Recovery Efforts and Actions
The following summarizes some of the recovery efforts to date and their impact on and implications for the Government’s consolidated financial statements. It should be noted that, although HERA and EESA authorize the Government to spend hundreds of billions of dollars in the recovery effort, the majority of those funds have yet to actually be spent, and as a result, are not and would not be reported on the Government’s consolidated financial statements. Generally, the Government has recorded the funds that have already been spent at cost. The Government expects to recover, if not earn a return on these funds.
Actions by Congress:
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Passes HERA, which enhanced the regulatory framework and provided temporary authority for the Treasury Secretary to provide financial support to Government Sponsored Enterprises (GSEs).
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Passes EESA, establishing the Troubled Asset Relief Program (TARP), authorizing the Treasury Department to use up to $700 billion in support of market stabilization efforts. The $700 billion limit shall be reduced by the difference between outstanding and guaranteed obligations under the EESA-authorized insurance program, if any, and the balance in the Troubled Assets Insurance Financing Fund (TAIFF), established by EESA to guarantee timely payments on mortgage-related assets.
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Legislation only authorizes the Government to engage in specified market relief efforts. Authorizations by themselves do not impact either the Government’s financial statements or the deficit – the exercise of those authorities do.
Actions by the Federal Reserve System (Fed)
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Lends approximately $30 billion in support of JP Morgan Chase to facilitate its acquisition of Bear Stearns;
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Agrees to lend up to $85 billion to American International Group (AIG). Subsequent to FY-end 2008, the credit facility was modified and Treasury agreed to purchase $40 billion in Senior AIG preferred stock and will receive common stock warrants for 2 percent of the outstanding AIG common stock;
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Announces Money Market Investor Funding Facility through which the Fed is authorized to buy $600 billion in CDs and commercial paper to bolster money market mutual funds, and sets up separate facilities to purchase certain AIG assets;
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Agrees to guarantee $306 billion of Citigroup troubled assets. Pursuant to the agreement, Citigroup would cover the first $37 billion in losses, Treasury would cover the next $5 billion, and FDIC would cover up to $10 billion of additional losses. Treasury and FDIC receive Citigroup preferred stock as part of the arrangement;
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Announces program to purchase up to $500 billion of mortgage-backed securities and up to $100 billion of Fannie and Freddie debt, and to lend up to $200 billion against new car, student, and small-business loans. Treasury has pledged $20 billion from TARP for this program as well;
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Under the Supplementary Financing Program, Treasury borrowed $300 billion to increase cash balances at the Fed to support the Fed’s market stabilization efforts.
The vast majority of Fed actions and transactions will not directly impact the Government’s financial statements since the Fed is an independent entity and, while part of the Government, is not considered part of the Federal Government reporting entity. To date, the Government’s exposure is largely limited to any impact that losses from these programs may have on excess profits that the Fed is required to pass on to the Treasury’s General fund.
Actions by Treasury:
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Under HERA authority, received preferred stock and warrants, valued at $7 billion as consideration for entering into assistance agreements – recorded as an investment. Commits to provide up to $200 billion under a preferred stock purchase agreement to ensure that GSEs’ assets and liabilities remain in balance – records $13.8 billion as a liability in FY 2008, based upon the Federal Housing Finance Agency’s notification to the Treasury Department that a payment is due to Freddie Mac, based on Freddie Mac’s September 30, 2008 net worth status. Fannie Mae did not require a payment in FY 2008. Purchased $3.3 billion in MBS and recorded that amount as a loan receivable in FY 2008.
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Under EESA, used over $200 billion to purchase assets of qualifying financial institutions since fiscal year-end as of December 9, 2008. None of these purchases occurred during FY 2008.
Amounts expended under HERA and EESA have been and are expected to be treated as either investments or loans, as the Government may recover and possibly even earn a positive return on amounts invested as economic conditions improve.
As the first quarter of FY 2009 draws to a close, the Government is exploring a number of other recovery strategies. Actions under HERA, EESA, and other initiatives are intended to restore confidence to lenders and consumers, and provide stability to the nation’s economy.
from -
http://www.gao.gov/financial/fy2008/08frusg.pdf
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