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Table of Contents
FEDERAL RESERVE SYSTEM
Contents
Scope and Methodology
Background
Overview of the Federal Reserve System
Financial Crisis
The Federal Reserve Board Used Emergency and Other Authorities to Authorize Liquidity Programs to Stabilize Markets and Institutions
In December 2007, the Federal Reserve Board Created TAF and Opened Swap Lines under Nonemergency Authorities to Address Global Strains in Interbank Lending Markets
Term Auction Facility
Dollar Swap Lines
In March 2008, the Federal Reserve Board Invoked Emergency Authority to Facilitate Sale of Bear Stearns and Expansion of Liquidity Support to Primary Dealers
Term Securities Lending Facility
Bridge Loan to Bear Stearns
Maiden Lane LLC
Primary Dealer Credit Facility
In Fall 2008, the Federal Reserve Board Modified Existing Programs and Launched Additional Programs to Support Other Key Markets
Asset-backed Commercial Paper Money Market Mutual Fund Liquidity Facility
Commercial Paper Funding Facility
Money Market Investor Funding Facility
Term Asset-Backed Securities Loan Facility
In Late 2008 and Early 2009, the Federal Reserve Board Announced Its Participation in Government Assistance to Individual Institutions
AIG
Citigroup
Bank of America
In 2009 and 2010, FRBNY Executed Large-Scale Purchases of Agency MBS to Provide Broader Support to the Economy
Most Programs Were Extended a Few Times before Closing in Early 2010
The Federal Reserve System and Its Emergency Activities Were Subject to Multiple Audits and Reviews
The Emergency Programs Have All Been Subject to Audits and Reviews
Audits and Reviews Have Not Identified Significant Accounting or Financial Reporting Internal Control Issues Concerning the Emergency Programs
The Reserve Banks and LLCs Received “Clean” Opinions on their Financial Statements
Audits and Reviews Did Not Identify Any Significant Issues Related to the Reserve Banks’ or LLCs’ Internal Control over Financial Reporting
The Federal Reserve System’s External Auditor Revised the Approach and Scope of Its Audits to Address the Emergency Programs
Reserve Banks Would Benefit From Strengthening Guidance for Noncompetitive Contracts Awarded in Exigent Circumstances
Reserve Banks Relied Extensively on Vendors to Establish and Operate the Emergency Programs, Particularly Those Designed to Assist Single Institutions
Assistance to Single Institutions
Broad-Based Emergency Programs
Nonvendors Working on Emergency Programs
Reserve Banks Awarded Largest Contracts Noncompetitvely and Would Benefit From Additional Guidance on Seeking Competition
Vendor Selection Process
Vendor Selection Criteria
Vendor Fees Generally Came from Program Income or Participants
While FRBNY Took Steps to Manage Conflicts of Interest for Employees, Directors, and Program Vendors, Opportunities Exist to Strengthen Conflict Policies
During the Crisis, FRBNY Expanded Its Efforts to Manage Employee Conflicts
Expanded Training and Guidance on Existing Conflict Policies
Program-Specific Information Barriers and Ethical Guidelines
Expanded Guidance for Prohibited Financial Interests and Management of Conflicts
FRBNY Has Not Revised Its Code of Conduct to Reflect Expanded Role
FRBNY Primarily Used Contract Protections to Manage Risks Related to Vendor Conflicts, and the Lack of a Comprehensive Policy Created Certain Limitations
Reserve Bank Directors Are Generally Subject to the Same Conflict Rules as Federal Employees and a Few Directors Played a Limited Role in Risk Oversight of the Programs
Opportunities Exist to Strengthen Risk Management Policies and Practices for Future Emergency Programs
Programs Contained Multiple Loss Protection Features Aimed at Balancing Loss Protections with Financial Stability Goals
Overcollateralized Loan Programs and Loans to Specific Institutions
Broad-Based Liquidity Programs that Made Loans to Intermediary Entities
Maiden Lane Portfolios and Lending Commitments for Citigroup and Bank of America
Emergency Programs That Have Closed Have Not Incurred Losses and the Federal Reserve Board Expects No Losses on Those With Outstanding Balances
While Reserve Banks Strengthened Controls and Risk Management over Time, Opportunities Exist to Further Strengthen Policies for Future Emergency Programs
Internal Controls over Compliance with Program Requirements Improved over Time
FRBNY Took Several Steps to Enhance Its Risk Management
Opportunities Exist to Improve the Federal Reserve System’s Risk Management for Any Future Emergency Activities
While Emergency Programs and Assistance Impact Excess Earnings to Treasury, the Federal Reserve Board Does Not Formally Make Projections for Several Reasons
While the Federal Reserve Board Took Steps to Promote Consistent Treatment of Participants, It Lacked Guidance and Documentation for Some Access Decisions
The Federal Reserve Board Designed Program Eligibility Requirements to Target Assistance to Groups of Institutions Facing Liquidity Strains
While Reserve Banks Generally Offered the Same Terms to Eligible Participants, Some Programs Lacked Documented Procedures to Systematically Apply Special Restrictions
The Federal Reserve Board Generally Offered Same Terms and Conditions to Eligible Participants
Relatively Few Cases of Incorrect Application of Program Requirements Occurred
Existing Procedures for a Few Programs Lacked Specific Guidance Needed to Help Ensure Consistent Decisions to Restrict Access by Certain Borrowers
The Federal Reserve Board Did Not Fully Document the Basis for Extending Credit to a Few Affiliates of Primary Dealers
The Federal Reserve Board Generally Has Not Provided Documented Guidance to Reserve Banks on Types of Program Decisions That Require Consultation with the Federal Reserve Board
The Federal Reserve Board Took Steps to Prevent Use that Would Be Inconsistent with Its Policy Objectives
Large Global Institutions Were Among the Largest Users of Several Programs
Use of the Programs Peaked at the Height of the Financial Crisis and Fell as Market Conditions Recovered
The Federal Reserve Board Modified Terms and Conditions of Several Programs to Reinforce Policy Objectives and Program Goals
AMLF Borrowing Was Concentrated Among Large Custodian Banks
Conclusions
Recommendations for Executive Action
Agency Comments and Our Evaluation
Appendix I: Agency Mortgage-Backed Securities Purchase Program
Background
Key Vendors for the Agency MBS Program
Appendix II: Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility
Background
Terms and Conditions for AMLF
Borrower Eligibility Requirements
Seller Eligibility Requirements
Collateral Eligibility Requirements
Term to Maturity for Loans
Interest Rates
Recourse Status
Appendix III: Assistance to American International Group, Inc.
Overview
Background
AIG Revolving Credit Facility (AIG RCF)
Background
AIG RCF Terms and Conditions
Key Vendors for AIG RCF
AIG Securities Borrowing Facility (SBF)
Background
Terms and Conditions for AIG SBF
Maiden Lane II LLC
Background
Terms and Conditions for Maiden Lane II
Financial Performance
Key Vendors for Maiden Lane II
Maiden Lane III LLC
Background
Terms and Conditions for Maiden Lane III LLC
Financial Performance
Key Vendors for Maiden Lane III
Appendix IV: Assistance to Facilitate Private Sector Acquisition of Bear Stearns Companies, Inc.
Background
Bridge Loan to Bear Stearns
Maiden Lane LLC
Key Vendors for Maiden Lane LLC
Appendix V: Bank of America Corporation Lending Commitment
Background
Key Vendors for Bank of America Lending Commitment
Appendix VI: Citigroup Inc. Lending Commitment
Background
Key Vendors for Citigroup Lending
Appendix VII: Commercial Paper Funding Facility
Background
Terms and Conditions for CPFF
Assets Eligible for Purchase
Issuer Eligibility Requirements
Interest Rates and Credit Surcharges
Registration Fees
Key Vendors for CPFF
Appendix VIII: Direct Money Market Mutual Fund Lending Facility
Background
Appendix IX: Dollar Swap Lines with Foreign Central Banks
Background
Use of Dollar Swap Lines by Foreign Central Banks
Appendix X: Money Market Investor Funding Facility
Background
Terms and Conditions for MMIFF
Assets Eligible for Sale through MMIFF
Seller Eligibility
Concentration Limits
Interest Rates
Accumulated Interest Income
Program Structure
Key Vendors for MMIFF
Appendix XI: Primary Dealer Credit Facility and Credit Extensions for Affiliates of Primary Dealers
Background
Terms and Conditions for PDCF
Borrower Eligibility
Term to Maturity for Loans
Collateral Eligibility
Loan Size
Interest Rate
Frequency-Based Fee
Recourse
Appendix XII: Term Asset-Backed Securities Loan Facility
Background
Terms and Conditions for TALF
Borrower Eligibility Requirements
Eligible Collateral Assets Classes
Interest Rates
Haircuts
Administrative Fees
Key Vendors for TALF
Appendix XIII: Term Auction Facility
Background
Terms and Conditions for TAF
Borrower Eligibility
Term to Maturity for Loans
Maximum and Minimum Bid Amounts
Minimum Bid Rate
Collateral Eligibility
Recourse
Vendors and Third Parties
TAF Auction Trends
Use by Foreign Institutions
Appendix XIV: Term Securities Lending Facility
Background
Terms and Conditions for TSLF
Borrower Eligibility
Auction Amount
Term to Maturity for Loans
Maximum and Minimum Bid Amounts
Interest Rate
Collateral Eligibility
Recourse
Key Vendors and Third Parties
Appendix XV: Comments from the Board of Governors of the Federal Reserve System
Appendix XVI: GAO Contact and Staff Acknowledgments
GAO Contact
GAO Acknowledgments
Glossary of Terms
Agency Mortgage-Backed Securities
Asset
Asset-Backed Commercial Paper
Asset-Backed Securities
Bank Holding Company
Clearing Bank
Collateral
Collateralized Debt Obligation
Commercial Paper
Credit Default Swap
Credit Rating
Depository Institution
Discount Window
Equity
Fair Value
Haircut
Liability
Liquidity
London Interbank Offered Rate
Margin
Money Market Mutual Fund
Mortgage-Backed securities
Nationally Recognized Statistical Rating Organizations
Open Market Operations
Overnight Indexed Swap Rate
Primary Dealers
Repurchase Agreement
Securitization
Special Purpose Vehicle
Tri-party Repurchase Agreement
Related GAO Products