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Project on Government Oversight




Risky Business: Bailout Watchdog Criticizes Treasury's Extensive Use of Outside Contractors

October 21, 2010 


Bloomberg reports that taxpayers received higher returns on the government’s investments in financial firms through the Troubled Asset Relief Program (TARP) than they would have made investing in 30-year Treasury bonds, high-yield savings accounts, money-market funds, or certificates of deposit. But did taxpayers get such a good deal on Treasury’s use of outside firms to implement the TARP?

POGO’s Scott Amey recently testified before the Congressional Oversight Panel (COP) on Treasury’s use of its bailout contracting authority during the financial crisis. POGO had previously written to Congress raising concerns that the government wasn’t doing enough to protect taxpayers from the conflicts of interest that were likely arise due to the government’s heavy reliance on outside firms to implement the TARP programs.

Last week, the Congressional Oversight Panel (COP) issued its monthly oversight report on “Examining Treasury’s Use of Financial Crisis Contracting Authority,” highlighting many of the issues raised in POGO’s testimony and letter to Congress.

The COP report correctly points out that this topic hasn’t exactly captured the public’s imagination, especially compared to other bailout-related controversies. Nonetheless, the COP has done a commendable job of surveying Treasury’s extensive use of outside firms—as of the end of last month, Treasury had entered into 96 financial agency agreements and contracts worth an obligated value of $436.7 million—and has offered sensible recommendations for making Treasury’s contracting more transparent and accountable.

Treasury’s use of outside firms: contractors and financial agents

It’s no surprise that Treasury and other government agencies had to turn to outside firms to assist with the implementation of the complex and urgent bailout programs. The COP points out that the TARP was “unique in its size and scope and the speed with which it was implemented”; that building the in-house infrastructure to implement the bailout would have been inconsistent with the Emergency Economic Stabilization Act (EESA), which intended to establish the TARP as a temporary financial assistance program; and that the amount spent on hiring outside firms was insignificant compared to the overall cost of the TARP.

But even if it was necessary for Treasury to use outside firms, there were still significant risks to U.S. taxpayers resulting from the extensive use of “private actors, who may be subject to conflicts of interests, who are not directly responsible to the public, and whose actions are not subject to the same disclosure requirements as government actors.”

Depending on the type of work being performed, Treasury had two different options for hiring outside firms: it could enter into contracts governed by the Federal Acquisition Regulation (FAR), or it could enter into financial agency agreements.

Traditionally, financial agents could only be employed to perform inherently governmental functions—functions that are so intimately related to the public interest that they cannot be outsourced to the private sector—and could only be paid using non-appropriated funds, while contracts were used to procure all other outside services. However, the COP found that the EESA may have actually broadened Treasury’s authority to employ financial agents, since it states that Treasury can designate financial agents “without limitation,” and that these agents can perform “all such reasonable duties” related to the implementation of the TARP.

The COP reported that Treasury did not consider whether a service was inherently governmental when deciding whether to hire a financial agent or a contractor. In fact, some of the financial agency agreements were clearly for non-inherently governmental functions such as whole loan or securities management. Furthermore, Treasury paid its financial agents with funds appropriated under the EESA, despite the fact that case law prior to EESA suggests that they could only be paid with non-appropriated funds. As a result, the COP concluded that “Treasury’s use of its financial agency agreement authority may be open to debate.”

Despite these concerns, the COP found “no reason to believe that Treasury abused its discretion.” In fact, there are some cases in which Treasury went beyond its legal obligations by bidding the financial agency agreements competitively. Furthermore, while the EESA gave Treasury the authority to waive the FAR provisions requiring full and open competition in the awarding of contracts, Treasury never used this authority, even in the hectic early stages of the TARP.

Opportunities for enhanced disclosure in bailout contracts and agreements

Although Treasury posts some basic information on its contracts and financial agency agreements, the COP found much room for improvement.

For instance, while Treasury lists the total value of the contract and the general services provided, it does not provide detailed information on the contractor’s obligations or the specific expenses incurred. Many of the details are found in task and delivery orders, which have not been released to the public. Treasury also does not publicly disclose detailed information on the names and duties of TARP subcontractors, nor does it publish the contracts themselves. The COP stated that a subcontractor status “operates like an umbrella, shielding contractors, financial agents, and Treasury from the need to disclose valuable information on the disposition of taxpayer funds.” In one instance, Treasury awarded a contract to “small disadvantaged business,” which in turn subcontracted nearly 80 percent of its work to Cadwalader, Wickersham & Taft, a large business that had already received other TARP contracts.

In addition, Treasury does not publish information on the performance of contractors and financial agents while their services are being performed, which means that any concerns about an outside firm’s performance can only be raised after the firm has been paid in full. Treasury does not disclose updated information on the ongoing actions taken by outside firms to monitor and mitigate conflicts of interest, nor does it disclose any amended conflict-of-interest mitigation plans submitted by the firms. It appears that Treasury created detailed “Policies and Procedures” on its relationship with contractors and financial agents, but these documents have never been disclosed. Public disclosure of these documents is particularly important since financial agents are not subject to the FAR, a concern POGO raised in its recent letter to Congress. Finally, since the contractors and financial agents are not subject to the Freedom of Information Act (FOIA), much of their work may be indefinitely shielded from public scrutiny.

Treasury should strengthen its conflict-of-interest rules

The COP outlined four scenarios in which conflicts of interest could affect Treasury’s use of outside firms: 1) Treasury treats a retained entity differently in Treasury’s exercise of its public responsibilities; 2) a retained entity carries out its assignments in a manner that serves its interest and not the public interest; 3) a retained entity carries out its assignments in a manner that serves the interest of the entity’s other clients; and 4) a retained entity uses information it obtains from its work for the TARP in a manner that benefits itself or its other clients.

Treasury issued an interim final rule on TARP conflicts of interest in January 2009. However, the COP found several shortcomings in the rule that raise concerns about Treasury’s ability to adequately protect taxpayers from conflicts of interest.

The rule does not address post-employment restrictions on Treasury employees who worked on the TARP, despite the fact the EESA specifically required Treasury to issue such a rule. Since Treasury does not publish information on the employment paths of individuals entering or leaving the TARP program, it is hard to know the extent to which there have been revolving door abuses related to the bailout. The rule does not address Treasury’s repeated use of a few select firms, even though a heavy reliance on these firms could leave Treasury “less nimble to consider the widest possible array of regulatory options,” and could also make Treasury more vulnerable to lobbying by certain firms and industries. The rule does not address the possibility that Treasury may be more inclined to provide future financial assistance to a firm it previously retained as a contractor or financial agent, especially if the firm provided its services at a cheap rate. In addition, the rule does not address Treasury’s limited ability to monitor conflicts of interest at the subcontractor level.

In his testimony before the COP, Mr. Amey also raised concerns that the conflict-of-interest rule tends to rely on the retained entities to monitor their own conflicts and to develop their own plans to mitigate these conflicts, even when the mitigation plans—such as trying to separate people who work in the same building—are probably inadequate. The COP found that since much of the monitoring is based on self-disclosure by the firms, “Treasury may not have sufficient information to ensure that all relevant conflicts are addressed.” Even when information is published or disclosed, there are questions about Treasury’s process for reviewing this information. The COP found one example in which Fannie Mae, a TARP financial agent, published incorrect information on mortgage borrower default rates under the Home Affordable Modification Program (HAMP), yet this error was detected by outside analysts, not Treasury. (The COP report includes an entire section on Treasury’s relationship with Fannie Mae and Freddie Mac in the implementation of the mortgage modification program; for more information, be sure to check out BailoutSleuth’s post.)  Finally, Scott raised concerns that a final conflict-of-interest rule has not yet been issued.

The COP found that the challenges in crafting a conflict-of-interest rule raise fundamental questions that will likely pertain to any future bailout programs: “[W]hen the government is tasked with intervening in the private sector to stabilize a faltering economy, how can it partner with private industry while simultaneously preserving public values?” and “[T]o what extent would truly robust conflict-of-interest regulations impede Treasury’s ability to hire the highest-performing contractors and financial agents?”

Recommendations for improving oversight of outside firms working on the bailout

As mentioned above, the COP provided many recommendations that would go a long way towards improving the public’s confidence in Treasury’s use of outside firms, and would help make the TARP initiatives more effective.

For instance, Treasury should provide more of an explanation when it turns to an outside firm rather than performing a service in-house. It should include more disclosure requirements in its contracts and financial agency agreements. It should require more transparency on the use of subcontractors. It should issue a final rule on conflicts of interest, and immediately disclose all efforts to monitor and mitigate conflicts. And it should consider alternatives to self-disclosure in tracking conflicts of interest.

Be sure to check out BailoutSleuth and ProPublica for more information on the COP report. And stay tuned in the weeks ahead, as the Government Accountability Office (GAO) and Special Inspector General for the Troubled Asset Relief Program (SIGTARP) will soon be releasing their own reports on Treasury’s use of outside firms in implementing the TARP.

Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO's investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.

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