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Project on Government Oversight

POGO Testifies on Treasury's Use of Private Contractors in Bailout Programs

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September 23, 2010

POGO’s Scott Amey testified yesterday before the Congressional Oversight Panel on the Treasury Department’s use of private of contractors in its bailout programs.

For those who missed it, you can find live updates from the hearing on POGO’s Twitter feed. A video of the hearing is also available on the Panel’s website.

Shortly after the passage of legislation in 2008 that created the Troubled Asset Relief Program (TARP), Treasury began turning to private financial institutions, law firms, accounting firms, consulting firms, and other entities to assist with the implementation of its bailout programs. According to its latest monthly Congressional report, Treasury has now entered into over 100 transactions with various contractors and financial agents to procure nearly $450 million worth of services.

The 2008 TARP legislation authorized Treasury to waive certain Federal Acquisition Regulation (FAR) provisions requiring full and open competition in the awarding of contracts, since Treasury had to rapidly implement the bailout programs in response to the financial crisis. This potential lack of competition raised concerns that the government would not be getting the best quality goods and services at the best price. POGO and others have also raised concerns about the potential for conflicts of interest resulting from Treasury awarding contracts to firms that perform similar services for their private clients.

In his testimony before the Panel, Mr. Amey described many of the big-picture problems in government contracting, such as inadequate competition, deficient accountability, lack of transparency, and risky contracting vehicles.

He also offered some analysis on Treasury’s use of its bailout contracting authority. Overall, Treasury has done a good job of being transparent about its TARP policies, procedures, and contracts, converting risky contract types, promoting competition, and utilizing small businesses. However, there are additional steps Treasury could take to safeguard the interests of taxpayers, such as improving its rule to mitigate conflicts of interest for private firms working on the TARP programs.

One potential problem with Treasury’s conflict-of-interest rule is that it tends to rely heavily on the contractors themselves to disclose and mitigate their own conflicts. One popular method for mitigating conflicts is to set up an “ethical wall” separating the employees who are working on the TARP programs from the employees who are working on the firm’s private investments. However, these internal firewalls may not be sufficient to fully protect against the conflicts of interest that are likely to arise when a firm is working on similar programs for both the government and its private clients.

There was also a specific concern raised last year about a conflict of interest involving Bank of New York Mellon. Shortly after the TARP legislation was passed, BNY Mellon was awarded a financial agency agreement to serve as the master custodian of Treasury’s bailout investments. The bank is expected to receive more than $20 million over the course of its 3-year agreement. In addition to providing a wide range of custodial services for Treasury’s portfolio of bailout investments, BNY Mellon is tasked with ensuring that participants in the Capital Purchase Program (CPP) are complying with Treasury requirements such as restrictions on executive compensation.

However, BNY Mellon also received $3 billion in capital under the CPP, and was therefore placed in a position where it was required to ensure its own compliance with the executive compensation restrictions. FOX Business reported that BNY Mellon’s chairman and CEO received some $33 million in executive compensation in 2007 and 2008.

The fact that BNY Mellon ended up on both sides of this deal highlights the need for strong conflict-of-interest rules, a point that has been repeatedly made in the Government Accountability Office’s reports on Treasury’s use of outside contractors and financial agents. Mr. Amey also recommended that Treasury provide a hotline for contractor employees to report conflicts of interest.

There have also been concerns raised about Treasury redacting the hourly billing rates in contracts awarded to law firms such as Cadwalader, Wickersham & Taft. At the hearing today, Panel Vice-Chairman Damon Silvers revealed that Treasury had refused to make representatives of Cadwalader available to testify, citing concerns over attorney-client privilege.

Although Treasury should be commended for posting its actual contracts and agreements online, Mr. Amey and other witnesses discussed additional steps that could be taken to disclose more information on these contracts.

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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