Treasury Assembles TARP Implementation, Oversight Team
In October, Congress passed the Emergency Economic Stabilization Act of 2008 (EESA), creating the Troubled Assets Relief Program (TARP) to restore liquidity and stability to the nation’s financial system through the acquisition by the U.S. Treasury of up to $700 billion in troubled assets from the nation’s financial institutions.
A primary focus will be the purchase of troubled mortgage-backed securities, the intent of which is to increase the liquidity of the secondary mortgage markets and reduce potential losses encountered by the financial institutions which own the securities. The key challenge will be establishing the purchase price of those securities, a complex exercise subject to a multitude of variables related to the housing market and the credit quality of the underlying mortgages.
To assist with that task and manage the deployment of TARP, the U.S. Treasury has assembled a team of leading financial services, accounting and legal firms and created several policy teams to guide specific aspects of the program.
In testimony before the Senate Committee on Banking, Housing and Urban Affairs on Oct. 23, Interim Assistant Secretary for the Office of Financial Stability Neel Kashkari noted that the Treasury’s “approach to procurement is based on the following strategy. First, in order to protect the taxpayers, we will seek the very best in private sector expertise to help execute this program. Second, to the extent possible, opportunities to compete for contracts and provide services should be available to small businesses, veteran-owned businesses, and minority and women-owned businesses. Third, we are taking appropriate steps to mitigate and manage conflicts of interest.”
One of the most significant hires was that of the Bank of New York Mellon, a global financial services company with more than $23 trillion in assets under custody and administration, more than $1.1 trillion in assets under management and servicing $12 trillion in outstanding debt. The company will provide the accounting of record for the TARP portfolio, hold all cash and assets in the portfolio and provide pricing and asset valuation and other related services. The firm will also track required unique asset attributes, including linkages to executive compensation limits and to warrants received from selling institutions. In addition, it will support the acquisition of securitized assets by serving as auction manager and conducting reverse auctions for the troubled assets and providing all related infrastructure needs.
EnnisKnupp and Associates, a global investment consulting firm with aggregate assets of more than $835 billion under advisement and approximately $1 trillion in project-related engagements, was hired to serve as the Treasury’s investment adviser for implementation of TARP. The firm will assist in the evaluation of potential asset managers and other vendors, develop and maintain investment policies and guidelines, and assist with oversight of the portfolio’s multiple asset managers. EnnisKnupp will also conduct research on mortgage whole loan asset managers and on servicing organizations, and will identify qualified minority- and women-owned businesses to provide services for the portfolio.
Other key TARP hires by the Treasury include PricewaterhouseCoopers LLP (PwC), which will help with accounting and internal control services needed to administer the complex portfolio of troubled assets targeted for purchase, and Ernst & Young, which will provide general accounting support and expert accounting advice. The Treasury also hired Simpson, Thacher and Bartlett to serve as a legal adviser for the implementation, and to assist the Treasury with structuring of the equity program.
The seven policy teams established by the Treasury are:
1. Mortgage-backed securities purchase program, charged with identifying which troubled assets to purchase, from whom to buy them and which purchase mechanism will best meet policy objectives. This team is currently designing the detailed auction protocols and will work with vendors to implement the program.
2. Whole loan purchase program, which is working with bank regulators to identify which types of loans to purchase first, how to value them, and which purchase mechanism will best meet policy objectives.
3. Insurance program, charged with establishing a program to insure troubled assets. Currently, this team is soliciting the ideas on structuring options.
4. Equity purchase program, responsible for designing a standardized program to purchase equity in a broad array of financial institutions. As with the other programs, the equity purchase program will be voluntary and designed with attractive terms to encourage participation from healthy institutions. It will also encourage firms to raise new private capital to complement public capita
5. Homeownership preservation, which is working with the Department of Housing and Urban Development to maximize opportunities to help as many homeowners as possible keep their homes while also protecting taxpayers.
6. Executive compensation, charged with issuing executive compensation guidelines for TARP programs. It has already issued guidelines for the Troubled Asset Auction and Capital Purchase programs as well as for Programs for Systemically Significant Failing Institutions.
7. Compliance, charged with overseeing the establishment of oversight and compliance structures, including establishing an Oversight Board, on-site participation of the General Accounting Office and the creation of a Special Inspector General, with thorough reporting requirements.
“We have accomplished a great deal in a short time. But our work is only beginning,” testified Kashkari. “A program as large and complex as this would normally take months – or even years – to establish. We don’t have months or years. Hence, we are moving to implement the TARP as quickly as possible while working to ensure high quality execution.”
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