------------------------------------------------------------------------
\440\ Data accessed through Bloomberg Data Service (Jan. 3, 2011).
\441\ Data accessed through Bloomberg Data Service (Jan. 3, 2011).
Interest Rate Spreads. As of January 3, 2011, the
conventional mortgage rate spread, which measures the
difference between 30-year mortgage rates and 10-year Treasury
bond yields, decreased by 8 percent since the Panel's December
2010 report.\442\ The TED spread, which captures the difference
between the 3-month LIBOR and the 3-month Treasury bill rates,
serves as an indicator for perceived risk in the financial
markets.\443\ As of January 3, 2011, the spread was 18.3 basis
points, increasing almost 30 percent in December.
---------------------------------------------------------------------------
\442\ Board of Governors of the Federal Reserve System, Federal
Reserve Statistical Release H.15: Selected Interest Rates: Historical
Data (Instrument: Conventional Mortgages, Frequency: Weekly) (online at
www.federalreserve.gov/releases/h15/data/Weekly_Thursday_/
H15_MORTG_NA.txt) (accessed Jan. 3, 2011) (hereinafter ``Federal
Reserve Statistical Release H.15''); Federal Reserve Bank of St. Louis,
Series DGS10: Interest Rates: Treasury Constant Maturity (Instrument:
10-Year Treasury Constant Maturity Rate, Frequency: Daily) (online at
research.stlouisfed.org/fred2/series/DGS10) (accessed Jan. 3, 2011).
\443\ Federal Reserve Bank of Minneapolis, Measuring Perceived
Risk--The TED Spread (Dec. 2008) (online at www.minneapolisfed.org/
publications_papers/pub_display.cfm?id=4120).
---------------------------------------------------------------------------
The LIBOR-OIS (Overnight Index Swap) spread serves as a
metric for the health of the banking system, reflecting what
banks believe to be the risk of default associated with
interbank lending.\444\ The spread increased over threefold
from early April to July 2010, before falling in mid-July.\445\
The LIBOR-OIS spread grew approximately 13 percent since the
Panel's December 2010 report. The decrease in both the LIBOR-
OIS spread and the TED spread from the middle of 2010 suggests
that hesitation among banks to lend to counterparties has
receded. As shown in Figures 30 and 31 below, these spreads
remain below pre-crisis levels.
---------------------------------------------------------------------------
\444\ Federal Reserve Bank of St. Louis, What the LIBOR-OIS Spread
Says (May 11, 2009) (online at research.stlouisfed.org/publications/es/
09/ES0924.pdf).
\445\ Data accessed through Bloomberg Data Service (Jan. 3, 2011).
---------------------------------------------------------------------------
FIGURE 30: TED SPREAD \446\
---------------------------------------------------------------------------
\446\ Data accessed through Bloomberg Data Service (Jan. 3, 2011).
[GRAPHIC] [TIFF OMITTED] T3381.023
FIGURE 31: LIBOR-OIS SPREAD \447\
---------------------------------------------------------------------------
\447\ Data accessed through Bloomberg Data Service (Jan. 3, 2011).
[GRAPHIC] [TIFF OMITTED] T3381.024
The interest rate spread on AA asset-backed commercial
paper, which is considered mid-investment grade, decreased by
almost 20 percent since the Panel's December 2010 report. The
interest rate spread on A2/P2 commercial paper, a lower grade
investment than AA asset-backed commercial paper, increased by
approximately 10 percent. Both interest rate spreads remain
below pre-crisis levels.
FIGURE 32: INTEREST RATE SPREADS (AS OF JANUARY 3, 2011)
------------------------------------------------------------------------
Percent Change
Indicator Current Since Last Report
Spread (12/1/2010)
------------------------------------------------------------------------
Conventional mortgage rate spread 1.44 (7.7)
\448\................................
TED Spread (basis points)............. 18.28 27.5
Overnight AA asset-backed commercial 0.06 (19.4)
paper interest rate spread \449\.....
Overnight A2/P2 nonfinancial 0.14 9.7
commercial paper interest rate spread
\450\................................
------------------------------------------------------------------------
\448\ Federal Reserve Statistical Release H.15, supra note 442; Board of
Governors of the Federal Reserve System, Federal Reserve Statistical
Release H.15: Selected Interest Rates: Historical Data (Instrument:
U.S. Government Securities/Treasury Constant Maturities/Nominal 10-
Year, Frequency: Weekly) (online at www.federalreserve.gov/releases/
h15/data/Weekly_Friday_/H15_TCMNOM_Y10.txt) (accessed Jan. 3, 2011).
\449\ The overnight AA asset-backed commercial paper interest rate
spread reflects the difference between the AA asset-backed commercial
paper discount rate and the AA nonfinancial commercial paper discount
rate. Board of Governors of the Federal Reserve System, Federal
Reserve Statistical Release: Commercial Paper Rates and Outstandings:
Data Download Program (Instrument: AA Asset-Backed Discount Rate,
Frequency: Daily) (online at www.federalreserve.gov/DataDownload/
Choose.aspx?rel=CP) (accessed Jan. 3, 2011); Board of Governors of the
Federal Reserve System, Federal Reserve Statistical Release:
Commercial Paper Rates and Outstandings: Data Download Program
(Instrument: AA Nonfinancial Discount Rate, Frequency: Daily) (online
at www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed
Jan. 3, 2011). In order to provide a more complete comparison, this
metric utilizes the average of the interest rate spread for the last
five days of December.
\450\ The overnight A2/P2 nonfinancial commercial paper interest rate
spread reflects the difference between the A2/P2 nonfinancial
commercial paper discount rate and the AA nonfinancial commercial
paper discount rate. Board of Governors of the Federal Reserve System,
Federal Reserve Statistical Release: Commercial Paper Rates and
Outstandings: Data Download Program (Instrument: A2/P2 Nonfinancial
Discount Rate, Frequency: Daily) (online at www.federalreserve.gov/
DataDownload/Choose.aspx?rel=CP) (accessed Jan. 3, 2011); Board of
Governors of the Federal Reserve System, Federal Reserve Statistical
Release: Commercial Paper Rates and Outstandings: Data Download
Program (Instrument: AA Nonfinancial Discount Rate, Frequency: Daily)
(online at www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP)
(accessed Jan. 3, 2011). In order to provide a more complete
comparison, this metric utilizes the average of the interest rate
spread for the last five days of December.
Corporate Bonds. The spread between Moody's Baa Corporate
Bond Yield Index and 30-year constant maturity U.S. Treasury
Bond, which indicates the difference in perceived risk between
corporate and government bonds, doubled from late April to mid-
June 2010. During December, the spread declined approximately
10 percent, and has fallen almost 30 percent since its post-
crisis peak in mid-June. The declining spread could indicate
waning concerns about the riskiness of corporate bonds.
FIGURE 33: MOODY'S BAA CORPORATE BOND INDEX AND 30-YEAR U.S. TREASURY
YIELD \451\
---------------------------------------------------------------------------
\451\ Federal Reserve Bank of St. Louis, Series DGS30: Selected
Interest Rates (Instrument: 30-Year Treasury Constant Maturity Rate,
Frequency: Daily) (online at research.stlouisfed.org/fred2/
release?rid=18) (accessed Jan. 3, 2011). Corporate Baa rate data
accessed through Bloomberg data service (Jan. 3, 2011).
[GRAPHIC] [TIFF OMITTED] T3381.025
2. Bank Conditions
Net Charge-Offs and Nonperforming Loan Rates. Data on net
charge-offs and nonperforming loans are beginning to reflect
stabilizing loan quality in domestic banks. Net loan charge-
offs represented 2.8 percent of all loans at the end of the
third quarter of 2010, falling 10 percent from the first
quarter of 2010. Nonperforming loans as a percentage of all
commercial bank loans have also declined. Nonperforming loans
include loans that are in default for 90 or more days and
nonaccrual loans.\452\ Since the beginning of 2010, this
percentage has fallen from 5.6 percent to 5.2 percent at the
end of the third quarter of 2010.
---------------------------------------------------------------------------
\452\ Loans in nonaccrual status include those that are: (a)
maintained on a cash basis because of deterioration in the financial
condition of the borrower; (b) full payment of principal or interest is
not expected; or (c) principal or interest has been in default for 90
or more days. Federal Deposit Insurance Corporation, Schedule RC-N--
Past Due and Nonaccrual Loans, Leases, and Other Assets, at 2 (online
at www.fdic.gov/regulations/resources/call/crinst/2008-03/308RC-
N032808.pdf).
---------------------------------------------------------------------------
Despite the recent decline, these two percentages remain
well above their respective levels in October 2008. At the
time, total net loan charge-offs accounted for only 1.2 percent
of all loans, and nonperforming loans represented 2.3 percent
of all loans.
FIGURE 34: NET LOAN CHARGE-OFFS AS A PERCENTAGE OF TOTAL LOANS (AS OF
Q3 2010) \453\
---------------------------------------------------------------------------
\453\ Federal Reserve Bank of St. Louis, Condition of Banking:
Total Net Loan Charge-offs (online at research.stlouisfed.org/fred2/
series/NCOTOT/downloaddata?cid=93) (accessed Jan. 3, 2011).
[GRAPHIC] [TIFF OMITTED] T3381.026
FIGURE 35: NONPERFORMING LOANS AS A PERCENTAGE OF TOTAL LOANS (AS OF Q3
2010) \454\
---------------------------------------------------------------------------
\454\ Federal Reserve Bank of St. Louis, Condition of Banking:
Nonperforming Loans (Past Due 90+ Days Plus Nonaccrual)/Total Loans for
All U.S. Banks (online at research.stlouisfed.org/fred2/series/
USNPTL?cid=93) (accessed Jan. 3, 2011).
[GRAPHIC] [TIFF OMITTED] T3381.027
Bank Failures. In 2010, a total of 157 banks failed and
were placed into receivership, with eight institutions failing
in December. Despite exceeding the total number of bank
failures for 2009, banks that failed in 2010 had $92.1 billion
in total assets, which represents approximately half of the
total assets of failed institutions in 2009.\455\ Most failures
in 2010 involved institutions that held less than $10 billion
in assets.
---------------------------------------------------------------------------
\455\ Federal Deposit Insurance Corporation, Failures & Assistance
Transactions (online at www2.fdic.gov/hsob/SelectRpt.asp?EntryTyp=30)
(accessed Jan. 3, 2011) (hereinafter ``FDIC Failures & Assistance
Transactions'').
---------------------------------------------------------------------------
FIGURE 36: BANK FAILURES AS A PERCENTAGE OF TOTAL BANKS AND BANK
FAILURES BY TOTAL ASSETS (1990-2010) \456\
---------------------------------------------------------------------------
\456\ The disparity between the number of and total assets of
failed banks in 2008 is driven primarily by the failure of Washington
Mutual Bank, which held $307 billion in assets. The 2010 year-to-date
percentage of bank failures includes failures through December. The
total number of FDIC-insured institutions as of September 30, 2010 is
7,760 commercial banks and savings institutions, which represents a
quarter-over-quarter decline of 70 institutions and a decrease of 624
institutions since the end of the third quarter of 2008. Furthermore,
there are currently 860 institutions on the FDIC's ``Problem List.''
FDIC Failures & Assistance Transactions, supra note 455; Federal
Deposit Insurance Corporation, Quarterly Banking Profile, Third Quarter
2010: Statistics At A Glance, at 5 (online at www.fdic.gov/bank/
statistical/stats/2010sep/industry.pdf) (accessed Jan. 3, 2011). Asset
totals have been converted into 2005 dollars using the GDP implicit
price deflator. The quarterly values were averaged into a yearly value.
FDIC Failures & Assistance Transactions, supra note 455.
[GRAPHIC] [TIFF OMITTED] T3381.028
3. Housing Indices
Home Sales. Both new and existing home sales saw a month-
over-month increase in November 2010, increasing 2 percent
during the month. New home sales, as measured by the U.S.
Census Bureau, increased 2 percent to 290,000 during the month.
With respect to existing home sales, the National Association
of Realtors estimates a 6 percent month-over-month increase in
November, to an annual rate of 4.4 million homes sold. Although
existing home sales in November remain below the ten-year
historical average, current levels are above the July 2010
level, when existing home sales reached their lowest point in
more than a decade.
FIGURE 37: NEW AND EXISTING HOME SALES (2000-2010) \457\
---------------------------------------------------------------------------
\457\ Data accessed through Bloomberg Data Service (Jan. 3, 2011).
Spikes in both new and existing home sales in January 2009 and November
2009 correlate with the tax credits extended to first-time and repeat
home buyers during these periods. After both tax credits were
extinguished on April 30, 2010, existing home sales dropped to 3.8
million homes in July, their lowest level in a decade. National
Association of Realtors, July Existing-Home Sales Fall as Expected but
Prices Rise (Aug. 24, 2010) (online at www.realtor.org/press_room/
news_releases/2010/08/ehs_fall).
[GRAPHIC] [TIFF OMITTED] T3381.029
Foreclosures. Foreclosure actions, which consist of default
notices, scheduled auctions, and bank repossessions, decreased
21 percent in November 2010 to 262,339, marking the first month
since February 2009 that foreclosure filings have been below
300,000.\458\ However, it is important to note that much of the
decline could be attributed to a number of loan servicers
suspending foreclosures in the fall of 2010 as they conducted
internal reviews of their foreclosure procedures.\459\ Since
the enactment of EESA, there have been approximately 8.4
million foreclosure filings.\460\
---------------------------------------------------------------------------
\458\ RealtyTrac, Foreclosure Activity Decreases 21 Percent in
November (Dec. 16, 2010) (online at www.realtytrac.com/content/press-
releases/foreclosure-activity-decreases-21-percent-in-november-6251)
(hereinafter ``RealtyTrac--Foreclosure Activity Decreases'').
\459\ For more information on foreclosure irregularities, see
November 2010 Oversight Report, supra note 369.
\460\ Data accessed through Bloomberg Data Service (Jan. 3, 2011).
---------------------------------------------------------------------------
Home Prices. With respect to housing price indices, the
Case-Shiller Composite 20-City Composite Home Price Index
decreased by less than 1 percent, while the FHFA Housing Price
Index increased by less than 1 percent in October 2010. The
Case-Shiller and FHFA indices are approximately 8 percent and 5
percent below their respective October 2008 levels.\461\
---------------------------------------------------------------------------
\461\ The most recent data available are for September 2010. See
Standard and Poor's, S&P/Case-Shiller Home Price Indices (Instrument:
Case-Shiller 20-City Composite Seasonally Adjusted, Frequency: Monthly)
(online at www.standardandpoors.com/indices/sp-case-shiller-home-price-
indices/en/us/?indexId=spusa-cashpidff--us----) (accessed Jan. 3, 2011)
(hereinafter ``S&P/Case-Shiller Home Price Indices''); Federal Housing
Finance Agency, U.S. and Census Division Monthly Purchase Only Index
(Instrument: USA, Seasonally Adjusted) (online at www.fhfa.gov/
Default.aspx?Page=87) (accessed Jan. 3, 2011) (hereinafter ``FHFA
Monthly Purchase Only Index''). S&P has cautioned that the seasonal
adjustment is probably being distorted by irregular factors. These
factors could include distressed sales and the various government
programs. See Standard and Poor's, S&P/Case-Shiller Home Price Indices
and Seasonal Adjustment (Apr. 2010) (online at
www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-
Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline;+filen
ame%3D
CaseShiller_SeasonalAdjustment2,0.pdf&blobheadername2=Content-
Disposition&blobheadervalue1=application/
pdf&blobkey=id&blobheadername1=content-type
&blobwhere=1243679046081&blobheadervalue3=UTF-8). For a discussion of
the differences between the Case-Shiller Index and the FHFA Index, see
Congressional Oversight Panel, April Oversight Report: Evaluating
Progress on TARP Foreclosure Mitigation Programs, at 98 (Apr. 14, 2010)
(online at cop.senate.gov/documents/cop-041410-report.pdf).
---------------------------------------------------------------------------
Case-Shiller futures prices indicate a market expectation
that home-price values for the major Metropolitan Statistical
Areas (MSAs) will decrease through 2011.\462\ These futures are
cash-settled to a weighted composite index of U.S. housing
prices in the top ten MSAs, as well as to those specific
markets. They are used to hedge by businesses whose profits and
losses are related to a specific area of the housing industry,
and to balance portfolios by businesses seeking exposure to an
uncorrelated asset class. As such, futures prices are a
composite indicator of market information known to date and can
be used to indicate market expectations for home prices.
---------------------------------------------------------------------------
\462\ Data accessed through Bloomberg Data Service (Jan. 3, 2011).
The Case-Shiller Futures contract is traded on the Chicago Mercantile
Exchange (CME) and is settled to the Case-Shiller Index two months
after the previous calendar quarter. For example, the February contract
will be settled against the spot value of the S&P Case-Shiller Home
Price Index values representing the fourth calendar quarter of the
previous year, which is released in February one day after the
settlement of the contract. Note that most close observers believe that
the accuracy of these futures contracts as forecasts diminishes the
farther out one looks.
A Metropolitan Statistical Area is defined as a core area
containing a substantial population nucleus, together with adjacent
communities having a high degree of economic and social integration
with the core. U.S. Census Bureau, About Metropolitan and Micropolitan
Statistical Areas (online at www.census.gov/population/www/metroareas/
aboutmetro.html) (accessed Dec. 10, 2010).
FIGURE 38: HOUSING INDICATORS
----------------------------------------------------------------------------------------------------------------
Percent
Most Recent Percent Change Change
Indicator Monthly from Data Since
Data Available at Time October
of Last Report 2008
----------------------------------------------------------------------------------------------------------------
Monthly foreclosure actions \463\................................. 262,339 (21.0) (6.2)
S&P/Case-Shiller Composite 20 Index \464\......................... 143.52 (0.1) (8.2)
FHFA Housing Price Index \465\.................................... 190.83 0.2 (5.4)
----------------------------------------------------------------------------------------------------------------
\463\ RealtyTrac--Foreclosure Activity Decreases, supra note 458. The most recent data available are for
November 2010.
\464\ S&P/Case-Shiller Home Price Indices, supra note 461. The most recent data available are for October 2010.
\465\ FHFA Monthly Purchase Only Index, supra note 461. The most recent data available are for October 2010.
FIGURE 39: CASE-SHILLER HOME PRICE INDEX AND FUTURES VALUES \466\
---------------------------------------------------------------------------
\466\ All data normalized to 100 in January 2000. Futures data
accessed through Bloomberg Data Service (Jan. 3, 2011). S&P/Case-
Shiller Home Price Indices, supra note 461.
[GRAPHIC] [TIFF OMITTED] T3381.030
C. Financial Update
Each month, the Panel summarizes the resources that the
federal government has committed to the rescue and recovery of
the financial system. The following financial update provides:
(1) an updated accounting of the TARP, including a tally of
dividend income, repayments, and warrant dispositions that the
program has received as of November 30, 2010; and (2) an
updated accounting of the full federal resource commitment as
of December 30, 2010.
1. The TARP
a. Program Updates \467\
---------------------------------------------------------------------------
\467\ U.S. Department of the Treasury, Cumulative Dividends,
Interest and Distributions Report as of September 30, 2010 (Oct. 11,
2010) (online at financialstability.gov/docs/dividends-interest-
reports/September%202010%20Dividends%20&%20Interest%20Report.pdf);
Treasury Transactions Report, supra note 24.
---------------------------------------------------------------------------
Treasury's spending authority under the TARP officially
expired on October 3, 2010. Though it can no longer make new
funding commitments, Treasury can continue to provide funding
for programs for which it has existing contracts and previous
commitments. To date, $396.2 billion has been spent under the
TARP's $475 billion ceiling.\468\ Of the total amount
disbursed, $240.4 billion has been repaid. Treasury has also
incurred $6.1 billion in losses associated with its Capital
Purchase Program (CPP) and Automotive Industry Financing
Program (AIFP) investments. About two-thirds of the $149.8
billion in TARP funds currently outstanding relates to
Treasury's investments in AIG and assistance provided to the
automotive industry.
---------------------------------------------------------------------------
\468\ The original $700 billion TARP ceiling was reduced by $1.26
billion as part of the Helping Families Save Their Homes Act of 2009.
12 U.S.C. Sec. 5225(a)-(b) (online at www.gpo.gov/fdsys/pkg/PLAW-
111publ22/pdf/PLAW-111publ22.pdf). On June 30, 2010, the House-Senate
Conference Committee agreed to reduce the amount authorized under the
TARP from $700 billion to $475 billion as part of the Dodd-Frank Wall
Street Reform and Consumer Protection Act that was signed into law on
July 21, 2010. See Dodd-Frank Wall Street Reform and Consumer
Protection Act, Pub. L. No. 111-203 (2010) (online at www.gpo.gov/
fdsys/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf); The White House,
Remarks by the President at Signing of Dodd-Frank Wall Street Reform
and Consumer Protection Act (July 21, 2010) (online at
www.whitehouse.gov/the-press-office/remarks-president-signing-dodd-
frank-wall-street-reform-and-consumer-protection-act).
---------------------------------------------------------------------------
CPP Repayments
As of December 30, 2010, 131 of the 707 banks that
participated in the CPP have fully redeemed their preferred
shares either through capital repayment or exchanges for
investments under the Community Development Capital Initiative
(CDCI). During December 2010, Treasury received the funds from
the sale of the final outstanding Citigroup shares, equaling
full repayment of the $25 billion investment as well as an
additional $6.9 billion in profit from the sale of these
shares.\469\ An additional 14 banks fully repaid their
remaining CPP capital, returning $3.3 billion in principal to
Treasury. See Figure 40 below for repayment amounts.
---------------------------------------------------------------------------
\469\ This figure is comprised of the $4.2 billion in net proceeds
from the sale of Citigroup common stock between April 26 and December
6, 2010 as well as $2.7 billion in proceeds from the December 6 equity
underwriting.
FIGURE 40: BANKS THAT FULLY REPAID THEIR CPP LOANS IN DECEMBER 2010
\470\
------------------------------------------------------------------------
Remaining
Bank Amount Repaid Investment
------------------------------------------------------------------------
First Horizon National $866,540,000 Warrants
Corporation.
Huntington Bancshares........... 1,398,071,000 Warrants
Heritage Financial Corporation.. 24,000,000 Warrants
First PacTrust Bancorp, Inc..... 19,300,000 Warrants
East West Bancorp............... 406,546,000 Warrants
Wintrust Financial Corporation.. 250,000,000 Warrants
Capital Bancorp, Inc............ 4,700,000 None
Surrey Bancorp.................. 2,000,000 None
1st Source Corporation.......... 111,000,000 None
California Oaks State Bank...... 3,300,000 None
The Bank of Currituck........... 1,742,850 None
Haviland Bancshares, Inc........ 425,000 None
Signature Bancshares, Inc....... 1,700,000 None
Nationwide Bankshares, Inc...... 2,000,000 None
-------------------
Total........................... $3,332,871,850 ...................
------------------------------------------------------------------------
\470\ Treasury Transactions Report, supra note 24.
Additionally, during December 2010, United Financial
Banking Companies, Inc. made a partial repayment of $3 million,
and The Bank of Kentucky Financial Corporation made a partial
repayment of $17 million. A total of $167.9 billion has been
repaid under the program, leaving $34.4 billion in funds
currently outstanding.\471\
---------------------------------------------------------------------------
\471\ The $34.4 billion currently outstanding reflects the $2.6
billion in announced losses associated with the program. See Figure 42
for further details on losses associated with programs.
---------------------------------------------------------------------------
b. Income: Dividends, Interest, and Warrant Sales
In conjunction with its preferred stock investments under
the CPP and the Targeted Investment Program (TIP), Treasury
generally received warrants to purchase common equity.\472\ As
of December 30, 2010, 46 institutions have repurchased their
warrants from Treasury at an agreed-upon price. Treasury has
also sold warrants for 15 other institutions at auction. To
date, income from warrant dispositions totals $8.2 billion.
---------------------------------------------------------------------------
\472\ For its CPP investments in privately held financial
institutions, Treasury also received warrants to purchase additional
shares of preferred stock, which it exercised immediately. Similarly,
Treasury received warrants to purchase additional subordinated debt
that were immediately exercised along with its CPP investments in
subchapter S corporations. Treasury Transactions Report, supra note 24,
at 14.
---------------------------------------------------------------------------
In addition to warrant proceeds, Treasury also receives
dividend payments on the preferred shares that it holds under
the CPP, 5 percent per year for the first five years and 9
percent per year thereafter.\473\ For preferred shares issued
under the TIP, Treasury received a dividend of 8 percent per
year.\474\ In total, Treasury has received approximately $30.3
billion in net income from warrant repurchases, dividends,
interest payments, profit from the sale of stock, and other
proceeds deriving from TARP investments, after deducting
losses.\475\ For further information on TARP profit and loss,
see Figure 42.
---------------------------------------------------------------------------
\473\ U.S. Department of the Treasury, Capital Purchase Program
(Oct. 3, 2010) (online at www.financialstability.gov/roadtostability/
capitalpurchaseprogram.html).
\474\ U.S. Department of the Treasury, Targeted Investment Program
(Oct. 3, 2010) (online at www.financialstability.gov/roadtostability/
targetedinvestmentprogram.html).
\475\ U.S. Department of the Treasury, Cumulative Dividends,
Interest and Distributions Report as of November 30, 2010 (Dec. 10,
2010) (online at financialstability.gov/docs/dividends-interest-
reports/November%202010%20Dividends%20&%20Interest%20Report.pdf)
(hereinafter ``Cumulative Dividends, Interest and Distributions
Report''); Treasury Transactions Report, supra note 24. Treasury also
received an additional $1.2 billion in participation fees from its
Guarantee Program for Money Market Funds. U.S. Department of the
Treasury, Treasury Announces Expiration of Guarantee Program for Money
Market Funds (Sept. 18, 2009) (online at www.treasury.gov/press-center/
press-releases/Pages/tg293.aspx).
c. TARP Accounting
FIGURE 41: TARP ACCOUNTING (AS OF DECEMBER 30, 2010)
[billions of dollars] i
----------------------------------------------------------------------------------------------------------------
Total
Maximum Actual Repayments/ Total Funding Funding
Program Amount Funding Reduced Losses Currently Available
Allotted Exposure Outstanding
----------------------------------------------------------------------------------------------------------------
Capital Purchase Program (CPP).... $204.9 $204.9 ii $(167.9) iii$(2.6) $34.4 $0
Targeted Investment Program (TIP). 40.0 40.0 (40.0) 0 0 0
Asset Guarantee Program (AGP)..... 5.0 iv 5.0 v (5.0) 0 0 0
AIG Investment Program (AIGIP).... 69.8 vi 47.5 0 0 47.5 22.3
Auto Industry Financing Program 81.3 81.3 (26.4) vii (3.5) viii 51.4 0
(AIFP)...........................
Auto Supplier Support Program 0.4 0.4 (0.4) 0 0 0
(ASSP)ix.........................
Term Asset-Backed Securities Loan x 4.3 xi 0.1 0 0 0.1 4.2
Facility (TALF)..................
Public-Private Investment Program 22.4 xiii 15.1 xiv (0.6) 0 14.5 7.4
(PPIP) xii.......................
SBA 7(a) Securities Purchase 0.4 xv 0.4 0 0 0.4 xvi 0
Program..........................
Home Affordable Modification 29.9 0.8 0 0 0.7 29.1
Program (HAMP)...................
Hardest Hit Fund (HHF)............ xvii 7.6 xviii 0.1 0 0 0.1 7.5
FHA Refinance Program............. 8.1 xix 0.1 0 0 0.1 8.0
Community Development Capital 0.8 xx 0.6 0 0 0.6 0
Initiative (CDCI)................
----------------------------------------------------------------------------------------------------------------
Total............................. $475.0 $396.2 $(240.4) $(6.1) $149.8 $78.5
----------------------------------------------------------------------------------------------------------------
\i\ Figures affected by rounding. Unless otherwise noted, data in this table are from the following sources:
U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending
December 30, 2010 (Dec. 30, 2010) (online at www.financialstability.gov/docs/transaction-reports/12-30-
10%20Transactions%20Report%20as%20of%2012-30-10.pdf); U.S. Department of the Treasury, Troubled Assets Relief
Program Monthly 105(a) Report--November 2010 (Dec. 10, 2010) (online at www.financialstability.gov/docs/
November%20105(a)%20FINAL.pdf.
\ii\ In June 2009, Treasury exchanged $25 billion in Citigroup preferred stock for 7.7 billion shares of the
company's common stock at $3.25 per share. As of December 30, 2010, Treasury had sold the entirety of its
Citigroup common shares for $31.85 billion in gross proceeds. The amount repaid under CPP includes $25 billion
Treasury received as part of its sales of Citigroup common stock. The difference between these two numbers
represents the $6.85 billion in net profit Treasury has received from the sale of Citigroup common stock.
Total CPP repayments also include amounts repaid by institutions that exchanged their CPP investments for
investments under the CDCI, as well as proceeds earned from the sale of preferred stock issued by South
Financial Group, Inc., TIB Financial Corp, and the Bank of Currituck. See U.S. Department of the Treasury,
Troubled Asset Relief Program Transactions Report for the Period Ending December 30, 2010, at 2, 13-15 (Dec.
30, 2010) (online at www.financialstability.gov/docs/transaction-reports/12-30-
10%20Transactions%20Report%20as%20of%2012-30-10.pdf); U.S. Department of the Treasury, Troubled Asset Relief
Program: Two-Year Retrospective, at 25 (Oct. 2010) (online at www.financialstability.gov/docs/
TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf); U.S. Department of the Treasury,
Treasury Commences Plan to Sell Citigroup Common Stock (Apr. 26, 2010) (online at www.treasury.gov/press-
center/press-releases/Pages/tg660.aspx).
\iii\ In the TARP Transactions Report, Treasury has classified the investments it made in two institutions, CIT
Group ($2.3 billion) and Pacific Coast National Bancorp ($4.1 million), as losses. In addition, Treasury sold
its preferred ownership interests, along with warrants, in South Financial Group, Inc., TIB Financial Corp.,
and the Bank of Currituck to non-TARP participating institutions. These shares were sold at prices below the
value of the original CPP investment, at respective losses of $217 million, $25 million, and $2.3 million.
Therefore, Treasury's net current CPP investment is $34.4 billion due to the $2.6 billion in losses thus far.
See U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending
December 30, 2010, at 1-14 (Dec. 30, 2010) (online at www.financialstability.gov/docs/transaction-reports/12-
30-10%20Transactions%20Report%20as%20of%2012-30-10.pdf).
\iv\ The $5.0 billion AGP guarantee for Citigroup was unused since Treasury was not required to make any
guarantee payments during the life of the program. U.S. Department of the Treasury, Troubled Asset Relief
Program: Two-Year Retrospective, at 31 (Oct. 2010) (online at www.financialstability.gov/docs/
TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf); U.S. Department of the Treasury,
Troubled Asset Relief Program Transactions Report for the Period Ending December 30, 2010, at 20 (Dec. 30,
2010) (online at www.financialstability.gov/docs/transaction-reports/12-30-
10%20Transactions%20Report%20as%20of%2012-30-10.pdf).
\v\ Although this $5.0 billion is no longer exposed as part of the AGP, Treasury did not receive a repayment in
the same sense as with other investments. Treasury did receive other income as consideration for the
guarantee, which is not a repayment and is accounted for in Figure 42. See U.S. Department of the Treasury,
Troubled Asset Relief Program Transactions Report for the Period Ending December 30, 2010, at 20 (Dec. 30,
2010) (online at www.financialstability.gov/docs/transaction-reports/12-30-
10%20Transactions%20Report%20as%20of%2012-30-10.pdf).
\vi\ AIG has completely utilized the $40 billion that was made available on November 25, 2008, in exchange for
the company's preferred stock. See U.S. Department of the Treasury, Troubled Asset Relief Program Transactions
Report for the Period Ending December 30, 2010, at 21 (Dec. 30, 2010) (online at www.financialstability.gov/
docs/transaction-reports/12-30-10%20Transactions%20Report%20as%20of%2012-30-10.pdf). It has also drawn down
$7.5 billion of the $29.8 billion made available on April 17, 2009. American International Group, Inc., Form
10-Q for the Quarterly Period Ended September 30, 2010, at 119 (Nov. 5, 2010) (online at sec.gov/Archives/
edgar/data/5272/000104746910009269/a2200724z10-q.htm). This figure does not include $1.6 billion in
accumulated but unpaid dividends owed by AIG to Treasury due to the restructuring of Treasury's investment
from cumulative preferred shares to non-cumulative shares. See U.S. Department of the Treasury, Troubled Asset
Relief Program Transactions Report for the Period Ending December 30, 2010, at 21 (Dec. 30, 2010) (online at
www.financialstability.gov/docs/transaction-reports/12-30-10%20Transactions%20Report%20as%20of%2012-30-
10.pdf). AIG expects to draw down up to $22.3 billion in unutilized funds from the TARP as part of its plan to
repay the revolving credit facility provided by the Federal Reserve Bank of New York. American International
Group, Inc., AIG Announces Plan to Repay U.S. Government (Sept. 30, 2010) (online at www.aigcorporate.com/
newsroom/2010_September/AIGAnnouncesPlantoRepay30Sept2010.pdf);
\vii\ On May 14, 2010, Treasury accepted a $1.9 billion settlement payment for its $3.5 billion loan to Chrysler
Holding. The payment represented a $1.6 billion loss from the termination of the debt obligation. See U.S.
Department of the Treasury, Chrysler Financial Parent Company Repays $1.9 Billion in Settlement of Original
Chrysler Loan (May 17, 2010) (online at www.financialstability.gov/latest/pr_05172010c.html); U.S. Department
of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending December 30, 2010, at
18-19 (Dec. 30, 2010) (online at www.financialstability.gov/docs/transaction-reports/12-30-
10%20Transactions%20Report%20as%20of%2012-30-10.pdf). Also, following the bankruptcy proceedings for Old
Chrysler, which extinguished the $1.9 billion debtor-in-possession (DIP) loan provided to Old Chrysler,
Treasury retained the right to recover the proceeds from the liquidation of specified collateral. Although
Treasury does not expect a significant recovery from the liquidation proceeds, Treasury is not yet reporting
this loan as a loss in the TARP Transactions Report. As of December 30, 2010, Treasury had collected $48.1
million in proceeds from the sale of collateral. Treasury included these proceeds as part of the $26.4 billion
repaid under the AIFP. U.S. Department of the Treasury, Troubled Assets Relief Program Monthly 105(a) Report--
September 2010 (Oct. 12, 2010) (online at www.financialstability.gov/docs/105CongressionalReports/September
105(a) report_FINAL.pdf); Treasury conversations with Panel staff (Aug. 19, 2010 and Nov. 29, 2010); U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending December
30, 2010, at 18 (Dec. 30, 2010) (online at www.financialstability.gov/docs/transaction-reports/12-30-
10%20Transactions%20Report%20as%20of%2012-30-10.pdf).
\viii\ In the TARP Transactions Report, the $1.9 billion Chrysler debtor-in-possession loan, which was
extinguished April 30, 2010, was deducted from Treasury's current AIFP investment amount. U.S. Department of
the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending December 30, 2010, at 18
(Dec. 30, 2010) (online at www.financialstability.gov/docs/transaction-reports/12-30-
10%20Transactions%20Report%20as%20of%2012-30-10.pdf). See endnote vii, supra, for details on losses from
Treasury's investment in Chrysler.
\ix\ On April 5, 2010, Treasury terminated its commitment to lend to the GM special purpose vehicle (SPV) under
the ASSP. On April 7, 2010, it terminated its commitment to lend to the Chrysler SPV. In total, Treasury
received $413 million in repayments from loans provided by this program ($290 million from the GM SPV and $123
million from the Chrysler SPV). Further, Treasury received $101 million in proceeds from additional notes
associated with this program. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions
Report for the Period Ending December 30, 2010, at 19 (Dec. 30, 2010) (online at www.financialstability.gov/
docs/transaction-reports/12-30-10%20Transactions%20Report%20as%20of%2012-30-10.pdf).
\x\ For the TALF, $1 of TARP funds was committed for every $10 of funds obligated by the Federal Reserve. The
program was intended to be a $200 billion initiative, and the TARP was responsible for the first $20 billion
in loan-losses, if any were incurred. The loan was incrementally funded. When the program closed in June 2010,
a total of $43 billion in loans was outstanding under the TALF, and the TARP's commitments constituted $4.3
billion. The Federal Reserve Board of Governors agreed that it was appropriate for Treasury to reduce TALF
credit protection from the TARP to $4.3 billion. Board of Governors of the Federal Reserve System, Federal
Reserve Announces Agreement with the Treasury Department Regarding a Reduction of Credit Protection Provided
for the Term Asset-Backed Securities Loan Facility (TALF) (July 20, 2010) (online at www.federalreserve.gov/
newsevents/press/monetary/20100720a.htm).
\xi\ As of January 5, 2011, Treasury had provided $106 million to TALF LLC. This total is net of accrued
interest payable to Treasury. Board of Governors of the Federal Reserve System, Factors Affecting Reserve
Balances (H.4.1) (Jan. 3, 2010) (online at www.federalreserve.gov/releases/h41/20110106/).
\xii\ As of September 30, 2010, the total value of securities held by the PPIP fund managers was $19.3 billion.
Non-agency residential mortgage-backed securities represented 82 percent of the total; commercial mortgage-
backed securities represented the balance. U.S. Department of the Treasury, Legacy Securities Public-Private
Investment Program, Program Update--Quarter Ended September 30, 2010, at 4 (Oct. 20, 2010) (online at
www.financialstability.gov/docs/External%20Report%20-%2009-10%20vFinal.pdf).
\xiii\ U.S. Department of the Treasury, Troubled Assets Relief Program Monthly 105(a) Report--November 2010, at
4 (Dec. 10, 2010) (online at www.financialstability.gov/docs/November%20105(a)%20FINAL.pdf).
\xiv\ As of December 30, 2010, Treasury has received $593 million in capital repayments from two PPIP fund
managers. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period
Ending December 30, 2010, at 23 (Dec. 30, 2010) (online at www.financialstability.gov/docs/transaction-reports/
12-30-10%20Transactions%20Report%20as%20of%2012-30-10.pdf).
\xv\ As of December 30, 2010, Treasury's purchases under the SBA 7(a) Securities Purchase Program totaled $368.1
million. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period
Ending December 30, 2010, at 22 (Dec. 30, 2010) (online at www.financialstability.gov/docs/transaction-reports/
12-30-10%20Transactions%20Report%20as%20of%2012-30-10.pdf).
\xvi\ Treasury will not make additional purchases pursuant to the expiration of its purchasing authority under
EESA. U.S. Department of the Treasury, Troubled Asset Relief Program: Two-Year Retrospective, at 43 (Oct.
2010) (online at www.financialstability.gov/docs/
TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
\xvii\ On June 23, 2010, $1.5 billion was allocated to mortgage assistance through the Hardest Hit Fund (HHF).
Another $600 million was approved on August 3, 2010. U.S. Department of the Treasury, Obama Administration
Approves State Plans for $600 million of `Hardest Hit Fund' Foreclosure Prevention Assistance (Aug. 3, 2010)
(online at www.financialstability.gov/latest/pr_08042010.html). As part of its revisions to TARP allocations
upon enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Treasury allocated an
additional $2 billion in TARP funds to mortgage assistance for unemployed borrowers through the HHF. U.S.
Department of the Treasury, Obama Administration Announces Additional Support for Targeted Foreclosure-
Prevention Programs to Help Homeowners Struggling with Unemployment (Aug. 11, 2010) (online at
www.financialstability.gov/latest/pr_08112010.html). In October 2010, another $3.5 billion was allocated among
the 18 states and the District of Columbia currently participating in HHF. The amount each state received
during this round of funding is proportional to its population. U.S. Department of the Treasury, Troubled
Asset Relief Program: Two Year Retrospective, at 72 (Oct. 2010) (online at www.financialstability.gov/docs/
TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
\xviii\ As of December 31, 2010, a total of $103.6 million has been disbursed to 12 state Housing Finance
Agencies (HFAs). Data provided by Treasury (Jan. 4, 2011).
\xix\ This figure represents the amount Treasury disbursed to fund the advance purchase account of the Letter of
Credit issued under the FHA Short Refinance Program. The $53.3 million in the FHA Short Refinance program is
broken down as follows: $50 million for a deposit into an advance purchase account as collateral to the
initial $50 million Letter of Credit, $2.9 million for the closing and funding of the Letter of Credit,
$115,000 in trustee fees, $175,000 in claims processor fees, and $156,000 for an unused commitment fee for the
Letter of Credit. Data provided by Treasury (Dec. 2, 2010).
\xx\ U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending
December 30, 2010, at 1-13, 16-17 (Dec. 30, 2010) (online at www.financialstability.gov/docs/transaction-
reports/12-30-10%20Transactions%20Report%20as%20of%2012-30-10.pdf). Treasury closed the program on September
30, 2010, after investing $570 million in 84 CDFIs. U.S. Department of the Treasury, Treasury Announces
Special Financial Stabilization Initiative Investments of $570 Million in 84 Community Development Financial
Institutions in Underserved Areas (Sept. 30, 2010) (online at www.financialstability.gov/latest/
pr_09302010b.html).
FIGURE 42: TARP PROFIT AND LOSS
(millions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Warrant
Dividends xxii Interest xxiii Disposition Other Proceeds Losses xxv
TARP Initiative xxi (as of 11/30/ (as of 11/30/ Proceeds xxiv (as of 11/30/ (as of 12/30/ Total
2010) 2010) (as of 12/30/ 2010) 2010)
2010)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total................................................... $17,345 $1,083 $8,160 $9,801 ($6,066) $30,353
CPP..................................................... 10,169 59 6,905 xxvi 6,852 (2,578) 21,407
TIP..................................................... 3,004 - 1,256 - - 4,260
AIFP.................................................... xxvii 3,729 931 - xxviii 15 (3,488) 1,217
ASSP.................................................... - 15 - xxix 101 - 116
AGP..................................................... 443 - - xxx 2,246 - 2,689
PPIP.................................................... - 76 - xxxi 310 - 386
SBA 7(a)................................................ - 3 - - - 3
Bank of America Guarantee............................... - - - xxxii 276 - 276
--------------------------------------------------------------------------------------------------------------------------------------------------------
xxi AIG is not listed in this table because no profit or loss has been recorded to date for AIG. Its missed dividends were capitalized as part of the
issuance to Treasury of Series E preferred shares and are not considered to be outstanding. Treasury currently holds non-cumulative preferred shares,
meaning AIG is not penalized for non-payment. Therefore, no profit or loss has been realized on Treasury's AIG investment to date.
HAMP is not listed in this table because HAMP is a 100 percent subsidy program, and no profit is expected.
xxii U.S. Department of the Treasury, Cumulative Dividends, Interest and Distributions Report as of November 30, 2010 (Dec. 10, 2010) (online at
www.financialstability.gov/docs/dividends-interest-reports/November%202010%20Dividends%20&%20Interest%20Report.pdf).
xxiii U.S. Department of the Treasury, Cumulative Dividends, Interest and Distributions Report as of November 30, 2010 (Dec. 10, 2010) (online at
www.financialstability.gov/docs/dividends-interest-reports/November%202010%20Dividends%20&%20Interest%20Report.pdf).
xxiv U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending December 30, 2010 (Dec. 30, 2010) (online
at www.financialstability.gov/docs/transaction-reports/12-30-10%20Transactions%20Report%20as%20of%2012-30-10.pdf).
xxv In the TARP Transactions Report, Treasury classified the investments it made in two institutions, CIT Group ($2.3 billion) and Pacific Coast
National Bancorp ($4.1 million), as losses. Treasury has also sold its preferred ownership interests and warrants from South Financial Group, Inc.,
TIB Financial Corp., and the Bank of Currituck. This represents a $244.0 million loss on its CPP investments in these three banks. Two TARP
recipients, UCBH Holdings, Inc. ($298.7 million) and a banking subsidiary of Midwest Banc Holdings, Inc. ($89.4 million), are currently in bankruptcy
proceedings. As of November 26, three TARP recipients, Pierce County Bancorp, Sonoma Valley Bancorp, and Tifton Banking Company, had entered
receivership. Cumulatively, these three had received $19.3 million in TARP funding. U.S. Department of the Treasury, Troubled Asset Relief Program
Transactions Report for the Period Ending December 30, 2010 (Dec. 30, 2010) (online at www.financialstability.gov/docs/transaction-reports/12-30-
10%20Transactions%20Report%20as%20of%2012-30-10.pdf).
xxvi This figure represents net proceeds to Treasury from the sale of Citigroup common stock to date. For details on Treasury's sales of Citigroup
common stock, see endnote ii, supra. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending December
30, 2010, at 15 (Dec. 30, 2010) (online at www.financialstability.gov/docs/transaction-reports/12-30-10%20Transactions%20Report%20as%20of%2012-30-
10.pdf); U.S. Department of the Treasury, Troubled Asset Relief Program: Two-Year Retrospective, at 25 (Oct. 2010) (online at
www.financialstability.gov/docs/TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
xxvii This figure includes $815 million in dividends from GMAC/Ally Financial preferred stock, trust preferred securities, and mandatory convertible
preferred shares. The dividend total also includes a $748.6 million senior unsecured note from Treasury's investment in General Motors. U.S.
Department of the Treasury, Cumulative Dividends, Interest and Distributions Report as of November 30, 2010 (Dec. 10, 2010) (online at
financialstability.gov/docs/dividends-interest-reports/November%202010%20Dividends%20&%20Interest%20Report.pdf); Data provided by Treasury (May 7,
2010).
xxviii Treasury received proceeds from an additional note connected with the loan made to Chrysler Financial on January 16, 2009. U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending December 30, 2010, at 18 (Dec. 30, 2010) (online at
www.financialstability.gov/docs/transaction-reports/12-30-10%20Transactions%20Report%20as%20of%2012-30-10.pdf).
xxix This represents the total proceeds from additional notes connected with Treasury's investments in GM Supplier Receivables LLC and Chrysler
Receivables SPV LLC. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending December 30, 2010, at 19
(Dec. 30, 2010) (online at www.financialstability.gov/docs/transaction-reports/12-30-10%20Transactions%20Report%20as%20of%2012-30-10.pdf).
xxx As a fee for taking a second-loss position of up to $5 billion on a $301 billion pool of ring-fenced Citigroup assets as part of the AGP, Treasury
received $4.03 billion in Citigroup preferred stock and warrants. Treasury exchanged these preferred stocks for trust preferred securities in June
2009. Following the early termination of the guarantee in December 2009, Treasury cancelled $1.8 billion of the trust preferred securities, leaving
Treasury with $2.23 billion in Citigroup trust preferred securities. On September 30, 2010, Treasury sold these securities for $2.25 billion in total
proceeds. At the end of Citigroup's participation in the FDIC's Temporary Liquidity Guarantee Program (TLGP), the FDIC may transfer $800 million of
$3.02 billion in Citigroup Trust Preferred Securities it received in consideration for its role in the AGP to Treasury. U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending December 30, 2010, at 20 (Dec. 30, 2010) (online at
www.financialstability.gov/docs/transaction-reports/12-30-10%20Transactions%20Report%20as%20of%2012-30-10.pdf); U.S. Department of the Treasury, Board
of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Citigroup Inc., Termination Agreement, at 1 (Dec. 23, 2009)
(online at www.financialstability.gov/docs/Citi%20AGP%20Termination%20Agreement%20-%20Fully%20Executed%20Version.pdf); U.S. Department of the
Treasury, Treasury Announces Further Sales of Citigroup Securities and Cumulative Return to Taxpayers of $41.6 Billion (Sept. 30, 2010) (online at
financialstability.gov/latest/pr_09302010c.html); Federal Deposit Insurance Corporation, 2009 Annual Report, at 87 (June 30, 2010) (online at
www.fdic.gov/about/strategic/report/2009annualreport/AR09final.pdf).
xxxi As of November 30, 2010, Treasury has earned $289.6 million in membership interest distributions from the PPIP. Additionally, Treasury has earned
$20.6 million in total proceeds following the termination of the TCW fund. See U.S. Department of the Treasury, Cumulative Dividends, Interest and
Distributions Report as of November 30, 2010, at 14 (Dec. 10, 2010) (online at financialstability.gov/docs/dividends-interest-reports/
November%202010%20Dividends%20&%20Interest%20Report.pdf); U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the
Period Ending December 30, 2010, at 23 (Dec. 30, 2010) (online at www.financialstability.gov/docs/transaction-reports/12-30-
10%20Transactions%20Report%20as%20of%2012-30-10.pdf).
xxxii Although Treasury, the Federal Reserve, and the FDIC negotiated with Bank of America regarding a similar guarantee, the parties never reached an
agreement. In September 2009, Bank of America agreed to pay each of the prospective guarantors a fee as though the guarantee had been in place during
the negotiations period. This agreement resulted in payments of $276 million to Treasury, $57 million to the Federal Reserve, and $92 million to the
FDIC. U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Bank of America
Corporation, Termination Agreement, at 1-2 (Sept. 21, 2009) (online at www.financialstability.gov/docs/AGP/BofA%20-%20Termination%20Agreement%20-
%20executed.pdf).
d. CPP Unpaid Dividend and Interest Payments \476\
---------------------------------------------------------------------------
\476\ Cumulative Dividends, Interest and Distributions Report,
supra note 475, at 20.
---------------------------------------------------------------------------
As of November 30, 2010, 140 institutions have missed at
least one dividend payment on outstanding preferred stock
issued under the CPP.\477\ Among these institutions, 111 are
not current on cumulative dividends, amounting to $151.5
million in missed payments. Another 29 banks have not paid $9.7
million in non-cumulative dividends. Of the $49.5 billion
currently outstanding in CPP funding, Treasury's investments in
banks with non-current dividend payments total $7.2 billion. A
majority of the banks that remain delinquent on dividend
payments have under $1 billion in total assets on their balance
sheets. Also, there are 21 institutions that no longer have
outstanding unpaid dividends, after previously deferring their
quarterly payments.\478\
---------------------------------------------------------------------------
\477\ This figure does not include banks with missed dividend
payments that have either repaid all delinquent dividends, exited the
TARP, gone into receivership, or filed for bankruptcy.
\478\ Fifteen of these institutions made payments later. The 21
institutions also include those that have either (a) fully repaid their
CPP investment and exited the program or (b) entered bankruptcy or
their subsidiary was placed into receivership. Cumulative Dividends,
Interest and Distributions Report, supra note 475, at 21.
---------------------------------------------------------------------------
Twelve banks have failed to make six dividend payments, six
banks have missed seven quarterly payments, and one bank has
missed all eight quarterly payments. These institutions have
received a total of $897.2 million in CPP funding. Under the
terms of the CPP, after a bank fails to pay dividends for six
periods, Treasury has the right to elect two individuals to the
company's board of directors.\479\ Figure 43 below provides
further details on the distribution and the number of
institutions that have missed dividend payments.
---------------------------------------------------------------------------
\479\ U.S. Department of the Treasury, Frequently Asked Questions:
Capital Purchase Program (CPP): Related to Missed Dividend (or
Interest) Payments and Director Nomination (online at
www.financialstability.gov/docs/CPP/CPP%20Directors%20FAQs.pdf)
(accessed Jan. 11, 2011).
---------------------------------------------------------------------------
In addition, eight CPP participants have missed at least
one interest payment, representing $4.0 million in cumulative
unpaid interest payments. Treasury's total investments in these
non-public institutions represent less than $1 billion in CPP
funding.
FIGURE 43: CPP MISSED DIVIDEND PAYMENTS (AS OF NOVEMBER 30, 2010) \480\
------------------------------------------------------------------------
Number of Missed Payments 1 2 3 4 5 6 7 8 Total
------------------------------------------------------------------------
Cumulative Dividends
Number of Banks, by asset size.. 17 28 20 20 14 9 3 0 111
Under $1B................... 10 21 17 16 9 6 1 0 80
$1B-$10B.................... 6 6 3 3 5 3 2 0 28
Over $10B................... 1 1 0 1 0 0 0 0 3
Non-Cumulative Dividends
Number of Banks, by asset size.. 6 1 6 6 3 3 3 1 29
Under $1B................... 5 1 6 5 3 3 3 1 27
$1B-$10B.................... 0 0 0 1 0 0 0 0 1
Over $10B................... 1 0 0 0 0 0 0 0 1
---------------------------------------
Total Banks Missing Payments.... .. .. .. .. .. .. .. .. 140
---------------------------------------
Total Missed Payments........... .. .. .. .. .. .. .. .. 470
------------------------------------------------------------------------
\480\ Cumulative Dividends, Interest and Distributions Report, supra
note 475, at 17-20. Data on total bank assets compiled using SNL
Financial data service (accessed Jan. 6, 2011).
e. CPP Losses
As of December 30, 2010, Treasury has realized a total of
$2.6 billion in losses from investments in five CPP
participants. CIT Group Inc. and Pacific Coast National Bancorp
have both completed bankruptcy proceedings, and the preferred
stock and warrants issued by the South Financial Group, TIB
Financial Corp., and the Bank of Currituck were sold to third-
party institutions at a discount. Excluded from Treasury's
total losses are investments in institutions that have pending
receivership or bankruptcy proceedings, as well as an
institution that is currently the target of an
acquisition.\481\ Settlement of these transactions and
proceedings would increase total losses in the CPP to $3.0
billion. Figure 44 below details settled and unsettled
investment losses from CPP participants that have declared
bankruptcy, been placed into receivership, or renegotiated the
terms of their CPP contracts.
---------------------------------------------------------------------------
\481\ Treasury Transactions Report, supra note 24, at 13.
FIGURE 44: CPP SETTLED AND UNSETTLED LOSSES \482\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Investment Warrant
Institution Investment Disposition Disposition Dividends Possible Losses/ Action
Amount Amount Amount & Interest Reduced Exposure
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cadence Financial Corporation............... $44,000,000 $38,000,000 - $2,970,000 $(6,000,000) 10/29/2010: Treasury agreed to
sell preferred stock and
warrants issued by Cadence
Financial to Community Bancorp
LLC for $38 million plus
accrued and unpaid dividends.
Completion of the sale subject
to fulfillment of certain
closing conditions.
Capital Bank Corporation \483\.............. 41,279,000 - - 3,457,117 (20,639,500) 11/9/2010: Capital Bank Corp.
is seeking to enter an
agreement with Treasury
pursuant to which the company
will repurchase outstanding
TARP preferred shares at 50
percent of liquidation value,
plus accrued unpaid dividends.
The company will use cash
proceeds from its acquisition
by North American Financial
Holdings Inc. As of Nov. 30,
2010, no agreement has been
reached between Capital Bank
Corp. and Treasury.
CIT Group Inc.*............................. 2,330,000,000 - - 43,687,500 (2,330,000,000) 12/10/2009: Bankruptcy
reorganization plan for CIT
Group Inc. became effective.
CPP preferred shares and
warrants were extinguished and
replaced with contingent value
rights (CVR). On Feb. 8, 2010,
the CVRs expired without
value.
Midwest Banc Holdings, Inc.................. 89,388,000 - - 824,289 (89,388,000) 5/14/2010: Midwest Banc
Holdings, Inc. subsidiary,
Midwest Bank and Trust, Co.,
placed into receivership.
Midwest Banc Holdings is
currently in bankruptcy
proceedings.
Pacific Coast National Bancorp*............. 4,120,000 - - 18,088 (4,120,000) 2/11/2010: Pacific Coast
National Bancorp dismissed its
bankruptcy proceedings without
recovery to creditors or
investors. Investments,
including Treasury's CPP
investments, were
extinguished.
Pierce County Bancorp....................... 6,800,000 - - 207,948 (6,800,000) 11/5/2010: Pierce County
Bancorp subsidiary, Pierce
Commercial Bank, placed into
receivership.
Sonoma Valley Bancorp....................... 8,653,000 - - 347,164 (8,653,000) 8/20/2010: Sonoma Valley
Bancorp subsidiary, Sonoma
Valley Bank, placed into
receivership.
South Financial Group*...................... 347,000,000 130,179,219 $400,000 16,386,111 (216,820,781) 9/30/2010: Preferred stock and
warrants sold to Toronto-
Dominion Bank.
The Bank of Currituck*...................... 4,021,000 1,742,850 - 169,834 (2,278,150) 12/3/2010: The Bank of
Currituck completed its
repurchase of all preferred
stock (including preferred
stock received upon exercise
of warrants) issued to
Treasury.
TIB Financial Corp.*........................ 37,000,000 12,119,637 40,000 1,284,722 (24,880,363) 9/30/2010: Preferred stock and
warrants sold to North
American Financial Holdings.
Tifton Banking Company...................... 3,800,000 - - 223,208 (3,800,000) 11/12/2010: Tifton Banking
Company placed into
receivership.
UCBH Holdings, Inc.......................... 298,737,000 - - 7,509,920 (298,737,000) 11/6/2009: United Commercial
Bank, a wholly owned
subsidiary of UCBH Holdings,
Inc., was placed into
receivership. UCBH Holdings is
currently in bankruptcy
proceedings.
-----------------------------------------------------------------------------------------------------------
Total................................... $3,214,798,000 $182,041,706 440,000 77,085,901 $(3,012,116,794) ...............................
--------------------------------------------------------------------------------------------------------------------------------------------------------
\482\ Treasury Transactions Report, supra note 24, at 14. The asterisk (``*'') denotes recognized losses on Treasury's Transactions Report.
\483\ Capital Bank Corporation, Schedule 14A, at 5 (Nov. 19, 2010) (online at www.sec.gov/Archives/edgar/data/1071992/000095012310107474/
g25191ddef14a.htm).
f. Rate of Return
As of January 3, 2011, the average internal rate of return
for all public financial institutions that participated in the
CPP and fully repaid the U.S. government (including preferred
shares, dividends, and warrants) remained at 8.4 percent, with
only one institution, Central Jersey Bancorp, exiting the
program in December.\484\ The internal rate of return is the
annualized effective compounded return rate that can be earned
on invested capital.
---------------------------------------------------------------------------
\484\ Calculation of the internal rate of return (IRR) also
includes CPP investments in public institutions not repaid in full (for
reasons such as acquisition by another institution), such as The South
Financial Group and TIB Financial Corporation. The Panel's total IRR
calculation now includes CPP investments in public institutions
recorded as a loss on the TARP Transactions Report due to bankruptcy,
such as CIT Group Inc. Going forward, the Panel will continue to
include losses due to bankruptcy when Treasury determines that any
associated contingent value rights have expired without value. When
excluding CIT Group from the calculation, the resulting IRR is 10.4
percent. Treasury Transactions Report, supra note 24.
---------------------------------------------------------------------------
g. Warrant Disposition
FIGURE 45: WARRANT REPURCHASES/AUCTIONS FOR FINANCIAL INSTITUTIONS THAT HAVE FULLY REPAID CPP FUNDS (AS OF JANUARY 3, 2011)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Panel's Best
Warrant Warrant Valuation Price/
Institution Investment Repurchase Repurchase/ Sale Estimate at Estimate IRR
Date Date Amount Disposition Ratio (Percent)
Date
--------------------------------------------------------------------------------------------------------------------------------------------------------
Old National Bancorp.............................................. 12/12/2008 5/8/2009 $1,200,000 $2,150,000 0.558 9.3
Iberiabank Corporation............................................ 12/5/2008 5/20/2009 1,200,000 2,010,000 0.597 9.4
Firstmerit Corporation............................................ 1/9/2009 5/27/2009 5,025,000 4,260,000 1.180 20.3
Sun Bancorp, Inc.................................................. 1/9/2009 5/27/2009 2,100,000 5,580,000 0.376 15.3
Independent Bank Corp............................................. 1/9/2009 5/27/2009 2,200,000 3,870,000 0.568 15.6
Alliance Financial Corporation.................................... 12/19/2008 6/17/2009 900,000 1,580,000 0.570 13.8
First Niagara Financial Group..................................... 11/21/2008 6/24/2009 2,700,000 3,050,000 0.885 8.0
Berkshire Hills Bancorp, Inc...................................... 12/19/2008 6/24/2009 1,040,000 1,620,000 0.642 11.3
Somerset Hills Bancorp............................................ 1/16/2009 6/24/2009 275,000 580,000 0.474 16.6
SCBT Financial Corporation........................................ 1/16/2009 6/24/2009 1,400,000 2,290,000 0.611 11.7
HF Financial Corp................................................. 11/21/2008 6/30/2009 650,000 1,240,000 0.524 10.1
State Street...................................................... 10/28/2008 7/8/2009 60,000,000 54,200,000 1.107 9.9
U.S. Bancorp...................................................... 11/14/2008 7/15/2009 139,000,000 135,100,000 1.029 8.7
The Goldman Sachs Group, Inc...................................... 10/28/2008 7/22/2009 1,100,000,000 1,128,400,000 0.975 22.8
BB&T Corp......................................................... 11/14/2008 7/22/2009 67,010,402 68,200,000 0.983 8.7
American Express Company.......................................... 1/9/2009 7/29/2009 340,000,000 391,200,000 0.869 29.5
Bank of New York Mellon Corp...................................... 10/28/2008 8/5/2009 136,000,000 155,700,000 0.873 12.3
Morgan Stanley.................................................... 10/28/2008 8/12/2009 950,000,000 1,039,800,000 0.914 20.2
Northern Trust Corporation........................................ 11/14/2008 8/26/2009 87,000,000 89,800,000 0.969 14.5
Old Line Bancshares Inc........................................... 12/5/2008 9/2/2009 225,000 500,000 0.450 10.4
Bancorp Rhode Island, Inc......................................... 12/19/2008 9/30/2009 1,400,000 1,400,000 1.000 12.6
Centerstate Banks of Florida Inc.................................. 11/21/2008 10/28/2009 212,000 220,000 0.964 5.9
Manhattan Bancorp................................................. 12/5/2008 10/14/2009 63,364 140,000 0.453 9.8
CVB Financial Corp................................................ 12/5/2008 10/28/2009 1,307,000 3,522,198 0.371 6.4
Bank of the Ozarks................................................ 12/12/2008 11/24/2009 2,650,000 3,500,000 0.757 9.0
Capital One Financial............................................. 11/14/2008 12/3/2009 148,731,030 232,000,000 0.641 12.0
JPMorgan Chase & Co............................................... 10/28/2008 12/10/2009 950,318,243 1,006,587,697 0.944 10.9
CIT Group Inc..................................................... 12/31/2008 - - 562,541 - (97.2)
TCF Financial Corp................................................ 1/16/2009 12/16/2009 9,599,964 11,825,830 0.812 11.0
LSB Corporation................................................... 12/12/2008 12/16/2009 560,000 535,202 1.046 9.0
Wainwright Bank & Trust Company................................... 12/19/2008 12/16/2009 568,700 1,071,494 0.531 7.8
Wesbanco Bank, Inc................................................ 12/5/2008 12/23/2009 950,000 2,387,617 0.398 6.7
Union First Market Bankshares Corporation (Union Bankshares 12/19/2008 12/23/2009 450,000 1,130,418 0.398 5.8
Corporation).....................................................
Trustmark Corporation............................................. 11/21/2008 12/30/2009 10,000,000 11,573,699 0.864 9.4
Flushing Financial Corporation.................................... 12/19/2008 12/30/2009 900,000 2,861,919 0.314 6.5
OceanFirst Financial Corporation.................................. 1/16/2009 2/3/2010 430,797 279,359 1.542 6.2
Monarch Financial Holdings, Inc................................... 12/19/2008 2/10/2010 260,000 623,434 0.417 6.7
Bank of America................................................... 10/28/2008 3/3/2010 1,566,210,714 1,006,416,684 1.533 6.5
\485\ 1/9/2009
\486\ 1/14/
2009 \487\
Washington Federal Inc./Washington Federal Savings & Loan 11/14/2008 3/9/2010 15,623,222 10,166,404 1.537 18.6
Association......................................................
Signature Bank.................................................... 12/12/2008 3/10/2010 11,320,751 11,458,577 0.988 32.4
Texas Capital Bancshares, Inc..................................... 1/16/2009 3/11/2010 6,709,061 8,316,604 0.807 30.1
Umpqua Holdings Corp.............................................. 11/14/2008 3/31/2010 4,500,000 5,162,400 0.872 6.6
City National Corporation......................................... 11/21/2008 4/7/2010 18,500,000 24,376,448 0.759 8.5
First Litchfield Financial Corporation............................ 12/12/2008 4/7/2010 1,488,046 1,863,158 0.799 15.9
PNC Financial Services Group Inc.................................. 12/31/2008 4/29/2010 324,195,686 346,800,388 0.935 8.7
Comerica Inc...................................................... 11/14/2008 5/4/2010 183,673,472 276,426,071 0.664 10.8
Valley National Bancorp........................................... 11/14/2008 5/18/2010 5,571,592 5,955,884 0.935 8.3
Wells Fargo Bank.................................................. 10/28/2008 5/20/2010 849,014,998 1,064,247,725 0.798 7.8
First Financial Bancorp........................................... 12/23/2008 6/2/2010 3,116,284 3,051,431 1.021 8.2
Sterling Bancshares, Inc./Sterling Bank........................... 12/12/2008 6/9/2010 3,007,891 5,287,665 0.569 10.8
SVB Financial Group............................................... 12/12/2008 6/16/2010 6,820,000 7,884,633 0.865 7.7
Discover Financial Services....................................... 3/13/2009 7/7/2010 172,000,000 166,182,652 1.035 17.1
Bar Harbor Bancshares............................................. 1/16/2009 7/28/2010 250,000 518,511 0.482 6.2
Citizens & Northern Corporation................................... 1/16/2009 8/4/2010 400,000 468,164 0.854 5.9
Columbia Banking System, Inc...................................... 11/21/2008 8/11/2010 3,301,647 3,291,329 1.003 7.3
Hartford Financial Services Group, Inc............................ 6/26/2009 9/21/2010 713,687,430 472,221,996 1.511 30.3
Lincoln National Corporation...................................... 7/10/2009 9/16/2010 216,620,887 181,431,183 1.194 27.1
Fulton Financial Corporation...................................... 12/23/2008 9/8/2010 10,800,000 15,616,013 0.692 6.7
The Bancorp, Inc./The Bancorp Bank................................ 12/12/2008 9/8/2010 4,753,985 9,947,683 0.478 12.8
South Financial Group, Inc./Carolina First Bank................... 12/5/2008 9/30/2010 400,000 1,164,486 0.343 (34.2)
TIB Financial Corp/TIB Bank....................................... 12/5/2008 9/30/2010 40,000 235,757 0.170 (38.0)
Central Jersey Bancorp............................................ 12/23/2008 12/1/2010 319,659 1,554,457 0.206 6.3
-------------------------------------------------------------------------------------
Total............................................................. .............. ........... $8,148,651,825 $8,001,397,712 1.018 8.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
\485\ Investment date for Bank of America in the CPP.
\486\ Investment date for Merrill Lynch in the CPP.
\487\ Investment date for Bank of America in the TIP.
FIGURE 46: VALUATION OF CURRENT HOLDINGS OF WARRANTS (AS OF JANUARY 3,
2011)
------------------------------------------------------------------------
Warrant Valuation (millions of
dollars)
Financial Institutions with --------------------------------------
Warrants Outstanding Low High Best
Estimate Estimate Estimate
------------------------------------------------------------------------
Citigroup, Inc.\488\............. $53.80 $1,070.04 $168.61
SunTrust Banks, Inc.............. 15.38 186.09 78.14
Regions Financial Corporation.... 11.40 199.48 106.32
Fifth Third Bancorp.............. 137.43 428.31 228.42
KeyCorp.......................... 33.05 183.96 93.42
AIG.............................. 1,064.98 2,516.60 1,652.69
All Other Banks.................. 684.87 1,786.36 1,203.84
--------------------------------------
Total............................ $2,000.91 $6,370.84 $3,531.44
------------------------------------------------------------------------
\488\ Includes warrants issued under the CPP, the AGP, and the TIP.
2. Federal Financial Stability Efforts
a. Federal Reserve and FDIC Programs
In addition to the direct expenditures Treasury has
undertaken through the TARP, the federal government has engaged
in a much broader program directed at stabilizing the U.S.
financial system. Many of these initiatives explicitly augment
funds allocated by Treasury under specific TARP initiatives,
such as FDIC and Federal Reserve asset guarantees for
Citigroup, or operate in tandem with Treasury programs. Other
programs, like the Federal Reserve's extension of credit
through its Section 13(3) facilities and special purpose
vehicles (SPVs) and the FDIC's Temporary Liquidity Guarantee
Program (TLGP), operate independently of the TARP.
b. Total Financial Stability Resources
Beginning in its April 2009 report, the Panel broadly
classified the resources that the federal government has
devoted to stabilizing the economy through myriad new programs
and initiatives such as outlays, loans, or guarantees. With the
reductions in funding for certain TARP programs, the Panel
calculates the total value of these resources to be
approximately $2.5 trillion. However, this would translate into
the ultimate ``cost'' of the stabilization effort only if: (1)
assets do not appreciate; (2) no dividends are received, no
warrants are exercised, and no TARP funds are repaid; (3) all
loans default and are written off; and (4) all guarantees are
exercised and subsequently written off.
With respect to the FDIC and Federal Reserve programs, the
risk of loss varies significantly across the programs
considered here, as do the mechanisms providing protection for
the taxpayer against such risk. As discussed in the Panel's
November 2009 report, the FDIC assesses a premium of up to 100
basis points, or 1 percentage point, on TLGP debt
guarantees.\489\ In contrast, the Federal Reserve's liquidity
programs are generally available only to borrowers with good
credit, and the loans are over-collateralized and with recourse
to other assets of the borrower. If the assets securing a
Federal Reserve loan realize a decline in value greater than
the ``haircut,'' the Federal Reserve is able to demand more
collateral from the borrower. Similarly, should a borrower
default on a recourse loan, the Federal Reserve can turn to the
borrower's other assets to make the Federal Reserve whole. In
this way, the risk to the taxpayer on recourse loans only
materializes if the borrower enters bankruptcy.
---------------------------------------------------------------------------
\489\ Congressional Oversight Panel, November Oversight Report:
Guarantees and Contingent Payments in TARP and Related Programs, at 36
(Nov. 6, 2009) (online at cop.senate.gov/documents/cop-110609-
report.pdf).
---------------------------------------------------------------------------
c. Mortgage Purchase Programs
On September 7, 2008, Treasury announced the GSE Mortgage
Backed Securities Purchase (MBS) Program. The Housing and
Economic Recovery Act of 2008 provided Treasury with the
authority to purchase MBS guaranteed by government-sponsored
enterprises (GSEs) through December 31, 2009. Treasury
purchased approximately $225 billion in GSE MBS by the time its
authority expired.\490\ As of December 2010, there was
approximately $144.4 billion in MBS still outstanding under
this program.\491\
---------------------------------------------------------------------------
\490\ U.S. Department of the Treasury, FY2011 Budget in Brief, at
138 (Feb. 2010) (online at www.treasury.gov/about/budget-performance/
budget-in-brief/Documents/FY%202011%20BIB%20(2).pdf).
\491\ U.S. Department of the Treasury, MBS Purchase Program:
Portfolio by Month (online at www.financialstability.gov/docs/
December%202010%20Portfolio%20by%20month.pdf) (accessed Jan. 11, 2011).
Treasury has received $75.9 billion in principal repayments and $15.6
billion in interest payments from these securities. See U.S. Department
of the Treasury, MBS Purchase Program Principal and Interest Received
(online at www.financialstability.gov/docs/
December%202010%20MBS%20Principal%20and%20Interest%20Monthly%20Breakout.
pdf) (accessed Jan. 11, 2011).
---------------------------------------------------------------------------
In March 2009, the Federal Reserve authorized purchases of
$1.25 trillion MBS guaranteed by Fannie Mae, Freddie Mac, and
Ginnie Mae, and $200 billion of agency debt securities from
Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.\492\
The intended purchase amount for agency debt securities was
subsequently decreased to $175 billion.\493\ All purchasing
activity was completed on March 31, 2010. As of January 6,
2010, the Federal Reserve held $992 billion of agency MBS and
$147 billion of agency debt.\494\
---------------------------------------------------------------------------
\492\ Board of Governors of the Federal Reserve System, Federal
Reserve System Monthly Report on Credit and Liquidity Programs and the
Balance Sheet, at 5 (Dec. 2010) (online at federalreserve.gov/
monetarypolicy/files/monthlyclbsreport201012.pdf).
\493\ Id. at 5.
\494\ Board of Governors of the Federal Reserve System, Factors
Affecting Reserve Balances (H.4.1) (Jan. 6, 2011) (online at
www.federalreserve.gov/releases/h41/20110106/) (hereinafter ``Factors
Affecting Reserve Balances (H.4.1)'').
---------------------------------------------------------------------------
d. Federal Reserve Treasury Securities Purchases \495\
---------------------------------------------------------------------------
\495\ Board of Governors of the Federal Reserve System, Press
Release--FOMC Statement (Nov. 3, 2010) (online at
www.federalreserve.gov/newsevents/press/monetary/20101103a.htm);
Federal Reserve Bank of New York, Statement Regarding Purchases of
Treasury Securities (Nov. 3, 2010) (online at www.federalreserve.gov/
newsevents/press/monetary/monetary20101103a1.pdf).
---------------------------------------------------------------------------
On November 3, 2010, the Federal Open Market Committee
(FOMC) announced that it has directed the Federal Reserve Bank
of New York (FRBNY) to begin purchasing an additional $600
billion in longer-term Treasury securities. In addition, FRBNY
will reinvest $250 billion to $300 billion in principal
payments from agency debt and agency MBS in Treasury
securities.\496\ The additional purchases and reinvestments
will be conducted through the end of the second quarter of
2011, meaning the pace of purchases will be approximately $110
billion per month. In order to facilitate these purchases,
FRBNY will temporarily lift its System Open Market Account per-
issue limit, which prohibits the Federal Reserve's holdings of
an individual security from surpassing 35 percent of the
outstanding amount.\497\ As of January 6, 2010, the Federal
Reserve held $1.03 trillion in Treasury securities.\498\
---------------------------------------------------------------------------
\496\ On August 10, 2010, the Federal Reserve began reinvesting
principal payments on agency debt and agency MBS holdings in longer-
term Treasury securities in order to keep the amount of their
securities holdings in their System Open Market Account portfolio at
their then-current level. Board of Governors of the Federal Reserve
System, FOMC Statement (Aug. 10, 2010) (online at
www.federalreserve.gov/newsevents/press/monetary/20100810a.htm).
\497\ Federal Reserve Bank of New York, FAQs: Purchases of Longer-
term Treasury Securities (Nov. 3, 2010) (online at www.newyorkfed.org/
markets/lttreas_faq.html).
\498\ Factors Affecting Reserve Balances (H.4.1), supra note 494.
FIGURE 47: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF DECEMBER 30, 2010) xxxiii
----------------------------------------------------------------------------------------------------------------
Treasury Federal
Program (billions of dollars) (TARP) Reserve FDIC Total
----------------------------------------------------------------------------------------------------------------
Total........................................... $475.0 $1,311.6 $690.9 $2,477.5
Outlays xxxiv............................... 201.4 1,166.0 188.9 1,556.3
Loans....................................... 23.6 145.6 0 169.6
Guarantees xxxv............................. 4.3 0 502 506.3
Repaid and Unavailable TARP Funds........... 245.8 0 0 245.8
AIG xxxvi ...................................... 69.8 81.7 0 151.4
0utlays..................................... xxxvii 69.8 xxxviii 26.4 0 96.2
Loans....................................... 0 xxxix 55.2 0 55.2
Guarantees.................................. 0 0 0 0
Citigroup....................................... 0 0 0 0
0utlays..................................... xi 0 0 0 0
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Capital Purchase Program (Other)................ 34.4 0 0 34.4
Outlays..................................... xii 34.4 0 0 34.4
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Capital Assistance Program...................... N/A 0 0 xlii N/A
TALF............................................ 4.3 38.7 0 43.0
Outlays..................................... 0 0 0 0
Loans....................................... 0 xliv 38.7 0 38.7
Guarantees.................................. xliii 4.3 0 0 4.3
PPIP (Loans) xlv................................ 0 0 0 0
Outlays..................................... 0 0 0 0
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
PPIP (Securities)............................... xlvi 22.4 0 0 22.4
Outlays..................................... 7.4 0 0 7.4
Loans....................................... 15.1 0 0 15.1
Guarantees.................................. 0 0 0 0
Making Home Affordable Program/Foreclosure 45.6 0 0 45.6
Mitigation.....................................
Outlays..................................... xlvii 45.6 0 0 45.6
Outlays..................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Automotive Industry Financing Program........... xlviii 51.4 0 0 51.4
Outlays..................................... 43.3 0 0 43.3
Loans....................................... 8.1 0 0 8.1
Guarantees.................................. 0 0 0 0
Automotive Supplier Support Program............. 0.4 0 0 0.4
Outlays..................................... 0 0 0 0
Loans....................................... xliv 0.4 0 0 0.4
Guarantees.................................. 0 0 0 0
SBA 7(a) Securities Purchase.................... l 0.37 0 0 0.37
Outlays..................................... 0.37 0 0 0.37
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Community Development Capital Initiative........ li 0.57 0 0 0.57
Outlays..................................... 0 0 0 0
Loans....................................... 0.57 0 0 0.57
Guarantees.................................. 0 0 0 0
Temporary Liquidity Guarantee Program........... 0 0 502.0 502.0
Outlays..................................... 0 0 0 0
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 lii 502.0 502.0
Deposit Insurance Fund.......................... 0 0 188.9 188.9
Outlays..................................... 0 0 liii 88.9 188.9
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Other Federal Reserve Credit Expansion.......... 0 1,191.3 0 1,191.3
Outlays..................................... 0 liv 1,139.6 0 1,139.6
Loans....................................... 0 lv 51.7 0 51.7
Guarantees.................................. 0 0 0 0
----------------------------------------------------------------------------------------------------------------
xxxiii Unless otherwise noted, all data in this figure are as of December 30, 2010.
xxxiv The term ``outlays'' is used here to describe the use of Treasury funds under the TARP, which are broadly
classifiable as purchases of debt or equity securities (e.g., debentures, preferred stock, exercised warrants,
etc.). These values were calculated using (1) Treasury's actual reported expenditures, and (2) Treasury's
anticipated funding levels as estimated by a variety of sources, including Treasury statements and GAO
estimates. Anticipated funding levels are set at Treasury's discretion, have changed from initial
announcements, and are subject to further change. Outlays used here represent investment and asset purchases--
as well as commitments to make investments and asset purchases--and are not the same as budget outlays, which
under section 123 of EESA are recorded on a ``credit reform'' basis.
xxxv Although many of the guarantees may never be exercised or will be exercised only partially, the guarantee
figures included here represent the federal government's greatest possible financial exposure.
xxxvi U.S. Department of the Treasury, Treasury Update on AIG Investment Valuation (Nov. 1, 2010) (online at
financialstability.gov/latest/pr_11012010.html). AIG values exclude accrued dividends on preferred interests
in the AIA and ALICO SPVs and accrued interest payable to FRBNY on the Maiden Lane LLCs.
xxxvii This number includes investments under the AIGIP/SSFI Program: a $40 billion investment made on November
25, 2008, and a $30 billion investment made on April 17, 2009 (less a reduction of $165 million representing
bonuses paid to AIG Financial Products employees). As of November 1, 2010, AIG had utilized $47.5 billion of
the available $69.8 billion under the AIGIP/SSFI. U.S. Department of the Treasury, Treasury Update on AIG
Investment Valuation (Nov. 1, 2010) (online at www.financialstability.gov/latest/pr_11012010.html); U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending December
30, 2010, at 21 (Dec. 30, 2010) (online at www.financialstability.gov/docs/transaction-reports/12-30-
10%20Transactions%20Report%20as%20of%2012-30-10.pdf).
xxxviii As part of the restructuring of the U.S. government's investment in AIG announced on March 2, 2009, the
amount available to AIG through the Revolving Credit Facility was reduced by $25 billion in exchange for
preferred equity interests in two special purpose vehicles, AIA Aurora LLC and ALICO Holdings LLC. Board of
Governors of the Federal Reserve System, Federal Reserve System Monthly Report on Credit and Liquidity
Programs and the Balance Sheet, at 18 (Dec. 2010) (online at www.federalreserve.gov/monetarypolicy/files/
monthlyclbsreport201012.pdf). These SPVs were established to hold the common stock of two AIG subsidiaries:
American International Assurance Company Ltd. (AIA) and American Life Insurance Company (ALICO). As of January
6, 2011, the book value of the Federal Reserve Bank of New York's holdings in AIA Aurora LLC and ALICO
Holdings LLC was $26.4 billion in preferred equity ($16.9 billion in AIA and $9.5 billion in ALICO). Federal
Reserve Bank of New York, Factors Affecting Reserve Balances (H.4.1) (Jan. 6, 2011) (online at
www.federalreserve.gov/releases/h41/20110106/).
xxxix This number represents the full $28.9 billion made available to AIG through its Revolving Credit Facility
(RCF) with FRBNY ($20.0 billion had been drawn down as of January 5, 2011) and the outstanding principal of
the loans extended to the Maiden Lane II and III SPVs to buy AIG assets (as of January 5, 2011, $12.8 billion
and $13.5 billion, respectively). Federal Reserve Bank of New York, Factors Affecting Reserve Balances (H.4.1)
(Jan. 6, 2011) (online at www.federalreserve.gov/releases/h41/20110106/); Board of Governors of the Federal
Reserve System, Federal Reserve System, Federal Reserve System Monthly Report on Credit and Liquidity Programs
and the Balance Sheet, at 16 (Dec. 2010) (online at www.federalreserve.gov/monetarypolicy/files/
monthlyclbsreport201012.pdf). The amounts outstanding under the Maiden Lane II and III facilities do not
reflect the accrued interest payable to FRBNY. Income from the purchased assets is used to pay down the loans
to the SPVs, reducing the taxpayers' exposure to losses over time. Board of Governors of the Federal Reserve
System, Federal Reserve System Monthly Report on Credit and Liquidity Programs and the Balance Sheet, at 15
(Nov. 2010) (online at www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport201011.pdf).
The maximum amount available through the RCF decreased from $34.4 billion to $28.9 billion between March and
November 2010, primarily as a result of the sale of several subsidiaries. The reduced ceiling also reflects a
$3.95 billion repayment to the RCF from proceeds earned from a debt offering by the International Lease
Finance Corporation (ILFC), an AIG subsidiary. The balance on the RCF increased $0.7 billion between October
27 and November 24, 2010, primarily due to recapitalized interest and fees as principal repayments. Board of
Governors of the Federal Reserve System, Federal Reserve System Monthly Report on Credit and Liquidity
Programs and the Balance Sheet, at 16, 19 (Dec. 2010) (online at www.federalreserve.gov/monetarypolicy/files/
monthlyclbsreport201012.pdf).
xl The final sale of Treasury's Citigroup common stock resulted in full repayment of Treasury's investment of
$25 billion. See endnote ii, supra, for further details of the sales of Citigroup common stock. U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending December
30, 2010, at 1, 13 (Dec. 30, 2010) (online at www.financialstability.gov/docs/transaction-reports/12-30-
10%20Transactions%20Report%20as%20of%2012-30-10.pdf).
xli This figure represents the $204.9 billion Treasury disbursed under the CPP, minus the $25 billion investment
in Citigroup identified above, $139.5 billion in repayments (excluding the amount repaid for the Citigroup
investment) that are in ``repaid and unavailable'' TARP funds, and losses under the program. This figure does
not account for future repayments of CPP investments and dividend payments from CPP investments. U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending December
30, 2010, at 13 (Dec. 30, 2010) (online at www.financialstability.gov/docs/transaction-reports/12-30-
10%20Transactions%20Report%20as%20of%2012-30-10.pdf).
xlii On November 9, 2009, Treasury announced the closing of the CAP and that only one institution, GMAC/Ally
Financial, was in need of further capital from Treasury. GMAC/Ally Financial, however, received further
funding through the AIFP. Therefore, the Panel considers the CAP unused. U.S. Department of the Treasury,
Treasury Announcement Regarding the Capital Assistance Program (Nov. 9, 2009) (online at
www.financialstability.gov/latest/tg_11092009.html).
xliii This figure represents the $4.3 billion adjusted allocation to the TALF SPV. However, as of January 6,
2011, TALF LLC had drawn only $106 million of the available $4.3 billion. Board of Governors of the Federal
Reserve System, Factors Affecting Reserve Balances (H.4.1) (Jan. 6, 2011) (online at www.federalreserve.gov/
releases/h41/20110106/); U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report
for the Period Ending December 30, 2010, at 21 (Dec. 30, 2010) (online at financialstability.gov/latest/
tg_11092009.html). On June 30, 2010, the Federal Reserve ceased issuing loans collateralized by newly issued
CMBS. As of this date, investors had requested a total of $73.3 billion in TALF loans ($13.2 billion in CMBS
and $60.1 billion in non-CMBS) and $71 billion in TALF loans had been settled ($12 billion in CMBS and $59
billion in non-CMBS). Earlier, it ended its issues of loans collateralized by other TALF-eligible newly issued
and legacy ABS (non-CMBS) on March 31, 2010. Federal Reserve Bank of New York, Term Asset-Backed Securities
Loan Facility: Terms and Conditions (online at www.newyorkfed.org/markets/talf_terms.html) (accessed Jan. 6,
2011); Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: CMBS (online at
www.newyorkfed.org/markets/cmbs_operations.html) (accessed Jan. 6, 2011); Federal Reserve Bank of New York,
Term Asset-Backed Securities Loan Facility: CMBS (online at www.newyorkfed.org/markets/
CMBS_recent_operations.html) (accessed Jan. 6, 2011); Federal Reserve Bank of New York, Term Asset-Backed
Securities Loan Facility: non-CMBS (online at www.newyorkfed.org/markets/talf_operations.html) (accessed Jan.
6, 2011); Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: non-CMBS (online at
www.newyorkfed.org/markets/TALF_recent_operations.html) (accessed Jan. 6, 2011).
xliv This number is derived from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the value
of Federal Reserve loans under the TALF. U.S. Department of the Treasury, Fact Sheet: Financial Stability
Plan, at 4 (Feb. 10, 2009) (online at financialstability.gov/docs/fact-sheet.pdf) (describing the initial $20
billion Treasury contribution tied to $200 billion in Federal Reserve loans and announcing potential expansion
to a $100 billion Treasury contribution tied to $1 trillion in Federal Reserve loans). Since only $43 billion
in TALF loans remained outstanding when the program closed, Treasury is currently responsible for reimbursing
the Federal Reserve Board only up to $4.3 billion in losses from these loans. Thus, the Federal Reserve's
maximum potential exposure under the TALF is $38.7 billion. See Board of Governors of the Federal Reserve
System, Federal Reserve Announces Agreement with Treasury Regarding Reduction of Credit Protection Provided
for the Term Asset-Backed Securities Loan Facility (TALF) (July 20, 2010) (online at www.federalreserve.gov/
newsevents/press/monetary/20100720a.htm); Board of Governors of the Federal Reserve System, Factors Affecting
Reserve Balances (H.4.1) (Jan. 6, 2011) (online at www.federalreserve.gov/releases/h41/20110106/).
xlv No TARP resources were expended under the PPIP Legacy Loans Program, a TARP program that was announced in
March 2009 but never launched. Since no TARP funds were allocated for the program by the time the TARP expired
in October 2010, this or a similar program cannot be implemented unless another source of funding is
available.
xlvi This figure represents Treasury's final adjusted investment amount in the Legacy Securities Public-Private
Investment Program (PPIP). As of December 30, 2010, Treasury reported commitments of $15.1 billion in loans
and $7.4 billion in membership interest associated with the PPIP. See U.S. Department of the Treasury,
Troubled Asset Relief Program Transactions Report for the Period Ending December 30, 2010, at 23 (Dec. 30,
2010) (online at www.financialstability.gov/docs/transaction-reports/12-30-10%20Transactions%20
Report%20as%20of%2012-30-10.pdf). On January 4, 2010, Treasury and one of the nine fund managers, UST/TCW
Senior Mortgage Securities Fund, L.P. (TCW), entered into a ``Winding Up and Liquidation Agreement.'' U.S.
Department of the Treasury, Winding Up and Liquidation Agreement Between the United States Department of the
Treasury and UST/TCW Senior Mortgage Securities Fund, L.P. (Jan. 4, 2010) (online at financialstability.gov/
docs/TCW%20Winding%20Up%20Agmt%20(Execution%20Copy)%20Redacted.pdf). Treasury's final investment amount in TCW
totaled $356 million. Following the liquidation of the fund, Treasury's initial $3.3 billion obligation to TCW
was reallocated among the eight remaining funds on March 22, 2010. See U.S. Department of the Treasury,
Troubled Asset Relief Program Transactions Report for the Period Ending December 30, 2010, at 23 (Dec. 30,
2010) (online at www.financialstability.gov/docs/transaction-reports/12-30-
10%20Transactions%20Report%20as%20of %2012-30-10.pdf).
On October 20, 2010, Treasury released its fourth quarterly report on PPIP. The report indicates that as of
September 30, 2010, all eight investment funds have realized an internal rate of return since inception (net
of any management fees or expenses owed to Treasury) above 19 percent. The highest performing fund, thus far,
is AG GECC PPIF Master Fund, L.P., which has a net internal rate of return of 52 percent. U.S. Department of
the Treasury, Legacy Securities Public-Private Investment Program, at 7 (Oct. 20, 2010) (online at
financialstability.gov/docs/External%20Report%20-%2009-10%20vFinal.pdf).
xlvii The total amount of TARP funds committed to HAMP is $29.9 billion. U.S. Department of the Treasury,
Troubled Asset Relief Program Transactions Report for the Period Ending December 30, 2010, at 45 (Dec. 30,
2010) (online at www.financialstability.gov/docs/transaction-reports/12-30-
10%20Transactions%20Report%20as%20of%2012-30-10.pdf); U.S. Department of the Treasury, Troubled Assets Relief
Program Monthly 105(a) Report--November 2010, at 4 (Dec. 10, 2010) (online at financialstability.gov/docs/
November%20105(a)%20Report.pdf). However, as of December 31, 2010, only $840.1 million in non-GSE payments
have been disbursed under HAMP. Data provided by Treasury (Jan. 4, 2011).
xlviii A substantial portion of the total $81.3 billion in debt instruments extended under the AIFP has since
been converted to common equity and preferred shares in restructured companies. $8.1 billion has been retained
as first-lien debt (with $1 billion committed to Old GM and $7.1 billion to Chrysler). $51.4 billion
represents Treasury's current obligation under the AIFP after repayments and losses. U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending December 30, 2010, at 18
(Dec. 30, 2010) (online at www.financialstability.gov/docs/transaction-reports/12-30-
10%20Transactions%20Report%20as%20of%2012-30-10.pdf).
xlix This figure represents Treasury's total adjusted investment amount in the ASSP. U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending December 30, at 19 (Dec.
30, 2010) (online at www.financialstability.gov/docs/transaction-reports/12-30-10 %20Transactions%20Report
%20as%20of%2012-30-10.pdf).
l U.S. Department of the Treasury, Troubled Asset Relief Program: Two Year Retrospective, at 43 (Oct. 2010)
(online at www.financialstability.gov/docs/
TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
li U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending
December 30, 2010, at 17 (Dec. 30, 2010) (online at www.financialstability.gov/docs/transaction-reports/12-30-
10%20Transactions%20Report%20as%20of%2012-30-10.pdf).
lii This figure represents the current maximum aggregate debt guarantees that could be made under the program,
which is a function of the number and size of individual financial institutions participating. $286.8 billion
of debt subject to the guarantee is currently outstanding, which represents approximately 57.1 percent of the
current cap. Federal Deposit Insurance Corporation, Monthly Reports Related to the Temporary Liquidity
Guarantee Program: Debt Issuance Under Guarantee Program (Dec. 21, 2010) (online at www.fdic.gov/regulations/
resources/tlgp/total_issuance11-10.html). The FDIC has collected $10.4 billion in fees and surcharges from
this program since its inception in the fourth quarter of 2008. Federal Deposit Insurance Corporation, Monthly
Reports Related to the Temporary Liquidity Guarantee Program: Fees Under Temporary Liquidity Guarantee Debt
Program (Dec. 21, 2010) (online at www.fdic.gov/regulations/resources/tlgp/fees.html).
liii This figure represents the FDIC's provision for losses to its deposit insurance fund attributable to bank
failures in the third and fourth quarters of 2008; the first, second, third, and fourth quarters of 2009; and
the first, second, and third quarters of 2010. Federal Deposit Insurance Corporation, Chief Financial
Officer's (CFO) Report to the Board: DIF Income Statement--Third Quarter 2010 (Nov. 12, 2010) (online at
www.fdic.gov/about/strategic/corporate/cfo_report_3rdqtr_10/income.html). For earlier reports, see Federal
Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board (Sept. 23, 2010) (online at
www.fdic.gov/about/strategic/corporate/index.html). This figure includes the FDIC's estimates of its future
losses under loss-sharing agreements that it has entered into with banks acquiring assets of insolvent banks
during these eight quarters. Under a loss-sharing agreement, as a condition of an acquiring bank's agreement
to purchase the assets of an insolvent bank, the FDIC typically agrees to cover 80 percent of an acquiring
bank's future losses on an initial portion of these assets and 95 percent of losses on another portion of
assets. See, e.g., Federal Deposit Insurance Corporation, Purchase and Assumption Agreement--Whole Bank, All
Deposits--Among FDIC, Receiver of Guaranty Bank, Austin, Texas, Federal Deposit Insurance Corporation and
Compass Bank, at 65-66 (Aug. 21, 2009) (online at www.fdic.gov/bank/individual/failed/guaranty-
tx_p_and_a_w_addendum.pdf).
liv Outlays are comprised of the Federal Reserve Mortgage Related Facilities. The Federal Reserve balance sheet
accounts for these facilities under federal agency debt securities and mortgage-backed securities held by the
Federal Reserve. Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1)
(Jan. 6, 2011) (online at www.federalreserve.gov/releases/h41/20110106/)(accessed Jan. 6, 2011). Although the
Federal Reserve does not employ the outlays, loans, and guarantees classification, its accounting clearly
separates its mortgage-related purchasing programs from its liquidity programs. See, e.g., Board of Governors
of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1), at 2 (Jan. 6, 2011) (online at
www.federalreserve.gov/releases/h41/20110106/) (accessed Jan. 6, 2011).
lv Federal Reserve Liquidity Facilities classified in this table as loans include primary credit, secondary
credit, central bank liquidity swaps, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity
Facility, loans outstanding to Commercial Paper Funding Facility LLC, seasonal credit, term auction credit,
the Term Asset-Backed Securities Loan Facility, and loans outstanding to Bear Stearns (Maiden Lane LLC). Board
of Governors of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1) (Jan. 6, 2011) (online
at www.federalreserve.gov/releases/h41/20110106/)(accessed Jan. 6, 2011). For further information, see the
data that the Federal Reserve recently disclosed on these programs pursuant to its obligations under the Dodd-
Frank Wall Street Reform and Consumer Protection Act. Board of Governors of the Federal Reserve System, Credit
and Liquidity Programs and the Balance Sheet: Overview (May 11, 2010) (online at www.federalreserve.gov/
monetarypolicy/bst.htm); Board of Governors of the Federal Reserve System, Credit and Liquidity Programs and
the Balance Sheet: Reports and Disclosures (Aug. 24, 2010) (online at www.federalreserve.gov/monetarypolicy/
bst_reports.htm); Board of Governors of the Federal Reserve System, Usage of Federal Reserve Credit and
Liquidity Facilities (Dec. 3, 2010) (online at www.federalreserve.gov/newsevents/reform_transaction.htm).
SECTION FOUR: OVERSIGHT ACTIVITIES
The Congressional Oversight Panel was established as part
of the Emergency Economic Stabilization Act (EESA) and formed
on November 26, 2008. Since then, the Panel has produced 26
oversight reports as well as a special report on regulatory
reform, issued on January 29, 2009, and a special report on
farm credit, issued on July 21, 2009. Since the release of the
Panel's December oversight report, the following developments
pertaining to the Panel's oversight of the TARP took place:
The Panel held a hearing in Washington on
December 16, 2010 with Secretary Geithner, his fifth appearance
before the Panel. The Secretary had the opportunity to discuss
the economic impact and ultimate cost of the TARP, the
challenges that remain in supporting the financial system and
the housing market now that the TARP's authority has expired,
and other topics related to the Panel's recently published
oversight reports.
Upcoming Reports and Hearings
The Panel will release its next oversight report in
February. The report will discuss executive compensation
restrictions for companies that received TARP assistance,
expanding upon the Panel's hearing on the topic on October 21,
2010.\499\
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\499\ See Congressional Oversight Panel, COP Hearing on the TARP
and Executive Compensation Restrictions (Oct. 21, 2010) (online at
cop.senate.gov/hearings/library/hearing-102110-compensation.cfm).
SECTION FIVE: ABOUT THE CONGRESSIONAL OVERSIGHT PANEL
In response to the escalating financial crisis, on October
3, 2008, Congress provided Treasury with the authority to spend
$700 billion to stabilize the U.S. economy, preserve home
ownership, and promote economic growth. Congress created the
Office of Financial Stability (OFS) within Treasury to
implement the TARP. At the same time, Congress created the
Congressional Oversight Panel to ``review the current state of
financial markets and the regulatory system.'' The Panel is
empowered to hold hearings, review official data, and write
reports on actions taken by Treasury and financial institutions
and their effect on the economy. Through regular reports, the
Panel must oversee Treasury's actions, assess the impact of
spending to stabilize the economy, evaluate market
transparency, ensure effective foreclosure mitigation efforts,
and guarantee that Treasury's actions are in the best interests
of the American people. In addition, Congress instructed the
Panel to produce a special report on regulatory reform that
analyzes ``the current state of the regulatory system and its
effectiveness at overseeing the participants in the financial
system and protecting consumers.'' The Panel issued this report
in January 2009. Congress subsequently expanded the Panel's
mandate by directing it to produce a special report on the
availability of credit in the agricultural sector. The report
was issued on July 21, 2009.
On November 14, 2008, Senate Majority Leader Harry Reid and
the Speaker of the House Nancy Pelosi appointed Richard H.
Neiman, Superintendent of Banks for the State of New York,
Damon Silvers, Director of Policy and Special Counsel of the
American Federation of Labor and Congress of Industrial
Organizations (AFL-CIO), and Elizabeth Warren, Leo Gottlieb
Professor of Law at Harvard Law School, to the Panel. With the
appointment on November 19, 2008, of Congressman Jeb Hensarling
to the Panel by House Minority Leader John Boehner, the Panel
had a quorum and met for the first time on November 26, 2008,
electing Professor Warren as its chair. On December 16, 2008,
Senate Minority Leader Mitch McConnell named Senator John E.
Sununu to the Panel. Effective August 10, 2009, Senator Sununu
resigned from the Panel, and on August 20, 2009, Senator
McConnell announced the appointment of Paul Atkins, former
Commissioner of the U.S. Securities and Exchange Commission, to
fill the vacant seat. Effective December 9, 2009, Congressman
Jeb Hensarling resigned from the Panel, and House Minority
Leader John Boehner announced the appointment of J. Mark
McWatters to fill the vacant seat. Senate Minority Leader Mitch
McConnell appointed Kenneth Troske, Sturgill Professor of
Economics at the University of Kentucky, to fill the vacancy
created by the resignation of Paul Atkins on May 21, 2010.
Effective September 17, 2010, Elizabeth Warren resigned from
the Panel, and on September 30, 2010, Senate Majority Leader
Harry Reid announced the appointment of Senator Ted Kaufman to
fill the vacant seat. On October 4, 2010, the Panel elected
Senator Kaufman as its chair.