Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, January 26, 2012


The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) released its most recent Quarterly Report to Congress on Jan. 26, 2012 (Download SIGTARP.January_26_2012_Report_to_Congress[1]), and it makes for interesting reading.  From the executive summary:

TARP will continue to exist for years. TARP programs that support the housing market and certain securities markets are scheduled to last until as late as 2017, and Treasury can spend an additional $51 billion on these programs during those years. Taxpayers are still owed $132.9 billion in TARP funds, and taxpayers will never get back some of these funds. Some programs were designed as a Government subsidy with no return to taxpayers. Treasury has already written off or realized losses of $12 billion and Treasury predicts losses on other TARP investments. The Congressional Budget Office recently increased its estimated cost of TARP to $34 billion. One fallout of slow economic recovery is that it slows Treasury’s progress in recouping outstanding TARP funds. Unwinding Treasury investments in 458 institutions, including American International Group, Inc. (“AIG”), General Motors Corp. (“GM”), Ally Financial Inc. (“Ally Financial”), and community banks, in the near term could prove challenging as markets remain volatile and banks struggle to stay on their feet. Financial stress continues to pose obstacles to economic recovery, in part due to an 8.5% unemployment rate, decreased consumer confidence, nonperforming mortgages, and job cuts and asset sales by some of the nation’s largest institutions.

The U.S. Government continues to own 77% of AIG, 32% of GM and 74% of Ally.  Unwinding these investments is "likely to take several years." 

The Report also summarizes the findings of its previously released report examining executive compensation determinations made by the Office of the Special Master for TARP Compensation (Kenneth Feinberg), which found that

former Special Master Kenneth Feinberg could not effectively rein in excessive compensation at these companies because he was under the constraint that his most important goal was to get the companies to repay TARP.

SIGTARP goes on to paint a gloomy picture and epress continuing concerns about executive compensation:

There has been little fundamental change in the compensation structures at the largest institutions. The integrity of our financial system remains at risk, with many former TARP recipients now designated as systemically important financial institutions (“SIFIs”) that continue with compensation structures that may encourage risk taking. The implicit guarantee that came from the Government’s unprecedented intervention resulted in moral hazard, and companies continue to engage in risky behavior. SIFIs have a responsibility to discipline risk taking that could potentially trigger systemic consequences, including as it relates to compensation. Because companies generally have shown little or no appetite for reforming executive compensation practices, the economy remains at risk that compensation could play a material role in the event of a future crisis.

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