Thursday, February 11, 2010

GAO publishes evaluation report on Treasury's decision making process on TALF

Ooriginal posted on Lexocology by Darren Cooper:

On February 5, the Government Accountability Office (GAO) released a report entitled Troubled Asset Relief Program: Treasury Needs to Strengthen Its Decision-Making Process on the Term Asset-Backed Securities Loan Facility. The objectives of the report were to (1) analyze the risks that the Term Asset-Backed Securities Loan Facility (TALF) presents to TARP funds and taxpayers, (2) evaluate how Treasury analyzed the risk of TALF assets and used this information in making decisions on TALF with the Federal Reserve and Federal Reserve Bank of New York (FRBNY), and (3) assess changes in securitization and credit market conditions before and after TALF's implementation. The GAO concluded that, while overall market conditions have "generally improved" since TALF's implementation in 2008, the long term risk of loss "remain[s]" and it is too "difficult" to predict how the overall Asset-Backed Securities market will perform in the future and "how borrowers might respond to declines in the market." In particular, a return to 2008 economic conditions could "have adverse impacts on the [TALF] program, such as significantly reducing the value of TALF collateral, providing an economic incentive for borrowers to walk away from their loans and require TARP funds to buy TALF collateral."

To improve transparency of decision making on the use of TARP funds for TALF and to ensure adequate monitoring of risks related to TALF collateral, the GAO recommends that Treasury direct the Office of Financial Stability take the following actions:

  • Give greater attention to risks posed by commercial mortgage backed securities in light of distressed conditions in the commercial real estate market;
  • Strengthen the process for making major program decisions for TALF; and
  • Conduct a review of what data to track and what metrics to disclose to the public in the event that TALF LLC (a special purpose vehicle used top purchase collateral associated with TALF loans in the event such loans are not repaid) purchases surrendered assets from the FRBNY. Such data and metrics could include periodic reports on the date and purchase price of assets, fluctuations in the market value of assets held, the date, price and rationale when assets are sold, and the total amount of loans outstanding to Treasury

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