Financial Reform Watch

GAO Submits First Report and Recommendations on TARP to Congress

When the General Accountability Office (GAO) reports, Congress listens. The GAO is the non-partisan investigating and auditing arm of Congress, and in its first bi-monthly TARP oversight report, it provides a comprehensive overview of the financial crisis and Treasury’s response to it. As the subtitle conveys, the GAO recommends “Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency.” There is no scandal or surprise in the 60-plus page report. While GAO acknowledges that Treasury’s Office of Financial Stability (OFS), which is charged with executing the TARP, has only existed for 60 days, the report points to critical areas for improvement. In its analysis, the GAO said that the Treasury Department generally agrees with eight of the nine GAO recommendations.

Despite the lack of drama, however, the report is an important guide for the OFS. Upcoming congressional hearings are likely to focus intensely on the following nine recommendations and how (quickly) Treasury can implement them. The GAO recommends that Treasury should:

  • Work with federal banking regulators to develop methods to determine and report on whether the activities of financial institutions receiving TARP funds are compliant with the Emergency Economic Stabilization Act.
  • Ensure that financial institutions participating in the Capital Purchase Program (CPP) comply with the requirements of the Treasury agreements, including limits on executive compensation, dividend payments and the repurchase of stock.
  • Formalize the communications strategy so that Congress and the public are well informed about the current program and activities but also the rationale behind strategic program changes “to avoid information gaps and surprises.”
  • Develop a plan for a smooth transition to the Obama Administration.
  • Expedite the hiring process for the OFS so they have the necessary personnel.
  • Ensure that there are enough trained personnel to oversee the performance of contractors.
  • Continue to develop a comprehensive system of internal controls over TARP, e.g. policies, procedures and guidance to ensure that the program runs effectively and “taxpayers’ interests are protected.”
  • Issue final conflict of interest regulations concerning Treasury’s contractors and financial agents and review and renegotiate conflict mitigation plans to comply with the final rules.
  • Institute a system to manage and monitor the mitigation of conflicts of interest.

Treasury and the Federal Reserve differed with GAO on the first recommendation, preferring an approach that would develop “general metrics for evaluating the overall success of the CPP.” GAO believes a more focused approach, building on the existing regulatory reporting banks are already required to do, will provide for better transparency and accountability.

The GAO draws no conclusion on the success of the TARP thus far. In fact, it concludes that determining the effectiveness of TARP will be very difficult given all the other factors at work in the economy, including changes in domestic monetary and fiscal policies as well as global economic activity and regulations. Nevertheless, the GAO will look to interest rate spreads, mortgage rates, mortgage originations, and a handful of other indicators over the coming months as part of its ongoing requirement to report on the TARP. The complete GAO report can be downloaded here.

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